Flagstar Bank, National Association (NYSE:FLG) executives said the company has made significant progress stabilizing its balance sheet and repositioning its business model, while acknowledging that the turnaround remains a work in progress.
Speaking at an investor conference, Chairman and CEO Joseph Otting said that when current leadership arrived in March 2024, the bank faced “capital issues, liquidity issues, credit issues, and regulatory issues.” Otting said the company’s common equity tier 1 ratio now stands at 13.2%, while liquidity has increased to $27.5 billion from $6.5 billion.
“We really built now a solid risk governance structure that we're proud of,” Otting said, adding that the bank believes it is positioned to meet enhanced regulatory standards regardless of where they ultimately land.
Balance Sheet Shift Toward C&I Lending
Otting said Flagstar is working toward a balance sheet mix of roughly one-third commercial real estate, one-third commercial and industrial lending, and one-third consumer cash flows, including mortgage-backed securities. The strategy follows what executives described as an overconcentration in multifamily lending, particularly rent-regulated multifamily exposure in New York.
The company has been building out its commercial banking platform, with Otting saying the bank has generated more than $2 billion of new loan outstandings in each of the past two quarters. He said Rich Raffetto, who joined the company to help lead the effort, has recruited more than 300 people into the strategy.
Lee Smith, Flagstar’s chief financial officer, said the bank had largely stepped back from originating new commercial real estate loans from March 2024 through the end of 2025 because it was overweight the asset class. He said CRE concentration to capital has declined from more than 500% in the first quarter of 2024 to about 365%.
Smith said the bank has begun originating new CRE loans again, but with a focus on “good quality” credits in areas such as the Midwest, South Florida and California, emphasizing short-duration, floating-rate loans rather than fixed-rate multifamily exposure in New York City.
Deposit Growth and Ratings Upgrades
Otting said recent ratings upgrades have helped open the door to deeper commercial relationships, particularly with customers that had policies limiting deposits above FDIC insurance thresholds unless a bank met certain ratings standards.
He said Flagstar is adding about 75 new commercial and corporate banking customers per quarter. The bank reported $1.1 billion of core deposit growth in the first quarter, which Otting said occurred before the ratings increase.
Executives also said commercial lending is helping drive deposits. Otting said an ideal outcome would be for the bank to gather deposits equal to 30% to 40% of each loan made in the commercial sector. Smith said the bank currently has about a 90% loan-to-deposit ratio and expects to fund loan growth with deposits as it moves through 2026 and into early 2027.
CRE Runoff, Rent-Regulated Exposure and Credit Trends
Otting said the bank originally modeled $600 million to $800 million of quarterly commercial real estate payoffs, but recent quarters have run closer to $1.5 billion to $1.6 billion. He said market liquidity has supported the reduction in real estate exposure, with agency lenders accounting for about half of the payoffs.
Smith said the faster runoff has reduced earning assets and created near-term pressure on net interest income and net interest margin. However, he said the broader strategy remains intact and may only shift the timing of certain targets from late 2027 into early 2028 if C&I growth needs additional time to replace CRE runoff.
On New York rent-regulated multifamily loans, Smith said the bank has about $8.8 billion of loans tied to properties that are more than 50% rent-regulated. He said Flagstar modeled a three-year rent freeze beginning in October, with operating costs rising 2.75% annually and market rents rising 2.1% annually.
Smith said the analysis showed little to no impact on net operating income for buildings that are 70% or less rent-regulated, because market-rate units could offset the rent freeze. For buildings that are more than 70% rent-regulated, he said the modeled NOI impact over three years was 7% to 8%.
Smith said $4.6 billion of the $8.8 billion book is pass-rated with a debt service coverage ratio of 1.5%, while the remaining $4.2 billion in criticized and classified loans has more than $500 million of charge-offs and allowance for credit loss coverage against it. He said the bank feels “more than adequately covered.”
Technology, AI and Expense Initiatives
Executives also highlighted technology investments and cost reduction efforts. Otting said the bank has consolidated six legacy data centers into two co-location centers and aims to move from two core systems to one by the second quarter of next year.
Smith said that core consolidation is expected to generate $40 million to $45 million in annualized cost savings. He also cited additional opportunities from vendor expense reductions, real estate optimization, lower FDIC expenses and IT projects coming online over the next 18 months.
Smith said the company has taken more than $700 million of costs out while also investing in C&I banking, risk infrastructure and technology. He said the bank’s efficiency ratio target is 50% to 55%, while Otting is pushing the organization toward 50%.
On artificial intelligence, Smith said Flagstar has built a proprietary internal AI platform called StarIQ, which is available to all 5,400 employees. He said about 83% to 84% of employees use it regularly, and that the tool can analyze company records, policies and procedures, as well as assist with presentations and marketing materials.
Capital Returns Under Consideration
Otting said the bank is on a “fun side of the mountain” with respect to capital after earlier challenges. He said the company has roughly $1.6 billion to $1.7 billion of excess capital based on current levels, though management is still focused on sustained profitability, continued loan portfolio improvement and the balance between C&I growth and CRE payoff activity.
Once those factors are further evaluated, Otting said management will make a recommendation to the board on what to do with excess capital. He noted that at or below tangible book value, a buyback would be “very attractive.”
Otting also offered a favorable view of the current regulatory environment, saying regulators are moving toward “sensible and logical regulation” and focusing more on end results such as capital and liquidity rather than prescribing specific processes.
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.
This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.
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The article "Flagstar Bank Touts Turnaround Progress, Eyes Capital Returns as CRE Exposure Falls" first appeared on MarketBeat.
