C&I Lending Expansion And Balance Sheet Optimization Will Drive Stronger Long Term Bank Performance

Catalysts

About Flagstar Bank National Association

Flagstar Bank National Association is a regional bank focused on relationship-based commercial, real estate, consumer and private banking services across a diversified footprint.

What are the underlying business or industry changes driving this perspective?

• Scaling higher spread C&I lending through specialized industry verticals and corporate and regional banking, supported by an experienced banker buildout and a growing $1.8 billion pipeline, is expected to accelerate asset growth and lift net interest income and earnings.
• Systematic runoff and refinancing of low coupon multifamily and CRE loans, with proceeds redeployed into higher yielding C&I assets or used to retire high cost wholesale funding, should structurally expand net interest margin and enhance return on assets.
• Ongoing balance sheet optimization, including nearly $20 billion reduction in wholesale funding, disciplined deposit repricing and targeted growth of relationship based commercial and private bank deposits, is designed to lower funding costs and support net margin and earnings stability as rates decline.
• Strong capital levels, including a CET1 ratio of 12.45%, combined with declining criticized and classified assets and a focused nonaccrual resolution strategy of up to $1 billion by 2026, position the bank to redeploy capital into growth and improve profitability and potential return of capital over time.
• Large New York rent regulated multifamily exposure with high occupancy, significant prior charge offs and robust reserve coverage, alongside sustained market demand for these loans, creates embedded optionality for payoff, reset or restructure outcomes that can gradually relieve provision pressure and support more normalized earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Flagstar Bank National Association's revenue will grow by 25.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -23.7% today to 39.4% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $3.04) by about December 2028, up from $-427.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.0 billion in earnings, and the most bearish expecting $873.1 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 5.4x on those 2028 earnings, up from -12.7x today. This future PE is lower than the current PE for the US Banks industry at 12.0x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.78%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The bank is explicitly targeting a return to profitability, with management expecting net interest margin to continue expanding and noninterest expense to trend down further. If they execute on this plan and move from an adjusted net loss per share of $0.07 to sustained positive earnings, the share price could rerate higher as earnings and net margins improve.
• Management is building a high spread commercial and industrial lending engine, with new C&I commitments of $2.4 billion in the quarter, funded originations of $1.7 billion and a stated run rate ambition of $1.75 billion to $2.2 billion per quarter. If this is achieved alongside a growing $1.8 billion pipeline and more relationship bankers, it could drive above expected loan growth and net interest income.
• Flagstar is deliberately rotating out of low coupon multifamily and CRE into higher yielding C&I and new, geographically diversified CRE while also paying down nearly $20 billion of high cost wholesale funding and lowering deposit costs. The combined effect of mix shift and cheaper liabilities could structurally widen net interest margin far more than implied by a flat share price outlook.
• The bank’s capital and credit profile is strengthening, with a CET1 ratio of 12.45%, declining criticized and classified assets, shrinking net charge offs and a plan to reduce nonaccrual loans by up to $1 billion through 2026. If this risk normalization frees up capital for balance sheet growth or future capital returns, equity valuation multiples on earnings and book value could expand.
• Secular and company specific trends, including continued strong demand for New York multifamily assets evidenced by $1.3 billion of par payoffs, high reserve coverage on rent regulated loans and the prospect of lower interest rates supporting property owners and mortgage demand, may reduce credit losses faster than anticipated and enhance revenue stability. This could support higher, not flat, long term earnings and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $13.78 for Flagstar Bank National Association based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $16.0, and the most bearish reporting a price target of just $11.5.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 5.4x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $13.09, the analyst price target of $13.78 is 5.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.