TROY, Mich., Jan. 22, 2019 /PRNewswire/ --
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.
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 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.
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 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.
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 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.
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.
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.
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).
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.
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 .
This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of Flagstar Bancorp, Inc.'s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The Company's actual results could differ materially from those described in the forward-looking statements depending upon various factors as described in periodic Flagstar reports filed with the U.S. Securities and Exchange Commission, which are available on the Company's website (flagstar.com ) and on the Securities and Exchange Commission's website (sec.gov ). Other than as required under United States securities laws, Flagstar Bancorp does not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.
(Dollars in millions)
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.
For more information, contact:
David L. Urban
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SOURCE Flagstar Bancorp, Inc.