Flagstar Bank, National Association (NYSE:FLG) reported a return to profitability in the fourth quarter of 2025, highlighting improvements in net interest income, margin expansion, expense discipline, and credit trends as management continued repositioning the balance sheet away from commercial real estate (CRE) concentration and toward commercial and industrial (C&I) growth.
Fourth-quarter profitability returns
Chairman, President and CEO Joseph Otting said the bank posted adjusted net income of $30 million, or $0.06 per diluted share, in the fourth quarter, compared with a net loss of $0.07 per diluted share in the prior quarter. He credited the improvement to higher net interest income, net interest margin (NIM) expansion, and “disciplined expense management,” which together drove a $45 million increase in pre-provision net revenue and approximately 900 basis points of positive operating leverage.
Margin expansion and funding actions
Smith said NIM improved 23 basis points quarter-over-quarter to 2.14% when including a $20 million gain related to “tearing up” hedges tied to long-term Federal Home Loan Bank (FHLB) advances that were restructured at quarter-end. Excluding that one-time benefit, NIM was 2.05%, still up 14 basis points from the third quarter.
Management emphasized balance sheet deleveraging as a key driver of funding cost improvement. In the quarter, the bank paid off $1.7 billion of brokered deposits and $1 billion of FHLB advances. Smith added that the bank reduced brokered deposits by nearly $8 billion during 2025, leaving $2.3 billion of brokered deposits as of December 31.
On retail certificates of deposit (CDs), Smith said approximately $5.4 billion matured in the fourth quarter with a weighted average cost of 4.29%. The bank retained about 86% of those balances, rolling customers into other CD products roughly 45 to 50 basis points lower. For the first quarter of 2026, management expects another $5.3 billion of retail CDs to mature with a weighted average cost of 4.13%.
CRE reduction continues, with payoffs outpacing expectations
Both Otting and Smith pointed to continued progress in reducing CRE exposure, largely through par payoffs. Otting said the bank reduced multifamily and CRE loans by $2.3 billion, bringing the CRE concentration ratio below 400. Smith later said the CRE concentration ratio ended the quarter at 381% after a 120 percentage point decline, supported by a reduction in total CRE balances of $12.1 billion (25%) since year-end 2023 to about $36 billion.
Smith said par payoffs in multifamily and CRE remained “elevated” at about $1.8 billion in the fourth quarter, with 50% of those payoffs rated substandard. He noted that market interest from other banks and government-sponsored enterprises (GSEs) has remained strong, including for multifamily loans. Management also discussed that refinancing incentives have increased because the bank’s rollover pricing on some loans is higher than current market pricing.
During Q&A, management said it continues to expect par payoffs to remain strong in 2026 and indicated that, based on 2025 experience, roughly 40% to 50% of payoffs have been substandard, with no reason currently seen for that mix to change.
Growth priorities shift toward C&I and relationship banking
Management described continued momentum in building out the C&I platform. Otting said that over roughly 15 months, the bank has built an origination team “across America” under the leadership of Rich Raffetto. In the fourth quarter, total C&I commitments increased 28% to $3 billion, while originations increased 22% to $2.1 billion. Net C&I growth was $343 million, or 2% versus the third quarter, marking the second consecutive quarter of net C&I loan growth.
Management also discussed de-risking actions in the legacy C&I portfolio, including reductions tied to outsized single-name exposures (“tall trees”) and runoff in areas such as asset-based lending and dealer floor plan. Smith said roughly $4 billion of actions were taken during 2025, and management said it believes it is “mostly through” the right-sizing process, which it expects to support stronger C&I growth starting in the first quarter of 2026.
On pricing, Smith said new C&I loans have been coming on at spreads to SOFR of roughly 175 to 300 basis points, with a blended spread around 230 basis points. New CRE loans the bank expects to originate were described as coming on at spreads to SOFR of roughly 200 to 225 basis points.
Credit metrics improve; detailed view of NYC rent-regulated multifamily
Smith said credit quality metrics improved quarter-over-quarter, including a $330 million reduction in criticized and classified loans and a $267 million decline in non-accrual loans. Net charge-offs decreased $27 million to $46 million, and the provision for loan losses declined $35 million.
Management provided detailed commentary on New York City multifamily loans with 50% or more rent-regulated units. Smith said this tranche totals $9.2 billion, with 98% occupancy and a 70% current loan-to-value ratio. He said 53% ($4.8 billion) is pass-rated, while 47% ($4.3 billion) is criticized or classified, including $1.9 billion that is nonaccrual. Smith said those nonaccrual loans have been charged off to 90% of appraisal value, with $355 million (16%) charged off, plus an additional $91 million (5%) of ACL reserves, totaling 21% of combined charge-offs or reserves against that population.
Smith said the allowance for credit losses (ACL) coverage ratio, including unfunded commitments, remained flat at 1.79% quarter-over-quarter, and that the bank ended the year with a CET1 capital ratio of 12.83%, which management said left it about $2.1 billion pre-tax above the bottom of its targeted operating range of 10.5%.
Looking ahead, Smith said the bank updated its forecast through 2027, slightly adjusting net interest income guidance for 2026 and 2027 due to higher payoffs and a smaller balance sheet. The bank forecast 2026 EPS in the range of $0.65 to $0.70 and 2027 EPS in the range of $1.90 to $2.00. Management said it expects continued NIM improvement over time and described execution on growth, expense optimization, and continued reductions in non-accrual loans as key priorities for 2026.
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.
