Flagstar Bancorp: A Long-Term Buy

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Flagstar Bancorp (NYSE: FBC) has come out of the recession incredibly strong. It seems as though investors who were once scared of the bank during the height of the recession are beginning to climb back in and buy shares. Also, important is the fact that the bank's own customers seem to be coming back towards the bank, as the bank has increased core deposits 13% quarter-over-quarter. Even more importantly, hinting at consumer confidence in the bank is that Flagstar finished second in the JD Power and Associates annual survey for the North Central Region. This speaks to customers being able to trust the bank and the services that the bank is providing.  Now, let's dive into the financials and see why this company is truly a buy.

A better financial position

While revenue dropped the most recent quarter, net income increased quarter over quarter. Net income is in many ways much more important than revenue,as net income is the income that the bank makes after all of its expenses are paid. So the bank actually made a profit on decreased revenues. What is significant about the most recent quarter is the comment made during the conference call: "while we have clearly come down from the peak of 2012, we believe that we are now back to a level that's not far away from the longer term run rate." This would suggest that Flagstar seems to have its costs in check, which would be important for any stock that is being considered for a long term investment. 

Also of note is the fact that Free Cash flow jumped substantially quarter over quarter. This will help to ease any concerns that remained about Flagstar's liquidity situation. Flagstar's main focus can now be to increase its market share and its loan distribution in a way that is not as risky for shareholders. Flagstar has a plan to grow in a sustainable way long term. Shareholders should continue to buy into Flagstar's growth plan.

Risk has substantially been removed

Investors naturally hate risk, especially unforeseen risk in a stock. In this case, with capital levels going up, cash flow going up, and non-performing loans dropping; much of the risk typically associated with Flagstar has started to go away. Also, the recent settlement announced with MBIA (NYSE: MBI) will help to shore up the company's risk long term. While this is still quite a substantial amount of money in terms of a settlement, it is good for Flagstar long term as it has removed a cloud of uncertainty over the company. Investors are now easily able to quantify the value of MBIA's lawsuit and the impact that it will have on Flagstar's financials going forward. The settlement was an important step for Flagstar to move on, away from 2008, and every day it continues to become a stronger and stronger bank. 

This settlement was also very important for MBIA. While MBIA does appear to currently be under solid financial footing, the $110 million settlement was used to help pay down a loan from the National Public Finance Guarantee Corp. Along with another settlement that MBIA had with Bank of America for approximately $1.6 billion, MBIA was able to pay off its $1.7 billion loan from the National Public Finance Guarantee Corp. MBIA is becoming financially solid as it is shoring up its liabilities, which will help to provide additional value for shareholders. 

It is also believed that Flagstar is weighting the sale of its mortgage servicing rights. This would of course unlock even more cash for Flagstar in order to be able to expand its operations. The sale of these rights would also help to provide even more clarity for shareholders regarding Flagstar's financial position.  This also follows an industry trend, where Wells Fargo sold its mortgage servicing rights to Walter Investment Management Corp (NYSE: WAC)

Walter Investment Management Corp has been buying mortgage servicing rights rather rapidly. Recently acquiring a $12 billion reverse mortgage portfolio from Wells Fargo. This portfolio has the opportunity to unlock substantial returns for investors who are oriented towards the long term. Also, with the recent increase in net income when compared to the first quarter of 2012, Walter does appear to be heading in the right direction. 

Foolish bottom line

With a substantial increase in Free Cash flow, as well as increasing net income investors are no longer uncertain about the future of Flagstar. Flagstar has been slowly but steadily shoring up its balance sheet and trying to rid itself of the non-performing toxic loans. Flagstar's path forward continues, and it is continuing to make inroads with consumers. As more consumers come back to the bank, and as more loans are originated from Flagstar investors should continue to see the numbers improve at Flagstar. The worst is truly behind Flagstar, and its future looks bright. 

Alexander Maxwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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