Flagstar Financial, Inc. (FLG) Q3 2012 Earnings Report, Transcript and Summary

Good day everyone and welcome to the Flagstar Bank Annual Investor Meeting conference call. Today’s conference is being recorded. Today, you will be in a listen-only mode for the duration of this call. At this time, I would like to turn the conference over to Mr. Joe Campanelli. Please go ahead sir.

Good morning. My name is Christine Reid; I am the Corporate Secretary. We would like to welcome you to the 2012 Annual Meeting Of Stockholders of Flagstar Bancorp, Inc. In order to provide a fair and informative meeting, your cooperation in observing the following general procedures would be [Technical Difficulty]. If you wish to speak, please raise your hand. After the Chairman of the meeting recognizes you, kindly give your name and state whether you are a stockholder or you are holding a proxy of a stockholder. In order to speak at the meeting you must be a stockholder of record as of the close of business on August 14, 2012. Use of cameras, sound recording equipment, communication devices or any other similar equipment is prohibited without our written permission and the Chairman of the meeting will preside over the meeting and make any and all determinations with respect to the conduct of the meeting. Thank you for your cooperation.

The meeting will please come to order. Welcome to the Annual Meeting of Shareholder of Flagstar Bancorp; I am Joseph Campanelli, Chairman and CEO of Flagstar Bank and I will be acting as Chairman of the Meeting. On my right is Christine Reid who you have just heard from should be acting as secretary of the meeting. I would like to take a moment to present to you other individuals who is here with me. Our Board of Directors, David Matlin, Walter Carter, Jay Hansen, Michael Shonka; David Treadwell is travelling out of the country today, and we have James Ovenden and Gregory Eng joining us via video conference call. Other officers of corporation seated here this morning, Sal Rinaldi, Chief Operating Officer; Paul Borja, Chief Financial Officer; Todd McGowan, Chief Enterprise Risk Officer; Dan Landers, Chief Credit Officer; Steve Issa, Managing Director of Commercial and Specialty Banking; Mike Tierney, Managing Director of Personal Financial Services; Matt Kerin, Mortgage Banking and Warehouse Lending and Marshall Soura, Director of Loan Repurchases and Recourse Management. We also have Mike Maher, Executive Director Mortgage Servicing and Operations and Laura Anger, our Director of Human Resources. If there is any shareholder present who has not delivered his or her name to the Secretary or if there is any proxy holder who has not delivered his or her proxy to the Secretary and decides to do so, well, he or she please do so now. Flagstar’s prepared list of shareholders are entitled to vote at the meeting arranged in alphabetic order showing the holders of common stock entitled to vote at the close of business on August 14, 2012, the record date for voting. The Secretary informs me that our record show that there are outstanding of the record date and entitled to notice and…

Originate mortgages ever; I don’t understand how it benefits Flagstar to not expect the mortgage for the bank owned properties that you put up for sale?

I am not quite sure of the question.

Well, my attorney and thank you and several other of your executives of Flagstar (inaudible) package. I tried to purchase a Flagstar [home] with a pre-approved mortgage and I offered $45,777 more than what you accepted. You purchased the house at the [shares] auction for $68,800. Few months later, you put it up for sale for highest invest offer in four days, starting at $60,000. Within that four days, I supplied a pre-approved mortgage letter with a bid of $105,777. I was informed by [David Woods] of the President’s office that you accept at $60,000 a loss of [Technical Difficulty] Moving on right now we've on slide 13, which really just illustrates deliver products and service that we have expanded to do better job of cross selling into various households, small businesses, middle market companies and the consumer in general and also compliment our government banking business. We've invested to make ourselves competitive with the largest of banks within the regions and have the ability to deliver to community bank strategy. We are having people representing us in all of our key markets and making ourselves accessible to help cross-sell this. We're seeing very good traction help in [widening] the level of net interest margin where we see that the income that we are generating in longevity of the customer relationships that we implement. Our goal also as we talk about earlier is to really run off the book of legacy assets through 2005 to 2008 on the bank [originated] portfolio, residential assets of first and second mortgages of more than $5 billion, $1.6 billion in that legacy real estate commercial real estate assets that was really national in scope and conditions consumer lending products and services. Those activities have discontinued in mid-2008 given the financial crisis, and we came aggressively in 2009 and really put in strategies to reduce the level of these holdings substantially. We are seeing significant progress in each one of these asset classes, we believe we are very aggressive in marking end of the market and are now disclosing them well within our reserve levels. [Technical Difficulty]

Order of the portfolio has been (inaudible) looking for loan to sale. How many percentage or how would you characterize as loans in terms of percent that are new conformant versus legacy loans (inaudible)?

This entire portfolio here is legacy loans. They are originated prior 2009 and just broken up by three segments, general installment consumer all secured loans and we didn’t do any nor we do any credit card originations for portfolio that will be the home equity and first mortgage of commercial real estate.

Yeah. I guess my question goes to where the profitability of the bank right now is in going on (inaudible) market plan; we worked in the portfolio balance. My question is, are we selling really good loans and withholding the challenged loans or in the balance loans that we are selling?

Let me so that in answer it in a simplistic way. On the residential side, we're really are conforming originator of GSC, you know, Fannie Mae, Freddie Mac and FHA type loans that are purchased under a flow agreement underwritten souls. So those loans are strictly focused on originating and selling with service and retained, so we will continue to service those loans once we sell them for additional fee income. Everything that we’re originating on the commercial side or consumer side outside of conforming residential activities is for the balance sheet retention. So we have isolated the portfolio that was originated pre-2008 business trade runoff and this is running off for reinvesting relationships that you as a consumers of small businesses or commercial that we portfolio. And the key driver behind this to reduce your credit cost, the company’s core earnings power is very strong as you can see. It's paid for billions of dollars of prior credit cost before 2007, 2009 rather and the real piece that continues to drive down the source of these areas which is in our non-performing loans, those are 57% declines since June of 2010. We expect the decline to continue and just given the resources we have in the general dynamics of the marketplace. And then the other thing we are very happy to see is a considerable improvement in Michigan economy. Michigan had a much more difficult challenge with recession, but is bouncing off low, it’s much better than all the areas. So job creation is very strong within the footprint we compete in. We're seeing strong rebound in housing prices. There are certain urban areas that remain challenged because of the imbalance between supply and demand in markets like Detroit and others, but the market in general is actually one of the top in the country with respect to new job creation and in housing stability and we expect this to continue given the underlying fundamentals. So it’s a good market because we are operating in. We have also made a significant effort to support activities from the local communities to a variety of investments both on the human side with our team members taking part and allowing important activities to help support the development of our key markets and also supported various sponsorships to help make the difference and allows so many people little more connecting to these. I have taken quite few questions along the way, if anyone has any others I would be willing to answer at this time, yes. People on the phone won’t hear you.

One of the questions has to do with deposits, as I understand it, you are increasing deposits from people, putting money into savings account, is that right?

That’s one of the avenues.

Have you figured out why?

Why you put money in the savings?

Yeah, what interest do you pay?

We are competitive; our cost of funds are very attractive,

What exactly is it when somebody puts money into a savings account, what interest do they typically get?

I don’t know, Mike, you got savings rate today?

The question was what rate do they get in a savings deposit and the rate varies by a type product, but the one that we are promoting today would have been just over 1%.

Okay. So my question stands; have you figured out why anybody would put their money into bank savings account for only 1%; obviously you are doing it fine, I am just stunned to see how much money people have put in there and keep wondering if it could possibly continue, would they probably figure it out?

Well, now people want to put their money somewhere; we're hopeful that they don't look at the matches as an alternative. If the savings right in the US continues increase which we believe is a positive and the bank are benefiting from people looking at attractive rates, but its something that we look at constantly and we’ll tell where the rate environment goes with all the activities in the marketplace really driving a longer period of record low interest rates.

Okay, that one scares me; I just have a hard time depending on that, but you are doing fine. Second question has to do with your stock price and given your prospects right now, how seriously have you considered buying back a lot of that stock?

Right now capital is really better utilized to reinvest in some of the things we're talking about; repurchasing stock is not the priority at all quite candidly and until we’ve repaid TARP, it’s not an option. So we want to build the balance sheet, create excess capital and create excess liquidity, continue our move towards sustained long term profitability, we’ll look at those things and we believe you know continue to grow our book value in the related markets and take care of it. Those were questions. Maybe now that comes to the end. And at this time, I would like to introduce Tim Kosiek of Baker Tilly. Baker Tilly, our Independent Registered Public Accountants. Mr. Kosiek is available to respond to appropriate questions; is anyone having questions for Independent Registered Public Accountants. The inspectors have completed the count, secretary now read the report.

The report of inspectors confirmed that forum is and has been in the attendance of the meeting for all purposes. It also shows that each of the nominees has been elected as a director. I therefore declare that Joseph Campanelli, Walter Carter, Gregory Eng, and Jay Hansen, David Matlin, James Ovenden, Peter Schoels, Michael Shonka and David Treadwell each have been duly elected as the member of the board of directors, subject in the case of Mr. Schoels to receive of notice of non-objection from the Federal Reserve. The report of the inspectors shows that proposal two was adopted and the stockholders noted to grant to the Board of Directors the discretionary authority to approve an amendment to the articles of incorporation to the fact of reverse stock split of our authorized issued in outstanding common stock at anytime prior to October 24, 2012 at an exchange ratio of 1:10. The report of inspectors also shows that proposal three was adopted and Baker Tilly and Virchow Krause LLP has been ratified as our independent registered public accountants for the fiscal year ending December 31, 2012. The report of inspectors further shows that proposal four was adopted and the stockholders noted to approve the compensation of the executives named in the summary compensation table as disclosed pursuant to the SEC’s compensation disclosure rules as described in the compensation discussion and analysis and the tabular disclosure regarding named executive officer compensation together with the company narrative disclosures that are included in the proxy statement. The report of the inspectors has been accepted and approved and will be attached to the [minutes] of this meeting.

Thank you, Christine. There have been no further business to come for the meeting. A motion to adjourn is in order. [Technical Difficulty] I don’t think that’s a false number. [Technical Difficulty]. We said there was a vote to give the Board of Directors discretion.

Yeah, it has been granted. [Technical Difficulty]

We have implied October 24 for our board to take action, when they do take the action.

I think assuming the stock prices dollar, on the last day of the month, continues throughout this month, do we still have the option of not…

I can’t speak on behalf of entire board. The board will take, going through the due process. They got their authorization.

I guess I am asking a question. [Technical Difficulty]

No. I believe so. You know, the question before the motions we adjourn. [Technical Difficulty] No. What was it? Oh, I did answer. We don’t, that’s not the disclosed I think the vote was in. [Technical Difficulty]. I don’t have that number. [Technical Difficulty] The total percentage of shareholders voting of outstanding stock or was 89.42%. Yes. Any other questions before we have a motion to adjourn. Those in favor by saying aye, those oppose say no. Motions carried and the meeting is adjourned. Thank you.

That does conclude today’s teleconference. We thank you all for your participation.