Flagstar Reports Third Quarter 2013 Net Income of $12.8 million or $0.16 per Diluted Share

TROY, Mich., Oct. 22, 2013 /PRNewswire/ --

Results demonstrate the Company's continued progress reducing risk, improving credit performance and disposing of legacy assets

Non-performing loans declined by 46 percent, TDRs decreased by 21 percent, while allowance coverage ratio increased to 153 percent

Purchase mortgage originations increased 17 percent, reflecting industry shift to more purchase-driven market

Executing initiatives to optimize cost structure; non-interest expense decreased by $16 million during quarter, with further savings anticipated

Flagstar Bancorp, Inc. (NYSE: FBC) ("the Company"), the holding company for Flagstar Bank, FSB (the "Bank"), today reported third quarter 2013 net income applicable to common stockholders of $12.8 million, or $0.16 per share (diluted), as compared to $65.8 million, or $1.10 per share (diluted), in the second quarter 2013 and $79.7 million, or $1.36 per share (diluted), in the third quarter 2012.  Book value per common share increased to $17.96 at September 30, 2013, as compared to $17.66 at June 30, 2013.

"As expected, mortgage-related revenues were lower this quarter, with higher interest rates driving a significant decline in refinance volume," said Sandro DiNello, the Company's President and Chief Executive Officer.  "The 17 percent increase in purchase mortgage originations, along with improved credit performance and decreased fixed and variable expenses, helped to partially offset the reduction in refinance activity." 

DiNello continued, "Mortgage banking continues to be a key component of Flagstar's overall strategy, and we are adapting to a shift in the mortgage industry from a primarily refinance-driven market to a purchase market by further reducing our cost structure and focusing our efforts on appropriate growth opportunities.  We also have worked to reduce various risks in the organization.  At the same time, we increased our capital and liquidity position, and improved our reserve coverage, to provide Flagstar with the ability to capitalize on growth opportunities and deliver improved shareholder returns despite a weaker mortgage environment."       

"Our third quarter results demonstrate significant progress in our ongoing efforts to optimize Flagstar's cost structure, improve the Company's risk profile and dispose of legacy assets," said Lee Smith, the Company's Chief Operating Officer.  "During the third quarter, we executed a series of company-wide expense cutting initiatives, leading to a reduction in non-interest expense by almost $16 million from the prior quarter.  We sold approximately $167 million (unpaid principle balance) of non-performing loans and troubled debt restructurings, which significantly improved asset quality ratios and contributed to lower credit costs.  Total non-performing loans decreased to the lowest level since 2007, and our allowance increased to over 150 percent coverage of non-performing loans."

Smith added, "We have made great progress in addressing Flagstar's legacy issues and believe our actions have significantly improved the Company's financial performance and have placed Flagstar in a position to drive diversified and sustainable long-term revenue growth.  We are also working to create a sub-servicing platform which we believe will give us the ability to further diversify and increase revenues in the future."

ThirdQuarter 2013 Highlights:

• Net income applicable to common stockholders decreased to $12.8 million, as compared to $65.8 million in the prior quarter (which included the benefit of $44.1 million in income arising from the settlement agreements).
  • Gain on loan sales decreased by $69.7 million from the prior quarter.
  • Net interest income decreased by $4.4 million from the prior quarter.
  • Total credit-related costs decreased by $59.7 million from the prior quarter.
  • Non-interest expense decreased by $15.9 million from the prior quarter.
• Book value per common share increased to $17.96, compared to $17.66 in the prior quarter.
• Tier 1 leverage ratio increased by 98 basis points from the prior quarter to 11.98 percent.
• Total mortgage originations decreased by 28.9 percent from the prior quarter to $7.7 billion, driven by a decline in refinance mortgage originations.
  • Purchase mortgage originations increased by 17.0 percent from the prior quarter, partially offsetting the decline in refinance mortgage originations.
• Credit performance continued to improve:
  • Sold $167.2 million in unpaid principal balance of residential first mortgage non-performing loans and total troubled debt restructuring loans ("TDRs"), resulting in a net gain (after broker fees) of $1.6 million.
  • Total non-performing loans decreased by 46.2 percent to $138.8 million.
  • Total TDRs decreased by 20.9 percent to $432.7 million, of which $387.9 million were performing.
  • Ratio of allowance for loan losses to non-performing loans held-for-investment increased to 152.6 percent.
  • Net charge-offs decreased to $40.1 million, as compared to $78.6 million in the prior quarter.

Net Interest Income

Third quarter 2013 net interest income decreased to $42.7 million, as compared to $47.1 million for the second quarter 2013 and $73.1 million for the third quarter 2012.  The decrease from the prior quarter is in-line with expectations and largely due to a decrease in the average balance of interest-earning assets, primarily within the residential first mortgage loan (both available-for-sale and held-for-investment) and warehouse loan portfolios.  These decreases in average balances were partially offset by an increase in the yield earned on residential first mortgage loans held-for-sale and an improvement in the Bank's deposit mix.  Net interest margin for the Bank decreased to 1.68 percent for third quarter 2013, as compared to 1.72 percent for the second quarter 2013 and 2.21 percent for the third quarter 2012. 

The average cost of funds for the third quarter 2013 was 1.58 percent, unchanged from the second quarter 2013 and decreased from 1.73 percent for the third quarter 2012.  While the average cost of funds was flat from the prior quarter, the average cost of total deposits decreased to 0.67 percent for the third quarter 2013, as compared to 0.75 percent for the second quarter 2013 and 1.02 percent for the third quarter 2012.  The decrease from the prior quarter was driven primarily by a reduction in higher-cost retail certificates of deposit and a decrease in the average rate paid on retail savings accounts.

Non-interest Income

Third quarter 2013 non-interest income decreased to $134.3 million, as compared to $220.0 million for the second quarter 2013 and $273.7 million for the third quarter 2012.  The decrease from the prior quarter was driven by a decrease in net gain on loan sales, partially offset by a decrease in representation and warranty provision - change in estimate (discussed in Credit-Related Costs and Asset Quality, below).  The Company's non-interest income in the prior quarter included $36.8 million of the $44.1 million in total income related to settlement agreements with Assured and MBIA.   

Third quarter 2013 net gain on loan sales decreased to $75.1 million, as compared to $144.8 million for the second quarter 2013 and $334.4 million for the third quarter 2012.  The decrease from the prior quarter reflects both a lower level of mortgage rate lock commitments (given the rising interest rate environment) and a decrease in gain on loan sale margin.  Fallout adjusted mortgage rate lock commitments were $6.6 billion for the third quarter 2013, a 32.9 percent decrease from the prior quarter.

Mortgage originations also decreased to $7.7 billion for the third quarter 2013, as compared to $10.9 billion for second quarter 2013 and $14.5 billion for the third quarter 2012.  The decrease from the prior quarter was driven by a decline in refinance originations, consistent with the increase in mortgage interest rate levels as compared to prior quarter.  The decrease in refinance originations was partially offset by an increase in purchase mortgage originations, which increased by 17.0 percent from the prior quarter.  Purchase originations comprised 47.6 percent of the Company's overall residential first mortgage originations in the third quarter 2013, an increase from 28.9 percent in the prior quarter, consistent with the industry shift to a more purchase-driven market.   

Gain on loan sale margin (based on the amount of rate lock commitments net of estimated cancellations, or "fallout-adjusted locks") decreased to 1.14 percent for the third quarter 2013, as compared to 1.47 percent for the second quarter 2013 and 2.39 percent for the third quarter 2012.  The decrease from the prior quarter was driven by a number of factors, principally due to lower hedge performance.   

Loan fees and charges decreased to $20.9 million for the third quarter 2013, as compared to $29.9 million for the second quarter 2013 and $37.4 million for the third quarter 2012.  Loan fees and charges are driven by mortgage loan originations, and the decline from the prior quarter was consistent with the decline in mortgage originations during the third quarter 2013.

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), was $30.4 million for the third quarter 2013, as compared to $36.2 million for the second quarter 2013 and $11.3 million for the third quarter 2012.  The decrease from the prior quarter was primarily attributable to higher income in the second quarter 2013 resulting from bulk sales of mortgage servicing rights. There were no bulk sales of mortgage servicing rights during the third quarter 2013.

Non-interest Expense

Non-interest expense was $158.4 million for the third quarter 2013, as compared to $174.4 million for the second quarter 2013 and $233.5 million for the third quarter 2012.  Excluding asset resolution expense (discussed in Credit-Related Costs and Asset Quality, below), non-interest expense would have totaled $142.1 million for the third quarter 2013, as compared to $158.5 million for the second quarter 2013 and $221.0 million for the third quarter 2012.  The decrease from the prior quarter reflected lower variable expenses related to the decrease in mortgage originations from the prior quarter, as well as reduced fixed costs as a result of the Company's ongoing initiatives to optimize its cost structure in light of the changing mortgage origination market. 

Compensation and benefits decreased to $61.6 million for the third quarter 2013, as compared to $70.9 million for the second quarter 2013 and $67.4 million for the third quarter 2012.  The decrease from the prior quarter was driven by a reduction in annual incentive compensation and a decrease in both headcount and contract employees, both consistent with the Company's ongoing efforts to optimize its cost structure and manage expenses more in line with revenues.  Full-time equivalent employees plus loan officers and account executives decreased by 331 from the prior quarter, and the number of long-term subcontract employees decreased by 155 from the prior quarter.  

Commission expense decreased to $12.1 million for the third quarter 2013, as compared to $15.4 million for the second quarter 2013 and $19.9 million for the third quarter 2012.  Loan processing expense also decreased to $10.9 million for the third quarter 2013, as compared to $15.4 million for the second quarter 2013 and $15.7 million for the third quarter 2012.  Commissions and loan processing expense are both related to mortgage originations, and the decreases were consistent with the decrease in mortgage originations during the third quarter 2013. 

Third quarter 2013 occupancy and equipment expense decreased to $18.6 million, as compared to $22.2 million for the second quarter 2013 and $18.8 million for the third quarter 2012. The decrease from the prior quarter was primarily due to a reduction in capitalized projects, as a result of the Company's ongoing cost reduction initiatives.  

Third quarter 2013 legal and professional expenses increased to $19.6 million, as compared to $16.4 million for the second quarter 2013, and decreased from $57.2 million for the third quarter 2012.  The prior quarter included a $10.0 million release of reserves for pending and threatened litigation associated with the settlement agreements with Assured and MBIA.  Excluding the $10.0 million release of reserves in the prior quarter, legal and professional expenses would have decreased by $6.8 million from the prior quarter, driven largely by a reduction in third party legal expenses as a result of the resolution of the Assured and MBIA litigation, as well as and lower expenses related to the Company's vendor management and procurement initiatives. 

Credit-Related Costs and Asset Quality

For the third quarter 2013, total credit-related costs (see non-GAAP reconciliation) decreased to $25.6 million, as compared to $85.2 million for the second quarter 2013 and $189.7 million for the third quarter 2012.  The decrease from the prior quarter was primarily driven by decreases in the provision for loan losses and the representation and warranty reserve - change in estimate.

At September 30, 2013, the Company's allowance for loan losses decreased to $207.0 million, as compared to $243.0 million at June 30, 2013 and $305.0 million at September 30, 2012.  The decrease from the prior quarter was primarily the result of a release of reserves associated with the non-performing loans and TDRs sold during the quarter, as well as decreased reserves from normal loan run-off.  At September 30, 2013, the ratio of the allowance for loan losses to non-performing loans held-for-investment increased to 152.6 percent, as compared to 94.2 percent at June 30, 2013 and 76.5 percent at September 30, 2012.

Net charge-offs for the third quarter were $40.1 million, a decrease of $38.5 million as compared to $78.6 million for the prior quarter, and a slight increase from $34.6 million for the third quarter 2012.  Provision for loan losses decreased to $4.1 million for the third quarter 2013, as compared to $31.6 million for the prior quarter and $52.6 million for the third quarter 2012. The decrease from the prior quarter reflects the lower level of allowance for loan losses and the decrease in net charge-offs.

Total non-performing loans held-for-investment were $138.8 million at September 30, 2013, a decrease as compared to $257.9 million at June 30, 2013 and $398.9 million at September 30, 2012.  The decrease from the prior quarter was driven by lower consumer non-performing loans reflecting the sales completed during the quarter, as well as lower commercial non-performing loans driven by discounted pay-offs and note sales.  The ratio of non-performing loans held-for-investment to loans held-for-investment also decreased to 3.46 percent at September 30, 2013, from 5.74 percent at June 30, 2013 and 6.09 percent at September 30, 2012.

Real estate-owned and other non-performing assets decreased to $66.5 million at September 30, 2013, as compared to $86.4 million at June 30, 2013 and $119.5 million at September 30, 2012.  The decrease from the prior quarter was driven by sales of commercial real estate-owned properties and normal run-off in the consumer real estate-owned portfolio.

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 with the GSEs.  At September 30, 2013, the representation and warranty reserve was $174.0 million, as compared to $185.0 million at June 30, 2013 and $202.0 million at September 30, 2012.  The decrease from the prior quarter was consistent with a $14.1 million decrease in net charge-offs of loan repurchases from the prior quarter.  As a result, provisions related to the representation and warranty reserve - change in estimate decreased to $5.2 million for the third quarter 2013, as compared to $28.9 million for the second quarter 2013 and $124.5 million for the third quarter 2012. 

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 $16.3 million for the third quarter 2013, relatively flat as compared to $15.9 million for the second quarter 2013 and increased from $12.5 million for the third quarter 2012. 

Balance Sheet and Funding

Total assets decreased to $11.8 billion at September 30, 2013, as compared to $12.7 billion at June 30, 2013, driven primarily by decreases in the Company's loan portfolios, as a result of reduced mortgage production and the sales of non-performing loans and TDRs.  These decreases were partially offset by a $402.5 million increase in investment securities available-for-sale, as the Company invested a portion of its excess cash.

Loans repurchased with government guarantees decreased to $1.2 billion at September 30, 2013, as compared to $1.5 billion at June 30, 2013 and $1.9 billion at September 30, 2012.  This portfolio represents delinquent loans which have been repurchased from Ginnie Mae pools that are insured or guaranteed by the Federal Housing Administration.  The balance of this portfolio has continued to decrease, driven primarily by normal pay-downs, re-sales and accelerated dispositions.      

Total deposits decreased to $6.6 billion at September 30, 2013, as compared to $7.5 billion at June 30, 2013, due to lower funding needs resulting from a reduction in mortgage originations.  This decrease was primarily driven by a reduction in higher-cost retail certificates of deposit.

At September 30, 2013, the Company had $2.6 billion of cash on hand and interest-earning deposits, as compared to $2.7 billion at June 30, 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 September 30, 2013, the Bank had medium-term outstanding borrowings from the FHLB of $2.9 billion and an additional $0.4 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 September 30, 2013, the Bank had a Tier 1 leverage ratio of 11.98 percent, as compared to 11.00 percent at June 30, 2013.  At September 30, 2013, the Company had an equity-to-assets ratio of 10.78 percent.

Earnings Conference Call

As previously announced, the Company's quarterly earnings conference call will be held on Wednesday, October 23, 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 (800) 768-6563 toll free or (785) 830-7991, and use passcode: 9201691.  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: 9201691.

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. ("Flagstar") 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 $11.8 billion in total assets at September 30, 2013, Flagstar is the largest bank headquartered in Michigan.  Flagstar operates 111 banking centers, all of which are located in Michigan and 45 home lending centers located in 19 states, which primarily originate one-to-four family residential first mortgage loans.  Originating loans nationwide, Flagstar is one of the leading originators of residential first mortgage loans.  For more information, please visit flagstar.com.

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.