New York Community Bancorp Aktie

Okay. Up next, we have Flagstar Bank. We're delighted to have with us today Joseph Otting, Chairman and CEO; Lee Smith, Co-President, Co-COO and CFO; and Rich Raffetto, Co-President, Co-COO and Chief Banking Officer. Thanks so much for joining us.

Thank you very much. Honor to be here.

So Joseph, Rich and Lee, I want to extend my congratulations to all of you. Joseph, the Board recently announced for those that don't know in the room, a 1-year extension of your contract through March 2028. That's a strong vote of confidence in your leadership. And Rich and Lee, you're also now serving as Co-Presidents and Co-COOs in addition to your current role. So congratulations to all of you. Joseph, I guess the question for you is, would love to get your thoughts on the new leadership structure and what this means for Flagstar.

Yes. I think it's a natural progression of our company. As we came to the organization in March of 2024, we've assembled a relatively new management team from people throughout both the banking industry and the Office of the Comptroller of the Currency with my background there. And Rich was one of the people that we recruited to come in and run a big part of our banking operations. Lee was already there running really the most significant and important parts of the Flagstar organization.

And so giving Lee the opportunity to be the CFO last year, brought him into a very important role into the company. And now with the additions of the Human Resource function and the technology and operations expands his reach into the organization. And with Rich, it made perfect sense to put all our banking operations under one individual in the company and get the synergies that can have and be created from that. So we're really excited. These are 2 really great guys. I really like working with them, and it's a fun team to be a part of.

All right. Perfect. Yes. I think we'll go through some of that as well. Maybe to start with big picture, Joseph, 2025 was a transformational year. 2026, I think the focus has clearly shifted towards sustainable growth and profitability. So, can you walk us through the bank's strategic priorities, how they've evolved over the past 6 to 12 months, and what investors have been looking for in 2026 and beyond?

Sure. When we arrived in 2024, we laid out a 3-year financial plan and really described for our investors and our employees and the community what we thought the bank would look like in 2027. And we've really been on that path since that point in time. The goal really was to get the company to look more like a diversified regional bank, where 1/3 of our earnings were coming from Commercial and Industrial lending, 1/3 from Commercial Real Estate and 1/3 from consumer cash flows.

And our strategic plan really lined up about our goal to be a top-25 performing regional bank in 2027 as measured by Return on Assets, efficiency ratio, and Return on Equity. But just as important to build a really strong risk governance structure. If we look at what's transpired over the last couple of years, it wasn't that a number of banks that failed weren't good at what they did with their customers; it was generally there weren't good risk governance structures.

And my background as the Comptroller, I was able to recruit some really high-quality people from the Office of the Comptroller to help us build that out. So our second mission really was to have a really good risk governance structure. And the third part of our strategic plan is to build a really strong, customer-centric bank. When we look at Signature Bank, or First Republic, or Silicon Valley, or Union that have all gone away, they were the banks that people thought of in the regional bank space as best-in-class the way they serve our customers.

And so we have built our whole model and our whole plan around those 3 key initiatives. And there's a lot of energy and excitement in our company today because people are seeing the progress that we're making. We returned back to profitability in the fourth quarter of last year. We were profitable in the first quarter. And we've really taken on some really big tasks when we've accomplished those, and it's really shown with the energy that we have in the company to be successful.

Got it. A big part of that strategy is the commercial banking build-out, as you alluded to. And the C&I loan growth story has been a really successful story so far. 1Q was a really strong quarter as well, and there appears to be significant runway ahead. Rich, I want to bring you in here. You've talked about how C&I bankers typically see an accelerated ramp over their first 12 to 18 months. So can you talk about where the business stands in its cycle right now and how much upside there is to the growth?

Sure. Thanks, Manan, and excited to be here today. Using a baseball analogy, I'd have to say it feels like we rounded the third inning, and we're at the top of the fourth inning. So, we have a long-term strategy of building a durable and diversified commercial banking platform here at Flagstar. And with that effort, you can't do that without talent. So the first part of the road map was making sure that we attracted the right talent to the organization.

We focused on hiring mid-career bankers who know what good looks like, and it's really a two-pronged strategy to attract bankers in the geographies where Flagstar already has relevance and branch footprint in the 4 big geographies around the country where we operate today and accenting that with commercial and corporate bankers in those geographies to do core middle market and mid-corporate banking. And the second part of the strategy is a national effort to serve unique specialized industry verticals by attracting mid-career bankers who've spent their whole career in those individual industry verticals.

We now have over 15 individual industry verticals that touch large swaths of GDP in the energy sector, and health care, technology, entertainment, sports, hospitality, food and beverage, et cetera, as we continue to scale the commercial and corporate banking capabilities, both geographically and in those industry segments. And I'm pleased to report that with bankers on board, we're outperforming our own modeled expectations for how soon those bankers will be productive, bringing over relationships, either individual clients or clients that need more than one bank, and we joined that bank group because we just hired the banker who they've known and trusted for a decade onto our platform. And we expect the banker to be bringing over relationships in that first 90 days, and we're outperforming already.

So, as you think about the actions you're taking, the hiring on the one hand and then the macro environment on the other hand, there is some uncertainty out there. There are high energy prices. There's a little bit more inflation as well. How are you thinking about that impacting the pace of growth, whether it's in 2Q or beyond?

Sure. Well, we're certainly mindful of the macro environment and the kinds of bankers that we're hiring, we -- our goal is to hire trusted advisers who are giving advice to their clients in every step of the way. That includes guidance around the macro environment. So, we have some unique dynamics at Flagstar because we are so underpenetrated in the markets that we're serving that there's a lot of runway for us just to catch up from a market share perspective.

So, we grew our C&I loans 9% in the first quarter on a point-to-point basis, and we'll exceed that here in the second quarter into the 10-plus percent quarter-over-quarter loan growth as we simply onboard bank and become more relevant. In the macro environment, I think our clients are showing a lot of resolve and continuing to press forward with important business and strategic initiatives, and we're helping them, whether it's to buy a new building or to open a new distribution center, we're seeing that business owners in this country are showing a lot of resolve despite the macro environment.

And I think they're mindful of a higher interest rate environment and a longer-than-expected conflict in the Middle East, for example, and stickier inflation. So I think the interest rate outlook is our business-owner clients and commercial clients are very mindful of. And that's why having good advisers as bankers is really important. It's now the right time to hedge. It is now the right time to take on the strategic acquisition. So, we think that environment will continue, and we have the opportunity to outgrow our peers as we gain market share and continue to scale our platform in an environment where there's continued uncertainty.

Got it. All right. Perfect. So now maybe I want to bring it to the commercial real estate side. And Flagstar has continued to see par payoffs through the first quarter of this year. Just given the move higher in rates, what have we seen so far in 2Q in terms of payoffs, in terms of CRE growth?

Yes, sure. I'll take that, Manan. And again, thank you for having us and for your good wishes earlier. I would say that payoffs have slowed down slightly, and I think it's really driven by 3 things, one of which is the higher interest rates. And what I mean by that is when our borrowers hit their reset date, they have 2 options. They can either take a fixed rate or a floating rate. And I think more in this higher-for-longer environment are choosing the floating rate as a short-term option, thinking rates are going to come down further down the line.

As we mentioned on the last call, we are now looking to retain the better quality CRE loans, particularly where there's a deposit relationship or there's the potential for a relationship around deposits or fee income as we move forward. And we're originating new CRE loans generally, not necessarily multifamily rent-regulated in New York City, but CRE, good quality CRE loans in other parts of our footprint, South Florida, the Midwest, California. And so all of that together has slowed down the par payoffs and the runoff. And we'll probably be at about $1 billion plus or minus this quarter.

And I guess when you think about the CRE loans that you're willing to keep as they hit their reset dates, I guess how many of -- how much of those balances are you willing to keep? Is there a number you have in mind or a type of customer that you have in mind that you want to retain?

Yes. Well, first of all, it's all about relationship banking. So we're prioritizing, as I said, those customers where there is a deposit relationship, there's the potential for a deposit relationship, or we can do a lot more business and create fee income opportunities for the organization. But we look at it on a net basis. So rather than saying how many of these loans do we want to keep, when you look at how many loans do we want to keep, let's look at new originations and let's look at runoff on a combined or on a consolidated basis.

I think if we're in that $800 million to $1 billion a quarter of runoff, that's where we want to be, and we can pull any one of those levers to get there because, as Rich has mentioned, we're seeing some very strong C&I growth right now. And we believe this is the quarter where you're going to see us have that inflection point of balance sheet growth driven by that C&I growth that Rich talked about.

So maybe putting together the C&I side and the CRE side, any thoughts on loan growth overall this quarter?

We think it will -- we think we can be right around $1 billion of balance sheet growth.

That was...

Yes. This is a real inflection point for the company since we've been there. We predicted this at our earnings call that this would be the inflection point where the balance sheet starts to expand and then each quarter can expand a couple of billion dollars each quarter, and we start to build our way back towards $100 billion.

So clearly, really strong loan growth coming through. On the other side of the balance sheet, as you were thinking about funding that loan growth. You just had an upgrade on your deposit rating to investment grade. Can you talk about the opportunities that ratings upgrade unlocks in terms of either deposit or even on the lending side, in terms of the types of clients that you can get?

Yes. Rich, do you want to take that?

Sure. I'll start out, Joseph, and hand it over to you. The upgrade to an investment grade on the deposit ratings is very meaningful to us, especially as we look to be meaningful to middle-market customers and even into the corporate space. Many of our clients have minimum deposit counterparty ratings thresholds, and we can now check that box as part of that overall relationship. And we're already seeing the benefits of that, whether it's a financial institution client, a corporate client, or a commercial business owner client.

I think it really helps us from a credibility perspective. We have private banking and wealth clients that moved some of their assets off of our balance sheet. Those -- some of those assets are now coming back on in the form of both deposits and AUM. So it has really multiple touchpoints, all positive as we get these ratings upgrades.

Yes. I think the other thing is that as the balance sheet shrunk, we were able to significantly reduce the FHLB advances and the brokered deposits. Our brokered deposits now are down in line with our peer group. We've continued to use excess liquidity for the Federal Home Loan advances. And last quarter was the first quarter we showed net deposit growth of about $1.4 billion, and we reduced our deposit cost by 23 basis points. We look to have similar kind of deposit growth.

And the mix of the deposits for us are going to change as we're putting on 75 new relationships a quarter. The mix of those are going to be more business-related deposits that are less price-sensitive. And so as we're looking now to expand the balance sheet, we're going to be able to do that by generating deposits from our customers.

So that's all core deposit growth. Things that goes hand-in-hand with that is the branch footprint. You have about 340 branches and another 20 private bank offices. So, can you talk about how you're managing that branch footprint, both from a perspective of bringing in more of these core deposits as well as maybe what it does on the C&I side?

Yes. The branch -- we think the branch system for us has a real opportunity. Most of our branches are in very affluent markets because they had a bit of a legacy around the thrift model. And most of those branches were put in places where there was lots of liquidity. And so, we have a very good branch network. We've been working on really driving our new strategy in the branch, which is more focused on relationship-type banking versus just paying high deposit rates and having the vast majority of deposits being CDs or money market.

I would say we're kind of in the opening innings of that strategy. We really look for that to come together over the next year. But that's probably the biggest opportunity that we have on the deposit side is really get our branch system focused on relationship banking.

So as more of those core deposits come in, there is more opportunity to reduce deposit costs.

Yes, 100%. But I mean, I think if we grew $1.4 billion last quarter, we'll grow $1.4 billion this quarter, and we look for that deposit growth to accelerate, predominantly coming from private banking and the wholesale banking.

So does that help on the loan growth side as well? Or is that more of a deposit growth?

Well, on the business side, usually, what happens is in a single-bank relationship, you do the loan and over a 60-, 90-day, the treasury management and the deposits and the interest-rate derivatives all flow over to the bank. In the larger transaction where there's maybe 2 or 4 banks, you're doing the loan effectively gives you the ticket to compete for the other noninterest income and depository in that company. So as we book those type of transactions, there's a little bit longer delay.

But we clearly have a pricing model that makes it difficult for us to do a loan-only relationship. That the relationship managers have to be interacting with the management teams, talking about what other sources of revenue that are going to be available to the company, and we document that in the relationship plan. So we'll go back 12 months from now and say, were we able to get those 401(k) business, or the payments business, or the treasury management to adjunct the return on our credit relationship.

So maybe then let's talk about fees, but I do want to get back to NIM and NII. But as you think about fees and the product set when it comes to servicing middle-market and corporate borrowers, can you discuss what your capital markets and treasury management capabilities are that help you get that fee business as well?

Yes. Those sit under Rich. So I think...

Sure, investing in the core commercial banking products, including the transaction services like treasury management and commercial card, they are core to our strategy as well as the traditional set of bank capital markets. So loan syndications, certainly interest rate hedging and derivatives capabilities, foreign exchange. We're launching a commodity derivatives capability to serve our customers better in the energy ecosystem. We've got wealth management-related products for business owners, particularly if they experience a liquidity event, but we can also do day-to-day activities like 401(k) plan advisory.

So wrapping a commercial client that we started a relationship with on the lending side with deposit and these other fee services is all about the core of the relationship management strategy. And we're adding -- we continue to add additional specialty products that could include specialty financing products like an ESOP financing capability or a tax-exempt lending capability that the bank just didn't have 12 months ago. So every quarter, as new bankers come on board, they're reminding us of product capabilities that we either need to enhance or get into, and we're listening and investing in those product areas, and that will help us drive fee income in the future and round that relationship ROE.

We built a lot of that out in the last 12 months because either the capabilities weren't being used or we didn't have those. And Rich has done a really good job of hiring a really qualified capital markets team. So we're kind of front and center of offering all the capital market products to our customers. And that's now presented opportunities where we're the lead-left on a number of transactions, and in that business, getting to that #1 spot is very critical.

So, you're getting more of the relationship from the client perspective. Yes. Maybe pivoting back to net interest margins. As we think about the NIM, it came in at 2.15% in the first quarter. Your guidance is for 2.70% to 2.80% in 2027. How does the current rate environment change that, right? We've had some more -- an increase in the belly of the curve, long end of the curve, maybe rate cuts are coming out of the forward curve as well. How do you see that impacting funding costs and the NIM overall in the longer term?

Yes. I don't think it really affects where we think we can get our NIM margin. And that's because there are a number of levers for us to expand our NIM from where it is today. On the asset side, between now and the end of '27, we've got $12 billion of multifamily and CRE loans that are hitting their reset maturity dates with a weighted average coupon of less than 3.8% -- so they will either reset at a higher rate, and we'll get the NIM benefit or they will pay off, and we will use that liquidity and capital and give it to Rich, who is growing new C&I loans at an average spread to SOFR of 2.25% to 2.40%.

So again, a very, very strong market rate. We have $2.5 billion of non-accrual loans. So, as we continue to work down the non-accruals, that is trapped earnings, so it will expand NIM. And it's also trapped capital because they're 150% risk-weighted. So as we further reduce the non-accruals, that will have a positive impact on NIM and interest income. And then on the liability side, we continue to pay down wholesale borrowings, as Joseph mentioned, and we paid down FHLB advances in Q1. We paid down more in the second quarter. That will help NIM. And we're also able to reduce core deposit costs even without Fed cuts.

And the way we do that is we typically have about $5 billion of retail CDs maturing every quarter. And we're able -- and we're retaining 86% of them, but rolling them into new CDs that are typically 20, 25, 30 basis points lower than the maturing CDs. And we meet on this as a team weekly, and we're very surgical at looking at money market and savings accounts and just understanding where can we take 5 basis points, 10 basis points out without jeopardizing deposit balances. So we will continue to do that. If there are Fed cuts, then our expected beta is 55 to 60, and we were certainly achieving that and more based on the rate cuts that we saw at the end of last year.

And so it feels like you have a lot more flexibility on the deposit side. So even if deposit competition is picking up a little bit for the industry, it sounds like you have a lot more flexibility there.

Well, I think we can -- we're able to strategically reduce those deposit costs, as I mentioned. But the other thing we expect to start seeing coming through, and I think it ties into what Joseph mentioned about the $1.4 billion of deposit growth in Q1. We feel we'll be at a similar number in Q2. It's leveraging those new C&I relationships and other relationships to bring in ultimately non-interest-bearing DDAs, but also low-cost deposits as well, tying it to the lending that we're doing. So that's another capability and more optionality we have on the deposit side.

And the other thing to remind history is that we started from a much higher cost of interest-bearing deposits. So our ability to bring that down to market is an easier task, so to speak. I think we lowered our interest-bearing deposits by 23 basis points in the last quarter. And so when you start from a higher spot and looking at where the market is, we can bring those deposits down and our customers are not going to be able to look around and see that we're out of market.

Got it. All right. Perfect. So let's talk about expenses. Expenses are down about 9% year-on-year in 1Q. You're guiding to further reductions in both '26 and '27. At the same time, more banks are talking about investments in areas like AI, you're investing on the commercial side as well. So can you help us think through how you're balancing both the investment spend as well as the cost saves?

Yes. So we -- as you know, Man, we have taken out over $700 million of costs over the last 18 months on an annualized basis. And it's not an easy thing. There's no shortcut to doing that. You have to look at and under every single rock. But if you go back 2 years ago, I think the headcount of this organization was about 9,200, and we're 5,300, 5,400 today. But we continue to see opportunities to further reduce our expense base through technology projects coming online that will allow us to get more efficient.

We continue to drive vendor expenses out of the organization. As we continue to produce profitability quarter-over-quarter and improve asset quality, that will reduce FDIC expenses. We're looking at optimizing real estate, particularly some of the operating centers that we currently have. So we believe that we will achieve the NIE guidance that we have in our projections for '26 and '27, which would put us in '26 at about $1.7 billion to $1.75 billion of operating expense and then $1.65 billion to $1.7 billion of operating expense in '27.

Those numbers are net of the investment that we continue to make in Rich's businesses and the investment that we're making in technology as well. So yes, while we've done a lot on the expense side, there is more we feel we can do to drive expenses down. But at the same time, we're still investing heavily in the business.

So Richard spoke about some of the investment spend, right? There's investment spend in products and then clearly, there's hiring that you guys are doing as well. What is the investment spend on the tech side that you're doing right now?

Well, first of all, when we arrived, we had 6 data centers in the organization. And we, over the last 12 months, successfully closed all 6 of those, opened up 2 new colocation centers. So we went from 1963 Ford Fairlanes to modern state-of-the-art infrastructure. We also will be converting our core system. We're on 2 core systems. We'll go to 1 core system next year. That will save us roughly $42 million a year in 2028 when we get through the conversion. But I think the other areas that we've really invested in is the risk governance structure of the company.

You've heard numbers, we have probably invested $40 million in our risk governance structure to make sure that as we go back and get over the $100 billion, we're prepared and ready for that. And then as we've said, Rich's area, we've added 350 people. We've invested in products. All the way at the time, the net takeouts were $700 million. So, probably it's more like $900 million to $1 billion when you would say on the save side, but we have been reinvesting in the company.

When you think about the use cases for AI in all financial services, we look to participate in that from a financial statement spreading, credit memo underwriting, QA/QC. There's a lot of applications just in our commercial area where we think we can continue to scale the platform in a more efficient manner by embracing AI and other technology tools.

And in fact, we have our own Star IQ, which is our own internal AI tool that people can use in the bank. It's amazing. We have 89% utilization of it. We want to continue to expand how people are using it. We've kind of had people go from Google to AI tool. But really, we want people to use it for contract reviews. And as Rich was saying, financial analysis, all those things are available for people to use that. And it's going to make us a much more efficient organization.

Joseph, you also mentioned going over $100 billion. If the tailoring rules change, how does that impact any of the investment spend?

I don't think it changes because we've made the investment now, and we feel good about that investment and what it looks like. I do think that rule eventually gets raised. But that probably impacts 10 or 12 banks, while a lot of the things that you see the regulatory community doing today impacts thousands of banks. And so, they've really kind of focused on the side of where it has a big impact. And I think this whole issue in the regulatory community about focusing on MRAs or MOUs or supervisory action on material financial thing, I think, is really profound.

And I think when that final rule comes out from the FDIC and the OCC, it's going to be incredibly impactful for banks that they can now focus on the things that are most important. Everybody gets on the same page of that. And I think the regulatory harmony with banks will be really solid that we're all focusing on the right things.

Got it. Let's talk about credit a little bit. One aspect of your credit risk management process is to look out 18 months in your forward-look analysis. So you're currently looking out through the end of 2027. What are you seeing in that analysis today?

When you do that, you just have a certain percentage of the banks customers in that portfolio that their fixed-charge coverage on their loans are less than 1:1. And so that generally then has a tendency to flow into Special Mention. If it's substantially below 1:1, then you'll order an appraisal and try to make a determination is your primary and secondary source of repayment impaired. And so as we've looked out, I would say this quarter probably had probably the least amount of movement in the portfolio.

So we're really talking about, as you said, the fourth quarter of 2027. And then we kind of enter into 2028, where it's roughly $4 billion. So it falls off significantly. And you might say, well, why did that happen? It's because if you go back 5 years, that's when interest rates started to rise, people weren't locking in as much as the long-term debt, they went to more variable rates. So we think the vast majority of that has -- will then be through the process.

I think the thing I would add -- you got to remember, back in '24 after the new equity came in, we re-underwrote that multifamily and CRE book, and we took significant charge-offs, and we increased our ACL reserves, and our coverage ratios against a lot of those CRE asset classes are higher than any other bank in the industry. And we do, do that 18-month look forward. 2027 is the biggest year in terms of resets. We've got almost $9 billion. So, by the end of June, we're all the way through looking at that 2027 cohort.

And I think what I would say is we're not seeing anything draconian. And the way I would validate that is if you look at the last 2 quarters, criticized and classified loans have come down, charge-offs have come down, provision has come down. So if there was anything that was problematic, you wouldn't see those ratios coming down. And we also get annual financial statements on 96% of these borrowers. So there is a lot of work we're doing on this asset class. And as we've said before, given the $1 billion plus of par payoffs a quarter, there's a lot of liquidity in the market for this asset class from the agencies and other banks and lending institutions.

And that holds true even if there's a potential rent freeze you in New York?

Yes. We -- I think we've talked about -- we ran the analysis assuming a 3-year rent freeze beginning in October. We assume the market units would be able to increase by 2.1% their rents on an annual basis. Expenses would increase 2.75% in line with inflation. And what we found was the demarcation line was 70% rent-regulated. So buildings that are 70% or less rent-regulated doesn't have a significant impact on NOI. Those that are more than 70% rent-regulated over that 3-year period, it impacts NOI 7% or 8%.

And then as we've looked at our portfolio, and we have about $8 billion, half of it is pass-rated with a very strong DSCR, 1.5%. And the criticized or classified, as I mentioned, we have significant between charge-offs and ACL reserves. We've probably got 20% coverage on that. population. So we -- again, we feel pretty good about where we've got that marked.

Yes. And I think the proof is kind of in the pudding, so to speak, is as we've done DPOs and asset sales, virtually all of those have traded at or above where we have a marked on the balance sheet.

Got it. All right. And a quick clarification. There were some headlines recently regarding potential relief for certain categories of rent-regulated landlords. Is that meaningful for your customer set?

Well, I think the 2 points that have been made is there is what they call ghost units that are in the market where people have moved out of the units and the landlord could not get a sufficient return on their investment to remodel to make the units occupiable again. So they just basically closed the door, locked it, and didn't put a new tenant in. We're still trying to figure out the details around that, but I think that would be a brilliant move by the Mayor's Office if they released those 50,000 to 60,000 units and got them back in the market. That would be the easiest way to create availability.

There's also talk about a city-backed insurance platform. A lot of those projects have seen 30%, 40% back-to-back, year insurance cost increases. And so lowering that. And then there's tax abatement where some of the larger projects have gotten tax abatement, but they signed up to CapEx expenditures over the next 20 years for those tax abatements. So I think there are things and solutions that are coming together to try to solve what is, in a lot of instances, some very difficult economics for the owners of those buildings.

So if anything, it would be a positive.

Yes.

Okay. Perfect. Okay. So let's -- in the last minute or so that we have, let's end with capital. Joseph, just given the approximately $1.6 billion of excess capital that Flagstar has today, how are you thinking about the pace of capital deployment going forward? And how are you thinking about organic growth versus buybacks there?

Yes. The number you have is on an after-tax basis, $2.3 billion on a pretax, we're roughly 13.3% on CET1 that obviously will probably increase this quarter. Our target is in the 10.5% level range. So the bank does today have what would be deemed excess capital. We've communicated that 3 things that the management team thinks is important to gather around, one, that our core earnings are consistent and solid. We hope to begin to have the third quarter of profitability. The second is that we continue to improve the credit quality and the trend line on that is good as well.

And then really getting an understanding as Rich ramps up the C&I business, how much capital will be necessary to support his $2.5 billion to $3 billion of originations and how much real estate would pay down. And our plan is in the second half of the year is after we've gone and discussed it with the Board is that we think we would head in the direction of doing some type of stock buyback. And we think we have enough capital to do the organic growth that we anticipate happening.

So stay tuned for that July earnings.

Yes, sometime in the second half.

All right. Perfect. Great. With that, we're out of time. Joseph, Lee, Rich, thanks so much for your time.

Thank you very much.

Ready? Great. Well, thanks, everybody. Good afternoon. Thanks for joining us. We're excited to have Flagstar Bank, NA. No longer Flagstar Financial.

Joining us today, we have Joseph Otting, the Chairman and CEO; and Lee Smith, the CFO. Thanks very much for joining us here.

Thank you, Jared.

Thanks for having us, Jared.

Honored to be here. Phenomenal conference. So thank you very much.

Great. Thanks. Glad that you're having a good day.

Maybe just to start off at a little bit of a higher level. You all have come in to a franchise that needed some dramatic transformation. You've executed on that. Maybe just spend a few minutes at the beginning here sharing with us where you are in that transformation journey, what some of the bigger challenges were and what we should expect in the near to midterm from that?

Great. Well, thank you, Jared, and thanks for people that are here to hear our story. So when we came into the Bank in March of 2024, the Bank really was experiencing capital issues, liquidity issues, credit issues and regulatory issues. And if I, like a kid, it made the Bermuda Triangle look like an amusement park, from where we started.

And really it's -- we're proud to say today, you look 25 months later, our CET1 is 13.2%, if not the best -- the best in our peer group. Our liquidity is $27.5 billion. We started with $6.5 billion. We had a lot of unrecognized credit issues where we think we've now recognized those credit issues and we've continued to bring those down since we've been there.

And we really built now a solid risk governance structure that we're proud of, and we've brought a lot of talent in to build that risk governance structure. So we feel really confident, no matter where the levels of enhanced regulatory standards, when the Bank would be in a position to accomplish that.

And the other thing that we kind of talked about when we got there is we wanted to diversify the balance sheet. Clearly, one of the legacy organizations had gotten highly concentrated into the multifamily and then with a further specialization regulated in New York. And so we set out on a path to really look at the balance sheet from 1/3, 1/3, 1/3. 1/3 being in commercial real estate, 1/3 being in C&I and 1/3 being in consumer cash flows, which we put mortgage-backed securities into that category to show that diversification.

And when we got there, we really didn't have a commercial banking group the way that we felt and envisioned that, which was relationship-based, where we knew the executives of the company, we could be important to those companies, and started that build. We now built, where the last 2 quarters we generated over $2 billion of new loan outstandings. We've continued to see good deposit and fee income growth.

And really that business, we think we're in like the bottom of the second inning, that we really have a lot of future head -- Rich Raffetto, who came into our company, has recruited over 300 people into that strategy. It's really proving where a lot of people question, "Could you do that?" now people are like, "We know that's now a really core part of your business."

We've also taken our criticized and classified problem loans down. We've reduced now our nonperforming loans. And we have a really, I think, a glide path towards the end of the year to really improve the overall quality of the institution.

So when people ask me, like, where do you think the journey is, I'd say the journey is like halftime. But the neat thing is we got to come out of the locker room at halftime already with really well-established wheels and now it really comes down to executing, which we're really excited about.

One of the things as you have targeted this 1/3, 1/3, 1/3, I think that you had mentioned in the past, was just the rating agency rating made it a little more difficult to grow the deposit side. You got a couple of upgrades recently. How does that sort of help accelerate that transformation? And is that something that we should expect to see an acceleration in deposit growth coming from commercial customers out of that?

Yes. Clearly, we're excited about the upgrades and really were reflective, I think, of not only telling the story with the rating agencies, but then also being able to deliver the results. And after the 2009/2010 challenges to the economy, and then the disruption to the banking business in 2023, a lot of companies have implemented policies where they had to have these banks with a certain rating to be able to put deposits over the FDIC limit.

And so it really opens up the door, as we are adding 75 new commercial banking and corporate banking customers a quarter, for us to penetrate deeper into those customers and becoming their primary bank. Because most of the time, the business customers carry multimillion dollars in their checking accounts for operating funds, and if they were constantly at a $250,000 FDIC limit, it limited the amount of activities they could do with the Bank.

And so now we're in a position where they feel very comfortable. And we've seen a large influx of deposits. In the first quarter, we were up $1.1 billion, which really was our first quarter of significant growth in our core deposits. And that was really prior to the rating increase. So we're very encouraged not only by our products, our people and our service, but now having the backstop of that the rating agencies have made our deposit investment-grade.

As part of that transformation of 1/3, 1/3, 1/3, it involves reducing the CRE component, you've had a lot of progress with exiting some of those maybe non-relationship balances. I think last quarter was down $1.1 billion. Is that pushing out the -- what's the impact on NII from that? It feels like it's more of a near-term pressure as opposed to still creating that long-term opportunity. How long should we expect to see sort of accelerated paydown on the CRE side?

Yes. I would say that, when we arrived at the Bank, we modeled out that we could see $600 million to $800 million of payoffs of real estate on a quarterly basis. And that occurs both from maturities and rate resets. And the last couple of quarters, we've been in the $1.5 billion or $1.6 billion.

So the market really has demonstrated there's ample liquidity to be able to reduce our real estate exposure. We see half of it coming from the agencies, another 15% to 20% from JPMorgan and then the rest is kind of spread all over.

But the market has helped us, and our documentation helps also, because when the loans reset on a SOFR basis or 5-year SOFR, we charge SOFR plus 300. And the market can be found in the 225 range. So people, as those loans are interest rate resetting, are looking to take those and get cheaper interest rate. So it helps us on our strategy of diversifying the balance sheet.

As we've ran multiple quarters well over $1 billion, that has reduced the earning assets on the Bank's balance sheet and obviously the impact of the NII. But we've started to see now net loan growth in the balance sheet. And so we're really optimistic that even with the payoffs, we'll continue to grow the balance sheet with the C&I growth that we're experiencing.

The thing I would add, Jared, is the other thing to remember is from March '24 through pretty much the end of '25, we deliberately took ourselves out of originating new CRE loans because we were overweight that asset class. If you look at our concentration to capital, it was over 500% in Q1 of '24. If you look at where we are now, we're about 365%. So we've made phenomenal progress.

But in Q4 of '25, we've started originating new CRE loans. We're obviously not looking to do multifamily in New York City, but good-quality CRE loans with real estate funds in other parts of our footprint, so the Midwest, South Florida, California; short-duration, floating loans, not fixed rate. We're looking to do that.

And then as we said on the Q1 earnings call, we're also looking and saying if we've got high-quality CRE loans, we've got a very active builder finance business, for example. And there's a relationship there in the way of deposits or fee income, then we'll lean into that and we want to retain those relationships.

Because the other thing you've got to remember is a lot of the multifamily loans that are on the balance sheet, they were brought to us by one particular broker. It wasn't a direct relationship, and so you don't have those deposits or that fee income business. We're building a relationship bank where it is a direct lending relationship. And so we're looking -- as we've talked about 1/3, 1/3, 1/3, you think about a $100 billion balance sheet, it basically means that we should be $30 billion to $35 billion in CRE, C&I and consumer.

We're about $36 billion today in all CRE categories. But what we've got to do is pivot out of the low coupon 3.7% multifamily loans originated during COVID and move those into market rate, higher-quality loans. And that's what we're looking to do. And that's part of how you see the NIM expansion that we have in our projections.

When you look at the loans that are either coming up for reset or being refi-ed away, are the sponsors there with equity, are you seeing them -- obviously, I guess, to get a new rate somewhere else, they're having to put new equity into their deals. Do you see any concern with that trajectory going forward?

It actually has gotten better. We modeled out last quarter that 50% of the rate resets would roll over, and it ended up being about 35%. So whether borrowers are adding additional collateral or being down the loans or using cash flow off of other sources, they've clearly been able to tap the market with a lot of liquidity.

When you look at the remaining rent-controlled properties or book in New York, there's a lot of talk with the new mayor about the 0% rent increases. I guess the city has been in that environment before, but they didn't have the impact of the 2019 law limiting the ability to recoup some of the maintenance investments. How do you feel the book that's remaining on the balance sheet is positioned to absorb a tougher rent environment?

Yes, sure. So we've obviously looked at this in detail. So today, we have about $8.8 billion of rent-regulated New York City units. They are over 50% rent-regulated. The analysis that we did is we assumed the rent freeze starting this October for 3 years. We also assumed the operating costs would increase 2.75% a year. Think of that as inflation really. Market rents would increase 2.1%. So non-rent-regulated units would be able to increase the rent on those units 2.1% annually.

What we found is the demarcation line is 70%. So any building that is 70% or less rent-regulated, there's very little -- no impact on NOIs because they can offset the rent freeze by -- through rent increases in the market units.

Where you have an impact is those units that are more than 70% rent-regulated. And the impact on NOIs over a 3-year period is 7% or 8%. When you think about that $8.8 billion that I mentioned, $4.6 billion of that is pass-rated for us, with a DSCR of 1.5%. So those pass-rated loans have the cash flows to be able to absorb a rent freeze.

And then if you look at the criticized and classified loans, so the remaining $4.2 billion, we have taken over $500 million of charge-offs and ACL reserve coverage against that population. So we feel we're more than adequately covered.

I think the other things that we've done, Jared, as well is we do -- we get annual financials from all these borrowers and we're taking a hard look at all of those. We've got 97% of financials from borrowers. We're doing an 18-month look-forward of everything that is resetting or maturing 18 months out. So we're almost through full year '27 when you look 18 months out. '27 is our largest reset maturity year where we have $9 billion. So we've taken a real hard, deep-dive look on 3 quarters of that.

We're looking at the violations list; we don't have much exposure there. We look at the 100 Worst Landlords List in New York City; we don't have much exposure there. A lot of our borrowers, these buildings have been in the families for generations, so they have a low-cost basis or they've benefited from the 1031 rollover. So we don't have any OREO. People are not handing the keys back.

And then as Joseph pointed out, there's a lot of liquidity out there for this asset class, whether it be from the agencies, Fannie and Freddie, or other banks, and they get CRA benefits if they're funding a more than 50% rent-regulated building.

So when you look at the remaining '27 vintage that you're going to be wrapping up this quarter, no reason to expect that there is a significant divergence in the performance versus what we've sort of seen so far?

I think that's right because we're 3 quarters of the way through '27 already. So we're the majority of the way through. In Q4, the actual amount of resets of maturities versus the earlier quarters actually decreases slightly.

And the way it would show up is if you look at what's happened to their ACL reserve, the last 2 quarters, it's come down. Provision has been $3 million in Q4, 0 in Q1. Our net charge-offs have come down to about 30 basis points when you adjust for the 1 bankruptcy -- the 1 borrower that was in bankruptcy in Q1. And criticized and classified loans have come down.

So in Q1, you saw a reduction of $1 billion between nonaccruals and substandard. So if there was anything, it would be showing up in either the ACL reserve, which it is, or you'd start to see in some of those other components that feed into the ACL reserve, and we're not seeing it.

Okay. Maybe one more of a technical side of the question, but the loan yields this quarter I think were down a little more than people were thinking. Is there any dynamic that we should be thinking about with loan yields as we move forward, some, I guess, maybe more of the loans had hit reset than some people were thinking so the roll-off yield may not have been as low as expected? How should we think about sort of the pace of loan yields going forward given a flat Fed environment?

Yes. There was a couple of things playing out in the first quarter. First of all, you had the December rate cut, and so that obviously impacted yields in Q1. But then if you look in totality in Q1, including the par payoffs, but other paydowns of that CRE portfolio, it was down about $1.6 billion. And the average coupon of those payoffs was just over -- or paydowns was just over 5%.

And so as we said, it's good news, bad news. It's allowing us to more quickly diversify into that 1/3, 1/3, 1/3, and reduce exposure to an asset class we're overweighting, which is derisking. But it does impact short-term net interest income and NIM.

But as we've said, in terms of the overall thesis and strategy, it's intact completely. And the worst case is maybe instead of Q4 of '27, it takes us to Q1 or Q2 of '28. Because you just need another quarter or 2 of net $2 billion plus of C&I growth to replace that CRE runoff that is happening more quickly and sooner.

But it doesn't change your view of, call it, the second half of '28 in terms of the trajectory of the rate?

Not at all. Not at all.

Maybe shifting onto the C&I side. You talked about hiring Rich Raffetto and bringing in 300 people there. What's the outlook going forward from that? Is that the base you need? Are you still going to be hiring? And how is the sort of go-to-market strategy on the C&I side?

Yes. So it's important to lay out, I think, the strategy for us in C&I. We have kind of a two-pronged approach to this. Under Joe Abruzzo's group, we been infilling in the markets where we have branches. So in California, in Arizona, in Florida, in New York, New Jersey, Ohio, Michigan, Indiana, in Wisconsin, we've been covering now those markets with C&I or commercial bankers, and we did not have those before.

So when people drive by a Flagstar Bank and they get called on by a commercial banking, there's a tie-in that the Bank is in the community. Then also under Adam Feit, we've created what we call specialized industry strategy. And those kind of trail your big GDP levers in the economy: health care, energy, entertainment, sports franchises, technology, a wide variety of segments. And so we have a two-pronged approach of both geographic and industry specialization. All of those really start by hiring what I would say are highly qualified 15 to 30-year commercial bankers.

And our approach is a little bit different. We don't go hire a team. I can't think of where we've gone and did a lift-out of any team. Our approach is hire 1 or 2 people in a geographic area or industry specialization, and then as we grow that book of business, we add people to that. So I think if Rich was sitting here today, he's probably going to add 30 to 40 people in 2026. And then based upon our continued growth in the portfolio, we'll continue to add resources into that segment.

And how is that helping drive deposit growth and deposit mix shift? And how -- what's sort of the optimal mix for you as we look out over the rest of this year?

Well, I'll let Lee comment on like the ideal ratio, but I mean, I think what we have found last quarter, we had really solid deposit growth, $1.1 billion, across the franchise and we grew the C&I book $1.4 billion. So I do think there's a really strong momentum within the company on the deposit side.

And it depends a little bit on the sector. If you look at the middle market, generally, that's like winner-take-all approach. So you bid on the business and you win the depository and the foreign exchange and interest rate derivatives and treasury management fee and the loan. In some of the upper middle market corporate, usually making the loan gives you a ticket to soliciting the rest of the relationship.

But I think the ideal scenario is 30% to 40% of every loan you make in that sector, you should be able to gather in deposits to fund that. And then we obviously have the $36 billion of deposits in our retail bank. We look for that to grow 2% to 4% on an annualized basis, and changing the mix in all of those categories to more operating accounts and less interest-bearing.

A couple of things I'd add. So I want to start with the loan growth on the C&I side because I think that's important. So the way we think about it -- and the team, Rich and the team, have done a phenomenal job in the areas that Joseph has alluded to. But we have 131 customer-facing C&I bankers. And we put this in the Q4 earnings deck, but they've got 25, 30 years tenure. We expect those bankers to do 1 deal a quarter. So call it 4 deals a year. The average loan size is $25 million.

So it's very granular. We're not taking outsized positions in any one name, which is another way we're protecting ourselves from a credit point of view. 70% of our loans are utilized at an average spread to SOFR of 225 to 242 as it was in Q1.

So if you just do the math on that 131 bankers, 4 deals a year, $25 million, 70% utilization, you can see how we're getting and building up to that C&I growth. And we were at $1.4 billion net in Q1. And we feel that, certainly, by the second half of this year and maybe even this quarter, we'll be close to that $2 billion of net C&I growth in terms of fundings. And that's how we sort of think about it mathematically. And it's played out that way.

On the deposit side, we have about a 90% -- today we have about a 90% loan-to-deposit ratio. And we would expect to continue that as we move through sort of '26 and into the early part of '27. So we're funding the loan growth with deposits.

And as Joseph said, it's coming from the new C&I relationships. We're not just giving the balance sheet away. It is relationship banking, leveraging loan to bring in deposits and fee income. It's leveraging the private bank, and they've got all the products now and businesses. So we've got the interest-only mortgage, subscription lending, chief investment officer. We've got an insurance adviser, trusted adviser, family wealth planner. So we feel that's an area where we can grow deposits, as well as leveraging the 340 bank branches we have in terrific markets throughout the U.S.

How about on the spreads, are you seeing spread compression from the competitive landscape? Or are you maintaining spreads sort of as expected?

We actually saw spreads widen on new transaction. We were 225 in Q4 and 242 in Q1. And that has a little bit to do with the business mix in the market, but we did not see a falloff in spreads.

Great. You mentioned the fee income opportunities. You've made investments in wealth management and other areas. How has that build-out progressed? And what should we expect in terms of is there a target for fee income per commercial relationship on the commercial side? Or what are some of the targets on wealth management?

Yes. So we have -- first of all, we have a pricing model for every relationship. And so we're not just looking at the spread on the loan, we're looking at the deposits and we're looking for the fee income opportunities. And incidentally, all of our bankers know the management teams of the companies that we're lending to, which makes a big difference.

So we're looking at the -- we're trying to drive to an ROE target and we're looking at every relationship, not just from a lending point of view, but including in the deposits, the cost of those deposits and the fee income as well. So it's absolutely part of the playbook here in terms of driving incremental deposits and fee income business for the bank.

We also hired a new Head of Capital Markets towards the end of 2025, and we feel that you're going to start to see that come to fruition as we move through '26. So capital markets, FX, swap, syndication fees. But we also think we can drive fees in other areas, so with the new loan fees, unused loan fees, mortgage -- gain on loan sale, particularly as we move out of the Q1 seasonally low period or quarter for mortgage, deposit fees as well, we think we can do a little bit more there on service fees and overdraft fees.

And then historically, on the private bank side, the company waived a lot of those fees and we're just being tighter in how we manage that. So we feel that you will see our fee income increase, and increase proportionately as we're bringing in those new C&I customers in particular.

Great. Any questions in the room? You just wait for the microphone, sorry, so we can have it in the webcast.

Can you say a few words about your digital strategy?

Are you referencing consumer or are you referencing wholesale? Because -- yes. So a couple of things I think are important to point out. When we've got to the Bank, we had 6 legacy data centers. And this last quarter, we completed the conversion of those -- closed all 6 of those data centers into 2 co-location centers, which what that does is brings a state-of-the-art, solid foundation to grow off of.

The second thing is, today, the bank operates off 2 cores. We have an FIS core and we have a Fiserv core. It's our goal in the second quarter of next year to be down to 1 core. In conjunction with all that work, we've been looking at our treasury management and our direct offerings on the consumer online.

On the commercial side, you really have to have digital offerings for your customers, meaning when they go in sending wires, checking balances, transferring money, account reconciliation -- and we have those tools today, we're in the process of enhancing those tools.

On the digital format in the consumer side, we've been upgrading how people come in to the bank and how they open up accounts. And that's very important, because last year was the first year that digital accounts opened -- were opened at banks more than they were opened in our branch. And we actually think that trend is going to continue where people are going to be digitally inclined to conduct their business, but branch-domiciled when they're looking for consulting around retirements, investments and mortgages and things like that.

I think the thing that I would add to what Joseph said is -- and then on the mortgage side, we actually leveraged with a partner called Blend to make that digital experience a lot more seamless. And I know you talked about digital, but I'm also going to talk about AI, we'll take the opportunity to talk about...

Yes. I was going to ask you that.

Yes. I'd like to talk about it. So we've -- the technology team have just done a phenomenal job, and they have built what we refer to as Star IQ, which is our own proprietary AI platform, so it's contained, and we're using that internally. And it's -- think of it in terms of 3 levels. So you've got a bachelor level, a master's level and a PhD level. It is open to all 5,400 employees. And we monitor this, about 83%, 84% are using it on a regular basis.

And this is so powerful in terms of its ability to analyze a lot of data quickly. It can access all of the company's records, policies, procedures, and it can just identify key points very quickly. It can help in terms of producing PowerPoints, presentations, marketing materials. And we're just beginning to scratch the surface, but there is so much that that can do in terms of driving efficiencies internally.

And the fact that we -- the technology team has built our own proprietary platform, which they've just patented by the way, that's how sort of proprietary is, we think that that is going to create a lot of opportunities as we move forward.

The other thing on the technology side, Joseph alluded to as one of the foundational aspects of what we've done, we've rightsized our cost structure and taken over $700 million of cost out. We've done that at the same time we've been investing in growing the C&I business. Investing in the risk structure, but also investing heavily in technology on things like AI development and other projects, that you're going to see those come onstream later this year and into '27, and that's going to drive further efficiencies.

And that's how when you look at our projections, our revenues are increasing but our costs are going down. They continue to decrease.

Yes. The thing I would comment on AI, yesterday we had our top 100 leaders of the company together for a training session, what -- the steps we've found is people quit using Google and started using Star IQ as their new Google. But we really want them to really advance.

And so we spent time yesterday going over 2 cases where, in one case, how to do a proposal for a customer, where you can feed in the credit proposal, you can feed in the treasury management, you can feed in the capital markets. And AI, in 3 minutes, produces this customer-specific proposal. It's really fascinating that -- the 30, 40 hours you historically would do to put something like that together.

We also put a 500-page policy of the bank into AI and then asked it a bunch of questions. 3 minutes, the answers all came out. Now you still have to take that data, evaluate it, make sure it looks right, but just the opportunities are really endless. I mean it's so exciting to see what you can do with that kind of tool that you have available to you.

And I would like to think, we have what we call S2, Simple and Sophisticated, as our technology platform, that that will be a really big competitive advantage for us as we move forward.

I guess on the expense side, you've highlighted you've done a great job of reducing a lot of the operating expenses, trying to build it and scale. You have the core systems conversion coming up. So I guess there's, what, $40 million or so of savings after that. What other initiatives should we expect over the next 18 months that haven't already been built in? And where do you ultimately see sort of the efficiency of the combined company once it's up at full scale?

Well, so from -- I'll tell you, because I know Joseph will, and he's drilled this into all of us, the efficiency target is sort of we have it as 50% to 55%. Joseph wants us to be at 50%. And so we're working to get to 50%. But as you think about the additional cost takeouts as we move forward here, it's sort of several-fold.

One, I mentioned we've got IT projects that are going to be completed over the coming 18 months. And as they come on stream, that's going to allow us to get much more efficient. You're going to see a continued reduction in FDIC expense. So the return to profitability, improvement in asset quality as we continue to pay down wholesale borrowings, you will see those FDIC expenses continue to come down.

There's still some things we're doing, optimizing real estate, there's a couple of operating centers that we're looking to consolidate. That's another area that will drive cost benefits. Vendor expenses, we've been very focused on the vendor expenses and driving those lower, especially as you look at the synergies from the -- bringing the 3 banks together, and I think we've done a nice job there and there's a little more to come.

And then as you alluded to, we're on 2 cores at the moment and we'll be on 1 core by the middle of next year, and that will lead to $40 million, $45 million annualized cost savings. So those are just some of the initiatives that we continue to work through.

So with first quarter earnings, that was your second quarter of profitability. This quarter, you're finalizing the evaluation of the biggest slug of that '27 vintage. So how should we think about how you view capital, what sort of an optimal capital level is? I think everybody is excited to see what a buyback could look like at Flagstar. What's sort of the broader view of capital for you?

Yes. So it's a fun side of the mountain to be on, is what I would say. The other side of the mountain was not as fun to be involved with. But the company today is probably sitting at 13.2% CET1. We think when the Basel rules get enacted, that's another 60 to 80 basis points. So the bank does have a very strong capital base.

When we got here, we felt there were 20 items that needed to be dealt with. We think we're down to roughly 4 regarding capital. The first being that sustained profitability at a level that we and the Board feel confident of, I think we'll be able to check that box as we go through 2026 and, specifically, the second quarter.

The second being that continued improvement in the loan portfolio. So while we think we've taken strong marks and charged-down loans, as we resolve loans, the proof is in the pudding, up until now, most of the loans that we've cleared off the book, we've traded at or above where we had the loans marked. But bringing those levels down are very important.

The third is this issue we discussed at the beginning between C&I growth and CRE payoffs. If all of a sudden the CRE payoffs started to slow and we had that kind of C&I growth, then we'll have another good, solid quarter to take a look at, I think, during this particular quarter. And once we get to that, I think management will make a recommendation to the Board of what we do with the excess capital, which today is probably $1.6 billion or $1.7 billion of excess capital in light of where we are as an organization.

And obviously, at and below tangible book value...

Is a very attractive trajectory, right. And when we say excess capital, we're just taking it down to 10.5%. So we're not even dipping below what would be kind of the upper edge of the...

Normal excess.

Yes. That's correct.

Your background is diverse. You had spent time as the Comptroller of the Currency, I think you have a great view of regulation and the Washington view of banks. What else do you see coming out of Washington for the industry after the finalization of Basel? Anything big on the horizon?

Yes. I really compliment the banking regulators in Washington, D.C. I think they've observed what they thought were the most important thing is to get banks actively involved in the economy to be a source of strength. I think today our banking industry is the most well-capitalized, liquid and profitable. And there's a reason for that, is people have worked really hard to understand the risk in banks.

I think what we're seeing coming out of Washington now is sensible and logical regulation on items. And I think also you're seeing a pullback of regulators looking at what is the end result and not how the banks got there. And for a while there, it was very prescriptive around processes. And I think today, it will be, well, how much capital do you have, how much capital are you creating, how much liquidity you have, not necessarily how you got to that point.

And I think Jonathan Gould is doing a phenomenal job as the Comptroller. I think him coming out and early on saying that we're going to change under what case an MRA or an MOU or a formal action, that it has to have a material financial impact on the institution, is very significant. Doesn't think it gets the headlines it deserves, but no longer will banks be diverted away from serving their customers and focusing on the bank when it is virtually an immaterial item that they would be cited for.

Clearly, banks want to do the right thing and have the right risk infrastructures and processes. But every time you're focused on items like that, that are not relevant, it takes away from what banks are supposed to do, which is being out in the marketplace, taking care of their customers.

Great. Well, I think that's probably a perfect place to end this. Thank you very much, gentlemen, for joining us. And thanks, everybody here, for taking the time.

Thank you, Jared.

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Bank First Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.

Thank you, Regina, and good morning, everyone. Welcome to Flagstar Bank's First Quarter 2026 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 results for the quarter.

During the 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, ir.flagstar.com. Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Bank NA may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements we 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. Additionally, when discussing our results, we will reference certain non-GAAP measures, which exclude certain items and reported results. Please refer to today's earnings release for a reconciliation of these non-GAAP measures.

And with that, I would now like to turn the call over to Mr. Otting. Joseph?

Thank you, Sal. Good morning, everyone, and welcome to our first quarter 2026 earnings conference call. We are pleased to report another quarter of solid progress and continued momentum across our core banking franchise. Our first quarter performance reflects continued improving fundamentals, strong C&I growth, a high level in growth of core deposits, further progress in reducing the level of nonaccrual and criticized classified loans, continued margin expansion and industry-leading capital levels.

Just as importantly, our first quarter results demonstrate we are exceeding and executing on the strategy we laid out 2 years ago and delivering against our priorities. We are doing exactly what we set out to do. strengthening our earnings profile, improving the quality of our balance sheet and building a top-performing regional bank.

The progress we are making is intentional and driven by a clear focus on disciplined execution. Now turning to the slides. Slide #3 of the investor presentation, I'd like to highlight some of the key performance factors and drivers during the quarter. First, disciplined expense management has been a hallmark of our return to profitability over the past 2 years. And in the first quarter, operating expenses continued to decrease, and we expect them to decrease in 2026 and 2027. We also had another quarter of net interest margin expansion, driven primarily by lower funding costs.

Second, one of our key growth strategy is to diversify our loan portfolio by increasing our C&I lending platform. This quarter marked the third consecutive quarter of C&I loan growth after us reducing our exposure to certain industries, lowering our single transaction exposures and exiting certain relationships that did not meet our return hurdles. And we've done this throughout 2024 and part of 2025.

Third, we experienced a further reduction in our overall CRE exposure, mostly through par payoffs resulting in the multifamily and CRE portfolios declining by $1.6 billion or 4% relative to the fourth quarter and further improvement in our CRE concentration. Fourth, we continue to see positive credit migration as nonaccrual loans declined by 11% and criticized and classified loans decreased by 3%. Additionally, we ended the quarter with a robust CET1 capital ratio of 13.2%. In terms of future capital distributions, our focus first is on demonstrating several quarters of sustainable profitability and continued improvement in our nonaccrual loans and flexibility to support our anticipated loan growth. We expect the Board taking actual and capital distributions in the second half of the year. Finally, I would like to highlight 2 other milestones during the first quarter. We were very pleased with Fitch and Moody upgraded the bank's long-term and short-term deposit ratings to investment grade with a positive outlook. And when we filed our 10-K in late February, we disclosed that the previously material weakness in internal controls have been remediated.

Both of these milestones reflect the tremendous effort, dedication and hard work of our entire team. On the next couple of slides, we spotlight the significant progress we continue to make in our C&I lending businesses. During the quarter, C&I loans grew by $1.4 billion or 9% on a linked-quarter basis, significantly higher than in prior quarters.

On Slide 4, we go into detail on the trends in our C&I portfolio. While the first quarter is typically a seasonally slow quarter for originations -- you can see on the left side of the slide that our originations were essentially flat compared to the fourth quarter. We also will note that the pipeline remains strong, and we expect second quarter fundings in C&I to be similar to Q1. On the right side is the 5-quarter trend in the C&I portfolio. After bottoming in the second quarter of last year, we've had steady growth and in the first quarter, C&I loans grew by $1.4 billion, up 9% compared to the fourth quarter and year-over-year 12%.

The next slide provides quarter-over-quarter growth by loan category. While the majority of the growth was driven by our 2 main strategic focus areas, specialized industries lending and corporate and regional commercial banking. This quarter growth was broad-based with growth also occurring in the mortgage finance and asset-based lending verticals.

Now turning to Slide 6. You can see the trend in our adjusted diluted EPS. We whereby we have now reported 2 consecutive quarters of VPS growth by executing on all our strategic initiatives. On an adjusted basis, we went from $0.03 in the fourth quarter to $0.04 during Q1. One other positive note I'd like to make is that during the first quarter, we completed the consolidation of our 6 legacy data centers into 2 co-location centers with no disruptions neither to the organization or any of our customers and this positions us well in 2027 to have the baseline and platform for our core conversion with ultimately the goal in 2027 is to get on to one core.

So with that, I'll now turn it over to Lee to review our financials and credit quality.

Thank you, Joseph, and good morning, everyone. We're very pleased with another quarter where we continued to execute our strategic vision to make Flagstar one of the best-performing regional banks in the country. We were profitable for the second consecutive quarter following the bank's return to profitability in the fourth quarter.

More importantly, we made real progress against key initiatives that drive our financial forecast. We achieved net C&I loan growth during the quarter of $1.4 billion, significantly higher than previous quarters following the origination of $2.6 billion in new C&I loans, of which $2 billion was funded. As we've discussed, net C&I growth in previous quarters was muted as we rightsized legacy C&I positions within the portfolio.

Most of this is behind us and you're now seeing the growth from new originations materialized into net loan growth. NIM expanded 10 basis points after adjusting for the onetime hedge gain of approximately $21 million in Q4. Furthermore, much of the new C&I growth occurred towards the end of Q1, meaning the full benefit of these newly originated loans will be felt in Q2 and beyond.

Core deposits, excluding broker grew $1.1 billion, and we reduced deposit costs by 21 basis points. We paid off another $1 billion of flub advances and $300 million of brokered deposits as we further reduced our reliance on high-cost wholesale funding. Despite this deleveraging of $1.3 billion, our balance sheet only decreased $400 million quarter-over-quarter.

CRE and multifamily payoffs were again elevated at $1.6 billion, $1.1 billion of wins were par payoffs and 42% of these payoffs were rated as substandard loans. We resolved the situation with one borrower that was in bankruptcy and reduced our nonaccrual loans by $323 million, while substandard loans decreased almost $700 million, meaning we reduced nonaccrual and substandard loans over $1 billion quarter-over-quarter.

Our ACL reserve decreased $78 million, primarily driven by lower CRE and multifamily loan balances. Operating expenses were again well contained at $441 million, a decrease of 5% quarter-over-quarter. And we ended the quarter with 13.24% CET1 capital at or near the top of our regional bank peers. We were also thrilled to be upgraded by both Moody's and Fitch, particularly given that both agencies returned our long and short-term deposit ratings to investment grade. We continue to execute on our strategic plan, exactly as we said we would.

Now turning to Slide 7. We reported net income attributable to common stockholders of $0.03 per diluted share. On an adjusted basis, we reported net income attributable to common stockholders of $0.04 per diluted share. First quarter was a relatively clean quarter with only one adjustment, our investment in FIGA Technologies, which decreased in value during the first quarter by $9 million based on its closing stock price as of March 31. Subsequent to the end of the quarter, we have sold out of approximately 75% of our FIG position at a gain of $1.8 million compared to our March 31 mark. interest income and NIM temporarily and until we replace it with new C&I, CRE or consumer growth.

In order to retain some of the higher quality relationship CRE runoff in the future, we have assumed spreads off of SOFR in the 175 to 225 basis point range versus our contractual option of 275 to 300 basis points of a 5-year flow. Lower noninterest-bearing DDA growth in Q1. Deposit growth in Q1 was all interest-bearing, which was positive, particularly as we also reduced interest-bearing deposit costs 21 basis points quarter-over-quarter. We believe the current rating agency upgrades will help us garner more noninterest-bearing DDAs going forward. But as it's been pushed out, it impacts net interest income and NIM.

We expect total assets to be approximately $94 billion at the end of '26 and $102 billion at the end of '27 as a result of net loan growth. The reduction in interest income has been partially offset by reducing provision and operating expense guidance. Adjusted EPS is now forecast to be in the $0.60 to $0.65 range in '26 and in the $1.80 to $1.90 range in '27.

Slide 9 depicts the trends in our net interest margin over the past 5 quarters. We continue to post steady quarterly improvements in NIM, driven largely by lower funding costs. First quarter NIM increased 10 basis points quarter-over-quarter to 2.15% after adjusting for the recognition of a onetime hedge gain of $21 million in the fourth quarter.

Turning to Slide 10. Our operating expenses continued to decline, reflecting our focus on cost containment. Quarter-over-quarter, operating expenses declined $21 million or 5%.

Slide 11 shows the growth in our capital over the last few quarters. At 13.24%, our CET1 ratio ranks among the top relative to other regional banks, and we have about $1.6 billion in excess capital after tax relative to the low end of our target CET1 operating range of 10.5%. The next slide provides an overview of our deposits. Core deposits, excluding brokered, increased $1.1 billion on a linked-quarter basis or about 2%. This growth was primarily driven by growth in commercial and private bank deposits of $461 million and retail deposits, which were up $142 million. As in past quarters, during the current quarter, we paid down $300 million of brokered deposits with a weighted average cost of 4.76% -- in addition, approximately $5.3 billion of retail CDs matured during the quarter with a weighted average cost of 4.13%, and we retained 86% of these CDs as they moved into other CD products with rates approximately 35 to 40 basis points lower than the maturing products.

In the second quarter, we had $4.8 billion of retail CDs maturing with an average cost of 3.98%. Also during the quarter, we further deleveraged the balance sheet by paying down $1 billion of flub advances with a weighted average cost of 3.85%. The deleveraging CD maturities and other deposit management actions led to a 21 basis point reduction in the cost of interest-bearing deposits quarter-over-quarter.

Slide 13 shows our multifamily and CRE par payoffs, which were again elevated this quarter at $1.1 billion, of which 42% were rated substandard. These payoffs are resulting in a significant reduction in overall CRE balances and in our CRE concentration ratio. Total CRE balances have decreased $13.4 billion or 28% since year-end 2023 to approximately $34 billion, aiding in our strategy to diversify the loan portfolio to a mix of 1/3 CRE, 1/3 C&I and 1/3 consumer. Additionally, the par payoffs have helped lower our CRE concentration ratio by 134 basis points to 3.67% -- the next slide provides an overview of the multifamily portfolio, which declined $5.5 billion or 17% on a year-over-year basis and $1.1 billion or 4% on a linked-quarter basis. The reserve coverage on the total multifamily portfolio was 1.83% and remains the highest relative to other multifamily focused lenders in the Northeast.

Additionally, the reserve coverage on these multifamily loans where 50% or more of the units are rent regulated is 3.20%. Currently, there are $11.9 billion of multifamily loans that are either resetting or maturing through year-end 2027 with a weighted average coupon of approximately 3.75%.

Moving to Slides 15 and 16, we have again provided detailed additional information on the New York City multifamily portfolio, where 50% or more of the units are rent regulated. At March 31, this tranche of the portfolio totaled $8.8 billion, down 4% compared to the previous quarter and has an occupancy rate of 97% and a current LTV of 70%. Approximately 52% or $4.6 billion of the $8.8 billion are pass rated loans and the remaining 48% or $4.3 billion are criticized or classified, meaning they are either special mention, substandard or nonaccrual. Of the $4.3 billion, $1.9 billion are nonaccrual and have already been charged off to at least 90% of appraised value, meaning $287 million or 15% has been charged off against these nonaccrual loans.

Furthermore, we also have an additional $73 million or 5% of ACL reserves against this nonaccrual population, meaning we have taken 20% of either charge-offs or reserves against this population. Of the remaining $2.7 billion, but a special mention in substandard loans between reserves and charge-offs, we have 5.8% or $154 million of loan loss coverage. We believe we're adequately reserved or have charged these loans off to the appropriate levels. And with excess capital of $2.2 billion before tax, we think we're more than covered were there to be any further degradation in this portion of the portfolio.

Slide 17 details our ACL coverage by category. The $78 million reduction in the ACL was largely driven by lower CRE and multifamily health reinvestment balances. Our coverage ratio, including unfunded commitments, was at 1.67% at quarter end.

On Slide 18, we provide additional details around credit quality, which trended positively during the quarter. Nonaccrual loans totaled $2.7 billion, down $323 million or 11% compared to the prior quarter. Criticized and classified loans also declined, decreasing $385 million or 3% compared to the prior quarter. During the quarter, we did see an increase in special mention loans as a result of our comprehensive and prudent process that analyzes in detail all loans with a reset or maturity date 18 months out, 18 months from March 31, 2026, is September 27, and 27 is our largest reset year where nearly $9 billion CRE loans either reset or mature. This amount includes approximately $2.9 billion of multifamily, where 50% or more of these units are rent regulated. As part of this internal forward-looking process, we've applied the relevant pro forma contractual interest rate calculations and adjusted risk ratings accordingly. Three items I would note, we are now 75% through analyzing the entire 2027 cohort. The results of this analysis is reflected in our ACL, and we continue to see significant substandard par payoffs each quarter. At the end of the quarter, 30- to 89-day delinquencies were approximately $967 million, a decrease of $19 million from the previous quarter.

As mentioned last quarter, the biggest driver of this delinquency number is the additional day or 31st day of March when calculating delinquencies at precisely 30 days. As of April 21, approximately $493 million of these delinquent loans have been brought current. We continue to deliver on our strategic plan and are excited about the journey we're on and the value we will create for our shareholders over the next 2 years.

With that, I will now turn the call back to Joseph.

Thank you very much, Lee. Before moving to Q&A, I wanted to add that we are encouraged by our continued progress made in the first quarter and remain focused on driving sustainable profitability, improving returns and delivering long-term value for our shareholders. With continued improvement in credit trends solid loan and deposit growth and strong capital levels, we believe that Flagstar is well positioned in 2026. In addition, I'd like to thank our Board of Directors, our executive leadership team and all the teammates at Flagstar for their dedication and commitment to the organization and our customers.

And operator, with that, I would be happy to turn it over to you to open the line for questions.

[Operator Instructions] Our first question will come from the line of Chris McGratty with KBW.

Lee, maybe a question for you to start the margin adjustment for next year. I hear you on being a little bit more competitive on the payoffs. Could you unpack just the differences in your assumptions for the margin for next year? Specifically, is it a balance sheet size and the NII conversation size versus margin?

Yes. So it's a little bit a balance sheet and then a little bit of the additional payoffs of the CRE and multifamily book. So as I mentioned, the balance sheet at the end of '26 will be about $94 billion, $102 billion at the end of '27. So we are assuming a slight reduction versus what we had previously guided to sort of in that $500 million to $750 million range. But if you look at Q1, we did see $1.6 billion of par payoffs, paydowns and amortization in that CRE and multifamily book. And as I mentioned in the prepared remarks, it's both good news and bad news.

The good news is it's allowing us to get to our diversified strategy more quickly of 1/3, 1/3, 1/3, but it does impact short-term interest income and NIM, and that's what you're seeing. So we think that we'll be able to use the funds from those payoffs to just further grow the C&I, the consumer and originate new CRE loans, but it sort of pushes everything out.

So that's one of the items that is impacting the NIM. I think some of the better quality CRE loans that we would look to retain -- we'll be pricing those after spread to soar in the 1.75 to 2.25 range. And that's obviously a lower rate than the contractual reset, which is 5-year plus $300 million. And we've deliberately left that contractual rate in place because, as you know, Chris, we've been trying to reduce our exposure to those CRE multifamily assets where we have -- we're overweight and there's higher risk. So that's obviously working. And then we're seeing, as a result of that, fewer loans that are resetting are staying with us. We were sort of originally in the 50% range. It's now in the 35% to 40% range. And then the final piece that I mentioned was we saw very strong deposit growth in the quarter, $1.1 billion very pleased with that.

It was all interest-bearing. We would like to see more noninterest-bearing growth. We think that will come with the rating agency upgrades, but that sort of pushes it affects NIM in the short term, and it sort of pushes everything out. So it's a combination of those items that you're seeing just bring the NIM down 10 to 12 basis points.

That's great. And then, Joseph, for you, I mean, the consequence of this is you have more capital and then I heard you on the Basel III. It feels like everything is lining up for the back half of the capital distribution that you alluded to in your prepared remarks. Can you just talk through the mile markers that from here you might need to see before you pull that lever?

So Chris, we've been fairly consistent saying is we wanted the company to demonstrate consistent quarterly earnings. And our goal is -- obviously, we feel that will occur now as we've turned the quarter in the fourth quarter and then the first quarter. That's one of the legs of the stool. The second would be our goal is to get the nonperforming assets down to $2 billion by the end of the year. And so that was kind of the second leg of that and to continue to make progress from roughly the $2.6 billion level that we are at today. And then the third is just understanding how much growth we can have in the C&I portfolio and balancing that against the CRE payoffs I'd say the way we look at that is the CRE payoffs have been greater than we expected, but the C&I originations have also been more. And we do see some acceleration in the C&I occurring not only in our pipeline, but as we add more people into the various industry specializations and geographic strategy that we actually think that will continue to grow.

And so when you take those kind of 3 factors into account. It was always management's intention to have a good insight to that through the second quarter and then have dialogue with the board on capital actions going forward.

Our next question will come from the line of Jared Shaw with Barclays.

Maybe just sticking with margin. But for this year, when we look at loan yields this quarter, I guess that was a little bit weaker than we were expecting. Anything that you're seeing there that we should call out? And then just sort of as we look at the pace of margin expansion for the next few quarters, how is the loan yield playing into that?

Yes. Well, if you look at the actual asset yield, it wasn't down that much quarter-over-quarter when you consider the rate reductions in the fourth quarter. That's what I would say. The reduction was twofold. So in terms of the interest income, you've got what I just mentioned we had more payoffs and paydowns as it relates to that CRE and multifamily book, which we think is sort of a -- it's a good news story, but it does impact that short-term interest income a NIM. And remember, you do need to adjust in Q4 you do need to adjust for that hedge gain of $21 million, which was included in interest income and NIM.

So when you adjust for that, the NIM was 2.05% in Q4, increasing 10 basis points to 2.15% in Q1. The other thing that I would point out, and I allude you to some of these in my prepared remarks, Jared, when you think of the $1.4 billion of net C&I growth in the quarter, I would say $600 million of that came right at the end of the quarter, in the last week or 10 days.

So you're not seeing any pickup in NIM and interest income in Q1 as a result of that but you will see that flow through in Q2 and beyond. The other part of it is the borrower that was in bankruptcy that got resolved on March 31, the last day of the quarter. So you've got a significant amount of loans coming off of nonaccrual and then a new accruing loan that is coming on you didn't see any benefit of that in the first quarter because it occurred on the last day of the month and the quarter. You will see that flow through in Q2 and beyond. And I would just point out the net C&I growth of $1.4 billion in the quarter, we feel that we can continue at least at that run rate throughout this year, and we've been talking about growing C&I and people have been asking you what do we think we can do. And I think this is the first quarter where we're really showing the power of everything that Jose and Rich have built and what those bankers are doing on the C&I side.

Okay. All right. And then if I could just ask quickly 1 more. You in the past talked about adding cash and securities. I think it was about $2 billion to $4 billion -- is that still -- what's sort of the path forward on cash and securities balances with the broader backdrop?

Yes. I think as you look forward in '26, you will probably see our cash position come down a couple of billion. We will be buying more securities. I think you can expect us in Q2 to be buying at least $1 billion, $1.5 billion of securities. And we would look to get that securities balance back up to probably $16 billion or so as we move into the second half of 2026. The securities were behind, as I've said before, pre vanilla short duration RMBS CMOs. But it gives us an additional lever should we need to create more cash to let some of those securities run off. But a lot of it, as well, remember, Jared, given by what are the par payoffs because as we're seeing those CRE and multifamily loans pay off, that is generating cash and we've got the option to grow the securities or pay down wholesale borrowings. And you saw us pay down another $1.3 billion of expensive wholesale borrowings in the quarter between flu and brokered deposits.

Our next question comes from the line of Manan Gosalia with Morgan Stanley.

Maybe staying on the topic of the Moody's and Fish upgrades. I think Moody's upgrade also came with a deposit rating upgrade. So can you talk about the implications for both funding costs? I think you mentioned more DDA growth. But also for expenses, is there any benefit on the FDIC expense side? So would love to get a full set of benefits from the upgrades beyond just the capital side?

Sure. Let me take the Moody's upgrade on the deposit. As we obviously look to bring on new relationships and roughly, there were 75 new relationships that came in, in the first quarter. is part of our strategy, obviously, is to make those both depository and fee income relationships in addition to loans. And not so much in the middle market, but in the lower end of the corporate market, where -- we are focused on a lot of those companies have in their -- kind of their bank or their investment policy is that the bank had to have an investment-grade rating generally from Moody's or an S&P rating to be able to exceed the FDIC insurance levels.

And so that rating is very important to that strategy as we look to penetrate in and gain operating accounts that often exceed those dollar amounts. And so we think that is a turning point, so to speak, for us of our ability to gain sizable new deposits with the relationships that we're bringing into the institution. And so -- we think that will be significant for us as we move forward in that strategy. And I'll turn it over to Xin's question to Lee and let him answer that.

Yes. The upgrades have no direct impact on FDIC expenses. But as Joseph mentioned, I think we -- it's a huge advantage in terms of being able to raise deposits going forward. And both Moody's and Fitch took our short- and long-term deposit rating back to investment grade. So we're very pleased with that, and Moody's still has us on a positive outlook as well.

Got it. And then maybe to stay on the expense side, Joseph, you spoke about the consolidation of the legacy data centers and the setup for the core conversion in 2027. I guess how big of a lift is that? Is that multiple years? And how are you thinking about the expense number there? And I'm guessing it's baked into your guidance, but if you can just speak to that.

Yes. So obviously, closing 6 data centers and getting into 2 co-location centers was really positive for us. It was reflected in our expense forecast for this year. Next year, we do today run 2 cores where we have 2 of the legacy organizations on 1 core provider and 1 on a third. It is our intent by July of next year to be [ AgeCore ] and on a run rate basis, we believe when that gets completed, it's roughly a $40 million decrease in expenses for the company.

Our next question will come from the line of David Severini with Jefferies.

So wanted to drill into credit quality a little bit. trends continue in the right direction with criticized and classified loans trending lower. Can you talk about your expectations going forward with these loans? Do you expect a continued downward trend? And any surprises you've observed either good or bad as these loans have matured or reset?

Thanks, David. Yes, no, we do not expect any surprises. Let me address that in the first instance. And we continue to see continued reduction of criticized and classified. As Joseph mentioned, we're on track to reduce nonaccruals by up to $1 billion this year, and we saw a nice reduction in Q1, and we believe that will continue throughout 2026. And that's obviously accretive from both an earnings and a capital point of view because those nonaccruals are 150% risk rated, we continue to see a lot of liquidity around the multifamily loans and that is why of the $1.1 billion of payoffs in Q1 42% was substandard. And that is consistent with the trend that we've seen for multiple quarters now.

So we expect to continue to see a reduction in the substandard loans. And then I mentioned the special mention loans have increased this quarter because we're doing that very comprehensive 18-month look forward of all loans that are maturing or resetting in the next 18 months. 2027 is our biggest reset maturity year. There's $9 billion that is resetting and maturing. So with 3 quarters of the way through that analysis. And by the end of Q2, we will be all the way through 2027. And again, everything -- even though there was an increase in special mention loans, given the reductions in the other categories, given the reduction in CRE and multifamily HFI balances it's all reflected within our ACL reserve. And the final point I would like to add is on the charge-offs, as you brought up credit, David. So charge-offs were $78 million this quarter versus $46 million last quarter.

However, $34 million of what was charged off related to the 1 borrower that was in bankruptcy. And of that $34 million $30 million was already fully reserved. So there was an incremental $4 million related to that bankruptcy really just sales costs that we needed to take. And if you subtract that $34 million from the $78 million, you're basically at $44 million of net charge-offs versus $46 million last quarter, which is about 30 basis points. So we are consistent from a net charge-off on a net charge-off basis and we expect that trend to continue next quarter as well.

Yes. And David, the 1 other thing that I would add, I think Lee did a good job of describing that is when we do that look forward, of those loans today are current in the special mention category. So if you called those borrowers up, they would say, well, I've never missed a payment. But what we do in that 18-month look forward is we apply the current rate that they would incur if that loan matured today. And then we analyze that cash flow and make a determination where does their cash flow sit against fixed charge cover or cash flow coverage on the property. And so if your property is at 3.5% today, and you take it up to 6.5% for our contractual rollover, that's what's causing those loans to look slightly impaired when actually that is really a forward look to those with pretty punitive interest rates.

Very helpful. And sticking with this theme, can you provide us with your latest views on a potential rent for us and the impact this could have on your portfolio?

Yes, absolutely. So we have modeled out a rent freeze, 3-year rent freeze occurred or starting October 1 '26. So a couple of other assumptions that I would add, we also assume as part of this analysis, the operating expenses increased 2.75% per annum and think about that as being inflationary. And we also assume that the market units or the non-regulated units are able to increase their rent 2.1% per annum.

So here's what we found when we ran that analysis anything that is 70% or less rent regulated, there is no impact to the NOIs. And the reason for that is the rent freezes on the rent-regulated units are offset by increasing the rent on the market or nonrent-regulated units.

So 70% is sort of the demarcation line. Anything that is above 70% rent regulated the recent impact to ROI over that time horizon, the 3-year time horizon of about 7% or 8%. And if you look at the rent regulated slides that we have in the earnings deck. So we have -- and the earnings deck shows everything that is more than 50% rent regulated, and we have $8.8 billion. But $4.6 billion is pass rated. -- with an amortizing DSCR of 1.5. So those borrowers would be able to absorb the rent freezes and that impact on -- and then when you look at the criticized and classified, which is $4.2 billion, we have taken significant charge-offs. So between charge-offs and ACL reserves, we've taken over GBP 500 million of charge-offs, and we have reserves against that population. So we believe that we're more than covered just given when we re-underwrote that book in '24 and we took over GBP 900 million of charge-offs, and we increased our ACL reserves we believe we're more than covered what -- given what we've already done.

A couple of other things I'd point out, though, on this. It's not just about the rent freeze as you know, we're getting annual financial statements from these borrowers and looking and digging into those we're doing a deep dive on everything that is maturing in the next 18 months, and we undertake a robust analysis on all of those loans. We're reviewing things like the worst landlord list and lean and violation lease, and we don't have much exposure there. A lot of our borrowers, as you know, these are families where the properties have been with them for multiple years.

So they have a low-cost basis they benefited from the 1031 tax rollover. So we do not have any REO on our balance sheet. And if there was an issue, it would be showing up in our charge-offs and ACL reserve, which, as we've just been through, you're not seeing. And the final thing I would add is there is still an incredible amount of liquidity for the ASC class. As we've seen from our quarterly par payoffs and as we saw again this quarter as well.

Our next question will come from the line of David Smith with Truwiuth Securities.

I guess big picture. You obviously took your '26 and '27 earnings guidance a bit lower. Do you just view this as a delay and push out of your expectations by a couple of quarters? Or has anything changed at all about your medium and long-term profitability expectations for the bank?

David you are spot on. And that is exactly joseph and I were having this conversation. Not -- if you look at our thesis and everything we're doing, we are executing against our strategy. And all these stores worst case is maybe pushes things out 1 quarter or 2 quarters. And let me tell you what I've been by that. because the -- we're seeing increased paydowns or payoffs of that CRE multifamily maybe we just need 1 more quarter of $2-plus billion net C&I growth for 2 quarters.

So everything is intact, those reset and maturity dates. We know they're coming. We just need to sit here and be patient. It's just time. and worst-case scenario, maybe you're just looking at an extra quarter or 2. So I think you've hit the nail right on the head there.

And then the change in assumption on multifamily loan repricing to $175 million to $225 million over SOFR instead of 300 over the 5-year. Does that have any impact on credit as you do the 18 months look forward on loans resetting?

Yes. So let me just clarify that. We the contractual resets, we are sticking by. So anything that is resetting or maturing but really resetting the contractual term is 5-year flood plus 300 or prime plus 275. We're not wavering off that, and we haven't waived off that. All we are saying is if there are better quality CRE loans within our portfolio, maybe it's in the builder finance arena or maybe it's in a non-officer where there's a deposit relationship. It's a strong credit then we probably need to -- in order to retain them, we probably need to move to a market rate which would be so for plus $75 million to $225 million.

So that's all we're saying that we'll be very selective in only selecting those credits that are extremely high quality, and we think that there's either an existing or the potential for a future relationship.

David, one point I think you were perhaps asking there was like when we're doing that forward look, and we're applying our contractual rate. We probably are 75 basis points over the market when we do that analysis that would perhaps push some of the loans into the special mention category that if you use a strictly a market rate and that analysis you would not see as many special mention credits.

Our next question will come from the line of Dave Rochester with Cantor.

Appreciate the comments on the Board meeting coming up and your thoughts on just capital deployment in general. You called out the $1.6 billion of excess capital above the bottom end of your target capital range. You talked about that for a quarter or 2 now. I was just curious how you're looking at that excess capital because we've seen some banks manage that down to their targets fairly quickly. Now that we have some clarity with the capital proposals. You've got more loan growth that's ramping up through the end of this year.

Obviously, that's going to be improving profitability and whatnot, and you want to save capital for that. But are you in a situation now where you could easily just save half of that excess and dedicate that to the loan growth that you're expecting over the next couple of years and then take the other half and pay that out over the next couple of quarters? How are you thinking about getting to your targets more so in terms of timing?

Yes. Well, great question. And look, we -- I think we're in the fortune of what sort of ironic if you turn the clock back 18 months ago, people were asking if we had enough capital and you sort of fast forward to where we are today, and again, because of the great work that the Flagstar team has done, we're in this sort of situation where people are asking, what are you going to do with all the capital. We're in the fortunate position where we can do both, we can grow, and we can obviously execute on capital actions later in the year, as Jose alluded to. I think also what Jose said is exactly what we're looking to do here, which is the consistent profitability, and we've now had 2 quarters of profitability.

So we're on the right track. We want to see those problem loans come down. We had a nice quarter in Q1, and so we want to see more of that. and then the organic growth, particularly on the C&I side, and you're really beginning to see that come through as you saw in Q1 with $1.4 billion of net C&I growth. But we can do both. And you mentioned the new capital rules and the Basel III proposal, look, we've analyzed that, and we believe that, that will give us an additional 60 to 80 basis points of CET1.

So that's all in the risk ratings. And again, that's something that would be very helpful to us as well. But yes, we have optionality, and we're able to, I think, grow and we're able to take capital actions. We just want to prove out the consistent profitability as you see and see a little bit more reduction in those problem lines.

Sounds good. Appreciate it. And then just on the new C&I bankers you've hired, I was just wondering how they've done with their marching orders to bring in the first deal in the first 90 days. And -- if you can just give an update on where you are on hiring for this year. I think you're targeting 200 bankers by the end of this year, which meant maybe another 75 that you had to go. If you could just give us an update on that. And then any lingering derisking efforts that you're wrapping up in equipment finance or any of the other segments? That would be good to hear about as well.

Yes. Let me start with the banks. So first of all, I mean, I just want to complement the job and the work that Rich and those bankers are doing. They have been phenomenal. As you can see from the net C&I growth in Q1. And again, this is very granular. The average loan size is in that $20 million to $30 million range in Q1. The average spread to sofa was actually went up. It was actually 242 basis points, and we've got just over 70% utilization. So doing a tremendous job. Today, we have 131 customer facing, C&I bankers I think Rich would like to probably more like 180.

So I think you've probably got another $40 million to $60 million to go in terms of new hires. As we said before, our expectation and these are all seasoned bankers that know Jose, no rich our expectation is that they're executing on their first deal within 90 days. And then they're doing, on average, 3 or 4 deals in that first year, 5 or 6 deals a year thereafter. And I think if you sort of do the math on that, that's how we're getting to the C&I growth that we've alluded to. And again, you saw that come through in the first quarter. And then the second part of the question, yes, as I mentioned, a lot of the tool trees, as we referred to, where we had outsized exposure to single names. We are mostly through that. And if you look at the page on earlier in the deck, you can see that we really. We didn't have anywhere near as much runoff in those legacy equipment finance, asset-based lending categories.

There was a little bit of a swap between the two. So that's why there may be a little noise there. But on a net basis, there wasn't much runoff at all. And we feel that you'll start to see those areas grow, which will then complement what we're doing with the national lending verticals, the specialty verticals as well as what we're doing from a middle and upper C&I market point of view going forward as well.

Yes. The other thing obviously, Lee hit on the spot, we've assembled really an incredible team in the C&I space that have come to the company in that 20 to 25-year experience level across both geographic markets and industry specialization. Our focus really is in kind of that $20 million to $75 million range type credit size. And that gives us the ability both to scale quickly, but also clients that use a lot of bank products and services that gives us cross-sell opportunities. So I would say, I think if Rich was here, he would say probably 90% of the people are kind of hitting that first deal in 90 days with a number of them far exceeding that kind of production level.

So it's really been an impressive story and I think if you had to assess where we are, I think we're kind of sliding in the second base on that overall strategy. So we really do continue to see, I think, good market expansion, good growth in both adding people and those people that have now been in the company for 6 to 9 months, are really hitting the stride. I commented in my comments that we really expect to be at or above the production level for Q2 to what we've done in Q1. And we actually were pretty hot coming out of the box this quarter with new closings that may have tried to get down in the first quarter, but leaked over into the second quarter.

So the opposite of what we had in the first quarter is we had a really strong March on closing. We actually came out of the box really hot in April. And so we look for this to be an exceptional quarter.

Our next question comes from the line of Anthony Elian with JPMorgan.

Lee, on fee income, you reduced slightly the '26 outlook, but it still implies a material step-up for the rest of this year to hit that range. Talk to us about the areas you think will drive the increase in 2Q and beyond?

Yes, sure. So a couple of things on the fee income. First of all, and you probably already have, but I want to make sure people are adjusting for the figure gains, losses because that is in the noninterest fee income section. So we had a $9 million gain in Q4 and then we reduced the valuation and effectively, you saw a $9 million degradation in Q1. So that's an $18 million swing quarter-over-quarter. So I just want to make sure people are capturing that. But we think that -- it's really all of the line items.

So capital markets syndication income, swap and derivatives. We hired a new head of Capital markets towards the end of last year and he's just finding getting his feet under the table, and we feel pretty excited about some of the things that we're seeing there. As we originate more loans, we expect unused loan fees to increase. We have some SBIC investments. The returns were slightly down in Q1 versus normal quarters, and we expect that to return to normal as we move forward.

Q1 is seasonally low for mortgage gain on sale, and we would expect gain on sale to increase will increase as you move into Q2 and beyond. And then the CRE fee income should increase as we start originating new CRE loans. The consumer overdraft and service charges should increase. We think net loan fees and charges, deposit fees will increase. And we've said before, one of the things that we identified that was happening was we were waiving a lot of fees in the private bank and we are gradually reducing the amount of fees that we've been waving in the private bank.

So -- it's not 1 area in particular. We expect to drive fee income across all categories and in all parts of our business model.

And then on NII, can you share with us how much visibility you have just on the level of commercial real estate payoffs going forward, right, why what you saw in 1Q would lead to such a sharp reduction in your NII outlook next year? And really what I'm trying to get at is the confidence you have that this is it for reductions to the NII outlook.

Yes. No, it's a fair question. I would tell you that people, I think, need to appreciate is there are more moving parts to this model than probably any other bank out there that especially banks that are mature because you're dealing with par payoffs, pay downs, new originations, we're in growth mode, you're dealing with reductions in nonaccrual loans and they're lumpy. It's not linear.

We're looking to pay down wholesale borrowings reduce the cost of core there are more moving parts to the story than any other bank out there. We are moving in the right direction. -- to be absolutely precise on every single one of those, it's not easy. And so we feel, based on the guidance that we've provided that is the best look that we have today. But par payoffs or paydowns increased, Sure, they could. We've got strategies in place, as I mentioned, for the better quality loans to try and retain them. But there's a lot of moving parts.

I think what I would look at is the bigger picture. And as Joseph and I have both said, we are doing exactly what we said we would do and executing on our strategy. And the worst case here is maybe pushes things out 1 or 2 quarters. So instead of Q4 of '27, it's -- we get there in 1Q of 28 or 2 of because we just need another quarter or 2 of $2-plus billion of net C&I growth. That's the worst-case scenario. And that's how I would look at it when you're looking at the -- you got to look at the bigger picture.

Our next question comes from the line of Matthew Breese with Stephens.

I wanted to touch on the inflows and outflows of NPAs this quarter. And going back to the Pinnacle group the bankruptcy loans, which I thought was maybe $500 million or $600 million in balances. If that came out, it implies a decent chunk of new NPAs went in -- and so I was just curious if that's the case, could you provide some color on the new inflows of NPAs number of loans, size of relationship -- and Jose, do you -- are you sticking with your outlook for a $1 billion reduction in nonaccruals this year?

Yes. Yes. First of all, Matthew, we are sticking with that. it's kind of -- you got to look at that category kind of like accounts receivable each quarter, and we've had that like volatility where some come in and some go out. We had roughly million of resolutions during the quarter. So you do have inflows and outflows that in [indiscernible] and that has always been there where things are transitioning through that. We do expect this next quarter to be down $200 million in additional NPAs. So it's the trend line that we take a look at, but there is in and outside of that category on a fairly consistent basis. And Matt, I'll just remind you, 35% of our nonaccruals are current and paid -- we're very punitive on ourselves in the way that we risk rate these loans and no 1 else has that amount of their nonaccruals current and pay. But you've got to bear that in mind as and real estate secured.

Understood. Okay. And then, Lee, could you just clarify where the hedge gain was flowing through in the average balance sheet. I thought it was in borrowings, but I think you had mentioned it was in interest income.

I was squeezing in 2 questions in one.

Well, let me do -- let me handle 1 first because you'll have to pay for the next one. The -- it's all in the flu, the wholesale borrowings line. That's where that gain was, Matt.

Okay. And then could you just provide this quarter, what were new loan yield originations overall? How does that compare to the pipeline? And how does that compare to the fourth quarter?

The -- yes. So I mentioned a couple of questions. The new C&I loans were coming on at a spread to sofa of $24 basis points in Q1. So which was higher that they were coming on around 225 in Q4. So we saw a nice increase in Q1 in terms of average spread to sofa.

Our next question comes from the line of Casey Haire with Autonomous.

Lee, I had a question for you on the balance sheet forecast of $102 million in '27. So if we started 87 today, you have about $12 billion of multifamily coming back to you between now and 27. You lose 60% of it that is a $7 billion drag, that takes you down to $80 million. You originate $2 billion a quarter of C&I that takes you back up to $94 billion where is the -- what's the -- you're still $8 billion short versus that $100 million? I guess what are we missing here?

Yes. So a couple of things. C&I growth is pretty significant in both years. You're sort of looking at $7-plus billion in both years. But remember, on the CRE and multifamily side, we are originating new CRE loans, not New York City CRE loans, but CRE loans in other parts of our footprint. So the Midwest, South Florida California. So you've got to factor in the runoff in CRE and multifamily is not as big as you think because we're replacing some of that with new CRE originations. And then we also expect to see growth in the residential mortgage line item as well. as we're originating mortgages for balance sheet. So I think the piece you're probably missing is the CRE multifamily runoff is probably not as great as you're thinking because of the new loans we're originating.

Okay. Fair enough. And then the deposit growth was decent this quarter. What's the outlook there? Can you build on this momentum? And where do you want to what's -- how is the loan-to-deposit ratio? Where do you want to live on that ratio going forward?

Yes. We believe we can build on it. And as we said before, leveraging the new C&I customers that we're bringing in is as 1 area that we feel that we can be successful in. And if you look at Q1 and you look at the deposit growth, about $450 million was from the commercial customers and the private bank customers. And ultimately, we want to get the operating accounts of those commercial customers. But if we have to start with some interest there in deposits, that's fine as well.

So we believe that we can leverage those new relationships on the C&I side. And our treasury management team is working diligently to make that happen, and we saw some green shoots in Q1. We believe the private bank is another area where we can grow deposits. And Mark Pit runs the private bank it really built out a real private bank with the Chief Investment Officer, trusted adviser. We've got a family wealth planner -- we've got all the products that they would need, interest-only mortgages now in a broad mortgage product set subscription lending.

So we feel that that's an area where we can continue to bring in more deposits and then leveraging our 340 bank branches as well. And obviously, the new CRE lending we're doing, the expectation is that is relationship driven and will come with deposits and fee income opportunities as well. So we do believe that we can continue the momentum and grow more deposit I'd like to see some more noninterest-bearing DDA growth, but we think that will come with those upgrades that we got this quarter for Moody's and Fitch.

Our next question will come from the line of Bernard Von Gizycki with Deutsche Bank.

I know you I know your specialized and regional banking segments are being built out and deposit gathering initiatives will be in a different life cycle versus peers. But with rates potentially on hold, how would you describe deposit pricing pressure. It sounds like the Moody's switch upgrade could help alleviate some pressure that some peers might be seeing more of. Just talk on what you're seeing within your footprint?

Yes. Obviously, it's competitive [indiscernible] and we meet every week on this, and we review deposit gathering in every single market that we're in and we look at what our competitors are doing, and we make sure. Obviously, you need to be competitive. But what I would say is -- not only did we bring $1.1 billion of new deposits in Q1, we also reduced that cost of poor deposits 21 basis points. So we're not overpaying for these deposits. I think we're leveraging our relationships. We're leveraging the model that we built. And we'd be mindful, obviously, of what our peers and competitors are doing, you have to be.

But I would say despite that, you've still seen us sort of execute and be successful with the deposits that we brought in and the reduction in core deposit costs.

And just a follow-up. I know you paid down the FHLB advances by $1 billion during the quarter. What are your expectations for pay downs for the rest of the year?

Yes. I think the way we're thinking about it, Bernie, is we believe we can pay down another $2 billion or $3 billion over the rest of the year. And again, a lot of it will be driven by what excess cash do we have and that will be driven by what's going on with deposit growth, what's going on with the payoffs, the paydowns, but we think we can pay down another $2 billion or $3 billion of loan advances.

Which get us into the like $6 billion a -- if you recall, when we got here, it was about $23 billion.

And that concludes our question-and-answer session. I'll turn the call back over to Joseph for any closing comments.

Thank you very much, operator, and thank you for taking the time to understand our story. We often say here, we started with 20 big items that we needed to knock off the list. We really feel we're down to about 4, have those well under control and are executing on that. And we remain extremely focused on executing on our strategic plan. We really want to transform Flagstar into a top-performing regional bank. Creating a customer-centric organization that's relationship-based culture and effectively manage risk to drive long-term value. So thank you for your time this morning, and thank you for joining us.

This concludes our call today. Thank you all for joining. You may now disconnect.

I guess we get started with our next session. We have with us Flagstar. And from Flagstar, we have Lee Smith, CFO, and Richard Raffetto, Senior Executive Vice President and President of the Commercial and Private Bank. So first of all, thank you both for being with us.

Yes. Thanks, Ebrahim. It's great to be here again.

And maybe just to kick it off with you, Lee, give us an update. I mean, obviously, fourth quarter was a bit of a milestone for Flagstar, turned profitable. As you think about just a mark-to-market in terms of everything that's gone on over the last couple of years with the bank, -- just talk to us about the progress that's been made in terms of shifting the focus, moving from sort of addressing and ring-fencing the credit quality issues towards pivoting to growth and kind of how you've seen all of this evolve and where things stand today?

Yes. No, absolutely. It's obviously -- the last couple of years, it's been a tremendous effort and a lot of blood, sweat and tears. But I think, first of all, it all starts with people. And obviously, the new investors and Board, the first thing they did was they bought Joseph Otting in as the new CEO. And I think Joseph did an incredible job of bringing together very quickly a new management team, and it's a management team that is very communicative, very transparent. We meet at least twice a week for an hour, and we talk about everything. And so I think the foundation is with people.

But then in terms of building the foundation, we set about raising additional capital. So we sold some very successful noncore businesses, particularly mortgage businesses. That gave us the ability to raise capital, but also liquidity. We used that liquidity to deleverage the balance sheet. We've paid down over $20 billion of wholesale borrowings over the last 15 months, and that has reduced our funding costs significantly. We re-underwrote the credit book, particularly the multifamily and CRE book, and we took both credit marks and interest rate marks, which is something no other bank has done. And so in 2024, we took over $900 million of charge-offs as well as increasing our ACL reserves -- and so today, our coverage ratios are some of the highest in the industry for multiple asset classes. We took over $700 million of costs out of the business. That was something I think a lot of people didn't think we could do. And while we were doing all of that, we were investing heavily in Richie's C&I business so that we could build the C&I business and move to a more diversified balance sheet, which is we say 1/3, 1/3, 1/3. 1/3 CRE, 1/3 C&I, 1/3 consumer.

And so it was important that we did all of that because that created the foundation from which we could grow and be successful. And then as you move through '25, there were a couple of important milestones. In Q3, we achieved net C&I growth and that was something that we had been targeting. And then in the fourth quarter, as you mentioned, we actually returned to profitability after a couple of years, and that was something that we said we would do. So everything we said we would do, we accomplished in 2025. And now I think we're at that inflection point where it's really about the growth story. And we ended the year with a balance sheet of $87.5 billion. We're looking to get to $94 billion by the end of '26 and then about $102 billion, $103 billion by the end of 2027. And we believe that we've got the appropriate resources and teams in place to really drive that growth, particularly through Richie's C&I businesses.

Got it. That's helpful. And I'd like to come back to some of the credit quality and just the New York CRE topics. But maybe, Rich, since we are on C&I, it was a good sort of year 2025. As we think about just the momentum and what you've laid out around growth expectations for C&I. Just talk to us around, one, the bankers that were brought on last year, like just the pedigree of those bankers, their ability and sort of to move business both on the lending side and hopefully, at some point, deposits as well.

Sure. Thanks, Ebrahim, and it's great to be here. I will start with the theme of transformation that Lee touched on. Since I joined in June of 2024, we've had the privilege of on-boarding more than 300 new professionals in the commercial, corporate and private banking organization here at Flagstar. And these are generally mid-career professionals who know what good looks like. We're hiring from banks of our size and larger. The great news about having Joseph Otting as our Chairman and CEO and me running our commercial and private businesses, we grew up as -- we grew up as commercial bankers.

So we're able to go out in the marketplace, hire talent that we know or have worked with, bring in seasoned leaders who are also attracting talent. And that network effect is working very positively around how we're constructing a commercial bank from a bank whose legacy and roots were much more mortgage and commercial real estate than they were C&I or private banking. So that's the clay that we've had to mold. And as these folks have come on board, we've really focused in the C&I space on building two key focus areas. First and foremost, we need to be more relevant in the geographies where Flagstar also already has brick-and-mortar branch locations, and we're in those communities with 340-plus retail branches and 20 private banking and wealth branches. So -- but we didn't have commercial bankers in many of those geographies.

So adding commercial bankers in places like Ohio, South Florida, more density in the New York area and Michigan out in Arizona and California to make us more relevant in those markets in regional commercial and corporate banking, that's priority #1. Another part of priority #1 is leaning into specialized industry segments. So we've added over a dozen new industry verticals and hired the talent to support that side of the growth because many of the industries that we desire to serve in the C&I space require specialized industry knowledge and lending expertise. So we've hired not only revenue producers, but also credit underwriters and credit process professionals who understand the unique nature of different industries that we've entered just over the last 12 to 18 months, segments such as oil and gas, renewable energy, entertainment, sports, technology, health care and the list goes on financial institutions, insurance, sponsor coverage, et cetera, so that we can round out those areas of focus.

And that's enabled us each quarter for the last 6 quarters to show quarter-over-quarter momentum in new originations on the commitment side and in the funded loan outstandings. So we expect that trend to continue into 2026. And that brings us to our aspirations, which is, as we show on Slide 11 in our fourth quarter earnings slide deck, we aspire to drive billion to $7.5 billion of net C&I loan growth in 2026. And based on the originations volume, we feel like we have a great runway there. We also expect to add another 40 to 60 commercial bankers and corporate bankers that will help us as we further scale in both these geographies and in these specialized industry segments. So we feel like we have the workings of a very realistic expectation for this growth in 2026.

And if you think about it, with roughly 125 revenue-producing bankers and each banker delivering generally 4 new transactions, new client relationships for us, that turns out to about 500 new deals, if you will, with an average commitment size of about $25 million. That drives about $12 billion of new credit commitments -- and with about 70% of that funded, that yields $8 billion to $9 billion. And then with regular amortization, that gets us back to our target range of $6 billion to $7.5 billion of net C&I loan growth in 2026.

And remind us, Rich, what's the sort of time line between hiring a banker and before they start getting to the rhythm of adding four commitments in a quarter?

Great question, Ebrahim. The great news about hiring mid-career bankers is we generally find that our bankers are really productive in the first 90 days. We expect them to bring over their first relationship and do their first deal in the first 90 days of joining the company.

And then we expect that continued ramp where they're bringing over at least 4 new client relationships in the first 12 months of being there. But in that first 90 days, that's pivotal where they're starting to leverage that Rolodex bring over those relationships, whether it's being the next bank added in a multiple bank syndicate or a club transaction or a bilateral transaction where you're getting full relationship primacy where they can take that full client relationship over from the bank that they just joined us from.

Got it. And I think I know the answer, but when you think about just the appeal for these bankers to move to Flagstar, just remind us what is it I mean obviously, there's a ton of growth runway for them. But what sort of is appealing to them and what keeps them around not just for a year or 2, but to sort of build their careers for many years to come?

Great. Another great question. The things that attract bankers to our platform are, first and foremost, they love the fact that we have commercial bankers running the enterprise. So our Chairman and CEO grew up as a relationship manager in commercial banking, and that's the same way I grew up in the business as well. So I think that leadership is -- resonates with candidates. They definitely understand the macro story of Flagstar that we have this desire and ambition to create a diversified regional bank with 1/3 commercial real estate, 1/3 C&I and 1/3 consumer and private banking.

So they know we have a significant runway where banks of our size and complexity have C&I loan portfolios that are generally double the size of where Flagstar is today. So they know that we have a large runway and a whiteboard for them to build their business and be entrepreneurial. And one of the recurring themes that I hear from bankers that we bring over from not only the top 4 or 5 banks in the country, but also the super regionals and other banks of our size is they love the entrepreneurial spirit that we bring to the table where they know they can get business done, they can deliver for their clients.

We're not overly layered or bureaucratic because of the size of our company. At around $90 billion in assets, we like to say we're big enough to matter, but small enough to care. It's easy to get myself or our CEO out in front of a client in person. Happy to hop on an airplane to do that as we grow our business nationally. And it's really fun to build a business with an entrepreneurial set of bankers that feel like they can be -- make a big impact in an organization like Flagstar that's transforming.

I think I just add on what Rich has said, we're sitting on 12.83% CET1 capital. So we want to use that capital to grow the balance sheet based on the numbers that I mentioned earlier. A lot of that is going to be in C&I. These new C&I, the dozen verticals that Rich mentioned, we're sort of new to this. So we're growing it. We don't have those concentration levels that maybe other banks that have been in the business for multiple years and already they're full up or they're approaching those concentration levels in certain industries or certain names. We're not running up against that. So they have that runway as well at Flagstar, and I think that's important.

Got it. And when we think about the $6 billion to $7.5 billion in loan growth, right, like you talk to banks, you talk about the macro outlook. It feels like in your instance, it's a lot more about them moving their books of business. There should be a higher sort of less sensitivity to what the macro does in any given quarter. Would that be a fair way to sort of...

I would say that's a fair assessment.

Absolutely. We find the bankers in that first 90 days, they're not only bringing over that first transaction or that first relationship, but there's many in the queue behind that from their career and their contacts and their network. So yes, absolutely. So we feel like we can grow our business at a faster rate than the market gives us because of the ongoing build of our platform. And with more people in the seat for longer, they become exponentially more productive.

When do you think the banker peaks? And when do they go to a point where they've grown enough and then they're managing sort of to stay in place? Like is it...

So another great question. As we bring bankers on board, we see an accelerated ramp in the first 12 to 18 months. We think it starts to level off after 3 years because if you think about the life cycle of refinancing a middle market company's credit facility or some event-driven transaction like a new warehouse that they build or a competitor that they're going to merge or acquire, a lot of that plays out over a 3-year period, and that's when our banker has that opportunity to recapture that relationship over. So the maturity level is generally 36 months out.

And as we think about the loan growth, and you've been doing a lot on the liability side of the balance sheet. Like what's the expectation of these bankers to bring in core deposits? One, does Flagstar have the technology infrastructure and the products to bring in -- to be able to bring in those deposits? And yes, like what's the goal for these bankers to do that?

Yes. So I'll start and then I'll sort of kick it over to Rich to get more specific on their goals. But as we think about the asset growth, we want to fund that with deposit growth. The deposit growth is coming from multiple angles. So obviously, we want to use the new C&I relationships that we're building here to leverage those, not just for deposits, but for fee income as well. We're very much about relationship banking. We're not just into transactional banking and giving the balance sheet away.

That has to be a much deeper relationship. And so if we're going to lend to someone, then we expect that there's ultimately a deposit relationship and there's the opportunity for other fee income business to come our way as well. And I think Rich and the team, the bankers are aware of that. We're also leveraging the private bank to bring in deposits. So we further built out that private bank. The bankers have all the products that they need now. You think about the interest-only mortgage, subscription lending, Mark Pity, who runs the private bank, has got a Chief Investment Officer.

We've got a trust adviser. We've got an insurance adviser, a family wealth planner. So it looks like a real private bank, and we want to leverage all of those products and those services to bring in deposits. We obviously have 350 bank branches in very good markets, New York, New Jersey, South Florida, the Midwest, Arizona, California, and we feel that we have a good product set there. And then we're going to be originating new CRE loans, and we want to leverage just those loans to bring in deposits. We're talking to vendors that we do business with.

Again, if we're going to give them business, we expect something in return. So it's very much this relationship banking model, and we're not leaving a stone unturned as it relates to bringing in deposits. The final thing I'd mention is Rich has a team underneath him that is solely focused on bringing in these deposits. And as part of that team, you've got a government banking group that is working with municipalities and those municipalities in terms of deposit programs. So we're really looking at it in a holistic way, but I'll let Rich talk about any specific targets for the bankers.

Sure, sure. And it's very important. Every time we bring on a new relationship and over the last 12 months and in the focus areas, we've added about 165 new relationships. Each new relationship and each banker, we pressure test as they onboard that new relationship, what is the client strategy beyond just the initial extension of the balance sheet with credit. And that can come in the form of deposits, fee income products. And as we've invested in bankers, we're also investing in the product capabilities as well.

So whether it's uplifting a treasury management product or a fraud capability, a commercial card product capability or capital markets service like interest rate hedging or an FX and loan syndications and other kinds of capabilities, that exponentially expands our fee potential. And then with the -- having both the commercial bank and the private bank under my leadership, there's a natural synergy where we're banking lots of privately held businesses and there's an opportunity, whether there's a liquidity event or a planning event to work individually with those business owners and that bleeds into a private banking capability, residential mortgage lending, et cetera.

So that ecosystem is driven by goal setting, both at the relationship level at the outset and at the banker level where we set annual goals for growth. So I think that part of the ecosystem is how we're delivering on Lee's mention of us being a relationship-driven bank, but we think that should drive both the relationship primacy that we desire for multiple and deeper relationships and will help drive us forward both in funding the loan growth with deposits as well as driving our fee income numbers higher.

Got it. I guess maybe -- just pivoting back to the good old New York CRE book a little. Just talk to us in terms of how you're thinking about the nonaccrual portfolio and how we should think about the timing of that coming in like exiting some of those relationships?

Yes. So we've been very public that we're sitting on about $3 billion of non-accruals at the end of '25. We expect that to decline by $1 billion by the end of '26. So we think we can reduce that book by $1 billion. That does 2 things for us. It helps earnings because if you just think about that $1 billion, even if you just sit on that cash of 4%, you're earning $40 million is coming into your net interest income. It's not doing anything today sitting in nonaccrual. The other thing with the nonaccruals, they're 150% risk weighted. So as we further reduce the nonaccruals, it's capital accretive. And then I think the other big thing is it's been reported publicly.

There was obviously a big bankruptcy that went to auction early in 2026. The auction process was completed. And then the bankruptcy judge confirmed and approved that, and we expect to close that transaction before the end of Q1. That one transaction is $450 million of nonaccrual loans that will get resolved once we close it, hopefully, before the end of Q1. So it's a big focus of ours for both the capital and the earnings reason. And obviously, we're pretty close here to resolving a significant portion.

And the exits in this case, so this one went through bankruptcy process. It's going to move -- what are the other avenues to sort of exit these? Are there private assets like looking to pick these up?

Yes. So we have a SAG group, special asset group that is constantly working on these nonaccruals, and they have multiple tactics, whether that is working -- doing a workout with the borrower, discounted payoffs, the sales. So there's lots of different ways and tactics that we're looking to leverage to sort of bring this book down. But what I would tell you with the nonaccruals is every one is a separate negotiation with the borrower. So it's not linear. It can be chunky. But there absolutely are -- there are buyers out there for sort of pools of nonaccrual assets, and that's just something else that is at our disposal. We're obviously only going to pursue that if it makes economic sense for Flagstar.

Understood. And as we look forward, so you've done a lot of work on credit quality, the reserves you've taken, the charge-offs you've taken. As we look forward, where is the blind thought? Or where do things go wrong in terms of credit quality? Like what could lead to a worse outcome than what you're sort of positioned for today?

Well, look, I mean, you are always looking at credit. And so I don't think any wise person would make a definitive statement. But here's what I would tell you, as you said, we re-underwrote that CRE and multifamily credit book back in '24, and we took interest rate marks and credit marks, over $900 million of charge-offs. And we topped up our ACL reserves. So we have very, very strong coverage ratios.

Every multifamily and CRE loan that is resetting or maturing within 18 months, -- we do a DSCR analysis using pro forma interest rates, current interest rates. And so we're constantly looking at what is coming due 18 months out, and then that is informing us about how we should risk rate those assets as well. We get annual financial statements now from all of the CRE borrowers. That is something legacy NYCB did not do. And when we look at the '24 statements that we've been analyzing in '25, we're 93% of the way through. 80% of them are stable, 7% showed improvement, 13% have shown some decline.

So almost 90% are stable or improving, which is a good metric. You look at the quantity of C&I originations that Rich talked about. I think what is interesting here is the average loan size is $25 million. We're not taking outsized positions in any one name. And so that mitigates you from a risk point of view as well. And then when we think about our risk process, we have credit specialists in the first line. You've then got the second line, which is credit. Credit has the ultimate veto power. So they can say no to anything. And then you have the third line, which is loan review. So we never take our eye off the ball as it relates to credit because as we all know, that is something that can hurt you. And we look at it in lots of different ways to make sure we're not putting the bank under any undue risk from a credit point of view.

Got it. And I guess maybe just pivoting to the net interest margin outlook. I think it implied about 40 to 50 basis points of expansion. So I'm assuming some of that's coming from these nonaccrual loans going away. That's some component of the margin expansion.

Yes. So there's multiple components, and we're in a sort of fortunate position where there's multiple levers in terms of our margin expansion. First of all, over the next 2 years, we have $14 billion of multifamily and CRE loans that are either resetting or maturing. And the weighted average coupon of those is less than 3.7%. So we just sit here and a patient. Those loans are going to hit their reset or maturity dates.

And if they reset contractually with Flagstar, they reset a 5-year flood plus 300 or prime plus 275. So you get an immediate lift in NIM if they reset and stay with Flagstar. If they pay off, we can leverage those funds to invest in Ritchie's growth or pay down wholesale borrowings. So Ritchie's growth and the C&I loans that he's bringing on are typically coming on at a spread to SOFR of 220 to 230 basis points. So as we further grow that book, you're going to get NIM expansion there. And then the other things on the asset side would be as we're originating new CRE loans, not in New York, but in the Midwest, California, South Florida, other parts of our footprint, they're typically coming on at a spread to SOFR of 200 to 225, and these are floaters. They're not fixed rate.

The final thing on the asset side, as you alluded to, is as we reduce those nonaccruals, then we will use those funds and invest in interest-earning assets. So that comes immediately back into NIM. On the liability side, we've paid down over $20 billion of wholesale borrowings over the last 15 months, high-cost wholesale borrowings. So that has reduced our funding cost significantly. And we've done a nice job of reducing the cost of interest-bearing deposits.

Even without Fed cuts, we were bringing the cost of interest-bearing deposits down as retail CDs were maturing, we were keeping them, but rolling them into lower cost CDs. With the Fed cuts, we've targeted and we're hitting a 55% to 60% beta. And that's something that we're -- we have been very surgical and focused on is how do we reduce the cost of our interest-bearing deposits even without Fed cuts. And I think you'll continue to see that as we move throughout '26 as well. So there's multiple levers that we're pulling to achieve that NIM expansion.

Got it. That was clear. And I guess in terms of another lever, -- you've done a lot on the cost side in terms of optimization, cutting costs. As we look forward, I think your guidance still implies expenses will be somewhat lower in '26 versus where you ended fourth quarter on an annualized basis. Just where are the cost saving opportunities remaining at the bank now?

Yes, sure. So I mean, the team has done an unbelievable job. We've taken $700 million of costs out of the organization if you compare full year '25 to full year '24. And it's across a series of initiatives. So our headcount when we started on this journey was 9,200. We're at 5,500 today. You think of vendor costs that we've been able to reduce significantly, real estate optimization, FDIC expenses, we've outsourced or offshored noncore back-office functions. And so that is how we've sort of achieved the $700 million to date. Looking forward and looking at Q4, Q4 of '25 had some onetime expenses in there.

So we had some short-term incentive compensation, the associated taxes, and we had $4 million of severance costs related to a reduction that occurred 2 weeks ago. So that's about $25 million. If you take that out of Q4 and then look at the run rate, we are at the top end of our '26 guidance. But as we look through '26, we feel that we can gain further efficiencies, particularly as it relates to FDIC expenses continuing to come down as technology projects come online, that will enable us to get more efficient because we've still got a lot of manual processes in certain areas. There's some real estate optimization, but it's something that we continue to be myopically focused on. You have to be with costs. And we feel very comfortable that we'll be within the 26% range that we've provided.

I guess just last couple of questions. One, in terms of -- from a regulatory standpoint, I mean you're well below the $100 billion threshold today, but you will cross that at some point. Are you expecting additional clarity from the Fed around what the $100 billion threshold does or does not mean over the coming months?

Yes. So a couple of things on that. We didn't deliberately get below $100 billion. It was more happenstance as we've restructured the balance sheet. And as you say, our plan is to get back above the $100 billion by '27. We do think at some point that the demarcation line will get moved higher. But our risk infrastructure and the rest of our infrastructure has been built as though we are a Category 4 bank, and we think that, that provides certain competitive advantages.

I think from a regulatory point of view, the biggest thing for me is this materiality threshold that has been talked about and introduced because I think looking at it in a more pragmatic way is the right way to regulate. -- when you're doing things at scale, there are things that can go wrong. But if it isn't having a material impact, yes, you need to fix it. But you can actually tie yourself in knots and spend a lot of money and focus on fixing something and then you lose your focus on what you're trying to do. So I think the materiality threshold and the way that, that has been introduced and talked about is, for me, the most helpful thing from a regulatory point of view that I've heard.

Got it. And just I guess, moving to capital. So you have a -- you had a lot of capital at the end of the year at about 12.8% CET1. You're going to accrete a lot of capital, it sounds like in the near term. I think you've talked about like buybacks maybe something that you might look at in the back half of the year. Just talk to us in terms of is there an aspect to like just reducing the nonaccrual loans? Are there things that you're watching before you initiate buybacks? What's holding you back today?

Yes. I think, look, we were profitable in Q4. I think we want to show we can do it again. We want to get the bankruptcy behind us that we talked about, and I think we're pretty close to doing that. I think, look, we obviously want to use the capital to grow the balance sheet. That is the first sort of thought and what -- where we want to invest that capital because if we execute on the plan we've laid out, we will create a lot of value for our shareholders given where we're trading at a discount. We're trading at 82% of book, 90% of book when you factor in the warrants. Our peers are trading at anywhere from [ 1.5 to 1.7 ].

So that's the valuation gap that we are trying to solve for. And we believe we've laid out a plan that goes through the end of '27 that allows us to do that. And a big part of that is growing the balance sheet, and that's where we want to use the capital. Having said that, we do have a lot of capital, and we can likely do both. And I think sometime later this year, if we're still trading at a discount to book, and we're sitting on almost 13% CET1, then I think it's a real conversation that we'll have with the Board about should we look at doing a buyback here, maybe this is a good way to return value to shareholders.

Got it. I guess maybe one last one, just to wrap things up. As you fast forward maybe over the next 2 to 3 years, you've laid out the financial road map very clearly in terms of where you expect the ROE to go, earnings to go. What are the other major milestones? Like how do you think this franchise would look different in 2028 than what it does today?

Yes. I mean we want to be the best-performing regional bank in the country. It's as simple as that. If you think about our strategic plan, there are 3 pillars. It's sort of -- it's profitability, it's being customer-centric and offering the best customer experience in the industry. And it's obviously risk and compliance, not putting the banker undue risk. And so everything we sort of look to do, there's a lot behind it, but we try and keep it focused and simple. And in terms of 3 to 5 years, we want to be the best regional bank. And as I mentioned just a few moments ago, the opportunity for us is closing that valuation gap that we have to our peers. If we execute on our strategic plan by the end of '27, our profitability, our capital, our liquidity metrics, they look like all of our peers. And so if we are there at the end of '27, then there's no reason why we're not trading like our peers are. And if we're doing that, we've created a ton of value for our shareholders in a short period of time.

And then the other part of being relevant and where we want to be in 3 to 5 years is being more market present across the markets that we aspire to be more meaningful in. So we will be, as a leadership team, we will have a certain level of gratification if we look back 3 to 5 years from now, and we see how relevant we are in the commercial banking franchises that we are building right now with the team members that we're building, we're still attracting talent. We're going deeper in those communities and those geographies where Flagstar has a presence, first and foremost. And we're going deeper and wider in the industry segments that we seek to be relevant in, not just in my world, but in commercial real estate and consumer banking.

There's just a lot of franchise building that is the unique opportunity that is Flagstar. And I view this as the most special situation in the banking universe right now because we have this opportunity with our capital position, with our improving balance sheet and with the talent that we're attracting to really build something special and to make a really big impact in the market. And frankly, I'm a big fan of M&A as long as it's not us doing it or being involved in it. We have this incredible unique opportunity in many of our geographies to take advantage of dislocation that happens related to M&A. So by not being distracted by M&A, we're finding opportunities where banks will be distracted with M&A, focused on integration and other kinds of internal areas of focus. And we're -- we expect to be able to take advantage of bankers that may fall out of M&A integration situations.

We've already seen that in a number of our geographies, and we expect even more with some of these more recent announcements. And we expect clients to potentially be in motion as well because their banker may have just gotten a new assignment and the new organization, and that may have been the glue that kept that relationship at an institution, and we may have an opportunity to get relationship primacy with that client. So we see opportunities in the current M&A landscape with a constructive external economic landscape with a realistic regulatory environment, but with M&A happening for us to gain market share by acquiring really talented bankers. -- and by gaining market share and relevancy with clients and client engagement. So 3 to 5 years from now, we expect to just be a bigger version of ourselves with a lot more durable business mix and a lot more depth in the geographies and the business units that we're building.

That's a great point, given that one of your New York peer did decide to sell itself to a foreign bank. So I assume that creates some opportunities looking forward for Flagstar.

We love competitor M&A.

Excellent. On that note Rich, Lee, thank you so much.

Thanks, Ebrahim. Appreciate you having us.

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Bank Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.

Thank you, Regina, and good morning, everyone. Welcome to Flagstar Bank's Fourth Quarter 2025 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 results for the quarter and the full year ended December 31, 2025. 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, ir.flagstar.com.

Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Bank may include forward-looking statements within the meaning 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. Additionally, when discussing our results, we will reference certain non-GAAP measures which excludes certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. With that, now I would like to turn the call over to Mr. Otting. Joseph, please go ahead.

Thank you, Sal. Good morning, everyone, and welcome to our fourth quarter 2025 earnings conference call. We are pleased with the bank's performance throughout 2025, and especially during the fourth quarter. As all of you know, after 2 challenging years, I'm proud to share that we returned to profitability in the fourth quarter reporting adjusted net income of $30 million or $0.06 per diluted share compared to a net loss of $0.07 per diluted share in the previous quarter. 2025 was a year of significant momentum for the bank, which accelerated during the fourth quarter. We continue to successfully execute on our strategic plan to transform Flagstar Bank into one of the best-performing regional banks in the country. One with a diversified balance sheet and revenue streams and strong capital, liquidity and credit quality. While returning to profitability is a significant milestone, but it is only one of several positives during the quarter.

Turning to Slide 3 of the investor presentation, we'll highlight those. First, our return to profitability during the quarter was driven by several factors including growth in our net interest income, coupled with NIM expansion and disciplined expense management. This resulted in a $45 million increase in pre-provision net revenue and positive operating leverage of approximately 900 basis points. Second, we had another strong quarter of net C&I loan growth up a 2% on a linked quarter basis or about 9% on an annualized basis. Third, we continue to reduce our overall CRE exposure, mostly through par payoffs resulting in an overall $2.3 billion reduction in multifamily and CRE loans and a CRE concentration ratio now falling below 400% and fourth, our credit quality profile continued to improve as nonaccrual loans declined, while we also had a decrease in net charge-offs and the provision for loan losses.

Moving to Slide 4. After 2 years of building a solid foundation for growth, we expect that in 2026, our earning power will continue to strengthen with a full year of profitability driven by continued growth in net interest income and margin expansion, along with a continued focus on managing our expenses lower, leading to a positive operating leverage in 2026. We remain focused on further improving the bank's credit profile as we proactively manage our CRE exposure lower through par payoffs and opportunistic loan sales, reducing nonaccruals and a lower level of charge-offs. We will continue to diversify the loan portfolio through growth in non-CRE loans, especially through our C&I lending platform. And lastly, we will generate deposit growth across various business lines while keeping our discipline on pricing.

On the next slide, we highlight the road map we employed to solidify the balance sheet and reposition the bank for growth. We built a strong capital position as our CET1 capital ratio has increased by almost 400 basis points, now ranking us amongst the highest, best capitalized regional banks amongst our peers. We have also fortified our ACL through a rigorous credit review process and have increased the ACL up to 1.79%, also amongst the tops of the regional banks. We significantly enhanced our liquidity position as cash and securities have increased to 25% of total assets, and we reduced our reliance on wholesale funding, lowering the cost of funds and boosting our net interest margin. And during the year, we reduced our brokered deposits almost by $8 billion.

We believe that our strategic initiatives over the past couple of years have provided us with the opportunity to drive sustainable growth and profitability going forward. The next 2 slides highlight the continued momentum and tremendous progress in our C&I business. Under Rich Raffetto's leadership we've built in a relatively short period of time of about 15 months, a very powerful origination team across America. As you see on Slide 6, you can see that the C&I lending had another strong quarter in commitments and originations. As total commitments increased 28% to $3 billion, while originations increased 22% to $2.1 billion. This is led by the bank's 2 primary strategic focus areas, our specialized industries and corporate and regional banking group.

On Slide 7, you'll see the overall C&I growth was $343 million or 2% compared to the third quarter, our second consecutive quarter of net C&I loan growth. This was driven by $1.5 billion in combined growth in these 2 businesses. One of the things that you also can observe on this slide is that we derisked a number of the businesses, as we've talked about in the past, where either because of hold size or credit quality, we've decided to reduce those exposures or exit those credits. Alone in 2025, it was roughly about $4 billion of actions that we took and we do see the businesses of like asset base and equipment finance and mortgage starting to be accretive to our loan growth going forward. Turning now to Slide 8. You can clearly see the protective of our adjusted EPS as we successfully executed on all our strategic initiatives, resulting in the first profitable quarter since the third quarter of 2023. With that, I now will turn it over to Lee to review our financials and credit quality.

Thank you, Joseph, and good morning, everyone. We're obviously very pleased with our performance in the fourth quarter and for the full year in 2025. We're executing on our strategic vision and have returned the bank to profitability as we said we would do. we feel we're very much on track to make Flagstar one of the best-performing regional banks in the country over the next 2 years. Our unadjusted pre-provision pretax net revenue improved $51 million quarter-over-quarter, while our adjusted pre-provision pretax net revenue improved $45 million versus Q3. We achieved NIM expansion of 14 basis points quarter-over-quarter after adjusting for a onetime hedge gain of approximately $20 million. We paid off another $1.7 billion of high-cost brokered deposits and $1 billion of club advances as we further reduced our funding cost and continue to demonstrate excellent cost control.

On the credit side, quarter-over-quarter, we saw a reduction in criticized and classified loans of $330 million, including a reduction in nonaccruals of $267 million, while net charge-offs declined $26 million, and the provision decreased $35 million. CRE par payoffs were again elevated at $1.8 billion, of which 50% was substandard, and we ended the year with 12.83% CET1 capital. almost $2.1 billion pretax above the bottom of our targeted operating range of 10.5%. We're thrilled with the quarter and fiscal 2025, and are excited about what we will accomplish in 2026 and beyond. Now turning to Slide 9. This morning, we reported net income attributable to common stockholders of $0.05 per diluted share. There were only a couple of notable items in the fourth quarter. First, our investment in Figure Technologies was revalued $9 million higher than the value on September 30.

Second, we accrued $4 million in severance costs for FTE reductions that occurred in January 2026. Therefore, on an adjusted basis, after also excluding merger expenses, we reported net income of $0.06 per diluted share, significantly better than last quarter and above consensus. On Slide 10, we provide our updated forecast through 2027. We slightly adjusted our net interest income guidance for both 26 and 27 as a result of higher payoffs and a smaller balance sheet for 2026 is now forecast to be in the $0.65 to $0.70 range and EPS for 2027 is forecast to be in the $1.90 to $2 range. On Slide 11, we provide an overview of the expected balance sheet growth in 2026 when compared to year-end 2025-point to point. Another highlight this quarter was the double-digit increase in net interest margin. Slide 12 shows the trends in our NIM over the past several quarters.

Net interest margin improved 23 basis points quarter-over-quarter to 2.14% when including a gain of $20 million for the hedges tied to long-term flip advances that we restructured at the end of the quarter. Excluding this onetime benefit, NIM was 2.05%, still a 14 basis point increase from the third quarter. Turning to Slide 13. Costs remain well controlled as core operating expenses declined approximately $700 million when comparing full year $25 million to full year 2024. The modest linked quarter increase was mainly the result of higher short-term incentive compensation and associated taxes. Slide 14 shows the growth in our capital over the past 5 quarters and the strength of our CET1 ratio up 12.83%, our CET1 ratio ranks among the best relative to our regional bank peers. And at this level, we have over $2 billion in excess capital pretax or $1.4 billion after tax relative to the low end of our target operating CET1 range of 10.5%.

Slide 15 is our deposit overview. Like last quarter, we further deleveraged the balance sheet by paying down over $1.7 billion of brokered deposits, which had a weighted average cost of 4.4%. We also paid down $1 billion of advances with a weighted average cost of 4.3% and saw our mortgage escrow balances declined $1.4 billion, which was typical seasonality as taxes and insurance balances are paid out at the end of the year. In addition, approximately $5.4 billion of retail CDs matured with a weighted average cost of 4.29%. We retained approximately 86% of these CDs and they moved into other CD products that were approximately 45 to 50 basis points lower than the maturing product. In Q1 2026, we have another $5.3 billion of retail CDs maturing with a weighted average cost of 4.13%. The deleveraging actions, CD maturities and other deposit management strategies have allowed us to reduce interest-bearing deposit costs 26 basis points quarter-over-quarter.

We continue to actively manage the cost of our deposits and are performing in line with the 55% to 60% target beta on all interest-bearing deposits with the Fed cuts. Slide 16 shows our multifamily and CRE payoffs for the quarter and the full year. We continue to experience significant par payoffs of approximately $1.8 billion, in the fourth quarter, of which 50% were rated substandard, including the disposition of the previously disclosed $253 million sale in October. -- approximately $244 million of this quarter's payoffs were multifamily greater than 50% rent regulated. We continue to see strong market interest for multifamily loans from other banks and the GSEs. The par payoffs are also leading to a substantial reduction in overall CRE balances and in our CRE concentration ratio total CRE balances have declined $12.1 billion or 25% since year-end 2023 to about $36 billion, aiding our strategy to diversify the loan portfolio to a mix of 1/3 CRE, 1/3 C&I and 1/3 consumer.

In addition, the payoffs have led to a 120 percentage point decline in the CRE concentration ratio to 381%. The next slide is an overview of our multifamily portfolio which has declined 13% or $4.3 billion on a year-over-year basis. Our reserve coverage on the overall multifamily portfolio of 1.83% remains strong and is the highest relative to other multifamily focused lenders in the Northeast. Furthermore, the reserve coverage on those multifamily loans where 50% or more of the units are regulated is 3.44%. Currently, we have about $12.9 billion of multifamily loans that are either resetting or contractually maturing between now and the end of 2027. And with a weighted average coupon of less than 3.7%. If these loans pay off, we can reinvest the proceeds in C&I or other loan growth at market rates or choose to pay down wholesale borrowings. And the borrowers stay with Flagstar, the reset rate is significantly higher than the existing rate, which provides a NIM benefit.

On Slides 18 and 19, we have once again provided significant additional information on our New York City multifamily loans, where 50% or more units are regulated. This tranche of the multifamily portfolio totals $9.2 billion as an occupancy rate of 98% and a current LTV ratio of 70%. The approximately 53% or $4.8 billion of the $9.2 billion are pass rated and the remaining 47% of $4.3 billion are criticized or classified, meaning they are either special mention, substandard or nonaccrual. Of the $4.3 billion, $1.9 billion in nonaccrual and have already been charged off to 90% of appraisal value, meaning $355 million or 16% has been charged off against these nonaccrual loans. Furthermore, we have also added an additional $91 million or 5% of ACL reserves against this nonaccrual population, meaning we have taken 21% of either charge-offs or reserves against this population.

Of the remaining $2.4 billion that is special mention and substandard loans between reserves and charge-offs, we have 6% or $150 million of loan loss coverage we believe we're adequately reserved or have charged these loans off to the appropriate levels and with excess capital of $2.1 billion before tax we think we're more than covered were there to be any further degradation in this portion of the portfolio. Slide 20 details our ACL coverage by category. The $43 million reduction in the ACL was largely driven by lower health reinvestment balances, a better economic forecast and higher recoveries. Our coverage ratio, including unfunded commitments remained flat at 1.79% quarter-over-quarter. Our ACL reserve at 12/31 also includes adjustments for the 1 borrower in bankruptcy, where the auction process was recently finalized and confirmed by the bankruptcy court. We expect to close the sale of these properties before the end of the first quarter.

On Slide 21, we provide additional details around our asset quality trends. All of our credit quality metrics trended positively during the fourth quarter. Criticized and classified loans decreased $330 million or 2% on a quarter-over-quarter basis and were down $2.9 billion or 19% since the beginning of the year. Our net charge-offs decreased $27 million or 37% to $46 million compared to the previous quarter. and net charge-offs to average loans improved 16 basis points to 30 basis points. Nonaccrual loans were $3 billion, down $267 million or 8% compared to the prior quarter. Included in this $3 billion nonaccrual amount are the loans tied to the bankruptcy I referenced earlier, which we expect to close the sale on before the end of the first quarter. At the end of the quarter, 30- to 89-day delinquencies were approximately $988 million, an increase of $453 million from the previous quarter.

I will point out that the biggest driver of this increase is the additional day or 31st day of December versus 30 days in September. This accounted for $410 million of the increase and as of January 26, approximately $690 million or 70% of these delinquent loans have been brought current. Furthermore, $298 million of these delinquent loans at 12/31 were driven by 1 borrower who pay subsequent to the month end and has done so once again. bringing his account current as of Jan '26. As we reported last quarter, in the month of October, we sold approximately $253 million of these borrowers' loans, reducing our exposure in this 1 name. We're finalizing the review of the 2024 annual financial statements for all CRE borrowers. And today, we've completed the review on approximately 93% of loans of the 93% reviewed 80% are stable, 7% have improved and 13% have declined. So almost 90% are stable or improving.

All of this has been considered as part of our ACL analysis. Concluding on Slide 22. Since the beginning of 2024, and we have proactively managed our CRE exposure lower by over $12 billion or 24% through par payoffs, net charge-offs, amortization and other dispositions. We have also increased our ACL coverage against the remaining CRE portfolio during this time. This significant derisking, along with our solid capital position, strong liquidity and an expense optimization program has created the solid foundation for us to grow and be successful. We continue to deliver on our strategic plan and are excited about the journey we're on and the value we will create for our shareholders over the next 2 years. With that, I will now turn the call back to Joseph.

Okay. Lee. And before moving to Q&A, as I stated at the beginning of the call, we are extremely proud of our performance in 2025 and returning to profitability during the fourth quarter. This milestone reflects discipline and hard work of our entire team. We made a difficult but necessary decisions that strengthened our balance sheet, diversified the loan portfolio, lowered our cost we thoughtfully invested in our C&I and private banking businesses along with our IT and risk management infrastructure. I'd like to thank our executive leadership team and all the teammates for their dedication and commitment to the organization and our customers. I'd also like to thank our Board of Directors for their invaluable advice and support. As I said, I think we probably set a record for Board meetings last year. And now I'd be happy to turn it over to the operator to open up for questions. Thank you.

[Operator Instructions] Our first question will come from the line of David Chiaverini with Jefferies.

So I wanted to start on NII. I saw that you lowered it by $100 million. Can you talk about the drivers behind that? I'm assuming it's the higher payoff activity, but any detail there would be helpful.

Yes, you're exactly right, David. It's the higher payoff activity. particularly as it relates to multifamily and CRE loans. And we use that excess cash to further delever the balance sheet. And as I mentioned, we paid down $1 billion of flow $1.7 billion of brokered deposits. And then we saw $1.4 billion of mortgage escrows exit in Q4, which is seasonality because they would see escrow deposits, which is when they usually go out and then they build throughout the rest of the year pay out in the fourth quarter. And so that reduction -- the other thing that we -- I will point out is you've heard us talk about tall trees as it relates to that legacy C&I book. And what we mean by that is we have some large oversized exposures in individual names.

We're talking $250 million, $300 million. and we've rightsized a lot of those in order to bring them in line with our sort of risk tolerance levels and how we think about things today. And so you've seen run off, particularly in the ABL and dealer floor plan space and also the MSR space. I would say that we are mostly through that and so I think what you're going to see is higher net C&I growth starting in the first quarter here because we are mostly through that rightsizing of those to trees. But coming back to your initial question, it's those additional par payoffs that have effectively reduced the assets. We used the excess cash to sort of reducing NIM, and that's rolled through into '26 and '27.

Great. And sticking with the payoff activity, you're guiding $3.5 billion to $5 billion for 2026. How much of that -- to the extent you have line of sight on it, how much of that do you expect to be substandard?

Well, I commented on the $1.8 billion this quarter, which was 50% substandard. And we have been throughout 2025, we've seen 40% to 50% of those par payoffs be substandard loans. So we don't see any reason for that to change as we move through.

Yes. David, in that regard, I mean, as you have followed us, we originally were projecting those payoffs to be in the $700 to $800 million. But as those loans come up, our pricing rollover is higher -- significantly higher than market and so it motivates to align with our goal to reduce our real estate but it motivates people to take those loans to other institutions or to the agencies. Our next question will come from the line of Dave Rochester with Cantor.

Just looking at, I think, Slide 11 here, you've got some great loan growth planned for this year. I just wanted to hear about how comfortable you are on the funding side of things with funding this with core deposit growth.

Yes. Let me -- yes, go ahead, Lee.

Yes, I was going to say let me go and then Joseph can jump in. Yes, we feel pretty good. As we think about core deposit growth, I think there are a number of avenues that we're pursuing. Obviously, we think we can grow deposits from our 350 bank brand shares, we're in good geographies across the country, as you know. But we also are going to leverage these new C&I relationships. So as you've seen us grow the C&I business very successfully under Rich Raffetto, as Joseph mentioned, we believe that we will be able to leverage those relationships, not just to bring in deposits, but bringing more fee income as well. And then the final piece is the private client bank, and we feel that we can leverage deposits from our private client bankers as well going forward. And so that's how we're going to drive core deposit growth. as we move forward through '26 and into 2027 as well.

Great. Appreciate that. And then just on the capital, you mentioned $1.2 billion after tax -- of excess capital. You guys are still obviously trading at a discount to your adjusted tangible book value per share adjusted for the warrants. It sounds like you're making faster progress than maybe you expected even just a few months ago. You mentioned all the all trees that you had then it sounds like you're pretty much at the end of that process of trimming, meaning C&I growth ramps up earlier, faster you're making a lot of progress on the credit front, which is great to see and profitability is only going to follow from that. It seems like you're going to be in a great position to buy back your stock with all the fundamentals going the way you need and you've got a ton of excess capital. I know you talked about a potential Board meeting coming up in April. What are the prospects of you guys coming out strong on that and taking advantage of the opportunity here which I would think is probably not going to be here for very long to buy back your stock.

Yes. What we've kind of communicated is that the variables really are, as you described, how much balance sheet growth can we get in the targeted areas how quickly we see the nonperforming cure, which we are forecasting in total that in 2026, we'll be down $1 billion. And I think what the Board will look for with management's recommendation, as we look at those numbers coming together in 2026, how do we deploy that excess capital. And I would tell you, it's definitely discussion point amongst the board. And I would say, as we move forward through the year, it would be something we would look favorably if we're not deploying the capital.

Our next question will come from the line of Casey Haire with Autonomous.

Yes. Following up on Slide 11, another follow-up on the funding strategy. So Lee, I heard you sound pretty confident on the deposit growth. Just wondering where do the wholesale borrowings as a percentage of assets at 13%. Where does that go in your budget?

Yes. So we -- as I mentioned, we paid another $1.7 billion of brokered deposits of -- we only have $2.3 billion of brokered deposits remaining as of 12/31. So I mean we are writing probably better than other banks. And we've done a nice job over the last 18 months of reducing our exposure there. As it relates to -- and I talked a little bit about the flood restructuring in my prepared remarks. The reason we did that was we swapped out long-term flood for short-term flub and use some excess cash to pay off that or change out that $2 billion of long term. So we are now mostly sitting on short-term flub. And that is the opportunity for us in 2026 and beyond to further deleverage wholesale borrowings by paying down the club advances because we also get an FDIC benefit from that. So we think and we expect to continue to pay down the flub advances as we move through 2026 with any excess cash.

Got you. Okay. And then just switching to expenses. The expense guide of $1.5 billion to $1.8 billion, your current run rate, you're about $1.85 billion. So there's more expense rationalization coming in 2016? And just any color around that?

Yes. So there's a couple of things that I'd point out. And again, I mentioned this in my prepared remarks, we had additional incentive compensation and associated taxes in Q4. We also had severance of $4 million in the fourth quarter as well. And we -- the severance was related to some reductions. These are tough decisions that we executed on earlier this month. And so as I think about our sort of Q1 I we're probably more like , and this is excluding the amortization in the $4.55 to $4.65 range. And then you will see continue to decline after Q1 because remember in Q1, expenses are typically elevated because of FICA costs that are sort of front-end loaded in the year. But we continue to work through a number of other cost optimization initiatives.

And we think you'll see further reductions in our FDIC expenses. We've got technology projects that are coming on stream that will allow us to get more efficient as we move forward. as well. And then there's still some real estate optimization as it relates to a couple of operating centers that we have. So I feel very comfortable, Casey, that we will be within the range that we've guided to, and you will continue to see a reduction in expenses as we move through the year.

Our next question will come from the line of Manan Gosalia with Morgan Stanley.

Joseph, maybe a follow-up to the capital question. I know you noted that the priority for capital return or the priority for capital is to deploy for organic growth but I guess you also noted that the balance sheet will be lower given the CRE paydowns. Is there anything that could cause you to hold on to the excess capital for a little bit longer? Like are you maybe -- is it the rating agencies? Is it rent freezes and NYC? Is it maybe the C&I loans are coming on at a high RWA. Can you just help us think through what scenarios you would hold on to that excess capital?

Well, I think the -- first of all, on the balance sheet, we do feel this quarter will be the low point in the quarter for the size of the balance sheet and that should grow going forward from here. The other thing, I think, limbs that we've been looking at, and I think this quarter, we saw improvement was we've taken on an initiative to move the nonperforming loans out of the bank. And we want to see that, that initiative continues to be successful and we get the nonperforming loans down.

The other element that we do in '18, 1 of the reasons we think we have a very conservative view on our credit quality as we do this 18-month look forward on the loans to make sure what would the underwriting look like, both at the current coupon and what it would look like if they reset to market -- and that has historically, for us, drove a lot of loans into the special mention and to the substandard area. So I think as we can get some visibility around reducing all of that and as Lee commented, we have $9 billion of maturing in 2027. And we're about halfway through that because think about the 18 months. So we're -- this quarter, we're into the third quarter of 2027 looking at those loans that we're in a position to really understand what does that bubble look like coming through? And does it have any impact to the credit quality for the company. We haven't seen a major shift, but that's one area that we're keeping our eye on.

Got it. Very helpful. And then just maybe on the New York multifamily portfolio. So given that we could get rent freezes in New York in the near term, any updates on what you're hearing from your multifamily borrowers in the city?

There's just a lot of dialogue going on about like how can we I think, collectively come to resolution between the new city government and owners of properties and banks that finance those about resolution. We are we look what would be the impact if this year, it seems like the rent board will be former Mayor Adams tilted and they have a history of looking at kind of the overall expenses and making adjustments to revenue accordingly. We've started to spend a lot of time looking out like forward thinking is if those rents were flat for 2 or 3 years and expenses went up a couple of percent, the impact on the portfolio.

And so that's kind of where we're spending most of our time. But as Lee commented on, we have not seen a decline in liquidity. In fact, we saw acceleration of liquidity, taking us out of those loans in multifamily and regulated in the fourth quarter. So -- but we -- obviously, we spend a lot of time looking at various aspects of that portfolio to make sure that we understand our risk. And we were kind of early on in our process of effectively underwriting with that window out 18 months, both kind of what credit marks and interest rate marks would look like as those loans start to come up for maturity or repricing.

And Manan, I would just add to what Joseph said, I think the 2 key points that we made first of all was we haven't seen any slowdown in liquidity. Looking at the par payoffs we experienced in Q4, so that's number one. Number two, obviously, the work we did in 2024, where we re-underwrote that book and took both Ray and credit marks and we had the $900 million of charge-offs. But the other thing as well as sort of as we look forward, we have started looking at what sort of exposure might we have to the fines, violations, lens. We're just not -- we're not seeing much as it relates to that tie to app, but we don't have much exposure there was a landlord list that came out recently that we took a look at. And again, we don't have significant exposure there either. And we have the annual financial statements that we collect. And as I mentioned, we're 93% of the way through the '24 financials and 80% of stable, 7% have improved, 13% had deteriorated. So the vast majority are stable or improving. So there's a lot of different things we're doing to triangulate everything as it relates to that portfolio.

Our next question will come from the line of Bernard Von Gizycki with Deutsche Bank.

Just on a borrower that went through the bankruptcy process, Lee, can you just update us on some main takeaways like on the economics? How much of the loan you have left? I think you mentioned some of the sales you had on there it seems like it's mostly reserved for already from your prepared remarks, the new yields and you thought from improved credit profile. Any additional provided? Just any color you can share on that process on that loan position?

Yes. So first of all, as we've said before, we do not get into the specifics as it relates to customer loans and deals, transactions. We just don't do that in a public forum. I think what I would say and sort of just reemphasize is the auction was completed. It was confirmed, and we expect that to close before the end of the first quarter. what we've got in all of those loans today are in our nonaccrual balance and there's probably about $450-plus million of nonaccruals as it relates to that particular bankruptcy case. And anything that we do going forward would be an accruing loan. So I think that's how we would look at it. And as I said in my prepared remarks, everything related to that bankruptcy. So any additional charge-offs or that when they did we took in the fourth quarter, so there is nothing that is going to be taken in Q1 as it relates to that because we took what we needed to do in the fourth quarter and previous quarters.

Yes. In addition to lease, I would just add, there were very -- we were almost on top of the mark for where we knew the bid was. So there wasn't a material add to reserves for that particular transaction. But you can you can also run the math of like you have a nonperforming loan of that dollar amount, and you're going to turn that into a performing loan. It obviously is -- will be positive from a net interest income perspective.

Great. And then just on re-regulated portfolio on Slide 19, the $4.3 billion of criticized and classified I'm just wondering, of the $1.9 billion, how much of that has repriced as of today? And what percentage does that go through by the end of 2026. And I'm just wondering, similar repricing for that $2.4 billion of the special mention loans.

Yes. So I'm looking at the $4.3 billion in total, 54% of it is already repriced. And then another 36% of that will reprice within the next 18 months. So 90% of it has already repriced or will have repriced in the next 18 months.

Our next question will come from the line of Jared Shaw with Barclays.

This is Jon Rau on for Jared. just thinking about the new loans being added to the balance sheet in C&I and then with CRE originations starting back up again, what the new like roll-on yield is for those? And the floating versus fixed mix on those loans?

Yes, yes. So the C&I loans we've obviously got a number of C&I verticals. And the loans are coming on at a spread to sofa of anywhere from $175 million to $300 million on a blended basis, you're probably in that 230 basis point range. As we're looking at the new CRE growth, I would say that the spread to sofa on those loans is more like $200 million to $225 million. basis points. So that's how we would think about the spreads for the new originations.

Okay. Great. And then just thinking ahead, to the governor election later this year in New York. Any -- I guess, first, do you expect any potential action on the 2019 law change related to rent regulated in advance of that? And I guess, just broader thoughts on what the election could mean for that?

Yes. I think that's something that will take its ordinary course. On the 2019 legislation, I think there's -- now that we've had a number of years to kind of look back on that. I think there are certain parts of that, that I think there could be common ground on how do we fix the issue. And 1 of the areas is these go units where the legislation effectively made it uneconomic to remodel units that are vacated. And so what you've had is a number of instances where landlords just keep them vacant. Those are estimated 50,000 or 60,000 units and so I think there's a lot of talk about, is there an economic model that could revise that rule the way it was written to make those available to come back on the market and reimburse the owners. But the rest of that, I think we're going to have to see ultimately what direction that takes and how much discussion? I do know there's a lot of dialogue now occurring between property managers, owners of properties in the city. And hopefully, we all feel that we want people to live in safe and sound environments are supportive of continued correction of any violations amongst our portfolio. We're now watching that very closely. And we do expect borrowers when they have violations to cure those.

Our next question will come from the line of Chris McGratty with KBW.

Maybe for you, the $1.1 billion of par payoffs I think it was $1.2 billion or so last quarter. I guess my question is a degree of confidence in the updated balance sheet, especially if the forward curve comes through and you get a couple of cuts and maybe prepays pick up a bit.

Yes. I mean I think we feel good about the PAR Pay of sort of continuing as we move forward. Now, as Joseph mentioned, when we came in to '25, we thought that the par payoffs would be around sort of maybe $800 million on average a quarter. And we've seen in excess of $1 billion a quarter in 2025. There's a lot of demand out there from other financial institutions and the -- and we think that, that will continue in 2016. What I would say, Q1, seasonality-wise, is typically the lowest quarter for par payoffs as we saw in 2025 and then it sort of picks up Q2, Q3, Q4. And we expect to sort of see a similar thing in 2026. And look, I think the forecast we have put forward in the guidance, we were using the rate curve as of the middle of December, it had 2 cuts June and September. And a declining rate environment is only going to help those borrowers refinance. So yes, I mean, look, I think we feel that we should be in that $1 billion ZIP code on a quarter on an average basis plus as we move through 2026.

Okay. And then Chris, I would just add that we've declared that we're going to begin to originate some CR. And this isn't a big dollar amount. We're talking about a couple of billion in originations in a year. Just as if we've seen the acceleration in the paydowns and obviously, that will be New York City multifamily. But as we look across our franchise in Michigan, California, Florida, markets sourcing opportunities in the commercial real estate will help to offset some of that outflow.

Great. And my follow-up, I guess, 2 parts, Lee, on the model. the risk-weighted assets, given the par payoffs and the nonaccrual resolution plus the growth, how do we think about just the cadence of RWA growth over the year -- and then also a help on the first quarter share count with the warrants and everything.

Let me start with the share count. So in Q4, the share count was [ 459 million ]. And then if you're looking at the sort of [ 26 million and 27 million ] you should be using around 473 million and then 479 million shares. So that's how we would think about the share count. In terms of the risk-weighted assets. So you've got to remember that as it relates to the multifamily and CRE book, first of all, the nonaccruals are 150% risk weighted anything that is sort of substandard special mention is 100% risk-weighted and so C&I loans coming on are typically 100% risk-weighted but it's not as if you are really losing 2 we've got obviously the 50% risk weight in our multifamily for the performers. But as we've mentioned, we've seen a lot of those standard loans pay off at 100%. We're looking to reduce our nonaccruals, which are 150%. So while we use capital as we grow the balance sheet, it's actually not as punitive as you may think for those reasons.

Our next question will come from the line of Janet Lee with TD Cowen.

I appreciate the Slide 11, where you indicated an average deal size for C&I being around $25 million, which is on a larger side for a typical regional bank, but probably not for you guys. Are some of these syndications? And are you able to share any other metrics on underwriting just given that as a newer segment for Flagstar?

So Janet, I think that we -- if you go back and look at Slide, -- and the top 2 businesses is where we're seeing most of the growth now in the specialized industries and the corporate regional commercial bank. And so each of these businesses have a little bit different characteristics. But the commercial, corporate and regional we target kind of mid- to upper middle market and lower corporate and in those particular categories, we shoot in a lot of instances that we are the primary bank of those relationships that we're generating. So it is really kind of a 1, 2 or 3 bank where we would look to lead that. In the Specialized Industries group, those are 12 industry verticals and as we've come into those, we've hired highly experienced people that have been in a lot of these industries for 25 or 35 years, we're getting into bilateral and some participations, but our goal in those instances also is to be in smaller bank groups where it's like oil and gas or health care, very few of those where you would have 20 banks, and we're just one of banks making a $30 million commitment to the transaction.

That is where our focus has been where we've entered into transactions like that, our people have direct relationships with the management. And it's obviously our goal to swim up the fish ladder, so to speak, in the importance to those companies. So we -- it's highly diversified the originations. And then when you get into the equipment finance, those are usually multibank transactions, but we may be the only bank financing their equipment finance. And then in the asset base, we also look to be the primary bank in those transactions. So it's a really -- it's business by business is the way I would describe that.

Yes. The other thing, Janet, that I would -- first of all, on the credit side, as Joseph has mentioned, we're not we've seen really good growth on the C&I side, but it's not because we're taking outsized positions in single names Far from it. The average loan size is sort of $25 million, $30 million. And so we're kind of managing the risk just in terms of the deal size Credit has final say on all loans that come on to the balance sheet. We have a first line review within the business as it relates to all credits that come on. Then you have the second line credit and then we have loan review in the third line. So we have a very, very robust process in place as it relates to assessing the quality of these loans before we bring them on. And then a couple of other things that I would say. We've talked about the spreads that we're typically seeing. So we're not giving the business away. We're sort of averaging a spread to sofa of $225 million, $230 million and so I think that's a good indication that again, we're not giving it away or doing sort of cheap deals. And we've typically seen a 70% utilization on these facilities as well. And I think that's another important metric that is worth emphasizing.

And just lastly, for a NIM guide of [ 240 to 260 ], which is a pretty wide range, I think you said also balance sheet is at a low point this quarter and you're assuming 2 rate cuts. It's sort of the midpoint of that range where your baseline expectation is what would put you at the higher ed versus lower end?

Yes. Well, Janet, it's a good question. As you know, we have a lot of moving parts as it relates to the NIM improvements. And what I mean by that is on the asset side, you do have that multifamily and CRE runoff. And I mentioned that if you look at what is running off in -- what is resetting, I should say, or maturing in 2 and there's about $5 billion, it has a weighted average coupon of less than 3.7%. So you've obviously got how much of that is going to reset and stay how much will ultimately pay off. You've got the C&I growth at the spreads that I mentioned. We're going to be originating new CRE loans as Joseph mentioned. And then we also expect to continue to grow that consumer book, particularly by adding residential 1 to 4 mortgages to the balance sheet. And then on the funding side, we've done a really nice job of reducing core funding or core deposit costs in Q4 and 2025, and we will continue to do that.

Even outside of the Fed cuts by leveraging some of the opportunities we have as retail CDs, mature, and we can roll them into lower-cost CDs. And then obviously, continuing to pay down wholesale borrowings, particularly the flood advances. I think that's the focus for us in 2016, given the good work we've done, bringing our broker deposits down to a level that is pretty consistent with other banks. So you've got all of those sort of contribute to the NIM. And the final thing I should have added is obviously reducing our nonaccrual loans which we're intending on doing as well. So you've got all of those sort of moving pieces. They all contribute to the improving NIM. But that's why we've got that range because you've got all those variables.

Our next question will come from the line of David Smith with Truist Securities.

On the C&I growth, just a clarifying question. You pointed to 125 relationship bankers doing 4 deals a year. So that will be 500 deals at an average deal size of $25 million or what are the offsets bringing C&I growth down this year to $6 billion to $7.5 billion, if you're mostly done rightsizing legacy loans I guess maybe is that like originations as opposed to like actual loans coming on the balance sheet, but it seems still not quite to the 6.75% ramp.

Yes, David, you have to realize that, that's the model we have with the people, but not everybody is going to achieve that 100%.

Okay. So that's not an average, that's like the target or so -- it's our target.

Yes. Okay. Is what I said. That's the target. But again, that's if everything goes perfectly, number one. Number two, while we're mostly done, I think in '26, the one portfolio where you will see some additional runoff will be the ABL and dealer floor plan. I think there's still some additional sort of runoff there. And then with C&I loans, you're just going to have the normal course sort of pay downs and people using the line, not using the line in amortization so you've kind of got that movement as well. And so I think all we're trying to -- what we're trying to provide people with here is a lot of people have questioned our ability to grow C&I at the numbers that we've indicated -- and I think when you break it down like we have -- when we're showing $3 billion of new commitments in Q4, $2 billion funded and when we're showing the number of customer-facing bankers that we have and what our expectation is, I think what we're just indicating is, look, this isn't as big a stretch as I think some people thought a few months ago.

Okay. And then just there's a lot of uncertainty, obviously, in the rate backdrop right now. We just got a new Fed share-denominated can you talk about what you see as the ideal rate backdrop for Flagstar when you think about the bank's asset sensitivity today and how that evolves if you plan over the next year or.

Yes. I would say we're pretty neutral from an interest rate sensitivity point of view, there is no doubt about it, though, a declining rate environment, it helps our multifamily borrowers and so we think that, that is beneficial. It will also -- we believe you'll see more mortgage activity as well and so we have an active and very good mortgage business that we feel will benefit from in a declining rate environment. So we sort of call it this belies model hedge that even though from a balance sheet point of view, we're pretty neutral. The business model, there are benefits that we will enjoy in a declining rate environment.

And is that a steeper curve still being better or just overall flatter given CRE has been a.

Yes. I think if the short end because the way we think about multifamily, it's sort of the 5-year and then obviously, mortgages at the 10-year so we'd be looking to sort of see an impact with a 5- and 10-year in particular, that would really benefit the multifamily and mortgage borrowers.

Our next question will come from the line of Anthony Elian with JPMorgan.

Lee, how are you thinking about NIM and NII specifically for 1Q after we back out the 9 basis points and $20 million benefit you saw from the hedge gains.

Yes. Well, I'm not sort of -- I haven't -- and we haven't deliberately given sort of quarterly guidance. But I think what I would say is as I mentioned, in Q4, when you back out that onetime gain, we were at 2.05% and you've seen a steady increase quarter-over-quarter. So we were up 14 basis points versus Q3. And our expectation is you will continue to see that NIM improvement quarter-over-quarter as we move through the year. So we're not getting sort of specific by quarter. We're giving that overall guidance for the year. But I mean, just looking at that guidance, I think you can expect us to continue on that positive trajectory quarter-over-quarter.

Okay. And then on Slide 11, so you're calling for year-end assets in the range of $93.5 million to $95.5 billion. But if I stretch this out, how are you thinking about assets for 27 just relative to the range that you gave last quarter, I think it was $108 billion to $109 billion.

Yes, yes. So we think that the balance sheet at the end of [ 27 million ] will be sort of more around $103 billion.

Our next question will come from the line of Matthew Breese with Stephens.

Popular slide, Slide 11. I was focused on cash and securities. So cash balances are still a bit elevated at 6.7% of assets down this quarter. maybe first, what drove lower cash balances? And then as we look ahead, what is the breakdown between cash growth and securities growth to get kind of that $2.5 billion midpoint of total growth there for the year?

Yes. So the reduction in cash was the deleveraging and, as I mentioned, we paid down the $1.7 billion of broker deposits, $1 billion of flub. We did actually buy another $1 billion of securities in the fourth quarter. We haven't spoken about that, but we did buy another $1 billion of securities. So we used some of the cash to further build that securities book. And the way we think about it is sort of the cash in the securities is somewhat fungible. And we'll just kind of look on really a real-time basis what are we better doing with any excess cash we have, should we buy more securities? Or can we use that to lever and so that's the relationship between sort of securities and the cash, somewhat fungible. And that's how to think about it when you're looking at the numbers, Matt.

Okay. And then Lee, I don't know if you have it at your fingertips, but do you have the cost of deposits at year-end or more recently. And as we think about some of the higher cost categories, maybe time deposits what is kind of the blended rate that CDs are going to, as they mature and come back on? And is that a decent proxy for where you think CD cost could go over the next year?

Yes, yes. So the spot rate as of the end of the year, and this is for all interest bearing for all deposits. So it does include our noninterest-bearing DDAs are in here as well, was [ 2.56 ]. And then as I mentioned in my prepared remarks, we had $5.4 billion of CDs that matured in Q4 with a weighted average cost of 4.9%. And we've retained 86% of those move them into products sort of 40 to 50 basis points lower. In Q1, we have $5.3 billion of CDs maturing with a weighted average cost of 4.13%. So I think the way I would think about it is the CDs that are maturing in the first quarter, while we won't sort of probably realize the same 40 to 50 basis point benefit I do think that we can realize a sort of 25, 35 basis point benefit at least as those CDs mature -- and then just looking out further, right now, we have another $4.2 billion maturing in Q2 at a weighted average cost of 4%.

Very helpful. And then just last quick one, if I can sneak it in, is you provided some updated share counts for the years ahead. Is that both average diluted and common shares outstanding? And that's all I have.

Basically, the share count, it includes the warrants are included in there. So it's fully diluted.

Our next question will come from the line of Jon Arfstrom with RBC.

Curious on the multifamily loans maturing over the next 2 years. Curious on the health of those credits in general. And then any chance that nonperforming balances could have a larger step down at some point over the next couple of years, just based on what's maturing.

So we -- what we said previously, let me start sort of with the last part of the question. As it relates to the -- so we ended the year at about $3 billion. Our expectation is we can reduce those by $1 billion in 2026. Now Again, remember, included in that $1 billion is the bankruptcy loans that we've talked about earlier on this call, which is sort of $450 million. So we do believe that we can reduce the nonaccrual fairly substantially in 2016 when you include the resolution of the bankruptcy. In terms of the loans that are hitting their reset and maturity dates. There is nothing different about the overall quality or characteristics of those loans than any loans that have reset or matured prior, so in '25 or before.

And what we do, as Joseph has mentioned, is any loan that is resetting or maturing in the next 18 months. That is the trigger for us to do a deep dive analysis on that loan and run a pro forma SCR based on the interest rate that would be in effect today. And so we are constantly looking out and running those analyses on those loans that are coming to -- up to their reset or maturity day. And obviously, that's all considered as part of our process. So it's all included in everything that we've taken and disclosed in the fourth quarter. But the reason anything unique about the characteristics of the Multifamily and CRE loans that are hitting their maturity and reset dates over the course of the next 18 months, 2 years that we haven't seen in resets of maturities up to this point.

And one thing Jon, the one thing I would add, we track the payoffs and determining whether we're getting negative selection by keeping the back crafts and good credits are paying off. And it's held almost consistent really since we've been here. the percentage of substandard and then what's in the rent regulated. So it's amazingly consistent how that has continued to b, as those payoffs come in. And that, I think, is just reflective of what we think is a good assessment of the risk in that portfolio.

Okay. Good. And then, Lee, maybe just wrapping this up on the guidance. I get the adjustments in refinements. It's kind of like a mixed blessing, I guess, with the payoffs. But what do you think are the biggest risks on your '26 guidance. It doesn't seem like it's credit. Are we just talking about subtle nuances at this point?

Yes. I think it is certainly one. Obviously, I think we're sort of can we execute. I think that's really what it boils down to as I've mentioned, there's a lot of moving parts, which is -- it's a good thing, and it's a bad thing because obviously, you're having to kind of estimate what that all means -- but I think we're now pivoting to the growth side of the story. And so it's really all about can we execute on that growth side of the story. And look, I think everything we said we would do in '25 we've delivered on. And so I think this management team and this Flagstar team has proven that they are up for the challenge.

Our final question will come from the line of Christopher Marinac with Janney.

Just wanted to ask about the mix of deposits as C&I grows. When we see the C&I and the treasury a much different component, 12 and 24 months from now lead? Do you have any sort of guidepost just in general for how that mix is going to shift.

No, I think, again, we expect to leverage those relationships to bring in deposits. And I think it's going to be a mix, obviously, in an ideal situation you're bringing in noninterest-bearing the operating accounts. But I think as we sort of leg into that you'll see us sort of bring in interest-bearing DDAs and money market deposits. So I think it will be sort of a combination. But ultimately, as our strategy and our business model is about a full relationship business. It's not just giving the balance sheet away. So we would expect to start bringing in, in time, more operating accounts, which would be noninterest-bearing DDAs. And and further leveraging those relationships, not just for deposits, but the fee income as well.

Got it. So we'll see movement on those ratios and that mix during this year?

Yes, I think that's fair.

Okay.

The one comment I'd have for you, if you think about it, we've been effectively in this business about 15 months now. The credit opens up the license for us to be able to move more of the fee income and deposits into the company. And so it's a transitional period. But yes, I do think we will gain momentum on that, especially as we've not only in the C&I side, but we've also geared up some specialized industries on the deposit side. that are focusing on -- these are like some title and some escrow and some insurance companies that generally don't use the debt vehicles from banks as much, but they do use the depository treasury management, cash management services. from a bank. And so we're highly focused on growing that segment of our deposit business as well.

Got it.

I will now turn the call back over to Joseph Otting for closing remarks.

Okay. Thank you very much for joining us this morning. We really appreciate following the company and the questions that we get and both today and the follow-up meetings. We obviously remain extremely focused on executing on our strategic plan. including the transformation of Flagstar into a top-performing regional bank really focused on creating a customer-centric relationship-based culture and effectively to manage risk to drive long-term value. So thank you again for taking the time to join us this morning and for your interest in Flagstar Bank.

This concludes today's call. Thank you all for joining. You may now disconnect.

Hello, and welcome to the Flagstar Bank NA Third Quarter 2020 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. You may begin.

Thank you, Sarah, and good morning, everyone. Welcome to Flagstar Bank's Third Quarter 2025 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, who will discuss our results for the quarter and the outlook. 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 at irflagstar.com.

Also, before we begin, I'd like to remind everyone that certain comments made today by the management team 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 refer to 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.

When discussing our results, we will reference certain non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for a reconciliation of these non-GAAP measures.

And with that, I would now like to turn it to Mr. Otting. Joseph?

Thank you, Sal, and good morning, everybody, and welcome to our first quarterly earnings as Flagstar NA. We are very pleased with the operating results this quarter. Our third quarter performance provides further tangible evidence that are successfully executing on all our strategic priorities. Our operating results improved significantly throughout the year and during the quarter as many of our key metrics continue to trend positively.

From an earnings perspective, our adjusted net loss of $0.07 per diluted share narrowed substantially compared to the second quarter, while our pre-provision net revenue continues to trend higher, putting us on a path to profitability.

In addition to the improvement in earnings, we had several other positives during the quarter, highlighted by this was a breakout quarter in our C&I business as we originated $1.7 million in new loan outstandings and realized overall net loan growth of $448 million in the C&I portfolio.

Our net interest margin expanded for the third consecutive quarter, up 10 basis points to 1.91% compared to the second quarter. And our operating expenses remained well controlled and were down year-over-year $800 million on an annualized basis, significantly ahead of our plan.

Criticized and classified assets continued to decline, down $600 million or 5% on a linked quarter basis and $2.8 billion or 20% year-to-date, while nonaccrual loans were relatively stable.

We had another strong quarter of multifamily and CRA payoffs of $1.3 billion, and this has continued the trend over the last couple of quarters where we've been above our forecast on real estate payoffs. And our provision for loan losses decreased 41%, while our net charge-offs declined 38%.

Now turning to Slide 3 of the presentation. We have highlighted the key management areas that we have focused on and how we have performed in each category. First, to improve our earnings, we have reported smaller net loss every quarter for the past year due to a combination of factors, including margin expansion and cost reductions. Lee has a slide later on that he'll cover this in detail, but the trend line on this lines up very well with what we've communicated about a return to profitability for the company.

Second, we continue to implement our commercial lending and private banking strategy, which I will discuss in more detail shortly. And third, we proactively managed our multi-family and commercial real estate portfolio to continue to reduce our CRE concentration. And fourth, our credit quality profile, which has resulted in net charge-offs as we are starting to see signs of stabilization in the loan portfolio.

The next several slides highlight the tremendous progress we've made in our C&I business. Starting on Slide 4, this was a breakout quarter for our C&I lending. Our strategy in the C&I space really began after the June 2024 strategy as we hired Rich Repetto to come in and lead our commercial, private banking and commercial banking strategy. This strategy focuses on 2 primary businesses, specialized industries and corporate and regional commercial banking. Both of those gained momentum in the third quarter, driving C&I loan growth up nearly $450 million or 3% versus the second quarter. This was the first positive growth quarter since early last year.

Our 2 strategic focus areas led the growth with total loan growth of $1.1 billion, up 28% compared to the prior quarter.

On the next slide, you will see the positive trends in new commitments and new loan originations over the past 5 quarters. Compared to the second quarter, new commitments increased 26% to $2.4 billion, while originations grew 41% to $1.7 billion. More importantly, you can see that the contribution to this growth was from our 2 strategic focus areas was quite impressive. Specialized Industries and corporate and regional commercial banking experienced a 57% or almost a $750 million increase in commitments to $2.1 billion versus the prior quarter. Originations in these 2 areas increased 73% or nearly $600 million to $1.4 billion. Both areas have seen a consistent upward trend since the third quarter of last year, reflecting steady pipeline growth and a high success rate in converting opportunities.

Just as important as our C&I pipeline, which currently stands at $1.8 billion on commitments, up 51% compared to the $1.2 billion at this time last quarter, providing strong momentum for the fourth quarter C&I loan growth. Also important is the number of new relationships we've added. Year-to-date, we've added 99 relationships to the bank, including 41 just in the third quarter. I believe these 2 data points reflect the industries we chose to focus on and the talented individuals we brought into the company, most who are mid-career bankers with 25 to 35 years of experience in their respective industries and have impressive Rolodexes.

So far in 2025, we have doubled the number of relationship bankers and support staff in our 2 main focus areas to 124 and plan to add another 20 in the fourth quarter.

Turning to Slide 6. This provides an overview of our specialized industry business and the growth trends both in commitments and originations over the past 5 quarters. You can see they had strong growth in both commitments and originations during the third quarter.

Slide 7 provides a similar overview of the corporate and regional banking business. This business also had a very strong quarter in both total commitments and originations. We believe it has reached an inflection point after successfully building out 4 new segments and reinvigorating legacy businesses, showing that our relationship-based strategy is yielding positive results. We expect to see further growth in the C&I business as existing bankers continue to deepen their banking relationship and the addition of new bankers.

Additionally, we see potential opportunities from recent merger activity. Many of these are right in our core markets to selectively add talented bankers as well as winning new business relationships.

The next slide lays out the road map we employed to solidifying the balance sheet and reposition the bank for growth. This is a little bit of a down history lane, but we have increased our CET1 capital ratio by nearly 350 basis points, ranking us among the highest, best capitalized regional bank amongst our peers. We also fortified our ECL through a rigorous credit review process where we reviewed virtually every single multi-family and commercial real estate loan. We significantly enhanced our liquidity position and we reduced our reliance on wholesale funding, including flub advances and brokered deposits nearly $20 billion year-over-year, lowering our cost of funds and boosting our net interest margin. And in addition to what the items are identified on this slide, there could be many more. Obviously, our expenses, our deposit costs and our risk governance are other areas that we're heavily focused on.

Now turning to Slide 9. You can see the impact on our adjusted EPS from the balance sheet improvements I just talked about on the previous slide. Our adjusted diluted loss per share has consistently and significantly narrowed over the past 5 quarters, including a 50% quarter-over-quarter reduction in the third quarter loss to $0.07.

Now with that, I'd like to turn it over to Lee to review our financials.

Thank you, Joseph, and good morning, everyone. During the third quarter, we continued to execute on our strategic vision to make Flagstar 1 of the best-performing regional banks in the country. We achieved net interest margin expansion of 10 basis points quarter-over-quarter, paid off another $2 billion of high-cost brokered deposits as we further reduced our funding costs and continued to demonstrate excellent cost controls, continuing the surgical approach to cost optimization of the last 9 months.

Our unadjusted pre-provision net revenue improved by $14 million quarter-over-quarter, while our adjusted pre-provision net revenues improved $6 million versus the second quarter.

On the credit side, multi-family and CRE payoffs were again elevated at $1.3 billion, of which 42% was substandard. And criticized and classified loans declined about $600 million or 5% during the quarter and 19% or $2.8 billion on a year-to-date basis.

Net charge-offs decreased $44 million and the provision decreased $24 million, both compared to the second quarter. And we ended Q3 with a CET1 capital ratio of 12.45%.

As Joseph previously mentioned, we had net C&I loan growth during Q3 of approximately $450 million following the origination of $2.4 billion of new C&I commitments, of which $1.7 billion was funded. We're very pleased with the performance of our C&I businesses. We've surpassed our target of $1.5 billion of funded C&I loans per quarter and believe we can fund $1.75 billion to $2 billion per quarter going forward assuming no change in market conditions.

We will also start originating new CRE loans in the fourth quarter that are of high credit quality and geographically diverse. We've also started to experience growth in our health investment residential portfolio, which increased $100 million on a net basis. We're doing exactly what we said we would do, and I want to complement the entire Flagstar team on another successful quarter.

Now turning to the slides and specifically Slide 10. This morning, we reported a net loss attributable to common stockholders of $0.11 per diluted share. We had the following notable items in the third quarter. First, we had a $21 million fair value gain on a legacy investment in Figure Technologies following its September IPO. Second, we recorded a $14 million increase in litigation reserves related to the settlement of 2 legacy cyber matters dating back to 2021 and 2022, 1 of which involved a third-party vendor. And third, we had $8 million in severance costs related to FTE reductions. Therefore, on an adjusted basis, after also excluding merger expenses, we reported a net loss of $0.07 per diluted share, significantly better than last quarter and in line with consensus.

On Slide 11, we provide our updated forecast through 2027. We tweaked our 2025 noninterest income assumptions resulting in full year 2025 adjusted diluted EPS and in a range of minus $0.36 to minus $0.41 per diluted share. Our guidance for both 2026 and 2027 remains unchanged. One of the highlights this quarter was the double-digit increase in net interest margin. Slide 12 shows the trends in our NIM over the past several quarters which expanded 10 basis points quarter-over-quarter to 1.91% and has now increased for 3 consecutive quarters.

In September, our NIM was 1.94% compared to 1.91% for the third quarter, and we expect to see margin improvement going forward, driven by a lower cost of funds as we manage our cost of funding lower lower-yielding multifamily loans paying off a path or if they remain with Flagstar resetting at higher rates, ongoing growth in the C&I and other portfolios and a reduction in nonaccrual loans.

Turning to Slide 13. Another highlight this quarter was the decline in noninterest expenses. Our noninterest expenses remained well controlled as they declined another $3 million in the third quarter and are down 30% year-over-year or approximately $800 million on an annualized basis.

Slide 14 shows the growth in our capital over the past 5 quarters and the strength of our CET1 ratio. At 12.45%, our CET1 ratio ranks amongst the best relative to our regional bank peers. We will continue to prioritize reinvesting our capital into growing the C&I and other portfolios as we remain focused on diversifying the balance sheet and growing earnings.

Slide 15 is our deposit overview. Similar to last quarter, we further deleveraged the balance sheet by paying down $2 billion of brokered deposits at a weighted average cost of 5.08%. Going back to the third quarter of 2024, we have now paid down almost $20 billion of flub advances and brokered deposits. In addition, approximately $5.6 billion of retail CDs matured during the quarter at a weighted average cost of 4.50%. We retained approximately 85% of these CDs and they moved into other CD products that were approximately 30 to 35 basis points lower than the maturing product.

In the fourth quarter, we have another $5.4 billion in retail CDs maturing with a weighted average cost of 4.30%. These deleveraging actions, CD maturities and other deposit management strategies have allowed us to reduce deposit costs by 13 basis points quarter-over-quarter and liability costs by 10 basis points. We also saw an increase in interest-bearing deposits of $1.5 billion as a result of increased commercial, private bank and mortgage escrow balances. We continue to actively manage our cost of deposits and are targeting a 55% to 60% deposit beta on all interest-bearing deposits with the Fed rate cuts.

Slide 16 shows our multi-family and CRE par payoffs for the quarter, we continued to witness significant par payoffs of approximately $1.3 billion, of which 42% or about $540 million were rated substandard. Approximately $195 million of this quarter's payoffs were multi-family greater than 50% rent regulated.

We continue to witness strong market interest for these loans from other banks and from the GSEs. The par payoffs are also leading to a substantial reduction in overall CRE balances and in our CRE concentration ratio. Total CRE balances have declined $9.5 billion or 20% since year-end 2023 to about $38 billion, aiding our strategy to diversify the loan portfolio to a mix of 1/3 CRE, 1/3 C&I and 1/3 consumer. In addition, the payoffs have led to a 95 percentage point decline in the CRE concentration ratio to 407% since year-end 2023.

The next slide is an overview of our multi-family portfolio, which has declined 13% or $4.3 billion on a year-over-year basis. Our reserve coverage on the overall multi-family portfolio of 1.83% remains strong and is the highest relative to other multifamily focused lenders in the Northeast. Furthermore, the reserve coverage on those multifamily loans where 50% or more of the units are regulated is 3.05%. Currently, we have about $14.3 billion of multi-family loans that are either resetting or contractually maturing between now and year-end '27, with a weighted average coupon of less than 3.70%. If these loans pay off, we will reinvest the proceeds in our C&I or other portfolios or pay down wholesale borrowings. And if they stay with Flagstar, the reset rate is significantly higher than the existing rate, which provides a NIM benefit.

On Slide 18, we've once again provided significant additional information on our New York City multi-family loans where 50% or more units are rent regulated. This tranche of the multi-family portfolio totals $9.6 billion compared to $10 billion last quarter with an occupancy rate of 99% and a current LTV ratio of 70%. Approximately 55% or $5.3 billion of the $9.6 billion are pass rated and the remaining 45% or $4.3 billion are criticized or classified, meaning they are either special mention, substandard or nonaccrual. Of the $4.3 billion, $2 billion are nonaccrual and have already been charged off to 90% of appraisal value, meaning $370 million or 16% has been charged off against these nonaccrual loans. Furthermore, we also have an additional $40 million or 2% of ACL reserves against this nonaccrual population. Of the remaining $2.3 billion that are special mention and substandard loans between reserves and charge-offs, we have 7% or $165 million of loan loss coverage. We believe we're adequately reserved for charged these loans off to the appropriate levels and with excess capital of $1.7 billion before tax we think we're more than covered were there to be any further degradation in this portion of the portfolio.

Slide 19 details the ACL coverage by category. The ACL declined $34 million compared to the second quarter to $1.128 billion, a result of lower HFI loan balances and stabilization in property values and borrower financials. The overall ACL coverage ratio, including unfunded commitments was 1.80%, broadly in line with last quarter at 1.81%.

On Slide 20, we provide additional details around our asset quality trends. Criticized and classified loans continued to decline, down approximately $600 million compared to the second quarter. On a year-to-date basis, we have made tremendous progress in reducing these loans as they are down $2.8 billion or 19% since the beginning of the year. Our net charge-offs decreased $44 million or 38% compared to the prior quarter to $73 million, and the net charge-off ratio improved 26 basis points to 0.46%.

Nonaccrual loans, including those held for sale, were $3.2 billion, relatively stable compared to the prior quarter. I would add that approximately 41% or $1.3 billion of nonaccrual loans are performing. The 1 borrower we moved to nonaccrual status in the first quarter who subsequently filed for bankruptcy remains in the bankruptcy process, but there is an auction in progress that we hope conclude sometime in early 2026, which will allow us to resolve our position sometime during the first half of next year.

With respect to the 30- to 89-day delinquencies at quarter end, approximately $274 million of the $535 million were driven by 1 borrower who typically pay subsequent to month end and has done so again. As of October 20, $166 million of their delinquent loans have been brought current. More importantly, after quarter end, we sold approximately $254 million of these borrowers' loans above our book value, thereby reducing our exposure to this borrower.

Finally, we continue to review the 2024 annual financial statements for all borrowers. And today, we've completed the review on the majority of them. I'm pleased to report that the vast majority have stayed consistent compared to the prior year, indicating an overall stable trend for our borrowers.

We continue to deliver on our strategic plan and are excited about the journey we are on and the value we will create over the next 2 years.

With that, I will now turn the call back to Joseph.

Thanks, Lee. Before moving to Q&A, I'm also happy to share that last Friday, we closed on our holding company reorganization after receiving all necessary regulatory and shareholder approvals. As a result of this reorganization, Flagstar Financial, Inc. was ultimately merged with Flagstar Bank NA, with Flagstar Bank NA as the surviving entity. As I mentioned on last quarter's call, this reorganization simplifies our corporate structure, reduces our regulatory burden and lowers operating expenses by approximately $15 million.

As always, we remain extremely focused on executing our strategic plan, including transforming Flagstar into a top-performing regional bank, creating a more customer-centric relationship-based culture and effectively managing risk to drive long-term value.

Now we would be happy to answer your questions. Operator, please open the line for questions.

[Operator Instructions] Your first question comes from Manan Gosalia of Morgan Stanley.

So I wanted to focus on the NII guide for the year. If I take the guide for the full year, relative to the progress year-to-date, it implies that NII should be up about 5% to 15% Q-on-Q next quarter. You're making good progress on the C&I loan growth side, NIM has been rising consistently and you should benefit from additional rate cuts from here. But at the same time, earning assets have also been shrinking as you pay down some of those broker deposits. So can you talk about how we should think of each of these spots next quarter and into the first half of next year?

Yes, absolutely, Manan. So first of all, what I would say is in terms of the balance sheet, you'll have noticed that it only declined $500 million in despite us paying off another $2 billion of brokered deposits. And so we think at the end of this year, Q4 will probably be the low point. So the balance sheet will be -- and this is total assets $90 billion to $91 billion. And then we expect the balance sheet to start to grow as we move through 2026. So I think that kind of level sets everything first and foremost.

We do expect to see continued NIM expansion as we move forward. And we have multiple levers to do that, as you know. So I mentioned in my prepared remarks, as the multi-family loans continue to pay off or as they continue to hit their reset dates, they have a weighted average coupon that is less than 3.7%. So if they stay with Flagstar, with our sort of pricing reset is 5-year flub plus 300 or prime plus 2.75, and we're staying sort of firm to that. So we get a benefit if they reset and stay with Black Star. If they pay off then we're taking those proceeds and investing them into the C&I growth, or we use them to pay down high-cost either broker deposits or we can pay down flub advances. So that's sort of 1 area.

We continue to show excellent growth on the C&I side. What we didn't mention is of the new loan originations in the third quarter, the average spread to sofa on all of those was 242 basis points. So a very, very healthy spread on the new C&I loans that we're bringing on to the balance sheet. And we -- you heard Joseph talk about the pipeline. We think that we continue those growth trajectories going forward.

We're also going to start originating new CRE loans going forward. And this won't be rent-regulated New York City loans, we're looking for high quality, geographically diversified CRE loans in other parts of that footprint, the Midwest, California, South Florida, and we're starting to see the mortgage health investment portfolio increase, and we think that will increase further in a lower rate environment.

I think we've done a tremendous job managing the cost of our fundings down through paying off those high-cost brokered deposits and flub advances, but we've also reduced core deposit costs without Fed cuts. And with Fed cuts, I mentioned, we expect a 55 to 60 beta, and so that's a focus area on the liability side. And then finally, as we reduce our nonaccrual loans, and we do expect to see a reduction in the fourth quarter, that will also help our NIM.

So I know that was a long answer, Manan, but there are a lot of moving parts, as you can see.

That was great. That was the detail of that. was looking for. Maybe just a follow-up to your comments on the C&I side. I mean, the originations were clearly really strong this quarter. Can you talk about is this a new -- is this a good run rate for the next few quarters? Should it accelerate from here? And maybe talk about how you're managing risk as you do this because it's a rapid build-out and there is some macro uncertainty out there.

Yes, sure. Thank you. So actually, our viewpoint is that we will continue to see additional growth beyond what we saw this quarter. We do see somewhere between $1.7 billion billion to $2.2 billion is kind of our run rate going forward per quarter. And I'll recall that a number of the people who have joined the company haven't been here for much over 3 or 6 months. And so most of these people are really getting settled into the bank and generating opportunities for the company. So we kind of think we're an engine that's firing on 3 of the 6 cylinders today and have really an opportunity to get really the whole franchise performing at a higher level in the next couple of quarters. That's in addition to we will add 20 people in the fourth quarter, and we'll add probably somewhere around 100 people in 2026. So we'll continue to add.

The strategy there really is to -- we highlighted in the slides, we have a specialized industry strategy where we have 12 verticals. Virtually all the people who are leading those verticals and the people that have joined us are 20- to 35-year bankers. So they come to our company with lots of depth and knowledge in those particular verticals from an expertise perspective. And then from a risk underwriting perspective, we have the line unit embedded in the line is what we call the first line of defense and there are credit products people who sit in the first line who will underwrite and do the due diligence on the company independent of the relationship managers. And then those credits that are recommended based from the first line of defense to the actual credit approvals in the bank. That is a separate function that reports up to our Chief Credit Officer, and then who actually directly reports to me. So we think there are good checks and balances in our process to make sure that we're adhering to our credit standards without significant deviations from underwriting policies.

And Manan, 1 thing I would add, again, just looking at Q3, if you look at the average loan size of the new originations, it was just over $30 million. So as we've said before, we are not taking outsized positions in any 1 name or industry. We're diversified in terms of the size of the positions we're taking. We've said before, our sweet spot is maybe $50 million to $75 million. But in Q3, the average new loan commitment size was a little over $30 million, and that gives us comfort as well.

And I will leave at a good point. On Slide 4, it does highlight the other businesses like Flagstar Financial and leasing and the MSR lending and a couple of others where actually, we thought the exposures to a number of individual borrowers were too high. And so we brought down in those portfolios significant amounts of high individual company exposure, and that's resulted in some of the declines year-to-date in those portfolios. We do think that will start to stabilize now as we've made our way through those portfolios in 2025.

That's great. And just a clarification, the $1.7 billion to $2.2 billion that you mentioned, that's originations, correct?

That is correct.

The next question comes from Dave Rochester with Cantor.

On the $1.7 billion to $2.2 billion that you just talked about in C&I production, when do you think you ultimately hit that? Is that a 1Q timing on that or further into next year? And then given that and the restart of the CRE originations and what you're doing on the resi production front, at what point do you expect total loans will start to grow again next year. And then with the 100 people or so that you're planning on hiring for next year, are there any new verticals contemplated in that?

Yes, so I'll take the first part of your question. So as I mentioned to Manan, we think the low point for the balance sheet will be the fourth quarter and will be sort of between $90 billion and $91 billion. And our expectation is we'll see -- we'll start to see a little bit of balance sheet growth in Q1 of 2026, not a lot, but a little bit. And then it will really start to sort of trend upwards in Q2, Q3 and Q4 of next year. So that's kind of how we think about the balance sheet growth and the inflection point.

Got it. So you're also thinking not just assets, but total loans actually stabilizes next quarter. Or no, that's the [indiscernible] and then you go from there stabilization.

That's right. That's exactly right. Yes.

And then regarding your question on the $2.4 billion and the $1.7 billion, we do expect growth on those numbers both this quarter and going forward. So I mean that number clearly can get north of $2 billion on a pretty consistent basis.

That's great. And then just on the elimination of the holding company, I know that, that exempts you from annual stress tests whenever you cross over $100 billion or whatever that threshold is at that point. Any other regulatory relief you get from that as well? I know you save on the cost front, but anything else that you'd point to?

Yes. I mean in a lot of instances, you have examinations that cover the same thing from the OCC to the Fed. So you eliminate that, you also eliminate a lot of staff interaction with the Fed. So there's also caution you can't exactly quantify but frees up resources in time. So we obviously think it's the right thing to do. And for us, we do not do today nor do -- plan to do non-admitted activities. So it was a logical step for us as an organization.

The next question comes from Ebrahim Poonawala with Bank of America.

So I guess, maybe a question around, from an expense standpoint. So you talked about all the hiring over the coming year. When you look at the adjusted expenses, about $450 million in your outlook for next year. It seems like expenses are kind of flatlining at this run rate. Just talk to us in terms of incrementally like what's the cost save opportunity left within the expense base to invest and like the puts and takes around why they could be higher versus lower than what you have forecasted?

Yes. No problem at all, Ebrahim. First of all, again, I want to take the opportunity to complement the entire Flagstar team because as both Joseph and I noted. If you look at the Q3 '24 run rate and the Q3 '25 run rate, that's an $800 million reduction in noninterest expense. And that's a lot of work. It's blood, sweat and tears. But the team has just done an unbelievable job taking that amount of expenses out. As we look forward, you're exactly right. If you look at our sort of existing or current run rate, it's right around $450 million a quarter, which if you look at our guidance, is the top end of the 2026 expense guidance [indiscernible] $1.8 billion. And as we think about further opportunities moving forward, I think they're in 3 sort of areas. One, we think we can continue to reduce FDIC expenses. There's a lot of components to that. We've done a nice job of optimizing the liquidity component with reducing wholesale borrowings and broker deposits, and we'll continue to do that. But there are other measures that come into play as it relates to profitability, asset quality, regulatory relationship.

And so we think that on an ongoing basis, we can continue to drive those FDIC expenses down. We also believe we can continue to drive the vendor costs lower. I think we've done a nice job looking at vendor costs over the last 9 months, but I think there's more we can accomplish. And then I think we've got some pretty significant technology projects that are in the works that will be coming to fruition as we move into 2016 and beyond, and that's going to allow us to drive more efficiencies and cost reductions out as well.

Just to note to Lee's question or comment about technology, we talked about -- we had 6 data centers in the company, 2 for each legacy organization. During last quarter, we reduced that down to 4, and we will ultimately get down to 2 sites. So if you think about running 6 data centers, legacy somewhat outdated old technology and moving towards a new platform that allows us to take out significant costs in that process.

Got it. Got it. That's helpful. And I guess maybe just a separate question around all things sort of noninterest-bearing deposits, the balances, seems like they might be stabilizing, and I get it takes time for loan relationships to transfer into core deposits coming on. Just -- but give us a sense of NIB deposit growth from here and just either from a dollar balance or from a percentage of overall mix, how you see that trending? And what's the time line you think between lending relationships coming over from the bankers you brought on to that translating into core depot growth?

Yes, yes. So it does take a little bit of time, and we're seeing some traction. But obviously, as we move forward, we think we'll see a lot more traction. And so as we think of the noninterest-bearing deposit growth, I think it really comes from 3 areas, and you've touched on one. As we bring on all of these new C&I relationships, we certainly want to leverage those relationships to bring on more deposits, including operating accounts ultimately and those noninterest-bearing deposits. We also see growth on the noninterest-bearing deposit side coming from our private bank.

As we mentioned on the last call, we've hired Mark [indiscernible] to run the private bank. He has done a nice job of reorganizing the private bank and making sure that all the right product sets are in place. So we look like a real sort of private wealth bank. And so we think that we'll be able to leverage the private bank and those products to drive noninterest-bearing deposits as we move forward. And then obviously, our 360 bank branches, they play an important role in continuing to grow noninterest-bearing deposits with our existing customer base and bringing in new customers as well. So that's how we see the noninterest bearing deposit growth, where it's coming from.

The next question comes from Jared Shaw with Barclays.

Maybe starting on the credit side. Should we think that as we move forward and as you see the runoff in multi-family and CRE, maybe the loans that don't run off tend to have the weaker characteristics. So should we expect to see maybe a continued growth in CRE NPLs, but not corresponding growth in provision like we saw this quarter that you feel like those marks are adequate and sufficient?

Yes. I think this -- first of all, we had a really strong reduction of nonperforming loans in the second quarter. This was a little bit more of a flat and we were working, as Lee referenced, on a large portfolio sale. But in the fourth quarter, we currently have -- we have line of sight on reductions of about $400 million of nonperforming loans. That could be as high as $500 million in the fourth quarter. We've also really like dedicated a team now that's focused on our nonperforming loans where they are still paying and that represents roughly 42% to 43% of our nonperforming loans.

So we have a high percentage of the nonperforming loans that continue to pay and per the terms and conditions of the note, it's just our analysis of their cash flows that come off of those single source or repayment properties are insufficient. So those borrowers are drawing on cash flow or liquidity to continue to maintain those loans current. So we're really focused, and we do see a downward trend in those NPAs. Just our classifieds were down, our NPAs were virtually flat this quarter, but we do see a trend line of those going down.

Yes. And again, Jared, as you know, when we did the credit review in '24, we were deliberately punitive on ourselves. And the other point I would add to what Joseph mentioned, and I mentioned this in my prepared remarks, you've got 1 borrower that is in bankruptcy that is $500 million of those nonaccrual loans. And as I said, that's moving into an auction process. And so once that moves through the process and concludes, we feel that we'd be able to deal with a large chunk of those nonaccruals in the early part of 2026. That's in addition to the $400 million pipeline that Joseph mentioned.

Okay. Okay. Great. So that's -- those are 2 separate components. That's good color. And then as we look at guidance and your comments around assets being the low point in the fourth quarter, what's your -- what should we be thinking about in terms of either total asset growth or total loan growth as we look out for year-end '26 and '27 to tie in to that guidance?

Yes. No problem. So as I mentioned, at the end of '25, we think the balance sheet will be sort of $90 billion to $91 billion. We think that at the end of '26, our balance sheet will be around high $96 billion to sort of high $97 billion, right around that range. And then in '27, we think we get it to about $108 billion, $108 billion, $109 billion.

The next question comes from Mark Fitzgibbon with Piper Sandler.

I wondered if you could share with us of the $1.7 billion of C&I originations you had in the third quarter, what percentage was participations? And also curious if you had any tricolor or first brand exposure because I did see a little uptick in nonaccruals in the C&I bucket?

Yes, that was 1 credit. But yes, we're running -- 50% to 60% of our loans are participations. But the difference, I would say, Mark, is the people that are joining the company that are bringing those opportunities, they have direct relationships with management. We have not purchased participations where we are not directly interacting with the management of the company, which is a little bit different than basically have a trading desk and somebody buying loan participations. These are all active relationships that have been ongoing in any of those in our document, we require the relationship manager to do a relationship model of what we expect to get in both fee income and deposits by coming into that relationship. So we have a pretty high standard of what our expectations are, if we're going to get involved in a credit.

Just to confirm, we had no exposure to first brands or Tricolor or any of the other names that have been mentioned this quarter and obviously, we're pleased about that. We've looked at that. We do have a very, very small MDF book. A big portion of that is our MSR lending. So we feel good about that and no exposure to any of the names that have been disclosed previously.

Okay. And then just 1 separate question. What is -- I guess I'm curious, what does the note sale market look like today on sort of modestly challenged New York multifamily loans? Is there much depth to that? And where can kind of notes be sold today? Can you give us any kind of sense on that?

I mean, I would -- the way I look at it is, if you -- the noise that has been sort of emerging over the last 3 or 4 months regarding New York City rent regulated, we still had $1.3 billion of par payoffs in Q3, 42% of which was substandard. So rather than looking at no payoffs, I think there's still a lot of demand for this asset class from other lenders and the GSEs as I pointed out earlier. And I think that's good. And I think in a declining interest rate environment, I think you're probably going to see -- for us, you're going to see more par payoffs as well as we move forward. So that's just going to help us get to that diversified balance sheet of 1/3, 1/3, 1/3, even more quickly.

The next question comes from Bernard Von Gizycki with Deutsche Bank.

Lee, in your prepared remarks, I believe you mentioned that $195 million of the par payoffs of the $1.3 million were regulated over 50%. And I think that total portfolio declined almost $1 billion. Just wondering, were there any asset sales in that particular portfolio? And any updates you can provide on how we should think about the size of this book going forward in the next 6, 12 months?

Yes. Well, I think number one, I think you'll continue to see decline, mainly as a result of the par payoffs that we're seeing each quarter. Joseph mentioned, from a nonaccrual point of view, we do have an active pipeline that is $400 million that we have a line of sight into and hope to close in the fourth quarter. And so that's how I sort of look at the sort of movement in that rent regulated book going forward. And again, the reason we disclose these numbers, Bernie, is we're not seeing any adverse selection. We're seeing par payoffs across the board in every CRE asset class, whether they be market, rent-regulated less than 50% or rent regulated more than 50%. So -- and that is our expectation going forward. We'll continue to see the par payoffs and reductions across all of those multifamily asset classes.

Okay. And then maybe tying the payoffs with loan yields. I know they increased 3 basis points second quarter. We've seen that tick up. But just given the paydowns of the nonaccruals that mix shift from multifamily to C&I and now the growth in C&I that should be coming through nicely over the next several quarters, why not -- are you expecting a higher change in the yields? Or are these par payoffs that are coming at higher yields, holding that back a bit? Just want to get a little bit of sense of the expansion on loan yields from here.

Yes. The par payoffs, it's not every -- the par payoffs are not everything below 3.7%. Some are loans that have already reset. So if you look at the blended weighted average coupon of the $1.3 billion that paid off in Q3, it was 5.7%. So it's a blend of low coupon, but also loans that have already reset. And so that's the phenomenon that you're talking about or you see.

And some of the some of the payoffs also were coming out of some of the legacy C&I businesses, where we're reducing the exposures down in those credits where they're in the LIBOR plus, on average, [ 240 ] range. So some of those payoffs that does have some impact on that.

The next question comes from David Chiaverini with Jefferies.

So your paydown activity has been very strong past couple of quarters. Any line of sight -- you mentioned about the $400 million in NPLs for the fourth quarter. Any line of sight on total paydown activity anticipated for the fourth quarter? And how much of that could be substandard?

I think we have expectations for a similar range of $1 billion to $1.3 billion in the fourth quarter. So I would say that's been somewhat unabated, so to speak, of especially in the market of the regulated New York multi-family. Surprisingly, as Lee commented, that continues to be a robust refinance out by the agencies and a couple of the large banks who continue to add to their portfolios. So we don't see any material change. We had originally modeled at the start of the year, somewhere between $700 million and $800 million a quarter, and that just continued to accelerate in the second quarter. Obviously, the third quarter was the strongest at $1.5 billion. But I think those numbers paying somewhere in that range of $1 billion to $1.5 billion in the fourth quarter.

Great. And then could you refresh us with thoughts on Mamdani and the impact his potential election win could have on provisioning looking out to next year?

Yes. So his -- one of his stated items was that he would freeze the rent regulated rate increases for 4 years. The first impact of that is the decision would be made mid-next year by the commission on those freezes. So it's probably a little bit delayed. But the way we look at it is we go through that entire portfolio, we received 97% of the financials on that portfolio. And we go through property by property analysis, both of the cash flows and then if the cash flows are insufficient, we do an appraisal on the properties. So we feel like we have a pretty good handle on. It would take -- this year, as Lee commented, we're pretty much through that portfolio. We did not see material changes to it. And that's because I think the really big items that impacted those properties, which was -- a lot of insurance was up 30%, 40%, 50% they had increased labor rates, increased HVAC, we did not see that carry through for continued increases into this year.

So I think the way you model that out as you just make the assumption they're going to be flat revenues, and you really need just to understand the expense side because that will make the difference whether these properties are positive on a cash flow basis.

I think a couple of other things I would just add to what Joseph said, I mean rent increases for the next 12 months have just gone into effect. So the 3% for 1 year, 4.50% for 2 years. that runs through September of 2026. But I think what will have a bigger impact on these owners are reductions in interest rates. I think that's going to be a big advantage for them. And again, we said this previously, a lot of these owners have benefited from the 1031 tax rules. So they have low tax basis in these properties as well.

The next question comes from Chris McGratty with KBW.

The margin improvement on Slide 11 over the next 2 years roughly 90 to 100 basis points. How much of it is the resolution of credit? Like how much is the margin being suppressed from nonaccruals right now, give a ballpark?

Well, not an example -- but what I would say just to sort of level set is if you sort of -- those nonaccrual loans are obviously doing nothing from an earnings or a capital point of view because they're 150% risk weighted. So you get a release of capital as we reduce them. Even if we put them into a 100% risk-weighted assets, you're going to free up those 50 basis points. But they're not doing anything from an earnings point of view. So if we were to reduce $1 of nonaccruals, even if we were just to put it in cash, you're going to earn, let's just say, 4% on that. And so if we can then use that to invest in C&I and the spreads, as I mentioned earlier, we've got SOFR plus 242 basis points, that will lead to an even bigger improvement.

So reducing those nonaccruals is a key part of the strategy. What I would say to you is as we look at 2026, we think we can reduce those nonaccruals by up to $1 billion and $500 million of that, as I say, is tied up in the 1 borrower that's in bankruptcy, and we hope to resolve that in the first part of '26. And then we think we can do another $500 million on top of that throughout the remainder of the year. So that's obviously going to have a big impact on the NIM improvement. But along with all the other points that I pointed out at the beginning of the Q&A, I mean, it's not just nonaccruals. It's the continued resetting of those low coupon multifamily loans. It's growing the C&I book. It's growing other portfolios on the balance sheet. We're starting to originate new CRE loans the mortgage and residential book securities portfolio is an opportunity and then also managing our core deposits and paying off wholesale borrowings. So it all plays a part in that NIM expansion.

That's helpful. And then, Joseph, for you, the last 1.5 years have been really about optimizing the balance sheet, capital, liquidity and you're on a great track with expenses, too. What's the conversation going to be like a year from now? Like is it going to shift -- I assume it's going to shift in terms of strategic uses of capital. But any thoughts on capital between growth, buybacks, other strategic options?

Chris, we really haven't spent time at the Board in discussing that. I think as we get into 2026 and we show significant progress against the nonperforming loans in the overall portfolio, and we get assessment -- a better assessment of how much growth we can create through our business activities, I think that will give the Board the opportunity to sit down midyear and make that assessment of what to do if there is excess capital. But this is a very friendly -- shareholder-friendly board, very focused on earnings and growing the bank and using capital in the most efficient manner.

Perfect. And then, Lee, if I could, on the earning asset, the asset discussion. What's the embedded thoughts on the cash levels and the security balances in the next 1 to 2 years?

Yes. So what I would say, Chris, is you're probably going to see an increase in securities in the fourth quarter. We have some excess cash. And I think you'll see our securities balances increase about $1 billion in the fourth quarter of this year. Then I think we probably hold that level of securities as we move through 2026. So -- and then I would imagine that cash is probably in the sort of $7 billion to $8 billion range as we move through 2026.

Okay. So to get to those asset totals, its contingent really on the loan growth, continuing the momentum Got it.

That's exactly what's driving the growth on the balance sheet, correct?

The next question comes from Christopher Marinac with Janney.

Lee and Joseph, I just want to circle back on deposits from the commercial C&I growth that you obviously had a great quarter. Are there any goals on deposits these next several quarters? I'm thinking more next year than next quarter, but just curious to flesh that out further.

Yes. So we kind of have -- coming out of the C&I group is roughly about $6 billion of new deposits that will be originated both from the lending relationships, and we also have established a deposit-only group to focus on certain sectors, title, HOA, escrow, some of the conventional insurance industry. We have a group that really focuses on those high deposit categories. So we feel pretty good that we're going to start to see some real strong momentum in the deposit side.

Yes. And I would just add, as well as the $6 billion that Joseph mentioned, we do have sort of $2.5 billion that's tied to the CRE book. And so as we start originating new CRE loans, again, our strategy is about relationship banking. It's not us just giving the balance sheet away. We want to establish much deeper relationships, whether that be through deposits or being able to create fee income opportunities. And so that's the model that we're deploying across all businesses within the bank, not just the C&I piece, but with the private bank and the loans that they're originating, particularly the mortgages.

Great. And this is a component again of how an interest margin steps up in the next several quarters, and this is, I guess, a key piece.

Correct because we would expect a lot of these deposits to be noninterest-bearing or low interest deposits because they are tied to the loan.

The next question comes from Anthony Elian with JPMorgan.

The reduction in nonaccruals you expect in 4Q and through '26, is all of that occurring organically outside of the 1 in auction? Or does that include any asset sales as well?

Most of it will be organic.

Okay. And that includes... Go ahead. Go ahead, Lee.

Yes. It's organic, but we deploy a number of strategies. Joseph mentioned but there's work out, some could be through sales. So it's organic, but it's us working the various options and strategies that we can deploy against that nonaccrual book.

Yes. Our approach in what I think we found is you can sell those pools, you, in today's market, take a sizable discount to move that. And who we sell those to are going to do the same things that we would do, which is pick up the phone and see if we can work something out with the borrower. I'll remind you, in a lot of instances, low 40% of those borrowers have never missed a payment with us. So in their mind, they're performing at the terms and conditions of the loan. So we also have a pretty good track record that when we've sold assets or negotiated our way out of those loans, we've generally had a slight gain on the resolutions of those credits, which I think reflects that for the most part, we have those loans marked pretty close to where we're exiting the transactions.

And then on credit quality more broadly. I know you mentioned in the prepared remarks you don't have exposure to tricolor or any of the other names that have come up, but I'm curious if you've done any reviews on procedures or policies, particularly on the asset-based lending vertical within specialized industries after the recent credit events that have surfaced over the past several weeks.

Yes. Great question. We have. Obviously, we made sure all -- like I said earlier, all the names that have been in the press recently, we have no exposure. We reviewed our NDFI book, which is about $2.3 billion, $1.1 billion of that is MSR lending, and we lend to the biggest mortgage REITs and originators in the country. We feel good about that. And then on the sort of lender finance side, we're at about $1 billion of commitments, $600 million of which is drawn, and we went through that book, and we feel very good about it as well. So yes, we did a detailed review just given recent events in other parts of the industry.

The next question comes from Matthew Breese with Stephens Inc.

I wanted to go back to the NIM. What percentage of loans today are pure floating rate? And then second, if you have it, what was the spot cost of deposits either today or at quarter end?

Yes. So the vast -- I would say that when you look at our balance sheet today, the C&I loans are floating. You've got -- I mean, the residential loans that we have are typically 5- or 7- or 10-year arms. So they flow, but only after sort of 5, 7 or 10 years. So you've got a little bit of floating there. So those are kind of the -- obviously, you got cash, you got some of the securities as well. So that's what I would sort of say as it relates to the asset side of the balance sheet.

As it relates to our spot rate, we were at -- and I'm just looking at our daily report. So we were at [ $2.82 ] a couple of days ago, Matt.

Great. I appreciate that. And then the second one, within the updated guidance, there was a change in the tangible book value outlook. It now includes the warrants. What drove that change? And could you help us out with the average diluted versus common share outstanding expectations for the fourth quarter and early 2026? I also think there was some thinking, and I was curious on this as well that you'll be profitable in the fourth quarter. I was curious if that holds up as well?

So that is what's driving it. It's the warrants. So the warrants kick in, in Q4, the share count goes from about 416 million to 480 million and then that carries through in '26 and '27. We've also adjusted the total book value on the guidance slide for the warrants as well. So that's what you see, Matt, exactly right.

And that will impact average diluted as well as common shares outstanding?

Yes, that's correct.

Okay. And then on profitability, is the expectation still that you'll be profitable in 4Q?

We expect to be, but there's a lot of moving parts. And I think, again, I'll just point to the progress that we've made quarter-over-quarter for the last few quarters.

The next question comes from David Smith with Truth Securities.

Technical 1 on capital. After the holdco got consolidated down to the bank, I think there were some preferreds that got moved down. Is there any difference in how those are going to qualify for Tier 1 treatment now?

No. No change at all in how they will qualify.

The next question comes from Jon Arfstrom with RBC Capital Markets.

On the CRE pricing, you mentioned earlier, Lee, is that market or acceptable pricing on renewals? Just curious if you're losing deals on pricing? Or is that not really the case?

So I would say, and this is why we're seeing a significant amount of par payoffs that borrowers are able to get better deals at other institutions or the agency. So we've been very rigid in not moving off the 5-year flub plus 300 or prime plus 375. The reason being, as you know, we are overly concentrated in CRE, and we are looking to reduce that concentration. And so I think the reason that you've seen the heightened payoffs that we've experienced is we're being very rigid and sticking to that sort of knitting. And I think other lenders are leaning into the space and those borrowers are able to get better deals than what I just mentioned, and that's what's driving the par payoffs. And we're okay with that because, again, we're trying to reduce our exposure to CRE and multifamily and get to that diversified balance sheet structure.

Okay. Good. I appreciate that. And then, Joseph, for you, maybe kind of a simple question. But when I look at the credit stats, they're kind of flat to down. And I know it's not linear, but in your mind, is there anything new in the legacy credit book relative to a quarter ago? Or is it basically you know where the issues are and it's just timing for these numbers to fall?

Yes. There's nothing new. We obviously went through the entire multi-family portfolio again. And we laid out on Slide 18, really where the perceived risk is in the bank, which is in that greater than 50% regulated. So I think this is more -- the train is on the tracks. It's our responsibility to clean up the credit problems, and I think we're on a really structured path to get that done.

This concludes the question-and-answer session. I'll turn the call to Mr. Otting for closing remarks.

Well, thank you, everybody, and I'd like to personally thank our Board and especially our Lead Director, Secretary Steven Mnuchin. The work and commitment has been really important. And the leadership team at the bank has really valued the Board I think maybe over the last 12 to 15 months, we probably set a record for Board and committee meetings and in a bank. And it really shows in the results.

I'd also like to thank the executive leadership team of the bank and the women and men of the company. We really are focused on building a great company. And I thank you for all your work, dedication to the bank and very much important to our customers. And then as a final note, I'd like to thank the Federal Reserve and especially Mona Johnson and her team. While we no longer be regulated by the Fed, she was a source of knowledge and assistance as we navigated our challenges. So thank very much appreciate Mona and the Fed team who helped us. So thank you again for taking the time to join us this morning and your interest in Flagstar Bank.

This concludes today's call. Thank you for joining. You may now disconnect.

Thanks, everybody. Good afternoon. We're excited to welcome Flagstar Financial with us as our next speaker in fireside chat. We're excited to have Joseph Otting, the Chairman, President and CEO; Lee Smith, Chief Financial Officer; and Rich Raffetto, the Senior EVP and President of Commercial and Private Banking.

Thank you.

Thanks very much for being here.

Hello, everybody.

Yes. Maybe we'll start off maybe at a higher level with your background, Joseph is former controller of the currency and your lead director's background is former Secretary of the Treasury. It feels like Flagstar may be a little closer to regulatory leaders in the administration today than your average bank. Where would you see bank regulation? Or where do you expect bank regulation to go from here? We've all been eagerly awaiting some clarity on Cat IV and where you see some of the early opportunities for positive movement?

Yes. First of all, it's a pleasure to be here at the conference. This is one of the pre-M&A banking conferences. So thank you very much for hosting. And just by the volume of people and the excitement of the individual meetings, it's a great opportunity for Flagstar. This is like our coming out party, so it's great to do it at the Barclays Conference.

I think when you think about regulatory relations in the U.S., I think from the banking industry side for a number of years, they felt like the cost of the structure was prohibitive. It was complex. It was difficult and it impeded really good economic growth in the United States. And I think under this administration, they've set a priority for the banking regulators to always have a safe and sound banking industry, but that they really want the banking examiners to promote growth in the U.S.

And so how is that occurring? I think what you've seen President Trump do is sign a number of executive orders to drive certain aspects of the regulatory community to allow banks do what they do best is lend money, participate in their communities and provide services and be that engine for growth.

And where do you see those priorities occurring? I think we've seen some really pretty quick shifts by taking reputational risk out of the card deck, so to speak, of the regulatory community because frequently, the regulators would tell banks, they didn't want them to do that for reputational risk purposes, which was difficult to define.

But I think removing that had a real positive step. I think de-banking is one we're seeing today where the -- I think the fact of the matter is there has been a lot of debanking that has gone on over the last 5 to 7 years in the banking industry. I think bankers generally point to the AML/BSA regulations as what I've said is like when they look at who are your check cashers, who are your payday lenders, who are your gun manufacturers, who are your bullet manufacturers? And then how are you managing both reputational risk and AML/BSA. Frequently, a bank would say, well, I'm making $25,000 off that relationship and it's costing me $50,000 to manage the regulatory risk. And so you saw a big exit in that regard.

And I think the third area that you're going to see, I think, really Travis and Micky and the other Jonathan regulatory community is really thinking through should Flagstar Bank be regulated as a large bank under the same lens of JPMorgan. We've proven in our country that a regional bank can stumble, almost fail and be absorbed by the system, but we can't have a JPMorgan or a Bank of America or a large bank in America.

So really, I think there has to be added review and ensuring that they're complying, but a bank our size does it really require that enhanced regulatory infrastructure that is very costly to manage and maintain. And can those monies and resources be used to support communities and customers.

Great. Over the last 2 years, Flagstar has obviously gone through a lot of transition and change since you came on board and have brought in a new management team. Maybe just give us a little update on progress towards the goals that you've laid out. At first, it involved a lot of balance sheet movements and structuring, capital raises and a plan for future growth. How -- where are we on the path of that?

Yes. Well, first of all, I think we're in a really good spot. We had highly talented people in the company. We adjunct that with a number of senior executives who had long tenures in the banking business. And then I really believe our Board -- we've accumulated one of the best Boards in the banking industry. There's not too many boards that have the Secretary of Treasury on the Board, Milton Berlinski, who runs a major fund and very knowledgeable banking and then just a lot of what I would describe resident expert.

And it really takes both good management and Board, I think to steer a bank that perhaps was in trouble like this bank was. And the story was this bank got over its skis, so to speak, in commercial real estate, and most of those asset classes were bulletproof for the last 10 years. But if you're in this industry long enough, and I say every asset class has its time in the barrel, and we were in one of those cycles where not only multifamily, but regulated multifamily was really experiencing stress.

And so when we came in and brought capital to the bank, and we said, look, we want to build a really strong regional bank that serves communities across America and has a very highly diversified balance sheet. And so over the last 12 to 15 months, we've raised our capital to be one of the highest capital rated banks in our space. We have one of the highest liquidity levels. And we've really now focused on the future of building out this successful regional bank that focuses on profitability, strong risk governance structure and being able to replace some of the banks that were best-in-class in service in the industry like Silicon Valley and First Republic, Signature Bank and Union Bank become that bank of regional banks that really offers what we think is best-in-class service.

And we're well down that path now. We've really dramatically reduced our commercial real estate exposure. And under Rich Raffetto's leadership in the -- literally in a 3-quarter period, we've now built this machine of commercial banking professionals. We've recruited roughly 200 into the bank. That last quarter, we did $1.8 billion in commitments and roughly $1.2 billion in loan outstandings. And our goal really is to get the balance sheet to look much more deversified in the future.

Great. You announced that you're going to be collapsing the holding company. You have a special shareholder vote coming up in October for that. What's the time line for completing that? And what are the benefits for removing the holding company?

Yes. So just for clarification, what we're doing is we're taking the holding company, and we're merging that into a federal savings bank, and then we're going to merge simultaneously, the Federal Savings Bank the National Bank and effectively not have a holding company. And so the question would be, well, why would you do that? And I answered that question is because the things that you normally use a holding company for, we won't be doing. And what are those things?

Well, frequently, people will have insurance as part of the bank that's done at the holding company. They will want to make equity investments either in funds or various equity investments, we don't to do that. Or they'll do lending that generally will move away from the deposit coverage that will be in the holding company. None of that is something that we have strategic plan.

And so for us, it became an unnecessary layer in our regulatory oversight and structure. So it just made sense both from a cost and oversight perspective to collapse the holding company. And we think that is the best structure for Flagstar Bank.

Rich, maybe shift to you a minute here. And then I hear you joined the bank and you lead C&I and Private Banking. There's a corporate goal to have 1/3 of loans from C&I. How's traction? How is it going and trying to build that out? Maybe you can just talk a little bit about the hiring process, how you're attracting good relationship managers, how you're tracking clients? And how is the growth outlook looking now?

Great. Thank you, Jared. Thanks for hosting us today. I've been a commercial banker for 35 years. Joseph has a couple more years on me. But having had both of us grow up in the business of relationship building and in commercial banking, that's the approach that we're taking here at Flagstar for sure. I think our legacy institutions played in C&I, but it hasn't always been in a relationship-focused fashion.

So what we're doing is we are scaling our commercial banking platform and our Private Banking and Wealth platform. And on the commercial side, if you look at us compared to peer institutions of like size and complexity, we've really been underpenetrated and punching below our weight in commercial banking. So we and the Board saw a really great opportunity to scale our platform and relationship-based commercial banking.

And we've been successful to date in attracting, as Joseph pointed out, nearly 200 new professionals to the organization that have selected Flagstar as the next spot for their career growth. And we're really focusing on attracting mid-career bankers who have proven success either in the geography that they've operated.

And obviously, we're looking to round out commercial banking in all of the geographies were Flagstar has branched -- has north of 360 branches around the country in 4 big attractive geographies. But we're also building out on a national basis, certain specialized industry practice business units and capabilities and attracting mid-career bankers who have a reputation and a following in a particular industry segment.

So we've scaled our specialized industries platform along those lines from 5 specialized industry verticals to now a dozen or so. And we'll further build upon that strength. And we've added new capabilities such as in the energy system, both in oil and gas banking team as well as the renewables energy team. We've further scaled our activities in the health care C&I practice.

We've added a technology and communications team and we've also added an entertainment and sports team. So as we've seen opportunities and then finally, we've more recently entered the subscription finance business as we seek to serve the financial services industry both on the fund side and insurance, et cetera.

So as we scale up these industry specialties, we're able to have a running jump start, if you will, that's providing further momentum from a loan growth perspective and becoming meaningful, whether it's a multibank situation or a bilateral singular bank situation, we have instant street credentials, so to speak, with bankers who know the industry have great relationships in [Rolodex] and we're able to jump start that loan growth.

And as Joseph pointed out, in the second quarter alone, we had new originations and increased originations of over $1.8 billion, and we're very optimistic about keeping that momentum going into the third quarter and beyond as we continue to onboard new bankers in the last 4 quarters, north of 100 revenue-producing bankers have chosen to join the Flagstar platform, and we are far from done.

When do you think you sort of hit that inflection point where it's -- the hiring is behind you and you're really just being able to book that growth?

Well, I think from a C&I perspective, each quarter that this management team has in place, we've slowed the decline of C&I loans, and we very purposefully pruned the portfolio as well as the legacy bank had some low ROE lending-only relationships as well as some really large exposures relative to what we thought was prudent for a bank of our size and complexity.

So we've pruned the portfolio purposely while we've ramped up the originations engine. And we're getting to that point of inflection, so to speak, where we're looking at net loan growth going forward, I think, in the C&I book.

How do deposits play into that? You mentioned just trying to move away from that single product relationship and more into the full relationship. What's the outlook on the deposit growth side from commercial?

Great. Well, I think our commercial and private bank, we have a vibrant platform to build off of. We benefit from having over $21 billion in deposits, many of which we have relationship primacy and we are the primary operating bank. So we're building off of a good base across the commercial and private bank. So there's a real opportunity. And given the relationship focus that we have going forward, we expect, obviously, we'll start to ramp very quickly on the lending side, both in bilateral relationships where we are the primary bank and selectively into multibank relationships where we have a direct dialogue with the company, and that will drive deposit growth going forward as well as fee income momentum.

And we're not only investing in bankers and relationships, but we're also investing in product capabilities. So we're seeing an increased volume in interest rate swap not only capabilities but activity, foreign exchange, treasury management service fees, well as commercial card opportunities, Private Banking and Wealth related to those new relationships on the business side and capital markets opportunities where we just haven't had those opportunities in the past.

On the Private Banking side, you recently hired a new Head of Private Banking and a Chief Investment Officer. How are some of those hirings shaping and driving the private bank strategy?

Great. Great question, Jared. The momentum that we expect to have in our Private Banking and Wealth business is going to help us be that 1/3, 1/3, 1/3 balanced business mix with the final 1/3 certainly being consumer and private banking and wealth. And some of our new hires, including Mark Pittsey, who we announced in March would come over and lead that business. He had led the private banking and wealth franchise in North America for HSBC and was a senior person business at Wells Fargo previously. With that comes momentum.

And we think momentum is really important, and we followed that with a new Chief Investment Officer. We'll have some additional new hires to announce here shortly. We're adding professionals in the wealth planning arena as well as in insurance to really round out the private banking and wealth offering.

We're also going to -- we have been ramping up our private banking lending. Our organization has a historic competency in the mortgage business, and we are increasing our activities, and we launched an interest-only mortgage product, again, to fill in the market gap left by First Republic and others, where we see a real opportunity to broaden and deepen existing relationships where we may only have been on the business side to add the personal side to those relationships as well. So we're quite bullish on the build-out of our private banking and wealth enterprise under Mark's leadership.

Great. We have a few questions for the audience. If you can use your BlackBerry-looking device there to give us your opinion, we'd appreciate it.

First question, what's your current position in Flagstar shares? One, overweight or long; two, market weight or equal weight; three, underweight or short; or 4 not involved?

So it looks like there's a room of opportunity here, 36%, not involved right now and almost another 1/3 that are more equal weight. Hopefully, you're able to transfer some of these into new shareholders.

All right. Second question now, which would have the largest impact on improving the relative valuation of shares of Flagstar? One, better relative margin performance; two, above peer loan growth; three, better expense control; four, credit quality outperformance; five, more active share repurchases; or six accretive bank acquisition. These are what we ask everybody. So we'll see how this comes out. So 2/3 credit quality outperformance. In seems like you're continuing to make progress on that.

And I think that's a very important point. I mean what we hear from other investors is us achieving fourth quarter profitability, which we're on track to do, and then a continued improvement in the credit the financial institution out of the 2 variables. So I think people in the short run are looking for improvement.

Great. Our third question. What will organic loan growth be at Flagstar next year in 2026? One, 3% to 5%; two, 5% to 7%; three, 7% to 9% and four, greater than 9%?

How come Lee and Rich and I didn't get...

Yes. There will be a super one -- so I'll move up, starting to see some of that traction and expectations, 43%, 5% to 7% and another 1/3 at 3% to 5% growth.

All right. Overall margin in 2026 versus the 1.81% in 2Q and the current guidance for 2.40% to 2.60% for the full year '26. So 3.20% or lower -- I'm sorry, 2.30% or lower; two, 2.30% to 2.50%; three, 2.50% 50 to 2.70% or four 2.70% or higher. And Lee, feel free to jump in on this, too.

I think he want to comment. I mean the one thing that we're confident is there are lots of levers.

There are a lot of levers. And I think we'll get into that. On the next question, we'll talk about those levers.

All right. So 2.30% and 2.50% and our fifth -- how should excess capital be deployed increase the dividend, share buybacks or reinvest in the business?

I know where I would vote.

Reinvest in the business.

I think I'm closer to that beer now.

Great. Lee, following up on the margin and NII. The near-term target for NII and margin was reduced, but your longer-term goals remained unchanged. Can you just sort of walk through the drivers of that for us? And how do you think Flagstar is positioned for the likely rate cuts that are going to be coming the rest of this year?

Yes. First of all, good afternoon, Jared. Thanks for having us. Good to see you and everybody else. So the main driver of the reduction in net interest income was really we saw heightened payoffs of the CRE book, particularly family loans in Q2. So we were estimating that we would be between $800 million, $900 million a quarter, and there was $1.5 billion of par payoffs.

Now what I would tell you is 45% $680 million of those par payoffs were substandard loans. And we're okay with that because that just accelerates the derisking of the balance sheet, and it accelerates us getting to that more diversified of 1/3, 1/3, 1/3. It did have a short-term impact on the interest income in '25. And so we reduced our guidance, but we were able to offset a lot of that because we've outperformed on our cost reductions.

We had talked about taking $600 million of noninterest expense out of this organization year-over-year. We're going to be closer to $750 million. And so when we look in '26, that smaller balance sheet rolls into '26. And so we adjusted the net interest income down in '26. We were able to offset entire reduction with those cost reductions that I just mentioned. As we think about a lot of the levers that we have to increase improve our NIM and net interest income, I think we're in a very unique position.

We have between '25, '26 and '27 $20 billion of multifamily loans with a weighted average coupon of less than 3.8% that are either maturing or resetting. And if they reset and stay with Flagstar, then they reprice into a new note, which is 5-year follow-up plus 300 basis points or prime plus 275. So they're going for -- if they stay with Flagstar, they're going from less than 3.8% to at least 7.5%.

And obviously, if they pay off, then we will use that cash to invest in growing Richie's businesses or paying down high-cost broker deposits. We're also -- as we think about asset generation, Rich has talked about the great growth that we've seen from the bankers that he and Joseph have brought to Flagstar. We think in this declining rate environment, you're going to see us add a lot more residential 1 to 4 mortgages.

And our mortgage strategy is very much geared to high net worth comes who we can put their mortgages on balance sheet, leverage those lines to bring in deposits, wealth business or other opportunities. And we are going to turn CRE lending back on in Q4. So as we think about high-quality CRE loans in other parts of our footprint, Michigan, California, South Florida, we will look to originate those higher-quality CRE loans as well.

So we've got a lot of different ways that we can originate and grow assets organically. I think as you know, Jared, we've done a nice job of reducing the cost of our core deposits despite being no Fed reductions in the first half of this year. So as retail CDs have matured, we've been able to retain 85% of those and put them into new CDs at much lower rates. We've been tactical with some of our -- with what we're paying on some of our savings deposits and interest-bearing DDAs.

And then we've used excess cash to pay down broker deposits and FHLB advances, which are high cost as well. So again, that's just another lever on the liability side to continue to manage the NIM. If the Fed does reduce rates, our expectation is our deposit beta on interest-bearing deposits will be in the 55% to 60% range.

And then another piece of the equation as we grow that C&I business, Rich touched on this, we believe we can leverage those relationships, not just for deposits, but for fee income. So being lead left is one example, treasury management, swap fees, FX fees. So we're sort of seeing growth in that fee income and noninterest income part of the P&L. I think we've proven that we can sort of manage the cost. We're very myopic about that.

And we have over $3 billion of nonaccrual loans. And those nonaccrual loans are -- I look at it as locked up capital and locked up earnings. And as we can sort of reduce those, they're 150% risk weighted. So we'll get a pickup on the capital, but then we're going to take them from being nonaccrual and move them back into interest-earning assets.

When you look at the trends in CRE paydown, you mentioned second quarter, significantly higher level than expected with great representation and that's up standard. What's the pace -- so is that pace continuing as we move through the summer? And what's the expectation for sort of the appetite for other lenders to take these loans out? Is that continuing unabated?

Yes, we're absolutely seeing that continue. So we think Q3 will look very similar to Q2, where we're close to $1.5 billion of par payoffs. We think 45% to 50% will be substandard. And typically, we're seeing 20%, 25% that are refinancing are going to the agencies, Fannie, Freddie, with the remainder going to other financial institutions. So there's a lot of appetite out there for this asset class. And obviously, that's good for us because in terms of our strategy and just lightening up on that asset class in order to get to that diversified balance sheet that Joseph mentioned, it just accelerates our journey.

When we look at the $3 billion of nonaccrual loans, is there an appetite at all for sale or for doing something maybe to unlock some of that capital in the near term? Or is it -- do you feel that it's just going to be naturally moving off of balance sheet?

Yes. Yes. We have -- it's a multi sort of option strategy. So we're looking at DPOs. We're looking at workouts. We're looking at sales. Every loan is different. So you have to kind of deal with each one sort of separately. They all have their nuances. I mean, Joseph and I, we talk about it being a game of inches. And we're obviously going to choose the option that provides the best economic out for the bank. And I think we've proven we've been successful at doing that with some of the sales that we executed on in Q4 and Q1.

But there's a lot of different strategies we can deploy to bring those nonaccruals down. I do think, again, in a decreasing rate environment, that's only going to help us or accelerate us being able to do that because it will bring those nonaccrual loans into the money.

In the last slide deck, you gave some really great data on the multifamily portfolio in New York and the evaluation that you've done on those properties. From the conversations you've had with those property owners, how are they thinking about supporting those properties today as those are coming due? Are you seeing them be able to come with additional equity? How are they performing in this environment [with affordable] backdrop in New York.

Yes. I think at this point, we've been sort of very rigid when loans hit their reset date. You have 2 options with Flagstar. You have the 5-year FHLB plus 300 or the prime plus 275. And we've not wavered off that because our strategy has been to rightsize that portfolio. But I think you've seen just given the amount of par payoff, there's plenty of appetite out there, and 50% of our par payoffs have been substandard.

And so it's an asset class where there is a lot of demand out there and the borrowers obviously are looking for the best deals that they can find and they're able to find them. I think the other thing with a lot of the multifamily borrowers that we have, they're typically families and these properties have been in the families for generations. And so they've benefited from the 1031 tax rollover. So they have very low tax basis. So yes, generally, we're absolutely seeing the borrowers stand behind these properties.

Yes. And I think illustrative of that is roughly low 40% our nonaccrual portfolio continues to pay as agreed. So it's reflective that they want to keep these assets. They're using external resources from the properties, cash flow or liquidity to maintain updated status.

In this fall, there's an election coming up here in New York. Joseph, I would love to hear your thoughts on that and what potential Mamdani administration could do to sort of the strategy and the pace of that transformation?

Yes. I think Mamdani has ran an unbelievable campaign, and there hasn't been dilution after the primaries. It's actually somewhat accelerated. So I think we all have to live with the reality as he could become mayor of the City of New York. More specific to us is his viewpoints on the rent-regulated properties saying that he would freeze rents in the rent regulated.

Our observation in that portfolio is in 2023, when we really -- or excuse me, 2024, when we really went through portfolio, we had a number of downgrades in that portfolio from, first of all, starting with a fixed charge coverage and then what the loan to values look like.

This year, based upon the 2024 data, we're not really seeing movement and deterioration in credit quality. And I think what's happened in that business is you kind of hedge your revenue hedged, but you had your expenses unhedged, like the exact of what you'd want to look like. And as we went through that inflationary period, insurance rose, HVAC systems were up, you know what I mean, a lot of things drove cost up.

But we don't see the deterioration on last year occurring in the portfolio that which we've been through. And I think we have another 12 months at 3% increases. So the big challenge, I think, in that space is really interest rates. And if we can see interest rates pull back, as Lee commented, I think a number of those properties will continue to be fine. But if we go through a multiyear of those rates being fixed, I think it could be problematic in the future.

Let's see if there's any questions in the audience. Happy open it up.

Impact on collateral values?

Yes. So we actually suspended any of that activity when we arrived in April of last year. So we have not done any regulated new properties. We have done some restructurings for customers where we have full relationships with. But we have been basically out of that business out for 15 months.

So presumably, it's in runoff if there were adverse consequences from rent regulation.

Yes. In our quarterly deck last quarter, if you haven't seen it, Page 19, really gives a detailed breakdown of our rent regulated, and it bifurcates it based upon the percentage of rent regulated. And then in that bifurcation, it gives loan-to-value, lease cash flow coverage with the lease percentages are. And then in that portfolio, we give a breakdown of the asset quality within each of those categories. It's worth a look.

I think initially, there were some numbers that were very high in our exposure in the 50% or more. It turns out it was about $9.9 billion. It's down since that period of time. But we do see that running down over the next 24 months, probably another 15% to 20%. Do you have another question.

A few questions on the multifamily portfolio. Number one, you say that a lot of your loans have very low loan to value. Do you have a feel for what their cost basis is on their properties so that they actually handed you the keys, they would have a big tax bill?

Yes. We don't have it by specific property. Obviously, that would be confidential information that the borrower has. And we didn't seek that out as we kind of went through that process. But you can imply by amount of properties that if you were just singularly looking at the property, you would question it either has to be a nostalgic or their basis as to why they continue to make the payments when the properties do not sufficiently cover the cash flow.

Two follow-up. What do you expect to be having to the portfolio as the big bulge of refi over the next 2 years that go from a 3.5% coupon, to a 7% coupon. I mean, I can kind of do the math, that's a significant increase in interest expense for those property holders. What do you expect to happen there?

Like we said, we saw $1.5 billion of par payoffs just in the second quarter. We're seeing a similar trend in Q3. So I think a lower rate environment will accelerate the par payoffs of those loans, and that fits into our strategy of reducing our exposure to that asset class in order that we can get to a more diversified balance sheet of 1/3, 1/3, 1/3. So I think you'll just -- you'll continue to see those heightened par payoffs.

And I think one comment, Lee made a comment that 45% of those $1.5 billion payoffs were in substandard credits. And as we all know, substandard is the client has the flu. It's not just a little cold. There's real cash flow-related issues. But the other thing is 20% to 22% of those payoffs are in the regulated portfolio. So sizable ability to continue to decrease those dollar amounts.

Yes. Can I just ask on cost of deposits in Q3, except for -- excluding the September cut, would you expect a big catch-up benefit based on the CD repricing as well as the actions you've taken to strengthen the deposit base? Or do you expect it to be closer to flattish versus the second quarter, excluding the September cut?

The cost of...

The cost of deposits.

You're going to see our cost of deposits come down in Q3. And just one of the levers I mentioned, we've got $5.5 billion of retail CDs that are maturing in the third quarter at a weighted average cost of 4.5%. So we're going to naturally -- we've been retaining 85% of retail CDs that have been maturing, and we're able to reprice them at a lower rate.

And so you've got that dynamic playing with some of the excess cash that we've got from the par payoffs. We've paid down some additional brokered deposits, which are high cost. And then we've been very tactical, as I say, with some of our other interest-bearing deposits. So you will see us continue to reduce the cost of deposits even without the Fed cuts. And then the Fed cuts, they happen, we target a 55% to 60% beta.

Yes. And I think one of the things, like when we got here, it was about $12 billion of brokered deposits. We're down -- we've paid down $5.5 billion this year alone. And those are the highest cost because those are what the market was pricing those at the time they were issued.

Maybe the last question.

When is the time for potential M&A? Like at what point would you be ready?

Well, the way we look at that is we have so many opportunities the company. Our market share in C&I lending across the United States was 1% when we started this journey. And our focus on driving up the quality of our service with our customers, lowering our deposit costs are all things that we have in-house, the company that we can do.

And based upon our 2027 numbers, we think we get back very close to the market valuation is. And let's just say that's $13 today, 2026 book value is $18. And then we get 1.4 to 1.6x, you get a really quick valuation on the stock just by executing on our internal plan. But I think we're also highly focused on building out the risk governance structure Category IV bank.

And we think that all positions us very uniquely to be able to be strategically advantaged with that risk governance structure to be able to take advantage of opportunities as they're presented to us. A lot of people are out the bay of the Category IV, not knowing quite what to do. And if we're already there, I think that is very advantageous for us. We'll all celebrate together.

Great. Well, that's our time. Thank you very much to the Flagstar team and thanks, everyone, for joining us.

Thank you.

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 2025 Earnings Conference Call. [Operator Instructions] And I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Sal, you may begin.

Thank you, Krista, and good morning, everyone. Welcome to Flagstar Financial's Second Quarter 2025 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, [email protected]. In addition, please note that certain comments made today by the management team of Flagstar may include forward-looking statements within the meaning 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. Otting. Joseph, please go ahead.

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&I growth strategy as we generated almost $1.9 billion of commitments and $1.2 billion in new loans 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 on our plan to exceed prior estimates. Our credit quality improved as both criticized and classified assets declined 9% and nonaccrual loans declined by 4%. We meaningfully reduced our CRE exposure via record par payoffs, almost $1.5 billion, 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 all resulted in our CET1 capital ratio increasing to 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&I. This will further diversify our loan portfolio and generate deposits and fee income. We'll continue to reduce operating expenses and will reduce the level of nonaccrual loans and criticized and 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 the market.

Before jumping into our financial results for the quarter more fully, I'd like to turn to Slide 3 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 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 4 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&I and private bank growth initiatives, proactively manage the CRE portfolio, including reducing our concentrations, and Lee will cover that later on a slide, but we've made really spectacular strides in not only reducing the CRE portfolio, but taking corrective actions and the credit quality improvement through lower provisions and credit losses.

The next few slides show the significant progress made during the second quarter in our C&I business. Beginning on Slide 5, 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 2 focus areas, specialized industries lending and corporate/regional commercial banking.

Overall, new commitments increased 80% compared to the prior quarter to the $1.9 billion, while originations increased almost 60% to the $1.2 billion. But I think just more importantly is our pipeline currently stands at $1.2 billion, up 40% compared to the first quarter pipeline. And I really think this is just reflective of the focuses, the industries and bringing on really talented people into the organization, most who have 25 to 35 years of operating 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 and a middle market commercial banking franchise within Flagstar's main -- 4 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, health care, 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 6 depicts the momentum in these areas over the past several quarters. In our 2 focus areas, originations increased 81% to $810 million, while commitments slightly more than doubled to $1.7 billion. On Slide 7, while overall C&I loans declined modestly during the quarter due to our managed approach to derisking certain outsized credits in the legacy C&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 million or about 12% compared to the prior -- to the previous quarter. Runoff has decelerated as we have lowered our commitments in the C&I portfolio and along with growing momentum and new hires, we believe that the overall C&I portfolio will grow in the third quarter. On Slide 8, 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.

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 million, an improvement of plus $32 million 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 $1.3 billion, achieved significant growth in new C&I originations and saw record CRE par payoffs. In Q2, we paid down over $2 billion of brokered deposits at an average weighted cost of 4.60%. And we also let $2 billion of high-cost mortgage escrow-related deposits with a weighted average cost of 4.70% run off during the month of June. We also paid off $1 billion of flub advances right at quarter end with a weighted average cost of 4.50%. 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 $4.9 billion of retail CDs matured with a weighted average cost of 4.80%. 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 $5.2 billion of retail CDs maturing at a weighted average cost of 4.50%. 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 we will look for further opportunities to reduce our cost of funds during the remainder of 2025. We also accelerated $2 billion of investment securities purchases during the quarter to optimize our net interest margin. Collectively, these actions resulted in a 7 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&I business. We are thrilled with their performance and are firmly on pace to hit our target of $1.5 billion of funded C&I loans per quarter.

I should note that during the quarter, we had legacy C&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 $1.3 billion to $12.7 billion in the quarter, a result of payoffs and upgrades. Criticized assets have been reduced $2.2 billion or 15% since the beginning of the year.

The one borrower we moved to nonaccrual 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 8 loans, we've moved to appoint a receiver in the various jurisdictions and take direct control of these properties. With respect to the 30- to 89-day delinquencies, approximately $332 million were driven by one borrower who pays subsequent to month end and has done so again, meaning that about $329 million 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-regulated multifamily portfolio. When you look at all multifamily buildings that are more than 50% rent regulated, approximately $10 billion are within New York City with an average occupancy of 97% and a current loan-to-value ratio of 69%.

Of this $10 billion, $5.6 billion or 57% are pass rated loans. The remaining $4.3 billion or 43% are criticized or classified loans, meaning they are either special mention, substandard or on nonaccrual. Of this $4.3 billion, the current LTV is 79%. Interestingly, $1.9 billion are nonaccrual 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 18 months on 77% of these loans and updated financials on 93%.

If you subtract the nonaccrual loans from this criticized population, you are left with $2.3 billion. Of this $2.3 billion amount between charge-offs and ACL reserves, we have approximately 6% or $137 million of charge-off and reserve coverage. I should point out that of the $2.3 billion 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 2026, meaning they are in the 18-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 9. 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 million of merger-related expenses, $2 million of severance costs related to branch closures, $7 million in accelerated lease costs also related to branch closures and $3 million 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 million this quarter, an improvement of $32 million compared to last quarter. The following slide provides our updated 3-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 million and 10 basis points in 2025, but offsetting $75 million of that with a reduction in noninterest 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 million next year, but offset that entirely with $100 million of lower noninterest expense, meaning that our adjusted EPS guidance in '26 does not change, and there is no change to our '27 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 our cost of deposits lower, low coupon multifamily loans resetting higher or paying off at par, net growth in higher-yielding C&I loans and a reduction in nonaccrual loan balances. Earlier, Joseph touched on the reduction in our noninterest 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 million of costs on a year-over-year basis.

Our cost reduction efforts are focused on the following 5 areas: compensation and benefits, real estate optimization, vendor costs, outsourcing, offshoring nonstrategic back-office functions and processes and FDIC expenses. Quarter-over-quarter, expenses decreased $24 million, and we are significantly ahead of our full year 2025 noninterest expense guidance. Our cost savings are net of growth in other areas such as the build-out of our C&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&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 $2.2 billion of high-cost brokered deposits and approximately $2 billion of mortgage escrow-related deposits. The next slide shows our CRE par payoffs. We had a record quarter of par payoffs of approximately $1.5 billion, almost double the amount for the first quarter. Of this amount, 45% or $680 million were rated as substandard.

Approximately $500 million of this quarter's par payoffs or 33% were New York City greater than 50% rent-regulated buildings. This quarter's record number of CRE par payoffs provides an indication of the robustness of the market for these loans. And while this acceleration of par payoffs impact short-term earnings, it also accelerates our strategy to diversify our balance sheet to 1/3 CRE, 1/3 C&I and 1/3 consumer. These par 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 billion or 16% to $39.7 billion while the CRE concentration ratio is down 80 percentage points to 421% compared to 501% at year-end 2023. Slide 16 provides an overview of the multifamily portfolio. This portfolio has declined nearly $4 billion 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 billion of multifamily loans either resetting or maturing between now and the end of 2027, with a weighted average coupon of less than 3.7%. If these loans pay off, we will reinvest the proceeds and capital into C&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 January 1, 2024, approximately $4.9 billion of CRE loans have reset.

Of that amount, $2.3 billion has paid off at par and $1.9 billion have reset and occurrence, meaning 85% of CRE loans that have reset have at either paid off at par or current. Skipping to Slide 18. This slide details our ACL by loan category. Our ACL reserve decreased $53 million 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 million 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 $1.3 billion or 9% on a quarter-over-quarter basis to $12.7 billion, while they are down $2.2 billion or 15% since the beginning of the year. Net charge-offs of $117 million were relatively unchanged compared to the prior quarter at $115 million. 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.

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 $12.05, reflecting 70% of second quarter tangible book value per share compared to 160% for our peers. As we continue to improve our credit quality profile, 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 1x 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% from current levels. We have made significant strides during the first 6 months of the year, and we anticipate further progress over the remaining 6 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.

[Operator Instructions] Your first question comes from Jared Shaw with Barclays.

I 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, I guess, ending margin, does that take into account the FHLB payoff and sort of expectations around interest recapture in that? .

Yes, it does. So thanks for the question, Jared. We pulled forward $2 billion. If you go back last quarter, we -- 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 end of 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

Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. .

Joseph, I think you had previously suggested that stock repurchases were possible in mid-'26. Is that still sort of the expected time frame for buybacks? Or do you -- has it been pulled forward at all given your strong capital position.

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&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&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 '26, 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.

Yes. I think, Mark, what Lee 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.

Your next question comes from the line of Christopher McGratty with KBW.

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 payoffs, albeit at par, I guess, what's the degree of confidence that the payoff acceleration will continue in the asset base will be smaller?

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 '25, the balance sheet will be about $93.3 billion. So that's about $2.7 billion 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 par payoffs.

And then as we mentioned, we had a slide -- it was -- C&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 outsourced positions, poorer credit or credits that weren't meeting our profitability thresholds. We do think that in Q3, we will be net positive from a C&I point of view. But you've got that smaller balance sheet.

And as I mentioned in my prepared remarks, that rolls into '26 and then we start to recover some of that in '27. So the ending balance sheet at the end of '26 is about $98.5 billion. We were around $102 million -- and then in '27, the ending balance sheet is $109.6 billion versus $111.4 billion. And then the only other thing I'd add on '26 is just given the exceptional progress we've made with our expense optimization plan, we can offset dollar for dollar that reduction in guidance for net interest income with those cost reductions in '26.

Great. That's helpful. And my follow-up would be the collapsing of the holding company. I saw the $15 million of annual cost. That's great. I presume this will lead you to have to avoid to do CCAR. But any other comments on the collapsing would be great.

Yes. Clearly, as we've kind of 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 million that will reduce our costs. And those are predominantly third-party costs. There will also be some internal costs that we feel that we can successfully take off. But I think also it focuses into one regulatory supervision process within the company. And you're right, there is -- 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.

Your next question comes from the line of Ebrahim Poonawala with Bank of America.

I guess maybe just wanted to go through -- I think, Lee, you mentioned in terms of obviously nonaccrual loans are declining. You talked about repricing. 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 lower rates help if you don't get much relief on rates, is that incrementally negative or not if you look out the next 6 to 12 months? And then obviously, with all this chatter about the mayor elections in New York, how bad could that be for these clients.

Thanks, Ebrahim. 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 billion. And of that $10 billion, 97% is occupied, and it adds a 69% current LTV. When you further break that sort of $10 billion down, $5.6 billion 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 $4.3 billion, which is criticized and classified. So special mention, substandard and non-accrual.

And of that $4.3 billion, $1.9 billion is nonaccrual. 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. $334 million or almost 15% of charge-offs against that population. And we have a further $82 million or 4% of reserves against it. So we've obviously done a lot of work on the nonaccrual portfolio and written that down to 90% of appraised value. So then you're left with $2.3 billion, which is special mention and substandard, and of that $2.3 billion, we've got $137 million or about 6% coverage between ACL and charge-offs.

And I think what I would also point out about that $2.3 billion is 50% of that $2.3 billion has already reset and is continuing to pay. And 40% will reset within the next 18 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 18 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 try 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 will speed up the payoffs of that multifamily portfolio. And I think it probably brings any of the multifamily loans that are nonaccrual, it moves them further into the money.

Yes. Ebrahim, the other comment I'd make, if you look at the amortizing debt service coverage numbers, that kind of gets to your point. We all know that the next 12 months, the annual leases are going to go up 3% and multiyear, 2-year leases will go up 5.5%. Where you could see impact of the freezing of rent increases, which would not occur until July of '26, that 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 100% -- almost 100% occupied. But it really comes down to just if rents are frozen, then what's the arc of the operating expenses.

Your next question comes from the line of Manan Gosalia with Morgan Stanley.

Can you give us some more color on the change in the NII guide? I hear you that on the higher paydowns, but I was wondering if -- doesn't that come with paydowns 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 I'm wondering what I'm missing there. Is there less of a yield pickup as you move from some of the CRE paydowns into C&I or anything else happening there?

Yes. No, it's a great question. So when you look at the NIM change, there is sort of a rate and there's a volume impact. And I think we've obviously talked about the volume and what's -- 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 rate 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 tightening 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 nonaccruals. 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 billion balance sheet, then you have the volume reduction. That's why we've just tweaked the guidance down by $125 million and 10 basis points.

Got it. Did you have what the new loans are coming on at?

Could you say that again, please?

Do you have what the new C&I loans are coming on at what...

Yes. Yes, they're coming on a spread to SOFR depending on the type, anywhere -- spread to SOFR anywhere from 175 to 300 just depending on the type of the C&I loan that's coming on.

Your next question comes from the line of Bernard Von Gizycki with Deutsche Bank.

Just questions. I know you're trying to reduce your multifamily concentration and utilize proceeds into growing C&I. So the $16 billion in the regulated portfolio, are you contemplating any sales here? Or will reductions here going forward be from any maturing or charge-offs?

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 '27, we've got another $16 billion 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 nonaccrual 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.

Yes. And the other thing I would add there is, obviously, we're trying to work with borrowers where we can enhance the credit either through at maturities paydowns or then offering up 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, and we saw significant results this quarter from that effort.

Okay. And just one follow-up. Lee, I know you mentioned the one borrower that moved to nonaccrual status in 1Q and filed for bankruptcy in the second quarter. I know you took some adjustments in reserves and the 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?

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 million and in just some additional charge-offs. So when you look at where we were in at 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 million.

.

And no NIM reversal.

No. We took all of that in Q1. It was -- we moved it all to nonaccrual in the first quarter.

Your next question comes from the line of Casey Haire with Autonomous Research.

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.

I'm sorry, [ Cay ], 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 par payoffs -- and you've seen that very significant reduction in criticized assets, 15% or $2.2 billion since the beginning of the year. And so right now, we expect those trends to continue.

Okay. Great. And apologies if I missed this on a busy morning. But 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 terms of -- when you get these CRE payoffs, I don't know if it's a bank or some of the GSEs that are taking the other side of this. What kind of change in behavior have you seen from these 3 different constituencies since the primary last month?

Yes. I think there's a couple of buckets. First, to address the payoffs, probably roughly 50% comes from the agencies -- excuse me, 20% come roughly from the agencies. And in most of the instance, those credits meet a higher standard to be able to clear the agency hurdle. Roughly 20% are coming from JPMorgan. So about 40% of the payoffs are coming from those 2 channels. And then the rest is just kind of spread around is the way we would describe it.

And we are -- by our rollover documentation, we're 75 to 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 our intent is to reduce our exposure. Obviously, we've said that all along. And so borrowers are incented to do what they can on the substandard credits, which are 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 paydowns, that can be adding additional collateral, but 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 SOFR-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.

Your next question comes from the line of Matthew Breese with Stephens.

I wanted to follow up on the asset size question. And I heard you loud and clear on the new somewhat lower outlook for total assets. But I guess the question is, what's the cutoff for qualifying for the formal Category 4 bank stress test next year as it seems like you'll be under the threshold. .

We will be under the threshold. But with our transaction that we announced yesterday, we won't even be subject to the requirements.

Understood. And there are additional cost saves from that?

Yes. So no external vendor spend, no need for internal staffing, all of those things.

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 2026. Can you talk about that a bit, curious about size, timing or if that's still necessary?

Yes. Well, 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 will 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 is the capital structure within the company look like? We obviously expect next year -- we're still forecasting a return to profitability in the fourth quarter and that we will be significantly profitable next year in '26. So that's going to start to offer up a lot of options for the Board to consider.

Your next question comes from the line of David Smith with Truist Securities.

I was wondering if you could speak to any downsides that you see to merging the holdco into the bank. You outlined what sounds like some pretty nice positives. I'm just wondering if this is just such a great idea, why we don't see more banks following the same decision.

This is Bao Nguyen. 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 costs associated with the duplicative regulations of the holding company sort of outweighs the 1% of sort of assets that we really have at the holding company.

So for us, given our structure and given that our activities are all at the bank, there is really no downside for us here. There's no changes in our activities. We don't have any plans on engaging in nonbanking 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.

And then I just want to confirm, you still expect to be GAAP EPS profitable for the fourth quarter of this year?

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.

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.

Your next question comes from the line of Christopher Marinac with Janney Montgomery Scott.

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?

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&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.

Yes. I don't think you see -- we're not just buying participations. That's not our strategy. 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 401(k) offerings to companies. And we've also, on 6 or 8 transactions, have either been named lead left or lead right on in our leading credit transaction. So that's kind of our sweet spot with our balance sheet gives us the ability to 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. 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?

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.

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

I'm just thinking about '26 and '27, you have big hiring plans. And curious when you miss on a new hire, what are the top couple of reasons? And then what are some of the reasons the new relationship manager can't get their clients to come to Flagstar? What are the things you need to work on or improve there?

I think 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 describing hundreds of people who, through history, do Rich Raffetto or Joseph Otting as we have both spent 30 to 40 years in the banking business. And so a lot of people see that this is a team that they can join and be part of a winning strategy. So that's what I would say, number one. And number two is a lot of times, people are looking for growth.

And if you're at an institution, a large regional bank or a national bank that 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 the direction we're going.

On the miss side, I would say the real misses ours where the bank comes back and just basically does whatever it takes to keep that person in the company. And that, to me, just reinforces the type of people we're trying to hire or the type of people that organizations want to keep from that perspective. And on the client side, I would say we're really good now in the syndications. I think we're really good in the interest rate derivatives, our products and relationships and credit -- how we deliver credit.

The one area that we will probably need to invest a little bit more in is our treasury management. We're good enough but not great in treasury management. And so as we're doing some of the consolidation efforts this year in the technology and operations area, we'll be through most of those in late Q4 of this year, early Q1 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 this year, we've introduced kind of a capital call 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 5.1 and 7.1 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.

Yes, exactly.

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.

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 of 2024. 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&I business is coming along. We couldn't be more pleased with the talent and the growth in the C&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 Flagstar Bank.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.

Great. Up next, we have Flagstar Financial. I'll read our disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and the use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. And we are delighted to have with us today Lee Smith, Chief Financial Officer of Flagstar. Lee, thanks for joining the conference.

Thank you, Manan. It's great to be here, and good afternoon, everybody.

So Lee, lots to discuss today, but let's start a little bit big picture. When you think about the strategy for the bank, how should investors think about what Flagstar is going to look like 3 to 5 years from now? And what are the key milestones that they should be watching along the way?

Yes. Thanks, Manan. It's a great question. The way we think about it quite simply is 3 to 5 years from now, we want to be one of the best-performing regional banks in the country. We've put out 3-year financial information. And by the time we get to 2027, if you look at all of the metrics that we're aiming for from a financial point of view, that puts us in line with our peers. And so we think that, that is very achievable, and we're obviously making great progress.

I think what I also would say is we are striving to provide just a great customer experience, that is one of our big strategic goals, making it our point of difference across the organization and with -- in all of the business lines that we operate. And so -- and then we're also looking for diversification. I think when you look at the balance sheet in sort of 3, 4, 5 years' time, we're trying to be 1/3, 1/3, 1/3. So 1/3 C&I, 1/3 CRE, 1/3 consumer lending. So you're going to see that diversification, attention to a great customer experience. And then you're going to see our financial metrics move back in line with our peers.

So lots to dig into there, especially the C&I growth story. But maybe before that, if we can spend a little bit of time on commercial real estate and credit overall. Paydowns have been a significant tailwind for the bank over the past few quarters, including, I think, a significant amount coming from substandard, if I remember correctly, about 60% of the paydowns were from the substandard portfolio. So it looks like credit is improving quite meaningfully. Are you continuing to see that come through in the second quarter?

We are, yes. So we are continuing to see significant par paydowns and a substantial amount of those par paydowns are substandard loans. I think what I would say to everybody is, as you know, in 2024, we underwrote the entire CRE book, so multifamily and the CRE office book. We took $900 million of charge-offs, and we significantly increased our ACL reserves and coverage. If you look at what has happened since Q3 of '24, we have started to see those payoffs and a significant amount, as I say, of being substandard loans. That continued through Q1. I think you're going to see the same in the second quarter as well.

And you've also seen over the last 3 quarters, a reduction in charge-offs and you've also seen a reduction in criticized assets. So in the first quarter, we reduced criticized assets by $900 million. And the expectation is you will continue to see those trends, improved trends continue as we move forward here through the remainder of the year and beyond.

So when you think about these payments that are coming in at par, how do you think about deciding which loans you want to keep on the balance sheet versus what you're happy to see refi away?

Yes. So right now, we are obviously trying to reduce our exposure to CRE generally. So contractually, when a loan resets the borrower has 2 options. One would be a 5-year flow plus 300 fixed rate or we have a floating rate, which is prime plus 275. And we're not wavering off of that. And that is why I think you are seeing a significant number of payoffs because if borrowers are able to get a better deal with other financial institutions or the agencies because obviously, we are seeing people move to Fannie and Freddie on the multifamily side, then they're free to do that. And our objective right now is to reduce that CRE concentration so we can build that balance sheet diversification that I spoke about earlier.

Got it. And when you think about these payoffs in general, is there a level of rates that might cause payoffs to slow from here?

Not necessarily. So the resets are contractual. And as we look forward, over the next 3 years, there are $19 billion of loans that are resetting $5 billion in '25, $5 billion in '26 and $9 billion in '27. And so that is just going to happen in the course of time. Now obviously, if rates were to get lower, particularly the 5-year, we always look at the 5-year when talking about multifamily. I think that's helpful because it might accelerate some of those payoffs. But otherwise, just by being patient, we're going to see those loans reset.

Is there an opportunity to sell commercial real estate loans in this environment?

We have. We had 2 pool sales in Q4 and another 2 in Q1. I think it's one of our strategies to further reduce the nonaccrual book. And we've been successful in the sales that we've experienced. We actually booked some small gains on the sales in both Q4 and Q1. So that is absolutely one of the options we have to reduce the nonaccrual loans. Now we're not necessarily looking to sell performing CRE loans because, as I say, with the contractual resets the way they are and the par payoffs that we're seeing, we're very comfortable dealing with those loans through that mechanism.

Got it. So when we think about the risk on the commercial real estate side, what do you think matters the most? What are you watching the most? Is it rates? Is it inflation? Is it the overall environment? What are you most concerned about?

We're looking at all of those factors. There isn't sort of one that outweighs any of the others. What I would say, though, is we are in the process of receiving new financial information. So on an annual basis, we get new financial information on all of our commercial real estate credits. We obviously did that in 2024, where we fully underwrote or re-underwrote the entire book. And we're getting the financial information right now for 2024.

What I would tell you is the financial information we've received today, we feel very positive about. We're not seeing anything really change from what we had already looked at last year. We've seen a handful of upgrades even and de minimis downgrades. The rest have stayed on par with where they were. So we're obviously looking at the financial information. That's a big driver. As I said, if interest rates were to come down, that's helpful, but it's not the end all because you have the contractual resets. And then in terms of inflation, I mean, that is -- it's obviously come down from where it was a couple of years ago. And so I think that's helping owners. They're not sort of seeing those cost increases. So that's a good thing as well.

And is that mostly on the multifamily side, the cost increases?

Yes.

All right. Perfect. Maybe before moving on, there was one credit relationship that you called out that went into nonaccrual in the first quarter. Can you remind us, what that was and if there's any updates there?

Sure. Yes. So we had one borrower who had 90 loans and who had the ability to repay and decided to stop repaying early in '25. So had been paying us through the end of '24, very idiosyncratic, unique situation. We decided to seek all contractual and legal remedies including appointing a receiver. That was approved in the Manhattan Court and then the borrower subsequently filed for bankruptcy or 82 of the 90 properties filed for bankruptcy. We are -- we feel good about that. We feel that it will obviously lead to a much more orderly process as we move forward.

That just happened a couple of weeks ago. There was some first day orders, cash collateral and secondary hearings in the bankruptcy case will be towards the end of this month. But we just feel that having the whole sort of situation under the jurisdiction of the bankruptcy court will lead to a much more orderly process. We feel very good about our secured senior position, and we think that it will play out just following.

That's great detail. Thanks so much. So let's pivot over to C&I lending. The commercial banking, you've clearly been leaning in there, 75 new hires since last June, another 80 to 90 planned for this year. Can you give us some more color on the go-to-market strategy? What clients, the new bankers targeting and how are they incentivizing them to move their business?

Sure. So the C&I strategy is twofold. We have a national strategy around specialty lending verticals. So if you think of sports, entertainment, media, you think of oil and gas, energy, renewables, health care, technology, telecoms, those are national lending verticals. And we've also got a -- we're looking to better penetrate mid-market C&I, upper market C&I within our geographical footprint where we have brand recognition. So that would be New York, New Jersey, South Florida, the Midwest, Arizona and California.

What I would say is, Joseph obviously ran C&I lending, U.S. Bank. He built C&I lending at OneWest from nothing. We brought in Rich Raffetto to run the C&I and private client bank. He's got a lot of experience running C&I businesses. All of the bankers that we've hired are known to Joseph or Rich, and they have typically 25 to 30 years experience. So these are well tenured bankers. The expectation is, they will originate their first loan within 90 days, of being here. They'll originate 3, 4 loans in the first year and then 5 to 7 thereafter. And they are hitting their marks.

In Q1, we originated over $1 billion of commitments. These would be new C&I loans, $750 million of which was funded, and we're on track to do the same in the second quarter. And as you mentioned, we still continue to hire those bankers. Our sweet spot is typically $50 million to $75 million in terms of loan value. So we're not taking outsized positions in any one name. And we're diversified again between the different C&I strategies, so specialty lending and then better penetrating the markets that we're in from a middle market and upper market C&I point of view. And so yes, we feel very good with how that is progressing.

So it sounds like you're on track for that $1 billion increase in C&I outstandings that you were focused on for the second quarter?

So $1 billion of new originations because we do still have runoff of our legacy portfolio. So specialty and some of the other legacy portfolios, we've been rightsizing. And so you have that in the second quarter. We're getting towards the end of that and getting very close to where you'll start to see net growth from a C&I point of view. But in terms of new originations, yes, we will be above the $1 billion mark.

And are there any specific verticals that are getting you the most growth in the second quarter?

It's -- the specialty lending verticals particularly are doing very well. But it's across the board, and we're seeing good traction in the various specialty businesses as well as the middle market C&I as well.

And part of what you've spoken about there in the past is that these relationships are adding on the lending side, but how many of these relationships are also generating fee income for the bank as well?

Yes. So that ultimately is the goal. So I talked about the relationship strategy. And so ultimately, we'll leverage those C&I loans to do a couple of things. One would be to bring in deposits, but also to bring in fee income business. So treasury management and other fee income opportunities. And we've hired someone to build out that treasury management part of the business, which the legacy banks weren't really focused on. And so building those deep relationships with these C&I customers is a big part of the overall strategy.

So when you think about those fee businesses, right, there's treasury management, as you mentioned, but there's also payments, capital markets, 401(k) advisory. What areas are you expecting to drive the most growth over the next few quarters?

Again, I think it will be across the board. So it's the categories you've mentioned. We've just started subscription lending. We feel that can drive additional fee income as well. There was an example that I gave on the first quarter earnings call, we were lead left on a deal for a reputable fund where we were able to bring in structuring fees, agent fees and other fees. So as we build out the C&I business, having those lead left positions is another way we can build fee income.

But we can also generate fee income from the mortgage business and we feel that we'll generate more volume through the private client bankers from a mortgage point of view as well, as well as commission income from the wealth business that we have and deposit fees. So the fee income is sort of coming across multiple categories. We're not just necessarily relying on one.

And then the other piece is the expense side. That's been a big focus on -- for the bank overall, reducing expenses and over the next 3 years while still investing in the business. So you've talked about investing around $40 million in risk governance infrastructure. Can you give us some more color on what those investments are and when they'll be done?

Yes. So we have said that we are taking out $600 million of NIE year-over-year. That number is net of investments we're making in risk and compliance, as you just mentioned, but also the C&I growth that we've talked about. So the $600 million is net. We've been focused on 5 areas. So compensation and benefits, real estate optimization, vendor costs, outsourcing and offshoring noncore back office functions and the FDIC expense as well. So -- and we have effectively accomplished that $600 million. So -- and to give you sort of some examples, if you look back about a year ago, 15 months, the Flagstar organization had 9,000 employees. We're about 5,700 today as a result of some of the business sales that we've done. But also we were able to get synergies out of the 3 banks coming together that we hadn't previously done. And so we were able to sort of get cost savings there. We've obviously been working on reducing vendor costs. I think the legacy organizations had similar vendors doing the same things, and we've been able to consolidate some of our vendor costs as a result of that.

The FDIC expense are somewhat complex because the way they're calculated there's multiple sort of variables, including your liquidity profile, wholesale borrowings, profitability, asset quality, regulatory ratings. But we've done a nice job as we've delevered the balance sheet and paid down brokered deposits and flub advances of reducing those FDIC expenses. We've optimized our real estate portfolio. We've talked about and we took a onetime charge in Q4 of '24 of consolidating 60 bank branches that are in close proximity to other bank branches. There was about 17 private client facilities, again, very close to others where we can consolidate and 2 operating centers that we will be exiting as well.

And then we've outsourced or offshored those noncore back-office functions as an example. We have 6 data centers, one of which was in Manhattan. And so we're going down to 2. And ultimately, we'll get to fewer than that. But there's other back-office functions that our new CIO has been able to offshore or outsource. And so all of those actions that have either happened or are scheduled to happen have got us to that $600 million that we've talked about. And as I say, that's net of the investments we're making in risk compliance and growing the C&I and other parts of the organization as well.

And I know you're leading this effort on the expense side. It sounds like most of the work has already been done or at least been laid out. Is that fair?

It has for the savings that we were looking to achieve in '25. What I would tell you though with cost is you're never done. And it's probably my restructuring background, myopic about the expenses. And so we will continue to drive expenses out of the organization and get as efficient as we can. Obviously, I think we've done a lot of the heavy lifting. And certainly, what I would describe as the low-hanging fruit has been achieved. But I think there's opportunities to drive further savings in some of the categories that we just went through. And our aim is to continue to drive our efficiency ratio down and in line with our peers.

So I want to pivot over to deposits. In addition to the expense side, you've made a lot of progress in improving the funding profile of the company as well. I think you've been paying down wholesale funding, but also you've been growing core deposits. Can you talk a little bit about what you've done on the deposit side and what trends you're seeing more recently in the second quarter?

Sure. So we -- as you mentioned, we've paid down a lot of wholesale borrowings, certainly multiple billions in '24 of FHLB advances, brokered deposits. That continued in the first quarter. We paid down more -- about $2 billion of brokered deposits. And that trend will continue in the second quarter. You'll continue to see us bring down brokered deposits and the intention is to pay $1 billion of flub advances off between now and the end of the year as well. So we continue to reduce wholesale deposits.

At the same time, we're working as hard as we can to reduce the cost of our retail and other deposits that we have on the balance sheet. And we've done a nice job. I mean you saw a significant reduction in the first quarter over Q4. And you will see a reduction in the second quarter over Q1 despite there not being any Fed decreases. So we meet and we are myopic on looking at our deposit costs and what we can do to further optimize those overall costs.

What I would also say is in the second quarter, we've got $4.9 billion of retail CDs maturing at a weighted average cost of 4.8%. So we will get a natural benefit from those maturing and resetting lower. And typically, we've been retaining 80% to 85% of CDs that have been maturing and then replacing that small runoff with new CDs. So we've been very active in managing the cost of our deposits down. And I think when we do get a Fed rate decrease later in the year, looking at the forward curve, we'll target a 55% to 60% beta.

So it sounds like even if we don't get rate cuts, you actually have a line of sight at these deposit costs going down through the...

We have the ability to reduce cost...

Keeping it down...

Yes.

All right. Perfect. And in terms of growing those core deposits, what has your go-to-market strategy been there? Like how much of these new deposits are coming in because of the new products that you're putting on?

Yes. So we're obviously leveraging the new lending relationships to bring in deposits. That takes time. It doesn't happen immediately. We'll sort of leg into that over time, but that's definitely part of the core strategy. And the relationship banking and having deep relationships with our customers, not just it being one way where we're effectively giving our balance sheet away. So that is definitely a core part of the strategy. But I mean, the consumer team has done a really nice job from a deposit point of view as it relates to DDAs and savings deposits and the CDs. We're leveraging the private client groups as well to bring in deposits. And they're using some of their products, whether that be the mortgages as an example, that's a lever to bring in more deposits as well.

And then just other industry relationships we have, obviously, the mortgage relationships have allowed us to raise deposits from mortgage companies that we lend to from an MSR lending point of view. So that's how we've sort of been able to keep up the deposit story.

Got it. And how do you think about the loan-to-deposit ratio for the company overall over time?

Yes. Again, if you look at the 3-year projections that we've put out there, by the time we get to the end of '27, it's about an 80% loan-to-deposit ratio, which is in line with peers. We're probably around high 80s to 90% today. But as I mentioned at the beginning, our aim is to have all of our metrics looking like other regional peers by the end of '27.

Great. The other topic is NIM, and NIM has been starting to stabilize over the past couple of quarters, and your guide is for some nice improvement over the next 3 years. Sure. What is the optimal rate environment for you?

So the NIM strategy, again, there's sort of several tactics, which I'll get into shortly. In terms of the way we think about our balance sheet today, from an interest rate risk point of view, we're neutral. So I think we're in a good position. Obviously, if rates were to decrease, I think it would accelerate multifamily payoffs. The mortgage business would benefit, and you would see both more fee income and obviously, you'd see us add more mortgages to the balance sheet.

But in terms of our NIM strategy going forward, it's sort of really around a few factors. The multifamily loans that are resetting over the next 3 years, so there's $19 billion, they have a weighted average coupon of less than 3.8%. So when they reset, they're resetting at either 5-year [ flub ] plus 300 or prime plus 275. So at a minimum, they're going to 7.5%. So you get a big lift just from those loans resetting. And obviously, if they pay off, then we can invest that into the C&I growth. And typically, the C&I loans, you're looking at a spread to SOFR of anywhere from 175 to 250. And so that's obviously a big improvement on those multifamily loans today that are sitting at sub 3.8%.

As we talked about, we're continuing to be laser-focused on managing the cost of the liability side. So our own deposits as well as paying down those wholesale borrowings and deposits as well. And then we've got over $3 billion of nonaccrual loans. We've been very punitive on ourselves in the way we risk weighted assets last year. And as those -- as we reduce those nonaccrual loans, we'll get the NIM benefit as a result of those moving off of nonaccrual and either reinvesting the proceeds or they become performing and accruing loans. And so there's many levers that we're looking at that obviously help us improve our NIM over that 3-year horizon.

And when a loan moves from nonperforming into performing, do you have a catch-up benefit NII?

We do. Yes. So in many instances, if it goes from nonaccrual back to accrual, you will have a catch-up NIM benefit. That's exactly right.

Got it. So as we think about the right NIM for the bank, I think you mentioned 2.8% to 2.9% by 2027. Can it increase above that? What do you think the normalized NIM for the portfolio you have is?

Yes. So right now, the 2.8%, 2.9% is by the time we get to '27. I do think it can get better, reason being -- that 3-year horizon has $19 billion of the multifamily loans resetting. That still leaves another $14 billion or $15 billion beyond '27. And again, those are low coupon. And so there's definitely room for us to further improve the NIM once we get beyond '27, just given that we'll still have some of those legacy multifamily loans on the balance sheet that will eventually move off or reset. And we will continue to manage the liability side of the balance sheet as tightly as we can. So I do think there's room beyond that 2.8%, 2.9% that you're quoting at the end of '27 for us to get better.

And how do you think about the asset sensitivity of the balance sheet? Because I know some of the C&I loans come on at variable rates. The new CRE you're putting on is also at a variable rate. So how do you think about the asset sensitivity?

Yes, we're neutral. I mean we were slightly -- ever slightly liability sensitive as we pulled forward some securities purchases. And we've sort of hedged that to get back to neutral. So we feel pretty good about our sort of balance sheet sensitivity. And as I mentioned, just we have what I'd describe as a natural business model hedge. If rates were to come down, you would -- it would obviously help us with that multifamily portfolio and the mortgage business. So that's sort of just an embedded business model hedge that we have.

Got it. Perfect. And I think we might have covered this in your responses, but any other quarter-to-date updates that you want to give?

No, I think we're doing exactly what we said we would do. We're executing on the plan. We've obviously covered a lot of areas, but we're continuing to see healthy payoffs and paydowns of that multifamily book. We're seeing good traction in terms of new C&I origination activity. We are managing the liability side of the balance sheet in terms of the cost of deposits. We're paying down wholesale deposits as we said we would. We said we would accelerate securities purchases. We're doing that. And we feel very good about where our cost run rate is.

And as I say, we feel that we've done what we need to do or it's on the schedule to happen in terms of achieving the $600 million year-over-year cost savings. So we're executing and doing everything that we said we were going to do.

All right. Perfect. So I'll end on capital management and regulation overall. You've been pretty clear that you want to deploy the excess capital on the C&I side because that's your key growth area. But over the medium term, what is the right payout structure for the bank between buybacks and dividends?

So right now, as you correctly said, our focus is on investing in the franchise and growing franchise value. And we believe investing in the C&I growth and growing the balance sheet will help -- will obviously help us do that. We're obviously focused on returning to profitability. We've said publicly that we expect to do that in the fourth quarter. And so that is a big milestone for the organization. And that is our sort of near-term focus.

I do believe that if we get to sometime in Q2 '26, and we're profitable, we're firing on all cylinders. We're executing on our strategy. Obviously, if the stock is still trading at the discount to book that it is today, and we're sitting at over 12% CET1 capital like we are today, then I think that will be a conversation that we will have. But it's -- we're sort of 9 to 12 months away from that. Right now, we're focused on investing in the franchise, growing the franchise and realizing the shareholder value that we feel would come if we execute on our strategic plan.

If I think about the capital you need to grow the franchise, there is also the offset from the commercial real estate book that you're running off. right? So the net capital you need is a little bit lesser than what you're putting into new C&I loans. Is that fair?

That's right. But at some point here, you will -- we will be in a net growth mode. And so you're exactly right to think about it. But our expectation is at some point here, you will see us in a net growth mode where, as a result, we are using that capital.

Got it. The last topic I wanted to touch on was on regulation. And we have a new Vice Chair of Supervision. We've had new regulators with the FDIC and the OCC in their seats for some time. How are you thinking about potential changes to bank regulation, maybe any changes to the category thresholds for CAT-IV banks? Can you talk a little bit about where you see regulation going and what impact that might have on your strategy?

Sure. Yes. Joseph would be great at this question. But I think we feel good about the changes and the people that are in the seats. I listened and heard Michelle's comments the other day. I thought they were very positive. I think it will lead to a much more pragmatic approach. I do think that there will be greater unity across the agencies as well as a result of the new leaders. And I think that will drive more efficiencies and help all banks.

I don't necessarily think there'll be punitive from a capital point of view, which will allow banks to lend more to various businesses and industries. And I do think one of the outcomes will be a moving of the cap. So I don't know exactly what could happen to the $100 billion cap. I do believe it will go higher, whether it's inflationary or an arbitrary number that is chosen, I don't know, but I do believe that it will move higher.

One thing I would just say, the $100 billion cap, I know we're slightly below it. We're not managing to that. We've obviously invested in our risk compliance, internal audit infrastructure because we are a CAT-IV bank. And we believe that, that gives us competitive advantages. So we will keep that infrastructure in place because we think it's helpful. But I do think this new regulatory environment will be helpful to all banks, not just Flagstar but to all banks.

All right. Perfect. With that, we're out of time. Lee, thanks so much for joining us.

Thank you, Manan. Appreciate you having me.