Flagstar Announces Return to Profitability in Second Quarter 2012 Reports second quarter 2012 net income of $86.0 million, or $0.15 per share, and year-to-date 2012 net income of $77.3 million, or $0.13 per share; Continuing improvements in consumer credit quality

TROY, Mich., July 17, 2012 /PRNewswire/ -- Flagstar Bancorp, Inc. (NYSE: FBC) (the "Company"), the holding company for Flagstar Bank, FSB (the "Bank"), today announced its return to profitability, reporting second quarter 2012 net income applicable to common stockholders of $86.0 million, or $0.15 per share, as compared to a first quarter 2012 net loss of $(8.7) million, or $(0.02) per share and a second quarter 2011 net loss of $(74.9) million, or $(0.14) per share.  For the six months ended June 30, 2012, net income applicable to common stockholders totaled $77.3 million, or $0.13 per share, as compared to a net loss of $(106.6) million, or $(0.19) per share during the same period in 2011.

"I am very pleased to report strong net income for the second quarter and for the first six months of 2012," said Joseph P. Campanelli, Chairman of the Board, President and CEO.  "Returning to profitability following an extended period of losses marks a major milestone for our bank, and is the culmination of countless hours of hard work and dedication by our employees.  While we are excited about reaching this significant milestone, we recognize that we still have a great deal of work ahead of us.  We have made great progress in transforming Flagstar into a diversified super-community bank, and we remain committed to delivering diversified products and exceptional service to our customers and generating value for our shareholders." 

Campanelli continued, "Our second quarter performance reflects the earnings power of our industry-leading mortgage banking franchise and a continued focus on risk management and controlling credit costs, while at the same time, adding reserves to the balance sheet.  We also continued to see improvements in our consumer loan credit quality, with total delinquent consumer loans decreasing for the third consecutive quarter."                         

Second Quarter Highlights:

  • Gain on loan sale income increased to $212.7 million, reflecting a margin of 1.66 percent, as compared to $204.9 million, reflecting a margin of 1.89 percent, in the prior quarter.
  • Bank net interest margin remained relatively flat at 2.37 percent, as compared to 2.41 percent in the prior quarter.
  • Tier 1 capital ratio (to adjusted total assets) increased to 9.07 percent and total risk-based capital ratio (to risk-weighted assets) increased to 17.03 percent.
  • Significant liquidity at quarter-end, with cash on hand and interest-earning deposits of $1.3 billion, in addition to over $600 million in unused borrowing capacity at the Federal Home Loan Bank of Indianapolis (FHLB).
  • Total reserves increased by $25.0 million from the prior quarter, with the allowance for loan losses increasing to $287.0 million and the representation and warranty reserve increasing to $161.0 million.
  • Total delinquent loans (i.e., 30 days or more past due) held-for-investment decreased slightly from the prior quarter. 

Second quarter 2012 net income of $0.15 per share (diluted) was based on average shares outstanding of 561,821,000, as compared to a first quarter 2012 net loss of $(0.02) per share (diluted) based on average shares outstanding of 556,623,000 and a  second quarter 2011 net loss of $(0.14) per share (diluted) based on average shares outstanding of 553,946,000.

For the six months ended June 30, 2012, the net income of $0.13 per share (diluted) was based on average shares outstanding of 560,082,000, as compared to the net loss of $(0.19) per share (diluted) based on average shares of 553,752,000 during the same period 2011.

Net Interest Income
Second quarter 2012 net interest income was generally unchanged at $75.5 million, as compared to $74.7 million for the first quarter 2012.  Net interest margin for the Bank compressed slightly to 2.37 percent for the second quarter 2012, from 2.41 percent for the first quarter 2012.  The slight decrease in net interest margin for the Bank primarily reflects the lower interest rate environment during the second quarter 2012.  Yields on interest-earning assets declined at a greater rate than the rates paid on interest-bearing liabilities, partially offset by an increase in average interest-earning assets. 

Average interest-earning assets increased to $12.9 billion in the second quarter 2012, as compared to $12.6 billion for the first quarter 2012.  This increase was primarily driven by an increase in the average balance of available for sale mortgage loans due to the increase in mortgage originations during the quarter, and an increase in commercial loans held-for-investment driven by new commercial relationships.

The Company's average cost of funds for the second quarter 2012 decreased to 1.72 percent, an improvement from the prior quarter of 1.76 percent.  This decline was driven primarily by an increase in lower-cost retail core deposits from prior quarter.  The average cost of total retail deposits declined during the second quarter 2012 to 0.98 percent, as compared to 1.06 percent during the first quarter 2012.

Non-interest Income
Second quarter 2012 non-interest income increased to $240.3 million, as compared to $221.4 million for the first quarter 2012.  Excluding the provision related to the representation and warranty reserve (discussed in Credit-Related Costs and Asset Quality below), non-interest income increased to $286.4 million for the second quarter 2012, as compared to $281.9 million for the first quarter 2012.  The increase was primarily due to higher net gain on loan sales, which was reflective of strong consumer demand for the refinancing of residential mortgage loans in a declining interest rate environment.  Additionally, the Company believes it has been able to strategically take advantage of opportunities given the current displacement in the mortgage market.

Second quarter 2012 net gain on loan sales increased to $212.7 million, as compared to $204.9 million for the first quarter 2012.  This increase from the prior quarter was a result of increases in both residential first mortgage rate lock commitments and sales of residential first mortgage loans. 

Gain on loan sale margin is calculated based on residential first mortgage rate lock commitments and actual sales of residential first mortgage loans, and is net of sales expenses, hedging costs and provisions related to the representation and warranty reserve (i.e., the portion of the reserve established at the time of sale).  Gain on loan sale margin declined to 1.66 percent for the second quarter 2012, as compared to 1.89 percent for the first quarter 2012, due to increased hedging costs resulting from a more rapid declining rate market during second quarter 2012, as compared to the first quarter 2012.  Residential first mortgage rate lock commitments increased 17.9 percent to $17.5 billion for the second quarter 2012, as compared to $14.9 billion for the first quarter 2012.  Loan sales of residential first mortgage loans also increased for the second quarter 2012 to $12.8 billion, as compared to $10.8 billion for the first quarter 2012. 

Residential first mortgage loan originations, which are principally comprised of agency-eligible residential first mortgage loans, increased to $12.5 billion for the second quarter 2012, as compared to $11.2 billion for the first quarter 2012.

Loan fees and charges increased to $34.8 million for the second quarter 2012, as compared to $30.0 million for the first quarter 2012, reflecting the increase in residential first mortgage loan originations during the quarter.

Net servicing revenue, which is the combination of net loan administration income (including the economic hedges of mortgage servicing rights) and the gain (loss) on trading securities (i.e., the on-balance sheet hedges of mortgage servicing rights), decreased to $28.7 million for the second quarter 2012, as compared to $32.9 million for the first quarter 2012.  This decrease from the prior quarter reflects a lower value of mortgage servicing rights in the second quarter 2012, principally as a result of an increase in prepayment speeds due to the refinancing of consumer mortgages from the decline in interest rates during the quarter.  This decline in value was substantially offset by income generated from both the economic hedges (e.g., U.S. Treasury and Eurodollar futures, swap futures, and "to be announced" forwards) and the on-balance sheet hedges. 

Non-interest Expense
Second quarter 2012 non-interest expense declined to $169.5 million, as compared to $188.7 million for the first quarter 2012.  The 10.2 percent decrease in non-interest expense from prior quarter was primarily driven by decreases in asset resolution expense, warrant expense, and general and administrative expense.  Excluding asset resolution expense (discussed in Credit-Related Costs and Asset Quality below), non-interest expense declined to $148.6 million for the second quarter 2012, as compared to $152.0 million for the first quarter 2012.  The efficiency ratio, as adjusted to exclude credit-related costs, improved to 41.2 percent for the second quarter 2012, as compared to 42.6 percent for the first quarter 2012 (see non-GAAP reconciliation).

Compensation and benefits were $65.4 million for the second quarter 2012, relatively flat as compared to $66.0 million for the first quarter 2012.  Commission expense increased to $17.8 million for the second quarter 2012, as compared to $15.5 million for the first quarter 2012, as a result of the 12.3 percent increase in residential first mortgage loan originations during the quarter. 

Warrant income for the second quarter 2012 was $(0.6) million, as compared to an expense of $2.5 million in the first quarter 2012, reflecting the decrease in the quarterly valuation of the outstanding warrant liability arising from the decrease in the market price of the Company's common stock at June 30, 2012, as compared to March 31, 2012.

Balance Sheet and Funding
Total assets at June 30, 2012 were $14.4 billion, as compared to $14.0 billion at March 31, 2012.  The increase from the prior quarter was primarily the result of a $512.4 million increase in cash and cash equivalents arising from a short-term, period-end increase in company-controlled deposits.      

Loans are primarily funded with deposits obtained through banking centers in Michigan and from public units, as well as from deposits obtained in prior years from investment banking firms and not yet matured.  Funds are also obtained through loan repayments and sales of loans and securities in the ordinary course of business, advances from the FHLB in varying maturities depending on current needs, customer escrow accounts and security repurchase agreements.  Several of these sources are relied on at different times to address daily and forecasted liquidity needs for operational requirements and policy levels while managing overall net interest costs and interest-rate risk. 

At June 30, 2012, the Bank had approximately $1.3 billion of cash on hand and interest-earning deposits, as compared to $757.9 million at March 31, 2012.  The Bank also maintains a line of credit with the FHLB under which borrowings are collateralized by residential first mortgage loans and other assets of the Bank.  At June 30, 2012, the Bank's outstanding long-term borrowings on the FHLB line of credit were approximately $3.4 billion, with no short-term borrowings outstanding.  At June 30, 2012, the Bank also had approximately $650 million of collateralized borrowing capacity available. 

Credit-Related Costs and Asset Quality
For the second quarter 2012, total credit-related costs decreased to $127.6 million, as compared to $213.6 million for the first quarter 2012 (see non-GAAP reconciliation).  

The allowance for loan losses at June 30, 2012 increased to $287.0 million, as compared to $281.0 million at March 31, 2012.  The increase from prior quarter was primarily attributable to an increase in residential first mortgage loan modifications (also referred to as troubled debt restructurings) and an increase in historical loss rates, which are updated quarterly.  These increases were partially offset by a decrease in commercial allowance for loan losses, as older loans (originated prior to 2009) with higher loss rates paid off and were partially replaced by new originations with lower loss rates. 

At June 30, 2012, the ratio of the allowance for loan losses to loans held-for-investment was 4.4 percent and the ratio of the allowance for loan losses to non-performing loans held-for-investment was 66.5 percent, as compared to 4.2 percent and 69.1 percent, respectively, at March 31, 2012. 

The provision for loan losses in the second quarter 2012 decreased to $58.4 million, as compared to $114.7 million for the first quarter 2012.  The decline in second quarter 2012 provision for loan losses primarily reflects a lower level of net charge-offs for the second quarter 2012.  In the prior quarter, the Company wrote-off its specific valuation allowances related to residential and commercial loans over 180 days past due, and no longer carries such allowances.

Total non-performing loans increased to $431.6 million at June 30, 2012, as compared to $406.6 million at March 31, 2012.  The increase from the prior quarter was driven by a $45.8 million increase in non-performing commercial loans, substantially all of which was related to commercial real estate loans originated prior to 2009.  Non-performing consumer loans decreased by $20.8 million from the prior quarter, partially offsetting the increase in non-performing commercial loans.

Total delinquent loans decreased to $522.5 million at June 30, 2012, as compared to $533.4 million at March 31, 2012, primarily due to decreases in the 30-59 days past due and the 60-89 days past due loans. 

The Company maintains a representation and warranty reserve on the balance sheet, which reflects its estimate of probable losses that it may incur on loans that have been sold or securitized into the secondary market, primarily to the government sponsored entities ("GSEs").  At June 30, 2012, the representation and warranty reserve was $161.0 million, a 13.4 percent increase, as compared to $142.0 million at March 31, 2012.  The representation and warranty reserve reflects an increase in pending loan demands from the GSEs and changes in loss severity rates.  In the second quarter 2012, provisions related to the representation and warranty reserve, other than as included in our gain on sale computations, were $46.0 million, as compared to $60.5 million for the first quarter 2012.    

Asset resolution expense, which includes expenses associated with foreclosed properties (including the foreclosure claims in process with respect to government insured loans for which we file claims with the U.S. Department of Housing and Urban Development) decreased to $20.9 million for the second quarter 2012, as compared to $36.8 million for the first quarter 2012.  This decrease from the prior quarter was primarily attributable to a reduction in expected losses from loans repurchased with government guarantees, a reduction in foreclosure costs, and an improvement in recoveries.

Capital
The Bank was considered "well-capitalized" for regulatory purposes at June 30, 2012, and had regulatory capital ratios of 9.07 percent for the Tier 1 capital ratio (to adjusted total assets) and 17.03 percent for the total risk-based capital ratio (to risk-weighted assets).  At June 30, 2012, the Company had a Tier 1 common capital ratio (to risk-weighted assets) of 9.60 percent and an equity-to-assets ratio of 8.20 percent.

Earnings Conference Call
As previously announced, the Company's quarterly earnings conference call will be held on Wednesday, July 18, 2012 from 11 a.m. until noon (Eastern).

Questions for discussion at the conference call may be submitted in advance by e-mail to investors@flagstar.com or asked live during the conference call.

The conference call and accompanying slide presentation will be webcast live on the Investor Relations section of the Company's website, www.flagstar.com, with replays available at that site for at least 10 days.

To listen by telephone, please call at least 10 minutes prior to the start of the conference call at (800) 344-6491 toll free or (785) 830-7988 and use passcode: 4797176.

About Flagstar
Flagstar Bancorp, Inc. is a full-service financial services company, offering a range of products and services to consumers, businesses, and homeowners.  With $14.4 billion in total assets at June 30, 2012, Flagstar is the largest publicly held savings bank headquartered in the Midwest.  As of June 30, 2012, Flagstar operated 111 branches in Michigan, 30 home loan centers in 13 states, and a total of four commercial banking offices in Massachusetts, Connecticut, and Rhode Island.  Flagstar originates loans nationwide and is one of the leading originators of residential first mortgage loans. For more information, please visit flagstar.com.

Non-GAAP
This press release contains both financial measures based on accounting principles generally accepted in the United States (GAAP) and non-GAAP based financial measures, which are used where management believes it to be helpful in understanding the Company's results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in this press release. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Forward Looking Statements
This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that are difficult to predict and could cause actual results or outcomes to differ materially from those expressed in a forward-looking statement. Forward-looking statements contained in this press release and any information related to expectations about future events or results are based upon information available to the Company as of the date hereof. Forward-looking statements can be identified by such words as "anticipates," "intends," "plans," "seeks," "believes," "expects", "estimates," and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements made regarding the Company's results of operations, current expectations, plans or forecasts of core business drivers, credit related costs, asset quality, capital adequacy and liquidity, the implementation of the Company's business plan and growth strategies, and other similar matters.  Although we believe that these forward-looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies, and other factors.  Accordingly, we cannot give you any assurance that our expectations will in fact occur or that actual results will not differ materially from those expressed or implied by such forward-looking statements.  We caution you not to place undue reliance on any forward-looking statement and to consider all of the following uncertainties and risks, as well as those more fully discussed in the Company's filings with the Securities and Exchange Commission ("SEC"), including but not limited to, our Forms 10-K and 10-Q: volatile interest rates that impact, among other things, the mortgage banking business, our ability to originate loans and sell assets at a profit, prepayment speeds and our cost of funds; changes in regulatory capital requirements or an inability to achieve or maintain desired capital ratios; actions of mortgage loan purchasers, guarantors and insurers regarding repurchases and indemnity demands and uncertainty related to foreclosure procedures; our ability to control credit related costs and forecast the adequacy of reserves; and the imposition of regulatory enforcement actions against us.  Except to the extent required under the federal securities laws and the rules and regulations promulgated by the SEC, the Company undertakes no obligation to update any such statement to reflect events or circumstances after the date on which it is made.