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Flagstar Bancorp Inc. in Troy, Mich., reported a net loss of $14.2 million for the third quarter, a 37% improvement over the same period last year and its smallest quarterly loss since the start of the financial crisis three years ago.
October 26 -
For the last year, Flagstar's been talking about diversifying its mortgage-heavy portfolio with commercial credits. With credit problems now waning, that push is moving forward.
March 3 -
All that's standing between Flagstar Bancorp Inc.'s past as a troubled mortgage lender and a potential future as a full-service community bank is $1.1 billion of problem loans.
October 28
The capital markets have been kinder to Flagstar Bancorp Inc. than they have been to many banking companies, but Flagstar might not want to press its luck.
The $13.6 billion-asset company from Troy, Mich., said late Tuesday that it would suspend dividend payments on its trust-preferred securities and its government bailout funds so it could further bankroll its mortgage banking operations and complete its transformation to a more commercial-oriented bank. Those acts, executives say, could return the company to profitability.
"We believe it is prudent use of capital to defer such dividends and interest payments until our financial conditions improve and restore the company to profitability, and we'll continue to retain the funds to support our continued execution of our strategic plan," said Joseph Campanelli, Flagstar's chairman and chief executive, said on a Wednesday conference call.
Weary investors and observers, said they viewed the deferrals as recognition that Flagstar likely couldn't raise new capital while in its current state. Late Tuesday, the company announced a fourth-quarter loss of $44.9 million, compared to a loss of $14.2 million a quarter earlier, as credit costs rose. A year earlier, the company reported a $192.1 million loss, largely due to a hit it took in order to unload nearly half of its problem assets through a bulk sale. Since 2007, Flagstar has lost nearly $1.4 billion.
"This company has raised capital three times, two from this management team and one from the old management team," said Paul Miller, an analyst at FBR Capital Markets. "That is a lot of money, so I don't think they have any options besides making it work with what they have."
A MatlinPatterson spokesman said the firm stands by its investment. “We are confident that Flagstar is taking the right steps and is on track to achieve profitability,” he said. “Given MatlinPatterson’s long term perspective and time horizon, this investment is still in a relatively early stage, and we believe it will ultimately be successful."
Despite the private-equity firm's affirmed support, Miller was skeptical. "I'm sure as an investment, this has been a big disappointment for them," he said.
To be sure, Flagstar is not facing any immediate capital need. At Dec. 31, Flagstar Bank was well-capitalized, with a leverage ratio of 9.19% and a total risk-based capital ratio of 17.07%. The company's equity-to-assets ratio was 8.16% and it down-streamed $18 million of capital to the bank during the fourth quarter.
Still, persistent losses make capital an issue.
"Capital is fine for now," said Eliot Stark, a managing director at HeadwatersMB, a Denver-based investment bank. "But they can't continue to lose $45 million a quarter,"
Stark added that the loss was actually closer to $66 million,
"They are in a tough transition, the mortgage business is still a bit of a drag and they haven't been able to put it behind them," Stark said. "At some stage, they will get to the end of the pile, but the question is how much capital will be left then? It could be a good opportunity at that point for some vulture investment to pump in say $400 million and take a majority stake."
The company's nonperforming assets rose 8% from the third quarter and 2.5% from a year earlier, to $607.6 million.
Flagstar's credit-related costs, including its loan-loss provision and the representation and warranty reserve for loan repurchase requests received from government-sponsored enterprises such as Fannie Mae and Freddie Mac, rose 55% from the third quarter, to $173.2 million. Credit-related costs fell 36% from a year earlier when Flagstar carried out the bulk loan sale.
The company said the overwhelming majority of the uptick in nonperforming assets was related to troubled-debt restructuring for mortgages. Most of those modifications included the extension of terms, some interest-rate relief and a little principal reduction in home-equity lines of credit, Michael Maher, the company's director of mortgage operations and servicing, said during Wednesday's conference call.
Meanwhile,
Flagstar's net interest income rose 15% from a year earlier, to $75.8 million. The company's net interest margin expanded 13 basis points from a quarter earlier, to 2.43%.
Throughout the conference call, Campanelli and Paul Borja, Flagstar's chief financial officer, commented on the likelihood of a return to profitability in 2012.
Miller was dubious of those projections. "Nobody wants to hear how great things are going to be in 2012. They want to know when they are going to make money and what the earnings power is going to be. We can't know that until this huge credit overhang goes away," he said.
Miller's modeling, made prior to the release of the quarterly results, called for Flagstar to be near breakeven later this year and then profitable in 2013 and 2014. "I would not say that I'm impressed with the fourth-quarter earnings," Miller said.