FLG - NYSE

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. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.

Thank you, Regina, and good morning, everyone. Thank you for joining the management team of New York Community Bancorp 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. Also, 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. 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. 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?

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 along for the journey as we build a strong performing bank. 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. We have a firm hand on the steering wheel of the company and 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. In addition to our second quarter results, earlier 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. So we do view 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 JPMorgan Chase. 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. 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. 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 3, 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 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. 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 is 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 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 5 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%. It was a very solid result, both in our private banking and our retail banking franchise. As we commented, we diversified and 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 take-outs. while we continue to build our risk infrastructure and our C&I platform as we move forward. On item number three, achievable capitals and earnings forecast. The strategic sales will add about 130 basis points to our CET ratio. We pro forma 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 NII through loan portfolio pricing in the future and the increases to our C&I business. On the improved funding profile, our pro forma liquidity post the transactions will be roughly $40 billion. 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. 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. We continue to address problem loans through additional charge-offs in our ACL build up to [1.8%] (ph). And we're very focused on the remediation of problem loans and I'll add some comments to that on a couple of 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. Moving on to Slide 4. You can see on the Slide 4, there are key takeaways for the quarter, which we think were really solid. As I commented, we had meaningful enhancement to liquidity and capital. We grew our deposits in key areas of -- key focus, which includes our retail and private bank. 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. We've rebranded all of the branches between November and March. We have a very consistent theme to colors and messaging in the branches. And I was very impressed with our branch personnel with their outward mobility seeking customers and a very focused goals and objectives. 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 have 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 billion to $33 billion level to give us diversification on the balance sheet. 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%. 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. As far during the quarter, 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 that we re-underwrote the loan -- those loans that had a debt service coverage of one-to-one. We then ordered appraisals. And the end result of that is, if the debt service coverage and the loan to values were below -- excuse me, above 90%, we move 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 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 are continued 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. As we commented, we continue to look at non-core businesses for us. We probably have another additional $2 billion to $5 billion that we're evaluating whether we would exit those businesses. We do plan to probably move on some of that activity before -- between now and the end of the year. In most of those instances, that would provide an additional $200 million to $500 million of additional unallocated capital and $2 billion to $5 billion of liquidity. So we'll continue to look at bolstering both liquidity and the capital on the balance sheet. And then lastly, we really started to build, I think, positive momentum in the C&I franchise. This is a big focus for us. We're roughly around $20 billion of C&I assets. Our goal is to get that $30 billion 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. 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. Turning to Page 5 really kind of gives you a reflection of really 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 and credit management to our team. Chris 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. We're really pleased to have Chris and bring the disciplines into the credit organization. I think that will have a big impact. And then on the far right, the second one down is Rich Raffetto. Rich has joined us to lead both our C&I and our private banking initiatives. Rich also is a very senior executive, very well-known in the industry. Rich and I work together at US Bank and he's joined our organization from City National. I couldn't be more pleased to have Rich on the board and some of the leadership that he's going to bring to those two disciplines, where we do view the private bank and the C&I as some of our biggest growth engines as we try to move forward in expanding the organization. On Page 6, very busy quarter as we announced the sales, in addition to the Mr. Cooper. But I would like to just take for a second and focus on 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. We focus on our commercial industrial, 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, these two very well-run businesses we had, they were attractive acquisitions for people that are in these businesses. The mortgage warehouse generated -- as I said, will generate $6.1 billion. We sold those loans at par and we added approximately through that transaction 70 basis points in CET1 capital ratio. And we will use those proceeds to pay down our wholesale borrowings and fund future C&I growth. One of our other objectives is obviously to reduce overall the wholesale borrowings. As we announced this morning, at closing, we will add 60 basis points to the mortgage servicing sale. This will help reduce our high cost 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. We'll move forward and talk to some of the numbers, including a deeper dive on some of the credit position analysis. If you 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, 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 the shareholders approving in June an increase in our authorized shares that's been approved. And the second is there's some regulatory approvals associated with some of those preferred shareholders converting to common. Once we receive that, we'll increase our capital ratio of roughly 30 basis points. 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. And we did receive that cash in the final closing of that earlier this week. And then separately, the mortgage servicing business will get us about an increase of about 60 basis points in CET1. 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. We don't have a whole lot of unrealized losses on our security. So you can see that our CET1 ratio adjusted for the unrealized loss on securities at 10.4%. That's fairly strong compared to our Category IV 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 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 and adjusted for in the forecast. 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 peer 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 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. 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. On the forecast page on Page 9, you can see that our net interest income shows growth and as 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, we'll show it. 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. 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 million of that was charge-offs. The result of that is that given where we are today year-to-date from 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. Because we do expect loan growth, we do have an anticipation that we will have to -- that we'll 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. 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 from -- 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 where 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 to and our concentration on commercial real estate and helping those borrowers find ways to move off the balance sheet. We had almost $1 billion in CRE payoffs in the quarter. And you can see that three quarters of that was from multi-family. And also you can -- as 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 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. 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. On Slide 11 is an update with respect to our portfolio review. As Joseph mentioned, last quarter, we had made our way through -- we've only been here a few weeks, but we've made our way through about 37% of the portfolio, $18 billion. At this point, we're through about 75% of the portfolio and that's -- and that includes 80% of the multi-family portfolio, total of $33 billion in the principal balance that we've done detailed review on. You can see that broken out by portfolio towards the bottom. We are continue to be at a very high level with respect to office. Only about $500 million of the office portfolio remains under review. The multi-family portfolio only about $7 billion remains in review. And in a couple of slides, we have detail on that. And that's principally smaller balanced loans, which generally we've seen to have less risk. On Page 12, our multi-family 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 similar quarter. And we do expect that trend to continue. 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. Over the past 18 months, we've had $2.9 billion, almost $3 billion of our multi-family rent-regulated loans that have hit their reprice dates, and as I mentioned, strong payoffs there. Almost a fourth of those loans have paid off. 69% have repriced. And this is an important statistic. When they reprice, they reprice to an average of 8.19%. That's up from 3.85%. That trend will continue, and that will have a significant upside from -- into our net interest margin on a go-forward basis. This quarter, we do -- in the second quarter, we did receive our annual updates from borrowers for their financial statements. 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 3% and 5%. On Slide 13 is more detail on the multi-family portfolio. Again, there's about $4.7 billion that remains under review -- I'm sorry, $6.9 billion that remains under review. And you can see that the average loan balance on those is below $5 billion -- excuse me, $5 million. 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 of reprice. 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. 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 balanced 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. 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. The reserve associated with the remainder of the loans is 6.7%. That was right at -- it was between 10% and 11% last quarter. The difference there simply being the charge-offs that we recorded for the expected level of loan loss on those loans. 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. You can also see that their average balance is only $1.5 million, and the vast majority of those are not New York-related loans. On Page 16, Joseph mentioned that our allowance for loan loss is up to 1.7% of 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 multi-family loans. And as I mentioned, a decrease in the allowance associated with office as a result of the charge-offs that we recorded in the quarter. 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 them. Bottom left-hand side, non-accrual loans will end the quarter just shy of $2 billion. 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. 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. Importantly, on the non-accrual loans, well over half, 61% of those loans 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. On Page 18, a really good news story from a deposits perspective. We have been very successful on a customer deposit raising perspective, not only in our retail space where we have our premier products which had an increase of about $3.2 billion 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 space 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. Page 19 shows our liquidity profile and you can see the deposit gathering success has significantly increased our already strong liquidity position. The warehouse sale will bring us $6 billion. The mortgage sale will result in net about a reduction of about $2.5 billion against that total of $40 billion of pro forma liquidity. We will -- we anticipate that we will begin to redeploy some of that incremental liquidity through into the reduction of warehouse, into the reduction of wholesale borrowings over the next 30 to 45 days or so. 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 million, again that's $350 million of charge-offs and roughly a $40 million reserve bill. Our net interest margin ended 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 basis point to 8 basis point negative impact on margin and on a go-forward basis has about a 9 basis point impact to carry those loans. 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 -- as we close on the sale of the warehouse loans -- closed on the sale of 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 sheet. So overall, a summary that shares the story 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 commercial lending in addition to the commercial real estate portfolio. Joseph, I'll turn it back over to you.

Okay. Thank you very much, Craig. Appreciate the great overview. On the page 21, just wanted to highlight kind of our investment profile. Pro forma New York Community Bank currently trades at roughly 60% of fully converted tangible book value. This compares to 1.8% for Category IV banks and 1.55% for banks and assets between $50 billion and $100 billion. Our Q2 2024 tangible book value per share is $20.89, or $18.29 fully converted. We feel 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 valuation gap. First of all, focusing the portfolio on relationship banking activities is one of the keys. 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. 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. 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 cash management, interest rate derivatives, foreign exchange, 401(k), 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 do have a plan to take out $300 million 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 a standard 2025 on a run rate that those cost reductions will already be in place. So overall, I think the progress this quarter 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, 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. We also have gone through our annual review of the portfolio 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. 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 Flagstar, New York Community Bank kind of rebounding back and being the bank that we can support our customers. So with that, I'll turn it over to the operator, and we can open up the -- for the Q&A period of the call.

[Operator Instructions] Our first question will come from the line of Ebrahim Poonawala with Bank of America. Please go ahead.

Good morning.

Good morning.

I guess maybe -- hi. Just to follow up on the commercial real estate book first. 80% of reviews done on office multi-family. A few questions there. One, you've given sort of 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 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 paying down balances to kind of get LTVs, et cetera in place. So if you could talk to both those aspects.

Yes. 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. 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 to other opportunities. And there are -- for many of them, there are opportunities in the market that are cheaper price than the loan agreements. 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, 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, some multi-family charge-offs, as you mentioned, that -- as you repeated, we have made our way through quite a bit of the multi-family portfolio in detail, 80% level. The remainder of the loans generally are smaller balance. We generally when we look at them, see lower loss levels. 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 from a debt service coverage on the repriced coupon level for those loans that are in the next 18 months. We are 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 leap to more over the next couple of quarters as we get another slug of appraisals in.

And on those payoffs, 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 refied with the agencies. 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 refiing out of the bank to the agencies?

Yes, we do, and that's what we've seen, $700 million of payoffs in 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. And if I may sneak in one more for Joseph. You gave us sort of the medium-term outlook of the company. Given just all the moving pieces, just your own numbers, fourth quarter 2026 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 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? Thank you.

Yes. 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 in the MSRs. 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. So that's why we pushed it out two quarters. It's really affiliated that we reduce those two. As I commented, we do think there is an additional $2 billion to $5 billion of non-core activities that we'll be evaluating, that we would look to execute on between now and the end of the year.

Ebrahim, to put some numbers to it, the mortgage servicing business out in the 2026 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 2026 and 2027 redeployed the associated capital into lending. 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 2026 and into 2027.

Very clear. Thank you.

Our next question comes from the line of Casey Haire with Jefferies. Please go ahead.

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 remaining?

Yes. So the $11 billion that's left, I mean, you start to get into a lot of loan count 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. 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 they turn into charge-off dollars. And I hate to predict exactly the timing of the charge-offs and the resulting impact on the allowance. Provision expense, we feel like is in that $900 million to $1 billion range for the year.

And Casey, one thing I think it's important is like now that we're through 75% of the portfolio and 80% of the multi-family 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 we should be through 95% of the portfolio by the end of this quarter. And it would take further deterioration in the underlying assets of the loans 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 they're fairly material, when you go from 3.5% to 7.5% on a -- that 4% makes a big difference against the NOI. That immediately causes you to look at that, perhaps your future 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. But the other point I would make is this should not go on, unless there's deterioration in the underlying assets, because we'll be have -- through almost all of the portfolio by the end of the year.

Yes. In particular, with respect to the non-accruals, anything that's a non-accrual has already gone through getting the appraisal then charged down to the appraisal value minus the selling cost factor. So the non-accruals reflect a pretty focused perspective around the current condition, current value of the collateral. Not to say 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.

Great, thank you. And just one more on the expense front. So the forecast indicates a decent amount of about $0.5 billion 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 -- what are the key drivers and where you exit the year? It looks like about $425 million, if I look at 2026. So just some color there on what's a decent amount of expense leverage.

Yes. So actually, if you think about it all the way through the forecast period that we presented. So we have about a $750 million reduction in expense. I mentioned about $400 million of that as a result of the mortgage business exit, very, very high efficiency ratio business. So that overall -- that exit will reduce our overall efficiency ratio expectations. So that leaves about $300 million, $350 million of cost reductions on a $1 billion -- call it a $1.9 billion or so. So 15% to 20% cost reduction expectation over the course of -- over the next 18 months or so, with the vast majority 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 of 2025, 2026, 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.

And Casey, the one thing that I would add to Craig's comments was in addition to those cost take-outs, there also is cost build both in kind of our risk framework of the organization, in addition to that, that are C&I growth. And so, that is kind of a net number. So there is some moving elements to that number. But I would also say, Craig and I came from US Bank, highly disciplined on cost structures, very focused on the efficiency ratio, looking how we have done things. These are -- this is still three organizations that haven't really totally consolidated. They've combined, but not consolidated. We're going to be highly focused not only on the cost structure, but the way we do things and processes within the organization. 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 number that we expect them to get to. We've been working on this. We have 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.

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?

I think that's a question better reflected for -- directly to Mr. Mnuchin. I don't know all the intricacies of his agreement or portfolios. Stephen did publicly comment on that, that he indicated he did not have to do that. But I think I would leave that up to Stephen and Liberty to be able to make that comment. I would say, Stephen has been a remarkable lead director in the company. We value his activities and input. I couldn't ask for a better partner, so to speak, to help us kind of 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. 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.

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. 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 sort of the business mix change? Thank you.

Yes. 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 in the late -- right at the end of the third quarter -- first quarter, early second quarter, and it's been quite stable since then. And remarkably, so have the -- 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 Rich Raffetto has had a place to rally around and I think has a strong view 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 reputation.

Yes. I would just add, we did add Adam Feit. 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 Dailey 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 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, so we can -- already those engines are kind of up and running. Those include things like Flagstar Financial, some of the specialized industries and some of those businesses, we began also 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. Just to remind you, I've spent virtually my entire career on commercial banking and building franchises, both at US Bank. And then when I went to OneWest 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 OneWest Bank before the sale to CIT.

Thank you.

Welcome.

Our next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.

Hey, good morning. 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?

Yes. 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 through sales. We've been looking at and studying a couple of pools. We also have some large individual loans. We're really excited that we added Bill Fitzgerald, who has come in and joined our company to head up the workout group. He's highly experienced in this space. And we're meeting weekly now really going over how do we reduce those non-accruals through sales of the portfolio. 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.

Got it. But there's no willingness to sell maybe parts of the performing loan portfolio, maybe shrink the asset size below $100 billion.

I mean, I think we would look at everything. As we kind of look out, this quarter alone, we really have, between maturities and price resets, roughly $1,650 million 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 been either notified by the borrowers that they give us an indication. So, we're seeing just in that alone, that's $500 million or $600 million that will go away through payoffs. But for the most part, what we're really going to be focused on is how do we reduce those substandard and non-accrual loans between now and the end of the year.

Great. And maybe a more medium or longer-term question. As I look at the forecast update on Slide 9, you do have the net interest margins rising pretty significantly in 2026, almost relatively flat over 2024 and 2025. Can you speak to what drives that uptick? Is it just leaning into C&I? 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 repricing of the loans. Again, $5 billion in the -- and just taking multi-family, which is three-fourths of the book. That reprices $5 billion a year in the next two years, $7 billion to $8 billion out in 2027. So as you think about the impact of those repricing up from 3%, 3.5% rates to 7.5%, 8% rates, that has a pretty significant lift on margin. The other is redeployment into new lending at higher -- at not higher spreads, actually similar to lower spreads in the C&I space, but at more current market rates rather than the existing term carry rates.

Great. Thank you.

Welcome.

Our next question comes from the line of Bernard von Gizycki with Deutsche Bank. Please go ahead.

Hey, guys. Good morning. So just on the non-strategic asset sales, you identified an additional 2 billion to 5 billion. Just questions, was that after reviewing all of the loan portfolios? How do you balance the non-relationship, non-strategic assets with the ability to exit the asset at par or close to par? And are these potential sales excluded in this current forecast?

Yes. Well, 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 is out of the forecast. So that would be considered net at this point. So -- and what we've -- 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 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 enhance our overall yield by cross-selling.

Think about it this way. There's probably $10 billion 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, but 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 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 2 billion to 3 billion potential that we might look at over the next couple of quarters.

Okay, great. And then just a follow up, Craig, on the borrowers updated financial statements, I think you mentioned you received 80% of the portfolio. And I believe the NOIs were, it seemed higher than expected year-over-year. Just anything you've gotten from that data, because obviously the provisioning, the credit outlook has changed dramatically. And it's interesting that at least from the NOI comment, it's better. Was there anything else in those financials that either kind of confirmed that the borrowers' financial situation has improved or has it created? Anything you can comment on that?

I think I'd say what it's confirmed is that inflation was pretty impactful to particularly the rent-regulated portfolio. And while it's fairly stabilized at this point, it's certainly 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 borrowers' 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. 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 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.

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.

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? And I guess, the corollary is what's the value proposition for a customer coming incrementally coming on to the bank right now?

Yes. 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. 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. From a 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 in the private client space was right along the lines of 2.75% to 3%, and only about $200 million -- about $150 million of it was in the more premium price product. 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 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.

I think Craig kind of nailed it there. Really in the retail bank where we've seen significant amount, we offered kind of special five and seven months [Multiple Speakers] Yes, the five to seven-month CDs that gave us the opportunity to expand our customer base. And now Reggie and his team from the retail bank are really focusing on cross-selling. And I think when I was out again traveled around, saw basically 20 branches in three days. You could feel there's really good energy around cross-selling into that customer base. And I think that's what we'll continue to see in the retail franchise expanding those relationships.

Okay, thanks. And if I could just do a quick follow-up on the credit quality. 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 reevaluation that 18-month look forward?

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 moves them. Once we identify that the secondary source may have a shortfall, then they move into non-accrual and we take an associated charge-off with it.

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 -- 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.

Yes. So the result of looking with the current updated borrower financial information was in terms of looking out is an increase that we saw in substandards in the first quarter that then flowed through in terms of charge-offs. We do have an increase in substandards in the second quarter as well as a result of getting the updated borrower financial information.

So if you think about it, when a borrower submits the data, and at the current interest rate of 3.4%, you would look at that current cash flow 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. And so if you're looking at current NOI against a 400 basis point increase in your interest rate, that's what can push that into the non-accrual or the substandard category. Yes.

So the numbers are in the appendix to the earnings release. But think of it this way, the updated borrower financial information is driving the increase in substandards. The appraisal confirmation of value is what's driving the increase in non-accruals.

Got it. Thank you.

Our next question comes from the line of Steve Moss with Raymond James. Please go ahead.

Hi, Steve.

Hi. Good morning. Maybe we could start -- going back to the loans that reset this past quarter, you guys mentioned there's 8.19% rate. Just curious what is the debt service coverage for that type of borrower these days?

Starts getting pretty thin. I mean, that's -- the reality is you've had, particularly in the rent-regulated space, you get 3% rent increases, you get inflation for a couple of years running of 4%, 5%, and then you double the debt service. And where we had 50% to 60% debt service coverage ratios, or maybe I should say 200% debt service coverage ratios and underwriting. Now you start getting down pretty low. So that -- I don't know the statistic on that exact portfolio -- that exact bucket, but there's certainly ones that are resetting, particularly in the rent-regulated space, are getting in that. There's a lot of them in that 1% to 1.1% -- 1 to 1.1 multiple range.

Okay. And in terms of the loans that were placed on substandard or non-performing status this quarter, just curious, are the vast majority of those interest-only loans, are they rent control? Just kind of curious on some of the underlying characteristics.

The reprice really reflects the whole balance that reflects the general characteristics of the overall portfolio. So it's not -- there certainly are interest-only ones. There certainly are rent-regulated ones, but it's not in any particular pocket.

Okay. And just to clarify, you have an 18-month look forward. Is that kind of a cut-off for what loans are being classified as substandard or criticized these days? And for those maturities that are further out in 2026 and 2027, it's a long -- we'll see those build 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 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 in the future.

Okay. And one more I could 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 or multi-family...

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, different -- based upon the different product type, but anywhere from 6% to 9% cap rate.

Okay, great. Appreciate all that. I guess just maybe one last thing in terms of -- on the CRE side, you guys disclosed there's a -- that there's three-year I/Os in that portfolio. Curious how much of the commercial real estate is I/O? And what's the full principal and interest debt service charge ratio for that portfolio?

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 to borrow financials, we do it on a principal and interest fully amortizing basis. We're looking at the ability of those loans to cover. We don't just look at interest-only on a current basis.

Okay, great. I'll step back in the queue here. Thank you very much.

Thank you. Our next question comes from the line of Chris McGratty with KBW. Please go ahead.

All right. Great. Thanks for the question. Just want to go back to the loan sales that you're contemplating, the 2 billion to 5 billion. How much of an ROE impact will that have on your long-term targets?

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.

All right. So less than the sales that you had in this quarter. Okay. And then with the servicing sale, other deposits that will go with that or can you quantify?

There are. So the servicing deposits move up and down pretty volatility. But in the end of -- at the end of the month, they're slightly above, call it, their low point, typically at the end of the month. So about $3.7 billion deposits in the servicing business. Now we'll get $1.3 billion back in -- from the cash on the sale transaction. So net-net, impact on liquidity is just a little bit over $2.5 billion.

Okay, thank you.

And those are very high cost deposits.

Yes. There's two sets of those deposits. There's the deposits on our own servicing that are fairly low cost. That's about a $1 billion. But then the other $2.5 billion, $3 billion is fairly high cost deposits on the subservicing business. So I'm not sad to see those go. It basically works out kind of neutral to us from a funding cost perspective.

And are probably the highest cost…

Thank you.

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

Hey, good morning.

Good morning.

I was hoping you could just talk a little bit about the overall balance sheet size rest of this year, 2025. I think the guidance suggests that earning assets stay between, call it, $108 billion -- $109 billion. But I'm curious just how you're weighing the decision around staying over $100 billion or going below. And then with that, if you do just decide to stay over $100 billion, when do you become subject to the Category IV bank stress test, is that 2025 event or 2026 event?

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 billion, $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 mortgage warehouse loans being sold here in the third quarter. 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 IV bank. Officially, we became a Category IV bank on October 1st of 2023. With respect to the stress test, Cat 4 banks are every other year on the even years. So our expectation is that we wouldn't be in the CCAR stress test cycle until 2026 submission. We do run our own company run stress tests and in fact submitted to the Federal Reserve. Our company runs stress test here in 2024 and we'll do so again in 2025, but wouldn't expect to be held to the Federal Reserve run stress tests until 2026.

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 through the end of the year?

Yes. So accretable yield is tapering down. I think it -- let's just say it adds probably 7 basis points, 8 basis points 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 warehouse sale coming off of the balance sheet over the next couple of quarters. We've given the full year margin here. Hate to give exact predictions on the quarters, but we'll see it to be at this level to slightly down over the next two quarters.

And then I know you'd mentioned some cash levels, liquidity levels are high. They'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?

Well, I think the deposit growth that we had in the third -- in the second quarter is strong and gives us the capacity to -- gave 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 we'll redeploy into paying down debt is around the level of what we get from the warehouse. 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'll have long paydowns that will then be redeploying into new lending categories.

And then when all is said and done with the preferred conversions, 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 that we should expect going forward?

Well, so it really depends on what you expect in terms of the share price. They'll be net sellable. And so, it's public information how many warrants are out there. But at current share prices, it's 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 it's hard to predict exactly what the share price would be and when those holders would choose to convert or when they choose to net exercise.

Okay. Last quick one for me. Just some understanding as to why loan administration income went negative this quarter. Is that negative $5 million a decent run rate here?

From a loan administration perspective, we -- 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 associated with the FDIC in servicing their loans. I would expect after the servicing sale, our loan administration income would be essentially zero.

Thank you. That's all I have.

All right. Thank you.

Our final question will come from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

Hey, thanks. Good morning, guys.

Good morning.

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 higher confidence level than we had last quarter. I mean the management -- 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. 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. Really what's left is some appraisal gathering. But we've generally provisioned where we would expect that would come in. But from a loan classification standpoint, there will be some additional trickle-on impact, most of that came in, 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.

Okay, good. That's fair. On NPA expectations, I think you're signaling we should expect another increase in Q3. Is that fair? Is it going to be a step function or how can you prepare us for what we should see in NPAs in the third quarter?

Yes, it won't be as significant as it was in the second quarter. I think we'll see some increase, but I think as Joseph mentioned, we'll be working to taper that back with transactions where we dispose of some of that NPA bucket. Will that exactly net out? Probably not in the third quarter. As we look into the fourth quarter, we -- our expectations, we'd be able to keep that flat to down as we get into the fourth quarter and into early next year.

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? I'm curious if you feel like, is it triage mode, or is that unfair and is this all kind of methodical at this point for you?

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 kind of three buckets that we were really focused on. One was getting our earnings accurate and forecasting and communicating those and understanding the consequences of activities. The second was really making sure we understood the loan book and that we understand the risk and we could communicate that risk with a degree of confidence. And the third was building out our risk infrastructure within the company. This organization grew very quickly. Both the talent and infrastructure of the risk organization was not in place. If you look on that page five, where we've added talent, you can see a lot of the talent that we've added, have OCC experience, and are here to help us build that infrastructure. So if we decide to stay above $100 billion, that we have the right risk infrastructure for Category IV bank. But the third big bucket being that we really, 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'd say in those three buckets, we feel like we've made incredible progress. And then I would also say we recognize the desire to have a very strong liquidity and capital in the bank. As we're making these movements to become more simpler, we also want to have a very fortress liquidity and equity of the company.

Okay. Thank you very much.

Welcome.

I will now turn the call back over to Joseph Otting for any closing remarks.

Okay. Thank you very much, operator. Very much appreciate everybody joining. 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. 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 and the sectors that we've communicated, specifically in the private bank, the retail bank, small business, in the C&I segments of our company. Too often people can get drug into the problems and not be thinking about the solution. 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.