FLG Q3 Deep Dive: C&I Lending Growth, CRE Reduction, and Cost Controls Define Trajectory

Regional banking company Flagstar Financial (NYSE:FLG) reported Q3 CY2025 results beating Wall Street’s revenue expectations, but sales fell by 16.7% year on year to $519 million. Its non-GAAP loss of $0.07 per share was in line with analysts’ consensus estimates.

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StockStory’s Take

Flagstar Financial’s third quarter results were marked by stabilization in key operating metrics and a narrowing non-GAAP loss, which aligned with Wall Street’s consensus. Management highlighted expansion in commercial and industrial (C&I) lending and ongoing reductions in commercial real estate (CRE) exposures as central to the quarter’s results. CEO Joseph Otting underscored, “Our third quarter performance provides further tangible evidence that we are successfully executing on all our strategic priorities,” while also noting disciplined cost controls and improved net interest margin. Management described progress in diversifying the loan portfolio and lowering criticized assets as instrumental in shaping the quarter’s outcome.

Looking ahead, Flagstar Financial’s guidance is anchored by expectations for continued C&I loan growth, active management of CRE reductions, and further cost discipline. Management believes net interest margin will benefit from both lower funding costs and a shift to higher-yielding assets. CFO Lee Smith cautioned that asset growth will be gradual, stating, “Q4 will probably be the low point… and then we expect the balance sheet to start to grow as we move through 2026.” Leadership anticipates that operating leverage from technology investments and a more diversified loan book will be important drivers, though credit quality and regulatory changes remain watchpoints.

Key Insights from Management’s Remarks

Management attributed Q3’s operating improvement to momentum in C&I lending, rigorous CRE management, and sustained cost discipline, while also referencing progress on digital transformation and strategic hiring.

• C&I lending momentum: The C&I portfolio saw net loan growth of $448 million, driven by specialized industries and corporate banking teams. Management cited a 28% sequential increase in loan commitments and a 73% rise in originations within key focus areas, reflecting traction from recently hired banking professionals with deep industry experience.
• CRE exposure reduction: Flagstar continued its strategy of lowering CRE concentration, with multifamily and CRE payoffs totaling $1.3 billion for the quarter. Management noted a 20% year-to-date decline in total CRE balances, supporting efforts to rebalance the portfolio toward a mix of one-third CRE, one-third C&I, and one-third consumer loans.
• Cost control and operational efficiency: Noninterest expenses declined by approximately 30% year-over-year, equivalent to $800 million on an annualized basis. Leadership credited both technology consolidation—such as reducing data centers—and vendor management for driving sustained operating leverage.
• Credit quality stabilization: Criticized and classified assets decreased by $600 million quarter-over-quarter, while net charge-offs and provision for loan losses both declined significantly. Management pointed to a dedicated team managing nonperforming loans and steady progress on legacy credit issues.
• Corporate restructuring benefits: The completed holding company reorganization is expected to reduce regulatory burden and lower annual operating expenses by $15 million, streamlining oversight and freeing resources for core banking activities.

Drivers of Future Performance

Flagstar’s outlook is guided by C&I loan expansion, controlled CRE runoff, and ongoing expense management, with a focus on improving net interest margin and credit quality.

• C&I and deposit growth: Management expects quarterly C&I loan originations to run between $1.7 billion and $2.2 billion, supported by continued hiring of experienced bankers and new relationship development. These efforts are also projected to drive core deposit growth, especially in noninterest-bearing accounts, which are critical for funding cost efficiency.
• CRE portfolio management: The company will maintain a strict approach to CRE renewals and originations, prioritizing high-quality, geographically diversified loans. Leadership anticipates ongoing multifamily and CRE payoffs in the $1 billion to $1.5 billion range per quarter, which should further reduce risk concentrations and enable capital redeployment.
• Expense discipline and technology investments: Expense levels are expected to remain near the current run rate, with opportunities for further reductions via lower FDIC costs, vendor renegotiations, and technology projects—including data center consolidation. Management also cited ongoing efforts to optimize the private bank and realize efficiencies from the new corporate structure.

Catalysts in Upcoming Quarters

Looking forward, the StockStory team will watch (1) whether C&I originations and deposit growth continue at the expected pace, (2) sustained progress on reducing CRE and multifamily exposures while maintaining credit quality, and (3) signs that technology and cost initiatives yield further efficiency gains. Developments in nonperforming loan resolution and regulatory impacts from the recent corporate restructuring will also be key indicators.

Flagstar Financial currently trades at $11.88, up from $11.56 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free for active Edge members).

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