Flagstar Reports First Quarter 2013 Results

TROY, Mich., April 23, 2013 /PRNewswire/ -- Flagstar Bancorp, Inc. (NYSE:FBC) ("the Company"), the holding company for Flagstar Bank, FSB (the "Bank"), today reported first quarter 2013 net income applicable to common stockholders of $22.2 million, or $0.33 per share (diluted), as compared to a net loss of $(94.2) million, or $(1.75) per share, in the fourth quarter 2012, and a net loss of $(8.7) million, or $(0.22) per share, in the first quarter 2012.  

"In the past year, we have been focused on improving our risk management operations, strengthening compliance and quality control, and de-risking the balance sheet, while at the same time returning Flagstar to profitability," said Michael Tierney, the Company's President and Chief Executive Officer.  "Our results for the past quarter reflect the positive impact from this commitment as we saw a significant improvement in overall credit quality, with a decline in credit costs to the lowest level since 2008.  In addition, non-performing loans decreased by eight percent, net charge-offs declined by 30 percent, and the total repurchase pipeline decreased by 17 percent.  We also significantly strengthened our capital and liquidity ratios, and continued our efforts to reduce MSR concentrations, as we prepare to meet the requirements of Basel III and the regulatory-prescribed stress tests.

"In addition, we enhanced our leadership team during the quarter with the appointment of Hugh Boyle as our new Chief Risk Officer and Michael Flynn as General Counsel.  We are dedicated to strategically growing our business and creating long-term shareholder value, and Hugh and Michael's leadership will help us to advance those objectives while strengthening our risk management capabilities and our culture of compliance."

Mr. Tierney concluded, "Flagstar's revenues are heavily dependent on the mortgage banking business, with gain on loan sales, net interest income, and loan fees all driven by mortgage volume.  Along with the industry, we experienced a slowdown in mortgage banking activity during the quarter, with reduced demand and tighter margins due to increased competition and excess capacity.  In response to recent headwinds, we have taken steps to gain market share and improve margins, and are confident that Flagstar remains well positioned to capitalize on future opportunities in the mortgage business.  Additionally, we will continue to carefully and aggressively manage expenses to be in line with revenue trends, and improve company-wide efficiency."

First Quarter 2013 Highlights (as Compared to Fourth Quarter 2012)

• Earned net income applicable to common stockholders of $22.2 million, as compared to a loss of $(94.2) million:
  • Decrease in legal and professional expense of $184.6 million, primarily related to increasing reserves for pending and threatened litigation in the fourth quarter 2012.
  • Decrease in total credit-related costs of $43.2 million.
  • Decrease in gain on loan sales of $101.4 million.
    • Gross mortgage rate lock commitments decreased to $12.1 billion, as compared to $16.2 billion.
    • Gain on loan sale margin (based on fallout-adjusted locks) decreased to 1.40 percent, as compared to 1.90 percent.
  • Decrease in net interest income of $18.3 million.

• Strengthened capital and liquidity, improved mix of deposits:
  • Tier 1 leverage ratio increased by 88 basis points to 10.14 percent.
  • Cash on hand and interest-earning deposits increased by $1.3 billion to $2.2 billion.
  • Completed bulk sales of mortgage servicing rights related to $10.7 billion in underlying mortgage loans.
  • Consistent with emphasis on growing retail core deposits in Michigan, increased the average balance of demand deposits by 2.3 percent (12.1 percent increase as compared to first quarter 2012) and the average balance of savings deposits by 22.5 percent (43.9 percent increase as compared to first quarter 2012).

• Improved credit quality:
  • Total non-performing loans decreased by 7.6 percent to $369.3 million.
  • Net charge-offs of loans held-for-investment decreased by 29.7 percent to $35.4 million.
  • Ratio of allowance for loan losses to non-performing loans increased to 78.5 percent.
  • Net charge-offs of loan repurchases decreased by 24.8 percent to $31.2 million.
  • Total pipeline of active loan repurchase demands (the "repurchase pipeline") decreased by 16.6 percent to $187.0 million.

Net Interest Income

First quarter 2013 net interest income decreased to $55.7 million, as compared to $73.9 million for the fourth quarter 2012 and $74.7 million for the first quarter 2012.  The decrease from the prior quarter was primarily due to a decrease in interest-earnings assets.  Net interest margin for the Bank decreased to 1.89 percent, as compared to 2.26 percent for the fourth quarter 2012 and 2.41 percent for the first quarter 2012.

As compared to the prior quarter, interest income decreased by $20.4 million, driven primarily by lower average balances of residential first mortgage loans held-for-sale and warehouse loans, both attributable to a decrease in residential first mortgage loan originations during the quarter.  It also reflects a decline in commercial and commercial real estate loans related to the previously announced agreements to sell a substantial portion of the Company's commercial loan portfolio, most of which was located in the Northeast (the "Commercial Loan Sales"). 

Interest expense decreased by $2.2 million from the prior quarter, driven primarily by an improvement in the mix of deposits.  The Company's average cost of funds for the first quarter 2013 was 1.54 percent, a decrease from 1.60 percent for the fourth quarter 2012 and from 1.76 percent for the first quarter 2012.  The decrease from the prior quarter was primarily driven by a decrease in the average balance of wholesale deposits and a lower average cost of total deposits, which decreased to 0.78 percent for the first quarter 2013, as compared to 0.86 percent for the fourth quarter 2012 and 1.15 percent for the first quarter 2012. 

Non-interest Income

First quarter 2013 non-interest income decreased to $184.9 million, as compared to $285.8 million for the fourth quarter 2012 and $221.4 million for the first quarter 2012.  The decrease from the prior quarter was primarily due to lower net gain on loan sales.  First quarter 2013 net gain on loan sales decreased to $137.5 million, as compared to $239.0 million for the fourth quarter 2012 and $204.9 million for the first quarter 2012.  The decrease from the prior quarter was equally attributable to a decrease in the volume of mortgage rate lock commitments and a lower gain on sale margin. 

The volume of gross mortgage rate lock commitments decreased to $12.1 billion for the first quarter 2013, as compared to $16.2 billion for the fourth quarter 2012 and $14.9 billion for the first quarter 2012.  The decrease from the prior quarter was driven primarily by an overall industry decline in volume due to seasonality and an increase in mortgage rates during the quarter, as well as increased competition in the mortgage market.  Purchase mortgage originations decreased by 19.8 percent and refinance mortgage originations decreased by 18.9 percent from the prior quarter.  As part of its focus on increasing purchase mortgage originations, the Company added 10 new retail home lending centers during the quarter, bringing its total to 41 at March 31, 2013, from 31 at December 31, 2012.   

Gain on loan sale margin (based on the amount of rate lock commitments net of estimated cancellations, or "fallout-adjusted locks") decreased to 1.40 percent for the first quarter 2013, as compared to 1.90 percent for the fourth quarter 2012 and 1.91 percent for the first quarter 2012.  Gain on loan sale margin (based on loan sales) decreased to 1.07 percent for the first quarter 2013, as compared to 1.53 percent for the fourth quarter 2012 and 1.89 percent for the first quarter 2012.  As compared to the prior quarter, the decrease in gain on sale margin was driven largely by a decrease in base margin. 

Loan fees and charges decreased to $33.4 million for the first quarter 2013, as compared to $40.8 million for the fourth quarter 2012, but increased as compared to $30.0 million for the first quarter 2012.  Loan fees and charges are driven by mortgage loan originations, which decreased to $12.4 billion for the first quarter 2013, as compared to $15.4 billion for the fourth quarter 2012, but increased as compared to $11.2 billion for the first quarter 2012.

Net servicing revenue, which is the combination of loan administration income (including the off-balance sheet 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 $20.4 million for the first quarter 2013, as compared to $25.0 million for the fourth quarter 2012 and $32.9 million for the first quarter 2012.  The decrease from the prior quarter was primarily attributable to hedging challenges associated with significant interest rate volatility during the quarter.

The Company completed bulk sales of mortgage servicing rights related to $10.7 billion in underlying mortgage loans during the first quarter 2013, as part of its strategy to seek opportunistic ways to reduce its concentration of mortgage servicing rights.

Non-interest Expense

Non-interest expense was $196.6 million for the first quarter 2013, as compared to $398.0 million for the fourth quarter 2012 and $188.7 million for the first quarter 2012.  Excluding asset resolution expense (discussed in Credit-Related Costs and Asset Quality, below), non-interest expense would have totaled $180.1 million for the first quarter 2013, as compared to $376.7 million for the fourth quarter 2012 and $152.0 million for the first quarter 2012.  The decrease from the prior quarter reflects an $184.6 million decline in legal and professional expense incurred during the fourth quarter 2012, primarily related to the increase in reserves for pending and threatened litigation.

Compensation and benefits increased to $77.2 million for the first quarter 2013, as compared to $72.1 million for the fourth quarter 2012 and $66.0 million for the first quarter 2012.  The increase from the prior quarter was primarily due to the timing of payroll taxes.  Commission expense decreased to $17.5 million for the first quarter 2013, as compared to $22.2 million for the fourth quarter 2012 and increased as compared to $15.5 million for the first quarter 2012.  The decrease from the prior quarter was consistent with the decrease in mortgage loan originations during the first quarter 2013. 

Warrant income was $3.5 million for the first quarter 2013, as compared to an expense of $5.4 million in the fourth quarter 2012 and an expense of $2.5 million for the first quarter 2012.  As compared to the prior quarter, the decrease reflects the quarterly valuation of the outstanding warrant liability arising from the decrease in the market price of the Company's common stock at March 31, 2013, as compared to December 31, 2012.

Credit-Related Costs and Asset Quality

For the first quarter 2013, total credit-related costs (see non-GAAP reconciliation) decreased to $54.4 million, as compared to $97.6 million for the fourth quarter 2012 and $213.6 million for the first quarter 2012.  The decrease from the prior quarter was primarily due to a decrease in the representation and warranty reserve - change in estimate expense, as well as a decrease in provision for loan losses.

The Company maintains a representation and warranty reserve on the balance sheet, which reflects an estimate of losses that may occur on both loans that have been sold or securitized into the secondary market and those currently in the repurchase pipeline, primarily to the GSEs. At March 31, 2013, the representation and warranty reserve was $185.0 million, a decrease as compared to $193.0 million at December 31, 2012.  The decrease from the prior quarter was driven primarily by a decrease in the total repurchase pipeline, as well as lower loss rates resulting from two consecutive quarters of declining levels of net charge-offs of loan repurchases.  There was a $10.3 million decrease in net charge-offs of loan repurchases from the prior quarter, and as a result, provisions related to the representation and warranty reserve - change in estimate decreased to $17.4 million for the first quarter 2013 as compared to $25.2 million for the fourth quarter 2012. 

At March 31, 2013, the total repurchase pipeline decreased to $187.0 million, as compared to $224.2 million at December 31, 2012, as the Company continued to aggressively work through its existing population of repurchase requests.  New audit file review requests increased by 3.7 percent from the prior quarter, and new repurchase demands increased by 20.9 percent from the prior quarter, which management believes is appropriately reflected in its existing loss estimation model and arises from heightened scrutiny by the GSEs as they transition to their new review process.

At March 31, 2013, the allowance for loan losses decreased to $290.0 million, as compared to $305.0 million at December 31, 2012.  The decrease from the prior quarter was driven by a release of reserves associated with loans sold as part of the Commercial Loan Sales and a decrease in the consumer allowance for loan losses driven by portfolio run-off and lower loss rates.  At March 31, 2013, the ratio of the allowance for loan losses to non-performing loans held-for-investment improved to 78.5 percent, as compared to 76.3 percent at December 31, 2012. There was a $14.9 million decrease in net charge-offs from the prior quarter, and as a result, provision for loan losses in the first quarter 2013 decreased to $20.4 million, as compared to $50.4 million for the fourth quarter 2012.

Total non-performing loans held-for-investment were $369.3 million at March 31, 2013, a decrease of 7.6 percent as compared to $399.8 million at December 31, 2012, and a decrease of 9.2 percent as compared to $406.6 million at March 31, 2012.  The ratio of non-performing loans held-for-investment to loans held-for-investment increased to 7.79 percent at March 31, 2013, from 7.35 percent at December 31, 2012, as the level of loans held for investment decreased more than the level of total non-performing loans during the quarter.   

Consumer non-performing loans decreased to $303.2 million at March 31, 2013, as compared to $313.4 million at December 31, 2012 and $314.2 million at March 31, 2012.  The decrease from the prior quarter primarily reflects a reduction in greater than 90 days past due residential first mortgage loans.  Commercial non-performing loans decreased to $66.1 million at March 31, 2013, as compared to $86.4 million at December 31, 2012 and $92.4 million at March 31, 2012.  The decrease from the prior quarter was driven primarily by continued work-outs and individual note sales within the portfolio. 

Asset resolution expense, which includes expenses associated with foreclosed properties (including the foreclosure claims in process with respect to government insured loans for which the Bank files claims with HUD) decreased to $16.4 million for the first quarter 2013, as compared to $21.2 million for the fourth quarter 2012 and to $36.8 million for the first quarter 2012.  The decrease from the prior quarter was primarily attributable to the realization of gains on the sales of repossessed assets due to an improvement in home prices.

Balance Sheet and Funding

Total assets at March 31, 2013 were $13.1 billion, as compared to $14.1 billion at December 31, 2012.  The decrease from the prior quarter was driven largely by an $859.0 million reduction in commercial loans held-for-sale, as a result of the settlements of the Commercial Loan Sales.  Mortgage loans held-for-sale also decreased by $403.5 million from the prior quarter and warehouse loans decreased by $597.0 reflecting the decrease in mortgage loan originations during the first quarter 2013.  Loans repurchased with government guarantees also decreased by $236.4 million. These decreases were partially offset by an increase in cash and interest-earnings deposits resulting from the proceeds from the Commercial Loan Sales and the Company's continued strengthening of its liquidity position.

Total deposits were $7.8 billion at March 31, 2013, a decrease of $447.0 million as compared to $8.3 billion at December 31, 2012.  The decrease from the prior quarter was primarily attributable to decreases in company-controlled custodial deposits and certificate of deposits, partially offset by increased savings deposits, as the Company continues to shift its funding mix towards more core branch deposits. 

At March 31, 2013, the Company had approximately $2.2 billion of cash on hand and interest-earning deposits, as compared to $1.0 billion at December 31, 2012.  The Bank 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 March 31, 2013, the Bank had medium-term outstanding borrowings from the FHLB of $2.9 billion, as compared to medium-term and short-term borrowings of $3.2 billion at December 31, 2012.  At March 31, 2013, the Bank had an additional $0.9 billion of collateralized borrowing capacity available at the FHLB.  

Capital

The Bank's regulatory capital ratios remain above current regulatory quantitative guidelines for "well-capitalized" institutions.  At March 31, 2013, the Bank had a Tier 1 leverage ratio of 10.14 percent, as compared to 9.26 percent at December 31, 2012.  At March 31, 2013, the Company had an equity-to-assets ratio of 9.04 percent.

Troubled Asset Relief Program ("TARP")

During the first quarter 2013, the U.S. Treasury sold to private investors all of the shares of the Company's Series C fixed rate cumulative non-convertible perpetual preferred stock ("Series C Preferred Stock") previously acquired by the U.S. Treasury as part of the TARP Capital Purchase Program.  Pursuant to that program, the Company had sold the Series C Preferred Stock, as well as a warrant to purchase 645,137 shares of common stock at an exercise price of $62.00 per share (the "Treasury Warrant"), to the U.S. Treasury in January 2009 for $266.7 million.  The Series C Preferred Stock qualifies as Tier 1 capital and accrues cumulative dividends quarterly at a rate of 5 percent per annum until January 2014, and 9 percent per annum thereafter.  The sale did not include the Treasury Warrant, which is still held by the U.S. Treasury. 

Earnings Conference Call

As previously announced, the Company's quarterly earnings conference call will be held on Wednesday, April 24, 2013 from 11 a.m. until Noon (Eastern).

It is preferred that questions are emailed in advance to [email protected], or they may be asked during the conference call.

To join the call, please dial (800) 684-1259 toll free or (913) 312-1503, and use passcode: 2962176.  Please call at least 10 minutes before the call is scheduled to begin.  A replay will be available for five business days by calling (888) 203-1112 toll free or (719) 457-0820, using passcode: 2962176.

The conference call will also be available as a live audiocast on the Investor Relations section of flagstar.com.  It will be archived on that site and will be available for replay and download.  A slide presentation to accompany the conference call will also be posted on the site.

About Flagstar

Flagstar Bancorp, Inc. is the holding company for Flagstar Bank, FSB, a full-service financial institution offering a range of products and services to consumers, businesses, and homeowners.  With $13.1 billion in total assets at March 31, 2013, Flagstar is the largest publicly held savings bank headquartered in the Midwest.  Flagstar operates 111 banking centers, all of which are located in Michigan and 41 home lending centers located in 19 states, which primarily originate one-to-four family residential first mortgage loans.  Originating loans nationwide, Flagstar is one of the leading originators of residential first mortgage loans.  For more information, please visit flagstar.com.