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Press release from PR Newswire

Flagstar Reports Second Quarter Results

Tuesday, July 26, 2011

Flagstar Reports Second Quarter Results16:30 EDT Tuesday, July 26, 2011Transformation continues supported by historically high capital and liquidity ratios Announces agreement to sell retail branches in GeorgiaTROY, Mich., July 26, 2011 /PRNewswire/ -- Flagstar Bancorp, Inc. (NYSE: FBC) (the ?Company?), the holding company for Flagstar Bank, FSB (the ?Bank?), today reported a second quarter 2011 net loss applicable to common shareholders of $(74.9) million, as compared to a first quarter 2011 net loss of $(31.7) million and a second quarter 2010 net loss of $(97.0) million.?Our net loss this quarter, while an improvement of 23 percent from second quarter 2010, was principally the result of continued credit costs associated with our legacy balance sheet.  We are able to generate positive core earnings to offset those credit costs, driven by strong mortgage banking revenues, and are encouraged by the ongoing success we have had in implementing a number of initiatives to de-risk and generate high-quality interest-earning assets for our balance sheet.  We continue to take aggressive steps to put legacy issues behind us, and remain focused on balancing the solid revenue base provided by our long-standing mortgage business with our continued efforts to execute on our transformation strategy to a diversified super community bank,? commented Joseph P. Campanelli, Chairman of the Board, President and CEO.   Campanelli continued, ?We are encouraged by the early success of our commercial and specialty banking initiative, originating almost $100 million in high quality commercial loans for our balance sheet during the quarter.  In addition, we continue to grow our commercial loan portfolio, and maintain an active and robust pipeline that is consistent with our commercial growth strategy.  We also opened four new commercial banking centers during the quarter, and continue to attract experienced and highly talented commercial bankers to our team.  At the same time, we maintained strong capital and liquidity levels, and further de-risked our balance sheet by selling, for a minimal gain, $68.1 million in non-performing commercial real estate assets, all of which will help fuel our planned transition.?Key Items for Second Quarter 2011: Entered into an agreement with PNC Bank to divest the Company?s Georgia deposit franchise (deposits and facilities).Sold $68.1 million of non-performing commercial real estate assets, resulting in a $0.6 million gain.  Originated commercial loans of $99.1 million, approximately a 300 percent increase from prior quarter.Increased held-for-investment loan portfolio $210.5 million, or 3.7 percent, from prior quarter.Continued to generate pre-tax, pre-credit cost income, with $41.0 million in second quarter 2011.Mortgage rate-lock commitments increased $0.9 billion, or 16.8 percent, from prior quarter.Decreased total non-performing assets by $34.8 million, or 6.3 percent, from prior quarter.Asset resolution expense related to non-performing residential first mortgage and commercial loans decreased by 38.9 percent from the prior quarter, to $23.3 million.Average core deposits increased by 8.4 percent from prior quarter, to $2.7 billion. Strengthened Tier 1 capital ratio to 10.07 percent.Campanelli went on to say, ?The agreement with PNC to divest our Georgia retail franchise for book value was a win-win for both parties.  PNC will be acquiring a banking franchise with great potential, while Flagstar will be able to focus its growth strategy on our two major markets, the Midwest and the Northeast.?Second quarter 2011 net loss per share was $(0.14) per share (diluted) based on average shares outstanding of 553,946,000, as compared to a first quarter 2011 of $(0.06) per share (diluted) based on average shares outstanding of 553,555,000 and $(0.63) per share (diluted) based on average shares outstanding of 153,298,000 in the second quarter 2010.  For the six months ended June 30, 2011, the net loss applicable to common stockholders totaled $(106.6) million, or $(0.19) per share (diluted) based on average shares outstanding of 553,752,000, a 40 percent improvement as compared to $(178.9) million or $(1.55) per share (diluted) based on average shares of 115,707,000 during the same period 2010.Recent DevelopmentsThe Company announced that it has entered into an agreement for the sale or lease of its Georgia retail bank branch franchise to PNC Bank, N.A., part of The PNC Financial Services Group, Inc. (NYSE: PNC).  Under the agreement, PNC Bank will be purchasing the facilities or assuming the leases associated with 27 branch offices, and buying the associated business and retail deposits (approximately $240 million at June 30, 2011).  PNC Bank has agreed to pay net book value of the acquired real estate and fixed assets (approximately $42 million at June 30, 2011) associated with the branches and to assume all current lease obligations with respect to the branches.  The transaction is anticipated to close during December 2011 and is subject to regulatory approvals and other customary terms and conditions. For additional information on this transaction, refer to the Company's Form 8-K to be filed with the Securities and Exchange Commission.The 27 affected branches will operate normally through completion of the transaction.  Customer ATM cards, checks and accounts will function as usual.  Customers of these branches need not take any action at this time, and they will be contacted by both PNC and the Company prior to the branch transfer.Asset QualityDuring the second quarter 2011, the Company sold $68.1 million of non-performing commercial real estate assets, which resulted in a $0.6 million gain and is included in net gain (loss) on sale of assets. During the first quarter 2011, the Company sold $80.3 million of non-performing residential first mortgage loans which were included in the available-for-sale category. Since the fourth quarter 2010, the Company has sold $622.4 million in non-performing assets through bulk sales, which are in addition to loan or property sales in the ordinary course of business.Non-performing assets held-for-investment totaled $518.8 million at June 30, 2011, as compared to $553.5 million at March 31, 2011, and $1.2 billion at June 30, 2010.  This category of assets is comprised of non-performing loans (i.e., loans 90 days or more past due and matured loans), real estate owned and net repurchased assets, and it excludes repurchased loans that are guaranteed primarily by the Federal Housing Administration (FHA).  The $34.7 million decrease in the second quarter 2011, as compared to first quarter 2011,  consisted primarily of a $80.1 million decrease in non-performing commercial loans and commercial real estate owned ($68.1 million as the result of the above mentioned commercial real estate sale), offset in part by an $53.7 million increase in non-performing residential first mortgage loans.Allowance for loan losses at June 30, 2011 was $274.0 million, or 4.6 percent of loans held-for-investment and 67.9 percent of non-performing loans held-for-investment, as compared to $271.0 million, or 4.7 percent of loans held-for-investment and 73.6 percent of non-performing loans held-for-investment at March 31, 2011.  The decline in allowance for loan loss, as compared to second quarter 2010, was driven largely by a decrease in riskier loans as a result of the bulk sales of non-performing assets.  At June 30, 2010, the allowance for loan losses was $530.0 million, or 7.2 percent of loans held-for-investment and 52.3 percent of non-performing loans.The Company maintains a secondary marketing reserve on its balance sheet, which reflects the estimate of probable losses that currently exists on loans that it has sold or securitized into the secondary market, except for loans repurchased with government guarantees.  The secondary marketing reserve was $79.4 million as of June 30, 2011 and March 31, 2011, as compared to $76.0 million at June 30, 2010.  For the second quarter 2011, the Company incurred a secondary marketing reserve provision expense of $21.8 million, as compared to $22.7 million in the first quarter 2011 and $6.8 million in the second quarter 2010.  CapitalFlagstar Bank remained ?well-capitalized? for regulatory purposes at June 30, 2011, with regulatory capital ratios of 10.07 percent for Tier 1 capital and 19.73 percent for total risk-based capital. The Company had an equity-to-assets ratio of 9.27 percent at June 30, 2011.Mortgage Banking OperationsIn the second quarter 2011, gain on loan sales totaled $39.8 million, as compared to $50.2 million for the first quarter 2011 and $64.3 million for the second quarter 2010.  The decrease from the prior quarter is a result of increased competition in pricing during the quarter resulting in decreased spreads on originations, offset by an increase in fallout adjusted locks.  Notwithstanding the reduction in pricing, gain on sale margin increased in the quarter, as it is calculated based on loans sold, rather than on fallout adjusted locks and is therefore a trailing indicator of pricing.Mortgage rate lock commitments increased to $6.4 billion during the second quarter 2011, as compared to $5.5 billion during the first quarter 2011, and decreased from $8.3 billion during the second quarter 2010.  Mortgage loan originations, which are substantially comprised of agency-eligible residential first mortgage loans, were $4.6 billion during the second quarter 2011, a decrease from $4.9 billion in the first quarter 2011 and from $5.5 billion in the second quarter 2010.  Loan sales for the second quarter of 2011 decreased to $4.4 billion, as compared to $5.8 billion for the first quarter 2011 and $5.3 billion for the second quarter 2010. At June 30, 2011, loans serviced for others totaled $57.1 billion with a weighted average servicing fee of 30.3 basis points. This was a decrease from $59.6 billion at March 31, 2011, with a weighted average servicing fee of 30.2 basis points, and an increase from $50.4 billion at June 30, 2010 with a weighted average servicing fee of 32.4 basis points. During the second quarter, the Company sold $47.1 million in residential first mortgage servicing rights through bulk sales.    Net Interest MarginOn June 30, 2011, the Company implemented a reclassification in the financial reporting application of amounts due from FHA relating to the servicing of delinquent FHA loans to recognize the accrued credit from FHA as interest income.  Previously, income from FHA was applied as an offset to non-interest expense (asset resolution expense) relating to the servicing of delinquent FHA loans, and recorded on a net basis as asset resolution expense.  The impact of the reclassification on the three and six months ended June 30, 2011, was an increase in net interest income of $12.7 million and $25.5 million, respectively, with an equal increase to asset resolution expense and an increase in the Bank?s net interest margin of 21 basis points in both periods.  The impact of the reclassification on the three and six months ended June 30, 2010, was an increase in net interest income of $7.1 million and $13.2 million, respectively, with an equal increase to asset resolution expense and an increase in the Bank?s net interest margin of eight basis points and nine basis points, respectively.Net interest margin for the Bank was 1.86 percent for the second quarter 2011, as compared to 1.87 percent for the first quarter 2011 and 1.61 percent for the second quarter 2010 (reflecting the reclassification in the financial reporting application relating to the servicing of delinquent FHA loans as described above).  The slight decrease from first quarter 2011 reflects a 1.5 percent decline in average interest earning assets to $11.3 billion for the second quarter 2011 from $11.5 billion for the first quarter 2011.  Average interest-earning deposits, on which the Bank earns a minimal interest rate (25 basis points), were $1.5 billion in the second quarter 2011.  The Bank?s interest-earning deposits allow the Bank flexibility to fund its on-going strategic initiatives to increase commercial and specialty lending, as well as other mortgage related initiatives.   The Bank?s deposit cost for the second quarter 2011 was 1.50 percent, an 8.0 percent decline, compared to 1.63 percent in the first quarter 2011, and a 34.2 percent decline compared to 2.28 percent in the second quarter 2010.  The Bank reduced its deposit funding costs as higher yielding certificates of deposit matured and were replaced with lower-cost core deposits.  Net Interest IncomeSecond quarter 2011 net interest income was $51.3 million, as compared to $52.6 million during the first quarter 2011 and $49.6 million during the second quarter 2010.  The $1.3 million decrease from first quarter 2011 reflects the 1.5 percent decline in average interest-earning assets, including loans held-for-investment and loans available-for-sale, offset by an increase in securities classified as available-for-sale or trading. Provision for Loan LossesThe second quarter 2011 loan loss provision expense increased by $20.1 million to $48.4 million, as compared to $28.3 million in first quarter 2011 and decreased compared to $86.0 million in second quarter 2010.  The increase compared to the first quarter 2011 was due to an increase in residential loan portfolio provisions resulting from continued increases in delinquencies and on-going nationwide market pressures on home price values.  Loan loss provisions for the six months ended June 30, 2011 decreased 48.7 percent to $76.7 million from $149.6 million for the six months ended June 30, 2010.Non-interest IncomeSecond quarter 2011 non-interest income was $58.1 million, as compared to $96.3 million for the first quarter 2011 and $100.3 million for the second quarter 2010.  Non-interest income included the following components:Impairment on investment securities available-for-sale was $(15.6) million during the second quarter 2011, as compared to no impairment incurred during in the first quarter 2011, and an impairment of less than $0.4 million in the second quarter 2010.  The increase in impairment losses during the second quarter reflected the quarterly valuation impairment charge on the collateralized mortgage obligations in line with current industry forecasts for future home price expectations. Gain on loan sale income decreased by $10.4 million to $39.8 million in the second quarter 2011, as compared to $50.2 million for the first quarter 2011.  For more information, see Mortgage Banking Operations. Net servicing revenue, which is the combination of net loan administration income and the gain (loss) on trading securities (the on-balance sheet hedge of mortgage servicing rights), decreased by 22.5 percent to $30.5 million during second quarter 2011 as compared to $39.3 million during first quarter 2011.  The decrease as compared to first quarter 2011 was primarily attributable to a decline of 9.1 percent in the portfolio of mortgage servicing rights due to mortgage servicing right asset sales, a lower and more volatile interest rate environment, and a reduction in the capitalization of new servicing assets during the second quarter.Other fees and charges were a net expense of $15.9 million, as compared to a net expense of $13.3 million for the first quarter 2011.  The increase in expense was principally driven by a $1.9 million reduction in a one-time legal settlement fee and a $0.9 million decrease in secondary market reserve provisions, which are accrued for probable losses on loans that are expected to be repurchased from the secondary market. Non-interest ExpenseNon-interest expense was $130.9 million for the second quarter 2011, a decrease of 11.1 percent from $147.2 million for the first quarter 2011, and a decrease of 16.2 percent from $156.2 million for the second quarter 2010. Asset resolution expense, which are expenses associated with foreclosed properties, decreased by 38.9 percent to $23.3 million, as compared to $38.1 million in the first quarter of 2011. The decline was due to a $12.4 million decrease in the provision on real estate owned properties.  Compensation, benefits and commission expense decreased by $2.1 million to $61.2 million for the second quarter 2011, as compared to $63.3 million in first quarter 2011, and increased by $10.0 million as compared to $51.2 million in second quarter 2010.  The $10.0 million increase in compensation, benefits and commissions expense was primarily due to the increase in the number of employees at June 30, 2011, as compared to June 30, 2010. Federal deposit insurance premiums increased by $2.1 million in the second quarter 2011 to $10.8 million, as compared to $8.7 million in first quarter 2011 and $10.6 million in second quarter 2010.  The increase in second quarter 2011 premiums compared to first quarter 2011 was primarily due to the FDIC?s change in assessment methodology.Balance Sheet CompositionTotal assets at June 30, 2011 were $12.7 billion, as compared to $13.0 billion at March 31, 2011 and $13.7 billion at June 30, 2010.  During the second quarter 2011, the Bank deployed $963.5 million of interest-earning deposits into $393.4 million of loans available-for-sale and $210.5 million of loans held-for-investment, primarily commercial and specialty loan originations and warehouse lending. Additionally, non-core deposits declined $343.9 million during the second quarter 2011.Funding Sources The Bank?s primary sources of funds are deposits obtained through its community banking branches and its internet banking platform, as well as deposits obtained from municipalities and investment banking firms.  Funds are also obtained from time to time through loan repayments and sales of loans and securities in the ordinary course of business, advances from the FHLB, community banking operations, customer escrow accounts and security repurchase agreements.  The Bank relies upon several of these sources at different times to address its daily and forecasted liquidity needs for operational requirements and policy levels while managing overall net interest costs.  Retail deposits were $5.2 billion at June 30, 2011, as compared to $5.5 billion at March 31, 2011 and $5.2 billion at June 30, 2010.  At June 30, 2011, the Bank had a collateralized $4.4 billion line of credit with the FHLB, of which $3.4 billion was advanced or borrowed, and $1.0 billion remained as borrowing capacity. The Bank also had $1.6 billion of liquidity in the form of cash on hand, interest-earning deposits and securities available-for-sale or trading.Community Banking Operations Flagstar Bank had 162 community banking branches at June 30, 2011, December 31, 2010 and June 30, 2010.  Earnings Conference CallThe Company's quarterly earnings conference call will be held on Wednesday, July 27, 2011 from 11 a.m. until noon (Eastern). Questions for discussion at the conference call may be submitted in advance by e-mail to investors@flagstar.com or asked live during the conference call.The conference call and accompanying slide presentation will be webcast live on the Investor Relations section of the Company?s Web site, www.flagstar.com, with replays available at that site for at least 10 days.To listen by telephone, please call at least 10 minutes prior to the start of the conference call at (866) 834-5823 toll free or (973) 341-3018 and use passcode: 82054354.Flagstar Bancorp, with $12.7 billion in total assets, is the largest publicly held savings bank headquartered in the Midwest.  At June 30, 2011, Flagstar operated 162 banking centers in Michigan, Indiana and Georgia and 30 loan origination centers in 15 states.  Flagstar Bank originates loans nationwide and is one of the leading originators of residential first mortgage loans.The information contained in this release is not intended as a solicitation to buy Flagstar Bancorp, Inc. stock and is provided for general information.  This release contains certain statements that may constitute ?forward-looking statements? within the meaning of federal securities laws.  These forward-looking statements include statements about the Company?s beliefs, plans, objectives, goals, expectations, anticipations, estimates, and intentions, that are subject to significant risks and uncertainties, including, but are not limited to, the fact the sale of the Bank's branches in Georgia may not be consummated pursuant to its terms, at the time anticipated or at all, and are subject to change based upon various factors (some of which may be beyond the Company?s control).  The words ?may,? ?could,? ?should,? ?would,? ?believe,? and similar expressions are intended to identify forward-looking statements.Flagstar Bancorp, Inc.Consolidated Statements of Financial Condition(In thousands, except share data)June 30, 2011March 31, 2011December 31, 2010June 30, 2010Assets(Unaudited)    Cash and cash items$56,031$                  49,677$                   60,039$                52,867    Interest-earning deposits701,8521,665,342893,495702,251         Cash and cash equivalents757,8831,715,019953,534755,118    Securities classified as trading292,438160,650160,775487,370    Securities classified as available-for-sale551,173452,368475,225544,474    Other investments - restricted---1,951    Loans available-for-sale         ($1,870,499, $1,484,824, $2,343,638 and $1,692,286 at fair value at June 30, 2011, March 31, 2011, December 31, 2010 and June 30, 2010, respectively)2,002,8881,609,5012,585,2001,849,718    Loans repurchased with government guarantees1,711,5911,756,5341,674,7521,323,517    Loans held-for-investment ($21,514, $22,198, $19,011 and $14,935 at fair value at June 30, 2011, March 31, 2011, December 31, 2010 and June 30, 2010, respectively)5,975,1345,764,6756,305,4837,365,817         Less: allowance for loan losses(274,000)(271,000)(274,000)(530,000)         Loans held-for-investment, net5,701,1345,493,6756,031,4836,835,817             Total interest-earning assets10,961,07611,138,07011,820,93011,745,098    Accrued interest receivable91,52786,86283,89380,842    Repossessed assets, net110,050146,372151,085198,230    Federal Home Loan Bank stock301,737337,190337,190373,443    Premises and equipment, net244,565233,621232,203234,880    Mortgage servicing rights at fair value577,401635,122580,299474,814    Other assets320,425390,053377,865533,656             Total assets$12,662,812$                13,016,967$            13,643,504$     13,693,830Liabilities and Stockholders' Equity    Deposits$7,405,027$                  7,748,910$              7,998,099$       8,254,046    Federal Home Loan Bank advances3,406,5713,400,0003,725,0833,650,000    Long-term debt248,610248,610248,610248,635            Total interest-bearing liabilities11,060,20811,397,52011,971,79212,152,681    Accrued interest payable10,93510,12412,96525,117    Secondary market reserve79,40079,40079,40076,000    Other liabilities337,829292,901319,684363,671            Total liabilities11,488,37211,779,94512,383,84112,617,469    Commitments and contingencies ? Note 21----    Stockholders' Equity    Preferred stock $0.01 par value, liquidation value $1,000 per share, 25,000,000 shares authorized; 266,657 issued and outstanding and outstanding at June 30, 2011, March 31, 2011, December 31, 2010, and June 30, 2010, respectively3333    Common stock $0.01 par value, 700,000,000  shares authorized; 554,163,337 and 553,313,113 and 153,338,007 shares issued and outstanding at June 30, 2011, March 31, 2011, December 31, 2010 and June 30, 2010,  respectively5,5425,5375,5331,533    Additional paid in capital ? preferred251,956250,569249,193246,481    Additional paid in capital ? common 1,464,1311,462,6201,461,3731,077,244    Accumulated other comprehensive loss (357)(9,760)(16,165)(23,282)    Retained earnings (accumulated deficit)(546,835)(471,947)(440,274)(225,618)            Total stockholders' equity1,174,4401,237,0221,259,6631,076,361            Total liabilities and stockholders' equity$12,662,812$                13,016,967$            13,643,504$        13,693,830Flagstar Bancorp, Inc.Consolidated Statements of Operations(In thousands, except per share data)(Unaudited)For the Three Months Ended For the Six Months EndedJune 30, 2011March 31, 2011June 30, 2010June 30, 2011June 30, 2010 Interest Income Loans $                   98,155$                 102,115$               115,953$                  200,269$              232,234 Securities classified as available-for-sale or trading8,9498,09720,73517,04636,102 Interest-earning deposits and other9579684821,9251,126    Total interest income108,061111,180137,170219,240269,462 Interest Expense Deposits24,90227,02241,52151,92483,407 FHLB advances30,21829,97942,15160,19683,938 Security repurchase agreements--1,597-2,750 Other1,6171,6062,3483,2236,044    Total interest expense56,73758,60787,617115,343176,139 Net interest income51,32452,57349,553103,89793,323 Provision for loan losses48,38428,30986,01976,693149,579 Net interest expense after provision for loan losses2,94024,264(36,466)27,204(56,256) Non-Interest Income Loan fees and charges14,71216,13820,23630,85036,565 Deposit fees and charges7,8457,5008,79815,34517,211 Loan administration30,45039,336(54,665)69,786(28,515) Gain (loss) on trading securities102(74)69,6602866,348 Loss on residual and transferors' interest(2,258)(2,381)(4,312)(4,640)(6,994) Net gain on loan sales39,82750,18464,25790,012116,823 Net loss on sales of mortgage servicing rights(2,381)(112)(1,266)(2,493)(3,479) Net gain on securities available-for-sale--4,523-6,689 Net gain (loss) on sale of assets1,293(1,036)-256-    Total other-than-temporary impairment gain 39,725-11,27439,72536,796    Loss recognized in other comprehensive           income before taxes(55,309)-(11,665)(55,309)(40,473) Net impairment losses recognized in earnings(15,584)-(391)(15,584)(3,677) Other fees and charges, net(15,928)(13,289)(6,509)(29,216)(28,642)    Total non-interest income58,07896,266100,331154,344172,329 Non-Interest Expense Compensation, commissions and benefits61,15663,30851,104124,464112,125 Occupancy and equipment16,96916,61815,90333,58731,914 Asset resolution23,28238,11052,58761,39175,246 Federal insurance premiums10,7898,72510,64019,51520,688 Other taxes6678668411,5331,696 Warrant (income) expense(1,998)(827)(3,486)(2,825)(2,259)Loss on extinguishment of debt--8,971-8,971 General and administrative20,05720,43019,62140,48837,229    Total non-interest expense130,922147,230156,181278,153285,610 Loss before federal income taxes(69,904)(26,700)(92,316)(96,605)(169,537) Provision for federal income taxes264264-528- Net Loss(70,168)(26,964)(92,316)(97,133)(169,537) Preferred stock dividend/accretion (4,720)(4,710)(4,690)(9,429)(9,369) Net loss applicable to common stock$                   (74,888)$                  (31,674)$                 (97,006)$                (106,562)$           (178,906) Loss per share       Basic $                       (0.14)$                    (0.06)$                     (0.63)$                      (0.19)$                 (1.55)       Diluted $                       (0.14)$                    (0.06)$                     (0.63)$                      (0.19)$                 (1.55)Flagstar Bancorp, Inc.Summary of Selected Consolidated Financial and Statistical Data(Dollars in thousands, except per share data)(Unaudited)For the Three Months EndedFor the Six Months EndedSummary of ConsolidatedStatements of OperationsJune 30, 2011March 31, 2011June 30,2010June 30, 2011June 30,2010Return on average assets(2.32)%(0.96)%(2.72)%(1.64)%(2.55)%Return on average equity(24.87)%(10.17)%(34.72)%(17.40)%(37.31)%Efficiency ratio119.7%98.8%104.2%107.7%107.5%Equity/assets ratio (average for the period)9.33%9.48%7.84%9.40%6.84%Residential first mortgage loans originated $   4,642,706$      4,856,312$     5,451,667$          9,499,017$       9,776,788Other loans originated $      152,566$           31,363$            6,935$             183,929$            19,662Mortgage loans sold and securitized $   4,362,518$      5,829,508$     5,259,830$        10,192,026$     9,796,450Interest rate spread ? Bank only (1)1.62%1.62%1.29%1.62%1.31%Net interest margin ? Bank only (2) 1.86%1.87%1.61%1.87%1.57%Interest rate spread ? Consolidated (1) 1.61%1.61%1.28%1.61%1.27%Net interest margin ? Consolidated (2)1.81%1.81%1.54%1.81%1.47%Average common shares outstanding 553,946,138553,554,886153,298,115553,751,593115,707,181Average fully diluted shares outstanding 553,946,138553,554,886153,298,115553,751,593115,707,181Average interest earning assets$ 11,297,984$    11,473,046$   12,746,811$        11,385,031$     12,514,547Average interest paying liabilities$ 10,301,159$    10,460,463$   11,641,804$        10,380,371$     11,707,054Average stockholder's equity$   1,204,652$      1,245,229$     1,117,686$          1,224,829$          959,039Charge-offs to average investment loans       (annualized) 3.15%2.14%5.07%2.64%5.42%June 31,2011March 31, 2011December 31,2010June 30,2010Equity/assets ratio9.27%9.50%9.23%7.86%Core capital ratio (3)10.07%9.87%9.61%9.24%Total risk-based capital ratio (3)19.73%20.51%18.55%17.20%Book value per common share$                  1.66$                   1.78$                   1.83$                   5.41Number of common shares outstanding 554,163,337553,711,848553,313,113153,338,007Mortgage loans serviced for others$       57,087,989$        59,577,239$        56,040,063$        50,385,208Weighted average service fee (bps)30.330.230.832.4Capitalized value of mortgage servicing rights1.01%1.07%1.04%0.94%Ratio of allowance for loan losses to non-    performing loans held-for-investment (4)67.9%73.6%86.1%52.3%Ratio of allowance for loan losses to loans    held-for-investment (4)4.59%4.70%4.35%7.20%Ratio of non-performing assets to total assets    (bank only) 4.10%4.26%4.35%9.06%Number of bank branches162162162162Number of loan origination centers30292728Number of employees (excluding loan officers   and account executives)2,9903,0303,0012,885Number of loan officers and account executives316306278296(1) 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.(2) Net interest margin is the annualized effect of the net interest income divided by that period's average interest-earning assets.(3) Based on adjusted total assets for purposes of core capital and risk-weighted assets for purposes of total risk-based capital.  These ratios are applicable to the Bank only.  (4) Bank only and does not include non-performing loans available-for-saleLoan Originations(Dollars in thousands)(Unaudited)For the Three Months EndedJune 30,2011March 31,2011June 30,2010Consumer loans:    Residential first mortgage $        4,642,70696.8%$   4,856,31299.3%$     5,451,66799.9%    Other consumer (1)2,6840.11,2000.11,577-Total consumer loans 4,645,39096.94,857,51299.45,453,24499.9Commercial loans (2)149,8823.130,1630.65,9950.1      Total loan originations$        4,795,272100.0%$   4,887,675100.0%$     5,459,239100.0%For the Six Months EndedJune 30,2011June 30,2010Consumer loans:    Residential first mortgage $        9,499,01798.1%$   9,776,78899.8%    Other consumer (1)3,8840.17,4650.1Total consumer loans         9,502,90198.2   9,784,25399.9Commercial loans (2)180,0451.812,1970.1      Total loan originations$       9,682,946100.0%$   9,796,450100.0%(1)  Other consumer loans include: second mortgage, construction, warehouse lending, HELOC and other consumer loans.(2)  Commercial loans include: commercial real estate, commercial and industrial and commercial lease financing loans.Loans Held-for-Investment(Dollars in thousands)(Unaudited)June 30,2011March 31,2011December 31,2010June 30,2010Consumer loans:Residential first mortgage$   3,744,34262.7%$     3,751,77265.1%$      3,784,70060.1%$         4,614,82262.7%Second mortgage 155,5372.6165,1612.8174,7892.8196,7022.7Construction 898-3,2460.18,0120.113,0030.2Warehouse lending513,6788.6303,7855.3720,77011.4702,4559.5HELOC241,3964.0255,0124.4271,3264.3294,6194.0Other77,0521.381,0371.486,7101.493,6311.3    Total consumer loans4,732,90379.24,560,01379.15,046,30780.15,915,23280.4Commercial loans:Commercial real estate 1,111,13118.61,170,19820.31,250,30119.81,439,32419.5Commercial and industrial106,9431.89,3260.28,8750.111,2610.1Commercial lease financing 24,1570.425,1380.4----    Total commercial loans1,242,23120.81,204,66220.91,259,17619.91,450,58519.6     Total loans held-for-investment$   5,975,134100.0%$     5,764,675100.0%$      6,305,483100.0%$         7,365,817100.0%Composition of Mortgage Loans Held-for-Investment(In thousands)(Unaudited)June 30, 2011March 31, 2011Portfolio Balance (1)Allowance (1)Portfolio Balance (1)Allowance (1)     Performing modified (TDR)$                    529,588$                     44,838$                    562,570$                   45,309     Performing and not delinquent within             last 36 months2,237,48626,6962,326,48629,798     Performing with government             insurance120,059-127,953-     Other performing650,70635,963631,83329,886     Non-performing - 90+ day delinquent241,25853,077146,95138,986     Non-performing with government            insurance60,14790266,4601,513     30 day and 60 day delinquent61,5334,10357,9264,642Total$                 3,900,777$                   165,579$                 3,920,179$                 150,134December 31, 2010June 30, 2010Portfolio Balance (1)Allowance (1)Portfolio Balance (1)Allowance (1)     Performing modified (TDR)$                    576,594$                     46,857$                    479,635$                   44,467     Performing and not delinquent within             last 36 months2,084,57827,7002,416,30231,836     Performing with government             insurance122,677-136,065-     Other performing987,97543,4621,000,84350,664     Non-performing - 90+ day delinquent76,57219,786651,630180,125     Non-performing with government            insurance56,5871,91543,964818     30 day and 60 day delinquent62,5184,86696,0884,621Total$                 3,967,501$                   144,586$                 4,824,527$                 312,531(1)  Includes residential first mortgage, second mortgage and construction loans.Composition of Commercial Loans Held-for-Investment(In thousands)(Unaudited)June 30, 2011  March 31, 2011Portfolio Balance (1)Allowance (1)Portfolio Balance (1)Allowance (1)     Performing ? not impaired$                       966,754$                    34,190$                    893,670$                    33,766     Special mention ? not impaired91,1047,90197,6247,316     Impaired82,49619,6305,649957     Non-performing ? not impaired4021763,91515,834     Non-performing101,47521,885143,80436,429Total$                    1,242,23183,623$                 1,204,662$                    94,302December 31, 2010June 30, 2010Portfolio Balance (1)Allowance (1)Portfolio Balance (1)Allowance (1)     Performing ? not impaired$                    933,557$                    31,291$               918,672$                  30,289     Special mention ? not impaired85,1035,907117,1829,525     Impaired73,63117,18114,022296     Non-performing ? not impaired6,48575294,08319,907     Non-performing160,40039,847306,626109,764Total$                 1,259,176$                    94,978$            1,450,585$                169,781(1)  Includes commercial real estate, commercial and industrial, and commercial lease financing loans.Allowance for Loan Losses(Dollars in thousands)(Unaudited)For the Three Months EndedFor the Six Months EndedJune 30, 2011March 31, 2011June 30, 2010June 30, 2011June 30, 2010Beginning balance$          271,000$          274,000$     538,000$               274,000$           524,000Provision for loan losses 48,38428,30986,01976,693149,579Charge-offsConsumer loans:     Residential first mortgage (8,383)(2,482)(45,597)(10,865)(75,282)     Second mortgage(6,138)(5,778)(8,401)(11,916)(15,096)     Construction (419)-(60)(419)(81)     Warehouse lending(288)-(1,278)(288)(1,749)HELOC(4,925)(5,063)(7,363)(9,988)(12,240)Other(507)(839)(982)(1,346)(1,616) Total consumer loans(20,660)(14,162)(63,681)(34,822)(106,064)Commercial loans:     Commercial real estate(25,957)(19,289)(31,402)(45,246)(39,736)     Commercial and industrial(9)(48)(316)(57)(463) Total commercial loans(25,966)(19,337)(31,718)(45,303)(40,199) Other(639)(620)(688)(1,259)(1,385)Total charge-offs$            (47,265)$            (34,119)$        (96,087)$                 (81,384)$           (147,648)RecoveriesConsumer loans:     Residential first mortgage$                    158$                    336$               585$                        494$                  1,249     Second mortgage3448663931,210658     Construction -1415     Warehouse lending-553553HELOC443486348929702Other 290239248529549Total consumer loans1,2351,9331,6313,1683,216Commercial loans:     Commercial real estate4627292271,191600     Commercial and industrial--2-2Total commercial loans4627292291,191602Other184148208332251Total recoveries$                 1,881$                 2,810$            2,068$                     4,691$                  4,069Charge-offs, net of recoveries$            (45,384)$            (31,309)$        (94,019)$                 (76,693)$           (143,579)Ending balance$             274,000$             271,000$        530,000$                 274,000$             530,000Net charge-off ratio 3.15%2.14%5.07%2.64%3.85%Composition of Allowance for Loan LossesAs of June 30, 2011(In thousands)(Unaudited)General ReservesSpecific ReservesTotalConsumer loans:   Residential first mortgage $                    135,975$                     9,269$               145,244   Second mortgage 19,53456320,097   Construction 16078238   Warehouse lending 8747461,620   HELOC16,230-16,230   Other1,78811,789Total consumer loans174,56110,657185,218Commercial loans:   Commercial real estate 42,03339,09581,128   Commercial and industrial 176-176   Commercial lease financing 1,7325882,320Total commercial loans43,94139,68383,624   Other and unallocated  5,158-5,158Total allowance for loan losses$                    223,660$                   50,340$               274,000Non-Performing Loans and Assets(Dollars in thousands)(Unaudited)June 30, 2011March 31,2011December 31,2010June 30, 2010Non-performing loans held-for-investment$               403,381$           368,152$               318,416$          1,013,828Real estate and other non-performing assets, net110,050178,774179,557226,215Nonperforming assets held-for-investment, net513,431546,926497,9731,240,043Non-performing loans available-for-sale5,3416,59894,889-Total non-performing assets including loans available-for-sale$               518,772$           553,524$               592,862$          1,240,043Ratio of nonperforming loans held-for-     investment to loans held-for-investment6.75%6.39%5.05%13.76%Ratio of non-performing assets to total assets4.10%4.26%4.35%9.06%Asset Quality ? Loans Held-for-Investment(Dollars in thousands)(Unaudited)June 30, 2011March 31, 2011December 31, 2010June 30, 2010Days delinquentBalance% of TotalBalance% of TotalBalance% of TotalBalance% of Total30$             92,5771.5%$             94,1321.6%$           133,4492.1%$          112,6941.5%6046,2690.856,0371.053,7450.983,0461.190+ and matured       delinquent403,3816.8368,1526.4318,4165.01,013,82813.8Total$           542,2279.1%$           518,3219.0%$           505,6108.0%1,209,56816.4%Loans held-for-       investment$        5,975,134$        5,764,675$        6,305,483$       7,365,817Gain on Loan Sales and Securitizations(Dollars in thousands)(Unaudited)For the Three Months EndedJune 30, 2011March 31, 2011June 30, 2010Description(000's)bps(000's)bps(000's)bpsValuation gain (loss):     Value of interest rate locks$            (2,860)(7)$               (616)(1)$               33,07563     Value of forward sales(3,657)(8)(40,361)(69)(58,475)(111)     Fair value of loans available for sale82,76019044,32276103,643197     LOCOM adjustments on loans held-for-         investment46-(30)-(45)-Total valuation gains76,2891753,315678,198149Sales gains (losses):     Marketing gains, net of adjustments21,86550751126,15449     Pair-off gains (losses)(56,951)(131)48,45883(33,309)(63)     Provisions for secondary marketing reserve(1,375)(3)(2,339)(4)(6,786)(13)Total sales gains(36,462)(84)46,87080(13,941)(27)Total gain on loan sales and securitizations39,8279150,1858664,257122Total loan sales and securitizations$        4,362,518$        5,829,508$          5,259,830For the Six Months EndedJune 30, 2011June 30, 2010Description(000's)bps(000's)bpsValuation gain (loss):     Value of interest rate locks$            (3,476)(3)$               36,09935     Value of forward sales(44,018)(43)(78,530)(76)     Fair value of loans available for sale127,082124162,720158     LOCOM adjustments on loans held-for-         investment16-(133)-Total valuation gains79,60478120,156117Sales gains (losses):     Marketing gains, net of adjustments22,6162253,96953     Pair-off gains (losses)(8,494)(8)(43,373)(42)     Provisions for secondary marketing reserve(3,714)(4)(13,929)(14)Total sales gains10,40810(3,333)(3)Total gain on loan sales and securitizations90,01288$116,823114Total loan sales and securitizations$      10,192,026$        10,274,578Average Balances, Yields and Rates(Dollars in thousands)(Unaudited)For the Three Months EndedJune 30, 2011March 31, 2011June 30, 2010Average BalanceAnnualizedYield/RateAverage BalanceAnnualizedYield/RateAverage BalanceAnnualizedYield/RateInterest-Earning Assets:Loans available-for-sale$        1,509,6924.72%$        1,683,8144.44%$        1,675,5025.00%Loans repurchased with     government guarantees1,752,8163.031,745,3912.931,173,3982.44Loans held-for-investment:     Consumer loans (1)4,551,2674.594,615,6884.835,885,2614.82     Commercial loans (1)1,211,2844.851,228,4784.851,535,0254.38Loans held-for-investment5,762,5514.655,844,1664.847,420,2864.73Securities classified as available-for-sale     or trading724,6944.94629,4445.151,653,6625.02Interest-earning deposits and other1,548,2310.251,570,2310.25823,9630.24Total interest-earning assets11,297,9843.8211,473,0463.8812,746,8114.31Other assets1,612,2931,665,3671,517,946Total assets$      12,910,277$      13,138,413$      14,264,757Interest-Bearing Liabilities:         Demand deposits$           409,6630.33$           398,3600.39%$           388,4020.57%         Savings deposits1,182,1450.791,075,2530.90691,1700.90         Money market deposits579,3610.73555,9830.78562,4420.96         Certificate of deposits3,002,3631.813,185,6141.933,313,7112.94      Total retail deposits5,173,5321.345,215,2101.484,955,7252.24         Demand deposits66,5490.5577,7470.54392,0540.48         Savings deposits433,6420.65357,1220.6568,7220.59         Certificate of deposits237,6000.67251,6460.69245,7020.81      Total government deposits737,7910.65686,5150.65706,4780.60      Wholesale deposits741,0243.46841,0733.341,628,9403.14   Total deposits6,652,3471.506,742,7981.637,291,1432.28   FHLB advances3,400,2023.563,469,0553.503,891,7584.34   Security repurchase agreements----210,2683.05   Other248,6102.61248,6102.62248,6353.79Total interest-bearing liabilities 10,301,1592.2110,460,4632.2711,641,8043.03Other liabilities1,404,4661,432,7211,505,267Stockholder's equity1,204,6521,245,2291,117,686Total liabilities and stockholder's equity$      12,910,277$      13,138,413$      14,264,757(1)  Consumer loans include: residential first mortgage, second mortgage, construction, warehouse lending, HELOC and other consumer loans. Commercial loans include: commercial real estate, commercial and industrial, and commercial lease financing loans.Average Balances, Yields and Rates(Dollars in thousands)(Unaudited)For the Six Months EndedJune 30, 2011June 30, 2010Average BalanceAnnualizedYield/RateAverage BalanceAnnualizedYield/RateInterest-Earning Assets:Loans available-for-sale$        1,596,2724.57%$        1,598,9964.99%Loans repurchased with     government guarantees1,749,1242.981,045,1402.53Loans held-for-investment:     Consumer loans (1)4,583,2994.725,885,0684.87     Commercial loans (1)1,219,8344.851,569,0254.56Loans held-for-investment5,803,1334.757,454,0934.81Securities classified as available-for-sale     or trading677,3325.041,397,0185.19Interest-earning deposits and other1,559,1700.251,019,3000.22Total interest-earning assets11,385,0313.8512,514,5474.32Other assets1,638,6841,500,333Total assets$      13,023,715$      14,014,880Interest-Bearing Liabilities:         Demand deposits$           404,0430.36$           379,2600.56%         Savings deposits1,128,9940.85690,0800.87         Money market deposits567,7370.76572,0910.92         Certificate of deposits3,093,4821.873,352,0202.95      Total retail deposits5,194,2561.414,993,4512.25         Demand deposits72,1170.55342,2540.44         Savings deposits395,5940.6572,9540.53         Certificate of deposits244,5840.68259,6160.78      Total government deposits712,2950.65674,8240.58      Wholesale deposits790,7723.401,709,2413.04   Total deposits6,697,3231.567,377,5162.28   FHLB advances3,434,4383.533,895,8564.34   Security repurchase agreements--159,4163.48   Other248,6102.61274,2664.43Total interest-bearing liabilities 10,380,3702.2411,707,0543.03Other liabilities1,418,5161,348,787Stockholder's equity1,224,829959,039Total liabilities and stockholder's equity$      13,023,715$      14,014,880(1) Consumer loans include: residential first mortgage, second mortgage, construction, warehouse lending, HELOC and other consumer loans. Commercial loans include: commercial real estate, commercial and industrial, and commercial lease financing loans.Pre-tax, pre-credit-cost Income(Non GAAP measure)(Dollars in thousands)(Unaudited)For the Three Months EndedFor the Six Months EndedJune 30, 2011March 31, 2011June 30, 2010June 30, 2011June 30, 2010Loss before tax provision$     (69,904)$         (26,700)$       (92,316)$         (96,605)$       (169,537)Add back:     Provision for loan losses48,38428,30986,01976,693149,579     Asset resolution23,28238,11052,58761,39175,246     Other than temporary impairment           on AFS investments15,584-39115,5843,677     Secondary marketing reserve           provision21,36420,42711,38941,79138,216     Write down of residual interest2,2582,3814,3124,6396,994     Reserve increase for reinsurance--433-433          Total credit-related-costs:110,87289,227155,131200,098274,145Pre-tax, pre-credit-cost income$        40,968$            62,527$          62,815$           103,493$           104,608SOURCE Flagstar Bancorp, Inc.For further information: Paul D. Borja, Executive Vice President / CFO, or Bradley T. Howes, Investor Relations Officer, +1-248-312-2000