Q4 2024 Flagstar Financial Inc Earnings Call
The
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Regina: 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 Financial fourth quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.
Regina: After the speaker's remarks, there will be a question and answer session.
Speaker Change: If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you'd like 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.
Sal Dimartino: Thank you Regina and good morning everyone. Thank you for joining the management team of Flagstar Financial for today's call.
Speaker Change: Our discussion today of the company's fourth quarter and full year 2024 results will be led by Chairman, President, and CEO, Joseph Otting, along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Smith.
Speaker Change: Before the discussion begins, I would like to remind everyone that our quarterly earnings press release and investor presentation can be found on the investor relations section of our company website at ir.flagstar.com
Speaker Change: Such forward-looking statements we may make are subject to the Safe Harbor Rules.
Speaker Change: When discussing our results, we will reference certain non-GAAP measures which exclude certain items from reported results.
Speaker Change: Please refer to today's earnings release for reconciliations of these non-GAAP measures.
Otting: And with that, now I would like to turn the call to Mr. Otting.
Mr. Otting: Thank you, Sal, and good morning, everyone, and welcome to our fourth quarter earnings call.
Mr. Otting: Today is somewhat of a tragic in our nation and our you know our hearts and minds this morning are with the accident victims and first responders at the Reagan National Airport. I think a lot of you know that for four years that was my primary airport and I know a lot of the people in that area so truly a tragedy for our nation.
Mr. Otting: I'd like to thank all of you for your interest and support as we've worked to build a successful regional bank. I would also like to welcome Lee Smith, who is joining me this morning for his first earnings call as the company's new Chief Financial Officer.
Mr. Otting: Excuse me, Lee has been an important part of the company's leadership team and active in various aspects of the company's turnaround, really throughout the past year, and especially over the last six weeks as he is named to the CFO role in the company.
Mr. Otting: This morning we'll discuss our results for the fourth quarter, which were better than our internal projections and analysis forecast.
Mr. Otting: I'm excited to share our fourth quarter results and even more excited about the momentum and progress we are seeing going on in 2025.
Mr. Otting: As I look back on 2024, I think we've accomplished a lot of things in a very short period of time. While last year was a transitional year for the organization, we really made significant progress on all of our strategic priorities, setting the stage for profitable growth going forward.
Mr. Otting: When I joined the company last March, we outlined for the investment community our three primary objectives for the year.
Mr. Otting: They included understanding the credit risk in the commercial real estate portfolio.
Mr. Otting: Getting our hands around the regulatory compliance issues and putting the bank back on a path to profitability.
Mr. Otting: Today, I can say that we've done this and that the company is in a better position than it was 12 months ago and strategically for a long time.
Mr. Otting: Moving on to our presentation, starting on page three, this slide provides you with an update of our strategic focus.
Mr. Otting: As you can see across the top, you know, we've continued to bolster management and talent in the organization. And more importantly, as we've kind of looked forward in our C&I business, we added significant amounts of new talent to grow that business. We'll talk a little bit about some of those results.
You know, the third quarter.
Mr. Otting: This is the third quarter of consecutive solid deposit growth in our retail and private banking. We've continued to reduce our CRE exposure. We've had proactive management of our problem loans, and we successfully completed the sale of the mortgage warehouse and mortgaging, servicing, and subservicing businesses.
Mr. Otting: On the goal, a strategic focus of achieving capital and earnings. We're on track to reach the full profitability in 2026.
Mr. Otting: And in approving funding costs, we have strong liquidity profile of over $31 billion.
Mr. Otting: We reduced wholesale borrowings by almost $7 billion, or 34% during the year, and now represents just 13% of total assets.
Mr. Otting: and we maintained a solid ACL coverage ratio of 1.78%, but this is importantly, we've increased those on the riskiest aspects of the portfolio.
Mr. Otting: So I think, you know, overall, we really feel, you know, good and comfortable about the direction and probably the most important slide or area on that slide is that our CET capital ratio for the fourth quarter was up to 11.9% up over 280 basis points during the course of the year in ranking us within the top quartile of our peers.
Mr. Otting: So very, very successful growth and strategic focus for the organization.
Mr. Otting: On slide 4, as you can expect, our transition in 2025, there are really four main areas that we're focused on. We want to improve our earnings profile via NIM expansion.
Mr. Otting: Moderating Credit Costs and Driving Operational Efficiency. By the end of 2025, we'll have reduced our operating expenses by $600 million or 23% compared to 2024.
Mr. Otting: We also want to execute on our CNI and private bank growth initiatives, and we want to continually proactive the CRE size of the portfolio and the make of it, and then we want our credit to normalize, resulting in lower charge-offs, provision, and slowing new loan formation.
Mr. Otting: On slide five, we provide an update on the commercial banking to illustrate how far we've come over the last six months.
Mr. Otting: Starting in the lower left of the slide, we continue to hire seasoned mid-career bankers from other regional money center banks who have a proven track record of building a commercial business.
Mr. Otting: We added 24 bankers during the quarter across various functions and line of business, on top of the 30 we hired during the third quarter, and we plan to hire an additional 100 over the course of 2025.
Mr. Otting: On the lending front, we already have a good platform of roughly $7.2 billion.
Mr. Otting: To begin with, our new hires are starting to make an impact. As you can see on the slide, during the fourth quarter, we had new loan commitments of $620 million and funded slightly under $400 million of loans, double what we did in the third quarter.
David Chiaverini, David Chiaverini, David Chiaverini, David Chiaverini,
We also have a solid base of low cost deposits.
Mr. Otting: So with that, I'd like to turn it over to our CFO, Lee Smith, for his comments. Thank you, Joseph, and good morning, everyone.
Mr. Otting: Furthermore, we have executed on several initiatives which create a solid foundation from which we can build from.
Mr. Otting: Pivotal to this was the sale of the mortgage warehouse portfolio in the third quarter, which created 70 basis points of Tier 1 capital and approximately $6 billion of liquidity.
Mr. Otting: This was supplemented in the fourth quarter by the sale of the MSR asset, the servicing subservicing business and the TPO origination business.
Mr. Otting: We've continued with the Cost Optimization Program with a focus on getting our non-interest expense run rate in line with previously provided guidance for year 2025.
Mr. Otting: As Joseph mentioned, we are planning to reduce operating expenses by $600 million in 2025 and we are on track to get there.
Mr. Otting: Many initiatives have either been completed or are in process and include particular focus on compensation and benefits, vendor spend, real estate optimisation and process improvements.
Mr. Otting: We paid down just under $5 billion of FHLB advances with a blended weighted average cost of 4.83%.
Mr. Otting: and we repaid 2.8 billion of broker deposits and issued only 200 million of new broker deposits for a net pay down of 2.6 billion with a whack of approximately 5.2 percent.
Mr. Otting: Given the timing of most of these paydowns, the full benefits to the net interest margin will not be realised until the first quarter of 2025.
Mr. Otting: Furthermore, these pay downs, in addition to improving our funding profile, have also helped reduce our FDIC insurance costs, another focal point of our cost optimisation strategy, which declined $24 million in the fourth quarter, compared to the third quarter.
Mr. Otting: The pay down of wholesale borrowings has also been made possible by the continued strength in our deposit gathering, which I will elaborate on later.
Speaker Change: Moving to slide six, as Joseph said, our results came in better than expected with a smaller loss for both the fourth quarter and full year 2024.
Speaker Change: Notable items included a $92 million gain on the sale of the mortgage businesses and related activity which included $3 million of trailing revenues tied to the business and assets sold.
31 million in severance costs
77 million in long-term real estate asset impairments
Speaker Change: 12 million in trailing expenses related to the sale of the mortgage businesses and 11 million in merger related expenses
Speaker Change: Once you factor in all of these items, our fourth quarter net loss narrowed to 34 cents per diluted share.
Speaker Change: Slide 7 has summary statistics on our capital and liquidity position.
Speaker Change: You can see that we were in line to slightly better than expected for each of the major line items.
Speaker Change: Slide 9 provides our updated forecast for 2025 out through 2027.
Speaker Change: I will note that we are forecasting a smaller loss per share relative to the previous guidance in 2025.
Speaker Change: For 2025, while our net interest income is slightly lower than previously forecast, driven primarily by a smaller balance sheet, it is more than offset by slightly higher non-interest income and lower non-interest expenses.
Our EPS guidance for 2026 and 2027 remain unchanged.
Speaker Change: Slide 10 is another look at our Strengthened Capital Position. Our CT1 ratio increased over 280 basis points over the past year to 11.9%.
Speaker Change: Due to the strategic actions taken in 2024, this capital will be redeployed into growing our C&I and consumer businesses as we look to create a diversified balance sheet.
Speaker Change: We saw strong growth in our retail channel of 900 million and in the private bank of 500 million.
Speaker Change: Approximately 4.5 billion of these deposits have left the bank and we expect the remaining billion to one and a quarter billion to a fully runoff by the middle of the first quarter.
Speaker Change: I would also point out that cycle to date at deposit beta has been running over 45%.
Speaker Change: To put this into context, we deliberately lagged on the first 50 basis point rate cut in September, but for the November and December rate cuts, we were within or above our targeted beta range of 55-60%.
Speaker Change: If we turn to slide 12, we had another strong quarter for commercial real estate payoffs, all of which were at par. During the quarter we saw $916 million of multifamily and CRE payoffs, of which $440 million, or 48%, were categorised as substandard.
Speaker Change: This has continued the trend of plus minus a billion par payoffs per quarter over the last three quarters.
Speaker Change: On the lower part of this slide, you can see the success we've made today on reducing our CRE concentration.
Speaker Change: Also, if you look at our CRE concentration ratio, it declined to 443% from 501%. These declines are testament to how proactive we've been in managing down our CRE exposure.
Speaker Change: Slide 13 is a breakout of our loan portfolio and our priorities for 2025. In 2025, we will continue to reduce overall CRE exposure through a combination of payoffs and loan sales.
Grow the C&I Businesses
Speaker Change: and grow the residential mortgage portfolio leveraging our bank, branch and private client customers together with our full suite of mortgage products.
Speaker Change: During the quarter, we sold approximately 244 million of non-accrual CRE acids.
including our largest office credit.
Speaker Change: We will continue to be opportunistic and explore all options, including loan sales, as it relates to reducing our CRE exposure and non-performing loans, and will execute on transactions that are in the best economic interest of Flagstar.
Speaker Change: Our allowance coverage at 1231, excluding co-op loans, stood at 1.9%, the highest relative to other multi-family focused lenders in the North East.
Speaker Change: During 2024, 3 billion of multifamily loans have reset and as of January 22nd 41% or 1.2 billion have paid off. The remaining 1.8 billion repriced per the contractual terms of the loan agreement and 1.5 billion of those loan resets are current.
Speaker Change: In other words, 90% of multifamily loans resetting in 2024 have either paid off or have repriced an occurrence.
Speaker Change: As we look forward, we have approximately $5 billion of multifamily loans either resetting or maturing in 2025, another $5 billion in 2026, and almost $9 billion in 2027.
Speaker Change: Slide 15 provides an overview of the office portfolio. We have been very proactive in managing this portfolio, reflected by a 900 million or 27% decline in the portfolio during the year, which now represents 2.5 billion or 3.6% of total loans.
Speaker Change: As with the multifamily portfolio, we've done this through a combination of payoffs, loan sales and charge-offs of $368 million.
Speaker Change: Our allowance coverage at 1231, excluding owner-occupied CRE, increased to 7% among the highest compared to our regional bank peers.
Speaker Change: Slide 16 provides our allowance by loan category. There are three points I'd like to make.
Speaker Change: First, both our Total Allowance for Loan Losses coverage ratio and our Total ACL coverage, including unfunded commitments, decreased slightly but remain at very strong levels.
Speaker Change: Second, our coverage on those asset classes perceived to have more risk.
Rent regulated multifamily and office increased during the quarter.
Speaker Change: This, along with our allowance and our strong capital position, provides a significant cushion to absorb any future losses.
Speaker Change: Next on slide 17 we provide some additional color around our asset quality trends and non-accrual loans increased 101 million or 4% to 2.6 billion.
Speaker Change: However, it is important to note that 56% of our non-accrual loans are current and performing.
Speaker Change: Also during the quarter we saw a linked quarter increase in delinquencies, primarily in the multi-family portfolio. This was largely due to one borrower and as of January 22nd
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Speaker Change: Finally slide 18 depicts our liquidity profile. Overall our liquidity remains strong due to continued growth in core deposits.
Speaker Change: We have approximately 32 billion of total liquidity, which represents almost 250% of uninsured deposits.
David Chiaverini,
Speaker Change: During the quarter, we utilised excess cash to pay down high-cost borrowings, including wholesale borrowings and brokerage CDs, which improved our funding profile.
Speaker Change: In conclusion, we're very pleased with what we've accomplished in a short period of time and feel as if we've laid the foundations and are on track to deliver significant value to our shareholders over the next 24 months.
to rightsize this organization and position it for successful growth.
Speaker Change: One final slide before turning it over for questions on slide 19. We show Flagstar's investment profile. I believe most of you are aware we currently trade at a discount of our tangible book value is roughly between 55 and 60 percent.
Speaker Change: So we believe this valuation gap should narrow over time as our profitability outlet continues to improve. We show that we are successfully executing on our turnaround strategy and our credit quality continues to improve.
Speaker Change: that the board approved in December. It's a high focus on profitability, being a customer centric organization and building out the risk infrastructure within the organization.
Speaker Change: And with that, operator, I'd like to be happy to turn it over for questions.
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Speaker Change: At this time, I'd like to remind everyone that in order to ask a question, press star, followed by the number one on your telephone keypad. We ask that you please limit your questions to one and return to the queue for any additional questions that you might have. Our first question will come from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey guys, good morning.
Speaker Change: Does that suggest that you're contemplating a sale lease back on branches or does that suggest that you're contemplating branch consolidation?
David Chiaverini, David Chiaverini,
There were about 20 private clients.
Speaker Change: Retail locations that we are looking to consolidate and they are in close proximity to other locations so we feel we can be more efficient and not lose anything from a customer service point of view.
Speaker Change: and then there are approximately 60 retail branches, most of which we lease.
Speaker Change: We're phasing the closure of those branches in three different phases, one of which is already underway, and then a further two phases that will occur later this year.
Speaker Change: Okay, and then just one follow-up, unrelated. Could you help us think about how you're viewing the securities portfolio? The AOCL mark increased pretty significantly this quarter. I guess I'm curious, any plans to restructure that or potentially grow that portfolio?
Speaker Change: As we look forward into 2025, right now, we do contemplate growing the securities portfolio.
Speaker Change: But we'll obviously be dynamic in how we manage that and we'll allocate the cash where we can generate the best returns for the organization. But we are contemplating at this moment increasing that securities portfolio as we move through 25.
Thank you.
Speaker Change: Our next question comes from the line of Jared Shaw with Barclays. Please go ahead.
Hi, good morning.
Thank you, Eric.
I guess when you look at
The potential market price hit from sales.
Speaker Change: So, hey Jarrett, thank you for the question. We feel, you know, in our ACL model, when a credit becomes non-performing, it comes out of the bottle, we do specific reserves against those particular loans.
Speaker Change: And so we feel pretty comfortable over the last, you know, four quarters as we've, you know, looked at those loans, got updated financials, received appraisals.
Speaker Change: that when we've executed on sales of the portfolios we've had, you know,
Speaker Change: That portfolio overall is pretty well marked, but obviously we have strong reserves against that, and then in addition to the capital, I think really it comes down to how can we deploy that excess capital to further grow the loans on the balance sheet, and that's really where our focus will be in 2025.
Speaker Change: Okay, and then when we look at when we look at that guidance for NII and some of the broader guidance Ranges there. What what does that balance sheet growth? Look like what's what's the expectation for? For you know either loan growth or end of period loans as we as we look out over the next for 25 and 26
Speaker Change: Yes, well so as you look at 25, so we ended the year 24 at about $100 billion, we're looking at ending 25 at around $98 billion.
Speaker Change: And so what you've got to remember is we will continue to run down the CRE and multifamily portfolios and redeploy.
Speaker Change: that into C&I growth. We do have some excess cash at the moment. And we do imagine that we'll continue to pay off or down brokered deposits.
Speaker Change: And so that's why you see that slight reduction of about $2 billion, and it's why the interest income is slightly lower than previously forecast, but the NIM is staying pretty constant. And then when you look forward to 2026,
Speaker Change: We imagine a balance sheet at the end of the year around $104-$105 billion.
Great, thank you.
Speaker Change: Our next question comes from the line of Christopher Marinak with Janie Montgomery Scott. Please go ahead.
Speaker Change: Yeah, I think I think we're comfortable where it sits today, you know, obviously we've started to adjunct the resources in in that organization, but I mean We feel pretty comfortable where the where the team is where the locations are and our ability, you know As we're growing the CNI business. It's a natural extension for the private bankers to be able to interact and solicit, you know, the executives and owners of those companies and
So I think in tandem.
Speaker Change: You know, a little bit different is we do have private banking and C&I under Rich Raffetto's leadership. And the reason for that,
Speaker Change: It's my experience as a kind of a longtime CNI banker, the more integrated we can have the personal bankers with the commercial bankers that that will result in a more harmonious relationship and get larger share of wallet of both the individual and the corporate
Unknown Speaker 07.01.21
Speaker Change: Great, and within the guide today, is there any implied deposit growth on a core basis? I know Lee talked about the paying down brokered.
Speaker Change: Yeah, there is yes, we we are anticipating core deposit growth
coming from the consumer bank and the private bank.
Speaker Change: and that will, as we pay down broker deposits, and we also, as I mentioned in my prepared remarks,
Speaker Change: expect another billion to a billion and a quarter of mortgage escrows to run off in the first quarter as the final loans that were sold as part of the mortgage transaction in Q4 are transferred off the platform.
David Chiaverini, David Chiaverini,
Speaker Change: Great. Thank you very much for the information this morning. Yeah, I think one maybe point on that is, you know, one of the big shifts that occurred both this year and we expect to occur next year, is shifting out of high-cost funding sources, you know, the wholesale borrowings, the flood advances, the broker deposits, and replacing those with core deposits. And we feel pretty comfortable we have the infrastructure and franchise to be able to do that.
Nope. Makes sense. Thanks again.
Okay.
Speaker Change: Our next question comes from the line of Manon Gosalia with Morgan Stanley. Please go ahead.
Hi, good morning.
Manon Gosalia: You noted the CRE review is complete, NPLs haven't really gone up that much, and you're broadly guiding forward provisions in line with your prior guide. So I guess the question here is, what level of rates have you marked the portfolio to?
Speaker Change: And if the longitudinal curve starts to move up again, how much does that matter for credit performance overall?
Speaker Change: You know, a couple points that I think are important is one is the payoffs that we had during the year were slightly below $3.5 billion.
Speaker Change: And of that $3.5 billion, $1.3 billion of it was substandard or rated eight credits, so roughly 38%.
So, our pattern is, is those loans are...
Speaker Change: coming up and borrowers want to do with it that we're getting out at 100 cents on the dollar. And so that is probably initially we expected based upon, you know, just the properties that perhaps, you know, we would, that would not be the outcome, but it has been and that trend should continue.
Speaker Change: And then Lee referenced the resets for interest rates. And, you know, we had, you know, roughly $3.5 billion of interest rate resets in 2004. We have roughly about $4.9 billion of resets in 2025.
Speaker Change: And the performance in the resets has been pretty extraordinary. You know, a billion four of that paid off, leaving two point one billion dollars and 90 percent of that is current. So what what we're finding is that the borrowers of the type of relationships we have.
Speaker Change: Many times these are long-term assets in their family that required multi generations of gold and so they have a high desire to retain these properties and so as we so those are those are kind of two data points the third data point would be is I think you know as we've shared on previous calls
We're constantly looking 18 months ahead.
Speaker Change: of kind of what's rolling down the path, so to speak, in the price resets or maturities.
Speaker Change: We're looking at the current financials and then kind of projecting out like what the debt service coverage is on those loans.
Speaker Change: In addition to that, we've done kind of a challenger model, where we've looked at, you know, those loans that are, you know, in the entire portfolio, and the impact of, you know, debt yields. And, and quite frankly, we feel pretty comfortable that the risk is well contained in the book of business.
Speaker Change: So just to follow up on that 18-month lookout, I guess as we get into later this year, you're going to start looking at 2027 and there's an elevated level of contractual maturities at that time. So if we're in a higher for longer rate environment, maybe if inflation is a little persistent there, would that impact how you're thinking about building reserves and provisions into this year and next year?
Speaker Change: It really comes down to the performance of the individual property. You know, we look at each individual property with annual financial statements.
Speaker Change: I think, you know, we shared last year, you know, we got virtually financials on 95% of the book.
Speaker Change: and year-over-year net income was roughly around 6%. So we'll begin to receive the 2024 financials here in the next 60 to 90 days and then we'll do an individual property look.
Speaker Change: And so it really depends on the NOIs, you know, where do the NOIs go on their respective properties and then their relationship to, you know, where the current interest rates. So it's a bit of a moving thing. Obviously,
Speaker Change: And we're mindful of that. And we look and we do look at that, you know, if the loan matured today, and it was current interest rates with an amortization, what would that do to the debt service coverage. So we're mindful of that. And we continue to, you know, watch that and observe it.
Speaker Change: But I, but on the other side of that, yeah, on the other side of that, what we're finding is, hey, the payoffs at par and the resets are, you know, at such a high level, that it really has exceeded our expectations.
Got it. Thank you.
Speaker Change: Our next question comes from the line of Ibrahim Poonawalla with Bank of America. Please go ahead.
Good morning.
Good morning.
Speaker Change: It is just two follow-up questions. One on capital. I'm wondering on CT1, you're well above your targets now.
Speaker Change: My sense is your risk-weighted assets are going to continue to go down.
Speaker Change: So just remind us if there is also a Tangible Common Equity or a CET-1 or Capital-II CRE loans that you're managing too.
Speaker Change: And I guess the essence of the question is, could we see buybacks being initiated at some point?
Speaker Change: Joseph, you mentioned where the stock trades eligible tangible book, I think buybacks will go a long way in terms of the ROTC improvement and getting TBV accretion at these levels. So would love to hear how you're thinking about balance sheet runoff. At what point do buybacks become a realistic option for the bank?
Speaker Change: We actually, you know, we haven't had any dialogue in the company with the board regarding, you know, capital actions at this point. And we really anticipate that we will use excess capital to be able to grow the balance sheet. That's really the focus. We think the company is
Speaker Change: Very uniquely positioned now if you know as a strong regional bank
Speaker Change: You know, America needs a strong regional bank. That's another category for bank.
Speaker Change: We see that in the CNI business because so many credits, the other regional banks are kind of tapped out in multi-bank. We're a new entrant into that space and we're also hiring people who have long histories in track record.
Speaker Change: So I think our first actions are, it would be to expand the balance sheet and continue to grow the loan book to create earning assets.
Understood. And I guess on that point on C&I loans...
Speaker Change: From an industry standpoint, there's still uncertainty in terms of when you see a pickup in loan demand, how much will it be.
Speaker Change: Given, as you pointed out, I think you're uniquely positioned on the back of all the hiring you've done. Give us a sense of just thinking about the CNI book, what's the level of growth do you expect and does it really require an industry-wide pickup in loan growth or is there a lot of market share movement opportunities given the tenure of the bankers you've hired?
Speaker Change: Yeah, you know, another point that I would just make is in some of the portfolios, the historical practice of the company was to take very large positions. We found that in the commercial real estate book.
Speaker Change: pulling those commitments down slightly while we're growing the market to give better diversity to the portfolio. But I would say, you know, first of all, by hiring highly experienced people in the market generally, and they have long term relationships, we're getting lots of opportunities that are independent of true loan growth.
Speaker Change: You know, if a company is $100 million and they want to go to 130 on their credit facilities, and the two or three other banks are tapped out at their levels.
Speaker Change: We we have tremendous opportunity to come in and pick that piece up and then demand non-interest income to support the lending
Speaker Change: So that's where I think you're going to see a lot of our really accelerated growth is.
Speaker Change: We just become a new entrant. And, you know, obviously, we've hired people who have long track records in markets who know other people in the marketplace. So we're a welcome addition.
Speaker Change: to those multi-bank groups. And clearly, what our whole focus is, is to be a relationship bank. So we will not enter relationships where we do not have the opportunity for non-interest income. And those can range.
Speaker Change: You know, we have proficient product sets and interest rate swaps and and treasury management depository 401k.
Speaker Change: Lots of non-interest opportunities for us that, you know, we see as the opportunity to be able to get an overall return on the relationship for the bank.
Speaker Change: and Ibrahim Italy just to add to what Joseph said and he mentioned this in his prepared remarks so
Speaker Change: If you look at the bankers, the C&I bankers that we've hired
Speaker Change: 43 of the 65 started in Q4, so they're relatively new. And these aren't just producers, they're underwriters and credit specialists. But we originated 572 million of new commitments in the fourth quarter, 18 new relationships.
Speaker Change: You know, this is coming from a team that is very new and as they get their feet under the table and we further grow and supplement that, for all the reasons Joseph said, we feel very bullish about what we can do from a C&I point of view.
Speaker Change: It was all the help to the color. Thank you both. Thank you.
Speaker Change: With all the balance sheet actions, I'm interested in a comment on just how you're viewing overall rate sensitivity. Obviously, your margin has some pretty big improvement because of the refinancing of the debt and the deposits, but maybe an ideal or a less ideal comment for where the rate curve would be. Thanks. And what's assumed in your guide?
Speaker Change: Yeah, sure. So what's assuming that we we did this, call it using the November guide. So there were three rate cuts assumed in 25. Obviously, now it's looking like two. But as we've done our analysis, we are
Speaker Change: neutral to ever so slightly asset sensitive. And so we don't think that it's going to have a an impact on what we're projecting for the earnings in the guidance that we've provided.
David Chiaverini, David Chiaverini,
Okay. And I guess my follow-up would be...
Speaker Change: Any thoughts on share count? I know there's the warrants and the conversions. Anything else left to convert? And also if you have the accredible yield number that's in your outlook in the fourth quarter. Thank you.
Speaker Change: I'll get you the accretive yield outlook, I don't have that. But in terms of the guidance, just so you're aware as you're looking at this model, we assumed that the warrants...
fully convert in Q4 of 2025.
Speaker Change: John Gifford, Salvatore DiMartino, Unknown Executive, Joseph Otting, Thomas Cangemi, Thomas Cangemi, Unknown Executive, Joseph Otting, Thomas Cangemi, Unknown Executive,
Okay, thank you. Thanks.
Okay, thank you.
Speaker Change: Our next question comes from the line of Ben Gerlinger with Citi. Please go ahead.
Hey, good morning, everyone.
Hi, Ben.
Speaker Change: So I think conceptually, if rates, if you're assuming kind of a two to three cuts here, if you look over the next six months, I feel like funding cost reduction
Speaker Change: The bigger driver and then call it six to 18 months.
Speaker Change: You have a backlog for fixed asset repricing being a big driver.
Speaker Change: I mean, obviously, that's not just, you know, those are the kind of levers pulling more severity. Is that a fair way to think about the next 24 months or so?
You are completely right and as we mentioned that's
That was
driving some of the deleveraging.
Speaker Change: at the first quarter and there's going to be another billion of escrow runoff.
Speaker Change: And then the other thing that I would say is in the first quarter we have about five billion of retail CDs repricing and those CDs
So, they're automatically...
Going to reprice
Speaker Change: Unknown Executive, Joseph Otting, Thomas Cangemi, Unknown Executive, Joseph Otting, Unknown
Speaker Change: CDs that are maturing, we've been retaining 75-80%, and then the 20-25% that we haven't been retaining, we've been bringing the equivalent in, in new customers, so our CD balances have remained pretty flat.
Speaker Change: but your thesis is the right way to think about it for all those reasons.
Gotcha, okay, um, wait, you said...
Speaker Change: Sorry, in the actual press release, you had a pretty substantial link order increase in 30 to 90 day delinquent. And I think in your prepared remarks, you said 500 plus million has since paid off before the end of the year. I just want to double check what that was.
Speaker Change: the same cohort of loans. Would you be expecting more early delinquency payoffs this quarter? Or how should we think about the next two, three quarters with that kind of delinquency trend?
Speaker Change: Yes, so $541 million paid subsequent to the year-end. So, and a lot of that was one borrower and so
Speaker Change: I would like to think that we will not see it going forward, but, you know.
Speaker Change: You never know and we're just going to have to manage that but it's sort of concentrated in In one borrower and as I say, you know 541 million of 56% Has come current subsequent to the 1231 year end
Speaker Change: So if you remember, Ben, in the second quarter, that same borrower slipped past as well and then brought the loan current, and so we have the same kind of an anomaly.
Speaker Change: Not ideal, we're not happy about it, but you know it's an unfortunate answer.
David Chiaverini, David Chiaverini,
Speaker Change: Any color, how many properties is that? Just out of curiosity, if you're willing to give the info.
Unknown Speaker 00.00.00
Speaker Change: We can get that for you. I'd be guessing it's more than, it's more than 20.
Speaker Change: Gotcha, okay, I appreciate it. I'll follow up after I post the call.
Speaker Change: Our next question comes from the line of Bernard Bongazzichi with Deutsche Bank. Please go ahead.
Hi guys, good morning. Good morning, Bernard.
Speaker Change: Just on the updated forecast, a few changes from last quarter, I know 625 expenses were lowered by $100 million.
Speaker Change: In general, there's a reduction in net interest income you noted during the smaller balance sheet and the increase in fee income. Can you just provide some color on just what the lower 25 expenses are coming from and what's driving the higher fee income than previously modeled?
Real Estate Consolidation and Optimization, Reducing Vendor Costs
and then improving processes.
and so that's having a big impact.
Speaker Change: and then the deleveraging that we did had a significant impact on our FDIC expenses.
Speaker Change: And so that's what's driving the reduced expenses in 2025 versus what you saw in October. The fee income is up only ever so slightly in 2025 and it's sort of driven by several categories. I think we feel we can do better from a mortgage fee income gain on sale point of view.
Speaker Change: as a combination what's driving the improvement in fees in 2025. As we move forward into 26 and 27
Speaker Change: Unknown Executive, Joseph Otting, Thomas Cangemi, Unknown Executive, Joseph Otting, Thomas Cangemi,
Speaker Change: And then again, you know, I think we feel we can do more from a mortgage gain on sale point of view and a deposit fee point of view as well.
Speaker Change: And Ben, the other, Bernard, the other point I would make.
Speaker Change: is the overall staffing in the company is gone from roughly 9000 down to 6000 people, which includes roughly 1100 out of the mortgage. But you know, as we shared with you, we've really taken a close look at the cost structure within the company.
Speaker Change: and, you know, really from top to bottom and really looked at, you know, taking the cost out of the organization down to what the, to the core mission.
Ciao.
Speaker Change: and then on the fee income side, you know, clearly the C&I business is really where you can get lead left arrangements, you get the treasury management.
Speaker Change: We just won yesterday a lead left relationship where we're going to be the syndicate bank.
Speaker Change: I think most people realize that really, Rich Raffetto, he's been in that business for many, many years. That's where I grew up in the banking business. So that has a real power booster, so to speak, as you get into that space and use your balance sheet.
We expect to grow that business significantly.
Speaker Change: Okay, great. And then just a follow-up on the commercial bank effort. I know it was previously kind of mentioned on the call, but you know, Joseph, you mentioned the addition of the 30 hires in 3Q and 24 in 4Q.
Speaker Change: and looking to add another 100 commercial bankers at 25. Obviously, the recent hires are already bringing in production and building up the pipeline. Noli, you noted the recent hires have been a mixture of producers and underwriters.
Speaker Change: So I'm just wondering, can you elaborate on expectations on just the ramp up on production efforts? Does it generally take 12 to 18 months from time of new hire on average, given a mix of, you know, seasoned and mid-senior bankers? Just any color you can provide here, just so we understand, given the mix.
of seniority and composition of the hires.
Speaker Change: Yeah, our model has expectations of starting to close transactions 90 days after their arrival.
Speaker Change: So, so we have high expectations for quick production by hiring the seasoned people. And, you know, just for the record, most of these people we have worked with, you know, at one time or another.
Speaker Change: You know, Rich has been in this business for 35 years. I've been in this business for 35 years. People know us. They know our reputations and our success.
Speaker Change: And similar to One West Bank, you know, if you recall, when we went to One West Bank, we did not have any C&I portfolio, we added a substantial amount of bankers to that company as well, and significantly grew in a short period of time the C&I business. So, so it's a little bit of a replay here.
Speaker Change: Now, we're ahead of the game in some regards because when we got to One West Bank, we didn't even have a boarding system for commercial loans, nor cash management, nor interest rate derivatives. Here we have the platforms of those. We may want to enhance some of those, but those products are here that we can launch off of.
Okay, great. Thanks for taking my questions.
Yep.
Speaker Change: Our next question comes from the line of Steve Moss with Raymond James. Please go ahead.
Speaker Change: Good morning. Hi, Steve. Maybe just starting on the NII guide here, just kind of curious, what kind of deposit data are you guys assuming? And then also, you know, curious where you expect non-disparaging deposits to stabilize?
Speaker Change: 46%. Now, what I would tell you, Steve, is we lagged.
and so we are operating.
Speaker Change: Within or above our targeted beta range of 55 to 60, that's how we think about it and where we want to be for the interest bearing deposits.
Speaker Change: Okay, and then in terms of just denaturing, you know, just kind of curious how we think about where those balances could stabilize in 2025.
I think the non-interest bearing
Thomas Cangemi: Unknown Executive, Joseph Otting, Thomas Cangemi, Unknown Executive, Joseph Otting, Thomas Cangemi,
Speaker Change: that were categorized as non-interest bearing and the reason for that is
but, and this is a quirk of Gap,
Speaker Change: So it actually showed up in the non-interest income section of the P&L, it did not show up.
Speaker Change: Unknown Executive, Joseph Otting, Thomas Cangemi, Unknown Executive, Joseph Otting, Thomas Cangemi,
Speaker Change: Okay, appreciate that. And then just on credit here, just kind of curious, where did special mentioned substandard loans end up for the quarter? And just as you guys mentioned on, you know, the upcoming maturities here in 25, 26, and 27,
Speaker Change: Curious if any one of those vintages is more aggressively underwritten versus the others, or are they, you know, consistent across the board?
So the substandard loans ended up around $11 billion.
Speaker Change: The special mention, let us see if we can, I don't have that number right at hand, but we will,
Speaker Change: Let us get you that special mention number Steve but the substandard will ride around 11 billion. The special mention the substandard I should say yeah
Speaker Change: My comment on the underwriting is, you know, as a general rule, these loans were underwritten within market.
Speaker Change: and Mark it being, you know, 125 to 130 debt service coverage at the time and 75% kind of loan to value. And really what's toppled this over is, you know, the dramatic rise in interest rates. A lot of these loans are resetting from three and a half to six and a half or 7%.
you know, growth in the NOI.
Speaker Change: So as I look at it, I wouldn't like point to, you know, you know, 18 or 19 or 20 being significantly different in the underwriting and the impact. But, you know, we can do some work on that and get back to you specifically on default rates. But if you really think about it, it's really the doubling of interest rates.
that the borrower is paying on the debt.
Speaker Change: Okay, great. Really appreciate all that, Colleague Joseph and Lee. Thank you very much.
You're welcome. Thanks, Steve.
Speaker Change: Our next question comes from the line of Anthony Elyon with J.P. Morgan. Please go ahead.
Hi, everyone. Lee, I have a follow-up.
Morning. I had a follow-up on your updated forecast.
Speaker Change: For 2025 provision expense, your outlook was unchanged, but 4Q provision came in a little bit lower than forecast.
Speaker Change: Unknown Speaker Although I see that you slightly lowered your 26 provision outlook, could you just talk about that reduction for 2026 provision and why not lower 2025 provision?
Speaker Change: Yeah, look I think we we want to be sort of conservative in in the way we are
Thank you.
Speaker Change: Thank you. Then my follow-up on slide 15 on the office slide, you know that you completed your loan review for office and that the office reserve ratio increased about a hundred basis points quarter over quarter.
Speaker Change: But if I recall in the third quarter, you took down your office reserve ratio, I think about 60 basis points. Now you've taken it back up. So can you just talk about the dynamics there and what drove the increase in the office reserve sequentially? Thank you.
Speaker Change: So, you know, as we said, we were going through a process where we were ordering appraisals.
Speaker Change: So as appraisals come in, you obviously look at the charge-off and the risk associated with those. So it's a bit of a fluid situation as we're updating. As Lee also indicated, we sold our largest borrower in that particular space, and we had moved that over to held for sale, but executed on that during the fourth quarter.
Speaker Change: and I think that's the other thing you've got to bear in mind. So as we've mentioned we've moved various loans, we've sold loans or moved them to available for sale and so you do have some of that dynamic playing out as well.
David Chiaverini, David Chiaverini,
Thank you.
www.gifford.ca
Thank you.
John Armstrong: Our next question comes from the line of John Armstrong with RBC Cowell to Markets. Please go ahead. Thanks, good morning.
Unknown Speaker
John Armstrong: Lee, you just kind of answered my question, I think, but can you talk a little bit more about the general process to determine reserve adequacy? I'm not questioning the level, but I'm just curious, the overall reserve level came down and I'm just, you know, thinking, is that a message that the worst is over or not?
John Armstrong: We obviously go through a very, very detailed process. Obviously, there's models, we look at it quantitatively, qualitatively, we break it down by asset class, by loan type, so there's a very, very detailed process.
process and modelling that goes into it.
John Armstrong: The Health Reinvestment Portfolio has reduced $3.8 billion in the quarter. We took $223 million of charge-offs in Q4, and we've taken $900 million of charge-offs in the full year. So, you know, if you look at the reserve and you add that $900 million of charge-offs,
John Armstrong: Unknown Executive, Joseph Otting, Thomas Cangemi, Unknown Executive, Joseph Otting, Thomas Cangemi,
John Armstrong: And the final other thing that I would just mention is.
Speaker Change: It's such a complicated and sophisticated model, you can't point to sort of one thing only, but when you look at all of those things that I've just described together, that's really what's driving it.
Speaker Change: Good, fair enough. Just, Joseph, for you, when you're talking to potential new clients,
Speaker Change: Are there any concerns or questions from everything that's happened at the company over the last 12 months?
Speaker Change: Or is it a typical process? Do you have to explain anything? Or is it just more of a typical process of onboarding? You know, it kind of breaks down existing clients who have lived, you know, especially if you're a Signature Bank customer, and you kind of went through the Signature Bank event, and then disruptions we had in March,
Speaker Change: They're they want to have a much more technical discussion around the bank's capital and liquidity and Lee and I In addition to hosting this call. We also now have a customer Call that we hold for all the customers of the private and CNI Bank
Speaker Change: that, you know, so we've kind of starting in quarter one really have done a lot of outreach where they can ask us questions and we have dialogue with the customer. On the new customers, not so much. Again, I go back to it's a little bit about reputational.
Speaker Change: But, you know, when we can show, you know, the amount of liquidity on the balance sheet and the capital levels and where our focus is, we get a lot less discussions, you know, about the bank in the marketplace.
Okay, thank you.
Yep.
Speaker Change: Our final question comes from the line of Matthew Brees with Stevens. Please go ahead.
Hey, good morning.
Speaker Change: Lee, you mentioned a couple times on this call the excess cash position of the balance sheet. Where do you envision working that down to as, you know, either dollar-wise or percentage of assets by year-end 25, and is that a good level to run within 26 and beyond?
Unknown Speaker Thank you. I appreciate it.
Yeah, I think we
Speaker Change: broker deposits during the year. We're going to have a billion of escrows that are coming out this quarter. Now we do feel that we can grow our core deposits.
Speaker Change: So, I mean, look, I think the cash position net-net probably comes down another...
Speaker Change: three or four billion from where we are today. But again, you know, that's what we're projecting. And we're going to we'll, we'll manage that dynamically depending on, you know, what we're seeing, you know, in the market, but that's how I would think about it. And the other the other sort of piece to the jigsaw that I gave
Unknown Speaker ____________________________________
Speaker Change: will use that cash appropriately. But I think, I think if you sort of imagine
Great. And then my second one was...
Speaker Change: With the commercial real estate multifamily book fully reviewed, should we read into anything as it relates to where we are in terms of non-accrual levels? Have we peaked or near peaked?
Speaker Change: And could you give us some sense for charge-off expectations in 25, you know, certainly 2024 was elevated. Can we start to see that decline from here?
Speaker Change: Thank you. So on the substandard non-accrual, in the fourth quarter, we ended roughly substandard at about $8.7 billion.
Speaker Change: and the non accruals at $2.5 billion. Yeah, and it's our expectations that the non accruals will point in time at the end of the year be down 30%.
Speaker Change: and that the substandard will be down 10%. So we do see that those numbers will decline is what our current forecast is.
And then as far as charge-offs,
Unknown Executive, Joseph Otting, Thomas Cangemi, Unknown Executive, Joseph Otting,
Great.
Speaker Change: If I could sneak in one more. As a Category 4 bank and Joseph, your prior standing in terms of the regulator and head of the OCC, could you give us some sense under the new administration for your expectations for potential changes in how Category 4 banks are regulated and
Speaker Change: You know, that's kind of embedded in any of the guidance items. Thank you
Speaker Change: You don't have to be determined based upon who the new comptroller is.
Speaker Change: But, you know, our really goal is that we will remain as a Category 4 bank and we're building the right infrastructure and credit processes.
Speaker Change: and Risk Governance Framework to be able to be a Category 4 bank because
Speaker Change: As we start to become profitable and grow, we want to be attuned to that so we don't have any growth restrictions.
Speaker Change: We don't have any growth restrictions today, but you know, we just think it's better. We brought in, you know, enormous talent, you know From the OCC to help us do that
That's all I had. Thank you very much.
Speaker Change: And I will now turn the call back over to Joseph Otting for closing remarks.
Okay, great. Thank you very much for all the questions.
Speaker Change: In a short period of time, it's amazing how quick you guys get to the bottom line and understand these numbers and I think you were spot on on kind of the observations.
Speaker Change: You know, we want to thank you again for taking the time, you know, for joining us and your interest in Flagstar.
Speaker Change: I look forward to speaking and meeting with many of you in the weeks to come. Lee and I are available through Sal. If you want to arrange one-on-one calls and meetings, we're happy to do that.
Speaker Change: We're really excited about our story and the direction and the work that we've accomplished in 2024 and really look forward to kind of delivering now in 2025 for all of you, our investors, our employees, and our customers. So thank you very much.
Speaker Change: That will conclude our call today. Thank you all for joining. You may now disconnect.