Flagstar Reports Second Quarter 2013 Net Income of $65.8 million or $1.10 per Diluted Share

TROY, Mich., July 23, 2013 /PRNewswire/ -- Flagstar Bancorp, Inc. (NYSE: FBC) ("the Company"), the holding company for Flagstar Bank, FSB (the "Bank"), today reported second quarter 2013 net income applicable to common stockholders of $65.8 million, or $1.10 per share (diluted), as compared to $22.2 million, or $0.33 per share (diluted), in the first quarter 2013 and $86.0 million, or $1.47 per share (diluted), in the second quarter 2012. Book value per common share increased to $17.66 at June 30, 2013, as compared to $16.46 at March 31, 2013.

"Our second quarter results represent the successful continuation of Flagstar's efforts to reduce risk, address legacy issues and build strong capital levels," said Sandro DiNello, the Company's President and Chief Executive Officer. "We believe that these efforts, along with new initiatives to reduce expenses and maximize efficiency across the organization, collectively position Flagstar for long-term growth and shareholder value creation.

"During the quarter, we were opportunistic in the resolution of our remaining legacy litigation, entering into settlement agreements with both MBIA and Assured, resulting in a net gain of $44 million. In addition, we took advantage of an improving market for loan demand, selling a substantial amount of non-performing loans and troubled debt restructurings virtually at book, which significantly improved our asset quality ratios. This month, we also made the decision to outsource our non-core default servicing business, which we believe will generate significant cost savings and better position the company to focus on growing the core performing servicing business."

Mr. DiNello continued, "Gain on loan sale income grew from the prior quarter, reflecting an increase in base margin and a flat level of mortgage locks. Despite this improvement, it is important to convey that we believe the recent uptick in mortgage rates will significantly decrease overall refinance volumes in the coming quarters. We believe we can offset some of the expected decrease in refinance production by leveraging our product offerings, overall market position and reputation for speed of closing, and certainty of execution, to continue to grow our share of the purchase market. We also plan to focus on efficiency optimization and disciplined expense management throughout the organization, while developing strategies to improve cross-sells and to utilize excess cash to grow interest-earning assets. As we drive towards Flagstar's next phase of growth and development, we remain committed to improved disclosure and transparency to ensure that our strategy and improved performance is better communicated among the investment community."

SecondQuarter 2013 Highlights (as Compared to First Quarter 2013)

• Net income applicable to common stockholders increased to $65.8 million, as compared to $22.2 million:
  • Income of $49.1 million related to the previously announced settlement with Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Inc. ("Assured").
  • Loss of $(4.9) million related to the settlement with MBIA Insurance Corporation ("MBIA").
  • Decrease in net interest income to $47.1 million, as compared to $55.7 million.
  • Increase in gain on loan sales to $144.8 million, as compared to $137.5 million.
    • Fallout-adjusted mortgage rate lock commitments of $9.8 billion, relatively flat.
    • Gain on loan sale margin (based on fallout-adjusted locks) of 1.47 percent, as compared to 1.40 percent.
  • Increase in net loan administration income to $36.2 million, as compared to $20.4 million.
    
    
• Strengthened regulatory capital ratios, maintained liquidity and sold mortgage servicing rights:
  • Tier 1 leverage ratio increased by 86 basis points to 11.00 percent
  • Cash and cash equivalents increased by $0.5 billion to $2.7 billion.
  • Completed bulk sales of mortgage servicing rights related to $12.7 billion in underlying mortgage loans.
    
    
• Significantly improved credit quality:
  • Sold $341.1 million in unpaid principal balance of residential first mortgage non-performing loans and total troubled debt restructurings ("TDRs"), with a carrying value of $277.9 million, for 99.5 percent of carrying value, resulting in a net loss (before broker fees) of $1.4 million.
  • Total non-performing loans decreased by 30.2 percent to $257.9 million and total TDRs decreased by 26.4 percent to $547.3 million, of which $451.1 million are performing TDRs.
  • Ratio of allowance for loan losses to non-performing loans increased to 94.2 percent.
  • Total pipeline of active loan repurchase demands (the "repurchase pipeline") decreased by 38.5 percent to $115.0 million, while the representation and warranty reserve remained at $185.0 million.

Litigation Settlements

On May 2, 2013 the Bank entered into an agreement (the "MBIA Settlement Agreement") to settle the previously announced lawsuit which was filed by MBIA on January 11, 2013. The lawsuit involved approximately $1.1 billion of non-agency securitization transactions in 2006 and 2007 involving fixed and adjustable rate second mortgage loans that MBIA insured. Under the terms of the Settlement Agreement, MBIA terminated its pending lawsuit and in exchange, among other consideration and transaction provisions, the Company paid MBIA $110.0 million. As a result of the MBIA Settlement Agreement, the Company recognized a loss of $(4.9) million. This includes a $7.2 million loss (recorded in other non-interest income) arising from the fair value of the assets in the mortgage securitizations and an $8.8 million other-than-temporary impairment, partially offset by $5.0 million in income recognition resulting from the reversal of related reserves for pending and threatened litigation and a $6.1 million tax benefit resulting from the deferred tax asset associated with the mortgage securitization.

On June 21, 2013 the Bank entered into an agreement (the "Assured Settlement Agreement") to settle the previously announced lawsuit filed by Assured. The litigation pertained to $902.2 million of non-agency securitization transactions in 2005 and 2006 involving home equity line of credit ("HELOC") loans which were insured by Assured. Under the terms of the Assured Settlement Agreement, Assured terminated its pending lawsuit and will not pursue any related claims at any time in the future. In exchange, the Company paid Assured $105.0 million and will assume responsibility for future claims associated with the two HELOC securitization trusts, including the right to receive from Assured all future reimbursements for claims paid to which Assured would have been entitled. As a result of the Assured Settlement Agreement, the Company recognized $49.1 million of income, which includes $44.1 million in income arising from the excess of the fair value of the net assets and liabilities in the two HELOC securitizations and $5.0 million in income recognition from the reversal of related reserves for pending and threatened litigation.

Net Interest Income

Second quarter 2013 net interest income decreased to $47.1 million, as compared to $55.7 million for the first quarter 2013 and $75.5 million for the second quarter 2012. The decrease from the prior quarter was driven primarily by lower average balances of interest-earning assets and a decrease in the yield paid on those assets, plus a slight increase in the cost of funds. Net interest margin for the Bank decreased to 1.72 percent, as compared to 1.89 percent for the first quarter 2013 and 2.37 percent for the second quarter 2012. The decrease from the prior quarter reflects the decline in net interest income, which more than offset the decline in the average balances of higher-yielding assets, primarily mortgage loans held-for-sale and warehouse loans.

The average cost of funds for the second quarter 2013 was 1.58 percent, an increase from 1.54 percent for the first quarter 2013 and a decrease from 1.72 percent for the second quarter 2012. The increase from the prior quarter was driven by the use of lower costing short-term FHLB advances during the first quarter which were paid-off during the second quarter 2013 as a result of the availability of increased liquidity. Average cost of total deposits decreased to 0.75 percent for the second quarter 2013, as compared to 0.78 percent for the first quarter 2013 and 1.07 percent for the second quarter 2012. The decrease from the prior quarter was consistent with the Company's improvement in funding mix, as higher-cost retail certificates of deposit were replaced with lower-cost demand and savings deposits.

Non-interest Income

Second quarter 2013 non-interest income increased to $220.0 million, as compared to $184.9 million for the first quarter 2013 and decreased from $240.3 million for the second quarter 2012. The increase from the prior quarter was driven by increased gain on loan sales, net servicing revenue and other non-interest income.

Second quarter 2013 net gain on loan sales increased to $144.8 million, as compared to $137.5 million for the first quarter 2013 and decreased from $212.7 million for the second quarter 2012. The increase from the prior quarter was primarily due to an increase in the gain on sale margin, combined with a flat level of mortgage rate lock commitments. Gain on loan sale margin (based on the amount of rate lock commitments net of estimated cancellations, or "fallout-adjusted locks") increased to 1.47 percent for the second quarter 2013, as compared to 1.40 percent for the first quarter 2013 and decreased from 1.59 percent for the second quarter 2012. Fallout-adjusted locks were $9.8 billion in the second quarter 2013, flat from the level in the prior quarter.

Mortgage originations decreased to $10.9 billion for the second quarter 2013, as compared to $12.4 billion for the prior quarter and $12.5 billion for the second quarter 2012. Purchase originations comprised 28.9 percent of overall mortgage originations in the second quarter, as compared to 18.8 percent in the prior quarter, reflecting the shift to a more purchase-driven market as a result of the recent and sustained increase in mortgage interest rate levels.

Loan fees and charges decreased to $29.9 million for the second quarter 2013, as compared to $33.4 million for the first quarter 2013 and $34.8 million for the second quarter 2012. Loan fees and charges are driven by mortgage loan originations, which decreased to $10.9 billion for the second quarter 2013, as compared to $12.4 billion for the first quarter 2013 to $12.5 billion for the second 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), increased to $36.2 million for the second quarter 2013, as compared to $20.4 million for the first quarter 2013 and $28.7 million for the second quarter 2012. The increase from the prior quarter was primarily attributable to a gain associated with bulk sales of mortgage servicing rights related to $12.7 billion in underlying mortgage loans, partially offset by a decrease in hedge performance from the prior quarter.

The Company's second quarter 2013 results included $44.1 million related to the Assured Settlement Agreement and a loss of $7.2 million related to the MBIA Settlement Agreement, which in total, increased other non-interest income by $36.8 million from the prior quarter.

The Company also recorded a second quarter 2013 net impairment loss on its investment securities available-for-sale of $8.8 million (recognized in earnings), as compared to no impairment in the prior quarter, as a result of the MBIA Settlement Agreement.

Non-interest Expense

Non-interest expense was $174.4 million for the second quarter 2013, as compared to $196.6 million for the first quarter 2013 and $169.5 million for the second quarter 2012. Excluding asset resolution expense (discussed in Credit-Related Costs and Asset Quality, below), non-interest expense would have totaled $158.5 million for the second quarter 2013, as compared to $180.1 million for the first quarter 2013 and $148.6 million for the second quarter 2012. The decrease from the prior quarter primarily reflects decreases in legal and professional expense and compensation and benefits.

Second quarter 2013 legal and professional expense decreased to $16.4 million, as compared to $28.8 million for the first quarter 2013. The decrease from the prior quarter was primarily driven by a $10.0 million release of reserves for pending and threatened litigation associated the Assured Settlement Agreement and the MBIA Settlement Agreement. As a result of the settlement agreements, the Company's reserves for pending and threatened litigation decreased by $221.2 million from the prior quarter to a balance of $26.8 million at June 30, 2013, which primarily includes the U.S. Department of Justice ("DOJ") litigation.

Compensation and benefits decreased to $70.9 million for the second quarter 2013, as compared to $77.2 million for the first quarter 2013 but increased from $65.4 million for the second quarter 2012. The decrease from the prior quarter was primarily related to the timing of payroll taxes. Commission expense decreased to $15.4 million for the second quarter 2013, as compared to $17.5 million for the first quarter 2013 and $17.8 million for the second quarter 2012. The decrease from the prior quarter was consistent with the 12.4 percent decrease in mortgage loan originations during the quarter.

Credit-Related Costs and Asset Quality

For the second quarter 2013, total credit-related costs (see non-GAAP reconciliation) increased to $85.2 million, as compared to $54.4 million for the first quarter 2013 and $127.6 million for the second quarter 2012. The increase from the prior quarter was primarily due to increases in the provision for loan losses, representation and warranty reserve - change in estimate and other than temporary impairment on available-for-sale investment securities (discussed in Non-interest Income, above).

During the quarter, the Company sold $341.1 million in unpaid principal balance of residential first mortgage non-performing and TDRs, with a carrying value of $277.9 million. The Company recorded a total loss on the sales of $3.0 million, which included $1.6 million in fees paid to the broker.

At June 30, 2013, the allowance for loan losses decreased to $243.0 million, as compared to $290.0 million at March 31, 2013, primarily driven by the charge-off of $38.3 million in reserves associated with the non-performing loan and TDR sales, partially offset by an increase in the allowance for loan losses related to emerging risks associated with loans expected to convert from interest-only to full-pay. At June 30, 2013, the ratio of the allowance for loan losses to non-performing loans held-for-investment increased to 94.2 percent, as compared to 78.5 percent at March 31, 2013.

Provision for loan losses increased to $31.6 million for the second quarter 2013, as compared to $20.4 million for the prior quarter, driven primarily by the increased allowance for loan losses related to emerging risks associated with loans expected to convert from interest-only to full-pay. Second quarter 2013 net charge-offs increased to $78.6 million, as compared to $35.4 million for the prior quarter, driven primarily by the $38.3 million in charge-offs associated with the non-performing loan and TDR sales.

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 June 30, 2013, the representation and warranty reserve was $185.0 million, which remained flat as compared to March 31, 2013. During the second quarter 2013, the model was enhanced to reflect a change in estimate of loss period as a result of increased requests by the GSEs for loan files for loans originated in earlier vintages. As a result, provisions related to the representation and warranty reserve - change in estimate increased to $28.9 million for the second quarter 2013, as compared to $17.4 million for the first quarter 2013.

At June 30, 2013, the total repurchase pipeline decreased to $115.0 million, as compared to $187.0 million at March 31, 2013, as the Company continued to aggressively work through its existing population of repurchase requests. New audit file review requests increased by 33.5 percent in the second quarter 2013 from the first quarter 2013, while new repurchase demands decreased by 35.4 percent from the prior quarter.

Total non-performing loans held-for-investment were $257.9 million at June 30, 2013, a decrease as compared to $369.3 million at March 31, 2013 and $431.6 million at June 30, 2012. The ratio of non-performing loans held-for-investment to loans held-for-investment also decreased to 5.74 percent at June 30, 2013, from 7.79 percent at March 31, 2013, as a result of the decrease in non-performing loans. These decreases from the prior quarter were primarily due to a decrease in consumer non-performing loans as a result of the sale of residential first mortgage non-performing loans completed during the second quarter 2013.

Commercial non-performing loans decreased to $63.8 million at June 30, 2013, as compared to $66.1 million at March 31, 2013 and $138.1 million at June 30, 2012, primarily driven by normal dispositions of commercial real estate loans.

Real estate-owned and other non-performing assets also decreased to $86.4 million at June 30, 2013, as compared to $114.4 million at March 31, 2013. The decrease was driven primarily by the sale of residential first mortgage non-performing loans, a portion of which were considered in-substance foreclosures for accounting purposes and therefore classified as real-estate owned.

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) was $15.9 million for the second quarter 2013, relatively flat as compared to $16.4 million for the first quarter 2013, but decreased from $20.9 million for the second quarter 2012.

Balance Sheet and Funding

Total assets at June 30, 2013 were $12.7 billion, as compared to $13.1 billion at March 31, 2013, driven primarily by a decrease in loans held-for-sale reflecting the decrease in mortgage loan originations during the second quarter 2013. This decrease was partially offset by an increase in cash on hand and interest-earning deposits from the proceeds of the non-performing loan and TDR sales completed during the second quarter 2013.

Long-term debt increased to $367.4 million at June 30, 2013, as compared to $247.4 million at March 30, 2013, driven by the on balance-sheet recognition of debt, which is recorded at fair value, associated with the Company's re-consolidation of the two HELOC securitization trusts as a result of the Assured Settlement Agreement.

Total deposits were $7.5 billion at June 30, 2013, a decrease of $0.3 billion as compared to $7.8 billion at March 31, 2013. The decrease from the prior quarter was primarily attributable to a decrease in retail certificates of deposits, which were replaced, in part, by retail demand and savings deposits. The Company's average balances of retail demand and savings deposits increased by 2.1 percent and 7.0 percent, respectively, from the prior quarter.

At June 30, 2013, the Company had approximately $2.7 billion of cash on hand and interest-earning deposits, as compared to $2.2 billion at March 31, 2013. 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 June 30, 2013, the Bank had medium-term outstanding borrowings from the FHLB of $2.9 billion and an additional $0.5 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 June 30, 2013, the Bank had a Tier 1 leverage ratio of 11.00 percent, as compared to 10.14 percent at March 31, 2013. At June 30, 2013, the Company had an equity-to-assets ratio of 9.84 percent.

Earnings Conference Call

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

It is preferred that questions are emailed in advance to investors@flagstar.com, or they may be asked during the conference call.

To join the call, please dial (888) 726-2423 toll free or (913) 312-1480, and use passcode: 7813813. 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: 7813813.

The conference call will also be available as a live audio cast 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 $12.7 billion in total assets at June 30, 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 40 home lending centers located in 17 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.

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 current expectations, plans or forecasts of its core business drivers, credit related costs, asset quality, capital adequacy and liquidity, the implementation of the Company's business plan and growth strategies, the suspension of dividend payments on preferred stock, the deferral of interest payment on trust preferred securities, the result of improvements to the Company's servicing processes, the Company's strategy for outsourcing its non-core default servicing business 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 Form 10-K and Forms 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 Supervisory Agreement with the Board of Governors of the Federal Reserve System and the Consent Order with the Office of the Comptroller of the Currency. 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.