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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the NYCB Q1 2023 Earnings Conference Call. At this time all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, April 28, 2023.
I would now like to turn the conference over to Mr. Sal DiMartino, Director of Investor Relations. Please go ahead, sir.
Thank you, Laura. Good morning, everyone, and thank you for joining the management team of New York Community Bancorp for today's conference call. Today's discussion of the company's first quarter 2023 results will be led by President and CEO, Thomas Cangemi; joined by the company's Chief Financial Officer, John Pinto; Reggie Davis, President of Banking; and Lee Smith, President of Mortgage.
Before the discussion begins, I'd like to remind you that certain comments made today by the management team of New York Community may include certain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us.
And with that, now I would like to turn the call over to Mr. Cangemi.
Thank you, Sal. Good morning, everyone, and thank you for joining us today. Today, I would like to cover a few topics with you. Our first quarter 2023 operating results, the first is a combined company with Flagstar, how we fared during the recent market upheaval, the Signature Bank transaction and finally provide you with some forward-looking guidance. As you all know, the first quarter was a volatile quarter for the banking industry and unfortunately several good financial institutions became victims of this volatility. While no financial institution is 100% immune from the damage that the crisis [indiscernible] causes, New York Community fared very well during this period of turmoil due to our diversified business model focusing on several core businesses, retail banking, commercial lending, multifamily and commercial real estate lending and the residential mortgage origination and servicing business.
We do not have any exposure to cryptocurrency or stable stablecoin related industries nor do we have significant relationships with financial technology companies. Moreover, during this time, our percentage of uninsured deposits was amongst the lowest in the industry. Not only do we successfully navigate the market turmoil, but we emerged from this in a stronger position when on March 20th, we announced that our bank subsidiary, Flagstar Bank, N.A., purchased certain assets and assumed certain liabilities of Signature Bridge Bank.
This transaction is a game changer for us. Strategically, it builds upon the momentum created by our recent merger with Flagstar and accelerates our transformation to a high-performing commercial bank. It improves our deposit base and our overall funding profile, while providing further loan diversification, in addition it jumpstart our commercial middle market lending business in our relationship banking strategy. The transaction included several other businesses that were part of our longer-term build-out strategy, including the broker-dealer and wealth management business and several new attractive lending verticals such as healthcare and SBA lending.
Importantly, we also returned – retained virtually all of Signature's highly productive private client banking teams, predominantly based in the New York region, along with those teams waited to Signature's recent West Coast expansion, primarily based in California. Everyone here at New Community is extremely pleased to have them and the other talented employees from Signature Bank join our team, and we look forward to us doing great things together. Lastly, the transaction is anticipated to be financially attractive with expected EPS accretion of more than 20%, while it's also significantly and immediately accretive to tangible book value per share. At closing, tangible book value per share jumped 20% and to $9.86 per share at the end of the first quarter compared to the fourth quarter of last year. Given our earnings power from this transaction, we expect tangible book value generation to accelerate.
Turning now to our results. First quarter 2023 results on a GAAP basis were impacted by several items arising from the Signature transaction and the Flagstar acquisition, including an approximate $2 billion bargain purchase gain, merger-related expenses of $67 million and initial provision for credit loss of $132 million for the loans acquired from Signature. Adjusted first quarter diluted earnings per share were $0.23 a share, slightly ahead of consensus estimates for the quarter. Net income available to common stockholders as adjusted increased 14% to $159 million compared to the fourth quarter of last year. Operating results were driven by a full quarter's benefit from the Flagstar acquisition, which closed on December 1st of last year, approximately two weeks of Signature's operations, strong organic loan growth in the legacy franchise and a much higher net interest margin.
One of the many benefits from the Flagstar acquisition is the impact of our net interest margin from adding its mostly variable rate loan portfolio and its lower-cost deposit base. We saw some of this benefit in the fourth quarter, but it was more pronounced this quarter as the net interest margin was 2.60%, up 32 basis points compared to the fourth quarter of 2022. We believe that margin expansion will continue throughout the year with additional expansion opportunities from the Signature transaction.
Turning to our loan portfolio. Excluding loans acquired from the Signature transaction of approximately $12 billion, total loans and leases increased $1.5 billion during the current first quarter, up about 9% on a linked-quarter basis. About $1.1 billion of this growth was in the C&I portfolio, particularly in specialty finance and the mortgage warehouse businesses. The loan portfolio continues to become more diversified as we continue our evolution to a commercial bank model. Commercial loans at March 31st represented 44% of total loans compared to 33% at December 31, while multifamily loans stood at 46% of total loans compared to 55%.
As for the quality of our loan portfolio, both our asset quality metrics and trends remain strong. Total non-performing assets of $161 million were up only modestly on a linked-quarter basis and represents a low 13 basis points of total assets. The allowance for credit losses increased to $159 million or 40% from year-end to $549 million, and the coverage improves to 370% of non-performing loans or nearly 4x.
Importantly, we reported another quarter of low or no loan losses as net charge-offs was 0 during the current first quarter compared to $1 million during the previous quarter. Our office exposure remains very manageable, and we remain comfortable with the credit trends in this sector. Our office exposure at quarter end was $3.4 billion or approximately 4% of total loans. We provided some details in our investor presentation, but to summarize, the average loan size is $11 million with a weighted average coupon of 4.62%. The weighted average LTV is 56% and the weighted average debt service coverage ratio was 1.73x. Furthermore, we have no delinquencies and no chargeoffs in this portfolio.
As you can see, these metrics are proof positive that our conservative underwriting standards have served us well over numerous credit cycles, this is along with a high-quality balance sheet should serve us well in the event of an economic downturn. Regardless, we will continue to be laser-focused on credit quality across all the new verticals, especially those that we have recently entered. On the deposit front, our deposits totaled $84.9 billion at March 31. The Signature transaction after experiencing initial expected outflows contributed $31.5 billion of deposits as of quarter end.
Legacy Flagstar NYCB deposits declined $5.4 billion due to anticipated spend down in the prepaid debit card program and the reserve account withdraw from Circle. All told, these two categories accounted for over 80% of the decline in legacy deposit balances remaining were mostly institutional deposits. In terms of liquidity, while we have always had ample sources of liquidity, our liquidity position was enhanced by the $25 billion in cash from the Signature transaction. Currently, our available liquidity from cash, unpledged securities and our borrowing capacity at both the FHLB of New York and the Fed is over $42 billion. At the same time, our uninsured deposits, excluding collateralized deposits totaled $28.7 billion, with 34% of total deposits. Accordingly, our ready liquidity represents 147% of uninsured deposits.
In addition to our diversified business mix, we have a conservative and high-quality available-for-sale securities portfolio, consisting primarily of GSE-related securities. Approximately one third of these securities were mark-to-market in conjunction with the Flagstar acquisition. Accordingly, the amount of AOCI is amongst the lowest in the industry and has minimal impact on capital. Also, as part of our long-term liquidity planning strategy, we do not have any securities designated as held to maturity. In terms of our expenses, total OpEx were $398 million, up $194 million compared to $204 million in the fourth quarter. Our first quarter expense base includes a full quarter of Flagstar expenses compared to only one month during the fourth quarter and 12 days of Signature.
As for guidance, given the current outlook, we expect first quarter 2023 NIM to expand from first quarter levels to a range of 2.70% to 2.80%. First quarter gain on sale of mortgage loans is $20 million to $24 million and a full year tax rate of approximately 23%. We've accomplished quite a lot in a relatively short period of time. We will devote the rest of this year to integrating and converting Signature and Flagstar, reducing our expenses, growing our deposits further and building out each of our businesses as we evolve to become the new Flagstar. Lastly, I would like to thank all of our teammates for their hard work and support over the past few months, especially the last two months. None of what would have accomplished so far would it be possible without them.
With that, we'll be happy to answer any questions you may have. We'll do our very best to get to all of you within the time remaining. But if we don't, please feel free to call us later today. Operator, please open the line for questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Ebrahim Poonawala from Bank of America. Please go ahead. Your line is now live.
Thank you. Good…
Good morning, Ebrahim.
Good morning, Tom. So I guess maybe first question just around deposits, the Slide 8, where you have the waterfall, two things. One, give us a sense of what's underlying your assumption. I think I heard you say you expect margin expansion, not just in the second quarter, but throughout the year. So what's underpinning that in terms of deposits? One, around legacy Flagstar, do you expect more runoffs similar to what you saw, I think, in the early part of the year the $5.5 billion, how much more you see leaving the bank there? And then on Signature deposits, I think they've held up much better than I would have thought. So give us a sense of what you expect around the Signature deposit base.
So I'll start off Ebrahim, and then I'll pass it over to John and Reggie regarding the deposit base. But I will tell you, given the timing of this transaction and the speed of execution, we modeled approximately the 20% runoff because given the circumstances of the turmoil going on in March, we felt that that was a conservative number. We actually came in less than 10%, most important about that structure when we go into April, if you look at what's the activity has been, the DDA activity has been a rock. It's been solid. It's been actually up slightly throughout April. And if you think about where we were a year ago as NYCB standalone, that was a $4 billion DDA balance that went to approximately $12 billion worth of Flagstar transaction now a $23 billion of DDA, or 27% of deposits. So if you think about how that impacts the margin, those costs are zero.
So that's a very powerful position to be in when it looks at the historical franchise where we're more focused on higher cost type liabilities. So we're very pleased on the stability of the DDA accounts. As far as the stability overall, we're seeing a relatively flat position right now. We expected some runoff the first days following the announcement, and it's been very manageable. With that, I'll pass the baton over to John and then John will pass to Reggie talk about what we're seeing throughout the whole organization.
Yes. And just quickly, if you – when we're talking about the margin guide, one of the items to keep in mind, too, is on the borrowing side. So, we have $6 billion of wholesale funding that is coming due or we expect to be put back to us in the second quarter, and that's at a 440 rate. So, we're going to get some margin benefit there by just paying that down in the quarter. We also have some brokerage CD runoff at pretty high rates as well.
So with the stability of the noninterest-bearing deposits that Tom talked about, and that Reggie will talk to quickly on the retail side, what we're looking that's coming due and paying down, especially in the second quarter is higher rate, wholesale borrowings and brokered CDs that we're going to pay down with the excess cash that we have on the balance sheet.
Reggie, anything you want to add on the deposit side?
Yes. I would just say, I think, the first quarter was actually a validation of just how stable our retail and core wholesale book are. If you kind of look point-to-point, December 2022, we're only down 3% on a combined basis across NYCB and Flagstar. So, that's like less than $1 billion on a $28 billion book. So, I would consider that a win. And some of that, quite frankly, was kind of natural surge runoff in kind of what we see in the portfolio on a run rate basis. So, I think the portfolio performed extremely well and would continue to perform this year in the same way.
So Ebrahim, just to comment on that, again, just to reiterate and going to the margin, if you think about the cash position and what we're sitting on an abundance of liquidity and what the funding cost was that we've acquired to the deposit side on Signature, net-net, I think a 3% carry, which is above our current margin is sitting in cash and just managing the cash flow, as John indicated, paying off higher cost debt as we go forward. That is ultimately the strategy to have a much better funded balance sheet going forward here and more commercial bank-like deposits.
So, the benefit of just sitting in cash right now is actually contributing to higher margins. But as we deploy it into other businesses at higher yields, and more importantly, we focus on paying down some of the higher cost wholesale liability to be more traditional funded, that will continue to see some good margin benefits throughout the full year.
Got it. And I guess just a second question, Tom, talk to us around the alignment and integration means, obviously, you have the Flagstar integration going on with Signature and you've kept a senior executive from Signature, including Eric on board. Give us a sense of how that integration is proceeding? What should we be watching in terms of the success of like keeping those teams on board? And then what does that mean for just growth outlook going forward?
So, great question Ebrahim. So obviously, Day One, we hit the ground running, both Eric and I spent significant energy on ensuring that we have the transition for the teams. We're very confident and very happy on the results of that. As indicated in my prepared remarks, we preserve the teams, both on the East Coast and the West Coast. And also the business lines. All the lines of businesses are in place, and we're very pleased on bringing them on board. And when you think about the next step here, which is culture, culture, culture, we have to integrate these companies culturally, and it's going to be a substantial amount of energy. But we are super excited about the Signature folks coming on board. We know them well. We know that we know our competition. So we're clearly working together.
And when it comes to systems, the Flagstar transaction is still scheduled for the first quarter of 2024, and we're going to a deep dive right now in assessing what's best for the bank and more importantly, how the customers are going to be served. So, it's all going to be about customer service as we truly take on a relationship banking model. So, the most important aspect of that as we make these decisions that we integrate this at the appropriate time frame to ensure there is no customer disruption.
Mr. Pinto wants to add a little bit more on the integration side regarding Signature versus Flagstar. John?
Yes. The most important thing we've been doing from our teams in operations IT is just really making sure we understand the size and the scope of what the private client groups and the teams at Signature are used to on the system side. So our main focus is to ensure that we avoid any potential customer negativity, minimize any customer impact. So we're going through that process now. That process will not impact the actual data, the Flagstar integration, but it is something we're working towards now to finalize the data on and just to ensure that we get the systems converted in the most efficient and effective way possible while minimizing customer impact.
That’s fair.
Thank you.
Thank you. Your next question comes from the line of Chris McGratty from KBW. Please go ahead, your line is now live.
Good morning Chris.
Hey, good morning. I want to go to the guidance slide, if you could, for a moment, the expense guide. The $1.3 billion to $1.4 billion, which is pre Signature, understand there's a ton of moving in its parts and it's still early, but can you help us just on the expense contribution from Signature?
So I'll lead and I'm going to pass the baton back to John on the expense side. Obviously, it's early days. If you look back what they were running, they were running around $800, mid-$800 million run rate on the previous year. Remember, we didn't take all the businesses, and there is a lot of transactional benefits we have is why we structured the transaction. So, we're running at 1.3 to 1.4, and we reiterated that guide on a stand-alone basis. But as we put on the Signature teams – and a lot of – obviously, the actual private client groups are going to remain intact. So that's a lot of expense that we are forecasting within our run rate.
But if you start with the mid-800s and then you assume a transaction the nature of a transaction like this, since it's not a traditional M&A deal, it's an assisted it's a receivership transaction, we tend to leave there is much more savings given the type of transaction.
So, historically, we've always been between 35% to 50% range. You probably look at the higher end of the range given the nature of the transaction over time, which then you can probably formulate a run rate as we as we integrate these companies, I think, that's a reasonable way to look at the combined company.
And Mr. Pinto want to add as the CFO as what you are thinking there.
Yes. I think as Tom said, it makes a lot of sense, and it's what we're working towards right now, which is we know what our run rate is going to be. We do believe that in the next couple of quarters, our expenses will be elevated as we continue to go through the process of integration understanding exactly what we have and the processes we're going to use to do it and especially until we get the systems converted. What we do believe, though, is that we – if you look back, of course, at our track record, we believe we've been very, very consistent in how we've managed noninterest expense, it's been extremely important to us. We have a lot of history around effectively managing that in multiple different cycles. And even with integrations and acquisitions that we had in the past.
So, we're really confident in our ability to do that over time. But we do believe that in the short term, expenses will be a little bit higher here as we go through this process. And then once we get our systems converted, we will be able to have a run rate that gets into the levels that Tom just mentioned, right.
And the other thing, just to bring up quickly, on our last call, we talked about trying to front run some of the cost saves from the Flagstar transaction into 2023. That process was ongoing, given, of course, the Signature transaction, that will take a little bit of a step back. So, that's why you'll see just a little bit more expenses in the quarter than we anticipated. And then from a run rate perspective, we believe we'll be able to manage through to a really solid run rate combined once we get through our systems integration.
Yes. So, Chris, I would also add, just to be mindful in the first quarter, at the beginning of the year, we did a substantial mortgage banking repositioning for the franchise to position ourselves regardless of interest rates on the mortgage space and under Lee Smith's execution, that was put in place. I think it was late January into February. So we don't have the full benefit of that going forward.
So we feel over each quarter as we put on Signature and as we get to the benefits of the full mortgage repositioning, you'll see ongoing favorable adjustments as we work through the integration phase towards the end of the year. With Signature, clearly, we'll see each quarter more steps made towards putting the franchises together.
Maybe Lee Smith, if you want to talk a little bit about on the mortgage side, what we've accomplished with that, Lee?
Yes. No, Thanks, Tom. So yes, I think we mentioned on the last call that we executed on a big restructuring on the mortgage business. We let 700 FTEs go as we right size the distributed retail business so that we are just an in-branch footprint model. But when I say in-branch footprint that is a combination of both the Flagstar and New York Community Bank branches. So it's a bigger geography, not – and we did it because we want to be profitable on the origination side, even in this tough mortgage market, but we are still one of the biggest bank originators [indiscernible] in all six channels. We hold a considerable MSR asset, which generates strong returns. We've got the servicing and subservicing business that flows off a lot of fee income.
We're the second largest warehouse lender. We do MSR lending, servicing advanced lending, and we're working on more aggressive deposit gathering from the mortgage ecosystem. So whether you – we do B2B, B2C on the mortgage side, whether you're the biggest fund in the industry or whether you are an individual borrower, you can come to Flagstar, we take care of you. We look at it as the one-stop shop, and we're able to generate strong earnings through the whole food chain of the mortgage ecosystem.
Thanks. Thank you for all that. My follow-up, I just want to make sure I understand, John. So if I'm starting mid-8s for legacy expenses for Signature and you said 50%. So that would get you low 400s kind of is the destination. And then we would on top of that add the CDI that you've previously talked about. Is that the message we should be taking away?
Yes, I think, that may be a little bit aggressive. That's the high end of the range, Tom gave. I think it's probably a little bit lower than that. But that's a decent way to start to look at it.
Chris, I think, it's also the timing of it, right? It's going to happen in same quarter as you get to – so you think about some in Q1, when the Flagstar actual transaction is integrated, we're going to have significant benefits there on the tech side as well. So we're really looking at putting all these systems together. And as you remember, when we announced the conversion date, we should get significant benefits on a standalone basis pre-Signature and Flagstar post the conversion date as well. So when you come up with your estimate run rate, I think, those are all fair assessments when we're coming up with what you think the expense run rate. As we progress during the year, we'll hopefully update our guidance as we dive deep into the Signature franchise.
And then on the one-timers to come, maybe a little help there and also the share count, given the warranty I assume just the end of period is a good proxy.
Yes. The end of period is a good proxy, that 720-ish range, right, that's a good proxy to use for share count going forward. So that's where you need to be.
Okay. And remaining one timers, just for book value purposes?
Listen, we do have a handful coming still from both the Flagstar transaction in the short term, we probably got another $100 million to look at over the next couple of quarters.
Two quarters, yes.
All right, thanks a lot. Great.
Thank you. Your next question comes from the line of Mark Fitzgibbon from Piper Sandler. Please go ahead, your line is now live.
Hey guys good morning.
Good morning.
Just to follow-up on earlier questions, I think, Tom, that Signature had something like 134 teams. Do you have a sense for how many have stayed, how many are there today?
Yes, so Mark, a great point. So obviously, we didn't acquire the entire institution. There were other teams that didn't come with the transaction. So we estimate it's about 126, 127-ish. I think we're like 125 now. So, I called that a huge success. I think Eric had worked hard alongside with me to make sure that we have the retention plans in place and we're super excited about where we are there.
So, we think about the teams that we were focusing on, it's about 125 out of 127-ish but we feel really good about that. And the retention process has been very strong. And more importantly, the culture of getting this company together with a much larger balance sheet, being able to do a lot more for the client only enhanced. So we’re excited about that, Mark, and I would say it’s a huge success for us, and it’s never ending, right? You have to make sure that as we work on culture, now the team understands that we do have other products, other opportunities for the new customers from Signature coming on board to really enhance the customer experience. So, Eric and I spend a lot of time on retention, and we believe it’s been a success.
And then secondly, unrelated, what is the pipeline of new business in the banking as a service space look like today?
So look, I think in general, we are developing a lot of technology initiatives. We’re really trying to get our strategy focused on going out there and being within the middle of the pack, and we had some good work to do over time, and we see some good developments there. Just on the side, if you think of what Signature has done historically on technology developments with the client has also been very innovative. So collectively, I think our opportunity is even more innovative now with the talent skills over at Signature combined with our initiatives here on what we’re doing in banking as a service.
There’s been some good wins along the way. We have – the government business is obviously a focus of ours, and it’s been consistent, and we’re looking forward to partner with our technology partners there, and it’s been a very successful process for us. And we’re looking at all opportunities that make sense for the bank going forward to tie in to the customer needs. So, I’d say it’s been relatively strong. We had some runoff that we expected during the turmoil and launch. But the dollar amount of mortgage as a service and government as a service and banking as a service of 7.5 [ph], John.
A little lower. Yes.
So it’s still a relatively strong number, and we’re looking forward to, hopefully, new developments with the U.S. treasury relationship as that gets onboarded. We’re doing a lot around the digital side. That’s all in automation analysis trying to get that up and running where we go from world plastic to digital. And that’s the plan to work with the government on that. So we’re excited about development. But it’s a long churning market. And I think the pickup of the Signature team is going to help that journey.
Last question I had for you is, I wondered if you could share with us your thoughts on capital or whether you have a target there and also the dividend.
Well, obviously, what capital build is going to be significant as to tangible in my prepared remarks, I made it very clear that we’re talking about capital formation going forward, which is a very good place to be in. This transaction is highly accretive, both on the upfront tangible as well as the earnings per share going forward. And our dividend coverage ratio just on the pro forma analysis, the ratio comes down substantially. So, we’re very pleased about where we end up on a projected basis what we see as our dividend coverage ratio dramatically improving on the dividend side.
So obviously, the dividend is strong, and we’re very comfortable and going forward into these multiple transactions it becomes even more, in our opinion, much stronger. With that being said, on capital, we think that we are in a very good position to generate a lot of capital with – as we go into the quarters ahead. And that’s kind of in my prepared remarks, focusing on the tangible book value creation. So John, if you want to…
And the other thing that we started looking at too is when you look at our common equity Tier 1 we’re in the – we increased it a little bit in the quarter. So it came in a little better than we anticipated. We’ve run it at a 9% or under – slightly under CET1 in the past. We’re comfortable at those levels. But those levels are going to start coming up. And the other thing to keep in mind, Mark too is when you look at the unrealized loss on our securities portfolio, and if you looked at our peer group analysis for including unrealized losses on securities, we’re at closer to the top of the list in CET1 than the bottom of the list. So there’s a couple of different ways that we do look at capital. You know our history from a loss perspective. So, we believe we can run it at these levels. We’re cognizant of the fact of where we are from a peer perspective, and that’s why this transaction we look so forward to because of the capital generation it provides.
Yes, Mark, just one major point here. When we put the transaction together, working behind the scenes and getting this deal done with our regulatory constituents. We were very clear that we wanted to solve for capital where there was no negative impact to capital as a result of the transaction. And then the accretion benefit is substantial. And that’s how we kind of solve for and how we formulated our bidding process to be able to be successful to acquire the selected assets in line and assume the liabilities that we focused on. That was key on our capital review as far as coming in to figure out how we can put this transaction together. So, we’re very excited about the capital build formation post transaction.
Thank you.
Thank you. Your next question comes from the line of Brody Preston from UBS. Please go ahead. Your line is now live.
Hey good morning everyone. I just wanted to put a finer point on the expenses. Again, I know it’s tough, but you said the mid-800s. I think Signature at the end of the year was running closer to like a 930 [ph] kind of run rate. And I know you didn’t bring over everything. So, I just wanted to clarify, is it starting from a mid-800s level, John, and then working its way down to 35% to 50% cost savings from there?
Yes. I mean the 862 [ph] we mentioned was just the year, right, the annual 2022 expense. So we just use that kind of as a kickoff point for the piece. But that’s right; we didn’t take all of the businesses. So, we think the number from that perspective is just probably under a $2 billion run rate on a combined basis. I think that’s the easiest way to look at it. We think that’s pretty conservative. Hopefully, we’ll be able to do a little bit better than that over time. But we think that’s really where this is going to shake out when you look at putting both companies together for the go-forward period when we get the systems converted.
Got it. Thank you for that. And I did want to follow up on just the legacy deposit base. Could you give us a sense. I know there’s a lot of moving parts between all the programs and then the seasonality from the custodial deposits and whatnot. But I guess when you look at legacy deposit base; do you have any thoughts on what the seasonality will look like throughout the year? And I guess what your growth targets are for deposits – for the year?
Yes. Let me – I’ll just start that and then I can turn it over a little bit to Reggie on the retail side. But one item to keep in mind is the government as a service business. Those deposits, which we’ve talked about on multiple calls, which worked out for us because they’re non-interest-bearing. But they – that runoff does continue on those deposits. It is done slightly better than we originally anticipated. But that runoff continues. So that we’ll see runoff in that non-interest-bearing segment throughout the next couple of quarters. That totals $1.3 billion as of March 31. So, we’ll see some runoff there. We really – a lot of the banking as a service type stuff that we expected to run off when the liquidity event happened has run off. So there’s probably a handful of smaller items in that perspective where we’ll see some slight runoff, but there’s nothing really besides the government deposits, there’s nothing really that we see from a materiality perspective that we expect to run down here.
In the onboard as well.
Well, new programs that we’re hoping new programs are coming from California by the end of the year, maybe even the end of the third quarter. So, we’re hoping that starts to kick in, but I was just looking at the runoff piece, which we don’t think will be that material when we’re looking at the banking as a service as the mortgage as a service pieces.
Okay. I did have just one more question if Reggie doesn’t any input there.
No, the only thing I would – yes the only thing I would say – and I don’t want to be redundant, but we have pegged in plan for deposits to be essentially flat to slightly down, and at this point in time, we would not change that. When I say slightly down, we’re talking $300 million to $500 million on that base of $28 billion or so. So again, we think we can kind of hold deposits. We’ve been successful even through the first quarter. And so there’s no reason to think differently.
Got it. Thank you. And then I did have one more question. Just on the office slide. I appreciate you putting that in there. I wanted to ask if you happen to know of the 55% that’s in Manhattan, where that’s kind of geographically in Manhattan, like what percent is Midtown versus the other neighborhoods?
We’ll follow back on that. I think the messaging is that we know our customers very well. We’re very comfortable with the LTV, the debt service coverage ratio, and we can follow up and get more granular there. But clearly, a lot of that business is generated from the long-standing relationships we had with our customers and a lot of that transactional growth has been driven off of 1031 exchanges. So if you have a significant asset gain that’s been in a family business with so many decades and value is created, multifamily versus CRE, they kind of move around depending on market conditions.
That’s been the history of our focus on this type of asset class; we’re not in the business of doing office building financed in very rare circumstances. So this is a culmination of many, many years of relationship lending that tied out to the holistic position within the strong relationship of the legacy NYCB. And again, we have no delinquencies; we have no charge-offs in the space. If you look historically, and going back from decades, I think our overall loss content in CRE is probably lower than multifamily I think it was like, John, 10 basis points or...
Slightly lower than multifamily.
Again, we feel really confident in it. But right now, we’re seeing very strong performance, no delinquencies, no late pay, and we’re working with our customers in the event there is some issues on just changes in square foot rent rolls. However, the LTVs are very low and the relationships are very strong and we know the customer very well. And I think John can then follow up with more granularity. We don’t have it in front of us right now, but we can get back to you as far as what street they are on. If it’s – I’d say it’s more towards A and B type. We don’t see lending period. And I think we’re probably more driven towards the – more towards the B to B plus-ish, but we stay away from the C type situations.
Awesome. Thank you very much everyone. Appreciated.
Thank you. Your next question comes from the line of Bernard Von Gizycki from Deutsche Bank. Please go ahead. Your line is now live.
Hi, good morning. So, I know there’s a lot of puts and takes to 2023, like you’ve outlined, obviously, the uncertainty in the market, but the purchase and assumption agreement for Signature has provided a lot of liquidity and presented bigger growth opportunities like you’ve outlined. I’m just wondering that the initial targets from the Flagstar deal, including the 12 [ph] ROA, 16% [indiscernible] the 52% efficiency ratio. Would these be considered a bit conservative given the benefits of the Signature deal? Or are these targets when you hit a more steady like run rate? What will you be thinking here?
So, I’m going to take it from a very high level, and I’ll pass it on to John again because it’s the financial questions on forward-looking guidance. We don’t have a lot of forward-looking guidance. We gave some short-dated forward-looking guidance. But very pleased on culturally putting the Flagstar transaction together. It’s been a very good experience with the team. Senior team is doing a great job on focusing on getting the culture right. And more importantly, our integration plans are on target. With that being said, the mortgage business has been up and down, and it’s a volatile business.
So, we were very proactive right out of the right post our closing to right size that. And that was the first step to ensure that we continue profitability in all interest rate environments. Where we stand today, our institution is in a very different place when it comes to liquidity, when it comes to asset sensitivity versus liability sensitivity. I can’t remember ever being in the seat where we can talk about asset sensitivity. So it’s a pretty good place to be having tremendous optionality about the business and where we’re going to deploy that excess liquidity. But I think I indicated previously that by sitting on cash right now and making those decisions, we’re making a 3% spread based on the transaction and on Signature standalone is pretty attractive when our margin was, I think, close to 260.
So as we’ve deployed the cash, as you look at the round out of the commercial banking space we have a lot of verticals. We have some great opportunity to really round out the verticals, build out the commercial bank and clearly focused on team builds, focusing on integrating the Signature culture into the new Flagstar culture. And it's going to be about keeping the teams focused and bringing those deposits back. I mean, I just don't underestimate the opportunity in front of us here that when there was a run in the system, these accounts were not closed. They were just moved out.
Well, our goal is to get a lot of that money back and be creative with our clients, especially on the Signature side to really be their white glove service, that's the secret sauce of Signature. So that's an exciting opportunity for this institution. And then we could take the growth in the future. Looking at our brick-and-mortar locations and phenomenal plus of the country, where we can take Eric and Eric's team to start ramping up growth and continue doing what he's done very well for the past 20 years, which is build value. So it's an exciting time and I think when you think about overall returns, this bank is not a traditional thrift model anymore. It's moving towards a commercial banking model, and I feel very strongly that we've accelerated that with the Signature transaction and the Flagstar transaction by a tune of 10 years. So that's a good place to be, and that's just my opening, signs [ph].
So maybe, John, if you want to.
Yes. I think remember too, when we announced that the Flagstar transaction that was all the way back in April, and that was a totally different interest rate environment. So just keep that in mine.
We're not at zero interest rates anymore, right?
Right. Right.
But we're pleased with the ecosystem. I really think there's a great opportunity on the mortgage ecosystem, as Lee Smith alluded to, we are going to go after deposit opportunities in all parts of our business. And I think it's an uncharted opportunity here with the TPO channel, with the relationships with the warehouse business, we want to have our share of compensating balances. We have some great, great team members here that's going to go after it, and it's going to be measured and strategized as a focus towards the new Flagstar.
And then just a follow-up, you did provide some guide to expenses regarding signature, which is helpful. I'm just wondering, from your talks, your discussions with FDIC, I think there are a couple of things with the transition service agreement. I believe that those – the resulting conversation is what – how you kind of like guided, I believe. I'm not sure if there's anything you can share on that specifically, I'm not sure if that's still being hammered out. And like what you kind of alluded to is that some of the costs could be elevated in the next couple of quarters. I just wondered anything you can share there? And then obviously if discussions on servicing the remaining loans have been discussed and you can share anything there.
So yes, that process is ongoing. We're still just a little over a month from the transaction. So that process is still ongoing. So we're working through exactly what loans, what deposits, what processes, other assets or the liabilities that we're taking going through the whole pro forma analysis. So yes, that is one of the reasons why in the short-term will be slightly higher than the run rate we talked about earlier. From a servicing perspective, we continue to service the loans for the FDIC and will be reimbursed for our cost for the servicing of those loans. And then once something happens and those loans are disposed of by the receiver, there's always an opportunity to see what happens and who that buyer is to see if there's a longer-term potential benefit to continue servicing those loans depending on what the buyer wants. So yes, that process is ongoing. As you can imagine, it takes a little while to kind of finalize that as we go through, but yes we're working towards all of that as we're speaking.
Yes. I would just add one comment on that whole process with respect to the real estate side of things. We have – it's an in-market transaction. This is – was our number one competitor in the multi-CRE space. So they're in New York, we're in New York and we have great consolidation opportunities to really take advantage of the opportunity to bring people together in the appropriate real estate setting. So we're excited about our teams diving into that deeply. We don't have a lot of time to make those decisions in conjunction with the contract that we signed with the FDIC, but we think there's a great opportunity for efficiency.
Okay. Great. Thank you.
Thank you. Your next question comes from the line of Steven Alexopoulos from J.P. Morgan. Please go ahead. Your line is now live.
Good morning, Steven.
Hey. Good morning everyone. So I want to start, Tom, given the strong retention of the Signature teams, I'm surprised you have been able to draw back some of the deposits they've lost. I'd imagine the teams are fairly well intended to do that. I know it's still early, but what are you hearing from their customers right now?
So it's a great question. And we went into this with the expectation of a much significant outflow because who knew what's going to happen on Monday. But what's most important is that the team is excited; the team has the incentive plan to bring the money back to the bank and as well as different solutions, right? I think in general, there is an industry where there's a reluctancy to be well above uninsured, right? So we have to plan for that and be there for our clients and be creative. And I think the creativity under Eric's leadership with his team is going to go after the opportunity. And I think the way we've structured it would be a legacy signature model that they have strong incentive comp plans to be recognized based on the success on deposit gathering. That's the model, right, Steven?
So it's early days, right? And we're not going to quote a win yet because it's – who knows what happens on Monday of this week. So you just got to be very cognizant that I don't think that the marketplace is still out of the woods with respect to this volatility. But there's no question that it's stable, which is great. I'll reiterate my point on DDA. It's a rock. It hasn't moved. That's a phenomenal statistic, that operating DDA count that actually was slightly up in the month of April compared to the closing of the transaction, which is a testament for the payroll accounts, the operating accounts tied to the businesses. But the push here is to go back and convince the customers that banking overall is in a safe perspective, and it was an idiosyncratic situation that happened in early March. And ultimately, the system is strong and highly regulated, and we have to convince that, and that's our job to go out there and handhold the customers to get back to confidence in the system and that's what we're doing.
And very proud of my team because it's been ongoing, and even during in the depth of that crisis, we were talking to many of our clients. And look, we're a regional bank that really handhold our customers, it's important. Now, it's all about service on a stand-alone basis. NYCB folks did a great job and now we put on Flagstar and now we're putting our Signature, it's all about service. And I want to reiterate again, culture, culture, culture and we have a tremendous opportunity in front of you to really make sure it's client first and get them comfortable that with the stamp of approval of doing a transaction of this magnitude, in the depths of a doc situation in banking, I think it goes a long way when you talk to clients about the safety and standards of our institution.
Got it. Let me follow up on that, Tom. So you basically doubled the size of the company in a few quarters. And if we learn anything particularly from SVB, it's that they – you grew so quickly, they probably outgrew their capabilities and risk management. I'm sure your risk management is fine or also regulators would not have given you the stamp of approval [ph] that you just talked about. But you also just said in response to the prior question that you accelerated the transformation of the company by 10 years with these two deals. So talk about the risk management infrastructure that you have today. How much do you have to now invest in it, people, systems, et cetera? And how should we think about the cost of that?
So I would say to you, Steve, this goes back to the legacy CCAR and SIFI, right? We went to a journey at [indiscernible], I recall when I was CFO for about five years at the time holding the line in [indiscernible] and not crossing over on an average, so that so we really built a position to understand what was expected as our regulatory framework was uniquely different than some others, which gave us a lot of oversight at the time to be a CCAR bank. And obviously, those rules and announcements have changed but we've held true to our position that we were going to have a bank that could be ready to be $100 billion. That goes back when we started that journey back in 2012 or 2011 and it's been a constant reinvestment over time. So we're really excited about where we are.
There's always going to be update. There's always going to be evolving, especially given the regulatory landscape that we're internally because who knows what's going to come out of this – we'll call it many crisis of confidence but I don't think it's going to get easier, but we're prepared to do what we have to do to manage a safe and sound organization, and risk management is on number one focus, right? So we have a tremendous team, and I'm proud of my risk team and they do a great job. and we're going to add a lot of new people from all three organizations together as well as from the outside and be ready for what's required for us as a highly regulated institution, but this is nothing new to us. This is something we've been working on for quite some time, and we're prepared to make sure we have the highest standard.
John, if you want to add a little bit more comments on risk?
Yes. And I think what Tom mentioned, just to add when you look at some of the capital stress testing and liquidity stress testing frameworks that we built in that time frame will serve us extremely well here as we integrate both Flagstar and Signature onto those models from a stress testing perspective. Our teams built those with the expectation of the $100 million threshold that we're at now. So there's always – there will always be some incremental add, but we don't think it will be a material add given the structure and the backbone that we already have in place.
And I think in general, you're looking at operating leverage now, right? This is something we didn't geared up, and we assume the Flagstar transaction is we were ready to be at that $100 million margin and getting ready. But we were there as far as operationally moving in that direction. But at the same time, we get the operating leverage we're making very substantial investments going back to early days, and we just continue to evolve from that. So obviously, it's the most important aspect of this company going forward is handling risk.
Given the nature of the bank and our new products, but we're clearly excited when I say 10 years, it's really more the transformation from a thrift to a commercial bank. That's a milestone of the vision to take a traditional thrift mentality and bring it to the commercial banking platform. And having these great team members that come from all over the country with tremendous banking experience in commercial operations and dealing with the high touch, white glove service, that's the transition. So I think that's what this acceleration and having different verticals, having different products. We've completely changed the dynamic of who we are going forward as the new Flagstar.
Got it. That's helpful. And just one final one, maybe for John. So you said you expect margin expansion through the rest of this year. One, what rate assumptions like which rate backdrop are you assuming; and two, which is even more important, given the new balance sheet mix, what's better for your margin for the Fed to start cutting rates in the second half or if the Fed goes up and then hold for the rest of the year. Like which of those backdrops is better for this balance sheet? Thanks.
Yes. So in a very short period of time, we've gone from on a stand-alone NYCB sensitive to pretty significantly liability sensitive to layering in the Flagstar transaction, which got us to slightly moderately liability-sensitive and now laying on Signature, where we're moderately asset-sensitive. So we have an asset-sensitive balance sheet right now that has an awful lot of flexibility in it given the cash that we have on the balance sheet. So it's – there's a lot of flexibility, a lot of easy ways to kind of move that asset sensitivity around in the short term. But to answer your question, yes, we would benefit from a Fed rates right now.
And when we look at, when we’re – with the modeling to get to the next quarter or so has increased, a couple of items there that I mentioned. We are expecting one more rate hike here in the Bloomberg forecast next week and then pretty flat to the end of the year. There might be – and one at the end. I think there’s one cut that we forecasted at the end of the year. But when you look at what’s coming due, especially in the second quarter, that’s going to help pick up a little bit to the margin. That’s one of the main drivers as well as what Tom has mentioned, which is just the non-interest-bearing percentage and the stability that we’ve seen so far in those deposits.
Yes. So Stephen, big picture for us is that we’re in a very unique position given these the fact that we have a balance sheet that is very versatile. We have tremendous optionality given it’s sitting in cash. And as I indicated previously that let’s say we yield 5% of the cash temporarily, and we picked up the liabilities at around 2%. So the spread on that’s about 3%, it’s still above our margin. So as we – if we have to shift, we have a position of cash to make that a smooth transition to rebalance our seller depending on what policy is going to be driving the Fed. So we’re in a very interesting spot and we expect the balance sheet.
Got it. Thanks for taking my questions.
You’re welcome.
Thank you. Your next question comes from the line of Matthew Breese from Stephens. Please go ahead. Your line is now live.
Good morning.
Good morning, Matt.
I just wanted to go back to the Signature deposits down less than expected 9% versus expectations for 20%. From here, how much more run over, if any, do you expect and over what time frame?
Just well, just from a straight modeling perspective, we haven’t changed our modeling when we’re looking at forecasting to the original 20%. We’re cautiously optimistic that we won’t see anywhere near that runoff. And hopefully, potentially could see some growth once this really and continues to stabilize. But right now, from a forecast perspective, we haven’t changed our initial modeling of a 20% runoff.
Okay. And then for the quarter, what was accretable yields prepayment penalty income? And then looking forward with Signature, what is the expectations for accretable yield through the end of the year?
So prepayment penalty income for the year was, I think, $1.6 million. So a really, really small number on the prepayment side. On the accretable yield perspective, with Signature, we’re looking at our best estimate now is picking up about $100 million a year. That’s what we’re looking at. If you look at the mark that we booked, it’s about a four or five year average maturity – we are still, of course, finalizing that process as we go through all of our purchase accounting items, but we think it’s going to be around that $100 million range.
And that’s the added accretion. What was it for the quarter? And maybe just because it was a partial quarter with Signature, a full quarter for Flagstar. Give me some idea.
Yes, really. Yes it was a very, very small amount for Signature. I think the number was in the $5 million range, $4 million to $5 million range. I’ll get you the Flagstar accretion number. I don’t have that in front of me.
Okay. Could you comment a little bit on and I’m understanding the business today is much more diversified than it has been historically, but give us some sense for new loan yields today and what the roll-on versus roll-off dynamics are?
So Matt, it’s interesting what’s having for us, given the market conditions in commercial real estate and multifamily, our spreads are 300 basis points spread off of the five year treasury with a minimum of 6.5% coupon. So, you’re not seeing much fixed rate product being done at all in general. But we’ve introduced over the past year, which I think is a very interesting opportunity for our customers for choice is having synthetic opportunities to think about structuring a transaction as the fixed to float, and we get the opportunity to put a floating rate instrument, which historically we’ve never done before.
So with that being said, I think we put on about just from repricing, about $2 billion of our multifamily businesses now tied to SOFR plus 250, which came off of about 3.5%, and now it’s yielding about 7.5% as they figure out what they’re going to do maybe next year if rates were to go lower and we’ll make decisions upon financing that in the future, but that’s been a very positive balance sheet contributor to having a more versatile asset sensitive balance sheet, so is tied to floating rates.
Many customers now are contemplating on putting on a swap and doing a floating rate structure with us. And then at the same time, we’re also introducing our capital markets business, which has a sizable benefit to sell and protection on that and be able to structure the transaction where we generate fee income. So that’s part of our model going forward. Now we don’t – we haven’t modeled that in, but that’s what we’re seeing in the business. And most of the other products are all floating rates. So that’s significant spreads. So that’s going to be the ongoing benefit of versatility within the asset classes.
But it is a change in the market when it comes to multifamily series [ph] because of just the tightening of credit. There’s no question that credit has tightened when it comes to the offering. And I think most banks are around that level, between 2.75% to 3.25% spread, of the five year treasury as an offering. And I think many customers are just kind of waiting and see what to do and you don’t see a lot of actual transaction when a transaction does take place, I think the financing cost is very different than it was a year ago, which I think will be an advantage to the bank as long as they could handle that service coverage ratios, right?
Right. Actually, that brings to my next question just is all eyes are on office CRE these days. Rent-regulated multifamily had its challenges on the top-line, given the Red Guidelines Board. As you’ve seen those types of loans reset today coming out of 2018 vintages, how have debt service coverage ratios reacted to higher rates? And have you had to do anything with those borrowers like lower rates or extend amortization periods just to keep them going and keep them operating the properties.
Given that we’re a low leverage lender, LTVs are traditionally lower, are we underwrite very differently than some of our competitors. We haven’t had to have those conversations as of today. What we are seeing is that when they’re in an option period, they’re choosing a SOFR plus 250 option versus the home loan bank spread option, which is punitive. And in very rare circumstances, you’re seeing refinance activity. So, we’re getting the benefit of pricing a 3.5 coupon back to 7.50 in the current marketplace. Now it was a lot cheaper for them last year, but rates are elevated, but we’re still seeing 100% consistency on no delinquencies, no late pays. And customers are thinking about probably next year, they’ll take this option and come back to the bank. – if rates are lower.
So they’re making, I guess, a decision in the future to come back to the bank when they feel it’s necessary. But it’s been very, very consistent on a monthly basis. Again, growth on the multifamily side has been very slow. It’s going to be, I would say, relatively flat. But what’s interesting about our portfolio, I’m not sure the exact number, maybe John has it, but it’s probably $4 billion, $5 billion coming due on that same roll period on credits that have to refinance or actually have the option. And right now, we’re seeing about 75% of those customers take the option, which is a nice pickup for our margin.
Understood. I appreciate it. I’ll leave it there. Thanks for taking my questions.
Thank you. Your next question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead. Your line is now live.
Good morning.
Hi, good morning. Just a couple of points of clarification from me. You noted you will continue to use the excess cash to pay down borrowings. Does the pace of that accelerate beyond the second quarter? Or are you doing a majority of what you intend to do in the second quarter itself?
So, we’re going to continue to look at the market conditions that we’re in, but right now, we expect to pay down borrowings as they’re coming due. We just have most of our borrowings coming due in the second quarter. We got a little piece coming due in the third and the fourth as well. So the plan is to pay down borrowings throughout the year, depending, of course, on our liquidity position and other items, loan growth.
One item just to keep in mind with our securities portfolio being so low and the security asset percentage, we’ll hold a little bit more cash on the balance sheet just as a placeholder for that piece as well. But yes, the current plan is to continue to pay down borrowings. We’ll look to pay down some of our wholesale deposits like a broker deposits, as we mentioned earlier, as they come due, depending on market conditions and we’re where cost is on deposits like that.
Just to add the point there. When I took over CEO, I made it very clear, our challenge and our strategy is to be less dependent on financing such as wholesale liabilities to run this business as the transition from a thrift to a Commercial Bank. And going back to the acceleration of the business for 10 years, this is a lot of liabilities that are not subject to wholesale liabilities, but a traditional commercial banking and going back to the DDA growth of 27% of total deposits, that is in my opinion, acceleration of where we have to be as a successful business. And we’re super proud that we’re able to have a better funding mix to generate better returns over time. So this is going to be very powerful towards the story as we continue to hone in on commercial accounts and the DDA side of things as well as relationship banking.
So is it fair to say that despite the high asset sensitivity from the deals, if the Fed does start to cut rates gradually next year, you should still see some sort of benefit to NIM from cutting cost of funding?
So, I’d say it this way, we’re in a very interesting position given that my whole career had NYCB with the liability center. So, we’re excited about our balance sheet positioning, and we think we have versatility and optionality to make the decision when that does take place. But if you’re in – if you look at forward Fed fund futures and one and done the hole for a while, if they raise it, being asset sensitive, we’ll make more money. And then we’ll adjust accordingly, but having the versatility of cash makes it a little bit easier to make decisions on that versus having fixed rate assets that are locked in long term. We have sitting on lots of cash right now to make those determinations as we redeploy into assets that are more commercial bank like in traditional thrift type assets.
Got it. And just the last question for me. Just given all the moving pieces in the quarter, do you have what the spot deposit costs are as of March 31 or as of April?
Yes. Interest-bearing deposits are $260 million [ph].
Great. Thank you.
Thank you. That will for our last question. I would now like to turn the call over back to Mr. Cangemi for any closing remarks.
Thank you again for taking the time to join us this morning and for your interest in NYCB.
Thank you so much, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.