Earnings at Flagstar Bancorp (FBC) in Troy, Mich., fell 7% from a quarter earlier as credit and litigation costs offset a large gain from loan sales.
Flagstar earned $79.7 million in the third quarter, marking the first time that the $14.9 billion-asset company has reported back-to-back profits since mid-2007. The third-quarter results compare to a loss of $14.2 million a year earlier.
"Although we are pleased with our second straight quarter of profitable results … we recognize that significant work remains to address Flagstar's legacy issues," Joseph P. Campanelli, Flagstar's chief executive, said a press release late Tuesday. Campanelli is expected to step down as CEO next week. Flagstar has already Michael Tierney, its former managing director of personal financial services, to succeed Campanelli.
Gains from loan sales increased 57% from a quarter earlier, to $334 million, because of first mortgage loan activity. The company recorded $104 million in gains from loan sales a year earlier.
Flagstar's representation and warranty reserve, which estimates probable losses on loans it has sold or securitized in the secondary market, rose 25% from a quarter earlier, to $202 million. Flagstar set aside $124.5 million during the third quarter to boost that reserve, which tempered gains from its loan sales.
Noninterest income increased 14% from the second quarter and more than doubled from a year earlier, to $273.7 million. The loan-loss provision fell nearly 10% from the second quarter but rose 43% from a year earlier, to $52.6 million. Nonperforming assets fell 7% from a year earlier, to $520.5 million.
Quarterly expenses rose 55% from a year earlier, to $233.5 million. Flagstar said it had conducted an assessment of its exposure to pending and threatened litigation, setting aside $40 million to prepare for such matters. The company is set to stand trial over allegations that it breached contracts for guarantees on roughly $1 billion in residential mortgage-backed securities in the years prior to the financial crisis.
The company also disclosed Tuesday that its Flagstar Bank has entered into a consent order with the Office of the Comptroller of the Currency stemming from items identified during exams in late 2011 and early 2012. The order replaces a previous enforcement action issued by the Office of Thrift Supervision, which the OCC absorbed in July 2011.
The new enforcement action orders the bank to re-designate its regulatory oversight committee as its compliance committee, review its existing capital plan and adopt written policies and procedures to maintaining an adequate allowance for loan losses, among other things.