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FBC > SEC Filings for FBC > Form 10-Q on 29-Jul-2014All Recent SEC Filings

Show all filings for FLAGSTAR BANCORP INC



Quarterly Report

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Where we say "we," "us," or "our," we usually mean Flagstar Bancorp, Inc. However, in some cases, a reference to "we," "us," or "our" will include our wholly-owned subsidiary Flagstar Bank, FSB, which we refer to as the "Bank."


This report 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 could cause actual results or outcomes to differ materially from those expressed in a forward-looking statement. Examples of forward-looking statements include statements regarding our expectations, beliefs, plans, goals, objectives and future financial or other performance. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. Except to fulfill our obligations under the U.S. securities laws, we undertake no obligation to update any such statement to reflect events or circumstances after the date on which it is made.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include:

(1) General business and economic conditions, including unemployment rates, movements in interest rates, the slope of the yield curve, any increase in mortgage fraud and other related activity and the further decline of asset values in certain geographic markets, that affect us or our counterparties;

(2) Volatile interest rates, and our ability to effectively hedge against them, which could affect, among other things, (i) the mortgage business, (ii) our ability to originate loans and sell assets at a profit, (iii) prepayment speeds, (iv) our cost of funds and (v) investments in mortgage servicing rights;

(3) The adequacy of our allowance for loan losses and our representation and warranty reserves;

(4) Changes in accounting standards generally applicable to us and our application of such standards, including in the calculation of the fair value of our assets and liabilities;

(5) Our ability to borrow funds, maintain or increase deposits or raise capital on commercially reasonable terms or at all and our ability to achieve or maintain desired capital ratios;

(6) Changes in material factors affecting our loan portfolio, particularly our residential mortgage loans, and the market areas where our business is geographically concentrated or further loan portfolio or geographic concentration;

(7) Changes in, or expansion of, the regulation of financial services companies and government-sponsored housing enterprises, including new legislation, regulations, rulemaking and interpretive guidance, enforcement actions, the imposition of fines and other penalties by our regulators, the impact of existing laws and regulations, new or changed roles or guidelines of government-sponsored entities, changes in regulatory capital ratios, and increases in deposit insurance premiums and special assessments of the Federal Deposit Insurance Corporation;

(8) Our ability to comply with the terms and conditions of the Supervisory Agreement with the Board of Governors of the Federal Reserve and the Bank's ability to comply with the Consent Order with the Office of Comptroller of the Currency, and our ability to address matters raised by our regulators, including Matters Requiring Attention and Matters Requiring Immediate Attention, if any;

(9) The Bank's ability to make capital distributions and our ability to pay dividends on our capital stock or interest on our trust preferred securities;

(10) Our ability to attract and retain senior management and other qualified personnel to execute our business strategy, including our entry into new lines of business, our introduction of new products and services and

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management of risks relating thereto, and our competing in the mortgage loan originations and mortgage servicing and commercial and retail banking lines of business;

(11) Our ability to satisfy our mortgage servicing and subservicing obligations and manage repurchases and indemnity demands by mortgage loan purchasers, guarantors and insurers;

(12) The outcome and cost of defending current and future legal or regulatory litigation, proceedings or investigations;

(13) Our ability to create and maintain an effective risk management framework and effectively manage risk, including, among other things, market, interest rate, credit and liquidity risk, including risks relating to the cyclicality and seasonality of our mortgage banking business, litigation and regulatory risk, operational risk, counterparty risk and reputational risk;

(14) The control by, and influence of, our majority stockholder;

(15) A failure of, interruption in or cybersecurity attack on our network or computer systems, which could impact our ability to properly collect, process and maintain personal data and system integrity with respect to funds settlement;

(16) Our ability to meet our forecasted earnings such that we are able to realize the benefits of reversing our deferred tax allowance, or the need to increase the valuation allowance in future periods;

(17) Our compliance with the terms and conditions of the agreement with the U.S. Department of Justice and the impact of compliance with that agreement and our ability to accurately estimate the financial impact of that agreement, including the fair value and timing of the future payments; and

(18) The downgrade of the long-term credit rating of the United States by one or more ratings agencies could materially affect global and domestic financial markets and economic conditions.

All of the above factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such factor on our business.

Please also refer to Item 1A to Part I of our Annual Report on Form 10-K for the year ended December 31, 2013 and Item 1A to Part II of this Quarterly Report on Form 10-Q, which are incorporated by reference herein, for further information on these and other factors affecting us.

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. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.


We are a Michigan-based savings and loan holding company founded in 1993. Our business is primarily conducted through our principal subsidiary, the Bank, a federally chartered stock savings bank founded in 1987. At June 30, 2014, our total assets were $9.9 billion, making us the largest bank headquartered in Michigan and one of the top ten largest savings banks in the United States. Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "FBC." We are considered a controlled company for NYSE purposes, because MP Thrift Investments, L.P. ("MP Thrift") held approximately 63.3 percent of our common stock as of June 30, 2014.

As a savings and loan holding company, we are subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve (the "Federal Reserve"). The Bank is subject to regulation, examination and supervision by the Office of the Comptroller of the Currency ("OCC") of the U.S. Department of the Treasury ("U.S. Treasury"). The Bank is also subject to regulation, examination and supervision by the Federal Deposit Insurance Corporation ("FDIC") and the Bank's deposits are insured by the FDIC through the Deposit Insurance Fund. The Bank is also subject to the rule-making, supervision and examination authority of the Consumer Financial Protection Bureau (the "CFPB"), which is responsible for enforcing the principal federal consumer protection laws. The Bank is a member of the Federal Home Loan Bank ("FHLB") of Indianapolis.

In January 2014, we reorganized the manner in which our operations are managed based on core operating functions. The segments are based on an internally-aligned segment leadership structure, which is also how the results are monitored and performance assessed. We expect that the combination of our business model and the services that our operating segments provide will result in a competitive advantage that supports revenue and earnings. Our business model emphasizes the delivery of a complete set of mortgage and banking products and services, including originating, acquiring, selling and servicing one-to-four family residential first mortgage loans, which we believe is distinguished by timely processing and customer service.

Our Mortgage Originations segment originates or purchases residential first mortgage loans throughout the country and sells them into securitization pools, primarily to Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") and Government National Mortgage Association ("Ginnie Mae") (collectively, the "Agencies") or as whole loans. The majority of our total loan originations during the six months ended June 30, 2014 represented mortgage loans that were collateralized by residential first mortgages on single-family residences and were eligible for sale to the Agencies. Our revenue primarily consists of net gain on loan sales, loan fees and charges and interest income from residential first mortgage loans held-for-sale. At June 30, 2014, we originated residential first mortgage loans through our wholesale relationships with approximately 800 mortgage brokers and approximately 900 correspondents, which were located in all 50 states. At June 30, 2014, we also operated 32 home loan centers located in 18 states, which primarily originate one-to-four family residential first mortgage loans as part of our Mortgage Originations segment. The combination of our home lending, broker and correspondent channels gives us broad access to customers across diverse geographies to originate, fulfill, sell and service our residential first mortgage loan products. We also originate mortgage loans through referrals from our banking centers, consumer direct call center and our website,

Our Mortgage Servicing segment activities primarily consist of collecting cash for principal, interest and escrow payments from borrowers, assisting homeowners through loss mitigation activities, and accounting for and remitting principal and interest payments to mortgage-backed securities investors and escrow payments to third parties. These activities are performed on a fee basis for third party mortgage servicing rights holders, residential mortgages held for investment by the Community Banking segment and mortgage servicing rights held by the Other segment.

Our Community Banking segment revenues include net interest income and fee-based income from community banking services. At June 30, 2014, we operated 106 banking centers in Michigan (of which eight were located in retail stores). Of the 106 banking centers, 70 facilities are owned and 36 facilities are leased. During the six months ended June 30, 2014, we relocated one and closed five banking centers to better align the branch structure with the Company's focus on key market areas and to improve banking center efficiencies. Through our banking centers, we gather deposits and offer a line of consumer and commercial financial products and services to individuals and businesses. We provide deposit and cash management services to governmental units on a relationship basis. We leverage our banking centers to cross-sell loans, deposit products and insurance and investment services to existing customers and to increase our customer base by attracting new customers. At June 30, 2014, we had a total of $6.6 billion in deposits, including $5.1 billion in retail deposits, $0.8 billion in government deposits and $0.7 billion in company controlled deposits.

At June 30, 2014, we had 2,741 full-time equivalent salaried employees of which 260 were account executives and loan officers.

Recent Developments
Executive Leadership Change

Effective August 4, 2014, Paul Borja, the Company and the Bank's current Chief Financial Officer and Principal Accounting Officer, will assume a new position of Senior Deputy General Counsel in the Company and the Bank's Legal Department. In that role, Mr. Borja will have supervision over legal functions involving mortgage and retail banking; commercial transactions and vendor contracts; and corporate governance, securities and human resources. Prior to joining Flagstar as its Chief Financial Officer, Mr. Borja had been a partner in the Washington, DC office of Kutak Rock LLP, where he practiced in the areas of corporate, banking, securities and tax law. Prior to practicing law, Mr. Borja had practiced as a CPA with KPMG.

Effective August 4, 2014, James K. Ciroli will assume the position of Executive Vice President, Chief Financial Officer and Principal Accounting Officer of both the Company and the Bank, subject to receipt of regulatory non-objection from the Office of the Comptroller of the Currency (the "OCC") and the Board of Governors of the Federal Reserve System (the "Federal Reserve").

For his entire career, Mr. Ciroli, age 49, has worked in a variety of finance roles of increasing responsibility in the financial services sector. Mr. Ciroli comes to the Company from First Niagara Financial Group, Inc., where he served as its Senior Vice President, Corporate Controller and Principal Accounting Officer and supervised a team with responsibility for accounting, treasury operations, regulatory reporting, sourcing, tax and internal controls. Before he joined First Niagara in November 2009, he spent 8 years at Huntington Bancshares Incorporated as Senior Vice President and Assistant Controller. Prior to Huntington, he also held positions of progressive responsibility at KeyCorp in its finance function and at Deloitte and Touche.

Subject to receipt of applicable regulatory approval, Mr. Ciroli's base salary will be $450,000 annually payable in cash. He will also receive a signing bonus of $100,000 as well as a guaranteed minimum cash bonus for 2014 of $225,000, payable in the first quarter of 2015. Mr. Ciroli will be entitled to an allowance for relocation expenses and to receive such fringe and other benefits and perquisites as are regularly and generally provided to other senior executives of the Company and the Bank, subject to the terms and conditions of any employee benefits plans and other arrangements maintained by the Company and the Bank.

Organizational Restructuring

On January 16, 2014, we completed an organizational restructuring to reduce expenses consistent with our previously communicated strategy of optimizing its cost structure across all business lines. As part of this restructuring initiative, we reduced full-time equivalents by approximately 350 during the first quarter 2014. Including the restructuring completed in the third quarter 2013, we have reduced staffing levels across the organization by approximately 600 full-time equivalents from our September 30, 2013 level.

Sale of Mortgage Servicing Rights

On December 18, 2013, we entered into a definitive agreement to sell $40.7 billion unpaid principal balance (net of write downs) of our mortgage servicing rights ("MSR") portfolio to Matrix Financial Services Corporation ("Matrix"), 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, we entered into an agreement with Matrix to subservice the residential mortgage loans sold to Matrix. As a result, we will receive subservicing income and retain a portion of the ancillary fees to be paid as the subservicer of the loans.

During the second quarter 2014, we had bulk sales of mortgage servicing rights related to $8.8 billion in underlying mortgage loans, of which $4.8 billion was simultaneously entered into an agreement with Two Harbors to subservice the residential mortgage loans covered under the agreement to sell.

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Summary of Operations

Our net income applicable to common stock for the three months ended June 30, 2014 was $25.5 million ($0.33 per diluted share), compared to $65.8 million ($1.10 per diluted share), for the three months ended June 30, 2013. Our net loss applicable to common stock for the six months ended June 30, 2014 was $53.4 million ($1.17 loss per share), compared to net income of $87.9 million ($1.43 income per diluted share) for the six months ended June 30, 2013. The change during the six months ended June 30, 2014, compared to the six months ended June 30, 2013, was affected to the following factors:

Net gain on loan sales decreased $182.2 million for the six months ended June 30, 2014, to $100.1 million, primarily due to lower mortgage volume, consistent with an overall industry production decrease impacted by the current interest rate environment;

Provision for loan losses increased by $66.5 million for the six months ended June 30, 2014, to $118.5 million, primarily driven by two changes in estimates: the evaluation of current data related to the loss emergence period and the evaluation of the enhanced risk associated with payment resets relating to interest-only loans;

Other noninterest income decreased by $60.9 million for the six months ended June 30, 2014, to a loss of $6.9 million, primarily due to the first quarter 2014 negative fair value adjustment primarily related to performing loans repurchased and the second quarter 2013 income of $49.1 million related to the reconsolidation, at fair value, of the HELOC securitization trusts as a result of a legal settlement;

Net loan fees and charges decreased by $25.7 million for the six months ended June 30, 2014, to $37.6 million, primarily due to lower mortgage volume, partially offset by an unanticipated benefit from a contract renegotiation; and

Loan administration income decreased $23.0 million for the six months ended June 30, 2014, to $33.5 million, primarily due to lower servicing revenue resulting from the sale of the MSR asset, while retaining subservicing, offset by higher net value of the MSR asset.

These decreases in net income were partially offset by the following factors:

Representation and warranty reserve - change in estimate decreased $42.8 million to $3.6 million for the six months ended June 30, 2014, primarily due to the benefit associated with the previously announced settlement agreements with Fannie Mae and Freddie Mac;

Legal and professional expense decreased $33.4 million to $11.8 million for the six months ended June 30, 2014, primarily due to lower consulting fees and a decrease in the fair value liability associated with the Department of Justice ("DOJ") settlement arising principally from updating of the related payment schedule within the settlement agreement; and

Compensation and benefit expense decreased $27.4 million to $120.8 million for the six months ended June 30, 2014, primarily due to a reduction in headcount.

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                           Selected Financial Ratios
                   (Dollars in thousands, except share data)
                                 Three Months Ended June 30,         Six Months Ended June 30,
                                    2014              2013             2014              2013
Mortgage loans originated (1) $    5,950,650     $ 10,882,129     $ 10,817,280      $ 23,305,492
Other loans originated        $      131,602     $     67,763     $    303,908      $    142,503
Mortgage loans sold and
securitized                   $    6,029,817     $ 11,123,821     $ 10,504,104      $ 23,946,700
Interest rate spread - bank
only (2)                                2.95 %           1.46 %           2.96  %           1.55 %
Net interest margin - bank
only (3)                                3.06 %           1.72 %           3.05  %           1.81 %
Interest rate spread -
consolidated (2)                        2.87 %           1.43 %           2.87  %           1.52 %
Net interest margin -
consolidated (3)                        2.98 %           1.66 %           2.97  %           1.75 %
Average common shares
outstanding                       56,230,458       56,053,922       56,212,422        56,014,126
Average fully diluted shares
outstanding                       56,822,102       56,419,163       56,212,422        56,417,122
Average interest earning
assets                        $    8,366,703     $ 11,311,945     $  8,099,742      $ 11,691,470
Average interest paying
liabilities                   $    6,795,144     $  9,642,543     $  6,580,494      $  9,988,671
Average stockholders' equity  $    1,381,948     $  1,238,787     $  1,413,192      $  1,206,563
Return on average assets                1.04 %           2.03 %          (1.12 )%           1.32 %
Return on average equity                7.38 %          21.23 %          (7.56 )%          14.57 %
Efficiency ratio                        73.6 %           65.3 %           87.4  %           73.1 %
Efficiency ratio (adjusted)
(4)                                     71.3 %           68.8 %           80.8  %           72.4 %
Equity/assets ratio (average
for the period)                        14.12 %           9.56 %          14.80  %           9.06 %
Charge-offs to average LHFI
(5)                                     0.78 %           6.96 %           1.07  %           4.88 %
Charge-offs, to average LHFI
adjusted (5)(6)                         0.78 %           3.56 %           0.94  %           3.24 %

                                            June 30, 2014     December 31, 2013      June 30, 2013
Book value per common share                $       19.90     $            20.66     $       17.66
Number of common shares outstanding           56,238,925             56,138,074        56,077,528
Mortgage loans serviced for others         $  25,342,335     $       25,743,396     $  68,320,534
Mortgage loans subserviced for others      $  43,103,393     $       40,431,865     $           -
Weighted average service fee (basis
points)                                             29.2                   28.7              29.5
Capitalized value of mortgage servicing
rights                                              1.14 %                 1.11 %            1.07 %
Mortgage servicing rights to Tier 1
capital (4)                                         24.3 %                 22.6 %            52.4 %
Ratio of allowance for loans losses to
nonperforming LHFI (5)                             263.1 %                145.9 %            94.2 %
Ratio of allowance for loan losses to LHFI
(5)                                                 7.41 %                 5.42 %            5.75 %
Ratio of nonperforming assets to total
assets (bank only)                                  1.54 %                 1.95 %            2.71 %
Equity-to-assets ratio                             13.95 %                15.16 %            9.84 %
Tier 1 leverage ratio (to adjusted total
assets) (6)                                        12.52 %                13.97 %           11.00 %
Total risk-based capital ratio (to
risk-weighted assets) (6)                          25.05 %                28.11 %           25.01 %
Number of banking centers                            106                    111               111
Number of loan origination centers                    32                     39                40
Number of employees (excludes loan
officers and account executives)                   2,481                  2,894             3,418
Number of loan officers and account
executives                                           260                    359               341

(1) Includes residential first mortgage and second mortgage loans.

(2) Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period and the annualized average rate of interest paid on average interest-bearing liabilities for the period.

(3) Net interest margin is the annualized effect of the net interest income divided by that period's average interest-earning assets.

(4) See Non-GAAP reconciliation.

(5) Excludes loans carried under the fair value option.

(6) Excludes charge-offs of $2.3 million related to the sale of nonperforming and TDR loans, during the six months ended June 30, 2014, and $38.3 million of charge-offs related to the sale of non-performing and TDR loans during both the three and six months ended June 30, 2013, respectively.

(7) Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of risk-based capital and total risk-based capital. These ratios are applicable to the Bank only.

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Net Interest Income

Net interest income is primarily the dollar value of the average yield we earn on the average balances of our interest-earning assets, less the dollar value of the average cost of funds we incur on the average balances of our interest-bearing liabilities. Interest income recorded on loans is reduced by the amortization net premiums and net deferred loan origination costs.

Net interest income increased to $62.4 million for the three months ended June 30, 2014, as compared to $47.1 million for the three months ended June 30, 2013. The increase for the three months ended June 30, 2014, is primarily due to the repayment of FHLB advances, lower average balances and rates. Net interest income represented 37.9 percent of our total revenue for the three month ended June 30, 2014, compared to 20.6 percent for the three month ended June 30, 2013.

Interest income decreased $13.2 million for the three months ended June 30, 2014 to $71.9 million, compared to $85.1 million during the three months ended June 30, 2013. The decrease in interest income was primarily driven by lower average balances in the mortgage loans available-for-sale and warehouse loans held-for-investment portfolios, primarily due to a decrease in mortgage loan originations during the three months ended June 30, 2014, as compared to the . . .

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