Flagstar Bank, National Association Q1 FY2023 Earnings Call

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 have been provided. 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 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 often 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 stablecoin-related industries nor do we have significant relationships with financial technology companies. Moreover, during this time, our percentage of uninsured deposits was amongst the lowest in the industry. Not only did we successfully navigate the market turmoil, but we emerged from this in a stronger position when on 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 jumpstarts our commercial middle market lending business and our relationship banking strategy. The transaction included several other businesses that were part of our longer-term build-out strategy, including the broker-dealer and wealth management business and several new attractive lending verticals such as healthcare and SBA lending. Importantly, we also retained virtually all of Signature's highly productive private client banking teams, predominantly based in the New York region, along with those teams related 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 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% 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 on 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 represent a low 13 basis points of total assets. The allowance for credit losses increased to $549 million, up 40% from year-end, 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 were zero 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 charge-offs in this portfolio. As you can see, these metrics are proof positive that our conservative underwriting standards have served us well over numerous credit cycles; this, along with a high-quality balance sheet, should serve us well in the event of an economic downturn. Regardless, we will continue to be laser-focused on credit quality across all 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 withdrawals from Circle. All told, these two categories accounted for over 80% of the decline in legacy deposit balances; remaining declines 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, or 34% of total deposits. Accordingly, our ready liquidity represents 147% of uninsured deposits. In addition to our diversified business mix, we have a conservative and high-quality available-for-sale securities portfolio, consisting primarily of GSE-related securities. Approximately one third of these securities were marked to market in conjunction with the Flagstar acquisition. Accordingly, the amount of AOCI is amongst the lowest in the industry and has minimal impact on capital. Also, as part of our long-term liquidity planning strategy, we do not have any securities designated as held to maturity. In terms of our expenses, total OpEx were $398 million, up $194 million compared 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 2023 NIM to expand from first quarter levels to a range of 2.70% to 2.80%. Gain on sale of mortgage loans is expected to be $20 million to $24 million for the quarter 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 we've accomplished so far would have been 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 have been provided. 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 a 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 is when we go into April, if you look at the activity, the DDA activity has been a rock. It's been solid. It's actually up slightly throughout April. And if you think about where we were a year ago as NYCB standalone, that DDA was about $4 billion and it went to approximately $12 billion with the Flagstar transaction and is now $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 you look at the historical franchise where we were 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 to talk about what we're seeing throughout the organization.

Yes. And just quickly, when we're talking about the margin guide, one of the items to keep in mind, too, is on the borrowing side. We have $6 billion of wholesale funding that is coming due or we expect to be put back to us in the second quarter, 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 at 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 the first quarter was actually a validation of just how stable our retail and core wholesale book are. If you look point-to-point, December 2022, we're only down 3% on a combined basis across NYCB and Flagstar. So that's less than $1 billion on a $28 billion book. I would consider that a win. And some of that, quite frankly, was natural runoff that 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 traditionally funded, we will continue to see 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 keeping those teams on board? And then what does that mean for just growth outlook going forward?

So, great question, Ebrahim. From 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 with the results of that. As indicated in my prepared remarks, we preserved the teams, both on the East Coast and the West Coast. Also, the business lines are in place, and we're very pleased to have them on board. 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 require a substantial amount of energy. But we are super excited about the Signature folks coming on board. We know them well. We're clearly working together. And when it comes to systems, the Flagstar conversion is still scheduled for the first quarter of 2024, and we're conducting 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 will be all about customer service as we truly take on a relationship banking model. The most important aspect of that is that we integrate at the appropriate time frame to ensure there is no customer disruption. John, do you want to add a little bit more on the integration side regarding Signature versus Flagstar?

Yes. The most important thing we've been doing from our teams in operations and IT is 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. Our main focus is to ensure that we avoid any potential customer negativity and minimize any customer impact. So we're going through that process now. That process will not impact the actual data Flagstar integration, but it is something we're working towards now to finalize and 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, I understand there's a ton of moving parts and it's still early, but can you help us just on the expense contribution from Signature?

So I'll lead and then I'm going to pass the baton back to John on the expense side. Obviously, it's early days. If you look back at what Signature was running, they were running around the mid-$800 million run rate last year. Remember, we didn't take all the businesses, and there are a lot of transactional benefits we have, which is why we structured the transaction. So, we're running at $1.3 to $1.4 billion, and we reiterated that guide on a stand-alone basis. But as we put on the Signature teams — and a lot of the private client groups are going to remain intact — that's a lot of expense that we are forecasting within our run rate. But if you start with the mid-$800 million and then you assume a transaction of this nature, since it's not a traditional M&A deal and it is a receivership-type transaction, we tend to realize more savings given the type of transaction. Historically, we've always realized between 35% to 50% savings in these kinds of deals. You'd probably look at the higher end of that range given the nature of the transaction over time, which then you can formulate a run rate for the combined company as we integrate. John, want to add what you are thinking there?

Yes. I think as Tom said, that makes a lot of sense and it's what we're working towards right now. 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 and understanding exactly what we have and the processes we're going to use to do it, especially until we get the systems converted. What we do believe, though, is if you look back at our track record, we've been 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 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 have a run rate that gets into the levels that Tom just mentioned. Another thing to bring up quickly: on our last call, we talked about trying to front-run some of the cost savings 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. From a run rate perspective, we believe we'll be able to manage 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. Lee, maybe you want to talk a little bit about on the mortgage side what we've accomplished?

Yes. Thanks, Tom. So we mentioned on the last call that we executed a big restructuring on the mortgage business. We let 700 FTEs go as we right-sized the distributed retail business so that we are just an in-branch footprint model. By in-branch footprint I mean a combination of both the Flagstar and New York Community Bank branches, so it's a bigger geography. 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 in all six channels. We hold a considerable MSR asset, which generates strong returns. We have 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 advance lending, and we're working on more aggressive deposit gathering from the mortgage ecosystem. So whether you are a big fund in the industry or an individual borrower, you can come to Flagstar and we take care of you. We look at it as a one-stop shop, and we're able to generate strong earnings through the whole 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-800s for legacy Signature expenses and you said 50%. So that would get you low $400 million kind of as the destination. And then we would on top of that add the cost saves that you've previously talked about. Is that the message we should be taking away?

I think that may be a little bit aggressive; that's the high end of the range Tom mentioned. I think it's probably a little 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. It's going to happen as you get to each quarter as we integrate and get to the benefits. So when 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. When we announced the conversion date, we expected 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 fair considerations. As we progress during the year, we'll 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 warrant I assume just the end of period is a good proxy.

Yes. The end of period is a good proxy: the 720-ish million range, that's a good proxy to use for share count going forward.

Okay. And remaining one-timers just for book value purposes?

We do have a handful coming still from both the Flagstar transaction in the short term; we probably have another $100 million to look at over the next couple of quarters.

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 Signature had something like 134 teams. Do you have a sense for how many have stayed, how many are there today?

Yes, Mark, great point. So obviously, we didn't acquire the entire institution. There were other teams that didn't come with the transaction. We estimate it's about 126 to 127 teams; I think we're around 125 now. I called that a huge success. Eric worked hard alongside me to make sure we have the retention plans in place and we're super excited about where we are. The retention process has been very strong. 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 enhances the opportunity. So, Eric and I have spent 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, in general, we are developing a lot of technology initiatives. We're really trying to get our strategy focused on being in the middle of the pack and improving; we see good developments. Signature historically has done innovative work on technology for the client. Collectively, our opportunity is even more innovative now with the talent from Signature combined with our initiatives. We've had some good wins along the way. The government business is obviously a focus of ours and it has been consistent, and we look forward to partnering with our technology partners there. We're looking at all opportunities that make sense for the bank going forward to tie into customer needs. 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, government as a service and banking as a service is about $7.5 billion, though John said it's a little lower. It's still a relatively strong number, and we're looking forward to new developments with the U.S. Treasury relationship as that gets onboarded. We're doing a lot around the digital side and automation to move from physical 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. I think the pickup of the Signature team is going to help that journey.

Last question I had for you: 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, capital build is going to be significant, as I mentioned in my prepared remarks. We were 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. Our dividend coverage ratio on a pro forma analysis improves substantially. So, we're very pleased about where we end up on a projected basis. The dividend is strong and we're very comfortable. Going forward, into these multiple transactions it becomes, in our opinion, even stronger. On capital, we think we are in a very good position to generate a lot of capital as we go into the quarters ahead. That is a focus on tangible book value creation. John, if you want to add?

When you look at our common equity Tier 1, we increased it a little bit in the quarter; it came in a little better than we anticipated. We've run it at a 9% or slightly under CET1 in the past and are comfortable at those levels, but those levels are going to start coming up. When you look at the unrealized loss on our securities portfolio and include unrealized losses for peer group analysis, we're closer to the top of the list in CET1 than the bottom. So there are a couple different ways we look at capital. Given our history from a loss perspective, we believe we can run at these levels. We're cognizant of where we are from a peer perspective and that's why this transaction is so appealing because of the capital generation it provides.

Mark, one major point: when we put the transaction together and worked 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. Then the accretion benefit is substantial. That's how we formulated our bidding process to acquire the selected assets and assume the liabilities that we focused on. That was key in our capital review for getting this deal done. 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 a $930 million 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. The $862 million we mentioned was just the 2022 annual figure. So we use that as a kickoff point. But that's right; we didn't take all of the businesses. So we think the combined run rate will be just 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?

I'll start and then turn it a bit to Reggie on the retail side. One item to keep in mind is the government-as-a-service business. Those deposits, which we've talked about on multiple calls and which have worked out for us because they're non-interest-bearing, that runoff continues on those deposits. It has performed slightly better than we originally anticipated but that runoff continues. So we will 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. A lot of the banking-as-a-service type stuff that we expected to run off with the liquidity event has already run off. So there's probably a handful of smaller items where we'll see slight runoff, but nothing material besides the government deposits that we expect to decline materially.

Okay. I did have just one more question if Reggie has any input there.

The only thing I would say is 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 about $28 billion. So again, we think we can hold deposits. We’ve been successful even through the first quarter. And so there’s no reason to think differently.

Got it. 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 geographically in Manhattan, like what percent is Midtown versus the other neighborhoods?

We'll follow up on that with more granularity. The messaging is we know our customers very well. We're comfortable with the LTV, the debt service coverage ratio, and we can get more granular on location. A lot of that business is generated from long-standing relationships and transactional growth driven by 1031 exchanges and other activity. We are not in the business of financing riskier office buildings in many cases. These metrics show conservative underwriting and low delinquencies. We can follow up with specifics on which streets or neighborhoods, but overall they are A and B type assets and we avoid 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% ROA, 16% ROTCE and 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 run rate? What will you be thinking here?

I'll take that from a high level and then pass to John. We don't have a lot of long-term forward guidance; we gave short-dated guidance. We're pleased with the Flagstar integration and the team's progress on culture and integration plans. The mortgage business is volatile, so we were proactive to right-size it post-closing to ensure profitability across interest rate environments. Our institution is in a very different place now with respect to liquidity and asset versus liability sensitivity. I can't remember ever being in a position where we can talk about asset sensitivity — it's a strong place to be, giving us tremendous optionality about where to deploy cash. Sitting on cash right now and managing cash flow while paying off higher-cost liabilities gives margin benefits. We have the opportunity to redeploy into commercial banking verticals, build out relationships, and leverage Signature's private client model and culture to bring deposits back. We see a great opportunity for future growth. This bank is no longer a traditional thrift; it's moving toward a commercial banking model, and I feel strongly that we've accelerated that transformation with the Signature and Flagstar transactions by about a decade. John?

Also remember, when we announced the Flagstar transaction back in April, the interest rate environment was totally different. So keep that in mind. On capital, we look at several metrics. Our CET1 improved in the quarter and we are comfortable running it at historic levels, but the transaction will generate capital for us and improve our position versus peers.

When we put the transaction together, we worked with regulators to ensure we solved for capital, and we structured the bid accordingly. We also think there are consolidation and efficiency opportunities, particularly in-market on the real estate side, given Signature was a major competitor in our footprint. We don't have unlimited time to make all decisions under the contract with the FDIC, but we think there's an efficiency opportunity for the combined teams.

And then just a follow-up, you did provide some guidance to expenses regarding Signature, which is helpful. I'm just wondering, from your talks and discussions with the FDIC, I think there are a couple of things with the transition service agreement. Are those still being hammered out? Anything you can share on that specifically? And have discussions on servicing the remaining loans been discussed and can you share anything there?

Yes, that process is ongoing. We're still just a little over a month from the transaction, so that process is still ongoing. We're working through exactly what loans, what deposits, what processes, other assets or liabilities we're taking and we’re going through the full pro forma analysis. That is one of the reasons why in the short-term expenses will be slightly higher than the run rate we discussed earlier. From a servicing perspective, we continue to service the loans for the FDIC and will be reimbursed for our cost of servicing those loans. Once those loans are disposed of by the receiver, there's always an opportunity to see what happens and who the 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; it takes time to finalize.

To add: this was an in-market transaction. Signature was a major competitor in the multi-CRE space in New York. So we have great consolidation opportunities to bring people together and find efficiency. Our teams are excited to dive into that. We don't have a lot of time under the FDIC contract to make decisions, but we see 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-positioned to do that. I know it's still early, but what are you hearing from their customers right now?

It's a great question. We went into this expecting more significant outflows because who knew what was going to happen immediately. But what's most important is that the team is excited and they have incentive plans to bring the money back to the bank as well as different solutions. There's a general reluctance in the marketplace to be far above uninsured balances, so we have to plan for that and be creative. The creativity under Eric's leadership and his team is going to be important. The way we've structured it and the retention and incentive compensation is aligned to deposit gathering. It's early days and the marketplace is still not fully out of the woods with respect to volatility. But the DDA stability is notable: it hasn't moved and was slightly up in April compared to closing. That speaks to payroll and operating accounts tied to businesses. Our push is to convince customers that banking is safe, that the situation in early March was idiosyncratic, and to handhold customers back to confidence in the system. We're a regional bank that handholds clients; now with Flagstar and Signature together, it's all about service and culture. We're excited about the opportunity to bring customers back and to deliver white-glove service.

Let me follow up. You basically doubled the size of the company in a few quarters. If we learned anything from SVB, it's that rapid growth can outgrow capabilities and risk management. I'm sure your risk management is robust or regulators wouldn't have approved this, but you also said you accelerated the transformation by 10 years. Talk about the risk management infrastructure you have today. How much do you have to now invest in people, systems, etc.? How should we think about that cost?

Steve, this goes back to legacy CCAR and SIFI frameworks. We started a journey years ago to build up our regulatory and risk infrastructure with the expectation of being prepared for these scales. We've constantly reinvested over time to maintain strong risk management. We're committed to maintaining the highest standards. We'll add people from all three organizations and externally as needed. This isn't new to us; it's something we've been working on for quite some time. We're prepared to make the investments necessary to be a safe and sound organization. John?

When you look at our capital stress testing and liquidity stress frameworks built in that time frame, they will serve us extremely well as we integrate both Flagstar and Signature onto those models. Our teams built those with the expectation of the $100 billion threshold we're at now. So there's always going to be incremental additions but we don't think it'll be a material add given the structure and backbone we already have in place.

And on operating leverage: we've been gearing up for this scale. We've made investments and we continue to evolve. The most important aspect going forward is handling risk. Given the nature of the bank and our new products, we're committed to high standards. When I say accelerating 10 years, it's about transforming from a thrift mentality to a commercial bank platform with dedicated relationship-banking capabilities. That transformation is underway.

Got it. That's helpful. One final one, maybe for John: you said you expect margin expansion through the rest of this year. What rate assumptions are you using? More importantly, given the new balance sheet mix, which Fed path is better for your margin: cuts in the second half or hikes and then a hold?

In a short period we've gone from stand-alone NYCB being liability-sensitive to layering Flagstar and now Signature which makes us moderately asset-sensitive. We have an asset-sensitive balance sheet with lots of flexibility given the cash on the balance sheet. So yes, we would benefit from higher rates now. In our modeling into the next quarter, Bloomberg forecast shows another hike and then pretty flat to the end of the year with maybe one cut; the main drivers for margin pickup are the borrowings coming due in the second quarter that we'll pay down and the non-interest-bearing deposit stability Tom mentioned.

Big picture: we're in a unique position. We have a versatile balance sheet and tremendous optionality. Sitting on cash while paying down higher cost liabilities gives us flexibility to react to policy and redeploy into higher-yielding assets as needed. That optionality will allow us to manage margin well.

Got it. Thanks for taking my questions.

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. I wanted to go back to the Signature deposits being down less than expected: 9% versus expectations for 20%. From here, how much more runoff, if any, do you expect and over what time frame?

From a straight modeling perspective, we haven't changed our initial model which forecasted a 20% runoff. We're cautiously optimistic that we won't see anywhere near that runoff and potentially could see some growth once things stabilize, but we haven’t changed the initial modeling assumption of 20% for forecasting purposes.

Okay. And then for the quarter, what was accretable yield or prepayment penalty income? And looking forward with Signature, what is the expectation for accretable yield through the end of the year?

Prepayment penalty income for the quarter was about $1.6 million, a very small number. On the accretable yield perspective with Signature, 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- to five-year average accretion; we are finalizing purchase accounting items but we think it's around that $100 million annual range. For the quarter, the accretion from Signature was very small, in the $4 million to $5 million range. I'll get you the Flagstar accretion number separately.

Okay. Could you comment a little on the business today being more diversified than historically: give us a sense for new loan yields today and what roll-on versus roll-off dynamics are?

Given the market conditions in commercial real estate and multifamily, our spreads are around 300 basis points off the five-year treasury with a minimum coupon of 6.5% on many products. You're not seeing much fixed-rate product being done in general. We've introduced synthetic opportunities to provide customers choice — structuring a transaction as fixed-to-floating using swaps and floating-rate instruments. As a result, we've repriced about $2 billion of our multifamily business to be tied to SOFR plus 250, which came from roughly 3.5% coupons and is now yielding around 7.5% as customers decide their path. That has been a positive contributor to the balance sheet and helped make us more asset-sensitive. We're also introducing a capital markets business to generate fee income and help structure transactions. Most other products are floating-rate, which benefits margins. Many banks are in a similar spread environment, roughly 2.75% to 3.25% over the five-year treasury as an offering. There's less transaction volume, but when transactions happen, financing costs are very different than a year ago, which can be an advantage if customers maintain coverage ratios.

All eyes are on office CRE these days. As loans reset, particularly 2018 vintages, how have debt service coverage ratios reacted to higher rates? Have you had to lower rates or extend amortization periods to keep borrowers going?

Given our low-leverage underwriting and historically lower LTVs, we haven't had to broadly restructure loans. Customers are choosing options like SOFR plus 250 versus other more punitive options. Refinance activity is rare. We're seeing customers take options that pick up margin for us; it's been consistent with no delinquencies or late pays. Growth on multifamily has been slow and relatively flat, but we have a sizable amount coming due over the next period and right now roughly 75% of customers are taking options, which is a nice pickup for margin.

Understood. I appreciate it. I'll leave it there.

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 clarifications. You noted you will continue to use the excess cash to pay down borrowings. Does the pace of that accelerate beyond the second quarter? Or are you doing a majority of what you intend to do in the second quarter itself?

We're going to continue to look at market conditions, but right now we expect to pay down borrowings as they come due. Most of our borrowings come due in the second quarter, with smaller pieces in the third and fourth. So the plan is to pay down borrowings throughout the year depending on liquidity, loan growth, and market conditions. One item to keep in mind: with our securities portfolio being relatively low, we'll hold a bit more cash on the balance sheet as a placeholder for that piece as well. But the current plan is to continue to pay down borrowings and look to pay down higher-cost wholesale deposits and brokered CDs as they come due.

When I took over as CEO, my strategy was to be less dependent on wholesale funding and move toward traditional commercial bank funding as we transition from a thrift. The DDA growth we've seen — 27% of total deposits now — is acceleration and positions us better for returns. We're proud to have a better funding mix.

So is it fair to say that despite the high asset sensitivity from the deals, if the Fed starts to cut rates gradually next year, you should still see some benefit to NIM from lower cost of funding?

I'd say we are in a very interesting position. Historically, NYCB was liability-centric, so this is a meaningful shift. We have versatility and optionality because of the cash position, and we can make smoother transitions to rebalance the balance sheet when policy changes. If rates fall, we expect to have flexibility to benefit from lower funding costs as appropriate.

Got it. And just the last question: given all the moving pieces in the quarter, do you have the spot deposit costs as of March 31 or as of April?

Interest-bearing deposit expense was $260 million.

Great. Thank you.

That will be our last question. I would now like to turn the call back over 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.