Flagstar regains profitability despite lower mortgage revenues

Flagstar Bancorp returned to profitability in the first quarter after tax reform caused a fourth quarter loss, but its mortgage revenues dropped 15% due to margin compression and lower volume.

The Troy, Mich., company generated net income of $35 million for the first quarter, compared with a fourth quarter loss of $45 million and net income of $27 million for the first quarter of 2017. Flagstar also took a $80 million noncash charge in the fourth quarter because it needed to revalue its deferred tax asset following the passage of the Tax Cuts and Jobs Act.

"We continued to book high-quality commercial loans, we grew deposits, we kept our net interest margin stable and we closed on two strategic acquisitions that helped both sides of the balance sheet," said Alessandro DiNello, Flagstar's president and CEO, in a press release. "First, we closed on the purchase of the mortgage warehouse business from Santander Bank, which brought approximately $500 million of mortgage warehouse loans to the balance sheet; then we acquired the branches of Desert Community Bank, bringing approximately $600 million in low cost deposits to the balance sheet."

Flagstar also continued its shift from owning mortgage servicing rights to selling them and then subservicing the loans during the quarter.

"We sold $12 billion of mortgage servicing rights in the first quarter and agreed to sell an additional $7 billion next quarter, while entering into subservicing agreements for 100% of the sales," DiNello said. "After all these sales close and together with non-Flagstar originated loans that we are scheduled to onboard in May and June, we will comfortably be above 500,000 loans serviced or subserviced by the end of the second quarter."

The company serviced $104.1 billion as of March 31, of which $77.7 billion was subservicing. On March 31, 2017, Flagstar serviced $83.1 billion, of which $48.9 billion was subservicing.

But its net gain-on-sale margin was 77 basis points, compared with 91 bps in the fourth quarter and 80 bps for the first quarter of 2017.

The company's combined gain on sale and net return on mortgage servicing rights was $64 million, compared with $75 million in the fourth quarter and $62 million in the first quarter of 2017.

Flagstar originated $7.9 billion of residential first mortgages in the quarter, down from $9.7 billion in the fourth quarter but up from $5.9 billion in the first quarter last year.