Flagstar Reports Second Quarter 2017 Net Income of $41 million, or $0.71 per Diluted Share

TROY, Mich., July 25, 2017 /PRNewswire/ -- 

Key Highlights - Second Quarter 2017

• Net income per diluted share increased $0.25, or 54 percent, from first quarter 2017.
• Strong loan growth with average commercial loans up 17 percent from last quarter.
• Net interest income rose $14 million, or 17 percent, from prior quarter, driven by strong earning asset growth and a higher net interest margin.
• Mortgage revenues, including gain on sale and return on MSR, up $10 million, or 16 percent, from last quarter led by seasonal increase in mortgage originations and recent acquisitions which successfully mitigated impact of softer mortgage market.
• Asset quality strong with minimal net charge-offs and low delinquencies across all loan portfolios.

Flagstar Bancorp, Inc. (NYSE: FBC), the holding company for Flagstar Bank, FSB, today reported second quarter 2017 net income of $41 million, or $0.71 per diluted share, as compared to $27 million, or $0.46 per diluted share, in the first quarter 2017, and $47 million, or $0.66 per diluted share, in the second quarter 2016.

"We are pleased to report another solid quarter," said Alessandro DiNello, president and chief executive officer of Flagstar Bancorp, Inc. "Our community bank results continued to be outstanding and we're right where we expected. Average warehouse loans rebounded nicely, growing 23 percent, and we saw a 15 percent increase in average commercial and industrial and commercial real estate loans. We also posted a 10 basis point increase in net interest margin, maintaining a stable deposit cost despite recent Fed rate hikes. The maturation of our community bank has generated a more balanced, more sustainable earnings stream for our Company."

"Additionally, we closed on the previously reported bulk sales of $191 million of mortgage servicing rights (MSRs), successfully executing our MSR reduction strategy and releasing capital to support balance sheet growth. We are the subservicer on approximately 85 percent of the MSRs we sold, providing a boost to our subservicing business and helping us to exceed over 400,000 accounts serviced or subserviced. Our MSRs now stand at 13 percent of our Tier 1 capital, positioning us well for the full phase-in of Basel III."

"Our mortgage business also had an outstanding quarter. Fallout-adjusted locks rose 50 percent to $9.0 billion, driven primarily by the impact of the acquisitions of Opes Advisors (Opes) this quarter, as well as the delegated correspondent business from Stearns Lending (Stearns) last quarter. The integration of Opes is going smoothly, and the division is helping us maintain revenue in a softer mortgage origination market. Opes brings us more than double our pre-acquisition distributed retail origination volume and puts us now in a strong position for the move to a purchase mortgage market."

"We have a formidable banking business, an industry-leading mortgage origination platform and a blossoming subservicing business--supported by strong capital and liquidity. It's a powerful combination that positions us to grow our balance sheet with higher quality, relationship-focused assets and continues to create value for our shareholders."

Second Quarter 2017 Highlights:

Net Interest Income

Net interest income rose $14 million, or 17 percent, to $97 million, as compared to $83 million for the first quarter 2017. The results reflected a 14 percent increase in average earning assets, led by growth in commercial loans and loans held-for-sale, and net interest margin expansion of 10 basis points.

Average loans held-for-sale were $4.3 billion in the second quarter 2017, increasing $1 billion, or 30 percent, from the first quarter 2017, on higher mortgage activity.

Loans held-for-investment averaged $6.2 billion for the second quarter 2017, increasing $585 million, or 10 percent, from the prior quarter. During the second quarter 2017, average commercial loans rose 17 percent with average commercial and industrial loans rising $162 million, or 21 percent, average warehouse loans increasing $160 million, or 23 percent and average commercial real estate loans increasing $159 million, or 12 percent. Average consumer loans rose 4 percent, driven by an increase in mortgage loans (primarily jumbos).

Average total deposits were $8.7 billion in the second quarter 2017, unchanged from the first quarter 2017. Higher company-controlled and retail deposits largely offset lower government deposits. Average retail deposits increased $32 million, led by a 4 percent increase in demand deposits. Excluding warehouse loans and company-controlled deposits, the Company's held-for-investment (HFI) loan-to-deposit ratio was 73 percent in the second quarter 2017, as compared to 66 percent in the first quarter 2017.

Net interest margin increased 10 basis points to 2.77 percent for the second quarter 2017, as compared to the first quarter 2017. The increase from the prior quarter was driven by increased interest income on loans held-for-sale and commercial loans, partially offset by higher interest expense on short-term Federal Home Loan Bank advances due to recent Federal Reserve rate hikes. Total deposit costs remained relatively unchanged.

Provision (Benefit) for Loan Losses

The Company experienced a provision benefit in the second quarter 2017, resulting primarily from a continued decline in loss rates in the held-for-investment portfolio. The provision benefit for loan losses totaled $1 million for the second quarter 2017, as compared to a $3 million provision expense for the first quarter 2017.

Noninterest Income

Noninterest income rose $16 million, or 16 percent, to $116 million in the second quarter of 2017, as compared to $100 million for the first quarter 2017. The increase was primarily due to an increase in mortgage revenues and loan fees and charges, partially offset by a decrease in the net return on the mortgage servicing rights.

Second quarter 2017 net gain on loan sales increased to $66 million, as compared to $48 million in the first quarter 2017. Fallout-adjusted locks rose 50 percent to $9.0 billion, led by a seasonal increase in the mortgage market and the impact of recent acquisitions (Stearns and Opes). Excluding recent acquisitions, fallout-adjusted locks increased 23 percent to $7.0 billion. The net gain on loan sale margin fell 7 basis points to 0.73 percent for the second quarter 2017, as compared to 0.80 percent for the first quarter 2017.

Loan fees and charges rose to $20 million for the second quarter 2017, as compared to $15 million for the first quarter 2017. The increase primarily reflected higher mortgage loan closings with a greater mix of delegated correspondent loans.

Net return on the mortgage servicing rights (including the impact of hedges) was a net gain of $6 million for the second quarter 2017, as compared to a net gain of $14 million for the first quarter 2017. The drop in the net return on the mortgage servicing rights largely reflected lower service fee income due to MSR bulk sales with a fair value of $191 million that closed in the second quarter 2017.

The representation and warranty benefit was $3 million for the second quarter 2017, as compared to a $4 million benefit in the first quarter 2017. The representation and warranty reserve was reduced to $20 million at June 30, 2017, from $23 million at March 31, 2017, reflecting a continued improvement in risk trends and a repurchase pipeline that was only $4 million at June 30, 2017.

Noninterest Expense

Noninterest expense rose to $154 million for the second quarter 2017, as compared to $140 million for the first quarter 2017. The increase from the prior quarter was primarily due to operating expenses and transaction costs associated with the recent acquisitions of Stearns and Opes, and an increase in commissions and loan processing expense from higher mortgage closings. Excluding $11 million of operating expenses and $1 million of transaction costs from the acquisitions, our adjusted non-GAAP noninterest expense was $142 million.

The Company's efficiency ratio improved to 72 percent for the second quarter 2017, as compared to 77 percent for the first quarter 2017.

Income Taxes

The second quarter 2017 provision for income taxes totaled $19 million, as compared to $13 million in the first quarter 2017. The effective tax rate was 32 percent for the second quarter 2017, as compared to 33 percent for the first quarter 2017.

Asset Quality

The allowance for loan losses was $140 million at June 30, 2017, covering 2.1 percent of loans held-for-investment, as compared to an allowance for loan losses of $141 million at March 31, 2017, covering 2.4 percent of loans held-for-investment.

Net charge-offs in the second quarter 2017 were less than $1 million, or 0.04 percent of HFI loans, compared to $4 million, or 0.27 percent of such loans in the prior quarter.

Nonperforming loans held-for-investment were $30 million at June 30, 2017, compared to $28 million at March 31, 2017. As in the prior quarter, there were no nonperforming commercial loans at June 30, 2017. The ratio of nonperforming loans to loans held-for-investment decreased to 0.44 percent at June 30, 2017 from 0.47 percent at March 31, 2017. At June 30, 2017, consumer loan delinquencies totaled $5 million, unchanged from March 31, 2017.

Capital

The Company maintained a robust capital position with regulatory ratios well above current regulatory quantitative guidelines for "well capitalized" institutions. At June 30, 2017, the Company had a Tier 1 leverage ratio of 9.10 percent, as compared to 9.31 percent at March 31, 2017.

At June 30, 2017, the Company had a common equity-to-assets ratio of 8.82 percent.

Earnings Conference Call

As previously announced, the Company's second quarter 2017 earnings call will be held Tuesday, July 25, 2017 at 11 a.m. (ET).

To join the call, please dial (888) 394-8218 toll free or (719) 325-2226 and use passcode 2137097. 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 2137097.

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 $16.0 billion savings and loan holding company headquartered in Troy, Mich. Flagstar Bank, FSB, provides commercial, small business, and consumer banking services through 99 branches in the state. It also provides home loans through a wholesale network of brokers and correspondents in all 50 states, as well as 85 retail locations in 26 states, representing the combined retail branches of Flagstar and Opes Advisors mortgage division. Flagstar is a leading national originator and servicer of mortgage loans, handling payments and record keeping for $87 billion of home loans representing 402,000 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 and estimated fully implemented Basel III capital levels and ratios. 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. Factors that could cause the Company's actual results to differ materially from those described in the forward-looking statements can be 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). 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.

For more information, contact:               
David L. Urban
[email protected]
(248) 312-5970

Non-GAAP Reconciliation
(Dollars in millions)
(Unaudited)

Basel III (transitional) to Basel III (fully phased-in) reconciliation. On January 1, 2015, the Basel III rules became effective, subject to transition provisions primarily related to regulatory deductions and adjustments impacting common equity Tier 1 capital and Tier 1 capital. We have transitioned to the Basel III framework beginning in January 2015 and are subject to a phase-in period extending through 2018. Accordingly, the calculations provided below are estimates. These measures are considered to be non-GAAP financial measures because they are not formally defined by GAAP and the Basel III implementation regulations will not be fully phased-in until January 1, 2019. The regulations are subject to change as clarifying guidance becomes available and the calculations currently include our interpretations of the requirements including informal feedback received through the regulatory process. Other entities may calculate the Basel III ratios differently from ours based on their interpretation of the guidelines. Since analysts and banking regulators may assess our capital adequacy using the Basel III framework, we believe that it is useful to provide investors information enabling them to assess our capital adequacy on the same basis.

Tangible book value per share. 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. This non-GAAP measure reflects the adjustment 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 Company believes that tangible book value per share provides a meaningful representation of its operating performance on an ongoing basis. Management uses this measure to assess performance of the Company against its peers and evaluate overall performance. The Company believes this non-GAAP financial measure provides useful information for investors, securities analysts and others because it provides a tool to evaluate the Company's performance on an ongoing basis and compared to its peers.

The following table provides a reconciliation of non-GAAP financial measures.

SOURCE Flagstar Bancorp, Inc.

Related Links

http://www.flagstar.com