New York Community Bancorp Stock

Thank you. Hello everyone, thank you for joining us and welcome to the Flagstar Bank third quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1. [Operator Instructions] I will now hand the conference over to Sal DiMartino, Director of Investor Relations. Sal, please go ahead.

Thank you, Holly, and good morning everyone. Welcome to our third quarter 2026 earnings conference call. This morning, our Executive Chairman and CEO, Joseph Otting, along with the company's Co-President, Co-Chief Operating Officer, and Chief Banking Officer, Rich Raffetto, and Co-President, Co-Chief Operating Officer, 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 may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. In addition, 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 reconciliation of these non-GAAP measures. And with that, I would now like to turn the call over to Mr. Otting. Joseph?

Yes, thank you, Sal, and good morning, everyone. We appreciate you joining the call today. I'd like to begin on slide 3 by providing updates to factor our business and updates around the financial forecast. We continue to make meaningful progress in strengthening our core business and advancing our strategic priorities. Net interest income increased, the net interest margin expanded, and pre-provisioned net revenue improved compared to the previous quarter. We also grew our C&I loan portfolio in deposits while reducing our exposure to commercial real estate loans as well. However, several variables pressured credit costs during the third quarter, including the effects of higher interest rates, actions related to the New York City rent-regulated (RIT) regulations, and persistent inflationary pressures. At the same time, a competitive deposit environment continues to impact deposit pricing and growth expectations. Our success as a company will be determined by our ability to continue to reduce our New York rent-regulated exposure, which we did during the quarter, and attract deposits in an economic manner and expand the balance sheet through C&I loan growth. We are still on track towards achieving our strategic objectives and with our plan to diversify our balance sheet. However, given a higher for longer interest rate environment, the full realization of our transformation has shifted to 2028 from 2027. As a result, we are adjusting our guidance from what we previously outlined to reflect the impact of higher interest rates, the rate environment on credit quality, less deposit growth, and corresponding C&I loan growth, and the net interest margin, which Lee will discuss in more detail shortly. Moving to slide 4, I'd like to discuss some of our third quarter highlights in each of our key focus areas. First, in terms of our earnings, both our net interest income and margin increased compared to the prior quarter, while PPNR also continued to improve. Second, a key part of our balance sheet diversification strategy is growing our C&I loan portfolio. This quarter we delivered another $2 billion of net C&I loan growth, which resulted in about $1 billion of net loan portfolio growth during the quarter. On average, the average loan in that portfolio that we added was about $28 million in loan outstandings, and it was roughly 75 relationships. Third, another key component of our balance sheet diversification strategy is reducing our overall commercial real estate exposure. During the quarter, our CRE PAR payoffs totaled $1.2 billion, of which 35% were rated substandard. The decline in the overall CRE portfolio was slightly less as we funded approximately $375 million of new high-quality relationship-based CRE loans on commitments of over $700 million. In our forecast, we project CRE to decline net $1 billion per quarter. And fourth, we continued to apply a prudent approach to credit quality. During the quarter, we had net charge-offs of $74 million, or 49 basis points of average loans, down $25 million compared to the prior quarter, while non-accrual loans were relatively stable. Now I'd like to turn it over to our Chief Financial Officer, Lee Smith, who can provide more color on our revised guidance, asset quality, and third quarter trends. Lee, I'll hand it over to you.

Thank you, Joseph, and good morning, everyone. As you just heard, the turnaround story at Flagstar is very much on track. However, certain macroeconomic headwinds, especially from higher interest rates, have pushed back the timing of us achieving peer-like metrics by approximately 12 months. The last few months have seen a significant shift in interest rates. The five-year Treasury had increased 75 basis points over the last three months as of October 14th and 111 basis points over the last six months. Two quarters ago, the forward curve assumed two rate cuts in 2026, and as recently as June 18th of this year, the forward curve had shifted to one rate hike in October. Fast forward to September 18 and the current forward curve has four rate hikes in September, December, March and June. We're also seeing extended inflationary pressures as a result of higher energy prices. This change in interest rates and inflationary pressures have impacted our New York City rent-regulated multifamily portfolio in particular. When we use the forward curve with full rate hikes and include inflationary pressures, it has had the following effects: increased cap rates on rent-regulated buildings, particularly in the Bronx; increased operating expenses at a time when rents have been frozen for up to two years; put pressure on debt service coverage ratios; increased the risk that more loans migrate to criticized and classified status. These events have caused an increase in our provision expense to $76 million in the third quarter. Turning now to slide 5, given what I have just outlined and our commitment to transparent reporting on the impact of any change to our forecast, we've adjusted our guidance downward for both '26 and '27, predominantly the result of higher provision costs in 4Q and full year '27 for the reasons I just mentioned. The higher interest rates have also resulted in a more competitive deposit environment. While we expect to grow deposits quarter over quarter, it's at a reduced level than previously anticipated. Less deposit growth also results in a smaller balance sheet. We expect the balance sheet to grow on average approximately $1 billion a quarter in 2027 and 2028, driven by net new loan growth of $2 billion, funding approximately 50% with deposit growth and 50% with CRE runoff, as we continue to diversify the balance sheet and improve the mix of C&I loans in particular. The higher rate environment is also resulting in lower mortgage originations, impacting both interest income and non-interest income, and non-accruals declining at a slower rate than previously anticipated. EPS for '26 is now forecast to be in the $0.10 to $0.15 range, and EPS for '27 is forecast to be in the $0.85 to $0.95 range. We are also including a full year '28 forecast where EPS is expected to be $1.60 to $1.70 on top of where we previously expected full year 2027 EPS to be. I would note that our goal to return Flagstar to profitability metrics similar to our peers is on track to occur in 2028. The inflection point is '27 for the following reasons. Between October 1st, 2026 and December 31st, '27, we have $12 billion of low coupon, less than 3.9% CRE multifamily loans, either resetting or maturing. If they reset and stay with Flagstar, they will reprice to a market rate significantly higher current coupons. If they pay off, we will use the proceeds to originate market rates, C&I or CRE loans. We have a further $7 billion resetting or maturing in 2028, with a weighted average coupon of 4.43%. Both these scenarios result in net interest income and NIM expansion. The reset dates are all contractual, and '27 is our largest reset year, allowing us to significantly improve the mix of the balance sheet over the next 15 months. As we continue to originate new C&I loans and grow the balance sheet, the spread between the new loans coming on and the marginal cost of the new deposits used to fund such growth should be accretive to net interest income and NIM expansion. While we expect the pace of non-accrual resolution to slow, we still expect our non-accrual balances to decrease throughout '27 and '28. And given these loans are on the balance sheet and funded today, as they return to accruing status, this is also accretive to net interest income, and NIM. A significant driver of the remixing of the balance sheet over the next 12 to 18 months is mechanical in nature, given the volume of low coupon loans hitting their reset or maturity dates. On slides 6 and 7, we have provided a bridge to our 2027 and 2028 net interest income forecasts. As you can see, the main drivers in both years is balance sheet growth along with fixed rate repricing and lower non-accrual loans. On slide 8, we show the trend in pre-provision net revenue through 2028. And slide 9 depicts our EPS progression over the same time period. I would like to point out that in 3Q pre-credit provision, we generated plus $0.13 of earnings, which included a $22 million or $0.04 tax benefit as we settled a legacy tax audit from 2020 in our favor. The next slide details our NIM trends. Our NIM expanded four basis points in 3Q versus 2Q to 2.17%, with the September NIM coming in at 2.23%. Next is operating expenses on slide 11. Here I would highlight that despite the modest increase during the quarter, we still expect full year '26 operating expenses to decline approximately $168 million or 9% year over year versus full year 2025. On the capital slide, you can see that at 12.38%, our CET1 ratio continues to rank among the top quartile in our peer group. We also completed the previously approved stock repurchase program of $250 million, repurchasing 19.1 million shares at an average price of approximately $13 per share. Turning now to our deposits on slide 13. Total deposits increased about $300 million quarter over quarter, while average interest-bearing deposits rose 1%. The cost of interest-bearing deposits increased only one basis point to 3.09% versus last. Moving next to slide 14, which shows the continuing positive trend of commercial real estate PAR payoffs. During the third quarter, PAR payoffs were $1.2 billion, of which 35% were rated substandard, and our CRE concentration ratio is now at 346%. The next several slides provide additional details on our multifamily portfolio. On slide 15, I would note that in 2027, we have approximately $8.4 billion of multifamily loans that mature or reach their contractual reset date. Of this amount, approximately $2.9 billion or 35% is NYC multifamily with greater than 50% rent-regulated units. And I would also note the reserve coverage on the greater than 50% rent-regulated population, including loans outside of New York City, is nearly 3%. If we look at just the New York City rent-regulated portfolio greater than 50%, the coverage ratio increased 21 basis points quarter over quarter to 3.37%. Moving next to slides 16 and 17, where we provide a more comprehensive overview of the rent-regulated portfolio. At September 30th, this tranche of the portfolio was $12.9 billion, down $531 million or 4% compared to the second quarter. While the rent-regulated component greater than 50% was $8.1 billion, down $370 million or 4% quarter over quarter. The next slide details our ACL by loan category. The link quarter ACL was unchanged as increases related to higher interest rates and growth in the C&I portfolio, and the impact from a higher interest rate environment were offset by volume reductions in our multifamily portfolio. Finally, slide 19 provides a look at our broader credit quality trends during the quarter. At approximately $2.8 billion, our non-accrual loans were relatively stable quarter over quarter. Of note, 42% of our non-accrual loans are current and performing. Substandard loans increased $248 million, or 4%, as overall criticized and classified loans increased $670 million, or 6%, due to our prudent and comprehensive look forward of loans that are maturing or repricing within the next 18 months. With regards to charge-offs, net charge-offs this quarter was $74 million or 0.49% of average loans, down $25 million compared to the prior quarter. To conclude, we remain on track to achieve our strategic goals, significantly improve profitability through 2028 and deliver value to our shareholders. Now, I'd like to turn it over to our Chief Banking Officer, Rich Raffetto, who will discuss our commercial banking trends in more detail. Rich.

Thank you, Lee, and good morning to everyone as well. As you turn to slide 20, you will see that we continue to make significant progress in building out a relationship-based commercial and private banking platform here at Flagstar. Our two-pronged approach to this business combines specialized industries banking with corporate and regional commercial banking coverage featuring customized solutions for business owners, and it's delivering strong but disciplined growth. We continue to hire talented mid-career bankers to join the platform, including 35 new and replacement hires during the third quarter alone, bringing our aggregate hiring activity to more than 400 professionals over the last couple of years. And at the end of the quarter, we had 164 revenue producing commercial bankers credit underwriters up from 124 at the start of the year. During the third quarter, we generated $4.6 billion in new and increased C&I loan commitments, resulting in $2.9 billion in loan originations, up 4% compared to the prior quarter, and we ended the quarter with a strong pipeline going into the fourth quarter at $2.7 billion. We also continued to successfully add new commercial relationships, as Joseph mentioned, adding roughly 75 this quarter alone. The right side of this slide shows the quarterly trend in C&I loan balances. And C&I loans during the third quarter increased $2 billion to $20.6 billion, up 11% compared to the second quarter, continuing our trend of brisk but prudent loan growth. Slide 21 provides a more detailed look at C&I loan growth by business line. And loan growth in the third quarter was fueled by various industry-focused verticals and lending segments, including financial institutions, lender finance, renewables energy, entertainment banking, technology, healthcare, leisure, hospitality, and gaming, public finance, equipment, equipment finance, and diversified industrials. In addition, regionally speaking, our commercial banking teams in Southern California, New York City, Long Island, and New Jersey were key contributors to the third quarter loan growth. And we are optimistic about future momentum in regional markets where we have recently established or upgraded team leader talent, including Dallas, Detroit, Chicago, Cleveland, and Phoenix. And in a sign of continued progress in our goal of building broad-based relationships across our commercial banking enterprise, we experienced a notable increase in core commercial client deposits during the quarter of approximately $600 million. And we also experienced strong year-over-year and quarter-over-quarter increases in capital markets fees, and collected treasury management fees. So with that, I will now turn the call back to Joseph.

Thank you, Lee and Rich. Let me close with a few summary comments. We remain committed to our long-term strategy of transforming Flagstar into a top performing regional bank. While the current operating environment has affected the pace of our turnaround, we believe our long-term objectives remain very achievable with our expected timeline now extending to 2028. This is a change in timing, not in our strategy nor expectations. We will continue to execute on our strategic plan with discipline, strengthening our core franchise and focus on delivering value for our shareholders. Now we'd be happy to turn it back over to the operator and open up for questions. Thank you.

We will now begin the question and answer session. [Operator Instructions] Your first question comes from the line of Chris McGrady with KBW. Chris, your line is now open. Please go ahead. Chris McGrady, KBW.

Oh, great. Thank you. Good morning. Maybe we could start on slide 15. You have been giving us the slide with the contractual maturity by year for some time. I think this quarter you split out the rent-regulated, which is helpful. Can you help with the visibility into the resets in the maturity wall that you've talked about given the change in the rate environment? You guys have said you've gotten through most of it, but are you going through it again, given the change in the macro? Thanks.

Yes, so Chris, we, as you know, we do the 18-month look forward. 2027 is our biggest reset and maturity year where we have about $10 billion, so if you think about with through that and if you think about this last quarter, it pushes us through to 1Q of 2028. And as I mentioned in my prepared remarks, we have about $7 billion that is resetting or maturing in 2028. So, you know, we have visibility into the biggest year. I think there's and we feel that given the interest rate environment using that forward curve, that's what the credit team has looked at when they've done that look forward. We've accounted for that. I think what is interesting is when you look at '27, the amount of resets and maturities, $2.9 billion of that $10 billion is more than 50% rent-regulated. So the vast majority is market or less than 50% rent-regulated. I think the other interesting phenomenon for us as we look at our migration this quarter. When we do the look forward, it's very formulaic. Okay, so what we're doing is we're overlaying the interest rate environments at the time and saying what does the DSCR coverage look like? And that DSCR coverage is driving how we risk rate those loans and the migration. The vast majority of the migration this quarter was on market units. And the reason we see a change in interest rates, we will react quickly because we're prudent and we're conservative. If you think about the annual financial statements that we're using, we're using '25 financial statements at the moment. So in terms of those market units being able to increase rent. We don't see that yet. And we don't adjust for that until we see it on the financial statements. So I'm telling you that because we're very, very prudent in the way that we assess the credit quality of our multifamily book.

Okay. Thanks for that, Lee. And then Joseph on the, um, on the capital, nice to see you get through the $250. Given the messaging on smaller balance sheet, and then you're roughly 12.4% versus your target of 11%, how do we think about buybacks from here, given a little bit of noise and credit?

Yes, so you know, Chris, I think we've been pretty consistent in our messages that you know the three things that management looks at and has dialogue with the board, how are our core earnings growing? What is the credit quality of the company and the trends in the credit quality? And then how much capital do we expect to use in the C&I growth? And, you know, obviously with the short-term disruptions in that, uh, don't envision us doing any additional stock buybacks in the fourth quarter, but with our capital levels, we would expect to resume buybacks in 2027.

And then just to put a finer point on 2027, so you'd need to see the credit get a decent amount better before you – I'm just trying to gauge. Is it a first half event? Is it we're going to wait a few quarters?

You know, if you really look at like the credit like funnel, and that's the thing that I look at is, you know, charge-offs were, on a gross basis, the lowest since we've been here. Non-accrual was flat. And really, you know, other than two borrowers which have resolutions, we haven't seen an increase in past new loans. So where we've seen migration was really on the upper end in the special mention and substandard. And that gets back to Lee's point is when you're looking out in that portfolio 18 months and you're applying interest rates on the five-year curve plus our contractual borrowing in the notes at either SOFR plus 300 or a reference rate plus 275, you know, that's a pretty punitive interest rate that those loans are being underwritten to. And that's what, you know, drag nets in some of those relationships and loan outstandings into those special mention and substandard. So we'll watch to see if there's migration, but we haven't seen that migration to, you know, what I would consider, you know, more critical or difficult loans, you know, at this point yet.

Okay, great. Thanks, Nicola.

You're welcome. Your next question comes from the line of Dave Rochester with Cantor. Dave, your line is now open. Please go ahead.

Hey, good morning, guys. Good morning. Just on the C&I growth that you've had and the deposit picture today, I know part of the C&I strategy was that you get the deposits associated with those new lending relationships. Can you just talk about the progress you've made there and how much more deposit growth potential you think you have coming from those new relationships you've always brought over and your confidence in getting that, you know, with funding 50% of that growth, with new deposit relationships that are hopefully on the lower side of cost. Thanks.

Great. Thanks, Dave. This is Rich. In the third quarter, as we reported, net C&I loan growth was $2 billion, and we brought in just under $600 million of deposits around that commercial activity. So that batting average, we feel, you know, pretty good about bringing in 30% of deposits. I will tell you that our bankers are very motivated to drive full relationship value whether that's deposits or fee income or a combination thereof and get more relationship primacy as we further mature our commercial banking platform. So with our focus both on special industries coverage and regional commercial banking, as well as deepening our existing private banking relationships. That is how we will continue to fund the loan growth that we are forecasting in the future. So it's about relationship primacy and it's about deepening existing relationships. So that's where we are in the journey, Dave.

Appreciate that. And then just for the new 2028 guide, how do you assess that confidence level that you'll get that profitability ramp up all in that year? We're still in this higher for longer environment when it's just really challenging to project what you're going to get in the next couple of quarters. Right.

Yes, so Dave, that's why we put the bridge slides in there. So maybe let me walk you through. Let me walk you through '27 first of all, because the two biggest drivers are the balance sheet growth and then the fixed asset repricing. So the way we think about the balance sheet growth, sort of a couple of components. You've got the new loans that are coming on that are funded by the new deposit growth. So on and this is all on a weighted average basis because you've obviously got loans and deposits coming in towards the end of '26 that we get the full year benefit from in '27, et cetera. But if you assume that you've got balance sheet growth so this is new growth on average of about $2.8 billion and that is funded by the new deposits coming on. And we're assuming that we can bring in approximately $800 million to $1 billion of new deposits. And the split there would be about 18% non-interest bearing, 80%, 82% interest bearing. The cost that we've assumed for the interest-bearing is between 3.9% and 4%, and then when you overlay the interest-bearing or the non-interest-bearing deposits, the cost is around overall cost is around 3.20%. So that's and that spot rate is significantly above our spot rate today for our existing portfolio. So you're earning a spread on those new loans of anywhere from 3.40% to 3.50%. That's that's the new loans coming on from the new deposits. You've also got new loans coming on that are being funded by the CRE runoff, and getting a big lift in the shift. In spread because as we've said. The multifamily loans that are resetting have a coupon less than 3.9%. And so you then bring in on market rate C&I loans or new CRE loans and you're going to pick up 2.5% of the spread on that and that number is somewhere between $4 billion and $4.5 billion. So that's how you sort of get to the balance sheet growth. If you then look at the fixed asset repricing, our assumption is we will retain 35% to 40% of what is resetting at much higher rates. And again, we're using the forward curve here. So you're probably going to pick up anywhere from 3.30% to 3.50% in terms of incremental spread. And then the other thing in a rising rate environment that we haven't sort of really spoken about previously, about $10.7 billion of our CRE portfolio is floating. So as rates rise, we'll get the benefit of those loans, $10.7 billion repricing. And that's the reason why, when you look at our interest rate sensitivity, we're neutral to ever so slightly asset sensitive.

All right. Thank you very much.

Got it. Your next question comes from the line of David Chiaverini with Jefferies. David, your line is open. Please go ahead.

Hi, thanks for taking the questions. I guess a bit of a follow up on that last question. When thinking about, I guess drilling in on net interest income and the walk on, say, slide 7, which of these factors would you say is the most at risk of coming in weaker and which ones are the most kind of locked in and mechanical?

Yes, so here's what I would say. I think first of all, we've obviously, because of the competitive deposit environment, we've brought down our assumption in terms of the amount of deposits we can bring in. And we're saying it would be $800 million to $1.25 billion, Dave. And so that to me is the, that's the assumption that I would look at and say, can these guys bring in that amount of deposits? Because I think the rest of it, we've proven out. You know, Rich and the team have consistently been originating C&I loans at a clip of $2 billion growth a quarter. So I don't think there's any question about our ability to generate assets. And then the fixed asset repricing, that is all mechanical because those loans are either going to pay off and we're going to use them use those funds to originate more C&I loans at market spreads, or they will stay with us and we're going to get an increase in coupon, which is going to significantly increase net interest income. And NIM, and you've got a significant portion of that CRE portfolio, the $10.7 billion, which is floating. So in a rising rate environment, you pick up the benefit there. So to me, I think the question is, can we deliver on the deposit growth?

Thank you for that. And then on the C&I growth side of things, the pipeline at $2.7 billion, to what extent could the higher rate environment impact the pull through of that pipeline? And did that pipeline kind of build? You know kind of evenly through the quarter or did it slow down towards the end of the quarter?

Good question, David. I would describe the external environment of our business and commercial and corporate clients as resilient. We have traveled around the country in the third quarter and hosted private gatherings with a number of our clients and in existing geographies and newer geographies. And it is impressive how resilient we are finding the business owner community in terms of executing on their strategic plan, taking advantage of uplift from the significant CapEx investment around technology and AI and data centers that's like a pebble in a pile pond with concentric circles of businesses that benefit from that macro environment. And so I would say that the pull-through is solid, and it's well diversified in terms of what makes up that $2.7 billion of pipeline, and it's amidst an environment that is not without challenges in terms of the inflationary environment and diesel fuel prices, et cetera, and geopolitical concerns. But our customers are telling us that they are moving forward with capital projects, moving forward with M&A, and other strategic initiatives around expansion. So we feel good about the breadth of the loan pipeline, and we also feel good about the ability to pull that through. And I would not say that we experienced any material slowdown as the third quarter came to a close in terms of what we're adding to that pipeline. We also have the unique nature of continuing to be in a scale and growth mode, so as new bankers come onto our platform, they are bringing over their relationship activity and that is also helping to further build our pipeline. That's something that's a little bit more unique to our bank and why you've seen us materially outperform a number of our peers in terms of C&I loan growth.

Great to hear. Thank you.

Your next question comes from the line of Casey Hare with Autonomous. Casey, your line is now open. Please go ahead.

Yes, great, thanks. Good morning, everyone. Wanted to touch on, what is the forward guide assumed for net charge-offs and within that, you know, the ACL ratio at 150, what's, you know, you know, how low can that go?

Yes, so I would, the provision forecast, I would look at that as the proxy for net charge-offs, Casey. So what we're showing as a provision number, I would use that as your proxy for the net charge-offs.

Got you. Thank you. And then on the deposit front, that's really helpful color on the new money deposit growth. Just wanted to get a finer point on the third quarter. You guys gave a September NIM, the 3.09% deposit costs in the third quarter. What was that in September? And sort of what is the beta expectation going forward? Yes.

So yes, so a couple of things. First of all, our spot rate as of September 30th and again, this includes non-interest-bearing and brokered was 2.56%. The way we think about the beta is we are targeting a 60% beta. If you look at where we are, and this this is as of three or four days ago, Casey, versus the September rate hike. And this is for interest-bearing deposits excluding CDs. We were at 32%.

Thank you. Your next question comes from the line of Jared Shaw with Barclays Capital. Jared, your line is now open. Please go ahead.

Thanks. Good morning. Um, I guess trying to to get hey, trying to to get to an assumption for you, year end assets in '27 and '28 and just looking at the guide for commercial loan growth. I guess you've been running significantly higher than that. What's, I guess, driving that slowdown? Is that just you being more selective and more judicious with capital deployment? And then I guess within that loan growth, what portion do you assume is residential versus commercial?

So, Jared, what's driving where we are for '27 and '28 is really, like I said, it's the deposits. So, you know, what we're sort of saying is we think that we can generate net sort of C&I growth and it's all going to be, I say all, 90% of the growth is going to come from C&I. There will be some residential growth, but obviously the higher rate environment impacts that. But if you think that we're growing substantially, sort of new loans $2 billion a quarter on average and the way we're funding that is $1 billion of CRE runoff net and then you've got $1 billion, $800 million to $1 billion of new deposit flows. So what is, when you look at the growth, it really predicated on the deposit, the new deposits that we can bring in.

Okay, okay, thanks. Um, and then shifting a little bit, I guess, what's what's the sentiment around among the the New York City rent-regulated landlords? Do you still have confidence that they're going to have the ability and desire to support their properties to the same degree as they were in the past, given the rate environment and the political climate in New York?

We do. I mean, we've said this before. We don't have any REO. A lot of these owners have benefited from the 1031 tax rules. So, you know, that's obviously a huge advantage. The migration that we've seen has been at the upper end of the portfolio because of the way that we calculate, you know, the DSCR and the formulaic nature of how we look at the credit and 42% of our non-accruals continue to be current and are paying. And again, you know, we saw a very healthy amount of part payoffs this quarter, $1.2 billion, 35% of which was substandard.

Yes, hey, Jared, the comment that I would say is, you know, like a lot of these borrowers are resetting from, pick a number, 3% to 4% interest rate that they took out either 5-1s or 7-1s. And our documentation, just as a reminder, resets at their SOFR index plus 300, reference rate plus 275. So those are pretty steep interest rates that frequently can have a borrower go from, say, 3.5% to 7.5%. So we don't see a desire not to own the property. What you see is a desire maybe for the bank to restructure and lower their interest rate off the contractual coupon. But I mean, for the most part, that has held up, you know, relatively well. Um, so we haven't seen a material change. And, you know, you've seen some trades in the marketplace recently where, you know, some investors are coming in and buying pools from banks. So I there's a fair amount of and I think that who have a more longer-term viewpoint of the market than just perhaps maybe the next four to six years.

Thanks. Your next question comes from the line of David Smith with Truist Securities. David, your line is now open. Please go ahead.

Good morning. Good morning. Can you just like explicitly clarify your expectations for ending assets over the next few years? Like it's basically $1 billion a quarter of net asset growth with the new originations net of the runoff, but I just wanted to confirm that.

Yeah, you're right, David. So end of '26, we're at $82.1 billion. This is total assets, $82.1 billion. End of '27, $92.1 billion. And then end of '28, we're just around $97 billion.

Okay. Um, and, you know, you've got a lot of people. You touched upon this a little bit in the last question, but just thinking about it, interest rates are a lot lower a lot higher today than they were a quarter ago, but your expectation for CRE runoff and paydowns isn't really that much lower. Is there, I guess, two things. Is there a rate level where you feel like that that would start to decline more meaningfully? Just flesh out a little bit of what you think is supporting that um, you know, that level of pay down and those options that are outside you in the marketplace still today.

Yes, it's really driven by volume, David. As I mentioned, we have $10 billion of loans that are resetting and maturing in '27 and another $7 billion in '28. And by the way, that doesn't include $1.8 billion in 4Q of '26. So if you just add those three numbers you're at $19 billion of loans that are resetting or maturing. And so you know I would say that, you know, on a net runoff of $1 billion a quarter that that's how we get there and for all the reasons that I just mentioned. 3Q, you know, we have the high rate environment. We still saw $1.2 billion of PAR payoffs. And then I think the other interesting fact is of the $10 billion that is resetting or maturing in '27, only $3 billion is more than 50% rent-regulated. So $7 billion is market to less than 50% rent-regulated.

Thank you. Your next question comes from the line of Ryan Kenny with Morgan Stanley. Hold on a second. Open, please go ahead.

Hey, good morning. It was a good quarter in terms of growth in non-interest-bearing deposits. And I wonder if you could give some more color on what's driving that growth. Can that continue? And how the investments in Treasury management, you know, from here maybe need to interject. Thanks.

Yes, so let me take the first part of the question and then I'll hand it to Rich. So we did during the quarter, towards the end of the quarter. We have been undertaking a pretty comprehensive product review. We did move around $900 million to $1 billion of interest-bearing deposits. These were deposits that we were paying one, two, three basis points on. We moved from interest-bearing to non-interest-bearing because for all intents and purposes, they are non-interest-bearing. So that's what you're seeing in the non-interest-bearing line item. And then I think, you know, in terms of going forward, I mentioned in '27, when we think of the new deposit growth on a weighted average point of view, about 18% are non-interest-bearing. And we want to leverage our relationships, particularly from a commercial lending point of view, from a private banking point of view, and then leveraging the 340 bank branches that we have to drive, not just the non-interest-bearing, but the interest-bearing deposits as well. And I'll let Rich comment on some of the strategies that we deploy.

Yes, thanks, Ryan. As Lee mentioned, we are driving further with respect to our relationship banking model business banking to commercial banking and private banking and as we move forward on that journey. We continue to deploy our treasury management platform. When we win new business, I think the receptivity, we have a competitive, management platform that's comparable to other regional banks. We are focused on solutions around working capital management and deploying tools for our clients, especially around fraud and cyber risk, which is, you know, perhaps the #1 concern of our clients when they are banking with digitally, so we are deploying enhanced digital capabilities and fraud protection as we onboard customers and, you know, with a goal to have fulsome relationships that include not just a deposit that's interest-bearing, but those operational accounts that bring bring non-interest-bearing accounts to to the to the front, as well as other payments capabilities including card.

Merchant solutions as well. Thanks. And then separately to follow up on the earlier question on rent-regulated multifamily, what's the net charge-off you're assuming on rent-regulated relative to what you're seeing recently? Is there an uptick embedded in the guidance?

No, no, not particularly at all. I think the one thing I'd point out on the net charge-offs as well this quarter, so we had net charge-offs of $74 million. And what I would say about that is $34 million was already fully reserved for. So the so if you take that out, we would have been at $40 million in in net charge-offs, which that's where we sort of expected our provision to be. The reason that we were at the sort of 75 is that 34 that would have come out normally we had to replace because of the higher rate environment impacting those cap rates on units in the Bronx in particular. In particular, the inflationary environment, putting pressure on operating expenses, on the higher rate environment, putting, you know, more pressure on the DSCRs, and then that caused more migration. And so, you know, without that higher interest rate environment, the charge-offs net charge-offs, you know, we wouldn't have had to replace that $34 million and your provision would have been $40 million for the quarter instead of the, you know, the $76 million that we saw. Thank you.

Your next question comes from the line of Ebrahim Poonawala with Bank of America. Ebrahim, your line is now open. Please go ahead.

Good morning. Morning, Apologies if I apologize, Heli, if I missed it. Is why are we shutting down the buybacks? Like when you look at the stock at 1.1x tangible book, 15x, shouldn't this be the time to be leaning in? And I ask that because I think you mentioned that you might reinitiate buybacks in in one queue. So I'm just trying to understand, is there like very narrowly a metric that you're managing to as opposed to one like why not buy back today or if the environment is becoming uncertain, why not push and suspend buybacks indefinitely? I'm just trying to figure out between those two spectrums why you said what you said.

I mean I just think it's prudent until we build our core earnings and and ensure that our credit quality forecast is accurate and then the C&I growth has been spectacular. But those are the three variables management will use to make a recommendation to the board. I mean we we clearly acknowledge our capital levels are higher than our intended levels. Um but you know just in light of that uncertainty we will wait until 2027 before we would look to buy back. We, you know, we fully expect to resume that in 2027.

Got it. And separately, this big picture, it feels like rates don't go down. There is not a whole lot that's going to be helpful from the CRE book resolution unwind. Obviously, this quarter was an evidence of that. If rates move up, and I appreciate they've come down a little bit in the last week, but but maybe Joseph talk to us how you're thinking about, yes, the C&I strategy is working, but beyond that, like are there other strategic options like strategic merge larger partnerships with other banks that you would be exploring in order to unlock shareholder value?

Yes, you know, Ebrahim, I think really we think the best value for the shareholders of this company is for us to execute on our business plan. Able to do that, we really can unlock, I think, significant value in the valuation of the company just by executing, you know, on the path that we expect to get to in 2028.

And Ebrahim, I would just add, you know, and to Joseph's point, we've laid out sort of the path here over the next two years, and as we've said and as we've answered other questions, a large part of this is mechanical as these low-coupon multifamily CRE loans. I think, you know, the deposit growth we we brought down and if we can achieve that, we know we can generate the C&I loans so you. You know, look, I think that if we achieve these numbers, it's going to create significant value for the shareholders over a short time period. In terms of your question around sort of the interest rate environment, we are slightly, well, we're neutral to slightly asset sensitive. You know, so obviously in that scenario, a higher rate environment is helpful. Higher rate environment does put pressure on the credit side. But again, you know, I think as I described earlier, the migration we saw was sort of more in the market rents, the upper end of our portfolio, because we're sort of, we're very kind of punitive on ourselves and conservative in in the way that we do that 18-month look forward in the formulaic approach so I I agree with Joseph. I think there is an enormous amount of value creation here by executing on the plan we've laid out.

Understood. Thank you both.

Your next question comes from the line of Ben Gerlinger with Citigroup. Ben, your line is now open. Please go ahead.

Hey, good morning. I just want to double check. Was this forecast based on 9/30 curve for like last Friday?

Uh, this was based on a September curve that had four hikes in it. So we've got September, December, March, and June.

Got it. Okay. So, this kind of gets to the question Ebrahim just had where he's basically kind of saying like, I apologize in advance, because I don't want to diminish the progress you guys have made. It just seems kind of like the franchise today is very much an interest rate curve bet. And the only reason I say that is five-year has come down roughly 30 basis points since the end of last quarter. So the first three weeks here. So like when you think about just the update, if we just kind of retrace, wouldn't that put like alleviate quite a bit of the incremental pressure you guys have just kind of alluded to in terms of credit, like I get the positive price is a little bit more expensive today based on the front of the curve, but like the credit resolution opportunity probably gets a little easier relative to where it was just three weeks ago if the curve kind of plays out on the belly of the curve. Am I thinking about this correctly or am I kind of off base?

Ben, you're spot on. If rates come down, that is definitely beneficial and certainly on the credit side. So that is absolutely the right way to think about it. You are correct.

But I think, Ben, when you look at what last time we were forecasting was in mid-June, seen a hundred basis points increase even from the pullback. So that's on that half of the equation. The other half, I would say you've seen a super hyper increase in deposit cost. You know, 30 days ago, it was pretty difficult to find a CD for one year over 4%. Some of the competitors are at 4.75% today. So you've seen super hyper pricing increases in the deposit that hopefully we'll see that pull back also. But in the short run, some of the competitors are very aggressive.

Got it. And then just kind of thinking from a client-based perspective in terms of the multifamily slash areas where you might see pockets of pressure on a DSCR coverage, like when you think about their level of sophistication, if the five-year comes in a little bit more, would you potentially see like kind of rapid payoffs or like basically the borrower hitting the bid to refinance because it's a window of opportunity that's pretty small or presumably pretty small? I'm just trying to think like how sensitive this kind of lumpy payoff potential might be to rates bit more formulaic over time period of kind of getting close to expiration.

No, no, no. I think you're exactly right. You know, we do so, you know, Joseph has described, we have two options contractually, five-year SOFR plus 300 or prime plus 275. We do see, and there is a SOFR sort of opportunity, we do see people taking the floating rate because they're effectively making the bet that rates will come down and then they will be able to refinance. So your thesis is exactly right. You've got people that will take a floating rate now in a high rate environment because they're betting that rates come down and then they will be able to refinance at a lower rate and with a better opportunity. So I think if rates come down, then yeah, you would see more of that activity which is people taking advantage of the drop to refinance what they would see as.

Good right yes and the other thing then I think they recognize this next really five quarters is the largest, you know, repricing window that we've seen since we've been here in '24 so they'll just the numerator to that is so much higher than what we've experienced. That gets back to an earlier question about how confident are you that you can net reduce that CRE portfolio by $1 billion if you just kind of applied historical levels, we would be much higher than that. But we are also originating now CRE outside New York, across Seattle. United States and predominantly transitional type of properties.

Got it. That is helpful. Thank you. Thanks, Ben. Your next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Bernard, your line is now open. Please go ahead.

Hey guys, good morning. Just on the NIM outlook, it's growing but at a slower pace than originally expected. Could you just maybe provide some updates on some of the headwinds? I know you already mentioned maybe slower expectations on the non-accruals coming down, but what about the expectations on the levels of retention of maturing loans? And pricing of higher quality retained loans. Just some thoughts on some of the push and takes.

Yes, so I think there's a couple of things that have played out. And Bernie, first of all, I think as we mentioned, we did see a four basis point increase in quarter over quarter in September. Came in at 2.23%, but I'd say the headwinds are the deposit costs. I mean, we've sort of... We thought that, and if you look at our history for the last several quarters, we've been able to bring deposit costs down consistently. And obviously on a weighted average basis, it kicked up one basis point in 3Q when we were sort of putting the previous forecast together. Knowing that we're going to be these full rate hikes in the curve, you know, we thought we would still be able to chip away at those deposit costs. So I think that's that's one of the things that would mention in 3Q, and Rich can touch on this a little bit. Given the mix of C&I lending that we did, I would say that the spread came in a little lighter than 2Q when we were at 2.25%, not much but a little bit, but that was all more just the mix of loans that we bought in. And then on the non-accruals, you're right, non-accruals are flat. So we're not getting the benefit of the release of those non-accruals back into earnings and back into capital. And as we've described before, the non-accruals is a little bit like a receivable account. You've got non-accruals that are resolving and are going away, and then you've got some new ones coming in. Some new ones coming in that has an impact on your net interest income as well so. You know that that's what I would. Described but I think overall if you look at the trend line, you know, you are beginning to see the interest income was up $20 million quarter over quarter. NIM was up and, you know, we're about to sort of embark on this big wave of resets and maturities which is going allow us to sort of accelerate that expansion.

Okay, great. And then just, Lee, on slide 7, you have funding mix as a positive component helping the NIM in '27. Are you still expecting wholesale borrowings to come down? We're going to start on slide 21 and come back in 20 seconds and come back down.

Yeah, so that's exactly what it is. There's two things playing out on that or in that particular particular part of the chart. One, yes, we got the flood coming down about $1 billion in '28 and then we also in 4Q of '28 we see you don't it's not counting for a large part of this, but we pay down $300 million of sub debt so that's the. That's what you're seeing in that funding mix chart on page 7. It's a reduction in FLOBBR of $1 billion. And then in 4Q, you've got a little bit of benefit because we're paying off those sub notes.

Great, thanks for taking my questions.

Your next question comes from Janet Lee with TD Cowen. Janet, your line is now open. Please go ahead.

Good morning. Good morning. Hi, Janet. Following up on provision and the forward curve, so is it as simple as if we don't get a rate hike in December, your provision forecast would be lower?

I would say that there is potential for that, Janet, because it is very It is very much linked to interest rates and we have sort of, you know, been looking at the forward curve as of the credit guys. There are other things at play as it relates to the provision. So, you know, the amount of C&I growth, obviously the net $2 billion of C&I growth in 3Q, that did contribute to provision and then you also have we use the Moody's economic forecast so you know we have to wait and see what does that Moody's economic forecast look like as well so it's not the only variable there are other variables that, you know, we do need to sort of consider here.

Got it. And it's, I believe you said, the non-accruals NPLs are likely to come down but obviously at a slower magnitude than expected before. How much visibility do you have on it? I don't believe you still expect, you know, getting to the $2.3 billion level by the end of this year like, is there, is there a line of sight into where that could go over the next year, just given you're also charging off a little more?

You have some line of sight, but not total line of sight because it's not linear. We have a special asset group who are doing a fantastic job working through these non-accruals. And they have lots of different strategies, sort of DPOs, workout, asset sales. In order to be able to to reduce those non-accruals. And so sometimes, you know, we do have this ability into what is coming, but as you might imagine, sometimes things can come up and be resolved in a couple of days where you have less visibility. Right now, we're assuming that we end the year at about $2.6 billion of non-accruals, Janet. And then in full transparency, as we look through '27, we do believe we can bring those non-accruals down to about $2 billion. So those numbers are higher than what we had previously thought, because the higher rate environment does slow down the resolution of the non-accruals. But as I mentioned in my prepared remarks, and as you can see from the bridges, we are still low, we still believe we can reduce those non-accruals from where we are. And that is accretive to both earnings and capital because they're 150% risk weighted as well.

Got it. Thanks so much. Thank you so much for it. Just a quick follow-up if I. NIM of 2.23%, do you think that's a reasonable floor from here?

I would like, let me put it this way, we think 4Q NIM can be 2.20% to 2.25%. So, you know, I think we are, I don't want to say it's a floor in case one of the months is 2.22%, but I do feel that we can continue to build off of 3Q. And I think that we do think that that 2.23% is absolutely within the range that we expect to be at in 4Q overall.

Thank you. Your next question comes from the line of Anthony Elian with J.P. Morgan. Anthony, your line is now open. Please go ahead.

Great. Thank you. Slide 17, Lee, you note the ACL on criticized and classified on rent-regulated was about 502. I think that's up from 48 last quarter. What's embedded in your forecast for that?

So well I think what you're seeing here is, you know, what is, you know, what is what is embedded in our forecast. And I think, you know, as I mentioned earlier, you know, I would look at the provision number that we have going forward as a proxy for the, you know, for the charge-offs. And so, um, and most of that is going to be weighted towards the multifamily portfolio.

Okay, and then more broadly on rent-regulated. So there have been a couple of banks here in the New York market that as recent as yesterday announced that they're selling parts of their New York City rent-regulated portfolio. Joseph, I'm curious, is this something you guys are considering given the headwinds you called out this quarter on rent-regulated? Which seem to be overshadowing the progress you've been making on what Rich discussed earlier on this call. Thank you.

You know, the way we look at that is we, you know, obviously we observed those sales and look at, you know, our portfolio. But, you know, what we have been able to do because where we have those loans marked is most of our resolutions, whether DPOs or payoffs or negotiated settlements, have been with, you know, 1% to 5% either positively or negatively where we have those loans marked. And most of those investors are looking at 15% to 20% returns. And so we've taken the position, we have the team in place, we've been working these out. That, you know, a year or two from now, we think our shareholders are better served by us, you know, loan by loan, having resolutions to that. But I mean, we clearly obviously monitor the market closely. And, and, you know, if there was an opportunity, speak opportunity to sell some of that we would, but I would say we have, you know, currently, you know, like nothing on the table to do that, that we will, you know, we're obviously talking to lots of people in the marketplace, but, but our resolution internally really has optimized the retention of capital for the company.

Understood, thank you.

Your next question comes from the line of Matthew Breese with Stephens Inc. Matthew, your line is now open. Please go ahead.

Good morning. Good morning. Come on in. You know, Lee, I was hoping you could provide a little bit more color on the fee income outlook. Looks like it's about an $80 million to $100 million reduction. I'm curious areas you're expecting to see, you know, reduced level of fee income from.

Yes, so the biggest drivers of the reduction in the fee income forecast are lower gain on loan sale from the mortgage origination business, the higher rate environment. I mean, that's been sort of costing us a couple of million a month. That is a big driver. As I've mentioned, we've reduced our deposit forecast down, which also had an impact on the loan origination volumes versus the previous forecast. And so you're seeing less fees from sort of the deposit and loan businesses as a result of just those lower volumes. And so those are the sort of the big drivers. If you sort of look year over year from '26 to '27, you know, we are showing growth from a net interest or a non-interest income point of view. And we do feel that, you know, from capital market fees, treasury management fees, the swaps, FX, everything that Rich and the team is doing, that we're going to continue to expand our fee income as we move forward. But we're just right now in the higher rate environment, we're not going to get the help that we had originally thought from the mortgage business.

Got it. Okay. And then I wanted to go back to, you had mentioned that you have $10.7 billion in commercial real estate that's now floating. Is that a function of folks that have hit the end of the five-year fix and are now floating? Or is that a function of swaps? It feels a little bit unnatural for a commercial real estate borrower to hold a floating rate for an extended period of time. I'm wondering if that's a risk factor to your interesting position going forward those folks either locking in for five or leaving for five elsewhere.

Yeah, no, no, I think it's there's there's a couple of things that are that are playing out. Some of those CRE loans, about $3 billion, are actually healthcare facilities, that we fund in another part of the organization, but they're categorized as a CRE. And then the other part is people that are selecting, you can either select the prime rate, and we know that when they select the prime rate plus 275, that's probably on a short-term basis until they find a better opportunity. And you're always going to, so you're going to have people cyclically in and out of that. But then there are, as I mentioned, there are SOFR options that our team is also making available to certain borrowers. And you've got people that are that are going with those SOFR options as well on the CRE side.

I think you have to think about that as a landing spot. If you just happened to hit two weeks ago when the five-year was 5.12% or 5.13%, you wanted to see, are rates going to pull back? And so a landing spot for people to set where they're kind of watching interest rates. And for us, what we think that ultimately means is, as Lee referenced, we expect 65% of those loans to pay off as a general rule when they come up for maturity. They may stick around for 60 to 120 days, but we do eventually think they go away.

As we reopen selectively for originations across the country in CRE, we are seeing a higher percentage of floating rate SOFR-based loans. And if the client wants to fix the rate, they'll do that synthetically through a swap transaction.

Okay. If that plays out just the way you thought, with 65% locking in, I guess, elsewhere, is that moving into a liability sensitive type interest rate position? No.

No it doesn't remember, you know, if you look at our balance sheet, we are putting on with transitioning to more C&I loans, right? So that in itself, you know, makes us asset sensitive. You've got this sort of $10.7 billion of CRE that is floating, but I think you're going to have in and ins and outs. Some of that is permanent because of the health care facilities because of the new CRE loans that we're doing that are typically floating. We're not sort of, you know, really offering those fixed rates unless they're part of the research that sets and a contractual. Our non-interest-bearing deposits increased because we moved those very low cost deposits from interest-bearing to non-interest-bearing. No, I don't think it doesn't move us to a liability sensitive position. I think we're very much neutral to asset sensitive. Probably moving more in that direction, given the transition of the balance sheet to more C&I. I'll leave it there. Thank you.

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. John, your line is now open. Please go ahead. Thanks. Good morning. Good morning. Hi, John. Yep. Hi, John. Yep.

Hey, one small one and then one bigger picture, but Lee, on the higher expense guide, maybe I missed it, but I know it's small, but just curious what the driver of that was.

You mean for '27? Yeah. Yes. So it so the previous guide, we were sort of towards the top end of the range, and then we we continue to invest in sort of people and technology. And so that just put us sort of beyond the top end of the previous guide and into the sort of the current guide, which is consistent with where our expenses are this year. So it's just investment in people and technology.

Okay, okay, good. Um, and then the bigger picture one, I just, I asked this respectfully, but I know a lot of this is hard to predict, but that update slide, it's been drifting lower for a few quarters and it's elongated a bit and maybe an unfair question, but any elements of this that were maybe a deeper dive reset where you think this is probably the bottom? Them or set another way? What does it take for things to get tougher from here? And I guess I'm focused kind of more on the core trends. I think credit works its way out. But how deep did you guys go on this reset? Because for '27, it's a pretty big cut.

Yeah, I mean, we've spent countless hours, days, weeks, pouring over this, John. And as I mentioned, you know, we, a lot of this is mechanical now because of the repricing. You know, as I mentioned to one of the previous questions, you know, if you look at this and say, okay, big picture, you know, where is the risk? We have the ability to create and generate assets. I think, you know, we've proven that on the C&I side. And so we know the resets are going to happen. They're contractual. We all just sit here and wait. Time is our friend in that regard. And we've taken the deposit um down but we're saying we're going to grow deposits, you know, $800 million to $1 billion a quarter. And so, you know, that is the that would be the question, can we bring in $800 million to $1 billion of deposits a quarter? And so, we believe we can. And so that's if we can do that, then we can hit all of these numbers because that helps fund the incremental balance sheet growth. 50% of it is funded by CRE runoff. That is going to obviously change the mix of the balance sheet more favorably. And you have the pickup in the spread just given everything everything that's resetting is sort of, or a lot of it is low coupon. So I think it comes down to, can we bring in the deposits?

Okay, thank you.

This concludes the question and answer session. I will now turn the call back to Joseph Otting for closing remarks.

Thank you very much, operator. As noted with this presentation, we provided our 2028 forecast. We thought that was important so that the journey ahead is well defined. As we have done in the past along the way, as both internal and external factors alter that, we've come forward and really tried to make sure that, as we have those changes, we communicated those, so everyone knew how we observed the business. We do, as I said in my opening comments, feel we remain to be on the path for Flagstar Bank to complete its turnaround. It's just if you look at the numbers, you know, the $0.28 really on top of previous '27. So this is a what I would just say it pushed it out, but it didn't change the direction that we were going. So we do feel very good about the continued fundamentals of this transformation of this company where the C&I business will become, and is now becoming a much more significant portion of the business and that we look to really have a balanced balance sheet where a third of the assets are dedicated to consumer cash flows, a third to commercial real estate, and a third to business lending. In closing, I'd like to thank our executive leadership team and all our teammates for their dedication and commitment to the organization and our customers. I'd like to also thank the Board of Directors for their support and counsel. And thank you for taking the time to join us this morning and asking what we thought were really important and critical questions. So thank you for your interest in Flagstar.

This concludes today's conference. Thank you for participating. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

Thanks, everyone, for joining us this afternoon. We're pleased to have Flagstar Bank here today joining us. Joseph Otting, the Executive Chairman, Chief Executive Officer; Lee Smith, Co-President, Co-Chief Operating Officer and Chief Financial Officer; and Rich Raffetto, also Co-President and Co-Chief Operating Officer and Chief Banking Officer.

Thanks a lot, guys.

Thank you, Jared.

Appreciate you joining us. I know you didn't have too far to travel to get here, so it's good to have you all here.

Maybe just starting off, the commercial banking build-out has become the primary growth engine of the company. What allows Flagstar to win so many new relationships today? And how have you differentiated yourself from peers who are pursuing the same clients?

Great. So first of all, Jared, thank you very much for the invitation to the conference. It's the Barclays conference year after year is a highlight for our organization and for the people that are attending. And the ability to sit down and talk with investors on a one-on-one basis, almost like speed dating is, builds a lot of solid relationships. So thank you for you and the organization putting this together.

When we joined the company in March of 2024, we laid out a plan that we really wanted to diversify the balance sheet. And we wanted the risk to look like 1/3 in commercial real estate, 1/3 in consumer cash flows, and we put mortgage-backed securities into that bucket, and 1/3 in C&I. And to build a relationship commercial banking business, which really wasn't a part of the DNA of the legacy organizations.

We were fortunate to hire Rich Raffetto to come in and lead that effort for us. And both Rich and I really spent the majority of our careers in the C&I kind of business banking, corporate banking, middle market space. And we really had a vision that we could build something out that could be really special where we could be customer-centric, be responsive to the customers.

But the real ingredient that was really important is that we recruited really top-notch talent into the bank. And as Rich and I laugh every once in a while in those early days, it was a bit of a hat trick to get people that knew us to join the company, but the momentum started. And today, Rich has done an amazing job of hiring over 400 banking professionals. This covers relationship management, product areas, credit underwriting.

And I think the core, not only that the senior management is committed to this space, we think it's a big part of the future of the bank, but that we brought people in who knew the owners and leaders and executives of companies that we wanted to bank. And while we bought credibility from Flagstar, they created credibility for Flagstar in the eyes of the customers.

And so now we're generating $2.8 billion to $3 billion of new loan outstandings a quarter. We're doing that one relationship at a time. We're generating about 75 relationships per quarter. And we really think the future is very bright for Flagstar. And we're in a unique position where people are looking for regional banks to play a role. And as some of our brethren at Silicon Valley and First Republic and Union and Signature have gone away, it's really opened up a really good vortex for us to be able to step in and fill that void.

You often -- you talked about now and you talked in the past about building a relationship-based bank rather than simply growing loans. As these newer relationships mature, how should we think about the opportunity for deposits, treasury management, capital markets and wealth management revenues?

Yes. It's really a wide open opportunity for us. Rich quotes the number that over the last 6 months, we've boarded $4.4 billion in new loans in the commercial bank and in the Private Bank and $2.4 billion of deposits. And so we have expectations depending upon the vertical and the business and the industry, and we're going to get a full relationship with these customers.

Frequently, you have to use your balance sheet that gives you the fishing license to start the process. But about half of our relationships now are single bank or 1 or 2 banks where we're the lead on that, and half of those are coming where we're a participant with other banks. But we have full expectations that not only fee income and deposits will come with those relationships and our short-term successes has proved that.

As you said, the growth has come from that combination of geographic expansion and specialized industry verticals, which verticals and markets have exceeded expectations? And where do you see the largest opportunity over the next few years?

Yes. So we're really excited because across the United States, Flagstar has retail banking presence in California and Arizona, in Florida, New York, New Jersey, Ohio, Indiana and Michigan, really solid, solid markets. But we didn't have commercial banking operations. And so we've developed a strategy in those markets and others to put commercial bankers to coexist with our brand in those markets.

We've had really, really good success at penetrating the middle and lower corporate market with that. And then we also felt specialized business brings a unique ability for relationship managers to understand the needs of owners in certain industries. And for us, we've seen really great growth in oil and gas and in health care, entertainment, sports specialty. We're also seeing a lot of great momentum in renewable energy right now, a lot of that.

And we've opened up this year a couple of new ones in food and other things where all those kind of parallel into large chunks of GDP in the economy. And so again, starting from 0 and being able to gain market share allows us to show significant growth in all of those areas.

Maybe we can talk a little bit about the balance sheet transformation and what's gone on since you all have come on board? The pace of CRE reduction continues to exceed, I think, what you originally expected with another $1.1 billion payoffs in second quarter and a meaningful portion coming from the criticized asset portfolio. How has your thinking evolved around the speed of the transformation and how much is left to do?

Yes. So if you go back to the 1/3, 1/3, 1/3, today, we sit at about 48% of the loan book is in commercial real estate as a whole. That includes owner-occupied and really real estate across the nation. About 28% is in what we consider consumer cash flows and roughly 26% in C&I. And so you're right, that transformation into that much more diversified balance sheet has occurred much more rapidly than we thought. And when we originally got there, 70% of the book or more was in commercial real estate. We had a lot of discussions with customers of the bank that basically said we did not want to renew or extend any real estate loans.

We're now at a position where we're excited about being able to do new real estate transaction because that exposure has shrunk. But I think when we get to the beginning of 2028, we're going to feel pretty good that we're in the geography of the range that we were hoping to get to. And that builds, I think, a much more durable, diversified institution.

The pace of that runoff remains elevated and you have some more capacity under your CRE concentration. How do you determine when it's worth to retain a CRE relationship versus running off at this point? And has that framework changed as the balance sheet become stronger?

Yes. It -- initially, it was we wanted to reduce our commercial real estate exposure with limited exceptions. We really communicated. And today, we've now graduated to the point where if someone has a strong noncredit relationship with the bank, we will make exceptions. And then as we pursue markets in California and Arizona and Florida and Chicago, Michigan and Ohio. We're looking for -- where people want and need commercial real estate, either construction financing, transition financing or mini perm financing, but we'll expect and have to have depository relationship with that. And if it doesn't, then we're probably going to pass on those relationships.

Maybe shift a little bit to margin and NII. The market has spent a lot of time focusing on near-term NII pressure from the CRE runoff. As you think about the next several years, what are the biggest building blocks that get Flagstar from today's earnings profile towards the profitability targets that you've outlined?

This is where I hand the baton to Lee.

Thank you, Joe. Thanks for having us. It's always nice to be here, as Joseph said. I think when you look -- I mean, just looking at '27, I think in terms of NIM expansion, I think the 3 biggest drivers are we have -- in '27 alone, we have $9 billion of low coupon multifamily loans that are resetting or maturing. And when I say low coupon, less than 3.9%. So they will either reset at the market rate, and we will keep them or they will pay off, and we will give Rich that liquidity to continue to originate and build the C&I portfolio.

So we're going to get a lift from those resets because those resets are contractual. They're just going to happen as they hit those dates. So we get a big lift, which is somewhat mechanical just by letting that play through. I think the second item is as we grow the C&I book and the balance sheet, if we're -- as we said in Q2, Rich brought on net growth, $2 billion of C&I loans at an average spread to SOFR of 225.

So you're looking at an all-in coupon of just around 6%. Our cost of interest-bearing deposits in the second quarter was 3.05%. The spot rate of our deposit cost when you include noninterest-bearing are around 2.52%. So if we can sort of keep deposit costs somewhat consistent, maybe they increased a couple of basis points, but we're putting on loans at that -- at those spreads then -- and those coupons, then we're going to continue to drive NIM expansion and interest income expansion.

And then the third main driver is bringing those nonaccrual loans down. We have $2.8 billion of nonaccruals today, 30% of which I want to point out are performing and current. We're very punitive on how we classify nonaccruals, but that is dead capital, dead earnings because they're 150% risk weighted and they're not doing anything for interest income or NIM. So as we bring those nonaccruals down, it's automatically going to be accretive from an earnings point of view. So if you're thinking of the NIM expansion, those are the 3 main drivers.

Since the original plan was developed, the rate outlook CRE payoff activity and the deposit environment have evolved. How do you think about the balance between loan yields, deposit costs, multifamily repricing and balance sheet growth as drivers going forward?

Yes. I mean, look, I think the -- as I mentioned, the resets are a big deal for us, and that's going to obviously help the NIM expansion. But we're typically seeing coming back to what Joseph said earlier, we're trying to limit the sort of CRE multifamily runoff to somewhere between $800 million and $1 billion a quarter. We think that Rich can originate what we saw in Q2, which is about net C&I growth of $2-plus billion a quarter. We think we can sort of continue that going forward.

And so on the loan side, you've got the C&I growth. Some of that is going to be funded by CRE runoff. And so you're looking to fund the remainder of the C&I growth with incremental deposit growth. We expect that to come from the commercial relationships that we're bringing in every quarter with the new C&I growth and then the Private Bank growing its deposits as well. So the question is what is the incremental cost of the deposits that we're bringing in to fund that new C&I growth? And if we can bring that in at the right cost, then -- and we think we can, then you're going to achieve earnings accretion for the bank.

Two other points that I just want to make on what I previously said. If you think about the $9 billion of CRE loans that are resetting in '27, they're on our balance sheet today. We're already funding those. We don't have to go and get incremental funding. We're just going to get the pickup in the improved spreads or coupons that we get on those loans, whether they reset, pay off, and we use the liquidity for C&I.

And the nonaccrual loans that are on the balance sheet today of $2.8 billion, we're already funding that. We don't need incremental funding for those 2 big drivers of net interest expansion. Where we have to go and get some additional liquidity is to fund the C&I growth that isn't being funded by the CRE runoff.

And maybe just looking -- sticking with the multifamily portfolio for a minute. You did a lot of deep work on evaluating credit over the last 2 years with that. At this point last year, the expectation was that we're going into a lower rate environment, now we're going into a higher rate environment. How do you see maybe some of those criticized and classified but not nonperforming loans, reacting with a reset that's potentially higher with the backdrop in New York still pretty rough for those owners?

Yes. I think -- and I will -- I'll talk about nonaccruals at the end. But I think what we have consistently seen over the last several quarters is of the $1 billion plus of par payoffs each quarter, 40% to 50% of those par payoffs have been substandard. And again, that's because we've been very punitive in the way we've risk rated the book. We do not see that changing at least in the near term. I mean we've seen those loans that are paying off going to the agency Fannie, Freddie and obviously, going to other lending institutions. For those rent-regulated buildings that are more than 50%, some of those other institutions do get CRA benefits for financing those loans. So we think that is a part of what we've seen.

But there's a lot of liquidity out there for this asset class. And so we've consistently brought down our criticized and classified, and we think that will continue. I think if there's one area where we think the higher rate environment might slow us down a little bit, it's the speed and the pace with which we can reduce the nonaccrual loans.

Okay. Rich, maybe you've done a lot of work over the last few years, bringing in new people and really growing the C&I space in an environment where there's a lot of banks out there looking to hire good C&I lenders. What's sort of the value proposition as you pitch it to people to come over to Flagstar and help build out that commercial business?

Well, thanks, Jared. I think it's a very relevant question. As Joseph mentioned, the commercial banking build-out was one of the great opportunities that our new management team that's not new to the industry, but when we arrived at Flagstar, it was one of the glaring obvious opportunities for the company. And since then, we're pretty proud that we've onboarded over 400 new bankers to build out this commercial banking platform and to deepen our existing platform in private banking. And we've been very gratified by the quality of the professionals who we've brought on board.

And frankly, one of the attractive things is that we've got Joseph in the corner office, having grown up as a commercial banker. I can count on one hand how many commercial bankers are serving as Chairman and CEO of the top 30 bank in this country. And I think that really does resonate. In addition, the opportunity to build something and make a big impact in an environment where you know that C&I and commercial banking is going to be core to the strategy of the new management team. That's been certainly a tailwind for us in bringing on new talent and the quality of the people that have come from much bigger institutions that are now building out the platform at Flagstar has also been a draw.

We're pretty proud to note that we've only used an executive search firm on a couple of bespoke hiring opportunities. Most of the people that we're attracting to the franchise are through that network effect of people that we've worked with and trusted over the years, and they're trusting us to come over to build something special together, and it's in an environment where a bank that's big enough to matter in terms of the ability to provide capital to their clients as they come over. And -- but they're not 10 layers down from the CEO, and they know they can make a big impact. And we're not burdened with a legacy of being overweight from a credit exposure perspective in really any of our C&I subsectors that we're building out.

And as Joseph mentioned, it's a two-pronged strategy to cover specialized industries with experienced bankers as well as to fill in our geographies around the country with geographically focused commercial bankers that are networked in that community and can really make a big impact. So we're pleased with the progress that we're making. And I think those factors are continuing to be a tailwind as we continue to onboard talent.

And I would describe this as we're in the top of the fourth inning in a 9-inning game, but you're starting to see it now with the quarter-over-quarter C&I loan growth and the fact that we're onboarding 70 to 80 new relationships each quarter on the commercial side of our book, that the loan is only the beginning of that relationship in a relationship-focused strategy. And we can go deeper with treasury management, capital markets, private banking and wealth management and connecting those dots in a tight knit organization is how we're executing.

About when you're -- so you brought on the people with the relationships. They have to bring over their own relationships and onboard the new customers. What's the -- similarly, what's that value proposition to get somebody to leave the bank that they're banking with today and to come to Flagstar, which may be relatively new in the -- on the scene for this type of banking.

Sure. Well, having been a commercial banker myself for about 35 years, I can tell you that most of the client engagement team are pretty entrepreneurial in spirit. And building something is something that is very attractive to folks in the marketplace. And as you can imagine, with a number of institutions either full up in different segments or going through strategic shifts might be M&A integration of -- we've seen a number of regional banks get taken out either in M&A or following 2023. There's an opportunity that we at Flagstar are grabbing to take market share where there's bankers that are looking for a platform like ours where they know they can make a really big difference. They know that commercial banking is core to building out the platform.

They know we've got capacity across commercial and private banking to be relevant in different industry sectors. And they know that we need to be more impactful in the communities where our brand is already known in 4 big geographies around the country. So I think that's one of the -- and they're going to work with people who know what good looks like from other institutions at large top 10 banks in the country. And I think that those things are resonating and they know that they can be impactful and they know they have an executive management team, including the 3 people up on stage today that are happy to jump on an airplane or come across town and meet with a business owner who's trying to decide between us or another institution.

And I think that's the formula that we put into the mixing bowl that's resulting in really good relationship growth. And over time, we will drive higher returns on those relationships as we go deeper with additional products beyond credit is only at the beginning. We go to deposits and then the fee-generating services, and that's the model that we're executing.

Lee, you mentioned a little bit about the need for funding growth as well to support this loan growth. What's -- what are you seeing in terms of deposit pricing out there in the market today? And with likely rate hike or expected rate hike tomorrow, how are you expecting to see deposit pricing trends through the rest of the year?

Yes, it's undoubtedly competitive. There's no doubt about it, and that's what we're seeing. But I think, as I mentioned earlier, what we're trying to accomplish is -- and we've done this in the first 2 quarters of the year. We've grown deposit balances, but we've been able to reduce our cost of interest bearing deposits at the same time. I think we're at an inflection point where, can we continue to grow deposits but keep the cost of the deposits relatively flat. So maybe it goes up a couple of basis points, but you don't see a big jump in the cost of deposits. And that's what we're trying to aim for.

We are seeing banks that have savings promos, CDs out there that are north of 4% in some instances. We've got our own promo on the website, 3.75%. But at the same time, we're leveraging the commercial relationships and the private bank relationships to bring in some noninterest-bearing. We'd like to bring in more, but also low interest-bearing deposits so that you're bringing that overall cost of deposits, keeping it relatively stable.

And so as we think about the funding side of the balance sheet, generally, if we can keep the cost of deposits sort of in a very sort of tight zip code and then we'll continue to chip away at the FHLB advances and that's how we'll sort of continue to reduce funding costs.

And maybe -- shifting to the expense side and some of the technology spend in AI. AI is obviously a big theme this year. You've talked increasingly about modernizing the technology stack at the bank. Where are you seeing the most tangible benefits today? And where do you think some of the biggest opportunities are still out there?

Yes. So when we first arrived, we had 6 technology centers. Each legacy bank had 2. And really, through the course of this year, we've converted -- we've closed those 6 and opened up really 2 co-location centers. So we went down 6, up 2 is the way I would look at it. We've made that transition rather smoothly. There was no disruption both at the bank or with our customers.

The next big transition is we currently operate on 2 cores. We'll be converting down to 1 core in June of next year. And so those all have kind of allowed us to build what we call the S2 platform in our organization. Simple and sophisticated is what we've really focused on.

But also bringing forth that the legacy banks did not have the ability to invest in the technology spend. We've been able to drive the cost down substantially by a number of these moves and use those dollars to reinvest in our technology platform. And so that includes products and services, the way we process things, using external resources, using some international resources to drive the cost down. So we've actually lowered our costs while dramatically improving the technology that's available.

We've also -- we're an early user and adapter of AI technology in the company. We have StarIQ, which is kind of a proprietary system that is based upon the Claude. That is actually used within the company. So it's a closed-loop system where we make AI available to all our employees. And we're constantly doing lots of education now about how people can use AI to further advance their efficiency, effectiveness in their work environment. So we're really excited not only about where our technology has come under Chris Higgins and Jason Pope's leadership, but really what we have available to yet to get done and creating the efficiencies.

Great. On capital, you obviously have plenty of capital. You announced the $250 million share repurchase in the second quarter, which I think was expected, but it's certainly resonated with investors. What does that say about management's confidence in the transformation and forward earnings trajectory? And should we think about that as more of an introductory start to capital management and where ultimately you see capital ratios settling out for you...

Yes. We've had, what, 12 meetings today, and that's the first time that come up.

Really, yes.

First of all, the 3 things that both management and the Board has really focused on is building those core earnings up. And we publicly said, look, we want to continue to see the path on core earnings. That's the probably most important thing for the company. The second is cleaning up the loan portfolio as we have it today. And then the third is really how much capital will we deploy in Rich's C&I build. But I think the Board -- management recommended and the Board supported the stock buyback. I would say that was earlier than I think most people thought. I think most people were thinking that was going to be perhaps a September or October event, and we announced it earlier.

And we just think that's a way for us to demonstrate with the bank's excess capital. And as long as those 3 other variables come along, we're going to continue to look at that and see what's the best option for our investors. And we're confident that those 3 items are going to continue to improve. C&I is going to grow. We're going to continue to see real positive core earnings growth. And we really want -- we're really highly focused on reducing the substandard and nonaccruals on the bank's balance sheet.

Okay. Great. Any questions in the audience? Happy to open it up. Well, I think if we're sitting here next year at the same time and get you to join us and the stock is resonating with investors, what do you think be the main drivers of that change would be between now and a year from now?

Yes. I think that we continue down the path of growing and building our C&I franchise that we've transformed the real estate portfolio that now we are recognized as someone who is a provider of debt and relationship banking into the commercial real estate. We are also transforming our retail banking group to be a little bit more sales oriented and outward focused. And so -- we have a retail banking franchise with about $36 billion in deposits that we want to really turn it into a deposit origination machine. And then we can serve both local consumers and small businesses through that 360 branch network.

And that we continue to hear and see that Flagstar plays an important role as a bank in America and that people can rely upon us, and we can provide great quality, relationship managers who offer solutions to our clients where we can add value to the client. And I think we're well on the path of doing that across America.

And I would add, Jared, that the talent piece of the equation continues to be critically important, particularly as we expand in these markets while we've planted the flag in different industry segments and geographies and we've retooled and invested in product capabilities to match competitors of our size and complexity, continuing to attract bankers to the platform is key. We talked about adding 40 to 60 new bankers to our platform over the course of 2026 in the C&I space. We are well on that path and feel really good about getting to that number, probably the higher end of that number by the end of the calendar year, and that momentum we expect to carry over into 2027 as well.

The other piece of the equation that's now different now that we have very purposefully managed down the commercial real estate exposure as a percent of capital at the company, we're selectively reopening for business in the CRE space. So our new originations in the third quarter will be markedly improved from very little activity in the new origination space in commercial real estate in prior quarters under this management team. So our homebuilder finance group, it's based down in Houston and our non-New York centric commercial real estate business based out in Detroit and in other markets, we're starting to add commercial real estate originations focused bankers and credit underwriting professionals in markets like Southern California and Chicago and Dallas and Mid-Atlantic in South Florida where we simply had not had them before.

So I think our momentum on our overall commercial businesses, including commercial real estate. You'll see this point of inflection continue where the C&I momentum continues to build. We'll go deeper in these relationships, driving more deposits and fees, but also commercial real estate is starting to -- they're joining the party 2 years late. But now they're moving back into more traditional BAU mode, while we continue to work down the concentration that we have in the New York area with legacy New York rent regulated.

So it's a nice transition, but kind of moving more into the middle innings, if I would describe it.

Yes. I think looking forward a year, I mean I think we've been one of the most transparent banks in the country in terms of you go back a couple of years, we put a 3-year plan out there. And we've continued to put that guidance out there through the end of '27 and a lot of backup information in terms of how we're going to get there. And as Joseph said, the strategy hasn't changed.

We are very much on the rails. And so I think I would just emphasize that don't underestimate the power of $9 billion of low coupon multifamily loans resetting in '27. And obviously, it's cumulative quarter-over-quarter. So as you move through the year, the impact is only going to increase, reducing those nonaccruals that are doing nothing for us today and then obviously continuing to grow that C&I portfolio.

And if you actually do the calculation, only sort of $3 million of interest income can move our NIM 4 basis points. It's very sensitive. So when you have those 3 levers, it can be meaningful.

Great. Well, thank you very much.

Thanks, Jared. Thanks, Barclays.

Thanks, everybody, for joining us today.

All right. Thank you.

Thank you.

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Flagstar Bank Second 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 Second Quarter 2026 Earnings Call. This morning, our Executive Chairman and Chief Executive Officer, Joseph Otting, along with the company's Co-President, Co-Chief Operating Officer and Chief Banking Officer, Rich Raffetto; and Co-President, Co-Chief Operating Officer and Chief Financial Officer, Lee Smith, will discuss our results for the quarter.

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 ir.flagstar.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 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 today, we will reference certain non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures.

Now I would like to turn the call over to Mr. Otting. Joseph, please go ahead.

Thank you, Sal, and good morning, everyone, and thank you for joining us today. We are pleased to report another quarter full of meaningful progress across our franchise. Our results reflect continued execution against each of the strategic priorities we've outlined over the past 2 years. Our second quarter operating results reflect our third consecutive quarter of profitability and improved earnings. Higher pre-provision net revenue, the resumption of balance sheet growth, disciplined expense management and the continued strategic reduction in the commercial real estate loan portfolio, a record level of C&I loan production, solid deposit growth, all while reducing our deposit costs and the decline in our criticized and classified loans.

This is the result of a clear strategic plan that we have laid out with disciplined execution and the talent to build this across our organization. We are in the early stages of a multiyear growth story, and we are confident that we are on the right path.

For some more color, I'd like to turn to Slide 3. This slide demonstrates the underlying strength and momentum of our core banking business as well as the tangible progress we are making against each of our 4 focus areas. Let me walk you through each one. Under our first focus area, we believe that our capital position remains a competitive advantage, providing flexibility to support our organic growth and return capital to shareholders. In that regard, I am pleased that this morning, we announced a $250 million share buyback. A clear signal of progress we are making on our strategic plan and long-term outlook for the bank.

We're also pleased to report our third consecutive quarter of profitability and improved earnings as our pre-provision net revenue increased 51% compared to last quarter. Disciplined expense management has been a key contributor of our return to profitability. And in the second quarter, they declined 3%, helping drive positive operating leverage. Also, the second quarter marked an inflection point in our growth trajectory as the balance sheet grew by almost $600 million, as we had indicated in the last call. And in terms of deposits, we grew core deposits this quarter by over $600 million while reducing deposit costs.

Second, A key component of our transformation strategy is to diversify our loan portfolio by growing the C&I book of business. This quarter, we delivered $2 billion of net C&I loan growth on record origination volumes of $2.8 billion. This is our fourth consecutive quarter of net C&I loan growth in the first quarter overall loan growth since the fourth quarter of 2023.

In addition to the strong loan growth, we also grew C&I and private banking deposits this quarter by approximately $900 million.

Third, we continue to systematically reduce our CRE exposure as multi-family and CRE par payoffs totaled $1.1 billion, which 39% of those were substandard rated loans. While CRE concentration decreased to 350% from 367% last quarter, and well over 500% when we originally came to the company.

Fourth, in terms of credit, our criticized and classified loans declined 1% compared to last quarter and are down $1.1 billion or 9% on a year-over-year basis. In the second quarter, we did experience an increase in net charge-offs to $100 million, but half of those were previously 100% reserved for.

Next, turning to Slide 4. The EPS progression tells a compelling story of the bank's underlying momentum. On an adjusted basis, we moved from a loss of $0.14 in the second quarter of 2025 to $0.05 in the second quarter of 2026, representing our third straight quarter of profitability.

Now I'd like to turn it over to Rich Raffetto. With our recent reorganization, Rich assumes responsibility for all the banking activities in the company. This is his first earnings report with us, and so I'd like to welcome Rich. And Rich, please, I'll turn it over to you.

Great. Thank you, Joseph, and good morning to everyone as well. On the next couple of slides, I'd like to highlight the tremendous progress we are making in building out a scaled relationship-based commercial banking business.

As you turn to Slide 5, I am pleased to report that our commercial banking franchise continues to build significant momentum during the second quarter. Our two-pronged focused growth strategy, combining specialized industries banking with corporate and regional commercial banking is clearly delivering results.

In the second quarter, we generated $4.2 billion in new and increased credit commitments, which yielded $2.8 billion in new C&I closed loan originations, which was up about $800 million or 40% from the prior quarter, representing a record quarter in terms of loan production from our growing team of seasoned relationship managers.

We added 75 new to bank C&I relationships during the quarter, reflecting the strength of our C&I banker recruitment efforts as well as our expanding market presence. And our pipeline going into the third quarter stands at over $2 billion in C&I commitments, providing strong visibility into continued C&I loan growth and momentum.

Looking at the C&I loan balance trend on the right side of Slide 5, Total C&I loans grew from $16.6 billion last quarter to $18.6 billion this quarter, an increase of $2 billion or 12% quarter-over-quarter. And this growth was broad-based, but particularly concentrated in our core strategic focus areas. Specialized, Industries and Corporate & Regional, Commercial Banking, together drove $2.1 billion of end-of-period loan growth, which was up 29% quarter-over-quarter. This is the direct result of the talent that we have been recruiting, the product capabilities we have been building and the relationships we have been cultivating across our target markets and industry verticals.

The C&I growth was well diversified, both by industry segment and geographically with particular strength in our energy, financial institutions, health care, technology and sports and entertainment verticals as well as our large corporate diversified and our New York and Southern California-based regional commercial banking teams.

During the second quarter, we hired 32 new producers and credit underwriters to our C&I banking effort as well as support staff to drive further growth, especially in specialized industries and corporate and regional commercial banking. In addition, we hired new commercial banking team leaders regionally in the Dallas, Detroit, Cleveland and Phoenix markets, and we also launched specialized industries verticals during the quarter, food and beverage, leisure hospitality and gaming and education and nonprofits. We also launched a new regional commercial banking initiative in Texas, which represents a new geography for us.

Continuing on the next slide, which is Slide 6, we show a more granular look at the C&I portfolio composition at June 30, 2026. With specialized industries as a standout performer this quarter, it grew $1.7 billion or 34% compared to the previous quarter and reflecting the depth and breadth of our industry verticals and the quality of the bankers that we have brought on board.

Corporate and Regional Commercial Banking grew $375 million in the quarter or 18% to $2.4 billion as we continue to build out our middle market franchise across key geographies.

And finally, our equipment finance team returned to growth in the quarter as well as our asset-based finance team, which was relatively stable, while mortgage finance declined $109 million, reflecting seasonality.

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

Thank you, Rich, and good morning, everyone. We're very pleased with our third consecutive quarter of profitability, where we continue to execute on our strategic vision to transform Flagstar into one of the best-performing regional banks in the country.

As Joseph mentioned, this morning, we also announced a $250 million share repurchase program. This action reflects the bank's strong capital position and our commitment to creating long-term shareholder value. In addition, we achieved several other accomplishments during the second quarter, including pre-provision net revenue increased $34 million on an unadjusted basis and $22 million (sic) [$21 million] on an adjusted basis. Our balance sheet grew approximately $600 million quarter-over-quarter, driven by strong C&I loan and deposit growth.

As Rich discussed, the C&I loan portfolio increased $2 billion or 12% compared to the previous quarter. Core deposits, excluding brokered deposits, increased $700 million and have increased approximately $1.8 billion (sic) [ $1.5 billion ]during the first half of the year. While deposits grew, we were also able to reduce deposit costs by 5 basis points despite a higher for longer interest rate environment. We continue to deleverage the balance sheet by paying off another $250 million of FHLB advances as we continue to reduce our reliance on higher cost wholesale borrowings. Without this deleveraging, the balance sheet would have increased over $800 million quarter-over-quarter.

multi-family and commercial real estate payoffs were again elevated during the quarter at $1.5 billion, $1.1 billion of which were par payoffs and 39% of the par payoffs were substandard rated loans.

The ACL decreased $81 million, driven primarily by lower multi-family and CRE loan balances, higher charge-offs, of which a significant amount were already reserved for and more appraisals leading to reductions on qualitative adjustments on individually evaluated loans. We also witnessed a reduction in substandard loans of $375 million (sic) [ $369 million ] quarter-over-quarter. Operating expenses were again well contained, down 3% quarter-over-quarter to $427 million, well within our previously provided guidance range.

And finally, we ended the quarter with a 13.16% CET1 capital ratio, comfortably one of the strongest CET1 ratios of any other regional bank and a driving factor behind our stock buyback announcement.

Now turning to Slide 7. We reported net income attributable to common stockholders of $0.06 per diluted share on a GAAP basis and $0.05 per diluted share on an adjusted basis. The one notable item this quarter was related to our equity investment in Figure Technologies, which we exited in full during the quarter for a gain of $3.5 million (sic) [$4 million].

On the next slide, I'd like to walk you through our updated forecast for '26 and '27. We have adjusted our interest income guidance downward for both years as a result of increased multi-family and CRE payoffs, paydowns and amortization. This is both good news and bad news as it accelerates our diversification strategy by reducing our CRE exposure, but it reduces interest income and NIM in the short term, lower noninterest-bearing DDA growth in the second quarter. While we had good deposit growth in the quarter, it was from interest-bearing deposits. While we expect to grow noninterest-bearing DDAs going forward, the timing has been pushed out, and we have changed the mix of deposit growth to more interest-bearing deposits, which impacts interest income and NIM.

Non-accrual loan balances at the end of the year are expected to be slightly higher than previously forecasted. And the higher for longer interest rate environment is impacting mortgage gain on sale revenues, and therefore, we reduced noninterest income versus our previous guidance. EPS for '26 is now forecast to be in the $0.40 to $0.50 range and EPS for '27 is forecast to be in the $1.60 to $1.70 range.

Moving next to Slide 9 and the trends in our net interest margin. The second quarter NIM of 2.13% compared to 2.15% in the first quarter, but was impacted by an extra day in the quarter. Excluding this, the net interest margin would have been 2.16% in the second quarter. Furthermore, June net interest margin was 2.19% as we began to see NIM expansion from the larger balance sheet.

Turning now to Slide 10 and noninterest expense, which remains a key pillar of our strategy to optimize efficiency and therefore, earnings and drive positive operating leverage. Operating expenses continued to decline during the second quarter, down $14 million or 3% compared to the prior quarter and down $33 million or 7% on a year-over-year basis. Moving on to capital on Slide 11, which shows that we maintain a strong capital position with a CET1 ratio of 13.16%. This places us in the top quartile of our peer group. At this level, we have approximately $1.6 billion of excess capital after tax relative to the low end of our target CET1 operating range.

And as we mentioned earlier, we're going to put some of this excess capital to use with our $250 million share buyback program. The next slide is an overview of our deposits. Core deposits, excluding brokered, increased $700 million on a linked quarter basis or 1%. This growth was primarily driven by growth in commercial and private bank deposits of $900 million, partially offset by lower retail deposits of $290 million. On deposit costs, we continue to make progress as the cost of interest-bearing deposits declined 5 basis points quarter-over-quarter and 65 basis points year-over-year. This improvement reflects our disciplined approach to deposit pricing and the benefit of growing commercial and private banking relationships.

During the quarter, $4.8 billion (sic) [14.8 billion] of retail CDs matured with a weighted average cost of 3.98%, and we retained approximately 85% of these balances as they moved into other CD products that were approximately 15 to 25 basis points lower than the maturing CDs. In the third quarter, we have another $4.4 billion (sic) [ 14.4 billion] of retail CDs maturing with a weighted average cost of 3.87% -- we also continued to deleverage the balance sheet by paying down $250 million of FHLB advances with a weighted average cost of approximately 3.95% during the quarter.

Moving next to Slide 13, which shows total commercial real estate par payoffs. In the second quarter, par payoffs remained elevated, totaling $1.1 billion, 39% of which were rated substandard, which is a particularly important data point. We're not just reducing the size of the CRE portfolio, we're improving asset quality by clearing out the lower quality credits and executing on our strategy to diversify the balance sheet. These payoffs are resulting in a significant reduction in combined multi-family and CRE balances. In total, CRE balances are down $14.9 billion or 28% since 2023, including a $1.5 billion or 4% quarter-over-quarter reduction.

Additionally, the payoffs have lowered our CRE concentration ratio to 350%, down nearly 150 percentage points since 2023.

Turning now to Slide 14 and an overview of the multi-family portfolio. We continue to proactively reduce our multi-family exposure as total multi-family balances have decreased $4.9 billion or 16% year-over-year and $0.9 billion or 3% quarter-over-quarter. The reserve coverage on the overall multi-family portfolio was 1.63%. Additionally, the reserve coverage on those New York City multi-family loans where 50% or more of the units are rent regulated is 2.87%. Currently, we have about $11 billion of multi-family loans with a weighted average coupon of approximately 3.90% that are either resetting or maturing between June 30, 2026 and December 31, 2027.

Moving now to Slides 15 and 16, where we provide a more detailed view of the New York City rent-regulated multi-family portfolio. As of June 30, this tranche of the portfolio was $13.4 billion, down $677 million or 5% quarter-over-quarter, while the tranche where 50% or more of the units are rent regulated was $8.5 billion, down about $338 million or 4% quarter-over-quarter. This portfolio has an occupancy rate of 97% and a current LTV of 70%. Approximately 48% or $4.1 billion of the $8.5 billion are pass-rated loans and the remaining $4.4 billion are criticized or classified loans, meaning they are either special mention, substandard or non-accrual. Of the $4.4 billion, $1.7 billion are non-accrual and have already been charged off to at least 90% of appraisal value, meaning $351 million or 17% has been charged off against these non-accrual loans.

Furthermore, we also have an additional $76 million or 4% of reserves against this non-accrual population, meaning we have taken 21% of either charge-offs or reserves against this population. Of the remaining $2.7 billion that are special mention and substandard loans between reserves and charge-offs, we have 5% or $134 million of loan loss coverage. We believe we're adequately reserved or have charged these loans off to 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 17 details our ACL coverage by category. The $81 million reduction in the ACL was largely driven by lower CRE and multi-family balances, higher charge-offs and lower individually evaluated reserves as we received more appraisals. Our coverage ratio, including unfunded commitments, was at 1.52% quarter-over-quarter.

Slide 18 provides a broader view of asset quality trends during the second quarter. Criticized and classified loans decreased $152 million (sic) [ $143 million] or 1% quarter-over-quarter and $1.1 billion or 9% year-over-year. Non-accrual loans increased modestly to $2.8 billion, up $123 million or 5% quarter-over-quarter. During the quarter, we did experience an increase in special mention loans of $100 million as a result of our comprehensive and prudent internal process of looking in detail at all loans with a reset or maturity date 18 months forward. 18 months from June 30 brings us to the end of '27, and '27 is our largest reset year, where approximately $9 billion of CRE loans either reset or mature.

We have applied pro forma interest rate calculations for these loans based on contractual reset terms and have adjusted the risk ratings accordingly. This look forward was also the main driver for the quarter-over-quarter increase in non-accrual loans. I would also highlight that 40% of our non-accrual loans are current and paying. Three other items of note, we are now 100% through analyzing 2027 loans in their entirety. We continue to see a significant amount of substandard loans paying off at par each quarter, and all of this analysis is reflected in our ACL reserve.

At the end of the quarter, 30- to 89-day delinquencies were approximately $368 million, down almost $600 million quarter-over-quarter. The biggest driver of the decrease is June being a 30-day month. As we previously discussed, any time a month past 31 days, it spikes to the delinquency number for those borrowers paying on the last day of the month, given that we calculate delinquencies at precisely 30 days. 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 and Rich. Before moving to Q&A, let me close with a few summary thoughts. When we put our original forecast together, we were unaware of the change to interest rates that we would be experiencing a perspective in the market that interest rates would be rising versus decreasing. We also saw a sizable increase of cost of energy to our customers. And the rent control Board, while we had focused on and did a lot of modeling, ultimately voted not to increase rents for the 1- and 2-year leases going forward.

In spite of this, overall, we are still pleased with the trajectory of the business. We achieved our third straight quarter of profitability. We grew the balance sheet for the first time since 2023, both in aggregate and in our loan book. We delivered record C&I loan growth. We grew our deposits, and we continue to reduce our CRE exposure while maintaining strong capital and the announcement of the $250 million share buyback.

In addition, I'd like to thank our executive leadership team and all our teammates for their dedication and commitment to the organization and our customers. I'd also like to thank our Board of Directors for their support and counsel.

And now I would be happy to answer questions. Operator, if you can please open the line for questions.

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

So jumping right to the buyback. Great to see the $250 million authorization. Your excess capital is significantly above this level at $1.6 billion. Can you talk about how you're balancing capital priorities between growth and buybacks?

Yes. Thank you for the question. We've been very consistent in that there are 3 variables that management and the Board are observing. The number one is the growth in core earnings is an important part of the story. The second is that the trends that we see in the credit quality of the loan book. And then the third being this balancing between the amount of CRE payoffs and the amount of capital that we'll need to support the C&I growth.

So those are the variables that both internally and at the Board level, we're using to make a determination of how much capital in the form of a share buyback, it will return to the shareholders.

Great. And then on the C&I loan growth outlook, in the quarter, very strong $2 billion. Pipeline looks strong as well at $2.8 billion. How should we think about growth going forward? Is a similar pace reasonable? How should we think about that?

Rich, do you want to take that question?

Sure. Happy to take it. I would suggest that we see consistent loan growth going forward, consistent with what we delivered in the second quarter. We continue to onboard new-to-bank hires, and they are building their pipeline. So we see increasing momentum going forward in our loan growth expectations, including new geographies and new verticals. In addition, I would mention that our commercial real estate team has started to originate loans more nationally, and that will also help us reduce CRE payoffs on a net basis.

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

Just a quick one back on the buyback. What was the -- I know you said it was for the next 12 months, but you guys are obviously still trading below adjusted tangible book value and you do have that excess capital. Is it reasonable to assume that you can potentially get through this $250 million and then go back to the Board and ask for something. I guess maybe what I'm really asking is in your comments back and forth, did you get the sense that the Board should be willing to [indiscernible]?

Yes. Dave, I think it's those 3 variables as we progress through the year. They clearly want -- both the management and the Board want to see the increases in the core earnings. we see a downward projection continued in the loan portfolio. And then it really gets into how much capital are we going to see. You saw a little bit that our CET1 was down this quarter because of the expansion of the balance sheet. And we probably will continue to see that as our projections show us continuing from this point forward to expand the balance sheet. So it's a little bit of as we march our way through the rest of the year into 2027, looking at those 3 variables and then making a decision and a recommendation to the Board.

Okay. Great. And then just as a follow-up on the margin guide, the [ 2.19% ] that you mentioned, Lee, for June. Are you looking at that as more of a floor going forward for the margin? Because it seems like your guide is baking in a decent amount of expansion in the second half of the year to get to the bottom of that NIM range for '26. So I just wanted to get your thoughts on that and your confidence around that and what's going to be the major drivers of that?

Yes. I am looking at that as a floor, and that was the reason for pointing out the June NIM margin. And I think as I mentioned in my prepared remarks, what you're seeing is the NIM expanding as we grow the balance sheet. This is the first quarter we've shown overall balance sheet growth since '23. And a lot of that growth occurred towards the end of the quarter, and you obviously saw the margin pick up in June.

But the other drivers of the NIM expansion, as we've spoken about before, is that multi-family book is going to continue to reset or mature. And effectively, between now and the end of '27, you've got about $11 billion of low coupon multi-family loans that are going to hit their reset or maturity dates. That's obviously a big driver. We're going to continue to grow the C&I book at market rates and the $2 billion that Rich and his team put on in the second quarter came on at an average spread to SOFR of 226 basis points.

Rich also mentioned we're going to start originate -- well, we have started originating new CRE loans again at market rates. That will offset some of the runoff that we saw in Q1 and Q2 of this year. You may have noticed, if you look at the balance sheet, while our overall cash and securities balance on a combined basis was flat. We actually swapped more cash into securities, about $2 billion.

And we think that, that will help us from a NIM expansion point of view. And then as we mentioned on the liability side, we were able to reduce deposit costs 5 basis points, and we did that as well as increase deposit growth, $700 million in the quarter. We paid down another $250 million of wholesale borrowings. That's something that we're always looking at. And then we do expect to reduce non-accrual loans between now and the end of the year. And then again, as we get into '27 and the reduction of those non-accrual loans has a positive impact on NIM as well.

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

So I wanted to touch on credit. You just mentioned NPL reduction, you still expect that. I think you guys have been targeting $1 billion reduction, just a little bit of a setback this quarter. I was just wondering, is that still a reasonable target as well as what is your forecast for net charge-offs in the next couple of quarters?

Yes. On the non-accrual loans, as we look through the end of the year, we expect to end the year at about $2.3 billion. So that would be a reduction of sort of $450 million to $500 million from the end of June. But as I mentioned in my prepared remarks, slightly higher than what we thought we'd end the year at about $2 billion, $2.1 billion, and that would -- we would end the year at $2.3 billion.

So slightly higher than where we previously were, but a reduction of about $450 million, $500 million from the end of June. In terms of the charge-offs, and Joseph alluded to this in his prepared remarks, while net charge-offs were $99 million in the quarter, $47 million of that was already fully reserved for. So if you back that out, you're at $53 million. And if you look at that on the net charge-off ratio, it would put us at about 35 basis points.

Okay. Very good. And just a question on the reserve. So can you give us a sense of where the reserve is on your C&I production just trying to get a -- like the reserve was down this quarter. Obviously, the momentum on the C&I front is applying pressure to the provision. Just want to get a sense of where the new production is coming on so we can get a sense on the landing point for the reserve.

Yes, sure. So you can assume that new C&I is coming on at about 1%. But what I would add is what is rolling off is much higher risk and has a higher coverage ratio. So I mentioned that we had about $375 million of substandard par payoffs. So a lot of that CRE and multi-family payoff and activity has a much higher coverage ratio. So we're reducing the higher risk, higher coverage assets and the C&I that's coming on is coming on at a much lower coverage ratio at about 1%.

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

Can we just look maybe at the loan yields this quarter, there was the decline. What was the yield on the par payoffs? I guess maybe more of those have hit reset than I was expecting. And was there any significant impact from interest reversals from the NPL growth this quarter? Just trying to figure out where we should expect to see sort of loan yields trending for the rest of the year?

Yes. Yes. So here's what I would say, Jared, great question. If you look at the $1.5 billion of CRE total par payoffs, so I'm not just including the par payoffs on the multi-family. I'm looking at this in totality. It was about just over 5% with the yields on those loans that paid off. So that obviously had an impact. The fact that non-accruals picked up a little bit in the quarter, quarter-over-quarter, that obviously also has an impact.

The other thing that I'd mention is when you look at Q1, we did have a little bit more deferred income. And so these were legacy Signature loans that had been marked through purchase accounting that refinanced, and we got sort of that benefit from a yield point of view in Q1. There wasn't any of that in the second quarter or there was very little of that. So the way I look at the asset yields right now is this should sort of be a bottom, a floor what you saw in the second quarter.

Okay. All right. That's good. And then just a quick follow-up on the credit. You mentioned going through and reevaluating all of '27 now. How did the -- how has your success rate been on sort of these revaluations? If you look at what happened in '26 of those dispositions come in close to where your original -- or your updated assumptions were?

Yes. I think -- I mean, one thing I'd remind everybody -- remember, we -- as part of the strategy when the new equity and the new investors came in, we re-underwrote the multi-family and CRE book in 2024. And we took over $900 million of charge-offs and significantly increased our reserve. So you've got to remember that we did all that work in 2024. And so I think it's worked out that we were pretty close to what we thought because if we weren't close to what we thought, you would see it in the ACL reserve, and you're not sort of seeing that.

And the other thing that I'd say, Jared, just to remind everybody is, remember, we're getting annual financial statements now on all of these borrowers we're also prudently doing that 18-month look forward for everything that is resetting or maturing in the next 18 months. And I think if we have been off or we're off, you would see it reflected in the ACL reserve. And if you look at what has happened to the ACL reserve, certainly over the last 3 quarters, you haven't seen that. So I think we feel that we were -- all the work we did in '24 was pretty close to the mark.

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

Maybe we could just talk about the 18-month forward look out. If we do get a rate hike or 2, how has that impacted the stress that you see there? Like what are the changes? And what are you incorporating when you look at the 18 months? Is it a hike? Just can you give us some thoughts on the sensitivities that you're running?

Sure. Yes. So we -- if you look at our forecast, Bernard, we have one rate hike assumed that is in October of this year. And so as we do our 18-month look forward, it's underpinned by a very thorough DSCR analysis. And so we are looking at all of that and factoring that in based on the contractual terms that we have in our contracts, which I think as you know, people have 2 options. It's 5-year FHLB plus 300 or prime plus 275, and we really haven't wavered off of that much. I think what I would say is if there are interest rate hikes, what it's more likely going to do is people will wait to the last minute before they act. Because remember, these reset dates and maturities, those are cast in stone. It doesn't matter what happens to interest rates, that time is going to come and they're going to have to act.

If rates were declining, that might encourage people to move sooner to take advantage of the lower rates. So I think all the rate hike does, it just means that people are going to hang on to the last minute. But as I've said in my prepared remarks and during the Q&A, we have $11 billion of multi-family loans that are going to hit their reset or maturity date between now and the end of '27, and that has to force the borrower to take action.

Okay. And just as a follow-up, Lee, I think you mentioned that the balance sheet growth would be a little bit higher than you previously forecasted for this year. Could you just update us on what is that $94 billion, $95 billion? And what do you have for '27, if you could provide any updates?

Yes, sure. So right now, Bernard, I think we believe that we'll end this year, '26 at about $91.5 billion to $92 billion. And then we think we can get to $100 billion by the end of '27, total balance sheet solid.

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

On the forward guide, revenues are going down a little bit, expenses, you're keeping relatively in line with the prior guide. Is that a function of the hiring and the investments you're making? Or is there a little bit of flexibility there as we get into next year?

On the expenses, I think we -- I mean, expenses is something we've been myopically focused on. And the team has done an unbelievable job reducing expenses as we have done. So I think we feel good about the guidance that we provided around expenses because not only are we cutting costs, we continue to invest in Rich's business, technology as well. And so there is investment we continue to make, and we're still able to offset that investment and bring our cost down as you've seen. So we feel pretty good about the guidance we've provided around expenses.

Got it. And then on the C&I growth side, there's some really nice C&I growth coming through. You're adding relationships. Can you talk about how many of those relationships are coming with the deposits and fee-based revenues as well?

And how you're thinking about that going forward if there's more opportunity to bring in more deposits and fees from those relationships?

Sure. Thanks, Manan. This is Rich. I'll tell you on a year-to-date basis in our C&I and private banking businesses, we experienced net loan growth of over $3 billion and deposit growth of $1.4 billion on a net growth basis. In the first 6 months of the year, we brought in roughly 130 new-to-bank C&I relationships, and we feel good about our momentum in both deposits and fee income generation from these new relationships, not just with spread income from deposits, but also fees.

We expect our capital markets fees and treasury management fees, in particular, to show significant growth in 2026 and beyond as we further build out the product set and the natural synergies between our commercial bank growth and our private banking capability set drives business customers to also become personal customers and personal customers to also become business customers. So we are very bullish about our opportunity set in both deposits and fees based on our relationship-based banking strategy.

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

Joseph, I appreciate the comments about coming in and setting a bar for the profitability targets when you first joined, and there's been a lot going on. I guess the question that I'm getting is the degree of confidence in the NII? Is this the last revision? Because I think if it is, I think the pieces fall into place with the buyback and the stock. So any comments on conviction level in NII would be great.

I think we feel pretty good, Chris. I mean when you go back to our original projections, we were expecting CRE payoffs in the $600 million to $800 million range per quarter. And this quarter was almost $1.5 billion. Last quarter, it was $1.5 billion. So that has far outstripped like double what we originally forecasted. Kind of going forward, we're looking for net CRE payoffs to be about $1 billion. And that's also with us originating $200 million to $300 million a quarter in new CRE originations.

So I feel really, really good about what's going on in the C&I book and our ability to continue to have net growth in the C&I business. And the variable to that is the CRE. And I think now that we have new production occurring in there, that will help offset what has been really enormous payoffs.

And Lee mentioned it's a good news, bad news. The good news is we are fast approaching the lower 300% level where is our target as a percentage of real estate concentration, we will get there probably 1.5 years to 2 years earlier than what we originally forecasted. So yes, I think we feel good about expanding the balance sheet as we saw this quarter and the variable really comes down to how much CRE gets paid off.

Yes, Chris and Joseph. -- if I might add. Chris, I think everything we said we were going to do, we've done. And remember, this was a complicated multifaceted turnaround. There were a lot of moving parts. And I think everything we said we were going to do, we've done. And as I said on the last call, everything we can control, I think we're delivering on. We obviously don't control interest rates. We didn't know rates were going to be higher for longer. 6 months ago, never mind sort of 18 months ago but we've reacted, and I think we've got a balance sheet that is pretty neutral.

And the way I look at this is we're on track. And the worst-case scenario is maybe it takes us 1 or 2 quarters longer to get to where we said we were going to be by Q4 of '27. And I don't think that is a bad thing at all given the hand we were dealt 2 years ago, where we are today, and I think where we will be 12, 18 months from now.

I appreciate that. That's great color. And then just kind of a technical question with the guide. I think, Lee, correct me if I'm wrong, the guide historically has not assumed buybacks. Does the updated guide now that you have an authorization include buybacks? Or is this still without it?

Chris, it's without it. There are no buybacks, including the $250 million we announced this morning. That is not included in the forecast and the guidance that I provided.

Okay. So it would be additive if you do...

Correct.

Execute.

Our next question comes from the line of Ben Gerlinger with Citi.

So you guys are saying like you've done everything you've said you're going to do, at least on the initiatives that you have control of the market keeps giving opportunities for people to pay off a little earlier than expected. So the floor keeps moving on you with that respect. So I guess you're thinking about growth that's a big use of capital. So I could see your understandingly reluctant to do a big buyback. But if payoffs continue to be elevated, you're going to have excess capital. You have the ability to kind of walk into both of them at the same time. So like is price sensitivity on the buyback a big factor? Or is it just something out there for buying dips?

Just trying to get a sense of like how active you'll be, especially if you have the pace of the balance sheet doesn't grow as much as you're anticipating because of those things that are out of your control?

Yes. Ben, I think clearly, we recognize the amount of capital the bank has and that really we built up through the process. That capital allowed -- with the original capital injection and then we took action to sell the mortgage warehouse business and the mortgage servicing businesses that created excess capital. So I think now as we turn the corner and go in the other direction, we'll be looking at the variables of how the capital is being used and what our forecast looks like.

And really, we think we're on track to meet our core earnings revised forecast. We do think Rich is going to net grow in excess of $2 billion now a quarter. And then the other variable is as we work our way through the non-accruals and the problem loans is can we execute on that to the way that we forecast it. So those -- I'd say we're in the early innings of all of those coming together, and we'll get better clarity as we move through the rest of the year, which will then give us the ability to make recommendations to the Board about future buyback actions.

Got you. And then just wanted to follow up again on the sensitivity. If for some reason, your stock went to like $10 or something much lower than what it is, could we anticipate use the whole thing like immediately?

I think clearly, we -- that would be an incredibly attractive price, for us to execute on our stock buyback. So I think there would definitely be dialogue about should we move quickly at those kind of price levels.

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

Rich, within C&I, it was a really strong quarter for the specialized industries with, I think, $1.9 billion of origination and about $1.7 billion of funded balances. What are the industry groups contributing most to this? Because I know you stood up a few new groups this quarter that presumably aren't contributing very much yet.

Yes. Thanks, David. I would underscore in our specialized industry groups, the ones that are a little bit more mature that we started over a year ago, and those include our energy sector banking group, especially our oil and gas unit, but as well, we have a power and renewables team. So both of those teams are contributing significantly to that significant loan growth in the second quarter. Our health care team had a very good quarter as did our technology and government services team.

We also saw particular growth in our entertainment and sports verticals and our financial institutions verticals. And that includes a lender finance team, an insurance team, a fund finance team and a sponsor finance team. So those would be the units on the specialized side that I would call out where we saw particularly strong loan growth in the second quarter.

And then shifting gears to multi-family. There's obviously been some legal action announced about the rent stabilized rent freeze in New York City. Could the outcome of that have a material impact on Flagstar either way?

Well, we've gone through a process, as we indicated before, in the allocated reserve side of it, you really couldn't capture that directly with that. So we have overrides in the ACL process. We, this last quarter, were able to kind of really build a model around the specific borrowings and looking at the cap rates and the direction. And when we kind of brought all that together between allocated and unallocated, there was a slight uptick in the ACL for the rent-regulated multi-family.

But I think what we've tried to indicate before, we've tried to stay on top of that portfolio and make sure that our reserves are satisfactory. And I think this process that we went through kind of proved that out.

Our next question comes from the line of Timur Braziler with UBS.

Another one on the margin guidance with 2027 being left unchanged and second quarter coming in a little bit. I guess, can you just maybe walk us through the stair step in the progression to get to that 2027 level? In your mind, is it pretty even per quarter? Or given the fact that maybe some of the DDA production is being pushed out, NPLs are a little bit higher, that's largely skewed kind of towards the back end of that timetable?

Yes. The margin continues to improve quarter-over-quarter, and that's driven largely by the continued multi-family and CRE loans hitting their reset maturity date. So we're carrying fewer lower coupon multi-family CRE loans. So by the time you get to the end of '27, as I've mentioned, there's about $11 billion of those multi-family loans that are hitting their reset or maturity date. And if you look at the balance sheet, they have a weighted average coupon of less than sort of 3.9%.

So we continue to sort of work through that overhang. Rich continues to originate new C&I loans, $2 billion in Q2 at an average spread to SOFR of 226. So we're going to continue to add C&I loans to the balance sheet every quarter. So the mix of the balance sheet is improving every single day. And so that is another big driver. We're going to be originating and we've already been originating new CRE loans at market rates. So as we see par payoffs, particularly the lower coupon par payoffs, we're replacing some of that runoff with market rate CRE loans.

As I mentioned, we've used some of that cash to buy more securities, and that helps from a NIM point of view. We're going to continue to manage our funding costs, both core deposits and where we have opportunities to continue to pay down wholesale borrowings, we will do that. And then we expect to reduce our non-accrual loans. Now the reduction of the non-accrual loans isn't necessarily linear because every single loan has its own story and workout strategy, but we do expect to reduce the non-accrual.

So it's all of that, that goes into the NIM expansion. And look, the balance sheet as of 12/31/26, which is the jump-off point for '27, will look a lot different than it does at June 30 because we're going to have fewer lower coupon multi-family CRE loans, and we expect to add several billion of C&I loans between now and then as well.

Great. And I guess on that $11 billion of lower-yielding multi-family that's expected to mature between now and year-end '27. What's the expected retention there? I mean that divide by 6, you get kind of $1.8 billion, that's all leaving, that's still seeming to be a pretty big headwind. Are you expecting to retain a decent portion of that? Or is this larger chunk going to remain a headwind to net loan growth?

Yes. No, we're retaining about 35% to 40% of loans that are resetting typically just that's kind of what we are.

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

First, a quick one. Lee, just curious what the spot cost of deposits were at the end of the quarter and curious on how you feel about your ability to maintain or further lower deposit costs from here just given kind of industry dynamics.

Yes. So the spot cost, and I always mention this. So I'm going to give you a spot cost, including all of our noninterest-bearing. It does include the brokered deposits as well. So it's all in, it's about 2.49% -- and look, yes, and just to answer the second part of your question, we were able to reduce deposit costs 5 basis points in the second quarter. It's going to get -- without rate decreases, it definitely gets a little tougher.

There are strategies that we're able to deploy, especially as we have retail CDs maturing. And sort of as I mentioned, we're retaining typically about 85% of those, and we're moving them into lower cost CDs. There are certain strategies around back books that we're looking at. But the other big driver for us of reducing funding costs is paying down those wholesale borrowings, those FHLB advances. And so that is something that as we have the opportunity, we'll continue to pay down FHLB advances going forward.

Got it. Okay. Then the other question I had, bigger picture, we've talked about it a couple of times, is the rent guidelines board, the 1- and 2-year rent freeze. And what is your 18-month look-forward modeling for rent freezes, I guess, for the remainder of the Mamdani term? It seems much more real that there could be a 4-year freeze while expenses regardless of the rent guidelines board determination continue to climb higher. It feels like another material valuation risk to the asset class, and I'm curious if that's baked into your assumptions and showing up in the appraisals as well.

We have previously -- and I mentioned this last quarter, we had done an exercise where we assumed that there was a rent freeze in place for 3 years, and we assumed that operating costs were going up 2.75% and market rents would be able to increase 2.1%. And what we found was the demarcation line was 70%. So any building that was 70% or less rent regulated, the NOIs aren't impacted because they can offset the rent freezes by increasing rents on the market rate units.

For the buildings that are more than 70%, it had an impact of about 7% to 8% on NOI over that 3-year period. And Matt, if you look at our deck, we lay out our exposure to New York City rent-regulated buildings. And we've got about $8.5 billion that are more than 50% rent regulated. $4 billion of that are pass rated loans with very strong DSCRs. So we don't feel that it has a significant impact there.

And then of the $4.4 billion that's criticized and classified, as I mentioned in my prepared remarks, between charge-offs and reserves we've taken a significant amount of sort of coverage between those -- the charge-offs on the non-accruals are $351 million, and we have another $76 million reserved against that population, which is more than 20%.

And then we have $134 million on the special mention and substandard. So we feel we're adequately covered. We do the 18-month look forward. We get annual financial statements. We're looking at the violations and lien and lis pendens list.

We're looking at the worst landlord list. We're doing a lot of homework on this. And I think if we had an issue, you would see it in our ACL reserve. And as Joseph mentioned, we had previously reserved for this eventuality. And as we sort of got -- we refined our analysis in Q2, it had a nominal impact as you can see by what happened to the ACL reserve and provision this quarter.

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

On your anticipated $500 million-ish decline in NPLs, I believe about 75% of that -- of your total NPLs are coming from the New York City rent regulated. Can we assume that roughly the similar proportion of the NPLs are -- NPL reduction is coming from the rent regulated? Or is there a difference in composition there?

You can't -- so what I would say is the majority of the NPLs will be multi-family because it's the biggest portfolio. In terms of the resolution, as I mentioned earlier, every loan is -- has a different story. And so you can't really sort of say on a percentage basis that it's going to be the same percentage that drives the reduction because, for example, you may just find that you're able to resolve CRE office non-accruals in a particular sort of stretch versus multi-family.

So it's not linear and mathematical in that regard. But what I would say is we have a SAG team that is doing a tremendous job applying multiple strategies, workout strategies, TPOs, sales strategies in order to reduce that non-accrual book. And as I say, we feel that we can reduce that as we look forward, not just through the end of this year, but through the end of '27 as well.

Got it. Fair. So it is -- so regulated multi-family non-accruals are still expected to come down, but obviously, the composition might be a little different.

And Janet, again, the other thing I'll just remind everybody, 4-0, 40% of our non-accrual book is current and paying.

Right. And on your deposit costs, so does your NII contemplate a decline in your deposit -- further decline in deposit costs or relatively stable if a rate hike materialize or maybe in a flat rate environment, how does the -- what is your baseline expectation baked in there?

Yes. We think that we would be relatively flat even with the rate hike. I mean I think, look, given the current rate curve, we don't feel we have to reprice the entire back book, and we'll continue to manage our deposit costs diligently as we always have done and you've seen us do so.

Janet, I would offer also as Rich's businesses becomes a much bigger part of the company and their deposits affiliated with those are business deposits, they're generally less price sensitive. And so you see the mix moving more towards wholesale customers versus just consumers, which we have predominantly today. So that mix helps us a little bit as well.

Got it. If I can squeeze in just one more. For buybacks, TCE ratio also a constraint -- binding constraint for you? -- or just CET1.

Say that one more time.

Is TCE tangible common equity, TCE ratio, is that a binding constraint for you when you consider the amount of buybacks or not so much?

I mean not in light of where our capital levels are today.

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

Joseph, if I step back to the 3 variables you're looking at for the buyback, you're projecting continued growth in core earnings, but then credit quality of the loan portfolio took a step back this quarter, and you're still seeing elevated CRE payoffs and strong C&I growth. To me, that doesn't sound like a recipe to deploy much of the buyback, but I'd love to hear your thoughts on that.

I don't -- perhaps clarity around -- I don't see that necessarily being a governor on the buybacks. It's more when people were asking the question about future dollars being dedicated to the buyback, I'd say that's what we'll be using as a guide is, are we performing well on those 3 variables.

Okay. And then my follow-up -- you reduced the fee income outlook. I think you attributed some of that to gain on sale. It still implies a meaningful step-up in the second half. Could you comment on some of the drivers you expect in 3Q and 4Q?

Yes, sure. So -- and a lot of this is driven by Rich's businesses. So I'll sort of start and then I'll pass it to Rich. But we do expect to see more capital markets and syndication fee income, FX swap derivatives income. As we're originating more CRE loans, I think you'll see some more CRE fee income. I think we expect more fees from the consumer or retail side of the bank, including deposit fees.

And even though we've taken our gain on sale down from our previous forecast because of the interest rate environment, I think we still think we might see a little bit more gain on sale versus sort of Q1 and Q2 certainly in Q3. Q4, there's going to be seasonality again, but certainly in Q3. So most of it is coming from the expansion of the commercial business, and I'll let Rich comment further.

Yes. Thanks, Lee. Anthony, I would agree, largely driven by loan originations, which are largely floating rate. We are experiencing good opportunities for interest rate hedging with those customers, including not just the C&I book, but as the CRE book -- we start to do more new business in commercial real estate. There are very good interest rate hedging opportunities. Our commercial clients are often sourcing or selling internationally. So there's FX opportunities. We would consider that flow business. We are -- with the volume of originations, we have very good loan origination fees, which amortize over the life of the loan or can be taken upfront if we are a lead arranger or a joint lead arranger where we can capture immediate syndication fee income for those arranger fees.

On the operating services side, with more operational deposits, we expect to continue to have higher service charges on deposits -- we're also looking aggressively at our back book of deposit customers across the bank and being more disciplined around fee collection for services rendered, and that's providing some good uplift. We're also expanding the product set around commercial card capabilities and wealth management, and that is driving fees both in the consumer bank and in the private banking and wealth side of the organization. So I hope that's helpful, Anthony.

Our next question comes from the line of Manuel Navas with Piper Sandler.

Staying on the C&I track in the C&I business, with all those goals and with all those expectations on relationship wins, how has talent competition progressed? You were able to hire 30-plus people this past quarter. Has there been any shift in the competitive landscape for C&I talent?

Great. Thanks, Manuel. I'll take that. It's Rich. We are pleased with our progress, and we continue to be very constructive about the quality of the talent, the seasoned bankers that we're bringing on to the platform, both in pure production roles, client coverage, relationship management roles as well as our credit underwriters and our product specialists. We've added a number of subject matter experts on a year-to-date basis.

From a talent perspective, we've added 62 professionals across the C&I businesses in the first half of 2026. 36 of that 62 count are client coverage sales producers and another 26 are credit support professionals, credit underwriters, portfolio management and product subject matter experts that are jointly covering clients and are client-facing from that perspective.

The outlook for talent -- the reason I'm very constructive about the outlook for talent is certainly with other banks going through M&A integration regionally around the country and with our ability to grow, I think bankers view our platform as very attractive given the stated enterprise goal to grow our commercial businesses and our corporate businesses over the next number of coming years. So they view our platform as very constructive. -- and a great place -- great next place for their next part of their career development. We do expect to continue to hire, albeit at a slightly lower pace in quarters 3 and quarter 4 with an expectation of another 20 to 30 additional producers and credit underwriting and product sales professionals as we look out into the third and fourth quarters.

I would say that every bank you hear from will tell you about their expectations and aspirations around C&I loan growth. We are delivering that, and we're still very constructive about adding additional talent to our platform.

I really appreciate that. Going from that portfolio to the NII range, what's kind of -- there's been plenty of discussion about it, but just to kind of sum up, what are some of the wildcards that get to the high end or low end of the NII range?

Yes. I mean I think as I mentioned previously, I mean, if you look at sort of the adjustment to the forecast this quarter, we saw higher CRE payoffs, paydowns and amortization. And Joseph mentioned, we thought it would be sort of around $800 million or so. And the last couple of quarters, it's been over $1.5 billion. The deposit growth has been more on the interest-bearing versus noninterest-bearing side. And obviously, we want to -- and we think we will grow noninterest-bearing because that's the most efficient form of funding, but the $1.7 billion, $1.8 billion of deposit growth to date has been on the interest-bearing side.

So we've tweaked the mix of deposit growth as we look forward, and that's contemplated now in the new forecast. non-accruals picked up slightly in the quarter, and we think we're going to reduce them, but we're going to end the year slightly higher than we previously forecasted. And then the higher for longer rates mean that we've moved our gain on sale mortgage gain on sale revenues down slightly. So there's a lot of things at play with us. It's -- I think we've proven our ability to originate new C&I loans, and we expect we will continue to build up the $2 billion that you've seen this quarter.

I think the rate of CRE payoffs, we think with new originations and retention strategies, we can limit that going forward. but that's obviously a factor. We're working to bring down those non-accruals. But again, that's not mathematical. That's a negotiation with every single borrower. So it's not necessarily linear.

And then we're going to work to grow deposits, but do so without significantly increasing our deposit costs and reduce wholesale borrowings. So there's a lot of variables, but we feel good about the guidance that we've obviously put out this quarter.

On those variables, it sounds like you've tweaked payoffs. You've tweaked your deposit mix expectations. Will you continue to do that to maintain your current guide? Will you be more aggressive on retaining multi-family or some CRE if it keeps that guide more set. Just wanted to make sure that you're doing as much as you can to adjust to get to your targets.

We absolutely are. I mean we've obviously talked about Rich hiring a lot on the C&I side. We have been hiring CRE bankers as well across the country. So we think that will drive more new originations. And we are looking to retain more of the better quality CRE loans, and we're being more aggressive in our strategies and pricing in order to retain those loans. So the answer to that is yes.

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

Lee, can you help us on the tax rate for the back half and into '27 as the earnings ramp?

Yes. So basically, the tax rate in Q2 was 28.2%. Our marginal tax rate is 26.5%. So we're a little bit north of that because of various add-backs, including FDIC expense. As we get more profitable, you'll see us move more towards our marginal tax rate of 26.5%. So I think the back half of this year will probably be somewhere between the 26.5% and the 28.2.

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

Okay. Thank you very much, operator. We remain focused on executing on our strategic plan, which we've laid out for everybody, including transforming Flagstar into a top-performing regional bank, creating a customer-centric relationship-based culture and effectively managing risk to drive long-term value.

So I want to thank you again for taking the time to join us this morning and for following and your interest in Flagstar Bank. Thank you very much.

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

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.