This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk13: Good morning, everyone. This is Sal DiMartino. Thank you for joining the management team of New York Community for today's conference call. Today's discussion of the company's first quarter 2022 results will be led by Chairman, President, and CEO Thomas Kangemi, joined by Chief Operating Officer Robert Wan and the company's Chief Financial Officer John Pinto. Before we begin our discussion, I'd like to remind you that certain comments made today by the management team of New York Community may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and investor presentation for more information about the risks and uncertainties which may affect us. Now, with that, I'd like to turn the call over to Mr. Kangemi.
spk01: Thank you, Sal. Good morning to everyone, and thank you for joining us today to discuss our first quarter 2022 performance. In addition to Robert and John, also joining on the line are Sandra Dinello, President and CEO of Flagstar, and Lee Smith, President of Flagstar Mortgage. In addition to our earnings release this morning, we announced that NYCB and Flagstar mutually agreed to extend our merger agreement by approximately six months to October 31, 2022. In conjunction with the extension, both banks amended the merger agreement to provide that the combined company will operate under a national bank charter. Although we recently received New York State DFS approval, and we are very much appreciative of this, Both sides truly believe that a national bank charter is an appropriate charter for the new organization. Under the revised agreement, the necessary regulatory approvals required to consummate the merger would come from the Federal Reserve and the OCC. Despite the extension, the benefits of this transformational deal remain the same today as they did when we announced the deal one year ago. The merger of our two great organizations provides many benefits, including geographical and product diversification, It also accelerates our plan to transform our business model to a multifaceted commercial bank to a strong, sustainable financial performance and capital generation. Additionally, it dramatically improves our overall funding profile and interest rate positioning. The combination of our two balance sheets will create a pro forma balance sheet that is asset sensitive and significantly deposit funded. Over the past 12 months, both sides have worked very closely together to get us into a position to close a deal once regulatory approvals are received. We have a detailed integration plan in place. All major systems have been determined, and my leadership team has been appointed. Both sides are ready to go. And importantly, the deal still meets all of our financial metrics, despite the change in interest rates and in the mortgage business. We still forecast double-digit earnings per share accretion, while tangible book value accretion is now expected to be 7% to 8% on day one. Double. what we envisioned when we initially announced the deal. Having worked together over the past year, we feel very confident in our cost savings assumptions. And while we have not modeled or assumed any revenue synergies, we know that there are multiple revenue enhancement opportunities. More importantly, we are still not assuming any financial engineering, such as buybacks and balance repositioning in our accretion numbers. Turning now to our first quarter results. the first quarter of 2022 we reported diluted earnings per share 32 cents a share up 10 compared to 29 cents a share for the first quarter of 2021. we're extremely pleased with our results this quarter after reporting continued growth in loans net income earnings per share and deposits as well as lower operating expenses margin expansion and continued exceptional asset quality turning now to the details of our quarterly performance I would like to start off with the exceptional deposit growth we reported for the quarter. As I was appointed CEO on January 1st of last year, there has been a significant cultural shift in our approach to bringing in deposits. During 2021, we embarked on a number of initiatives designed to increase our deposits and lessen our reliance on alternative funding sources that are less traditional in the commercial banking space, such as wholesale borrowings. As a result, since year end 2020, To today, total deposits have increased $5.5 billion, or 70%, to $38 billion, and core deposits have increased $8 billion to $30 billion. During the current first quarter, total deposits rose nearly $3 billion compared to the fourth quarter of last year. This was driven by growth in our banking as a service business as we continue to gain traction and staff launch new initiatives in this area. Total BAS-related deposits were $5.4 billion at March 31, 2022, a significant increase since we started the business from scratch 12 months ago. BAS-related deposits fall under three categories. BAS deposits tied to our FinTech partnerships totaling $3.8 billion so far, government BAS deposits of $709 million, and mortgage as a service deposits of $923 million. Last year, we won several mandates for our banking as a service business. More recently, we were selected by the Bureau of Fiscal Services as the financial agent for the U.S. Treasury's prepaid debit card program. This is a big win for us, and we should begin to see benefits materializing from this relationship later this year. We also continue to make significant progress in garnering deposits from our borrowers. Total loan-related deposits rose $427 million during the first quarter to $4.4 billion, up 11% sequentially. This compares to growth of $475 million for all of last year. All in all, since we began focusing on this source of funding early last year, we've gotten over $900 million of incremental loan-related deposits, up 26% since year-end 2020. In addition, earlier this year, we relaunched our direct bank channel, MyBankingDirect.com. While it was just rolled out in March, early receptivity has been very positive. We have an active pipeline of additional opportunities that should benefit our deposit gathering initiatives, including those focusing on BAS type of fintech companies. Now moving on to loan growth. After $2 billion in loan growth during the fourth quarter of last year, total loans grew by $1 billion during the first quarter to $46.8 billion, up 9% annualized on a one-quarter basis. Once again, the majority of the growth was in the multifamily portfolio, which increased $1.1 billion during the quarter, $35.8 billion of 13% annualized compared to the previous quarter. Loan demand in the multifamily category continues to be driven by increased refinancing activity as the outlook in 2022 continues to call for higher interest rates, higher property transactions, and less competition from both other banks and GSEs. The specialty finance portfolio, $3.3 billion at the end of the first quarter, was down $168 million compared to the prior quarter. This was largely the result of one payoff. Otherwise, the specialty finance portfolio would have been relatively unchanged. At March 31, 2022, the specialty finance portfolio had $5.7 billion in total commitments, up 2% compared to year end. Of that amount, 71% or $4 billion are structured as floating rate obligations. With the recent increase in treasury rates, we've also increased our lending rates on multifamily loans several times during the past quarter. and will continue to do so as market rates increase. Our current multifamily pricing is in the 4.5% to 4.75% range, depending on the type of credit. That is about 100 to 125 basis points higher than at the end of last year. It's very important to note that we have approximately $8 billion of multifamily and theory loans that come up on their contractual maturity date or optionally pricing date over the next two years. So borrowers have to act within that time frame. Despite the increase in rates, we still continue to have strong originations and a growing pipeline. Loan originations continue their strong pace into the first quarter. Total first quarter originations were $3.5 billion, or $1 billion, or 39% compared to the first quarter of last year. First quarter originations exceeded the previous quarter's pipeline by $1.3 billion, or 59%. Of the first quarter's originations, 42% were refinances in our portfolio, 34% were refinances from other banks' portfolio, and 23% were due to property transactions. Speaking of the pipeline, the pipeline heading into the second quarter of 2022 is a strong $2.5 billion compared to $2.2 billion last quarter, up 14%. Of this amount, 68% of the loans in the pipeline represented new money to the bank. Moving now on to asset quality. Our credit trends in asset quality remain exceptional and continue to rank among the best in the industry. Non-performing assets total $70 million on 11 basis points of total assets as of March 31st, while we charged off a mere $2 million during the quarter. Our delinquency trend continues to improve with loans 30 to 89 past due declining $33 million or 49% to $34 million compared to December 31st, 2021. Lastly, principal-only loan deferrals declined 41% to $282 million compared to the previous quarter, and we continue to have zero full payment deferrals. Before proceeding, I'd like to provide an update on the New York City real estate market. The residential real estate market in New York City has improved significantly. The rental market is currently facing strong demand and low inventory levels as discounts and concessions expire and rental prices approach new records. Manhattan's median rent in March was at the highest level on record, although the vacancy rate remained below 2% for the fourth consecutive month. In Brooklyn, the median rent exceeded pre-pandemic levels for the first time while new lease signings and process claims reached a 10-year high. Moving on to the income statement. First quarter net interest income rose 4% on a year-over-year basis. Excluding the impact from prepayment, net interest income rose 8% on a year-over-year basis to $321 million. In addition, excluding merger-related expenses, first quarter preprovision revenue increased 6% on a year-over-year basis to $212 million. Turning to the net interest margins. Our margin for the first quarter was 2.43%. Excluding the impact from prepayment income, the first quarter NIM was 2.35% up, three basis points on a linked quarter basis and in line with our expectations. On the expense side, we continue to be pleased with our expense discipline, excluding merger rate expenses of $7 million. Operating expenses for the first quarter were $134 million up, 2 million or 2% on a year-over-year basis. Our efficiency ratio remained below 40%. For the first quarter of the year, it was 38.65%. At yesterday's meeting, the Board of Directors declared a $0.17 per share dividend on common shares. The dividend will be paid on May 19th. The common share holds a record as of May 9th. Based on yesterday's closing price, this translates to an annual dividend yield of 7%. Lastly, I would like to thank all of our employees for their hard work in helping us to achieve another exceptional quarter. With that, we would be happy to answer the questions you may have. We will do our very best to get to all of you within the time remaining. If we don't, please feel free to call us later today or during the week. Operator, please open the line for questions.
spk02: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk09: One moment, please, while we poll for questions. Thank you. Our first question is from Abraham Poonawalla with Bank of America.
spk02: Please proceed with your question. Good morning, Abraham.
spk08: Good morning, Tom. I guess first question just in terms of the margin outlook in light of the deal timing getting pushed out. So two questions there. Any additional clarity around when this deal could close? Is there a chance it still closes in the second quarter? Or should we be thinking more about 3Q or maybe even fourth quarter given the extension date? And secondly, tied to that, what does that mean for the core margin with the Fed expected to hike maybe 100, 150 basis points in the second quarter? I went back and looked at like 2017. Your margin went down 50 basis points year over year, fourth quarter 17 over 16. Just give us a sense, because that's going to be a concern around what happens to NYB margin in light of the Fed actions.
spk01: So, Abraham, let me just point out the big picture view of us and TriStar coming together. They're asset-sensitive or liability-sensitive. I'd say we're probably less liability-sensitive today than we were when you cited that move. So when you take a very significant asset-sensitive bank like TriStar, and we constantly have the merger this year, This will have, in my opinion, a very positive position in a rising rate environment going into 2023. So we're very appreciative of the balance sheet coming together with unique positioning, us being slightly liability-sensitive and CLASA being asset-sensitive. So collectively, when we come together, going into 2023, we'll position well for that rising rate environment. With that being said, I'm going to defer to Mr. Pinto on the short-term guidance on the market. John?
spk12: Yeah, for the second quarter, we expect the net interest margin X prepays to be flat to Q1. We have a couple of things going on in the quarter. As we've talked on our last calls, we have the full benefit of the hedge rolling off that rolled off in February. We have flat for the second quarter, and then depending on what happens with interest rates, we'll see what happens in the third and fourth quarter. There'll be some pressure on the margins.
spk08: And John, what are you assuming for Fed to do in the second quarter as part of the flat margin guidance?
spk12: 50-50. 50 in May, 50 in June.
spk08: That's helpful. And Tom, any thoughts around the timing of the deal? Is the OCC approval of that process, will it by default push it out into later in the year, or is there a likelihood the deal closes in the second quarter?
spk01: We were very clear in our press release this morning that We put out an October 30 date out there, and we're comfortable with that timeframe based on where we are in the regulatory process. We can't really dive into specifically, but we're hopeful that we will meet that timeframe, and we feel that's a reasonable timeframe.
spk08: Got it. And just one last question, maybe for Lee. Gain on sale, reset lower, I don't think totally surprising in the first quarter for Flagstar. We didn't see any... Would love to hear one, where do you think J&M sales goes from here and is there anything on the expense side that you can do that offsets that revenue that we've seen over the last couple of quarters?
spk00: Yeah, thanks for that question. So, yeah, margins are obviously under pressure given the excess capacity in the system at the moment. We've gone from a $4.4 trillion market last year and right now they're forecasting a $2.8 trillion. So people are working to remove that capacity, but until it's gone, it's going to put pressure on margins. What I would say, when you look at our margin, we were down 43 basis points quarter over quarter. A big piece of that was the EBOs. We had 26 million of gain on sale benefit in the fourth quarter, and we had five million in Q1. So when you look at that reduction of 43 basis points quarter over quarter, 23 basis points was because of the EBOs, and then you had about 11 basis points mix and volatility, and nine basis points was competitiveness, and that's just waiting for that excess capacity to exit the system. In terms of what we've done from a cost point of view, you know, remember 70% to 75% of our mortgage costs are variable or semi-variable, so we have that flexibility, but we have taken additional actions. We've right-sized our infrastructure, and unfortunately, we've had to lay off 358 employees in two waves, one at the end of March and one at the end of April. and then a further 62 employees have attrited that we haven't replaced for a total reduction of 420 since 1231. To put that into perspective, that's a 20% reduction in our total mortgage employees since 1231, or 25% of our mortgage operations staff. In terms of what impact that has from a dollar point of view, We think it'll save us about 4.4, 4.5 million in the second quarter. And then going forward from Q3 onwards, it'll be about 6 million in savings.
spk08: Got it. Thanks for taking my questions.
spk02: Thank you. Our next question is from Chris McGatty with KBW. Please proceed with your question.
spk11: Morning, Chris. Great. Hey, good morning. Just a question on the banking as a service deposits. Can you speak to the rates that are currently being paid on those and your expectations for betas as the Fed moves? Thanks.
spk01: I'm going to just take it in general. We've been very successful with this initiative on our focus on dealing with our fintech partnerships, in particular dealing with government opportunities. The typical deposit relationship there is zero cost. for that type of relationship. That should kick in as more programs come to place and Treasury Department starts rolling out new initiatives and as the government starts to deal with the various agencies and how they're going to distribute card-like programs, we will get the benefit of zero float there. As far as the other deposits, it varies. I mean, mortgage as a service is typically tied towards LIBOR, either plus or minus the spread, and then you look at the FinTech partnerships, they can go from zero to as to live or less some type of spread, depending on the relationship. We were very fortunate in the quarter to win a very unique piece of business. We are one of the few banks, I think it's one of six, to deal with the fiat-based stablecoin exchanges that we hold reserve accounts for. That is a new initiative of ours as we focus on stablecoin. This has been a very successful adventure for us, and we continue to look at that as opportunistic. At the same time, we have a significant amount of partnerships that we're working on onboarding, and we're building staff around that to onboard the true FinTech partnership of banking as a service for a lot of these challenger institutions that have banking operations, but they're not an FDIC-insured institution. So we are working as the BIN provider and the banking as a service provider for those types of initiatives. But they do vary, and the goal here is that that coupled with a significant push towards getting our fair share of deposits from our customers on the loan side is our strategy for the future, and it's been very successful since last year.
spk11: Great, and if I could add one more. I think you said in the Prepare to Mark Tangible book, the creation is going to be 2X, what you thought. Can you help with where you believe CET1 will shake out and kind of remind us either if that's your binder or which one your binder is?
spk01: I'd say back of the napkin with the Flagstaff transaction closing, we're probably higher on a Tier 1 capital perspective, probably hovering close to 11%. So I think maybe John can go ahead and add some more.
spk12: Yeah, originally we anticipated our tier one common equity ratio to be 10.4%. So just given the growth and tangible book, that'll be slightly higher. So it'll probably be just under 11 right now is our estimate.
spk09: Thanks, John. You got it.
spk02: Thank you. Our next question comes from Steven Alexopoulos with JP Morgan. Please proceed with your question.
spk05: Hey, good morning, everyone. Tom, can you give more color on the decision to go the route of the national bank charter? And you said you received NYSDFS approval. Was the FDIC a roadblock in getting the steel approved?
spk01: Well, I'm not going to comment on any agency. I will tell you that we truly believe that with the national banking platform and where we're heading the bank in the future, that the the OCC charter is the way to go. So clearly we're very much appreciative of DSS approval, and I'm not going to comment on any other regulatory discussions there.
spk05: Okay. But can you go into the decision to switch to the national charter?
spk01: I just did. I do appreciate the question, and you can be sensitive on the commentary, but we went through a journey through this process. It's now a year through the approval process. And as we went through this process, we feel very confident that the business model is focused on a national mortgage banking platform and a national commercial banking platform that will be more inclined for an OCC charter.
spk05: Okay. Tom, will there be any additional costs or oversight with this type of charter versus previous?
spk01: You know, I would say in general, it's probably going to be very similar to the structure with respect to costs. I think the efficiency of the mortgage banking business, there may be some savings on licensing and things of that nature and complexities around states and municipal deposits and things of that nature. But overall, I would be in material. Okay.
spk05: And in terms of the Fed and OCC now, has that process been ongoing or are you now just starting that process with them?
spk01: Steve, you would assume that the Fed has had our application since April, May of last year. So they're very familiar with the process. We gave a relatively short window to get this closed, which is October, which is two quarters from now, six months. And we're confident that that's the adequate timeframe to achieve these approvals based on where we are in the approval process.
spk05: Okay. And then finally, so if I look at your community, the company has made a lot of progress in 15 months' time since you've been CEO. You're changing a lot on the funding side. We know the market, at least at the moment, is not a fan of the mortgage banking business. And if you look at Plexar's 1Q results, you can get a sense why, right? Talking about gain on sale margins compressing so much. And here you extended the merger agreement. I'm not suggesting you should have called the deal off, but can you walk us through? So you made the decision to extend. What does this give you that you couldn't have accomplished on your own? Why did it make sense for NYCB shareholders here to extend the agreement? Thanks.
spk01: Steven, so again, we're not going to waver from our original discussion. We put the deal in front of both Sandra and I. We looked at this opportunity. We had an opportunity here to look at the mortgage business with full knowledge that 22 was going to be dramatically less than it was in 21. We modeled down 55%. So I would say what we know of the company right now based on their forecast, we're right in line with what we expected. This is not a surprise. With that being said, the deposit-rich franchise and transforming this company into a full-service commercial bank from a traditional thrift model is a catalyst. We've done so much work around what the opportunities are on revenue enhancements, changing the verticals, putting these companies together to build a great institution that's well-diversified and a national footprint. We believe we'll feel very strongly about the transaction. As I said in my opening remarks, we're very confident in the financial merits of the transaction. It's a well-structured transaction. We're very comfortable with the mortgage business. We know the mortgage business. But more importantly, we anticipated a substantial drop. And if you look at the history of what Flagstar has done from transitioning their own balance sheet, they're well along the way becoming more of a full-service commercial bank. They've moved well past that 50% of their balance sheet, which is commercial banking assets. So we're in a path to accelerate the transformation. under new leadership at NYCB, to combine into a very well-thought-out way to take a traditional model, which could take a decade to transform, into a much accelerated path. We truly feel confident that this is a significant opportunity to really change the financial metrics of this company towards shareholder value with a well-rounded, diversified balance sheet with a vision of a unique commercial banking model. Okay.
spk05: Great. Thanks for that, Culler.
spk02: Sure. Thank you. Our next question comes from Dave Rochester with Compass. Please proceed with your question. Hey, good morning, guys.
spk04: Tom, on the deal accretion comments you made, you mentioned you still see double-digit EPS accretion for the deal. Are you still in line with that 16% you've been talking about previously? And then if you are in line with that, can you just talk about what you're assuming for that mortgage revenue and the warehouse book size you're baking into that?
spk01: So, Dave, let me be clear. I'm not going to give guidance to 23 and 24. When you put the deal together, it's a double-digit accretive deal. Correct the number with 16%. We don't have 23, 24 guidance, and there's not a lot of guidance past what we see with FLAXA right now that's public. So when you look at the numbers on a spot basis, our tangible look value is more than doubled on the accretion side to 8% approximately. We believe it's a double-digit accretive deal. We don't have public guidance. We're very confident that putting these companies together without any liability reshuffling, without any buybacks, without any financial engineering, we have a very well-structured transaction that can create good shareholder value and combine, including double-digit EPS accretion. But we're not giving out 23 and 24 guidance.
spk04: Okay. Maybe just going to the deposit growth, you had some solid deposit growth this quarter, and I know the banking as a service piece contributed to that. Can you maybe just size the amount of deposits at those customers that you onboarded this quarter that maybe haven't yet come onto the balance sheet at this point, if you're still bringing those in? And then it sounds like you've got more customers that are coming in later this year. Can you just maybe size the pipeline of those customers that you're seeing coming in?
spk01: So, look, we were very cautious when we had our change of strategy about a year and a half ago. And obviously on the loan side we're being very cautious because it's a lot of hard work and it's a mandate. It's a cultural mandate. And we're doing great work there of 26% since we started that initiative. And I was very cautious on giving the street specificity around how much we can take from what's ours, which is our deposit to our customers. But it's been successful. That's been moving very well. That is a passion at the board level all the way down to the line. So that's moving very nicely for us. That's how we do business going forward. And on the BAS side, we continue to onboard some great people, especially in the middleware to get the onboarding efficiently. Our team is all geared up, and we have an online pipeline of some very unique opportunities. As mentioned, I mentioned we're now one of the, I think one of six banks approved of the largest CF-based stablecoin provider in the world. That's a significant win for the company. It's small now, but that could grow very nicely. And at the same time, we have a number of initiatives. So I would say you're going to see continued deposit growth every quarter. That's the goal. I'm not going to tell you we're going to be up $3 billion every quarter. But the good news is as we bring in this excess liquidity and we price it accordingly, we feel that we could be competitive. And we have some really good talent that we brought in as part of our digital platform. We brought someone in very talented who ran a $100 billion book. And there's a lot of relationship opportunities out there that we think we can tap. And we're going to be very creative on the technology side. There is a need for a bank of our size versus some of the smaller banks that are under $10 billion that truly emphasize their capacity on Durban fees. So we're focusing on more funding opportunities. Eventually, we believe that these relationships will tie into other lines of businesses, hopefully on the lending side, and more importantly, on the fee side. So this is a strategy that we're focusing on. We mentioned a little bit about MyBankingDirect. MyBankingDirect, over the long term, will be our digital platform. And we're going to roll out a full-service digital challenger bank as an alternative solution for customers. And hopefully, it could be a solution for the underserved, underbanked, But we have a lot of unique technology. We have a strong team of new hires that are working with us to gather that business. So it's a focus of the bank. We had some great success. On the government side, it's been very successful. We won about, I think, three specific deals last year, and those deals will start to kick in over time. And they're both fee-related, and those types of transactions are zero-cost deposits. Now, a lot of the other stuff on the mortgage side is where we're going to get significant benefit when you buy into what Flagstar does as a business model. You know, being a substantial wholesale provider for mortgage warehouse, they have tremendous relationships. Collectively, they're not looking for that liquidity. We will come in and be the banking as a service partners. I think there's a real great opportunity there as a banking as a service partner for mortgage. So mortgage as a service is an initiative. We have about a billion dollar book going into the consummation of the deal. We think that number can expand dramatically. They run around $6 billion as Flagstar standalone, but that number can significantly increase. Maybe Sandro can give some color on that opportunity that they don't go after right now because of the lack of desire for balance sheet preference. Sandro, do you want to add to that?
spk16: Yeah, sure, Tom.
spk01: Thank you.
spk16: As you saw in the Flagstar numbers, our balance sheet shrunk a little bit in the first quarter principally due to the lower available for sale balances as well as the lower warehouse balances. And while they're still substantial, they are less than they were a quarter ago. And so we're not pursuing those opportunities that Tom has referenced. And I think it's an opportunity that's very, very significant in the billions of dollars relative to the additional deposits that can be brought in through our warehouse customers as well as our MSR partners. So I think that's very significant. And it's one of the reasons why at Flexar we've been able to adjust to a changing market. If you look at our guidance, what you see is that the model that we've been building is beginning to work and it's showing that it does work in both rising and falling interest rate market. When rates were low the last two years, our mortgage business thrived and we reported record earnings. Now that interest rates are rising, we are seeing our non-origination businesses really beginning to thrive. As you saw in our earnings deck, our margin hit a new high of 319 in March, an all-time high, and we're guiding to that expanding to almost 360 in Q2, and with a continued increase throughout the year to average close to 360, closing out the year maybe north of 370 in December. And our MSR investment, which has always performed in an outstanding fashion, has had a much higher return in Q1, particularly in March as we eased our hedges and saw a nice valuation increase. So we're guiding to an elevated return on our MSR for the year. And as you hope saw, we don't have any delinquent commercial loans, so we're pretty confident about the credit quality, and we will be keeping an eye on expenses and keeping them in the range where they currently are. So while the mortgage environment is difficult, We have right-sized it and despite modest expectations for gain on sale for the year, I'm really quite optimistic that our full year results will be very strong and Q1 will play out to be a transitional quarter given that the velocity of the increased mortgage rates in the quarter was the highest in something like 40 years and we really didn't see the benefit of the Fed's actions until mid-March. I think all of these things together with the liquidity opportunities that we bring to the balance sheet for for efficiently priced deposits. When you put these two organizations together, as Tom has already suggested a couple of times, we think it's really, really a powerful balance sheet and opportunity for shareholder value growth.
spk01: Hey, David, one thing I would add to your comment on data risk. I will tell you that, in our opinion, unless you have transactional deposits at zero, with an elongated period of zero interest rates for so long, I believe all deposit-type pricing is going to rise in an aggressive Fed tightening cycle. So it's interesting when you can say things are tied to short-term LIBOR, SOFR, or tied to record more high-beta risk-type liabilities. But ultimately, as zero becomes 50, 50 becomes 100, I would say that in general, the Fed's in a tightening mode. I think all liabilities, with the exception of demand deposits tied to customers, are and we'll call it maybe savings to a lesser extent, you're going to have high beta risk in general. So we assume this is going to be more of an industry phenomenon, not just because we're slightly liability sensitive. This is going to be, in my opinion, a beta risk environment, and I think we're all prepared for that.
spk04: Yeah, that makes sense. Maybe if I can sneak in one more. I know you have a couple of advances. What's your expectation, just given the current curve, as to what comes back to you this year? I know you've got some cash there. You can pay some of that off. You can pay all of it off with deposit, growth, and cash.
spk01: So let me give you a general view. I'll try and be more specific. But the big picture is that in the event that stuff gets put back to us, we're in a deposit growing initiative. We're in a liability gathering initiative. So we'll have lots of flexibility. And more importantly, when we merge with Flagstar, we're going to have a tremendous opportunity to really reshuffle a liability position to right-size ourselves into 23 and 24. So that's my broad view of what we're going to do with things coming back at us and things we put back to us. But if we put back and we have the cash, we're in a great position. So maybe John can add some more cover for that.
spk12: Yeah, so depending on what happens with short-term interest rates this quarter, it is possible that we'll get a handful of puttable borrowings back to us. But as Tom mentioned, When you look at this from an interest rate risk perspective, since these are quarterly puttable, in just about all of our interest rate increasing scenarios, we assume these are getting put anyway. So even if you replaced it with high beta deposits from an interest rate risk perspective, you'd be in the same perspective. And from an earnings perspective, you'd be a little bit better because the individual coupons that are coming on are coming on lower than where the puttables are coming off. So it could be a benefit that we could see in the short term as these things get put back to us. And the goal is to pay them off with deposits and just continue the less of a reliance on wholesale funding. That's right.
spk04: Okay. All right. Thanks, guys. Appreciate it.
spk02: Thank you. Our next question is from Brock Vanderbleet with UBS. Please proceed with your question. Good morning, Brock. Good morning, Tom. Good morning.
spk03: Just following up with the Flagstar question, Look at your deposit growth. It's pretty muted. Non-interest bearing down about 20% year-over-year to $6.8 billion. I assume some of that's mortgage-related. If you could just talk about what's going on there.
spk16: Yeah, it's totally, Sandra, it's totally related to the mortgage business. So as I mentioned earlier, with the balance sheet declining, We've left some of those servicing-related deposits go, escrow deposits and so forth. So that's just managing the size of the balance sheet or the size of the funding that we need for the balance sheet. So it's all planned. The retail deposits, consumer deposits, commercial deposits, are all moving in the right direction as they have historically. So this is just our ability to manage the wholesale deposits in a way that fits best for the balance sheet.
spk00: Yes, Sandro Talib, I can just jump in. It is all escrow deposits. Obviously, escrow deposits are higher when you've got a lower rate environment and there's more payoffs and as rates rise and you have lower payoffs. you see a reduction in the escrow deposit. So it's all escrow deposit related, Brock.
spk03: Okay. And shifting back to get on sale margin to beat that horse a little bit more, is this the – Could this be the trough, or what are you seeing in your current production in terms of a gross margin?
spk16: Yeah, you know, it's hard to know because, as Lee said in his remarks earlier, everybody is adjusting capacity. Some companies are not going to make it. We're kind of where we were two years ago, right, not too much before COVID hit. and so it takes it takes a while but if you look at our guidance we're being very very careful on the on the guidance for gain on sale so even with that lower guidance when you put all of the numbers into your model i think you'll see that the flagstar number is still pretty darn good and and as tom said consistent with what was projected a year ago when you put the transaction together although the composition of the earnings is very different because the mortgage earnings is down quite a bit, and then the banking and servicing earnings are up quite a bit. And again, as I said earlier, that's exactly how this model is intended to work on the Flagstaff slide.
spk09: Okay. Thanks for the questions. Thanks, Frank.
spk02: Thank you. Our next question is from Steve Moss with B Reilly Securities. Please proceed with your question. Good morning. Good morning.
spk14: Maybe just following up on the stablecoin partnership, I hear you in your comments, Tom. I'm just kind of curious. Are those deposits going to be indexed, or are they going to be non-dress bearing? And should we think about those as interchangeable to what CDs are scheduled to reprice? And if you guys could quantify also how many dollar values of CDs are scheduled to reprice.
spk12: I'll start with the... Yeah, the stablecoin fiat currencies. They're usually tied to Fed funds, either target or effective Fed funds, minus some sort of a spread depending on the type. So they are floating rate against Fed funds, but they are to a minus spread. And then when you look at CDs where they're coming due, we have about $3.8 billion in maturing CDs in the second quarter. um and that's at a 45 basis point rate so yes if you think about it that you know the gains that we have on these kinds of deposits can help offset some cd runoff if we have it okay thank you that's helpful and then just on expenses here i don't think that came up with just updated guidance as to what you guys are thinking for expenses on a standalone basis yeah really no change we're very very happy with the expense management and we've been able to continue that so We're flat to the first quarter is what our estimate would be for the second quarter. And I think last earnings release, we gave guidance for the full year. We're comfortable with that guidance.
spk14: Okay, great. Thank you very much.
spk12: Yeah, 540 for the year.
spk02: Thank you. Our next question is from Peter Winter with Wedbush Security. Please proceed with your question.
spk15: Good morning, Peter. Good morning. Good morning, Tom. The loan growth was exceptionally strong this quarter, and you raised guidance in January to upper single digits. I'm just wondering how you're thinking about loan growth going forward.
spk01: It's an exciting transition period. The fourth quarter was interesting given property transactions were elevated, a lot of activity, a lot of smart moves from borrowers to get refinanced, try to get access to their capital. You saw a lot of that in Q4. It continued in Q1. Rates are dramatically higher, Peter. So if you think about where we are in the market, we're still between 160, 175 spread off of five-year money. We're not really in the 10-year market much at all in the seven. It's mostly a five-year product. And you look at the shape of the curve, we feel very confident that our customers are going to – our retention is going to be much higher. I think the last month of the quarter, retention was close to 69%. It was very high, which is a very good turn for the company. So that will transition to more growth. So I think it's fair to say that we're looking at a high single-digit net loan growth story for 2022 on a standalone basis, excluding flag stocks. So that's unique since we had a very strong Q1. But what's interesting about that, as I discussed on my prepared remarks, we have about $8 billion that's going to have to make a decision in the next 24 months. And I think the coupon of that's probably in the low threes. So this is going to, in my opinion, accelerate prepayment activity. We'll be able to hold on to more fee income there and be more resilient on ensuring that we get our economics, given the rising rate environment. And if customers realize that cap rates may rise a little bit here and LTVs may be more conservative as a matter of course, of conservatism, you probably want to access your capital sooner. So it could go into a very strong 2022 for a lot of acceleration within the customer base itself. At the same time, there's a lot of property transactions. If you look at the New York City marketplace, it's rich. There's transactions happening, and we haven't seen a lot post the pandemic. So it started to kick in in Q4, and it's continuing. So we're very bullish about the activity that we're seeing in the multifamily space. And by the way, all the borrowers are very strong.
spk15: Got it. That's really helpful. If I could ask about the margin, I guess two questions, just one. John, how much of the benefit in terms of the margin for the full quarter impact from the swap rolling off in the second quarter? And then secondly, I'm just wondering if you could quantify what the impact is to either the margin or net interest income for every 25 basis point increase in rates and the deposit betas that you're assuming.
spk12: Yeah, on your first point, the benefit in the margin we saw from the swap rolling off this quarter was four basis points. So that's the $2 billion swap that rolled off on February 15th. So we had half the benefit the first quarter and then the rest of the full benefit on a run rate basis this quarter. We're not going to give guidance on specific 25 basis point increases. We realize we are liability sensitive. There are deposits. A lot of the deposits that we brought in are tied to Fed funds, so there will be an impact as we go forward. But we'll manage that as individual deposits come through and we bring in new relationships.
spk01: I just want to go back to John's point, though. Think about on the big picture, we have this asset-sensitive institution that will have the flush with liquidity opportunities. And we're less liability sensitive today than we were three, four years ago, and definitely within the last rate tightening cycle. So when you take that all things being equal, put that together, you have a very unique opportunity to position this company into a changing interest rate environment that's going to benefit the margin going forward. So that's our view when we model this. This is all about putting the strength of these two companies together, but when you of the business model. They have a lot of low-cost funding over at Flagstar that will hold very nicely transactional type money. At the same time, they have this beautiful opportunity on the mortgage side where we can really be a major depository player regarding relationship opportunities. We think there's going to be a growth opportunity for liquidity and being able to really transition our balance sheet from wholesale funding. And that's going to be the focus of the combined entity. And the combined entity will have an asset-sensitive position going into a rising rate environment.
spk15: Could you just say what the, on a combined basis, what the asset sensitivity goes to?
spk12: Yeah, I think we put in our first analyst report around 5% on an NII, and I think it's right around that level. We redid it as of our last go-around, so... Yeah, between 5% and 8% are NIIC.
spk01: That has very modest deposit initiative growth on NYCB standalone, right? That's right. If you think about what we've accomplished since 20, at the end of 20, 21, 22, our core deposit franchise is up, I think, $8 billion, $5.5 billion on the lending side. So these are solid relationship deposits. The goal here is to culturally change how we do business, and that's the mandate. And I think we're making tremendous success here. Be patient. We're not going to give quarterly guidance on how much loan deposits that we're going to bring in every quarter, but we've been successful, and it's been a cultural shift in how we conduct our business.
spk09: Got it. Thanks, Tom. Sure.
spk02: Thank you. Our next question comes from Matthew Brees with Stevens, Inc. Please proceed with your question.
spk06: Hey, good morning. Good morning. Going back to the charter discussion, I was curious, does the FDIC have any remaining say on your charter change to the OCC? And is the charter change contingent upon the deal, or are you going to make the switch standalone prior to or regardless of the deal close?
spk01: So I'm not going to say a whole lot about what can happen. The reality is that we have the DFS approval. We believe that this company's position is better served as an OCC charter on a combined basis. And that's the direction we're heading. As far as commentary on what could happen, what may happen, the reality is that we're seeking a Fed chart, a Fed approval, and an OCC approval. And we put out a date, which is October 31st. We feel that we can meet those approval dates. That's the plan. We've been through this process for a year now. So I think we've learned as we went along here. And this is the path that we believe for a national mortgage banking platform that's going to have 400 retail locations throughout the country, 100 LOA offices, and a commercial banking model that would serve under the OCC chart.
spk06: Okay. The other thing is, if you screen for U.S. banks with elevated CRE concentrations, most often you come across institutions that are FDIC and state-regulated. Many of them are New York, but very, very few are over 300% and regulated by the OCC. Now, at year-end, I think you're at 765, and with the deal, You're still north of 300, but lower than 765. So do you need to make any changes on this end to lower your CRE concentrations ahead of the charter change?
spk01: Let me give you just a general overview, and I want to kind of cite history here, going back to 06 guidance. When the guidance was put out in 06, they were very clear that well-structured multifamily housing was uniquely positioned when it's perceived regarding this concentration. When you look at our company, combined basis, and you take out cooperatives which is our average LTV is 25% and rent regulated cash flows, we would be pro forma under 300%. If you take out multifamily as just a position that's not considered high risk CRE, we're at 112%. So again, we have a unique business model that has decades, decades of zero losses in the asset class. hundreds of millions of dollars over the years as we look to become a C-card bank, going back to 2012 and up to 2016, on making sure we have very strong risk management practices around Cree. But when you think about the business model and how we land, we're a cash flow lender, predominantly in multifamily rent-regulated housing, and we have a relatively significant cooperative portfolio with a mid-20% LTVs that we have never had a nickel of loss, ever. as a company. So these are very unique positions for history. So when you take that all things being equal and look at where your true creed position would be when you carve out multifamily and cooperatives, it's about 112% pro forma. So I think it's manageable and we have a very interesting story to tell regarding credit history.
spk06: Understood. And then along those lines, the other question they had was, I was curious your thoughts on the health of the rent-regulated multifamily borrowers, given limitations on rent increases from the RGB. But in this inflationary environment, you could envision higher core expenses, particularly on the energy front. As we go through the year, if there's minimum kind of allowed rent increases, do you think there's going to be any problems there?
spk01: Matt, that's a great question. I will tell you that three years ago we focused on that. Obviously, when we had the rent law changes, maybe it was four years ago. And the reality is that we look at the Bronx very differently than some of the other markets, and we lend differently in those markets. But there's no question that if inflation outpaces revenue growth on the cash flow side, you have some pressure there. So what we do, we do a lot of stress testing around risk management. In particular, we've carved up the Bronx portfolio with significant detail. Some of our largest players in the Bronx have significant portfolios, And we believe that we have really low LTV, great bars, history of long duration hold periods, and generational holdings. And we feel very confident that after stress testing this in very, very adverse scenarios, we're comfortable that we have a solid portfolio. But it's simple math, right? So I have a feeling that as inflation continues to be more of a challenge for these customers, there'll be less ability to do a cash out refi, and they have to be more accelerated to come to the table sooner. So I think it's probably going to bring a lot of borrowers to the table a lot quicker just because of the potential of the squeeze, and we're going to be probably more conservative on LTVs. But we do have a relatively low LTV portfolio, especially in a rent-regulated cash flow portfolio.
spk07: Understood.
spk01: That's a great question. It's definitely a risk. It's a great question, and we appreciate that commentary because we spend a lot of time getting comfortable on the risk management side And I think that's something that, you know, we've got good arms around it. We feel really good about it. We've done a ton of work around the rent control area, given the changes in rent laws and the nuances on how cash flows are created. And it's a different environment today than it was a decade ago.
spk06: The other question I had, just to flip sides and go to Flagstar, is, you know, on page 14 of their deck, their mortgage custodial deposits is around $5 billion. I was hoping to just get a little bit of a better understanding of what those are. You know, what are those? Who are they from? What's the anticipated beta for that book? And the other thing is, what's driving these volatility imbalances?
spk00: Yeah, let me... Go ahead, go ahead, Sandra. Go ahead, go ahead, Sandra.
spk16: Yeah, it's... The available-for-sale portfolio and the servicing portfolio has deposits associated with it. And the servicing portfolio... When rates are declining, the payoffs are very, very significant. And so you're holding payoffs during the course of the month. And so your escrow balances are much, much higher than when you're in a rising rate environment and the prepayments are very, very low. So almost all of that is related to that phenomenon. The beta on those, so the escrow deposits carry no If we own the MSR, the escrow deposits carry no cost. If it is connected with a subservicing arrangement, then we pay the MSR owner some level of deposit, typically LIBOR-ish. And that's really it. And if you look at the history of Flexstar, you'll see that we've had the ability to manage that volatility very well because there's kind of gives and takes. As you're in that higher interest rate environment, prepayments are slower, you have less extra deposits, but at the same time, the available for sale portfolio is lower because originations are lower. So they kind of offset each other. And again, there's a lot of history there that you can look at as you begin to understand Five Star better. And it's not a problematic volatility, if you will.
spk00: Yeah, I'll just jump in. And Sandra has hit the nail on the head. Think of the deposits that you're looking at on page 14. They're entirely related to our servicing or subservicing books. So the 1.3 million loans that we service or subservice, some of which we own and some of which we subservice for others. And to Tom's point, when he talks about mortgage as a service, we could go and get more of those deposits. We just have chosen not to because we haven't needed to given we've got ample deposit capacity to fund the balance sheet that we have. But when we bring the two organizations together, that's an area where we could go and seek additional deposit growth.
spk06: Understood. Okay. That's all I had. Thanks for taking my questions.
spk02: Thank you. Our next question is from Christopher Muranak with Janice.
spk10: Please proceed with your question. Hey, thanks. Hey, good morning, Tom. Thank you for taking my question. So you're no stranger to recessions. You've seen many over your career. And if we have one in the next year or two or whenever, it seems that your reserves are really strong relative to any hypothetical charge-off rate. So I'm just curious kind of how you manage the reserve from here. Do you think it will grow? It seems you've got a lot of leeway with the reserve and just kind of want to talk through that.
spk01: Yeah, so I'm going to defer to John Pinto regarding the complexities around the new accounting for loan reserve. So, John, why don't you take us back to that one?
spk12: Yeah, there's no doubt that there's some opportunity there, but we are growing the loan portfolio as well. So, you know, under CECL and the life of loan estimate, you've got to put up those full, you know, potential life of loan losses the day you do the loan. So that will offset some of that. You'll have the growth in the portfolio, some benefits. We've seen continued benefits in the macroeconomic forecast recently, even given what's been going on right now. So when you're looking at where we are from a macroeconomic and our individual portfolio metrics, we're very comfortable with where we are here. I wouldn't say we'll see substantial declines or increases unless something dramatic happens in the economy. But I do think that there's an ability to offset some of that growth in the portfolio and those provisions as we go forward as long as the macroeconomic indicators stay relatively consistent with where they are today.
spk01: I would say historically the company has a very conservative view of an in-place cash flow lender. Our focus has been on conservatism and historically if you look at the statistics You know, you can run this out 20, 30 years. In the course of 30 years, we have very little losses based on actual experience. So we're very confident in how we run culturally, and that's not changing. If anything, in a recessionary environment, we'll just be more conservative. And I think that's important for customers to understand. As rates start to significantly rise, if they're heading into a recession, and rates start to rise, and ultimately these low coupons have to refinance, There may be less money to take out based on what the value they've created over the past five to seven years. So it's an accelerant. And when they come to the table, the cash flow is going to be the net cash flow to them given the carry cost is lower. So you're giving less dollars. And it's almost an incentive for them to come to the table sooner before cap rates follow interest rate increases. At the same time, we have a history here. We're an in-place cash flow lender. We don't look at what the future is going to hold for property transactions, what's in place, and that's our conservative outlook at being a cash flow lender for portfolio.
spk10: Great, Tom. Thank you, and thank you, John, as well. Appreciate it.
spk02: Thank you. Our next question is from Abraham Kunawala with Bank of America. Please proceed with your question.
spk01: Abraham, you're back.
spk08: Hey, thanks for squeezing me in. I know we've gone over time. Just a very quick question maybe for John. The tangible book value accretion you mentioned, what's driving that? Is it just purely based on the interest rate mark today versus when you announced the deal?
spk01: It's the tangible book value accretion on the transactions.
spk12: Yeah, we're using the guidance that John gave. It's got an estimate of where the mark would be as of March 31st. So that does move around, no doubt, right? That could change, but that's really an all-inclusive number is where we expect things to come out. If you look at where we were in the beginning when we announced the transaction, we would add a pretty significantly higher credit mark on the portfolio. And just look at the allowance and the CECL results that Flagstar had. when we announce the deal compared to now, and then that, of course, will be offset by a rate mark. So we'll have a much higher rate mark on the portfolio and a much lower credit mark on the portfolio when you're looking at loans.
spk01: I think, obviously, in this valuation perspective, when you put the deal together on an accounting perspective, you're probably at negative goodwill, I would imagine, John. Yeah, there's a bargain purchase fee at these levels. Given the current landscape, that could obviously change as we get closer to closing. But if you look at the past year, Pfizer had a tremendous increase at 2021 economically. So that goes into the capital coffers. And when you reset the transaction on an accounting perspective, we have a lot more capital there.
spk08: Got it. And just one follow-up. Go ahead.
spk12: Yeah.
spk08: Go ahead, John.
spk12: No, go ahead. I was just going to say, you're right. It is dependent on where the final marks come out, no doubt.
spk08: Okay. And just one final question, Tom. Any risk to the dividend as you go through the OCC process to get the deal approved? I know payout ratio is fine. You're going to have excess capital. but just would love to hear in terms of your confidence in the dividend sustainability.
spk01: We're very confident in our position to return value back to shareholders, and our priority is to continue maintaining a carbon dividend position. And obviously when we model this, the payout ratio based on the performers comes down significantly. So we still believe that that's the case, and our focus is to continue maintaining our dividend, and we're going to hold to that assumption.
spk02: Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing comments.
spk01: Thank you again for taking the time to join us this morning and for your interest in MICV. We look forward to chatting with you again at the end of July when we discuss the performance of the second quarter of 2022. This concludes today's conference.
spk02: You may disconnect your lines at this time.
spk09: Thank you for your participation.
Disclaimer