Flagstar Bancorp Reports Third Quarter 2021 Net Income of $152 Million, or $2.83 Per Diluted Share

TROY, Mich., Oct. 27, 2021 /PRNewswire/ --

Key Highlights - Third Quarter 2021

• Generated net interest income of $195 million, up $12 million from the prior quarter.
• Produced mortgage revenue of $178 million -- sixth consecutive quarter over $150 million.
• Grew capital significantly with total risk-based capital ratio increasing 42 basis points to 14.5 percent.
• Delivered exceptional returns on average tangible common equity of 25.2 percent and on average assets of 2.2 percent.

Flagstar Bancorp, Inc. (NYSE: FBC), the holding company for Flagstar Bank, today reported third quarter 2021 net income of $152 million, or $2.83 per diluted share, compared to second quarter 2021 net income of $147 million, or $2.74 per diluted share, and third quarter 2020 net income of $222 million, or $3.88 per diluted share.

Flagstar reported year to date 2021 net income of $448 million, or $8.37 per diluted share, compared to year to date 2020 net income of $384 million, or $6.71 per diluted share.

On an adjusted basis, Flagstar reported net income of $156 million, or $2.94 per diluted share, for the third quarter 2021, compared to $146 million, or $2.73 per diluted share, for the second quarter 2021. Flagstar reported adjusted year to date 2021 net income of $478 million, or $8.92 per diluted share.

"Today we posted another quarter of outstanding earnings," said Alessandro DiNello, president and chief executive officer of Flagstar Bancorp. "Highlights include growth of net interest income with a stable net interest margin, steady growth in our servicing portfolio, and excellent mortgage results that were in line with our expectations.

"The results once again demonstrated the strength of all our key businesses. The increase in our net interest income, the discipline of our mortgage team to drive overall gain on sale revenues and capitalize on market opportunities to become the second-largest RMBS issuer in the country during the quarter, and the uptick in our servicing portfolio, all demonstrate how we can deliver strong results. We also excelled in expense discipline, lowering the efficiency ratio 6 percent and achieving positive operating leverage. This performance combined to produce a 6 percent growth in tangible book value, which now exceeds $47 per share, and a return on average assets of 2.2 percent -- our fifth consecutive quarter that return on average assets has exceeded 2 percent. Further, since the beginning of 2020, we have grown tangible book value by $18.64 per share -- a remarkable 63 percent.

"Credit quality remained high during the quarter, with just one charge-off and one credit going to non-accrual, for which we have a healthy reserve. Given our confidence in the quality of our portfolio and forecasts for an improving economic environment, we released $30 million of our allowance for credit losses. Even with this release, excluding warehouse loans, our coverage ratio was 2.3 percent.

"As we move closer to completing our previously announced partnership with New York Community Bank, we are well positioned with strong fundamentals and a demonstrated power to generate capital. Until then, we are focusing on ensuring a smooth transition and continuing to execute on the business plan that has served our shareholders so well and brought us to this pivotal point in the history of our company."

Net Interest Income

Net interest income in the third quarter was $195 million, an increase of $12 million, or 7 percent, as compared to the second quarter 2021. The results primarily reflect higher earning assets, the result of higher loans held-for-sale during the quarter. Average earning assets increased $0.4 billion, or 2 percent, as average loans held-for-sale increased $0.9 billion. Net interest income further benefited from a decrease in funding costs, partially offset by decreases in certain yields in the loans held-for-investment portfolio.

Net interest margin in the third quarter was 3.00 percent, a 10 basis point increase from the prior quarter. Excluding the impact from the loans with government guarantees that have not been repurchased and do not accrue interest, adjusted net interest margin decreased 2 basis points to 3.04 percent in the third quarter, compared to adjusted net interest margin of 3.06 percent in the prior quarter. This compression was largely attributable to pricing actions we took to maintain warehouse balances.  Retail banking deposit rates decreased 1 basis point primarily driven by the maturity of higher cost time deposits. 

Average total deposits were $19.7 billion in the third quarter, up $0.6 billion, or 3 percent, from the second quarter 2021, largely due to $0.4 billion, or 20 percent, higher average government deposits resulting from seasonal tax collections and average retail deposits that increased $0.1 billion, or 1 percent. Average custodial deposits remained steady at $6.2 billion.

Provision for Credit Losses

The benefit for credit losses was $23 million for the third quarter, as compared to a $44 million benefit for the second quarter 2021, reflecting the performance of our portfolio and improved economic forecasts.

Noninterest Income

Noninterest income increased $14 million to $266 million in the third quarter, as compared to $252 million for the second quarter 2021, primarily due to higher mortgage revenues.

Third quarter net gain on loan sales increased $1 million, to $169 million, as compared to $168 million in the second quarter 2021. Gain on sale margins increased 15 basis points to 150 basis points for the third quarter 2021, compared to 135 basis points for the second quarter 2021. Fallout adjusted lock volume declined slightly, to $11.3 billion from $12.4 billion for the second quarter 2021.

Net return on mortgage servicing rights increased $14 million, to $9 million for the third quarter 2021, compared to a $5 million net loss for the second quarter 2021. This was driven by the improved valuation of our MSR portfolio at September 30, 2021.

Loan fees and charges decreased $4 million, to $33 million for the third quarter, compared to $37 million for the second quarter 2021, primarily due to a 2 percent decrease in mortgage loans closed.  

Noninterest Expense

Noninterest expense decreased to $286 million for the third quarter, compared to $289 million for the second quarter 2021. Excluding $5 million of merger costs in the third quarter of 2021 and $9 million of merger expenses in the second quarter 2021, and adjusting for the $10 million benefit from an agreement to reduce the 2009 former

CEO supplemental executive retirement plan liability in the second quarter 2021, noninterest expense decreased $9 million, or 3 percent. The decrease in noninterest expense primarily reflects lower commissions as mortgage loan closings decreased 2 percent compared to the prior quarter and seasonally lower benefit costs.

Mortgage expenses were $125 million for the third quarter, a decrease of $6 million compared to the prior quarter. The ratio of mortgage noninterest expense to closings -- our mortgage expense ratio -- was 1.00 percent, a decrease of 3 basis points from the second quarter 2021.

The efficiency ratio was 62 percent for the third quarter, as compared to 67 percent for the second quarter 2021. Excluding $5 million of merger expenses in the third quarter 2021, and $9 million of merger expenses in the second quarter 2021, and adjusting for the $10 million benefit from an agreement to reduce the 2009 former CEO supplemental executive retirement plan liability in the second quarter 2021, the adjusted efficiency ratio was 61 percent and 67 percent, respectively.

Income Taxes

The third quarter provision for income taxes totaled $46 million, with an effective tax rate of 23.2 percent, compared to $43 million and an effective tax rate of 22.5 percent for the second quarter 2021. The prior quarter's effective tax rate benefited from deductions associated with restricted stock vesting in that quarter.

Asset Quality

Our portfolio has held up well following the economic stress posed by the pandemic, resulting in net charge-offs of $6 million, or 19 basis points of LHFI in the third quarter 2021, primarily from one commercial borrower, compared to net charge-offs of $1 million, or 1 basis point in the prior quarter.

Nonperforming loans held-for-investment and troubled debt restructurings (TDRs) were $96 million and our ratio of nonperforming loans held-for-investment and TDRs to loans held-for-investment was 66 basis points at September 30, 2021, a 13 basis point increase compared to June 30, 2021. At September 30, 2021, early stage loan delinquencies totaled $14 million, or 10 basis points of total loans, compared to $12 million, or 9 basis points, at June 30, 2021.

The allowance for credit losses was $190 million and covered 1.33 percent of loans held-for-investment at September 30, 2021, a 24 basis point decrease from June 30, 2021. Excluding warehouse loans, the allowance coverage ratio was 2.29 percent, a 34 basis point decrease from June 30, 2021. The lower allowance for credit losses primarily reflects improvements in our economic forecasts and our evaluation of the performance of the LHFI portfolio as borrowers continue to recover from the economic stress caused by the pandemic. Overall, the portfolio quality has remained solid as shown by the relatively low levels of charge-offs, TDRs, nonperforming loans and early stage delinquencies.

Capital

We maintained a solid capital position with regulatory ratios above current regulatory quantitative guidelines for "well capitalized" institutions. The capital ratios are impacted by a 100 percent risk-weighting of the warehouse loan portfolio -- the largest component of the our held-for-investment portfolio. Adjusting the risk-weighting of warehouse loans to 50 percent, because of historically low level of losses from this portfolio, coupled with the fact that the portfolio is fully collateralized with assets that would receive a 50 percent risk weighting, we would have had a Tier 1 common equity ratio of 13.91 percent and a total risk-based capital ratio of 16.94 percent at September 30, 2021.

Importantly, tangible book value per share grew to $47.21, up $2.83, or 6 percent from last quarter.

About Flagstar

Flagstar Bancorp, Inc. (NYSE: FBC) is a $27.0 billion savings and loan holding company headquartered in Troy, Mich. Flagstar Bank, FSB, provides commercial, small business, and consumer banking services through 158 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 84 retail locations in 28 states. Flagstar is a leading national originator and servicer of mortgage and other consumer loans, handling payments and record keeping for $272 billion of loans representing over 1.2 million 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 certain non-GAAP financial measures. 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 periodic Flagstar reports filed with the U.S. Securities and Exchange Commission, which are available on the Company's website at flagstar.com.

Cautionary Statements Regarding Forward-Looking Statements

Certain statements in this press release may constitute "forward–looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to New York Community Banks ("NYCB") and Flagstar's beliefs, goals, intentions, and expectations regarding revenues, earnings, loan production, asset quality, capital levels, and acquisitions, among other matters; NYCB's and Flagstar's estimates of future costs and benefits of the actions each company may take; NYCB's and Flagstar's assessments of probable losses on loans; NYCB's and Flagstar's assessments of interest rate and other market risks; and NYCB's and Flagstar's ability to achieve their respective financial and other strategic goals.

Forward–looking statements are typically identified by such words as "believe," "expect," "anticipate," "intend," "outlook," "estimate," "forecast," "project," "should," and other similar words and expressions, and are subject to numerous assumptions, risks, and uncertainties, which change over time. These forward-looking statements include, without limitation, those relating to the terms, timing and closing of the proposed transaction.

Additionally, forward–looking statements speak only as of the date they are made; NYCB and Flagstar do not assume any duty, and do not undertake, to update such forward–looking statements. Furthermore, because forward–looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those indicated in such forward-looking statements as a result of a variety of factors, many of which are beyond the control of NYCB and Flagstar. The factors that could cause actual results to differ materially include the following: the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the definitive merger agreement among NYCB, 615 Corp. and Flagstar; the outcome of any legal proceedings that may be instituted against NYCB or Flagstar; the possibility that the proposed transaction will not close when expected or at all because required regulatory, or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated; the ability of NYCB and Flagstar to meet expectations regarding the timing, completion and accounting and tax treatments of the proposed transaction; the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of the common stock of NYCB or Flagstar; the possibility that the anticipated benefits of the proposed transaction will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where NYCB and Flagstar do business; certain restrictions during the pendency of the proposed transaction that may impact the parties' ability to pursue certain business opportunities or strategic transactions; the possibility that the proposed transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management's attention from ongoing business operations and opportunities; the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the proposed transaction within the expected timeframes or at all and to successfully integrate Flagstar's operations and those of NYCB; such integration may be more difficult, time consuming or costly than expected; revenues following the proposed transaction may be lower than expected; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the proposed transaction; NYCB's and Flagstar's success in executing their respective business plans and strategies and managing the risks involved in the foregoing; the dilution caused by NYCB's issuance of additional shares of its capital stock in connection with the proposed transaction; and other factors that may affect future results of NYCB and Flagstar; and the other factors discussed in the "Risk Factors" section NYCB's Annual Report on Form 10–K for the year ended December 31, 2020 and in other reports NYCB files with the U.S. Securities and Exchange Commission (the "SEC"), which are available at https://www.sec.gov and in the "SEC Filings" section of NYCB's website, https://ir.mynycb.com, under the heading "Financial Information," and in Flagstar's Annual Report on Form 10-K for the year ended December 31, 2020 and in Flagstar's other filings with SEC, which are available at https://www.sec.gov and in the "Documents" section of Flagstar's website, https://investors.flagstar.com.