Flagstar Bank, National Association (FLG) September 2026 Conference Transcript

Thanks, everyone, for joining us this afternoon. We're pleased to have Flagstar Bank here today joining us. Joseph Otting, the Executive Chairman, Chief Executive Officer. Lee Smith, Co-President, Co-Chief Operating Officer, and Chief Financial Officer. And Rich Raffetto, also Co-President, Co-Chief Operating Officer, and Chief Banking Officer. Thanks a lot, guys.

Thank you, Jared.

I appreciate you joining us. I know you didn't have too far to travel to get here. So it's good to have you all here. Maybe just starting off, the commercial banking build-out has become the primary growth engine of the company. What allows Flagstar to win so many new relationships today, and how have you differentiated yourself from peers who are pursuing the same clients?

So first of all, Jared, thank you very much for the invitation to that conference. It's the Barclays Conference, you know, year after year is a highlight for our organization and for the people that are attending. And the ability to sit down and talk with investors in a one-on-one basis, almost like speed dating, builds a lot of solid relationships. So thank you for you and the organizations putting this together. You know, when we joined the company in March of 2024, you know, we laid out a plan that we really wanted to diversify the balance sheet. And we wanted the risk to look like a third in commercial real estate, a third in consumer cash flows, that we put mortgage-backed securities into that bucket, and a third in CNI. And to build a relationship commercial banking business, which really wasn't a part of the DNA of the legacy organizations, we were fortunate to hire Rich Raffetto to come in and lead that effort for us. And both Rich and I really spent the majority of our careers in the CNI kind of business banking, corporate banking, middle market space. And we really had a vision that we could build something out that could be really special, where we could be customer-centric, be responsive to the customers. But the real ingredient that was really important is that we recruited really top-notch talent into the bank. And as Rich and I laugh every once in a while in those early days, it was a bit of a hat trick to get, you know, people that knew us to join the company, but the momentum started. And today, Rich has done an amazing job of hiring over 400 banking professionals. This covers relationship management, product areas, credit underwriting. And I think the core, not only that the senior management is committed to this space, we think it's a big part of the future of the bank, but that we brought people in who knew the owners and leaders and executives of companies that we wanted to bank. And while we brought credibility from Flagstar, they created credibility for Flagstar in the eyes of the customers. And so now, you know, we're generating $2.8 to $3 billion of new loan outstandings a quarter. We're doing that one relationship at a time. We're generating about 75 relationships per quarter, and we really think the future is very bright for Flagstar. We're in a unique position where people are looking for regional banks to play a role, and as some of our brethren at Silicon Valley and First Republic and Union and Signature have gone away, it's really opened up a really good vortex for us to be able to step in and fill that void.

You talked about now and you've talked in the past about building a relationship-based bank rather than simply growing loans. As these new relationships mature, how should we think about the opportunity for deposits, treasury management, capital markets, and wealth management revenues?

Yeah, it's really a wide-open opportunity for us. You know, Rich quotes a number that, you know, over the last six months, we boarded $4.4 billion in new loans in the commercial bank and in the private bank and $2.4 billion of deposits. And so, you know, we have expectations, you know, depending upon the vertical and the business and the industry, that we're going to get a full relationship with these customers. Frequently, you have to use your balance sheet that gives you the phishing license to start the process, but about half of our relationships now are single bank or one or two bank. Well, we're the lead on that, and half of those are coming where we're a participant with other banks. But we have full expectations that not only fee income and deposits will come with those relationships, and our short-term success has proved that.

You know, as you said, you know, the growth has come from that combination of geographic expansion and specialized industry verticals. Which verticals and markets have exceeded expectations? Where do you see the largest opportunity over the next few years?

Yeah, so we're really excited because, you know, across the United States, Flagstar has retail banking presence in California and Arizona and Florida and New York, New Jersey, Ohio, Indiana, and Michigan, really solid, solid markets. but we didn't have commercial banking operations. And so we've developed a strategy in those markets and others to put commercial bankers to coexist with our brand in those markets. We've had really, really good success of penetrating the middle and lower corporate market with that. And then we also felt specialized business brings a unique ability for relationship managers to understand the needs of owners in certain industries. And for us, we've seen really great growth in oil and gas and in healthcare entertainment, sports specialty, we're also seeing a lot of great momentum in renewable energy right now, a lot of that. And we've opened up this year a couple new ones in food and other things where all those kind of parallel into large chunks of GDP in the economy. And so, again, starting from zero and being able to gain market share allows us to show significant growth in all of those areas.

Maybe we can talk a little bit about the balance sheet transformation and what's gone on since you all have come on board. You know, the pace of CRE reduction continues to exceed, I think, what you originally expected with another billion-one payoffs in the second quarter and a meaningful portion coming from the criticized asset portfolio. How has your thinking evolved around the speed of the transformation and how much is left to do?

Yeah. So if you go back to the third, a third, a third, you know, today we sit at about 48% of the loan book is in commercial real estate as a whole. That includes owner-occupied and really real estate across the nation. About 28% is in what we consider consumer, you know, cash flows and roughly 26% in CNI. and I. And so you're right, that transformation into that much more diversified balance sheet has occurred much more rapidly than we thought. And when we originally got there, 70% of the book or more was in commercial real estate. We had a lot of discussions with customers of the bank that basically said we did not want to renew or extend any real estate loans. We're now at a position where we're excited about being able to do new real estate transactions because that exposure has shrunk, but I think, you know, when we get to, you know, the beginning of 2028, we're going to feel pretty good that we're in the geography of the range that we were hoping to get to, and that builds, I think, a much more durable, diversified institution.

You know, as the pace of that runoff remains elevated and, you know, you have some more capacity under your CRE concentration, how do you determine when it's worth to retain a CRE relationship versus, you know, running off at this point? And has that framework changed as the balance sheets become stronger?

Initially, it was we wanted to reduce our commercial real estate exposure with limited exceptions. We really communicated. And today, we've now graduated to the point where if someone has a strong non-credit relationship with the bank, we will make exceptions. And then as we pursue markets in California and Arizona and Florida and Chicago, Michigan, and Ohio, we're looking for where people want and need commercial real estate, either construction financing, transition financing, or mini perm financing. But we'll expect and have to have a depository relationship with that. And if it doesn't, then we're probably going to pass on those relationships.

We shift a little bit to margin and NII. You know, the market has spent a lot of time focusing on near-term NII pressure from the CRE runoff. You know, as you think about the next several years, what are the biggest building blocks that get Flagstar from today's earnings profile towards the profitability targets that you've outlined?

This is where I hand the baton to Lee. Okay, thank you. Thank you, Joseph.

Thanks for having us. It's always good to be here, as Joseph said. I think when you look, I mean, just looking at 27, I think in terms of NIM expansion, I think the three biggest drivers are, we have in 27 alone, we have $9 billion of low-coupon multifamily loans that are resetting or maturing. And when I say low-coupon, less than 3.9%. 9%. So they will either reset at a market rate and we will keep them, or they will pay off and we will give Rich that liquidity to continue to originate and build the C&I portfolio. So we're going to get a lift from those resets because those resets are contractual. They're just going to happen as they hit those dates. So we get a big lift, which is somewhat mechanical just by letting that play through. I think the second item is as we grow the C&I book and the balance sheet, if we're, as we said in Q2, Rich brought on net growth $2 billion of C&I loans at an average spread to SOFA of $2.25. So you're looking at an all-in coupon of just around 6%. Our cost of interest-bearing deposits in the second quarter was 3.05. The spot rate of our deposit costs when you include non-interest-sparing are around 252. So if we can sort of keep deposit costs somewhat consistent, maybe they increase a couple of basis points, but we're putting on loans at those spreads and those coupons, then we're going to continue to drive NIM expansion and interest income expansion. And then the third main driver is bringing those non-accrual loans down. We have 2.8 billion of non-accruals today, 40% of which I want to point out are performing and current. We're very punitive on how we classify non-accruals, but that is dead capital, dead earnings, because they're 150% risk-weighted, and they're not doing anything for interest income or NIM. So as we bring those non-accruals down, it's automatically going to be accretive from an earnings point of view. So, you know, if you're thinking of the NIM expansion, those are the three main drivers.

Since the original plan was developed, the rate outlook, CRE payoff activity, and the deposit environment evolved. How do you think about the balance between loan yields, deposit costs, multifamily repricing, and balance sheet growth as drivers going forward?

Yeah, I mean, look, I think, as I mentioned, the resets are a big deal for us, and that's going to obviously help the NIM expansion. But we're typically seeing, coming back to what Joseph said earlier, we're trying to limit the sort of CRE multifamily runoff to somewhere between $800 million and $1 billion a quarter. We think that rich can originate what we saw in Q2, which is about net C&I growth of $2 plus billion a quarter. We think we can sort of continue that going forward. And so on the loan side, you've got the C&I growth. Some of that is going to be funded by CRE runoff. And so you're looking to fund the remainder of the C&I growth with incremental deposit We expect that to come from the commercial relationships that we're bringing in every quarter with the new C&I growth and then the private bank growing its deposits as well. So the question is, what is the incremental costs of the deposits that we're bringing in to fund that new C&I growth? And if we can bring that in at the right cost, and we think we can, then you're going to achieve earnings accretion for the bank. Two of the points that I just want to make on what I've previously said. If you think about the $9 billion of CRE loans that are resetting in 27, they're on our balance sheet today. We're already funding those. We don't have to go and get incremental funding. We're just going to get the pickup in the improved spreads or coupons that we get on those loans, whether they reset, pay off, and we use the liquidity for C&I. And the non-accrual loans that are on the balance sheet today of $2.8 billion, we're already funding that. We don't need incremental funding for those two big drivers of net interest expansion. Where we have to go and get some additional liquidity is to fund the C&I growth that isn't being funded by the CRE runoff.

Maybe just sticking with the multifamily portfolio for a minute, you did a lot of deep work on evaluating credit over the last two years with that. At this point last year, the expectation was that we're going into a lower rate environment. Now we're going into a higher rate environment. How do you see maybe some of those criticized and classified but not non-performing loans reacting with a reset that's potentially higher with the backdrop in New York still pretty rough for those owners?

Yeah, I think, and I'll talk about non-accruals at the end, but I think what we have consistently seen over the last several quarters is of the billion-plus of par payoffs each quarter, 40% to 50% of those par payoffs have been substandard. And again, that's because we've been very punitive in the way we've risk-rated the book. We do not see that changing, at least in the near term. I mean, we've seen those loans that are paying off going to the agency, Spani-Freddy, and obviously going to other lending institutions. For those rent-regulated buildings that are more than 50%, some of those other institutions do get CRA benefits for financing those loans. So we think, you know, that is a part of what we've seen. But there's a lot of liquidity out there for this asset class. And so we've consistently bought down our criticized and classified, and we think that will continue. I think if there's one area where we think the higher rate environment might slow us down a little bit, it's the speed and the pace with which we can reduce the non-accrual loans.

Rich, maybe you've done a lot of work over the last few years bringing in new people and really growing the C&I space in an environment where there's a lot of banks out there looking to hire. good C&I lenders, what's sort of the value proposition as you pitch it to people to come over to Flagstar and, you know, help build out that commercial business?

Well, thanks, Jared. I think it's a very relevant question. As Joseph mentioned, the commercial banking build-out was one of the great opportunities that our new management team, that's not new to the industry, but when we arrived at Flagstar, it was one of the glaring, obvious opportunities for the company. And since then, we're pretty proud that we've onboarded over 400 new bankers to build out this commercial banking platform and to deepen our existing platform in private banking. And we've been very gratified by the quality of the professionals that we've brought on board. And frankly, one of the attractive things is that we've got Joseph in the corner office having grown up as a commercial banker. I can count on one hand how many commercial bankers are serving as chairman and CEO of a top 30 bank in this country, and I think that really does resonate. In addition, the opportunity to build something and make a big impact in an environment where you know that C&I and commercial banking is going to be core to the strategy of the new management team, that's been certainly a tailwind for us in bringing on new talent. and the quality of the people that have come from much bigger institutions that are now building out the platform at Flagstar has also been a draw. We're pretty proud to note that we've only used an executive search firm on a couple of bespoke hiring opportunities. Most of the people that we're attracting to the franchise are through that network effect of people that we've worked with and trusted over the years, and they're trusting us to come over to build something special together. and it's in an environment where we're a bank that's big enough to matter in terms of the ability to provide capital to their clients as they come over but they're not 10 layers down from the CEO and they know they can make a big impact and we're not burdened with a legacy of being overweight from a credit exposure perspective in really any of our C&I subsectors that we're building out and as Joseph mentioned, it's a two-pronged strategy to cover specialized industries with experienced bankers, as well as to fill in our geographies around the country with geographically focused commercial bankers that are networked in that community and can really make a big impact. So we're pleased with the progress that we're making, and I think those factors are continuing to be a tailwind as we continue to onboard talent. And I would describe this as, you know, we're in the top of the fourth inning in a nine-inning game, but you're starting to see it now with the quarter-over-quarter CNI loan growth and the fact that we're onboarding, you know, 70 to 80 new relationships each quarter on the commercial side of our book, that, you know, the loan is only the beginning of that relationship in a relationship-focused strategy, and we can go deeper with treasury management, capital markets, private banking and wealth management, and connecting those dots in a, you know, tight-knit organization is how we're executing.

What about when you're, you know, so you brought on the people with the relationships. they have to bring over their own relationships and onboard the new customers. Similarly, what's that value proposition to get somebody to leave the bank that they're banking with today and to come to Flagstar, which may be relatively new on the scene for this type of banking?

Sure. Well, having been a commercial banker myself for about 35 years, I can tell you that most of the client engagement team are pretty entrepreneurial in spirit. And building something is something that is very attractive to folks in the marketplace. And as you can imagine, with a number of institutions either full up in different segments or going through, you know, strategic shifts, might be M&A integration. We've seen a number of regional banks get taken out either in M&A or following 2023. there's an opportunity that we at Flagstar are grabbing to take market share where there's bankers that are looking for a platform like ours where they know they can make a really big difference. They know that commercial banking is core to building out the platform. They know we've got capacity across commercial and private banking to be relevant in different industry sectors, and they know that we need to be more impactful in the communities where our brand is already known in four big geographies around the country. So I think that's one of the things, and they're going to work with people who know what good looks like from other institutions at large, you know, top ten banks in the country. And I think that those things are resonating, and they know that they can be impactful, and they know they have an executive management team, including the three people up on stage today, that are happy to jump on an airplane or come across town and meet with a business owner who's, you know, trying to decide between us or another institution. and I think that's the formula that we put into the mixing bowl that's resulting in really good relationship growth and over time we will drive higher returns on those relationships as we go deeper with additional products beyond credits only at the beginning. We go to deposits and then the fee generating services and that's the model that we're executing.

Lee, you mentioned a little bit about the need for funding growth as well to support this loan growth. What are you seeing in terms of deposit pricing out there in the market today and with a likely rate hike or expected rate hike tomorrow? How are you expecting to see deposit pricing trends through the rest of the year?

Yeah, it's undoubtedly competitive. There's no doubt about it, and that's what we're seeing. But I think, as I mentioned earlier, what we're trying to accomplish is, And we've done this in the first two quarters of the year. We've grown deposit balances, but we've been able to reduce our cost of interest-bearing deposits at the same time. I think we're at an inflection point where can we continue to grow deposits but keep the cost of the deposits relatively flat? So maybe it goes up a couple of basis points, but you don't see a big jump in the cost of deposits. And that's what, you know, we're trying to aim for. You know, we are seeing banks that have savings promos, CDs out there that are north of 4% in some instances. You know, we've got our own promo on the website, 375. But at the same time, we're leveraging the commercial relationships and the private bank relationships to bring in some non-interest-bearing. We'd like to bring in more, but also low interest bearing deposits so that you bring in that overall cost of deposits, keeping it relatively stable. And so as we think about the funding side of the balance sheet, generally, if we can keep the cost of deposits sort of in a very sort of, you know, tight zip code, and then we'll continue to chip away at the flub advances, and that's how we'll sort of continue to reduce funding costs.

You know, maybe shifting to the expense side and some of the technology spend in AI, you know, AI is obviously a big theme this year. You've talked increasingly about modernizing the technology stack at the bank. Where are you seeing the most tangible benefits today, and where do you think some of the biggest opportunities are still out there?

So when we first arrived, we had six technology centers. Each legacy bank had two. And really through the course of this year, we've converted, we've closed those six and opened up really two co-location centers. So we went down six, up two is the way I would look at. We made that transition rather smoothly. There was no disruption both at the bank or with our customers. The next big transition is we currently operate on two cores. We'll be converting down to one core in June of next year. And so those all have kind of allowed us to build what we call the S2 platform in our organization. You know, simple and sophisticated is what we really focused on. But also bringing forth that, you know, the legacy banks did not have the ability to invest in the technology spend. We've been able to drive the cost down substantially by a number of these moves and use those dollars to reinvest in our technology platform. And so that includes products and services, the way we process things, using external resources, using some international resources to drive the cost down. So we've actually lowered our costs while dramatically improving the technology that's available. We also were an early user and adapter of AI technology in the company. We have StarIQ, which is kind of a proprietary system that is based upon the quad that is actually used within the company. So it's a closed-loop system where we make AI available to all our employees. And we're constantly doing lots of education now about how people can use AI to further advance their efficiency, effectiveness, and their work environment. So we're really excited not only about where our technology has come under Chris Higgins and Jason Pope's leadership, but really what we have available to yet to get done in creating the efficiencies.

You know, on capital, you obviously have plenty of capital. You announced the $250 million share repurchase in the second quarter, which I think was expected, but it certainly resonated with investors. what does that say about management's confidence in the transformation and forward earnings trajectory, and should we think about that as more of an introductory start to capital management and where ultimately you see capital ratios settling out for your – Yeah, we've had, what, 12 meetings today, and that's the first time that's come up.

You know, first of all, the three things that both management and the board has really focused on is building those core earnings up. And, you know, we publicly said, look, we want to continue to see the path on core earnings. That's the probably most important thing for the company. The second is cleaning up, you know, the loan portfolio as we have it today. And then the third is really how much capital will we deploy in which is CNI build. But I think, you know, the board management recommended and the board supported the stock buyback, I would say that was earlier than I think most people thought. I think most people were thinking that was going to be perhaps a September or October event, and we announced it earlier. And we just think that's a way for us to demonstrate with the bank's excess capital, and as long as those three other variables come along, we're going to continue to look at that and see what's the best option for our investors. And we're confident that those three items are going to continue to improve. C&I is going to grow. We're going to continue to see real positive core earnings growth. And we're really highly focused on reducing the substandard and non-accruals on the bank's balance sheet.

Okay, great.

Any questions in the audience? Happy to open it up.

I think if we're sitting here next year at the same time and get you to join us, and the stock is resonating with investors. What do you think the main drivers of that change would be between now and a year from now?

Yeah, I think that we continue down the path of growing and building our C&I franchise, that we've transformed the real estate portfolio, that now we are recognized as someone who is a provider of debt and relationship banking into the commercial real estate. We are also transforming our retail banking group to be a little bit more sales-oriented and outward-focused. And so we have a retail banking franchise with about $36 billion in deposits that we want to really turn it into a deposit origination machine. And then we can serve both local consumers and small businesses through that 360 branch network. And, you know, that we continue to hear and see that Flagstar plays an important role as a bank in America and that, you know, people can rely upon us and we can provide great quality relationship managers who offer solutions to our clients where we can add value to the client. And I think we're well on the path of doing that across America.

And I would add, that, Jared, that the talent piece of the equation continues to be critically important, particularly as we expand in these markets. While we've planted the flag in different industry segments and in geographies, and we've retooled and invested in product capabilities to match competitors of our size and complexity, continuing to attract bankers to the platform is key. We talked about adding 40 to 60 new bankers to our platform over the course of 2026 in the C&I space. We are well on that path and feel really good about getting to that number, probably the higher end of that number by the end of the calendar year. And that momentum we expect to carry over into 2027 as well. The other piece of the equation that's now different, now that we have very purposefully managed down the commercial real estate exposure as a percent of capital at the company, we're selectively reopening for business in the CRE space. So our new originations in the third quarter will be markedly improved from very little activity in the new origination space in commercial real estate in prior quarters under this management team. So our home builder finance group, which is based down in Houston, and our non-New York-centric commercial real estate business based out in Detroit and in other markets, We're starting to add commercial real estate originations-focused bankers and credit underwriting professionals in markets like Southern California and Chicago and Dallas and Mid-Atlantic and South Florida, where we simply had not had them before. So I think our momentum on our overall commercial businesses, including commercial real estate, you'll see this point of inflection continue, where the C&I momentum continues to build. We'll go deeper in these relationships, driving more deposits and fees, but also commercial real estate is starting to, they're joining the party two years late, but now they're moving back into more traditional BAU mode while we continue to work down the concentration that we have in the New York area with, you know, legacy New York rent regulated. So it's a nice transition, but kind of moving more into the middle innings, if I would describe it.

Yeah, I think looking forward a year, I mean, I think we've been one of the most transparent banks in the country in terms of you go back a couple of years, we put a three year plan out there and we've continued to put that guidance out there through the end of 27 and a lot of backup information in terms of how we're going to get there. And as Joseph said, the strategy hasn't changed. You know, we are very much on the rails. And so I think I would just emphasize that don't underestimate the power of $9 billion of low-coupon multifamily loans resetting in 27. And obviously, it's cumulative quarter over quarter. So as you move through the year, the impact is only going to increase. You know, reducing those non-accruals that are doing nothing for us today. and then obviously continuing to grow that C&I portfolio. And if you actually do the calculation, only sort of $3 million of interest income can move our NIMP four basis points. It's very sensitive. So when you have those three levers, it can be meaningful. Thank you very much.

Thanks, Parkway. Thanks, everybody, for joining us today. Thank you.