Operator: Good morning, everyone. Thank you for joining us, and welcome to the Flagstar Bank Q3 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Sal DiMartino, Director of Investor Relations. Sal, please go ahead.
Sal DiMartino: Thank you, Holly, and good morning, everyone. Welcome to our Q3 2026 earnings conference call. This morning, our Executive Chairman and CEO, Joseph Otting, along with the company's Co-President, Co-Chief Operating Officer, and Chief Banking Officer, Rich Raffetto, and Co-President, Co-Chief Operating Officer, and Chief Financial Officer, Lee Smith, will discuss our results for the quarter. During the call, we will be referring to a presentation which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the investor relations section of our company website, ir.flagstar.com. Also, before we begin, I would like to remind everyone that certain comments made today by the management team of Flagstar Bank 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.
Sal DiMartino: 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. In addition, when discussing our results, we will reference certain non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliation of these non-GAAP measures. With that, I would now like to turn the call over to Mr. Otting. Joseph?
Joseph Otting: Yeah. Thank you, Sal, and good morning, everyone. We appreciate you joining the call today. I would like to begin on slide 3 by providing updates to factors affecting our business and updates around the financial forecast. We continue to make meaningful progress in strengthening our core business and advancing our strategic priorities. Net interest income increased, the net interest margin expanded, and PPNR improved compared to the previous quarter. We also grew our C&I loan portfolio and deposits while reducing our exposure to commercial real estate loans this quarter. However, several variables pressured credit costs during the Q3, including the effects of higher interest rates, actions related to the New York City rent regulations, and persistent inflationary pressures. At the same time, a competitive deposit environment continues to impact deposit pricing and growth expectations.
Joseph Otting: Our success as a company will be determined by our ability to continue to reduce our New York rent-regulated exposure, which we did during the quarter, and attract deposits in an economic manner and expand the balance sheet through C&I loan growth. We are still on track towards achieving our strategic objectives and with our plan to diversify our balance sheet. However, given a higher for longer interest rate environment, the full realization of our transformation has shifted to 2028 from 2027. As a result, we are adjusting our guidance from what we previously outlined to reflect the impact of higher interest rates, the rate environment on credit quality, less deposit growth, and corresponding C&I loan growth and the net interest margin, which Lee will discuss in more detail shortly.
Joseph Otting: Moving to slide 4, I would like to discuss some of our Q3 highlights in each of our key focus areas. First, in terms of our earnings, both our net interest income and margin increased compared to the prior quarter, while PPNR also continued to improve. Second, a key part of our balance sheet diversification strategy is growing our C&I loan portfolio. This quarter, we delivered another $2 billion of net C&I loan growth, which resulted in about $1 billion of net loan portfolio growth during the quarter. On average, the average loan in that portfolio we added was about $28 million in loan outstanding, and it was roughly 75 relationships. Third, another key component of our balance sheet diversification strategy is reducing our overall commercial real estate exposure. During the quarter, our CRE par payoffs totaled $1.2 billion, of which 35% were rated substandard.
Joseph Otting: The decline in the overall CRE portfolio was slightly less as we funded approximately $375 million of new high-quality relationship-based CRE loans on commitments of over $700 million. In our forecast, we project CRE to decline net $1 billion per quarter. Fourth, we continue to apply a prudent approach to credit quality. During the quarter, we had net charge-offs of $74 million, or 49 basis points of average loans, down $25 million compared to the prior quarter, while non-accrual loans were relatively stable. Now I would like to turn it over to our Chief Financial Officer, Lee Smith, who can provide more color on our revised guidance, asset quality, and Q3 trends. Lee, I will hand it over to you.
Lee Smith: Thank you, Joseph, and good morning, everyone. As you just heard, the turnaround story of Flagstar is very much on track. However, certain macroeconomic headwinds, especially from higher interest rates, have pushed back the timing of us achieving peer-like metrics by approximately 12 months. The last few months have seen a significant shift in interest rates. The 5-year Treasury had increased 75 basis points over the last 3 months as of 14 October, and 111 basis points over the last 6 months. 2 quarters ago, the forward curve assumed 2 rate cuts in 2026, and as recently as 18 June of this year, the forward curve had shifted to 1 rate hike in October. Fast-forward to 18 September, and the current forward curve has 4 rate hikes in September, December, March, and June. We are also seeing extended inflationary pressures as a result of higher energy prices.
Lee Smith: This change in interest rates and inflationary pressures have impacted our New York City rent-regulated multifamily portfolio in particular. When we use the forward curve with 4 rate hikes and include inflationary pressures, it has had the following effects: increased cap rates on rent-regulated buildings, particularly in the Bronx; increased operating expenses at a time when rents have been frozen for up to 2 years; put pressure on debt service coverage ratios; increased the risk that more loans migrate to criticized and classified status. These events have caused an increase in our provision expense to $76 million in Q3. Turning now to slide 5.
Lee Smith: Given what I have just outlined and our commitment to transparent reporting on the impact of any change to our forecast, we have adjusted our guidance downward for both 2026 and 2027, predominantly the result of higher provision costs in Q4 and full year 2027 for the reasons I just mentioned. The higher interest rates have also resulted in a more competitive deposit environment. While we expect to grow deposits quarter-over-quarter, it is at a reduced level than previously anticipated. Less deposit growth also results in a smaller balance sheet. We expect the balance sheet to grow on average approximately $1 billion a quarter in 2027 and 2028, driven by net new loan growth of $2 billion, funded approximately 50% with deposit growth and 50% with CRE runoff as we continue to diversify the balance sheet and improve the mix of C&I loans in particular.
Lee Smith: The higher rate environment is also resulting in lower mortgage originations impacting both interest income and non-interest income, and non-accruals declining at a slower rate than previously anticipated. EPS for 2026 is now forecast to be in the $0.10 to $0.15 range, and EPS for 2027 is forecast to be in the $0.85 to $0.95 range. We are also including a full-year 2028 forecast where EPS is expected to be $1.60 to $1.70, on top of where we previously expected full-year 2027 EPS to be. I would note that our goal to return Flagstar to profitability metrics similar to our peers is on track to occur in 2028. The inflection point is 2027 for the following reasons: between 1 October 2026, and 31 December 2027, we have $12 billion of low coupon, less than 3.9% CRE multifamily loans either resetting or maturing.
Lee Smith: If they reset and stay with Flagstar, they will reprice to a market rate significantly higher than current coupons. If they pay off, we will use the proceeds to originate market-rate C&I or CRE loans. We have a further $7 billion resetting or maturing in 2028 with a weighted average coupon of 4.43%. Both these scenarios result in net interest income and NIM expansion. The reset dates are all contractual, and 2027 is our largest reset year, allowing us to significantly improve the mix of the balance sheet over the next 15 months. As we continue to originate new C&I loans and grow the balance sheet, the spread between the new loans coming on and the marginal cost of the new deposits used to fund such growth should be accretive to net interest income and NIM expansion.
Lee Smith: While we expect the pace of nonaccrual resolution to slow, we still expect our nonaccrual balances to decrease throughout 2027 and 2028. Given these loans are on the balance sheet and funded today, as they return to accruing status, this is also accretive to net interest income and NIM. A significant driver of the remixing of the balance sheet over the next 12 to 18 months is mechanical in nature, given the volume of low-coupon loans hitting their reset or maturity dates. On slides 6 and 7, we have provided a bridge to our 2027 and 2028 net interest income forecasts. As you can see, the main drivers in both years is balance sheet growth along with fixed asset repricing and lower nonaccrual loans. On slide 8, we show the trend in pre-provision net revenue through 2028, and slide 9 depicts our EPS progression over the same time period.
Lee Smith: I would like to point out that in Q3, pre-credit provision, we generated +13 cents of earnings, which included a $22 million or 4 cent tax benefit as we settled a legacy tax audit from 2020 in our favor. The next slide details our NIM trends. Our NIM expanded four basis points in Q3 versus Q2 to 2.17%, with the September NIM coming in at 2.23%. Next is operating expenses on slide 11. Here, I would highlight that despite the modest increase during the quarter, we still expect full year 2026 operating expenses to decline approximately $168 million or 9% year-over-year versus full year 2025. On the capital slide, you can see that at 12.38%, our CET1 ratio continues to rank among the top quartile in our peer group.
Lee Smith: We also completed the previously approved stock repurchase program of $250 million, repurchasing 19.1 million shares at an average price of approximately $13 per share. Turning now to our deposits on slide 13. Total deposits increased about $300 million quarter-over-quarter, while average interest-bearing deposit rose 1%. The cost of interest-bearing deposits increased only one basis point to 3.09% versus last quarter. Moving next to slide 14, which shows the continuing positive trend of commercial real estate par payoffs. During the Q3, par payoffs were $1.2 billion, of which 35% were rated substandard, and our CRE concentration ratio is now at 346%. The next several slides provide additional details on our multifamily portfolio. On slide 15, I would note that in 2027, we have approximately $8.4 billion of multifamily loans that mature or reach their contractual reset date.
Lee Smith: Of this amount, approximately $2.9 billion or 35% are NYC multifamily with greater than 50% rent-regulated units. I would also note the reserve coverage on the greater than 50% rent-regulated population, including loans outside of New York City, is nearly 3%. If we look at just the New York City rent-regulated portfolio greater than 50%, the coverage ratio increased 21 basis points quarter over quarter to 3.37%. Moving next to slides 16 and 17, where we provide a more comprehensive overview of the rent-regulated portfolio. At 30 September, this tranche of the portfolio was $12.9 billion, down $531 million or 4% compared to Q2. The rent-regulated component greater than 50% was $8.1 billion, down $370 million or 4% quarter over quarter. The next slide details our ACL by loan category.
Lee Smith: The linked quarter ACL was unchanged as increases related to higher interest rates and growth in the C&I portfolio, and the impact from a higher interest rate environment were offset by volume reductions in our multifamily portfolio. Finally, slide 19 provides a look at our broader credit quality trends during the quarter. At approximately $2.8 billion, our nonaccrual loans were relatively stable quarter over quarter. Of note, 42% of our nonaccrual loans are current and performing.
Lee Smith: Substandard loans increased $248 million or 4%, as overall criticized and classified loans increased $670 million or 6%, due to our prudent and comprehensive look forward of loans that are maturing or repricing within the next 18 months. With regards to charge-offs, net charge-offs this quarter was $74 million or 0.49% of average loans, down $25 million compared to the prior quarter. To conclude, we remain on track to achieve our strategic goals, significantly improve profitability through 2028, and deliver value to our shareholders. Now I'd like to turn it over to our Chief Banking Officer, Rich Raffetto, who will discuss our commercial banking trends in more detail. Rich?
Rich Raffetto: Thank you, Lee, and good morning to everyone as well. As you turn to slide 20, you will see that we continue to make significant progress in building out a relationship-based commercial and private banking platform here at Flagstar. Our two-pronged approach to this business combines specialized industries banking with corporate and regional commercial banking coverage, featuring customized solutions for business owners, and it's delivering strong but disciplined growth. We continue to hire talented mid-career bankers to join the platform, including 35 new and replacement hires during Q3 alone, bringing our aggregate hiring activity to more than 400 professionals over the last couple of years. At the end of the quarter, we had 164 revenue-producing commercial bankers and credit underwriters, up from 124 at the start of the year.
Rich Raffetto: During Q3, we generated $4.6 billion in new and increased C&I loan commitments, resulting in $2.9 billion in loan originations, up 4% compared to the prior quarter. We ended the quarter with a strong pipeline going into Q4 at $2.7 billion. We also continued to successfully add new commercial relationships, as Joseph mentioned, adding roughly 75 this quarter alone. The right side of this slide shows the quarterly trend in C&I loan balances. C&I loans during Q3 increased $2 billion to $20.6 billion, up 11% compared to Q2, continuing our trend of brisk but prudent loan growth.
Rich Raffetto: Slide 21 provides a more detailed look at C&I loan growth by business line. Loan growth in Q3 was fueled by various industry-focused verticals and lending segments, including financial institutions, lender finance, renewables energy, entertainment banking, technology, healthcare, leisure hospitality and gaming, public finance, equipment finance, and diversified industrials. In addition, regionally speaking, our commercial banking teams in Southern California, New York City, Long Island, and New Jersey were key contributors to Q3 loan growth. We are optimistic about future momentum in regional markets where we have recently established or upgraded team leader talent, including Dallas, Detroit, Chicago, Cleveland, and Phoenix.
Rich Raffetto: In a sign of continued progress in our goal of building broad-based relationships across our commercial banking enterprise, we experienced a notable increase in core commercial client deposits during the quarter of approximately $600 million. We also experienced strong year-over-year and quarter-over-quarter increases in capital markets fees and collected treasury management fees. With that, I will now turn the call back to Joseph.
Joseph Otting: Thank you, Lee and Rich. Let me close with a few summary comments. We remain committed to our long-term strategy of transforming Flagstar into a top-performing regional bank. While the current operating environment has affected the pace of our turnaround, we believe our long-term objectives remain very achievable, with our expected timeline now extending to 2028. This is a change in timing, not in our strategy nor expectations. We will continue to execute on our strategic plan with discipline, strengthening our core franchise, and focus on delivering value for our shareholders. Now we would be happy to turn it back over to the operator and open up for questions. Thank you.
Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Chris McGratty with KBW. Chris, your line is now open. Please go ahead.
Chris McGratty: Oh, great. Thank you. Good morning. Maybe we could start on slide 15. You have been giving us the slide with the contractual maturity by year for some time. I think this quarter you split out the rent reg, which is helpful. Can you help with the visibility into the resets in the maturity wall that you've talked about, given the change in the rate environment? I know you guys have said you've gotten through most of it, but are you going through it again, given the change in the macro? Thanks.
Lee Smith: Yeah. So Chris, as you know, we do the 18-month look forward. 2027 is our biggest reset and maturity year where we have about $10 billion. So if you think about we're through that, if you think about this last quarter, it pushes us through to Q1 of 2028. As I mentioned in my prepared remarks, we have about $7 billion that is resetting or maturing in 2028. So we have visibility into the biggest year. We feel that given the interest rate environment, using that forward curve, that's what the credit team has looked at when they've done that look-forward. We've accounted for that.
Lee Smith: I think what is interesting is when you look at 2027, the amount of resets and maturities, $2.9 billion of that $10 billion is more than 50% rent-regulated. So the vast majority is market or less than 50% rent-regulated. I think the other interesting phenomenon for us as we look at our migration this quarter, when we do the look-forward, it's very formulaic. Okay?
Lee Smith: So what we are doing is we are overlaying the interest rate environment at the time and saying, "What does the DSCR coverage look like?" That DSCR coverage is driving how we risk rate those loans and the migration. The vast majority of the migration this quarter was on market units. The reason for that is when we see a change in interest rates, we will react quickly because we are prudent and we are conservative. If you think about the annual financial statements that we are using, we are using '25 financial statements at the moment. So in terms of those market units being able to increase rent, we do not see that yet. We do not adjust for that until we see it on the financial statements.
Lee Smith: So I am telling you that because we are very prudent in the way that we assess the credit quality of our multifamily book.
Chris McGratty: Okay. Thanks for that, Lee. Joseph, on the capital, nice to see you get through the 250. Given the messaging on smaller balance sheet, your roughly 12.4% versus your target of 11%, how do we think about buybacks from here, given a little bit of noise in credit?
Joseph Otting: Yeah. So Chris, I think we have been pretty consistent in our messages that the three things that management looks at and has dialogue with the board is how are our core earnings growing, what is the credit quality of the company and the trends in the credit quality, and then how much capital do we expect to use in the C&I growth. Obviously with the short-term disruption in that, do not envisage us doing any additional stock buybacks in Q4. But with our capital levels, we would expect to resume buybacks in 2027.
Chris McGratty: Just to put a finer point on 2027. So you would need to see the credit get a decent amount better before you. I am just trying to gauge. Is it a H1 event? Is it we are going to wait a few quarters?
Joseph Otting: If you really look at the credit funnel, and that's the thing that I look at is charge-offs were on a gross basis the lowest since we've been here. Non-accrual was flat. Really, other than two borrowers which have resolutions, we haven't seen an increase in past due loans.
Joseph Otting: Where we've seen migration was really on the upper end in the special mention and substandard. That gets back to Lee's point is when you're looking out in that portfolio 18 months and you're applying interest rates on the five-year curve, plus our contractual borrowing in the notes at either SOFR plus 300 or a reference rate plus 275, that's a pretty punitive interest rate that those loans are being underwritten to. That's what drag nets in some of those relationships and loan outstanding into those special mention and substandard. We'll watch to see if there's migration, but we haven't seen that migration to what I would consider more critical or difficult loans at this point yet.
Chris McGratty: Okay, great. Thanks for the color.
Joseph Otting: Welcome.
Operator: Your next question comes from the line of Dave Rochester with Cantor. Dave, your line is now open. Please go ahead.
Dave Rochester: Hey, good morning, guys.
Joseph Otting: Good morning.
Dave Rochester: Just on the C&I growth that you have had and the deposit picture today. I know part of the C&I strategy was that you get the deposits associated with those new lending relationships. Can you just talk about the progress you have made there and how much more deposit growth potential you think you have coming from those new relationships you have always brought over and your confidence in getting that funding 50% of that growth with new deposit relationships that are hopefully on the lower side of cost? Thanks.
Rich Raffetto: Great. Thanks, Dave. This is Rich. In Q3, as we reported, net C&I loan growth was $2 billion, and we brought in just under $600 million of deposits around that commercial activity. So that batting average, we feel pretty good about bringing in 30% of deposits. I will tell you that our bankers are very motivated to drive full relationship.
Rich Raffetto: The value, whether that is deposits or fee income or a combination thereof, and get more relationship primacy as we further mature our commercial banking platform. With our focus both on special industries coverage and regional commercial banking, as well as deepening our existing private banking relationships, that is how we will continue to fund the loan growth that we are forecasting in the future. It is about relationship primacy, and it is about deepening existing relationships. That is where we are in the journey, Dave.
Dave Rochester: Appreciate that. Just for the new 2028 guide, how do you assess that confidence level that you will get that profitability ramp up all in that year? We are still in this higher for longer environment when it is just really challenging to project what you are going to get in the next couple of quarters.
Lee Smith: Yeah. Dave, that is why we put the bridge slides in there. Maybe let me walk you through 2027, first of all, because the two biggest drivers are the balance sheet growth and then the fixed asset repricing. The way we think about the balance sheet growth, there is sort of a couple of components. You have got the new loans that are coming on that are funded by the new deposit growth. This is all on a weighted average basis because you have obviously got loans and deposits coming in towards the end of 2026 that we get the full year benefit from in 2027, et cetera. But if you assume that you have got balance sheet growth, this is new growth on average of about $2.8 billion, and that is funded by the new deposits coming on.
Lee Smith: We are assuming that we can bring in approximately $800 million to $1 billion a quarter of new deposits. The split there would be about 18% non-interest bearing, 80%, 82% interest bearing. The cost that we have assumed for the interest bearing is between 3.9% and 4%. Then when you overlay the interest bearing or the non-interest bearing deposits, the overall cost is around 320. That spot rate is significantly above our spot rate today for our existing portfolio. So you are earning a spread on those new loans of anywhere from 340 to 350. That is the new loans coming on from the new deposits. You have also got new loans coming on that are being funded by the CRE runoff. You are getting a big lift in the shift in spread because as we have said, the multifamily loans that are resetting have a coupon less than 3.9%.
Lee Smith: You then bring in on market rate C&I loans or new CRE loans, and you are going to pick up 2.5% spread on that. That number is somewhere between $4 billion and $4.5 billion. That is how you sort of get to the balance sheet growth. If you then look at the fixed asset repricing, our assumption is we will retain 35% to 40% of what is resetting at much higher rates. Again, we are using the forward curve here. You are probably going to pick up anywhere from 3.30 to 350, in terms of incremental spread. Then the other thing in a rising rate environment that we have not sort of really spoken about previously, about $10.7 billion of our CRE portfolio is floated. As rates rise, we will get the benefit of those loans, $10.7 billion repricing.
Lee Smith: That is the reason why when you look at our interest rate sensitivity, we are neutral to ever so slightly asset sensitive.
Dave Rochester: All right. Thank you very much. Appreciate it.
Operator: Your next question comes from the line of David Chiaverini with Jefferies. David, your line is open. Please go ahead.
David Chiaverini: Hi, thanks for taking the questions. I guess a bit of a follow-up on that last question. When thinking about, I guess, drilling in on net interest income and the walk on, say, slide 7, which of these factors would you say is the most at risk of coming in weaker, and which ones are the most locked in and mechanical?
Lee Smith: Here is what I would say. I think first of all, we have obviously, because of the competitive deposit environment, we have brought down our assumption in terms of the amount of deposits we can bring in. We are saying it would be $800 million to $1 billion a quarter, Dave. That to me is the assumption that I would look at and say, "Can these guys bring in that amount of deposits?" Because I think the rest of it, we have proven out. Rich and the team have consistently been originating C&I loans at a clip of $2 billion growth a quarter. I do not think there is any question about our ability to generate assets.
Lee Smith: The fixed asset repricing, that is all mechanical because those loans are either going to pay off, and we are going to use those funds to originate more C&I loans at market spreads, or they will stay with us. We are going to get an increase in coupon, which is going to significantly increase net interest income and NIM. You have a significant portion of that CRE portfolio, the $10.7 billion, which is floated. In a rising rate environment, you pick up the benefit there. To me, I think the question is: Can we deliver on the deposit growth?
David Chiaverini: Thank you for that. On the C&I growth side of things, the pipeline at $2.7 billion, to what extent could the higher rate environment impact the pull-through of that pipeline? Did that pipeline kind of build evenly through the quarter, or did it slow down towards the end of the quarter?
Rich Raffetto: Good question, David. I would describe the external environment of our business and commercial and corporate clients as resilient. We have traveled around the country in Q3 and hosted private gatherings with a number of our clients, in existing geographies and newer geographies. It is impressive how resilient we are finding the business owner community in terms of executing on their strategic plan, taking advantage of uplift from the significant CapEx investment around technology and AI and data centers. That is like a pebble in a pond with concentric circles of businesses that benefit from that macro environment. I would say that the pull-through is solid, and it is well diversified in terms of what makes up that $2.7 billion of pipeline.
Rich Raffetto: It is amidst an environment that is not without challenges in terms of the inflationary environment and diesel fuel prices, et cetera, and geopolitical concerns. Our customers are telling us that they are moving forward with capital projects, moving forward with M&A, and other strategic initiatives around expansion. We feel good about the breadth of the loan pipeline, and we also feel good about the ability to pull that through. I would not say that we experienced any material slowdown as Q3 came to a close in terms of what we are adding to that pipeline. We also have the unique nature of continuing to be in a scale and growth mode. As new bankers come onto our platform, they are bringing over their relationship activity. That is also helping to further build our pipeline.
Rich Raffetto: That is something that is a little bit more unique to our bank and why you have seen us materially outperform a number of our peers in terms of C&I loan growth.
David Chiaverini: Great to hear. Thank you.
Operator: Your next question comes from the line of Casey Haire with Autonomous. Casey, your line is now open. Please go ahead.
Casey Haire: Yeah, great. Thanks. Good morning, everyone. Wanted to touch on what is the forward guide assumed for net charge-offs? Within that, the ACL ratio at 150, how low can that go?
Lee Smith: Yeah. The provision forecast, I would look at that as the proxy for net charge-offs, Casey. So what we are showing as a provision number, I would use that as your proxy for the net charge-offs.
Casey Haire: Got you. Thank you. On the deposit front, that is helpful color on the new money deposit growth. Just wanted to get a finer point on Q3. You guys gave a September NIM. The 309 deposit costs in Q3, what was that in September, and what is the beta expectation going forward?
Lee Smith: Yes. So a couple of things. First of all, our spot rate as of 30 September, and again, this includes non-interest-bearing and brokered, was 2.56%. The way we think about the beta is we are targeting a 60% beta. If you look at where we are, and this is as of three or four days ago, Casey, versus the September rate hike, and this is for interest-bearing deposits excluding CDs, we were at 32%.
Casey Haire: Great. Thank you.
Operator: Your next question comes from the line of Jared Shaw with Barclays Capital. Jared, your line is now open. Please go ahead.
Jared Shaw: Thanks. Good morning.
Jared Shaw: I guess trying to get to an assumption for year-end assets in 2027 and 2028, and just looking at the guide for commercial loan growth. I guess you have been running significantly higher than that. What is driving that slowdown? Is that just you being more selective and more judicious with capital deployment? Then I guess within that loan growth, what portion do you assume is residential versus commercial?
Lee Smith: Jared, what is driving where we are for 2027 and 2028 is really like I said, it is the deposits. What we are sort of saying is we think that we can generate net C&I growth, and it is all going to be, I say all, 90% of the growth is going to come from C&I. There will be some residential growth, but obviously the higher rate environment impacts that. If you think that we are growing new loans $2 billion a quarter on average, and the way we are funding that is $1 billion of CRE runoff net. Then you have got $800 million to $1 billion of new deposit inflows. When you look at the growth, it really is predicated on the new deposits that we can bring in.
Jared Shaw: Okay. Thanks. Then shifting a little bit, I guess, what is the sentiment around among the New York City rent-regulated landlords? Do you still have confidence that they are going to have the ability and desire to support their properties to the same degree as they were in the past, given the rate environment and the political climate in New York?
Lee Smith: We do. We have said this before. We do not have any REO. A lot of these owners have benefited from the 1031 tax rules. That is obviously a huge advantage. The migration that we have seen has been at the upper end of the portfolio because of the way that we calculate the DSCR and the formulaic nature of how we look at credit. 42% of our non-accruals continue to be current and are paying. Again, we saw a very healthy amount of par payoffs this quarter, $1.2 billion, 35% of which was substandard.
Joseph Otting: Yeah. Hey, Jared, the comment that I would say is a lot of these borrowers are resetting from, pick a number, 3% to 4% interest rate that they took out, either 5/1s or 7/1s. Our documentation, just as a reminder, resets at their SOFR index plus 300 or reference rate plus 275. Those are pretty steep interest rates that frequently can have a borrower go from, say, 3.5% to 7.5%. We do not see a desire not to own the property. What you see is a desire maybe for the bank to restructure and lower their interest rate off the contractual coupon. For the most part, that has held up relatively well. So we have not seen a material change. You have seen some trades in the marketplace recently where some investors are coming in and buying pools from banks.
Joseph Otting: There is a fair amount of demand, I think, that who have a more longer term viewpoint of the market than just perhaps maybe the next four to six years.
Jared Shaw: Thanks.
Operator: Your next question comes from the line of David Smith with Truist Securities. David, your line is now open. Please go ahead.
David Smith: Hi. Good morning.
Lee Smith: Morning.
David Smith: Could you explicitly clarify your expectations for ending assets over the next few years? It seems like it is basically $1 billion a quarter of net asset growth with the new originations net of the runoff. I just wanted to confirm that.
Lee Smith: Yeah. You are right, David. So end of 2026, we are at $82.1 billion. This is total assets, $82.1 billion. End of 2027, $92.1 billion. Then end of 2028, we are just around $97 billion.
David Smith: Okay. You touched upon this a little bit in the last question, but just thinking about it, interest rates are a lot higher today than they were a quarter ago. Your expectation for CRE runoff and pay downs is not really that much lower. I guess two things. Is there a rate level where you feel like that would start to decline more meaningfully? If you can just flesh out a little bit of what you think is supporting that level of pay down and those options that are outside you in the marketplace still today.
Lee Smith: Yeah. It is really driven by volume, David. As I mentioned, we have $10 billion of loans that are resetting and maturing in 2027 and another $7 billion in 2028. By the way, that does not include $1.8 billion in Q4 of 2026. If you just add those three numbers, you are at $19 billion of loans that are resetting or maturing. I would say that net runoff of $1 billion a quarter, that is how we get there. For all the reasons that I just mentioned, Q3 we have the high rate environment. We still saw $1.2 billion of par payoffs. I think the other interesting fact is of the $10 billion that is resetting or maturing in 2027, only $3 billion is more than 50% rent-regulated. So $7 billion is market to less than 50% rent-regulated.
David Smith: All right. Thank you.
Operator: Your next question comes from the line of Ryan Kenny with Morgan Stanley. Ryan, your line is open. Please go ahead.
Ryan Kenny: Hey. Good morning. It was a good quarter in terms of growth in non-interest-bearing deposits. Wondering if you could give some more color on what is driving that growth. Can that continue? How the investments in treasury management from here maybe need to traject. Thanks.
Lee Smith: Yeah. Let me take the first part of the question, and then I will hand it to Rich. We did, during the quarter, towards the end of the quarter, we have been undertaking a pretty comprehensive product review. We did move around $900 million to $1 billion of interest-bearing deposit. These were deposits that we were paying 1 to 3 basis points on. We moved from interest-bearing to non-interest-bearing because, for all intents and purposes, they are non-interest-bearing. That is what you are seeing in the non-interest-bearing line item. Then I think, in terms of going forward, I mentioned in 2027, when we think of the new deposit growth on a weighted average point of view, about 18% are non-interest-bearing.
Lee Smith: We want to leverage our relationships, particularly from a commercial lending point of view, from a private banking point of view, and then leveraging the 340 bank branches that we have to drive not just the non-interest-bearing, but the interest-bearing deposits as well. I will let Rich comment on some of the strategies that we are deploying.
Rich Raffetto: Yeah. Thanks, Ryan. As Lee mentioned, we are driving further with respect to our relationship banking model, from business banking to commercial banking and private banking. As we move forward on that journey, we continue to deploy our treasury management platform when we win new business. I think the receptivity, we have a competitive treasury management platform that is comparable to other regional banks. We are focused on solutions around working capital management and deploying tools for our clients, especially around fraud and cyber risk, which is perhaps the number one concern of our clients when they are banking with us digitally. So we are deploying enhanced digital capabilities and fraud protection as we onboard customers.
Rich Raffetto: With a goal to have fulsome relationships that include not just a deposit that is interest-bearing, but those operational accounts that bring non-interest-bearing accounts to the front as well as other payments capabilities, including card and merchant solutions as well.
Ryan Kenny: Thanks. Then separately, to follow up on the earlier question on rent-regulated and multifamily, what is the net charge-off you are assuming on rent regulated relative to what you are seeing recently? Is there an uptick embedded in the guidance?
Lee Smith: No. Not particularly at all. I think one thing I would point out on the net charge-offs as well this quarter. We had net charge-offs of $74 million. What I would say about that is $34 million was already fully reserved for. If you take that out, we would have been at $40 million in net charge-offs, which that is where we sort of expected our provision to be. The reason that we were at the sort of $75 is that $34 that would have come out normally, we had to replace because of the higher rate environment impacting those cap rates on units in the Bronx, in particular. The inflationary environment putting pressure on operating expenses, and the higher rate environment putting more pressure on the DSCRs. That caused more migration.
Lee Smith: Without that higher interest rate environment, the net charge-offs, we wouldn't have had to have replaced that $34 million. Your provision would have been $40 million for the quarter instead of the $76 that we saw.
Ryan Kenny: Thank you.
Ryan Kenny: Your next question comes from the line of Ebrahim Poonawala with Bank of America. Ebrahim, your line is now open. Please go ahead.
Ebrahim Poonawala: Hey, good morning.
Lee Smith: Morning, Ebrahim.
Ebrahim Poonawala: Apologies, Lee, if I missed it. Why are we shutting down the buybacks? When you look at the stock at $11, tangible book 15, shouldn't this be the time to be leaning in? I ask that because I think you mentioned that you might reinitiate buybacks in Q1. I am just trying to understand, is there very narrowly a metric that you are managing to, as opposed to one, why not buy back today? Or if the environment is becoming uncertain, why not push and suspend buybacks indefinitely? I am just trying to figure out between those two spectrums why you said what you said.
Joseph Otting: Abraham, I just think it is prudent until we build our core earnings and ensure that our credit quality forecast is accurate. The C&I growth has been spectacular. Those are the three variables management will use to make a recommendation to the board. We clearly acknowledge our capital levels are higher than our intended levels. Just in light of that uncertainty, we will wait until 2027 before we would look to buy back. We fully expect to resume that in 2027.
Ebrahim Poonawala: Got it. Separately, just big picture, it feels like if rates do not go down, there is not a whole lot that is going to be helpful from the CRE book resolution unwind. Obviously, this quarter was an evidence of that. If rates move up, and I appreciate they have come down a little bit in the last week, but maybe Joseph, talk to us how you are thinking about, yes, the C&I strategy is working, but beyond that, are there other strategic options, like strategic merger partnerships with other banks that you would be exploring in order to unlock shareholder value?
Joseph Otting: Yeah, Abraham, I think really we think the best value for the shareholders of this company is for us to execute on our business plan. If we are able to do that, we really can unlock, I think, significant value in the valuation of the company just by executing on the path that we expect to get to in 2028.
Lee Smith: Abraham, I would just add, and to Joseph's point, we have laid out sort of the path here over the next two years, and as we have said, and as we have answered other questions, a large part of this is mechanical as these low-coupon multifamily CRE loans reset. I think the deposit growth we have brought down, and if we can achieve that, we know we can generate the C&I loans. Look, I think that if we achieve these numbers, it is going to create significant value for the shareholders over a short time period. In terms of your question around sort of the interest rate environment, we are slightly, or we are neutral to slightly asset sensitive. Obviously in that scenario, a higher rate environment is helpful. Higher rate environment does put pressure on the credit side.
Lee Smith: But again, I think, as I described earlier, the migration we saw was sort of more in the market rents, the upper end of our portfolio, because we are very kind of punitive on ourselves and conservative in the way that we do that 18-month look-forward and the formulaic approach. So I agree with Joseph. I think there is an enormous amount of value creation here by executing on the plan we have laid out.
Ebrahim Poonawala: Understood. Thank you both.
Lee Smith: You are welcome.
Operator: Your next question comes from the line of Ben Gerlinger with Citi. Ben, your line is now open. Please go ahead.
Ben Gerlinger: Hey, good morning. Just want to double-check. Was this forecast based on 9:30 curve or like last Friday?
Lee Smith: This was based on a September curve that had four hikes in it. We've got September, December, March, and June.
Ben Gerlinger: Got it. Okay. This kind of gets to the question Ebrahim just had, where I was basically kind of saying I apologize in advance because I don't want to diminish the progress you guys have made. It just seems kind of like the franchise today is very much an interest rate curve bet. The only reason I say that is the five-year's come down roughly 30 basis points since the end of last quarter. The first three weeks here. When you think about just the update, if we just kind of retrace, wouldn't that alleviate quite a bit of the incremental pressure you guys have just kind of alluded to in terms of credit?
Ben Gerlinger: I get deposit price is probably a little bit more expensive today based on the front end of the curve, but the credit resolution opportunity probably gets a little easier relative to where it was just three weeks ago if the curve kind of plays out on the belly of the curve. Am I thinking about this correctly or am I kind of off base?
Lee Smith: Ben, you are absolutely, no, you are spot on. If rates come down, that is definitely beneficial, and certainly on the credit side. That is absolutely the right way to think about it. You are correct.
Joseph Otting: I think, Ben, when you look at what last time we were forecasting was in mid-June, we have seen 100 basis points increase even from the pullback. That is on that half of the equation. The other half, I would say you have seen a super hyper increase in deposit cost. 30 days ago, it was pretty difficult to find a CD for one year over 4%. Some of the competitors are at 4.75% today. So you have seen super hyper pricing increases in the deposit that hopefully we will see that pullback also. In the short run, some of the competitors are very aggressive.
Ben Gerlinger: Got it. Then just kind of thinking from a client-based perspective in terms of the multifamily/areas where you might see pockets of pressure on a DSCR coverage. When you think about their level of sophistication, if the five-year comes in a little bit more, would you potentially see rapid payoffs or basically the borrower hitting the bid to refinance because it is a window of opportunity that is pretty small or presumably pretty small. I am just trying to think how sensitive this lumpy payoff potential might be to rates, or is it a little bit more formulaic over time period of getting close to expiration?
Lee Smith: No, I think you are exactly right. Joseph has described we have two options contractually, five-year float plus 300, or prime plus 275. There is a SOFR sort of opportunity. We do see people taking the floating rate because they are effectively making the bet that rates will come down, and then they will be able to refinance. Your thesis is exactly right. You have got people that will take a floating rate now in a high-rate environment because they are betting that rates come down, and then they will be able to refinance at a lower rate and with a better opportunity. So I think if rates come down, then yeah, you would see more of that activity, which is people taking advantage of the drop to refinance at what they would see as good rates.
Joseph Otting: Yeah. The other thing, Ben, I think to recognize this next really five quarters is the largest repricing window that we have seen since we have been here in 2024. So the numerator to that is so much higher than what we have experienced. That gets back to an earlier question about how confident are you that you can net reduce that CRE portfolio by $1 billion. If you just applied historical levels, we would be much higher than that. But we are also originating now CRE outside New York, across the United States, and predominantly transitional type of properties.
Ben Gerlinger: Got it. That is helpful. Thank you.
Lee Smith: Thanks, Ben.
Operator: Your next question comes from the line of Bernard von-Gizycki with Deutsche Bank. Bernard, your line is now open. Please go ahead.
Bernard Von-Gizycki: Hey, guys. Good morning. Lee, on the NIM outlook, it is growing, but at a slower pace than originally expected. Could you just maybe provide some updates on some of the headwinds? I know you already mentioned maybe slower expectations on the non-accruals coming down. What about the expectation on the levels of retention of maturing loans and pricing of higher quality retained loans? Just some thoughts on some of the puts and takes.
Lee Smith: Yeah. I think there is a couple of things that have played out. Bernie, first of all, I think as we mentioned, we did see a 4 basis point increase in NIM quarter-over-quarter in September. NIM came in at 223. I would say the headwinds are the deposit costs. If you look at our history for the last several quarters, we have been able to bring deposit costs down consistently, and obviously on a weighted average basis, it ticked up 1 basis point in Q3. When we were putting the previous forecast together, not knowing there were going to be these four rate hikes in the curve, we thought we would still be able to chip away at those deposit costs. I think that is one of the things that I would mention. In Q3, Rich can touch on this a little bit.
Lee Smith: Given the mix of C&I lending that we did, I would say that the spread came in a little lighter than Q2 when we were at 225. Not much, but a little bit. That was all more just a mix of loans that we bought in. On the non-accruals, you are right. Non-accruals are flat, so we are not getting the benefit of the release of those non-accruals back into earnings and back into capital. As we described before, the non-accruals is a little bit like a receivable account. You have got non-accruals that we are resolving and are going away, and then you have got some new ones coming in. When you get some new ones coming in, that has an impact on your net interest income as well. That is what I would describe.
Lee Smith: But I think overall, if you look at the trend line, you are beginning to see the interest income was up $20 million quarter-over-quarter. NIM was up, and we are about to sort of embark on this big wave of resets and maturities, which is going to really allow us to accelerate that expansion.
Bernard Von-Gizycki: Okay, great. Lee, on slide 7, you have funding mix as a positive component, helping NII in 2027. Are you still expecting wholesale borrowings to come down?
Lee Smith: Yeah. There are two things playing out on that or in that particular part of the chart. One, yes. We got FHLB coming down about $1 billion in 2028. Then we also in Q4 of 2028, it is not accounting for a large part of this, but we pay down $300 million of sub-debt. So that is what you are seeing in that funding mix chart on page 7. It is a reduction in FHLB of $1 billion, and then in Q4, you have a little bit of benefit because we are paying off those sub-notes.
Bernard Von-Gizycki: Great. Thanks for taking my questions.
Operator: Your next question comes from Janet Lee with TD Cowen. Janet, your line is now open. Please go ahead.
Janet Lee: Good morning.
Joseph Otting: Good morning.
Lee Smith: Hi, Janet.
Janet Lee: Following up on provision and the forward curve. Is it as simple as if we do not get a rate hike in December, your provision forecast would be lower?
Lee Smith: I would say that there is potential for that, Janet, because it is very much linked to interest rates, and we have sort of been looking at the forward curve as have the credit guys. There are other things at play as it relates to the provision. The amount of C&I growth, obviously the net $2 billion of C&I growth in Q3, that did contribute to the provision. Then we use the Moody's economic forecast, so we have to wait and see what does that Moody's economic forecast look like as well. It is not the only variable. There are other variables that we do need to sort of consider here.
Janet Lee: Got it. I believe you said the non-accruals NPLs are likely to come down, but obviously at a slower magnitude than expected before. How much visibility do you have on it? I do not believe you still expect getting to the $2.3 billion level by the end of this year. Is there a line of sight into where that could go over the next year, just given you are also charging off a little more?
Lee Smith: You have some line of sight, but not total line of sight because it is not linear. We have a special asset group who are doing a fantastic job working through these non-accruals, and they have lots of different strategies, sort of DPOs, workout asset sales in order to be able to reduce those non-accruals. Sometimes, we do have visibility into what is coming. As you might imagine, sometimes things can come up and be resolved in a couple of days where you have less visibility. Right now, we are assuming that we end the year at about $2.6 billion of non-accruals, Janet. Then, in full transparency, as we look through 2027, we do believe we can bring those non-accruals down to about $2 billion.
Lee Smith: Those numbers are higher than what we had previously thought because the higher rate environment does slow down the resolution of the non-accruals. As I mentioned in my prepared remarks, and as you can see from the bridges, we still believe we can reduce those non-accruals from where we are, and that is accreted to both earnings and capital because they are 150% risk-weighted as well.
Janet Lee: Got it. Thank you so much for it. Just a quick follow-up, if I NIM of 2.23%, do you think that is a reasonable floor from here?
Lee Smith: Well, let me put it this way. We think Q4 NIM can be 2.20% to 2.25%. I do not want to say it is a floor in case one of the months is 2.22%, but I do feel that we can continue to build off of Q3. We do think that that 2.23% is absolutely within the range that we expect to be at in Q4 overall.
Janet Lee: Thank you.
Operator: Your next question comes from the line of Anthony Elian with JPMorgan. Anthony, your line is now open. Please go ahead.
Anthony Elian: Great. Thank you. Slide 17, Lee, you note the ACL on criticized and classified on rent regulated was about $502. I think that's up from $408 last quarter. What's embedded in your forecast for that?
Lee Smith: Well, I think what you're seeing here is what is embedded in our forecast. I think as I mentioned earlier, I would look at the provision number that we have going forward as a proxy for the charge-offs. Most of that is going to be weighted towards the multifamily portfolio.
Anthony Elian: Okay. More broadly on rent regulated. There have been a couple of banks here in the New York market that, as recent as yesterday, announced that they're selling parts of their New York City rent regulated portfolio. Joseph, I'm curious, is this something you guys are considering given the headwinds you called out this quarter on rent regulated, which seem to be overshadowing the progress you've been making on what Rich discussed earlier on this call? Thank you.
Joseph Otting: The way we look at that is obviously we observe those sales and look at our portfolio. What we have been able to do because where we have those loans marked, is most of our resolutions, whether DPOs or payoffs or negotiated settlements, have been with 1% to 5%, either positively or negatively, where we have those loans marked. Most of those investors are looking at 15% to 20% returns. We've taken the position, we have the team in place. We've been working these out, that a year or 2 from now, we think our shareholders are better served by us, loan by loan, having resolutions to that. We clearly obviously monitor the market closely, and if there was an opportunity to sell some of that, we would. I would say we have currently nothing on the table to do that.
Joseph Otting: We are obviously talking to lots of people in the marketplace. But our resolution internally really has optimized the retention of capital for the company.
Anthony Elian: Understood. Thank you.
Operator: Your next question comes from the line of Matthew Breese with Stephens Inc. Matthew, your line is now open. Please go ahead.
Matthew Breese: Good morning.
Lee Smith: Good morning.
Matthew Breese: A couple for me. Lee, I was hoping you could provide a little bit more color on the fee income outlook. It looks like it's about an $80 to $100 million reduction. I'm curious what areas you're expecting to see reduced level of fee income from.
Lee Smith: Yeah. The biggest drivers of the reduction in the fee income forecast are lower gain on loan sale from the mortgage origination business. The higher rate environment, that's been costing us a couple of million a month. That is a big driver. As I've mentioned, we've reduced our deposit forecast down, which also had an impact on the loan origination volumes versus the previous forecast. You're seeing less fees from the deposit and loan businesses as a result of just those lower volumes. Those are the big drivers.
Lee Smith: But if you look year over year from 2026 to 2027, we are showing growth from a net interest or a non-interest income point of view, and we do feel that from capital market fees, treasury management fees, the swaps, FX, everything that Rich and the team is doing, that we're going to continue to expand that fee income as we move forward. But right now in the higher rate environment, we're not going to get the help that we had originally thought from the mortgage business.
Matthew Breese: Got it. Okay. I wanted to go back to, you had mentioned that you have $10.7 billion in commercial real estate that is now floating. Is that a function of folks that have hit the end of the five-year fix and are now floating, or is that a function of swaps? Because it feels a little bit unnatural for a commercial real estate borrower to hold a floating rate for an extended period of time. I am wondering if that is a risk factor to your interest rate position going forward, those folks either locking in for five or leaving for five elsewhere.
Lee Smith: Yeah. No, I think there are a couple of things that are playing out. Some of those CRE loans, about $3 billion, are actually healthcare facilities that we fund in another part of the organization, but they are categorized as a CRE. The other part is people that are selecting. You can either select the prime rate, and we know that when they select the prime rate plus 275, that is probably on a short-term basis until they find a better opportunity. So you are going to have people cycling in and out of that. As I mentioned, there are SOFR options that our team is also making available to certain borrowers, and you have got people that are going with those SOFR options as well on the CRE side.
Joseph Otting: Yeah, I think you have to think about that as a landing spot. If you just happened to hit two weeks ago when the five-year was 512 or 513, you wanted to see, are rates going to pull back? So a landing spot for people to sit while they are kind of watching interest rates. For us, what we think that ultimately means is, as Lee referenced, we expect 65% of those loans to pay off.
Lee Smith: Yeah.
Joseph Otting: as a general rule when they come up for maturity. They may stick around for 60 to 120 days, but we do eventually think they go away.
Lee Smith: As we reopen selectively for originations across the country in CRE, we are seeing a higher percentage of floating rate SOFR-based loans. If the client wants to fix the rate, they will do that synthetically through a swap transaction.
Matthew Breese: Okay. If that plays out just the way you thought, with 65% locking in, I guess, elsewhere, does that move you into a liability sensitive type interest rate position?
Lee Smith: No. No, it does not. Remember, if you look at our balance sheet, we are transitioning to more C&I loans. So that in itself makes us asset sensitive. You have this sort of $10.7 billion of CRE that is floating. But I think you are going to have ins and outs. Some of that is permanent because of the healthcare facilities, because of the new CRE loans that we are doing that are typically floating. We are not really offering those fixed rates unless they are part of the resets and are contractual. Our non-interest-bearing deposits increased because we moved those very low-cost deposits from interest-bearing to non-interest-bearing. So no, it does not move us to a liability-sensitive position. I think we are very much neutral to asset sensitive and probably moving more in that direction given the transition of the balance sheet to more C&I.
Joseph Otting: I will leave it there. Thank you.
Operator: Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Jon, your line is now open. Please go ahead.
Jon Arfstrom: Thanks. Good morning.
Lee Smith: Morning. Hi, Jon.
Joseph Otting: Hi, Jon.
Jon Arfstrom: Yep. Hey, one small one, then one bigger picture. Lee, on the higher expense guide, maybe I missed it, but I know it is small, but just curious what the driver of that was.
Lee Smith: You mean for 2027?
Jon Arfstrom: Yeah.
Lee Smith: Yeah. The previous guide, we were sort of towards the top end of the range. We continue to invest in sort of people and technology. That just put us sort of beyond the top end of the previous guide and into the sort of the current guide, which is consistent with where our expenses are this year. So it is just investment in people and technology.
Jon Arfstrom: Okay. Good. The bigger picture one, I ask this respectfully, but I know a lot of this is hard to predict, but that update slide, it has been drifting lower for a few quarters, and it is elongated a bit. Maybe an unfair question, but any elements of this that were maybe a deeper dive reset where you think this is probably the bottom or said another way, what does it take for things to get tougher from here? I guess I am focused kind of more on the core trends. I think credit works its way out. How deep did you guys go on this reset? Because for 2027, it is a pretty big cut.
Lee Smith: Yeah. We have spent countless hours, days, weeks poring over this, Jon. As I mentioned, a lot of this is mechanical now because of the repricing. As I mentioned to one of the previous questions, if you look at this and say, "Okay, big picture where is the risk?" We have the ability to create and generate assets. I think we have proven that on the C&I side. We know the resets are going to happen. They are contractual. We all just sit here and wait. Time is our friend in that regard. We have taken the deposit growth down, but we are saying we are going to grow deposits $800 million to $1 billion a quarter. That would be the question, can we bring in $800 million to $1 billion of deposits a quarter? We believe we can.
Lee Smith: If we can do that, then we can hit all of these numbers because that helps fund the incremental balance sheet growth. 50% of it is funded by CRE runoff. That is going to obviously change the mix of the balance sheet more favorably. You have the pickup in the spreads just given everything that is resetting is sort of or a lot of it is low coupon. I think it comes down to can we bring in the deposits?
Jon Arfstrom: Okay. Thank you.
Operator: This concludes the question and answer session. I will now turn the call back to Joseph Otting for closing remarks.
Joseph Otting: Hey, thank you very much, operator. As noted with this presentation, we provided our 2028 forecast. We thought that was important so that the journey ahead is well-defined. As we have done in the past along the way as both internal and external factors alter that, we have come forward and really tried to make sure that as we had those changes, we communicated those so everyone knew how we observed the business. We do, as I said in my opening comments, feel we remain to be on the path for Flagstar Bank to complete its turnaround. It is just if you look at the numbers, the 2028 sits really on top of the previous 2027. This is what I would just say. It pushed it out, but it did not change the direction that we were going.
Joseph Otting: We do feel very good about the continued fundamentals of this transformation of this company where the C&I business will become and is now becoming a much more significant portion of the business. We look to really have a balanced balance sheet where a third of the assets are dedicated to consumer cash flows, a third to commercial real estate, and a third to business lending. In closing, I would like to thank our executive leadership team and all our teammates for their dedication and commitment to the organization and our customers. I would like to also thank the board of directors for their support and counsel. Thank you for taking the time to join us this morning and asking what we thought were really important and critical questions. Thank you for your interest in Flagstar.
Operator: This concludes today's call. Thank you for attending. You may now disconnect.
