Flagstar Dilutes, Shares Tank

The Michigan lender announced a reduced net loss and a large, dilutive capital raise.
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TROY, Mich. (

TheStreet

) -- Shares of

Flagstar Bancorp

(FBC) - Get Report

closed down 46% Thursday afternoon to $1.24, following the company's announcement of its third-quarter results and a $380 million capital raise.

The stock offering consisted of 110 million shares common stock priced at a dollar a share -- a 57% discount to Wednesday's closing price of $2.32 - and 13.5 million convertible preferred shares priced at $20.

The company plans to have a special meeting of shareholders as soon as possible to authorize sufficient additional common shares to enable Flagstar to convert the new convertible preferred shares to common shares on the next business day. If shareholders don't authorize the issuance of sufficient common shares to convert all the new preferred shares to common, the company will pay a non-cumulative dividend of 15% on the new preferred shares.

Flagstar reported a third-quarter net loss to common shareholders of $22.6 million, or 15 cents a share, improving from a net loss of $97 million, or 63 cents, the previous quarter and $298.2 million, or $6.36 a share, during the third quarter of 2009

Third-quarter earnings to common shareholders were net of $4.7 million in dividends on preferred shares, including $267 million held by the government for assistance provided through the Troubled Assets Relief Program, or TARP.

Contributing to the earnings improvement from the second quarter were a 40% decline in the provision for loan losses to $51.4 million, a 25% decline in problem asset resolution expenses to $34.2 million and a 20% increase in loan fees, to $24.4 million.

Flagstar reported strong mortgage origination volume of $7.6 billion during the third quarter, which was an increase of 61% from the second quarter.

Nonperforming assets - comprised of loans past due 90 days or more or in nonaccrual status (less government-guaranteed balances), along with repossessed real estate - made up 8.25% of total assets for main subsidiary

Flagstar Bank

as of September 30, improving from 9.06% the previous quarter and 9.25% a year earlier. This is a high nonperforming assets ratio when compared to the most recent aggregate "noncurrent assets" ratio for all U.S. banks and thrifts, which was 3.31% as of June 30.

The ratio of net charge-offs to average loans at Flagstar Bank for the third quarter was 5.90%, increasing from 5.07% in the second quarter and 3.48% in the third quarter of 2009. While third quarter industry aggregates won't be available for several weeks, the national aggregate net charge-off ratio in the second quarter was 2.64% according to the FDIC. Cullen/Frost's loan loss reserves covered 1.57% of total loans as of September 30.

The bank's loan loss reserves covered 6.48% of total loan as of September 30.

Despite the increasing loan loss rate, Flagstar Bancorp's loan loss reserves declined by $56 million during the third quarter, to $474 million. The $56 million "reserve release" directly affected the bottom-line results and matched the trend for the largest U.S. bank holding companies, including

Citigroup

(C) - Get Report

, which released $1.8 billion from loan loss reserves;

Bank of America

(BAC) - Get Report

, which also released $1.8 billion from reserves;

Wells Fargo

(WFC) - Get Report

, which released $650 million from reserves; and

JPMorgan Chase

(JPM) - Get Report

, which released $1.7 billion from reserves during the third quarter.

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--

Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.