Flagstar Bank, National Association Q4 FY2024 Earnings Call

Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time I would like to welcome everyone to the Flagstar Financial Fourth Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. Operator Instructions. I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.

Thank you, Regina, and good morning, everyone. Thank you for joining the management team of Flagstar Financial for today's call. Our discussion today of the company's fourth quarter and full year 2024 results will be led by Chairman, President, and CEO; Joseph Otting, along with the company's Senior Executive Vice President and Chief Financial Officer Lee Smith. 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.flagstar.com. Additionally, certain comments we made today by the management team of Flagstar Financial 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 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. When discussing our results, we will reference certain non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliation of these non-GAAP measures. And with that, now I would like to turn the call to Mr. Otting.

Thank you, Sal. And good morning everyone and welcome to our fourth quarter earnings call. Today is somewhat tragic in our nation. Our hearts and minds this morning are with the accident victims and first responders at Reagan National Airport. I think a lot of you know that for four years, that was my primary airport. I know many people in that area, so it's really a tragedy for our nation. I'd like to thank all of you for your interest and support as we've worked to build a successful Regional Bank. I would also like to welcome Lee Smith who is joining me this morning for his first earnings call as the company's new Chief Financial Officer. Lee has been an important part of the company's leadership team and active in various aspects of the company's turnaround throughout the past year, especially over the last six weeks, since being named to the CFO role. This morning, we'll discuss our results for the fourth quarter, which were better than our internal projections and analysts' forecasts. We'll discuss some of the trends we are seeing, update you on our strategic priorities, and provide you with our three-year forecast. I'm excited to share our fourth quarter results, and even more excited about the momentum and progress we are seeing in 2025. As I look back on 2024, I think we've accomplished a lot in a very short period of time. While last year was transitional for the organization, we made significant progress on all of our strategic priorities, setting the stage for profitable growth going forward. When I joined the company last March, we outlined for the investment community our three primary objectives for the year: understanding credit risk in the commercial real estate portfolio, addressing regulatory compliance issues, and putting the bank back on a path to profitability. Today, I can say that we've achieved this, and the company is in a better position than it was 12 months ago. We are on track to be profitable in the fourth quarter of this year, marking a turning point for consistent profitability. Moving on to our presentation, starting on Page 3. This slide provides an update on our strategic focus. As you can see, we continue to bolster management and talent in the organization. More importantly, we have added significant talent to grow our C&I business. We'll discuss some of those results shortly. We see strong deposit growth in retail and private banking. We have significantly reduced our CRE exposure and have proactively managed problem loans while successfully completing the sale of our mortgage warehouse and mortgage servicing businesses. Our strategic focus on achieving capital and earnings has us set to reach full profitability in 2026. We also have a strong liquidity profile of over $31 billion. We reduced wholesale borrowings by almost $7 billion or 34% during the year, representing just 13% of total assets, with our loan deposit ratio at 90%. We've completed reviews of our CRE, addressed exposure through charge-offs, pay-offs, and loan sales. Our ACL coverage ratio stands at 1.78%, and we have increased those reserves for the riskier aspects of the portfolio. Overall, we feel good about the direction we are heading, with our CET1 capital ratio for the fourth quarter up to 11.9%, increased by over 280 basis points during the year, ranking us within the top quartile of our peers. Moving to Slide 4, in 2025 we aim to improve our earnings profile via NIM expansion, moderating credit costs, and driving operational efficiency. By the end of 2025, we plan to reduce operating expenses by $600 million, or 23%, compared to 2024. The focus is on executing our C&I and private bank growth initiatives, proactively managing the CRE size of the portfolio, and normalizing credit to reduce charge-offs, provisions, and slow new loan formation. On Slide 5, we illustrate how much we've progressed in commercial banking over the last six months. We added 24 bankers during the quarter, building on the 30 that we added in the third quarter, and we plan to hire an additional 100 throughout 2025. We've begun with a strong platform of roughly $7.2 billion to start. In the fourth quarter, we secured new loan commitments of $620 million and funded just under $400 million in loans, doubling what we did in the third quarter. Additionally, we have a solid base of low-cost deposits and see meaningful growth opportunities in this segment, following market mergers and the exit of competitors enabling us to expand our market share. I would like to turn it over to our CFO, Lee Smith, for his comments.

Thank you, Joseph, and good morning, everyone. Before I dive into the quarter's results, I want to reiterate how we are executing our strategic plan to transform Flagstar into a top-performing, diversified, relationship-driven regional bank. Over the last nine months, Joseph and the new investors have assembled a strong Board of Directors and a quality executive management team. We have executed several initiatives that create a solid foundation from which we can build. A pivotal moment was the sale of the mortgage warehouse portfolio in the third quarter, which generated 70 basis points of tier 1 capital and approximately $6 billion of liquidity. This was also bolstered in the fourth quarter by selling the MSR asset, the servicing subservicing business, and the TPO origination business. This transaction yielded several benefits for the bank, including an additional 50 basis points of tier 1 capital and allowed us to initiate a cost optimization program. We are continuing with that program with a focus on aligning our non-interest expense run rate with previously provided full year 2025 guidance. As Joseph mentioned, we're on track to reduce operating expenses by $600 million in 2025, with many initiatives either completed or in process. The initiatives include a focus on compensation and benefits, vendor spend, real estate optimization, and process improvements, aiming for a leaner and more efficient organization without sacrificing our commitment to safety and soundness. Additionally, during the fourth quarter, we leveraged our excess cash position to pay down higher-cost wholesale borrowings, repaying just under $5 billion of FHLB advances with a blended weighted average cost of 4.83%. We also repaid a $1 billion advance from the bank term funding program with a cost of 4.85%, and we repaid $2.8 billion of brokered deposits while issuing only $200 million in new brokered deposits, resulting in a net pay down of $2.6 billion with a cost of approximately 5.2%. Given the timing of most of these paydowns, the full benefits to the net interest margin will not be realized until the first quarter of 2025. Furthermore, these paydowns, alongside improving our funding profile, have helped reduce our FDIC insurance cost by $24 million in the fourth quarter compared to the third quarter. Our strong deposit-gathering ability has enabled us to achieve this. Moving on to Slide 6, our results came in better than expected with a smaller loss for both the fourth quarter and the full year 2024. We reported a net loss available to common stockholders of $0.41 per diluted share on a GAAP basis. Notable items included a $92 million gain on the sale of mortgage businesses and related activity, which included $3 million in trailing revenues tied to the business and assets sold, $31 million in severance costs, $77 million in long-term real estate asset impairments, $12 million in trailing expenses related to the sale of the mortgage businesses, and $11 million in merger-related expenses. Factoring all of these items, our fourth quarter net loss narrowed to $0.34 per diluted share. On Slide 7, we summarize our capital and liquidity position. Our CET1 ratio of 11.9% improved significantly compared to the previous quarter and the year-ago quarter, placing us in the top quartile among both Category 4 banks and regional banks between $50 billion and $100 billion in assets. Adjusted for AOCI, our CET1 capital ratio would be 10.8%, also in the top quartile relative to peers. Moving to Slide 8, the slide reflects our actual results for the full year 2024 compared to the forecast we provided last quarter. We were in line with or slightly better than expected for each of the major line items. Slide 9 provides our updated forecast for 2025 through 2027. We are forecasting a smaller loss per share relative to previous guidance in 2025. While our net interest income is slightly lower than previously forecast, primarily due to a smaller balance sheet, it is offset by slightly higher non-interest income and lower non-interest expenses. Our EPS guidance for 2026 and 2027 remains unchanged. Slide 10 gives another look at our strengthened capital position, with our CET1 ratio increasing over 280 basis points over the past year to 11.9% due to the strategic actions taken in 2024. This capital will be redeployed into growing our C&I and consumer businesses as we aim to create a diversified balance sheet. On Slide 11, we provide an overview of our quarter-over-quarter deposit growth. Although overall deposits decreased by approximately $7 billion, largely due to the sale of the mortgage servicing business, we saw strong growth in our retail channel of $900 million and in our private bank of $500 million. The sale of the mortgage servicing business allowed us to reduce higher-cost escrow deposits. Approximately $4.5 billion of these deposits have left the bank, and we anticipate the remaining $1 billion to $1.25 billion to run off fully by mid-first quarter. We noted that the deposit beta has been running over 45%. To provide context, we have deliberately lagged on the first 50 basis point rate cut in September, but for the November and December rate cuts, we remained within or above our targeted beta range of 55% to 60%. On Slide 12, we had another strong quarter for commercial real estate payoffs, all at par. During the quarter, we observed $916 million of multifamily and CRE payoffs, with $440 million, or 48%, categorized as substandard. This trend of plus or minus $1 billion in par payoffs has sustained over the last three quarters. On the lower part of this slide, you can see how we've proactively managed our CRE concentration. On a spot basis, total CRE balances, excluding owner-occupied CRE, are down $4.7 billion, or 9%, year-over-year. Also, our CRE concentration ratio has declined from 501% to 443%. These declines attest to how proactive we've been in managing down our CRE exposure. Slide 13 details our loan portfolio and our priorities for 2025. We will continue to reduce overall CRE exposure through payoffs and loan sales while growing our C&I businesses and residential mortgage portfolios, leveraging our bank, branch, and private client customers together with our full suite of mortgage products. During the quarter, we sold approximately $244 million of non-accrual CRE assets, including our largest office credit, and moved a further $266 million to available for sale, which we expect to close in the first quarter. We also sold $42 million of non-performing 1-to-4 family loans during Q4. We will remain opportunistic and explore all options, including loan sales, related to reducing our CRE exposure and non-performing loans, executing transactions that are in the best economic interest of Flagstar. The slide that follows gives an overview of our multifamily portfolio, which we've reduced by $3.2 billion or 9% in 2024 through payoffs, sales, and charge-offs, with over $300 million charged off last year. Our allowance coverage at 12/31, excluding co-op loans, stood at 1.9%, the highest among multifamily-focused lenders in the Northeast. During 2024, we had $3 billion of multifamily loans reset, and as of January 22nd, 41% or $1.2 billion have been paid off. The remaining $1.8 billion repriced according to the contract's terms, with $1.5 billion of those loans currently in good standing. In essence, 90% of multifamily loans resetting in 2024 have either paid off or have repriced and are current. Looking ahead, we have approximately $5 billion of multifamily loans either resetting or maturing in 2025, another $5 billion in 2026, and almost $9 billion in 2027. Slide 15 reviews our office portfolio, which we've actively managed, shown by a $900 million or 27% decline over the year to $2.5 billion or 3.6% of total loans. Like the multifamily portfolio, this progress has been achieved through payoffs, loan sales, and charge-offs totaling $368 million. Our allowance coverage as of 12/31, excluding owner-occupied CRE, increased to 7%, ranking among the highest compared to our regional bank peers. We sold our largest office exposure during the quarter. Slide 16 shows our allowance by loan category. We have three points to make. First, our total allowance for loan losses coverage ratio and our total ACL coverage, including unfunded commitments, has slightly decreased but remains strong levels, driven by lower loan balances. Second, our coverage on asset classes identified as riskier, such as rent-regulated multifamily and office, increased during the quarter. Lastly, in 2024, we took significant charge-offs on the portfolio totaling nearly $900 million. Along with our allowance and our strong capital position, this provides a significant cushion to absorb any future losses. On Slide 17, we provide additional insights into our asset quality trends. Our non-accrual loans increased $101 million, or 4%, to $2.6 billion. However, it is essential to highlight that 56% of our non-accrual loans are current and performing. We have been proactively identifying problem loans and putting them on a path to resolution. We moved around $266 million net of $20 million in charge-offs to held-for-sale. We also noted a linked quarter increase in delinquencies, primarily in the multifamily portfolio, largely attributed to one borrower. As of January 22nd, $541 million of the loans were brought current. Finally, Slide 18 illustrates our liquidity profile, which remains robust due to ongoing growth in core deposits. We maintain roughly $32 billion of total liquidity, representing nearly 250% of uninsured deposits. During the quarter, we utilized excess cash to pay down high-cost borrowings, including wholesale borrowings and brokered CDs, enhancing our funding profile. In conclusion, we are thrilled with our achievements in a short time and believe we have laid the groundwork to deliver significant value to our shareholders over the next 24 months. Joseph, I will turn the call back to you.

Great. Thank you very much, Lee, and thank you for sharing that positive news. Our organization, board, and employees have worked very hard over the last 12 months to right-size and position for growth. One final slide before turning it over for questions. On Slide 19, we highlight Flagstar's investment profile. Most of you are aware we currently trade at a discount to our tangible book value, roughly between 55% and 60%. This contrasts with 184% for our Category 4 banks and about 166% for our regional banks. We believe this valuation gap should narrow as our profitability outlook improves. We successfully execute our turnaround strategy, and our credit quality continues to improve. Finally, I would like to thank each of our teammates for their dedication and commitment to our customers as we move forward with our 2025-2027 strategic plan approved by the Board in December, focusing on profitability and building out the risk infrastructure within the organization. And with that, operator, I would like to turn it over for questions.

Operator Instructions. Our first question will come from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey guys, good morning.

Hi Mark.

Lee, you mentioned real estate optimization in your comments. I was curious, does that suggest that you're contemplating a sale-leaseback on branches, or does it imply branch consolidation?

Thanks for the question, Mark, and good morning. As we discuss real estate impairments, it relates to several of our locations. We're considering consolidating a few operating centers that we own and moving into smaller facilities. There are around 20 private client retail locations that we plan to consolidate due to their proximity to other locations. We believe this will enhance efficiency without compromising customer service. Additionally, we're looking to consolidate approximately 60 retail branches, most of which we lease, also close to other locations. We do not anticipate any disruption to customer experience, and we are phasing this closure in three distinct phases, one of which is already underway, with the latter two occurring later this year.

Okay. And just one unrelated follow-up. Could you help us understand how you're viewing the securities portfolio? The AOCI mark increased significantly this quarter. Any plans to restructure that or grow that portfolio?

You're correct. If you look at the flash report we put up for 2024, most metrics were positive, except for the total book value impacted by increased AOCI losses due to interest rate movements. Looking ahead to 2025, we are contemplating growing the securities portfolio but will dynamically manage that and allocate cash where we can generate the best returns for the organization. We're currently considering increasing that securities portfolio as we move through 2025.

Thank you.

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

Hi, good morning.

Hi, Jared.

Looking at the capital ratios being above target and the discussion surrounding potential loan sales, do you expect some of that excess capital to cover loan sales and absorb any potential losses, or do you feel the current reserves already consider the potential market price hit from sales?

Hey, Jared, thank you for the question. We believe in our ACL model that when a credit becomes non-performing, it is accounted for separately. We set specific reserves against those loans. Thus, we feel confident in our portfolio's overall marking. We've maintained strong reserves on top of the capital, focusing primarily on how we can leverage that excess capital to grow loans on our balance sheet. Our priority will remain expanding the loan book with this excess capital.

Great, thank you.

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

Thanks. Good morning. Joseph, I wanted to ask you about retaining the former Signature Teams. Is there anything you need to do with personnel there to retain that business, or are you comfortable with the current situation?

We're comfortable with where we are today. We’ve started augmenting resources in that organization. We feel confident about the team's continuity, locations, and capabilities. As we grow the C&I business, it naturally complements private banking, allowing our private bankers to engage with executives and owners of those companies. Having private banking and C&I under Rich Raffetto's leadership is intentional since as someone with long-term C&I banking experience, he can foster better integration. This should lead to more harmonious relationships and a larger share of both individual and corporate business.

Great. Within today’s guidance, is there any implied core deposit growth?

Yes, there is. We anticipate core deposit growth from both the consumer and private banks. This will occur as we pay down brokered deposits and expect another $1 billion to $1.25 billion in mortgage escrows to run off in the first quarter.

Thank you very much for the information this morning.

One point to note is that a significant shift occurred this year and is expected next year, moving away from high-cost funding sources like wholesale borrowings and broker deposits towards core deposits. We feel confident in our ability to make that transition.

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

Hi, good morning.

Good morning.

You noted the CRE review is complete, and the NPLs haven't really increased significantly. As you guide forward provisions in line with prior forecasts, what level of rates have you marked the portfolio to? If the long-end of the curve starts to move up again, how much does that impact credit performance overall?

As we've been here roughly nine months, I've closely examined portfolio characteristics. Over the year, we’ve managed payoffs slightly below $3.5 billion, with $1.3 billion classified as substandard, approximately 38%. Our pattern shows we’re getting out at 100 cents on the dollar. When loans come up for renewals or payoffs, we've seen borrowers maintain their commitments. For interest rate resets, we had $3.5 billion in 2024 and nearly $4.9 billion in 2025. Notably, 90% of those loans are current. We’re able to analyze each loan's performance with updated loan information and projections, ensuring that our risk remains contained. We've done thorough analyses to see how credit yields fluctuate with the rising interest rates.

Got it. Thank you.

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

Good morning.

Good morning.

Regarding capital, your CET1 is above your targets. My sense is your risk-weighted assets will continue to decline. Could we see buybacks initiated at some point? You mentioned the stock price's relation to tangible book, suggesting buybacks could positively impact ROTCE and TBV accretion at these levels. What’s your outlook on balance sheet runoff? At what point might buybacks become a realistic option for the bank?

We haven’t had any dialogue about capital actions with the board at this point. Our plan is to use excess capital to grow our balance sheet. We believe the company is well-positioned as a strong regional bank, with significant opportunities in C&I lending due to demand. We're uniquely placed as a new entrant in a space with many other regional banks heavily involved. Our initial efforts will focus on expanding the loan book to create earning assets.

Understood. Regarding the C&I loans, there's still an element of uncertainty in the industry. What level of growth do you expect in your C&I book? Does it depend on an industry-wide upturn, or are there significant opportunities for market share movement given your recent hires?

The historical approach for the company was to make significant commitments. We've managed down the position sizes in our commercial real estate book and found similar trends in certain commercial banking books. We will gradually scale back those large commitments while building market share. By hiring seasoned professionals with long-standing relationships, we're discovering opportunities independent of market-wide loan growth. For instance, if clients wish to increase their credit facilities, we find ample opportunity to step in and fulfill those requirements while generating non-interest income through various offerings. We're optimizing to be a robust relationship bank where we won't enter into relationships unless we can generate attractive non-interest income.

In addition to Joseph's points, 43 of the 65 C&I bankers we've hired started in Q4. They are not just producers but also underwriters and credit specialists. We generated $572 million in new commitments in Q4 and arrived at 18 new relationships, positioning us with a $460 million pipeline entering 2025. We anticipate significant growth due to this new team.

Thank you both for that information.

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

Oh great, good morning. How are you viewing overall rate sensitivity? Your margin has improved due to refinancing debt and deposits. Could you clarify where you see the rate curve leading, and what assumptions you've made in your forecast?

In our guidance, we based it on the November outlook, which assumed three rate cuts in 2025. It now appears to be two. Our analysis indicates we are neutral to slightly asset-sensitive and we do not believe this will substantially change what we've projected for earnings.

And a follow-up — any thoughts on share count? I know there are warrants and conversions. Are there any other pending conversions? Also, do you have the accretable yield number in your outlook for Q4?

I'll provide the accretive yield outlook later. Regarding share count, we assumed the warrants will fully convert in Q4 of 2025, increasing the share count from approximately 450 million to about 480 million.

Thank you, Lee.

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

Hi, good morning, everyone.

Hi, Ben.

Considering your rate assumptions, funding cost reductions appear significant now, while in 6 to 18 months, back book repricing will be substantial. Is this the right way to project the next 24 months?

You're absolutely correct. This reduction is helping with deleveraging. We're looking to reduce brokered CDs by another $1 billion in Q1, plus an additional $1 billion of escrow runoff. In Q1, we have about $5 billion of retail CDs maturing, with an average cost of around 5.29%. These are coming due and will shift to lower-cost CDs. We've been able to consistently retain 75% to 80% of maturing CDs while bringing in roughly 20% to 25% of new customers. This stability shows the validity of your assumptions.

I’d like to double-check something. In the press release, there was a notable increase in 30 to 90-day delinquency. I believe you said $500 million had since paid off by the year-end. Was this from the same group of loans, and should we expect more early delinquency payoffs this quarter?

Yes, $541 million was brought current after year-end. Much of this was linked to one borrower, therefore, I hope not to see similar trend moving forward. These issues can arise but predominantly focused on one account and have all since been managed adequately.

Regarding that loan, we don't expect major changes or payoffs soon. It's a strong relationship and has a history of bouncing back despite delays.

Do you have a sense of how many properties were related to this situation? If you're comfortable sharing.

We'll follow up with that. My guess is there are more than 20 involved.

Understood. Thank you.

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

Hi, guys. Good morning.

Good morning, Bernard.

Regarding the updated forecast, could you share insights on the changes from last quarter? I noticed non-interest expenses were lowered by $100 million while net interest income decreased due to a smaller balance sheet. What factors contributed to both the expense reduction and the increased fee income compared to your earlier models?

The reduction in non-interest expenses stems from many initiatives I mentioned in my prepared remarks focusing on optimization. This includes compensation, benefits, and real estate consolidations, as well as lowering vendor costs and improving our processes. We've made substantial progress here. With our deleveraging efforts, we achieved a $24 million reduction in FDIC expenses compared to the previous quarter, and this trend will carry over to 2025. For fee income, the increase is slight and driven by various categories, like mortgage-related fee income. We also expect to generate more fees from deposit collections, treasury management, and overall fee capture rate improvement. The outlook heats up even more in 2026 and 2027 as additional fee income comes from C&I business and treasury management growth.

To add to that, the workforce reduction from about 9,000 to 6,000 employees also significantly aided in our cost management, including 1,100 from the mortgage sector. We’ve scrutinized our cost structure organization-wide and streamlined it to essentials, maintaining alignment with our mission. With fee income, tapping into C&I growth will greatly yield non-interest income while also winning lead roles in transactions. With Rich's experience in the business, we expect this strategy to yield substantial results.

Great. Regarding your commercial banking effort, you noted the hiring numbers previously. Can you elaborate on your production ramp-up expectations? How long does it typically take for new hires to start producing results? Given the mix of seniority and experience in the recent hires, how do you see that playing out?

Our expectations for production start roughly 90 days after hiring, particularly for experienced senior personnel. These seasoned bankers can quickly dive back into existing relationships, driving production earlier. We've seen tremendous success at OneWest Bank with a similar strategy, where substantial growth occurred swiftly, bolstered by having established platforms for commercial loans and cash management already operational.

Thanks for the insights.

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

Good morning.

Hi, Steve.

Regarding your NII guidance, what deposit beta are you assuming? Where do you foresee non-interest-bearing deposits stabilizing?

For deposit beta, a 100 basis point cut in 2024 reflected a beta of 46%. We intentionally lagged with the September cut due to the bank's conditions, but by November, our beta was 66% and 58% in December. Our goal is to maintain a beta range of 55% to 60%. As for non-interest-bearing deposits, they should stabilize where they currently are, understanding that about $4 billion of subservicing escrow deposits were counted as non-interest-bearing. While the runoff reflects reductions in these deposits, I envision relative stability going forward.

Thank you.

Our next question comes from the line of Anthony Elian with JP Morgan. Please go ahead.

Hi everyone. Lee, I had a follow-up regarding updated forecast provisions. Your 2025 provision outlook was unchanged while the Q4 provision came in slightly lower than forecast. I noticed you've lowered the '26 provision outlook. Can you discuss why you decided to leave the 2025 number unchanged, yet lower '26?

We prefer to take a conservative stance. Our intention was to hold 2025 provision steady but to lower expectations for 2026 and beyond as we map elements more clearly going forward.

Thank you. On Slide 15 regarding the office portfolio review, I understand the reserve ratio increased 100 basis points this quarter after dropping in the prior quarter. What prompted that increase?

We've been ordering appraisals and reviewing risk levels as appraisals were processed. As appraisals arrive, we assess charge-offs. It’s a dynamic process. Additionally, we sold our largest exposure in the office space, abstracting it as held for sale and executing transactions during Q4.

It's important to recognize that although there's been a minor reduction in reserves, we increased those on the riskier asset classes, including office and rent-regulated multifamily properties. We continue to monitor and adjust—our process is complex but effective.

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

Thanks, good morning. Lee, could you discuss the general process for determining reserve adequacy? A reduction in overall reserve levels can signal several things. Should we interpret this as a sign that the worst is over?

We employ a comprehensive process for reserve assessment, using quantitative and qualitative models specific to asset class and loan type. Though the overall reserve decreased, we've attributed significant protections owing to the charge-offs taken. We’re assessing the quality of the remaining portfolio with every appraisal update we receive; our assessments of risk continue to improve as we review individual loans holistically.

Okay, fair enough. Joseph, as the head of a prior bank regulator agency, could you provide insight into potential regulatory changes impacting Category 4 banks?

The discussions surrounding enhanced standards for Category 4 banks, specifically regarding whether the threshold should be $100 billion or $250 billion in assets, are ongoing. Decisions will likely depend on the new controller. Regardless, our goal is to remain a Category 4 bank, building strong risk management frameworks and infrastructure to support our continued growth while maintaining flexibility.

Thank you very much.

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

Okay. Great. Thank you very much for all the questions. In a short period of time, it's remarkable how quickly you all grasp the numbers and the critical insights. Your observations are spot on. Thank you for your time today and interest in Flagstar. I look forward to interacting with many of you in the upcoming weeks. Lee and I are available through Sal to arrange one-on-one calls and meetings. We're excited about our story and the trajectory we’re on in 2024 and beyond as we focus on delivering for our investors, employees, and customers. Thank you very much.

That will conclude our call today. Thank you all for joining. You may now disconnect.