EX-99.1 2 pressrelease4q2018.htm EXHIBIT 99.1 Exhibit


flagstara43.jpg                fbcnyselisteda20.jpg

EXHIBIT 99.1
NEWS RELEASE
For more information, contact:        
David L. Urban
david.urban@flagstar.com
(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

1

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.


2

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.





3

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.


4

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.


5

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).


6

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

7

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.


8

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