Once more unto the breach, dear Fools, as we look at another bank stock today.
Not that Michigan's Flagstar Bancorp
While the fourth quarter was a challenging one relative to the year-ago period, the company still produced results that exceeded the average estimate. Net earnings came in down about 10% relative to last year, because net interest income after provisions for losses fell 2%, non-interest income rose 23%, and non-interest expenses climbed 21%.
That's not an especially favorable mix. Consequently, the efficiency ratio rose to 62.6 from 59.1 (higher is bad), while the return on equity and return on assets fell. In fact, I believe this is Flagstar's worst return on equity in its history as a public company.
On the interest income side, the margin further compressed to 1.73%, a very low level in absolute terms. Part of the problem here is the high cost of the bank's funds -- average deposit costs rose to 3.56% (from 2.71%), and Flagstar has a relatively low percentage of low-cost demand deposits (like checking accounts and the like).
On the mortgage side, there was a better spread on loan sales, but Flagstar actually sold about one-third fewer loans than in the year-ago quarter. Overall, though, the bank's gain on loan sales nearly tripled from the year-ago period.
I'm fine with buying unusual banks, but this one worries me. More than one- third of the bank's loan portfolio is made up of residential interest-only loans, and while the delinquency rates on those loans are fine for now, we haven't even come close to hitting a rough spot in the economy or job market yet.
So although this bank is quite cheap on a historical basis (trading at less than 1.25 times book value vs. a historical average of about 1.7) and pays a generous dividend, I'll be sticking with turnaround candidates like Fifth Third
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).