Flagstar Financial, Inc. Q4 FY2025 earnings call

• Return to profitability in Q4 with adjusted net income of $30 million, reversing prior quarter's loss.
• 2025 was a year of momentum, with strategic execution leading to diversified balance sheet and improved credit quality.
• Net interest income grew, NIM expanded, and expenses were disciplined.
• Net C&I loan growth continued, with 2% linked quarter growth.
• CRE exposure reduced by $2.3 billion, with concentration ratio below 400%.
• Credit quality improved with reduced nonaccrual loans, net charge-offs, and provision for loan losses.
• 2026 outlook includes continued profitability driven by net interest income growth, margin expansion, expense management, and further credit profile improvement.

The bank saw a return to profitability in the fourth quarter with adjusted net income of $30 million or $0.06 per diluted share. On the loan front, net C&I loan growth was up 2% on a linked quarter basis (about 9% annualized). CRE exposure was reduced by $2.3 billion, with the CRE concentration ratio falling below 400%. C&I lending had strong commitments and originations, with total commitments up 28% to $3 billion and originations up 22% to $2.1 billion. The C&I loan portfolio grew by $343 million or 2% quarter-over-quarter, driven by growth in specialized industries and corporate and regional banking groups. Deposit management saw deleveraging of brokered deposits and club advances, with interest-bearing deposit costs reduced 26 basis points quarter-over-quarter.

• Net interest income guidance for 2026 is in the $0.65 to $0.70 range, slightly adjusted due to higher payoff activity.
• EPS guidance for 2027 is in the $1.90 to $2 range.
• Expect balance sheet growth in 2026, with balance sheet at a low point in Q4 2025 and expected to grow going forward.
• Target to continue deleveraging wholesale borrowings and growing core deposits through C&I relationships and private client banking.

• Credit quality risks related to CRE loans, including potential impact of rent freezes in NYC and regulatory changes.
• Interest rate risks affecting loan repricing and deposit costs.
• Execution risks related to achieving growth targets in C&I lending and deposit growth.
• Regulatory risks associated with changes in banking regulations affecting CRE and other loan portfolios.

Q: David Chiaverini asked about drivers of lower NII, specifically higher payoff activity.

A: Lee Smith responded that higher payoff activity, especially in multifamily and CRE loans, reduced assets and delevered the balance sheet, affecting NII.

Q: David Chiaverini asked about payoff activity guidance for 2026 and substandard loans.

A: Lee Smith said $3.5 billion to $5 billion in payoffs expected, with 40%-50% of par payoffs being substandard.

Q: David Rochester asked about funding side of loan growth.

A: Lee Smith responded that core deposit growth will come from C&I relationships, private client banking, and leveraging 350 bank brand shares.

Q: Casey Haire asked about wholesale borrowings and expense rationalization.

A: Lee Smith said wholesale borrowings are being reduced, and expenses are expected to be within the $1.5 billion to $1.8 billion guide with further optimization initiatives.

Q: Manan Gosalia asked about capital deployment and NY multifamily portfolio.

A: Joseph Otting and Lee Smith discussed monitoring nonperforming loans, rent freeze impacts, and ongoing dialogue for resolution in NY multifamily portfolio.

Q: Bernard Von Gizycki asked about bankruptcy borrower loan position.

A: Joseph Otting and Lee Smith provided updates on bankruptcy auction completion and expected loan resolution, with no material additional charge-offs expected.

Q: Jonathan Rau asked about new loan roll-on yield and NY governor election impact.

A: Lee Smith provided spread details for new loans and discussed ongoing dialogue on rent regulation changes in NY.

Q: Christopher McGratty asked about balance sheet confidence and RWA.

A: Lee Smith and Joseph Otting discussed confidence in par payoffs continuing, RWA impact of loan growth and nonaccrual resolution, and share count expectations.

Q: Sun Young Lee asked about C&I underwriting metrics.

A: Joseph Otting and Lee Smith discussed C&I underwriting processes, deal sizes, and robust credit review processes.

Q: David Smith asked about C&I growth and rate backdrop.

A: Joseph Otting and Lee Smith discussed C&I growth targets, underwriting spreads, and benefits of a declining rate environment for multifamily and mortgage borrowers.

Q: Anthony Elian asked about NIM and NII in 1Q and asset guidance.

A: Lee Smith discussed NIM trajectory and asset guidance for 2027.

Q: Matthew Breese asked about cash balances, CD costs, and share counts.

A: Joseph Otting and Lee Smith provided details on cash balance drivers, CD cost trends, and fully diluted share count considerations.

Q: Jon Arfstrom asked about multifamily loan health and nonperforming balance step down.

A: Lee Smith and Joseph Otting discussed expectations for nonaccrual reduction in 2026 and consistent characteristics of maturing multifamily loans.

Q: Christopher Marinac asked about deposit mix shift with C&I growth.

A: Joseph Otting discussed leveraging C&I relationships to bring in deposits, including noninterest-bearing DDAs and fee income opportunities.