Flagstar Bancorp Inc. of Troy, Mich., is betting that it can use its nationwide home lending platform to ramp up in commercial lending.
The $15.2 billion-asset company, which makes home loans in 26 states, said last week that it plans to start doing commercial real estate lending from its offices in many of those states, mostly in the West, Midwest, and South.
Peter W. Smith, the senior vice president for commercial lending, said Flagstar has already made commercial loans in Las Vegas, south Texas, and in the Carolinas based on referrals from its home mortgage clients, and wants to hire more commercial lending specialists so it can follow up on referrals elsewhere.
"This is an opportunity for us to take full advantage of the presence we have on the home side," Mr. Smith said.
This push for commercial real estate loans comes while Flagstar is also expanding its retail presence. In July the company said it would like to open 100 new branches by the end of 2010, and it has set a goal of having at least 10% deposit share in each of its markets. It has 146 branches in Michigan, Indiana, and Georgia.
Mr. Smith said Flagstar's goal is to have 15% of its loan portfolio in commercial loans, up from 8% now.
Though the company is a fairly active commercial lender in markets where it has branches - especially in Michigan - Mr. Smith said it could reach its goals faster by going nationwide. It plans to begin making loans in 16 additional states, including Florida, Illinois, and Oregon.
"We are a Midwestern bank headquartered here in Michigan, and we all know about the Michigan economy," Mr. Smith said.
Mr. Smith said the company would start to look for loans between $1 million and $20 million by using contacts made through its home mortgage offices, and through direct mail with the existing borrowing base.
He added that Flagstar has put a strict loan approval process in place under which loans between $100,000 and $5 million must be approved by a commercial loan committee; those in the $5 million to $10 million range would go to the company's executive loan committee; and any loan over $10 million must be approved by the board of directors.
"It takes an added level of due diligence and review of the credits when we move into these other markets, and we are prepared to do that," Mr. Smith said.
Fred A. Cummings, an analyst with KeyBanc Capital Markets of Cleveland, said that the approval process makes him more comfortable with Flagstar's strategy.
"Having that disciplined underwriting in place is critical," Mr. Cummings said.
He said the company would need to add to its reserves because commercial real estate chargeoffs tend to be larger than home mortgage chargeoffs, but overall he said the company is on the right track.
"I think it is the right long-term strategy for Flagstar to continue to diversify away from the residential mortgages," Mr. Cummings said.
One challenge could be finding the right personnel. Experienced commercial lenders are in short supply these days and Flagstar will likely face fierce competition for talent.
Still, analysts say that Flagstar is making the right move in looking to get away from the mortgage lending that has dominated its business, though they do not expect it to pay immediate dividends.
In the second quarter, its increase in earnings was due largely to its sale of mortgage servicing rights. Its net interest margin fell 30 basis points from the same quarter last year, to 1.49%, in part because of its reliance on certificates of deposit rather than core deposits; and the spread on its gain on the sale of loans - primarily mortgages - dropped 27 basis points, to 0.2%.
"The company is being challenged on a lot of fronts, so growing the commercial real estate program is not going to affect the earnings in the near term," said Terry J. McEvoy, an analyst with Oppenheimer & Co. Inc. in Portsmouth, N.H.
Flagstar's stock price has not moved much since it announced the commercial lending initiative on Sept. 18, but Mr. McEvoy said the market would respond well over time.
"Diversifying the revenue stream and the balance sheet away from mortgages will improve the way the market values the company over the long term," Mr. McEvoy said.
