Flagstar Reports 2006 Second Quarter Results

TROY, Mich., July 20 /PRNewswire-FirstCall/ -- Flagstar Bancorp, Inc. , today reported 2006 second quarter net earnings of $28.6 million, or $0.44 per share - diluted. For the six months ended June 30, 2006 net earnings totaled $47.6 million, or $0.74 - diluted.

For the 2005 second quarter, net earnings were $27.8 million, or $0.43 per share - diluted. For the six months ended June 30, 2005, net earnings were $47.6 million, or $0.74 per share - diluted.

"We performed as we expected in a challenging environment," said Mark Hammond, President and Chief Executive Officer. "Competitive price pressures on deposits and loans, as well as the flat yield curve, continued to strain net interest margins and loan sale margins. Nevertheless, we are actively engaged in managing the short-term challenges, while also continuing to implement our long-term strategic initiatives.

"In particular," noted Mr. Hammond, "we are continuing to expand our bank branch network and build our core deposit accounts. We have also been introducing new products to improve our loan origination volume and provide opportunities for non-agency securitization, while maintaining high credit standards in our held for investment portfolio. Additionally, we have been diligent in reducing overhead and making investments in systems to improve processes and workflow. Lastly, as long-term yields have risen, we have resumed our historic practice of strategically selling mortgage servicing rights as opportunities arise."

Highlights for the 2006 second quarter include the following: * A return on average equity of 14.5% * Opening of the 145th banking center * Loan production of $5.3 billion, including residential mortgages of $4.9 billion * Loans serviced for others of $22.4 billion * Sale of mortgage servicing rights related to $9.9 billion in underlying loans Balance Sheet and Capital Adequacy

Consolidated assets were $15.2 billion at June 30, 2006 as compared to $15.1 billion at December 31, 2005 and $14.9 billion at June 30, 2005. With a core capital ratio of 6.4% and a risk-based capital ratio of 11.2%, at June 30, 2006, Flagstar Bank, our wholly-owned subsidiary, was considered "well- capitalized" for regulatory purposes.

Net Interest Margin

The net interest margin for the second quarter of 2006 was 1.49%, as compared to 1.72% for the first quarter of 2006 and 1.79% for the second quarter of 2005. For the six months ended June 30, 2006 the net interest margin was 1.60% as compared to 1.90% reported for the six months ended June 30, 2005.

Retail Banking Operations

Flagstar Bank had 145 branches in operation at June 30, 2006 and expects to open approximately seven more branches by the end of 2006. During the second quarter, Flagstar completed its bank wide implementation of its Loyalty Pricing Program to build its core deposit base. This program enhanced the Company's cross-sell ratio. The households in this program had an average of 4.8 accounts versus 1.8 accounts for other households.

Mortgage Banking Operations

Flagstar's gain on sale spread decreased to 20 basis points during the quarter ended June 30, 2006 as compared to 33 basis points recorded during first quarter of 2006. During the 2005 second quarter, the gain decreased 27 basis points as compared to 47 basis points gain on sale. For the six months ended June 30, 2006 gain on sale decreased 6 basis points to 26 basis points as compared to 32 basis points recorded for the six months ended June 30, 2005.

During the second quarter of 2006, Flagstar sold servicing rights related to underlying loans of $9.9 billion of servicing as compared to $2.4 billion during the first quarter of 2006 and none during the second quarter of 2005. Sales of servicing rights totaled $12.2 billion for the six months ended June 30, 2006 and $2.5 billion during the same period in 2005.

At June 30, 2006, Flagstar's mortgage servicing portfolio totaled $22.4 billion with a weighted average service fee of 35.6 basis points, a decrease from $29.2 billion at March 31, 2006 with a weighted average servicing fee of 34.8 basis points. The decrease is the result of the bulk sale that occurred in the second quarter. The capitalized value of Flagstar's servicing portfolio was $231 million, or 1.03% of the outstanding balance of loans serviced for others, at June 30, 2006 as compared to $321 million, or 1.10%, at March 31, 2006. The estimated market value of the portfolio was $328.7 million at June 30, 2006 and $442.6 million March 31, 2006.

Asset Quality

Non-performing loans totaled $50.0 million at June 30, 2006, a decrease of $8.0 million as compared to $58.0 million recorded at March 31, 2006. Delinquencies (30 day +) as a percent of loans held for investment also decreased slightly to 0.53% at June 30, 2006, from 0.59% at March 31, 2006. At June 30, 2006, 89.9% of non-performing loans were secured by first or second mortgages on single-family homes. Single-family residential first mortgage loans held by Flagstar for investment at June 30, 2006 had an average FICO credit score of 720 and an average loan-to-value ratio of 71%.

As Previously Announced

The Company's quarterly earnings conference call will be held on Friday, July 21, 2006 from 11 a.m. until noon (Eastern).

Questions for discussion at the conference call may only be submitted in advance by email to [e-mail] .

The conference call and accompanying slide presentation will be webcast live on the Investor Relations section of the Company's website, http://www.flagstar.com/ .

To listen by telephone, please call at least 10 minutes prior to the start of the conference call at [phone] or toll free at [phone], passcode: 7944706.

Flagstar Bancorp, which has $15.2 billion in total assets, is the largest publicly held savings bank headquartered in the Midwest. Flagstar currently operates 145 banking centers located throughout southern Michigan, Indiana and Georgia and operates 87 loan centers in 26 states. Flagstar Bank originates loans nationwide and is one of the nation's top 30 originators of residential 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, 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. Summary of Selected Consolidated Financial Data (in thousands, except share data) (unaudited) Summary of the Consolidated Statements of Earnings At or for the three months ended June 30, March 31, June 30, 2006 2006 2005 Interest income $192,648 $191,299 $166,111 Interest expense (141,910) (132,624) (107,670) Net interest income 50,738 58,675 58,441 Provision for losses (5,859) (4,063) (2,903) Net interest income after provision 44,879 54,612 55,538 Non-interest income Loan fees and charges, net 1,239 1,611 3,213 Deposit fees and charges 5,692 4,812 4,400 Loan servicing fees, net 309 4,355 1,669 Gain on loan sales, net 9,650 17,085 32,347 Gain on MSR sales, net 34,932 8,586 2,262 Net loss on securities available for sale - (3,557) - Other income 9,750 9,731 10,978 Non-interest expenses Compensation and benefits (38,758) (39,873) (38,477) Commissions (20,911) (16,967) (22,887) Occupancy and equipment (16,748) (16,908) (18,302) General and administrative (10,957) (9,871) (11,860) Other (749) (5,886) (6,421) Capitalized direct cost of loan closing 25,770 21,434 30,873 Earnings before federal income tax 44,099 29,163 43,333 Provision for federal income taxes (15,457) (10,253) (15,533) Net earnings 28,640 $18,910 $27,800 Basic earnings per share $0.45 $0.30 $0.45 Diluted earnings per share $0.44 $0.29 $0.43 Dividends paid per common share $0.15 $0.15 $0.25 Interest rate spread 1.41% 1.57% 1.71% Net interest margin 1.49% 1.72% 1.79% Return on average assets 0.76% 0.50% 0.77% Return on average equity 14.46% 9.73% 14.88% Efficiency ratio 55.52% 67.20% 59.20% Average interest earning assets $13,650,019 $13,845,517 $13,061,681 Average interest paying liabilities $13,427,419 $13,591,084 $12,795,846 Average stockholders' equity $791,998 $777,620 $747,452 Equity/assets ratio (average for the period) 5.22% 5.14% 5.15% Ratio of charge-offs to average loans held for investment 0.23% 0.15% 0.19% Summary of the Consolidated Statements of Earnings At or for the six months ended June 30, June 30, 2006 2005 Interest income $383,947 $329,237 Interest expense (274,534) (205,586) Net interest income 109,413 123,651 Provision for losses (9,923) (9,150) Net interest income after provision 99,490 114,501 Non-interest income Loan fees and charges, net 2,850 5,835 Deposit fees and charges 10,503 7,977 Loan servicing fees, net 4,664 7,614 Gain on loan sales, net 26,735 41,924 Gain on MSR sales, net 43,518 6,510 Net loss on securities available for sale (3,557) - Other income 19,481 20,570 Non-interest expenses Compensation and benefits (78,631) (76,032) Commissions (37,878) (43,967) Occupancy and equipment (33,656) (34,953) General and administrative (20,828) (23,300) Other (6,635) (12,462) Capitalized direct cost of loan closing 47,204 59,918 Earnings before federal income tax 73,260 74,135 Provision for federal income taxes (25,710) (26,557) Net earnings $47,550 $47,578 Basic earnings per share $0.75 $0.77 Diluted earnings per share $0.74 $0.74 Dividends paid per common share $0.30 $0.50 Interest rate spread 1.48% 1.71% Net interest margin 1.60% 1.90% Return on average assets 0.63% 0.67% Return on average equity 12.12% 12.80% Efficiency ratio 61.06% 61.10% Average interest earning assets $13,747,768 $13,108,399 Average interest paying liabilities $13,509,251 $12,576,554 Average stockholders' equity $784,828 $743,618 Equity/assets ratio (average for the period) 5.18% 5.25% Ratio of charge-offs to average loans held for investment 0.20% 0.19% Summary of the Consolidated Statements of June 30, March 31, December 31, June 30, Financial Condition: 2006 2006 2005 2005 Total assets $15,225,864 $15,051,458 $15,075,430 $14,926,516 Loans held for sale 2,817,428 2,442,616 1,773,394 1,961,977 Loans held for investment, net 9,387,460 9,794,612 10,537,331 11,751,110 Allowance for loan losses 39,606 39,520 39,140 36,944 Servicing rights 230,984 321,167 315,678 284,331 Deposits 7,843,249 8,208,435 7,979,000 7,887,028 FHLB advances 4,290,000 3,844,000 4,225,000 5,161,035 Repurchase agreements 1,145,578 1,103,537 1,060,097 - Stockholders' equity 803,944 783,084 771,883 749,395 Other Financial and Statistical Data: Equity/assets ratio 5.28% 5.20% 5.12% 5.02% Core capital ratio 6.39% 6.33% 6.26% 6.07% Total risk-based capital ratio 11.15% 11.20% 11.09% 10.50% Book value per share $12.65 $12.33 $12.21 $12.04 Shares outstanding 63,529 63,488 63,208 62,244 Loans serviced for others $22,379,937 $29,242,906 $29,648,088 $26,646,532 Weighted average service fee (bps) 35.6 34.8 34.7 34.8 Value of servicing rights 1.03% 1.10% 1.06% 1.07% Allowance for loan losses to non performing loans 79.2% 68.2% 60.7% 56.7% Allowance for loan losses to loans held for investment 0.42% 0.40% 0.37% 0.31% Non performing assets to total assets 0.99% 1.00% 0.98% 0.93% Number of bank branches 145 141 137 128 Number of loan origination centers 87 97 101 114 Number of employees (excluding loan officers & account executives 2,548 2,421 2,405 2,431 Number of loan officers and account executives 530 594 689 800 Flagstar Bancorp, Inc. Loan Originations (in millions) (unaudited) For the three months ended June 30, March June 30, Loan type 2006 % 31, 2006 % 2005 % Residential mortgage loans $4,901 93.2 $4,348 93.0 $7,104 94.3 Consumer loans 194 3.7 180 3.8 323 4.3 Commercial loans 165 3.1 146 3.2 104 1.4 Total loan production $5,260 100.0 $4,674 100.0 $7,531 100.0 For the six months ended June 30, June 30, Loan type 2006 % 2005 % Residential mortgage loans $9,249 93.1 $14,317 94.8 Consumer loans 374 3.8 571 3.8 Commercial loans 311 3.1 214 1.4 Total loan production $9,934 100.0 $15,102 100.0 Gain on Loan Sales (in thousands) (unaudited) For the three months ended June 30, March 31, June 30, Description 2006 2006 2005 Net gain on loan sales $9,651 $17,084 $32,347 Plus: FASB 133 adjustment (3,337) (5,381) (5,866) Plus: secondary market reserve 1,420 1,006 1,282 Gain on loan sales $7,734 $12,709 $27,763 Loans sold $3,964,625 $3,894,070 $5,891,492 Sales spread 0.20% 0.33% 0.47% For the six months ended Description June 30, June 30, 2006 2005 Net gain on loan sales $26,735 $41,924 Plus: FASB 133 adjustment (8,718) (9,001) Plus: secondary market reserve 2,426 2,463 Gain on loan sales $20,443 $35,386 Loans sold $7,858,695 $11,329,539 Sales spread 0.26% 0.32% Loans Held for Investment (in thousands) (unaudited) Description June 30, 2006 March 31, 2006 First mortgage loans $7,091,818 75.2% $7,309,685 74.3% Second mortgage loans 470,885 5.0% 762,918 7.8% Commercial real estate loans 1,210,212 12.8% 1,091,179 11.1% Construction loans 62,847 0.7% 63,998 0.7% Warehouse lending 190,466 2.0% 187,610 1.9% Consumer loans 389,167 4.1% 406,267 4.1% Non-real estate commercial loans 11,670 0.1% 12,475 0.1% Total loans held for investment $9,427,065 100.0% $9,834,132 100.0% Description Dec. 31, 2005 June 30, 2005 First mortgage loans $8,248,897 78.0% $9,371,300 79.5% Second mortgage loans 700,492 6.6% 293,582 2.5% Commercial real estate loans 995,410 9.4% 850,260 7.2% Construction loans 65,646 0.6% 67,749 0.6% Warehouse lending 146,694 1.4% 289,244 2.5% Consumer loans 410,920 3.9% 908,185 7.7% Non-real estate commercial loans 8,411 0.1% 7,732 0.1% Total loans held for investment $10,576,470 100.0% $11,788,052 100.0% Deposit Portfolio (in thousands) (unaudited) Description June 30, 2006 March 31, 2006 Balance Rate Balance Rate ($ '000) (%) ($ '000) (%) Demand deposits $340,843 0.75 $355,487 0.64 Savings deposits 184,103 1.65 207,131 1.41 Money market deposits 656,902 3.89 661,067 3.24 Certificates of deposits 3,723,086 4.50 3,687,232 4.25 Total retail deposits 4,904,934 4.06 4,910,917 3.74 Municipal deposits 1,448,077 5.16 1,688,691 4.75 Wholesale deposits 1,490,238 3.53 1,608,827 3.48 Total deposits $7,843,249 4.17 $8,208,435 3.89 Description Dec. 31, 2005 June 30, 2005 Balance Rate Balance Rate ($ '000) (%) ($ '000) (%) Demand deposits $374,816 0.60 $331,842 0.69 Savings deposits 239,215 1.52 388,363 1.78 Money market deposits 781,087 2.98 1,027,099 2.77 Certificates of deposits 3,450,450 3.94 2,819,086 3.67 Total retail deposits 4,845,568 3.41 4,566,390 3.09 Municipal deposits 1,353,633 4.30 1,463,333 3.41 Wholesale deposits 1,779,799 3.42 1,857,305 3.28 Total deposits $7,979,000 3.56 $7,887,028 3.19 Asset Quality & Reserves (in thousands) (unaudited) Delinquencies at June 30, 2006 March 31, 2006 Days delinquent June 30, 2006 % $ % 30 $28,703 30.5 $24,462 24.5 60 15,253 16.2 17,244 17.3 90 49,530 52.7 56,469 56.7 Matured - Delinquent 497 0.5 1,501 1.5 Total $93,983 100.0 $99,676 100.0 Investment loans $9,427,065 $9,834,132 Delinquency % (90+ Days and Matured) 0.53% 0.59% Delinquencies at Dec. 31, 2005 June 30, 2005 $ % $ % $30,972 26.7% $28,728 24.3% 20,456 17.7% 24,155 20.5% 61,816 53.3% 65,003 55.1% 2,650 2.3% 165 0.1% $115,894 100.0% $118,051 100.0% $10,576,471 $11,784,482 0.61% 0.55% Non-Performing Loans and Assets at June 30, March 31, Dec. 31, June 30, 2006 2006 2005 2005 Non-Performing Loans $50,027 $57,970 $64,466 $65,168 As a Percentage of Investment Loans 0.53% 0.59% 0.61% 0.55% Non-Performing Assets $150,369 $150,975 $146,967 $137,922 As a Percentage of Total Assets 0.99% 1.00% 0.98% 0.93%