Flagstar Financial (FLG) Stock Soars After Q4 Earnings Report Beats Estimates

Flagstar Financial (NYSE:FLG) has surged over 16% today after delivering better-than-expected Q4 earnings, The stock is still down significantly in the past year due to the decline in early 2024 after it posted a $252 million Q4 2023 net loss. This was driven by $552 million in loan losses and far exceeded what analysts expected.

That said, the road to recovery doesn’t seem to have as many bumps as previously thought, and the stock has been recovering fast today. Here’s what you need to know:

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Flagstar Financial’s Q4 Earnings Report Was Solid

Flagstar Financial reported a Q4 adjusted net loss of $0.34 per share and beat estimates of a $0.55 loss. This is a significant improvement from the previous quarter, where it posted $0.79 in per-share losses. The loss looks even better when you consider the fact that it reported $11.27 in per-share losses in the year-ago period.

The top line also performed well. It reached $625 million vs. expectations of $558.6 million. Flagstar Financial then slashed its provision for credit losses by 55% to $108 million. As previously noted, the $552 million provision in Q4 2023 has been a major reason why FLG stock hasn’t recovered and has instead traded sideways. This roadblock is now much less of a problem.

Flagstar’s Capital Position Is Improving Fast

The CET1 capital ratio rose to 11.9%. This means Flagstar Financial is now in the top quartile of its peers. It also reduced its high-cost deposits and wholesale borrowings while growing retail and private banking deposits by 3% sequentially. The $1.3 billion sale of mortgage servicing rights to Mr. Cooper increased Flagstar’s CET1 capital ratio by 60 basis points. If you combine this with the earlier $5.9 billion in mortgage warehouse loans to JPMorgan (NYSE:JPM), total capital adequacy ends up improving 130 basis points in 2024 just from those two deals.

It also cut its commercial real estate loans by 17% year-to-date. Multi-family loans were cut by 9%. On the other hand, retail and private banking deposits grew 3% sequentially.

Nonetheless, you should still keep in mind that there are some risks with a smaller loan portfolio. Net interest margin fell to 1.73% (down 6 basis points) in Q4 due to this.

Management Plans Further Improvements

Management is targeting profitability by 2026 with a $600 million expense reduction plan. Flagstar is selling its non-core mortgage business and is instead moving to more higher-margin businesses.

Flagstar reduced its workforce from 9,000 to 6,000, and the mortgage assets sale will lead to a better balance sheet. Moreover, average cash balances increased $9.5 billion or 84% to $19.5 billion in Q4.

If Flagstar can keep enhancing its balance sheet and return to profitability, there’s a good chance it will recover even more from here.

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