Growth outside of its residential mortgage business helped Flagstar Bank beat first-quarter earnings estimates, company executives said.
It reported net income of $27 million, or 46 cents per share, for the first quarter. This was above estimates of 39 cents per share. But compared with one year prior, net income was down from $39 million.
"Make no mistake; we are a midsized bank, operating on a national basis with an incredibly strong mortgage business," President and CEO Alessandro DiNello said during a conference call to discuss the Troy, Mich.-based bank's results.
But its first-quarter results are proof that Flagstar is no longer "just a mortgage company," he added.
Growth in commercial real estate, commercial and industrial, and mortgage loans on its balance sheet allowed Flagstar to partially overcome a decline in lending for mortgage warehouse lines of credit, DiNello said.
Commercial mortgages held for investment increased to $1.4 billion through March from $851 million a year earlier, while C&I loans increased to $854 million from $571 million.
Adding more of these loans to its portfolio resulted in an increase in net interest income to $83 million, from $79 million for the first quarter of 2016.
But noninterest income, which includes the gain from selling mortgage loans in the secondary market and mortgage servicing revenue, fell to $100 million from $105 million over the same period.
There was a 27% decline in Flagstar's gain on mortgage loan sales to the secondary market, to $48 million from $66 million, during the same period.
"Let's put this in perspective. In 2012, we averaged $250 million in gain on loan sale per quarter. In this quarter, gain on loan sale was $48 million and we were much more profitable," DiNello said.
The combination of seasonality and rising interest rates made for "the most challenging six-month run for mortgage revenue that I can recall in our history," he said.
Mortgage revenue increased by 3%, to $62 million, from $60 million in the first quarter of 2016. There was a $14 million return on mortgage servicing rights for the quarter, versus a loss of $6 million a year earlier.
Flagstar closed $5.9 billion in mortgages during the quarter, down from $6.3 billion in last year's first quarter. Purchase volume was $3.1 billion, up from $2.7 billion, but refinance originations fell to $2.8 billion from $3.7 billion.
Net interest income increased to $83 million from $79 million in the first quarter of 2016.
Warehouse loans on Flagstar's balance sheet fell to $840 million from $1.3 billion in the first quarter of 2016. But commercial real estate loans held for investment increased to $1.4 billion from $851 million and C&I loans increased to $854 million from $571 million.
Warehouse income was affected by drops in line usage and the number of days mortgages were on the line.
Flagstar sold bulk mortgage servicing rights with a fair market value of $65 million during the first quarter, and it made agreements to sell an additional $195 million in the second quarter.
The second-quarter sales are at a break-even price and Flagstar will subservice two-thirds of the sold MSRs.
Flagstar services 393,000 loans, of which 243,000 are subserviced for others.
"We remain focused on growing our fee-income-generating subservicing business which has the capacity to subservice up to 1 million loans and executing on our MSR reduction strategy through efficient bulk and flow sales given the requirements of Basel 3," Chief Operating Officer Lee Smith said during the call.
Meanwhile, it is building up its originations business, purchasing Stearns Lending's delegated correspondent production unit and agreeing to buy certain assets of Opes Advisors.
Stearns purchased closed loans from 250 lenders, and these are now firms Flagstar will be able to market its warehouse and other lending lines to, Smith said.
When asked if Flagstar is looking to do more acquisitions on the mortgage side or shift to the community banking side, DiNello said "it's all about what opportunities present themselves to us. We're not specifically looking to try to grow the mortgage business, but if the right situation presents itself, we can bolt something on that helps us stabilize that revenue stream, we'll certainly do that."
Nor does Flagstar feel any pressure to do something on the bank side, but if the right opportunity presented itself, where it would see accretion to earnings come from new revenue streams rather than cost cutting, the company would consider it, he continued.