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10 Cheapest Bank Stocks for 2013

2. Flagstar Bancorp


Shares of Flagstar Bancorp (FBC) of Troy, Mich., closed at $18.85 Friday, returning a whopping 270% year-to-date, following a 69% decline during 2011, adjusted for a one-for-10 reverse split after the market closed on Oct. 10.

The shares trade for 1.1 times tangible book value, and for 5.1 times the consensus 2013 EPS estimate of $3.71.

The company owes $266.7 million in TARP money. Flagstar in October announced that its main subsidiary Flagstar Bank had entered into a consent order with the Office of the Comptroller of the Currency, requiring the bank to "adopt or review and revise various plans, policies and procedures related to, among other things, regulatory capital, enterprise risk management and liquidity." Flagstar Bank CEO Joseph Campanelli said in a press release that "The matters reflected in the Consent Order were initially brought to our attention earlier this year by the OCC in connection with its examinations of the Bank," as part of a transition from being regulated by the Office of Thrift Supervision to being regulated by the OCC.

Campanelli said that "for much of this year, the Bank has been devoting significant attention and resources to addressing the matters identified in the Consent Order and developing or refining the relevant plans, policies and procedures. We have already made significant progress, and the Bank's Board of Directors is committed to working closely with the OCC and to achieving full compliance with the provisions of the Consent Order."

Flagstar's earnings have improved dramatically as the company has taken advantage of the mortgage refinancing wave. The company reported third-quarter net income available to common stockholders of $79.7 million, or $1.36 a share, compared to $85.6 million, or $1.47 million a share, during the second quarter, and a net loss to common stockholders of $14.2 million, or 26 cents a share, during the third quarter of 2011.

The main factor in the earnings improvement has been gains on the sale of newly originated mortgage loans, which totaled $334.4 million in the third quarter, compared to $212.7 million the previous quarter, and $103.9 million a year earlier. The third quarter results were affected by a $124.5 million provision for mortgage repurchase demands.

FBR analyst Paul Miller rates Flagstar "Outperform," with a $25 price target, and on Dec. 19 said that he expected the company would "be able to out-earn remaining legacy credit and litigation costs."

"With a valuation now just over current tangible book value of $17.76," Miller said that "the early part of 2013 will be key for Flagstar to continue recent stock price appreciation through book value growth. With sustainable profitability well within the company's capabilities, the next several quarters will be critical as FBC looks to realize back its $309 million deferred tax asset valuation allowance and to repay TARP capital."

Miller estimates that Flagstar will earn $3.92 a share in 2013, factoring-in the DTA recapture, with a 2014 EPS estimate of $3.40.

Interested in more on Flagstar Bancorp? See TheStreet Ratings' report card for this stock.

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