Q2 2021 New York Community Bancorp Inc Earnings Call

Good morning, everyone. This is Sal dimartino director of investor relations. Thank you for joining the management team of New York Community Bancorp, for today's conference call. Today's discussion of the company, second quarter 2021 results will be led by chairman president and CEO Thomas cangemi.

Before the discussion begins, I'd like to remind you that certain comments made today by the management team of New York community may include forward-looking statements within the meanings of the private Securities. Litigation Reform, Act of 1995, such forward-looking statements, we make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in. Today's press release and investor presentation for more information about

Risks and uncertainties.

These, which may affect us. Now, I would like to introduce New York communities, chairman president, and CEO Thomas cangemi. Thank you. South. Good morning to everyone, and thank you for joining us today to discuss second quarter 2021 performance. Joining me, and I'll Long Island headquarters our chief operating officer, Robert 1 and our Chief Financial Officer. John Pinto also joining on the line from Flagstar Bank, or Sandro, Dinello, president, and CEO Flagstar. And

Lee Smith president of Flagstar Mortgage, as you may have already seen Flagstar reported strong second quarter results today. We also announced better than expected results for the second quarter of the Year. This is the second consecutive quarter better than expected quarterly results. I'm very happy with our strong operating performance. This quarter which was highlighted by continued expansion, you know and then interest margin lower. Operating expenses, good loan growth solid, credit quality and most importantly a

Improvement in our earnings per share. In fact, this is the company's best quarterly operating performance in over 15 years. When we reported loaded EPS the 35 cents, back in first quarter of 2005 on a non-gaap basis excluding mostly merger related non-recurring. Items of twelve million dollars earnings per. Share were 33 cents fifty 7 percent year over year and 3 cents or 10 percent ahead of consensus estimates. While diluted earnings per share were 30 cents, a share up 43%.

On a year-over-year basis.

As for the details of the quarter, starting with our net interest margin, our second quarter module was 2 and a half percent up to basis points. Sequentially prepayment income was very strong during the second quarter increasing 35 percent to 27 million dollars compared to the first quarter of the year and added 20 basis points to the margin compared to 15 basis points in the previous quarter.

Excluding prepayment income and the impact from holding excess liquidity during the quarter. The net interest margin increased 5 basis points to 2 point 3 percent compared to the prior quarter head of our expectations.

I pre provision that revenue is also strong during the current second quarter, excluding merger late, expenses of 10 million dollars, ppnr totaled, 218 million dollars, a very solid..38 percent year-over-year. Another highlight of the quarter was our efficiency ratio which improved the 37 percent compared to 40 percent during the previous quarter. Total. Operating expenses decreased 3 million dollars or 2 percent compared to the previous quarter which was also better than what we anticipated.

Dated moving on to deposits total deposits that June 30th 2021 worth thirty..4 point 2 billion dollars relatively unchanged on the link quarter basis. However this mask the significant progress, we are making on our deposit growth strategy since the beginning of the year. If you look at the average deposits, they've increased 2.3 billion or 14%, get back to March 31st. This was primarily driven by deposits gone and from a relationship with our technology Partnerships which increased to over 3 billion dollars during the

before settling back the 1.1 billion dollars since

Named CEO has been 1 of my top initiatives to bring in more core deposits from our multifamily and Commercial Real Estate bars. Season issues are beginning to bear fruit as low and related deposits. At June 30th, increased 380 million dollars, or twenty 2 percent annualized to 3.9 billion compared to December 30.2020, balances, as a result of these initiatives CDs, as a percentage of total deposits at the client to 26 percent as of the current second quarter compared to 38%.

Ant in the year-ago quarter, while total deposits have increased.

We will continue to focus on growing deposit through a variety of strategies. Including by further, penetrating our existing borrowed base as well as expanding into the banking as a service based new Partnerships with fintech companies on the lending front. We had a relatively good quarter in terms of bone growth. Total loans Health Investments, increase 449 million dollars or 4 percent annualized on a link quarter basis to forty 3 point 6 billion dollars, the multifamily portfolio, increase, 345 million or 4 percent annualized.

Back to the first quarter of the Year, despite an elevated level of prepayments, while the commercial real estate portfolio decline, modest place, especially Finance, portfolio continues to grow, and it's increasing to 3.4 billion. Oh, 7 percent annualized computer the previous quarter, as for a credit quality or mattress contains to be very strong and ranked. Among the best in the industry, we reported another quarter of net recovery while npa's improved slightly more importantly, 60% or a 1.5

I billion of the 2 and a half billion dollars of the furloughs paying interest only have returned to full payment status. We expect to see a notable Improvement throughout 2021. As we move closer to the full reopening of the New York City metro region. Since the beginning of the pandemic okoto COVID-19, the furloughs have the client substantially to 1 billion dollars or a 2% of total loans compared to 7 point 4. But you know 17% of total loans. This time last year, all the while gradually working with our boy.

Bars and not incurring. Any losses. In terms of the local economy, our Outlook continues to be a positive 1. Our portion of the New York City real estate market. The nonluxury rent-regulated multifamily market portion is performing extremely well. Ranko actions continue to be at the same level as they were before the pandemic and our bars are plenty of equality. While we remain vigilant for any signs of weakness, we are looking forward to the full reopening of the region in the upcoming months.

Lastly, I'd like to provide a brief update on our plan transaction with Flagstar Bank or we are making significant progress on multiple fronts integration teams have been formed. We meet at least weekly if not daily on the integration planning process to date a number of key decisions have been made, including selection of the technology platform and ancillary systems, we will use and the products and services, we will offer a combined customers.

In addition and they KV filed last week subject to the completion of the plan merger. We have named our senior executive leadership team reporting directly to me and who will support our strategic priorities. Going forward all necessary, regulatory applications for the merger have been filed the joint proxy statement, withstand to both sets of shareholders last month. The next Milestone is both companies, special meeting of shareholders to be held virtually on August 4th followed by an estimate closing. Early in the fourth quarter, which is subject to all required regulatory approvals,

Since we are.

I've been spending more time with Saint Joe and executive management team and our shared vision of the combined organizations, more evident as each day goes by this. In my opinion, is not a traditional merger, it is an alliance where we are taking the best of both companies and forming it. Much stronger better, position organization, and creating significant value for everyone. The more time I spend looking at the 2 companies, becoming 1 of the more exciting become about the combination in addition to compelling Financial metrics including double-digit EPs accretion and immediate tangible book,

Value creation. There are significant deposit growth opportunities, new learning opportunities, and a substantial amount of fee, income opportunities by cross-selling Flagstar, as retail products that through the NYC Branch Network. This is where the benefits of scale, readily apparent. The combined company will ranked at, or near the top and a number of key business, has n given a bigger balance sheet, we will have the opportunity to leverage up and number of businesses and or increase market share these businesses include both direct and indirect multifamily lending mortgage Warehouse.

Mortgage Banking, as well as expanding traditional, cni lending into each of our markets with that. We would be happy to answer any questions you may have. As I stated earlier in the call, both Sandra and Lee are also here to answer any questions you may have on their results and their business model. You will do our very best to get to all of you within the time remaining, but if you don't feel free to call us either today or during the week, operator, please open the line for questions. Thank you.

Thank you. Our first question comes from Steve Moss with be Riley security. Please proceed with your question. Good morning, maybe just starting here with you know, margin expectations and Loan pricing here. You know good quarter here in terms of the underlying core just you know kind of color there. You could give Tom in terms of where you're seeing pricing going,

So obviously interest rates has changed significantly over the throughout the second quarter. But the good news for us is that we're still holding around that that significant will call at 275 is spread to The Five-Year. So what seeing anywhere from 3 to 3 and 1/8 on a traditional product on the multi and respect to commercial, probably getting 30 to 40 basis points above that. But as far as overall, economic returns in the business, as you can see, the prepayment have been relatively strong. And despite the level of paintings, we still go to book. So we're excited about growing the poor

We're still anticipating that, you know, mid-single digit long go to the company and I would say Don on, if you think about margin with the fact that we have around that 3% type of yield coming back onto the portfolio and holding a portfolio at a reasonable growth. Trajectory for the year, of course, the funds are still declining slightly but we anticipate brother decline. Of course, the funds. As we move into the second course, I'd say we probably looking at, I mean between 3 to 5 basis points of margin potential expansion and Q2. So the ongoing continuous

Aaron of the expansion is occurring, as we set ourselves up for the

This combination of 5 so which will bring a lot of liquidity. More importantly a lot of balance sheet opportunity on on the on the wholesale side that we're going to evaluate. We haven't been specific as what we're going to do there. It's not baked into the merger math, but we have a tremendous opportunity to look at our combined wholesale liability portfolio, as we bring in the experts liquidity, and we'll make it a business decision as we as we get closer to the the closing of the transaction. So we're excited about the ongoing. Continuing margin expansion even though we've enjoyed a very unique opportunity over the past few quarters. I say,

It's been almost a year and a half now, hours of reductions of a, of a, of a cost of funds and improving in the margin, we anticipate that to continue as we as we focus on the consolidation of the business model into 2023. Sure.

That's hopeful. And then maybe 1 question first on drove here just, you know, Sandra, just kind of if you give us an update on your thoughts on the Mortgage Banking market and kind of where you see things playing out, I do see the guidance in the deck which is kind of color around that and what your, what Your underlined expectations are with the adverse Market. See coming out. Hi Steve. Nice to hear from you. Yeah, look, we think that the mortgage business is continues to be very strong, the projections by the gses and the MBA

Continue to look for a very, very strong mortgage Market. What we've been trying to do is, you know, you've been following us is build a consistent mortgage Revenue stream and I think we've found our way there and it show not only and what we've done this quarter, but also in what we're guiding to for next quarter, so we feel very good about the consistency of the mortgage Revenue. I think what you see today is we we hope will be sort of a Runway

if you will plus, or -10% over the long term, but let me let Lee be a little bit more specific about that. Yeah, thanks, thanks for the question. Steve. So just giving a little more color to what Sandro said in terms of volumes are holding up Steve. So the agencies and the NBA I've got 20.21 at a 3 point..9 trillion dollar market 2022 at 2.7 trillion 2023 at 2 point 4 trillion and then when you look at the primary spread, it's been pretty constant.

Over the last several weeks between 125 and 135 as have the gain on sale margins, furthermore, given our Diversified mortgage model, we're able to find pockets of opportunities, other Originators cannot. And so what I mean by that is we originated in all 6 sales channels, we have a balance sheet which gives us available for sale, held for investment and MSR flexibility. And we have an rmbs program.

Which provides execution optionality. We execute it on for rmbs deals in Q2 and with the third biggest issue of rmbs in the quarter behind JPMorgan, Chase and Goldman Sachs, and we're planning on 5 deals in Q3. And as the GSE step away from certain product classes such as non-owner occupied, we're able to step in and take advantage, given our balance sheet and our MBS program. The key is Sandro.

he's being consistent and we want to bring

Persistency to our mortgage earnings and gain on sale revenues because we have so many different levers we can pull to make that happen. So in the second quarter of gardi to a hundred and fifty to a hundred and seventy million of gain on sale and in Q3, I'm guiding to a hundred and sixty to a hundred and eighty million. The relevance of that is if we're generating north of a hundred and fifty million gain on sale, in the quarter, Flagstar is going to generate over.

Irr $2 earnings per share for the quarter or 8 dollars and you lost. That's a lot of capital and Firepower for Flagstar and ultimately the combined company. And I want to be able to provide that consistency and reliability from mortgage, every quarter. And when the market provides opportunity through interest rate, drops, we can generate even more earnings and capital and finally, with the bigger balance sheet that we're going to have of the combined entity, it's going to give us growth

From a mortgage point of view around. The HFI portfolio holding more msrs, the rmbs program, bigger balance sheet, we can hold more inventory expanding new and existing origination channels and support in the 238, New York Community Bank branches and their customers as well. And Lee relative to the GRCC that was illuminated, what maybe a couple of quick comment on that. Yeah, it's helpful. And we've seen

A pickup in our pipeline from a mark-to-market point of view. And from a balance sheet point of view given that we're delaying delivery still after a 1, when that removal goes live, but if you think about it, that 50 bits it equates to about a 10 bit higher mortgage rate for borrowers. So while it elimination is positive for prospective re5 volume, it's not going to have a material impact. I think what is interesting?

More recently has been the drop in the tenure to around 125 and we definitely seen an increase in re 5 volumes as a result of that and combined with the fhfa removing their re5 fee. It's helpful. But the removal of the, the in and of itself won't drive a ton of volume, but it's certainly given us a bumper pick up on our pipeline.

Great, thank you for your call that color and gray quarter on both sides.

I guess they do.

Thank you. Our next question. Comes from Brock. Vanderbilt with UBS. Please. Proceed with your question. Wanting Brock. How are you?

And more generally, you know, has the corrective phase within that asset class really shaking out at this point, or where do we stand there? Oh, obviously, it's been relatively slow in the past few years, but more importantly, what this focus of the pandemic and, and coming at a covert has been, you know, a lack of activity. But we've done pretty well with our customer base, Reef eyes always been significant. As you can see from the quarter. We had significant prepayment

Tiffany. So, we've held a lot of those deals. A lot of them did trade away. Me still glue the book, so we were very pleased with that. I'd say that we're looking forward to. The second half is being more of a growth year opportunity. For us, we still feel confident that we can grow will call the core multifamily of that 5% type growth rate. I think whether interesting opportunities and it behaves, when we combine with Flagstar, this is going to be a growth story. And I don't think anybody really has the anticipation of the capital infusion that will go into the combined entity and we can significantly increase our exposure.

A lot of San Jose great relationships, over Flagstar, including Warehouse, commercial, real estate. And, and on the Builder Finance, these are, these are positions that were extremely well managed on their end and their cat that a certain levels. But, you know, when you, when you put a significant infusion to Capital and the combined basis, we've done it, when Richmond County merge. But NYC be, we were capped at a fifty million dollars, a a customer. Now we have substantial hundreds of millions of dollars of exposure to the best bars. I believe that type of growth opportunity will be there for us now, we're not giving projections for next.

Next year until we close this transaction. But there's no question that the fact that the companies are combining, we can increase the best customers within opportunity, to grow with us at the same time, really go after the deposit opportunity throughout throughout the branch Network. So we're excited about the second half but it's not going to be a double digit on a standalone basis, but we think we can make that 5 percent net loan growth number. And as far as the specialty Finance business, it's doing really well. We have about 2 billion dollars excess sitting out there on Drawn because of the supply chain issue.

Is an and and people managing their, their overall Capital stack, given where Capital markets are right now. But ultimately, as business picks up, we think they'll draw down and we see that as a also potentially High team grow as well. So we're excited about this company combining. We think it's going to be a growth story as well. And that's going to be, I think a catalyst for investors

Everybody will be surprised everyone to understand it, but clearly there's no question that it's in people's minds. It's we asked I asked my top customers all the time, is it positive? You know, it is what it is and to tax. It's a tax strategy, that may or may go, may or may not go away but

Now, it seems like it's losing a little bit of momentum. It's, it's, it's a big issue for commercial real estate. What does that do for us? Ultimately, the asked to stay on longer, assuming they take it away but the jury's out of it goes away. It's a pretty big benefit for both the commercial real estate owners. But more importantly, the city does, you know, transact to get significant economic benefit from transactions that work within the New York City Marketplace. So I think that will have implications to the budgets of New York City. So as as we dive into these Tax Strategies and right now, it seems like there's

Stalling..1031 is always is always an issue for long-term investors, but they'll find

Means that the look at the valuable take out there. They'll talk to Cash out. Refinance know it may be able to take less cash. Re fiber. The old do kshatriya, 500 use their and ultimately hold the acid a lot longer. They'll look at situations such as you know, looking at the the other tax opportunities that are out there with their several not as meaningful as a 1031. There are several opportunities such as the opportunities knows that said that is taking advantage of and ultimately they'll plan their state accordingly. But no question that at 10:31.

1 removal was not going to be a positive for the sentiment of the owners. Sure.

Thank you. Our next question. Comes from David. Rochester with compass point. Please proceed with your question morning. Dave. Hey, good morning guys. Nice quarter.

Expect on either the loan or deposit growth side of the fee income side. I know you've mentioned the strong deposit opportunity. Previously going after deposits at Flagstar. 'S current Warehouse customers. For example, you know, that sounds like a great shot on goal. Can you just quantify maybe how large that pool is? You're seeing there now and what you think the chances are, you can capture some of that. So we see so many opportunities. As we as we spend time together as the to management teams are really working. Very hard to get to the finish line here. What's most

Important is that when you look at the analysis transaction, none of those attributes are in the deal, right? So we have this a double-digit EPS accretive transaction with tangible value creation, but not forecasting. The benefit of a book called a wholesale shift from wholesale to retail deposits. That's going to be a significant benefit as we decide where we're going to go with a liability structure, they'll be tremendous opportunity to look at the combined entity. You know what, we're, we're liability sent to their assistants have combined. We can choose our positioning as

That has to make their decisions towards the end of the years where they're heading, with interest rate, that's a significant Catalyst rust. If you think about the opportunities, we discussed on the previous question, on the growth opportunity, you know, they have some very strong relationship, the number 2, and Warehouse in the country. And we believe we can hold that and, and, and grow it very nicely as they look at the best customer base that they have and expand into into sizable. A concentration opportunities at very low risk. It's a very low risk business model comes to Warehouse if managed well,

They do a really good job with that so we're excited about that opportunity, all their best customers, what will be reignited by having a a capital infusion. So we've done it before, as I indicated, when we Richmond County merger. Then why Stevie we've significantly increased our catechism longer. Also the loan growth opportunities and be real from the capital infusion of the combined basis. We're running just south of 90 billion dollars in a pro forma basis. And this is going to have a lot of liquidity regarding the escrow opportunities, through the, through the inside those business model. And it's going to be

Some some opportunities that deposit spot in the warehouse, you know, they, they turn away the deposit cuz I had so much.

Accordingly, we will accept that, you know, at the same time, the same time, they were also looking at a tremendous opportunities on banking as a service, it's an issue of mine is it? So my announcement last Friday, we're reallocating resources to building out a digital platform and more importantly banking, as a service, we had a win on in the first quarter. Was it was our first when I believe we just got 1 another 1 last night actually 2 for the second quarter. This is going to build up to a nice line of business for us as we focused on, you know, getting our fair share of the payment space over.

The time and and trying to catch up on the technology side. So we're excited about that. But collectively there's so much opportunity on cross selling product. I mean the C&I side we really don't do much at all. Then hold our balances on seeing. I will going to be in the cni business. We get our fair share of a local market without what our market share. We should do very well on growing by the lines of business, it will call them verticals that we haven't done in the past. So we're excited about a full service commercial opportunity over time. You don't want to give any guidance right now until

It closer to closing and we'll talk about the opportunities, but I think they've over time investors will look at this as a growth story with a tremendous credit enhancement here. So will you know, obviously both companies have, you know, tremendous track record on credit and the businesses that we're in our very low risk credit profile,

Okay, appreciate that Switching gears. A little bit more on the warehouse lines. This quarter look like the balance held in fairly well, just given the industry Trends was just wondering how you see that book training from here just given the mortgage activity forecast out there. I know you, you talked about the cash window cap that could actually help Drive some more Warehouse volume in the market. Can you just talk about how you see that book training from here? So they were super excited about the business. I'm going to defer to sound wrong.

And this was obviously they run that business currently what we're going to stand by that and make significant investment. We believe is tremendous opportunity, but I'm going to defer to both Leandro on that. Yeah, I Dave nice to hear from you again. Well, look from the point of view of we. If we were as we run the business independently, the way we look at the warehouse businesses, we take as much as we can get in a warehouse or whatever the market gives us, we're going to take. And so when the mortgage markets, really

Strong, our balances are going to be higher. When it's less strong, they're going to be a little bit lower. Now, in the meantime, given the upcoming combination of our 2 companies, we are looking at the every opportunity that we can to expand the lines that we have with existing customers and also to talk to customers who were too big for us previously. So I think we can mitigate some of the natural reduction and balances that we might see in a smaller mortgage Market because of the business.

Nation. But really when you look at the Flagstar balance, you can't don't get too focused on. Just the warehouse business because what we've been able to prove quarter after quarter is that if Warehouse goes down, something else goes up and it depends on where the opportunity is. And that's the beauty of the Diversified commercial business model that we have and that's why are our net interest income is very consistent over time and if you look at that, look at it quarter-over-quarter. You'll see that we're going to be a hundred eighty million, net interest.

Income plus or -5 to 10% every quarter. And if you believe that that is a run rate for Flagstar, then don't get focused on on any 1 line of business because in any given quarter Builder Finance may be lower or higher and Warehouse may be lower or higher, but we managed to the total and then we managed to the net, interest margin and we've been able to show a very stable, net interest margin throughout all the economic scenarios, whether you're talking about before the pandemic or in the pandemic or now are

And it just margin went up..8 basis points is passed.

So we managed to the total we don't worry about what might be weak or strong, any particular area, we look for the opportunities to offset that another areas. And then when you add the consistency of the mortgage business, that that Lee spoke to, if you can get yourself comfortable, that that the guidance said, well, the results that we've had recently, and the guidance that he, that he's comfortable giving you that that's there. And has he said, the combination of what we're doing in our Commercial Banking business.

Has and the mortgage business. I'm just talking about Flagstar now, you get yourself very comfortable. I think that $2 a share for this company. On a quarterly basis is pretty pretty possible and when you convert that to the combined company, that's a contribution of 50 cents, a quarter to the total. So that's 2 dollars a share.

Contribution, coming from Flagstar to the NYC, be total on a combined basis. That's what's powerful here. And that is before talking about the, the synergies that you asked about and it's hard for us to answer that question right now, but I ask you don't. Don't focus on what the possibility is just focus on today, right? If you believe NYC be can make 30 cents a share of quarter. And if you believe plaster,

On a converted basis based on the the the exchange ratio can make 50 cents a share. Now you got 80 cents per share per quarter over 3 dollars a year. I mean, look, the value here. I think the value potential is just outstanding. Yeah, I agree, thanks for all that detail. Maybe just 1, last 1 on expenses. Tom, those were better than expected. This quarter. What are you thinking about in terms of the trajectory going into the end of the year?

We've been working hard to even keeping the expense line, you know, obviously, at a very conservative level. Here we, we budgeted. I possibly a hundred thirty, we can't adapt, but 129 John 1:29 is like, I think it's to be relatively flat, Q3.130. I'll give you some guidance for the year, but it's we have to take the guidance with the table because hopefully the deals closed by the fourth quarter by 5 and a quarter. Runway for 2021 is we're doing a little bit better than that. So 1.30-ish, you know, obviously q1 plus Q2 is lowered for Donnelly driven by payroll tax issues. It's a hike.

The payroll tax. But what please, we're very pleased we're focused on efficiencies. I think there's going to be some opportunities as we combine in the longer run. When we look at Automation and Technology, we are focusing on getting ourselves caught up on the table to be more efficient by utilization of of the Fiserv conversion. From the previous year, we have opportunities. As we look at the combined entities, we believe that we will, you clearly achieve our estimated cost savings on the transaction, but we think they'll be more opportunities as we look at initiatives on on on, on on.

Dealing with robotics artificial intelligence are focusing on the technology and issues that's going to get ourselves caught up to the industry as we move towards more of a Commercial Banking model. So we are spending a lot of effort on the tech side. We believe there's some great opportunities to even make ourselves more efficient via the tech side.

Great thanks guys. Appreciate. Thank you, Dave.

Thank you. Our next question comes from Steven alexopoulos. With JP Morgan please proceed with your question. Want to get morning morning, Tom regarding the deposits that came in from the relationship with Fiserv. Can you give more and more color on the nature of those deposits and what drove? Such a wide, fluctuation, through the quarter, I'm going to defer to mr. Pinto he'll go through some of the programs, but just to be just to be clear, that's 1 of the many initiatives were working on. So we, we plan on building a banking as a service initiative.

I'm going to defer to John to specifically go through the problem. Yeah, with that program, Steve that's related to the economic impact stimulus payments. Both round 1, 2 and 3. So there was a large portion of it that came from from the third program. So, what happens is when those and those debit cards are sent out to the individual consumers, the individual people, they start using them as their use. The deposit balances start to Trend down, so as you can imagine, it ramps up very quickly. And then there's an initial drop

Over a month or 2, which is what we saw. In the second quarter is Tom mentioned in his opening comments where we peeked over 3 billion and have now come down to 1.1 billion as of June 30th and then what happens after a couple of months is that, that that decline starts to slow down as people either, you know, use part of the card and leave the rest on the shelf for a little while. So that's what we've seen. We expect it to roll down much, much more slowly in the second half of the year. So we believe it'll be, it'll have a little duration here, Force, but as Tom said, this is just

The first of hopefully many backing is a service opportunities that will have to bring in deposits from our technology Partners. If see, I will tell you that, as of recently, we found out, we just did we anticipate to more to come on this quarter? I believe last night, we also got another anticipated win and we had 1 about a week ago, so for the third quarter, we should have 2 more programs coming on board once feed generated. The other 1, is the positive generated with zero cost of deposits? We have another large 1 that's in the pipeline. Well, you know, of course nothing is but working hard, they're trying to win these deals.

Eels and it's it's just the versifying who we are as a company. Looking at the funding base. We really want to move away from our dependency and wholesale finance and ultimately you know, and going back to my initial comments, be bought in a, we want to close to 400 million dollars from our customers from Jan 1 through June 30th. That was from all the lenders. Going back to our customers and getting our fair share. What's ours is all deposits. So it's an initiative, it's a culture. Now, what changing the culture here? You know, we're doing lending and you have to have your the

The relationship. So, we talked about initially my strategy, the low-lying fruit to be taken from the customer base at the hours, we have the technology. We have a strong partnership with 5 star of the commercial service. In banking platform is is standardized, people are very comfortable with it and we're going to expand upon it. So you know, when we do loans, we want to deposit relationships not just lending and find to find the funding. It's getting the loans and getting the deposits as a combination of the business relationship and we're proud of that. So, our learning team in our own, a retail strategies were working hard together.

Do you know the handoff goes from from lending to retail and and they closed the deal and putting them onto private banking and we picked up 400 million to a pretty good start. I didn't want to give too much excitement on the initiative because it's just under 4 billion dollars now but it's a nice growth trajectory for us. I think we're going to have further wins. We all looking at lines of credits for a best customers and part of that lines of credit is that they also bring in more deposit and it's been working. Well for are very wealthy property owners have been doing business for the last for multiple decades. It's a culture that the board has clearly accepted and we're going to move forward with this, but it's going to

The way we do business going forward, it's going to be about changing the culture on the deposit side, we have to find our balance, sheets more like a Traditional Bank.

So over time we like to see some more room on on the reduction of the wholesale. I think it's exciting to look at the combined benefit of Flagstone and wise to be combining. We have lots of optionality as we try to figure out where rates are going, we have lots of liquidity that, I mean, at this point in time, Flagstar has liabilities that are funded out to other banks will take, it will bring it back on. So, I'll balance you and then look at our wholesale position and hopefully reduce our dependency but over the long term. We want to find like a traditional Commercial Bank.

I'm if we stay with the 4 billion of deposits from loan customers 1, how do you sighs that potential and what is it? You're doing to get that kind of growth that are you just basically bundling the pricing with new loans?

A lot of transactions were waived. We're not, we're not changing our pricing, it's just getting our

Our share of what oh, to us which is the operating accounts, the least security deposit account working with extending lines of credit that they have other lines of businesses that they won't more than willing to move their relationship from. Let's say the money center bank, or maybe the moving from from your company to the from JPMorgan, to over to, to NYC based focusing on. If you want a bank with us, if you want, if you want the money to put out, we want to have your deposit relationship. Especially if we have the technology to service it. I think it can becomes part of a cultural request. It's not, you know,

Got nothing going banking. Just that historically, culturally, it wasn't a priority of the bank. This is I'm making that a priority of model leadership, it has to be done. That's how we're looking at the business going forward. You know, all businesses and and and once we start ramping up, I was seeing I expectations in the marketplace and we expand what the Flagstar people on the Reggie Davis. We're going to be looking at these markets and bringing in, you know, deposit relations from from the local community, which we don't do curly, that's going to be another Catalyst. Now, we're not going to put a growth number on that.

But that starting at zero so I'm very excited about that opportunity. I know that we're going to be ramping that up as we as we get to the towards the next year and we're excited about getting people out in the field and getting our fair share of the customer bases. Within all in our Marketplace, we have huge deposit share when it comes to deposits, but now we need the people in the field to bring into the positive relationship. So that's going to be a focus of mine and just finally so the prepayment income was obviously very strong in the quarter. Tom what?

Portion of the loans. Prepaying are staying with you guys and given where rates of moved? Are you starting to see more now move to take advantage of the government option? They can lock in longer-term, funding, great question. Obviously, we have 27 million, tolling, 5 million was, for my bus portfolio. So we have about a 600 million dollar portfolio left on the Dodge, that's something we don't control. That's a, that's just to securitize multi-family package. And we do get that from time to time, but when it comes to the business, you know, we had a couple of 1 upside, say, when you take out the large 1 UPS, or

Still probably around 50.60 percent. I'd like to see higher, I think we should do better. Unfortunately, when the government's offering very attractive financing, I'll tell you. What's interesting about the combined company, we will be offering a, a, an alternative to the government program, which is being able to offer them Capital markets activity where we can swap out their instrument to allow us to be competitive and what for another product to keep the business. And we may decide to package it up and sell it, but, you know, we are losing some to the government and some of the law.

Trades, like, went through the quarter, it is what it is there, you know? The customer makes a choice. But when we fight for those,

Internal relationships. You don't want to lose a large pool of strong relationship. The loan portfolios, but from time to time, they make business decisions on their portfolio. I will tell you that. It seems like, you know, it going into the second half, we're going to be very focused to ensure that we get, you know, a lot of the bread-and-butter business. The what will mining the portfolio with very focused on are looking at some other ways to get these bars to the table. If rates were ever to go up sometime in the future, you know, this is a short book so they have to make decisions but I'll tell you that now.

The government has been somewhat aggressive as to rape, but we're going to be overall competitive as we merged with Flagstar and take some of the capital markets activity that we can offset some of these losses that go to the government, may clearly having the derivative opportunity to embed the same Financial structure in into the, into the loan book and and work with our customers, take to retain the business is going to be an option for us. So it is what it is. It's always been, it's I'll call the 800 pound gorilla in the room. Historically, it's been the US government and we've done pretty well. We've gone the book and prepaid.

And strong has been to quarterback the back of strong prepay. Usually Q3 is a generally slower in general because of the holidays, but you know, we'd usually ramp it up in Q4 and it seems that we're focused on obviously grow it. So, with the, with the current growth where we are today going into the, to the end of the year, I still feel confident. We can grow the book mid-single digits on a standalone basis. Not including price on is very helpful.

Thank you. Our next question comes from Christopher marinac with chani Montgomery. Scott, please proceed with your question morning. Chris thanks. Hey, how are you Tom? How much time has to pass after the merger closed before you can deploy the additional earnings? And is that something that's on the near term Horizon? I think it's I think it's fair to say it is underneath memorize and obviously we're in proxy solicitation right now. Both sides. I know that last or had it opportunity.

It's a significant Capital. Those numbers are actually better than expected on a combined basis on a very conservative assumption. We anticipate an extra half a billion dollars of additional Capital outside of our current rate that will generate for potential Capital Alternatives and I think when the company combines obviously, we're in the midst of closing of the transaction. Assuming we're going to want to be the transaction closer. We'll look at all capital markets opportunities including you know, a current dividend which is very strong and we stand by and as well as the

opportunity to look at from time to time the buyback opportunity depending on market conditions, look at the end of the day, we want to put this money into growth, we think that there's a great growth opportunity. I know it sounds interesting because the bank has not been growing at double digits, but collectively you have a real opportunity to grow this company as a growth story, and pay a very strong dividend. And depending on market conditions, we can always move that over to the dividend and the buyback over time, depending on how much capital is generated at Saint Joe Illustrated. They generate a ton of capital, we're expecting

A conservative assumptions when you put this deal together in excess of 500 million, you know, after all fully vetted costs go through is that's a lot of vectors.

Capital that we would have to either grow and or, you know, buy back or stop depending on market conditions, as well as paying a very strong given and that half a billion dollar access includes us continuing paying a current dividend. So, it's a significant amount of capital generation, right? For the payout ratio is should improve, but the absolute distribution could rise as your support. Absolutely. We're going to look at all our Alternatives, but we believe this growth and I saw Joe and I spend a lot of time on opportunities, looking at the customer base.

That as we speak right now, they have great relationships. They capped out. They will, they will have significant Runway when the capital gets infused together and go after their current customer base as. And also going after on the warehouse, some larger relationships, that they would just probably too small to offer any terms. We cannot walk for collectively, and what for them are more opportunities to build that book of business. So that's the priority growing, the business of the priority reinvesting back into into the company and building, you know, a better platform for us. It's going to be the priority but starting tomorrow. Can you do?

You know, we will put all options on the table.

All right. And last question is hot. It's just on the integration of the system side. How much will get done by year-end 2021 versus what's pushed into the first half of 22? This is a this is a the our largest transaction. The beauty of it is 5:00 service advisor. DNA platform, you can't ask for a better cause conversions. This is great. They're all partners that Sandra's partners with it. You know, collectively by far, the largest customer with all hands on deck. Here we anticipate a lot of work has been done, we will convert the systems, we were shooting for the early on the

Can half of next year, so assuming they close a deal early. In the fourth quarter, we should be able to have the system converted by mid-year. Next year, the meantime, a lot of great decisions have made. We talked about my leadership, team, we've established that you made that public. Just to be clear and I stand by my alliance. Yeah, it's 13. Direct reports. Me 6 Flagstar..7n. Y, CB. This is not a traditional merger. This isn't a Wyatt. You know, we spend a lot of time culturally integrating the fabric of the 2 franchises. It's super important that we make this company.

Anyone. It's not Austin them. It's combining the strengths of both sides and building a, a powerful combined entity where the culture integrates, and that's the culture throughout the organization. My leadership has been set. Now, my direct reports will set their leadership and to be a blended culture. So we're excited about it. Will have do headquarters will have unique verticals. I'm going to build onto it and we're looking for. Otherwise, the businesses is, it will not just stopping at what we have today. There are opportunities out there, it doesn't have to be Bank Acquisitions. It could be mines of businesses that are out. There has been significant consolidation.

That's in in our Marketplace and as well as in San Jose Marketplace, we should capitalize on that is going to be a lot of Fallout in it within the system that we want to take advantage of. So we're excited to close this deal. We're excited to bring the cultures and sound Rose team is is excellent and we're excited to partner with them.

Great. Thank you.

Well, that think the question was about the integration and the integration is moving along at a nice Pace teams are working together really well. And I think that, as Tom said, the Fiserv relationship that we both have is a big plus. So I think that, you know, getting the, the basic system core system, converted won't be particularly difficult and then if you think about the Flagstar business and the mortgage side, it's that nothing needs to convert their it's going to stay.

Where it's at. So you know we we view this as I don't want, I don't want to oversimplify it, you know, because when you when you look at it, there's over 400 different systems that you have to deal with. So so it it it's an undertaking but I'm very, very comfortable with the progress that we're making and I don't think it will be any integration issues that will have a negative impact on the business operations as we get the legal day, 1 and then eventually to the full conversion.

Great. Thank you. We appreciate it.

Thank you. Our next question comes from Peter winter with wedbush Securities. Please proceed with your question..1 or 2 later. Good morning morning with the new potential lending opportunities. With combining with Flagstar. I was just wondering how are you thinking about office space? And the reason I ask is the credit portfolio standard. It's it's doing great but it does seem like some level of

Work from home is going to be permanent and and in fact, it would affect the office value buildings. Longer-term. Yeah. So that was a great question. You know, that that's going to be interesting to find out how that all pans out in New York City. You know who we are? We've led to some very strong bars. So the collateral that we have is low leverage, you know, if you think about the talk about, you know, criticize acid like that may lead to the office discussion, we believe we peaked in February as far as the acid.

Moving into criticized category so we'll see me ongoing decline as they're getting their cash flow re-evaluated and moving back to a higher rating. That's very encouraging along with a substantial drop on loans that were paying interest only now a full payment so that trend is going to continue. We deal directly with our large customers on the office side, if you have about maybe 5 hundred million that's sitting out there that's in the classified situation, the Ltd in that book is around 56%. It was just under 60% and I think we have some enough room there.

This is enough equity in the position that there's not going to be a loss to the bank. So we feel comfortable. They have ample liquidity and capacity to pay and yes, it's going to be changes in in and how the, the employers think about their office space. That's far as we're concerned. You know, we're going to be very focused on continuing learning to our customers. We feel confident and and building out their expectations on what their future needs are. And which is it in the event that they are looking at moving out of the city that's fine as they can stay in New York.

City. But they're, they're leasing up and and and the the actual discussions I've had with many of my customers.

That at the end of the day, they are comfortable that they could continue having a very strong cash flow and we re-evaluate those cash flows. So I think it's important to understand that when you think about our exposure or low leverage lender, I can't make a statement for all of the of the office space in New York City. But for our predominant, New York City portfolio, its global average and to the best customers with, with significant backing, so the very strong sponsorship.

And I'm not that Vision anywhere else is there.

And and do you think that's a portfolio that it would decline over time? Just given that the changes on the dynamic it could it could decline a little bit. But I mean about commercials commercial, we're going to be very active. The bank, the best customers and our backyard. We're going to expand that into into San Jose Marketplace. We're going to think about, and then we're going into new markets and we're going to be on the ground. So come farther will be on the ground. In Florida, we in the ground, in Arizona, we're going to be there in the ground in Michigan in other markets that they serve. So we have opportunities for future growth.

And I think having the right, you know, the right leaders in in those Landing verticals is going to bring business to the bank and we're going to do solid conservative underwriting. That's who we are culturally. That's how San Jose team is. It culturally conservative and we're going to do conservative lending for the red best opportunities.

He's okay, next time, inventors. Just if I could follow up on the court margin Outlook, again, I know that was 1 of the first questions, but can you just clarify again? What you're looking for in the third quarter and and some of the drivers to the margin for the third quarter?

And ultimately, I think that as we bring on these technology initiatives that have zero cost of deposits that helps us, we are sitting on some excess liquidity. At the end of the day, we have an opportunity here to continue to drive down the cost. You have some barns coming, do not a whole lot of balls coming do but some they'll be reduced. Next year, we have a significant amount of opportunity X flag star on the on the macro hedge, that we probably save about 200 basis points on 2 billion dollars of derivatives that in when we combine with Flagstar, it's not

Tera to have on the balance sheets and macro hedge against the fixed portfolio. They are predominately asset sensitive. So we'll pick up a significant benefit there. It's about 40 million dollars of pre-tax earnings, coming to the margin. So it seems like we'll have an ongoing margin expansion throughout know, going from 2021 and to 2022. I'll be with the consolidation of the business model. So what's driving is in the short term, it's going to be, you know, lower cost of funds and holding reasonable yield on the multifamily side.

Okay. Thanks. Tom.

Thank you. Our next question comes from Steven Duong with RBC Capital markets, please proceed with your question..1, nii and in should we see that in the second quarter?

I'm next.

So, I would say to you and I think I just said in Last Call on the last question we anticipate clearly was combining with Flagstar. The, the company will be at the center so having that derivative on more like than that would be removed. So we'll take that off. It's probably picking up about 40 million dollars a pre-tax, it's a 2 percent, benefit 2%, 200 basis points savings on about 2 billion dollars going into next year. I think it's Boston. February, John is February of next year.

Many benefits, we're going to have when we combine the franchise, which is not indicated in our forecast and it comes to the merger math, right? So, so we're expecting margin expansion and we'll have optionality when we go into the transaction, right? We're going to have a large wholesale Finance book that we can make decisions upon. We have a substantial amount of liquidity coming from the Flagstar company in respect to their escrow business and opportunities within their client base that we will maximize that you want. And look at the best use of the funding opportunities and Ensure.

I was at the set us up very nicely for next year, as we combine. So we'll have some very good optionality on how we're going to position our margins. And we're excited about the opportunity because, you know, we've always were very dependent on a standalone basis. Going to the Home Loan Bank, to finance the company we want to move more towards traditionals Finance for the bank. That's that's great to hear it. So nice to have another Tailwind in the first half of next year coming on and then maybe Tom it's you can just, you know, you talked about that banking as a service.

Is that mainly just your focus on growing deposits? There was there a credit component to it. So right now that we haven't ruled out, the credit component that is been a long term but in the short term we're looking at fees and deposits an opportunity. So we had I believe we last night, we've notified and some very interesting opportunities, aren't you, Joe opportunities? But there is a fee income opportunity. We won, that's a positive. So we think in Q3 will have 2 more coming on 1 depository..1 cebit. See benefits.

Clearly utilizing our technology opportunities to go out there and get other Revenue / suppository benefits over time. We're looking at other initiatives, which is, you know, when I am not going to discuss missed call until we get more closer to finality, but we think there's a tremendous opportunity to focus on digital banking platform, which we were almost there. We intend to build it out and when we do build it out, we have some significant plans there and ultimately being able to access the consumer Marketplace as well as the undisturbed.

A key Market. There's a whole host of opportunities that are out there. We have that individuals are underbanked undisturbed. We think through technology, we can offer products and and credit enhancements. For the customer that could be something that be very useful as we build out this Justice platform. So no question it's a priority I carved it out as a, as a leadership role reporting to the CEO but it's important. We have to be at the catch up. You've named a a head of digital. We're going to be hiring in that particular area, we have some very good initiatives that are in the pipeline, I think.

If all goes well this year we should have 3 or 4 wins this year. We're going to build it out as we look at other

Turner's that are very attractive. And in the digital space, including by the way, including including evaluating how we're going to play our financial services opportunity in the blockchain, there's opportunities there and we're spending a lot of time there. Interesting you can squeeze in 1 more, maybe this is just business, you know, obviously you know it Ebbs and flows with the interest rate environment. But you know, when you're in the business for the Long Haul, how do you differentiate differentiate and and grow your mark?

Cash are in that business. Well, I give you the same answer regardless of what line of business at Flagstar. You asked me about and it's about providing the best service in the marketplace and I think we do that in a warehouse business. We've been in that business for 30 years and so we know what we're doing and customers like us and we don't always have to be the best price. And so I think that's why you see, you've seen our ability to to once we focus on it to grow from a very small

Line of business, I think when Lee and I got into our positions at Flagstar 8 years ago, that was a 300 million dollar balance in that business and and we've grown or commitments actually and we've grown that now to over 10 billion. And as Tom noted earlier, number 2 in the country behind Chase. So you know, I think that the service model that we provide the ability to be there, no matter what the economic conditions are. You know, when we got into this pandemic, there were a lot of Warehouse lenders that were

Not providing the support that their customers needed and we were there to pick that up and that has allowed us to gain relationships with customers that we didn't have before. And we always keep enough dry powder there to be able to be there when someone is in need of a lender. So it's all about the service equation, frankly. And it's proven itself to to work and we're going to continue to do that. And I think we're going to continue to be, you know 1 of the top Warehouse lenders and in the country.

If I could just add, I mean, obviously being a big originator, we understand the mortgage business. We buy loans from certain of our warehouse customers and we also offer ancillary lending Services, MSR Lending Service in Advance, lending that can be helpful to some of the bigger Warehouse customers. So we're a One-Stop shop in that regard. And I think that's all part of the service equation that standard just alluded to people come and go and we could people that leave the business people come

Into the business and they but there's 1 company 1, that's been there for 30 years providing Warehouse lending in this country, and that's why it's time.

That's great to hear. I appreciate the color gentleman.

Thank you. Our next question comes from Ibrahim, poonawala with Bank of America, please proceed with your question morning, Abraham

Fourth.

Ppnr power relative to to Q if you could just talk to that, because that's been a big source of uncertainty around where Flagstar ppnr shakes out as we look forward into 22 and Beyond. Well, if you look at our Capital we we've leveraged capital, I think really, really well. And so we're taking advantage of the of the capital base that we have in the company and we maximize the return that we can get from that. Abraham's you look at 2015 through 2020.

Stars, total shareholder. Return was a hundred sixty-two percent. I think that Stacks up pretty well against almost anybody. And the reason for that is is because is because we focus on the end number, right? Well, how do we get to a number? That gets the market confidence? Gives the market confidence that they can see value creation. And so you got to be able to, you know, move left, move, right? Whatever way you got to go in order to get the bottom line to where you need it to be. And and

But my best in your capital in the smartest way possible where you can get to the, the growth in the, the margins and the consistency of earnings. And so I, you know, I can't we have never historically spoken very much about the future other than, you know, the next 3 months and we've given guidance in our release about the next 3 months. So I'm not going to go any farther than that, but I ask you to look at history and if history means anything, I think you can get yourself pretty comfortable with the opportunity for growth in the future.

Irr.

Understood in. This is a separate question. Tom, you talked about bringing on teams, some of that under the leadership from Reggie. Davis, should we expect any onboarding of hiring commercial lenders prior to the deal closed? Or is this going to be more of a 2022 event and even if so, are you already talking to folks to bring them on early next year?

Abraham were extremely active with the interesting about the consolidation way was staying, it's to our advantage. So obviously Reggie's been very busy. Sorting out the opportunities in the marketplaces. We're doing a lot on on, on leadership roles right now. Obviously, we're integrating the company culturally but there's a lot to do. We think there's tremendous opportunity, we talked about lines of businesses to be. We felt about having individuals out in the field, even down to the branch managers having people to bring the market managers getting out there. And and going after the business that culturally, what were you never?

Here at NYC be, that's what Flagstar is doing. We want to do that for the combined company. So Reggie has a very substantial task in front of him. We're working together very well. We're excited about people calling us both, not only just on the retail spot and and the C&I side but also on the mortgage side, I think the fact that this company beginning just south of 90 billion dollars in the mortgage space, I think, you know what bigger now and I think there's going to be a lot of excitement on Lee Smith business that people want to gravitate here. So Talent is is knocking what

Is always great and we're looking at opportunities and we're standing by these businesses. And you know what, we're excited about the opportunity. We talked about initially when we when we announced the deal he called it the Picasso is starting with a blank page what are we going to pay in here you know starting from zero is a good start, we have a lot to do on the retail side and I know Reggie. Truly believes that all share is strong, we don't have a share of the loan book and we're going to get it and we're going to get it with people and processes and, and being out there and offering competitive products. And and work is Epsilon 0. In the case,

With loyalty and trust with the clients. And and that's the plan. I think it's going to be a very interesting opportunity for this company, will look back a year from now and talk about growth and, and what we've accomplished. But every day we accomplish something and it's going to be focused on

Building a better company.

Any questions?

Now, you ever ham?

Thank you. Our next question comes from Matthew Breese with Piper Sandler. Please proceed with your question. Good morning. So you changed from, I'm at Stephens. Now,

Must be old. Hey Tom can you give us a sense for how much of the loan portfolio combined will be floating rate and able to repriced with with fed hikes. And I appreciate that you know with and without floors if you have it it's a great question. I don't have a specific number in Front of Me, John maybe to add some insight but at the end of the day flash is always been a floating rate franchise. They they look at all of their deals and it had it pegged to a floating instrument. We've been the sixth straight line. Therefore, for the beginning of

We will be hat, we will have Capital markets activity on a combined basis. We're going to have the the tools in a tool shed to utilize for the customer base and make it put on the the derivatives to, to manage that on an individual basis. But bicultural with the, it's a fixed rate lender combining where they in just the right lenders. So collectively, I think it's a good balance. Obviously, depending on what wind grows, faster will really determine the floating rate inside of it. But for the most part in to be well-balanced and I'm not going to be specific on

You can do the quick math. We have a very large multifamily book which is predominately fix rates, we don't do a lot of floating rate in the moment. He's right. As we don't really offer specific the derivative contracts per instrument but that'll change as we combine and we'll have that offering for the customer base. At the same time, we also plan on working with on the Capital Market side Alternatives. Versus the government alternative because it's difficult when your customer has to go to the government and you lose that you lose that opportunity. And perhaps we can capitalize with some of our Partnerships that we have on.

On the on the broker side we have a very strong relationship and reading Capital there that I looked at them as very strong partners and we're working with their team on under the getting opportunities, they have for the customer base, but we can partner together when opportunity. So we're going to have a blended portfolio, you know, different verticals and and hopefully, over time new verticals, we offered through our customer base and have more than just the traditional lending products that we have here. Going back to the traditional Commercial Bank. We are Thrift transitioning to Commercial Banking, and we won't look at opportunities and we're gonna look at cancer

What about opportunities at culturally Santos team, our team historically been tremendous, conservative lenders, and and we look at that as part of a Hallmark about business. Any business, we going to have to have conservative attributes,

On the lending side of sure. Okay. And then, you know, maybe turning to, you know, the core margin guide, + 3 to 5 basis points, curious, if that's again, adjusted for liquidity like this quarter. And then I was hoping for a bit of, you know, of a definition for what you're calling excess liquidity. So there's there's 2 point 1 billion of cash on the balance sheet. This quarter, there is 2.7 billion last quarter, but I didn't see the same adjustment. So I was hoping for a little bit of a definition there.

but I will tell you that, but

Number I gave is just the anticipate. That's the overall margin. It depend on what we put this cash out. We have excess liquidity, I'm hoping for more growth in in Q3 and Q4. So obviously, it's going to be married by the transaction. We anticipate the closes transaction, hopefully by early fourth quarter subject to regulatory approval. But clearly we have, you know, a margin that's continuing to rise, it's an ongoing track record with now number of years, now, going into the Flagstar transaction with further margin expansion and we look at

at 22, being another margin expansion, your regardless, where interest rates are. So John if you want expand upon some of the questions on the margin side. Yeah. Just just quickly, it's really not an ending deposit balance. It's an average to polish, the deposit balance thought process, right? So, if you look at the first quarter or average, non-interest bearing deposits is 3.2 billion. And then we went up to 5.5 in the second quarter, so that's the change right there. That's that's really from that from our first technology partner relationship. So that's the piece that

Carved out when we looked at the margin this quarter because as it was our first 1 and we didn't really, uh, really know the duration of those deposits. And we did realize that it would Peak very quickly and run down very quickly and that all happened within the quarter. So when you look at it from a you know, quarter-over-quarter perspective it down a little but it did he, you know, almost 2 billion higher. So the from an average balance perspective that's why we carved it out because it really hit during the same quarter and that, you know, we talked about these other initiatives. We I believe we have another win.

In that we have coming on, that should be a sizable amount of deposit flow 0 cause the funds to be attractive for the bank as an alternative. And then you using the wholesale markets for growth. And we also picked up, we believe you have another fee income opportunity on banking as a service, and we have a very large 1 that's out there. If it hits it's going to be significant. So we're very excited about alternative looking at alternative deposit initiatives or funding strategies, we believe that it's the right direction for the bank. We believe we have opportunities on the technologists by working with partners,

Not only just with with our existing Partnerships with other partners that we're bringing to the table to bring in the positive opportunities seeing opportunities and ultimately potentially learning opportunities. Over time, you with the utilization of technology, so stay tuned. We we hope to update the marketplace soon as we get closer to getting some things done here but we're excited about it. You know you mentioned expanding your Financial Services offering to the blockchain and I was curious you know what capabilities?

These are you envisioning adding or what markets do you plan on attacking just a little bit more on that on that comment to be very careful. Specifically I said I will tell you that you know we're spending a lot of time understanding where the financial services industry is heading there going to be a diversified company Li believe and I think it's on Joe and Lee believes there's going to be changes in how the blockchain will benefit banking services. So we are very much actively looking at how that could create.

The efficiency side as well as business opportunity. So I'm not going to be

But I will tell you that if it's here or what will be on paying attention to a working very hard on looking at how it could benefit us. On a combined basis, we have very large businesses that via the blockchain could generate significant efficiencies in potential customer opportunity. So I'm not going to be specific but I will say, just stay tuned. And we're excited about where we are today. Last 1 for me is the tax rate stepped up a little bit. This quarter what is a good run rate going forward and then if you

You have it. A combined tax rate would be helpful looking through the potential of a combined tax rate. We don't believe it's going to move dramatically from where we are. Maybe it'll be a slight benefit when we put to the 2 together based on state. Apportionment, if you look at the second quarter, the reasons to reasons why it was higher or merger related, expenses are primarily non-deductible given the type of expenses that they were and also New York State increase the tax rate from 6.5 percent to 7 point.

5 percent. So we did have a one-time head to revalue our deferred taxes. For that tax. Increase on a run rate basis. I would say we're just under twenty 6 percent is a good run rate for us on a standalone perspective. We're still doing a lot of work on the combined basis. We don't expect it to be significantly different than that though. Okay, that's all I had. I appreciate taking my questions. Thank you.

Thank you. Our next question comes from Andrew with KBW. Please. Proceed with your question morning. Andrew.

Thanks, great question. Obviously, we are not prepared remarks. We talked about the drop in the the loans that were subject to interest only it's down to about, I believe a billion dollars, that's 2 and a half at the beginning of the quarter to a billion. At the end of the second quarter, you'll see that continue to drop, you know, there's going to be and as we get closer to the end of the cares that which I believe is the end of this year. We believe most of our customers will be, you know out of end in any form of relief, we have zero clients on for the furrow, which is great. And it's been an ongoing strategy of hours and

And we've been very clear with our customers to work with them but we're seeing significant benefits as far as the particular Manhattan reopening of Manhattan's been very favorable than the last borrow. That was in the waiting game. So our customers that are exposed to Manhattan which was about 85% of the the loans that were considered classified. I think the most important note that this statement here is Pat, we think we picked, we think that the classifies I asked its peak in February, was seeing the trends, come to the client. That will also bode well for expenses, as these assets, thought to decline and go back into

Past rated assets, you also get the benefit of the FDIC expense on that. So that's going to be another favorable event as we manage our operating costs. But on a credit side, it's been a

Very good story, Sandra talked about his credit portfolio. Very strong story has zero loans on the floor as well. So very strong credit on both sides but we're seeing significant momentum on the reopening. I will tell you that Manhattan was the last Borough to get there. The other boroughs were doing fine in as early as January. But you know, now that we have the vaccine rolled out and the city's reopening and and you see more employers have their employees come back to work. You see a lot of the supplies?

Management, when it comes to rental. So very strongly made you. A lot of our customers are very pleased. There's some work to do on office and Retail, but I think that will follow as the as the employees and and the traffic stop to pick up in Manhattan. In Manhattan. You got to have, hopefully the theaters open up and I look the Delta vibrating is what it is. I'm not going to make a healthcare prediction, we're going to follow CDC guidelines, but I think it's encouraging to see New York fare. Well, regarding the pandemic and it's good to see the city moving in the right direction. And I'll customers are very pleased and we're seeing tremendous after quality.

Results. Because of that.

Great, thank you for the color and then just 1 more if I can. Was there any reason why you moved your true loyalty loans? Back out of hell, for sale into the helper Investment Portfolio. Thank you. Are PPP loans, Rose down to 95 million. We were very comfortable with holding those and given where the market was and the excess cash. We had, we were just very comfortable holding those bones long term, so we decided to move him back to back into hell for investment.

Okay, thank you.

Thank you. There are no further questions at this time. I'd like to turn the floor. Back over to management. Hey, thank you again for taking the time to join us this morning. And for your interest in NYC, be in Flagstar. We look forward to chatting with you again at the end of October, when we will discuss our performance for the 3 and 9 months, ending September 30.2012, he won and provide further updates on the planned merger.

Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.