Joe Campanelli - Chief Executive Officer
Paul Borja - Chief Financial Officer
Flagstar Bancorp, Inc. (FBC) Q3 2009 Earnings Call November 3, 2009 11:00 AM ET
Good afternoon. My name is Stefanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Bank Q3 2009 investor relations conference call. (Operator Instructions).
I'd now like to turn the conference over to Paul Borja, Chief Financial Officer. Please begin sir.
Thank you. Good morning everyone. My name is Paul Borja and I am the Chief Financial Officer, Flagstar Bancorp.
Before Joe Campanelli and I 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, comparative pressures within the financial services industry and legislative or regulatory requirements that may affect our businesses.
For additional factors, we urge you to please see our press release and SEC documents as well as the legal disclaimer on page two of our slide that we have posted on our Investor Relations website for this speech.
Please also note that the questions that we have received so far have been incorporated into our comments.
With that, I’ll turn it over to Joe Campanelli, our CEO
Thank you, Paul. Good morning everyone. My name is Joe Campanelli. I am Chairman and CEO of Flagstar Bank. I am very pleased to be here for my first earnings call. First of, I would like to thank to Tom Hammond, the former Chairman and Mark Hammond the former CEO for their assistance for making this a smooth transition.
We will be getting into our third quarter earnings report in just a moment, but first I'd like to note several announcements that have been made and initiatives that are underway at Flagstar.
Today, we filed a shelf registration statement for $2 billion to put Flagstar in a position to take advantage of future market opportunities. This bank continues to remain well capitalized according to all regulatory standards; however, the market place that we anticipate will present opportunities for consolidation.
We believe it is prudent to ensure access to additional capital to best position Flagstar to take advantage of those opportunities. Perhaps more so today than at any other time in this industry, capital is king, and we've maintained a strong capital position will continue to be priority of ours.
We're assembling a management team with great depth and breadth in experience. I have been very pleased with the members of Flagstar leadership with whom I had a chance to meet and work with over the past month.
I am very encouraged by the level of teamwork, energy and commitment. At the same time, we are making some important additions to our senior leadership. They will add complementary skills to Flagstar's already strong talent base.
We've recently announced that Salvatore Rinaldi has joined Flagstar as Executive Vice President and Chief of Staff. Sal has over 30 years of banking experience and was former Executive Vice President and Chief of Staff of Sovereign Bancorp until February, 2009. His 11 years at Sovereign, Sal served in a variety of senior leadership roles, including management of all acquisitions and integrations for the organization.
Also joining us on our Flagstar leadership team is, Marshall Soura as Executive Vice President and Director of Corporate Services. Marshall oversees product development and strategic alliances. He is well-versed in these areas with over 40 years of banking industry experience, having served in a variety of executive positions at Sovereign Bank, Banc of America and BankOne
Marshall, will ensure that we have the products and services necessary for us to compete on a cost effective basis. Sal and Marshall are of great help as we work together to transform a traditional retail trip institution and to own the top 25 community banks in the country
I am excited about our ability to attract new talent, to complement the strong team of leaders, I have found here at Flagstar. There is great value in this franchise and the ability to recruit top banking talent is one measure of that.
As I sit here today, I believe we have a very clear understanding of our strengths and weaknesses, also I am very comfortable with the work that is been done to access Flagstar's underlying asset quality and exercising his own due diligence and other analysis, MatlinPatterson has done much work in evaluating the assets of this Bank to determine the relative value.
While I have been here just a month, I have also spent a considerable amount of time performing my own diligence. The balance sheet has been exhaustively analyzed, and I feel we have accounted for it appropriately. Additionally over the past 9 months, experienced third-parties have engaged to write ongoing examinations of Flagstar's assets under their independent analysis. That analysis continues to validate our own assessment.
I feel that based on the work that's collectively been done, there is a fair amount of comfort that all the issues have been adequately identified. However, we do recognize, we continue to operate in a fundamentally weak economy. This work on analyzing our asset strength is fundamental to the development of our overall strategy.
I'd now like to turn things over to our Chief Financial Officer. Paul Borja, who will take us through the third quarter financial results
Thank you, Joe. For Q3 2009, we reported $298 million loss to common stockholders as compared to $76.6 million loss in Q2 2009, and a $62.1 million loss in Q3 of 2008. Key drivers in the loss as compared to Q2 2009, is in Q3 2009 we had a deferred tax asset valuation allowance.
The expenses effect of that allowance was $183.9 million, which had about the $0.39 per share effect, and that breaks down of federal tax expenses effect of $172 million, and the state tax affect of $11.9 million.
I want to emphasize a couple of things about this deferred tax assets allowance. First of all it's a non-cash expense, so it's a valuation adjustment to our book assets. Secondly, because it is an offset against the asset, it is recoverable in future years against taxable income of the company.
Second. Net interest income before provision declined by $12.4 million. This is due in large part to the lower average balance of our available for sale loans. You'll see it declined about $1.1 billion as compared to Q2 2009 as our loan sales outpaced our originations.
In Q3, we had loan sales of $7.6 billion versus Q2 loan sales of $9.9, but also in Q3 we had originations of $6.6 billion, versus Q2 originations of $9.3 billion. The increase in these average yields on these assets to 5.3% in Q3 from 5.12 % in Q2 was not enough to offset the decline in the average volume.
However the decline in originations during Q3 2009, reflected the overall decline in the industry during that same quarter with Flagstar retaining its 1.8% market share. Additionally during Q2 2009, our net interest margin declined due to a lower net interest income, lower average interest earning asset base, overall about $1.7 billion, resulting in a net interest margin for Q3 of 1.58% versus 1.69% for Q2.
In Q3 2009, our provision for loan losses remained unchanged from Q2 2009 of $125 million. The provision included the following. Our non-performing loans increased about $114 million, our non-performing loans to held for investment loans was 12.98% in Q3 versus 11.18% in Q2, and delinquencies increased in the over 120-day category by about a $114 million as compared to Q2.
However, we did see a decline in charge-offs of about $46 million during Q3. Overall, our allowance for loan loss increased about $54 million. As a result, our allowance for loan loss coverage held for investment loans was 6.49% in Q3 versus 5.63% in Q2, and our allowance for loan loss to our non-performance loans remained unchanged at 50% in Q3 versus Q2.
Within our Q3 results was also loan administration income. As you look through the P&L in the earnings release, please remember to combine the gain loss and trading securities together with the loan administration income, because that gain loss and trading securities represents a hedge against our mortgage servicing rights.
The net result of combining those two as an $8.6 million loss in Q3, versus a net gain of 2.8 million for Q2, the loss in Q3 arises primarily from a decline in the value of the rights due to a sale in Q3 2009. We were able to sell higher costing high tech servicing during that period.
We also continued to have gain on loan sales during Q3, which totaled $104 million during Q3, the same as Q2. Year-to-date, our gain on loan sales is [$404.7 million (inaudible 10, 0:24)] versus year-to-date 2008 of a $129 million. And believe this highlights the mortgage banking operation as an important source of revenue for the bank.
Finally, we had a loss in trading securities, which was due to a write down of our residuals and also due to reorganization of a write down of transfer interest that we hold related to our HELOC securitizations.
Turning to the balance sheet, we had a $1.6 billon decline in assets, about $1 billion of that was related to decline in the quarter end balance of loans available for sale, as sales outpaced originations.
About $500 million was due to a decline in investment securities as we sold investment securities to move a hedge off balance sheet from on balance sheet, and finally about $100 million decline associated with our mortgage servicing rights due to the servicing sale, I mentioned earlier that occurred in Q3. As a result, our capital was 6.39% of Tier 1 and 12.06% of total risk base at the end of Q3, and so the bank remains well-capitalized.
With that I'll turn it back to Joe Campanelli.
Thank you, Paul. Well, there is no question that we have some challenges facing us, and there are some important decisions to be made, perhaps some unpleasant ones, but I come to this with a good measure of confidence having done this before at large institution with similar platform, and I come to you with a vision of how we remain a leader in originating in servicing agency first mortgages as we grow the core franchise of Flagstar Bank. Clearly, we need to be more efficient and we will be.
Underway now is a comprehensive effort to appropriately align expenses with revenues and appropriately right size the Flagstar business model. We are also placing a strategic emphasis on maximizing the value of Flagstar's 176-branch community banking platform, spreading in three states.
This is a very important asset that has been underutilized and unleveraged. With an average of 1.1 products per household, there is tremendous opportunity in expanding our existing customer relationships and increasing the rate of customer acquisition.
Flagstar's ability to enhance and diversify earnings capacity in the regions we serve. We have indentified significant opportunities for improvement. The executives we bought in, the Flagstar have accomplished this type of transformation on a platform of quite candidly unless to work with.
Flagstar has an infrastructure that's been well-maintained and results from significant historical investments. We'll also continue to invest in Flagstar's position as one of the leading residential mortgage originators in the countries.
We know this business, we understand it. It also provides a good foundation to cross-sell, especially in the markets that make up our community banking platform. We anticipate consolidation in the industry and we have positioned ourselves appropriately.
If I could leave you with several points, first, we are well-focused on maintaining a strong capital position. Our primary investor is committed to Flagstar. We have placed ourselves in the position to raise additional capital as needed to the filing of the $2 billion shelf registration this morning. It appears repeating that in today's market capital is king, and we acknowledge that we must earn the right to be a market consolidator to the flawless execution of a highly focused strategy.
I look forward to seeing many of you out on the road in the months to come, and thank you again for joining our call today. Have a great day.
Thank you. This concludes today's conference call. You may now disconnect.
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