Flagstar Reports Second Quarter Results

TROY, Mich., July 26, 2011 /PRNewswire/ -- Flagstar Bancorp, Inc. (NYSE: FBC) (the “Company”), the holding company for Flagstar Bank, FSB (the “Bank”), today reported a second quarter 2011 net loss applicable to common shareholders of $(74.9) million, as compared to a first quarter 2011 net loss of $(31.7) million and a second quarter 2010 net loss of $(97.0) million.

“Our net loss this quarter, while an improvement of 23 percent from second quarter 2010, was principally the result of continued credit costs associated with our legacy balance sheet.  We are able to generate positive core earnings to offset those credit costs, driven by strong mortgage banking revenues, and are encouraged by the ongoing success we have had in implementing a number of initiatives to de-risk and generate high-quality interest-earning assets for our balance sheet.  We continue to take aggressive steps to put legacy issues behind us, and remain focused on balancing the solid revenue base provided by our long-standing mortgage business with our continued efforts to execute on our transformation strategy to a diversified super community bank,” commented Joseph P. Campanelli, Chairman of the Board, President and CEO.  

Campanelli continued, “We are encouraged by the early success of our commercial and specialty banking initiative, originating almost $100 million in high quality commercial loans for our balance sheet during the quarter.  In addition, we continue to grow our commercial loan portfolio, and maintain an active and robust pipeline that is consistent with our commercial growth strategy.  We also opened four new commercial banking centers during the quarter, and continue to attract experienced and highly talented commercial bankers to our team.  At the same time, we maintained strong capital and liquidity levels, and further de-risked our balance sheet by selling, for a minimal gain, $68.1 million in non-performing commercial real estate assets, all of which will help fuel our planned transition.”

Key Items for Second Quarter 2011:

• Entered into an agreement with PNC Bank to divest the Company’s Georgia deposit franchise (deposits and facilities).

• Sold $68.1 million of non-performing commercial real estate assets, resulting in a $0.6 million gain.  

• Originated commercial loans of $99.1 million, approximately a 300 percent increase from prior quarter.

• Increased held-for-investment loan portfolio $210.5 million, or 3.7 percent, from prior quarter.

• Continued to generate pre-tax, pre-credit cost income, with $41.0 million in second quarter 2011.

• Mortgage rate-lock commitments increased $0.9 billion, or 16.8 percent, from prior quarter.

• Decreased total non-performing assets by $34.8 million, or 6.3 percent, from prior quarter.

• Asset resolution expense related to non-performing residential first mortgage and commercial loans decreased by 38.9 percent from the prior quarter, to $23.3 million.

• Average core deposits increased by 8.4 percent from prior quarter, to $2.7 billion.

• Strengthened Tier 1 capital ratio to 10.07 percent.

Campanelli went on to say, “The agreement with PNC to divest our Georgia retail franchise for book value was a win-win for both parties.  PNC will be acquiring a banking franchise with great potential, while Flagstar will be able to focus its growth strategy on our two major markets, the Midwest and the Northeast.”

Second quarter 2011 net loss per share was $(0.14) per share (diluted) based on average shares outstanding of 553,946,000, as compared to a first quarter 2011 of $(0.06) per share (diluted) based on average shares outstanding of 553,555,000 and $(0.63) per share (diluted) based on average shares outstanding of 153,298,000 in the second quarter 2010.  

For the six months ended June 30, 2011, the net loss applicable to common stockholders totaled $(106.6) million, or $(0.19) per share (diluted) based on average shares outstanding of 553,752,000, a 40 percent improvement as compared to $(178.9) million or $(1.55) per share (diluted) based on average shares of 115,707,000 during the same period 2010.

Recent Developments

The Company announced that it has entered into an agreement for the sale or lease of its Georgia retail bank branch franchise to PNC Bank, N.A., part of The PNC Financial Services Group, Inc. (NYSE: PNC).  Under the agreement, PNC Bank will be purchasing the facilities or assuming the leases associated with 27 branch offices, and buying the associated business and retail deposits (approximately $240 million at June 30, 2011).  

PNC Bank has agreed to pay net book value of the acquired real estate and fixed assets (approximately $42 million at June 30, 2011) associated with the branches and to assume all current lease obligations with respect to the branches.  The transaction is anticipated to close during December 2011 and is subject to regulatory approvals and other customary terms and conditions. For additional information on this transaction, refer to the Company's Form 8-K to be filed with the Securities and Exchange Commission.

The 27 affected branches will operate normally through completion of the transaction.  Customer ATM cards, checks and accounts will function as usual.  Customers of these branches need not take any action at this time, and they will be contacted by both PNC and the Company prior to the branch transfer.

Asset Quality

During the second quarter 2011, the Company sold $68.1 million of non-performing commercial real estate assets, which resulted in a $0.6 million gain and is included in net gain (loss) on sale of assets. During the first quarter 2011, the Company sold $80.3 million of non-performing residential first mortgage loans which were included in the available-for-sale category. Since the fourth quarter 2010, the Company has sold $622.4 million in non-performing assets through bulk sales, which are in addition to loan or property sales in the ordinary course of business.

Non-performing assets held-for-investment totaled $518.8 million at June 30, 2011, as compared to $553.5 million at March 31, 2011, and $1.2 billion at June 30, 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 loans that are guaranteed primarily by the Federal Housing Administration (FHA).  The $34.7 million decrease in the second quarter 2011, as compared to first quarter 2011,  consisted primarily of a $80.1 million decrease in non-performing commercial loans and commercial real estate owned ($68.1 million as the result of the above mentioned commercial real estate sale), offset in part by an $53.7 million increase in non-performing residential first mortgage loans.

Allowance for loan losses at June 30, 2011 was $274.0 million, or 4.6 percent of loans held-for-investment and 67.9 percent of non-performing loans held-for-investment, as compared to $271.0 million, or 4.7 percent of loans held-for-investment and 73.6 percent of non-performing loans held-for-investment at March 31, 2011.  The decline in allowance for loan loss, as compared to second quarter 2010, was driven largely by a decrease in riskier loans as a result of the bulk sales of non-performing assets.  At June 30, 2010, the allowance for loan losses was $530.0 million, or 7.2 percent of loans held-for-investment and 52.3 percent of non-performing loans.

The Company maintains a secondary marketing reserve on its balance sheet, which reflects the estimate of probable losses that currently exists on loans that it has sold or securitized into the secondary market, except for loans repurchased with government guarantees.  The secondary marketing reserve was $79.4 million as of June 30, 2011 and March 31, 2011, as compared to $76.0 million at June 30, 2010.  For the second quarter 2011, the Company incurred a secondary marketing reserve provision expense of $21.8 million, as compared to $22.7 million in the first quarter 2011 and $6.8 million in the second quarter 2010.  

Capital

Flagstar Bank remained “well-capitalized” for regulatory purposes at June 30, 2011, with regulatory capital ratios of 10.07 percent for Tier 1 capital and 19.73 percent for total risk-based capital. The Company had an equity-to-assets ratio of 9.27 percent at June 30, 2011.

Mortgage Banking Operations

In the second quarter 2011, gain on loan sales totaled $39.8 million, as compared to $50.2 million for the first quarter 2011 and $64.3 million for the second quarter 2010.  The decrease from the prior quarter is a result of increased competition in pricing during the quarter resulting in decreased spreads on originations, offset by an increase in fallout adjusted locks.  Notwithstanding the reduction in pricing, gain on sale margin increased in the quarter, as it is calculated based on loans sold, rather than on fallout adjusted locks and is therefore a trailing indicator of pricing.

Mortgage rate lock commitments increased to $6.4 billion during the second quarter 2011, as compared to $5.5 billion during the first quarter 2011, and decreased from $8.3 billion during the second quarter 2010.  Mortgage loan originations, which are substantially comprised of agency-eligible residential first mortgage loans, were $4.6 billion during the second quarter 2011, a decrease from $4.9 billion in the first quarter 2011 and from $5.5 billion in the second quarter 2010.  Loan sales for the second quarter of 2011 decreased to $4.4 billion, as compared to $5.8 billion for the first quarter 2011 and $5.3 billion for the second quarter 2010.

At June 30, 2011, loans serviced for others totaled $57.1 billion with a weighted average servicing fee of 30.3 basis points. This was a decrease from $59.6 billion at March 31, 2011, with a weighted average servicing fee of 30.2 basis points, and an increase from $50.4 billion at June 30, 2010 with a weighted average servicing fee of 32.4 basis points. During the second quarter, the Company sold $47.1 million in residential first mortgage servicing rights through bulk sales.    

Net Interest Margin

On June 30, 2011, the Company implemented a reclassification in the financial reporting application of amounts due from FHA relating to the servicing of delinquent FHA loans to recognize the accrued credit from FHA as interest income.  Previously, income from FHA was applied as an offset to non-interest expense (asset resolution expense) relating to the servicing of delinquent FHA loans, and recorded on a net basis as asset resolution expense.  The impact of the reclassification on the three and six months ended June 30, 2011, was an increase in net interest income of $12.7 million and $25.5 million, respectively, with an equal increase to asset resolution expense and an increase in the Bank’s net interest margin of 21 basis points in both periods.  The impact of the reclassification on the three and six months ended June 30, 2010, was an increase in net interest income of $7.1 million and $13.2 million, respectively, with an equal increase to asset resolution expense and an increase in the Bank’s net interest margin of eight basis points and nine basis points, respectively.

Net interest margin for the Bank was 1.86 percent for the second quarter 2011, as compared to 1.87 percent for the first quarter 2011 and 1.61 percent for the second quarter 2010 (reflecting the reclassification in the financial reporting application relating to the servicing of delinquent FHA loans as described above).  The slight decrease from first quarter 2011 reflects a 1.5 percent decline in average interest earning assets to $11.3 billion for the second quarter 2011 from $11.5 billion for the first quarter 2011.  

Average interest-earning deposits, on which the Bank earns a minimal interest rate (25 basis points), were $1.5 billion in the second quarter 2011.  The Bank’s interest-earning deposits allow the Bank flexibility to fund its on-going strategic initiatives to increase commercial and specialty lending, as well as other mortgage related initiatives.  

The Bank’s deposit cost for the second quarter 2011 was 1.50 percent, an 8.0 percent decline, compared to 1.63 percent in the first quarter 2011, and a 34.2 percent decline compared to 2.28 percent in the second quarter 2010.  The Bank reduced its deposit funding costs as higher yielding certificates of deposit matured and were replaced with lower-cost core deposits.  

Net Interest Income

Second quarter 2011 net interest income was $51.3 million, as compared to $52.6 million during the first quarter 2011 and $49.6 million during the second quarter 2010.  The $1.3 million decrease from first quarter 2011 reflects the 1.5 percent decline in average interest-earning assets, including loans held-for-investment and loans available-for-sale, offset by an increase in securities classified as available-for-sale or trading.

Provision for Loan Losses

The second quarter 2011 loan loss provision expense increased by $20.1 million to $48.4 million, as compared to $28.3 million in first quarter 2011 and decreased compared to $86.0 million in second quarter 2010.  The increase compared to the first quarter 2011 was due to an increase in residential loan portfolio provisions resulting from continued increases in delinquencies and on-going nationwide market pressures on home price values.  Loan loss provisions for the six months ended June 30, 2011 decreased 48.7 percent to $76.7 million from $149.6 million for the six months ended June 30, 2010.

Non-interest Income

Second quarter 2011 non-interest income was $58.1 million, as compared to $96.3 million for the first quarter 2011 and $100.3 million for the second quarter 2010.  Non-interest income included the following components:

• Impairment on investment securities available-for-sale was $(15.6) million during the second quarter 2011, as compared to no impairment incurred during in the first quarter 2011, and an impairment of less than $0.4 million in the second quarter 2010.  The increase in impairment losses during the second quarter reflected the quarterly valuation impairment charge on the collateralized mortgage obligations in line with current industry forecasts for future home price expectations.

• Gain on loan sale income decreased by $10.4 million to $39.8 million in the second quarter 2011, as compared to $50.2 million for the first quarter 2011.  For more information, see Mortgage Banking Operations.

• Net servicing revenue, which is the combination of net loan administration income and the gain (loss) on trading securities (the on-balance sheet hedge of mortgage servicing rights), decreased by 22.5 percent to $30.5 million during second quarter 2011 as compared to $39.3 million during first quarter 2011.  The decrease as compared to first quarter 2011 was primarily attributable to a decline of 9.1 percent in the portfolio of mortgage servicing rights due to mortgage servicing right asset sales, a lower and more volatile interest rate environment, and a reduction in the capitalization of new servicing assets during the second quarter.

• Other fees and charges were a net expense of $15.9 million, as compared to a net expense of $13.3 million for the first quarter 2011.  The increase in expense was principally driven by a $1.9 million reduction in a one-time legal settlement fee and a $0.9 million decrease in secondary market reserve provisions, which are accrued for probable losses on loans that are expected to be repurchased from the secondary market.

Non-interest Expense

Non-interest expense was $130.9 million for the second quarter 2011, a decrease of 11.1 percent from $147.2 million for the first quarter 2011, and a decrease of 16.2 percent from $156.2 million for the second quarter 2010.

• Asset resolution expense, which are expenses associated with foreclosed properties, decreased by 38.9 percent to $23.3 million, as compared to $38.1 million in the first quarter of 2011. The decline was due to a $12.4 million decrease in the provision on real estate owned properties.  

• Compensation, benefits and commission expense decreased by $2.1 million to $61.2 million for the second quarter 2011, as compared to $63.3 million in first quarter 2011, and increased by $10.0 million as compared to $51.2 million in second quarter 2010.  The $10.0 million increase in compensation, benefits and commissions expense was primarily due to the increase in the number of employees at June 30, 2011, as compared to June 30, 2010.

• Federal deposit insurance premiums increased by $2.1 million in the second quarter 2011 to $10.8 million, as compared to $8.7 million in first quarter 2011 and $10.6 million in second quarter 2010.  The increase in second quarter 2011 premiums compared to first quarter 2011 was primarily due to the FDIC’s change in assessment methodology.

Balance Sheet Composition

Total assets at June 30, 2011 were $12.7 billion, as compared to $13.0 billion at March 31, 2011 and $13.7 billion at June 30, 2010.  During the second quarter 2011, the Bank deployed $963.5 million of interest-earning deposits into $393.4 million of loans available-for-sale and $210.5 million of loans held-for-investment, primarily commercial and specialty loan originations and warehouse lending. Additionally, non-core deposits declined $343.9 million during the second quarter 2011.

Funding Sources

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.  Retail deposits were $5.2 billion at June 30, 2011, as compared to $5.5 billion at March 31, 2011 and $5.2 billion at June 30, 2010.  

At June 30, 2011, the Bank had a collateralized $4.4 billion line of credit with the FHLB, of which $3.4 billion was advanced or borrowed, and $1.0 billion remained as borrowing capacity. The Bank also had $1.6 billion of liquidity in the form of cash on hand, interest-earning deposits and securities available-for-sale or trading.

Community Banking Operations

Flagstar Bank had 162 community banking branches at June 30, 2011, December 31, 2010 and June 30, 2010.  

Earnings Conference Call

The Company's quarterly earnings conference call will be held on Wednesday, July 27, 2011 from 11 a.m. until 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) 834-5823 toll free or (973) 341-3018 and use passcode: 82054354.

Flagstar Bancorp, with $12.7 billion in total assets, is the largest publicly held savings bank headquartered in the Midwest.  At June 30, 2011, Flagstar operated 162 banking centers in Michigan, Indiana and Georgia and 30 loan origination centers in 15 states.  Flagstar Bank originates loans nationwide and is one of the leading originators of residential first 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, including, but are not limited to, the fact the sale of the Bank's branches in Georgia may not be consummated pursuant to its terms, at the time anticipated or at all, 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.