Flagstar Reports Third Quarter 2014 Results

TROY, Mich., Oct. 21, 2014 /PRNewswire/ --Flagstar Bancorp, Inc. FBC ("the Company"), the holding company for Flagstar Bank, FSB (the "Bank"), today reported a third quarter 2014 net loss applicable to common stockholders of $27.6 million, or $0.61 per diluted share, as compared to net income applicable to common stockholders of

$25.5 million in the second quarter 2014, or $0.33 per diluted share, and net income applicable to common stockholders of $12.8 million in the third quarter 2013, or $0.16 per diluted share.

Alessandro P. DiNello, president and chief executive officer, commented, "We remain intensely focused on improving the operations of the Bank.  At the same time, we continue to improve our compliance and risk management, while also prudently managing expenses and continuing to grow in a measured fashion."

Mr. DiNello continued, "We took significant action during the quarter to reduce risk.  First, we settled with the Consumer Financial Protection Bureau ("CFPB") for claims arising out of loss mitigation practices and default servicing operations dating back to 2011.  We also recognized additional expense related to certain government insured loans.  Adjusting for these items, we would have achieved a modest profit in a difficult mortgage market, reflecting our sustained commitment to both growing operations and controlling noninterest expenses."

Both the third and second quarters of 2014 included various significant items which are as follows:

Excluding these significant items, core operating net income for the third quarter 2014 was $7.7 million, or $0.01 per diluted share, (after a deduction for preferred dividends), as compared to core operating net income for the second quarter 2014 of $14.4 million, or $0.13 per diluted share.

Net Interest Income

Third quarter 2014 net interest income increased to $64.4 million, as compared to $62.4 million for the second quarter 2014. The increase in net interest income was attributable to growth in earning assets of 5% to $8.8 billion from $8.4 billion in the second quarter 2014, partially offset by a 7 basis point contraction of the net interest margin to 2.91% in the current quarter. The higher level of average earning assets in the third quarter 2014 was attributable to balanced growth in both commercial and consumer loans, coupled with growth in investment securities. The growth in consumer loans was primarily attributable to higher levels of warehouse loans.  Commercial loan growth of 10%, resulting from our core Michigan franchise, continued to be well-balanced among industries, products, and collateral types. Funding for this growth came from a 6% increase in average interest-bearing deposits, driven by an increase in government and retail savings deposits.

Provision for Loan Losses

Provision for loan losses totaled $8.1 million for the third quarter 2014, as compared to $6.2 million for the second quarter 2014. The $1.9 million increase from the prior quarter was primarily attributable to higher levels of charge-offs in the current quarter as a result of the sales of $48.9 million of performing jumbo residential mortgage loans and $25.2 million of underperforming residential mortgage loans during the third quarter 2014.

Noninterest Income

Third quarter 2014 core operating noninterest income was $95.6 million, as compared to core operating noninterest income of $92.5 million for the second quarter 2014.

Core operating loan fees and charges increased to $18.7 million for the third quarter 2014, as compared to $15.3 million reported for the second quarter 2014. The increase of $3.4 million, or 22%, primarily related to an increase in loan originations of 20% for the third quarter 2014, as compared to the second quarter 2014.

Third quarter 2014 net gain on loan sales decreased to $52.2 million, as compared to $54.8 million for the second quarter 2014. The decrease from the prior quarter reflects the impact of a 6% decline in fallout-adjusted mortgage rate lock commitments. Fallout-adjusted locks were $6.3 billion for the third quarter 2014, as compared to $6.7 billion for the second quarter 2014. The net gain on loan sale margin increased to 83 basis points for the third quarter 2014, as compared to 82 basis points for the second quarter 2014.

Net return on the mortgage servicing asset (including off-balance sheet hedges of mortgage servicing rights) decreased to $1.3 million for the third quarter 2014, as compared to $5.0 million for the second quarter 2014. The decrease from the prior quarter resulted from a negative fair value adjustment which was driven by increased prepayments and from reduced hedge performance.

Third quarter 2014 net gain on sales of assets was $4.9 million, as compared to $3.5 million for the second quarter 2014. The increase from the prior quarter resulted from the net gain recorded on the sales of performing jumbo residential mortgage loans and underperforming residential mortgage loans.

Core operating representation and warranty provision, which is a contra noninterest income item, decreased to $2.2 million for the third quarter 2014, as compared to $5.2 million reported for the second quarter 2014. The decline was the result of a lower open pipeline of repurchase demands which declined 43% from the second quarter 2014 to $30.8 million, the lowest level since the first quarter of 2008. This does not include the $10.4 million representation and warranty provision related to indemnifications on government loans.

The third quarter 2014 other noninterest income was $9.5 million, as compared to $7.6 million for the second quarter 2014. The increase from the prior quarter resulted from the gain on sale of securities, in the normal course of business, of $1.9 million.

Noninterest Expense

Core operating noninterest expense was $140.8 million for the third quarter 2014, as compared core operating noninterest expense of $128.5 million for the second quarter 2014.

Third quarter 2014 asset resolution expense decreased to $13.7 million, as compared to $17.9 million for the second quarter 2014.

Core operating legal and professional expenses were $13.9 million for the third quarter 2014, as compared to $10.6 million reported for the second quarter 2014. The $3.3 million increase was attributable to higher consulting expenses.

Core operating other noninterest expenses for the third quarter 2014 totaled $12.8 million, as compared to $1.8 million reported for the second quarter 2014. The increase of $11.0 million, from the prior quarter, represented increases in the fair value of the DOJ liability, litigation reserves and the establishment of a reserve for unfunded loan commitments.

Income Taxes

The third quarter 2014 benefit for income taxes totaled $10.3 million, as compared to a tax provision of $11.9 million in the second quarter 2014. The effective tax rate in the third quarter 2014 was 27.2%, as compared to 31.8% in the second quarter 2014.

Asset Quality

Nonperforming loans decreased by $13.2 million to $106.9 million at September 30, 2014, the lowest level of nonperforming loans since the third quarter of 2006.  The decrease was driven by sales of nonperforming loans during the quarter.  The ratio of nonperforming loans to loans held for investment decreased to 2.56% at September 30, 2014 from 2.76% at June 30, 2014. 

Third quarter 2014 net charge-offs were $13.1 million, representing 1.36% of associated loans, excluding loans carried under a fair value option.  This increased $5.9 million from the second quarter 2014 net charge-offs of $7.2 million, or 0.78%, of associated loans. The increase in the current quarter was the result of $6.3 million of charge-offs related to loans sold.

The allowance for loan losses was $301.0 million at September 30, 2014, covering 7.6% of total loans held for investment, excluding loans carried under a fair value option.  The allowance for loan losses was $306.0 million at June 30, 2014, covering 7.4% of total loans held for investment. The increase in the coverage ratio during the third quarter 2014 was primarily due to a slight increase in the average loss rate as a result of loan sales during the quarter.

Earnings Conference Call

As previously announced, the Company's quarterly earnings conference call will be held on Wednesday, October 22, 2014 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 (866) 454-4209 toll free or (913) 312-0643, and use passcode: 7089877. 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: 7089877.

The conference call will also be available as a live audio cast on the Investor Relations section of www.flagstar.com. It will be archived on that site and will be available for replay and download. A slide presentation accompanying 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 $9.6 billion in total assets and $7.2 billion in total deposits, at September 30, 2014, Flagstar is the largest bank headquartered in Michigan. Flagstar operates 106 banking centers, all of which are located in Michigan and 32 home lending centers in 18 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 www.flagstar.com.

Use of Non-GAAP Financial Measures

The Company prepares its Consolidated Financial Statements using accounting principles generally accepted in the U.S. ("U.S. GAAP").  That presentation, which is referred to as "reported" basis, provides the reader with an understanding of the Company's results that can be tracked consistently from period-to-period and enables a comparison of the Company's performance with other companies' U.S. GAAP financial statements.

This press release contains U.S. GAAP financial measures as well as non-GAAP financial measures where management believes it to be helpful in understanding the Company's results of operations or financial position.

In addition to analyzing the Company's results on a reported basis, management reviews the Company's results and the results of its lines of business on a "core operating" basis. These non-GAAP measures reflect the adjustment of the reported U.S. GAAP results for significant items. The Company believes the use of these non-GAAP financial measures provides additional clarity in assessing the Company's results on a run-rate basis. These and other non-GAAP financial measures used by the Company may not be comparable to similarly named non-GAAP financial measures used by other companies.

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 earnings release, conference call slides, or the Form 8-K related to this press release. Additional discussion of the use of non-GAAP measures can also be found in Flagstar Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013, and Quarterly Report on Form 10-Q  for the quarters ended March 31, 2014 and June 30, 2014. All of which can be found on the Company's website at www.flagstar.com.

Forward Looking Statements

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of Flagstar Bancorp, Inc.'s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Factors that could cause Flagstar Bancorp, Inc.'s actual results to differ materially from those described in the forward-looking statements can be found in Flagstar Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013, and Quarterly Report on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014, which have been filed with the Securities and Exchange Commission and are available on Flagstar Bancorp, Inc.'s website (www.flagstar.com) and on the Securities and Exchange Commission's website (www.sec.gov). Flagstar Bancorp, Inc. does not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Bank currently calculates risk-based capital ratios under guidelines adopted by the OCC based on the 1988 Capital Accord ("Basel I") of the Basel Committee on Banking Supervision (the "Basel Committee"). In December 2010, the Basel Committee released its final framework for Basel III, which will strengthen international capital and liquidity regulations. When fully phased-in, Basel III will increase capital requirements through higher minimum capital levels as well as through increases in risk-weights for certain exposures. Additionally, the final Basel III rules place greater emphasis on common equity. In October 2013, the OCC and Federal Reserve released final rules detailing the U.S. implementation of Basel III and the application of the risk-based and leverage capital rules to top-tier savings and loan holding companies. The Company will begin transitioning to the Basel III framework in January 2015 subject to a phase-in period extending through January 2019. The Company is currently evaluating the impact of the final Basel III rules. Accordingly, the calculations provided below are estimates.

 

 

 

 

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SOURCE Flagstar Bancorp, Inc.