Flagstar Bancorp, Inc. (FBC)

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Flagstar Bancorp, Inc. (FBC)

Q3 2010 Earnings Call

October 28, 2010 11:00 a.m. ET


Joseph Campanelli - Chairman and CEO

Paul Borja – CFO

Matt Kerin - EVP and Managing Director - Corporate Specialties of the Company and the Bank

Matt Roslin - EVP of Company and Bank, CLO and CAO


Terry Macalvoy [ph]

Bose George - KBW

Paul Miller - FBR Capital Markets

Bryce McLoughlin – Private Investor



My name is Mia and I will be your conference operator today. At this time I would like to welcome everyone to the quarterly conference call. All lines have been place on mute to prevent any background noise.

After the speakers remarks there will be a question and answer session. (Operator Instructions)

Mr. Paul Borja you may begin your conference.

Paul Borja

Good evening everyone. I’d like to welcome you to our third 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 remind you about a few things. That this presentation does contain some forward looking statements regarding both our financial condition and our financial result and that these statements involve certain risk 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 SEC document, as well as the legal disclaimer on page two of our slides that we have posted tonight on our investor relations website for this call.

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

Joe Campanelli

Thank you, Paul, and good evening everyone. I would also like to welcome you to our third quarter 2010 earnings call.

Earlier this evening we filed perspective supplements related to a public offering of our securities. The security laws restrict our ability to discuss the public offering other than point you to our public filing. In that regards, we will not discuss the public offering or answer any questions relating to the public offering on this conference call.

I’m going to first talk to you a few minutes about the positive trends we see in our core business, a few industry developments, and then provide you with and update on where we stand in our transformation.

After that Paul’s going to discuss the detailed financial and then I will update the key drivers for the remainder of 2010 and for 2011. Paul and I will then take questions relating to our third quarter results.

Despite a sluggish economy and tighter margins for the industry, we were please with a number of positive trends we experienced during the third quarter. While others struggled to keep top line revenues flat we were able to increase our revenues. Exclusively with credit costs by 53% from the prior quarter.

During the quarter we lost $22.6 million, which is one of our lowest quarterly net losses since we experienced a gain in the second quarter of 2008. The $22.6 million loss also included an $11.9 million expense related to the prepayment of a $250 million FHLB advance as we continue our plan to restructure our balance sheet. The prepaid advance would have otherwise accrued interest at the rate of 4.825, well above current market conditions, through its maturity date in September 2011.

During the quarter we expect a number of improvements in our core business, combined with a significant declines in credit related expenses and a continuing improvement accretive quality.

These improvements came without having the benefit of any additional revenues and margin improvements from our transformation. I’d like to highlight a few of those core business trends to you.

Residential mortgage originations increased by 40% from the prior quarter, as recent activity increase and implementation of key initiatives in the first half of the year had a positive impact.

We also been pleased to see an increase in our third quarter gross lot market share, according to industry sources, which is typically a leading indicator of closing market share.

Gain on loan sales continue to be strong with margin for the quarter at 135 basis points. A 13 basis point improvement from second quarter.

Third quarter rate lock commitments we at the highest level this year, indicating fourth quarter origination should be strong.

Net Interest income is up just slightly for the third quarter as the decline in interest income from the refinancing of adjustable rate mortgage loans is being offset by the decline in interest expense for reduced funding costs.

At the end of the quarter, we took several steps towards improving the margin going forward. Including paying off the $250 million FHLB advance and restructuring seven other groups of advances, which we expect to see benefit in the fourth quarter. Paul will discuss those in more detail momentarily.

I’d like to now discuss asset quality and capital. During the third quarter we saw a continuation of the positive asset quality trend, which we experienced in the second quarter. As a result credit-related expenses declined in total by 30% from quarter to quarter. This was driven by the decline in provision along with decline asset and asset resolution expenses.

The total 90-plus days non-performing loans in our investment portfolio declined by 10% from quarter to quarter, to the lowest monthly level in 12 months. The decline was driven by declining levels of residential non-performing loans combined with our continued efforts to aggressively work out certain charge offs of non-performing loans in the commercial real estate portfolio.

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