Flagstar Reports Fourth Quarter and Full Year 2012 Results

TROY, Mich., Jan. 23, 2013 /PRNewswire/ -- Flagstar Bancorp, Inc. (NYSE: FBC) (the "Company"), the holding company for Flagstar Bank, FSB (the "Bank"), today reported fourth quarter 2012 net income applicable to common stockholders of $66.8 million, or $1.12 per share (diluted), as compared to third quarter 2012 net income of $79.7 million, or $1.36 per share (diluted), and a fourth quarter 2011 net loss of $(78.2) million, or $(1.41) per share (diluted).   The full year 2012 net income applicable to common stockholders was $223.7 million, or $3.74 per share (diluted), compared to a full year 2011 net loss of $(198.9) million, or $(3.62) per share (diluted). 

"We are pleased to report fourth quarter and full year financial results that demonstrate continued performance improvement and sustainable profitability," said Michael Tierney, President and Chief Executive Officer of the Company.  "During the fourth quarter we significantly reduced credit costs, further strengthened and de-risked the balance sheet, and improved the Tier 1 leverage capital ratio by over 100 basis points from the previous quarter.  We remain dedicated to building a strong culture of compliance, and we believe that the initiatives we completed during the fourth quarter demonstrate our continued emphasis on quality, risk management and sound governance.  Our sustained profitability is a testament to the hard work of Flagstar's talented employees, and I thank them for their continued dedication." 

Mr. Tierney continued, "With the recently announced sale of a substantial portion of Flagstar's Northeast-based commercial loan portfolio, we are refocusing our business strategy on our national mortgage presence and our Michigan-based community banking model.  We remain committed to being the largest bank headquartered in Michigan, through our 111 branches and our commercial banking team, and we look forward to continuing to meet and exceed the needs of our clients and communities.  At the same time, we will continually strive to improve our risk management systems and processes, and deliver enhanced value to all of our stakeholders."

Highlights

• Delivered strong financial performance:
  • Net income applicable to common stockholders of $66.8 million, or $1.12 per diluted share.
  • Gain on loan sale income remained strong, at $239.0 million, reflecting a margin of 1.53 percent.
  • Net interest income increased slightly from the prior quarter to $73.9 million.
  • Total provisions related to the representation and warranty reserve decreased by 75.2 percent from the prior quarter to $32.5 million.
• Strengthened and de-risked the balance sheet:
  • Total repurchase pipeline decreased by $201.4 million from the prior quarter to $224.2 million, as the Company continued to work through the existing population of repurchase requests.
  • Continued to add reserves for pending and threatened litigation.
  • Entered into a definitive agreement to sell a substantial portion of Northeast-based commercial loan portfolio, which is expected to be capital accretive (discussed in Commercial Loan Sale below).
• Improved capital ratios, liquidity remained strong:
  • Tier 1 capital ratio (to adjusted total assets) increased by 110 basis points to 10.41 percent.
  • Cash on hand and interest-earning deposits of approximately $1.0 billion.
• Non-performing loans were flat from prior quarter, but declined significantly from December 31, 2011:
  • Consumer non-performing loans increased by 13.4 percent from the prior quarter, driven primarily by an increase in performing nonaccrual TDRs, but declined by 19.1 percent from December 31, 2011.
  • Commercial non-performing loans declined by 29.5 percent from the prior quarter and 14.5 percent from December 31, 2011.

Commercial Loan Sale

As previously announced, effective December 31, 2012 the Bank entered into a definitive Transaction Purchase and Sale Agreement (the "Agreement") with CIT Bank, the wholly-owned U.S. commercial bank subsidiary of  CIT Group Inc. (NYSE: CIT) ("CIT").  Under the terms of the Agreement, CIT will acquire $1.3 billion in commercial loan commitments, $785.0 million of which is currently outstanding.  The Company expects that the total purchase price for the portfolio will be approximately $779.0 million and that a vast majority of the assets will be sold during the first quarter of 2013.

Net Interest Income

Fourth quarter 2012 net interest income increased slightly to $73.9 million, as compared to $73.1 million for the third quarter 2012.  Net interest margin for the Bank also increased to 2.26 percent, as compared to 2.21 percent for the third quarter 2012, driven primarily by an improvement in our funding costs.

Interest income decreased by $4.3 million from the prior quarter, driven primarily by a lower average balance of investment securities available-for-sale primarily resulting from the sale of non-agency collateralized mortgage obligation securities during the third quarter 2012 and lower average balances of loans held-for-investment.  Fourth quarter 2012 average yield on interest-earnings assets was 3.44 percent, as compared to 3.54 percent for the third quarter 2012. 

Interest expense decreased by $5.2 million during the fourth quarter 2012 from the third quarter 2012, more than offsetting the decline in interest income.  The decrease in interest expense from prior quarter was primarily due to an improvement in the funding mix and a lower average cost of deposits. 

The Company's average cost of funds for the fourth quarter 2012 was 1.60 percent, a decrease from the third quarter 2012 of 1.73 percent, driven primarily by a decrease in the average rate paid on retail certificates of deposits.  During the fourth quarter 2012, the Company reduced higher cost retail deposits.  The average cost of total deposits decreased during the fourth quarter 2012 to 0.86 percent, as compared to 1.02 percent during the third quarter 2012. 

Non-interest Income

Fourth quarter 2012 non-interest income increased to $285.8 million, as compared to $273.7 million for the third quarter 2012.  Excluding the provision related to the representation and warranty reserve - change in estimate, which decreased by $99.3 million (discussed in Credit-Related Costs and Asset Quality below), non-interest income would have totaled $311.0 million for the fourth quarter 2012, as compared to $398.2 million for the third quarter 2012.  This decrease from the prior quarter was primarily due to lower net gain on loan sales.

Fourth quarter 2012 net gain on loan sales decreased to $239.0 million, as compared to $334.4 million for the third quarter 2012, but increased as compared to $106.9 million for the fourth quarter 2011.  The decrease from the prior quarter was reflective of both a decrease in mortgage rate lock commitments and a decrease in margin on rate lock commitments.  Mortgage rate lock commitments decreased to $16.2 billion for the fourth quarter 2012, as compared to $18.1 billion for the third quarter 2012, driven by seasonal and competitive mortgage patterns, as well as actions to manage volume levels.   

As compared to the fourth quarter 2011, net gain on loan sales increased by $132.1 million, primarily driven by increases in mortgage rate lock commitments and increased margin on rate lock commitments. 

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 decreased to 1.53 percent for the fourth quarter 2012, as compared to 2.42 percent for the third quarter 2012, but increased from 1.02 percent for the fourth quarter 2011.  The decrease from the prior quarter was largely attributable to a decrease in gross gain on sale margin, as well as a 12.5 percent increase in mortgage loan sales (which serves as the denominator in computing the reported margin) as compared to the prior quarter.  As compared to the fourth quarter 2011, gain on loan sale margin increased by 51 basis points, reflective of strong consumer demand for the refinancing of residential mortgage loans in a declining interest rate environment and fewer competitors in the marketplace.

Loan fees and charges increased to $40.8 million for the fourth quarter 2012, as compared to $37.4 million for the third quarter 2012.  Loan fees are driven by mortgage loan originations, which increased to $15.4 billion for the fourth quarter 2012, as compared to $14.5 billion for the third quarter 2012.   

Net servicing revenue, which is the combination of net 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), increased to $25.0 million for the fourth quarter 2012, as compared to $11.3 million for the third quarter 2012.  This increase from the prior quarter was primarily attributable to effective hedge positioning, despite significant rate volatility intra-quarter and the absence of uncertainty from the central banks with respect to quantitative easing. 

The Company also recorded a net loss on sales of mortgage servicing rights of $7.7 million during the fourth quarter 2012, due to bulk sales of mortgage servicing rights related to $13.8 billion in underlying mortgage loans.  The Company intends to continue to look for opportunistic ways to reduce its concentration of mortgage servicing rights.

Credit-Related Costs and Asset Quality

For the fourth quarter 2012, total credit-related costs (see non-GAAP reconciliation) decreased to $97.6 million, as compared to $189.7 million for the third quarter 2012 and $173.2 million for the fourth quarter 2011.  The declines from the prior quarter, and the same quarter in 2011, were driven primarily by a decrease in representation and warranty reserve - change in estimate provisions (exclusive of provisions for representation and warranty reserve which are taken through gain on loan sale income).  

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 December 31, 2012, the representation and warranty reserve was $193.0 million, a decrease as compared to $202.0 million at September 30, 2012, but an increase of $73.0 million as compared to $120.0 million at December 31, 2011.  The decrease from the prior quarter includes an $11.0 million reclassification of reserves associated with loans insured by the MBIA Insurance Corporation ("MBIA").  This reclassification reflects the nature of the reserves following the filing by MBIA of its lawsuit against the Bank (discussed in Non-interest Expense below).

Representation and warranty reserve - change in estimate provision was $25.2 million for the fourth quarter 2012, as compared to $124.5 million for the third quarter 2012 and $69.3 million for the fourth quarter 2011.  The declines from the prior quarter, and the same quarter in 2011, primarily reflect decreases in net charge-offs of loan repurchases.           

At December 31, 2012, the total repurchase pipeline decreased to $224.2 million, as compared to $425.6 million at September 30, 2012, as the Company continued to work through the existing population of repurchase requests. New audit file review requests increased by 12.7 percent from the prior quarter, which management believes is a reflection of the GSEs continuing their reviews as they transition to a new review process.

The provision for loan losses in the fourth quarter 2012 decreased to $50.4 million, as compared to $52.6 million for the third quarter 2012 and $63.5 million for the fourth quarter 2011.  At December 31, 2012, the allowance for loan losses remained unchanged at $305.0 million, as compared to September 30, 2012, and decreased as compared to $318.0 million at December 31, 2011.  At December 31, 2012, the ratio of the allowance for loan losses to non-performing loans held-for-investment was 76.3 percent, relatively unchanged as compared to 76.5 percent at September 30, 2012, but increased as compared to 65.1 percent at December 31, 2011. 

The consumer allowance for loan losses increased to $260.7 million at December 31, 2012, as compared to $244.6 million at September 30, 2012, which reflects management's view of potentially higher losses from re-defaults within the portfolio of troubled debt restructurings ("TDRs"), as well as an increase in the level of TDRs.  The total commercial allowance for loan losses decreased to $44.3 million at December 31, 2012, as compared to $60.4 million at September 30, 2012, reflecting the continued run-off in the commercial loan portfolio and reversal of $12.6 million in reserves associated with the December sale of commercial loans under the Agreement with CIT. 

Total non-performing loans were $399.8 million as of December 31, 2012, essentially unchanged as compared to $398.9 million at September 30, 2012, but decreased by 18.1 percent from December 31, 2011.  Consumer non-performing loans increased to $313.4 million at December 31, 2012, as compared to $276.3 million at September 30, 2012, but decreased by 19.1 percent from December 31, 2011.  The increase from the prior quarter was driven primarily by an increase in TDRs, virtually all of which were performing as agreed, as a result of the implementation of the Office of the Comptroller of the Currency guidance on bankruptcies.  Commercial non-performing loans decreased to $86.4 million at December 31, 2012, as compared to $122.6 million at September 30, 2012 and $101.0 million at December 31, 2011.  The decrease from the prior quarter was primarily driven 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) increased to $21.2 million for the fourth quarter 2012, as compared to $12.5 million for the third quarter 2012, but decreased as compared to $32.4 million for the fourth quarter 2011.  The increase from the prior quarter was driven primarily by the recognition of a $7.8 million benefit applied against asset resolution expense in the third quarter 2012, as a result of the Company's participation in a HUD-coordinated market auction of loans repurchased with government guarantees.

Non-interest Expense

Non-interest expense was $237.0 million for the fourth quarter 2012, as compared to $233.5 million for the third quarter 2012 and $205.8 million for the fourth quarter 2011.  Excluding asset resolution expense (discussed in Credit-Related Costs and Asset Quality above), non-interest expense would have totaled $215.7 million for the fourth quarter 2012, as compared to $221.0 million for the third quarter 2012 and $173.4 for the fourth quarter 2011.  The decrease in non-interest expense (excluding asset resolution expense) from the prior quarter is primarily due to a $15.2 million decrease in loss on extinguishment of debt resulting from the Company's prepayment of FHLB advances during the third quarter 2012.

As compared to the fourth quarter 2011, the increase in non-interest expense was driven by an increase in compensation and benefits related to significant staffing increases in the default servicing and loss mitigation areas, an increase in commissions driven by increased mortgage loan originations, and an increase in general and administrative expense from additional legal reserves for pending and threatened litigation.

Compensation and benefits increased to $72.1 million for the fourth quarter 2012, as compared to $67.4 million for the third quarter 2012, reflecting incentive compensation and retention expenses.  Commission expense also increased to $22.2 million for the fourth quarter 2012, as compared to $19.9 million for the third quarter 2012. This increase from the prior quarter was consistent with an increase in mortgage loan originations during the quarter. 

The fourth quarter 2012 general and administrative expense includes approximately $27.0 million with respect to the Company's assessment of exposure from pending and threatened litigation.  This includes the reclassification of $11.0 million previously recorded in the representation and warranty reserve.  The total amount reserved by the Company for pending and threatened litigation, including amounts paid in anticipation of a future settlement, was approximately $82.7 million at December 31, 2012.  Included in this reserve are amounts for the previously disclosed lawsuit filed by Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Inc. ("Assured"), and for the lawsuit that MBIA filed against the Bank on January 11, 2013.  The MBIA claims relate to approximately $1.1 billion of non-agency securitization transactions in 2006 and 2007 involving fixed and adjustable rate second mortgage loans that Flagstar held at the time in its investment portfolio.  MBIA guaranteed the offered securities.  The Assured and MBIA cases are pending in the United States District Court for the Southern District of New York.  The bench trial in the Assured case concluded on November 13, 2012, and the Company expects a decision in late January.  Although there can be no assurance as to the ultimate outcome of the Assured and MBIA lawsuits, the Company believes that the Bank has meritorious defenses and intends to continue to defend itself vigorously.  The actual costs of resolving the Assured and MBIA claims, and the other pending and threatened litigation, may be materially higher or lower than the amounts reserved.

Capital

The Bank was considered "well-capitalized" for regulatory purposes at December 31, 2012, and had regulatory capital ratios of 10.41 percent for the Tier 1 capital ratio (to adjusted total assets) and 19.16 percent for the total risk-based capital ratio (to risk-weighted assets).  

At December 31, 2012, the Company had an equity-to-assets ratio of 9.38 percent.

Balance Sheet and Funding

Total assets at December 31, 2012 were $14.1 billion, as compared to $14.9 billion at September 30, 2012. The decrease from the prior quarter was primarily driven by a decrease in held-for-sale residential first mortgage loans resulting from an excess of residential first mortgage loan sales over residential first mortgage loan originations, and a decrease in commercial real estate loans held-for-investment driven by the Company's continued emphasis on reducing the balances of loans originated prior to 2009. During the quarter, commercial loans related to the Agreement with CIT were transferred from the loans held-for-investment portfolio to the loans held-for-sale portfolio.

Loans are primarily funded with deposits obtained through branches in Michigan and from public entities. 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 upon 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. 

Total deposits were $8.3 billion at December 31, 2012, a decrease of $1.2 billion as compared to September 30, 2012.  The decrease from the prior quarter was primarily attributable to a $1.2 billion transfer of principal and interest custodian accounts serviced for GSEs to a third party.  Retail checking and savings balances increased, more than offsetting a decrease in retail and wholesale certificates of deposit, as the Company continued to replace higher costing funding with core deposits.

At December 31, 2012 and September 30, 2012, the Bank had approximately $1.0 billion of cash on hand and interest-earning deposits.  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 December 31, 2012, the Bank had outstanding borrowings from the FHLB of $3.2 billion, as compared to $3.1 billion at September 30, 2012.  At December 31, 2012, the Bank had an additional $1.1 billion of collateralized borrowing capacity available at the FHLB. 

Earnings Conference Call

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

Questions may be asked during the conference call or by emailing questions in advance to [email protected]

To join the call, please dial (800) 684-1259 toll free or (913) 312-1503, and use passcode: 3359641.  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: 3359641.

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. (NYSE: FBC) is the holding company for Flagstar Bank, a full-service financial institution offering a range of products and services to consumers, businesses, and homeowners.  With $14.1 billion in total assets at December 31, 2012, Flagstar is the largest publicly held savings bank headquartered in the Midwest.  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, the impact, timing and consummation of the commercial loan sale 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; uncertainty regarding pending and threatened litigation; our ability to control credit related costs and forecast the adequacy of reserves; the imposition of regulatory enforcement actions against us; our compliance with the Consent Order with the Office of the Comptroller of the Currency, which was disclosed on October 23, 2012; and the commercial loan sale may not have the projected impact or be consummated in a timely manner.  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.

SOURCE Flagstar Bancorp