Flagstar Corp. (FBC) wrapped up its first quarter with a $22.2 million profit and less exposure to mortgage servicing rights as the company prepped to meet Basel III capital and liquidity requirements.

It’s been known for a while that banks may cut back on MSR exposures due to Basel III’s prescription for calculating servicing rights when establishing their capital ratios.

Under new Basel guidelines, the value of mortgage servicing rights can only be used to account for up to 10% of common equity when determining a bank's Tier 1 capital ratio.  

Flagstar’s profit of $22.2 million, or 33 cents a share, for the first-quarter of 2013 improved over a net loss of $8.7 million, or 22 cents a share, in 1Q 2012.

The Michigan-based bank attributes its profit growth to improvement in risk management operations, higher levels of compliance, quality control and balance sheet de-risking.

At the same time, the company’s CEO and President Michael Tierney credited the bank with strengthening its capital and liquidity ratios – a task that required a reduction in MSRs.

Still, the company, which also lost a major MBS court case filed by insurer Assured Guaranty, still faces an uncertain mortgage market.

"Flagstar's revenues are heavily dependent on the mortgage banking business, with gain on loan sales, net interest income, and loan fees all driven by mortgage volume," Tierney said in a statement. 

"Along with the industry, we experienced a slowdown in mortgage banking activity during the quarter, with reduced demand and tighter margins due to increased competition and excess capacity. In response to recent headwinds, we have taken steps to gain market share and improve margins, and are confident that Flagstar remains well positioned to capitalize on future opportunities in the mortgage business."