Banks
Flagstar's third-quarter profit shrinks to $12 million as provisions quadruple on New York rent-regulated loans
Net interest income and business lending grew, but higher rates hit the bank's multifamily book and pushed its strategic targets back a year to 2028.
HedgeWeekly News Desk ·
Flagstar Bank reported third-quarter net income of $12 million on Friday, down from $34 million in the second quarter, leaving $3 million, or $0.01 a diluted share, for common stockholders. Its provision for credit losses rose to $76 million from $18 million. Management put the increase mainly down to higher interest rates, including their effect on New York City rent-regulated multifamily loans. A $22 million tax benefit from settling a federal audit of 2019 to 2021 supported the result.
The core bank improved. Net interest income rose 5% from the prior quarter to $460 million and the net interest margin widened 4 basis points to 2.17%. Commercial and industrial lending grew $2.0 billion, or 11%, to $20.6 billion, lifting loans held for investment by $958 million to $61.9 billion, a second straight quarterly gain. Multifamily and commercial real estate loans shrank $1.1 billion to $34.1 billion as $1.2 billion of CRE loans paid off at par, 35% of which were rated substandard.
Credit signals were mixed. Net charge-offs fell 26% to $74 million, or 0.49% of average loans annualised, against 0.66% in the second quarter. But criticized and classified loans rose $670 million, or 6%, and non-accrual loans stood at $2.82 billion, or 4.55% of loans held for investment. The CET1 ratio slipped to 12.38% from 13.16%, and the bank completed a $250 million share buyback in early October. Chief executive Joseph Otting said full delivery of the bank's long-term goals now looks like 2028 rather than 2027, citing a higher-for-longer rate environment.
For investors, the quarter shows that Flagstar's shift toward business lending is gaining ground while its legacy New York apartment book still drives credit costs. The release points to state rent-freeze legislation on certain properties that took effect on October 1, and it carries a 2.97% reserve against multifamily loans where at least half the units are rent-regulated. Rates are the swing factor: the Federal Reserve meets on October 28, and fed funds futures on Friday morning priced only about a 5% chance of a hike this month.