Flagstar Reports Third Quarter 2015 Net Income of $47 million, or $0.69 per Diluted Share

TROY, Mich., Oct. 27, 2015 /PRNewswire/ -- Flagstar Bancorp, Inc. FBC, the holding company for Flagstar Bank, FSB, today reported third quarter 2015 net income of $47 million, or $0.69 per diluted share, as compared to $46 million in the second quarter 2015, or $0.68 per diluted share, and a net loss of $28 million in the third quarter 2014, or a loss of $0.61 per diluted share.

"We are pleased with the solid results we were able to post again this quarter. Despite lower revenue from mortgage originations, we grew total revenue and reduced expenses, resulting in positive operating leverage," said Alessandro P. DiNello, president and chief executive officer of Flagstar Bancorp. "We've now posted four straight quarters of positive net income and operating leverage, a testament to the execution of our business plan."

"Additionally, on October 15, 2015, we sold $214 million of interest-only loans, after previously moving these loans to our held-for-sale portfolio in anticipation of this transaction. We've now sold $600 million of these assets this year. Despite these sales, we've been able to grow the earnings power of our balance sheet, reinvesting the proceeds from these sales into higher quality assets. Additionally, our level of nonperforming loans remains below pre-crisis levels."

"Our success has only strengthened our resolve in our business plan of growing our community bank, increasing the profitability of our mortgage originations, and building our mortgage sub-servicing business. We continue to make progress on the regulatory front and believe that we are on track for lifting the OCC consent order and redeeming our TARP preferred securities."

Third Quarter 2015 Highlights:

Net Interest Income

Third quarter 2015 net interest income was unchanged at $73 million. The results were led by modest earning asset growth offset by a slight drop in net interest margin.

Net interest margin decreased 4 basis points to 2.75 percent for the third quarter 2015, as compared to 2.79 percent for the second quarter 2015. The decrease from the prior quarter was primarily driven by a lower yield on commercial loans held-for-investment (including warehouse loans) and higher interest on FHLB debt to match-fund long-term assets.

Average loans held-for-investment totaled $5.4 billion for the third quarter 2015, increasing $474 million, or 10 percent, compared to the second quarter 2015. Residential first mortgage loans grew $374 million, or 16 percent, as the Company retained more loan production on the balance sheet. Home equity lines of credit increased $83 million, or 25 percent, reflecting the acquisition of a loan portfolio in the second quarter 2015.

Average total deposits were $8.3 billion in the third quarter 2015, increasing $524 million, or 7 percent, from the prior quarter. Company-controlled deposits increased $380 million, or 24 percent, driven by the return of mortgage escrow deposits. Government deposits rose $124 million, or 13 percent, led by higher demand and savings deposits.

Provision for Loan Losses

The Company experienced a provision benefit in the third quarter 2015 from the transfer of interest-only and sale of lower performing loans. The benefit for loan losses totaled $1 million for the third quarter 2015, as compared to a benefit of $13 million for the second quarter 2015. During the third quarter 2015, the Company realized a $9 million net allowance release primarily related to loan sales.

Net charge-offs in the third quarter 2015 were $24 million, or 1.84 percent of applicable loans, compared to $18 million, or 1.49 percent of applicable loans in the prior quarter. The third quarter 2015 amount included $16 million of net charge-offs associated with the sale of $233 million unpaid principal balance of interest-only and lower performing loans. The second quarter 2015 amount included $15 million of net charge-offs associated with the sale of $456 million unpaid principal balance of interest-only and lower performing loans. Excluding loan sales in both quarters, net charge-offs in the third quarter 2015 were $8 million, or 0.61 percent of applicable loans, compared to $3 million, or 0.26 percent of applicable loans in the prior quarter.

Noninterest Income

Third quarter 2015 noninterest income increased $2 million, or 2 percent, to $128 million, as compared to $126 million for the second quarter 2015. The third quarter 2015 results were led by an increase in the net return on the mortgage servicing asset, the net gain on sale of assets and other noninterest income, partially offset by lower net gain on loan sales.

Third quarter 2015 net gain on loan sales decreased $15 million, or 18 percent, to $68 million, as compared to $83 million for the second quarter 2015. The decrease from the prior quarter reflected a drop in the gain on sale margin and lower fallout-adjusted locks. The net gain on loan sale margin fell 16 basis points to 1.05 percent for the third quarter 2015, as compared to 1.21 percent for the second quarter 2015, led by lower margins on government and refinance business. In the third quarter 2015, fallout-adjusted locks decreased 5 percent to $6.5 billion. The Company increased government and jumbo production to partially offset a drop in conventional volumes.

Net return on the mortgage servicing asset (including the impact of economic hedges of mortgage servicing rights) rose to $12 million for the third quarter 2015, as compared to $9 million for the second quarter 2015. The net return on the mortgage servicing asset improved $3 million from the prior quarter largely as the prior quarter had $5 million of elevated costs associated with sales in that quarter and the current quarter benefited $3 million from collections of contingencies held back by the purchaser relating to MSR sales in prior periods. These benefits were partially offset in the current quarter by the net impact of market-driven changes in the position.

Other noninterest income for the third quarter 2015 totaled $9 million, as compared to a loss of $1 million for the second quarter 2015. The $10 million improvement was the result of three main factors. First, the change in the fair value of the Company's commitments to purchase HFI residential first mortgage loans improved $5 million due to a drop in interest rates at the end of the third quarter 2015, compared to an increase in rates at the end of the second quarter 2015; second, the change in fair value for HFI residential first mortgage loans carried under a fair value election was $3 million better due to the impact of the same change in interest rates; and finally, the fair value of HELOCs improved $2 million due to a $2 million charge in the prior quarter while certain of these loans were serviced by an outside servicer.  At the end of the second quarter 2015, we exercised our clean-up call on part of this portfolio and its performance in the third quarter 2015 has been consistent with our expectations.

Noninterest Expense

Noninterest expense decreased $7 million, or 5 percent, to $131 million for the third quarter 2015, as compared to $138 million for the second quarter 2015. The third quarter 2015 results were led by a decrease in asset resolution expense and other noninterest expense, partially offset by higher legal and professional expense. The Company's efficiency ratio improved to 65.0 percent for the third quarter 2015 through careful expense management.

Compensation and benefits decreased $1 million, or 2 percent, to $58 million for the third quarter 2015, as compared to $59 million in the prior quarter.

Third quarter 2015 asset resolution expense declined $5 million, as compared to the second quarter 2015. The decrease largely reflected the positive impact of building a stronger balance sheet.

Legal and professional expenses were $10 million for the third quarter 2015, as compared to $8 million for the second quarter 2015. The $2 million increase was due to higher legal expense related to the execution of various non-agency loan sales and consulting fees on various projects to improve operational efficiency and risk management.

Other noninterest expenses for the third quarter 2015 totaled $13 million, as compared to $15 million for the second quarter 2015. The $2 million decrease from the prior quarter was related to lower advertising costs and regulatory-related expense.

Income Taxes

The third quarter 2015 provision for income taxes totaled $24 million, as compared to $28 million in the second quarter 2015. The effective tax rate in the third quarter 2015 was 34.4 percent, as compared to 37.2 percent in the second quarter 2015. The decline in the marginal tax rate in the third quarter 2015 resulted from the recognition of R&D tax credits and higher tax exempt income.

Asset Quality

The allowance for loan losses was $197 million at September 30, 2015, covering 3.7 percent of loans held-for-investment. The allowance for loan losses was $222 million at June 30, 2015, covering 4.3 percent of loans held-for-investment. The decrease in the allowance for loan losses in the third quarter 2015 was largely due to charge-offs and the allowance release related to the transfer of interest-only and sale of lower performing loans.

Third quarter 2015 net charge-offs were $24 million, representing 1.84 percent of applicable loans. This represented an increase of $6 million from the second quarter 2015 net charge-offs of $18 million, or 1.49 percent of applicable loans. Excluding loan sales in both quarters, net charge-offs in the third quarter 2015 were $8 million, or 0.61 percent, compared to $3 million, or 0.26 percent in the prior quarter. The increase was primarily due to $3 million of commercial loan charge-offs and $1 million of consumer charge-offs related to an operational change to partially charge-off loans when they are 180 days past the loan's maturity date, regardless of the delinquency status of the loan. The remaining $4 million of charge-offs accounted for 0.30 percent of applicable loans.

Nonperforming loans decreased to $63 million at September 30, 2015 from $65 million at June 30, 2015. The ratio of nonperforming loans to loans held-for-investment decreased to 1.15 percent at September 30, 2015 from 1.22 percent at June 30, 2015. At September 30, 2015, consumer loan delinquencies (30-89 days past due) totaled $21 million, or 64 basis points, an increase of 12 basis points from June 30, 2015 and a decrease of 131 basis points from the same period last year. There were no commercial loan delinquencies (30-89 days past due) at September 30, 2015. 

Capital

The Company's regulatory capital ratios remain well above current regulatory quantitative guidelines for "well-capitalized" institutions. At September 30, 2015, the Company had a Tier 1 leverage ratio of 11.65 percent, as compared to 11.47 percent at June 30, 2015. The increase in the ratio resulted from earnings retention and a lower deduction for net operating loss-related deferred tax assets. At September 30, 2015, the Company had a common equity-to-assets ratio of 9.88 percent.

Earnings Conference Call

As previously announced, the Company's third quarter 2015 earnings call will be held Tuesday, October 27, 2015 at 11 a.m. (ET).

To join the call, please dial (877) 719-9795 toll free or (719) 325-4751, and use passcode 908089. 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 908089.

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 $12.5 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 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 through 14 retail centers in 10 states. Flagstar is the 10th largest national originator of mortgage loans and a top 20 mortgage servicer, handling payments and record keeping for over $74.3 billion home loans for nearly 370,000 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 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For more information, contact:
David L. Urban
david.urban@flagstar.com
(248) 312-5970

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SOURCE Flagstar Bancorp, Inc.