FLG 3Q 2026 Earnings Webcast - FLAGSTAR BANCORP INC

Hello, everyone. Thank you for joining us and welcome to the Flagstar Bank third quarter 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Sal DiMartino, Director of Investor Relations. Sal, please go ahead. Thank you, Holly, and good morning, everyone. Welcome to our third quarter 2026 earnings conference call. This morning, our Executive Chairman and CEO, Joseph Otting, along with the company's Co-President, Co-Chief Operating Officer, and Chief Banking Officer, Rich Raffetto, and Co- President, Co Chief Operating officer, and chief financial officer, Lee Smith, will discuss our results for the quarter. During the call, we will be referring to a presentation, which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the investor relations section of our company website, ir.flagstar.com. Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Bank may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-lookings disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. In addition, when discussing our results, we will reference certain non-GAAP measures which excludes certain items from reported results. Please refer to today's earnings release for reconciliation of these non-GAAP measures. And with that, I would now like to turn the call over to Mr. Otting. Joseph? Yeah, thank you, Sal, and good morning, everyone. We appreciate you joining the call today. I'd like to begin on slide three by providing updates to factor affecting our business and updates around the financial forecast. we continued to make meaningful progress in strengthening our core business and advancing our strategic priorities. Net interest income increased, the net interest margin expanded, and pre-provisioned net revenue improved compared to the previous quarter. We also grew our CNI loan portfolio in deposits while reducing our exposure to commercial real estate loans this quarter. However, several variables pressured credit costs during the third quarter, including the effects of higher interest rates, actions related to the New York City rent regulations, and persistent inflationary pressures. At the same time, a competitive deposit environment continues to impact deposit pricing and growth expectations. Our success as a company will be determined by our ability to continue to reduce our New york rent regulated exposure which we did during the quarter and attract deposits in an economic manner and expand the balance sheet through cni low growth we are still on track towards achieving our strategic objectives and with our plan to diversify our balance sheet however given a higher for longer interest rate environment the full realization of our transformation has shifted to 2028 from 2027. As a result, we are adjusting our guidance from what we previously outlined to reflect the impact of higher interest rates, the rate environment on credit quality, less deposit growth, and corresponding C&I loan growth, and the net interest margin, which Lee will discuss in more detail shortly. Moving to slide four, I'd like to discuss some of our third quarter highlights in each of our key focus areas. First, in terms of our earnings, both our net interest income and margin increase compared to the prior quarter, while PPNR also continued to improve. Second, a key part of our balance sheet diversification strategy is growing our CNI loan portfolio. quarter, we delivered another $2 billion of net C&I loan growth, which resulted in about $1 billion of net loan portfolio growth during the quarter. On average, the average loan in that portfolio we added was about $28 million in loan outstandings, and it was roughly 75 relationships. Third, another key component of our balance sheet diversification strategy is reducing our overall commercial real estate exposure. During the quarter, our CRE par payoffs totaled $1.2 billion, of which 35% were rated substandard. The decline in the overall CRE portfolio was slightly less as we funded approximately $375 million of new high-quality relationship-based CRE loans on commitments of over $700 million. In our forecast, we project CRE to decline net $1 billion per quarter. And fourth, we continue to apply a prudent approach to credit quality. During the quarter, we had net charge-offs of $74 million, or 49 basis points of average loans, down $25 million compared to the prior quarter, while non-accrual loans were relatively stable. Now, I'd like to turn it over to our Chief Financial Officer, Lee Smith, who can provide more color on our revised guidance, asset quality, and third quarter trends. Lee, I'll hand it over. Thank you, Joseph, and good morning, everyone. As you just heard, the turnaround story of Flagstar is very much on track. However, certain macroeconomic headwinds, especially from higher interest rates, have pushed back the timing of us achieving peer-like metrics by approximately 12 months. The last few months have seen a significant shift in interest rates. The five-year Treasury had increased 75 basis points over the last three months as of October 14th and 111 basis points over the past six months. Two quarters ago, the forward curve assumed two rate cuts in 2026 and as recently as June 18th of this year, the forward curve had shifted to one rate hike in October. Fast forward to September 18th and the current forward curve has four rate hikes in September, December, March and June. We're also seeing extended inflationary pressures as a result of higher energy prices. This change in interest rates and inflationary pressures have impacted our New York City rent-regulated multifamily portfolio in particular. When we use the forward curve with four rate hikes and include inflationary pressure, it has had the following effects. Increased cap rates on rent- regulated buildings, particularly in the Bronx. • Increased operating expenses at a time when rents have been frozen for up to 2 years • Put pressure on debt service coverage ratios • Increase the risk that more loans migrate to Criticised and Classified status These events have caused an increase in our provision expense to £76 million in the third quarter. Turning now to slide five, given what I have just outlined and our commitment to transparent reporting on the impact of any change to our forecast, we've adjusted our guidance downward for both 26 and 27, predominantly the result of higher provision costs in Q4 and full year 27 for the reasons I just mentioned. higher interest rates have also resulted in a more competitive deposit environment. While we expect to grow deposits quarter over quarter, it's at a reduced level than previously anticipated. Less deposit growth also results in a smaller balance sheet. We expect the balance sheet to grow on average approximately $1 billion a quarter in 2027 and 2028, driven by net new loan growth of $2 billion, funding approximately 50% with deposit growth and 50% with CRE runoff, as we continue to diversify the balance sheet and improve the mix of C&I loans in particular. The higher rate environment is also resulting in lower mortgage originations, impacting both interest income and non-interest income, and nonaccruals declining at a slower rate than previously anticipated. EPS for 26 is now forecast to be in the $0.10 to $0,015 range, and EPS for 27 is forecast to being the $85 to $95 cent range. We are also including a full year 28 forecast where EPS is expected to be $160 to $170, on top of where we previously expected full year 2027 EPS to be. I would note that our goal to return Flagstar to profitability metrics similar to our peers is on track to occur in 2028. The inflection point is 27 for the following reasons. Between October 1st, 2026 and December 31st, 27, we have $12 billion of low coupon, less than 3.9% CRE multifamily loans either resetting or maturing. If they reset and stay with Flagstar, they will reprice to a market rate significantly higher than current coupons. If they pay off, we will use the proceeds to originate market rate C&I or CRE loans. We have a further $7 billion resetting and maturing in 2028 with a weighted average coupon of 4.43%. Both these scenarios result in net interest income and NIM expansion. The reset dates are all contractual, and 27 is our largest reset year, allowing us to significantly improve the mix of the balance sheet over the next 15 months. As we continue to originate new C&I loans and grow the balance sheets, the spread between the new loans coming on and the marginal cost of the new deposits used to fund such growth should be accretive to net interest income and NIM expansion. While we expect the pace of non-accrual resolution to slow, we still expect our non- accrual balances to decrease throughout 27 and 28. And given these loans are on the balance sheet and funded today, as they return to accruing status, this is also accreted to net interest income, and NIM. A significant driver of the remixing of the balance sheet over the next 12 to 18 months is mechanical in nature, given the volume of low coupon loans hitting their reset or maturity dates. On slides 6 and 7, we have provided a bridge to our 2027 and 2028 net interest income forecast. As you can see, the main drivers in both years is balance sheet growth along with fixed asset repricing and lower non-accrual loans. On slide 8, we show the trend in pre-provision net revenue through 2028, and slide 9 depicts our EPS progression over the same time period. I would like to point out that in Q3 pre-credit provision, we generated plus 13 cents of earnings, which included a $22 million or $0.04 tax benefit as we settled a legacy tax audit from 2020 in our favor. The next slide details our NIM trends. Our NIM expanded four basis points in Q3 versus Q2 to 2.17%, with the September NIM coming in at 2.23%. percent next is operating expenses on slide 11. here i would highlight that despite the modest increase during the quarter we still expect full year 26 operating expenses to decline approximately 168 million or nine percent year over year versus full year 2025 on the capital slide you can see that at 12.38%, our CET1 ratio continues to rank among the top quartile in our peer group. We also completed the previously approved stock repurchase program of $250 million, repurchasing 19.1 million shares at an average price of approximately $13 per share. Turning now to our deposits on slide 13, total deposits increased about $300 million quarter over quarter, while average interest bearing deposit rose 1%. The cost of interest bearing deposits increased only one basis point to 3.09% versus last quarter. Moving next to slide 14, which shows the continuing positive trend of commercial real estate par payoffs, during the third quarter, our payoffs were $1.2 billion, of which 35% were rated substandard, and our CRE concentration ratio is now at 346%. The next several slides provide additional details on our multifamily portfolio. On slide 15, I would note that in 2027, we have approximately $8.4 billion of multifamily loans that mature or reach their contractual reset date. Of this amount, approximately 2.9 billion, or 35%, NYC multifamily with greater than 50% rent-regulated units. And I would also note the reserve coverage on the greater than 15% rent regulated population, including loans outside of New York City is nearly 3%. If we look at just the New York city rent regulated portfolio greater than 50%, the coverage ratio increased 21 basis points quarter over quarter to 3.37%. Moving next to slides 16 and 17, where we provide a more comprehensive overview of the rent regulated Portfolio. At September 30th, this tranche of the portfolio was $12.9 billion, down $531 million, or 4%, compared to the second quarter, while the rent-regulated component, greater than 50%, was $8.1 billion, down $370 million, of 4%, quarter over quarter. The next slide details our ACL by loan category. The linked quarter ACL was unchanged, as increases related to higher interest rates and growth in the C&I portfolio, and the impact from a higher interest rate environment were offset by volume reductions in our multifamily portfolio. Finally, slide 19 provides a look at our broader credit quality trends during the quarter. At approximately $2.8 billion, our non-accrual loans were relatively stable quarter over quarter. Of note, 42% of our non‑accruals loans are current and performing. Substandard loans increased $248 million or 4% as overall criticised and classified loans increased $670 million or 6% due to our prudent and comprehensive look forward of loans that are maturing or repricing within the next 18 months. With regards to charge-offs, net charge-off this quarter was $74 million, or 0.49% of average loans, down $25 million compared to the prior quarter. To conclude, we remain on track to achieve our strategic goals, significantly improve profitability through 2028, and deliver value to our shareholders. Now, I'd like to turn it over to our Chief Banking Officer, Rich Raffetto, who will discuss our commercial banking trends in more Rich. Thank you, Lee, and good morning to everyone as well. As you turn to slide 20, you will see that we continue to make significant progress in building out a relationship-based commercial and private banking platform here at Flagstar. Our two-pronged approach to this business combines specialized industries banking with corporate and regional commercial banking coverage featuring customized solutions for business owners, and it's delivering strong but disciplined growth. We continue to hire talented mid-career bankers to join the platform, including 35 new and replacement hires during the third quarter alone, bringing our aggregate hiring activity to more than 400 professionals over the last couple of years. And at the end of the quarter, we had 164 revenue-producing commercial bankers and credit underwriters, up from 124 at the start of the year. During the third quarter, we generated $4.6 billion in new and increased C&I loan commitments, resulting in $2.9 billion in loan originations, up 4% compared to the prior quarter, and we ended the quarter with a strong pipeline going into the fourth quarter at $2,7 billion. We also continued to successfully add new commercial relationships, as Joseph mentioned, adding roughly 75 this quarter alone. The right side of this slide shows the quarterly trend in CNI loan balances, and CNI loans during the third quarter increased $2 billion to $20.6 billion, up 11% compared to the second quarter, continuing our trend of brisk but prudent loan growth. Slide 21 provides a more detailed look at CNI Loan Growth by Business Line, and loan Growth in the third quarter was fueled by various industry-focused verticals and lending segments, including financial institutions, lender finance, renewables energy, entertainment banking, technology, healthcare, leisure, hospitality, and gaming, public finance, equipment finance, and diversified industrials. In addition, regionally speaking, our commercial banking teams in Southern California, New York City, Long Island, and New Jersey were key contributors to the third quarter loan growth, and we are optimistic about future momentum in regional markets where we have recently established or upgraded team leader talent, including Dallas, Detroit, Chicago, Cleveland, and Phoenix. And in a sign of continued progress in our goal of building broad-based relationships across our commercial banking enterprise, we experienced a notable increase in core commercial client deposits during the quarter of approximately $600 million. And we also experienced strong year-over-year and quarter-over quarter increases in capital markets fees and collected treasury management fees. So with that, I will now turn the call back to Joseph. Thank you, Lee and Rich. Let me close with a few summary comments. We remain committed to our long-term strategy of transforming Flagstar into a top-performing regional bank. While the current operating environment has affected the pace of our turnaround, we believe our long-term objectives remain very achievable with our expected timeline now extending to 2028. This is a change in timing, not in our strategy nor expectations. We will continue to execute on our strategic plan with discipline, strengthening our core franchise, and focus on delivering value for our shareholders. Now we'd be happy to turn it back over to the operator and open up for questions. Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Chris McGrady with KBW. Chris, your line is now open. Please go ahead. Oh, great. Thank you. Good morning. Maybe we could start on slide 15. And you have been giving us the slide with the contractual maturity by year for some time. I think this quarter you split out the rent reg, which is helpful. Can you help with the visibility into the resets in the maturity wall that you've talked about, given the change in the right environment? I know you guys have said you've gotten through most of it, but are you going through it again, given the changes in the macro? Thanks. yeah so chris we as you know we do the 18 month look forward uh and 2027 is our biggest uh reset and maturity year where we have about 10 billion so uh if you think about we're through that and if you Think about this uh last quarter it pushes us through to q1 of 2028 and as i mentioned uh in my prepared remarks, we have about $7 billion that is resetting or maturing in 2028. So we have visibility into the biggest year. I think there's, and we feel that given the interest rate environment using that forward curve, that's what the credit team has looked at when they've done that look forward we've we've accounted for that i think what is interesting is when you look at 27 the the amount of resets and maturities 2.9 billion of that 10 billion is more than 50 rent regulated so the vast majority is market or less than 50 rent regulated i think the other interesting phenomenon for us as we look at our migration this quarter when we do the look forward it's very formulaic okay so what we're doing is we're overlaying the interest rate environment at the time uh and saying what does the dscr coverage like look like and that dsc r coverage is driving how we risk rate those loans and and the migration the vast majority of the migration this quarter was on market units and the reason for that is when we see a change in interest rates we will react quickly because we're prudent and we're conservative if you think about the annual financial statements that we're using we're using 25 annual financial statements at the moment so in terms of those market units being able to increase rent we don't see that yet that we and we don t adjust for that until we see it on the financial statements so i'm telling you that because we're very very prudent in the way that we assess the credit quality of our multi-family book Okay, thanks for that, Lee. And then, Joseph, on the capital, nice to see you get through the 250. Given the messaging on smaller balance sheet, you know, and then you're roughly, you know, 12.4 versus your target of 11, like, how do we think about buybacks from here, given a little bit of noise in credit? Yeah. So, you know, Chris, I think we've been pretty consistent in our message is that, you know, the three things that management looks at and has dialogue with the board is, you know, how are our core earnings growing? What is the credit quality of the company and the trends in the credit equality? And then how much capital do we expect to use in the CNI growth? And, you know, obviously with the short-term disruption in that, don't induce us doing any additional stock buybacks in the fourth quarter. But with our capital levels, we would expect to resume buybacks into 2027. And then just to put a finer point on 2027, so you'd need to see the credit get a decent amount better before you – I'm just trying to gauge. Is it a first half event? Is it we're going to wait a few quarters? You know, if you really look at like the credit like funnel, and that's the thing that I look at is, you know, charge offs were on a gross basis, the lowest since we've been here, non accrual was flat. And really, you Know, other than two borrowers, which have resolutions, we haven't seen a increase in past due loans. So where we've seen migration was really on the upper end in the special mention and substandard, and that gets back to Lee's point is when you're looking out in that portfolio 18 months and you're applying interest rates on the five-year curve plus our contractual borrowing in the notes at either SOFR plus 300 or a reference rate plus 275, You know, that's a pretty punitive interest rate that those loans are being underwritten to, and that's what, you know, drag nets in some of those relationships and loan outstandings into those special mention and substandard. So we'll watch to see if there's migration, but we haven't seen that migration to, you know, what I would consider, you knows, more critical or difficult loans, you know, at this point yet. Okay, great. Thanks for the call. Your next question comes from the line of Dave Rochester with Cantor. Dave, your line is now open. Please go ahead. Hey, good morning, guys. Good morning. Just on the C&I growth that you've had and the deposit picture today, I know part of the C&Is strategy was that you get the deposits associated with those new lending relationships. Can you just talk about the progress you've made there and how much more deposit growth potential do you think you have coming from those new relationships you've always brought over and your confidence in getting that, you know, funding 50% of that growth with, you know, new deposit relationships that are hopefully on the lower side of cost? Thanks. Great. Thanks, Dave. This is Rich. In the third quarter, as we reported, net C&I loan growth was $2 billion, and we brought in just under $600 million of deposits around that commercial activity. So that batting average, we feel pretty good about bringing in 30% of deposits. I will tell you that our bankers are very motivated to drive full relationship value, whether that's deposits or fee income or a combination thereof, and get more relationship primacy as we further mature our commercial banking platform. So with our focus both on special industries coverage and regional commercial banking, as well as deepening our existing private banking relationships, you know, that is how we will continue to fund the loan growth that we are forecasting in the future. So it's about relationship primacy, and it's abut deepening existing relationships. So that's where we are in the journey, Dave. Appreciate that. And then just for the new 2028 guide, how do you assess that confidence level that you'll get that profitability ramp up all in that year? We're still in the tire for longer environment when it's just really challenging to project what you're going to get in the next couple of quarters. Yeah. So, Dave, that's why we put the bridge slides in there. so maybe let me walk you through 27 first of all, because the two biggest drivers are the balance sheet growth and then the fixed asset repricing. So the way we think about the balance sheet growth, there's sort of a couple of components. You've got the new loans that are coming on that are funded by the new deposit growth. And this is all on a weighted average basis because you've obviously got loans and deposits coming in towards the end of 26 that we get the full year benefit from in 27, et cetera. But if you assume that you've got balance sheet growth, so this is new growth on average of about $2.8 billion, and that is funded by the new deposits coming on. And we're assuming that we can bring in approximately $800 million to a billion and a quarter of new deposits. And the split there would be about 18% non-interest bearing, 80%, 82% interest bearing. The cost that we've assumed for the interest bearing is between 3.9% and 4%. And then when you overlay the interest-bearing or the non-interest-bearning deposits, the overall cost is around $320,000. And that spot rate is significantly above our spot rate today for our existing portfolio. So you're earning a spread on those new loans of anywhere from 340 to 350. That's the new loans coming on from the new deposits. You've also got new loans Coming on that are being funded by the CRE runoff. And so you're getting a big lift in the shift in spread. Because as we've said, the multifamily loans that are resetting have a coupon on less than 3.9%. And so you then bring in on market rate CNI loans or new CRE loans, and you're going to pick up 2.5% spread on that. And that number is somewhere between 4 and 4.5 billion. So that's how you sort of get to the balance sheet growth. If you then look at the fixed asset repricing, our assumption is we will retain 35% to 40% of what is resetting at much higher rates. And again, we're using the forward curve here. So you're probably going to pick up anywhere from 3.30% to 3.50% in terms of incremental spread. And then the other thing that in a rising rate environment that we haven't sort of really spoken about previously, about $10.7 billion of our CRE portfolio is floating. So as rates rise, we'll get the benefit of those loans, $107 billion repricing. And that's the reason why, you know, when you look at our interest rate sensitivity, we're neutral to ever so slightly asset sensitive. All right. Thank you very much. Appreciate it. Your next question comes from the line of David Chiaverini with Jefferies. David, your line is open. Please go ahead. David Chiarverini, Jefferies, Hi, thanks for taking the questions. I guess a bit of a follow-up on that last question. When thinking about, I guess, drilling in on net interest income and the walk on, say, slide seven, which of these factors would you say is, you know, the most at risk of coming in, you know weaker in which ones are, you the most kind of locked in and mechanical. Yeah. So here's what I would say. I think first of all, um, we we've obviously, because of the competitive deposit environment, we bought down our assumption in terms of the amount of deposits we can bring in. And we're saying it would be $800 million to a billion a quarter, Dave. And so that, to me, is the assumption that I would look at and say, can these guys bring in that amount of deposits? Because I think the rest of it, we've proven out. Rich and the team have consistently been originating C&I loans at a clip of $2 billion growth a quarter. So I don't think there's any question about our ability to generate assets. And then the fixed asset repricing, that is all mechanical because those loans are either going to pay off and we're going to use those funds to originate more C&I loans at market spreads, or they will stay with us and we are going to get an increase in coupon, which is going to significantly increase net interest income, and NIM. And you've got a significant portion of that CRE portfolio, the $10.7 billion, which is floated. So in a rising rate environment, you pick up the benefit there. So to me, I think the question is, can we deliver on the deposit growth? Thank you for that. And then on the CNI growth side of things, the pipeline at $2.7 billion, to what extent could the higher rate environment impact the pull through of that pipeline? And did that pipeline kind of build, you know, kind of evenly through the quarter or did it slow down towards the end of the quarter a good question David I would describe the external environment of our business and commercial and corporate clients as resilient you know we have traveled around the country in the third quarter and hosted private gatherings with a number of our clients and in existing geographies and newer geographies. And it is impressive how resilient we are finding the business owner community in terms of executing on their strategic plan, taking advantage of uplift from the significant CapEx investment around technology and AI and data centers. That's like a pebble in a pond with concentric circles of businesses that benefit from that macro environment. And so I would say that the pull-through is solid and it's well diversified in terms of what makes up that $2.7 billion of pipeline. And it's amidst an environment that is You know, not without challenges in terms of the inflationary environment and, you know, diesel fuel prices, et cetera, and geopolitical concerns, but our customers are telling us that they are moving forward with capital projects, moving forward with M&A and other strategic initiatives around expansion. So we feel good about the breadth of the loan pipeline, and we also feel good About the ability to pull that through. And I would not say that we experienced any material slowdown as the third quarter came to a close in terms of what we're adding to that pipeline. We also have the unique nature of continuing to be in a scale and growth mode. So as new bankers come onto our platform, they are bringing over their relationship activity, and that is also helping to further build our pipeline. And that's something that's a little bit more unique to our bank and why you've seen us materially outperform a number of our peers in terms of C&I loan growth. Great to hear. Thank you. Your next question comes from the line of Casey Hare with Autonomous. Casey, your line is now open. Please go ahead. Yeah, great. Thanks. Good morning, everyone. Wanted to touch on the, what is the, what does the Forward Guide assume for net charge-offs? um and within that um you know the acl ratio at 150 what what's uh you know how low can that go yeah so i i would uh the the provision forecast i would look at that as the proxy for net charge offs casey so what we're showing as a provision number i would use that as as your proxy for the net charge-offs. Gotcha, thank you. And then on the deposit front, that's Lee, helpful color on the new money deposit growth. Just wanted to get a finer point on the third quarter. You guys gave a September NIM, the 309 deposit costs in the third-quarter. What was that in September? and sort of what is the beta expectation going forward? Yes, so yeah, so a couple of things. First of all, our spot rate as of September 30th, and again, this includes non-interest bearing and brokered was 2.56%. The way we think about the beta is we are targeting a 60% beta. If you look at where we are, and this is as of three or four days ago, Casey, versus the September rate hike, and this for interest-bearing deposits excluding CDs, we were at 32%. Great. Thank you. your next question comes from the line of jared shaw with barclays capital jared your line is now open please go ahead thanks good morning um i guess trying to to get a trying to get to an assumption for year-end assets in 27 and 28 and just looking at at the the guide for um commercial loan growth you know i guess you've been running significantly higher than that um what what's i guess driving that that slowdown is that just you being more selective and more uh judicious with with capital deployment and then i guess within that loan growth what what portion do you assume is is residential versus commercial uh it's so jaredy what's driving the uh where we are for 27 and 28 is really, like I said, it's the deposits. So, you know, what we're sort of saying is we think that we can generate net sort of C&I growth, and it's all going to be, I say all, 90% of the growth is going to come from C&Is. There will be some residential growth, but obviously the higher rate environment impacts that. But if you think that we're growing sort of new loans, 2 billion a quarter on average. And the way we're funding that is a billion dollars of CRE runoff net. And then you've got $800 million to a billion of new deposit inflows. So when you look at the growth, it really predicated on the new deposits that we can bring in. Okay. Thanks. And And then shifting a little bit, I guess, what's the sentiment among the New York City rent-regulated landlords? Do you still have confidence that they're going to have the ability and desire to support their properties to the same degree as they were in the past, given the rate environment and the political climate in New York? We do. I mean, we've said this before. We don't have any REO. a lot of these owners have benefited from the 1031 tax rules. So, you know, that's obviously a huge advantage. The migration that we've seen has been at the upper end of the portfolio because of the way that we calculate, you knows, the DSCR and the formulaic nature of how we look credit. And 42% of our non-accruals continue to be current and are paying. And again, you know, we saw a very healthy amount of part payoffs this quarter, $1.2 billion, 35% of which was substandard. Yeah, Jared, the comment that I would say is, you know, like a lot of these borrowers are resetting from, pick a number, 3% to 4% interest rate that they took out either five ones or seven ones and our documentation just as a reminder resets at their SOFR index plus 300 or reference rate plus 275. So those are pretty steep interest rates you know that frequently you know can you know have a borrower go from say three and a half to seven and a halve. So we don't see a desire not to own the property. What you see is a desire maybe for the bank to restructure and lower their interest rate off the contractual coupon. But I mean, for the most part, that has held up relatively well. So we haven't seen a material change. And you've seen some trades in the marketplace recently where some investors are coming in and buying pools from banks. So there's a fair amount of demand, I think, who have a more longer-term viewpoint of the market than just perhaps maybe the next four to six years. Thanks. Your next question comes from the line of David Smith with Truist Securities. David, your line is now open. Please go ahead. Hi. Good morning. Good morning? Can you just like explicitly clarify your expectations for ending assets over the next few years? It seems like it's basically a billion, a quarter of net asset growth with with the new originations net of the runoff. But I just wanted to confirm that. Yeah, you're right, David. So end of 26, we're at 82.1. This is total assets. $82.1 billion, end of 27, $92.1 billion, and then end of 28, we're just around $97 billion. Okay. And you touched upon this a little bit in the last question, but just thinking about it, interest rates are a lot higher today than they were a quarter ago, but your expectations for CRE runoff and paydowns isn't really that much lower. Like, is there, I guess, two things. Is there a rate level where you feel like that would start to decline more meaningfully? And if you can just flesh out a little bit of what you think is supporting that level of paydown and those options that are outside you in the marketplace still today. Yeah, it's really driven by volume, David. As I mentioned, we have $10 billion of loans that are resetting and maturing in 27 and another $7 billion in 28. And by the way, that doesn't include $1.8 billion in Q4 of 26. So if you just add those three numbers, you're at $19 billion of loans that are resetting or maturing. And so, you know, I would say that, you know, kind of net runoff of a billion dollars a quarter, that's how we get there. And for all the reasons that I just mentioned, Q3, you know, we have the high rate environment. We still saw 1.2 billion of par payoffs. And then I think the other interesting fact is of the 10 billion that is resetting or maturing in 27, only 3 billion is more than 50% rent regulated. So 7 billion is market to less than 50 percent rent regulated Thank you. Your next question comes from the line of Ryan Kenny with Morgan Stanley. Ryan, your line is open. Please go ahead. hey good morning so it was a good quarter in terms of growth in non-interest-bearing deposits and wondering if you could give some more color on what's driving that growth can that continue and how the you know investments in treasury management um you know from here maybe need to uh to jack thanks yeah so let me take the first part of the question and then i'll hand it to So we did, during the quarter, towards the end of the quarter We, having undertaken a pretty comprehensive product review We did move around $900 million to $1 billion of interest-bearing deposits These were deposits that we were paying 1, 2, 3 basis points on We moved from interest-baring to non-interest-bearring Because for all intents and purposes, they are non-interest-beary So that's what you're seeing in the non-interest-bearing line item. And then I think, you know, in terms of going forward, I mentioned in 27, when we think of the new deposit growth on a weighted average point of view, about 18% are non-interest-bearring. And we want to leverage our relationships, particularly from a commercial lending point of view, from a private banking point of view, and then leveraging the 340 bank branches that we have to drive, not just the non-interest-bearing, but the interest-beary deposits as well. And I'll let Rich comment on some of the strategies that we're deploying. Yeah, thanks, Ryan. And as Lee mentioned, we are driving further with respect to our relationship banking model from business banking to commercial banking and private banking. And as we move forward on that journey, we continue to deploy our treasury management platform. When we win new business, I think the receptivity, we have a competitive treasury management platform that's comparable to other regional banks. We are focused on solutions around working capital management and deploying tools for our clients, especially around fraud and cyber risk, which is perhaps the number one concern of our clients when they are banking with us digitally. So we are deploying enhanced digital capabilities and fraud protection as we onboard customers and, you know, with a goal to have fulsome relationships that include not just a deposit that's interest-bearing but those operational accounts that bring non-interest-beary accounts to the front, as well as other payments capabilities, including card and merchant solutions as well. Thanks. And then separately, to follow up on the earlier question on rent-regulated multifamily, what's the net charge-off you're assuming on rent regulated relative to what you're seeing recently? Is there an uptick embedded in the guidance? No, not particularly at all. I think the one thing I'd point out on the net charge-offs as well this quarter. So we had net charge-off of $74 million. And what I would say about that is $34 million was already fully reserved for. So if you take that out, we would have been at $40 million in net charge offs, which that's where we sort of expected our provision to be. The reason that we were at the sort of 75 is that 34 that would have come out normally, we had to replace because of the higher rate environment impacting those cap rates on units in the Bronx in particular, the inflationary environment putting pressure on operating expenses, on the higher-rate environment putting more pressure on the DSCRs, and then that caused more migration. And so, you know, without that higher interest rate environment, the charge-offs, net charge-off, you now, we wouldn't have had to replace that $34 million, and your provision would have been $40 million for the quarter instead of the, you Now, the $76 million that we saw. Thank you. your next question comes from the line of ebrahim punawala with bank of america ever him your line is now open please go ahead hey good morning i guess maybe just morning apologies if i uh apologies hilly uh if i missed it it why are we shutting down the buybacks like when you look at the stock at 11 bucks tangible book 15 shouldn't this be the time to be leaning in and i asked that because i think you mentioned that you might reinitiate buybacks in in one queue so i'm just trying to understand is there like very narrowly a metric that you're managing to as opposed to one like why not buy back today or if the environment is becoming uncertain why not push and suspend buybacks indefinitely i'm just trying to figure out between those two spectrums why you said what you said. Abraham, I just think it's prudent until we build our core earnings and ensure that our credit quality forecast is accurate and then the CNI growth has been spectacular, that those are the three variables management will use to make a recommendation to the board. I mean, we clearly acknowledge our capital levels are higher than our intended levels. But just in light of that uncertainty, we will wait until 2027 before we would look to buy back. We fully expect to resume that in 2027. Got it. And separately, this big picture, it feels like rates don't go down. There is not a whole lot that's going to be helpful from the CRE book resolution unwind. Obviously, this quarter was an evidence of that. If rates move up, and I appreciate they've come down a little bit in the last week, but maybe, Joseph, talk to us how you're thinking about, yes, the C&I strategy is working, but beyond that, like, are there other strategic options, like strategic merger partnerships with other banks that you would be exploring in order to unlock shareholder value yeah i you know abraham i think really we think the best value for the shareholders of this company is for us to execute on our business plan you know if we're able to do that we really can unlock i think significant value um uh in the valuation of the company just by executing you know on the path that we expect to get to in 2028. And Ibrahim, I would just, you know, and to Josie's point, we've laid out sort of the path here over the next two years. And as we've said, and as we're going to do, we've answered other questions. A large part of this is mechanical as these low-coupon multifamily CRE loans reset. I think, you now, the deposit growth we've brought down, and if we can achieve that, we know we can generate the C&I loans. So, you know, look, I think that if we achieve these numbers, it's going to create significant value for the shareholders over a short time period. In terms of your question around sort of the interest rate environment, we are slightly, well, we're neutral to slightly asset sensitive. You know, so obviously in that scenario, a higher rate environment is helpful. Higher rate environment does put pressure on the credit side. But again, you know, I think as I described earlier, the migration we saw was sort of more in the market rents, the upper end of our portfolio, because we're sort of we're very kind of punitive on ourselves and conservative in the way that we do that 18 month look forward in the formulaic approach so i i agree with joseph i think there is a an enormous amount of value creation here by um executing on the plan we've laid out understood thank you both your next question comes from the line of ben gerlinger with city bank ben your line is now open please go ahead hey good morning i just want to double check was this forecast based on 9.30 curve for like last Friday? This was based on a September curve that had four hikes in it. So we've got September, December, March and June. Got it. Okay. So this kind of gets to the question Abraham's had where he's basically kind of saying like I apologize in advance because I don't want to diminish the progress you guys have made. It just seems kind of like the franchise today is very much an interest rate curve bet and that the only reason i say that is five years come down roughly 30 basis points since the end of last quarter so the first three weeks here so like when you think about just the update if we just kind of retrace what didn't that put like alleviate quite a bit of the incremental pressure you guys have just kindof alluded to in terms of credit like i get the positive price is probably a little bit more expensive today based on the front of the curve But, like, the credit resolution opportunity probably gets a little easier relative to where it was just three weeks ago if the curve kind of plays out on the belly. Am I thinking about this correctly or am I kind of off base? Ben, you're absolutely – no, no, you spot on. If rates come down, that is definitely beneficial and certainly on the credit side. So that is absolutely the right way to think about it. You are correct. But I think, Ben, when you look at when last time we were forecasting was in mid-June, we've seen a 100 basis points increase even from the pullback. So that's on that half of the equation. The other half, I would say you've seen a super hyper increase in deposit cost. You know, 30 days ago, it was pretty difficult to find a CD for one year over 4%. Some of the competitors are at 475 today. So you've seen super hyper pricing increases in the deposit that hopefully we'll see that pull back also. But in the short run, some of the competitors are very aggressive. Got it. And then just kind of thinking from a client-based perspective in terms of the multifamily slash areas where you might see pockets of pressure on a DSCR coverage, like when you think about their level of sophistication, if the five-year comes in a little bit more, would you potentially we see like kind of rapid payoff or like basically the borrower hitting the bid to refinance because it's a window of opportunity that's pretty small or presumably pretty small. I'm just trying to think like how sensitive this kind of lumpy payoff potential might be to rates or is it a little bit more formulaic over time period of kind of getting close to expiration? No, no, no. I think you're exactly right you know we we do so you know joseph has described we have two options contractually five-year flood plus 300 uh or prime plus 275 um we do see and there is a sofa uh sort of uh opportunity we do See people taking the floating rate because they're effectively making the bet that rates will come down and then they will be able to refinance. So your thesis is exactly right. You've got people that will take a floating rate now in a high rate environment because they're betting that rates come down, and then I will be to refinace at a lower rate and with a better opportunity. So I think if rates come then, yeah, you would see more of that activity, which is people taking advantage of the drop to refinance at what they would see as good rates. Yeah. And the other thing, Ben, I think to recognize this next really five quarters is the largest repricing window that we've seen since we've been here in 24. So the numerator to that is so much higher than what we've experienced. That gets back to an earlier question about you know how confident are you that you can net you know reduce that CRE portfolio by a billion dollars if you just kind of applied you know historical levels we would be much higher than that but we are also originating you know now CRE outside New York across the United States and predominantly you know transitional type of properties got it that is helpful thank you you. Thanks, Ben. Your next question comes from the line of Bernard Von Gizitsky with Deutsche Bank. Bernard, your line is now open. Please go ahead. Hey, guys. Good morning. Just on the NIM outlook, it's growing, but at a slower pace than originally expected. Could you just maybe provide some updates on some of the headwinds? I know you already mentioned maybe slower expectations on the non-accruals coming down, but what about the expectations on the levels of retention of maturing loans and pricing of higher quality retained loans? Just some thoughts on some of the present takes. Yeah, so I think there's a couple of things that have played out. And Bernie, first of all, I think, as we mentioned, we did see a full basis point increase in NIM quarter over quarter and September NIM came in at 223. But I'd say the headwinds are the deposit costs. I mean, we've sort of, we thought that, and if you look at our history for the last several quarters, we'd been able to bring deposit costs down consistently. And obviously on a weighted average basis, it kicked up one basis point in Q3. When we were sort of putting the previous forecast together, not knowing that we're going to be these four rate hikes in the curve, you know, we thought we would still be able to chip away at those deposit costs. So I think that's one of the things that I would mention. In Q3, and Rich can touch on this a little bit, given the mix of C&I lending that we did, I would say that the spread came in a little lighter than Q2 when we were at 225, not much, but a little bit. But that was all more just the mix of loans that we bought in. And then on the non-accruals, you're right, non- accruals are flat. So we're not getting the benefit of the release of those non-accruals back into earnings and back into capital. And as we've described before, the non- accruals is a little bit like a receivable account. You've got non-acruals that we're resolving and are going away, and then you've got some new ones coming in. And when you get some new one's coming in, that has an impact on your net interest income as well. So, you know, that's what I would describe. But I think overall, if you look at the trend line, you know you are beginning to see the interesting, interest income was up 20 million quarter over quarter, NIM was up, and you know we're about to sort of embark on this big wave of resets and maturities, which is gonna really allow us to sort accelerate that expansion. Okay, great. And then just, Lee, on slide seven, you have funding mix as a positive component, helping the AI in 27. Are you still expecting wholesale borrowings to come down? Yeah, so that's exactly what it is. There's two things playing out on that or in that particular part of the chart. One, yes, we got FLUB coming down about a billion dollars in 28. And then we also, in Q4 of 28, it's not counting for a large part of this, but we pay down $300 million of sub-debt. So that's what you're seeing in that funding mix chart on page 7. It's a reduction in a flubber of a billion. And in Q5, you've got a little bit benefit because we're paying off those sub notes. Great. Thanks for taking my questions. Your next question comes from Janet Lee with TD Cowan. Janet, your line is now open. Please go ahead. Good morning. Good Morning. Hi Janet. um following up on provision and the forward curve so is it as simple as if we don't get a rate hike in december your provision forecast would be lower i would say that the the there is potential for that janet because it is very uh it is very much linked to interest rates. And we have sort of, you know, been looking at the forward curve as of the credit guys. But there are other things at play as it relates to the provision. So, you know the amount of C&I growth, obviously the net 2 billion of C & I growth in Q3, that did contribute to the revision. And then you also have, we use the Moody's economic forecast. So, you know, we have to wait and see what does that Moody's economic forecast look like as well. So it's not the only variable. There are other variables that, you Know, we do need to sort of consider here. Got it. And I believe you said the non-accruals NPLs are likely to come down, but obviously at a slower magnitude than expected before. How much visibility do you have on it? I don't believe you'd still expect getting to the $2.3 billion level by the end of this year. Is there a line of sight into where that could go over the next year, just given you're also charging off a little more? uh it's you have some line of sight but not total line of side because it's not linear uh we have a special asset group who are doing a fantastic job working through these non-accruals and they have lots of different strategies you know sort of dpos um work out asset sales in order to be able to reduce those non-accruals. And so sometimes, you know, we do have visibility into what is coming. But as you might imagine, sometimes things can come up and be resolved in a couple of days where you have less visibility. Right now, we're assuming that we end the year at about 2.6 billion of non-accruals, Janet. And then, you know, in full transparency, as we look through 27, we do believe we can bring those non- accruals down to about 2 billion. So those numbers are higher than what we had previously thought, because the higher rate environment does slow down the resolution of the non- Accruals. But as I mentioned in my prepared remarks, and as you can see from the bridges, we are still low, we still believe we can reduce those non-accruals from where we are, and that is accretive to both earnings and capital, because they're 150% risk-weighted as well. Got it. Thanks so, thank you so much for it. Just a quick follow-up, if I, M of 223, do you think that's a reasonable floor from here? So I would like – let me put it this way. We think Q4 NIM can be 220 to 225. And so, you know, I think we are – I don't want to say it's a flaw in case one of the months is 222, but I do feel that we can continue to build off of Q3. And, you know, and I think that, we do think that that 223 is absolutely within the range that we expect to be at in Q4 overall. Thank you. Your next question comes from the line of Anthony Illion with JPMorgan. Anthony, your line is now open. Please go ahead. Great. Thank you, Slide 17, Lee, you note the ACL on Criticized and Classified on rent regulated was about 502. I think that's up from 48 last quarter. What's embedded in your forecast for that? So, well, I think what you're seeing here is what is embedded in our forecast. And I think, as I mentioned earlier, I would look at the provision number that we have going forward as a proxy for the charge-offs. And most of that is going to be weighted towards the multifamily portfolio. Okay. And then more broadly on rent regulated, so there have been a couple of banks here in the New York market that as recent as yesterday announced that they're selling parts of their New York City rent regulated portfolio. Joseph, I'm curious, is this something you guys are considering given the headwinds you called out this quarter on rent regulated, which seems to be overshadowing the progress you've been making on what Rich discussed earlier on this call? Thank you. Hey, you know, the way we look at that is we, you know, obviously we observed those sales and look at, you know, our portfolio. But, you know, what we have been able to do because where we have those loans marked is most of our resolutions, whether DPOs or payoffs or negotiated settlements, have been with, you know. One to five percent, either positively or negatively, where we had those loans marked. And, you, know, most of those investors are looking at, you now, 15 to 20 percent returns. And so we've taken the position, you know, we have the team in place. We've been working these out that, you know, a year or two from now, we think our shareholders are better served by us, you know, loan by loan, having resolutions to that. But I mean, we clearly obviously monitor the market closely. And, you know, if there was an opportunity to sell some of that, we would. But I would say we have, you know, currently, like, nothing on the table to do that, that we will, you know—we're obviously talking to lots of people in the marketplace, but our resolution internally really has optimized the retention of capital for the company. Understood. Thank you. Your next question comes from the line of Matthew Breeze with Stevens, Inc. Matthew, your line is now open. Please go ahead. Good morning. Good morning to me. You know, Lee, I was hoping you could provide a little bit more color on the fee income outlook. Looks like it's about an $80 to $100 million reduction. I'm curious what areas you're expecting to see, you know, reduced level of fee income from. Yeah, so the biggest drivers of the reduction in the fee-income forecast are lower gain on loan sale from the mortgage origination business, the higher rate environment. I mean, that's been sort of costing us a couple of million a month. So that is a big driver. As I've mentioned, we've reduced our deposit forecast down, which also had an impact on the loan origination volumes versus the previous forecast. And so you're seeing less fees from sort of the deposit and loan businesses as a result of just those lower volumes. And so those are the sort of – the big drivers. But if you sort of look year over year from 20 – sort of 6 to 27, you know, we are showing growth from a net interest or a non-interest income point of view. And we do feel that, you know, from capital market fees, treasury management fees, you know, the swaps, FX, everything that Rich and the team is doing, that we're going to continue to expand our fee income as we move forward. But we're just right now in the higher rate environment. We're not going to get the help that we had originally thought from the mortgage business. Got it. Okay. And then I wanted to go back to, you had mentioned that you have $10.7 billion in commercial real estate that's now floating. Is that a function of folks that have hit the end of the five-year fix and are now floating, or is that a fonction of swaps? Because it feels a little bit unnatural for a commercial real estate borrower to hold a floating rate for an extended period of time. I'm wondering if that's a risk factor to your interest rate position going forward, those folks either locking in for five or leaving for five elsewhere. Yeah, no, no. I think there's a couple of things that are playing out. Some of those CRE loans, about $3 billion, are actually healthcare facilities that we fund in another part of the organization, but they're categorized as a CRE. and and then the other part is is people that are selecting uh there's you can either select the prime rate and we know that when they select the prime right plus 275 that's probably for a short on a short-term basis until they find a better opportunity and you're always going to so you're going to have people cycling in and out of that uh but then there are you know as i mentioned, there are SOFR options that our team is also making available to certain borrowers, and you've got people that are going with those SOFR option as well on the CRE side. Yeah, I think you have to think about that as a landing spot. If you just happened to hit two weeks ago when the five-year was 512 or 513, you wanted to see, are rates going to pull back? And so a landing spot for people to sit while they're kind of watching interest rates. And for us, what we think that ultimately means is, as Lee referenced, we expect 65% of those loans to pay off as a general rule when they come up for maturity. They may stick around for 60 to 120 days, but we do eventually think they go away. As we reopen selectively for originations across the country in CRE, we are seeing a higher percentage of floating rate SOFR-based loans. And if the client wants to fix the rate, they'll do that synthetically through a swap transaction. Okay. If that plays out just the way you thought, with 65% locking in, I guess, elsewhere, does that move you into a liability-sensitive type interest rate position? No. No, it doesn't. Remember, if you look at our balance sheet, we are putting on, we're transitioning to more C&I loans, right? So that in itself makes us asset sensitive. You've got this sort of 10.7 billion of CRE that is floating. But I think you're going to have in and ins and outs. Some of that is permanent because of the healthcare facilities, because of the new CRE loans that we're doing that are typically floating. We're not sort of, you know, really offering those fixed rates unless they're part of the resets and a contractual. You know, our non-interest bearing deposits increased because, you knows, we moved those very low cost deposits from interest bearing to non-interest bearing. So no, I don't think it doesn't move us to a liability sensitive position. I think we're very much neutral to asset sensitive and probably moving more in that direction, given the transition of the balance sheet to more C&R. I'll leave it there. Thank you. your next question comes from the line of john arfstrom with rbc capital markets john your line is now open please go ahead thanks good morning um hi john hi john yep hey one small one and one bigger picture but lee on the higher expense guide maybe i missed it but i know it's small but just curious what the driver of that was uh you mean for 27 yeah yeah so it's so the previous guide we were sort of towards the top end of the range and then um we we continue to invest in in sort of people and technology and so it that just put us sort of beyond the top edge of the previous slide and into this sort of uh the current guide which is consistent with where our expenses are this year so it is just investment in people and technology okay okay good um and then the bigger picture one i just i asked this respectfully but i know a lot of this is hard to predict but that update slide it's been drifting lower for a few quarters and it's elongated a bit and maybe an unfair question but any elements of this that were maybe a deeper dive reset or you think this is probably the bottom or you know set another the way, what does it take for things to get tougher from here? And I guess I'm focused kind of more on the core trends. I think credit works its way out. But how deep did you guys go on this reset? Because for 27, it's a pretty big cut. Yeah. I mean, we've spent countless hours, days, weeks pouring over this, John. And as I mentioned, a lot of this is mechanical now because of the repricing. As I mentioned to one of the previous questions, if you look at this and say, OK, big picture, where is the risk? We have the ability to create and generate assets. I think, you know, we've proven that on the C&I side. And so, we know the resets are going to happen. They're contractual. We all just sit here and wait. Time is our friend in that regard. So, and we've taken the deposit growth down, but we're saying we're going to grow deposits, you know 800 to a billion a quarter. And, so, you, know, that is the, that would be the question, can we bring in $800 million to $1 billion of deposits a quarter? And so we believe we can. And so if we can do that, then we can hit all of these numbers, because that helps fund the incremental balance sheet growth. 50% of it is funded by CRE runoff. That is going to obviously change the mix of the balance sheet more favorably. And you have the pickup in the the spreads, just given everything that's resetting is sort of, or a lot of it is low coupon. So, I think it comes down to, you know, can we bring in the deposits? Okay. Thank you. This concludes the question and answer session. I will now turn the call back to I'll just add in for closing remarks. Hey, thank you very much, operator. And, you know, as noted with this presentation, we provided our 2028 forecast and we thought that was important so that the journey ahead is well defined. You know, as we have done in the past along the way, you know, as both internal and external factors alter that, we've come forward and really tried to make sure that, you know, as we had those changes, we communicated those, you know, so everyone knew how we observed the business. We do, as I said in my opening comments, feel we remain to be on the path for Flagstar Bank to complete its turnaround. It's just, if you look at the numbers, you Know, the 28th since really on top of previous 27. So this is what I would just say it pushed it out, but it didn't change the direction that we were going. So we do feel, you know, very good about, you know, the continued fundamentals of this transformation of this company where the CNI business will become, you know, and is now becoming a much more significant portion of the business and that we look to really have a balanced balance sheet where a third of the assets are dedicated to consumer cash flows, a third to commercial real estate, and a third to business lending. In closing, I'd like to thank our, you executive leadership team and all our teammates for their dedication and commitment to the organization and our customers. I'd like to also thank the Board of Directors for their support and counsel. And thank you for taking the time to join us this morning and asking what we thought were really important and critical questions. So thank you für your interest in Flagstar. This concludes today's call. Thank you for attending. You may now disconnect.