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Flagstar Bancorp, Inc. (NYSE:FBC)

Q1 2010 Earnings Call Transcript

April 28, 2010 11:00 am ET

Executives

Paul Borja – EVP and CFO

Joseph Campanelli – Chairman and CEO

Matt Kerin – EVP, Consumer Lending and Specialty Groups

Sandro DiNello – President, Retail Banking

Analysts

Bose George – KBW

Byf Levin [ph]

Jessica Halenda – FBR Capital

Brad Milsaps – Sandler O'Neill

Operator

Good afternoon. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Bank first quarter investor relations 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. Mr. Borja, you may begin your conference.

Paul Borja

Thank you. Good morning. I would like to welcome you to our first quarter 2010 earnings call. My name is Paul Borja and I am the Chief Financial Officer at Flagstar Bancorp. Before we begin our comments, let me remind you about a few things, that 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 businesses.

For additional factors, we urge you to please see our press release and SEC documents as well as a legal disclaimer on page two of our slide that 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 to Flagstar's first quarter conference call. I would like to begin by taking a few moments to update you on where we stand overall. Our transformation to the new Flagstar is well underway. Our new leadership team has been in place for several quarters now, and we believe there has already been a positive impact on operations, company culture, and overall sense of urgency throughout the company. Today, we believe we have a strong and stable capital position. We have created a dynamic business plan, anchored by our platform of 162 community banking offices in three states, and 28 home lending centers strategically located throughout the country, which provide Flagstar with a significant opportunity to diversify our revenue streams.

We continue to improve efficiency and identify significant cost savings, in that regard, a culture of finding ways to do things better, faster, and cheaper is taking hold throughout the company. Our investment in state of the art technologies is already having a positive impact on our customer experience. Initiatives are also underway to improve the depth and breadth of our products and services. Flagstar is on the move to position for growth and moving in the right direction. Our leadership team and all Flagstar team members are working hard to execute this transformation that will return Flagstar to profitability. Management accountability and a cultured discipline and our core values and share it throughout our company.

We have begun to spend more time getting out on the road to meet with investors, and tell our story, and anticipate seeing more of you and other investors over the coming quarters. Today, we will announce that we are presenting at the Oppenheimer conference in New York City on May 5. We also continue to provide greater transparency to our investors. Our recently completed 10-K has an expanded emphasis on balance sheet components and business strategy. In a relatively short period of time, some very positive and important things have been accomplished. We had two successful capital raises in the first quarter of 2010, a rights offering to close in January of just over $300 million and a recently completed common stock offering in March of approximately $275 million.

We have completed an enterprise-wide conversion to a new state of the art bank platform, built around open architecture software, which will further enhance our strong customer experience. This now gives us a complete view of the customer relationship, and at time with an accurate picture, where and when it is needed most, at the time of customer interaction, whether it be at the teller line, our community banking platform or call center, our service team is equipped with the tools necessary to deliver an enhanced experience.

And just this past week, we are very happy to announce that Flagstar ranked the highest in customer satisfaction in the North Central region, which includes Michigan, Indiana, Ohio, Kentucky, and West Virginia in the JD Power & Associates 2010 Retail Banking Satisfaction Survey. This shows that the hard work our team members put into providing premier customer service is paying off. And that is a key relationship that builds an opportunity to cross sell. These are already important in executing our overall strategy.

We also welcome a new member to our Board of Directors, Jim Ovenden. Jim brings a depth of financial and managerial expertise to our overall Board governance process.

Our focus and direction is very clear. We are working hard to become a top tier super community bank, leveraging a state of the art bank platform and help the customer relationships we build, and are being recognized throughout. Flagstar's existing footprint alone provides access to an attractive market, with more than 3.3 million households and over half a million small businesses to grow retail and commercial banking. The infrastructure and foundation we have established is scalable, and will support efficient growth in all business and market segments. We are confident that the execution of our strategy results in a more balanced and higher quality revenue mix over the coming years. We are focused on growing core deposits, as we implement new initiatives, including new lending products to accelerate account growth and household penetration.

It is important to understand that we will continue to build our national leadership position in the residential mortgage industry. We continue to implement initiatives to grow share in the key target markets, and to adjust to the changing landscape and regulatory environment. The residential mortgage industry is one of the most important asset classes in the U.S. economy, and Flagstar has carved out an attractive market position. Mortgage banking remains the cornerstone of our business model, and we are leveraging the mortgage business to view our investments in retail commercial banking. The new Flagstar is built to have more predictable and sustainability in revenue streams, unless we rely exclusively on the mortgage business.

We continue to work through credit quality issues on our legacy loan portfolio. While we anticipate a continued challenging environment, we are seeing signs of improvement. Loan loss, which was down considerably quarter over quarter, as net charge-offs were cut in half. Classified assets appeared to have peaked in September of 2009, and continue to be flat. Commercial delinquencies and charge-offs also maybe moderating. Paul will speak in more detail about the specific asset quality issues and trends.

We have the capital on pre-tax pre-credit revenue to weather these challenging conditions. We are focused on enhancing and accelerating asset resolution strategies as we remove problem and non-performing assets from our books. We have seen a strong affirmation as a Flagstar franchise through the investment of (inaudible), in a clear showing of increased support of Flagstar has brought the investment community to our public offering. Our Tier-1 capital is now well above 9%, and last quarter, we told you our goals and how we plan to get there. We have accomplished a lot in a relatively short period of time, and I am excited about the opportunity of leading this team as we transform to the new Flagstar Bank.

I am now going to turn the call over to Paul Borja to discuss the financial results. Following that, I look forward, along with other members of my management team, to answer any questions you may have. Paul?

Paul Borja

Thank you, Joe. And this is Paul Borja. What I would like to do is just discuss key components and changes in the profit and loss statement as well as in our balance sheet.

Overall, for Q1 2010, we had a net loss of $81.9 million versus a $71.6 million in Q4 of 2009. The key drivers contributing to this result, we had reduced net interest income due to a lower available for sale loan portfolio balance, and a smaller average of securities investment portfolio. We had an improvement in our loan loss provision. We had a decline in our revenue from loan sales and loan fees. And we had continued improvement in non-interest expense. Added to net interest income, it declined to $37.7 million in Q1 2010 versus $47.2 million in Q4.

This shortfall reflects a number of items. First, it reflects a reduced average balance of our available for sale loans due to lower production. Our average balances declined about $700 million Q1 versus Q4. We see this decline as temporary, and as part of our decision to be an earlier adopter of the new closing processes and deal with the associated complexities affecting the entire industry due to RESPA.

Also, the average yield on those balances declined about 30 basis points. We also had a decline in the average balance of our available for sale securities due to sales of those securities during Q4. The average balance declined $367 million, and the average yield on the remaining securities declined versus Q4 of 2009 by 39 basis points.

We did have a smaller decline in funding costs versus the decline in yields, as the overall decline in our liability mix was in a lower costing average deposit base, rather than the higher costing long-term FHLB advances. Our average deposits declined $514.0 million in Q1 versus Q4, and their average cost declined 27 basis points.

We expect net interest margin to return to expectations, as our loan closings resume. With respect to the loan loss provision, this declined to $63.6 million in Q1 of 2010 versus $94.9 million in Q4 2009. The decline reflects a decline in loss rates associated with the 36-month performing first mortgages. This is a tranche of about $2.8 million in first mortgages. Our first mortgage portfolio had a flattening 30-day and 60-day delinquency trend. It had a decline in the delinquency roll rates beginning in Q1 four loans rolling into over 30 and over 60-day buckets. It also had a decline in the dollar balances in the 30-day and 60-day buckets.

The decline in the loan loss provision also reflects reduced provisions for second mortgages and for HELOC. And as Joe mentioned, it reflects reduced net charge-offs. Overall, our net charge-offs were $49.6 million in Q1 2010 versus $98.9 million in Q4. Added to that, our first mortgage net charge-offs were $29.0 million in Q1 2010 versus $32.8 million in Q4. And overall, our resi mortgages, which are first, second, and HELOCs, had $39.9 million in net charge-offs in Q1 versus $53.6 million in Q4.

Also, you will note that our provisions for Q1 2010 still exceeded our charge-offs by $14.0 million. As a result, our allowance for loan losses to help our investment ratio for Q1 still increased to 7.1% versus 6.7% at Q4 2009. We expect this to affect our outlook for provisions, but also intend to review this closely again during the second quarter.

Our gain on sale declined to $52.6 million in Q1 2010 versus $96.5 million in Q4 2009. This is a result of a number of factors. We had a decrease in interest rate locks to $6.1 billion in Q1 2010 versus $7.9 billion in Q4 2009, which affects our gain on sale, since we have got to fair value for our overall mortgage portfolio. It also reflects a decrease in residential mortgage loan sales to $5 billion in Q1 2010 versus $7.1 billion in Q4 2009. And it reflects a decline in the margins on loan sales to 1.05% in Q1 versus 1.35% in Q4 2009.

Our loan administration income. This is the income from our servicing portfolio, plus the effects of our hedging of an MSR portfolio. Our loan administration income in Q1 declined to $22.8 million versus $26.9 million in Q4 2009. Remember when you are looking at the income statement to net the income statement items, loan administration income, and the item, gain loss on trading securities, because that latter item represents our on-balance sheet hedge.

Even with this decline, we believe it provides an above average return, while maintaining our exposure well within acceptable risk tolerances. Also during Q1 2010, we sold mortgage servicing rights for the notional amount of $10.8 billion, with a net loss on our income statement of about $2.2 million, which is effectively close to a par value.

Under other non-interest expense, we had $123.3 million in non-interest expense in Q1 2010 versus $150.7 million in Q4 2009. This decline reflects lower commissions that we paid due to lower production of loans. It also reflects lower asset resolution expenses, due to a reduced level in Q1 2010 of provision expense for potential losses and real estate owned, as well as an offset arising from the gain on sale of real estate owned during Q1 2010.

With reference to our general and administrative expenses contained within non-interest expense, the reduction is due primarily to the absence in Q1, where we had it in Q4 of a Federal Home Loan bank advance prepayment expense. And that was an expense we incurred in 2009 to pre-pay FHLB advances, and it was about $16.5 million. That reduction is also due to lower consulting and accounting advisory fees during 2010. We are continuing to address cost efficiencies, including proactive vendor negotiations.

On our balance sheet, our assets increased to $14.3 billion at March 31 versus $14.0 billion at 12/31/09. Key items to that change were an increase in our overall trading securities and that was the deployment at the end of the quarter of cash that we had on our balance sheet and that is used for on-balance sheet hedging of mortgage servicing rights. We had a decline in our loans held for investment. We have a static loan portfolio, and so, we expect to see declines due to loan pay-downs. And we had a decline in our mortgage servicing rights line item, principally due to the $10.8 billion notional sale during Q1 that I mentioned earlier.

Our liabilities also declined, and in particular, I would like to talk about our declining deposits. Our declining deposits during Q1 versus Q4 was based primarily on our overall balance sheet management, especially given the amount of the capital infusions during Q1 of approximately $570.0 million – our decline was approximately $570.0 million. The decline in deposits, we had about $333 million in retail, and about $217.0 million in wholesale or broker deposits, and about $176 million in escrow accounts that declined. This was offset by an increase of about $93.0 million in public funds or CDARS.

Also during Q1 2010, as Joe mentioned earlier, we did have two capital raises, a rights offering of $300.0 million, and a public offering which gave us in net amount of about $276.0 million. Because of the price offered in the public offering, we issued warrants based upon anti-dilution provisions contained in already outstanding warrants issued to investors from May 2008. Prior to the public offering, the warrants had a strike price of $0.62 per share and there were about 11,111,000 warrants outstanding. After adjusting for the dilution provisions on a post-public offering basis, there are now 13,778,000 warrants outstanding at a strike price of $0.50 per share.

With that, I would like to turn this back to Joe.

Joseph Campanelli

Thank you, Paul. Before we move to page 26 of the presentation to talk about our outlook for 2010, I would like to add that following our shareholder meeting in late May, we are assuming shareholder approval, for which current intent is to effect a ten-to-one reverse stock split prior to the end of our second quarter.

Now moving on to our outlook for 2010, the first slide suggests our target asset size. We are projecting that we will end 2010 with an asset size in the range between $13.5 billion and $14.5 billion, as we continue our emphasis on maintaining higher regulatory capital levels, and also because we will be selling virtually all of our residential loan production, rather than growing the balance sheet. At March 31, 2010, we ended the quarter with a balance sheet of $14.3 billion. As we are not intentionally adding any new loans to our investment portfolio, we plan to maintain our asset size through normal runoff, replacing payoffs and outperforming loan resolutions, with performing assets and diversified asset classes as we pursue our transformation plan. In addition, we continue to reduce our reliance on wholesale deposits, as you may have seen, with core deposit growth.

Now moving onto residential mortgage originations, we are forecasting a range of $22.0 billion to $26.0 billion from residential mortgage originations for 2010. As Paul mentioned, this reflects a further decline in industry projections for mortgage volumes in 2010 year over year, offset by an increase in our market share based on a number of initiatives that we have implemented. These initiatives includes continued focus on the conversion of brokers to correspondents, but capitalizing on our warehouse lending expertise, the origination of mortgages through our branch network and reduced competition in the wholesale lending area. We believe that we have a leadership position when it comes to utilization of technology to effectively originate residential mortgage loans and that our competitive advantage in this respect will be evident as it originates throughout the country continue to struggle with the recent implementation of RESPA reform.

Loan sales, we still intend to sell virtually all of our residential mortgage reduction, therefore loan sales in 2010 are also forecasted at a consistent range of $22 billion to $26 billion. The first quarter originated $4.3 billion of loans, but had loan sales of $5 billion, as a result of time lags between origination and sale.

With respect to margin on origination loans sales, our 2010 estimate to margin and loan sales in the range to 85 to 105 basis points. Although we continue to see healthy spreads, we do not believe the historical highs of 2009 will continue throughout 2010, and as industry forecasts of volume have been reduced, we are also observing a decrease in margin, which is typical in industry. We believe that we will be able to hold margins and maintain the production levels that we have forecast, partially due to our wholesale lending capacity, and what we believe to be the best in class platform for wholesale mortgage originations.

Our net interest margin, at the bank level, we are anticipating our range for 2010 to be 140 to 175 basis points, more in line with the 165 basis points for 2009 that we originally forecast. We believe that our NIM will improve as a result of the influx of additional capital. In addition, as we resolve and reduce the level of non-performing loans, we are replacing them with interest-bearing assets.

Finally, we are expecting our focus on core deposits to lower our funding costs and have resulting improvement in our net interest margin, even if the yield curve flattens somewhat throughout the year.

With respect to our provision expense, we project our provision expense to be between $200 million and $250 million for 2010, a reduction of $504 million from 2009. Although we continue to model the declines, the real estate values and high levels of unemployment in line with a bearish market sentiment, we have a static seasoned loan portfolio and have been observing a reduction in classified assets in our commercial real estate portfolio and the flattening of delinquencies in our residential portfolio.

In addition, we have seen stabilization in a large percentage of our residential book. In addition to our provision methodology, we are taken into account the increased severity of loss with current appraises and recent losses as we bring in corporate into the model. Although considerable, we believe that our credit costs are both measurable and predictable, and we can manage through them, particularly with the influx of additional capital.

I would now like to open the lines up to questions and answers. Can we open up the line for questions?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Bose George with KBW.

Bose George – KBW

Good morning. I had a couple of questions. The first was just wanted to talk a little more about the reduction in your guidance on the net interest margin, you know, just the drivers for that change, and also a little more about the timeline to get to the higher net interest margin that you have suggested and the kind of margins that you would need to get to you know, the ROIs that you talked about during the road show.

Paul Borja

Bose, Paul Borja; thank you. With respect to the net interest margin, would you like to talk first about that or the loan production or the loan sales?

Bose George – KBW

Yes, that would be great, just to see what sort of breakdown drove that down.

Paul Borja

A large part of the decline in the NIM for Q1 versus Q4 has to do with, as I mentioned, the manner in which we are adopting the processes to close loans. We think we have a sufficient backlog that once we release the backlog, you will see it affected through the net interest margin side as the interest income from our available facility for loan production increases through the short time it is on our books. So we expect that that will happen through the course of Q2 and slightly into Q3. It is an extremely complex closing process introduced by these regs that we wanted to be among the first in the nation to adopt those and we think it is going to pay off in the longer run.

Matt Kerin

Further, George, this is Matt Kerin. I think, also coupled with the fact that there was a significant influx of competition on our margin compression in the first month of January, and that has impacted our production volumes and margins pretty consistently with the industry. You know, from a relative basis, we are optimistic, coupled with early adoption of the RESPA guidelines, we are getting through the Q from a severance perspective and we are actually up in our broker segment of the market. So I think we are fairly optimistic in this Q that we will get ourselves back to where we want to be.

Paul Borja

Right. I would look at that as a timing issue relative to the balance sheet components, but I think strategically, Bose, and we had talked about this, we need to reduce the level of non-performing assets on our balance sheet, will have a significant impact along with the core deposits funding as a source rather than wholesale and higher FHLB borrowings. This really we will get the accelerations in the net interest margin. And a lot of our time is now on improving the quality of the balance sheet.

Bose George – KBW

Okay, great. Then, just switching to the gain on sale margin, the record warranty costs, I guess that was about $26 million. I was wondering, as you sort of move past some of those old originations, can we see that reg and warranty costs number fall pretty sharply? Is that something we could expect?

Matt Kerin

The answer is, I think I believe, yes. This is Matt Kerin again. You know, obviously, you have got Fannie Mae was 2,000 people down in Texas stacked up to continue this, but we have seen a relative flattening in the requests and you know, we are continuing to work with two fairly solid success rates in our discussions. So clearly, as we crest through 2007 and 2008, you should see a significant curtailment. At what point that occurs, I can't really predict right now.

Bose George – KBW

Okay, good. And then just finally on credit, obviously some pretty positive trends in your portfolio. I was just wondering where you are seeing lost severities on the residential mortgages.

Matt Kerin

I mean clearly we are seeing severities come down fairly dramatically. You know, we have got these improved economic outlook that drove the reserve reduction as well as an improvement in our overall roll rates. So, you know, without jinxing ourselves, you know, we are guardedly optimistic about the future.

Bose George – KBW

Okay. Can you quantify the loss severities at all or is that not something you give out?

Paul Borja

It is not – this is Paul; it is not necessarily something we give out, what we can do within the Q that we expect to file rather shortly over the next week or two is provide more color on that. We had quite a bit of color in the 10-K, as you may recall, and we expect to replicate that level of information, which we believe provides sufficient guidance or a significant amount of guidance for investors.

Bose George – KBW

Okay, great. Thanks a lot and good quarter. You have accomplished a tremendous amount.

Joseph Campanelli

Thanks, Bose.

Operator

Your next question comes from Byf Levin [ph], individual investor. Byf, your line is open.

Byf Levin

During the last earnings conference call last quarter, a question was asked about when we could expect to return to profitability and I think at that time, Mr. Borja indicated a preference to speak in terms of business drivers, rather than profitability. So the question is twofold. One, are you able to address that now, can you inform us at all about when we expect to return to profitability, and if not, can you give a timeframe as to when you might be able to speak on those terms?

Paul Borja

It is Paul Borja. I remember the question. I think our corporate policy is still the same. We speak certainly to drivers, because there are a number of different ways models can be derived and models can be put together. So different people put different weights on the different drivers. We want to provide the basis for that. So our drivers are what they are up there. I think that one of the things you can – and at the same time, because we don't do that, we at the same time don't set a time line for when we think a particular model will view those drivers to move towards a profitable trend line.

I think that when you take a look at the drivers up there, you will see that in some respects, there is some degree of improvement, and it is offset unfortunately by some degree of worsening of some of the other drivers. So I think that we are going to have a better feel for this as we move towards the middle of the year. There is a lot of things that we put into place, sir, since November and December, and as Joe mentioned, I think he said folks have been here working through several quarters, it is actually just two quarters, and so, I think we are starting to see the fruits of a lot of the efforts and we expect to see more towards Q2 and have a better feel after Q2 about where we think we might be for the year.

Operator

Your next question comes from Paul Miller with FBR Capital.

Jessica Halenda – FBR Capital

This is Jessica Halenda in for Paul. I just wanted to ask, I know you mentioned REO expense a little bit, but can you give a little more color, I mean, it was obviously improved this quarter. Is that – are you seeing stabilization in asset values, or are you seeing a different mix of assets? Can you give a little color around that?

Joseph Campanelli

Well, it is in our components. One, we are seeing stabilization in asset values; you know, it is a pretty direct correlation to what you see in the HBI. It is obviously geographically focused. Part of that has also been, if you look at our – over 90s, you will see the timing of some of the delays in the foreclosure process, but we are – again, the trends are favorable in what we are seeing in terms of the roll rates and realizations and we are keeping a close watch on it.

Paul Borja

This is Paul. One of the things I mentioned is we had during Q1 some gains on sales of REOs and so I think what you are seeing within our own portfolio is kind of a stabilization of where the markets are. Part of the results you are also seeing are the changes that have been affected over the last four to five months. So it is in part due to stabilization of the overall market place, but it is also due in some part, not a small part, to sort of a restructuring and reworking that kind of servicing and collections process that we have in place. It is something we mentioned in the last set of slides that we had filed with the SEC regarding our road show. As with some of the other pieces, things have been starting to see the fruits of the efforts, and we will have a much better feel after Q2 about how those efforts have played out versus the marketplace.

Jessica Halenda – FBR Capital

Have you disclosed where your REO and NPLs are marked?

Paul Borja

I don't believe we have, but we can certainly look towards some additional disclosure on that.

Jessica Halenda – FBR Capital

Okay, thank you very much.

Operator

Your next question comes from Brad Milsaps with Sandler O'Neill.

Brad Milsaps – Sandler O'Neill

Just curious if you guys could talk about maybe your outlook for operating expenses, sort of exclusive of kind of credit-related costs. Any additional opportunity to cut overhead or other significant aspects you might have out there to reduce costs even further?

Joseph Campanelli

Yes, I think we have had ongoing discussions on what we are looking at on a net year-over-year expense changes. I mean, obviously certain costs going up such as the FDIC insurance therein, and then you have an investment as you transform and move into small business middle market and expand our product set on the expense side. But on a net basis, we anticipate being consistent with what we provided during our road show, that low double-digit expense reduction year-over-year.

Brad Milsaps – Sandler O'Neill

Okay, and then a second question on kind of deposits in the quarter and the rates paid. Slide 11, I think lays it out fairly well. Just curious if you guys could talk about – it looks like most categories, the average rate paid actually went up a bit on a linked-quarter basis. Wanted to see if you could give some more color there. Is that trying to gain market share in some of your smaller markets? Kind of curious what your outlook would be kind of going forward on those deposit rates.

Sandro DiNello

This is Sandro DiNello. With respect to the positive rates, we really have kept rates relatively flat during the quarter, and because as Paul mentioned earlier, you know, we have been trying to manage the balance sheet, and we have been continuing to work on improving the mix of the process. If you look at the level of core deposits, we are up about 1.5% during the quarter. So we are seeing some improvement in there, and as we continue to bring our new products, which is the really important part of our ability to be able to improve the mix of the process, new lending products, we will continue to see an improvement in that area. So, in the first quarter, I would say generally speaking, we try to hold our position where we can and we are actually seeing our deposit costs decline. If you look at overall on the retail side, our average cost of deposits drops from 244 to 219, and for our government deposits, our average cost dropped from 63 basis points to 55. So overall, we do see a decline in costs, and you look at average balances during the quarter and the average of rates paid during the quarter.

Paul Borja

Sandro, I would like to jump in. With respect to the tables attached to the earnings release, you will see pretty much the same deposit portfolio table with respect to the slide here, we will revise it, but what you are looking at on the slide page 11 are the same numbers you see in the table, the only difference is with the slides what we should have noted that we note on the earnings release is that these are month end rates. So these are the end of the period. With respect to the average balances, which we will disclose within the Q more fully or in more detail, we had, for Q4, on demand deposits of an average rate of 96 basis points in Q4 versus 67 basis points in Q1 2010 for savings accounts. It also declined by about 26 basis points and for CDs, they declined about 13 basis points. So overall, for deposits themselves on a weighted average basis, Q4 to Q1, it had the decline that we had mentioned within the press release.

Brad Milsaps – Sandler O'Neill

Okay, great. Thank you.

Operator

(Operator Instructions). You do have a follow-up from Bose George with KBW.

Bose George – KBW

Good morning, again. Had a couple of other little things. One, just wanted to see if I could get the dollar amount of your risk-weighted assets.

Paul Borja

I apologize. I don't know if we have that readily available, let me just check.

Bose George – KBW

Okay. I can just move onto another question and get that later. The other one I had was just on the status of the supervisory agreement. Is there any way to assess when that gets removed and any update on that?

Joseph Campanelli

Yes, we don't have any direct timeline. What we can say is that we are operating the bank within the intended agreement, and everything that we talked about, our strategies, is really based on management's ability to implement and execute. So I think that there has really been no change to the prior discussions and nor would I have expected one. We have not set a hard timeline on something like that, but clearly, we believe we continue to run the bank as we have laid out that will be making progress on all fronts, including you know, regulatory.

Bose George – KBW

Great. Thank you.

Paul Borja

And Bose, by the way, our risk-laid assets, and we will have this in the 10-Q would be $8.075 billion.

Bose George – KBW

Great. Thanks a lot.

Operator

Your next question is a follow-up from Paul Miller with FBR.

Jessica Halenda – FBR Capital

I just wanted to ask one more question on, I mean, you obviously had a huge improvement in net charge-offs this quarter and a lot of that was driven by CRE. Was that just like one big roll and moving through in the fourth quarter and that drove the improvement, or can you remind me what happened there?

Joseph Campanelli

CRE, it is a little bit different from the residential portfolio. Obviously, it is not on an individual loan level basis. You know, our portfolio is comprised of just under an1,200 loans that we go through periodic reviews, some of them annually, and obviously, if it is problem loan, which more frequently you need to adjust for realized cost and disposition or update appraisals, and I think is indicative of the underlying activities and to resolve problems in activity.

Jessica Halenda – FBR Capital

Okay, you are getting better year-over-year I guess there, quarter-over-quarter –

Joseph Campanelli

Excuse me?

Jessica Halenda – FBR Capital

Sorry, appraisals, do you do the appraisals on these loans yearly, quarterly?

Joseph Campanelli

Individually, no less than annually to look for any impairment. However, if there is a feeling that the loan may be adversely affected for any range of reasons, we would do it more frequently, and take appropriate steps to market appropriately. So it really is a dynamic process that we have got a very skilled group of lenders that have been handling those relationships on a day-to-day basis that really manage them in a proactive fashion.

Jessica Halenda – FBR Capital

Great. Thank you.

Operator

There are no further questions at this time.

Joseph Campanelli

Well, I want to thank all of you for joining us this morning, and I would look forward to seeing you as we make our rounds throughout the country. Paul, do you have anything to announce?

Paul Borja

One other piece I would like to mention here with respect to the decline of deposits we talked about in a number of different areas with respect to deposits, one of the points I wanted to make and I just touched on in my comments had to do with some reduction as part of an overall balance sheet management. The reduction is part of what we were planning to do, because what we do is we are making a balance sheet that takes into account the inherent risk as well as regulatory capital ratios, and we want to make sure that we are operating within a certain comfort zone. So the deposit decline was part of a planned reduction, and also, as we start to let some of these deposits roll off and we bring others to replace them, going back and forth, we use that as an opportunity to reduce the higher cost and kind of deposits and continue to build our core deposit structure as we have discussed in our other calls.

Joseph Campanelli

Again, thank you, everyone.

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Source: Flagstar Bancorp, Inc. Q1 2010 Earnings Call Transcript
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