Flagstar Financial Q1 2025 Earnings Report

Flagstar Financial EPS Results

• Actual EPS: -$0.23
• Consensus EPS: -$0.26
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: N/A

Flagstar Financial Revenue Results

• Actual Revenue: $490.00 million
• Expected Revenue: $511.00 million
• Beat/Miss: Missed by -$21.00 million
• YoY Revenue Growth: -22.60%

Flagstar Financial Announcement Details

• Quarter: Q1 2025
• Date: 4/25/2025
• Time: Before Market Opens
• Conference Call Date: Friday, April 25, 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 Q1 2025 Earnings Call Transcript

Presentation

[Operator]

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 First Quarter twenty twenty five 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 DiMartino, 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. Welcome to Flagstar Financial's first quarter twenty twenty five earnings call. This morning, our Chairman, President and CEO, Joseph Fadding along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Smith, will discuss our first quarter results and outlook. During this call, we will be referring to our earnings 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.

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

Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Financial 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 review the forward looking disclaimer and Safe Harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. Also, when discussing our results, we will reference certain non GAAP measures, which exclude 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 over to Mr. Otting. Joseph?

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

Thank you, Sal, and good morning, everyone, and welcome to our first quarter earnings call. We are very pleased with this quarter's operating performance and financial results as we continue to make significant progress on our journey to profitability, executing on our strategic plan and transferring the company to a strong performing regional bank. We executed on the critical cost takeouts, credit management, C and I growth and risk governance during the quarter and really aligned with our overall pattern that we laid out for all of you in early twenty twenty four. Our first quarter adjusted net loss available to common shareholders was $0.23 per diluted share compared to a consensus of $0.27 per diluted share. This was also $0.17 better than what we reported in the fourth quarter.

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

In addition to our improved financial results, I'm also excited with the progress that we are making in building out our commercial lending business, where we continue to add talented bankers. These new hires now generating strong origination volumes, which I will detail for you shortly. Also during the quarter, we announced the hiring of Mark Pizzi to lead our private bank and wealth management business. Mark's extensive expertise at various large regional and international banks will help us drive our continued growth in these two core businesses. And we're really excited because Mark is going to be a great leader.

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

He's already brought focus to those businesses and we look to add additional talent as we move forward as he executes on his business model. In addition, we rounded out some key product offerings in the C and I, including an interest only jumbo AMR mortgage with a low loan to value aimed at our high net worth clients and a subscription loan product. We feel now that we have the appropriate product set in place to grow market share in the high net worth space. Turning to Slide three of our presentation. In 2024, we successfully built capital, improved liquidity and enhanced the credit quality of our commercial real estate and multifamily portfolios.

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

In 2025, our focus is on the following four areas: improving our earnings profile through margin expansion as our cost of funds decreases, moderating credit cost and cost reductions. Lee will discuss these and outline these later on a couple of slides. And we'll continue to execute on our C and I and Private Bank growth initiatives and then proactively manage the CRE portfolio, including reducing our CRE concentration, which you'll also see in a couple of slides. We've continued to do that virtually since we've arrived, and we continue to see that as we kind of move through the remainder of 2025 and 2026. And then we also see normalizing credit.

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

I will note that both net charge offs and the loan loss provision in the first quarter each declined by almost 50% on a quarter over quarter basis. I'd like to spend the next few slides discussing the build out and increasing momentum in our C and I business, which we've consistently communicated as one of our key targets, is to diversify the balance sheet away from being a CRA driven balance sheet to one where we focus on consumer, C and I and commercial real estate going forward. We've continued to add talent in the C and I business. We hired another 15 bankers during the first quarter and intend to hire another 80 to 90 during the remainder of the year. These additional hires are already factored into our forecast and will not impact our cost savings initiatives.

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

Early returns from the bankers we hired in 2024 are impressive, especially in our two main focus areas, which are corporate and regional commercial banking and our specialized industry verticals. Overall, we had over $1,000,000,000 of C and I loan commitments in the quarter with $769,000,000 in originations, up over 40% versus the fourth quarter. Our C and I pipeline currently stands at $870,000,000 up over two times compared to the fourth quarter. Our expansion strategy in this is twofold. Our corporate and regional commercial banking business is focused on relationship lending in and around our branch footprint to ensure we can maximize our middle market and corporate banking lending opportunities in our backyard, specifically where we have Flagstar brand recognition.

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

And then the second is our specialized industry business is a national model and focuses on several industry verticals, including things like sports and entertainment, energy and energy renewables, franchise finance, health care and lender finance. Slide five depicts the momentum we have in these two areas over the last several quarters. And if you recall, we really, with Rich Raffetto's hiring in June of twenty twenty four, began to organize ourselves and began to recruit talent into that space. But as you can see on slide five, importantly, in our two areas of forecast, originations increased over 70% to $449,000,000 on a linked quarter basis, while commitments rose 40% to $656,000,000 So we're really excited about that, and it really shows as we've talked to people about growing out our C and I opportunities in the marketplace that those are really starting to come through as we forecast it. On Slide six, in addition to the sale of the mortgage warehouse business, we opted to strategically reduce our exposure to several non core, non relationship based C and I borrowers.

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

As a result, over the past several quarters, the runoff in these portfolios has masked the progress we are making in growing our new focus areas. As you can see in the upper left of this slide on page six, while overall C and I loans declined again this quarter, corporate, regional, commercial banking and the specialized interest loans increased to $147,000,000 up 4.4% compared to the fourth quarter. Runoff is now abated in the C and I portfolios. And combined with continued momentum in our focus area, we feel comfortable that the overall C and I portfolio will begin to net grow in the second quarter. With that, I will turn it over to Lee and allow Lee to kind of walk you through some of our financial data.

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

Thank you, Joseph, and good morning, everyone. We're very pleased with the continued progress of our turnaround strategy to transform Flagstar into a top performing, well diversified, relationship driven regional bank. From a fundamental point of view, our CET1 capital ratio remains right around 12%, one of the strongest in the industry for regional banks. We further improved our liquidity profile as we continue to reduce brokered deposits and FHLB advances, and the results of our cost optimization efforts are on full display as our noninterest expenses, excluding onetime charges, merger expenses and intangible amortization, declined $71,000,000 quarter over quarter, putting us on track to achieve our full 2025 forecasted run rate. We continue to see significant par payoffs in our commercial real estate portfolio, and we closed on the two nonaccrual loan sales that had been moved to available for sale during the fourth quarter with a combined book value of $290,000,000 resulting in a small gain of $9,000,000 on these loan sales.

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

We will continue to explore all options as it relates to reducing our multifamily and commercial real estate portfolios and nonperforming loans, and we'll execute on what is in the best economic interest of the bank. Joseph already touched on the momentum in the C and I business, but let me add that our goal is to originate 1 plus billion of C and I loans per quarter and believe the first quarter trends prove we're on track to do this. Moreover, this growth is at market spreads, which together with the expected multifamily resets and maturities will drive margin expansion over the next three years. We paid off approximately €1,900,000,000 of brokered deposits during the quarter with a weighted average cost of five percent and €250,000,000 of flub advances with a weighted average cost of approximately 4.5%. The last £1,400,000,000 of our high cost savings promos with a weighted average cost of 5.2% matured during the first quarter, and we had €5,000,000,000 of retail CD maturities at a weighted average cost of almost 5%.

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

Overall, our weighted average cost of deposits declined 34 basis points in Q1 versus Q4. Looking ahead, a further €4,900,000,000 of retail CDs will mature in the second quarter with a weighted average cost of 4.8%. We continue to actively manage our deposit costs and will further deleverage the balance sheet in 2025 by paying down more brokered deposits and FHLB advances. Over the next three quarters, we expect to reduce our brokered deposits by an additional $3,000,000,000 and our FHLB advances by another $1,000,000,000 On the asset quality front, our criticized assets declined quarter over quarter, while our allowance for credit losses and reserve coverage remained stable due to lower held for investment loan balances and better appraisal values. The increase in thirty to eighty nine day delinquencies were driven by one borrower who pays subsequent to month end and has done so again, meaning that $414,000,000 of delinquent loans as of March 31 are current as of April 23.

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

We also moved one significant borrower to non accrual status during the quarter. Their portfolio is approximately $563,000,000 and 90 properties. We are pursuing all legal and contractual remedies against this borrower. Turning to Slide seven. As you read in our earnings release, our first quarter loss narrowed significantly compared to the previous quarter.

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

And as Joseph mentioned, it was ahead of consensus estimates. On a GAAP basis, we reported a net loss available to common stockholders of $0.26 per diluted share. And on an adjusted basis, we reported a net loss available to common stockholders of $0.23 per diluted share versus $0.40 in the fourth quarter after adjusting for the following items in Q1: '5 million dollars in trailing costs from the sale of the mortgage servicing and third party origination business 6,000,000 in accelerated lease costs related to branch closures and $8,000,000 of merger related expenses. Moreover, our adjusted pre provision, pretax net revenue for the quarter was negative 20 3 million euros also much improved compared to the previous quarter as we aim to return the bank to profitability by the fourth quarter twenty twenty five. On Slide eight, you can see the tremendous strides we have made in strengthening our balance sheet over the past five quarters.

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

We have increased capital by nearly 300 basis points, improved our reserve coverage by almost 60 basis points, significantly enhanced our liquidity position, and we enhanced our funding profile by reducing our reliance on higher cost wholesale borrowings. This last item also helps us reduce our FDIC expenses. We now have a more fortified balance sheet that will better support our diversification strategy as we move forward. Slide nine provides our updated three year forecast through 2027. We slightly lowered our 2025 net interest income forecast and increased our forecast for fee income.

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

These largely offset, resulting in no change to our 2025 earnings per share. Fiscal years 2026 and 2027 remain unchanged. Slide 10 shows our NIM trends, and as you can see, the margin has stabilized over the past two quarters. The NIM is expected to increase as we move forward based on a lower cost of funds as we continue to deleverage the balance sheet and manage our cost of deposits lower, using excess cash to purchase investment securities, low coupon multifamily loans resetting higher or paying off at par, growth in higher yielding C and I loans, and a reduction in non accrual loan balances. I touched on our cost optimization efforts a moment ago, and on slide 11, you can see the significant progress we've made in reducing our expense base.

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

Our cost reduction efforts are focused on the following five areas: compensation and benefits, real estate optimization, vendor costs, outsourcing, offshoring, non strategic back office functions and processes and FDIC expenses. We've reduced noninterest expenses $71,000,000 quarter over quarter on an adjusted basis and are on track to reduce expenses by over $600,000,000 year over year and achieve our non interest expense forecast for 2025. It is important to note that our cost savings goal is net of growth in other areas, including our C and I businesses and investment in our risk compliance and technology infrastructure. Turning now to Slide 12, which shows the growth and strength of our capital position. At just under 12%, our CET1 capital ratio is top quartile among our peer group.

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

Our priority is to redeploy this capital into growing our C and I business as we diversify our balance sheet. The next slide is our deposit overview. Our deposits decreased approximately $2,000,000,000 driven by the payoff of $1,900,000,000 in brokered deposits, consistent with management's strategy to reduce our reliance on wholesale funding. Moving to slide 14, the first quarter was another strong quarter for par payoffs in the CRE portfolio, which totaled $840,000,000 6 70 3 million dollars or 80% of these were in the multifamily portfolio, and importantly, 59% of the payoffs were loans rated substandard. These payoffs are driving a significant reduction in our CRE balances and in the CRE concentration ratio.

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

Since year end 2023, CRE balances are down $5,700,000,000 or 12% to $42,000,000,000 while the CRE concentration ratio is down 62 percentage points to 439% compared to 501% at year end 2023. Slide 15 provides an overview of the multifamily portfolio. This portfolio has declined $3,300,000,000 or 9% year over year. In addition to the payoffs, this portfolio has been reduced through loan sales and charge offs. We maintain a strong reserve coverage on this portfolio of 1.82%, the highest relative to other multi family focused banks in the Northeast.

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

Furthermore, the reserve coverage on multi family loans, where more than 50% of the units are rent regulated, is 2.82. Earlier, I stated that one driver to our margin expansion is the resetting of our multi family loans. We have about €18,000,000,000 of multifamily loans either resetting or maturing through the remainder of 2025 and end of twenty twenty seven, with a weighted average coupon of less than 3.8%. If these loans pay off, we will reinvest the proceeds and capital into C and I growth or pay down wholesale borrowings. If they reset, the contractual reset is at least 7.5%, which gives us an immediate NIM benefit.

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

Going back to 01/01/2024, approximately 3,400,000,000 of multifamily loans have reset. Over 90% of these loans have either paid off at par or reset and at current, excluding the one borrower we moved to non accrual. Slide 16 provides an overview of the office portfolio. We have reduced our office exposure by approximately $800,000,000 or 25% over the past five quarters, and we will continue to actively manage this portfolio lower throughout the course of the year. Our office allowance coverage at March 31 stood at 6.68% and remains among the highs compared to our regional bank peers.

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

The next slide details our allowance for credit losses by loan category. Of note, our total ACL coverage, including unfunded commitments of 1.82%, was relatively unchanged compared to the previous quarter due to lower loan balances, charge offs and the receipt of additional appraisals. On Slide 18, we provide additional details around our credit quality trends. Criticized loans declined almost £900,000,000 or 6% on a quarter over quarter basis to £14,000,000,000 Additionally, net charge offs declined 48% to £115,000,000 compared to the previous quarter, reflecting further normalization of credit costs. As I mentioned earlier, one borrower relationship totaling £563,000,000 became non accrual during the quarter, which accounted for almost all of the increase in non accruals.

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

Excluding this non accrual, loans including held for sale would have declined modestly compared to last quarter. Finally, slide 19 depicts our liquidity position as of quarter end. Overall, our liquidity remained strong, totaling $30,000,000,000 representing 231% of uninsured deposits. During the quarter, we used that cash position to pay down brokered deposits, wholesale borrowings and to purchase investment securities. In conclusion, we're executing on our turnaround and strategic plan to return Flagstar to profitability and make us one of the best performing regional banks in the country.

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

I will now turn the call back to Joseph.

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

Hey. Thank you very much, Lee. Before we go to questions, I'd just reference for everybody's benefit Slide 20. As we started this journey with all of you when we arrived virtually a year ago and started to talk about, like, the direction we wanted to take the company, there were some critical, you know, components that need to be you know, that we we needed to accomplish. We obviously needed to lower the cost.

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

We needed to get our arms around the credit risk within the company. We needed to build a C and I franchise that could originate loans, and we could move the company forward on that journey. And I think where we sit today, we feel very confident on the turnaround of the company. And as Lee referenced, we do forecast and believe that our fourth quarter will be a profitable quarter for us, turning point in the organization's history. On Slide 20, we give you a reference that compared to where the current stock price is trading and where we think it would be on a one times multiple that we do feel for investors there is a tremendous opportunity in owning the Flagstar Bank stock going forward.

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

So with that, operator, I will turn it back to you and we can open it up for questions.

[Operator]

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

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

Thank you and happy Friday. I see your guidance, Joseph, on Page 10 of the slide deck and as it relates to the NIM. But I guess I'm curious to get to a $1.95 to $2.05 NIM for the year, it looks like a pretty big lift from the 174,000,000 we had this quarter. So I guess I'm curious, does that incorporate any rate cuts? If so, how many?

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

And secondly, of the four main drivers that you referenced, what are the biggest pieces of that, which really contributes the most of the NIM benefit?

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

Yes. Thanks for the question. So when we put this latest forecast together, we were using the forward rate curve as of March. So there are two rate cuts in 2025 assumed in this. And as you think of the NIM improvement going forward, it is driven by the items that are noted.

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

So you'll see our cash balances come down throughout the remainder of this year and that's the result of us we're going buy another $2,000,000,000 of securities between now and the end of the year. We're planning on reducing brokered CDs another 3,000,000,000 and we will pay off another $1,000,000,000 of FHLB advances. As we've mentioned previously, we've got another $4,000,000,000 of multifamily loans resetting in 2025. They have a coupon that is less than 3.8%. So as they reset, they're going to move into if they stay, they're going to move into coupons that are at least 7.5%.

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

So we get an immediate NIM benefit there. And if they pay off at par, we will reinvest those proceeds in growing our C and I portfolio, which is based off a SOFA spread. So that is improving the NIM position as well. We're also going to manage the cost of our and continue to manage the cost of our deposits lower like we have in the first quarter. We've managed interest bearing deposits down 34 basis points versus Q4 and we're going to continue to do that as we move throughout not just 2025, but beyond as well.

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

We've got $4,900,000,000 of retail CDs maturing in the second quarter. They've got a weighted average cost of 4.8. Then as I mentioned, we're planning on reducing our non accrual loans and that will be additive to NIM as well.

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

Okay. And then secondly, just was curious on that one large relationship that went on non accrual this quarter. Can you give us a sense what the LTVs on those loans look like? And also how much you have in specific reserves on that relationship?

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

Yes. So here's what I would say. We're not going to get into the specifics around the relationship. But what I would tell you is when we looked at this, this loan had the ability to pay. The LTVs and all the other metrics were adequate.

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

This was a borrower who decided that he wasn't going to pay, and that was a human behavioral choice, but he certainly had the ability to pay. A couple of other things that I would mention is when you look at the specific impact of this on the quarter between additional reserves and charge offs, it cost us about $28,000,000 And then in terms of NIM reversal, it was about $5,000,000 So this particular borrower, it cost us about $33,000,000 or $07 just in the quarter. And the other thing that I would add is we've obviously scrubbed the remaining portfolio. We have done a lot of screens and we believe that this was a very unique situation. This borrower, he looked to gain additional leverage by pledging his equity interest.

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

And as we've done various other screens, we don't see anything like this in the rest of the portfolio. So we do see as being very idiosyncratic and unique.

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

And the thing I would add, Mark, is I think we've communicated the journey through twenty twenty four through the whole portfolio. We continue to in an instance like this is we do an assessment of our current reserves. And then when we move it to non accrual, you do specific reserves against the loan. So what Lee was kind of referencing was that we've placed additional reserves against that loan. So we feel subject to getting appraisals back in is that we're adequately reserved on that loan for any action that we would take.

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

I think just one other thing that I would add. Outside of that loan, if you look at the credit trends, charge offs are down, the provision was down. And if you look at classified assets, as I mentioned in the prepared remarks, they were down $900,000,000 quarter over quarter as well.

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

Thank you.

[Operator]

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

[Jared Shaw, Managing Director at Barclays Capital]

Hey, good morning.

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

Hi, Jared.

[Jared Shaw, Managing Director at Barclays Capital]

I guess when we look at the projected growth in commercial lending and then tie that with the guidance for provision, How should we be thinking about the ratio of allowance as we go forward? I mean, is this going to be at this point, we're going to continue to see reserve releasing and most of the provision is going to be for that growth in the commercial portfolios? Or is there still potential for reserves as some of those multifamily loans get that eighteen month refi window?

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

Yes. So a couple of questions there, Jared. First of all, this quarter, as you use the Moody data and you put it into your quantitative model, it did not reflect the reduction in interest rates. And so if interest rates, especially on the five year curve, were down any given day 40 to 60 basis points, I do think that that will have some positive impact when we do the quantitative analysis in the second quarter. And the reserve build would be the offset to that would be that as we add new C and I incrementally that we're reserving against those loans as they get boarded.

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

Yes. And I'll just add.

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

If you look at Page 17 of the deck, you will see the reserve or the coverage against the C and I loans did increase quarter over quarter as a result of some of those new originations, but also the economic forecast that Joseph referenced that was coming out of Moody's. But as we think about the overall provision, I think it's looking at the entire book. So it's factoring in what we're doing on the C and I side from a growth point of view, but it's also taking into account what we expect to happen from a CRE and multifamily point of view as well.

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

Just to remind you, Gerard, we actually went through the entire portfolio in 2024 and virtually re underwrote all the commercial real estate, including the multifamily, that it was mark to market, so to speak, from the standpoint of where we thought the underlying cash flow supported and the loan to value on the underlying assets.

[Jared Shaw, Managing Director at Barclays Capital]

Okay. All right. Thanks. And if I could just ask a follow-up on capital. With the capital CET1 being sort of above that target range and then all the positive steps that you've outlined with tailwinds on margin and tailwinds on credit.

[Jared Shaw, Managing Director at Barclays Capital]

What are your updated thoughts on maybe deploying some of that capital into a buyback maybe around here with the valuation being so far below tangible book?

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

Yes. We think that as we start to stabilize and pay down the real estate, the offset to that will be deploying that capital into the C and I and private bank. And so I think our forecast at this point in time is to use that capital to expand the balance sheet. One thing we did do, Jared, is we did combination of we shrunk the balance sheet between 15,000,000,000 and $16,000,000,000 over the last twelve months. And we actually think we can turn it around and go back the other way now with the balance sheet and use that excess capital for growing the franchise.

[Jared Shaw, Managing Director at Barclays Capital]

Thanks.

[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]

Hey, good morning.

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

Good morning, Ben.

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

So you guys referenced around $1,000,000,000 or so kind of aspirational run rate on C and I. I was kinda curious if you could dig into that a little bit. I know you

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

made 75

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

plus, so I think you're a doubling around in terms of hiring. So just kind of a low in size or segments or another pricing you said at market rate, but 1,000,000,000 is quite a bit more than I was expecting.

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

Yes. So the 1,000,000,000 is consistent from an origination point of view. That's what we accomplished in the first quarter. We originated $1,000,000,000 of commitments from a C and I point of view, and we outlined that on Page five. And this is coming from the 60 bankers that we recruited in the second half of twenty twenty four.

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

We've recruited another 15 to 20 just in the first quarter of this year, and we still intend to recruit another 60 to 70 throughout the remainder of this year. These bankers are very experienced. They come with a track record. They're coming from other big financial institutions, and they're typically originating their first loan within the first ninety days of arriving at Flagstar. And that's how we're seeing these numbers.

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

From a strategic point of view, we're sort of focused in two areas. On a national basis, we're starting these specialty lending verticals. So you heard Joseph mention sports and entertainment, but also oil and gas, renewables, energy, health care are just some of the other national lending verticals that we've set up. But then geographically, as it relates to our footprint, we're also hiring experienced bankers to better penetrate the middle market C and I areas within our footprint. So it's a twofold approach.

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

There's the national approach from a specialty lending point of view and then there's a geographical approach leveraging our brand name in the geographies that we operate. And I mean, we're thrilled obviously with what we've accomplished in the first quarter, and we believe that we can maintain that and even grow it going forward. What I would tell you is we also believe Q2 will be the turning point. And what I mean by that is right now, even though we've been originating these new C and I loans, the C and I balances have been decreasing quarter over quarter as we've rightsized other legacy portfolios. Starting in the second quarter, you'll start to see overall C and I balances increasing.

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

So we're sort of making that pivot and you'll see an increasing C and I loan balance Q2 and going forward.

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

Yes. That's helpful.

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

And then

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

not to take away from the successes you guys have seen on the expense front because it seems like you moved mountains quite a bit here. But when you think about the back half of this year, the remaining three quarters, I know you still have initiatives and plans. Is there anything to think about in terms of timing on additional cuts and or accruals for kind of C and I success that would work against that? Or should we think about it linear to get to the range that you guys provided?

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

Yes. No, here's what I would say on the cost reduction efforts, and it's just been a tremendous effort by the entire organization. We are mostly there and then some. And what I mean by that is I actually think right now that there's probably 25,000,000 to $30,000,000 good guide from the bottom end of our range. We did not want to move our range this quarter.

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

We obviously wanted to get another quarter under our belt. But the way things are trending on the expense side, I think will be what we're guiding to. In terms of things that are still in process, as we mentioned last quarter, there are some additional branch closures that will happen at the June, about 23. There's some private client locations that we are merging and exiting in early July, and then there'll be some additional branch consolidation at the September. So obviously, that's all factored into our numbers.

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

But the vast majority of what we were looking to accomplish has been accomplished or is on the agenda to be accomplished.

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

Hey, Ben. The other thing that I would add, which I think is really important is these costs are our net of we're investing $40,000,000 in our risk governance infrastructure. What we're doing in the C and I group of effectively adding 120 people over a twelve month period. And then we have some pretty significant IT and operational initiatives to drive costs down. But at the same time, we're investing in our systems to finalize the combination of the entire bank now onto one platform.

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

So those are things that are all kind of laying the work and the foundation for that to get completed in 02/2025. So, you know, it can't you know, our our probably total expenses, as as Lee indicated, probably are somewhere around 7 to 750,000,000 takeout. But but we are making investments in the company in addition to taking those costs out. And I, you know, I I would say, you know, we did get a lot of questions whether we were gonna be able to to meet those numbers. And as Lee referenced, we feel really confident that not only are we going to meet those numbers, but we can exceed those in 2025.

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

Got you. That's helpful. Thank you.

[Operator]

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

[Manan Gosalia, Analyst at Morgan Stanley]

Hi, good morning. Lee, I just wanted to follow-up on your comments on C and I. How are you thinking about utilization of those $1,000,000,000 in new commitments each quarter? How quickly do you expect to see balance sheet growth in C and I coming from those commitments?

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

Yes. So if you look at the again, if you look at Page five of the deck, so of the $1,000,000,000 7 60 million dollars has been funded, which indicates a pretty high utilization rate. Will it remain at that level? Hopefully. But I think we're sort of looking at it on a more traditional basis where people will sort of leg into it a little more and it will ramp over time.

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

But again, just sort of using Q1 as an example, we've sort of seen about 75%, seventy six % of what was originated utilized.

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

Yes. And our pricing model is pretty punitive to put commitments out that aren't being utilized. So that also spears the team, you know, to look at transactions that meet high credit quality standards, but at the same time have high utilization rates. And, you know, one of the things, you know, that I would mention, you know, we feel really good about these growth numbers, but we also have less than 1% market share in kind of C and I. And so our ability to put these numbers forward, we may go from 1% to

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

So it's not like we're gathering huge market share, but there's a lot of market available for us to participate in.

[Manan Gosalia, Analyst at Morgan Stanley]

Got it. And then, Joseph, there are concerns about the economy slowing over the next twelve months. You've recently done a review and re underwritten the entire loan book and the credit metrics continue to improve. Can you talk about how insulated Flagstar is from the concerns around tariffs and economic growth? And do you think credit metrics can still improve from here?

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

Yes. We did an analysis of the portfolio of the sectors that we thought would be impacted by tariffs. Those are the obvious ones, auto, construction, consumer products. We have about $2,800,000,000 of commitments across the organization into that space. And and so, you know, it's not a big number for us.

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

And of that, there's $2,300,000,000 of loan outstandings. And and just slightly over half of that is in the auto space. And so the auto space actually is having a pretty good quarter because people are kind of pre buying automobiles. As we now get into the individual credits that make up $2,800,000,000 we are not seeing obviously, it's going to take time to see the impact of this, but the aggregate dollars are very minor for us, number one. And number two, they seem to be in areas that won't have significance.

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

The other thing that I would reference in that regard, as we are looking at new opportunities, obviously, of the things that are being looked at hard in any new credit originations today is what is the tariff impact and what could it be, to a particular company. We have passed on a number of opportunities where we thought, you know, like where somebody was manufacturing in China or Vietnam or other countries that this could be problematic in the future. It may not be today, but we've passed on a number of opportunities where we thought, this needs to kind of stabilize before we would enter the opportunity. So I think we're also in a unique position that we're not starting with a big portfolio of stuff that could be impacted, and we can use that as part of our criteria in the credit underwriting.

[Manan Gosalia, Analyst at Morgan Stanley]

Great. Thank you.

[Operator]

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

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

Thanks. Good morning. Lee, can you tell us about the warrant conversion and how that stands? And should we be thinking of tangible book on a fully converted basis soon?

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

Yes. So the way we factored that into our forecast is we assume that it converts in Q4 of twenty twenty five. And so what that does is it does factor in to the earnings per share that you've seen in the forecast. So that assumes that after Q4 twenty twenty five, the warrants have been exercised, but we have not included it in the TBV per share number because it actually because they haven't been exercised, if you see what I mean. But for the purposes of the earnings per share number, because we hit profitability in Q4, we assume that they are exercised and they are included The dilutive impact is included in the EPS number.

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

Got you. And is there any material change in the number of shares represented by the warrants? Would the figure we have from the case still be somewhat accurate?

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

Yes. I think so. The way they work, obviously, there is a it depends where the stock is trading when they're exercised. As you know, there's a strike price and their net settled. And so the dilutive impact increases as the stock price increases.

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

But overall, they're not incredibly dilutive. And what we've laid out in the K, I think it gets you what you need from an information point of view.

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

Perfect. Thank you for that. And just a quick credit question. From a high level, when you look at overall frequency and severity in the book, whether it's multifamily or other parts of CRE, are those numbers kind of the same as you thought a quarter or two ago? Or do you see those perhaps trending in a different direction somewhat better?

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

Couple of comments that I would add is, we're right in the season where we will be getting the updated financials from the borrowers. And last year, we were in the mid-ninety percent of borrowers who provided this updated financial, which was up substantially from the legacy bank. So we'll have a like a really good look into how twenty four was here in the next sixty days and clearly be able to talk about that in the second quarter. But for the most part, what we're seeing in the market and we see through our appraisals is we've seen stabilization both in the multifamily and in the office, while office is really a relatively immaterial number to us. If you think back to '24, that's really where a bunch of the big hits came as we moved out of some problem office credits that we had.

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

So I, you know, I think what I would say is right now is for the most part, if you think about what Lee commented on, you know, the movement in the special mention and the substandard down substantially and then our charge offs being down, I think it would lead you to indicate that we just don't have a lot of flow now into those categories from the portfolio. And I think that's a result of when we were doing forward looking in the portfolio through 2024 that we were catching everything that was going to mature or price reset eighteen months out, gave us a pretty long runway to be able to look at our credit exposure. And each quarter, we pick up another quarter in that kind of analysis. So we just haven't seen really the deterioration at this point from new appraisals and new credits falling into that bucket. So and we do overall, we do forecast continue to forecast that our NPAs will be down by year end.

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

And we continue to see reductions in our special mention and substandard.

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

Yes. I would just sort of echo and reiterate a couple of things Joseph mentioned. I mean the charge offs coming down up to $115,000,000 from $222,000,000 last quarter, I think, is a very positive sign. The appraisals are coming in better than we were when I say we're expecting, certainly better than the shock analysis that we have when we don't have appraisals. Of the 800 plus million of payoffs in the first quarter, '50 '9 percent we had them rated substandard.

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

I think that is another good sign. And then when you look at that reduction in classified assets from $14,900,000,000 to $14,000,000,000 as well as those payoffs, we did have $600,000,000 of upgrades, And I think that's important to note as well. So as we get new information, as credits continue to pay, we get appraisals, we're seeing upgrades as well. So those are obviously all good indicators.

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

And we not only looked at the credit debt service coverage, but we also factored in that analysis market rate interest rates. So if they were at 3.8%, we reset them at 7% or 7.5 and underwrote those credits.

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

Great. Thank you both very much. It was very helpful.

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

Okay. You're welcome.

[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. Joseph

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

or Lee, the nonaccrual comment, I think on the January call, you said by the end of the year, 30%. Obviously, that I'm sure I didn't contemplate this quarter's move, but any degree of resolution magnitude from these levels? And secondarily, the collateral on the non accruals, was that the building? I assume that's

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

the building itself, but just a little clarity there. Thanks.

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

Chris, we wiener was not factored into those numbers, but we still are currently forecasting to go from like the $3,300,000,000 to around $2,700,000,000 by year end. So we do see that those numbers will continue to decline. And then your question on the collateral, was that regarding the borrower that went non accrual during the quarter?

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

That's right. Yes.

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

Those were fully collateralized predominantly by multifamily properties.

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

Okay.

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

And then my follow-up, if I'm looking at Slide nine, the, appreciate your comments on basically going to overachieve the cost saves near term. But if I look at the kind of the medium term cadence of the expenses, there's still a pretty good lift down by 2027 and a pretty big ramp up in, call it, fees. Can you

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

just give me a little

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

bit more color on what's that next level of growth and next level of step down in costs?

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

Yes. So there were let me start with on the cost side. There were actions that we've executed on that are behind us now in the first quarter that you're not seeing the full benefit of in the first quarter. You'll start to see the full benefit of those actions in Q2, Q3, Q4. So you've kind of got that phenomenon, particularly around compensation and benefits.

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

I think you're going to continue to see the FDIC expense come down as we further deleverage the balance sheet. And so you saw another reduction in Q1 versus Q4 as the impact of what we did in Q4. You got the full quarterly impact in Q1, and you're going to continue to see that as we move forward here as well. I mentioned that there are various real estate locations, so bank branches and PCG locations that we will be combining and exiting in the second quarter and early in Q3 and then some additional branches that we're combining at the end of Q3. And then we've also been working on outsourcing, offshoring sort of certain back office processes and functions.

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

And again, some of those actions we executed on recently. And so you're not seeing the full benefit of those cost reductions in the Q1 actual run rate. And so that will start to come through as we move through the year. So that's why we feel pretty good about what we've accomplished today from a cost reduction point of view and why we feel good about where 2025 is going to come out from an overall NIE point of view. And then on the fees, Joseph mentioned, we've just launched the subscription lending product, and we feel that there's a lot of pent up demand for that.

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

That's going to help us from a fee point of view. We're beginning to sort of see opportunities where we're leading deals. We had one recently where we will lead left to a top tier sponsor, and it was a combined revolving credit facility term loan, delayed draw term loan, and we got an upfront fee structuring for the an admin agent fee. And I think there's going to be more of those opportunities. We've continued to build out our treasury management team, and that's pretty much complete now, and we feel pretty good about where they are.

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

And so all of those are driving the increase in the fee income that we adjusted for in 2025.

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

That's very helpful. Thanks a lot, Lee.

[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]

Good morning. How are Yes, ma'am. I just wanted to follow-up on margin because I looked at the average earning assets this quarter and where you will expect this margin to go next year, that's at 2.5. That kind of gets you to the NII that you're projecting for next year. So, correct me if I'm wrong.

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

It feels like the balance sheet still has some shrinkage to go to be in it. And any assets still declining.

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

Hey, Abraham. We're we're having a tough time hearing you. You're kinda cutting in and out. I apologize. So you, I think you're asking about the margin going forward.

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

Is that is that the question you asked?

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

And the balance I think you mentioned the balance sheet size as well, Ebrahim.

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

So sorry about that. I'm not sure if it's any better now. But

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

It's a little better.

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

Yeah. So

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

We've lost you again. Yeah.

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

Abraham, do you wanna try to come back in and see if that, improves it? Because we we can't we can't understand the question.

[Operator]

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

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

Thanks. Good morning, guys. Can you hear me?

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

Yes. Hear you fine.

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

All right. Great. So I'll ask Ibrahim's balance sheet question. So, I think that's what he was getting at. But, I think you outlined about between multifamily runoff and then pay down of borrowings and brokers about $8,000,000,000 of, asset headwind.

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

Obviously, C and I is doing well and you have the ability to build the bond book. Just wondering where does the balance sheet end this year? When does it start net growing?

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

Yes, yes. Got it. Good question. And I'm glad you asked it. So we end the year at around $96,000,000,000 So the balance sheet this is total assets.

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

The balance sheet will be about $96,000,000,000 at the end of the year. And then just to I'll give you the numbers. At the end of 2026, we expect it to be around $102,000,000,000 And then at the end of 'twenty seven, we expect it to be around $111,000,000,000 So that's how I would model it. We end 'twenty five at $96,000,000,000

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

Understood. Great. Thank you. And then slide five, I wanted to ask about the C and I originations. I hear you that I think you said you wanna get to over a billion, and you're certainly on your way there.

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

I'm wondering when you guys are fully staffed and you hire these 80 or so bankers by the end of this year, What do you like, fast forward a year, where what is the C and I growth when you got the full kind of team on the court?

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

Yeah. So so one clarification is we we expect to get the the loan outstandings up to a billion dollars a quarter going forward, and then that continues to accelerate. But Lee has the exact numbers kind of do you wanna share those?

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

Yeah. Sure. So, that's exactly right. With the growth, as we think about that billion dollars, it's really that's that's outstanding, rather than, commitments. And I think we feel that by the time we are fully staffed, we're doing about 1,000,000,000 a quarter in outstandings.

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

And just so everybody's aware, when we talk about hiring these bankers, they're not all account managers. We're bringing in credit specialists. We're bringing in underwriters so that you're bringing in the entire team. And so that's also embedded in that number of 70 to 80 of hires between now and the end of the year. But ultimately, we're looking to get to $1,000,000,000 of outstandings on a quarterly basis.

[Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research]

Thank you.

[Operator]

Our next question comes from the line of Bernard Bongezicki with Deutsche Bank. Please go ahead.

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

Hey guys, good morning. Good morning. Just on succession planning, Joseph, you know, in a recent filing, it noted you'd be staying on till March 2027. And I think at a recent media article, noted that after the three years, you'll be looking to move to Chairman Row. So five years collectively.

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

Could you just confirm if accurate? And how does that fit within the time frame of transforming the business?

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

Really, this comes down to being a Board decision, you know what I mean, ultimately. I clearly committed to the company for a five year term, you know, in capacity. But I think from a succession planning as the board starts to look at that, you know, I think the guidance is is that, you know, in 02/1927, we'd be looking to transition the CEO role to to another person, and then I would stick around for a period of time if the board wants me to after that to, to help lead and and manage the company as well.

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

Okay. Got it. And then maybe just as a follow-up, Lee, with the balance sheet growth numbers you gave, obviously, you're also deploying some of that excess liquidity into securities. Just any thoughts on how you're thinking about growing the securities book from here? And any thoughts on the growth that you kind of gave out?

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

How much of that is like, I guess, loans? I'm assuming in the forty years, it's more maybe in the recent short term, it's a little bit more in securities. So could you maybe just help give a little bit of color on that?

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

Yes. That's exactly right. So like I mentioned in my prepared remarks, we're looking to buy another $2,000,000,000 of securities in 2025. So that's kind of where we're going to deploy or one of the areas that we're going to deploy the cash. I think as you move into '26 and '27, it'll be all about loan growth and particularly C and I growth.

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

So that's the pivot you'll see in 2026 and 2027. But in 2025 and the remainder of this year, yes, we're certainly looking to buy at least another $2,000,000,000 of securities with the excess cash.

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

Okay, great. Thanks for taking my questions.

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

You're welcome.

[Operator]

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

[Matthew Breese, Managing Director at Stephens Inc]

Hey, good morning. Good morning. Hey, I was hoping that we

[Matthew Breese, Managing Director at Stephens Inc]

could first touch on, you know, and I but a different way. You you had mentioned in the release in your prepared remarks that there are some portions of the C and I book that are considered noncore. Could you just outline for us how much in the C and I book is noncore, what those areas are? And then remind us, over the next couple of years, where you want the, the CRE multifamily books to be as a proportion of total loans.

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

Yes. So if you go to page six,

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

clearly, the first category is the specialized industry and corporate banking is where we see really the significant growth. And then the specialty finance, what what we've really done in that space is our our comfort level for single relationships. It's very similar to what we discovered a little bit into the CRE and multifamily. The hold levels, you know, at the legacy NYCB were significantly larger than what our comfort level is. Usually, at a risk rated five credit, which is kind of down the middle, you know, from a credit quality, 75,000,000 hold.

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

And for a credit that's just slightly at or below investment grade, we're at $100,000,000 What was a lot in those portfolios and it was a strategy of the company was, in a lot of instances, they were in the 150,000,000 to $250,000,000 range of commitments. And so we've narrowed and brought back our commitments in those credits down to what are a comfort zone for us. So actually, in the specialty finance, it was down roughly 180,000,000 We actually see that growing from that point forward. So I wouldn't say that was non core. And then the similar story, if you go from the second line from the bottom, the MSR and EBO lending is a very similar story.

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

We had very large hold levels, and and we're reducing our exposures at the individual relationship level. But we we did have one payoff in that space of a large relationship, but the rest, we do think we'll have stabilization kinda going forward in that regard. And then the two other in the middle, Flagstar Financial Leasing and Flagstar Public Funding, those were really five or six businesses in that space. We've kind of stopped non relationship activities there where we were just buying paper but had no relationships with the borrowers. And so we do also see those going positive in the second and the third quarter.

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

So I wouldn't call them non core as I would say we were reducing what we thought was the risk appetite by hold levels.

[Matthew Breese, Managing Director at Stephens Inc]

Great. Okay. Very helpful. And then my last one is just a little bit of a different question, but there's been a recent discussion across the banking industry around catering to the crypto industry and stablecoin, and it seems there's a much warmer welcome to the banks to participate, in this industry again. New York Community once had its toe dipped in these waters, and I'm curious if you have any appetite to pursue that again and pursue deposit growth via those verticals.

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

Yeah. I don't see us forming a specialty group or, you know, going after that aggressively, that particular space. I mean, clearly, there are some companies that I would put under the general corporate banking that, you know, we would consider if, given the opportunity. But but, I I don't see that being one of the specialty businesses within the company.

[Matthew Breese, Managing Director at Stephens Inc]

I'll leave it there. Thank you.

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

Okay. Thank you very much.

[Operator]

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

[Anthony Elian, Equity Research – Banks at J.P. Morgan]

Hi, everyone. Can you hear me okay?

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

Yes. We can hear you fine. Good morning, Anthony.

[Anthony Elian, Equity Research – Banks at J.P. Morgan]

Joseph, I know you said you're starting to receive updated financials from borrowers for 2024, but can you share with us any early reads you've seen so far? And I guess what I'm really trying to get at is specifically for the $19,000,000,000 or so of loans you have in rent regulated in New York, are you seeing improvements or deterioration of NOIs?

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

Well, you know, it's it's a little early to tell on that question because we haven't received the '24 financials yet. But, you know, '23 was really a rough period in in the rent regulated because, you know, the increases were were, you know, restricted. Occupancy is very high in those buildings, generally in the '98, '90 '9 percent. So it's like it's not like you're gonna fill up a bunch of extra space and generate cash flow. And really where they got impacted was on the expense side.

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

In most instances, insurance went up 30% to 40%. HVAC and maintenance and things like that were up 40% and labor was up 30%. So I think I'm hopeful that stabilization on the expense side over the last twelve months will be positive in the NOIs in that particular space. So we do see investors reentering in demand for buying loans for us in that space. So I think that's an indication that investors are starting to feel more positive about the rent regulated now.

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

And there's been some, you know, large projects that have gotten tax abatement, you know, that the legislation doesn't without, you know, more change in the direction, I don't think we're gonna see legislative changes. But you have seen tools that are being used to be able to make those projects more economic by providing tax abatement, but within an agreement that owners and investors will dedicate a certain amount back into the projects from a CapEx perspective.

[Anthony Elian, Equity Research – Banks at J.P. Morgan]

Thank you. And then for Lee, on Slide 17 that walks through the allowance by loan portfolio, what was the driver of increasing the reserves tied to C and I office owner occupied? Looks like it went up by about 30,000,000 or 40 basis points sequentially. Thank you.

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

Yep. Yep. Two things. It was the economic forecast, as we mentioned, and it was also just some individual credits and specific credit or increases around specific credit. So those were the two drivers of that increase in the C and I non specialty finance line item.

[Anthony Elian, Equity Research – Banks at J.P. Morgan]

Thank you.

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

Okay. Thank you very much.

[Operator]

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

[Steve Moss, Director at Raymond James Financial]

Good morning.

[Steve Moss, Director at Raymond James Financial]

Hi, Hey, Joseph. On the C and I side, Joseph, just kind of curious here, what kind of spreads you're getting on the new C and I loans you're originating here? And if there's any deposits coming over with those relationships?

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

Yes. The spreads are ranging from like $2.25 to $2.75 over Sulphur. So the spreads have held up pretty well in the C and I season even in light of a lot of competition. And then what you generally see in those relationships, we are getting deposits, but most of that transitions in over a period of time. But where we have seen significant results is really on the fee side, where Lee mentioned we're now starting to get senior leadership roles in some of these credits because the people who join us have those roles at their prior institutions.

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

But, you know, we're we're very few opportunities are we willing to do where it's a credit only relationship. And most of those, we either are offering, you know, four zero one k or treasury management or interest rate derivative products. We have a broker dealer so we can get bond economics. So our pricing model does not work very effective or where we're not getting non interest income or deposits from a yield perspective. And so now, you know, we're using a new pricing model in the company that will really drive people to have to get, you know, those those sales in addition to the credit sales on the front end.

[Steve Moss, Director at Raymond James Financial]

Okay. Great. That's That's really helpful. And then in terms of just the funding side of the equation, just curious how you guys are thinking about the step down here over the course of the year in funding costs. I see your CD rates are generally marketed around the Fed funds rate and you have some other promotional products at a similar pace.

[Steve Moss, Director at Raymond James Financial]

I'm wondering at what point you think maybe we could feel a bit of separation between the rates you're offering and Fed funds as the year goes on?

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

Yes. So it's just one CD rate, the six month CD. We saw an opportunity to bring in incremental deposits. So that was kind of the one area that we sort of had the promo rate out on. We have not sort of touched the one year, two year or three months.

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

As I mentioned in the prepared remarks, we have $4,900,000,000 of CDs maturing in the second quarter at a weighted average cost of 4.8%. We're going to get a natural reduction there as those mature. Typically, as CDs are maturing, we're retaining about 75%, eighty % of them, and then we're making up the difference with new CDs coming in. And then we've been actively managing our other interest bearing accounts, whether those be savings, interest bearing DDAs, money market. Again, I mentioned in the prepared remarks, quarter over quarter, interest bearing deposit costs were down 34 basis points.

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

So it's something that we have meetings weekly on this, and we are looking at it and strategizing all the time. But we feel good about hitting the targets that we have in our forecast.

[Steve Moss, Director at Raymond James Financial]

Okay. Great. And one last one for me. Just in terms of the multifamily and commercial real estate books, just curious, kind of seems like there's going be some stabilization maybe here late this year based on the asset size of

[Steve Moss, Director at Raymond James Financial]

the bank you guys are projecting.

[Steve Moss, Director at Raymond James Financial]

Just kind of curious if that's a fair assumption or should we expect further runoff in those books throughout 2026?

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

Yes. I think the you should expect further runoff because as we've said before, we're trying to create a diversified balance sheet, a third, a third, a third. And we probably won't quite get to a third in consumer, but a third C and I, third CRE and a third consumer. And so what that means is we really want to try and get that CRE book, which includes multifamily, to $35,000,000,000 30 billion dollars 30 5 billion dollars And so you will continue to see runoff throughout the three year period as it relates to multifamily.

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

And just as a reminder, we've been running 800 that Lee referenced through payoffs. And basically, we're telling borrowers where we have loan only relationships specifically that our desire on a maturing credit is that they would take that credit to another financial institution. And, you know, fortunately for us, you know, roughly half of those are substandard credits. And so we've we've continued to see that trend line.

[Steve Moss, Director at Raymond James Financial]

Okay. Great. Thank you very much. I appreciate all the color.

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

Thanks. You're welcome.

[Operator]

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

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

Thanks. Good morning.

[Steve Moss, Director at Raymond James Financial]

Hi, John.

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

Hi. Lee, on Slide 13, just kind of a follow-up. What do you think that mix looks like in a year? And maybe when you get to your twenty twenty seven goals,

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

Is the deposit mix?

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

Yeah. Right. So I think you we're obviously going to continue to pay down brokered deposits. So you will see a reduction more reduction in brokered deposits. And I think you'll see us increase our retail and private bank deposits, and that's kind of how we're thinking about it.

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

We're built we're looking to build core deposits and further reduce the wholesale borrowing and reliance on broker deposits and flood advances. So I think that's what you can expect. And on the deposit side, Joseph just made this point. As we leg into these new C and I relationships, that's another opportunity for us to bring in core deposits as well and build that deep relationship with those C and I customers.

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

Yes. The broker deposits now are down two point we're even further in the month of April. We're down, I think, 2,200,000,000 year to date. So that's really a big opportunity for us to use our excess liquidity to pay that down.

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

And it helps us from an FDIC expense point of view.

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

Yep. Okay.

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

Joseph, one for you, kind of a, call it, a due diligence or check the box question. But what are you guys working on now in terms of the non client facing activities? Do you feel like things are fully buttoned up from a risk and regulatory point of view? Or are there other hurdles or objectives you need to meet?

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

We've come a long way in the company. From the time we got here, the company was a or is a category four bank. And neither of the legacy banks had risk governance and infrastructure along those lines to be a bank of that size. I couldn't be more pleased in the direction and the rails that we now have built. And I think from now to the end of really 2025 and into 2026 is we're gonna feel very comfortable that that ourselves and our regulators are gonna feel good about, you know, the the risk governance structure that we have kind of put in place.

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

And I think, you know, the technology side is gonna be very helpful. We're we're investing in really creating a platform. You know, today, we're sitting here with six, you know Out of centers. Data centers, that were never consolidated. And and, you know, all those actions that are pent up, we're going to get done here in 2025.

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

In addition to we're investing in an organization wide Actimize. We're implementing a new Gliva platform. So all of that gets done this year, and it's really stuff that should have been done in '23. And then as we got our arms around them in '24. So I think the company really is coming a long ways in that regard.

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

And I couldn't be more happy the team, you know, what we've been able to put together here as far as a team of really highly qualified people to execute on those.

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

Okay. Thank you very much. Appreciate it.

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

Welcome.

[Operator]

Our next question comes from the line of Nick Holoca with UBS. Please go ahead.

[Nicholas Holowko, Director at UBS Group]

Hi, good morning.

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

Good morning.

[Nicholas Holowko, Director at UBS Group]

Maybe just a first question for Lee. I know you and a follow-up on deposits. I know you gave a lot of color on the broker deposit mix and the CD maturities. But maybe you could just touch on the NIB trends that you had in the quarter and how you're thinking about that over the near term. And if by chance you have it, potentially the spot rate on the interest bearing deposits or the net interest margin at the end of the quarter?

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

Yes. So I don't have the spot rate. But what I would tell you in terms of the trends were the we saw we were down about $300,000,000 in the private bank. That was sort of seasonal in nature, but that was offset by increases in our retail deposits or consumer bank. They were up about $3,450,000,000 And then we had a slight increase in our commercial deposits.

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

They were up about $350,000,000 So by and large, they sort of netted each other off. The other part that netted itself out was we had the last loans transfer as a result of the mortgage sale that we executed on in Q4 of twenty twenty four. So there were about $1,000,000,000 of mortgage escrows that left, but we subsequently got an increase in what we call our SMBS area, which is predominantly mortgage escrows of a similar amount. And that was just a buildup of T and I and other escrows. That pretty much offset itself as well.

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

And so the biggest driver of the change quarter over quarter was the paydown of those brokered deposits of 1,900,000,000.0

[Nicholas Holowko, Director at UBS Group]

Got it. Thank you. And then maybe just one follow-up on the single borrower non accrual in the quarter. I know you give color on like the average loan size in your multifamily book around $8,500,000 on average. If I was to look at, like the loan book on like a per borrower basis rather than a per loan, how materially different would that be?

[Nicholas Holowko, Director at UBS Group]

And are there do you have a substantial number of borrowers with similarly large exposures above the $500,000,000 range? Thank you.

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

Yes. We probably got somewhere between a dozen to 20 or so large relationships that are similar to this one particular borrower. And as I mentioned earlier, we've screened and scrubbed all of those looking for anything that might be similar to this one particular borrower, we're not seeing it. And as I say, one of the biggest factors was the additional leverage that this borrower looked to achieve by pledging his equity interest. You know, again, we see this as a very sort of unique idiosyncratic situation.

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

Yeah. And and we're not referencing twelve to twenty four hours over 500,000,000, in size. Correct. Yeah.

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

So Yeah.

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

But but I I would also say, you know, these aren't, like, huge loans to one piece of property. These are 90 loans that represent $500,000,000. So you can run the math on those. But so there are a lot of different properties with individual loans.

[Nicholas Holowko, Director at UBS Group]

Understood. Thank you for that.

[Operator]

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

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

Okay. Thank you very much. I very much appreciate your interest in the company. We couldn't be more pleased the journey we're on. We think we've made incredible progress over the last twelve months.

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

We think there'll be a significant amount of progress in 2025. We're going to look like a completely different company when we end the year. As Lee indicated, all indications in our forecast and analysis is that we will return to profitability in the fourth quarter. We feel our risk elements of the company are under control, and we're really excited about what we can grow and develop the company into a top performing regional bank. And so we look forward to continue to have dialogue with each of you on the journey of the company.

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

I'm open to any dialogue and discussions that you have, and, appreciate, everybody getting up on a Friday morning and be part of the call.

[Operator]

This does conclude today's call. 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 Capital
• Ben Gerlinger, Vice President of Equity Research at Citigroup
• Manan Gosalia, Analyst at Morgan Stanley
• Christopher Marinac, Director of Research at Janney Montgomery Scott
• Christopher Mcgratty, MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)
• Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch
• Casey Haire, Senior Research Analyst, Mid-Cap Banks at Autonomous Research
• Bernard Von Gizycki, Equity Research Analyst at Deutsche Bank
• Matthew Breese, Managing Director at Stephens Inc
• Anthony Elian, Equity Research – Banks at J.P. Morgan
• Steve Moss, Director at Raymond James Financial
• Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets
• Nicholas Holowko, Director at UBS Group