FLG Q1 Deep Dive: Commercial Lending Expansion and Cost Controls Define Turnaround Efforts

Regional banking company Flagstar Financial (NYSE: FLG) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 22.6% year on year to $490 million. Its non-GAAP loss of $0.23 per share was 17.1% above analysts’ consensus estimates.

Is now the time to buy FLG? Find out in our full research report (it’s free).

StockStory’s Take

Flagstar Financial’s first quarter results for 2025 were marked by a significant year-over-year revenue decline and continued operating losses. Despite this, the market reacted positively, as management highlighted progress in cost reduction, capital strength, and credit quality improvements. CEO Joseph Otting credited the narrowing loss and improved outlook to ongoing cost takeouts, effective risk governance, and the expansion of the commercial and industrial (C&I) lending business. Otting noted, “We executed on critical cost takeouts, credit management, C&I growth, and risk governance during the quarter,” pointing to lower net charge-offs and a decline in loan loss provisions as evidence of early momentum in the turnaround strategy.

Looking ahead, management’s guidance centers on continued expansion of the C&I lending platform, ongoing reductions in wholesale funding costs, and a planned shift in balance sheet composition. CFO Lee Smith stated that margin expansion is expected as high-cost deposits mature and multifamily loans reset at higher rates or pay off. The company also plans to reinvest capital into its C&I and private banking operations, with the goal of returning to profitability by the end of the year. Otting emphasized, “We feel confident on the turnaround of the company…we do forecast and believe that our fourth quarter will be a profitable quarter for us, a turning point in the organization’s history.”

Key Insights from Management’s Remarks

Management attributed the quarter’s results to disciplined cost reductions, targeted C&I loan growth, and efforts to de-risk the commercial real estate portfolio.

• C&I Lending Expansion: Flagstar added experienced bankers and launched new lending products, resulting in over $1 billion in C&I loan commitments and $769 million in originations, up more than 40% from the previous quarter. The company’s focus on relationship-based lending in both regional and specialized national verticals is driving this momentum.

• Cost Structure Overhaul: Noninterest expenses, excluding certain one-time charges, declined by $71 million quarter over quarter. Management accelerated real estate optimization, vendor contract renegotiations, and outsourcing of non-strategic back-office functions. These reductions were achieved while still investing in risk, compliance, and technology infrastructure.

• Credit Quality Progress: Net charge-offs and loan loss provisions each fell by nearly 50% from the prior quarter. Although one large borrower moved to non-accrual status, management described this as a “unique, idiosyncratic” case and emphasized that overall criticized assets and classified loans declined.

• CRE and Multifamily Portfolio De-risking: The company continued to reduce exposure to commercial real estate (CRE) and multifamily loans, with $840 million of CRE payoffs in the quarter—59% of which were substandard credits. Reserve coverage for multifamily loans, particularly those with rent-regulated units, remains among the highest relative to peers.

• Capital and Liquidity Strength: Flagstar’s Common Equity Tier 1 (CET1) capital ratio held near 12%. The company paid down $1.9 billion in brokered deposits and $250 million in wholesale funding, improving both its funding mix and liquidity position—totaling $30 billion, covering more than twice its uninsured deposits.

Drivers of Future Performance

Flagstar’s outlook rests on growing C&I lending, margin expansion from lower funding costs, and continued balance sheet reshaping.

• Ongoing C&I Loan Growth: Management plans to further grow C&I originations by hiring up to 90 additional bankers this year, targeting $1 billion in new commitments per quarter. This expansion is expected to diversify revenue sources and mitigate reliance on commercial real estate.

• Margin Improvement from Asset Repricing: As high-cost retail certificates of deposit (CDs) mature and multifamily loans reset to higher rates or are paid off, Flagstar expects its net interest margin (NIM) to expand. Management assumes two rate cuts in 2025 and is reallocating capital into higher-yielding C&I loans and select securities purchases.

• Persistent CRE Runoff and Risk Management: The company will continue to proactively reduce its CRE and multifamily exposure, aiming for a more balanced loan portfolio. Reserve coverage and asset quality metrics are expected to remain a focus, especially as credit conditions evolve with macroeconomic shifts and tariff impacts in certain sectors.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) whether C&I loan growth sustains as new bankers are onboarded, (2) the pace of margin expansion as funding costs decline and asset repricing accelerates, and (3) further reductions in CRE and multifamily exposures. Execution on cost controls and risk management will also be critical to achieving the forecasted return to profitability.

Flagstar Financial currently trades at $11.51, up from $11.27 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free).

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