Flagstar Bancorp Reports First Quarter 2020 Net Income of $46 Million, or $0.80 Per Diluted Share

Key Highlights – First Quarter 2020

• Transitioned smoothly to remote operations to protect the health of employees and ensure business continuity
• Achieved mortgage revenues of $96 million, driven by strong refinance volume and higher return on MSRs
• Effectively managed NIM compression through the challenging rate environment
• Adopted CECL, increasing credit reserves to $152 million at March 31st
• Ended the quarter in a solid financial position–ample capital and liquidity

Flagstar Bancorp, Inc. (NYSE: FBC), the holding company for Flagstar Bank, FSB, today reported first quarter 2020 net income of $46 million, or $0.80 per diluted share, compared to fourth quarter 2019 net income of $58 million, or $1.00 per diluted share and first quarter 2019 net income of $36 million, or $0.63 per diluted share.

“We posted strong results in the quarter,” said Alessandro DiNello, president and chief executive officer of Flagstar Bancorp, Inc. “but the real story of the quarter was the last two weeks as our way of doing business changed and the health and safety of our employees and financial well-being of our customers took center stage. I couldn’t be more proud of the way our company has responded to the COVID-19 crisis. We executed on our business continuity plan, virtually overnight, without a hitch. Today, we are operating differently, but smoothly.

“On the business side, we’re supporting our customers by providing needed payment relief as we partner with them through this health crisis. On the community side, we have adjusted our giving priorities to support the fight against COVID-19, including nearly $1 million in financial support from the Flagstar Foundation. We are also participating in the SBA’s Paycheck Protection Program to support small business and nonprofit partners.

“Turning to our financial performance, we demonstrated the underlying strength of our diversified business model as our mortgage business was a standout, servicing was solid and banking held its own against headwinds. Compared to the fourth quarter 2019, net interest income fell $4 million, or 3 percent, reflecting only a 10 basis point decrease in net interest margin, despite a full quarter’s impact from prior rate cuts and the partial impact of March rate cuts. Margin compression was partially cushioned by growth in interest earnings assets. We also adopted CECL during the quarter, which increased our credit reserves by almost 40% to $152 million.

“We closed the quarter servicing or subservicing nearly 1.1 million loans, consistent with the prior quarter. Despite the high prepayment activity driven by lower interest rates, we held our ground in servicing which is a testament to our capability to leverage our mortgage origination business to replace loans that prepaid.

“Our mortgage team had a strong quarter, with mortgage revenues of $96 million, driven by a 36 percent increase in fallout adjusted locks and a $9 million increase in return on our mortgage servicing rights. Our gain on sale margin was 80 basis points, a strong first quarter performance despite the impact that the unprecedented Federal Reserve purchases of agency mortgage-backed securities had on our hedge effectiveness.

“Our results this quarter show the power of our business model and the reason we remain so committed to it. Thanks to our mortgage and warehouse businesses, we are uniquely positioned among banks to take advantage of the strong refinance market to carry us through what is likely to be a challenging credit and rate cycle. We understand that the rest of the year, and possibly beyond, may be like nothing we’ve ever experienced before. We are a strong company, with great people, a resilient business strategy, and an unerring commitment to do what is right, which will serve us well as we head into uncharted territory.”

Net Interest Income

Net interest income decreased $4 million, or 3 percent, to $148 million for the first quarter 2020 as compared to the fourth quarter 2019. The results reflect a 2 percent increase in average earning assets, primarily fueled by the acquisition of investment securities. Net interest margin decreased only 10 basis points, to 2.81 percent for the first quarter 2020 as compared to the fourth quarter 2019, as we effectively managed net interest margin compression through the full impact of the prior quarter rate cut and the partial impact of the March rate cuts.

Loans held-for-investment averaged $11.8 billion for the first quarter 2020, decreasing $345 million from the prior quarter. Average warehouse loans decreased $437 million, or 16 percent, consistent with the volume decline in the overall mortgage market and average residential mortgages decreased $153 million, or 5 percent, due to loan repayments.

Average total deposits were $15.8 billion in the first quarter 2020, decreasing $109 million, or 1 percent, from the fourth quarter 2019. Average time and brokered deposits decreased $282 million, or 10 percent, as these higher costs deposits matured and were replaced with less expensive funding.

Provision for Credit Losses

The Company had provision for credit losses and unfunded commitments of $14 million for the three months ended March 31, 2020. The provision was driven by our economic forecast, which included our estimate of the impact related to COVID-19 as of March 31st, partially offset by strong asset quality and low delinquencies.

Noninterest Income

Noninterest income decreased $5 million to $157 million in the first quarter 2020, as compared to $162 million for the fourth quarter 2019, primarily due to lower mortgage revenues.

First quarter 2020 net gain on loan sales decreased $11 million, or 11 percent, to $90 million, as compared to $101 million in the fourth quarter 2019.  Fallout-adjusted locks increased $3.0 billion, or 36 percent, to $11.2 billion, primarily driven by the robust refinance market. The net gain on loan sale margin decreased 43 basis points, to 0.80 percent for the first quarter 2020, as compared to 1.23 percent for the fourth quarter 2019 reflecting the negative impact the Federal Reserve’s purchases of agency mortgage-backed securities in the first quarter 2020 had on our hedge effectiveness.

Net return on mortgage servicing rights increased $9 million, to $6 million for the first quarter of 2020, compared to a $3 million net loss for the fourth quarter 2019 reflecting favorable hedge performance.

Noninterest Expense

Noninterest expense decreased to $235 million for the first quarter 2020, as compared to $245 million for the fourth quarter 2019, primarily reflecting $9 million decrease in mortgage-related expenses–commissions and loan processing–due to lower closings.

The Company’s efficiency ratio was 77 percent for the first quarter 2020, as compared to 78 percent for the fourth quarter 2019.

Income Taxes

The first quarter 2020 provision for income taxes totaled $10 million, compared to $11 million for the fourth quarter 2019. The effective tax rate was 18.4 percent for the first quarter 2020, compared to 16.7 percent for the fourth quarter 2019. The current economic environment has resulted in uncertainty about the timing of receiving tax benefits related to certain investments, causing the tax rate to increase.

Asset Quality

The allowance coverage for credit losses was $152 million and covered 1.1 percent of loans held-for-investment at March 31, 2020, a 20 basis point increase from December 31, 2019. The increase in the allowance coverage reflects the forecasted impact of the COVID-19 pandemic as of March 31st. Excluding warehouse loans, the allowance coverage ratio was 1.5 percent.

Net charge-offs in the first quarter 2020 were $2 million, or 8 basis points of LHFI, compared to $3 million, or 10 basis points in the prior quarter, reflecting continued strength in the credit quality of the loan portfolio.

Nonperforming loans were $29 million and our ratio of nonperforming loans to loans held-for-investment was 21 basis points at March 31, 2020, flat compared to December 31, 2019.  At March 31, 2020, early stage loan delinquencies totaled $26 million, or 0.19 percent, of total loans, compared to $14 million, or 0.12 percent, at December 31, 2019.

Capital

The Company maintained a solid capital position with regulatory ratios well above current regulatory quantitative guidelines for “well capitalized” institutions. At March 31, 2020, the Company had a total risk-based capital ratio of 11.2 percent, as compared to 11.5 percent at December 31, 2019.

Earnings Conference Call

As previously announced, the Company’s first quarter 2020 earnings call will be held Tuesday, April 28, 2020 at 11 a.m. (ET).

To join the call, please dial (866) 575-6539 toll free or (323) 794-2551 and use passcode 2135884. 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 2135884.

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

About Flagstar

Flagstar Bancorp, Inc. (NYSE: FBC) is a $26.8 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 87 retail locations in 28 states, representing the combined retail branches of Flagstar and its Opes Advisors mortgage division. Flagstar is a leading national originator and servicer of mortgage and other consumer loans, handling payments and record keeping for $225 billion of loans representing nearly 1.1 million borrowers. For more information, please visit flagstar.com.

Use of Non-GAAP Financial Measures

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

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

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

Forward-Looking Statements

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of Flagstar Bancorp, Inc.’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The Company’s actual results could differ materially from those described in the forward-looking statements depending upon various factors as described in periodic Flagstar reports filed with the U.S. Securities and Exchange Commission, which are available on the Company’s website (flagstar.com) and on the Securities and Exchange Commission’s website (sec.gov). The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. 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.