Q2 2025 Flagstar Financial Inc Earnings Call
Ladies and gentlemen, thank you for standing by. My name is Krista and I will be your conference operator. Today at this time I would like to welcome everyone to the Flagstar Financial second. Quarter 2025 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 would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. And if you would like to withdraw that question, press star 1 again, thank you. And I would now like to turn the conference over to South de Martino director of investor relations. Sell you may begin
Speaker Change: Thank you, Krista and good morning, everyone. Welcome to flexstar financial second quarter 2025 earnings call
Speaker Change: This morning, our chairman president and CEO Joseph phodong along with the company's senior Executive Vice, President and Chief Financial Officer. Lee Smith will discuss our second quarter, results and Outlook.
bow win: Also joining us on this. Call this morning is bow win companies general counsel and chief of staff to the CEO.
bow win: before we begin, I would like to remind everyone that during this call, we will be referring to a presentation which provides additional detail on our quarterly results and operating performance
bow win: both the earnings presentation and the press release can be found on the investor relations section of our company website, IR at flagstar.com
bow win: In addition, please note that certain comments made today by the management team of Flagstar may include forward-looking statements within the meanings of the private Securities. Litigation Reform, Act of 1995.
bow win: Such forward-looking statements. We may make our 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
Also, when discussing our results, we will reference certain non-gaap measures which exclude items from reported results. Please refer to today's earnings release for reconciliations of these non-gaap measures.
Now like to turn the call over to Mr. Adding Joseph. Please go ahead.
Speaker Change: Thank you s and uh good morning everybody and welcome to our second uh quarter earnings call.
Speaker Change: Uh, we are very pleased with our operating results achieved. During the second quarter, we continue to accomplish everything we set out to do and make progress on several fronts.
Speaker Change: Um, we had significant momentum on our cni growth strategy as we uh generated almost 1.9 billion dollars of commitments and 1.2 billion dollars in new loans uh and and added additional Talent during the quarter as well. Um, and I'll remind everybody, we really started this initiative in the third quarter of last year.
Speaker Change: Um, we further reduced operating expenses and our on, on our plan to exceed prior estimates, our credit quality improved as both criticized and classified assets declined, 9% and non-accrual Loans declined. By 4%,
Speaker Change: We meaningfully reduced our CRA exposure via record par payoffs, almost 1.5 billion dollars, which was substantially over. What our initial forecast was, we grew the net, interest margin and we reduced high cost, deposits and borrowings. And this result all resulted in our CIT cet1 Capital ratio increasing to 12.3%.
Speaker Change: Going forward. Um we will continue to focus on the following areas as we continue to execute on our winning strategy, the transform Flagstar Bank, into a top performing Regional Bank,
Speaker Change: We anticipate that we'll continue to grow cni, this will further diversify our loan portfolio and generate deposits in fee income.
Speaker Change: We'll continue to reduce operating expenses and we'll reduce the level of non-accrual loans and criticize and classified loans.
Speaker Change: Illegal also provide an overview of our New York rent regulated, exposure and portfolio, which we think you'll see that we've substantially taken action against that portfolio. Um, and the overall risk is much less than I think that has been reported in the market before jumping into our financial results. For the quarter more fully, I'd like to turn to slide 3, to discuss the news. We issued yesterday after the close of the market regarding our plan to merge our holding company into the bank.
Speaker Change: Flagstar Bank. Thereby eliminating, the whole holding company.
Speaker Change: This is a similar action that 1 of our regional Bankers undertook in 2018. When I was the controller of the currency, we were supportive of this then and feel, this is the right move for our company.
Speaker Change: This action is designed primarily enhance our corporate legal and Regulatory structure.
Also, as you can see, there are additional benefits including a further reduction in our operating expenses, streamlining certain functions across the bank.
Speaker Change: Eliminating redundant corporate activities such as dual board meetings reducing redundant, supervision and regulation.
I will add that other than the elimination of the holding cupping, really nothing else changes for our company. Our board Remains the Same, our management team Remains the Same, and our common stock will continue to trade on the New York Stock Exchange under the ticker of flg.
Speaker Change: On the next slide. We highlight the 4 primary management, Focus areas for 2025.
Speaker Change: Each of each of which gained momentum during the second quarter.
Speaker Change: We want to improve our earnings profile through margin expansion. Fee income and reducing operating expenses.
Continue to execute it on our cni and private bank growth initiatives.
Speaker Change: Proactively manage the CRA portfolio, including reducing our concentrations and Lee will cover that later on a slide. But we've made really spectacular strides in re not only reducing the CRA portfolio, uh, but taking corrective actions.
Speaker Change: Um, and the credit quality improvement to lower provisions and credit losses.
Speaker Change: The next few slides.
Speaker Change: Show the significant progress made during the second quarter in our cni business.
Beginning on slide 5, we show some of the key highlights during the quarter.
Speaker Change: In the second quarter, we hired an additional 46, New bankers and related support staff including credit Underwriters and portfolio managers.
Speaker Change: We have added more than 100 Commercial Bankers since June 2024 and we intend to add an additional 50 during the second half of the year.
Speaker Change: During the quarter. We showed tremendous growth in our 2. Focus areas specialized Industries, lending and corporate slash Regional Commercial Banking.
Speaker Change: Overall new commitments increased 80% compared to the prior quarter to the 1.9 billion, while originations increased almost 60% to the 1.2 billion.
Just more importantly, is our pipeline, currently stands at 1.2 billion dollars up, 40% compared to the first quarter Pipeline. And I really think this is just reflective of the focuses, the industries and bringing on, you know, really talented people into the organization, most who have, you know, 25 to 35 years of operating uh, in the in their specific special days.
Speaker Change: Our expansion strategy is really twofold. Our corporate Regional Commercial Banking, business is focused on building out a relationship based National corporate banking effort and a middle Market Commercial Banking franchise within Flagstar. Main Aur main, geographic areas,
Speaker Change: Our specialized industry is in corporate banking, business is a national model and focuses on several industry verticals, including sponsored Finance subscription.
Finance lender, help lender Finance, Healthcare oil, and gas, power and renewable, franchise sports entertainment and media and Communications, in each of these have been staffed, uh, and are led by significant industry, uh, specialist in their respective area.
Speaker Change: We recently announced the expansion of this business as you will see in the next few slides. It is already already driving strong, origination volume.
Speaker Change: Slide 6 the momentum in these areas over the past, several quarters.
Speaker Change: In our 2. Focus areas originations increased 81% to 810 million while commitments slightly more than doubled to 1.7 billion.
Speaker Change: On slide 7 while overall cni loans declined modestly during the quarter due to our managed approach to de-risking certain outsized credits. In the Legacy, cni portfolio and this is really the result of us implementing a new hold limit policy within the company where we are driving down uh those commitments to be within our home limits, the corporate Regional Commercial Banking and specialized Industries, portfolios, increase, 422 million, or about 12% compared to the prior to the previous quarter.
Speaker Change: Runoff has decelerated as we have lowered, our commitments in the cni portfolio and low along with growing momentum and new hires. We believe that the overall CN Port cni portfolio will will grow in the third quarter.
Speaker Change: On Friday, you can see the significant Improvement. The company has made over the past quarters, and strengthening our balance sheet and is in line with what we said, we would do and what we have done.
Speaker Change: Our cet1 Capital ratio has increased by over 300 points to 12.3 ranking, US among the highest relative to our peer groups.
Speaker Change: We have significantly improved our Reserve coverage through a rigorous credit review process.
Speaker Change: We've enhanced overall liquidity and we've reduced our Reliance on wholesale borrowings, which helps our margin going forward.
Lie: So now I'd like to turn it over to lie uh to cover some of the financial data. Thank you, Joseph and good morning everyone.
Lie: As Joseph said earlier, during the second quarter, we did exactly what we said we would do. And we're very pleased with the continued progress of our turnaround strategy.
Lie: From a fundamental point of view, our ct1 Capital ratio ended. The quarter at 12.3% ranking us as 1 of the best capitalized, Regional Banks and our adjusted pre-provision pre-tax net revenue was a positive 9 million and Improvement of plus 32 million from last quarter. As we look to return the bank to profitability in the fourth quarter of this year.
We continue to deleverage the balance sheet by reducing high cost flub advances and broker deposits. We made further progress on our expense reduction, plans, reduce criticized assets by 1.3 billion achieved significant growth in new cni, originations and saw records CRA payoffs.
Lie: In Q2, we pay down over 2 billion of brokered deposits. At an average weighted cost of 4.6%. And we also let 2 billion of high cost mortgage. Escrow related deposits with a weighted average cost of 4.70% runoff during the month of June.
Lie: We also paid off, 1 billion of flood advances, right at quarter end with a weighted average cost of 4.500%.
The reduction of these high cost funds will provide us with an ongoing margin benefit during the second half of the year and they also provide us with an FDIC Insurance expense benefit.
Lie: 4.9 billion of retail CDs matured with a weighted average cost of 4.80%.
Lie: We retained approximately 85% of the CDs and they migrated into other CD products that were anywhere from 50 to 65 basis points lower than the maturing CDs.
In the third quarter, we have another 5.2 billion of retail CDs. Maturing at a weighted average cost of 4.550%.
Lie: These deleveraging actions CD maturities and other deposit management strategies have allowed us to reduce our cost of deposits. 11 basis points quarter over quarter and our overall cost of funds by 10 basis points compared to the prior quarter.
Lie: We continue to actively manage our deposit costs and we'll look for further opportunities to reduce our cost of funds during the remainder of 2025.
Lie: we also accelerated 2 billion of investment Securities purchases during the quarter to optimize our net, interest margin
Lie: Collectively, these actions resulted in a 7 basis. Point quarter over quarter near Improvement to 1.81%
Lie: Our name for the month of June was 1.88%.
Lie: Joseph already commented on the strong results in the cni business.
Lie: We are thrilled with their performance and are firmly on Pace. To hit our Target of 1.5 billion of funded cni loans per quarter.
Lie: I should note that during the quarter we had Legacy cni payoffs.
Lie: As we took deliberate de-risking actions to rightsize outside credits by reducing hold limits and exiting lower risk rated, and less profitable credits.
Lie: in terms of asset quality criticized acids declined, 1.3 billion, to 12.7 billion in the quarter, a result of payoffs and upgrades
Lie: Criticized assets have been reduced, 2.2 billion or 15% since the beginning of the year.
Lie: The 1 B where we moved to non across status in the first quarter filed for bankruptcy during the second quarter.
Lie: We believed this will lead to a more orderly process on about 82 of the 90 loans that are subject to bankruptcy proceedings.
Lie: Of the remaining 8 loans, we've moved to appoint a receiver in the various jurisdictions and take Direct Control of these properties.
Lie: With respect to the 30 to 89 de delinquencies. Approximately 332 million were driven by 1 borrower, who pays subsequent to month end and has done. So again, meaning that about 329 million of their delinquent loans, as of June 30th are now current, as of July 23rd.
Lie: On slide 17 of the earnings presentation. We have provided significant information around our rent regulated multi family portfolio.
Lie: When you look at all multifamily buildings that are more than 50%. Rent, regulated approximately 10 billion are within New York City, with an average occupancy of 97% and a current loan to value ratio of 69%.
Lie: Of this 10 billion 5.6 billion or 57% are pass rated loans.
Lie: The remaining 4.3 billion or 43% are criticized or classified loans. Meaning they are either special mentioned, substandard or on non-accrual
Of these 4.3 billion, the current LTV 79%.
Lie: Interestingly, 1.9 billion on non-accrual and have already been charged off to 90% of appraisal value.
Lie: Furthermore of this criticized and classified population, we have recent appraisals within the last 18 months on 77% of these loans and updated financials on 93%.
Lie: If you subtract the non-accrual loans, from these criticized population, you are left with 2.3 billion.
Lie: Of these 2.3 billion amount between charge Ops and ACL reserves. We have approximately 6% or 137 million of charge off and reserved coverage
Lie: Meaning they are in the 18-month window of enhanced financial review.
Lie: Suffice to say, given credit metrics charge offs and current ACL reserves. We feel that we are appropriately reserved against the portfolio.
Lie: Also we are currently reviewing the annual finan financial statements for all borrowers, and today we've completed the review on approximately 28%.
Lie: I'm pleased to report that there have been more upgrades than downgrades while the vast majority have stayed consistent compared to last year. Implying that the overall trend is improving
Now, turning to slide 9 as we reported earlier today. Our second quarter loss per share narrowed significantly compared to the previous quarter.
Lie: and on an adjusted basis, it came in in line with consensus
Lie: We reported a net loss of 19 cents per diluted share. And as adjusted we reported a net loss available to Common stockholders of 14, cents per diluted share compared to 23 Cent, net loss in the first quarter.
After adjusting for the following notable items, 14 million of merger, related expenses 2 million of severance cost related to Branch closures. 7 million in accelerated lease cost. Also related to Branch closures and 3 million in trailing costs from the sale of the mortgage servicing and third party origination business.
Lie: Importantly. However, and as a previously, mentioned, our adjusted pre-provision Revenue was a positive 9 million this quarter and Improvement of 32 million compared to last quarter.
Lie: the following slide provides our updated 3 year forecast through 2027,
Given the earning assets are lower than previously forecast, due to the higher loan. Payoffs, we are refining our net interest income and Nim guidance, by 125 million, and 10 basis points in 2025, but offsetting 75 million of that with a reduction in non-interest expense.
Lie: Resulting in adjusted, EPS being approximately 10 cents lower than previously forecast.
Lie: The lower balance is then rolled into 2026. So we have tempered net interest income by 100 million next year, but offset that
Lie: Entirely with a 100 million of lower non-interest expense. Meaning that that our adjusted EPS guidance in 26 does not change and there is no change to our 27 guidance.
Lie: Slide 11 highlights our Nim Trends. And as you can see, we had margin growth during the second quarter and we expect to see margin growth over the remainder of the year.
Lie: As I mentioned earlier, the ninth for the month of June was 1.88% compared to the 1.81% average for the second quarter.
Lie: Drivers to our Nim expansion include a lower cost of funds as we continue to de-lever the balance sheet and manage our cost of deposits. Lower low coupon multi family loans, resetting higher or paying off at par.
Net growth in higher yielding, cni loans, and a reduction in non-accrual loan, balances.
Earlier Joseph touched on the reduction in our non-interest expense and on slide 12. You can see the substantial progress we've made in reducing operating expenses.
We've worked exceptionally hard to optimize the cost structure of the organization.
Given actions. Today, we've taken out over 700 million of costs on a year-over-year basis. Our cost reduction efforts are focused on the following 5 areas.
Compensation and benefits real estate optimization.
Vendor costs.
Lie: Outsourcing offshoring, non-strategic back, office, functions, and processes, and FDIC expenses.
Lie: Quarter over quarter, expenses, decreased 24 million and we are significantly ahead of our full year 2025 non-interest expense guidance.
Our cost savings are net of growth in other areas, such as the buildout of our cni business together with investments in our risk compliance and Technology infrastructure.
Turning now to slide 13 which shows the growth and strength of our Capital position.
A 12.3%. Our ct1 Capital ratio is top quartile and nunga peer group. Our priority continues uh, to be to redeploy this Capital into growing our cni business. As we further diversify our balance sheet.
Lie: Was due to the payoff of 2.2 billion of high cost, broker deposits, and approximately 2 billion of mortgage, escrow related deposits.
Lie: The next slide shows our CRA par payoffs, we had a record quarter of par payoffs of approximately 1.5 billion, almost double the amount for the first quarter.
Of this amount 45% or 680 million were rated as substandard.
Approximately 500 million of this quarter's part payoffs or 33% were New York City greater than 50%. Rent regulated buildings.
Lie: This quarter's record number of CRA part, payoffs provides an indication of the robustness of the market for these loans. And while this acceleration of par payoffs impact short-term earnings, it also accelerates our strategy to diversify our balance sheet to a third, CRA, a third cni, and a third consumer.
these par payoffs are also driving the significant reduction in CRA balances and in the CRA concentration ratio,
Lie: Since year, end 2023, CRA balance is a decline 8 billion or 16% to 39.7 billion while the CRA concentration ratio is down. 80% points to 421% compared to 501% at year end 2023.
Lie: Slide. 16 provides an overview of the multifamily portfolio. This portfolio has declined nearly 4 billion or 12% year-over-year.
We maintain a strong Reserve coverage on this portfolio of 1.68% the highest relative to other multifamily focused banks in the Northeast.
Lie: Furthermore, the reserve coverage on multifamily loans where more than 50% of the units are rent. Regulated is 2.88%
Lie: Earlier, I stated that 1 driver to our margin expansion is the resetting of our multifamily loans.
Lie: We have about 16 billion of multifamily loans, either resetting or maturing between now and the end of 2027 with a weighted average coupon of less than 3.7%
Lie: If these Loans pay off, we will reinvest the proceeds and capital into cni growth or pay down wholesale borrowings if they reset. The contractual reset is at least 7 and a half percent which gives us an immediate Nim benefit.
Lie: Going back to January 1 2024, approximately 4.9 billion of CRA loans have reset of that. Amount 2.3 billion has paid off a par and 1.9 billion, have reset and occurrence, meaning 85% of CRA loans. That have reset have either paid off a part or a current
Lie: Skipping to slide 18. This slide details, our ACL by loan category, our ACL, Reserve decreased 53 million quarter over quarter. A result of lower health, for investment balances, and lower criticized assets.
Lie: These positives were offset by a weaker Moody's economic forecasts, which added over 60 million to the reserve.
Lie: Our coverage ratio including unfunded commitments was 1.81% in line with last quarter at 1.82%.
On slide 19. We provided additional details around our credit quality Trends, criticized and classified loans to decline 1.3 billion or 9% on a quarter over quarter basis to 12.7 billion while they are down, 2.2 billion or 15% since the beginning of the year.
Lie: Net charge offs of 117 million were relatively unchanged compared to the prior quarter at 115 million.
Lie: We believe We further de-risked and positioned the balance sheet for growth and profitability fundamentally. We have strong Capital that we can invest into loan growth, strong liquidity, and funding strong, credit reserves. And we've executed on optimizing the cost structure of the organization.
Joseph: I will now turn the call back to Joseph.
Joseph: Thank you Lee. Uh, on slide 20, we highlight the significant embedded price appreciation, potential in the stock price at current price levels.
Speaker Change: We closed yesterday at 12 and 5, referrals tangible book value per share, compared to 160% for our peers.
Speaker Change: Star and our peers will narrow and ultimately go away.
Speaker Change: If we trade at only 1 times our year, end 2027 tangible book, value per, share adjusted for warrants our stock. Could trade at $17.64 representing potential upside of 46% from current levels.
If we trade in line with the peer, multiple our stock price could trade at 28.23% in potential upside of 134% from current levels.
Speaker Change: We have made significant strides during the first 6 Months of the Year and we anticipate further progress over the remaining 6 months.
Speaker Change: As always, I'd like to thank all of our teammates for their efforts in collaboration.
I turn around as a team effort and together we will transform Flagstar into 1 of the best performing Regional banks in the country.
Speaker Change: Now, operator, I would like to turn it over and open it up for questions. Thank you.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw your question, again, press star 1, we do ask that you limit yourself to 1 question for any additional questions, please. Reach you.
Speaker Change: Your first question comes from Jared, Shaw with Barkley's. Please go ahead.
Jared Shaw: Good morning, everybody.
Guess, uh, on March and um, can you give a little bit of detail on the Securities purchase, um, that that happened? And then as we as we look, outgoing forward with that 188, um, I guess ending margin, uh, does that take into account the
Jared Shaw: fhlb payoff and, uh, sort of expectations around interest recapture and that
Jared Shaw: Yeah, it does. So, um, thanks for the question. Jared we we pulled forward, uh, 2 billion.
Jared Shaw: If you go about last quarter, we that was what we forecast, the buy between the end of q1, and the end of the year, uh, given our excess cash position. We accelerated those security purchases into Q2, um, because, uh, it maximizes name, we were basically buying agency CMOS, um, with a weighted average coupon of about 5 and a quarter, uh, percent. And so, um, we just felt that that was, it was just another action. We could take to optimize our name, uh, position, um, and the fhlb
uh,
Jared Shaw: Purchase or, or, or, or what we bought back it was right at the end of June. So you don't see any benefit of that in the Q2 results but it is included in the Nim forecast for the remainder of the year.
Speaker Change: Your next question comes from the line of Mark. Fifth Gibbon with Piper Sandler. Please go ahead.
Mark: Hey guys. Good morning. Um, Joseph, I think you had had previously suggested that stock repurchases were possible in mid 26, is that still sort of the expected time frame for BuyBacks? Or do you do? You has it been pulled forward at all given your strong Capital position? Thank you.
Mark: Yeah, this is Lee. I think, as we've said both Joseph and I right now, the focus is on investing the excess, uh, capital in growing cni, uh, and other asset classes, quite frankly. Uh, and so that's where, uh, we want to invest the capital, uh, in the franchise. Uh, and we feel, you know, you've seen the tremendous progress that we've made from a cni point of view. Uh, and we feel that that trajectory, uh, and positive momentum will continue. I think in terms of stock BuyBacks, you know, right now we're not looking to do that. But, you know, as I've said previously, if we get to the middle of 26, were we, we're back to profitability with firing on all cylinders, if we're still
Mark: trading at a discount to book like we are today you know that may well be something that that we need to take a look at
Speaker Change: Yeah, I think I think Mark that what leader said was kind of what we communicated with clearly need to get through 25 well into 26 and if we start being accretive to Capital, then I think the board will have some Dialogue on what to do with that excess capital.
Speaker Change: Your next question comes from the line of Christopher McGrady with KBW. Please go ahead.
Christopher McGrady: Have a great morning.
Speaker Change: Payoffs albeit at par. I guess what's the degree of confidence? That the payoffs acceleration. Won't continue in the asset base will be smallest sex.
Speaker Change: Yeah, so um it's it's a good point Chris. And that's part of the reason why we've tweaked the interest income guidance. So right now, we believe that at the end of 25, the balance sheet will be, um, about 93.3 billion. So that's about 2.7 billion, less than uh, what we thought it would be at the end of last quarter. And it's really just because of a couple of things. Uh, the the CRA payoffs coming in almost double what they were in. Uh, q1. And we actually think that Q3 will be another strong quarter, uh, of par payoffs. And then as we mentioned, um, we had a slight, it was the cni was, was sort of on a net basis down slightly uh, as we look to de-risk, uh, some of the Legacy portfolios where we felt we had outside positions, poorer credits, or credits, that weren't meeting our profitability thresholds.
Speaker Change: We do think that in Q3, uh, we will be net positive from a, from a cni point of view, but you've got that smaller balance sheet and as I mentioned in my prepared remarks that rolls into 26, um, uh, and and and then, we start to recover some of that in 27. So the
Speaker Change: Ending balance sheet, at the end of 26, is about 98.5 billion. Uh, we were around 102. Uh, and then in 27, the ending balance sheet is 109.6 billion versus 111.4. Uh, and then, the only other thing I'd add on 26, is just given the exceptional progress. We've made with our, uh, expense optimization plan. Uh, we cannot set dollar for dollar that reduction in, uh, guidance for net interest income, with those cost, reductions in 26.
Speaker Change: Great and mate. Thank you for that help. And my follow-up would be the collapsing of the holding company. I saw the 15 million of annual costs, that's that's great. I presume this will. Um,
Speaker Change: Uh, lead you to have to avoid to do ccar. But any any other um,
Speaker Change: Uh, comment on the collapsing. Would be great. Thanks.
Speaker Change: Yeah, you know. Um you know clearly as we've kind of gone line by line across the organization looking at, you know what is a value to the company and where we can take cost out, you know our estimate is this is roughly 15 billion or 15 million dollars. That that will reduce our costs.
Speaker Change: And those are predominately third-party costs. They'll also be some internal costs that we feel that we can successfully take off. But I think also, it is, you know, focuses into 1 regulator supervision process within the company and you're right, there is a, you know, obviously the OCC does a capital review submission by the bank and but we will not be subject to the car going forward. That's correct.
All right, thanks so much.
Speaker Change: Welcome. Thanks Chris, you are. Next question, comes from the line of Abraham puno Walla with Bank of America. Please go ahead.
Speaker Change: Hey, good morning. Good morning.
Speaker Change: I guess maybe just wanted to go through. So I think Liu mentioned in terms of obviously non-accrual loans are uh uh declining you talked about you pricing. Um if you don't mind just walking through the latest in terms of the health of the rent, stabilized multi family, uh, landlords both in terms of giving their interest rates are like, would would lower rates help if you don't get uh, much relief on rates is, is that incrementally negative or not? If you look out the next 6 to 12 months and then obviously, with all this chatter about the May mayor elections in New York. How bad could that be for? Uh, uh, for these clients. Thank you.
Speaker Change: 62% current LTV. So then you're left with 4.3 billion which is uh,
Speaker Change: Criticized and classified. So special mentioned substandard, a non-accrual, um, and, and of, that 4.3 billion 1.9 billion is not a cruel. And, as I said, in my prepared remarks, we've already taken charge of, and you can see this in the table in the bottom left 334 million, or almost 15% of of charge offs against that population and we have a further, um, 82 million or 4% of reserves against it. Um, so, you know, we've obviously done a lot of work on, on, on the non-accrual portfolio and and, and, and written that down to 90% of, um, appraised value. So then you left with 2.3 billion, which a special mention and substandard, um, a a and of that 2.3 billion, uh, we've got 137 million or about 6% coverage between uh, ACL and uh, and charge offs and you know,
You know what, I think, what I would also point out about that. Um, 2.3 billion is 50% of that 2.3 billion has already reset and these continuing to pay and and 40% will reset within the next 18 months. What that means for us is it's in the
Enhanced review period. So we've done additional work on those because we know they're going to reset within the next 18 months. So, you know, like we just feel that, uh, first of all, when you look at it, um, a lot of big numbers were being thrown around by some sort of, uh, in some analysis that we were looking at. That's not true and we've tried to articulate it here and given all the work that we've done, we feel that we are more than adequately reserved, um, against the portfolio and then to answer your other point, Ibrahim, if rates drop, that's obviously helpful. Um, if we're in a decline in rate environment, I would expect that you'll see It'll speed up uh the payoffs of of that multi uh family portfolio. And I think it probably brings any of the multi family loans that are non cruel. It moves them further into the money.
Speaker Change: Yeah. Abraham. The the other comment I'd make if you look at the the advertising debt service coverage numbers and kind of gets to your point, you know, we all know that the next 12 months, the uh annual leases are going to go up, 3% and uh multi-year 2 year leases will go up 5 and a half percent where you could see impact of of the freezing of rent increases which would not occur until, uh, July of 26. Um, that the, the numbers on the debt service coverage. It would depend upon how fast expenses
Speaker Change: Went up to impact, those debt service coverage because we know those properties virtually stay, you know, 100%, Almost 100% occupied. But it really comes down to just, if rents are frozen, then, what is the Opera? What's the, what's the Arc of the operating expenses?
That's helpful. Thank you both.
Your next question comes from the line of Manan goelia with Morgan Stanley. Please go ahead.
Speaker Change: Hey, good morning. Good morning.
Speaker Change: Um, can you give us some more color on the change in the knee guide? Um, I I I hear you that, uh, on on the higher pay downs, but I was wondering if, you know, doesn't that come with, uh, pay Downs of more lower yielding loans and then, that ALS gives you the ability to drive down those deposit costs, which have already been coming down nicely. So, you know, I'm wondering what I'm missing there. Um, is there less of a yield pickup? Um, as you move from some of the CRA pay Downs into cni, or um, anything else happening there? Yeah, yeah, no. It's a great, great question. So when when you look at the, uh, the name change there is, uh, the sort of a rate and there's a volume impact. And, and I think we've, we've obviously talked about the volume and what's um, what's driving that. But in terms of rate, I mean the the the weighted average coupon of the loans that are paying off is uh it's it's sort of under 6% because what you've got is a situation where loans that are re
Speaker Change: The the rate.
There's a lot of ins and outs at the moment. As you can see, as we are optimizing and tidying up the balance sheet, we've got new loans coming in, we've got runoff, uh, you've got things in there. Like the the, the fhlb stock dividend, you got non acrs. There's a lot of things that can just, uh, affect the overall Nim by a basis point here and and there. And so you have a sort of cumulative effect and it's it's not much it's sort of single digit bits. But obviously, when you take those single digits on a 92 billion balance sheet, then you have the volume reduction. That's why we've just tweaked the guidance down by 125 million and 10 basis points.
Speaker Change: so that uh did you have what the the new Launcher coming on at
They could you say that again please? Uh do you have what the what the new cni loans are coming on at, what, what? Yeah, they're coming on. Yeah, they're coming on a Sprint to soap for depending on the type anywhere, uh, a spread to so for anywhere from 1.75 to 300, just depending on the type of the uh cni loan that that's coming on.
Speaker Change: Great. Thank you.
Speaker Change: Your next question comes from the line of Bernhard Von, giese with Joyce Bank, please go ahead.
Speaker Change: Uh, Hey guys, good morning. Uh, so just questions. I know you're trying to reduce your multifamily concentration. Uh, and utilize proceeds into growing cni. So the 16 billion in in the regulated portfolio uh are you contemplating any uh sales here? Or will reductions? Here going forward be from any maturing or charge offs.
Speaker Change: Yeah, so I think as you can see um we're doing a very nice job at receiving part payoffs and and a substantial amount of those par payoffs are substandard. Uh and and as you correctly point out between now and the end of 27 we've got another 16 billion resetting. So uh as it relates to the Performing part of the portfolio, we feel very comfortable that what we're executing on right now is paying dividends. I think, you know the sale option is it it applies more to the non-accrual loans. That's just 1 of the options along with, you know, dpos workouts. Um, uh, that's just 1 of the sort of strategies in terms of dealing with the non-accrual loans. And so that's how I sort of think of the sales strategy.
Can the, the other thing I would add there is, you know, obviously, we're trying to work with borrowers, where we can enhance the credit either through, uh, uh, at maturities pay Downs, or them offering up additional collateral with cash flow to support the loan. So it is a multitude of buckets and quite frankly, you know what you've heard from us for multiple quarters is you know our our real desire to get the criticized loans paid down as a concerted effort and we saw you know significant results this quarter from that effort.
Speaker Change: Okay, I just want to follow up. Um, Lee, I know you mentioned the, the 1 bar of the move to non acral status in 1q and file for bankruptcy, uh, in the second quarter uh you know, I know you took some adjustments, some reserves. Um, and then reversal, uh, in 1 CU to reflect that. Just given the change in status were there any, um, uh, updates in, um, any in reversals or, uh, Reserve increases for for 2?
Speaker Change: Uh, is it relates to that, particular borrower? Um, yes. So as we got some appraisals, in towards the end of the second quarter, there was a net increase of uh, 18 million, uh, and, and just in just some additional charge up. So when when you look at where we were in the uh, at the end of the first quarter from a provisioning in charge of point of view and where we ended the second quarter, as we got those appraisals in. There was a net increase of 80
Speaker Change: 18 million.
Speaker Change: And known in reversal.
Speaker Change: No, we took all of that in q1. It was we moved it, all to non acrl in the first quarter.
Speaker Change: Great. Thanks for taking my questions.
Your next question comes from the line of Casey hair with autonomous research. Please go ahead.
Speaker Change: Yeah, thanks. Good morning guys. Um, so I guess just following up on that last question. Um, I was wondering if you could provide an outlook for for the net charge offs and I know you guys kept your, your provision, uh, guide intact. But was wondering if we could see some leverage, uh, from net charge drops, which held collapses for thank you.
Speaker Change: To Q3 Q4 and we're very comfortable with the guidance that we've provided. Um, as it relates to the provision for the remainder of the year, I think I would just emphasize again. You, you're seeing a reduction in in and you've seen a reduction in HFI portfolio predominantly because of those multi family par payoffs and you're seeing that very significant reduction in criticized acids, 15% or 2.2 billion um, since the beginning of the year. And so, you know, right now we we expect those Trends to continue.
Speaker Change: Okay, great and apologies. If I missed this, uh, on a busy morning, but, um,
Speaker Change: Just just wondering, what has whatever you guys seen in terms of changes from building owners. What have you guys been doing differently? And then have you seen any change?
Speaker Change: In, you know, in terms of, you know, when you get these CRA payoffs, um, you know, I don't know if it's a bank or, or, or some of the, uh, the gsc's that are taking the other side of this. You know, what kind of
Changing Behavior. Have you seen from these, uh, 3 different constituencies since the uh primary last month?
Speaker Change: Yeah, I I think there's a couple buckets first to address the payoffs probably, probably, you know, roughly 50%. It comes from the agencies.
Speaker Change: Oh, excuse me. 20% come roughly from the agencies. Um, and in most of the incidents, those credits, you know, meet a higher standard to be able to to clear the agency hurdle. Roughly 20% are coming from JP Morgan so about 40% of the payoffs are coming from those 2 channels and then the rest is just kind of spread around is is the way we would describe it. Um, and and, you know, we we are by our rollover documentation. We're we're 75 to 100 basis points what I would consider over market. So we, it is a motivating factor with the borrowers as we're having discussions that. You know, our intent is is to reduce our exposure. Obviously we've said that all along. Um, and so borrowers are incented to do what they can, uh, on the substandard credits which are, you know, roughly 50% of the payoffs that they are offering up credit enhancements to get those off our books and as we
Speaker Change: Referenced earlier in the call that can be pay Downs. That can be adding additional collateral. But but borrowers are moving those to gain lower interest rates in the marketplace. We do have a number of borrowers who exercised their option to roll that over a lot of those are going to uh, suffer related, uh, indexes under the assumption that we are going to see lower interest rates later in the year and they can then prepay those without a prepayment penalty as we move forward. Um, the other comment I would make is you know, we did have a home builder business um in the CRA group and we We've ran down pretty significantly. Any land lending. Um in that portfolio over the last couple quarters. Um, so we don't have a really a lot of exposure to what you're starting to hear. That some of the inventory levels are backing up at the home builder level. So our exposure, there is quite small
Speaker Change: Great, thank you. You're welcome.
Your next question comes from the line of Matthew Breeze with Stevens. Please go ahead.
Matthew Breeze: Hey, good morning.
Speaker Change: Happy.
I wanted to follow up on the the asset size question, um, and I and I heard you loud and clear on the new, you know, somewhat lower outlook for total assets. But I guess the question is, what's the cutoff for qualifying? For the formal category for bank stress tests next year? Um, as it seems like you'll be, you'll be under the threshold.
Speaker Change: We will be under the threshold but uh with our uh transaction that we announced yesterday, we won't even be subject to the requirements.
Speaker Change: Understood and there are additional cost saves from that. Yes.
Speaker Change: So no, no external vendor spin, no need for internal Staffing. All of those things.
Speaker Change: Understood. Okay. And then Joseph, maybe 1 for you earlier this year at a conference, you made reference
Joseph: As the balance sheet either expands and we use that capital or we have excess Capital. What what is the capital structure within the company? It looked like, you know, we obviously expect next year, you know, we're still forecasting a return to profitability in the fourth quarter and that we will be, you know, significantly profitable next year in 26. So that's going to start to offer up a lot of options for the board to consider.
Joseph: Great. A leader. Thank you. Okay, thank you.
Speaker Change: You're next question comes from the line of David Smith with truist Securities. Please go ahead.
Good morning. I wonder if you could speak to any downsides or, you know, that you see to, um, merging the hold Co into the bank, you know, you. You outlines what sound like some, you know, pretty nice. Positives. I'm just wondering, you know, if this is just such a great idea. Why we don't see more more Banks following the same decision?
B win: Hey, this is B win.
B win: Um, I we don't see any downsides as we sort of noted in our press release yesterday. Today, we have most of our operations, 99% of our operations is in the bank and the costs associated with the duplicity of regulations of the holding company.
B win: Sort of outweighs the 1%, uh, of of sort of assets that we really have at the holding company. So, for us, it it, you know, given our structure and given that our activities are are all at the bank. There is really no, downsides for us here. There's no changes in our activities. Um, you know, we we don't have any plans on engaging in non-banking activities, which is really the key reason for having a holding company. Um, so for us, it's all quite positive and no, uh, no, downsides from our perspective.
Speaker Change: And then um, I just want to confirm you, you still expect to be gaap EPS profitable for the fourth quarter of this year.
Speaker Change: We do yes. That that absolutely and uh, we're on track given the results of Q2. Uh, the progress we've made from q1. And that's exactly the uh, the goal and objective and we're on track.
I think the other thing can I add on the holding company question? You know, we will continue as a bank to be able to access the discount window, uh, all those sorts of things that are available, to banking organizations. Uh, so I think that just sort of emphasized for us. No, no, no change. Uh, that are negative, uh, from our perspective.
Speaker Change: Thank you.
Your next question comes from the line of Christopher marionette with Jamie macgomery Scott. Please go ahead.
Speaker Change: Thanks. Good morning. Um, wanted to ask about deposit flows. And do you think that we will see a turn on the private bank and, and the commercial and Premiere, are you incented or incenting growth in those channels?
Speaker Change: Yeah, absolutely. I think, um, as we've said before, as, as we move forward here, we want to leverage the new relationships that we're bringing in on the cni side to to bring in deposits. Now, it takes time, it doesn't happen overnight. But our strategy used to be a full relationship Bank, uh, and it we're not sort of just going to give the balance sheet away. Um, we want to have a deep relationship where we're creating deposit flows fee income opportunities as as well as the lending relationship. So uh that is absolutely uh a big part of the strategy as we move forward here.
Speaker Change: Okay, I don't I don't think you see we're we're not just buying participations, that's not our strategy. These, these are our new relationships are ones where the people are joining. The company have been connected to these companies for significant periods of time and we're already seeing it in, you know, our interest rate derivative products. We're seeing it in our 401K offerings to companies, and we've also, you know, on 6, or 8 transactions have either.
Speaker Change: Been named lead, laughter lead right on and are leading credit transaction. So that's that's kind of our sweet spot with our balance sheet gives us the ability to, you know, be quick and Nimble on the credit process. But also be large enough to be able to be a significant player for uh, either existing or prospective clients.
Speaker Change: Great, thank you both for that and just a quick follow-up on sort of the payoffs. And the multifamily uh bucket. Are you seeing agencies and other Banks take loans from you? Is there any uh additional commentary on? Kind of how that mixes has been?
Speaker Change: Um, we're absolutely seeing other uh, financial institutions, uh, and the agencies, although the agencies have always been there leaning into this asset class.
Speaker Change: Great. Thank you Lee. I appreciate it.
Speaker Change: No problem.
Speaker Change: Your next question comes from the line of John arfstrom with RBC Capital markets. Please go ahead.
Hey, thanks. Good morning.
Speaker Change: Good morning. Hi John. Uh,
On uh I'm just thinking about 26 and 27. You you have big hiring plans and curious when you miss
Speaker Change: On a new hire.
Speaker Change: What are the top couple of reasons and then what are some of the reasons? The new relationship manager?
Can't get their clients to come to Flagstar. What are the things you need to work on or improve their? Thank you.
Speaker Change: Um, you know, I I think, uh, uh, we, you know, we 1 of our claim to fame is virtually all the people we've hired except for 1, they are people that we knew and did not use in executive recruiter. So we're, you know, we're describing, you know, hundreds of people who through history do rich for fetto or Joseph adding as we have both spent, you know, 30 to 40 years in the banking business. And so, uh, a lot of people, you know, see that this is a a team that they can join and be part of a winning strategy. So that's, that's
That's what I would say. Number 1 and number 2 is
Speaker Change: A lot of times, you know, people are looking for growth and if you're at an institution, a large Regional Bank, or a national bank, that, you know, may have their share of credits, uh, and commitments into a relationship. This is kind of a clean slate, where they can come over here and be part of a clean slate. Um, and so that excites people, I think to be part of that strategy and and the direction we're going on, the mid side, I would say the real. This is where the bank comes back and is basically, you know, does whatever. It takes to keep that that person in the company. And that to me, just reinforces the type of people. We're trying to hire, you know, where the type of people that that organizations want to keep, um, from that perspective. And on the client side, you know, I I would say we're we're really good. Now in the syndications, I think we're really good in the interest rate, derivatives uh, products and and and relationships and credit, you know, how we deliver credit, the 1 area that we will probably need to invest a little bit more in is our treasury management.
Speaker Change: You know, we're we're good enough, but not great in treasury management. And so, as we're doing some of the consolidation efforts this year in the technology and operations area, we'll be through most of those in in late. Uh, the Q4 of this year, early q1 of next year, that we'll be able to start to be able to focus on products within the company. We've also done a good job, you know, this year, we've introduced, you know, kind of a capital call, you know.
Speaker Change: Facilities Equity Investments for clients to be able to make Equity investments in law, firms, and private equity. And then we did come out with a kind of a private banking oriented jumbo mortgage program that, uh, is interest, only on kind of 51 and 71 products, that is also starting to gain some real traction. With some of our private banking customers.
Speaker Change: Okay, good. And that, that's the commenter on further strengthening commercial products and services. Yeah, yeah, exactly. Yeah. Okay, all right. Thanks a lot.
Speaker Change: You're welcome.
Speaker Change: We have no further questions in our Queue at this time. I will now turn the call back over to Joseph aing for closing comments.
Speaker Change: Okay, thank you. Uh, very much for joining us this morning and allowing us to give you a kind of an update. Um, you know, the the executive management team of the bank is very excited about our progress and the direction that we're heading, um, we laid out an ambitious plan when we first arrived. Um, shortly after March of 2024 for the most part, we've stuck with that plan um and and actually outperformed in certain areas of the plan, including expenses, I think at the time, people were questioning perhaps our sanity that we could take that much expense out but not only are we going to take that out. Uh we're going to exceed that. Um and also the cni business is coming along. We couldn't be more pleased with the talent and the growth in the cni business and that's a real driver for us to reshape what Flagstar Bank will look.
Look like in in the future. So we do think we're well on track for, you know, all the parameters that we laid out and goals and objectives. And the team is really focused on on building this into a really top performing Regional Bank. So again, I'd like to thank you for taking the time to join us this morning and for your interest in Flagstar Bay.
Speaker Change: Please wait the conference will begin shortly.