Flagstar's Profit Improves on Drop in Value of Legal Settlement Liability

Flagstar Bancorp's quarterly profit increased after a decline in the value of a 2012 legal settlement liability tied to its mortgage lending practices.

The $14 billion-asset company's third-quarter net income rose 21% from a year earlier, to $57 million, or 96 cents a share.

During the third quarter, Flagstar accepted a $200 million dividend payment from its bank. Because of that dividend, and an expectation of more dividend payments, Flagstar updated the projected timing of its future payments to the Justice Department to satisfy a legal settlement. In total, the moves lowered the fair value of Flagstar's legal settlement liability to $60 million at Sept. 30, from $84 million on June 30.

The reduction of the value of the settlement liability produced a $24 million benefit to Flagstar's third-quarter noninterest income. In total, noninterest income rose 22% to $156 million.

Net interest income, including the loan-loss provision, fell 1% to $73 million. The company recorded a $7 million provision, compared to a $1 million reversal a year earlier, as Flagstar established a reserve for repossessed loans with government guarantees.

Mortgage originations rose 17% to $9.2 billion. Flagstar sold and securitized $8.7 billion in mortgages, representing a 19% increase.

Noninterest expense rose 8% to $142 million because of compensation and benefits, commissions and occupancy and equipment costs.

Flagstar in July 2012 agreed to a settlement with the Justice Department over an investigation into its underwriting practices on loans insured by the Federal Housing Administration and Department of Housing and Urban Development. As part of the settlement, Flagstar made an initial $15 million payment and agreed to make future payments totaling $118 million, subject to certain conditions. Flagstar met one of those conditions in July, when it repaid $371 million in Troubled Asset Relief Program shares to the Treasury Department.

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