Flagstar Financial (NYSE:FLG) Q3 2025 Earnings Call October 24, 2025 08:00 AM ET Company ParticipantsDavid Smith - VP of Banks Equity ResearchLee Smith - CFOChristopher Marinac - Director of ResearchMatthew Breese - Managing DirectorSalvatore DiMartino - Director of Investor RelationsJared Shaw - Managing DirectorManan Gosalia - Head of US Midcaps Banks ResearchMark Fitzgibbon - Head of FSG ResearchJon Arfstrom - Associate Director of US ResearchChris McGratty - Managing DirectorEbrahim Poonawala - Head of ...

Financial Data and Key Metrics Changes - The company reported a return on tangible common equity of 18% and a return on assets (ROA) of nearly 1.3% for Q3 2025, with overall revenue growth of 2.3% compared to the prior quarter [5][6] - Loan growth was 2.6%, amounting to an increase of $1.4 billion, while deposits also grew over 2% [14][15] - Net income rose to $261 million from $259 million in the previous quarter, with earnings per share (EPS) increasing to $1.54 from $1.52 [16][20] Business Line Data and Key Metrics Changes - All major lending categories contributed to the growth in commercial and consumer lending, with a notable increase in loan-related fees due to more active capital markets [10] - The private credit joint venture with Marathon Asset Management is fully operational, showing positive early returns and expanding lending solutions [11][12] - HSA Bank is expected to see significant growth due to new legislation increasing the addressable market for HSA accounts, potentially adding $1 billion to $2.5 billion in incremental deposits over five years [12][13] Market Data and Key Metrics Changes - The company experienced a seasonal increase in public funds, with deposits up by $1.2 billion [15] - The net interest margin (NIM) decreased by four basis points to 3.4%, influenced by tighter credit spreads on new loans [17][60] - Charge-offs remained stable at 28 basis points, consistent with the previous quarter, indicating stable credit quality [20][78] Company Strategy and Development Direction - The company aims to leverage its diverse balance sheet growth while maintaining substantial liquidity and conservative credit positioning [5][6] - There is a focus on expanding product offerings through the Marathon joint venture, which is expected to enhance both transactions and on-balance sheet business opportunities [30][31] - The company is not currently pursuing whole bank M&A but is open to smaller healthcare-related acquisitions that would enhance fee and deposit generation capabilities [42][64] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about macroeconomic tailwinds for the banking industry, despite recent market volatility [7][8] - The outlook for Q4 anticipates flat net interest income, with expectations of seasonal outflows of deposits and higher debt costs [21][22] - Management remains confident in the credit profile, noting a 7% decline in criticized loans and stable nonaccrual loans [20][78] Other Important Information - The company celebrated its 90th anniversary, highlighting its long-standing commitment to serving clients and communities [23] - The tangible book value per share increased to $36.42 from $35.13, reflecting net income and improvements in accumulated other comprehensive income (AOCI) [20] Q&A Session Summary Question: Details on the Marathon partnership and growth outlook - Management reported a strong pipeline of business from the Marathon partnership, with optimism for growth in 2025 and beyond [29] Question: Trajectory of deposit growth and priorities - The company is focused on growing attractive categories like HSA and EnterSync, preferring these over broker deposits [31][32] Question: Exposure to private credit and risk management - The company has a solid track record in private credit, with no losses reported, and maintains a conservative approach to underwriting [36][39] Question: Loan growth outlook and pipelines - Management indicated a robust pipeline for loans but expects a potential increase in prepayments in Q4, leading to more moderate growth expectations [46][48] Question: Capital allocation and buyback pace - The company will prioritize loan growth and strategic acquisitions before considering returning capital to shareholders through buybacks [50][51] Question: Credit quality outlook - Management noted stable credit quality metrics and expressed confidence in the gradual improvement of nonaccrual and classified loans [74][78] Question: Investment opportunities and regulatory changes - The company plans to redeploy investment dollars into new business initiatives, particularly in digitization and treasury management capabilities [102][104]

Core Viewpoint - The Hong Kong Securities and Futures Commission (SFC) has temporarily suspended the license of former Ming Tai Fu Securities officer Lo Wai-Han for four months due to inadequate management of credit risk and failure to identify and report suspicious trading patterns [1][2] Group 1: Regulatory Actions - The suspension period is from September 30, 2025, to January 29, 2026, highlighting the severity of the violations [1] - The SFC found that Ming Tai Fu did not maintain effective policies and procedures for managing credit risk and lacked a proper monitoring system for identifying and reporting suspicious transactions [1][2] Group 2: Specific Violations - The investigation revealed that in January 2021, three cash clients opened accounts with only HKD 10,000 deposited, yet Ming Tai Fu granted them trading limits between HKD 4 million and HKD 5 million without proper due diligence [1] - The clients engaged in transactions that were inconsistent with their financial status, which should have raised suspicions of potential market misconduct and money laundering [2] Group 3: Implications and Considerations - The SFC emphasized that the deficiencies could undermine public confidence in the market and disrupt market integrity, necessitating a deterrent message regarding such unacceptable lapses [2] - Lo Wai-Han cooperated with the SFC during the investigation, and he has no prior disciplinary record [2]

Core Viewpoint - The joint issuance of guidelines by seven departments, including the People's Bank of China, aims to enhance financial support for new industrialization while managing credit risks and monitoring fund usage to prevent misuse and competition issues [1] Group 1: Risk Management and Monitoring - Establishment of a risk coordination and prevention mechanism to jointly assess and warn about industrial and financial risks [1] - Strengthening risk evaluation for major projects and key industries by relevant departments, ensuring timely sharing of high-risk project and enterprise information with financial management and institutions [1] - Emphasis on the importance of financial institutions adhering to national industrial policy requirements and enhancing credit risk management and fund usage monitoring [1] Group 2: Support for Manufacturing Sector - Strict implementation of manufacturing loan classification requirements to accurately reflect the risk situation of manufacturing loans [1] - Encouragement for banks to increase efforts in handling non-performing loans through restructuring, write-offs, and transfers in a lawful and compliant manner [1]

Financial Data and Key Metrics Changes - The company reported net income of $18.4 million or $0.12 per share, with adjusted net income of $48.4 million or $0.31 per share, reflecting a strong performance in the second quarter [12][13] - Net interest income increased by 3.4% from the prior quarter to $240 million, driven by strong loan growth and higher loan yields [14] - The net interest margin expanded to 3.1%, supported by a three basis point increase in average loan yields to 5.93% [14][15] Business Line Data and Key Metrics Changes - Total annualized loan growth reached 9%, with significant contributions from lender finance, fund finance, and purchased single-family residential loans [5][14] - Core held for sale loans increased by 12% annualized, while construction loans declined due to payoffs and completed projects [7][8] - Non-interest income totaled $32.6 million, down 3% from the prior quarter, primarily due to fluctuations in CRA-related equity investments [18] Market Data and Key Metrics Changes - The company experienced strong production levels in loan origination, achieving the highest level of originations since the merger at $1.2 billion [7] - Average core deposits increased by 5% annualized, although the average balance per account faced pressure due to seasonal and macroeconomic factors [16][19] - The multifamily portfolio, representing 26% of the loan portfolio, has significant repricing opportunities with $3.2 billion maturing over the next two and a half years [17] Company Strategy and Development Direction - The company is focused on optimizing its balance sheet through strategic sales of loans, aiming for high-quality, consistent, and sustainable earnings growth [5][10] - There is a strong emphasis on maintaining disciplined pricing and underwriting standards while proactively managing credit risk [9][11] - The company aims to capitalize on growth opportunities in California, leveraging its position as a leading business bank in the region [25][26] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the resilience of the market and strong demand for products and services, despite uncertainties in the broader macroeconomic environment [11] - The outlook for the second half of 2025 includes expectations for continued growth in core profitability and mid-single-digit increases in net interest income [21][22] - Management highlighted the importance of maintaining a strong credit quality profile while pursuing growth opportunities [20][21] Other Important Information - The company repurchased $150 million of common stock, representing about 6.8% of shares, with $150 million remaining in the buyback program [6] - A one-time non-cash income tax expense of $9.8 million was recorded, primarily related to the revaluation of deferred tax assets [13] - The company anticipates $243 million of loan sales to close in the third quarter, with a focus on maintaining a healthy capital position [13][19] Q&A Session Summary Question: Loan sales and balance sheet impact - Management clarified that loan sales do not necessitate a one-to-one relationship with unwinding wholesale funding, as they have been growing rapidly and providing leverage on sold loans [31][34] Question: Expense guidance and ECR - Management indicated that while expenses came in below guidance, they expect to settle at the lower end of the range due to investments in compensation and infrastructure [38][39] Question: Asset quality and provisioning expectations - Management expects normalized provisioning to be around $10 to $12 million per quarter, depending on the type of loans being grown [109][110] Question: M&A considerations - Management emphasized the focus on organic growth and maintaining independence, while remaining open to opportunities if market conditions normalize [112][114]

Core Viewpoint - The Hong Kong Securities and Futures Commission (SFC) has imposed a six-month ban on Wong Lai-suen, a former executive director of Ming Tai Fu Securities Limited, due to her failure to manage credit risk and identify suspicious trading patterns [1][2][3] Group 1: Regulatory Findings - The SFC's investigation revealed that in January 2021, three cash clients opened accounts at Ming Tai Fu and deposited only HKD 10,000 each, yet the firm granted them trading limits ranging from HKD 4 million to HKD 5 million without proper applications [1] - Following the approval of these trading limits, the clients engaged in transactions that were inconsistent with their financial status, which should have raised suspicions of potential market misconduct and money laundering [1] - Ming Tai Fu failed to identify these transactions as suspicious and did not report them to the Joint Financial Intelligence Unit or the SFC, indicating a lack of effective policies and procedures for managing credit risk and monitoring suspicious activities [1] Group 2: Disciplinary Actions - The SFC deemed the deficiencies at Ming Tai Fu to be serious, as they could undermine public confidence in the market and compromise its integrity [3] - The decision to discipline Wong was influenced by her acknowledgment of shortcomings in assessing suspicious transactions during the SFC's investigation [3] - Wong had no prior record of disciplinary actions against her, which was considered in the SFC's decision [3]

Core Viewpoint - The case of illegal loan issuance by Shanxi Yaodu Rural Commercial Bank highlights significant compliance failures within the banking sector, emphasizing the need for improved internal controls and risk management practices [1][2][3]. Group 1: Case Summary - The original loan of 30 million yuan was issued illegally by the bank's branch manager and customer manager, leading to a two-year prison sentence with a two-year probation for both individuals [1][3]. - The court found that the defendants failed to perform due diligence, resulting in a significant risk exposure of 26 million yuan that remained overdue despite partial repayment [2][3]. - The bank attempted to mitigate the consequences by providing a letter of understanding, but the court maintained the original ruling, citing the severity of the offense [1][4][5]. Group 2: Compliance Issues - The case reveals systemic issues in the credit management practices of small and medium-sized banks, where procedural lapses and inadequate oversight contributed to the illegal loan issuance [7][8]. - Historical data indicates that regional banks often prioritize performance over compliance, leading to a culture of negligence in loan management processes [8][9]. - Regulatory actions against banks have increased, with a significant number of penalties issued for compliance failures, particularly in the area of credit management [8][9]. Group 3: Recommendations for Improvement - Experts suggest that banks need to enhance their internal control mechanisms and risk management frameworks to prevent similar incidents in the future [9]. - There is a call for banks to balance compliance with credit growth, ensuring that risk assessment and monitoring processes are robust and effective [9]. - The adoption of financial technology is recommended to improve risk evaluation and monitoring efficiency, alongside a focus on supporting key sectors of the economy [9].