Flagstar Bank Corporation (FBC)
Q2 2011 Earnings Call
July 27, 2011 11:00 am ET
Paul Borja – Chief Financial Officer
Joseph Campanelli – Chairman and CEO
Macek Ken – Business Analyst
Bose George – KBW
Kevin Bartner– FBR
Terry Mcevoy – Oppenheimer
Marc Steinberg – Dawson James Securities
Previous Statements by FBC
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Thank you. Good morning everyone. I’d like to welcome you to our second 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 that this presentation does contain some forward-looking statements regarding both our financial condition and our financial results and that 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 business.
For additional factors, we urge you to please review our press release we issued last night and SEC documents, as well as the legal disclaimer on page two of our earnings call slides that we have posted on our Investor Relations website.
I'd like to now turn the call over to Joseph Campanelli, our Chairman and Chief Executive Officer.
Thank you, Paul, and good morning everyone. I'd also like to welcome you to our second quarter 2011 earnings call. I'd like to begin today by updating you on some of the early successes we see in our key initiatives in transforming the company
Paul will then discuss our financial results and then I will update and review our outlook for the second half of 2011. Finally, Paul and I, along with the rest of the executive management team will be available to answer questions you may have.
First off, last night we announced the divestiture of Georgia Bank branches to P&C Bank. P&C is assuming essentially all of our Georgia employees and the deposits of all of our branches in the state. The transaction is expected to close in the fourth quarter of this year.
From a financial perspective the transaction will be essentially breakeven relative to book value. However, given the relatively young age of our distribution channel, the revenue stream had yet to mature, resulted in negative contribution margin even before allocation of indirect charges.
This deal allow Flagstar to focus our growth strategy on our two major markets, the Midwest and the Northeast. Our second quarter net loss of $74.9 million is reflective of the continued credit cost associated with our legacy balance and legacy business operations. They were impacted by the continuing high level of unemployment nationally and a continued weakening of the Home Price Index or HPI.
When I joined Flagstar in September 2009, we began making changes in implementing initiatives to build out other lines of business to augment the revenues produced by a best-in-class mortgage banking franchise. Thus transforming Flagstar to a full-service super community bank.
We are encouraged by the steady results we are seeing from these initiatives and the continued progress that we have made in our transformation. I’d like to take a few minutes to discuss those initiatives. We continue to take aggressive steps to put legacy issues behind us and remained focused on reducing balance sheet risk and addressing underperforming asset concentrations.
During the second quarter, we sold $68.1 million of non-performing assets from our commercial real estate and real estate own portfolios. These assets were sold for small gain reaffirming the current march we have on the portfolio. Since the fourth quarter of 2010, we’ve sold over $622 million in non-performing assets and we’ll continue to implement strategies to further derisk the balance sheet.
We were able to generate positive core earnings before taxes and credit costs, attributable to the strong revenues from our mortgage banking franchise. In line with the industry, we experienced a decrease in mortgage banking revenues on a linked quarter basis, although a gain on sale remain strong increasing to 91 basis points for the second quarter of 2011.
Equally encouraging, mortgage rate law commitments increased by 16.8% on a linked quarter basis, indicating strong origination trends heading into the third quarter. Late in the second quarter we also launched an initiative to promote prime jumbo mortgages which will improve our return on excess cash and lead consumer demand while maintaining strict underwriting criteria.
Early volumes were encouraging as you had approximately $136 million in rate lock commitments at June 30. We believe this is a promising initiative that addresses the continued demand for these mortgage products, from segment of the market that is been underserved, and has attractive credit and profit fundamentals.
We recognize really an opportunity for jumbo origination growth to support both home purchases and refinancings.
Turning to commercial banking we are pleased with the early success of our recently launched commercial banking initiative. Over the past year, we have funded significant investment in foundation for solid commercial banking platform. Investments in new systems, enhanced policy procedures and experienced leadership, complemented with robust cash management and other non-credit products and services have begun to pay off.