Flagstar Bancorp Inc. executives said the bank will be active on the mergers-and-acquisitions front after it exited a regulatory consent order that had prevented deal activity. Further, low rates should hurt mortgage originators focused on refinancing activity, which will hit Flagstar's earnings but could also create acquisition opportunities.
A spike in interest rates since the November 2016 presidential election has hurt mortgage refinance activity, dampening Flagstar's gain-on-loan sale income. The figure declined 39% from the linked quarter to $57 million in the 2016 fourth quarter, driving a 26% quarter-over-quarter decline in the company's adjusted noninterest income. Management provided guidance that gain-on-loan sale income would decline roughly 5% in the 2017 first quarter while projecting lower margin on gain-on-loan sales because of continued price competition.
"I think the first quarter is going to be really tough," said CEO Sandro DiNello. "The rest of the year is going to depend on what happens with the economy and whether the purchase market really kicks in or not. It remains to be seen whether these interest rates are going to stay at this level or not. In order to stay here, it's got to be supported by economic growth. We've sort of got the cart before the horse here."
However, the collapse in refinancing activity could also provide some opportunity for the company. The Office of the Comptroller of the Currency lifted its consent order against Flagstar in December 2016, freeing the company to pursue more acquisitions. DiNello said the company could pursue acquisitions of nonbank mortgage originators and/or community banks.
"Certainly, M&A is more in the forefront of our thinking" after the consent order exit, DiNello said, adding that he has long talked about pursuing a retail mortgage originator and would continue to look for the right fit. Companies that relied on refinance activity could be in need of a sale.
"On the banking side, I think there's a lot of small banks that are interested in combining with a company like ours and we'll be searching for the right situation. So I can't guarantee that something in that regard is going to happen this year, but I can tell you for sure that we're going to be looking at a lot of opportunities," DiNello said.
He also said the mortgage originator could come from any geographic region. For a bank, he said a Michigan-based company could make a lot of sense from a cost-savings perspective while adding that Flagstar was "not afraid to go to other parts of the country" to acquire a bank.