Flagstar Financial (NYSE:FLG) released first-quarter financial results and hosted an earnings call on Friday. Read the complete transcript below.
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Summary
Flagstar Financial reported strong first-quarter 2026 results, with significant progress in core banking operations, including net interest margin expansion and increased core deposits.
The company highlighted a strategic focus on diversifying its loan portfolio, specifically through CNI loan growth, and reduced its CRE exposure by $1.6 billion.
Management noted continued improvement in credit quality, with a 11% decrease in non-accrual loans and a 3% reduction in criticized and classified loans.
Flagstar Financial achieved a CET1 capital ratio of 13.2%, with plans for potential capital distributions in the second half of the year following sustained profitability.
The company completed the consolidation of six legacy data centers into two, setting the stage for a core conversion in 2027, and received upgrades from Fitch and Moody’s to investment grade.
Future guidance suggests a slight downgrade in interest income expectations due to increased CRE payoffs, but the company remains optimistic about continued CNI growth.
Full Transcript
Regina (Operator)
Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time I would like to welcome everyone to Flagstar Financial first quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you’d like to ask a question during this time, simply press Star then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations, director of investor Relations. Please go ahead.
Sal DiMartino (Director of Investor Relations)
Thank you, Regina and good morning everyone. Welcome to Flagstar Financial’s first quarter 2026 earnings call. This morning our Chairman, President and CEO Joseph Otting along with the company’s Senior Executive Vice President and Chief Financial Officer Lee Smith will discuss our results for the quarter. During the call we will be referring to a presentation which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the Investor Relations section of our company website, ir.flagstarfinancial.com Also, before we begin, I’d like to remind everyone that certain comments made today by the management team of Flagstar Financial may include forward looking statements within the meanings of the Private Securities Litigation Reform act of 1995. Such forward looking statements we make are subject to the safe harbor rules. Please review the forward looking disclaimer and safe harbor language in today’s press release and presentation for more information about risks and uncertainties which may affect us. Additionally, when discussing our results, we will reference certain non GAAP measures which exclude certain items from reported results. Please refer to today’s earnings release for reconciliation of these non GAAP measures and with that I would now like to turn the call over to Mr. Otting. Joseph
Joseph Otting (Chairman, President and CEO)
thank you Sal. Good morning everyone and welcome to our first quarter 2026 earnings conference call. We are pleased to report another quarter of solid progress and continued momentum across our core banking franchise. Our first quarter performance reflects continued improving fundamentals, strong C&I growth, a high level in growth of core deposits, further progress in reducing the level of non accrual and criticized classified loans, continued margin expansion and industry leading capital levels. Just as importantly, our first quarter results demonstrate we are exceeding and executing on the strategy we laid out two years ago. In delivering against our priorities, we are doing exactly what we set out to do. Strengthening our earnings profile, improving the quality of our balance sheet and building a top performing regional bank. The progress we are making is intentional and driven by a clear focus on disciplined execution. Now turning to the slides, slide number 3 of the investor presentation, I’d like to highlight some of the key performance factors and drivers during the quarter. First, disciplined expense management has been a hallmark of our return to profitability over the past two years and in the first quarter operating expenses continued to decrease and we expect them to decrease in 2026 and 2027. We also had another quarter of net interest margin expansion driven primarily by lower funding costs. Second, one of our key growth strategy is to diversify our loan portfolio by increasing our CNI lending platform. This quarter marked the third consecutive quarter of CNI loan growth after us reducing our exposure to certain industries, lowering our single transactions exposure exposures and exiting certain relationships that did not meet our return hurdles and we’ve done this throughout 2024 and part of 20. Third, we experience a further reduction in our overall Commercial Real Estate (CRE) exposure mostly through PAR payoffs, resulting in the multifamily and Commercial Real Estate (CRE) portfolios declining by 1.6 billion or 4% relative to the fourth quarter and further improvement in our Commercial Real Estate (CRE) concentration. Fourth, we continue to see positive credit migration as non accrual loans declined by 11% and criticized and classified loans decreased by 3%. Additionally, we ended the quarter with a robust Common Equity Tier 1 (CET1) capital ratio of 13.2%. In terms of future capital distributions, our focus first is on demonstrating several quarters of sustainable profitability and continued improvement in our non accrual loans and flexibility to support our anticipated loan growth. We expect the board taking action on capital distributions in the second half of the year. Finally, I would like to highlight 2 other milestones during the first quarter. We were very pleased with Fitch and Moody, upgraded the bank’s long term and short term deposit ratings to investment grade with a positive outlook and when we filed our 10k in late February we disclosed that the previously material weakness in internal controls have been remediated. Both of these milestones reflect the tremendous effort, dedication and hard work of our entire team. On the next couple of slides we spotlight the significant progress we continue to make in our C&I lending businesses during the quarter. C&I loans grew by 1.4 billion or 9% on a linked quarter basis, significantly higher than in prior quarters. On slide four we go into detail on the trends in our CNI portfolio. While the first quarter is typically a seasonally slow quarter for originations, you can see on the left side of the slide that our originations were essentially flat compared to the fourth quarter. We also will note that the pipeline remains strong and we expect second quarter funding from CNI to be similar to Q1. On the right side is the five quarter trend in the CNI portfolio. After bottoming in the second quarter of last year, we’ve had steady growth in the first quarter. CNI loans grew by the 1.4 billion, up 9% compared to the fourth quarter and year over year 12%. The next slide provides quarter over quarter growth by loan category. While the majority of the growth was driven by our two main strategic focus areas, specialized industries lending and corporate and regional commercial banking, this quarter gross was broad based with gross also occurring in the mortgage finance and asset based lending verticals. Now turning to Slide 6, you can see the trend in our adjusted diluted EPS whereby we have now reported two consecutive quarters of EPS growth By executing on all our strategic initiatives on an adjusted basis, we went from $0.03 in the fourth quarter to $0.04 during Q1. One other positive note I’d like to make is that during the first quarter we completed the consolidation of our six legacy data centers into two colocation centers with no disruptions neither to the organization or any of our customers. And this positions us well in 2027 to have the baseline and platform for our core conversion with Ultimately the goal in 2027 is to get onto one core. So with that I’ll now turn it over to Lee to review our financials and credit quality.
Lee Smith (Senior Executive Vice President and Chief Financial Officer)
Thank you Joseph and good morning everyone. We’re very pleased with another quarter where we continue to execute our strategic vision to make Flagstar one of the best performing regional banks in the country. We were profitable for the second consecutive quarter following the bank’s return to profitability in the fourth quarter. More importantly, we made real progress against key initiatives that drive our financial forecast. We achieved net C&I loan growth during the quarter of 1.4 billion, significantly higher than previous quarters following the origination of 2.6 billion in new CNI loans of which 2 billion was funded. As we’ve discussed, net CNI growth in previous quarters was muted as we right sized legacy CNI positions within the portfolio. Most of this is behind us and you’re now seeing the growth from new originations materialise into net loan growth. Net Interest Margin (NIM) expanded 10 basis points after adjusting for the one time hedge gain of approximately 21 million in Q4. Furthermore, much of the new CNI growth occurred towards the end of Q1, meaning the full benefit of these newly originated loans will be felt in Q2 and beyond. Core deposits excluding brokered grew 1.1 billion and we reduced deposit costs by 21 basis points. We paid off another 1 billion of flub advances and 300 million of brokered deposits as we further reduced our reliance on high cost wholesale funding. Despite this deleveraging of 1.3 billion, our balance sheet only decreased 400 million quarter over quarter. Commercial Real Estate (CRE) and multifamily payoffs were again elevated at 1.6 billion, 1.1 billion of which were par payoffs and 42% of these par payoffs were rated as substandard loans. We resolved the situation with the one borrower that was in bankruptcy and reduced our non accrual loans by 323 million while substandard loans decreased almost 700 million, meaning we reduced non accrual and substandard loans over 1 billion quarter over quarter. Our ACL reserve decreased 78 million, primarily driven by lower Commercial Real Estate (CRE) and multi family loan balances. Operating expenses were again well contained at 441 million, a decrease of 5% quarter over quarter and we ended the quarter with 13.24% Common Equity Tier 1 (CET1) capital at or near the top of our regional bank peers. We were also thrilled to be upgraded by both Moody’s and Fitch, particularly given that both agencies returned our long and short term deposit ratings to investment grade. We continue to execute on our strategic plan exactly as we said we would. Now turning to Slide 7. We reported net income attributable to common stockholders of $0.03 per diluted share. On an adjusted basis, we reported net income attributable to common stockholders of $0.04 per diluted share. First quarter was a relatively clean quarter with only one adjustment, our investment in figure technologies which decreased in value during the first quarter by 9 million based on its closing stock price as of March 31. Subsequent to the end of the quarter we have sold out of approximately 75% of our figure position at a gain of 1.8 million compared to our March 31 mark on Slide 8. We provide our updated forecast for 2026 and 2027. We have adjusted our interest income guidance downward for both years as a result of increased Commercial Real Estate (CRE) and multifamily payoffs, pay downs and amortization. This is both good news and bad news as it accelerates our diversification strategy and reduces our Commercial Real Estate (CRE) exposure but also reduces interest income and Net Interest Margin (NIM) in the short term. Also, we are seeing fewer resetting loans staying on our balance sheet. We’re currently retaining 35 to 40% of resetting loans versus 50% previously. Again, while this accelerates our overall diversification strategy, it reduces short term net interest income and Net Interest Margin (NIM) temporarily and until we replace it with new CNI Commercial Real Estate (CRE) or consumer growth in order to retain some of the higher quality relationship Commercial Real Estate (CRE) runoff in the future. We have assumed spreads off of sofa in the 175 to 225 basis point range versus our contractual option of 275 to 300 basis points off a 5 year flub lower non interest bearing DDA growth in Q1 deposit growth in Q1 was all interest bearing which was positive particularly as we also reduced interest bearing deposit costs. 21 basis points quarter over quarter. We believe the current rate in agency upgrades will help us garner more non interest bearing DDAs going forward, but as it’s been pushed out it impacts net interest income and nimble. We expect total assets to be approximately 94 billion at the end of 26 and 102 billion at the end of 27 as a result of net loan growth. The reduction in interest income has been partially offset by reducing provision and operating expense guidance. Adjusted EPS is now forecast to be in the 60 to 65 cent range in 26 and in the $1.80 to $1.90 range in 2017. Slide 9 depicts the trends in our net interest margin over the past five quarters. We continue to post steady quarterly improvements in Net Interest Margin (NIM) driven largely by lower funding costs. First quarter Net Interest Margin (NIM) increased 10 basis points quarter over quarter to 2.15% after adjusting for the recognition of a one time hedge gain of 21 million in the fourth quarter. Turning to slide 10, our operating expenses continue to decline reflecting our focus on cost containment. Quarter over quarter operating expenses declined 21 million or 5%. Slide 11 shows the growth in our capital over the last few quarters at 13.24%. Our CT1 ratio ranks among the top relative to other regional banks and we have about 1.6 billion in excess capital after tax relative to the low end of our target Common Equity Tier 1 (CET1) operating range of 10.5%. The next slide provides an overview of our deposits. Core deposits excluding brokered increased 1.1 billion on a linked quarter basis or about 2%. This growth was primarily driven by growth in commercial and private bank deposits of 461 million and retail deposits which were up 142 million. As in past quarters, during the current quarter we paid down 300 million of broker deposits with a weighted average cost of 4.76%. In addition, approximately 5.3 billion of retail CDs matured during the quarter with a weighted average cost of 4.13% and we retained 86% of these CDs as they moved into other CD products with rates approximately 35 to 40 basis points lower than the maturing products. In the second quarter we have 4.8 billion of retail CDs maturing with an average cost of 3.98%. Also during the quarter we further deleveraged the balance sheet by paying down 1 billion of flub advances with a weighted average cost of 3.85%. The deleveraging CD maturities and other deposit management actions led to a 21 basis point reduction in the cost of interest bearing deposits quarter over quarter. Slide 13 shows our multifamily and Commercial Real Estate (CRE)PA payoffs which were again elevated this quarter at 1.1 billion of which 42% were rated substandard. These payoffs are resulting in a significant reduction in in overall Commercial Real Estate (CRE) balances and in our Commercial Real Estate (CRE) concentration ratio. Total Commercial Real Estate (CRE) balances have decreased 13.4 billion or 28% since year end 2023 to approximately 34 billion, aiding in our strategy to diversify the loan portfolio to a mix of 1/3 Commercial Real Estate (CRE), 1/3 CNI and 1/3 consumer. Additionally, the PAR payoffs have helped lower our Cre concentration ratio by 134% basis points to 3.67%. The next slide provides an overview of the multifamily portfolio which declined 5.5 billion or 17% on a year over year basis and 1.1 billion or 4% on a linked quarter basis. The reserve coverage on the total multi family portfolio was 1.83% and remains the highest relative to other multifamily focused lenders in the Northeast. Additionally, the reserve coverage on these multi family loans where 50% or more of the units are rent regulated is 3.20%. Currently there are $11.9 billion of multi family loans that are either resetting or maturing through year end 2027 with a weighted average coupon of approximately 3.75%. Moving to slides 15 and 16, we have again provided detailed additional information on the New York City multifamily portfolio where 50% or more of the units are rent regulated. At March 31st this tranche of the portfolio totaled 8.8 billion down 4% compared to the previous quarter and has an occupancy rate of 97% and a current LTV of 70%. Approximately 52% or 4.6 billion of the 8.8 billion are pass rated loans and the remaining 48% or 4.3 billion are criticised for classified meaning they are either special mention substandard or non accrual. Of the 4.3 billion, 1.9 billion are non accrual and have already been charged off to at least 90% of appraised value, meaning 287 million or 15% has been charged off against these non accrual loans. Furthermore, we also have an additional 73 million or 5% of ACL reserves against this non accrual population, meaning we have taken 20% of either charge offs or reserves against this population. Of the remaining 2.7 billion that are special mention substandard loans between reserves and charge offs we have 5.8% or 154 million pounds of loan loss coverage. We believe we’re adequately reserved or have charged these loans off to the appropriate levels and with excess capital of 2.2 billion before tax we think we’re more than covered were there to be any further degradation in this portion of the portfolio. Slide 17 details our ACL coverage by category. The 78 million reduction in the ACL was largely driven by lower CERE and multifamily health reinvestment balances. Our coverage ratio included unfunded commitments was at 1.67% at quarter end. On slide 18 we provide additional details around credit quality which trended positively during the quarter. Non accrual loans totaled $2.7 billion down $323 million or 11% compared to the prior quarter. Criticised and classified loans also declined decreasing $385 million or 3% compared to the prior quarter. During the quarter we did see an increase in special mention loans as a result of our comprehensive and prudent process that analyses in detail all loans with a reset or maturity date 18 months out 18 months from March 31, 2026 is September 27 and 27 is our largest reset year where nearly 9 billion Commercial Real Estate (CRE) loans either reset or mature. This amount includes approximately 2.9 billion of multifamily where 50% or more of these units are rent regulated. As part of this internal forward looking process we’ve applied the relevant pro forma contractual interest rate calculations and adjusted risk ratings accordingly. Three items I would note we are now 75% through analysing the entire 2027 cohort. The results of this analysis is reflected in our ACL and we continue to see significant substandard PAR payoffs each quarter. At the end of the quarter 30 to 89 day delinquencies were approximately 967 million, a decrease of 19 million from the previous quarter. As mentioned last quarter, the biggest driver of this delinquency Number is the additional day or 31st day of March when calculating delinquencies. At precisely 30 days as of April 21, approximately 493 million of these delinquent loans had been brought current. We continue to deliver on our strategic plan and are excited about the journey we’re on and the value we will create for our shareholders over the next two years. With that, I will now turn the call back to Joseph.
Joseph Otting (Chairman, President and CEO)
Thank you very much Lee. Before moving to Q and A, I wanted to add that we are encouraged by our continued progress made in the first quarter and remain focused on driving sustainable profitability, improving returns and delivering long term value for our shareholders. With continued improvement in credit trends, …
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