Flagstar Bancorp, Inc. (FBC)

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Flagstar Bancorp Inc. (FBC)

Q4 2009 Earnings Call

February 2, 2010 11:00 am ET


Joseph Campanelli - Chief Executive Officer

Paul Borja - Chief Financial Officer

Sandro DiNello - Head of Retail Banking

Matthew Kerin - Executive Vice President, Managing Director & Corporate Specialties


Jessica Halenda - FBR

Bose George - KBW

[Michael Roman - JP Morgan]



Ladies and gentlemen, thank you for standing by and welcome to the Flagstar Bank fourth quarter, Investor Relations 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)

I would now like to turn the conference over to Mr. Paul Borja, Chief Financial Officer. Sir, you may begin your conference.

Paul Borja

Thank you. Good morning. My name is Paul Borja and I am the Chief Financial Officer at Flagstar Bancorp. I would like to welcome you to our fourth quarter earnings call. 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.

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 please see our press release that we issued last night and our SEC documents as well as a legal disclaimer on page two of our slides we have posted our Investor Relations website for this speech.

I would like to now turn the call over to Joseph Campanelli, our Chairman and Chief Executive Officer.

Joseph Campanelli

Thank you, Paul, and welcome everyone. I would like to first talk about where we stand overall the several initiatives we have underway. We were working to strengthen our competitive position, return to profitability, and maximize the value of the Flagstar franchise.

Our focus is threefold. First to deliver improved financial performance on a consistent basis, next to refine our business model and tried to focus and strategy and to better position Flagstar for long term stability and success. We have implemented a new organizational structure to better align profit centers, promote accountability, and improve corporate governance.

Our Executive Management Team, see considerable promise in the Flagstar franchise and strong potential for a return to profitable growth and diversification of earnings. I would like to take a few moments to discuss some of the highlights of our plan for 2010. We have developed a comprehensive business plan that focuses on the quality of our legacy loan portfolio, improved operating efficiencies, and new revenue sources.

This plan has been approved by our Board of Directors and has been reviewed without objection by our primary regulator. Great deals of resources have been allocated to addressing the elevated levels of delinquencies and problem loans in our residential and commercial real estate portfolios.

Significant losses have been incurred over the past several years as the markets we serve have been hard hit with higher unemployment, a weak housing market, and increasing vacancies in commercial real estate. We have increased our loan loss reserve to almost 6.8% of loans held for investment.

In addition, virtually no new loans have put on our balance sheet since 2007. Our forecast for loan loss division that would provide as one of our key drivers has been estimated assuming continued weakness in employment and housing values. As the portfolio continues to season, year-over-year non-performing assets increased to $1.3 billion at December 31, 2009, from $848 million at December 31, 2008, which led to both credit losses and a reduction in net interest margin.

We believe our asset quality issues are well understood and being managed appropriately. We continue to allocate additional resources to accelerate the disposition of problem assets and improve our servicing capabilities. We are projecting that these efforts will mitigate losses and improve net interest margin.

As I had mentioned, the increased delinquencies in our legacy balance sheet are attributable to a static pool of loans. In our commercial loan portfolio we believe that our substandard and otherwise classified assets peaked at September 30, 2009, at $462 million and have since been reduced by 10% to $415 million at December 31, 2009.

Similarly, the 30 and 60-day delinquent segment in our residential mortgage portfolio have shown some signs of improvement with the delinquency rate holding steady for much of 2009. The 90-day plus delinquent segment in our residential portfolio climb dramatically in 2008 and it continued to moderately increase throughout 2009.

However the rate of increase has flattened considerably during the second half of 2009. We have provided greater transparency relative to the composition and characteristics of the loan portfolios. The debt supporting our earnings release contains a variety of charts that may help you in getting more comfortable with the underlying portfolios and our ability to clean up the challenges of the legacy portfolios.

As you know, Flagstar, as one of the largest conforming mortgage originators in the United States, originating over $32 billion of residential mortgages in 2009.Currently, our mortgage banking operations comprised almost the entirety of Flagstar as well in generation. Absent a more diverse mix of revenue sources, such as consumer banking products, business loans, cash management, and treasury services, Flagstar has historically been subject to significant volatility from changes in the interest rate environment.

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