Flagstar Financial, Inc. (FLG) Q3 2026 Earnings Report, Transcript and Summary

Hello, everyone. Thank you for joining us, and welcome to the Flagstar Bank Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Salvatore DiMartino, Director of Investor Relations. Sal, please go ahead.

Thank you, Holly, and good morning, everyone. Welcome to our third quarter 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'd 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. 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 a reconciliation of these non-GAAP measures. And with that, I would now like to turn the call over to Mr. Otting. Joseph?

Yes. Thank you, Sal, and good morning, everyone. We appreciate you joining the call today. I'd 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 pre-provision net revenue 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 third quarter, 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. 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. Moving to Slide 4. I'd like to discuss some of our third quarter 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, we -- the average loan in that portfolio we added was about $28 million in loan outstandings, 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 payoffs totaled $1.2 billion, of which 35% were rated substandard. 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. And 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 nonaccrual loans were relatively stable. Now I'd like to turn it over to our Chief Financial Officer, Lee Smith, who can provide more color on our revised guidance, asset quality and third quarter trends. Lee, I'll hand it over to you.

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 October 14 and 111 basis points over the last 6 months. Two quarters ago, the forward curve assumed 2 rate cuts in 2026. And as recently as June 18 of this year, the forward curve had shifted to 1 rate hike in October. Fast forward to September 18, and the current forward curve has 4 rate hikes in September, December, March and June. We're also seeing extended inflationary pressures as a result of higher energy prices. 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 the third quarter. Turning now to Slide 5. Given what I have just outlined and our commitment to transparent reporting on the impact of any change to our forecast, we've adjusted our guidance downward for both '26 and '27, predominantly the result of higher provision costs in Q4 and full year '27 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's 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, funding 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. The higher rate environment is also resulting in lower mortgage originations impacting both interest income and noninterest income, and nonaccruals declining at a slower rate than previously anticipated. EPS for '26 is now forecast to be in the $0.10 to $0.15 range and EPS for '27 is forecast to be in the $0.85 to $0.95 range. We are also including a full year '28 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 '27 for the following reasons: -- between October 1, 2026, and December 31, '27, we have $12 billion of low coupon, less than 3.9% CRE multifamily loans either resetting or maturing. 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 '27 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. While we expect the pace of nonaccrual resolution to slow, we still expect our nonaccrual balances to decrease throughout '27 and '28. And 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 forecast. 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. I would like to point out that in Q3, pre-credit provision, we generated plus $0.13 of earnings, which included a $22 million or $0.04 tax benefit as we settled a legacy tax audit from 2020 in our favor. The next slide details our NIM trends. Our NIM expanded 4 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 '26 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. 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 deposits rose 1%. The cost of interest-bearing deposits increased only 1 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 third quarter, 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. Of this amount, approximately $2.9 billion or 35% are NYC multifamily with greater than 50% rent-regulated units. And 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 September 30, this tranche of the portfolio was $12.9 billion, down $531 million or 4% compared to the second quarter, while 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. 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. 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 were $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?

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 the third quarter alone, bringing our aggregate hiring activity to more than 400 professionals over the last couple of years. And 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. During the third quarter, 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, and we ended the quarter with a strong pipeline going into the fourth quarter 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. And C&I loans during the third quarter increased $2 billion to $20.6 billion, up 11% compared to the second quarter, continuing our trend of brisk but prudent loan growth. Slide 21 provides a more detailed look at C&I loan growth by business line and loan growth in the third quarter was fueled by various industry-focused verticals and lending segments, including financial institutions, lender finance, renewables energy, entertainment banking, technology, health care, 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 the third quarter loan growth, and 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. And 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, and we also experienced strong year-over-year and quarter-over-quarter increases in capital markets fees and collected treasury management fees. So with that, I will now turn the call back to Joseph.

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 time line 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'd be happy to turn it back over to the operator and open up for questions. Thank you.

[Operator Instructions] Your first question comes from the line of Chris McGratty with KBW.

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 and 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?

Yes. So Chris, we -- as you know, we do the 18-month look forward and 2027 is our biggest reset and maturity year where we have about $10 billion. So -- if you think about -- we're through that and if you think about this last quarter, it pushes us through to Q1 of 2028. And 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. I think there's -- and 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. I think what is interesting is when you look at '27, 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? So what we're doing is we are overlaying the interest rate environment at the time and saying what does the DSCR coverage look like? And 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. And the reason for that is when we see a change in interest rates, we will react quickly because we're prudent and we're conservative. If you think about the annual financial statements that we're using, we're using '25 financial statements at the moment. So in terms of those market units being able to increase rent, we don't see that yet. That -- and we don't adjust for that until we see it on the financial statements. So I'm telling you that because we're very, very prudent in the way that we assess the credit quality of our multifamily book.

Okay. And then, Joseph, on the capital, nice to see you get through the $250 million. Given the messaging on smaller balance sheet and then you're roughly 12.4% versus your target of 11%, like how do we think about buybacks from here given a little bit of noise in credit?

Yes. So Chris, I think we've been pretty consistent in our message is that the 3 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? And obviously, with the short-term disruption in that, don't envisage us doing any additional stock buybacks in the fourth quarter. But with our capital levels, we would expect to resume buybacks in 2027.

And then just to put a finer point on 2027. So you need to see the credit get a decent amount better before you -- I'm just trying to gauge, is it a first half event? Is it -- we're going to wait a few quarters?

If you really look at like the credit like 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. Nonaccrual was flat. And really, other than 2 borrowers, which have resolutions, we haven't seen an increase in past due loans. So where we've seen migration was really on the upper end in the special mention and substandard. And 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 5-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. And that's what dragnets in some of those relationships and loan outstandings into those special mention and substandard. So 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.

Your next question comes from the line of Dave Rochester with Cantor.

Just on the C&I growth that you've 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've made there and how much more deposit growth potential you think you have coming from those new relationships you've 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?

Great. Thanks, Dave. This is Rich. In the third quarter, 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 value, whether that's deposits or fee income or a combination thereof and get more relationship primacy as we further mature our commercial banking platform. So 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. So it's about relationship primacy, and it's about deepening existing relationships. So that's where we are in the journey, Dave.

Appreciate that. And then just for the new 2028 guide, how do you assess that confidence level that you'll get that profitability ramp up all in that year if we're still in this higher for longer environment when it's just really challenging to project what you're going to get in the next couple of quarters?

Yes. So Dave, that's why we put the bridge slides in there. So maybe let me walk you through -- let me walk you through '27, first of all, because the 2 biggest drivers of the balance sheet growth and then the fixed asset repricing. So the way we think about the balance sheet growth, there's sort of a couple of components. You've got the new loans that are coming on that are funded by the new deposit growth. So -- and this is all on a weighted average basis because you've obviously got loans and deposits coming in towards the end of '26 that we get the full year benefit from in '27, et cetera. But if you assume that you've got balance sheet growth, so this is new growth on average of about $2.8 billion, and that is funded by the new deposits coming on. And we're assuming that we can bring in approximately $800 million to $1.5 billion of new deposits. And the split there would be about 18% noninterest-bearing, 80%, 82% interest-bearing. The cost that we've assumed for the interest-bearing is between 3.9% and 4% -- and then when you overlay the interest-bearing or the noninterest-bearing deposits, the cost is around -- overall cost is around 320 basis points. So that's -- and that spot rate is significantly above our spot rate today for our existing portfolio. So you're earning a spread on those new loans of anywhere from 340 to 350 basis points. That's the new loans coming on from the new deposits. You've also got new loans coming on that are being funded by the CRE runoff. And so you're getting a big lift in the shift in spread because as we've said, the multifamily loans that are resetting have a coupon less than 3.9%. And so you then bring in on market rate C&I loans or new CRE loans, and you're going to pick up 2.5% spread on that. And that number is somewhere between $4 billion and $4.5 billion. So that's 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. And again, we're using the forward curve here. So you're probably going to pick up anywhere from 3.30% to 3.50% in terms of incremental spread. And then the other thing that in a rising rate environment that we haven't sort of really spoken about previously, about $10.7 billion of our CRE portfolio is floating. So as rates rise, we'll get the benefit of those loans, $10.7 billion repricing. And that's the reason why when you look at our interest rate sensitivity, we're neutral to ever so slightly asset sensitive.

Your next question comes from the line of David Chiaverini with Jefferies.

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 kind of locked in and mechanical?

Yes. So here's what I would say. I think, first of all, we've obviously -- because of the competitive deposit environment, we've brought down our assumption in terms of the amount of deposits we can bring in. And we're saying it would be $800 million to $1 billion a quarter, Dave. And so that to me is the -- that's 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've proven out. Rich and the team have consistently been originating C&I loans at a clip of $2 billion growth a quarter. So I don't think there's any question about our ability to generate assets. And then the fixed asset repricing, that is all mechanical because those loans are either going to pay off, and we're going to use those funds to originate more C&I loans at market spreads or they will stay with us, and we're going to get an increase in coupon, which is going to significantly increase net interest income and NIM. And you've got a significant portion of that CRE portfolio, the $10.7 billion, which is floating. So in a rising rate environment, you pick up the benefit there. So to me, I think the question is, can we deliver on the deposit growth.

And then 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? And did that pipeline kind of build kind of evenly through the quarter? Or did it slow down towards the end of the quarter?

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 the third quarter and hosted private gatherings with a number of our clients and in existing geographies and newer geographies. And 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's like a pebble in a pond with concentric circles of businesses that benefit from that macro environment. And so I would say that the pull-through is solid, and it's well diversified in terms of what makes up that $2.7 billion of pipeline. And it's amidst an environment that is not without challenges in terms of the inflationary environment and diesel fuel prices, et cetera, and geopolitical concerns. But our customers are telling us that they are moving forward with capital projects, moving forward with M&A and other strategic initiatives around expansion. So we feel good about the breadth of the loan pipeline, and we also feel good about the ability to pull that through. And I would not say that we experienced any material slowdown as the third quarter came to a close in terms of what we're adding to that pipeline. We also have the unique nature of continuing to be in a scale and growth mode. So as new bankers come on to, onto our platform, they are bringing over their relationship activity, and that is also helping to further build our pipeline, and that's something that's a little bit more unique to our bank and why you've seen us materially outperform a number of our peers in terms of C&I loan growth.

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

I wanted to touch on the -- what is the forward guide assume for net charge-offs? And within that, the ACL ratio at 150, what's -- how low can that go?

Yes. So I would -- the provision forecast, I would look at that as the proxy for net charge-offs, Casey. So what we're showing as a provision number, I would use that as your proxy for the net charge-offs.

Got you. And then on the deposit front, that's helpful color on the new money deposit growth. Just wanted to get a finer point on the third quarter. You guys gave a September NIM. The 3.09% deposit costs in the third quarter, what was that in September? And sort of what is the beta expectation going forward? Yes.

So yes, so a couple of things. First of all, our spot rate as of September 30, and again, this includes noninterest-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 3 or 4 days ago, Casey, versus the September rate hike, and this is for noninterest-bearing deposits -- or this is for interest-bearing deposits, excluding CDs, we were at 32%.

Your next question comes from the line of Jared Shaw with Barclays Capital.

I guess, trying to get to an assumption for year-end assets in '27 and '28 and just looking at the guide for commercial loan growth. I guess you've been running significantly higher than that. What's, I guess, driving that slowdown? Is that just you being more selective and more judicious with capital deployment? And then I guess, within that loan growth, what portion do you assume is residential versus commercial?

So Jared, what's driving the -- where we are for '27 and '28 is really, like I said, it's the deposits. So what we're sort of saying is we think that we can generate net sort of C&I growth. And it's 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. But if you think that we're growing sort of new loans $2 billion a quarter on average, and the way we're funding that is $1 billion of CRE runoff net. And then you've got $1 billion -- $800 million to $1 billion of new deposit inflows. So what is -- when you look at the growth, it really is predicated on the deposit -- the new deposits that we can bring in.

Okay. Okay. And then shifting a little bit, I guess, what's the sentiment around among the New York City rent-regulated landlords? Do you still have confidence that they're 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?

We do. I mean we've said this before, we don't have any REO. A lot of these owners have benefited from the 1031 tax rules. So that's obviously a huge advantage. The migration that we've 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. And 42% of our nonaccruals continue to be current and are paying. And again, we saw a very healthy amount of par payoffs this quarter, $1.2 billion, 35% of which was substandard.

Yes. Jared, the comment that I would say is like 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. And our documentation, just as a reminder, resets at their SOFR index plus 300 or reference rate plus 275. So those are pretty steep interest rates that frequently can have a borrower go from, say, 3.5% to 7.5%. So we don't 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. But I mean, for the most part, that has held up relatively well. So we haven't seen a material change. And you've seen some trades in the marketplace recently where some investors are coming in and buying pools from banks. So there's a fair amount of demand, I think, that who have a more longer-term viewpoint of the market than just perhaps maybe the next 4 to 6 years.

Your next question comes from the line of David Smith with Truist Securities.

Can you just like explicitly clarify your expectations for ending assets over the next few years? It seems like it's basically $1 billion a quarter of net asset growth with the new originations net of the runoff, but I just wanted to confirm that.

Yes, you're right, David. So end of '26, we're at $82.1 -- this is total assets, $82.1 billion, end of '27, $92.1 billion. And then end of '28, we're just around $97 billion.

Okay. And 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, but your expectation for CRE runoff and paydowns isn't really that much lower? Like is there -- I guess, 2 things. Is there a rate level where you feel like that would start to decline more meaningfully? And if you could just flesh out a little bit of what you think is supporting that level of paydown and those options that are outside in the marketplace still today?

Yes. It's really driven by volume, David. As I mentioned, we have $10 billion of loans that are resetting and maturing in '27 and another $7 billion in '28. And by the way, that doesn't include $1.8 billion in Q4 of '26, so if you just add those 3 numbers, you're at $19 billion of loans that are resetting or maturing. And so I would say that kind of net runoff of $1 billion a quarter, that's how we get there. And for all the reasons that I just mentioned, Q3, we have the high rate environment. We still saw $1.2 billion of par payoffs. And then I think the other interesting fact is of the $10 billion that is resetting or maturing in '27, only $3 billion is more than 50% rent regulated. So $7 billion is market to less than 50% rent regulated.

Your next question comes from the line of Ryan Kenny with Morgan Stanley.

So it was a good quarter in terms of growth in noninterest-bearing deposits. And wondering if you could give some more color on what's driving that growth? Can that continue? And how the investments in treasury management from here maybe need to traject?

Yes. So let me take the first part of the question, and then I'll hand it to Rich. So 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, 2, 3 basis points on. We moved from interest-bearing to noninterest-bearing because for all intents and purposes, they are noninterest-bearing. So that's what you're seeing in the noninterest-bearing line item. And then I think in terms of going forward, I mentioned in '27, when we think of the new deposit growth on a weighted average point of view, about 18% in noninterest-bearing. And 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 noninterest-bearing, but the interest-bearing deposits as well. And I'll let Rich comment on some of the strategies that we're deploying.

Yes. 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. And 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's 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 #1 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 and with a goal to have fulsome relationships that include not just a deposit that's interest-bearing, but those operational accounts that bring noninterest-bearing accounts to the front as well as other payments capabilities, including card and merchant solutions as well.

And then separately, to follow up on the earlier question on rent-regulated multifamily. What's the net charge-off you're assuming on rent-regulated relative to what you're seeing recently? Is there an uptick embedded in the guidance?

No, not particularly at all. I think the -- one thing I'd point out on the net charge-offs as well this quarter. So we had net charge-offs of $74 million. And what I would say about that is $34 million was already fully reserved for. So if you take that out, we would have been at $40 million in net charge-offs, which that's where we sort of expected our provision to be. The reason that we were at the sort of $75 million is that $34 million 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 and then that caused more migration. And so without that higher interest rate environment, the charge-offs, net charge-offs, we wouldn't have had to have replaced that $34 million and your provision would have been $40 million for the quarter instead of the $76 million that we saw.

Your next question comes from the line of Ebrahim Poonawala with Bank of America.

I guess maybe just, apologies, hey, Lee, if I missed it, is why are we shutting down the buybacks? Like when you look at the stock at $11, tangible book $15, shouldn't this be the time to be leaning in? And I ask that because I think you mentioned that you might reinitiate buybacks in 1Q. So I'm just trying to understand, is there like very narrowly a metric that you're managing to as opposed to, one, like why not buy back today? Or if the environment is becoming uncertain, why not push and suspend buybacks indefinitely? I'm just trying to figure out between those 2 spectrums, why you said what you said.

Ebrahim, I just think it's prudent until we build our core earnings and ensure that our credit quality forecast is accurate. And then the C&I growth has been spectacular. But those are the 3 variables management will use to make a recommendation to the Board. I mean we clearly acknowledge our capital levels are higher than our intended levels. But 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.

Got it. And separately, just big picture, it feels like if rates don't go down, there is not a whole lot that's 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've come down a little bit in the last week. But maybe Joseph, talk to us how you're thinking about, yes, the C&I strategy is working. But beyond that, like are there other strategic options, like strategic merger partnerships with other banks that you would be exploring in order to unlock shareholder value?

Yes. Ebrahim, 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're 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.

And Ebrahim, I would just add -- and to Joseph's point, we've laid out sort of the path here over the next 2 years. And as we've said and as we've answered other questions, a large part of this is mechanical as these low coupon multifamily CRE loans reset. I think the deposit growth we've brought down. And if we can achieve that, we know we can generate the C&I loans. So look, I think that if we achieve these numbers, it's 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're neutral to slightly asset sensitive. So obviously, in that scenario, a higher rate environment is helpful. Higher rate environment does put pressure on the credit side. 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're sort of -- we're 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've laid out.

Your next question comes from the line of Ben Gerlinger with Citibank.

I just want to double check, was this forecast based on 9/30 curve or like last Friday?

This was based on a September curve that had 4 hikes in it. So we've got September, December, March and June.

Got it. Okay. So this kind of gets to the question Ebrahim has had where it was basically kind of saying like I apologize in advance because I don't want to diminish the progress you guys have made. It just seems kind of like your -- the franchise today is very much an interest rate curve bet. And the only reason I say that is the 5 year's come down roughly 30 basis points since the end of last quarter. So the first 3 weeks here. So like when you think about just the update, if we just kind of retrace, wouldn't that put -- like alleviate quite a bit of the incremental pressure you guys have just kind of alluded to in terms of credit? Like I get deposit price is probably a little bit more expensive today based on the front of the curve, but like the credit resolution opportunity probably gets a little easier relative to where it was just 3 weeks ago if the curve kind of plays out on belly of the curve. Am I thinking about this correctly? Or am I kind of off base?

Ben, you're absolutely -- no, no, no, you're spot on. If rates come down, that is definitely beneficial and certainly on the credit side. So that is absolutely the right way to think about it. You are correct.

But I think, Ben, when you look at what last time we were forecasting was in mid-June, we've seen a 100 basis points increase even from the pullback -- so that's on that half of the equation. The other half, I would say, you've seen a super hyper increase in deposit cost. 30 days ago, it was pretty difficult to find a CD for 1 year over 4%. Some of the competitors are at 4.75% today. So you've seen super hyper pricing increases in the deposits. And hopefully, we'll see that pull back also. But in the short run, some of the competitors are very aggressive.

Got it. And then just kind of thinking from a client base perspective in terms of the multifamily areas where you might see pockets of pressure on a DSCR coverage. Like when you think about their level of sophistication, if the 5-year comes in a little bit more, would you potentially see like kind of rapid payoffs or like basically the borrower hitting the bid to refinance because there's a window of opportunity that's pretty small or presumably pretty small. I'm just trying to think like how sensitive this kind of lumpy payoff potential might be to rates? Or is it a little bit more formulaic over time period of kind of getting close to expiration?

No, no, no. I think you're exactly right. We do -- so Joseph has described, we have 2 options contractually, five-year FHLB plus 300 or prime plus 275. We do see -- and there is a SOFR sort of opportunity. We do see people taking the floating rate because they're effectively making the bet that rates will come down and then they will be able to refinance. So your thesis is exactly right. You've got people that will take a floating rate now in a higher rate environment because they're 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 yes, 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.

Yes. And the other thing, Ben, I think to recognize this next really 5 quarters is the largest repricing window that we've seen since we've been here in '24. So just -- the numerator to that is so much higher than what we've experienced. That gets back to an earlier question about how confident are you that you can reduce that CRE portfolio by $1 billion if you just kind of 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.

Your next question comes from the line of Bernard Von Gizycki with Deutsche Bank.

Just Lee, on the NIM outlook, it's 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 nonaccruals coming down. But 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.

Yes. So I think there's a couple of things that have played out. And Bernie, first of all, I think as we mentioned, we did see a 4 basis point increase in NIM quarter-over-quarter and September NIM came in at 2.23%. But I'd say the headwinds are the deposit costs. I mean, we've sort of -- we thought that -- and if you look at our history for the last several quarters, we've been able to bring deposit costs down consistently. And obviously, on a weighted average basis, it ticked up 1 basis point in Q3. And when we were sort of putting the previous forecast together, not knowing there were going to be these rate hikes in the curve, we thought we would still be able to chip away at those deposit costs. So I think that's one of the things that I would mention. In Q3, and Rich can touch on this a little bit, given the mix of C&I lending that we did, the -- I would say that the spread came in a little lighter than Q2 when we were at 2.25%, not much, but a little bit, but that was all more just the mix of loans that we brought in. And then on the nonaccruals, you're right, nonaccruals are flat. So we're not getting the benefit of the release of those nonaccruals back into earnings and back into capital. And as we've described before, the nonaccruals is a little bit like a receivable account. You've got nonaccruals that we're resolving and are going away and then you've got some new ones coming in. And when you get some new ones coming in, that has an impact on your net interest income as well. So that's what I would describe. 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're about to sort of embark on this big wave of resets and maturities, which is going to really allow us to sort of accelerate that expansion.

Okay. Great. And then just, Lee, on Slide 7, you have funding mix as a positive component helping NII in '27. Are you still expecting wholesale borrowings to come down?

Yes. So that -- yes, that's exactly what -- there's 2 things playing out on that -- or in that particular part of the chart. One, yes, we got FHLB coming down about $1 billion in '28. And then we also -- in Q4 of '28, we -- and so you don't -- it's not accounting for a large part of this, but we paid down $300 million of sub debt. So that's what you're seeing in that funding mix chart on Page 7. It's a reduction in FHLB of $1 billion. And then it's in Q4, you've got a little bit of benefit because we're paying off those sub notes.

Your next question comes from Janet Lee with TD Cowen.

Following up on provision and the forward curve. So is it as simple as if you don't get a rate hike in December, your provision forecast would be lower?

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. But there are other things at play as it relates to the provision. So the amount of C&I growth, obviously, the net $2 billion of C&I growth in Q3, that did contribute to the provision. And then you also have -- 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. So it's not the only variable. There are other variables that we do need to sort of consider here.

Got it. And believe you said the nonaccruals, NPLs are likely to come down, but obviously at a slower magnitude than expected before. How much visibility do you have on it? I don't believe you still expect getting to the $2.3 billion level by the end of this year. Like is there a line of sight into where that could go over the next year, just given you're also charging off a little more?

It's -- you have some line of sight, but not total line of sight because it's not linear. We have a special asset group who are doing a fantastic job working through these nonaccruals. And they have lots of different strategies, sort of DPOs, workout asset sales in order to be able to reduce those nonaccruals. And so sometimes, we do have visibility into what is coming. But 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're assuming that we end the year at about $2.6 billion of nonaccruals, Janet. And then in full transparency, as we look through '27, we do believe we can bring those nonaccruals down to about $2 billion. So those numbers are higher than what we had previously thought because the higher rate environment does slow down the resolution of the nonaccruals. But as I mentioned in my prepared remarks and as you can see from the bridges, we are still low -- we still believe we can reduce those nonaccruals from where we are, and that is accretive to both earnings and capital because they're 150% risk weighted as well.

Got it. Just a quick follow-up, if I, NIM of 2.23%, do you think that's a reasonable floor from here?

So I would like -- let me put it this way. We are -- we think Q4 NIM can be 2.20% to 2.25%. And so I think we are -- I don't want to say it's a floor in case one of the months is 2.22%, but I do feel that we can continue to build off of Q3. And I think that -- we do think that, that 2.23% is absolutely within the range that we expect to be at in Q4 overall.

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

Slide 17, Lee, you note the ACL on criticized and classified on rent regulated was about 5.02%. I think that's up from 4.8% last quarter. What's embedded in your forecast for that?

So well, I think what you're seeing here is what is embedded in our forecast. And 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. And so -- and most of that is going to be weighted towards the multifamily portfolio.

And then more broadly on rent regulated. So 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.

The way we look at that is we -- obviously, we observed those sales and look at our portfolio. But 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. And most of those investors are looking at 15% to 20% returns. And so 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. But I mean, we clearly obviously monitor the market closely. And if there was an opportunistic opportunity to sell some of that, we would. But I would say we have currently like nothing on the table to do that, but we will -- we're obviously talking to lots of people in the marketplace. But our resolution internally really has optimized the retention of capital for the company.

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

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 million to $100 million reduction. I'm curious what areas you're expecting to see reduced level of fee income from.

Yes. So 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, I mean that's been sort of costing us a couple of million a month. So 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. And so you're seeing less fees from sort of the deposit and loan businesses as a result of just those lower volumes. And so those are the sort of the big drivers. But if you sort of look year-over-year from '26 to '27, we are showing growth from a net interest or a noninterest income point of view. And we do feel that from capital markets 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 we're just right now in the higher rate environment, we're not going to get the help that we had originally thought from the mortgage business.

Got it. Okay. And then I wanted to go back to -- you had mentioned that you have $10.7 billion in commercial real estate that's now floating. Is that a function of folks that have hit the end of the 5-year fixed 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'm wondering if that's a risk factor to your interest rate position going forward, those folks either locking in for 5 or leaving for 5 elsewhere?

Yes. No, no, I think it's -- there's a couple of things that are playing out. Some of those CRE loans, about $3 billion are actually health care facilities that we fund in another part of the organization, but they're categorized as CRE. And then 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 2.75%, that's probably for a short -- on a short-term basis until they find a better opportunity. And you're always going to -- so you're going to have people cycling in and out of that. But then there are -- as I mentioned, there are SOFR options that our team is also making available to certain borrowers, and you've got people that are going with those SOFR options as well on the CRE side.

Yes. I think you have to think about that as a landing spot if you just happened to hit 2 weeks ago when the 5-year was 5.12% or 5.13%, you wanted to see are rates going to pull back. And so a landing spot for people to sit where they're kind of watching interest rates. And for us, what we think that ultimately means is, as Lee referenced, we expect 65% of those loans to pay off 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.

As we reopen selectively for originations across the country in CRE, we are seeing a higher percentage of floating rate SOFR-based loans. And if the client wants to fix the rate, they'll do that synthetically through a swap transaction.

Okay. If that plays out just the way you thought with 65% locking in, I guess, elsewhere, does that move into a liability-sensitive type interest rate position?

No. No, it doesn't. Remember, if you look at our balance sheet, we are putting on -- we're transitioning to more C&I loans, right? So that in itself makes us asset sensitive. You've got this sort of $10.7 billion of CRE that is floating. But I think you're going to have ins and outs. Some of that is permanent because of the health care facilities because of the new CRE loans that we're doing that are typically floating. We're not sort of really offering those fixed rates unless they're part of the resets and are contractual. Our noninterest-bearing deposits increased because we moved those very low cost deposits from interest-bearing to noninterest-bearing. So no, I don't think it doesn't move us to a liability-sensitive position. I think we're very much neutral to asset sensitive and probably moving more in that direction given the transition of the balance sheet to more C&I.

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

One small one and then one bigger picture. But Lee, on the higher expense guide, maybe I missed it, but I know it's small, but just curious what the driver of that was.

You mean for '27?

Yes.

Yes. So the previous guide, we were sort of towards the top end of the range. And then we continue to invest in sort of people and technology. And so 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's just investment in people and technology.

Okay. Okay. Good. And then the bigger picture one, I just -- I asked this respectfully, but I know a lot of this is hard to predict, but that update slide, it's been drifting lower for a few quarters and it's elongated a bit. And 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? And I guess I'm focused kind of more on the core trends. I think credit works its way out. But how deep did you guys go on this reset because for '27, it's a pretty big cut.

Yes. I mean, we have spent countless hours, days, weeks poring over this, Jon. And as I mentioned, we -- 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've proven that on the C&I side. And so we know the resets are going to happen. They're contractual. We all just sit here and wait. Time is our friend in that regard. So -- and we've taken the deposit growth down, but we're saying we're going to grow deposits $800 million to $1 billion a quarter. And so that is the -- that would be the question. Can we bring in $800 million to $1 billion of deposits a quarter. And so we believe we can. And so that's -- 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. And you have the pickup in the spreads just given everything that's resetting is sort of -- or a lot of it is low coupon. So I think it comes down to can we bring in the deposits.

This concludes the question-and-answer session. I will now turn the call back to Joseph Otting for closing remarks.

Thank you very much, operator. And as noted with this presentation, we provided our 2028 forecast. And 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've come forward and really tried to make sure that as we have 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's just -- if you look at the numbers, the '28 sits really on top of previous '27. So this is what I would just say, it pushed it out, but it didn't change the direction that we were going. So 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 and that we look to really have a balanced balance sheet where 1/3 of the assets are dedicated to consumer cash flows, 1/3 to commercial real estate and 1/3 to business lending. In closing, I'd like to thank our executive leadership team and all our teammates for their dedication and commitment to the organization and our customers. I'd like to also thank the Board of Directors for their support and counsel. And thank you for taking the time to join us this morning and asking what we thought were really important and critical questions. So thank you for your interest in Flagstar.

This concludes today's call. Thank you for attending. You may now disconnect.