FLG

Overall Strategic Progress & Capital Position

• Flagstar achieved its third consecutive quarter of profitability, with adjusted EPS of 5 cents in Q2 2026, up from a 14 cent loss in Q2 2025. Pre-provision net revenue increased 51% quarter-over-quarter, and total operating expenses declined 3% QoQ to $427 million, driving positive operating leverage.
• The company ended the quarter with a Common Equity Tier 1 (CET1) capital ratio of 13.16%, placing it in the top quartile of regional bank peers, with approximately $1.6 billion of after-tax excess capital above the low end of the target operating range.
• Management announced a new $250 million share repurchase program, reflecting confidence in the bank's progress and strong capital position.
• The quarter marked an inflection point for balance sheet growth: total assets grew ~$600 million, the first overall balance sheet growth since Q4 2023. Core deposits grew $600+ million while deposit costs fell 5 basis points, despite the higher-for-longer interest rate environment.

Portfolio Diversification & Growth

• The bank is executing on a strategy to diversify away from CRE by growing the C&I loan portfolio, with four consecutive quarters of net C&I growth. 75 new-to-bank C&I relationships were added in Q2, and the C&I pipeline entering Q3 stands at over $2 billion, providing strong visibility for continued growth.
• 32 new producers, credit underwriters, and support staff were hired for C&I banking in Q2, with new regional team leaders added in Dallas, Detroit, Cleveland, and Phoenix. Three new specialized industry verticals (Food and Beverage; Leisure, Hospitality and Gaming; Education and Nonprofits) were launched, and a new regional commercial banking initiative was launched in Texas, a new market for Flagstar.
• Growth in the C&I portfolio is broad-based across geographies and industries, with particular strength in energy, financial institutions, healthcare, technology, and sports and entertainment.

Credit Quality & CRE Reduction

• Criticized and classified loans declined 1% QoQ and 9% YoY, falling $1.1 billion year-over-year. Substandard loans declined $375 million quarter-over-quarter.
• Net charge-offs totaled $100 million in Q2, half of which were from loans that were already 100% reserved. Allowance for Credit Losses (ACL) declined $81 million primarily due to lower CRE and multifamily balances and updated appraisals that reduced qualitative reserve adjustments.
• Proactive CRE reduction has improved asset quality: 39% of Q2 CRE par payoffs were lower-rated substandard loans, reducing concentration and clearing out higher-risk credits. The ACL coverage ratio (including unfunded commitments) stands at 1.52% as of quarter-end, and management believes reserves are appropriately sized for the remaining portfolio.

• 2026 EPS Guidance: Revised downward to a range of $0.40 to $0.50, from prior guidance. 2027 EPS guidance is maintained at $1.60 to $1.70.
• Interest Income & Non-Interest Income Guidance: Both 2026 and 2027 interest income guidance are revised downward due to faster-than-expected CRE paydowns, slower-than-forecast growth in non-interest-bearing demand deposit accounts (DDA), and higher-for-longer interest rates that have reduced expected mortgage gain-on-sale revenue. The downward revision reflects accelerated CRE portfolio reduction (which is strategically favorable long-term but creates near-term headwinds for net interest income (NII)).
• Net Interest Margin (NIM) Guidance: Management views June 2026 NIM of 2.19% as a floor for the margin going forward, with expected sequential expansion through the end of 2027 driven by growth in higher-yield C&I loans, resetting/maturing of low-coupon multifamily loans, continued deposit cost reduction, and paydown of higher-cost wholesale borrowings.
• Balance Sheet Guidance: Total assets are expected to end 2026 at $91.5 billion to $92 billion, and grow to ~$100 billion by the end of 2027.
• Non-accrual Loan Guidance: Non-accrual loans are expected to end 2026 at ~$2.3 billion, which is slightly higher than prior guidance of $2.0 to $2.1 billion, still representing a ~$450 to $500 million reduction from the Q2 2026 level of $2.8 billion.
• Expense Guidance: Operating expense guidance is maintained in line with prior forecasts, as continued cost cutting offsets the investments being made in C&I hiring, product expansion, and technology. The current 2026 EPS guidance does not include any impact from the newly announced $250 million share buyback.
• CRE Payoff Guidance: Management expects net CRE payoffs going forward to be ~$1 billion per quarter, with $200 to $300 million in new CRE originations per quarter offsetting some runoff, bringing the bank to its 350% CRE concentration target 1.5 to 2 years earlier than originally forecast.

Flagstar Bank reports performance across three main loan segments: 1) Commercial and Industrial (C&I/CNI): Total CNI loans grew 12% quarter-over-quarter to $18.6 billion, with $2 billion in net growth from record originations of $2.8 billion. Specialized industries grew $1.7 billion (34% QoQ) and contributed 85% of total CNI loan growth, while corporate and regional commercial banking grew $375 million (18% QoQ) to $2.4 billion. Equipment finance returned to growth, asset-based finance was stable, and mortgage finance declined $109 million due to seasonality. CNI contributes roughly 20% of total loans as of Q2 2026. 2) Commercial Real Estate (CRE) including Multifamily: Total CRE balances declined $1.5 billion (4% QoQ / 28% since 2023) to $40.25 billion, with par payoffs of $1.1 billion (39% of which were substandard rated loans). CRE concentration fell to 350% from 367% last quarter. Multifamily balances declined $0.9 billion (3% QoQ / 16% YoY) to $11 billion. New York City rent-regulated multifamily (≥50% units regulated) declined 4% QoQ to $8.5 billion. CRE contributes roughly 44% of total loans as of Q2 2026. 3) Retail Banking & Other: Retail deposits declined $290 million QoQ, partially offsetting commercial deposit growth. Mortgage gain-on-sale revenue was lower than prior guidance due to the higher-for-longer interest rate environment.

• Higher-than-expected interest rates staying elevated for longer creates pressure on loan yields for low-coupon existing multifamily and CRE loans, and reduces mortgage origination and gain-on-sale revenue. Higher rates may also cause borrowers to delay action on upcoming loan resets until the last minute, increasing short-term credit uncertainty.
• Sustained rent freezes on New York City rent-regulated multifamily properties increase operating expenses for property owners faster than rental revenue, which reduces net operating income and property valuations for high-concentration rent-regulated buildings. 4.4 billion of Flagstar's NYC rent-regulated portfolio is classified as criticized or non-accrual, presenting ongoing valuation risk.
• Faster-than-expected CRE payoffs create near-term downward pressure on net interest income and NIM, even as it improves long-term portfolio composition.
• Non-accrual loan reduction is not linear, as each credit has a unique workout timeline, creating uncertainty around the pace of credit quality improvement.
• Deposit growth has been concentrated in interest-bearing deposits rather than lower-cost non-interest-bearing deposits, which puts moderate downward pressure on NIM relative to prior forecasts.
• Talent competition for experienced C&I bankers and underwriters remains an ongoing challenge as all regional banks pursue C&I growth.

Q: With $1.6 billion in excess capital but only a $250 million buyback, how does management balance capital allocation between C&I growth and returning capital to shareholders? / A: Management and the board evaluate three core factors to determine future buyback size: growth in core earnings, trends in credit quality of the loan portfolio, and the pace of CRE payoffs that impacts capital needs for C&I growth. The current $250 million authorization reflects progress on these factors, and future decisions will be made as more clarity emerges over the rest of 2026 and into 2027. Management confirms that the bank is in the early innings of executing its strategic plan and will update guidance as the variables solidify.

Q: Given the faster-than-forecast CRE payoffs that reduced NII guidance, is this the last downward guidance revision, and how confident is management in the current trajectory? / A: Management notes that CRE payoffs over the last two quarters have been roughly double the original forecast of $600-$800 million per quarter, driven by market opportunities to deleverage. Management now forecasts net CRE payoffs of ~$1 billion per quarter, with $200-$300 million in new CRE originations that will offset some runoff, and expects to hit the 350% CRE concentration target 1.5-2 years earlier than planned. All controllable strategic milestones have been delivered on; the only unforeseen factor has been higher-for-longer rates. Management states that even if the plan takes 1-2 extra quarters to hit 2027 targets, that is a reasonable outcome given the starting point of the turnaround two years ago.

Q: What is the outlook for C&I growth after the record $2 billion net growth in Q2, and is this pace sustainable? / A: Management expects consistent C&I growth going forward in line with the Q2 2026 pace, with increasing momentum as newly hired relationship managers build out their pipelines. Growth will be supported by expansion into new geographies like Texas and new industry verticals. The CRE team has also resumed national originations of new CRE loans, which will reduce net CRE runoff over time. Year-to-date through Q2, C&I has delivered $3 billion in net loan growth and $1.4 billion in net deposit growth from new relationships, with growing fee income potential from cross-selling capital markets and treasury services.

Q: How has the 18-month forward stress test for 2027 CRE/multifamily resets incorporated potential additional interest rate hikes, and what is the impact? / A: Management's base forecast already assumes one additional rate hike in Q4 2026, and all loans being reset are modeled with full pro forma DSCR analysis based on contractual reset terms (typically 5-year SOFR + 300 bps or prime + 275 bps). Higher rates are expected to only change borrower behavior, leading borrowers to wait until the last minute to act on resets, rather than increasing projected credit losses materially. All existing stress scenarios and credit adjustments already incorporate this outcome, and the ACL reserve already reflects the results of the full review of all 2027 resets. This full review of 2027 loans is now 100% complete, with no material unexpected losses identified.

Q: For the New York City rent-regulated multifamily portfolio, how is a potential multi-year rent freeze incorporated into reserves, and is there material remaining risk? / A: Management modeled a three-year rent freeze with 2.75% annual operating expense growth, finding that only buildings with >70% of units regulated see a 7-8% NOI impact, while buildings with ≤70% regulated units can offset freezes with market rent increases. Of Flagstar's $8.5 billion in ≥50% regulated loans, $4.1 billion are pass-rated investment-grade loans with strong DSCR that have minimal risk. For the remaining $4.4 billion in criticized/non-accrual loans, management has already taken 21% in combined charge-offs and reserves against non-accrual loans, and 5% coverage for special mention/substandard loans. Management notes that any incremental impact from refined modeling in Q2 was nominal, and the portfolio is already adequately reserved.