FLG - NYSE

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Bank Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 31, 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, ir.flagstar.com. Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Bank may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-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 excludes 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 call. We are pleased with the bank's performance throughout 2025, and especially during the fourth quarter. As all of you know, after 2 challenging years, I'm proud to share that we returned to profitability in the fourth quarter reporting adjusted net income of $30 million or $0.06 per diluted share compared to a net loss of $0.07 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 3 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 a 2% on a linked quarter basis or about 9% on an annualized 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 nonaccrual loans declined, while we also had a decrease in net charge-offs and the provision for loan losses. Moving to Slide 4. After 2 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 nonaccruals 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 road map we employed to solidify the balance sheet and reposition the bank for growth. We built 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 brokered 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 2 slides highlight the continued momentum and tremendous progress in our C&I 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 6, you can see that the C&I 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 2 primary strategic focus areas, our specialized industries and corporate and regional banking group. On Slide 7, you'll see the overall C&I 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 2 businesses. One of the things that you also can observe on this slide is that we derisked a number of the businesses, as we've talked about in the past, where either because of hold size or credit quality, 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 8. You can clearly see the protective of our adjusted EPS as we successfully executed on all our strategic initiatives, resulting 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 2 years. Our unadjusted pre-provision pretax net revenue improved $51 million quarter-over-quarter, while our adjusted pre-provision pretax net revenue improved $45 million versus Q3. We achieved NIM expansion of 14 basis points quarter-over-quarter after adjusting for a onetime hedge gain of approximately $20 million. We paid off another $1.7 billion of high-cost brokered deposits and $1 billion of club advances as we further reduced our funding cost and continue to demonstrate excellent cost control. On the credit side, quarter-over-quarter, we saw a reduction in criticized and classified loans of $330 million, including a reduction in nonaccruals 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 pretax 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 9. This morning, we reported net income attributable to common stockholders of $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 30. 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 slightly adjusted our net interest income guidance for both 26 and 27 as a result of higher payoffs and a smaller balance sheet for 2026 is now forecast to be in the $0.65 to $0.70 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 hedges tied to long-term flip advances that we restructured at the end of the quarter. Excluding this onetime benefit, NIM was 2.05%, still a 14 basis point increase from the third quarter. Turning to Slide 13. Costs remain well controlled as core operating expenses declined approximately $700 million when comparing full year $25 million to full 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 5 quarters and the strength of our CET1 ratio up 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 pretax or $1.4 billion after tax relative to the low end of our target operating CET1 range of 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 4.4%. We also paid down $1 billion of advances with a weighted average cost of 4.3% and saw our mortgage escrow balances declined $1.4 billion, which was typical seasonality as 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 deleveraging 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 beta on all interest-bearing deposits with the Fed cuts. Slide 16 shows our multifamily and CRE 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 1/3 CRE, 1/3 C&I and 1/3 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 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. And 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 at market rates or choose to pay down wholesale borrowings. And 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 regulated. This tranche of the multifamily portfolio totals $9.2 billion as an occupancy rate of 98% and a current LTV ratio of 70%. The approximately 53% or $4.8 billion of the $9.2 billion are pass rated and the remaining 47% of $4.3 billion are criticized or classified, meaning they are either special mention, substandard or nonaccrual. Of the $4.3 billion, $1.9 billion in nonaccrual and have already been charged off to 90% of appraisal value, meaning $355 million or 16% has been charged off against these nonaccrual loans. Furthermore, we have also added an additional $91 million or 5% of ACL reserves against this nonaccrual population, meaning we have taken 21% of either charge-offs or reserves against this population. Of the remaining $2.4 billion that is 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 we're 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 reinvestment 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 12/31 also includes adjustments for the 1 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. Criticized 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. Nonaccrual loans were $3 billion, down $267 million or 8% compared to the prior quarter. Included in this $3 billion nonaccrual 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 26, approximately $690 million or 70% of these delinquent loans have been brought current. Furthermore, $298 million of these delinquent loans at 12/31 were driven by 1 borrower who pay 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 1 name. We're finalizing 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, and 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 derisking, along with our solid capital position, strong liquidity and an expense optimization 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 2 years. With that, I will now turn the call back to Joseph.

Okay. Lee. And before moving to Q&A, as I stated at the beginning of the call, 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 a difficult but necessary decisions that strengthened our balance sheet, diversified the loan portfolio, lowered our cost 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.

[Operator Instructions] Our first question will come from the line of David Chiaverini with Jefferies.

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.

Yes, 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 paid down $1 billion of flow $1.7 billion of brokered deposits. And then we saw $1.4 billion of mortgage escrows exit in Q4, which is seasonality because they would see escrow deposits, which is when they usually go out and then they build throughout the rest of the year pay out in the fourth quarter. And so that reduction -- the other thing that we -- I will point out is you've heard us talk about tall trees as it relates to that legacy C&I book. And what we mean by that is we have some large oversized exposures in individual names. We're talking $250 million, $300 million. and we've rightsized 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 run off, 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 rightsizing of those to trees. But coming back to your initial question, it's those additional par payoffs that have effectively reduced the assets. We used the excess cash to sort of reducing NIM, and that's rolled through into '26 and '27.

Great. And sticking with the payoff activity, you're guiding $3.5 billion to $5 billion 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, 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.

Yes. David, in that regard, I mean, as you have followed us, we originally were projecting those payoffs to be in the $700 to $800 million. But as those loans come up, our pricing rollover is higher -- significantly higher than market and so it motivates 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.

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 how comfortable you are on the funding side of things with funding this with core deposit growth.

Yes. Let me -- yes, go ahead, Lee.

Yes, I was going to say let me go and then Joseph can jump in. Yes, we feel pretty good. As we think about core deposit growth, I think there are a number of avenues that we're pursuing. Obviously, we think we can grow deposits from our 350 bank brand shares, 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 $1.2 billion after tax -- of excess capital. You guys are still obviously trading at a discount to your adjusted tangible book 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 all trees that you had then it sounds like you're pretty much at the end of that process of trimming, meaning C&I 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 a 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.

Yes. What we've kind of communicated is that the variables really are, as you described, how much balance sheet growth can we get in the targeted areas how quickly we see the nonperforming cure, which we are forecasting in total that in 2026, we'll be down $1 billion. And I think what the Board will look for with management's recommendation, as we look at those numbers coming together in 2026, how do we deploy that excess capital. And I would tell you, it's definitely discussion point amongst the board. And I would say, as we move forward through the year, it would be something we would look favorably if we're not deploying the capital.

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

Yes. 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 do the wholesale borrowings as a percentage of assets at 13%. Where does that go in your budget?

Yes. So we -- as I mentioned, we paid another $1.7 billion of brokered deposits of -- we only have $2.3 billion of brokered deposits remaining as of 12/31. So I mean we are writing probably better than other banks. And we've done a nice job over the last 18 months of reducing our exposure there. As it relates to -- and 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 flub and use 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 flub. And that is the opportunity for us in 2026 and beyond to further deleverage wholesale borrowings by paying down the club advances because we also get an FDIC benefit from that. So we think and we expect to continue to pay down the flub advances as we move through 2026 with any excess cash.

Got you. Okay. And then just switching to expenses. The expense guide of $1.5 billion to $1.8 billion, your current run rate, you're about $1.85 billion. So there's more expense rationalization coming in 2016? And just any color around that?

Yes. So there's a couple of things that I'd point out. And again, I mentioned this in my prepared remarks, we had additional incentive compensation and associated taxes in Q4. We also had severance of $4 million in the fourth quarter as well. And we -- the severance was related to some reductions. These are tough decisions that we executed on earlier this month. And so as I think about our sort of Q1 I we're probably more like , and this is excluding the amortization in the $4.55 to $4.65 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 optimization 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 optimization as it relates to a couple of operating centers 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.

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

Joseph, maybe a follow-up to the capital question. 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? Like are you maybe -- is it the rating agencies? Is it rent freezes and NYC? Is it maybe the C&I loans are coming on at a high RWA. Can you just help us think through what scenarios you would hold on to that excess capital?

Well, I think the -- 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 thing, I think, limbs that we've been looking at, and I think this quarter, we saw improvement was we've taken on an initiative to move the nonperforming loans out of the bank. And we want to see that, that initiative continues to be successful and we get the nonperforming loans down. The other element that we do in '18, 1 of the reasons we think we have a very conservative view on our credit quality as 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 historically, for us, drove a lot of loans into the special mention and to the substandard area. So I think as we can get some visibility around reducing all of that and as Lee commented, we have $9 billion of maturing in 2027. And we're about halfway through that because think about the 18 months. So we're -- 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 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 freezes in New York in the near term, any updates on what you're hearing from your multifamily borrowers in the city?

There's just a lot of dialogue going on about like how can we I think, collectively come to resolution between the new city government and owners of properties and banks that finance those about resolution. We are we look what would be the impact if this year, it seems like the rent board will be former Mayor Adams tilted and 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 out like forward thinking is if those rents were flat for 2 or 3 years and expenses went up a couple of 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 in multifamily and regulated in the fourth quarter. So -- but we -- obviously, we spend a lot of time looking at various aspects of that portfolio to make sure that we understand our risk. And we were kind of early on in our process of effectively underwriting with that window out 18 months, 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 Manan, I would just add to what Joseph said, I think the 2 key points that we made first of all was we haven't seen any slowdown in liquidity. Looking at the par payoffs we experienced in Q4, so that's number one. Number two, obviously, the work we did in 2024, where we re-underwrote that book and took both Ray and credit marks and we had the $900 million of charge-offs. But the other thing as well as sort of as we look forward, we have started looking at what sort of exposure might we have to the fines, violations, lens. We're just not -- we're not seeing much as it relates to that tie to app, but we don't have much exposure there was a landlord list that came out recently that we took a look at. And again, we don't have significant exposure there either. And we have the annual financial statements that we collect. And as I mentioned, we're 93% of the way through the '24 financials and 80% of stable, 7% have improved, 13% had 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.

Our next question will come from the line of Bernard Von Gizycki with Deutsche Bank.

Just on a borrower that went through the bankruptcy process, Lee, 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 yields and you thought from improved credit profile. Any additional provided? Just any color you can share on that process on that loan position?

Yes. 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 reemphasize is the auction was completed. It was confirmed, and we expect that to close before the end of the first quarter. what we've got in all of those loans today are in our nonaccrual balance and there's probably about $450-plus million of nonaccruals 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 we would look at it. And as I said in my prepared remarks, everything related to that bankruptcy. So any additional charge-offs or that when they did 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 took what we needed to do in the fourth quarter and previous quarters.

Yes. In addition to lease, I would just add, 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 nonperforming loan of that dollar amount, and you're going to turn that into a performing loan. It obviously is -- will be positive from a net interest income perspective.

Great. And then just on re-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 through by the end of 2026. And I'm just wondering, similar repricing for that $2.4 billion of the special mention loans.

Yes. 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 has already repriced or will have repriced in the next 18 months.

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

This is Jon Rau on for Jared. just thinking about the new loans being added to the balance sheet in C&I and then with CRE originations starting back up again, what the new like roll-on yield is for those? And the floating versus fixed mix on those loans?

Yes, yes. So the C&I loans 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 million to $300 million 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 million to $225 million. basis points. So that's how we would think about the spreads for the new originations.

Okay. Great. And then just thinking ahead, to the governor election later this year in New York. Any -- I guess, 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?

Yes. I think that's something that will take its ordinary course. On the 2019 legislation, I think there's -- 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 common ground on how do we fix the issue. And 1 of the areas is these go 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 50,000 or 60,000 units and so I think 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 we're going to have to see ultimately what direction that takes and how much discussion? I do know there's a lot of dialogue now occurring between property managers, owners of properties in the city. And hopefully, we all feel that we want people to live in safe and sound environments are supportive of continued correction of any violations amongst our portfolio. We're now watching that very closely. And we do expect borrowers when they have violations to cure those.

Our next question will come from the line of Chris McGratty with KBW.

Maybe for you, the $1.1 billion of par payoffs I think it was $1.2 billion or so last quarter. I guess my question is a 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.

Yes. I mean I think we feel good about the PAR Pay of sort of continuing as we move forward. Now, as Joseph mentioned, when we came in to '25, 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 $1 billion a quarter in 2025. There's a lot of demand out there from other financial institutions and the -- and we think that, that will continue in 2016. 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 2026. And look, I think the forecast we have put forward in the guidance, we were using the rate curve as of the middle of December, it had 2 cuts June and September. And a declining rate environment is only going to help those borrowers refinance. So yes, I mean, look, I think we feel that we should be in that $1 billion

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

Great. And my follow-up, I guess, 2 parts, Lee, on the model. the risk-weighted assets, given the par payoffs and the nonaccrual resolution plus the growth, how do we think about just the cadence of RWA growth over the year -- and then also a help on the first quarter share count with the warrants and everything.

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 million and 27 million ] you should be using around 473 million and then 479 million shares. So that's how we would think about the share count. In terms of the risk-weighted assets. So you've got to remember that as it relates to the multifamily and CRE book, first of all, the nonaccruals 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 2 we've got obviously the 50% risk weight in our multifamily for the performers. But as we've mentioned, we've seen a lot of those standard loans pay off at 100%. We're looking to reduce our nonaccruals, 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.

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

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

So Janet, I think that we -- if you go back and look at Slide, -- and the top 2 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, we shoot in a lot of instances that we are the primary bank of those relationships that we're generating. So it is really kind of a 1, 2 or 3 bank where we would look to lead that. In the Specialized Industries group, those are 12 industry verticals and as we've come into those, we've hired highly experienced people that have been in a lot of these industries for 25 or 35 years, 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 health care, very few of those where you would have 20 banks, and we're just one of banks making a $30 million commitment to the transaction. That is 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 swim up the fish ladder, so to speak, in the importance to those companies. So we -- it's highly diversified the originations. And then when you get into the equipment finance, those are usually multibank transactions, but we may be the only bank financing their equipment finance. And then in the asset base, we also look to be the primary bank in those transactions. So it's a really -- it's business by business is the way I would describe that.

Yes. The other thing, Janet, that I would -- first of all, on the credit side, 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. The average 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 Credit has final say on all loans that come on to 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 in the third line. So 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. 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 $225 million, $230 million 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've typically seen a 70% utilization on these facilities as well. And I think that's another important metric that is worth emphasizing.

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 2 rate cuts. It's sort of the midpoint of that range where your baseline expectation is what would put you at the higher ed versus lower end?

Yes. 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 what I mean by that is on the asset side, you do have that multifamily and CRE runoff. And I mentioned that if you look at what is running off in -- what is resetting, I should say, or maturing in 2 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 I 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 1 to 4 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 2016, given the good work we've done, bringing our broker deposits down to a level that is pretty consistent with other banks. So you've got all of those sort of contribute to the NIM. And the final thing I should have added is obviously reducing our nonaccrual 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 we've got that range because you've got all those variables.

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

On the C&I growth, just a clarifying question. You pointed to 125 relationship bankers doing 4 deals a year. So that will be 500 deals at an average deal size of $25 million or what are the offsets bringing C&I growth down this year to $6 billion to $7.5 billion, if you're mostly done rightsizing 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 to the 6.75% ramp.

Yes, 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 so -- it's our target.

Yes. Okay. Is what I said. That's the target. But again, 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 with C&I loans, you're just going to have the normal course sort of pay downs and people using the line, not using the line in 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 share-denominated can you talk about what you see as the ideal rate backdrop for Flagstar when you think about the bank's asset sensitivity today and how that evolves if you plan over the next year or.

Yes. 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 will benefit from in a declining rate environment. So we sort of call it this belies model hedge that 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 CRE has been a.

Yes. I think if the short end because the way we think about multifamily, it's sort of the 5-year and then obviously, mortgages at the 10-year so we'd be looking to sort of see an impact with a 5- and 10-year in particular, that would really benefit the multifamily and mortgage borrowers.

Our next question will come from the line of Anthony Elian with JPMorgan.

Lee, how are you thinking about NIM and NII specifically for 1Q after we back out the 9 basis points and $20 million benefit you saw from the hedge gains.

Yes. Well, I'm not sort of -- 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 onetime 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 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 $93.5 million to $95.5 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 billion to $109 billion.

Yes, yes. So we think that the balance sheet at the end of [ 27 million ] will be sort of more around $103 billion.

Our next question will come from the line of Matthew Breese with Stephens.

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. 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?

Yes. So the reduction in cash was the deleveraging and, as I mentioned, we paid down the $1.7 billion of broker deposits, $1 billion of flub. We did actually buy another $1 billion of securities in the fourth quarter. We haven't spoken about that, but we did buy another $1 billion of securities. So we used some of the cash to further build that securities book. And 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 what are we better doing with any excess cash we have, should we buy more securities? Or can we use that to lever and so that's the relationship between sort of securities and the cash, somewhat fungible. And that's how to think about it when you're looking at the numbers, Matt.

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

Yes, yes. So the spot rate as of the end of the year, and this is for all interest bearing for all deposits. So it does include our noninterest-bearing DDAs are in here as well, was [ 2.56 ]. 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 4.9%. And we've retained 86% of those move 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 I do think that we can realize a sort of 25, 35 basis point benefit at least as those CDs mature -- and then just looking out further, right now, we have another $4.2 billion maturing in Q2 at a weighted 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.

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 Jon Arfstrom with RBC.

Curious on the multifamily loans maturing over the next 2 years. Curious on the health of those credits in general. And then any chance that nonperforming balances could have a larger step down at some point over the next couple of years, just based on what's maturing.

So we -- what we said previously, let me start sort of with the last part of the question. As it relates to the -- so we ended the year at about $3 billion. Our expectation is we can reduce those by $1 billion in 2026. Now Again, remember, included in that $1 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 nonaccrual fairly substantially in 2016 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, 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 SCR based on the interest rate that would be in effect today. And so we are constantly looking out and running those analyses on those loans that are coming to -- up to their reset or maturity day. And obviously, that's all considered as part of our process. So it's all included in everything that we've taken and disclosed in the fourth quarter. But the reason anything unique about the characteristics of the Multifamily and CRE loans that are hitting their maturity and reset dates over the course of the next 18 months, 2 years that we haven't seen in resets of maturities up to this point.

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

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

Yes. I think it is certainly one. Obviously, I think we're sort of can we execute. I think that's really what it boils down to as I've mentioned, there's a lot of moving parts, which is -- it's a good thing, and it's a bad thing because obviously, you're having to kind of estimate what that all means -- but I think 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, I think everything we said we would do in '25 we've delivered on. And so I think this management team and this Flagstar team has proven that they are up for the challenge.

Our final question will come from the line of Christopher Marinac with Janney.

Just wanted to ask about the mix of deposits as C&I grows. When we see the C&I and the treasury a much different component, 12 and 24 months from now lead? Do you have any sort of guidepost just in general for how that mix is going to shift.

No, I think, again, we expect to leverage those relationships to bring in deposits. And I think it's going to be a mix, obviously, in an ideal situation you're bringing in noninterest-bearing the operating accounts. But I think as we sort of leg into that you'll see us sort of bring in interest-bearing DDAs and money market deposits. So I think it will be sort of a combination. But ultimately, 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 noninterest-bearing DDAs. And and further leveraging those relationships, not just for deposits, but the fee income as well.

Got it. So we'll see movement on those ratios and that mix during this year?

Yes, I think that's fair.

Okay.

The one comment I'd have for you, if you think about it, we've been effectively in this business about 15 months now. 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 yes, I do think we will gain momentum on that, especially as we've not only in the C&I side, but we've also geared up some specialized industries on the deposit side. that are focusing on -- these are like some title and some escrow and some insurance companies that 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 growing that segment of our deposit business as well.

Got it.

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

Okay. Thank you very much for joining us this morning. We really appreciate following the company and the questions that we get and both today and the follow-up meetings. We obviously remain extremely focused on executing on our strategic plan. including the transformation of Flagstar into a top-performing regional bank really focused on creating a customer-centric relationship-based culture and effectively to 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.