Flagstar Reports Second Quarter 2015 Net Income of $46.4 million, or $0.68 per Diluted Share

TROY, Mich., July 28, 2015 /PRNewswire/ --

Key Q2 Highlights

• Net income increased $14.9 million, or $0.25 per diluted share, from first quarter 2015
• Positive operating leverage, led by 9 percent rise in revenue and 1 percent increase in expenses versus prior quarter
• Interest-earning assets increased 10 percent from first quarter 2015, driven by loan growth; warehouse lending rose 56 percent
• Interest-only loans decreased $386 million and NPLs declined 22 percent versus prior quarter, contributing to $10.3 million after-tax net allowance release
• Tier 1 leverage ratio remained strong at 11.5 percent

Flagstar Bancorp, Inc. FBC, the holding company for Flagstar Bank, FSB, today reported second quarter 2015 net income of $46.4 million, or $0.68 per diluted share, as compared to $31.5 million in the first quarter 2015, or $0.43 per diluted share and $25.5 million in the second quarter 2014, or $0.33 per diluted share.

"We're pleased with the strong results we demonstrated in the quarter, thanks largely to growth in banking revenue, solid mortgage revenue, and continued expense discipline," said Alessandro P. DiNello, president and chief executive officer of Flagstar Bancorp. "We posted positive operating leverage as net interest income grew 12 percent and noninterest income rose 7 percent. We also continued to de-risk the balance sheet and improve our efficiency ratio.

"Our sale of a large portion of interest-only loans during the quarter was a major accomplishment. We sold $386 million of interest-only loans, nearly half the portfolio, along with $70 million of lower performing loans. Our execution in connection with these transactions was strong and drove a $10 million after-tax net allowance release and a sizeable drop in nonperforming loans.

"Looking forward, we will continue to build out our community bank where average loans held-for-investment grew 15 percent in the second quarter. I'm encouraged by the progress we have made diversifying our Company and confident that Flagstar is on the path to sustained profit growth."

Second Quarter 2015 Highlights:

N/M - Not meaningful 
(1) Fully diluted earnings (loss) per share, except where securities would be anti-dilutive. Includes deferred unpaid dividends.

 

N/M - Not meaningful 
(1) See non-GAAP reconciliation.

 

 

Net Interest Income

Second quarter 2015 net interest income increased $7.6 million, or 12 percent to $72.5 million, as compared to $64.9 million for the first quarter 2015. The increase from the prior quarter was led by solid interest-earning asset growth and net interest margin expansion.

Net interest margin improved four basis points to 2.79 percent for the second quarter 2015, as compared to 2.75 percent for the first quarter 2015. The increase from the prior quarter was driven primarily by a greater proportion of higher yielding assets while maintaining a relatively stable funding cost.

Average loans held-for-investment totaled $4.9 billion for the second quarter 2015, increasing $0.6 billion, or 15 percent, compared to the first quarter 2015. Warehouse lending grew $349 million, or 56 percent, led by higher line utilization and new accounts. Residential first mortgage loans increased $221 million, or 10 percent, as the Company retained certain mortgage loan production on balance sheet.

Average interest bearing deposits were $6.1 billion in the second quarter 2015, increasing $144 million or 2 percent from the prior quarter. Retail deposits rose $159 million, or 3 percent, led by growth in savings deposits. Average noninterest bearing deposits increased $224 million, or 16 percent, driven by seasonal growth in company controlled mortgage escrow deposits.

Provision for Loan Losses

The Company experienced a provision benefit in the second quarter 2015 from the sale of lower performing loans. The benefit for loan losses totaled $13.3 million for the second quarter 2015, as compared to a benefit of $3.5 million for the first quarter 2015. In the second quarter 2015, the Company realized a $16.4 million net allowance release primarily related to loan sales.

Net charge-offs in the second quarter 2015 were $17.7 million, or 1.49 percent of applicable loans, compared to $40.5 million, or 3.97 percent of applicable loans in the prior quarter. The second quarter 2015 amount included $14.6 million of net charge-offs associated with the sale of $456.3 million unpaid principal balance of interest-only and lower performing loans during the quarter. The first quarter 2015 amount included $36.0 million of net charge-offs associated with the sale of $331.0 million of lower performing loans during the quarter. Excluding loan sales in both quarters, net charge-offs in the second quarter 2015 were $3.1 million, or 0.26 percent of applicable loans, compared to $4.5 million, or 0.45 percent of applicable loans in the prior quarter.

Noninterest Income

Second quarter 2015 noninterest income increased $8.7 million, or 7.4 percent, to $127.0 million, as compared to $118.3 million for the first quarter 2015. The second quarter 2015 results were led by an increase in the net return on the mortgage servicing asset, higher loan administration income and a larger representation and warranty benefit, partially offset by lower net gain on loan sales.

 

(1) Reverse benefit for contract renegotiation. 
(2) Add back reserve increase related to indemnifications claims on government insured loans. 
(3) Non-GAAP number, see page 23 for reconciliation.

 

Second quarter 2015 net gain on loan sales decreased $9.1 million, or 10.0 percent to $82.2 million, as compared to $91.3 million for the first quarter 2015. The decrease from the prior quarter reflected lower fallout-adjusted locks and a drop in the gain on sale margin. In the second quarter 2015, fallout-adjusted locks decreased 5 percent to $6.8 billion, led by a decline in refinance activity due to higher mortgage interest rates. The net gain on loan sale margin decreased 6 basis points to 1.21 percent for the second quarter 2015, as compared to 1.27 percent for the first quarter 2015, driven by increased competition on conventional business, partially offset by a higher mix of government production.

 

(1) Gain on sale margin is based on net gain on loan sales to fallout-adjusted mortgage rate lock commitments.
(2) 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.
(3)  Includes serviced for own loan portfolio, serviced for others and subserviced for others loans.

 

Loan administration income increased to $6.8 million for the second quarter 2015, as compared to $4.3 million in the first quarter 2015. The increase was primarily due to slower prepayments in the Company's mortgage servicing portfolio during the second quarter 2015.

Net return on the mortgage servicing asset (including the impact of economic hedges of mortgage servicing rights) increased to $9.3 million for the second quarter 2015, as compared to a loss of $2.4 million for the first quarter 2015. The net return on the mortgage servicing asset was 14 percent in the second quarter 2015, an increase from the first quarter 2015, primarily due to a net hedge gain from falling market implied volatility, increased servicing fee income, and a decrease in anticipated run-off speeds due to higher mortgage rates.

Representation and warranty provision was a $5.9 million benefit for the second quarter 2015, as compared to a $1.5 million benefit in the first quarter 2015. The change from the prior quarter was primarily due to lower net charge-offs and positive claims experience. The overall level of the representation and warranty reserve was $48.0 million and $53.0 million at June 30, 2015 and March 31, 2015 respectively.

Noninterest Expense

Noninterest expense increased $1.9 million, or 1 percent, to $138.9 million for the second quarter 2015, as compared to $137.0 million for the first quarter 2015. During the second quarter 2015, commissions and loan processing expense increased $3.2 million as a result of increased mortgage origination volume, offset by lower compensation and benefits, asset resolution, and legal and professional expense.

 

(1)  Adjust for legal expenses related to CFPB litigation settlements during the respective periods.
(2)  Adjust for CFPB litigation settlement expense and an additional accrual for the DOJ litigation, respectively.
(3)  Non-GAAP number, see page 23 for reconciliation.

 

Compensation and benefits decreased $1.7 million, or 3 percent, to $59.1 million for the second quarter 2015, as compared to $60.8 million in the prior quarter, primarily due to lower payroll taxes, partially offset by higher variable expense related to higher mortgage origination volumes.

Second quarter 2015 asset resolution expense decreased to $4.7 million, as compared to $7.8 million for the first quarter 2015. The $3.1 million decrease reflects the Company's on-going efforts to de-risk the balance sheet and includes the benefit of an FHA indemnification release.

Loan processing expense was $14.3 million for the second quarter 2015, as compared to $11.7 million for the first quarter 2015. The $2.6 million increase in the second quarter 2015 was primarily attributable to higher mortgage origination activity.

Legal and professional expenses were $7.8 million for the second quarter 2015, as compared to $9.0 million for the first quarter 2015.

Other noninterest expenses for the second quarter 2015 totaled $15.9 million, as compared to $11.9 million for the first quarter 2015. The $4.0 million increase from the prior quarter was related to a $2.5 million rise in warrant expense and planned advertising expense.

Income Taxes

The second quarter 2015 provision for income taxes totaled $27.5 million, as compared to $18.2 million in the first quarter 2015. The effective tax rate in the second quarter 2015 was 37.2 percent, as compared to 36.6 percent in the first quarter 2015. The marginal tax rate in the second quarter 2015 was impacted by the Company's effort to utilize net operating loss carryforwards.

Asset Quality

N/M - Not meaningful 
(1)  Excludes charge-offs of $14.6 million, $36.0 million, $3.0 million and $6.3 million related to the sale of nonperforming loans and TDRs during the three months ended June 30, 2015, March 31, 2015, December 31, 2014, and September 30, 2014, respectively.

 

The allowance for loan losses was $222 million at June 30, 2015, covering 4.31 percent of loans held-for-investment. The allowance for loan losses was $253 million at March 31, 2015, covering 5.69 percent of loans held-for-investment. The decrease in the allowance for loan losses in the second quarter 2015 was largely due to charge-offs and the allowance release related to the sale of interest-only and lower performing loans.

Second quarter 2015 net charge-offs were $17.7 million, representing 1.49 percent of applicable loans. This represented a decrease of $22.8 million from first quarter 2015 net charge-offs of $40.5 million, or 3.97 percent of applicable loans. Excluding loan sales in both quarters, net charge-offs in the second quarter 2015 were $3.1 million, or 0.26 percent, compared to $4.5 million, or 0.45 percent in the prior quarter.

Nonperforming loans decreased to $65 million at June 30, 2015 from $84 million at March 31, 2015. The improved asset quality was primarily driven by the sale of $22.5 million unpaid principal balance of nonperforming loans in the second quarter 2015. The ratio of nonperforming loans to loans held-for-investment decreased to 1.22 percent at June 30, 2015 from 1.81 percent at March 31, 2015. At June 30, 2015, consumer loan delinquencies (30-89 days past due) totaled $15 million, or 50 basis points, an improvement of 71 basis points from March 31, 2015. The improvement in the delinquency ratio was led by better asset quality, the sale of lower performing loans and recent growth in the residential mortgage loan portfolio. There were no commercial loan delinquencies at June 30, 2015.

Capital

(1)  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 reported under Basel I (which included the Market Risk Final Rules) at December 31, 2014 and prior.

 

The Company's regulatory capital ratios remain well above current regulatory quantitative guidelines for "well-capitalized" institutions. At June 30, 2015, the Company had a Tier 1 leverage ratio of 11.47 percent, as compared to 12.02 percent at March 31, 2015. The decrease in the ratio resulted from the deployment of capital for balance sheet growth. At June 30, 2015, the Company had a common equity-to-assets ratio of 9.76 percent.

Earnings Conference Call

As previously announced, the Company's second quarter 2015 earnings call will be held Tuesday, July 28, 2015 at 11 a.m. (ET).

To join the call, please dial (888) 208-1814 toll free or (719) 457-2618, and use passcode 9686622. 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 9686622.

The conference call will also be available as a live audiocast on the Investor Relations section of flagstar.com.

It will be archived on that site and will be available for replay and download. The slide presentation accompanying the conference call will be posted on the site.

About Flagstar

Flagstar Bancorp, Inc. FBC is a $12.1 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 100 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 13 retail centers in nine states. Flagstar is the 10th largest national originator of mortgage loans and a top 20 mortgage servicer, handling payments and record keeping for over $76 billion of home loans for 377,673 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 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 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 the Company's adjusted noninterest income and noninterest expense and adjusted earnings per share along with a reconciliation of these non-GAAP financial measures to GAAP.

 

Nonperforming assets / Tier 1 + Allowance for Loan Losses. The ratio of nonperforming assets to Tier 1 capital 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 transition 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 and prior. 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 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.

 

 

Fore more information, contact:

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

 

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/flagstar-reports-second-quarter-2015-net-income-of-464-million-or-068-per-diluted-share-300119351.html

SOURCE Flagstar Bancorp, Inc.