Flagstar Posts Loss on Switch to Fair Value Option for MSRs
Flagstar Bancorp. Inc. (FBC) said late Tuesday that it lost $10.6 million, or $(0.17) per share, during the first quarter as a switch in accounting valuation methods for the bank's mortgage servicing rights led the bank into the red. The Michigan-based bank said it was "adversely affected" by a decision to carry its MSR portfolio at fair value, rather than on an amortized basis as had been done in the past; the fair-value option led to a loan administration loss of $17 million for the quarter, Flagstar said in a press statement. Had the bank used the amortization method, it said, it would have posted meagerly positive earnings for the quarter of $617,663, or $.01 per share. Regardless, first quarter's performance was a far cry from one year earlier, when Flagstar posted earnings of $7.8 million, or $.12 per share. Driving the drop in earnings was a continuing and accelerating weakness in the bank's real estate portfolio, which saw non-performing assets jump 27 percent within just one quarter to $399.5 million -- a number that should be interpreted in the context of the bank's $15.8 billion in consolidated assets at the end of the quarter. NPAs are now well more than double year-ago levels, and non-performing residential first mortgage liens are just less than half of the NPA total (adding in foreclosures would undoubtedly move that number higher). $400 million in NPAs at the end of Q1 contrasted against $121.4 in loan loss reserves, net of charge-off activity. Interesting to note, as well, is that loss reserves are failing to keep pace with growth in NPAs -- reserves grew at a 16.7 percent pace from December to March, compared to the 27 percent jump in NPAs during the same period. The bottom line is that the numbers suggest that further loss provisions are likely to be necessary in future quarters -- a trend common at many regional banks, and covered in a related Associated Press story. HW readers know that we've been targeting credit quality at regional banks, especially around residential mortgages and construction lending, for some time now. Disclosure: The author held no positions in FBC when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.