From a new home in Michigan, former Sovereign Bank CEO Joseph Campanelli has sent emissaries to colonize New England’s business lending scene.
They’re New Englanders themselves, but their bank – previously a family-run mortgage lending operation – seems like an unusual fit for the East Coast commercial lending market.
Campanelli, ousted from Sovereign shortly before it was sold to Spanish banking giant Santander, took over the struggling, $13 billion, Troy, Mich.-based Flagstar Bancorp as CEO in October 2009. Before the economic meltdown, former Flagstar leaders had attempted to diversify the business away from a near-total reliance on mortgages – but it was too little, too late, according to at least one analyst.
Now, Flagstar’s diversification strategy has a new plan involving New England, a place where the bank is unknown, but its new hires are not.
“While they don’t know Flagstar, they know us,” said Steven Issa, managing director of commercial lending with Flagstar and a former regional CEO of Sovereign Bank. Over the past several months, the bank has opened commercial lending offices in Boston, Foxborough, West Hartford, Conn., and Providence, R.I. Twenty-two people work out of those offices already, and Issa told Banker & Tradesman another eight to 10 more would be added in upcoming months. Former Sovereign employees make up about 25 percent of the new hires, he added.
Sovereign Bank Spokesman Edward Cafasso told Banker & Tradesman he couldn’t comment on specific personnel issues regarding any former Sovereign bankers who’d gone to work for Flagstar.
Diversification Plan
Issa and other new hires – the latest of which was Maureen Bachman, a former Sovereign vice president who joined Flagstar July 5 as treasury-management consultant – can clearly capitalize on existing contacts here in New England, analysts say.
Flagstar currently has branches in Michigan, Indiana and Georgia, and until recently was overwhelmingly a mortgage lender. At the end of 2003, according to FDIC data, about 80 percent of the bank’s assets were in single-family mortgages.
Flagstar, operated for decades by the Hammond family and by CEO Nick Hammond before Campanelli’s arrival, had gradually been trying to diversify into a more full-service bank where single-family mortgages played a lesser role, according to Terry McEvoy, analyst for Oppenheimer & Co. FDIC numbers back him up: By the second quarter of 2011, single-family mortgages comprised roughly half the bank’s assets.
Back when mortgage lending was a better business to be in, McEvoy said, the bank invested heavily in a branch network within their existing footprint, setting up shop in desirable locations. But management just couldn’t execute a plan to make those branches into moneymakers by cross-selling different banking products.
At the end of 2008, the bank accepted a $250 million cash infusion from investment firm MatlinPatterson, giving the investor control over 70 percent of the bank’s stock. Flagstar also received $523 million in Troubled Asset Relief Program funds.
Flagstar’s FDIC statistics show delinquent loans rising significantly through the years. Non-accrual loans, or loans that are significantly delinquent and no longer accumulating interest, stand at $1.7 billion as of the end of the second quarter 2011. That’s on the rise from last year, when such loans only amounted to $1.5 billion.
Still, some note that the bank has been slowly making progress to reverse its fortunes. BauerFinancial, a financial researcher, took Flagstar off its list of troubled banks in June, and McEvoy avows that the bank has made improvements.
“The balance sheet is now stronger, the strategy for growth is in place,” he said. “The foundation is there.”
Advantageous Timing
Part of this new era, clearly, involves commercial lending in New England. Flagstar officials say retail branch banking may be in the bank’s future, but at the moment the focus is on commercial lending.
The move raised eyebrows from local consultant Thomas Grottke, president of Connecticut-based Northeastern Banking Services Group.
Grottke expressed curiosity as to how the Michigan bank would grow among business borrowers without having branches to provide a full complement of services. He said a bigger physical presence is important for commercial lending, which is based strongly on an active bank-customer relationship. Plenty of lenders are moving more of their energies to electronic banking and remote deposit capture, but new technologies can only take a lender so far.
Besides, he added, the commercial lending market in New England is highly competitive right now, with local players engaged in aggressive pricing.
But Issa found plenty of bright spots in the New England commercial banking market that are giving hope to Flagstar’s ambitions.
Flagstar currently has a very small commercial portfolio, and is essentially starting from scratch in New England. This gives it many advantages – including local know-how – but no troubled loans to bring them down.
Competitor banks, meanwhile, are more internally focused at the moment, Issa added. In many cases they’re working through troubled commercial loans or distracted by the big changes occurring in the banking industry at large.
But not Flagstar, he said – to the local offices, the field is wide open.
“It’s a wonderful opportunity, and the timing could not be better,” he said.
