Flagstar Reports Fourth Quarter 2013 Net Income of $160.5 Million or $2.77 per Diluted Share

TROY, Mich., Jan. 22, 2014 /PRNewswire/ -- Flagstar Bancorp, Inc. (NYSE:FBC) ("the Company"), the holding company for Flagstar Bank, FSB (the "Bank"), today reported fourth quarter 2013 net income applicable to common stockholders of $160.5 million, or $2.77 per share (diluted), as compared to income of $12.8 million, or $0.16 per share (diluted), in the third quarter 2013 and a loss of $(94.2) million, or a loss of $(1.75) per share (diluted), in the fourth quarter 2012.  The full year 2013 net income applicable to common stockholders was $261.2 million, or $4.37 per share (diluted), as compared to a full year 2012 net income applicable to common stockholders of $62.7 million, or $0.87 per share (diluted).  Book value per common share increased to $20.66 at December 31, 2013, as compared to $17.96 at September 30, 2013 and $16.12 at December 31, 2012.

"During 2013, we achieved important strategic and operational progress: improved the Company's risk profile, strengthened the balance sheet, built capital, eliminated valuation overhangs and optimized our cost structure," said Sandro DiNello, the Company's President and Chief Executive Officer.  "I am pleased with all that we accomplished in 2013, and I believe the Company has turned a corner and is poised for growth and success in 2014 and beyond.  Having taken the necessary steps to position our Company for sustainable growth over the long-term, and with a continued commitment to building on our culture of compliance, our focus now can shift to prudently redeploying excess capital, leveraging the balance sheet with our core businesses and increasing our share of wallet.  As we execute on these objectives, we will adhere to our core commitment to serving our customers and communities with an emphasis on quality, care and pride."    

Mr. DiNello continued, "Despite the near-term impact of initiatives designed to position the Company for long-term success, as well as a challenging mortgage market, we delivered net income of $261 million for the year and drove a 28 percent increase in book value per share from 2012.  We also increased our Tier 1 leverage ratio, lowered our MSR concentration, reduced operating costs and improved our asset quality and allowance coverage ratios."      

"While a decision to restructure the organization is never taken lightly, the cost savings from the workforce reductions, together with those already realized from our vendor management and procurement initiatives, the outsourcing of default servicing and other variable cost decreases, put us on track to achieve the high-end of our previously provided guidance for 2014 of $145 million to $190 million in annualized non-interest expense savings," added Lee Smith, the Bank's Chief Operating Officer.

Fourth Quarter 2013 Highlights:

• Net income applicable to common stockholders increased to $160.5 million, as compared to $12.8 million in the prior quarter, primarily attributable to several significant items:
  • Tax benefit of $410.4 million, primarily due to the full reversal of the federal deferred tax asset ("DTA") valuation allowance and a partial reversal of the state DTA valuation allowance.
  • Loss on extinguishment of debt of $177.6 million (included in non-interest expense) from the prepayment of $2.9 billion in long-term fixed-rate Federal Home Loan Bank ("FHLB") advances.
  • Incremental non-interest expense of $61.0 million related to the estimated fair value liability associated with a lending-related legal settlement reached in February 2012 with the Department of Justice ("DOJ Settlement").
  • Benefit (included in non-interest income) of approximately $24.9 million associated with the previously announced settlement agreements with Fannie Mae and Freddie Mac.
    
    
• Net gain on loan sales decreased to $44.8 million, as compared to $75.1 million in the prior quarter:
  • Total mortgage originations decreased to $6.4 billion, as compared to $7.7 billion in the prior quarter.
  • Gain on sale margin (based on fallout-adjusted rate locks) decreased to 0.85 percent, as compared to 1.14 percent in the prior quarter.
    
    
• Sold $53.4 billion in aggregate unpaid principal balance of mortgage servicing rights ("MSR"):
  • Ratio of MSR-to-Tier 1 capital reduced to 22.6 percent, as compared to 56.8 percent in the prior quarter (see non-GAAP reconciliation).
  • Includes the previously announced bulk sale of MSRs of $40.7 billion, in which the Company will remain the sub-servicer of the loans.
    
    
• Excluding the effect of the loss on extinguishment of debt and the expense related to the DOJ settlement noted above, non-interest expense decreased to $150.1 million, as compared to $158.4 million in the prior quarter, consistent with the Company's ongoing cost optimization efforts.
  
  
• Tier 1 leverage ratio increased to 13.97 percent, as compared to 11.98 percent in the prior quarter.
  
  
• Continued improvement in asset quality:
  • Net charge-offs decreased to $14.1 million, as compared to $40.1 million in the prior quarter.
  • Non-performing assets decreased to $182.3 million, as compared to $205.3 million in the prior quarter.
  • Ratio of allowance for loan losses to non-performing loans held-for-investment at 145.9 percent.

Significant Items

Reversal of Valuation Allowance on DTA

During the fourth quarter 2013, the Company reversed 100 percent of the valuation allowance on its federal DTA and a portion of its state DTA, which had been previously established as of September 30, 2009.  As a result, net income was increased due to the recording of a $410.4 million benefit for income taxes.  This benefit was comprised of a $355.8 DTA valuation allowance reversal, or $6.28 per diluted share, as of January 1, 2013 and the current period benefit for income taxes of $54.6 million.

DOJ Settlement Liability

In February 2012, the Bank entered into the DOJ settlement.  As part of the settlement, the Bank agreed to make payments totaling $118.0 million, contingent upon the occurrence of certain future events, including the reversal of the valuation allowance on the DTA.  As a result of the fourth quarter 2013 reversal of the DTA valuation allowance, the Company increased the fair value liability associated with its DOJ Settlement by $61.0 million.  The total fair value of the DOJ settlement liability was increased to $93.0 million for the fourth quarter 2013, as compared to $28.5 million for the third quarter 2013, resulting in total non-interest expense of $64.5 million for the fourth quarter 2013.  

Settlements with Fannie Mae and Freddie Mac

On November 6, 2013, the Company announced that the Bank had entered into a settlement agreement with Fannie Mae to resolve substantially all of the repurchase requests and obligations associated with loans originated between January 1, 2000 and December 31, 2008 and sold to Fannie Mae.  The total resolution amount was $121.5 million.  After paid claim credits and other adjustments, the Bank paid $93.5 million to Fannie Mae.

On December 30, 2013, the Company announced that the Bank had entered into a settlement agreement with the Federal Home Loan Mortgage Corporation ("Freddie Mac") to resolve substantially all of the repurchase requests and obligations associated with loans originated between January 1, 2000 and December 31, 2008 and sold to Freddie Mac.  The total resolution amount was $10.8 million.  After paid claim credits and other adjustments, the Bank paid $8.9 million to Freddie Mac. 

As a result of these settlements, the Company released approximately $24.9 million of previously recognized reserves.

Organizational Restructuring

On January 16, 2014, the Company announced that it had implemented an organizational restructuring to reduce expenses in light of the current operating environment and consistent with its previously communicated strategy of optimizing its cost structure across all business lines.  As part of this restructuring initiative, the Company has reduced full-time equivalents by approximately 350 during the first quarter 2014, which did not impact the 2013 financial results.  Including the restructuring completed in the first quarter 2014, the Company has reduced staffing levels across the organization by approximately 600 full-time equivalents from its September 30, 2013 level. 

The Company estimates this restructuring initiative will generate annualized cost savings of approximately $40 million, the majority of which was not reflected in the 2013 financial results.  The Company also estimates it will incur a total pre-tax charge of $5.2 million related to this restructuring initiative, of which $1.4 million was expensed in the fourth quarter 2013.

Sale of Mortgage Servicing Rights

On December 18, 2013, the Bank entered into a definitive agreement to sell $40.7 billion unpaid principal balance of its MSR portfolio to Matrix Financial Services Corporation, a wholly owned subsidiary of Two Harbors Investment Corp.  Covered under the agreement are certain mortgage loans serviced for both Fannie Mae and Ginnie Mae, originated primarily after 2010.  Simultaneously, the Bank entered into an agreement with Matrix to sub-service the residential mortgage loans covered under the agreement to sell.

Prepayment of FHLB advances

During the fourth quarter 2013, the Company prepaid $2.9 billion in long-term FHLB advances with an average coupon of 3.29 percent, which resulted in a $177.6 million loss on extinguishment of debt (included in non-interest expense).

Net Interest Income

Fourth quarter 2013 net interest income decreased to $41.2 million, as compared to $42.7 million for the third quarter 2013 and $73.9 million for the fourth quarter 2012.  The decrease from the prior quarter is primarily due to lower average balances in the mortgage loans available-for-sale and warehouse loans held-for-investment portfolios, and a lower yield on loans repurchased with government guarantees.  

Net interest margin for the Bank increased to 1.80 percent for fourth quarter 2013, as compared to 1.68 percent for the third quarter 2013 and decreased from 2.26 percent for the fourth quarter 2012.  The decrease from the prior quarter was driven primarily by a decrease in the average cost of deposits.     

The average cost of funds for the fourth quarter 2013 was 1.44 percent, as compared 1.58 percent for the third quarter 2013 and 1.60 percent for the fourth quarter 2012.  The decrease from the prior quarter was primarily due to the run-off of retail certificates of deposits and wholesale deposits, both of which carry higher rates, and a lower average rate paid on savings accounts.  The average cost of total deposits decreased to 0.50 percent for the fourth quarter 2013, as compared to 0.67 percent for the third quarter 2013 and 0.86 percent for the fourth quarter 2012.

Non-interest Income

Fourth quarter 2013 non-interest income decreased to $113.1 million, as compared to $134.3 million for the third quarter 2013 and $285.8 million for the fourth quarter 2012.  The decrease from the prior quarter was driven by a decrease in net gain on loan sales and an increase in net transaction costs on sales of MSRs, partially offset by a decrease in representation and warranty provision - change in estimate (discussed in Credit-Related Costs and Asset Quality).   

Fourth quarter 2013 net gain on loan sales decreased to $44.8 million, as compared to $75.1 million for the third quarter 2013 and $239.0 million for the fourth quarter 2012.  The decrease from the prior quarter reflects both a lower level of mortgage rate lock commitments and a decrease in gain on loan sale margin.  

Mortgage originations decreased to $6.4 billion for the fourth quarter 2013, as compared to $7.7 billion for third quarter 2013 and $15.4 billion for the fourth quarter 2012.  The 16.8 percent decrease from the prior quarter was driven primarily by a decline in refinance originations, reflecting the rising mortgage interest rate environment during the fourth quarter.  Purchase originations increased to 57.1 percent of overall residential first mortgage originations in the fourth quarter 2013, from 47.6 percent in the prior quarter. 

Gain on loan sale income is driven by rate lock commitments net of estimated cancellations, or "fallout-adjusted locks", as the Company uses fair value accounting to account for the majority of its mortgage business.  Fallout-adjusted locks were $5.3 billion for the fourth quarter 2013, a 19.8 percent decrease from the third quarter 2013.

Gain on loan sale margin (based on the amount of fallout-adjusted locks) decreased to 0.85 percent for the fourth quarter 2013, as compared to 1.14 percent for the third quarter 2013 and 1.90 percent for the fourth quarter 2012.  The decrease from the prior quarter was driven primarily by mortgage interest rate volatility during the fourth quarter.

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 $28.9 million for the fourth quarter 2013, as compared to $30.4 million for the third quarter 2013 and $25.0 million for the fourth quarter 2012.  As discussed above, the Company sold $53.4 billion in aggregate unpaid principal balance of MSRs during the fourth quarter 2013, which improved its ratio of MSR-to-Tier 1 capital to 22.6 percent, as compared to 56.8 percent in the third quarter.  As a result, net transaction costs on sales of mortgage servicing rights increased to $9.0 million for the fourth quarter 2013, as compared to $1.8 million for the third quarter 2013.

Non-interest Expense

Non-interest expense was $388.7 million for the fourth quarter 2013, as compared to $158.4 million for the third quarter 2013 and $398.0 million for the fourth quarter 2012.  Excluding the loss on extinguishment of debt and the incremental expense related to the DOJ litigation liability (discussed in Significant Items), non-interest expense was $150.1 million, a decrease as compared to $158.4 million for the third quarter 2013, driven primarily by a decrease in asset resolution expense (discussed in Credit Related Costs and Asset Quality).

Compensation and benefits increased to $69.6 million for the fourth quarter 2013, as compared to $61.6 million for the third quarter 2013, but decreased from $72.1 million for the fourth quarter 2012.  The increase from the prior quarter was primarily due to expense associated with annual incentive compensation.  

Commission expense decreased to $9.4 million for the fourth quarter 2013, as compared to $12.1 million for the third quarter 2013 and $22.2 million for the fourth quarter 2012.  Loan processing expense also decreased to $8.8 million for the fourth quarter 2013, as compared to $10.9 million for the third quarter 2013 and $18.6 million for the fourth quarter 2012.  Commissions and loan processing expense are both driven by mortgage originations, and the decreases were consistent with the decrease in mortgage originations during the fourth quarter 2013. 

Fourth quarter 2013 legal and professional expenses increased to $79.2 million, as compared to $19.6 million for the third quarter 2013, but decreased from $213.4 million for the fourth quarter 2012.  The increase from the prior quarter was primarily driven by the $61.0 million in expense related to the fair value liability associated with the DOJ Settlement.

Credit-Related Costs and Asset Quality

For the fourth quarter 2013, total credit-related costs (see non-GAAP reconciliation) decreased to $2.1 million, as compared to $25.6 million for the third quarter 2013 and $97.6 million for the fourth quarter 2012.  The decrease from the prior quarter was primarily driven by a decrease in representation and warranty - change in estimate, reflecting the release of reserves of approximately $24.9 million associated with the settlements with Fannie Mae and Freddie Mac.

At December 31, 2013, the Company's allowance for loan losses was $207.0 million, unchanged from September 30, 2013 but decreased from $305.0 million at December 31, 2012.  At December 31, 2013, the ratio of the allowance for loan losses to non-performing loans held-for-investment was 145.9 percent, as compared to 152.6 percent at September 30, 2013 and 76.3 percent at December 31, 2012.

Net charge-offs for the fourth quarter decreased to $14.1 million, as compared to $40.1 million for the third quarter 2013, and from $50.4 million for the fourth quarter 2012, driven primarily by a decrease in residential first mortgage loan charge-offs.  Provision for loan losses increased to $14.1 million for the fourth quarter 2013, as compared to $4.1 million for the prior quarter and $50.4 million for the fourth quarter 2012.  The increase from the prior quarter reflects an increased level of residential first mortgage reserves as the Company continues to refine some of the primary data inputs to its allowance methodology.

Total non-performing loans held-for-investment was $145.7 million at December 31, 2013, an increase as compared to $138.8 million at September 30, 2013 and a decrease from $399.8 million at December 31, 2012.  The increase from the prior quarter was driven primarily by an increase in residential first mortgage non-performing loans, partially offset by a decrease in commercial non-performing loans.  The ratio of non-performing loans held-for-investment to loans held-for-investment increased to 3.59 percent at December 31, 2013, from 3.46 percent at September 30, 2013 and 7.35 percent at December 31, 2012.

Real estate-owned and other non-performing assets decreased to $36.6 million at December 31, 2013, as compared to $66.5 million at September 30, 2013 and $120.7 million at December 31, 2012.  The decrease from the prior quarter was primarily due to payoffs resulting from liquidations and transfers of real estate-owned properties. 

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 December 31, 2013, the representation and warranty reserve was $54.0 million, as compared to $174.0 million at September 30, 2013 and $193.0 million at December 31, 2012.  The decrease from the prior quarter was primarily driven by $24.9 million in releases of reserves associated with the settlements with Fannie Mae and Freddie Mac (discussed in Significant Items).

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 $3.4 million for the fourth quarter 2013, as compared to $16.3 million for the third quarter 2013 and from $21.2 million for the fourth quarter 2012.  The decrease from the prior quarter was primarily driven by gains on the sale of commercial real-estate owned properties and a decrease in foreclosure costs associated with loans the Company services for others.

Balance Sheet and Funding

Total assets decreased to $9.4 billion at December 31, 2013, as compared to $11.8 billion at September 30, 2013.  The decrease from the prior quarter was primarily due to a decrease in interest-earning deposits, as the Company used excess cash for the prepayment of FHLB advances, and a decrease in MSRs resulting from the bulk sales completed during the quarter.

Loans repurchased with government guarantees totaled $1.3 billion at December 31, 2013, as compared to $1.2 billion at September 30, 2013 and $1.8 billion at December 31, 2012.  This portfolio represents delinquent loans which have been repurchased from Ginnie Mae pools that are insured or guaranteed by the Federal Housing Administration.   

Total deposits decreased to $6.1 billion at December 31, 2013, as compared to $6.6 billion at September 30, 2013, due to lower funding needs resulting from a reduction in mortgage originations.  This decrease was primarily driven by decreases in retail certificates of deposits.

At December 31, 2013, the Company had $0.3 billion of cash on hand and interest-earning deposits, as compared to $2.6 billion at September 30, 2013.  The decrease from the prior quarter was driven by the prepayment of FHLB advances, as well as the Company's investment of a portion of its excess cash into higher-yielding liquid securities.  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 December 31, 2013, the Bank had outstanding borrowings from the FHLB of $1.0 billion and an additional $1.7 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 December 31, 2013, the Bank had a Tier 1 leverage ratio of 13.97 percent, as compared to 11.98 percent at September 30, 2013.  At December 31, 2013, the Company had an equity-to-assets ratio of 15.16 percent.

Earnings Conference Call

As previously announced, the Company's quarterly earnings conference call will be held on Thursday, January 23, 2014 from 11 a.m. until Noon (Eastern).

It is preferred that questions are emailed in advance to [email protected], or they may be asked during the conference call.

To join the call, please dial (888) 715-1387 toll free or (913) 312-1521, and use passcode: 2979193.  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: 2979193.

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 $9.4 billion in total assets at December 31, 2013, Flagstar is the largest bank headquartered in Michigan.  Flagstar operates 111 banking centers, all of which are located in Michigan and 39 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 its 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.

SOURCE Flagstar Bancorp