FLAGSTAR BANK, NATIONAL ASSOCIATION Q3 FY2026 earnings call

• Strategic Timeline Shift: Management announced that the full realization of their transformation strategy has shifted from 2027 to 2028 due to the 'higher for longer' interest rate environment, persistent inflation, and slower deposit growth. This is described as a change in timing, not strategy.
• Balance Sheet Diversification: The bank continues to reduce CRE exposure while growing its C&I loan portfolio. In Q3, the bank delivered $2 billion of net C&I loan growth, resulting in approximately $1 billion of net total loan portfolio growth. Average new loans were roughly $28 million across 75 relationships.
• CRE Portfolio Reduction: CRE par payoffs totaled $1.2 billion in Q3, with 35% rated substandard. The bank funded $375 million in new high-quality CRE loans against over $700 million in commitments. The forecast projects a net decline of $1 billion in CRE per quarter.
• Credit Quality and Provisioning: Net charge-offs decreased to $74 million. However, provision expense rose to $76 million due to higher interest rates impacting Debt Service Coverage Ratios (DSCR) on rent-regulated multifamily properties, particularly in the Bronx. Non-accrual loans remained stable at approximately $2.8 billion, with 42% being current and performing.
• Deposit and Funding Environment: Total deposits increased by about $300 million quarter-over-quarter. The cost of interest-bearing deposits increased only one basis point to 3.09%. Core commercial client deposits grew by approximately $600 million. The competitive deposit environment and higher rates have slowed deposit growth expectations.
• Capital and Efficiency: The CET1 ratio remains strong at 12.38%, ranking in the top quartile of peers. The company completed its $250 million stock repurchase program. Full-year 2026 operating expenses are expected to decline by approximately $168 million (9%) year-over-year.

Flagstar Bank operates primarily as a commercial bank with a focus on Commercial & Industrial (C&I) lending, Commercial Real Estate (CRE), and multifamily loans. The transcript does not provide a breakdown of revenue contribution percentages by distinct product segment. However, key financial metrics for the quarter include: Net Interest Income increased compared to the prior quarter; Pre-Provision Net Revenue (PPNR) improved; Net Charge-Offs were $74 million (49 basis points of average loans), down $25 million from the previous quarter; Provision Expense was $76 million due to credit quality pressures; and Non-Interest Income faced headwinds from lower mortgage originations.

• EPS Guidance Revised Downward: Full-year 2026 EPS is now forecast to be in the 10 to 15 cent range. Full-year 2027 EPS is forecast to be in the 85 to 95 cent range.
• New 2028 Forecast Introduced: For the first time, management provided a full-year 2028 EPS forecast of 160 to 170 cents, indicating the target timeline for returning to peer-like profitability metrics.
• Balance Sheet Growth: The balance sheet is expected to grow by approximately $1 billion per quarter in 2027 and 2028, driven by $2 billion in net new loan growth. This growth will be funded 50% by deposit growth and 50% by CRE runoff.
• NIM Expansion: Net Interest Margin (NIM) expanded four basis points in Q3 to 2.17%, with September NIM at 2.23%. Management expects NIM to continue expanding in Q4 (targeting 2.20% - 2.25%), driven by fixed asset repricing and balance sheet growth.
• Deposit Growth Assumptions: Management has lowered deposit growth assumptions due to a more competitive environment, expecting $800 million to $1 billion in new deposits per quarter in 2027.
• Operating Expenses: Full-year 2026 operating expenses are expected to decrease by approximately 9% year-over-year.

• Interest Rate Risk: The 'higher for longer' interest rate environment has pressured credit costs, specifically affecting New York City rent-regulated multifamily loans by increasing cap rates and operating expenses while freezing rents. This has led to increased provisions and migration of loans to criticized/substandard status.
• Credit Quality Deterioration: Higher rates have put pressure on Debt Service Coverage Ratios (DSCR). While net charge-offs are manageable, there is an increase in substandard and criticized loans. Non-accrual resolution is slowing down.
• Deposit Competition: A highly competitive deposit market has increased funding costs and reduced deposit growth expectations, impacting the ability to fund loan growth organically.
• Execution Risk on Transformation: The turnaround strategy relies heavily on mechanical repricing of low-coupon CRE loans maturing in 2027 and 2028. Delays in this process or failure to attract sufficient deposits could further delay profitability targets.
• Mortgage Origination Headwinds: Higher interest rates have significantly impacted mortgage origination volumes, reducing non-interest income from gains on loan sales.

Q: Analyst asked for visibility into the maturity wall and reset schedule given the changing macro environment. / A: CFO Lee Smith confirmed 2027 is the largest reset year with ~$10 billion maturing/resetting, pushing through most of it by Q1 2028, followed by $7 billion in 2028. Of the 2027 volume, $2.9 billion is >50% rent-regulated. Migration is formulaic based on DSCR analysis under the current forward curve. Most migration occurred in market-rent units because the bank prudesly waits for actual financial statement evidence of rent increases before adjusting risk ratings, despite contractual ability to raise rents.

Q: Analyst questioned the suspension of stock buybacks given high capital levels (CET1 12.38%) and depressed stock price. / A: CEO Joseph Otting stated buybacks are paused until core earnings growth is evident, credit quality trends stabilize, and C&I growth capital needs are clear. He noted short-term disruptions prevent additional buybacks in Q4, but expects resumption in 2027. He emphasized that credit metrics like charge-offs are at lows, though migration to substandard status reflects prudent 18-month look-forward modeling under punitive contractually set interest rates (SOFR + 300 bps).

Q: Analyst asked about the confidence level in the new 2028 profitability ramp-up amidst a higher-for-longer rate environment. / A: CFO Lee Smith detailed the bridge to 2028/2029 earnings, citing two main drivers: balance sheet growth and fixed asset repricing. New C&I loans ($2.8B avg growth) are funded by new deposits (~$800M-$1.25B) at ~3.2% cost, earning ~3.4-3.5% spread. Additionally, replacing low-coupon (<3.9%) resetting CRE with market-rate C&I adds ~2.5% spread. Retained resetting loans also reprice significantly. The bank is neutral to slightly asset-sensitive, benefiting from rising rates on its ~$10.7B floating CRE book.

Q: Analyst asked if the bank would consider selling its NYC rent-regulated portfolio, noting peers are doing so. / A: CEO Joseph Otting stated they are not currently selling any assets. They have resolved most issues via DPOs or settlements at +/- 1-5% of marked value, whereas external buyers demand 15-20% returns. Internal resolution optimizes capital retention. They monitor the market closely but believe shareholders are better served by continuing internal work-outs over the next 1-2 years.

Q: Analyst asked about the sensitivity of the CRE payoff/runoff forecast to interest rates and whether borrowers might refinance rapidly if rates drop. / A: CFO Lee Smith and CEO Joseph Otting explained that many CRE borrowers are on floating rates (SOFR + 300 or Prime + 275) as a 'landing spot' while watching rates. If rates drop, they may refinance. However, the forecast assumes a net CRE runoff of $1 billion/quarter regardless, driven by volume of maturities ($19B total in 2026-2028). Only $3B of the 2027 reset volume is >50% rent-regulated; the rest is market/lower-regulation. The bank sees resilience in borrower desire to own, though some seek restructuring.