Flagstar Financial Q3 2026 Earnings Call Transcript

Flagstar Financial (NYSE:FLG) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Flagstar Financial reported an increase in net interest income and net interest margin for Q3 2026, with improvement in pre-provision net revenue.

The company is progressing in diversifying its balance sheet by growing C&I loans and reducing commercial real estate exposure, although macroeconomic headwinds, including higher interest rates, have adjusted the timeline for achieving transformation goals to 2028.

C&I loan growth of $2 billion was reported, contributing to a $1 billion net increase in the loan portfolio, while CRE payoffs totaled $1.2 billion.

The company revised its guidance downward for 2026 and 2027 due to higher provision costs, with EPS for 2026 expected to be between 10-15 cents and for 2027 between 85-95 cents.

Flagstar Financial completed a $250 million stock repurchase program, but further buybacks are paused until 2027 due to market uncertainties and prioritizing capital for C&I growth.

Challenges include a competitive deposit environment and inflationary pressures impacting credit costs, particularly in the New York rent-regulated multifamily portfolio.

The company expects asset growth of about $1 billion per quarter in 2027 and 2028, driven by C&I loan growth and CRE runoff.

Management remains committed to long-term strategies for transforming into a top-performing regional bank by 2028, despite delays from external economic factors.

Full Transcript

Holly (Operator)

Conference call: After today’s prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Sal DiMartino, Director of Investor Relations. Sal, please go ahead.

Sal DiMartino (Director of Investor Relations)

Thank you, Holly, and good morning, everyone. Welcome to our third quarter 2026 earnings conference call. This morning our Executive Chairman and CEO, Joseph Otting, along with the company’s Co‑President, Co‑Chief Operating Officer and Chief Banking Officer, Richard Raffetto, and Co‑President, Co‑Chief Operating Officer and Chief Financial Officer, Lee Smith, will discuss our results for the quarter. During the call, we will be referring to a presentation which provides additional detail on our quarterly results and operating performance. Both the earnings presentation and the press release can be found on the Investor Relations section of our company website, ir.flagstar.com.

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

In addition, when discussing our results, we will reference certain non‑GAAP measures which exclude certain items from reported results. Please refer to today’s earnings release for reconciliation of these non‑GAAP measures. And with that, I would now like to turn the call over to Mr. Otting.

Joseph Otting (Executive Chairman and Chief Executive Officer)

Yeah, thank you, Sal, and good morning, everyone. We appreciate you joining the call today. I’d like to begin on slide 3 by providing updates to factors affecting our business and updates around the financial forecast. We continue to make meaningful progress in strengthening our core business and advancing our strategic priorities. Net interest income increased, the net interest margin expanded, and pre‑provision net revenue improved compared to the previous quarter.

We also grew our C&I loan portfolio and deposits while reducing our exposure to commercial real estate loans this quarter. However, several variables pressured credit costs during the third quarter, including the effects of higher interest rates, actions related to the New York City rent regulations, and persistent inflationary pressures. At the same time, a competitive deposit environment continues to impact deposit pricing and growth expectations. Our success as a company will be determined by our ability to continue to reduce our New York rent‑regulated exposure, which we did during the quarter, and attract deposits in an economic manner and expand the balance sheet through C&I loan growth.

We are still on track towards achieving our strategic objectives and with our plan to diversify our balance sheet. However, given a higher‑for‑longer interest rate environment, the full realization of our transformation has shifted to 2028 from 2027. As a result, we are adjusting our guidance from what we previously outlined to reflect the impact of higher interest rates, the rate environment on credit quality, less deposit growth and corresponding C&I loan growth, and the net interest margin, which Lee will discuss in more detail shortly.

Moving to slide 4, I’d like to discuss some of our third quarter highlights in each of our key focus areas. First, in terms of our earnings, both our net interest income and margin increased compared to the prior quarter, while PPNR also continued to improve. Second, a key part of our balance sheet diversification strategy is growing our C&I loan portfolio. This quarter we delivered another $2 billion of net C&I loan growth, which resulted in about $1 billion of net loan portfolio growth during the quarter. On average, the average loan in that portfolio we added was about $28 million in loan outstandings, and it was roughly 75 relationships.

Third, another key component of our balance sheet diversification strategy is reducing our overall commercial real estate exposure. During the quarter our CRE portfolio payoffs totaled $1.2 billion, of which 35% were rated substandard. The decline in the overall CRE portfolio was slightly less as we funded approximately $375 million of new high‑quality, relationship‑based CRE loans on commitments of over $700 million. In our forecast, we project CRE to decline net $1 billion per quarter.

And fourth, we continue to apply a prudent approach to credit quality. During the quarter we had net charge‑offs of $74 million, or 49 basis points of average loans, down $25 million compared to the prior quarter, while nonaccrual loans were relatively stable. Now I’d like to turn it over to our Chief Financial Officer, Lee Smith, who can provide more color on our revised guidance, asset quality, and third quarter trends. Lee, I’ll hand it over to you.

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Thank you, Joseph, and good morning, everyone. As you just heard, the turnaround story of Flagstar Financial is very much on track. However, certain macroeconomic headwinds, especially from higher interest rates, have pushed back the timing of us achieving peer-like metrics by approximately 12 months. The last few months have seen a significant shift in interest rates. The five-year Treasury had increased 75 basis points over the last three months as of October 14th and 111 basis points over the last six months.

Two quarters ago, the forward curve assumed two rate cuts in 2026, and as recently as June 18th of this year, the forward curve had shifted to one rate hike in October. Fast forward to September 18th, and the current forward curve has four rate hikes in September, December, March, and June. We’re also seeing extended inflationary pressures as a result of higher energy prices. This change in interest rates and inflationary pressures have impacted our New York City rent-regulated multifamily portfolio.

In particular, when we use the forward curve with four rate hikes and include inflationary pressures, it has had the following effects: increased cap rates on rent-regulated buildings, particularly in the Bronx; increased operating expenses at a time when rents have been frozen for up to two years; put pressure on debt service coverage ratios; increased the risk that more loans migrate to criticized and classified status. These events have caused an increase in our provision expense to 76 million in the third quarter.

Turning now to Slide 5. Given what I have just outlined and our commitment to transparent reporting on the impact of any change to our forecast, we’ve adjusted our guidance downward for both 26 and 27, predominantly the result of higher provision costs in Q4 and full year 27 for the reasons I just mentioned. The higher interest rates have also resulted in a more competitive deposit environment. While we expect to grow deposits quarter over quarter, it’s at a reduced level than previously anticipated.

Less deposit growth also results in a smaller balance sheet. We expect the balance sheet to grow on average approximately 1 billion a quarter in 2027 and 2028, driven by net new loan growth of 2 billion, funding approximately 50% with deposit growth and 50% with CRE runoff, as we continue to diversify the balance sheet and improve the mix of C&I loans. In particular, the higher rate environment is also resulting in lower mortgage originations, impacting both interest income and noninterest income, and nonaccruals declining at a slower rate than previously anticipated.

EPS for 26 is now forecast to be in the 10 to 15 cent range, and EPS for 27 is forecast to be in the 85 to 95 cent range. We are also including a full year 28 forecast where EPS is expected to be 160 to 170, on top of where we previously expected full year 2027 EPS to be. I would note that our goal to return Flagstar Financial to profitability metrics similar to our peers is on track to occur in 2028. The inflection point is 27 for the following reasons. Between 10-01-2026 and 12-31-27 we have 12 billion of low-coupon, less than 3.9%, CRE multifamily loans either resetting or maturing. If they reset and stay with Flagstar Financial, they will reprice to a market rate significantly higher than current coupons. If they pay off, we will use the proceeds to originate market-rate C&I or CRE loans. We have a further 7 billion resetting or maturing in 2028 with a weighted average coupon of 4.43%.

Both these scenarios result in net interest income and NIM expansion. The reset dates are all contractual, and 27 is our largest reset year, allowing us to significantly improve the mix of the balance sheet over the next 15 months as we continue to originate new C&I loans and grow the balance sheet. The spread between the new loans coming on and the marginal cost of the new deposits used to fund such growth should be accretive to net interest income and NIM expansion.

While we expect the pace of nonaccrual resolution to slow, we still expect our nonaccrual balances to decrease throughout 27 and 28. And given these loans are on the balance sheet and funded today, as they return to accruing status, this is also accretive to net interest income and NIM. A significant driver of the remixing of the balance sheet over the next 12 to 18 months is mechanical in nature, given the volume of low-coupon loans hitting their reset or maturity dates.

On slide 6 and 7 we have provided a bridge to our 2027 and 2028 net interest income forecast. As you can see, the main drivers in both years are balance sheet growth along with fixed asset repricing and lower nonaccrual loans. On slide 8 we show the trend in pre-provision net revenue through 2028, and slide 9 depicts our EPS progression over the same time period. I would like to point out that in Q3, pre-credit provision, we generated plus 13 cents of earnings, which included a 22 million, or 4 cent, tax benefit as we settled a legacy tax audit from 2020 in our favor.

The next slide details our NIM trends. Our NIM expanded 4 basis points in Q3 versus Q2 to 2.17%, with the September NIM coming in at 2.23%. Next is operating expenses on slide 11. Here I would highlight that despite the modest increase during the quarter, we still expect full year 26 operating expenses to decline approximately 168 million, or 9%, year over year versus full year 2025. On the capital slide you can see that at 12.38% our CET1 ratio continues to rank among the top quartile in our peer group. We also completed the previously approved stock repurchase program of 250 million, repurchasing 19.1 million shares at an average price of approximately $13 per share.

Turning now to our deposits on slide 13, total deposits increased about 300 million quarter over quarter, while average interest-bearing deposits rose 1%. The cost of interest-bearing deposits increased only 1 basis point to 3.09% versus last quarter. Moving next to slide 14, which shows the continuing positive trend of commercial real estate par payoffs during the third quarter. Par payoffs were 1.2 billion, of which 35% were rated substandard, and our CRE concentration ratio is now at 346%.

The next several slides provide additional details on our multifamily portfolio. On slide 15 I would note that in 2027 we have approximately $8.4 billion of multifamily loans that mature or reach their contractual reset date. Of this amount, approximately 2.9 billion, or 35%, is NYC multifamily with greater than 50% rent-regulated units, and I would also note the reserve coverage on the greater-than-50% rent-regulated population, including loans outside of New York City, is nearly 3%.

If we look at just the New York City rent-regulated portfolio greater than 50%, the coverage ratio increased 21 basis points quarter over quarter to 3.37%. Moving next to slide 16 and 17, where we provide a more comprehensive overview of the rent-regulated portfolio. At September 30th this tranche of the portfolio was 12.9 billion, down 531 million, or 4%, compared to the second quarter, while the rent-regulated component greater than 50% was 8.1 billion, down 370 million, or 4%, quarter over quarter. The next slide details our ACL by loan category. The linked-quarter ACL was unchanged as increases related to higher interest rates and growth in the C&I portfolio, and the impact from a higher interest rate environment were offset by volume reductions in our multifamily portfolio.

Finally, slide 19 provides a look at our broader credit quality trends during the quarter. At approximately 2.8 billion, our nonaccrual loans were relatively stable quarter over quarter. Of note, 42% of our nonaccrual loans are current and performing. Substandard loans increased 248 million, or 4%, as overall criticized and classified loans increased 670 million, or 6%, due to our prudent and comprehensive look-forward of loans that are maturing or repricing within the next 18 months.

With regards to charge-offs, net charge-offs this quarter were 74 million, or 0.49% of average loans, down 25 million compared to the prior quarter. To conclude, we remain on track to achieve our strategic goals, significantly improve profitability through 2028, and deliver value to our shareholders. Now I’d like to turn it over to our Chief Banking Officer, Rich Raffetto, who will discuss our commercial banking trends in more detail.

Richard Raffetto (President of Commercial & Private Banking)

Thank you, Lee, and good morning to everyone as well. As you turn to slide 20, you will see that we continue to make significant progress in building out a relationship-based commercial and private banking platform here at Flagstar Financial. Our two-pronged approach to this business combines specialized industries banking with corporate and regional commercial banking coverage, featuring customized solutions for business owners, and it’s delivering strong but disciplined growth.

We continue to hire talented mid-career bankers to join the platform, including 35 new and replacement hires during the third quarter alone, bringing our aggregate hiring activity to more than 400 professionals over the last couple of years, and at the end of the quarter we had 164 revenue-producing commercial bankers and credit underwriters, up from 124 at the start of the year. During the third quarter we generated 4.6 billion in new and increased C&I loan commitments, resulting in 2.9 billion in loan originations, up 4% compared to the prior quarter, and we ended the quarter with a strong pipeline going into the fourth quarter at $2.7 billion.

We also continue to successfully add new commercial relationships, as Joseph mentioned, adding roughly 75 this quarter alone. The right side of this slide shows the quarterly trend in C&I loan balances, and C&I loans during the third quarter increased 2 billion to 20.6 billion, up 11% compared to the second quarter, continuing our trend of brisk but prudent loan growth. Slide 21 provides a more detailed look at C&I loan growth by business line, and loan growth in the third quarter was fueled by various industry-focused verticals and lending segments including financial institutions, lender finance, renewable energy, entertainment, banking, technology, health care, leisure, hospitality and gaming, public finance, equipment finance, and diversified industrials.

In addition, regionally speaking, our commercial banking teams in Southern California, New York City, Long Island, and New Jersey were key contributors to the third quarter loan growth, and we are optimistic about future momentum in regional markets where we have recently established or upgraded team leader talent, including Dallas, Detroit, Chicago, Cleveland, and Phoenix. And in a sign of continued progress in our goal of building broad-based relationships across our commercial banking enterprise, we experienced a notable increase in core commercial client deposits during the quarter of approximately 600 million, and we also experienced strong year-over-year and quarter-over-quarter increases in capital markets fees and collected treasury management fees.

So with that, I will now turn the call back to Joseph.

Joseph Otting (Executive Chairman and Chief Executive Officer)

Thank you, Lee and Rich. Let me close with a few summary comments. We remain committed to our long-term strategy of transforming Flagstar Financial into a top-performing regional bank. While the current operating environment has affected the pace of our turnaround, we believe our long-term objectives remain very achievable, with our expected timeline now extending to 2028. This is a change in timing, not in our strategy nor expectations. We will continue to execute on our strategic plan with discipline, strengthening our core franchise and focus on delivering value for our shareholders.

Now we’d be happy to turn it back over to the operator and open up for questions. Thank you.

Holly (Operator)

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality if you are muted locally. Please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Chris McGrady with KBW.

Chris, your line is now open. Please go ahead.

Chris McGrady (Analyst at KBW)

Oh, great. Thank you. Good morning. Maybe we could start on slide 15. You have been giving us the slide with the contractual maturity by year for some time. I think this quarter you split out the rent registration, which is helpful. Can you help with the visibility into the resets and the maturity wall that you’ve talked about given the change in the rate environment? I know you guys have said you’ve gotten through most of it, but, you know, are you going through it again given the change in the macro?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah. So Chris, as you know, we do the 18-month look forward, and 2027 is our biggest reset and maturity year where we have about 10, 10 billion. So if you think about through that, and if you think about this last quarter, it pushes us through to Q1 of 2028. And as I mentioned in my prepared remarks, we have about 7 billion that is resetting or maturing in 2028. So, you know, we have visibility into the biggest year, I think there’s… And we feel that given the interest rate environment, using that forward curve—that’s what the credit team has looked at when they’ve done that look forward—we’ve accounted for that.

I think what is interesting is when you look at ’27, the amount of resets and maturities, 2.9 billion of that 10 billion is more than 50% rent regulated. So the vast majority is market or less than 50% rent regulated. I think the other interesting phenomenon for us as we look at our migration this quarter: when we do the look forward, it’s very formulaic. So what we’re doing is we’re overlaying the interest rate environment at the time and saying, what does the DSCR coverage look like?

And that DSCR coverage is driving how we risk-rate those loans. And the migration—the vast majority of the migration this quarter—was on market units. And the reason for that is when we see a change in interest rates, we will react quickly because we’re prudent and we’re conservative. If you think about the annual financial statements that we’re using, we’re using ’25 financial statements at the moment. So in terms of those market units being able to increase rent, we don’t see that yet, and we don’t adjust for that until we see it on the financial statements. So I’m telling you that because we’re very, very prudent in the way that we assess the credit quality of our multifamily book.

Chris McGrady (Analyst at KBW)

Okay, thanks. Thanks for that, Lee. And then, Joseph, on the capital, nice to see you get through the 250 given the messaging on smaller balance sheet, you know, and then you’re roughly, you know, 12.4 versus your target of 11. Like, how do we think about buybacks from here, given a little bit noise in credit?

Joseph Otting (Executive Chairman and Chief Executive Officer)

Yeah. So, you know, Chris, I think we’ve been pretty consistent in our messages that, you know, the three things that management looks at and has dialogue with the board is, you know, how are our core earnings growing, what is the credit quality of the company and the trends in the credit quality, and then how much capital do we expect to use in the C&I growth? And, you know, obviously with the short-term disruption in that, don’t envision us doing any additional, additional stock buybacks in the fourth quarter.

But with our capital levels, we would expect to resume buybacks in 2027.

Chris McGrady (Analyst at KBW)

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

Joseph Otting (Executive Chairman and Chief Executive Officer)

You know, if you really look at, like, the credit, like, funnel—and that’s the thing that I look at—is, you know, charge-offs were, on a gross basis, the lowest since we’ve been here. Nonaccrual was flat. And really, you know, other than two borrowers which have resolutions, we haven’t seen an increase in past-due loans. So where we’ve seen migration was really on the upper end in the special mention and substandard. And that gets back to Lee’s point: when you’re looking out in that portfolio 18 months and you’re applying, you know, interest rates on the five-year, you know, curve plus our contractual borrowing in the notes at either SOFR plus 300 or a reference rate plus 275, you know, that’s a pretty punitive interest rate that those loans are being underwritten to. And that’s what, you know, dragnets in some of those relationships and loan outstanding into those special mention and substandard.

So we’ll watch to see if there’s migration. But we haven’t seen that migration to, you know, what I would consider, you know, more critical or difficult loans, you know, at this point yet.

Chris McGrady (Analyst at KBW)

Okay, great. Thanks for the color.

Holly (Operator)

Your next question comes from the line of Dave Rochester with Cantor. Dave, your line is now open. Please go ahead.

Dave Rochester (Analyst at Cantor)

Hey, good morning, guys. Just on the C&I growth that you’ve had and the deposit picture today. I know part of the C&I strategy was that you get the deposits associated with those new lending relationships. Can you just talk about the progress you’ve made there and how much more deposit growth potential you think you have coming from those new relationships you’ve always brought over, and your confidence in getting that, you know, funding 50% of that growth with, you know, new deposit relationships that are hopefully on the lower side of cost?

Richard Raffetto (President of Commercial & Private Banking)

Great, thanks, Dave. This is Rich. In the third quarter, as we reported, net C&I loan growth was $2 billion, and we brought in just under $600 million of deposits around that commercial activity. So that batting average, we feel pretty good about—bringing in 30% of deposits. I will tell you that our bankers are very motivated to drive full relationship value, whether that’s deposits or fee income or a combination thereof, and get more relationship primacy as we further mature our commercial banking platform.

So with our focus both on specialized industries coverage and regional commercial banking, as well as deepening our existing private banking relationships, you know, that is how we will continue to fund the loan growth that we are forecasting in the future. So it’s about relationship primacy, and it’s about deepening existing relationships. So that’s where we are in the journey, Dave.

Dave Rochester (Analyst at Cantor)

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

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah. So Dave, that’s why we put the bridge slides in there. So maybe let me walk you through—let me walk you through ’27 first of all, because the two biggest drivers are the balance sheet growth and then the fixed asset repricing. So the way we think about the balance sheet growth, there’s sort of a couple of components. You’ve got the new loans that are coming on that are funded by the new deposit growth. And this is all on a weighted average basis because you’ve obviously got loans and deposits coming in towards the end of ’26 that we get the full-year benefit from in ’27, et cetera.

But if you assume that you’ve got balance sheet growth—so this is new growth—on average of about 2.8 billion, and that is funded by the new deposits coming on, and we’re assuming that we can bring in approximately 800 million to a billion a quarter of new deposits, and the split there would be about 18% non-interest-bearing, 80–82% interest-bearing. The cost that we’ve assumed for the interest-bearing is between 3.9% and 4%. And then when you overlay the interest-bearing or the non-interest-bearing deposits, the overall cost is around 3.20%.

So that’s—and that spot rate is significantly above our spot rate today for our existing portfolio. So you’re earning a spread on those new loans of anywhere from 340 to 350. That’s the new loans coming on from the new deposits. You’ve also got new loans coming on that are being funded by the CRE runoff. And so you’re getting a big lift in the shift in spread because, as we’ve said, the multifamily loans that are resetting have a coupon less than 3.9%. And so you then bring in on-market-rate C&I loans or new CRE loans, and you’re going to pick up 2.5% spread on that. And that number is somewhere between 4 and 4.5 billion. So that’s how you sort of get to the balance sheet growth.

If you then look at the fixed asset repricing, our assumption is we will retain 35% to 40% of what is resetting at much higher rates. And again, we’re using the forward curve here, so you’re probably going to pick up anywhere from 3.30 to 3.50 in terms of incremental spread. And then the other thing in a rising rate environment that we haven’t really spoken about previously: obviously about 10.7 billion of our CRE portfolio is floating. So as rates rise, we’ll get the benefit of those loans—10.7 billion—repricing.

And that’s the reason why, when you look at our interest rate sensitivity, we’re neutral to ever so slightly asset sensitive.

Dave Rochester (Analyst at Cantor)

All right, thank you very much. Appreciate it.

Holly (Operator)

Your next question comes from the line of David Chiaverini with Jefferies. David, your line is open. Please go ahead.

David Chiaverini (Analyst at Jefferies)

Hi, thanks for taking the questions. I guess a bit of a follow-up on that last question. When thinking about, I guess, drilling in on net interest income and the walk on, say, slide 7, which of these factors would you say is, you know, the most at risk of coming in, you know, weaker, and which ones are, you know, the most kind of locked in and mechanical?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah. So here’s what I would say. I think, first of all, we’ve obviously—because of the competitive deposit environment—brought down our assumption in terms of the amount of deposits we can bring in, and we’re saying it would be 800 million to a billion a quarter, Dave. And so that, to me, is the assumption that I would look at and say, can these guys bring in that amount of deposits? Because I think the rest of it we’ve proven out. You know, Rich and the team have consistently been originating C&I loans at a clip of $2 billion growth a quarter.

So I don’t think there’s any question about our ability to generate assets. And then the fixed asset repricing—that is all mechanical, because those loans are either going to pay off and we’re going to use those funds to originate more C&I loans at market spreads, or they will stay with us and we’re going to get an increase in coupon, which is going to significantly increase net interest income and NIM. And you’ve got a significant portion of that CRE portfolio—the 10.7 billion—which is floating.

So in a rising rate environment, you pick up the benefit there. So, you know, to me, I think the question is, can we deliver on the deposit growth?

David Chiaverini (Analyst at Jefferies)

Thank you for that. And then on the CNI growth side of things, the pipeline at two point, to what extent could the higher rate environment impact the pull-through of that pipeline? And did that pipeline kind of build, you know, kind of evenly through the quarter, or did it slow down towards the end of the quarter?

Richard Raffetto (President of Commercial & Private Banking)

Good question, David. I would describe the external environment of our business and commercial and corporate clients as resilient. You know, we have traveled around the country in the third quarter and hosted private gatherings with a number of our clients and in existing geographies and newer geographies. And it is impressive how resilient we are finding the business owner community in terms of executing on their strategic plan, taking advantage of uplift from the significant CapEx investment around technology and AI and data centers.

That’s like a pebble in a pond with concentric circles of businesses that benefit from that macro environment. And so I would say that the pull-through is solid and it’s well diversified in terms of what makes up that 2.7 billion of pipeline. And it’s amidst an environment that is not without challenges in terms of the inflationary environment and diesel fuel prices, etc., and geopolitical concerns. But our customers are telling us that they are moving forward with capital projects, moving forward with M&A and other strategic initiatives around expansion.

So we feel good about the breadth of the loan pipeline and we also feel good about the ability to pull that through. And I would not say that we experienced any material slowdown as the third quarter came to a close in terms of what we’re adding to that pipeline. We also have the unique nature of continuing to be in a scale and growth mode. So as new bankers come onto our platform, they are bringing over their relationship activity and that is also helping to further build our pipeline. And that’s something that’s a little bit more unique to our bank and why you’ve seen us materially outperform a number of our peers in terms of CNI loan growth.

Great to hear. Thank you.

Holly (Operator)

Your next question comes from the line of Casey Hare with Autonomous. Casey, your line is now open. Please go ahead.

Casey Hare (Analyst at Autonomous)

Yeah, great, thanks. Good morning everyone. Wanted to touch on the, what is the forward guide assume for net charge-offs and within that, you know, the ACL ratio at 150, what, you know, how low can that go?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

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

Casey Hare (Analyst at Autonomous)

Gotcha. Thank you. And then on the deposit front, that’s helpful color on the new money deposit growth. Just wanted to get a finer point on the third quarter. You guys gave a September NIM, the 309 deposit costs in the third quarter. What was that in September? And sort of what is the beta expectation going forward?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yes, so a couple of things. First of all, our spot rate as of September 30th, and again this includes non-interest-bearing and brokered, was 2.56%. The way we think about the beta is we are targeting a 60% beta. If you look at where we are, and this is as of three or four days ago, Casey, versus the September rate hike, and this is for interest-bearing deposits excluding CDs, we were at 32%.

Casey Hare (Analyst at Autonomous)

Great, thank you.

Holly (Operator)

Your next question comes from the line of Jared Shaw with Barclays Capital. Jared, your line is now open. Please go ahead.

Jared Shaw (Analyst at Barclays Capital)

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

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

So, Jared, what’s driving where we are for 27 and 28 is really, like I said, it’s the deposits. So what we’re sort of saying is we think that we can generate net sort of CNI growth, and it’s all going to be—I say all—90% of the growth is going to come from CNI. There will be some residential growth, but obviously the higher rate environment impacts that. But if you think that we’re growing sort of new loans, 2 billion a quarter on average, and the way we’re funding that is a billion dollars of CRE runoff net, and then you’ve got a billion dollars, 800 million to a billion dollars of new deposit inflows.

So when you look at the growth it really is predicated on the new deposits that we can bring in.

Jared Shaw (Analyst at Barclays Capital)

Okay, thanks. And then shifting a little bit, what’s the sentiment among the New York City rent-regulated landlords? Do you still have confidence that they have the ability and desire to support their properties to the same degree as they were in the past, given the rate environment and the political climate in New York?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

We do. I mean we’ve said this before, we don’t have any REO. A lot of these owners have benefited from the 1031 tax rules, so that’s obviously a huge advantage. The migration that we’ve seen has been at the upper end of the portfolio because of the way that we calculate the DSCR and the formulaic nature of how we look at credit. And 42% of our nonaccruals continue to be current and are paying. And again, we saw a very healthy amount of par payoffs this quarter, 1.2 billion, 35% of which was substandard.

Richard Raffetto (President of Commercial & Private Banking)

Hey, Jared, the comment that I would say is, you know, a lot of these borrowers are resetting from, pick a number, 3 to 4% interest rate that they took out, either 5-ones or 7-ones. And our documentation, just as a reminder, resets at their SOFR index plus 300 or reference rate plus 275. So those are pretty steep interest rates that frequently can have a borrower go from, say, three and a half to seven and a half. So we don’t see a desire not to own the property.

What you see is a desire maybe for the bank to restructure and lower their interest rate off the contractual coupon. But for the most part that has held up relatively well. So we haven’t seen a material change. And you’ve seen some trades in the marketplace recently where some investors are coming in, buying pools from banks. So there’s a fair amount of demand, I think, from those who have a more longer-term viewpoint of the market than just perhaps maybe the next four to six years.

Holly (Operator)

Your next question comes from the line of David Smith with Truist Securities. David, your line is now open. Please go ahead.

David Smith (Analyst at Truist Securities)

Hey, good morning.

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Good morning.

David Smith (Analyst at Truist Securities)

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

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah, you’re right, David. So end of 26, we’re at 82.1—this is total assets—82.1 billion. End of 27, 92.1 billion. And then end of 28, we’re just around 97 billion.

David Smith (Analyst at Truist Securities)

Okay, and you touched upon this a little bit in the last question. But just thinking about it, interest rates are a lot higher today than they were a quarter ago, but your expectation for CRE runoff and paydowns isn’t really that much lower. I guess two things: Is there a rate level where you feel like that would start to decline more meaningfully? And if you can just flesh out a little bit of what you think is supporting that level of paydown and those options that are outside you in the marketplace still today?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah, it’s really driven by volume, David. You know, as I mentioned, we have 10 billion of loans that are resetting and maturing in 27 and another 7 billion in 28. And by the way, that doesn’t include 1.8 billion in Q4 of 26. So if you just add those three numbers, you’re at 19 billion of loans that are resetting or maturing. And so I would say that kind of net runoff of a billion dollars a quarter, that’s how we get there. And for all the reasons that I just mentioned, Q3 we have the high rate environment, we still saw 1.2 billion of par payoffs.

And then I think the other interesting fact is of the 10 billion that is resetting or maturing in 27, only 3 billion is more than 50% rent regulated. So 7 billion is market to less than 50% rent regulated.

David Smith (Analyst at Truist Securities)

Thank you.

Holly (Operator)

Your next question comes from the line of Ryan Kenny with Morgan Stanley. Your line is open. Please go ahead.

Ryan Kenny (Analyst at Morgan Stanley)

Hey, good morning. So it was a good quarter in terms of growth in non-interest-bearing deposits, and wondering if you could give some more color on what’s driving that growth. Can that continue, and how the investments in treasury management, you know, from here maybe need to traject. Thanks.

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah, so let me take the first part of the question and then I’ll hand it to Rich. So we did, during the quarter towards the end of the quarter, we have been undertaking a pretty comprehensive product review. We did move around 900 million to a billion of interest-bearing deposits—these were deposits that we were paying 1, 2, 3 basis points on. We moved from interest-bearing to non-interest-bearing because for all intents and purposes they are non-interest-bearing.

So that’s what you’re seeing in the non-interest-bearing line item. And then I think in terms of going forward, I mentioned in 27, when we think of the new deposit growth on a weighted average point of view, about 18% are non-interest-bearing. And we want to leverage our relationships, particularly from a commercial lending point of view, from a private banking point of view, and then leveraging the 340 bank branches that we have to drive not just the non-interest-bearing, but the interest-bearing deposits as well.

And I’ll let Rich comment on some of the strategies that we would deploy.

Richard Raffetto (President of Commercial & Private Banking)

Yeah, thanks, Ryan. As Lee mentioned, we are driving further with respect to our relationship banking model from business banking to commercial banking and private banking. And as we move forward on that journey, we continue to deploy our treasury management platform when we win new business. I think the receptivity—we have a competitive treasury management platform that’s comparable to other regional banks. We are focused on solutions around working capital management and deploying tools for our clients, especially around fraud and cyber risk, which is perhaps the number one concern of our clients when they are banking with us digitally.

So we are deploying enhanced digital capabilities and fraud protection as we onboard customers and, you know, with a goal to have fulsome relationships that include not just a deposit that’s interest-bearing but those operational accounts that bring non-interest-bearing accounts to the front, as well as other payments capabilities including card and merchant solutions as well.

Ryan Kenny (Analyst at Morgan Stanley)

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

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

No, not particularly at all. I think the one thing I’d point out on the net charge-offs as well this quarter. So we had net charge-offs of 74 million, and what I would say about that is 34 million was already fully reserved for. So if you take that out, we would have been at 40 million in net charge-offs, which that’s where we sort of expected our provision to be. The reason that we were at the sort of 75 is that 34 that would have come out normally, we had to replace because of the higher rate environment impacting those cap rates on units in the Bronx, in particular the inflationary environment putting pressure on operating expenses, and the higher rate environment putting more pressure on the DSCRs, and then that caused more migration. Without that higher interest rate environment, the net charge-offs, we wouldn’t have had to have replaced that 34 million, and your provision would have been 40 million for the quarter instead of the 76 that we saw.

Holly (Operator)

Your next question comes from the line of Ibrahim Poonawalla with Bank of America. Your line is now open. Please go ahead.

Ibrahim Poonawalla (Analyst at Bank of America)

Good morning. Apologies, Haley, if I missed it. Why are we shutting down the buybacks? Like, when you look at the stock at 11 bucks, tangible book 15, shouldn’t this be the time to be leaning in? And I ask that because I think you mentioned that you might reinitiate buybacks in 1Q. So I’m just trying to understand, is there, like, very narrowly a metric that you’re managing to, as opposed to, like, why not buy back today? Or if the environment is becoming uncertain, why not push and suspend buybacks indefinitely?

I’m just trying to figure out between those two spectrums why you said what you said.

Joseph Otting (Executive Chairman and Chief Executive Officer)

Ibrahim, I just think it’s prudent until we build our core earnings and ensure that our credit quality forecast is accurate. And then the C&I growth has been spectacular. But those are the three variables management will use to make a recommendation to the board. I mean, we clearly acknowledge our capital levels are higher than our intended levels. But, you know, just in light of that uncertainty, we will wait until 2027 before we would look to buy back.

We fully expect to resume that in 2027.

Ibrahim Poonawalla (Analyst at Bank of America)

Got it. And separately, just big picture, it feels like if rates don’t go down, there is not a whole lot that’s going to be helpful from the CRE book resolution unwind. Obviously, this quarter was an evidence of that. If rates move up—and I appreciate they’ve come down a little bit in the last week—but maybe, Joseph, talk to us how you’re thinking about, yes, the C&I strategy is working, but beyond that, are there other strategic options, like strategic merger partnerships with other banks, that you would be exploring in order to unlock shareholder value?

Joseph Otting (Executive Chairman and Chief Executive Officer)

Yeah, you know, Ibrahim, I think really we think the best value for the shareholders of this company is for us to execute on our business plan. If we’re able to do that, we really can unlock, I think, significant value in the valuation of the company just by executing on the path that we expect to get to in 2020.

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

And Ibrahim, to Joseph’s point, we’ve laid out the path here over the next two years. And as we’ve said and as we’ve answered other questions, a large part of this is mechanical. As these low-coupon multifamily CRE loans reset, I think the deposit growth we’ve brought down, and if we can achieve that, we know we can generate the C&I loans. So, look, I think that if we achieve these numbers, it’s going to create significant value for the shareholders over a short time period.

In terms of your question around the interest rate environment, we are neutral to slightly asset sensitive. So obviously, in that scenario, a higher rate environment is helpful. Higher rate environment does put pressure on the credit side. But again, I think as I described earlier, the migration we saw was more in the market rents at the upper end of our portfolio because we’re very punitive on ourselves and conservative in the way that we do that 18-month look forward and the formulaic approach.

So I agree with Joseph. I think there is an enormous amount of value creation here by executing on the plan we’ve laid out.

Ibrahim Poonawalla (Analyst at Bank of America)

Understood. Thank you both.

Holly (Operator)

Rob, your next question comes from the line of Ben Gerlinger with Citi. Ben, your line is now open. Please go ahead.

Ben Gerlinger (Analyst at Citi)

Hey, good morning. I just want to double-check. Was this forecast based on the 9/30 curve or, like, last Friday?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

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

Ben Gerlinger (Analyst at Citi)

Got it. Okay. So this kind of gets to the question Ibrahim had where it’s basically kind of saying, like—apologize in advance because I don’t want to diminish the progress these guys have made—it just seems kind of like the franchise today is very much an interest rate curve bet. And the only reason I say that is five years have come down roughly 30 basis points since the end of last quarter, so the first three weeks here. So when you think about just the update, if we just kind of retrace, wouldn’t that alleviate quite a bit of the incremental pressure you guys have just kind of alluded to in terms of credit?

I get deposit price is probably a little bit more expensive today based on the front of the curve, but the credit resolution opportunity probably gets a little easier relative to where it was just three weeks ago, if the curve kind of plays out on the belly of the curve. Am I thinking about this correctly or am I off base?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Ben, you’re spot on. If rates come down, that is definitely beneficial, and certainly on the credit side. So that is absolutely the right way to think about it. You are correct.

Joseph Otting (Executive Chairman and Chief Executive Officer)

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

But in the short run, some of the competitors are very aggressive.

Ben Gerlinger (Analyst at Citi)

Got it. And then just kind of thinking from a client-based perspective in terms of the multifamily areas where you might see pockets of pressure on DSCR coverage—when you think about their level of sophistication, if the five-year comes in a little bit more, would you potentially see kind of rapid payoff or basically the borrower hitting the bid to refinance because it’s a window of opportunity that’s pretty small, or presumably pretty small? I’m just trying to think how sensitive this kind of lumpy payoff potential might be to rates.

Or is it a little bit more formulaic over a time period of kind of getting close to expiration?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

No, I think you’re exactly right. You know, as Joseph has described, we have two options contractually: five-year SOFR plus 300 or prime plus 275. We do see—and there is a SOFR sort of opportunity—we do see people taking the floating rate because they’re effectively making the bet that rates will come down and then they will be able to refinance. So your thesis is exactly right. You’ve got people that will take a floating rate now in a high-rate environment because they’re betting that rates come down, and then they will be able to refinance at a lower rate and with a better opportunity.

So I think if rates come down, then, yeah, you would see more of that activity, which is people taking advantage of the drop to refinance at what they would see as good rates.

Joseph Otting (Executive Chairman and Chief Executive Officer)

Yeah, and the other thing, Ben, I think to recognize, this next really 5/4 is the largest repricing window that we’ve seen since we’ve been here in 24. So the numerator to that is so much higher than what we’ve experienced. That gets back to an earlier question about how confident are you that you can net reduce that CRE by a billion dollars. If you just kind of applied historical levels, we would be much higher than that. But we are also originating now CRE outside New York, across the United States, and predominantly transitional type of properties.

Ben Gerlinger (Analyst at Citi)

Got it. That is helpful, thank you.

Holly (Operator)

Your next question comes from the line of Bernard von Gazicki with Deutsche Bank. Bernard, your line is now open. Please go ahead.

Bernard von Gazicki (Analyst at Deutsche Bank)

Hey guys, good morning. Just, Lee, on the NIM outlook—you know it’s growing, but at a slower pace than originally expected—could you provide some updates on some of the headwinds? I know you already mentioned maybe slower expectations on the nonaccruals coming down, but what about the expectations on the levels of retention of maturing loans and pricing of higher-quality retained loans? Just some thoughts on some of the puts and takes.

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah, so I think there’s a couple of things that have played out. And, Bernie, first of all, I think as we mentioned, we did see a 4 basis point increase in NIM quarter over quarter, and September NIM came in at 2.23%. But I’d say the headwinds are the deposit costs. If you look at our history for the last several quarters, we’ve been able to bring deposit costs down consistently, and obviously on a weighted average basis, it ticked up one basis point in Q3.

When we were putting the previous forecast together, not knowing there were going to be these four rate hikes in the curve, we thought we would still be able to chip away at those deposit costs, so I think that’s one of the things. I would mention in Q3—and Rich can touch on this a little bit—given the mix of C&I lending that we did, I would say that the spread came in a little lighter than Q2 when we were at 2.25%. Not much, but a little bit. But that was more just the mix of loans that we brought in. And then on the nonaccruals, you’re right, nonaccruals are flat, so we’re not getting the benefit of the release of those nonaccruals back into earnings and back into capital.

And as we described before, the nonaccruals are a little bit like a receivable account. You’ve got nonaccruals that we’re resolving and are going away, and then you’ve got some new ones coming in. And when you get some new ones coming in, that has an impact on your net interest income as well. So that’s what I would describe. But I think overall, if you look at the trend line, you are beginning to see the interest income was up 20 million quarter over quarter, NIM was up, and we’re about to embark on this big wave of resets and maturities which is going to really allow us to accelerate that expansion.

Bernard von Gazicki (Analyst at Deutsche Bank)

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

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah, that’s exactly right. There’s two things playing out in that particular part of the chart. One, yes, we’ve got FHLB coming down about a billion dollars in ’28, and then also in Q4 of ’28—it’s not accounting for a large part of this—but we pay down 300 million of sub debt. So that’s what you’re seeing in that funding mix chart on page seven: it’s a reduction in FHLB of a billion, and then in Q4 you’ve got a little bit of benefit because we’re paying off those sub notes.

Bernard von Gazicki (Analyst at Deutsche Bank)

Great. Thanks for taking my questions.

Holly (Operator)

Your next question comes from Janet Lee with TD Cowen. Janet, your line is now open. Please go ahead.

Janet Lee (Analyst at TD Cowen)

Good morning.

Joseph Otting (Executive Chairman and Chief Executive Officer)

Hi, Janet.

Janet Lee (Analyst at TD Cowen)

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

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

I would say that there is potential for that, Janet, because it is very much linked to interest rates. And we have sort of been looking at the forward curve, as have the credit guys. But there are other things at play as it relates to the provision. So, you know, the amount of C&I growth — obviously the net $2 billion of C&I growth in Q3 — that did contribute to the provision. And then you also have, we use the Moody’s economic forecast, so, you know, we have to wait and see what does that Moody’s economic forecast look like as well?

So it’s not the only variable. There are other variables that, you know, we do need to sort of keep in consideration here.

Janet Lee (Analyst at TD Cowen)

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

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

You have some line of sight, but not total line of sight, because it’s not linear. We have a special asset group who are doing a fantastic job working through these nonaccruals, and they have lots of different strategies — sort of DPOs, workouts, asset sales — in order to be able to reduce those nonaccruals. And so sometimes we do have visibility into what is coming, but as you might imagine, sometimes things can come up and be resolved in a couple of days where you have less visibility.

Right now we’re assuming that we end the year at about $2.6 billion of nonaccruals, Janet, and then in full transparency as we look through ’27 we do believe we can bring those nonaccruals down to about $2 billion. So those numbers are higher than what we had previously thought because the higher-rate environment does slow down the resolution of the nonaccruals. But as I mentioned in my prepared remarks and as you can see from the bridges, we still believe we can reduce those nonaccruals from where we are, and that is accretive to both earnings and capital because they’re 150% risk-weighted as well.

Janet Lee (Analyst at TD Cowen)

Got it. Thanks. Thank you so much for it. Just a quick follow-up. If a NIM of 2.23, do you think that’s a reasonable floor from here?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

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

Holly (Operator)

Thank you. Your next question comes from the line of Anthony Ilian with J.P. Morgan. Anthony, your line is now open. Please go ahead.

Anthony Ilian (Analyst at J.P. Morgan)

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

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

So, well, I think what you’re seeing here is what is embedded in our forecast. And I think, you know, as I mentioned earlier, I would look at the provision number that we have going forward as a proxy for the charge-offs, and most of that is going to be weighted towards the multifamily portfolio.

Anthony Ilian (Analyst at J.P. Morgan)

And then more broadly on rent regulated — so there have been a couple of banks here in the New York market that, as recent as yesterday, announced that they’re selling parts of their New York City rent regulated portfolio. Joseph, I’m curious, is this something you guys are considering given the headwinds you called out this quarter on rent regulated, which seem to be overshadowing the progress you’ve been making on what Rich discussed earlier on this call?

Thank you.

Joseph Otting (Executive Chairman and Chief Executive Officer)

You know, the way we look at that is we, you know, obviously we observe those sales and look at, you know, our portfolio. But, you know, what we have been able to do, because of where we have those loans marked, is most of our resolutions, whether DPOs or payoffs or negotiated settlements, have been within, you know, 1% to 5% — either positively or negatively — of where we have those loans marked. And most of those investors are looking at 15% to 20% returns.

And so we’ve taken the position — we have the team in place, we’ve been working these out — that a year or two from now we think our shareholders are better served by us, loan by loan, having resolutions to that. But, I mean, we clearly obviously monitor the market closely and, you know, if there was an opportunity to sell some of that, we would. But I would say we have, you know, currently nothing on the table to do that. We are obviously talking to lots of people in the marketplace, but our resolution internally really has optimized the retention of capital for the company.

Anthony Ilian (Analyst at J.P. Morgan)

Understood, thank you.

Holly (Operator)

Your next question comes from the line of Matthew Brees with Stevens Inc. Matthew, your line is now open. Please go ahead.

Matthew Brees (Analyst at Stevens Inc.)

Good morning. You know, Lee, I was hoping you could provide a little bit more color on the fee income outlook. Looks like it’s about an $80 to $100 million reduction. I’m curious what areas you’re expecting to see reduced level fee income from.

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah, so the biggest drivers of the reduction in the fee income forecast are lower gain on loan sale from the mortgage origination business. The higher-rate environment, I mean, that’s been sort of costing us a couple of million a month, so that is a big driver. As I’ve mentioned, we’ve reduced our deposit forecast down, which also had an impact on the loan origination volumes versus the previous forecast, and so you’re seeing less fees from sort of the deposit and loan businesses as a result of just those lower volumes.

And so those are the big drivers. But if you sort of look year over year from ’26 to ’27, we are showing growth from a noninterest income point of view. And we do feel that from capital markets fees, treasury management fees, the swaps, FX — everything that Rich and the team is doing — that we’re going to continue to expand our fee income as we move forward. But we’re just, right now, in the higher-rate environment, not going to get the help that we had originally thought from the mortgage business.

Matthew Brees (Analyst at Stevens Inc.)

Got it. Okay. And then I wanted to go back to — you had mentioned that you have $10.7 billion in commercial real estate that’s now floating. Is that a function of folks that have hit the end of the five-year fix and are now floating, or is that a function of swaps? Because it feels a little bit unnatural for a commercial real estate borrower to hold a floating rate for an extended period of time. I’m wondering if that’s a risk factor to your interest rate position going forward — those folks either locking in for five or leaving for five elsewhere?

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah, no, no. I think there’s a couple of things that are playing out. Some of those CRE loans — about $3 billion — are actually healthcare facilities that we fund in another part of the organization, but they’re categorized as CRE. And then the other part is people that are selecting — you can either select the prime rate, and we know that when they select the prime rate plus 275, that’s probably on a short-term basis until they find a better opportunity.

And you’re always going to have people cycling in and out of that. But then there are, you know, as I mentioned, there are SOFR options that our team is also making available to certain borrowers, and you’ve got people that are going with those SOFR options as well on the CRE side.

Richard Raffetto (President of Commercial & Private Banking)

Yeah, I think you have to think about that as a landing spot. If you just happened to hit two weeks ago when the five-year was 5.12 or 5.13, you wanted to see, are rates going to pull back? And so a landing spot for people to sit while they’re kind of watching interest rates. And for us, what we think that ultimately means is, as Lee referenced, we expect 65% of those loans to pay off. You know, as a general rule, when they come up for maturity, they may stick around for 60 to 120 days, but we do eventually think they go away as we reopen selectively for originations across the country.

In CRE we are seeing a higher percentage of floating-rate SOFR-based loans. And if the client wants to fix the rate, they’ll do that synthetically through a swap transaction.

Matthew Brees (Analyst at Stevens Inc.)

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

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

No, no it doesn’t. Remember, you know, if you look at our balance sheet, we’re transitioning to more C&I loans. Right? So that in itself makes us asset sensitive. You’ve got this sort of $10.7 billion of CRE that is floating, but I think you’re going to have ins and outs. Some of that is permanent — because of the healthcare facilities, because of the new CRE loans that we’re doing that are typically floating. We’re not, sort of, you know, really hopping those fixed rates unless they’re part of the resets.

And contractual noninterest-bearing deposits increased because we moved those very low-cost deposits from interest-bearing to noninterest-bearing. So, no, I don’t think it moves us to a liability-sensitive position. I think we’re very much neutral to asset sensitive and probably moving more in that direction given the transition of the balance sheet to more C&I.

Matthew Brees (Analyst at Stevens Inc.)

Leave it there. Thank you.

Holly (Operator)

Your next question comes from the line of John Armstrong with RBC Capital Markets. John, your line is now open. Please go ahead.

John Armstrong (Analyst at RBC Capital Markets)

Thanks. Good morning. Yep. Hey. One small one, then one bigger picture. But, Lee, on the higher expense guide — maybe I missed it — but I know it’s small, but just curious what the driver of that was.

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

You mean for ’27? Yeah. So the previous guide we were sort of towards the top end of the range, and then we continue to invest in people and technology, and so that just put us beyond the top end of the previous guide and into the current guide, which is consistent with where expenses are this year. So it’s just investment in people and technology.

John Armstrong (Analyst at RBC Capital Markets)

Okay, good. And then the bigger picture one — I ask this respectfully, but I know a lot of this is hard to predict — but that update slide, it’s been drifting lower for a few quarters and it’s elongated a bit. And maybe an unfair question, but any elements of this that were maybe a deeper-dive reset, where you think this is probably the bottom, or said another way, what does it take for things to get tougher from here? And I guess I’m focused kind of more on the core trends — I think credit works its way out — but how deep did you guys go on this reset?

Because for ’27 it’s a pretty big cut.

Lee Smith (Co-President, Co-COO, Chief Financial Officer)

Yeah, we’ve spent countless hours, days, weeks, you know, poring over this, John. And as I mentioned, you know, a lot of this is mechanical now because of the repricing, you know, as I mentioned to one of the previous questions. You know, if you look at this and say, okay, big picture, you know, where is the risk? We have the ability to create and generate assets. I think, you know, we’ve proven that on the C&I side. And so we know the resets are going to happen.

They’re contractual. We all just sit here and wait. Time is our friend in that regard. And we’ve taken the deposit growth down, but we’re saying we’re going to grow deposits 800 to a billion a quarter. And so that would be the question: can we bring in 800 million to a billion dollars of deposits a quarter? And so we believe we can. And so if we can do that, then we can hit all of these numbers because that helps fund the incremental balance sheet growth. 50% of it is funded by CRE runoff. That is going to obviously change the mix of the balance sheet more favorably. And you have the pickup in the spreads, just given everything that’s resetting is sort of— or a lot of it is low coupon. So I think it comes down to, you know, can we bring in the deposits?

John Armstrong (Analyst at RBC Capital Markets)

Okay, thank you.

Holly (Operator)

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

Joseph Otting (Executive Chairman and Chief Executive Officer)

Thank you very much, operator. And, you know, as noted with this presentation, we provided our 2028 forecast, and we thought that was important so that the journey ahead is well defined, you know, as we have done in the past along the way, you know, as both internal and external factors alter that, we’ve come forward and really tried to make sure that, you know, as we have those changes, we communicated those, you know, so everyone knew how we observe the business.

We do, as I said in my opening comments, feel we remain to be on the path for Flagstar Financial to complete its turnaround. It’s just, if you look at the numbers, you know, the 28 sits really on top of previous 27. So this is what I would say. It pushed it out, but it didn’t change the direction that we were going. So we do feel very good about the continued fundamentals of this transformation of this company, where the CNI business will become, you know, and is now becoming a much more significant portion of the business.

And that we look to really have a balanced balance sheet where a third of the assets are dedicated to consumer cash flows, a third to commercial real estate, and a third to business lending. In closing, I’d like to thank our executive leadership team and all our teammates for their dedication and commitment to the organization, unit and our customers. I’d like to also thank the board of directors for their support and counsel, and thank you for taking the time to join us this morning and asking what we thought were really important and critical questions. So thank you for your interest in Flagstar Financial.

Holly (Operator)

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

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