Analysts Think Capital Could Be an Issue at Flagstar

Analysts at FBR Capital Markets state they are worried about capital adequacy at Flagstar Bancorp Inc., Troy, Mich., as the company's tangible common equity ratio decreased to 2.75% from 4.01% at the end of the third quarter. "We would encourage FBC to boost capital levels, as we expect credit headwinds to persist and remain elevated for some time. We are lowering our fiscal-year 2009 and fiscal-year 2010 earnings per share estimates to $1.85 and $0.30 from $1.25 and $0.20, respectively," said the report, written by Paul Miller, William Wallace and Jessica Halenda. FBR cut its price target by half to $0.50 per share from $1. Flagstar had missed the consensus estimate of $0.04 for its third-quarter loss and FBR's $0.10 estimate primarily driven by a $172 million deferred tax asset writedown in the quarter, which FBR estimated impacted EPS by about $0.38. The analysts added that they expect nonperforming assets at Flagstar to continue increasing over the next several quarters and are likely peak in mid 2010. FBR thinks Flagstar will start breaking even in late 2010 and begin posting positive EPS in 2011. In a section titled "The Other Side of the Story," the FBR analysts wrote. "If the economy recovers more quickly than expected and charge-offs do not continue to accelerate, lower credit costs could result in upside to our earnings estimates. With the government's support for the housing and mortgage markets, mortgage origination volumes could increase and benefit earnings. Higher earnings from mortgage originations could provide a cushion for higher credit costs."