New York Community Bancorp Inc

NYSE:NYCB

Earnings Call Analysis

New York Community Bancorp's Strong Growth and Strategic Realignments

In its recent quarter, New York Community Bancorp reported strong deposit growth of 8% in retail and 11% in private banking as customer confidence returns. They are strategically transitioning to a diversified regional bank and reducing noncore assets, with an aim to lower their commercial real estate portfolio to $30 billion. The forward-looking forecast shows net interest margin expected to improve from Q4 2024 through 2027. However, increased provisions for loan losses are anticipated, adjusting to $1.1-$1.2 billion for 2024. Their CET1 ratio stood robust at 11.4%, positioning them favorably against peers in a challenging economic landscape.

Steady Progress Amid Challenges

New York Community Bancorp (NYCB) reported significant achievements in its third quarter of 2024, marking steady progress toward its transformation into a diversified regional bank. The company is focusing on consumer, small business, commercial banking, private banking, and commercial real estate, with both deposit growth and strategic workforce enhancements taking center stage.

Robust Deposit Growth

For the second consecutive quarter, NYCB experienced robust deposit growth. Retail channel deposits increased by approximately $2.5 billion, a rise of nearly 8%, while private banking deposits surged by $1.8 billion, equating to an 11% growth. The private banking sector is particularly noteworthy since it typically involves lower-cost deposits, averaging around 2%.

Strategic Asset Optimization

The company is focusing on exiting non-core businesses, aiming to divest $2 billion to $5 billion worth of such assets. In the latest quarter alone, NYCB reduced its Commercial and Industrial (C&I) loans by $1.3 billion, an 8% decline, which reflects their continued efforts in optimizing asset quality and minimizing unnecessary risk.

Strong Capital and Liquidity Position

NYCB’s pro forma Common Equity Tier 1 (CET1) ratio stands at a strong 11.4%, positioning it favorably compared to its peers. Additionally, the bank holds robust liquidity levels, with over $41 billion available, providing approximately 300% coverage of uninsured deposits. This solid position is bolstered by the company’s initiative to repay $10 billion in wholesale borrowings—$9 billion in the previous quarter and an additional $1 billion in October.

Updates on Forecasts and Financial Metrics

While the outlook for 2025 and 2026 indicates a reduced earnings projection due to expected elevated levels of nonaccrual loans and higher FDIC assessments—approximately $100 million annually—the company is optimistic about future performance as conditions improve. Significant changes have also been noted in the company’s margins, which are projected to begin improving through 2027.

Challenges in Asset Quality

The bank's portfolio faced increased scrutiny, resulting in a net charge-off level of $240 million in Q3, with expectations of similar, though slightly lower, figures in Q4. This stems from challenges in the multi-family loan sector. However, approximately 68% of NYCB's nonaccrual loans are performing as agreed, signaling potential stability in troubled assets.

Long-Term Strategic Vision

NYCB is ambitiously targeting a growth in its C&I loan portfolio from the current $16 billion to around $30 billion over the next 3-5 years. This strategy involves enhancing its operational capabilities through significant hiring, which already includes over 30 new personnel, aimed at driving growth in commercial banking.

Proactive Risk Management

The bank's management has focused heavily on risk governance, completing almost 97% of its Commercial Real Estate (CRE) portfolio review, enhancing its capability to manage problem loans proactively. The company acknowledges the difficulties ahead but is implementing stringent measures to de-risk its loan portfolio.

Looking Ahead

As NYCB continues its strategic realignment, the upcoming quarters will be pivotal for executing on its C&I strategy and improving overall profitability. The bank is committed to maintaining discipline in growth and operational efficiency, providing a potentially strong upside as they navigate through their upgrades in management and innovative financial strategies.

Earnings Call Transcript 2024-Q3

[Operator]

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 New York Community Bancorp Third Quarter 2024 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.

[Salvatore DiMartino, executive]

Thank you, Regina, and good morning, everyone. Thank you for joining the management team of New York Community Bancorp for today's call.

Today's discussion of the company's third quarter results will be led by Chairman, President and CEO, Joseph Otting; along with the company's Chief Financial Officer, Craig Gifford; and our Chief Credit Officer, Kris Gagnon.

Before the discussion begins, I would like to remind everyone that our quarterly earnings press release and investor presentation can be found on the Investor Relations section of our company website at ir.mynycb.com. Additionally, certain comments made today by the management team of New York Community Bancorp may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us.

Also, when discussing our results today, we will reference certain non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. And now I would like to turn the call over to Mr. Otting.

[Joseph Otting, executive]

Thank you, Sal, and good morning, everyone, and welcome to our third quarter earnings call. We're actually pretty excited about the quarter and what we accomplished during the course of the quarter. And today, we're going to review the third quarter results, an update of our 3-year forecast and provide an overview on our key strategic initiatives.

As I've mentioned in the past, it is important to both Board and management team that we remain engaged with the analyst community and investors on our progress as we continue to transition for the remainder of 2024 and 2025.

During the third quarter, we continue to make significant progress on multiple fronts towards our goal of becoming a diversified regional bank, which focuses on consumer, small business, commercial banking, private banking and commercial real estate, and some of the actions that we've taken over the last 3 to 5 months, point is in that direction.

Turning to Slide 3. Under the first area, you will see that with our Board transformation complete, we are quickly building out our middle market commercial banking and specialized industry lending verticals with the addition of over 30 new hires in this space over the last 90 days. This includes seasonal lenders and the infrastructure to support them.

In addition, we're excited. We also hired a new Chief Information Officer. His name is Chris Higgins. Chris previously worked at U.S. Bank, and most recently was the CIO at MUFG. Chris brings tremendous amount of experience and will be a key asset and leader in the company as we go forward as well. One of the things, I think we're most excited about is we continue to attract top-tier talent to the organization and virtually every -- excuse me, every area of the company, and I'm very confident in the leadership team of the bank.

As far as our executing on our operating plan, this quarter was the second consecutive quarter of really solid deposit growth, both in retail and in the private bank. In the private bank, we're seeing many customers returning to the bank after the disruption earlier this year, and we are winning new relationships. Moreover, the private banking deposits are more moderately priced, having weighted average cost in the low 2% range.

Last quarter, I talked about the opportunity to exit another $2 billion to $5 billion in noncore businesses. During the quarter, we made the strategic decision to exit certain nonrelationship-based businesses and reduce our exposures under some large exposures, where we syndicated our positions out within the C&I portfolio. As a result, the C&I loans declined $1.3 billion or 8% compared to the second quarter to the runoff of these loans.

Our pro forma CET1 ratio, including the impact of the sale of the MSR and third-party origination business is 11.4%, which compares very favorably to our peers. And as a matter, we do anticipate at the end of this month, the first of November of closing the sale of the servicing MSR and third-party broker business to Mr. Cooper.

Also, we made significant progress in reducing operating expenses through head count reductions and cost controls, while still investing in key areas like our commercial, private banking and our risk infrastructure. Last week, we announced a workforce reduction plan, which will show up in our fourth quarter results. And in addition to that, we've also taken out significant nonpersonnel costs as we focus the organization and brought talent in to perform functions within the organization. And as Craig will speak to shortly, we are on track to meet our earnings forecast goals by year-end 2027.

Under improved funding profile, and these are one of the areas that when Craig and I first arrived, we talked about increasing the liquidity in the company. Our liquidity remains extremely strong at over $41 billion, resulting in an approximate 300% coverage to uninsured deposits. We also utilized a portion of our excess liquidity during the quarter to pay down $9 billion in wholesale borrowings. And during the month of October, we paid down an additional $1 billion, which will help improve our funding costs over time.

Finally, there is our focus on credit and risk management. You'll get a chance to hear from Kris Gagnon, our new Chief Credit Officer. We have completed reviewing virtually the entire CRE portfolio. At the end of the third quarter, we were 97% complete compared to 75% in the second quarter. We continue to proactively manage our problem loans and take appropriate action to de-risk the loan portfolio, including taking significant charge-offs and continuing to build our allowance for credit losses.

In addition, we continue to add both talent and resources in our risk management area as we build out our risk governance infrastructure. Slide 4 highlights the 5 key takeaways for the third quarter. The biggest takeaway from our perspective is that our multi-family borrowers continue to support their properties. During the first 9 months of the year, approximately $2.1 billion of our multi-family reached their repricing date. And in most instances, these properties are repricing from the mid-3% to the mid-6s or higher. Of these loans, over 90% have either paid off or at par or remain current.

We also continued to reduce our CRE exposure. As Kris will discuss, we had another strong quarter in loan payoffs. As you know, one of our key strategic roles is to reduce our CRE portfolio to about $30 billion over time, and these payoffs certainly will help us towards that goal.

Deposit growth, as we've previously discussed in our prior earnings call, was another one of the highlights this quarter. This growth, along with us paying down about 1/3 of our wholesale borrowings, resulted in a positive shift in our funding mix.

And lastly, I believe we are well positioned to successfully execute on our C&I strategy, which we've talked about trying to get significant growth in C&I, which I will discuss in the next 2 slides.

On Slide 5 highlights the senior management team we have assembled within the commercial and industrial space to drive our growth in this area. Ric Raffetto oversees this effort, and has assembled what I believe, as a long-time commercial banker myself, some of the best leadership in the industry, reflecting our commitment to this strategic area of growth. As you can see, we are hiring a proven group of individuals to execute on our business strategy.

Slide 6 outlines our C&I strategy. We already have a good platform to build from with approximately $16 billion of C&I loans. Our goal is to get back to $30 billion in the next 3 to 5 years by expanding our existing platform across middle market, corporate banking and various specialized industries and building out our product capabilities and to drive fee income and relationship pricing. Part of this buildout includes hiring more experienced bankers and support staff. To date, we have brought in more than 30 individuals and continue to attract top talent.

I'm really pleased with how far the management team has brought the company over the last 7 months. We are building a great company that will be reflected in our future financial results. And I'll now turn it over to Craig, and I look forward to your questions.

[Craig Gifford, executive]

Thank you, Joseph. On Slide 7, you can see our financial balance sheet information. And you can see that our CET ratio on a pro forma basis for the sale of the MSR business, as Joseph mentioned, is 11.4%. We ended the quarter with an actual GAAP ratio of 10.8%. The 60 basis point increase on a pro forma basis reflects the lower RWAs from the sale of the mortgage transaction as well as the increase in capital that comes from the small gain that we expect to recognize on the transaction. Joseph mentioned that we expect that transaction will close in the next couple of weeks.

Adjusting for AOCI, our pro forma CET1 ratio is 10.7%. In general, we have lower securities unrealized losses than our peers. And you can see that our liquidity position is robust and continues to improve.

Slides 8 and 9 present an updated forecast out through 2027, and I'll cover some of the more relevant changes from prior information that we provided. The most significant updates reflect an expectation that our nonaccrual loans will remain elevated through 2026, which Kris will discuss in more detail. We also reflect an expectation of a higher FDIC assessment cost level through 2026, principally related to our criticized and classified loan levels. And there's a line switch between margin and fees related to the cost of subservicing deposits that go away this quarter, which I'll describe on the next page.

You can see that from a ratio perspective, the impact of those items does reflect an expectation from an EPS perspective of a reduced level of earnings in 2025 and 2026. But as we get beyond the nonaccruals and the FDIC assessment increases, we would expect 2027 to be consistent with our previous expectations.

Turning to Slide 9, from a margin perspective. As I mentioned, we will have pressure on noninterest -- excuse me, on interest income related to a higher level of nonaccruals out through 2026. Additionally, in 2025 and 2026, there's roughly $150 million of a change in a remapping of interest expense on the custodial deposits, which reduces from prior forecast, our net interest income and increases our noninterest income. So again, it's just a line switch.

If you think about margin, our margin does continue to improve beginning in '25 through '27, as a result principally of repricing of our commercial real estate and multi-family loan portfolio. We do expect that our margin has bottomed in the third quarter. You'll see in our press release the margin percentage. We expect a similar margin percentage in the fourth quarter and then increasing through 2025.

Our provision for loan losses was impacted by a charge-off level net of recoveries of $240 million in the third quarter. We do have an expectation of a similar, although probably slightly less in the fourth quarter of charge-offs, and then tapering in 2025. Our expectation for the full year of provision for loan losses for '24 is $1.1 billion to $1.2 billion. That's an increase from our prior guidance and that is related to our experience on the charge-offs associated with multi-family loans. As Kris will point out, the multi-family portfolio continues to perform quite well, and the vast majority of loans that are in our nonaccrual portfolio continue to be current on their payments.

From a noninterest perspective, noninterest expense perspective, we do expect a higher level of FDIC assessment, again, principally related to the criticized and classified portfolio. That has an impact of about $100 million a year in '25 and '26. Incrementally, in the fourth quarter of this year, the mortgage transaction will close in the next couple of weeks, but we had previously anticipated that it would be completed by the end of September. Regulatory approvals delayed that a little bit and that will have a little bit of a negative impact on expenses for the fourth quarter. These reflect those changes.

Slide 10 shows the success that we're having on the deposit gathering front. As Joseph said earlier on the call, this is the second quarter of very solid deposit growth. We continue to grow deposits in the retail channel up $2.5 billion or just under 8% this quarter. We also had a very good deposit growth quarter in the Private Bank, with deposits increasing $1.8 billion or 11% to nearly $18 billion as our bankers are successfully winning new relationships and many customers are returning dollars to the bank. More importantly, the Private Banking deposits overall carry a lower cost -- a lower cost of funds that are generally more moderately priced.

And now I'll turn the call over to Kris Gagnon to discuss our asset quality and credit metrics.

[Kris Gagnon, executive]

Thank you, Craig. If we turn to Slide 11. We had just over $1 billion in commercial real estate payoffs during the third quarter, bringing the year-to-date amount to $2.6 billion. Importantly, these payoffs were at par, and approximately 34% of these payoffs were related to our substandard portfolio.

If we move to Slide 12. This is an update of our annual CRE portfolio review. Through the third quarter, we have reviewed 97% of the total CRE portfolio that includes 97% of the multi-family portfolio, 93% of the office and 94% of the non-office in the CRE.

If we turn to Slide 13, this is an overview of the multi-family portfolio. The key takeaways here are that year-to-date, we had $2.1 billion of multi-family loans repricing, of those loans, 34% paid off at par and the remainder stayed within the bank. We'll talk about the repricing that we're facing going forward in the next slide.

So Slide 14 provides a few more details on the multi-family portfolio. Approximately 3% of the portfolio is left to review. These are loans with an average balance of $3 million. So we're getting to the smaller end of the portfolio. All of the largest loans in the portfolio have been reviewed and nearly all of the loans with rent-regulated units between 50% and 100% of total units have been reviewed.

Well, I want to spend a little bit of time though on the bottom right side of the portfolio. As you can see, through 2027, we have a significant amount of loans that -- multi-family loans that are either going to reprice or mature. And the important thing to understand here is that as these loans enter a window 18 months in advance, we reevaluate those loans at current market rates and their ability to service those loans -- the borrower to service those loans on the change terms. This can lead to more severe classification of those loans, if the result of the analysis is that the cash flow is either impaired or insufficient to service the loans appropriately.

Moving on to the office portfolio on Slide 15. We reviewed 93% of this portfolio. Again, I think we've gotten through the largest loans. So the remaining 7% is generally smaller balance loans. We've been very proactive and aggressive in managing this portfolio. We've taken significant charge-offs through the years with this portfolio because early on, the larger loans that we looked at, there were some idiosyncratic losses. I think we're largely through those issues. The office reserves associated with the remainder of the loans in the portfolio is 6%, which compares favorably alongside our peers.

Slide 16 is our non-office CRE portfolio, 94% of this portfolio has been reviewed. Most loans that remain reviewed are again, smaller into the portfolio, which are non-New York City loans, and it's a very diversified portfolio.

Slide 17 provides our allowance by loan category. Our allowance for credit losses up to 1.87% this quarter compared to 1.78% in the prior quarter.

And then Slide 18 provides some further perspective around asset quality. We have been diligently identifying problem loans and working towards resolution. You can see that on this slide, this quarter, we had approximately $600 million increase in our nonaccrual portfolio. Important to note that 68% of these nonaccruals are actually performing as agreed to the terms of their credit agreement. And this sort of relates back to the issue that we talked about before as we put some of these loans on nonaccrual or substandard is related to future ability to pay as they enter those repricing windows.

So with that, Craig, I'll turn it back over to you.

[Craig Gifford, executive]

Okay. Thank you, Kris. Slide 19 depicts our liquidity profile. Overall, our liquidity remains quite strong due to the success of our deposit gathering efforts over the last 2 quarters. We have $41.5 billion of total liquidity, which represents about 300% of our uninsured deposits.

Slide 20 summarizes our third quarter financials. And as I mentioned, the net loss attributable to common stockholders was $289 million or $0.79 per share, principally driven by the provisions and expense for the quarter. It was also related to a lower level of noninterest income due to the sale of the mortgage warehouse portfolio, which closed in July.

Joseph, I'll turn the call back to you.

[Joseph Otting, executive]

Okay Thanks, Kris, and Craig. One final slide before we'll turn it over for questions. On Slide 21, we show New York CB's investment profile. We currently trade at 63% of tangible book value. We think being able to move forward and deal with our credit issues and then the emergence of our C&I strategy should help close that gap. This compares to 179% for Category 4 banks and about 155% for regional banks. So a significant upside in the company as we execute on the business plan.

I would also like to thank a number of you recommended and suggested that we convert our holding company name. We chose Flagstar Financial with the symbol we'll begin trading on Monday, FLG. This aligns the overall organization going forward with our Flagstar brand and the branches, which between November and March of last year -- November to March of this year, we rebranded all the branches with the consistent brands, consistent look and consistent theme now all across our retail banking franchise, which all of you know is California, Arizona, Florida, New York, New Jersey and then around Michigan, Great Lake. So a really solid retail banking brand.

So finally, I'd like to thank each of our teammates for their dedication and determination and their commitment to our customers. And now we'd be happy to answer any questions you may have. Operator, you can open the line for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Manan Gosalia with Morgan Stanley.

[Manan Gosalia, analyst]

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

[Craig Gifford, executive]

Yes. So we're slightly liability-sensitive. We will benefit from -- a bit from lower rates. We do have quite a bit of very short-term assets in our cash and securities portfolio. So we'll certainly benefit from a deposit side perspective, but there will be pressure on the on-balance sheet liquidity aspect of the portfolio.

I would say though that we've been very successful in bringing down our deposit rates in the last 6 weeks. So on our more liabilities, our more rate-sensitive deposits, our savings portfolios and our CDs, we've actually have a higher than 100 beta. We brought down those rates between 60 and 75 basis points compared to the Federal Reserve move. So we've been very successful in tapering that.

The impact of that in the fourth quarter will be a lower level of deposit gathering on the retail bank. I would expect I think that will be flat to slightly positive from a retail deposit gathering and -- but I still think we'll see strength in the Private Bank, probably not as strong as the third quarter was, but we'll still see deposit growth in the Private Bank in the fourth quarter.

[Manan Gosalia, analyst]

Got it. And if I can have a quick follow-up. So it seems like the main difference between the 2 guides between last quarter and this quarter is the nonaccrual loans. So what's causing those nonaccrual loans to remain on the balance sheet for longer? Is it that you'd rather not sell them given the pricing being offered in the open market? And would you consider selling them down the line?

[Unknown Executive]

Yes. We're exploring all opportunities to reduce our nonaccrual portfolio. We are working with borrowers to work them out. We were looking at a discounted payoffs. We will explore the market to see if there's an opportunity to sell. In some cases, so far, as we've looked at that, we think that we can do better working them out ourselves as opposed to selling them. So those are some of the avenues that we're taking to reduce the portfolio.

[Operator]

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

[Ebrahim Poonawala, analyst]

I just wanted to follow-up on the credit comments. So the 68% of loans, the nonaccrual and the maturity profile that you showed through '26, '27, I'm just trying to get to -- it looks like your provisioning outlook did not change quarter-over-quarter as you talk -- look into '25, '26. So are we to conclude that at this point, credit quality risk tied to repricing, all of that, even for loans that are coming up for repricing in '27 has been ring-fenced either through reserves? Or these loans have been already put into nonaccrual? So where I'm getting to is the risk of negative supplies is on credit from here should be fairly limited? And talk to us in terms of the rate sensitivity, like the 5-year being 20 or 30 basis points higher or lower from where it is today because that have a meaningful impact in that analysis?

[Craig Gifford, executive]

Ebrahim, so the rate profile is interesting, right? Because at the end of the third quarter, rates had come down at the 5-year point, roughly 90 basis points. But since then, they've backed up about 35 to 40 basis points. So we were cautious in reflecting the improvement in rates in the reserving, recognizing that it can be transient. But I will say that the decrease in rate levels that we've seen is quite favorable to the portfolio in our credit modeling, probably about a $200 million improvement in the credit risk profile as a result of the improvement in rates. And I would expect a similar level of that as rates continue -- if rates continue to decline at the intermediate term. But importantly, it's that intermediate-term point that is particularly relevant for the repricing of these loans.

As Kris mentioned, if you look out into the projections from a provisioning standpoint, I do expect that the provisioning for the '25, '26 time frame is still relatively in line. I think that we'll see a higher level of charge-offs in the first quarter and tapering through the rest of the year.

Kris pointed out on Slide 14, the maturity profile or the reset profile of the portfolio. So we are effectively reflecting in our criticized and classified loans, those loans that we would expect to reprice out through the middle of 2026. So that's 18 months from now. And if you look at that chart, then you still have a reset profile out beyond that, which would be reflected as we then begin to regrade those loans as they move into that repricing window that we analyze from a loan grading perspective. But we feel like from a provisioning perspective, the guide reflects the impact of that.

[Ebrahim Poonawala, analyst]

That was helpful. And just one follow-up question. Maybe Joseph, for you. I think you talked about where the stock rate from relative to tangible book. I think the concern from an investor standpoint is just the lack of visibility. Like we've seen a lot of senior hires that you've announced, but we saw the big change in '25, '26 earnings outlook relative to what we expected last quarter.

Appreciate '27 is the same. Just talk to us in terms of how we can measure all the senior hires that you're bringing on to the bank. Banking is a tough business, even to own a 10% ROE. So I'm just trying to understand is the goal, and should we start seeing proof points of these teams have come and we should see accelerated low-cost deposit growth, loan growth as we look even starting fourth quarter '25? And what's the best way to measure that we are moving in the right direction in that regard?

[Joseph Otting, executive]

Ebrahim, I think it first starts with like how are we rebalancing the balance sheet and our goals there. We're sitting somewhere slightly south of $45 billion in commercial real estate. And our goal is to get that into the low $30 billion range. And so we're doing that through a combination of payoffs, which are averaging somewhere around -- since we've arrived roughly $1 billion a quarter. So obviously, that's $4 billion times 3 is $12 billion. So we naturally get there in a 3-year period. So that rebalancing is occurring with going in our C&I book today, which is about $16 billion. In 2027, we would like to get that into the $30 billion range is our goal.

And so most of us, who have joined this company have spent the vast majority of our career in the C&I kind of space and grew up in it. And so we've gone out and have added really talented people, who are highly experienced, who have operated in this space for, some of us, 25 to 35 years. So we bring those relationships and direct involvement with CEOs and CFOs in companies that we bank.

So to answer your question, we do see, right away, the ability as these people come on to the organization the opportunity to do out rebound solicitation into relationships. And the other avenue is if you look at the makeup of our C&I portfolio, very limited of that is commercial and corporate banking and the type of people that we're hiring are commercial and corporate bankers. So it isn't like we're going into these syndicated credits or large 1 or 2 bank credits, where we have a lot of exposure in that area. We are somewhat of a new entrant into that segment of the market, which should present us some pretty significant growth opportunities.

[Craig Gifford, executive]

The balance sheet projections, if you think about the portfolio that reprices and resets and the experience that we've had in repayments, if you look out on a projected basis, something between $750 million and $1 billion of commercial real estate and multi-family runoff per quarter over the next 2 years. And as we get into late 2025, a pretty -- we're projecting a pretty similar level of increases in commercial banking and C&I growth from a loan perspective.

We're also expecting that those bankers bring in deposits and that will increase our deposit growth starting in late 2025, pretty significantly through '26 and into '27. Roughly, think about it as roughly a 2-for-1 basis loans for deposits. So we're expecting that, that commercial banking group does bring in deposits that are supportive in funding that loan profile.

[Operator]

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

[David Rochester, analyst]

Sorry, if I missed this. earlier, but I heard you mentioned the $2 billion to $5 billion of assets that you would had assessed as noncore. You talked about that last quarter as well. I was just wondering where you guys stand on that now, just given the runoff that we've seen on the C&I front? And then are you still looking at the business and trying to analyze for core/noncore and could that increase from here? How are you guys thinking about that?

[Joseph Otting, executive]

Yes. We've done virtually a business review of all the businesses now in the company and are in the market generating new C&I loans, while some of those had been tabled prior to our arrival. But we are -- the viewpoint overall is that the businesses that we have today, we like. There are certain aspects of some of the businesses, where we wanted to reduce our exposure, either because where we are in the cycle in relationship to that industry or our viewpoint was in some of the hold levels in the company were larger than what our comfort level was. And so we brought the whole levels down and then brought participants in for those credits. So I'd say it's a combination of reevaluating, where we are in the cycles for certain industries and then the other is reducing hold levels. The bank historically took very light hold positions in credit and we just favor a more diversified portfolio.

[David Rochester, analyst]

Great. And where is the $2 billion to $5 billion now? Is that [ $1 billion to $3 billion ], just given some of the runoff? Or where do you see it today?

[Craig Gifford, executive]

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

[Operator]

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

[Mark Fitzgibbon, analyst]

This quarter, you made some pretty sizable changes to your projections outlook over the next couple of years. And I guess I'm trying to get a sense for -- I certainly understand there's a lot of moving parts here, but trying to get a sense for how much more confidence you have in these projections than you did in the old ones and whether we're likely to see similar kinds of variability in coming periods?

[Craig Gifford, executive]

Yes. I would say that we continue to improve our visibility into the portfolio, into the credit performance and into the expense profile of the company. This is now Joseph and my second quarter of in-depth review of the financials, we have instituted an in-depth review at the business line level each month on our financial performance with each of the senior leaders. So every month, we get more and more visibility.

I have a pretty good degree of confidence in the noninterest income -- excuse me, in the net interest income and the margin line at this point. Again, there's a bit of noise in the -- if one is comparing the projections because of the remap associated with the cost of those mortgage deposits. We had projected that as a benefit in the margin line, that's actually a benefit in the fees line, which is where the -- where that has previously been recorded from an expense perspective.

The other area is, obviously, what we're seeing from a noninterest expense perspective. We did take a pretty significant action last week that will improve our expense profile on an ongoing basis, roughly $200 million a year, and we still have more to go. So this forecast expects that we will continue to identify efficiency opportunities, many of which are underway as we continue to improve our technology capabilities and our business processes, and those will result in further cost improvements as we get into '25 and early '26 time frame.

The FDIC assessment pressure is something that is related to the business profile and related to the way the FDIC determines its insurance premiums. It's a complex formula, but it does encompass some things that are -- that provide -- that resulted in an increased rate for us, and I expect that will go through '26. That's probably the most significant change in the -- in the forecast from an earnings perspective.

[Mark Fitzgibbon, analyst]

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

[Craig Gifford, executive]

We're essentially assuming a relatively flat balance sheet. We're assuming that we will see a transition from commercial real estate and multi-family loans into C&I loans as the real estate loans repay and runoff and the C&I begins to come on as those bankers get traction in the marketplace. So not seeing a lot of balance sheet growth. We're projecting a lot of balance sheet growth through '26, but we are projecting a degree of balance sheet growth in the commercial banking space in '27.

[Operator]

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

[Bernard Von Gizycki, analyst]

Question is on revamping the company structure. You've done a good job on bringing new hires on the senior management level and changing the Board. You highlighted progress within C&I. Can you just talk to like what inning you are in with regards to building out your C&I platform? And then in risk management, given previous deficiencies identified, how far are you with revamping your risk control function? And then just lastly on the same topic, any other further head count optimization left to go that hasn't been announced?

[Joseph Otting, executive]

Yes. So obviously, at the Board level, we announced that Peter, who is a long time Flagstar Board member, will be leaving the Board, and we do anticipate to fill that position, hopefully in the fourth quarter. So that is kind of the remaining Board spot at the kind of what I would call the executive management team. We are fully deployed now. And with the addition of Chris Higgins, that completes the rebuild of the executive management.

The next level down, we've hired 10 to 20 people in that category, where we've upgraded both risk positions and infrastructure under Craig's world, finance people to help us prepare our financials. We have confidence in them. And then when you look at the 2 specific areas you mentioned, I'd say in the C&I, we're rounding first base is what I would say. We anticipate to go from roughly 30 hires to 130 hires is what's built into our plan that we will build that out. So we have a fair amount of hiring to do. But we're not hiring all those people at once. Now we're going to start to grow the revenue. And so it will be a revenue, seeing the revenue, then we'll have the expense in the revenue and the expense.

On the risk infrastructure, I think that's a relatively good story of the direction and how far we've come in 7 months. Obviously, we've added some really highly talented people, who worked at the OCC for the vast majority of their careers. That includes Bob Phelps, Menefee and Bryan Hubbard. So 3 very senior people from the OCC, and it helped us. One of the things that we're doing in the company is really building out the first and second and third line of defenses. Those were not here in the organization. And as everybody knows, a category or bank, you have enhanced standards you have to adhere to.

But I really feel good about the people and the direction that we're going in that regard. And I do believe that we worked closely with the regulatory community since we all arrived. I mean obviously, my background of being the controller, I understand the importance of that. And so I think we've built a strong bridge to our regulators. We appreciate their input and guidance as we build this. But I would say, as we look at the risk infrastructure, we feel really good about, where we are with the risk management in the organization, our internal audit. And we're building out the first line of defense in the business units, and that's also built into our cost model.

[Bernard Von Gizycki, analyst]

Okay. Great. Just maybe as a follow-up. So you paid down nearly $9 billion of borrowings, utilizing your assets liquidity from the business sales and deposit growth. And you noted that you paid down an initial $1 billion in October. What are you targeting as a normalized level of borrowings? And how can we think of the pace of those coming down from here?

[Craig Gifford, executive]

Yes. So if you look at the third quarter, we will have a reduction in the overall liquidity of about $3 billion related to the mortgage servicing sale -- business sales. So those deposits will leave and we have been holding excess liquidity to provide for that. From here, I think that we'll relatively match the loan growth with deposit growth. We have a bit of excess liquidity that we will use to reduce our broker deposit funding in 2025 as those broker deposits, which are principally CDs, come due, we won't -- I don't expect it will replace those broker deposits on a dollar-for-dollar basis.

So we'll see the broker deposit funding come down. And then as we grow customer deposits, particularly in the Private Banking and commercial space, then we'll look to continue to repay some of our wholesale, some of our wholesale borrowings with the home loan bank. But I wouldn't expect that it would be material in the rest of '25. Actually in the rest of '24 and then '25, maybe a $2 million.

[Operator]

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

[Jared David Shaw, analyst]

Just circling back on the deposit trends. Could you give us a spot rate on the deposit cost at the end of the quarter? And then you talked about a beta, the early beta being greater than 100% on some of the retail deposits. How should we be thinking about beta over the next few rate cuts?

[Craig Gifford, executive]

Yes. So our spot rate on our savings is at 5%. That was about [ 55% ] if you call it, 6 months ago, even 3 months ago. So we brought that down over 50 basis points. And I would expect to see that continue to decrease as rates decline here in the fourth quarter a bit further. Modeling from an overall interest-bearing deposit perspective, modeling of 50 beta. Obviously, on a more premium product, it will be more significant than that.

And from a Private Banking perspective, again, we see -- that's a more moderate deposit base because it has more noninterest-bearing DDA type of accounts there. So when we bring on those deposits generally, that has not been at our most premium rates that's been at a more moderated rate. And that's what I would expect going forward.

[Jared David Shaw, analyst]

Okay. All right. And then this is as a follow-up. How should we be thinking about the multi-family reserve level here with the expectation for higher losses? Have you been reserving for that? Or we should expect to see that reserve level start to go higher with the provisioning going forward? .

[Craig Gifford, executive]

Well, it's a balance of the expectations around the criticized and classified portfolio as well as the level of charge-offs. I don't expect to see the reserve level coming down significantly in the fourth quarter and the first quarter beyond that as we get into '25 and '26, particularly as the portfolio gets through a lot of the repricing and we see how the borrowers perform against that repricing, that will inform where we go with reserve levels. But I think we'll see a pretty consistent reserve level for the next quarter or 2.

[Operator]

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

[Benjamin Gerlinger, analyst]

Just wanted to clarify something here in your guide or the forward couple of years because I believe, Craig, you talked about the remapping. So if you look at NII change and then fees change, and the remapping was kind of associated with the ECR -- excuse me, just remapping of a couple of items. So net-net, like revenue is down $5 million. Is that kind of what you wanted to convey? I just wanted to make sure that's the net change associated [indiscernible].

[Craig Gifford, executive]

To keep it simple, revenue difference. To keep it simple, in '25 and '26, there's $150 million that moves from net interest income to noninterest income. And that's associated with the earnings credit on the Escrow deposit, the subservice Escrow deposits. Incrementally, I do expect a higher level of nonaccruals than what we had previously contemplated out through '26, and that has -- that has an increased level of pressure in the guide for '26.

[Benjamin Gerlinger, analyst]

Got you. Okay. And then from an ECR -- excuse me, from an expense guide perspective, you guys increased at $150 million. So I think -- is $100 million of that roughly the FDIC, that guidance for kind of just the [indiscernible] related items. Which is really is just temporary, like once you can have lower rates, you assume you could probably do a little bit better on a credit review. And so that doesn't get taxed. It's not tax deductible. That's kind of what the difference is. I noticed the footnote here. So I'm just trying to think like your guidance really didn't change, but you're just kind of elongating that expense.

[Craig Gifford, executive]

Particularly with respect to the FDIC, that's correct. Yes, the piece related to taxes is mostly because the tax rate moves around quite a bit. And that's because the FDIC piece is pretty sizable. The FDIC assessment is pretty sizable and being nondeductible, it represents a fairly large percentage of the bottom line over the next 2 years, and that causes the tax rate to move around. So that footnote, just explaining the tax rate.

[Benjamin Gerlinger, analyst]

Got you. And so when you think about the rate perspective, if you were to move rates lower back to kind of the where they just were recently a couple of weeks ago, you'd probably get a little bit more of a green light to change. But how long do you need to be in that green light. You need 12 straight months before things would look better on a credit perspective due to the rates? I'm just trying to think about the timing of which you think it would look -- like it is better, but you can't just oscillate these things quarter-to-quarter based on rates themselves.

[Craig Gifford, executive]

Right. We can't move them around. And the other challenge is that once we do have a downgrade, rates have to move pretty substantially in order for us to be able to upgrade the loans. And so that pressure continues out for a couple of years. I do expect it will be through '26.

[Operator]

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

[Christopher Marinac, analyst]

Just wanted to clarify if the substandard and special mention loans are falling this quarter or kind of what you see is their trend from here?

[Unknown Executive]

Yes. In the fourth quarter, I would expect to see that our special mention and substandard loans will continue to increase at a -- not at the pace that we've seen thus far. But as we still have a bit of financial information to get through, and we have things moving into the repricing window. So I think the trend would be for an increase in substandard and special mention.

[Christopher Marinac, analyst]

Okay. And they are higher at the end of September, just given the inflow, outflow? I mean, I know you've had payoffs, but you also pushed the new loans in from the repricing schedule, as you said. Is that right?

[Unknown Executive]

That's correct.

[Christopher Marinac, analyst]

Okay. Got it. And then on the general cost of funds for the company going forward, how would you look at that relative to wherever Fed funds go? Like if we look at a year from now, if Fed funds is 4% for example, would the cost of funds be at more of a discount to that than it is today?

[Craig Gifford, executive]

I'm thinking about the math of your question. I think that the answer would be our average cost of funds would be at roughly the same discount that it is today on -- in total. If you think about our funding profile, about half of our funding profile is very short-term priced and the other half is either noninterest-bearing or longer-term priced.

So you can kind of do the math of that as the Fed moves to short-term price component of that, I expect that we'll see a very high beta on that. So virtually, all of our wholesale funding at this point is priced something under a year. And of course, our savings deposits move immediately. So I think that you'll see that discount roughly -- remain roughly the same over time.

[Unknown Executive]

The mix will change a little bit with wholesale. With more C&I customers coming on board, the mix of that will move more to transaction accounts, which should help as well.

[Operator]

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

[Christopher McGratty, analyst]

The loan-to-deposit ratio, is it about where you would like it to be longer term, kind of low-80s?

[Craig Gifford, executive]

I'd actually like to see it be a bit higher. I think that we'll continue to gather customer deposits over the course of the next 2 years. We'll see a relatively flat overall balance sheet and continue to gather deposits. And so I would expect that it would improve, that we'll see a continued decrease in the loan-to-deposit ratio, but it won't be of the significance that we've seen in the last 2 quarters.

[Christopher McGratty, analyst]

Okay. Great. And then just a couple of housekeeping items for the fourth quarter. Just teasing through the one-timers that are in the guide. Could you just help [ start ] that the fees and expenses for the fourth quarter and also the share count once the -- all the preferreds are converted?

[Craig Gifford, executive]

Yes. So the share count has pretty much settled down. The end of quarter share count will be -- is reflective of the expectation on an ongoing basis. Virtually, all of the preferred that I expect will convert in the near term did convert in the third quarter, and that's been public information.

From a one-timer perspective, in the fourth quarter, I do expect that we'll see some charges associated with the mortgage business transaction exit. So we'll have some asset impairments and a bit of severance and then the action that we took last week. We'll also have some severance associated with it. All in, I think that those charges will be in the $100 million range.

[Operator]

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

[Matthew Breese, analyst]

I was hoping we could first talk a little bit about loan portfolio yields. So loan yields have been down for 4 consecutive quarters despite kind of a positive repricing narrative and repricing dynamics within CRE multi-family. So I guess how much accretion was there this quarter within loan yields? How much impact did nonaccruals have? And when do you think we can actually start to see loan yields begin to expand?

[Craig Gifford, executive]

Yes, the majority of the impact on -- from decreasing loan yields is from the nonaccruals. There is not much accretion at this point that's built into the -- into the margin or that would go away. It's maybe $15 million a quarter that tapers off over the next 4 quarters. If we think about from a repricing perspective, you can see that we've got about $5 billion a year that will reprice, and that moves up from an average rate of about 3.5%. In our forecast, we do have rates coming down. But at that intermediate term level, not a lot. So we see that -- those loans as they come in from a repricing perspective, reprice from the 3.5% level up to the 7.5% level. So that's what's driving the increase. And I do think that we'll see that turn in the fourth quarter a bit. And then as we get into '25, we see less incremental nonaccruals than what we've had on a quarterly basis the last 2 quarters, then we'll see that turn positive.

[Matthew Breese, analyst]

Got it. Okay. And then I just wanted to go back. You noted that you expect the balance sheet to be flat a couple of times now. If I look at the forward guide, the NII and the guidance implies that you'll take earning assets down to around $102 billion in '25 and '26 from $109 billion today. Can you just talk a little bit about that and then the pros and cons of going below $100 billion as it relates to category for bank designation? It feels like you're hesitant to go that route, to go sub-$100 billion. I'm curious, if there's more to it than we currently understand.

[Unknown Executive]

So regarding the $100 billion level, if you work your way through that, if you get below $100 billion, you still have 4 quarters that you are anticipated to be compliant with the Category 4. And then from a regulatory perspective, when you start to get close to $90 billion, you have to put in place a plan to become compliant. So just because you get below $100 billion, doesn't mean that you don't have to have the enhanced standards.

So that isn't like our target to get below $100 billion and said what we've taken the approach was to build out the appropriate risk infrastructure in the company, and then allow our business model to take it where we can grow and expand. And so it isn't a goal of ours. It isn't a desire. And quite frankly, you probably have to shrink $20 billion or more to get to the point where you wouldn't be subject to those standards.

[Matthew Breese, analyst]

Understood. Is my thinking correct in that earning assets could trend $5 billion to $10 billion here?

[Craig Gifford, executive]

Yes. But I think that there's a reasonable chunk of that that's actually coming out from a cash perspective. So, it's earning, but we're deploying that cash either to pay down debt or to pay down broker deposits. So there's -- the loan portfolio, I don't expect to be decreasing as much as the cash -- the cash component.

[Operator]

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

[Jon Arfstrom, analyst]

I don't know, if this is an easy question or a hard question, but if the economy stays in kind of a steady state, when do you guys think we'll see the peak in nonperformers?

[Craig Gifford, executive]

I think the repricing that comes into the portfolio over the course of the next 2 years, we'll continue to have a component of it that moves into nonperforming. And so, I think we'll see a continued level of new additions to nonperforming through '26. And then the question becomes how quickly will we be able to action the existing portfolio of nonperformers.

Many of the loans that are in the nonaccrual category are in there because of our focus on looking out at the repricing characteristics and a pretty stringent assumption that or a criteria that from a classification standpoint would suggest that we expect them to default. The reality is that we see the vast majority of them continuing to perform even when they do reprice. And so that will -- those loans are performing. They are amortizing their principal balances. But I think that we'll continue to see new loans being added to the nonperforming portfolio over the course of the next 2 years as loans reprice.

[Jon Arfstrom, analyst]

Anything unusual about this quarter in terms of the review? Obviously, it didn't go up like last quarter. But are you saying this is increasing at a decreasing rate or how material do you expect it to be, the increases?

[Unknown Executive]

No, there wasn't anything particularly unique about this quarter. We just continue to run our process. We still had financials to grind through. The level of new substandards sort of at the same pace that we saw before. We've gotten through the bigger loans. It's smaller. So we're looking at a lot of smaller loans that -- more widgets, but there wasn't much of a change. We're just sort of getting through it. This is an annual process. As Craig said, this will continue each year. We'll have to do new financial reviews and review these loans as they're getting into the refinance window. So I wouldn't say that there's anything unique.

[Joseph Otting, executive]

The one thing that I would add is, Kris said this is an annual process, but we went to a standard on the expectation is that the borrowers would provide us the financial data. And perhaps in the past, it was more lax about whether they sent their financial data into the company.

And then second of all, I think there's a new standard of underwriting around debt service coverage and loan-to-value as opposed to using loan-to-value for the risk rating process. And so that in itself, there's more rigor around your primary and secondary social repayment.

[Unknown Executive]

Yes. I agree with that, Joseph. We were very aggressive in terms of getting financial information. And I think 98% of our borrowers provided financial information, which is significantly higher than in the past. And we did in the second quarter, institute changes relative to how we evaluate risk with more of a focus on debt service coverage ratio, as Joseph said, as opposed to loan-to-value. But that process started in the second quarter and continued on into the third, and that will be our standard going forward.

[Jon Arfstrom, analyst]

Okay. That helps. And then just 2 others. You guys do a lot of benchmarking in the presentation. And I know this isn't an easy question, but what do you think the normalized -- more normalized reserve percentage should look like for the company in '26 and into '27?

[Craig Gifford, executive]

From a provisioning or overall reserve percentage?

[Jon Arfstrom, analyst]

Overall reserves. Overall reserves.

[Craig Gifford, executive]

Yes. I think our portfolio is pretty idiosyncratic and it kind of depends on how the portfolio performs as we transition into a more C&I-based portfolio and balanced portfolio. I think that you'll see the C&I reserve levels will be substantially lower than what the commercial real estate levels on the existing portfolio are. And so that will have an impact, but it will really depend on the portfolio performance.

[Unknown Executive]

Portfolio mix is very important.

[Jon Arfstrom, analyst]

The mix. Okay. You said the mix. Okay. I understand that. And then on Slide 9 and then some of your comments about the margin thinking -- I hate to ask it this way, but is that the easy part of the formula, just the margin lift from CRE repricing? Is that just the natural output of the maturity schedule and you have high confidence in that margin trajectory?

[Craig Gifford, executive]

Yes, the bulk of that -- the margin percentage is a combination of the -- the repricing of the commercial real estate multi-family portfolio, but it's actually tempered a bit with the C&I build because we expect that the C&I loans would have a slightly lower overall spread than the commercial real estate and multi-family loans as they reprice. So it's the lift from the repricing balanced with the growth in the C&I portfolio.

[Operator]

Our final question will come from the line of Steve Moss with Raymond James.

[Stephen Moss, analyst]

Just wanted to follow-up on nonperformers here. The multi-family bucket was the driver of the increase this quarter. And I'm just curious if that's related to the roll forward setup in terms of the 18-month look forward on -- as you analyze what substandard and criticized? And just maybe during the second quarter we'll see this step up given the reprice dynamics stretch out into 2026 and pick up in 2027? Or if there's something special this quarter about the -- something else that drove that?

[Craig Gifford, executive]

Well, this quarter is a combination of getting through more of the portfolio. We moved from 75% to 95% of the portfolio and another quarter coming into the 18-month window, so to speak. Moving forward, we have a little bit more of the catch-up to do, but not much. And then well each quarter have more loans that will come into the window. It's about $1 billion a quarter for the next 4 quarters that comes into the window, and then the 2027 repricings that move in are about $1.5 billion a quarter that move into the window for evaluation. And when they do, some portion goes to substandards, some portion remains in past graded. But that repricing pathway is what will drive it moving forward, if you get -- once we get beyond fourth quarter, where we've gotten through the full portfolio review.

[Stephen Moss, analyst]

Okay. And then just one follow-up here in terms of -- I know the secondary market seems to have improved here in the past couple of months. Just curious, if you think there's any potential for an acceleration in prepays for the multi-family portfolio, just given the shifting rates? I know we've had it back up here in the last couple of weeks, but I'm just curious if there's any possibility?

[Joseph Otting, executive]

One comment I would have, obviously, when rates, as Craig mentioned, back up a bit, there was somewhat of a flurry of a lot of people locking in rates. I think because they've now increased, back up slightly, people are waiting to see the next Fed move. But that should spur a fair amount of refinancing. And what we're finding is people are coming out of pocket to rebalance loans, and our objective would be for them to take those loans elsewhere and get financing.

So we have found in the number of the large office transactions we have, as you probably noticed, we moved one large transaction to held for sale. We do expect in the month of November to close that transaction. We marked it at what our agreed-upon sales price was for that transaction. And there are a number, 4 or 5 other large transactions were under discussion at this point.

So there is interest, even in the office space for the investors. And some of those we're selling at where we have a market, and some of them, we're taking slight losses. But overall that -- we do think that will pick up. And then on the multi-family side, there has been kind of a renewed interest even in the rent-regulated space for people looking for assets in that space. So we are optimistic that the next couple of quarters, as we did bring on a new head of our workout group has organized that group with a team, who is doing outreach to customers and having dialogue. We have an assigned kind of SWAT team that's taking that on. We do think we'll see the fruits of that activity going forward.

[Operator]

And with that, I'll turn the call back to Joseph Otting for closing remarks.

[Joseph Otting, executive]

Okay. Thank you for taking the time to join us this morning. We very much appreciate your questions and your interest in the company. Craig and I are usually readily available, if you would like to have dialogue or further questions. If you do, please contact Sal, and he'll arrange time for us to talk.

And I'd just like to say, this is the closeout for us at New York Community Bank as the holding company and look forward to next time we meeting being under the Flagstar Financial banner. So thank you very much.

[Operator]

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