Flagstar Reports First Quarter 2015 Net Income of $31.5 million, or $0.43 per Diluted Share

TROY, Mich., April 28, 2015 /PRNewswire/ -- Flagstar Bancorp, Inc. FBC ("the Company"), the holding company for Flagstar Bank, FSB (the "Bank"), today reported first quarter 2015 net income of $31.5 million, or $0.43 per diluted share, as compared to $11.1 million in the fourth quarter 2014, or $0.07 per diluted share and a net loss of $78.9 million in the first quarter 2014, or $1.51 loss per share.

"Our first quarter results reflect our significant efforts to strengthen our core business and improve financial performance," said Alessandro P. DiNello, president and chief executive officer of Flagstar Bancorp. "Mortgage volumes increased during the first quarter, providing a favorable tailwind, but most of our revenue growth was due to improved gain on sale margins in part from fundamental changes to optimize our mortgage originations business. In addition to improving our top- and bottom-line results, we also grew our balance sheet and executed on our strategic priority to reduce risk by continuing to sell lower quality loans. Nonperforming loans are now well below $100 million, a level Flagstar has not seen since 2006.

"We are encouraged by our progress, especially in controlling expenses given this quarter's higher business levels. We remain focused on continuing our strong results by growing our community banking franchise in Michigan and expanding our national warehouse lending business, which led our loan growth this quarter.

"Last quarter, we pointed to the work done the previous two years to position the Company for going-forward success. We believe this quarter delivers on our promise to continue to build on this foundation."

First Quarter 2015 Highlights:

 

 

 

Net Interest Income

First quarter 2015 net interest income increased to $64.9 million, as compared to $61.3 million for the fourth quarter 2014. The increase from the prior quarter was led by interest-earning asset growth, partially offset by net interest margin reduction.

Net interest margin decreased to 2.75 percent for the first quarter 2015, as compared to 2.80 percent for the fourth quarter 2014. The decrease from the prior quarter was driven primarily by increased Federal Home Loan Bank advances that provided more stable funding for planned loan growth, partially offset by increased interest income.

Average loans held-for-investment totaled $4.3 billion for the first quarter 2015, increasing $263 million or 7 percent compared to the fourth quarter 2014. The Company realized solid growth in warehouse, commercial real estate, and commercial loans. Warehouse loans rose $79 million, or 15 percent, led by market share gains.

Average interest-bearing deposits were $6.0 billion in first quarter 2015, increasing $88 million or 1 percent versus the prior quarter. Retail deposits rose $121 million or 3 percent, led by growth in savings deposits, partially offset by a decline in certificates of deposits.

Average Federal Home Loan Bank advances totaled $1.2 billion for the first quarter 2015, up $388 million compared to the fourth quarter 2014. During the quarter, the Company entered into longer-term fixed rate advances to provide more stable funding for planned loan growth.

Provision for Loan Losses

Provision for loan losses totaled $(3.5) million for the first quarter 2015, as compared to $5.0 million for the fourth quarter 2014. The improvement from the prior quarter was primarily attributable to the reduction of reserves relating to troubled debt restructuring loans which were subsequently sold. The reduction of reserves was partially offset by an increase in provision related to growth in the loan portfolio.

Net charge-offs in the first quarter 2015 were $40.5 million, or 3.97 percent of applicable loans, compared to $9.0 million, or 0.91 percent of applicable loans in the prior quarter. The first quarter 2015 amount included $36.0 million of net charge-offs associated with the sale of $331 million of lower performing loans during the quarter. Excluding loan sales in both quarters, net charge-offs in the first quarter of 2015 were $4.6 million, or 0.45 percent of applicable loans, compared to $6.0 million, or 0.60 percent of applicable loans in the prior quarter.

Noninterest Income

First quarter 2015 noninterest income was $118.3 million, as compared to noninterest income of $98.4 million for the fourth quarter 2014. The first quarter 2015 results were led by higher net gain on loan sales, partially offset by a decrease in the net return on the mortgage servicing asset and a reduction in the fair value of securitized home equity lines of credit ("HELOCs").

 

First quarter 2015 net gain on loan sales increased to $91.3 million, as compared to $53.5 million for the fourth quarter 2014. The increase from the prior quarter reflected higher fall-out adjusted locks and improved gain on sales margins. In the first quarter of 2015, fall-out adjusted locks rose 17 percent to $7.2 billion, led by an increase in refinance activity due to lower mortgage interest rates. The net gain on loan sale margin increased 40 basis points to 1.27 percent for the first quarter 2015, as compared to 0.87 percent for the fourth quarter 2014, driven by stronger market pricing power and improved business performance. In recent months, the Company made fundamental changes in its mortgage origination business to enhance customer service and profitability.

 

Loan administration income decreased to $4.3 million for the first quarter 2015, as compared to $5.5 million in the fourth quarter 2014.The decrease was primarily due to charges attributable to pool payoffs arising from higher prepayments in the Company's mortgage servicing portfolio during the first quarter 2015.

Net return on the mortgage servicing asset (including off-balance sheet hedges of mortgage servicing rights) decreased to $(2.4) million for the first quarter 2015, as compared to income of $1.6 million for the fourth quarter 2014. The gross return on the mortgage servicing rights asset was (1.2) percent in the first quarter 2015, a decrease from the fourth quarter 2014, primarily as a result of an increase in anticipated run-off speeds related to elevated mortgage refinance volumes and a net hedge loss related to an increase in market implied volatility.

Net gain on sales of assets decreased to a loss of $0.4 million in the first quarter 2015, compared to a gain of $1.7 million in the prior quarter. The Company sold $24 million of lower performing mortgage loans during the fourth quarter 2014, resulting in a net gain of $1.7 million.

Representation and warranty provision was $1.5 million for the first quarter 2015, as compared to $6.1 million reported for the fourth quarter 2014. The change from the prior quarter was primarily due to a benefit in the prior quarter related to a downward adjustment in the anticipated level of loss rates on claims from Fannie Mae and Freddie Mac and the recovery of expenses. The overall level of the representation and warranty reserve remained at $53.0 million for both March 31, 2015 and December 31, 2014.

The first quarter 2015 other noninterest income was $0.9 million, as compared to $7.2 million for the fourth quarter 2014. The decrease from the prior quarter primarily resulted from a $5.5 million reduction in the fair value of securitized HELOCs.

Noninterest Expense

Noninterest expense was $137.0 million for the first quarter 2015, as compared to $139.2 million for the fourth quarter 2014. The first quarter 2015 results were led by lower asset resolution expense, partially offset by higher variable expense related to increased business activity.

 

Compensation and benefits increased to $60.8 million for the first quarter 2015, as compared to $59.0 million in the prior quarter, primarily due to higher mortgage origination activity. Commissions rose to $10.4 million for the first quarter 2015, versus $9.3 million in the prior quarter.

First quarter 2015 asset resolution expense decreased to $7.8 million, as compared to $13.4 million for the fourth quarter 2014. The decrease reflects the Company's on-going efforts to improve asset quality and de-risk the balance sheet.

Legal and professional expenses were $9.0 million for the first quarter 2015, as compared to $10.8 million for the fourth quarter 2014. The $1.8 million decrease in the first quarter was primarily attributable to a reduced volume of foreclosure actions and the completion of various consulting projects.

Other noninterest expenses for the first quarter 2015 totaled $11.9 million, as compared to $10.7 million for the fourth quarter 2014. The increase from the prior quarter was related to loan processing fees tied to higher mortgage origination activity.

Income Taxes

The first quarter 2015 provision for income taxes totaled $18.2 million, as compared to $4.4 million in the fourth quarter 2014. The effective tax rate in the first quarter 2015 was 36.6 percent, as compared to 28.4 percent in the fourth quarter 2014. The lower marginal tax rate in fourth quarter 2014 resulted from year end state tax true-ups and a lower level of pre-tax income.

Asset Quality

 

First quarter 2015 net charge-offs were $40.5 million, representing 3.97 percent of applicable loans. This represented an increase of $31.5 million from the fourth quarter 2014 net charge-offs of $9.0 million, or 0.91 percent of applicable loans. Excluding loan sales in both quarters, net charge-offs in the first quarter were $4.5 million, or 0.45 percent, compared to $6.0 million, or 0.60 percent in the prior quarter.

Nonperforming loans decreased to $84 million at March 31, 2015 from $120 million at December 31, 2014. The improved asset quality was primarily driven by the sale of lower performing loans in the first quarter 2015. The ratio of nonperforming loans to loans held-for-investment decreased to 1.81 percent at March 31, 2015 from 2.71 percent at December 31, 2014.

The allowance for loan losses was $253 million at March 31, 2015, covering 5.69 percent of loans held-for-investment. The allowance for loan losses was $297 million at December 31, 2014, covering 7.01 percent of loans held-for-investment. The drop in the allowance for loan losses in the first quarter of 2015 was largely due to charge-offs related to the sale of lower performing loans.

Capital

 

The Company's regulatory capital ratios remain well above current regulatory quantitative guidelines for "well-capitalized" institutions. At March 31, 2015, the Company had a Tier 1 leverage ratio of 12.0 percent, as compared to 12.6 percent at December 31, 2014. The drop in the regulatory capital ratio resulted from balance sheet growth and a 7 basis point impact from the partial phase-in of Basel III. At March 31, 2015, the Company had a common equity-to-assets ratio of 9.96 percent.

Earnings Conference Call

As previously announced, the Company's first quarter 2015 earnings call will be held on Tuesday, April 28, 2015 at 11 a.m. (Eastern).

To join the call, please dial (888) 812-8589 toll free or (913) 312-1276, and use passcode: 2728522. 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, using passcode: 2728522.

The conference call will also be available as a live audio cast on the Investor Relations section of flagstar.com. It will be archived on that site and will be available for replay and download. A slide presentation accompanying the conference call will also be posted on the site.

About Flagstar

Flagstar Bancorp, Inc. FBC is a $11.6 billion savings and loan holding company headquartered in Troy, Mich. Flagstar Bank, FSB, the largest bank headquartered in Michigan, provides commercial, small business, and consumer banking services through 107 branches in the state. It also provides home loans through a wholesale network of brokers and correspondents in all 50 states, as well as through 16 retail centers in 11 states. Flagstar is the ninth largest national originator of mortgage loans and a top 20 mortgage servicer, handling payments and recordkeeping for over $75 billion of home loans for nearly 385,000 borrowers. For more information, please visit flagstar.com.

Use of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP, this press release includes non-GAAP financial measures such as an adjusted efficiency ratio, adjusted earnings, the ratio of total nonperforming assets to Tier 1 capital (to adjusted total assets) and estimated Basel III ratios. The Company believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying performance and trends of Flagstar.

Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To mitigate these limitations, there are practices in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that the Company's performance is properly reflected to facilitate consistent period-to-period comparisons. Although the Company believes the non-GAAP financial measures disclosed in this report enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for those financial measures prepared in accordance with GAAP.

Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in this earnings release, conference call slides, or the Form 8-K related to this press release. Additional discussion of the use of non-GAAP measures can also be found in Flagstar Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2014. These documents can 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 Flagstar Bancorp Annual Report on Form 10-K for the year ended December 31, 2014, which has been or will be filed with the Securities and Exchange Commission and is 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio and efficiency ratio (adjusted). The efficiency ratio, which generally measures the productivity of a bank, is calculated as noninterest expense divided by total operating income. Total operating income includes net interest income and total noninterest income. Management utilizes the efficiency ratio to monitor its own productivity and believes the ratio provides investors with a meaningful tool to monitor period-to-period productivity trends. The efficiency ratio (adjusted), excludes from noninterest expense and noninterest income (GAAP) certain adjusting items, that are described in the table below. As the provision for loan losses is already excluded by the ratio's own definition, we believe that the exclusion of representation and warranty provision provides investors with a more complete picture of our productivity and ability to generate operating income. The efficiency ratio (adjusted) provides investors with a meaningful base for period to period comparisons, which management believes will assist investors in analyzing our operating results and predicting future performance. These non-GAAP financial measures are also utilized internally by management to assess the performance of our own business.

Our calculations of the efficiency ratio may differ from the calculation of similar measures used by other banks and should be used to determine and evaluate period to period trends in our performance, rather than in comparison to other similar non-GAAP measurements utilized by other companies. In addition, investors should keep in mind that certain items excluded from income and expenses in the efficiency ratio (adjusted) are recurring and integral expenses to our operations, and that these expenses will still accrue under similar GAAP measures.

Adjusted Income from Operations and Adjusted Earnings 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. These non-GAAP measures reflect 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 following table provides a reconciliation of non-GAAP financial measures utilized in the adjusted efficiency ratio and adjusted earnings per share.

 

Nonperforming assets / Tier 1 + Allowance for Loan Losses. The ratio of nonperforming assets to Tier 1 and allowance for loan losses divides the total level of nonperforming assets held for investment by Tier 1 capital (to adjusted total assets), as defined by bank regulations, plus allowance for loan losses. We believe these measurements are meaningful measures of capital adequacy used by investors, regulators, management and others to evaluate the adequacy of capital in comparison to other companies within the industry.

 

Basel III (transitional) to Basel III (fully phased-in) reconciliation. On January 1, 2015, the Basel III rules became effective, subject to transitions provisions primarily related to regulatory deductions and adjustments impacting common equity Tier 1 capital and Tier 1 capital. We reported under Basel I (which included the Market Risk Final Rules) at December 31, 2014. When fully phased-in, Basel III will increase capital requirements through higher minimum capital levels as well as through increases in risk-weights for certain exposures. Additionally, the final Basel III rules place greater emphasis on common equity. In October 2013, the OCC and Federal Reserve released final rules detailing the U.S. implementation of Basel III and the application of the risk-based and leverage capital rules to top-tier savings and loan holding companies. We have transitioned to the Basel III framework beginning in January 2015 and are subject to a phase-in period extending through January 2019. 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 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.

 

 

 

For more information, contact:                               

David L. Urban
david.urban@flagstar.com
(248) 312-5970

 

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SOURCE Flagstar Bancorp, Inc.