Flagstar Financial, Inc.

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Financial fourth quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.

Thank you, Regina, and good morning, everyone. Thank you for joining the management team of Flagstar Financial for today's call. Our discussion today of the company's fourth quarter and full year 2024 results will be led by Chairman, President, and CEO, Joseph Otting, along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Smith. Before the discussion begins, I would like to remind everyone that our quarterly earnings press release and investor presentation can be found on the investor relations section of our company website at ir.flagstar.com. Additionally, certain comments made today by the management team of Flagstar Financial may include forward-looking statements within the meetings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. When discussing our results, we will reference certain non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliation of these non-GAAP measures. And with that, now I would like to turn the call to Mr. Otting.

Thank you, Sal. And good morning, everyone, and welcome to our fourth quarter earnings call. Today is somewhat of a tragic in our nation, and our hearts and minds this morning are with the accident victims and first responders at the Reagan National Airport. I think a lot of you know that for four years that was my primary airport, and I know a lot of the people in that area, so truly a tragedy for our nation. I'd like to thank all of you for your interest and support as we've worked to build a successful regional bank. I would also like to welcome Lee Smith, who is joining me this morning for his first earnings call as the company's new chief financial officer. Lee has been an important part of the company's leadership team and active in various aspects of the company's turnaround really throughout the past year, and especially over the last six weeks as he has named to the CFO role in the company. This morning, we'll discuss our results for the fourth quarter, which were better than our internal projections and analysis forecasts. We'll also discuss some of the trends we are seeing, update you on our strategic priorities, and provide you with our three-year forecast. I'm excited to share our fourth quarter results and even more excited about the momentum and progress we are seeing going on in 2025. As I look back on 2024, I think we've accomplished a lot of things in a very short period of time. While last year was a transitional year for the organization, We really made significant progress on all of our strategic priorities, setting the stage for profitable growth going forward. When I joined the company last March, we outlined the, for the investment community, our three primary objectives for the year. They included understanding the credit risk and the commercial real estate portfolio, getting our hands around the regulatory compliance issues and putting the bank back on a path to profitability. Today, I can say that we've done this and that the company is in a better position than it was 12 months ago and strategically for a long time. We are on projections to be profitable now in the fourth quarter of this year, and I think this will ultimately mark the company's turning point on its return to consistent profitability. Moving on to our presentation, starting on page three, this slide provides you with an update of our strategic focus. As you can see across the top, you know, we continue to bolster management and talent in the organization. And more importantly, as we've kind of looked forward in our CNI business, we added significant amounts of new talent to grow that business. We'll talk a little bit about some of those results. Ongoing execution of our operating plan. You know, the third quarter, this is the third quarter of consecutive solid deposit growth in our retail and private banking. We've continued to reduce our CRE exposure. We've had proactive management of our problem loans, and we successfully completed the sale of the mortgage warehouse and mortgaging, servicing, and subservicing businesses. On the goal, a strategic focus of achieving capital and earnings, we're on track to reach the full profitability in 2026. And in approving funding costs, we have strong liquidity profile of over $31 billion. We reduced wholesale borrowings by almost $7 billion, or 34% during the year, and now represents just 13% of total assets. And our loan deposit ratio is at 90%. On the focus of credit and risk management, as we've taken you through the journey, we've completed the reviews of our CRE. We de-risked the office and multifamily portfolios through charge-offs, payoffs, and loan sales. And we maintained a solid ACL coverage ratio of 1.78%. But just as importantly, we've increased those on the riskiest aspects of the portfolio. So I think, you know, overall, we really feel, you know, good and comfortable about the direction. And probably the most important slide or area on that slide is that our CET capital ratio for the fourth quarter was up to 11.9%, up over 280 basis points during the course of the year in ranking us within the top quartile of our peers. So very, very successful growth and strategic focus for the organization. On slide four, as you can expect, our transition in 2025 There are really four main areas that we're focused on. We want to improve our earnings profile via NIM expansion, moderating credit costs, and driving operational efficiency. By the end of 2025, we'll have reduced our operating expenses by $600 million or 23% compared to 2024. We also want to execute on our CNI and private bank growth initiatives. And we want to continually proactive the CRE size of the portfolio and the make of it. And then we want our credit to normalize, resulting in lower charge-offs, provision, and slowing new loan formation. On slide five, we provide an update on the commercial banking to illustrate how far we've come over the last six months. Starting in the lower left of the slide, we continue to hire seasoned mid-career bankers from other regional money center banks. who have a proven track record of building a commercial business. We added 24 bankers during the quarter across various functions and line of business, on top of the 30 we hired during the third quarter. And we plan to hire an additional 100 over the course of 2025. On the lending front, we already have a good platform of roughly $7.2 billion to begin with, and our new hires are starting to make an impact. As you can see on the slide, during the fourth quarter, We had new loan commitments of $620 million and funded slightly under $400 billion of loans, double what we did in the third quarter. We also have a solid base of low-cost deposits and a meaningful opportunity to grow both loans and deposits in this segment, as in-market mergers and the exit of competition has allowed us to expand market share. And then as some of our competitors have capacity and various credit facilities, we're a welcome new entrant into those credit facilities as well. So with that, I'd like to turn it over to our CFO, Lee Smith, for his comments.

Thank you, Joseph, and good morning, everyone. Before I dig into the quarter's results, I do want to reemphasize how we are executing on our strategic plan to transform Flagstar into a top-performing, diversified, relationship-driven regional bank. During the last nine months, Joseph and the new investors have assembled a strong board of directors and a quality executive management team. Furthermore, we have executed on several initiatives which create a solid foundation from which we can build from. Pivotal to this was the sale of the mortgage warehouse portfolio in the third quarter, which created 70 basis points of Tier 1 capital and approximately $6 billion of liquidity. This was supplemented in the fourth quarter by the sale of the MSR asset, the servicing subservicing business, and the TPO origination business. This latter transaction provided several benefits for the bank. It created 50 basis points of Tier 1 capital and allowed us to jumpstart our cost optimization program. We've continued with the cost optimization program with a focus on getting our non-interest expense run rate in line with previously provided guidance for year 2025. As Joseph mentioned, we're planning to reduce operating expenses by $600 million in 2025, and we're on track to get there. Many initiatives have either been completed or are in process and include particular focus on compensation and benefits, vendor spend, real estate optimization, and process improvements. These actions will result in a leaner and much more efficient organization without compromising our commitment to safety and soundness. Additionally, during the fourth quarter, we used our excess cash position to deleverage and pay down higher-cost wholesale borrowings. We paid down just under $5 billion of FHLB advances with a blended weighted average cost of 4.83%. We repaid a $1 billion advance from the bank term funding program with a WAC of 4.85 percent. And we repaid $2.8 billion of broker deposits and issued only $200 million of new broker deposits for a net pay down of $2.6 billion with a WAC of approximately 5.2 percent. Given the timing of most of these pay downs, the full benefits to the net interest margin will not be realized until the first quarter of 2025. Furthermore, these paydowns, in addition to improving our funding profile, have also helped reduce our FDIC insurance costs, another focal point of our cost optimization strategy, which declined $24 million in the fourth quarter compared to the third quarter. The paydown of wholesale borrowings has also been made possible by the continued strength in our deposit gathering, which I will elaborate on later. Moving to slide six, as Joseph said, our results came in better than expected with a smaller loss for both the fourth quarter and full year 2024. Fourth quarter results had a number of notable items, which are outlined on this slide. On a GAAP basis, we reported a net loss available to common stockholders of 41 cents per diluted share. Notable items included a $92 million gain on the sale of the mortgage businesses and related activity, which included $3 million of trailing revenues tied to the business and assets sold, $31 million in severance costs, $77 million in long-term real estate asset impairments, $12 million in trailing expenses related to the sale of the mortgage businesses, and $11 million in merger-related expenses. Once you factor in all of these items, our fourth quarter net loss narrowed to $0.34 per diluted share. Slide 7 has summary statistics on our capital and liquidity position. As you can see, our CET1 ratio of 11.9% improved dramatically compared to the previous quarter and to the year-ago quarter, and places us in the top quartile among both Category 4 banks and regional banks between $50 and $100 billion in assets. Adjusting for AOCI, our CET1 capital ratio would be 10.8%, also in the top quartile relative to peers. Moving to slide 8. This slide reflects our actual results for fall year 24 compared to the forecast we provided last quarter. You can see that we were in line to slightly better than expected for each of the major line items. Slide nine provides our updated forecast for 25 out through 2027. I will note that we are forecasting a smaller loss per share relative to the previous guidance in 2025. For 2025, while our net interest income is slightly lower than previously forecast, driven primarily by a smaller balance sheet, it is more than offset by slightly higher non-interest income and lower non-interest expenses. Our EPS guidance for 26 and 27 remain unchanged. Slide 10 is another look at our strengthened capital position. Our CT1 ratio increased over 280 basis points over the past year to 11.9% due to the strategic actions taken in 2024. This capital will be redeployed into growing our C&I and consumer businesses as we look to create a diversified balance sheet. Slide 11 is an overview of our quarter-over-quarter deposit growth. While our overall deposits decreased approximately $7 billion, largely due to the sale of the mortgage servicing business, we saw strong growth in our retail channel of $900 million and in the private bank of $500 million. The sale of the mortgage servicing business has also allowed us to reduce the amount of higher cost escrow deposits. Approximately $4.5 billion of these deposits have left the bank and we expect the remaining billion to one and a quarter billion to have fully run off by the middle of the first quarter. I would also point out that cycle to date, our deposit data has been running over 45%. To put this into context, we deliberately lagged on the first 50 basis point rate cut in September, but for the November and December rate cuts, we were within or above our targeted beta range of 55% to 60%. If we turn to slide 12, we had another strong quarter for commercial real estate payoffs, all of which were apart. During the quarter, we saw $916 million of multifamily and CRE payoffs, of which $440 million, or 48%, were categorized as substandard. This has continued the trend of plus minus a billion par payoffs per quarter over the last three quarters. On the lower part of this slide, you can see the success we've made today on reducing our CRE concentration. On a spot basis, total CRE balances excluding owner occupied CRE are down 4.7 billion or 9% year over year. Also, if you look at our CRE concentration ratio, It declined to 443% from 501%. These declines are testament to how proactive we've been in managing down our CRE exposure. Slide 13 is a breakout of our loan portfolio and our priorities for 2025. In 2025, we will continue to reduce overall CRE exposure through a combination of payoffs and loan sales. grow the C&I businesses, and grow the residential mortgage portfolio, leveraging our bank, branch, and private client customers, together with our full suite of mortgage products. During the quarter, we sold approximately $244 million of non-accrual CRE assets, including our largest office credit, and moved a further $266 million to available for sale. which we expect to close sometime during the first quarter. We also sold 42 million of non-performing one-to-four family loans during Q4. We will continue to be opportunistic and explore all options, including loan sales, as it relates to reducing our CRE exposure and non-performing loans, and will execute on transactions that are in the best economic interest of Flagstaff. The next slide provides an overview of our multifamily portfolio. As you can see, we have reduced this portfolio by 3.2 billion, or 9%, in 2024 through payoffs, sales, and charge-offs, having charged off over $300 million last year. Our allowance coverage at 1231, excluding co-op loans, stood at 1.9%, the highest relative to other multifamily-focused lenders in the Northeast. During 2024, 3 billion of multifamily loans have reset, and as of January 22nd, 41% or 1.2 billion have paid off. The remaining 1.8 billion repriced per the contractual terms of the loan agreement, and 1.5 billion of those loan resets are current. In other words, 90% of multifamily loans resetting in 2024 have either paid off or have repriced and are current, another indicator that borrowers are standing behind their properties. As we look forward, we have approximately $5 billion of multifamily loans either resetting and maturing in 2025, another $5 billion in 2026, and almost $9 billion in 2027. Slide 15 provides an overview of the office portfolio. we have been very proactive in managing this portfolio reflected by a 900 million or 27% decline in the portfolio during the year, which now represents 2.5 billion or 3.6% of total loans. As with the multifamily portfolio, we've done this through a combination of payoffs, loan sales, and charge-offs of 368 million. Our allowance coverage at 1231 excluding owner-occupied CRE increased to 7% among the highest compared to our regional bank peers. During the quarter, we sold our largest office exposure. Slide 16 provides our allowance by loan category. There are three points I'd like to make. First, both our total allowance for loan losses coverage ratio and our total ACL coverage including unfunded commitments, decreased slightly but remain at very strong levels. The decrease was driven by lower loan balances. Second, our coverage on those asset classes perceived to have more risk, rent-regulated multifamily and office, increased during the quarter. And third, during 2024, we took significant charge-offs on the portfolio, totaling nearly $900 million. This, along with our allowance and our strong capital position, provides a significant cushion to absorb any future losses. Next, on slide 17, we provide some additional color around our asset quality trends. Our non-accrual loans increased $101 million, or 4%, to $2.6 billion. However, it is important to note that 56% of our non-accrual loans are current and performing. We have been proactively working to identify problem loans and put them on a path to resolution. As I mentioned earlier, we moved approximately $266 million net of $20 million in charge-offs to held for sale. Also during the quarter, we saw a linked quarter increase in delinquencies primarily in the multifamily portfolio. This was largely due to one borrower, and as of January 22nd, 541 million of the loans were brought current. Finally, slide 18 depicts our liquidity profile. Overall, our liquidity remains strong due to continued growth in core deposits. We have approximately 32 billion of total liquidity which represents almost 250% of uninsured deposits. During the quarter, we utilized excess cash to pay down high-cost borrowings, including wholesale borrowings and broker CDs, which improved our funding profile. In conclusion, we're very pleased with what we've accomplished in a short period of time and feel as if we've laid the foundations and are on track to deliver significant value to our shareholders over the next 24 months. Joseph, I'll turn the call back to you.

Great.

Thank you very much, Lee, and thank you for sharing that positive news. We as an organization and a board and all our employees across the company have worked very hard over the last 12 months to right-size this organization and position it for successful growth. One final slide before turning your questions on slide 19, we show Flagstar's investment profile. I believe most of you are aware we currently trade at a discount of our tangible book value is roughly between 55 and 60%. This compares to 184% for our category four banks and about 166% for our regional banks. So we believe this valuation gap should narrow over time as our profitability outlet continues to improve We show that we are successfully executing on our turnaround strategy and our credit quality continues to improve. And then finally, I would like to thank each of our teammates for their dedication and determination and their commitment to our customers as we start to move forward with our 2025 through 2027 strategic plan that the board approved in December. It's a high focus on profitability, being a customer-centric organization, and building out the risk infrastructure within the organization. And with that, operator, I'd like to be happy to turn it over for questions.

At this time, I'd like to remind everyone that in order to ask a question, press star followed by the number one on your telephone keypad. We ask that you please limit your questions to one and return to the queue for any additional questions that you might have. Our first question will come from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

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

So thanks for the question, Mark, and good morning. So as we talk about real estate impairments, it actually relates to several of our locations. There are a couple of operating centers that we are looking to consolidate that we own and move out of those into smaller facilities. There were about 20 private client retail locations that we are looking to consolidate, and they are in close proximity to other locations, so we feel we can be more efficient and not lose anything from a customer service point of view. And then there are approximately 60 retail branches, most of which we lease, that we are looking to consolidate. Again, these are close to other locations, and so we do not feel there'll be any disruption to the customer experience. And we're phasing the closure of those branches in three different phases, one of which is already underway. and then a further two phases that will occur later this year.

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

Yeah, so you're exactly right. The If you look at the flash report we put up for 2024, all the metrics were green. Other than the total book value, that was driven by increased AOCI losses as a result of interest rate movements. As we look forward into 2025 right now, we do contemplate growing the securities portfolio, but we'll obviously be dynamic in how we manage that, and we'll allocate the cash where we can generate the best returns for the organization. But we are contemplating at this moment increasing that securities portfolio as we move through 25.

Thank you.

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

Hi, good morning.

Hi, Jared.

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

So hey, Jared, thank you for the question. We feel in our ACL model, when a credit becomes non-performing, it comes out of the model. We do specific reserves against those particular loans. And so we feel pretty comfortable over the last four quarters as we've looked at those loans, got updated financials, received appraisals, that when we've executed on sales of the portfolios, we've had minor increases in some loans of charge off, we've actually had some gains on some charge off. So we feel that portfolio overall is pretty well marked. But obviously, we have strong reserves against that. And then in addition to the capital of I think really, it comes down to how can we deploy that excess capital to further grow the loans on the balance sheet. And that's really where our focus will be in 2025.

Okay. And then when we look at that guidance for NII and some of the broader guidance ranges there, what does that balance sheet growth look like? What's the expectation for either loan growth or end-of-period loans as we look out over the next, for 25 and 26?

Yes. Well, so as you look at 25, so we ended the year 24 at about $100 billion. We're looking at ending 25 at around 98 billion. And so what you've got to remember is we will continue to run down the CRE and multifamily portfolios and redeploy that into C&I growth. We do have some excess cash at the moment, and we do imagine that we'll continue to pay off or down broker deposit And so that's why you see that slight reduction of about $2 billion. And it's why the interest income is slightly lower than previously forecast, but the NIM is staying pretty constant. And then when you look forward to 2026, we imagine a balance sheet at the end of the year around $104, $105 billion.

Great. Thank you.

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

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

Yeah, I think we're comfortable where it sits today. You know, obviously, we've started to adjunct the resources in that organization. I mean, we feel pretty comfortable where the team is, where the locations are, and our ability, you know, as we're growing the CNI business, it's a natural extension for the private bankers to be able to interact and solicit, you know, the executives and owners of those companies. So I think in tandem, you know, a little bit different is we do have private banking and CNI under Rich Ruffetto's leadership, and the reason for that is my experience as kind of a longtime CNI banker, the more integrated we can have the personal bankers with the commercial bankers, that will result in a more harmonious relationship and get larger share of wallet of both the individual and the corporate relationship.

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

Yeah, there is, yes. We are anticipating core deposit growth coming from the consumer bank and the private bank. And that will, as we pay down broker deposits, and we also, as I mentioned in my prepared remarks, expect another billion to a billion and a quarter of mortgage escrow to run off in the first quarter as the final loans drop. that were sold as part of the mortgage transaction in Q4 are transferred off the platform.

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

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

Nope, makes sense. Thanks again.

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

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

Tad Piper- As soon as a couple you know as as we've been here now roughly nine months and have the ability to kind of really look at the characteristics of the portfolio. Tad Piper- You know, a couple points that I think are important is one is the payoffs that we had during the year we're slightly below $3.5 billion. And of that $3.5 billion, $1.3 billion of it was substandard or rated 8 credits, so roughly 38%. So our pattern is, as those loans are coming up and borrowers want to do with it, that we're getting out at 100 cents on the dollar. And so that is probably... initially we expected based upon just the properties that perhaps that would not be the outcome, but it has been and that trend should continue. And then Lee referenced the resets for interest rates. And we had roughly $3.5 billion of interest rate resets in 24. We have roughly about $4.9 billion of resets in 2025. And the performance in the resets has been Pretty extraordinary. You know, $1.4 billion of that paid off, leaving $2.1 billion, and 90% of that is current. So what we're finding is that the borrowers of the type of relationships we have, many times these are long-term assets in their family that required multi-generations of go. And so they have a high desire to retain these properties. And so those are kind of two data points The third data point would be, as I think, you know, as we've shared on previous calls, we're constantly looking 18 months ahead of kind of what's rolling down the path, so to speak, in the price resets or maturities. We're looking at the current financials and then kind of projecting out like what the debt service coverage is on those loans. So while it does have impacts and, you know, obviously if interest rates rise significantly, But really over the 18 months, we feel pretty comfortable. We understand the risk in the portfolio. In addition to that, we've done kind of a challenger model where we've looked at those loans that are in the entire portfolio and the impact of debt yields. And quite frankly, we feel pretty comfortable that the risk is well contained in the book of business.

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

It really comes down to the performance of the individual property. We look at each individual property with annual financial statements. I think we shared last year we got virtually financials on 95% of the book, and year-over-year net income was roughly around 6%. So we'll begin to receive the 2024 financials here in the next 60 to 90 days, and then we'll do an individual property look. And so it really depends on the NOIs, you know, where do the NOIs go on the respective properties and then their relationship to, you know, where the current interest rates. So it's a bit of a moving thing. Obviously, you know, just intuitively, if interest rates rise, there's going to be a higher, you know, debt service, you know, coverage with the interest. And we're mindful of that. And we do look at that, you know, if the loan matured today. and it was current interest rates with an amortization, what would that do to the debt service coverage? So we're mindful of that, and we continue to watch that and observe it. But on the other side of that, what we're finding is, hey, the payoffs at par and the resets are at such a high level that it really has exceeded our expectations.

Got it. Thank you.

Our next question comes from the line of Ibrahim Poonawalla with Bank of America. Please go ahead.

Good morning. Good morning.

Just two follow-up questions. One on capital. I'm wondering, on CT1, you're well above your targets now. My sense is your risk-weighted assets are going to continue to go down. So just remind us if there is also a tangible common equity situation or a CET1 or capital to CRE loans that you're managing too. And I guess the essence of the question is, could we see buybacks being initiated at some point? Joseph, you mentioned where the stock trades eligible to tangible book. I think buybacks will go a long way in terms of the ROTC improvement and getting TBV accretion at these levels. So I would love to hear how you're thinking about balance sheet runoff. At what point do buybacks become a realistic option for the bank?

We actually, you know, we haven't had any dialogue in the company with the board regarding, you know, capital actions at this point. And we really anticipate that we will use excess capital to be able to grow the balance sheet. That's really the focus. We think the company is very uniquely positioned now, you know, as a strong regional bank. You know, America needs a strong regional bank. That's another Category 4 bank. We see that in the CNI business because so many credits, the other regional banks are kind of tapped out in multi-bank. We're a new entrant into that space. And we're also hiring people who have long histories and track record. So I think our first actions are, it would be to expand the balance sheet and continue to grow the loan book to create earning assets.

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

James Rattling Leafs- yeah I think you know, another point that I would just make is in some of the portfolios the historical practice of the company was to take very large positions we found that in the commercial real estate book. James Rattling Leafs- Where we've managed down the size of some of the positions we've also found in a couple of the commercial banking books very large position so it's a combination of like. pulling those commitments down slightly, why we're growing the market to give better diversity to the portfolio. But I would say, you know, first of all, by hiring highly experienced people in the market generally, and they have long-term relationships, we're getting lots of opportunities that are independent of true loan growth. You know, if a company has a hundred million dollars and they want to go to 130 on their credit facilities and the two or three other banks are tapped out at their levels, we have tremendous opportunity to come in and pick that piece up and then demand non-interest income to support the lending. So that's where I think you're going to see a lot of our really accelerated growth is we just become a new interest. And, you know, obviously we've hired people who have long track records in markets who know other people in the marketplace. So we're a welcome addition to those multi-bank groups. And clearly, you know, what our whole focus is is to be a relationship bank. So we will not enter relationships where we do not have the opportunity for non-interest income. And those can range, you know, we have proficient product sets and interest rate swaps and treasury management, depository, 401k, lots of non-interest opportunities for us that, you know, we see as the opportunity to be able to get an overall return on the relationship for the bank.

And Ibrahim, just to add to what Joseph said, and he mentioned this in his prepared remarks. So if you look at the bankers, the C&I bankers that we've hired, 43 of the 65 started in Q4, so they're relatively new. And these aren't just producers, they're underwriters and credit specialists. But we originated 572 million of new commitments in the fourth quarter. 18 new relationships, and we're going into 25 with a pipeline of 460 million. So, you know, this is coming from a team that is very new, and as they get their feet under the table and we further grow and supplement that, you know, for all the reasons Joseph said, we feel very bullish about what we can do from a CNI point of view.

That was all I had to say.

Thank you.

Thank you.

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

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

Yeah, sure. So what's assuming that we did this, call it using the November guide. So there were three rate cuts assumed in 25. Obviously, now it's looking like two. But as we've done our analysis, we are neutral to ever so slightly acid sensitive. And so we don't think that it's going to have an impact on what we're projecting for the earnings in the guidance that we've provided.

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

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

Okay, thank you. Thanks, Len.

Okay, thank you.

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

Hey, good morning, everyone. Hi, Ben. So I think, conceptually, if rates, if you're assuming kind of a two to three cuts here, if you look over the next six months, I feel like funding cost reduction is a bigger driver, and then call it six to 18 months. You have back book or fixed asset repricing being a big driver. I mean, obviously, that's not just, you know, those are the kind of levers pulling more severity. Is that a fair way to think about the next 24 months or so?

You are completely right. And as we mentioned, that was driving some of the deleveraging. We are thinking about reducing brokered CDs, another billion, in the first quarter, and there's going to be another billion of escrow runoff. And then the other thing that I would say is in the first quarter, we have about $5 billion of retail CDs repricing. And those CDs that are maturing in the first quarter, they have a whack of about 5.29%. So they're automatically going to reprice into lower-cost CDs. And we've done a really nice job of retaining the CDs as they mature. What I would say the team has accomplished is CDs that are maturing, we've been retaining 75% to 80%, and then the 20% to 25% that we haven't been retaining, we've been bringing the equivalent in in new customers, so our CD balances have remained pretty flat. But your thesis is the right way to think about it for all those reasons.

Gotcha. Okay. And when you said, sorry, in the actual press release, you had a pretty substantial link quarter increase in 30- to 90-day delinquent. And I think in your prepared remarks, you said 500-plus million have since paid off before the end of the year. I just want to double-check that that was the same cohort of loans. Would you be expecting more? that early delinquency payoffs this quarter?

Or how should we think about the next two or three quarters with that kind of delinquency trend? Yeah, so $541 million paid subsequent to the year end. And a lot of that was one borrower. And so I would like to think that we will not see it going forward. But, you know... You never know. And we're just going to have to manage that. But it's sort of concentrated in one borrower. And as I say, $541 million of 56% has come current subsequent to the 1231 year end.

So if you remember, Ben, in the second quarter, that same borrower slipped past as well and then brought the loan current. And so we have the same kind of anomaly. Not ideal. Not we're not happy about it, but you know it's it's an unfortunate answer. Gotcha OK, so it seems that clearly just for clarity that that loan we don't expect to pay off or those loans we don't expect to pay off. That's a relationship. It just bounces into the past due and then comes current.

Jackson any color? I mean properties that just out of curiosity. If you're willing to give that info.

We can get that for you. I'd be guessing it's more than, it's more than 20. Yeah. Gotcha. Okay. Okay. I appreciate it.

I'll follow up after post the call.

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

Hi, guys. Good morning. Good morning, Bernard. Just on the updated forecast, the few changes from last quarter, I know 65 expenses were lowered by $100 million. In general, there's a reduction in net interest income, you noted, during the smaller balance sheet, and the increase in fee income. Could you just provide some color on just what the lower 25 expenses are coming from and what's driving the higher fee income than previously modeled?

Yeah, so the non-interest expense reduction is everything that I mentioned in the prepared remarks. So we're doing a lot from a cost optimization point of view, and it's tied to compensation and benefits reduction. real estate consolidation and optimization, reducing vendor costs, and then improving processes. And so that's having a big impact. And then the deleveraging that we did had a significant impact on our FDIC expenses that are down $24 million quarter over quarter, and that obviously carries through into 2025 as well. So that was part of what we factored into the deleveraging. And so that's what's driving the reduced expenses in 2025 versus what you saw in October. The fee income is up only ever so slightly in 2025, and it's sort of driven by several categories. I think we feel we can do better from a mortgage fee income gain on sale point of view, deposit fees as we continue to grow, core deposits. I think we can do more from a treasury management fee point of view. And I think there's some fees in certain areas of the bank that we can do a better job of collecting that we've probably been a little generous historically at waiving. And that's as a combination what's driving the improvement in fees in 2025. As we move forward into 26 and 27, you've seen a bigger increase in fees and that really will be driven by more fees coming from treasury management. I think as we do more deals from a C&I point of view and we're leading deals, you'll see us get the agent fees. And then again, you know, I think we feel we can do more from a mortgage gain on sale point of view and a deposit fee point of view as well.

And Ben, the other, Bernard, the other point I would make is the overall staffing in the company is gone from roughly 9,000 down to 6,000 people, which includes roughly $1,100 out of the mortgage. But as we shared with you, we've really taken a close look at the cost structure within the company, and really from top to bottom, and really looked at taking the cost out of the organization down to the core mission. And then on the fee income side, you know, clearly the C&I business is really where you can get lead left arrangements. You get the treasury management. We just won yesterday a lead left relationship where we're going to be the syndicate bank. And I think most people realize that really Rich Raffetto, he's been in that business for many, many years. That's where I grew up in the banking business. So that has a real power booster, so to speak, as you get into that space and use your balance sheet to be able to be the lead left is where you get substantial amounts of the non-interest income and then the syndication fees. We expect to grow that business significantly.

Okay, great. And then just a follow-up on the commercial bank effort. I know it's previously kind of mentioned on the call, but, you know, Joseph, you mentioned the addition of the 30 hires in 3Q and 24 in 4Q. looking to add another 100, commercial bankers at 25. Obviously, the recent hires already bringing in production and building up the pipeline. Noli, you noted the recent hires have been a mixture of producers and underwriters. So I'm just wondering, can you elaborate on expectations on just the ramp up on production efforts? Does it generally take 12 to 18 months from time of new hire on average, given a mix of seasoned and mid-senior bankers? Just any color you can provide here, just so we understand, given the mix of seniority and composition of the hires?

Yeah, our model has expectations of starting to close transactions 90 days after their arrival. You may have that expectation where I was with junior people, but these are highly experienced senior people. So they are able to step back into relationships that they had. So we have high expectations for quick production by hiring the seasoned people. And just for the record, most of these people we have worked with at one time or another. So Rich has been in this business for 35 years. I've been in this business for 35 years. People know us. They know our reputations and our success. And similar to One West Bank, if you recall, when we went to One West Bank, we did not have any CNI portfolio. We added a substantial amount of portfolio Ben Speggen, Bankers to to that company as well and significantly grew in a short period of time to see and I business so so it's a little bit of a replay here. Ben Speggen, Now we're ahead of the game in some regards, because you know when we got to one West Bank, we didn't even have a boarding system for commercial loans, nor cash management, nor. Ben Speggen, industry derivatives here, we have the platforms of those we may want to enhance some of those but those products are here that we can launch off.

James Meeker, Okay, great thanks for taking my questions yep.

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

Good morning. Hi, Steve. Maybe just starting on the NII guide here, just kind of curious, what kind of deposit data are you guys assuming? And then also, you know, curious where you expect non-trust bearing deposits to stabilize?

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

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

I think the non-interest bearing, they should probably stay fairly consistent with where they are now. Now, what I will tell you about the non-interest bearing, there's a little bit of an anomaly because I mentioned that the non-interest there was about $4 billion of subservice escrow deposits that were categorized as non-interest bearing. And the reason for that is we were paying SOFR on those to the subservicing customers that we were subservicing their loans for. But, and this is a quirk of GAAP, that interest expense was deducted from the fees that we were getting from subservicing the loans So it actually showed up in the non-interest income section of the P&L. It did not show up, as you might expect with deposits, in the interest income section. And so the runoff that you've seen is really related to those deposits. And I would expect those deposits to remain relatively constant from where we are now.

Okay. Appreciate that. And then just Justin Cappos- On credit here just kind of curious where did, especially mentioned substandard loans end up for the quarter and, just as you guys mentioned on you know the upcoming maturities here in 2526 and 27. Justin Cappos- curious if any one of those vintages is more aggressively underwritten versus the others, or they you know consistent across the board.

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

My comment on the underwriting is, you know, as a general rule, these loans were underwritten within market, and market being, you know, 125 to 130 debt service coverage at the time and 75% kind of loan to value. And really what's toppled this over is, you know, the dramatic rise in interest rates. A lot of these loans are resetting from 3.5% to 6.5% or 7%. And then narrowing into the rent regulated, you just have some of the legislative actions, which is restricting growth in the NOI. So as I look at it, I wouldn't point to 18 or 19 or 20 being significantly different in the underwriting and the impact, but we can do some work on that and get back to you specifically on default rates. But if you really think about it, it's really the doubling of interest rates that the borrower is paying on the debt.

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

You're welcome.

Thanks, Steve.

Our next question comes from the line of Anthony Elion with JP Morgan. Please go ahead.

Hi, everyone. Lee, I had a follow-up morning. I had a follow-up on your updated forecast. For 2025 provision expense, your outlook was unchanged, but 4Q provision came in a little bit lower than forecast. Although I see that you slightly lowered your 26 provision outlook. Could you just talk about that reduction for 2026 provision and why not lower 2025?

Yeah, look, I think we want to be sort of conservative in the way we are thinking about things. And that's why, you know, I think we felt we'll hold provision where it is in 25 and then You start to see it come down in 26 and 27, but it was really, you know, we wanted to sort of be more on the conservative side as we think about credit, and that's really what's driving the provision number.

Thank you. Then my follow-up on slide 15 on the office slide, you know that you completed your loan review for office and that the office reserve ratio increased about 100 basis points quarter over quarter. But if I recall, in the third quarter, you took down your office reserve ratio, I think about 60 basis points. Now you've taken it back up. So can you just talk about the dynamics there and what drove the increase in the office reserve sequentially? Thank you.

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

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

Thank you.

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

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

Thanks. Good morning. We had just kind of answered my question, I think, but can you talk a little bit more about the general process to determine reserve adequacy? I'm not questioning the level, but I'm just curious the overall reserve level came down and I'm just, you know, thinking, is that a message that the worst is over or not?

We obviously go through a very, very detailed process. Obviously, there's models. We look at it quantitatively, qualitatively, You know, we break it down by asset class, by loan type. So there's a very, very detailed process and modeling that goes into it. I think what I would say, as you think about the reduction, the health investment portfolio has reduced $3.8 billion in the quarter. We took $223 million of charge-offs in Q4, and we've taken $900 million of charge-offs in the full year. So, you know, if you look at the reserve and you add that $900 million of charge-offs, that's sort of a lot of protection that we've built. And then, as I said, even though there's an overall decline, the coverage ratio on the riskier or perceived riskier asset classes increased for rent-regulated and CRE office. And the final other thing that I would just mention is, you know, we're getting more and more appraisals coming back. And those appraisals, you know, are not coming back as punitive as we may be thought. And so it's a combination of all of those factors. It's such a complicated and sophisticated model. You can't point to sort of one thing only. But when you look at all of those things that are just described together, that's really what's driving it.

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

You know, it kind of breaks down existing clients who have lived, you know, especially if you're a signature bank customer and you kind of went through the signature bank event and then disruptions we had in March. They want to have a much more technical discussion around the bank's capital and liquidity and Lee and I, in addition to hosting this call, we also now have a customer call that we hold for all the customers of the private and CNI bank that, you know, so we've kind of starting in quarter one, really have done a lot of outreach where they can ask us questions and we have dialogue with the customer. On the new customers, not so much. They, you know, again, I go back to it's a little bit about reputational. But, you know, when we can show, you know, the amount of liquidity on the balance sheet and the capital levels and where our focus is, we get a lot less discussions, you know, about the bank in the marketplace. Okay, thank you. Yep.

Our final question comes from the line of Matthew Brees with Stevens. Please go ahead.

Hey, good morning. Lee, you've mentioned a couple times on this call the excess cash position of the balance sheet. Where do you envision working that down to as either dollar wise or percentage of assets by year end 25? And is that a good level to run within 26 and beyond?

Yeah, I think we the way I would think about it is because obviously cash is dynamic. I think I've sort of given you some of the. guidance previously. So I think we believe we'll pay down another $3 billion of broker deposits during the year. We're going to have a billion of escrows that are coming out this quarter. Now, we do feel that we can grow our core deposits. So, I mean, look, I think the cash position, net-net, probably comes down another $3 or $4 billion from where we are today. But again, that's what we're projecting, and we'll manage that dynamically depending on what we're seeing in the market. But that's how I would think about it. And the other sort of piece to the jigsaw that I gave to everybody was, look, the balance sheet is probably going to come down another $2 billion. And so, you know, you're going to have some additional asset runoff as well. And we'll use that cash appropriately. But I think if you sort of imagine a $3, $4 billion reduction, that would be the right way to think about it. And some of that will be moved into securities. You know, like I said, we do think that we'll grow our securities portfolio as well.

Great. And then my second one was, With the commercial real estate multifamily book fully reviewed, should we read into anything as it relates to where we are in terms of non-accrual levels? Have we peaked or near peaked? And could you give us some sense for charge-off expectations in 2025? Certainly 2024 was elevated. Can we start to see that decline from here? Thank you.

So on the substandard non-accrual in the fourth quarter, we ended roughly substandard at about $8.7 billion, and the non-accruals at $2.5 billion. Yeah, and it's our expectations that the non-accruals will, at a point in time at the end of the year, be down 30%, and that the substandard will be down 10%. So we do see that those numbers will decline significantly. is what our current forecast is. And then as far as charge-offs, Lee, do you have those numbers? I think it's the charge-offs for 2025.

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

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

Well, you know, first of all, there are, you know, current criteria for enhanced standards for a Category 4 bank. You know, I think there's been a lot of dialogue is the $100 billion the right number is 250, and I think that'll, have to be determined based upon who the new comptroller is. But our really goal is that we will remain as a category four bank and we're building the right infrastructure and credit processes and risk governance framework to be able to be a category four bank because as we start to become profitable and grow, we want to be attuned to that so we don't have any growth restrictions. We don't have any growth restrictions today, but, you know, we just think it's better. We brought in, you know, enormous talent, you know, from the OCC to help us do that. And so we're kind of mindset on building our risk governance framework to be able to be a category four bank. And we're well on our way to accomplishing that goal.

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

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

Joseph Auding, Hey, great. Thank you very much for all the questions. Um, uh, uh, in a short period of time, uh, it's amazing how quick you guys get to the bottom line and understand these numbers. And, and I think you were spot on, on kind of the observations. Um, you know, we want to thank you again for taking the time, you know, for joining us and your interest in Flagstar. I look forward to speaking and meeting with many of you in the weeks to come. Lee and I are available through SAL if you want to arrange one-on-one calls and meetings, we're happy to do that. We're really excited about our story and the direction and the work that we've accomplished in 2024 and really look forward to delivering now in 2025 for all of you, our investors, our employees, and our customers. So thank you very much.

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