Than ks, everybody. Good afternoon. We're excited to welcome Flagstar Financial with us as our next speaker in Fireside Chat. We're excited to have Joseph Otting, the Chairm an, President, and CEO; Lee Smith, Chief Financial Officer; and Richard Raffetto, the Senior Executive Vice President and President of Commercial and Private Banking.
Thank you.
Thanks very much.
Pleasure to be here. Hello, everybody.
Maybe we'll start off at a higher level. With your background, Joseph, as former Comptroller of the Currency, and your Lead Director's background as former Secretary of the Treasury, it feels like Flagstar may be a little closer to regulatory leaders in the administration today than your average bank. Where would you see bank regulation or where do you expect bank regulation to go from here? We've all been eagerly awaiting some clarity on Cat 4. Where do you see some of the early opportunities for positive movement?
First of all, it's a pleasure to be here at the conference. This is one of the preeminent banking conferences, so thank you very much for hosting. Just by the volume of people and the excitement of the individual meetings, it's a great opportunity for Flagstar. This is like our coming-out party, so it's great to do it at the Barclays conference. When you think about regulatory relations in the U.S., from the banking industry side, for a number of years, they felt like the cost to the structure was prohibitive. It was complex. It was difficult. It impeded really good economic growth in the United States. I think under this administration, they've set a priority for the banking regulators to always have a safe and sound banking industry, but they really want the banking examiners to promote growth in the U.S. How is that occurring?
I think what you've seen President Trump do is sign a number of executive orders to drive certain aspects of the regulatory community to allow banks to do what they do best, which is lend money, participate in their communities, and provide services and be that engine for growth. Where do you see those priorities occurring? I think we've seen some really pretty quick shifts by taking reputational risk out of the card deck, so to speak, of the regulatory community. Frequently, the regulators would tell banks they didn't want them to do that for reputational risk purposes, which was difficult to define. I think removing that had a real positive step. Debanking is one we're seeing today where the fact of the matter is there has been a lot of debanking that has gone on over the last five to seven years in the banking industry.
Bankers generally point to the AML/BSA regulations as what I've said is, when they look at who are your check cashers, who are your payday lenders, who are your gun manufacturers, who are your bullet manufacturers, and then how are you managing both reputational risk and AML/BSA. Frequently, a bank would say, I'm making $25,000 off that relationship, but it's costing me $50,000 to manage the regulatory risk. You saw a big exit in that regard. I think the third area that you're going to see, I think really, you know, Travis and Mickey and the other, you know, Jonathan, regulatory community is really thinking through, should Flagstar Bank be regulated as a large bank under the same lens of JPMorgan? We've proven in our country that a regional bank can stumble, almost fail, and be absorbed by the system.
We can't have a JPMorgan or a Bank of America or a large bank in America. I think there has to be added review and ensuring that they're complying. A bank our size doesn't really require that enhanced regulatory infrastructure. That is very costly to manage and maintain. Can those monies and resources be used to support communities and customers?
Great. Over the last two years, Flagstar has obviously gone through a lot of transition and change since you came on board and have brought in a new management team. Maybe just give us a little update on progress towards the goals that you've laid out. At first, it involved a lot of balance sheet movements and structuring, capital raises, and a plan for future growth. Where are we on the path of that?
Yeah. First of all, I think we're in a really good spot. We had highly talented people in the company. We adjunct that with a number of senior executives who had long tenures in the banking business. I really believe our board, we've accumulated one of the best boards in the banking industry. There's not too many boards that have the Secretary of Treasury on the board, Belinsky, who runs a major fund and is very knowledgeable about banking, and then just a lot of what I would describe as resident experts. It really takes both good management and a board, I think, to steer a bank that perhaps was in trouble like this bank was. The story was this bank got over its skis, so to speak, in commercial real estate. Most of those asset classes were bulletproof for the last 10 years.
If you're in this industry long enough, I say every asset class has its time in the barrel. We were in one of those cycles where not only multifamily, but rent-regulated multifamily was really experiencing stress. When we came in and brought capital to the bank, we said, look, we want to build a really strong regional bank that serves communities across America and has a very highly diversified balance sheet. Over the last 12-1 5 months, we've raised our capital to be one of the highest capital-rated banks in our space. We have one of the highest liquidity levels.
We've really now focused on the future of building out this successful regional bank that focuses on profitability, strong risk governance structure, and being able to replace some of the banks that were best in class and service in the industry, like Silicon Valley Bank and First Republic , Signature Bank, and Union Bank, become that bank of regional banks that really offers what we think is best in class service. We're well down that path now. We've really dramatically reduced our commercial real estate exposure. Under Richard Raffetto's leadership, literally in a three-quarter period, we've now built this machine of commercial banking professionals. We've recruited roughly 200 into the bank. That last quarter, we did $1.8 billion in commitments and roughly $1.2 billion in loan outstandings. Our goal really is to get the balance sheet to look much more diversified in the future.
Great. You announced that you're going to be collapsing the holding company. You have a special shareholder vote coming up in October for that. What's the timeline for completing that? What are the benefits for removing the holding company?
Yeah, so just for clarification, what we're doing is we're taking the holding company and we're merging that into a federal savings bank. Then we're going to merge simultaneously the federal savings bank into the national bank and effectively not have a holding company. The question would be, why would you do that? I answer that question because the things that you normally use a holding company for, we won't be doing. What are those things? Frequently, people will have insurance as part of the bank that's done at the holding company. They will want to make equity investments either in funds or various equity investments. We don't plan to do that. Or they'll do lending that generally will move away from the deposit coverage that will be in the holding company. None of that is something that we have in our strategic plan.
For us, it became an unnecessary layer in our regulatory oversight and structure. It just made sense both from a cost and oversight perspective to collapse the holding company. We think that is the best structure for Flagstar Bank.
Rich, maybe shift to you a minute here. You joined the bank and you lead C&I in private banking. There's a corporate goal to have a third of loans from C&I. How's traction? How's it going and trying to build that out? Maybe you can just talk a little bit about the hiring process, how you're attracting good relationship managers, how you're attracting clients, and how's the growth looking now?
Great. Thank you, Jared. Thanks for hosting us today. You know, I've been a commercial banker for 35 years. Joseph has a couple more years on me. Having had both of us grow up in the business of relationship building and in commercial banking, that's the approach that we're taking here at Flagstar for sure. I think our legacy institutions played in C&I, but it hasn't always been in a relationship-focused fashion. What we're doing is we are scaling our commercial banking platform and our private banking and wealth platform. On the commercial side, if you look at us compared to peer institutions of like size and complexity, we've really been underpenetrated and punching below our weight in commercial banking. We and the board saw a really great opportunity to scale our platform in relationship-based commercial banking.
We've been successful to date in attracting, as Joseph pointed out, nearly 200 new professionals to the organization that have selected Flagstar as the next spot for their career growth. We're really focusing on attracting mid-career bankers who have proven success either in the geography that they've operated in. Obviously, we're looking to round out commercial banking in all of the geographies where Flagstar has north of 360 branches around the country in four big attractive geographies. We're also building out on a national basis certain specialized industry practice business units and capabilities and attracting mid-career bankers who have a reputation and a following in a particular industry segment. We've scaled our specialized industries platform along those lines from five specialized industry verticals to now a dozen or so. We'll further build upon that strength.
We've added new capabilities such as in the energy ecosystem, both an oil and gas banking team as well as a renewables energy team. We've further scaled our activities in the healthcare C&I practice. We've added a technology and communications team. We've also added an entertainment and sports team. As we've seen opportunities, we've more recently entered the subscription finance business as we seek to serve the financial services industry, both on the fund side and insurance, et cetera. As we scale up these industry specialties, we're able to have a running jumpstart, if you will, that's providing further momentum from a loan growth perspective and becoming meaningful. Whether it's a multi-bank situation or a bilateral singular bank situation, we have instant street credentials, so to speak, with bankers who know the industry, have great relationships and Rolodex. We're able to jumpstart that loan growth.
As Joseph pointed out, in the second quarter alone, we had new originations and increased originations of over $1.8 billion. We're very optimistic about keeping that momentum going into the third quarter and beyond as we continue to onboard new bankers. In the last four quarters, north of 100 revenue-producing bankers have chosen to join the Flagstar platform, and we are far from done.
When do you think you sort of hit that inflection point where the hiring is behind you and you're really just being able to book that growth?
From a C&I perspective, each quarter that this management team's been in place, we've slowed the decline of C&I loans. We've very purposefully pruned the portfolio, as the legacy bank had some low ROE lending-only relationships, as well as some really large exposures relative to what we thought was prudent for a bank of our size and complexity. We've pruned the portfolio purposely while we've ramped up the originations engine, and we're getting to that point of inflection, so to speak, where we're looking at net loan growth going forward, I think, in the C&I book.
How do deposits play into that? You mentioned trying to move away from that single product relationship and more into the full relationship. What's the outlook on the deposit growth side from commercial?
Great. I think our commercial and private bank, we have a vibrant platform to build off of. We benefit from having over $21 billion in deposits, many of which we have relationship primacy, and we are the primary operating bank. We're building off of a good base across the commercial and private bank. There's a real opportunity. Given the relationship focus that we have going forward, we expect obviously we'll start to ramp very quickly on the lending side, both in bilateral relationships where we are the primary bank and selectively into multi-bank relationships where we have a direct dialogue with the company. That will drive deposit growth going forward, as well as fee income momentum. We're not only investing in bankers and relationships, but we're also investing in product capabilities.
We're seeing an increased volume in interest rate swap, not only capabilities, but activity, foreign exchange, treasury management service fees, as well as commercial card opportunities, private banking and wealth related to those new relationships on the business side, and capital markets opportunities where we just haven't had those opportunities in the past.
You know, on the private banking side, you recently hired a new Head of Private Banking and a Chief Investment Officer. How are some of those hirings shaping and driving the private bank strategy?
Great question, Jared. The momentum that we expect to have in our private banking and wealth business is going to help us be that one-third, one-third, one-third balanced business mix, with the final third certainly being consumer and private banking and wealth. Some of our new hires, including Mark Pitzer, who we announced in March, would come over and lead that business. He had led the private banking and wealth franchise in North America for HSBC and was a senior person in that business at Wells Fargo previously. With that comes momentum. We think momentum is really important. We followed that with a new Chief Investment Officer. We'll have some additional new hires to announce here shortly. We're adding professionals in the wealth planning arena, as well as in insurance, to really round out the private banking and wealth offering. We have been ramping up our private banking lending.
Our organization has a historic competency in the mortgage business, and we are increasing our activities. We launched an interest-only mortgage product, again, to fill in the market gap left by [First Republic] and others, where we see a real opportunity to broaden and deepen existing relationships where we may only have been on the business side to add the personal side to those relationships as well. We're quite bullish on the build-out of our private banking and wealth enterprise under Mark's leadership.
Great. We have a few questions for the audience. If you can use your BlackBerry-looking device there to give us your opinion, we'd really appreciate it. First question, what's your current position in Flagstar shares? One, overweight or long? Two, market weight or equal weight? Three, underweight or short? Four, not involved? It looks like there's a room of opportunity here. You know, 36% not involve d right now. Almost another third that are more equal weight. Hopefully, you're able to transfer some of these into new shareholders. All right, second question now. Which would have the largest impact on improving the relative valuation of shares of Flagstar? One, better relative margin performance. Two, above peer loan growth. Three, better expense control. Four, credit quality outperformance. Five, more active share repurchases. Six, accredited bank acquisition. These are what we ask everybody. We'll see how this comes out. Two-thirds credit quality outperformance.
It seems like you're continuing to make progress on that.
I think that's a very important point. What we hear from other investors is us achieving fourth quarter profitability, which we're on track to do, and then a continued improvement in the credit quality of the financial institution are the two variables I think people in the short run are looking for improvement.
All right, next, third question. What will organic loan growth be at Flagstar next year in 2026? One, 3% to 5%. Two, 5%- 7%. Three, 7%- 9%. Four, greater than 9%.
How come Lee, Rich, and I didn't get?
Yeah, we can get you. It'll be a super one. Move up, starting to see some of that traction and expectations. 43%, 5% to 7%, and another third at 3% to 5% growth. All right, what will margin end 2026 versus the 1.81% in 2Q and the current guidance for 2.40% to 2.60% for the full year 2026? 3.20% or lower. I'm sorry, 2.30% or lower. Two, 2.30% to 2.50%. Three, 2.50% to 2.70%. Four, 2.70% or higher. Lee, feel free to jump in on this too.
Lee, you want to comment? I mean, the one thing that we're confident in is there are lots of levers.
There are a lot of levers. I think we'll get into that. On the next question, we'll talk about those levers.
All right, so 230% to 250%. Our fifth, how should excess capital be deployed? Increase the dividend, share buybacks, or reinvest in the business?
I know where I would vote.
Reinvest in the business. Good.
Hank, I think I'm closer to that beer now.
Great. Lee, following up on the margin and NII, the near-term target for NII and margin was reduced, but your longer-term goals remained unchanged. Can you just sort of walk through the drivers of that for us and how you think Flagstar is positioned for the likely rate cuts that are going to be coming in the rest of this year?
Yeah, first of all, good afternoon, Jared. Thanks for having us. Good to see you and everybody else. The main driver of the reduction in net interest income was really we saw heightened payoffs of the CRE book, particularly multifamily loans in Q2. We were estimating that we would be between $800 million to $900 million a quarter, and there was $1.5 billion of par payoffs. What I would tell you is 45% or $680 million of those par payoffs were substandard loans. We're OK with that because that just accelerates the de-risking of the balance sheet, and it accelerates us getting to that more diversified balance sheet of a third, a third, a third. It did have short-term impact on the interest income in 2025, and we reduced our guidance. We were able to offset a lot of that because we've outperformed on our cost reductions.
We had talked about taking $600 million of non-interest expense out of this organization year-over-year. We're going to be closer to $750 million. When we look in 2026, that smaller balance sheet rolls into 2026, and we adjusted the net interest income down in 2026. We were able to offset that entire reduction with those cost reductions that I just mentioned. As we think about a lot of the levers that we have to increase and improve our NIIM and net interest income, I think we're in a very unique position. We have between 2025, 2026, and 2027 $20 billion of multifamily loans with a weighted average coupon of less than 3.8% that are either maturing or resetting. If they reset and stay with Flagstar, then they reprice into a NUNO, which is five-year flood plus 300 basis points or prime plus 275.
If they stay with Flagstar, they're going from less than 3.8% to at least 7.5%. Obviously, if they pay off, we will use that cash to invest in growing Rich's businesses or paying down high-cost broker deposits. As we think about asset generation, Rich has talked about the great growth that we've seen from the bankers that he and Joseph have brought to Flagstar. We think in this declining rate environment, you're going to see us add a lot more residential one-to-four mortgages. Our mortgage strategy is very much geared to high net worth customers who we can put their mortgages on balance sheet, leverage those loans to bring in deposits, wealth business, or other opportunities. We are going to turn CRE lending back on in Q4.
As we think about high-quality CRE loans in other parts of our footprint, Michigan, California, South Florida, we will look to originate those higher-quality CRE loans as well. We've got a lot of different ways that we can originate and grow assets organically. I think, as you know, Jared, we've done a nice job of reducing the cost of our core deposits despite there being no Fed reductions in the first half of this year. As retail CDs have matured, we've been able to retain 85% of those and put them into new CDs at much lower rates. We've been tactical with what we're paying on some of our savings deposits and interest-bearing DDAs. We've used excess cash to pay down broker deposits and FHLB advances, which are high cost as well. That's just another lever on the liability side to continue to manage the NIIM.
If the Fed does reduce rates, our expectation is our deposit beta on interest-bearing deposits will be in the 55% to 60% range. Another piece of the equation, as we grow that C&I business, Rich touched on this, we believe we can leverage those relationships not just for deposits, but for fee income. Being lead left is one example. Treasury management, swap fees, FX fees. We're sort of seeing growth in that fee income and non-interest income part of the P&L. I think we've proven that we can sort of manage the cost. We're very myopic about that. We have over $3 billion of non-accrual loans. Those non-accrual loans are locked. I look at it as locked-up capital and locked-up earnings. As we can sort of reduce those, they're 150% risk-weighted. We'll get a pickup on the capital side.
We're going to take them from being non-accrual and move them back into interest-earning assets.
When you look at the trends in CRE paydown, you mentioned second quarter significantly higher level than expected with great representation in that substandard. What's the pace? Is that pace continuing as we move through the summer? What's the expectation for sort of the appetite for other lenders to take these loans out? Is that continuing unabated?
Yeah, we're absolutely seeing that continue. We think Q3 will look very similar to Q2, where we're close to $1.5 billion of par payoffs. We think 45% to 50% will be substandard. Typically, we're seeing 20% to 25% that are refinancing are going to the agencies, Fannie and Freddie, with the remainder going to other financial institutions. There's a lot of appetite out there for this asset class. Obviously, that's good for us because in terms of our strategy and just lightening up on that asset class in order to get to that diversified balance sheet that Joseph mentioned, it just accelerates that journey.
When we look at the $3 billion of non-accrual loans, is there an appetite at all for a sale or for doing something, maybe, you know, to unlock some of that capital in the near term? Or do you feel that it's just going to be naturally moving off the balance sheet?
Yeah, yeah. We have, it's a multi-sort of option strategy. You know, we're looking at DPOs, we're looking at workouts, we're looking at sales. Every loan is different, so you have to kind of deal with each one separately. They all have their nuances. I mean, Joseph and I, we talk about it being a game of inches. We're obviously going to choose the option that provides the best economic outcome for the bank. I think we've proven we've been successful at doing that with some of the sales that we executed on in Q4 and Q1. There's a lot of different strategies we can deploy to bring those non-accruals down. I do think, again, in a decreasing rate environment, that's only going to help us or accelerate us being able to do that because it'll bring those non-accrual loans into the money.
In the last slide deck, you gave some really great data on the multifamily portfolio in New York and the evaluation that you've done on those properties. From the conversations you've had with those property owners, how are they thinking about supporting those properties today as those are coming due? Are you seeing them be able to come up with additional equity? How are they performing in this environment with the political backdrop in New York?
Yeah, I think up to this point, we've been sort of very rigid. When loans hit their reset day, you have two options with Flagstar. You have the five-year flood plus 300% or the prime plus 275%. We've not wavered off that because our strategy has been to right-size that portfolio. I think you've seen, just given the amount of par payoffs, there's plenty of appetite out there. 50% of our par payoffs have been substandard. It's an asset class where there is a lot of demand out there. The borrowers obviously are looking for the best deals that they can find, and they're able to find them. I think the other thing with a lot of the multifamily borrowers that we have, they're typically families, and these properties have been in the families for generations. They've benefited from the 1031 tax rollover, so they have very low tax basis.
Yeah, generally, we're absolutely seeing the borrowers stand behind these properties.
I think illustrative of that is roughly low 40% of our non-accrual portfolio continues to pay as agreed. It's reflective that they want to keep these assets. They're using external resources from the properties, cash flow, or liquidity to maintain the updated status.
This fall, there's an election coming up here in New York. Joseph would love to hear your thoughts on that and what a potential Mondami administration could do to sort of the strategy and the pace of that transformation.
Yeah, you know, I think Mondami has run an unbelievable campaign. There hasn't been dilution after the primaries. It's actually somewhat accelerated. I think we all have to live with the reality he could become mayor of the city of New York. Most specific to us is his viewpoints on the rent-regulated properties, saying that he would freeze rents in the rent-regulated. Our observation in that portfolio is, in 2023, when we really, or excuse me, 2024, when we really went through that portfolio, we had a number of downgrades in that portfolio, starting with a fixed charge coverage and then what the loan-to-values look like. This year, based upon the 2024 data, we're not really seeing much movement in deterioration in credit quality.
I think what's happened in that business is you kind of had your revenue hedged, but you had your expenses unhedged, like the exact opposite of what you'd want to look like. As we went through that inflationary period, insurance rose, HVAC systems were up, a lot of things drove cost up. We don't see the deterioration on last year's numbers occurring in the portfolio that we've been through. I think we have another 12 months at 3% increases. The big challenge in that space is really interest rates. If we can see interest rates pull back, as Lee commented, I think a number of those properties will continue to be fine. If we go through a multi-year of those rates being fixed, I think it could be problematic in the future.
Let's see if there's any questions in the audience. Happy to open it up.
Impact on collateral values? Yeah, we actually suspended any of that activity when we arrived in April of last year. We have not done any rent-regulated new properties. We have done some restructurings for customers where we have full relationships with, but we have been basically out of that business now for 15 months.
Presumably, it's in runoff if there were adverse consequences from rent regulation.
Yeah. In our quarterly deck last quarter, if you haven't seen it, page 19 really gives a detailed breakdown of our rent-regulated. It bifurcates it based upon the percentage of rent-regulated, and in that bifurcation, it gives loan-to-value, lease cash flow coverage, what the lease percentages are. In that portfolio, we give a breakdown of the asset quality within each of those categories. It's worth a look. I think initially, there were some numbers that were very high in our exposure in the 50% or more. Turns out it was about $9.9 billion. It's down since that period of time. We do see that running down over the next 24 months, probably another 15% - 20%.
We have another question over here.
A few questions on the multifamily portfolio. Number one, you say that a lot of your loans have very low loan-to-value. Do you have a feel for what their cost basis is on their property so that, you know, if they actually handed you the keys, they would have a big tax bill?
Yeah, we don't have it by specific property. Obviously, that would be confidential information that the borrower has. We didn't seek that out as we kind of went through that process. You can imply by the amount of properties that if you were just singularly looking at the property, you would question it either has to be nostalgic or their basis as to why they continue to make the payments when the properties do not sufficiently cover the cash flow.
To follow up, what do you expect to be having to the portfolio as the big bulge of refi over the next two years that go to from a 3.5% coupon to a 7% coupon? I mean, I can kind of do the math that that's a significant increase in interest expense for those property holders. What do you expect to happen there?
Like we said, we saw $1.5 billion of par payoffs just in the second quarter. We've seen a similar trend in Q3. I think a lower rate environment will accelerate the par payoffs of those loans. That fits into our strategy of reducing our exposure to that asset class in order that we can get to a more diversified balance sheet of a third, a third, a third. I think you'll just continue to see those heightened par payoffs.
I think one comment, Lee made a comment that, you know, 45% of those $1.5 billion payoffs were in substandard credits. As we all know, substandard is the client, you know, has the flu. It's not just a little cold. There's real, you know, cash flow-related issues. The other thing is 20% to soo 22% of those payoffs are in the rent-regulated portfolio. Sizable ability to continue to decrease those dollar amounts.
Can I just ask on cost of deposits in Q3, except for excluding the September cut? Would you expect a big catch-up benefit based on the CD re-prici ng as well as the actions you've taken to strengthen the deposit base? Or do you expect it to be closer to flattish versus like the second quarter, excluding the September cut t he cost of deposits?
You
are going to see our cost of deposits come down in Q3. Just one of the levers I mentioned, we have $5.5 billion of retail CDs that are maturing in the third quarter at a weighted average cost of 4.5%. We have been retaining 85% of retail CDs that have been maturing, and we are able to reprice them at a lower rate. You have that dynamic playing out with some of the excess cash that we have from the par payoffs. We have paid down some additional brokered deposits, which are high cost, and we have been very tactical, as I say, with some of our other interest-bearing deposits. You will see us continue to reduce the cost of deposits even without the Fed cuts. If the Fed cuts happen, we target a 55% to 60% beta.
I think one of the things, like when we got here, it was about $12 billion of brokered deposits. We've paid down $5.5 billion this year alone. Those are the highest cost because those are what the market was pricing those at the time they were issued.
Maybe the last question.
Thank you. When is the time for potential M&A? At what point would you be ready?
The way we look at that is we have so many opportunities within the company. Our market share in C&I lending across the United States was 1% when we started this journey. Our focus on driving up the quality of our customer service with our customers and lowering our deposit cost are all things that we have in-house, the company that we can do. Based upon our 2027 numbers, we think we get back very close to what the market valuation is. Let's just say that's $13 today, 2026 book value is $18. Then we get 1.4- 1.6 times. You get a really quick valuation on the stock just by executing on our internal plan. I think we're also highly focused on building out the risk governance structure of a category four bank.
We think that all positions us very uniquely to be able to be strategically advantaged with that risk governance structure to be able to take advantage of opportunities as they're presented to us. A lot of people are outside the bay of the category four, not knowing quite what to do. If we're already there, I think that that is very advantageous for us. We'll all celebrate together.
Great. That's our time. Thank you very much to the Flagstar team, and thanks, everyone, for joining us.
Thank you.
Thank you.