Flagstar Financial narrows Q3 net loss to $0.07 per share, driven by strong CNI loan growth and improved operating metrics.

OPERATOR - (00:03:30)

Hello and welcome to the Flagstar Bank NA third quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session and if you would like to ask a question during this time, please press star 1 on your telephone keypad. I would now like to turn the conference over to Sal DiMartino, director of investor Relations. You may begin.

Sal DiMartino - Director of Investor Relations - (00:03:57)

Thank you Sarah and good morning everyone. Welcome to Flagstar Bank NA's third quarter 2025 earnings call. This morning our chairman, President and CEO Joseph Otting, along with the Company's Senior Executive Vice President and Chief Financial Officer Lee Smith will discuss our results for the quarter and the outlook. During this 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 may include forward looking statements within the meanings of the Private Securities Litigation Reform act of 1995. Such forward looking statements we may make are subject to the Safe harbor rules. Please refer to the forward looking disclaimer in Safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. When discussing our results, we will reference certain non GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non GAAP measures and with that I would now like to turn it to Mr. Otting.

UNKNOWN - (00:05:31)

Joseph.

Joseph Otting - Chairman, President and CEO - (00:05:34)

Thank you Sal and good morning everybody and welcome to our first quarterly earnings as Flagstar na. We are very pleased with the operating results this quarter. Our third quarter performance provides further tangible evidence that our successful execution on all our strategic priorities. Our operating results improved significantly throughout the year and during the quarter as many of our key metrics continue to trend positively. From an earnings perspective, our adjusted net loss of $0.07 per diluted share narrowed substantially compared to the second quarter while our pre provision net revenue continues to trend higher putting us on a path to profitability. In addition to the improvement in earnings, we had several other positives during the quarter highlighted by this was a breakout quarter in our CNI business as we originated 1.7 in new loan outstandings and realized overall net loan growth of 448 million in the CNI portfolio. Our net interest margin expanded for the third consecutive quarter up 10 basis points to 1.91% compared to the second quarter and our operating expenses remained well controlled and were down year over year, 800 million on an annualized basis significantly ahead of our plan. Criticized and classified assets continued to decline down 600 million or 5% on a linked quarter basis and 2.8 billion or 20% year to date, while non accrual loans were relatively stable. We had another strong quarter of multifamily and cra payoffs of $1.3 billion and this has continued a trend over the last couple quarters where we've been above our forecast on real estate payoffs and our provision for loan losses decreased 41% while our net charge offs declined 38%. Now turning to Slide 3 of the presentation, we have highlighted the key management area that we have focused on and how we have performed in each category. First, to improve our earnings, we have reported smaller net loss every quarter for the past year due to a combination of factors including margin expansion and cost reductions. Lee has a slide later on that he'll cover this in detail, but the trend line on this lines up very well with what we've communicated about a return to profitability for the company. Second, we continue to implement our commercial lending and private banking strategy, which I will discuss in more detail shortly. And third, we proactively managed our multifamily and commercial real estate portfolio to continue to reduce our CRE concentration and fourth, our credit quality profile which has resulted in net charge offs as we are starting to see signs of stabilization in the loan portfolio. The next several slides highlight the tremendous progress we've made in our CNI business Starting on slide 4, this was a breakout quarter for our CNI lending. Our strategy in the CNI space really began after the June 2024 strategy as we hired Rich Ruffetto to come in and lead our commercial private banking and commercial banking strategy. This strategy focuses on two primary businesses, specialized industries and corporate and regional commercial banking. Both of those gained momentum in the third quarter, driving CNI loan growth up nearly 450 million or 3% versus the second quarter. This was the first positive growth quarter since early last year. Our two strategic focus areas led to growth with total loan growth of 1.1 million billion up 28% compared to the prior quarter. On the next slide you will see the positive trends in new commitments and new loan originations over the past five quarters. Compared to the second quarter, new commitments increased 26% to 2.4 billion while originations grew 41% to 1.7 billion. More importantly, you can see that the contribution to this growth was from our two strategic focus areas was quite impressive. Specialized industries and corporate and regional commercial banking experienced a 57% or almost a 750 million increase in commitments to 2.1 billion versus the prior quarter. Originations in these two areas increased 73% from nearly 600 million to 1.4 billion. Both areas have seen a consistent upward trend since the third quarter of last year reflecting steady pipeline growth and a high success rate in converting opportunities. Just as important is our CNI pipeline which currently stands at 1.8 billion on commitments, up 51% compared to the 1.2 billion at this time last quarter, providing strong momentum for the fourth quarter CNI loan growth. Also important is the number of new relationships we've added. Year to date we've added 99 relationships to the bank including 41 just in the third quarter. I believe these two data points reflect the industries we chose to focus on and the talented individuals we brought into the company. Most who are mid career bankers with 25 to 35 years of experience in their respective industries and have impressive Rolodexes. So far in 2025 we have doubled the number of relationship bankers and support staff in our 2 main focus areas to 124 and plan to add another 20 in the fourth quarter. Turning to Slide 6, this provides an overview of our specialized industry business and the growth trends both in commitments and originations over the past five quarters. You can see they had strong growth in both commitments and originations during the third quarter. Slide 7 provides a similar overview of the corporate and regional banking business. This business also had a very strong quarter in both total commitments and originations. We believe it has reached an inflection point after successfully building out four new segments and reinvigorating legacy businesses, showing that our relationship based strategy is yielding positive results. We expect to see further growth in the CNI business as existing bankers continue to deepen their banking relationship and the addition of new bankers. Additionally, we see potential opportunities from recent merger activity. Many of these are right in our core markets to selectively add talented bankers as well as winning new business relationships. The next slide lays out the roadmap we employ to solidifying the balance sheet and reposition the bank for growth. This is a little bit of a, you know, down history lane, but we have increased our CAET1 capital ratio by nearly 350 basis points ranking us among the highest best capitalized regional bank amongst our peers. We also fortified our ACL through a rigorous credit review process where we reviewed virtually every single multifamily and commercial real estate load. We significantly enhanced our liquidity position and we reduced our reliance on wholesale funding including flub advances and broker deposits nearly $20 billion year over year, lowering our cost of funds and boosting our net interest margin. In addition to what the items are identified on this slide, there could be many more. Obviously our expenses, our deposit costs and our risk governance are other areas that we've heavily focused on. Now Turning to Slide 9, you can see the impact on our adjusted EPS from the balance sheet improvements I just talked about on the previous slide. Our adjusted diluted loss per share has consistently and significantly narrowed over the past five quarters including a 50% quarter over quarter reduction in the third quarter loss to $0.07. Now with that, I'd like to turn it over to Lee to review our financials.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:14:19)

Thank you Joseph and good morning everyone. During the third quarter we continue to execute on our strategic vision to make Flagstar one of the best performing regional banks in the country. We achieved net interest margin expansion of 10 basis points quarter over quarter, paid off another 2 billion of high cost broker deposits as we further reduced our funding costs and continued to demonstrate excellent cost controls continuing the surgical approach to cost optimisation of the last nine months, our unadjusted pre provision net revenue improved by 14 million quarter over quarter while our adjusted pre Provision net revenues improved 6 million versus the second quarter. On the credit side, multifamily and CRE part payoffs were again elevated at 1.3 billion of which 42% were substandard and criticised and classified loans declined about 600 million or 5% during the quarter and 19% or 2.8 billion on a year to date basis. Net charge offs decreased 44 million and the provision decreased 24 million both compared to the second quarter and we ended Q3 with a C1 capital ratio of 12.45%. As Joseph previously mentioned, we had net CNI loan growth during Q3 of approximately 450 million following the origination of 2.4 billion of new CNI commitments of which 1.7 billion was funded. We're very pleased with the performance of our CNI businesses. We've surpassed our target of 1.5 billion of funded C and I loans per quarter and believe we can fund 1.75 billion to 2 billion per quarter going forward assuming no change in market conditions. We will also start originating new CRE loans in the fourth quarter that are of high credit quality and geographically diverse. We've also started to experience growth in our health reinvestment residential portfolio which increased 100 million on a net basis we're doing exactly what we said we would do and I want to compliment the entire Flagstar team on another successful quarter. Now turning to the slides and specifically slide 10. This morning we reported a net loss attributable to common stockholders of $0.11 per diluted share. We had the following notable items in the third quarter. First we had a 21 million fair value gain on a legacy investment in Figure Technologies following its September IPO. Second, we recorded a 14 million increase in litigation reserves related to the settlement of two legacy cyber matters dating back to 2021 and 2022, one of which involved a third party vendor and third we had 8 million in severance costs related to FTE reductions. Therefore, on an adjusted basis after also excluding merger expenses, we reported a net loss of $0.07 per diluted share, significantly better than last quarter and in line with consensus on slide 11 we provide our updated forecast through 2027. We tweaked our 2025 non interest income assumptions resulting in full year 2025 adjusted diluted EPS in a range of minus $0.36 to minus $0.41 per diluted share. Our guidance for both 2026 and 2027 remains unchanged. One of the highlights this quarter was the double digit increase in net interest margin. Slide 12 shows the trends in our NIM over the past several quarters which expanded 10 basis points quarter over quarter to 1.91% and has now increased for three consecutive quarters. In September an NIM was 1.94% and compared to 1.91% for the third quarter and we expect to see margin improvement going forward driven by a lower cost of funds as we manage our cost of funding lower, lower yielding multifamily loans paying off at par or if they remain with flagstart resetting at higher rates, ongoing growth in the CNI and other portfolios and a reduction in non accrual loans. Turning to Slide 13, another highlight this quarter was the decline in non interest expenses. Our non interest expenses remain well controlled as they declined another 3 million in the third quarter and are down 30% year over year or approximately 800 million on an annualised basis. Slide 14 shows the growth in our capital over the past five quarters and the strength of our CET1 ratio at 12.45%. Our CT1 ratio ranks amongst the best relative to our regional bank peers. We will continue to prioritise reinvesting our capital into growing the CNI and other portfolios as we remain focused on diversifying the balance sheet and growing earnings. Slide 15 is our deposit overview. Similar to last quarter, we further deleveraged the balance sheet by paying down 2 billion of brokered deposits at a weighted average cost of 5.08%. Going back to the third quarter of 2024, we have now paid down almost 20 billion of flood advances and brokered deposits. In addition, approximately 5.6 billion of retail CDs matured during the quarter at a weighted average cost of 4.50%. We retained approximately 85% of these CDs and they moved into other CD products that were approximately 30 to 35 basis points lower than the maturing product. In the fourth quarter we have another 5.4 billion in retail CDs maturing with a weighted average cost of 4.30%. These deleveraging actions, CD maturities and other deposit management strategies have allowed us to reduce deposit costs by 13 basis points quarter over quarter and liability costs by 10 basis points. We also saw an increase in interest bearing deposits of 1.5 billion as a result of increased commercial, private bank and mortgage escrow balances. We continue to actively manage our cost of deposits and are targeting a 55% to 60% deposit data on all interest bearing deposits with the Fed rate cuts. Slide 16 shows our multifamily and CRE PAR payoffs for the quarter. We continue to witness significant PAR payoffs of approximately 1.3 billion, of which 42% or about 540 million were rated substandard. Approximately 195 million of this quarter's payoffs were multifamily greater than 50% rent regulated. We continue to witness strong market interest for these loans from other banks and from the GSEs. The PAR payoffs are also leading to a substantial reduction in overall CRE balances and in our CRE concentration ratio. Total CRE balances have declined 9.5 billion or 20% since year end 2023 to about 38 billion, aiding our strategy to diversify the loan portfolio to a mix of 1/3 CRE, 1/3 CNI and 1/3 consumer. In addition, the payoffs have led to a 95 percentage point decline in the CRE concentration ratio to 407% since year end 2023. The next slide is an overview of our multifamily portfolio which has declined 13% or $4.3 billion on a year over year basis. Our reserve coverage on the overall multi family portfolio of 1.83% remains strong and is the highest relative to other multifamily focused lenders in the Northeast. Furthermore, the reserve coverage on those multi family loans where 50% or more of the units are rent regulated is 3.05%. Currently we have about 14.3 billion of multi family loans that are either resetting or contractually maturing between now and year end 27 with a weighted average coupon of less than 3.70%. If these loans pay off, we will reinvest the proceeds in our CNI or other portfolios or pay down wholesale borrowings if they stay with Flagstar. The reset rate is significantly higher than the existing rate which provides a nim benefit. On slide 18 we've once again provided significant additional information on our New York City multifamily loans where 50% or more units are rent regulated. This tranche of the Multifamily portfolio totals 9.6 billion compared to 10 billion last quarter with an occupancy rate of 99% and a current LTV ratio of 70%. Approximately 55% or 5.3 billion of the 9.6 billion are pass rated and the remaining 45% or 4.3 billion are are criticised or classified meaning they are either special mention, substandard or non accrual. Of the 4.3 billion, 2 billion are non accrual and have already been charged off to 90% of appraisal value meaning 370 million or 16% has been charged off against these non accrual loans. Furthermore, we also have an additional 40 million or 2% of ACL reserves against this non accrual population of the remaining 2.3 billion that are special mention and substandard loans. Between reserves and charge offs we have 7% or 165 million of loan loss coverage. We believe we're adequately reserved or have charged these loans off to the appropriate levels and with excess capital of 1.7 billion before tax. We think we're more than covered were there to be any further degradation in this portion of the portfolio. Slide 19 details the ACL coverage by category. The ACL declined 34 million compared to the second quarter to 1.128 billion, a result of lower HFI loan balances and stabilization in property values and borrower financials. The overall ACL coverage ratio including unfunded commitments was 1.80% broadly in line with last quarter at 1.81%. On slide 20 we provide additional details around our asset quality trends criticized and classified loans continue to decline down approximately 600 million compared to the second quarter on a year to date basis. We have made tremendous progress in reducing these loans as they are down 2.8 billion or 19% since the beginning of the year, our net charge offs decreased 44 million dollars or 38% compared to the prior quarter to 73 million dollars and the net charge off ratio improved 26 basis points to 0.46%. Non accrual loans, including those held for sale were 3.2 billion relatively stable compared to the prior quarter. I would add that approximately 41% or $1.3 billion of non accrual loans are performing. The one borrower we moved to non accrual status in the first quarter who subsequently filed for bankruptcy, remains in the bankruptcy process, but there is an auction in progress that we hope concludes sometime in early 2026 which will allow us to resolve our position sometime during the first half of next year with respect to the 30 to 89 day delinquencies. At quarter end, approximately 274 million of the 535 million were driven by one borrower who typically pays subsequent to month end and has done so again as of October 20, 166 million of their delinquent loans have been brought current. More importantly, after quarter end we sold approximately 254 million of this borrower's loans above our book value, thereby reducing our exposure to this borrower. Finally, we continue to review the 2024 annual financial statements for all borrowers and today we've completed the review on the majority of them. I'm pleased to report that the vast majority have stayed consistent compared to the prior year, indicating an overall stable trend for our borrowers. We continue to deliver on our strategic plan and are excited about the journey we are on and the value we will create over the next two years. With that, I will now turn the call back to Joseph.

Joseph Otting - Chairman, President and CEO - (00:28:26)

Thanks Lee. Before moving to Q and A, I'm also happy to share that last Friday we closed on our holding company reorganization after receiving all necessary regulatory and shareholder approvals. As a result of this reorganization, Flagstar Financial Inc. Was ultimately merged with Flagstar bank na, with Flagstar Bank NA as the surviving entity. As I mentioned on last quarter's call, this reorganization simplifies our corporate structure, reduces our regulatory burden and lowers operating expenses by approximately $15 million. As always, we remain extremely focused on executing our strategic plan, including transforming Flagstar into a top performing regional bank, creating a customer centric relationship based culture and effectively managing risk to drive long term value. Now we would be happy to answer your questions. Operators, please open the line for questions.

OPERATOR - (00:29:31)

Thank you. If you would like to ask a question, please press Star one on your telephone keypad. If you would like to withdraw your question, simply press star one. Again we ask that you please limit yourself to one question and one follow up. Thank you. Your first question comes from Manan Ghazalia of Morgan Stanley. Your line is open.

Manan Ghazalia - Equity Analyst - (00:29:56)

Hi, Good morning all.

Joseph Otting - Chairman, President and CEO - (00:29:58)

Good morning.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:29:58)

Hi Manan.

Manan Ghazalia - Equity Analyst - (00:30:00)

So I wanted to focus on the NII guide for the year. If I take the guide for the full year relative to the progress year to date, it implies that NII should be up about 5 to 15%. Q on Q next quarter you're making good progress on the CNI loan growth side. NIM has been rising consistently and you should benefit from additional rate cuts from here. But. But at the same time earning assets have also been shrinking as you pay down some of those broker deposits. So can you talk about how we should think of each of these P spots next quarter and into the first half of next year?

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:30:37)

Yeah, absolutely Manant. So first of all what I would say is in terms of the balance sheet, you'll have noticed that it only declined 500 million in Q3 despite us paying off another 2 billion of brokered deposits. And so we think at the end of this year Q4 will probably be the low point. So the balance sheet will be and this is total assets 90 to 91 billion. And then we expect the balance sheet to start to grow as we move through 2026. So I think that kind of level sets everything. First and foremost we do expect to see continued NIM expansion as we move forward and we have multiple levers to do that, as you know. So I mentioned in my prepared remarks, as the multifamily loans continue to pay off or as they continue to hit their reset dates, they have a weighted average coupon that is less than 3.7%. So if they stay with Flagstar where our sort of pricing reset is 5 year flood plus 300 or prime plus 275 and we're staying sort of firm to that. So we get a benefit if they reset and stay with Flagstar. If they pay off then we're taking those proceeds and investing them into the CNI growth or we use need to pay down high cost either broker deposits or we can pay down flub advances. So that's sort of one area. We continue to show excellent growth. On the CNI side. What we didn't mention is of the new loan originations in the third quarter, the average spread to SOFA on all of those was 242 basis points. So a very, very healthy spread on the new CNI loans that we're bringing onto the balance sheet. And we, you heard Joseph talk about the pipeline. We think that we continue those growth trajectories going forward. We're also going to start originating new CRE loans going forward and these won't be rent regulated New York City loans. We're looking for high quality geographically diversified CRE loans in other parts of our footprint, the Midwest, California, South Florida. And we're starting to see the mortgage health reinvestment portfolio increase and we think that will increase further in a lower rate environment. I think we've done a tremendous job managing the cost of our fundings down through paying off those high costs brokered deposits and flub advances. But we've also reduced core deposit costs without Fed cuts. And with Fed cuts I mentioned we expect a 55 to 60 beta. And so that's a focus area on the liability side. And then finally as we reduce our non accrual loans and we do expect to see a reduction in the fourth quarter that will also help our nims. So I know that was a long answer manan, but there are a lot of moving parts as you can see.

Manan Ghazalia - Equity Analyst - (00:34:03)

That was great. That was the detail that I was looking for. Maybe just to follow up to your comments on the CNI side, I mean the originations were clearly really strong this quarter. Can you talk about is this a good run rate for the next few quarters? Should it accelerate from here and maybe talk about how you're managing risk as you do this because it's a rapid build out and there is some macro uncertainty out there.

Joseph Otting - Chairman, President and CEO - (00:34:33)

Yeah, sure. Thank you. So actually our viewpoint is that we will continue to see additional growth beyond what we saw this quarter. We do see somewhere between a billion 7 to $2.2 billion as kind of our run rate going forward per quarter. And I recall that a number of the people who have joined the company haven't been here for much over three or six months. And so most of these people are really getting settled into the bank and generating opportunities for the company. So we kind of think we're an engine that's firing on three of the six cylinders today and have really an opportunity to get really the whole franchise performing at a, you know, higher level in the next couple quarters. That's in addition to we will add 20 people in the fourth quarter and we'll add, you know, probably somewhere around 100 people in 2026. So, so we'll continue to add, you know, the strategy there really is to, you know, when we highlighted in the slides we have a specialized industry strategy where we have 12 verticals. Virtually all the people who are leading those verticals and the people that have joined us are 20 to 35 year bankers. So they come to our company with lots of depth and knowledge in those particular verticals from an expertise perspective and then from a risk underwriting perspective, we have the line unit. Embedded in the line is what we call the first line of defense. And there are credit products people who sit in the first line who will underwrite and do the due diligence on the company independent of the relationship managers. And then those credits then are recommended based from the first line of defense to the actual credit approvers in the bank. That is a separate function that reports up to our chief credit officer and then who actually directly reports to me. So we think there are good checks and balances in our process to make sure that we're hearing to our credit standards without significant deviations from underwriting policies.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:36:52)

Manan One thing I would add again, just looking at Q3, if you look at the average loan size of the new originations, it was just over 30 million. So as we said before, we are not taking outsized positions in any one name or industry. We, we're diversified in terms of the size of the positions we're taking. We've said before our sweet spot is maybe 50 to 75 million. But in Q3, the average new loan commitment size was a little over 30 million. And that gives us comfort as well.

Joseph Otting - Chairman, President and CEO - (00:37:28)

Yeah, and Lee brought up a good point on slide 4. It does highlight, you know, the other businesses like Flagstar Financial and Leasing and the MSR Lending and a couple of others were actually, we thought the exposures to a number of individual borrowers were too high. And so we brought down in those portfolios significant amounts of high individual company exposure. And that's resulted in some of the declines year to date in those portfolios. We do think that will start to stabilize now as we made our way through those portfolios in 2025.

Manan Ghazalia - Equity Analyst - (00:38:06)

That's great. Thank you. And just a clarification, the billion 7 to 2.2 billion that you mentioned, that's originations, correct?

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:38:14)

That is correct.

Manan Ghazalia - Equity Analyst - (00:38:15)

Thank you.

OPERATOR - (00:38:18)

The next question comes from Dave Rochester with Cantor. Your line is open.

Dave Rochester - Equity Analyst - (00:38:24)

Hey, good morning, guys. Nice CNI growth this quarter. That was great to see.

Joseph Otting - Chairman, President and CEO - (00:38:28)

Thank you. Thanks.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:38:29)

Dave.

Dave Rochester - Equity Analyst - (00:38:31)

On the 1.7 to 2.2 that you just talked about in CNI production, when do you think you ultimately hit that? Is that a 1Q timing on that or further into next year? And then given that and the restart of The CRE originations and what you're doing on the resi production front, at what point do you expect Total Loans will start to grow again next year and then with the hundred people or so that you're planning on hiring for next year, are there any new verticals contemplated in that?

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:38:59)

Thanks. Yeah, Dave, so I'll take the first part of your question. So, as I mentioned to Manan, we think the low point for the balance sheet will be the fourth quarter and will be sort of between 90 and 91 billion. And our expectation is we'll start to see a little bit of balance sheet Growth in Q1 of 2026. Not a lot, but a little bit. And then it will really start to sort of Trend upwards in Q2, Q3 and Q4 of next year. So that's kind of how we think about the balance sheet growth and the inflection point.

Dave Rochester - Equity Analyst - (00:39:45)

Got it. So you're also thinking not just assets but total loans actually stabilizes next quarter or.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:39:52)

No, that's the low.

Dave Rochester - Equity Analyst - (00:39:53)

And then, and then you go from there.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:39:55)

Stabilization.

Dave Rochester - Equity Analyst - (00:39:57)

That's exactly right. That's exactly right. Yeah.

Joseph Otting - Chairman, President and CEO - (00:40:00)

And then regarding your question on the 2.4 and the 1.7, we do expect growth on those numbers both this quarter and going forward. So I mean that number clearly could get north of $2 billion on a pretty consistent basis.

Dave Rochester - Equity Analyst - (00:40:20)

That's great, Appreciate that. And then just on the elimination of the holding company, I know that that exempts you from annual stress tests whenever you cross over 100 billion or whatever that threshold is at that point. Any other regulatory relief you get from that as well, I know you save on the cost front, but anything else. That you'd point to.

Joseph Otting - Chairman, President and CEO - (00:40:40)

Thanks. I mean, you know, in a lot of instances you have examinations that cover the same thing from the OCC to the Fed. So you eliminate that. You also eliminate a lot of staff interaction with the Fed. So there's also, you know, cost you can't exactly quantify, but frees up resources and time. So you know, we, we obviously think it's a, the right thing to do. And for, for us it's, you know, we do not do, we do not do today nor do plan to do non-banking activities. So it was a logical step for us as an organization.

Dave Rochester - Equity Analyst - (00:41:23)

Sounds good.

Joseph Otting - Chairman, President and CEO - (00:41:23)

All right, thanks guys. Thanks, Dave.

OPERATOR - (00:41:27)

The next question comes from Ibrahim Poonawalla with Bank of America. Your line is open.

Ibrahim Poonawalla - Equity Analyst - (00:41:36)

Good morning.

Joseph Otting - Chairman, President and CEO - (00:41:38)

Hey, Brian.

Ibrahim Poonawalla - Equity Analyst - (00:41:39)

Hey. So I guess maybe a question around from an expense standpoint. So you talked about all the hiring over the coming year when you look at the adjusted expenses, about 450 million in your outlook for next year. Seems like expenses are kind of flatlining at this run rate. Just talk to us in terms of incrementally, like what's the cost save opportunity left within the expense space to invest and like the puts and takes around, why they could be higher versus lower than what you have forecasted. Thanks.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:42:15)

Yeah, no problem at all, Ibrahim. First of all, again, I want to take the opportunity to compliment the entire Flagstar team because as both Joseph and I noted, if you look at the Q3.24 run rate and the Q3.25 run rate, that's an $800 million reduction in non interest expense. And you know, that's a lot of work. It's blood, sweat and tears. But the team has just done an unbelievable job taking that amount of expenses out as we look forward. You're exactly right. If you look at our sort of existing or current run rate, it's right around 450 a quarter, which if you look at our guidance is the top end of the 2026 expense guidance of 1.8 billion. And as we think about further opportunities moving forward, I think they're in three sort of areas. One, we think we can continue to reduce FDIC insurance expenses. There's a lot of components to that. We've done a nice job of optimizing the liquidity component with reducing wholesale borrowings and broker deposits and we'll continue to do that. But there are other measures that come into play as it relates to profitability, asset quality, regulatory relationship. And so we think that on an ongoing basis we can continue to drive those FDIC insurance expenses down. We also believe we can continue to drive vendor costs lower. I think we've done a nice job looking at vendor costs over the last nine months, but I think there's more we can accomplish. And then I think we've got some pretty significant technology projects that are, that are in the works that will be coming to fruition as we move into 26 and beyond. And that's going to allow us to drive more efficiencies and cost reductions out as well.

Joseph Otting - Chairman, President and CEO - (00:44:21)

Just a note to Lee's question or comment about technology we talked about. We had six data centers in the company, two for each legacy organization during last quarter. We reduced that down to four and we will ultimately get down to two sites. So if you think about, you know, running six data centers legacy, somewhat outdated old technology and moving towards a new platform that allows us to take out significant costs in that process.

Ibrahim Poonawalla - Equity Analyst - (00:44:58)

Got it. Got it. That's helpful and I guess maybe just a separate question around all things sort of non interest bearing deposits, the balances seems like they might be stabilizing and I get it takes time for sort of loan relationships to transfer into core deposits coming on just. But give us a sense of nib deposit growth from here and just either from a dollar balance or from a percentage of overall mix. How you see that trending and what's the timeline you think between lending relationships coming over from the bankers you brought on to that translating into core deposit growth. Thanks.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:45:38)

Yeah, yeah. So it does, it does take a little bit of time and we've seen some traction but obviously you know, as we move forward we think we'll see a lot more traction. And so as we think of the non interest bearing deposit growth, I think it really comes from, from three areas and you've touched on one. As we bring on all of these new CNI relationships, we certainly want to leverage those relationships to bring on more deposits including operating accounts ultimately and those non interest bearing deposits. We also see growth on the non interest bearing deposit side coming from our private bank. As we mentioned on the last call, we've hired Mark Pizzey to run the private bank. He has done a nice job of reorganizing the private bank and making sure that all the right product sets are in place. So we look like a real sort of private wealth bank. And so we think that we'll be able to leverage the private bank and those products to drive non interest bearing deposits as we move forward. And then obviously, you know, our 360 bank branches, they play an important role in continuing to grow non interest bearing deposits with our existing customer base and bringing in new customers as well. So that's how we see the non interest bearing deposit growth, where it's coming from.

Ibrahim Poonawalla - Equity Analyst - (00:47:18)

Helpful, thank you.

OPERATOR - (00:47:22)

The next question comes from Jared Shaw with Barclays. Your line is open.

Jared Shaw - Equity Analyst - (00:47:27)

Hi Jared. Hey, good morning. Maybe starting on the credit side, should we think that, you know, as we move forward and as you, as you see the runoff in multifamily and cre, you know, maybe the loans that don't run off tend to have the weaker characteristics. So could we, should we expect to. See maybe a continued growth in CRE mpls but not corresponding growth in provision like we saw this quarter, that you feel like those, those marks are adequate and sufficient?

Joseph Otting - Chairman, President and CEO - (00:48:02)

Yeah, you know, I think this, you know, first of all we had a really strong reduction of non performing loans in the second quarter. This was a little bit more of a flat and we were working, as Lee referenced, on a large portfolio sale. But in the fourth quarter we currently have, you know, we have line of sight on reductions of about 400 million of non performing loans. That could be as high as 500 million in the, in the fourth quarter. We've also really like dedicated a team now that's focused on our non performing loans where they are still paying and that represents roughly 42 to 43% of our non performing loans. So we have a high percentage of the non performing loans that continue to pay and pay per the terms and conditions of the note. It's just our analysis of their cash flows that come off of those single source or repayment properties are insufficient. So those borrowers are drawing on cash flow or liquidity to continue to maintain those loans current. So we're really focused and we do see a downward Trend. And those MPAs just our classifieds were down. Our NPAs were virtually flat this quarter. But we do see a trend line of those going down.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:49:23)

Yeah. And again Jared, as you know, when we did the Credit Review In 24, we were deliberately punitive on ourselves. And the other point I would add to what Joseph mentioned and I mentioned this in my prepared remarks. You've got one borrower that is in bankruptcy, that is 500 million of those non accrual loans. And as I said, that's moving into an auction process. And so once that moves through the process and concludes, we feel that we'd be able to deal with a large chunk of those non accruals in the early part of 2026. That's in addition to the, you know, the 400 million pipeline that Joseph mentioned.

Jared Shaw - Equity Analyst - (00:50:13)

Okay. Okay, great. So those are two separate components. That's good color. Thank you. And then you know, as we look at guidance and you know, your comments around assets being the low point in fourth quarter, what's your, what should we be thinking about in terms of either total asset growth or total loan growth as we look out for year end 26 and 27 to tie into that guidance?

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:50:42)

No problem. As I mentioned, at the end of 25 we think the balance sheet will be 90 to 91 billion. We think that at the end of 26 our balance sheet will be around high 96 to sort of high 97 billion. Right around that range. And then in 27 we think we get it to about 108 billion. 100, 809 billion.

Jared Shaw - Equity Analyst - (00:51:11)

Great, thank you.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:51:14)

Welcome.

OPERATOR - (00:51:16)

The next question comes from Mark Fitzgibbon with Piper Sandler. Your line is open.

Mark Fitzgibbon - (00:51:22)

Hey guys.

Joseph Otting - Chairman, President and CEO - (00:51:23)

Good morning.

Mark Fitzgibbon - (00:51:23)

I wondered if you could share with us, of the billion 7 of CNI originations you had in the third quarter, what percentage was participations? And also curious if you had any Tricolor or First Brand exposure because I did see a little uptick in non accruals in the CNI bucket.

Joseph Otting - Chairman, President and CEO - (00:51:40)

Yeah, that was one credit. But yeah, we're running 50 to 60% of our loans are participations. But the difference I would say, Mark, is the people that are joining the company that are bringing those opportunities, they have direct relationships with management. We have not purchased participations where we are not directly interacting with the management of the company, which is a little bit different than basically having a trading desk and somebody buying loan participations. These are all active relationships that have been ongoing and any of those in our document, we require the relationship manager to do a relationship model of what we expect to get in both fee income and deposits by coming into that relationship. So we have a pretty high standard of what our expectations are if we're going to get involved in a credit.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:52:40)

Just to confirm, we had no exposure to First Brands or Tricolor or any of the other names that have been mentioned this quarter. And obviously we're pleased about that. We've looked at that. We do have a very, very small NDFI book. A big portion of that is our MSR lending. So we feel good about that. And no exposure to any of the names that have been disclosed previously. Okay.

Mark Fitzgibbon - (00:53:06)

And then just one separate question. What is, I guess I'm curious, what is the note sale market look like today on sort of, you know, modestly challenged New York multifamily loans? You know, is there much depth to that and where can kind of notes be sold today? Can you give us any kind of sense on that?

Joseph Otting - Chairman, President and CEO - (00:53:26)

I mean, I would. The way I look at it is if you the noise that has been sort of emerging over the last three or four months regarding New York City rent regulated, we still had 1.3 billion of par payoffs in Q3, 42% of which was substandard. So, you know, rather than looking at no payoffs, I think there's still a lot of demand for this asset class from other lenders and the GSEs, as I pointed out earlier. And I think that's good. And I think in a declining interest rate environment, I think you're probably going to see for us you're going to see more par payoffs as well as we move forward. So that's just going to help us get to that diversified balance sheet of a third, a third, a third Even more quickly.

Mark Fitzgibbon - (00:54:22)

Thank you.

Joseph Otting - Chairman, President and CEO - (00:54:24)

You're welcome.

OPERATOR - (00:54:26)

The next question comes from Bernard von Gazicke with Deutsche Bank. Your line is open.

Bernard von Gazicke - Equity Analyst - (00:54:34)

Hey guys.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:54:34)

Good morning.

Bernard von Gazicke - Equity Analyst - (00:54:37)

Lee.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:54:38)

In your prepared remarks, I believe you mentioned that 195 million of the PAR payoffs of the 1.3 were regulated over 50%. And I think that total portfolio declined almost a billion.

Bernard von Gazicke - Equity Analyst - (00:54:53)

Just wondering, were there any asset sales. In that particular portfolio and any updates you can provide on how we should. Think about the size of this book. Going forward in the next six or months?

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:55:05)

Yeah, well, I think, number one, I think you'll continue to see decline mainly as a result of the payoffs that were seen each quarter. Joseph mentioned. From a non accrual point of view, we do have an active pipeline that is, you know, 400 million that we have a line of sight into and hope to close, you know, in the fourth quarter. And so, you know, that's, that's how I sort of look at the sort of movement in that rent regulated book going forward. And again, the reason we disclose these numbers, Bernie, is, you know, we're not seeing any adverse selection. You know, we're seeing PAR payoffs across the board in every CRE asset class, whether they be market rent regulated less than 50% or rent regulated more than 50%. So, you know, and that is our expectation going forward. We'll continue to see the PAR payoffs and reductions across all of those multifamily asset classes.

Bernard von Gazicke - Equity Analyst - (00:56:17)

Okay. And then maybe tying the payoffs with loan yields. I know they increased three basis points second quarter. We've seen that tick up. But just given the pay downs of the non accruals, you know, that mix shift from multifamily to C and I, and now the growth in cni, that should be coming through nicely over the next several quarters. Why not? You know, are you expecting a higher change in the yields or are these poor payoffs that are coming at higher yields holding that back a bit? Just want to get a little bit of sense of the expansion on loan yields from here.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:56:53)

Yeah, the PAR payoffs, it's not every, the PAR payoffs are not everything below 3.7%, some alone sort of already reset. So if you look at the blended weighted average coupon of the 1.3 billion that paid off in Q3, it was 5.7%. So it's a blend of low coupon, but also loans that have already reset. And so that's the phenomenon that you're talking about or you see.

Bernard von Gazicke - Equity Analyst - (00:57:25)

And you.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (00:57:25)

Know, some of the payoffs also are coming out of some of the legacy CNI businesses where, you know, we're reducing the exposures down in those credits where, you know, they're in the Libor plus, you know, on average 240 range. So some of those payoff that does have some impact on that.

OPERATOR - (00:57:51)

The next question comes from David Chiaverini with Jefferies. Your line is open.

David Chiaverini - Equity Analyst - (00:57:59)

Hi. Thanks. So your pay down activity has been, you know, very strong the past couple quarters. Any line of sight you mentioned about the 400 million in NPLs for the fourth quarter, any line of sight on total pay down activity anticipated for the fourth quarter and how much of that could be substandard?

Joseph Otting - Chairman, President and CEO - (00:58:19)

I think, you know, we have expectations for a similar range of a billion to a billion three in the fourth quarter. So, you know, I would say, you know, that's been somewhat unabated, so to speak of especially you know, in the market of the regulated New York multifamily. Surprisingly, as Lee commented, that continues to be a robust refinance out by, by the agencies and a couple of the large banks who continue to add to their portfolios. So we don't see any material change. You know, we had originally modeled at the start of the year somewhere between seven and $800 million a quarter. And that just continued to accelerate in the second quarter. Obviously the third quarter was the strongest at a billion five. But I think those numbers hang somewhere in that range of a billion to a billion three in the fourth quarter.

David Chiaverini - Equity Analyst - (00:59:20)

Great, thanks for that. And then could you refresh us with thoughts on Mamdani and the impact his potential election win could have on provisioning Latin out to next year? Yes.

Joseph Otting - Chairman, President and CEO - (00:59:35)

So, you know, his, one of his stated, you know, items was that he would freeze the regulated rate increases for four years. The first impact of that is, you know, the decision would be made mid next year by the commission on those freezes. So it's probably, you know, a little bit delayed. But you know, the way we look at it is we go through that entire portfolio, we receive 97% of the financials on that portfolio and we go through property by property analysis both of the cash flows and then if the cash flows are insufficient, we do an appraisal on the properties. So, so we feel like we have a pretty good handle on it would take, you know, this year, as Lee commented, we were pretty much through that portfolio. We did not see material changes to it. And that's because I think the really big items that impacted those properties, which was a lot of insurance, was up 30, 40, 50%. They had increased labor rates increased, H vac, we did not see that carry through for continued increases into this year. So I think the way you model that out is you just make the assumption they're going to be flat revenues and you really need just to understand the expense side because that'll make the difference whether these properties are positive on a cash flow basis.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:01:08)

I think a couple of other things I would just add to what Joseph said. I mean rent increases for the next 12 months have just gone into effect. So the 3% for one year, 4.50 for two years, that runs through September of, of 2026. But I think what will have a bigger impact on these owners are reductions in interest rates. I think that's going to be a big advantage for them. And again we said this previously, a lot of these owners have benefited from the 1031 tax rules. So they have low tax bases in these properties as well.

David Chiaverini - Equity Analyst - (01:01:46)

Thank you.

OPERATOR - (01:01:49)

The next question comes from Chris McGrathy with KBW. Your line is open.

Chris McGrathy - Equity Analyst - (01:01:56)

Morning Chris.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:01:58)

Good morning everyone. Lee, the the margin improvement on Slide 11 over the next two years, roughly 90 to 100 basis points. How much of it is, is the resolution of credit? Like how much is the margin being suppressed from non accruals right now? Do you have a ballpark? Well not an exact bullpup but what I would say just to sort of you know level set is if you, if you sort of those non accrual loans are obviously doing nothing from an earnings or a capital point of view because they're 150% risk weighted. So you get a release of capital as we, you know, as we reduce them, even if we put them into 100% risk weighted asset, you're going to free up those 50 basis points but they're not doing anything from an earnings point of view. So if we were to reduce $1 of non accruals, even if we were just to put it in cash, you're going to earn let's just say 4% on that. And so if we can then use that to invest in CNI and the spreads, as I mentioned earlier, we've got sofa plus 242 basis points that will lead to an even bigger improvement. So reducing those non accruals is a key part of the strategy. What I would say to you is as we look at 2026 we think we can reduce those non accruals by up to a billion dollars and 500 million of that as I say is tied up in the one borrower that's in bankruptcy and we hope to Resolve that in the first part of 26 and then we think we can do another 500 million on top of that throughout the remainder of the year. So that's obviously going to have a big impact on the NIM improvement. But along with all the other points that are pointed out at the beginning of the Q and A, I mean it's not just non accruals, you know, it's the continued resetting of those low coupon multifamily loans. It's growing the CNI book, it's growing other portfolios on the balance sheet. We're starting to originate new CRE loans. The mortgage and residential book securities portfolio is an opportunity. And then also managing our core deposits and paying off wholesale borrowing. So it all plays a part in that NIM expansion.

Chris McGrathy - Equity Analyst - (01:04:35)

Okay, that was helpful. Thanks, Lee.

Joseph Otting - Chairman, President and CEO - (01:04:37)

And then Joseph, for you, the last year and a half have been really about optimizing the balance sheet capital liquidity. And you're on a great track with expenses too. What's the conversation going to be like a year from now? Like, is it going to shift? I assume it's going to shift, you know, in terms of strategic, you know, uses the capital. But any, any thoughts on capital between growth, buybacks, other strategic options? Thanks. You know Chris, we, we really haven't spent time at the board discussing that, you know, you know, I think as we get into 2026 and we show, you know, significant progress against the non performing loans in the overall portfolio and we get assessment, a better assessment of how much growth we can create through our, our business activities. I think that'll give the board the opportunity to sit down mid year and make that assessment of what to do if there is excess capital. But you know, this is a very friendly shareholder friendly board, very focused on, you know, earnings and growing the bank and using capital in the most efficient manner.

Chris McGrathy - Equity Analyst - (01:05:43)

Perfect. And then Lee, if I could, on the earning asset, the asset discussion, what's the embedded thoughts on the cash levels and the security balances in the next one to two years?

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:05:55)

Yeah, so what I would say, Chris, is you're probably going to see an increase in securities in the fourth quarter. We have some excess cash and I think you'll see our securities balances increase about a billion dollars in the fourth quarter of this year. Then I think we probably hold that level of securities as we move through 2026. And then I would imagine that cash is probably in the sort of seven to $8 billion range as we move through 2026.

Chris McGrathy - Equity Analyst - (01:06:36)

Okay. So to get to those asset totals, it's contingent really on the loan growth, you know, continuing the momentum. Got it. Okay, thank you.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:06:45)

That's exactly what's driving the, the growth on the balance sheet. Correct.

Chris McGrathy - Equity Analyst - (01:06:50)

All right, thank you very much.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:06:52)

Welcome.

OPERATOR - (01:06:54)

The next question comes from Christopher Marinak with Jamie. Your line is open.

Christopher Marinak - (01:07:00)

Hey, thanks. Good morning. Lee and Joseph just want to circle back on deposits from the commercial C and I growth that you have obviously had a great quarter. Are there any goals on deposits these next several quarters? I'm thinking more next year than next quarter, but just curious to flush that out further.

Joseph Otting - Chairman, President and CEO - (01:07:20)

Yeah, so we kind of have coming out of this in I group is roughly about $6 billion of new new deposits that will be originated both from the lending relationships. And we also have established a deposit only group to focus on certain sectors. Title, hoa, escrow, some of the conventional insurance industry. We have a group that really focuses on those high deposit categories. So we feel pretty good that we're going to start to see some real strong momentum in the deposit side.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:07:54)

Yeah, I would just add as well as the 6 billion that Joseph mentioned, we do have 2 and a half billion that's tied to the CRE book. And so as we start originating in new CRE loans, again our strategy is about relationship banking. It's not us just giving the balance sheet away. We want to establish much deeper relationships whether that be through deposits or being able to create fee income opportunities. And so that's the model that we're deploying across all businesses within the bank, not just the CNI piece, but you know, with the private bank and the loans that they're originating, particularly the mortgages.

Christopher Marinak - (01:08:43)

Great, thank you very much. And this is a component again of. How managers margin steps up in the next several quarters. And this is I guess a key. Piece, correct, because you know, we would expect a lot of these deposits to be non interest bearing or low interest deposits because they are tied to the loan. Great, thanks again.

Joseph Otting - Chairman, President and CEO - (01:09:05)

You're welcome.

OPERATOR - (01:09:07)

The next question comes from Anthony Elian with JP Morgan. Your line is open.

Anthony Elian - Equity Analyst - (01:09:13)

Hi everyone. The reduction in non accruals you expect in 4Q and through 26, is all of that occurring organically outside of the one in auction or does that include any asset sales as well?

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:09:28)

Most of it. It'll be organic.

Anthony Elian - Equity Analyst - (01:09:34)

Okay. And that, and that includes. Go ahead, go ahead, Lee.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:09:37)

Yeah, it's organic but we deploy a number of strategies. You know Joseph mentioned DPOs, but there's workouts. Some could be through sales. So it's organic but it's, it's, it's us working the various options and strategies that we can deploy against that non accrual book.

Joseph Otting - Chairman, President and CEO - (01:09:59)

Yeah, our approach and what I think we found is, you know, you can sell those pools, you know, in today's market, take a sizable discount to move that. And who we sell those to are going to do the same things that we would do, which is pick up the phone and see if we can work something out with the borrower. I'll remind you, in a lot of instances, you know, low 40% of those borrowers have never missed a payment with us. So in their mind they're performing, you know, at the terms and conditions of the loan. So, you know, we also have a pretty good track record that when we've sold assets or negotiated our way out of those loans, we've generally had a slight gain on the resolutions of those credits, which I think reflects that for the most part we have those loans, you know, marked, you know, pretty close to where we're exiting the transactions.

Anthony Elian - Equity Analyst - (01:10:56)

Thank you. And then on credit quality more broadly, I know you mentioned the prepared remarks. You don't have exposure to Tricolor or any of the other names that have come up, but I'm curious if you've done any reviews on procedures or policies, particularly on the asset based lending vertical within specialized industries after the recent credit events that have surfaced over the past several weeks. Thank you.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:11:17)

Yeah, yeah, great question. We have. Obviously we made sure, like I said earlier, all the names that have been in the press recently, we have no exposure. We reviewed our NDFI book which is about 2.3 billion, 1.1 billion of that is MSR lending. And we lend to the biggest mortgage REITs and originators in the country. We feel good about that. And then on the sort of lender finance side, we're at about a billion dollars of commitments, 600 million of which is drawn. And we went through that book and we feel very good about it as well. So yeah, we did a detailed review just given recent events in other parts of the industry.

Anthony Elian - Equity Analyst - (01:12:09)

Thank you.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:12:11)

Welcome.

OPERATOR - (01:12:13)

The next question comes from Matthew Breese with Steven Zinks. Your line is open.

Matthew Breese - Equity Analyst - (01:12:20)

Hey, good morning.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:12:21)

Good morning.

Matthew Breese - Equity Analyst - (01:12:22)

I wanted to go back to the nim. You know, what percentage of loans today are pure floating rate? And then second, if you have it, what was the spot cost of deposits either today or at quarter end?

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:12:38)

Yeah, so the vast. I would say that when you look at our balance sheet today, you know, the CNI loans are floating. You've got, I mean the residential loans that we have are typically five or seven or ten year arms. So they float, but only after sort of five, seven or 10 years. So you've got a little bit of floating there. So you know those, those are kind of the, obviously you got cash, you got, you got some of the securities as well. So that's what I would sort of say as it relates to the, to the asset side of the balance sheet. As it relates to our spot rate, we were at. And I'm just looking at our daily report. This is the 282.

Matthew Breese - Equity Analyst - (01:13:41)

Yeah.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:13:42)

So we're at. We were at 282 a couple of days ago, Matt.

Matthew Breese - Equity Analyst - (01:13:49)

Great, I appreciate that. And then the second one, within the updated guidance, there was a change in the tangible book value outlook. It now includes the warrants. What drove that change? And could you help us out with the average diluted versus common share outstanding expectations for the fourth quarter and early 2026? I also think there is some, some thinking and I was curious on this as well. You know that you'll be profitable in the fourth quarter. I was curious if that holds up as well.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:14:18)

So that is what's driving it. It's the warrants. So the warrants kick in in Q4, the share count goes from about 416 million to 480 million and then that carries through in 26 and 27. We've also adjusted the total book value on the guidance slide for the warrants as well. So that's what you're seeing, Matt. Exactly right.

Matthew Breese - Equity Analyst - (01:14:45)

And that'll impact average dilute as well as common shares outstanding.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:14:49)

Yeah, that's correct.

Matthew Breese - Equity Analyst - (01:14:51)

Okay. And then on profitability is the expectation still that you'll be profitable in 4.2?

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:14:57)

We expect to be, but there's a lot of moving parts and I think again I'll just point to the progress that we've made quarter over quarter for the last few quarters.

Matthew Breese - Equity Analyst - (01:15:13)

I'll leave it there. Thanks for taking my questions.

OPERATOR - (01:15:17)

The next question comes from David Smith with Truist Securities. Your line is open.

David Smith - Equity Analyst - (01:15:24)

Hi technical one on capital. After the holdco got consolidated down to the bank, I think there were some preferred that got moved down. Is there any difference in how those. Are going to qualify for Tier 1 treatment now?

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:15:40)

No change at all in how they will qualify. Thank you.

David Smith - Equity Analyst - (01:15:49)

Thanks, David.

OPERATOR - (01:15:50)

The next question comes from John Arfstrom with RBC Capital Markets. Your line is open.

John Arfstrom - Equity Analyst - (01:15:58)

Hey, thanks.

Lee Smith - Senior Executive Vice President and Chief Financial Officer - (01:15:59)

Good morning guys. On the CRE pricing you mentioned earlier, Lee, is that market or acceptable pricing on renewals? Just curious if you're losing deals on pricing or is that not really the case. So I would say, and this is why we're seeing a significant amount of par payoffs, that borrowers are able to get better deals at other institutions or the agencies. So we've been very rigid in not moving off the 5 year FHLB plus 300 or prime plus 275. The reason being, as you know, we are overly concentrated in CRE and we are looking to reduce that concentration. And so I think the reason that you've seen the heightened payoffs that we've experienced is we're being very rigid and sticking to that sort of knitting. And I think other lenders are leaning into the space and those borrowers are able to get better deals than what I just mentioned. And that's what's driving the part payoffs. And we're okay with that because again, we're trying to reduce our exposure to CRE and multifamily and get to that diversified balance sheet structure.

John Arfstrom - Equity Analyst - (01:17:20)

Okay, good. I appreciate that. And then Joseph, for you maybe kind of a simple question, but when I look at the credit stats are kind of flat to down and I know it's not linear, but in your mind, is there anything new in the legacy credit book relative to a quarter ago, or is it basically, you know, where the issues are and it's just timing for these numbers to fall?

Joseph Otting - Chairman, President and CEO - (01:17:46)

Yeah, there's nothing new. You know, we obviously went through the entire multifamily portfolio again and, you know, we laid out on Slide 18, you know, really where the, you know, perceived risk is in the bank, which is in that greater than 50%, 50% rent regulated. So I think, you know, this is, you know, more, you know, the train is on the tracks. It's our responsibility to clean up the credit problems. And I think we're on a really structured path to get that done.

John Arfstrom - Equity Analyst - (01:18:19)

Okay. All right, thank you very much.

OPERATOR - (01:18:24)

This concludes the question and answer session. I'll turn the call to Mr. Otting for closing remarks.

Joseph Otting - Chairman, President and CEO - (01:18:31)

Well, thank you everybody and I'd like to personally thank our board and especially our lead director, Secretary Steven Mnuchin. The work and commitment has been really important. The leadership team at the bank has really valued the board. I think maybe over the last 12 to 15 months, we probably set a record for board and committee meetings in a bank, and it really shows in the results. I'd also like to thank the executive leadership team of the bank and the women and men of the company. We really are focused on building a great company. And I thank you for all your work, dedication to the bank and very much important to our customers. And then as a final note, I'd like to thank the Federal Reserve and especially Mona Johnson and her team will no longer be regulated by the Fed. She was, she was a source of, you know, knowledge and assistance as we navigated our challenges. So thank very much, appreciate Mona and the Fed team who, who helped us. So, so thank you again for taking the time to join us this morning and your interest in Flagstar Bank.

OPERATOR - (01:19:45)

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