Flagstar Bank, National Association Q3 FY2024 Earnings Call

Hello, and thank you for joining us. My name is Regina, and I will be your operator for today’s conference. I want to welcome everyone to the New York Community Bancorp, Inc. Third Quarter 2024 Earnings Conference Call. All lines are muted to minimize background noise. After the speakers finish their remarks, we will have a question-and-answer session. Now, I would like to hand the conference over to Sal DiMartino, Director of Investor Relations. Please proceed.

Thank you, Regina, and good morning, everyone. Thank you for joining the management team of New York Community Bancorp for today's call. Today's discussion of the company's third quarter results will be led by Chairman, President and CEO, Joseph Otting; along with the company's Chief Financial Officer, Craig Gifford; and our Chief Credit Officer, Kris Gagnon. Before the discussion begins, I would like to remind everyone that our quarterly earnings press release and investor presentation can be found on the Investor Relations section of our company website at ir.mynycb.com. Additionally, certain comments made today by the management team of New York Community Bancorp may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. Also, when discussing our results today, 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 now, I would like to turn the call over to Mr. Otting.

Thank you, Sal, and good morning, everyone, and welcome to our third quarter earnings call. We're actually quite excited about the quarter and what we accomplished during the course of the quarter. Today, we're going to review the third quarter results, an update of our three-year forecast and provide an overview on our key strategic initiatives. As I've mentioned in the past, it is important for our management team to remain engaged with the analyst community and investors on our progress as we continue to transition for the remainder of 2024 and into 2025. During the third quarter, we continued to make significant progress on multiple fronts towards our goal of becoming a diversified regional bank, which focuses on consumer, small business, commercial banking, private banking, and commercial real estate. Some of the actions that we've taken over the last three to five months point us in that direction. Turning to Slide 3. Under the first area, you will see that with our Board transformation complete, we are quickly building out our middle market commercial banking and specialized industry lending verticals with the addition of over 30 new hires in this space over the last 90 days. This includes seasoned lenders and the infrastructure to support them. Additionally, we hired a new Chief Information Officer, Chris Higgins, who previously worked at U.S. Bank and was most recently the CIO at MUFG. He brings a tremendous amount of experience and will be a key asset and leader in the company as we proceed. One of the things I think we're most excited about is that we continue to attract top-tier talent to the organization in virtually every area of the company, and I have great confidence in the leadership team of the bank. As far as executing on our operating plan, this quarter marked the second consecutive quarter of solid deposit growth, both in retail and in the private bank. In the private bank, we're seeing many customers return after the disruption earlier this year, and we're winning new relationships. Moreover, private banking deposits are more moderately priced, with a weighted average cost in the low 2% range. Last quarter, I discussed the opportunity to exit another $2 billion to $5 billion in non-core businesses. During the quarter, we made the strategic decision to exit certain non-relationship based businesses and reduce our exposures under some large exposures where we've syndicated our positions within the C&I portfolio. As a result, C&I loans declined $1.3 billion, or 8%, compared to the second quarter due to the runoff of these loans. Our pro forma CET1 ratio, including the impact of the sale of the MSR and third-party origination business, is 11.4%, which compares favorably to our peers. We anticipate closing the sale of the servicing MSR and third-party broker business to Mr. Cooper by the end of this month, November. We have also made significant progress in reducing operating expenses through headcount reductions and cost controls, while still investing in critical areas like our commercial and private banking, and our risk infrastructure. Last week, we announced a workforce reduction plan, which will reflect in our fourth quarter results. In addition, we have significantly cut non-personnel costs as we focus the organization and brought in talent to perform functions within the organization. We are on track to meet our earnings forecast goals by year-end 2027. Our liquidity remains strong at over $41 billion, resulting in approximately 300% coverage to uninsured deposits. We also utilized a portion of our excess liquidity during the quarter to pay down $9 billion in wholesale borrowings. In October, we paid down an additional $1 billion, which will help improve our funding costs over time. We have completed reviewing virtually the entire CRE portfolio. At the end of the third quarter, we were 97% complete compared to 75% in the second quarter. We continue to proactively manage our problem loans and take appropriate actions to de-risk the loan portfolio, including taking significant charge-offs and continuing to build our allowance for credit losses. In addition, we're continually adding talent and resources in our risk management area as we build out our risk governance infrastructure. The biggest takeaway from our perspective is that our multi-family borrowers continue to support their properties. During the first nine months of the year, approximately $2.1 billion of our multi-family loans reached their repricing date. Over 90% of these properties either paid off or are at par or remain current. We also continued to reduce our CRE exposure. Deposit growth, as previously discussed, was another highlight this quarter. This growth, along with our paying down about a third of our wholesale borrowings, resulted in a positive shift in our funding mix. I'm pleased with the progress we're making, and I'll now turn it over to Craig, and I look forward to your questions.

Thank you, Joseph. On Slide 7, you can see our financial balance sheet information. Our CET ratio on a pro forma basis for the sale of the MSR business, as Joseph mentioned, is 11.4%. We ended the quarter with an actual GAAP ratio of 10.8%. The 60 basis point increase on a pro forma basis reflects the lower RWAs from the sale of the mortgage transaction and the increase in capital that comes from the small gain we expect to recognize on the transaction. Adjusting for AOCI, our pro forma CET1 ratio is 10.7%. In general, we have lower securities unrealized losses than our peers. Our liquidity position is robust and continues to improve. Slides 8 and 9 present an updated forecast through 2027, covering some of the more relevant changes from prior information provided. The most significant updates reflect an expectation that our non-accrual loans will remain elevated through 2026, which Kris will discuss in more detail. We also expect higher FDIC assessment costs through 2026, principally related to our criticized and classified loan levels. From a ratio perspective, the impact of those items does reflect an expectation of a reduced level of earnings in 2025 and 2026. However, as we get beyond the non-accruals and the FDIC assessment increases, we expect 2027 to be consistent with our previous expectations. Moving to Slide 9, from a margin perspective, we will have pressure on interest income related to a higher level of non-accruals out through 2026. Additionally, in 2025 and 2026, we expect approximately $150 million of a change in a remapping of interest expense on custodial deposits, which reduces prior forecasts for our net interest income and increases our non-interest income. Our margin continues to improve beginning in '25 through '27 due to the repricing of our commercial real estate and multi-family loan portfolios. We expect our margin has bottomed in the third quarter. Our provision for loan losses was impacted by charge-off levels net of recoveries of $240 million in the third quarter. We expect a similar, although slightly less, charge-off level in the fourth quarter, tapering in 2025. Our expectation for the full year of provision for loan losses for '24 is $1.1 billion to $1.2 billion. That's an increase from our prior guidance related to our experience with charge-offs associated with multi-family loans. We will expect a higher FDIC assessment, about $100 million a year in '25 and '26. In the fourth quarter of this year, the mortgage transaction will close in a few weeks. I think those reflect the changes. Slide 10 shows the success we're having in deposit gathering. As Joseph said, this is the second quarter of solid deposit growth. We've seen increased deposits in the retail channel, up $2.5 billion or just under 8%, and also in the Private Bank, with deposits increasing $1.8 billion or 11% to nearly $18 billion as our bankers are winning new relationships and customers are returning dollars to the bank. More importantly, the Private Banking deposits carry a lower cost of funds and are generally more moderately priced. I will now turn the call over to Kris Gagnon to discuss our asset quality and credit metrics.

Thank you, Craig. If we turn to Slide 11, we had just over $1 billion in commercial real estate payoffs during the third quarter, bringing the year-to-date amount to $2.6 billion. Importantly, these payoffs were at par, and approximately 34% of these payoffs related to our substandard portfolio. If we move to Slide 12, this is an update of our annual CRE portfolio review. Through the third quarter, we have reviewed 97% of the total CRE portfolio, which includes 97% of the multi-family portfolio, 93% of the office, and 94% of the non-office in the CRE. If we turn to Slide 13, this is an overview of the multi-family portfolio. The key takeaways are that year-to-date, we had $2.1 billion of multi-family loans repricing; of those loans, 34% paid off at par, while the remainder stayed with the bank. On Slide 14, approximately 3% of the portfolio is left to review, and these are loans with an average balance of $3 million. Most of the largest loans in the portfolio have been reviewed. I want to emphasize that as these loans near their repricing window, we re-evaluate them at current market rates and their ability to service those loans. This can lead to more severe classifications if the borrower’s cash flow is impaired or insufficient to service the loans appropriately. Moving on to the office portfolio on Slide 15, we reviewed 93% of this portfolio. We have been proactive in managing this portfolio and have taken significant charge-offs over the years. The office reserves for the remainder of the loans in the portfolio stand at 6%, which compares favorably against our peers. Slide 16 presents our non-office CRE portfolio; 94% of this portfolio has been reviewed. At this point in time, I'd like to provide insight into our allowance by loan category, detailed on Slide 17. Our allowance for credit loss is up to 1.87% this quarter compared to 1.78% in the prior quarter. And Slide 18 gives further perspective around asset quality. We have been diligently identifying problem loans and working towards resolution. This quarter, we had approximately $600 million increase in our non-accrual portfolio. Notably, 68% of these non-accruals are performing as per the terms of their credit agreements. This relates to the fact that many loans entering non-accrual status are based on future ability to pay as they move closer to the repricing window. With that, Craig, I'll turn it back over to you.

Okay. Thank you, Kris. Slide 19 depicts our liquidity profile. Our liquidity remains strong due to the success of our deposit gathering efforts over the last two quarters. We have $41.5 billion in total liquidity, representing about 300% of our uninsured deposits. Slide 20 summarizes our third quarter financials. As I mentioned, the net loss attributable to common stockholders was $289 million, or $0.79 per share, driven by the provisions and expenses for the quarter, as well as a lower level of noninterest income due to the sale of the mortgage warehouse portfolio that closed in July. Joseph, I'll turn the call back to you.

Okay. Thanks, Kris and Craig. One final slide before we turn it over for questions. On Slide 21, we show New York CB's investment profile. We currently trade at 63% of tangible book value. We believe that moving forward to address our credit issues, along with the emergence of our C&I strategy, should help close that gap. This compares to 179% for Category 4 banks and about 155% for regional banks, indicating significant upside in the company as we execute our business plan. I would also like to thank many of you who recommended that we convert our holding company name. We chose Flagstar Financial, with the symbol FLG, and we will begin trading on Monday. This aligns the organization going forward with our Flagstar brand, including branches in November through March of this year, where we rebranded all the branches with a consistent look and theme across our retail banking franchise, which includes California, Arizona, Florida, New York, New Jersey, and around Michigan's Great Lake. Finally, I'd like to thank each of our teammates for their dedication and commitment to our customers. And now we'd be happy to answer any questions you may have. Operator, you can open the line for questions.

Our first question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

Hi, good morning.

Good morning.

Appreciate all the color on the moving pieces between the old and new guide. Was any of the change from the change in the forward rate curve? Can you talk about how you think the balance sheet is positioned for rate cuts here?

Yeah. So we're slightly liability-sensitive. We will benefit a bit from lower rates. We have quite a bit of very short-term assets in our cash and securities portfolio. We’ll benefit from a deposit-side perspective, but there will be pressure on the on-balance sheet liquidity aspect of the portfolio. I would say though that we've been very successful in bringing down our deposit rates in the last six weeks. On our more liabilities, our more rate-sensitive deposits, our savings portfolios and our CDs, we've actually had a higher than 100 beta. We brought down those rates between 60 and 75 basis points compared to the Federal Reserve move. So we've been very successful in tapering that. The impact in the fourth quarter will be a lower level of deposit gathering on the retail bank. I expect it to be flat to slightly positive from a retail deposit gathering, but I think we'll see strength in the Private Bank, probably not as strong as the third quarter was, but we should still see deposit growth in the Private Bank in the fourth quarter.

Got it. And if I can have a quick follow-up. It seems like the main difference between the two guides between last quarter and this quarter is the non-accrual loans. So what's causing those non-accrual loans to remain on the balance sheet for longer? Is it that you'd rather not sell them given the pricing being offered in the open market? And would you consider selling them down the line?

Yeah. Thanks for that question. We're exploring all opportunities to reduce our non-accrual portfolio. We are working with borrowers to work them out. We are considering discounted payoffs and will explore the market to see if there's an opportunity to sell. In some cases, we think we can do better working them out ourselves rather than selling them. So, those are some avenues we are taking to reduce the portfolio.

Great. Thank you.

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

Good morning.

Hi, Ebrahim.

Hey. I wanted to follow up on the credit comments. Regarding the 68% of loans, the non-accrual, and the maturity profile you showed through '26 and '27, I'm trying to understand if your provisioning outlook has remained unchanged quarter-over-quarter. Can we conclude that at this point, the credit quality risks linked to repricing, even for loans maturing in '27, are managed either through reserves or are already classified as non-accrual? Essentially, does this mean that the risk of negative surprises in credit is fairly limited from here? Additionally, could you discuss rate sensitivity and how a 20 or 30 basis point change in the five-year rate from its current position affects that analysis?

Ebrahim, thank you. The rate profile is interesting. At the end of the third quarter, rates had come down at the five-year point, roughly 90 basis points. But since then, they've backed up about 35 to 40 basis points. We were cautious in reflecting the improvement in rates in the reserving, as we recognize changes can be transient. The decrease in rate levels we’ve seen is quite favorable to the portfolio in our credit modeling, probably about a $200 million improvement in the credit risk profile due to the improvement in rates. I would expect a similar level of improvement if rates continue to decline in the intermediate term. It's particularly relevant for the repricing of these loans. As Kris mentioned, if you look at the projections from a provisioning standpoint, I expect the provision for '25 and '26 will remain relatively in line. I think we’ll see a higher level of charge-offs in the first quarter and a tapering through the rest of the year. Kris pointed out on Slide 14 the maturity profile or the reset profile of the portfolio. We effectively reflect in our criticized and classified loans those loans expected to reprice out through the middle of 2026. If you look at that chart, you’ll see a reset profile beyond that, and we'll reflect those as we regrade them when they enter the repricing window we assess from a loan grading perspective. We feel confident that the guidance reflects the impact of that.

That was helpful. And just one follow-up question. Maybe Joseph, for you. I think you talked about where the stock trades relative to tangible book. The concern from an investor standpoint is just the lack of visibility. Like we’ve seen a lot of senior hires that you've announced, but we saw the significant changes in '25 and '26 earnings outlook compared to last quarter. I appreciate that '27 is the same. Just talk to us in terms of how we can measure the senior hires you're bringing on to the bank. Banking is a tough business, even to achieve a 10% ROE. So I’m trying to understand if the goal should be to see proof points of these teams coming on-board and possibly an acceleration of low-cost deposit growth or loan growth starting in the fourth quarter of '25? What’s the best way to measure the progress moving in the right direction in that regard?

Thank you, Ebrahim. It starts with how we're rebalancing the balance sheet. We're currently sitting somewhere below $45 billion in commercial real estate, and our goal is to get that down to the low $30 billion range. We're achieving this through a combination of payoffs, averaging around $1 billion per quarter. So, over three years, that could naturally lead us to the target. Meanwhile, we’re actively focusing on our C&I book, currently around $16 billion, with a goal to increase that to $30 billion by 2027. Most of our new hires have extensive backgrounds in the C&I space and built significant relationships with CEOs and CFOs in these companies. To answer your question, we anticipate seeing the ability of our new hires to solicit outward into relationships immediately. Additionally, in our existing C&I portfolio, very little of it represents commercial and corporate banking, which our newly hired bankers specialize in. Thus, it presents considerable growth opportunities for us.

The balance sheet projections show that the portfolio reprices and resets, with the experience of repayments showing between $750 million and $1 billion in commercial real estate and multi-family runoff per quarter over the next two years. We expect similar increases in commercial banking and C&I growth as loans begin to pay off. Our expectation is that these bankers will bring in deposits that will significantly increase our deposit growth starting in late 2025, continuing through '26 and into '27. Roughly, you can think of it as a two-for-one basis for loans to deposits, so we're expecting that the commercial banking group will bring in deposits to support that loan profile.

Got it. Thank you both.

Our next question comes from the line of Dave Rochester with Compass Point. Please go ahead.

Hey, good morning, guys.

Hi, David.

Sorry if I missed this earlier, but I heard you mention the $2 billion to $5 billion of assets assessed as non-core. You addressed that last quarter as well. Where do you stand on that now, given the runoff we’ve seen on the C&I front? Are you still looking at the business and evaluating for core/non-core? Could that increase from here? How are you thinking about that?

We've completed a comprehensive review of all businesses in the company and are actively generating new C&I loans that had previously been tabled prior to our arrival. Overall, the businesses we currently have are solid; however, we wanted to reduce exposure in certain aspects, especially where we are in the cycle regarding those industries or if our hold levels were larger than we found comfortable. We have adjusted the hold levels down accordingly and have sought participation with those credits. In short, we’re reevaluating our positions based on industry cycles and reducing our hold limits to foster a more diversified portfolio.

Great. And where does the $2 billion to $5 billion currently sit? Is it at $1 billion to $3 billion, given some of the runoff? Where do you see it today?

We’re not anticipating any significant portfolio repositioning in the near term at this point. I could see a bit more rescaling on some credits, but it will be less significant than what we saw in the third quarter.

Great. All right. Thanks, guys. Appreciate it.

Our next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey guys, good morning. This quarter, you made some sizable changes to your projections outlook over the next couple of years. I'm trying to get a sense of how much more confidence you have in these projections than you did in the old ones and whether we're likely to see similar kinds of variability in coming periods?

I would say we continue to improve our visibility into the portfolio and credit performance as well as the expense profile of the company. This is now Joseph’s and my second quarter of in-depth financials review. We have instituted a routine in-depth review at the business line level each month on our financial performance with each of the senior leaders. So, every month, we gain more visibility. I have a good degree of confidence in the net interest income and margin line now. There's a bit of noise in comparing projections because of the remap associated with mortgage deposit costs. We previously projected a benefit in the margin line, but it is actually a benefit in the fees line from an expense perspective. We have taken significant actions to improve our expense profile, roughly $200 million a year, and we still have more to go. We expect to continue identifying efficiency opportunities, many of which are underway, as we improve our technology and business processes resulting in cost improvements in '25 and early '26. The FDIC assessment pressure, notably, is related to business profiles and FDIC determination of insurance premiums. It’s a complex formula reflecting some results from our increased rate, which we expect will be seen through '26. That’s likely the most significant change in the forecast from an earnings perspective.

Okay. And then just one quick follow-up. I’m curious, Craig, on your modeling, what are you assuming in terms of the balance sheet size maybe at the end of '25 and the end of '26?

We're essentially assuming a relatively flat balance sheet. We're projecting a transition from commercial real estate and multi-family loans into C&I loans as real estate loans repay and runoff. Therefore, not seeing much balance sheet growth, but we project a degree of balance sheet growth in the commercial banking area in '27.

Thank you.

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

Hey, guys. Good morning.

Hi.

My question is on revamping the company structure. You've effectively improved senior management and Board expansions. You highlighted progress within C&I. Can you comment on which inning you are in concerning building out your C&I platform? Regarding risk management, considering past deficiencies identified, how far along are you with revamping your risk control function? Also, do you see any further headcount optimization left to go that hasn’t been announced?

As for the Board, we announced that Peter, a long-time Flagstar Board member, will be leaving, and we expect to fill that position hopefully in the fourth quarter. At the executive management level, we are fully deployed now. With the addition of Chris Higgins, we have completed the executive management rebuild. As for hiring at the next level down, we've added 10 to 20 people, enhancing risk positions and infrastructure. We feel positive about the people and the direction we've taken in C&I so far. We're rounding first base in that regard. Our plan incorporates expanding from 30 hires to 130 hires to achieve our goals, and we're not hiring everyone at once. We plan to start growing revenue before adding expenses. On risk infrastructure, we've made significant advancements in the last seven months. We've added talented people with extensive experience from the OCC. We're working on building out the first, second, and third lines of defense which were previously absent and require adherence to enhanced standards. I believe we have built a strong relationship with our regulators as we build this out. Overall, I think we’ve made good progress in risk management and internal audit.

Okay, great. Thanks for that color. Just as a follow-up, you paid down nearly $9 billion of borrowings, utilizing excess liquidity from business sales and deposit growth. What targeted normalized level of borrowings do you aim to reach? How can we understand the pace of those reductions from here?

If you look at the third quarter, we’ll see a reduction in overall liquidity of about $3 billion related to the mortgage servicing sale. Those deposits will leave, and we're holding excess liquidity to provide for that. From here, we’ll generally match loan growth with deposit growth. We have a bit of excess liquidity we’ll use to reduce broker deposit funding in 2025. Those broker deposits, principally CDs, will come due, and we do not anticipate replacing them on a dollar-for-dollar basis. We’ll see a decrease in broker deposit funding. As we grow customer deposits, especially in the Private Banking and commercial spaces, we’ll look to repay some of our wholesale borrowings, but it won't be substantial for the remainder of '24 and maybe a couple of billion in '25.

Okay, great. Thanks for taking my questions.

Our next question comes from the line of Jared Shaw with Barclays. Please go ahead.

Hi, Jared.

Hey, good morning. Thanks. Just circling back on the deposit trends, could you give us a spot rate on the deposit cost at the end of the quarter? You talked about beta, the early beta being greater than 100% on some of the retail deposits. How should we interpret beta over the next few expected rate cuts?

Certainly. Our spot rate on savings is at 5%. That was around 5.55% six months ago and even three months ago. We've brought that down over 50 basis points. I expect to see that continue to decrease further as rates decline in the fourth quarter. In modeling an overall interest-bearing deposit perspective, we project a beta of 50. On a premium product, it will likely be more significant. For Private Banking, the deposit base is more moderate as it includes more noninterest-bearing accounts. So, we expect to gradually bring rates down with those deposits.

Okay. All right. Thanks. As a follow-up, how should we perceive the multi-family reserve level with expectations for higher losses? Have you been reserving for that? Should we anticipate seeing those reserve levels start to climb with provisioning going forward?

It's a balance of the expectations for the criticized-classified portfolio as well as charge-off levels. I don't expect to see the reserve level coming down significantly in the fourth quarter or first quarter. Beyond that, as we get into '25 and '26, particularly as the portfolio moves through many repricings and we monitor borrower performances, we will adjust those reserve levels accordingly. I believe we'll see a fairly consistent reserve level for the next quarter or two.

Great. Thank you.

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

Hey, good morning.

Good morning.

I want to clarify something regarding your guidance for the next couple of years. Craig, you mentioned the remapping. So if we think about NII change predicting a lower revenue change than fees, is that attributable to the $5 million movement you indicated?

To simplify, in '25 and '26, there’s $150 million that moves from net interest income to noninterest income. This shift is related to the earnings credit on the subservice escrow deposits. Additionally, I do anticipate a higher level of non-accruals than previously contemplated through '26, including a greater level of pressure in the guidance for that year.

Got you. Okay. And from an expense perspective, you increased that by $150 million. Is $100 million of this tied to FDIC, guidance primarily related to credit items, which is generally temporary? So, do you expect this to fluctuate? It appears it’s not drastically changing, merely extending expenses.

Particularly concerning the FDIC, that's accurate; the non-deductible FDIC assessment is substantial, causing variable effects on the bottom line over the next two years. This impacts the tax rate, as noted in the footnote.

Understood. So, if rates were to fall back to previous levels, how long would it take to see improvements on credit from a ratings perspective?

We can't reposition them quarter to quarter. The challenge becomes that once we have a downgrade, rates need to shift significantly for upgrades. This pressure will thus continue into '26.

Got you. Appreciate the color. Thanks, guys.

Our next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Hey, thanks. Good morning. I would like to clarify if the substandard and special mention loans have decreased this quarter or what their trend is going forward?

In the fourth quarter, I would expect our special mention and substandard loans to continue increasing, not at the pace we've witnessed previously. We need to review more financial data, and there are loans nearing the repricing window. Trends suggest an increase in substandard and special mention categories.

Understood. They're higher at the end of September, considering inflow and outflow? I see that you’ve had payoffs, but new loans are also entering the repricing schedule.

That's correct.

Thank you for the explanation.

And our last question will come from the line of Chris McGratty with KBW. Please go ahead.

Great. Good morning, guys. The loan-to-deposit ratio, is it at the level you would prefer, kind of low 80s?

I'd like to see it be a bit higher. We’ll continue to gather customer deposits and observe a relatively flat overall balance sheet. I expect the loan-to-deposit ratio will improve but not dramatically as we did in the last two quarters.

Understood. Thank you. I just have a couple of housekeeping items for the fourth quarter. Could you break down the one-time fees and expenses for the fourth quarter and share count once all preferreds are converted?

The share count has settled down. The end of quarter share count reflects ongoing expectations. Virtually all of the preferred shares expected to convert did so in the third quarter. In terms of one-time charges, I expect to see some associated with the mortgage business transaction exit, including asset impairments and severance, likely totaling around $100 million.

Great. Thank you.

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

Hey, good morning. Could we discuss loan portfolio yields? They have been down for four consecutive quarters, despite positive repricing within CRE multi-family. How much accretion was there this quarter within loan yields? How much impact did non-accruals have? When can we expect loan yields to begin to expand?

The primary impact on decreasing loan yields is from non-accruals. There isn’t much accretion currently, merely about $15 million a quarter that we expect will taper off over the next four quarters. In terms of repricing, we have approximately $5 billion a year that will reprice, transitioning from an average rate around 3.5%. In our forecasts, we do have rates declining, but not significantly in that intermediate term. We see those loans moving from the 3.5% level to 7.5% over time. I think we’ll see a turnaround in the fourth quarter and anticipate a positive guidance into '25 as we encounter fewer incremental non-accruals than what we have recently experienced.

Understood. I just wanted to go back and mention your forecast indicating a flat balance sheet overall. If I examine forward guidance, the NII change implies a decrease in earning assets to the tune of around $102 billion in '25 and '26 from $109 billion today. Can you discuss that and the pros and cons of going below $100 billion concerning category designation?

If you drop below $100 billion, you still have four quarters where you are updated towards compliance with Category 4. When you get close to $90 billion, you need to set forth a plan to achieve compliance. Being under $100 billion is not a target or goal; rather, we aim to construct the appropriate risk infrastructure, allowing our business model to grow and expand. To reduce to sub-$100 billion, you would need to shrink by $20 billion or more to escape the tightened standards.

Understood. Your outlook suggests that earning assets could decrease by $5 billion to $10 billion?

Yes, although much of that can probably come from cash. It's earning assets, but we are directed towards cash deployment, either paying down debt or decreasing broker deposits. The loan portfolio is not expected to decrease as much as the cash component.

Appreciate that. Thank you.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

Hey, thanks. Good morning, guys.

Good morning.

If the economy stays steady, when do you think we'll see the peak in non-performers?

We expect this ongoing repricing will continue to create new additions in the non-performing portfolio over the next two years. The key question is how swiftly we can resolve existing non-performers. Most non-accrual loans remain performing, however, many remain classified due to future payment expectations as they approach their repricing windows.

Was there anything unusual this quarter in terms of review? It didn’t rise like last quarter, but are you saying increases are occurring at a decreasing rate or how material do you expect any future increases to be?

No, nothing unique about this quarter. We’re maintain our standard processes. Financial reviews are ongoing. We’ve moved to smaller loans - more widgets, I suppose. We'd expect the trend moving forward reflects an increase in substandard loans and special mention loans.

I’d like to add that our new standards include more stringent borrower-required financial data submissions. In many instances, we see the borrowers providing consistent financial data, and we’ve instituted a new standard of evaluating debt service coverage in addition to loan-to-value reviews.

Yes. There’s been a marked improvement in the collection of financial information from our borrowers; 98% provided it, which is substantially higher than before. Implementations from the second quarter continue to drive evaluation standards toward debt coverage, rather than relying solely on loan-to-values.

Okay. That clarifies it. I have two others. You’ve provided a lot of benchmarking, and I know it’s a tough question, but what should normalized reserves look like for the company into '26 and '27?

Our portfolio is quite specific. It depends significantly on the performance of the portfolio as we shift toward a more C&I-based and balanced offering. The C&I reserve levels will be considerably lower than those from commercial real estate in the existing portfolio, which will affect the overall reserves.

The portfolio mix is crucial.

You mentioned margins and impacts from repricing. Is this a straightforward path for margin improvement, mainly driven by CRE resets? Are you confident in that margin trajectory?

The margin percentage is principally driven by repricing of the commercial real estate and multi-family portfolios combined with pressure from the growth in C&I, which tends to have lower spreads.

All right. Thank you, guys.

Our final question comes from the line of Steve Moss with Raymond James. Please go ahead.

Hey, good morning.

Hi, Steve.

I wanted to follow up on non-performers. The multi-family bucket was the primary driver of the increase this quarter, and I'm curious if that is due to the roll-forward setup concerning the 18-month analysis as you assess substandard and criticized loans? Is it that we could see step-ups in certain quarters based on repricing dynamics extending into 2026, or was there something unique impacting it this quarter?

This quarter is a blend of progress on our review process. We advanced from 75% to 95% in evaluations, leading to more loans entering that 18-month analysis range. While we have a bit more review to catch up on, not much, I expect we’ll see ongoing quarterly additions. Within the next year, expect $1 billion a quarter to enter this evaluation window along with additional larger transactions moving through for scrutiny and classification. These factors combined will continue driving future changes.

Thanks for taking my questions.

Okay, thank you. We appreciate your time today and all the questions regarding our performance. Craig and I are available to discuss further if needed. Please reach out to Sal for engagement. We conclude this as New York Community Bank and look forward to our next meeting under the Flagstar Financial name. Thank you.

That will conclude today's call. Thank you all for joining, and you may now disconnect.