Form 8-K FLAGSTAR BANCORP INC For: Jan 18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 18, 2019
(Exact name of registrant as specified in its charter)
Michigan | 1-16577 | 38-3150651 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||
5151 Corporate Drive, Troy, Michigan 48098 | ||||
(Address of principal executive offices) (Zip Code) |
(248) 312-2000
(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02 | Results of Operations and Financial Condition |
On January 22, 2019, Flagstar Bancorp, Inc. (the "Company") issued a press release regarding its preliminary results of operations and financial condition for the three months ended December 31, 2018. The text of the press release is furnished as Exhibit 99.1 to this report. The Company will include final financial statements and additional analyses for the year ended December 31, 2018 as part of its Annual Report on Form 10-K.
On January 22, 2019, the Company will hold a conference call to review fourth quarter 2018 earnings. A copy of the slide presentation to be used by the Company on the conference call is furnished as Exhibit 99.2 to this Current Report on Form 8-K.
Item 5.02 | Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. |
On January 18, 2019, Flagstar Bancorp, Inc. (the "Company") and Flagstar Bank, FSB (the "Bank") entered into separate change in control agreements with James Ciroli (the “Ciroli Agreement”) and with Stephen Figliuolo (the “Figliuolo Agreement”) to provide each of them with certain benefits upon their respective termination of employment due to a “change in control” as defined therein.
The agreements provide that Mr. Ciroli and Mr. Figliuolo will each receive two times the sum of their respective base salary and targeted bonus in the event that the executive is terminated due to a “change in control”. For 2018, Mr. Ciroli’s annual base salary was $500,000 and Mr. Figliuolo’s annual base salary was $425,000. The agreements also provide that all of Executive’s then-outstanding unvested stock shall become fully vested.
The Ciroli Agreement and the Figliuolo Agreement each continue for 12 months from the date of execution, and each will automatically renew at the end of their respective terms for successive 12 month periods thereafter unless any party to each such agreement gives notice otherwise at least 60 days in advance. In addition, both the Ciroli Agreement and the Figliuolo Agreement contain non-compete and non-solicit requirements that apply during the term of the agreement and for one year thereafter.
Item 9.01 | Financial Statements and Exhibits |
Exhibits | ||||
99.1 | Press release of Flagstar Bancorp, Inc. dated January 22, 2018 | |||
99.2 | Flagstar Bancorp, Inc. Conference Call Presentation Slides - Earnings Presentation Fourth Quarter |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
FLAGSTAR BANCORP, INC. | |||||||
Dated: | January 22, 2019 | By: | /s/ James K. Ciroli | ||||
James K. Ciroli | |||||||
Executive Vice President and Chief Financial Officer |
Exhibit Index
EXHIBIT 99.1
NEWS RELEASE
For more information, contact:
David L. Urban
(248) 312-5970
Flagstar Reports Fourth Quarter 2018 Net Income of $54 million, or $0.93 Per Diluted Share
Company delivers solid earnings reflecting stronger, more diversified franchise
Key Highlights - Fourth Quarter 2018
• | Completed Wells Fargo branch acquisition, providing low-cost, stable liquidity for continued banking growth. |
◦ | Results include a $29 million pre-tax benefit for hedging gains recognized in conjunction with the acquisition and $14 million of pre-tax acquisition-related expenses. |
◦ | Excluding the acquisition-related benefit and expenses, adjusted net income was $42 million, or $0.72 per diluted share, an increase of 20 percent from adjusted fourth quarter 2017 net income. |
• | Strong capital position with total risk-based capital ratio at 13.6 percent. |
• | Pristine asset quality with minimal net charge-offs, low consumer delinquencies and no commercial delinquencies. |
TROY, Mich., Jan. 22, 2019 - Flagstar Bancorp, Inc. (NYSE: FBC), the holding company for Flagstar Bank, FSB, today reported fourth quarter 2018 net income of $54 million, or $0.93 per diluted share, and adjusted net income of $42 million, or $0.72 per diluted share, excluding Wells Fargo branch acquisition-related benefit and expenses. The Company reported net income of $48 million, or $0.83 per diluted share, in the third quarter 2018, and a net loss of $45 million, or $0.79 per diluted share, in the fourth quarter 2017, due to a one-time, non-cash charge of $80 million from new tax legislation.
"Our fourth quarter results further reflect the transformation Flagstar has made,” said Alessandro DiNello, president and chief executive officer of Flagstar Bancorp, Inc. “We reported adjusted net income of $0.72 per diluted share for the quarter, net income of $3.21 per diluted share for the year and adjusted net income of $3.02 per diluted share for the year, evidencing the stronger, more diversified franchise we’ve become. While this quarter’s gain on sale revenue was the lowest since the early days of the financial crisis, we delivered solid earnings as reflected in an adjusted return on average assets of 0.91 percent.
“The most recent step in our transformation was the acquisition of 52 Midwest branches from Wells Fargo Bank, which closed this quarter and significantly increased our core customer base. While we experienced some initial challenges in the transition, the Flagstar team worked hard to take care of each customer’s
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individual circumstances. I’m proud of how the team reacted to this challenge. Although the deposits we purchased at acquisition were lower than anticipated, at this point, nearly 2 months after the conversion, we’ve seen only 8.7 percent attrition (as of January 19) as compared to the 17 percent post-closing attrition we had projected. We remain confident in the benefits of the acquisition, which boosts our net interest margin and provides substantial, low-cost stable liquidity.
“Our banking and mortgage servicing businesses had another good quarter. Deposit costs were relatively unchanged, despite the increase in short-term rates at the end of the third quarter. The adjusted net interest margin expanded 6 basis points to 2.99 percent. Total serviced accounts increased a remarkable 34 percent to nearly 827,000, further growing an important source of fee income and liquidity.
"Our mortgage business was softer than we expected. Fallout-adjusted locks declined 36 percent to $5.3 billion, partially offset by a higher gain on sale margin, which rose 9 basis points to 0.60 percent. We remain focused on reinforcing mortgage profitability, and believe we can use our market position and scale to succeed in a mortgage market with fewer players.
“As we move into 2019, we like how our business model has evolved and we believe we are positioned for success. We have strong, diversified sources of revenue, a track record of expense discipline, and pristine credit quality, supported by a robust level of allowance coverage. Underlying this position is an abundant level of capital, giving us added flexibility and durability as we continue to execute on our growth strategies in 2019."
Overall, 2018 was a good year for the Company. Full year 2018 net income was $187 million, or $3.21 per diluted share, as compared to full year 2017 net income of $63 million, or $1.09 per diluted share. Excluding the Wells Fargo branch acquisition-related benefit and expenses in the fourth quarter 2018 and a tax charge in the fourth quarter 2017, the Company had adjusted 2018 net income of $176 million, or $3.02 per diluted share, as compared to adjusted 2017 net income of $143 million, or $2.47 per diluted share. On an adjusted basis, the Company realized a strong 23 percent increase in net income for the full year 2018.
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Income Statement Highlights | |||||||||||||||
Three Months Ended | |||||||||||||||
December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | |||||||||||
(Dollars in millions) | |||||||||||||||
Net interest income | $ | 152 | $ | 124 | $ | 115 | $ | 106 | $ | 107 | |||||
Provision (benefit) for loan losses | (5 | ) | (2 | ) | (1 | ) | — | 2 | |||||||
Noninterest income | 98 | 107 | 123 | 111 | 124 | ||||||||||
Noninterest expense | 189 | 173 | 177 | 173 | 178 | ||||||||||
Income before income taxes | 66 | 60 | 62 | 44 | 51 | ||||||||||
Provision for income taxes | 12 | 12 | 12 | 9 | 96 | ||||||||||
Net income (loss) | $ | 54 | $ | 48 | $ | 50 | $ | 35 | $ | (45 | ) | ||||
Income (loss) per share: | |||||||||||||||
Basic | $ | 0.94 | $ | 0.84 | $ | 0.86 | $ | 0.61 | $ | (0.79 | ) | ||||
Diluted | $ | 0.93 | $ | 0.83 | $ | 0.85 | $ | 0.60 | $ | (0.79 | ) |
Adjusted Income Statement Highlights (Non-GAAP) (1) | |||||||||||||||
Three Months Ended | |||||||||||||||
December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | |||||||||||
(Dollars in millions) | |||||||||||||||
Net interest income | $ | 123 | $ | 124 | $ | 115 | $ | 106 | $ | 107 | |||||
Provision (benefit) for loan losses | (5 | ) | (2 | ) | (1 | ) | — | 2 | |||||||
Noninterest income | 98 | 107 | 123 | 111 | 124 | ||||||||||
Noninterest expense | 175 | 172 | 177 | 173 | 178 | ||||||||||
Income before income taxes | 51 | 61 | 62 | 44 | 51 | ||||||||||
Provision for income taxes | 9 | 12 | 12 | 9 | 16 | ||||||||||
Net income | $ | 42 | $ | 49 | $ | 50 | $ | 35 | $ | 35 | |||||
Income per share: | |||||||||||||||
Basic | $ | 0.73 | $ | 0.86 | $ | 0.86 | $ | 0.61 | $ | 0.61 | |||||
Diluted | $ | 0.72 | $ | 0.85 | $ | 0.85 | $ | 0.60 | $ | 0.60 |
(1) | See Non-GAAP Reconciliation for further information. |
Key Ratios | ||||||||||||
Three Months Ended | Change (bps) | |||||||||||
December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | Seq | Yr/Yr | ||||||
Net interest margin | 3.70 | % | 2.93 | % | 2.86 | % | 2.76 | % | 2.76 | % | 77 | 94 |
Adjusted net interest margin (1) | 2.99 | % | 2.93 | % | 2.86 | % | 2.76 | % | 2.76 | % | 6 | 23 |
Return on average assets | 1.2 | % | 1.0 | % | 1.1 | % | 0.8 | % | (1.1 | )% | 20 | N/M |
Return on average equity | 14.0 | % | 12.8 | % | 13.5 | % | 9.9 | % | (12.1 | )% | 120 | N/M |
Efficiency ratio | 75.7 | % | 74.6 | % | 74.4 | % | 79.7 | % | 77.1 | % | 110 | (140) |
N/M - Not meaningful
(1) | The three months ended December 31, 2018, excludes $29 million of hedging gains reclassified from AOCI to net interest income in conjunction with the payment of long-term FHLB advances. See Non-GAAP Reconciliation for further information. |
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Average Balance Sheet Highlights | |||||||||||||||||||
Three Months Ended | % Change | ||||||||||||||||||
December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | Seq | Yr/Yr | |||||||||||||
(Dollars in millions) | |||||||||||||||||||
Average interest-earning assets | $ | 16,391 | $ | 16,786 | $ | 15,993 | $ | 15,354 | $ | 15,379 | (2 | )% | 7 | % | |||||
Average loans held-for-sale (LHFS) | 3,991 | 4,393 | 4,170 | 4,231 | 4,537 | (9 | )% | (12 | )% | ||||||||||
Average loans held-for-investment (LHFI) | 8,916 | 8,872 | 8,380 | 7,487 | 7,295 | — | % | 22 | % | ||||||||||
Average total deposits | 11,942 | 11,336 | 10,414 | 9,371 | 9,084 | 5 | % | 31 | % |
Net Interest Income
Net interest income rose $28 million to $152 million for the fourth quarter 2018, as compared to the third quarter 2018, due to the recognition of $29 million of hedging gains recognized in conjunction with the Wells Fargo branch acquisition. Excluding hedging gains, the Company's adjusted net interest income fell $1 million to $123 million in the fourth quarter 2018, reflecting seasonal declines in loans held-for-sale and warehouse loans, largely offset by an expanded net interest margin. The adjusted net interest margin rose 6 basis points to 2.99 percent for the fourth quarter 2018 as compared to third quarter 2018 as a significant drop in Federal Home Loan Bank advances and higher yields on interest-earning assets more than offset a modest increase in deposit costs.
Loans held-for-investment averaged $8.9 billion for the fourth quarter 2018, increasing $44 million from the prior quarter. During the fourth quarter 2018, average consumer loans rose $213 million, or 6 percent, driven primarily by mortgage (mainly jumbos) and non-auto indirect loans. Average commercial loans rose $80 million, or 2 percent, excluding a $249 million drop in warehouse loans due to anticipated seasonal factors.
Average total deposits were $11.9 billion in the fourth quarter 2018, increasing $606 million, or 5 percent from the third quarter 2018, driven by the benefit of one month of Wells Fargo branch deposits and higher custodial deposits. Excluding the impact of the acquisition, average total deposits rose $22 million. Average retail deposits increased $371 million, or 5 percent, as acquired Wells Fargo deposits were partially offset by a drop in savings deposits. Average custodial deposits rose $162 million, or 8 percent, driven by a 34 percent increase in serviced accounts.
Provision for Loan Losses
The Company experienced a provision benefit in the fourth quarter 2018, resulting primarily from a continued decline in loss rates in the held-for-investment portfolio. The provision benefit totaled $5 million for the fourth quarter 2018, as compared to $2 million for the third quarter 2018.
Noninterest Income
Noninterest income decreased $9 million, or 8 percent, to $98 million in the fourth quarter 2018, as compared to $107 million for the third quarter 2018. The decrease was primarily due to lower net gain on loan sales, loan fees and charges and lower net return on mortgage servicing rights.
Fourth quarter 2018 net gain on loan sales fell $9 million, or 21 percent, to $34 million, versus $43 million in the third quarter 2018. The results reflected lower mortgage origination volume, partially offset by an improved gain on sale margin. Fallout-adjusted locks fell 36 percent to $5.3 billion, reflecting anticipated seasonal factors and lower mortgage volume. The net gain on loan sale margin rose 9 basis points to 0.60 percent for the fourth quarter 2018, as compared to 0.51 percent for the third quarter 2018.
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Mortgage Metrics | |||||||||||||||||||
Change (% / bps) | |||||||||||||||||||
December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | Seq | Yr/Yr | |||||||||||||
(Dollars in millions) | |||||||||||||||||||
For the three months ended: | |||||||||||||||||||
Mortgage rate lock commitments (fallout-adjusted) (1) | $ | 5,284 | $ | 8,290 | $ | 9,011 | $ | 7,722 | $ | 8,631 | (36 | )% | (39 | )% | |||||
Net margin on mortgage rate lock commitments (fallout-adjusted) (1) (2) | 0.60 | % | 0.51 | % | 0.71 | % | 0.77 | % | 0.91 | % | 9 | (31) | |||||||
Net gain on loan sales | $ | 34 | $ | 43 | $ | 63 | $ | 60 | $ | 79 | (21 | )% | (57 | )% | |||||
Net (loss) return on the mortgage servicing rights (MSR) | $ | 10 | $ | 13 | $ | 9 | $ | 4 | $ | (4 | ) | (23 | )% | N/M | |||||
Gain on loan sales + net (loss) return on the MSR | $ | 44 | $ | 56 | $ | 72 | $ | 64 | $ | 75 | (21 | )% | (41 | )% | |||||
At the end of the period: | |||||||||||||||||||
Residential loans serviced (number of accounts - 000's) (3) | 827 | 619 | 535 | 470 | 442 | 34 | % | 87 | % | ||||||||||
Capitalized value of MSRs | 1.35 | % | 1.43 | % | 1.34 | % | 1.27 | % | 1.16 | % | (8) | 19 | |||||||
N/M - Not meaningful | |||||||||||||||||||
(1) Fallout-adjusted mortgage rate lock commitments are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on previous historical experience and the level of interest rates. | |||||||||||||||||||
(2) Gain on sale margin is based on net gain on loan sales (excludes net gain on loan sales of $2 million and $1 million, from loans transferred from LHFI in the three months ended December 31, 2018 and December 31, 2017, respectively) to fallout-adjusted mortgage rate lock commitments. | |||||||||||||||||||
(3) Includes loans serviced for own loan portfolio, serviced for others, and subserviced for others. |
Loan fees and charges fell to $20 million for the fourth quarter 2018, as compared to $23 million for the third quarter 2018. The decrease primarily reflected lower mortgage loan closings.
Net return on mortgage servicing rights (including the impact of hedges) decreased $3 million, resulting in a net gain of $10 million for the fourth quarter 2018, as compared to a net gain of $13 million for the third quarter 2018. The decrease from the prior quarter largely reflected a smaller benefit from the collection of contingencies related to MSR sales in prior periods.
Noninterest Expense
Noninterest expense increased to $189 million for the fourth quarter 2018, as compared to $173 million for the third quarter 2018, primarily due to $14 million of expenses attributable to the Wells Fargo branch acquisition, partially offset by lower commissions reflecting lower mortgage volume. Excluding acquisition-related expenses in both quarters, the Company's adjusted noninterest expense was $175 million in the fourth quarter 2018 versus $172 million in the prior quarter.
The Company's efficiency ratio was 76 percent for the fourth quarter 2018, as compared to 75 percent for the third quarter 2018. Excluding hedging gains and expenses related to the acquisition of Wells Fargo branches, the adjusted efficiency ratio was 79 percent in the fourth quarter 2018 versus 74 percent in the prior quarter.
Income Taxes
The fourth quarter 2018 provision for income taxes totaled $12 million, unchanged from the third quarter 2018. The Company's effective tax rate was 18 percent for the fourth quarter 2018, compared to 20 percent for the third quarter 2018. The lower tax rate in the fourth quarter reflects the implementation of tax management strategies and certain discrete benefits which reduced the full year 2018 effective tax rate to 19 percent. Going forward, we expect the effective tax rate in 2019 should be approximately 18 percent.
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Asset Quality
Credit Quality Ratios | |||||||||||||||||||
Three Months Ended | Change (% / bps) | ||||||||||||||||||
December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | Seq | Yr/Yr | |||||||||||||
(Dollars in millions) | |||||||||||||||||||
Allowance for loan loss to LHFI | 1.4 | % | 1.5 | % | 1.5 | % | 1.7 | % | 1.8 | % | (10) | (40) | |||||||
Charge-offs, net of recoveries | $ | 1 | $ | 1 | $ | 1 | $ | 1 | $ | 2 | — | % | (50 | )% | |||||
Total nonperforming LHFI and TDRs | $ | 22 | $ | 25 | $ | 27 | $ | 29 | $ | 29 | (12 | )% | (24 | )% | |||||
Net charge-offs to LHFI ratio (annualized) | 0.04 | % | 0.05 | % | 0.02 | % | 0.06 | % | 0.11 | % | (1) | (7) | |||||||
Ratio of nonperforming LHFI and TDRs to LHFI | 0.24 | % | 0.28 | % | 0.30 | % | 0.35 | % | 0.38 | % | (4) | (14) |
The allowance for loan losses was $128 million at December 31, 2018, compared to $134 million at September 30, 2018. The allowance for loan losses covered 1.4 percent of loans held-for-investment at December 31, 2018, as compared to 1.5 percent of loans held-for-investment at September 30, 2018.
Net charge-offs in the fourth quarter 2018 were $1 million, or 4 basis points of LHFI, compared to $1 million, or 5 basis points in the prior quarter.
Nonperforming loans were $22 million at December 31, 2018, compared to $25 million at September 30, 2018. The ratio of nonperforming loans to loans held-for-investment was 0.24 percent at December 31, 2018, compared to 0.28 percent at September 30, 2018. At December 31, 2018, early stage consumer loan delinquencies totaled $7 million, or 0.17 percent of consumer loans, compared to $3 million, or 0.08 percent at September 30, 2018. There were no commercial loan delinquencies greater than 30 days at December 31, 2018.
Capital
Capital Ratios (Bancorp) | Three Months Ended | Change (% / bps) | |||||||||||||||||
December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | Seq | Yr/Yr | |||||||||||||
Tangible common equity to assets ratio (1) | 7.45 | % | 7.74 | % | 7.74 | % | 7.65 | % | 8.15 | % | (29) | (70) | |||||||
Tier 1 leverage (to adj. avg. total assets) | 8.29 | % | 8.36 | % | 8.65 | % | 8.72 | % | 8.51 | % | (7) | (22) | |||||||
Tier 1 common equity (to RWA) | 10.54 | % | 11.01 | % | 10.84 | % | 10.80 | % | 11.50 | % | (47) | (96) | |||||||
Tier 1 capital (to RWA) | 12.54 | % | 13.04 | % | 12.86 | % | 12.90 | % | 13.63 | % | (50) | (109) | |||||||
Total capital (to RWA) | 13.63 | % | 14.20 | % | 14.04 | % | 14.14 | % | 14.90 | % | (57) | (127) | |||||||
MSRs to Tier 1 capital | 19.3 | % | 20.3 | % | 16.9 | % | 16.2 | % | 20.1 | % | (100) | (80) | |||||||
Tangible book value per share (1) | $ | 23.90 | $ | 25.13 | $ | 24.37 | $ | 23.62 | $ | 24.04 | (5 | )% | (1 | )% |
(1) | See Non-GAAP Reconciliation for further information. |
The Company maintained a robust capital position with regulatory ratios well above current regulatory quantitative guidelines for "well capitalized" institutions. At December 31, 2018, the Company had a total risk-based ratio of 13.63 percent, as compared to 14.20 percent at September 30, 2018. The decrease in the ratio resulted primarily from the Wells Fargo branch acquisition.
Under the terms of recently proposed changes to regulatory capital requirements, the Company's Tier 1 leverage ratio would have increased approximately 60 basis points and risk-based capital ratios by approximately 30-45 basis points at December 31, 2018 (pro forma basis).
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Earnings Conference Call
As previously announced, the Company's fourth quarter 2018 earnings call will be held Tuesday, January 22, 2019 at 11 a.m. (ET).
To join the call, please dial (888) 204-4368 toll free or (786) 789-4783 and use passcode 2250616. 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 2250616.
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 $18.5 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 75 retail locations in 24 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 $175 billion of home loans representing nearly 827,000 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 basic and diluted earnings per share, adjusted net interest margin, adjusted noninterest expense, adjusted net interest income, adjusted income before taxes, adjusted provision for income taxes, adjusted efficiency ratio 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
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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.
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Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(Dollars in millions)
(Unaudited)
December 31, 2018 | September 30, 2018 | December 31, 2017 | |||||||||
Assets | |||||||||||
Cash | $ | 260 | $ | 150 | $ | 122 | |||||
Interest-earning deposits | 148 | 114 | 82 | ||||||||
Total cash and cash equivalents | 408 | 264 | 204 | ||||||||
Investment securities available-for-sale | 2,142 | 1,857 | 1,853 | ||||||||
Investment securities held-to-maturity | 703 | 724 | 939 | ||||||||
Loans held-for-sale | 3,869 | 4,835 | 4,321 | ||||||||
Loans held-for-investment | 9,088 | 8,966 | 7,713 | ||||||||
Loans with government guarantees | 392 | 305 | 271 | ||||||||
Less: allowance for loan losses | (128 | ) | (134 | ) | (140 | ) | |||||
Total loans held-for-investment and loans with government guarantees, net | 9,352 | 9,137 | 7,844 | ||||||||
Mortgage servicing rights | 290 | 313 | 291 | ||||||||
Federal Home Loan Bank stock | 303 | 303 | 303 | ||||||||
Premises and equipment, net | 390 | 360 | 330 | ||||||||
Net deferred tax asset | 103 | 111 | 136 | ||||||||
Goodwill and intangible assets | 190 | 70 | 21 | ||||||||
Other assets | 781 | 723 | 670 | ||||||||
Total assets | $ | 18,531 | $ | 18,697 | $ | 16,912 | |||||
Liabilities and Stockholders' Equity | |||||||||||
Noninterest-bearing | $ | 2,989 | $ | 3,096 | $ | 2,049 | |||||
Interest-bearing | 9,391 | 8,493 | 6,885 | ||||||||
Total deposits | 12,380 | 11,589 | 8,934 | ||||||||
Short-term Federal Home Loan Bank advances | 3,244 | 3,199 | 4,260 | ||||||||
Long-term Federal Home Loan Bank advances | 150 | 1,280 | 1,405 | ||||||||
Other long-term debt | 495 | 495 | 494 | ||||||||
Other liabilities | 692 | 616 | 420 | ||||||||
Total liabilities | 16,961 | 17,179 | 15,513 | ||||||||
Stockholders' Equity | |||||||||||
Common stock | 1 | 1 | 1 | ||||||||
Additional paid in capital | 1,522 | 1,519 | 1,512 | ||||||||
Accumulated other comprehensive loss | (47 | ) | (42 | ) | (16 | ) | |||||
Retained earnings/(accumulated deficit) | 94 | 40 | (98 | ) | |||||||
Total stockholders' equity | 1,570 | 1,518 | 1,399 | ||||||||
Total liabilities and stockholders' equity | $ | 18,531 | $ | 18,697 | $ | 16,912 |
9
Flagstar Bancorp, Inc. Condensed Consolidated Statements of Operations (Dollars in millions, except per share data) (Unaudited) | |||||||||||||||||||||||||||
Fourth Quarter 2018 Compared to: | |||||||||||||||||||||||||||
Three Months Ended | Third Quarter 2018 | Fourth Quarter 2017 | |||||||||||||||||||||||||
December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | Amount | Percent | Amount | Percent | |||||||||||||||||||
Interest Income | |||||||||||||||||||||||||||
Total interest income | $ | 181 | $ | 183 | $ | 167 | $ | 152 | $ | 148 | $ | (2 | ) | (1 | )% | $ | 33 | 22 | % | ||||||||
Total interest expense | 29 | 59 | 52 | 46 | 41 | (30 | ) | (51 | )% | (12 | ) | (29 | )% | ||||||||||||||
Net interest income | 152 | 124 | 115 | 106 | 107 | 28 | 23 | % | 45 | 42 | % | ||||||||||||||||
Provision (benefit) for loan losses | (5 | ) | (2 | ) | (1 | ) | — | 2 | (3 | ) | N/M | (7 | ) | N/M | |||||||||||||
Net interest income after provision (benefit) for loan losses | 157 | 126 | 116 | 106 | 105 | 31 | 25 | % | 52 | 50 | % | ||||||||||||||||
Noninterest Income | |||||||||||||||||||||||||||
Net gain on loan sales | 34 | 43 | 63 | 60 | 79 | (9 | ) | (21 | )% | (45 | ) | (57 | )% | ||||||||||||||
Loan fees and charges | 20 | 23 | 24 | 20 | 24 | (3 | ) | (13 | )% | (4 | ) | (17 | )% | ||||||||||||||
Deposit fees and charges | 6 | 5 | 5 | 5 | 4 | 1 | 20 | % | 2 | 50 | % | ||||||||||||||||
Loan administration income | 8 | 5 | 5 | 5 | 5 | 3 | 60 | % | 3 | 60 | % | ||||||||||||||||
Net return (loss) on the mortgage servicing rights | 10 | 13 | 9 | 4 | (4 | ) | (3 | ) | (23 | )% | 14 | N/M | |||||||||||||||
Other noninterest income | 20 | 18 | 17 | 17 | 16 | 2 | 11 | % | 4 | 25 | % | ||||||||||||||||
Total noninterest income | 98 | 107 | 123 | 111 | 124 | (9 | ) | (8 | )% | (26 | ) | (21 | )% | ||||||||||||||
Noninterest Expense | |||||||||||||||||||||||||||
Compensation and benefits | 82 | 76 | 80 | 80 | 80 | 6 | 8 | % | 2 | 3 | % | ||||||||||||||||
Commissions | 16 | 21 | 25 | 18 | 23 | (5 | ) | (24 | )% | (7 | ) | (30 | )% | ||||||||||||||
Occupancy and equipment | 36 | 31 | 30 | 30 | 28 | 5 | 16 | % | 8 | 29 | % | ||||||||||||||||
Federal insurance premiums | 4 | 6 | 6 | 6 | 5 | (2 | ) | (33 | )% | (1 | ) | (20 | )% | ||||||||||||||
Loan processing expense | 16 | 14 | 15 | 14 | 16 | 2 | 14 | % | — | — | % | ||||||||||||||||
Legal and professional expense | 9 | 7 | 6 | 6 | 8 | 2 | 29 | % | 1 | 13 | % | ||||||||||||||||
Intangible asset amortization | 3 | 1 | 1 | — | — | 2 | N/M | 3 | N/M | ||||||||||||||||||
Other noninterest expense | 23 | 17 | 14 | 19 | 18 | 6 | 35 | % | 5 | 28 | % | ||||||||||||||||
Total noninterest expense | 189 | 173 | 177 | 173 | 178 | 16 | 9 | % | 11 | 6 | % | ||||||||||||||||
Income before income taxes | 66 | 60 | 62 | 44 | 51 | 6 | 10 | % | 15 | 29 | % | ||||||||||||||||
Provision for income taxes | 12 | 12 | 12 | 9 | 96 | — | — | % | (84 | ) | N/M | ||||||||||||||||
Net income (loss) | $ | 54 | $ | 48 | $ | 50 | $ | 35 | $ | (45 | ) | $ | 6 | 13 | % | $ | 99 | N/M | |||||||||
Income (loss) per share | |||||||||||||||||||||||||||
Basic | $ | 0.94 | $ | 0.84 | $ | 0.86 | $ | 0.61 | $ | (0.79 | ) | $ | 0.10 | 12 | % | $ | 1.73 | N/M | |||||||||
Diluted | $ | 0.93 | $ | 0.83 | $ | 0.85 | $ | 0.60 | $ | (0.79 | ) | $ | 0.10 | 12 | % | $ | 1.72 | N/M |
N/M - Not meaningful
10
Flagstar Bancorp, Inc. Consolidated Statements of Operations (Dollars in millions, except per data share) (Unaudited) | ||||||||||||
Twelve Months Ended | Compared to: Year Ended December 31, 2017 | |||||||||||
December 31, 2018 | December 31, 2017 | Amount | Percent | |||||||||
Total interest income | $ | 683 | $ | 527 | $ | 156 | 30 | % | ||||
Total interest expense | 186 | 137 | 49 | 36 | % | |||||||
Net interest income | 497 | 390 | 107 | 27 | % | |||||||
Provision (benefit) for loan losses | (8 | ) | 6 | (14 | ) | N/M | ||||||
Net interest income after provision (benefit) for loan losses | 505 | 384 | 121 | 32 | % | |||||||
Noninterest Income | ||||||||||||
Net gain on loan sales | 200 | 268 | (68 | ) | (25 | )% | ||||||
Loan fees and charges | 87 | 82 | 5 | 6 | % | |||||||
Deposit fees and charges | 21 | 18 | 3 | 17 | % | |||||||
Loan administration income | 23 | 21 | 2 | 10 | % | |||||||
Net return on the mortgage servicing rights | 36 | 22 | 14 | 64 | % | |||||||
Other noninterest income | 72 | 59 | 13 | 22 | % | |||||||
Total noninterest income | 439 | 470 | (31 | ) | (7 | )% | ||||||
Noninterest Expense | ||||||||||||
Compensation and benefits | 318 | 299 | 19 | 6 | % | |||||||
Commissions | 80 | 72 | 8 | 11 | % | |||||||
Occupancy and equipment | 127 | 103 | 24 | 23 | % | |||||||
Federal insurance premiums | 22 | 16 | 6 | 38 | % | |||||||
Loan processing expense | 59 | 57 | 2 | 4 | % | |||||||
Legal and professional expense | 28 | 30 | (2 | ) | (7 | )% | ||||||
Intangible asset amortization | 5 | — | 5 | N/M | ||||||||
Other noninterest expense | 73 | 66 | 7 | 11 | % | |||||||
Total noninterest expense | 712 | 643 | 69 | 11 | % | |||||||
Income before income taxes | 232 | 211 | 21 | 10 | % | |||||||
Provision for income taxes | 45 | 148 | (103 | ) | (70 | )% | ||||||
Net income | $ | 187 | $ | 63 | $ | 124 | N/M | |||||
Income per share | ||||||||||||
Basic | $ | 3.26 | $ | 1.11 | $ | 2.15 | N/M | |||||
Diluted | $ | 3.21 | $ | 1.09 | $ | 2.12 | N/M |
N/M - Not meaningful
11
Flagstar Bancorp, Inc.
Summary of Selected Consolidated Financial and Statistical Data
(Dollars in millions, except share data)
(Unaudited)
Three Months Ended | Twelve Months Ended | ||||||||||||||||||
December 31, 2018 | September 30, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | |||||||||||||||
Selected Mortgage Statistics: | |||||||||||||||||||
Mortgage rate lock commitments (fallout-adjusted) (1) | $ | 5,284 | $ | 8,290 | $ | 8,631 | $ | 30,308 | $ | 32,527 | |||||||||
Mortgage loans originated (2) | $ | 6,340 | $ | 9,199 | $ | 9,749 | $ | 32,465 | $ | 34,408 | |||||||||
Mortgage loans sold and securitized | $ | 7,146 | $ | 8,423 | $ | 10,096 | $ | 32,076 | $ | 32,493 | |||||||||
Selected Ratios: | |||||||||||||||||||
Interest rate spread | 3.52 | % | 2.57 | % | 2.56 | % | 2.58 | % | 2.56 | % | |||||||||
Adjusted interest rate spread (3) (4) | 2.63 | % | 2.57 | % | 2.56 | % | 2.58 | % | 2.56 | % | |||||||||
Net interest margin | 3.70 | % | 2.93 | % | 2.76 | % | 2.89 | % | 2.75 | % | |||||||||
Adjusted net interest margin (4) | 2.99 | % | 2.93 | % | 2.76 | % | 2.89 | % | 2.75 | % | |||||||||
Net margin on loans sold and securitized | 0.44 | % | 0.51 | % | 0.78 | % | 0.62 | % | 0.82 | % | |||||||||
Return on average assets | 1.17 | % | 1.04 | % | (1.05 | )% | 1.04 | % | 0.40 | % | |||||||||
Return on average equity | 13.98 | % | 12.80 | % | (12.07 | )% | 12.58 | % | 4.41 | % | |||||||||
Efficiency ratio | 75.7 | % | 74.6 | % | 77.1 | % | 76.0 | % | 74.8 | % | |||||||||
Equity-to-assets ratio (average for the period) | 8.41 | % | 8.13 | % | 8.73 | % | 8.28 | % | 9.05 | % | |||||||||
Average Balances: | |||||||||||||||||||
Average common shares outstanding | 57,628,561 | 57,600,360 | 57,186,367 | 57,520,289 | 57,093,868 | ||||||||||||||
Average fully diluted shares outstanding | 58,385,354 | 58,332,598 | 57,186,367 | 58,322,950 | 58,178,343 | ||||||||||||||
Average interest-earning assets | $ | 16,391 | $ | 16,786 | $ | 15,379 | $ | 16,136 | $ | 14,130 | |||||||||
Average interest-bearing liabilities | $ | 13,046 | $ | 13,308 | $ | 12,939 | $ | 13,124 | $ | 11,848 | |||||||||
Average stockholders' equity | $ | 1,548 | $ | 1,514 | $ | 1,497 | $ | 1,488 | $ | 1,433 |
(1) | Fallout-adjusted mortgage rate lock commitments are adjusted by a percentage of mortgage loans in the pipeline that are not expected to close based on previous historical experience and the level of interest rates. |
(2) | Includes residential first mortgage. |
(3) | Interest rate spread is the difference between the annualized yield earned on average interest-earning assets for the period and the annualized rate of interest paid on average interest-bearing liabilities for the period. |
(4) | The three months and twelve months ended December 31, 2018, excludes $29 million of hedging gains reclassified from AOCI to net interest income in conjunction with the payment of long-term FHLB advances. |
December 31, 2018 | September 30, 2018 | December 31, 2017 | |||||||||
Selected Statistics: | |||||||||||
Book value per common share | $ | 27.19 | $ | 26.34 | $ | 24.40 | |||||
Tangible book value per share (1) | 23.90 | 25.13 | 24.04 | ||||||||
Number of common shares outstanding | 57,749,464 | 57,625,439 | 57,321,228 | ||||||||
Number of FTE employees | 3,938 | 3,496 | 3,525 | ||||||||
Number of bank branches | 160 | 108 | 99 | ||||||||
Ratio of nonperforming assets to total assets (2) | 0.16 | % | 0.17 | % | 0.22 | % | |||||
Common equity-to-assets ratio | 8.47 | % | 8.12 | % | 8.27 | % | |||||
MSR Key Statistics and Ratios: | |||||||||||
Weighted average service fee (basis points) | 35.8 | 34.3 | 28.9 | ||||||||
Capitalized value of mortgage servicing rights | 1.35 | % | 1.43 | % | 1.16 | % | |||||
Mortgage servicing rights to Tier 1 capital | 19.3 | % | 20.3 | % | 20.1 | % |
(1) | Excludes goodwill and intangibles of $190 million, $70 million, and $21 million at December 31, 2018, September 30, 2018, and December 31, 2017, respectively. See Non-GAAP Reconciliation for further information. |
(2) | Ratio excludes LHFS. |
12
Average Balances, Yields and Rates
(Dollars in millions)
(Unaudited)
Three Months Ended | ||||||||||||||||||||||||||
December 31, 2018 | September 30, 2018 | December 31, 2017 | ||||||||||||||||||||||||
Average Balance | Interest | Annualized Yield/Rate | Average Balance | Interest | Annualized Yield/Rate | Average Balance | Interest | Annualized Yield/Rate | ||||||||||||||||||
Interest-Earning Assets | ||||||||||||||||||||||||||
Loans held-for-sale | $ | 3,991 | $ | 48 | 4.78 | % | $ | 4,393 | $ | 52 | 4.69 | % | $ | 4,537 | $ | 46 | 4.07 | % | ||||||||
Loans held-for-investment | ||||||||||||||||||||||||||
Residential first mortgage | 3,115 | 29 | 3.68 | % | 3,027 | 27 | 3.63 | % | 2,704 | 23 | 3.37 | % | ||||||||||||||
Home equity | 717 | 10 | 5.43 | % | 695 | 9 | 5.12 | % | 524 | 7 | 5.11 | % | ||||||||||||||
Other | 231 | 3 | 6.06 | % | 128 | 2 | 5.54 | % | 26 | — | 4.49 | % | ||||||||||||||
Total Consumer loans | 4,063 | 42 | 4.12 | % | 3,850 | 38 | 3.96 | % | 3,254 | 30 | 3.66 | % | ||||||||||||||
Commercial Real Estate | 2,171 | 31 | 5.52 | % | 2,106 | 29 | 5.37 | % | 1,866 | 21 | 4.48 | % | ||||||||||||||
Commercial and Industrial | 1,345 | 19 | 5.48 | % | 1,330 | 18 | 5.28 | % | 1,136 | 14 | 4.76 | % | ||||||||||||||
Warehouse Lending | 1,337 | 18 | 5.29 | % | 1,586 | 21 | 5.10 | % | 1,039 | 13 | 4.82 | % | ||||||||||||||
Total Commercial loans | 4,853 | 68 | 5.45 | % | 5,022 | 68 | 5.26 | % | 4,041 | 48 | 4.65 | % | ||||||||||||||
Total loans held-for-investment | 8,916 | 110 | 4.84 | % | 8,872 | 106 | 4.70 | % | 7,295 | 78 | 4.21 | % | ||||||||||||||
Loans with government guarantees | 350 | 2 | 2.72 | % | 292 | 3 | 4.20 | % | 260 | 3 | 3.90 | % | ||||||||||||||
Investment securities | 2,996 | 21 | 2.84 | % | 3,100 | 21 | 2.81 | % | 3,204 | 21 | 2.61 | % | ||||||||||||||
Interest-earning deposits | 138 | — | 1.55 | % | 129 | 1 | 2.38 | % | 83 | — | 1.33 | % | ||||||||||||||
Total interest-earning assets | 16,391 | $ | 181 | 4.39 | % | 16,786 | $ | 183 | 4.32 | % | 15,379 | $ | 148 | 3.81 | % | |||||||||||
Other assets | 2,022 | 1,825 | 1,772 | |||||||||||||||||||||||
Total assets | $ | 18,413 | $ | 18,611 | $ | 17,151 | ||||||||||||||||||||
Interest-Bearing Liabilities | ||||||||||||||||||||||||||
Retail deposits | ||||||||||||||||||||||||||
Demand deposits | $ | 1,072 | $ | 3 | 1.02 | % | $ | 727 | $ | 3 | 1.62 | % | $ | 547 | $ | — | 0.26 | % | ||||||||
Savings deposits | 3,075 | 7 | 0.91 | % | 3,229 | 7 | 0.90 | % | 3,621 | 8 | 0.77 | % | ||||||||||||||
Money market deposits | 446 | — | 0.41 | % | 252 | — | 0.62 | % | 231 | — | 0.52 | % | ||||||||||||||
Certificates of deposit | 2,274 | 11 | 1.88 | % | 2,150 | 10 | 1.78 | % | 1,397 | 5 | 1.32 | % | ||||||||||||||
Total retail deposits | 6,867 | 21 | 1.22 | % | 6,358 | 20 | 1.27 | % | 5,796 | 13 | 0.84 | % | ||||||||||||||
Government deposits | ||||||||||||||||||||||||||
Demand deposits | 269 | 1 | 0.67 | % | 283 | 1 | 0.59 | % | 204 | — | 0.59 | % | ||||||||||||||
Savings deposits | 602 | 3 | 1.69 | % | 564 | 2 | 1.48 | % | 394 | 1 | 0.94 | % | ||||||||||||||
Certificates of deposit | 313 | 1 | 1.76 | % | 327 | 1 | 1.52 | % | 376 | 1 | 1.05 | % | ||||||||||||||
Total government deposits | 1,184 | 5 | 1.48 | % | 1,174 | 4 | 1.28 | % | 974 | 2 | 0.91 | % | ||||||||||||||
Wholesale deposits and other | 625 | 3 | 2.08 | % | 537 | 3 | 2.03 | % | 45 | — | 1.50 | % | ||||||||||||||
Total interest-bearing deposits | 8,676 | 29 | 1.31 | % | 8,069 | 27 | 1.32 | % | 6,815 | 15 | 0.86 | % | ||||||||||||||
Short-term FHLB advances and other | 2,954 | 18 | 2.39 | % | 3,465 | 18 | 2.10 | % | 4,329 | 14 | 1.25 | % | ||||||||||||||
Long-term FHLB advances | 921 | (25 | ) | (10.65 | )% | 1,280 | 7 | 2.11 | % | 1,301 | 6 | 1.93 | % | |||||||||||||
Less: Swap gain reclassified out of OCI (4) | 29 | — | — | — | % | — | ||||||||||||||||||||
Adjusted long-term FHLB advances (4) | 921 | 4 | 1.97 | % | 1,280 | 7 | 2.11 | % | 1,301 | 6 | 1.93 | % | ||||||||||||||
Other long-term debt | 495 | 7 | 5.65 | % | 494 | 7 | 5.62 | % | 494 | 6 | 5.12 | % | ||||||||||||||
Adjusted total interest-bearing liabilities (4) | 13,046 | 58 | 1.76 | % | 13,308 | 59 | 1.75 | % | 12,939 | 41 | 1.25 | % | ||||||||||||||
Noninterest-bearing deposits (1) | 3,266 | 3,267 | 2,269 | |||||||||||||||||||||||
Other liabilities | 553 | 522 | 446 | |||||||||||||||||||||||
Stockholders' equity | 1,548 | 1,514 | 1,497 | |||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 18,413 | $ | 18,611 | $ | 17,151 | ||||||||||||||||||||
Net interest-earning assets | $ | 3,345 | $ | 3,478 | $ | 2,440 | ||||||||||||||||||||
Net interest income (4) | $ | 123 | $ | 124 | $ | 107 | ||||||||||||||||||||
Adjusted interest rate spread (2) (4) | 2.63 | % | 2.57 | % | 2.56 | % | ||||||||||||||||||||
Adjusted net interest margin (3) (4) | 2.99 | % | 2.93 | % | 2.76 | % | ||||||||||||||||||||
Ratio of average interest-earning assets to interest-bearing liabilities | 125.6 | % | 126.1 | % | 118.9 | % | ||||||||||||||||||||
Total average deposits | $ | 11,942 | $ | 11,336 | $ | 9,084 |
(1) | Includes noninterest-bearing custodial deposits that arise due to the servicing of loans for others. |
(2) | Interest rate spread is the difference between rate of interest earned on interest-earning assets and rate of interest paid on interest-bearing liabilities. |
(3) | Net interest margin is net interest income divided by average interest-earning assets. |
(4) | The three months ended December 31, 2018, excludes $29 million of hedging gains reclassified from AOCI in conjunction with the payment of long-term FHLB advances. |
13
Average Balances, Yields and Rates
(Dollars in millions)
(Unaudited)
Twelve Months Ended | |||||||||||||||||
December 31, 2018 | December 31, 2017 | ||||||||||||||||
Average Balance | Interest | Annualized Yield/Rate | Average Balance | Interest | Annualized Yield/Rate | ||||||||||||
Interest-Earning Assets | |||||||||||||||||
Loans held-for-sale | $ | 4,196 | $ | 190 | 4.52 | % | $ | 4,146 | $ | 165 | 3.99 | % | |||||
Loans held-for-investment | |||||||||||||||||
Residential first mortgage | 2,949 | 105 | 3.56 | % | 2,549 | 85 | 3.35 | % | |||||||||
Home equity | 690 | 36 | 5.21 | % | 471 | 24 | 5.06 | % | |||||||||
Other | 111 | 6 | 5.73 | % | 26 | 1 | 4.51 | % | |||||||||
Total Consumer loans | 3,750 | 147 | 3.93 | % | 3,046 | 110 | 3.62 | % | |||||||||
Commercial Real Estate | 2,063 | 109 | 5.23 | % | 1,579 | 68 | 4.25 | % | |||||||||
Commercial and Industrial | 1,288 | 69 | 5.32 | % | 981 | 47 | 4.73 | % | |||||||||
Warehouse Lending | 1,318 | 69 | 5.14 | % | 890 | 43 | 4.73 | % | |||||||||
Total Commercial loans | 4,669 | 247 | 5.23 | % | 3,450 | 158 | 4.51 | % | |||||||||
Total loans held-for-investment | 8,419 | 394 | 4.65 | % | 6,496 | 268 | 4.09 | % | |||||||||
Loans with government guarantees | 303 | 11 | 3.53 | % | 290 | 13 | 4.30 | % | |||||||||
Investment securities | 3,094 | 86 | 2.76 | % | 3,121 | 80 | 2.57 | % | |||||||||
Interest-earning deposits | 124 | 2 | 1.83 | % | 77 | 1 | 1.15 | % | |||||||||
Total interest-earning assets | 16,136 | $ | 683 | 4.21 | % | 14,130 | $ | 527 | 3.71 | % | |||||||
Other assets | 1,844 | 1,716 | |||||||||||||||
Total assets | $ | 17,980 | $ | 15,846 | |||||||||||||
Interest-Bearing Liabilities | |||||||||||||||||
Retail deposits | |||||||||||||||||
Demand deposits | $ | 764 | $ | 7 | 0.93 | % | $ | 514 | $ | 1 | 0.19 | % | |||||
Savings deposits | 3,300 | 29 | 0.87 | % | 3,829 | 29 | 0.76 | % | |||||||||
Money market deposits | 288 | 2 | 0.49 | % | 255 | 1 | 0.50 | % | |||||||||
Certificates of deposit | 2,015 | 34 | 1.70 | % | 1,187 | 14 | 1.18 | % | |||||||||
Total retail deposits | 6,367 | 72 | 1.12 | % | 5,785 | 45 | 0.78 | % | |||||||||
Government deposits | |||||||||||||||||
Demand deposits | 259 | 1 | 0.57 | % | 222 | 1 | 0.45 | % | |||||||||
Savings deposits | 535 | 8 | 1.41 | % | 406 | 3 | 0.68 | % | |||||||||
Certificates of deposit | 355 | 5 | 1.44 | % | 329 | 2 | 0.82 | % | |||||||||
Total government deposits | 1,149 | 14 | 1.23 | % | 957 | 6 | 0.67 | % | |||||||||
Wholesale deposits and other | 401 | 8 | 2.02 | % | 23 | — | 1.35 | % | |||||||||
Total interest-bearing deposits | 7,917 | 94 | 1.18 | % | 6,765 | 51 | 0.77 | % | |||||||||
Short-term FHLB advances and other | 3,521 | 68 | 1.93 | % | 3,356 | 37 | 1.09 | % | |||||||||
Long-term FHLB advances | 1,192 | (4 | ) | (0.32 | )% | 1,234 | 24 | 1.92 | % | ||||||||
Less: Swap gain reclassified out of OCI (4) | 29 | — | |||||||||||||||
Adjusted long-term FHLB advances (4) | 1,192 | 25 | 2.12 | % | 1,234 | 24 | 1.92 | % | |||||||||
Other long-term debt | 494 | 28 | 5.56 | % | 493 | 25 | 5.08 | % | |||||||||
Adjusted total interest-bearing liabilities (4) | 13,124 | 215 | 1.63 | % | 11,848 | 137 | 1.15 | % | |||||||||
Noninterest-bearing deposits (1) | 2,858 | 2,142 | |||||||||||||||
Other liabilities | 510 | 423 | |||||||||||||||
Stockholders' equity | 1,488 | 1,433 | |||||||||||||||
Total liabilities and stockholders' equity | $ | 17,980 | $ | 15,846 | |||||||||||||
Net interest-earning assets | $ | 3,012 | $ | 2,282 | |||||||||||||
Net interest income (4) | $ | 468 | $ | 390 | |||||||||||||
Adjusted interest rate spread (2) (4) | 2.58 | % | 2.56 | % | |||||||||||||
Adjusted net interest margin (3) (4) | 2.89 | % | 2.75 | % | |||||||||||||
Ratio of average interest-earning assets to interest-bearing liabilities | 122.9 | % | 119.3 | % | |||||||||||||
Total average deposits | $ | 10,775 | $ | 8,907 |
(1) | Includes noninterest-bearing custodial deposits that arise due to the servicing of loans for others. |
(2) | Interest rate spread is the difference between rate of interest earned on interest-earning assets and rate of interest paid on interest-bearing liabilities. |
(3) | Net interest margin is net interest income divided by average interest-earning assets. |
(4) | The twelve months ended December 31, 2018, excludes $29 million of hedging gains reclassified from AOCI in conjunction with the payment of long-term FHLB advances. |
14
Flagstar Bancorp, Inc.
Earnings Per Share
(Dollars in millions, except share data)
(Unaudited)
Three Months Ended | Twelve Months Ended | ||||||||||||||||||
December 31, 2018 | September 30, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | |||||||||||||||
Net income | 54 | 48 | (45 | ) | 187 | 63 | |||||||||||||
Weighted average shares | |||||||||||||||||||
Weighted average common shares outstanding | 57,628,561 | 57,600,360 | 57,186,367 | 57,520,289 | 57,093,868 | ||||||||||||||
Effect of dilutive securities | |||||||||||||||||||
May Investor warrants | — | — | — | — | 12,287 | ||||||||||||||
Stock-based awards (1) | 756,793 | 732,238 | — | 802,661 | 1,072,188 | ||||||||||||||
Weighted average diluted common shares | 58,385,354 | 58,332,598 | 57,186,367 | 58,322,950 | 58,178,343 | ||||||||||||||
Earnings per common share | |||||||||||||||||||
Basic earnings per common share | $ | 0.94 | $ | 0.84 | $ | (0.79 | ) | $ | 3.26 | $ | 1.11 | ||||||||
Effect of dilutive securities | |||||||||||||||||||
May Investor warrants | — | — | — | — | — | ||||||||||||||
Stock-based awards | (0.01 | ) | (0.01 | ) | — | (0.05 | ) | (0.02 | ) | ||||||||||
Diluted earnings per common share | $ | 0.93 | $ | 0.83 | $ | (0.79 | ) | $ | 3.21 | $ | 1.09 |
Regulatory Capital - Bancorp
(Dollars in millions)
(Unaudited)
December 31, 2018 | September 30, 2018 | December 31, 2017 | |||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
Tier 1 leverage (to adjusted avg. total assets) | $ | 1,505 | 8.29 | % | $ | 1,540 | 8.36 | % | $ | 1,442 | 8.51 | % | |||||
Total adjusted avg. total asset base | $ | 18,158 | $ | 18,426 | $ | 16,951 | |||||||||||
Tier 1 common equity (to risk weighted assets) | $ | 1,265 | 10.54 | % | $ | 1,300 | 11.01 | % | $ | 1,216 | 11.50 | % | |||||
Tier 1 capital (to risk weighted assets) | $ | 1,505 | 12.54 | % | $ | 1,540 | 13.04 | % | $ | 1,442 | 13.63 | % | |||||
Total capital (to risk weighted assets) | $ | 1,637 | 13.63 | % | $ | 1,677 | 14.20 | % | $ | 1,576 | 14.90 | % | |||||
Risk-weighted asset base | $ | 12,006 | $ | 11,811 | $ | 10,579 |
Regulatory Capital - Bank
(Dollars in millions)
(Unaudited)
December 31, 2018 | September 30, 2018 | December 31, 2017 | |||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
Tier 1 leverage (to adjusted avg. total assets) | $ | 1,574 | 8.67 | % | $ | 1,617 | 8.77 | % | $ | 1,531 | 9.04 | % | |||||
Total adjusted avg. total asset base | $ | 18,151 | $ | 18,433 | $ | 16,934 | |||||||||||
Tier 1 common equity (to risk weighted assets) | $ | 1,574 | 13.12 | % | $ | 1,617 | 13.68 | % | $ | 1,531 | 14.46 | % | |||||
Tier 1 capital (to risk weighted assets) | $ | 1,574 | 13.12 | % | $ | 1,617 | 13.68 | % | $ | 1,531 | 14.46 | % | |||||
Total capital (to risk weighted assets) | $ | 1,705 | 14.21 | % | $ | 1,753 | 14.84 | % | $ | 1,664 | 15.72 | % | |||||
Risk-weighted asset base | $ | 11,997 | $ | 11,818 | $ | 10,589 |
15
Residential Loans Serviced
(Dollars in millions)
(Unaudited)
December 31, 2018 | September 30, 2018 | December 31, 2017 | ||||||||||||||||||
Unpaid Principal Balance (1) | Number of accounts | Unpaid Principal Balance (1) | Number of accounts | Unpaid Principal Balance (1) | Number of accounts | |||||||||||||||
Subserviced for others (2) | $ | 146,040 | 705,149 | $ | 106,297 | 494,950 | $ | 65,864 | 309,814 | |||||||||||
Serviced for others | 21,592 | 88,434 | 21,835 | 88,410 | 25,073 | 103,137 | ||||||||||||||
Serviced for own loan portfolio (3) | 7,192 | 32,920 | 8,033 | 35,185 | 7,013 | 29,493 | ||||||||||||||
Total residential loans serviced | $ | 174,824 | 826,503 | $ | 136,165 | 618,545 | $ | 97,950 | 442,444 |
(1) | UPB, net of write downs, does not include premiums or discounts. |
(2) | Includes temporary short-term subservicing performed as a result of sales of servicing-released mortgage servicing rights. Includes repossessed assets. |
(3) | Includes loans held-for-investment (residential first mortgage and home equity), loans-held-for-sale (residential first mortgage), loans with government guarantees (residential first mortgage), and repossessed assets. |
Loans Held-for-Investment
(Dollars in millions)
(Unaudited)
December 31, 2018 | September 30, 2018 | December 31, 2017 | |||||||||||||||
Consumer loans | |||||||||||||||||
Residential first mortgage | $ | 2,999 | 33.0 | % | $ | 3,085 | 34.4 | % | $ | 2,754 | 35.7 | % | |||||
Home equity | 731 | 8.0 | % | 704 | 7.9 | % | 664 | 8.6 | % | ||||||||
Other | 314 | 3.5 | % | 150 | 1.7 | % | 25 | 0.3 | % | ||||||||
Total consumer loans | 4,044 | 44.5 | % | 3,939 | 43.9 | % | 3,443 | 44.6 | % | ||||||||
Commercial loans | |||||||||||||||||
Commercial real estate | 2,152 | 23.7 | % | 2,160 | 24.1 | % | 1,932 | 25.1 | % | ||||||||
Commercial and industrial | 1,433 | 15.8 | % | 1,317 | 14.7 | % | 1,196 | 15.5 | % | ||||||||
Warehouse lending | 1,459 | 16.0 | % | 1,550 | 17.3 | % | 1,142 | 14.8 | % | ||||||||
Total commercial loans | 5,044 | 55.5 | % | 5,027 | 56.1 | % | 4,270 | 55.4 | % | ||||||||
Total loans held-for-investment | $ | 9,088 | 100.0 | % | $ | 8,966 | 100.0 | % | $ | 7,713 | 100.0 | % |
Allowance for Loan Losses
(Dollars in millions)
(Unaudited)
As of/For the Three Months Ended | |||||||||||
December 31, 2018 | September 30, 2018 | December 31, 2017 | |||||||||
Allowance for loan losses | |||||||||||
Residential first mortgage | $ | 38 | $ | 40 | $ | 47 | |||||
Home equity | 15 | 20 | 22 | ||||||||
Other | 3 | 2 | 1 | ||||||||
Total consumer loans | 56 | 62 | 70 | ||||||||
Commercial real estate | 48 | 46 | 45 | ||||||||
Commercial and industrial | 18 | 20 | 19 | ||||||||
Warehouse lending | 6 | 6 | 6 | ||||||||
Total commercial loans | 72 | 72 | 70 | ||||||||
Total allowance for loan losses | $ | 128 | $ | 134 | $ | 140 |
16
Allowance for Loan Losses
(Dollars in millions)
(Unaudited)
For the Three Months Ended | For the Year Ended | ||||||||||||||||||
December 31, 2018 | September 30, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | |||||||||||||||
Beginning balance | $ | 134 | $ | 137 | $ | 140 | $ | 140 | $ | 142 | |||||||||
Provision (benefit) for loan losses | (5 | ) | (2 | ) | 2 | (8 | ) | 6 | |||||||||||
Charge-offs | |||||||||||||||||||
Total consumer loans | (2 | ) | (2 | ) | (3 | ) | (8 | ) | (13 | ) | |||||||||
Total commercial loans | — | — | (1 | ) | — | (1 | ) | ||||||||||||
Total charge-offs | $ | (2 | ) | $ | (2 | ) | $ | (4 | ) | $ | (8 | ) | $ | (14 | ) | ||||
Recoveries | |||||||||||||||||||
Total consumer loans | 1 | 1 | — | 4 | 4 | ||||||||||||||
Total commercial loans | — | — | 2 | — | 2 | ||||||||||||||
Total recoveries | 1 | 1 | 2 | 4 | 6 | ||||||||||||||
Charge-offs, net of recoveries | (1 | ) | (1 | ) | (2 | ) | (4 | ) | (8 | ) | |||||||||
Ending balance | $ | 128 | $ | 134 | $ | 140 | $ | 128 | $ | 140 | |||||||||
Net charge-offs to LHFI ratio (annualized) (1) | 0.04 | % | 0.05 | % | 0.11 | % | 0.04 | % | 0.12 | % | |||||||||
Net charge-offs/(recoveries) to LHFI ratio (annualized) by loan type (1): | |||||||||||||||||||
Residential first mortgage | 0.05 | % | 0.10 | % | 0.26 | % | 0.08 | % | 0.26 | % | |||||||||
Home equity and other consumer | 0.23 | % | 0.21 | % | 0.39 | % | 0.21 | % | 0.31 | % | |||||||||
Commercial real estate | (0.02 | )% | — | % | 0.03 | % | (0.01 | )% | — | % | |||||||||
Commercial and industrial | — | % | — | % | (0.15 | )% | (0.01 | )% | (0.05 | )% |
(1) | Excludes loans carried under the fair value option. |
Nonperforming Loans and Assets
(Dollars in millions)
(Unaudited)
December 31, 2018 | September 30, 2018 | December 31, 2017 | |||||||||
Nonperforming LHFI | $ | 12 | $ | 12 | $ | 13 | |||||
Nonperforming TDRs | 3 | 4 | 5 | ||||||||
Nonperforming TDRs at inception but performing for less than six months | 7 | 9 | 11 | ||||||||
Total nonperforming LHFI and TDRs (1) | 22 | 25 | 29 | ||||||||
Real estate and other nonperforming assets, net | 7 | 7 | 8 | ||||||||
LHFS | $ | 10 | $ | 10 | $ | 9 | |||||
Total nonperforming assets | $ | 39 | $ | 42 | $ | 46 | |||||
Ratio of nonperforming assets to total assets (2) | 0.16 | % | 0.17 | % | 0.22 | % | |||||
Ratio of nonperforming LHFI and TDRs to LHFI | 0.24 | % | 0.28 | % | 0.38 | % | |||||
Ratio of nonperforming assets to LHFI and repossessed assets (2) | 0.32 | % | 0.35 | % | 0.48 | % |
(1) | Includes less than 90 day past due performing loans placed on nonaccrual. Interest is not being accrued on these loans. |
(2) | Ratio excludes LHFS. |
17
Asset Quality - Loans Held-for-Investment
(Dollars in millions)
(Unaudited)
30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 days (1) | Total Past Due | Total Loans Held-for-Investment | |||||||||||||||
December 31, 2018 | |||||||||||||||||||
Consumer loans | $ | 5 | $ | 2 | $ | 22 | $ | 29 | $ | 4,044 | |||||||||
Commercial loans | — | — | — | — | 5,044 | ||||||||||||||
Total loans | $ | 5 | $ | 2 | $ | 22 | $ | 29 | $ | 9,088 | |||||||||
September 30, 2018 | |||||||||||||||||||
Consumer loans | $ | 2 | $ | 1 | $ | 25 | $ | 28 | $ | 3,939 | |||||||||
Commercial loans | — | — | — | — | 5,027 | ||||||||||||||
Total loans | $ | 2 | $ | 1 | $ | 25 | $ | 28 | $ | 8,966 | |||||||||
December 31, 2017 | |||||||||||||||||||
Consumer loans | $ | 3 | $ | 2 | $ | 29 | $ | 34 | $ | 3,443 | |||||||||
Commercial loans | — | — | — | — | 4,270 | ||||||||||||||
Total loans | $ | 3 | $ | 2 | $ | 29 | $ | 34 | $ | 7,713 |
(1) | Includes performing nonaccrual loans that are less than 90 days delinquent and for which interest cannot be accrued. |
Troubled Debt Restructurings
(Dollars in millions)
(Unaudited)
TDRs | |||||||||||
Performing | Nonperforming | Total | |||||||||
December 31, 2018 | |||||||||||
Consumer loans | $ | 44 | $ | 10 | $ | 54 | |||||
Total TDR loans | $ | 44 | $ | 10 | $ | 54 | |||||
September 30, 2018 | |||||||||||
Consumer loans | $ | 43 | $ | 13 | $ | 56 | |||||
Total TDR loans | $ | 43 | $ | 13 | $ | 56 | |||||
December 31, 2017 | |||||||||||
Consumer loans | $ | 43 | $ | 16 | $ | 59 | |||||
Total TDR loans | $ | 43 | $ | 16 | $ | 59 |
18
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 impact of tax reform in 2017 as well as acquisition related expenses and hedging gains recognized in conjunction with the Well Fargo branch acquisition in 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, 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, adjusted efficiency ratio and adjusted return on average assets provide a meaningful representation of its operating performance on an ongoing basis.
The following tables provide a reconciliation of non-GAAP financial measures.
Tangible book value per share and tangible common equity to assets ratio
December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | December 31, 2017 | |||||||||||||||
(Dollars in millions, except share data) | |||||||||||||||||||
Total stockholders' equity | $ | 1,570 | $ | 1,518 | $ | 1,475 | $ | 1,427 | $ | 1,399 | |||||||||
Goodwill and intangibles | 190 | 70 | 71 | 72 | 21 | ||||||||||||||
Tangible book value | $ | 1,380 | $ | 1,448 | $ | 1,404 | $ | 1,355 | $ | 1,378 | |||||||||
Number of common shares outstanding | 57,749,464 | 57,625,439 | 57,598,406 | 57,399,993 | 57,321,228 | ||||||||||||||
Tangible book value per share | $ | 23.90 | $ | 25.13 | $ | 24.37 | $ | 23.62 | $ | 24.04 | |||||||||
Total Assets | $ | 18,531 | $ | 18,697 | $ | 18,130 | $ | 17,736 | $ | 16,912 | |||||||||
Tangible common equity to assets ratio | 7.45 | % | 7.74 | % | 7.74 | % | 7.65 | % | 8.15 | % |
19
Adjusted Income Before Taxes, Net Income, Provision for Income Taxes, Basic Earnings per Share, Diluted Earnings per Share, Net interest income, Net Interest Margin, Noninterest Expense, Efficiency Ratio and Return on Average Assets
Three Months Ended | For the Year Ended | ||||||||||||||||||
December 31, 2018 | September 30, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | |||||||||||||||
(Dollars in millions) (Unaudited) | |||||||||||||||||||
Income before income taxes | $ | 66 | $ | 60 | $ | 51 | $ | 232 | $ | 211 | |||||||||
Adjustment for Wells Fargo acquisition costs | 14 | 1 | — | 15 | — | ||||||||||||||
Adjustment for hedging gains | (29 | ) | — | — | (29 | ) | — | ||||||||||||
Adjusted income before income taxes | $ | 51 | $ | 61 | $ | 51 | $ | 218 | $ | 211 | |||||||||
Provision for income taxes | $ | 12 | $ | 12 | $ | 96 | $ | 45 | $ | 148 | |||||||||
Tax impact on adjustment for Wells Fargo acquisition costs | 2 | — | — | 2 | — | ||||||||||||||
Tax impact on adjustment for hedging gains | (5 | ) | — | — | (5 | ) | — | ||||||||||||
Adjustment to remove tax reform impact | — | — | (80 | ) | — | (80 | ) | ||||||||||||
Adjusted provision for income taxes | $ | 9 | $ | 12 | $ | 16 | $ | 42 | $ | 68 | |||||||||
Net income (loss) | $ | 54 | $ | 48 | $ | (45 | ) | $ | 187 | $ | 63 | ||||||||
Adjusted net income | $ | 42 | $ | 49 | $ | 35 | $ | 176 | $ | 143 | |||||||||
Weighted average common shares outstanding | 57,628,561 | 57,600,360 | 57,186,367 | 57,520,289 | 57,093,868 | ||||||||||||||
Weighted average diluted common shares | 58,385,354 | 58,332,598 | 58,311,881 | 58,322,950 | 58,178,343 | ||||||||||||||
Adjusted basic earnings per share | $ | 0.73 | $ | 0.86 | 0.61 | $ | 3.06 | $ | 2.50 | ||||||||||
Adjusted diluted earnings per share | $ | 0.72 | $ | 0.85 | 0.60 | $ | 3.02 | $ | 2.47 | ||||||||||
Total net interest income | $ | 152 | $ | 124 | |||||||||||||||
Hedging gains | (29 | ) | — | ||||||||||||||||
Adjusted total net interest income | $ | 123 | $ | 124 | |||||||||||||||
Average interest earning assets | $ | 16,391 | $ | 16,786 | |||||||||||||||
Net interest margin | 3.70 | % | 2.93 | % | |||||||||||||||
Adjusted net interest margin | 2.99 | % | 2.93 | % | |||||||||||||||
Total noninterest expense | $ | 189 | $ | 173 | |||||||||||||||
Wells Fargo acquisition costs | 14 | 1 | |||||||||||||||||
Adjusted total noninterest expense | $ | 175 | $ | 172 | |||||||||||||||
Efficiency ratio | 75.7 | % | 74.6 | % | |||||||||||||||
Adjustment to remove Wells Fargo acquisition costs | (5.7 | )% | (0.5 | )% | |||||||||||||||
Adjustment to remove hedging gains | 9.2 | % | — | % | |||||||||||||||
Adjusted efficiency ratio | 79.2 | % | 74.1 | % | |||||||||||||||
Average total assets | $ | 18,413 | $ | 18,611 | |||||||||||||||
Return on average assets | 1.17 | % | 1.04 | % | |||||||||||||||
Adjustment to remove Wells Fargo acquisition costs | 0.26 | % | (0.08 | )% | |||||||||||||||
Adjustment to remove hedging gains | (0.52 | )% | — | % | |||||||||||||||
Adjusted return on average assets | 0.91 | % | 1.05 | % |
20
4th Quarter 2018 Flagstar Bancorp, Inc. (NYSE: FBC) Earnings Presentation 4th Quarter 2018 January 22, 2019
Cautionary statements 4th Quarter 2018 This presentation contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are based on management’s current expectations and assumptions regarding the Company’s business and performance, the economy and other future conditions, and forecasts of future events, circumstances and results. However, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies and other factors. Generally, forward-looking statements are not based on historical facts but instead represent our management’s beliefs regarding future events. Such statements may be identified by words such as believe, expect, anticipate, intend, plan, estimate, may increase, may fluctuate, and similar expressions or future or conditional verbs such as will, should, would and could. Such statements are based on management’s current expectations and are subject to risks, uncertainties and changes in circumstances. Actual results and capital and other financial conditions may differ materially from those included in these statements due to a variety of factors, including without limitation those found 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). Any forward-looking statements made by or on behalf of us speak only as to the date they are made, and we do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made, except as required under United States securities laws. In addition to results presented in accordance with GAAP, this presentation includes 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, which are not required to be uniformly applied. 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 these conference call slides. Additional discussion of the use of non-GAAP measures can also be found in the Form 8-K Current Report related to this presentation 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. 2
Executive Overview 4th Quarter 2018 Sandro DiNello, CEO
Strategic highlights 4th Quarter 2018 • Solid profitability driven by stable deposit costs and disciplined cost control Unique - Adjusted NIM(1) expanded 6bps to 2.99%, reflecting one month benefit of Wells Fargo deposits relationship-based (1) business model - Adjusted noninterest expense of $175mm; up 2% vs. 3Q18 and down 2% vs. 4Q17 - Adjusted return on assets(1) 0.9%; adjusted return on equity(1) 10.8% • Closed on acquisition of 52 Midwest branches of Wells Fargo Bank; significantly increases core customer base, Grow community providing low-cost, stable liquidity for continued growth banking - 8.7% deposit attrition as of January 19, 2019 as compared to projected 17% post-closing attrition • Average CRE and C&I loans up $80mm vs. 3Q18; average consumer loans up $213mm vs. 3Q18 • Mortgage business softer than expected due to seasonal factors and industry overcapacity Strengthen - Net gain on loan sales of $34mm; down 21% vs. 3Q18 and down 57% vs. 4Q17 mortgage revenues - Net return on MSRs of $10mm; down $3mm vs. 3Q18 and up $14mm vs. 4Q17 Highly profitable • Adjusted full year 2018 net income(1) of $3.02 per diluted share; up 23% vs. adjusted full year 2017 net income(1) operations • Built scale and profitability in servicing business; nearly 827,000 loans serviced, up 87% vs. 4Q17 • Strong credit metrics and low delinquency levels supported by 1.4% allowance coverage ratio Positioned to thrive in any market • Strong total risk based capital ratio of 13.6%; Capital Simplification NPR would improve total risk based capital ratio to 13.9%(1) 1) Non-GAAP number. Please see reconciliations on page 43 and 44. 4
Financial Overview 4th Quarter 2018 Jim Ciroli, CFO
Financial highlights 4th Quarter 2018 • Adjusted net income(1) of $42mm, or $0.72 per diluted share, in 4Q18; up 20% vs. adjusted 4Q17 net income(1) Solid earnings with - Stable adjusted net interest income(1) of $123mm, despite lower loans HFS and warehouse loans cost discipline - Net gain on loan sales of $34mm; lowest quarter since fourth quarter 2008 - Adjusted noninterest expense(1) of $175mm (low end of guidance range), reflecting expense discipline • NIM expansion largely offsets seasonally lower earning assets Strong growth in - Adjusted net interest margin(1) expanded 6bps to 2.99%; ex-Wells Fargo, overall cost of deposits rose modest 7bps community banking - Average earning assets down $395mm, or 2%, led by seasonal decline in loans HFS and warehouse loans; consumer, CRE and C&I loans experienced modest growth • Mortgage revenue(2) down $12mm, or 21%, primarily due to lower net gain on loan sales Lower mortgage - Net gain on loan sales fell $9mm, or 21%; FOAL down $3bn, or 36%, partially offset by higher GOS margin revenue - Net return on MSRs decreased $3mm, reflecting smaller benefit from collection of contingencies • Asset quality strong as net charge-offs only 4bps Pristine asset • Nonperforming loan ratio fell to 0.24%; early stage consumer delinquencies low and no commercial loan delinquencies quality • Allowance for loan losses covered 1.4% of loans HFI, among the strongest in the industry • Capital remains strong post-Wells Fargo branch acquisition with capital ratios in upper half of target operating ranges Robust capital - Total risk based capital ratio at 13.6% (13.9%(1) under Capital Simplification NPR) vs. target range of 13-14% position - Tier 1 leverage ratio at 8.3% (8.9%(1) under Capital Simplification NPR) vs. target range of 8-9% 1) Non-GAAP number. Please see reconciliations on page 43 and 44. 2) Mortgage revenue is defined as net gain on loan sales HFS plus the net return on the MSRs. 6
Quarterly income comparison 4th Quarter 2018 $mm Observations 4Q18 3Q18 $ Variance % Variance A Net interest income Net interest income A (1) $123 $124 (1) (1%) • Adjusted net interest income (1) fell $1mm, or 1% Provision (benefit) for loan losses ("PLL") (5) (2) (3) N/M - Average earning assets decreased 2%, led by Net interest income after PLL 128 126 2 2% anticipated seasonal decline in loans HFS and Net gain on loan sales 34 43 (9) (21%) warehouse loans (down $249mm) Loan fees and charges 20 23 (3) (13%) - Adjusted net interest margin (1) rose 6 bps to Loan administration income 8 5 3 60% 2.99%, reflecting one month benefit of lower Net return on mortgage servicing rights 10 13 (3) (23%) Wells Fargo deposits; deposits reduced FHLB borrowings Other noninterest income 26 23 3 13% Total noninterest income B 98 107 (9) (8%) B Noninterest income Compensation and benefits 79 (2) 76 3 4% Commissions and loan processing expense 32 35 (3) (9%) • Noninterest income decreased $9mm, or 8% Other noninterest expenses 64 (2) 61 (2) 3 5% Total noninterest expense C 175 (2) 172 (2) 3 2% - Net gain on loan sales fell $9mm, or 21%, primarily due to lower FOAL, reflecting seasonal Income before income taxes 51 (1)(2) 61 (2) (10) (16%) factors and lower mortgage volume; GOS margin rose 9 bps to 0.60% Provision for income taxes 9 (1)(2) 12 (2) (3) (25%) - Net return on MSRs decreased $3mm, reflecting Net income $42 (1)(2) $49 (2) ($7) (14%) smaller benefit from collection contingencies Diluted income per share $0.72 (1)(2) $0.85 (2) (0.13) (15%) C Noninterest expense Profitability Net interest margin 2.99% (1) 2.93% 6 bps • Adjusted noninterest expense(2) increased $3mm, Total revenues 221 (1) 231 ($10) (4%) or 2% (low end of guidance range) Net gain on loan sales / total revenue 15% 18% (3 bps) - Excludes $14mm of expenses attributable to Mortgage rate lock commitments, fallout adjusted $5,284 $8,290 ($3,006) (36%) Wells Fargo branch acquisition Mortgage closings $6,340 $9,199 ($2,859) (31%) Net gain on loan sale margin, HFS 0.60% 0.51% 9 bps - Higher costs reflect 1 month operating expenses for Wells Fargo branches, partially offset by lower 1) Non-GAAP number. Number shown excludes hedging gains reclassified from AOCI to net interest income in conjunction with mortgage expenses payment of long-term FHLB. Please see reconciliations on page 43 and 44. 2) Non-GAAP number. Number shown excludes expenses attributable to Wells Fargo branch acquisition. Please see reconciliations on page 43 and 44. N/M – not meaningful 7
Average balance sheet highlights 4th Quarter 2018 4Q18 ($mm) Observations Average Balance Sheet Interest-earning assets Incr (Decr)(1) $ $ % • AverageSolid gains loans in commercial HFI grew $44mm loan portfolio;; all loan warehouse categories loans excludingincreased warehouse$91mm, or 6experienced%, CRE loans modest increased growth; $88mm, Loans held-for-sale $3,991 ($402) (9%) warehouseor 4%, and C&Iloans loans declined increased seasonally $74mm, by $249mmor 6% (2) Consumer loans 4,063 213 6% • -ConsumerAverage consumerloans up $239mm, loans increased or 7%; focus$213mm, on adding or 6% Commercial loans(2) 4,853 (169) (3%) residential mortgage and indirect marine/RV loans with high- Average risk adjusted commercial returns loans rose $80mm, or 2%, Total loans held-for-investment 8,916 44 - % excluding drop in warehouse loans Other earning assets(3) 3,484 (37) (1%) Interest-bearing liabilities Interest-earning assets $16,391 ($395) (2%) Other assets 2,022 197 11% • AverageCustodial deposits deposits increased increased $606mm, $366mm ,or or 5%, 23%, driven on higher by benefitssubserviced of one accounts month of Wells Fargo deposits and higher Total assets $18,413 ($198) (1%) custodial deposits • Brokered deposits increased $273mm Deposits $11,942 $606 5% • Commercial- Average custodial demand deposits deposits rose increased $163mm $259mm,, or 8%, or driven 25% Short-term FHLB advances & other 2,954 (511) (15%) by 34% increase in serviced accounts Long-term FHLB advances 921 (359) (28%) - Provides additional risk based capital and funding at • Excluding impact of acquired deposits, average total cost favorable to marginal alternatives Other long-term debt 495 1 - % deposits rose $22mm, led by drop in savings deposits Other liabilities 553 31 6% with low deposit beta Total liabilities $16,865 ($232) (1%) Stockholders' equity 1,548 34 2% Equity(4) Total liabilities and stockholders' equity $18,413 ($198) (1%) • Tangible common equity to asset ratio of 7.45%7.74% (4) Tangible book value per common share $23.90 ($1.23) (5%) • FBC closing share price of $29.98$30.14 on JanuaryOctober 22,18, 20182019 is 125%120% of tangible book value per share 1) Measured vs. the prior quarter. 2) Consumer loans include first and second mortgages, HELOC and other loans; commercial loans include commercial real estate, commercial & industrial and warehouse loans. 3) Other earning assets include interest earning deposits, investment securities and loans with government guarantees. 4) Tangible book value per common share references a non-GAAP number. Please see reconciliations on page 43 and 44. 8
Asset quality 4th Quarter 2018 Delinquencies ($mm) Performing TDRs and NPLs ($mm) Performing TDRs NPLs $34 $34 $30 $28 $29 $78 $72 $70 $68 $66 29 29 27 25 22 43 49 43 43 44 12/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018 12/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018 Allowance coverage(1) (% of loans HFI) Nonperforming loan and asset ratios (2) (2) Total Consumer Commercial NPA/LHFI & OREOs NPL & TDRs/LHFI NPA/Total Assets 0.48% 0.42% 2.0% 2.0% 0.38% 0.35% 1.8% 0.32% 1.7% 1.7% 1.6% 0.38% 0.35% 1.5% 1.5% 1.4% 0.30% 0.28% 1.6% 1.4% 1.5% 0.22% 0.24% 1.4% 1.4% 1.4% 0.19% 0.19% 0.17% 0.16% 12/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018 12/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018 1) Excludes loans carried under the fair value option and loans with government guarantees. 2) Excludes loans held-for-sale 9
Robust capital 4th Quarter 2018 Flagstar Bancorp Capital Ratios Observations 4Q18 Balance sheet impact Net operating earnings contribution Change in MSR balance Impact from Wells Fargo acquisition Tier 1 CET-1 Tier 1 Total RBC Proforma ratio under Capital Simplification proposal(1) Leverage to RWA to RWA to RWA 4Q18 Actual 8.3% 10.6% 12.5% 13.6% 3Q18 Actual 8.4% 11.0% 13.1% 14.2% Total Risk Based Capital 14.52% • Capital remains strong post Wells Fargo branch acquisition, 13.91% 14.20% providing additional flexibility and durability Target Operating 13.63% • Total risk based capital ratio ended quarter at 13.6% (13.9% Range: +12 bps (1) 13-14% under Capital Simplification proposal) -107 bps -11 bps +49 bps - 391 basis points stress buffer above “well-capitalized” level - Operating in upper half of target operating range of 13-14% • Tier 1 leverage ratio ended quarter at 8.3% (8.9% under Capital Simplification proposal) (1) - 390 basis points stress buffer above “well-capitalized” level Well Capitalized - Operating in upper half of target operating range of 8-9% 10.0% • Supporting value creation strategy, company has ample capital to grow and hold additional interest earning assets. 9/30/2018 12/31/2018 1) Non-GAAP number. Please see reconciliations on page 43 and 44. 10
Business Segment Overview 4th Quarter 2018 Lee Smith, COO
Community banking 4th Quarter 2018 Average commercial loans ($bn) Quarter-end commercial loan commitments ($bn) Commercial and Industrial Commercial Real Estate Warehouse Commercial and Industrial Commercial Real Estate Warehouse $9.5 $9.1 $9.3 $9.2 $4.8 $5.0 $4.8 $7.6 $4.0 $4.0 1.6 1.3 3.8 1.5 4.3 4.2 4.0 1.0 0.8 2.8 2.0 2.0 2.1 2.2 3.4 1.9 2.9 2.9 3.0 3.2 1.1 1.2 1.3 1.3 1.3 1.9 1.9 2.1 2.0 2.3 4Q17 1Q18 2Q18 3Q18 4Q18 12/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018 Average consumer loans ($bn) Average deposit funding(1) ($bn) Residential First Mortgages Other Consumer Loans Retail Government Custodial deposits Brokered deposits $4.1 $11.9 $3.9 $11.3 $3.5 $3.6 $3.3 $10.4 0.9 1.0 $9.4 0.7 $9.1 2.0 2.1 0.6 0.7 1.6 1.5 1.2 1.6 1.2 1.2 1.0 1.1 2.9 3.0 3.1 2.7 2.8 7.6 8.0 6.5 6.6 7.3 4Q17 1Q18 2Q18 3Q18 4Q18 4Q17 1Q18 2Q18 3Q18 4Q18 1) Includes custodial deposits which are included as part of mortgage servicing. 12
Mortgage originations 4th Quarter 2018 Closings by purpose ($bn) Fallout-adjusted locks ($bn) Purchase originations Refinance originations $9.0 $8.6 $9.7 $8.3 $9.0 $9.2 $7.7 $7.9 2.6 2.4 4.4 $6.3 $5.3 3.4 2.0 6.4 6.8 5.3 4.5 4.3 4Q17 1Q18 2Q18 3Q18 4Q18 4Q17 1Q18 2Q18 3Q18 4Q18 Purchase 54% 59% 72% 71% 58% Mix % Closings by mortgage type ($bn) Net gain on loan sales – revenue and margin Conventional Government Jumbo Gain on loan sale ($mm) Gain on sale margin (HFS) $9.7 $79 $9.0 $9.2 2.5 $7.9 $63 2.2 2.2 $60 1.9 $6.3 2.3 $43 2.7 2.6 1.2 0.91% 2.1 0.77% 0.71% $34 1.9 0.51% 4.9 4.1 4.4 3.9 3.2 0.60% 4Q17 1Q18 2Q18 3Q18 4Q18 4Q17 1Q18 2Q18 3Q18 4Q18 13
Mortgage servicing 4th Quarter 2018 Quarter-end loans serviced (000’s) $ UPB of MSRs sold ($bn) Serviced for Others Subserviced for Others Flagstar Loans HFI Bulk Sales Flow Transactions 827 $12.0 619 535 442 470 $6.4 705 $5.9 495 $4.3 $4.4 1.3 310 361 424 4.6 103 77 79 89 88 12/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018 4Q17 1Q18 2Q18 3Q18 4Q18 Average custodial deposits ($bn) MSR / regulatory capital (Bancorp) MSR to Tier 1 Common MSR to Tier 1 Capital $2.1 $2.0 $1.6 $1.6 $1.5 24% 24% 23% 19% 20% 21% 20% 19% 16% 17% 4Q17 1Q18 2Q18 3Q18 4Q18 12/31/17 3/31/2018 6/30/2018 9/30/2018 12/31/2018 14
Noninterest expense and efficiency ratio 4th Quarter 2018 Quarterly noninterest expense ($mm) and efficiency ratio Adjusted noninterest expense (1) Adjusted efficiency ratio (1) $178 $177 $175 $173 $172 80% 79% 77% 74% 74% 4Q17 1Q18 2Q18 3Q18 4Q18 1) References non-GAAP number for 4Q18 and 3Q18; excludes acquisition costs of $14 million and $1 million for 4Q18 and 3Q18, respectively, related to Wells Fargo branch acquisition. In addition, 4Q18 excludes $29 million of hedging gains reclassified from AOCI to net interest income in conjunction with the payment of long-term FHLB advances. Please see reconciliations on page 43 and 44. 15
Closing Remarks / Q&A 4th Quarter 2018 Sandro DiNello, CEO
Earnings guidance(1) 4th Quarter 2018 1st Quarter 2019 Outlook • Net interest income up slightly - Average earning assets down moderately, led by seasonally lower loans HFS and warehouse loans Net interest income - Net interest margin expands 15 -20 bps, reflecting full quarter benefit of lower cost Wells Fargo branch deposits • Net gain on loan sales up 20-25% Noninterest income - Fallout-adjusted locks (FOAL) up 10-15%; GOS margin improves modestly • Net return on mortgage servicing rights flat, including transaction costs from closing 1Q19 MSR sales • Noninterest expense to increase to between $185-$190 million, due to full quarter of operating expenses for Noninterest expense Wells Fargo branches and seasonally higher payroll taxes and benefit costs Effective tax rate • Effective tax rate should be approximately 18%, consistent with 4Q18 1) See cautionary statements on slide 2. 17
Appendix 4th Quarter 2018 Company overview 19 Financial performance 24 Community banking 28 Mortgage originations 37 Mortgage servicing 39 Capital and liquidity 40 Non-GAAP reconciliation 43
COMPANY OVERVIEW Flagstar at a glance 4th Quarter 2018 Corporate Overview 40 35 Traded on the NYSE (FBC) 160 • Flagstar Opes Flagstar retail home retail home Headquartered in Troy, MI Bank • lending lending Branches (1) (2) • Market capitalization $1.7bn offices offices • Member of the Russell 2000 Index 99 Branches in Michigan Community banking • Leading Michigan-based bank with a balanced, diversified lending platform • $18.5bn of assets and $12.4bn of deposits • More than 247k household & 27k business relationships Mortgage origination • Leading national originator of residential mortgages ($32.5bn during twelve months ended 2018) • 75 retail home lending offices operating in 24 states with direct-to-consumer in all 50 states • More than 1,100 correspondent and nearly 900 broker relationships Mortgage servicing Operations center • 6th largest sub-servicer of mortgage loans nationwide • Servicing nearly 827k loans as of December 31, 2018 1) Includes seven home lending offices located in banking branches. • Efficiently priced deposits from escrow balances 2) Opes has one retail lending office in Honolulu, HI that is not pictured on this map. 19
COMPANY OVERVIEW Flagstar’s integrated business model 4th Quarter 2018 ● Illustrative case studies detailed below: Residential MBS Investor Home Builder Wholesale Originator Initial relationship Initial relationship Initial relationship • Bulk sale of MSRs with subservicing • Provided home builder line of credit • Established correspondent lending retained (2013 - 2014) (2016) relationship (2017) Expanded relationship - Secured real estate commitment of - Purchased over $305mm of $15mm (currently $53mm) mortgages since inception (2017) • Provided MSR lending facility (2016) Expanded relationship Expanded relationship - Commitments of $50mm collateralized by FNMA MSRs • Established 40 additional deposit • Warehouse line of credit (2017) accounts (2016-2018) - Subservice non-Flagstar mortgage - Commitments of $15mm accounts providing fee income - Average deposit balance of $7mm • Initiated subservicing agreement • Portfolio recapture services provided • Warehouse line of credit (2017) (2017) with direct-to-consumer refinancings of nearly $375mm since inception - Commitments of $10mm - Entire portfolio of newly originated (2016) mortgage loans are on-boarded with Flagstar • Additional bulk and flow sales of MSRs with subservicing retained (2017 and 2018) 20
COMPANY OVERVIEW Flagstar has a strong executive team 4th Quarter 2018 Board of Directors John Lewis Chairman Chief Audit Officer Sandro DiNello Brian Dunn President & CEO • CEO since 5/13 • Over 35 years of banking experience with Flagstar and its predecessors with a strong emphasis on community banking, including the management of retail operations and product strategy Chief Chief Mortgage Community Chief Risk General Operating Officer Financial Officer Banking Banking Officer Counsel Lee Smith Jim Ciroli Kristy Fercho Drew Ottaway Steve Figliuolo Patrick McGuirk • COO since 5/13 • CFO since 8/14 • Appointed • Executive Vice • CRO since 6/14 • General Counsel • Formerly a partner • More than 30 years President of President, Michigan • Over 35 years of since 6/15 of MatlinPatterson of banking and Mortgage effective Market President financial services • Over 20 years of Global Advisors and financial services 9/17 and Managing experience with financial services a Senior Director at experience with • Has 15 years Director, Lending Citizens Republic, legal experience Zolfo Cooper First Niagara, experience with • With Flagstar since Fleet Boston with the FDIC and • Extensive expe- Huntington and Fannie Mae in 12/15 and has 30 Financial, First Sidley Austin LLP rience in financial KeyCorp various executive years of banking Union and Chase management and and leadership and commercial Manhattan operations roles focused on lending experience building banking in southeast • Chartered Accoun- relationships and Michigan with tant in England and growth initiatives Comerica and NBD Wales 21
Risk management COMPANY OVERVIEW Best-in-class risk management platform with 228 FTEs(1) 4th Quarter 2018 Board of Directors Risk Committee Enterprise Sandro DiNello Risk Committee President & CEO Karen Sabatowski Steve Figliuolo Chief Compliance Chief Risk Officer Officer Chief QC / Financial Regulatory MFIU Fraud Loan Operational Credit Appraisal Crimes Compliance Affairs Investigations Review Risk Officer Review (BSA/AML) FTEs 5 67 49 12 7 13 45 30 1) Does not include 29 FTEs in internal audit as of 12/31/2018. 22
COMPANY OVERVIEW Strong growth opportunities 4th Quarter 2018 Grow community banking Build mortgage subservicing business • Opportunistic team lift outs • Grow subservicing operations • Grow national lending platforms(1) - Retain subservicing on MSR sales - Expand warehouse lending (275bp spread) - Acquire new 3rd party subservicing relationships where Flagstar was not the originator - Grow home builder finance (400bp spread) - Cross-sell additional revenue capabilities Build - Build MSR lending (300bp spread; LTVs<60%) • Cultivate middle-market and business banking relationships • Add specialty lending disciplines and teams 1) Indicated spreads are targets and may not be reflective of actual spreads. 23
FINANCIAL PERFORMANCE Financial performance 4th Quarter 2018 ● Solid growth in banking and subservicing has created more stable earnings ● Heightened focus on efficiency and expense management Revenue Composition and Earnings Metrics Percentage Revenue (millions) FY17 FY18 Increase Community Banking $ 259 $ 342 32% Mortgage Servicing 77 101 31% Subtotal 336 443 32% Mortgage Origination 499 441 (12%) Other 25 23 (2) (8%) Total $ 860 $ 907 5% Diluted Earnings per Share $ 2.47 (1) $ 3.02 (2)(3) 22% Return on Average Assets 0.9% (1) 1.0% (2)(3) Return on Average Equity 10.0% (1) 11.8% (2)(3) 1) Non-GAAP number. Number shown excludes non-cash charge of $80 million resulting from Tax Cuts and Jobs Act. Please see reconciliations on page 43 and 44. 2) Non-GAAP number. Number shown excludes $29 million of hedging gains reclassified from AOCI to net interest income in conjunction with the payment of long-term FHLB advances. Please see reconciliations on page 43 and 44. 3) Non-GAAP number. Number shown excludes acquisition costs of $15 million related to Wells Fargo branch acquisition. Please see reconciliations on page 43 and 44. 24
FINANCIAL PERFORMANCE Higher net interest income is stabilizing earnings 4th Quarter 2018 ● Achieving earning asset growth without diminishing net interest income growth - Growing and expanding net interest margin ● Transition to more stable net interest income Average earning assets and net interest income (1) Net interest income ($mm) Average earning assets ($bn) $16.8 $16.4 CAGR 19% $16.0 $15.4 $15.4 $124 $123 $14.7 $14.0 $115 CAGR 17% $107 $106 $12.8 $103 $12.3 $12.3 $97 $11.9 $11.6 $11.2 $87 $10.4 $10.7 $80 $83 $9.4 $76 $79 $77 $8.7 $73 $73 $65 $61 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1) References non-GAAP number for 4Q18; excludes $29 million of hedging gains reclassified from AOCI to net interest income in conjunction with the payment of long-term FHLB advances. Please see reconciliations on page 43 and 44. 25
FINANCIAL PERFORMANCE First Call consensus price target implies upside potential 4th Quarter 2018 Target price to actual price differential (%) 60% As of 1/18/2019 7 out of 8 50% Target Price: $38.81 analysts (88%) at Actual Price: $29.98 Buy at 1/18/2019 40% 8 out of 9 analysts (89%) at Buy at 1/18/19 30% 20% 10% 0% Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Target Price to Actual Price Ratio Source: Analyst ratings and target price (consensus estimate) as reported by First Call as of 1/18/2019. 26
FINANCIAL PERFORMANCE Valuation metrics 4th Quarter 2018 Observation: FBC trades at a discount to its banking peers Market / tangible book Price / LTM earnings . FBC valuation vs. SNL U.S. Bank and Thrift Index . FBC valuation vs. SNL U.S. Bank and Thrift Index Market value gap: ~$0.9B MarketMarket value value gap: gap: ~$0.4B ~$0.6B 83% 65% 68% 75% 63% 68% 1/31/2017 2/28/2017 3/31/2017 4/30/2017 5/31/2017 6/30/2017 7/31/2017 8/31/2017 9/30/2017 1/31/2018 2/28/2018 3/31/2018 4/30/2018 5/31/2018 6/30/2018 7/31/2018 8/31/2018 9/30/2018 1/31/2017 1/31/2017 2/28/2017 2/28/2017 3/31/2017 4/30/2017 3/31/2017 5/31/2017 4/30/2017 6/30/2017 5/31/2017 7/31/2017 8/31/2017 6/30/2017 9/30/2017 7/31/2017 8/31/2017 9/30/2017 1/31/2018 2/28/2018 3/31/2018 4/30/2018 5/31/2018 1/31/2018 6/30/2018 7/31/2018 2/28/2018 8/31/2018 3/31/2018 9/30/2018 4/30/2018 5/31/2018 6/30/2018 12/31/2016 10/31/2017 11/30/2017 12/31/2017 10/31/2018 11/30/2018 12/31/2018 12/31/2016 12/31/2016 10/31/2017 11/30/2017 12/31/2017 10/31/2017 11/30/2017 12/31/2017 10/31/2018 11/30/2018 12/31/2018 Source: SNL Financial; as of 1/18/2019 27
COMMUNITY BANKING Strong market position 4th Quarter 2018 ● Leading deposit share in Michigan, Fort Wayne, IN(1), and San Bernardino County, CA (High Desert Region) ● Provides access to markets with attractive demographics and low-cost, stable liquidity for continued balance sheet growth Michigan deposit share Key Markets Deposits as of Flagstar Deposits Deposit Median Proj HHI Proj pop Rank 6/30/18 ($mm) % YoY Market $mm % of total mkt share HHI grow th(4) grow th(4) Overall MI-based Institution Branches Total Share Change Oakland County, MI(3) 4,341 38.8% 8.0% 79,065 10.9% 2.6% 1 Chase 229 $43,637 20% 0% 2 Comerica 196 30,158 14% 2% Grand Rapids, MI MSA 435 3.9% 2.0% 65,403 11.5% 4.7% 3 Bank of America 106 19,225 9% 8% 4 PNC 185 17,234 8% -1% Ann Arbor, MI MSA 301 2.7% 3.4% 72,826 12.3% 4.3% 5 Fifth Third 208 16,451 8% -3% (1) 962 8.6% 8.7% 56,120 9.6% 2.5% 6 Huntington 316 15,767 7% 7% Fort Wayne, IN 7 1 Chemical 186 13,123 6% 13% Key Midwest Markets (5) 6,039 53.9% 6.3% 74,114 10.8% 2.8% 8 2 Flagstar(2)(3) 113 10,297 5% 7% 9 Citizens 89 5,641 3% 2% San Bernardino County, CA(6) 618 5.5% 20.0% 62,550 11.9% 4.0% 10 TCF 51 3,194 1% 6% Top 10 1,679 $174,726 81% 3% National aggregate 61,045 8.8% 3.6% Source: S&P Global Market Intelligence; Note: Deposit data as of June 30, 2018 and projections based on 2018 estimates; MI-based banks highlighted. 1) Fort Wayne, IN deposit data is based on Fort Wayne, IN Fed District. Fort Wayne, IN demographic data is based on counties within Fort Wayne, IN Fed District, deposit weighted based on Flagstar’s portfolio. 2) Reflects the acquisition of 14 Wells Fargo branches located in Michigan. 3) Oakland County data excludes $1.7bn of custodial deposits held at company headquarters. 4) 2019–2024 CAGR. 5) Key Midwest Markets Median HHI, projected HHI growth and projected population growth are deposit weighted based on Flagstar’s portfolio. 6) Deposit data is based on High Desert Region of San Bernardino County, CA. 28
Deposits COMMUNITY BANKING Portfolio and strategy overview 4th Quarter 2018 Total average deposits ($bn) Retail deposits (2) Other deposits $11.9 $11.3 $10.4 $9.4 $9.1 3.9 3.7 • Flagstar gathers deposits from consumers, 3.1 2.8 businesses and select governmental entities 2.6 – Traditionally, CDs and savings accounts 7.6 8.0 represented the bulk of our branch-based retail 6.5 6.6 7.3 depository relationships – Today, we are focused on growing DDA 4Q17 1Q18 2Q18 3Q18 4Q18 balances with consumer, business banking and 4Q18 total average deposits commercial relationships Savings – We additionally maintain depository 26% DDA relationships in connection with our mortgage 18% origination and servicing businesses, and with MMDA Michigan governmental entities 4% (1) – Cost of total deposits equal to 0.95% Government 10% CD 19% Custodial Brokered 18% 5% Total: $11.9bn 0.95% cost of total deposits(1) 1) Total deposits include noninterest bearing deposits. 2) Includes deposits from commercial and business banking customers. 29
COMMUNITY BANKING Deposit growth opportunities 4th Quarter 2018 Core Deposits(1) Other Deposits Retail Government • Average balance of $6.2bn during 4Q18 of which 59% are • Average balance of $1.2bn during 4Q18 demand & savings accounts • Michigan deposits are not required to be collateralized • Average core deposits(1) of $50mm per branch • Strong, long-term relationships across the state • Flagstar’s branding is helping grow core deposits • Branch acquisitions significantly enhance core deposit base Commercial(2) Custodial • Average balance of $1.8bn during 4Q18 • Average balance of $2.1bn during 4Q18 on nearly 827k loans serviced and subserviced • Increasing balances with growing lines of business, including home builder finance • Deposit balances increase along with the number of loans serviced and subserviced • Offer complete line of treasury management services • Provides risk-based capital by reducing risk-weighting on qualified loans to same borrowers 1) Core deposits = total deposits excluding government, custodial, and brokered deposits. 2) Includes deposits from commercial and business banking customers. 30
COMMUNITY BANKING Wells Fargo Branch Acquisition 4th Quarter 2018 Acquired deposits ($mm) Savings / Savings / MMDA Interest- MMDA Interest- 48% bearing 48% bearing demand demand 24% 24% Noninterest- Noninterest- bearing bearing 22% 21% Certificates Certificates of deposit of deposit 6% 7% Balance at Closing Current Balance Change 12/1/2018 1/19/2019 $ bps $ bps $ % Noninterest-bearing $394 0.00% $347 0.00% ($47) -11.9% Interest-bearing demand $418 0.02% $385 0.02% ($33) -7.9% Savings / MMDA $840 0.06% $769 0.05% ($71) -8.5% Certificates of deposit $110 0.59% $107 0.61% ($3) -2.7% Total deposits $1,762 0.07% $1,608 0.07% ($154) -8.7% Transaction-related expenses • Total acquisition related expenses of $15 million during 2018 • Branch costs of approximately $500k per year, net of fee income • Back office and support costs of approximately $18 million per year 31
Lending COMMUNITY BANKING Portfolio and strategy overview 4th Quarter 2018 Total average loans ($bn) Loans HFS Loans HFI Loans with government guarantees $13.6 $12.8 $13.3 • Flagstar’s largest category of earning assets consists $12.1 $12.0 of loans held-for-investment which averaged $8.9bn during 4Q18 8.9 7.3 7.5 8.3 8.9 – Loans to consumers consist of residential first and second mortgage loans, HELOC and other – C&I / CRE lending is an important growth strategy, 4.5 4.2 4.2 4.4 4.0 offering risk diversification and asset sensitivity 4Q17 1Q18 2Q18 3Q18 4Q18 – Warehouse lending to both originators that sell to Flagstar and those who sell to other investors 4Q18 average loans • Flagstar maintains a balance of mortgage loans held- 1st Mortgage for-sale which averaged $4.0bn during 4Q18 1st Mortgage HFI HFS 23% – Essentially all of our mortgage loans originated are 30% sold into the secondary market 2nds, HELOC – Flagstar has the option to direct a portion of the & other Loans with 7% mortgage loans it originates to its own balance sheet government guarantees Warehouse 3% 10% CRE and C&I 27% 32
COMMUNITY BANKING Community banking growth model 4th Quarter 2018 Relationship-based growth platform New banker additions (past 2 years) # of Avg Years • Primary focus is to build relationships Line of Service Additions Experience(1) - Recruit experienced bankers from larger regional banks Business Banking 10 23 - Retain seasoned bankers within our organization Commercial Lending 7 25 • Leverage deep industry experience and client CRE Lending 5 18 relationships Equip Financing Group 3 25 - Focus on moving relationships and credit facilities to Flagstar Homebuilder Finance 2 16 • Low incremental efficiency ratio Indirect Lending 6 26 - Marginal cost of 15-30% that varies with type of Warehouse Lending 5 26 loans underwritten • Estimated pre-tax contribution of $5bn loan growth Wealth Management 3 14 could contribute ~ $1.00 earnings per share Grand Total 41 22 1) We focus on recruitment of bankers with larger, regional bank lending experience. 33
Commercial lending COMMUNITY BANKING Diversified relationship-based approach 4th Quarter 2018 Overview Warehouse - $1.5bn (12/31/18) • Warehouse lines with approximately 325 active % Advances sold to Flagstar relationships nationwide, of which approximately 79% Warehouse sell a portion of their loans to Flagstar • Collateralized by mortgage loans being funded which ~140 are paid off once the loan is sold borrowers sell <25% • Diversified property types which are primarily income- Commercial producing in the normal course of business Real Estate • Focused on experienced top-tier developers with ~110 significant deposit and non-credit product opportunities ~75 borrowers borrowers sell >75% • Lines of credit and term loans for working capital sell 25% - 75% Commercial needs, equipment purchases, and expansion projects & Industrial • Primarily Michigan based relationships or relationships with national finance companies Average 21% advances sold to Flagstar Commercial Real Estate - $2.1bn (12/31/18) Commercial & Industrial - $1.4bn (12/31/18) Property type Industry Manufacturing 19% Office Owner occupied Retail 10% 16% Healthcare 14% Services 7% Multi- Hospitality 20% Distribution family 7% 7% 16% Financial, Home Other insurance & Government & builder real estate finance 8% education 39% Other 6% 29% 2% 34
COMMUNITY BANKING Warehouse lending 4th Quarter 2018 ● National relationship-based lending platform ● Attractive asset class with good spreads and low credit risk ● Strong growth potential and scalable platform ● Flagstar is well positioned to gain market share, leveraging relationships in complementary lines of business, including home builder finance and mortgage originations ● Acquired Santander mortgage warehouse business on 3/12/2018 Warehouse lenders ranked by commitments ($mm) FBC warehouse loan commitments ($bn) YOY 3Q18 Outstandings Unfunded Commitments Rank Institution Growth Total Share $4.3 $4.2 1 JPMorgan Chase 18% $13,000 20% $4.0 $3.8 2 Wells Fargo -7% 5,600 9% 3 Texas Capital -3% 5,477 8% 4 Flagstar Bancorp 46% 4,017 6% $2.8 2.4 2.9 2.4 2.3 5 BB&T -6% 3,665 6% 6 Comerica -10% 3,529 5% 1.7 7 TIAA FSB (Everbank) -11% 3,400 5% 8 Customers Bank -6% 3,250 5% 1.8 1.4 1.6 1.5 9 First Tennessee 0% 3,161 5% 1.1 10 U.S. Bancorp -1% 2,620 4% Top 10 3% $47,719 74% 12/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018 Source: Inside Mortgage Finance as of November 30, 2018. 35
COMMUNITY BANKING Home builder finance 4th Quarter 2018 Overview Tightening housing supply(1) ● National relationship-based lending platform launched in 1Q16 Existing home sales (mm) Months supply of existing homes for sale (left axis) (right axis) - Attractive asset class with good spreads (~425 bps) 8 12 - Meaningful cross-sell opportunities including warehouse loans, 7 commercial deposits and purchase originations 10 6 ● Flagstar is well positioned to gain market share given builder and 8 5 mortgage relationships 4 6 - Focused on markets with strong housing fundamentals and 3 higher growth potential 4 - We have direct relationships with 6 of the top 10 and do 2 2 business with 52 of the top 100 builders nationwide 1 - We are well positioned to take advantage of supply/demand 0 0 imbalance in housing market 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1) Source: Bloomberg (through 11/30/18) Home builder finance footprint Home builder loan commitments(2) ($mm) Unpaid principal balance Unused $1,364 $1,422 $1,284 $1,271 $1,271 $624 $704 $679 $657 $604 $740 $605 $614 $667 $718 12/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018 2) Commitments are for loans classified as commercial real estate and commercial & industrial. 36
MORTGAGE ORIGINATIONS National distribution through multiple channels 4th Quarter 2018 Residential mortgage originations by channel ($bn) Correspondent Broker Retail $7.3 $7.0 $6.6 $5.8 $4.7 $1.3 $1.2 $1.1 $1.1 $1.0 $1.2 $1.0 $1.2 $0.7 $0.9 4Q17 1Q18 2Q18 3Q18 4Q18 4Q17 1Q18 2Q18 3Q18 4Q18 4Q17 1Q18 2Q18 3Q18 4Q18 (1) • 4.8% market share with #5 national ranking(1) • 2.2% market share with #8 national ranking • Retail distribution share of 14% in 4Q18 • More than 1,100 correspondent partners • Nearly 900 brokerage relationships • 75 retail locations in 24 states • Top 10 relationships account for 11% of overall correspondent volume • Top 10 relationships account for 10% of overall • Direct-to-consumer is 12% of retail volume • Warehouse lines with more than 300 brokerage volume correspondent relationships 1) Data source: As reported by Inside Mortgage Finance for 3Q18 published November 23, 2018. 37
Flagstar has restructured its operations to be profitable MORTGAGE ORIGINATIONS even at historical lows for the mortgage origination market 4th Quarter 2018 U.S. residential mortgage origination market (historical and projected volumes) 5.8 $ in in $ trillions 4.5 4.2 4.0 3.7 3.6 3.1 3.0 2.5 2.4 2.3 2.2 2.1 2.0 2.0 2.0 1.9 1.9 1.8 1.8 1.7 1.6 1.6 1.6 1.6 1.5 1.5 1.4 1.3 1.3 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F Nominal ($) 0.6 0.9 1.0 0.8 0.6 0.8 0.8 1.7 1.4 1.1 2.2 2.9 3.8 2.8 3.0 2.7 2.4 1.5 2.0 1.7 1.4 2.0 1.8 1.3 1.7 2.1 1.8 1.6 1.6 1.6 Real(1) ($) 1.0 1.6 1.8 1.3 1.1 1.2 1.3 2.5 2.1 1.7 3.2 4.0 5.2 3.7 3.9 3.4 2.9 1.8 2.3 2.0 1.6 2.2 2.0 1.4 1.8 2.1 1.8 1.6 1.6 1.6 Adjusted(2) ($) 1.3 2.0 2.2 1.6 1.3 1.5 1.5 3.0 2.4 1.9 3.6 4.5 5.8 4.0 4.2 3.7 3.1 1.9 2.5 2.0 1.7 2.3 2.0 1.4 1.8 2.1 1.8 1.6 1.6 1.6 Source: Mortgage Bankers Association for actual periods and a blended average of forecast by Fannie Mae, Freddie Mac and Mortgage Bankers Association. 1. Adjusted for historical inflation as reported by Bureau of Labor Statistics (2018 = 100). 2. Adjusted for population growth as reported by the U.S. Census Bureau (2016 = 100). 38
MORTGAGE SERVICING MSR portfolio 4th Quarter 2018 MSR portfolio statistics MSR portfolio characteristics (% UPB) 2013 & Byby Vintage Measure ($mm) 9/30/2018 12/31/2018 Difference prior; 5% Unpaid principal balance $21,835 $21,592 ($243) Fair value of MSR $313 $290 ($23) 2014; Capitalized rate (% of UPB) 1.43% 1.35% (12 bps) 4% Multiple 4.152 3.709 (0.443) 2017 Note rate 4.355% 4.379% 2.4 bps 2015; 30% 2016 Service fee 0.345% 0.360% 1.5 bps 12% 2% Average Measure ($000) 2015 UPB per loan $247 $244 ($3) 2018 2016 & FICO 693 686 (7) 63% later; 79% & prior Loan to value 86.52% 88.18% 166 bps 5% Net (loss) return on mortgage servicing rights ($mm) By Investor $ Return 4Q17 1Q18 2Q18 3Q18 4Q18 Net hedged profit (loss) ($1) ($1) ($1) ($1) $0 Carry on asset 11 8 11 12 11 Run-off (7) (5) (3) (4) (4) GNMA Gross return on the $3 $2 $7 $7 $7 74% mortgage servicing rights Private 4% Sale transaction & P/L (3) 1 0 3 1 Freddie Model changes (4) 1 2 3 2 10% Net return on the Fannie ($4) $4 $9 $13 $10 mortgage servicing rights 12% Average mortgage $269 $269 $224 $270 $336 servicing rights 39
CAPITAL AND LIQUIDITY Balance sheet composition 4th Quarter 2018 4Q18 balance sheet (%) 1% Cash 16% Agency MBS ~65% of assets are in lower risk-content 19% 53% 61% Deposits excluding Deposits excluding assets: cash, marketable Mortgage loans held-for-investment custodial deposits custodial deposits securities, warehouse 58% Deposits excluding loans, loans held-for-sale custodial deposits and freshly-originated, high-FICO conforming 22% mortgages underwritten Loans held-for-sale by Flagstar 12% 7% Warehouse loans Custodial deposits 9% Custodial9% deposits Efficiently funds Custodial deposits Attractive relationship loans HFS and 24% lending with very low 21% 18% warehouse Commercial loans 16% delinquencies FHLB borrowings FHLB borrowings loans and other LHFI (1) FHLB borrowings 3% Other long-term debt 3% Other long-term debt 2% MSR 3% Other liabilities 4% Other liabilities Primarily low risk, stable 9% assets (FHLB stock, BOLI, Other assets 8% Common equity 8% Common equity premises & equipment, deferred tax asset, etc.) Average Assets Average Liabilities & Equity Liabilities and Equity as of 12/31/2018 1) Other LHFI includes home equity and other consumer loans. 40
CAPITAL AND LIQUIDITY Liquidity and funding 4th Quarter 2018 HFI loan-to-deposit ratio(1) Commentary 76% ■ Flagstar has invested significantly in building its 72% Community Bank, which provides attractive core deposit funding for its balance sheet ■ These retail deposits are supplemented by custodial deposits from the servicing business 9/30/2018 12/31/2018 ■ Much of the remainder of Flagstar’s balance sheet is self- (2) Liquidity ratio funding given it is eligible collateral for FHLB advances Cash & investment securities FHLB borrowing capacity (which provides significant liquidity capacity) 32% 30% ■ HFI loan-to-deposit ratio(1) 12% 15% declined 4 percentage points to 72 percent ■ Liquidity ratio(2) increased 2 18% 17% percentage points to 32 percent 9/30/2018 12/31/2018 1) HFI loan-to-deposit ratio is total loans HFI (excluding warehouse loans) expressed as a percentage of total deposits (excluding custodial deposits). 2) Cash, investment securities and FHLB borrowing capacity expressed as a percentage of total assets. 41
CAPITAL AND LIQUIDITY Low interest rate risk 4th Quarter 2018 ● Bank’s NIM is asset sensitive under parallel rate shock; liability sensitive under bear flattener ● Rate sensitivity of mortgage business largely offsets rate sensitivity of banking business Net interest margin – 12 month horizon instantaneous shocks ($mm) up 100 bps Bear Flattener 12/31/2018 500bps 450bps 400bps 350bps 300bps 250bps 200bps 150bps 100bps 50bps 0bps 1 3 6 1 2 3 5 7 10 20 30 month months months year years years years years years years years 42
NON-GAAP RECONCILIATION Non-GAAP reconciliation 4th Quarter 2018 $mm Adjusted Net Interest Income, Net Interest Margin, Total Revenues, Compensation and Benefits, Other Noninterest Expense, Noninterest Expense, Income before Income Taxes, Provision for Income Taxes, Net Income, and Diluted EPS 3 months ended 3 months ended 3 months ended Year ended Year ended December 31, 2018 September 30, 2018 December 31, 2017 December 31, 2018 December 31, 2017 Net Interest Income $ 152 $ 124 Adjustment to remove hedging gains 29 - Adjusted Net Interest Income $ 123 $ 124 Net Interest Margin 3.70% 2.93% Adjustment to remove hedging gains 0.71% 0.00% Adjusted Net Interest Margin 2.99% 2.93% Total Revenues $ 250 $ 231 Adjustment to remove hedging gains 29 - Adjusted Total Revenues $ 221 $ 231 Compensation and Benefits $ 82 $ 76 Adjustment to remove Wells Fargo acquisition costs 3 - Adjusted Compensation and Benefits $ 79 $ 76 Other Noninterest Expense $ 75 $ 62 Adjustment to remove Wells Fargo acquisition costs 11 1 Adjusted Other Noninterest Expense $ 64 $ 61 Noninterest Expense $ 189 $ 173 Adjustment to remove Wells Fargo acquisition costs 14 1 Adjusted Noninterest Expense $ 175 $ 172 Income before Income Taxes $ 66 $ 60 Adjustment to remove hedging gains (29) - Adjustment to remove Wells Fargo acquisition costs 14 1 Adjusted Income before Income Taxes $ 51 $ 61 Provision for Income Taxes $ 12 $ 12 Tax impact on adjustment for hedging gains (5) - Tax impact on adjustment for Wells Fargo acquisition costs 2 - Adjusted Provision for Income Taxes $ 9 $ 12 Net Income $ 54 $ 48 $ (45) $ 187 $ 63 Adjustment to remove Wells Fargo acquisition costs (net of tax) 12 1 - 13 - Adjustment to remove hedging gains (net of tax) (24) - - (24) - Adjustment to remove tax reform impact - - 80 - 80 Adjusted Net Income $ 42 $ 49 $ 35 $ 176 $ 143 Diluted Earnings per Share $ 0.93 $ 0.83 $ (0.79) $ 3.21 $ 1.09 Adjustment to remove Wells Fargo acquisition costs (net of tax) 0.21 0.02 - 0.23 - Adjustment to remove hedging gains (net of tax) (0.41) - - (0.42) - Adjustment to remove tax reform impact - - 1.39 - 1.38 Adjusted Diluted Earnings per Share $ 0.72 $ 0.85 $ 0.60 $ 3.02 $ 2.47 43
NON-GAAP RECONCILIATION Non-GAAP reconciliation (continued) 4th Quarter 2018 $mm Adjusted ROA, ROE, and Efficiency Ratio 3 months ended 3 months ended 3 months ended Year ended Year ended December 31, 2018 September 30, 2018 December 31, 2017 December 31, 2018 December 31, 2017 Return on Average Assets 1.2% 1.0% -1.1% 1.0% 0.4% Adjustment to remove Wells Fargo acquisition costs (net of tax) 0.2% 0.1% 0.0% 0.1% 0.0% Adjustment to remove hedging gains (net of tax) -0.5% 0.0% 0.0% -0.1% 0.0% Adjustment to remove tax reform impact 0.0% 0.0% 1.9% 0.0% 0.5% Adjusted Return on Average Assets 0.9% 1.1% 0.8% 1.0% 0.9% Return on Average Equity 14.0% 12.8% -12.1% 12.6% 4.4% Adjustment to remove Wells Fargo acquisition costs (net of tax) 3.0% 0.2% 0.0% 0.8% 0.0% Adjustment to remove hedging gains (net of tax) -6.2% 0.0% 0.0% -1.6% 0.0% Adjustment to remove tax reform impact 0.0% 0.0% 21.4% 0.0% 5.6% Adjusted Return on Average Equity 10.8% 13.0% 9.3% 11.8% 10.0% Efficiency Ratio 76% 75% Adjustment to remove Wells Fargo acquisition costs (net of tax) -6% -1% Adjustment to remove hedging gains (net of tax) 9% 0% Adjusted Efficiency Ratio 79% 74% Tangible Book Value per Share and Tangible Common Equity to Assets Ratio As of December 31, 2018 As of September 30, 2018 Total stockholders' equity $ 1,570 $ 1,518 Goodwill and intangible assets 190 70 Tangible book value $ 1,380 $ 1,448 Number of common shares outstanding 57,749,464 57,625,439 Tangible book value per share $ 23.90 $ 25.13 Total Assets $ 18,531 $ 18,697 Tangible common equity to assets ratio 7.45% 7.74% Regulatory Capital under Capital Simplification As of December 31, 2018 Total Risk-Based Capital Ratio Tier 1 Leverage Ratio Regulatory capital - Basel III to capital simplification Basel III $ 1,637 $ 1,505 Net change in deductions to DTAs, MSRs and other capital components 121 122 Basel III with capital simplification $ 1,758 $ 1,627 Risk-weighted assets – Basel III to capital simplification Basel III assets $ 12,006 $ 18,158 Net change in assets 630 121 Basel III with capital simplification $ 12,636 $ 18,279 Capital ratios Basel III 13.6% 8.3% Basel III with capital simplification 13.9% 8.9% 44
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