Joe Campanelli - Chairman, President & CEO
Christine Reid - Corporate Secretary
Flagstar Bancorp, Inc. (FBC) Annual Meeting of Stockholders Conference Call September 24, 2012 11:00 AM ET
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 to vote at this annual meeting, 557,993,063 shares of common stock. We have previously received an affidavit that the new ownership meeting in the form of proxy mailed on or about September 4, 2012 to each shareholder of record entitled to vote as the close to business on August 14, 2012 and a copy of the affidavit with documents attached will be attached to the minutes of this meeting.
The Board of Directors has previously appointed Danielle Tatum and Connie Atallah as Inspectors to act at this meeting in any adjournment. The inspectors then can report will be attached to the minutes of the meeting. Directors have previously delivered the inspectors a list of shareholders of record in all proxies that have been received.
The Secretary informs me that substantially more than the majority of the 557,973,063 shares of common stock entitled to notice of and to vote at the meeting are present in person or a proxy. The inspectors are making in that count and will submit a formal report of the number of shares present or represented during the course of the meeting. A quorum of the common stock is required presence subject to the confirmation of the fact by the inspector’s report.
The first time of visits to be acted upon meeting as stated in the notice of the meeting is the election of nine directors to the Board of Directors. In order to save of this meeting, we impose a range of proceedings to the votes we have taken at this time, while the inspectors are counting the ballots, we will continue with other business. Also, in accordance with the bylaws, writ nominations by any shareholder were required and been received by the Secretary prior to the date of this meeting. No such nominations were received; no further nominations are accepted at this meeting and hereby it’s clear that the nominations are closed.
We know in a proxy statement for this meeting that the shareholders waiting to receive non-objection from the Federal Reserve and the OCC, to serve as the director of Flagstar Bancorp, Flagstar Bank. The delay in receiving non-objection and these circumstances not unusual, as disclosed on page five of our proxy statement, in the election Mr. Schoels today will be subject to receipt of non-objection from the Federal Reserve. Mr. Schoels will begin serving as director of Flagstar Bancorp and Flagstar Bank upon receipt of notice of non-objection for the Federal Reserve and the Office of the Comptroller of the Currency.
We are now ready to proceed with the voting. If anyone wants to vote his shares by ballot, he should raise his hand now and we’ll furnish them. If you’ve already voted by proxy, notice we that proxy and vote again at this meeting but you will be not required to do so.
Has everyone had an opportunity to vote, please turn in your ballots to the inspectors. As it is, I declare the polls are closed for the selection.
Second item of business to be vote, to be acted upon is proposal of the grant the Board of Directors, discretionary authority to approve an amendment to the articles of incorporation to effect a reverse stock split of our authorized issued outstanding common shares at any time prior to October 24, 2012; an exchange ratio of 1:10.
The consideration and material provisions of this proposal are discussed in proxy statement. The Board of Directors recommends that the shareholders approve the proposal, to grant the Board of Directors, discretionary authority to affect the reverse stock split.
At this time, we will vote on this proposal. We have further motions to that proposal too. Are there any questions concerning this proposal? Yes. The main benefit of the reverse is to allow our stock we traded on, continue to be traded on New York Stock Exchange. The board and management believe that having an active liquid exchange in which you buy and sell your shares is supportive of all shareholders.
Any other questions? Unfortunately, with the exchange rules work, you have a six month carry period which we didn’t. Had that been period been extended and we continue through the end of September, it would have been. So we still have throughout the month of September but you have an overwriting rule and where I see the six month carry period.
The board will meet and discuss it and then will issue, I believe file an 8-K press release, what the final decision is, so we have up until October 24.
Yeah, I don’t know. We have [Technical Difficulty] I don’t believe, I think if you look at where banks are moving and the overall movement in stock market, most companies like ours we are getting positive support because of the high level to mortgage originations in the general mortgage business being very robust. I think it’s being more align with just general market conditions and Flagstar’s continuing market share. Yes.
We would certainly hope so. Any other questions? Thank you. [Technical Difficulty].
Proposal two, right? The third item of business we acted upon is proposal to ratify the appointment of Baker Tilly and Virchow Krause LLP, by the audit committee of the Board of Directors as our independent registered public accounts for the fiscal year ending December 31, 2012.
The considerations material provisions of this proposal are discussed in the proxy statement. The audit committees and Board of Directors has appointed Baker Tilly and the Board of Director recommends the shareholders to ratify Baker Tilly. At this time, we vote for this proposal. I will now obtain a motion for the proposal three we adopted with respect to proposal two prior moving on to proposal three. Thank you.
We will now vote out of motion to adopt proposal two which we call is the authorization for reverse stock split by the Board of Directors. Has anyone had an opportunity vote our proposal two? If so I declare the polls closed for the adoption of this proposal. Please return your ballots to the inspectors.
Now, moving on polls for three regarding the appointment of Baker Tilly and Virchow Krause. The audit committee of the Board of Directors has appointed Baker Tilly and the Board of Director recommends that the stockholders ratify Baker Tilly. At this time, we'll vote on proposal. I will now obtain a motion for the proposal three be adopted. You’ve heard the motion to adopt proposal three. Are there any questions concerning this proposal?
We will now vote on a motion for a proposal three. Has everyone had an opportunity to vote our proposal three? If so I declare the polls closed for the adoption of this proposal. Please return your ballots to the inspectors.
The fourth item of business we acted upon is the proposal to consider and approved by a non-binding advisory proposal, our executive compensation. The consideration of material provisions of this proposal are disclosed in proxy statement.
The Board of Directors recommended the shareholders vote to approve the compensation of executives in the summary compensation table as disclosed first went to the SEC’s compensation disclosures rules.
As described in the compensation discussion and analysis and the tabular disclosures regarding named executive officers’ compensation together with the accompanying (inaudible) disclosures in the proxy statements.
At this time, we will vote on this proposal. I will now obtain a motion to proposal four be adopted. [Technical Difficulty] further motion for adoption of proposal four; are there any questions that concern this proposal? We will vote on the motion to adopt proposal four. Has everyone had an opportunity to vote on proposal four?
If so I declare the polls closed for the adoption of this proposal. Please return your ballots to the inspectors. While inspectors are counting the votes, I would like to report you on the peers of the company. [Technical Difficulty] The first point to the cautionary statement obviously going forward actual results could be impacted by wide range of uncertainties including economic conditions and many other factors growing interest rates etcetera.
A great deal of work has been done over the last 18 months by the management team working together in addition to bring additional resources to really bring the company back to profitability. Over the last three years, we dealt aggressively with legacy credit cards while making substantial investments for the long-term to help Flagstar be a wider full service type bank in addition to serving to be an aggressive service in the mortgage business.
A lot of these investments and efforts are taking hold now. One of the key catalysts to driving revenues forward and also diversifying the company while we like the mortgage business a great deal, we do want to make sure that we have other types of requisites such as commercial banking, retail banking to provide diversifications so that we can be profitable on a variety of economic conditions.
We can also [Technical Difficulty]. We will make sure we get some hard copies available for you because there are a lot of things to cover. And of course in my discussion, I will try to talk slower and walk through these, but you can see in the prior three fiscal years, we had substantial legacy credit cost to deal with in the form of asset resolution expansions and dealing with foreclosed properties, credit charges on loans that did not performed as agreed and rep and warranty expenses where we actually repurchased loans that had gone bad. They were originated between 2005 and 2008.
So you can see we had substantial legacy credit cost to deal with. They are subsiding. They're moderating for a variety of reasons. One of things is the general economy. Two, it’s a lot of the efforts we put forth to be proactive in resolution of these credits and really putting a lot of emphasis around, you know, running off this part of the balance sheet and come over the business so that we continue to generate profits in the future.
You can see year-to-date, we made profits of over $77 million in spite of paying the cost of credit exposures that originated prior to 2009; while we're doing this we spend a lot of time, money and effort investing in our mortgage business. We have a very robust origination platform and servicing platform now. We've increased our market share significantly over this time and really positioned ourselves well to take advantage of the extraordinary levels of refinancing activities going on right now in the marketplace, and well positioned for a return of the purchase market.
There is still given the economic environment, a significant reluctance for people who move from the rental market into buying their own home, but we believe that the significant pent up demand there has been limited new housing starts. We are seeing the over abundance supply for closed properties mitigating. So there is a lot of underlying factors. There was support of return to the purchase market over the next year or two and we believe we’re extremely well positioned to continue take advantage of that. We have also increased our market share from just over 1% in 2007 to about 3% of a very large market putting us in the top eight in the United States originations and servicing.
Yeah, as the role defining the proxy what they include are full repayment of TARP, operating capital above 11%, there are a couple of other items in there also that make it highly contingent in a negotiating process, but for full description we can get you a page on proxy where its very well detailed.
As you can see, one of the key benefits to being a bank is attracting low cost core deposits. This is kind of remarkable success to the company has had raising deposits to fund all of our activities; in spite of the fact that we sold 28 branches in Indiana and about the likely amount in Georgia, we really looking concentrating our retail efforts in Southeast Michigan. So as we sold those deposits and eliminated those branches, we have to more than make up for deposit originations from our business there.
We have also announced recently the opening of two additional branches in Detroit, and Oakland County; we believe that we have considerable headroom and continue to grow in core deposits. It really is one of the few areas that a bank really has no other non-bank competition; most other areas you are competing with other mortgage originators or other commercial lenders really growing core deposits is the cornerstone of what makes your bank unique and allows to develop much lower cost funding source as we continue grow business lines.
Over the last three years, we've looked at making substantial investments in time, money and effort in these three primary areas and we made tremendous success. You saw on one of the earlier slides. First off, Financial Services area headed up by Mike Tierney and his team; we really are focused on leveraging the high quality customer service we have; we are excited that we received the JD Power recognition for high quality service two years in row. It really allows us to be more effective in our cross-selling opportunity. We have added a bunch of products and services that better meet the needs of various household consumers in that area. It’s really been the catalyst behind growing core deposits and will provide us very strong momentum over years to come.
The commercial and specialty banking business set up by Steve Issa; he has done a remarkable job over the last year adding over $1 billion of commitments; also within that 150 customer relationships here in Michigan and New England. It continues to provide the momentum to diversify our revenue stream while it can just being a major mortgage lender nationally.
A lot has changed in the mortgage space; I don't think anyone has been in the business can say that it is very much that hasn't changed in the last two or four years. The impact of Dodd-Frank on mortgage lending has been substantial; rating new agencies, establishing new benchmarks, originations, change in compensation structures, changing the way loan to service and we're at the forefront of embracing those changes and really creating a first class platform to allow us to compete effectively which really has led to record mortgage originations which we’ll see in a moment.
Just about every system in process within the company has been changed over the last three years to find the ways to do things better, faster, cheaper and to comply with the new reporting of regulatory standards.
As you can see, we have businesses that are national in scope; we originate mortgages in both the East Coast and West Coast all the way down to Florida. We originate the mortgages through three primary channels through brokers; of course a fine network that we have and through 27 retail lending offices strategically located around the country. We also have loan production offices for commercial banking relationships throughout New England and the Mid-Atlantic, so we really have been able to really identify markets where we can differentiate ourselves, arise a very good risk return investment for us and will allow us to continue to grow revenues in a safe and sound manner.
We are really focused in commercial middle market, privately held, closely held businesses, security transactions while the working capital landscape or receivables and inventory and other assets or machinery equipment lines by other assets; a lot of these – our goal her is to be big enough to meet the needs of our customer, but small enough to be compared with the (inaudible) relationship management and that’s really been a nice niche for us to fill in.
Yeah, well then we have asset based funding; we’ve got specific industries; a lot of clients maybe new to Flagstar but they are not new to relationship management team whether be New England; we have put together a team of people that service $ 25 million loan portfolio or Mid-Atlantic or Michigan we picked up some great lenders that has been in this market for over 20 years each and really working with the centers of influence accounts, the attorneys directs specific target marketing against clients that they know are looking for a change in the banking relationship.
It's interesting. The mortgage portfolio, you have to break it into two pieces. One is the origination of residential loans that are available for sale. We originate those loans throughout the month and every 21 days we settle with Fannie and Freddie who were selling then to. We do not originate full portfolio. So these are all aggregated for sale and those have a coupon between 3.5% to 4% and then on the warehouse planning side, slightly higher than that. So (inaudible) in those assets turn very quickly as you could imagine, your originate packaging and selling.
On the commercial side, our average spread is probably 275 basis points. On the credit side and then you look for cross-sell opportunities for swaps and cash management of the (inaudible) like that.
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.
Unidentified Company Representative
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
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.
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?
Unidentified Company Representative
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.
Unidentified Company Representative
Yeah, it has been granted.
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.
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.