LL Flooring Holdings Inc

NYSE:LL

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 Financial First Quarter 2025 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 Financial's first quarter 2025 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 first quarter results and outlook.

During this call, we will be referring to our earnings 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 at ir@flagstar.com.

Also, before we begin, I'd like to remind everyone that certain comments made today by the management team of Flagstar Financial 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.

Also, 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 reconciliations of these non-GAAP measures.

And with that, now I would like to turn the call over to Mr. Otting Joseph?

Thank you, Sal, and good morning, everyone, and welcome to our first quarter earnings call. We are very pleased with this quarter's operating performance and financial results as we continue to make significant progress on our journey to profitability, executing on our strategic plan and transforming the company to a strong performing regional bank.

We executed on the critical cost takeouts, credit management, C&I growth and risk governance during the quarter and really aligned with our overall pattern that we laid out for all of you in early 2024.

Our first quarter adjusted net loss available to common shareholders was $0.23 per diluted share compared to a consensus of $0.27 per diluted share. This was also $0.17 better than what we reported in the fourth quarter.

In addition to our improved financial results, I'm also excited with the progress that we are making in building out our commercial lending business, where we continue to add talented bankers. These new hires now are generating strong origination volumes, which I will detail for you shortly.

Also during the quarter, we announced the hiring of Mark Pittsey to lead our Private Bank and Wealth Management business. Mark's extensive expertise at various large regional and international banks will help us drive our continued growth in these 2 core businesses. And we're really excited because Mark is going to be a great leader. He's already brought focus to those businesses, and we look to add additional talent as we move forward as he executes on his business model.

In addition, we rounded out some key product offerings in the C&I, including an interest-only jumbo AMR mortgage with a low loan-to-value aimed at our high net worth clients and a subscription loan product. We feel now that we have the appropriate product set in place to grow market share in the high net worth space.

Turning to Slide 3 of our presentation. In 2024, we successfully built capital, improved liquidity and enhanced the credit quality of our commercial real estate and multifamily portfolios.

In 2025, our focus is on the following 4 areas: improving our earnings profile through margin expansion as our cost of funds decreases, moderating credit cost and cost reductions. Lee will discuss these and outline these later on a couple of slides. And we'll continue to execute on our C&I and private bank growth initiatives and then proactively manage the CRE portfolio, including reducing our CRE concentration, which you'll also see in a couple of slides. We've continued to do that virtually since we've arrived, and we've continued to see that as we kind of move through the remainder of '25 and '26.

And then we also see normalizing credit. I will note that, both net charge-offs and the loan loss provision in the first quarter each declined by almost 50% on a quarter-over-quarter basis.

I'd like to spend the next few slides discussing the build-out and increasing momentum in our C&I business, which we've consistently communicated as one of our key targets is to diversify the balance sheet away from being a CRA-driven balance sheet to one where we focus on consumer, C&I and commercial real estate going forward.

We've continued to add talent in the C&I business. We hired another 15 bankers during the first quarter and intend to hire another 80 to 90 during the remainder of the year. These additional hires are already factored into our forecast and will not impact our cost savings initiatives.

Early returns from the bankers we hired in 2024 are impressive, especially in our 2 main focus areas, which are corporate and regional commercial banking and our specialized industry verticals.

Overall, we had over $1 billion of C&I loan commitments in the quarter with $769 million in originations, up over 40% versus the fourth quarter. Our C&I pipeline currently stands at $870 million, up over 2x compared to the fourth quarter.

Our expansion strategy in this is twofold. Our corporate and regional commercial banking business is focused on relationship lending in and around our branch footprint to ensure we can maximize our middle market and corporate banking lending opportunities in our backyard, specifically where we have Flagstar brand recognition.

And then the second is our specialized industry business is a national model and focuses on several industry verticals, including things like sports and entertainment, energy and energy renewables, franchise finance, health care and lender finance.

Slide 5 depicts the momentum we have in these 2 areas over the last several quarters. And if you recall, we really, with Rich Raffetto's hiring in June of 2024, began to organize ourselves and began to recruit talent into that space. But as you can see on Slide 5, importantly, in our 2 areas of forecast, originations increased over 70% to $449 million on a linked-quarter basis, while commitments rose 40% to $656 million. So we're really excited about that, and it really shows as we've talked to people about growing out our C&I opportunities in the marketplace that those are really starting to come through as we forecasted.

On Slide 6, in addition to the sale of the mortgage warehouse business, we opted to strategically reduce our exposure to several noncore nonrelationship-based C&I borrowers. As a result, over the past several quarters, the runoff in these portfolios has masked the progress we are making in growing our new focus areas.

As you can see in the upper left of this slide on Page 6, while overall C&I loans declined again this quarter, corporate, regional, commercial banking and specialized industry loans increased to $147 million, up 4.4% compared to the fourth quarter.

Runoff has now abated in these C&I portfolios and combined with continued momentum in our focus area, we feel comfortable that the overall C&I portfolio will begin to net grow in the second quarter.

With that, I will turn it over to Lee and allow Lee to kind of walk you through some of our financial data.

Thank you, Joseph, and good morning, everyone. We're very pleased with the continued progress of our turnaround strategy to transform Flagstar into a top-performing, well-diversified relationship-driven regional bank. From a fundamental point of view, our CET1 capital ratio remains right around 12%, one of the strongest in the industry for regional banks.

We further improved our liquidity profile as we continue to reduce brokered deposits and FHLB advances and the results of our cost optimization efforts are on full display as our noninterest expenses, excluding onetime charges, merger expenses and intangible amortization declined $71 million quarter-over-quarter, putting us on track to achieve our full 2025 forecasted run rate.

We continue to see significant par payoffs in our commercial real estate portfolio, and we closed on the 2 nonaccrual loan sales that had been moved to available for sale during the fourth quarter with a combined book value of $290 million, resulting in a small gain of $9 million on these loan sales.

We will continue to explore all options as it relates to reducing our multifamily and commercial real estate portfolios and nonperforming loans, and we'll execute on what is in the best economic interest of the bank.

Joseph already touched on the momentum in the C&I business, but let me add that our goal is to originate $1-plus billion of C&I loans per quarter and believe the first quarter trends prove we're on track to do this. Moreover, this growth is at market spreads, which together with the expected multifamily resets and maturities will drive margin expansion over the next 3 years.

We paid off approximately $1.9 billion of brokered deposits during the quarter with a weighted average cost of 5% and $250 million of flood advances, with a weighted average cost of approximately 4.5%. The last $1.4 billion of our high-cost savings promos with a weighted average cost of 5.2% matured during the first quarter, and we had $5 billion of retail CD maturities at a weighted average cost of almost 5%. Overall, our weighted average cost of deposits declined 34 basis points in Q1 versus Q4.

Looking ahead, a further $4.9 billion of retail CDs will mature in the second quarter with a weighted average cost of 4.80%. We continue to actively manage our deposit costs and will further deleverage the balance sheet in 2025 by paying down more broker deposits and FHLB advances.

Over the next 3 quarters, we expect to reduce our brokered deposits by an additional $3 billion and our FHLB advances by another $1 billion. On the asset quality front, our criticized assets declined quarter-over-quarter, while our allowance for credit losses and reserve coverage remained stable due to lower held for investment loan balances and better appraisal values.

The increase in 30- to 89-day delinquencies were driven by one borrower who pays subsequent to month end and has done so again, meaning that $414 million of delinquent loans as of March 31 are current as of April 23. We also moved one significant borrower to nonaccrual status during the quarter. Their portfolio is approximately $563 million and 90 properties. We are pursuing all legal and contractual remedies against this borrower.

Turning to Slide 7. As you read in our earnings release, our first quarter loss narrowed significantly compared to the previous quarter. And as Joseph mentioned, it was ahead of consensus estimates.

On a GAAP basis, we reported a net loss available to common stockholders of $0.26 per diluted share. And on an adjusted basis, we reported a net loss available to common stockholders of $0.23 per diluted share versus $0.40 in the fourth quarter after adjusting for the following items in Q1: $5 million in trailing costs from the sale of the mortgage servicing and third-party origination business, $6 million in accelerated lease costs related to branch closures and $8 million of merger-related expenses. Moreover, our adjusted pre-provision pre-tax net revenue for the quarter was a negative $23 million, also much improved compared to the previous quarter as we aim to return the bank to profitability by the fourth quarter 2025.

On Slide 8, you can see the tremendous strides we have made in strengthening our balance sheet over the past 5 quarters. We have increased capital by nearly 300 basis points, improved our reserve coverage by almost 60 basis points, significantly enhanced our liquidity position, and we enhanced our funding profile by reducing our reliance on higher cost wholesale borrowings. This last item also helps us reduce our FDIC expenses. We now have a more fortified balance sheet that will better support our diversification strategy, as we move forward.

Slide 9 provides our updated 3-year forecast through 2027. We slightly lowered our 2025 net interest income forecast and increased our forecast for fee income. These largely offset, resulting in no change to our 2025 earnings per share. Fiscal years 2026 and 2027 remain unchanged.

Slide 10 shows our NIM trends. And as you can see, the margin has stabilized over the past 2 quarters. The NIM is expected to increase as we move forward based on a lower cost of funds as we continue to deleverage the balance sheet and manage our cost of deposits lower, using excess cash to purchase investment securities, low coupon multifamily loans resetting higher or paying off at par, growth in higher-yielding C&I loans and a reduction in nonaccrual loan balances.

I touched on our cost optimization efforts a moment ago. And on Slide 11, you can see the significant progress we've made in reducing our expense base. Our cost reduction efforts are focused on the following 5 areas: compensation and benefits, real estate optimization, vendor costs, outsourcing, offshoring nonstrategic back-office functions and processes and FDIC expenses.

We've reduced noninterest expenses $71 million quarter-over-quarter on an adjusted basis and are on track to reduce expenses by over $600 million year-over-year and achieve our noninterest expense forecast for 2025. It is important to note that our cost savings goal is net of growth in other areas, including our C&I businesses and investment in our risk, compliance and technology infrastructure.

Turning now to Slide 12, which shows the growth and strength of our capital position. At just under 12%, our CET1 capital ratio is top quartile among our peer group. Our priority is to redeploy this capital into growing our C&I business as we diversify our balance sheet.

The next slide is our deposit overview. Our deposits decreased approximately $2 billion, driven by the payoff of $1.9 billion in brokered deposits, consistent with management's strategy to reduce our reliance on wholesale funding.

Moving to Slide 14. The first quarter was another strong quarter for par payoffs in the CRE portfolio, which totaled $840 million. $673 million, or 80% of these were in the multifamily portfolio. And importantly, 59% of the payoffs were loans rated substandard. These payoffs are driving a significant reduction in our CRE balances and in the CRE concentration ratio. Since year-end 2023, CRE balances are down $5.7 billion, or 12% to $42 billion, while the CRE concentration ratio is down 62 percentage points to 439% compared to 501% at year-end 2023.

Slide 15 provides an overview of the multifamily portfolio. This portfolio has declined $3.3 billion, or 9% year-over-year. In addition to the payoffs, this portfolio has been reduced through loan sales and charge-offs. We maintain a strong reserve coverage on this portfolio of 1.82%, the highest relative to other multifamily-focused banks in the Northeast.

Furthermore, the reserve coverage on multifamily loans where more than 50% of the units are rent regulated is 2.82%. Earlier, I stated that one driver to our margin expansion is the resetting of our multifamily loans. We have about $18 billion of multifamily loans either resetting or maturing through the remainder of 2025 and end of 2027 with a weighted average coupon of less than 3.8%.

If these loans pay off, we will reinvest the proceeds and capital into C&I growth or pay down wholesale borrowings. If they reset, the contractual reset is at least 7.5%, which gives us an immediate NIM benefit.

Going back to January 1, 2024, approximately $3.4 billion of multifamily loans have reset. Over 90% of these loans have either paid off at par or reset and at current, excluding the one borrower we moved to nonaccrual.

Slide 16 provides an overview of the office portfolio. We have reduced our office exposure by approximately $800 million, or 25% over the past 5 quarters, and we will continue to actively manage this portfolio lower throughout the course of the year. Our office allowance coverage at March 31 stood at 6.68% and remains among the highest compared to our regional bank peers.

The next slide details our allowance for credit losses by loan category. Of note, our total ACL coverage, including unfunded commitments of 1.82% was relatively unchanged compared to the previous quarter due to lower loan balances, charge-offs and the receipt of additional appraisals.

On Slide 18, we provide additional details around our credit quality trends. Criticized loans declined almost $900 million, or 6% on a quarter-over-quarter basis to $14 billion. Additionally, net charge-offs declined 48% to $115 million compared to the previous quarter, reflecting further normalization of credit costs.

As I mentioned earlier, one borrower relationship totaling $563 million became nonaccrual during the quarter, which accounted for almost all of the increase in nonaccruals. Excluding this nonaccrual, loans, including held for sale would have declined modestly compared to last quarter.

Finally, Slide 19 depicts our liquidity position as of quarter end. Overall, our liquidity remains strong, totaling $30 billion, representing 231% of uninsured deposits. During the quarter, we used that cash position to pay down brokered deposits, wholesale borrowings and to purchase investment securities.

In conclusion, we're executing on our turnaround and strategic plan to return Flagstar to profitability and make us one of the best-performing regional banks in the country.

I will now turn the call back to Joseph.

Thank you very much, Lee. And before we go to questions, I'd just reference for everybody's benefit, Slide 20. As we started this journey with all of you when we arrived virtually a year ago and started to talk about like the direction we wanted to take the company, there were some critical components that need to be -- that we needed to accomplish. We obviously needed to lower the cost. We needed to get our arms around the credit risk within the company. We needed to build a C&I franchise that could originate loans, and we could move the company forward on that journey.

And I think where we sit today, we feel very confident on the turnaround of the company. And as Lee referenced, we do forecast and believe that our fourth quarter will be a profitable quarter for us, turning point in the organization's history.

On Slide 20, we give you a reference that compared to where the current stock price is trading and where we would think it would be on a 1x multiple that we do feel for investors, there is a tremendous opportunity in owning the Flagstar Bank stock going forward.

So with that, operator, I will turn it back to you, and we can open it up for questions.

[Operator Instructions] Our first question comes from the line of Mark Fitzgibbon with Piper Sandler.

Happy Friday. I see your guidance, Joseph, on Page 10 of the slide deck and as it relates to the NIM. But I guess, I'm curious, to get to a 1.95% to 2.05% NIM for the year, it looks like a pretty big lift from the 1.74% we had this quarter. So I guess, I'm curious, does that incorporate any rate cuts? If so, how many?

And secondly, of the 4 main drivers that you referenced, what are the biggest pieces of that, which really contributes the most to the NIM benefit?

Yes. Thanks for the question. So when we put this latest forecast together, we were using the forward rate curve as of March. So there are 2 rate cuts in 2025 assumed in this. And as you think of the NIM improvement going forward, it is driven by the items that are noted.

So you'll see our cash balances come down throughout the remainder of this year, and that's the result of us. We're going to buy another $2 billion of securities between now and the end of the year. We're planning on reducing brokered CDs another $3 billion, and we will pay off another $1 billion of FHLB advances.

As we've mentioned previously, we've got another $4 billion of multifamily loans resetting in 2025. They have a coupon that is less than 3.8%. So as they reset, they're going to move into -- if they stay, they're going to move into coupons that are at least 7.5%. So we get an immediate NIM benefit there. And if they pay off at par, we will reinvest those proceeds in growing our C&I portfolio, which is based off a SOFR spread. So that is improving the NIM position as well.

We're also going to manage the cost of our -- and continue to manage the cost of our deposits lower like we have in the first quarter. We've managed interest-bearing deposits down 34 basis points versus Q4, and we're going to continue to do that as we move throughout not just '25, but beyond as well.

We've got $4.9 billion of retail CDs maturing in the second quarter. They've got a weighted average cost of 4.8%. And then as I mentioned, we're planning on reducing our nonaccrual loans, and that will be additive to NIM as well.

Okay. And then secondly, just was curious on that one large relationship that went on nonaccrual this quarter. Can you give us a sense what the LTVs on those loans look like? And also how much you have in specific reserves on that relationship?

Yes. So here's what I would say. We're not going to get into the specifics around the relationship. But what I would tell you is when we looked at this, this loan had the ability to pay. The LTVs and all the other metrics were adequate. This was a borrower who decided that he wasn't going to pay. And that was a human behavioral choice, but he certainly had the ability to pay.

A couple of other things that I would mention is, when you look at the specific impact of this on the quarter between additional reserves and charge-offs, it cost us about $28 million. And then in terms of NIM reversal, it was about $5 million. So, this particular borrower, it cost us about $33 million, or $0.07 just in the quarter.

And the other thing that I would add is, we've obviously scrubbed the remaining portfolio. We have done a lot of screens. And we believe that this was a very unique situation. This borrower, he looked to gain additional leverage by pledging his equity interest. And as we've done various other screens, we don't see anything like this in the rest of the portfolio. So we do see it as being very idiosyncratic and unique.

And the thing I would add, Mark, is I think, we've communicated the journey through 2024 through the whole portfolio. We continue to -- in an instance like this is we do an assessment of our current reserves. And then when we move it to nonaccrual, you do specific reserves against the loan.

So what Lee was kind of referencing was that we've placed additional reserves against that loan. So we feel subject to getting appraisals back in is that we're adequately reserved on that loan for any action that we would take.

I think just one other thing that I would add, outside of that loan, if you look at the credit trends, charge-offs are down, the provision was down. And if you look at classified assets, as I mentioned in the prepared remarks, they were down $900 million quarter-over-quarter as well.

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

I guess when we look at the projected growth in commercial lending and then tie that with the guidance for provision, how should we be thinking about the ratio of allowance as we go forward? I mean, is this going to be -- at this point, we're going to continue to see reserve releasing and most of the provision is going to be for that growth in the commercial portfolios? Or is there still potential for reserves as some of those multifamily loans hit that 18-month refi window?

Yes. So a couple of questions there, Jared. First of all, this quarter, as you use the Moody data and you put it into your quantitative model, it did not reflect the reduction in interest rates. And so if interest rates, especially on the 5-year curve were down any given day, 40 to 60 basis points. I do think that, that will have some positive impact when we do the quantitative analysis in the second quarter. And the reserve build would be -- the offset to that would be that as we add new C&I incrementally that we're reserving against those loans as they get forwarded.

Yes. And I'll just add, if you look at Page 17 of the deck, you will see the reserve or the coverage against the C&I loans did increase quarter-over-quarter, as a result of some of those new originations, but also the economic forecast that Joseph referenced that was coming out of Moody's.

But as we think about the overall provision, I think it's looking at the entire book. So it's factoring in what we're doing on the C&I side from a growth point of view, but it's also taking into account what we expect to happen from a CRE and multifamily point of view as well.

And just to remind you, Jared, we actually went through the entire portfolio in 2024 and virtually re-underwrote all the commercial real estate, including the multifamily that it was mark-to-market, so to speak, from the standpoint of where we thought the underlying cash flows supported and the loan-to-value on the underlying assets.

Okay. All right. And if I could just ask a follow-up on capital. With the capital CET1 being sort of above that target range and then all the positive steps that you've outlined with tailwinds on margin and tailwinds on credit. What are your updated thoughts on maybe deploying some of that capital into a buyback, maybe around here with the valuation being so far below tangible book?

Yes. We think that as we start to stabilize and pay down the real estate, the offset to that will be deploying that capital into the C&I and Private Bank. And so I think our forecast at this point in time is to use that capital to expand the balance sheet. One thing we did do, Jared, is we did a combination of we shrunk the balance sheet between $15 billion and $16 billion over the last 12 months. And we actually think we can turn it around and go back the other way now with the balance sheet and use that excess capital for growing the franchise.

Our next question comes from the line of Ben Gerlinger with Citi.

So you guys referenced around $1 billion or so kind of aspirational run rate on C&I. I was kind of curious if you could dig into that a little bit. I know you made 75 plus do a doubling that in terms of hiring. So it just kind of a loan size or segments or I know the pricing says at market rate, but $1 billion is quite a bit more than I was expecting.

Yes. So the $1 billion is consistent from an origination point of view. That's what we accomplished in the first quarter. We originated $1 billion of commitments from a C&I point of view, and we outlined that on Page 5. And this is coming from the 60 bankers that we recruited in the second half of '24. We've recruited another 15 to 20 just in the first quarter of this year, and we still intend to recruit another 6 or 7 -- 60 to 70 throughout the remainder of this year.

These bankers are very experienced. They come with a track record. They're coming from other big financial institutions, and they're typically originating their first loan within the first 90 days of arriving at Flagstar. And that's how we're seeing these numbers. From a strategic point of view, we're sort of focused in 2 areas.

On a national basis, we're starting these specialty lending verticals. So you heard Joseph mentioned sports and entertainment, but also oil and gas, renewables, energy, healthcare are just some of the other national lending verticals that we've set up. But then geographically, as it relates to our footprint, we're also hiring experienced bankers to better penetrate the middle market C&I areas within our footprint.

So it's a twofold approach. There's the national approach from a specialty lending point of view. And then there's a geographical approach, leveraging our brand name in the geographies that we operate. And I mean, we're thrilled, obviously, with what we've accomplished in the first quarter, and we believe that we can maintain that and even grow it going forward.

What I would tell you is we also believe Q2 will be the turning point. And what I mean by that is right now, even though we've been originating these new C&I loans, the C&I balances have been decreasing quarter-over-quarter as we've rightsized other legacy portfolios.

Starting in the second quarter, you'll start to see overall C&I balances increasing. So we're sort of making that pivot, and you'll see an increasing C&I loan balance Q2 and going forward.

Got you. That's helpful. And then not to take away from the successes that you guys have seen on the expense front, because it seems like you've moved mountains quite a bit here. But when you think about the back half of this year, the remaining 3 quarters, I mean, you still have initiatives and plans. Is there anything to think about in terms of timing on additional cuts and/or accruals for kind of the C&I success that would work against that? Or should we think about it linear to get to the range that you guys provided?

Yes. No, here's what I would say on the cost reduction efforts, and it's just been a tremendous effort by the entire organization. We are mostly there and then some. And what I mean by that is I actually think right now that there's probably $25 million to $30 million good guide from the bottom end of our range. We did not want to move our range this quarter. We obviously wanted to get another quarter under our belt. But the way things are trending on the expense side, I think will be what we're guiding to.

In terms of things that are still in process, as we mentioned last quarter, there are some additional branch closures that will happen at the end of June, about '23. There's some private client locations that we are merging and exiting in early July. And then there will be some additional branch consolidation at the end of September. So obviously, that's all factored into our numbers. But the vast majority of what we were looking to accomplish has been accomplished or is on the agenda to be accomplished.

Ben, the other thing that I would add, which I think is really important is these costs are net of -- we're investing $40 million in our risk governance infrastructure, what we're doing in the C&I group of effectively adding 120 people over a 12-month period. And then we have some pretty significant IT and operational initiatives to drive costs down. But at the same time, we're investing in our systems to finalize the combination of the entire bank now onto one platform. So those are things that are all kind of laying the work and the foundation for that to get completed in 2025.

So it can't -- our probably total expenses, as Lee indicated, probably are somewhere around $700 million to $750 million takeout, but we are making investments in the company in addition to taking those costs out. And I would say we did get a lot of questions whether we were going to be able to meet those numbers. And as Lee referenced, we feel really confident that not only are we going to meet those numbers, but we can exceed those in 2025.

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

Lee, I just wanted to follow up on your comments on C&I. How are you thinking about the utilization of those $1 billion in new commitments each quarter? How quickly do you expect to see balance sheet growth in C&I coming from those commitments?

Yes. So if you look at the -- again, if you look at Page 5 of the deck, so of the $1 billion, $760 million has been funded, which indicates a pretty high utilization rate. Will it remain at that level? Hopefully. But I think we're sort of looking at it on a more traditional basis where people will sort of leg into it a little more and it will ramp over time. But again, just sort of using Q1 as an example, we've sort of seen about 75%, 76% of what was originated utilized.

Yes. And our pricing model is pretty punitive to put commitments out that aren't being utilized. So that also steers the team to look at transactions that meet high credit quality standards, but at the same time, have high utilization rates. And one of the things that I would mention, we feel really good about these growth numbers, but we also have less than 1% market share in kind of C&I. And so our ability to put these numbers forward, we may go from 1% to 3% by the end of '26. So it's not like we're gathering huge market share, but there's a lot of market available for us to participate in.

Got it. And then, Joseph, there are concerns about the economy slowing over the next 12 months. You've recently done a review and re-underwritten the entire loan book and the credit metrics continue to improve. Can you talk about how insulated Flagstar is from the concerns around tariffs and economic growth? And do you think credit metrics can still improve from here?

Yes. We did an analysis of the portfolio of the sectors that we thought would be impacted by tariffs. And those are the obvious ones, auto, construction, consumer products. We have about $2.8 billion of commitments across the organization into that space. And so it's not a big number for us. And of that, there's $2.3 billion of loan outstandings. And just slightly over half of that is in the auto space.

And so the auto space actually is having a pretty good quarter because people are kind of prebuying automobiles. So as we now get into the individual credits that are -- make up that $2.8 billion, we are not seeing -- obviously, it's going to take time to see the impact of this. But the aggregate dollars are very minor for us, number one. And number two, they seem to be in areas that won't have significance.

The other thing that I would reference in that regard, as we are looking at new opportunities, obviously, one of the things that are being looked at hard in any new credit originations today is what is the tariff impact? And what could it be to a particular company? And we have passed on a number of opportunities where we thought, like where somebody was manufacturing in China or Vietnam or other countries, that this could be problematic in the future. It may not be today, but we've passed on a number of opportunities where we thought, gee, this needs to kind of stabilize before we would enter the opportunity.

So I think we're also in a unique position that we're not starting with a big portfolio of stuff that could be impacted, and we can use that as part of our criteria in the credit underwriting.

Our next question comes from the line of Christopher Marinac with Janney.

Lee, can you tell us about the warrant conversion and how that stands? And should we be thinking of a tangible book on a fully converted basis soon?

Yes. So the way we factored that into our forecast is we assume that it converts in Q4 of 2025. And so what that does is it does factor in the earnings per share that you've seen in the forecast. So, that assumes that after Q4 2025, the warrants have been exercised, but we have not included it in the TBV per share number, because it actually -- because they haven't been exercised, if you see what I mean.

But for the purposes of the earnings per share number, because we hit profitability in Q4, we assume that they are exercised and they are included, the dilutive impact is included in the EPS number.

Got you. Is there any material change in the number of shares represented by the warrants with the figure we have on the K still be somewhat accurate?

Yes. I think so the way they work, obviously, there is -- it depends where the stock is trading when they're exercised. As you know, there's a strike price and they're net settled. And so the dilutive impact increases as the stock price increases. But overall, they're not incredibly dilutive. And what we've laid out in the K, I think it gets you what you need from an information point of view.

Perfect. And just a quick credit question. From a high level, when you look at overall frequency and severity in the book, whether it's multifamily or other parts of CRE, are those numbers kind of the same as you thought a quarter or 2 ago? Or do you see those perhaps trending in a different direction, somewhat better?

A couple of comments that I would add is, we're right in the season where we will be getting the updated financials from the borrowers. And last year, we were in the mid-90% of borrowers who provided this updated financial, which was up substantially from the legacy bank. So we'll have like a really good look into how '24 was here in the next 60 days, and clearly be able to talk about that in the second quarter.

But for the most part, what we're seeing in the market and we see through our appraisals is, we've seen stabilization both in the multifamily and in the office, while office is really a relatively immaterial number to us. If you think back to '24, that's really where a bunch of the big hits came as we moved out of some problem office credits that we had.

So I think what I would say is right now is, for the most part, if you think about what Lee commented on, the movement in the special mention and the substandard down substantially and then our charge-offs being down, I think would lead you to indicate that we just don't have a lot of flow now into those categories from the portfolio. And I think that's a result of when we were doing forward-looking in the portfolio through 2024 that we were catching everything that was going to mature or price reset 18 months out, gave us a pretty long runway to be able to look at our credit exposure. And each quarter, we pick up another quarter in that kind of analysis.

So -- and we just haven't seen really the deterioration at this point from new appraisals and new credits falling into that bucket. So -- and we do -- overall, we do forecast -- continue to forecast that our NPAs will be down by year-end, and we continue to see reductions in our special mention and substandard.

Yes. I would just sort of echo and reiterate a couple of things Joseph mentioned. I mean, the charge-offs coming down up to $115 million from $222 million last quarter, I think, is a very positive sign. The appraisals are coming in better than we were -- when I say, we're expecting, certainly better than the shock analysis that we have when we don't have appraisals.

The -- of the $800-plus million of payoffs in the first quarter, 59% we have them rated substandard. I think that is another good sign. And then when you look at that reduction in classified assets from $14.9 billion to $14 billion as well as those payoffs, we did have $600 million of upgrades. And I think that's important to note as well. So as we get new information, as credits continue to pay, we get appraisals, we're seeing upgrades as well. So those are obviously all good indicators.

And we not only looked at the credit debt service coverage, but we also factored in that analysis, market rate interest rates. So if they were at 3.8%, we reset them at 7% or 7.5% and underwrote those credits.

Our next question comes from the line of Chris McGratty with KBW.

Joseph or Lee, the nonaccrual comment, I think on the January call, you said by the end of the year, down 30%. Obviously, that I'm sure it didn't contemplate this quarter's move. But any degree of resolution magnitude from these levels? And secondarily, the collateral on the nonaccruals, was that the building? I assume that's the building itself, but just a little clarity there.

Yes. Chris, Wiener was not factored into those numbers, but we still are currently forecasting to go from like the $3.3 billion to around $2.7 billion by year-end. So we do see that those numbers will continue to decline. And then your question on the collateral was that regarding the borrower that went nonaccrual during the quarter?

That's right. Yes.

Those were fully collateralized predominantly by multifamily properties.

Okay. And then my follow-up, if I'm looking at Slide 9, the -- I appreciate your comments on basically going to overachieve the cost saves near term. But if I look at the kind of the medium-term cadence of the expenses, there's still a pretty good lift down by 2027 and a pretty big ramp-up in, call it, fees. Can you just give me a little bit more color on what's that next level of growth and next level of step-down in costs?

Yes. So the -- let me start with -- on the cost side. There were actions that we've executed on that are behind us now in the first quarter that you're not seeing the full benefit of in the first quarter. You'll start to see the full benefit of those actions in Q2, Q3, Q4. So you've kind of got that phenomenon, particularly around compensation and benefits.

I think you're going to continue to see the FDIC expense come down as we further deleverage the balance sheet. And so you saw another reduction in Q1 versus Q4 as the impact of what we did in Q4, you got the full quarterly impact in Q1, and you're going to continue to see that as we move forward here as well.

I mentioned that there are various real estate locations, so bank branches and PCG locations that we will be combining and exiting in the second quarter and early in Q3 and then some additional branches that we're combining at the end of Q3.

And then we've also been working on outsourcing, offshoring sort of certain back-office processes and functions. And again, some of those actions we executed on recently. And so you're not seeing the full benefit of those cost reductions in the Q1 actual run rate. And so that will start to come through as we move through the year. So that's why we feel pretty good about what we've accomplished to date from a cost reduction point of view, and why we feel good about where 2025 is going to come out from an overall NIE point of view.

And then on the fees, Joseph mentioned, we've just launched the subscription lending product, and we feel that, that -- there's a lot of pent-up demand for that. That's going to help us from a fee point of view. We're beginning to sort of see opportunities where we're leading deals. We had one recently where we were lead left to a top-tier sponsor, and it was a combined revolving credit facility term loan, delayed draw term loan, and we got an upfront fee structuring fee and admin agent fee.

And I think there's going to be more of those opportunities. We've continued to build out our treasury management team, and that's pretty much complete now, and we feel pretty good about where they are. And so all of those are driving the increase in the fee income that we adjusted for in 2025.

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

I just wanted to follow up on the margin. When I look at the average earning assets this quarter and where you expect the margin to go next year, that's at 2.5%, that kind of gets you to the NII that you're projecting for next year. So correct me, if I'm wrong, it feels like the balance sheet still has some shrinkage to go given that average earning assets still declining.

Ebrahim, we're having a tough time hearing you. You're kind of cutting in and out, I apologize. So you -- I think you're asking about the margin going forward. Is that the question you asked?

And the -- I think you mentioned the balance sheet size as well, Ebrahim.

So sorry, I'm not sure if it's any better now, but --

It's a little better.

Yes [ Technical Difficulty ]

We've lost you again.

Yes. Ebrahim, do you want to try to come back in and see if that improves it because we can't understand the question.

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

Can you hear me?

Yes, hear you fine.

All right. Great. So I'll ask Ebrahim's balance sheet question. So I think that's what he was getting at. But I think you outlined about between multifamily runoff and then pay down of borrowings and brokered about $8 billion of asset headwind. Obviously, C&I is doing well, and you have the ability to build the bond book. Just wondering where does the balance sheet end this year? When does it start net growing?

Yes. Yes. Got it. Good question. And I'm glad you asked it. So we end the year at around $96 billion. So the balance sheet -- this is total assets. The balance sheet will be about $96 billion at the end of the year. And then just to -- I'll give you the numbers. At the end of 2026, we expect it to be around $102 billion. And then at the end of '27, we expect it to be around $111 billion. So that's how I would model it, but we end '25 at $96 billion.

Understood. Great. And then Slide 5, I wanted to ask about the C&I originations. I hear you that I think you said you want to get to over $1 billion and you're certainly on your way there. I'm wondering when you guys are fully staffed and you hire these 80 or so bankers by the end of this year, what do you -- like fast forward a year, where -- what is the C&I growth when you got the full kind of team on the court?

Yes. So one clarification is we expect to get the loan outstandings up to $1 billion a quarter going forward. And then that continues to accelerate. But Lee has the exact numbers kind of -- do you want to share those?

Yes, sure. So that's exactly right. The growth, as we think about that $1 billion, it's really -- that's outstandings rather than commitments. And I think we feel that by the time we are fully staffed, we're doing about $1.5 billion a quarter in outstandings. And just so everybody is aware, when we talk about hiring these bankers, they're not all account managers. We're bringing in credit specialists. We're bringing in underwriters so that you're bringing in the entire team. And so that's also embedded in that number of 70 to 80 of hires between now and the end of the year. But ultimately, we're looking to get to $1.5 billion of outstandings on a quarterly basis.

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

Just on succession planning, Joseph, in the recent filing, it noted you'd be staying on until March 2027. And I think at a recent media article noted that after the 3 years, you'll be looking to move to Chairman role, so 5 years collectively. Can you just confirm it's accurate? And how does that fit within the time frame of transforming the business?

Really, this comes down to being a Board decision. You know what I mean, ultimately, I clearly committed to the company for a 5-year term in capacity. But I think from a succession planning as the Board starts to look at that, I think the guidance is that in 2027, we'd be looking to transition the CEO role to another person. And then I would stick around for a period of time, if the Board wants me to after that to help lead and manage the company as well.

Okay. Got it. And then maybe just as a follow-up, Lee, with the balance sheet growth numbers you gave, obviously, you're also deploying some of that excess liquidity into securities. Just any thoughts on how you're thinking about growing the securities book from here? And any thoughts on the growth that you kind of gave out? How much of that is like, I guess, loans? I'm assuming in the 4 years, it's more maybe in the recent short term, it's a little bit more in securities. So could you maybe just help give a little bit of color on that?

Yes, that's exactly right. So like I mentioned in my prepared remarks, we're looking to buy another $2 billion of securities in 2025. So that's kind of where we're going to deploy or one of the areas that we're going to deploy the cash. I think as you move into '26 and '27, it will be all about loan growth and particularly C&I growth. So that's the pivot you'll see in '26 and '27. But in '25 and the remainder of this year, yes, we're certainly looking to buy at least another $2 billion of securities with the excess cash.

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

I was hoping we could first touch on C&I, but a different way. You had mentioned in the release in your prepared remarks that there are some portions of the C&I book that are considered noncore. Could you just outline for us how much in the C&I book is noncore, what those areas are? And then remind us over the next couple of years, where you want the CRE multifamily books to be as a proportion of total loans?

Yes. So if you go to Page 6, clearly, the first category is the specialized industry and corporate banking is where we see really the significant growth. And then the specialty finance, what we've really done in that space is our comfort level for single relationships, it's very similar to what we discovered a little bit into the CRE and multifamily.

The hold levels at the legacy NYCB were significantly larger than what our comfort level is usually on a risk-rated 5 credit, which is kind of down the middle from a credit quality, $75 million hold and for a credit that's just slightly at or below investment grade, we're at $100 million. What was a lot in those portfolios, and it was a strategy of the company was in a lot of instances, they were in the $150 million to $250 million range of commitments.

And so we've narrowed and brought back our commitments in those credits down to what are a comfort zone for us. So actually, in the specialty finance, it was down roughly $180 million, we actually see that growing from that point forward. So I wouldn't say that was noncore.

And then the similar story, if you go from the second line from the bottom, the MSR and ABO lending is a very similar story. We had very large hold levels, and we're reducing our exposures at the individual relationship level. But we did have one payoff in that space of a large relationship, but the rest we do think we'll have stabilization kind of going forward in that regard.

And then the 2 other in the middle, Flagstar Financial Leasing and Flagstar Public Funding, those were really 5 or 6 businesses in that space. We've kind of stopped non-relationship activities there where we were just buying paper but had no relationships with the borrowers. And so we do also see those going positive in the second and the third quarter. So I wouldn't call them noncore as I would say, we were reducing what we thought was the risk appetite by hold levels.

Great. Okay. Very helpful. And then my last one is just a little bit of a different question, but there's been a recent discussion across the banking industry around catering to the crypto industry and stablecoin and it seems there's a much warmer welcome to the banks to participate in this industry again. New York Community once had its toe dipped in these waters, and I'm curious if you have any appetite to pursue that again and pursue deposit growth via those verticals.

Yes. I don't see us forming a specialty group or going after that aggressively that particular space. I mean, clearly, there are some companies that I would put under the general corporate banking that we would consider if given the opportunity. But I don't see that being one of the specialty businesses within the company.

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

Can you hear me?

Yes, we can hear you fine.

Joseph, I know you said you're starting to receive updated financials from borrowers for 2024. But can you share with us any early reads you've seen so far? And I guess, what I'm really trying to get at is specifically for the $19 billion or so of loans you have in rent regulated in New York, are you seeing improvements or deterioration of NOI?

Well, it's a little early to tell on that question because we haven't received the '24 financials yet. But '23 was really a rough period in the rent regulated because the increases were restricted. Occupancy is very high in those buildings, generally in the 98%, 99%. So it's like -- it's not like you're going to fill up a bunch of extra space and generate cash flow.

And really, where they got impacted was on the expense side. In most instances, insurance went up 30% to 40%. HVAC and maintenance and things like that were up 40% and labor was up 30%. So I think I'm hopeful that stabilization on the expense side over the last 12 months will be positive in the NOIs in that particular space.

So we do see investors reentering in demand for buying loans for us in that space. So I think that's an indication that investors are starting to feel more positive about the rent regulated now.

And there's been some large projects that have gotten tax abatement. The legislation doesn't -- without more change in the direction, I don't think we're going to see legislative changes, but you have seen tools that are being used to be able to make those projects more economic by providing tax abatement, but with an agreement that owners and investors will dedicate a certain amount back into the projects from a CapEx perspective.

And then for Lee, on Slide 17, that walks through the allowance by loan portfolio. What was the driver of increasing the reserves tied to C&I office owner occupied? It looks like it went up by about $30 million or 40 basis points sequentially.

Yes, it was 2 things. It was the economic forecast, as we mentioned, and it was also just some individual credits and specific credit or increases around specific credits. So those were the 2 drivers of that increase in the C&I non-specialty finance line item.

Our next question comes from the line of Steve Moss with Raymond James.

Maybe just -- on the C&I side, Joseph, just kind of curious here what kind of spreads you're getting on the new C&I loans you're originating here and if there's any deposits coming over with those relationships?

Yes. The spreads are ranging from like 2.25% to 2.75% over SOFR. So the spreads have held up pretty well in the C&I space, even in light of a lot of competition. And then what you generally see in those relationships, we are getting deposits, but most of that transitions in over a period of time. But where we have seen significant results is really on the fee side, where Lee mentioned, we're now starting to get senior leadership roles in some of these credits because the people who join us had those roles at their prior institutions. But we're very few opportunities are we willing to do where it's a credit-only relationship.

And most of those, we either are offering 401(k) or treasury management or interest rate derivative products. We have a broker-dealer so we can get bond economics. So our pricing model does not work very effective or where we're not getting noninterest income or deposits from a yield perspective. And so now we're using a new pricing model in the company that will really drive people to have to get those sales in addition to the credit sales on the front end.

Okay. Great. That's really helpful. And then in terms of just the funding side of the equation, just curious how you guys are thinking about the step down here over the course of the year in funding costs. I see your CD rates are generally marketed around the Fed funds rate and you have some other promotional products at a similar pace. Kind of like wondering at what point you think maybe we could see a little bit of separation between the rates you're offered in Fed funds as the year goes on?

Yes. So it's just one CD rate, the 6-month CD. We saw an opportunity to bring in incremental deposits. So that was kind of the one area that we sort of had the promo rate out on. We have not sort of touched the 1-year, 2-year or 3 months. As I mentioned in the prepared remarks, we have $4.9 billion of CDs maturing in the second quarter at a weighted average cost of 4.8%.

We're going to get a natural reduction there as those mature. Typically, as CDs are maturing, we're retaining about 75%, 80% of them, and then we're making up the difference with new CDs coming in. And then we've been actively managing our other interest-bearing accounts, whether those be savings, interest-bearing DDAs, money market.

Again, I mentioned in the prepared remarks, quarter-over-quarter, interest-bearing deposit costs were down 34 basis points. So it's something that we have meetings weekly on this, and we are looking at it and strategizing all the time, but we feel good about hitting the targets that we have in our forecast.

Okay. Great. And one last one for me, just in terms of the multifamily and commercial real estate books. Just curious, it kind of seems like there's going to be some stabilization maybe here late this year based on the asset size of the bank you guys are projecting. Just kind of curious if that's a fair assumption? Or should we expect further runoff in those books throughout 2026?

Yes. I think the -- you should expect further runoff because as we said before, we're trying to create a diversified balance sheet, 1/3, 1/3, 1/3. And it probably -- we probably won't quite get to 1/3 in consumer, but 1/3 C&I, 1/3 CRE and 1/3 consumer. And so what that means is, we really want to try and get that CRE book, which includes multifamily to $35 billion -- $30 billion, $35 billion. And so you will continue to see runoff throughout the 3-year period, as it relates to multifamily.

And just as a reminder, we've been running $800 million to $1 billion that Lee referenced through payoffs. And basically, we're telling borrowers where we have loan-only relationships, specifically that our desire on a maturing credit is that they would take that credit to another financial institution. And fortunately, for us, roughly half of those are substandard credits. And so we've continued to see that trend line.

Our next question comes from the line of Jon Arfstrom with RBC.

Lee, on Slide 13, just kind of a follow up. What do you think that mix looks like in a year and maybe when you get to your 2027 goals? The deposit mix?

Yes, right. So I think you -- we're obviously going to continue to pay down brokered deposits. So you will see a reduction -- more reduction in broker deposits. And I think you'll see us increase our retail and private bank deposits, and that's kind of how we're thinking about it. We're looking to build core deposits and further reduce the wholesale borrowing and reliance on broker deposits and flood advances. So I think that's what you can expect.

And on the deposit side, Joseph just made this point, as we leg into these new C&I relationships, that's another opportunity for us to bring in core deposits as well and build that deep relationship with those C&I customers.

Yes. The broker deposits now are down -- we're even further in the month of April, we're down, I think, $2.2 billion year-to-date. So that's really a big opportunity for us to use our excess liquidity to pay that down. And it helps us from an FDIC expense point of view.

Yes. Okay. Joseph, one for you, kind of a, call it, a due diligence or check the box question. But what are you guys working on now in terms of the non-client-facing activities? Do you feel like things are fully buttoned up from a risk and regulatory point of view? Or are there other hurdles or objectives you need to meet?

We've come a long way in the company. From the time we got here, the company was -- or it is a Category 4 bank. And neither of the legacy banks had the risk governance and infrastructure along those lines to be a bank of that size. I couldn't be more pleased in the direction and the rails that we now have built. And I think from now to the end of really '25 and into '26 is we're going to feel very comfortable that ourselves and our regulators are going to feel good about the risk governance structure that we have kind of put in place.

And I think the technology side is going to be very helpful. We're investing in really creating a platform. Today, we're sitting here with 6 data centers that were never consolidated, and all those actions that are kind of pent up, we're going to get done here in 2025. In addition to we're investing in an organization-wide Actimize. We're implementing a new GLBA platform.

So all of that gets done this year, and it's really stuff that should have been done in '23. And then as we got our arms around them in '24. So I think the company really is coming a long ways in that regard. And I couldn't be more happy with the team, what we've been able to put together here as far as a team of really highly qualified people to execute on those.

Our next question comes from the line of Nick Holowko with UBS.

Maybe just a first question for Lee. I know you -- and a follow-up on deposits. I know you gave a lot of color on the broker deposit mix and the CD maturities. But maybe you could just touch on the NIB trends that you had in the quarter and how you're thinking about that over the near term? And if by chance you have it, potentially the spot rate on the interest-bearing deposits or the net interest margin at the end of the quarter?

Yes. So I don't have the spot rate. But what I would tell you in terms of the trends were the -- we saw -- we were down about $300 million in the Private Bank. That was sort of seasonal in nature, but that was offset by increases in our retail deposits or consumer bank. They were up about $350 million, $400 million. And then we had a slight increase in our commercial deposits, they were up about $150 million, $200 million. So by and large, they sort of netted each other off.

The other part that netted itself out was we had the last loans transfer as a result of the mortgage sale that we executed on in Q4 of 2024. So there were about $1 billion of mortgage escrows that left, but we subsequently got an increase in what we call our SMBs area, which is predominantly mortgage escrows of a similar amount, and that was just a buildup of C&I and other escrows. That pretty much offset itself as well. And so the biggest driver of the change quarter-over-quarter was the paydown of those brokered deposits of $1.9 billion.

Got it. And then maybe just one follow-up on the single borrower nonaccrual in the quarter. I know you give color on like the average loan size in your multifamily book around $8.5 million on average. If I was to look at like the loan book on like a per borrower basis rather than a per loan, how materially different would that be? And are there -- do you have a substantial number of borrowers with similarly large exposures above the $500 million range?

Yes. We probably got somewhere between a dozen to 20 or so large relationships that are similar to this one particular borrower. And as I mentioned earlier, we've screened and scrubbed all of those looking for anything that might be similar to this one particular borrower. And we're not seeing it.

And as I say, one of the biggest factors was the additional leverage that this borrower look to achieve by pledging his equity interest. So again, we see this as a very sort of unique idiosyncratic situation.

Yes. And we're not referencing 12 to 20 borrowers over $500 million in size.

Correct.

Yes. But I would also say these aren't like huge loans to one piece of property. These are 90 loans that represent $500 million. So you can run the math on those. But -- so there are a lot of different properties with individual loans.

And I will now turn the call back over to Joseph Otting for any closing remarks.

Okay. Thank you very much. Very much appreciate your interest in the company. We couldn't be more pleased with the journey we're on. We think we've made incredible progress over the last 12 months. We think there'll be a significant amount of progress in 2025. We're going to look like a completely different company when we end the year.

As Lee indicated, all indications in our forecast and analysis is that we will return to profitability in the fourth quarter. We feel our risk elements of the company are under control, and we're really excited about what we can grow and develop the company into a top-performing regional bank.

And so we look forward to continuing to have dialogue with each of you on the journey of the company. I'm open to any dialogue and discussions that you have, and appreciate everybody being up on a Friday morning, and be part of the call.

This does conclude today's call. Thank you all for joining. You may now disconnect.