Flagstar Ends Margin Expansion as Commercial Loans Grow
Net interest margin slipped 2 bps to 2.13% as lower asset yields outweighed cheaper funding.
Flagstar Bank, National Association (FLG), the commercial bank focused on relationship lending, ended three quarters of margin expansion as net interest income slipped 1% QoQ to $440 million. NIM compressed 2 bps to 2.13% because lower asset yields outweighed a 7-bps reduction in funding costs, though the margin would have reached 2.16% excluding the quarter’s extra day. NIM remained 32 bps above the year-earlier level.
The balance sheet returned to loan growth for the first time since the fourth quarter of 2023. Loans held for investment rose 1% QoQ to $61.0 billion as C&I balances increased 12% to $18.6 billion, extending an acceleration that began late last year. Specialized Industries Banking grew 34%, while Corporate & Regional Commercial Banking expanded 18%.
That commercial growth more than absorbed another $1.5 billion reduction in multifamily and commercial real-estate loans, which fell 4% QoQ to $35.2 billion. The runoff lowered Flagstar’s CRE concentration ratio to 350% from 367%, continuing the bank’s shift toward C&I relationships.
Deposits rose about 1% QoQ to $67.5 billion, including $706 million tied to C&I customers. Interest-bearing checking and money-market balances increased 6%, while wholesale borrowings declined 2% to $9.9 billion. Deposit costs fell 5 bps and overall funding costs dropped 7 bps, preserving much of the YoY margin recovery despite the sequential NIM decline.
Fees and cost reductions provided the quarter’s other operating lift. Adjusted non-interest income rose 13% QoQ to $72 million, helped by treasury-management and capital-markets fees, while operating expenses declined 3% to $427 million. The combination produced 7% positive operating leverage and lifted adjusted pre-provision net revenue 51% to $62 million.
Flagstar’s CET1 ratio declined 7 bps QoQ to 13.16%, while its leverage ratio increased 9 bps to 9.70%. The bank paired that capital position with a new $250 million share-repurchase authorization.
Credit trends weakened as commercial lending resumed. Flagstar recorded an $18 million provision after no provision in the first quarter, reflecting C&I growth, higher charge-offs and revised assumptions for New York City rent-regulated multifamily loans. Net charge-offs increased 28% QoQ to $100 million, lifting the annualized charge-off rate by 14 bps to 0.66%.
Non-accrual loans rose 5% QoQ to $2.805 billion after two quarters of declines, and non-accrual held-for-investment loans reached 4.59% of the portfolio. Total allowance coverage fell 15 bps to 1.52% as Flagstar charged off specifically reserved loans and continued reducing multifamily and CRE balances, leaving credit performance as the principal counterweight to its expanding C&I franchise.