FHN - Flagstar Looks Undervalued But Volatility And Modeling Risk Also Look High

• Although Flagstar reported a steep sequential decline in revenue and pre-provision profits, results were still meaningfully better than expected as the mortgage banking business held up better than expected.
• The path forward for mortgage refi activity over the next two years is the biggest unknown; management is bullish on mortgage activity and there are opportunities to generate better margins.
• The community bank is an asset-sensitive lender waiting for better rates, and the credit situation looks fine.
• There's above average modeling risk with Flagstar given the very large (and volatile) mortgage banking business and the large amount of capital the bank is accumulating.
• If my long-term core earnings growth rate of around 6% is valid, these shares are undervalued below $50 and offer double-digit long-term total return potential, but with elevated risk/volatility.

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