Flagstar Bancorp, Inc. ( FBC)

Q3 2011 Earnings Conference Call

October 26, 2011 11:00 AM ET


Paul Borja – EVP and CFO

Joseph Campanelli – Chairman, President and CEO

Matthew Kerin – EVP and Managing Director


Jade Rahmani – KBW

Mark Steinberg – Dawson James

Julie Marsh [ph]

Jay Gohil [ph]



Good morning. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2011 Earnings 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. I would now like to turn the call over to Paul Borja, Chief Financial Officer. Please go ahead.

Paul Borja

Thank you. Good morning, everyone. I’d like to welcome you to our third quarter 2011 earnings call. My name is Paul Borja and I’m the Chief Financial Officer of Flagstar Bancorp.

Before we begin our comments, I’d like to remind you that the presentation today may contain forward-looking statements regarding both our financial condition and our financial results. 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 developments or requirements that may affect our businesses.

For additional factors, we urge you to review the press release we issued last night. Our SEC documents such as our most recently filed 10-K and 10-Q, as well as the legal disclaimer on Page 2 of our earnings call slides that we have posted this morning on our Investor Relations page at flagstar.com.

With that, 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 2011 third quarter earnings call.

Last night, we reported net loss to common share holders of $14.2 million or $0.03 a share. That was a significant improvement over our second quarter 2011 results and clearly marks progress on our path to sustainable profitability.

We were well positioned during the third quarter to capitalize on a robust banking business in an attractive industry environment, which were offset by the credit cost emanating from our legacy businesses.

This morning I’d like to begin providing you with some color on those credit costs. While we see them going over the next several quarters and what steps we’ve taken to mitigate ongoing losses on our legacy portfolio and while we’re confident we have enough capital to execute our strategy and return the company to sustainable profitability.

Then I’ll discuss the key financial highlights of our financial performance during the quarter before I turn the presentation over to Paul for a more detailed and in depth financial review. Paul and I along with the rest of the executive team will then be available to answer any questions you may have.

In total, credit costs for the third quarter were $11.7 million relatively flat from prior quarter. Virtually all of those costs relate to loans originate prior to 2009. We’ve spend a great deal of focus and attention on putting those costs behind us while growing and diversifying our core revenue streams. In fact, excluding credit costs before taxes, we earned $102. 5 million for the third quarter, which was the largest quarterly amount since the fourth quarter of 2009.

Year-to-date, we have generated $206 billion before taxes and credit costs. Our third quarter loan loss provision improved to $36.7 million as compared to $48.4 million in the prior quarter. The improvement was primarily attributable to a lower provision related to our residential first mortgage portfolio which has been in run-off since 2008. The decrease in residential provision reflected an improvement, an historical loss rates in our allowance model.

This improvement was consistent with the slowing pace of increase in our 90 plus day delinquent residential portfolio. The 90 plus day delinquent residential mortgages increased 341 million in the third quarter 2011 as compared to 286 million on a linked-quarter basis.

There are three points I’d like to make with respect to residential portfolio. First, we sold virtually our entire non-performing residential mortgage portfolio in the fourth quarter of 2010. At that time, we essentially started over for migration standpoint. One of the impacts in the sale was that it eliminated those loans that would have otherwise migrated due to foreclosure in the normal course. Now, nearly 12 months later, we are beginning to see non-performing residential mortgages migrate out of the 90 day bucket at a meaningful rate.

Second, the pace of increase in our 90 plus day delinquent residential first mortgages has been slowing since March 2011. But from December to March given the low starting level of 90 plus day mortgages following non-performing loan sale in the fourth quarter 2010, we saw a 66% increase in 90 plus residential first mortgages, which declined a 44% from March to June and then a 19% from June to September. Within the third quarter, the pace of increase slowed from 10% in July to 5% in August and 3.5% in September. You can see a graphical illustration of this trend on slide 17 – excuse me, on slide 15 of our earnings deck.

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