FLG

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Bank First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.

Thank you, Regina, and good morning, everyone. Welcome to Flagstar Bank's First Quarter 2026 Earnings Call. This morning, our Chairman, President, and CEO, Joseph Otting, along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Smith, will discuss our results for the quarter. During the call, we will be referring to a presentation which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the investor relations section of our company website, ir.flagstar.com. Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Bank, N.A. may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we make are subject to the safe harbor rules.

Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. Additionally, when discussing our results, we will reference certain non-GAAP measures which exclude certain items from recorded results. Please refer to today's earnings release for reconciliation of these non-GAAP measures. With that, I would now like to turn the call over to Mr. Otting. Joseph.

Thank you, Sal. Good morning, everyone, and welcome to our first quarter 2026 earnings conference call. We are pleased to report another quarter of solid progress and continued momentum across our core banking franchise. Our first quarter performance reflects continued improving fundamentals, strong C&I growth, a high level in growth of core deposits, further progress in reducing the level of nonaccrual and criticized classified loans, continued margin expansion, and industry-leading capital levels. Just as importantly, our first quarter results demonstrate we are exceeding and executing on the strategy we laid out two years ago in delivering against our priorities. We are doing exactly what we set out to do, strengthening our earnings profile, improving the quality of our balance sheet, and building a top-performing regional bank. The progress we are making is intentional and driven by a clear focus on disciplined execution. Now turning to the slides.

Slide 3 of the investor presentation, I'd like to highlight some of the key performance factors and drivers during the quarter. First, disciplined expense management has been a hallmark of our return to profitability over the past two years. In the first quarter, operating expenses continued to decrease, and we expect them to decrease in 2026 and 2027. We also had another quarter of net interest margin expansion driven primarily by lower funding costs. Second, one of our key growth strategies is to diversify our loan portfolio by increasing our C&I lending platform. This quarter marked the third consecutive quarter of C&I loan growth after our reducing our exposure to certain industries, lowering our single transactions exposures, and exiting certain relationships that did not meet our return hurdles, and we've done this throughout 2024 and part of 2025.

Third, we experienced a further reduction in our overall CRE exposure, mostly through par payoffs resulting in the multifamily and CRE portfolios declining by $1.6 billion or 4% relative to the fourth quarter and further improvement in our CRE concentration. Fourth, we continue to see positive credit migration as nonaccrual loans declined by 11% and criticized and classified loans decreased by 3%. Additionally, we ended the quarter with a robust CET1 capital ratio of 13.2%. In terms of future capital distributions, our focus first is on demonstrating several quarters of sustainable profitability and continued improvement in our nonaccrual loans and flexibility to support our anticipated loan growth. We expect the board taking action on capital distributions in the second half of the year. Finally, I would like to highlight two other milestones during the first quarter.

We were very pleased that Fitch and Moody's upgraded the bank's long-term and short-term deposit ratings to investment grade with a positive outlook. When we filed our 10-K in late February, we disclosed that the previously material weakness in internal controls have been remediated. Both of these milestones reflect the tremendous effort, dedication, and hard work of our entire team. On the next couple of slides, we spotlight the significant progress we continue to make in our C&I lending businesses. During the quarter, C&I loans grew by $1.4 billion, or 9% on a linked-quarter basis, significantly higher than in prior quarters. On Slide 4, we go into detail on the trends in our C&I portfolio. While the first quarter is typically a seasonally slow quarter for originations, you can see on the left side of the slide that our originations were essentially flat compared to the fourth quarter.

We also will note that the pipeline remains strong, and we expect second quarter fundings in C&I to be similar to Q1. On the right side is the five-quarter trend in the C&I portfolio. After bottoming in the second quarter of last year, we've had steady growth, and the first quarter C&I loans grew by $1.4 billion, up 9% compared to the fourth quarter, and year over year, 12%. The next slide provides quarter-over-quarter growth by loan category. While the majority of the growth was driven by our two main strategic focus areas, specialized industries lending and corporate and regional commercial banking, this quarter growth was broad-based with growth also occurring in the mortgage finance and asset-based lending verticals.

Now turning to Slide 6, you can see the trends in our adjusted diluted EPS, whereby we have now reported two consecutive quarters of EPS growth by executing on all our strategic initiatives. On an adjusted basis, we went from $0.03 in the fourth quarter to $0.04 during Q1. One other positive note I'd like to make is that during the first quarter, we completed the consolidation of our six legacy data centers into two co-location centers with no disruptions neither to the organization or any of our customers. This positions us well in 2027 to have the baseline and platform for our core conversion with ultimately the goal in 2027 is to get onto one core. With that, I'll now turn it over to Lee to review our financials and credit quality.

Thank you, Joseph, and good morning, everyone. We're very pleased with another quarter where we continue to execute our strategic vision to make Flagstar one of the best performing regional banks in the country. We were profitable for the second consecutive quarter following the bank's return to profitability in the fourth quarter. More importantly, we made real progress against key initiatives that drive our financial forecast. We achieved net C&I loan growth during the quarter of $1.4 billion, significantly higher than previous quarters, following the origination of $2.6 billion in new C&I loans, of which $2 billion was funded. As we've discussed, net C&I growth in previous quarters was muted as we right-sized legacy C&I positions within the portfolio. Most of this is behind us and you're now seeing the growth from new originations materialize into net loan growth.

NIM expanded 10 basis points after adjusting for the one-time hedge gain of approximately $21 million in Q4. Furthermore, much of the new C&I growth occurred towards the end of Q1, meaning the full benefit of these newly originated loans will be felt in Q2 and beyond. Core deposits excluding brokered grew $1.1 billion, and we reduced deposit costs by 21 basis points. We paid off another $1 billion of FHLB advances and $300 million of brokered deposits as we further reduced our reliance on high-cost wholesale funding. Despite this de-leveraging of $1.3 billion, our balance sheet only decreased $400 million quarter-over-quarter. CRE and multifamily payoffs were again elevated at $1.6 billion, $1.1 billion of which were par payoffs, and 42% of these par payoffs were rated as substandard loans.

We resolved the situation with the one borrower that was in bankruptcy and reduced our non-accrual loans by $323 million while substandard loans decreased almost $700 million, meaning we reduced non-accrual and substandard loans over $1 billion quarter-over-quarter. Our ACL reserve decreased $78 million, primarily driven by lower CRE and multifamily loan balances. Operating expenses were again well contained at $441 million, a decrease of 5% quarter-over-quarter. We ended the quarter with 13.24% CET1 capital at or near the top of our regional bank peers. We were also thrilled to be upgraded by both Moody's and Fitch, particularly given that both agencies returned our long- and short-term deposit ratings to investment grade. We continue to execute on our strategic plan exactly as we said we would. Now turning to Slide 7. We reported net income attributable to common stockholders of $0.03 per diluted share.

On an adjusted basis, we reported net income attributable to common stockholders of $0.04 per diluted share. First quarter was a relatively clean quarter with only one adjustment, our investment in Figure Technologies, which decreased in value during the first quarter by $9 million based on its closing stock price as of March 31. Subsequent to the end of the quarter, we have sold out of approximately 75% of our Figure position at a gain of $1.8 million compared to our March 31 mark. On Slide 8, we provide our updated forecast for 2026 and 2027. We have adjusted our interest income guidance downward for both years as a result of increased CRE and multifamily payoffs, pay downs, and amortization. This is both good news and bad news as it accelerates our diversification strategy and reduces our CRE exposure but also reduces interest income and NIM in the short term.

Also, we're seeing fewer resetting loans staying on our balance sheet. We're currently retaining 35%-40% of resetting loans versus 50% previously. Again, while this accelerates our overall diversification strategy, it reduces short-term net interest income and NIM temporarily and until we replace it with new C&I, CRE, or consumer growth. In order to retain some of the higher quality relationship CRE runoff in the future, we have assumed spreads off of SOFR in the 175-225 basis points range versus our contractual option of 275-300 basis points off of five-year FHLB. Lower non-interest-bearing DDA growth in Q1. Deposit growth in Q1 was all interest-bearing, which was positive, particularly as we also reduced interest-bearing deposit costs 21 basis points quarter-over-quarter.

We believe the current rating agency upgrades will help us garner more non-interest-bearing DDAs going forward, but as it's being pushed out, it impacts net interest income and NIM. We expect total assets to be approximately $94 billion at the end of 2026 and $102 billion at the end of 2027 as a result of net loan growth. The reduction in interest income has been partially offset by reducing provision and operating expense guidance. Adjusted EPS is now forecast to be in the $0.60-$0.65 range in 2026 and in the $1.80-$1.90 range in 2027. Slide 9 depicts the trends in our net interest margin over the past five quarters. We continue to post steady quarterly improvements in NIM, driven largely by lower funding costs.

First quarter NIM increased 10 basis points quarter-over-quarter to 2.15% after adjusting for the recognition of a one-time hedge gain of $21 million in the fourth quarter. Turning to Slide 10, our operating expenses continued to decline, reflecting our focus on cost containment. Quarter-over-quarter, operating expenses declined $21 million or 5%. Slide 11 shows the growth in our capital over the last few quarters. At 13.24%, our CET1 ratio ranks among the top relative to other regional banks, and we have about $1.6 billion in excess capital after tax relative to the low end of our target CET1 operating range of 10.5%. The next slide provides an overview of our deposits. Core deposits, excluding broker, increased $1.1 billion on a linked-quarter basis, or about 2%.

This growth was primarily driven by growth in commercial and private bank deposits of $461 million, and retail deposits, which were up $142 million. As in past quarters, during the current quarter, we paid down $300 million of brokered deposits with a weighted average cost of 4.76%. In addition, approximately $5.3 billion of retail CDs matured during the quarter with a weighted average cost of 4.13%. We retained 86% of these CDs as they moved into other CD products, with rates approximately 35-40 basis points lower than the maturing products. In the second quarter, we have $4.8 billion of retail CDs maturing with an average cost of 3.98%. Also during the quarter, we further deleveraged the balance sheet by paying down $1 billion of FHLB advances with a weighted average cost of 3.85%.

The deleveraging, CD maturities, and other deposit management actions led to a 21-basis point reduction in the cost of interest-bearing deposits quarter-over-quarter. Slide 13 shows our multifamily and CRE par payoffs, which were again elevated this quarter of $1.1 billion, of which 42% were rated substandard. These payoffs are resulting in a significant reduction in overall CRE balances and in our CRE concentration ratio. Total CRE balances have decreased $13.4 billion or 28% since year-end 2023 to approximately $34 billion, aiding in our strategy to diversify the loan portfolio to a mix of one-third CRE, one-third C&I, and one-third consumer. Additionally, the par payoffs have helped lower our CRE concentration ratio by 134 basis points to 3.67%. The next slide provides an overview of the multifamily portfolio, which declined $5.5 billion or 17% on a year-over-year basis, and $1.1 billion or 4% on a linked-quarter basis.

The reserve coverage on the total multifamily portfolio was 1.83% and remains the highest relative to other multifamily-focused lenders in the Northeast. Additionally, the reserve coverage on these multifamily loans, where 50% or more of the units are rent regulated, is 3.20%. Currently, there are $11.9 billion of multifamily loans that are either resetting or maturing through year-end 2027, with a weighted average coupon of approximately 3.75%. Moving to Slides 15 and 16, we have again provided detailed additional information on the New York City multifamily portfolio, where 50% or more of the units are rent regulated. At March 31, this tranche of the portfolio totaled $8.8 billion, down 4% compared to the previous quarter, and has an occupancy rate of 97% and a current LTV of 70%.

Approximately 52% or $4.6 billion of the $8.8 billion are pass-rated loans, and the remaining 48% or $4.3 billion are criticized or classified, meaning they are either special mention, substandard, or non-accrual. Of the $4.3 billion, $1.9 billion are non-accrual and have already been charged off to at least 90% of appraised value, meaning $287 million or 15% has been charged off against these non-accrual loans. Furthermore, we also have an additional $73 million or 5% of ACL reserves against this non-accrual population, meaning we have taken 20% of either charge-offs or reserves against this population. Of the remaining $2.7 billion that are special mention and substandard loans between reserves and charge-offs, we have 5.8% or $154 million of loan loss coverage.

We believe we're adequately reserved or have charged these loans off to the appropriate levels, and with excess capital of $2.2 billion before tax, we think we're more than covered were there to be any further degradation in this portion of the portfolio. Slide 17 details our ACL coverage by category. The $78 million reduction in the ACL was largely driven by lower CRE and multifamily held for investment balances. Our coverage ratio, including unfunded commitments, was at 1.67% at quarter end. On Slide 18, we provide additional details around credit quality, which trended positively during the quarter. Non-accrual loans totaled $2.7 billion, down $323 million or 11% compared to the prior quarter. Criticized and classified loans also declined, decreasing $385 million or 3% compared to the prior quarter.

During the quarter, we did see an increase in special mention loans as a result of our comprehensive and prudent process that analyzes in detail all loans with a reset or maturity date 18 months out. 18 months from March 31, 2026, is September 27, and 2027 is our largest reset year, where nearly $9 billion CRE loans either reset or mature. This amount includes approximately $2.9 billion of multifamily, where 50% or more of these units are rent regulated. As part of this internal forward-looking process, we've applied the relevant pro forma contractual interest rate calculations and adjusted risk ratings accordingly. Three items I would note. We are now 75% through analyzing the entire 2027 cohort. The result of this analysis is reflected in our ACL, and we continue to see significant substandard par payoffs each quarter.

At the end of the quarter, 30- to 89-day delinquencies were approximately $967 million, a decrease of $19 million from the previous quarter. As mentioned last quarter, the biggest driver of this delinquency number is the additional day or 31 March when calculating delinquencies of precisely 30 days. As of April 21, approximately $493 million of these delinquent loans have been brought current. We continue to deliver on our strategic plan and are excited about the journey we're on and the value we will create for our shareholders over the next two years. With that, I will now turn the call back to Joseph.

Thank you very much, Lee. Before moving to Q&A, I wanted to add that we are encouraged by our continued progress made in the first quarter and remain focused on driving sustainable profitability, improving returns, and delivering long-term value for our shareholders. With continued improvement in credit trends, solid loan and deposit growth, and strong capital levels, we believe that Flagstar is well-positioned in 2026. In addition, I'd like to thank our board of directors, our executive leadership team, and all the teammates at Flagstar for their dedication and commitment to the organization and our customers. Operator, with that, I would be happy to turn it over to you to open the line for questions.

We will now begin the question and answer session. To ask a question, press star then the number one on your telephone keypad. We ask that you please limit your initial question to one and return to the queue for any additional follow-up questions that you might have. Our first question will come from the line of Chris McGratty with KBW. Please go ahead.

Good morning.

Hi, Chris.

Lee, maybe a question for you to start. The margin adjustment for next year. I hear you on that being a little bit more competitive on the payoffs. Could you unpack just the differences in your assumptions for the margin for next year? Specifically, is it a balance sheet size and the NII deposit size versus margin effect?

Yeah. It's a little bit of balance sheet and then a little bit of the additional payoffs of the CRE and multifamily book. As I mentioned, the balance sheet at the end of 2026 will be about $94 billion, $102 billion at the end of 2027. We are assuming a slight reduction versus what we had previously guided to, sort of in that $500 million-$750 million range. If you look at Q1, we did see $1.6 billion of par payoffs, pay downs and amortization in that CRE and multifamily book. As I mentioned in the prepared remarks, it's both good news and bad news. The good news is it's allowing us to get to our diversified strategy more quickly of a third, a third, a third, but it does impact short-term interest income and NIM. That's what you're seeing.

We think that we'll be able to use the funds from those par payoffs to just further grow the C&I, the consumer and originate new CRE loans, but it sort of pushes everything out. That's one of the items that is impacting the NIM. I think some of the better quality CRE loans that we would look to retain, we'll be pricing those off the spread to SOFR in the 175-225 range. That's obviously a lower rate than the contractual reset, which is five-year FLOT plus 300. We've deliberately left that contractual rate in place because as you know, Chris, we've been trying to reduce our exposure to those CRE multifamily assets where we're overweight and there's higher risk. That's obviously working. Then we're seeing as a result of that, fewer loans that are resetting are staying with us.

We were sort of originally in the 50% range. It's now in the 35%-40% range. Then the final piece that I mentioned was we saw very strong deposit growth in the quarter, $1.1 billion. Very pleased with that. It was all interest-bearing. We would like to see more non-interest-bearing growth. We think that will come with the rating agency upgrades, but that sort of pushes, it affects NIM in the short term, and it sort of pushes everything out. It's a combination of those items that you're seeing just bring the NIM down 10-12 basis points.

That's great. Thanks for that. Joseph, for you, I mean the consequence of this is you have more capital and then I heard you on the Basel III. It feels like everything's lining up for the back half of the capital distribution that you alluded to in your prepared remarks. Can you just talk through the milestones that, from here, you might need to see before you pull that lever?

Yeah. Chris, what we've been fairly consistent saying is we wanted the company to demonstrate consistent quarterly earnings. Our goal is obviously we feel that will occur now as we've turned the corner in the fourth quarter and then the first quarter. That's one of the legs of the stool. The second would be our goal is to get the non-performing assets down to $2 billion by the end of the year. That was kind of the second leg of that and to continue to make progress from roughly the $2.6 billion level that we are at today. The third is just understanding how much growth we can have in the C&I portfolio and balancing that against the CRE payoffs.

I'd say the way we look at that is the CRE payoffs have been greater than we expected, but the C&I originations have also been more. We do see some acceleration in the C&I occurring not only in our pipelines, but as we add more people into the various industry specializations and geographic strategy that we actually think that will continue to grow. When you take that kind of three factors into account, it was always management's intention to have a good insight to that through the second quarter and then have dialogue with the board on capital actions going forward.

Okay, thank you.

You're welcome.

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

Hey, good morning.

Morning, Jared.

Morning, sir.

Maybe sticking with margin, but for this year when we look at loan yields this quarter, I guess that was a little bit weaker than we were expecting. Anything that you're seeing there that we should call out and then just sort of as we look at the pace of margin expansion for the next few quarters, how is the loan yield playing into that?

Yeah. Well, if you look at the actual asset yield, it wasn't down that much quarter-over-quarter when you consider the two rate reductions in the fourth quarter. That's what I would say. The reduction was twofold. In terms of the interest income, you've got what I just mentioned. We had more payoffs and pay downs as it relates to that CRE and multifamily book, which we think is a good news story, but it does impact that short-term interest income, and NIM. Remember, in Q4, you do need to adjust for that hedge gain of $21 million, which was included in interest income and NIM. When you adjust for that, the NIM was 2.05 in Q4, increasing 10 basis points to 2.15 in Q1. The other thing that I would point out, and I alluded to some of this in my prepared remarks, Jared.

When you think of the $1.4 billion of net C&I growth in the quarter, I would say $600 million of that came right at the end of the quarter in the last week or 10 days. You're not seeing any pickup in NIM and interest income in Q1 as a result of that. You will see that flow through in Q2 and beyond. The other part of it is the borrower that was in bankruptcy, that got resolved on March 31, the last day of the quarter. You've got a significant amount of loans coming off of non-accrual and then a new accruing loan that is coming on. You didn't see any benefit of that in the first quarter because it occurred on the last day of the month and the quarter. You will see that flow through in Q2 and beyond.

I would just point out the net C&I growth of $1.4 billion in the quarter. We feel that we can continue at least at that run rate throughout this year. We've been talking about growing C&I, and people have been asking what do we think we can do. I think this is the first quarter where we're really showing the power of everything that Joseph and Rich have built and what those bankers are doing on the C&I side.

Okay. All right, thanks. If I could just ask quickly one more. You, in the past, talked about adding cash and securities. I think it was about $2 billion-$4 billion. What's sort of the path forward on cash and securities balances with the broader backdrop.

Yeah, I think as you look forward in 2026, you will probably see our cash position come down $2 billion. We will be buying more securities. I think you can expect us in Q2 to be buying at least $1 billion-$1.5 billion of securities. We would look to get that securities balance back up to probably $16 billion or so as we move into the second half of 2026. The securities we're buying, as I've said before, pretty vanilla, short duration RMBS CMOs. It gives us an additional lever should we need to create more cash to let some of those securities run off. A lot of it as well, remember, Jared, is governed by what are the par payoffs, because as we're seeing those CRE and multifamily loans pay off, that is generating cash.

We've got the option to grow the securities or pay down wholesale borrowings. You saw us pay down another $1.3 billion of expensive wholesale borrowings in the quarter between FHLB and brokered deposits.

Thanks.

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

Hi, good morning.

Hi, Manan.

Maybe staying on the topic of the Moody's and Fitch upgrades, I think Moody's upgrade also came with a deposit rating upgrade. Can you talk about the implications for both funding costs, I think you mentioned more DDA growth, but also for expenses? Is there any benefit on the FDIC expense side? Would love to get the full set of benefits from the upgrades beyond just the capital side.

Sure. Let me take that. Moody's upgrade on the deposit. As we obviously look to bring on new relationships, and roughly there were 75 new relationships that came in in the first quarter, part of our strategy, obviously, is to make those both depository and fee income relationships in addition to loans. Not so much in the middle market, but in the lower end of the corporate market where we are focused on a lot of those companies have in their bank or their investment policy is that the bank had to have an investment-grade rating, generally from Moody's or an S&P rating, to be able to exceed the FDIC insurance levels. That rating is very important to that strategy as we look to penetrate in and gain operating accounts that often exceed those dollar amounts.

We think that is a turning point, so to speak, for us of our ability to gain sizable new deposits with the relationships that we're bringing into the institution. We think that'll be significant for us as we move forward in that strategy. I'll turn over the expense question to Lee and let him answer that.

Yeah. The upgrades have no direct impact on FDIC expenses. As Joseph mentioned, I think it's a huge advantage in terms of being able to raise deposits going forward. Both Moody's and Fitch took our short and long-term deposit ratings back to investment grade. We're very pleased with that. Moody's still has us on a positive outlook as well.

Got it. Maybe to stay on the expense side, Joseph, you spoke about the consolidation of the legacy data centers and the set up for the core conversion in 2027. I guess how big of a lift is that? Is that multiple years? How are you thinking about the expense number there? I'm guessing it's baked into your guidance, but if you can just speak to that.

Yeah. Obviously closing six data centers and getting it to two co-location centers was really positive for us and was reflected in our expense forecast for this year. Next year, we currently run two cores where we have two of the legacy organizations on one core provider and one on a third. It is our intent by July of next year to be on one core. On a run rate basis, we believe when that gets completed, it's roughly a $40 million decrease in expenses for the company.

Got it. Thank you.

Our next question will come from the line of David Chiaverini with Jefferies. Please go ahead.

Hi, thanks for taking the question. Wanted to drill into credit quality a little bit. Trends continue in the right direction with criticized and classified loans trending lower. Can you talk about your expectations going forward with these loans? Do you expect a continued downward trend? Any surprises you've observed, either good or bad, as these loans have matured or reset?

Thanks, David. Yeah. No, we do not expect any surprises. Let me address that in the first instance. We continue to see continued reduction of criticized and classified. As Joseph mentioned, we're on track to reduce non-accruals by up to $1 billion this year. We saw a nice reduction in Q1, and we believe that will continue throughout 2026. That's obviously accretive from both an earnings and a capital point of view because those non-accruals are 150% risk rated. We continue to see a lot of liquidity around the multi-family loans, and that is why of the $1.1 billion of par payoffs in Q1, 42% was substandard. That is consistent with the trend that we've seen for multiple quarters now. We expect to continue to see a reduction in the substandard loans.

Then I mentioned the special mention loans had increased this quarter because we're doing that very comprehensive 18-month look-forward of all loans that are maturing or resetting in the next 18 months. 2027 is our biggest reset maturity year. There's $9 billion that is resetting and maturing. We're three-quarters of the way through that analysis, and by the end of Q2, we will be all the way through 2027. Again, even though there was an increase in special mention loans, given the reductions in the other categories, given the reduction in CRE and multi-family HFI balances, it's all reflected within our ACL reserve. The final point I would like to add is on the charge-offs as you brought up credit, David. Charge-offs were $78 million this quarter versus $46 million last quarter.

However, $34 million of what was charged off related to the one borrower that was in bankruptcy. Of that $34 million, $30 million was already fully reserved. There was an incremental $4 million related to that bankruptcy, really just sales costs that we needed to take. If you subtract that 34 from the 78, you're basically at $44 million of net charge-offs versus $46 million last quarter, which is about 30 basis points. We are consistent on a net charge-off basis, and we expect that trend to continue next quarter as well.

Yeah. Hey, David, the one other thing that I would add, I think Lee did a good job at describing that, is when we do that look-forward, 99% of those loans today are current in the special mention category. If you called those borrowers up, they would say, "Well, I've never missed a payment." What we do in that 18-month look-forward is we apply the current rate that they would incur if that loan matured today. Then we analyze that cash flow and make a determination where does their cash flow sit against a fixed charge coverage or cash flow coverage on the property.

If your property is at 3.5% today and you take it up to 6.5% per our contractual rollover, that's what's causing those loans to look slightly impaired, when actually that is really a forward look to those with pretty punitive interest rates.

Very helpful. Sticking with this theme, can you provide us with your latest views on a potential rent freeze and the impact this could have on your portfolio?

Yeah, absolutely. We have modeled out a rent freeze, three-year rent freeze occur or start in October 1 of 2026. A couple of other assumptions that I would add. We also assume as part of this analysis that operating expenses increase 2.75% per annum, and think about that as being inflationary. We also assume that the market units, so the non-rent-regulated units, are able to increase their rent 2.1% per annum. Here's what we found when we ran that analysis. Anything that is 70% or less rent-regulated, there is no impact to the NOIs. The reason for that is the rent freezes on the rent-regulated units are offset by increasing the rent on the market or non-rent-regulated units. 70 is sort of the demarcation line.

Anything that is above 70% rent regulated, there is an impact to ROI over that time horizon, the three-year time horizon, of about 7% or 8%. If you look at the rent-regulated slides that we have in the earnings deck, the earnings deck shows everything that is more than 50% rent regulated, and we have $8.8 billion, but $4.6 billion is tax rated with an amortizing DSCR of 1.5. Those borrowers would be able to absorb the rent freezes and that impact on NOI. When you look at the criticized and classified, which is $4.2 billion, we have taken significant charge-offs. Between charge-offs and ACL reserves, we've taken over $500 million of charge-offs, and we have reserves against that population.

We believe that we're more than covered just given when we re-underwrote that book in 2024, and we took over $900 million of charge-offs, and we increased our ACL reserves. We believe we're more than covered given what we've already done. A couple of other things I'd point out, though, on this. It's not just about the rent freeze. As you know, we're getting annual financial statements from these borrowers and looking and digging into those. We're doing a deep dive on everything that is maturing in the next 18 months, and we undertake a robust analysis on all of those loans. We're reviewing things like the worst landlord list, and lien and violation lists, and we don't have much exposure there.

A lot of our borrowers, as you know, these are families where the properties have been with them for multiple years, so they have a low-cost basis, or they benefited from the 1031 tax rollover. We do not have any REO on our balance sheet. If there was an issue, it would be showing up in our charge-offs and ACL reserve, which as we've just been through, you're not seeing. The final thing I would add is there is still an incredible amount of liquidity for this asset class. As we've seen from our quarterly par payoffs and as we saw again this quarter as well.

Very helpful. Thank you.

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

Hey, good morning.

Hey, Dave.

Hi, David.

I guess big picture, you obviously took your 2026 and 2027 earnings guidance a bit lower. Do you just view this as a delay and push out of your expectations by a couple of quarters? Or has anything changed at all about your medium and long-term profitability expectations for the bank?

David, you are spot on. That is exactly. Joseph and I were having this conversation. If you look at our thesis and everything we're doing, we are executing against our strategy. All this does, worst case, is maybe pushes things out one quarter or two quarters. Let me tell you what I mean by that. Because we're seeing increased pay downs or payoffs of that CRE multi-family, maybe we just need one more quarter of $2+ billion next C&I growth or two quarters. Everything is intact. Those reset and maturity dates, we know they're coming. We just need to sit here and be patient. It's just time. Worst case scenario, maybe you're just looking at an extra quarter or two. I think you've hit the nail right on the head there.

Thank you. The change in assumption on multi-family loan repricing to 175-225 over SOFR instead of 300 over the five-year. Does that have any impact on credit as you do the 18 months look forward on loans resetting?

Yeah. Let me just clarify that. The contractual resets we are sticking by. Anything that is resetting or maturing, but really resetting the contractual term is a five-year FHLB plus 300 or prime plus 275. We're not wavering off that, and we haven't wavered off that. All we are saying is if there are better quality CRE loans within our portfolio, maybe it's in the builder finance arena, or maybe it's in non-office CRE, where there's a deposit relationship, it's a strong credit. In order to retain them, we probably need to move to a market rate, which would be SOFR plus 175-225. That's all we're saying that we'll be very selective in only selecting those credits that are extremely high quality, and we think that there's either an existing or the potential for a future relationship.

Yeah. Hey, David, one point I think you were perhaps asking there was when we're doing that forward look and we're applying our contractual rate, we probably are 75 basis points over the market when we do that analysis that would perhaps push some of the loans into the special mention category. That, if you used a strictly market rate in that analysis, you would not see as many special mentions credits.

Okay, understood. Thank you.

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

Hey, good morning, guys.

Good morning.

appreciated the comments on the board meeting coming up and your thoughts on just capital deployment in general. You called out the $1.6 billion of excess capital above the bottom end of your target capital range. You talked about that for a quarter or two now. I was just curious how you're looking at that excess capital because we've seen some banks manage that down to their targets fairly quickly now that we have some clarity with the capital proposals. You've got more loan growth that's ramping up through the end of this year. Obviously, that's going to be improving profitability and whatnot, and you'll want to save capital for that.

Are you in a situation now where you could easily just save half of that excess and dedicate that to the loan growth that you're expecting over the next couple of years, and then take the other half and pay that out of the next couple of quarters? How are you thinking about getting to your targets more so in terms of timing?

Yeah. Well, great question. Look, I think we're in the fortunate position. What's sort of ironic is if you turn the clock back 18 months ago, people were asking if we had enough capital, and you sort of fast-forward to where we are today, and again, because of the great work the Flagstar team has done, we're in this sort of situation where people are asking, "What are you going to do with all the capital?" We're in the fortunate position where we can do both. We can grow, and we can obviously execute on capital actions later in the year, as Joseph alluded to. I think also what Joseph said is exactly what we're looking to do here, which is the consistent profitability, and we've now had two quarters of profitability, so we're on the right track. We want to see those problem loans come down.

We had a nice quarter in Q1, and so we want to see more of that. Then the organic growth, particularly on the C&I side, and you're really beginning to see that come through as you saw in Q1 with $1.4 billion of net C&I growth. We can do both. You mentioned the new capital rules and the Basel III proposal. Look, we've analyzed that, and we believe that that will give us an additional 60-80 basis points of CET1. That's all in the risk ratings, and again, that's something that would be very helpful to us as well. Yeah, we have optionality, and we're able to, I think, grow, and we're able to take capital actions. We just want to prove out the consistent profitability as you've seen and see a little bit more reduction in those problem loans.

Sounds good. Appreciate it. Just on the new C&I bankers you've hired, I was just wondering how they've done with their marching orders to bring in the first deal in the first 90 days, and if you can just give an update on where you are on hiring for this year. I think you were targeting 200 bankers by the end of this year, which meant maybe another 75 that you had to go. If you just give us an update on that. Any lingering de-risking efforts that you're wrapping up in equipment finance or any of the other segments, that'd be good to hear about as well. Thanks.

Yeah. Let me start with the bankers. First of all, I just want to compliment the job and the work that Rich and those bankers are doing. They have been phenomenal. As you can see from the net C&I growth in Q1. Again, this is very granular. The average loan size is in that $20-$30 million range in Q1. The average spread to SOFR actually went up. It was actually 242 basis points, and we've got just over 70% utilization. So, doing a tremendous job. Today, we have 131 customer-facing C&I bankers. I think Rich would like to get to probably more like 180. So, I think, he's probably got another 40-60 to go in terms of new hires. As we said before, our expectation and these are all seasoned bankers that know Joseph, know Rich.

Our expectation is that they're executing on their first deal within 90 days. Then they're doing, on average, three or four deals in their first year, five or six deals a year thereafter. I think if you do the math on that's how we're getting to the C&I growth that we've alluded to. Again, you saw that come through in the first quarter. Then the second part of the question. Yeah, as I mentioned, a lot of the tall trees, as we referred to, where we had outsized exposure to single names, we are mostly through that. If you look at the page on earlier in the deck, you can see that we didn't have anywhere near as much runoff in those legacy equipment finance, asset-based lending categories. There was a little bit of a swap between the two.

That's why there may be a little noise there. On a net basis, there wasn't much runoff at all. We feel that you'll start to see those areas grow, which will then complement what we're doing with the national lending verticals, the specialty verticals, as well as what we're doing from a middle and upper C&I market point of view going forward as well.

Yeah. The other thing, obviously, Lee hit it on the spot. We've assembled really an incredible team in the C&I space that have come to the company in that 20-25-year experience level across both geographic markets and industry specialization. Our focus really is in kind of that $20 million-$75 million range type credit size. That gives us the ability both to scale quickly, but also clients that use a lot of bank products and services, that gives us cross-sell opportunities. I would say, I think if Rich was here, he would say probably 90% of the people are kind of hitting that first deal in 90 days, with a number of them far exceeding that kind of production level.

It's really been an impressive story, and I think if you had to assess where we are, I think we're kind of sliding into second based on that overall strategy. We really do continue to see I think good market expansion, good growth in both adding people and those people that have now been in the company for six to nine months are really hitting their stride. I commented in my comments that we really expect to be at or above the production level for Q2 to what we've done in Q1, and we actually were pretty hot coming out of the box this quarter with new closings that may have tried to get done in the first quarter but leaked over into the second quarter. The opposite of what we had in the first quarter is we had a really strong March on closing.

We actually came out of the box really hot in April. We look for this to be an exceptional quarter.

That's great. Appreciate all the color. Thanks.

Our next question comes from the line of Anthony Elian with J.P. Morgan. Please go ahead.

Hi, everyone. Lee, on fee income, you reduced slightly the 2026 outlook, but it still implies a material step up for the rest of this year to hit that range. Talk to us about the areas you think will drive the increase into Q and beyond?

Yeah, sure. Good morning, Anthony. A couple of things on the fee income. First of all, and you probably already have, but I want to make sure people are adjusting for the Figure gains, losses, because that is in the non-interest fee income section. We had a $9 million gain in Q4, and then we reduced the valuation, and effectively you saw a $9 million degradation in Q1. That's an $18 million swing quarter-over-quarter. I just want to make sure people are capturing that. We think that it's really all of the line items. Capital markets, syndication income, swaps and derivatives. We hired a new head of capital markets towards the end of last year. He's just getting his feet under the table, and we feel pretty excited about some of the things that we're seeing there.

As we originate more loans, we expect unused loan fees to increase. We have some SBIC investments. The returns were slightly down in Q1 versus normal quarters, and we expect that to return to normal as we move forward. Q1 is seasonally low for mortgage gain on sale. We would expect gain on sale to increase, or it will increase as you move into Q2 and beyond. The CRA fee income should increase as we start originating new CRE loans. The consumer overdraft and service charges should increase. We think net loan fees and charges; deposit fees will increase. We said before, one of the things that we identified that was happening was we were waiving a lot of fees in the private bank, and we are gradually reducing the amount of fees that we've been waiting in the private bank.

It's not one area in particular. We expect to drive fee income across all categories and all parts of our business model.

Thank you. Then on NII, can you share with us how much visibility you have just on the level of commercial real estate payoffs going forward, right? Why what you saw in 1Q lead to such a sharp reduction in your NII outlook next year? Really what I'm trying to get at is the confidence you have that this is it for reductions to the NII outlook. Thank you.

Yeah. No, it's a fair question. I would tell you that what people I think need to appreciate is there are more moving parts to this model than probably any other bank out there, especially banks that are mature because you're dealing with pool payoffs, pay downs, new originations. We're in growth mode. You're dealing with reductions in non-accrual loans, and they're lumpy. It's not linear. We're looking to pay down wholesale borrowings, reduce the cost of core deposit. There are more moving parts to this story than any other bank out there. We are moving in the right direction. To be absolutely precise on every single one of those, it's not easy. We feel based on the guidance that we've provided, that this is the best look that we have today. Could pool payoffs or pay downs increase? Sure, they could.

We've got strategies in place, as I mentioned, for the better-quality loans to try and retain them. There's a lot of moving parts. I think what I would look at is the bigger picture. As Joseph and I have both said, we are doing exactly what we said we would do and executing on our strategy. The worst case here is maybe it pushes things out one or two quarters. Instead of Q4 of 2027, we get there in 1Q of 2028 or 2Q of 2028, because we just need another quarter or two of $2+ billion of net C&I growth. That's the worst-case scenario, and that's how I would look at it when you're looking at the bigger picture. You've got to look at the bigger picture.

Fair enough. Thank you.

Our next question comes from the line of Matthew Breese with Stephens. Please go ahead.

Hey, good morning.

Morning, Matt.

Hi, Matt.

I wanted to touch on the inflows and outflows of NPAs this quarter. Going back to the Pinnacle group, the bankruptcy loans, which I thought was maybe $500 million or $600 million in balances. If that came out, it implies a decent chunk of new NPAs went in. I was just curious, if that's the case, could you provide some color on the new inflows of NPAs, number of loans, size of relationship? Joseph, are you sticking with your outlook for a billion-dollar reduction in non-accruals this year?

Yeah. First of all, Matthew, we are sticking with that. You've got to look at that category like accounts receivable each quarter. We've had that volatility where some come in and some go out. We had roughly $700 million of resolutions during the quarter. You do have inflows and outflows that occur, and that has always been there, where things are transitioning through that. We do expect this next quarter to be down $200 million in additional NPAs. It's the trend line that we take a look at. There is ins and outs out of that category on a fairly consistent basis.

Matt, I'll just remind you, 35% of our non-accruals are current and paid.

Yeah.

We're very punitive on ourselves in the way that we risk rate these loans. No one else has that amount of their non-accruals current and paid. You've got to bear that in mind as well.

Real estate secured.

Yeah.

Yeah.

Understood. Okay. Lee, could you just clarify where the hedge gain was flowing through in the average balance sheet? I thought it was in borrowings, but I think you had mentioned it was in interest income.

I'm sorry. Finish your question, Matt. Sorry.

I was squeezing in two questions in one.

Well, let me handle one first because you'll have to pay for the next one. It's all in the FHLB, the wholesale borrowings line. That's where that gain was, Matt.

Okay. Could you just provide this quarter, what were new loan yield originations? Overall, how does that compare to the pipeline, and how does that compare to the fourth quarter?

Yeah. I mentioned a couple of questions ago. The new C&I loans were coming on at a spread to SOFR of 242 basis points in Q1, which was higher. They were coming on around 225 in Q4. We saw a nice increase in Q1 in terms of average spread to SOFR.

Great. That's all I had. Thank you.

Right. Thanks, Matt.

Our next question comes from the line of Casey Haire with Autonomous. Please go ahead.

Great. Thanks. Good morning, guys. Lee, I had a question for you on the balance sheet forecast of $102 billion in 2027. If we start at $87 billion today, you have about $12 billion of multifamily coming back to you between now and 2027. You lose 60% of it. That is a $7 billion drag. That takes you down to $80 billion. You originate $2 billion a quarter of C&I. That takes you back up to $94 billion. You're still $8 billion short versus that $102 billion. I guess, what are we missing here?

No. Yeah. A couple of things. C&I growth is pretty significant in both years. You're sort of looking at $7+ billion in both years. Remember, on the CRE and multifamily side, we are originating new CRE loans. Not New York City CRE loans, but CRE loans in other parts of our footprint. The Midwest, South Florida, California. You've got to factor in the runoff in CRE and multifamily is not as big as you think because we're replacing some of that with new CRE originations. We also expect to see growth in the residential mortgage line item as well, as we're originating more mortgages for balance sheet. I think the piece you're probably missing is the CRE multifamily runoff is probably not as great as you're thinking because of the new loans we're originating.

Okay. Fair enough. The deposit growth was decent this quarter. What's the outlook there? Can you build on this momentum? How is the loan to deposit ratio? Where do you want to live on that ratio going forward?

Yeah, we believe we can build on it. As we said before, leveraging the new C&I customers that we're bringing in is one area that we feel that we can be successful in. If you look at Q1, and you look at the deposit growth, about $450 million was from the commercial customers and the Private Bank customers. Ultimately, we want to get the operating accounts of those commercial customers. If we have to start with some interest-bearing deposits, that's fine as well. We believe that we can leverage those new relationships on the C&I side. Our treasury management team is working diligently to make that happen, and we saw some green shoots in Q1. We believe the Private Bank is another area where we can grow deposits.

Mark Pittsey, who runs the private bank, has really built out a real private bank with the chief investment officer, trust advisor. We've got a family wealth planner. We've got all the products that they would need, interest-only mortgages now and a broad mortgage product set, subscription lending. We feel that that's an area where we can continue to bring in more deposits. Then leveraging our 340 bank branches as well. Obviously, the new CRE lending we're doing. The expectation is that is relationship-driven and will come with deposits and fee income opportunities as well. We do believe that we can continue the momentum and grow more deposits. I'd like to see some more non-interest-bearing DDA growth, but we think that will come with those rating upgrades that we got this quarter for Moody's and Fitch.

Okay, thank you.

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

Hey, guys. Good morning.

Morning.

Lee, I know your specialized regional banking segments are being built out and deposit gathering initiatives will be in a different life cycle versus peers. With rates potentially on hold, how would you describe deposit pricing pressure? Sounds like the Moody's Fitch upgrade could help alleviate some pressure that some peers might be seeing more of. Just talk on what you're seeing within your footprint.

Yeah. Obviously, it's competitive, Bernie, and we meet every week on this, and we review deposit gathering in every single market that we're in, and we look at what our competitors are doing, and we make sure you need to be competitive. What I would say is not only did we bring $1.1 billion of new deposits in in Q1, we also reduced our cost of core deposits 21 basis points. We're not overpaying for these deposits. I think we're leveraging our relationships. We're leveraging the model that we've built. We're being mindful, obviously, of what our peers and competitors are doing. You have to be. I would say despite that, you've still seen us sort of execute and be successful with the deposits that we've brought in and the reduction in core deposit costs.

Just to follow up, I know you paid down the FHLB advances by $1 billion during the quarter. What are your expectations for pay downs for the rest of the year?

Yeah, I think the way we're thinking about it, Bernie, is we believe we can pay down another $2 billion-$3 billion over the rest of the year. Again, a lot of it will be driven by what excess cash do we have. That will be driven by what's going on with deposit growth, what's going on with the payoffs, the pay downs. We think we can pay down another $2 billion-$3 billion of FHLB advances.

Which would get us into the $6 billion range.

Exactly.

Which if you recall, when we got here, it was about $23 billion.

Great. Thanks for taking my questions.

Yep. Thanks, Bernard.

That concludes our question and answer session. I'll turn the call back over to Joseph for any closing comments.

Thank you very much, operator, and thank you for taking the time to understand our story. We often say here we started with 20 big items that we needed to knock off the list. We really feel we're down to about four, have those well under control, and are executing on that. We remain extremely focused on executing on our strategic plan. We really want to transform Flagstar into a top-performing regional bank, creating a customer-centric organization that's relationship-based culture and effectively manage risk to drive long-term value. Thank you for your time this morning, and thank you for joining us.

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