Flagstar Bank, National Association Q1 Earnings Call Highlights

Key Points

• Profitability improving: Flagstar posted its second consecutive profitable quarter (adjusted EPS ~$0.04) as NIM expanded to about 2.15% after adjustments and operating expenses fell 5% to $441 million, with management guiding for continued expense reduction.
• Portfolio shift is underway: C&I loans grew $1.4 billion (9% linked-quarter) while CRE and multifamily balances declined $1.6 billion, a mix that accelerates diversification but is weighing on near-term net interest income and prompted lower 2026–27 interest-income/NIM forecasts.
• Credit and capital trends supportive: nonaccrual and criticized loans fell meaningfully, the bank ended Q1 with roughly CET1 13.2% and about $1.6 billion of excess capital, and Fitch/Moody’s upgraded deposit ratings to investment grade as the board eyes possible capital returns in H2 if profitability is sustained.

Flagstar Bank, National Association NYSE: FLG executives highlighted continued progress on profitability, balance sheet repositioning, and credit improvement during the company’s first quarter 2026 earnings call, while also acknowledging that elevated commercial real estate (CRE) and multifamily payoffs are tempering near-term net interest income expectations.

Quarterly progress: profitability, margin expansion, and expense reductions

Chairman, President, and CEO Joseph Otting said the quarter reflected “continued improving fundamentals,” pointing to strong commercial and industrial (C&I) growth, core deposit expansion, a decline in nonaccrual and criticized/classified loans, and “industry-leading capital levels.” Otting also emphasized that Flagstar has been executing against the strategy it laid out two years ago, with a focus on strengthening earnings and improving balance sheet quality.

Senior EVP and CFO Lee Smith said the bank was profitable for the second consecutive quarter after returning to profitability in the fourth quarter of 2025. Flagstar reported net income attributable to common stockholders of $0.03 per diluted share, or $0.04 per diluted share on an adjusted basis. Smith said first quarter adjustments were limited to a $9 million mark-to-market decline in the company’s investment in Figure Technologies; he added that after quarter-end Flagstar sold about 75% of its Figure position at a $1.8 million gain versus the March 31 valuation.

On net interest margin (NIM), Smith said NIM expanded 10 basis points quarter over quarter to 2.15% after adjusting for a $21 million one-time hedge gain that benefited fourth-quarter results. Both Otting and Smith attributed margin improvement primarily to lower funding costs, alongside ongoing balance sheet actions to reduce reliance on higher-cost wholesale funding.

Operating expenses declined to $441 million, down 5% from the prior quarter. Otting said expense discipline has been “a hallmark” of the bank’s return to profitability, and he and Smith both said they expect expenses to continue to decline in 2026 and 2027.

C&I loan growth accelerates as CRE exposure continues to decline

Management again emphasized its strategy to diversify the loan portfolio toward a mix of “one-third CRE, one-third C&I, and one-third consumer,” as Smith described it. In the first quarter, C&I loans grew by $1.4 billion, or 9% linked-quarter and 12% year over year, marking the third consecutive quarter of C&I growth. Smith said the bank originated $2.6 billion in new C&I loans, with $2.0 billion funded during the quarter, and noted that earlier quarters’ net growth had been muted as the company “right-sized legacy C&I positions.”

Smith said new C&I loans in the quarter were booked at an average spread of 242 basis points over SOFR, up from about 225 basis points in the fourth quarter, and that utilization was “just over 70%.” He also noted that a significant portion of C&I net growth occurred late in the quarter, limiting its impact on first-quarter NIM and positioning the portfolio to contribute more meaningfully in the second quarter and beyond.

At the same time, the bank continued to shrink CRE and multifamily balances. Otting said the multifamily and CRE portfolios declined $1.6 billion, or 4%, versus the fourth quarter, “mostly through par payoffs.” Smith said payoffs and paydowns were again elevated, including $1.1 billion of par payoffs, with 42% of those par payoffs rated substandard.

Smith said total CRE balances have declined $13.4 billion, or 28%, since year-end 2023 to approximately $34 billion, helping reduce the CRE concentration ratio by 134 basis points to 3.67%.

Credit metrics improve; management discusses NYC rent-regulated exposure

Credit quality trended positively, according to management. Smith said nonaccrual loans totaled $2.7 billion, down $323 million, or 11%, from the prior quarter, while criticized and classified loans fell $385 million, or 3%. He said the bank resolved a bankruptcy situation with a single borrower and reduced nonaccrual and substandard loans by more than $1 billion quarter over quarter.

Smith also addressed charge-offs, which were $78 million in the quarter versus $46 million in the prior quarter. He said $34 million of the quarter’s charge-offs were tied to the resolved bankruptcy borrower, and that $30 million of that amount was already reserved, with $4 million representing incremental costs such as sales expenses. Excluding that item, he said net charge-offs were roughly consistent with the prior quarter at about 30 basis points.

In discussing risk-rating processes, Smith said special mention loans increased due to a forward-looking review of loans with resets or maturities within 18 months, noting that 2027 is the largest reset year with nearly $9 billion of CRE loans resetting or maturing, including approximately $2.9 billion of multifamily loans where 50% or more of units are rent regulated. Otting added that many of these loans are current, but may appear “slightly impaired” under the bank’s analysis when applying higher contractual reset rates.

Smith provided additional detail on the New York City multifamily portfolio where 50% or more of units are rent regulated. At March 31, that tranche totaled $8.8 billion, down 4% from the prior quarter, with 97% occupancy and a current loan-to-value of 70%. Smith said about 52% of that tranche was pass-rated, with the remainder criticized or classified. He added that within the criticized/classified portion, $1.9 billion was nonaccrual and had already been charged off to at least 90% of appraised value.

Asked about the potential impact of a rent freeze, Smith said Flagstar modeled a three-year rent freeze starting Oct. 1, 2026, alongside assumptions including operating expenses increasing 2.75% per year and market (non-rent-regulated) rents increasing 2.1% per year. Under that analysis, he said properties with 70% or less rent-regulated units showed no impact to net operating income (NOI), while properties above 70% rent regulated saw an NOI impact of roughly 7% to 8% over the three-year horizon.

Capital position, ratings upgrades, and capital return timing

Flagstar ended the quarter with a common equity Tier 1 (CET1) ratio of about 13.2% (13.24% cited by Smith). Smith said the bank has approximately $1.6 billion in excess capital after tax relative to the low end of its targeted CET1 operating range of 10.5%.

Otting said the company’s priorities for capital include demonstrating “several quarters of sustainable profitability,” continued improvement in nonaccrual loans, and retaining flexibility to support anticipated loan growth. He said he expects the board to take action on capital distributions in the second half of the year. In response to analyst questions, Otting reiterated milestones management is monitoring: consistent quarterly earnings, progress toward reducing non-performing assets to $2 billion by year-end, and balancing C&I growth against CRE payoffs.

Management also highlighted ratings improvements. Otting said Fitch and Moody’s upgraded the bank’s long- and short-term deposit ratings to investment grade, with a positive outlook, calling it a “turning point” in efforts to win operating deposits from commercial relationships that have investment-grade requirements in their policies. Smith said the upgrades do not directly affect FDIC expenses, but should support deposit gathering.

Updated outlook: NII pressure from payoffs, but strategy unchanged

Smith said the company updated its 2026 and 2027 forecasts, lowering interest income guidance due to higher CRE and multifamily payoffs, paydowns, and amortization. He described the dynamic as “both good news and bad news,” since it accelerates diversification and reduces CRE exposure but pressures net interest income and NIM in the near term. He also said the bank is retaining a smaller share of resetting loans—currently 35% to 40% versus 50% previously—contributing to the near-term outlook shift.

Despite the changes, Smith framed the impact primarily as a timing issue, telling analysts that “worst case” the plan could be pushed out “one quarter or two quarters” as the bank replaces runoff with C&I, consumer, and selective CRE growth. Flagstar now forecasts adjusted EPS of $0.60 to $0.65 for 2026 and $1.80 to $1.90 for 2027, according to Smith.

On funding actions, Smith said Flagstar reduced deposit costs by 21 basis points and paid down $1 billion of Federal Home Loan Bank advances and $300 million of brokered deposits during the quarter. Looking ahead, he said the bank expects to pay down an additional $2 billion to $3 billion of FHLB advances over the rest of the year, depending on deposit growth and cash generation from payoffs.

Otting closed the call by saying the bank is “extremely focused” on executing its strategic plan and believes it has reduced a longer list of transformation priorities to “about four” remaining items, which management said are under control.

About Flagstar Bank, National Association NYSE: FLG

Flagstar Financial Corporation NYSE: FLG is a bank holding company whose principal subsidiary, Flagstar Bank, provides a range of financial services across the United States. Headquartered in Troy, Michigan, Flagstar combines commercial banking, mortgage lending and servicing, and deposit products to serve individuals, businesses and public entities. As a publicly traded company, Flagstar leverages its banking charter and national mortgage platform to deliver tailored financial solutions through both digital and branch channels.

The company's mortgage business is one of the largest residential originators and servicers in the nation, offering retail, wholesale and correspondent lending channels.

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