Flagstar Financial, lnc.(FLG) - 2025 Q1 - Quarterly Report

Financial Highlights Flagstar reported a reduced net loss in Q1 2025, reflecting strategic portfolio reductions and cost optimization amidst a challenging interest rate environment Overall Performance Flagstar reported a reduced net loss in Q1 2025, reflecting strategic portfolio reductions and cost optimization amidst a challenging interest rate environment Key Financial Metrics | Financial Metric | Q1 2025 | Q4 2024 | Q1 2024 | | :--- | :--- | :--- | :--- | | Net (Loss) | ($100M) | ($188M) | ($327M) | | Net (Loss) Attributable to Common | ($108M) | ($196M) | ($335M) | | Diluted (Loss) Per Share | ($0.26) | ($0.47) | ($1.36) | | Net Interest Income | $410M | $461M | $624M | | Net Interest Margin (NIM) | 1.74% | 1.73% | 2.28% | - The net loss in Q4 2024 was impacted by an $89 million gain on the sale of Mortgage Operations, a $77 million long-term asset impairment, and $31 million in severance costs[23] - As of March 31, 2025, the company had total assets of $97.6 billion, loans of $67.1 billion, and deposits of $73.9 billion[19] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of the company's financial performance, condition, and risk management strategies for the period Results of Operations Operating results reflect a reduced net loss, driven by lower net interest income from strategic portfolio reductions, decreased provision for credit losses, and reduced non-interest expenses Net Interest Income Net interest income declined quarter-over-quarter and year-over-year due to strategic loan reductions and lower interest-earning asset balances Net Interest Income and Margin Trends | Metric | Q1 2025 ($ millions) | Q4 2024 ($ millions) | Q1 2024 ($ millions) | | :--- | :--- | :--- | :--- | | Net Interest Income | $410M | $461M | $624M | | Net Interest Margin (NIM) | 1.74% | 1.73% | 2.28% | - Net interest income decreased by $51 million quarter-over-quarter, primarily due to lower average balances on mortgage, CRE, and C&I loans from strategic reductions, and lower average interest-earning cash, partly offset by paying off higher-cost brokered CDs[29][30] - Compared to the prior year, net interest income fell by $214 million, driven by the sale of the Mortgage Operations and warehouse lending portfolio, strategic loan reductions, and lower interest rates[29][31] Provision for Credit Losses The provision for credit losses significantly decreased due to lower net charge-offs and strategic loan portfolio reductions Provision for Credit Losses Trends | Period | Provision for Credit Losses ($ millions) | Change from Q4'24 | Change from Q1'24 | | :--- | :--- | :--- | :--- | | Q1 2025 | $79M | -46% | -75% | | Q4 2024 | $145M | | | | Q1 2024 | $315M | | | - The decrease in provision was primarily due to lower net charge-offs, ongoing credit reviews, and the receipt of recent appraisals, with the Allowance for Credit Losses (ACL) balance also decreasing due to strategic portfolio reductions[33][34] Non-Interest Income Non-interest income declined quarter-over-quarter due to a one-time gain in the prior period but increased year-over-year due to a non-recurring prior-year reduction Non-Interest Income Breakdown | Category | Q1 2025 ($ millions) | Q4 2024 ($ millions) | Q1 2024 ($ millions) | | :--- | :--- | :--- | :--- | | Fee income | $22M | $33M | $34M | | Net gain on mortgage/servicing sale | $0M | $89M | $0M | | Net gain on loan sales | $13M | $5M | $20M | | Bargain purchase gain | $0M | $0M | ($121M) | | Total Non-Interest Income | $80M | $164M | $9M | - The $84 million quarter-over-quarter decrease was primarily due to the non-recurrence of an $89 million gain from the sale of Mortgage Operations in Q4 2024[36] - The $71 million year-over-year increase was mainly due to the non-recurrence of a $121 million reduction in the Signature Transaction bargain purchase gain recorded in Q1 2024[37] Non-Interest Expense Non-interest expenses significantly decreased quarter-over-quarter and year-over-year due to cost optimization and non-recurring prior-period charges Non-Interest Expense Breakdown | Category | Q1 2025 ($ millions) | Q4 2024 ($ millions) | Q1 2024 ($ millions) | | :--- | :--- | :--- | :--- | | Compensation and benefits | $244M | $302M | $333M | | General and administrative | $147M | $252M | $186M | | Total Non-Interest Expense | $532M | $718M | $699M | - Expenses decreased by $186 million quarter-over-quarter, driven by the non-recurrence of a $77 million asset impairment charge, lower compensation costs from optimization actions, and lower FDIC insurance costs[39] - Year-over-year expenses decreased by $167 million due to lower compensation and benefits, reduced general and administrative costs following the sale of the Mortgage Business, and lower merger-related expenses[40] Financial Condition The balance sheet contracted with reduced assets, loans, and deposits, reflecting strategic portfolio reductions, while asset quality metrics showed some stress despite strong liquidity Loans and Leases Total loans held for investment decreased due to strategic reductions in Multi-Family, CRE, and C&I portfolios, with a significant portion of MF loans in New York State Loan Portfolio Composition and Changes | Loan Portfolio | Amount (Mar 31, 2025, $ billions) | % of Total HFI | Change from Dec 31, 2024 ($ millions) | | :--- | :--- | :--- | :--- | | Multi-family (MF) | $33.4B | 50.2% | ($656M) | | Commercial Real Estate (CRE) | $11.5B | 17.3% | ($326M) | | Commercial & Industrial (C&I) | $14.7B | 22.1% | ($634M) | | Total Loans Held for Investment (HFI) | $66.6B | 100.0% | ($1.7B) | - The reduction in loan portfolios is part of a continued strategy to diversify the loan portfolio by reducing exposure to MF, CRE, and non-core C&I loans[46][49][55] - Within the Multi-Family portfolio, $18.6 billion (56%) is secured by properties in New York State, many subject to rent regulation, with $11.5 billion having interest-only payments as of March 31, 2025[50][52] Asset Quality Asset quality metrics showed an increase in non-accrual loans, primarily due to a single large Multi-Family borrower, while the Allowance for Credit Losses decreased Key Asset Quality Ratios | Asset Quality Metric | Mar 31, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Non-accrual loans to total HFI loans | 4.93% | 3.83% | | Non-performing assets to total assets | 3.37% | 2.62% | | ACL on loans to non-accrual loans | 35.61% | 45.93% | | ACL on loans to total HFI loans | 1.75% | 1.76% | - Total non-accrual loans increased by $665 million to $3.28 billion quarter-over-quarter, primarily due to a single large Multi-Family borrower relationship being classified as non-accrual[71][72] - The Allowance for Credit Losses (ACL) on loans decreased by $33 million to $1.17 billion, mainly due to lower net charge-offs and strategic loan portfolio reductions, partially offset by a negatively trending macroeconomic environment[79] - Net charge-offs for Q1 2025 were $115 million, up from $81 million in Q1 2024, with Multi-Family charge-offs increasing to $80 million[82] Deposits and Borrowed Funds Total deposits and borrowed funds decreased, primarily due to the runoff of higher-cost brokered CDs and repayment of FHLB advances Deposits and Borrowed Funds Overview | Liability | Amount (Mar 31, 2025, $ billions) | Change from Dec 31, 2024 ($ billions) | | :--- | :--- | :--- | | Total Deposits | $73.9B | ($2.0B) | | - Brokered Deposits | $8.3B | ($1.9B) | | - Uninsured Deposits | $13.0B | N/A | | Total Borrowed Funds | $14.2B | ($0.2B) | - The decrease in total deposits was primarily due to the payoff of brokered certificates of deposit and a reduction in custodial deposits following the sale of the Mortgage Operations[87] - Total borrowed funds decreased mainly due to the repayment of $250 million of FHLB advances[92] Risk Management The company maintains a robust risk management framework, with stable liquidity, manageable interest rate risk, and a recent Moody's rating upgrade, despite a slight increase in classified loans - Classified loans stood at $11.6 billion at March 31, 2025, a slight increase from $11.5 billion at year-end 2024, primarily attributed to one large relationship being placed on non-accrual status[101] Liquidity Position | Liquidity Source | Mar 31, 2025 ($ billions) | Dec 31, 2024 ($ billions) | | :--- | :--- | :--- | | Cash at Federal Reserve | $12.0B | $15.0B | | High-quality Liquid Assets | $10.6B | $7.9B | | Total On-Balance Sheet Liquidity | $22.6B | $22.9B | | FHLB Available Capacity | $5.8B | $6.6B | | Discount Window Available Capacity | $1.6B | $0.4B | | Total Liquidity | $30.0B | $29.9B | - During Q1 2025, Moody's upgraded the company's Long-Term Issuer rating from B2 to B1[112] Interest Rate Sensitivity Analysis | Interest Rate Shock | Estimated % Change in EVE | Estimated % Change in NII (12-mo) | | :--- | :--- | :--- | | +100 bps | (2.1)% | (1.3)% | | +200 bps | (5.1)% | (2.9)% | | -100 bps | 2.3% | 0.1% | | -200 bps | 5.9% | 0.5% | Regulatory Capital The company and its bank subsidiary maintained well-capitalized status with improved CET1 ratio, exceeding all minimum regulatory requirements as a Category IV firm Company Regulatory Capital Ratios | Capital Ratio (Company) | Mar 31, 2025 | Dec 31, 2024 | Minimum Requirement | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 11.90% | 11.83% | 4.50% | | Tier 1 Risk-Based | 12.65% | 12.57% | 6.00% | | Total Risk-Based | 15.25% | 15.14% | 8.00% | | Leverage Ratio | 8.45% | 7.68% | 4.00% | - The Bank subsidiary also exceeded all minimum requirements to be categorized as "Well Capitalized," with a CET1 ratio of 13.36% at March 31, 2025[138][139] - Effective October 1, 2023, the company became subject to Category IV prudential standards, which include heightened requirements for capital planning, stress testing, liquidity risk management, and resolution planning[134][136] Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including the balance sheet, income statement, and cash flow statement, for the period ended March 31, 2025 Condensed Consolidated Financial Statements The unaudited condensed consolidated financial statements provide a snapshot of the company's financial position, results of operations, and cash flows as of March 31, 2025 Condensed Consolidated Balance Sheet Highlights | Balance Sheet Highlights | Mar 31, 2025 ($ millions) | Dec 31, 2024 ($ millions) | | :--- | :--- | :--- | | Total Assets | $97,628M | $100,160M | | Total Loans and Leases, net | $65,955M | $67,970M | | Total Deposits | $73,906M | $75,870M | | Total Borrowed Funds | $14,178M | $14,426M | | Total Stockholders' Equity | $8,153M | $8,167M | Condensed Consolidated Income Statement Highlights | Income Statement Highlights (3 Months Ended) | Mar 31, 2025 ($ millions) | Mar 31, 2024 ($ millions) | | :--- | :--- | :--- | | Net Interest Income | $410M | $624M | | Provision for Credit Losses | $79M | $315M | | Total Non-Interest Income | $80M | $9M | | Total Non-Interest Expense | $532M | $699M | | Net (Loss) | ($100M) | ($327M) | Notes to the Condensed Consolidated Financial Statements Detailed notes provide disclosures on financial statement presentation, loan portfolio, credit quality, fair value, derivatives, regulatory capital, and commitments, including legal proceedings - A 1-for-3 reverse stock split effective July 11, 2024, has been retroactively applied to all share and per-share amounts presented[164] - The allowance for credit losses on loans and leases decreased from $1,201 million at year-end 2024 to $1,168 million at March 31, 2025, with a provision of $82 million offset by net charge-offs of $115 million for the quarter[217] - The company has various off-balance sheet commitments, including $12.5 billion in loan commitments and $776 million in letters of credit as of March 31, 2025[324] - The company is involved in various legal proceedings, including shareholder class actions related to recent disclosures and stock performance, and class actions related to three separate cyber breach incidents[329][359][363] Controls and Other Information This section addresses the effectiveness of internal controls and procedures, ongoing remediation efforts, and other pertinent information including legal proceedings and share repurchases Controls and Procedures Management concluded that disclosure controls and procedures were ineffective due to material weaknesses in internal control over financial reporting, with ongoing remediation efforts - Management concluded that disclosure controls and procedures were not effective as of March 31, 2025[340] - The ineffectiveness is due to material weaknesses in internal control over financial reporting related to risk assessment, monitoring, and control activities, specifically independent Credit Review[342][343][345][346] - Remediation efforts are ongoing and include appointing a new Chief Risk Officer and Chief Credit Officer, enhancing the Independent Credit Review program, and increasing reporting frequency to the Board's committees[349][350][351] Other Information This section details ongoing legal proceedings, including shareholder and cyber breach class actions, and reports share repurchases for tax obligations on employee stock awards - The company is a defendant in a consolidated shareholder class action and multiple derivative actions alleging violations of federal securities laws related to disclosures made between March 2023 and February 2024 concerning the Flagstar and Signature transactions and the CRE loan portfolio[359][360][361] - The company is also defending three separate sets of class actions related to cyber breach incidents that occurred in January 2021, December 2021, and the MOVEit breach in 2023[363][364][365] - During Q1 2025, the company repurchased 376,569 shares at an average price of $10.53 per share, withheld to cover tax obligations for vesting stock awards and not part of the publicly announced repurchase program[368][371]