Flagstar Bank Posts Q4 Profit, Marking Turnaround as It Shifts Away from Commercial Real Estate
Flagstar Bank, N.A. (NYSE: FLG) has charted a course back to profitability, reporting a net income for the fourth quarter of 2025 after a period of losses. The results signal a potential inflection point for the Michigan-based lender, which has been aggressively repositioning its balance sheet to reduce its heavy exposure to commercial real estate (CRE) while building out its commercial and industrial (C&I) lending platform.
"Our disciplined execution on funding costs, expense management, and balance sheet repositioning is delivering tangible results," said Chairman, President, and CEO Joseph Otting. The bank posted adjusted net income of $30 million, or $0.06 per diluted share, a significant reversal from a net loss of $0.07 per share in the prior quarter. Otting credited a $45 million surge in pre-provision net revenue to higher net interest income and margin expansion.
A key theme of the quarter was deleveraging. CFO Lee Smith detailed how the bank paid down $1.7 billion in brokered deposits and $1 billion in Federal Home Loan Bank advances during Q4 alone. For the full year 2025, brokered deposits were slashed by nearly $8 billion. This, coupled with managing the rollover of retail certificates of deposit at lower rates, helped improve the net interest margin (NIM) to 2.14%, or 2.05% excluding a one-time hedge benefit.
The strategic shift away from CRE concentration remains central to Flagstar's narrative. The bank reduced its multifamily and CRE loan portfolio by $2.3 billion in the quarter, bringing its CRE concentration ratio down to 381%—a 120 percentage point drop. Since the end of 2023, total CRE balances have fallen by 25%, or $12.1 billion. Smith noted that payoffs in this segment remain "elevated," with about half of the $1.8 billion in Q4 payoffs coming from loans rated substandard.
As the CRE book shrinks, Flagstar is pushing growth in C&I lending. Total C&I commitments jumped 28% to $3 billion in Q4, with net loan growth marking a second consecutive quarter of increases. Management indicated that after a year of "de-risking" its legacy C&I portfolio, it expects stronger growth to commence in Q1 2026. New loans are being written at spreads to the Secured Overnight Financing Rate (SOFR) between 175 and 300 basis points.
Credit trends showed broad improvement. Criticized and classified loans fell by $330 million, non-accrual loans dropped by $267 million, and net charge-offs declined. The bank provided a detailed breakdown of its $9.2 billion New York City multifamily portfolio with rent-regulated units, revealing that nearly half is criticized or classified, including $1.9 billion on nonaccrual status.
Looking forward, Flagstar issued updated financial forecasts through 2027. The bank anticipates 2026 earnings per share between $0.65 and $0.70, projecting a significant ramp-up to $1.90-$2.00 in 2027. This outlook hinges on continued NIM improvement, expense optimization, and further reductions in problem loans.
Analyst & Investor Commentary:
"This is a solid quarter that confirms the turnaround thesis," said Michael Thorne, a banking analyst at Veritas Financial. "The accelerated CRE runoff and the sequential growth in C&I are exactly what investors needed to see. The 2027 EPS guidance suggests management has high confidence in the durability of this pivot."
"Finally, some light after a long tunnel," remarked Sarah Chen, a portfolio manager at Great Lakes Capital. "The drastic reduction in high-cost brokered deposits is a masterclass in funding cost management. It's painful in the short term but sets up much better profitability down the line. The capital position is robust, giving them room to maneuver."
"Let's not pop the champagne just yet," countered David R. Miller, a vocal critic and independent banking consultant. "A one-quarter profit built on one-time gains and aggressive balance sheet shrinkage isn't a sustainable model. They've offloaded $12 billion in CRE, but what's left? A $9 billion NYC rent-regulated book that's nearly half troubled. And 'expecting' stronger C&I growth is not the same as delivering it. The guidance for 2026 is still anaemic."
"The operational discipline is impressive," noted Priya Desai, a former regulator now with the Brookings Institute. "The rapid de-risking of the balance sheet addresses a key supervisory concern. However, the success of this story now completely depends on their ability to become a proficient C&I lender at scale—a very competitive field. The next few quarters will be critical to prove this isn't just a smaller, safer, but less profitable bank."
Flagstar Bank, headquartered in Troy, Michigan, is a national provider of banking, mortgage, and deposit services. Its mortgage operation ranks among the largest originators and servicers in the United States.