Flagstar Reports First Quarter 2017 Net Income of $27 million, or $0.46 per Diluted Share

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

Key Highlights - First Quarter 2017

• Strong commercial loan growth with period-end commercial and industrial and commercial real estate loans up 11 percent from prior quarter-end and up 58 percent versus same quarter-end last year.
• Mortgage revenues, including gain on sale and return on MSR, up $10 million, or 19 percent, from fourth quarter 2016, resulting from improved MSR returns; increased purchase mortgage volumes largely offset lower refinance levels.
• Noninterest expense improved $2 million, or 1 percent, versus prior quarter, on lower mortgage activity despite seasonally higher benefits costs and acquisition-related expenses.
• Sold $65 million fair value of MSR assets and entered into agreements to sell nearly $200 million additional MSRs in second quarter 2017, successfully executing MSR reduction strategy.
• Asset quality strong with nonperforming loans declining to $28 million.
• Strategic goals advanced with acquisition of Stearns' delegated correspondent business and agreement to acquire certain assets of Opes Advisors.

Flagstar Bancorp, Inc. (NYSE: FBC), the holding company for Flagstar Bank, FSB, today reported first quarter 2017 net income of $27 million, or $0.46 per diluted share, as compared to $28 million, or $0.49 per diluted share, in the fourth quarter 2016 and $39 million, or $0.54 per diluted share, in the first quarter 2016.

"We had another good quarter with solid results, despite facing the headwinds of seasonality and higher interest rates in our mortgage business," said Alessandro DiNello, president and chief executive officer of Flagstar Bancorp, Inc. "Our community bank came through again as a solid contributor to net interest income where strong growth in commercial real estate, commercial and industrial, and mortgage loans partially overcame a decline in warehouse loans. We also saw continued growth in retail deposits at an attractive funding level."

"We saw strong returns on the mortgage servicing rights we hold, reflecting the stronger market we are seeing in this rate environment. In the first quarter, we sold $65 million of our mortgage servicing rights. In the second quarter, we have entered into pending bulk sales of an additional $195 million of mortgage servicing rights under contract at a break-even price, including transaction costs. We have retained servicing on approximately two-thirds of the total MSR sale amount."

"We announced two acquisitions recently to support our position as a national leader in the mortgage industry. First was the purchase of the delegated correspondent business of Stearns Lending. This was an opportunistic acquisition that allows us to become a top five player in this channel. Second was our agreement to purchase certain assets of Opes Advisors, a high-quality retail mortgage originator. This acquisition dovetails nicely with our interest in growing our retail mortgage channel."

"We remain committed to continuing to grow our community bank and solidifying our position as an industry leader in mortgage banking. Looking ahead, we believe we are well positioned to benefit from a stronger economy, a stronger housing market and the pivot to a stronger purchase mortgage market."

First Quarter 2017 Highlights:

Net Interest Income

Net interest income decreased $4 million, or 5 percent, to $83 million, as compared to $87 million for the fourth quarter 2016. The results reflected a 4 percent decrease in average earning assets, led by a contraction in warehouse loans, partially offset by increased investment securities, mortgage loans, commercial real estate loans and commercial and industrial loans.

Loans held-for-investment averaged $5.6 billion for the first quarter 2017, decreasing $524 million, or 9 percent, from the prior quarter. During the first quarter 2017, average warehouse loans fell $852 million, driven by anticipated seasonal factors and lower overall mortgage volumes experienced by the Company's warehouse customers. Commercial loan growth was strong with average commercial real estate loans increasing $109 million, or 9 percent and average commercial and industrial loans increasing $53 million, or 7 percent. Average consumer loans rose $166 million, or 6 percent, driven by an increase in mortgage loans (primarily jumbos).

Average total deposits were $8.8 billion in the first quarter 2017, decreasing $438 million, or 5 percent, from the fourth quarter 2016. The decrease was led by lower company-controlled deposits, partially offset by higher retail deposits. Average retail deposits increased $98 million, or 2 percent, due to growth in consumer savings accounts. Excluding warehouse loans and company-controlled deposits, the Company's HFI loan-to-deposit ratio remained low at 66 percent in the first quarter 2017, as compared to 63 percent in the fourth quarter 2016.

Net interest margin was unchanged at 2.67 percent for the first quarter 2017, as compared to the fourth quarter 2016. During the fourth quarter 2016, the Company terminated certain fixed rate FHLB advances which resulted in a $2 million, or 6 basis point, benefit to interest expense in the prior quarter.

Provision for Loan Losses

The provision for loan losses totaled $3 million for the first quarter 2017, as compared to $1 million for the fourth quarter 2016. The low level of provision expense reflected strong asset quality and largely matched net charge-offs in the quarter.

Noninterest Income

Noninterest income rose $2 million, or 2 percent, to $100 million in the first quarter of 2017, as compared to $98 million for the fourth quarter 2016. The increase was primarily due to an increase in the net return on the mortgage servicing rights, partially offset by a drop in net gain on loan sales and loan fees and charges.

First quarter 2017 net gain on loan sales fell $9 million, or 16 percent, to $48 million, versus $57 million in the fourth quarter 2016. Fallout-adjusted locks fell 2 percent to $6.0 billion due to lower refinance volumes, largely offset by stronger purchase activity. The net gain on loan sale margin fell 13 basis points to 0.80 percent for the first quarter 2017, as compared to 0.93 percent for the fourth quarter 2016. The lower margin was primarily due to competitive factors and the impact of extended turn times, offsetting the impact of lower warehouse loans.

Loan fees and charges fell to $15 million for the first quarter 2017, as compared to $20 million for the fourth quarter 2016. The decrease primarily reflected lower mortgage loan closings.

Net return on the mortgage servicing rights (including the impact of hedges) increased $19 million and was a net gain of $14 million for the first quarter 2017, as compared to a net loss of $5 million for the fourth quarter 2016. At March 31, 2017, the Company had $295 million of mortgage servicing rights and $195 million fair value of contracted sales that are expected to settle in the second quarter 2017.

The representation and warranty benefit was $4 million for the first quarter 2017, as compared to a $7 million benefit in the fourth quarter 2016. The representation and warranty reserve was reduced to $23 million at March 31, 2017, from $27 million at December 31, 2016, reflecting a continued improvement in risk trends and a repurchase pipeline that was only $6 million at March 31, 2017.

Noninterest Expense

Noninterest expense fell $2 million, or 1 percent, to $140 million for the first quarter 2017, as compared to $142 million for the fourth quarter 2016. During the first quarter 2017, the Company experienced an $8 million decline in mortgage-related expense (commissions and loan processing) as a result of lower mortgage closings, partially offset by a $6 million increase in compensation and benefits expense.

Compensation and benefits increased to $72 million for the first quarter 2017, as compared to $66 million for the prior quarter, substantially all of which was seasonally higher benefits expense.

Commissions were $10 million for the first quarter 2017, as compared to $15 million for the fourth quarter 2016. The $5 million decrease in the first quarter 2017 was primarily attributable to lower mortgage closings this quarter.

The Company's efficiency ratio was unchanged at 77 percent for the first quarter 2017, as compared to the fourth quarter 2016. Excluding $6 million of seasonal benefits expense and $1 million of acquisition-related costs, the Company's adjusted non-GAAP efficiency ratio was 73 percent for the first quarter 2017.

Income Taxes

The first quarter 2017 provision for income taxes totaled $13 million, as compared to $14 million in the fourth quarter 2016. The effective tax rate was unchanged at 33 percent for the first quarter 2017, as compared to the fourth quarter 2016.

Asset Quality

The allowance for loan losses was $141 million at March 31, 2017, covering 2.4 percent of loans held-for-investment, as compared to an allowance for loan losses of $142 million at December 31, 2016, covering 2.4 percent of loans held-for-investment.

Net charge-offs in the first quarter 2017 were $4 million, or 0.27 percent of applicable loans, compared to $2 million, or 0.13 percent of applicable loans in the prior quarter. The first quarter 2017 amount included $2 million of net charge-offs associated with loans with government guarantees compared to $1 million in the fourth quarter of 2016.

Nonperforming loans held-for-investment were $28 million at March 31, 2017, compared to $40 million at December 31, 2016, reflecting the sale of lower performing loans during the quarter. As in the prior quarter, there were no nonperforming commercial loans at March 31, 2017. The ratio of nonperforming loans to loans held-for-investment decreased to 0.47 percent at March 31, 2017 from 0.67 percent at December 31, 2016. At March 31, 2017, consumer loan delinquencies totaled $5 million, compared to $10 million at December 31, 2016. As in the prior quarter, there were no commercial loans more than 30 days delinquent at 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 March 31, 2017, the Company had a Tier 1 leverage ratio of 9.31 percent, as compared to 8.88 percent at December 31, 2016. The increase in the ratio resulted from earnings retention, MSR sales and a decrease in earning assets, partially offset by a higher phase-in requirement under Basel III.

At March 31, 2017, the Company had a common equity-to-assets ratio of 8.92 percent.

Earnings Conference Call

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

To join the call, please dial (877) 852-6583 toll free or (719) 325-4934 and use passcode 6536406. 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 6536406

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 $15.4 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 43 retail locations in 23 states. Flagstar is a leading national originator and servicer of mortgage loans, handling payments and record keeping for $83 billion of home loans representing 393,000 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 noninterest expense, 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. 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
david.urban@flagstar.com
(248) 312-5970