Flagstar Reports Third Quarter 2018 Net Income of $48 million, or $0.83 per Diluted Share

TROY, Mich., Oct. 23, 2018 /PRNewswire/ --

Key Highlights - Third Quarter 2018

• Adjusted net income of $49 million, or $0.85 per diluted share, excluding costs for pending Wells Fargo branch acquisition.
• Net interest income grew $9 million, or 8 percent from second quarter 2018, led by earning asset growth and net interest margin expansion.
• Average loans held-for-investment rose 6 percent while average total deposits increased 9 percent from prior quarter.
• Total serviced accounts increased 16 percent from last quarter to nearly 620,000 accounts.
• Noninterest expense dropped $4 million, or 2 percent from prior quarter, driven by prudent expense management and lower mortgage expenses.
• Pristine asset quality - minimal net charge-offs, very low delinquencies and strong allowance for loan loss coverage.

Flagstar Bancorp, Inc. (NYSE: FBC), the holding company for Flagstar Bank, FSB, today reported third quarter 2018 net income of $48 million, or $0.83 per diluted share, and adjusted net income of $49 million, or $0.85 per diluted share, excluding $1.2 million of pre-tax expenses related to the pending acquisition of Wells Fargo branches. The Company reported net income of $50 million, or $0.85 per diluted share, in the second quarter 2018, and $40 million, or $0.70 per diluted share, in the third quarter 2017.

"Our third quarter results once again demonstrated the strength of our banking business," said Alessandro DiNello, president and chief executive officer of Flagstar Bancorp, Inc. "Solid growth in banking along with disciplined cost control, helped us deliver an adjusted ROA of 1.1 percent.

"Our banking business provided a stable and growing source of income. Net interest income grew 8 percent from last quarter, as average earning assets increased 5 percent and the net interest margin expanded 7 basis points. Also, we saw total serviced accounts increase 16 percent in the quarter and we now service nearly 620,000 accounts. We expect this total to exceed 800,000 by year-end.

"Earnings were also helped by our expense discipline. In the third quarter 2018, total noninterest expense fell 2 percent to $173 million, despite strong growth in the balance sheet and increased mortgage originations, as we continued to scale businesses with a lower level of incremental expense, along with aggressively managing our mortgage expenses.

"Mortgage revenues declined in the quarter as fallout-adjusted locks decreased 8 percent to $8.3 billion and the net gain on loan sale margin fell 20 basis points to 0.51 percent. This decline was partially offset by a stronger MSR return.

"Looking ahead, we believe we are well positioned for continued success. Our pending acquisition of 52 Midwest branches of Wells Fargo, which we expect to close at the beginning of December 2018, will bring us low cost and low beta deposits. Additionally, with the lifting of our Federal Reserve Supervisory Agreement this quarter, we now have more flexibility in managing our capital to maximize risk-adjusted returns for our shareholders."

Third Quarter 2018 Highlights:

Net Interest Income

Net interest income rose $9 million to $124 million for the third quarter 2018, as compared to the second quarter 2018. The results reflected a 5 percent increase in average earning assets, led by balanced growth in loans held-for-sale, commercial and consumer loans. The net interest margin expanded 7 basis points to 2.93 percent for the third quarter 2018 as higher yields on interest-earning assets more than offset higher deposit costs.

Loans held-for-investment averaged $8.9 billion for the third quarter 2018, increasing $492 million, or 6 percent, from the prior quarter. During the third quarter 2018, average commercial loans rose $253 million, or 5 percent, with average warehouse loans increasing $91 million, average commercial real estate loans rising $89 million and average commercial and industrial loans increasing $73 million. Average consumer loans rose $239 million, or 7 percent, driven by an increase in mortgage loans (primarily jumbo).

Average total deposits were $11.3 billion in the third quarter 2018, increasing $922 million, or 9 percent from the second quarter 2018, led primarily by higher custodial and retail deposits. Average custodial deposits rose $366 million, or 23 percent, led by a 16 percent increase in serviced accounts. Average retail deposits increased $211 million, or 3 percent, as higher demand deposits and certificates of deposit were partially offset by a drop in savings deposits.

Provision for Loan Losses

The Company experienced a provision benefit in the third quarter 2018, resulting primarily from a continued decline in loss rates in the held-for-investment portfolio. The provision benefit totaled $2 million for the third quarter 2018, as compared to $1 million for the second quarter 2018.

Noninterest Income

Noninterest income fell $16 million, or 13 percent, to $107 million in the third quarter of 2018, as compared to $123 million for the second quarter 2018. The decrease was primarily due to lower net gain on loan sales, partially offset by an increase in the net return on mortgage servicing rights.

Third quarter 2018 net gain on loan sales fell $20 million, or 32 percent, to $43 million, versus $63 million in the second quarter 2018. Fallout-adjusted locks decreased 8 percent to $8.3 billion, due to softer mortgage volume. The net gain on loan sale margin fell 20 basis points to 0.51 percent for the third quarter 2018, as compared to 0.71 percent for the second quarter 2018. The lower margin was primarily due to secondary margin compression and a mix shift toward lower margin, but lower cost delegated correspondent business. Excluding the secondary performance, the net gain on loan sale margin was 66 basis points.

Net return on mortgage servicing rights (including the impact of hedges) increased $4 million, resulting in a net gain of $13 million for the third quarter 2018, as compared to a net gain of $9 million for the second quarter 2018. The increase from the prior quarter largely reflected higher service fee income due to a larger MSR portfolio and a $1.9 million fair value gain associated with a pending MSR sale of $4.7 billion UPB expected to close in the fourth quarter 2018.

Noninterest Expense

Noninterest expense fell to $173 million for the third quarter 2018, as compared to $177 million for the second quarter 2018, primarily due to lower compensation and benefits and commissions, partially offset by acquisition costs related to the Company's pending acquisition of Wells Fargo branches. Excluding $1.2 million of transaction costs from pending acquisitions, the Company's adjusted noninterest expense was $172 million.

During the third quarter 2018, compensation and benefits declined $4 million, primarily due to cost reduction initiatives and lower incentive compensation, while commissions decreased $4 million, reflecting lower mortgage expenses.

The Company's total efficiency ratio rose slightly to 75 percent for the third quarter 2018, as compared to 74 percent for the second quarter 2018, resulting from the decline in mortgage revenue. Revenue decreased 3 percent while expenses fell 2 percent in the third quarter 2018.

Income Taxes

The third quarter 2018 provision for income taxes totaled $12 million, unchanged from the second quarter 2018. The Company's effective tax rate was 20 percent for the third quarter 2018, unchanged from the prior quarter.

Asset Quality

The allowance for loan losses was $134 million at September 30, 2018, compared to $137 million at June 30, 2018. The allowance for loan losses covered 1.5 percent of loans held-for-investment at September 30, 2018, unchanged from June 30, 2018.

Net charge-offs in the third quarter 2018 were $1 million, or 5 basis points of HFI loans, compared to $1 million, or 2 basis points in the prior quarter.

Nonperforming loans held-for-investment were $25 million at September 30, 2018, compared to $27 million at June 30, 2018. The ratio of nonperforming loans to loans held-for-investment was 0.28 percent at September 30, 2018, compared to 0.30 percent at June 30, 2018. At September 30, 2018, early stage consumer loan delinquencies totaled $3 million, or 0.08 percent of consumer loans, unchanged from June 30, 2018.

Capital

The Company maintained a robust capital position with regulatory ratios well above current regulatory quantitative guidelines for "well capitalized" institutions. At September 30, 2018, the Company had a Tier 1 leverage ratio of 8.36 percent, as compared to 8.65 percent at June 30, 2018. The decrease in the ratio resulted primarily from balance sheet growth and higher MSRs, partially offset by earnings retention.

Under the terms of recently proposed changes to regulatory capital requirements, the Company's Tier 1 leverage ratio would have increased approximately 67 basis points and risk-based capital ratios by approximately 30-50 basis points at September 30, 2018 (pro forma basis).

Earnings Conference Call

As previously announced, the Company's third quarter 2018 earnings call will be held Tuesday, October 23, 2018 at 11 a.m. (ET).

To join the call, please dial (877) 260-1479 toll free or (334) 323-0522 and use passcode 9173210. Please call at least 10 minutes before the conference is scheduled to begin. A replay will be available for five business days by calling (888) 203-1112 toll free or (719) 457-0820 and using passcode 9173210.

The conference call will also be available as a live audiocast on the Investor Relations section of flagstar.com, where it will be archived and available for replay and download. The slide presentation accompanying the conference call will be posted on the site.

About Flagstar

Flagstar Bancorp, Inc. (NYSE: FBC) is an $18.7 billion savings and loan holding company headquartered in Troy, Mich. Flagstar Bank, FSB, provides commercial, small business, and consumer banking services through 108 branches in Michigan and California. It also provides home loans through a wholesale network of brokers and correspondents in all 50 states, as well as 81 retail locations in 27 states, representing the combined retail branches of Flagstar and its Opes Advisors mortgage division. Flagstar is a leading national originator and servicer of mortgage loans, handling payments and record keeping for $136 billion of home loans representing nearly 620,000 borrowers. For more information, please visit flagstar.com.

Use of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this news release includes non-GAAP financial measures, such as tangible book value per share, tangible common equity to assets ratio, adjusted net income, adjusted diluted earnings per share, adjusted noninterest expense and adjusted return on average assets. The Company believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the capital requirements Flagstar will face in the future and underlying performance and trends of Flagstar.

Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. Also, we ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and that they are computed in a manner intended to facilitate consistent period-to-period comparisons. Flagstar's method of calculating these non-GAAP measures may differ from methods used by other companies. These non-GAAP measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements.

Where non-GAAP financial measures are used, the most directly comparable GAAP or regulatory financial measure, as well as the reconciliation to the most directly comparable GAAP or regulatory financial measure, can be found in this news release. Additional discussion of the use of non-GAAP measures can also be found in conference call slides, the Form 8-K Current Report related to this news release and in periodic Flagstar reports filed with the U.S. Securities and Exchange Commission. These documents can all be found on the Company's website at flagstar.com.

Forward-Looking Statements

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of Flagstar Bancorp, Inc.'s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The Company's actual results could differ materially from those described in the forward-looking statements depending upon various factors as described in periodic Flagstar reports filed with the U.S. Securities and Exchange Commission, which are available on the Company's website (flagstar.com) and on the Securities and Exchange Commission's website (sec.gov). Other than as required under United States securities laws, Flagstar Bancorp does not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

For more information, contact: 

David L. Urban
david.urban@flagstar.com  
(248) 312-5970