Q3 2025 Flagstar Financial Inc Earnings Call
Speaker #1: Hello and welcome to the Flagstar Bank Q3 2025 Earnings Call. All lines have been placed on mute to prevent any background noise.
Speaker #1: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star one on your telephone keypad.
Speaker #1: I would now like to turn the conference over to Salvatore DiMartino, Director of Investor Relations. You may begin.
Speaker #2: Thank you , Sarah , and good morning , everyone . Welcome to Flagstar Bank Na's third quarter 2020 earnings call . This morning , our chairman , president and CEO , Joseph Otting , along with the company's senior Executive Vice President and Chief Financial Officer , Lee Smith , will discuss our results for the quarter and the outlook .
Speaker #2: During this call , we will be referring to a presentation which which provides additional detail on our quarterly results and operating performance . Both the earnings presentation and the press release can be found on the Investor Relations section of our company website at IRS at Flagstar .
Speaker #2: Also . Before we begin , I'd like to remind everyone that certain comments made today by the management team may include forward looking statements within the meaning of the private securities litigation Reform Act of 1995 , such forward looking statements we may make are subject to the safe harbor rules .
Speaker #2: Please refer to the forward-looking disclaimer in Safe Harbor language in today's press release and presentation. For more information about risks and uncertainties, which may affect us when discussing our results.
Speaker #2: We will reference certain non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures.
Speaker #2: And with that, I would now like to turn it to Mr. Joseph.
Speaker #3: Thank you , Sal , and good morning , everybody , and welcome to our first quarterly earnings as Flagstar in a . We are very pleased with the operating results this quarter .
Speaker #3: Our third quarter performance provides further tangible evidence that we are successfully executing on all our strategic priorities. Our operating results improved significantly throughout the year and during the quarter, as many of our key metrics continue to trend positively. From an earnings perspective, our adjusted net loss of $0.07 per diluted share narrowed substantially compared to the second quarter.
Speaker #3: While our Pre-provision net revenue continues to trend higher , putting us on a path to profitability . In addition to the improvement in earnings , we had several other positives during the quarter , highlighted by this was a breakout quarter in our CNI business , as we originated 1.7 , a new loan Outstandings and .
Speaker #3: Realized overall net loan growth of $448 million in the CNI portfolio. Our net interest margin expanded for the third consecutive quarter, up ten basis points to 1.91% compared to the second quarter.
Speaker #3: And our operating expenses remained well controlled and were down year over year by $800 million on an annualized basis, significantly ahead of our plan. Criticized and classified assets continue to decline, down $600 million, or 5%, on a linked quarter basis and $2.8 billion, or 20%, year to date.
Speaker #3: While Non-accrual loans were relatively stable , we had another strong quarter of multifamily and CRA payoffs of $1.3 billion , and this has continued a trend over the last couple quarters where we've been above our forecast on real estate payoffs and our our provision for loan losses decreased 41% , while our net charge offs declined 38% .
Speaker #3: Now, turning to slide three of the presentation, we have highlighted the key management areas that we have focused on and how we have performed in each category.
Speaker #3: First, to improve our earnings, we have reported a smaller net loss every quarter for the past year due to a combination of factors, including margin expansion and cost reductions.
Speaker #3: Lee has a slide later on that he'll cover in detail, but the trend line on this lines up very well with what we've communicated about a return to profitability for the company.
Speaker #3: Second , we continue to implement our commercial lending and private banking strategy , which I will discuss in more detail shortly . And third , we proactively managed our multifamily and commercial real estate portfolio to continue to reduce our CRE concentration .
Speaker #3: And fourth, our credit quality profile, which has resulted in net charge-offs as we are starting to see signs of stabilization in the loan portfolio.
Speaker #3: The next several slides highlight the tremendous progress we've made in our CNI business, starting on slide four. This was a breakout quarter for CNI lending.
Speaker #3: Our strategy in the CNI space really began after the June 2024 strategy. As we hired Rich Raffetto to come in and lead our commercial private banking and commercial banking strategy.
Speaker #3: This strategy focuses on two primary businesses specialized industries and corporate and regional commercial banking . Both of those gained momentum in the third quarter , driving CNI loan growth up nearly 450 million , or 3% , versus the second quarter .
Speaker #3: This was the first positive growth quarter since early last year. Our two strategic focus areas led the growth with total loan growth of $1.1 billion, up 28% compared to the prior quarter.
Speaker #3: On the next slide, you will see the positive trends that new commitments and new loan originations have shown over the past five quarters compared to the second quarter.
Speaker #3: New commitments increased 26% to 2.4 billion , while originations grew 41% to 1.7 billion . More importantly , you can see that the contribution to this growth was from our two strategic focus areas was quite impressive .
Speaker #3: Specialized industries and corporate and regional commercial banking experienced a 57% increase, or almost $750 million, in commitments to $2.1 billion compared to the prior quarter's originations.
Speaker #3: In these two areas increased 73% , or nearly 600 million , to 1.4 billion . Both areas have seen a consistent upward trend since the third quarter of last year , reflecting steady pipeline growth and a high success rate in converting opportunities .
Speaker #3: Just as important is our CNI pipeline, which currently stands at $1.8 billion in commitments, up 51% compared to the $1.2 billion at this time last quarter, providing strong momentum for the fourth quarter.
Speaker #3: CNI loan growth . Also important is the number of new relationships we've added year to date . We've added 99 relationships to the bank , including 41 just in the third quarter .
Speaker #3: I believe these two data points reflect the industries we chose to focus on and the talented individuals we brought into the company. Most are mid-career bankers with 25 to 35 years of experience in their respective industries and have impressive rolodexes so far in 2025.
Speaker #3: We have doubled the number of relationship bankers and support staff in our two main focus areas to 124 and plan to add another 20 in the fourth quarter.
Speaker #3: Turning to slide six. This provides an overview of our specialized industry, business, and the growth trends both in commitments and originations over the past five quarters.
Speaker #3: You can see they had strong growth in both commitments and originations during the third quarter. Slide seven provides a similar overview of the corporate and regional banking business.
Speaker #3: This business also had a very strong quarter in both total commitments and originations. We believe it has reached an inflection point as, after successfully building out new segments and reinvigorating legacy businesses, we are showing that our relationship-based strategy is yielding positive results. We expect to see further growth in the CNI business as existing bankers continue to deepen their banking relationships and with the addition of new bankers.
Speaker #3: Additionally, we see potential opportunities from recent merger activity. Many of these are right in our core markets to selectively add talented bankers as well as winning new business relationships.
Speaker #3: The next slide lays out the roadmap we employ to solidifying the balance sheet and reposition the bank for growth . This is a little bit of a , you know , down history lane , but we have increased our Cet1 capital ratio by nearly 350 basis points , ranking us among the highest best capitalized regional banks amongst our peers .
Speaker #3: We also fortified our ACL through a rigorous credit review process, where we reviewed virtually every single multifamily and commercial real estate loan.
Speaker #3: We significantly enhanced our liquidity position , and we reduced our reliance on wholesale funding , including advances and brokered deposits . Nearly $20 billion year over year , lowering our cost of funds and boosting our net interest margin .
Speaker #3: In addition to what the items are identified on this slide , there could be many more . Obviously , our expenses , our deposit costs and our risk governance are other areas that we've heavily focused on .
Speaker #3: Now, turning to slide nine. You can see the impact on our adjusted EPS from the balance sheet improvements I just talked about on the previous slide.
Speaker #3: Our adjusted diluted loss per share has consistently and significantly narrowed over the past five quarters, including a 50% quarter-over-quarter reduction in the third quarter loss to $0.07.
Speaker #3: Now, with that, I'd like to turn it over to Lee to review our financials.
Speaker #4: Thank you . Joseph , and good morning , everyone . During the third quarter , we continued to execute on our strategic vision to make Flagstar one of the best performing regional banks in the country .
Speaker #4: We achieved net interest margin expansion of ten basis points quarter over quarter and paid off another $2 billion of high-cost brokered deposits.
Speaker #4: As we further reduced our funding costs and continued to demonstrate excellent cost controls, we are continuing the surgical approach to cost optimization of the last nine months.
Speaker #4: Our unadjusted pre-provision net revenue improved by 14 million quarter over quarter , while our adjusted Pre-provision net revenues improved 6 million versus the second quarter on the credit side , multifamily and CRE payoffs were again elevated at 1.3 billion , of which 42% were substandard and criticized and classified loans declined about 600 million , or 5% , during the quarter and 19% , or 2.8 billion on a year to date basis .
Speaker #4: Net charge offs decreased 44 million , and the provision decreased 24 million . Both compared to the second quarter . And we ended Q3 with a CC1 capital ratio of 12.45% .
Speaker #4: As Joseph previously mentioned, we had net CNI loan growth during Q3 of approximately $450 million, following the origination of $2.4 billion of new CNI commitments, of which $1.7 billion was funded.
Speaker #4: We're very pleased with the performance of our CNI businesses . We've surpassed our target of 1.5 billion of funded CNI loans per quarter , and believe we can fund 1.75 billion to 2 billion per quarter , going forward , assuming no change in market conditions .
Speaker #4: We will also start originating new CRE loans in the fourth quarter that are of high credit quality and geographically diverse. We've also started to experience growth in our reinvestment residential portfolio, which increased $100 million on a net basis.
Speaker #4: We're doing exactly what we said we would do, and I want to compliment the entire Flagstar team on another successful quarter. Now, turning to the slides and specifically slide ten.
Speaker #4: This morning, we reported a net loss attributable to common stockholders of $0.11 per diluted share. We had the following notable items in the third quarter.
Speaker #4: First , we had a 21 million fair value gain on a legacy investment in figure technologies . Following its September IPO . Second , we recorded a 14 million increase in litigation reserves related to the settlement of two legacy cyber matters dating back to 2021 and 2022 .
Speaker #4: One of which involved a third party vendor . And third , we had 8 million in severance costs related to FTE reductions . Therefore , on an adjusted basis , after also excluding merger expenses , we reported a net loss of $0.07 per diluted share , significantly better than last quarter .
Speaker #4: And in line with consensus on slide 11 . We provide our updated forecast through 2027 . We tweaked our 2025 non-interest income assumptions , resulting in full year 2025 adjusted diluted EPs in a range of -$0.36 to -$0.41 per diluted share .
Speaker #4: Our guidance for both 2026 and 2027 remains unchanged. One of the highlights this quarter was the double-digit increase in net interest margin.
Speaker #4: Slide 12 shows the trends in our NIM over the past several quarters, which expanded ten basis points quarter-over-quarter to 12.45 percent.
Speaker #4: And as now increased for three consecutive quarters in September , our Nim was 1.94% compared to 1.91% for the third quarter . And we expect to see margin improvement going forward , driven by a lower cost of funds as we manage our cost of funding , lower , lower yielding , more multifamily loans , paying off at par , or if they remain with flagstar resetting at higher rates , ongoing growth in the CNI and other portfolios and a reduction in Non-accrual loans .
Speaker #4: Turning to slide 13 . Another highlight this quarter was the decline in non-interest expenses . Our non-interest expenses remain well controlled as they declined another 3 million in the third quarter and are down 30% year over year , or approximately 800 million on an annualized basis .
Speaker #4: Slide 14 shows the growth in our capital over the past five quarters . And the strength of our ct1 ratio at 12.45% as Ct1 ratio ranks amongst the best relative to our regional bank peers , we will continue to prioritize reinvesting our capital into growing the CNI and other portfolios as we remain focused on diversifying the balance sheet and growing earnings .
Speaker #4: Slide 15 is our deposit overview. Similar to last quarter, we further deleverage the balance sheet by paying down $2 billion of brokered deposits at a weighted average cost of 5.08%, going back to the third quarter of 2024.
Speaker #4: We have now paid down almost $20 billion of advances and brokered deposits. In addition, approximately $5.6 billion of retail CDs matured during the quarter at a weighted average cost of 4.50%.
Speaker #4: We retained approximately 85% of these CDs, and they moved into other CD products that were approximately 30 to 35 basis points lower than the maturing products in the fourth quarter.
Speaker #4: We have another $5.4 billion in retail CDs maturing with a weighted average cost of 4.30%. These deleveraging actions, CD maturities, and other deposit management strategies have allowed us to reduce deposit costs by 13 basis points quarter over quarter and liability costs by ten basis points.
Speaker #4: We also saw an increase in interest-bearing deposits of $1.5 billion as a result of increased commercial, private bank, and mortgage escrow balances.
Speaker #4: We continue to actively manage our cost of deposits and are targeting 55% to 60% deposit data on all interest-bearing deposits, with the Fed rate cuts.
Speaker #4: Slide 16 shows our multifamily and CRE Pas payoffs for the quarter . We continued to witness significant Pas payoffs of approximately 1.3 billion , of which 42% , or about 540 million , were rated substandard .
Speaker #4: Approximately 195 million of this quarter's payoffs were multifamily, greater than 50% rent regulated. We continue to witness strong market interest for these loans from other banks and from the GSEs.
Speaker #4: The payoffs are also leading to a substantial reduction in overall CRE balances and in our CRE concentration ratio . Total CRE balances have declined 9.5 billion , or 20% , since year end 2023 to about 38 billion , aiding our strategy to diversify the loan portfolio to a mix of one third CRE , one third CNI and one third consumer .
Speaker #4: In addition, the payoffs have led to a 95 percentage point decline in the serum concentration ratio to 407% since year-end 2023.
Speaker #4: The next slide is an overview of our multifamily portfolio , which has declined 13% , or 4.3 billion on a year over year basis .
Speaker #4: Our reserve coverage on the overall multifamily portfolio of 1.83% remains strong and is the highest relative to other multifamily-focused lenders in the Northeast.
Speaker #4: Furthermore , the reserve coverage on those multifamily loans where 50% or more of the units are rent regulated , is 3.05% . Currently , we have about 14.3 billion of multifamily loans that are either resetting or contractually maturing between now and year end 27 , with a weighted average coupon of less than 3.70% .
Speaker #4: If these loans pay off, we will reinvest the proceeds in our CNI or other portfolios, or pay down wholesale borrowings if they stay with Flagstar.
Speaker #4: The reset rate is significantly higher than the existing rate , which provides a Nim benefit on slide 18 , we've once again provided significant additional information on our New York City multifamily loans , where 50% or more units are rent regulated .
Speaker #4: This tranche of the multifamily portfolio totals $9.6 billion, compared to $10 billion last quarter, with an occupancy rate of 99% and a current LTV ratio of 70%.
Speaker #4: Approximately 55% , or 5.3 billion , of the 9.6 billion , are past rated , and the remaining 45% , or 4.3 billion , are criticized or classified , meaning they are either special mention , substandard or nonaccrual .
Speaker #4: Of the $4.3 billion, $2 billion are non-accrual and have already been charged off to 90% of appraisal value, meaning $370 million, or 16%, has been charged off against these non-accrual loans.
Speaker #4: Furthermore , we also have an additional 40 million or 2% of ACL reserves against this nonaccrual population . Of the remaining 2.3 billion that a special mention and substandard loans between reserves and charge offs , we have 7% or 165 million of loan loss coverage .
Speaker #4: We believe we're adequately reserved or have charged these loans off to the appropriate levels, and with excess capital of $1.7 billion before tax, we think we're more than covered.
Speaker #4: Were there to be any further degradation in this portfolio portion of the portfolio . Slide 19 details the ACL coverage by category . The ACL declined 34 million compared to the second 12:45 .12 8 billion , a result of lower Hffy loan balances and stabilization in property values and borrower Financial's the overall ACL coverage ratio , including unfunded commitments , was 1.80% .
Speaker #4: Broadly in line with last quarter . At 1.81% . On slide 20 , we provide additional details around our asset quality trends criticized and classified loans continue to decline down approximately 600 million compared to the second quarter on a year to date basis .
Speaker #4: We have made tremendous progress in reducing these loans, as they are down $2.8 billion, or 19%, since the beginning of the year.
Speaker #4: Our net charge offs decreased 44 million , or 38% , compared to the prior quarter , to 73 million . And the net charge off ratio improved 26 basis points to 0.46% .
Speaker #4: Non-accrual loans , including those held for sale , were 3.2 billion , relatively stable compared to the prior quarter . I would add that approximately 41% , or 1.3 billion of Non-accrual loans are performing .
Speaker #4: The one borrower we moved to Non-accrual status in the first quarter who subsequently filed for bankruptcy , remains in the bankruptcy process , but there is an auction in progress that we hope concludes sometime in early 2026 , which will allow us to resolve our position sometime during the first half of next year with respect to the 30 to 89 day delinquencies at quarter end , approximately 274 million of the 535 million were driven by one borrower , who typically pays subsequent to month end , and has done so again as of October 20th , 166 million of their delinquent loans have been brought .
Speaker #4: Current . More importantly , after quarter end , we sold approximately 254 million of this borrowers loans above our book value , thereby reducing our exposure to this borrower .
Speaker #4: Finally , we continue to review the 2024 annual Financial statements for all borrowers . And to date , we've completed the review on the majority of them .
Speaker #4: I'm pleased to report that the vast majority have stayed consistent compared to the prior year, indicating an overall stable trend for our borrowers.
Speaker #4: We continue to deliver on our strategic plan and are excited about the journey we are on and the value we will create over the next two years.
Speaker #4: With that, I will now turn the call back to Joseph.
Speaker #3: Thanks , Leigh . Before moving to Q&A , I'm also happy to share that last Friday we closed on our holding company reorganization after receiving all necessary regulatory and shareholder approvals as a result of this reorganization , FLAGSTAR FINANCIAL, INC. was ultimately merged with Flagstar Bank in a with Flagstar Bank Na as the surviving entity .
Speaker #3: As I mentioned on last quarter's call, this reorganization simplifies our corporate structure, reduces our regulatory burden, and lowers operating expenses by approximately $15 million.
Speaker #3: As always , we remain extremely focused on executing our strategic plan , including transforming Flagstar into a top performing regional bank , creating a customer centric , relationship based culture , and effectively managing risk to drive long term value .
Speaker #3: Now we would be happy to answer your questions. Operator, please open the line for questions.
Speaker #1: Thank you . If you would like to ask a question , please press star one on your telephone keypad . If you would like to withdraw your question , simply press star one again .
Speaker #1: We ask that you please limit yourself to one question and one follow-up. Thank you. Your first question comes from Manan Casaglia of Morgan Stanley.
Speaker #1: Your line is open .
Speaker #5: Hi. Good morning, all.
Speaker #3: Good morning .
Speaker #4: Hi . My name .
Speaker #5: So I wanted to focus on the NII guide for the year . If I take the guide for the full year relative to the progress year to date , it implies that NII should be up about 5 to 15% .
Speaker #5: Q1 q next quarter you know you're making good progress on the CNI loan growth side , and Nim has been rising consistently , and you should benefit from additional rate cuts from here .
Speaker #5: But at the same time , earning assets have also been shrinking . As you pay down some of those broker deposits . So can you talk about how we should think of each of these spots next quarter and into the first half of next year ?
Speaker #4: Yeah , absolutely . So first of all , what I would say is in terms of the the balance sheet , you'll have noticed that it only declined 500 million in Q3 despite us paying off another 2 billion of brokered deposits .
Speaker #4: And so we think at the end of this year, Q4 will probably be the low point. So the balance sheet will be, and this is total assets, $90 to $91 billion.
Speaker #4: And then we expect the balance sheet to start to grow as we move through 2026. So I think that kind of level sets everything first.
Speaker #4: And foremost, we do expect to see continued NIM expansion as we move forward, and we have multiple levers to do that.
Speaker #4: As you know, I mentioned in my prepared remarks that as the multifamily loans continue to pay off or as they continue to hit their reset dates, they have a weighted average coupon that is less than 3.7%.
Speaker #4: So if they stay with Flagstar , we're our sort of pricing reset is five year flood plus 300 or Prime plus 275 . And we're staying sort of firm to that .
Speaker #4: So we get a benefit if they reset and stay with Flagstar if they pay off , then we're taking those proceeds and investing them into the CNI growth .
Speaker #4: Or we need to pay down high costs. Either brokered deposits or we can pay down FHLB advances. So that's sort of one area we continue to show.
Speaker #4: Excellent growth on the CNI side . What we didn't mention is of the the new loan originations in the third quarter , the average spread to Sofr on all of those was 242 basis points .
Speaker #4: So, a very, very healthy spread on the new CNI loans that we're bringing onto the balance sheet. And we heard Joseph talk about the pipeline.
Speaker #4: We think that we can continue those growth trajectories going forward. We're also going to start originating new loans going forward, and these won't be regulated.
Speaker #4: New York City loans . We're looking for high quality geographically diversified loans in other parts of our footprint . The Midwest , California , South Florida , and we're starting to see the mortgage health investment portfolio increase .
Speaker #4: And we think that will increase further in a lower rate environment. I think we've done a tremendous job managing the cost of our fundings down through paying off those high-cost brokered deposits and FLUB advances.
Speaker #4: But we've also reduced core deposit costs without fed cuts , and with fed cuts . I mentioned we expect a 55 to 60 beta , and so that's a focus area on the liability side .
Speaker #4: And then finally, as we reduce our non-accrual loans, we do expect to see a reduction in the fourth quarter that will also help our NIM.
Speaker #4: So I know that was a long answer , but there are a lot of moving parts . As you can see .
Speaker #5: Yeah , that was great . That was the detail that I was looking for . Maybe just just a follow up to your comments on the CNI side .
Speaker #5: I mean, the originations were clearly really strong this quarter. Can you talk about whether this is a new trend? Is this a good run rate for the next few quarters?
Speaker #5: Should it accelerate from here and maybe talk about how you're managing risk as you do this? Because it's a rapid build-out and there is some macro uncertainty out there.
Speaker #3: Yeah , sure . Thank you . So so actually our viewpoint is that we will continue to see additional growth beyond what we saw .
Speaker #3: This quarter . We do see somewhere between a billion and 7 to $2.2 billion is kind of our run rate going forward . Forward per quarter .
Speaker #3: And I'll recall that a number of the people who have joined the company haven't been here for much over 3 or 6 months, and so most of these people are really getting settled into the bank.
Speaker #3: And generating opportunities for the company . So we , you know , we kind of think we're an inch that's firing on three of the six cylinders today and have really an opportunity to get the really the whole franchise performing at a , you know , a higher level in the next couple quarters .
Speaker #3: That's in addition to we will add 20 people in the fourth quarter and we'll add probably somewhere around 100 people in 2026 . So so we'll continue to add , you know , the strategy there really is to , you know .
Speaker #3: I highlighted in the slides that we have a specialized industry strategy where we have 12 verticals. Virtually all the people who are leading those verticals, as well as the people that have joined us, are 20 to 35-year banking veterans.
Speaker #3: So, they come to our company with lots of depth and knowledge in those particular verticals. From an expertise perspective, and then from a risk underwriting perspective, we have the line unit embedded in the line, which is what we call the first line of defense.
Speaker #3: And there are credit products . People who sit in the first line , who will underwrite and do the due diligence on the company , independent of the relationship managers , and then those credits then are recommended based from the first line of defense to the actual credit , approvers in the bank .
Speaker #3: That is a separate function that reports up to our chief credit officer . And then who who actually directly reports to me . So we think there are good checks and balances in our process to make sure that we're adhering to our credit standards without significant deviations from underwriting policies .
Speaker #4: And one thing I would add , again , just looking at Q3 , if you look at the average loan size of the new originations , it was just over 30 million .
Speaker #4: So as we've said before , we are not taking outsized positions in in any one name or industry . We're diversified in terms of the size of the positions we're taking .
Speaker #4: We've said before , our sweet spot is maybe 50 to 75 million , but in Q3 , the average new loan commitment size was was a little over 30 million .
Speaker #4: And that gives us comfort as well.
Speaker #3: In up a good point on slide four , it does highlight , you know , the other businesses like Flagstar Financial and Leasing and the MSR lending and a couple of others .
Speaker #3: We actually thought the exposures to a number of individual borrowers were too high. So, we brought down in those portfolios significant amounts of high individual company exposure.
Speaker #3: And that's resulted in some of the declines year to date. We do think that those portfolios will start to stabilize now as we make our way through those portfolios in 2025.
Speaker #5: That's great . Thank you . And just a clarification , the billion 7 to 2.2 billion that you mentioned , that's originations . Correct ?
Speaker #3: That is correct .
Speaker #5: Thank you .
Speaker #1: The next question comes from Dave Rochester with Cantor. Your line is open.
Speaker #6: Hey, good morning, guys. Nice to see any growth this quarter; that was great to see.
Speaker #4: Thank you .
Speaker #6: Thanks Dave . On the the one 7 to 2 two that you just talked about . In CNI production . When do you think you ultimately hit that .
Speaker #6: Is that a one ? Q timing on that or further into next year . And then given that and the restart of the CRA originations and what you're doing on the resi production front , at what point do you expect total loans will start to grow again next year ?
Speaker #6: And then, with the 100 people or so that you're planning on hiring for next year, are there any new verticals contemplated in that?
Speaker #6: Thanks .
Speaker #4: Yeah . So I'll take the first part of your question . So as I mentioned to Manan , we think the the low point for the balance sheet will be the fourth quarter .
Speaker #4: And we'll be sort of between 90 and 91 billion . And our expectation is we'll see . We'll start to see a little bit of balance sheet growth in Q1 of 2026 .
Speaker #4: Not a lot, but a little bit. And then it will really start to sort of trend upwards in Q2 and Q3.
Speaker #4: And Q4 of next year. So that's kind of how we think about, you know, the balance sheet growth and the inflection point.
Speaker #6: Got it. So you're also thinking that not just assets, but total loans may actually stabilize next quarter, or no? Is that the low point?
Speaker #6: And then, and then you go from there, stabilization up a little bit. Right?
Speaker #4: That's that's exactly right . That's exactly right . Yeah .
Speaker #3: And then regarding your question on the $2.4 million and the $1.7 million, we do expect growth on those numbers, both this quarter and going forward.
Speaker #3: So, I mean, that number clearly could get north of $2 billion on a pretty consistent basis.
Speaker #6: That's great . I appreciate that . And then just on the elimination of the holding company , I know that that exempts you from annual stress tests whenever you cross over 100 billion or whatever that threshold is at that point , any other regulatory relief you get from that as well .
Speaker #6: I know you save on the cost front, but is there anything else that you'd point to? Thanks.
Speaker #3: Yeah . I mean , you know , in in a lot of instances you have examinations that cover the same thing from the OCC to the fed .
Speaker #3: So you eliminate that. You also eliminate a lot of staff interaction with the Fed. So there's also costs you can't exactly quantify.
Speaker #3: But frees up resources and time . So you know we obviously think it's a the right thing to do . And for for us you know we do not do we do not do today nor do plan to do non-admitted activities .
Speaker #3: So it was a logical step for us as an organization.
Speaker #6: Yep . Sounds good . All right . Thanks , guys .
Speaker #4: Thanks , Dave .
Speaker #1: The next question comes from Ebrahim Poonawala with Bank of America. Your line is open.
Speaker #7: Hey . Good morning .
Speaker #4: Hey , Brian .
Speaker #7: Hey . So I guess maybe a question around from an expense standpoint . So you talked about all the hiring over the coming year .
Speaker #7: When you look at the adjusted expenses , about 450 million in your outlook for next year , seems like expenses are kind of flatlining at this run rate .
Speaker #7: Just talk to us in terms of incrementally like what's the cost opportunity left within the expense base or to invest and like puts and takes around why they could be higher versus lower than what you have forecasted .
Speaker #7: Thanks .
Speaker #4: Yeah . No problem at all . Ebrahim . First of all , I again , I want to take the opportunity to to compliment the entire Flagstaff team because as both Joseph and I noted , if you look at the Q3 24 run rate and the Q3 25 run rate , that's an $800 , $800 million reduction in non-interest expense .
Speaker #4: And , you know , that's a lot of work . It's blood , sweat and tears . But the team has just done an unbelievable job taking that amount of expenses out as we as we look forward .
Speaker #4: You're exactly right . If you look at our sort of existing or current run rate , it's right around 450 a quarter , which if you look at our guidance , is the top end of the 2026 expense guidance of 1.8 billion .
Speaker #4: And as we think about further opportunities moving forward, I think they're in three sorts of areas. One, we think we can continue to reduce FDIC expenses.
Speaker #4: There's a lot of components to that. We've done a nice job of optimizing the liquidity component with reducing wholesale borrowings and brokered deposits.
Speaker #4: And we'll continue to do that. But there are other measures that come into play as it relates to profitability, asset quality, and regulatory relationships.
Speaker #4: And so , you know , we think that on an ongoing basis , we can continue to drive those FDIC expenses down . We also believe we can continue to drive vendor costs lower .
Speaker #4: I think we've done a nice job looking at vendor costs over the last nine months. But I think there's more we can accomplish.
Speaker #4: And then I think we've got some pretty significant technology . Projects that are that are in the works , that will be coming to fruition as we move into 26 and beyond , and that's going to allow us to drive more efficiencies and cost reductions out as well .
Speaker #3: And just a note to these question or comment about technology . We we talked about we had six data centers in the company , two for each legacy organization during last quarter .
Speaker #3: We reduced that down to four . And we will ultimately get down to two sites . So if you think about , you know , running six data centers , legacy somewhat outdated old technology and moving towards a new platform that allows us to take out significant costs in that process .
Speaker #7: That's helpful. And I guess maybe just a separate question around all things sort of non-interest bearing deposits. The balances seem like they might be stabilizing.
Speaker #7: And I get it takes time for sort of loan relationships to transfer into core deposits coming on just, but give us a sense of NIB deposit growth from your end, just either from a dollar balance or from a percentage of overall mix.
Speaker #7: How do you see that trending, and what's the timeline you think between lending relationships coming over from the bankers you brought on to that translating into core deposit growth?
Speaker #7: Thanks .
Speaker #4: Yeah , yeah . So it does it does take a little bit of time and we're seeing some traction . But obviously , you know , as we move forward we think we'll see a lot more traction .
Speaker #4: And so as we think of the the noninterest bearing deposit growth , I think it really comes from three areas . And you've touched on one as we bring on all of these new CNI relationships , we certainly want to leverage those relationships to bring on , you know , more deposits , including , you know , operating accounts .
Speaker #4: Ultimately , and those noninterest bearing deposits . We also see growth on the noninterest bearing deposit side coming from our private bank . As we mentioned on the last call , we've we've hired Mark Pizzi to run the private bank .
Speaker #4: He has done a nice job of reorganizing the private bank and making sure that all the right product sets are in place. So, we look like a real sort of private wealth bank.
Speaker #4: And so we think that we'll be able to leverage the private bank and those products to drive non-interest-bearing deposits as we move forward.
Speaker #4: And then obviously , you know , our 360 bank branches , they play an important role in continuing to grow noninterest bearing deposits with our existing customer base .
Speaker #4: And bringing in new customers as well . So that's how we see the noninterest bearing deposit growth , where it's coming from .
Speaker #7: Helpful . Thank you .
Speaker #1: The next question comes from Jared Shore with Barclays. Your line is open.
Speaker #4: Hey , Jared .
Speaker #8: Hey . Good morning . Maybe starting on on the credit side , should we think that , you know , as we move forward and as you as you see the runoff in multifamily and CRE , you know , maybe the loans that don't run off tend to have the weaker characteristics .
Speaker #8: So could we should we expect to see maybe a continued growth in CRE NPLs but not a corresponding growth in provision like we saw this quarter , that you feel like those those marks are , are adequate and sufficient .
Speaker #3: Yeah . You know , I think , you know , first of all we had a really strong reduction of non-performing loans in the second quarter .
Speaker #3: This was a little bit more of a flat and we were working as Lee referenced on a large portfolio sale . But in the fourth quarter , we currently have you know , we have Line of Sight on reductions of about 400 million of of non-performing loans .
Speaker #3: That could be as high as $500 million in the fourth quarter. We've also really like dedicated and a team now.
Speaker #3: That's focused on our non-performing loans , where they are still paying and that represents roughly 42 to 43% of our non-performing loans . So we have a high percentage of the non-performing loans that continue to pay and pay .
Speaker #3: You know, per the terms and conditions of the note, it's just our analysis of their cash flows that come off of those single source repayment properties is insufficient.
Speaker #3: So those borrowers are drawing on cash flow or liquidity to continue to maintain those loans. Current. So we're really focused, and we do see a downward trend.
Speaker #3: And those NPAs just , you know , our classifieds were down , our NPAs were virtually flat this quarter . But we do see a trend line of those going down .
Speaker #4: Yeah . And again , Jared , as you know , when we did the credit review in 24 , we were deliberately punitive on ourselves .
Speaker #4: And the other point I would add to what Joseph mentioned—and I mentioned this in my prepared remarks— is that you have one borrower that is in bankruptcy, that is $500 million of those non-accrual loans.
Speaker #4: And as I said , that's moving into an auction process . And so once that moves through the process and concludes , you know , we feel that we'd be able to deal with a large chunk of those non-accruals in the in the early part of of 2026 .
Speaker #4: That's in addition to the that's in addition to the , you know , the 400 million pipeline that Joseph mentioned .
Speaker #8: Okay . Okay . Great . So those are two separate components . That's a good color . Thank you . And then you know , as we as we look at guidance and you know , your comments around assets being the low point in fourth quarter , what's what's your you know , what should we be thinking about in terms of of either total asset growth or total loan growth .
Speaker #8: As we as we look out for year end , 26 and 27 to to tie into that guidance .
Speaker #4: Yeah, yeah. No problem. So, as I mentioned at the end of Q3 2025, we think the balance sheet will be sort of $90 to $91 billion.
Speaker #4: We think that at the end of Q3 2025, our balance sheet will be around high $96 billion to high $97 billion, right around that range.
Speaker #4: And then in 2027, we think we get up to about $108,000,000,108, or 109 billion.
Speaker #8: Great . Thank you .
Speaker #3: Welcome .
Speaker #1: The next question comes from Mark Fitzgibbon with Piper Sandler. Your line is open.
Speaker #9: Hey guys, good morning. I wondered if you could share with us, of the $1.7 billion of CNI originations you had in the third quarter, what percentage was participations?
Speaker #9: And also, I’m curious if you had any Tri-Color or first brand exposure, because I did see a little uptick in non-accruals in the CNI bucket.
Speaker #3: Yeah , that that was one credit . But we're running 50 to 60% of our loans are participations . But the difference , I would say , Mark , is the people that are joining the company that are bringing those opportunities , they have direct relationships with management .
Speaker #3: We have not purchased participations where we are not directly interacting with the management of the company, which is a little bit different than basically having a trading desk and somebody buying loan participations.
Speaker #3: These are all active relationships that have been ongoing in any of those in our document. We require the relationship manager to develop a relationship model of what we expect to obtain in both fee income and deposits by coming into that relationship.
Speaker #3: So we have a pretty high standard of what our expectations are. If we're going to get involved in a credit.
Speaker #4: And not just to confirm, we had no exposure to First Brands, or Tricolor, or any of the other names that have been mentioned.
Speaker #4: This quarter . And , and obviously , we're pleased about that . We've looked at that . We do have a very , very small NFI book , but a big portion of that is our MSR lending .
Speaker #4: So, we feel good about that, and there is no exposure to any of the names that have been disclosed previously.
Speaker #9: Okay . And then just one separate question . What is I guess I'm curious , what is the note sale market look like today on sort of , you know , modestly challenged New York multifamily loans ?
Speaker #9: You know, is there much depth to that? And where can the kind of notes be sold today? Can you give us any kind of sense on that?
Speaker #4: I mean , I would the way I look at it is if you the noise that has been sort of emerging over the last 3 or 4 months regarding New York City rent regulated , we still had 1.3 billion of PA pay in Q3 , 42% of which were substandard .
Speaker #4: So , you know , rather than looking at no , no pay offs , I think there's still a lot of demand for this asset class from other lenders .
Speaker #4: And the GSEs . As I pointed out earlier , and I think that's good . And I think in a decline interest rate environment , I think you're probably going to see for us , you're going to see more PA pay offs as well as we move forward .
Speaker #4: So that's just going to help us get to that diversified balance sheet of a third, a third, a third even more quickly.
Speaker #9: Thank you .
Speaker #3: You're welcome .
Speaker #1: The next question comes from Bernhard von Gizycki with Deutsche Bank. Your line is open.
Speaker #10: Hey, guys. Good morning. Lee Li, in your prepared remarks, I believe you mentioned that $195 million of the PA payoffs of the $1.3 billion were regulated over 50%, and I think that the total portfolio declined almost $1 billion.
Speaker #10: Just wondering , were there any asset sales in that particular portfolio and any updates you can provide on how we should think about the the size of this book going forward in the next , say , 12 months ?
Speaker #4: Yeah . Well , I think number one , I think you continue to see decline mainly as a result of , you know , the PA payoffs that were seen each quarter , you know , Joseph mentioned , you know , from a nonaccrual point of view , we do have an active pipeline that is , you know , 400 million that we have a line of sight into and hope to close , you know , in the fourth quarter .
Speaker #4: And so , you know , that's that's how I sort of look at the , the sort of movement in that rent regulated book going forward .
Speaker #4: And again , the reason we disclose these numbers , Bernie , is , you know , we're not seeing any adverse selection . You know , we're seeing PA payoffs across the board in every CRC asset class , whether they be market rent regulated , less than 50% or rent regulated more than 50% .
Speaker #4: So, you know, and that is our expectation going forward: we'll continue to see the PA payoffs and reductions across all of those multifamily asset classes.
Speaker #10: Okay. And then maybe tying the payoffs with low. I know they increased three basis points in the second quarter. We've seen that tick up.
Speaker #10: But just given the paydowns of the non-accruals , you know , that mix shift from multifamily to CNI . And now the growth in CNI , that should be coming through nicely over the next several quarters .
Speaker #10: Why not ? You know , are you expecting a higher change in the yields or are the are these poor payoffs that are coming at higher yields , holding that back a bit , just want to get a little bit of sense of the expansion on loan yields from here .
Speaker #4: Yeah . The payoffs . It's not every the the payoffs are not everything below 3.7% . Some are loans that have already reset .
Speaker #4: So if you look at the blended weighted average coupon of the $1.3 billion that paid off in Q3, it was 5.7%. So it's a blend of low coupon, but also loans that have already reset.
Speaker #4: And so that's the phenomenon that you're talking about, or you've seen.
Speaker #3: And you know , some of . the some of the payoffs also are coming out of some of the legacy CNI businesses where , you know , we're reducing the exposures down in those credits , where , you know , they're in the LIBOR .
Speaker #3: Plus , on average , 240 range . So some of those payoffs that does have some impact on that .
Speaker #1: The next question comes from David Chiaverini with Jefferies. Your line is open.
Speaker #11: Hi. Thanks. So, your paydown activity has been very strong the past couple of quarters. Any line of sight you mentioned about the $400 million in NPLs for the fourth quarter?
Speaker #11: Any line of sight on total paydown activity anticipated for the fourth quarter, and how much of that could be substandard?
Speaker #3: I think , you know , we have expectations for a similar range of 1 billion to 1 billion . Three in the fourth quarter .
Speaker #3: So , you know , I would say , you know , that's been somewhat unabated . So to speak , of of especially , you know , in the market of the regulated New York multifamily , the surprisingly , as Lee commented , that continues to be a robust refinance out by by the agencies and a couple of the large banks who continue to add to their portfolios .
Speaker #3: So we don't see any material change. You know, we had originally modeled at the start of the year somewhere between $700 million and $800 million a quarter, and that just continued to accelerate in the second quarter.
Speaker #3: Obviously, the third quarter was the strongest at $1,000,000,005. But I think those numbers hang somewhere in that range of $1 billion to $1 billion.
Speaker #3: Three in the fourth quarter.
Speaker #11: Great. Thanks for that. And then could you refresh us with thoughts on Mamdani and the impact his potential election win could have on provisioning looking out to next year?
Speaker #3: Yeah . So , so you know , his one of his stated , you know , items was that he would freeze the rent regulated rate increases for four years .
Speaker #3: The the first impact of that is , you know , the decision would be made mid next year by the Commission on on those freezes .
Speaker #3: So it's probably a , you know , a little bit delayed . But you know , the way we look at it is we go through that entire portfolio , we receive 97% of the financials on that portfolio .
Speaker #3: And we go through property by property analysis , both of the cash flows . And then if the cash flows are insufficient , we do an appraisal on the properties .
Speaker #3: So so we feel like we have a pretty good handle on it would take you know , this year as Lee commented , we're pretty much through that portfolio .
Speaker #3: We did not see material changes to it , and that's because I think the really big items that impacted those properties , which was , you know , a lot of insurance was up 30 , 40 , 50% .
Speaker #3: They had increased labor rates , increased HVAC . We did not see that carry through for continued increases into this year . So I think , you know , the way , you know , you model that out is you just make the assumption they're going to be flat revenues and and you really need to just understand the expense side because that that'll make the difference whether these properties are positive on a cash flow basis .
Speaker #4: I think a couple of other things I would just add to what Joseph said . I mean , rent increases for the next 12 months have just gone into effect .
Speaker #4: So the 3% for one year , 4.50 for two years , that runs through September of 2026 . But I think what will have a bigger impact on these owners are reductions in interest rates .
Speaker #4: I think that's a that's going to be a big advantage for them . And again , we've said this previously , a lot of these owners have benefited from the 1031 tax rules .
Speaker #4: So they have low tax bases in these in these properties as well .
Speaker #11: Thank you .
Speaker #3: Okay .
Speaker #1: The next question comes from Chris Mcgratty with KB . Your line is open .
Speaker #3: Morning .
Speaker #4: Good morning .
Speaker #12: Chris . Good morning . The the margin improvement on slide 11 . Over the next two years , roughly 90 to 100 basis points .
Speaker #12: How much of it is is the resolution of credit ? How much is the margin being suppressed from Non-accruals right now , give a ballpark .
Speaker #4: Well , not an exact , but what what I would say just to sort of , you know , level set is if you if you sort of those non-accrual loans are obviously doing nothing from an earnings or a capital point of view because they're 150% risk weighted .
Speaker #4: So you get a release of capital as we , you know , as we reduce them , even if we put them into 100% risk weighted assets , you're going to free up those 50 basis points .
Speaker #4: But they're not doing anything from an earnings point of view . So , you know , if we were to reduce $1 of of Non-accruals , even if we were just to put it in cash , you're going to earn .
Speaker #4: Let's just say 4% on that . And so if we can then use that to invest in CNI and the spreads , as I mentioned earlier , you know , we've got Sofr plus 242 basis points that will lead to an even bigger improvement .
Speaker #4: So reducing those non-accruals is a key part of the strategy . What I would say to you is , as we look at 2026 , you know , we think we can reduce those non-accruals by up to $1 billion .
Speaker #4: And 500 million of that , as I say , is tied up in the one borrower that's in bankruptcy . And we hope to resolve that in the first part of 26 .
Speaker #4: And then we think we can do another $500 million on top of that throughout the remainder of the year. So that's obviously going to have a big impact on the name improvement.
Speaker #4: But along with all the other points that are pointed out at the beginning of the Q&A , I mean , it's not just non-accruals , you know , it's it's the continued resetting of those low coupon multifamily loans .
Speaker #4: It's growing. The CNI book is growing, along with other portfolios on the balance sheet. We're starting to originate new CRE loans. The mortgage and residential book securities portfolio is an opportunity.
Speaker #4: And then also managing our core deposits and paying off wholesale borrowings . So it all plays a part in that . Nim expansion .
Speaker #12: Okay , that was helpful . Thanks , Billy . And then Joseph , for you , the last year and a half have been really about optimizing the balance sheet , capital , liquidity .
Speaker #12: And you're on a great track with expenses. What's the conversation going to be like a year from now? Is it going to shift?
Speaker #12: I assume it's going to shift , you know , in terms of strategic uses of capital . But any any thoughts on capital between growth buybacks , other strategic options ?
Speaker #12: Thanks .
Speaker #3: You know , Chris , we we really haven't spent time at the board discussing that . You know , you know I think as we get into 2026 and we show you significant progress against the non-performing loans in the overall portfolio .
Speaker #3: And and we get assessment a better assessment of how much growth we can create through our , our business activities . I think that give the board the opportunity to sit down mid-year and make that assessment of what to do if there is excess capital .
Speaker #3: But , you know , this is a very friendly , shareholder friendly board , very focused on , earnings and growing the bank and using capital in the most efficient manner .
Speaker #12: Perfect . And then , Lee , if I could , on the earning asset , the asset discussion . What's the embedded thoughts on the cash levels and the security balances in the next 1 to 2 years ?
Speaker #4: Yeah . So what I would say , Chris , is we're we're you're probably going to see an increase in securities in the fourth quarter .
Speaker #4: We have some excess cash . And and I think you'll see our securities balances increase about $1 billion in , in in the fourth quarter of this year .
Speaker #4: Then I think we probably hold up that level of securities as we move through 2026. So, and then I would imagine that cash is probably in the sort of $7 to $8 billion range as we move through 2026.
Speaker #12: Okay . So to get to those assets totals , it's it's contingent really on the loan growth . You know , continuing to momentum .
Speaker #12: Got it. Okay. Thank you.
Speaker #4: That's exactly what's driving the growth on the balance sheet. Correct.
Speaker #12: All right . Thank you very much . Welcome .
Speaker #1: The next question comes from Christopher Marinac with Janie. Your line is open.
Speaker #13: Hey, thanks. Good morning, Lee and Joseph. I just want to circle back on deposits from the commercial CNI growth that you obviously had a great quarter.
Speaker #13: Are there any goals on deposits these next several quarters ? I'm thinking more next year than next quarter , but just curious to flush that out further .
Speaker #3: Yeah . So we kind of have coming out of this group is roughly about $6 billion of new a new deposits that will be originated both from the lending relationships .
Speaker #3: And we also have established a deposit only group to focus on certain sectors . Tidal HOA , you know , escrow , some of the conventional insurance industry .
Speaker #3: We have a group that really focuses on those high deposit categories . So so we feel pretty good that we're going to start to see some real strong momentum in the deposit side .
Speaker #4: Yeah . And I would just add , you know , as well as the 6 billion that Joseph mentioned , you know we do have sort of 2.5 billion that's tied to the CRE book .
Speaker #4: And so as we start originating new Siri loans , again , you know , we our strategy is about relationship banking . It's not us just giving the balance sheet away .
Speaker #4: We want to establish much deeper relationships , whether that be through deposits or being able to to create fee income opportunities . And so that's that's the model that we're deploying across all businesses within the bank , not not just the CNI piece , but , you know , with the private bank and the loans that they're originating , particularly the mortgages .
Speaker #13: Great . Thank you very much . And this is a component , again , of how net interest margin steps up in the next several quarters .
Speaker #13: And this is , I guess , a key piece .
Speaker #4: That correct . Because , you know , we would expect a lot of these deposits to be non-interest bearing or low interest deposits because they are tied to the loan .
Speaker #13: Great . Thanks again .
Speaker #3: You're welcome .
Speaker #1: See you next question comes from Anthony Elion with J.P. Morgan . Your line is open .
Speaker #14: Hi , everyone . The reduction in Non-accruals you expect in for Q and through 26 is all of that . Occurring organically outside of the one in auction , or does that include any asset sales as well ?
Speaker #3: Well, most of it. It'll be organic.
Speaker #14: Okay . And that and that includes go ahead . Go ahead . Lee .
Speaker #12: Yeah .
Speaker #4: It organic . But we deploy a number of strategies , you know , Joseph mentioned Dppos , but there's workouts . Some could be through sales .
Speaker #4: So it's organic but it's it's it's us working the various options . And strategies that we can deploy against that Non-accrual book . .
Speaker #3: Yeah . Our approach in what I think we found is , you know , you can sell those pools . You know , in today's market , take a sizable discount to move that and who we sell those to are going to do the same things that we would do , which is pick up the phone and see if we can work something out with the borrower .
Speaker #3: I'll remind you that in a lot of instances, for the low 40% of those borrowers, have never missed a payment with us. So in their mind, they're performing at the terms and conditions of the loan.
Speaker #3: So , so , you know , we we we also have a pretty good track record that when we've sold assets or negotiated our way out of those loans , we've generally had a slight gain on the resolutions of those credits , which I think reflects that for the most part , we have those loans , you know , marked , you know , pretty close to where we're exiting the transactions .
Speaker #14: Thank you. And then on credit quality more broadly, I know you mentioned the prepared remarks. You don't have exposure to Tricolor or any of the other names that have come up.
Speaker #14: But I'm curious if you've done any reviews on procedures or policies , particularly on the asset based lending vertical , within specialized industries after the recent credit events that have surfaced over the past several weeks ?
Speaker #14: Thank you .
Speaker #4: Yeah , yeah . Great question . We have obviously we we made sure all like I said earlier , all the names that have been in the press recently , we have no exposure .
Speaker #4: We reviewed our NFI book , which is about 2.3 billion , 1.1 billion of that is MSR lending . And we lend to the biggest mortgage REITs and originators in the country .
Speaker #4: We feel good about that . And then on the sort of lender finance side , we're at about $1 billion of commitment , 600 million of which is drawn .
Speaker #4: And we went through that book and we feel very good about it as well . So yeah , we did a detailed review just given recent events in , in , in , in other parts of the industry .
Speaker #14: Thank you .
Speaker #3: Welcome .
Speaker #1: See you. Question comes from Matthew Bryce with Stephens Inc. Your line is open.
Speaker #12: Hey good morning .
Speaker #3: Good morning .
Speaker #15: I wanted to go back to the Nim . You know what percentage of loans today are pure floating rate . Then ? Second , if you have it , what was the spot cost of deposits ?
Speaker #15: Either today or at quarter end ?
Speaker #12: Yeah .
Speaker #4: So the the the vast I would say that when you look at our balance sheet today , you know , the CNI loans are floating .
Speaker #4: You've got I mean the residential loans that we have are typically five or 7 or 10 year arms . So they float , but only after sort of five , 7 or 10 years .
Speaker #4: So you've got a little bit of , of , of , of floating there . So you know those , those are kind of the obviously you got cash , you got , you got some of the securities as well .
Speaker #4: So that's what I would sort of say as it relates to the , to the asset side of the balance sheet as it relates to our spot rate .
Speaker #4: We were at . I'm just looking at our daily report .
Speaker #3: , really .
Speaker #4: Five this is the two .
Speaker #3: Yeah .
Speaker #4: So we're at two . We were at 282 a couple of days ago . Matt .
Speaker #15: Great . I appreciate that . And then the second one , you know , within the updated guidance , there was a change in the tangible book value outlook .
Speaker #15: It now includes the warrants . What drove that change . And could you help us out with the average diluted versus common share outstanding expectations for the fourth quarter .
Speaker #15: And early 2026 ? I also think there is some some thinking , and I was curious on this as well . You know , that you'll be profitable in the fourth quarter .
Speaker #15: I was curious if that holds up as well .
Speaker #4: So that is what's driving it . It's the warrants . So we the warrants kick in in Q4 . The share count goes from about 416 million to 480 million .
Speaker #4: And then that carries through in 2026 and 2027. We've also adjusted the total book value on the guidance slide for the warrants as well.
Speaker #4: So that's that's what you're seeing , Matt . Exactly right .
Speaker #15: And that will impact average diluted as well as common shares outstanding .
Speaker #4: Yeah . That's correct .
Speaker #15: Okay. And then on profitability, is the expectation still that you'll be profitable in Q4?
Speaker #4: We expect to be where we need to be, but there are a lot of moving parts. And I think, again, I'll just point to the progress that we've made quarter over quarter for the last few quarters.
Speaker #15: I'll leave it there . Thanks for taking my questions .
Speaker #1: The next question comes from David Smith with Truist Securities . Your line is open .
Speaker #12: Hi .
Speaker #16: Technical one on Capital . After the Holdco got consolidated down to the bank , I think there was some preferred that got moved down .
Speaker #16: Is there any difference in how those are going to qualify for tier one treatment now ?
Speaker #4: No, no, no change. No change at all in how they will qualify.
Speaker #16: Thank you .
Speaker #3: Thanks , David .
Speaker #1: The next question comes from Jon Arfstrom with RBC Capital Markets . Your line is open .
Speaker #8: Hey thanks .
Speaker #17: Good morning guys . On on the CRE pricing you mentioned earlier , Lee , is that market or acceptable pricing on renewals ? Just curious if you're if you're losing deals on pricing or is that not really the case .
Speaker #4: So, I would say, this is why we're seeing a significant amount of PA payoffs: borrowers are able to get better deals at other institutions or the agencies.
Speaker #4: So we've been very rigid in not moving off the five year flood plus 300 or or prime plus 275 . The reason being , as you know , we we are overly concentrated in theory and we are looking to reduce that concentration .
Speaker #4: And so I think the the reason that you've seen the , the heightened payoffs that we've experienced is we're being very rigid and sticking to our sort of knitting .
Speaker #4: And I think other lenders are leaning into the space , and those borrowers are able to get better deals than what I just mentioned .
Speaker #4: And that's what's driving the payoffs . And we're okay with that , because again , we're trying to reduce our exposure to Siri and multifamily and get to that diversified balance sheet structure .
Speaker #17: Yep . Okay . Good . I appreciate that . And then Joseph , for you , maybe kind of a simple question , but when I look at the credit stats , they're kind of flat to down .
Speaker #17: And I know it's not linear , but in your mind , is there anything new in the legacy credit book relative to a quarter ago , or is it basically , you know , where the issues are and it's just timing for these numbers to fall ?
Speaker #3: Yeah , I there's there's nothing new . You know , we obviously went through the entire multifamily portfolio again . And you know , we laid out on a slide 18 , you know , really where the , you know , perceived risk is in the bank , which is in that greater than 50% rent regulated .
Speaker #3: So I think , you know , this is , you know , more , you know , the train is on the tracks .
Speaker #3: It's our responsibility to clean up the credit problems . And I think we're on a really structured path to get that done .
Speaker #17: Okay. All right. Thank you very much.
Speaker #1: This concludes the question and answer session . I'll turn the call to Mr. Otting for closing remarks .
Speaker #3: Thank you everybody . And I'd like to personally thank our board and especially our lead director , Secretary Steven Mnuchin . The work and commitment has been really important .
Speaker #3: And the leadership team at the bank has really valued the board . I think maybe over the last 12 to 15 months , we probably set a record for board and committee meetings in a bank .
Speaker #3: And it really shows in the results. I'd also like to thank the executive leadership team of the bank and the women and men of the company.
Speaker #3: You know , we really are focused on building a great company , and I thank you for all your work , dedication to the bank and very much important to our customers .
Speaker #3: And then as a final note , I'd like to thank the Federal Reserve and especially Mona Johnson and her team will no longer be regulated by the fed .
Speaker #3: She was she was a source of , you knowledge and assistance as we navigated our challenges . So thank you very much . Appreciate Mona and the fed team .
Speaker #3: Who helped us so, so thank you again for taking the time to join us this morning and your interest in Flagstar Bank.