Flagstar Bank, N.A.

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 Black Star Bank fourth quarter 2025 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 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 Flagstar Bank's fourth 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 results for the quarter and the full year ended December 31st, 2025. During this call, we will be referring to a presentation which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the investor relations section of our company website, Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Bank may include forward-looking statements within the 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. Additionally, 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. With that, now I would like to turn the call over to Mr. Otting. Joseph, please go ahead.

Thank you, Sal. Good morning, everyone, and welcome to our fourth quarter 2025 earnings conference calls. We are pleased with the bank's performance throughout 2025, and especially during the fourth quarter. As all of you know, after two challenging years, I'm proud to share that we returned to profitability in the fourth quarter. reporting adjusted net income of 30 million or six cents per diluted share compared to a net loss of seven cents per diluted share in the previous quarter. 2025 was a year of significant momentum for the bank, which accelerated during the fourth quarter. We continue to successfully execute on our strategic plan to transform Flagstar Bank into one of the best performing regional banks in the country. one with a diversified balance sheet and revenue streams and strong capital liquidity and credit quality. While returning to profitability is a significant milestone, but it is only one of several positives during the quarter. Turning to slide three of the investor presentation, we'll highlight those. First, our return to profitability during the quarter was driven by several factors, including growth in our net interest income coupled with NIM expansion and disciplined expense management. This resulted in a $45 million increase in pre-provision net revenue and positive operating leverage of approximately 900 basis points. Second, we had another strong quarter of net C&I loan growth, up by 2% on a linked quarter basis or about 9% on an analyzed basis. Third, We continue to reduce our overall CRE exposure, mostly through par payoffs, resulting in an overall $2.3 billion reduction in multifamily and CRE loans, and a CRE concentration ratio now falling below 400. And fourth, our credit quality profile continued to improve as non-accrual loans declined, while we also had a decrease in net charge loss and the provision for loan losses. Moving to slide four, after two years of building a solid foundation for growth, we expect that in 2026, our earning power will continue to strengthen with a full year of profitability driven by continued growth in net interest income and margin expansion, along with a continued focus on managing our expenses lower, leading to a positive operating leverage in 2026. We remain focused on further improving the bank's credit profile, as we proactively manage our CRE exposure lower through par payoffs and opportunistic loan sales, reducing non-accruals, and a lower level of charge-offs. We will continue to diversify the loan portfolio through growth in non-CRE loans, especially through our C&I lending platform. And lastly, we will generate deposit growth across various business lines while keeping our discipline on pricing. On the next slide, we highlight the roadmap we employed to solidify the balance sheet and reposition the bank for growth. We build a strong capital position as our CET1 capital ratio has increased by almost 400 basis points, now ranking us amongst the highest best capitalized regional banks amongst our peers. We have also fortified our ACL through a rigorous credit review process and have increased the ACL up to 1.79% also amongst the tops of the regional banks. We significantly enhanced our liquidity position as cash and securities have increased to 25% of total assets. And we reduced our reliance on wholesale funding, lowering the cost of funds and boosting our net interest margin. And during the year, we reduced our broker deposits almost by $8 billion. We believe that our strategic initiatives over the past couple of years have provided us with the opportunity to drive sustainable growth and profitability going forward. The next two slides highlight the continued momentum and tremendous progress in our CNI business. Under Rich Raffetto's leadership, we've built in a relatively short period of time of about 15 months a very powerful origination team across America. As you see on slide six, You can see that the CNI lending had another strong quarter in commitments and originations. As total commitments increased 28% to $3 billion, while originations increased 22% to $2.1 billion. This is led by the bank's two primary strategic focus areas, our specialized industries and corporate and regional banking group. On slide seven, you'll see the overall CNI growth was 343 million or 2% compared to the third quarter. our second consecutive quarter of net C&I loan growth. This was driven by $1.5 billion in combined growth in these two businesses. One of the things that you also can observe on this slide is that we de-risked a number of the businesses, as we've talked about in the past, where either because of hold size or credit fall that we've decided to reduce those exposures or exit those credits. Alone in 2025, it was roughly about $4 billion of actions that we took And we do see the businesses of like asset base and equipment finance and mortgage starting to be accretive to our loan growth going forward. Turning now to slide eight, you can clearly see the trajectory of our adjusted EPS as we successfully executed on all our strategic initiatives, resolving in the first profitable quarter since the third quarter of 2023. With that, I now will turn it over to Lee to review our financials and credit quality.

Thank you, Joseph, and good morning, everyone. We're obviously very pleased with our performance in the fourth quarter and for the full year in 2025. We're executing on our strategic vision and have returned the bank to profitability, as we said we would do. We feel we're very much on track to make Flagstar one of the best performing regional banks in the country over the next two years. Our unadjusted pre-provisioned pre-tax net revenue improved $51 million quarter over quarter, while our adjusted pre-provisioned pre-tax net revenue improved $45 million versus Q3. We achieved NIM expansion of 14 basis points quarter over quarter after adjusting for a one-time hedge gain of approximately $20 million. We paid off another $1.7 billion of high-cost broker deposits and $1 billion of flood advances as we further reduced our funding costs and continue to demonstrate excellent cost control. On the credit side, quarter over quarter, we saw a reduction in criticised and classified loans of $330 million, including a reduction in non-accruals of $267 million, while net charge-offs declined $26 million and the provision decreased $35 million. CRE par payoffs were again elevated at $1.8 billion, of which 50% was substandard. and we ended the year with 12.83% CET1 capital, almost 2.1 billion pre-tax above the bottom of our targeted operating range of 10.5%. We're thrilled with the quarter and fiscal 2025 and are excited about what we will accomplish in 2026 and beyond. Now turning to slide nine. This morning, we reported net income attributable to common stockholders at $0.05 per diluted share. There were only a couple of notable items in the fourth quarter. First, our investment in figure technologies was revalued $9 million higher than the value on September 30th. Second, we accrued $4 million in severance costs for FTE reductions that occurred in January 2026. Therefore, on an adjusted basis, after also excluding merger expenses, we reported net income of $0.06 per diluted share, significantly better than last quarter and above consensus. On slide 10, we provide our updated forecast through 2027. We've slightly adjusted our net interest income guidance for both 26 and 27 as a result of higher payoffs and a smaller balance sheet. EPS for 2026 is now forecast to be in the 65 to 70 cent range, and EPS for 2027 is forecast to be in the $1.90 to $2 range. On slide 11, we provide an overview of the expected balance sheet growth in 2026 when compared to year-end 2025, point to point. Another highlight this quarter was the double-digit increase in net interest margin. Slide 12 shows the trends in our NIM over the past several quarters. Net interest margin improved 23 basis points quarter over quarter to 2.14%. when including a gain of $20 million for the tearing up of hedges tied to long-term flood advances that we restructured at the end of the quarter. Excluding this one-time benefit, NIM was 2.05%, still a 14 basis point increase from the third quarter. Turning to slide 13. Costs remained well controlled as core operating expenses declined approximately $700 million when comparing Fall Year 2025 to Fall Year 2024. The modest linked quarter increase was mainly the result of higher short-term incentive compensation and associated taxes. Slide 14 shows the growth in our capital over the past five quarters and the strength of our CET1 ratio. At 12.83%, our CET1 ratio ranks among the best relative to our regional bank peers. And at this level, we have over $2 billion in excess capital pre-tax or $1.4 billion after-tax relative to the low end of our target operating CET1 range at 10.5%. Slide 15 is our deposit overview. Like last quarter, we further deleveraged the balance sheet by paying down over $1.7 billion of brokered deposits, which had a weighted average cost of 4.74%. We also paid down $1 billion of flood advances with a weighted average cost of 4.3% and saw our mortgage escrow balances decline $1.4 billion, which was typical seasonality of taxes and insurance balances are paid out at the end of the year. In addition, approximately 5.4 billion of retail CDs matured with a weighted average cost of 4.29%. We retained approximately 86% of these CDs, and they moved into other CD products that were approximately 45 to 50 basis points lower than the maturing product. In Q1 2026, We have another $5.3 billion of retail CDs maturing with a weighted average cost of 4.13%. The deleverage in actions, CD maturities and other deposit management strategies have allowed us to reduce interest-bearing deposit costs 26 basis points quarter over quarter. We continue to actively manage the cost of our deposits and are performing in line with the 55% to 60% target data on all interest-bearing deposits with the Fed cuts. Slide 16 shows our multifamily and CRE par payoffs for the quarter and the full year. We continue to experience significant par payoffs of approximately $1.8 billion in the fourth quarter, of which 50% were rated substandard, including the disposition of the previously disclosed $253 million sale in October. Approximately $244 million of this quarter's payoffs were multifamily greater than 50% rent regulated. We continue to see strong market interest for multifamily loans from other banks and the GSEs. The par payoffs are also leading to a substantial reduction in overall CRE balances and in our CRE concentration ratio. Total CRE balances have declined $12.1 billion or 25% since year end 2023 to about $36 billion, aiding our strategy to diversify the loan portfolio to a mix of one-third CRE, one-third CNI and one-third consumer. In addition, the payoffs have led to a 120 percentage point decline in the CRE concentration ratio to 381%. The next slide is an overview of our multifamily portfolio, which has declined 13% or $4.3 billion on a year-over-year basis. our reserve coverage on the overall multifamily portfolio of 1.83% remains strong and is the highest relative to other multifamily-focused lenders in the Northeast. Furthermore, the reserve coverage on those multifamily loans where 50% or more of the units are rent-regulated is 3.44%. Currently, we have about $12.9 billion of multifamily loans that are either resetting or contractually maturing between now and the end of 2027, with a weighted average coupon of less than 3.7%. If these loans pay off, we can reinvest the proceeds in C&I or other loan growth of market rates, or choose to pay down wholesale borrowings. the borrowers stay with Flagstar, the reset rate is significantly higher than the existing rate, which provides a NIM benefit. On slides 18 and 19, we have once again provided significant additional information on our New York City multifamily loans, where 50% or more units are rent regulated. This tranche of the multifamily portfolio totals $9.2 billion, has an occupancy rate of 98% and a current LTV ratio of 70%. Approximately 53% or $4.8 billion of the $9.2 billion are pass-rated, and the remaining 47% or $4.3 billion are criticised or classified, meaning they are either special mentions, substandard or non-accrual. of the $4.3 billion, $1.9 billion are non-accrual and have already been charged off to 90% of appraisal value, meaning $355 million or 16% has been charged off against these non-accrual loans. Furthermore, we have also added an additional $91 million or 5% of ACL reserves against this non-accrual population. meaning we've taken 21% of either charge-offs or reserves against this population. Of the remaining $2.4 billion that are special mention and substandard loans, between reserves and charge-offs, we have 6% or $150 million of loan loss coverage. We believe we're adequately reserved or have charged these loans off to the appropriate levels. And with excess capital of $2.1 billion before tax, we think were more than covered were there to be any further degradation in this portion of the portfolio. Slide 20 details our ACL coverage by category. The $43 million reduction in the ACL was largely driven by lower health for investment balances, a better economic forecast and higher recoveries. Our coverage ratio, including unfunded commitments, remained flat at 1.79% quarter over quarter. Our ACL reserve at 1231 also includes adjustments for the one borrower in bankruptcy where the auction process was recently finalized and confirmed by the bankruptcy court. We expect to close the sale of these properties before the end of the first quarter. On slide 21, we provide additional details around our asset quality trends. All of our credit quality metrics trended positively during the fourth quarter. Criticised and classified loans decreased 330 million or 2% on a quarter over quarter basis and were down 2.9 billion or 19% since the beginning of the year. Our net charge-offs decreased 27 million or 37% to 46 million compared to the previous quarter and net charge-offs to average loans improved 16 basis points to 30 basis points. Non-accrual loans were $3 billion, down $267 million or 8% compared to the prior quarter. Included in this $3 billion non-accrual amount are the loans tied to the bankruptcy I referenced earlier, which we expect to close the sale on before the end of the first quarter. At the end of the quarter, 30- to 89-day delinquencies were approximately $988 million, an increase of $453 million from the previous quarter. I will point out that the biggest driver of this increase is the additional day or 31st day of December versus 30 days in September. This accounted for $410 million of the increase and as of January 26th, approximately $690 million or 70% of these delinquent loans had been brought current. Furthermore, $298 million of these delinquent loans at 1231 were driven by one borrower who pays subsequent to the month end and has done so once again, bringing his account current as of Jan 26. As we reported last quarter, in the month of October, we sold approximately $253 million of these borrowers' loans, reducing our exposure in this one name. We're finalising the review of the 2024 annual financial statements for all CRE borrowers and today we've completed the review on approximately 93% of loans. Of the 93% reviewed, 80% are stable, 7% have improved and 13% have declined. So almost 90% are stable or improving. All of this has been considered as part of our ACL analysis. Concluding on slide 22, since the beginning of 2024, we have proactively managed our CRE exposure lower by over $12 billion, or 24%, through par payoffs, net charge-offs, amortization, and other dispositions. We have also increased our ACL coverage against the remaining CRE portfolio during this time. This significant de-risking along with our solid capital position, strong liquidity and expense optimisation program has created the solid foundation for us to grow and be successful. We continue to deliver on our strategic plan and are excited about the journey we're on and the value we will create for our shareholders over the next two years. With that, I will now turn the call back to Joseph.

Okay. Thank you very much, Lee. And before moving to Q&A, as I stated at the beginning of the call, you know, we are extremely proud of our performance in 2025 and returning to profitability during the fourth quarter. This milestone reflects discipline and hard work of our entire team. We made it difficult but necessary decisions that strengthened our balance sheet, diversified the loan portfolio, lowered our cost, but we thoughtfully invested in our C&I and private banking businesses, along with our IT and risk management infrastructure. I'd like to thank our executive leadership team and all the teammates for their dedication and commitment to the organization and our customers. I'd also like to thank our board of directors for their invaluable advice and support. As I said, I think we probably set a record for board meetings last year, and now I'd be happy to turn it over to the operator to open up for questions. Thank you.

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 initial question to one and return to the queue for any additional questions you might have. Our first question will come from the line of David Ciaverini with Jefferies. Please go ahead.

Hi. Thanks for taking the question. So, I wanted to start on NII. I saw that you. lowered it by $100 million. Can you talk about the drivers behind that? I'm assuming it's the higher payoff activity, but any detail there would be helpful.

Yeah, you're exactly right, David. It's the higher payoff activity, particularly as it relates to multifamily and CRE loans. And we use that excess cash to further delever the balance sheet. And as I mentioned, we pay down $1 billion of FLAB $1.7 billion of brokered deposits. And then we saw $1.4 billion of mortgage escrows exit in Q4, which is seasonality because they were T&I escrow deposits, which is when they usually go out and then they bill throughout the rest of the year, pay out in the fourth quarter. And so that reduction – the other thing that I will point out is You've heard us talk about tall trees as it relates to that legacy CNI book. And what we mean by that is we have some large oversized exposures in individual names. We're talking 250, 300 million. And we've right-sized a lot of those in order to bring them in line with our sort of risk tolerance levels and how we think about things today. And so you've seen runoff, particularly in the ABL and dealer floor plan space and also the MSR space, I would say that we are mostly through that. And so I think what you're going to see is higher net C&I growth starting in the first quarter here because we are mostly through that right sizing of those tall trees. Coming back to your initial question, it's those additional par payoffs that have effectively reduced the assets. We've used the excess cash to deleverage. That's sort of reducing NIM, and that's rolled through into 26 and 27.

Great. Thanks for that. And sticking with the payoff activity, you're guiding 3.5 to 5 billion. you know, for 2026, how much of that, to the extent you have line of sight on it, how much of that do you expect to be substandard?

Well, you know, I commented on the $1.8 billion this quarter, which was 50% substandard. And we have been, throughout 2025, We've seen 40 to 50% of those par payoffs be substandard loans. So we don't see any reason for that to change as we move through 26. Thanks very much.

Yeah, you know, David, in that regard, I mean, as you have followed us, you know, we originally were projecting those payoffs to be in the 7 to 800 range. But as those loans come up, our pricing rollover is higher, significantly higher than market. And so, it motivates, you know, to align with our goal to reduce our real estate, but it motivates people to take those loans to other institutions or to the agencies.

Our next question will come from the line of Dave Rochester with Cantor. Please go ahead.

Hey, good morning, guys. Good morning. Hey, Dave. Just looking at, I think, slide 11 here, you've got some great loan growth planned for this year. I just wanted to hear about, you know, how comfortable you are on the funding side of things with funding that's with core deposit growth.

Yeah, let me – yeah, go ahead, Lee.

Yeah, I was going to say, let me go and then Joseph can jump in. Yeah, we feel pretty good. You know, as we think about, you know, core deposit growth, I think there are a number of avenues that we're pursuing. Obviously, you know, we think we can grow deposits from our 350 bank branches. We're in good geographies across the country, as you know. But we also are going to leverage these new C&I relationships. So as you've seen us grow the C&I business very successfully under Rich Raffetto, as Joseph mentioned, we believe that we will be able to leverage those relationships, not just to bring in deposits, but... bringing more fee income as well. And then the final piece is the private client bank, and we feel that we can leverage deposits from our private client bankers as well going forward. And so that's how we're going to drive core deposit growth as we move forward through 26 and into 2027 as well.

Great. Appreciate that. And then just on the capital, you mentioned $1.4 billion after tax of excess capital. You guys are still obviously trading at a discount to your adjusted tangible value per share, adjusted for the warrants. It sounds like you're making faster progress than maybe you expected even just a few months ago. You mentioned all the tall trees that you had then. It sounds like you're pretty much at the end of that process of trimming the meaning CNI growth ramps up earlier, faster. You're making a lot of progress on the credit front, which is great to see, and profitability is only going to follow from that. It seems like you're going to be in a great position to buy back your stock with all the fundamentals going the way you need, and you've got a ton of excess capital. I know you talked about potential board meeting coming up in April. What are the prospects of you guys coming out strong on that and taking advantage of the opportunity here which I would think is probably not going to be here for very long to buy back your stock.

Yeah, you know, what we've kind of communicated is that, you know, the variables really are, as you described, you know, how much balance sheet growth can we get in the targeted areas, how quickly we see the non-performing secure growth. which, you know, we are forecasting in total that in 2026 we'll be down a billion dollars. And I think, you know, what the board will look for with management's recommendation as we, you know, look at those numbers coming together in 2026, how do we deploy that excess capital? I would tell you it's definitely – a discussion point amongst the board, and I would say, you know, as we move forward through the year, it would be something we would look favorably if we're not deploying the capital.

All right, great. Thanks, guys.

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

Yeah, great. Thanks. Good morning, guys. Good morning. Following up on slide 11, another follow-up on the funding strategy. So, Lee, I heard you sound pretty confident on the deposit growth. Just wondering, where is the wholesale borrowings as percentage of assets at 13%? Where does that go in your budget?

Yeah, so we, as I mentioned, we paid another $1.7 billion of brokered deposits off in Q4. We only have $2.3 billion of brokered deposits remaining as of 12-31. So, I mean, we are writing up probably better than other banks. And we've done a nice job over the last, you know, 18 months of reducing our exposure there. As it relates to – and, you know, I talked a little bit about the flood restructuring in my prepared remarks. The reason we did that was we swapped out long-term flood for short-term flood and used some excess cash to pay off that or change out that $2 billion of long-term. So we are now mostly sitting on short-term flood. And that is the opportunity for us in 2026 and beyond to further deleverage the wholesale borrowings by paying down the FLUB advances because we also get an FDIC benefit from that. So, you know, we think and we expect to continue to pay down the FLUB advances as we move through 2026 with any excess cash.

Gotcha. Okay. And then just switching to expenses, the expense guide of $1,750 to $1.8 billion, your current run rate, you're about $1.85. So there's more expense rationalization coming in 2026 and just any color around that.

Yeah, so there's a couple of things that I'd point out. And again, I mentioned this in my prepared remarks. You know, we had additional incentive compensation and associated taxes in Q4. We also had severance of $4 million in the fourth quarter as well. And the severance was related to some reductions. These are top decisions that we executed on earlier this month. And so, you know, as I think about our sort of Q1 NIE, we're probably more like, and this is excluding the amortization, in the 455 to 465 range. and then you will see continue to decline after Q1, because, remember, in Q1, expenses are typically elevated because of FICA costs that are sort of front-end loaded in the year. But we continue to work through a number of other cost-optimisation initiatives. And we think you'll see further reductions in our FDIC expenses. We've got technology projects that are coming on stream that will allow us to get more efficient as we move forward as well. And then there's still some real estate optimisation as it relates to a couple of operating centres that we have. So I feel very comfortable, Casey, that we will be within the range that we've guided to, and you will continue to see a reduction in expenses as we move through the year. Thank you.

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

Hey, good morning. Joseph, maybe a follow-up to the capital question. You know, I know you noted that the priority for capital return or the priority for capital is to deploy for organic growth. But I guess you also noted that the balance sheet will be lower given the CRE paydowns. Is there anything that could cause you to hold on to the excess capital for a little bit longer? Is it the rating agencies? Is it rent freezes in NYC? Is it maybe the CNI loans are coming on at a high RWA? Can you just help us think through, you know, what scenarios you would hold on to that excess capital?

Well, I think the, you know, first of all, on the balance sheet, we do feel this quarter will be the low point in the quarter for the size of the balance sheet, and that should grow going forward from here. The other, you know, thing I think limbs that we've been looking at, and I think this quarter we saw improvement was, you know, we've taken on an initiative to move the non-performing loans out of the bank. And we want to see that that initiative continues to be successful and we get the non-performing loans down. The other element that, you know, we do an 18-month, you know, one of the reasons we think we have a very conservative view on our credit quality is we do this 18-month look forward on the loans to make sure what would the underwriting look like, both at the current coupon and what it would look like if they reset to market. And that has, you know, historically for us drove a lot of loans into the special mention and to the substandard area. So I think, you know, as we can get some visibility around reducing all of that and As Lee commented, you know, we have $9 billion of maturing in 2027, and we're about halfway through that because think about the 18 months. So this quarter we're into the third quarter of 2027 looking at those loans, that we're in a position to really understand what does that bubble look like coming through and does it have any impact to the credit quality for the company. We haven't, you know, seen a major shift, but that's one area that we're keeping our eye on.

Got it. Very helpful. And then just maybe on the New York multifamily portfolio, so given that we could get rent raises in New York in the near term, any updates in what you're hearing from your multifamily borrowers in the city?

You know, there's just a lot of dialogue going on about, like, how can we, you know, I think collectively come to resolution between the new city government and owners of properties and banks that finance those about resolution. We look, you know, what would be the impact if, you know, this year it seems like the rent board will be former Mayor Adams tilted. And, you know, they have a history of looking at kind of the overall expenses and making adjustments to revenue accordingly. We've started to spend a lot of time looking at, like, forward thinking as if those rents were flat for two or three years and expenses went up a couple percent, the impact on the portfolio. And so that's kind of where we're spending most of our time. But as Lee commented on, we have not seen a decline in liquidity In fact, we saw acceleration of liquidity taking us out of those loans and multifamily and rent regulated in the fourth quarter. So, but we're, you know, obviously we spend a lot of time looking at various aspects of that portfolio, make sure we understand our risk. And we were kind of early on, you know, in our process of, you know, effectively underwriting with that window out 18 months of both kind of what credit marks and interest rate marks would look like. as those loans start to come up for maturity or repricing.

And I would just add to what Joseph said. I think the two key points that he made, first of all, was we hadn't seen any slowdown in liquidity, you know, looking at the par payoffs we experienced in Q4. So that's number one. Number two, you know, obviously the work we did in 2024 where we re-underwrote that book, and took both REI and credit marks and we had, you know, the $900 million of charge-offs. But the other thing, as well as sort of as we look forward, you know, we have started looking at, you know, what sort of exposure might we have to the fines, violations, liens. We're just not – and we're not seeing much as it relates to that tied to Apple, but we don't have much exposure. There was a landlord list that came out recently that we took a look at, and again, you know, we don't have – significant exposure there either. And we have the annual financial statements that we collect and, you know, as I mentioned, we're 93% of the way through the 24 financials and 80% are stable, 7% have improved. 13% have deteriorated. So the vast majority are stable or improving. So there's a lot of different things we're doing to triangulate everything as it relates to that portfolio.

Great. Thank you both.

Our next question will come from the line of Bernard Bongazicki with Deutsche Bank. Please go ahead.

Hey, guys. Good morning. Just on that bar that went through the bankruptcy process, Lee, you know, can you just update us on some main takeaways, like on the economics, how much of the loan you have left? I think you mentioned some of the sales you had on there. It seems like it's mostly reserved for already from your prepared remarks. The new yield, any thoughts on the improved credit profile, any additional funds provided, just any color you can share on that process, on that loan position?

Yeah, so first of all, as we've said before, we do not get into the specifics as it relates to customer loans and deals, transactions. We just don't do that in a public forum. I think what I would say and sort of just re-emphasise is the auction was completed, it was confirmed. And we expect that to close before the end of the first quarter. You know, what we've got in all of those loans today are in our non-accrual balance. And, you know, there's probably about 450 plus million of non-accruals as it relates to that particular bankruptcy case. And anything that we do going forward would be an accruing loan. So I think that's how I would look at it. And as I said in my prepared remarks, everything related to that bankruptcy, so any additional charge-offs that were needed, we took in the fourth quarter. So there is nothing that is going to be taken in Q1 as it relates to that because we've took what we needed to do in the fourth quarter and previous quarters.

Thanks for that. In addition to Lease Conference, I would just add, you know, there were very – we were almost on top of the mark for where we knew the bid was. So there wasn't a material add to reserves for that particular transaction, but you can You can also run the math of, like, you have a non-performing loan of that dollar amount, and you're going to turn that into a performing loan. It obviously will be positive from a net interest income perspective.

Great. Thanks for that. And then just on regulated portfolio, on slide 19, the $4.3 billion of criticized and classified, I'm just wondering, of the $1.9 billion, how much of that has repriced as of today? And what percentage does that go to by the end of 2026? And I'm just wondering similar repricing for that $2.4 billion of the special mention loans.

Yeah, so I'm looking at the $4.3 billion in total. 54% of it is already repriced, and then another 36% of that will reprice within the next 18 months. So 90% of it is already repriced or will have repriced in the next 18 months.

Okay, great. Thanks for taking my questions.

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

Hi. This is John Rao. I'm for Jared. Just thinking about the new loans being added to the balance sheet in CNI and then with the re-origination starting back up again, what the new, like, roll-on yield is for those and the floating versus fixed mix of those loans?

Yes, so the C&I loans, so we've obviously got a number of C&I verticals and the loans are coming on at a spread to SOFA of anywhere from 175 to 300 on a blended basis. You're probably in that 230 basis point range. As we're looking at the new CRE growth, I would say that the spread to SOFA on those loans is more like 200 to 225 basis points. So that's how I would think about the spreads for the new originations.

Okay, great. Thank you for that. And then just thinking ahead to the governor election later this year in New York, any – First, do you expect any potential action on the 2019 law change related to rent regulated in advance of that? And I guess just broader thoughts on what the election could mean for that.

Yeah, you know, I think, you know, that's something that will take its ordinary course. On the 2019, you know, legislation, I think there's a, you know, now that we've had a number of years to kind of look back on that, I think there are certain parts of that that I think there could be, you know, common ground on how do we fix the issue. And one of the areas is these ghost units where the legislation effectively made it uneconomic to remodel units that are vacated. And so, what you've had is a number of instances where landlords just keep them vacant. Those are estimated, you know, 50 or 60,000 units. And so I think, you know, there's a lot of talk about is there an economic model that could revise that rule the way it was written to make those available to come back on the market and reimburse the owners. But the rest of that, I think, you know, we're going to have to see, you know, ultimately, you know, what direction that takes and how much discussion. I do know there's a lot of dialogue now occurring between, you know, property managers, owners of properties in the city, and hopefully – You know, we all, you know, feel that, you know, we want people to live in safe and sound, you know, environments and are supportive of, you know, continued, you know, correction of any violations amongst our portfolio. We're now watching that very closely. And, you know, we do expect borrowers when they have violations to cure those.

Okay. Thank you.

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

Oh, great. Morning. Hi, Chris. Good morning. Hi, Chris. Good morning. Maybe for you, the billion aid of par payoffs, I think it was a billion three or so last quarter. I guess my question is degree of confidence in the updated balance sheet, especially if the forward curve comes through and you get a couple of cuts and maybe prepays pick up a bit. Thanks.

Yeah, I mean, you know, I think we feel good about the par payoffs sort of continuing as we move forward. Now, you know, as Joseph mentioned, when we came into 2025, we thought that the par payoffs would be around sort of maybe $800 million on average, a quarter, and we've seen in excess of a billion dollars a quarter in 2025. There's a lot of demand out there from other financial institutions and the GSEs, and we think that that will continue in 26. What I would say, Q1 seasonality-wise is typically the lowest quarter for par payoffs, as we saw in 2025, and then it sort of picks up Q2, Q3, Q4. And we expect to sort of see a similar thing in 2020, in 2026. And look, I think the forecast we have put forward and the guidance, we were using the rate curve as of the middle of December. It had two cuts, June and September. And a decline in rate environment is only going to help those borrowers refinance so um so yeah i mean look i think we feel that we should be in that billion dollar uh zip code on a quarter on an average basis plus as we move through 2020 uh 2026. okay

Hey, Chris, I would just add that, you know, we've declared that we're going to begin to originate some CRA, and this isn't a big dollar amount. We're talking about a couple billion in originations in a year, just as if we've seen the acceleration in the paydowns. And obviously that won't be New York City, you know, multifamily. But as we look across our franchise in, you know, Michigan, California, Florida – those markets sourcing opportunities in the commercial real estate will help to offset some of that outflow.

Great. Thanks, Joseph. And my follow-up, I guess, to partly on the model, the risk-weighted assets given the par payoffs and the non-accrual resolution plus the growth, how do we think about just the cadence of RWA growth over the year and also help on the first quarter share count with the warrants and everything? Thanks.

Let me start with the share count. So in Q4, the share count was $459 million. And then if you're looking at the sort of 26 and 27, you should be using around 473 million and then 479 million shares. So that's how I would think about the share count. In terms of the risk-weighted assets. You've got to remember that as it relates to the multifamily and CRE book, first of all, the non-accruals are 150% risk-weighted. Anything that is sort of substandard, special mention, is 100% risk-weighted. And so C&I loans coming on are typically 100% risk-weighted. But it's not as if you are really losing too much. We've got, obviously, the 50% risk-weighting on multifamily loans. for the performers. But as we've mentioned, we're seeing a lot of those substandard loans pay off at 100%. We're looking to reduce our non-accruals, which are 150%. So while we use capital as we grow the balance sheet, it's actually not as punitive as you may think for those reasons.

That's helpful. Thank you.

Our next question will come from the line of Janet Lee with TD Cowen. Please go ahead.

Good morning.

Good morning, Janet. Hi, Janet.

I appreciate the slide 11 where you indicated an average deal size for CNI being around $25 million, which is on a larger side for a a typical regional bank, but probably not for you guys. Are some of these syndications, and are you able to share any other metrics underwriting, just given that it's a newer segment for Flagstar?

So, Janet, I think that we, you know, if you go back and look at slide seven, And, you know, the top two businesses is where we're seeing most of the growth now in the specialized industries and the corporate regional commercial bank. And so each of these businesses have a little bit different characteristics. But the commercial, corporate, and regional, we target kind of mid to upper middle market and lower corporate. And in those particular categories, you know, we shoot in a lot of instances that we are the primary bank of those relationships that we're generating. So it is really a kind of a onesie two or three bank where we would, you know, look to lead that. In the specialized industries group, those are 12 industry verticals. And as we've come into those, we've hired, you know, highly experienced people that have been in a lot of these industries for 25 or 35 years. You know, we're getting into bilateral and some participations, but our goal in those instances also is to be in smaller bank groups where it's like oil and gas or healthcare. Very few of those where you would have 20 banks and, you know, we're just one of banks, you know, making a $30 million commitment to the transaction. That isn't where our focus has been. Where we've entered into transactions like that, our people have direct relationships with the management. And it's obviously our goal to, you know, swim up the fish ladder, so to speak, in the importance to those companies. So we, you know, it's highly diversified, the originations. And then when you get into the equipment finance, those are usually, you know, multi-bank transactions, but we may be the only bank financing their equipment finance. And then in the asset base, we also look to be, you know, the primary bank in those transactions. So it's a really, you know, it's business by business is the way I would describe that.

Yeah, the other thing, Janet, that I would – first of all, on the credit side, you know, as Joseph has mentioned, we're not – we've seen really good growth on the C&I side, but it's not because we're taking outsized positions in single names. Far from it. You know, the average, you know, loan size is sort of $25 million, $30 million, and so we're kind of managing the risk just in terms of the deal size. You know, credit has final say on all loans that come onto the balance sheet. We have a first line review within the business as it relates to all credits that come on. Then you have the second line, credit, And then we have loan review, you know, in the third line. So, you know, we have a very, very robust process in place as it relates to assessing the quality of these loans before we bring them on. And then a couple of other things that I would say, you know, we've talked about the spreads that we're typically seeing so we're not giving the business away. We're sort of averaging a spread to SOFA of $2.25, $2.30 and so I think that's a good indication that, again, we're not giving it away or doing sort of cheap deals. And we're typically seeing a 70% utilization on these facilities as well. And I think that's another important metric that is worth emphasizing.

Thank you. Thank you for the color. And just lastly, for a NIM guide of 240 to 260, which is a pretty wide range, I think you said also balance sheet is at a low point this quarter. and you're assuming two rate cuts, it's sort of the midpoint of that range where your baseline expectation is what would put you at the higher end versus lower end. Thanks.

Yeah, well, Janet, it's a good question. As you know, we have a lot of moving parts as it relates to the NIM improvements. And, you know, what I mean by that is, you know, on the ASIC side, you do have that multifamily and CRE runoff. And I mentioned that if you look at what is running off in – or what is resetting, I should say, or maturing in 26 – and there's about $5 billion, it has a weighted average coupon of less than 3.7%. So you've obviously got how much of that is going to reset and stay, how much will ultimately pay off. You've got the C&I growth at the spreads that are mentioned. We're going to be originating new CRE loans, as Joseph mentioned, and then we also expect to continue to grow that consumer book, particularly by adding residential one-to-four mortgages to the balance sheet. And then on the funding side, we've done a really nice job of reducing core funding or core deposit costs in Q4 and 2025, and we will continue to do that, even outside of the Fed cuts, by leveraging some of the opportunities we have as retail CDs mature and we can roll them into lower cost CDs. And then obviously continuing to pay down wholesale borrowings, particularly the flood advances. I think that's the focus for us in 26, given the good work we've done bringing our broker deposits down to a level that is pretty consistent with other banks. You've got all of those sort of contribute to the NIM, and the final thing I should have added is obviously reducing our non-accrual loans, which we're intending on doing as well. So you've got all of those sort of moving pieces. They all contribute to the improving NIM, but that's why, you know, we've got that range because you've got all those variables.

Thanks for all the comments.

Our next question will come from the line of David Smith with Truist Securities. Please go ahead.

Hey, good morning. Hi, David. Hi, David.

On the C&I growth, just a clarifying question. You pointed to 125 relationship bankers doing four deals a year, so that would be 500 deals at an average deal size of 25 million or 12.5 billion. What are the offsets bringing C&I growth down this year to six to seven and a half billion if you're mostly done right-sizing legacy loans? I guess maybe is that like originations as opposed to like actual loans coming on the balance sheet, but it seems still not quite fit to the 6.7.5.

Yeah, David, you have to realize that that's the model we have with the people, but not everybody is going to achieve that 100%.

Okay, so that's not an average. That's like the target or something?

It's our target, yes.

Okay.

Here's what I'll say. That's the target, but, again, you know, that's if everything goes perfectly, number one. Number two, while we're mostly done, I think in 26, the one portfolio where you will see some additional runoff, will be the ABL and dealer floor plan. I think there's still some additional sort of runoff there. And then, you know, with C&I loans, you're just going to have the normal course sort of, you know, paydowns and people using the line, not using the line, amortization. So you've kind of got that movement as well. And so I think all we're trying to – what we're trying to provide – people with here is a lot of people have questioned our ability to grow C&I at the numbers that we've indicated. And I think when you break it down like we have, when we're showing $3 billion of new commitments in Q4, $2 billion funded, and when we're showing the number of customer-facing bankers that we have and what our expectation is, I think what we're just indicating is, look, This isn't as big a stretch as I think some people thought a few months ago.

Okay. And then just there's a lot of uncertainty, obviously, in the rate backdrop right now. We just got a new Fed chair nominated. Can you talk about what you see as the ideal rate backdrop for Flagstar when you think about, you know, the bank's asset sensitivity today and how that evolves with your plan over the next year or two?

Yeah, I would say we're pretty neutral from an interest rate sensitivity point of view. There is no doubt about it, though, a declining rate environment, it helps our multifamily borrowers. And so we think that that is beneficial. It will also, we believe, you'll see more mortgage activity as well. And so we have an active and very good mortgage business that we feel we'll benefit from in a declining rate environment. So, you know, we sort of call it this... business model hedge, even though from a balance sheet point of view, we're pretty neutral, the business model, there are benefits that we will enjoy in a declining rate environment.

And is that a steeper curve still being better or just overall flatter given how CRA has been?

I think... Yeah, I think, you know, if the short end, because the way we think about multifamily, it's sort of the five-year, and then obviously mortgages are the 10-year. So, you know, we'd be looking to sort of see an impact, you know, with a five- and 10-year in particular. That would really benefit the multifamily and mortgage borrowers. Thank you.

Our next question will come from the line of Anthony Elion with J.P. Morgan. Please go ahead.

Hi, Lee. How are you thinking about NIM and NII specifically for 1Q after we back out the nine basis points and 20 million benefit you saw from the hedge gains?

Yeah, well, I'm not sort of, you know, I haven't and we haven't deliberately given sort of quarterly guidance. But I think what I would say is, as I mentioned in Q4, when you back out that one-time gain, we were at 2.05%. And you've seen a steady increase. quarter over quarter so we were up 14 basis points versus Q3 and our expectation is you will continue to see that NIM improvement quarter over quarter as we move through the year so you know we're not getting sort of specific by quarter we're giving that overall guidance for the year but I mean just looking at that guidance I think you can expect us to continue on that positive trajectory quarter over quarter okay and then on slide 11 so you're calling for year-end assets in the range of 93 and a half to 95 and a half billion but if I stretch this out how are you thinking about

Assets for 27, just relative to the range that you gave last quarter, I think it was 108 to 109 billion.

Yeah, so we think that the balance sheet at the end of 27 will be sort of more around 103 billion.

Thank you.

Our next question will come from the line of Matthew Brees with Stevens. Please go ahead.

Hey, good morning. Good morning. Popular slide, slide 11. I was focused on cash and securities. So cash balances are still a bit elevated at 6.7% of assets down this quarter. You know, maybe first, what drove lower cash balances? And then as we look ahead, what is the breakdown between cash growth and securities growth to get kind of that $2.5 billion midpoint of total growth there for the year?

Yeah, so the reduction in cash was the deleverage, and as I mentioned, we paid down the $1.7 billion of broker deposits, a billion of FLUB. We did actually buy another billion of securities in the fourth quarter. We haven't spoken about that, but we did buy another billion dollars of securities, so we used some of the cash to further build that securities book. The way we think about it is sort of the cash in the securities is somewhat fungible and we'll just kind of look on really a real-time basis, you know, what are we better doing with any excess cash we have? You know, should we buy more securities or can we use that to de-lever? And so that's, you know, the relationship between sort of securities and the cash, somewhat fungible. And that's how I think about it when you're looking at the numbers there.

Okay. And then, Lee, I don't know if you have it at your fingertips, but, you know, do you have the cost of deposits at year-end or more recently? And as we think about some of the higher cost categories, you know, maybe time deposits, you know, what is kind of the blended – you know, rates that CDs are going to as they mature and come back on? And is that a decent proxy for where you think CD costs could go over the next year?

Yeah, yeah. So the spot rate as of the end of the year, and this is for all interest-bearing, well, it's for all deposits, so it does include non-interest-bearing DDAs are in here as well, was 2.56, Matt. And then, as I mentioned in my prepared remarks, we had 5.4 billion of CDs that matured in Q4 with a weighted average cost of 4.29%, and we retained 86% of those, moved them into products sort of 40 to 50 basis points lower, In Q1, we have 5.3 billion of CDs maturing with a weighted average cost of 4.13. So I think the way I would think about it is the CDs that are maturing in the first quarter While we won't sort of probably realize the same 40 to 50 basis point benefit, you know, I do think that we can realize a sort of 25, 35 basis point benefit at least as those CDs mature. And then, you know, just looking out further, right now we have another $4.2 billion maturing in Q2 at a weight average cost of 4%.

Very helpful. And then just last quick one, if I can sneak it in, is you provided some updated share counts for the years ahead. Is that both average diluted and common shares outstanding? And that's all I have.

Thank you. Basically, the share count, it includes the warrants are included in there. So, it's fully diluted.

Our next question will come from the line of John Arkstrom with RBC. Please go ahead.

Thanks. Good morning, guys. Good morning, John. I'm curious on the multifamily loans maturing over the next two years. I'm curious on the health of those credits in general. And then, you know, any chance that non-performing balances could have a larger step down at some point over the next couple of years? Just curious. you know, based on what's maturing?

So what we said previously, let me start sort of with the last part of your question. As it relates to the non-accruals, so we ended the year at about $3 billion. You know, our expectation is we can reduce those by a billion in 2026. Now, again, remember, included in that billion is the bankruptcy loans that we've talked about earlier on this call, which is sort of $450 million. So we do believe that we can reduce the non-accruals fairly substantially in 2026 when you include the resolution of the bankruptcy. In terms of the loans that are hitting their reset and maturity dates, there is nothing different about the overall quality or characteristics of those loans than any loans that have reset or matured prior, so in 25 or before. And what we do do, as Joseph has mentioned, is Any loan that is resetting or maturing in the next 18 months, that is the trigger for us to do a deep dive analysis on that loan and run a pro forma DSCR based on the interest rate that would be in effect today. And so, you know, we are constantly looking out 18 months and running those analyses on those loans that are coming up to their reset or maturity day, and obviously that's all considered as part of our ACL process, so it's all included in everything. we've taken and disclosed in the fourth quarter. But there isn't anything unique about the characteristics of the Māori family and CRE loans that are hitting their maturity and reset dates over the course of the next 18 months, two years, that we haven't seen in resets and maturities up to this point.

And, John, the one thing I would add, you know, we track the payoffs and, you know, determining whether, you know, we're getting negative selection by, you know, keeping the, you know, bad credits and the good credits are paying off. And it's held, you know, almost consistent really since we've been here. The percentage of, you know, substandard and then – what's in the rent regulated. So it's amazingly consistent how that has continued to, you know, be as those payoffs come in. And that, you know, that I think is just reflective of what we think is a good assessment of the risk in that portfolio.

Okay, good. Thank you. And then, Lee, maybe just wrapping this up on the guidance. I get the adjustments and refinements. It's, you know, kind of like a mixed blessing, I guess, with the payoffs. But What do you think are the biggest risks on your 26 or 27 guidance? It doesn't seem like it's credit. Are we just talking about subtle nuances at this point?

Yeah, I think it is subtle nuances. Obviously, I think we're sort of Can we execute? I think that's really what it boils down to. You know, as I've mentioned, there's a lot of moving parts which is a good thing and it's a bad thing because obviously, you know, you're having to kind of estimate what that all means. But I think, you know, we're now pivoting to the growth side of the story. And so it's really all about can we execute on that growth side of the story. And look, you know, I think everything we said we would do in 25, we've delivered on. And so, you know, I think this management team and this Flagstar team has proven that they're up for the challenge. Okay. Thank you.

Our final question will come from the line of Christopher Maranac with Jamie. Please go ahead.

Hey, thanks for taking all of our questions this morning. Just wanted to ask about the mix of deposits as CNI grows. Will we see the CNI and the Treasury be a much different component 12 and 24 months from now? Do you have any sort of guideposts just in general for how that mix is going to shift?

No, I think, again, we expect to leverage those relationships to bring in, you know, deposits. And I think it's going to be a mix. Obviously, in an ideal situation, you're bringing in non-interest-bearing DDA, the operating accounts. But I think, you know, as we sort of leg into that, you'll see us sort of bring in interest-bearing DDAs and the money market deposits. So I think it'll be sort of a combination. But ultimately, you know, as... Our strategy and our business model is about a full relationship business. It's not just giving the balance sheet away. So we would expect to start bringing in, in time, more operating accounts, which would be, you know, non-interest-bearing BVAs, and further leveraging those relationships, not just for deposits, but for fee income as well.

Got it. So we'll see movement on those ratios and that mix during this year. Yeah, I think that's fair. Okay.

You know, the one comment I'd have for you, you know, if you think about it, we've been effectively in this business about 15 months now. You know, the credit opens up the license for us to be able to move more of the fee income and deposits into the company. And so it's a transitional period. But, yeah, I do think we will gain momentum on that, especially as we've you know, not only in the CNI side, but we've also geared up some specialized industries on the deposit side that are focusing on, you know, these are like title and some escrow and some insurance companies that, you know, generally don't use the debt vehicles from banks as much, but they do use the depository treasury management, cash management services from a bank. And so we're highly focused on, you know, growing that segment of our deposit business as well.

Got it. Thanks again for all the information this morning. Thank you, Chris.

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

Okay. Thank you. Thank you very much for joining us this morning. You know, we really appreciate following the company and the questions that we get and both today and the follow-up meetings. You know, we obviously remain, you know, extremely focused on executing on our strategic plan you know, including the transformation of Flagstar into a top-performing regional bank, you know, really focused on creating a customer-centric relationship-based culture and effectively manage risk to drive long-term value. So thank you again for taking the time to join us this morning and for your interest in Flagstar Bank.

This concludes today's call. Thank you all for joining. You may now disconnect.