Flagstar Bancorp, Inc. (NYSE: FBC), today reported a 2008 first quarter net loss of $10.6 million, or $(0.17) per share (diluted). On a linked-quarter basis, fourth quarter 2007 net loss was $30.1 million, or $(0.50) per share (diluted). On a prior year basis, first quarter 2007 net earnings were $7.8 million, or $0.12 per share (diluted).
Return on equity and return on average assets for the first quarter 2008 were (5.93%) and (0.27%), respectively, as compared to (16.67%) and (0.75%) for the 2007 fourth quarter and 3.85% and 0.19% for the 2007 first quarter.
"Although we are disappointed with these results," said Mark T. Hammond, president and CEO, "we are pleased that our key operating metrics were at or above expectations, including our net interest margin, loan production and gain on loan sale margin. These positive developments were overshadowed by the charges we incurred from a change in our accounting for mortgage servicing rights and from increased credit costs and asset mark-downs."
Earnings for first quarter 2008 were adversely affected by the effect of Flagstar's election of fair value accounting for the vast majority of its mortgage servicing rights ("MSR") portfolio, which contributed to a loss on loan administration activities of $17.0 million. Prior to 2008, Flagstar had accounted for the MSRs using the amortization method. Had the amortization method been used, first quarter 2008 net earnings would have been $617,663, or $0.01 per share (diluted).
Earnings were also adversely affected by increased credit costs of a $34.3 million provision for loan losses in the first quarter 2008, as compared to $8.3 million for the same quarter in 2007. Further, earnings were impacted by asset mark-downs of a $9.5 million impairment of residuals related to asset securitizations and a $1.6 million decline in the fair value of interest rate swaps resulting from derecognition of cash flow hedges.
Liquidity
Flagstar's primary sources of funds are deposits, loan repayments and sales, advances from the Federal Home Loan Bank, security repurchase agreements, cash generated from operations and customer escrow accounts. Retail deposits increased to $5.2 billion at March 31, 2008, as compared to $ 5.1 billion at December 31, 2007 and $4.9 billion at March 31, 2007. At March 31, 2008, Flagstar had a $7.5 billion line of credit with the FHLB, as to which $1.3 billion remained available, and a $0.9 billion undrawn line of credit at the Federal Reserve discount window.
Capital
At March 31, 2008, Flagstar's wholly-owned subsidiary, Flagstar Bank, remained "well-capitalized" for bank regulatory purposes, with capital ratios of 5.64% for core capital and 10.47% for total risk-based capital.
"Our regulatory capital ratios are consistent with our historical norms and we believe they are appropriate given the composition of our balance sheet. Although we remain comfortable operating at these capital levels, we expect to pursue opportunities to increase both the core capital ratio and the total risk-based capital ratio until such time as the capital markets normalize and the residential real estate market shows signs of improvement," said Mr. Hammond.
Net Interest Margin
The net interest margin of Flagstar Bank increased to 1.66% for the 2008 first quarter, as compared to 1.62% for the fourth quarter 2007 and 1.43% for the first quarter 2007.
Retail Banking Operations
Flagstar Bank had 167 retail banking branches at March 31, 2008 as compared to 164 branches at December 31, 2007 and 155 branches at March 31, 2007. During the first quarter of 2008, the total number of retail accounts increased to approximately 299,700, representing an increase of 8.8% on an annualized basis as compared to December 31, 2007 and 15.4% on annualized basis, as compared to March 31, 2007.
Mortgage Banking Operations
Loan production for first quarter 2008 increased 19.4% to $8.0 billion, including $7.9 billion of residential loans, as compared to loan originations of $6.7 billion, including $6.5 billion in residential loans, in the fourth quarter 2007. Loan production increased 37.9%, as compared to loan originations of $5.8 billion, including $5.5 billion of residential loans, for first quarter of 2007.
Gain on loan sale or securitization spread increased to 89 basis points for the quarter ended March 31, 2008, its highest quarterly level since second quarter 2003, as compared to 42 basis points for the 2007 fourth quarter and 48 basis points for the first quarter 2007.
At March 31, 2008, the loans associated with Flagstar's MSR portfolio totaled $38.4 billion and had a weighted average service fee of 35.0 basis points. This was an increase from $32.5 billion at December 31, 2007 with a weighted average servicing fee of 36.0 basis points and an increase from $19.1 billion at March 31, 2007 with an average weighted servicing fee of 37.0 basis points.
Assets
Consolidated assets were $15.9 billion at March 31, 2008, as compared to $15.8 billion at December 31, 2007 and $15.4 billion at March 31, 2007.
The provision for loan losses was $34.3 million for the first quarter 2008 as compared to $38.4 million for the fourth quarter 2007 and $8.3 million for the first quarter 2007. Net charge-offs of loans during the first quarter 2008 increased to $16.9 million from $12.2 million during the fourth quarter 2007 and from $5.5 million during the first quarter 2007. As a result, the allowance for loan losses increased 16.7% to $121.4 million, or 1.42% of loans held for investment at March 31, 2008, from $104.0 million, or 1.28% of loans held for investment, at December 31, 2007 and from $48.5 million, or 0.61% of loans held for investment, at March 31, 2007.
Non-performing assets, which include non-performing loans, real estate owned and repurchased assets, increased to $399.5 million at March 31,2008, from $314.5 million at December 31, 2007 and $159.0 million at March 31, 2007. Non-performing loans, which are loans 90 days or more past due and matured loans, increased to $253.4 million (2.96% of loans held for investment) at March 31, 2008 as compared to $197.1 million (2.42%) at December 31, 2007 and $74.6 million (0.93%) at March 31, 2007.
Non-performing residential first mortgage loans increased to $172.6 million at March 31, 2008, as compared to $134.6 million at December 31, 2007 and $61.1 million at March 31, 2007. Single-family residential first mortgage loans held for investment at March 31, 2008 had an average original FICO credit score of 719 and an average original loan-to-value ratio of 73.7%. Non-performing commercial real estate mortgages increased to $72.7 million at March 31, 2008 from $57.8 million at December 31, 2007 and $9.0 million at March 31, 2007. Non-performing commercial real estate loans are individually evaluated for impairment and may not require a specific reserve depending upon the sufficiency of collateral or cash flows.
Real estate owned increased to $136.5 million at March 31, 2008 from $109.3 million at December 31, 2007 and from $76.8 million at March 31, 2007. Repurchased assets were $9.6 million at March 31, 2008 as compared to $8.1 million at December 31, 2007 and $7.7 million at March 31, 2007. -- Flagstar Bancorp, Inc.
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