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New York Community Bancorp Inc
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Good morning, everyone. This is Sal DiMartino. Thank you for joining the management team of New York Community for today's conference call. Today's discussion of the company's first quarter 2022 results will be led by Chairman, President and CEO, Thomas Cangemi; joined by Chief Operating Officer, Robert Wann; and the company's Chief Financial Officer, John Pinto.
Before we begin our discussion, I'd like to remind you that certain comments made today by the management team of New York Community may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and investor presentation for more information about the risks and uncertainties which may affect us.
Now with that, I'd like to turn the call over to Mr. Cangemi.
Thank you, Sal. Good morning to everyone, and thank you for joining us today to discuss our first quarter 2022 performance. In addition to Robert and John, also joining on the line are Sandro DiNello, President and CEO of Flagstar; and Lee Smith, President of Flagstar Mortgage.
In addition to our earnings release this morning, we announced that NYCB and Flagstar mutually agreed to extend our merger agreement by approximately six months to October 31, 2022. In conjunction with the extension, both banks amended the merger agreement to provide that the combined company will operate under a national bank charter. Although we recently received New York State DFS approval and we are very much appreciative to this, both sides truly believe that a National Bank Charter is an appropriate charter for the new organization.
Under the revised agreement, the necessary regulatory approvals required to consummate the merger will come from the Fed Reserve and the OCC. Despite the extension, the benefits of this transformational deal remained the same today as we did when we announced the deal one year ago. The merger of our two great organizations provides many benefits, including geographical and product diversification. It also accelerates our plan to transform our business model to a multifaceted commercial bank by strong, sustainable financial performance and capital generation. Additionally, it dramatically improves our overall funding profile and interest rate positioning. The combination of our two balance sheets will create a pro forma balance sheet that is asset sensitive and significantly deposit funded.
Over the past 12 months, both sides have worked very closely together to get us into a position to close the deal once regulatory approvals are received. We have a detailed integration plan in place. All major systems have been determined and my leadership team has been appointed. Both sides are ready to go. And importantly, the deal still meets all of our financial metrics despite the change in interest rates and in the mortgage business. We still forecast double-digit earnings per share accretion, while tangible book value accretion is now expected to be 7% to 8% on day one, double what we envision 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 $0.32 a share, up 10% compared to $0.29 a share for the first quarter of 2021. We are extremely pleased with our results this quarter after reporting continued growth in loans, net income, earnings per share and deposits as well as lower operating expenses, margin expansion and continued exceptional asset quality.
Turning now to the details of our quarterly performance. I would like to start off with the exceptional deposit growth we reported for the quarter. Since I was appointed CEO on January 1st of last year, there has been a significant cultural shift in our approach to bringing in deposits.
During 2021, we embarked on a number of initiatives design to increase our deposits and lessen our reliance on alternative funding sources that are less traditional in the commercial banking space such as wholesale borrowings. As a result, since year-end 2020, so today, total deposits have increased $5.5 billion, or 17% to $38 billion, and core deposits have increased $8 billion to $30 billion.
During the current first quarter, total deposits rose nearly $3 billion compared to the fourth quarter last year. This was driven by growth in our Banking as a Service business as we continue to gain traction, add staff, launch new initiatives in this area. Total BAS-related deposits were $5.4 billion at March 31, 2022, a significant increase since we started the business from scratch 12 months ago.
BAS-related deposits fall under three categories: BAS deposits tied to our fintech partnerships, totaling $3.8 billion so far; government BAS deposits of $709 million; and Mortgage as a Service deposits of $923 million.
Last year, we won several mandates for our Banking as a Service business. More recently, we were selected by the Bureau of Fiscal Services as the financial agent for the US Treasury's prepaid debit card program. This is a big win for us, and we should begin to see benefits materializing from this relationship later this year. We also continue to make significant progress in garnering deposits from our borrowers.
Total loan-related deposits rose $427 million during the first quarter to $4.4 billion, up 11% sequentially. This compares to growth of $475 million for all of last year. All in all, since we began focusing on the source of funding early last year, we've gotten over $900 million of incremental loan-related deposits of 26% since year-end 2020.
In addition, earlier this year, we re-launched our direct bank channel, mybankingdirect.com. While it was just rolled out in March, early receptivity has been very positive. We have an active pipeline of additional opportunities that should benefit our deposit-gathering initiatives, including those focusing on BAS type of fintech companies.
Now moving on to loan growth, after $2 billion of loan growth during the fourth quarter of last year, total loans grew by $1 billion during the first quarter to $46.8 billion, up 9% annualized on a linked-quarter basis. Once again, the majority of the growth was in the multi-family 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 multi-family category continues to be driven by increased refinancing activity as the outlook in 2022 continues to call for higher interest rates, higher property transactions and less competition from both other banks and GSEs. The specialty finance portfolio 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, the specialty finance portfolio would have been relatively unchanged.
At March 31, 2022, the specialty finance portfolio had $5.7 billion in total commitments, up 2% compared to year-end. Of that amount, 71% or $4 billion are structured as floating rate obligations. With the recent increase in treasury rates, we've also increased our lending rate for multi-family loans several times during the past quarter, and we'll continue to do so as market rates increase.
Our current multi-family pricing is in the 4.5% to 4.75% range, depending on the type of credit. That is about 100 to 125 basis points higher than at the end of last year.
It is very important to note that we have approximately $8 billion of multi-family and CRE loans that come up on their contractual maturity date or 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 continued their strong pace into the first quarter. Total first quarter originations were $3.5 billion, up $1 billion, or 39% compared to the first quarter of last year.
First quarter originations exceeded the previous quarter's pipeline by $1.3 billion or 59%. Of the first quarter's originations, 42% are refinances in our portfolio, 34% were refinances some other banks portfolio and 23% were due to property transactions.
Now speaking of the pipeline, the pipeline heading into the second quarter of 2022 as a strong $2.5 billion compared to $2.2 billion last quarter, up 14%. Of this amount, 68% of the loans in the pipeline represent a new money to the bank.
Moving now on to asset quality. Our credit trends and asset quality remains exceptional and continue to rank them on the best in the industry. Nonperforming assets totaled $70 million or 11 basis points of total assets as of March 31, while we charged off a mere $2 million during the quarter.
Our delinquency trends continue to improve with loans 30 to 89 past due declining $33 million or 49% to $34 million ended December 31, 2021. Lastly, principal-only loan deferrals declined 41% to $282 million compared to the previous quarter, and we continue to have zero full payment deferrals.
Before proceeding, I'd like to provide an update on the New York City real estate market. The residential real estate market in New York City has improved significantly. The rental market is currently facing strong demand and low inventory levels, as discounts and concessions expire and rental prices approach new records.
Manhattan's median rent in March was at the highest level on record, although 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 price agreements reached a 10-year high.
Moving on to the income statement. First quarter net interest income was 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 revenue increased 6% on a year-over-year basis to $212 million.
Turning to the net interest margin. Our margin for the first quarter was 2.43%. Excluding the impact from prepayment income, the first quarter NIM was 2.35%, up 3 basis points on a linked-quarter basis and in line with our expectations.
On the expense side, we continue to be pleased with our expense discipline. Excluding merger-related expenses of $7 million, operating expenses for the first quarter were $134 million, up $2 million or 2% on a year-over-year basis. Our efficiency ratio remained below 40%. For the first quarter of the year, it was 38.65%.
At yesterday's meeting, the Board of Directors declared a $0.17 per share dividend on common shares. The dividend will be paid on May 19 to common shareholders of record as of May 9. Based on yesterday's closing price, this translates to an annualized dividend yield of 7%.
Lastly, I would like to thank all of our employees for their hard work in helping us to achieve another exceptional quarter. With that, we would be happy to answer the questions you may have. We will do our very best to get to all of you within the time remaining. 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. [Operator Instructions] Thank you. Our first question is from Ebrahim Poonawala with Bank of America. Please go ahead.
Good morning, Ebrahim
Good morning, Tom. I guess, first question just in terms of the margin outlook in light of the deal timing getting pushed out. So two questions there. One, any additional clarity around when this deal could close? Is there a chance that still closes in the second quarter, or should we be thinking more about 3Q or maybe in fourth quarter given the extension date?
And secondly, tied to that, what does that mean for the core margin with the Fed expected to hike maybe 100, 150 basis points in the second quarter? I went back and saw, looked at like 2017, your margins went down 50 basis points year-over-year fourth quarter 2017 over 2016. Just give us a sense because that's going to be a concern around what happened to NYB margin in light of the Fed actions.
So Ebrahim, let me just point out the big picture view of us and price are coming together. They are asset sensitive or liability sensitive. I'd say, we'll probably less liability funded today than we will when you cited that move. So we take a very significant asset that intense bank with Flagstar when we consented the merger this year. This will have, in my opinion, a very positive position in the rising rate environment going into 2023. And so we're very appreciative of the balance sheet coming together with unique positioning, us being slightly liability sensitive and tried for being asset sensors. So collectively, when we come together, going to 2023, we'll position well for that rising rate environment. That being said, I'm going to refer to Mr. Pinto on the short-term guidance on the mortgage. John?
Yes. For the second quarter, we expect the net interest margin ex-prepays to be flat to Q1. We have a couple of things going on in the quarter. We -- as we've talked on our last call, we have the full benefit of the hedge rolling off that rolled off in February. So we have some -- we have flat to for the second quarter. And then depending on what happens with interest rates, we'll see what happens in the third and fourth quarter. There will be some pressure on the market.
And John, what are you assuming for Fed to do in the second quarter as part of the flat margin guidance?
50-50. 50 in May and 50 in June.
That's helpful. And Tom, any thoughts around the timing of the deal? Is the OCC approval on that process, will it be by default push it out into later in the year, or is there a likelihood the deal closes in the second quarter?
So we were very clear in our press release this morning that we put out an October 30 data out there, and we're comfortable with that timeframe based on where we are in the regulatory process. We can't really dive into specifically, but we're hopeful that we will meet that timeframe, and we feel that's a reasonable timeframe.
Got it. And just one last question, maybe for Lee. Gain on sale reset lower. I don't think totally surprising in the first quarter for Flagstar. We didn't see any expense offset. Would love to hear, one, where do you think gain on sale goes from here? And is there anything on the expense side that you can do that offsets that revenue hit that we've seen over the last couple of quarters?
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 $4.4 trillion market last year, and right now, they're forecasting a $2.8 trillion market. So people are working to remove that capacity, but until it's gone, it's going to put pressure on margins. What I would say, when you look at our margin, we were down 43 basis points quarter-over-quarter. A big piece of that was the EBOs. We had $26 million of gain on sale benefit in the fourth quarter, and we had $5 million in Q1. So when you look at that reduction of 43 basis points quarter-over-quarter, 23 basis points was because of the EBOs. And then you had about 11 basis points mix and volatility and 9 basis points was competitiveness, and that's just waiting for that excess capacity to exit the system.
In terms of what we've done from a cost point of view, remember, 70% to 75% of our mortgage costs are variable or semi variable. So we have that flexibility, but we have taken additional actions. We've rightsized our infrastructure, and unfortunately, we've had to lay off 358 employees in two waves, one at the end of March and one at the end of April. And then a further 62 employees have attrited that we haven't replaced for a total reduction of 420 since 12/31.
\
To put that into perspective, that's a 20% reduction in our total mortgage employees since 12/31 or 25% of our mortgage operations staff. In terms of what impact that has from a dollar point of view, we think it will save us about $4.4 million, $4.5 million in the second quarter. And then going forward from Q3 onwards, it will be about $6 million in savings.
Got it. Thanks for taking my questions.
Thank you. Our next question is from Chris McGratty with KBW. Please proceed with your question.
Tom, how are your doing?
Great.
Hey, good morning. Just a question on the Banking as a Service deposits. Can you speak to the rates that are currently being paid on those and your expectations for betas as the Fed moves? Thanks.
I'm going to just take it in general. We've been very successful with this initiative, and our focus on dealing with our fintech partnerships, in particular, dealing with government opportunities, the typical deposit relationship there is zero cost for that type of relationship. That should kick in as more programs come to place and treasury department starts rolling out new initiatives and as the government looks to deal with the various agencies and how they're going to distribute card-like programs, we will get the benefit of zero float there.
As far as the other deposits, it varies. I mean Mortgage as a Service is typically tied towards LIBOR either plus or minus a spread. And then you look at the fintech partnerships, they can go from zero to LIBOR less some type of spread depending on the relationship. We were very fortunate in the quarter to win a very unique piece of business. We are one of the few banks -- I think it's one of six to deal with the fiat-based stablecoin exchanges that we hold reserve accounts for. That is a new initiative of ours as we focus on stablecoin. This has been a very successful venture for us, and we continue to look at that as opportunistic.
At the same time, we have a significant amount of partnerships that we're working on onboarding, and we're building staff around that. For onboard, there's a true fintech partnership of Banking as a Service for a lot of these challenger institutions that have banking operations, but they're not actually insured institutions. So we are working as the bank provider and the Banking as a Service provider for those types of initiatives, but they do vary. And the goal here is that, that coupled with a significant push towards getting our fair share of deposits from our customers on the loan side is our strategy for the future, and it's been very successful since last year.
Great. And if I could add one more. I think you said in the prepared remarks, tangible book accretion is going to be 2x what we thought. Can you help with where you believe CET1 will shake out and kind of remind us what either if that's your binder or which one your binder is? Thanks.
I'd say, back [indiscernible] with the Flagstar transaction closing, we'll probably hire on a Tier 1 capital perspective, probably hovering close to 11%. So I think maybe John can look and add some more color.
Yeah. Originally, we anticipated our Tier 1 common equity ratio to be 10.4%. So just given the growth in tangible book, that will be slightly higher. So it'll probably be just under 11% right now is our estimate.
Thanks, John.
Hope you got it.
Thank you. Our next question comes from Steven Alexopoulos with JPMorgan. Please proceed with your question.
Hey, good morning, everyone. Can you give more color on the decision to go the route of the national bank charter? And you said, you received NYS VSS 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 in the future that the OCC charter is the way to go. So clearly, we're 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. As we -- I do appreciate the question and it can be sensitive on the commentary, but we went to a journey through this process. It's now a year through the approval process, and as we went through this process, we feel very confident that the business model is focused on a national mortgage banking platform and a national commercial banking platform that will be more inclined for an OCC Charter.
Okay. Tom, will there be any additional cost 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 in respecting costs. I think the efficiencies of the mortgage banking business, there may be some savings on licensing and things of that nature and complexities around states and municipal deposits and things of that nature, but overall, it would be immaterial.
Okay. In terms of the Fed and OCC now, has that process been ongoing? Are you now just starting that process with them?
Steve, you would assume that the Fed has had our application since May of last year. So they're very familiar with the process. We gave a relatively short window to get disclosed, which is October which is two quarters from now, six months. And we're confident that, that's the adequate timeframe to achieve these approvals based on where we are in the approval process.
Okay. And then finally, so if I look at your community, the company has made a lot of progress in 15 months' time since you've been CEO. You're changing a lot on the funding side. We know the market, at least at the moment, is not a fan of the mortgage banking business. And if you look at 1Q results, you can get a sense why right talking about gain on sale margins compressing so much. And here you extended the merger agreement. I'm not suggesting you should have called the deal off, but can you walk us through -- so you made the decision to extend. What does this give you that you couldn't have accomplished on your own? Like why did it make sense for NYCB shareholders here to extend the agreement? Thanks.
So Steven, so again, we're not going to waver from our original discussion. When we put the deal in front of, both Sandro and I, we looked at this opportunity. We had an opportunity here to look at the mortgage business with full knowledge that '22 would be dramatically less than it was in '21. We modeled down 55%. So I would say, what we know of the company right now based on their forecast, we're right in line what we expected. This is not a surprise.
With that being said, the deposit-rich franchise and transforming this company into a full-service commercial bank from our traditional thrift model is a catalyst. We've done so much work around what the opportunities on revenue enhancements and changing the verticals, putting these companies together to build a great institution that's well diversified and a national footprint, we believe we feel very strongly about the transaction.
As I said in my opening remarks, we're very confident on the financial merits of the transaction. It's a well-structured transaction. We're very comfortable with the mortgage business. We know the mortgage business. But more importantly, we anticipated a substantial drop. And if you look at the history of what Flagstar has done from transitioning to their own balance sheet, they're well along the way becoming more of a full-service commercial bank. They've moved well set at 50% of their balance sheet, which is commercial banking assets.
So, we're in a tap to accelerate the transformation of the new leadership at NYCB to combine into a very well thought out way to take a traditional model, which would take a decade to transform into a much-accelerated path. So, we truly feel confident that this is a significant opportunity to really change the financial metrics company toward shareholder value or that well around is diversified balance sheet with the vision of a unique commercial banking model.
Great. Thanks for that color.
Sure.
Thank you. Our next question comes from David Rochester with Compass. Please proceed with your question.
Hey good morning, guys. Tom, on the deal accretion comments you made, you mentioned you still see double-digit EPS accretion for the deal. Are you still in-line with that 16% you've been talking about previously? And then if you are in-line with that, can you just talk about what you're assuming for that mortgage revenue and the warehouse book size you're baking into that?
So Dave, let me be clear, I'm not going to give guidance for '23 and '24. When we put the deal together, it's a double-digit accretive deal. Correct, the number was 16%. We don't have '23, '24 guidance, and there's not a lot of guidance just 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 doubled on the accretion side to 8% approximately.
We believe this is a double-digit accretive deal. We don't have public guidance. So, we're very confident that putting these companies together without any reliability shuffling, without any buybacks, without any financial engineering, we have a very well-structured transactions that can create good shareholder value and combined, including double-digit EPS accretion, but we're not giving out '23 and '24 guidance.
Okay. Maybe just going to the deposit growth. You had solid deposit growth this quarter, and I know the Banking as a Service has contributed to that. Can you maybe just size the amount, of deposits at those customers that you onboarded this quarter that maybe haven't yet come on to the balance sheet at this point, if you're still bringing those in? And then it sounds like you've got more customers that are coming in later this year, can you just maybe size the pipeline of those customers that you're seeing coming in?
So look, we were very cautious when we had our change of strategy about 1.5 years ago. And obviously, on the loan side, we're being very cautious a lot of hard work, and it's a mandate. It's a cultural mandate. And we're doing great work here, up 26% since we started that initiative and I was very cautious on giving the street specificity around, how much we can take from what's ours, which is our deposit to our customers. It's been successful. That's been moving very well. That is a passion here at the Board level all the way down to the line.
So that's moving very nicely for us. That's how we do business going forward. And on the VA [ph] side, where we continue to onboard some great people, especially in the middleware to get the onboarding efficiently. Our team is all geared up and we have online pipeline, that's a very unique opportunities.
As mentioned -- I mentioned, we're now one of the -- I think one of six banks approved, one of the largest fiat-based stablecoin provider in the world. That's a significant win for the company. It's small now, but that could grow very nicely. At the same time, we have a number of initiatives.
So, I would say, you're going to see continued deposit growth every quarter. That's the goal. I'm not going to tell you, we're going to be up $3 billion every quarter. But the good news is, as we bring in to such as liquidity and we price it accordingly, we feel that we could be competitive.
And we have some really good talent that we brought in as part of our digital platform. We've bought someone in very talented -- we ran a $100 billion book. And there's a lot of relationship opportunities out there that we think we can tap and we're going to be very creative on the technology side.
There is a need for a bank of our size versus some of the smaller banks that are under $10 billion that truly emphasize their capacity on urban fees. So we're focusing on more funding opportunities. Eventually, we believe that these relationships will tie into other lines of businesses. Hopefully, on the lending side and, more importantly, on the fee side. So, this is a strategy that we're focusing on.
We mentioned a little bit about My Banking Direct. My Banking Direct over the long-term will be our digital platform, and we're going to roll out a full-service digital challenger bank as an alternative solution for customers. And hopefully, it could be a solution for the underserved under bank, but we have a lot of unique technology and have a strong team of new hires that are working with us to gather that business.
So, it's a focus of the bank. We had some great success on the government side. It's been very successful. We won about the three specific deals last year, and those deals will start to kick-in over time. And they're both fee-related and those types of transactions are zero cost deposits.
Now a lot of the other stuff on the mortgage side is where we're going to get significant benefit when you buy into what Flagstar does as a business model, being a substantial wholesale provider for mortgage warehouse. They have tremendous relationships collectively. They have been not looking for that liquidity. We will come in and be the Banking as a Service partner.
So I think there's a real great opportunity there as a Banking as a Service product for mortgage. So, mortgage as a service initiative. We have about $1 billion book going into the all consummation of the deal. We think that number can expand dramatically. They run around $6 billion as Flagstar standalone, but that number can significantly increase.
Maybe Sandro can give some color on that opportunity that they don't go after right now, because there's a lack of desire for balance sheet purposes. Sandro, you want to add some color there?
Yeah, sure, Tom. Thank you. Yeah, as you saw in the flat card numbers, our balance sheet shrunk a little bit in the first quarter, principally due to the lower available for sale balances as well as the lower warehouse balances. And while they're still substantial, they are less than we were a quarter ago.
And so, we're not pursuing those opportunities that Tom has reference. And I think it's an opportunity that's very, very significant in the billions of dollars relative to the additional deposits that can be brought in through our warehouse customers as well as our MSR partners. So I think that's very significant.
And it's one of the reasons why, at Flagstar, we've been able to adjust to a changing market. If you look at our guidance, what you see is that the model that we've been building is beginning to work and it's showing that it does work in both rising and falling interest rate market.
When rates were low in the last two years, our mortgage business thrived and we reported record earnings. And now that interest rates are rising, we are seeing our non-origination business is really beginning to thrive.
As you saw in our earnings deck, our margin had a new high at 3.19 in March, all-time high. And we're guiding to that expanding to almost 3.60 in Q2 and with the continued increase throughout the year to average, close to 3.60, closing out the year maybe north of 3.70 in December.
And our MSR investment, which has always performed in an outstanding fashion has had a much higher return in Q1, particularly in March, as we eased our hedges and saw a nice valuation increase. So, we're guiding to an elevated return on MSR for the year. And as you -- I hope so, we don't have any delinquent commercial loans. So, we're pretty confident about the credit quality, and we will be keeping an eye on expenses and keeping them in the range where they currently are.
So, while the mortgage environment is difficult, we have rightsized it and despite modest expectations for gain on sale for the year, I'm really quite optimistic that our full year results will be very strong, and Q1 will play out to be a transitional quarter given that the velocity of the increased mortgage rates in the quarter was the highest in something like 40 years and we really did see the benefit of the Fed's actions until mid-March.
So, I think all of these things together with the liquidity opportunities that we bring to the balance sheet for efficiently priced deposits, when you put these two organizations together, as Tom has already suggested a couple of times, we think it's really, really a powerful balance sheet and opportunity for shareholder value growth.
David, one thing I would add to your comment on beta risk, I will tell you that, in our opinion, unless you have transactional deposits at zero with an elongated period of zero interest rates is so long, I believe all deposit side pricing is going to rise in aggressive Fed tightening cycle.
So, just when you can say things are tied to short-term LIBOR so far or tied to what we call it more high beta risk type liabilities. But ultimately, as zero becomes 50, 50 becomes 100, I would say that in general, the Fed is in a 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, they're going to have high value risk in general. So, we assume that they're going to be more of an industry phenomenon, not just because we're slightly liability sensitive, this is going to be, in my opinion, a beta risk environment, and I think we all prepared for that.
Yes, that make sense. Maybe if I can sneak in one more. I know you have advances. What's your expectation, just given the current curve as to what kind of back to you this year? I know you've got some cash there. You can pay some of that off. Do you think you can pay all of it off with deposit growth in cash?
So, let me give you a general view to be more specific, but big picture is that in the event that stuff to put back to us, we're in a deposit rolling initiative. We're in a liability gathering initiatives. So, we'll have lots of flexibility.
And more importantly, when we merge with Flagstar, we're going to have a tremendous opportunity to really be shuffled our liability position, the right-size ourselves into 2023 and 2024. So, that's my broad view of what we're going to do with things coming back at us and things to put back to us. But if it put back, we have the cash, we're in a great position. So, maybe, John, can you add some more color to that.
Yes. So, depending on what happens with short-term interest rates this quarter, it is possible that we'll get a handful of potable borrowings back to us. But as Tom mentioned, when you look at us from an interest rate risk perspective, since these are quarterly in just about all of our interest rate increasing scenarios, we assume 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 potable are coming off.
So, it could be a benefit that we could see in the short-term as these things get put back to us. And the goal is to pay them off with deposits and just continue the less of a reliance on wholesale funding.
That's right.
Okay. All right. Thanks guys. Appreciate it.
Thank you. Our next question is from Brocker Vandervliet with UBS. Please proceed with your question.
Good morning, Brock.
Good morning, San. Good morning. Just following up on -- with the Flagstar team. I look at your deposit growth is pretty muted. Non-interest-bearing down about 20% year-over-year to $6.8 billion. I assume some of that's mortgage related. If you could just talk about what's going on there?
Yes. It's totally -- this is Sandro. Totally related to the mortgage business. So as I mentioned earlier, with the balance sheet declining, we've left some of those servicing-related deposits go as for deposits and so forth and lower. So that's managing the size of the balance sheet or the size of the funding that we need for the balance sheet. So it's all planned. The retail deposits, consumer deposits, commercial deposits are all moving in the right direction as they have historically. So this is just our ability to manage the wholesale deposits in a way that fits best for the balance sheet.
Yes, Sandro, it's Lee. If I can just jump in, it is all escrow deposits. Obviously, escrow deposits are higher when you've got a lower rate environment and there's more payoffs. And as rates rise and you have lower payoffs that you see a reduction in the escrow deposits. So it's all escrow deposit related, Brock.
Okay. And shifting back to the gain on sale margin to beat that horse a little bit more, is this the -- could this be the trough, or what are you seeing in your current production in terms of the gross margin?
Yes. It's hard to know because as Lee said in his remarks earlier, everybody is adjusting capacity. Some companies are not going to make it. We're kind of where we were two years ago, right? Not too much before COVID hit, and so it takes a while. But if you look at our guidance, we're being very, very careful on the guidance for gain on sale. So even with that lower guidance, when you put all of the numbers into your model, I think you'll see that Flagstar numbers still pretty darn good, and as Tom said, consistent with what was projected a year ago when we put the transaction together, although the composition of the earnings is very different because the mortgage earnings is down quite a bit, and then the banking and servicing earnings are up quite a bit. And again, as I said earlier, that's exactly how this model is intended to work on the Flagstar side.
Okay. Thanks for the question.
Thanks, Brock.
Thank you. Our next question is from Steve Moss with B. Riley Securities. Please proceed with your question.
Good morning.
Good morning. Maybe just following up on the stablecoin partnership. I hear you on your comments, Tom. Just kind of curious, are those deposits going to be indexed, or are they going to be not just bearing? And should we think about those as interchangeable to what CDs are scheduled to be priced? And I think you guys could quantify also what -- how many dollar value of CDs scheduled to reprice?
I'll start with the -- yes, the stablecoin fiat currencies. They're usually tied to Fed funds, either target or effective Fed funds, minus some sort of a spread depending on the type. So they are floating rate against Fed funds, but they are to a minus spread. And then when you look at CDs where they're come in due, we have about $3.8 billion in maturing CDs in the second quarter, and that's at a 45 basis point rate. So yes, if you think about it, the gains that we have on these kinds of deposits can help offset some CD runoff, if we have it.
Okay. Thank you. That's helpful. And then just on expenses here. I don't think that came up with just updated guidance is still what you guys are thinking for expenses on a stand-alone basis.
Yeah. Really no change. We're very, very happy with the expense management and how we've been able to continue that. So we're flat to the first quarter is what our estimate would be for the second quarter. And I think last earnings release, we gave guidance for the full year, we're comfortable with that guidance.
Okay. Great. Thank you very much.
5.40 for the year.
Thank you. Our next question is from Peter Winter with Wedbush Securities. Please proceed with your question.
Good morning, Peter.
Good morning. Good morning, Tom. The loan growth was exceptionally strong this quarter, and you raised guidance in January to upper single digits. I'm just wondering how you're thinking about loan growth going forward.
So it's an exciting transition period, given – fourth quarter was interesting given property transactions were elevated. A lot of activity, a lot of smart moves and borrowers to get refinanced try to get access to their capital. So we saw a lot of that in Q4 and continue in Q1. Rates are dramatically higher, Peter. So if you think about where we are in the market, we're still between 160, 175 spreads of five-year money. We're not really in the 10-year market, much at all in the seven, its mostly a five-year product. And you look at the shape of the curve, we feel very confident that 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%. It was very high, which is a very good turn for the company. So that will transition to more growth.
So I think it's fair to say that, we're looking at a high single-digit net loan growth story for 2022 on a standalone basis, excluding Flagstar. So that's unique since we had a very strong Q1. But what's interesting about that, as I discussed in my prepared remarks, we have about $8 billion that's going to have to make a decision in the next 24 months. And I think the coupon on that is probably in the low threes. So this is going to, in my opinion, accelerate prepayment activity. We'll be able to hold on some more fee income there and be more resilient on ensuring that we get our economics given the rising rate environment.
And if customers realize that cap rates may rise a little bit here and LTVs may be more conservative as a matter, of course, of conservatism, you probably want to access your capital sooner. So it could volumes were very strong 2022 for a lot of acceleration within the customer base itself. At the same time, there's a lot of property transactions. If you look at the New City marketplace, it's rich. The 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 multi-family space. And by the way, all the borrowers are very strong.
Got it. That's really helpful. If I could ask about the margin. I guess two questions. Just one, John, how much of the benefit in terms of the margin for the full quarter impact from the swap rolling off in the second quarter? And then secondly, I'm just wondering if you could quantify what the impact is to either the margin or net interest income for every 25 basis point increase in rates and the deposit betas that you're assuming?
Yeah. For the -- 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 15. So we had -- have to benefit the first quarter and then the rest of the full benefit on a run rate basis this quarter.
We're not going to give guidance on specific 25 basis point increases. We realize we are liability sensitive. There are deposits. A lot of the deposits that we brought in are tied to Fed funds. So there will be an impact as we go forward, but we'll manage that as individual deposits come through and we bring in new relationships.
If I could then maybe ...
I just want to go back to John's point. I think about -- on the big picture, we have this active sensitive institution that has -- will have the fresh liquidity opportunities. And we're less liability centers today than we were three, four years ago and definitely within the last rate tightening cycle.
So when you take that all things being equal, put that together, you have a very unique opportunity to position this company into a changing interest rate environment that's going to benefit the margin going forward.
So that's our view when we model this. This is all about putting the strength of the two companies together, but when you think about the business model, they have a lot of low-cost funding of that Flagstar that will hold very nicely transactional type money. At the same time, we have this beautiful opportunity on the mortgage so we can really be a major depository player regarding relationship opportunities.
So we think there's going to be a growth opportunity for liquidity and being able to really transition our balance sheet from wholesale funding. And that's going to be the focus of the combined entity, and the combined entity will have an asset-sensitive position going into a rising rate environment.
What -- could you just say what the -- on a combined basis, what the asset sensitivity goes to?
Yeah. We are -- I think we put in the analysts -- in our first analyst report around 5% on an NII. And I think its right around that level. We redid it as of our last go round, so -- yeah, between, 5% and 8%.
That has a very modest deposit initiative brought on NYCB standalone, right?
That's right.
If you think about what we've accomplished since 2020, at the end of 2021, 2022, our core deposit franchise is up, I think an $8 billion, $5.5 billion on the lending side. So these are solid relationship deposits. The goal here is to culturally change how we do business and that's the mandate.
And I think we're making tremendous success here. So be patient. We're not going to give quarterly guidance on how much loan deposits that we're going to bring in every quarter, but we've been successful, and it's been a cultural shift on how we conduct our business.
Got it. Thanks Tom.
Sure.
Thank you. Our next question comes from Matthew Breese with Stephens, Inc. Please proceed with your question.
Hey. Good morning guys.
Good morning, Matthew.
Going back to the charter discussion, I was curious does the FDIC have any remaining say on your charter change? And is the charter change contingent upon the deal, or are you going to make the switch standalone prior to or regardless of the deal close?
So I'm not going to say a whole lot about what can happen. The reality is that we have FDIC approval. We believe that this company's position is better served as an OCC charter on a combined basis, and that's the direction we're heading.
As far as commentary on what could happen or may happen, the reality is that we're seeking a Fed shot, a Fed set 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've been to this process for a year now. So I think we've learned as we went along here, and this is the path that we believe for a national mortgage banking platform that's going to have 400 retail locations throughout the country, 100 LOA offices and a commercial banking model that would serve under the OCC charter.
Okay. The other thing is, if you screen for US 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 than 765. So do you need to make any changes on this end to lower your CRE concentrations ahead of the chart change?
Let me give you just a general overview, and I want to kind of fight history, going back to 2006 guidance. When the guidance was put out in 2006, it was very clear that well-structured multi-family housing was uniquely positioned when it's perceived regarding this concentration. When you look at our company combined basis and you take out cooperatives, which is average LTV is 25% and rent-regulated cash flows, we will be pro forma under 300%.
If you take out multi-family as just position that's not considered high risk CRE, we're 112%. So again, we have a unique business model that has decades of zero losses in the asset class. We spent hundreds of millions of dollars over the years as we look to become a CCAR bank going back to 2012 and up to 2016 on making sure we have very strong risk management practices around CRE. But when you think about the business loan, how we land our cash flow and they're predominantly in multi-family regulated housing, and we have a relatively significant cooperative portfolio with the mid-20% LTVs that we have never had a nickel of loss ever as a company. So these are very unique positions for history. So when you take that all things being equal and look at where your true CRE position would be when you called out multi-family 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, just curious your thoughts on the health of the rent-regulated multi-family borrowers, given limitations on rent increases from the RGB. But in this inflationary environment, you could envision higher core expenses, particularly on the energy front. As we go through the year, if there's minimum allowed rent increases, do you think there's going to be any problems there?
Matt, that's a great question. I would tell you that we -- three years ago, we focused on that. Obviously, when we had the rent law changes maybe four years ago, and the reality is that we look at the Bronx very differently than some of the other markets, and we lend differently in those markets. But there's no question that if inflation outpaced revenue growth on the cash flow side, you have some pressure there.
So what we do, we do a lot of stress testing around risk management. In particular, we've carved out the Bronx portfolio. It was with significant detail. Some of our largest players are in the -- Bronx have significant portfolios, and we believe that we have really low LTV, great borrowers, a history of long duration hold period and generational holdings. And we feel very confident that after stress testing is -- in very, very adverse scenarios, we're comfortable that we have a solid portfolio, but it's simple math, right? So I have a feeling that inflation continues to be more of a challenge for these customers. There will be less stability to do a cash-out refi, and they have to be more accelerate to come to the table sooner.
So I think it's probably going to bring a lot of balls to the table a lot quicker just because of the potential of the squeeze. And we're going to be probably more conservative on LTVs, but we do have a relatively low LTV portfolio, especially in the rent-regulated cash flow portfolio.
Understood.
That's a great question. It's definitely -- it's a great question, and we 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. We've done a ton of work around on the rent control area, given the changes in rent laws and the nuances on how cash flows are created. And it's a different environment, say, than it was a decade ago.
The other question I had just the flip side and go to Flagstar is, on Page 14 of their deck, their mortgage custodial deposits is around $5 billion. I was hoping just get a little bit of a better understanding of what those are. What are those? Who are they from? What's the anticipated beta for that book? And the other thing is, what's driving the volatility imbalances?
Yes. Yes, go ahead. Go ahead, Sandro. Go ahead. Go ahead, Sandro.
Yes. The available-for-sale portfolio and the servicing portfolio has deposits associated with it. And the servicing portfolio, when rates are declining, the payoffs are very, very significant. And so you're holding payoffs during the course of the month, and so your escrow balances are much, much higher than when you're in a rising rate environment, and the key payments are very, very low. So almost all of that is related to that phenomenon. The data on those, so the escrow deposits carry no -- if we own the MSR, the escrow deposits carry no cost. If it's connected with a subservicing arrangement, then we pay the MSR owner some level of deposits, typically LIBOR-ish. And that's really it.
And if you look at the history of Flagstar, you'll see that our -- we have the ability to manage that volatility very well because there's kind of gives and takes as you're in that higher interest rate environment, prepayments are lower, you have less escrow deposits. But at the same time, the available-for-sale portfolio is lower because originations are lower. So they kind of offset each other. And again, there's a lot of history there that you can look at as you begin to understand Flagstar better, and it's not a problematic volatility, if you will.
Yes, I'll just jump in, and Sandro has hit the nail on the head. Think of the deposits that you're looking at on Page 14, they're entirely related to our servicing or subservicing book. So the 1.3 million loans that we service or sub service, some of which we own and some of which we subserviced for others. And to Tom's point, when he talks about Mortgage as a Service, we could go and get more of those deposits. We just have chosen not to because we haven't needed to, given we've got ample deposit capacity to fund the balance sheet that we have. But when we bring the two organizations together, that's an area where we could go and seek additional deposit growth.
Understood. Okay. That’s all I had. Thanks for taking my questions.
Thank you. Our next question is from Christopher Marinac with Janney. Please proceed with your question
Hi, Chris.
Hi, thanks. Hi, good morning Tom. Thank you for taking the 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 you manage the reserve from here? Do you think it will grow? It seems you've got a lot of leeway with the reserve and just kind of want to talk through that.
Yes. So I'm going to defer to John Pinto regarding the complexities around the new accounting for loan reserve. And so John, why don't you take on that one?
Yes, there's no doubt that there's some opportunity there, but we are growing the loan portfolio as well. So under CECL and the life of loan estimate to put up those full potential life of loan losses the day you do the loan. So that will offset some of that. So you'll have the growth in the portfolio of some benefits. We've seen continued benefits in the macroeconomic forecast.
Recently, even given what's been going on right now. So when you're looking at where we are from a macroeconomic and our individual portfolio metrics, we are very comfortable with where we are here. I wouldn't say, we'll see substantial declines or increases unless something dramatic happens in the economy, but I do think that there's an ability to offset some of that growth in the portfolio in those provisions as we go forward as long as the macroeconomic indicators stay relatively consistent with where they are today.
I think I would say, historically, the company has a very conservative view of an in-place cash flow vendor. Our focus has been of conservatism. And historically, if you look at the statistics, you could run this out 20, 30 years. It's close to 30 years. We have very little losses based on actual experience.
So we're very confident in how we land culturally, and that's not changing. If anything, in a recessionary environment, we'll just be more conservative. And I think that's important for customers to understand as rates start to significantly rise, if we're heading into a recession and base funds arise and ultimately, these low coupons have to refinance, there may be less money to take out based on what the value they've created over the past five to seven years. So it's an accelerant.
And when they come to the table, the cash flow is going to be the net cash flow for them given the carry cost is lower. So you're giving less dollars, and it's almost an incentive for them to come to the table sooner before cap rates follow interest rate increases. At the same time, we have a history here where we're an in-place cash flow lender. We don't look at what the future is going to hold for proper transactions, what's in place, and that's our conservative outlook as being a cash flow line portfolio.
Great, Tom. Thank you. And thank you John as well. Appreciate it.
Thank you. Our next question is from Ebrahim Poonawala with Bank of America. Please proceed with your question.
Hey, Ebrahim, you’re back.
Hey, thanks for squeezing me in. I know we've gone over time. Just a very quick question, maybe for John. The tangible book value accretion you mentioned, what's driving that? Is it just clearly based on the interest rate mark today versus when you announced the deal?
It's a tangible book value creation on the transaction.
Yes, we're using -- the guidance that Tom gave has got an estimate of where the mark would be as of March 31. So that does move around, no doubt, right? So that could change, but that's really an all-inclusive number is what -- where we expect things to come out. If you look at where we were at the beginning when we announced the transaction, we would add a pretty significantly higher credit mark on the portfolio. And just look at the allowance that the CECL results that Flagstar had when we announced the deal compared to now, and then that, of course, will be offset by our rate mark. So we'll have a much higher rate mark on the portfolio and a much lower credit mark on the portfolio when you're looking at loans.
I think, obviously, in this valuation perspective, when you put the deal together on an accounting perspective, you that negative goodwill, I would imagine, John.
Yes, there's a bargain purchase at these levels.
Again, on this transaction, given the current landscape that, that obviously change as we get closer to closing. But if you look at the past year, Flagstar had a tremendous 2021 economically. So that goes into the capital. So when you reset the transaction on an accounting perspective, we have a lot more capital there.
Got it. And just want to follow up -- go ahead. Go ahead, John.
No, go ahead. I was just going to say, you're 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 through the OCC process to get the deal approved? I know [indiscernible] fine. You're going to have excess capital, but just would love to hear in terms of your confidence in the dividend sustainability.
We're very confident in our position to return value back to shareholders and our priorities to continue maintaining our covering dividend position. And obviously, when we model this, the payout ratio based upon the pro formas 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 NYCB. 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.