Flagstar Financial, Inc. Q3 FY2025 earnings call

Earnings Improvement - Adjusted net loss per diluted share narrowed significantly from prior quarters, with pre-provision net revenue trending higher, putting the company on a path to profitability. ### C&I Business Breakout - Originated $1.7 million in new loan outstandings, achieved overall net loan growth of $448 million in the C&I portfolio, with new commitments at $2.4 billion and originations at $1.7 billion in the quarter. ### Net Interest Margin - Expanded 10 basis points to 1.91% for the third consecutive quarter. ### Operational Expenses - Remained well controlled, down year-over-year $800 million on an annualized basis. ### Credit Quality - Criticized and classified assets declined $600 million QoQ and $2.8 billion YTD; nonaccrual loans relatively stable. Multi-family and CRA payoffs were $1.3 billion, above forecast. ### Balance Sheet Improvements - Increased CET1 capital ratio by nearly 350 basis points, fortified ECL through rigorous credit review, enhanced liquidity, reduced reliance on wholesale funding. ### Holding Company Reorganization - Completed, simplifying structure, reducing regulatory burden, and saving $15 million in operating expenses.

For the third quarter, Flagstar Bank NA saw significant improvements. In the C&I business, they originated $1.7 million in new loan outstandings and realized net loan growth of $448 million in the C&I portfolio. The net interest margin expanded 10 basis points to 1.91% for the third consecutive quarter. Multi-family and CRA payoffs totaled $1.3 billion, continuing the trend of being above forecast. The adjusted net loss per diluted share narrowed to $0.07, showing progress towards profitability. In terms of revenue contribution, the C&I business played a key role in loan growth, while the multi-family and CRA payoffs contributed to balance sheet repositioning.

2025 Outlook - Adjusted diluted EPS range for 2025 is minus $0.36 to minus $0.41 per diluted share, with noninterest income assumptions tweaked. ### 2026 and 2027 - Guidance remains unchanged. ### Balance Sheet Growth - Anticipate balance sheet to start growing in 2026, with total assets expected to be around $96 billion to $97 billion by year-end 2026 and $108 billion to $109 billion by year-end 2027. ### C&I Loan Growth - Expect C&I loan growth to continue with a run rate of $1.7 billion to $2.2 billion per quarter, driven by new relationships and potential from merger activity. ### NIM Expansion - Expect continued NIM expansion through multi-family loan payoffs/resets, C&I growth, deposit management, and reduction in nonaccrual loans.

Macro Uncertainty - Potential impact of economic conditions on C&I loan growth and overall loan performance. ### Regulatory Changes - Possible effects of regulatory shifts on the bank's operations and capital requirements. ### Specific Borrower Exposures - Exposure to certain borrowers or sectors, though managed through underwriting processes to mitigate risks.

Q: Focus on NII guide, balance sheet growth, and C&I risk management A: Lee Smith and Joseph Otting discussed that the balance sheet will likely bottom out in Q4 2025 at around $90 billion to $91 billion, with growth expected in 2026. They highlighted multiple levers for NIM expansion including multi-family loan payoffs/resets, C&I growth, and deposit management. Regarding C&I risk, they emphasized underwriting standards, relationship-based lending, and checks and balances in the credit process.

Q: Expense outlook and hiring impact A: Lee Smith mentioned that expenses are at a run rate of around $450 million per quarter, with opportunities to further reduce FDIC expenses, vendor costs, and leverage technology projects. Hiring plans, including adding 20 people in Q4 2025 and 100 people in 2026, are part of the strategy to drive growth.

Q: Credit quality and NPL reduction A: Joseph Otting and Lee Smith stated that they expect nonaccrual loan reductions in the fourth quarter and 2026, with a line of sight on reducing $400 million to $500 million in nonperforming loans. This includes organic resolution efforts and managing specific problem loans through processes like auctions for troubled borrowers.

Q: Holding company reorganization benefits A: Joseph Otting explained that the reorganization simplified the corporate structure, reduced regulatory burden, and saved $15 million in operating expenses, also freeing up resources by eliminating redundant examinations and staff interactions with regulators.