During the October 8 lightning round of Mad Money, a caller asked about Flagstar Bank, National Association (NYSE:FLG). Jim Cramer pointed to concerns that technology could make it easier for depositors to move their money, as he said:
Okay, here’s what’s happening in Flagstar. A lot of people are saying, “This kind of bank is going to be hurt by Muse.” You say to Muse, “Hey, take my money out of low-earning, whatever, and put it into a higher-earning bank.” And I think someone’s going to say that’s hurting Flagstar, hurting all the regional banks. My take is don’t fight the trend. It’s too powerful. It’s time to move on.
Cramer’s reservations predate the deposit-switching concern. When asked about Flagstar in April, he stopped short of recommending a sale but found little reason to buy, with his hesitation centered elsewhere in the business.
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Deposits Grew as Profitability Improved
Flagstar Bank, National Association’s latest reported results do not show the deposit losses contemplated in Cramer’s comments. Second-quarter deposits increased $689 million, or 1%, from the preceding quarter, while deposit costs declined five basis points. The bank reported its third consecutive profitable quarter, with net income attributable to common shareholders of $26 million, or $0.06 per diluted share.
Commercial and industrial loans increased 12% sequentially to $18.6 billion. Flagstar also announced a $250 million share-repurchase authorization, providing another potential use for its capital as the recovery progresses. These figures do not settle whether faster deposit switching could become a competitive problem. They do distinguish the bank’s reported performance from Cramer’s concern about future customer behavior. The recovery had already earned Flagstar a place among undervalued financial stocks. That coverage examined why one analyst upgraded the shares while another maintained a more restrained rating.
Credit Quality Remains an Immediate Test
Flagstar Bank, National Association’s loan portfolio provides a more measurable risk. Non-accrual loans, including loans held for sale, rose $123 million, or 5%, from the first quarter. Its net interest margin was approximately unchanged at 2.13%. Although multifamily and commercial real estate exposure declined by $1.5 billion, problem loans still require attention.
The valuation sends mixed signals. Data shows Flagstar at approximately 0.62x book value, compared with 1.25x for KeyCorp. However, Flagstar’s forward P/E was approximately 16.8x, above KeyCorp’s 10.2x. The shares look discounted against accounting equity but more expensive against forecast earnings. That distinction matters for a bank rebuilding profitability. A discount to book value can offer upside if earnings recover, but it can persist when investors question future returns or expect further credit losses. Flagstar needs to earn more from its balance sheet, not simply trade below the value assigned to it. A bullish thesis published in February approached Flagstar from a different valuation starting point. Revisiting it raises a useful question: how much of that original opportunity remains at today’s earnings multiple?
Fund Participation Was Unchanged
Insider Monkey’s database showed 44 hedge funds holding Flagstar in both Q2 and Q1. Short interest was 11.77% of the public float. The unchanged holder count provides little evidence of a broad shift among those funds, while the short position shows that bearish investors remain active.
Cramer is unwilling to challenge the selling, but Flagstar Bank, National Association’s latest deposit figures are better than his warning might suggest. The more immediate question is whether the bank can build on its return to profitability while resolving troubled loans. Until that improvement becomes more dependable, the discount to book value may be insufficient to change investors’ minds.
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