Flagstar Financial, Inc. (FLG) Q1 2026 Earnings Report, Transcript and Summary

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flagstar Bank First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.

Thank you, Regina, and good morning, everyone. Welcome to Flagstar Bank's First Quarter 2026 Earnings Call. This morning, our Chairman, President and CEO, Joseph Otting, along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Smith, will discuss our results for the quarter. During the call, we will be referring to a presentation, which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the Investor Relations section of our company website, ir.flagstar.com. Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Bank NA may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us. Additionally, when discussing our results, we will reference certain non-GAAP measures, which exclude certain items and reported results. Please refer to today's earnings release for a reconciliation of these non-GAAP measures. And with that, I would now like to turn the call over to Mr. Otting. Joseph?

Thank you, Sal. Good morning, everyone, and welcome to our first quarter 2026 earnings conference call. We are pleased to report another quarter of solid progress and continued momentum across our core banking franchise. Our first quarter performance reflects continued improving fundamentals, strong C&I growth, a high level in growth of core deposits, further progress in reducing the level of nonaccrual and criticized classified loans, continued margin expansion and industry-leading capital levels. Just as importantly, our first quarter results demonstrate we are exceeding and executing on the strategy we laid out 2 years ago and delivering against our priorities. We are doing exactly what we set out to do. strengthening our earnings profile, improving the quality of our balance sheet and building a top-performing regional bank. The progress we are making is intentional and driven by a clear focus on disciplined execution. Now turning to the slides. Slide #3 of the investor presentation, I'd like to highlight some of the key performance factors and drivers during the quarter. First, disciplined expense management has been a hallmark of our return to profitability over the past 2 years. And in the first quarter, operating expenses continued to decrease, and we expect them to decrease in 2026 and 2027. We also had another quarter of net interest margin expansion, driven primarily by lower funding costs. Second, one of our key growth strategy is to diversify our loan portfolio by increasing our C&I lending platform. This quarter marked the third consecutive quarter of C&I loan growth after us reducing our exposure to certain industries, lowering our single transaction exposures and exiting certain relationships that did not meet our return hurdles. And we've done this throughout 2024 and part of 2025. Third, we experienced a further reduction in our overall CRE exposure, mostly through par payoffs resulting in the multifamily and CRE portfolios declining by $1.6 billion or 4% relative to the fourth quarter and further improvement in our CRE concentration. Fourth, we continue to see positive credit migration as nonaccrual loans declined by 11% and criticized and classified loans decreased by 3%. Additionally, we ended the quarter with a robust CET1 capital ratio of 13.2%. In terms of future capital distributions, our focus first is on demonstrating several quarters of sustainable profitability and continued improvement in our nonaccrual loans and flexibility to support our anticipated loan growth. We expect the Board taking actual and capital distributions in the second half of the year. Finally, I would like to highlight 2 other milestones during the first quarter. We were very pleased with Fitch and Moody upgraded the bank's long-term and short-term deposit ratings to investment grade with a positive outlook. And when we filed our 10-K in late February, we disclosed that the previously material weakness in internal controls have been remediated. Both of these milestones reflect the tremendous effort, dedication and hard work of our entire team. On the next couple of slides, we spotlight the significant progress we continue to make in our C&I lending businesses. During the quarter, C&I loans grew by $1.4 billion or 9% on a linked-quarter basis, significantly higher than in prior quarters. On Slide 4, we go into detail on the trends in our C&I portfolio. While the first quarter is typically a seasonally slow quarter for originations -- you can see on the left side of the slide that our originations were essentially flat compared to the fourth quarter. We also will note that the pipeline remains strong, and we expect second quarter fundings in C&I to be similar to Q1. On the right side is the 5-quarter trend in the C&I portfolio. After bottoming in the second quarter of last year, we've had steady growth and in the first quarter, C&I loans grew by $1.4 billion, up 9% compared to the fourth quarter and year-over-year 12%. The next slide provides quarter-over-quarter growth by loan category. While the majority of the growth was driven by our 2 main strategic focus areas, specialized industries lending and corporate and regional commercial banking. This quarter growth was broad-based with growth also occurring in the mortgage finance and asset-based lending verticals. Now turning to Slide 6. You can see the trend in our adjusted diluted EPS. We whereby we have now reported 2 consecutive quarters of VPS growth by executing on all our strategic initiatives. On an adjusted basis, we went from $0.03 in the fourth quarter to $0.04 during Q1. One other positive note I'd like to make is that during the first quarter, we completed the consolidation of our 6 legacy data centers into 2 co-location centers with no disruptions neither to the organization or any of our customers and this positions us well in 2027 to have the baseline and platform for our core conversion with ultimately the goal in 2027 is to get on to one core. So with that, I'll now turn it over to Lee to review our financials and credit quality.

Thank you, Joseph, and good morning, everyone. We're very pleased with another quarter where we continued to execute our strategic vision to make Flagstar one of the best-performing regional banks in the country. We were profitable for the second consecutive quarter following the bank's return to profitability in the fourth quarter. More importantly, we made real progress against key initiatives that drive our financial forecast. We achieved net C&I loan growth during the quarter of $1.4 billion, significantly higher than previous quarters following the origination of $2.6 billion in new C&I loans, of which $2 billion was funded. As we've discussed, net C&I growth in previous quarters was muted as we rightsized legacy C&I positions within the portfolio. Most of this is behind us and you're now seeing the growth from new originations materialized into net loan growth. NIM expanded 10 basis points after adjusting for the onetime hedge gain of approximately $21 million in Q4. Furthermore, much of the new C&I growth occurred towards the end of Q1, meaning the full benefit of these newly originated loans will be felt in Q2 and beyond. Core deposits, excluding broker grew $1.1 billion, and we reduced deposit costs by 21 basis points. We paid off another $1 billion of flub advances and $300 million of brokered deposits as we further reduced our reliance on high-cost wholesale funding. Despite this deleveraging of $1.3 billion, our balance sheet only decreased $400 million quarter-over-quarter. CRE and multifamily payoffs were again elevated at $1.6 billion, $1.1 billion of wins were par payoffs and 42% of these payoffs were rated as substandard loans. We resolved the situation with one borrower that was in bankruptcy and reduced our nonaccrual loans by $323 million, while substandard loans decreased almost $700 million, meaning we reduced nonaccrual and substandard loans over $1 billion quarter-over-quarter. Our ACL reserve decreased $78 million, primarily driven by lower CRE and multifamily loan balances. Operating expenses were again well contained at $441 million, a decrease of 5% quarter-over-quarter. And we ended the quarter with 13.24% CET1 capital at or near the top of our regional bank peers. We were also thrilled to be upgraded by both Moody's and Fitch, particularly given that both agencies returned our long and short-term deposit ratings to investment grade. We continue to execute on our strategic plan, exactly as we said we would. Now turning to Slide 7. We reported net income attributable to common stockholders of $0.03 per diluted share. On an adjusted basis, we reported net income attributable to common stockholders of $0.04 per diluted share. First quarter was a relatively clean quarter with only one adjustment, our investment in FIGA Technologies, which decreased in value during the first quarter by $9 million based on its closing stock price as of March 31. Subsequent to the end of the quarter, we have sold out of approximately 75% of our FIG position at a gain of $1.8 million compared to our March 31 mark. interest income and NIM temporarily and until we replace it with new C&I, CRE or consumer growth. In order to retain some of the higher quality relationship CRE runoff in the future, we have assumed spreads off of SOFR in the 175 to 225 basis point range versus our contractual option of 275 to 300 basis points of a 5-year flow. Lower noninterest-bearing DDA growth in Q1. Deposit growth in Q1 was all interest-bearing, which was positive, particularly as we also reduced interest-bearing deposit costs 21 basis points quarter-over-quarter. We believe the current rating agency upgrades will help us garner more noninterest-bearing DDAs going forward. But as it's been pushed out, it impacts net interest income and NIM. We expect total assets to be approximately $94 billion at the end of '26 and $102 billion at the end of '27 as a result of net loan growth. The reduction in interest income has been partially offset by reducing provision and operating expense guidance. Adjusted EPS is now forecast to be in the $0.60 to $0.65 range in '26 and in the $1.80 to $1.90 range in '27. Slide 9 depicts the trends in our net interest margin over the past 5 quarters. We continue to post steady quarterly improvements in NIM, driven largely by lower funding costs. First quarter NIM increased 10 basis points quarter-over-quarter to 2.15% after adjusting for the recognition of a onetime hedge gain of $21 million in the fourth quarter. Turning to Slide 10. Our operating expenses continued to decline, reflecting our focus on cost containment. Quarter-over-quarter, operating expenses declined $21 million or 5%. Slide 11 shows the growth in our capital over the last few quarters. At 13.24%, our CET1 ratio ranks among the top relative to other regional banks, and we have about $1.6 billion in excess capital after tax relative to the low end of our target CET1 operating range of 10.5%. The next slide provides an overview of our deposits. Core deposits, excluding brokered, increased $1.1 billion on a linked-quarter basis or about 2%. This growth was primarily driven by growth in commercial and private bank deposits of $461 million and retail deposits, which were up $142 million. As in past quarters, during the current quarter, we paid down $300 million of brokered deposits with a weighted average cost of 4.76% -- in addition, approximately $5.3 billion of retail CDs matured during the quarter with a weighted average cost of 4.13%, and we retained 86% of these CDs as they moved into other CD products with rates approximately 35 to 40 basis points lower than the maturing products. In the second quarter, we had $4.8 billion of retail CDs maturing with an average cost of 3.98%. Also during the quarter, we further deleveraged the balance sheet by paying down $1 billion of flub advances with a weighted average cost of 3.85%. The deleveraging CD maturities and other deposit management actions led to a 21 basis point reduction in the cost of interest-bearing deposits quarter-over-quarter. Slide 13 shows our multifamily and CRE par payoffs, which were again elevated this quarter at $1.1 billion, of which 42% were rated substandard. These payoffs are resulting in a significant reduction in overall CRE balances and in our CRE concentration ratio. Total CRE balances have decreased $13.4 billion or 28% since year-end 2023 to approximately $34 billion, aiding in our strategy to diversify the loan portfolio to a mix of 1/3 CRE, 1/3 C&I and 1/3 consumer. Additionally, the par payoffs have helped lower our CRE concentration ratio by 134 basis points to 3.67% -- the next slide provides an overview of the multifamily portfolio, which declined $5.5 billion or 17% on a year-over-year basis and $1.1 billion or 4% on a linked-quarter basis. The reserve coverage on the total multifamily portfolio was 1.83% and remains the highest relative to other multifamily focused lenders in the Northeast. Additionally, the reserve coverage on these multifamily loans where 50% or more of the units are rent regulated is 3.20%. Currently, there are $11.9 billion of multifamily loans that are either resetting or maturing through year-end 2027 with a weighted average coupon of approximately 3.75%. Moving to Slides 15 and 16, we have again provided detailed additional information on the New York City multifamily portfolio, where 50% or more of the units are rent regulated. At March 31, this tranche of the portfolio totaled $8.8 billion, down 4% compared to the previous quarter and has an occupancy rate of 97% and a current LTV of 70%. Approximately 52% or $4.6 billion of the $8.8 billion are pass rated loans and the remaining 48% or $4.3 billion are criticized or classified, meaning they are either special mention, substandard or nonaccrual. Of the $4.3 billion, $1.9 billion are nonaccrual and have already been charged off to at least 90% of appraised value, meaning $287 million or 15% has been charged off against these nonaccrual loans. Furthermore, we also have an additional $73 million or 5% of ACL reserves against this nonaccrual population, meaning we have taken 20% of either charge-offs or reserves against this population. Of the remaining $2.7 billion, but a special mention in substandard loans between reserves and charge-offs, we have 5.8% or $154 million of loan loss coverage. We believe we're adequately reserved or have charged these loans off to the appropriate levels. And with excess capital of $2.2 billion before tax, we think we're more than covered were there to be any further degradation in this portion of the portfolio. Slide 17 details our ACL coverage by category. The $78 million reduction in the ACL was largely driven by lower CRE and multifamily health reinvestment balances. Our coverage ratio, including unfunded commitments, was at 1.67% at quarter end. On Slide 18, we provide additional details around credit quality, which trended positively during the quarter. Nonaccrual loans totaled $2.7 billion, down $323 million or 11% compared to the prior quarter. Criticized and classified loans also declined, decreasing $385 million or 3% compared to the prior quarter. During the quarter, we did see an increase in special mention loans as a result of our comprehensive and prudent process that analyzes in detail all loans with a reset or maturity date 18 months out, 18 months from March 31, 2026, is September 27, and 27 is our largest reset year where nearly $9 billion CRE loans either reset or mature. This amount includes approximately $2.9 billion of multifamily, where 50% or more of these units are rent regulated. As part of this internal forward-looking process, we've applied the relevant pro forma contractual interest rate calculations and adjusted risk ratings accordingly. Three items I would note, we are now 75% through analyzing the entire 2027 cohort. The results of this analysis is reflected in our ACL, and we continue to see significant substandard par payoffs each quarter. At the end of the quarter, 30- to 89-day delinquencies were approximately $967 million, a decrease of $19 million from the previous quarter. As mentioned last quarter, the biggest driver of this delinquency number is the additional day or 31st day of March when calculating delinquencies at precisely 30 days. As of April 21, approximately $493 million of these delinquent loans have been brought current. We continue to deliver on our strategic plan and are excited about the journey we're on and the value we will create for our shareholders over the next 2 years. With that, I will now turn the call back to Joseph.

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

[Operator Instructions] Our first question will come from the line of Chris McGratty with KBW.

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

Yes. So it's a little bit a balance sheet and then a little bit of the additional payoffs of the CRE and multifamily book. So as I mentioned, the balance sheet at the end of '26 will be about $94 billion, $102 billion at the end of '27. So we are assuming a slight reduction versus what we had previously guided to sort of in that $500 million to $750 million range. But if you look at Q1, we did see $1.6 billion of par payoffs, paydowns and amortization in that CRE and multifamily book. And as I mentioned in the prepared remarks, it's both good news and bad news. The good news is it's allowing us to get to our diversified strategy more quickly of 1/3, 1/3, 1/3, but it does impact short-term interest income and NIM, and that's what you're seeing. So we think that we'll be able to use the funds from those payoffs to just further grow the C&I, the consumer and originate new CRE loans, but it sort of pushes everything out. So that's one of the items that is impacting the NIM. I think some of the better quality CRE loans that we would look to retain -- we'll be pricing those after spread to soar in the 1.75 to 2.25 range. And that's obviously a lower rate than the contractual reset, which is 5-year plus $300 million. And we've deliberately left that contractual rate in place because, as you know, Chris, we've been trying to reduce our exposure to those CRE multifamily assets where we have -- we're overweight and there's higher risk. So that's obviously working. And then we're seeing, as a result of that, fewer loans that are resetting are staying with us. We were sort of originally in the 50% range. It's now in the 35% to 40% range. And then the final piece that I mentioned was we saw very strong deposit growth in the quarter, $1.1 billion very pleased with that. It was all interest-bearing. We would like to see more noninterest-bearing growth. We think that will come with the rating agency upgrades, but that sort of pushes it affects NIM in the short term, and it sort of pushes everything out. So it's a combination of those items that you're seeing just bring the NIM down 10 to 12 basis points.

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

So Chris, we've been fairly consistent saying is we wanted the company to demonstrate consistent quarterly earnings. And our goal is -- obviously, we feel that will occur now as we've turned the quarter in the fourth quarter and then the first quarter. That's one of the legs of the stool. The second would be our goal is to get the nonperforming assets down to $2 billion by the end of the year. And so that was kind of the second leg of that and to continue to make progress from roughly the $2.6 billion level that we are at today. And then the third is just understanding how much growth we can have in the C&I portfolio and balancing that against the CRE payoffs I'd say the way we look at that is the CRE payoffs have been greater than we expected, but the C&I originations have also been more. And we do see some acceleration in the C&I occurring not only in our pipeline, but as we add more people into the various industry specializations and geographic strategy that we actually think that will continue to grow. And so when you take those kind of 3 factors into account. It was always management's intention to have a good insight to that through the second quarter and then have dialogue with the board on capital actions going forward.

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

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

Yes. Well, if you look at the actual asset yield, it wasn't down that much quarter-over-quarter when you consider the rate reductions in the fourth quarter. That's what I would say. The reduction was twofold. So in terms of the interest income, you've got what I just mentioned we had more payoffs and paydowns as it relates to that CRE and multifamily book, which we think is sort of a -- it's a good news story, but it does impact that short-term interest income a NIM. And remember, you do need to adjust in Q4 you do need to adjust for that hedge gain of $21 million, which was included in interest income and NIM. So when you adjust for that, the NIM was 2.05% in Q4, increasing 10 basis points to 2.15% in Q1. The other thing that I would point out, and I allude you to some of these in my prepared remarks, Jared, when you think of the $1.4 billion of net C&I growth in the quarter, I would say $600 million of that came right at the end of the quarter, in the last week or 10 days. So you're not seeing any pickup in NIM and interest income in Q1 as a result of that but you will see that flow through in Q2 and beyond. The other part of it is the borrower that was in bankruptcy that got resolved on March 31, the last day of the quarter. So you've got a significant amount of loans coming off of nonaccrual and then a new accruing loan that is coming on you didn't see any benefit of that in the first quarter because it occurred on the last day of the month and the quarter. You will see that flow through in Q2 and beyond. And I would just point out the net C&I growth of $1.4 billion in the quarter, we feel that we can continue at least at that run rate throughout this year, and we've been talking about growing C&I and people have been asking you what do we think we can do. And I think this is the first quarter where we're really showing the power of everything that Jose and Rich have built and what those bankers are doing on the C&I side.

Okay. All right. And then if I could just ask quickly 1 more. You in the past talked about adding cash and securities. I think it was about $2 billion to $4 billion -- is that still -- what's sort of the path forward on cash and securities balances with the broader backdrop?

Yes. I think as you look forward in '26, you will probably see our cash position come down a couple of billion. We will be buying more securities. I think you can expect us in Q2 to be buying at least $1 billion, $1.5 billion of securities. And we would look to get that securities balance back up to probably $16 billion or so as we move into the second half of 2026. The securities were behind, as I've said before, pre vanilla short duration RMBS CMOs. But it gives us an additional lever should we need to create more cash to let some of those securities run off. But a lot of it, as well, remember, Jared, given by what are the par payoffs because as we're seeing those CRE and multifamily loans pay off, that is generating cash and we've got the option to grow the securities or pay down wholesale borrowings. And you saw us pay down another $1.3 billion of expensive wholesale borrowings in the quarter between flu and brokered deposits.

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

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

Sure. Let me take the Moody's upgrade on the deposit. As we obviously look to bring on new relationships and roughly, there were 75 new relationships that came in, in the first quarter. is part of our strategy, obviously, is to make those both depository and fee income relationships in addition to loans. And not so much in the middle market, but in the lower end of the corporate market, where -- we are focused on a lot of those companies have in their -- kind of their bank or their investment policy is that the bank had to have an investment-grade rating generally from Moody's or an S&P rating to be able to exceed the FDIC insurance levels. And so that rating is very important to that strategy as we look to penetrate in and gain operating accounts that often exceed those dollar amounts. And so we think that is a turning point, so to speak, for us of our ability to gain sizable new deposits with the relationships that we're bringing into the institution. And so -- we think that will be significant for us as we move forward in that strategy. And I'll turn it over to Xin's question to Lee and let him answer that.

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

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

Yes. So obviously, closing 6 data centers and getting into 2 co-location centers was really positive for us. It was reflected in our expense forecast for this year. Next year, we do today run 2 cores where we have 2 of the legacy organizations on 1 core provider and 1 on a third. It is our intent by July of next year to be [ AgeCore ] and on a run rate basis, we believe when that gets completed, it's roughly a $40 million decrease in expenses for the company.

Our next question will come from the line of David Severini with Jefferies.

So wanted to drill into credit quality a little bit. trends continue in the right direction with criticized and classified loans trending lower. Can you talk about your expectations going forward with these loans? Do you expect a continued downward trend? And any surprises you've observed either good or bad as these loans have matured or reset?

Thanks, David. Yes, no, we do not expect any surprises. Let me address that in the first instance. And we continue to see continued reduction of criticized and classified. As Joseph mentioned, we're on track to reduce nonaccruals by up to $1 billion this year, and we saw a nice reduction in Q1, and we believe that will continue throughout 2026. And that's obviously accretive from both an earnings and a capital point of view because those nonaccruals are 150% risk rated, we continue to see a lot of liquidity around the multifamily loans and that is why of the $1.1 billion of payoffs in Q1 42% was substandard. And that is consistent with the trend that we've seen for multiple quarters now. So we expect to continue to see a reduction in the substandard loans. And then I mentioned the special mention loans have increased this quarter because we're doing that very comprehensive 18-month look forward of all loans that are maturing or resetting in the next 18 months. 2027 is our biggest reset maturity year. There's $9 billion that is resetting and maturing. So with 3 quarters of the way through that analysis. And by the end of Q2, we will be all the way through 2027. And again, everything -- even though there was an increase in special mention loans, given the reductions in the other categories, given the reduction in CRE and multifamily HFI balances it's all reflected within our ACL reserve. And the final point I would like to add is on the charge-offs, as you brought up credit, David. So charge-offs were $78 million this quarter versus $46 million last quarter. However, $34 million of what was charged off related to the 1 borrower that was in bankruptcy. And of that $34 million $30 million was already fully reserved. So there was an incremental $4 million related to that bankruptcy really just sales costs that we needed to take. And if you subtract that $34 million from the $78 million, you're basically at $44 million of net charge-offs versus $46 million last quarter, which is about 30 basis points. So we are consistent from a net charge-off on a net charge-off basis and we expect that trend to continue next quarter as well.

Yes. And David, the 1 other thing that I would add, I think Lee did a good job of describing that is when we do that look forward, of those loans today are current in the special mention category. So if you called those borrowers up, they would say, well, I've never missed a payment. But what we do in that 18-month look forward is we apply the current rate that they would incur if that loan matured today. And then we analyze that cash flow and make a determination where does their cash flow sit against fixed charge cover or cash flow coverage on the property. And so if your property is at 3.5% today, and you take it up to 6.5% for our contractual rollover, that's what's causing those loans to look slightly impaired when actually that is really a forward look to those with pretty punitive interest rates.

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

Yes, absolutely. So we have modeled out a rent freeze, 3-year rent freeze occurred or starting October 1 '26. So a couple of other assumptions that I would add, we also assume as part of this analysis, the operating expenses increased 2.75% per annum and think about that as being inflationary. And we also assume that the market units or the non-regulated units are able to increase their rent 2.1% per annum. So here's what we found when we ran that analysis anything that is 70% or less rent regulated, there is no impact to the NOIs. And the reason for that is the rent freezes on the rent-regulated units are offset by increasing the rent on the market or nonrent-regulated units. So 70% is sort of the demarcation line. Anything that is above 70% rent regulated the recent impact to ROI over that time horizon, the 3-year time horizon of about 7% or 8%. And if you look at the rent regulated slides that we have in the earnings deck. So we have -- and the earnings deck shows everything that is more than 50% rent regulated, and we have $8.8 billion. But $4.6 billion is pass rated. -- with an amortizing DSCR of 1.5. So those borrowers would be able to absorb the rent freezes and that impact on -- and then when you look at the criticized and classified, which is $4.2 billion, we have taken significant charge-offs. So between charge-offs and ACL reserves, we've taken over GBP 500 million of charge-offs, and we have reserves against that population. So we believe that we're more than covered just given when we re-underwrote that book in '24 and we took over GBP 900 million of charge-offs, and we increased our ACL reserves we believe we're more than covered what -- given what we've already done. A couple of other things I'd point out, though, on this. It's not just about the rent freeze as you know, we're getting annual financial statements from these borrowers and looking and digging into those we're doing a deep dive on everything that is maturing in the next 18 months, and we undertake a robust analysis on all of those loans. We're reviewing things like the worst landlord list and lean and violation lease, and we don't have much exposure there. A lot of our borrowers, as you know, these are families where the properties have been with them for multiple years. So they have a low-cost basis they benefited from the 1031 tax rollover. So we do not have any REO on our balance sheet. And if there was an issue, it would be showing up in our charge-offs and ACL reserve, which, as we've just been through, you're not seeing. And the final thing I would add is there is still an incredible amount of liquidity for the ASC class. As we've seen from our quarterly par payoffs and as we saw again this quarter as well.

Our next question will come from the line of David Smith with Truwiuth Securities.

I guess big picture. You obviously took your '26 and '27 earnings guidance a bit lower. Do you just view this as a delay and push out of your expectations by a couple of quarters? Or has anything changed at all about your medium and long-term profitability expectations for the bank?

David you are spot on. And that is exactly joseph and I were having this conversation. Not -- if you look at our thesis and everything we're doing, we are executing against our strategy. And all these stores worst case is maybe pushes things out 1 quarter or 2 quarters. And let me tell you what I've been by that. because the -- we're seeing increased paydowns or payoffs of that CRE multifamily maybe we just need 1 more quarter of $2-plus billion net C&I growth for 2 quarters. So everything is intact, those reset and maturity dates. We know they're coming. We just need to sit here and be patient. It's just time. and worst-case scenario, maybe you're just looking at an extra quarter or 2. So I think you've hit the nail right on the head there.

And then the change in assumption on multifamily loan repricing to $175 million to $225 million over SOFR instead of 300 over the 5-year. Does that have any impact on credit as you do the 18 months look forward on loans resetting?

Yes. So let me just clarify that. We the contractual resets, we are sticking by. So anything that is resetting or maturing but really resetting the contractual term is 5-year flood plus 300 or prime plus 275. We're not wavering off that, and we haven't waived off that. All we are saying is if there are better quality CRE loans within our portfolio, maybe it's in the builder finance arena or maybe it's in a non-officer where there's a deposit relationship. It's a strong credit then we probably need to -- in order to retain them, we probably need to move to a market rate which would be so for plus $75 million to $225 million. So that's all we're saying that we'll be very selective in only selecting those credits that are extremely high quality, and we think that there's either an existing or the potential for a future relationship.

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

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

Appreciate the comments on the Board meeting coming up and your thoughts on just capital deployment in general. You called out the $1.6 billion of excess capital above the bottom end of your target capital range. You talked about that for a quarter or 2 now. I was just curious how you're looking at that excess capital because we've seen some banks manage that down to their targets fairly quickly. Now that we have some clarity with the capital proposals. You've got more loan growth that's ramping up through the end of this year. Obviously, that's going to be improving profitability and whatnot, and you want to save capital for that. But are you in a situation now where you could easily just save half of that excess and dedicate that to the loan growth that you're expecting over the next couple of years and then take the other half and pay that out over the next couple of quarters? How are you thinking about getting to your targets more so in terms of timing?

Yes. Well, great question. And look, we -- I think we're in the fortune of what sort of ironic if you turn the clock back 18 months ago, people were asking if we had enough capital and you sort of fast forward to where we are today, and again, because of the great work that the Flagstar team has done, we're in this sort of situation where people are asking, what are you going to do with all the capital. We're in the fortunate position where we can do both, we can grow, and we can obviously execute on capital actions later in the year, as Jose alluded to. I think also what Jose said is exactly what we're looking to do here, which is the consistent profitability, and we've now had 2 quarters of profitability. So we're on the right track. We want to see those problem loans come down. We had a nice quarter in Q1, and so we want to see more of that. and then the organic growth, particularly on the C&I side, and you're really beginning to see that come through as you saw in Q1 with $1.4 billion of net C&I growth. But we can do both. And you mentioned the new capital rules and the Basel III proposal, look, we've analyzed that, and we believe that, that will give us an additional 60 to 80 basis points of CET1. So that's all in the risk ratings. And again, that's something that would be very helpful to us as well. But yes, we have optionality, and we're able to, I think, grow and we're able to take capital actions. We just want to prove out the consistent profitability as you see and see a little bit more reduction in those problem lines.

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

Yes. Let me start with the banks. So first of all, I mean, I just want to complement the job and the work that Rich and those bankers are doing. They have been phenomenal. As you can see from the net C&I growth in Q1. And again, this is very granular. The average loan size is in that $20 million to $30 million range in Q1. The average spread to sofa was actually went up. It was actually 242 basis points, and we've got just over 70% utilization. So doing a tremendous job. Today, we have 131 customer facing, C&I bankers I think Rich would like to probably more like 180. So I think you've probably got another $40 million to $60 million to go in terms of new hires. As we said before, our expectation and these are all seasoned bankers that know Jose, no rich our expectation is that they're executing on their first deal within 90 days. And then they're doing, on average, 3 or 4 deals in that first year, 5 or 6 deals a year thereafter. And I think if you sort of do the math on that, that's how we're getting to the C&I growth that we've alluded to. And again, you saw that come through in the first quarter. And then the second part of the question, yes, as I mentioned, a lot of the tool trees, as we referred to, where we had outsized exposure to single names. We are mostly through that. And if you look at the page on earlier in the deck, you can see that we really. We didn't have anywhere near as much runoff in those legacy equipment finance, asset-based lending categories. There was a little bit of a swap between the two. So that's why there may be a little noise there. But on a net basis, there wasn't much runoff at all. And we feel that you'll start to see those areas grow, which will then complement what we're doing with the national lending verticals, the specialty verticals as well as what we're doing from a middle and upper C&I market point of view going forward as well.

Yes. The other thing obviously, Lee hit on the spot, we've assembled really an incredible team in the C&I space that have come to the company in that 20 to 25-year experience level across both geographic markets and industry specialization. Our focus really is in kind of that $20 million to $75 million range type credit size. And that gives us the ability both to scale quickly, but also clients that use a lot of bank products and services that gives us cross-sell opportunities. So I would say, I think if Rich was here, he would say probably 90% of the people are kind of hitting that first deal in 90 days with a number of them far exceeding that kind of production level. So it's really been an impressive story and I think if you had to assess where we are, I think we're kind of sliding in the second base on that overall strategy. So we really do continue to see, I think, good market expansion, good growth in both adding people and those people that have now been in the company for 6 to 9 months, are really hitting the stride. I commented in my comments that we really expect to be at or above the production level for Q2 to what we've done in Q1. And we actually were pretty hot coming out of the box this quarter with new closings that may have tried to get down in the first quarter, but leaked over into the second quarter. So the opposite of what we had in the first quarter is we had a really strong March on closing. We actually came out of the box really hot in April. And so we look for this to be an exceptional quarter.

Our next question comes from the line of Anthony Elian with JPMorgan.

Lee, on fee income, you reduced slightly the '26 outlook, but it still implies a material step-up for the rest of this year to hit that range. Talk to us about the areas you think will drive the increase in 2Q and beyond?

Yes, sure. So a couple of things on the fee income. First of all, and you probably already have, but I want to make sure people are adjusting for the figure gains, losses because that is in the noninterest fee income section. So we had a $9 million gain in Q4 and then we reduced the valuation and effectively, you saw a $9 million degradation in Q1. So that's an $18 million swing quarter-over-quarter. So I just want to make sure people are capturing that. But we think that -- it's really all of the line items. So capital markets syndication income, swap and derivatives. We hired a new head of Capital markets towards the end of last year and he's just finding getting his feet under the table, and we feel pretty excited about some of the things that we're seeing there. As we originate more loans, we expect unused loan fees to increase. We have some SBIC investments. The returns were slightly down in Q1 versus normal quarters, and we expect that to return to normal as we move forward. Q1 is seasonally low for mortgage gain on sale, and we would expect gain on sale to increase will increase as you move into Q2 and beyond. And then the CRE fee income should increase as we start originating new CRE loans. The consumer overdraft and service charges should increase. We think net loan fees and charges, deposit fees will increase. And we've said before, one of the things that we identified that was happening was we were waiving a lot of fees in the private bank and we are gradually reducing the amount of fees that we've been waving in the private bank. So -- it's not 1 area in particular. We expect to drive fee income across all categories and in all parts of our business model.

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

Yes. No, it's a fair question. I would tell you that people, I think, need to appreciate is there are more moving parts to this model than probably any other bank out there that especially banks that are mature because you're dealing with par payoffs, pay downs, new originations, we're in growth mode, you're dealing with reductions in nonaccrual loans and they're lumpy. It's not linear. We're looking to pay down wholesale borrowings reduce the cost of core there are more moving parts to the story than any other bank out there. We are moving in the right direction. -- to be absolutely precise on every single one of those, it's not easy. And so we feel, based on the guidance that we've provided that is the best look that we have today. But par payoffs or paydowns increased, Sure, they could. We've got strategies in place, as I mentioned, for the better quality loans to try and retain them. But there's a lot of moving parts. I think what I would look at is the bigger picture. And as Joseph and I have both said, we are doing exactly what we said we would do and executing on our strategy. And the worst case here is maybe pushes things out 1 or 2 quarters. So instead of Q4 of '27, it's -- we get there in 1Q of 28 or 2 of because we just need another quarter or 2 of $2-plus billion of net C&I growth. That's the worst-case scenario. And that's how I would look at it when you're looking at the -- you got to look at the bigger picture.

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

I wanted to touch on the inflows and outflows of NPAs this quarter. And going back to the Pinnacle group the bankruptcy loans, which I thought was maybe $500 million or $600 million in balances. If that came out, it implies a decent chunk of new NPAs went in -- and so I was just curious if that's the case, could you provide some color on the new inflows of NPAs number of loans, size of relationship -- and Jose, do you -- are you sticking with your outlook for a $1 billion reduction in nonaccruals this year?

Yes. Yes. First of all, Matthew, we are sticking with that. it's kind of -- you got to look at that category kind of like accounts receivable each quarter, and we've had that like volatility where some come in and some go out. We had roughly million of resolutions during the quarter. So you do have inflows and outflows that in [indiscernible] and that has always been there where things are transitioning through that. We do expect this next quarter to be down $200 million in additional NPAs. So it's the trend line that we take a look at, but there is in and outside of that category on a fairly consistent basis. And Matt, I'll just remind you, 35% of our nonaccruals are current and paid -- we're very punitive on ourselves in the way that we risk rate these loans and no 1 else has that amount of their nonaccruals current and pay. But you've got to bear that in mind as and real estate secured.

Understood. Okay. And then, Lee, could you just clarify where the hedge gain was flowing through in the average balance sheet. I thought it was in borrowings, but I think you had mentioned it was in interest income. I was squeezing in 2 questions in one.

Well, let me do -- let me handle 1 first because you'll have to pay for the next one. The -- it's all in the flu, the wholesale borrowings line. That's where that gain was, Matt.

Okay. And then could you just provide this quarter, what were new loan yield originations overall? How does that compare to the pipeline? And how does that compare to the fourth quarter?

The -- yes. So I mentioned a couple of questions. The new C&I loans were coming on at a spread to sofa of $24 basis points in Q1. So which was higher that they were coming on around 225 in Q4. So we saw a nice increase in Q1 in terms of average spread to sofa.

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

Lee, I had a question for you on the balance sheet forecast of $102 million in '27. So if we started 87 today, you have about $12 billion of multifamily coming back to you between now and 27. You lose 60% of it that is a $7 billion drag, that takes you down to $80 million. You originate $2 billion a quarter of C&I that takes you back up to $94 billion where is the -- what's the -- you're still $8 billion short versus that $100 million? I guess what are we missing here?

Yes. So a couple of things. C&I growth is pretty significant in both years. You're sort of looking at $7-plus billion in both years. But remember, on the CRE and multifamily side, we are originating new CRE loans, not New York City CRE loans, but CRE loans in other parts of our footprint. So the Midwest, South Florida California. So you've got to factor in the runoff in CRE and multifamily is not as big as you think because we're replacing some of that with new CRE originations. And then we also expect to see growth in the residential mortgage line item as well. as we're originating mortgages for balance sheet. So I think the piece you're probably missing is the CRE multifamily runoff is probably not as great as you're thinking because of the new loans we're originating.

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

Yes. We believe we can build on it. And as we said before, leveraging the new C&I customers that we're bringing in is as 1 area that we feel that we can be successful in. And if you look at Q1 and you look at the deposit growth, about $450 million was from the commercial customers and the private bank customers. And ultimately, we want to get the operating accounts of those commercial customers. But if we have to start with some interest there in deposits, that's fine as well. So we believe that we can leverage those new relationships on the C&I side. And our treasury management team is working diligently to make that happen, and we saw some green shoots in Q1. We believe the private bank is another area where we can grow deposits. And Mark Pit runs the private bank it really built out a real private bank with the Chief Investment Officer, trusted adviser. We've got a family wealth planner -- we've got all the products that they would need, interest-only mortgages now in a broad mortgage product set subscription lending. So we feel that that's an area where we can continue to bring in more deposits and then leveraging our 340 bank branches as well. And obviously, the new CRE lending we're doing, the expectation is that is relationship driven and will come with deposits and fee income opportunities as well. So we do believe that we can continue the momentum and grow more deposit I'd like to see some more noninterest-bearing DDA growth, but we think that will come with those upgrades that we got this quarter for Moody's and Fitch.

Our next question will come from the line of Bernard Von Gizycki with Deutsche Bank.

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

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

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

Yes. I think the way we're thinking about it, Bernie, is we believe we can pay down another $2 billion or $3 billion over the rest of the year. And again, a lot of it will be driven by what excess cash do we have and that will be driven by what's going on with deposit growth, what's going on with the payoffs, the paydowns, but we think we can pay down another $2 billion or $3 billion of loan advances.

Which get us into the like $6 billion a -- if you recall, when we got here, it was about $23 billion.

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

Thank you very much, operator, and thank you for taking the time to understand our story. We often say here, we started with 20 big items that we needed to knock off the list. We really feel we're down to about 4, have those well under control and are executing on that. And we remain extremely focused on executing on our strategic plan. We really want to transform Flagstar into a top-performing regional bank. Creating a customer-centric organization that's relationship-based culture and effectively manage risk to drive long-term value. So thank you for your time this morning, and thank you for joining us.

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