Franchise News

Key Highlights - Second Quarter 2019

• Adjusted net income of $41 million, or $0.71 per diluted share, excluding Department of Justice ("DOJ") benefit of $25 million.
  
• Positive operating leverage as total adjusted operating revenue increased $46 million, or 20 percent, while noninterest expense rose $23 million, or 12 percent from last quarter.
  
• Mortgage revenues increased $25 million from prior quarter, led by margin expansion of 17 basis points and an increase in fallout-adjusted locks, partially offset by lower net return on MSRs.
  
• Net interest income increased $12 million, driven by broad-based earning asset growth.

Flagstar Bancorp, Inc. (NYSE: FBC), the holding company for Flagstar Bank, FSB, today reported second quarter 2019 net income of $61 million, or $1.06 per diluted share, compared to first quarter 2019 net income of $36 million, or $0.63 per diluted share. On an adjusted basis, Flagstar reported net income of $41 million, or $0.71 per diluted share, for the second quarter 2019, compared to net income of $37 million, or $0.64 per diluted share, for the first quarter 2019. For the second quarter 2018, Flagstar reported net income of $50 million, or $0.85 per diluted share.

Second Quarter 2019 Highlights:

"Our solid second quarter results demonstrate the strength and durability of our franchise," said Alessandro DiNello, president and chief executive officer of Flagstar Bancorp, Inc. "Our commercial lending, mortgage banking and servicing teams executed well, fueling top-line growth and driving positive operating leverage and an improved efficiency ratio. The flexibility of our business model positioned us to quickly pivot during the quarter to take advantage of attractive market opportunities.

"The community banking and mortgage servicing businesses provided another quarter of stable earnings. Net interest income grew $12 million as earning assets grew $1.5 billion, or 9 percent during the quarter. Our commercial loan growth was 22 percent as we focused on growing our higher-yielding portfolios, such as our warehouse business. Total serviced accounts increased to 983,000, continuing growth in a segment that provides both a stable source of fee income and liquidity.

"Our mortgage team delivered a strong quarter as they maintained pricing discipline and grew gain on sale margin by 17 basis points compared to first quarter 2019 and 18 basis points compared to second quarter 2018. It is also the third consecutive quarter that gain on sale margin expanded and we increased fallout-adjusted locks by 26 percent to $8.3 billion. The improvement in net gain on loan sales more than offset a lower net return on MSRs.

"During the quarter we recognized a $30 million partial charge-off related to the Live Well Financial loan we disclosed in our first quarter Form 10-Q. While we believe a recovery of some amount may be realized through legal remedies, we cannot quantify that at this time. We are confident this is an isolated situation as the credit quality of our loan portfolio remains strong.

"We were very pleased with the quality of earnings this quarter, as we realized earnings per share growth over prior quarter. This performance reflects the strength and flexibility of our unique business model to adapt to ever-changing market conditions and continue to improve profitability. Looking forward, we believe we are positioned well to continue to deliver positive results for our shareholders."

Net Interest Income

Net interest income increased $12 million, or 10 percent, to $138 million for the second quarter 2019 as compared to the first quarter 2019. The results reflect a 9 percent increase in average earning assets, led by 22 percent growth in commercial loans.  Net interest margin decreased 1 basis point to 3.08 percent for the second quarter 2019 as compared to the first quarter 2019. This was accomplished all while generating high quality loan and deposit growth despite falling interest rates.

Loans held-for-investment averaged $10.6 billion for the second quarter 2019, increasing $1.4 billion from the prior quarter. During the second quarter 2019, average warehouse loans increased $822 million, or 70 percent, due to actions taken to grow overall net interest income while also benefiting from seasonally higher volume. We also had broad-based commercial real estate and commercial and industrial loan growth as those portfolios rose $294 million, or 8 percent. Average consumer loans increased $333 million, or 8 percent, driven primarily by loan growth in non-auto indirect and mortgage.

Average total deposits were $14.2 billion in the second quarter 2019, increasing $1.3 billion, or 10 percent, from the first quarter 2019. The increase reflects $936 million higher custodial deposits and $332 million higher retail deposits.

Provision for Loan Losses

The provision for loan losses was $17 million for the second quarter 2019, as compared to no provision for the first quarter 2019. The higher provision was due to the $30 million Live Well Financial partial loan charge-off resulting from the borrower unexpectedly ceasing operations under unusual circumstances and $4 million of net charge-offs primarily on unsecured consumer loans. This was partially offset by $9 million from the payoff of substandard commercial loans and the continued strength of our consumer portfolio.

Noninterest Income

Noninterest income increased $59 million, or 54 percent, to $168 million in the second quarter 2019, as compared to $109 million for the first quarter 2019. Excluding the $25 million DOJ benefit, adjusted noninterest income rose $34 million, or 31 percent, primarily due to actions we took to increase gain on sale margin while also benefiting from increased refinance activity and the seasonality of our mortgage business. During the quarter, certain available for sale securities were sold, which resulted in a gain. These increases were partially offset by lower net loan administration income.

Second quarter 2019 net gain on loan sales increased $26 million, or 53 percent, to $75 million, versus $49 million in the first quarter 2019. The net gain on loan sale margin expanded 17 basis points to 0.89 percent for the second quarter 2019, as compared to 0.72 percent for the first quarter 2019. Fallout-adjusted locks increased 26 percent to $8.3 billion, reflecting seasonally higher volume and increased refinance activity due to the persistence of lower mortgage rates.

Loan fees and charges increased $7 million, or 41 percent, to $24 million for the second quarter 2019, as compared to $17 million for the first quarter 2019, driven by seasonally higher mortgage loan closings.

The DOJ settlement liability fair value adjustment was $25 million for the quarter, reducing the liability to $35 million at June 30, 2019.  The lower value resulted from a change in the expectation as to the likelihood and timing of payments to the DOJ.

Noninterest Expense

Noninterest expense increased to $214 million for the second quarter 2019, as compared to $191 million for the first quarter 2019. The increase is primarily attributable to mortgage-related expenses driven by seasonally higher mortgage closings.

The Company's efficiency ratio was 70 percent for the second quarter 2019, as compared to 81 percent for the first quarter 2019. The adjusted efficiency ratio was 76 percent in the second quarter 2019. The results reflect positive operating leverage as adjusted total revenue increased 20 percent while expenses rose 12 percent during the second quarter of 2019.

Income Taxes

The second quarter 2019 provision for income taxes totaled $14 million, compared to $8 million for the first quarter 2019. The Company's effective tax rate was 19 percent for the second quarter 2019, compared to 18 percent for the first quarter 2019.

Asset Quality

The allowance for loan losses was $110 million at June 30, 2019, compared to $127 million at March 31, 2019. The allowance for loan losses covered 0.9 percent of loans held-for-investment at June 30, 2019, as compared to 1.3 percent of loans held-for-investment at March 31, 2019.

Net charge-offs in the second quarter 2019 were $34 million, or 129 basis points of LHFI, compared to $1 million, or 5 basis points in the prior quarter. Charge-offs in the second quarter included the $30 million loss mentioned above and $4 million in other net charge-offs primarily related to unsecured consumer credits acquired in the December branch acquisition.

Nonperforming loans were $63 million at June 30, 2019, compared to $24 million at March 31, 2019. Nonperforming loans at June 30, 2019 includes $37 million collateral dependent commercial loan noted above. The ratio of nonperforming loans to loans held-for-investment was 0.54 percent at June 30, 2019, compared to 0.24 percent at March 31, 2019. At June 30, 2019, early stage loan delinquencies totaled $8 million, or 0.07 percent, of total loans, compared to $9 million, or 0.09 percent, at March 31, 2019.

Capital

The Company maintained a solid capital position with regulatory ratios well above current regulatory quantitative guidelines for "well capitalized" institutions. At June 30, 2019, the Company had a total risk-based capital ratio of 11.56 percent, as compared to 12.49 percent at March 31, 2019. The decrease in the ratio resulted primarily from $1 billion of warehouse loan growth during the quarter which will naturally decline due to the seasonality of the mortgage business.

Under the terms of recently approved regulatory capital requirements, the Company's Tier 1 leverage ratio would have increased approximately 63 basis points and risk-based capital ratios by approximately 40-50 basis points at June 30, 2019 (pro forma basis).

Earnings Conference Call

As previously announced, the Company's second quarter 2019 earnings call will be held Tuesday, July 23, 2019 at 11 a.m. (ET).

To join the call, please dial (888) 599-8686 toll free or (786) 789-4797 and use passcode 6186033. 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 6186033.

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 $20.2 billion savings and loan holding company headquartered in Troy, Mich. Flagstar Bank, FSB, provides commercial, small business, and consumer banking services through 160 branches in Michigan, Indiana, California, Wisconsin and Ohio. It also provides home loans through a wholesale network of brokers and correspondents in all 50 states, as well as 78 retail locations in 21 states, representing the combined retail branches of Flagstar and its Opes Advisors mortgage division. Flagstar is a leading national originator and servicer of mortgage and other consumer loans, handling payments and record keeping for $203 billion of loans representing 983,000 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, return on average tangible equity, adjusted return on average tangible equity, adjusted return on average assets, adjusted HFI loan-to-deposit ratio, adjusted net interest income, adjusted noninterest income, adjusted noninterest expense, adjusted income before income taxes, adjusted provision for income taxes, adjusted net income, adjusted basic and diluted earnings per share, adjusted net interest margin, and adjusted efficiency ratio. 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.

Non-GAAP Reconciliation
(Dollars in millions)
(Unaudited)

In addition to analyzing the Company's results on a reported basis, management reviews the Company's results and the results on an adjusted basis. The non-GAAP measures presented in the tables below reflect the adjustments of the reported U.S.GAAP results for significant items that management does not believe are reflective of the Company's current and ongoing operations. The DOJ benefit and acquisition related expenses and hedging gains recognized in conjunction with the Well Fargo branch acquisition from 2018 are not reflective of our ongoing operations and, therefore, have been excluded from our U.S. GAAP results. The Company believes that tangible book value per share, tangible common equity to assets ratio, return on average tangible equity, adjusted return on average tangible equity, adjusted return on average assets, adjusted HFI loan-to-deposit ratio, adjusted net income, adjusted basic and diluted earnings per share, adjusted noninterest expense, adjusted net interest income, adjusted net interest margin, adjusted income before taxes, adjusted provision for income taxes, and adjusted efficiency ratio provide a meaningful representation of its operating performance on an ongoing basis.

The following tables provide a reconciliation of non-GAAP financial measures.