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 Cangemi, joined by Chief Operating Officer Robert Wann, 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. Cangemi.
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 Sandro 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 through 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 the 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. 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%-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. 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 sheet repositioning in our accretion numbers. Turning now to our first quarter results.
For the first quarter of 2022, we reported diluted earnings per share of $0.32 a share, up 10% compared to $0.29 a share for the first quarter of 2021. We're extremely pleased with our results this quarter as we reported 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. Since 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- $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, add staff, launch new initiatives in this area. Total BaaS-related deposits were $5.4 billion on March 31, 2022, a significant increase since we started the business from scratch 12 months ago.
BaaS-related deposits fall under three categories. BaaS deposits tied to our fintech partnerships totaling $3.8 billion so far, government BaaS 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 the Fiscal Service as a 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 initiative, including those focusing on BaaS 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 linked quarter basis.
Once again, the majority of the growth was in the multifamily portfolio, which increased $1.1 billion during the quarter to $35.8 billion, up 13% annualized compared to the previous quarter. Loan demand in the multifamily category continued 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 has $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%-4.75% range, depending on the type of credit. That is about 100-125 basis points higher than at the end of last year. It is very important to note that we have approximately $8 billion of multifamily and CRA 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 timeframe. Despite the increase in rates, we still continue to have strong originations and a growing pipeline.
Loan originations continued their strong pace into the first quarter. Total first quarter originations were $3.5 billion, up $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 and asset quality remains exceptional and continue to rank among the best in the industry. Non-performing assets totaled $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 trends continue to improve with loans 30-89 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, while 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 in parts of Queens reached a 10-year high. Moving on to the income statement. First quarter's 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 pre-provision net revenue increased 6% on a year-over-year basis to $212 million. Turning to the net interest margin.
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-related 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 19 to common shareholders of record as of May 9.
Based on yesterday's closing price, this translates to an annualized 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.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two 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 key. One moment please while we poll for questions. Thank you. Our first question is from Ebrahim Poonawala with Bank of America. Please proceed with your question.
Good morning, Ebrahim.
Hey, morning, Tom. I guess first question, just in terms of the margin outlook, in light of the deal timing getting pushed out. Two questions there. One, 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? 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 2017 over 2016.
Just give us a sense because that's going to be a concern around what happens to NIB margin in light of the Fed actions.
Ebrahim, let me just point out the big picture view of us and Flagstar coming together. They're asset sensitive, we're liability sensitive. I'd say we're probably less liability sensitive today than we were when you cited that move. When you take a very significant asset sensitive bank like Flagstar, and we consummate the merger this year, this will have, in my opinion, a very positive position in a rising rate environment going to 2023. We're very appreciative of the balance sheet coming together with a unique positioning, us being slightly liability sensitive and Flagstar being asset sensitive. Collectively, when we come together going to 2023, we'll position well for that rising rate environment. With that being said, I'm gonna defer to Mr.
Pinto on the short-term guidance on the margin. John?
Yeah. For the second quarter, we expect the net interest margin ex 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. So we have some. We have flat to for the second quarter. 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 margin.
John, what are you assuming for Fed to do in the second quarter as part of that flat margin guidance?
50/50. 50 in May, 50 in June.
That's helpful. Tom, any thoughts around the timing of the deal? Like, is the OCC approval and 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?
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 you know, we're hopeful that we will meet that timeframe. We feel that's a reasonable timeframe.
Got it. 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 expense offset. Would love to hear, one, where do you think gain on sale goes from here, and is there anything on the expense side that you can do that offsets that revenue hit that we've seen over the last couple of quarters?
Yeah. Thanks for that question. 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 dollar market. People are working to remove that capacity, but until it's gone, it's gonna 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 $5 million in Q1. When you look at that reduction of 43 basis points quarter- over- quarter, 23 basis points was because of the EBOs.
Then you had about 11 basis points mix and volatility, and 9 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%-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. Then a further 62 employees have attrited that we haven't replaced, for a total reduction of 420 since 12/31.
To put that into perspective, that's a 20% reduction in our total mortgage employees since 12/31 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 million-$4.5 million in the second quarter. Then, going forward from Q3 onwards, it'll be about $6 million in savings.
Got it. Thanks for taking my questions.
Thank you. Our next question is from Chris McGratty with KBW. Please proceed with your question.
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 deposit moves? Thanks.
I'm gonna just take 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. As the government starts to deal with the various agencies on how they're gonna 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 toward LIBOR, either plus or minus a spread. Then you look at the FinTech partnerships, they can go from zero to as low as LIBOR 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 venture 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 partners for banking as a service for a lot of these challenger institutions that have banking operations, but they're not an FDIC-insured institution.
We are working as the BIN provider and the banking as a service provider for those types of initiatives. They do vary. The goal here is 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.
Great. If I could add one more. I think you said in the prepared remarks tangible book accretion's gonna be 2x what you thought. Can you help with where you believe CET1 will shake out and kind of remind us what either if that's your binder or which one your binder is? Thanks.
I'd say back of the napkin with the Flagstar transaction closing, we're probably higher on a Tier 1 capital perspective, probably hovering close to 11%. I think maybe John Pinto could add some more color.
Yeah. Originally, we anticipated our Tier 1 common equity ratio to be 10.4%. Just given the growth and tangible book, that'll be slightly higher. We'll probably be just under 11 right now is our estimate.
Thanks, John.
You got it.
Thank you. Our next question comes from Steven Alexopoulos with JP Morgan. Please proceed with your question.
Morning.
Hey, good morning, everyone.
Morning.
Tom, can you give more color on the decision to go the route of the national bank charter? You said you received NYSDFS approval. Was the FDIC a roadblock in getting this deal approved?
Well, I'm not gonna 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 OCC charter is the way to go. Clearly, we're very much appreciative of DFS approval, and I'm not gonna comment on any other regulatory discussions there.
Okay. Why? Can you go into the decision to switch to the national charter?
I just did. You know, I do appreciate the question, and you can be sensitive on the commentary. We went through a journey through this process. It's now a year through the approval process. 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.
Okay. Tom, will there be any additional costs or oversight with this type of charter versus previous?
You know, I would say in general, it's probably gonna be very similar to the structure with respect to cost. I think the efficiencies 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, would be immaterial.
Okay. In terms of the Fed and OCC now, has that process been ongoing, or are you now just starting that process with them?
Well, Steven, 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. We're confident that that's the adequate timeframe to achieve these approval based on where we are in the approval process.
Okay. If I look at your community, right? The company's 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. If you look at Flagstar's 1Q results, you can get a sense why, right, talking about gain on sale margins compressing so much. 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. You know, what does this give you that you couldn't have accomplished on your own? Like, why did it make sense for NYCB shareholders here to extend the agreement? Thanks.
Steven, again, we're not going to waver from our original discussion. We put the deal in front of both Sandro and I. We looked at this opportunity. We had an opportunity here to look at the mortgage business with full knowledge that 2022 was going to be dramatically less than it was in 2021. We modeled down 55%. 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 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. More importantly, we anticipated a substantial drop. If you look at the history of what Flagstar has done from transitioning their own balance sheet, they are well along the way becoming more of a full service commercial bank.
We would well cap at 50% of their balance sheet, which is commercial banking assets. We're on 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 to add shareholder value with a well-rounded diversified balance sheet with a vision of a unique commercial banking model.
Okay. Great. Thanks for that color.
Sure.
Thank you. Our next question comes from Dave Rochester with Compass. Please proceed with your question.
Hey, good morning, guys.
Morning.
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? 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?
Dave, let me be clear. I'm not going to give guidance for 2023 and 2024. When we put the deal together, this is a double-digit accretive deal. Correct, the number was 16%. We don't have 2023, 2024 guidance, and there's not a lot of guidance past what we see with Flagstar right now that's public. When you look at the numbers on a spot basis, our tangible book value has more than doubled on the accretion side to 8% approximately. We believe this is 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 when combined, including double-digit EPS accretion.
We're not giving out 2023 and 2024 guidance.
Sure. Okay. Maybe just go into the deposit growth. You had some solid deposit growth this quarter, and I know the Banking as a Service piece contributed to that. Yeah, 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? 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?
Yeah. Look, we were very cautious when we had our change of strategy about a year and 1/2 ago. 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. We're doing great work there, up 26% since we started that initiative. 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. It's been successful. That's been moving very well. That is a passion within, at the board level all the way down to the line. That's moving very nicely for us. That's how we do business going forward.
On the BaaS side, we continue to onboard some great people, especially in the middleware to get you know the onboarding efficiently. Our team is all geared up and we have an online pipeline of some very unique opportunities. As mentioned, we're now one of, I think one of six banks approved of one 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. At the same time, we have a number of initiatives. 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.
The good news is as we bring in this excess liquidity, and we price it accordingly, we feel that we can be competitive. 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. There's a lot of relationship opportunities out there that we think we can tap. 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 Durbin exemptions. 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.
This is a strategy that we're focusing on. We mentioned a little bit about My Banking Direct. My Banking Direct over the long term will be our digital platform, and we're going to roll out a full service digital challenger bank to it as an alternative solution for customers. Hopefully it could be a solution for the underserved underbanked. We have a lot of unique technology and have a strong team of new hires that are working with us to gather that business. 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. Those deals will start to kick in over time. 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 tie 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 now looking for that liquidity. We will come in and be the banking as a service partner. I think there's a real great opportunity there as a banking as a service partner for mortgage. Mortgage as a service 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 purposes. Sandro, maybe you want to add some color there?
Yeah, sure, Tom. Thank you. Yeah, 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. While they're still substantial, they are less than they were 1/4 ago. We're not pursuing those opportunities that Tom.
Uh-huh.
has referenced. I think it's an opportunity that's 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. I think that's very significant. You know, it's one of the reasons why.
Uh-huh.
At Flagstar we've been able to adjust to a changing market. You know, 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. You know, 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, all-time high. We're guiding to that expanding to almost 360 in Q2.
With the continued increase throughout the year to average close to 360, closing out the year, you know, maybe north of 370 in December. Our MSR investment, which has always performed in an outstanding fashion, has had a much higher return in Q1, and particularly in March as we eased our hedges and saw a nice valuation increase. We're guiding to an elevated return on our MSR for the year. As you hopefully 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.
While the mortgage environment's difficult, you know, we have right-sized it, and despite modest expectations for gain on sales 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 efficiently priced deposits, when you put these two organizations together, as Tom has already suggested a couple of times, we think it's really a powerful balance sheet and opportunity for shareholder value growth.
Hey, Dave. One thing I would add to your comment on beta 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, you know, all deposit type pricing is going to rise in an aggressive Fed tightening cycle. It's interesting when you can say things are tied to short-term LIBOR, SOFR or tied to the core more high beta risk type liabilities. Ultimately, as zero becomes 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 and we'll call it maybe savings to a lesser extent, they're gonna have high beta risk in general. 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.
Yeah. That makes sense. Let me try to sneak in one more. I know you have putable advances. What's your expectation, just given the current curve as to what kind of put back to you this year? I know you've got some cash there. You can pay some of that off. Do you think you can pay all of it off with deposit growth and cash?
Let me give you a general view, and I'll have Tom be more specific. Big picture is that in the event that stuff is put back to us, we're in a deposit growing initiative. We're in a liability gathering initiative. We'll have lots of flexibility. More importantly, when we merge with Flagstar, we're gonna have a tremendous opportunity to really reshuffle our liability position to rightsize ourselves into 2023 and 2024. That's my broad view of what we're gonna do with things coming back at us and things are put back to us. If they put back and we have the cash, we're in a great position. Maybe John can add some more color to that.
Yeah. Depending on what happens with short-term interest rates this quarter, it is possible that we'll get a handful of putable borrowings back to us. As Tom mentioned, when you look at us from an interest rate risk perspective, since these are quarterly putable, in just about all of our interest rate increasing scenarios, we're assuming these are getting put anyway. Even if you replaced it with high beta deposits from an interest rate risk perspective, you'd be in the same perspective. From an earnings perspective, you'd be a little bit better because, you know, the individual coupons that are coming on are coming on lower than where the putables are coming off.
Right
It could be a benefit that we could see in the short term as these things get put back to us. The goal is to pay them off with deposits, and just continue the less of a reliance on wholesale funding.
That's right.
Yeah. Okay. All right. Thanks, guys. Appreciate it. Bye.
Thank you. Our next question is from Brock Vandervliet with UBS. Please proceed with your question.
Good morning, Brock.
Good morning, Tom. Good morning. Just following up on with the Flagstar team. I 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.
Yeah, it's totally, Sandro, it's totally related to the mortgage business. As I mentioned earlier, with the balance sheet declining, we've let some of those servicing related and deposits go. You know, escrow deposits and so forth, and lower, so you know, that's just managing the size of the balance sheet or the size of the funding that we need for the balance sheet. It's all planned. The retail deposits, consumer deposits, commercial deposits are all moving in the right direction as they have historically. This is just our ability to manage the wholesale deposits in a way that fits best for the balance sheet.
Yes, Sandro, it's Lee. If 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. As rates rise and you have lower payoffs, that is, you see a reduction in the escrow deposits. It's all escrow deposit related, Brock.
Okay, and shifting back to gain on sale margin to beat that horse a little bit more. Could this be the trough or what are you seeing in your current production in terms of a GOS margin?
Yeah, you know, it's hard to know because as Lee said in his remarks earlier, everybody is adjusting capacity. Some companies are not gonna make it. We're kind of where we were two years ago, right, you know, or not too much before COVID hit. It takes a while. If you look at our guidance, we're being very careful on the guidance for gain on sale. 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. As Tom said, consistent with what was projected a year ago when we 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. Again, as I said earlier, that's exactly how this model is intended to work and on the Flagstar side.
Okay. Thanks for the questions.
Thanks, Brock.
Thank you. Our next question is from Steve Moss with B. Riley Securities. Please proceed with your question.
Good morning. Maybe just following up on the stablecoin partnership. You know, I hear you on your comments, Tom. Just kind of curious, are those deposits gonna be indexed or are they going to be interest-bearing? Should we think about those as interchangeable to what CDs are scheduled to reprice? If you guys could quantify also how many dollar values of CDs scheduled to reprice?
I'll start with the
Fiat currency.
The fiat. Yeah, the stable coin 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. They are a floating rate against Fed funds, but they are to a minus spread. Then when you look at, you know, CDs, where they're coming due, we have, you know, about $3.8 billion in maturing CDs in the second quarter. That's at a 45 basis point rate. Yes, if you think about it, 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. 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. We're flat to the first quarter is what our estimate would be for the second quarter. I think last earnings release, we gave guidance for the full year. We're comfortable with that guidance.
Okay. Great. Thank you very much.
5:40.
$540 guidance.
Yeah, 5.40 for the year.
Thank you. Our next question is from Peter Winter with Wedbush Securities. Please proceed with your question.
Morning, Peter.
Good morning. Good morning, Tom. The loan growth was exceptionally strong this quarter and you've raised guidance in January to upper single digits. I'm just wondering if you.
Sure.
How you're thinking about loan growth going forward?
It's an exciting transition period given the fourth quarter was interesting given property transactions were elevated, a lot of activity, a lot of smart moves from borrowers to, you know, 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. 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. When you look at the shape of the curve, we feel very confident our retention is gonna 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 term for the company. That, that'll transition to more growth. 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 Flagstar. That's unique since we had a very strong Q1. But what's interesting about that, you know, as I discussed on my prepared remarks, we have about $8 billion that's gonna have to make a decision in the next 24 months. I think the coupon on that's probably in the low threes. 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. 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 wanna access your capital sooner.
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. It started to kick in in Q4, and it's continuing. We're very bullish about the activity that we're seeing in the multifamily space. By the way, all the borrowers are very strong.
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? 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.
Yeah. On your first point, the benefit in the margin we saw from the swap rolling off this quarter was 4 basis points. So that's the $2 billion swap that rolled off on February 15th. 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 gonna 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 you know, there will be an impact as we go forward. But you know, we'll manage that as individual deposits come through and we bring in new relationships.
If I could ask, then maybe. [crosstalk]
Just wanna go back to John's point, though. Think about on the big picture, you know, we have this asset-sensitive institution that it will have the flexible liquidity opportunities, and we're less liability sensitive today than we were three, four years ago and definitely within the last rate tightening cycle. 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 gonna benefit the margin going forward. That's our view when we model this. This is all about, you know, putting the strengths of these two companies together. When you think about 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, we have this beautiful opportunity on the mortgage side where we can really be a major depository player regarding relationship opportunities. We think there's gonna be a growth opportunity for liquidity and being able to really transition our balance sheet from wholesale funding. That's gonna be the focus of the combined entity. The combined entity will have an asset sensitive position going into a rising rate environment.
Could you just say what the asset sensitivity goes to on a combined basis?
Yeah. I think we put in our first analyst report around 5% on an NII. I think it's right around that level. We redid it as of our last go-round. Between 5% and 8% is our NII sensitivity.
That is very modest deposit initiative growth on NYCB standalone, right?
That's right.
You're thinking about what we've accomplished since 2020. At the end of 2020, 2021, 2022, our core deposit franchise is up, I think $8 billion, $5.5 billion on the lending side. These are solid relationship deposits. The goal here is to culturally change how we do business, and that's the mandate. I think we're making tremendous success here. Be patient. We're not gonna give quarterly guidance on how much loans and deposits that we're gonna bring in every quarter. We've been successful, and it's been a cultural shift on how we conduct our business.
Got it. Thanks, Tom.
Sure.
Thank you. Our next question comes from Matthew Breese with Stephens Inc. Please proceed with your question.
Hey, good morning.
Morning.
Going back to the charter discussion, I was curious, does the FDIC have any remaining say on your charter change to the OCC? Is the charter change contingent upon the deal, or are you going to make the switch stand alone prior to or regardless of the deal close?
I'm not gonna say a whole lot about what can happen. The reality is that, you know, 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 charter, a Fed approval and an OCC approval. 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.
This is the path that we believe for a national mortgage banking platform that's gonna have 400 retail locations throughout the country, 100 LPO offices and a commercial banking model that would serve under the OCC charter.
Okay. The other thing is if you screen for U.S. banks with elevated CRE concentrations, you know, most often you come across institutions that are FDIC and state regulated. Many of them are in New York, but very, very few are over 300% and regulated by the OCC. Now, at year-end, I think you were at 765%, and with the deal, you're still north of 300%, but lower than 765%. Do you need to make any changes on this end to lower your CRE concentrations ahead of the charter change?
Let me give you just a general overview, and I wanna kind of cite history here, going back to 2006 guidance. When the guidance was put out in 2006, 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% in 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 of zero losses in the asset class.
We've spent hundreds of millions of dollars over the years as we look to become a CCAR bank, going back to 2012 and 16 up through 16 on making sure we have very strong risk management practices around CRE. When you think about the business model and how we lend, we're a cash flow lender predominantly in multifamily rent-regulated housing, and we have a relatively significant cooperative portfolio with mid-20% LTVs that we've never had a nickel of loss ever as a company. These are very unique positions in history. When you take that all things being equal and look at where your true CRE position would be when you carve out multifamily and cooperatives, it's about 112% pro forma.
I think it's manageable, and we have a very interesting story to tell regarding credit history.
Understood. Then along those lines, the other question they had was, I was curious your thoughts on the health of the rent-regulated multifamily borrowers, you know, 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 gonna be any problems there?
Matt, that's a great question. I will tell you that we've you know, three years ago, we focused on that. Obviously, when we had the rent law changes, it maybe was four years ago. The reality is that we look at the Bronx very differently than some of the other markets and we lend differently in those markets. There's no question that if inflation outpaces revenue growth on the cash flow side, you have some pressure there. 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 are in the Bronx that have significant portfolios, and we believe that we have really low LTV, great borrowers, history of long duration and long duration hold periods and generational holdings. We feel very confident that, you know, after stress testing this in very adverse scenarios, we're comfortable that we have a solid portfolio. It's simple math, right? 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.
I think it's probably gonna bring a lot of borrowers to the table a lot quicker just because of the potential of the squeeze, and we're gonna be probably more conservative on LTVs. We do have a relatively low LTV portfolio, especially in the rent-regulated cash flow portfolio.
Understood. Okay.
That's a great question. It's definitely a risk. It's a great question. We appreciate that commentary because we spent a lot of time getting comfortable on the risk management side. I think that's something that, you know, we've got our arms around it. We feel really good about it. We've done a ton of work on the rent control area, given the changes in rent laws and the nuances on how cash flows are created. It's a different environment today than it was a decade ago.
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 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 the volatility and balances?
Yeah.
Yeah, let me.
Go ahead, Sandro.
It's the available-for-sale portfolio and the servicing portfolio has deposits associated with it. The servicing portfolio, when rates are declining, the payoffs are very significant. You're holding payoffs during the course of the month, your escrow balances are much higher than when you're in a rising rate environment and the key payments are very low. Almost all of that is related to that phenomenon. The beta on those, the escrow deposits carry no cost. 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. That's really it.
If you look at the history of Flagstar, you'll see that we've had the ability to manage that volatility very well because there's kind of gives and takes. You're in that higher interest rate environment, prepayments are slower, you have less escrow deposits. At the same time, the available-for-sale portfolio is lower because originations are lower. They kind of offset each other. Again, there's a lot of history there that you can look at as you begin to understand Flagstar better, and it's not a problematic volatility, if you will.
Yeah, I'll just jump in, and Sandro's 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 sub-servicing books. The $1.3 million loans that we service or sub-service, some of which we own, and some of which we sub-service for others. 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. When we bring the two organizations together, that's an area where we could go and seek additional deposit growth.
Understood. Okay. That's all I had. Thanks for taking my questions.
Thank you. Our next question is from Christopher Marinac with Janney. Please proceed with your question.
Hi. Hey, thanks. Hey, good morning, Tom. Thank you for taking my question. 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. I'm just curious kind of how you manage the reserve from here. You know, do you think it will grow? It seems you've got a lot of leeway with the reserve and I just kind of want to talk through that.
Yeah. I'm gonna defer to John Pinto regarding the complexities around the new accounting for loan reserve and that. John, why don't you take a crack at that one?
Yeah. There's no doubt that there's some opportunity there, but we are growing the loan portfolio as well. You know, under CECL and the life of loan estimate, you had to put up those full, what, you know, potential life of loan losses the day you do the loan. That'll 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. 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. You know, I wouldn't say we'll see substantial declines or increases unless something dramatic happens in the economy.
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.
I think it's great. I appreciate.
Yeah. I would say historically, the company has a very conservative view of an in-place cash flow lender. Our focus has been on conservatism. Historically, if you look at the statistics, you know, you can run this out 20, 30 years. It's been close to 30 years. We have very little losses based on actual experience. So we're very confident in how we lend culturally, and that's not changing. If anything, in a recessionary environment, we'll just be more conservative. 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 lower coupons have to refinance, there may be less money to take out based on what the value they've created over the past five-seven years.
It's an accelerant. 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, you know, come to the table sooner before cap rates follow interest rate increases. At the same time, you know, we have a history here. We're an in-place cash flow lender. We don't look at what the future's gonna hold for property transactions, what's in place, and that's our conservative outlook as being a cash flow lender to portfolio.
Great, Tom. Thank you, and thank you, John, as well. Appreciate it.
Thank you. Our next question is from Ebrahim Poonawala with Bank of America. Please proceed with your question.
Ebrahim, you're back.
Hey, thanks for squeezing me in. I know we've gone over time. Just 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?
I think it's the tangible book value accretion on the transaction.
Yeah, we're using the guidance that John gave. It's got an estimate of where the mark would be, as of March 31st. That does move around no doubt, right? That could change, but that's really an all-inclusive number where we expect things to come out. If you look at where we were at the beginning when we announced the transaction, we would add a pretty significantly higher credit mark on the portfolio. Just look at the allowance in the CECL results that Flagstar had when we announced the deal compared to now, and then that of course will be offset by our rate mark. 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.
I think obviously in this valuation perspective, when you put the deal together from an accounting perspective at negative goodwill, I would imagine, John Pinto.
Yeah, there's a bargain purchase fee at these levels here.
On this transaction, given the current landscape, that could obviously change as we get closer to closing. If you look at the past year, Flagstar had a tremendous 2021 economically. That goes into the capital coffers. When you reset the transaction on an accounting perspective, we have a lot more capital there.
Got it. Just one follow-up. Go ahead.
Yeah.
Go, John.
No, go ahead. I was just gonna say, you're right. It is dependent on where the final marks come out, no doubt.
Okay. 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 gonna have excess capital, but just would love to hear in terms of your confidence in the dividend sustainability.
We're very confident in our position to return value back to shareholders, and our priority is to continue maintaining a covered dividend position. Obviously when we model this, the payout ratio based on the pro formas comes down significantly. 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.
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.
Thank you again for taking the time to join us this morning and for your interest in NYCB. 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. You may disconnect your lines at this time. Thank you for your participation.