Flagstar Financial - Q1 2024

Transcript

Operator (participant)

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. First Quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. 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. To withdraw your question, simply press Star one again. I would now like to turn the conference over to Sal DiMartino, Director of Investor Relations. Please go ahead.

Salvatore DiMartino (Director of Investor Relations)

Thank you, Regina, and good morning, everyone. Thank you for joining the management team of New York Community Bancorp on short notice for today's conference call. Today's discussion of the company's first quarter 2024 results will be led by President and CEO, Joseph Otting, joined by the company's Chief Financial Officer, Craig Gifford. Before the discussion begins, I would like to remind everyone that our quarterly earnings press release and investor presentation can be found on the Investor Relations section of our company website at ir.mynycb.com. Additionally, certain comments made today by the management team 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 these safe harbor rules.

Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. Also, when discussing our results, we will reference certain non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliation of these non-GAAP measures. And now, I would like to turn the call over to Mr. Otting. Joseph?

Joseph Otting (President and CEO)

Thank you, Sal, and good morning, everybody, and thank you for joining us today. Before I go into my prepared remarks, I'd like to also offer my apologies for the late notification for today's earnings call. Clearly, this is not the standard we intend to operate by in the future, and we will notify you in a timely manner in the future quarters. However, we made some big promises for this meeting when we met on March seventh, which was a very tall order. And being a new management team, not only did we have to obtain and analyze information, we had to ensure we had both controls and processes and completed the credit review that we had indicated that we would conduct.

As I indicated when we first got together on March seventh, I had really three overarching items that I wanted to focus on in my first 12 weeks. The first was, you know, to reevaluate and get our forecast accurate and formulate strategies around the businesses. We wanted to conduct a review and understand our credit risk in the portfolio, and it was very important for us to engage with our regulators and develop relationships because they're very important to our overall organization in building our risk framework. We think, you know, that these were critical components.

We think we've done a tremendous amount of work on that, and we think you'll find through the slide presentation today, we came a long, really a long ways in the last four weeks since the new team has come together. So now turning to the first quarter. During the quarter, the company took a number of actions, designed to lay down the groundwork for our return to long-term, sustainable profitability, more in line with our regional bank peers. First and foremost, we successfully completed a little over $1 billion equity raise, anchored by Liberty Strategic Capital, a firm led by former Treasury Secretary Steven Mnuchin, along with Hudson Bay Capital Management, Reverence Capital Partners, and Citadel Global Equities. The completion of this equity raise significantly strengthens our capital and liquidity position.

It really demonstrates the confidence that the new investors have in the turnaround currently underway at the company. Second, we bolstered our board of directors and executive management team. In conjunction with the capital raise, we reduced the size of our board to nine members and added five new directors, all who bring extensive banking and turnaround experience to the bank. In addition, I have known for a long time and view them as independent thinkers and will challenge management appropriately as very strong board members. More recently, we announced the appointment of four senior leaders to our executive management team, each who have deep industry knowledge and extensive backgrounds in their respective fields.

I think when you think about the characteristics of the people that have joined us, they all are coming from very strong organizations with backgrounds from organizations like U.S. Bank, Bank of America, and most of us have worked together either at one of those institutions or at OneWest Bank. So we understand the kind of culture and the type of risk organization that we want collectively to build, and we all came from those organizations that were viewed in the industry as very high-performing organizations. I'm confident, together with the newly reconstructed board, we'll be able to drive our strategic initiatives forward and solidify our position as the leading regional bank.... We've done this before, and we feel we can do it again.

Third, we completed an in-depth due diligence process of our multifamily and commercial real estate portfolios, including the office portfolio, performed both by the bank and separately by an independent third party. We increased our credit loss reserves as a result of information from this review and other analysis we performed during the quarter. Now I'll take you through the earnings presentation, beginning with slide 2. On slide 2, it highlights kind of our, our strategy. As I said, we're- you know, we bolstered the management and the board. We've developed what we think we can share with you today, a realistic operating plan to get the organization by the end of the, of 2026 at or above industry, standards for performance. We have achievable, achievable capital and earnings forecasts.

We have implemented now a rigorous credit risk management process, and we've strengthened the talent on the credit risk process, and we maintained sufficient liquidity, as we'll walk you through earlier today. Our future targets are that we will be a strong, diversified regional bank producing a return on average assets of 1%, a return on average total TCE of 11-12, and a CET1 ratio 11-12 to 11 or 12%, and we'll walk you through those later today. The goal is to create long-term, meaningful shareholder value. 2024 will obviously be a transition year to a more normalized 2025 and 2026. On page 3, it gives you a highlight, and on that page, 7 of the 10 people are new to the company within the last 5 months.

That adds 3 important people that were legacy NYCB and Flagstar people who have joined the organization. Slide 4 gives a quick overview of the board members and the depth and knowledge that they bring to the organization. On slide 5, slide 5 is a key slide outlining our path to profitability. As you can see, we feel that we have multiple levers to get us there, and I'll spend a few minutes kind of walking our way through that. On number 1, obviously, as you know, the industry is confronted with the rapid rise in interest rates. A lot of the loans that were fixed rates that had either 3, 5, or 7 interest rate resets, a number of those are starting to come forward now, and we'll go through a repricing process.

And so that will benefit, obviously, net interest income and NIM. Number 2, focus on workout or problem loans. We recently brought new resources into the company to bolster the talent in dealing with the workout side of our organization, and this obviously will have long-term reductions in our NPAs. Number 3, we will begin to build a more robust middle-market relationship banking franchise. Today, we roughly have $20 billion in C&I loan outstandings in the portfolio. That will create a really good basis for us to move forward, and we see that business over $30 billion in the next 3-5 years. Just as a comment, you know, really, I've spent the vast majority of my career in this space. We successfully grew this business at U.S. Bank under my leadership.

We created that business at OneWest Bank in a very short order, put billions of dollars in new loan outstanding, attracted the right kind of talent, and I think that we will be able to do that here, and that'll be one of the more successful areas of our story when we look to have a balanced balance sheet. On number five, we'll look to fully integrate all three banks. Currently today, in 2024, we integrated the Flagstar and NYCB onto a single platform called Fiserv. And we have, the Signature legacy is on FIS, and so we will look to get to one platform in the future. And obviously, it's a very costly proposition when you're operating on two different platforms and consolidating that from an informational perspective. And number six, you know, the efficiency ratio tells the story.

We are an organization with an 80% efficiency ratio. Most of us came from U.S. Bank, where Jerry Grundhofer taught us how to squeeze nickels. And so it's in our culture, in our DNA, and we will aggressively look at our cost structure and make determinations of how we will be able to bring that back in with industry standards. As far as medium-term items, we will, as I indicated, look to diversify our loan portfolio. You know, our commercial real estate portfolio today is around $47 billion. Our strategic target is to bring that down around the $30 billion range. We'll improve funding by growing core deposits, and we think that will be helpful by building more relationship-type strategies. Then number three, we'll increase our fee income by cross-selling into the businesses.

Today, we have capabilities on cash management, derivatives, commercial cards, and syndication capabilities, and we can drive those further and deeper into our relationships. One comment I would like to make back onto the top in the short term, I jumped over number four, where it says sale or run off of non-strategic assets. We continue to look at the portfolio of assets on the balance sheet, and have started a process within the organization where we're reviewing that. We've identified an opportunity that could close quickly for $5 billion at par, minus a transaction fee that we believe could close within a 60-70-day period, that we may be announcing here in the next week or so. So we've already begun that process of looking at which assets fit strategically going forward.

By doing that, you know, we'll obviously create additional capital for the balance sheet, and we'll obviously create, you know, $5 billion of liquidity. With that, I'm going to turn it over to Craig Gifford, our newly appointed CFO, who I've really enjoyed the opportunity to partner with on this project. He's a man of tremendous strengths and talents, so Craig, I'll turn it over to you.

Craig Gifford (CFO)

Thank you, Joseph, and thanks to all those who were able to join the call today. I look forward to meeting many of you in the near future. Over the next few slides, I'll take you through how we think about our forecast, our loan portfolio and our credit risk, and our deposit base and liquidity. If you turn to slide 6, you can see a summary of the next 3 years' expectations of our financial performance. At the very beginning, you can see that we expect our diluted EPS, and this is on a fully converted basis for our outstanding preferreds, growing from our current level through to about $0.65-$0.75 at the end of 2026. As Joseph mentioned, you can see that we have expectations to reduce our efficiency ratio down to, from the current level, down to peer levels.

And we would see that happening through integration of our previous mergers and a close look at our overlapping cost structures. Our capital ratios were certainly bolstered by the recent capital infusion that Joseph mentioned, and we see that moving to peer levels over the next 2 years through our earnings power and retention of, of the earnings into capital. Our return on assets, we see improving through a rebalancing of our asset mix, as well as loan repricing into current market rates. Our return on equity, our return on tangible equity, will benefit as a result of these items and will drive us back to an 11%-12% return on tangible co, return on tangible capital over the outlook period. And finally, we believe that that will result in a tangible book value in the $7 range as we get to the end of 2026.

These all reflect the strategies that Joseph outlined on the previous page. If you turn to page 7, this is really where the rubber meets the road. How is this going to happen? Starting at the top of our income statement, our net interest income will benefit as we see loans reprice over the next couple of years. Our expectations with respect to rates that we've built into these numbers follow the median rate forecast. We have about $4 billion a year over the next three years that we'll reprice, and that's reflected in these numbers. We're actually relatively interest rate risk insensitive right now. We recently exited some pay-fixed swaps that moved us into a relatively flat, neutral position. Our net interest margin certainly decreased this quarter.

That was a result really of two things: our need to move into a bit more, a different shift in our funding mix and more wholesale funding, as well as an increase in our borrowing costs. We expect to see that improve over the next two years, again, principally a result of repricing of our loan portfolio. From a provision expense, as Joseph mentioned, after taking a deep dive look at our credit portfolio and looking at current market conditions, we did increase our loan loss reserves in the quarter. We do expect to see an elevated level of provisioning through the rest of the year as market conditions potentially impact more borrowers. But after that, we expect to see a return to a more normalized through-the-cycle level of losses, and we have shown you our expectations here.

Our non-interest income expectations are relatively flat in these targets, but we actually see upside as we balance our customer mix towards broader relationships, as Joseph mentioned. Non-interest expense, we do expect that we'll be able to drive efficiencies through our platform as we focus on our merger activity, we have systems, processes, and infrastructure duplication that we do believe that present us opportunities to, to reduce our costs. Over the forecast period, we've assumed between 10% and 15% reduction in our cost structure. If you move to slide 8, you can see where we currently stand. Our equity position—our equity infusion in March has us at a 10.1% CET1 ratio on a fully converted basis.

You can see that the reserve increase that we did in the first quarter brings us to a 1.58% allowance for loan losses as a percent of total loans, excluding our warehouse loans. And importantly, and I'll cover this in a few minutes in more depth, 84% of our deposits are insured deposits. We have a very low level of uninsured deposits compared to our peers at the moment. If you move to slide 9, I'll talk a little bit about our loan portfolio and the level of credit review that we did on a number of our higher-risk positions in the first quarter.

This slide presents our loan portfolio in total at the left, and then covers on the right-hand side, the number of loans and the percentage of the portfolio that we did what we refer to as a deep dive. That deep dive involved a lot of internal analysis, as well as getting third-party information about property valuations, and we've taken that information and considered the credit exposure in the portfolio, and I would say it confirms the potential for credit loss that was previously disclosed in our materials. You can see on the bottom right-hand side, the dollars and the percent of the portfolio that we covered, and I'll cover the office and multifamily portfolios in detail on the next two pages. But at a high level, we had a deep dive on roughly 75% of our office portfolio and roughly 30% of our multifamily portfolio....

If you move to slide 10, you can see what I'm saying in the top right-hand corner. We did a deep dive review of $2.5 billion of a $3 billion office portfolio. Certainly, office portfolio—the office portfolio, is in a market segment that is suffering a high degree of stress. Our overall, it doesn't represent a particularly large percentage of our overall loan portfolio at only $3 billion. You can see that we, on the bottom right-hand side, stand at a 10.3% allowance to total office loans, excluding owner-occupied loans. On the bottom left, you can see that in our deep dive review, we covered our top 50 loans, and those had an average principal balance of about $50 million. The remainder of the portfolio is fairly homogenous.

On a loan - an average loan balance, you can see of about $5 million, and we believe those have a differentiated credit risk, largely because they have more refinancing options, just given their loan size. If you move to slide 11, you can see more information about our multifamily portfolio. It's certainly our largest segment of the loan portfolio at $36.9 billion. You can see that we covered 36% of that portfolio in our deep dive credit review. And on the left-hand side, you can see that at the end of the quarter, we have a 1.3% allowance to total loan coverage ratio in the multifamily portfolio.

Again, on the bottom right, you can see that the loan sizes that we covered in our deep dive were those loans that were largely above $50 million, and the loan sizes that we think of as more of a homogeneous basis portfolio are around $5 million. In the bullets, you'll note that we expect about $2.6 billion of our multifamily book to reprice in 2024. I mentioned an expectation of about $4 billion in total. We've had very good success with repricing of our existing portfolio over the last 15 months. We've had $2.1 billion of loans that have repriced. About a fourth of those have actually paid off at the repricing dates, and the other three-fourths have repriced up to current market rates, and we've seen almost no delinquencies to date.

In other words, they, the borrowers have been able to cover debt service in spite of the elevated level of interest rates. If you move to slide 12, we have some information on our non-office portfolio, roughly $7.4 billion. Importantly, you can see on the bottom right that we have a very diverse book. There's no real credit concentrations. We did review about a fourth of this book, and we don't really see any stresses in the rest of the portfolio. On page 13 is a breakout of our allowance for loan losses, and I'll just point out that on the multifamily portfolio, again, we're at 1.3% allowance coverage ratio. That's up 45 basis points from 82 basis points at the first quarter... excuse me, at the year-end. And again, you can see the office allowance ratio is 10.3%.

The office ratio, in particular, puts us at the high end of the range compared to our regional bank peers. Moving to liquidity, deposits and liquidity, if you turn to page 14, you'll see in the top left-hand side that roughly 41% of our deposit base are transactional and lower-cost funding. It's not a CD-focused book. That said, we have looked to the CD market for some recent funding needs. Bottom left-hand side, importantly, you can see that our deposit base has been very stable since the capital infusion, and in fact, we've grown deposits. And that's not only through the end of March, but subsequent to the end of March to date. In April, we've seen a very stable deposit base and stable growth. I'm sure you know, you've seen that in the market, we have a premium product. We call it the 555 Product.

Importantly, we're seeing good traction, but it's not so large as to move our margin. It's focused on new money and new customers that we are bringing to the bank, and I would say that it's not driving an overall wholesale repricing of our deposit book. If you turn to slide 15, as I mentioned before, the vast majority of our deposits are insured deposits. We only have $12.4 billion of uninsured deposits. And on this slide, you can see that we have more cash on the balance sheet than the entire amount of our uninsured deposits. That's quite unusual compared to regional bank peers. In fact, from a total liquidity perspective, we have over 200% of our uninsured deposits.

We continue to focus on building liquidity, and as Joseph mentioned, as we look at potential strategic portfolio transactions, we would expect to see some degree of further build in liquidity coming from those transactions. Slide 16 is just a brief look at our first quarter financial highlights. We had a net loss to shareholders, to common shareholders, of $335 million for the quarter. That was largely driven by the provisioning of $315 million for the quarter. Certainly elevated. There was a bit of noise as well in our net, in our net loss related to our merger-related activities, which we see declining throughout the year and don't see that carrying over into 2025 and 2026.

And then we also had a bit of noise related to some adjustments from the previous bargain gain that we recorded last year, as we close out the accounting associated with the Signature transaction. Excluding those and at a more normal provision level, you can see that our base operations were actually at a slight net income level in the first quarter. And now I'd like to turn the call back to Joseph. Thank you.

Joseph Otting (President and CEO)

Okay. Thank you, Craig. First of all, I appreciate your patience. You know, since this is really our first opportunity to get together with all of you, we thought it was very important to go through the deck as opposed to just reading opening comments... that you could get really the context and details of where the organization is today, and then how we see that transforming into the future. So I hope you found that helpful and useful, and we clearly look forward, Craig and I do, to meeting a number of you and following up and having discussions in further detail, and really what other areas of the packet that you would like to have. You know, one of the things that we looked at is, you know, what is the upside for the company?

You know, we are currently trading at roughly 0.42 of a fully converted tangible book value of $6.33. This compares to about 1.5 times for Category IV banks and about 1.4 times for regional banks. I believe this valuation gap will narrow significantly as we execute on our transformation plan. And this plan is, you know, we're all experienced of going down this journey and this path. We've done it before. We know what the end looks like. We know what we have to do to execute on it, and we, as a executive management team, are optimistic that we can deliver on the plan. It's gonna be a lot of hard work.

We recognize that, but this is a strong team that's come together, with a very diversified background, that has been in environments what they see, what the strong regional banks can kind of look like. So, finally, I'd like to really thank all of our teammates for their hard work and commitment to the bank and our customers. As you can appreciate, I've been here slightly under eight weeks now. Craig has been here two and a half weeks. But it was very important for us to be able to kind of meet with you as soon as possible and give you an overview on the organization. We look forward to fielding any questions from the group.

Operator, I will turn it back over to you now, for you to be able to call on people for questions.

Operator (participant)

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 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 Abraham Poonawalla with Bank of America. Please go ahead.

Ebrahim Poonawala (Head Managing Director, American Banks Research)

Hey, good morning.

Joseph Otting (President and CEO)

Hi, Ebrahim.

Craig Gifford (CFO)

Good morning, Ebrahim.

Ebrahim Poonawala (Head Managing Director, American Banks Research)

Good morning to you. So appreciate everything that you outlined around business strategy and credit. Maybe first question, I guess both of you know this better than most, we are in a tough interest rate backdrop. Just talk to us when you talk about growing the core deposit franchise, which is extremely tough right now for even the best of banks. In terms of the nuts and bolts of how you can execute that without undue pressure on deposit costs, and also, if you don't mind addressing, there's been a fair amount of chatter about talent leaving NYB over the last few weeks. Like, how impactful would that be, and how much of that is baked into your forecast and outlook from here? Thank you.

Joseph Otting (President and CEO)

Yeah, thank you very much. So the first question is, when you look at kind of the legacy organization, it was kind of a monoline business where they focused on multifamily, and then they raised high money market and CD rates to fund that. And then the evolution with Flagstar brought more relationship deposits into the fold. And then the third leg of that was the Signature Bank joining the organization through the FDIC-assisted transaction. So we've been able to, through those processes, get to, as when Craig showed on the chart, 41% of our deposits are actually in non-interest bearing and interest bearing, which are transaction-related accounts.

And if you ask most people, Abraham, you know, "Who's your bank?" Most people identify, no matter if you have $1 million in your brokerage account and you have your mortgage with somebody, they usually identify with who's their checking account is. And so we have a strong baseline in our retail franchise to be able to grow off of those relationships. And then as we look to expand into the C&I business, usually, if you can be important to the customer stack, and usually in the middle market, in the specialty industry business, there's usually 3-5 banks. And if you can be important in that stack, you will usually get the relationship products, and those will be, you know, deposits, cash management, derivatives, syndication activities.

So really, our big focus is developing and recruiting talent into that space and building upon what we already have. We do already have some very good businesses in that space, and that's where I think as we execute on that strategy, you'll get less interest-sensitive clients and more clients that are interested in supporting the overall relationship. The second part of your question, I think, dealt with the Signature Bank. And what I would say about Signature Bank is, you know, we really want to build the baseline of our C&I commercial business around the Signature Bank teams. You know, we really have a unique franchise that we were able to obtain where we have commercial bankers and private banking people from Signature Bank.

They're really, you know, in some of the most lucrative markets, you know, in the United States. They're in the Southwest, the Northeast, the Southeast, and then around the Great Lakes. I will say, it has been a tough integration of them into our bank. Some of it has been our fault. And we have to take responsibility that, you know, not all of our products have flowed effectively for them. But I would also say, you know, some of the clients did not, you know, some of the legacy clients of Signature did not meet our BSA standards, and those clients are no longer with Flagstar. So there also was a little bit of a uniqueness of trying to fit. They had a decentralized risk model. We have a centralized risk model.

So I think there was a higher standard around that. But, you know, we have lost roughly 200 people in that group. We do track on a daily basis. The departure balance when the teams left was $6.176 billion, and today the current balance is $6 billion. So roughly, slightly less than $200 million of deposits have left. And we do recognize some of those deposits will take time to migrate out of the organization. But I think we've done a couple, there's been a couple contrary things why that has stuck, is when those teams left, they frequently did not take the whole team. So the team was 10, they took three and left seven people. Those seven people have done an extraordinary job of stepping up and calling on those contacts and retaining those.

And that really has been quite positive. And where, you know, there were smaller teams where the whole team left, we quickly reassigned those to other teams. And so I think a combination of that has helped us be able to retain a significant amount of those deposits and be in a position to kind of move forward. So there's always at risk for some more deposits, but it isn't like we've had a big wholesale. And as Craig pointed out on the slide, we've actually had pretty good growth in deposits during the quarter. And we continue to see that carrying through into April as well. And really, it's strong growth in the retail franchise and growth in the private bank.

Where you would perhaps anticipate that that would be rolling down, it's actually been rolling up.

Ebrahim Poonawala (Head Managing Director, American Banks Research)

No, thanks. Go ahead.

Craig Gifford (CFO)

As Joseph mentioned, there, there's been very little deposit departures since the press associated with the advisor, with the group of advisors that left. A couple of $200 billion... I'm sorry, yeah, a couple $200 million of departures. All of that occurred in the first two weeks, and over the last couple of weeks, it's just been a trickle. Very positive.

Ebrahim Poonawala (Head Managing Director, American Banks Research)

Right.

Joseph Otting (President and CEO)

And you know, you Abraham, one of the other things is, like, most of the, you know, those teams have left for small banks, and some of these clients, you know, just can't be serviced by those small banks. So they, they may move part of the relationship, but if they're fully integrated into the bank, it's very complicated to, you know, delink the treasury management and all the services and systems that you have. So my guess is we'll have split relationships with some of those small banks of things that can move over. But we've been able to retain a significant portion of the deposits and activities. And we've been calling, Sandro and I have spent a lot of time calling on the private banking clients, you know, meeting with the people, trying to understand.

As I said, you know, some of this is our fault, you know, the integration process of making sure we understand how we can be more responsive to credit needs, account opening, and those things that can make it more transparent for those customers to integrate into the bank.

Ebrahim Poonawala (Head Managing Director, American Banks Research)

That's great, color. And if I can have one quick follow-up. So appreciate all the deep dive you've done on the office and multifamily. When all this began, there was a lot of concern around New York City rent-stabilized multifamily book, and I, I, I appreciate there's more to do in terms of the deep dive review. Just give us a sense, like, for the longest time I've covered the bank, it felt like the loss content in the, in that book should be minimal. And I would love to hear your thoughts in terms of how we should think about the rent-stabilized New York City multifamily and your view on the loss content. Thank you.

Joseph Otting (President and CEO)

Well, couple things. I mean, we all know about the 2019 legislative-

Ebrahim Poonawala (Head Managing Director, American Banks Research)

Yep

Joseph Otting (President and CEO)

... you know, changes, and then the expectation perhaps that the Supreme Court would rule against that, and they, and they haven't. So we're kind of in a quandary, so to speak, with what we have. You know, we may have hit the low point now that some of the jurisdictions are doing tax abatements. You know, we've looked at the very big multifamilies that have large exposures, and we'll do more work on the remainder of the portfolio during this particular quarter. But as we say, you know, the revenue is pretty solid in that space. I mean, there's very few vacancies. You know, they know what the revenue. Where there's been problems really is how on the other side of the operating expenses have risen.

You know, people will tell you, buy a new HVAC system, it's 30% or 40% higher than what it was two years ago. You know, hiring people to do work on site, you know, interest rate resets, just a lot of, you know, negative consequences on the expense side. You know, we, and on one of the chart pages, Craig-

Craig Gifford (CFO)

Eleven.

Joseph Otting (President and CEO)

Yeah, chart 11, I think one of the important parts about our portfolio is if you look at, it's the part that shows the past due, there's a page that... Let's see. The one that shows the past due, so 30-89 days past due. Anyway, while he's finding that page, Abraham, one of the things that our portfolio has exhibited is amazing resiliency, where clients are not going past due. So where we see that, you know, perhaps the property is over 100% loan to value, and just for the properties, the debt service coverage is below 1:1. These are frequently long-time-owned properties by families, and they are supporting those properties from resources amongst the family because they don't want those properties to lose those properties.

And while, you know, in those instances, we don't have, you know, guarantees, you know, potential tax liabilities are, you know, motivating people to be at the table with us, negotiating to make sure that they can, you know, they have time to kind of manage their way. And Abraham, what I was referencing is on page 8. The third item up from the bottom is, or excuse me, second item up from the bottom is total loans, 30-89 days past due. At the end of the first quarter, we were 26% versus category four was 64%, and then 50 to 100 was 29%. So our portfolio, you know, while we do feel there's, you know, loss given defaults and probability defaults, the portfolio has held up very well from the standpoint of, the borrowers continue to make payments.

Got it. Thank you for taking my questions.

You're welcome.

Operator (participant)

Your next question comes from the line of Dave Rochester with Compass Point. Please go ahead.

David Rochester (Managing Director and Senior Banks Analyst)

Hey, good morning, guys. Congrats on getting all this together in such a short period of time. It's very impressive. Just following up on your comments on the $6 billion in deposits, appreciate all the color on that. What's the mix of that $6 billion that's remaining? So what portion of that is DDA versus interest-bearing or higher rate CDs? And then if you could just talk about how many of those teams are remaining at the bank and where you stand with lockups and whatnot, with the remaining, you know, private bank teams, and how you're managing that relationship, at this point going forward.

Joseph Otting (President and CEO)

Yeah. There's about 100 teams left with the bank today. So if you said there was roughly 130 at the beginning, there's 100 left. And you know, we had in place, you know, a cash payment after 1 year, a cash payment after 2 years, and then an equity pay, you know, RSUs that would vest in the third year, kind of on a cliff vesting. And you know— But I would also say, Dave, you know, money is one thing, but if you're servicing your clients in that space, and they have a really unique model, which I actually like, is they're a single point of contact for their customers, and I'm supportive of that model.

If you're not able to support your clients, you're going to be frustrated, and, and you're not going to stay at an institution you don't think that will give you those tools. And so it's really, we got to fix that. And if we can fix that, I think people can really have a successful career here, and we can take care of their clients because we have the ability to execute. So lockups are one thing, but, you know, if you're not able to take care of your customers and that's your franchise, then I don't think there's any money that would keep you at the, the bank. And I don't know, do you have the number on this?

Craig Gifford (CFO)

To put some numbers around the deposit mix of that, of that $5.8 billion, only about $250 million of that is CDs. So it's not—it's stable because of the relationship and the business, not because of maturity term structure.

David Rochester (Managing Director and Senior Banks Analyst)

What piece of that is DDA? Non-interest-bearing.

Craig Gifford (CFO)

I don't have that number in front of me, but it's the bulk of it is transactional accounts.

David Rochester (Managing Director and Senior Banks Analyst)

Gotcha. What do you think in terms of the timing of, you know, ironing out all the issues on the service side?

Joseph Otting (President and CEO)

We've been all over it. It's been one of my personal initiatives. You know, we meet, we have met and continue to meet with... They're called private bankers, but I'll be honest with you, most of them are just really good commercial bankers. And we're kind of working through. We first worked through some of the approval levels that were assigned, and we got them back to kind of what their approval levels were with Signature Bank. And then we've been working through the credit process. We've assigned a particular person to work through how credits get approved. So, for the most part, I think we're ironing those kind of things out. You know, we've kind of basically gone down to a trickle of people leaving at this point.

I really think the people that are here are engaged, and they want to be part of the organization.

David Rochester (Managing Director and Senior Banks Analyst)

All right, great. Thanks, guys. Appreciate it.

Joseph Otting (President and CEO)

Yeah, thank you.

Craig Gifford (CFO)

Thank you.

Operator (participant)

Your next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon (Managing Director and Head of Financial Services Group (FSG) Research)

Hey, guys. Good morning, and thank you for all the detail.

Joseph Otting (President and CEO)

Thank you.

Mark Fitzgibbon (Managing Director and Head of Financial Services Group (FSG) Research)

I wondered if you could share with us, what you're assuming for the balance sheet size in your modeling?

Craig Gifford (CFO)

Yes, we can. We are not assuming any significant reduction in the modeling that represents the numbers on pages six and seven in our balance sheet size. As Joseph mentioned, we are thinking about and looking at a number of strategic transactions, but we don't have a balance sheet reduction as our principal target. We'll make, we'll make strategic moves that are right for the business and right for our balance sheet, and importantly, increase our shareholder returns.

Mark Fitzgibbon (Managing Director and Head of Financial Services Group (FSG) Research)

Okay. And then secondly, I think your lead independent director had suggested on CNBC recently that, you know, the company could be used as a roll-up vehicle for more FDIC deals. When do you think that's conceivable? Is any of that, you know, baked into your plan through 2026?

Joseph Otting (President and CEO)

It's not baked into our plan. What I would, you know, obviously, with my background of being the Comptroller of the Currency, I have good visions into what a good credit or good risk management infrastructure looks like. You know, what is first line of defense and second line of defense and third line of defense, you know, should be. And by no means are we in a position, you know, in the short term to be in that position to be acquiring other entities. We'll clean up our house and get it in order. And, you know, really, our focus is to work, you know, with our regulators at the OCC and the Fed.

They're important partners to us, you know, to guide us and partner with us as we build the infrastructure here. You know, we have, we have a lot of work to do in this organization to put the risk structure in place, and we're committed to doing that. We've taken some actions where, you know, we formed a committee at the bank. We, you know, we're hiring a person to coordinate it in the organization. It's their job. We formed a management committee. We're really focused on it, and we want to deliver because we think it's important for us. We're not doing it because, you know, anybody else wants us to do a KPMG or the regulators. We want to do it because we think it's important.

Craig Gifford (CFO)

I would tell you that the financial impact of that infrastructure, needs and build is included in the financial forecast. So we would see that some of the opportunities for efficiency that we'll drive out of the business, will be reinvested in developing risk management infrastructure.

Mark Fitzgibbon (Managing Director and Head of Financial Services Group (FSG) Research)

Great. And then just lastly, would you consider selling a part of the branch franchise? Are there any sort of far-flung areas where you see an opportunity to kind of shrink down part of the branch franchise?

Joseph Otting (President and CEO)

I don't think so, not at this point. I think we really like the deposits and how the bank has operated in the retail bank. If anything, we would like to get more products that they could have available. We obviously are really good at originating mortgages, and being better at originating mortgages out of the branch could be a strong initiative. Reggie is focused on, you know, doing more small business lending out of the branches as well. So I think we're more into how do we enhance what we offer through our branch network. They've done a really strong job. We have a very powerful deposit base out of the branch network, and we think we can grow upon that.

Mark Fitzgibbon (Managing Director and Head of Financial Services Group (FSG) Research)

Thank you.

Joseph Otting (President and CEO)

You're welcome.

Operator (participant)

Your next question comes from the line of Chris McGratty with KBW. Please go ahead.

Christopher McGratty (Senior Banking Analyst)

Oh, good morning.

Joseph Otting (President and CEO)

Great.

Christopher McGratty (Senior Banking Analyst)

Thanks for the question. Hey, good morning. Could you share where you are looking to run the loan-to-deposit ratio over the next two to three years?

Craig Gifford (CFO)

Mm-hmm. Yeah, I think that the loan-to-deposit ratio, as we, as our current balance sheet mix looks, will continue out at least over the next 24 months. As we get beyond that and, look at our wholesale funding and our on-balance sheet liquidity position, you might see us move to, a lower reliance on wholesale funding and perhaps an increase in deposits that would, reduce that ratio a bit. But I don't expect to, see it transition significantly in the next 24 months.

Joseph Otting (President and CEO)

Yeah. Do you want-

Christopher McGratty (Senior Banking Analyst)

So it'll remain elevated there? Okay.

Craig Gifford (CFO)

Well, as we look at strategic transactions-

Christopher McGratty (Senior Banking Analyst)

Yeah

Craig Gifford (CFO)

... we might see, we might see, some reduction of loans that would, that would reduce the loan-to-deposit ratio just through strategic transactions that would, be intended to drive liquidity, as well as, perhaps operational efficiency and ultimately shareholder value, particularly by releasing some capital demand.

Joseph Otting (President and CEO)

Right. And Chris, one of the, I'd, I'd say, the overarching strategies within the company is to really look at, where we have scale and where we have relationships. Some businesses where, you know, we don't know the customer, they're just singularly using the balance sheet. Those would be, you know, businesses that probably, you know, would be complicated and difficult for us to hold on to in the future. And the market, you know, today is, you know, there's a lot of buyers for that kind of product. And so as we would, you know, execute on transactions, as Craig said, that would give us the ability to use that liquidity, either to reduce wholesale borrowings or increase our liquidity. So.

Craig Gifford (CFO)

Or invest in-

Christopher McGratty (Senior Banking Analyst)

Okay. Um-

Craig Gifford (CFO)

Requirements.

Joseph Otting (President and CEO)

Yeah.

Craig Gifford (CFO)

Mm-hmm.

Christopher McGratty (Senior Banking Analyst)

Great. And I guess that's my follow-up, but it's two-part. The $5 billion you talked about that you might be in a position to announce details, could you share what asset class that is? And also, would the strategic decisions of the balance sheet also be considering like a CRT transaction where you reduce risk-weighted assets? Thanks.

Joseph Otting (President and CEO)

Yeah. You know, Chris, I wanted to make sure people are aware of it in case we announce it in a day or two. But I don't want to go into details. I think at this point, it's not appropriate to do that. But you know, we are right at the doorstep of deciding whether we're going to move forward with that transaction.

Craig Gifford (CFO)

Importantly, that transaction would be accretive to our capital ratios. It would reduce our capital demand and wouldn't have a significant effect on either immediate gains or losses or earnings, our earnings potential.

Christopher McGratty (Senior Banking Analyst)

Great. Thank you.

Operator (participant)

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

Brian Wilczynski (Equity Analyst)

Hi, good morning. This is Brian Wolczynski filling in for Manan. Can you talk about your approach to complying with the long-term debt rules that were proposed last year? And related question is, what do the rating agencies need to see in order for you to have a better rating? Thanks.

Craig Gifford (CFO)

I'll move to the last one. The second question, they need to see a reliable path towards earnings, and the ability to demonstrate our understanding of the credit risk. I don't see that as an immediate term. We certainly think that there are opportunities for us to demonstrate our understanding of the business and our financial performance in a repeatable way that could lead to upgrade potential or positive outlook in a medium-term time frame. In terms of the long-term debt rules. You know, I think where we stand from a capital position will benefit our funding as we continue to increase our capital ratios. But we continue to evaluate our balance sheet position and haven't really made any long-term decisions on how we'd be structured there.

Brian Wilczynski (Equity Analyst)

Okay, great. Thank you. And then just as a follow-up, when it comes to bringing down the commercial real estate concentration, can you give some more details on the types of commercial real estate that you might choose to maintain or grow over time versus what you are more likely to de-emphasize?

Joseph Otting (President and CEO)

Well, you know, clearly the biggest concentration is in the multifamily sector of the portfolio. So to move any significant numbers, you would have to reduce your exposure in that particular area. I would say from a risk perspective, you know, it would be our desire to reduce our exposure in the office marketplace. You know, we've done a pretty deep dive on $2.5 billion of the $3.3 billion of the portfolio. And so, you know, clearly, there's stress there, you know, I think there's been a fundamental change, you know, how people are going to work and, you know, what space is going to be used in the future. It's just... You know, it's difficult to see the end on office.

So I would say, you know, if I was like, where would I like to see the first reductions? It would be in office. But then eventually, to get down to that $30 billion level, we would definitely have to go into the multifamily book and reduce our exposure there.

Craig Gifford (CFO)

But I'd say it's more likely to be through how we manage our relationships and the transactions-

Joseph Otting (President and CEO)

Yep.

Craig Gifford (CFO)

—as opposed to, as opposed to portfolio sales.

Joseph Otting (President and CEO)

Right. Yeah, I mean-

Brian Wilczynski (Equity Analyst)

Okay.

Joseph Otting (President and CEO)

Our, our goal around here is like, A, if we have a relationship with you in the deposits, then if you want to do something and it's a good credit, we'll still do it for you. Option B is, you know, if you, if you want us to do a loan and you're either going to bring deposits back or we can gather a big part of your relationship, we'll do those. Option C, where you just want to use our balance sheet, we won't do transactions like that in the future.

Brian Wilczynski (Equity Analyst)

Thank you for taking my questions.

Joseph Otting (President and CEO)

You're welcome, Brian.

Operator (participant)

Your next question comes from the line of Ben Gerlinger with Citi. Please go ahead.

Benjamin Gerlinger (Vice President and Senior Equity Research Analyst)

Hey, good morning.

Joseph Otting (President and CEO)

Hi, Ben.

Craig Gifford (CFO)

Hi, Ben.

Benjamin Gerlinger (Vice President and Senior Equity Research Analyst)

I know you gave a good amount of information on your independent, or excuse me, the individual categories of some, your, CRE book. Just curious, just because, I mean, multifamily reviewed roughly a third, some non-office CRE is definitely a quarter. Is there an intention to do a complete 100%, or did you just start with the largest just to make sure you're kind of in an appropriate area for your reserve levels?

Craig Gifford (CFO)

So we started with the largest, not only because it's they're large loans and we get more coverage with fewer accounts, but because they're generally more institutionally owned as opposed to either family-owned or privately owned investments. The decisioning factors are different there, as Joseph pointed out. Additionally, obviously, as I mentioned, the refinance risk is more of a challenge when you're talking about a $100 million credit as opposed to a $3 million credit. We will continue through our standard and improving credit processes to take a closer look at the smaller loan portfolio, and I'd say the next cut would be in a more standardized approach to look at our portfolio balances over about a $10 million threshold.

As we continue to look at that and as we continue to see borrower performance in the current environment, that could impact our reserving levels. But we believe that we have appropriate levels of reserves for the portfolio right now.

Benjamin Gerlinger (Vice President and Senior Equity Research Analyst)

Gotcha. And just kind of following up-

Joseph Otting (President and CEO)

One other thing.

Benjamin Gerlinger (Vice President and Senior Equity Research Analyst)

Go ahead.

Joseph Otting (President and CEO)

The next phase is, we're kind of looking at the large borrowers. And what we mean by that is instead of large loans, we're going to look at where there's a consolidation of the borrowers. And then also, any relationship where there's $10 million or more, by June thirtieth, we'll be through that process. So when we report to you next time as well, we'll be able to kind of give some statistics around that. So we are kind of waterfalling our way down through the portfolio, to make sure that we're comfortable with, you know, obviously, the risk ratings and, and the reserves against the portfolio.

Benjamin Gerlinger (Vice President and Senior Equity Research Analyst)

Gotcha. And then just follow up here quickly. I know you gave the guidance of an elevated loan loss provision throughout the rest of this year, and it wanes pretty materially in 2025 and 2026. For this year, what is it really predicated on? Is it more so allowance building, or is there some sort of, as you push things out, you might have to be marking a loss similar to earlier this year? Just kind of, I'm just trying to get a sense of why you're anticipating higher provisioning going forward or for the next couple years.

Craig Gifford (CFO)

Well, I think it's... No, it's a good question. I think that what we've seen is repricing at higher interest rate levels obviously put stress on debt service coverage ratios for some borrowers. We've had really good experience, and that's particularly relevant to the way we model credit loss for reserving purposes. But we also know that there will be some classes of borrowers that will experience stress. And as we begin to get more insight into current market level debt service coverage ratios and see how those borrowers, a broader population of those borrowers react in reset environments, we could see that until the rate curve comes down, that there'll be additional stress. Our expectations are based upon the current rate curve and the current market conditions.

Those conditions, you know, could change. The Fed's talking about higher for longer, and that could have an impact on future conditions, and we've considered that as we put our forecast together.

Benjamin Gerlinger (Vice President and Senior Equity Research Analyst)

Got you. That's helpful. Thank you.

Craig Gifford (CFO)

You're welcome.

Operator (participant)

Your next question will come from the line of Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac (Director of Research)

Thanks. Good morning, and thanks for taking all of our questions and information. I wanted to drill down on the net reserve build. So we look at the provision guide that you gave us this year and next year. What type of charge-offs should we anticipate, and how should net reserves change over time?

Craig Gifford (CFO)

Yes, we anticipate an elevated level of charge-offs. We had about $80 million this quarter, and in our outlook, we don't distinguish dramatically between charge-offs and reserving. I should say, and reserve build, because they all ultimately reflect the underlying credit loss of the portfolio. But I think that we'll see a ramping of charge-offs over the next couple of quarters. And then as we get out beyond that, whether it's a charge-off or reserve build, we think it'll come back to a more normalized run rate credit loss.

Christopher Marinac (Director of Research)

Great. And as some of those charge-offs are taken, would some of that be kind of new loans that are reset and just taking the value impairment, or would some of those be loans that leave the bank altogether?

Craig Gifford (CFO)

So it's loans that the charge-offs this quarter are principally a couple of office loans, and as we talked about, the office market's pretty stressed, and it was a couple of stressed office loans that got to the point where the investors chose to have a-- come to us, and we had to take over the property. I think... I don't know that we've taken them at this point, but we look at them and believe that a loss is likely on those. It's just a couple of office loans.

Christopher Marinac (Director of Research)

Great. Thanks very much for the questions this morning.

Craig Gifford (CFO)

Thank you.

Operator (participant)

Your next question will come from the line of Bernard Von Gizycki with Deutsche Bank. Please go ahead.

Bernard Von Gizycki (Equity Research Analyst)

Hi, yes. Hi, good morning. So regarding being a Category Four bank, in the 10-K, you noted anticipating significant expenses to develop policies, programs, and systems that comply with the enhanced standards. Would have assumed the revamping of risk management infrastructure would also be costly, but I think, Craig, you noted it's included in the forecast today. So on today's call, it sounds you're optimistic about driving expenses down, which are seen in your forecast on page 7. Can you just help reconcile these expected cost pressures and efficiencies you expect over time?

Craig Gifford (CFO)

Hi, Bernard. Thanks for the question. So if you look on page 7, you can see a walk forward. As I mentioned, it's roughly a by year, between 10%-15% reduction. Obviously, there are some of those costs that are fixed that we can't do a lot of, a lot about, and there are other portions that are very manageable. If you think about our organization, we took three—it wasn't a large bank that bought a small bank, and there's only a little bit of opportunity to drive efficiency out of the organization. It's three banks that had three full sets of infrastructure. While we've partially been able to take advantage of the opportunities there, there's certainly more to come.

As Joseph mentioned, we have a strong existing employee base, but we brought in a number of management team members that have experience building risk management functions. We've done this before, and we have a pretty good feel of what that scale looks like and what the costs are for that. And so as we think about our forecast for the future, I think there's a pretty high degree of predictability around what the costs are associated with the risk management build, and we've contemplated that in these numbers.

Bernard Von Gizycki (Equity Research Analyst)

Okay. And then just another follow-up from the 10-K. You know, you noted a number of items included in the remediation status of the reported material weaknesses identified by your auditors. Just a few items noted included the frequency of reporting, you know, expanding the use of independent credit analysis, reducing the reliance on internally created tools, and just assessing staffing qualifications. You know, could you just help explain the situation you inherited? You know, it does sound like the department was working entirely on manual spreadsheets, had no defined reporting or guidelines. So any color here would be helpful to just understand the situation that you inherited.

Craig Gifford (CFO)

Yeah, I think probably the biggest indicator of the situation was just that, there wasn't as much visibility to the developing situation in the office market and to a small degree in the multifamily market, and the impacts that that would have on provisioning. So, that ultimately passed through in the 10-K and the fourth quarter in a big reserve. I think what we've demonstrated here is that this management team, along with the existing staff, have done a good job to really catch up, so to speak. Now, our internal infrastructure still has a lot of improvement to go, and we continue to work on those action plans.

Again, many of us are pretty new here, and so we're jumping into existing action plans and bringing our knowledge and experience into how we can further improve those. So we have a ways to go. We're not done, but over the last 4-6 weeks, we've done a lot of work to make up for some of the previous deficiencies, at least as we stand today.

Joseph Otting (President and CEO)

Yeah, and the other thing that I would add is, we have brought very experienced talent into the company, from Jim Simmons, who for 20 years with the was the head approval officer and ran the workout for commercial real estate at U.S. Bank, joined us. He is called the Special Assistant to the President, but we wanted Jim to come in and look at all the processes, the forecasting of the NPLs, charge-offs. And so Jim's working on that project right now, and we're adding additional staff into that infrastructure as well. So we recognize the need to beef that up, but we don't see that as a heavy lift for us. We think that's more just bringing our expertise and the talents together. The information is available to us.

We just need to formulate that information in the right way.

Bernard Von Gizycki (Equity Research Analyst)

Okay, thanks for taking my questions.

Joseph Otting (President and CEO)

You're welcome.

Operator (participant)

Your next question will come from the line of Casey Haire with Jefferies. Please go ahead.

Casey Haire (Vice President and Senior Equity Analyst)

Yeah, thanks. Good morning. Follow-up on credit quality. So, following the review of some of the more troubled exposures in your loan book, office, multifamily, and traditional CRA, just wondering what kind of price declines you guys came across as you built reserves? Just looking for some-

Craig Gifford (CFO)

Yeah, it depends on the book, but I would tell you that our reserving process contemplated 42% price declines in office and in the 30% range for multifamily. That's the way we've modeled it. If you think about LTVs, that's why we see office as pretty stressed because our origination LTV is at 42%, puts us pretty close. On the multifamily book, our origination LTVs were in the 60% range. Our origination debt service coverage was in the 1.6+ coverage ratio level. So if we think about current LTVs being in that multifamily book, perhaps down as much as 30%, which is what we've modeled, that puts the overall loan-to-value ratio potentially in the high 80s-low 90s range.

If you think about the resets, and the rate level for resets, depending on where we are in the rate curve and when those reset, they're sort of hovering in that 1-1.1 debt service coverage ratio. Which is why we're not seeing a lot of defaults, is because they're able to cover the, the debt service. They're not making as much money as they'd like, for owners, but they're able to cover the debt service.

Casey Haire (Vice President and Senior Equity Analyst)

Got it. Thanks. Then on slide 8, you guys outline your relative position versus Category IV banks. One of the metrics not here is the CRE concentration. It sounds like you guys are—your forecast is based on a flat balance sheet, aside from the $5 billion potential sale, but on a flat balance sheet, how—with C&I, I think, Craig, I think you mentioned a $10 billion growth opportunity in C&I longer term. Just wondering, how does the CRE concentration evolve in the coming years, on a flat balance sheet?

Craig Gifford (CFO)

I think it evolves as we work through the refinance, reset, and maturity cycle over the next 2-3 years and retain the credits that we want, where we have broader business relationships and allow the credits that are more balance sheet use-focused to run off the balance sheet. Then we're able to have capital to deploy into these growing business opportunities.

Joseph Otting (President and CEO)

Yeah, and just a point out of information. It isn't like we're saying the balance sheet is going to remain flat. When in our baseline case, we had it flat, and then the other attributes of asset sales, winding down businesses, could have obviously impacts to the size of the balance sheet. So it's just in the baseline case, that's the way it's set. But clearly, you know, if we're sitting here three years from now, we would like to be looking down, you know, the path of a $30 billion CRE portfolio.

Casey Haire (Vice President and Senior Equity Analyst)

Thank you.

Operator (participant)

Your next question will come from the line of George Shaw with Barclays. Please go ahead.

Joseph Otting (President and CEO)

Hi, George.

Jared Shaw (Managing Director and Senior Equity Research Analyst)

Hi, good morning. Hi, it's actually Jared Shaw. But just a quick question on liquidity expectations. You know, how should we be thinking about on-balance sheet liquidity and HQLA in light of some of the guidance that we've seen here?

Craig Gifford (CFO)

Yeah. So on-balance sheet liquidity right now is ample. As I pointed out, we have quite a bit more on-balance sheet liquidity today than what we have in uninsured deposits. As I mentioned, to the extent that we do transactions, I would expect that a good portion of that, at least in the near term, would be continued on-balance sheet liquidity. I don't really expect to grow the securities portfolio substantially. It'll be pretty short-term liquidity. As I mentioned, we're pretty interest rate risk neutral right now. I'm not sure I want to extend the duration very far out. We'll take a look at it, but we're pretty interest rate risk neutral, so we like the balance of our liquidity mix.

Jared Shaw (Managing Director and Senior Equity Research Analyst)

Okay, thanks. And then just two quick modeling questions. Do you have what the loan accretion was in the quarter? And then when we look at the expense guide, is that including intangible amortization?

Craig Gifford (CFO)

The expense guide is including intangible amortization. I don't have the loan accretion.

Jared Shaw (Managing Director and Senior Equity Research Analyst)

Okay, thanks.

Operator (participant)

Your next question will come from the line of Steven Alexopoulos with J.P. Morgan. Please go ahead.

Janet Lee (Equity Research Analyst)

Morning, this is actually Janet Lee on for Steve Alexopoulos. Back to your flat balance sheet comment earlier, is it fair to say that overall deposits are basically staying flattish through 2026 at the $75 billion level? And in your NII outlook, what is assumed for your non-interest-bearing deposits to bottom out, and can you share color on how that deposit mix should change from here for the remainder of 2024?

Craig Gifford (CFO)

... Hi, Janet. We've been pretty conservative from a forecasting standpoint. We've assumed a flat mix to date. We do expect that we'll see, as Joseph mentioned, as we expand our relationships with many of these customers into deeper relationships, we expect to see more demand deposit and transactional-type funding. And so, there's the opportunity for upside in terms of our funding mix, but in our base model that we've presented, we haven't included an optimistic outlook on that, so to speak.

Janet Lee (Equity Research Analyst)

Okay. And as your CRE loans are coming down to the $30 billion range over the next few years, can you give us more detailed timeline on that? As in, where do you expect your overall loan balance to be at towards the end of 2024, and what's a more normalized level of loan growth for you going forward in 2025 and 2026?

Craig Gifford (CFO)

So the portfolio, excuse me, the forecast that we've included does not really include a loan mix change in the outlook. These are more... think of them as strategic plans as opposed to forecasting. But as we think about the potential, as I mentioned, we have about $4 billion a year that will hit, that will hit resets and maturities over the next three years. And so you think about that, the kind of and the bulk of that is either multifamily or office. About 2.5 of that a year is multifamily. So as we think about the opportunity, it's that kind of size is what will be a natural opportunity to adjust concentrations over the next three years as opposed to portfolio sales.

And then as we think about loan growth, we haven't modeled substantial loan growth in the book here. We've kept the balance sheet relatively flat.

Janet Lee (Equity Research Analyst)

Okay, and my last question on credit. Besides the couple of office charge-offs you had in the first quarter, can you talk about how much of your rent-regulated multifamily and CRE loans that came due in 1Q2024, and what happened to these loans? How much got refinanced or paid off, or these given modifications and extensions?

Craig Gifford (CFO)

Well, as I mentioned, over the last 15 months, we've had, you know, $2 billion that has reached reset dates, and a fourth of that has paid off, and 75% of that has refinanced, and the performance has been really, really strong. I'm not going to say that we haven't had any delinquencies. There's probably 1 or 2 out there, but it's essentially no delinquencies to date on those loans that have reset at current rate levels. The first quarter performance is relatively similar. I mean, something that reset in the first quarter hasn't had much time to perform, so I don't want to speak too hard on that. But the overall characteristics of the first quarter weren't any different than the previous 12 months.

Janet Lee (Equity Research Analyst)

All right. Thanks for taking my questions.

Craig Gifford (CFO)

Thank you.

Operator (participant)

Your next question will come from the line of Peter Winter with D.A. Davidson. Please go ahead.

Peter Winter (Managing Director and Senior Research Analyst)

Thanks. Good morning. Can you provide an update on the criticized and classified loans, the trends this quarter?

Craig Gifford (CFO)

Yeah. So we did have about a little over $1 billion of rating changes, but criticized and classifieds. I'm just taking a look, a quick look here. So criticized and classifieds increased about $500 million from quarter to quarter. That's the wrong number. I'm sorry. Criticized and classifieds increased about $2 billion from quarter to quarter. And those are the-

Peter Winter (Managing Director and Senior Research Analyst)

Two-

Craig Gifford (CFO)

those are the loans that we're looking at as we think about how changes in the interest rate curve impact them when they get to the reprice dates. Not all of those reprice in the near term, but overall, it was about a $2 billion increase.

Peter Winter (Managing Director and Senior Research Analyst)

Got it. Thanks. And then, just if I could just ask, if I look at the average share count, pretty much most people got it wrong in the first quarter. Just how do we, how should we think about the average share count in the second and third quarter?

Craig Gifford (CFO)

Yeah. I wouldn't say that people necessarily got it wrong. It's a confusing math story, in part because-

Peter Winter (Managing Director and Senior Research Analyst)

Yes

Craig Gifford (CFO)

... the way we're presenting in this deck is on a fully converted basis for the preferred stock. So the transaction that we did in March had a good portion of that being preferred. So we have 750 million shares, today, and the, on an as-converted basis, will be, will be over 1 billion, and we present the details of that in the materials. But that's, an expectation that those shares would convert in the second quarter, and so all of our information is then presented as if those shares were fully converted throughout the forecast period.

Peter Winter (Managing Director and Senior Research Analyst)

Okay. Thanks.

Craig Gifford (CFO)

You're welcome.

Operator (participant)

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

Matthew Breese (Managing Director and Senior Research Analyst)

Good morning.

Craig Gifford (CFO)

Hi, Matthew.

Matthew Breese (Managing Director and Senior Research Analyst)

I was hoping you could talk about the, you know, the potential sale and one-off of non-strategic assets beyond the identified $5 billion, areas you're focused on and the amount you deem non-strategic. Then in addition, you know, last quarter, we discussed the CRE concentration and the need to get that in line with Category IV bank peers, which is a significant gap between where you are today. I'm curious where you see that CRE concentration going by year-end 2026 with the rest of the guidance areas, capital and profitability.

Joseph Otting (President and CEO)

Matthew, obviously, we're not in a position to comment on the $5 billion. So, as I indicated, we are close to having the option of choosing that transaction. So, we'll be working on that over the next, you know, 24-48 hours.

... as far as like our process, we really have been, you know, both Craig and I have been here a relatively short period of time, but going through, sitting down with the business owners within the company and trying to understand the business. We've had numerous meetings to kind of go through, sit down, and understand the business and make a determination, you know, where is it that we have relationships?

and so that has really given us the opportunity to kind of then come back, and we're going to put through a process where we'll build our strategic plan for the company, and we'll be in a position to give you better identification when we get together for the second quarter, after we've had a little bit more time to kind of go through that and make some determinations of which are strategic assets and which are not.

Matthew Breese (Managing Director and Senior Research Analyst)

On the CRE concentration, where do you anticipate that being by year-end 2026?

Joseph Otting (President and CEO)

Where do I think, Where do I think what, Matthew?

Matthew Breese (Managing Director and Senior Research Analyst)

The commercial real estate concentration.

Joseph Otting (President and CEO)

I mean, I think the commercial real estate concentration probably—I think in an ideal world, you're probably somewhere around 25%-30%, some type of consumer related, probably 40% in C&I, and probably 30%, you know, in your CRE. We really see the growth potential in the C&I based upon not only my experience, but the talent that we will draw into the company.

Matthew Breese (Managing Director and Senior Research Analyst)

Okay. Then I did want to touch on capital. How are you thinking about the warrants and timing on those being exercised, or is that a longer-term item? And then I wanted to touch on, you know, TLAC-related debt, whether that's incorporated in your, you know, 2026 outlook.

Craig Gifford (CFO)

The answer is, on TLAC, we haven't incorporated a significant amount of long-term debt in this outlook. With respect to the warrants, the capital numbers that we include here do not include any capital that would come from the exercise of the warrants. They do include an allocation of a portion of the $1 billion capital raise in March to the warrant classification, but we haven't included anything from an exercise price. So there's potential upside from that.

Matthew Breese (Managing Director and Senior Research Analyst)

Okay. And then last one for me is: How much in deposits are at the bank tied to Signature's legacy specialized mortgage solutions team? And then, how sticky important is that business to you all going forward?

Craig Gifford (CFO)

Well, I think I'd focus on less on the Signature and more on the on the mortgage banking aspect. They're business relationships that are part of either broader business activities or our mortgage model, more so than the than the Signature advisor, so to speak. It's roughly about... It varies because they're they're mortgage escrow related, so some of them move up and down with principal and interest in the cash flows associated with that. But call it big round numbers, $3 billion-$4 billion. It's not a big number for us.

Matthew Breese (Managing Director and Senior Research Analyst)

I'll leave it there. Thank you for taking my questions.

Craig Gifford (CFO)

You're welcome.

Joseph Otting (President and CEO)

Thank you.

Operator (participant)

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

Craig Gifford (CFO)

Hi, Steve.

Stephen Moss (Director and Senior Equity Research Analyst)

Hi, good morning. Maybe just going back to the multifamily credit here. I hear you guys with regard to, you know, rates seem to be influencing your expectation on credit costs. Should we think about the provisions primarily being driven by loans resetting over the next 12-18 months? And could that provision therefore be more elevated as we go through, you know, a larger set of resets over the next 4-5 years, if we stay up at a 4%-5% coupon on the five-year?

Craig Gifford (CFO)

Well, I think we focused our credit review based on where the market forecasts are from interest rates. I mean, certainly, it could. As I mentioned, we have $4 billion in the whole book that matures, that resets over the next—each year over the next 3 years. If you get out into 2027, it's about $9 billion. So you got a bit of a bubble as you, as you sort of take 5-year, 5-year stuff out to 2027. So if you see rates stay this high that long, but I think that would—I think there's, there's other issues that with that might foretell for the economy if we see rates that high that long.

Stephen Moss (Director and Senior Equity Research Analyst)

Okay. And then in terms of just the ability for a number of these borrowers who are, you know, in more aggressive structures to pay, it sounds like you have some expectation of government subsidies, whether it's tax benefits or other programs. Just kind of curious, you know, how much maybe government programs are influencing your expectations on credit costs going forward. And one other thing, with regard to the coverage there, just curious as to... Well, I'll stop there with that.

Craig Gifford (CFO)

So I'd say that we haven't the government support doesn't hasn't really influenced our view on credit credit risk or reserving. I think what we were really speaking to more is not the government aspects, but just simply the ownership aspects. What types of owners, how they've invested, what their historical investment path has been, whether they have significant bases or small bases, and the potential for tax implications to them if they were to exit versus continue to hold and support the debt.

Joseph Otting (President and CEO)

Yeah. And, Steve, the thing I would add there is, you know, the owners of these properties will come in and advise us that they have are seeking tax abatement, and we do not put that into, you know, our models on their NOI until I-

Craig Gifford (CFO)

Unless they have it.

Joseph Otting (President and CEO)

Well-

Craig Gifford (CFO)

Until they get it.

Joseph Otting (President and CEO)

Until they get it. And so, and there have been some recent surprises that they were able to get those completed, which were very positive for the properties.

Stephen Moss (Director and Senior Equity Research Analyst)

... Right. Okay, appreciate that. And just, two, two more for me. In terms of, Craig, you mentioned, debt service coverage on the portfolio of 1.6, but I think when NY, you know, previous management was disclosing that it was on current payment terms. Is that debt service coverage ratio on, current payment terms or full P&I for even the interest-only, loans?

Craig Gifford (CFO)

So the number I gave you was on current payment terms based upon current payment terms and their existing contractual rates. On full P&I, it's call it 20 basis points lower than that.

Stephen Moss (Director and Senior Equity Research Analyst)

Okay. And last one for me, just curious here as to when the lockup expires for the investors in March?

Craig Gifford (CFO)

I don't know the answer to that question.

Stephen Moss (Director and Senior Equity Research Analyst)

Got it. Okay. I appreciate all the color and time. Thank you very much.

Craig Gifford (CFO)

You're welcome.

Operator (participant)

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

Jon Arfstrom (Managing Director and Senior Equity Research Analyst)

Hey, thanks. Good morning, guys.

Joseph Otting (President and CEO)

Hi, Jon.

Jon Arfstrom (Managing Director and Senior Equity Research Analyst)

One, one for each of you. Craig, for you on slide six, your numbers suggest maybe a modest loss from here for 2024, maybe breakeven, I don't know. But how should we think about the cadence of earnings in the very near term? Should we expect a second quarter loss and then profitability to build from there, or are you sending a different message there?

Craig Gifford (CFO)

No, I think you're seeing the message.

Jon Arfstrom (Managing Director and Senior Equity Research Analyst)

Okay. So all right, that's helpful. And then, Joseph, for you, much bigger picture, any major surprises for you on the deep dive? And you raised $1 billion. Based on what you know now, is that enough, or is it too much, given what you know right now?

Joseph Otting (President and CEO)

No, we think it was appropriate. When we went through the due diligence process, you know, initially we had a smaller number, and then it was concluded it needed to be north of $1 billion. So I think that's the right number. When you look at kind of our CET1 and the baseline at where we are today and how that grows, we feel like we have sufficient liquidity and capital to execute the business plan.

Jon Arfstrom (Managing Director and Senior Equity Research Analyst)

Mm-hmm. Okay. And, and no real surprises from your point of view in the review?

Joseph Otting (President and CEO)

Well, I mean, you, you know, when you say surprises, I wish the regulatory relationships were better in-- at the organization. We have a lot of work to do, and that's on us. We as an organization, in some regards, were not ready to be regulated by the OCC, and so we have a lot of catching up to do to get our standards up. But we're committed to doing that, and we've hired the people who understand what that looks like. And I think part of the problem we had before was we didn't have people that could visualize the end game or work in a work environment that had that proper regulatory infrastructure. So I would say that is kind of number one.

Number 2, Craig and I grew up where, you know, every unit in the bank of significance has their own personal financial statements, and we do a monthly reviews with them, and we're constantly forecasting out with those business units what their business is going to look like over a 12-quarter basis. That doesn't exist in this company. I think culturally, that will change a lot when we get that implemented. That isn't a long-term thing. That'll be a relatively short thing. We'll, we'll get done, and then, we can do a much more accurate job, I think, and, and influence the performance of the company by driving that through those businesses.

Craig Gifford (CFO)

It'll make us more nimble.

Joseph Otting (President and CEO)

Yep. And, and, you know, the other, the other thing I would just add to that is, you know, when, when the infrastructure part of the company can spend money and the business units aren't being allocated it, and, and, you know, we need to create a little tension between, you know, infrastructure and the lines where they'll be paying for it. So there's a little bit of pushback and questioning the dollar amount. You know, that enhances, I think, our financial disciplines.

Jon Arfstrom (Managing Director and Senior Equity Research Analyst)

Okay. All right. Thanks, guys. Good luck with all this.

Craig Gifford (CFO)

Thank you.

Operator (participant)

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

Joseph Otting (President and CEO)

Okay. Well, first of all, thank you all for joining the call today. It was an important day for us and the company, and the board to be able to share this information with you. We're excited about the journey ahead. We do recognize it's going to take a lot of work, but we also think that this plan is achievable and one that the management team will be able to execute on. And so, appreciate your support and confidence in us. And as Craig said, you know, we do look forward to having some follow-up calls and information, to be able to address any particular questions that people have. So thank you very much.

Operator (participant)

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