FLG 3Q 2026 Earnings Webcast - FLAGSTAR BANCORP INC

Financial Performance:

• Net interest income and Net Interest Margin (NIM) expanded in Q3 2026, with NIM reaching 2.17% for the quarter and 2.23% in September.
• Pre-provisioned net revenue (PPNR) improved, generating positive earnings of $0.13 per share in Q3 pre-credit provision, boosted by a $22 million tax benefit from a settled 2020 audit.
• Net charge-offs were $74 million (49 basis points of average loans), down $25 million sequentially; $34 million of this was fully reserved, resulting in $40 million in net charge-offs excluding reserve replacements.
• Provision expense rose to $76 million in Q3 due to higher interest rates, inflation, and New York City rent regulation pressures impacting debt service coverage ratios.
• CET1 ratio remains robust at 12.38%, ranking in the top quartile of peer groups.
• Total deposits increased $300 million quarter-over-quarter; average interest-bearing deposits rose 1% with costs increasing only 1 basis point to 3.09%.
• Non-accrual loans were stable at approximately $2.8 billion (42% are current and performing), with criticized and classified loans increasing 6% to $670 million due to forward-looking rate assessments.

Guidance and Future Outlook:

• Full-year 2026 EPS guidance lowered to $0.10–$0.15; Full-year 2027 guidance lowered to $0.85–$0.95.
• New Full-year 2028 EPS guidance set at $1.60–$1.70, reflecting the extension of the profitability turnaround timeline from 2027 to 2028.
• Balance sheet growth is projected at an average of $1 billion per quarter in 2027–2028, driven by $2 billion in net new C&I loan growth funded 50% by deposit growth and 50% by CRE runoff.
• The "inflection point" for peer-like profitability metrics is now expected in 2028, driven by the mechanical repricing of $12 billion in low-coupon CRE loans maturing/resetting in 2027 and $7 billion in 2028.
• Deposit growth assumptions were reduced; projected new deposit inflows are $800 million to $1 billion per quarter in 2027–2028, with expected weighted average costs of 3.9%–4.0% for interest-bearing new money.
• Operating expenses for 2026 are forecast to decline 9% YoY ($168 million), with 2027 expenses slightly higher due to continued investment in people and technology.

Business Segments and Product Lines:

• C&I loan portfolio grew by $2 billion in Q3 to $20.6 billion (up 11% QoQ); average loan size added was $28 million across ~75 new relationships.
• Total C&I loan commitments reached $4.6 billion, with $2.9 billion in originations and a $2.7 billion pipeline for Q4.
• Commercial Real Estate (CRE) exposure continues to reduce; CRE par payoffs totaled $1.2 billion in Q3 (35% substandard), while new high-quality CRE loans funded approx. $375 million.
• Net CRE portfolio decline projected at $1 billion per quarter going forward; CRE concentration ratio reduced to 34.6%.
• Rent-regulated multifamily portfolio (specifically NYC >50% regulated) stands at $8.1 billion, down 4% QoQ; reserve coverage for this segment increased to 3.37%.
• New revenue-producing commercial bankers hired in Q3 (35 new/replacements), bringing total to 164; aggregate hiring over two years exceeds 400.
• Fee income headwinds driven by lower mortgage origination volumes and gain-on-sale; expected growth in capital markets and treasury management fees as commercial relationships deepen.

Market and Competitive Landscape:

• Competitive deposit environment remains challenging, with deposit costs rising due to aggressive pricing by competitors (some CDs exceeding 4.75%).
• New York City rent-regulated multifamily sector faces pressure from frozen rents, rising operating expenses, and higher cap rates, particularly in the Bronx.
• Broader commercial banking environment remains resilient, with business owners advancing CapEx plans in AI, data centers, and technology despite inflation and geopolitical concerns.
• Bank positions as "neutral to slightly asset sensitive"; approximately $10.7 billion of CRE portfolio is floating rate (SOFR/Prime), benefiting from potential rate hikes.
• Market trends show increased borrower preference for floating rates as they wait for potential rate cuts to refinance at lower fixed rates.

Risks and Challenges:

• Macroeconomic headwinds including the "higher-for-longer" interest rate environment are delaying the transformation timeline by approximately 12 months.
• Credit quality pressure from rent-regulated loans facing declining debt service coverage ratios; potential for loans to migrate to criticized/classified status.
• Slower-than-expected resolution of non-accruals due to the high-rate environment hindering borrower refinancing or repayment capabilities.
• Deposit growth uncertainty; failure to meet the $800M–$1B quarterly deposit growth target could constrain balance sheet expansion and margin accretion.
• Lower mortgage origination volumes negatively impacting non-interest income and interest income.

Management Commentary and Tone:

• Management tone is cautious but confident in the long-term strategy, emphasizing that the 2028 target reflects a timing shift, not a strategic change.
• Strong emphasis on executing the "mechanical" balance sheet remixing through contractual loan maturities and CRE runoff.
• Leadership highlighted the resilience of the commercial banking platform and its ability to originate loans consistently despite macro headwinds.
• Reiteration that capital deployment will be disciplined until core earnings grow, credit quality improves, and C&I growth is sustained, delaying stock buybacks until 2027.

Analyst Questions and Answers:

• Buybacks: Management confirmed suspension of buybacks until 2027, pending improvement in credit quality and core earnings growth; capital levels are currently above intended targets.
• Rent-Regulated Portfolio: Management stated they are not selling portfolios currently, preferring internal resolutions (DPOs, settlements) as market investors demand higher returns (15-20%) than internal mark-to-market levels allow.
• Deposit Growth Strategy: Focus on leveraging treasury management, fraud protection, and working capital solutions to drive non-interest-bearing deposit growth and deepen relationships.
• NIM Trajectory: Q4 NIM projected between 2.20%–2.25%, with expansion driven by repricing cycles and CRE runoff offsetting higher deposit costs.
• Asset Sensitivity: Despite floating CRE loans, the shift to C&I lending and non-interest-bearing deposit growth maintains an asset-sensitive or neutral position.

Other Key Points:

• $19 billion in total CRE loans are scheduled to reset or mature across 2026 (Q4), 2027, and 2028, forming the core of the balance sheet transformation.
• The company has successfully completed its $250 million stock repurchase program, buying back 19.1 million shares at an average price of ~$13.
• A specific tax benefit of $22 million was recognized in Q3 from a settled 2020 audit, which was a one-time gain.
• Management highlighted the "special mention" and "substandard" migration is driven by a conservative 18-month look-forward model applying current high rates to future debt service coverage.