Q2 2024 New York Community Bancorp Inc Earnings Call
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Regina: 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 Inc. second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.
Regina: 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 Inc. Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Regina: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.
Regina: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.
Regina: If you would like to withdraw your question, press star 1 again. I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.
Salvatore J. DiMartino: Thank you, Regina, and good morning, everyone. Thank you for joining the management team of New York Community Bank Corp. for today's call. Our discussion today will be led by Chairman, President, and CEO Joseph Otting, along with the company's Chief Financial Officer, Craig Gifford. Before the discussion begins, I would like to remind everyone that our press releases and investor presentation can be found on the investor relations section of our company website at ir.mynycb.com.
Salvatore J. DiMartino: Thank You Regina and good morning everyone. Thank you for joining the management team of New York Community Bank Corp for today's call.
Speaker Change: Our discussion today will be led by Chairman, President, and CEO , Joseph Otting, along with the company's Chief Financial Officer, Craig Gifford.
Salvatore J. DiMartino: Also, certain comments made today by the management team of New York Community may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to the Safe Harbor Rules. Please review the forward-looking disclaimer and Safe Harbor language in today's press release and presentation for more information about risks and uncertainties that may affect us. When discussing our results, we will reference certain non-GAAP measures which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. With that, I now would like to turn the call over to Mr. Otting. Joseph
Salvatore J. DiMartino: Before the discussion begins, I would like to remind everyone that our press releases and investor presentation can be found on the Investor Relations section of our company website at ir.mynycb.com.
Salvatore J. DiMartino: also
Speaker Change: 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 may make are subject to the Safe Harbor Rules.
Speaker Change: 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.
Speaker Change: When discussing our results, we will reference certain non-GAAP measures which exclude certain items from reported results.
Speaker Change: Please refer to today's earnings release for reconciliations of these non-GAAP measures.
Speaker Change: With that, I now would like to turn the call over to Mr. Otting. Joseph. Thank you, Sal. Good morning and welcome to our earnings announcement, strategic plan update, and forecast call.
Joseph M. Otting: Thank you, Sal. Good morning and welcome to our earnings announcement, strategic plan update, and forecast call. As we go through this transition year in 2024, we will continue to provide updates about the company, including forecasts. We feel it's important for our investors to be informed and to long for the journey as we build a strong performing bank. When we met last on May 1st, Craig and I had been in our positions for roughly four weeks.
Speaker Change: As we go through this transition year in 2024, we will continue to provide updates about the company, including forecasts. We feel it's important for our investors to be informed and along for the journey as we build a strong performing bank.
Joseph M. Otting: Now that we've had an additional 90 days, we feel we understand the company and have put it on a path to success. We have a firm hand on the steering wheel of the company, and we are excited to be in the position that we are today. This has been a very busy quarter for us, and we feel like we've accomplished a lot of great things.
Speaker Change: When we met last May 1st, Craig and I had been in our positions for roughly four weeks. Now that we've had an additional 90 days, we feel we understand the company and have put it on a path to success.
Speaker Change: We have a firm hand on the steering wheel of the company and excited to be in the position that we are today.
Speaker Change: This has been a very busy quarter for us and we feel like we've accomplished a lot of great things.
Joseph M. Otting: In addition to our second quarter results, early this morning, we announced a significant transaction, the sale of our mortgage servicing businesses and third party origination platform to Mr. Cooper, one of the country's leading mortgage companies. We've also had a strong relationship with Mr. Cooper, both from a banking relationship and knowing a number of the personnel.
Speaker Change: In addition to our second quarter results,
Speaker Change: Early this morning we announced a significant transaction, the sale of our mortgage servicing businesses.
Speaker Change: and third-party origination platform to Mr. Cooper, one of the country's leading mortgage companies.
Speaker Change: We've also had a strong relationship with Mr. Cooper's, both from a banking relationship and knowing a number of the personnel, so we do view this will be a good and easy transition of our important assets into the company.
Joseph M. Otting: So we do think this will be a good and easy transition of our important assets into the company. This comes on top of our announcement on Monday that we closed on the sale of our mortgage warehouse loans to J.P. Morgan Chase. We discussed that at our last earnings call, but did not identify that transaction by name, but that has now closed.
Speaker Change: This comes on top of our announcement on Monday that we closed on the sale of our mortgage warehouse loans to JPMorgan Chase.
Speaker Change: We discussed that at our last earnings call. Did not identify that transaction by name, but that has now closed. We received $5.9 billion of liquidity on Monday. There's roughly $200 million that should close over the next 30 days.
Joseph M. Otting: We received $5.9 billion of liquidity on Monday, and there's roughly $200 million that should close over the next 30 days. Both of these sales are important milestones for us as we look to simplify our business model and strengthen our balance sheet. And as we will highlight later,
Speaker Change: Both of these sales are important milestones for us as we look to simplify our business model and strengthen our balance sheet. And as we will highlight later, collectively these two transactions we feel bolster our liquidity and increase our capital ratios.
Joseph M. Otting: Collectively, these two transactions we feel bolster our liquidity and increase our capital ratio. Last quarter, we laid out the strategic initiatives for the company. This quarter, I want to update you on the status of those initiatives. Starting with slide three, you can see we have made significant progress during our transition year on each of the five strategies outlined on page three. Under the first, we conducted and completed our board transfer transformation. I'm happy to report I think we have one of the strongest boards in the industry today. I've had the opportunity over the last 120 days to observe them in action.
Speaker Change: Last quarter we laid out the strategic initiatives for the company. This quarter I want to update you on the status of those initiatives.
Speaker Change: Starting with slide 3, you can see we have made significant progress during our transition year on each of the five strategies outlined on page 3.
Joseph M. Otting: They are an active board, they challenge management, and they have established a very high standard for performance and execution. And I think that's one of the hallmarks of any great organization, a very complete and solid board. In addition to that, during the quarter, we added nine additional senior executives to our executive and leadership team. This brings the total of 16 new executives to date to the organization.
Speaker Change: Under the first, we conducted and completed our board transformation.
Speaker Change: I'm happy to report I think we have one of the strongest boards in the industry today.
Speaker Change: I've had the opportunity over the last 120 days to observe them in action. They are an active board, they challenge management, and they have established a very high standard for performance and execution.
Speaker Change: and I think that's one of the hallmarks of any great organization is a very complete and and solid board.
Speaker Change: In addition to that, during the quarter we added nine additional senior executives to our executive and leadership team.
Joseph M. Otting: I'll remind people on the call that we did this within a five month period, and I'll talk a little bit more on slide five when we get to about the level of that talent. As far as our ongoing execution of our operating plan, we had very strong deposit growth during the quarter. Our deposits grew 5.6%.
Speaker Change: This brings to the total of 16 new executives to date to the organization. I'll remind people on the call we did this within a five-month period, and I'll talk a little bit more on slide five when we get to about the level of that talent.
Speaker Change: On as far as our ongoing execution of our operating plan, we had very strong deposit growth during the quarter. Our deposits grew 5.6 percent. It was a very solid result both in our private banking and our retail banking franchise.
Joseph M. Otting: It was a very solid result, both in our private banking and our retail banking franchise. As we adapted, we diversified, and we are strengthening our balance sheet. We exited two non-core businesses, as I described, and we feel we are on track to meet the expense targets in our forecast, which will be over $300 million of net cost takeouts, while we continue to build our RISD infrastructure and our CNI platform as we move forward on item number three, achievable capital and earnings forecast. The strategic sales will add about 130 basis points to our CET ratio.
Speaker Change: As we commented, we diversified in our strengthening our balance sheet.
Speaker Change: We exited two non-core businesses as I described.
Speaker Change: And we feel we are on track to meet the expense targets in our forecast, which will be over $300 million of net cost takeouts, while we continue to build our RISD infrastructure and our CNI platform as we move forward.
Joseph M. Otting: We do this at a CET of 11.2%, which we feel is at and above our peers. And we also had an incremental improvement in NIM and NNI through loan portfolio pricing in the future and increases to our CNI business. On the improved funding profile, our pro forma liquidity post the transactions will be roughly $40 billion. This results in over a 300% coverage ratio for our uninsured deposits, and the transactions provide a net about $6.5 billion of liquidity to the organization through divestitures and deposit growth.
Speaker Change: An item number three, achievable capitals and earnings forecast.
Speaker Change: The strategic sales will add about 130 basis points to our CET ratio.
Speaker Change: We perform this at a CET of 11.2%, which we feel is at and above our peers. And we also had an incremental improvement in NIM and NNI through loan portfolio pricing in the future and the increases to our CNI business.
Speaker Change: On the improved funding profile, our pro forma liquidity post the transactions will be roughly $40 billion.
Speaker Change: This results in over 300% coverage ratio to our uninsured deposits, and the transactions provide a net about $6.5 billion of liquidity to the organization through divestitures and deposit growth.
Joseph M. Otting: As we talked about in the call in May, there's been a lot of focus on credit risk management in the company. We now have through roughly 75% of our CRE portfolio, compared to roughly 35% in the first quarter.
Speaker Change: As we talked about in the call in May, there's been a lot of focus on the credit risk management in the company. We now are through roughly 75% of our CRE portfolio. That was roughly 35% in the first quarter.
Joseph M. Otting: We continue to address problem loans through additional charge-offs in our ACL bill up to 1.78%. And we're very focused on the remediation of problem loans. And I'll add some comments to that on a couple slides later. And then we have also begun to add talent and resources in this area. We hired a new head of our workout group during the quarter, which is one of the talented people we feel in the industry. Moving on to slide four.
Speaker Change: We continue to address problem loans through additional charge-offs in our ACL bill up to 1.78%.
Speaker Change: And we're very focused on the remediation of problem loans, and I'll add some comments to that on a couple slides later. And then we also have begun to add talent and resources in this area. We hired a new head of our workout group during the quarter, which is one of the talented people we feel in the industry.
Joseph M. Otting: You can see on slide four, there are key takeaways for the quarter, which we think were really solid. As I commented, we had meaningful enhancements to liquidity and capital. We grew our deposits in key areas of key focus, which include our retail and private bank. Since we had a chance to discuss last, I've done a fair number of branch visits. We visited branches in Arizona, Michigan, and Florida. We rebranded all of the branches between November and March. We have a very consistent theme of colors and messaging in the branches, and I was very impressed with our branch personnel, with their outward mobility-seeking customers, and with their very focused goals and objectives.
Speaker Change: Moving on to slide 4.
Speaker Change: You can see on slide four, there are key takeaways for the quarter, which we think were really solid. As I commented, we had meaningful enhancement to liquidity and capital.
Speaker Change: We grew our deposits in key areas of key focus, which includes our retail and private bank.
Speaker Change: Since we had a chance to discuss last, I've done a fair amount of branch visits. We visited branches in Arizona, Michigan, and Florida.
Speaker Change: We've rebranded all of the branches between November and March. We have a very consistent theme to colors.
Speaker Change: and messaging in the branches. And I was very impressed.
Speaker Change: with our grants personnel with their outward mobility seeking customers.
Joseph M. Otting: I think not only are we seeing, as we commented on, strong deposit growth, but we're also seeing very strong referrals to our investment activities as well. We had meaningful CRE payoffs. As we commented before, one of the strategic goals of the company is to shrink our CRE exposure. It's roughly $45 billion, and we have a long-term goal to get that into the $30 to $33 billion level to give us diversification on the balance sheet.
Speaker Change: and a very focused goals and objectives. I think, you know, not only are we seeing, as we commented on, strong deposit growth, but we're also seeing very strong referrals to our investment activities as well.
Speaker Change: We had meaningful CRE payoffs. As we commented before, one of the strategic goals of the company is to shrink our CRE exposure. It's roughly $45 billion, and we have a long-term goal to get that into the $30 to $33 billion level to give us diversification on the balance sheet.
Joseph M. Otting: As Craig will talk about on slide 10, we do continue to have payoffs in the CRE portfolio. We were down on an annualized basis from the first to the second quarter by about 10%. But just as importantly, of those payoffs, 50% of those were in the classified categories. So we continue to see both payoffs and reductions through payoffs in the classified categories.
Speaker Change: As Craig will talk about on slide 10, we do continue to have payoffs in the CRE portfolio. We were down on an annualized basis from the first to the second quarter about 10 percent.
Craig E. Gifford: But just as importantly, of those payoffs, 50% of those were in the classified categories. So we continue to see both payoffs and reductions through payoffs in the classified categories.
Joseph M. Otting: As far as the quarter, you know, we've talked about, during the first quarter, we had quickly gone through the largest loans in the portfolio. We took further actions on the loan portfolio this quarter. We are now through 75% of the CRE portfolio, 80% of the office, and 80% of the multifamily. And just as important, we also kind of lean forward because one of the big questions is how are the rapid rate increases impacting portfolios and credit quality. We did an 18-month look forward on the portfolio. We re-underwrote the loans, those loans that had a debt service coverage of one-to-one. We then ordered appraisals.
Craig E. Gifford: As far during the quarter, you know, we've talked about, you know, during the first quarter we had
Craig E. Gifford: the office and 80% of the multifamily.
Craig E. Gifford: And just as important, we also kind of lean forward.
Craig E. Gifford: Because one of the big questions is how are, you know, the rapid rate increases impacting portfolios and credit quality. We did an 18-month look forward on the portfolio. Then we re-underwrote the loan, those loans that had a debt service coverage of one-to-one. We then ordered appraisals.
Joseph M. Otting: And the end result of that is if the debt service coverage and the loan-to-values were below, or excuse me, above 90%, we moved those loans into the classified section. So that kind of look forward pulls a lot of that risk into our current numbers, and we feel that is one of the reasons why we've seen an increase both in our criticized and our classified loans and our non-accruals. And I'll just make a comment that over 60% of those loans that are substandard today are still performing. So we still have a very high percentage of both our classified and our non-accrual loans that continue to perform.
Craig E. Gifford: And the end result of that is if the debt service coverage and the loan-to-values...
Craig E. Gifford: We're below, or excuse me, above 90%. We moved those loans into the classified section.
Craig E. Gifford: So that kind of look forward pulls a lot of that risk into our current numbers and we feel that is one of the reasons why we've seen an increase both in our criticized and our classified and our non-accruals.
Craig E. Gifford: And I'll just make a comment that over 60% of those loans.
Craig E. Gifford: that are substandard today are still performing. So we still have a very high percentage of both our classified and our non-accrual loans that continue to perform. And I think that's an indication that we are having a forward looking at the risk that's coming down the pipeline in the portfolio.
Joseph M. Otting: And I think that's an indication that we are looking forward to the risk that's coming down the pipeline in the portfolio. As we commented, we continue to look at non-core businesses for us. We probably have another additional $2 to $5 billion that we're evaluating whether we would exit those businesses. We do plan to move on some of that activity between now and the end of the year.
Craig E. Gifford: As we commented, we continue to look at non-core businesses for us.
Craig E. Gifford: We probably have another additional two to five billion dollars that we're evaluating whether we would exit those businesses.
Craig E. Gifford: We do plan to probably move on some of that activity between now and the end of the year. In most of those instances, that would provide an additional $200 to $500 million of additional unallocated capital.
Joseph M. Otting: In most of those instances, that would provide an additional $200 to $500 million of additional unallocated capital and $2 to $5 billion of liquidity. We'll continue to look at bolstering both liquidity and the capital on the balance sheet. And then lastly, we have really started to build, I think, positive momentum in the C&I franchise. You know, this is a big focus for us.
Craig E. Gifford: and two to five billion dollars of liquidity. So we'll continue to look at bolstering both the liquidity and the capital on the balance sheet.
Craig E. Gifford: And then lastly, we, you know, we really started to build, I think, positive momentum in the CNI franchise.
Joseph M. Otting: We're roughly around $20 billion in C&I assets. Our goal is to get that to $30 to $35 billion in the next three to five years. We've done this before at other institutions. We're an experienced group of people.
Craig E. Gifford: This is a big focus for us. We're roughly around $20 billion of CNI assets. Our goal is to get that to $30 to $35 billion in the next three to five years.
Craig E. Gifford: We've done this before at other institutions. We're an experienced group of people.
Craig E. Gifford: We're hiring experienced people to execute on this business plan and we're very optimistic as a new entrant into the general specialized lending, middle market lending, the type of people we're hiring will give us immediate access to opportunities in those spaces.
Joseph M. Otting: We're hiring experienced people to execute on this business plan, and we're very optimistic that as a new entrant into the general specialized lending, and middle market lending, the type of people we're hiring will give us immediate access to opportunities in those spaces. Turning to page five really kind of gives you a reflection of the very strong and experienced team that we've accumulated at the bank. As I indicated, basically, in five months, we've recruited what I consider to be one of the strongest mid-sized banking teams in the industry today. These are across a wide variety of disciplines. I'll highlight a couple on that page. The second on the left from the top is Chris Gagnon.
Craig E. Gifford: Turning to page five really kind of gives you a reflection of really the very strong and experienced team that we've accumulated at the bank.
Craig E. Gifford: As I indicated, basically in five months we've recruited what I consider to be one of the strongest.
Craig E. Gifford: Mid-sized banking teams in the industry today. These are across a wide variety of disciplines. I'll highlight a couple on that page.
Joseph M. Otting: Chris brings over 35 years of very strong experience in risk management and credit management to our team. He was appointed this week to be the chief credit officer. He's been on staff with us for about five months in a consulting role.
Craig E. Gifford: The second on the left from the top is Chris Gagnon.
Craig E. Gifford: Chris brings over 35 years of very strong experience, risk management and credit management to our team.
Speaker Change: Chris was appointed this week to be the Chief Credit Officer. He's been on staff with us.
Speaker Change: for about five months in a consulting role. We're really pleased to have Chris.
Speaker Change: and bring the disciplines into the credit organization. I think that will have a big impact.
Speaker Change: And then on the far right, the second one down is Rich Ruffetto. Rich has joined us to lead both our C&I and our private banking initiatives. Rich also is...
Speaker Change: A very senior executive, very well known in the industry, Rich and I work together at U.S. Bank.
Speaker Change: and he's joined our organization from Citi National. Couldn't be more pleased to have Rich on the board and some of the leadership that he's gonna bring to those two disciplines where we do view the private bank and the CNI as some of our biggest growth engines as we try to move forward in expanding the organization.
Joseph M. Otting: We're really pleased to have Chris and bring the disciplines into the credit organization. I think that will have a big impact. biggest growth engines as we try to move forward in expanding the organization. On page six, a very busy quarter, you know, as we announce the sale of the warehouse business, in addition to the Mr. Cooper's, but I would like to just take for a second and focus on, you know, what are we going to look like in the future and really our focus is on being a retail bank, a small business, that we provide residential mortgages to our customers and prospects that come out of the retail banking, private banking, and commercial.
Speaker Change: On page six, very busy quarter, you know, as we announced the sale of the warehouse business, in addition to the Mr. Cooper's, but
Speaker Change: I would like to just take for a second and focus on, you know, what are we going to look like in the future? And really our focus is on being a retail bank, a small business.
Speaker Change: That we provide residential mortgages to our customers and prospects that come out of the retail banking, private banking, and commercial. We focus on our commercial, industrial, and then our commercial real estate. And that's really what we would define as our core businesses going into the future.
Joseph M. Otting: We focus on our commercial, industrial, and then our commercial real estate, and that's really what we would define as our core businesses going into the future. But as I said, you know, these two very well-run businesses we had were attractive acquisitions for people that are in these businesses.
Speaker Change: But as I said, you know, these two very well run businesses, we had, they were attractive acquisitions for people that are in these businesses.
Joseph M. Otting: The mortgage warehouse generated, as I said, will generate 6.1 billion dollars. We sold those loans at par, and we added approximately 70 basis points to the CET1 capital ratio through that transaction. And we will use those proceeds to pay down our wholesale borrowings and fund future C&I growth is one of our other objectives, and it's obviously to reduce overall wholesale borrowing. As we announced this morning, at closing, we will add 60 basis points to the mortgage servicing sale.
Speaker Change: The Mortgage Warehouse generated, as I said, will generate $6.1 billion. We sold those loans at par.
Speaker Change: And we added approximately, through that transaction, 70 basis points in CET-1 capital ratio. And we will use those proceeds to pay down our wholesale borrowings and fund future C&I growth. As one of our other objectives is obviously to reduce overall the wholesale borrowings.
Speaker Change: As we announced this morning, at closing we will add 60 basis points to the mortgage servicing sale. This will help reduce our high costs and volatile mortgage deposits.
Joseph M. Otting: This will help reduce our high costs and volatile mortgage deposits. This is a $1.4 billion all-cash transaction. We sold $1.2 billion of assets and subservicing business at a premium to book value. And we do expect this to close in 2024. So with that, I will turn it over to Craig and then look forward to answering questions during the Q&A period. Thank you, Joseph.
Speaker Change: This is a $1.4 billion all-cash transaction. We sold $1.2 billion of assets and subservicing business at a premium to book value, and we do expect this to close in 2024.
Speaker Change: So with that, I will turn it over to Craig and then look forward to answering questions during the Q&A period.
Craig E. Gifford: We'll move forward and talk about some of the numbers, including a deeper dive on some of the credit position analysis. If we move to slide 7, you can see that our CET1 ratio, as converted and pro forma for the business transactions that Joseph mentioned, is 11.2%. So that's a 9.54% CET1 actual, and about 30 basis points for the assumed conversion of the remainder of the preferred stock from the March capital raise. There were two items that were gating items for that.
Craig E. Gifford: Thank you, Joseph.
Craig E. Gifford: We'll move forward and talk to some of the numbers, including a deeper dive on some of the credit position analysis. If we move to slide 7.
Craig E. Gifford: You can see that our CET1 ratio...
Craig E. Gifford: As converted and pro forma for the business transactions that Joseph mentioned is 11.2%. So that's a 9.54% CET1 actual.
Craig E. Gifford: About 30 basis points for the assumed conversion of the remainder of the preferred stock from the March capital raise. There were two items that were gating items for that. One was...
Craig E. Gifford: One was the shareholders approving in June an increase in our authorized shares. That's been approved. And the second is that there are some regulatory approvals associated with some of those preferred shareholders converting to common. Once received, that will increase our capital ratio by roughly 30 basis points. And then, as Joseph mentioned, about 70 basis points of increment associated with the warehouse portfolio. That's about $6 billion on the balance sheet in help for sale this quarter.
Craig E. Gifford: The shareholders approving in.
Craig E. Gifford: June , an increase in our authorized shares that's been that's been approved and the second is there's some regulatory approvals associated with some of those
Craig E. Gifford: Preferred shareholders converting to common.
Craig E. Gifford: Once received, that will increase our capital ratio of roughly 30 basis points.
Craig E. Gifford: And then, as Joseph mentioned, about 70 basis points increment associated with the warehouse portfolio. That's about $6 billion on the balance sheet and held for sale this quarter.
Craig E. Gifford: And we did receive that cash in the final closing of that earlier this week. And then separately, the mortgage servicing business will give us an increase of about 60 basis points in CET1. And that's a result of the removal of roughly $1.2 billion in balance sheet carrying assets for the mortgage servicing rights, which is a pretty high risk weighted asset. And then a small gain on the transaction associated with the premium that we received on the business. We don't have a whole lot of unrealized losses on our security.
Craig E. Gifford: and we did receive that cash in the final closing of that earlier this week.
Joseph M. Otting: and then separately the mortgage servicing business.
Joseph M. Otting: We'll get us an increase of about 60 basis points.
Speaker Change: in CET-1, and that's a result of the removal of roughly $1.2 billion on-balance sheet carrying asset for the mortgage servicing rights, which is a pretty high-risk weighted asset, and then a small gain on the transaction associated with the premium that we received on the business.
Craig E. Gifford: So you can see that our CET1 ratio adjusted for the unrealized loss on securities is 10.4%. That's fairly strong compared to our Category 4 peers. And then Joseph mentioned the cash and liquidity position. There are slides further back that I'll go through in detail. But we do find ourselves in a fairly strong liquidity position, which is nice to have. On page 8, we've adjusted our forecast for the transactions that we spoke about, if you'll recall, last quarter. We had mentioned that there was a potential for an asset transaction. That was the warehouse transaction. Those numbers were not included or adjusted for in the forecast.
Speaker Change: We don't have a whole lot of unrealized losses on our security, so you can see that our CET-1 ratio...
Joseph M. Otting: Adjusted for the unrealized loss on securities at 10.4 percent. That's fairly strong compared to our Category 4 peers. And then Joseph mentioned...
Joseph M. Otting: The cash and liquidity position, there are slides further back that I'll go through in detail, but we do find ourselves in a fairly strong liquidity position, which is nice to have.
Joseph M. Otting: On page 8, we've adjusted our forecast.
Joseph M. Otting: For the transactions that we spoke about, if you recall last quarter, we had mentioned that there was a potential for an asset transaction. That was the warehouse transaction. Those numbers were not included, adjusted for in the forecast.
Craig E. Gifford: We were clear about that. And then separately now, we have the mortgage business transaction, and those are now reflected in this forecast. You see that the result of the transactions is that we push out our expectation of achieving pure median returns about two quarters into the second quarter of 2027, as we redeploy the capital into lending businesses in 2026 and 2027 that's generated from those transactions. You can see on the slide that our tangible book value per share will be between $17.50 and $18.00 per share at the end of 2024, and as we look out into 2026 and 2027, we see that growing into the $20 to $21.00 per share range, and those numbers exclude the impact of warrants.
Joseph M. Otting: We were clear about that.
Joseph M. Otting: And then separately now we have the mortgage business transaction, and those are now reflected in this forecast.
Joseph M. Otting: You see that the result of the transactions is that we push out our expectation of achieving pure median returns about two quarters into the second quarter of 27 as we redeploy the capital into lending businesses in 2026 and 2027 that's generated.
Craig E. Gifford: There is an impact that we do have to think about on a long-term basis, in terms of the share count that would come from the. On the forecast page, on page nine, you can see that our net interest income shows growth, and so does our net interest margin. That's principally a result of the resetting of our loan portfolio to more current interest rates as those loans hit their reset dates over the next couple of years.
Joseph M. Otting: from those transactions.
Joseph M. Otting: You can see on the slide that our tangible book value per share will be between $17.50 and $18 per share at the end of 2024, and as we look out into 2026 and 2027, we see that growing into the $20 to $21 share range.
Joseph M. Otting: and those numbers exclude the impact of warrants. There is an impact that we do have to think about on a long-term basis in terms of the share count that would come from the warrants.
Joseph M. Otting: On the forecast page on page 9, you can see that our net interest income shows growth.
Joseph M. Otting: And as does our manager's margin. That's principally a result of the resetting of our loan portfolio to more current interest rates as those loans hit their reset dates over the next couple of years. We'll have a metric in a couple of slides that shows you the significance of that impact as we're rolling through the next few quarters.
Craig E. Gifford: We'll have a metric on a couple of slides that shows you the significance of that impact as we're rolling through the next few quarters. From a provision expense standpoint, we'll have a slide at the end that shows our experience for the quarter. We did record $390 million of provision expense for the quarter, and 350 of that was charge-offs.
Joseph M. Otting: From a provision expense standpoint, we'll have a slide at the end that has our experience for the quarter. We did record $390 million of provision expense for the quarter. $350 of that was charge-offs.
Craig E. Gifford: The result of that is that given where we are today, year-to-date from a provision expense perspective, we do expect that our provision expense for the year will wind up between $900 million and $1 billion in total for 2024. Because we do expect loan growth, we do have an expectation that we will have increased provisioning, not only through 2025 related to current market conditions, but into 2026 as we have loan growth in the C&I portfolio and have to provision for that.
Joseph M. Otting: The result of that is that, given where we are today, year-to-date from a provision expense, we do expect that our provision expense for the year will wind up between $900 million and $1 billion in total for 2024.
Joseph M. Otting: Because we do expect loan growth, we do have an anticipation that we will have increased provisioning, not only through 2025 related to current market conditions, but into 2026 as we have loan growth in the C&I portfolio and have to provision for that loan growth.
Craig E. Gifford: If you turn to slide 10, we can start to talk about some of the credit results. And one of the things that we have seen for the last several quarters is really strong results in terms of payoffs on our CRE portfolio. So as we have loans that are hitting reset dates and maturity dates, we're certainly working to retain those borrowers when we have relationships where they bring us deposits. But those borrowers that are simply using our balance sheet as they hit reset dates, we're working to reduce our exposure and our concentration on commercial real estate and helping those borrowers find ways to move off the balance sheet. We had almost a billion dollars in CRE payoffs in the quarter, and you can see that three-fourths of that was from multifamily.
Joseph M. Otting: If you turn to slide 10,
Joseph M. Otting: We can start to talk about some of the credit results.
Joseph M. Otting: And one of the things that we have seen for the last several quarters is really strong results in terms of payoffs on our CRE portfolio. So as we have loans that are hitting reset dates and maturity dates.
Joseph M. Otting: We're certainly working to retain those borrowers when we have relationships where they bring us deposits.
Joseph M. Otting: But those bars, they're simply using our balance sheet.
Joseph M. Otting: As they hit reset dates, we're working to reduce our exposure and our concentration on commercial real estate and helping those borrowers find ways to move off the balance sheet. We had almost a billion dollars in CRE payoffs in the quarter, and you can see that three-fourths of that was from multifamily.
Craig E. Gifford: And also, we've shown on the right-hand side, the amount of that that was in our classified portfolio. So, as Joseph mentioned, we've been pretty aggressive at looking at the ability of borrowers to repay and moving loans to classified over the last couple of quarters. But those borrowers are able to find options in the marketplace as they come to their reset dates.
Joseph M. Otting: and also you can...
Joseph M. Otting: shown on the right hand side, the amount of that that was in our classified portfolio. So as Joseph mentioned, we've been pretty aggressive at looking at the ability of borrowers to repay and moving loans to classified over the last couple of quarters. But those borrowers are able to find options in the marketplace as they come to their reset dates.
Craig E. Gifford: And almost half of the payoffs this quarter were out of our classified portfolio, and all of those payoffs were at par, so they weren't discounted. On slide 11 is an update with respect to our portfolio review. As Joseph mentioned last quarter, we'd only been here a few weeks, but we'd made our way through about 37% of the portfolio, $18 billion. At this point, we're through about 75% of the portfolio, and that includes 80% of the multifamily portfolio.
Speaker Change: And over almost half of the payoffs this quarter were out of our classified portfolio, and all of those payoffs were at par, so they weren't discounted payoffs.
Speaker Change: On slide 11 is an update with respect to our portfolio review. As Joseph mentioned, last quarter we had made our way through, we'd only been here a few weeks, but we'd made our way through about 37% of the portfolio, $18 billion. At this point we're through about 75% of the portfolio, and that includes 80% of the multifamily portfolio.
Craig E. Gifford: A total of $33 billion in the principal balance that we've done a detailed review on. You can see that broken out by portfolio towards the bottom. We continue to be at a very high level with respect to office. Only about $500 million of the office portfolio remains under review.
Speaker Change: Total of thirty three billion dollars in in the principal balance that we've done detail review on.
Speaker Change: You can see that broken out by portfolio towards the bottom.
Speaker Change: We continue to be at a very high level with respect to office.
Craig E. Gifford: The multi-family portfolio, only about $7 billion remains under review. And in a couple of slides, we have details on that. And it's principally smaller balance loans, which generally seem to have less risk. On page 12, our multifamily portfolio, you see that year over year, we're down 4%. But importantly, as I mentioned, we had $700 million in payoffs in the quarter. From a quarterly perspective, we're down 3% just in a singular quarter. And we do expect that trend to continue. On the next page, I'll show you how many hits reset dates over the next two years.
Speaker Change: Only about $500 million of the office portfolio remains under review. The multi-family portfolio, only about $7 billion remains under review, and in a couple of slides we have detail on that, and it's principally smaller balanced loans, which generally we've seen to have less risk.
Speaker Change: On page 12, our multifamily portfolio, you can see that year over year we're down 4%, but importantly, as I mentioned, we had $700 million of payoffs in the quarter. From a quarterly perspective, we're down 3% just in a singular quarter, and we do expect that trend to continue.
Speaker Change: On the next page, I'll show you how much hits reset dates over the next two years. And as we move forward, we expect to continue to encourage those borrowers to find other options.
Craig E. Gifford: And as we move forward, we expect to continue to encourage those borrowers to find other options. Over the past 18 months, we've had $2.9 billion, almost $3 billion of our multifamily rent-regulated loans that have hit their repriced dates, and, as I mentioned, strong payoffs. Almost a fourth of those loans have paid off. 69% have repriced, and this is an important statistic.
Speaker Change: Over the past 18 months, we've had $2.9 billion, almost $3 billion of our multifamily rent regulated loans that have hit their repriced dates. And as I mentioned, strong payoffs there. Almost a fourth of those loans have paid off.
Craig E. Gifford: When they repriced, they repriced at an average of 8.19%. That's up from 3.85%. That trend will continue, and that'll have a significant upside to our net interest margin going forward. In the second quarter, we did receive our annual updates from borrowers on their financial statements.
Speaker Change: 69% have repriced, and this is an important statistic, when they repriced, they repriced to an average of 8.19%. That's up from 3.85%. That trend will continue, and that'll have a significant upside into our net interest margin on a go-forward basis.
Speaker Change: This quarter we do, in the second quarter we did receive our annual updates.
Craig E. Gifford: We have over 80% of the portfolio that we've received annual updates on, and interestingly, on average, the NOIs on those updates are up year over year. About two-thirds of the loans have increased NOIs, and about a third have decreased NOIs, on average increasing between three and five percent. On slide 13, there is more detail on the multifamily portfolio. Again, it's about $4.7 billion. It remains under review. I'm sorry $6.9 billion. It remains under review.
Speaker Change: From borrowers up for their financial statements. We have over 80% of the portfolio that we've received annual updates on and interestingly
Speaker Change: On average, the NOIs on those updates are up year over year. About two-thirds of the loans have increased NOIs and about a third have decreased NOIs, on average increasing between 3 and 5 percent.
Craig E. Gifford: And you can see that the average loan balance on those is below $5 billion. And then, on the far right-hand side, bottom of the page, you can see that over the next couple of years, we have roughly $5 billion that reprices in 2025 and 2026, and then out into 2027, that's roughly $7 billion that reprices. So significant upside potential in margin, as well as an opportunity to decrease the concentration in CRE as we work those bonds off the market.
Speaker Change: On slide 13 is more detail on the multi-family portfolio. Again, there's about 4.7 billion dollars that remains under review. I'm sorry, 6.9 billion dollars that remains under review. And you can see that the average loan balance on those is below 5 billion dollars, excuse me, 5 million dollars.
Speaker Change: And then on the far right-hand side, bottom of the page.
Speaker Change: You can see that over the next couple of years we have roughly $5 billion that reprices.
Speaker Change: In 25 and 26, and then out into 27, that's roughly $7 billion it repriced. So significant upside potential in margin, as well as opportunity to decrease the concentration in CRE as we work those loans off the balance sheet.
Craig E. Gifford: Our office portfolio on page 14, we had gotten through about 75% of the portfolio last quarter. We'd really focused on that because that's where we had quite a bit of large balance loans that were also in a space that was experiencing pretty significant market stress in terms of occupancy levels. We're through 82% now, and the remainder of the portfolio is only about $500 million or so. As a result of working through those loans, we did order and receive a lot of appraisals this quarter on those properties, and that resulted in a significant level of charge-offs this quarter. The reserve associated with the remainder of the loans is 6.7%. That was right at; it was between 10 and 11% last quarter.
Speaker Change: Our office portfolio on page 14, we had gotten through about 75% of the portfolio last quarter. We'd really focused on that because that's where we have quite a bit of large balance loans.
Speaker Change: that were also in a space that was experiencing pretty significant market stress in terms of occupancy levels. We're through 82% now.
Speaker Change: And the remainder of the portfolio is only about $500 million or so.
Speaker Change: The result of working through those loans, we did order and receive a lot of appraisals this quarter on those properties, and that's resulted in a significant level of charge offs this quarter.
Speaker Change: The reserve associated with the remainder of the loans is 6.7 percent. That was right at, it was between 10 and 11 percent last quarter. The difference there simply being the charge-offs that we recorded for the expected level of loan loss on those loans.
Craig E. Gifford: The difference is simply the charge-offs that we've recorded for the expected level of loan loss on those properties. On page 15, our non-office CRE portfolio, it's a pretty diversified set of loans. You can see that on the bottom left that we have made our way through about 48% of the loans. So the half that are remaining, they're very diversified.
Speaker Change: On page 15, our non-office CRE portfolio, it's a pretty diversified set of loans. You can see that on the bottom left that we have
Speaker Change: Made our way through about 48% of the loans. So the half that are remaining, they're very diversified. You can also see the average balance is only a million and a half. And the vast majority of those are not New York-related loans.
Craig E. Gifford: You can also see that the average balance is only a million and a half, and the vast majority of those are not New York related. On page 16, Joseph mentioned that our allowance for loan loss is up to 1.7% of the total portfolio. Our credit loss reserve is up to 1.78% of the total portfolio. That's up from about 1.5% with increases in the multifamily loans and, as I mentioned, a decrease in the allowance associated with the office as a result of the charge-offs that we reported in the past.
Speaker Change: On page 16, Joseph mentioned that our allowance for loan loss is up to 1.7% of total portfolio or credit loss.
Joseph M. Otting: Reserve is up to 1.78% of the total portfolio. That's up from about 1.5%.
Joseph M. Otting: With increases in the multifamily loans, and as I mentioned, a decrease in the allowance associated with office as a result of the charge offs that we reported in the quarter.
Craig E. Gifford: Page 17 gives you some perspective around asset quality. Joseph mentioned we worked hard to identify those problem loans, recognize them, and work towards resolution on the bottom left-hand side. Non-accrual loans will be just shy of $2 billion in the quarter. That's a fairly significant increase up from roughly $700 million in the first quarter. Our delinquency data had a spike in the second quarter, up to $1.2 billion.
Joseph M. Otting: Page 17 gives you some perspective around asset quality. Joseph mentioned we worked hard to
Joseph M. Otting: Identify those problem loans, recognize them.
Joseph M. Otting: and work towards resolution on the bottom left-hand side. Non-accrual loans will, in the quarter, just shy of $2 billion.
Joseph M. Otting: That's a fairly significant increase up from roughly $700 million in the first quarter. Our delinquency data had a spike in the second quarter.
Craig E. Gifford: But subsequent to that, roughly $700 million of that has come current, so the increase on the delinquencies is only up to about $500. Importantly, on the non-accrual loans, well over half, 61% of those loans, are actually current on their payments.
Joseph M. Otting: Up to $1.2 billion, but subsequent to that, roughly $700 million of that has come current. So the increase on the delinquencies is only up to about $500 million.
Joseph M. Otting: Importantly on the non-accrual loans.
Craig E. Gifford: In fact, from us on the CRE portfolio, 77% of the loans that are in non-accrual are actually current on their payments. We've just been pretty aggressive at recognizing the potential impact of market stresses on property values, which in many cases. Unknown Executive, Manan Gosalia, Joseph Otting, On page 18, a really good news story from a deposits perspective that we have been very successful from a customer deposit raising perspective, not only in our retail space where we have our premier products.
Joseph M. Otting: Well over half, 61% of those loans.
Joseph M. Otting: are actually current on their payments. In fact, from us on the CRE portfolio, 77% of the loans that are in non-accrual are actually current on their payments. We've just been pretty aggressive at recognizing the potential impact of the market stresses on the property values, which in many cases becomes the ultimate source of repayment.
Craig E. Gifford: Unknown Executive, Manan Gosalia, Joseph Otting, Unknown Executive, Manan Gosalia, Unknown, Page 19 shows our liquidity profile. You can see the deposit gathering success has significantly increased our already strong liquidity position. The warehouse sale will bring us $6 billion.
Speaker Change: On page 18, a really good news story from a deposits perspective that we have been very successful on a customer deposit raising perspective, not only in our retail space where we have our premier products,
Joseph M. Otting: But which had an increase of about 3.2 billion dollars for the quarter But particularly in the private bank where there had been some concerns associated with the departure of some of our private bankers We've actually seen deposit growth in that in that space
Joseph M. Otting: And in that business, roughly $500 million quarter over quarter as our bankers have gotten out, really connected with our customer base. And we're seeing return of dollars to the balance sheet, as well as new relationships.
Joseph M. Otting: Page 19 shows our liquidity profile. You can see the deposit gathering success.
Joseph M. Otting: has significantly increased our already strong liquidity position.
Craig E. Gifford: The mortgage sale will result in a net reduction of about $2 and 1 12 billion against that total of $40 billion of pro forma liquidity. We anticipate that we will begin to redeploy some of that incremental liquidity into the reduction of warehouse, sorry, into the reduction of wholesale borrowings over the next 30 to 45 years. Page 20 has our financial results for the quarter. You can see that our netting, our net loss to shareholders for the quarter, was $333 million.
Joseph M. Otting: The warehouse sale will bring us $6 billion.
Joseph M. Otting: The mortgage sale will result in net about a reduction of about two and a half billion dollars against that total of 40 billion dollars of pro forma liquidity. We will and we anticipate that we will begin to redeploy some of that incremental liquidity through into the reduction of warehouse
Joseph M. Otting: TV into the Reduction of Wholesale Borrowings over the next 30 to 45 days or so.
Joseph M. Otting: Page 20 has our financial results for the quarter. You can see that our net loss to shareholders for the quarter was $333 million. That's principally driven by the provision for loan losses of $390,000. Again, that's $350,000 of charge-offs and roughly a $40 million reserve bill.
Craig E. Gifford: That's principally driven by the provision for loan losses of $390. Again, that's $350 of charge-offs and roughly a $40 million dollar reserve. Our net interest margin at the end of the quarter was 1.98%. We did have margin pressure from the interest reversals associated with the non-accruals.
Joseph M. Otting: Our net interest margin of end of the quarter at 1.98%, we did have margin pressure from the interest reversals associated with the non-accruals. Pretty significant rise, obviously, as I mentioned on non-accruals. That had about a 7 to 8 basis point negative impact on margin.
Craig E. Gifford: Pretty significant rise, obviously, as I mentioned, on non-accruals. That had about a seven to eight basis point negative impact on margin, and on a go-forward basis, it had about a nine basis point impact on carrying those loans, and that impact is baked into the forecast numbers on the earlier pages over the next couple of years. Our balance sheet ended at $119 billion.
Joseph M. Otting: and on a go forward basis has about a nine basis point impact.
Joseph M. Otting: to carry those loans.
Joseph M. Otting: And that impact is baked into the forecast numbers on earlier pages over the next couple of years. Our balance sheet ended at $119 billion. That will go down in the third quarter as we sell the
Craig E. Gifford: That will go down in the third quarter as we close on the sale of the warehouse loans in the third quarter and then a bit of reduction associated with the mortgage transaction. And my expectation is that we would redeploy a good chunk of that cash into paying down debt on the balance. So, overall, a summary that shares the story of, from a numbers perspective, moving forward to simplifying the balance sheet, reducing operating risk, and positioning ourselves from a strong capital position as we go through a period of uncertainty and then move into the opportunity to redeploy that capital into a more diversified balance sheet and I'll turn it back over to you.
Joseph M. Otting: As we closed on the sale of the warehouse loans, closed on the sale of the warehouse loans in the third quarter, and then a bit of reduction associated with the mortgage.
Joseph M. Otting: Transaction, and my expectation is that we would redeploy a good chunk of that cash into paying down debt on the balance sheet.
Joseph M. Otting: So overall, a summary that shares the story of
Joseph M. Otting: From a numbers perspective of moving forward to simplifying the balance sheet, reducing operating risk, and positioning ourselves from a strong capital position as we go through a period of uncertainty, and then move into the opportunity to redeploy that capital into a more diversified balance sheet and a focus on
Joseph M. Otting: Commercial Lending in addition to the Commercial Real Estate Portfolio.
Joseph M. Otting: Okay. Thank you very much, Craig. I appreciate the great overview. On page 21, I just wanted to highlight a kind of our investment profile. You know, Proforma, New York Community Bank, curling trades at roughly 60 percent of fully converted tangible book value. This compares to 1.8 percent for Category 4 banks and 1.55 percent for banks with assets between 50 and 100 billion. Our Q2-24 tangible book value per share is $20.89, or $18.29 fully converted.
Joseph M. Otting: I'll turn it back over to you. Okay. Thank you very much, Craig. I appreciate the great overview.
Joseph M. Otting: On the page 21 just wanted to highlight kind of our investment profile.
Speaker Change: Proforma, New York Community Bank, Curling Trades at roughly 60% of fully converted tangible book value. This compares to 1.8% for Category 4 banks and 1.55% for banks and assets between $50 and $100 billion.
Speaker Change: Our Q2-24 tangible book value per share is $20.89, or $18.29 fully converted.
Joseph M. Otting: We feel, you know, as we successfully execute our strategic plan to transform the company into a focused, diversified, high-performing regional bank, that this valuation gap will close. We as we've talked about we have multiple levers to be able to kind of close this evaluation gap First of all, you know focusing the portfolio on relationship banking activities Is one of the key and with that we will diversify the loan portfolio from being concentrated into real estate We continue to increase the core relationship based deposits Craig showed on the deposit page You know, we do have a significant portion of our deposits in both interest-bearing and non-interest-bearing demand accounts which is critical and as we grow the C&I business that will also bring a lower cost of deposits and and Diversification to that.
Speaker Change: We feel, you know, as we successfully execute our strategic plan to transform the company into a focused, diversified, high-performing regional bank, that this valuation gap will close.
Speaker Change: We, as we've talked about, we have multiple levers to be able to kind of close this evaluation gap. First of all, you know, focusing the portfolio on relationship banking activities is one of the key, and with that we will diversify the loan portfolio from being concentrated into real estate.
Speaker Change: We continue to increase the core relationship-based deposits.
Speaker Change: Craig showed on the deposit page, you know, we do have a significant portion of our deposits in both interest-bearing and non-interest-bearing demand accounts, which is critical. And as we grow the C&I business, that will also bring a lower cost of deposits and diversification to that.
Joseph M. Otting: We also think that we can increase the level of fee income generated from fee based businesses Most of these products are in the company today may need some enhancements, but we're talking about, you know cash management interest rate derivatives foreign exchange 401k core banking products that we can offer and do a better job of being able to provide to our customers and Then lastly, we're very much focused on reducing and rationalize our cost structure as we've communicated We you know, we do have a plan to take out, you know, 300 million dollars Independent of the mortgage activities of cost structure and we're well on our way To achieving those cost reduction activities by the end of the year that will allow us to enter 2025 on a run rate that those cost reductions will already be in place, So, you know, overall, I think the progress this quarter was, was fantastic. And really, in a five month period of time, I think we've changed the culture, we've clearly changed the quality of the people that are in the organization, the focus on the credit risk within the portfolio.
Speaker Change: We also think that we can increase the level of fee income generated from fee-based businesses. Most of these products are in the company today, may need some enhancements.
Speaker Change: But we're talking about, you know, cash management, interest rate derivatives, foreign exchange, 401k, core banking products that we can offer and do a better job of being able to provide to our customers.
Speaker Change: And then lastly, we're very much focused on reducing and rationalize our cost structure.
Speaker Change: As we've communicated, we do have a plan to take out $300 million.
Speaker Change: Independent of the mortgage activities of cost structure and we're well on our way to achieving those cost reduction activities by the end of the year that will allow us to enter 2025 on a run rate that those cost reductions will already be in place.
Joseph M. Otting: And as I commented, that forward looking of the portfolio, we think, gives us really good insight to any risk that's coming down the pathway, such as interest rate movements or credit risk associated with fixed charge coverage. We also have gone through our annual review of the portfolio in commercial real estate where we look at every individual loan from the standpoint of their NOI and how that works in relationship to their debt service coverage today and with any potential future increases in interest rates. So a lot of really good progress on behalf of the team here.
Speaker Change: So, you know, overall, I think the progress this quarter was, was fantastic and really in a five month period of time.
Speaker Change: I think we've changed the culture, we've clearly changed the quality of the people that are in the organization.
Speaker Change: The focus on the credit risk within the portfolio, and as I commented, that forward looking of the portfolio, we think, gives us really good insight to any risk that's coming down the pathway with interest rate movement or credit risk associated with fixed charge coverage.
Speaker Change: We also have gone through our annual review of the portfolio.
Speaker Change: In the commercial real estate, where we look at every individual loan from the standpoint of their NOI, and how does that work in relationship to their debt service coverage today, and with any potential future increases in interest rates. So, a lot of really good progress on behalf of the team here. Great momentum, I think, amongst people in the bank. They can see the finish line that this company can be a really successful regional bank.
Joseph M. Otting: Great momentum, I think, amongst people in the bank; they can see the finish line and that this company can be a really successful regional bank. And there's a lot of good energy and excitement, not only from ourselves and our employees, but also as we're out talking to our customers in the marketplace, people are sharing that energy about, you know, Flagstar, New York Community Bank, kind of rebounding and being the bank that we can support our customers.
Speaker Change: And there's a lot of good energy and excitement, not only from ourselves and our employees, but also as we're out talking to our customers in the marketplace. People are sharing that energy about, you know, Flagstar, New York Community Bank kind of rebounding back and being the bank that we can support our customers.
Joseph M. Otting: So with that, I'll turn it over to the operator, and we can open up for the Q&A period of the call. At this time, I'd like to remind everyone that in order to ask a question, press the star followed by the number one on your telephone keypad.
Speaker Change: So with that, I'll turn it over to the operator and we can open up for the Q&A period of the call.
Speaker Change: At this time, I'd like to remind everyone that in order to ask a question, press star followed by the number one on your telephone keypad. We do ask that you please limit your initial question to one and return to the queue for any additional questions that you might have. Our first question will come from the line of Ebrahim Poonawala with Think of America. Please go ahead.
Regina: We do ask that you please limit your initial question to one and return to the queue for any additional questions that you might have. Our first question will come from the line of Ebrahim Poonawala with Think of America. Please go ahead. Good morning.
Ebrahim Huseini Poonawala: I guess, maybe. Hi, just to follow up on the commercial real estate book first. 80% of reviews done on Office Multifamily. A few questions there. One, you've given sort of an outlook for provisioning and where the reserves are, but give us a sense of the lost content in this book as you've gone through it and where you are seeing those charge-offs come through on the CRE book, number one. And secondly, when you talked about loans repricing from 3% to 8% plus, is that, I'm assuming, triggering some negotiation with the customer to sort of pay down balances to kind of get LTVs, etc. in place?
Ebrahim Huseini Poonawala: Good morning.
Speaker Change: Just to follow up on the commercial real estate book first,
Ebrahim Huseini Poonawala: 80% of reviews done on Office Multifamily, a few questions there, one...
Speaker Change: [inaudible]
Ebrahim Huseini Poonawala: Is that, I'm assuming, triggering some negotiation with the customer to sort of paying down balances to kind of get LTVs, et cetera, in place? So if you could talk to both those aspects.
Joseph M. Otting: So if you could talk about both those aspects, yeah, so I'll start on the last question. So for the most part, when loans are repricing, we are holding customers to the rate options that are in the loan agreements. If they have strong deposit relationships or bring other business to us, then we'll consider other options. But in general, we're holding them to the terms in the loan agreements, which is pushing them to look for other opportunities. And there are, for many of them, opportunities in the market that are cheaper priced than the loan agreements.
Speaker Change: Yeah, so I'll start on the last question. So for the most part, when loans are repricing, we are holding the customers to the rate options that are in the loan agreements.
Speaker Change: If they have strong deposit relationships or bring other business to us, then we'll consider other options. But in general, we're holding them to the terms in the loan agreements.
Speaker Change: which is pushing them to look to other opportunities and there are, for many of them, there are opportunities in the market that are cheaper priced than the loan agreements.
Craig E. Gifford: And where those happen, that's where we're seeing the payoffs coming from. So for the most part, we're not seeking paydowns. However, in certain cases, we'll consider that as a part of a structuring arrangement, particularly where it's a borrower that we want to have a continued relationship with. From a charge-offs perspective, we had charge-offs principally associated with the office portfolio in the quarter.
Speaker Change: And where those happen, that's where we're seeing the payoffs coming from. So for the most part, we're not seeking paydowns, although in certain cases, you know, we'll consider that as a part of a structuring arrangement, particularly where it's a borrower that we want to have a continuing relationship with.
Speaker Change: From a charge-offs perspective, you know, we had charge-offs principally associated with the office portfolio.
Craig E. Gifford: Some multifamily charge-offs, as you mentioned, that, as you repeated, we have made our way through quite a bit of the multifamily portfolio in detail, at the 80% level. The remainder of the loans generally are smaller balances. We generally, when we look at them, see lower loss levels.
Speaker Change: In the quarter, some multifamily charge-offs, as you mentioned, that, as you repeated, we have made our way through quite a bit of the multifamily portfolio in detail, 80% level. The remainder of the loans are generally a smaller balance. We generally, when we look at them, see lower loss levels.
Craig E. Gifford: But as we've received updated borrower financial information, we now have a much more refreshed view in terms of the information about the loans and where the loans are close to a debt service coverage on the repriced coupon level for those loans that are in the next 18 months. We're taking a really hard look at them. We're generally downgrading those to substandard, and we're getting appraisals on those, and that has led to some charge-offs and has the potential to lead to more over the next couple of quarters as we get another slug of. On those payoffs, if you can talk to the appetite among the GSEs, one of the other banks talked about how they've seen a pickup in being able to move these things or Have you seen that?
Speaker Change: But as we've received updates and borrowed financial information, we now have a much more refreshed...
Speaker Change: view in terms of the information about the loans.
Speaker Change: and where the loans are close.
Speaker Change: from a debt service coverage on the repriced coupon level for those loans that are in the next 18 months.
Speaker Change: We're taking a really hard look at those, we're generally downgrading those to substandard and we're getting appraisals on those and that has led to some charge-offs and has the potential to lead to more over the next couple of quarters as we get another slug of appraisals in.
Speaker Change: and all those people.
Speaker Change: If you can talk to the appetite among the GSEs, one of the other banks talked about they've seen a pickup in being able to move these things or getting reified with the agencies.
Craig E. Gifford: And given what's happened to rates even in the last few days, do you think that could trigger even more stuff refying out of the bank to the agencies? Yeah, we do. And that's what we've seen $700 million of payoffs and multifamily in the second quarter. We see that continuing, and that's a good thing. It helps us move towards our overall goal of reducing the concentration in commercial real estate, and we do have opportunities to redeploy that liquidity, including paying down debt. So we see that continuing over the next several quarters. Got it.
Speaker Change: have you seen that and given what's happened to rates even in the last few days do you think that could trigger even more stuff refining out of the bank to the agencies? Yeah we do and that's what we've seen 700 million dollars of payoffs in multifamily in the
Speaker Change: In the second quarter, we see that continuing, and that's a good thing, it helps us move towards our overall goal of reducing the concentration in commercial real estate, and we do have opportunities to redeploy that liquidity, including paying down debt. So we see that continuing over the next several quarters.
Joseph M. Otting: And if I may sneak in one more for Joseph, you gave us sort of the medium-term outlook for the company, given just all the moving pieces, just your own numbers: fourth quarter, 26 earnings went from $2.10 last quarter to $1.65 this quarter. So clearly, again, a lot of stuff going on. As we look at the announcements that you made on the warehouse and the servicing, what are we doing in terms of just strategically realigning the balance sheet and the company? Or could we see more of such actions taken over the coming months and quarters?
Speaker Change: Got it. And if I may sneak in one more for Joseph.
Speaker Change: You gave us sort of the medium-term outlook of the company, given just all the moving pieces.
Speaker Change: This your own numbers fourth quarter 26 earnings went from $2.10 since last quarter to $1.65 this quarter So clearly again a lot of stuff going on
Speaker Change: As we look at the announcements that you made on the warehouse and the servicing, are we done in terms of just strategically realigning the balance sheet and the company, or could we see more of such actions taken over the coming months and quarters?
Joseph M. Otting: Thank you. So some of that movement and reduction in those fourth-quarter 2026 numbers are associated with the sale of the mortgage warehouse and the mortgage servicing and the MSRs. So that pushed it out because if you think about it, as those are going away, we're adding CNI, it's kind of like as one is going down, the other is going up, and they'll cross over sometime in early 2026. So that's why we pushed it out by two quarters.
Speaker Change: Thank you. So some of that movement and reduction in those fourth quarter 2026 numbers are associated with the sale of the mortgage warehouse and the mortgage servicing and the MSRs.
Speaker Change: So that pushed it out because if you think about it, as those are going away, we're adding C&I. It's kind of like as one is going down, the other is going up, and they'll cross over sometime in early 2026.
Joseph M. Otting: It's really important that, you know, we reduce those two. As I commented, you know, we do think there is an additional two to $5 billion of non-core activities that we will be evaluating that we would look to execute on between now and the end of the year. The mortgage servicing business out in the 26th time frame was about $475 million worth of fee income and about $410 million of expense, and that's what we've removed from the forecast out in that period and then, over 26 and 27, redeployed the associated capital into lending.
Speaker Change: So that's why we pushed it out two quarters. It's really affiliated that, you know, we reduced those two.
Speaker Change: As I commented, you know, we do think there is an additional two to five billion dollars of non-core activities that we will be evaluating that we would look to execute on between now and the end of the year.
Speaker Change: So Abraham, to put some numbers to it, the mortgage servicing business out in the 26th time frame was about $475 million worth of fee income and about $410 million of expense.
Speaker Change: and that's what we've removed from the forecast out in that period and then over 26 and 27 redeployed the associated capital into lending.
Joseph M. Otting: The warehouse business, we removed that $6 billion worth of loans, and then our expectation is that we would essentially swap that for C&I loans beginning in 2025 and building out through Lake 26. Very good. Thank you. Our next question comes from the line of Casey Haire with Jeffries. Please go ahead.
Speaker Change: The warehouse business is, we removed that $6 billion worth of loans and then our expectation is that we would essentially swap that for C&I loans beginning in 2025 and building out through late 26 and into 27.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Casey Haire with Jeffries. Please go ahead.
Casey Haire: Great, thanks. Good morning, guys. So just wanted to follow up on the credit front. So the ACL, if you could put some numbers as to, we see your provision guide, but where do you see the ACL ending up following the review of this $11 billion remit? Yeah, so the $11 billion that's left, I mean, you start to get into a lot of loan counts and some smaller loans. And so I'm not, I wouldn't say that we're going to finish up $11 billion. We'll get into what I would say is a more normal cycle of continuing updates around the analysis of the credit portfolio.
Casey Haire: Great. Thanks. Good morning, guys. So just wanted to follow up on the credit.
Casey Haire: So the ACL, if you could put some numbers as to, we see your provision guide, but where do you see the ACL ending up following the review of this $11 billion remaining?
Speaker Change: Yeah, so the $11 billion that's left, I mean, you start to get into a lot of loan count and some smaller loans.
Speaker Change: And so I'm not I wouldn't say that we're going to finish up 11 billion We'll we'll get into what I would say is a more normal cycle of continuing
Casey Haire: But I think we'll see increased charge-offs; I think we'll see continued charge-offs, though at a lower level in the third and the fourth quarter, which will likely decrease overall our ACO coverage or ACO reserve percentage, just as we take reserve dollars and they turn into charge-off dollars. But I hate to predict exactly the timing of that, of the Charge Ops, and the resulting impact on...
Speaker Change: Updates around the analysis of the credit portfolio.
Speaker Change: But I think we'll see increased charge-offs. I think we'll see continued charge-offs, though at a lower level in the third and the fourth quarter, which will likely decrease overall our ACL coverage or ACL reserve percentage just as we take reserve dollars and that turn into charge-off dollars. But I hate to predict exactly the timing of the...
Craig E. Gifford: Provision expense, if you like, is in that $900 billion. And Casey, one thing I think it's important is that now that we're through, you know, 75% of the portfolio and 80% of the multifamily and all, there isn't like a big wing of loans left that we haven't been through. So when we kind of look forward, you really conclude, you know, we should be through 95% of the portfolio by the end of this quarter.
Speaker Change: of the charge-offs and the resulting impact on the allowance. Provision expense, we feel like, is in that $900-billion range for the year.
Speaker Change: And Casey, one thing I think is important is like, you know, now that we're through, you know, 75% of the portfolio and 80% of the multifamily and all, there isn't like a big wing of loans left that we haven't been through.
Speaker Change: So when we kind of look forward, you really conclude, you know, we should be through 95% of the portfolio by the end of this quarter. And it would take further deterioration in the underlying assets.
Craig E. Gifford: And it would take further deterioration in the underlying assets of the loans to see further deterioration. Because, just to remind you, we've looked forward 18 months, and we've taken into account any significant rate changes, which, you know, they're fairly material when you go from 3.5% to 7.5%. That 4% makes a big difference against the NOI.
Speaker Change: of the Lounge.
Speaker Change: to see further deterioration. Because in most instances, just to remind you, we've looked forward 18 months. We've taken into account any significant rate changes, which
Speaker Change: You know, they're fairly material when you go from 3.5% to 7.5%, that 4% makes a big difference against the NOI.
Speaker Change: That immediately causes you to look at perhaps your future.
Joseph M. Otting: That immediately causes you to look at that perhaps your future debt service coverage would be at or below one, which then causes us to get an appraisal. So, as Craig said, really, over 70% of our commercial real estate portfolio continues to perform and pay as agreed, though we're recognizing the future risk associated with those interest payments. But the other point I would make is this shouldn't, you know, should not go on unless there's deterioration in the underlying assets because we'll be out through, you know, almost all of the portfolio by the end of the year. Great, thank you.
Speaker Change: Debt service coverage would be at or below one. That then causes us to get an appraisal. So as Craig said, really over 70% of our commercial real estate portfolio continues to perform and pay as agreed, though we're recognizing the future risk associated with those interest payments.
Speaker Change: But the other point I would make is this isn't, you know, should not go on unless there's deterioration in the underlying assets because we'll be out through, you know, almost all of the portfolio by the end of the year. Yeah, in particular with respect to the non-accruals.
Speaker Change: anything that's a non-accrual has already gone through getting the appraisal and charged down to the appraisal value minus the selling cost factor. So the non-accruals reflect a pretty focused.
Speaker Change: perspective around the current condition current value of the collateral not to say that that market conditions couldn't worsen and have further degradation of the collateral but that would be the only case that we would see a need for significant increase in reserves on the non accruals.
Casey Haire: And just one more on the expense front. The forecast indicates a decent amount of about half a billion dollars of expense leverage. I know you guys have some consolidations, but can you just give us some color as to how that progresses? And any any, you know, what are the key drivers?
Speaker Change: Great, thank you. And just one more on the expense front. The forecast indicates a decent amount of
Speaker Change: About half a billion dollars of expense leverage. I know you guys have some consolidations But can you just give us some color as to how that progresses and any any you know, what are the key drivers? And and where you exit the year looks like about
Speaker Change: 425 million, if I look at 26, so just some color there on what's a decent amount of expense leverage.
Craig E. Gifford: And where you end the year, it looks like about 425 million if I look at 26. Just some color there on what's a decent amount of expenses. Yeah, so if you actually think about it all the way through the forecast period that we've presented, so about a $750 million reduction expense, I mentioned about 400 of that as a result of the mortgage business exit, a very, very high efficiency ratio business. So that overall, that exit will reduce our overall efficiency ratio.
Speaker Change: Yeah, so if you actually if you think about it all the way through the forecast period that we've presented, so about a $750 million reduction expense, I mentioned about 400 of that as a result of the mortgage business exit, very, very high efficiency ratio business.
Speaker Change: So that overall, that exit will reduce our overall efficiency ratio.
Craig E. Gifford: Unknown Executive, Manan Gosalia, Joseph Otting, We'll call it a billion nine or so. So, 15 to 20% cost reduction expectation over the course of. Over the next 18 months or so, we would expect it to be transacted or being executed by the end of the year. So that we go into 2025 on a much leaner basis with a lower cost.
Speaker Change: expectations so that leaves about 300 350 million dollars of cost reductions on billion call it a billion nine or so so 15 to 20 percent cost reduction expectation over the course of over the next 18 months or so with the
Speaker Change: We would expect being transacted or being executed by the end of the year so that we go into 2025 on a much leaner basis with a lower cost infrastructure. I do expect that we'll see a bit of continuing cost reductions in 2025, and then particularly as we get out into 2026.
Joseph M. Otting: I do expect that we'll see a bit of continuing cost reductions in 2025, and then, particularly as we get out into 2026, the expectation that we'll be able to lower some of our regulatory activity set and regulatory costs in 2026. And that's what's driving me. And Casey, the one thing that I would add to Craig's comments was, you know, in addition to those cost takeouts, there is also cost build, both in kind of our risk framework of the organization, in addition to that, our C&I growth. And so that is kind of a net number. So there are some moving elements to that number.
Speaker Change: The expectation that we'll be able to lower some of our regulatory activity set and regulatory costs into 2026 and into 2027, and that's what's driving that subsequent reduction of expenses out into the late period.
Speaker Change: And Casey, the one thing that I would add to Craig's comments was, you know, in addition to those cost takeouts,
Casey Haire: There also is cost bill, both in kind of our risk
Casey Haire: Framework of the organization. In addition to that, that our CNI growth and so that is kind of a net number. So there is some moving elements to that number.
Casey Haire: But I would also say it's, you know, Craig and I came from U.S. Bank, highly disciplined on cost structures, you know, very focused on the efficiency ratio, looking how we, you know, have done things.
Casey Haire: But I would also say it's, you know, Craig and I came from US Bank, highly disciplined on cost structures, very focused on the efficiency ratio, looking at how we, you know, have done things. These are, this is still three organizations that haven't really, you know, totally consolidated; they've combined, but not consolidated. And, you know, we're going to be highly focused not only on the cost structure but the way we do things and processes within the organization.
Speaker Change: These are, this is still three organizations that haven't really, you know, totally consolidated. They've combined, but not consolidated, and, you know, we're going to be highly focused not only, you know, on the cost structure, but the way we do things and processes within the organization.
Speaker Change: And I would just say this is a strong discipline of ours, that we are focused.
Speaker Change: Each business unit or shared services part of the organization knows the number that we expect them to get to. We've been working on this. We have, you know, every other week meetings on the cost takeout.
Casey Haire: And I would just say this is a strong discipline of ours that we are focused on; each business unit, or shared services, part of the organization knows the numbers that we expect them to get to. And we've been working on this; we have, you know, every other week meetings on the cost takeout. So, as we've talked about, we really believe that we will hit the run rate by the fourth quarter of this year and be able to enter into 2025 at the levels that we need to be. Our next question will come from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.
Speaker Change: So, as we've talked about, we really believe that we will hit the run rate by the fourth quarter of this year and be able to enter into 2025 at the levels that we need to be.
Speaker Change: and many more.
Speaker Change: Our next question will come from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.
Mark Thomas Fitzgibbon: Good morning and thanks for all the detail. Joseph, as you understand it, if Mr. Mnuchin decided to return to the Treasury or another agency within a new administration, would he be required to sell his holdings in New York Community? You know, I think that's a question better directed to, you know, directly to Mr. Mnuchin. I don't know all the intricacies of, you know, his agreement or portfolios. Stephen did publicly comment on that, saying he indicated he did not have to do that.
Mark Thomas Fitzgibbon: Good morning and thanks for all the detail. Joseph, I was wondering, as you understand it, if Mr. Mnuchin decided to return to the Treasury or another agency within a new administration, would he be required to sell his holdings in New York Community?
Speaker Change: I you know I think that's a question better reflected for you know directly to Mr. Mnuchin. I don't know all the intricacies of you know his
Speaker Change: Stephen did publicly comment on that, that he indicated he did not.
Joseph M. Otting: But I think I would leave that up to, you know, Stephen and Liberty to be able to make that comment. I would say, you know, Stephen has been a remarkable lead director in the company. We value his activities and input. I couldn't ask for a better, you know, partner, so to speak, to help us kind of navigate, you know, all the activities. And he answered the bell last time when he was asked to come to Washington, D.C., and I can appreciate, you know, that comes with great sacrifices because, you know, I joined that train also to go to Washington, D.C., and quite frankly, he was, in my opinion, one of the best treasury secretaries that we've ever had in the history of our nation.
Speaker Change: Have to do that, but I think I would leave that up to, you know, Stephen and Liberty to be able to make that comment.
Speaker Change: I would say, you know,
Speaker Change: Stephen has been a remarkable lead director in the company.
Speaker Change: We value his activities and input.
Speaker Change: I couldn't ask for a better partner, so to speak, to help us navigate all the activities. And he answered the bell last time when he was asked to come to Washington, D.C., and I can appreciate that comes with great sacrifices, because I joined that train also to go to Washington, D.C.
Speaker Change: Quite frankly, he was, in my opinion, one of the best Treasury Secretaries that we've ever had in the history of our nation.
Mark Thomas Fitzgibbon: Okay. And then just one follow-up. Could you share with us the number of private client teams that you have today? I think it was 100 last quarter.
Speaker Change: Okay, and then just one follow-up. Could you share with us the number of private client teams that you have today? I think it was a hundred last quarter, and I know you've had a lot of senior hires recently, but have you hired many commercial lenders or relationship people to help drive, you know, sort of the business mix change?
Joseph M. Otting: And I know you've had a lot of senior hires recently, but have you hired any commercial lenders or relationship people to help drive, you know, sort of the business mix change? Thank you. Yeah, so I'll speak to the private client. So the attrition of the private client banker group, we've had a couple of teams and bankers here and there, but the bulk of the departure of those bankers was late, right at the end of the first quarter, early second quarter, and it's been quite stable since then, and remarkably, so has the deposit base.
Joseph M. Otting: We've lost less than 10% of the deposits previously associated with those bankers and are now seeing deposit growth on that front. So overall, private client has been really, really solid. That team, with the hiring of Richard Fetto, has had a place to rally around and I think has a strong...
Speaker Change: I'll speak to the private client. So the nutrition of the private client banker group, we've had a couple of teams and bankers here and there, but the bulk of the
Speaker Change: Departure of those bankers was in the late, right at the end of the first quarter, early second quarter, and it's been quite stable since then, and remarkably so has the deposit base. We've lost less than 10% of the deposits previously associated with those bankers, and are now seeing deposit growth on that front. So overall, private client has been really, really solid. That team, with the hiring of Richard Fetto, has had a place to rally around, and I think has a strong...
Joseph M. Otting: Unknown to you forward, Joseph can weigh in obviously from a people perspective, but Rich has already made a couple of key hires and has several more on the way, so we're definitely gaining traction in terms of bringing in talent in the C&I space, led by Rich's strong leadership and industry knowledge. Yeah, I would just add, you know, we did add Adam Feicht.
Speaker Change: view forward.
Speaker Change: Joseph can can weigh in obviously from a people perspective but Rich has already made a couple of key hires and has several more on the way so we're definitely gaining traction in terms of bringing in talent in the C&I space led by Rich's strong leadership and industry reputation.
Joseph M. Otting: Adam was a longtime, highly recognized banker that worked for Union MUFG out on the West Coast. He's going to head up our specialized industries and capital markets group. Rita Daly is also joining our company. She's a longtime banker. I worked with Rita many years ago at Union Bank.
Speaker Change: Yeah, I would just add, you know, we did add Adam Feith. Adam was a longtime, highly recognized banker that worked for Union MUFG out on the West Coast. He's going to head up our Specialized Industries and Capital Markets group.
Speaker Change: Rita Daley also is joining our company. She's a longtime banker. I worked with Rita many years ago at Union Bank. She's coming in to run our
Joseph M. Otting: She's coming in to run our deposit-focused industries and our treasury management. And then we're very close to hiring somebody in the Northeast who would run our national commercial banking operation. And so, in addition to really, really strong leadership, we began to fill in. If you recall, we do have a number of existing CNI businesses that operate in the company today. And we began to add people to those businesses together.
Speaker Change: Deposit-Focused Industries and our Treasury Management. And then we're very close to hiring somebody in the Northeast here who would run our national commercial banking operation. And so in addition to like really, really strong leadership, we began to fill in. If you recall, we do have a number of existing C&I businesses that operate in the company today. And we began to like add people into those businesses together.
Speaker Change: So we can, you know, already those engines are kind of up and running those, you know, include things like Flagstar Financial, some of the specialized industries. And in some of those businesses, we began also to add talent in those to grow those verticals as well. So, so I would I would think when we
Joseph M. Otting: So we can, you know, already those engines are kind of up and running. They include things like Flagstar Financials, some of the specialized industries. And in some of those businesses, we have begun to add talent in those to grow those verticals as well. So, I would think when we meet 90 days from now, we should have a pretty long list of people that have joined us.
Speaker Change: You know, meet 90 days from now, we should have a pretty long list of people that have joined us.
Speaker Change: You know, just to remind you, I've spent virtually my entire career, you know, on commercial banking and building franchises.
Speaker Change: Both at U.S. Bank and then when I went to One West Bank, we started from scratch in a very quick order.
Joseph M. Otting: You know, just remind you, I've spent virtually my entire career in commercial banking and building franchises, both at US Bank. And then when I went to One West Bank, we started from scratch in a very quick order, accumulated some really talented people into the organization, and grew that business to be roughly a third of the business in a short period of time and substantially increased the franchise value at One West Bank before the sale to CIT. Thank you. Our next question comes from the line of Manan Gosalia, with Morgan Stanley. Please go ahead.
Speaker Change: Accumulated some really talented people into the organization and grew that business to be roughly, you know, a third of the business in a short period of time and substantially increased the franchise value at One West Bank before the sale to CIT.
Manan Gosalia: Were there any CRE loans that were sold, or is most of the reduction coming through paydowns? If there were no sales this quarter, is there any potential to sell as rates come down? Are you seeing a bid for any parts of that portfolio? Yeah, yeah.
Speaker Change: Thank you.
Speaker Change: Welcome.
Speaker Change: Our next question comes from the line of Manan Gosalia with Morgan Stanley . Please go ahead.
Speaker Change: Douglas Goldstein, CFP®, Financial Planner & Investment Advisor On this quarter, were there any CRE loans that were sold or is most of it coming through, is most of the reduction coming through paydowns? And if there were no sales this quarter, is there any potential to do sales as rates come down? Are you seeing a bid for any parts of that portfolio?
Joseph M. Otting: First of all, we did not really conduct any significant sales during the quarter. However, it is our intention between now and the end of the year that we will look to reduce the non-accrual loans through sales. We've, you know, been looking at and studying a couple pools. We also have some large individual loans. We're really excited, you know, that we have Bill Fitzgerald who has come in and joined our company to head up the workout group. He's highly experienced in this space.
Speaker Change: Yeah, yeah, first of all, we did not really conduct any significant sales during the quarter. It is our intention between now and the end of the year that we would look to reduce the non-accrual loans.
Speaker Change: through sales we've you know we've been looking at and studying a couple pools
Mark Thomas Fitzgibbon: We also have some large individual loans. We're really excited that we had Bill Fitzgerald who has come in and joined our company to head up the workout group. He's highly experienced in this space.
Joseph M. Otting: And we're meeting weekly now, really going over how we reduce those non-accruals through sales to the portfolio. You know, we feel these are marked appropriately. And, you know, while you never quite know exactly where the market will be, we do think we have a real opportunity to move a number of these assets off the balance sheet between now and the end of. Got it. But there's no there's no willingness to sell maybe parts of the performing loan portfolio, maybe, you know, shrink the asset size below 100 billion.
Speaker Change: And we're meeting weekly now, really going over how do we reduce those non-accruals through sales to the portfolio.
Speaker Change: We feel these are marked appropriately, and while you never quite know exactly where the market will be, we do think we have a real opportunity to move a number of these assets off the balance sheet between now and the end of the year.
Speaker Change: Got it, but there's no willingness to sell maybe parts of the performing loan portfolio, maybe shrink the asset size below $100 billion?
Joseph M. Otting: I mean, I think we would look at everything, you know, as we kind of look out. This quarter alone, we really have, between maturities and price resets, roughly $1,650,000,000 that's in the CRE portfolio. And so when you look at that, I mean, we're estimating roughly 40% of that portfolio should pay off this quarter. We've either been notified by the borrowers, or they gave us indications.
Speaker Change: I mean, I think we would look at everything, you know, as we kind of look out, you know, this quarter alone, we really have between maturities and price resets.
Speaker Change: Roughly $1,650,000,000 that's in the
Speaker Change: The CRE portfolio. And so when you when you look at that, I mean, we're estimating roughly 40% of that portfolio should pay off this quarter. We've been either notified by the borrowers or they gave us indication.
Manan Gosalia: So we are seeing, you know, just in that alone, $500 or $600,000,000 that will go away through payoffs. But you know, for the most part, what we're really going to be focused on is how do we reduce those substandard and nonaccrual loans between now and the end of the year. Great.
Speaker Change: So we are seeing, you know, just in that alone, you know, that's five or six hundred million dollars that will go away through payoffs. But you know, for the most part, what we're really going to be focused on is how do we reduce those substandard and nonaccrual loans between now and the end of the year.
Manan Gosalia: And maybe a more medium or longer-term question, you know, as I look at the forecast update on slide 9, you do have the net interest margins rising pretty significantly in 2026, although it's relatively flat in 2024 and 2025. Can you speak to what drives that uptick? You know, is it just leaning into CNI, or is it maturities on the CRE side? If you could just speak to that, thanks. I'd say about three-fourths of the margin lift is coming from the repricing of the loans.
Speaker Change: Great. And maybe a more medium or longer term question, you know, as I look at the forecast update on slide nine, you do have the net interest margins rising.
Speaker Change: Pretty significantly in 2026, although it's relatively flat over 24 and 25. Can you speak to what drives that uptick? You know, is it just leading into CNI, is it maturities on the CRE side, if you could just speak to that, thanks.
Manan Gosalia: Again, $5 billion in the, and just take multifamily, which is three-fourths of the book. You know, that reprices $5 billion a year for the next two years, $7 to $8 billion out in 2027. So as you think about the impact of those repricing up from three, three and a half percent rates to seven and a half, eight percent rates, that has a pretty significant lift on the margin. The other is redeployment into new lending at higher, not higher spreads, actually similar to lower spreads in the CNI space, but at more current market rates rather than the existing. Great, thank you. Our next question comes from the line of Bernard von Gizycki with Deutsche Bank. Please go ahead. Hey guys. Good morning.
Speaker Change: I'd say about three-fourths of the margin lift is coming from repricing of the loans.
Speaker Change: Again, $5 billion in the, and just to take multifamily, which is.
Speaker Change: Three-fourths of the book.
Speaker Change: You know, that reprices $5 billion a year in the next two years, $7 to $8 billion out in 2027. So as you think about the impact of those repricing up from three, three and a half percent rates to seven and a half, eight percent rates.
Speaker Change: That has a pretty significant lift.
Speaker Change: on margin. The other is redeployment into new lending at higher, at not higher spreads, actually similar to lower spreads in the CNI space, but at more current market rates rather than the existing term carry rates.
Speaker Change: Great, thank you.
Speaker Change #107: Our next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please go ahead.
Bernard Von Gizycki: So just on the non-strategic asset sales, you identified an additional $2 to $5 billion. Just questions, you know; was that after reviewing all of the loan portfolios? You know, how do you balance the non-relationship, non-strategic assets with the ability to exit the asset at par, close to par? And are these potential sales excluded in this current forecast? Yeah, well, first of all, future sales are not between two to $5 billion.
Speaker Change: Hey guys, good morning. So just on the non-strategic asset sales, you identified an additional $2 to $5 billion. Just questions, you know, was that after reviewing all of the loan portfolios?
Speaker Change: How do you balance the non-relationship, non-strategic assets with the ability to exit the asset at par, close to par? And are these potential sales excluded in this current forecast?
Bernard Von Gizycki: However, just for a point of clarification, the two sales, both the mortgage warehouse and the mortgage servicing and MSR business, are out of the forecast. So that that would be considered net at this point.
Speaker Change: First of all, the future sales are not $2 to $5 billion. However, just for point of clarification, the two sales, both the mortgage warehouse and the mortgage servicing and MSR business, is out of the forecast. So that would be considered net at this point.
Speaker Change: So, in what we've, you know, the whole common denominator that we've been looking at in the company, what is core and non-core, is where we have a relationship with the borrower and we have full relationships with the company, meaning we have depository and other activities with the organization.
Joseph M. Otting: So in what we've, you know, the whole common denominator that we've been looking at in the company, what is core and non core, is where we have a relationship with the borrower, and we have full relationships with the company, meaning we have depository and other activities with the organization. So as we look at those businesses where, you know, there's limited interactions with the customer or potential with the customer, then those are being viewed as non core and or where the relationship is predominantly a lending relationship and does not offer up any other opportunities to to grow and or enhance our overall yield by cross, Think about it this way, there's probably $10 to $15 billion of loans in our books that we could pretty easily exit, pretty easily and quickly exit at par if we needed to just from a pure capital perspective.
Speaker Change: So as we look at those businesses where, you know, there's limited interactions with the customer or potential with the customer, then those are being viewed as non-core and or where the relationship is predominantly a lending relationship and does not offer up any other opportunities to grow and or enhance our overall yield by cross-selling.
Speaker Change: Think about it this way, there's probably 10 to 15 billion dollars of loans in our books that we could pretty easily exit, pretty easily and quickly exit at par if we needed to just from a pure capital perspective.
Joseph M. Otting: And so that has a bit of a backstop in terms of capital buffer opportunity, but it would have an impact from an earnings perspective. And more importantly, as Joseph mentioned, some of those are in businesses that are client-based, and we'd want to retain. So as we work through that and take out the businesses that are strategic, the businesses that are more important to us from a growth perspective, that's where you get back to that $2 to $3 billion potential that we might look at. Okay, great.
Joseph M. Otting: And so that has a bit of a backstop in terms of capital buffer opportunity, but it would have an impact from an earnings perspective, and more importantly, as Joseph mentioned,
Joseph M. Otting: Some of those are in businesses that are client-based and we want to retain. So as we work through that and take out from that the businesses that are strategic, the businesses that are more important to us from a growth perspective, that's where you get back to that two to three billion potential that we might look at over the next couple of quarters.
Bernard Von Gizycki: And then just to follow up, Craig, on the borrower's updated financial statements, I think you mentioned you received 80% of the portfolio, and I believe the NOIs were, you know, higher than expected year-over-year. Anything you've gotten from that data, because obviously, the provisioning, the credit outlook has changed, you know, dramatically, and, you know, it's interesting that, at least from the NOI comment, it But was there anything else in those financials that kind of confirmed that the borrower's financial situation has improved or has deteriorated? Anything you can comment on that?
Speaker Change: Okay, great. And then just to follow up, Craig, on the...
Speaker Change: The borrower's updated financial statements. I think you mentioned
Speaker Change: You receive 80% of the portfolio.
Speaker Change: And I believe the NOIs were, it seemed, you know, higher than expected year over year.
Speaker Change: Just anything you've gotten from that data, because obviously the provisioning, the credit outlook.
Speaker Change: has changed dramatically, and it's interesting that, at least from the NOI comment, it's better. But was there anything else in those financials that either kind of confirmed that the bar's financial situation has improved or has deteriorated? Anything you can comment on that?
Craig E. Gifford: I'd say what it's confirmed is that inflation was pretty impactful to particularly the regulated portfolio and while it's fairly stabilized at this point, it's certainly at a much lower level of return for those borrowers, but from a lender perspective, we're to a point where it seems to have come in at a level that a lot of the loans will be able to get through or with a little bit of borrower support will be able to get through and there will be some that will fail and that's where we focused really hard at identifying that, measuring that and classifying that. Again, about two-thirds of the NOIs came in higher than the previous year, about a third lower.
Speaker Change: I'd say what it's confirmed is that inflation was pretty impactful to particularly the regulated portfolio and while it's fairly stabilized at this point.
Speaker Change: It's certainly a much lower level of return for those borrowers.
Speaker Change #127: But from a lender perspective, we're to a point where it seems to have...
Speaker Change: have come in at a level that a lot of the loans will be able to get through, or with a little bit of borrower support will be able to get through, and there will be some that will fail, and that's why we're focused really hard at identifying that, measuring that, and classifying it.
Speaker Change: Again, about two-thirds of the NOIs came in higher than the previous year, about a third lower. It's the ones that are lower that you worry about, and that's why it's good that we're through a significant portion of the portfolio. We really focused on...
Craig E. Gifford: It's the ones that are lower that you worry about, and that's why it's good that we're through a significant portion of the portfolio. We really focused on going out to the borrowers, ensuring we got the financials, pointing out to them some of the repercussions for them if they didn't provide them, and making sure that we got as much current information as we could. Pretty quickly as we get, Okay, great. Thanks for taking my questions. Our next question comes from the line of Jared Shaw with Barclays. Please go ahead. Hi Jared. Hi Jared.
Speaker Change: Going out to the borrowers, ensuring we got the financials, pointing out to them some of the repercussions to them if they didn't provide them, and making sure that we got as much current information as we could pretty quickly as we got into this portfolio.
Speaker Change: Okay, great. Thanks for taking my questions.
Speaker Change: Our next question comes from the line of Jared Shaw with Barclays. Please go ahead.
Jared David Wesley Shaw: Hey, good morning. Thanks. Maybe just shifting to the other side of the balance sheet, looking at deposit growth, what's the incremental cost of deposit growth right now? And when you look at DDAs, are you paying up through ECR to get those? And I guess, you know, the corollary is, what's the value proposition for a customer coming, incrementally, to the bank right now? Yeah, so in the private client commercial space, we're not really paying up from an ECR perspective.
Jared Shaw: Thank you.
Jared Shaw: Hey, good morning. Thanks. Maybe just shifting to the other side of the balance sheet, looking at the deposit growth. What's the incremental cost of deposit growth right now? And when you look at the DDAs, are you paying up through ECR to get those?
Speaker Change: And I guess, you know, the corollary is what's the value proposition for a customer coming incrementally coming on to...
Craig E. Gifford: In the retail space, we are about half of that growth was in our savings product, and about half was in the CD product. We're certainly priced attractively in the market from a customer perspective, but we're paying close attention to the opportunities as rates are receding a bit here and bringing down rates appropriately there. From a private client space, the vast majority of that growth was actually not premium priced. It was actually pretty typical for that business, which is a very transaction-based deposit set.
Speaker Change: to the bank right now.
Speaker Change: Yeah, so in the private client and commercial space, we're not really paying up from an ECR perspective. In the retail space, we are about half of that growth was in our savings product and about half was in the CD product.
Speaker Change: And we are, we're certainly priced attractively in the market from a customer perspective, but we're paying close attention on the opportunities as rates are receding a bit here and bringing down rates appropriately there.
Speaker Change: From the private client space, the vast majority of that growth actually was not premium priced, it was actually pretty typical for that business, which is a very transaction-based deposit set. I think the average pricing on the deposits raised
Craig E. Gifford: I think the average pricing on the deposits raised in the private client space was right along the lines of 2.75% to 3%, and only about $150 million of it was in the more premium pricing. So from a business proposition perspective, obviously, it's our ability to serve the customer. Certainly, in the private client space, the high-touch relationship aspect for retail customers. The expectation that as we move customers into the savings products, it gives us the opportunity to make broader connections and make them more sticky by expanding our product set through the brand.
Speaker Change: in the private client space was right along the lines of two and three quarters to three percent. And only about 200 million, or about 150 million of it was in the more premium priced product.
Speaker Change: So from a business proposition perspective, obviously, it's our ability to serve the customers, certainly in the private client space, the high touch relationship aspect. And then for the retail customers, it's
Speaker Change: The expectation that as we move the customers into the savings products, it gives us the opportunity to make broader connections and make them more sticky by expanding our product set through the branch network.
Craig E. Gifford: I think Craig kind of nailed it there really in the retail bank where we've seen a significant amount of, you know, we offered a special five and seven, Unknown Speaker Yeah, the five to seven month CDs that gave us the opportunity to expand our customer base. And now, you know, Reggie and his team from the retail bank are really focusing on cross selling.
Speaker Change: I think Craig kind of nailed it there. Really, in the retail bank where we've seen a significant amount, you know, we offered a kind of special five and seven.
Speaker Change: The five to seven month CDs that gave us the opportunity to expand our customer base. And now, you know, Reggie and his team from the retail bank,
Jared David Wesley Shaw: And I think that when I was out again, traveled around, saw, you know, basically 20 branches in three days, you could feel there's really good energy around cross selling into that customer base. And I think, you know, that's what we'll continue to see in the retail franchise expanding those. Okay, thanks. And if I could just do a quick follow up on the credit quality. You talked about the 18 month look forward.
Speaker Change: are really focusing on cross-selling. And I think when I was out, again, traveled around SAW, you know, basically 20 branches in three days, you could feel there's really good energy around cross-selling into that customer base.
Speaker Change: And I think, you know, that's what we'll continue to see in the retail franchise, expanding those relationships.
Jared David Wesley Shaw: And if it's over 90% LTV after that move to classified, what portion of the NPL growth this quarter was due purely to that reevaluation, that 18 month look forward? Well, again, it wasn't necessarily the look forward.
Speaker Change: Okay, thanks. And if I could just do a quick follow-up on the...
Speaker Change: You talked about the 18-month look forward, and if it's over 90% LTV after that move to classified, what portion of the NPL growth this quarter was due purely to that re-evaluation, that 18-month look forward?
Craig E. Gifford: It was the receipt of, in large part, the receipt of appraisals on the assets that then lost them. Once we identify that the secondary source may have a shortfall, then they move into nonaccrual, and we take an associated charge. But, but it is. I think we don't have that number necessarily like right in front of us, but we can see if we can get that for you. And because that, you know, instead of looking at today's loan through the review, we also look forward to say what the pricing impact would be. Yeah, so, the result of looking with the current updated borrower financial was, in terms of looking out, an increase that we saw in substandards in the first quarter that then flowed through in terms of charge-offs.
Speaker Change: Well, again, it wasn't necessarily the look forward, it was the receipt of, in large part, the receipt of appraisals on the assets that then lose them once we identify that the secondary source may have a shortfall, then they move into nonaccrual, and we take an associated charge off with it.
Speaker Change: But it is, I think, we don't have that number necessarily like right in front of us, but we can see if we can get that for you. And because that, you know, instead of looking at like today's loan through the review, we also look forward to say, what would the pricing impact be 18 months out? Yeah, so the result of looking with the current updated borrower financial information.
Craig E. Gifford: We do have an increase in substandards in the second quarter as well as a result of the... are updated. So if you think about it, a borrower submits the data, and at the current interest rate of 3.4%, we would look at that current cash loan and say, hey, you know, there's sufficient debt service coverage here. But then when you look forward 18 months, and if that gets caught in that net, so to speak, of either repricing or maturity, then we also underwrite that loan at the current market interest rates.
Speaker Change: [inaudible]
Speaker Change: So if you think about it, a borrower submits the data, and at the current interest rate of 3.4%, we would look at that current cash flow and say, hey, you know, there's sufficient debt service coverage here.
Craig E. Gifford: And so if you're looking at, you know, current NOI against a 400 basis point increase in your interest rate, that's what can push that into the non-accrual or substandard category. So the numbers are in the appendix to the earnings release, but think about it this way. The updated bar of financial information is driving the increase in substandards. The appraisal confirmation of value is what's driving the increase. Got it.
Jared David Wesley Shaw: Thank you. Our next question comes from the line of Steve Moss with Raymond James. Please go ahead. Good morning.
Speaker Change #105: Got it. Thank you.
Speaker Change: Our next question comes from the line of Steve Moss with Raymond James. Please go ahead.
Stephen M. Moss: Maybe we could start going back to the loans that reset this past quarter. You guys mentioned there's an 8.19 percent rate. Just curious, what is the debt service coverage for that type of borrower these days? starts getting pretty thin.
Speaker Change: Hi Steve. Good morning.
Stephen M. Moss: Maybe we could start going back to the loans that reset this past quarter. You guys mentioned there's an 8.19% rate. Just curious, what is the debt service coverage for that type of borrower these days?
Craig E. Gifford: I mean, the reality is you've had, particularly in the rent-regulated space, you get 3% rent increases, inflation for a couple years running at 4-5%, and then you double the debt service. And where we had... Unknown Executive, Manan Gosalia, Joseph Otting, Unknown Executive, Manan Gosalia, Unknown, are getting in that, there's a lot of them in that 1 to 1.1%, 1 to 1.1 multiple. Okay. And in terms of, you know, the loans that were, you know, placed on substandard or non-performing status this quarter, you know, just curious, you know, are the vast majority of those interest- Are they rent-controlled? Just kind of curious about some of the underlying characteristics.
Speaker Change: Starts getting pretty thin.
Speaker Change: I mean, that's the reality is you've had.
Speaker Change #101: Particularly in the rent regulated space, you get 3% rent.
Speaker Change: increases you get.
Speaker Change: Inflation for a couple years running of 4-5% and then you double the debt service and where we had
Speaker Change: Or maybe I should say, 200% debt service coverage ratios and underwriting. Now you start getting down pretty low.
Speaker Change: I don't know the statistic on that exact bucket.
Speaker Change: But there's certainly ones that are resetting, particularly in the regulated space, are getting in that, there's a lot of them in that 1 to 1.1 percent, 1 to 1.1 multiple range.
Speaker Change #100: Okay. And in terms of, you know, the loans that were, you know, placed on substandard or non-performing status this quarter, you know, just curious, you know, are the vast majority of those interest-only loans? Are they rent-controlled? Just kind of curious on some of the underlying characteristics.
Craig E. Gifford: The reprice really reflects the whole balance. It reflects the general characteristics of the overall portfolio, so that it's not – there certainly are interest-only ones. There certainly are rent-regulated ones, but it's not in any particular position.
Speaker Change: The reprice really reflects the whole balance, reflects the general characteristics of the overall portfolio so that it's not, there certainly are interest only ones, there certainly are rent regulated ones, but it's not in any particular pocket.
Stephen M. Moss: Okay. And just to clarify, you know, you have an 18-month look forward. Is that kind of a cutoff for what loans are being classified as substandard or criticized these days? And, you know, for those maturities that are further out in 2026 and 2027, it's a long time before we'll see those build if rates stay up at current levels. Is that kind of how you think about the pipeline?
Speaker Change: Okay, and just
Speaker Change #110: To clarify, you know, you have an 18-month look forward. Is that kind of a cutoff for what loans are being classified as?
Speaker Change: substandard or criticized these days and
Speaker Change #104: You know, for those maturities that are further out in 2026 and 2027.
Speaker Change #114: It's a long, you know, we'll see those bills, if rates stay up at current levels, is that kind of how to think about the pipeline? That's exactly the way to think about it. If rates stay higher for longer than what the curve projects right now, then that would be a worsening of credit conditions that would have an impact on us in the future.
Craig E. Gifford: That's exactly the way to think about it. You think if rates stay higher for longer than what the curve projects right now, then that would be a worsening of credit conditions that would have an impact on us. Okay, and one more right to begin on the appraisals that you're getting here. What is the cap rate you're seeing? What's the cap rate that you're using or receiving on appraisals? You know, it varies quite broadly. It's a great question.
Speaker Change #103: Okay, and one more right sneak in on on the appraisals that you're getting here. What is the cap rate you're seeing? What's the cap rate that you're using or receiving on appraisals? You know, it varies quite broadly.
Stephen M. Moss: It varies quite broadly between the asset classes and the geography. I mean, even the five boroughs have very different cap rates, different based on the different product types, but anywhere from six to nine percent cap rate. Okay, great, appreciate all that. I guess just maybe one last thing in terms of on the CRE side, you guys disclosed that there are three year IOs in that portfolio.
Speaker Change #109: It's a great question. It varies quite broadly between the asset classes and the geography. I mean, even the five boroughs have very different cap rates based upon the different product type, but anywhere from six to nine percent cap rates.
Stephen M. Moss: Curious how much of the commercial real estate is IO and what's the full principal and interest debt service card ratio for that portfolio? So I don't have the statistics for that, but I would tell you that when we do a credit risk rate and we get the borrowed financials, we do it on a principal and interest fully amortizing basis.
Speaker Change #103: Okay, great.
Speaker Change #102: Appreciate all that. I guess just maybe one last thing in terms of on the CRE side, you guys disclosed, you know, that there's three year IOs in that portfolio. Curious how much of the commercial real estate is IO and what's the full principal and interest debt service card ratio for that portfolio?
Speaker Change #122: So I don't have the statistics for full, but I would tell you that when we do a, when we credit risk rate and we get the borrowed financials, we do it on a principal and interest fully amortizing basis. When we're looking at the ability of those loans to cover, we don't just look at interest only on a current basis.
Craig E. Gifford: We're looking at the ability of those loans to cover. We don't just look at interest only in an Okay, great. I'll step back in the queue here. Thank you very much.
Speaker Change #111: Okay, great. I'll step back in the queue here. Thank you very much.
Stephen M. Moss: Our next question comes from the line of Chris McGratty with KBW. Please go ahead. All right. Great. Thanks for the question. I just want to go back to the loan sales that you're contemplating, the $2 to $5 billion. How much of an ROE impact will that have on your long-term target? You know, we'd focus principally on the portfolios that don't carry much spread, and aren't high-margin. So I wouldn't expect it would have a significant negative impact on our sales, Alright, so less than the sales that you had in this quarter. Okay.
Speaker Change #106: Thank you.
Speaker Change #106: Our next question comes from the line of Chris McGratty with KBW. Please go ahead.
Christopher Edward McGratty: All right. Great. Thanks for the question. Just want to go back to the loan sales that you're contemplating, the $2 to $5 billion. How much of an ROE impact will that have on your long-term targets?
Speaker Change #108: You know, we'd focus principally on the portfolios that don't carry much spread, aren't high margin, so I wouldn't expect it would have a significant negative impact on ROE.
Christopher Edward McGratty: And then with the servicing sale, are there deposits that will go with that? Or can you quantify that? There are so the servicing deposits move up and down pretty volatilely. But at the end of at the end of the month, they're slightly above their low point, typically at the end of the month, so about $3.7 billion of deposits in the servicing business. Now we'll get a billion and a half back in from the cash on the sale transaction. So the net net impact on liquidity is just a little bit over. Okay, thank you. And those are very high-cost deposits.
Speaker Change #112: All right, so less than the sales that you had in this quarter. Okay. And then with the servicing sale, are there deposits that will go with that or can you quantify?
Craig E. Gifford: Yeah, there's two sets of those deposits. There are the deposits on our own servicing that are fairly low-cost. That's about a billion dollars. But then the other two and a half, three billion dollars, are fairly high-cost deposits on the subject. I'm not sad to see those go.
Christopher Edward McGratty: It basically worked out kind of neutral to us from a financial standpoint and was probably our highest cost. Thank you. Our next question comes from the line of Matthew Breese with Stevens. Please go ahead. Hey, good morning.
Matthew M. Breese: Morning. I was hoping you could just talk a little bit about the overall balance sheet size for the rest of this year, $25 billion. I think the guidance suggests that earning assets stay between call it 108 and 109 billion. But I'm curious just how you're weighing the decision around staying over 100 or going below.
Craig E. Gifford: And then with that, if you do just decide to stay over 100 billion, when do you become subject to the category four bank stress test, that 25 event or 26, So the current projections are that we wouldn't come below $100 billion in total assets. We absolutely will have a decrease. So we were at earning assets of $110, $111 billion at the end of June. We'd see that drift down to the end of the year around $104 billion, principally related to the Morris Warehouse loans being sold here in the third quarter.
Craig E. Gifford: As you think about moving forward and $100 billion, we do have a much higher level of on balance sheet liquidity that we have to hold as a Category 4 bank. Officially, we became a Category 4 bank on October 1st, 2023. With respect to the stress test, Cat 4 banks are every other year on the even year, so our expectation is that we wouldn't be in the CCAR stress test cycle until 2026.
Speaker Change #112: Liquidity that we have to hold as a category four bank officially we became a category four bank on October <unk> of 2023.
Speaker Change #119: With respect to the stress test a cat four banks or every other year on the even years. So our expectation is that we wouldn't be in the in the in the CCAR stress test cycle until 2026, I'm submission, we do run our own company run stress tests in fact.
Craig E. Gifford: We do run our own company runs stress tests, and in fact, we submitted to the Federal Reserve our company runs stress tests here in 2024, and will do so again in 2025, but wouldn't expect to be held to the Federal Reserve run stress tests until, Great.
Speaker Change #119: Submitted to the Federal Reserve our company run stress stress test here in 2024 and will do so again in 2025, but wouldnt expect to be can be held to the to the federal reserve run stress tests until 2026.
Matthew M. Breese: And then could you just help me out with the NIM outlook for the next couple of quarters? And I would really appreciate it if you could provide what a credible yield was for this quarter and expectations for the end of the year. Yeah, so a credible yield is tapering down. I think it, let's just say it adds probably seven, eight basis points to the margin, and it taper down through into the middle of next year.
Speaker Change #115: Great and then could you just help me out with the NIM outlook for the next couple of quarters and I would really appreciate if you could provide what accretable yield was for this quarter and expectations for the end of the year.
Speaker Change #118: So accretable yield.
Speaker Change #116: Is tapering down.
Speaker Change #117: I think it.
Speaker Change #121: Let's just say it adds.
Speaker Change #120: <unk>, probably seven to eight basis points.
Speaker Change #120: To the to the margin and it tapers down through into the middle of next year. The expectation around margin is that we will see a continued reduction principally a result of the.
Matthew M. Breese: The expectation around margin is that we will see a continued reduction, principally as a result of the warehouse sale coming off of the balance sheet over the next couple of quarters. We've given the full year margin here. I hate to give exact predictions on the quarters, but we'll see it be at this level or slightly down over the next two quarters.
Speaker Change #125: Warehouse sale coming off of the balance sheet over the next couple of quarters. We've given the full year margin here could you give an exact predictions on the on the quarters, but we'll see it to be at this level to slightly down over the next few quarters.
Speaker Change #116: Yeah.
Matthew M. Breese: And then, I know you've mentioned some, you know, cash levels, liquidity levels are high, and you're going to use it to pay down some wholesale. Could you just give us some frame of reference of where you think the cash to assets ratio will sit by the end of the year? And is that a good level where you want to be in 2025?
Speaker Change #123: And then I know you had mentioned some yeah.
Speaker Change #130: Cash levels liquidity levels are high but couldn't use it to pay down some wholesale could you just give us some frame of reference of where you think the cash to assets ratio will sit by the end of the year and is that a good level, where you want to be 25.
Matthew M. Breese: Well, I think the deposit growth that we had in the third quarter is strong and gives us the capacity to let those high-cost deposits with the mortgage business go. And if you think about the cash that we get from the warehouse sale, I think that you'll see that that will be sort of the level that will be redeployed into paying down debt is around the level of what we get from the warehouse sale. And I think that puts us in an appropriate position.
Speaker Change #123: Well I think the deposit growth that we had in the third in the second quarter is.
Speaker Change #123: Is strong and gives us the capacity to gave us the capacity to let those high cost deposits with the mortgage business go.
Speaker Change #116: And if you think about the cash that we get from the warehouse sale I think that youll see that that will be sort of the level that we will redeploy into paying down debt is around the level of what we get from the warehouse.
Speaker Change #116: And I think that puts us at an appropriate position as we look forward, we'll have deposit growth that will allow us to continue to repay debt and we will have.
Matthew M. Breese: As we look forward, we'll have deposit growth that will allow us to continue to repay debt, and we'll have long paydowns that we'll then be redeploying into new lending, and then, when all is said and done with the preferred conversions, or let me back up. I appreciate you providing the common shares outstanding with the reverse share split. What is the impact from the warrants on the diluted shares that we should expect going forward?
Speaker Change #116: Well, we'll have loan pay downs that will then be redeploying into new lending categories.
Speaker Change #116: And then.
Speaker Change #116: When all is said and done with the <unk>.
Speaker Change #132: But the preferred convergence right, let me backup I appreciate you providing the common shares outstanding.
Speaker Change #116: With the.
Speaker Change #116: Reverse share split.
Speaker Change #129: What is the impact from the warrants on the diluted that we should expect going forward.
Matthew M. Breese: Well, so it really depends on what you expect in terms of the share price; they'll be net settleable. And so, you know, it's public information how many warrants are out there. But it, you know, at current share prices, is not particularly impactful; at a higher share price, then that net settlement could lead to a much higher level of shares. It's hard to predict exactly what the share price would be and when those holders would choose to convert, or when they would choose to net it.
Speaker Change #124: Well so it really depends on what you expect in terms of the share price there there'll be net sellable and so.
Speaker Change #142: It's public information, how many warrants are out there.
Speaker Change #128: But you know it.
Speaker Change #124: Current share prices is not particularly impactful at more share price at a higher share price then that net settlement could lead to a much higher level of shares but.
Speaker Change #124: It's hard to predict exactly what the share price would be and when those those holders would choose to convert when they choose to and that exercise.
Matthew M. Breese: Okay, last quick one for me, just some understanding as to why loan administration income went negative this quarter, and is that negative $5 million a decent run right here? From a loan administration perspective, I guess I would say that it relates to a number of factors. The servicing business, some of the trickle-on stuff that we had to associate with the FDIC in servicing their loans. I would expect after the servicing sale, our loan administration income would be essentially, Thank you. That's all I had. Our final question will come from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Speaker Change #126: Okay last quick one from me just just some understanding as to why loan administration income went negative this quarter and is is.
Speaker Change #131: Is that negative $5 million.
Speaker Change #126: Recent run rate here.
Speaker Change #126: Hum.
Speaker Change #137: From a loan administration perspective, we I guess I would say that.
Speaker Change #133: It relates to a number of factors the servicing business some of the trickle on stuff that we had associated with the FDIC in servicing their loans I would expect after the servicing sale. Our loan administration income would is it would be essentially zero.
Speaker Change #141: Thank you that's all I had.
Speaker Change #135: Alright, thank you.
Jon Glenn Arfstrom: Our final question will come from the line of Jon <unk> with RBC capital markets. Please go ahead.
Jon Glenn Arfstrom: Hey, thanks. Good morning, guys. Hey, Craig, on slide nine, the provision expectations obviously increased. And I don't know, maybe it's unfair to ask for an accurate outlook last quarter, but what kind of confidence level do you have in the provision outlook that you're providing? I'd say that a higher confidence level than we had last quarter. I mean, the management team, not only were we new, but not all of them were here. We have a new chief credit officer who's here. He's been in the house for about a month and is really dug in.
Jon Glenn Arfstrom: Hey, Thanks, good morning, guys.
Jon: Hey, Craig on slide nine the provision expectations, obviously increased and I don't know, maybe it's unfair to ask for an accurate outlook last quarter, but what kind of confidence level do you have in the provision outlook that you're providing.
Speaker Change #139: I would say that a higher confidence level than we had last quarter I mean the management.
Speaker Change #136: Agent team not.
Speaker Change #143: Not only will renew but not all of them were here, we have a new chief credit officer, who is here he's been in the in the house for about a month and has really dug in and then again, we had our updated borrower financial information level was about 20% at the end of the first quarter and it's 80% now so we have a lot more visibility.
Craig E. Gifford: And then, again, we had our updated borrower financial information level was about 20% at the end of the first quarter, and it's 80% now. So we have a lot more visibility, and that drives a lot of the measurements.
Speaker Change #136: And that drives a lot of the measurements are really whats left and some appraisal gathering but.
Jon Glenn Arfstrom: Really, what's left is some appraisal gathering, but we've generally provisioned where we expect that would come in. But from a loan classification standpoint, there will be some additional trickle-on impact. Most of that came in the second quarter. I won't give you a confidence level, but I would say we have a much higher confidence level now than we did at the end of the first quarter. Good, that's fair. On NPA expectations, I think you're signaling we should expect another increase in Q3. Is that fair?
Speaker Change #136: But we've generally provision where we would expect that would come in.
Jon Glenn Arfstrom: But from a from a client loan classification standpoint, there'll be some additional strict one impact most of that came in in the second quarter I won't give you a confidence level, but I would say, it's where we have a much higher confidence level now than we did at the end of the first quarter.
Speaker Change #152: Okay. Good luck Scott.
Speaker Change #148: NPA expectations, I think youre signaling we should expect.
Craig E. Gifford: Is it going to be a step function? Or, you know, how can you prepare us for what we should see in NPAs in the third quarter? Yeah, it won't be as significant as it was in the second quarter, I think, I think we'll see some increase. But I think, as Joseph mentioned, we'll be working to taper that back with transactions to where we dispose of some of that MPA bucket. Will that exactly net out? Probably not in the third quarter.
Scott: Another increase in Q3.
Speaker Change #154: Is that fair or is it going to be a step function or.
Speaker Change #145: How can you prepare us for what we should see an NPA as of the third quarter.
Speaker Change #145: It won't be as significant as it was in the second quarter I think I think we will see some increase but I think as Josef mentioned, we will be working to taper that back with with transactions to where we.
Josef: Dispose of some of that NPA.
Jon Glenn Arfstrom: As we look into the fourth quarter, our expectation is we'll be able to keep that flat to down as we get into the fourth quarter and into early. Okay, good. Last one, Joseph, for you. Call it a financial psychology question, but where do you feel the most rushed or under pressure in terms of your day-to-day tasks? You know, I'm curious if you feel like, is it triage mode, or is that unfair
Scott: Yeah.
Speaker Change #150: Well that exactly net out probably not in the third quarter as we look into the fourth quarter we.
Scott: Our expectations, we've been able to keep that flat to down as we get into the fourth quarter and into early next year.
Scott: Okay.
Scott: Last one Joseph for you call it a financial psychology question.
Speaker Change #144: But where do you feel the most rushed or under pressure in terms of your day to day tasks.
Joseph M. Otting: And is this all kind of methodical at this point for you? Well, I think, you know, we've spent a lot of time over the last 90 days really understanding the company and digging into, you know, the attributes. I think when we met last time, we said there were really, you know, kind of three buckets that we were really focused on. One was getting our earnings accurate and forecasting and communicating those, and understanding, you know, the consequences of activities.
Speaker Change #144:
Speaker Change #147: Curious if you feel like is it triage mode or is that unfair.
Speaker Change #149: This all kind of methodical at this point for you.
Joseph M. Otting: Well I think we've spent a lot of time over the last 90 days really understanding the company and digging into the attributes I think when we met last time, we said there were really.
Speaker Change: Kind of three buckets that we were really focused on one was getting our earnings.
Joseph M. Otting: Accurate in forecasting when communicating those can understanding that.
Joseph M. Otting: The consequences of activities. The second was really making sure we understood the loan book.
Joseph M. Otting: The second was really making sure we understood the loan book and that, you know, we understood the risk, and we could communicate that risk with a degree of confidence. And the third was, you know, building out our risk infrastructure within the company. You know, this organization grew very quickly, but both the talent and the infrastructure of the risk organization were not in place.
Joseph M. Otting: And that we understand the risk and we can communicate that risks and with a degree of confidence in the third ways building out our risk infrastructure within the company.
Joseph M. Otting: This organization grew very quickly.
Joseph M. Otting: Both the talent and infrastructure of the risk organization was not in place.
Joseph M. Otting: If you look on page five, where we've added talent, you can see that a lot of the talent that we've added has OCC experience and is here to help us build that infrastructure. So if we decide to stay above $100 billion, we have the right risk infrastructure for category four banks, but the third big bucket being that we really, you know, including my background, you know, being comptroller of the currency, we view that as a very important part of an organization that we have the right risk infrastructure. So I'd say in those three buckets, we feel like we've made incredible progress.
Joseph M. Otting: If you look on that page five where we've added talent you can see a lot of the talent that we've added.
Speaker Change #155: Have OCC experienced sand and are here to help us build that infrastructure. So if we decided to stay above $100 billion that we have the right risk infrastructure for a category four bank.
Speaker Change #151: But the third big bucket being that we really got including my background being Comptroller of the currency, we view that a very important part of an organization that we have the right risk infrastructure. So I would say in those three buckets, we feel like we've made incredible progress and then I would also say we recognized.
Joseph M. Otting: And then I would also say, you know, we recognize the desire to have, you know, very strong liquidity and capital in the bank as we're making these movements to become more simple. We also want to have a very strong fortress of liquidity and equity in the company. Okay, thank you very much.
Speaker Change #151: A desire to have.
Speaker Change #151: Very strong liquidity and capital in the bank.
Speaker Change #151: As we're making these movements to become more simpler we also want to have a very <unk>.
Speaker Change #151: Fortress.
Speaker Change #151: Liquidity and equity.
Speaker Change #151: The company.
Speaker Change #156: Okay. Thank you very much.
Joseph M. Otting: I will now turn the call back over to Joseph Otting for any closing remarks. Okay, thank you very much, operator. You know, I very much appreciate everybody joining us. This is, I would say there's a lot of really good energy around the company and the direction we're heading. We now have, I think, a very experienced executive and leadership team to execute the business plan. We will have a simpler organization when we've concluded the asset sales and moved the company forward.
Speaker Change #151: I will now turn the call back over to Joseph Otting for any closing remarks.
Joseph M. Otting: Okay. Thank you very much operator.
Joseph M. Otting: We very much appreciate everybody joining us.
Joseph M. Otting: I would say there is a lot of really good energy around the company and the direction we're heading.
Speaker Change #153: We now have I think a very experienced.
Speaker Change #153: Executive and leadership team to execute the business plan.
Speaker Change #153: We will have a simpler organization when we've concluded the asset sales and move the company forward.
Joseph M. Otting: We will maintain liquidity and capital, which we think are more than necessary to run this organization. And at the same time, we're really focused on growing the bank and the sectors that we've communicated, specifically in the private bank, the retail bank, small business, and the C&I segments of our company. You know, too often people can get dragged into the problems and not be thinking about the solution.
Speaker Change #153: We will maintain liquidity and capital, which we think are more than necessary to run this organization and that at the same time, we're really much focused on growing the bank in the sectors that we've communicated.
Speaker Change #153: Specifically in the private bank to retail bank small business and C&I segments of our company.
Speaker Change: Too often people, who can get drug into the problems.
Joseph M. Otting: And not be thinking about the solution and I just want to assure the investment community and our investors that we're also focused on what this company will look like in the future. So thank you very much for your time and your interest.
Joseph M. Otting: I just want to assure the investment community and our investors that we're also focused on what this company will look like in the future. So, thank you very much for your time and your interest. It's very much appreciated. And if there are any follow-up questions, if you can forward those on to Sal, we'll be happy to address those for people that have additional questions. This concludes our call today. Thank you all for joining, and you may now disconnect. Please wait; the conference will begin shortly.
Speaker Change #153: It's very much appreciated and if there are any follow up questions. If you can forward those onto Sal will be happy to address those for people that have additional questions.
Speaker Change #153: This.
Speaker Change #153: Our call today. Thank you all for joining and you may now disconnect.
Speaker Change #153: Please wait the conference will begin shortly.
Speaker Change #153: [music].
Speaker Change #153: Okay.
Speaker Change #153: Okay.
Speaker Change #153: Yes.