Flagstar Reports Third Quarter 2011 Net Loss of $14.2 Million Strength of Mortgage Banking Franchise Drives 81 percent Quarterly Improvement in Bottom Line

TROY, Mich., Oct. 25, 2011 /PRNewswire/ -- Flagstar Bancorp, Inc. (NYSE: FBC) (the "Company"), the holding company for Flagstar Bank, FSB (the "Bank"), today reported a third quarter 2011 net loss applicable to common shareholders of $(14.2) million, as compared to a second quarter 2011 net loss of $(74.9) million and a third quarter 2010 net loss of $(22.6) million.

"Overall, we were pleased with the improvement in fundamentals on our core revenue drivers, even though such fundamentals continue to be offset by legacy credit costs.  During the quarter, we reported our strongest earnings, before taxes and credit costs, since 2009.  We experienced significant quarterly improvements in our bank net interest margin, our gain on loan sale income, and our mortgage originations and rate lock commitments.  We also saw meaningful loan growth in our core portfolios, with our average held for investment loans increasing by an annualized rate of 13.6 percent from the prior quarter.  We continue to execute on our commercial strategy, originating over $300 million in new core commercial and specialty loans, more than double the amount in the second quarter 2011," commented Joseph P. Campanelli, Chairman of the Board, President and CEO.

Campanelli continued, "Our overall credit costs in the third quarter were relatively flat from the prior quarter, as we continue to work through challenges in our legacy balance sheet.  We saw some encouraging trends in the third quarter, with 30-day delinquent and 60-day delinquent residential mortgage loans flat from the prior quarter, and the pace of increase slowing dramatically in the greater than 90 days delinquent residential first mortgage loans.  Macroeconomic conditions and home prices remain challenging, however, we are confident we have the resources, including the capital, liquidity and leadership, necessary to support our business plan and continue our planned growth strategies."              

Third Quarter 2011 Highlights:

  • Strong revenue growth, with our largest quarterly level of earnings, before taxes and credit costs, since 2009.
    • Gain on loan sale income of $103.9 million (margin of 153 basis points), increased from prior quarter level of $39.8 million (91 basis points).  
    • Residential mortgage originations of $6.9 billion, increased 50 percent from prior quarter.
    • Mortgage rate-lock commitments of $13.1 billion, increased 105 percent from prior quarter.
    • Loan fees of $18.4 million, increased $3.7 million from prior quarter.

  • Successfully converted our legacy residential mortgage servicing system to a nationally recognized loan servicing platform and restructured our residential servicing process, which management believes will materially improve efficiencies and loss mitigation activities.

  • Entered into separate agreements to divest our 27 branch retail bank franchise in Georgia at break-even and to divest our 22 branch retail bank franchise in Indiana for a gain of approximately $24 million.

  • Improved bank net interest margin to 2.30 percent, from 1.86 percent in prior quarter.
    • Average bank yield on interest earning assets of 4.09 percent, improvement from prior quarter level of 3.82 percent.
    • Overall bank cost of funds of 2.08 percent, improvement from prior quarter level of 2.20 percent.
    • Meaningful growth in interest earnings assets, driven by increases in available-for-sale loan portfolio, and the warehouse lending and commercial and industrial portfolios.

  • Increased average core deposits by 4.9 percent from prior quarter, to $2.8 billion.

  • Continued to fortify balance sheet, selling $15.4 million of non-performing commercial real estate assets, resulting in a nominal gain.

  • Capital and liquidity levels remained strong, with a Tier 1 capital ratio of 9.31 percent and cash and cash equivalents equal to 6.6 percent of total assets (does not include other marketable assets).  

  • Incurred total credit costs of $111.7 million, relatively flat from prior quarter.
    • Loan loss provision expense decreased by $11.7 million due to lower historical residential first mortgage loss rates that offset the increase in greater than 90 days delinquent residential first mortgages.
    • Secondary marketing reserve provision increased to $39 million, driven by a heightened level of loan repurchase requests primarily from Fannie Mae, consistent with industry trends.
    • Asset resolution expense increased to $34.5 million as a result of increased costs associated with Ginnie Mae repurchased loans.  

Third quarter 2011 net loss per share was $(0.03) per share (diluted) based on average shares outstanding of 554,489,000, as compared to a second quarter 2011 of $(0.14) per share (diluted) based on average shares outstanding of 553,946,000 and $(0.15) per share (diluted) based on average shares outstanding of 153,405,000 in the third quarter 2010.  

For the nine months ended September 30, 2011, the net loss applicable to common stockholders totaled $(120.8) million, or $(0.22) per share (diluted) based on average shares outstanding of 554,000,000, a 40.1 percent improvement as compared to $(201.5) million or $(1.57) per share (diluted) based on average shares of 128,411,000 during the same period 2010.

Georgia and Indiana Branch Divestitures

During the third quarter, the Bank announced it had entered into separate agreements to divest its 27-branch Georgia and its 22-branch Indiana retail bank franchises, with PNC Bank, N.A., part of The PNC Financial Services Group, Inc. ("PNC") and First Financial Bancorp ("First Financial"), respectively.  Management believes that the Company's presence in the Georgia and Indiana markets lacked market density and sufficient scale, and believes that these transactions are consistent with its strategic focus on its core Midwest banking markets, and on its deployment of capital towards its continuing growth in commercial and consumer banking in those markets, as well as the emerging Northeast market.  

Under the Georgia agreement, PNC is to purchase the facilities or assume the leases associated with the branches and is to purchase associated business and retail deposits (approximately $233 million at September 30, 2011).  PNC has also agreed to pay the net book value of the acquired real estate and fixed and other personal assets associated with the branches.  

Under the Indiana agreement, First Financial is to pay a consideration equal to a seven percent premium on the consumer and commercial deposits.  At September 30, 2011, the total amount of consumer and commercial deposits were $343 million, which translates to a one-time gain of approximately $24 million.  First Financial will also pay net book value on real estate and personal assets of the bank branches and will assume the existing leases on 14 of the branches.  

The Company predominantly originated residential mortgage loans for sale in the secondary market in both the Georgia and Indiana markets.  Accordingly, the amount of loans on its balance sheet and potentially available to be transferred as part of these transactions was immaterial; thus no loans will be transferred in either transaction.  Both transactions are anticipated to close during December 2011, subject to satisfaction of customary closing conditions and receipt of regulatory approvals.

Net Interest Income and Margin

Third quarter 2011 net interest income was $65.6 million, as compared to $51.3 million during the second quarter 2011 and $41.1 million during the third quarter 2010.  The $14.3 million increase from second quarter 2011 reflects an improvement in the net interest spreads, and a 3.4 percent increase in average interest-earning assets, driven primarily by increases in the available-for-sale, warehouse lending and commercial and industrial loan portfolios.

Net interest margin for the Bank was 2.30 percent for the third quarter 2011, as compared to 1.86 percent for the second quarter 2011 and 1.68 percent for the third quarter 2010.  The increase for the third quarter 2011 reflects a 3.4 percent increase in average interest earning assets to $11.7 billion, from $11.3 billion for the second quarter 2011.  It also reflects a 7.1 percent increase in the average yield on interest earnings assets to 4.09 percent for the third quarter 2011.  Third quarter 2011 overall cost of funds decreased to 2.08 percent from 2.20 percent in the second quarter 2011.  

The Bank's cost of deposits for the third quarter 2011 was 1.37 percent, an 8.7 percent decline, compared to 1.50 percent in the second quarter 2011, and a 37.4 percent decline, compared to 2.19 percent in the third quarter 2010.  The decrease in overall funding costs for the third quarter 2011 was primarily due to the success of Bank's initiatives to replace maturing high-cost certificates of deposit in part with lower cost core retail deposits.  The Bank also refinanced $1.0 billion of long-term FHLB advances during September 2011, which is expected to reduce total interest expense by approximately $14.1 million annually.

Net interest margin for the Bank was 2.01 percent for the nine months ended September 30, 2011, as compared to 1.61 percent for the nine months ended September 30, 2010.  The increase for the nine months ended September 30, 2011, compared to the same period in 2010, was primarily due to increased net interest income that offset the decline in average interest-earnings assets for the nine months ended September 30, 2011 as compared to the same period ended September 30, 2010.

Average interest-earning deposits, on which the Bank earns a minimal interest rate (25 basis points), were $718.6 million in the third quarter 2011, and represent 5.2 percent of total assets.  Management believes the Bank's interest-earning deposits allow it sufficient flexibility to fund its on-going strategic initiatives, which include increasing commercial and specialty lending, as well as other mortgage related initiatives.  

Non-interest Income

Third quarter 2011 non-interest income was $112.6 million, as compared to $58.1 million for the second quarter 2011 and $144.9 million for the third quarter 2010.  The increase in non-interest income was primarily due to the third quarter 2011 reduced mortgage interest rate environment and the resulting strength of the mortgage business.    

In the third quarter 2011, gain on loan sales totaled $103.9 million, as compared to $39.8 million for the second quarter 2011 and $103.2 million for the third quarter 2010.  The increase from the prior quarter was a result of both an increase in amount of interest rate lock commitments and an increase in associated margin.  Gain on loan sale margin increased to 1.53 percent for the third quarter 2011, as compared to 0.91 percent for the second quarter 2011 and 1.35 percent for the third quarter 2010.

Residential mortgage loan originations, which are principally comprised of agency-eligible residential first mortgage loans, were $6.9 billion during the third quarter 2011, an increase from $4.6 billion in the second quarter 2011 and a decrease from $7.6 billion in the third quarter 2010.  Loan sales for the third quarter of 2011 increased to $6.8 billion, as compared to $4.4 billion for the second quarter 2011 and decreased from $7.6 billion for the third quarter 2010.  Mortgage rate lock commitments increased to $13.1 billion during the third quarter 2011, as compared to $6.4 billion during the second quarter 2011, and from $11.0 billion during the third quarter 2010.  

Net servicing revenue, which is the combination of net loan administration income (including the off-balance hedges of mortgage servicing rights) and the gain (loss) on trading securities (the on-balance sheet hedges of mortgage servicing rights), decreased to $16.9 million during third quarter 2011, as compared to $30.5 million during second quarter 2011.  The decrease as compared to second quarter 2011 was primarily attributable to historically low interest rate levels, increased prepayment activity, and a continued reduction in the capitalization of new servicing assets during the third quarter.

At September 30, 2011, loans serviced for others totaled $56.8 billion with a weighted average servicing fee of 30.5 basis points. This was a decrease from $57.1 billion at June 30, 2011, with a weighted average servicing fee of 30.3 basis points, and an increase from $52.3 billion at September 30, 2010 with a weighted average servicing fee of 31.5 basis points. During the third quarter, the Company sold $31.3 million in residential first mortgage servicing rights, with $4.6 billion in underlying loans, through bulk sales.    

Non-interest Expense

Non-interest expense was $150.7 million for the third quarter 2011, compared to $130.9 million in the second quarter 2011, and $162.6 million for the third quarter 2010.  Excluding asset resolution expense, non-interest expense was $116.2 million in the third quarter 2011, compare to $107.6 million in the second quarter 2011.  The third quarter 2011 increase in non-interest expense (excluding asset resolution expense) compared to second quarter 2011, was primarily driven by increased compensation and commissions related to the increase in the mortgage banking business and a $5.2 million general and administrative expense associated with a commercial letter of credit.  Our efficiency ratio, as adjusted to exclude credit costs, improved to 53.5 percent during the third quarter 2011, as compared 82.3 percent during the second quarter 2011.  

Compensation, benefits and commission expense increased by $4.2 million to $65.4 million for the third quarter 2011, as compared to $61.2 million in second quarter 2011, and compared to $59.8 million in third quarter 2010.  The increase in compensation, benefits and commissions expense in the third quarter 2011 compared to second quarter 2011, was primarily due to a $3.1 million increase in commissions as a result of  an increase in mortgage banking volumes during the third quarter 2011.  

Warrant income, reflected as an offset under non-interest expense, was $4.2 million for the third quarter 2011, as compared to $2.0 million in the second quarter 2011, primarily due to the quarterly valuation of the outstanding warrant liability.

Balance Sheet and Funding

Total assets at September 30, 2011 were $13.7 billion, as compared to $12.7 billion at June 30, 2011 and $13.8 billion at September 30, 2010.  The increase in total assets was primarily due to a $1.1 billion increase in total interest-earning assets, as the Bank was able to generate loan growth in warehouse lending and commercial and industrial loan portfolios, and an increase in the available-for-sale residential mortgage loan portfolio.  The increase in warehouse lending and available-for-sale loans was attributable to the increase in residential mortgage originations.  

The Bank's primary sources of funds are deposits obtained through its community banking branches and its internet banking platform, as well as deposits obtained from municipalities and investment banking firms.  Funds are also obtained from time to time through loan repayments and sales of loans and securities in the ordinary course of business, advances from the FHLB, community banking operations, customer escrow accounts and security repurchase agreements.  The Bank relies upon several of these sources at different times to address its daily and forecasted liquidity needs for operational requirements and policy levels while managing overall net interest costs.  

Total retail deposits were $5.5 billion at September 30, 2011, as compared to $5.2 billion at June 30, 2011 and $5.4 billion at September 30, 2010.  The increase in retail deposits at September 30, 2011, compared to June 30, 2011, was due to an increase in both certificates of deposits and savings deposits.    

At September 30, 2011, the Bank had a collateralized $4.6 billion line of credit with the FHLB, of which $3.6 billion was advanced or borrowed, and $921 million remained as borrowing capacity. The Bank also had approximately $900 million of cash on hand and interest-earning deposits, in addition to other marketable securities.

Credit Related Costs and Asset Quality

Credit related costs consist primarily of loan loss provision expense, secondary market reserve provision expense, asset resolution expense and impairment on investment securities available-for-sale.  The Company's credit related costs totaled $111.7 million for the third quarter 2011, as compared to $110.9 million for the second quarter 2011 and $113.3 million for the third quarter 2010.  

Third quarter 2011 loan loss provision expense decreased by $11.7 million to $36.7 million, as compared to $48.4 million in second quarter 2011 and decreased compared to $51.4 million in third quarter 2010.  The third quarter 2011 decrease from second quarter 2011 was primarily due to a $10.1 million decrease in provision related to residential first mortgages, consistent with a slowing pace of an increase on the greater than 90 days delinquent residential first mortgages.  Third quarter 2011, 30 day and 60 day delinquent residential first mortgages were relatively unchanged from the second quarter 2011, indicating reduced levels of inflows.

For commercial real estate loans, loan loss provision decreased slightly from the second quarter 2011, and has now decreased for four consecutive quarters.  The Company also sold $15.4 million of non-performing commercial real estate assets during the third quarter 2011, which resulted in a $0.1 million gain.

Third quarter 2011 secondary marketing reserve provision expense was $39.0 million, as compared to $21.4 million in the second quarter 2011 and $13.0 million in the third quarter 2010.  Management believes the increase from prior quarter is consistent with recent industry trends, as the GSEs (a term generally used to refer collectively or singularly to Fannie Mae and Freddie Mac) continue to be more aggressive in the number of pre-2009 loans files being reviewed and their interpretation of their rights under the related representations and warranties.  The Company has not experienced similar issues with its 2009, 2010 or 2011 vintages.      

The Company maintains a secondary marketing reserve on the balance sheet, which reflects the estimate of probable losses that currently exists on loans which have sold or securitized into the secondary market, except for loans repurchased with government guarantees.  The secondary marketing reserve was $85.0 million as of September 30, 2011, as compared to $79.4 million as of June 30, 2011 and $77.5 million at September 30, 2010.  

Asset resolution expense, which are expenses associated with foreclosed properties (including the foreclosure claims in process with Ginnie Mae), increased by 48.2 percent to $34.5 million in the third quarter 2011, as compared to $23.3 million in the second quarter of 2011. The third quarter 2011 increase compared to second quarter 2011, was primarily due to continued pressure on home values and heightened costs associated with servicing the loans repurchased with government guarantees.  During the third quarter 2011, the Company made improvements to the servicing processes within the loans repurchased with government guarantees portfolio, which management believes will provide a benefit in the next several quarters by reducing associated servicing costs.  

Impairment on investment securities available-for-sale was $(1.3) million during the third quarter 2011, as compared to $(15.6) million incurred during in the second quarter 2011, and no impairment in the third quarter 2010.  The decrease in impairment losses during the third quarter reflected the quarterly valuation impairment charge on the collateralized mortgage obligations in line with current industry forecasts for future home price expectations.

Non-performing assets held-for-investment were $558.3 million at September 30, 2011, as compared to $513.4 million at June 30, 2011, and $1.1 billion at September 30, 2010.  Such loans are principally from the Company's pre-2009 loan origination activity (referred to as "legacy loans").  This category of assets is comprised of non-performing loans (i.e., loans 90 days or more past due and matured loans), real estate owned and net repurchased assets, and it excludes repurchased loans that are guaranteed primarily by the Federal Housing Administration (FHA).  The $44.9 million increase in the third quarter 2011, as compared to second quarter 2011, was driven primarily by a $55.0 million increase in non-performing residential first mortgage loans, offset by a $12.2 million decrease in non-performing commercial and commercial real estate loans.  Management expects that the growth in non-performing loans will moderate as such loans are modified or foreclosed upon, and continues to aggressively look for opportunities to de-risk its legacy residential first mortgage and commercial real estate loan portfolios.  Beginning in the fourth quarter 2010, the Company has now cumulatively sold $637.8 million in legacy non-performing assets through bulk sales, which are in addition to loan or property sales in the ordinary course of business.

Allowance for loan losses at September 30, 2011 was $282.0 million, or 4.1 percent of loans held-for-investment and 63.4 percent of non-performing loans held-for-investment, as compared to $274.0 million, or 4.6 percent of loans held-for-investment and 67.9 percent of non-performing loans held-for-investment at June 30, 2011.  The slight increase in allowance for loan loss, as compared to second quarter 2011, was primarily due to an increase in residential non-performing loans.  The decline in the ratio of allowance to loans held-for-investment reflects the changing composition of the loan portfolio, as warehouse loans and commercial and industrial loans, which usually have lower historical industry-wide loss rates than residential first mortgage loans, have increased the size of the held-for-investment loan portfolio.  At September 30, 2010, the allowance for loan losses was $474.0 million, or 6.5 percent of loans held-for-investment and 52.0 percent of non-performing loans.

Capital

Flagstar Bank remained "well-capitalized" for regulatory purposes at September 30, 2011, with regulatory capital ratios of 9.31 percent for Tier 1 capital and 17.64 percent for total risk-based capital. The Company had an equity-to-assets ratio of 8.44 percent at September 30, 2011.

As Previously Announced

The Company's quarterly earnings conference call will be held on Wednesday, October 26, 2011 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 Web site, 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 (866) 834-5823 toll free or (973) 341-3018 and use passcode: 14214072.

About Flagstar

Flagstar Bancorp is a full-service financial services company, offering a range of products and services to consumers, businesses, and homeowners.  With $13.7 billion in total assets at September 30, 2011, Flagstar is the largest publicly held savings bank headquartered in the Midwest.  As of September 30, 2011, Flagstar operated 162 branches in Michigan, Indiana, and Georgia, and has subsequently entered into agreements to sell or lease its 27 branches in Georgia and 22 branches in Indiana.  Flagstar also operated, at September 30, 2011, 29 home loan centers in 14 states, and a total of four commercial banking offices in Massachusetts, Connecticut, and Rhode Island.  Flagstar Bank originates loans nationwide and is one of the leading originators of residential mortgage loans. For more information, please visit flagstar.com.

Forward Looking Statements