Flagstar (FLG) Q1 2026 Earnings Transcript

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Date

Friday, April 24, 2026 at 8:00 a.m. ET

Call participants

• Chairman, President and Chief Executive Officer — Joseph M. Otting
• Senior Executive Vice President and Chief Financial Officer — Lee Matthew Smith
• Director of Investor Relations — Salvatore J. DiMartino

Takeaways

• Net Income Attributable to Common Stockholders -- $0.03 per diluted share GAAP, $0.04 per diluted share adjusted, reflecting the second consecutive quarter of profitability.
• Net Interest Margin (NIM) -- 2.15% after adjusting for a $21 million one-time hedge gain in Q4, up 10 basis points sequentially.
• C&I Loan Growth -- $1.4 billion increase (9% QOQ, 12% YOY), including broad-based expansion across specialized industries, regional commercial banking, mortgage finance, and asset-based lending.
• CRE/Multifamily Portfolio Decline -- $1.6 billion reduction (4% QOQ) through elevated par payoffs, furthering diversification goals.
• Nonaccrual Loans -- Decreased by $323 million (11% QOQ) to $2.7 billion, supporting credit improvement.
• Criticized and Classified Loans -- Fell by $385 million (3% QOQ), with special mention loans rising due to proactive eighteen-month forward analysis.
• Allowance for Credit Losses (ACL) Reserve -- Down $78 million, with a coverage ratio at 1.67% (including unfunded commitments); $73 million additional ACL reserves against nonaccrual multifamily population.
• Charge-offs -- $78 million total, with $34 million related to a resolved bankruptcy (of which $30 million was previously reserved).
• Core Deposits Excluding Brokered -- Grew $1.1 billion QOQ (2%), driven by $461 million from commercial/private bank and $142 million retail increase.
• Cost of Interest-Bearing Deposits -- Lowered by 21 basis points sequentially, aided by deposit mix shift and maturity/rollover activity in CDs.
• Operating Expenses -- $441 million, down $21 million (5% QOQ), with anticipated further decline from data center consolidation and core system rationalization.
• CET1 Capital Ratio -- 13.24%, among top peer levels, described as "at or near the top of our regional bank peers."
• Investment Grade Upgrades -- Fitch and Moody's improved both long- and short-term deposit ratings to investment grade, with Moody’s maintaining a positive outlook.
• CRE Concentration Ratio -- Reduced by 134 basis points to 3.67%, supporting diversification.
• Multifamily Portfolio -- $8.8 billion in New York City loans with ≥50% rent regulated; $4.6 billion pass rated, $4.3 billion criticized/classified ($1.9 billion nonaccrual, 20% covered via charge-offs/reserves); 97% occupancy, 70% LTV.
• Total CRE Balances -- Down $13.4 billion (28%) since year-end 2023 to roughly $34 billion.
• Balance Sheet Size -- Down $400 million QOQ to about $87 billion, post $1.3 billion in deleveraging.
• Capital Distributions -- Board review targeted for 2H26, contingent on "sustainable profitability" and progress on nonaccrual loan reduction toward $2 billion target.
• Adjusted EPS Guidance -- Lowered to $0.60–$0.65 for 2026 and $1.80–$1.90 for 2027 due to CRE/multifamily runoff and lower NIM, partially offset by cost discipline.
• Asset and Deposit Guidance -- Total assets projected at $94 billion (end 2026) and $102 billion (end 2027); strategy leverages C&I, incoming CRE, and residential mortgage origination.
• Figure Technologies Investment -- $9 million markdown in Q1, but post-quarter sale of 75% position yielded a $1.8 million gain over the Q1 valuation.
• Fee Income Drivers -- Expected improvement across capital markets, syndication, swap/derivatives, gain on sale, and private bank fees; Q1 seasonally low with normalization expected.
• Data Center Consolidation -- Six legacy sites combined to two, with no disruption, positioning for further core simplification in 2027 and a $40 million run-rate cost benefit.
• Hired C&I Bankers -- 131 currently, intention to reach approximately 180 with targets of three to six deals per banker annually; 90% achieving first deal inside 90 days.
• Wholesale Borrowing Reduction -- Paid off $1 billion in FHLB advances and $300 million in brokered deposits, planning for another $2–$3 billion in FHLB paydowns in 2026.
• Nonaccrual Multifamily Coverage -- 20% of nonaccrual segment covered through charge-offs and reserves after $287 million in charge-offs and $73 million ACL.
• 2027 CRE Loan Resets -- $9 billion scheduled, including $2.9 billion with ≥50% rent regulated units; forward risk analysis now covers 75% of this cohort.
• 30–89 Day Delinquencies -- $967 million at quarter end, $493 million since brought current as of April 21.

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Risks

• Interest income and NIM face pressure due to higher-than-expected CRE and multifamily loan payoffs and lower retention of resetting loans, contributing to the downward revision of 2026–2027 EPS guidance.
• "The reduction in interest income has been partially offset by reducing provision and operating expense guidance," but lower noninterest DDA growth and a deposit mix skewed toward interest bearing accounts negatively affect NIM.
• 2027 represents a concentration of CRE loan maturities/resets at $9 billion, including significant exposure to regulated multifamily, which requires "robust" forward-looking analysis and has increased special mention loans.

Summary

Flagstar Financial (NYSE:FLG) delivered sequential profitability and improved net interest margin, while ongoing loan portfolio reshaping drove higher C&I balances and further reductions in CRE exposure. The quarter saw elevated par payoffs, a drop in criticized and classified assets, and major credit rating upgrades from Moody’s and Fitch that could support future deposit growth from institutional clients. Management adjusted forecasts for lower short-term earnings due to the accelerated pace of CRE runoff, with guidance for assets, capital, and EPS now revised, but maintained a multi-year outlook for diversification and C&I expansion. Near-term capital actions are conditioned on continued earnings consistency and the attainment of nonaccrual asset reduction targets.

• Leadership expects the Board to revisit capital distributions in the second half following demonstration of "several quarters of sustainable profitability" and additional reduction in nonaccrual loans toward the $2 billion level.
• The $1.6 billion decrease in multifamily and CRE portfolios was partially counterbalanced by robust C&I origination, with most net growth occurring late in the quarter and expected to contribute to next quarter’s results.
• Guidance assumes a non-linear replacement of runoff loans, with greater C&I growth required to offset lost CRE balances and maintain momentum.
• Updated ACL and forward-looking credit analysis incorporate aggressive stress-testing, including an assumed three-year rent freeze for regulated multifamily exposure starting October 2026; 70% rent regulation is cited as the line at which NOI impacts become material.
• Deposits grew $1.1 billion, all interest-bearing this quarter, and interest-bearing deposit costs fell 21 basis points, though leadership expresses intent to grow noninterest DDA with support from investment grade ratings.
• Capital markets, loan fee, and private banking business lines are forecast to contribute more meaningfully to fee income as recently hired leaders ramp initiatives across multiple revenue categories.

Industry glossary

• C&I: Commercial and Industrial loans, typically business loans not secured by real estate.
• CRE: Commercial Real Estate loans, financing for income-producing property such as multifamily, office, retail, and industrial buildings.
• Special Mention: Regulatory loan classification indicating potential weaknesses that warrant management’s close attention but do not yet warrant substandard status.
• Par Payoff: Loan repayment in full at face value before maturity, often without penalty, affecting loan portfolio balances.
• CD: Certificate of Deposit, a time deposit with a fixed maturity and interest rate.
• FHLB: Federal Home Loan Bank, a system of regional banks providing liquidity to financial institutions.
• SOFR: Secured Overnight Financing Rate, a benchmark interest rate for dollar-denominated derivatives and loans.
• ACL: Allowance for Credit Losses, the reserve set aside for expected losses on loans and leases.
• CET1: Common Equity Tier 1, a regulatory capital metric representing core capital as a percentage of risk-weighted assets.
• DDA: Demand Deposit Account, typically a noninterest or low-interest checking account.
• HFI: Held-for-Investment, loans carried at amortized cost (not intended for sale).
• RMBS: Residential Mortgage-Backed Securities, securities backed by pools of residential mortgages.
• CMO: Collateralized Mortgage Obligation, a type of mortgage-backed security with tranches.

Full Conference Call Transcript

Operator: 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, Inc. First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Salvatore J. DiMartino, Director of Investor Relations. Please go ahead.

Salvatore J. DiMartino: Thank you, Regina, and good morning, everyone. Welcome to Flagstar Financial, Inc.'s First Quarter 2026 Earnings Call. This morning, our Chairman, President and CEO, Joseph M. Otting along with the company's Senior Executive Vice President and Chief Financial Officer, Lee Matthew Smith, will discuss our results for the quarter. During the call, we will be referring to a presentation which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the Investor Relations section of our company website ir.flagstar.com.

Also, before we begin, I would like to remind everyone that certain comments made today by the management team of Flagstar Financial, Inc. may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. Additionally, when discussing our results we will reference certain non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliation of these non-GAAP measures.

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

Joseph M. Otting: Thank you, Sal. Good morning, everyone, and welcome to our first quarter 2026 earnings conference call. We are pleased to report another quarter of solid progress and continued momentum across our core banking franchise. Our first quarter performance reflects continued improving fundamentals, strong C&I growth, a high level in growth of core deposits, further progress in reducing the level of nonaccrual and criticized/classified loans, continued margin expansion, and industry-leading capital levels. Just as importantly, our first quarter results demonstrate we are executing on the strategy we laid out two years ago, delivering against our priorities.

We are doing exactly what we set out to do: strengthening our earnings profile, improving the quality of our balance sheet, and building a top performing regional bank. The progress we are making is intentional and driven by a clear focus on disciplined execution. Now turning to the slides. Slide number three of the investor presentation, I would like to highlight some of the key performance factors and drivers during the quarter. First, disciplined expense management has been a hallmark of our return to profitability over the past two years. And in the first quarter, operating expenses continued to decrease and we expect them to decrease in 2026 and 2027.

We also had another quarter of net interest margin expansion driven primarily by lower funding costs. Second, one of our key growth strategies is to diversify our loan portfolio by increasing our C&I lending platform. This quarter marked the third consecutive quarter of C&I loan growth, after us reducing our exposure to certain industries, lowering our single transaction exposures, and exiting certain relationships that did not meet our return hurdles. And we have done this throughout 2024 and part of 2025.

Third, we experienced a further reduction in our overall CRE exposure mostly through par payoffs resulting in the multifamily and CRE portfolios declining by $1.6 billion or 4% relative to the fourth quarter and further improvement in our CRE concentration. Fourth, we continue to see positive credit migration as nonaccrual loans declined by 11% and criticized and classified loans decreased by 3%. Additionally, we ended the quarter with a robust CET1 capital ratio of 13.2%. In terms of future capital distributions, our focus first is on demonstrating several quarters of sustainable profitability and continued improvement in our nonaccrual loans, and flexibility to support our anticipated loan growth.

We expect the Board to take action in capital distributions in the second half of the year. Finally, I would like to highlight two other milestones during the first quarter. We were very pleased that Fitch and Moody's upgraded the bank's long-term and short-term deposit ratings to investment grade with a positive outlook. And when we filed our 10-K in late February, we disclosed that the previously material weakness in internal controls had been remediated. Both of these milestones reflect the tremendous effort, dedication, and hard work of our entire team. On the next couple of slides, we spotlight the significant progress we continue to make in our C&I lending businesses.

During the quarter, C&I loans grew by $1.4 billion or 9% on a linked quarter basis, significantly higher than in prior quarters. On slide four, we go into detail on the trends in our C&I portfolio. While the first quarter is typically a seasonally slow quarter for originations, you can see on the left side of the slide that our originations were essentially flat compared to the fourth quarter. We also will note that the pipeline remains strong, and we expect second quarter funding for C&I to be similar to Q1. On the right side is the five quarter trend in the C&I portfolio.

After bottoming in the second quarter of last year, we have had steady growth and in the first quarter, C&I loans grew by the $1.4 billion, up 9% compared to the fourth quarter and year-over-year 12%. The next slide provides quarter-over-quarter growth by loan category. While the majority of the growth was driven by our two main strategic focus areas, specialized industries lending and corporate and regional commercial banking, this quarter growth was broad based with growth also occurring in the mortgage finance and asset-based lending verticals. Now turning to slide six, you can see the trends in our adjusted diluted EPS, whereby we have now reported two consecutive quarters of EPS growth by executing on all our strategic initiatives.

On an adjusted basis, we went from $0.03 in the fourth quarter to $0.04 during Q1. One other positive note I would like to make is that during the first quarter, we completed the consolidation of our six legacy data centers into two colocation centers with no disruptions neither to the organization nor any of our customers. This positions us well in 2027 to have the baseline and platform for our core conversion with ultimately the goal in 2027 to get onto one core. I will now turn it over to Lee to review our financials and credit quality.

Lee Matthew Smith: Thank you, Joseph, and good morning, everyone. We are very pleased with another quarter where we continue to execute our strategic vision to make Flagstar Financial, Inc. one of the best performing regional banks in the country. We were profitable for the second consecutive quarter following the bank's return to profitability in the fourth quarter. More importantly, we made real progress against key initiatives that drive our financial forecast. We achieved net C&I loan growth during the quarter of $1.4 billion, significantly higher than previous quarters, following the origination of $2.6 billion in new C&I loans of which $2 billion was funded.

As we have discussed, net C&I growth in previous quarters was muted as we right-sized legacy C&I positions within the portfolio. Most of this is behind us, and you are now seeing the growth from new originations materialize into net loan growth. NIM expanded 10 basis points after adjusting for the one-time hedge gain of approximately $21 million in Q4. Furthermore, much of the new C&I growth occurred towards the end of Q1, meaning the full benefit of these newly originated loans will be felt in Q2 and beyond. Core deposits excluding brokered grew $1.1 billion and we reduced deposit costs by 21 basis points.

We paid off another $1 billion of FHLB advances and $300 million of brokered deposits, as we further reduced our reliance on high-cost wholesale funding. Despite this deleveraging of $1.3 billion our balance sheet only decreased $400 million quarter over quarter. CRE and multifamily payoffs were again elevated at $2.7 billion of which were par payoffs, and 42% of these par payoffs were rated as substandard loans. We resolved the situation with the one borrower that was in bankruptcy and reduced our nonaccrual loans by $323 million, while substandard loans decreased almost $700 million, meaning we reduced nonaccrual and substandard loans over $1 billion quarter over quarter.

Our ACL reserve decreased $78 million primarily driven by lower CRE and multifamily loan balances. Operating expenses were again well contained at $441 million, a decrease of 5% quarter over quarter, and we ended the quarter with 13.24% CET1 capital, at or near the top of our regional bank peers. We were also thrilled to be upgraded by both Moody's and Fitch, particularly given that both agencies returned our long- and short-term deposit ratings to investment grade, as we continue to execute on our strategic plan, exactly as we said we would. Now turning to slide seven. We reported net income attributable to common stockholders of $0.03 per diluted share.

On an adjusted basis, we reported net income attributable to common stockholders of $0.04 per diluted share. First quarter was a relatively clean quarter with only one adjustment. Our investment in Figure Technologies, which decreased in value during the first quarter by $9 million based on its closing stock price as of March 31. Subsequent to the end of the quarter, we have sold out of approximately 75% of our Figure position at a gain of $1.8 million compared to our March 31 mark. On slide eight, we provide our updated forecast for 2026 and 2027. We have adjusted our interest income guidance downward for both years as a result of increased CRE and multifamily payoffs, paydowns, and amortization.

This is both good news and bad news, as it accelerates our diversification strategy and reduces our CRE exposure, but also reduces interest income and NIM in the short term. Also, we are seeing fewer resetting loans staying on our balance sheet. We are currently retaining 35% to 40% of resetting loans, versus 50% previously. Again, while this accelerates our overall diversification strategy, it reduces short-term net interest income and NIM temporarily, and until we replace it with new C&I, CRE, or consumer growth.

In order to retain some of the higher quality relationship CRE runoff in the future, with assumed spreads off of SOFR in the 175 to 225 basis point range versus that contractual option of 275 to 300 basis points off a five-year FHLB. Lower noninterest-bearing DDA growth in Q1. Deposit growth in Q1 was all interest bearing which was positive, particularly as we also reduced interest-bearing deposit costs 21 basis points quarter over quarter. We believe the current rating agency upgrades will help us garner more noninterest-bearing DDAs going forward, but as it has been pushed out, it impacts net interest income and NIM.

We expect total assets to be approximately $94 billion at the end of 2026, and $102 billion at the end of 2027 as a result of net loan growth. The reduction in interest income has been partially offset by reducing provision and operating expense guidance. Adjusted EPS is now forecast to be in the $0.60 to $0.65 range in 2026 and in the $1.80 to $1.90 range in 2027. Slide nine depicts the trends in our net interest margin over the past five quarters. We continued to post steady quarterly improvements in NIM driven largely by lower funding costs.

First quarter NIM increased 10 basis points quarter over quarter to 2.15%, after adjusting for the recognition of a one-time hedge gain of $21 million in the fourth quarter. Turning to slide 10. Our operating expenses continued to decline reflecting our focus on cost containment. Quarter over quarter, operating expenses declined $21 million or 5%. Slide 11 shows the growth in capital over the last few quarters. At 13.24%, our CET1 ratio ranks among the top relative to other regional banks. And we have about $1.6 billion in excess capital after tax relative to the low end of our target CET1 operating range of 10%. The next slide provides an overview of our deposits.

Core deposits, excluding brokered, increased $1.1 billion on a linked quarter basis, or about 2%. This growth was primarily driven by growth in commercial and private bank deposits of $461 million and retail deposits, which were up $142 million. As in past quarters, during the current quarter, we paid down $300 million of brokered deposits with a weighted average cost of 4.76%. In addition, approximately $5.3 billion of retail CDs matured during the quarter, with a weighted average cost of 4.13%, and we retained 86% of these CDs as they moved into other CD products with rates approximately 35 to 40 basis points lower than the maturing products.

In the second quarter, we had $4.8 billion of retail CDs maturing, with an average cost of 3.98%. Also during the quarter, we further deleveraged the balance sheet by paying down $1 billion of FHLB advances with a weighted average cost of 3.85%. The deleveraging, CD maturities, and other deposit management actions led to a 21 basis point reduction in the cost of interest-bearing deposits quarter over quarter. Slide 13 shows our multifamily and CRE par payoffs, which were again elevated this quarter at $1.1 billion of which 42% were rated substandard. These payoffs are resulting in a significant reduction in overall CRE balances and in our CRE concentration ratio.

Total CRE balances have decreased $13.4 billion or 28% since year end 2023, approximately to $34 billion, aiding in our strategy to diversify the loan portfolio to a mix of one third CRE, one third C&I, and one third consumer. Additionally, the par payoffs have helped lower our CRE concentration ratio by 134 basis points to 3.67%. The next slide provides an overview of the multifamily portfolio, which declined $5.5 billion or 17% on a year-over-year basis, and $1.1 billion or 4% on a linked quarter basis. The reserve coverage on the total multifamily portfolio was 1.83% and remains the highest relative to other multifamily focused lenders in the Northeast.

Additionally, the reserve coverage on these multifamily loans where 50% or more of the units are rent regulated is 3.2%. Currently, there are $11.9 billion of multifamily loans that are either resetting or maturing through year end 2027, with a weighted average coupon of approximately 3.75%. Moving to slides fifteen and sixteen, we have again provided detailed additional information on the New York City multifamily portfolio where 50% or more of the units are rent regulated. At March 31, this tranche of the portfolio totaled $8.8 billion, down 4% compared to the previous quarter, and has an occupancy rate of 97% and a current LTV of 70%.

Approximately 52% or $4.6 billion of the $8.8 billion are pass rated loans, and the remaining 48% or $4.3 billion are criticized or classified, meaning they are either special mention, substandard, or nonaccrual. Of the $4.3 billion, $1.9 billion are nonaccrual, and have already been charged off to at least 90% of appraised value, meaning $287 million or 15% has been charged off against these nonaccrual loans. Furthermore, we also have an additional $73 million or 5% of ACL reserves against this nonaccrual population, meaning we have taken 20% of either charge-offs or reserves against this population.

Of the remaining $2.7 billion that are special mention/substandard loans, between reserves and charge-offs we had 5.8% or $154 million of loan loss coverage. We believe we are adequately reserved or have charged these loans off to the appropriate levels. And with excess capital of $2.2 billion before tax, we think we are more than covered were there to be any further degradation in this portion of the portfolio. Slide 17 details our ACL coverage by category. The $78 million reduction in the ACL was largely driven by lower CRE and multifamily held-for-investment balances. Our coverage ratio, including unfunded commitments, was at 1.67% at quarter end.

On slide 18, we provide additional details around credit quality, which trended positively during the quarter. Nonaccrual loans totaled $2.7 billion, down $323 million or 11% compared to the prior quarter. Criticized and classified loans also declined, decreasing $385 million or 3% compared to the prior quarter. During the quarter, we did see an increase in special mention loans as a result of our comprehensive and prudent process that analyzes in detail all loans with a reset or maturity date eighteen months out. Eighteen months from 03/31/2026 is September 2027, and 2027 is our largest reset year where nearly $9 billion CRE loans either reset or mature.

This amount includes approximately $2.9 billion of multifamily with 50% or more of these units rent regulated. As part of this internal forward-looking process, we have applied the relevant pro forma contractual interest rate calculations and adjusted risk ratings accordingly. Three items I would note. We are now 75% through analyzing the entire 2027 cohort. The results of this analysis are reflected in our ACL, and we continue to see significant substandard par payoffs each quarter. At the end of the quarter, 30–89 day delinquencies were approximately $967 million, a decrease of $19 million from the previous quarter.

As mentioned last quarter, the biggest driver of this delinquency number is the additional day in March when calculating delinquencies of precisely thirty days. As of April 21, approximately $493 million of these delinquent loans have been brought current. We continue to deliver on our strategic plan and are excited about the journey we are on and the value we will create for our shareholders over the next two years. With that, I will now turn the call back to Joseph.

Joseph M. Otting: Thank you very much, Lee. Before moving to Q&A, I wanted to add that we are encouraged by our continued progress made in the first quarter and remain focused on driving sustainable profitability, improving returns, and delivering long-term value for our shareholders. With continued improvement in credit trends, solid loan and deposit growth, and strong capital levels, we believe that Flagstar Financial, Inc. is well positioned in 2026. In addition, I would like to thank our board of directors, our executive leadership team, and all the teammates at Flagstar Financial, Inc. for their dedication and commitment to the organization and our customers.

And, operator, with that, I would be happy to turn it over to you to open the line for questions.

Operator: We will now begin the question and answer session. To ask a question, press star then the number one on your telephone keypad. We ask that you please limit your initial question to one and return to the queue any additional follow-up questions that you might have. Our first question will come from the line of Christopher Edward McGratty with KBW. Please go ahead.

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

Lee Matthew Smith: Yeah. So it is a little bit balance sheet and then a little bit the additional payoffs of the CRE and multifamily book. So as I mentioned, the balance sheet at the end of 2026 will be about $94 billion, $102 billion at the end of 2027. So we are assuming a slight reduction versus what we had previously guided to, sort of in that $500 million to $750 million range. But if you look at Q1, we did see $1.6 billion of par payoffs, paydowns and amortization in that CRE and multifamily book. And as I mentioned in the prepared remarks, it is both good news and bad news.

The good news is it is allowing us to get to our diversified strategy more quickly of a third, a third, a third. But it does impact short-term interest income and NIM. And that is what you are seeing. So we think that we will be able to use the funds from those par payoffs to further grow the C&I, the consumer, and originate new CRE loans, but it sort of pushes everything out. So that is one of the items that is impacting the NIM. I think some of the better quality CRE loans that we would look to retain, we will be pricing those off the spreads to SOFR in the 1.75% to 2.25% range.

And that is obviously a lower rate than the contractual reset which is five-year plus 300. And we have deliberately left that contractual rate in place because, as you know, Chris, we have been trying to reduce our exposure to those CRE multifamily assets where we are overweight and there is higher risk. So that is obviously working. And then we are seeing, as a result of that, fewer loans that are resetting staying with us. We were originally in the 50% range. It is now in the 35% to 40% range. And then the final piece that I mentioned was we saw very strong deposit growth in the quarter, $1.1 billion. Very pleased with that.

It was all interest bearing. We would like to see more noninterest-bearing growth. We think that will come with the rating agency upgrade. But that sort of pushes, it affects NIM in the short term, and it sort of pushes everything out. So it is a combination of those items that you are seeing just bring the NIM down, you know, 10 or 12 basis points.

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

Joseph M. Otting: Yeah. So, Chris, what we have been fairly consistent saying is we wanted the company to demonstrate consistent quarterly earnings. And, you know, our goal is, obviously, we feel that will occur now as we have turned the corner in the fourth quarter and then the first quarter. So that is one of the legs of the stool. The second would be, you know, our goal is to get the nonperforming assets down to $2 billion by the end of the year. And so that was kind of the second leg of that. And continue to make progress from roughly the $2.6 billion level that we are at today.

And then the third is just understanding how much growth we can have in the C&I portfolio and balancing that against the CRE payoffs. You know, I would say the way we look at that is the CRE payoffs have been greater than we expected, but the C&I originations have also been more. And we do see some acceleration in the C&I occurring not only in our pipelines, but as we add more people into the various industry specializations and geographic strategy, that we actually think that will continue to grow.

And so when you take those kind of three factors into account, it was always management's intention to have a good insight to that through the second quarter, and then have dialogue with the Board on capital actions going forward.

Operator: Our next question will come from the line of Jared David Shaw with Barclays. Please go ahead.

Jared David Shaw: Good morning. Sticking with margin, but for this year, we look at loan yields this quarter, I guess that was a little bit weaker than we were expecting. Anything that you are seeing there that we should call out and then just sort of as we look at the pace of margin expansion for the next few quarters, how is the loan yield playing into that?

Lee Matthew Smith: Yeah. Well, if you look at the actual asset yield, it was not down that much quarter over quarter when you consider that there were two rate reductions in the fourth quarter. That is what I would say. The reduction was twofold. So in terms of the interest income, you have got what I just mentioned. We had more payoffs and paydowns as it relates to that CRE and multifamily book, which we think is a good news story, but it does impact that short-term interest income and NIM. And remember, you do need to adjust in Q4 for that hedge gain of $21 million, which was included in interest income and NIM.

So when you adjust for that, the NIM was 2.05% in Q4, increasing 10 basis points to 2.15% in Q1. The other thing that I would point out, and I alluded to some of these in my prepared remarks, Jared, when you think of the $1.4 billion of net C&I growth in the quarter, I would say $600 million of that came right at the end of the quarter in the last week or ten days. So you are not seeing any pickup in NIM and interest income in Q1 as a result of that, but you will see that flow through in Q2 and beyond.

The other part of it is the borrower that was in bankruptcy that got resolved on March 31, the last day of the quarter. So you have got a significant amount of loans coming off of nonaccrual and then a new accruing loan that is coming on. You did not see any benefit of that in the first quarter because it occurred on the last day of the month and the quarter. You will see that flow through in Q2 and beyond. And I would just point out the net C&I growth of $1.4 billion in the quarter, we feel that we can continue at least at that run rate throughout this year.

And we have been talking about growing C&I, and people have been asking what do we think we can do, and I think this is the first quarter where we are really showing the power of everything that Joseph and Rich have built, and what those bankers are doing on the C&I side.

Jared David Shaw: Thanks. And then if I could just ask quickly one more. You, in the past, talked about adding cash and securities. I think it was about $2 billion to $4 billion. Is that still what is sort of the path forward on cash and securities balances with the broader backdrop?

Lee Matthew Smith: Yeah. I think as you look forward in 2026, you will probably see our cash position come down a couple of billion. We will be buying more securities. I think you can expect us in Q2 to be buying at least $1 billion to $1.5 billion of securities, and we would look to get that securities balance back up to probably, you know, $16 billion or so as we move into the second half of 2026. The securities we are buying, as I have said before, are pretty vanilla: short duration RMBS and CMOs. But it gives us an additional lever should we need to create more cash to let some of those securities run off.

But a lot of it, as well, remember, Jared, is governed by what are the par payoffs because as we are seeing those CRE and multifamily loans pay off, that is generating cash and, you know, we have got the option to grow the securities or pay down wholesale borrowings, and you saw us pay down another $1.3 billion of expensive wholesale borrowings in the quarter between FHLB and brokered deposits.

Operator: Our next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.

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

Joseph M. Otting: Sure. Let me take that. On Moody's upgrade on the deposit, as we obviously look to bring on new relationships, and roughly, you know, there were 75 new relationships that came in the first quarter, as part of our strategy, obviously, is to make those both depository and fee income relationships in addition to loans. And in not so much in the middle market but in the lower end of the corporate market where we are focused on, a lot of those companies have in their bank or their investment policy that the bank had to have an investment grade rating generally from Moody's or an S&P rating to be able to exceed the FDIC insurance levels.

And so that rating is very important to that strategy as we look to penetrate and gain operating accounts that often exceed those dollar amounts. And so we think that is a turning point, so to speak, for us, of our ability to gain sizable new deposits with the relationships that we are bringing into the institution. And so we think that will be significant for us as we move forward in that strategy. And I will turn over the expense question to Lee and let him answer that.

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

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

Joseph M. Otting: Yeah. So, you know, obviously, closing six data centers and getting into two colocation was really positive for us. It was reflected in our expense forecast for this year. Next year, we do today run two cores where we have two of the legacy organizations on one core provider and one on a third. It is our intent by July to be out of one core. And on a run-rate basis, we believe when that gets completed, it is roughly a $40 million decrease in expenses for the company.

Operator: Our next question will come from the line of David Chiaverini with Jefferies. Please go ahead.

David Chiaverini: Hi, thanks for taking the question. So wanted to drill into credit quality a little bit. Trends continue in the right direction with criticized and classified loans trending lower. Can you talk about your expectations going forward with these loans? Do you expect a continued downward trend? And any surprises you have observed, either good or bad, as these loans have matured or reset?

Lee Matthew Smith: Thanks, David. Yes. No, we do not expect any surprises. Let me address that in the first instance. And we continue to see continued reduction of criticized and classified. As Joseph mentioned, we are on track to reduce nonaccruals by $1 billion this year, and we saw a nice reduction in Q1. And we believe that will continue throughout 2026. And that is obviously accretive from both an earnings and a capital point of view because those nonaccruals are 150% risk weighted. We continue to see a lot of liquidity around the multifamily loans.

And that is why of the $1.1 billion of par payoffs in Q1, 42% was substandard, and that is consistent with the trend that we have seen for multiple quarters now. So we expect to continue to see a reduction in the substandard loans. And then I mentioned the special mention loans had increased this quarter because we are doing that very comprehensive eighteen-month look forward of all loans that are maturing or resetting in the next eighteen months. 2027 is our biggest reset/maturity year. There is $9 billion that is resetting and maturing. So we are three quarters of the way through that analysis and by the end of Q2, we will be all the way through 2027.

And, again, everything, even though there was an increase in special mention loans, given the reductions in the other categories, given the reduction in CRE and multifamily HFI balances, is all reflected within our ACL reserve. And the final point I would like to add is on the charge-offs, as you brought up credit, David. So charge-offs were $78 million this quarter versus $46 million last quarter. However, $34 million of what was charged off related to the one borrower that was in bankruptcy. And of that $34 million, $30 million was already fully reserved. So there was an incremental $4 million related to that bankruptcy, really just sales costs that we needed to take.

And if you subtract that $34 million from the $78 million, you are basically at $44 million of net charge-offs versus $46 million last quarter, which is about 30 basis points. So we are consistent from a net charge-off basis, and we expect that trend to continue next quarter as well.

Joseph M. Otting: Yeah. And, hey, David. The one other thing that I would add—I think Lee did a good job at describing that—is when we do that look forward, 99% of those loans today are current in the special mention category. So if you called those borrowers up, they would say, well, I have never missed a payment. But what we do in that eighteen-month look forward is we apply the current rate that they would incur if that loan matured today. And then we analyze that cash flow and make a determination where does their cash flow sit against a fixed charge coverage or cash flow coverage on the property.

And so if your property is at 3.5% today, and you take it up to 6.5% for our contractual rollover, that is what is causing those loans to look slightly impaired when actually that is really a forward look to those with pretty punitive interest rates.

David Chiaverini: Helpful. And sticking with this theme, can you provide us with your latest views on a potential rent freeze and the impact this could have on your portfolio?

Lee Matthew Smith: Yes, absolutely. So we have modeled out a rent freeze—three-year rent freeze—occurring all starting 10/01/2026. A couple of other assumptions that I would add: we also assume as part of this analysis that operating expenses increased 2.75% per annum—think about that as being inflationary—and we also assume that the market units, so the non rent-regulated units, are able to increase their rent 2.1% per annum. So here is what we found when we ran that analysis. Anything that is 70% or less rent regulated, there is no impact to the NOIs. And the reason for that is the rent freezes on the rent regulated units are offset by increasing the rent on the market or non rent-regulated units.

So 70% is sort of the demarcation line. Anything that is above 70% rent regulated, there is an impact to NOI over that time horizon—the three-year time horizon—of about 7% or 8%. And if you look at the rent regulated slides that we have in the earnings deck—so the earnings deck shows everything that is more than 50% rent regulated—and we have $8.8 billion. But $4.6 billion is pass rated with an amortizing DSCR of 1.5. So those borrowers would be able to absorb the rent freezes and impact on NOI. Then when you look at the criticized and classified which is $4.2 billion, we have taken significant charge-offs.

So between charge-offs and ACL reserves, we have taken over $500 million of charge-offs and we have reserves against that population. So we believe that we are more than covered, given when we re-underwrote that book in 2024 and we took over $900 million in charge-offs and we increased our ACL reserves. We believe we are more than covered given what we have already done. A couple of other things I would point out, though, on this. It is not just about the rent freeze. As you know, we are getting annual financial statements from these borrowers and looking and digging into those.

We are doing a deep dive on everything that is maturing in the next eighteen months, and we undertake a robust analysis on all of those loans. We are reviewing things like the worst landlord list, and lien and violation list, and we do not have much exposure there. A lot of our borrowers, as you know, these are families where the properties have been with them for years. So they have a low cost basis, or they benefited from the 1031 tax rollover. So we do not have any REO on our balance sheet.

And if there was an issue, it would be showing up in our charge-offs and ACL reserve, which, as we have just been through, you are not seeing. And the final thing I would add is there is still an incredible amount of liquidity for this asset class, as we have seen from our quarterly par payoffs and as we saw again this quarter as well.

Operator: Our next question will come from the line of David Charles Smith with Truist Securities. Please go ahead.

David Charles Smith: Good morning. Big picture, you obviously took your 2026–2027 earnings guidance a bit lower. Do you just view this as a delay and push out of your expectations by a couple of quarters? Or has anything changed at all about your medium and long-term profitability expectations for the bank?

Lee Matthew Smith: David, you are spot on, and that is exactly right. Joseph and I were having this conversation. If you look at our thesis and everything we are doing, we are executing against our strategy. And all this does, worst case, is maybe pushes things out one quarter or two quarters. And let me tell you what I mean by that. Because we are seeing increased paydowns or payoffs of that CRE multifamily, maybe we just need one more quarter of two-plus billion net C&I growth for two quarters. So everything is intact. Those reset and maturity dates—we know they are coming. We just need to sit here and be patient. It is just time.

And worst case scenario, maybe you are just looking at a quarter or two. So I think you have hit the nail right on the head there.

David Charles Smith: Thank you. And then the change in assumption on multifamily loan repricing to 1.75% to 2.25% over SOFR instead of 300 over the five-year—does that have any impact on credit as you do the eighteen-month look forward on loans resetting?

Lee Matthew Smith: Yeah. So let me just clarify that. The contractual resets, we are sticking by. So anything that is resetting or maturing—or really resetting—the contractual term is five-year plus 300 or prime plus 275. We are not wavering off that, and we have not wavered off that. All we are saying is if there are better quality CRE loans within our portfolio—maybe it is in the builder finance arena, or maybe it is in a non-office CRE where there is a deposit relationship, it is a strong credit—then we probably need to, in order to retain them, move to a market rate which would be SOFR plus 1.75% to 2.25%.

So that is all we are saying, that we will be very selective in only selecting those credits that are extremely high quality, and we think that there is either an existing or the potential for future relationship.

Joseph M. Otting: Yeah. Hey, David. One point I think you were perhaps asking there was, like, when we are doing that forward look, and we are applying our contractual rate, we probably are 75 basis points over the market when we do that analysis. That would perhaps push some of the loans into the special mention category that, if you used strictly market rate in that analysis, you would not see as many special mention credits.

Operator: Our next question will come from the line of Dave Rochester with Cantor. Please go ahead.

Dave Rochester: Good morning, guys. Appreciate the comments on the board meeting coming up and your thoughts on just capital deployment in general. You called out the $1.6 billion of excess capital above the bottom end of your target capital range. You talked about that for a quarter or two now. I was just curious how you are looking at that excess capital because we have seen some banks manage that down to their targets fairly quickly. Now that we have some clarity with the capital proposals, you have got more loan growth that is ramping up through the end of this year. Obviously, that is going to be improving profit and whatnot, you will want to save capital for that.

But are you in a situation now where you could easily just save half of that excess and dedicate that to the loan growth that you are expecting over the next couple of years, and then take the other half and pay that out over the next couple of quarters? How are you thinking about getting to your targets, more so in terms of timing?

Lee Matthew Smith: Yeah. Well, great question. And, look, I think we are in the fortunate position—what is sort of ironic is if you turn the clock back eighteen months ago, people were asking if we had enough capital, and you sort of fast forward to where we are today, and again, because of the great work that the Flagstar Financial, Inc. team has done, we are in this situation where people are asking what are you going to do with all the capital. We are in the fortunate position where we can do both. We can grow and we can obviously execute on capital actions later in the year as Joseph alluded to.

I think also what Joseph said is exactly what we are looking to do here, which is the consistent profitability, and we have now had two quarters of profitability. So we are on the right track. We want to see those problem loans come down. We had a nice quarter in Q1. And so we want to see more of that. And then the organic growth on the C&I side, and you are really beginning to see that come through as you saw in Q1 with $1.4 billion of net C&I growth. But we can do both. And you mentioned the new capital rules and the Basel III proposal.

We have analyzed that, and we believe that will give us an additional 60 to 80 basis points of CET1. So that is all in the risk weightings. And, again, that is something that would be very helpful to us as well. But, yeah, we have optionality and we are able, I think, to grow and we are able to take capital actions. We just want to prove out the consistent profitability, as you have seen, and see a little bit more reduction in those problem loans.

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

Lee Matthew Smith: Yeah. Let me start with the bankers. First of all, I just want to compliment the job and the work that Rich and those bankers are doing. They have been phenomenal, as you can see from the net C&I growth in Q1. And, again, this is very granular. The average loan size is in that $20 million to $30 million range in Q1. The average spread to SOFR actually went up. It is actually 242 basis points, and we have got just over 70% utilization. So doing a tremendous job. Today, we have 131 customer-facing C&I bankers. I think Rich would like to get to probably more like 180.

So I think he has probably got another 40 to 60 to go in terms of new hires. As we said before, our expectation—and these are all seasoned bankers that know Joseph, know Rich—our expectation is that they are on their first deal within ninety days. And then they are doing, on average, three or four deals in their first year, five or six deals a year thereafter. And I think if you sort of do the math on that, that is how we are getting to the C&I growth that we have alluded to, and you saw that come through in the first quarter.

And then the second part of the question—yeah, as I mentioned, a lot of the tall trees, as we referred to, where we had outsized exposure to single names, we are mostly through that. And if you look at the page earlier in the deck, you can see that we really did not have anywhere near as much runoff in those legacy equipment finance/asset-based lending categories. There was a little bit of a swap between the two, so there may be a little noise there.

But on a net basis, there was not much runoff at all, and we feel that you will start to see those areas grow, which will then complement what we are doing with the national lending verticals, the specialty verticals, as well as what we are doing from a middle and upper C&I market point of view going forward as well.

Joseph M. Otting: Yeah. The other thing—I know, obviously, Lee here on the spot—we have assembled really an incredible team in the C&I space that have come to the company in that 20- to 25-year experience level across both geographic markets and industry specialization. Our focus really is in that $20 million to $75 million range type credit size. And that gives us the ability both to scale quickly, but also clients that use a lot of bank products and services that gives us cross-sell opportunities.

So I would say, I think if Rich was here, he would say probably 90% of the people are hitting that first deal in ninety days, with a number of them far exceeding that kind of production level. So it has really been an impressive story and, you know, I think if you had to assess where we are, I think we are sliding into second base on that overall strategy. So we really do continue to see good market expansion, good growth in both adding people and those people that have now been in the company for six to nine months are really hitting their stride.

I commented in my comments that we really expect to be at or above the production level for Q2 to what we have done in Q1. And we actually were pretty hot coming out of the box this quarter with new closings that may have tried to get done in the first quarter leaked over into the second quarter. So the opposite of what we had in the first quarter is we had a really strong March on closing. We actually came out of the box really hot in April, and so we look for this to be an exceptional quarter.

Operator: Our next question comes from the line of Anthony Elian with JPMorgan. Please go ahead.

Anthony Elian: Hi, everyone. Lee, on fee income, you reduced slightly the 2026 outlook but it still implies a material step up for the rest of this year to hit that range. Talk to us about the areas you think will drive the increase in February and beyond.

Lee Matthew Smith: Yes, sure. Good morning, Anthony. So a couple of things on the fee line. First of all, and you probably already have, but I want to make sure people are adjusting for the Figure gains/losses because that is in the noninterest fee income section. So we had a $9 million gain in Q4, and then we reduced the valuation and effectively you saw a $9 million degradation in Q1. So that is an $18 million swing quarter over quarter. So I just want to make sure people are capturing that. But we think that it is really all of the line items.

So capital markets, syndication income, swap and derivatives—we hired a new head of capital markets towards the end of last year, and he is just starting to get his feet under the table, and we feel pretty excited about some of the things that we are seeing there. As we originate more loans, we expect unused loan fees to increase. We have some SBIC investments. The returns were slightly down in Q1 versus normal quarters, and we expect that to return to normal as we move forward. Q1 is seasonally low for mortgage gain on sale, and we would expect gain on sale to increase as you move into Q2 and beyond.

And then the CRE fee income should increase as we start originating new CRE loans. The consumer overdraft and service charges should increase. We think net loan fees/charges, deposit fees will increase. And we have said before, of the things that we identified that was happening was we were waiving a lot of fees in the private bank, and we are gradually reducing the amount of fees that we have been waiving in the private bank. So it is not one area in particular. We expect to drive fee income across all categories and all parts of our business model.

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

Lee Matthew Smith: Yeah. No. It is a fair question. I would tell you that what people, I think, need to appreciate is there are more moving parts to this model than probably any other bank out there, especially banks that are mature, because you are dealing with par payoffs, paydowns, new originations. We are in growth mode. You are dealing with reductions in nonaccrual loans. And they are lumpy. It is not linear. We are looking to pay down wholesale borrowings, reduce the cost of core deposits. There are more moving parts to this story than any other bank out there. We are moving in the right direction. But to be absolutely precise on every single one of those—it is not easy.

And so, you know, we feel based on the guidance that we have provided that this is the best look that we have today. But could par payoffs or paydowns increase? Sure. We have got strategies in place, as I have mentioned, for the better quality loans to try and retain them. But there is a lot of moving parts. I think what I would look at is the bigger picture. And as Joseph and I have both said, we are doing exactly what we said we would do in executing on our strategy. And the worst case here is maybe it pushes things out one or two quarters into 2028.

So instead of 2027, it is when we get there in 1Q of 2028 or February 2028, because we just need another quarter or two of two-plus billion of net C&I growth. That is the worst case scenario, and that is how I would look at it when you are looking at the bigger picture.

Operator: Our next question comes from the line of Matthew M. Breese with Stephens. Please go ahead.

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

Joseph M. Otting: Yes. First of all, Matthew, we are sticking with that. You know, you have got to look at that category kind of like accounts receivable each quarter. And we have had that volatility where some come in and some go out. You know, we had roughly $700 million of resolutions during the quarter. So you do have inflows and outflows that occur, and that has always been there where things are transitioning through that. We do expect this next quarter to be down $200 million in additional NPAs. So it is the trend line that we take a look at, but there are ins and outs of that category on a fairly consistent basis.

Lee Matthew Smith: And, Matt, I will just remind you, 35% of our nonaccruals are current and paid. We are very punitive on ourselves in the way that we risk rate these loans, and no one else has that amount of their nonaccruals current and paid. But you have got to bear that in mind as well. And they are real estate-secured.

Matthew M. Breese: Understood. Okay. And then, Lee, could you just clarify where the hedge gain was flowing through in the average balance sheet? I thought it was in borrowings, but I think you had mentioned it was in interest income.

Lee Matthew Smith: It is all in the FHLB, the wholesale borrowings line. That is where that gain was, Matt.

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

Lee Matthew Smith: Yes. So I mentioned a couple questions ago, the new C&I loans were coming on at a spread to SOFR of 242 basis points in Q1, which was higher. They were coming on around 225 in Q4. So we saw a nice increase in Q1 in terms of average spread to SOFR.

Operator: Our next question comes from the line of Casey Haire with Autonomous. Please go ahead.

Casey Haire: Lee, I had a question for you on the balance sheet forecast of $102 billion in 2027. So if we started $87 billion today, you have about $12 billion of multifamily coming back to you between now and 2027. You lose 60% of it. That is a $7 billion drag. That takes you down to $80 billion. You originate $2 billion a quarter of C&I—that takes you back up to $94 billion. What is the—you are still $8 billion short versus that $102 billion. I guess, what are we missing here?

Lee Matthew Smith: No. Yeah. So a couple of things. C&I growth is pretty significant in both years. You are sort of looking at $7-plus billion in both years. But remember, on the CRE and multifamily side, we are originating new CRE loans—not New York City CRE loans—but CRE loans in other parts of our footprint, so the Midwest, South Florida, California. So you have got to factor in that the runoff in CRE and multifamily is not as big as you think because we are replacing some of that with new CRE originations. And then we also expect to see growth in the residential mortgage line item as well, as we are originating more mortgages for balance sheet.

So I think the piece you are probably missing is the CRE/multifamily runoff. It is probably not as great as you are thinking because of the new loans we are originating.

Casey Haire: Okay. Fair enough. And then the deposit growth was decent this quarter. What is the outlook there? Do you build on this momentum? And where do you want the loan-to-deposit ratio to live going forward?

Lee Matthew Smith: Yeah. We believe we can build on it. And as we said before, leveraging the new C&I customers that we are bringing in is one area that we feel we can be successful in. And if you look at Q1 and you look at the deposit growth, about $450 million was from the commercial customers and the private bank customers. And ultimately, we want to get the operating accounts of those commercial customers. But if we have to start with some interest-bearing deposits, that is fine as well. So we believe that we can leverage those new relationships on the C&I side.

And our treasury management team is working diligently to make that happen, and we saw some green shoots in Q1. We believe the private bank is another area where we can grow deposits, and Mark Fitzgibbon, who runs the private bank, has really built out a real private bank with the chief investment officer, trusted adviser, we have got a family wealth planner, we have got all the products that they would need—interest-only mortgages now and a broad mortgage product set—subscription lending. So we feel that is an area where we can continue to bring in more deposits and then leverage our 340 bank branches as well.

And, obviously, the new CRE lending we are doing—the expectation is that is relationship-driven and will come with deposits and fee income opportunities as well. So we do believe that we can continue the momentum and grow more deposits. I would like to see some more noninterest-bearing DDA growth, but we think that will come with those rating upgrades that we got this quarter from Moody's and Fitch.

Operator: Our next question will come from the line of Bernard Von Gizycki with Deutsche Bank. Please go ahead.

Bernard Von Gizycki: Hey, guys. Good morning. I know your specialized and regional banking segments are being built out, and deposit gathering initiatives will be in a different life cycle versus peers. But with rates potentially on hold, how would you describe deposit pricing pressure? Sounds like the Moody's/Fitch upgrade could help alleviate some pressure that some peers might be seeing more of. Just talk on what you are seeing within your footprint.

Lee Matthew Smith: Yeah. Obviously, it is competitive, Bernie, and we meet weekly on this, and we review deposit gathering in every single market that we are in, and we look at what our competitors are doing, and we make sure—obviously, you need to be competitive. But what I would say is, not only did we bring $1.1 billion of new deposits in Q1, we also reduced the cost of core deposits 21 basis points. So we are not overpaying for these deposits. I think we are leveraging our relationships. We are leveraging the model that we have built. And we are mindful, obviously, of what our peers and competitors are doing—you have to be.

But I would say, despite that, you have still seen us execute and be successful with the deposits that we brought in and the reduction in core deposit costs.

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

Lee Matthew Smith: Yeah. I think the way we are thinking it, Bernie, is we believe we can pay down another $2 billion or $3 billion over the rest of the year. And, again, a lot of it will be driven by what excess cash do we have, and that will be driven by what is going on with deposit growth, what is going on with the payoffs, the paydowns. But we think we can pay down another $2 billion or $3 billion of FHLB advances.

Joseph M. Otting: Which would get us into, like, the $6 billion range.

Lee Matthew Smith: Exactly right.

Joseph M. Otting: Which, if you recall, when we got here, it was about $23 billion.

Operator: And that concludes our question and answer session. I will turn the call back over to Joseph for any closing comments.

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

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

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