What Flagstar Bank, National Association (FLG) Said on Its Q3 Earnings Call

Key Points

• Flagstar extended its turnaround timeline to 2028, lowering its 2026 and 2027 earnings outlook due to higher-for-longer interest rates, tougher deposit competition, reduced mortgage activity and elevated credit provisions.
• The bank is shifting its balance sheet toward commercial and industrial lending, adding $2 billion in C&I loans during the quarter while allowing commercial real estate balances to decline by roughly $1 billion per quarter.
• Credit risks remain concentrated in New York City multifamily lending: third-quarter provision expense was $76 million, criticized and classified loans rose 6%, and management expects nonaccrual loans to decline more slowly than previously projected.

Flagstar Bank, National Association NYSE: FLG said its turnaround plan remains intact but will take longer to reach its targeted profitability metrics as elevated interest rates, inflation and deposit competition pressure credit costs and balance-sheet growth.

During its third-quarter 2026 earnings call, Executive Chairman and CEO Joseph Otting said the company now expects to complete its transformation in 2028, rather than 2027. Management cited a higher-for-longer rate environment, slower expected deposit growth, related limits on commercial and industrial lending growth, and increased provision costs tied largely to New York City rent-regulated multifamily loans.

“This is a change in timing, not in our strategy nor expectations,” Otting said.

Revised Outlook Extends Into 2028

Co-President, Co-Chief Operating Officer and Chief Financial Officer Lee Smith said Flagstar reduced its forecasts for 2026 and 2027, while adding a 2028 outlook. The bank now expects 2026 earnings per share of $0.10 to $0.15 and 2027 EPS of $0.85 to $0.95. For 2028, Flagstar forecast EPS of $1.60 to $1.70.

Smith said the revised outlook reflects higher expected provision expense in the fourth quarter and in 2027, a more competitive environment for deposits, reduced mortgage originations and a slower pace of nonaccrual-loan resolution.

Interest rates have shifted substantially in recent months, according to Smith. He said the five-year Treasury yield had risen 75 basis points over the preceding three months as of Oct. 14 and 111 basis points over the preceding six months. The bank’s forecast incorporated a forward curve with four expected rate hikes.

Higher rates and inflation have increased capitalization rates and operating expenses for New York City rent-regulated buildings while rents have been frozen for as long as two years in some cases, Smith said. Those factors have pressured debt-service coverage ratios and increased the risk of loans moving into criticized and classified categories.

Flagstar recorded a $76 million provision expense in the third quarter. Smith said the bank’s outlook for provisions should be viewed as a proxy for expected net charge-offs.

C&I Growth Continues as CRE Exposure Declines

Flagstar continued to shift its balance sheet toward commercial and industrial lending. The bank added $2 billion in net C&I loans during the third quarter, bringing total C&I balances to $20.6 billion, up 11% from the prior quarter. The growth reflected approximately 75 new relationships, with an average loan outstanding of roughly $28 million.

Co-President, Co-Chief Operating Officer and Chief Banking Officer Rich Raffetto said Flagstar generated $4.6 billion in new and increased C&I commitments and $2.9 billion in loan originations during the quarter. Its C&I pipeline stood at $2.7 billion at quarter-end.

Growth was supported by lending across financial institutions, lender finance, renewable energy, entertainment, technology, healthcare, leisure and hospitality, public finance, equipment finance and diversified industrials, Raffetto said. The bank also added 35 new and replacement commercial-banking hires during the quarter, bringing total hiring over the past several years to more than 400 professionals.

Meanwhile, commercial real estate par payoffs totaled $1.2 billion in the third quarter, including $420 million of loans rated substandard. Flagstar funded approximately $375 million of new relationship-based CRE loans during the quarter, resulting in a smaller net decline in the portfolio. Management expects CRE balances to decline by about $1 billion per quarter.

The bank expects average balance-sheet growth of approximately $1 billion per quarter in 2027 and 2028. Management said it expects to add about $2 billion of net loans per quarter, funded roughly equally through deposit growth and CRE runoff.

Deposit Competition Remains a Key Variable

Total deposits rose approximately $300 million from the prior quarter. Core commercial client deposits increased by about $600 million, Raffetto said, alongside gains in capital-markets and treasury-management fees.

However, Smith said Flagstar has reduced its deposit-growth assumptions because of intensified competition. The bank expects to attract roughly $800 million to $1 billion of deposits per quarter in 2027, with about 18% expected to be noninterest-bearing. Management identified its ability to achieve that deposit growth as the principal risk to its forecast.

Average interest-bearing deposit costs increased one basis point sequentially to 3.09%. Flagstar’s net interest margin expanded four basis points from the second quarter to 2.17%, while September margin reached 2.23%. Smith said the bank expects fourth-quarter NIM to range from 2.20% to 2.25%.

Management expects future margin expansion to benefit from the reset or maturity of low-coupon multifamily loans. Between Oct. 1, 2026, and Dec. 31, 2027, approximately $12 billion of CRE multifamily loans with coupons below 3.9% are scheduled to reset or mature. Another $7 billion of loans with a weighted average coupon of 4.43% are scheduled to reset or mature in 2028.

Smith said loans that remain at the bank would reprice at higher market rates, while paid-off balances could be redeployed into market-rate C&I or CRE loans.

Credit Trends and Capital Position

Net charge-offs were $74 million, or 49 basis points of average loans, down $25 million from the previous quarter. Nonaccrual loans were relatively stable at approximately $2.8 billion, and 42% of nonaccrual loans were current and performing, according to Smith.

Criticized and classified loans increased $670 million, or 6%, as Flagstar performed an 18-month forward review of loans nearing maturity or repricing. Smith said a significant part of the migration occurred among market-rate units rather than solely within the rent-regulated portfolio.

Flagstar’s New York City rent-regulated portfolio with more than 50% rent-regulated units totaled $8.1 billion at Sept. 30, down $370 million, or 4%, from the second quarter. The broader rent-regulated portfolio totaled $12.9 billion, down $531 million, or 4%.

The bank expects nonaccrual loans to end 2026 at about $2.6 billion and decline to roughly $2 billion during 2027, though at a slower pace than previously forecast.

Flagstar reported a common equity Tier 1 ratio of 12.38%. The bank completed its previously authorized $250 million repurchase program, buying back 19.1 million shares at an average price of about $13 each. Otting said management does not anticipate additional repurchases in the fourth quarter but expects to consider resuming buybacks in 2027, depending on core earnings growth, credit trends and capital needs for C&I expansion.

About Flagstar Bank, National Association (NYSE:FLG)

Flagstar Bank, National Association is a full-service regional bank and the principal banking subsidiary of Flagstar Financial, Inc, formerly known as New York Community Bancorp. The bank provides consumer and business banking services through deposits, checking and savings accounts, lending, cash management, and digital banking channels.

Flagstar's lending activities include residential mortgages, mortgage servicing, commercial real estate loans, multifamily financing, commercial and industrial loans, and other consumer credit products.

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