After posting a loss of $78.9 million in the first quarter of 2014, Michigan's largest community bank, Flagstar Bancorp (FBC), reversed course in the second quarter and posted a net income of $25.5 million, or $0.33 per diluted share.
The company cited improved net interest income and gain on loan sales, increased mortgage rate lock commitments and loan origination volume and a continued focus on expense management as drivers of the income growth.
"Our second-quarter results reflect the continued enhancements, that we began in 2013, to put the bank in a position to be profitable," said Sandro DiNello, the company's president and CEO.
“We continue to focus on controlling our noninterest expense in the current mortgage environment and are managing expenses in order to be profitable in any origination environment,” DiNello added. “While we are pleased with these results, this quarter brought two changes that impacted pretax income by approximately $20 million, albeit favorably.
“Overall, we are encouraged by our progress, especially as it relates to our growth in net interest income and net gain on sale income, as well as our continued expense discipline."
According to the bank, second quarter 2014 net interest income increased to $62.4 million, as compared to $58.2 million for the first quarter 2014 and $47.1 million for the second quarter 2013. Of the $4.2 million net increase from the prior quarter, $4.6 million was attributable to an increase in volume of average net interest earning assets.
This increase was partially offset by higher funding costs. Net interest margin for the bank increased to 3.06% for second quarter 2014, as compared to 3.05% for the first quarter 2014 and 1.72% for the second quarter 2013.
Net transaction costs on sales of mortgage servicing rights decreased to an expense of $2.7 million for the second quarter 2014, as compared to income of $3.6 million for the first quarter 2014 and an expense of $4.3 million for the second quarter 2013. The decrease from the prior quarter was primarily due to the first quarter 2014 release of holdback reserves on sales completed in prior periods.
Loan administration income (including off-balance sheet hedges of mortgage servicing rights) decreased to $13.9 million for the second quarter 2014, as compared to $19.6 million for the first quarter 2014 and $36.2 million for the second quarter 2013. The decrease was due to negative mortgage servicing rights fair value adjustments.
Compensation and benefits decreased to $55.2 million for the second quarter 2014, as compared to $65.6 million for the first quarter 2014 and $70.9 million for the second quarter 2013. The decrease from the prior quarter was primarily due to the effect of previously announced staff reductions that occurred during the first quarter 2014.
In the last year, the lender outsourced its default servicing and announced layoffs, while entering into massive mortgage settlements with insurers and government-sponsored enterprises.
The clincher came in January when Flagstar said it planned to slash 600 jobs as part of said massive restructuring initiative.
The bank maintains a representation and warranty reserve on its balance sheet, which reflects an estimate of losses that may occur both on loans that have been sold or securitized into the secondary market and those currently in the repurchase pipeline, primarily with Fannie Mae and Freddie Mac.
As of June 30, 2014, the representation and warranty reserve was $50 million, as compared to $48 million on March 31, 2014 and $185 million on June 30, 2013. The provisions related to the representation and warranty reserve – change in estimate was $5.2 million for the second quarter 2014, as compared to a benefit of $1.7 million for the first quarter 2014 and a provision of $28.9 million for the second quarter 2013.
