Q1 2022 New York Community Bancorp Inc Earnings Call
But securities Litigation Reform Act of 1095.
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. Ken Jimmy.
Good morning to everyone and thank you for joining us today to discuss our first quarter 2022 performance.
To Robert and John also joining on the line of Sander, Vanilla, President and CEO of Flagstar, and Lee Smith President of Flagstar mortgage.
In addition to our earnings release. This morning, we announced that NYSE being flagstar mutually agreed to extend our merger agreement by approximately six months to October 31 2022.
In conjunction with the extension both bank's 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 appreciate it.
Both sides truly believes that a national bank charter is an appropriate charter for the new organization.
Under the revised agreement unnecessarily necessary regulatory approvals required to consummate the merger would come from the fed reserve and the OCC.
Despite the expansion the benefits of this transformational deal remain the same today as it did when we announced the deal one year ago.
The merger of our two great organization provides many benefits, including Geo geographical and product diversification. It also accelerates our plan to transform our business model to a multi faceted commercial bank drive 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.
Over the past 12 months, both sides have worked very closely together to get us into a position to close a deal once regulatory approvals are received we.
We have a detailed integration plan in place all major systems have been determined and my leadership team has been appointed.
Both sides are ready to go.
And importantly, the deal still needs all of our financial metrics. Despite the change in interest rates and in the mortgage business.
<unk> forecast double digit earnings per share accretion, while tangible book value accretion is now expected to be 7% to 8% on day, one double what we envisioned when we initially announced the deal.
Having worked together over the past year, we feel very confident in our cost savings assumptions and while we have not modeled or assumed any revenue synergies. We know that there are multiple revenue enhancement opportunities.
More importantly, we are still not assuming any financial engineering, such as buybacks and balance 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 <unk> 32, a share up 10% compared to 29 cents per share for the first quarter of 2021.
We are 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 expense and margin expansion and continued exceptional asset quality.
Turning now to the details of our quarterly performance.
I would like to start off with exceptional deposit growth, we reported for the quarter.
Since I was appointed CEO on January one of last year, there has been a significant cultural shift in our approach to bringing in deposits.
During 2021, and we embarked on a number of initiatives designed to increase our deposits and lessen our lines and alternative funding sources that are less traditional in the commercial banking space such as wholesale borrowings.
As a result since year end 2022 today total deposits have increased $5 $5 billion was 70% to 38 billion and core deposits have increased $8 billion to $30 billion.
Given the current first quarter total deposits rose nearly $3 billion compared to the fourth quarter last year.
This was driven.
By growth in our banking as a service business as we continued to gain traction add staff launch new initiatives in this area.
Total bas related deposits were $5 4 billion at March 31, 2022, a significant increase since we started the business from scratch 12 months ago.
Eas related deposits fall under three categories.
VA is deposits tied to our fintech partnerships totaling $3 8 billion so far.
Government bas deposits of $709 million and mortgage as a service deposits of $923 million.
Last year, we won several mandates for our banking as a service business more recently, we were selected by the Bureau of physical services is a financial agent for the U S. Treasuries 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 continued 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.
This compares to growth of $475 million for all of last year. All in all since we began focusing on the 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 My banking direct dot com.
Just rolled out in March early receptivity has been very positive.
Do you have an active pipeline of additional opportunities that should benefit our deposit gathering initiatives, including those focusing on bas type of Fintech companies now.
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.
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 continues to be driven by increased refinancing activity as the outlook. In 2022 22 continues to call for higher interest rates higher property transactions and less competition from both other banks and GSE loans.
The specialty finance portfolio of $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, especially finance portfolio would have been relatively unchanged.
At March 31, 2022 specialty finance portfolio has five 7 billion and total commitments up 2% compared to year end of that amount, 71% or $4 billion of structured as floating rate obligations.
With the recent increase in treasure rates. We've also increased our lending rates on multifamily loans several times during the past quarter and we'll continue to do so as market rates increase our current multifamily pricing.
As in the $4, 5% to 475% range, depending on the type of credit that is about 100 to 125 basis points higher than at the end of last year.
It's very important to note that we have approximately 8 billion of multifamily and CRE loans that come up on their contractual maturity date option repricing 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 continue the strong pace into the first quarter total first quarter originations were $3 5 billion 1 billion, while 39% compared to the first quarter of last year.
First quarter originations exceeded the previous quarters pipeline by $1 3 billion or 59% of.
The first quarter's originations of 42% of our refinances in our portfolio.
34% refinances, some other bank portfolio and 23% with due to property transactions.
And speaking of the pipeline the pipeline heading into the second quarter of 2022 was a strong $2 5 billion compared to $2 2 billion last quarter up 14%.
Of this amount, 6% to 8% of the loans in the pipeline represented new money to the bank.
Moving now I want to asset quality.
Credit trends and asset quality remains exceptional and continue to rank among the best in the industry nonperforming assets totaled $70 million on 11 basis points of total assets as of March 31, while we charged off EMEA 2 million during the quarter.
Delinquency trends continue to improve with loans 30 to 89 past due to declining $32 million or 49% to 34 million compared to December 31 2021.
Lastly, principal only Rhonda <unk> 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 at discounts and concessions expire and rental prices approaching records.
And Hatton meeting ranked in March was at the highest level on record although vacancy rate remained below 2% for the fourth consecutive month.
In Brooklyn, the median rent exceeded pre pandemic levels for the first time, while new lease signings and plus it cleans reached a 10 year high.
Moving on to the income statement.
First quarter net interest income rose, 4% on a year over year basis, excluding the impact from prepayment net interest income rose, 8% on a year over year basis to $321 million.
In addition, excluding merger related expenses first quarter pre provision net revenue increased 6% on a year over year basis at $212 million.
Turning to the net interest margin our margin for the first quarter was 224, 3% excluding the impact from prepayment income the first quarter NIM was 235% 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 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 six 5%.
At Yesterdays meeting the board of directors declared a <unk> 17 per share dividend on common shares the dividend will be paid on may 19 to common shareholders of record as of May nine 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 happy to answer. The questions. You may have we will do our very best to get to all of you within the time remaining but 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 you rely on it in the question queue you.
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 keys.
One moment, please while we poll for questions.
Thank you. Our first question is from Ebrahim <unk> with Bank of America. Please proceed with your question.
Hey, Brian Hey morning, Tom.
I guess first question just in terms of the margin outlook in light of the deal timing getting pushed out so two questions. There one.
Any additional clarity around when this deal could close is it has got a chance at some closes in the second quarter or should we be thinking more about <unk> or maybe in fourth quarter given the.
The extension date, and secondly tied to that what does that mean for the core margin with the fed expected to hike, maybe 100 150 basis points in the second quarter I went back and saw looked at like 2017. Your margin went down 50 basis points year over year fourth quarter 17 over 16.
Give us a sense because thats going to be a concern around what happened there and maybe margin in light of the fed actions.
So erinn, let me just point out the Big picture view of Austin price, we're coming together they are asset sensitive or liability sensitive.
I'd say were probably less liability sensitive today than we were when we decided that move so we can take a very significant asset.
The bank like bright spot.
Consummate the merger this year.
This will have in my opinion, a very positive position in a rising rate environment going into 2023.
So we're very we're very appreciative of the balance sheet comment together with unique positioning us being slightly liability sensitive and flagstar being asset sensitive so collectively when they come together and go into 2023, well positioned well for that rising rate environment that being said I'm going to defer to Mr. Pinto on this one.
On guidance on the market yes.
Yes for the second quarter, we expect the net interest margin X prepays to be flat to Q1.
Couple of things going on in the quarter, we as we've talked on our last call is we have the full benefit of the hedge rolling off that rolled off in February .
We have some we are flat to.
For the second quarter, and then depending on what happens with interest rates, we will see what happens in the third and fourth quarter there'll be some pressure on the market.
And John what are you assuming for fifth set to do in the second quarter as part of that flat margin guidance.
50, 50 50 in May and June .
That's helpful and Tom any thoughts around the timing of the Lake.
Is the OCC approval and that process will it be.
By default push it out into later in the year ago, instead of likelihood the deal closed in the second quarter.
We were very clear in our press release. This morning that you put out on October 30 data out there.
We're comfortable with that timeframe based on where we are in the regulatory process.
We can't really dive into specifically, but we're hopeful that we will meet that timeframe and we feel thats a reasonable timeframe.
Got it and just one last question maybe for Lee gain on sale reset lower I don't think totally surprising in the fourth quarter for flagstar, we didn't see any.
<unk> expense offset would love to hear one way do you think gain on sale growth from year end is that anything on the expense side that you can do that offsets that revenue that we've seen over the last couple of quarters.
Yes. Thanks for that question. So yes margins are obviously under pressure given the excess capacity in the system at the moment.
We've gone from a $4 four trillion dollar market last year and right now they are forecasting a $2 eight trillion.
Dollar market. So people are working to remove that capacity until it's gone.
Going to put pressure on.
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 <unk>, we had $26 million of gain on sale benefit in the fourth quarter, we had $5 million in Q1. So when you look back a reduction of 40.
Three basis points quarter over quarter 23 basis points was because of the <unk> OS.
Had about 11 basis points mix and volatility unknowing basis points was competitiveness, our Max just waiting for that excess capacity to exit.
The system in terms of what we've done from a from a cost point of view.
Remember, 70% to 75% of our mortgage cost variable or semi variable. So we have that flexibility, but we have taken additional actions, we've ROIC solely staffing infrastructure.
And unfortunately, we have to lay off 350 employees in two <unk> one at the end of March and one at the end of April .
Then a further 62 employees, who have a choice, but we havent replaced for a total reduction of 426 12 31 to put that into perspective, that's a 20% reduction in total mortgage employees since 12 31.
Or 25% of our.
Our mortgage operation staff.
In terms of what impact that has from a dollar point of view we think.
It will save us about four for $4 5 million in the second quarter.
Then.
Going forward from Q3 onwards, it'll be about $6 million of savings.
Got it thanks for taking my questions.
Okay.
Thank you. Our next question is from Chris Mcgratty with <unk>. Please proceed with your question.
Morning, Chris Great Hey, Good morning, just a question on the.
The banking as a service deposits can you.
Can you speak to the rates that are currently being paid on those and your expectations for betas as the fed moves.
Thanks.
I'm going to just take in general we've been very successful with this initiative on our focus on dealing with our fintech partnerships in particular.
With government opportunities the typical deposit relationship there is zero cost.
So that type of relationship that should kick in as more programs come to place and Treasury Department, such rolling out new initiatives and as the government starts to deal with the various agencies on how they are going to distribute cloud like programs, we will get the benefit of zero float there as far as the other deposits. It varies I mean mortgage is a services typically.
Towards a LIBOR, either plus or minus a spread and then you look at the the Fintech partnerships that can go from zero to is to LIBOR less some some type of spread depending on the relationship we were very fortunate in the quarter two when a very unique piece of business. We are one of the few banks I think is one of six to deal.
With the fee based stable coin exchanges that we hold reserve accounts for that is a new initiative of ours as we focus on stable coin. 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 building staff around that the on.
<unk>.
But the truth Fintech partnerships banking as a service for a lot of these challenger institutions that have.
Banking operations, but they're not a necessity.
E insured institution. So we are working as the <unk> provider in the banking as a service provider for those types of initiatives, but they do vary and the goal here is that that coupled with a significant push towards getting our fair share of deposits from our customers on the loan side is our strategy for the future and it's been very successful since last year.
Great and if I could add one more thing you said in the prepared remarks tangible book accretion can be to ask what you thought can you help with where you believe CET, one will shake out and kind of remind us.
Either if that's your binder or which one you are binders.
I would say back of the napkin with the flagstone transaction closing, we'll probably hire on a tier one capital perspective, probably hovering close to 11%. So I think maybe John can add some market. Originally we anticipated our tier one common equity ratio to be 10, 4% or just given the growth in tangible book that'll be that'll be slightly higher so it will probably be just under 11 right now is our estimate.
Thanks, John .
So what you've got.
Thank you. Our next question comes from Steven Alexopoulos with Jpmorgan. Please proceed with your question.
Hey, good morning, everyone.
Could you give can you give more color on the decision to go the route of the National Bank charter and <unk>.
You said you received NYS DFS approval.
Was the FDIC a roadblock in getting this deal approved.
Well I'm not going to comment on any agency I will tell you that we truly believe that with the national banking platform and where we're heading in the bank and the future of that.
STC charter.
Is the way to go so clearly were much very much appreciative of VSS approval and I'm not going to comment on any other regulatory discussions there.
Okay, but what can you go into the decision to switch to the national charter.
I just did.
Yes.
And I do appreciate the question and you can be sensitive on the commentary, but we went through a journey through this process is now a year through that through the approval process and as we went through this process. We feel very confident that the business model is focused on a national mortgage banking platform and our national commercial banking platform.
That will be more client for an OCC charter okay.
Yes.
Tom will there be any additional costs or oversight with this type of charter versus previous.
I would say in general, it's probably going to be very similar to the structure with respect to cost I think the efficiency of the mortgage banking business. There may be some savings on licensing and things of that nature and complexities around state and municipal deposits and things of that nature, but overall I 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.
Steve you would assume that the fed has had our applications in April may of last year. So they're very familiar with the process. We gave a relatively short window to get this closed which is October which is two quarters from now.
Six months and we're confident that that's the adequate timeframe to achieve these approval based on where we are in the approval process.
Okay.
And then.
Finally, so if I look at your community.
The company has made a lot of progress in 15 months' time since you've been CEO you are changing a lot on the funding side, we know the market at least at the moment is not a fan of the mortgage banking business and.
And if you look at <unk> results you can get a sense of why are you talking about gain on sale margins compressing so much as you can.
Extended the merger agreement I'm, not suggesting you should call the deal up but can you walk us through so you've made the decision to extend what does this give you that you couldnt have accomplished on your own like why did it make sense for NY CBS shareholders here to extend the agreement.
So Steven so again, we're not going to waver from our original discussion we put the deal in front of of both sides of it we looked at this opportunity we had an opportunity here to look at the mortgage business, but with full knowledge that 'twenty two has to be dramatically less than it was in 'twenty. One we modeled down 55%. So I would say what we know.
All of the company right now based on their forecast were right in line. What we expected this is not a surprise.
That being said the.
The deposit rich franchise and transforming this company into a full service commercial bank. So much traditional thrift model is a catalyst we've done so much work around what the opportunities on revenue enhancements changing the verticals, putting these companies together to build a great institution that is well diversified and a national footprint. We believe we will feel very strongly about the <unk>.
And as I said in my opening remarks, we're very confident in the financial merits of the transaction, it's a well structured transaction, we're very comfortable with the mortgage business. We know the mortgage business, but more importantly, we anticipate a substantial drop and if you look over the history of what Pfizer has done from transitioning their own balance sheet, yes, well along the way becoming more of a full service commercial bank.
Well past that 50% of their balance sheet, which is commercial banking asset. So we're in a path to accelerate the transformation under new leadership.
ICB of combined into a very well thought out way to take a traditional model, which could take a decade to transform into a much accelerated paths. So we can truly feel confident that this is a significant opportunity to really change the financial metrics the company towards shareholder value, whether it with well rounded diversified bag.
Alex sheet with their vision of a unique commercial banking model.
Okay great.
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.
Tom on the on the <unk>.
Accretion Technology Bank, you mentioned, you still see double digit EPS accretion from the deal are you still along with that 16% you've been talking about previously and then if you are in line with that could you just talk about what youre assuming for that mortgage revenue in the warehouse book size Youre baking into that.
So Dave let me, let me be clear I am not going to give guidance of 23 and 24, we put the deal together to the double digit accretive deal correct. The number was 16%. They don't have 'twenty three 'twenty four guidance and is that a lot of guidance past, what with what we see with flagstar right now that's public. So when you look at the numbers on a spot basis, our tangible book value is more than <unk>.
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 that any financial engineering, we have a very well structured transaction can create good shareholder value when combined including double digit EPS accretion, but we're not giving out 2003 and 2004 guidance.
Alright, okay.
Maybe just go into the deposit growth you have to.
Solid deposit growth this quarter and I know the banking as a service piece contributed to that.
Can you maybe just size the amount of deposits at those customers that you onboard this quarter, but.
Haven't yet come onto the balance sheet at this point, if youre still bringing those down and then it sounds like you've got more customers that are coming in later this year can you just maybe size the pipeline of those customers that you're seeing coming up. So look we were very cautious when we had a change of strategy about a year and a half ago and obviously on the loan side were being very cautious because it's a lot of hard work and its demand.
It's a cultural mandate and we're doing great work there up 26% since we started that initiative and I was very cautious on given the street specificity around how much we can take from what's hours, which is our deposit to our customers. Our spin successful that's been moving very well that is a passion at the board level all the way down to the lines. So that's moving very nicely for us Thats, how we do business.
Forward and on the on the DIY.
Side, we continue to onboard some great people, especially in the middleware to get get the Onboarding efficiently. Our team is all geared up and we have a online pipeline has some very unique opportunities.
As mentioned I mentioned, we are now one of the one of I think one of six banks approval once the largest CFA stable corn provider in the world.
That's a significant win for the company, it's small now but that could grow very nicely and at the same time, we have a number of initiatives. So I would say youre going to see continued deposit growth every quarter. That's the goal I'm not going to tell you we're going to be a $3 billion every quarter, but the good news is as we bring in this excess liquidity.
Price. It accordingly, we feel that we can be competitive and we have some really good talent that we brought in as part of our digital platform.
What somewhat and very talented will add $100 million book and there's a lot of relationship opportunities out there that we think we can tap and we're going to be very creative on the technology side. There was 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 fees. So we're focusing on more funding opportunities.
<unk>, we believe that these relationships will tie into other lines of businesses.
On the lending side and more importantly on the fee side. So this is a strategy that we're focusing on we mentioned a little bit about my back interact my bank over the long term will be our digital platform and we are going to rollout a full service digital challenger bank.
An alternative solution for customers and hopefully it can be a solution for the underserved underbanked, but we have a lot of unique technology and a strong team of new hires that are working with us to gather that business. So it's a focus of the bank. We had some great success on the government side has been very successful with one of our epic three specific deals.
Best year, and those deals will start to kick in over time and they bought they both fee related and those types of transactions of our zero cost deposits now a lot of the other stuff on the mortgage side is where we are going to get significant benefit when you tie in to what flagstar does as a business model being a substantial wholesale provide.
Provider for mortgage warehouse they have tremendous relationships.
<unk> they have been out looking for that liquidity, we will come in and be the banking as a service partners I think theres, a real great opportunity there as the banking as a service product for mortgage so mortgage as a services initiative, we have about $1 billion book going into into the consummation of the deal. We think that number can expand dramatically they run around $6 billion at flagstar.
Standalone, but that number can significantly.
The increase maybe Sanjay can give some color on on that opportunity that they don't go after right now because of the lack of them.
XI for balance sheet purposes, sondra nationwide all of that.
Yes sure. Thank you.
On the Black card numbers are balance sheet shrunk a little bit in the first quarter, principally due to the lower available for sale balances as well as the lower warehouse balances and while there is still substantial and they are less than they were a quarter ago and so and so we're not pursuing those opportunities that Tom.
And I think it's it's.
It's an opportunity that is very very significant in the billions of dollars relative to the additional deposits that can be brought in through our warehouse.
Customers as well as our MSR partners.
That's very significant.
It's one of the reasons why flagstar, we've been able to adjust to changing market. You look 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.
Right market when rates were low the last two years, our mortgage business thrive and we reported record earnings and now that interest rates are rising we are seeing a non origination businesses really beginning surprised as you saw in our earnings deck, our margin hit a new high of 2019 and March all time high and we're guiding to that.
<unk> to almost 60 in Q2 and with.
With the continued to increase throughout the year to average close to 360 closing out the year, maybe north of 370 in December .
MSR investment, which has always performed in an outstanding fashion has had a much higher had a much higher return in Q1, particularly in March as we ease our hedges and saw a nice valuation increase so we're guiding to an elevated return on MSR for the year.
And as you hope salary.
Not have any delinquent commercial loans, so we're pretty confident about the credit quality and.
And we will be keeping an eye on expenses and keeping them in the range, where they currently are so a lot of the mortgage environment difficult, we have right sized it and despite modest expectations for gain on sale for the year I'm really quite optimistic that our full year results will be very strong in Q1 will.
Hey 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.
We didn't see the benefit of the transactions until mid March. So I think all of these things together with the liquidity opportunities that we bring to the balance sheet four four Additionally price deposits. When you put these two organizations together as Tom has already suggested a couple of times, we think that's really really powerful.
Balance sheets and opportunity for shareholder grow shareholder value growth.
Hey, Hey, David One thing I would add I would add to your comment on beta risk I would tell you that in our opinion.
Yes, you have transactional deposits at zero.
With an elongated period of zero interest rates for so long I believe all deposit type pricing is going to rise and an aggressive fed tightening cycle. So.
Interesting when you can say things are tied to short term LIBOR sofa or tied to call. It a more high beta risk type liabilities, but ultimately as <unk> become 50, 50 becomes 100, I would say that in general the fed's tightening mode. I think all liabilities with the exception of demand deposits tied to our customers.
And we'll call it maybe savings to a lesser extent youre going to have high value risk in general so we.
We assume this is going to be more of an industry phenomenon not just because we're a slightly liability sensitive this is going to be in my opinion.
Our beta risk environment, and I think we will prepare for that.
Yes that makes sense, maybe sneak in one more.
Out of all advances, what's your expectation just given the current curve.
What comes back to you this year I know you've got some cash.
Some of that off you can pay all of it off the deposit growth and cash flow.
Let me give you a general the launch on being more specific what big picture is that in the event that the put back to us where in the morning deposit growing initiatives were in our liability gathering initiatives. So we will have lots of flexibility and more importantly, when we merge with lifestyle, we're going to have a tremendous opportunity to really be shuffle a liability position.
The rightsize ourselves into 'twenty three 'twenty four so that's my broad view of what we're going to deal with things coming back at US I think were put back to us, but if they put back we have the cash would have a position and maybe John can add some more color to that yes, so depending on what happens with short term interest rates this quarter.
It's possible that we will get a handful of portable borrowings back to us, but as Tom mentioned when you look at us from an interest rate risk perspective. Since these are quarterly portable and just about all of our interest rate increasing scenarios. We're assuming these are getting put anyway. So even if you replace it with high beta deposits from an interest rate risk perspective, you'd be in the same perspective.
And from an earnings perspective, you'd be a little bit better because the individual coupons that are coming on are coming on lower than where the <unk> coming off so it could be a benefit that we could see in.
In the short term as these things get put back to us.
And the goal is to pay them off with deposit and just continue the less of a reliance on wholesale funding that's right.
Okay, Alright, thanks, guys appreciate it.
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 the fly.
Thanks to our team.
Look at your.
Deposit growth was pretty muted.
Noninterest bearing down about 20% year over year to $6 8 billion.
Some of that is mortgage related.
If you could just talk about what's what's going on there.
Yes, totally Sunday, it's totally related to the mortgage business. So as I mentioned earlier with the balance sheet declining we've left.
Some of those servicing related.
Deposits are going online escrow deposits and so forth and lower.
No.
Managing the size of the balance sheet or the size of the funding that we need for the balance sheet. So it's all it's all a plan.
<unk>.
Retail deposits consumer deposits commercial deposits are all moving in the right direction as they have historically. So this is just our ability to manage the.
The wholesale deposits in a way that fits best for the balance sheet.
Sandra Lee if I could just jumping a diesel escrow deposits, obviously escrow deposits.
Deposits are higher when you've got a lower rate environment more pay offs and those rights Royce and.
You have lower payoffs.
That is you see a reduction in the escrow deposit so it's all less growth deposit related broke.
Okay.
And shifting back to.
Shale margin could.
To beat dead horse, a little bit more.
Is this the.
Could this be the trough or.
What are you what are you seeing in your current production in terms of our gross margin.
Yes, it's hard to know because.
<unk> said in his remarks earlier.
Everybody is adjusting capacity some companies that are not going to make it where kind of where we were two years ago right right.
Not too much before Covid hit.
And so it takes it takes a while but if you look at our guidance, we're being very very careful on this.
On the guidance for gain on sale, so even with that lower guidance. When you put all of the numbers into your model I think youll see that the flagstone numbers, so pretty darn good.
And as Tom said consistent with what was projected a year ago to put the transaction together, although the composition of the earnings is very different because the mortgage earnings.
<unk> quite a bit and then the banking servicing earnings are up quite a bit and again as I said earlier thats exactly how this model is intended to work.
Flagstar slab.
Yeah.
Okay. Thanks for the questions.
Thanks Scott.
Thank you. Our next question is from Steve Moss with B Riley Securities. Please proceed with it.
Good morning.
Good morning, maybe just following up on the stable Quint partnership.
I hear your comments, Tom just kind of curious are those deposits going to index.
Or are they going to be noninterest bearing and should we think about those as interchangeable too with TD, they're scheduled to reprice and if you guys could quantify also.
Whats.
The dollar value of Cds scheduled to reprice.
I'll start with the.
Yes.
The stable coin Fiat currencies there.
They're usually tied to fed funds either target our effective fed funds minus some sort of a spread depending on the type.
They are.
Floating rate against fed funds, but they are to a minus spread and then when you look at Cds, where theyre coming due we have.
We have about $3 8 billion in maturing Cds in the second quarter.
And that's about 45 basis point rate. So, yes, if you think about it.
Sure.
Gains that we have on these kinds of deposits can help offset some CD run off as we have it.
Okay. Thank you that's helpful. And then just on expenses here I don't think that came up with just updated guidance as to what you guys are thinking for expensive on a standalone basis.
Yes, it really no change, we're very very happy with the expense management that we've been able to continue that so were flat to the first quarter is what our estimate would be for the second quarter and I think last earnings release, we gave guidance for the full year, we're comfortable with that guidance.
Okay, great. Thank you very much.
<unk> hundred $45 43 again.
Thank you. Our next question is from Peter Winter with Wedbush.
Wedbush Securities. Please proceed with your question good.
Good 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. So I'm just wondering.
How youre thinking about loan growth going forward.
So it's and it's an exciting transition period, given the fourth quarter was interesting given property transactions were elevated amount of activity a lot of smart moves from borrowers to get refinanced.
Try to get access to the capital. So you saw a lot of that in Q4 and continued in Q1 rates are dramatically higher Peter. So if you think about where we are in the market are still between $1 60, 175 sped up a five year money, we're not really an opinion market much at all in the 700, mostly a five year product and you look at the shape of the curve, we feel very confident.
Our customers are going to we're going to have our retention is going to be much higher I think the last month of the quarter retention was close to 69% was very high which is a very good term for the company. So that will transition to more growth. So I think it's fair to say that we're looking at a high single digit net loan growth story for 2022 on a standalone basis.
Excluding flagstar, so thats unique.
Unique since we had a very strong Q1, but what's interesting about that.
Because on my prepared remarks, we have about $8 billion thats going to have to make a decision in the next 24 months and I think the coupon on that is probably in the low threes. So this is going to in my opinion accelerate prepayment activity will.
We will be able to hold onto more fee income there and be more resilient on ensuring that we get our economics, given the rising rate environment.
As customers realize that cap rates may rise, a little bit here and Ltvs may be more conservative as a matter of course of conservatism, we probably want to access capital sooner. So that it could grow into a very strong 2022 for a lot of acceleration within the customer base itself at the same time. There is a lot of property transactions. If you if you look at the.
New York City marketplace, it's rich.
Transactions happening and we haven't seen a lot.
Post the pandemic. So it started to kick in in Q4, and it's continuing so we're very bullish about the activity that we're seeing in the multifamily space and by the way all of the borrowers are very strong.
Got it that's really helpful.
If I could ask about the.
The margin.
I guess two questions just one.
John how much of the benefit.
Terms of the margin for the full quarter impact from the swap rolling off.
In the second quarter, and then secondly, I'm just wondering if you could quantify what the impact is to either either the margin or net interest income for every 25 basis point increase in rates.
The deposit betas that euro.
Assuming.
Yes.
On your first point the benefit in the margin we saw from the swap rolling off this quarter was four basis points.
So that's.
The $2 billion swap that rolled off on February 15th So we had half the benefit in the first quarter and then the rest of the full benefit on a run rate basis. This quarter, we're not going to give guidance on specific 25 basis point increases we realize we are liability sensitive there are deposits.
The deposit that we brought in are tied to fed funds. So there will be an impact as we go forward.
But we will manage that as individual deposits come through and we bring in new relationships.
If I could ask maybe.
Back to John's point that I think about on the Big picture, we have this asset sensitive institutions.
Have the flush with liquidity opportunities.
Less liability sensitive today than we were three or four years ago.
Definitely that within the last rate tightening cycle. So when you take that all things being equal put that together you have a very unique opportunity to position. This company into a changing interest rate environment, that's going to benefit the margin going forward. So that's our that's our view when we originally Modelled US. This is all about putting the strength of these two companies together, but I can think of.
About the business model they have a lot of low cost funding of our feedstocks that will hold very nicely transactional type money at the same time. They have this beautiful opportunity on the mortgage side, where we can really be a major.
Posit toy player regarding relationship opportunity. So we think theres going to be a growth opportunity for liquidity and being able to really transition our balance sheet from wholesale funding.
And that's going to be the focus of the combined entity and the combined entity will have an asset sensitive position going into a rising rate environment.
Could you just say what the on a combined basis, what the asset sensitivity goes to.
Yes, we are.
I think we've put in the analysts and our first analyst report around 5% on an NII.
And I think it's right around that level, we redid it as of our last go around so.
Yes between 5% to 8% net our NII very modest deposit initiatives relevant M. ICD Standalone right, that's what you're thinking about what we've accomplished since 'twenty at the end of 2021 'twenty two our core deposit franchise is up I think the $8 billion.
Five 5 billion on the lending side. So these are solid relationship deposit. The goal here is to culturally change how we do business and that's the mandate and I think we're making tremendous success here, so I'll be patient and we're not going to give quarterly guidance on how much loan deposits that we got we're going to bring in every every quarter, but we've been successful and it's been a cultural.
Chip and how we conduct our business.
Got it thanks Tom.
Sure.
Yeah.
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 has any remaining say on your charter change to the OCC and as the charter change contingent upon the deal or are you going to make the switch standalone prior to or regardless of the deal close.
So I'm not going to say a whole lot about what can what can happen in reality is that we have the DFS approval. We believe that this company's position is that of started as an OCC charter on a combined basis and that's the direction, we're heading as far as commentary on what could happen when they happen. The reality is that we are seeking a fed chart.
Fed approval and an OCC approval.
And we put out a date, which is October 31, we feel that we can meet those approval dates that's the plan.
We went through this process for a year now so I think we've learned as we as we as we went along here and this is the path that we believe Hawaii national mortgage banking platform that is going to have 400 retail locations throughout the country of 100 <unk> offices.
In our 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. 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.
And then 765, so do you need to make any changes on this and to lower your CRE concentrations ahead of the charter change, but let me give me just a general overview and I wanted to kind of site history going back to <unk> guidance. When the guidance was put out in those six it was very clear that well structured multifamily housing was uniquely positioned.
And when it precedes rigs.
Regarding this concentration when you look at our company combined basis, when you take out cooperatives, which is our average LTV is 25% and rent regulated cash flows we will be pro forma under 300%. If you take out multifamily as just a physician is not considered high risk Craig we're at 112% again.
Yeah.
We have a unique business model that has decades decades of zero losses in the asset class is.
Spent hundreds of millions of dollars over the years as we look to become a CCAR bank going back to going back to.
2012, and fix up to 16 on making sure we have very strong risk management practices around three but when you think about the business about how we land with a cash flow lender predominantly in multifamily rent regulated housing and we have a relatively significant cooperative portfolio.
Mid 20% Ltvs that we have never had a nickel of loss ever as a company. So these are very unique physicians for history. So when you take that all things being equal and look at where your <unk> position would be when you carve out multifamily and cooperatives, it's about 112% pro forma so I think it's manageable and we have a very interesting story.
To tell regarding credit history.
Understood and then along those lines. The other question I had was.
I was curious your thoughts on the health of the rent regulated multifamily borrowers given limitations on rent increases from the RGB.
But in this inflationary environment, you could envision higher core expenses, particularly on the energy front as we go through the year, if theres minimum kind of allowed rent increases do you think theres going to be any problems there.
Matt That's a great question I would tell you that.
Three years ago, we focused on that obviously you only had the rent law changes maybe it's four years ago and reality is that we look at the Bronx very differently than some of the other markets and and we lend differently in those markets, but theres no question that as inflation outpaced revenue growth on the on the.
On the cash flow side, you have some pressure there. So what we do we do a lot of stress testing around risk management in particular, we've carved out of the box portfolio.
Significant detail some of them some of our largest players are in Nebraska have significant portfolios and we believe that we have really low LTV Gray bar has a history of long duration and long duration of whole periods and generational holdings and we feel very confident that now after stress testing is in very very high.
Adverse scenarios, we're comfortable that we have a solid portfolio, but it's simple math right. So.
I have a feeling that as inflation continues to be more of a challenge for these customers there'll be less ability to do a cash out refi and they have to be more accelerated come to the table sooner. So I think it's probably going to bring a lot of borrowers to the table a lot quicker just because of the potential of the squeezed and we're going to be probably more conservative on ltvs, but we do have a relatively low LTV portfolio.
Actually in the rent regulated cash flow portfolio.
Understood. That's a great question, it's definitely it's a great question.
I appreciate that commentary because we spent a lot of time getting comfortable on the risk management side and I think that's something that we've got a good arms around it we feel really good about it and we've done a ton of work about around on the rent control area given the changes in rent laws and 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 the flip side and go to Flagstar is on page 14 of the deck. There mortgage custodial deposits is around 5 billion I was hoping to just get a little bit of a better understanding of what those are.
What are those who are they from what do you anticipate a beta for that book and the other thing is.
What's driving the volatility imbalances.
Yes.
Yes, Let me go ahead go ahead.
Go ahead go ahead Sandra.
Yes.
Okay.
The helps us the available for sale portfolio and the servicing portfolio has.
Deposits associated with it and the servicing portfolio when rates are declining.
Payoffs are very very significant and so youre holding payoffs during the course of the month.
And.
So your actual balances are much much higher than when youre in a rising rate environment and the.
Key payments are very very low so almost all of that is related to that phenomenon.
Data on those so the escrow deposits carried no if we own the MSR or the estimated positive carry no cost.
Yes.
And connected with a sub servicing arrangement then we pay the MSR owner some level of deposit typically LIBOR ish.
And that's really it and if you look at the history of Flagstar Youll see that our we have the ability to to manage that volatility.
Volatility very well because this kind of gives and takes as you are in that higher interest rate environment prepayments are slower you have left us with a positive but at the same time.
The available for sale portfolio is lower because originations are lower so they kind of offset each other.
And again, there's a lot of history. There that you can look at as you begin to understand flagstar better and it's not it's not a problematic volatility if you will.
Yes, I'll just I'll just jump in I'm Sandra hit the nail on the head to think to the policy, but youre looking at on page 14, the entirely related to asset servicing or Subservicing book. So the $1 3 million loans that we service a sub service some of which we own.
Some of which we sub service for others.
Tom's point when he talks about mortgages is service.
We could go and get more of those deposits. We just have chosen not to because we haven't needed to.
Given we've got ample.
Deposit capacity to fund the balance sheet that we have but when we bring the two organizations together, that's an area, where we could go and seek additional deposit growth.
Understood. Okay. That's all I had thank you for taking my questions.
Okay.
Thank you. Our next question is from Christopher <unk> with Janney. Please proceed with your question.
Alright. Thanks.
Hey, good morning, Tom. Thank you for taking my question. So you're no stranger to recessions you've seen many of your career and if we have one in the next year or two or whatever it seems that your reserves are really strong relative to any hypothetical charge off rate. So I'm, just curious kind of how we manage the reserve from here do you think it will grow it.
<unk> got a lot of leeway with the reserve I'm, just kind of want to talk through that.
Yeah, so I'm going to defer to John Pinto regarding the complexities around the new the new accounting for <unk>.
Loan reserve and so John why don't you subtract that then one yes.
There's no doubt that there is some opportunity there, but we are growing the loan portfolio as well so under C zone, a life of loan estimate you have to put up those full.
Potential life of loan losses of the day you do the loans, so that will offset that offset some of that so you will have the growth in the portfolio. Some benefits. We've seen continued benefits in the macroeconomic forecast recently, even given what's been going on.
Right now so when you're looking at where we are from a macroeconomic and our individual portfolio metrics you were very comfortable with where we are here.
Wouldn't say, we'll see substantial declines or increases unless something dramatic happens in the economy, but I do think that there is 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.
But I think it's great.
I would say historically the company has a very conservative view of an in place cash flow lender. Our focus has been up conservatism and historically if you look at the statistics you could run us out 2030 years, but because of 30 years, we have very little losses based on actual experience. So we're very confident highly land culturally and thats.
Not changing.
If anything in a recessionary environment will just be more conservative and I think that's important for.
For customers to understand as they start to significantly rise.
If we're heading into a recession and based funds arrived it ultimately.
This lower coupons have refinanced there may be less money to take take out based on what the value. They have created over the past five to seven years. So it's not an accelerant and when they come to the table. The cash flow is going to be the net cash flow to them given the carrying cost is lower so you're getting less dollars and it's almost an incentive.
Them to come to the table sooner before Capex follow interest rate increases at the same time, we have a history here we were already in place cash flow lender you don't look at what the future is going to hold for property transactions, what's in place and that's a conservative outlook as being a cash flow lender for portfolio.
Great Tom Thank you and thank you John as well I appreciate it.
Yeah.
Thank you.
Next question is from Ebrahim <unk> with Bank of America. Please proceed with your question.
Have you back.
Hey, Thanks for squeezing me in I know, we've gone over time.
Question, maybe for Joel the tangible book value accretion you mentioned, what's driving that is it just purely based on the interest rate Mark versus when you announced the deal.
And its a tangible book value creation on the transaction.
Using the guidance that Tom gave it's got an estimate of where the mark would be.
<unk>.
March 31, so we've done that.
Does move around no doubt, though that could change, but that's really an all inclusive number is but where we expect things to come out if you look at where we werent at the beginning when we announced the transaction, we would add a pretty significantly higher credit mark on the portfolio.
Look at the allowance that.
Seasonal results at Flagstar had when we announced the deal compared to now and then that of course will be offset by a rate Mark. So we'll have a much higher rate mark on our portfolio and a much lower credit mark on the portfolio. When you are looking at loans I think obviously at this valuation perspective, when you put the deal together on accounting.
Negative goodwill I would imagine John yes. It is a bargain purchase gain at these levels and on this transaction given the current landscape that could obviously change as we get closer to closing, but if you look at the past year fiber had a tremendous 2021 economically so that goes into the capital cough, assuming you and when you reset the transaction on an accounting perspective, we have a lot more capital there.
Got it and just one follow up.
Yes.
No go ahead I was just going to say you are right. It is dependent on where the final marks come out no doubt.
Okay, and just one final question, Tom any risk to the dividend as you go to the OCC process to get the deal approved I know reallocation flying you're going to have excess capital, but just lumpier in terms of your confidence in the dividend sustainably.
We're very confident in our position to return value back to shareholders and our priority is to continue maintaining our current dividend position.
And obviously when we model this payout ratio based upon our pro forma is.
It comes down significantly so we still believe that that's the case and our focus is to continue maintaining our dividend and we're going to hold to that assumption.
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 <unk>. We look forward to chatting with you again at the end of July when we discuss our performance for the second quarter of 2022.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Revenue.
Sure.
Sure.
Yes.
Yes.
Sure.
Yes.
Yes.
Okay.
Yes.
Okay.
Yes.
Yes.
Okay.