Flagstar Financial's Turnaround Momentum: Is Now the Time to Buy the Dip?

In the world of value investing, few stories are as compelling as a company on the cusp of a transformation. Flagstar Financial (FLG) fits this narrative, with a combination of aggressive cost-cutting, strategic pivot toward commercial lending, and balance sheet deleveraging creating a compelling case for long-term investors. While the stock remains near its book value, the question is whether the market is underestimating its potential to return to profitability by year-end.

Operational Overhaul: Cutting Costs to Fuel Growth

Flagstar's second-quarter 2025 results underscored the effectiveness of its cost-cutting initiatives. Non-interest expenses fell 27% year-over-year to $513 million, driven by a streamlined structure after merging its bank holding company into Flagstar Bank. Adjusted operating expenses dropped 5% sequentially, even after accounting for $14 million in merger-related costs. These savings were further amplified by branch closures and workforce optimization, including $9 million in severance and lease cost acceleration.

The result? A narrowing net loss and a positive pre-provision net revenue (PPNR) of $9 million in Q2, a stark contrast to a $23 million PPNR loss in Q1 2025. This shift is critical. By reducing structural inefficiencies, Flagstar has created a leaner platform to allocate capital toward its core growth areas.

C&I Loan Growth: A Strategic Shift with High Upside

While the company's commercial real estate (CRE) exposure has been a drag, its pivot to commercial and industrial (C&I) lending is paying dividends. New C&I commitments surged 80% quarter-over-quarter to $1.9 billion, with originations up 60% to $1.2 billion. The pipeline now stands at $1.2 billion, reflecting robust demand in sectors like healthcare, oil and gas, and media.

This focus on C&I is no accident. Unlike CRE, which is cyclical and prone to volatility, C&I loans are typically shorter-term and tied to the cash flows of operating businesses. Flagstar's hiring spree—adding 46 commercial bankers in Q2 alone—positions it to capitalize on this trend. The company's CEO, Joseph Otting, has emphasized a “third CRE, third C&I, third consumer” portfolio mix, which should diversify risk and stabilize earnings.

Balance Sheet Deleveraging: A Path to Margin Expansion

Flagstar's deleveraging efforts are equally impressive. The company paid off $2 billion in high-cost brokered deposits (average cost: 4.6%) and $1 billion in FHLB advances (4.5%), reducing its funding costs by 10 basis points. By allowing $2 billion in mortgage escrow-related deposits to runoff, it further lightened its cost of funds. These actions contributed to a 7-basis-point improvement in its net interest margin (NIM) to 1.81% in Q2, with June's NIM hitting 1.88%.

The capital position is equally strong. Flagstar's CET1 ratio now stands at 12.3%, up from 11.9% in Q1, and its liquidity coverage ratio of 231% on uninsured deposits provides a buffer against regulatory scrutiny. This capital fortification is essential as the company scales its C&I business and absorbs potential credit costs.

Valuation Metrics: Buying the Dip at a Discount

At a tangible book value of $17.33 per share and a stock price of $11.61 as of March 31, 2025, Flagstar trades at a 33% discount to tangible book value. This near-book valuation is rare for a regional bank with a capital ratio exceeding 12% and a clear path to deleveraging. The company's liquidity of $30 billion and $18.1 billion in available borrowing capacity further bolster its balance sheet.

For value investors, the question is whether this discount reflects lingering doubts about its turnaround or represents a mispricing. The latter seems more plausible. With operating expenses down $700 million year-over-year and a $600 million cost-cutting target for 2025, Flagstar's path to profitability is clear. If its C&I growth continues to outpace expectations and its NIM stabilizes near 1.9%, the company could achieve positive earnings by Q4 2025.

Risks to Consider

1. Economic Sensitivity: C&I loans are less sensitive to interest rate cycles than CRE, but a recession could still strain credit quality. Flagstar's net charge-offs have declined 48% year-over-year, but the allowance for credit losses (1.82% of loans) remains elevated.
2. Execution Risk: Scaling the C&I business requires disciplined underwriting. Overly aggressive lending could erode margins or lead to credit losses.
3. Regulatory Scrutiny: As a regional bank, Flagstar must maintain its “Well Capitalized” status. While its CET1 ratio of 12.3% is robust, any missteps in credit quality could trigger a downgrade.

Verdict: A Long-Term Buy for the Patient Investor

Flagstar Financial is no longer the value trap it was a year ago. Its cost-cutting, C&I growth, and deleveraging have created a foundation for sustainable profitability. At current prices, the stock offers a margin of safety for investors willing to hold through near-term volatility.

For those with a 12–18-month horizon, FLG represents a compelling entry point. The company's capital strength, improving credit metrics, and strategic focus on C&I loans position it to outperform peers as the economy stabilizes. If the market continues to discount its turnaround, this could be the last dip worth buying.

Final Call: Flagstar's transformation is well underway. For value investors who can stomach short-term noise, the rewards of this long-term bet may be substantial.