Why Flagstar Bancorp Inc Jumped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of bank holding company Flagstar Bancorp (NYSE: FBC  ) gained as much as 16% on Thursday on the back of yesterday afternoon's announcement that it has achieved an agreement with Fannie Mae to resolve repurchase requests and obligations associated with loans originated from 2000 through 2008. The announcement also prompted a Thursday upgrade of the shares by Compass Point from neutral, to buy.

So what: The total resolution amount in the agreement is $121.5 million; but, after paid claim credits and other adjustments, the bank will pay Fannie Mae $93.5 million -- all of which was fully reserved for at Sep. 30.

Highlighting the importance of this settlement for Flagstar Bancorp, Compass Point analyst Kevin Barker wrote:

We have remained on the sidelines with FBC given the overhang of the Fannie settlement and the potential hit to book value it may have caused. FBC screened as having the most exposure to GSE [government-sponsored entities] rep/warrants liabilities of any bank still dealing with GSE rep/warrants... The settlement was the biggest hurdle the company needed to overcome before it could effectively restructure its balance sheet.

Now what: The "overhang of the Fannie settlement" had clearly been weighing on Flagstar's shares – as of Tuesday's close, they were valued at an 11% discount to their tangible book value. The agreement with Fannie Mae provides an immediate catalyst for share gains and increased business momentum as it frees senior management up to focus on more productive pursuits. Flagstar looks over-reserved, and overcapitalized, so it also appears to have the financial resources to expand its lending activity (assuming the demand is there).

Although the shares have certainly been cheaper over the past year, at less than 10 times next 12 months' earnings-per-share estimates (prior to today's pop), Flagstar Bancorp could prove to be an interesting turnaround investment. Long-term investors with some tolerance for volatility may find this small-capitalization bank intriguing.

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