Flagstar Bank, National Association Barclays 24th Annual Global Financial Services Conference

Thanks everyone for joining us this afternoon. We are 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 and Co-Chief Operating Officer and Chief Banking Officer. Thanks a lot, guys. Thank you, Jared.

Appreciate you joining us. I know you did not have too far to travel to get here. It is 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?

Oh, great. First of all, Jared, thank you very much for the invitation to the conference. The Barclays conference, year after year, is a highlight for our organization and for the people that are attending. The ability to sit down and talk with investors in a one-on-one basis, almost like speed dating, has built a lot of solid relationships. Thank you for you and the organization putting this together. When we joined the company in March of 2024, 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, and we put mortgage-backed securities into that bucket, and a third in C&I. To build a relationship commercial banking business, which really was not 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. Both Rich and I really spent the majority of our careers in the C&I kind of business banking, corporate banking, middle market space. 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. As Rich and I laugh every once in a while, those early days, it was a bit of a hat trick to get 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.

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. While we brought credibility from Flagstar, they created credibility for Flagstar in the eyes of the customers. So now, we're generating $2.8 billion 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. 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.

As some of our brethren at Silicon Valley Bank and First Republic Bank and Union Bank and Signature Bank 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 newer relationships mature, how should we think about the opportunity for deposits, treasury management, capital markets, and wealth management revenues?

Right. It's really a wide-open opportunity for us. Rich Raffetto quotes the number that over the last six months, we've boarded $4.4 billion in new loans in the commercial bank and in the private bank and $2.4 billion of deposits. We have expectations, depending upon the vertical and the business and the industry, and we're going to get a full relationship with these customers. Frequently, you have to use your balance sheet that gives you the fishing license to start the process. About half of our relationships now are single bank or one or two bank where 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.

As you said, 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. We're really excited because across the U.S., Flagstar Bank has retail banking presence in California and Arizona and Florida, New York, New Jersey, Ohio, Indiana, and Michigan. Really 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 good success at penetrating the middle and lower corporate market with that. Then we also felt specialized business brings a unique ability for relationship managers to understand the needs of owners in certain industries. 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.

We've opened up this year a couple of new ones in food, and other things where all those kind of parallel into large chunks of GDP in the economy. 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 has gone on since you all have come on board. The pace of CRE reduction continues to exceed, I think, what you originally expected, with another $1.1 billion 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. Today, we sit at about 48% of the loan book is in commercial real estate as a whole. That includes owner-occupied and real estate across the nation. About 28% is in what we consider consumer cash flows, and roughly 26% in C&I. You are right. A transformation into that much more diversified balance sheet has occurred much more rapidly than we thought. 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 are now at a position where we are excited about being able to do new real estate transactions because that exposure has shrunk.

But I think when we get to the beginning of 2028, we are going to feel pretty good that we are in the geography of the range that we were hoping to get to. That builds, I think, a much more durable, diversified institution.