Flagstar Bancorp, Inc. (



Q1 2011 Earnings Call

April 27, 2011 11:00 am ET


Paul Borja – CFO

Joseph Campanelli – Chairman and CEO

Matt Kerin – EVP

Matt Roslin – EVP, Chief Legal Officer and Chief Administrative Officer


Bose George – KBW

Terry McEvoy – Oppenheimer

Paul Miret – FBI

Ben Hockenberg – Venor Capital

Herb Wamboldt

Michael Moskoff – MRM Capital

Bob Hobocan


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Good morning. My name is Melissa [ph] and I will be your conference operator today. At this time, I'd like to welcome everyone to the Flagstar Bank First Quarter Investor Relations Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Paul Borja, Chief Financial Officer, you may begin your conference.

Paul Borja

Thank you. Good morning. I'd like to welcome you to our first quarter 2011 earnings call. My name is Paul Borja and I'm the Chief Financial Officer of Flagstar Bank.

Before we begin our comments, let me remind you about a few things. 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 please review our press release and the SEC documents as well as the legal disclaimer on page two of our slides that we posted on our Investor Relations Web site for this speech. I'd like to now turn the call over to Joseph Campanelli, our Chairman and Chief Executive Officer.

Joseph Campanelli

Thank you, Paul and good morning everyone. I'd also like to welcome you to our first quarter 2011 earnings call. I'll begin today by updating you on our first quarter financial results and discussing the key items that drove those results. I'll also spend some time discussing on progress we've made in our transformation to a more diversified super-community bank model.

This progress is very important, but not fully reflected in our financial results this quarter. Paul then discuss the financials in greater detail and then I will update and review our key business drivers for 2011. Finally, Paul and I along with the rest of my executive management team will be available to answer questions you may have.

Last night, we reported first quarter net loss to common shareholders of approximately $32 million, as compared to $192 million loss in the fourth quarter of 2010 and then $82 million loss for the first quarter 2010. Our quarterly loss was an improvement from prior quarters and we believe we remain on track in meeting our primary goals and targets.

We continue to identify ways to conduct our business better faster and cheaper. Productivity gains have funded our investment new products, enhanced our share – our customer experience and support investments and risk management.

The improvement in the first quarter was driven primarily by a decline in our credit related expenses. Our biggest – our three biggest credit cost provision for loan losses as to resolution expenses and secondary marketing reserve provision have now decreased in total for four consecutive quarters.

We continue to maintain a prudent level of reserves and we believe we are starting to see the light again at the end of the tunnel. Many of our key asset quality metrics continue to trend in a positive direction, non-performing assets in total decreased on a linked-quarter basis both at absolute value and as a percentage of total assets. Regardless, we continue to maintain a healthy allowance with our reserve to non-performing loan coverage ratio at 74% at March 31, 2011.

At the same time, we remain committed to continuing to derisk the balance sheet through opportunistic sale of assets. During the first quarter, we sold $80.3 million non-performing residential first mortgage loans, which represents a vast majority of the loans which are moved to our available sale portfolio on our balance sheet. The $80.3 million in non-performing loans was essentially sold at the carrying value so there is no material effect on our P&L.

Given our strong capital, liquidity and reserve levels, we believe we're in a good position to selectively pursue other opportunities to accelerate the de-risking of our balance sheet by selling legacy asset at or near the carrying value. Aggressive write downs, prudent oversight, and improving marketing positions have put us in a position for continued improvement in our asset quality.

During the quarter, we also increased our capital ratios. We ended the first quarter with a Tier 1 ratio of 9.87 and a total risk-based capital ratio of 20.51%. Our first quarter equity to asset ratio was 9.5%.

The improvement in credit cost was offset by two key items, first a decline in net interest margin and second, the lower mortgage banking revenues. In the first quarter, the bank had a net interest margin of 1.68%, down 19% from the prior quarter level of 2.08. The decrease in margin had a negative impact of approximately $10 million on our bottom line P&L.

The decreased net interest margin was driven by reduction in average loan balances in both our available for sale and warehouse portfolios. Consistent with the slowdown in the mortgage banking business and an increased short-term liquidity position, we provides for the funding for new asset generation.

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