Flagstar Bancorp, Inc. (FBC)

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Flagstar Bancorp, Inc. (FBC)

Q1 2013 Earnings Call

April 24, 2013 11:00 AM ET


Paul Borja – EVP and CFO

Michael Tierney – President and CEO

Matthew Kerin – EVP and President, Mortgage Banking Division

Alessandra DiNello – Chief Administrative Officer, EVP and President

Michael Flynn – General Counsel


Paul Miller – FBR

Kevin Barker – Compass Point

Marc Steinberg – Dawson James Securities

Robert Drenk – Optimum First

Jim Fowler – Harvest Capital

Bose George – KBW



Good day and welcome to the Flagstar Bank First Quarter Investor Relations Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Paul Borja. Please go ahead.

Paul Borja

Thank you. Good morning everyone. I’d like to welcome you to our first quarter 2013 earnings call. My name is Paul Borja and I’m the Chief Financial Officer of Flagstar Bank.

Before we begin our comments today, I’d like to remind you that the presentation today may contain forward-looking statement 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, the outcome of pending litigation, competitive pressures within the financial services industry and legislative or regulatory requirements that may affect our business.

For additional factors, we urge you to review the press release we issued last night. Our SEC documents such as our most recent Form 10-K and our Form 10-Q as well as a disclaimer on page two of our first quarter 2013 earnings call slides that we posted today on our investor relations page at flagstar.com.

During the call, we may also discuss non-GAAP measures regarding our financial performance. A reconciliation of these measures to similar GAAP measures is provided in the tables to our press release which we issued last night, as well as in the appendix to our earnings call’s slides.

With that, I’d like to now turn the call over to Mike Tierney, our Chief Executive Officer.

Michael Tierney

Thank you, Paul. Good morning, everyone. Thank you for joining us. I’d also like to welcome you to our first quarter 2013 earnings call. On the last conference call, we told you that we’re going to be refocusing our strategy in our national mortgage banking business and our Michigan base community bank model. We also mentioned that we’ll continue to improve risk management, strengthen compliance and quality control and strengthen the balance sheet.

Our results for the first quarter reflect the positive impact from these efforts which are highlighted by the strong improvements in many aspects of our business this quarter.

Total credit cost declined significantly for the lowest quarterly level since 2008. Total non-performing loans decreased by approximately 8% from the prior quarter, and now decreased by 785 million or approximately 70% from their peak level during the second quarter of 2010.

Our allowance coverage ratio increased to 78% of non-performing loans and our active repurchase pipeline decreased by about 17% from the prior quarter.

A representation and warranty reserve is now almost equal to our active repurchase pipeline.

We also continue to add deposit customers in Michigan where we experienced a 13% increase in core deposits from the prior quarter.

We are experiencing solid commercial and consumer loan growth. At the same time, we significantly strengthened our capital and liquidity rations and continued our efforts to reduce MSR concentrations as we prepared to meet the requirements of Basel III, and the regulatory prescribed stress test.

Along with the rest of the industry, we experienced a significant reduction in mortgage banking activity in the first quarter.

Flagstar’s business model is heavily dependent on mortgage production and our top line revenue was negatively impacted by decreased in gain on loan sales, reduced interest income from mortgage and warehouse loans, and lower loan fees from new mortgage originations.

We saw a reduced demand due to the upward movement of rates during the quarter. Margins also compressed due to the increased competition with excess capacity in the mortgage space. As a result, we lost some market share in the first quarter. In response to that, we’ve taken steps to gain market share back and improve our margins.

We feel positive about our national foot print and core penetration levels in our key markets and continue to believe we’re well positioned to grow market share. In addition, we saw positive signs during the end of the first quarter which will continue to end of April.

I’d now like to discuss some of the key drivers of our first quarter results. Matt Kerin, our Mortgage Banking President will then talk about the mortgage business.

After Matt, Sandro DiNello, our bank President will provide an update on our community banking areas. Paul Borja will then take us through the financial outlook, and finally, we’ll be available to answer your questions.

Let’s begin on slide five. As you can see, we reported first quarter net income of 22.2 million, or 0.33 per share. On an annualized basis, this represented a return on average assets of 0.65% and a return on average equity of 7.55%.

Turning to slide six, we provided a bridge from the fourth quarter of 2012 net loss to our first quarter 2013 net income. As you can see on the slide, our first quarter results were impacted by four key items.

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