Flagstar Bancorp Inc. (FBC)
Q3 2012 Earnings Call
October 24, 2012 11:00 AM ET
Paul Borja – EVP and CFO
Joseph Campanelli – Chairman, President and CEO
Mike Tierney – President
Matt Kerin – EVP, Managing Director, Mortgage Banking and Warehouse
Paul Miller – FBR Capital Markets
Bose George – KBW
Andrew Luke – Jersey Micks
Eric Goldsmith – DSG Capital
Brad Artmonsov – Coastal Investment
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Thank you. Good morning, everyone. I’d like to welcome you to our third quarter 2012 earnings call. My name is Paul Borja, and I’m the Chief Financial Officer of Flagstar Bancorp.
Before we begin our comments, I’d like to remind you that the presentation today, may contain forward-looking information 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, 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, the Form 8-K, we also issued last night which was filled this morning with the SEC containing the press release.
Our SEC documents such as our most recent Form 10-K and Form 10-Q, as well as the legal disclaimer on page 2 of our earnings call slides that we have posted 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 like GAAP measures, is provided in a table to our press releases which was issued last night, as well as in the appendix to our earnings call slides.
With that, I’d like to now turn the call over to Joseph Campanelli, our Chief Executive Officer.
Thank you, Paul, and good morning, everyone. I’d also like to welcome everyone to our third quarter 2012 earnings call. I would like to begin today with some general comments on the third quarter specifically around credit cost and asset quality.
I will then turn the call over to Mike Tierney who will discuss some of the key drivers during the quarter. After Mike finishes his remarks, Paul Borja will take us through a more detailed financial review, including our outlook for the fourth quarter. Afterwards, our executive team will be available to answer any questions you may have.
We report another strong quarter. In our second consecutive quarter profitability with third quarter net income to common shareholders of $79.7 million or 1.36, $1.36 per diluted share.
On annualized basis, third quarter return on average assets, was 2.1%, and return on average equity was 25.8%. Our quarterly net income contributed to our tier one capital ratio to 9.31% which you can see on slide 9.
Book value also increased to $17.76 per share as compared to $16.50 per share in the prior quarter, a quarter over quarter improvement of approximately 8%.
Our third quarter performance was driven primarily by record levels of residential mortgage originations and gain in loan sale revenue which we attributed largely to initiatives we have implemented over the last several years.
These initiative, combined with record low interest rates and the ongoing dislocation of mortgage market place, have a lot as to leverage our vast distribution channels in long standing customer relationships, thus prudently increasing our market share of our customer share wallet and mortgage market share.
Based on the most current industry data, Flagstar has grown its total mortgage market share, from 2%, and 9th in the country in 2011, to 3% and the 8th in the country through the first six months of 2012.
We anticipate this trend will continue as we remain focus on leveraging our core competencies as a top tier mortgage lender in a Super-Community Bank in Michigan emphasizing all three lines of business, mortgage banking, personal financial services and commercial banking.
Slides 10 through 13, highlights some of our key mortgage banking drivers including gain on loan sale revenue and margin, mortgage originations, mortgage rate locks, and revenues from our mortgage servicing rates.
As you can see, with the exception of the MSR income, we experience significant improvement in each of the key drivers.
MSR incomes was down from previous quarters due to rate volatility, however, it still remains positive.
At the same time, we continue to encourage substantial credit cost associated with our legacy portfolios in representation warranty exposure. However, turning to slide 14, you can see that the 2012 revenues from our mortgage banking business have more than fully offset credit related cost.
Slide 15, this is a breakdown of our three primary credit costs, provision for loan losses, representation of warranty reserve change in estimate, and asset resolution expense.
I want to spend some time to provide further color on each of these components. Please note that in vision [ph] for the slides I’m going to cover, we have prepared a number of slides in the appendix that related to credit quality and additional stratifications of the legacy loan portfolios which you may find helpful.