Now that he's cleaned up Flagstar Bancorp Inc., Joseph P. Campanelli is introducing the company to his old territory.
The $13.6 billion-asset Flagstar has been talking for the past year about diversifying its mortgage-heavy portfolio with commercial credits. With credit problems now waning, that push is moving forward in earnest. And at least part of that diversification will be sought in New England, the region Campanelli once oversaw at Sovereign Bank before ascending to that company's top position.
"Flagstar might be new to the area, but the relationships we have there go back decades," Campanelli, Flagstar's chairman and chief executive, said in an interview Monday.
Before the downturn, banking companies, particularly those in the Midwest, often sought geographical diversity by moving to warmer climates. Now, those craving growth want an area that has a stable economy. Flagstar, of Troy, Mich., must be prepared to encounter a fiercely competitive landscape.
"It is a crowded dance floor with lots of formidable companies that Joe knows well. The opportunity that will present itself will be the competitive vaccuum that will exist as the industry consolidates," said John Carusone, the president of the Bank Analysis Center in Hartford, Conn. "It is still going to be challenging. They could be viewed as an out-of-region interloper."
To assist in the growth, Campanelli recruited another Sovereign executive.
On Monday, Flagstar said it had hired Steven Issa, who had led Sovereign's middle market and specialty group in New England, to serve as Flagstar's New England market president. He will also oversee commercial banking.
Issa and his team will focus on small businesses and middle-market companies, looking to make loans ranging from $1 million to $20 million. Flagstar plans to open loan production offices across the region. Branches could follow, Campanelli said. Flagstar's supervisory agreement with regulators does not limit its growth, he said.
Bose George, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said a New England expansion has long been expected given Campanelli's background. Still, he is glad Flagstar is starting with loan production offices.
"We assumed at some point this would happen, although I wasn't necessarily expecting it now; it is a reasonable step to take. They might have a lot of success," George said. "I like that they are doing it without significant costs. If this doesn't play out, they can get out."
An eastward push does not come at the expense of Flagstar's other regions, namely Michigan. Executives said that things are looking up in their home state.
"The auto industry had a much better 2010, and there are still an awful lot of suppliers. We want to be their lenders," said Michael Tierney, who was named managing director of retail banking on Monday.
Flagstar announced other crucial hires and said it would add 20 lenders and managers by yearend. As part of Flagstar's makeover, Campanelli wants to realign its portfolio to be split evenly among mortgage, commercial and retail loans. Currently, the portfolio is almost exclusively mortgage related and Flagstar's assets have shrunk nearly 20% since 2008.
Though Campanelli announced the commercial push last February, it is the last leg of a three-pronged strategy. The first two were improving infrastructure, adding products like remote deposit capture, and cleaning up the problem assets that once totaled $1.1 billion. The cleanup has been Flagstar's headline issue. Flagstar has raised $1.5 billion since early 2009 to deal with its problems.
Most of the capital came from MatlinPatterson Global Advisors LLC, a New York private-equity firm, but also includes $266 million from the Treasury Department's Troubled Asset Relief Program. Ir raised $370 million in the fourth quarter so it could sell $474 million of its nonperforming assets at 44 cents on the dollar.
The distressed sale led to a $225 million loan-loss provision but reduced nonperforming assets by 48% from a quarter earlier, to $593 million at Dec. 31. Flagstar's ratio of nonperforming assets to total assets fell to a more manageable 4.35% from a high of 8.25%.
"They've largely put their problems behind them," George said. "It has been a long time since they've been on the offensive."
