We'll go ahead and get started. Next up, we have from Flagstar President and CEO Joseph Otting, and CFO Lee Smith. Thank you so much both for joining us.
Thank you.
Thanks for having us.
Maybe we were just talking about this earlier offstage, but you came in, Joseph, approximately a year ago. Give us a sense of, if we can go back over the last 12 months in terms of the task at hand, when you came in, what you saw in terms of the risks, opportunities, because clearly you found it interesting enough to sort of come back and get sucked back by, working at a bank, and w here do things stand today as you think about the health of the franchise?
Oh, sure. Well, hello everybody. Nice to be here and nice to be able to tell our story. So, we made an investment in the bank in early March 2024, where Steven Mnuchin and myself raised a little bit north of a billion dollars, put that capital into the bank. And really, it was an intent to kind of come in and be involved in an institution that we thought could be a strong regional bank in America, and at that point in time, there were some real questions around:, was a billion dollars enough? Does the bank have enough liquidity to survive? And what was the condition of the loan portfolio? Was it a billion dollars of losses or was it $5 billion in losses? And so, we, we really started out under three kind of contexts at that point in time.
One was to really get our arms around the credit portfolio, and we, through the course of the next nine months, really did kind of a complete deep dive due diligence on the portfolio where we looked at the entire book, including getting updated financials, where we marked the portfolio based upon the debt service coverage and then the loan to value if it had a secondary source of repayment. The other two big initiatives, obviously, was to raise capital within the organization and to create liquidity, and so we did three relatively large transactions. We went from about 9% CET to just under 12% a year in. There were three big ways that we did that. One, we sold our mortgage warehouse business. It was $6.5 billion. We sold that to JPMorgan at par. That created $6.5 billion in liquidity and roughly $650 million in unallocated capital.
We conducted and concluded the Mr. Cooper's mortgage servicing and MSR transaction that provided us roughly $280 billion, oh excuse me, $280 million of capital. It actually took some liquidity away because of the nature of some of the deposits. And then the last thing we did was we shrunk the balance sheet to roughly $100 billion, that created, you know, liquidity in that process as well. So, all of that process was designed to, you know, really create a strong financial institution to which us to start to move in the direction of growing the bank. And now our initiatives are really around building a bank that has a highly diversified loan portfolio between commercial real estate, C&I, and consumer-related assets. And we've launched a large initiative around commercial and industrial.
We've hired 60 people i n 2024. W e'll hire another hundred people in 2025 to execute that strategy. Just in the fourth quarter, from a, you know, standing start position, we generated just north of $640 million of commitments during the fourth quarter and roughly just under $400 million in loan outstanding. We're pretty excited about the direction that we can take the franchise, with being on very strong financial footing.
Good. I guess, maybe if you can break down and so all the steps that you outlined around restructuring the business, kind of ring-fencing the credit risk, and then the growth strategy going forward. Maybe on the credit risk, it seems like when I talk to investors, you've seen that, in your update that you gave last month, where it feels like you have a pretty decent handle on credit risk. If you don't mind spending some time on just the health of the CRE portfolio.
Uh-huh.
And where the maximum pressure is in terms of the customer base that's still under stress, and how you see that evolving from here.
Yeah. There were two primary concentrations in the commercial real estate portfolio. There was New York Manhattan office space. That portfolio today is about $2.5 billion. It was about $3.5 billion when we arrived. I would say that's where the biggest, like, hits to UPB were taken.
Right.
It was in the commercial real estate, and as you know, examples building that was 2019 appraised for $100 million, reappraised in 2024 at $40 million. Our $60 million loan should have been a $24 million loan. And so as we worked our way through the portfolio, we effectively kind of reset based upon cash flow and loan-to-value . That is what that portfolio looks like. I think we really feel like we understand the risk in that book of business. And you know, the observations by a lot of people is that sector has probably hit bottom and is starting to recover slightly. The other really big, you know, concentration in the bank is the multifamily portfolio. And that today, excluding about $2 billion in co-ops, is about $32 billion. And roughly about 13 of that 32 is in rent-controlled.
And so what you're having kind of occur in that space is, you got a combination of, you know, two different types of product. In the rent-controlled , they really do not have very many issues with occupancy because, you know, those buildings are 99% occupied. The challenge has been, as we saw these inflationary pressures on HVAC and labor and everything, they were somewhat restricted to a 3% increase on their rent increases, but what we found in our portfolio was the NOI in 2023 , 'cause we're always a year back, actually, was up 6%. S o, the portfolios have held pretty well. The big challenge that you have in that space is those loans go from 3.5% to current market rates at 7% when they reset.
But we've also had fairly good news in that regard, is we had $3.3 billion last year of resets, and 90% of those either paid off or are current today. So we're not seeing the stress that we personally anticipated to see in that portfolio when we actually went through, went loan- by- loan, and then kind of built up what we thought the risk was in the portfolio. And two parameters I would point to was we also last year had $3.5 billion of loans that paid off, at par, from other sources, and 40% of that was substandard debt. So we're, you know, we obviously have $5 billion of resets this year, $5 billion of resets next year, and $9 billion in 2027. But the borrowers that we have in our portfolio, which are predominantly family or closely held LLCs, really have supported these properties.
I would just add to what Joseph mentioned around credit. I mean, if you look at our ACL reserve, it's just under $1.2 billion. We took over $900 million of charge-offs as well, in 2024. So, you know, we've done a lot to sort of really get our arms around the portfolios. And to Joseph's point, we're still sitting today at just under 12% of CET1. I think the other point I would make, because there's a lot of different metrics we're looking at in the fourth quarter, we executed on some loan sales, including our largest CRE office loan.
We've got a couple of sales that we're going to execute on in the first quarter. And we're executing on those sales pretty much where we've got those loans marked. So, as well as all the payoffs and the reset history, we're getting more financials, we're getting more appraisals. We've done a lot to buffer the balance sheet with the ACL reserve and the charge-offs that we took.
Got it. And for those of us who've been following NYB or Flagstar now for a while, the rent regulation had a very detrimental impact on that multifamily space. Do you see anything from policymakers in New York and Albany that could actually provide some relief to make it a little more practical, I guess, for the landlords?
The only thing we've observed, you know, there's been all kinds of proposals because obviously it impairs the ability to operate those units in a successful manner. And it's causing some projects not to put the CapEx in when there's turnover. We've started to see tax abatement, where large properties are going and negotiating tax abatement for a guaranteed investment into the properties. We have had a number of customers that where they've done that, and it changed the properties from a negative debt service coverage to a positive. So that's where I think you'll see some action.
But I just don't see in today's world where there'll be an overturn in Albany on the legislative actions. You know, the Supreme Court last year validated not that this was like legal, but whether the legislators had the right to impose that legislation, and the Supreme Court came back and said they did. So, I think that was kind of the nail in the coffin, so to speak at that, that I don't see that getting overturned.
Understood. I guess the other thing, I think at the time it felt very courageous of you for putting out two, three-year guidance around what you at least thought the, the guardrails around earnings or ROE. When we think about that forecast, I'm sure you've fine-tuned it over the last 12 months. Where do you have the most conviction versus where do you see the biggest risk on why the bank may not be able to achieve those targets?
Yeah, I think there's three big levers that we have available. One is our funding cost. We have now been able to successfully during the course of between March of 2024 and today; we reduced our FHLB advances by $11 billion, and we have those at $13 billion, those are expensive as a funding source. We replace those with deposits. We also paid off the discount , the Fed discount window. There was $4 billion at the Fed discount window we paid off, and then we reduced our broker deposits by $2.5 billion. So, I think when you think of the overall funding cost matrix, that progress is going to allow us to continue to move into more relationship deposits and pay off those high-cost deposits. That's number one.
Number two, on the loan side, the resets on the portfolio on the multifamily, $5 billion, $5 billion, $9 billion, when those are resetting roughly from list issues 3.5%-7% , that's a sizable increase in the net interest margin for the company. And so you're going to see that. And then, in addition to our strategy of being more C&I related, those are better spreads. You know, they're generally priced on a variable basis over SOFR, or if there's fixed, there's generally hedges that the client will take out. So I think on the margin, you know, on the coupon side, you know, we have a good tailwind behind us.
Then the third that I would say is, you know, we committed to take out $600 million of operating expense in the company, and we are well on our way to achieving that between 2024 and 2025 to take those costs out. I think there are three big levers there that we have an advantage. I think on the other side, if you said, well, where do you see risk? I think the risk would be as if we saw a 200 or 300 basis points increase in interest rates, and w hat the impact would be is whether our clients would be able to support those properties with liquidity or other cash flow. That could be the risk in the projections that you could see more deterioration.
Just on that, we've seen from time to time your stock reacts negatively on how the market perceives where interest rates are headed.
Yeah.
So, one: Fed funds versus where the five or 10-year part of the curve—what matters more? And if we don't see any action from the Fed and the 10-year remains around between four and a half to five, is that a bad outcome for the bank?
Yeah. So, generally, most of the multifamily is priced on the five-year end of the curve. But as loans were maturing, people had a choice to go SOFR on the short end. And a lot of people stayed on the short end because if we were sitting here six months ago, all of us probably would have bet that interest rates were going down. And now the yield curve has steepened slightly,, and it appears to be interest rates will be flat for a longer period of time. And so I think, you know, most of the product will roll into the five-year going forward.
Okay.
Because, you know, there's a bias that interest rates actually could go up, and I think people are looking for certainty on the properties.
Does that at the margin make you worry more about credit or at this point?
Yeah, it's more about credit because we clearly will reprice a coupon from 3.5%- 7%. So.
But is that a big deal credit quality-wise or?
Pardon me?
Is it going to be a big issue from a credit risk perspective or?
Well.
Like, when do rates become an incremental risk that you've not accounted for as far as credit quality is concerned?
Yeah, I think, I think, I think you have to look at the. There's an economic way to look at the borrower, and there's a borrower behavior. And because we don't, we did not lend into REITs or large institutional investors, the portfolio is generally made up of family-owned businesses or closely controlled LLCs. That what we have found is economically, the property may show that it's slightly less than one-to-one debt service coverage, but the owners of these properties continue to feed the properties. And they continue to pay us off on. We had $3.5 billion of payoffs. The resets that have remained current are non-accruals. 60% roughly are still current on their payments. So I think it gets to a point, and every individual borrower is different.
At what point do they get to if interest rates continue to rise that they finally have to give up on the property? Now, one of the advantages that we have is a lot of our family-owned businesses have been in the family for two and three generations. Grandpa bought the building for $3 million. It's worth $50 million. They've got a $30 million loan. If they lose the property, they have a $27 billion gain that would be subject to taxation, and we're finding that stickiness has caused people to say, "I'm going to support these loans because A, I don't want the tax liability, and I'm hopeful that between rents increasing and maybe interest rates going down, I can get back into harmony where the project by itself will support the loan.
Got it. Maybe switching gears to the growth aspect, the C&I Bank, as you mentioned, means. I don't need to tell you this. Means banking is an extremely tough and competitive business.
It is.
But give us a sense of why the level of confidence you have in terms of the bankers you've hired and why you think they should be able to move either their books of business or grow that C&I book while also growing maybe deposits?
Yeah. We've hired 60 people in the C&I space. Our model is to hire highly experienced people that we've worked with in the past. I've worked in, I started as an analyst, became a covenant compliance guy, became a senior relationship manager, became a relationship manager. So, I spent really 35 years in this space through three institutions, Union Bank, U.S. Bank, and OneWest Bank. I know a lot of people and I've worked with a lot of people. Our story is a fun, fresh story to be part of a success story with this organization. We specifically have hired people with like 25 years more experience who are known in their marketplaces or in their industries as someone who's a really good banker.
And what happens a lot of time is they come join Flagstar. Client had never heard of Flagstar. They introduced Flagstar to them, and next thing you know, we're joining the bank group or providing credit or services into that relationship. That's our model is how we're going to grow. And then we think there's really four key ways to compete in the banking business. You can compete by geography. Pretty easy to disrupt because if you're doing well in a geography, trust me, all the other banks are going to show up. You can compete by products, but again, the industry are pretty quick product adapters. You can compete on price, but somebody else can always be cheaper, or you can compete on service. And our really whole kind of strategic plan is to compete where people view us as a really high-quality service provider.
And when you think about, well, what's transpired in the last 12 months, you know, or so, Silicon Valley went away, very high-quality service providers. First Republic went away, very high-quality service provider. Union Bank went away, very high-quality service provider. And Signature Bank went away or became part of it, became part of our family. But those four key banks that really defined high-quality service have all kind of evaporated. And in my mind, there's a role to be played, you know, in that, in that space.
The only thing I would add on the C&I side and credit to Joseph and the other executives, everybody we've hired is known to somebody. We haven't used a recruitment firm. And so we know the quality of the people that we're hiring. And I think from a growth point of view, as we sort of introduce these new C&I lending verticals, they're new to us. So, we have a lot of runway. You look at a lot of other banks who are probably maybe full up or close to their concentration limits. And so if these businesses are looking to expand their facility, we are ideally situated to be able to come in and take a piece of that expansion.
Got it. And I guess when we tie to C&I and services, talk to us a little bit about tech spend. Like, is the technology infrastructure in place to support that kind of, the kind of business you're looking to drive, or what are the two or three big investment projects underway at the bank?
Yeah, so when we went to OneWest Bank, which, you know, was the original IndyMac Bank, when we showed up, they didn't know how to spell commercial banking. Nobody had ever boarded a commercial loan, and so we really started from day one. We had to go get AFS systems. We had to, you know, put a treasury management system. We had to put foreign exchange derivatives, you know, all the products had to be assembled. Fortunately, coming to this organization, there is a baseline of products. We today can offer 401(k) services. We can offer corporate cards. We can offer merchant services. We can do treasury management. Oh, we have all the products. We need to enhance some of the products, predominantly the treasury management systems, but those products are in place with minimal expenditures.
We think we can have, you know, products that can compete in the industry. And so it's really not a lot of incremental cost other than people to be able to execute the strategy. And then in addition to general banking, we also have developed specialized verticals. We're in the entertainment. We hired City National's person, which is probably the best bank in the entertainment world, has joined our bank. We have a Sports group now that's functioning in New York. We have an Oil and Gas group that's closed already two transactions. They're not even here 60 days. And so we continue to play both on the specialized industries and also in general commercial and corporate.
The other thing you stressed on the call, and just in terms of the growth in fee revenues, is this essentially going to be driven by bringing in the lending relationships and then providing ancillary services through the customer base? Is that, is that the idea?
It's a combination. One is, you know, we come into the company really recognizing what relationship banking and lending and commercial is all about. We've spent a lot of time looking at our customers now and really saying, what are we doing for the customer, and what could we be doing for the customer? And there was limited motivation, incentive for people to cross-sell in the company. And we've moved that up now as an important part of any relationship. When we do a relationship review, we just don't want to be a lender. We want to have other products that justify our participation in the lending products. So we have this big customer base that we get a first go harvest into and make sure that we're providing them all the services that we can provide.
And then second of all, there was a fair amount of freebies that I think, you know, just by the nature of lack of accounting, and that people gave away to their customers that we're going to go have some discussions about customers. If they want those products, they're going to have to pay for them. And then I think, you know, Abraham, there's the third bucket, which is we bring new customers into the bank, obviously, cross-selling, you know, those customers. So, there's really kind of three big buckets where we see the fee income coming from.
The only thing I would add on the fee income is, don't forget about that mortgage business as well, which gives us a hedge in a declining rate environment. We've still got the retail mortgage origination business. We're obviously planning on originating loans for our private client customers, and that can generate significant fee income, certainly in a declining rate environment as well.
Got it. Just following up in terms of the bankers, and you mentioned you've known these people, many of them, have worked with you at prior banks. What's the competitive backdrop in terms of banker hiring today, relative to the big banks, other regional banks? Is it intense?
Of course, it's competitive. It's intense. But, I think people are looking for a success story in a place that they can have fun. In some institutions, they're constrained either by where the prospects are allocated or the number of credits that are already involved. It's kind of like you come to Flagstar, you get a fresh start, you know, don't have a big portfolio. I can go to all my old customers and try to become, you know, part of the relationship. I think most people, like probably a lot of you sitting in the audience today, see big upside in the stock of the company. We trade at 70% of book value. That's up from 60%.
You know, I think as we get more validation around our you know that we feel comfortable with the loan book and everybody else starts to get comfortable with that and they see the growth, and they see the margin and the spreads increase in the bank, we get to book value, then if we get to the peer group at 1.7, 1.8, this stock could be easily a $28 or $29 stock price. I think people are excited, you know, about, you know, being part of that as well.
Got it. And I guess, you mentioned earlier about paying down Federal Home Loan Bank wholesale funding, replacing them with lower customer or retail deposits. But talk to us about just the deposit engine for those of us, the NYB part of the business, never quite known for deposit growth. Just, I mean, I'm assuming it's still very competitive in terms of growing new deposits. And I'm wondering if rates don't go lower from here at some point, where do things plateau out, and how confident are you in terms of actually growing lower cost customer deposits?
Yeah, no, absolutely. So it comes from when we think about core deposits. So, as we said on the earnings call in the fourth quarter, the consumer bank grew core deposits $900 million. The private client bank grew core deposits $500 million. And so we think that we can continue, in those two businesses to grow core deposits. And the other area where I think we can bring in more deposits is as we're doing more C&I lending, we'll leverage those C&I loans to bring in more deposits from these new C&I customers as well. Coming back to the private client group, we've just introduced an interest-only mortgage. And if you think about broad product set of mortgages, so we've got the jumbo ARMs, we've got construction mortgages, professional loans, HELOCs. The intention is to leverage those to bring in deposits.
We'll do more mortgages that we'll put on balance sheet, but we'll get the deposit relationship as a result of that. And then, on the consumer bank, you know, we're always looking at the markets that we're in to just see what is the competition doing, where do we need to be from a pricing point of view? And what I would tell you is when we look at our retail CDs as an example, as they've been maturing, we've been retaining about 75%-80% of those. And then we've been making up the gap with new CDs that have come in from either new or existing customers. So, you know, they've remained relatively flat.
And as we think about the first quarter and just the pricing, we've got $5 billion of retail CDs that are maturing in the first quarter, that are pretty close to 5% and are going to reprice significantly lower. And then the last part of our promotional deposit price in the 555, the 535 programs, that'll be running off in the first quarter as well, and repricing at a lower cost as well. Oh, not only do we think we can bring in new core deposits, we've done a nice job of managing the cost of those deposits lower as well.
I guess maybe switching gears to the regulatory outlook, I think from a bank shareholder investor standpoint, lots of optimism around what the Trump administration could mean for banking supervision and regulation. Joseph, you've been the head of the OCC under the first Trump administration. If you don't mind, just share your perspective in terms of how punitive the supervisory backdrop was over the last few years, and what should bank shareholders expect in terms of relief that the banks could get.
Thank you for the question. I've obviously been asked that question a lot over the last 30 days. So I, I think to put it into context, you know, there's really like two core areas that a comptroller has, oversight and responsibility for. One is kind of rulemaking and policy. And, and a rulemaking and policy process usually is about a nine-month runway. So new comptroller shows up or Rodney's in the desk, you know, effective now. It's, it's by the time you write the rule, and you run it through comments and put it out for public comment, and you know, respond to all the public comments, it's about a nine, nine-month process. The other side of that coin is really how you influence the supervision part of the bank. And that's where a comptroller really has a lot of input and variety to that.
What I mean by that is I'll give you, like, an example. When Tom Curry was the Comptroller, he had put a stake in the ground that, you know, your AML BSA had to be bulletproof and clean and no violations of the pillars. Or if there were, irregardless of your capital and liquidity, you couldn't open a branch, close a branch, introduce a new product, expand the bank, merge the bank. He was very rigid around that particular part. When I got to the OCC, I was like, well, this is important. It's a rule, it's a law, it's soundness and safety, and it also protects the United States. But if a company has good liquidity and good capital and they're working on these pillars, then we need to allow them to continue to run their businesses.
And so, when I think about where a new comptroller is, he's going to, I think, put things in the context in my mind of what's the most important. And then I think when you mix in that Trump 2.0 is really focused on growing the economy, and banks can be a source of strength for that growth, I think they're going to really say, we want banks in the market providing services and lending to businesses that allow them to grow. And the speeding ticket part of this job, which is, you know, catching you going 38 in a 25 and writing you a ticket and then making you, you know, spend all this effort on that speeding ticket, is probably going to diminish. You know, it's not going to go away, but it's going to diminish a lot.
The better criteria is, what is the bank's liquidity? W hat is its capital? And then, can they help grow the economy? It's astonishing to me, with the billions of dollars that have been spent in the banking business, that 75% of all the, you know, Category IV banks and above are rated unsatisfactory on their compliance program. It's staggering to me. Like, how can that possibly be? A lot of it is you can get to 90% pretty quick, but the last 10% is really tough. And it doesn't impact safety and soundness. With that as the backdrop, I think you're going to see a more pro-growth. I think you're going to see a more pro-lending, a more expansion. I think you're going to see an administration that will support M&A and new creations of banks.
Because the other thing that occurred under the FDIC and the OCC over the last really four years was trying to get a new bank charter was almost impossible. And I think, you're going to see a turn to that, that let's get fresh capital. Let's recognize private equity as a valid source of fresh capital into the banking business. I think this, you know, negativism towards private equity is probably going to go away. I think, you know, if people want to sell or buy banks, they're going to be given the ability to do that based upon the merits of the bank, not the policies in Washington.
And we discussed earlier in a regulatory panel with the CEOs of BPI and ABA. Does it matter? I guess we have an Acting Comptroller of the Currency right at the moment. Does it, from a practical perspective, if we don't have someone permanent, does that limit that individual's ability to enact change?
Yeah, usually there's pretty good guidance to the acting about the administrative kind of overall viewpoint, and you know, previously, Keith Noreika was the acting for me. Keith began to plow the field. So when I stepped into the tractor, I could just, you know, Keith already knew what fields, what we wanted to do, where were our priorities, and he began executing on those. I think that's what we'll find with the new comptroller: Rodney will step in, he'll start the process. I think we'll see tangible improvements really quickly, and then I think the new comptroller can come in, you know, which is usually, you know, a three to six month process to get through the confirmation process, and they'll already have a path that's been created for them.
Got it. And I guess when you bring this home to Flagstar, you have obviously done a lot over the last year to reposition the franchise. But is there an aspect to regulations or supervision that could actually give you some breathing room in terms of what you're doing day to day?
I think you got to really question, should a Category IV bank start at $100 billion? I think, there's a general consensus that that number probably should be $250 billion, you know, that it's too punitive at the lower level. The other element that I think is too punitive is if you have a business plan that says in a three-year period, you're going to get to $100 billion. When you get to $100 billion, you have to be compliant to go over the line. I think there's some thoughts of, is it necessary that you're 100% compliant to get there? Do you really need to start back at 85% incurring all that cost for that journey?
I think, you know, if the dollar amount doesn't get lifted, I think you'll see more flexibility, as you're ramping up to move in that direction. Because today we have a bunch of regional banks clustered in that, you know, 70- 85 range, because they don't want to all of a sudden trip, you know, the regulatory input of, we need you to add $20 million or $30 million to your infrastructure to start building towards being a Category IV bank.
Makes sense, and from a capital standpoint, so you have well in excess of the CET1, 11% at the high end you're targeting. I think you mentioned earlier by your math, the stock could be in the 20s if you execute on what you, so why not buy back stock today or do you, do you see the room to deploy all that excess capital towards organic growth?
Yeah. We think, we think that on a compounded basis, if we can get to 11 or 12, you know, return on capital, why would you give that capital up, you know, today? We really think that we're going to run at deploying that excess capital. And then we'll have another discussion a year from now about, you know, that excess capital, if we haven't been able to redeploy, what are our options of returning that to our shareholders? But, you know, we're all in on growing the bank. You didn't ask the question, but I usually get this question, so maybe I'll answer it. A lot of people say, Well, you're at $100 billion today. Why don't you just fall below $100 billion, and you can get rid of all this regulatory?
But the reality is, even if you go below a hundred, you're subject to those enhanced standards for four quarters. The second thing is we'd have to fall all the way down to 85 before we would get, you know, all of that taken away. So in my mind, it's a strategic advantage to be over a hundred. We don't have to go ask to do it. We're already there. We're building the infrastructure to be compliant. So in the future, if the opportunities present themselves for acquisitions or whatever, that'll be one less thing we'll have to tackle at that point in time.
I think, given the discount to book we're currently trading at, we believe that by investing in the franchise, we can create much more shareholder value by growing the C&I businesses and executing on the three-year plan that we've obviously put out in our earnings materials, and so we think that that will generate a much greater return for our shareholders by keeping investing in the franchise.
Got it. And while on crossing $100 billion or Category IV banks, I mean, I think talk to us around long-term debt. Is that something you're thinking about at the present in terms of do you need to raise long-term debt the level at which you want TLAC debt at the bank? You know, what's the latest?
I think that requirement is gone now. I don't think, you know, that is going to recirculate back. I think, you know, if you're a bank, $250 billion, you may have some requirements along those lines, but I don't think a bank of our size will, in the next draft that will be included. I think on our capital plan, you know, we're kind of a one-trick pony, you know, common and I think our plan would be late in 2026, probably to look at doing some preferred into the balance sheet, so to diversify the capital structure a little bit and then on the investment grade, you know, we meet with the rating agencies every quarter.
They like what they see, obviously, with the capital and the liquidity and the refocusing and diversifying the balance sheet, but they really want to see the company become profitable. You know, we're currently on track now to become profitable in the fourth quarter of 2025, build strong profitability in 2026, and then build what we think will be in the top 25% of profitability for regional banks in 2027. My guess is we start to have dialogue a year from now on upgrades to investment grade.
Got it. I guess one last question just around regulations changing. I think, part of the view around regulatory changes is also that we could see a pickup in bank M&A. When you think about your franchise positioning with you being at a bank that's entered strategic partnerships back at IndyMac, OneWest, give us your sense of how you see bank M&A evolving, and does bank M&A have a role to play for Flagstar?
Yeah. So it's like maybe three questions there. So let me.
But I only have two minutes. So, I just squeezed it in.
So I think, I think you're going to see a lot of the M&A down in the $20 billion and $30 billion bank.
Okay.
I think you're going to see a lot of those banks come together and become $50 billion and $60 billion banks, and that'll bring either in-market consolidations or new geographic locations for those banks to be able to operate in. So, I think there's a lot of discussions and activity in that particular space. When you start to go up the food chain, it's, you know, all of us could fit in a room to have some dialogue, and, you know, our future is we're really focused on building out the risk governance, the processes of the organization so we can grow, and that growth can be organic and we think it can be acquired in the future. We're pretty adept at buying banks.
You know, we took over IndyMac, then we bought First Fed, then we bought La Jolla Bank and Trust, and then we bought part of Citibank. And when I was at U.S. Bank, we did a hundred acquisitions. I led a number of those acquisitions. So, it's a skill set we have. Organic is always the best in my mind. And that's really where we're going to put the gas pedal on. But I do think in the whole kind of ecosystem, we would also be viewed as a very attractive franchise once you can really focus on, hey, the credit issues are behind them, they're growing their C&I, their margins are back, and they're profitable. Because, you know, we have a California, Arizona, Florida, New York, New Jersey, Ohio, Michigan, Indiana franchise. That, for a lot of banks, is pretty attractive.
Either because you're in-market consolidating, or you're getting new geographic areas. And so, you know, I think we have a group of investors that own a big percentage of the bank. Fortunately, we're public already, so they can sell whenever they want. But I think, you know, this is a franchise that will be viewed very attractive in the future.
I agree. All right. With that, Joseph, Lee, thank you so much.
Thank you very much.
Thank you for having us.