Flagstar in Michigan Loses $79 Million on Provision Spike

Flagstar Bancorp (FBC) in Troy, Mich., reported a significant first-quarter loss as its loan-loss provision more than quintupled.

The $9.6 billion-asset company lost $78.9 million, compared to earnings of $22.2 million a year earlier. Flagstar's loss of $1.51 a share was well below the average estimate of analysts polled by Bloomberg, who had predicted earnings per share of 15 cents.

"Our first-quarter results were largely in line with expectations except for our provision for loan losses and a one-time adjustment to our repurchased loans," Sandro DiNello, Flagstar’s president and chief executive, said in a press release Wednesday. "During the quarter, we made the determination to significantly bolster our loan-loss reserve estimates which results in an increase to the loss coverage period from approximately 12 months to 18 months."

Flagstar's loan-loss provision rose 450%, to $112.3 million. The company also recorded a $21.1 million reduction to the originally recorded fair value of loans repurchased from government-sponsored entities. The reduction was "primarily caused by liquidity risk which will not repeat," the company said. Net chargeoffs fell 65%, to $12.3 million.

Flagstar's net interest income rose 4%, to $55.7 million.

Noninterest income plunged 59%, to $75 million. The decline was driven in part a $14.5 million loss in the category of other noninterest income, which included the $21.1 million valuation adjustment to repurchased loans. Flagstar also posted lower revenue from loan fees and charges and gains on loan sales.

Flagstar laid off roughly 600 employees in the first quarter, which contributed to a 29% reduction in noninterest expenses. The company's operating costs totaled $139.3 million. 

Flagstar has wrestled in recent years with nonperforming assets and litigation tied to its sales of mortgage-backed securities in the run-up to the financial crisis. The company agreed in December to sell the bulk of its mortgage-servicing rights to Matrix Financial Services, a unit of Two Harbors Investment. Flagstar also sold about $3 billion in subservicing rights on defaulted mortgages and $1.2 billion in commercial loans last year.