FLG

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2025 for Flagstar Bank, National Association. Effective October 17, 2025, the Bank became the successor reporting company to Flagstar Financial, Inc. following an internal corporate reorganization that eliminated the holding company structure. The Bank operates approximately 340 locations across nine states, with significant presence in the New York/New Jersey metropolitan region, the upper Midwest, Florida, and the West Coast. As of September 30, 2025, the Bank reported total assets of $91.7 billion, loans of $63.2 billion, and deposits of $69.2 billion.

Key Financial Metrics

Material Changes vs. Prior Periods

• Net Loss Improvement: The net loss for Q3 2025 narrowed significantly to $36 million from $280 million in Q3 2024. Year-to-date losses decreased to $206 million from $930 million in the prior year. This improvement is primarily driven by a substantial reduction in the provision for credit losses ($181 million YTD 2025 vs. $947 million YTD 2024) and lower non-interest expenses.
• Net Interest Income Decline: NII decreased $85 million in Q3 and $437 million YTD compared to the prior year. This was caused by a strategic reduction in the loan portfolio (specifically multi-family and CRE loans) and the sale of the mortgage origination and servicing businesses. However, NIM improved 10 basis points quarter-over-quarter to 1.91% due to lower funding costs from paying down brokered CDs and wholesale borrowings.
• Expense Reduction: Total non-interest expenses decreased $194 million in Q3 and $553 million YTD compared to the prior year. This was driven by lower compensation and benefits costs, reduced FDIC insurance premiums (due to a lower asset base), and the elimination of mortgage operations expenses.
• Loan Portfolio Shift: Total loans held for investment decreased $5.6 billion from December 31, 2024, to $62.7 billion. The multi-family portfolio decreased $3.6 billion, and the CRE portfolio decreased $1.7 billion, consistent with the strategy to diversify away from these sectors. Conversely, the Commercial and Industrial (C&I) portfolio saw $3.7 billion in new originations.
• Asset Quality: Non-accrual loans increased to $3.24 billion (5.17% of total loans) from $2.62 billion at year-end 2024. This increase was primarily driven by the classification of $566 million in multi-family loans as non-accrual in Q1 2025, largely related to a single borrower in bankruptcy. Net charge-offs improved significantly to $73 million in Q3 2025 from $240 million in Q3 2024.

Guidance, Outlook, Risks, and Unusual Items

• Strategic Transformation: Management is executing a plan to evolve into a fully diversified bank with a strong balance sheet. Key priorities include reducing non-core assets, improving funding mix, and enhancing operational efficiency.
• Unusual Items:
  • Gain on Investment: Non-interest income included a $21 million gain on the investment in Figure Technology Solutions, Inc., following its IPO.
  • Legal Settlements: Q3 non-interest expenses included a $14 million increase in litigation accruals related to a settlement agreement for claims originating at Flagstar Bancorp prior to the merger.
  • Bargain Purchase Gain: The prior year (2024) included a $121 million reduction in the Signature Transaction bargain purchase gain, which did not recur in 2025.
• Risks and Contingencies:
  • Internal Control Weaknesses: The Bank disclosed material weaknesses in internal control over financial reporting related to risk assessment, monitoring, and control activities (specifically independent Credit Review). Remediation efforts are ongoing but not yet complete.
  • Legal Proceedings: The Bank is involved in various legal actions, including shareholder class actions regarding disclosures related to the Flagstar Bancorp and Signature transactions, and cyber breach incidents. A global settlement was reached in August 2025 for two data breach cases, pending court approval.
  • CRE and Multi-Family Exposure: Significant exposure to rent-regulated multi-family properties in New York State poses risks due to inflationary pressures on operating costs and limits on rent increases. Approximately 87% of the NY multi-family portfolio is subject to rent regulation.
  • Liquidity: Total liquidity stands at $27.6 billion, exceeding uninsured deposits ($13.4 billion) by $14.2 billion. The Bank maintains access to FHLB and Discount Window facilities.

Key Facts for Investor Verification

• Remediation of Material Weaknesses: Verify the progress and validation testing results regarding the remediation of internal control weaknesses, particularly in the Independent Credit Review function, as these impact the reliability of financial reporting and ACL estimates.
• Multi-Family Loan Performance: Monitor the performance of the remaining $30.5 billion multi-family portfolio, specifically the impact of rent regulations in New York and the concentration of non-accrual loans related to the single borrower in bankruptcy.
• Legal Settlement Outcomes: Track the final court approval and financial impact of the global settlement for the 2021 data breach litigation and the status of pending shareholder class actions.
• Loan Portfolio Diversification: Assess the success of the strategy to shift from multi-family/CRE to C&I loans, including the credit quality of new C&I originations and the ability to maintain yield spreads.
• Capital Ratios: Confirm that the Bank continues to exceed "Well Capitalized" thresholds under the Prompt Corrective Action framework following the reorganization.