Flagstar Financial, Inc. Q2 FY2025 earnings call

• C&I Growth: The bank generated $1.9 billion in commitments and $1.2 billion in new C&I loans in Q2. It hired 46 new bankers and related support staff, with the C&I pipeline standing at $1.2 billion, up 40% from the first quarter. Focused on specialized industries and corporate/regional commercial banking. • Expense Reduction: Exceeded prior estimates for expense reduction, with over $700 million in cost reductions year-over-year. Q2 operating expenses decreased by $24 million, significantly ahead of full-year 2025 noninterest expense guidance. • Credit Quality: Criticized and classified assets declined 9%, nonaccrual loans decreased by 4%, and criticized assets were reduced by $2.2 billion since the start of the year. • CRE Par Payoffs: Achieved a record $1.5 billion in CRE par payoffs, reducing CRE exposure and the CRE concentration ratio. • Balance Sheet: The CET1 capital ratio reached 12.3%, the highest among peer groups. Liquidity was enhanced, and reliance on wholesale borrowings was reduced. • Rent-Regulated Exposure: Substantially acted on the rent-regulated multifamily portfolio, with $10 billion in NYC multifamily loans, 57% of which were pass-rated loans, while 43% were criticized or classified but appropriately reserved.

In the second quarter, Flagstar Financial achieved significant momentum in its C&I growth strategy, generating nearly $1.9 billion in commitments and $1.2 billion in new loans. Credit quality improved with criticized and classified assets declining 9% and nonaccrual loans decreasing by 4%. The bank meaningfully reduced its CRE exposure through record par payoffs of almost $1.5 billion. The CET1 capital ratio climbed to 12.3%. In focus areas for C&I, originations increased 81% to $810 million over past quarters with commitments slightly more than doubling to $1.7 billion. Deposits saw a decrease due to the payoff of $2.2 billion in high-cost brokered deposits and approximately $2 billion in mortgage escrow-related deposits.

• Refined net interest income and NIM guidance for 2025 by $125 million and 10 basis points, offsetting $75 million of the reduction with a decrease in noninterest expense. • For 2026, net interest income guidance was tempered by $100 million, which was entirely offset by $100 million in lower noninterest expense, keeping adjusted EPS guidance unchanged. • 2027 guidance remains unchanged. • Anticipates continued C&I growth, further expense reduction, and a reduction in nonaccrual and criticized loans.

• Market interest rate fluctuations could impact the net interest margin (NIM) and loan valuations. • Uncertainty in the CRE market may affect par payoffs and credit quality. • The rent-regulated multifamily portfolio still has criticized and classified loans, with potential exposure if rent freezes or operating expenses increase.

Q: On margin, can you give detail on the securities purchase?

A: We pulled forward $2 billion of securities purchases into Q2 to maximize NIM. We bought agency CMOs with a weighted average coupon of about 5.25% because it optimized our NIM position.

Q: Is stock repurchase possible in mid-'26?

A: Currently, the focus is on investing excess capital in growing C&I. Stock buybacks are not immediately planned, but if we are trading at a discount to book by mid-'26 and back to profitability, it may be reconsidered.

Q: Degree of confidence in payoff acceleration continuing?

A: Q3 is expected to be another strong quarter for CRE par payoffs. The ending balance sheet at the end of 2025 is projected to be $93.3 billion, $98.5 billion in 2026, and $109.6 billion in 2027. Expense optimization in 2026 will offset the reduction in net interest income guidance.

Q: Collapsing the holding company, impact on CCAR?

A: We will not be subject to the CCAR going forward. The estimated annual cost reduction from collapsing the holding company is approximately $15 million, primarily from reducing third-party costs.