Flagstar Reports Third Quarter 2016 Net Income of $57 million, or $0.96 per Diluted Share

TROY, Mich., Oct. 25, 2016 /PRNewswire/ -- Flagstar Bancorp, Inc. FBC, the holding company for Flagstar Bank, FSB, today reported third quarter 2016 net income of $57 million, or $0.96 per diluted share, as compared to $47 million, or $0.66 per diluted share, in the second quarter 2016 and $47 million, or $0.69 per diluted share, in the third quarter 2015.

Third quarter results included a $24 million benefit related to a decrease in the fair value of the Department of Justice ("DOJ") settlement liability. Excluding this benefit, the Company had adjusted non-GAAP third quarter 2016 net income of $41 million, or $0.69 per diluted share, an increase in diluted earnings per share of 5 percent from the second quarter 2016.

"We had another quarter of solid earnings, fueled by good loan growth and positive operating leverage," said Alessandro DiNello, president and chief executive officer of Flagstar Bancorp, Inc. "Both commercial lending and mortgage banking were stand-outs, with commercial loans growing across all business lines. Top-line growth drove positive operating leverage and an improved efficiency ratio as we continued to maintain good expense discipline.

"We were very pleased with the quality of earnings this quarter," DiNello continued. "We posted earnings per share growth over the last quarter, even after adjusting for the DOJ benefit. This performance reflects the strength of our relationship model in the Community Banking segment, our focus on risk management, and the significantly lower cost of capital that resulted from the redemption of our TARP preferred. As a result, and excluding the DOJ benefit, we posted an adjusted non-GAAP return on assets of 1.2 percent and an adjusted non-GAAP return on common equity of 12.6 percent."

"Looking ahead, we will continue to search for opportunities to strengthen our one-of-a-kind business model and grow our franchise. We believe we are uniquely positioned to continue to deliver industry-leading results."

Third Quarter 2016 Highlights:

 

 

 

Net Interest Income

Third quarter 2016 net interest income increased to $80 million, compared to $77 million for the second quarter 2016. The results reflected a 6 percent increase in average earning assets, led by solid growth in loans held-for-sale and commercial loans, partially offset by a slight drop in the net interest margin.

Average loans held-for-sale were $3.4 billion in the third quarter 2016, increasing $532 million, or 18 percent, from the second quarter 2016, on higher mortgage activity and longer turn times to take advantage of attractive spreads and gain better execution on loan sales.

Average loans held-for-investment totaled $5.8 billion for the third quarter 2016, increasing $279 million, or 5 percent, from the prior quarter. During the third quarter 2016, commercial loans increased while consumer loans declined. Average commercial loans increased $445 million, or 16 percent, led by a $236 million, or 18 percent increase in warehouse loans. Commercial real estate loans also registered solid gains, increasing $183 million, or 20 percent. Average consumer loans fell $166 million, or 6 percent, led by a drop in mortgage loans due to prepayments and the impact of second quarter 2016 loan sales.

Average total deposits were $9.1 billion in the third quarter 2016, increasing $495 million, or 6 percent, from the second quarter 2016. The increase was led by higher company-controlled and government deposits. Average company-controlled deposits rose $292 million, or 19 percent, due to a higher number of loans serviced and increased refinance volume.

Net interest margin decreased 5 basis points to 2.58 percent for the third quarter 2016, as compared to 2.63 percent for the second quarter 2016. The decrease from the prior quarter was driven by interest expense on senior debt issued for TARP redemption, partially offset by increased interest income from a rotation of lower spread residential mortgages into higher spread commercial loans.

Provision (Benefit) for Loan Losses

The provision for loan losses totaled $7 million for the third quarter 2016, as compared to a provision benefit of $3 million for the second quarter 2016. The third quarter provision was largely to establish a reserve for repossessed loans with government guarantees. In the second quarter, the provision benefit resulted primarily from the sale of $408 million (UPB) performing residential first mortgage loans, precipitating a $12 million reduction in the allowance for loan losses. Please refer to the asset quality section for a more detailed discussion.

Noninterest Income

Noninterest income increased $28 million, or 22 percent, to $156 million, as compared to $128 million for the second quarter 2016. Excluding the $24 million benefit from the drop in fair value on the DOJ settlement liability, adjusted non-GAAP noninterest income rose $4 million, or 3 percent, primarily due to higher net gain on loan sales and loan fees and charges, partially offset by an increase in the net loss on the mortgage servicing asset.

Third quarter 2016 net gain on loan sales increased to $94 million, as compared to $90 million for the second quarter 2016. The increase from the prior quarter primarily reflected an improved gain on sale margin. Net gains on loan sales rose $9 million, or 11 percent, from the second quarter 2016, excluding $5 million of gains in the prior quarter on loans that were previously designated as HFI. The net gain on loan sale margin was 1.13 percent, as compared to 1.04 percent, excluding HFI loan sales, for the second quarter 2016, driven by stronger market pricing power as the Company controlled capacity to maintain service levels.

 

Loan fees and charges rose to $22 million for the third quarter 2016, as compared to $19 million in the second quarter 2016. The increase primarily reflected higher mortgage loan closings.

Net return on the mortgage servicing asset (including the impact of hedges) was a net loss of $11 million for the third quarter 2016, as compared to a net loss of $4 million for the second quarter 2016. The return on the mortgage servicing asset decreased from the second quarter 2016, primarily due to higher prepayments and a decrease in fair value driven by MSR sales. Changes in fair value related to sales included a $7 million charge associated with pending MSR sales with a fair value of $50 million expected to close in the fourth quarter 2016. These sales represent nearly all of the Company's remaining GNMA MSRs and will significantly reduce the mortgage servicing asset as we work to prepare for Basel III final phase-in capital requirements.

The representation and warranty benefit was $6 million for the third quarter 2016, as compared to a $4 million benefit in the second quarter 2016. The representation and warranty reserve fell to $32 million at September 30, 2016, from $36 million at June 30, 2016, reflecting a continued improvement in risk trends and a repurchase demand pipeline that was only $11 million at September 30, 2016.

Total noninterest income for the third quarter 2016 was $156 million, as compared to $128 million for the second quarter 2016. The increase was almost entirely due to a reduction in the fair value of the Company's DOJ settlement liability. This liability was $60 million at September 30, 2016, which was $24 million lower than the fair value at June 30, 2016. The lower value resulted from a change in the expectation as to the timing of payments to the DOJ, as a result of the $200 million dividend paid by the Bank to Bancorp during the third quarter 2016 combined with an expectation for additional dividends in the future from the Bank to Bancorp.

Noninterest Expense

The Company experienced only modest expense growth in the third quarter 2016, due entirely to performance driven items. Noninterest expense increased $3 million, or 2 percent, to $142 million for the third quarter 2016, as compared to $139 million for the second quarter 2016. Compensation and benefits increased $3 million, primarily due to higher performance-based compensation, and commissions rose $2 million on increased business activity.

Excluding the $24 million benefit from the drop in fair value on the DOJ settlement liability, the Company's adjusted non-GAAP efficiency ratio was 67.0 percent for the third quarter 2016, compared to an efficiency ratio of 68.2 percent in the prior quarter.

Income Taxes

The third quarter 2016 provision for income taxes totaled $30 million, as compared to $22 million in the second quarter 2016. The effective tax rate in the third quarter 2016 was 34 percent, as compared to 33 percent in the second quarter 2016. The increase in the marginal tax rate in the third quarter 2016 was largely due to a benefit for state tax settlements in the prior quarter.

Asset Quality

 

The Company maintained strong reserve coverage and solid credit quality in the third quarter 2016. The allowance for loan losses was $143 million at September 30, 2016, covering 2.3 percent of loans held-for-investment, as compared to an allowance for loan losses of $150 million at June 30, 2016, covering 2.6 percent of loans held-for-investment. The change in the allowance for loan losses resulted primarily from continued improvement in the Company's consumer portfolio, partially offset by an increase in commercial loan volume.

Net charge-offs in the third quarter 2016 were $7 million, or 0.51 percent of applicable loans, compared to $9 million, or 0.62 percent of applicable loans in the prior quarter. The third quarter 2016 amount included $5 million of net charge-offs associated with loans with government guarantees compared to $4 million in the second quarter of 2016. Additionally, second quarter 2016 included $2 million of net charge-offs associated with the sale of $14 million (UPB) of nonperforming, TDR, and other higher risk loans. Excluding the charge-offs associated with loan sales and loans with government guarantees in both quarters, net charge-offs in the third quarter 2016 would have been $2 million, or 0.15 percent of applicable loans, compared to $3 million, or 0.18 percent of applicable loans in the prior quarter.

Nonperforming loans held-for-investment decreased to $40 million at September 30, 2016 from $44 million at June 30, 2016. As in the prior quarter, there were no nonperforming commercial loans at September 30, 2016. The ratio of nonperforming loans to loans held-for-investment decreased to 0.63 percent at September 30, 2016 from 0.76 percent at June 30, 2016. At September 30, 2016, consumer loan delinquencies totaled $8 million, up slightly from June 30, 2016. As in the prior quarter, there were no commercial loans more than 30 days delinquent at September 30, 2016.

Capital

 

The Company maintained a robust capital position with regulatory capital ratios well above current regulatory quantitative guidelines for "well capitalized" institutions. At September 30, 2016, the Company had a Tier 1 leverage ratio of 8.88 percent, as compared to 11.59 percent at June 30, 2016. The decrease in the ratio resulted from TARP redemption and balance sheet growth, partially offset by earnings retention.

At September 30, 2016, the Company had a common equity-to-assets ratio of 9.01 percent.

Earnings Conference Call

As previously announced, the Company's third quarter 2016 earnings call will be held Tuesday, October 25, 2016 at 11 a.m. (ET).

To join the call, please dial (888) 554-1430 toll free or (719) 325-2278 and use passcode 2883109. Please call at least 10 minutes before the conference is scheduled to begin. A replay will be available for five business days by calling (866) 375-1919 toll free or (719) 457-0820, using passcode 2883109.

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. FBC is a $14.3 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 through 31 retail locations in 21 states. Flagstar is a leading national originator and servicer of mortgage loans, handling payments and record keeping for nearly $76 billion of 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 news release includes non-GAAP financial measures, such as adjusted net income, adjusted return on assets, adjusted return on equity, adjusted noninterest income, adjusted efficiency ratio 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, which are not required to be uniformly applied. 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 Company believes that adjusted net income and adjusted non-interest income and ratios based on these non-GAAP measures provide a meaningful representation of its operating performance on an ongoing basis. These are measures that management uses to assess performance of the Company against its peers and evaluate overall performance. The Company believes these non-GAAP financial measures provide useful information for investors, securities analysts and others because they provide 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 utilized in the adjusted efficiency ratio and adjusted earnings per share.

 

For more information, contact:               

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

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SOURCE Flagstar Bancorp, Inc.