Flagstar Reports Fourth Quarter and Full Year 2010 Results

TROY, Mich., Jan. 25, 2011 /PRNewswire/ -- Flagstar Bancorp, Inc. (NYSE: FBC) (the "Company"), the holding company for Flagstar Bank FSB, today reported its annual and fourth quarter results for 2010.  

"Flagstar Bank made significant progress in 2010 toward improving our asset quality, de-risking our balance sheet and strengthening our capital base. We also continued to build top notch management by attracting new talent to our leadership team, maintained our leadership position as a premier mortgage lender, and have begun seeing the returns from our transformation to a super community bank through growth in new accounts and business banking relationships", commented Joseph P. Campanelli, Chairman of the Board, President and CEO.

The Company reduced its net loss by 23% during the year ended December 31, 2010, as compared to the same period for 2009.  For the year ended December 31, 2010, the net loss applicable to common stockholders totaled $(393.6) million, or $(2.44) per share (diluted) based on average shares outstanding of 161,565,000, as compared to a net loss of $(513.8) million, or $(16.17) per share (diluted) based on average shares outstanding of 31,766,000 during the same period in 2009.  The loss for 2010 included a loss of $176.5 million related to its sale of non-performing residential loans during the fourth quarter.

For fourth quarter 2010, the Company had a net loss applicable to common stockholders of $(192.1) million, or $(0.74) per share (diluted) based on average shares outstanding of 259,946,000, as compared to a third quarter 2010 net loss of $(22.6) million, or $(0.15) per share (diluted) based on average shares outstanding of 153,405,000. This loss included a loss of $176.5 million related to its sale of non-performing residential loans during the fourth quarter. As of December 31, 2010 there were 553,313,000 shares outstanding.  Fourth quarter 2009 net loss was $(71.6) million, or $(1.53) per share (diluted) based on average shares outstanding of 46,862,000.  

Key Items for Fourth Quarter:

• Completed public equity offering of $400.0 million.

• Sold $474.0 million of non-performing residential first mortgage loans and transferred $104.2 million of similar loans to available-for-sale, marking them to fair value.

• Originated residential mortgages of $9.2 billion, an increase of 20% from prior quarter.

• Improved net interest margin to 2.08%, from 1.55% in prior quarter.

• Increased loan fees up 17% from prior quarter, to  $28.6 million.

• Increased net servicing revenue up 21% from prior quarter, to $28.1 million.

• Decreased asset resolution expense related to non-performing residential and commercial loans,  by 12% from the prior quarter to $30.0 million.

• Decreased non-performing loans held for investment by 65% from prior quarter.

Asset Quality

As previously announced on November 15, 2010, the Company sold $474.0 million of non-performing residential first mortgage loans and transferred $104.2 million in such loans to the available-for-sale category, resulting in a $176.5 million loss reflected as an increase in the provision for loan losses.

Non-performing assets held for investment decreased to $498.0 million at December 31, 2010, from $1.1 billion at September 30, 2010 and $1.3 billion at December 31, 2009.  Non-performing residential first mortgage loans available for sale, which were transferred to this category in November totaled $94.9 million (with a fair value of $45.6 million), at December 31, 2010. 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 assets that are insured by the Federal Housing Agency (FHA).  The decline in non-performing assets includes the sale of $474.0 million in non-performing residential first mortgage loans and the transfer of $104.2 million of non-performing loans to the available-for-sale category.  

The allowance for loan losses at December 31, 2010 decreased to $274.0 million from $474.0 million at September 30, 2010 and equaled 4.35% of loans held for investment and 86.1% of non-performing loans held-for-investment.  The allowance for loan losses at September 30, 2010 equaled 6.48% of loans held for investment and 52.0% of non-performing loans held-for-investment. At December 31, 2009, the allowance for loan losses was $524.0 million and equaled 6.79% of loans held for investment and 48.9% of non-performing loans. The decline in the allowance resulted principally from the sale of non-performing residential loans and the transfer of similar loans to the available-for-sale category and the concurrent charge-off of the related allowance.

Non-performing residential first mortgage loans held for investment decreased 82%, to $119.9 million at December 31, 2010, as compared to $651.9 million at September 30, 2010.  The decrease reflected the sale of certain non-performing loans and the transfer of the additional non-performing loans to the available-for-sale category as discussed above.  Non-performing commercial real estate mortgages decreased to $175.6 million at December 31, 2010 as compared to $238.6 million at September 30, 2010, principally due to charge-offs and continuing efforts to dispose of these assets.

The Company maintains a secondary marketing reserve on its balance sheet, which reflects the estimate of losses that it expects to incur on loans that it sold or securitized into the secondary market.  At December 31, 2010, the secondary marketing reserve was $79.4 million, as compared to $77.5 million at September 30, 2010 and $66.0 million at December 31, 2009.  For the fourth quarter 2010, the Company incurred a secondary marketing reserve provision expense of $10.3 million, as compared to $13.0 million in the third quarter 2010.  

Capital

Flagstar Bank remained "well-capitalized" for regulatory purposes at December 31, 2010, with regulatory capital ratios of 9.61% for Tier 1 capital and 18.49% for total risk-based capital. The Company had a tangible common equity ratio of 7.4% at December 31, 2010.

On November 2, 2010, the Company announced that it completed public equity offerings of $400 million, comprised of common stock and convertible preferred stock.  The public offerings resulted in aggregate net proceeds of $385.8 million, after deducting underwriting fees and estimated offering expenses. On December 21, 2010, at a special meeting of stockholders, stockholders approved a proposal to increase the number of shares of common stock, $0.01 par value per share, issuable by the Company from 300,000,000 to 700,000,000. As a result of the stockholder approval, the convertible preferred shares outstanding on the conversion date, December 22, 2010, automatically converted into 283,845,000 shares of common stock, bringing the total number of common shares outstanding at December 31, 2010 to 553,313,000 shares.

Mortgage Banking Operations

In the fourth quarter 2010, gain on loan sales was $76.9 million, as compared to $103.2 million for the third quarter 2010 and $96.5 million for the fourth quarter 2009.  This reflects the decrease in interest rate lock commitments and a decline in margin. Gain on loan sale margins decreased to 0.89% for the fourth quarter 2010, as compared to 1.35% for both the third quarter 2010 and the fourth quarter 2009.

Mortgage rate lock commitments decreased to $8.9 billion during the fourth quarter 2010 as compared to $11.0 billion during the third quarter 2010 and increased slightly from $7.9 billion during the fourth quarter 2009.  Loan production, substantially comprised of agency-eligible residential first mortgage loans, increased to $9.2 billion in the fourth quarter 2010, as compared to $7.6 billion in the third quarter 2010 and $6.9 billion in the fourth quarter 2009. Loan sales for the fourth quarter of 2010 were $8.6 billion, as compared to $7.6 billion for the third quarter 2010 and $7.1 billion for the fourth quarter 2009.

For the twelve months ended December 31, 2010 gain on loan sales decreased 41% to $297.0 million as compared to $501.3 million for the twelve months ended December 31, 2009.   This decrease reflects the 18% decrease in loan sales volume to $26.5 billion for the year ended December 31, 2010, compared to $32.3 billion for the same period 2009. Gain on sale margin decreased to 1.12 % for the year ended December 31, 2010 from 1.55% for the 2009 period.

For the twelve months ended December 31, 2010, loan production was $26.6 billion, which was comprised of $15.5 billion originated through the correspondent channel, $9.1 billion originated through the broker channel and $2.0 billion originated through the retail channel, as compared to $32.4 billion for the twelve months ended December 31, 2009.

At December 31, 2010, loans serviced for others totaled $56.0 billion and had a weighted average servicing fee of 30.8 basis points. This was an increase from $52.3 billion at September 30, 2010 with a weighted average servicing fee of 31.5 basis points, and a slight decrease from $56.5 billion at December 31, 2009 with a weighted average servicing fee of 32.1 basis points.

Net Interest Margin

Net interest margin for the Bank increased to 2.08% for the fourth quarter 2010 as compared to 1.55% for the third quarter 2010 and 1.67% for the fourth quarter 2009.  The increase from third quarter 2010 reflects a 0.54% decline in funding costs and a 3.7% decline in average interest bearing liabilities to $10.7 billion, which was partially offset by a 0.3% decrease in earning asset yields and a decline in average interest earning assets to $10.8 billion for the fourth quarter 2010.  The decline in funding costs during the fourth quarter was due to reduced borrowings and rates associated with Federal Home Loan Bank (FHLB) advances and the payoff during the third quarter of 2010 all of the remaining repurchase agreements.  

Net interest margin for the Bank for the year ended December 31, 2010 was 1.64% as compared to 1.65% for the twelve months ended December 31, 2009. This decrease reflects a 0.70% decline in funding costs and a decrease in average interest bearing liabilities of $2.1 billion, for the year ended December 31, 2010 as compared to the same period for 2009. It also reflects a 0.65% decline in yield on earning assets and a $2.3 billion decrease in average earning assets when compared to the year ended December 31, 2009.

As part of the Bank's focus on reducing its borrowing costs, it initiated a restructuring of several of its FHLB advances intended to better match its funding maturities with asset maturities to maintain an asset sensitive balance sheet and obtain the benefit of the current lower interest rate environment.  To this end, the Bank prepaid $500 million in advances otherwise due in 2011 and restructured seven other advances totaling $1.9 billion to extend maturities during which time the now-current interest rates would apply.  

In addition, the Bank reduced its deposit funding costs as higher yielding certificates of deposit matured and were replaced with lower-cost deposits.  These deposits included both retail and government certificates of deposits, as to which the average rate on retail certificates of deposits declined 0.60% during the fourth quarter of 2010 and 0.97% for the year ended December 31, 2010, while government certificate rates declined 0.14% and 0.72% for the quarter ended and year ended December 31, 2010, respectively.  This caused the overall deposit costs to decline 0.40% and 0.84% for the fourth quarter of 2010 and the year ended December 31, 2010, respectively.

Net Interest Income

• Fourth quarter 2010 net interest income increased to $54.4 million, as compared to $41.1 million during the third quarter 2010 and $47.2 million during the fourth quarter 2009.  The increase reflects a 0.55% decrease in funding costs offset by a 0.03% decrease in the average yield. Net interest income for the twelve months ended December 31, 2010 declined to $175.6 million from $211.5 million for the same 2009 period.
• Fourth quarter loan loss provisions of $225.4 million included $176.5 million in losses recorded on the non-performing loan sale and the reclassification of non-performing loans to the available for sale portfolio.   Loan loss provisions for the year ended December 31, 2010 decreased 15% to $426.4 million from $504.4 million for the year ended December 31, 2009.

Non-interest Income

Fourth quarter non-interest income equaled $136.5 million, as compared to $144.9 million for the third quarter 2010 and $131.6 million for the fourth quarter 2009.  For the year ended December 31, 2010 non-interest income totaled $453.7 million as compared to $523.3 million for the same 2009 period.  Non-interest income included the following components:

• Gain on loan sales decreased $26.3 million to $76.9 million, compared to $103.2 million for the third quarter 2010, reflecting the decrease in margin for the fourth quarter of 2010 to 0.89% from 1.35% for the third quarter 2010 and the decline in interest rate locks on mortgage loans to $8.9 billion in the fourth quarter 2010 from $11.0 billion in the third quarter 2010. Residential mortgage loan sales were $8.6 billion for the fourth quarter of 2010 as compared to $7.6 billion in the third quarter 2010. For the year ended December 31, 2010, the gain on loan sales was $297.0 million as compared to $501.3 million for the same period in 2009. The 41% decline is reflective of the decline in both the volume of loan sales and the margin.
• Net servicing revenue, which is the combination of net loan administration income and the related hedging effect of gain (loss) on trading securities, increased 21% to $28.1 million during fourth quarter 2010 as compared to $23.2 million during third quarter 2010. The increase reflects a 7.5% increase in the average loans serviced for others portfolio to $54.3 billion for fourth quarter 2010 as compared to $50.5 billion for the third quarter 2010. Net servicing revenue for the year ended December 31, 2010 was $89.2 million, as compared to $13.0 million for the year ended December 31, 2009.
• Loan fees, which arise from the origination of residential mortgage loans, increased 17% to $28.6 million for the fourth quarter 2010 as compared to $24.4 million for the third quarter 2010. The increase in loan fees reflected the 21% increase in originations to $9.2 billion during the fourth quarter 2010 as compared to $7.6 billion during the third quarter 2010.  For the year ended December 31, 2010, loan fees declined 29% to $89.5 million from $125.2 million for the same 2009 period, reflecting the 17% decline in residential loan originations for the year ended December 31, 2010 to $26.6 billion as compared to $32.4 billion for the year ended December 31, 2009.
• Other fees and charges were $(4.7) million, as compared to $(7.7) million for the third quarter 2010, principally as the result of a $2.6 million decrease in secondary market reserve provisions accrued for expected losses on loans repurchased from the secondary market. For the year ended December 31, 2010 and 2009, other fees and charges were a loss of $(41.1) million and $(50.0) million, respectively, which the decline reflects in part, the decline in the secondary market provisions to $61.5 million during 2010 as compared to $75.6 million during 2009.

Non-interest Expense

Non-interest expense decreased to $150.8 million for the fourth quarter 2010, as compared to $152.5 million for the third quarter 2010 and $151.0 million for the fourth quarter 2009. For the year ended December 31, 2010, non-interest expense declined to $575.7 million, as compared to $672.1 million for the 2009 period.

• Asset resolution expenses, which are expenses associated with foreclosed property and repurchased assets, decreased 12% to $30.0 million, as compared to $34.2 million in the third quarter of 2010. The decline was principally due to the reduced amount of additional expenses experienced on foreclosed property and repurchased FHA-insured loans offset by an increase in gains recognized on sales of foreclosed properties. Asset resolution expenses related to foreclosed property arising from held-for-investment loans declined 22% in the fourth quarter of 2010 as compared to the third quarter 2010. Asset resolution expenses totaled $126.3 million for the year ended December 31, 2010 as compared to $96.6 million for the same period in 2009.  
• Compensation and benefits expense increased $6.3 million to $66.1 million in the fourth quarter of 2010, as compared to the third quarter 2010. The increase reflects the new employees to staff the new commercial lending initiatives, additional employees necessary to handle the increased loan production and an increase in incentive pay associated with increased loan underwriting activity. Commission expense increased $1.6 million, or 15%, to $12.6 million. This increase is consistent with the 21% increase in loan production for the fourth quarter 2010, as compared to the third quarter 2010. Compensation, benefits and commissions declined 20% to $238.2 million for the year ended December 31, 2010, reflecting a 48% decrease in commissions and an 11% decrease in compensation and benefits.
• Loss on the early extinguishment of debt decreased $11.9 million during the fourth quarter 2010 compared to third quarter 2010, reflecting the prepayment of a $250.0 million advance from the FHLB in the third quarter and no such prepayment in the fourth quarter. For the year ended December 31, 2010, losses on early extinguishment of debt increased 27% to $20.8 million as the result of the prepayment of two advances totaling $500 million and the early payoff of $310.6 million in repurchase agreements during 2010 as compared to FHLB advance prepayments of $650 million during 2009.
• The re-valuation of outstanding warrants at the end of fourth quarter 2010 resulted in expense of $7.9 million, as compared to income of $1.4 million recognized at the end of third quarter of 2010. The change in value resulted from an increase in the number of warrants to 6.9 million at December 31, 2010, due to the November 2, 2010 public equity offerings, and also from the increase in the market price of the Company's common stock since the end of third quarter 2010.  Warrant expense totaled $4.2 million for the year ended 2010 as compared to $23.3 million for the same period in 2009, reflecting the initial classification of the US Treasury warrants as liabilities during the first quarter of 2009.

Assets

Total assets at December 31, 2010 were $13.6 billion, as compared to $13.8 billion at September 30, 2010 and $14.0 billion at December 31, 2009.  The decrease from September 30, 2010 reflected a continued run-off of and the sale of non-performing residential mortgage loans within the Bank's held-for-investment portfolio, and decreases in interest-earning deposits, Federal Home Loan Bank stock and securities available for sale, partially offset by an increase in loans available for sale.  

Funding Sources

The Bank's primary sources of funds are deposits obtained through its 162 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 any one time to address its daily and forecasted liquidity needs for operational requirements and policy levels while managing overall net interest costs.  Retail deposits were $5.4 billion at December 31, 2010 and September 30, 2010 and $5.5 billion at December 31, 2009.  

At December 31, 2010, the Bank had a collateralized $4.8 billion line of credit with the FHLB with $1.1 billion of remaining capacity.

Community Banking Operations

Flagstar Bank had 162 community banking branches at both December 31, 2010 and September 30, 2010, and 165 branches at December 31, 2009.  

Earnings Conference Call

The Company's quarterly earnings conference call will be held on Wednesday, January 26, 2011 from 11:00 a.m. until 12:00 noon (Eastern).

Questions for discussion at the conference call may be submitted in advance by e-mail to [email protected] 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) 294-1212 toll free or (702) 696-4911 and use passcode: 36800260.

Flagstar Bancorp, with $13.6 billion in total assets, is the largest publicly held savings bank headquartered in the Midwest.  At December 31, 2010, Flagstar operated 162 banking centers in Michigan, Indiana and Georgia and 27 home loan centers in 13 states.  Flagstar Bank originates loans nationwide and is one of the leading originators of residential mortgage loans.

The information contained in this release is not intended as a solicitation to buy Flagstar Bancorp, Inc. stock and is provided for general information.  This release contains certain statements that may constitute "forward-looking statements" within the meaning of federal securities laws.  These forward-looking statements include statements about the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates, and intentions, that are subject to significant risks and uncertainties, and are subject to change based upon various factors (some of which may be beyond the Company's control).  The words "may," "could," "should," "would," "believe," and similar expressions are intended to identify forward-looking statements.

SOURCE Flagstar Bancorp, Inc.