Okay. Thank you everyone for being here this afternoon.
Thank you.
Pleased to have Flagstar here today. We have Joseph Otting, and Rich Raffetto, and Lee Smith. We've developed a reputation for our conference for having drama around it. I think back to two years ago about this time, something happened, and here we are two years later and we're talking about breaking even and getting profitability.
Profitability
I think it's fantastic. Joseph, we do this with every session. Just give us a 30,000-foot overview of a description of Flagstar and the company, and then I wanna talk a little bit about kinda where you were and where you are today, and then we'll get in and get Rich and Lee involved.
Perfect. Well, first of all, thank you for the conference. It 's the premier conference for banks, and one that you definitely wanna be on the invitation list, so it's an honor to be here. These are exciting times for Flagstar Bank. We spent the last couple years preparing for this moment of our company ability to be in the market and growing the bank, and that took a lot of hard work. We had to build a lot of foundational things in the organization, including our risk infrastructure, our credit processes. Today, we sit here as a $90 billion bank, servicing major markets like California, Arizona, Florida, New York, New Jersey, Ohio, and Michigan.
Really our goal is to be a full service bank serving the needs of consumers, real estate developers, and investors, and commercial and industrial type clients. We see the outlook being very positive and as we look to diversify that balance sheet to a third. Rich Raffetto came on, and we're growing a strong C&I business that's generating about $2 billion in outstandings each quarter. As you noted, last quarter was the first quarter in this journey we returned back to profitability, and we see the outlook being very positive for the bank as we move forward. As we look at our strategic plan, we have three real big buckets. One is we wanna be a top 25% performing bank in the regional bank sector.
Second of all, we wanna be known to have a very strong risk culture within the organization. The third is, we really think there's a place for a regional bank to be the best customer-centric bank in America, as measured like what our customers are telling us by what they need and how the bank serves their needs. Very much enjoy to be here. Look forward to answering some more detailed questions.
Okay. Good. The other part to maybe, I don't wanna say get out of the way, but talk about, is just your views on the economy in general. I know that your footprint is somewhat regional, but it's also national, but what are you guys seeing, economically?
Well, a week ago conference or today conference?
Like I said.
You know, it's kind of amazing, you know, the evolution of what's kind of happened. I think for the most part, when we're out talking to our customers, if the war truly is short term and it isn't disruptive from, you know, inventory sources or petroleum prices or a rapidly rising interest rate, I think people are very optimistic on what they think the U.S. economy is like. You know, I think everybody's subscribed to that we're gonna have 2%-3% GDP growth. That, you know, inflation at least seems to be contained around 2.7%. I think those are metrics for really strong economic growth. Businesses, as we observed, were looking to expand and invest in their businesses, and I think people were, you know, generally very optimistic.
We've traveled around the United States over the last couple weeks, hosting a lot of customers at different events, and I can't recall one person being negative about the outlook for their business. This is a very, I think, opportunistic time in our economy.
Rich, maybe it's a good time to introduce yourself and what you do, and I'm sure you agree with Joseph, but give us an idea. You're maybe a little closer to the customer, and talk about what you do and how you see the economy.
Sure. Thank you, Jon. I have the privilege of leading our Commercial & Corporate Bank , as well as our Private Banking and Wealth business. We are talking to clients every single day, business owners, entrepreneurs, C-suite executives. I would echo Joseph's comments about the constructive nature of the outlook. Business owners are investing for the future. We're certainly excited to be a part of that journey with them. We're staffing up to do it. We're building a commercial bank and a private bank that's fit for purpose with a lot of fresh capital to put to work, and building relationships and recruiting people. We view the environment as constructive. There's, you know, areas of concern around, you know, oil prices, the geopolitical environment, some concerns around private credit and the macro space. Business owners are generally constructive.
Yep. Okay. Lee, maybe introduce yourself a bit, and then also give us like an overview of the framework that you're looking for in terms of kind of current results and where you wanna see the financials eventually turn in 2026 and 2027.
Yeah, sure. Thanks, Jon. Lee Smith, Chief Financial Officer. I think just building off of what Joseph and Rich have said, when we sort of embarked on this journey about 18 months ago, we wanted to create a solid foundation from which to grow from. Otherwise, you're building on quicksand. We re-underwrote that CRE and multifamily book, and we took a number of charge-offs, and we increased our ACL reserves to really sort of batten down the credit side of the story. We sold non-core businesses, good businesses, in order to create liquidity and capital. If you look at where we ended Q4, we had 12.83% CET1 capital. That is the best amongst all regional banks.
If you look at what we have available from a liquidity point of view today, we have access to $27 billion between cash securities that we can pledge to the Fed immediately, and then other borrowings from the FHLB or the discount window. We're in a very, very strong position from a liquidity and funding point of view. We've taken over $700 million of expenses out of this organization on a net basis because we've obviously been investing in Rich's businesses and the growth there. We've been investing in technology. We've been investing in risk and compliance because that's a key part of our strategic plan. That created the foundation from which we can now grow and be successful.
As Joseph said, we're looking to create a diversified balance sheet, which is a third CRE, C&I, and consumer. We've invested heavily in Rich's businesses and further growing out the C&I business, both in terms of the mid-market within our footprint and those national verticals, and we have about 12 of those, which Rich can get into. We achieved profitability in the fourth quarter of 2025, which was something that we said we would do. I feel that now we are pivoting to the growth side of the story. It's about further growing the C&I business. We're starting to originate new CRE loans, not in New York City, but in other parts of our footprint, and growing that consumer book.
That will create NIM expansion. It'll create fee income expansion, and you'll start to see the profit, profitability of this business take hold. I think the great thing about this story is when you look at where this bank is trading at a discount to book, we don't have to do anything sort of crazy. If we just stick and execute on our plan, by the end of 2027, our profitability, our capital, our liquidity metrics look like our peers. Our peers are trading at 1.6, 1.7 times book. There's a lot of value creation that we believe we will achieve over the next 18 months to two years.
Yeah. Okay. I wanna ask this question, Joseph. It's kind of nuanced, but how do you spend your time today versus how you spent your time a year ago or 18 months ago? How big was the lift in terms of turning everything around to where you are today?
Yeah. I think if you know, reflect back when we first arrived, you know, the bank was having liquidity issues, had capital issues, had credit issues, and we clearly did not have a regulatory structure within the company to support the size of the organization. You know, clicking those off, we solved the capital issue, we solved the liquidity issue, we continue to work on finalizing the cleanup of some of the problem loan issues, and we've really built the credit risk infrastructure within the company. Where that probably assumed 150% of my time at that period in time. Today, I think that's less than 20% of my time.
We really have spent a lot of time over the last year with our employees talking about what's our strategic plan and where the direction we're going. We've introduced what we call STAR Values, so people know the type of behavior and people we wanna have in the organization. Then I would say it's emerging, but, you know, 40%-50% of my time now is being spent out in the marketplace, really on the front foot of interacting with potential customers of the bank. We're doing that all across the nation. Tonight, we have an event here in New York where we have 40 or 50, you know, predominantly prospects coming in. It's a joy to be out telling the Flagstar story. People are excited about it.
As being a new entrant with a fresh source of capital and telling people we wanna grow our wholesale banking business by $15 billion-$17 billion, we're a very attractive discussion point with people about, you know, being a partner in their bank groups.
Yeah. Okay. Wonderful. Rich, maybe to you, Lee somewhat alluded. He did allude to it, but why do bankers choose to come to Flagstar? Where are you on that hiring journey to get the commercial production where you want it to be?
Sure. Thanks, Jon. I mean, if you think about it, for a bank of our size and complexity, we have about half the C&I book of many of our peers. We see a great opportunity, as Joseph mentioned, to grow our balance sheet and be meaningful in our geographies and in certain selected industry segments in the C&I book, as we build a great regional bank. We're active in four big geographies, very attractive geographies around the country. Attracting talent is really critical for that journey to build that great regional bank. We're
Focusing on hiring mid-career bankers who know what good looks like. They've operated in an OCC-regulated large bank environment. They're coming on board to help us in our C&I growth journey, either focused on a particular geography where we can be relevant or in a certain industry segment, and we've launched a number of different industry verticals, and those bankers are able to come and add value pretty quickly. We're still only in the third or fourth inning of a nine-inning game, and I think it's very attractive to bankers, first and foremost, that our chairman and CEO, Joseph, grew up as a commercial banker. I grew up as a commercial and private banker, and we know these markets, and we are hiring people that we know or that our leaders that we've recruited to the organization also know.
We're hiring people with a track record of success at their prior organizations, and they're enjoying the fact that A, we have a lot of capital to put to work. We can lead with the balance sheet. We're investing not only in bankers but also in product capabilities so that they can do more than just provide credit to their customers. They're enjoying the fact that we don't have too much exposure in all of our C&I industry segments so that they know that we have capacity to serve their customers, and they love the entrepreneurial spirit of working for a bank that's big enough to matter but small enough to not be bureaucratic, so we can get decisions done quickly. Kris Gagnon, our Chief Credit Officer, was at Bank of America for many years.
Even as we stand up new industry verticals, there's not an industry that he hasn't seen. We're building, as Lee mentioned, a good foundation around credit process and standards as we enter new industry verticals, and we become simply more relevant as a commercial bank so that we can gain market share to catch up to many of our peer banks in terms of size and scope for a bank of our size in C&I.
Just to follow up on that, you crossed $2 billion in commercial originations in the fourth quarter, $3 billion in commitments. Where can this go over time?
To $10 billion a quarter.
Good ask. Volley for serve. I don't know what we call it.
Well, go ahead and answer it.
Where can it go over time?
Well, Jon, it's a great question. You know, we are continuing to scale the commercial side of our organization, and we're investing in both the commercial bank and the private bank. With our C&I originations reaching a strong milestone in the fourth quarter, I think the numbers that we saw in the third quarter and the fourth quarter are consistent and repeatable as we look forward. I think where we've reached an inflection point is with those strong originations, you're gonna start to see more of that new originations volume flow through in net C&I loan growth in the upcoming quarters. The momentum is going to get quite a bit stronger in terms of net C&I loan growth.
We've spent the last three or four quarters right-sizing some outsized legacy C&I exposures and reducing risk in the portfolio in some sectors that were experiencing some stress. Now we think we're mostly through that. Those strong originations, now that we've got more, just more bankers on the platform and some really great talent, we're gonna hire another 40-60 C&I bankers this year. You'll see in the first quarter, you know, we made great progress towards that, and we'll continue to make great progress with some really meaningful new hires. We feel really great about the momentum continuing that will translate into, you know, more net C&I loan growth. I could see us putting numbers up there, you know, mid-single digits C&I loan growth for the first quarter.
Mm-hmm.
Well, one thing just to add to what Rich said, Jon, which I think is important, and people don't realize this. When you look at that $3 billion of commitments and $2.1 billion of fundings in Q4, the average loan size was $25 million. We're not taking outsize names in singular corporations. This is a very granular portfolio. It's diversified across the mid-market businesses within our footprint and those national verticals. The average spread to SOFR was 225, so we're not giving this business away. The utilization rate is 70%, so this is real good quality C&I lending that we're doing. I think Rich and his team brought in 75 new customers as a result of those numbers in the fourth quarter.
Mm-hmm. Okay. Good.
Yeah, one other point. I think, you know, as people sitting in the audience, as we transform this balance sheet, last quarter we had a $1.5 billion payoff in commercial real estate. Our average coupon on the multifamily is about 3.7%, and if you just round SOFR off, you know, Rich is putting stuff on at 5.75%, so we're getting a dramatic lift in our net interest margin, and that should be reflective going forward as well.
Okay. Good. I did wanna talk about CRE, but just maybe one follow-up for you, Rich. Where are you finding the bankers? Where do you expect the hiring to take place? Is it specialized industries, geographic? Help us understand that.
Jon, it's a little bit of both. We are finding success in the industry verticals that we've launched. We've added a layer of management and leadership in various industry verticals. We will selectively continue to increase and announce some new industry verticals in the coming quarters. We're also very importantly investing in talented regional bankers across our footprint so that Flagstar can simply be more relevant in the communities where we have, you know, roughly 340 branches in those four big geographies. We have a long runway ahead that will continue to drive growth in the platform.
Bankers are coming from, you know, other large OCC-regulated banks, and I think the entrepreneurial nature of what we're building is very attractive, to mid-career bankers that see what we're building and see the momentum that we have in the market.
Yep. I get it. That makes sense. Lee, maybe for you on commercial real estate or any of you. Give us an update on the multifamily paydowns and payoffs to the extent you're willing to about, you know, for the quarter and then for the year, how you see that shaping up. You talked a little bit, I think, Joseph, about an inflection in CRE, and you're seeing some growth opportunities as well. Just frame the CRE payoffs and then what kind of growth opportunities you see.
Yeah, sure. Happy to provide this information. Right now, we're sort of right around $950 million for the quarter in par payoffs. We've still got three weeks to go. The trend is as we've seen previously, which is 40%-50% of those par payoffs are substandard loans. There remains a tremendous amount of liquidity out there for this asset class, whether it be the GSEs or other lenders. We see a big appetite and our par payoffs continuing at a fair clip. We're very encouraged by that. What I would say about new CRE lending, again, this is all part of the relationship-driven model.
We're working with real estate companies, private equity CRE funds, and as Joseph mentioned, that's who we'll be having dinner with tonight. It's acquisition and bridge loans, it's construction loans, it's term debt, but these will be floating rates tied to SOFR, typically 200-225 basis points. We're not looking to do fixed rate loans. Right now we're not focused on New York City. We know that we have a concentration in this geography, so it's leveraging the relationships we have in other parts of the country, the Midwest, South Florida, California, and we think we can add $2 billion of those new CRE loans this year.
Great. If anybody has questions, feel free to put your hand up, and we can get them answered. Transitioning to the margin, we could go a hundred different directions on the margin, but this is a margin and funding question. You provided some ranges for 2026 and 2027.
Yeah.
How do you think about some of the inputs to hitting the lower or higher end of the range of 2.40%-2.60%? How big of a lift is it to get to this 2.80%-2.90% margin for 2027?
You said we could go in a million directions. I'll go in five. There's a number of levers. First of all, between now and the end of 2027, we have $14 billion of multifamily and CRE loans that are hitting their reset dates or maturity dates that have a weighted average coupon of less than 3.7%. When they hit their reset or maturity, they either pay off and we use that liquidity to give to Rich to invest, or they reset at five-year FHLB plus 300. We're getting an immediate lift if they reset and stay with us. If they pay off, we're getting an immediate lift because Rich is originating those new C&I loans that are spread to SOFR of 225.
Those are two areas that are helping our asset yields. We also have $3 billion of non-accruals, and we've said that we'll reduce that by $1 billion by the end of 2026. We have one borrower in bankruptcy that has gone through the auction process, and it's been approved by the court that we expect to close that deal before the end of the first quarter. That's $450 million of non-accruals that go away. Those non-accruals are punitive from a capital and earnings point of view because it's not included in the NIM. As we reduce those non-accruals, that $450 million, we can now put that into an accruing loan, and bring it back into NIM. That helps the expansion.
Then on the liability side, we will continue to pay down expensive wholesale borrowings. As we've done to date, we've paid down over $20 billion of brokered deposits and FHLB advances that are expensive. We've done a nice job of reducing the cost of our core deposits. When the Fed cuts, we've targeted a 55-60 beta, and we've done better than that. We've also surgically been able to reduce our core deposit cost even without Fed cuts. Those are all the different levers we can pull. I feel that you'll continue to see NIM expansion this quarter, as we've shown over the last few quarters, and we'll get to the targets that we've put in our projections.
Even at the end of 2027, we will still have an amount of multifamily loans on the balance sheet that are less than 3.7% coupon. There's an ability to go even higher once you get into 2028 and beyond.
Mm-hmm. Okay. Thank you on that. You touched on the funding mix. Maybe Rich or Joseph, for you, what's the mandate for, you know, for the people you're hiring and your existing staff in terms of remixing the funding? We all talk about loans, and that's fun to talk about, but seems like the hard stuff is the funding. What's the philosophy, and what are you pushing people on?
Well, on deposit generation, we are building a relationship-centric commercial bank, and we've always been a relationship-centric private bank. I think that's two of the strengths of our organizations. Our bankers are motivated, not just to generate loan outstandings to be meaningful in the capital structure of their clients, but also to be their primary operating bank, if we can get that business. We're finding that we're winning in the marketplace every day, especially in the middle market and the lower middle market in the geographies where we're adding talent. Helping to fund the loan growth as we transition the balance sheet back into growth mode is a core part of the strategy. The bankers that we're bringing in know and embrace that strategy.
The bankers that have been here a long time, especially in our private bank, have always embraced that strategy. Being a meaningful player in the segments that we choose to play in and having that relationship primacy is key to driving deposit growth. We also cover certain industry segments that tend to be long on liquidity and deposits. Think about real estate related companies, the insurance industry, law firms, other professional services firms, municipal and government sector clients, nonprofit sector clients. We have an opportunity to get outsized deposit share relative to their loan needs. Those are very attractive market segments as we look at ways to continue to fund our loan growth and our return to balance sheet growth.
Mm-hmm.
Yeah. The other thing I would add, Jon, is we have a pricer that determines return on equity. For the most part, it's really difficult to get to our target of 11%-12% return on equity unless there are other aspects of the relationship. Depository fee income. Fee income can be treasury management, interest rate derivatives or 401(k). A lot of different products. It's incumbent upon the relationship manager who's going to start with a loan-only relationship to identify in the credit display how he gets to, before maturity, those acceptable yields. That's the driver. I would also say it comes down to leadership and management. We spend a lot of time in the company.
Lee and I and Rich spend every week with the entire organization of deposit, talking about pricing and growth and forecast to show people how important that it is that the company, you know, continue to move forward on our deposit strategies.
Okay. Great. Want to touch on credit and capital before we end as well. I ask you these questions periodically at the end of the earnings call if anything's changed. Give us your view on overall credit trends at the company. Lee touched on the nonperforming curing. How are you feeling about credit today?
Yeah, I mean, we feel like the trend line is positive. We should see substantial reductions in our non-performing loans this year. I think through the par payoffs, we'll continue to see, you know, our sub-standards reduced. You know, you gotta look at that kind of in accounts receivable. Some come in, some come out. But we think the net effect will be that they will be down. In the special mention category, we may be flat to slightly up because as we look 18 months out of loans that are repricing or maturing, we're then kind of looking at them from a risk rating perspective. To get into the special mention category, this says that you're getting close to a debt service coverage of one to one .
Overall, the metrics I think of what we're seeing clearly on the C&I portfolio is very positive, an improvement in the commercial real estate.
Okay. On the topic of capital, it sounds like it's been a popular question today in your meetings. Rich, you probably love the excess capital, you know.
We do.
To be able to lend out. On the other side, the tension is the investors want it lower, and they want buybacks as long as you're at this valuation. What's the board's view? What do you wanna see happen? What's an optimal capital approach?
You know, it's fun to be, Jon, on this side of the equation.
Absolutely.
I think there are three key things that management needs to execute on before the board makes a decision on the capital. Number one is retaining and maintaining a profitable organization. Last quarter was our first quarter where we were accretive to capital. The second really comes down to can you execute on reductions in the non-performing? The third is how much capital that Rich is gonna need, which is a combination of how fast the real estate loan pays down and how fast he grows his C&I. It's our viewpoint that as we get into the second quarter, we'll have better clarity on all three of those items. I think the board will have dialogue, you know, in July about, you know, what's the appropriate use of the excess capital.
Yeah. Okay. Great. Just maybe a minute or so left. Lee, anything else you wanna touch on about first quarter trends or anything else you feel like we may have missed from a fundamental or numbers point of view?
No. I mean, I think we continue to execute like we did in 2025. Everything we said we would do, we have done or we did. I feel that it's a continuation of that journey. That's the beauty of this story. If we just continue to execute, then we will get our metrics in line with our peers, and that's the valuation gap that we're looking to close. I think there's a tremendous amount of upside for our shareholders if we're able to do that in what is a very short period of time between now and the end of 2027.
As our financial strength continues to gain momentum, you probably saw, Jon, last week Fitch upgraded our credit ratings and especially our deposit ratings back to investment grade. That's very powerful for our bankers in the market to gather deposits, continue to build momentum as we further build the franchise.
Anything else, Joseph?
No. It's been a pleasure to, you know, have our team together. Most of the people joined the company with the recapitalization. We're fortunate to have Lee and Reggie there to be part of this team. The momentum in the company.
Sal.
Sal. Excuse me. The momentum in the company is really positive. You know, via employee surveys and communication, people are very energized about being what could be one of the greatest success stories in the history of the banking business, as a comeback from a very, you know, severe situation in 2024.
Yeah.
As we try to be more meaningful with not only our colleagues, but in the client base and in the communities that we operate, it's energizing to get feedback from clients, whether it's at client dinners like we're doing tonight or with third party surveys like the Crisil Greenwich survey, which recently named us as a best in class business bank and commercial bank. We're constantly trying to get feedback across those various constituents as we continue to execute on our plan.
Okay.
Great.
Amazing progress.
Thank you.
Thank you, guys. Good luck.
Thank you, Jon.
The rest of the day.
Great. Thank you.
Appreciate.
tonight.
Thank you.