Flagstar Financial Q4 2024 Earnings Report

Flagstar Financial EPS Results

• Actual EPS: -$0.34
• Consensus EPS: -$0.51
• Beat/Miss: Beat by +$0.17
• One Year Ago EPS: N/A

Flagstar Financial Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $559.71 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Flagstar Financial Announcement Details

• Quarter: Q4 2024
• Date: 1/30/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, January 30, 2025
• Conference Call Time: 8:00AM ET

Flagstar Financial (NYSE:FLG) operates as the bank holding company for Flagstar Bank, N.A. that provides banking products and services in the United States. The company's deposit products include interest-bearing checking and money market, savings, non-interest-bearing, and retirement accounts, as well as certificates of deposit. Its loan products comprise multi-family loans; commercial real estate loans; acquisition, development, and construction loans; commercial and industrial loans; one-to-four family loans; specialty finance loans and leases; warehouse loans; and other loans, such as home equity lines of credit, boat and recreational vehicle indirect lending, point of sale consumer loans, and other consumer loans, including overdraft loans. The company offers cash management products; non-deposit investment and insurance products; and online banking, mobile banking, and bank-by-phone services. It primarily serves individuals, small and mid-size businesses, and professional associations. The company was formerly known as New York Community Bancorp, Inc. and changed its name to Flagstar Financial, Inc. in October 2024. Flagstar Financial, Inc. was founded in 1859 and is headquartered in Hicksville, New York.

Flagstar Financial Q4 2024 Earnings Call Transcript

Presentation

[Operator]

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 Financial 4th Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

[Operator]

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

[Salvatore DiMartino, Executive VP & Director of Investor Relations at Flagstar Financial]

Thank you, Regina, and good morning, everyone. Thank you for joining the management team of Flagstar Financial for today's call. Our discussion today of the company's Q4 and full year 2024 results will be led by Chairman, President and CEO, Joseph Otting along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Smith. Before the discussion begins, I would like to remind everyone that our quarterly earnings press release and investor presentation can be found on the Investor Relations section of our company website at ir. Flagstar.com.

[Salvatore DiMartino, Executive VP & Director of Investor Relations at Flagstar Financial]

Additionally, certain comments we make today excuse me, certain comments made today by the management team of Flagstar Financial 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. 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 reconciliations of these non GAAP measures.

[Salvatore DiMartino, Executive VP & Director of Investor Relations at Flagstar Financial]

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

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Thank you, Sal, and good morning, everyone, and welcome to our Q4 earnings call. Today is somewhat of a tragic in our nation and our hearts and minds this morning are with the accident victims and first responders at Reagan National Airport. I think a lot of you know that for 4 years that was my primary airport and I know a lot of the people in that area. So it's truly a tragedy for our nation. I'd like to thank all of you for your interest and support as we've worked to build a successful regional bank.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

I would also like to welcome Lee Smith, who is joining me this morning for his first earnings call as the company's new Chief Financial Officer. Excuse me, Lee has been an important part of the company's leadership team and active in various aspects of the company's turnaround really throughout the past year and aspects of the company's turnaround really throughout the past year and especially over the last 6 weeks as he has named to the CFO role in the company. This morning, we'll discuss our results for the Q4, which were better than our internal projections and analysts forecast. We will also discuss some of the trends we are seeing you seeing, update you on our strategic priorities and provide you with our 3 year forecast. I'm excited to share our 4th quarter results and even more excited about the momentum and progress we are seeing going on in 2025.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

As I look back on 2024, I think we've accomplished a lot of things in a very short period of time. While last year was a transitional year for the organization, we really made significant progress on all of our strategic priorities, setting the stage for profitable growth going forward. When I joined the company last March, we outlined for the investment community our 3 primary objectives for the year. They included understanding the credit risk and the commercial real estate portfolio, getting our hands around the regulatory compliance issues and putting the bank back on a path to profitability. Today, I can say that we've done this and that the company is in a better position than it was 12 months ago and strategically for a long time.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

We are on projections to be profitable now in the Q4 of this year and I think this will ultimately mark the company's turning point on its return to consistent profitability. Moving on to our presentation, starting on Page 3, this slide provides you with an update of our strategic focus. As you can see across the top, we continue to bolster management and talent in the organization. And more importantly, as we've kind of looked forward in our C and I business, we added significant amounts of new talent to grow that business. We'll talk a little bit about some of those results.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Ongoing execution of our operating plan, The Q3 this is the Q3 of consecutive solid deposit growth in our retail and private banking. We've continued to reduce our CRE exposure. We've had proactive management of our problem loans and we completely successfully completed the sale of the mortgage warehouse and mortgaging servicing and sub servicing businesses. On the goal of strategic focus of achieving capital and earnings, we're on track to reach the full profitability in 2026. And in improving funding costs, we have strong liquidity profile of over $31,000,000,000 We reduced wholesale borrowings by almost $7,000,000,000 or 34% during the year and now represents just 13% of total assets and our loan deposit ratio is at 90%.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

On the focus of credit and risk management, as we've taken you through the journey, we've completed the reviews of our CRE. We de risked the office and multifamily portfolios through charge offs, pay offs and loan sales. And we maintained a solid ACL coverage ratio of 1.78%. But this is importantly, we've increased those on the riskiest aspects of the portfolio. So I think, overall, we really feel good and comfortable about the direction and probably the most important slide or area on that slide is that our CET capital ratio for the 4th quarter was up to 11.9%, up over 280 basis points during the course of the year and ranking us within the top quartile of our peers.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

So very, very successful growth and strategic focus for the organization. On Slide 4, as you can expect our transition in 2025, there are really 4 main areas that we're focused on. We want to improve our earnings profile via NIM expansion, moderating credit costs and driving operational efficiency. By the end of 2025, we'll have reduced our operating expenses by $600,000,000 or 23% compared to 2024. We also want to execute on our C and I and private bank growth initiatives and we want to continually proactive demand the CRE size of the portfolio and the makeup it and then we want our credit to normalize resulting in lower charge offs provision and slowing new loan formation.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

On Slide 5, we provide an update on the commercial banking to illustrate how far we've come over the last 6 months. Starting in the lower left of the slide, we continue to hire seasoned mid career bankers from other regional money center banks who have a proven track record of building a commercial business. We added 24 bankers during the quarter across various functions in line of business on top of the 30 we hired during the Q3. And we plan to hire an additional 100 over the course of 2025. On the lending front, we already have a good platform of roughly $7,200,000,000 to begin with and our new hires are starting to make an impact.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

As you can see on the slide, during the Q4, we had new loan commitments of $620,000,000 and funded slightly under $400,000,000,000 of loans, double what we did in the 3rd quarter. We also have a solid base of low cost deposits and a meaningful opportunity to grow both loans and deposits in this segment as end market mergers and the exit of competition, has allowed us to expand market share. And then as some of our competitors have capacity and various credit facilities, we're a welcome new entrant into those credit facilities as well. So with that, I'd like to turn it over to our CFO, Lee Smith, for his comments.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Thank you, Joseph, and good morning, everyone. Before I dig into the quarter's results, I do want to reemphasize how we are executing on our strategic plan to transform Flagstar into a top performing, diversified relationship driven regional bank. During the last 9 months, Joseph and the new investors have assembled a strong Board of Directors and a quality executive management team. Furthermore, we have executed on several initiatives, which creates a solid foundation from which we can build from. Pivotal to this was the sale of the mortgage warehouse portfolio in the 3rd quarter, which created 70 basis points of Tier 1 capital and approximately $6,000,000,000 of liquidity.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

This was supplemented in the 4th quarter by the sale of the MSR asset, the servicing subservicing business and the TPO origination business. This latter transaction provided several benefits for the bank. It created 50 basis points of Tier 1 capital and allowed us to jump start our cost optimization program. We've continued with the cost optimization program with a focus on getting our non interest expense run rate in line with previously provided guidance full year 2025. As Joseph mentioned, we are planning to reduce operating expenses by $600,000,000 in 2025 and we are on track to get there.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Many initiatives have either been completed or are in process and include particular focus on compensation and benefits, vendor spend, real estate optimization and process improvements. These actions will result in a leaner and much more efficient organization without compromising our commitment to safety and soundness. Additionally, during the Q4, we used our excess cash position to deleverage and pay down high cost wholesale borrowings. We paid down just under $5,000,000,000 of FHLB advances with a blended weighted average cost of 4.83%. We repaid a $1,000,000,000 advance from the bank term funding program with a WACC of 4.85 percent and we repaid $2,800,000,000 of brokered deposits and issued only $200,000,000 of new brokered deposits for a net pay down of $2,600,000,000 with a WACC of approximately 5.2%.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Given the timing of most of these pay downs, the full benefits to the net interest margin will not be realized until the Q1 of 2025. Furthermore, these pay downs in addition to improving our funding profile have also helped reduce our FDIC insurance costs, another focal point of our cost optimization strategy, which declined $24,000,000 in the 4th quarter compared to the 3rd quarter. The pay down of wholesale borrowings has also been made possible by the continued strength in our deposit gathering, which I will elaborate on later. Moving to Slide 6. As Joseph said, our results came in better than expected with a smaller loss for both the Q4 and full year 2024.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

4th quarter results had a number of notable items, which are outlined on this slide. On a GAAP basis, we reported a net loss available to common stockholders of $0.41 per diluted share. Notable items included a $92,000,000 gain on the sale of the mortgage businesses and related activity, which included $3,000,000 of trailing revenues tied to the business and assets sold dollars 31,000,000 in severance costs dollars 77,000,000 in long term real estate asset impairments dollars 12,000,000 in trailing expenses related to the sale of the mortgage businesses and $11,000,000 in merger related expenses. Once you factor in all of these items, our 4th quarter net loss narrowed to $0.34 per diluted share. Slide 7 has summary statistics on our capital and liquidity position.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

As you can see, our CET1 ratio of 11.9% improved dramatically compared to the previous quarter and to the year ago quarter and places us in the top quartile among both category 4 banks and regional banks between $50,000,000,000 and $100,000,000,000 in assets. Adjusting for AOCI, our CET1 capital ratio would be 10.8%, also in the top quartile relative to peers. Moving to Slide 8. This slide reflects our actual results for full year 2024 compared to the forecast we provided last quarter. You can see that we were in line to slightly better than expected for each of the major line items.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Slide 9 provides our updated forecast for 2025 out through 2027. I will note that we are forecasting a smaller loss per share relative to the previous guidance in 2025. For 2025, while our net interest income is slightly lower than previously forecast, driven primarily by smaller balance sheet, it is more than offset by slightly higher non interest income and lower non interest expenses. Our EPS guidance for $26,000,000 and $27,000,000 remain unchanged. Slide 10 is another look at our strength in capital position.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Our CET1 ratio increased over 280 basis points over the past year to 11.9% due to the strategic actions taken in 2024. This capital will be redeployed into growing our C and I and consumer businesses as we look to create a diversified balance sheet. Slide 11 is an overview of our quarter over quarter deposit growth. While our overall deposits decreased approximately £7,000,000,000 largely due to the sale of the mortgage servicing business, We saw strong growth in our retail channel of $900,000,000 and in the private bank of $500,000,000 The sale of the mortgage servicing business has also allowed us to reduce the amount of higher cost escrow deposits. Approximately $4,500,000,000 of these deposits have left the bank and we expect the remaining $1,000,000,000 to $1,250,000,000 to a fully run off by the middle of the first quarter.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

I would also point out that cycle to date our deposit beta has been running over 45%. To put this into context, we deliberately lagged on the first 50 basis point rate cut in September, but for the November December rate cuts, we were within or above our targeted beta range of 55% to 60%. If we turn to Slide 12, we had another strong quarter for commercial real estate payoffs, all of which were apart. During the quarter, we saw $960,000,000 of multifamily and CRE payoffs, of which $440,000,000 or 48 percent were categorized as substandard. This has continued the trend of plusminus1000000000 par payoffs per quarter over the last three quarters.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

On the lower part of this slide, you can see the success we've made today on reducing our CRE concentration. On a spot basis, total CRE balances, excluding owner occupied CRE, are down $4,700,000,000 or 9% year over year. Also, if you look at our CRE concentration ratio, it declined to 4 43% from 5 0 1%. These declines are testament to how proactive we've been in managing down our CRE exposure. Slide 13 is a breakout of our loan portfolio and our priorities for 2025.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

In 2025, we will continue to reduce overall CRE exposure

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

through

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

a combination of payoffs and loan sales, grow the C and I businesses and grow the residential mortgage portfolio leveraging our bank, branch and private client customers together with our full suite of mortgage products. During the quarter, we sold approximately 244,000,000 dollars of non accrual CRE assets, including our largest office credit and moved a further $266,000,000 to available for sale, which we expect to close sometime during the Q1. We also sold $42,000,000 of non performing 1 to 4 family loans during Q4. We will continue to be opportunistic and explore all options including loan sales as it relates to reducing our CRE exposure and non performing loans and we'll execute on transactions that are in the best economic interest of Flagstar. The next slide provides an overview of our multifamily portfolio.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

As you can see, we have reduced this portfolio by $3,200,000,000 or 9% in 2024 through payoffs, sales and charge offs having charged off over $300,000,000 last year. Our allowance coverage at twelvethirty one excluding co op loans stood at 1.9%, the highest relative to other multifamily focused lenders in the Northeast. During 2024, dollars 3,000,000,000 of multifamily loans have reset and as of January 22, 41 percent or $1,200,000,000 have paid off. The remaining $1,800,000,000 repriced per the contractual terms of the loan agreement and $1,500,000,000 of those loan resets are current. In other words, 90% of multifamily loans resetting in 2024 have either paid off or have repriced and are current.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Another indicator that borrowers are standing behind their properties. As we look forward, we have approximately $5,000,000,000 of multifamily loans either resetting or maturing in 2025, another $5,000,000,000 in 2026 and almost £9,000,000,000 in 2027. Slide 15 provides an overview of the office portfolio. We have been very proactive in managing this portfolio reflected by a £900,000,000 or 27% decline in the portfolio during the year, which now represents CAD2.5 billion or 3.6 percent of total loans. As with the multifamily portfolio, we've done this through a combination of payoffs, loan sales and charge offs of $368,000,000 Our allowance coverage at twelvethirty one, excluding owner occupied CRE, increased to 7% among the highest compared to our regional bank peers.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

During the quarter, we sold our largest office exposure. Slide 16 provides our allowance by loan category. There are three points I'd like to make. First, both our total allowance for loan losses coverage ratio and our total ACL coverage including unfunded commitments decreased slightly but remain at very strong levels. The decrease was driven by lower loan balances.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

2nd, our coverage on those asset classes perceived to have more risk, rent regulated multifamily and office increased during the quarter. And 3rd, during 2024, we took significant charge offs on the portfolio, totaling nearly 900,000,000 dollars This, along with our allowance and our strong capital position, provides a significant cushion to absorb any future losses. Next, on Slide 17, we provide some additional color around our asset quality trends. Our non accrual loans increased $101,000,000 or 4% to $2,600,000,000 However, it is important to note that 56 percent of our non accrual loans are current and performing. We have been proactively working to identify problem loans and put them on a path to resolution.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

As I mentioned earlier, we moved approximately $266,000,000 net of $20,000,000 in charge offs to held for sale. Also during the quarter, we saw a linked quarter increase in delinquencies, primarily in the multifamily portfolio. This was largely due to 1 borrower. And as of January 22, dollars 541,000,000 of the loans were brought current. Finally, Slide 18 depicts our liquidity profile.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Overall, our liquidity remains strong due to continued growth in core deposits. We have approximately $32,000,000,000 of total liquidity, which represents almost 2 50 percent of uninsured deposits. During the quarter, we utilized excess cash to pay down high cost borrowings, including wholesale borrowings and brokered CDs, which improved our funding profile. In conclusion, we're very pleased with what we've accomplished in a short period of time and feel as if we've laid the foundations and are on track to deliver significant value to our shareholders over the next 24 months. Joseph, I'll turn the call back to you.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Great. Thank you very much, Lee, and thank you for sharing that positive news. We as an organization and a Board and all our employees across the company have worked very hard over the last 12 months to right size this organization and position it for successful growth. One final slide before turning you over for questions. On Slide 19, we show Flagstar's investment profile.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

I believe most of you are aware we currently trade at a discount of our tangible book value is roughly between 55% 60%. This compares to 184 percent for our Category 4 banks and about 166 percent for our regional banks. So we believe this valuation gap should narrow over time as our profitability outlook continues to improve. We show that we are successfully executing on our turnaround strategy and our credit quality continues to improve. And then finally, I would like to thank each of our teammates for their dedication and determination and their commitment to our customers as we start to move forward with our 2025 to 2027 strategic plan that the board approved and it's a high focus on profitability, being a customer centric organization and building out the risk infrastructure within the organization.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

And with that, operator, I'd like to be happy to turn it over for questions.

[Operator]

Our first question will come from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

[Mark Fitzgibbon, Head of FSG Research at Piper Sandler Companies]

Hey, guys. Good morning. Hey, Mark. Lee, you mentioned real estate optimization in your comments. I guess, I was curious, does that suggest that you're contemplating a sale leaseback on branches or does that suggest that you're contemplating branch consolidation?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

So, thanks for the question, Mark, and good morning. So, as we talk about real estate impairments, it actually relates to several of our locations. There are a couple of operating centers that we are looking to consolidate that we own and move out of those into smaller facilities. There were about 20 private client retail locations that we are looking to consolidate and they are in close proximity to other locations. So we feel we can be more efficient and not lose anything from a customer service point of view.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

And then there are approximately 60 retail branches, most of which we lease that we are looking to consolidate. Again, these are close to other locations and so we do not feel there'll be any disruption to the customer experience and we're phasing the closure of those branches in 3 different phases, one of which is already underway and then a further 2 phases that will occur later this year.

[Mark Fitzgibbon, Head of FSG Research at Piper Sandler Companies]

Okay. And then just one follow-up unrelated. Could you help us think about how you're viewing the securities portfolio, the AOCL mark increased pretty significantly this quarter. I guess I'm curious, any plans to restructure that or potentially grow that portfolio?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Yes. So you're exactly right. If you look at the flash report we put up for 2024, all the metrics were green other than the total book value that was driven by increased AOCI losses as a result of interest rate movements. As we look forward into 2025, right now, we do contemplate growing the securities portfolio, but we'll obviously be dynamic in how we manage that and we'll allocate the cash where we can generate the best returns for the organization. But we are contemplating at this moment increasing that securities portfolio as we move through 2025.

[Mark Fitzgibbon, Head of FSG Research at Piper Sandler Companies]

Thank you.

[Operator]

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

[Jared Shaw, Managing Director at Barclays]

Hi, good morning.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Hi, Jared.

[Jared Shaw, Managing Director at Barclays]

I guess when you look at the capital ratios being sort of above target and then the discussion around the potential for some loan sales, is there an expectation that some of that excess capital can maybe give some cover for loan sales and take that there? Or do you feel the current reserves contemplate the potential market price hit from sales?

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

So, hey, Jared. Thank you for the question. We feel in our ACL model when a credit becomes non performing, it comes out of the model. We do specific reserves against those particular loans. And so we feel pretty comfortable over the last four quarters as we've looked at those loans, got updated financials, received appraisals that when we've executed on sales of the portfolios, we've had minor increases in But obviously But obviously we have strong reserves against that.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

And then in addition to the capital, I think really it comes down to how can we deploy that excess capital to further grow the loans on the balance sheet. And that's really where our focus will be in 2025.

[Jared Shaw, Managing Director at Barclays]

Okay. And then when we look at that guidance for NII and some of the broader guidance ranges there, what does that balance sheet growth look like? What's the expectation for either loan growth or end of period loans as we look out over the next for 2025 and 2026?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Yes. Well, so as you look at 2025, so we ended the year 2024 at about 100,000,000,000 dollars We're looking at ending $25,000,000,000 at around $98,000,000,000 And so what you've got to remember is we will continue to run down the CRE and multifamily portfolios and redeploy that into C and I growth. We do have some excess cash at the moment and we do imagine that we'll continue to pay off or down brokered deposits. And so that's why you see that slight reduction of about $2,000,000,000 and it's why the interest income is slightly lower than previously forecast, but the NIM is staying pretty constant. And then when you look forward to 2026, we imagine a balance sheet at the end of the year around $104,000,000,000 $105,000,000,000

[Jared Shaw, Managing Director at Barclays]

Great. Thank you.

[Operator]

Our next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Please go ahead.

[Christopher Marinac, Director of Research at Janney Montgomery Scott]

Thanks. Good morning. Joseph, I wanted to ask you about retaining the former Signature teams. Is there anything that you need to do with personnel there to retain that business? Or are you comfortable with kind of where that sits at this moment?

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Yes. I think we're comfortable where it sits today. Obviously, we've started to adjunct the resources in that organization. But I mean, we feel pretty comfortable where the team is, where the locations are and our ability as we're growing the C and I business, it's a natural extension for the private bankers to be able to interact and solicit the executives and owners of those companies. So I think in tandem, a little bit different is we do have private banking and C and I under Rich Ruffetto's leadership.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

And the reason for that is my experience is kind of a long time C and I banker. The more integrated we can have the personal bankers with the commercial bankers that will result in a more harmonious relationship and get larger share of wallet of both the individual and the corporate relationship.

[Christopher Marinac, Director of Research at Janney Montgomery Scott]

Great. And within the guide today, is there any implied deposit growth on a core basis? I know Lee talked about paying down brokered.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Yes, there is. Yes, we are anticipating core deposit growth coming from the consumer bank and the private bank. And that will as we pay down broker deposits and we also as I mentioned in my prepared remarks expect another $1,000,000,000 to $1,250,000,000 of mortgages gross to run off in the Q1, as the final loans that were sold as part of the mortgage transaction in Q4 are transferred off the platform.

[Christopher Marinac, Director of Research at Janney Montgomery Scott]

Great. Thank you very much for the information this morning.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Yes. I think one maybe point on that is one of the big shifts that occurred both this year and we expect to occur next year is shifting out of high cost funding sources, the wholesale borrowings, the FFO advances, the broker deposits and replacing those with core deposits. And we feel pretty comfortable we have the infrastructure and franchise to be able to do that.

[Christopher Marinac, Director of Research at Janney Montgomery Scott]

No, makes sense. Thanks again.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Okay.

[Operator]

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

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Hi, good morning.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

You

[Manan Gosalia, Equity Analyst at Morgan Stanley]

noted the CRE review is complete. NPLs haven't really gone up that much, and you're broadly guiding forward provisions in line with your prior guide. So I guess the question here is, what level of rates have you marked the portfolio to? And if the long end of the curve starts to move up again, how much does that matter for credit performance overall?

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

So couple as we've been here now roughly 9 months and have the ability to kind of really look at the characteristics of the portfolio, a couple points that I think are important is one is the payoffs that we had during the year were slightly below $3,500,000,000 and of that $3,500,000,000 $1,300,000,000 of it was substandard or rated 8 credits, so roughly 38%. So our pattern is as those loans are coming up and borrowers want to do that we're getting out at $100 on the dollar. And so that is probably initially we expected based upon just the properties that perhaps we would that would not be the outcome, but it has been and that trend should continue. And then Lee referenced the resets for interest rates. And we had roughly $3,500,000,000 of interest rate resets in 2024.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

We have roughly about $4,900,000,000 of resets in 2025. And the performance in the resets has been pretty extraordinary. $1,400,000,000 of that paid off leaving $2,100,000,000 90% of that is current. So what we're finding is that the borrowers of the type of relationships we have, many times these are long term assets in their family that were acquired multi generations ago. And so they have a high desire to retain these properties.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

And so as we so those are kind of 2 data points. The 3rd data point would be as I think as we've shared on previous calls, we're constantly looking 18 months ahead of kind of what's rolling down the path, so to speak, in the price resets or maturities. We're looking at the current financials and then kind of projecting out like what the debt service kind of reviews on those loans. So while it does have impacts and obviously if interest rates rise significantly, but really over the 18 months, we feel pretty comfortable we understand the risk in the portfolio. In addition to that, we've done kind of a challenger model where we've looked at those loans that are in the entire portfolio and the impact of debt yields.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

And quite frankly, we feel pretty comfortable that the risk is well contained in the book of business.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

So just to follow-up on that 18 month lookout, I guess as we get into later this year, you're going to start looking at 2027 and there's an elevated level of contractual maturities at that time. So if we're in a higher for longer rate environment, maybe if inflation is a little persistent there, would that impact how you're thinking about building reserves and provisions into this year and next year?

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

It really comes down to the performance of the individual property. We look at each individual property with annual financial statements. I think we shared last year, we got virtually financials on 95% of the book, and year over year net income was roughly around 6%. So we'll begin to receive the 2024 financials here in the next 60 to 90 days and then we'll do an individual property look. And so it really depends on the NOIs, where do the NOIs go on the respective properties and then their relationship to where the current interest rates.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

So it's a bit of a moving thing. Obviously, just intuitively, if interest rates rise, there's going to be a higher debt service coverage with the interest. And we're mindful of that. And we look and we do look at that if the loan matured today and it was current interest rates with an amortization, what would that do to the debt service coverage. So we're mindful of that and we continue to watch that and observe it.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

But on the other side of that, what we're finding is, hey, the payoffs at par and the resets are at such a high level, that it really has exceeded our expectations.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Got it. Thank you.

[Operator]

Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

Hey, good morning.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Good morning.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

Just two follow-up questions. 1 on capital. I'm wondering on CET1, you're well above your targets now. My sense is your risk weighted assets are going to continue to go down. So just remind us if there is also a tangible common equity for CET1 or Capital 2 CRE loans that you're managing too.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

And I guess the essence of the question is, could we see buybacks being initiated at some point? Joseph, you mentioned where the stock trades relative to tangible book, I think buybacks will go a long way in terms of the ROTCE improvement and getting TVV accretion at these levels. So would love to hear how you're thinking about balance sheet runoff, at what point do buybacks become a realistic option for the bank?

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

We actually we haven't had any dialogue in the company with the board regarding capital actions at this point. And we really anticipate that we will use excess capital to be able to grow the balance sheet. That's really the focus. We think the company is very uniquely positioned now as a strong regional bank. America needs a strong regional bank.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

That's another category for bank. We see that in the C and I business because so many credits, the other regional banks are kind of tapped out in multi bank. We're a new entrant into that space and we're also hiring people who have long histories and track record. So I think our first actions are it would be to expand the balance sheet and continue to grow the loan book to create earning assets.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

Understood. And I guess on that point on C and I loans, from an industry standpoint, there's still uncertainty in terms of when you see a pickup in loan demand, how much will it be given as you pointed out, I think you are uniquely positioned on the back of all the hiring you've done. Give us a sense of just thinking about the C and I book, what's the level of growth do you expect? And does it really require industry wide pickup in loan growth? Or is there a lot of market share movement opportunities given the tenure of the bankers you've hired?

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Yes. Another point that I would just make is in some of the portfolios, the historical practice of the company was to take very large positions. We found that in the commercial real estate book where we've managed down the size of some of the positions. We've also found in a couple of the commercial banking books, very large positions. So it's a combination of like pulling those commitments down slightly, why we're growing the market to get better diversity to the portfolio.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

But I would say, first of all, by hiring highly experienced people in the market generally and they have long term relationship, we're getting lots of opportunities that are independent of true loan growth. If a company is $100,000,000 and they want to go to $130,000,000 on their credit facilities and the 2 or 3 other banks are tapped out at their levels, we have tremendous opportunity to come in and pick that piece up and then demand non interest income to support the lending. So that's where I think you're going to see a lot of our really accelerated growth is, we just become a new entrant. And obviously, we've hired people who have long track records in markets who know other people in the marketplace. So we're a welcome addition to those multi bank groups.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

And clearly, what our whole focus is, is to be a relationship bank. So we will not enter relationships where we do not have the opportunity for non interest income and those can range. We have proficient product sets and interest rate swaps and treasury management, depository, 401, lots of non interest opportunities for us that we see as the opportunity to be able to get an overall return on the relationship for the bank.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

And Ebrahim, it's Lee. Just to add to what Joseph said and he mentioned this in his prepared remarks. So if you look at the bankers, the C and I bankers that we've hired, 43 of the 65 started in Q4. So they're relatively new. And these aren't just producers, they're underwriters and credit specialists.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

But we originated $572,000,000 of new commitments in the 4th quarter, 18 new relationships. And we're going into $25,000,000 with a pipeline of $460,000,000 So this is coming from a team that is very new. And as they get their feet under the table and we further grow and supplement that, we for all the reasons Joseph said, we feel very bullish about what we can do from a C and I point of view.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

That's all the helpful color. Thank you, both.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Thank you.

[Operator]

Our next question comes from the line of Chris McGratty with KBW. Please go ahead.

[Christopher Mcgratty, MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)]

Great. Good morning.

[Operator]

Good morning, Chris.

[Christopher Mcgratty, MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)]

With all the balance sheet actions, I'm interested in the comment on just how you're viewing overall rate sensitivity. Obviously, your margin has some pretty big improvement because of the refinancing of the debt and the deposits, but maybe an ideal or a less ideal comment for where the rate curve would be? Thanks. And what's assuming in your guide?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Yes, sure. So what's assuming we did this call it using the November guide. So there were 3 rate cuts assumed in 2025. Obviously, now it's looking like 2. But as we've done our analysis, we are neutral to ever so slightly asset sensitive.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

And so, we don't think that it's going to have an impact on what we're projecting for the earnings in the guidance that we've provided.

[Christopher Mcgratty, MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)]

Okay. And I guess my follow-up would be any thoughts on share count? I know there's the warrants and the conversions. Anything else left to convert? And also if you have the accretable yield number that's in your outlook in the Q4?

[Christopher Mcgratty, MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)]

Thank you.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

I'll get you the accretive yield outlook. I don't have that. But in terms of the guidance, just so you're aware as you're looking at this model, we assumed that the warrants fully convert in Q4 of 2025. And so that'll take the share count up from the $415,000,000 to about $480,000,000

[Christopher Mcgratty, MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)]

Okay. Thank you. Thanks, Lee.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Okay. Thank you.

[Operator]

Our next question comes from the line of Ben Gurlinger with Citi. Please go ahead.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

Hi. Good morning, everyone. Hi, Ben.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

So I think conceptually, if rates if you're assuming kind of a 2 to 3 cuts here, if you look over the next 6 months, if you like funding cost reduction is a bigger driver and then call it 6 to 18 months, you have back book or fixed asset repricing being a big driver. I mean, obviously, that's not just those are the kind of levers pulling at more severity. Is that a fair way to think about the next 24 months or so?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

You are completely right. And as we mentioned, that was driving some of the deleveraging. We are thinking about reducing brokered CDs, another $1,000,000,000 in the Q1 and there's going to be another $1,000,000,000 of escrow runoff. And then the other thing that I would say is in the Q1, we have about $5,000,000,000 of retail CDs repricing. And those CDs that are maturing in the Q1, they have a whack of about 5.29%.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

So they're automatically going to reprice into lower cost CDs. And we've done a really nice job of retaining the CDs as they mature. What I would say the team has accomplished is CDs that are maturing, we've been retaining 75% to 80% and then the 20% to 25% that we haven't been retaining, we've been bringing the equivalent in new customers. So our CD balances have remained pretty flat. But your thesis is the right way to think about it for all those reasons.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

Got you. Okay. And then when you said sorry, in the actual press release, you had a pretty substantial linked quarter increase in 30 to 90 day delinquent. And then I think in your prepared remarks, you said the $500,000,000 plus has since paid off before the end of the year. I just want to double check if that was the same cohort of loans.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

Would you be expecting more from that early delinquency payoffs this quarter? Or how should we think about the next 2, 3 quarters with that kind of delinquency trend?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Yes. So $541,000,000

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

paid subsequent to the year end. So and a lot of that was 1 borrower. And so I would like to think that we will not see going forward, but you never know. And we're just going to have to manage that, but it's sort of concentrated in 1 borrower. And as I say, dollars 541,000,000 or 56% has come current subsequent to the twelvethirty one year end.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

So if you remember, Ben, in the second quarter, that same borrower slipped past on the as well and then brought the loan current. And so we have the same kind of anomaly. Not ideal, not we're not happy about it, but it's an unfortunate answer.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

Got you. Okay. So it seems clearly

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Just for clarity, that loan we don't expect to pay off or those loans we don't expect to pay off. That's a relationship. It just bounces into the past due and then comes current.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

Got you. Any color

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

how many properties is that?

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

Just out of curiosity, if you're willing to give that info.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

We can get that for you. I'd be guessing it's more than 20.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

Got you. Okay. So small. Okay. I appreciate it.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

I'll follow-up after post the call.

[Operator]

Our next question comes from the line of Bernard Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn

[Bernard Von Gizycki, Equity Research Analyst at Deutsche Bank]

Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn Baughn B

[Bernard Von Gizycki, Equity Research Analyst at Deutsche Bank]

Just on the updated forecast, a few changes from last quarter. I know 2025 expenses were lowered by $100,000,000 In general, there's a reduction in net interest income you noted during the smaller balance sheet and the increase in fee income. Could you just provide some color on just what the lower 25 expenses are coming from and what's driving the higher fee income than previously modeled?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Yes. So the non interest expense reduction is everything that I mentioned in the prepared remarks. So we're doing a lot from a cost optimization point of view and it's tied to compensation and benefits, real estate consolidation and optimization, reducing vendor costs and then improving processes. And so that's having a big impact. And then the deleveraging that we did had a significant impact on our FDIC expenses that are down $24,000,000 quarter over quarter and that obviously carries through into 2025 as well.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

So that was part of what we factored into the deleveraging. And so that's what's driving the reduced expenses in 2025 versus what you saw in October. The fee income is up only ever so slightly in 2025 And it's sort of driven by several categories. I think we feel we can do better from a mortgage fee income, gain on sale point of view, deposit fees as we continue to grow core deposits. I think we can do more from a treasury management fee point of view.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

And I think there's some fees in certain areas of the bank that we can do a better job of collecting that we've probably been a little generous historically at waiving. And that's as a combination what's driving the improvement in fees in 2025. As we move forward into 2026 and 2027, you've seen a bigger increase in fees and that really will be driven by more fees coming from treasury management. I think as we do more deals from a C and I point of view and we're leading deals, you'll see us get the agent fees. And then again, I think we feel we can do more from a mortgage gain on sale point of view and a deposit fee point of view as well.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

And then the other, Bernard, the other point I would make is the overall staffing in the company is gone from roughly 9,000 down to 6,000 people, which includes roughly 1100 out of the mortgage. But as we shared with you, we've really taken a close look at the cost structure within the company and really from top to bottom and really looked at taking the cost out of the organization down to what the to the core mission. So and then on the fee income side, clearly the C and I business is really where you can get lead left arrangements, you get the treasury management. We just won yesterday a lead left relationship where we're going to be the syndicate bank. And I think most people realize that really Rich Rufetto, he's been in that business for many, many years.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

That's where I grew up in the banking business. So that has a real power booster, so to speak, as you get into that space and use your balance sheet to be able to be the lead left is where you get substantial amounts of the non interest income and then the syndication fees. We expect to grow that business significantly.

[Bernard Von Gizycki, Equity Research Analyst at Deutsche Bank]

Okay, great. And then just a follow-up on the commercial bank effort. I know it was previously kind of mentioned on the call, but, Joseph, you mentioned the addition of the 30 hires in 3Q and 24 in 4Q and looking to add another 100 commercial bankers at 25. Obviously, the recent hires are already bringing in production and building up the pipeline. Noli, you noted the recent hires have been a mixture of producers and underwriters.

[Bernard Von Gizycki, Equity Research Analyst at Deutsche Bank]

So I'm just wondering, can you elaborate on expectations on just the ramp up on production efforts? Does it generally take 12 to 18 months from time of new hire on average given a mix of seasoned and mid senior bankers? Just any color you can provide here just so we understand given the mix of seniority and composition of the hires?

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Yes. Our model has expectations of closing starting to close transactions 90 days after their arrival. You may have that expectation with junior people, but these are highly experienced senior people. So they are able to step back into relationships that they had. So we have high expectations for quick production by hiring the seasoned people.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

And just for the record, most of these people we have worked with at one time or another. So Rich has been in this business for 35 years. I've been in this business for 35 years. People know us. They know our reputations and our success.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

And similar to One West Bank, if you recall, when we went to One West Bank, we did not have any C and I portfolio. We added a substantial amount of bankers to that company as well and significantly grew at a short period of time the C and I business. So it's a little bit of a replay here. Now we're ahead of the game in some regards because when we got to One West Bank, we didn't even have a boarding system for commercial loans nor cash management nor interest rate derivatives. Here we have the platforms of those.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

We may want to enhance some of those, but those products are here that we can launch off of them.

[Bernard Von Gizycki, Equity Research Analyst at Deutsche Bank]

Okay, great. Thanks for taking my questions. Yes.

[Operator]

Our next question comes from the line of Steve Moss with Raymond James. Please go ahead.

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

Good morning.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Hi, Steve.

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

Maybe just starting on the NII guide here, just kind of curious what

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

kind of deposit beta are you guys assuming? And then also

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

curious where you deposit beta are you guys assuming? And then also curious where you expect non interest bearing deposits to stabilize?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

So from a beta point of view, and I mentioned this in my prepared remarks. So if you look at the 100 basis point cut in 2024, our beta was 46%. Now what I would tell you, Steve, is we lagged with the September cut deliberately given some of the timing and sort of the situation the bank was in at that time. But as we moved through November December and the cut in November, our beta is 66% and in December it's 58%. And so we are operating within or above our targeted beta range of 55% to 60%.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

That's how we think about it and where we want to be for the non interest for the interest bearing deposits.

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

Okay. And then in terms of just the non interest bearing, just kind of curious how we think about where those balances could stabilize in 2025?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

I think the non interest bearing, they should probably stay fairly consistent with where they are on that. Now what I would tell you about the non interest bearing, there's a little bit of an anomaly because I mentioned that the there was about $4,000,000,000 of sub service escrow deposits that were categorized as non interest bearing. And the reason for that is they were we were paying so far on those to the subservicing customers that we were subservicing the loans for. But and this is a quirk of GAAP, that interest expense was deducted from the fees that we were getting from subservicing the loans. So we've actually showed up in the non interest income section of the P and L.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

It did not show up as you might expect with deposits in the interest income section. And so the runoff that you've seen is really related to those deposits and I would expect those deposits to remain relatively constant from where we are now.

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

Okay. Appreciate that. And then just on credit here, just kind of curious where did special mention in substandard loans end up for the quarter? And just as you guys mentioned on the upcoming maturities here in 2025, 2020 and 2027. Curious if any one of those vintages is more aggressively underwritten versus the others or are they consistent across the board?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

So the sub standard loans were ended up around $11,000,000,000 The special mention, let us see if we can I don't have that number right at hand, but we will let us get you that special mention number Steve? But the substandard we're right around $11,000,000,000 The special mention, the substandard I should say, yes.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

My comment on the underwriting is as a general rule, these loans were underwritten within market and market being 125 to 130 debt service coverage at the time and 75% kind of loan to value. And really what's toppled this over is the dramatic rise in interest rates. A lot of these loans are resetting from 3.5% to 6.5% or 7%. And then narrowing into the regulated, you just have some of the legislative actions, which is restricting growth in the NOI. So as I look at it, I wouldn't like point to 2018 or 2019 or 2020 being significantly different in the underwriting and the impact, but we can do some work on that and get back to you specifically on default rates.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

But if you really think about it, it's really the doubling of interest rates that the borrower is paying on the debt.

[Steve Moss, Director - Banking & Arlington at Raymond James Financial]

Okay, great. Really appreciate all that color, Joseph and Lee. Thank you very much.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

You're welcome.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Thanks, Steve.

[Operator]

Our next question comes from the line of Anthony Eleon with JPMorgan. Please go ahead.

[Anthony Elian, Equity Research Analyst at JP Morgan]

Hi, everyone. Lee, I had a follow-up on your updated forecast. For 2025 provision expense, your outlook was unchanged, but 4Q provision came in a little bit lower than forecast. Although I see that you slightly lowered your 20 26 provision outlook. Could you just talk about that reduction for 20 26 provision and why not lower 2025?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Yes. Look, I think we want to be sort of conservative in the way we are thinking about things. And that's why I think we felt we'll hold provision where it is in 25, and then you start to see come down in 2026 and 2027. But it was really we wanted to sort of be more on the conservative side as we think about credit and that's really what's driving that provision number.

[Anthony Elian, Equity Research Analyst at JP Morgan]

Thank you. And then my follow-up on Slide 15 on the office slide. You noted that you completed your loan review for office and that the office reserve ratio increased about 100 basis points quarter over quarter. But if I recall, in the Q3, you took down your office reserve ratio, I think, about 60 basis points. Now you've taken it back up.

[Anthony Elian, Equity Research Analyst at JP Morgan]

So can you just talk about the dynamics there and what drove the increase in the office reserve sequentially? Thank you.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

So as we said, we were going through a process where we were ordering appraisals. So as appraisals come in, you obviously look at the charge off and the risk associated with those. So it's a bit of a fluid situation as we're updating. As Lee also indicated, we sold our largest borrower in that particular space and we had moved that over to held for sale, but executed on that during the Q4.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

And I think that's the other thing you've got to bear in mind. So as we've mentioned, we've moved various loans. We sold loans, we'll move them to available for sale. And so you do have some of that dynamic playing out as well.

[Anthony Elian, Equity Research Analyst at JP Morgan]

Thank you.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

I think one thing I would say though and again I'd reemphasize when we look even though there's been a slight reduction in the reserve, the coverage ratio on CRE office and multifamily rent regulated increased quarter over quarter. And so the perceived riskier assets, we did increase the coverage ratio on those classes.

[Operator]

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Thanks. Good morning. Lee, you just kind of answered my question, I think. But can you talk a little bit more about the general process to determine reserve adequacy? I'm not questioning the level, but I'm just curious the overall reserve level came down.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

And I'm just thinking is that a message that the worst is over or not?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

We obviously go through a very, very detailed process. Obviously, there's models. We look at it quantitatively, qualitatively. We break it down by asset class, by loan type. So there's a very, very detailed process and modeling that goes into it.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

I think what I would say as you think about the reduction, the health reinvestment portfolio has reduced $3,800,000,000 in the quarter. We took $223,000,000 of charge offs in Q4 and we've taken $900,000,000 of charge offs in the full year. So if you add if you look at the reserve and you add that $900,000,000 of charge offs, it's sort of a lot of protection that we've built. And then as I said, even though there's an overall decline, the coverage ratio on the riskier or perceived riskier asset classes increase for rent regulated and CRE office. And then final other thing that I would just mention is, we're getting more and more appraisals coming back and those appraisals are not coming back as punitive as we may be thought.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

And so it's a combination of all of those factors. It's such a complicated and sophisticated model. You can't point to sort of one thing only. But when you look at all of those things that I've just described together, that's really what's driving it.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Okay. Fair enough. Just Joseph for you, when you're talking to potential new clients, are there any concerns or questions from everything that's happened at the company over the last 12 months? Or is it a typical process? Do you have to explain anything?

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Or is it just more of a typical process of onboarding?

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

It kind of breaks down existing clients who have lived, especially if you're a Signature Bank customer and you kind of went through the Signature Bank event and then disruptions we had in March. They want to have a much more technical discussion around the bank's capital liquidity. And Lee and I, in addition to hosting this call, we also now have a customer call that we hold for all the customers of the private and C and I Bank that so we've kind of starting in quarter 1 really have done a lot of outreach, where they can ask us questions and we have dialogue with the customer. On the new customers, not so much. They it's again, I go back to it's a little bit about reputational.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

But when we can show the amount of liquidity on the balance sheet and the capital levels and where our focus is, we get a lot less discussions about the bank in the marketplace.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Okay. Thank you.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Yes.

[Operator]

Our final question comes from the line of Matthew Breese with Stephens. Please go ahead.

[Matthew Breese, Managing Director at Stephens Inc]

Hey, good morning. Lee, you mentioned a couple

[Matthew Breese, Managing Director at Stephens Inc]

of times on this call

[Matthew Breese, Managing Director at Stephens Inc]

the excess cash position in the balance sheet. Where do you envision working that down to as either dollar wise or percentage of assets by year end 2025? And is that a good level to run within 2016

[Matthew Breese, Managing Director at Stephens Inc]

beyond?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Yes. I think we the way I would think about it is because obviously cash is dynamic. I think I've sort of given you some of the guidance previously. So I think we believe we'll pay down another $3,000,000,000 of growth deposits during the year.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

We're going to have $1,000,000,000 of grows that are coming out this quarter. Now we do feel that we can grow our core deposits. So I mean, look, I think the cash position net net probably comes down another $3,000,000,000 or $4,000,000,000 from where we are today. But again, that's what we're projecting and we're going to we'll manage that dynamically depending on what we're seeing in the market. But that's how I would think about it.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

And the other sort of piece to the jigsaw that I gave to everybody was look the balance sheet is probably going to come down another 2,000,000,000 dollars And so you're going to have some additional asset runoff as well. And we'll use that cash appropriately. But I think if you sort of imagine a $3,000,000,000 $4,000,000,000 reduction that would be the right way to think about it. And some of that will be moved into securities. We like I said, we do think that we'll grow our securities portfolio as well.

[Matthew Breese, Managing Director at Stephens Inc]

Great. And then my second one was with the commercial real estate multifamily book fully reviewed, should we read into anything as it relates to where we are in terms of non accrual levels? Have we peaked or near peaked? And could you give us some sense for charge off expectations in 'twenty five? Certainly 2024 was elevated.

[Matthew Breese, Managing Director at Stephens Inc]

Can we start to see that decline from here? Thank you.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

So on the substandard non accrual in the Q4, we ended roughly substandard at about $8,700,000,000 and the non accruals at $2,500,000,000 Absolutely. Yes. And it's our expectations that the non accruals will point in time at the end of the year be down 30% and that the substandard will be down 10%. So we do see that those numbers will decline is what our current forecast is. And then as far as charge offs, we do have those numbers.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

I think it's the charge offs for 2025?

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

It's approximately similar to what we've got in provision. It's going to be around $250,000,000

[Matthew Breese, Managing Director at Stephens Inc]

Great.

[Matthew Breese, Managing Director at Stephens Inc]

If I could sneak in one more.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Yes.

[Matthew Breese, Managing Director at Stephens Inc]

As a Category 4 bank and Joseph, your prior standing in terms of the regulator and head of the OCC, could you give us some sense under the new administration for your expectations for potential changes in how Category 4 banks are regulated and if that's kind of embedded in any of the guidance items? Thank you.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Well, first of all, there are current criteria for enhanced standards for a Category 4 bank. I think there's been a lot of dialogue is the $100,000,000,000 the right number is $250,000,000 and I think that'll have to be determined based upon who the non comp who the new comptroller is. But our really goal is that we will remain as a Category 4 bank and we're building the right infrastructure and credit processes and risk governance framework to be able to be a Category 4 bank because as we start to become profitable and grow, we want to be attuned to that. So we don't have any growth restrictions. We don't have any growth restrictions today, but we just think it's better.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

We brought in enormous talent from the OCC to help us do that. And so we're kind of mindset on building our risk governance framework to be able to be a Category 4 bank. And we're well on our way to accomplishing that goal.

[Matthew Breese, Managing Director at Stephens Inc]

That's all I had. Thank you very much.

[Lee Smith, Senior Executive Vice President & CFO at Flagstar Financial]

Okay.

[Operator]

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

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

Hey, great. Thank you very much for all the questions. In a short period of time, it's amazing how quick you guys get to the bottom line and understand these numbers. And I think you were spot on kind of the observations. We want to thank you again for taking the time for joining us and your interest in Flagstar.

[Joseph Otting, Executive Chairman, President & CEO at Flagstar Financial]

I look forward to speaking and meeting with many of you in the weeks to come. Lee and I are available through Sal. If you want to arrange 1 on 1 kind of calls and meetings, we're happy to do that. We're really excited about our story and the direction and the work that we've accomplished in 2024 and really look forward to kind of delivering now in 2025 for all of you, our investors, our employees and our customers. So thank you very much.

[Operator]

That will conclude our call today. Thank you all for joining. You may now disconnect.

Participants

Executives

• Salvatore DiMartino, Executive VP & Director of Investor Relations
• Joseph Otting, Executive Chairman, President & CEO
• Lee Smith, Senior Executive Vice President & CFO

Analysts

• Mark Fitzgibbon, Head of FSG Research at Piper Sandler Companies
• Jared Shaw, Managing Director at Barclays
• Christopher Marinac, Director of Research at Janney Montgomery Scott
• Manan Gosalia, Equity Analyst at Morgan Stanley
• Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch
• Christopher Mcgratty, MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)
• Ben Gerlinger, Vice President of Equity Research at Citigroup
• Bernard Von Gizycki, Equity Research Analyst at Deutsche Bank
• Steve Moss, Director - Banking & Arlington at Raymond James Financial
• Anthony Elian, Equity Research Analyst at JP Morgan
• Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets
• Matthew Breese, Managing Director at Stephens Inc