Earnings call transcript: Flagstar Financial Q2 2025 shows adjusted EPS loss

Flagstar Financial Inc. reported its second-quarter earnings for 2025, revealing an adjusted net loss of $0.14 per diluted share, meeting analyst expectations. The company recorded revenue of $496 million, which fell short of the forecasted $519.38 million. Following the earnings release, Flagstar’s stock experienced a decline, with premarket trading showing a decrease of 5.39% to $11.40 per share. According to InvestingPro data, five analysts have recently revised their earnings estimates downward for the upcoming period, while the company’s last twelve months’ revenue showed a significant decline of 43.67%.

Key Takeaways

• Flagstar Financial reported a net loss, with adjusted EPS matching forecasts.
• Revenue missed expectations by $23.38 million.
• The company aims to return to profitability by Q4 2025.
• Stock price dropped 5.39% in premarket trading following the earnings report.
• Significant operational cost reductions were achieved, enhancing financial stability.

Company Performance

Flagstar Financial’s Q2 2025 results showed a continuation of its efforts to stabilize and improve its financial health. Despite recording a net loss, the company’s adjusted pre-provision revenue turned positive, reflecting a $32 million improvement from the previous quarter. The bank’s focus on expanding its Commercial & Industrial (C&I) lending portfolio and reducing operating expenses contributed to this progress.

Financial Highlights

• Revenue: $496 million, down from the forecasted $519.38 million.
• Adjusted net loss per share: $0.14, meeting expectations.
• CET1 capital ratio increased to 12.3%, indicating strong capital reserves.
• Operating expenses reduced by over $700 million year-over-year.

Earnings vs. Forecast

Flagstar Financial’s adjusted EPS of -$0.14 met analyst expectations, resulting in no earnings surprise. However, the company reported a revenue shortfall of $23.38 million, a 4.5% miss from the forecasted figures. This discrepancy highlights ongoing challenges in revenue generation despite improvements in operational efficiency.

Market Reaction

Following the earnings announcement, Flagstar Financial’s stock price fell 5.39% in premarket trading, settling at $11.40 per share. This decline reflects investor concerns over the revenue miss and the ongoing net loss. The stock’s movement places it closer to its 52-week low of $8.56, suggesting a cautious market sentiment. With a market capitalization of $5.01 billion and trading at 0.62 times book value, InvestingPro analysis indicates the stock is currently trading near its Fair Value. For deeper insights into Flagstar’s valuation and 12+ additional ProTips, subscribers can access the comprehensive Pro Research Report.

Outlook & Guidance

Looking ahead, Flagstar Financial projects a return to profitability by the fourth quarter of 2025. The company expects continued growth in its C&I portfolio and plans to expand its team of commercial bankers. With a projected balance sheet of $93.3 billion by year-end, Flagstar remains focused on diversifying its portfolio and optimizing its cost structure.

Executive Commentary

CEO Joseph Otting expressed confidence in the company’s strategic direction, stating, "We are well on track for all the parameters that we laid out and goals and objectives." CFO Lee Smith added, "We’re on track to return to profitability in the fourth quarter," highlighting the company’s commitment to achieving financial stability.

Risks and Challenges

• Revenue generation remains a challenge, as evidenced by the recent miss.
• Market conditions in the commercial real estate sector could impact growth.
• Cost management will be crucial to maintaining financial improvements.
• Potential macroeconomic pressures could affect lending and investment activities.
• The company must successfully integrate new hires to drive C&I growth.

Q&A

During the earnings call, analysts inquired about the health of Flagstar’s multifamily portfolio, particularly rent-regulated properties. Executives discussed strategies for managing CRE loan payoffs and confirmed expectations of GAAP EPS profitability in Q4 2025. The company emphasized its focus on building comprehensive banking relationships to support long-term growth.

Full transcript - Flagstar Financial Inc (FLG) Q2 2025:

Krista, Conference Operator: Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Financial Second Quarter twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session.

Thank you. And I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Sal, you may begin.

Sal DiMartino, Director of Investor Relations, Flagstar Financial: Thank you, Krista, and good morning, everyone. Welcome to Flagstar Financial’s second quarter twenty twenty five earnings call. This morning, our Chairman, President and CEO, Joseph Otting along with the company’s Senior Executive Vice President and Chief Financial Officer, Lee Smith, will discuss our second quarter results and outlook. Also joining us on this call this morning is Bao Nguyen, company’s General Counsel and Chief of Staff to the CEO. Before we begin, I would like to remind everyone that during this call, we will be referring to a presentation which provides additional detail on our quarterly results and operating performance.

Both the earnings presentation and the press release can be found on the Investor Relations section of our company website, irflagstar.com. In addition, please note that certain comments made today by the management team of Flagstar may include forward looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward looking statements we may make are subject to the Safe Harbor rules. Please review the forward looking disclaimer and Safe Harbor language in today’s press release and presentation for more information about risks and uncertainties, which may affect us. Also, when discussing our results, we will reference certain non GAAP measures, which exclude items from reported results.

Please refer to today’s earnings release for reconciliations of these non GAAP measures. And with that, I would now like to turn the call over to Mr. Adi. Joseph, please go ahead.

Joseph Otting, Chairman, President and CEO, Flagstar Financial: Thank you, Sal, and good morning, everybody, and welcome to our second quarter earnings call. We are very pleased with our operating results achieved during the second quarter. We continue to accomplish everything we set out to do and make progress on several fronts. We had significant momentum on our C and I growth strategy as we, generated almost 1,900,000,000 of commitments and $1,200,000,000 in new loans, and and added additional talent during the quarter as well. And I’ll remind everybody, we really started this initiative in the third quarter of last year.

We further reduced operating expenses in our plan to exceed prior estimates. Our credit quality improved as both criticized and classified assets declined 9% and non accrual loans declined by 4%. We meaningfully reduced our CRE exposure via record par payoffs, almost $1,500,000,000 which was substantially over what our initial forecast was. We grew the net interest margin and we reduced high cost deposits and borrowings and this result all resulted in our CET1 capital ratio increasing 12.3%. Going forward, we will continue to focus on the following areas as we continue to execute on our winning strategy to transform Flagstar Bank into a top performing regional bank.

We anticipate that we’ll continue to grow C and I. This will further diversify our loan portfolio and generate deposits and fee income. We’ll continue to reduce operating expenses and we’ll reduce the level of nonaccrual loans and criticizing classified loans. Lee will also provide an overview of our New York rent regulated exposure and portfolio, which we think you’ll see that we’ve substantially taken action against that portfolio, and the overall risk is much less than I think that has been reported in Before jumping into our financial results for the quarter more fully, I’d like to turn to Slide three to discuss the news we issued yesterday after the close of the market regarding our plan to merge our holding company into the bank. Flagstar Bank thereby eliminating the hold holding company.

This is a similar action that one of our regional bank peers undertook in 2018 when I was the comptroller of the currency. We were supportive of this then and feel this is the right move for our company. This action is designed to primarily enhance our corporate, legal and regulatory structure. Also, as you can see, there are additional benefits including a further reduction in our operating expenses, streamlining certain functions across the bank, eliminating redundant corporate activities such as dual board meetings, reducing redundant supervision and regulation. I will add that other than the elimination of the holding company, really nothing else changes for our company.

Our board remains the same. Our management team remains the same. And our common stock will continue to trade on the New York Stock Exchange under the ticker of FLG. On the next slide, we highlight the four primary management focus areas for 2025, each of which gained momentum during the second quarter. We want to improve our earnings profile through margin expansion, fee income and reducing operating expenses continue to execute on our C and I and private bank growth initiatives proactively manage the CRE portfolio, including reducing our concentrations, and Lee will cover that later on the slide, but we’ve made really spectacular strides in not only reducing the CRE portfolio, but taking corrective actions, And the credit quality improvement to lower provisions and credit losses.

The next few slides show the significant progress made during the second quarter in our C and I business. Beginning on Slide five, we show some of the key highlights during the quarter. In the second quarter, we hired an additional 46 new bankers and related support staff, including credit underwriters and portfolio managers. We have added more than 100 commercial bankers since June 2024, and we intend to add an additional 50 during the second half of the year. During the quarter, we showed tremendous growth in our two focus areas, specialized industries lending and corporateregional commercial banking.

Overall, new commitments increased 80% compared to the prior quarter to the $1,900,000,000 while originations increased almost 60% to the 1,200,000,000.0 But I think just more importantly is our pipeline currently stands at $1,200,000,000, up 40% compared to the first quarter pipeline. And I really think this is just reflective of the focuses, the industries, and bringing on, you know, really talented people into the organization, most who have, you know, twenty five to thirty five years of operating, in the in their specific specialties. Our expansion strategy is really twofold. Our corporate regional commercial banking business is focused on building out a relationship based national corporate banking effort in a middle market commercial banking franchise within Flagstar’s main four main geographic areas. Our specialized industries and corporate banking business is a national model and focuses on several industry verticals including sponsor finance, subscription, finance, lender finance, healthcare, oil and gas, power and renewable franchise, sports entertainment, and media and communications.

And each of these have been staffed, and are led by significant industry, specialists in their respective area. We recently announced the expansion of this business. As you will see in the next few slides, it is already driving strong origination volume. Slide six depicts the momentum in these areas over the past several quarters. In our two focus areas, originations increased 81% to $810,000,000 while commitments slightly more than doubled to $1,700,000,000 On Slide seven, while overall C and I loans declined modestly during the quarter due to our managed approach to derisking certain outsized credits in the legacy C and I portfolio, and this is really the result of us implementing a new hold limit policy within the company where we are driving down, those commitments to be within our hold limits.

The corporate, regional, commercial banking, and specialized industries portfolios increased $422,000,000 or about 12% compared to the prior to the previous quarter. Runoff has decelerated as we have lowered our commitments in the C and I portfolio. And along with growing momentum and new hires, we believe that the overall C and I portfolio will grow in the third quarter. On Slide eight, you can see the significant improvement the company has made over the past quarters in strengthening our balance sheet and is in line with what we said we would do and what we have done. Our CET1 capital ratio has increased by over 300 points to 12.3, ranking us among the highest relative to our peer groups.

We have significantly improved our reserve coverage through a rigorous credit review process. We’ve enhanced overall liquidity and we’ve reduced our reliance on wholesale borrowings, which helps our margin going forward. So now I’d like to turn it over to Lee to cover some of the financial data.

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: Thank you, Joseph, and good morning, everyone. As Joseph said earlier, during the second quarter, we did exactly what we said we would do, and we’re very pleased with the continued progress of our turnaround strategy. From a fundamental point of view, our CET1 capital ratio ended the quarter at 12.3%, ranking us as one of the best capitalized regional banks and our adjusted pre provision, pretax net revenue was a positive $9,000,000 an improvement of plus $32,000,000 from last quarter as we look to return the bank to profitability in the fourth quarter of this year. We continue to deleverage the balance sheet by reducing high cost FLUB advances and brokered deposits. We made further progress on our expense reduction plans, reduced criticized assets by $1,300,000,000 achieved significant growth in new C and I originations and saw record CRE part payoffs.

In Q2, we paid down over €2,000,000,000 of brokered deposits at an average weighted cost of 4.6%, and we also let €2,000,000,000 of high cost mortgage escrow related deposits with a weighted average cost of 4.7% runoff during the month of June. We also paid off €1,000,000,000 of FLUB advances right at quarter end with a weighted average cost of 4.5%. The reduction of these high cost funds will provide us with an ongoing margin benefit during the second half of the year, and they also provide us with an FDIC insurance expense benefit. During the quarter, approximately €4,900,000,000 of retail CDs matured with a weighted average cost of 4.8%. We retained approximately 85% of these CDs, and they migrated into other CD products that were anywhere from 50 to 65 basis points lower than the maturing CDs.

In the third quarter, we have another €5,200,000,000 of retail CDs maturing at a weighted average cost of 4.5%. These deleveraging actions, CD maturities and other deposit management strategies have allowed us to reduce our cost of deposits 11 basis points quarter over quarter and our overall cost of funds by 10 basis points compared to the prior quarter. We continue to actively manage our deposit costs and will look for further opportunities to reduce our cost of funds during the remainder of 2025. We also accelerated €2,000,000,000 of investment securities purchases during the quarter to optimize our net interest margin. Collectively, these actions resulted in a seven basis point quarter over quarter NIM improvement to 1.81%.

Our NIM for the month of June was 1.88. Joseph already commented on the strong results in the C and I business. We are thrilled with their performance and are firmly on pace to hit our target of €1,500,000,000 of funded C and I loans per quarter. I should note that during the quarter, we had legacy C and I payoffs as we took deliberate derisking actions to rightsize outsized credits by reducing hold limits and exiting lower risk rated and less profitable credits. In terms of asset quality, criticized assets declined €1,300,000,000 to €12,700,000,000 in the quarter, a result of payoffs and upgrades.

Criticized assets have been reduced 2,200,000,000.0 or 15% since the beginning of the year. The one borrower we moved to non accrual status in the first quarter filed for bankruptcy during the second quarter. We believe this will lead to a more orderly process on about 82 of the 90 loans that are subject to bankruptcy proceedings. Of the remaining eight loans, we’ve moved to appoint a receiver in the various jurisdictions and take direct control of these properties. With respect to the thirty to eighty nine day delinquencies, approximately $332,000,000 were driven by one borrower who pays subsequent to month end and has done so again, meaning that about $329,000,000 of their delinquent loans as of June 30 are now current as of July 23.

On Slide 17 of the earnings presentation, we have provided significant information around our rent rate regulated multifamily portfolio. When you look at all multifamily buildings that are more than 50% rent regulated, approximately $10,000,000,000 are within New York City, with an average occupancy of 97% and a current loan to value ratio of 69%. Of this €10,000,000,000 €5,600,000,000 or 57% are pass rated loans. The remaining €4,300,000,000 or 43% are criticized or classified loans, meaning they are either special mention, substandard or on non accrual. Of this €4,300,000,000 the current LTV is 79%.

Interestingly, dollars 1,900,000,000.0 are non accrual and have already been charged off to 90% of appraisal value. Furthermore, of this criticized and classified population, we have recent appraisals within the last eighteen months on 77% of these loans and updated financials on 93%. If you subtract the non accrual loans from this criticized population, you are left with $2,300,000,000 Of this $2,300,000,000 amount between charge offs and ACL reserves, we have approximately 6% or $137,000,000 of charge off and reserve coverage. I should point out that of the $2,300,000,000 of special mention and substandard loans, 50% have already reset to a higher rate and are paying, and 40% will reprice by the end of twenty twenty six, meaning they are in the eighteen month window of enhanced financial review. Suffice to say, given credit metrics charge offs and current ACL reserves, we feel that we are appropriately reserved against the portfolio.

Also, we are currently reviewing the annual financial statements for all borrowers, and to date, we’ve completed the review on approximately 28%. I’m pleased to report that there have been more upgrades than downgrades, while the vast majority have stayed consistent compared to last year, implying that the overall trend is improving. Now turning to Slide nine. As we reported earlier today, our second quarter loss per share narrowed significantly compared to the previous quarter, and on an adjusted basis, it came in, in line with consensus. We reported a net loss of $0.19 per diluted share and as adjusted, we reported a net loss available to common stockholders of $0.14 per diluted share compared to $0.23 net loss in the first quarter after adjusting for the following notable items: $14,000,000 of merger related expenses $2,000,000 of severance costs related to branch closures $7,000,000 in accelerated lease costs also related to branch closures and $3,000,000 in trailing costs from the sale of the mortgage servicing and third party origination business.

Importantly, however, and as I previously mentioned, our adjusted pre provision revenue was a positive $9,000,000 this quarter, an improvement of $32,000,000 compared to last quarter. The following slide provides our updated three year forecast through 2027. Given the earning assets are lower than previously forecast due to the higher loan payoffs, we are refining our net interest income and NIM guidance by $125,000,000 and 10 basis points in 2025, but offsetting $75,000,000 of that with a reduction in non interest expense, resulting in adjusted EPS being approximately $0.10 lower than previously forecast. The lower balances then roll into 2026, so we have tempered net interest income by $100,000,000 next year, but offset that entirely with $100,000,000 of lower non interest expense, meaning that our adjusted EPS guidance in ’twenty six does not change, and there is no change to our ’twenty seven guidance. Slide 11 highlights our NIM trends, And as you can see, we had margin growth during the second quarter, and we expect to see margin growth over the remainder of the year.

As I mentioned earlier, the NIM for the month of June was 1.88% compared to the 1.81% average for the second quarter. Drivers to our NIM expansion include a lower cost of funds as we continue to deleverage the balance sheet and manage lower, low coupon multifamily loans resetting higher or paying off at par, net growth in higher yielding C and I loans and a reduction in non accrual loan balances. Earlier, Joseph touched on the reduction in our non interest expense. And on Slide 12, you can see the substantial progress we’ve made in reducing operating expenses. We’ve worked exceptionally hard to optimize the cost structure of the organization.

Given actions to date, we’ve taken out over £700,000,000 of costs on a year over year basis. Our cost reduction efforts are focused on the following five areas: compensation and benefits, real estate optimization, vendor costs, outsourcing, offshoring, non strategic back office functions and processes, and FDIC expenses. Quarter over quarter, expenses decreased $24,000,000 and we are significantly ahead of our full year 2025 non interest expense guidance. Our cost savings are net of growth in other areas such as the build out of our C and I business, together with investments in our risk compliance and technology infrastructure. Turning now to Slide 13, which shows the growth and strength of our capital position.

At 12.3%, our CET1 capital ratio is top quartile among our peer group. Our priority continues to be to redeploy this capital into growing our C and I business as we further diversify our balance sheet. The next slide is our deposit overview. As I mentioned earlier, the decrease in our deposits was due to the payoff of $2,200,000,000 of high cost brokered deposits and approximately $2,000,000,000 of mortgage escrow related deposits. The next slide shows our CRE par payoffs.

We had a record quarter of par payoffs of approximately 1,500,000,000.0 almost double the amount for the first quarter. Of this amount, 45 percent or $680,000,000 were rated as substandard. Approximately $500,000,000 of this quarter’s part payoffs or 33% were New York City greater than 50% rent regulated buildings. This quarter’s record number of CRE part payoffs provides an indication of the robustness of the market for these loans, And while this acceleration of par payoffs impacts short term earnings, it also accelerates our strategy to diversify our balance sheet to a third CRE, a third C and I and a third consumer. These part payoffs are also driving the significant reduction in CRE balances and in the CRE concentration ratio.

Since year end 2023, CRE balances have declined $8,000,000,000 or 16% to $39,700,000,000 while the CRE concentration ratio is down 80 percentage points to 421% compared to five zero one percent at year end 2023. Slide 16 provides an overview of the multifamily portfolio. This portfolio has declined nearly $4,000,000,000 or 12% year over year. We maintain a strong reserve coverage on this portfolio of 1.68%, the highest relative to other multifamily focused banks in the Northeast. Furthermore, the reserve coverage on multifamily loans, where more than 50% of the units are rent regulated, is 2.88%.

Earlier, I stated that one driver to our margin expansion is the resetting of our multifamily loans. We have about $16,000,000,000 of multifamily loans either resetting or maturing between now and the end of twenty twenty seven, with a weighted average coupon of less than 3.7%. If these loans pay off, we will reinvest the proceeds and capital into C and I growth or pay down wholesale borrowings. If they reset, the contractual reset is at least 7.5%, which gives us an immediate NIM benefit. Going back to 01/01/2024, approximately $4,900,000,000 of CRE loans have reset.

Of that amount, dollars 2,300,000,000.0, has paid off at par and $1,900,000,000 of reset and occurrence, meaning 85% of CRE loans that have reset have either paid off at par or are current. Skipping to slide 18, this slide details our ACL by loan category. Our ACL reserve decreased $53,000,000 quarter over quarter, a result of lower held for investment balances and lower criticized assets. These positives were offset by a weaker Moody’s economic forecast, which added over €60,000,000 to the reserve. Our coverage ratio, including unfunded commitments, was 1.81%, in line with last quarter of 1.82%.

On Slide 19, we provide additional details around our credit quality trends. Criticized and classified loans declined $1,300,000,000 or 9% on a quarter over quarter basis to $12,700,000,000 while they are down $2,200,000,000 or 15% since the beginning of the year. Net charge offs of $117,000,000 were relatively unchanged compared to the prior quarter at 115,000,000 We believe we further derisked and positioned the balance sheet for growth and profitability. Fundamentally, we have strong capital that we can invest into loan growth, strong liquidity and funding, strong credit reserves, and we’ve executed on optimizing the cost structure of the organization. I will now turn the call back to Joseph.

Joseph Otting, Chairman, President and CEO, Flagstar Financial: Thank you, Lee. On slide 20, we highlight the significant embedded price appreciation potential in the stock price at current price levels. We closed yesterday at $12.5 reflecting 70% of second quarter tangible book value per share compared to 160% for our peers. As we continue to improve our credit quality profiles, successfully execute on our strategic plan and return to profitability, we believe the valuation gap between Flagstar and our peers will narrow and ultimately go away. If we trade at only one times our year end 2027 tangible book value per share adjusted for warrants, our stock could trade at $17.64 representing potential upside of 46% from current levels.

If we trade in line with the peer multiple, our stock price could trade at $28.23 representing potential upside of 134 percent from current levels. We have made significant strides during the first six months of the year, and we anticipate further progress over the remaining six months. As always, I’d like to thank all of our teammates for their efforts and collaboration. A turnaround is a team effort, and together, we will transform Flagstar into one of the best performing regional banks in the country. Now operator, I would like to turn it over and open it up for questions.

Thank you.

Krista, Conference Operator: Thank you. We will now begin the question and answer First question comes from Jared Shaw with Barclays. Please go ahead.

Jared Shaw, Analyst, Barclays: Hey, good morning everybody.

: Hi, Jared.

Jared Shaw, Analyst, Barclays: Guess on margin, can you give a little bit of detail on the securities purchase that happened? And then as we look out going forward with that 188,000,000 I guess ending margin, does that take into account the FHLB payoff and sort of expectations around interest recapture in that?

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: Yes, it does. So thanks for the question, Jared. We pulled forward $2,000,000,000 If you go back last quarter, that was what we forecast to buy between the end of Q1 and the end of the year. Given our excess cash position, we accelerated those securities purchases into Q2 because it maximizes NIM. We were basically buying agency CMOs with a weighted average coupon of about 5.25%.

And so we just felt that that was it was just another action we could take to optimize our NIM position. And the FHLB purchase or what we bought back, it was right at the June. So you don’t see any benefit of that in the Q2 results, but it is included in the NIM forecast for the remainder of the year.

Krista, Conference Operator: Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon, Analyst, Piper Sandler: Hey guys, good morning. Joseph, I think you had previously suggested that stock repurchases were possible in mid-twenty twenty six. Is that still sort of the expected timeframe for buybacks? Or do you has it been pulled forward at all given your strong capital position? Thank you.

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: Yes. This is Lee. I think as we’ve said both Joseph and I, right now the focus is on investing the excess capital in growing C and I and other asset classes quite frankly. And so that’s where we want to invest the capital in the franchise. And we feel you’ve seen the tremendous progress that we’ve made from a C and I point of view, and we feel that, that trajectory and positive momentum will continue.

I think in terms of stock buybacks, right now, we’re not looking to do that. But as I’ve said previously, if we get to the middle of twenty six, we’re back to profitability, we’re firing on all cylinders. If we’re still trading at a discount to book like we are today, that may well be something that we need to take a look at.

Joseph Otting, Chairman, President and CEO, Flagstar Financial: Yeah. I think I think, Mark, that what Lee just said was kind of what we’ve communicated with. Clearly, we need to get through ’25 well into ’26. And if we start being accretive to capital, then I think the board will have some dialogue on what to do with that excess capital.

Krista, Conference Operator: Your next question comes from the line of Christopher McGratty with KBW. Please go ahead.

Christopher McGratty, Analyst, KBW: Great. Good morning.

Mark Fitzgibbon, Analyst, Piper Sandler: How are you? Last quarter, you talked about the trajectory of the asset base over the next couple of years. I guess my question is, with this quarter’s payoff, albeit at par, I guess, what’s the degree of confidence that the payoff acceleration won’t continue and

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: the asset base will be smaller? Thanks. Yes. So it’s a good point, Chris, and that’s part of the reason why we’ve tweaked the interest income guidance. So right now, we believe that at the end of ’twenty five, the balance sheet will be about $93,300,000,000 So that’s about $2,700,000,000 less than what we thought it would be at the end of last quarter.

And it’s really just because of a couple of things. The CRE part payoffs coming in almost double what they were in Q1 and we actually think that Q3 will be another strong quarter of part payoffs. And then as we mentioned, we had a slight it was C and I was sort of on a net basis down slightly as we look to derisk some of the legacy portfolios where we felt we had outsized positions, poorer credits or credits that weren’t meeting our profitability thresholds. We do think that in Q3, we will be net positive from a C and I point of view. But you’ve got that smaller balance sheet.

And as I mentioned in my prepared remarks, that rolls into ’twenty six and then we start to recover some of that in ’twenty seven. So the ending balance sheet at the end of ’twenty six is about $98,500,000,000 We were around 102,000,000,000 And then in ’twenty seven, the ending balance sheet is $109,600,000,000 versus 111.4 And then the only other thing I’d add on ’26 is just given the exceptional progress we’ve made with that expense optimization plan, we can offset dollar for dollar that reduction in guidance for net interest income with those cost reductions in 2026.

Mark Fitzgibbon, Analyst, Piper Sandler: Great. And my thank you for that. It’s helpful. And my follow-up would be the collapsing of the holding company. I saw the $15,000,000 of annual costs.

That’s great. I presume this will, lead you to have to avoid to do CCAR, but any any other, comments on the collapsing would be great. Thanks.

Joseph Otting, Chairman, President and CEO, Flagstar Financial: Yeah. You know, you know, clearly, as we’ve kinda gone line by line across the organization looking at, what is the value to the company and where we could take cost out, our estimate is this is roughly $15,000,000,000 that will reduce our costs. And those are predominantly third party costs. There’ll also be some internal costs that we feel that we can successfully take off. But I think also it just, you know, focuses into one regulatory supervision process within the company.

And you’re right. There is a you know, obviously, the OCC does a capital review submission by the bank and but we will not be subject to the CCAR going forward. That’s correct.

Mark Fitzgibbon, Analyst, Piper Sandler: Right. Thanks so much.

: Welcome. Thanks, Chris.

Krista, Conference Operator: Your next question comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala, Analyst, Bank of America: Hey, good morning.

: Good morning.

Ebrahim Poonawala, Analyst, Bank of America: I guess maybe just wanted to go through so I think, Lee, you mentioned in terms of obviously, nonaccrual loans are declining. You talked about repricing. If if you don’t mind just walking through the latest in terms of the health of the rent stabilized multifamily landlords both in terms of given where interest rates are, like, would would lower rates help if you don’t get much relief on rates? Is is that incrementally negative or not if you look out the next six to twelve months? And then obviously, with all this chatter about the may mayoral elections in New York, how bad could that be for, for these clients?

Thank you.

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: Yeah. Thanks, Ibrahim. So that’s I’m glad you asked that question. That’s why we sort of put Slide 17 into the earnings deck. And I know there’s a lot of information here.

But what we’re really trying to point out is when you look at the New York rent regulated more than 50%, and I’m talking about New York City, we have about $10,000,000,000 And of that $10,000,000,000 97% is occupied and it has a 69% current LTV. When you further break that sort of $10,000,000,000 down, dollars 5,600,000,000.0 is pass rated. So as we’ve done our reviews, that is those are pass rated loans, 98% occupied, 62% current LTV. So then you’re left with $4,300,000,000 which is criticized and classified, so special mention, substandard and non accrual. Of that $4,300,000,000 $1,900,000,000 is non accrual.

And as I said in my prepared remarks, we’ve already taken charge offs and you can see this in the table in the bottom left, dollars $334,000,000 or almost 15% of charge offs against that population. And we have a further $82,000,000 or 4% of reserves against it. So we’ve obviously done a lot of work on the non accrual portfolio and written that down to 90% of appraised value. So then you’re left with $2,300,000,000 which is special mention and substandard. And of that $2,300,000,000 we’ve got $137,000,000 or about 6% coverage between ACL and charge offs.

Think what I would also point out about that $2,300,000,000 is 50% of that $2,300,000,000 has already reset and is continuing to pay, and 40% will reset within the next eighteen months. What that means for us is it’s in the enhanced review period. So we’ve done additional work on those because we know they’re going to reset within the next eighteen months. So we just feel that, first of all, when you look at it, a lot of big numbers were being thrown around by some sort of in some analysis that we were looking at. That’s not true, and we’ve tried to articulate it here.

And given all the work that we’ve done, we feel that we are more than adequately reserved against the portfolio. And then to answer your other point, Ebrahim, if rates drop, that’s obviously helpful. If we’re in a declining rate environment, I would expect that you’ll see it’ll speed up the payoffs of that multifamily portfolio. And I think it probably brings any of the multifamily loans that are non accrual, It moves them further into the money.

Joseph Otting, Chairman, President and CEO, Flagstar Financial: Yeah. Abraham, the the other comment I’d make, if you look at the the amortizing debt service covered numbers, it kinda gets to your point. You know, we all know that the next twelve months, the annual leases are gonna go up 3% and the multi year two year leases will go up 5.5%. Where you could see impact of of the freezing of rent increases, would not occur until July, that the the numbers on the debt service coverage, it would depend upon how fast expenses went up to impact those debt service coverage. Because we know those properties virtually stay, you know, a 100% almost a 100% occupied, but it really comes down to just if rents are frozen, then what is the what’s the what’s the arc of the operating expenses?

: That’s helpful. Thank you both. Your

Krista, Conference Operator: next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.

Sal DiMartino, Director of Investor Relations, Flagstar Financial0: Hey. Good morning.

: Good morning.

Ebrahim Poonawala, Analyst, Bank of America: Can you give us some more color on the change in

Sal DiMartino, Director of Investor Relations, Flagstar Financial0: the NII guide? I hear you that on the higher pay downs, but I was wondering if doesn’t that come with pay downs of more lower yielding loans? And then that also gives you the ability to drive down those deposit costs, which have already been coming down nicely. So, you know, I’m wondering what I’m missing there. Is there less of a yield pickup as you move from some of the CRE pay downs into C and I or anything else happening there?

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: Yes. No, it’s a great question. So when you look at the NIM change, there is the sort of a rate and there’s a volume impact. I think we’ve obviously talked about the volume and what’s driving that. But in terms of rate, I mean, the weighted average coupon of the loans that are paying off is it’s sort of under 6% because what you’ve got is a situation where loans that are resetting at the higher rates for a short period of time are then paying off.

And so yes, you’ve got a lot of the we’re getting rid of a lot of the lower yielding loans, but you’ve also got loans that have reset at the higher rate and are then moving. And so you’ve got to factor that into the equation as well. And the other thing that impacts the rate, there’s a lot of ins and outs at the moment, as you can see, as we are optimizing and tidying up the balance sheet. We’ve got new loans coming in. We’ve got runoff.

You’ve got things in there like the FHLB stock dividend. You’ve got non accruals. There’s a lot of things that can just affect the overall NIM by a basis point here and there. And so you have a sort of cumulative effect. And it’s not much, it’s sort of single digit bps.

But obviously, when you take those single digits on a $92,000,000,000 balance sheet, then you have the volume reduction. That’s why we just tweaked the guidance down by $125,000,000 and 10 basis points.

Sal DiMartino, Director of Investor Relations, Flagstar Financial0: Got it. Did you have what the new loans are coming on at?

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: Could you say that again, please?

Sal DiMartino, Director of Investor Relations, Flagstar Financial0: Do you have what the new C and I loans are coming on at?

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: What’s Yes. They’re coming on a spread to SOFA depending on the type anywhere a spread to SOFA anywhere from 175,000,000 to 300,000,000 just depending on the type of the C and I loan that’s coming on.

Sal DiMartino, Director of Investor Relations, Flagstar Financial0: Great. Thank you.

Krista, Conference Operator: Your next question comes from the line of Bernard von Giedzicke with Deutsche Bank. Please go ahead.

Christopher McGratty, Analyst, KBW: Hey, guys. Good morning. Good morning. So just questions. I know you’re trying to reduce your multifamily concentration, and utilize proceeds into growing C and I.

So the 16,000,000,000 in in the rep regulated portfolio, are you contemplating any, sales here? Or will reductions here going forward be from any maturing or charge offs?

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: Yes. So I think as you can see, we’re doing a very nice job of receiving par payoffs, and a substantial amount of those par payoffs are substandard. And as you correctly point out, between now and the end of ’twenty seven, we’ve got another $16,000,000,000 resetting. So as it relates to the performing part of the portfolio, we feel very comfortable that what we’re executing on right now is paying dividends. I think the sale option is it applies more to the non accrual loans.

That’s just one of the options along with DPOs, workouts. That’s just one of the sort of strategies in terms of dealing with the nonaccrual loans. And so that’s how I sort of think of the sales strategy.

Joseph Otting, Chairman, President and CEO, Flagstar Financial: And the the other thing I would add there is, know, obviously, we’re trying to work with borrowers where we can enhance the credit either through, at maturities pay downs or them offering up additional additional collateral with cash flow to support the loan. So it is a multitude of buckets. And quite frankly, what you’ve heard from us for multiple quarters is our real desire to get the criticized loans paid down as a concerted effort. We saw significant results this quarter from that effort.

Christopher McGratty, Analyst, KBW: Okay. And just one follow-up. Lee, know you mentioned the one borrower that moved to nonaccrual status in 1Q and filed for bankruptcy in the second quarter. You know, I know you took some adjustments, some reserves, and a NIM reversal in 1Q to reflect that. Just given the change in status, were there any updates in any NIM reversals or reserve increases for 2Q?

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: As it relates to that particular borrower, yes. So as we got some appraisals in towards the end of the second quarter, there was a net increase of $18,000,000 and just in just some additional charge offs. So when you look at where we were in the the end of the first quarter from a provisioning and charge off point of view and where we ended the second quarter as we got those appraisals in, there was a net increase of $18,800,000

Christopher McGratty, Analyst, KBW: And no NIM reversal?

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: No. We took all of that in Q1. It was we moved it all to non accrual in the first quarter.

Christopher McGratty, Analyst, KBW: Great. Thanks for taking my questions.

Krista, Conference Operator: Your next question comes from the line of Casey Haire with Autonomous Research. Please go ahead.

Sal DiMartino, Director of Investor Relations, Flagstar Financial1: Yes, thanks. Good morning, guys.

Christopher McGratty, Analyst, KBW: Good morning.

Sal DiMartino, Director of Investor Relations, Flagstar Financial1: So I guess just following up on that last question. I was wondering if you could provide an outlook for the net charge offs. I know you guys kept your provision guide intact, but I was wondering if we could see some leverage from net charge offs, which held flat this quarter. Thank you.

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: I’m sorry, Kate. I think we’ve yes, we expect the charge offs to come down as we move into Q3, Q4. And we’re very comfortable with the guidance that we’ve provided as it relates to the provision for the remainder of the year. I think I would just emphasize again, you’ve seen a reduction in and you’ve seen a reduction in the HFI portfolio predominantly because of those multifamily part payoffs. And you’ve seen that very significant reduction in criticized assets, 15% or 2,200,000,000.0 since the beginning of the year.

And so right now, we expect those trends to continue.

Sal DiMartino, Director of Investor Relations, Flagstar Financial1: Okay, great. Apologies if I missed this on a busy morning, but just just wondering what has what have you guys seen in terms of changes from building owners? What have you guys been doing differently? And then have you seen any change in, you know, in terms you know, when you get these CRE payoffs, you know, I don’t know if it’s a bank or or or some of the GSEs that are taking the other side of this. You know, what kind of change in behavior have you seen from these three different constituencies since the primary last month?

Joseph Otting, Chairman, President and CEO, Flagstar Financial: Yeah. I I think there’s a couple buckets. First, to address the payoffs, probably, you know, roughly 50%, it comes from the agencies. Oh, excuse me. 20% come roughly from the agencies.

And in most of the instance, those credits, you know, meet a higher standard to be able to to clear the agency hurdle. Roughly 20% are coming from JPMorgan. So about 40% of the payoffs are coming from those two channels. And then the rest is just kinda spread around is the is the way we would describe it. And and, you know, we we are by our rollover documentation, we’re we’re 75 to a 100 basis points, what I would consider over market.

So we it is a motivating factor with the borrowers as we’re having discussions that, you know, our intent is is to reduce our exposure. Obviously, we’ve said that all along. And so borrowers are incented to do what they can, on these substandard credits, which are, you know, roughly 50% of the payoffs that they are offering up credit enhancements to get those off our books. And as we referenced earlier in the call, that can be pay downs, that can be adding additional collateral, but the borrowers are moving those to gain lower interest rates in the marketplace. We do have a number of borrowers who exercise their option to roll that over.

A lot of those are going to, sulfur related, indexes under the assumption that we are going to see lower interest rates later in the year, and they can then prepay those without a prepayment penalty as we move forward. The other comment I would make is, we did have a homebuilder business in the CRE group and we’ve ran down pretty significantly any land lending in that portfolio over the last couple of quarters. So we don’t have really a lot of exposure to what you’re starting to hear that some of the inventory levels are backing up at the homebuilder level. So our exposure there is quite small.

: Great. Thank you. You’re welcome.

Krista, Conference Operator: Your next question comes from the line of Matthew Breese with Stephens. Please go ahead.

Mark Fitzgibbon, Analyst, Piper Sandler: Hey. Good morning.

: Hi, Matthew. Hi, Matt.

Mark Fitzgibbon, Analyst, Piper Sandler: I wanted to follow-up on the the asset size question. And I and I heard you loud and clear on the new, you know, somewhat lower outlook for total assets. But I guess the question is what’s the cutoff for qualifying for the formal category four bank stress test next year? As it seems like you’ll be you’ll be under the threshold.

Sal DiMartino, Director of Investor Relations, Flagstar Financial2: We will be under the threshold. But, with our, transaction that we announced yesterday, we won’t even be subject to the requirements.

Mark Fitzgibbon, Analyst, Piper Sandler: Understood. And there are additional cost saves from that?

Sal DiMartino, Director of Investor Relations, Flagstar Financial2: Yes. So no no external vendor spend, no need for internal staffing, all of those things.

Mark Fitzgibbon, Analyst, Piper Sandler: Understood. Okay. And then, Joseph, maybe one for you. Earlier this year at a conference, you made reference to diversifying the capital stack and perhaps adding some preferred capital. I think you said in late twenty twenty six.

Can you talk about that a bit? Curious about size, timing, if that’s still necessary.

Joseph Otting, Chairman, President and CEO, Flagstar Financial: Yeah. I well, you know, clearly, where we sit at 12.3% today, the bank has very effectively raised its capital levels in the company. But we are a bit of a one trick pony on our capital stack compared to our peers. And so looking at that, clearly, we’ll be on the docket for the board as we as the balance sheet either expands and we use that capital or we have excess capital, what what is the capital structure within the company look like? We obviously expect next year you know, we’re still forecasting return to profitability in the fourth quarter and that we will be, you know, significantly profitable next year in ’26.

So that’s going to start to offer up a lot of options for the board to consider.

Mark Fitzgibbon, Analyst, Piper Sandler: Great. I’ll leave it there. Thank you.

: Okay. Thank you.

Krista, Conference Operator: Your next question comes from the line of David Smith with Truist Securities. Please go ahead.

Sal DiMartino, Director of Investor Relations, Flagstar Financial1: Good morning. I was wondering if you could speak to any downsides or that you see to merging the HoldCo into the bank. You outlined what sounded like some pretty nice positives. I’m just wondering if this is just such a great idea why we don’t see more more banks following the same decision. Yeah.

Sal DiMartino, Director of Investor Relations, Flagstar Financial2: Hey. This is Bowen. We don’t see any downsides as we sort of noted in our press release yesterday. Today, we have most of our operations, 99% of our operations is in the bank. And the cost associated with the duplicative regulations of the holding company sort of outweighs the 1% of of sort of assets that we really have at the holding company.

So for us, it it you know, given our structure and given that our activities are are all at the bank, there is really no downsides for us here. There’s no changes in our activities. You know, we we don’t have any plans on engaging in non banking activities, which is really the key reason for having a holding company. So for us, it’s all quite positive and no downsides from our perspective.

Sal DiMartino, Director of Investor Relations, Flagstar Financial1: Thanks. And then I just want to confirm, you still expect to be GAAP EPS profitable for the fourth quarter of this year?

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: We do. Yes. That absolutely. And we’re on track given the results of Q2, the progress we’ve made from Q1 and that’s exactly the goal and objective and we’re on track.

Sal DiMartino, Director of Investor Relations, Flagstar Financial2: I think the other thing can I add on the holding company question? We will continue as a bank to be able to access the discount window, all those sorts of things that are available to banking organizations. So I think that just sort of emphasize for us no change that are negative from our perspective.

Sal DiMartino, Director of Investor Relations, Flagstar Financial1: Thank you.

Krista, Conference Operator: Your next question comes from the line of Christopher Marinac with Jamie Montgomery Scott. Please go ahead.

: Thanks. Good morning. I wanted to ask about deposit flows. And do you think that we will see a turn on the private bank and the commercial and premier? Are you incented or incenting growth in those channels?

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: Yes, absolutely. I think as we’ve said before, as we move forward here, we want to leverage the new relationships that we’re bringing in on the C and I side to bring in deposits. Now it takes time. It doesn’t happen overnight. But our strategy is to be a full relationship bank.

And we’re not sort of just going to give the balance sheet away. We want to have a deep relationship where we’re creating deposit flows, fee income opportunities as well as the lending relationship. So that is absolutely a big part of the strategy as we move forward here.

Joseph Otting, Chairman, President and CEO, Flagstar Financial: Yeah. I don’t I don’t think you see we’re we’re not just buying participations. That’s not our strategy. These these are our new relationships are ones where the people are joining the company, have been connected to these companies for significant periods of time. And we’re already seeing it in our interest rate derivative products.

We’re seeing it in our four zero one offerings to companies. And we’ve also on six or eight transactions have either been named lead left or lead right on in our leading credit transaction. So that’s that’s kind of our sweet spot with our balance sheet gives us the ability to, you know, be quick and nimble on the credit process, but also be large enough to be able to be a significant player for, either existing or prospective clients.

: Great. Thank you both for that. And just a quick follow-up on sort of the payoffs in the multifamily bucket. Are you seeing agencies and other banks take loans from you? Is there any additional commentary on kind of how that mix has been?

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: Yes, absolutely. And as Joseph mentioned, that’s exactly where they’re going. So about 20% of the payoffs are going to Fannie Freddie. The remainder are going to other financial institutions, the biggest of which is JPMorgan. So, we’re absolutely seeing other financial institutions and the agencies, although the agencies have always been there leaning into this asset class.

Mark Fitzgibbon, Analyst, Piper Sandler: Great. Thank you, Lee. Appreciate it.

Lee Smith, Senior Executive Vice President and Chief Financial Officer, Flagstar Financial: No problem.

Krista, Conference Operator: Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

: Hey, thanks. Good morning. Good morning. Hi, John. On, I’m just thinking about ’26 and ’27.

You you have big hiring plans. And curious when you miss on a new hire, what what are the top couple of reasons? And then what are some of the reasons a new relationship manager can’t get their clients to come to Flagstar? What are the things you need to work on or improve there? Thank you.

Joseph Otting, Chairman, President and CEO, Flagstar Financial: You know, I I think, we, you know, we one of our claim to fame is virtually all the people we’ve hired except for one, they are people that we knew and did not use an executive recruiter. So we’re, you know, we’re describing, you know, hundreds of people who, through history, do Rich Raffetto or Joseph Otting as we have both spent, you know, thirty to forty years in the banking business. And so, a lot of people, you know, see that this is a team that they can join and be part of a winning strategy. So that’s that’s what I would say, number one. And number two is a lot of times, you know, people are looking for growth.

And if you’re at an institution, a large regional bank or a national bank that, you know, may have their share of credits, and commitments into a relationship, this is kind of a clean slate where they can come over here and be part of a clean slate. And so that excites people, I think, to be part of that strategy and and the direction we’re going. On the miss side, I would say the real misses are is where the bank comes back and just basically, you know, does whatever it takes to keep that that person in the company. And that, to me, just reinforces the type of people we’re trying to hire, you know, or the type of people that that organizations wanna keep, from that perspective. And on the client side, you know, I I would say we’re we’re really good now in the syndications.

I think we’re really good in the interest rate derivatives, products and and and relationships and credit, know, how we deliver credit. The one area that we will probably need to invest a little bit more in is our treasury management. You know, we’re we’re good enough, but not great in treasury management. And so as we’re doing some of

: the

Joseph Otting, Chairman, President and CEO, Flagstar Financial: consolidation efforts this year in the technology and operations area, We’ll be through most of those in in late, the q four of this year, early q one of next year, that we’ll be able to start to be able to focus on products within the company. We’ve also done a good job. You know, this year, we’ve introduced, you know, kind of a capital call, you know, facilities, equity investments for clients to be able to make equity investments in law firms and private equity. And then we did come out with a kind of a private banking oriented jumbo mortgage program that, is interest only on kind of five one and seven one products that is also starting to gain some real traction with some of our private banking customers.

: Okay. Good. And that’s the comment around further strengthening commercial products and services?

Joseph Otting, Chairman, President and CEO, Flagstar Financial: Yes. Exactly.

Mark Fitzgibbon, Analyst, Piper Sandler: Yes. Okay.

: All right. Thanks a lot. Welcome.

Krista, Conference Operator: We have no further questions in our queue at this time. I will now turn the call back over to Joseph Otting for closing comments.

Joseph Otting, Chairman, President and CEO, Flagstar Financial: Okay. Thank you very much for joining us this morning and allowing us to give you kind of an update. The executive management team of the bank is very excited about our progress and the direction that we’re heading. We laid out an ambitious plan when we first arrived shortly after March. For the most part, we’ve stuck with that plan and actually outperformed in certain areas of the plan including expenses.

I think at the time people were questioning perhaps our sanity that we could take that much expense out, but not only are we going to take that out, we’re going to exceed that. And also the C and I business is coming along. We couldn’t be more pleased with the talent and the growth in the C and I business, and that’s a real driver for us to reshape what Flagstar Bank will look like in the future. So we do think we’re well on track for all the parameters that we laid out and goals and objectives, and the team is really focused on building this into a really top performing regional bank. So again, I’d like to thank you for taking the time to join us this morning and for your interest in Flag Star Bay.

Krista, Conference Operator: This concludes today’s conference call. Thank you for your participation, and you may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.