Good morning, ladies and gentlemen, and welcome to the NYCB Q1 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, 28th April 2023. I would now like to turn the conference over to Mr. Sal DiMartino, Director of Investor Relations. Please go ahead, sir.
Thank you, Laura. Good morning, everyone, thank you for joining the management team of N.Y. Community Bancorp for today's conference call. Today's discussion of the company's first quarter 2023 results will be led by President and CEO Thomas Cangemi, joined by the company's Chief Financial Officer John Pinto, Reginald Davis, President of Banking, and Lee Smith, President of Mortgage. Before the discussion begins, I'd like to remind you that certain comments made today by the management team of N.Y. Community may include certain 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 presentation for more information about risks and uncertainties which may affect us.
With that, now I would like to turn the call over to Mr. Cangemi.
Thank you, Sal. Good morning, everyone, and thank you for joining us today. Today, I would like to cover a few topics with you. Our first quarter 2023 operating results, the first as a combined company with Flagstar, how we fared during the recent market upheaval, the Signature Bank transaction, and finally, provide you some forward-looking guidance. As you all know, the first quarter was a volatile quarter for the banking industry, and unfortunately, several good financial institutions became victims of this volatility. While no financial institution is 100% immune from the damage that the crisis in confidence causes, N.Y. Community fared very well during this period of turmoil due to our diversified business model focusing on several core businesses: retail banking, commercial lending, multifamily and commercial real estate lending, and the residential mortgage origination and servicing business.
We do not have any exposure to cryptocurrency or stablecoin-related industries, nor do we have significant relationships with financial technology companies. Moreover, during this time, our percentage of uninsured deposits was amongst the lowest in the industry. Not only did we successfully navigate the market turmoil, but we emerged from this in a stronger position when on 20th March , we announced that our bank subsidiary, Flagstar Bank, N.A., purchased certain assets and assumed certain liabilities of Signature Bridge Bank, N.A. This transaction is a game changer for us. Strategically, it builds upon the momentum created by our recent merger with Flagstar and accelerates our transformation to a high-performing commercial bank. It improves our deposit base and our overall funding profile while providing further loan diversification. In addition, it jumpstarts our commercial middle-market lending business and our relationship banking strategy.
The transaction included several other businesses that were part of our longer-term build-out strategy, including the broker-dealer and wealth management business and several new attractive lending verticals such as healthcare and SBA lending. Importantly, we also retained virtually all of Signature's highly productive private client banking teams, predominantly based in the N.Y. region, along with those teams related to Signature's recent West Coast expansion, primarily based in California. Everyone here at N.Y. Community is extremely pleased to have them and the other talented employees from Signature Bank join our team. We look forward to us doing great things together. Lastly, the transaction is anticipated to be financially attractive, with expected EPS accretion of more than 20%, while it is also significantly and immediately accretive to tangible book value per share.
At closing, tangible book value per share jumped 20% to $9.86 a share at the end of the first quarter compared to the fourth quarter of last year. Given our earnings power from this transaction, we expect tangible book value generation to accelerate. Turning now to our results. First quarter 2023 results on a GAAP basis were impacted by several items arising from Signature transaction and the Flagstar acquisition, including an approximate $2 billion bargain purchase gain, merger-related expenses of $67 million, and initial provision for credit loss of $132 million for the loans acquired from Signature. Adjusted first quarter diluted earnings per share were $0.23 a share, slightly ahead of consensus estimates for the quarter.
Net income available to common stockholders, as adjusted, increased 14% - $159 million compared to the fourth quarter of last year. Operating results were driven by a full quarter's benefit from the Flagstar acquisition, which closed on 1st December of last year. Approximately two leases Signature's operations, strong organic loan growth in the legacy franchise, and a much higher net interest margin. One of the many benefits from the Flagstar acquisition is the impact of our net interest margin from adding its mostly variable rate loan portfolio and its low-cost deposit base. We saw some of this benefit in the fourth quarter, but it was more pronounced this quarter, as the net interest margin was 2.60% up 32 basis points compared to the fourth quarter of 2022.
We believe that margin expansion will continue throughout the year with additional expansion opportunities from the Signature transaction. Turning to our loan portfolio. Excluding loans acquired from the Signature transaction of approximately $12 billion, total loans and leases increased $1.5 billion during the current first quarter, up about 9% on a linked-quarter basis. About $1.1 billion of this growth was in the C&I portfolio, particularly in specialty finance and the mortgage warehouse businesses. The loan portfolio continues to become more diversified as we continue our evolution to a commercial bank model. Commercial loans at 31st March represented 44% of total loans compared to 32% at 31st December . While multifamily loans stood at 46% of total loans compared to 55%. As for the quality of our loan portfolio, both our asset quality metrics and trends remain strong.
Total non-performing assets of $161 million are up only modestly on a linked quarter basis and represents a low 13 basis points of total assets. The allowance for credit losses increased $159 million or 40% from year-end- $549 million, and the coverage improves to 370% of non-performing loans, or nearly 4x . Importantly, we reported another quarter of low or no loan losses as net charge-offs was 0 during the current first quarter compared to $1 million during the previous quarter. Our office exposure remains very manageable, and we remain comfortable with the credit trends in this sector. Our office exposure at quarter end was $3.4 billion, or approximately 4% of total loans.
We provided some details in our investor presentation, to summarize, the average loan size is $11 million with a weighted average coupon of 4.62%. The weighted average LTV is 56%, the weighted average debt service coverage ratio is 1.73x . Furthermore, we have no delinquencies and no charge-offs in this portfolio. As you can see, these metrics are proof positive that our conservative underwriting standards have served us well over numerous credit cycles. This, along with a high-quality balance sheet, should serve us well in the event of an economic downturn. Regardless, we will continue to be laser-focused on credit quality across all lending verticals, especially those that we have recently entered. On a deposit front, our deposits totaled $84.9 billion at 31st March.
The Signature transaction, after experiencing initial expected outflows, contributed $31.5 billion of deposits as of quarter end. Legacy Flagstar NYCB deposits declined $5.4 billion due to anticipated spend down in the prepaid debit card program and the reserve account withdrawal from Circle. All told, these two categories accounted for over 80% of the decline in legacy deposit balances. The remaining were mostly institutional deposits. In terms of liquidity, while we have always had ample sources of liquidity, our liquidity position was enhanced by the $25 billion in cash from the Signature transaction. Currently, our available liquidity from cash, unpledged securities and our borrowing capacity at both the FHLB of N.Y. and the Fed is over $42 billion. At the same time, our uninsured deposits, excluding collateralized deposits, totaled $28.7 billion, or 34% of total deposits.
Accordingly, our ready liquidity represents 147% of uninsured deposits. In addition to our diversified business mix, we have a conservative and high quality available for sale securities portfolio consisting primarily of GSE related securities. Approximately 1/3 of these securities were marked to market in conjunction with the Flagstar acquisition. Accordingly, the amount of AOCI is amongst the lowest in the industry and has minimal impact on capital. Also, as part of our long-term liquidity planning strategy, we do not have any securities designated as held to maturity. In terms of our expenses, total OpEx were $398 million, up $194 million compared- $204 million in the fourth quarter. Our first quarter expense base includes a full quarter of Flagstar expenses compared to only one month during the fourth quarter and twelve days of Signature.
As for guidance, given the current outlook, we expect first quarter 2023 NIM to expand from first quarter levels to a range of 2.70%-2.80%. First quarter gain on sale of mortgage loans is $20 million-$24 million and a full year tax rate of approximately 23%. We've accomplished quite a lot in a relatively short period of time. We will devote the rest of this year to integrating and converting Signature and Flagstar, reducing our expenses, growing our deposits further, and building out each of our businesses as we evolve to become the new Flagstar. Lastly, I'd like to thank all of our teammates for their hard work and support over the past few months, especially the last two months. None of what we have accomplished so far would be possible without them.
With that, we'll be happy to answer any questions you may have. We'll 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. Operator, please open the line for questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. If you would like to withdraw your request, please press star followed by the number two. One moment please for your first question. Your first question comes from the line of Ebrahim Poonawala from Bank of America. Please go ahead. Your line is now live.
Morning, Ebrahim.
Thank you. Good morning, all. I guess maybe first question just around deposits, the slide eight where you have the waterfall. Two things. One, give us a sense of what's underlying your assumption. I think I heard you say you expect margin expansion not just in the second quarter but throughout the year. What's underpinning that in terms of deposits? One, around legacy Flagstar, do you expect more runoffs, similar to what you saw, I think, in the early part of the year, the $5.5 billion? How much more do you see leaving the bank there? Then on the Signature deposits, I think they've held up much better than I would have thought. Give us a sense of what you expect around the Signature deposit base.
I'll start off, Ebrahim, then I'll pass it over to John and Reggie regarding deposit base. I will tell you, given the timing of this transaction and the speed of execution, we modeled approximately the 20% runoff because, you know, given the circumstances of the turmoil going on in March, we felt that that was a conservative number. We actually came in less than 10%. What's most important about that structure when we go into April, if you look at what the activity has been, the DDA activity has been a rock. It's been solid. It's been actually up slightly throughout April.
If you think about where we were a year ago as NYCB standalone, that was a $4 billion DDA balance that went to approximately $12 billion with the Flagstar transaction. Now we're $23 billion in DDA or 27% of deposits. If you think about how that impacts the margin, those costs are 0. That's a very powerful position to be in when we looked at the historical franchise where we were more focused on higher cost type liabilities. We're very pleased on the stability of the DDA accounts. As far as the stability overall, we're seeing a relatively flat position right now. We expected some runoff the first days following the announcement, and it's been very manageable.
With that, I'll pass the baton over to John, and then John will pass it to Reggie to talk about what we're seeing throughout the whole organization.
Yeah. Just quickly, when we're talking about the margin guide, one of the items to keep in mind too is on the borrowing side. We have $6 billion of wholesale funding that is coming due or we expect to be put back to us in the second quarter. That's at a 4.40% rate. You know, we're gonna get some margin benefit there by just paying that down in the quarter. We also have some brokerage CD runoff at pretty high rates as well.
You know, with the stability of the non-interest bearing deposits that Tom talked about and that Reggie will talk to quickly on the retail side, you know, what we're looking that's coming due and paying down, especially in the second quarter, is higher rate wholesale borrowings and brokerage CDs that we're gonna pay down with the excess cash that we have on the balance sheet. Reggie, anything you want to add on the deposit side?
Yeah. I would just say, you know, I think the first quarter was actually validation of just how stable our retail and core wholesale book are. If you kind of look point to point, December 2022, we're only down 3% on a combined basis across NYCB and Flagstar. That's like less than $1 billion on a $28 billion book. I'd consider that a win. Some of that, quite frankly, was kind of natural, you know, surge runoff and kind of what we see in the portfolio on a run rate basis. I think the portfolio performed extremely well, and we'd continue to perform this year in the same way.
Ebrahim, just to comment on that again, just to reiterate in going to the margin. If you think about the cash position and we're sitting on an abundance of liquidity and what the funding cost was that we've acquired through the, through the deposit side on Signature net-net, that's like a 3% carry, which is above our current margin. This is sitting in cash and just, you know, managing the cash flow as John Pinto indicated, paying off higher cost debt as we go forward. That is ultimately the strategy to have a much better funded balance sheet going forward here and more commercial bank-like deposits. The benefit of just sitting in cash right now is actually contributing to higher margins.
As we deploy it into other businesses at higher yields, and more importantly, we focus on paying down some of the higher cost wholesale liabilities and be more traditional funded, that will continue to see some good margin benefits throughout this full year.
Got it. I guess just a second question, Tom. Talk to us around the alignment and integration. Means obviously you have the Flagstar integration going on with Signature, and you've kept senior executives from Signature, including Eric on board. Give us a sense of how that integration is proceeding. What should we be watching in terms of the success of, like, keeping those teams on board? What does that mean for just growth outlook going forward?
Great question, Ebrahim. Obviously, you know, day one, you know, we hit the ground running. Both Eric and I have spent, you know, significant energy on ensuring that we have the transition for the teams. We're very confident and very happy on the results of that. As indicated in my prepared remarks, we preserved the teams both on the East Coast and the West Coast, and also the business lines. All the lines of businesses are in place, and we're very pleased on bringing them on board. We think about the next step here, which is culture, culture. We have to integrate these companies culturally, and it's going to be a substantial amount of energy. You know, we are super excited about the Signature folks coming on board. We know them well.
We know that we know our competition, so we're clearly working together. When it comes to systems, the Flagstar transaction is still scheduled for the first quarter of 2024, and we're going through a deep dive right now in assessing what's best for the bank and more importantly, how the customers are going to be served. It's all going to be about customer service as we truly take on a relationship banking model. The most important aspect of that as we make these decisions, that we integrate this at the appropriate timeframe to ensure there's no customer disruption. I don't know if Mr. Pinto wants to add a little bit more on the integration side regarding Signature versus Flagstar. John?
Yeah. The most important thing we've been doing from our teams in operations IT is just really making sure we understand the size and the scope of what the private client groups and the, you know, the teams at Signature are used to on the system side. You know, our main focus is to ensure that we avoid any potential customer negativity, minimize any customer impact. We're going through that process now. You know, that process will not impact the actual date of the Flagstar integration, but it is something we're working towards now to finalize the date on and just to ensure that we, you know, we get the systems converted in the most efficient and effective way possible while minimizing customer impact.
That's right.
Cool. Thank you.
Thank you. Your next question comes from the line of Christopher McGratty from KBW. Please go ahead. Your line is now live.
Hi, Chris.
Hey, good morning. I want to go to the guidance slide, if you could, for a moment. The, the expense guide. The $1.3 billion-$1.4 billion, which is pre-Signature. I understand there's a ton of moving in its parts and it's still early, but can you help us just on the expense contribution from Signature?
I'll lead, and I'm gonna pass the baton back to John on the expense side. Obviously, it's early days. If you look back what they were running, they were running around mid-$800 million run rate on the previous year. Remember, we didn't take all the businesses, and there's a lot of transactional benefits we have is the way we structured the transaction. We're running at $1.3 billion-$1.4 billion, and we reiterated that guide on a standalone basis. As we put on the Signature teams, and a lot of the, obviously, the actual private client groups are gonna remain intact. That's a lot of expense that we are forecasting within our run rate.
If you start with the mid 800s and then you assume a transaction, the nature of a transaction like this, since it's not a traditional M&A deal, it's an assisted transaction base, it's a receivership transaction. We tend to believe there's much more savings given the type of transaction. Historically, we've always been between 35%-50% range. You probably look at the higher end of the range given the nature of the transaction over time, which then you can probably formulate a run rate as we integrate these companies. I think that's a reasonable way to look at the combined company. I don't know if Mr. Pinto want to add as the CFO as far as what you're thinking there.
I think, you know, what Tom said, it makes a lot of sense, and it's what we're working towards right now, which is, we know what our run rate's gonna be. We do believe that in the next couple of quarters, our expenses will be elevated as we continue to go through the process of integration, understanding exactly what we have and the processes we're gonna use to do it, and especially until we get the systems converted. What we do believe, though, is that, you know, if you look back, of course, at our track record, we believe we've been, you know, very, very consistent in how we've managed non-interest expense. It's been extremely important to us.
We have, you know, a lot of history around effectively managing that, you know, in multiple different cycles and even with integrations and acquisitions that we've had in the past. You know, we're really confident in our ability to do that over time. We do believe that in the short-term expense, it'll be a little bit higher here as we go through this process. Then once we get our systems converted, you know, we'll be able to have a run rate that gets into the levels that Tom just mentioned, right? And the other thing just to bring up quickly. You know, on our last call, we talked about trying to front run some of the cost saves from the Flagstar transaction into 2023. That process was ongoing.
Given of course, the Signature transaction, that'll take a little bit of a step back. That's why you'll see just a little bit more expenses in the quarter than we anticipated. You know, from a run rate perspective, we believe we'll be able to manage to a, to a really solid run rate combined once we get through our systems integration.
Chris, I would also add, just be mindful, in the first quarter at the beginning of the year, we did a substantial mortgage banking repositioning for the franchise-
Right.
To position ourselves regardless of interest rates on the mortgage space. Under Lee Smith's execution, that was put in place, I think it was late January into February-ish. We don't have the full benefit of that going forward. We feel over each quarter as we put on Signature and as we get to the benefits of the full mortgage repositioning, you'll see ongoing favorable adjustments as we work through the integration phase toward the end of the year with Signature. Clearly, we'll see each quarter more steps made towards putting the franchises together. Maybe Lee Smith, you wanna talk a little bit about on the mortgage side, what we've accomplished with that. Lee?
No. Thanks, Tom. I think we mentioned on the last call that we executed on a big restructuring on the mortgage business. We let 700 FTEs go as we right-sized the distributed retail business so that we're just an in-branch footprint model. When I say in-branch footprint, that is a combination of both the Flagstar and N.Y. Community Bank branches. It's a bigger geography. And we did it because we wanna be profitable on the origination side, even in this tough mortgage market. We're still one of the biggest bank originators of mortgages originating in all 6 channels. We hold a considerable MSR asset which generates strong returns. We've got the servicing and sub-servicing business that throws off a lot of fee income. We're the second largest warehouse lender.
We do MSR lending, servicing advanced lending, and we're working on more aggressive deposit gathering from the mortgage ecosystem. We do B2B, B2C on the mortgage side. Whether you're the biggest fund in the industry or whether you're an individual borrower, you can come to Flagstar, we take care of you. We look at it as the one-stop shop, and we're able to generate strong earnings through the whole food chain of the mortgage ecosystem.
Thanks. Thank you for all that. My follow-up, just want to make sure I understand, John. If I'm starting 8 mid 8s for legacy expenses for Signature, and you said 50%, that would get you low 400s kind of as a destination. Then we would add on top of that, add the CDI that you've previously talked about. Is that the message that we should be taking away?
Yeah. I think that's maybe a little bit aggressive. You know, that's the high end of the range Tom gave. I think it's probably a little bit lower than that. You know, that's a decent way to start to look at it.
Chris, I think it's also the timing of it, right? It's gonna happen in phased quarters as we get to all four.
Correct.
You think about assuming Q1 when the Flagstar transaction is integrated, we're gonna now have significant benefits there on the tech side as well. We're really looking at putting all these systems together. As we remember from when we announced the conversion date, you should get significant benefits on a standalone basis pre-Signature on Flagstar, you know, post the conversion date as well. You know, when you come up with your estimated run rate, I think that those are all fair assessments when we're coming up with what you think.
Okay.
The expense run rate is. As we progress during the year, we'll hopefully update our guidance as we dive deep into those Signature franchises.
On the one-timers to come, maybe a little help there and also, the share count given the warrants, I assume just the end of period is a good proxy.
Yeah. The end of period is a good proxy. That 720-ish range, right? That's a good proxy to use, for share count going forward. You know, that's where you need to be.
Okay. Remaining one-timers just for book value purposes.
Listen, we do have a handful coming still from both the Flagstar transaction in the short-term. We probably got another $100 million to look at over the next couple of quarters.
Two quarters. Yeah. All right. Thanks a lot.
Great.
Thank you. Your next question comes from the line of Mark Fitzgibbon from Piper Sandler. Please go ahead. Your line is now live.
Hey, guys. Good morning.
Good morning, Mark.
Just to follow up on one of your earlier questions. I think, Tom, that Signature had something like 134 teams. Do you have a sense for how many have stayed? How many are there today?
Mark, great point. Obviously, we didn't acquire the entire institution. There were other teams that didn't come with the transaction. We estimate it's about 126, 127-ish. I think we're, like, 125 now. I call that a huge success. I think Eric had worked hard alongside with me to make sure that we have the retention plans in place, and we're super excited about where we are there. When you think about the teams that we were focusing on, it's about a 125 out of 127-ish. We feel really good about that. The retention process has been very strong.
More importantly, you know, the culture of getting this company together with a much larger balance sheet, being able to do a lot more for the client is only enhanced. We're excited about that, Mark. I would say it's a huge success for us. It's never ending, right? You have to make sure that as you work on culture, the team understands that we do have other products, other opportunities for the new customers from Signature coming on board to really enhance the customer experience. Eric and I spent a lot of time on retention, and we believe it's been a success.
Secondly, unrelated. You know, what is the pipeline of new business in the banking-as-a-service space look like today?
Look, I think in general, we are developing a lot of technology initiatives. We're really trying to, you know, get our strategy focused on going out there and being within the middle of the pack. We've had some good work to do over time, and we see some good developments there. Just on a side, if you think of what Signature has done historically on technology developments with the clients, it's also been very innovative. Collectively, I think our opportunity is even more innovative now with the talent skills over at Signature, combined with our initiatives here on what we're doing in banking as a service. There's been some good wins along the way.
We have the government business is obviously a focus of ours, and it's been consistent, and we're looking forward to partner with our technology partners there. It's been a very successful process for us. We're looking at all opportunities that make sense for the bank going forward to tie into the customer needs. I'd say it's been relatively strong. You know, we had some runoffs that we expected during the turmoil in March. The dollar amount of if you mortgage as a service and government as a service and banking as a service was, what, $7.5, John? $7.4.
Little lower. Yeah.
It's still a relatively strong number, and we're looking forward to, hopefully new developments with the US Treasury relationship as that gets onboarded. We're doing a lot around the digital side. That's all in automation analysis, trying to get that up and running where we go from more classic to digital. That's the plan to work with the government on that. We're excited about development. You know, it's a long journey, Mark. I think the Signature team is gonna help that journey.
Last question I had for you is, I wondered if you could share with us your thoughts on capital or whether you have a target there and also the dividend.
Well, obviously, you know, we're capital build is going to be significant to tangible. In my, in my prepared remarks, I made that very clear that, you know, we're talking about capital formation going forward, which is a very good place to be in. You know, this transaction is highly accretive, both on the upfront tangible as well as the earnings per share going forward. Our dividend coverage ratio just on, you know, pro forma analysis is the ratio comes down substantially. We're very pleased about where we end up on a projected basis, what we see as our dividend coverage ratio dramatically improving on the dividend side. Obviously the dividend is strong and we're very comfortable. Going forward into these multiple transactions, it becomes even more, in our opinion, much stronger.
With that being said, on capital, we think that we're in a very good position to generate a lot of capital with as we go into the quarters ahead. That's kind of in my prepared remarks, focusing on the tangible book value creation. John, if you want to.
The other thing that, you know, we started looking at too, is when you look at our, you know, common equity tier one, you know, we increased it a little bit in the quarter. It came in a little better than we anticipated. You know, we've run it at, you know, a 9% or under, slightly under CET 1 in the past. We're comfortable at those levels. Those levels are gonna start coming up.
The other thing to keep in mind, Mark, too, is, you know, when you look at the unrealized loss on our securities portfolio, and if you looked at a peer group analysis including unrealized losses on securities, you know, we're closer to the top of the list in CET 1 than the bottom of the list. There's a couple of different ways that we do look at capital. You know our history from a loss perspective. You know, we believe we can run at these levels. We're cognizant of the fact though, of where we are from a peer perspective. That's why this transaction, you know, we look so forward to because of the capital generation it provides.
Yeah. Mark, just one major point here. When we put the transaction together, working behind the scenes and getting this deal done with our regulatory constituents, we were very clear that we wanted to solve for capital where there was no negative impact to capital as a result of the transaction, and then the accretion benefit is substantial. That's how we kind of solved for and how we formulated our bidding process to be able to be successful to acquire the selected assets and assume the liabilities that we focused on. That was key in our, in our capital review as far as coming in to figure out how we can put this transaction together. We're very excited about the capital build formation post-transaction.
Thank you.
Thank you. Your next question comes from the line of Brody Preston from UBS. Please go ahead. Your line is now live.
Morning, guys.
Hey, good morning, everyone. Hey, I just wanted to put a finer point on the expenses. Again, I know it's tough, but you said the mid $800s. I think Signature at the end of the year was running closer to like a $930 kinda run rate. You know, I know you didn't bring over everything, so I just wanted to clarify. Is it starting from a mid $800s level, John, and then working its way down to 35% to 50% cost savings from there?
Yeah. I mean, the 862 we mentioned was just the year, right?
Yeah.
2022 expense. We just use that kind of as a kickoff point for the piece. That's right. We didn't take, you know, all of the businesses. You know, we think the number on, you know, from that perspective is just probably under a $2 billion run rate on a combined basis. I think that's the easiest way to look at it. We think that's pretty conservative. Hopefully, we'll be able to do a little bit better than that over time. We think that's really where this is gonna shake out when you look at putting both companies together, you know, for the go-forward period when we get the systems converted.
Got it. Thank you for that. I did wanna follow up on just the legacy deposit base. You know, could you give us a sense, I know there's a lot of moving parts between all the programs and then the seasonality from the custodial deposits and whatnot, but I guess, you know, when you look at the legacy deposit base, do you have any thoughts on, you know, what the seasonality will look like throughout the year and, you know, I guess what your growth targets are for deposits for the year?
Yes. I'll just start that, and then, you know, I can turn it over a little bit to Reggie on the retail side. One item to keep in mind is the government as a service business. You know, those deposits, which, you know, we've talked about on multiple calls, which worked out for us because they're non-interest bearing. That runoff does continue on those deposits. It is done, you know, slightly better than we originally anticipated. You know, that runoff continues. That, We'll see runoff in that non-interest bearing segment throughout the next couple of quarters. That total is $1.3 billion as of 31st March . We'll see some runoff there.
A lot of the banking-as-a-service type stuff that we expected to run off when the liquidity event happened has run off. There's probably a handful of smaller items in that perspective where we'll see some slight runoff. There's nothing really besides the government deposits. There's nothing really that we see from a materiality perspective that we expect to run down here.
The onboard of the new program. Onboard.
Well, new programs that we're hoping new programs are coming from California by the end of the year, maybe even the end of the third quarter. We're hoping that starts to kick in. I was just looking at the runoff piece, which, you know, we don't think it'll be that material when we're looking at the banking-as-a-service or the mortgage-as-a-service pieces.
Reggie,
Okay. I did have one, just one more question if Reggie doesn't have any input there.
No. The only thing I would say, I don't wanna be redundant, you know, we have pegged in plan for deposits to be essentially flat to slightly down. At this point in time, we would not change that. When I say slightly down, we're talking $300 million-$500 million on that base of $28 billion or so. Again, we think we can kinda hold deposits. We've been successful even through the first quarter, there's no reason to think differently.
Got it. Thank you. I did have one more question just on the office slide. I appreciate you putting that in there. I wanted to ask if you happen to know of the 55% that's in Manhattan, you know, where that's kind of geographically in Manhattan. Like, is it, you know, what percent is Midtown, you know, versus the other neighborhoods?
We'll follow back on that. I think the messaging is that, you know, we know our customers very well. We're very comfortable with the LTV, the debt service coverage ratio, and we could, you know, follow up and get more granular there. Clearly, a lot of that business is generated from the longstanding relationships we had with our customers. A lot of that transactional growth has been driven off of 1031 exchanges. If you have a significant asset gain that's been in this, in a family business for so many decades and value is created, multifamily versus CRE, they kind of move around depending on market conditions. That's been the history of our focus on this, on this type of asset class.
We're not in the business of doing office building finance in very rare circumstances. This is a culmination of many years of relationship lending that tied out to the holistic position within the strong relationship of the legacy NYCB. Again, we have no delinquencies. We have no charge-offs in the space. If you look historically, and going back to the from decades, I think our overall loss content in CRE is probably lower than multifamily. I think it was like, John, it was 10 basis points.
Slightly lower than multifamily.
Again, we feel really confident in it, you know. You know, right now we're seeing very strong performance, no delinquencies, no late pay, and we're working with our customers in the event there is some issues on just changes in square foot rent rolls. However, the LTVs are very low and the relationships are very strong, and we know the customer very well. I think John can then follow up with more granularity. We don't have it in front of us right now, but we can get back to you as far as what streets they are on. If it's I'd say it's more towards A and B type. We don't do C lending, period. I think we're probably more driven towards the, you know, more towards the B to B plus-ish.
You know, we stay away from the C type situations.
Awesome. Thank you very much everyone. I appreciate it.
Thank you. Your next question comes from the line of Bernard von- Gizycki from Deutsche Bank. Please go ahead. Your line is now live.
Yeah. Hi, good morning. I know there's lots of puts and takes to 2023 like you've outlined. Obviously the uncertainty in the markets, but the purchase and assumption agreement for Signature has provided a lot of liquidity and presented bigger growth opportunities like you've outlined. You know, I'm just wondering the initial targets from the Flagstar deal, you know, including the 1.2% ROA, 16% ROTCE, the 52% efficiency ratio. You know, would these be considered a bit conservative given the benefits of the Signature deal? Like, are these targets, you know, when you hit a more steady like run rate, you know, what will you be thinking here?
No. I'm gonna take it from a very high level and I'll pass the baton to John again because it's financial questions on forward-looking guidance. We don't have a lot of forward-looking guidance. We gave some short-dated forward-looking guidance. We're very pleased on culturally putting the Flagstar transaction together. It's been a very good experience with the team. Senior team is doing a great job on focusing on getting the culture right. And more importantly, our integration plans are on target. With that being said, you know, the mortgage business has been up and down and it's a volatile business, so we were very proactive right out of the post our closing to rightsize that.
That was the first step to ensure that we continue profitability in all interest rate environments. Where we stand today, our institution is in a very different place when it comes to liquidity, when it comes to asset sensitivity versus liability sensitivity. I can't remember ever being in a seat where we can talk about asset sensitivity. It's a pretty good place to be and having tremendous optionality about the business and where we're gonna deploy that excess liquidity. I think I indicated previously that by sitting on cash right now and making those decisions, we're making a 3% spread based on the transaction and on Signature standalone, which is pretty attractive when our margin was, I think closer to 2.60%.
As we deploy the cash, as we look at the round out of the commercial banking space, we have a lot of verticals. We have some great opportunity to really round out the verticals, build out the commercial bank and clearly focus on team build, focusing on integrating the Signature culture into the new Flagstar culture. It's gonna be about, you know, keeping the teams focused and bringing those deposits back. I mean, I just don't underestimate the opportunity in front of us here that when there was a run in the system, you know, these accounts were not closed, they were just moved out. Our goal is to get a lot of that money back and be creative with our clients, especially on the Signature side, to really be their white glove service.
That's the secret sauce of Signature. That's an exciting opportunity for this institution. We can take the growth in the future with looking at our brick-and-mortar locations in phenomenal parts of the country where we can take Eric and Eric's team to start ramping up growth and continue doing what he's done very well for the past twenty years, which is build value. It's an exciting time and I think when you think about overall returns, this bank is not a traditional thrift model anymore. It's moving towards a commercial banking model. I feel very strongly that we've accelerated that with the Signature transaction and the Flagstar transaction by a tune of ten years. That, that's a good place to be. That's just my opening value. Maybe John, if you.
Yeah. I think remember too, when we announced that the Flagstar transaction, that was all the way back in April.
Yeah.
You know, that was a totally different interest rate environment. Just to keep that in mind.
We're not at zero interest rates anymore, right?
Right. That's right.
We're pleased with the ecosystem. I really think there's a great opportunity on the mortgage ecosystem. As Lee Smith alluded to, we are gonna go after deposit opportunities in all parts of our business. I think it's an uncharted opportunity here with the TPO channel, with the relationships with the warehouse business. We wanna have our share of compensating balances. We have some great team members here that's gonna go after it, and it's gonna be measured and strategized as a focus towards the new Flagstar.
Just to follow up, you know, you did provide some guide to expenses regarding Signature, which is helpful. I'm just wondering, you know, from your talks, your discussions with FDIC, you know, I think there are a couple of things with the transition service agreement. I believe that, you know, the resulting conversation is what, how you kind of like guide it, I believe. I'm not sure if there's anything you can share on that specifically. I'm not sure if that's still being hammered out. Like, you know, what you kind of alluded to is that some of the costs could be elevated in the next couple of quarters. I just wonder if anything you can share there.
Then obviously, if discussions on the, you know, servicing, the remaining, loans, have been discussed and you can share anything there.
Yeah, that process is ongoing. You know, we're still just a little over a month from the, from the transaction. That process is still ongoing. We're working through exactly, you know, what loans, what deposits, what processes, other assets, other liabilities that we're taking going through the whole pro forma analysis. Yes, that is one of the reasons why, you know, in the short-term will be slightly higher than the, than the run rate we talked about earlier. From a servicing perspective, we continue to service the loans for the FDIC, and we'll be reimbursed for our cost for the, for the servicing of those loans.
You know, once something happens and those loans are disposed of by the receiver, you know, there's always an opportunity to see what happens and who that buyer is to see if there's a longer term potential benefit to continue servicing those loans depending on what the buyer wants. Yeah, that process is ongoing. As you can imagine, it takes a little while to kind of finalize that as we go through. Yes, we're working towards all of that, you know, as we're speaking.
Yeah. I would just add one comment on that whole process with respect to the real estate side of things. We have you know, it's an in-market transaction. This was our number one competitor in the multi-CRE space. They're in N.Y., we're in N.Y., and we have great consolidation opportunity to really take advantage of the opportunity to bring people together in the appropriate real estate setting. We're excited about our team diving into that deeply. We don't have a lot of time to make those decisions in conjunction with the contract that we signed with the FDIC, we think there's great opportunity there for efficiency.
Okay, great. Thank you.
Thank you. Your next question comes from the line of Steven Alexopoulos from JPMorgan. Please go ahead. Your line is now live.
Morning, Steven.
Good morning everyone. I wanna start, Tom, given the strong retention of the Signature teams, I'm surprised you have been able to draw back some of the deposits they lost. I'd imagine the teams are fairly well incented to do that. I know it's still early, but what are you hearing from their customers right now?
Look, it's a great question. You know, we went into this with the expectation of a much significant outflow because who knew what's gonna happen on Monday. What's most important is that the team is as excited, the team has the incentive plan to bring the money back to the bank and as well as different solutions, right? I think in general, there's an industry where there's a reluctance to be well above uninsured, right? We have to plan for that and be there for our clients and be creative. I think the creativity under Eric's leadership with his team is gonna go after the opportunity.
I think the way it was structured with the legacy Signature model that they have, you know, strong incentive comp plans to be, you know, recognized based on their success on deposit gathering. That's the model, right, Steven? So it's early days, right? And we're not even gonna call it a win yet because it's who knows what happens on Monday of this week. You just gotta be very cognizant that I don't think that the marketplace is still out of the woods with respect to the volatility. There's no question that it's stable, which is great. I'll reiterate my point on DDA. It's a rock. It hasn't moved.
That's a phenomenal statistic that our operating DDA accounts have actually was slightly up in the month of April compared to the closing of the transaction, which is a testament to the payroll accounts, the operating accounts tied to the businesses. The push here is to go back and, you know, convince the customers that, you know, banking is overall is in a safe perspective, and it was an idiosyncratic situation that happened in early March. Ultimately the system is strong and highly regulated, and we have to convince that. That's our job to go out there and handhold the customers to get back the confidence in the system. That's what we're doing. Very proud of my team because it's been ongoing.
Even during, in the depths of that crisis, we were talking to many of our clients. Look, you know, we're a regional bank and we handhold our customers. It's important. You know, service, it's all about service on a standalone basis, NYCB folks that do a great job. Now we put on Flagstar, now we're putting on Signature. It's all about service. I'm gonna reiterate again, culture, culture.
We have a tremendous opportunity in front of you to really make sure it's client first and get them comfortable that, you know, with the stamp of approval of doing a transaction of this magnitude in the depths of a dark situation in banking, I think it goes a long way when you talk to clients about the safety and soundness of our institution.
Got it. Let me follow up on that, Tom. You basically doubled the size of the company in a few quarters. If we learn anything, particularly from SVB, it's that they, you know, grew so quickly they probably outgrew their capabilities in risk management. I'm sure your risk management's fine, or else the regulators would not have given you the stamp of approval you just talked about. You also just said in response to the prior question that you accelerated the transformation of the company by ten years with these two deals. Talk about the risk management infrastructure that you have today. How much do you have to now invest in it, people, systems, et cetera, and how should we think about the cost of that?
I would say to you, Steven, this goes back to legacy Signature and SIFI, right? You know, we went through a journey at $49.9 billion, if I recall, and I was CFO for about five years at the time, holding the line at $49.9 billion and not crossing over on an average until we really built a position to understand what was expected as our regulatory framework was uniquely different than some others, which gave us, you know, a lot of oversight at the time to be, you know, a Signature Bank. Obviously, those rules and pronouncements have changed. We've held true to our position that we were gonna have a bank that could be ready to be $100 billion.
That goes back when we started that journey back in 2012 or 2011. It's been a constant reinvestment over time. We're really excited about where we are. There's always gonna be updates. There's always gonna be evolving, especially given the regulatory landscape that we're in currently, because who knows what's gonna come out of this, we'll call it mini crisis of confidence. I don't think it's gonna get easier. You know, we're prepared to do what we have to do to manage a safe and sound organization. Risk management is our number one focus, right? We have a tremendous team, and I'm proud of my risk team, and they do a great job.
We're gonna add a lot of new people from all three organizations together, as well as from the outside, and be ready for what's required for us as a highly regulated institution. This is nothing new to us. This is something we've been working on for quite some time, and we're prepared to make sure we have the highest standard. John, if you wanna add a little bit more comments on risk.
Yeah. I think, you know, what Tom mentioned, just to add, when you look at some of the capital stress testing and liquidity stress testing frameworks that, you know, we built in that timeframe will serve us extremely well here as we integrate both Flagstar and Signature onto those models from a stress testing perspective. You know, our teams built those with the expectation of the $100 billion threshold that we're at now. So, you know, there will always be some incremental add, but we don't think it'll be a material add given the structure and the backbone that we already have in place.
Yeah. I think in general, you're looking at operating leverage now, right? This is something we've been geared up and, you know, we assumed the Flagstar transaction. We were ready to be at that $100 billion marking and getting ready. We were there as far as operationally moving in that direction. At the same time, we get the operating leverage. We're making very substantial investments going back to, you know, early days, and we just continue to evolve from that. Obviously, it's the most important aspect of this company going forward, is handling risk given the nature of the bank and our new products. We're clearly excited. When I say ten years, it's really more the transformation from a thrift to a commercial bank.
You know, that's a milestone of a vision to take a traditional thrift mentality and bring it to the commercial banking platform. Having these great team members that come from all over the country with tremendous banking experience in commercial operations and dealing with the high touch white glove service, that's the transition. I think that's where there's acceleration and having different verticals, having different products. You know, we've completely changed the dynamic of who we are going forward as the new Flagstar.
Got it. That's helpful. Just one final one maybe for John. You said you expect margin expansion through the rest of this year. You, you know, one, what rate assumptions, like which rate backdrop are you assuming? And two, which is even more important, given the new balance sheet mix, what's better for your margin for the Fed to start cutting rates in the second half, or if the Fed goes up and then holds for the rest of the year, like which of those backdrops is better for this balance sheet? Thanks.
Yeah. In a very short period of time, we've gone from, you know, on a standalone NYCB sensitive to pretty significantly liability sensitive to layering in the Flagstar transaction which got us to slightly moderately liability sensitive and now layering around Signature where we're moderately asset sensitive. We have an asset sensitive balance sheet right now, that has an awful lot of flexibility in it given the cash that we have on the balance sheet. It's, you know, there's a lot of flexibility, a lot of easy ways to kind of to move that asset sensitivity around in the short-term. To answer your question, yeah, we would benefit from a Fed raise right now.
When we look at, you know, when we're with the modeling, you know, to get to the, to the next quarter or so's increase, couple items there that I mentioned, you know, it, you know, we are expecting one more rate hike here in the Bloomberg forecast next week, then pretty flat for the end of the year. There might be, you know, and one at the end. I think there's one cut that we forecasted in at the end of the year. When you, when you look at what's coming due, especially in the second quarter, that's gonna help pick up a little bit to the margin. That's one of the main drivers as well.
You know, as well as what Tom has mentioned, which is just the non-interest bearing percentage, and the stability that we've seen, you know, so far in those deposits.
Yeah. Steven, big picture for us is that we're in a very unique position given the fact that we have a balance sheet that is very versatile. We have tremendous optionality given it's sitting in cash. And as I indicated previously that, you know, let's say we yield 5% on the cash temporarily, and we picked up the liabilities at, you know, around $2. The spread on that's about $3. It's still above our margin. If we have to shift, we have a position of cash to make that a smooth transition to rebalance ourselves depending on what policy is gonna be driving, you know, the Fed. We're in a very interesting spot in respect to balance sheet.
Got it. Thanks for taking my questions.
Sure.
Thank you. Your next question comes from the line of Matthew Breese from Stephens. Please go ahead. Your line is now live.
Good morning.
Morning, Matt.
Morning.
I just wanted to go back to the Signature deposits, down less than expected 9% versus expectations for 20%. From here, how much more runoff, if any, do you expect, and over what time frame?
Well, just from a straight modeling perspective, we haven't changed our modeling. You know, when we're looking at forecasting to the original 20%, we're cautiously optimistic that we won't see, you know, anywhere near that runoff. Hopefully, you know, potentially could see some growth, you know, once this really continues to stabilize. Right now from a forecast perspective, we haven't changed our initial modeling of a 20% runoff.
Okay. Then for the quarter, what was the credible yield prepayment penalty income? Then looking forward with Signature, what is your expectations for credible yield through the end of the year?
Prepayment penalty income for the year was, I think, $1.6 million. You know, really small number on the, on the prepayment side. On the accretable yield perspective with Signature, we're looking at, you know, our best estimate now is picking up about $100 million a year. That's what we're looking at. If you look at the mark that we booked, it's about a fourt or five year average maturity. We are still, of course, finalizing that process as we go through all of our purchase accounting items, but we think it's gonna be around that $100 million range.
That's the added accretion. What was it for the quarter? Maybe just, you know, because it was a partial quarter with Signature, full quarter for Flagstar. Give me some idea of-.
Yeah. Really, yeah, it was a very, very small amount for Signature. I think the number was in the $5 million range, $4 million-$5 million range. I'll get you the Flagstar accretion number. I don't have that in front of me.
Okay. Could you comment a little bit on. I'm understanding the business today is much more diversified than it has been historically. Give us some sense for new loan yields today and what the roll-on versus roll-off dynamics are.
Matt, it's interesting what's happening for us, given the market conditions in commercial real estate and multifamily, you know, our spreads are 300 basis point spread off of the five-year treasury with a minimum of 6.5% coupon. You're not seeing much fixed rate product being done at all in general. We've introduced this over the past year, which I think is a very interesting opportunity for our customers for choice is having synthetic opportunities to think about structuring a transaction as to fix the float, and we get the opportunity to put a floating rate instrument which historically we've never done before.
With that being said, I think we put on about, just from repricing about $2 billion of our multifamily business is now tied to SOFR plus 250, which came off about 3.5%, and now it's yielding about 7.5% as they figure out what they're going to do maybe next year if rates were to go lower. We'll make decisions upon financing that in the future. That's been a very positive balance sheet contributor to having a more versatile asset center to the balance sheet. It's tied to floating rates. Many customers now are contemplating on putting on a swap and doing a floating rate structure with us.
At the same time, we're also introducing our capital markets business, which has a sizable benefit to sell them protection on that and be able to structure the transaction where we generate fee income. That's part of our model going forward. Now we haven't modeled that in, but that's what we're seeing in the business. Most of the other products are all floating rate. You know, at significant spreads. That's going to be the ongoing benefit of versatility within the asset classes. It is a change in the market when it comes to multifamily CRE because of just the tightening of credit. There's no question that credit has tightened when it comes to the offering.
I think most banks are around that level between 275-325 basis points spread off the five-year Treasury as an offering. I think many customers are just kind of waiting and see what to do, and you don't see a lot of actual transaction. When a transaction does take place, I think the financing cost is very different than it was a year ago, which I think will be an advantage to the Bank as long as they could handle the debt service coverage ratios. Right.
Right. Actually, that brings me to my next question, just as you know, all eyes are on office CRE these days. Rent-regulated multifamily has had its challenges on the top line, given the Rent Guidelines Board . As you've seen those types of loans reset today coming out of 2018 vintages, how have debt service coverage ratios reacted to higher rates? Have you had to do anything with those borrowers, like lower rates or extend amortization periods just to keep them going and keep them operating the properties?
Given that we're a low leverage lender, our LTVs are traditionally lower. We underwrite very differently than some of our competitors. We haven't had to have those conversations as of today. What we are seeing is that when they're in an option period, they're choosing a SOFR plus 250 option versus the home loan bank spread option, which is too punitive. In very rare circumstances, you're seeing refinance activity. We're getting the benefit of pricing a 3.5 coupon back to 750 in the current marketplace. It was a lot cheaper for them last year, rates are elevated, but we're still seeing, you know, 100% consistency on no delinquencies, no late pays, and customers are thinking about probably next year they'll take this option and come back to the bank if rates are lower.
They're making a, I guess, a decision in the future to come back to the bank when they feel it's necessary. It's been very, very consistent on a monthly basis. Again, growth on the multifamily side has been very slow. It's gonna be, I'd say, relatively flat. What's interesting about our portfolio, I'm not sure the exact number, maybe John has it, but it's probably $4 billion-$5 billion coming due on that same roll period on credits that have to refinance or actually have the option. Right now we're seeing about 75% of those customers take the option, which is a nice pickup for our margin.
Understood. I appreciate it. I'll leave it there. Thanks for taking my questions.
Yeah.
Thank you. Your next question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead. Your line is now live.
Morning. Morning.
Hi. Good morning. Just a couple of points of clarification from me. You know, you noted you will continue to use the excess cash to pay down borrowings. Does the pace of that accelerate beyond the second quarter or are you doing a majority of what you intend to do in the second quarter itself?
We're gonna continue to, you know, look at the market conditions that we're in, but right now we expect to pay down borrowings as they're coming due. We just have most of our borrowings coming due in the second quarter. We got a little piece coming due in the third and the fourth as well. The plan is to pay down borrowings throughout the year, you know, depending of course on our liquidity position and other items, loan growth. One item, you know, just to keep in mind with our securities portfolio being so low and the securities asset percentage, we'll hold a little bit more cash on the balance sheet, just as a, as a placeholder for that piece as well. Yeah, the current plan is to continue to pay down borrowings.
We'll look to pay down some of our wholesale deposits like broker deposits as we mentioned earlier, as they come due, depending on market conditions and where, you know, where cost is on deposits like that.
Just to add the point there. You know, when I took over CEO, I made it very clear our challenge and our strategy is to be less dependent on financing such as wholesale liabilities to run this business. It's a transition from a thrift to a commercial bank. Going back to the acceleration of the business for ten years, this is a lot of liabilities that are not subject to wholesale liabilities, but a traditional commercial banking. Going back to the DDA growth to 27% of total deposits, that is a, in my opinion, a acceleration of where we have to be as a successful business. We're super proud that we're able to have a better funding mix to generate better returns over time.
This is going to be very powerful towards the story as we continue to hone in on commercial accounts and the BDA side of things as well as relationship banking.
Is it fair to say that despite the high asset sensitivity from the deals, if the Fed does start to cut rates gradually next year, you should still see some sort of benefit to NIM from cutting cost of funding?
Let's say this way. We're in a very interesting position given that my whole career at NYCB we've been liability sensitive. We're excited about our balance sheet positioning, and we think we have versatility and optionality to make the decision when that does take place. If you look at forward Fed fund futures and one and done, they hold for a while, if they raise it, being asset sensitive, we'll make more money and then we'll adjust accordingly. Having the versatility of cash makes that a little bit easier to make decisions on that versus having, you know, fixed rate assets that are locked in long-term. We have sitting on lots of cash right now to make those determinations as we redeploy into assets that are more commercial bank-like and traditional thrift-type assets.
Got it. Just the last question from me. Just given all the moving pieces in the quarter, do you have what the spot deposit costs are as of 31st March or as of April?
Yeah. Interest bearing deposits are $260.
Great. Thank you.
Sure.
Thank you. That will be for our last question. I would now like to turn the call over back to Mr. Thomas Cangemi for any closing remarks.
Thank you again for taking the time to join us this morning and for your interest in NYCB.
Thank you so much, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.