Flagstar Bancorp Inc., the holding company for Flagstar Bank FSB, has announced third quarter results for the period ended Sept. 30, 2009. In addition, Flagstar's board of directors announced several initiatives designed to strengthen Flagstar leadership, improve operational efficiency and enhance earnings capacity and long-term performance. The board announced it will move forward with the following:
► The appointments of Salvatore Rinaldi to the position of executive vice president and chief of staff, and Marshall Soura to the position of executive vice president and director of corporate services.
► A comprehensive effort to better align expenses with revenues and appropriately rightsize the Flagstar enterprise.
► A strategic focus on maximizing the value of Flagstar's 176-branch community banking platform located in three states.
► A continued emphasis on investing in Flagstar's position as one of the leading residential mortgage originators in the country.
In addition, the board announced the election of president and chief executive officer Joseph P. Campanelli, to the position of chairman. Campanelli replaces Thomas J. Hammond, who retired on Oct. 22.
"In the geographies we serve, Flagstar has the ability to significantly enhance and diversify our earnings capacity," said Campanelli. "We will achieve this through organic growth and, where prudent, by taking advantage of consolidation opportunities. The senior management team I have assembled includes key executives already at Flagstar and seasoned banking executives with whom I have worked in the past and who join us with complementary skills and the experience of having accomplished this type of transformation on a platform with many similarities to Flagstar."
Rinaldi was formerly executive vice president and chief of staff of Sovereign Bancorp Inc. until February 2009. Rinaldi joined Sovereign Bancorp in August 1998 and served in a variety of senior positions including managing all acquisitions and integrations for the organization. Additionally, Rinaldi managed most major initiatives for the bank as well as the supervision of the IT, operations and administrative functions.
Soura has over 40 years of banking industry experience, having served in executive positions at Sovereign Bank, Bank of America and BankOne. His responsibilities will include product development and strategic alliances.
Campanelli added, "We anticipate a significant level of industry consolidation and want to be active in that process. But in the near term, we will have to bring expenses into better alignment and make prudent operating decisions as we seek to broaden our earnings streams beyond our traditional mortgage activity. I believe that in the long-term these decisions will enhance shareholder value and create better opportunities to serve our communities. The infrastructure and people are in place to serve these communities in a more comprehensive manner. The combination of our efficiency and strategic focus on Flagstar's banking platform will enable us to execute this strategy. I look forward to communicating the progress of these activities in the coming quarters."
Third quarter earnings
Flagstar reported a third quarter 2009 net loss applicable to common stockholders of $298.5 million, or $(0.64) per share (diluted), as compared to a net loss of $76.6 million, or $(0.32) per share (diluted) on a linked quarter basis. During the third quarter 2009, Flagstar increased its provision for federal income taxes by $172.0 million to establish a valuation allowance on its federal deferred tax asset. In addition, Flagstar increased its valuation allowance for its deferred state tax asset by an additional $11.9 million, which was recorded in the other taxes expense category.
Net loss was $62.1 million, or $(0.79) per share (diluted), in the third quarter 2008. For the nine months ended September 30, 2009, Flagstar's net loss applicable to common stockholders was $442.2 million, or $(1.66) per share (diluted), as compared to net a loss of $56.9 million, or $(0.83) per share (diluted) for the same period 2008.
On a pre-tax, pre-credit cost basis, earnings before preferred dividends were $58.8 million in the third quarter 2009, as compared to such earnings of $78.9 million in the second quarter 2009.
Mortgage banking operations
Loan production, substantially comprised of agency residential first mortgage loans, decreased to $6.6 billion for the third quarter 2009, as compared to $9.3 billion in the second quarter 2009, and from $6.7 billion for the third quarter 2008.
For the nine months ended Sept. 30, 2009 loan production increased 11.3 percent to $25.5 billion, of which $25.4 billion were residential loans, as compared to $22.9 billion, including $22.6 billion of residential loans, for the nine months ended Sept. 30, 2008.
Gain on loan sales margins increased to 1.37 percent for the third quarter 2009, as compared to 1.06 percent for the second quarter 2009, and from 0.33 percent for the third quarter 2008. For the nine months ended Sept. 30, 2009, the gain on sale margin increased to 1.61 percent as compared to 0.59 percent for the same period in 2008.
At Sept. 30, 2009, the unpaid principal balances of loans associated with the mortgage servicing rights portfolio totaled $53.2 billion and had a weighted average service fee of 32.6 basis points. This was a decrease from $61.5 billion at June 30, 2009 with a weighted average servicing fee of 33.1 basis points and an increase from $51.8 billion at Sept. 30, 2008 with an average weighted servicing fee of 33.6 basis points.
Asset quality
Non-performing assets, which include non-performing loans (i.e., loans 90 days or more past due, and matured loans), real estate-owned (REO) and repurchased assets, but which exclude any FHA-insured assets, increased to $1.2 billion at Sept. 30, 2009, from $1.1 billion at June 30, 2009 and $0.5 billion at Sept. 30, 2008.
At Sept. 30, 2008, the allowance for loan losses was $528.0 million, which equaled 50 percent of non-performing loans and 6.49 percent of loans held for investment. At June 30, 2009 and Sept.r 30, 2008, the allowance for loan losses were, respectively, $474.0 million (5.63 percent of loans held for investment) and $224.0 million (2.45 percent of loans held for investment) and equaled 50.4 percent and 54.1 percent, respectively, of non-performing loans.
Of the non-performing loans, residential first mortgage loans increased to $606.3 million at Sept. 30, 2009, as compared to $588.2 million at June 30, 2009 and $304.8 million at Sept. 30, 2008. Portfolio of single-family residential first mortgage loans held for investment at September 30, 2009 had an average original FICO credit score of 717 and an average original loan-to-value ratio of 74.4 percent.
Non-performing commercial real estate mortgages increased to $419.5 million at Sept. 30, 2009 as compared to $295.8 million at June 30, 2009 and $146.9 million at Sept. 30, 2008.
The balance of our real estate-owned, net of any FHA-insured assets, increased to $164.9 million at September 30, 2009 from $131.6 million at June 30, 2009 and $119.2 million at September 30, 2008. Repurchased assets were $26.6 million at September 30, 2009 as compared to $18.4 million at June 30, 2009 and $15.4 million at September 30, 2008.
Net loan charge-offs were $71.5 million for the third quarter 2009 as compared to $117.7 million for the second quarter 2009 and $19.6 million for the third quarter 2008. The provision for loan losses was $125.5 million for the third quarter 2009 as compared to $125.7 million for the second quarter 2009 and $89.6 million for the third quarter 2008.
Capital
At Sept. 30, 2009, the wholly owned subsidiary Flagstar Bank remained "well-capitalized" for regulatory purposes, with capital ratios of 6.39 percent for Tier 1 capital and 12.06 percent for total risk-based capital.
Assets
Total assets at Sept. 30, 2009 were $14.8 billion as compared to $16.4 billion at June 30, 2009. The decrease was primarily a result of the decline in loans available for sale, loans held for investment and trading securities. Total assets were $14.2 billion at both Dec. 31, 2008 and Sept. 30, 2008.
Operations
For the third quarter 2009, the net loss applicable to common stockholders of $298.2 million reflected the following:
► Gain on loan sales decreased slightly to $104.4 million as compared to $104.7 million for the second quarter 2009, reflecting the decrease in loan sales to $7.6 billion as compared to $9.9 billion in the second quarter of 2009. Margin on loan sales increased during the third quarter 2009 to 1.37 percent from 1.06 percent.
► Provision for loan losses decreased slightly to $125.5 million as compared to $125.7 million for the second quarter of 2009.
► Loan fees, resulting from originating loans, decreased to $29.4 million in the third quarter 2009 as compared to $35.0 million during the second quarter 2009. This decrease reflects a reduction in loan originations of $2.7 billion, to $6.6 billion for third quarter 2009.
► Net loan administration income reflected a loss of $30.3 million (offset by a gain of approximately $21.7 million on trading securities that were used for economic hedging purposes) as compared to a gain of $41.9 million for the second quarter 2009 (offset by a loss of approximately $39.1 million on trading securities that were used for economic hedging purposes).
►The third quarter net loss of $8.6 million, as compared to the second quarter 2009 net gain of $2.8 million, includes a decline in the value of mortgage servicing rights sold during the third quarter. Those rights related to $12.3 billion of agency residential mortgage loans that were identified as having higher risks of default and therefore had higher costs of servicing.
Non interest expense decreased to $166.9 million as compared to $171.8 million in the second quarter 2009. The decrease reflected a decline in commissions of $3.2 million due to lower loan origination volume in the third quarter 2009 and a revised commission structure, and it also reflected a net $13.2 million decline in general and administrative expenses. These declines were offset in part by an increase in other expenses of $11.7 million.
Other expenses include an $8.9 million decline in FDIC premium expense for the third quarter 2009 which equates to the absence of a $7.9 million special assessment that was imposed on all banks during the second quarter 2009 and an $1.0 million decrease in the regular assessment due to a decrease in deposits, offset by an $8.9 million increase in costs associated with foreclosed properties and an increase of $11.7 million in non-cash state tax expense as a result of recording a valuation allowance on state deferred tax assets. The valuation allowance, which is an offset against the tax asset rather than a charge-off, is generally recoverable in future years as taxable income is earned.
Provision for federal income taxes increased to $115.0 million as compared to a benefit of $(31.3) million for the second quarter of 2009. The increase is the result of a $172.0 million non-cash federal tax expense as a result of recording a valuation allowance on federal deferred tax assets, offset in part by the monthly benefit recorded of $57.0 million. The valuation allowance, because it is an offset against the tax asset rather than a charge-off , is generally recoverable in future years as taxable income is earned.
Community Banking Operations
Flagstar Bank had 176 community banking branches at Sept. 30, 2009 as compared to 175 branches at June 30, 2009 and 173 branches at Sept. 30, 2008.
Net interest margin
Net interest margin decreased to 1.58 percent for the third quarter 2009 as compared to 1.69 percent for the second quarter 2009 and 1.93 percent for third quarter 2008. The decline from second quarter 2009 reflects a $1.2 billion decline in the average balance of loans available for sale as loan sales outpaced originations, and a $200 million decline in the average balance of loans held for investment due to loan payoffs and the absence of any significant new originations into that category. For the nine months ended Sept. 30, 2009, the net interest margin was 1.65 percent as compared to 1.84 percent for the nine months ended Sept. 30, 2008, primarily reflecting a 0.72 percent decline in yield during the 2009 declining interest rate environment that was only partly offset by a 0.52 percent decline in funding costs during the same period.
For more information, visit www.flagstar.com.
