Flagstar pares back earnings outlook amid elevated CRE payoffs

• Key insight: Elevated payoffs and paydowns in Flagstar’s commercial real estate portfolio were driving factors in the bank’s decision to lower its earnings guidance for 2026 and 2027.
• What’s at stake: The bank is trying to remix its loan portfolio as part of a turnaround that involves reducing its historically high concentration in commercial real estate lending.
• Forward look: Flagstar’s board will likely consider capital distribution actions later this year, CEO Joseph Otting said.

Flagstar Bank notched its second consecutive profitable quarter, but lowered its near-term earnings guidance, citing elevated payoffs and paydowns of commercial real estate loans.

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The Long Island-based bank reduced its diluted adjusted earnings per share outlook by five cents this year and 10 cents next year. It also lowered its net interest income expectations. While the additional payoffs and paydowns are helping Flagstar to further diversify its loan book, they are temporarily constraining net interest income and margin growth, executives said.

During the quarter, which ended March 31, Flagstar’s commercial real estate and multifamily loan book fell by $1.6 billion, including through par payoffs and paydowns, the bank said. Of the total, $1.1 billion were par payoffs, and 42% of those were on substandard loans.

The payoffs and paydowns are “both good news and bad news,” Chief Financial Officer Lee Smith told analysts Friday. Fueled by weaknesses in its commercial real estate and multifamily loan book, the $87.1 billion-asset bank experienced eight straight quarterly losses before returning to profitability during the fourth quarter of 2025.

“The good news is it’s allowing us to get to our diversified strategy more quickly … but it does impact short-term interest income and [the net interest margin], and that’s what you’re seeing,” Smith said.

The bank is revamping its loan book, which has been dominated for decades by multifamily loans, to be more balanced. The goal is to have a portfolio that is one-third commercial real estate loans, one-third commercial-and-industrial loans and one-third consumer loans.

The company expects to be able to use the funds from commercial real estate payoffs to grow its commercial-and-industrial loans and consumer loans, and to originate new commercial real estate loans. But in the meantime, “it just sort of pushes everything out,” Smith said.

Flagstar, which was formerly known as New York Community Bancorp, has been in turnaround mode for the past two years. It nearly collapsed in early 2024, after disclosing significant troubles in its commercial real estate portfolio. A $1.05 billion capital injection provided stability, and Joseph Otting, the comptroller of the currency during President Trump’s first term, took over as CEO.

After Otting arrived, he and the rest of a mostly new management team laid out a three-year business overhaul, and then moved quickly to implement it. Since mid-2024, the bank has made progress by slashing expenses, remixing its loan portfolio, reeling in more low-cost deposits and improving its credit quality.

“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,” Otting said Friday.

Executives expect Flagstar’s assets to be about $94 billion by the end of this year, and to increase to $102 billion by the end of 2027, aided by more commercial-and-industrial loan originations, growth in retained mortgages and new commercial real estate loans in areas outside of New York City, such as the Midwest, South Florida and California.

Analysts are keeping a close eye on Flagstar. 

The bank “continues to show fundamental progress on remixing the balance sheet, both on the asset and liability side,” Jon Arfstrom, an analyst at RBC Capital Markets, wrote Friday in a research note. He described the bank’s commercial-and-industrial loan growth — those loans rose by 9% between the fourth quarter of last year and the first quarter of 2026 — as “strong.”

Net income for the first quarter was $21 million, compared with a loss of $100 million during the same period last year. Diluted earnings per share were three cents, matching analysts’ forecast, according to S&P Capital IQ. Adjusted diluted earnings per share, which excluded a $9 million fair value loss related to an equity investment in Figure Technology Solutions, were four cents.

Total revenue was $498 million, an improvement of 2% versus the prior-year quarter.

Net interest income totaled $443 million, up 8% year over year. Fee income was $55 million, down 31% from the year-ago period, reflecting the sale of the bank’s mortgage servicing business, which led to lower loan origination fees and loan administration income.

Noninterest expenses continued to decline, coming in at $466 million for the quarter, down about 12% year over year. Insurance charges by the Federal Deposit Insurance Corp. fell by 40%, while general and administrative costs and professional services expenses both saw double-digit declines.

For all of 2026, Flagstar is now expecting net interest income between $1.95 billion and $2.05 billion. In January, it had predicted full-year net interest income of between $2.15 billion and $2.2 billion. 

Diluted adjusted EPS, which includes warrants and options, is now expected to be 60-65 cents for the entire year, down from the 65-70 cents forecasted in January.

For 2027, the bank now anticipates net interest income between $2.6 billion and $2.7 billion, down from the $2.8 billion-$2.9 billion it called for three months ago. Diluted EPS should be $1.80-$1.90, down from the $1.90-$2.00 predicted in January, the bank said.

During Friday’s call, some analysts were curious about what Flagstar will do with its excess capital, which totaled about $1.6 billion as of March 31.

The board, which has been waiting for consistent quarterly earnings, will likely consider capital distributions in the second half of the year, Otting said.