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 Flag Star Financial first quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background in a ways. After the speakers remarks there will be a question and answer session. If you would like to ask a question during this 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. Welcome to Flag Star Financial's first quarter 2025 earnings call. This morning our chairman, president and CEO Joseph Otting, along with the company's senior executive vice president and chief financial officer Lee Smith will discuss our first quarter results and outlook. During this call we will be referring to our earnings presentation which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the investor relations section of our company website at IR at flagstar.com. Also before we begin I'd like to remind everyone that certain comments made today by the management team of Flag Star Financial may include forward looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward looking statements we may make are subject to the safe harbor rules. Please review the forward looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. Also when discussing our results we will reference certain non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. And with that now I would like to turn the call over to Mr. Otting. Joseph?

Thank you Sal and good morning everyone and welcome to our first quarter earnings call. We are very pleased with this quarter's operating performance and financial results as we continue to make significant progress on our journey to profitability, executing on our strategic plan and transferring the company to a strong performing regional bank. We executed on critical cost takeouts, credit management, CNI growth and risk governance during the quarter and really aligned with our overall pattern that we laid out for all of you in early 2024. Our first quarter adjusted net loss available to common shareholders was 23 cents per diluted share compared to a consensus of 27 cents per diluted share. This was also 17 cents better than what we reported in the fourth quarter. In addition to our improved financial results I'm also excited with the progress that we are making in building out our commercial lending business where we continue to add talented bankers. These new hires now are generating strong origination volumes which I will detail for you shortly. Also during the quarter we announced the hiring of Mark Pizzee to lead our private bank and wealth management business. Mark's extensive expertise at various large regional and international banks will help us drive our continued growth in these two core businesses and we're really excited because Mark is going to be a great leader. He's already brought focus to those businesses and we look to add additional talent as we move forward as he executes on his business model. In addition we rounded out some key product offerings in the CNI including an interest only jumbo AMR mortgage with a low loan to value aimed at our high network clients and a subscription loan product. We feel now that we have the appropriate product set in place to grow market share in the high net worth space. Turning to slide three of our presentation, in 2024 we successfully built capital, improved liquidity and enhanced the credit quality of our commercial real estate and multifamily portfolios. In 2025 our focus is on the following four areas. Improving our earnings profile through margin expansion as our cost of funds decreases moderating credit cost and cost reductions. Lee will discuss these and outline these later on a couple slides. And we'll continue to execute on our CNI and private bank growth initiatives and then proactively manage the CRE portfolio including reducing our CRE concentration which you'll also see in a couple slides. We've continued to do that virtually since we've arrived and we continue to see that as we kind of move through the remainder of 25 and 26. And then we also see normalizing credit. I will note that both net charge odds and the loan loss provision in the first quarter each declined by almost 50% on a quarter over quarter basis. I'd like to spend the next few slides discussing the build out and increasing momentum in our CNI business which we've consistently communicated as one of our key targets is to diversify the balance sheet away from being a CRA driven balance sheet to one where we focus on consumer, CNI and commercial real estate going forward. We've continued to add talent in the CNI business. We hired another 15 bankers during the first quarter and tend to hire another 80 to 90 during the remainder of the year. These additional hires are already factored into our forecast will not impact our cost savings initiatives. Early returns from the bankers we hired in 2024 are impressive especially in our two main focus areas which are corporate and regional commercial banking and our specialized industry verticals. Overall we had over a billion dollars of CNI loan commitments in the quarter with 769 million in originations up over 40% versus the fourth quarter. Our CNI pipeline currently stands at 870 million up over two times compared to the fourth quarter. Our expansion strategy in this is two-folds. Our corporate and regional commercial banking business is focused on relationship lending in and around our branch footprint to ensure we can maximize our middle market and corporate banking lending opportunities in our backyard specifically where we have flag star brand recognition. And then the second is our specialized industry business is a national model and focuses on several industry verticals including sports and entertainment, energy and energy renewables, franchise finance, healthcare and lender finance. Slide five depicts the momentum we have in these two areas over the last several quarters. And if you recall we really with Rich Raffetto's hiring in June of 2024 began to organize ourselves and began to recruit talent into that space. But as you can see on slide five, importantly in our two areas of forecast originations increased over 70% to 449 million on a link quarter basis while commitments rose 40% to $656 million. So we're really excited about that and it really shows as we've talked to people about growing out our CNI opportunities in the marketplace that those are really starting to come through as we forecast it. On slide six in addition to the sale of the mortgage warehouse business we opted to strategically reduce our exposure to several non-core non-relationship based CNI borrowers. As a result over the past several quarters the runoff in these portfolios has masked the progress we are making in growing our new focus areas. As you can see in the upper left of this slide on page six while overall CNI loans declined again this quarter corporate, regional, commercial banking and specialized interest loans increased to 147 million up .4% compared to the fourth quarter. Runoff is now evaded in the CNI portfolios and combined with continued momentum in our focus area we feel comfortable that the overall CNI portfolio will begin to net grow in the second quarter. With that I will turn it over to Lee and allow Lee to kind of walk you through some of our financial data.

Thank you Joseph and good morning everyone. We're very pleased with the continued progress of our turnaround strategy to transform Flagstar into a top performing well diversified relationship driven regional bank. From a fundamental point of view our CET1 capital ratio remains right around 12%. One of the strongest in the industry for regional banks. We further improved our liquidity profile as we continue to reduce brokered deposits and FHLB advances and the results of our cost optimization efforts are on full display as our non-interest expenses excluding one-time charges, merger expenses and intangible amortization declined 71 million quarter over quarter putting us on track to achieve that full 2025 forecasted run rate. We continue to see significant payoffs in our commercial real estate portfolio and we closed on the two non-accrual loan sales that had been moved to available for sale during the fourth quarter with a combined book value of 290 million resulting in a small gain of 9 million on these loan sales. We will continue to explore all options as it relates to reducing our multifamily and commercial real estate portfolios and non-performing loans and will execute on what is in the best economic interest of the bank. Joseph already touched on the momentum in the CNI business but let me add that our goal is to originate one plus billion of CNI loans per quarter and believe the first quarter trends prove we're on track to do this. Moreover, this growth is at market spreads which together with the expected multifamily resets and maturities will drive margin expansion over the next three years. We paid off approximately 1.9 billion of broker deposits during the quarter with a weighted average cost of 5% and 250 million of flood advances with a weighted average cost of approximately 4.5%. The last 1.4 billion of our high cost savings promos with a weighted average cost of .2% mature during the first quarter and we had 5 billion of retail CD maturities at a weighted average cost of almost 5%. Overall, our weighted average cost of deposits declined 34 basis points in Q1 versus Q4. Looking ahead, a further 4.9 billion of retail CDs will mature in the second quarter with a weighted average cost of 4.80%. We continue to actively manage our deposit costs and will further deleverage the balance sheet in 2025 by paying down more broker deposits and FHLB advances. Over the next three quarters, we expect to reduce our broker deposits by an additional 3 billion and our FHLB advances by another 1 billion. On the asset quality front, our criticized assets declined quarter over quarter while allowance for credit losses and reserve coverage remained stable due to lower health for investment loan balances and better appraisal values. The increase in 30 to 89-day delinquencies were driven by one borrower who pays subsequent to month end and has done so again, meaning that 414 million of delinquent loans as of March 31st are current as of April 23rd. We also moved one significant borrower to non-accrual status during the quarter. Their portfolio is approximately 563 million and 90 properties. We are pursuing all legal and contractual remedies against this borrower. Turning to slide seven, as you read in our earnings release, our first quarter loss narrowed significantly compared to the previous quarter and as Joseph mentioned, it was ahead of consensus estimates. On a gap basis, we reported a net loss available to common stockholders of 26 cents per diluted share and on an adjusted basis, we reported a net loss available to common stockholders of 23 cents per diluted share versus 40 cents in the fourth quarter after adjusting for the following items in Q1. Five million in trailing costs from the sale of the mortgage servicing and third-party origination business. Six million in accelerated lease costs related to branch closures and eight million of merger related expenses. Moreover, our adjusted pre-provision, pre-tax net revenue for the quarter was a negative 23 million, also much improved compared to the previous quarter as we aim to return the bank to profitability by the fourth quarter 2025. On slide eight, you can see the tremendous strides we've made in strengthening our balance sheet over the past five quarters. We have increased capital by nearly 300 basis points, improved our reserve coverage by almost 60 basis points, significantly enhanced our liquidity position and we enhanced our funding profile by reducing our reliance on higher cost wholesale borrowings. This last item also helps us reduce our FDIC expenses. We now have a more fortified balance sheet that will better support our diversification strategy as we move forward. Slide nine provides our updated three-year forecast through 2027. We slightly lowered our 2025 net interest income forecast and increased our forecast for fee These largely offset resulting in no change to our 2025 earnings per share. Fiscal years 2026 and 2027 remain unchanged. Slide 10 shows our NIM trends and as you can see the margin is stabilized over the past two quarters. The NIM is expected to increase as we move forward based on a lower cost of funds as we continue to leverage the balance sheet and manage our cost of deposits lower, using excess cash to purchase investment securities, low coupon multifamily loans resetting higher or paying off at par, growth in higher yielding CNI loans and a reduction in non-accrual loan balances. I touched on our cost optimization efforts a moment ago and on slide 11 you can see the significant progress we've made in reducing our expense base. Our cost reduction efforts are focused on the following five areas. Compensation and benefits, real estate optimization, vendor costs, outsourcing offshoring non-strategic back office functions and processes and FDIC expenses. We've reduced non-interest expenses 71 million quarter over quarter on an adjusted basis and are on track to reduce expenses by over 600 million year over year and achieve our non-interest expense forecast for 2025. It is important to note that our cost savings goal is net of growth in other areas including our CNI businesses and investment in our risk compliance and technology infrastructure. Turning now to slide 12 which shows the growth and strength of our capital position. At just under 12% our CET1 capital ratio is top quartile among our peer group. Our priority is to redeploy this capital into growing our CNI business as we diversify our balance sheet. The next slide is our deposit overview. Our deposits decreased approximately 2 billion driven by the previous year. Pay off of 1.9 billion in brokered deposits consistent with management strategy to reduce our reliance on wholesale funding. Moving to slide 14 the first quarter was another strong quarter for payoffs in the CRE portfolio which totaled 840 million. 673 million or 80% of these were in the multifamily portfolio and importantly 59% of the payoffs were rated substandard. These payoffs are driving a significant reduction in our CRE balances and in the CRE concentration ratio. Since year end 2023 CRE balances are down 5.7 billion or 12% to 42 billion while the CRE concentration ratio is down 62 percentage points to 439% compared to 501% at year end 2023. Slide 15 provides an overview of the multifamily portfolio. This portfolio has declined 3.3 billion or 9% year over year. In addition to the payoffs this portfolio has been reduced through loan sales and charge-offs. We maintain a strong reserve coverage on this portfolio of 1.82%, the highest relative to other family focused banks in the northeast. Furthermore the reserve coverage on multifamily loans where more than 50% of the units are regulated is 2.82%. Earlier I stated that one driver to our margin expansion is the resetting of our multifamily loans. We have about 18 billion of multifamily loans either resetting or maturing through the remainder of 2025 and end of 2027 with a weighted average coupon of less than 3.8%. If these loans pay off we will reinvest the proceeds and capital into C&I growth or pay down wholesale borrowings. If they reset the contractual reset is at least .5% which gives us an immediate NIMB benefit. Going back to January 1st 2024 approximately 3.4 billion of multifamily loans have reset. Over 90% of these loans have either paid off at par or reset and are current excluding the one borrower we moved to not accrual. Slide 16 provides an overview of the office portfolio. We have reduced our office exposure by approximately 800 million or 25% over the past five quarters and we will continue to actively manage this portfolio lower throughout the course of the year. Our office allowance coverage at March 31st stood at .68% and remains among the highs compared to our regional bank peers. The next slide details our allowance for credit losses by loan category. Of note our total ACL coverage including unfunded commitments of .82% was relatively unchanged compared to the previous quarter due to lower loan balances, charge-offs and the receipt of additional appraisals. On slide 18 we provide additional details around our credit quality trends. Criticised loans declined almost 900 million or 6% on a -over-quarter basis to 14 billion. Additionally net charge-offs declined 48% to 115 million compared to the previous quarter reflecting further normalisation of credit costs. As I mentioned earlier one borrower relationship totalling 563 million became non-accrual during the quarter which accounted for almost all of the increase in non-accruals. Excluding this non-accrual loans including help the sale would have declined modestly compared to last quarter. Finally slide 19 depicts our liquidity position as a quarter end. Overall our liquidity remains strong totalling 30 billion representing 231% of uninsured deposits. During the quarter we use that cash position to pay down brokered deposits, wholesale borrowings and to purchase investment securities. In conclusion we're executing on our turnaround and strategic plan to return Flagstar to profitability and make us one of the best performing regional banks in the country. I will now turn the call back to Joseph.

Okay thank you very much Lee and before we go to questions I'd just reference for everybody's benefit slide 20. You know as we started this journey with all of you when we arrived virtually a year ago and started to talk about like the components that need to be you know that we we needed to accomplish. We obviously needed to lower the cost, we needed to get our arms around the credit risk within the company, we needed to build a CNI franchise that could originate loans and we could move the company forward on that journey and I think where we sit today we feel very confident on the turnaround of the company and as Lee referenced we do forecast and believe that our fourth quarter will be a profitable quarter for us you know turning point in the organization's history. On slide 20 we give you a reference that compared to where the current stock price is trading and where we think it would be on a one time multiple that we do feel for our investors there is a tremendous opportunity in owning Flagstar Bank stock going forward. So with that operator I will turn it back to you and we can open it up for questions.

At this time I would 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 initial question to one and return to the queue for any additional questions that you might have. Our first question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Thank you and happy Friday. I see your guidance Joseph on page 10 of the slide deck and as it relates to the NIM but I guess I'm curious to get to a 195 to 205 NIM for the year looks like a pretty big lift from the 174 we had this quarter. So I guess I'm curious does that incorporate any rate cuts if so how many and secondly you know are the four main drivers that you reference you know what are the biggest pieces of that you know which really contributes the most to the NIM benefit?

Yeah thanks for the question. So when we put this latest forecast together we were using the forward rate curve as of March so there are two rate cuts in 2025 assumed in this and as you think of the NIM improvement going forward it is driven by the items that are noted. So you'll see our cash balances come down throughout the remainder of this year and that's the result of us. We're going to buy another two billion of securities between now and the end of the year. We're planning on reducing brokered CDs another three billion and we will pay off another billion of FHLB advances. As we've mentioned previously we've got another four billion of multi-family loans resetting in 2025. They have a coupon that is less than 3.8 percent so as they reset they're going to move into if they stay they're going to move into coupons that are at least seven and a half percent. So we get an immediate NIM benefit there and if they pay off a par we will reinvest those proceeds in growing our C&I portfolio which is based off a SOFA spread so that is improving the NIM position as well. We're also going to manage the cost of our and continue to manage the cost of our deposits lower like we have in the first quarter. We've managed interest bearing deposits down 34 basis points versus Q4 and we're going to continue to do that as we move throughout not just 25 but beyond as well. We've got 4.9 billion of retail CDs maturing in the second quarter. They've got a weighted average cost of 4.8 percent and then as I mentioned we're planning on reducing our non-accrual loans and that will be additive to NIM as well.

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

Yeah so here's what I would say we're not going to get into the specifics around the relationship but what I would tell you is when we looked at this this loan had the ability to pay. The LTVs and all the other metrics were adequate. This was a borrower who decided that he wasn't going to pay and that was a human behavioral choice but he certainly had the ability to pay. A couple of other things that I would mention is when you look at the specific impact of this on the quarter between additional reserves and charge-offs it cost us about 28 million and then in terms of NIM reversal it was about five million so this particular borrower it cost us about 33 million or seven cents just in the quarter and the other thing that I would add is we've obviously scrubbed the remaining portfolio we have done a lot of screens and we believe that this was a very unique situation this borrower he looked to gain additional leverage by pledging his equity interests and as we've done various other screens we don't see anything like this in the rest of the portfolio so we do see as being very idiosyncratic and unique.

And the thing I would add Mark is you know I think we've communicated the journey through 2024 through the whole portfolio you know we continue to in an instance like this is we do do an assessment of our current reserves and then when we move it to non-accrual you do specific reserves against the loan so what Lee was kind of referencing was that we've placed additional reserves against that loan so we feel subject to getting appraisals back in is that we're adequately reserved on that loan for any action that we would take.

I think just one other thing that I would add outside of that loan if you look at the credit trends you know charge-offs are down the provision was down and if you look at classified assets as I mentioned in the prepared remarks they were down 900 million quarter over quarter as well.

Thank you.

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

Hey good morning.

Hi Jared.

I guess when we when we look at the projected growth in commercial lending and then tie that with the the guidance for provision how should we be thinking about the the ratio of allowance as as we go forward I mean is this going to be you know at this point we're going to continue to see reserve releasing and most of the provision is going to be for that growth in the the commercial portfolios or you know whether there's still you know potential for reserves as some of those multifamily loans that get that 18-month refi window.

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

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

And just remind you Jared we we actually went through the higher portfolio in 2024 and virtually re-underwrote all the commercial real estate including the multifamily that it was mark to market you know so to speak from the standpoint of where we thought the underlying cash flows supported and the loan to value on the underlying assets.

Okay all right thanks and if I could just ask a follow-up on capital you know with the capital CT1 being sort of above that target range and then all the the you know positive steps that you've outlined with with tailwinds on margin and tailwinds on on credit what are your updated thoughts on on maybe deploying some of that capital into a buyback you know maybe around here with with the the valuation being so far below tangible book?

Yeah you know we think that as we start to capitalize and pay down the real estate the offset to that will be deploying that capital into the CNI and private bank and so I think our you know forecast at this point in time is to use that capital to expand the balance sheet. You know one thing we did do Jared is we did a combination of we shrunk the balance sheet you know between 15 and 16 billion dollars over the last 12 months and we actually think we can turn it around and go back the other way now with the balance sheet and use that excess capital for growing the franchise.

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

Hey good morning. Good morning guys. So you guys reference around a billion or so kind of aspirational run rate on CNI. I was kind of curious if you could dig into that a little bit. I know you made a 75 plus and you're going to be doing a doubling that in terms of hiring. So just kind of a low in size or segments or another pricing instead of that market rate but a billion is quite a bit more than I was expecting.

Yeah so the billion is consistent from an origination point of view. That's what we in the first quarter we originated a billion of commitments from a CNI point of view and we outlined that on page five and this is coming from the 60 bankers that we recruited in the second half of 24. We've recruited another 15 to 20 just in the first quarter of this year and we still intend to recruit another 60 or 70 throughout the remainder of this year. These bankers are very experienced. They come with a track record. They're coming from other big financial institutions and they're typically originating their first loan within the first 90 days of arriving at Flagstar and that's how you know we're seeing these numbers from a strategic point of view. We're sort of focused in two areas. On a national basis we're starting these specialty lending verticals. So you heard Joseph mention sports and entertainment but also oil and gas, renewables, energy, healthcare are just some of the other national lending verticals that we've set up. But then geographically as it relates to our footprint we're also hiring experienced bankers to better penetrate the middle market CNI areas within our footprint. So it's a twofold approach. There's the national approach from a specialty lending point of view and then there's a geographical approach leveraging our brand name in the geographies that we operate and we're thrilled obviously with what we've accomplished in the first quarter and we believe that we can maintain that and even grow it going forward. What I would tell you is we also believe Q2 will be the turning point and what I mean by that is right now even though we've been originating these new CNI loans the CNI balances have been decreasing quarter over quarter as we've sized other legacy portfolios. Starting in the second quarter you'll start to see overall CNI balances increasing. So we're sort of making that pivot and you'll see an increasing CNI loan balance Q2 and going forward. Yeah that's helpful and

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

the

range that you guys provided?

Yeah now here's what I would say on the cost reduction efforts and it's just been a tremendous effort by the entire organization. We are mostly there and then some and what I mean by that is I actually think right now that there's probably 25 to 30 million good guys from the bottom end of our range. We did not want to move our range this quarter. We obviously wanted to get another quarter under our belt but the way things are trending on the expense side I think will be what we're guiding to. In terms of things that are still in process as we mentioned last quarter there are some additional branch closures that will happen at the end of June about 23. There's some private client locations that we are emerging and exiting in early July and then there'll be some additional branch consolidation at the end of September. So obviously that's all factored into our numbers but the vast majority of what we were looking to accomplish has been accomplished or is on the agenda to be accomplished.

Ben the other thing that I would add which I think is really important is these costs are in our net of investing 40 million dollars in our risk governance infrastructure. What we're doing in the CNI group of effectively adding 120 people over a 12 month period and then we have some pretty significant IT and operational initiatives to drive costs down but at the same time we're investing in our systems to finalize the combination of the entire bank now onto one platform. So those are things that are all kind of laying the work and the foundation for that to get completed in 2025. So you know you can't you know our probably total expenses as Lee indicated probably are somewhere around seven to seven hundred and fifty million take out but we are making investments in the company in addition to taking those costs out. I would say you know we did get a lot of questions whether we were going to be able to to meet those numbers and as Lee referenced we feel really confident that not only are we going to meet those numbers but we can exceed those in 2025. That's helpful thank you.

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

Hi good morning. Lee I just wanted to follow up on your comments on CNI. How are you thinking about the utilization of those one billion and new commitments each quarter? How quickly do you expect to see balance sheet growth in CNI coming from those commitments?

Yeah so if you look at again if you look at page five of the deck so of the billion dollars seven hundred and sixty has been funded which you know it indicates a pretty high utilization rate. Will it remain at that level? Yeah hopefully but I think you know we're sort of looking at it on a more traditional basis where people will sort of leg into it a little more and it will ramp up over time but again just sort of using Q1 as an example we've sort of seen about 75-76 percent of what was originated utilized.

Yeah and our pricing model you know is pretty punitive to put commitments out that aren't being utilized so that also steers the team you know to look at transactions that meet high credit quality standards but at the same time have high utilization rates and you know one of the things you know that I would mention you know we feel really good about these growth numbers but we also have less than one percent market share in kind of CNI and so our ability to put these numbers forward you know we may go from one to percent to three percent by the end of 26 so it's not like we're gathering huge market share but there's a lot of market available for us to participate in.

Got it and then Joseph there are concerns about the economy slowing over the next 12 months. You've recently done a review and re-underwritten the entire loan book and the credit metrics continue to improve. Can you talk about how insulated Flagstar is from the concerns around tariffs and economic growth and you think credit metrics can still improve from here?

Yeah we did an analysis of the portfolio of the sectors that we thought would be impacted by tariffs and those are the obvious ones auto, construction, consumer products. We have about 2.8 billion dollars of commitments across the organization into that space and so you know it's not a big number for us and of that there's 2.3 billion dollars of loan outstandings and just slightly over half of that is in the auto space and so the auto space actually is having a pretty good quarter because people you know are kind of pre-buying automobiles so as we now get into the individual credits that are make up that you know that 2.8 billion dollars we are not seeing you know obviously it's going to take time to see the impact of this but the aggregate dollars are very minor for us number one and number two they seem to be in areas that won't have significance. The other thing that I would reference in that regard you know as we are looking at new opportunities obviously one of the things that are being looked at hard in any new credit originations today is what is the tariff impact and what could it be to a particular company and we have passed on a number of opportunities where we thought you know where somebody was manufacturing in China or Vietnam or other countries that you know this could be problematic in the future it may not be today but we've passed on a number of opportunities where we thought this needs to kind of stabilize before we would enter the opportunity so I think I think we're also in a unique position that we're not starting with a big portfolio of stuff that could be impacted and we can use that as part of our criteria in the credit underwriting. Great

thank

you.

Our next question comes from the line of Christopher Maranac with Jani please go ahead.

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

Yeah so the way we factor that into our forecast is we assume that it converts in Q4 of 2025 and so what that does is it does factor in to the earnings per share that you've seen in the forecast so that assumes that after Q4 2025 the warrants have been exercised but we have not included it in the TBV per share number because it actually because they they haven't been exercised if you see what I mean but for the purposes of the earnings per share number because we hit profitability in Q4 we assume that they are exercised and they are included the diluted impact is included in the EPS number.

Got you and is there any material change in the number of shares represented by the warrants with the figure we have on the case still be somewhat accurate?

Yeah I think so the way the way they work obviously there is a it depends where the stock is trading when they're exercised as you know there's a strike price and their net settled and so you know the dilutive impact increases as the stock price increases but overall you know they're not incredibly dilutive and what we've laid out in the K I think you know it gets you what you need from an information point of view.

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

A couple comments that I that I would add is we're right in the season where we will be getting the updated financials from the borrowers and you know last year we were in the mid 90 percent of borrowers who provided this updated financial which was up substantially from the legacy bank so we'll have a like a really good look into how 24 was here in the next 60 days and clearly be able to talk about that in the second quarter but for the most part you know what we're seeing in the market and we see through appraisals is we've seen stabilization both in the multifamily and in the office while office is really you know a relatively immaterial number to us if you think back to 24 that's really where a bunch of the big hits came as we moved out of you know some problem office credits that we had so I you know I think what I would say is right now is for the most part if you think about what Lee commented on you know the movement and the special mention of the substandard down substantially and then our charge-offs being down I think you know would lead you to indicate that we just don't have a lot of flow now into those categories from the portfolio and I think that's a result of you know what we were doing forward looking in the portfolio through 2024 that we were catching everything that was going to mature or price reset 18 months out gave us a pretty long runway to be able to look at our credit exposure and each quarter we pick up another quarter in that kind of analysis so and we just haven't seen really the deterioration at this point from new appraisals and new credits falling into that bucket so and we do you know overall we do continue to forecast that our NPAs will be down by year end and we continue to see you know reductions in our special mention and substandard

yeah I would just you know sort of echo and reiterate a couple of things Joseph mentioned I mean the charge-offs coming down up to 115 million from 222 last quarter I think is a very positive sign the appraisals are coming in better than we were when I say we're expecting certainly better than the shock analysis that we have when we don't have appraisals the of the 800 plus million of payoffs in the first quarter 59 percent we have them rated substandard I think that is another good sign and then when you look at that reduction in classified assets from 14.9 billion to 14 billion as well as those payoffs we did have 600 million of upgrades and I think that's important to know as well so as we get new information as credits continue to pay we get appraisals we're seeing upgrades as well so those are obviously all good indicators and

we we not only looked at you know the credit debt service coverage but we also factored in that analysis market rate interest rates so if they were at 3.8 we reset them at seven or seven and a half and underwrote those credits

great thank you both very much it's very helpful

okay you're welcome

our next question comes from line of Chris McGrady with KBW please go ahead

oh great good morning um Joseph or Leeds the non-accrual comment I think on the January call you said by the end of the year down 30 percent um obviously that I'm sure I didn't contemplate this quarter's move but any degree of resolution magnitude from from these levels and and secondarily the collateral on the non-accruals was that the building I assume that's the building itself but just a little bit a little

Chris you know Wiener was not factored into those numbers but we still are you know currently forecasting go from like the 3.3 billion to around 2.7 billion by by year end so we do see that those numbers will continue to decline and then your question on the collateral was that regarding the borrower that went non-accrual during the quarter

that's right yeah

those those fully collateralized predominantly by multifamily properties

okay and then my follow-up if I'm looking at slide nine the um appreciate your comments I'm basically going to overachieve the cost phase near term but if I look at the kind of a medium term cadence of the expenses there's still a pretty good lift down by 2027 and a pretty big ramp up and call it fees can you just give me a little bit more color on what's that next level of growth and next level of step down costs thanks

yeah so there were let me start with on the cost side there were actions that we've executed on that are behind us now in the first quarter that you're not seeing the full benefit of in the first quarter you'll start to see the full benefit of those actions in you know q234 so you've kind of got that phenomenon particularly around compensation and benefits I think you're going to continue to see the FDIC expense come down as we further de-leverage the balance sheet and so you saw another reduction in q1 versus q4 as the impact of what we did in q4 you got the four quarterly impact in q1 and you're going to continue to see that as we move forward here as well I mentioned that there are various real estate locations so bank branches and pcg locations that we will be combining and exiting in the second quarter and early in q3 and then some additional branches that we're combining at the end of q3 and then we've also been working on outsourcing offshoring sort of certain back office processes and functions and again some of those actions we executed on recently and so you're not seeing the full benefit of those cost reductions in the q1 actual run rate and so that will start to come through as we move through the year so that's why we feel pretty good about what we've accomplished today from a cost reduction point of view and why we feel good about where 2025 is going to come out from an overall NIE point of view and then on the fees joseph mentioned we've just launched the subscription lending product and we feel that there's a lot of pent up demand for that that's going to help us from a fee point of view we're beginning to sort of see opportunities where we're leading deals we had one recently where we were lead left to a top tier sponsor and it was a combined revolving credit facility term loan delay draw term loan and we got an upfront fee structurally free an admin agent fee and i think there's going to be more of those opportunities we've we've continued to build out our treasury management team and that's pretty much complete now and we feel pretty good about where they are and so all of those are driving the the the increase in the fee income that we adjusted for in 2025 that's

very helpful thanks thanks a lot

our next question comes from the line of ibrahim punawalla with bank of america please go ahead

good morning i just want to follow up on margin because i look at the average of the assets this and they will expect this margin to go next year that's an open five that kind of gets you to the ni that you're projecting for next year so correct me if i'm wrong it feels like the balance it still has some shrinkage to go so be that average of assets still declining hey

abram we're we're having a tough time hearing you you're kind of cutting in and out i apologize so you uh i think you're asking about the margin going forward is that is that the question you asked

and the balance i think you mentioned the balance sheet size as well abram

so sorry about that not sure if it's any better now but

it's a little better

yeah

we've lost you again

yeah abram do you want to try to come back in and see if that improves it because we we can't we can't understand the question

our next question will come from the line of kasey hair with autonomous please go ahead

thanks good morning guys can you hear me yeah here you're fine all right great so i'll ask your him's balance sheet question so i think that's what he was getting at but i think you outlined about between multifamily runoff and then paid out of borrowings and brokers about eight billion of asset headwind obviously cni is doing well and you have the ability to build the bond book just wondering where where does the balance sheet end this year when does it start net growing

yeah yeah got it good question and i'm glad you asked it so we end the year at around 96 billion so the balance sheet this is total assets with the balance sheet will be about 96 billion at the end of the year and then just to i'll give you the numbers at the end of 2026 we expect it to be around 102 billion and then and then at the end of 27 we expect it to be around 111 billion so that's that's how i would model it but but we end 25 at 96 billion okay

understood great thank you and then slide five i wanted to ask about the cni originations i hear you that i think you said you know you want to get to over a billion and you're certainly on your way there i'm wondering when you guys are fully staffed and you hire these 80 or so bankers this year what do you sit like fast forward a year where what is the cni growth when you got the full kind of team on the court

yeah so so one one clarification is we we expect to get the the loan out standings up to a billion dollars a quarter going forward and then that continues to believe has the exact numbers kind of you want to share this

yeah sure so that's exactly right with the growth as we think about that billion dollars it's really that's that's out standings rather than commitments and and i think we feel that you know by the time we are fully staffed we're we're doing about a billion and a half a quarter in out standings and and just so everybody's when we talk about hiring these bankers they're not all account managers we're bringing in credit specialists we're bringing in underwriters so that you know you're bringing in the entire team and so that's also embedded in that number of 70 to 80 of hires between now and the end of the year but ultimately we're looking to get to a billion and a half of out standings on a quarterly basis

thank you our next question comes from the line of bernard bongozicki with deutsch bank please go ahead

oh hey guys good morning uh just on succession planning um joseph you know in a recent filing it noted you'd be staying on till march 2027 and i think at a recent media article it noted that after the three years you'll be looking to move to chairman role so five years collectively could confirm exactly and how does that fit within the time frame of transforming the business

you know um really this comes down to being a board decision you know what i mean ultimately you know i clearly you know i'm committed to the company for a five-year term you know in capacity but i think from a succession planning as the board starts to look at that you know i think the role to another person and then i would stick around for a period of time if the board wants me to after that to to help lead and manage the company as well

okay got it um and then maybe just as a follow-up uh lee with the balance sheet growth numbers you gave uh obviously you're also deploying some of that excess liquidity into securities uh just any thinking about growing the securities book from here and any thoughts on the growth that you kind of gave out how much of that is like i guess loans i'm assuming in the out your word years it's more maybe in the recent uh short term it's it's a little bit more in security so could you maybe just help give a little bit of color on that

yeah that that's exactly right so um like i mentioned in remarks we're looking to buy another two billion of securities in 2025 um so that that's kind of where we're going to deploy or one of the areas that we're going to deploy the cash i think as you move into 26 and 27 it'll be all about loan growth and particularly um cni growth so that that's pivot you'll see in 26 and 27 but but in 25 and the remainder of this year yeah we're certainly looking to uh buy at least another two billion of securities with the excess cash

okay great thanks for taking my questions

you're

welcome

our next question comes from the line of matthew breeze with stevens please go ahead

hey good morning good morning um hey i was hoping we first touch on um you know cni but a different way you you'd mentioned in the release and you prepared remarks that there are some portions of the cni book that are considered non-core could you just outline for us how much in the cni book is non-core what those areas are and then remind us over the next couple of years where you want the um the cre multi-family books to be it's a proportion of total loans

yes so if you go to page six um uh clearly the first category is the specialized industry and corporate banking is where we see really this significant growth and then the specialty finance what we've really done in that uh space is our comfort level for single relationships it's very similar to what we discovered a little bit into the cre and the hold levels you know at the legacy nycb were significantly larger than what our comfort level is usually on a risk-rated five credit which is kind of down the middle you know from a credit quality 75 million hold and for a credit that's just slightly at or below investment grade we're at 100 million what was a lot in those portfolios and it was a strategy and the company was in a lot of instances they were in the 150 to 250 range of commitments and so we've narrowed and brought back our commitments in in those credits down to what are a comfort zone for us so actually in the specialty finance but it was down roughly 180 million dollars we actually see that growing from that point forward so i wouldn't say that was non-core and then the similar story if you go from the second line from the bottom the msr and abo lending is a very similar story we had very large hold levels and and we're reducing our exposures at the individual relationship level but we we did have one payoff in that space of a large relationship but the rest we do think will have stabilization kind of going forward in in that regard and then the two other in the middle middle flagstar financial leasing and flagstar public finance funding those were really five or six businesses in in that space we've kind of stopped non-relationship activities there where we were just buying paper but had no relationships with the borrowers and so we do also see those going positive in the second and the third quarter so i wouldn't call them non-core as i would say we were reducing what we thought was the risk appetite by home levels

great okay very helpful and then my last one is just a little bit of a different question but there's been a recent discussion across the banking industry around catering to the crypto industry and stablecoin and seems there's a much warmer welcome to the banks to participate in this industry again new york community once had its its toe dipped in these waters and i'm curious if you have any appetite to you know pursue that again and pursue deposit growth via those those verticals

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

i'll leave it there thank you

okay thank you very much

our next question comes from the line of anthony elion with jp morgan please go ahead

hi everyone can hear me okay yeah yeah fine good morning anthony joseph morning joseph i i know you said you're starting to receive updated financials from borrowers for 2024 but can you share with us any early reads you've seen so far and i guess what i'm really trying to get at is specifically for the 19 billion or so loans you have in rent regulated in new york are you seeing improvements or deterioration of no i

well you know um uh it's it's a little early to tell on that question because we haven't received a 24 financial yet um but you know 23 was really a rough period in in the rent regulated because you know the increases were were you know restricted occupancy is very high in those buildings generally in the 98 99 percent so it's like it's not like you're going to fill up a bunch of extra space and generate cash flow and really where they got you know impacted was on the expense you know in most instances insurance went up 30 to 40 percent you know h vac and maintenance and things like that were up 40 percent and labor was up 30 percent so i think i'm hopeful that stabilization on the expense side over the last 12 months will will be positive in the nois in that particular space so we we we do see investors uh re-entering um in in in demand for buying loans for us in that space so i think that's an indication that investors you know are starting to feel more positive about the rent regulated now and there's been some you know large projects that have gotten tax abatement you know that the legislation doesn't without you know more change in the direction i don't think we're going to see legislative changes but you have seen tools that are being used to be able to make those projects more economic by you know providing tax abatement but within an agreement that owners and investors will dedicate a certain amount back into the projects from a capex perspective

thank you and then for lee on slide 17 that walks through the allowance by loan portfolio what was the driver of increasing the reserves tied to cni office owner occupied looks like it went up by about 30 million or 40 basis points sequentially thank you

yeah yeah it was two things it was the economic forecast as we mentioned uh and it was also uh just some individual credits and and specific uh uh credit or increases around specific credit so those were the two drivers of that increase in the cni non-specialty finance line item

thank you okay thank you very much

our next question comes from the line of steve moss with raymond james please go ahead

good morning

thanks

steve

on

the on the on the cni side joseph just kind of curious here what kind spreads you're getting on the new cni loans you're originating here and if there's any deposit coming over with those relationships

yeah the spreads are ranging from like 225 to 275 uh over sulfur so they the spreads have held up pretty well in the in the cni suites even in light of a lot of competition um and then then what you generally see in those relationships are getting deposits but but most of that transitions in over a period of time but where we have seen significant opportunity results is really on the fee side um where lee mentioned we're now starting to get you know senior leadership roles in some of these credits because the people who join us had those roles at their prior institutions but you know we're very few opportunities are we willing to do where it's a credit only relationship and most of those we either are offering you know 401k or treasury management or interest rate derivative products we have a broker dealer so we can get bond economics so so our pricing model does not work very effective or where we're not getting non-interest income or deposits from a yield perspective and so now you know we're using a new pricing model in the company that will really drive people to have to get you know those those sales in addition to the credit sales on the front end

okay great that's that's really helpful and then in terms of just the funding side equation um just curious how you guys are thinking about the step down here over the course of the funding costs you know i see your cd rates are generally marketed around the fed funds rate and you have some other promotional products at a similar pace i'm like wondering you know at what point you think maybe we could feel a bit of separation between the rates you're offered and fed funds as the year goes on

yeah so the the it's just one cd rate the six month cd uh we saw an opportunity to bring in incremental deposits so that was kind of the one area that we sort of had promo rate out on we have not sort of touched the uh the one year two year or three months as i mentioned in the prepared remarks we have 4.9 billion of cds maturing in the second quarter at a weighted average cost of 4.8 percent we're going to get a natural reduction there as those mature typically as cds are maturing we're retaining about 75 80 percent of them and then making up the difference with with new cds uh coming in and then we've been actively managing um our other interest bearing accounts whether those be savings interest bearing ddas money market again i mentioned in the prepared remarks quarter over quarter interest bearing deposit costs were down 34 basis points so it's something that we have meetings weekly on this uh and and we are looking at it uh and strategizing all the time uh but we feel good about uh hitting the targets that we have in our forecast

okay great and one last one for me just in terms of the multifamily and commercial real estate books just curious you know it kind of seems like there's going to be some stabilization maybe here late this year based on the asset size of the bank you guys are projecting just kind of curious if that's a fair assumption or should we expect further runoff in those books through throughout 2026

yeah i think the the the you should expect further runoff because as we've said before we're trying to create a diversified balance sheet a third a third a third uh and it probably we probably won't quite get to a third in consumer but you know a third cni third cre and a third uh consumer and so you know what that means is we we really want to try and get that cre book which includes multifamily to you know 35 billion 30 35 billion and so you will continue to see um runoff throughout the um the three-year period as it relates to multifamily

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

okay great thank you very much i appreciate all the power okay you're welcome

our next question comes from the line of john arstrom with rbc please go ahead

thanks good morning

hi

john

hey um lee on slide 13 just kind of a follow-up what what do you think that mix looks like in a year and maybe when you get to your 2027 goals is the deposit next

yeah right so i think you uh we're obviously going to continue to pay down brokered uh deposits so you will see a reduction uh more reduction in in in brokered deposits and i think you'll see us increase um our retail uh and and private bank deposits and that's kind of how we're thinking about it we're built we're looking to build core deposits uh and and further reduce the wholesale borrowing and reliance on brokered deposits and and and flood uh advances so i think that's what you can expect and and on the deposit side you know joseph just made this point as we uh leg into these new cni relationships that's another opportunity for us to bring in core deposits uh as well and build that deep relationship with those cni customers

yeah the brokered deposits now are down two point you know we're even further in the month of april we're down i think 2.2 billion dollars year to date so

that that's

really a big opportunity for us you know to uh you know use our excess liquidity to pay that down

and it helps us from an fdic point of view

yep okay um joseph one for you kind of a call it a due diligence or check the box question but what what are you guys working on now in terms of the non-client facing activities do you feel like things are fully buttoned up from a risk and regulatory point of view or are there other you know hurdles or objectives you need to meet

you know we uh we've we've come a long way in the you know uh from the time we got here you know the company was a you know is a category four bank and neither of the legacy banks had risk governance and infrastructure along those lines to to be a bank of that size i couldn't be more pleased in the the direction and the rails that we now have built and i think from now you know to the end of really 25 and into 26 is we're going to feel very comfortable that that ourselves and our regulators are going to feel good about you know the the risk governance structure that we have kind of put in place and i think you know the technology side is going to be very helpful we're we're investing in really creating a platform you know today we're sitting here with six you know uh data centers that were never consolidated and in you know all those actions that are kind of pent up we're going to get done here in 2025 in addition to you know we're investing in an organization wide actimize we're permitting a new glib a you know platform and you know so all of that gets done this year and it's that really stuff that should have been done in 23 and then as we got our arms around them in 24 so i think i think the company really is coming a long ways in that regard and couldn't be more happy that team you know what we've been able to put together here as far as a team of really highly qualified people to execute on those

okay thank you very much appreciate it

welcome our next question comes from the line of nick holoca with ubs please go ahead

hi good morning morning maybe just a first question for for lee you know i know you and a follow-up on deposits i know you gave a lot of color on the broker deposit mix and the cd but maybe you could just touch on the nib trends that you had in the quarter and how you're thinking about that over the near term and if by chance you have it potentially the the spot rate on the interest bearing deposits or the net interest margin at the end of the quarter

yeah so i don't have the spot rate but what i would tell you in terms of the trends were the we saw we were down about 300 million in the private bank that was sort of seasonal in nature but that was offset by increases in our retail deposits or consumer bank they were up about 350 400 million and then we had a slight increase in our commercial deposits they were up about 150 200 million so by and large they sort of netted each other off the other part that netted itself out was we had the last loans transfer as a result of the mortgage sale that we executed on in being q4 of 24 so there were about $1.5 billion of mortgage escrows that left but we subsequently got an increase in what we call our snbs area which is predominantly mortgage escrows of a similar amount and that was just a build-up of t and i and other escrows that pretty much offset itself as well and so the biggest driver of the change quarter over quarter was the pay down of those broker deposits of 1.9 billion

got it thank you and then and then maybe just one follow-up on the single borrower non-accrual in the quarter you know i know you give color on like the average loan size in your multifamily book around eight and a half million on average if i was to look at uh like the loan book on like a borrower basis rather than a per loan how materially different would that be and are there do you have a substantial number of borrowers with similarly large exposures above the 500 million dollar range thank you

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

yeah and we're not referencing 12 to 24 hours over 500 million uh in size correct yeah so

yes

but but i i would also say you know these aren't like huge loans to one piece of property these are 90 loans that represent uh 500 million dollars so you can run the math on those but so there are a lot of different properties with individual loans

understood thank you for that

and i will now turn the call back over to joseph auding for any closing remarks

okay thank you very much uh very much appreciate your interest in the company we couldn't be more pleased the journey we're on we think we've made incredible progress over the last 12 months we think there'll be a significant amount of progress in 2025 we're going to look like a completely different company when we end the year as lee indicated you know all indications in our forecast and analysis is that we will return to profitability in the fourth quarter we feel our risk elements of the company are under control and we're really excited about what we can grow and develop the company into a top performing regional bank and so we look forward to continue to have dialogue with each of you you know on the journey of the company and open to any dialogue and discussions that you have and appreciate everybody getting up on a friday morning and be part of

the call this does conclude today's call thank you all for joining you may now disconnect