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Climate Change Scenario Analysis

Our clear-eyed approach for lowering risk and planning for the future 

Managing ESG-related risks and opportunities

Governance

Our Board of Directors views oversight and effective management of ESG-related risks and opportunities important to our ability to execute its climate risk strategy and achieve long-term sustainability goals. For management oversight, an ESG Working Group was established in 2021 to develop a governance approach to address ESG considerations, including climate change risks and opportunities.

For a complete overview of our governance over climate-related risks, please see our 2022 Task Force on Climate-Related Financial Disclosures Report.

Approaches and opportunities for climate risks

As part of our organizational resilience to physical climate risks, we have developed and implemented an Enterprise Disaster Recovery/Business Continuity Strategy designed to provide immediate response efforts and subsequent recovery from unplanned business interruptions (UBIs). A UBI can result from a multitude of events, including physical disasters caused by climate change, as outlined below. These climate-related physical risks are mitigated by our response plan by ensuring an appropriate and consistent response and escalation process is followed. Our business continuity plan also provides an opportunity for us to leverage the lessons learned from near-term climate-related events to assess how mitigation strategies can be applied to help reduce the physical risks of climate change in our operations. We also leverage Site Response Plans (SRP) for our properties, which promotes the safety and security of our employees and customers. Once it is safe to do so, the SRP then helps conduct damage assessments, evaluates the potential impact of the event on our facilities, equipment, and operations, and subsequently communicates the results to management teams responsible for insurance claims. Prior to acquiring a large-scale property, a Phase 1 Environmental Property Assessment is typically performed by a licensed professional engineer to determine the integrity of, and/or the potential risk associated with, the facility and the property on which it is built. Properties and facilities of a smaller scale are evaluated by qualified in-house assessors, as well as by industry experts in environmental testing and remediation.

In addition to Flagstar’s properties, we encounter certain environmental risks in our lending activities. We attempt to mitigate such environmental risks by requiring either that a borrower purchase environmental insurance or that an appropriate environmental site assessment be completed as part of our underwriting review on the initial granting of CRE and ADC loans, regardless of location, and of any out-of-state multi-family loans we may originate. Depending on the results of an assessment, appropriate measures are taken to address the identified risks.

Managing climate risk

For all Flagstar’s properties, we carry insurance policies that protect against losses due to the perils outlined below. For properties geographically located in higher-risk areas for each respective peril, we enroll in additional insurances for these properties dependent on risk appetite to mitigate losses, as discussed below. Beyond adequate insurance, our goal is to proactively determine how to improve property resilience to minimize or altogether prevent damages or losses caused by these extreme weather events.

Our current and future responses to physical climate risks may also include required improvements to properties to enhance resilience, as outlined below for each respective peril. In addition to physical climate risks, we have identified two transitional climate-related risks discussed in detail below. These transitional risks are managed through monitoring and ensuring compliance with current and future regulations and proactively implementing sustainability and ESG throughout our operations.

Climate risk assessment process

We teamed with CoreLogic to deploy CoreLogic’s Climate Risk Analysis propriety tools, and datasets, to conduct climate risk assessments at the individual asset level. This allowed the identification of properties at elevated risk of severe weather events caused by climate change. The properties analyzed for this assessment included both legacy Flagstar and New York Community Bank leased and owned properties.

CoreLogic Climate Risk Analytics estimates risk to properties with respect to natural perils that may be affected by current climate conditions and the projected future climate considering the impacts of climate change. The risk is manifested in the monetary loss resulting from damage to structures and their content (structure vulnerability). The damage is caused by various hazards associated with multiple perils.

CoreLogic estimates the potential impact of future climate change using insights from the Intergovernmental Panel for Climate Change (IPCC) scenarios, scientific consensus climate-related phenomenon models from organizations such as NOAA, and its own propriety models. To model these risks, CoreLogic utilizes a vast amount of parcel and structure information, such as but not limited to construction materials, regional information such as flood zone areas, and distances from rivers or earthquake faults.

CoreLogic creates the necessary Hazard, Vulnerability, and Exposure modules for the Climate Risk Analysis process and routinely incorporates new observations from post-disaster field surveys to calibrate the model. The hazard and vulnerability modules have undergone stringent review by internationally recognized scientific experts.

Climate risks

The Results table summarizes relevant climate risks identified as part of our ongoing risk assessment process. The table relates the physical and transitional impacts of climate change in alignment with Task Force on Climate-Related Financial Disclosures (TCFD) guidelines. To assess the risk, the analysis utilized Representative Concentration Pathways (RCP) – 8.5 as adapted by the Intergovernmental Panel for Climate Change (IPCC) in its Fifth Assessment Report (AR5) published in 2014. This scenario represents 4 degrees Celsius mean global temperature increase over the next 30 years (time-horizon 2050).

The metric chosen for the risk assessment process is the Occurrence Exceedance Probability (OEP) damage at the probability of 0.4% (i.e., 1-in-250 years return-period). This aligns with the Federal Reserve recommendations for physical risk, namely the utilization of climate conditions broadly consistent with possible future climate conditions in 2050 as characterized by the SSP5-8.5 (or RCP 8.5) pathways with a 200-year return period loss. Any citing of Occurrence Exceedance (later in the following table) refers to this chosen scenario with the 250-year return period. The Occurrence Exceedance Probability (OEP), also known as Probable Maximum Loss (PML), is the probability that an event loss shall be greater than the maximum event loss in a year; thus, the analysis provides the loss dollar figure estimated to be exceeded with a probability of 4%.

For each peril, two metrics are provided: the geographical distribution of bank assets with respect to the specific hazard geographical presence and the potential monetary losses as a percentage of our total portfolio estimated for reconstruction cost. A risk category is attached to each metric and an overall risk category for both combined. The risk is divided into three categories: Low for percentages ≤ 30%, Medium for percentages ≤ 60%, and High for percentages > 60%. Note that “Very Low” is not a separate category; rather, it signifies that the risk is essentially negligible.

The approach, a risk management tactic, is summarized for each potential impact area in the following climate risk table. Flagstar believes that resilience needs posed by climate change can be met by taking a proactive approach to mitigate the risk.

The 250-year-per-occurrence loss for all perils represents around 5% of the total portfolio reconstruction cost. Thus, the overall risk for Flagstar commercial properties is relatively low.

RCP Chart

Flagstar owned and operated property distribution by state after analyzing more than 90% of the bank’s properties.

Flagstar Property map

Peril & Risk

Exposure

Approach

Island Flood

Flooding occurs when normally dry land is inundated with:

  • Overflowing of existing waterways to surrounding areas that can extend up to hundreds of miles and last for days or longer.
  • Poor rainwater drainage in low areas where drainage systems may be antiquated, over-stressed, damaged, or poorly maintained.
  • Flash floods that are shorter-term, localized, and incredibly fast with floating debris, such as trees, resulting from high-intensity rainfall, dam break, levee failure, rapid snowmelt, and ice jams.

Overall Risk: Low to Medium

Geographically: Medium to High

More than 50% of our commercial properties are in the Midwest states of Michigan, Indiana, and Ohio, where inland floods are more prominent, as well as in New York and California, where floods due to storms are more frequent.

 

Financially: Low

Occurrence exceedance loss percentage of total portfolio value is estimated at 1.42%, or approximately $4.6M.

We respond to the ongoing threat of inland flooding by carrying additional insurance coverage for properties exposed to protect against losses.

Our Enterprise Disaster Recovery/Business Continuity Strategy helps prepare our properties for inland flooding and ensures consistent responses for recovery.

We have made or are considering making enhancements to properties exposed to inland floods, where applicable, including upgrading old pipes and drainage systems and improving drainage system maintenance.

Hurricane Wind

Hurricanes move in a circular motion: anticlockwise in the Northern Hemisphere and clockwise in the Southern Hemisphere, deriving their energy from warm ocean surface water. The strong wind can cause severe damage to the destruction of structures.

  • A tropical storm becomes a hurricane with sustained winds faster than 74 mph. Hurricanes can create destructive weather resulting in catastrophic economic and human loss. In addition to releasing large volumes of water, potentially causing flooding, they can cause catastrophic damage due to their destructive winds.
  • With climate change, there is high confidence that the frequency of severe hurricanes (category IV and V) will increase.

Overall Risk: Medium

Geographically: Medium

More than 40% of our commercial properties are in the Northeast Coastal states of New York and New Jersey, followed by the Southeast Coastal state of Florida, where hurricane events are frequent, with extreme severity causing serious wind damage.

Financially: Low

Occurrence exceedance loss percentage of total portfolio value is estimated at 2.25%, or approximately $7.2M.

We respond to the ongoing threat of hurricane winds by carrying additional insurance coverage for properties exposed to protect against losses.

 

Our Enterprise Disaster Recovery/Business Continuity Strategy helps prepare our properties for hurricane winds and ensures consistent responses for recovery.

 

We have made or are considering making enhancements to properties exposed to hurricane winds, where applicable, including maintaining tree trimming (e.g., weak branches) or removing weak trees altogether, upgrading glass doors to tempered glass, and sealing exterior wall openings.

Hurricane Storm Surge

Storm surge is an abnormal rise of water generated by a storm, much larger than predicted astronomical tides. Several factors affect the surge height and reach:

  • Hurricane extreme winds push shallow coastal waters in such a way that causes the sea level to rise, causing extreme flooding in coastal areas. Powerful storms can cause up to 30 feet of storm surge. The frequency of severe hurricanes (category IV and V) will also likely increase under climate change.
  • Sea level rise will accelerate under future climate change as increasing temperatures melt ice sheets and warm the oceans, causing thermal expansion.

 

In addition, a regional rise due to changes in ocean circulation resulting from the input of freshwater and heat further raises the height of tides and allows storm surges to penetrate farther inland.

Overall Risk: Medium

Geographically: Medium

Approximately 40% of our commercial properties are in the East Coastal states of New York, and Florida where storm surge events resulting from severe hurricane and low elevation terrain subject to sea surge are relatively frequent.

 

Financially: Low

Occurrence exceedance loss percentage of total portfolio value is estimated at 0.48%, or approximately $1.6M.

We respond to the ongoing threat of hurricane storm surge by carrying additional insurance coverage for properties exposed to protect against losses.

 

Our Enterprise Disaster Recovery/Business Continuity Strategy helps prepare our properties for hurricane storm surges and ensures consistent responses for recovery.

 

We have made or are considering making enhancements to properties exposed to hurricane storm surge, where applicable, including sealing gaps and cracks in structures.

 

Furthermore, we strive for environmental improvement and share actions with the community, when possible, in creating and maintaining evacuation paths, shelters, and emergency supply kits.

Severe Convective Storm

A severe convective storm is a weather phenomenon due to land surface heating, causing warm moist air to rise into the atmosphere. The main types of storms are:

  • Tornado: Tornadoes are one of the most devastating natural hazards worldwide. Tornadoes are violently rotating columns of air that tend to form with severe thunderstorms. They can last from a few seconds to more than an hour.
  • Hail: When strong convective updrafts exceed 100 mph, substantial amounts of moisture and debris are brought into the storm and provide seed for raindrops to form. They grow as they travel upwards above the freezing point and eventually fall due to gravitational pull as hail. Hail develops in most mid-latitude thunderstorms, and depending on the hail size, it may ruin roofs, break windows, and cause other structural damage.
  • Straight-line winds - Severe convective systems often produce straight-line winds with possible sustained winds of over 58 mph. 

Overall Risk: Low

Geographically: High

More than 60% of Flagstar’s commercial properties are in areas prone to severe convective storms, such as Indiana, Michigan, Ohio, and New York.

 

Financially: Low

Occurrence exceedance loss percentage of total portfolio value is estimated at 0.19%, or approximately $0.65M.

 

We respond to the ongoing threat of severe convective storms by carrying additional insurance coverage for properties exposed to protect against losses.

 

Our Enterprise Disaster Recovery/Business Continuity Strategy helps prepare our properties for severe convective storms and ensures consistent responses for recovery.

 

We have also made or are considering making enhancements to properties exposed to severe convective storms, where applicable, including installing strong shutters, ensuring buildings with double-pane windows are in place, and maintaining tree trimming (e.g., weak branches) or removing weak trees altogether. 

 

Furthermore, we strive for environmental improvement and share actions with the community, when possible, in creating and maintaining shelters, as well as emergency supply kits.

Winter Storm

From November to April, winter storms covering thousands of miles are formed by mixing sufficiently chilly air and abundant moisture. The northern branch of the jet stream brings frigid air to the Midwest and Southern Great Plains states.

  • Winter storm precipitation includes snow, sleet, freezing rain, and rain. Many types of weather-related damage can occur depending on the rate of precipitation and its composition.
  • Winter storms can cause roof damage due to snow accumulation and frozen and ruptured pipes that flood the structure. Ice formation on roofs and gutters can prevent melting snow from draining and cause interior water damage.
  • Climate extremes are expected to worsen, and precipitation rates are expected to increase as a warmer atmosphere can hold more moisture. This may make severe winter storms more likely for certain regions.
  • Additionally, polar jet streams reaching farther south may bring severe winter storm as far as the Southern Great Plains.

Overall Risk: Very Low

Geographically: Low

Our commercial properties are noticeably light in Midwest regions that may be affected by severe winter storms. There are no properties in the Great Plains or Northern states such as Maine or North Dakota.

 

Financially: Very Low

Occurrence exceedance loss percentage of total portfolio value is estimated at 0.09%, or approximately $0.3M.

 

We respond to the ongoing threat of winter storms by carrying additional insurance coverage for properties exposed to protect against losses.

 

Our Enterprise Disaster Recovery/Business Continuity Strategy helps prepare our properties for winter storms and ensures consistent responses for recovery.

 

Our well-distributed geographical portfolio with a majority of properties outside affected areas of severe winter storms helps diversify risk.

 

We have also made or are considering making enhancements to properties exposed to winter storms, where applicable, including improving and maintaining heating systems to prevent pipes from freezing, improving and maintaining roof and gutter systems to allow for melting snow drainage, and insulating outside pipes.

 

Furthermore, we strive for environmental improvement and share actions with the community, when possible, in creating and maintaining shelters, as well as emergency supply kits.

WILDFIRE

A wildfire is an unplanned, uncontrolled fire that spreads across the landscape in response to environmental fuel, weather, and topography.

  • Wildfires are natural phenomena in California and much of the West; however, climate change is increasing their frequency and severity.
  • Earlier spring snowmelt providing for more vegetation lengthens fires and fire frequency, while increasing temperature (and vapor) dry the vegetation making it a better fuel.

 

Wildfire propagation depends on the available fuel, topography, and weather conditions, such as temperature, humidity, and winds. 

Overall Risk: Low

Geographically: Low

Our commercial properties in areas prone to wildfire events, such as the West Coast and Southwest, is quite low. A small number of properties, around 5%, are in California and Arizona.

 

Financially: Low

Occurrence exceedance loss percentage of total portfolio value is estimated at 0.19%, or approximately $0.6M.

We respond to the ongoing threat of wildfires by carrying additional insurance coverage for properties exposed to protect against losses.

 

Our Enterprise Disaster Recovery/Business Continuity Strategy helps prepare our properties for wildfires and ensures consistent responses for recovery.

 

Our well-distributed geographical portfolio with the majority of properties outside of affected areas of severe wildfires helps diversify risk.

 

We have also made or are considering making enhancements to properties exposed to wildfires, where applicable, including replacing flammable outside surfaces with fire-resistant materials, such as concrete, and maintaining clean roofs and gutters.

 

Furthermore, we strive for environmental improvement and share actions with the community, when possible, in maintaining varying degrees of separation between trees and shrubs related to the distance from the structure and maintaining varying degrees of tree and shrub heights with respect to distance from the structure.

Earthquake

An earthquake is a sudden slip on a fault between tectonic plates. The plates move slowly but may get stuck at their edges due to friction, causing stress to build at the fault. When the stress overcomes the friction, a quake releases energy in waves that travel through the earth’s crust.

  • Two major tectonic plates engage in the earthquakes that primarily afflict California: the North America Plate, comprising most of the North American Continent and parts of the Atlantic Ocean, and the Pacific Plate, comprising most of the Pacific Ocean floor and the California coastline. They meet primarily along the San Andreas fault over 650 miles with a depth of over 10 miles and other smaller faults (e.g., the Hayward in Northern California).
  • Earthquakes can cause major structural damage due to the shaking energy, especially to older buildings, water damage due to sprinkler leaks and broken pipes, and destruction due to fire from gas leaks or torn power lines.
  • The physical phenomenon of an earthquake is not expected to change due to climate change. However, the associated perils of fire following earthquakes and tsunamis may, however, be exacerbated by climate change impacts to wildfire risk and rising sea levels.

Overall Risk: Very Low

Geography: Very Low

Our commercial properties prone to earthquake events, such as the West Coast, is quite low. A small number of properties, less than 2%, are in California.

 

Financially: Low

Occurrence exceedance loss percentage of total portfolio value is estimated at 0.14%, or approximately $0.46M. 

We respond to the ongoing threat of earthquakes by carrying additional insurance coverage for properties exposed to protect against losses.

 

Our Enterprise Disaster Recovery/Business Continuity Strategy helps prepare our properties for earthquakes and ensures consistent responses for recovery.

 

Our well-distributed geographical portfolio with a majority of properties outside of affected areas of severe earthquakes helps diversify risk.

 

We have made or are considering making enhancements to properties exposed to earthquakes, where applicable, including maintaining roofs and chimneys to prevent loose tiles and bricks.

 

Furthermore, we strive for environmental improvement and share actions with the community, when possible, in creating and maintaining evacuation paths, as well as shelters and emergency supply kits.

Regulatory

Regulatory risks are earnings or capital arising from the violation of law, rule, or regulation or non-conformance with prescribed compliance practices or ethical standards that may expose the bank to fines, civil penalties, litigation costs, payment of damages, and voided contracts.

 

An increasing number of federal, state, and local climate- and ESG-related policies and regulations could result in increased operating and capital costs due to the impacts of compliance. These regulations and policies may relate to energy/water efficiencies for our properties, greenhouse gas accounting and reductions, climate-related reporting on bank operations, and other ESG-related policies, such as the SEC Climate Proposal or NYC’s Local Law 97.

Overall Risk: Low

Geography: Portfolio-wide transitional risk exposure

 

Financially: Low

We regularly monitor regulatory and industry developments to ensure compliance with federal, state, and local climate- and ESG-related policies.

 

We also participate in banking industry and peer benchmarking information sharing events on ESG and climate topics in addition to consulting with sustainability and climate risk specialists.

 

As discussed in our NYCB’s 2023 Proxy and throughout Flagstar’s ESG website, we have made numerous ESG and climate accomplishments in 2022 to mitigate current and future regulatory pressure. Some of these accomplishments include launching the Green Team ERG, completing LED retrofits, making energy efficiency improvements, upgrades to insulation, reducing employee travel and commuting, managing water efficiencies, pursuing green building certifications, financing various green projects, improving waste efficiencies, conducting climate change scenarios, and conducting baseline assessments over our greenhouse gas inventory.

Reputational

Risk that an action, transaction, investment, or event will reduce customer, counterparty, investor, regulator, employee and/or the public trust in the bank’s integrity and competence.

 

The reputational risk of not adopting sustainable and ESG business practices could result in adverse impacts to revenue, funding, or operations due to changes in stakeholder preferences. 

Overall Risk: Low

Geography: Portfolio-wide transitional risk exposure

 

Financially: Low

We continuously strive to improve and implement sustainability initiatives throughout our operations to mitigate reputational risk.

 

For further information on our ESG effort, see our annual report on our ESG website. You’ll find our latest accomplishments and progress across ESG-related topics. 

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