Earnings Call Transcript - FLG Q4 2025

Operator, Operator

Hello, and thank you for joining us. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Flagstar Bank Fourth Quarter 2025 Earnings Conference Call. I will now turn the conference over to Sal DiMartino, Director of Investor Relations. Please proceed.

Salvatore DiMartino, Director of Investor Relations

Thank you, Regina, and good morning, everyone. Welcome to Flagstar Bank's Fourth 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 full year ended December 31, 2025. 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 of Flagstar Bank 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 that may affect us. Additionally, when discussing our results, we will reference certain non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. With that, I would like to turn the call over to Mr. Otting. Joseph, please go ahead.

Joseph Otting, CEO

Thank you, Sal. Good morning, everyone, and welcome to our fourth quarter 2025 earnings conference call. We are pleased with the bank's performance throughout 2025, and especially during the fourth quarter. As all of you know, after two challenging years, I'm proud to share that we returned to profitability in the fourth quarter, reporting adjusted net income of $30 million or $0.06 per diluted share compared to a net loss of $0.07 per diluted share in the previous quarter. 2025 was a year of significant momentum for the bank, which accelerated during the fourth quarter. We continue to successfully execute on our strategic plan to transform Flagstar Bank into one of the best-performing regional banks in the country. One with a diversified balance sheet and revenue streams as well as strong capital, liquidity, and credit quality. While returning to profitability is a significant milestone, it is only one of several positives during the quarter. Turning to Slide 3 of the investor presentation, we'll highlight those. First, our return to profitability during the quarter was driven by several factors, including growth in our net interest income, coupled with NIM expansion and disciplined expense management. This resulted in a $45 million increase in pre-provision net revenue and positive operating leverage of approximately 900 basis points. Second, we had another strong quarter of net C&I loan growth, up 2% on a linked quarter basis or about 9% on an annualized basis. Third, we continue to reduce our overall CRE exposure, mostly through par payoffs resulting in an overall $2.3 billion reduction in multifamily and CRE loans and a CRE concentration ratio now falling below 400%. Fourth, our credit quality profile continued to improve as nonaccrual loans declined, while we also had a decrease in net charge-offs and the provision for loan losses. Moving to Slide 4. After two years of building a solid foundation for growth, we expect that in 2026, our earning power will continue to strengthen with a full year of profitability driven by a continued growth in net interest income and margin expansion, along with a continued focus on managing our expenses lower, leading to positive operating leverage in 2026. We remain focused on further improving the bank's credit profile as we proactively manage our CRE exposure lower through par payoffs and opportunistic loan sales, reducing nonaccruals and maintaining a lower level of charge-offs. We will continue to diversify the loan portfolio through growth in non-CRE loans, especially through our C&I lending platform. Lastly, we will generate deposit growth across various business lines while keeping our discipline on pricing. On the next slide, we highlight the roadmap we employed to solidify the balance sheet and reposition the bank for growth. We built a strong capital position as our CET1 capital ratio has increased by almost 400 basis points, now ranking us amongst the best capitalized regional banks among our peers. We have also fortified our ACL through a rigorous credit review process and have increased the ACL up to 1.79%, also among the tops of the regional banks. We significantly enhanced our liquidity position as cash and securities have increased to 25% of total assets, and we reduced our reliance on wholesale funding, lowering the cost of funds and boosting our net interest margin. During the year, we reduced our brokered deposits almost by $8 billion. We believe that our strategic initiatives over the past couple of years have provided us with the opportunity to drive sustainable growth and profitability going forward. The next two slides highlight the continued momentum and tremendous progress in our C&I business. Under Rich Raffetto's leadership, we've built a relatively powerful origination team across America in a short period of about 15 months. As you see on Slide 6, you can see that C&I lending had another strong quarter in commitments and originations, with total commitments increasing 28% to $3 billion while originations increased 22% to $2.1 billion. This is led by the bank's two primary strategic focus areas, our specialized industries and corporate and regional banking group. On Slide 7, you'll see the overall C&I growth was $343 million or 2% compared to the third quarter, marking our second consecutive quarter of net C&I loan growth. This was driven by $1.5 billion in combined growth in these two businesses. One of the things you can also observe on this slide is that we derisked a number of the businesses, as we've talked about in the past, where either because of hold size or credit quality, we've decided to reduce those exposures or exit those credits. Alone in 2025, it was roughly about $4 billion of actions that we took, and we do see the businesses of like asset-backed and equipment finance and mortgage starting to be accretive to our loan growth going forward. Turning now to Slide 8. You can clearly see the protection of our adjusted EPS as we successfully executed on all our strategic initiatives, resulting in the first profitable quarter since the third quarter of 2023. With that, I will turn it over to Lee to review our financials and credit quality.

Lee Smith, CFO

Thank you, Joseph, and good morning, everyone. We're obviously very pleased with our performance in the fourth quarter and for the full year in 2025. We're executing on our strategic vision and have returned the bank to profitability as we said we would do. We feel we're very much on track to make Flagstar one of the best-performing regional banks in the country over the next two years. Our unadjusted pre-provision pretax net revenue improved $51 million quarter-over-quarter, while our adjusted pre-provision pretax net revenue improved $45 million versus Q3. We achieved NIM expansion of 14 basis points quarter-over-quarter after adjusting for a one-time hedge gain of approximately $20 million. We paid off another $1.7 billion of high-cost brokered deposits and $1 billion of club advances as we further reduced our funding cost and continue to demonstrate excellent cost control. On the credit side, quarter-over-quarter, we saw a reduction in criticized and classified loans of $330 million, including a reduction in nonaccruals of $267 million, while net charge-offs declined $26 million and the provision decreased $35 million. CRE par payoffs were again elevated at $1.8 billion, of which 50% was substandard, and we ended the year with 12.83% CET1 capital, almost $2.1 billion pretax above the bottom of our targeted operating range of 10.5%. We're thrilled with the quarter and fiscal 2025, and are excited about what we will accomplish in 2026 and beyond. Now turning to Slide 9. This morning, we reported net income attributable to common stockholders of $0.05 per diluted share. There were only a couple of notable items in the fourth quarter. First, our investment in Figure Technologies was revalued $9 million higher than the value on September 30. Second, we accrued $4 million in severance costs for FTE reductions that occurred in January 2026. Therefore, on an adjusted basis, after also excluding merger expenses, we reported net income of $0.06 per diluted share, significantly better than last quarter and above consensus. On Slide 10, we provide our updated forecast through 2027. We slightly adjusted our net interest income guidance for both 2026 and 2027 as a result of higher payoffs and a smaller balance sheet; for 2026, it is now forecast to be in the $0.65 to $0.70 range, and EPS for 2027 is forecast to be in the $1.90 to $2 range. On Slide 11, we provide an overview of the expected balance sheet growth in 2026 when compared to year-end 2025-point to point. Another highlight this quarter was the double-digit increase in net interest margin. Slide 12 shows the trends in our NIM over the past several quarters. Net interest margin improved 23 basis points quarter-over-quarter to 2.14% when including a gain of $20 million for the hedges tied to long-term flip advances that we restructured at the end of the quarter. Excluding this one-time benefit, NIM was 2.05%, still a 14 basis point increase from the third quarter. Turning to Slide 13. Costs remain well controlled as core operating expenses declined approximately $700 million when comparing full year 2025 to full year 2024. The modest linked quarter increase was mainly the result of higher short-term incentive compensation and associated taxes. Slide 14 shows the growth in our capital over the past five quarters and the strength of our CET1 ratio up 12.83%, which ranks among the best relative to our regional bank peers. At this level, we have over $2 billion in excess capital pretax or $1.4 billion after tax relative to the low end of our target operating CET1 range of 10.5%. Slide 15 is our deposit overview. Like last quarter, we further deleveraged the balance sheet by paying down over $1.7 billion of brokered deposits, which had a weighted average cost of 4.4%. We also paid down $1 billion of advances with a weighted average cost of 4.3% and saw our mortgage escrow balances decline $1.4 billion, which was typical seasonality as taxes and insurance balances are paid out at the end of the year. Additionally, approximately $5.4 billion of retail CDs matured with a weighted average cost of 4.29%. We retained approximately 86% of these CDs and they moved into other CD products that were about 45 to 50 basis points lower than the maturing product. In Q1 2026, we have another $5.3 billion of retail CDs maturing with a weighted average cost of 4.13%. The deleveraging actions, CD maturities, and other deposit management strategies have allowed us to reduce interest-bearing deposit costs by 26 basis points quarter-over-quarter. We continue to actively manage the cost of our deposits and are performing in line with the 55% to 60% target beta on all interest-bearing deposits with the Fed cuts. Slide 16 shows our multifamily and CRE payoffs for the quarter and the full year. We continue to experience significant par payoffs of approximately $1.8 billion in the fourth quarter, of which 50% were rated substandard, including the disposition of the previously disclosed $253 million sale in October. Approximately $244 million of this quarter's payoffs were multifamily, greater than 50% rent regulated. We continue to see strong market interest for multifamily loans from other banks and 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 $12.1 billion or 25% since year-end 2023 to about $36 billion, aiding our strategy to diversify the loan portfolio to a mix of one-third CRE, one-third C&I, and one-third consumer. In addition, the payoffs have led to a 120 percentage point decline in the CRE concentration ratio to 381%. 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 multifamily 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 multifamily loans where 50% or more of the units are regulated is 3.44%. Currently, we have about $12.9 billion of multifamily loans that are either resetting or contractually maturing between now and the end of 2027 and with a weighted average coupon of less than 3.7%. If these loans pay off, we can reinvest the proceeds in C&I or other loan growth at market rates or choose to pay down wholesale borrowings. If the borrowers stay with Flagstar, the reset rate is significantly higher than the existing rate which provides a NIM benefit. On Slides 18 and 19, we have once again provided significant additional information on our New York City multifamily loans, where 50% or more units are regulated. This tranche of the multifamily portfolio totals $9.2 billion with an occupancy rate of 98% and a current LTV ratio of 70%. Approximately 53% or $4.8 billion of the $9.2 billion are pass rated and the remaining 47% of $4.3 billion are criticized or classified, meaning they are either special mention, substandard, or nonaccrual. Of the $4.3 billion, $1.9 billion are nonaccrual and have already been charged off to 90% of appraisal value, meaning $355 million or 16% has been charged off against these nonaccrual loans. Furthermore, we have also added an additional $91 million or 5% of ACL reserves against this nonaccrual population, meaning we have taken 21% of either charge-offs or reserves against this population. Of the remaining $2.4 billion that is special mention and substandard loans, between reserves and charge-offs, we have 6% or $150 million of loan loss coverage, and we believe we're adequately reserved or have charged these loans off to the appropriate levels. With excess capital of $2.1 billion before tax, we think we're more than covered were there to be any further degradation in this portion of the portfolio. Slide 20 details our ACL coverage by category. The $43 million reduction in the ACL was largely driven by lower health reinvestment balances, a better economic forecast, and higher recoveries. Our coverage ratio, including unfunded commitments remained flat at 1.79% quarter-over-quarter. Our ACL reserve at 12/31 also includes adjustments for one borrower in bankruptcy, where the auction process was recently finalized and confirmed by the bankruptcy court. We expect to close the sale of these properties before the end of the first quarter. On Slide 21, we provide additional details around our asset quality trends. All of our credit quality metrics trended positively during the fourth quarter. Criticized and classified loans decreased $330 million or 2% on a quarter-over-quarter basis and were down $2.9 billion or 19% since the beginning of the year. Our net charge-offs decreased $27 million or 37% to $46 million compared to the previous quarter, and net charge-offs to average loans improved 16 basis points to 30 basis points. Nonaccrual loans were $3 billion, down $267 million or 8% compared to the prior quarter. Included in this $3 billion nonaccrual amount are the loans tied to the bankruptcy I referenced earlier, which we expect to close the sale on before the end of the first quarter. At the end of the quarter, 30- to 89-day delinquencies were approximately $988 million, an increase of $453 million from the previous quarter. I will point out that the biggest driver of this increase is the additional day or 31st day of December versus 30 days in September. This accounted for $410 million of the increase and as of January 26, approximately $690 million or 70% of these delinquent loans have been brought current. Furthermore, $298 million of these delinquent loans at 12/31 were driven by one borrower who paid subsequent to the month end and has done so once again, bringing his account current as of January 26. As we reported last quarter, in the month of October, we sold approximately $253 million of these borrowers' loans, reducing our exposure in this one name. We're finalizing the review of the 2024 annual financial statements for all CRE borrowers. Today, we've completed the review on approximately 93% of loans; of the 93% reviewed, 80% are stable, 7% have improved, and 13% have declined, so almost 90% are stable or improving. All of this has been considered as part of our ACL analysis. Concluding on Slide 22, since the beginning of 2024, we have proactively managed our CRE exposure lower by over $12 billion or 24% through par payoffs, net charge-offs, amortization, and other dispositions. We have also increased our ACL coverage against the remaining CRE portfolio during this time. This significant derisking, along with our solid capital position, strong liquidity, and an expense optimization program has created a solid foundation for us to grow and be successful. We continue to deliver on our strategic plan and are excited about the journey we're on and the value we will create for our shareholders over the next two years. With that, I will now turn the call back to Joseph.

Joseph Otting, CEO

Okay, Lee. Before moving to Q&A, as I stated at the beginning of the call, we are extremely proud of our performance in 2025 and returning to profitability during the fourth quarter. This milestone reflects the discipline and hard work of our entire team. We made difficult but necessary decisions that strengthened our balance sheet, diversified the loan portfolio, and lowered our costs. We thoughtfully invested in our C&I and private banking businesses, along with our IT and risk management infrastructure. I'd like to thank our executive leadership team and all the teammates for their dedication and commitment to the organization and our customers. I'd also like to thank our Board of Directors for their invaluable advice and support. As I said, I think we probably set a record for Board meetings last year. Now I'd be happy to turn it over to the operator to open up for questions. Thank you.

Operator, Operator

Our first question will come from David Chiaverini with Jefferies.

David Chiaverini, Analyst

So I wanted to start on NII. I saw that you lowered it by $100 million. Can you talk about the drivers behind that? I'm assuming it's the higher payoff activity, but any detail there would be helpful.

Lee Smith, CFO

Yes, you're exactly right, David. It's the higher payoff activity, particularly as it relates to multifamily and CRE loans. We used that excess cash to further delever the balance sheet. As I mentioned, we paid down $1 billion of flow and $1.7 billion of brokered deposits. Then we saw $1.4 billion of mortgage escrows exit in Q4, which is seasonality because they usually go out at the end of the year. Additionally, I will point out, you've heard us talk about tall trees regarding our legacy C&I book. What we mean by that is we have some large oversized exposures in individual names, we're talking $250 million, $300 million, and we've rightsized a lot of those to bring them in line with our risk tolerance levels. You've seen runoff, particularly in the ABL and dealer floor plan space and also the MSR space. I would say we are mostly through that, and I think what you're going to see is higher net C&I growth starting in the first quarter here because we are mostly through that rightsizing process. Coming back to your initial question, it's those additional par payoffs that have effectively reduced the assets, and we've used the excess cash to reduce NIM, which will roll through into 2026 and 2027.

David Chiaverini, Analyst

Great. In terms of the payoff activity, you're projecting between $3.5 billion and $5 billion for 2026. How much of that do you anticipate will be substandard, to the extent you have insight on it?

Lee Smith, CFO

Well, I commented on the $1.8 billion this quarter, which was 50% substandard. Throughout 2025, we've seen 40% to 50% of those par payoffs be substandard loans. So we don't see any reason for that to change as we move through.

Joseph Otting, CEO

Yes. David, regarding that, as you've followed us, we originally projected those payoffs to be in the $700 to $800 million range. As those loans come up, our pricing rollover is significantly higher than market rates and so it motivates borrowers to take those loans to other institutions or to the agencies.

David Rochester, Analyst

Just looking at Slide 11 here, you've got some great loan growth planned for this year. I just wanted to hear about how comfortable you are on the funding side of things with funding this with core deposit growth.

Joseph Otting, CEO

Yes, go ahead, Lee.

Lee Smith, CFO

Yes, I was going to say let me go and then Joseph can jump in. Yes, we feel pretty good. As we think about core deposit growth, there are several avenues we are pursuing. Obviously, we think we can grow deposits from our 350 bank brand shares, we're in good geographies across the country. We also will leverage these new C&I relationships. As you've seen us successfully grow the C&I business under Rich Raffetto's leadership, we believe we'll be able to leverage those relationships, not just for deposits, but for more fee income. Additionally, the final piece is the private client bank, and we feel that we can leverage deposits from our private client bankers as well going forward. So that's how we're going to drive core deposit growth as we move forward through 2026 and into 2027 as well.

David Chiaverini, Analyst

Great. Appreciate that. Then on the capital, you mentioned $1.2 billion after tax of excess capital. You guys are still obviously trading at a discount to your adjusted tangible book value per share adjusted for the warrants. It sounds like you're making faster progress than maybe you expected just a few months ago. You mentioned all the tall trees that you had; it sounds like you're pretty much at the end of that trimming process, meaning C&I growth ramps up earlier and faster, you're making a lot of progress on the credit front, which is great to see, and profitability is only going to follow from that. It seems like you're going to be in a great position to buy back your stock with all the fundamentals going the way you need, and you've got a ton of excess capital. I know you talked about a potential Board meeting coming up in April. What are the prospects of you guys coming out strong on that and taking advantage of the opportunity here, which I would think is probably not going to be here for very long to buy back your stock?

Joseph Otting, CEO

Yes. What we've communicated is that the variables really are, as you described, how much balance sheet growth can we get in the targeted areas and how quickly we see the nonperforming cure. We are forecasting that in 2026, we'll be down $1 billion in nonperforming loans. The Board's consideration will revolve around how to deploy that excess capital when those numbers come together in 2026. I would say it's definitely a discussion point amongst the board. As we move forward through the year, it would be something we would look favorably if we're not deploying the capital.

Operator, Operator

Our next question will come from the line of Casey Haire with Autonomous.

Casey Haire, Analyst

Yes. Following up on Slide 11, another follow-up on the funding strategy. So Lee, I heard you sound pretty confident on the deposit growth. Just wondering where do the wholesale borrowings as a percentage of assets at 13%? Where does that go in your budget?

Lee Smith, CFO

Yes. We paid another $1.7 billion of brokered deposits, leaving us with $2.3 billion remaining as of December 31. We are performing better than other banks in this area and have successfully reduced our exposure over the past 18 months. Regarding the flag restructuring I mentioned earlier, we chose to replace long-term funding with short-term funding and utilized some excess cash to pay off or refinance $2 billion of long-term funding. We are currently primarily utilizing short-term funding. This creates an opportunity for us in 2026 and beyond to further reduce wholesale borrowings by paying down the club advances, which provides an FDIC benefit. We plan to continue reducing those advances with any excess cash as we progress through 2026.

Casey Haire, Analyst

Got you. Okay. And then just switching to expenses. The expense guide of $1.5 billion to $1.8 billion, your current run rate, you're about $1.85 billion. So there's more expense rationalization coming in 2026? Any color around that?

Lee Smith, CFO

Yes. So there are a couple of things that I'd point out. As I mentioned in my prepared remarks, we had additional incentive compensation and associated taxes in Q4. We also had severance of $4 million in the fourth quarter, which relates to reductions. These are tough decisions, and we executed on those earlier this month. As I think about Q1, we're probably more like $1.5 billion to $1.65 billion, and then you will see continued decline after Q1 because expenses are typically elevated in Q1 due to FICA costs that are sort of front-end loaded in the year. We are continuing with a number of other cost optimization initiatives, and I think you'll see further reductions in our FDIC expenses. We have technology projects that are coming on-stream that will allow us to become more efficient as we move forward. I remain comfortable that we will be within the range that we've guided to, and you will see a reduction in expenses as we move through the year.

Operator, Operator

Our next question will come from the line of Manan Gosalia with Morgan Stanley.

Manan Gosalia, Analyst

Joseph, maybe a follow-up to the capital question. I know you noted that the priority for capital return or the priority for capital is to deploy for organic growth, but I guess you also noted that the balance sheet will be lower given the CRE paydowns. Is there anything that could cause you to hold onto the excess capital for a little bit longer? Like, is it the rating agencies, rent freezes in NYC, or maybe C&I loans are coming on at a high RWA? Can you just help us think through what scenarios would lead you to hold onto that excess capital?

Joseph Otting, CEO

Well, first of all, we do feel this quarter will be the low point in terms of the size of the balance sheet and that should grow going forward from here. One thing we've been looking at is the initiative to move the nonperforming loans out of the bank. We want to see that initiative continue to be successful, and we get the nonperforming loans down. We maintain a conservative view on credit quality as we do this 18-month look forward on the loans, and we conduct a thorough underwriting. We haven’t seen a major shift, but that's an area we're monitoring closely.

Manan Gosalia, Analyst

Got it. Very helpful. And then just on the New York multifamily portfolio. Given that we could get rent freezes in New York in the near term, any updates on what you're hearing from your multifamily borrowers in the city?

Joseph Otting, CEO

There’s a lot of dialogue going on about how we can collectively come to resolution between the new city government, property owners, and banks that finance those properties. We're examining the impact of potential rent freezes and the overall outcomes on our portfolio. We've started to analyze what the effects would be if rents were flat for two to three years while expenses increased by a couple of percent. We haven't seen a decline in liquidity; in fact, we saw acceleration of liquidity coming out of multifamily and regulated properties in Q4. We are assessing our risk in this portfolio, and we are in the process of underwriting with an 18-month view.

Lee Smith, CFO

I would just add to what Joseph said; we haven't seen any slowdown in liquidity. As reflected in the par payoffs we experienced in Q4, that's number one. Two, the work we did in 2024, where we re-underwrote that book, resulted in $900 million in charge-offs. Looking ahead, we are mindful of potential fines or violations and are ensuring that our portfolio remains in good standing. We don't have significant exposure, and we have been collecting annual financial statements, with 80% showing stable conditions.

Operator, Operator

Our next question will come from the line of Bernard Von Gizycki with Deutsche Bank.

Bernard Von Gizycki, Analyst

Just on a borrower that went through the bankruptcy process, Lee, can you just update us on some main takeaways like on the economics? How much of the loan do you have left? I think you mentioned some sales you had on there; it seems like it's mostly reserved for already from your prepared remarks, the new yields, and you thought from improved credit profile. Any additional provided? Just any color you can share on that process on that loan position?

Joseph Otting, CEO

Yes. First of all, we do not get into specifics regarding customer loans and deals in a public forum. The auction was completed, and we expect that to close before the end of the first quarter. What we have in all those loans today is in our nonaccrual balance, and there's probably about $450-plus million of nonaccruals related to that particular bankruptcy case. Any future actions would classify those loans as accruing loans. We took the necessary charge-offs in prior quarters, so there's nothing anticipated for Q1. That was addressed by us in the fourth quarter.

Lee Smith, CFO

Additionally, we were almost on the mark in terms of where we anticipated the bid would land, so there wasn't a material addition to reserves required for that particular transaction. You can consider the nonperforming loan turning into a performing loan as a positive from a net interest income perspective.

Bernard Von Gizycki, Analyst

Great. And then just on the re-regulated portfolio on Slide 19, the $4.3 billion of criticized and classified; I'm just wondering, of the $1.9 billion, how much of that has repriced as of today? And what percentage does that go through by the end of 2026? I'm wondering about similar repricing for that $2.4 billion of the special mention loans.

Lee Smith, CFO

Looking at the $4.3 billion in total, 54% of it is already repriced. Another 36% of that will reprice within the next 18 months, meaning 90% of it has already repriced or will have repriced in the next 18 months.

Operator, Operator

Our next question will come from the line of Jared Shaw with Barclays.

Jonathan Rau, Analyst

This is Jon Rau on for Jared. Just thinking about the new loans being added to the balance sheet in C&I and with CRE originations starting back up again, what the new like roll-on yield is for those? What's the floating versus fixed mix on those loans?

Lee Smith, CFO

Yes. For C&I loans, we have a number of C&I verticals. The loans are coming on at a spread to SOFR of anywhere from 175 to 300 basis points, and a blended basis puts you in that 230 basis point range. As for the new CRE growth, the spread to SOFR on those loans is more like 200 to 225 basis points, so that's how we would think about the spreads for the new originations.

Jonathan Rau, Analyst

Okay, great. And looking ahead to the governor election later this year in New York, do you anticipate any action on the 2019 law change regarding rent regulation before that? What are your broader thoughts on what the election could imply for that?

Joseph Otting, CEO

I believe that will take its ordinary course. On the 2019 legislation, now that we've had several years to reflect on it, there are parts of it that may have common ground for discussions. An area of focus is the units where the legislation made it financially unviable for landlords to remodel vacated units. We've estimated that is around 50,000 to 60,000 units. I think there's discussion around finding an economic model to revise that rule and make those units available. However, we will have to see how that unfolds.

Lee Smith, CFO

I would like to add that there’s ongoing dialogue between property managers, property owners in the city, and banks. We are watching closely and anticipate our borrowers will address any violations. It’s a process we are engaged in proactively.

Operator, Operator

Our next question will come from the line of Chris McGratty with KBW.

Christopher McGratty, Analyst

Maybe for you, the $1.1 billion of par payoffs, I think it was $1.2 billion or so last quarter. I guess my question is the degree of confidence in the updated balance sheet, especially if the forward curve comes through and you get a couple of cuts and maybe prepays pick up a bit.

Lee Smith, CFO

Yes, we feel good about the par payoffs continuing as we move forward. As Joseph mentioned, when we came into 2025, we thought the par payoffs would be around $800 million on average per quarter, and we've seen in excess of $1 billion per quarter in 2025. There is a lot of demand from other financial institutions, and we expect that to continue into 2026. Typically, Q1 is the lowest quarter for par payoffs, as we saw in 2025, and then it picks up in Q2, Q3, and Q4. We expect to see a similar trend in 2026. Our forecast is based on the rate curve as of mid-December, which had two cuts in June and September. A declining rate environment will only assist those borrowers to refinance, so we believe par payoffs will fall into the $1 billion range per quarter as we move through 2026.

Joseph Otting, CEO

Additionally, I would add that we're declaring our intention to begin to originate some CRE loans. This isn't a large dollar amount; we're targeting about a couple of billion in origination this year. The observed acceleration in paydowns will be primarily in New York City multifamily. However, we are looking for sourcing opportunities in commercial real estate across our franchise in Michigan, California, Florida that will help offset some of that portfolio outflow.

Christopher McGratty, Analyst

Great. And my follow-up, I guess, two parts. Lee, on the model, the risk-weighted assets, given the par payoffs and the nonaccrual resolution plus the growth, how do we think about just the cadence of RWA growth over the year? Also, help on the first quarter share count with the warrants and everything.

Lee Smith, CFO

Let me start with the share count. In Q4, the share count was 459 million. For 2026, you should be using around 473 million and then 479 million shares for 2027. In terms of risk-weighted assets, keep in mind that with multifamily and CRE, nonaccruals are 150% risk weighted, while anything that's special mention is 100% risk-weighted. The C&I loans coming on are typically 100% risk-weighted, but given the dynamics with 50% risk weight in our multifamily for performers, it’s not as punitive as one might think.

Operator, Operator

Our next question will come from the line of Janet Lee with TD Cowen.

Sun Young Lee, Analyst

I appreciate Slide 11, where you indicated an average deal size for C&I being around $25 million, which is on the larger side for a typical regional bank, but probably not for you guys. Are some of these syndications? Can you share other metrics on underwriting, given that this is a newer segment for Flagstar?

Joseph Otting, CEO

If you go back and look at our primary growth areas for C&I, they focus on specialized industries and corporate regional commercial banking. We target mid- to upper market and lower corporate clients. In many instances, we aim to be the primary bank for these relationships.

Lee Smith, CFO

Credit has final say on all loans that come on to the balance sheet. We are seeing growth on the C&I side without taking outsized positions in single names. The average loan size is roughly $25 million to $30 million. We have a robust process in place to assess loan quality pre-approval with severe review at various levels. We're averaging a spread to SOFR of about 225 to 230 basis points with a 70% utilization rate on these facilities.

Operator, Operator

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

Joseph Otting, CEO

Thank you very much for joining us this morning. We really appreciate your interest in the company and the questions you have provided. We remain extremely focused on executing our strategic plan, including the transformation of Flagstar into a top-performing regional bank, centered around creating a customer-centric relationship-based culture, enhancing risk management, and driving long-term shareholder value. Thank you again for your time today.

Operator, Operator

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