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Flagstar Bancorp, (



Q4 2010 Earnings Conference Call

January 26, 2011 11:00 am ET


Joseph P. Campanelli – Chairman of the Board, President, Chief Executive Officer

Paul D. Borja – Executive Vice President and Chief Financial Officer of the Company and the Bank

Todd McGowan – Executive Vice President, Chief Risk Officer

Matthew A. Kerin – Executive Vice President and Managing Director – Corporate Specialties of the Company and the Bank

Matthew I. Roslin – EVP of Company and Bank and Chief Legal Officer and Chief Administrative Officer of the Bank

Salvatore J. Rinaldi – Executive Vice President and Chief of Staff of the Company and the Bank

Marshall Soura – Executive Vice President, Direct – Corporate Services

Allessandro DiNello – Executive Vice President; Head of Retail Banking

James D. Coleman – Director

Jay J. Hansen -- Director

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Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience.

Good morning. My name is Felecia, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Flagstar Bank quarterly conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator instructions). Thank you.

Mr. Borja, you may begin.

Paul D. Borja

Thank you. Good morning. I'd like to welcome you to our fourth quarter 2010 earnings call. My name is Paul Borja, and I'm the Chief Financial Officer of Flagstar Bank. Before we begin our comments, let me apologize for the delay in starting the call. We had difficulties loading the presentation that relates to this release on the website. We can tell you it's now loaded up, so you may want to check.

Also, I'd like to remind you about a few things before we proceed. This presentation does contain some forward-looking statements regarding both our financial condition and our financial results and these statements involve certain risks that may cause actual results in the future to be different from our current expectations. These factors include among other things, changes in economic conditions, changes in interest rates, competitive pressures within the financial services industry, and legislative or regulatory requirements that may affect our businesses.

For additional factors, we urge you to review our press release and FCC documents, as well as the legal disclaimer on page two of the slides that we posted on our investor relations website for this speech.

With that, I'd like to now turn the call over to Joseph Campanelli, our Chairman and Chief Executive Officer.

Joseph P. Campanelli

Thank you, Paul, and good morning everyone. I'd also like to welcome you to our fourth quarter 2010 earnings call. We've had a busy fourth quarter, and for that matter, a busy 2010. We've accomplished a great deal during this time and established a clear direction for returning the company to profitability. I'd like to begin by talking briefly about our fourth quarter results, and then discussing the progress that we have made in our transformation to a super community bank.

After that, Paul is going to discuss the financials in greater detail and then I will update and review our key business drivers for 2011. Paul and I, along with the rest of our executive leadership team, will be available to answer questions you may have following our presentation.

In last night's press release, we reported a net loss to common shareholders of $192 million for the fourth quarter, which included $176.5 million loss on the sale of nonperforming loans. In November, we announced that we had sold 474 million of residential, nonperforming first mortgage loans. We also subsequently reclassified an additional $104.2 million of nonperforming first mortgage loans as available for sale. The $176.5 million loss was included in our fourth quarter loss and reflected our provision for loan loss expense.

For the full year 2010, the loss total, $393.6 million, which includes the $176.5 loss I just mentioned. Although you're always disappointed to report a loss, we believe that 2010 was a year in which we took the steps necessary to derisk our balance sheet and return the bank to sustainable profitability.

In the earnings call presentation we have prepared a slide which shows you our pretax, precredit cost earnings. We earned $275 million in 2010, excluding credit costs and nonrecurring charges. We believe this provides a sense of the normalized earnings potential for the bank and the associated return on assets and return on equity that will help carry us through the transition process, and over time, supplement a more diversified earnings strength.

We experienced a number of positive trends in our core business during the fourth quarter. Our three biggest credit costs, while significant, are trending down for the prior quarters. This includes a provision for loan losses, excluding those related to the sale of nonperforming assets or loans, asset resolution, and secondary marketing reserve provision. For these banking revenues to continue to be strong, we've gained a loan sales income of $76.9 million and the margin of that income of 89 basis points.

Fourth quarter mortgage originations increased by 20% from the prior quarter and our net interest margin improved significantly as we've seen the results of the steps we took in 2010 to lower funding costs.

For the fourth quarter, bank net interest margin was 2.08%, which is over 50 base improvement on a linked quarter basis. We continued our focus on replacing maturing high cost brokered and retail certificates of deposits with lower cost core deposits. Our overall cost deposits decreased to 2.13% from 2.97% year over year. The prepayment of $500 million in high cost FHLB structured borrowings in the restructuring of $1.9 billion of fixed rate FHLB advances have combined to move our net interest margin more in line with those of our peer group.

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