Flagstar Reports First Quarter 2018 Net Income of $35 million, or $0.60 per Diluted Share

TROY, Mich., April 24, 2018 /PRNewswire/ --

Key Highlights - First Quarter 2018

• Net interest income relatively stable at $106 million, supported by solid gains in commercial loans.
• Mortgage revenues decreased $11 million, or 15 percent from prior quarter, led by seasonal decline in mortgage originations and margin compression from competitive market.
• Noninterest expense fell $5 million, or 3 percent from last quarter, driven by lower mortgage closings and prudent expense management.
• Strong asset quality with minimal net charge-offs, low consumer delinquencies and no commercial delinquencies.
• Acquisitions in the quarter position the Community Banking business for continued growth.

Flagstar Bancorp, Inc. (NYSE:FBC), the holding company for Flagstar Bank, FSB, today reported first quarter 2018 net income of $35 million, or $0.60 per diluted share. This compared to a fourth quarter 2017 net loss of $45 million, or $0.79 per diluted share, which included a non-cash charge to the provision for income taxes of $80 million, or $1.37 per diluted share. Excluding the tax reform-related charge in the fourth quarter 2017, the Company had adjusted net income of $35 million, or $0.60 per diluted share. For the first quarter 2017, the Company reported net income of $27 million, or $0.46 per diluted share.

"This quarter continued to prove the resilience of our earnings," said Alessandro DiNello, president and chief executive officer of Flagstar Bancorp, Inc. "Our solid base of earning assets, along with careful expense management, helped us deliver strong results.

"We made terrific progress in strengthening the franchise in the first quarter. We continued to book high-quality commercial loans, we grew deposits, we kept our net interest margin stable and we closed on two strategic acquisitions that helped both sides of the balance sheet.

"First, we closed on the purchase of the mortgage warehouse business from Santander Bank, which brought approximately $500 million of mortgage warehouse loans to the balance sheet, then we acquired the branches of Desert Community Bank, bringing approximately $600 million in low cost deposits to the balance sheet.

"Servicing also continued to prosper. We sold $12 billion of mortgage servicing rights in the first quarter and agreed to sell an additional $7 billion next quarter, while entering into subservicing agreements for 100 percent of the sales. The purchasers of the MSRs have selected Flagstar to subservice their loans which is a testament to our best-in-class servicing platform. After all these sales close and together with non-Flagstar originated loans that we are scheduled to onboard in May and June, we will comfortably be above 500,000 loans serviced or subserviced by the end of the second quarter.

"We're off to a nice start in 2018 supported by solid capital and a strong allowance coverage. Clearly, we have transformed our company into a well-diversified bank and have demonstrated the ability to produce consistent earnings."

First Quarter 2018 Highlights:

Net Interest Income

Net interest income fell $1 million to $106 million for the first quarter 2018, as compared to the fourth quarter 2017. The decrease from the prior quarter reflected two fewer days in the first quarter 2018. Both average earning assets and net interest margin were steady at $15.4 billion and 2.76 percent, respectively, as higher consumer, commercial real estate and commercial and industrial loans were offset by seasonal declines in loans held-for-sale and warehouse loans.

Loans held-for-investment averaged $7.5 billion for the first quarter 2018, increasing $192 million, or 3 percent, from the prior quarter. During the first quarter 2018, average consumer loans rose $214 million, or 7 percent, led by home equity lines of credit and mortgage loans (primarily jumbos). Commercial loan growth was solid with average commercial and industrial and commercial real estate loans increasing $169 million, or 6 percent. Average warehouse loans fell $191 million, driven by anticipated seasonal factors and lower overall mortgage volumes experienced by the Company's warehouse customers. The Company's purchase of a mortgage warehouse business occurring late in the quarter did not have a significant impact on average warehouse balances.

Average total deposits were $9.4 billion in the first quarter 2018, increasing $287 million, or 3 percent from the fourth quarter 2017. The increase was led by higher government and retail deposits, partially offset by seasonally lower company controlled deposits. Average government deposits rose $151 million, or 15 percent. Average retail deposits increased $109 million, or 2 percent, as higher retail certificates of deposit (up $222 million, or 16 percent) were partially offset by a decline in retail savings deposits (down $131 million, or 4 percent).

Provision for Loan Losses

The Company had no provision for loan losses for the first quarter 2018, as compared to $2 million for the fourth quarter 2017. The lack of provision expense reflected strong asset quality and a low level of net charge-offs in the quarter.

Noninterest Income

Noninterest income fell $13 million, or 10 percent, to $111 million in the first quarter of 2018, as compared to $124 million for the fourth quarter 2017. The decrease was primarily due to a drop in net gain on loan sales and loan fees and charges, partially offset by an increase in the net return on the mortgage servicing rights.

First quarter 2018 net gain on loan sales fell $19 million, or 24 percent, to $60 million, versus $79 million in the fourth quarter 2017. Fallout-adjusted locks fell 11 percent to $7.7 billion primarily due to a seasonal decline in mortgage originations. The net gain on loan sale margin fell 14 basis points to 0.77 percent for the first quarter 2018, as compared to 0.91 percent for the fourth quarter 2017. The lower margin was primarily due to competitive pricing pressure.

Loan fees and charges fell to $20 million for the first quarter 2018, as compared to $24 million for the fourth quarter 2017. The decrease primarily reflected lower mortgage loan closings.

Net return on mortgage servicing rights (including the impact of hedges) increased $8 million, resulting in a net gain of $4 million for the first quarter 2018, as compared to a net loss of $4 million for the fourth quarter 2017. The increase from the prior quarter largely reflected two factors realized in the fourth quarter 2017 -- a $4 million decrease in fair value driven by model changes and a $3 million charge associated with MSR sales that closed in the first quarter 2018.

Noninterest Expense

Noninterest expense fell to $173 million for the first quarter 2018, as compared to $178 million for the fourth quarter 2017, due to lower mortgage closings and prudent expense management. During the first quarter 2018, commissions fell $5 million and loan processing expense declined $2 million from lower mortgage closings. The Company's efficiency ratio was 80 percent for the first quarter 2018, as compared to 77 percent for the fourth quarter 2017, resulting from the seasonal decline in mortgage revenue.

Income Taxes

The first quarter 2018 provision for income taxes totaled $9 million, as compared to $96 million in the fourth quarter 2017, which included a charge to the provision for income taxes of $80 million resulting from new tax legislation. As a result of tax reform, the Company's effective tax rate was 20 percent for the first quarter 2018, as compared to the adjusted effective tax rate of 32 percent for the fourth quarter 2017.

Asset Quality

The allowance for loan losses was $139 million at March 31, 2018, compared to $140 million at December 31, 2017. The allowance for loan losses covered 1.7 percent of loans held-for-investment at March 31, 2018, as compared to 1.8 percent of loans held-for-investment at December 31, 2017.

Net charge-offs in the first quarter 2018 were $1 million, or 6 basis points of HFI loans, compared to $2 million, or 12 basis points in the prior quarter.

Nonperforming loans held-for-investment were $29 million at March 31, 2018, unchanged from December 31, 2017. The ratio of nonperforming loans to loans held-for-investment was 0.35 percent at March 31, 2018, compared to 0.38 percent at December 31, 2017. At March 31, 2018, consumer loan delinquencies totaled $5 million, or 0.14 percent of consumer loans, compared to $5 million, or 0.15 percent at December 31, 2017. There were no commercial loan delinquencies greater than 30 days at March 31, 2018.

Capital

The Company maintained a robust capital position with regulatory ratios well above current regulatory quantitative guidelines for "well capitalized" institutions. At March 31, 2018, the Company had a Tier 1 leverage ratio of 8.72 percent, as compared to 8.51 percent at December 31, 2017. The increase in the ratio resulted from MSR sales and earnings retention, partially offset by the Company's acquisition of the branches of Desert Community Bank and the mortgage warehouse business from Santander Bank.

Under the terms of recently proposed changes to regulatory capital requirements, the Company's Tier 1 leverage ratio would have increased by approximately 50 basis points and risk-based capital ratios by approximately 10-25 basis points at March 31, 2018 (pro-forma basis).

Earnings Conference Call

As previously announced, the Company's first quarter 2018 earnings call will be held Tuesday, April 24, 2018 at 11 a.m. (ET).

To join the call, please dial (800) 667-5617 toll free or (334) 323-0505 and use passcode 3321708. 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 3321708.

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 a $17.7 billion savings and loan holding company headquartered in Troy, Mich. Flagstar Bank, FSB, provides commercial, small business, and consumer banking services through 99 branches in Michigan and 8 branches in California through its Desert Community Bank division. It also provides home loans through a wholesale network of brokers and correspondents in all 50 states, as well as 92 retail locations in 31 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 $104 billion of home loans representing over 470,000 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, adjusted net income and adjusted earnings per share. 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.