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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
EXECUTIVE SUMMARY
On March 20, 2023, the Bank assumed a substantial amount of the deposits and certain identified liabilities and acquired certain assets and lines of business of Signature Bridge Bank, from the FDIC, as receiver for Signature Bridge Bank (the “Signature Transaction”), pursuant to the terms of the Purchase and Assumption Agreement - All Deposits, dated March 20, 2023, among the FDIC, as receiver of Signature Bridge Bank, the FDIC and the Bank (the “Signature Purchase Agreement”). See Note 3 “Business Combinations” to the Consolidated Financial Statements for further information regarding the Signature Transaction.
For the three months ended March 31, 2023, net income was $2.0 billion as compared to $172 million for the three months ended December 31, 2022. Net income available to common stockholders for the three months ended March 31, 2023 was also $2.0 billion, compared to $164 million for the three months ended December 31, 2022. Diluted EPS totaled $2.87 for the three months ended March 31, 2023 compared to $0.30 for the three months ended December 31, 2022.
First quarter 2023 net income and diluted EPS were impacted by a bargain purchase gain of $2.0 billion arising from the purchase and assumption of certain assets and liabilities in the Signature Bridge Bank transaction (the “Signature Transaction”). We believe the Signature Transaction strengthens our deposit base, lowers the loan-to-deposit ratio, adds liquidity and provides the opportunity to pay down wholesale funding. It also further diversifies our loan portfolio away from CRE loans and more toward commercial loans and expands our net interest margin. We believe the Signature Transaction will be accretive to both earnings per share and to tangible book value per share while maintaining strong capital ratios.
In addition to the bargain purchase gain, our first quarter 2023 results were impacted by the following items:
•Merger-related and restructuring expenses of $67 million, comprised of $40 million for the Flagstar acquisition and $27 million for the Signature Transaction;
•An initial provision for credit losses totaling $132 million for the loans acquired from Signature; and
•First full quarter of Flagstar Bank activity to our balance sheet and overall financial results.
Loan Portfolio
At March 31, 2023, total C&I loans were $23.4 billion compared to $12.3 billion at December 31, 2022. The majority of the increase is attributable to the $10 billion of C&I loans acquired in the Signature Transaction. In addition, organic C&I loan growth totaled $1.1 billion on a linked-quarter basis, largely the result of growth in specialty finance lending and the mortgage warehouse business.
The multi-family loan portfolio was $38.0 billion at March 31, 2023, down slightly compared to $38.1 billion at December 31, 2022. The slight decline during the current first quarter was due to a combination of higher interest rates and our loan diversification strategy. At March 31, 2023, multi-family loans represented 46 percent of total loans, compared to 55 percent at December 31, 2022, further reducing our concentration in this asset class.
Commercial loans (commercial real estate and acquisition, development and construction) increased $2.1 billion at March 31, 2023 to $12.7 billion compared to $10.5 billion at December 31, 2022. Of the linked-quarter increase, approximately $1.9 billion was due to the Signature Transaction and $230 million was due to organic growth.
One-to-four family residential loans totaled $5.9 billion at March 31, 2023, representing seven percent of total loans compared to $5.8 billion or eight percent of total loans at December 31, 2022. Other loans totaled $2.6 billion at March 31, 2023 compared to $2.3 billion at December 31, 2022. The other loan portfolio consists mostly of consumer loans.
Loans held-for-sale at March 31, 2023 totaled $1.3 billion, up from $1.1 billion at December 31, 2022. Loans related to the Signature Transaction added $360 million to this growth.
The loans held-for-investment acquired in the Signature transaction are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Principal Balance | | Carrying Value | | Weighted Average Interest Rate | | Weighted Average Maturity |
| C&I | $ | 10,608 | | | $ | 10,131 | | | 5.76 | % | | 3.85 |
| CRE | 2,173 | | | 1,915 | | | 5.58 | % | | 6.06 |
| Total | $ | 12,781 | | | $ | 12,046 | | | 5.73 | % | | 4.23 |
Of the loans acquired, approximately $28 million were over 90 days past due or nonaccrual.
Deposit Base
Deposits at March 31, 2023 totaled $84.8 billion up $26.1 billion compared to $58.7 billion at December 31, 2022. The Signature Transaction, contributed $31.5 billion of deposits as of quarter-end. Our deposits remained stable except for declines of $5.4 billion due primarily to anticipated spend down in the prepaid debit card program related to the California Middle-Class Tax Relief Program, the reserve account withdrawal from Circle Internet Financial ("Circle"), and seasonality in the mortgage escrow deposits business.
Of the $5.4 billion decline described above, Banking as a Service (“BaaS”) deposits declined $3.7 billion or 32 percent to $7.8 billion at March 31, 2023 compared to $11.5 billion at December 31, 2022. The decrease is attributable to the aforementioned decline in the California Middle-Class Tax Relief Program of approximately $1.8 billion to $1.3 billion at March 31, 2023 and a $2.8 billion decline in the Circle reserve account. At March 31, 2023, the Company no longer has a deposit relationship with Circle and does not have any stablecoin or cryptocurrency-related deposits.
Our deposit base includes $29.2 billion of uninsured deposits at March 31, 2023 a net increase of $9.6 billion as compared to December 31, 2022 due to the Signature acquisition. This represents 34.4 percent of our total deposits. We also have $42 billion (or approximately 1.4 times the uninsured deposits) of total ready liquidity (cash and cash equivalents, unpledged securities, and Fed Funds and FHLB borrowing capacity) reflects a significant amount of liquid assets and sufficient sources of readily-available funds that can be accessed to meet its obligations and unanticipated needs as they arise.
Net Interest Income
For the three months ended March 31, 2023, net interest income totaled $555 million, up $176 million or 46 percent compared to the three months ended December 31, 2022. The current quarter’s results include a full-quarter’s contribution from the Flagstar acquisition along with a partial month related to the Signature Transaction, compared to only a one-month Flagstar contribution in the fourth quarter of last year.
For the three months ended March 31, 2023, the NIM was 2.60 percent up 32 basis points compared to the fourth quarter of last year. The linked-quarter improvement was due to both a higher level of average earnings assets owing to Flagstar being included for the entire quarter compared to only one month during the fourth quarter of last year, along with significantly higher yields on those assets, stemming primarily from the Flagstar acquisition. This was partially offset by a higher cost of funds and higher average interest-bearing liabilities. Average interest-earnings assets increased $19.9 billion or 30 percent to $86.7 billion, while the average yield rose 73 basis points to 4.80 percent. Average interest-bearing liabilities grew $13.8 billion or 24 percent to $70.2 billion, while the average cost of funds increased 65 basis points to 2.77 percent.
Asset Quality
Our asset quality metrics remained strong during the first quarter of 2023 with increases in NPLs and NPAs attributable to the Signature Transaction. Total NPLs at March 31, 2023 were $161 million, up $20 million or 14 percent compared to December 31, 2022. Total NPAs were $174 million at March 31, 2023, up $21 million or 14 percent compared to December 31, 2022. Repossessed assets of $13 million were relatively unchanged compared to the $12 million recorded in the prior quarter.
At March 31, 2023, NPAs to total assets equaled 14 basis points compared to 17 basis points at December 31, 2022 while NPLs to total loans equaled 20 basis points compared to 20 basis points at December 31, 2022.
Recent Events
Declaration of Dividend on Common Shares
On April 25, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.17 per share on the Company's common stock. The dividend is payable on May 18, 2023 to common stockholders of record as of May 8, 2023.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is our primary source of income. Its level is a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by various external factors, including the local economy, competition for loans and deposits, the monetary policy of the FOMC, and market interest rates.
The cost of our deposits and borrowed funds is largely based on short-term rates of interest, the level of which is partially impacted by the actions of the FOMC.
While the target federal funds rate generally impacts the cost of our short-term borrowings and deposits, the yields on our held-for-investment loans and other interest-earning assets are not as sensitive to intermediate-term market interest rates.
Another factor that impacts the yields on our interest-earning assets—and our net interest income—is the income generated by our multi-family and CRE loans and securities when they prepay. Since prepayment income is recorded as interest income, an increase or decrease in its level will also be reflected in the average yields (as applicable) on our loans, securities, and interest-earning assets, and therefore in our net interest income, our net interest rate spread, and our net interest margin.
It should be noted that the level of prepayment income on loans recorded in any given period depends on the volume of loans that refinance or prepay during that time. Such activity is largely dependent on such external factors as current market conditions, including real estate values, and the perceived or actual direction of market interest rates. This impact is most prevalent in our multi-family portfolio. In addition, while a decline in market interest rates may trigger an increase in refinancing and, therefore, prepayment income, so too may an increase in market interest rates. It is not unusual for borrowers to lock in lower interest rates when they expect, or see, that market interest rates are rising rather than risk refinancing later at a still higher interest rate. The impact of prepayments on the current quarter was minimal.
Comparison to Prior Quarter
Net interest income for the three months ended March 31, 2023 was $555 million, up $176 million or 46 percent compared to the three months ended December 31, 2022. This quarter’s results include a full-quarter’s contribution from the Flagstar acquisition compared to only a one-month contribution in the fourth quarter of last year. In addition, the current quarter includes a partial-month contribution from the Signature Transaction.
•Interest income on mortgage and other loans, net, totaled $867 million, up $278 million compared to fourth quarter of last year. Interest income also increased across all other categories with securities and income on money market investments up $75 million. The income on money market investments was primarily due to the higher average balances held at the Federal Reserve.
•Interest income on mortgages and other loans, net was driven by a $14.8 billion or 26 percent increase in average loan balances to $70.8 billion. This is due to organic loan growth throughout the quarter and the December acquisition of Flagstar and the March Signature Transaction. Additionally, we had a 72 basis points increase in the average loan yield to 4.92 percent from 4.20 percent in the prior quarter due primarily to the rising interest rate environment.
•Interest income on securities was positively impacted by a 60 basis points increase in the average yield to 3.86% from 3.26% along with a $1.7 billion or 18.17 percent increase in the average securities balance to $10.9 billion.
•Interest-earning cash and cash equivalents were positively impacted by a 72 basis points increase in the average yield to 4.96 percent driven by higher short-term market rates, coupled with an increase in the average balance of $3.3 billion.
•Interest expense on average interest-bearing deposits increased $83 million to $283 million during the three months ended March 31, 2023, driven by a 47 basis point increase in the average cost of interest-bearing deposits due to rising interest rates and competition for deposits. Additionally, our average interest earning deposits grew $7.0 billion, or 16.99 percent, to $47.9 billion. The balance growth reflects the December acquisition of Flagstar and the March Signature Transaction.
•Interest expense on borrowed funds increased $94 million or 92 percent to $196 million driven by a 94-basis point increase in rates in addition to a $6.8 billion or 44 percent increase in the average balance to $22.3 billion, partially due to our shift to lower cost deposits.
Comparison to Prior Year Quarter
For the three months ended March 31, 2023, net interest income totaled $555 million, up $223 million or 67 percent compared to the three months ended March 31, 2022. This quarter’s results include a full-quarter’s contribution from the Flagstar acquisition and a partial-month contribution from the Signature Transaction which were not part of the Company in the first quarter of last year.
•Interest income on mortgages and other loans, net was driven by a $25 billion or 55 percent increase in average loan balances to $70.8 billion. This is due to organic loan growth and the December acquisition of Flagstar and the March Signature Transaction. Additionally, we had a 149 basis point increase in the average loan yield to 4.92 percent in the current year quarter due primarily to the rising interest rate environment.
•Interest income on securities was positively impacted by a 174 basis point increase in the average yield to 3.86 percent from 2.12 percent along with a $4.3 billion or 66 percent increase in the average securities balance to $10.9 billion.
•Interest-earning cash and cash equivalents reflected a 475 basis point increase in the average yield to 4.96 percent driven by higher short-term market rates and an increase in the average balance of $2.3 billion.
•Interest expense on average interest-bearing deposits increased $256 million to $283 million during the three months ended March 31, 2023, driven by a 205 basis point increase in the average cost of interest-bearing deposits due to rising interest rates. Average interest earning deposits grew $16.8 billion, or 54.22 percent, to $48 billion. The balance growth primarily reflects the December acquisition of Flagstar and the March Signature Transaction.
•Interest expense on borrowed funds increased $126 million or 180 percent to $196 million driven by a 184-basis point increase in rates in addition to a $5.8 billion or 34.79 percent increase in the average balance to $22.3 billion.
Net Interest Margin
The following table sets forth certain information regarding our average balance sheet for the periods indicated, including the average yields on our interest-earning assets and the average costs of our interest-bearing liabilities. Average yields are calculated by dividing the interest income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the interest expense produced by the average balance of interest-bearing liabilities. The average balances for the periods are derived from average balances that are calculated daily. The average yields and costs include fees, as well as premiums and discounts (including mark-to-market adjustments from acquisitions), that are considered adjustments to such average yields and costs.
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| Three Months Ended, |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| (dollars in millions) | Average Balance | Interest | Average Yield/Cost | | Average Balance | Interest | Average Yield/Cost | | Average Balance | Interest | Average Yield/Cost |
| ASSETS: | | | | | | | | | | | |
| Interest-earning assets: | | | | | | | | | | | |
Mortgage and other loans and leases , net (1) | $ | 70,774 | | $ | 867 | | 4.92 | % | | $ | 55,957 | | $ | 589 | | 4.20 | % | | $ | 45,807 | | $ | 393 | | 3.43 | % |
Securities (2) (3) | 10,850 | 104 | 3.86 | % | | 9,182 | | 75 | | 3.26 | % | | 6,538 | | 34 | | 2.12 | % |
| Reverse repurchase agreements | 785 | 11 | 5.53 | % | | 676 | | 8 | | 4.78 | % | | 292 | | 1 | | 1.12 | % |
| Interest-earning cash and cash equivalents | 4,257 | 52 | 4.96 | % | | 980 | | 9 | | 4.24 | % | | 1,924 | | 1 | | 0.21 | % |
| Total interest-earning assets | $ | 86,666 | | $ | 1,034 | | 4.80 | % | | $ | 66,795 | | $ | 681 | | 4.07 | % | | $ | 54,561 | | $ | 429 | | 3.15 | % |
| Non-interest-earning assets | 7,864 | | | | 5,537 | | | | | 5,333 | | | |
| Total assets | $ | 94,530 | | | | | $ | 72,332 | | | | | $ | 59,894 | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY: | | | | | | | | | | | |
| Interest-bearing deposits: | | | | | | | | | | | |
| Interest-bearing checking and money market accounts | $ | 23,098 | | $ | 157 | | 2.76 | % | | $ | 20,864 | | $ | 122 | | 2.31 | % | | $ | 13,784 | | $ | 8 | | 0.24 | % |
| Savings accounts | 11,093 | 39 | 1.44 | % | | 9,605 | | 27 | | 1.10 | % | | 9,208 | | 8 | | 0.35 | % |
| Certificates of deposit | 13,712 | 87 | 2.57 | % | | 10,478 | | 51 | | 1.94 | % | | 8,070 | | 11 | | 0.53 | % |
| Total interest-bearing deposits | $ | 47,903 | | $ | 283 | | 2.40 | % | | $ | 40,947 | | $ | 200 | | 1.93 | % | | $ | 31,062 | | $ | 27 | | 0.35 | % |
| Short term borrowed funds | 9,036 | 103 | 4.61 | % | | 3,842 | | 39 | | 4.07 | % | | 3,212 | | 3 | | 0.39 | % |
| Other borrowed funds | 13,290 | 93 | 2.85 | % | | 11,683 | | 63 | | 2.16 | % | | 13,351 | | 67 | | 2.04 | % |
| Total Borrowed funds | $ | 22,326 | | $ | 196 | | 3.56 | % | | $ | 15,525 | | $ | 102 | | 2.62 | % | | $ | 16,563 | | $ | 70 | | 1.72 | % |
| Total interest-bearing liabilities | $ | 70,229 | | $ | 479 | | 2.77 | % | | $ | 56,472 | | $ | 302 | | 2.12 | % | | $ | 47,625 | | $ | 97 | | 0.82 | % |
| Non-interest-bearing deposits | 13,189 | | | | 7,474 | | | | | 4,397 | | | |
| Other liabilities | 1,939 | | | | 897 | | | | | 826 | | | |
| Total liabilities | $ | 85,357 | | | | | $ | 64,843 | | | | | $ | 52,848 | | | |
| Stockholders’ equity | 9,173 | | | | 7,489 | | | | | 7,046 | | | |
| Total liabilities and stockholders’ equity | $ | 94,530 | | | | | $ | 72,332 | | | | | $ | 59,894 | | | |
| Net interest income/interest rate spread | | $ | 555 | | 2.03 | % | | | $ | 379 | | 1.95 | % | | | $ | 332 | | 2.33 | % |
| Net interest margin | | | 2.60 | % | | | | 2.28 | % | | | | 2.43 | % |
| Ratio of interest-earning assets to interest-bearing liabilities | | | 1.23 | % | | | | 1.18 | | | | | 1.15 | % |
(1)Amounts are net of net deferred loan origination costs/(fees) and the allowances for loan losses and includes loans held for sale and non-performing loans.
(2)Amounts are at amortized cost.
(3)Includes FHLB stock and FRB stock.
The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) the changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) the changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended, | | Three Months Ended, |
| | March 31, 2023 compared to December 31, 2022
Increase/(Decrease) Due to: | | March 31, 2023 compared to March 31, 2022
Increase/(Decrease) Due to: |
| (in millions) | | Volume | Rate | Net | | Volume | Rate | Net |
| INTEREST-EARNING ASSETS: | | | | | | | | |
| Mortgage and other loans and leases, net | | $ | 96 | | $ | 182 | | $ | 278 | | | $ | 167 | | $ | 307 | | $ | 474 | |
| Securities | | 13 | | 16 | | 29 | | | 28 | | 42 | | 70 | |
| Reverse repurchase agreements | | 1 | | 2 | | 3 | | | 3 | | 7 | | 10 | |
| Interest Earning Cash & Cash Equivalent | | 2 | | 41 | | 43 | | | 22 | | 29 | | 51 | |
| Total interest-earnings assets | | $ | 112 | | $ | 241 | | $ | 353 | | | $ | 220 | | $ | 385 | | $ | 605 | |
| INTEREST-BEARING LIABILITIES: | | | | | | | | |
| Interest-bearing checking and money market accounts | | $ | 20 | | $ | 15 | | $ | 35 | | | $ | 85 | | $ | 64 | | $ | 149 | |
| Savings accounts | | 7 | | 5 | | 12 | | | 24 | | 7 | | 31 | |
| Certificates of deposit | | 15 | | 21 | | 36 | | | 40 | | 36 | | 76 | |
| Short Term Borrowed Funds | | 4 | | 60 | | 64 | | | 65 | | 35 | | 100 | |
| Other Borrowed Funds | | 11 | | 19 | | 30 | | | 27 | | (1) | | 26 | |
| Total interest-bearing liabilities | | 57 | | 120 | | 177 | | | 241 | | 141 | | 382 | |
| Change in net interest income | | $ | 55 | | $ | 121 | | $ | 176 | | | $ | (21) | | $ | 244 | | $ | 223 | |
Comparison to Prior Quarter
The Company's net interest margin for the three months ended March 31, 2023, was 2.60 percent up 32 basis points compared to the three months ended December 31, 2022. The increase was driven by both a higher level of average earnings assets due to Flagstar being included for the entire quarter compared to only one month during the fourth quarter of last year, along with significantly higher yields on those assets. This was partially offset by a higher cost of funds and higher average interest-bearing liabilities.
Average interest-earning assets increased $19.9 billion or 30 percent to $86.7 billion, while the average yield rose 73 basis points to 4.80 percent. Average interest-bearing liabilities grew $13.8 billion or 24 percent to $70.2 billion, while the average cost of funds increased 65 basis points to 2.77 percent.
Comparison to Prior Year Quarter
The Company's net interest margin for the three months ended March 31, 2023, was 2.60 percent compared to 2.43 percent for the three months ended March 31, 2022. The increase was driven by both a higher level of average earnings assets due to Flagstar being included for the first quarter of 2023, along with significantly higher yields on those assets, stemming primarily from the Flagstar acquisition. This was partially offset by a higher cost of funds and higher average interest-bearing liabilities.
Average interest-earnings assets increased $32.1 billion or 59 percent to $86.7 billion, while the average yield increased 165 basis points to 4.80 percent. Average interest-bearing liabilities increased $22.6 billion or 47 percent to $70.2 billion, while the average cost of funds increased 195 basis points to 2.77 percent.
Provision (Benefit) for Credit Losses
Comparison to Prior Quarter
The three months ended March 31, 2023, provision for credit losses totaled $170 million compared to a $124 million provision for the three months ended December 31, 2022. The first quarter provision for credit losses included a $132 million initial provision for credit losses related to the initial ACL measurement of non-PCD acquired loans from the Signature Transaction compared to $117 million during the fourth quarter of last year related to the Flagstar acquisition. The first quarter 2023, also includes a $20 million provision for losses on Signature debt securities held by the Company and $18 million primarily related to higher loan volume.
Comparison to Prior Year Quarter
The three months ended March 31, 2023 provision for credit losses was $170 million compared to a $2 million benefit for credit losses for the three months ended March 31, 2022.
For additional information about our methodologies for recording recoveries of, and provisions for, loan losses, please refer to Critical Accounting Policies in our Form 10-K for the year ended December 31, 2022, which is available on our website, under the Investor Relations section, or on the website of the Securities and Exchange Commission, at sec.gov.
Non-Interest Income
We generate non-interest income through a variety of sources, including—among others—fee income (in the form of retail deposit fees and charges on loans); income from our investment in BOLI; net return on our MSR asset; net gain on loan sales; and “other” sources, including the revenues produced through the sale of third-party investment products and loan subservicing.
The following table summarizes our non-interest income for the respective periods:
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| | Three Months Ended, |
| (in millions) | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| Bargain purchase gain | | $ | 2,001 | | | $ | 159 | | | $ | — | |
| Fee income | | 27 | | 10 | | 6 |
| Net return on mortgage servicing rights | | 22 | | 6 | | — |
| Gain on loan sales | | 20 | | 5 | | — |
| Other | | 11 | | 7 | | 2 |
| BOLI income | | 10 | | 8 | | 7 |
| Loan administration income | | 7 | | 3 | | — |
| Net (loss) gain on securities | | — | | — | | (1) |
| Total non-interest income | | $ | 2,098 | | | $ | 198 | | | $ | 14 | |
Comparison to Prior Quarter
For the three months ended March 31, 2023, non-interest income totaled $2.1 billion, which includes a bargain purchase gain of $2.0 billion related to the Signature Transaction, as compared $159 million bargain purchase gain recognized in the fourth quarter of 2022 in connection with the Flagstar acquisition.
First quarter 2023 non-interest income includes a gain on loan sales of $20 million compared to $5 million during the fourth quarter of last year, with a gain on sale margin of 76 basis points compared to 56 basis points last quarter. The net return on mortgage servicing rights was $22 million or 8.5% for the first quarter compared to $6 million or 6.80% for the fourth quarter of last year. Net loan administration income totaled $7 million for the three months ended March 31, 2023 compared to $3 million for the three months ended December 31, 2022.
Comparison to Prior Year Quarter
Noninterest income increased $2.1 billion for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to the bargain purchase gain of $2.0 billion related to the Signature Transaction. Increases in non-interest income were driven by the inclusion of a full-quarter’s contribution from the Flagstar acquisition including a $21 million increase in fee income, net return on mortgage servicing rights of $22 million, and gain on loan sales of $20 million..
Non-Interest Expense
Comparison to Prior Quarter
For the three months ended March 31, 2023, non-interest expenses totaled $476 million, up $207 million for the quarter ended December 31, 2022. Total operating expenses for the three months ended March 31, 2023 were $392 million, up $188 million compared to $204 million for the three months ended December 31, 2022. For both items, first-quarter 2023 includes a full quarter of Flagstar expenses compared to only one month during fourth-quarter 2022.
Comparison to Prior Year Quarter
Noninterest expense increased $335 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Excluding merger-related and restructuring expenses and intangible amortization expense, total operating expenses for the three months ended March 31, 2023 were up $258 million compared to the three months ended March 31, 2023. Both increases were primarily due the inclusion of Flagstar activity.
Income Tax Expense
Comparison to Prior Quarter
For the three months ended March 31, 2023, the provision for income taxes was $1 million compared $12 million for the three months ended December 31, 2022. Income tax expense for both the current quarter and the fourth quarter of last year was impacted the Signature Transaction and Flagstar acquisition, respectively.
Comparison to Prior Year Quarter
For the three months ended March 31, 2023, the provision for income taxes was $1 million, compared to $52 million for the three months ended March 31, 2022. Income tax expense for the current quarter was impacted by the Signature Transaction.
FINANCIAL CONDITION
Balance Sheet Summary
At March 31, 2023 total assets were $123.7 billion compared to $90.1 billion at December 31, 2022 and $61.0 billion at March 31, 2022. The linked-quarter increase was primarily driven by the Signature Transaction and organic loan growth. The year-over-year increase was due to three factors: organic loan growth, the Flagstar acquisition which closed December 1, 2022, and the Signature Transaction, which closed on March 20, 2023.
The Company acquired approximately $25 billion of cash, approximately $12 billion, of loans, net of purchase accounting adjustments ("PAA"), $34 billion of deposits, net of PAA, and $3 billion of other liabilities related to the Signature Transaction.
Total loans and leases held for investment were $82.5 billion at March 31, 2023 compared to $69.0 billion at December 31, 2022 and $46.8 billion at March 31, 2022. The increase was driven by the aforementioned loans acquired from the Signature Transaction and $1.5 billion of organic loan growth.
The securities portfolio totaled $7.6 billion at March 31, 2023, compared to $9.1 billion at December 31, 2022 and $5.6 billion at March 31, 2022. During the month of March 2023, the Company sold approximately $1.2 billion of mostly U.S. Treasuries and reinvested the proceeds into cash. As of March 31, 2023, the Company has no held-to-maturity securities portfolio and all of the Company’s securities were designated as “Available-for-Sale”, unchanged from December 31, 2022.
Total deposits at March 31, 2023 were $84.8 billion compared to $58.7 billion at December 31, 2022 and $38.0 billion at March 31, 2022. The sequential quarter increase was driven by the deposits acquired from the Signature Transaction and the annual increase includes the Flagstar acquisition and Signature Transaction.
Wholesale borrowings at March 31, 2023 were $20.4 billion compared to $20.3 billion at December 31, 2022 and $14.7 billion at March 31, 2022.
Loans held-for-investment
The following table summarizes the composition of our loan portfolio:
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (dollars in millions) | Amount | Percent of Loans Held for Investment | | Amount | Percent of Loans Held for Investment |
| Mortgage Loans: | | | | | |
| Multi-family | $38,004 | 46.0 | % | | $ | 38,130 | | 55.3 | % |
| Commercial real estate | 10,464 | 12.7 | % | | 8,526 | 12.4 | % |
| One-to-four family first mortgage | 5,934 | 7.2 | % | | 5,821 | 8.4 | % |
| Acquisition, development, and construction | 2,203 | 2.7 | % | | 1,996 | 2.9 | % |
| Total mortgage loans | $ | 56,605 | | 68.6 | % | | $ | 54,473 | | 78.9 | % |
| Other Loans: | | | | | |
| Commercial and industrial | $ | 23,357 | | 28.3 | % | | $ | 12,276 | | 17.8 | % |
| Other loans | 2,585 | 3.1 | % | | 2,252 | 3.3 | % |
| Total other loans held for investment | $ | 25,942 | | 31.4 | % | | $ | 14,528 | | 21.1 | % |
| Total loans and leases held for investment | $ | 82,547 | | 100.0 | % | | $ | 69,001 | | 100.0 | % |
| Allowance for credit losses on loans and leases | (550) | | | (393) | |
| Total loans and leases held for investment, net | $ | 81,997 | | | | $ | 68,608 | | |
| Loans held for sale, at fair value | 1,305 | | | 1,115 | |
| Total loans and leases, net | $ | 83,302 | | | | $ | 69,723 | | |
The following table summarizes our production of loans held for investment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| (dollars in millions) | Amount | Percent of Total | | Amount | Percent of Total | | Amount | Percent of Total |
| Mortgage Loan Originated for Investment: | | | | | | | | |
| Multi-family | $ | 340 | | 10.4 | % | | $ | 1,322 | | 29.4 | % | | $ | 2,410 | | 68.2 | % |
| Commercial real estate | 309 | 9.4 | % | | 348 | 7.7 | % | | 281 | 7.9 | % |
| One-to-four family first mortgage | 274 | 8.4 | % | | 171 | 3.8 | % | | 62 | 1.8 | % |
| Acquisition, development, and construction | 185 | 5.6 | % | | 67 | 1.5 | % | | 40 | 1.1 | % |
| Total mortgage loans originated for investment | $ | 1,108 | | 33.8 | % | | $ | 1,908 | | 42.4 | % | | $ | 2,793 | | 79.0 | % |
| Other Loans Originated for Investment: | | | | | | | | |
| Specialty finance | $ | 1,335 | | 40.7 | % | | $ | 1,926 | | 42.8 | % | | $ | 638 | | 18.0 | % |
| Commercial and industrial | 497 | 15.2 | % | | 583 | 13.0 | % | | 102 | 2.9 | % |
| Other | 338 | 10.3 | % | | 78 | 1.7 | % | | 2 | 0.1 | % |
| Total other loans originated for investment | $ | 2,170 | | 66.2 | % | | $ | 2,587 | | 57.6 | % | | $ | 742 | | 21.0 | % |
| Total loans originated for investment | $ | 3,278 | | 100.0 | % | | $ | 4,495 | | 100.0 | % | | $ | 3,535 | | 100.0 | % |
Multi-Family Loans
The multi-family loans we produce are primarily secured by non-luxury residential apartment buildings in New York City that feature rent-regulated units and below-market rents.
The multi-family loan portfolio was $38.0 billion at March 31, 2023, down slightly compared to $38.1 billion at December 31, 2022. The slight decline during the current first quarter was due to a combination of higher interest rates and our loan diversification strategy.
The majority of our multi-family loans were secured by rental apartment buildings.
At March 31, 2023, $22 billion or 58 percent of the Company’s total multi-family loan portfolio is secured by properties in New York State and, therefore, are subject to the new rent regulation laws. The weighted average LTV of the NYS rent regulated multi-family portfolio was 57.1 percent as of March 31, 2023, compared to a weighted average LTV of 60.5 percent for the multi-family loan portfolio at December 31, 2022.
In addition to underwriting multi-family loans on the basis of the buildings’ income and condition, we consider the borrowers’ credit history, profitability, and building management expertise. Borrowers are required to present evidence of their ability to repay the loan from the buildings’ current rent rolls, their financial statements, and related documents.
While a percentage of our multi-family loans are ten-year fixed rate credits, the vast majority of our multi-family loans feature a term of ten or twelve years, with a fixed rate of interest for the first five or seven years of the loan, and an alternative rate of interest in years six through ten or eight through twelve. The rate charged in the first five or seven years is generally based on intermediate-term interest rates plus a spread.
During the remaining years, the loan resets to an annually adjustable rate that is indexed to CME Term SOFR , plus a spread. Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the FHLB-NY, plus a spread. The fixed-rate option also requires the payment of one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five-or seven-year term. As the rent roll increases, the typical property owner seeks to refinance the mortgage, and generally does so before the loan reprices in year six or eight.
Multi-family loans that refinance within the first five or seven years are typically subject to an established prepayment penalty schedule. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed-rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve. For example, a ten-year multi-family loan that prepays in year three would generally be expected to pay a prepayment penalty equal to three percentage points of the remaining principal balance. A twelve-year multi-family loan that prepays in year one or two would generally be expected to pay a penalty equal to five percentage points.
Because prepayment penalties are recorded as interest income, they are reflected in the average yields on our loans and interest-earning assets, our net interest rate spread and net interest margin, and the level of net interest income we record. No assumptions are involved in the recognition of prepayment income, as such income is recorded when the cash is received.
Our success as a multi-family lender partly reflects the solid relationships we have developed with the market’s leading mortgage brokers, who are familiar with our lending practices, our underwriting standards, and our long-standing practice of basing our loans on the cash flows produced by the properties. The process of producing such loans is generally four to six weeks in duration and, because the multi-family market is largely broker-driven, the expense incurred in sourcing such loans is substantially reduced.
We believe our underwriting quality of multi-family lending is distinctive. This reflects the nature of the buildings securing our loans, our underwriting process and standards, and the generally conservative LTV ratios our multi-family loans feature at origination. Historically, a relatively small percentage of the multi-family loans that have transitioned to non-performing status have resulted in actual losses, even when the credit cycle has taken a downward turn.
We primarily underwrite our multi-family loans based on the current cash flows produced by the collateral property, with a reliance on the “income” approach to appraising the properties, rather than the “sales” approach. We also consider a variety of other factors, including the physical condition of the underlying property; the net operating income of the mortgaged premises
prior to debt service; the DSCR, which is the ratio of the property’s net operating income to its debt service; and the ratio of the loan amount to the appraised value (i.e., the LTV) of the property.
In addition to requiring a minimum DSCR of 120 percent on multi-family buildings, we obtain a security interest in the personal property located on the premises, and an assignment of rents and leases. Our multi-family loans generally represent no more than 75 percent of the lower of the appraised value or the sales price of the underlying property, and typically feature an amortization period of 30 years. In addition, our multi-family loans may contain an initial interest-only period which typically does not exceed two years; however, these loans are underwritten on a fully amortizing basis.
Accordingly, while our multi-family lending niche has not been immune to downturns in the credit cycle, the limited number of losses we have recorded, even in adverse credit cycles, suggests that the multi-family loans we produce involve less credit risk than certain other types of loans. In general, buildings that are subject to rent regulation have tended to be stable, with occupancy levels remaining more or less constant over time. Because the rents are typically below market and the buildings securing our loans are generally maintained in good condition, they have been more likely to retain their tenants in adverse economic times. In addition, we exclude any short-term property tax exemptions and abatement benefits the property owners receive when we underwrite our multi-family loans.
The following table presents a geographical analysis of the multi-family loans in our held-for-investment loan portfolio:
| | | | | | | | |
| At March 31, 2023 |
| Multi-Family Loans |
| (dollars in millions) | Amount | Percent of Total |
| New York City: | | |
| Manhattan | $ | 7,243 | | 19 | % |
| Brooklyn | 6,343 | | 17 | % |
| Bronx | 3,669 | | 10 | % |
| Queens | 2,882 | | 8 | % |
| Staten Island | 135 | | — | % |
| Total New York City | $ | 20,272 | | 54 | % |
| New Jersey | 5,094 | | 13 | % |
| Long Island | 561 | | 1 | % |
| Total Metro New York | $ | 25,927 | | 68 | % |
| Other New York State | 1,205 | | 3 | % |
| Pennsylvania | 3,763 | | 10 | % |
| Florida | 1,689 | | 4 | % |
| Ohio | 982 | | 3 | % |
| Arizona | 437 | | 1 | % |
| All other states | 4,001 | | 11 | % |
| Total | $ | 38,004 | | 100 | % |
Commercial Real Estate
At March 31, 2023, CRE loans represented $10.5 billion, or 12.7 percent, of total loans held for investment, reflecting a $2.1 billion increase when compared to $10.5 billion at December 31, 2022. Approximately $1.9 billion was due to the Signature Transaction and $230 million was due to organic growth.
CRE loans represented $309 million, or 9.43 percent, of the loans we originated in the first quarter 2023, as compared to $348 million, or 7.74 percent for the three months ended December 31, 2022.
The CRE loans we produce are secured by income-producing properties such as office buildings, retail centers, mixed-use buildings, and multi-tenanted light industrial properties. At March 31, 2023, the largest concentration of CRE loans were secured by properties in the metro New York City area, refer to the Geographical Analysis table included below for additional details.
Approximately $3.4 billion of the CRE portfolio are office properties with an average balance of approximately $14.8 million and located primarily in the New York metro area. There are no delinquencies or non-performing loans with respect to this portfolio as of March 31, 2023.
The terms of more than half of our CRE loans are similar to the terms of our multi-family credits which primarily feature a fixed rate of interest for the first five years of the loan that is generally based on intermediate-term interest rates plus a spread. In addition to customary fixed rate terms, we now also offer floating rates advances indexed to CME Term SOFR. These products are generally offered in combination with interest rate cap or swaps that provide borrowers with additional optionality to manage their interest rate risk. Following the initial fixed rate period, the loan resets to an adjustable interest rate that is indexed to CME Term SOFR, plus a spread. Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the FHLB-NY plus a spread. The fixed-rate option also requires the payment of an amount equal to one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five- or seven-year term.
Prepayment penalties apply to certain of our CRE loans, as they do our multi-family credits. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve.
The repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis of the property’s current income stream and DSCR. The approval of a loan also depends on the borrower’s credit history, profitability, and expertise in property management, and generally requires a minimum DSCR of 130 percent and a maximum LTV of 65 percent. In addition, the origination of CRE loans typically requires a security interest in the fixtures, equipment, and other personal property of the borrower and/or an assignment of the rents and/or leases. In addition, our CRE loans may contain an interest-only period which typically does not exceed three years; however, these loans are underwritten on a fully amortizing basis.
The following table presents a geographical analysis of the CRE loans in our held-for-investment loan portfolio:
| | | | | | | | |
| At March 31, 2023 |
| Commercial Real Estate Loans |
| (dollars in millions) | Amount | Percent of Total |
| New York | $ | 5,837 | | 56 | % |
| Michigan | 1,102 | | 11 | % |
| New Jersey | 605 | | 6 | % |
| Pennsylvania | 353 | | 3 | % |
| Florida | 263 | | 3 | % |
| Ohio | 139 | | 1 | % |
| Arizona | 75 | | 1 | % |
| All other states | 2,090 | | 20 | % |
| Total | $ | 10,464 | | 101 | % |
Acquisition, Development, and Construction Loans
At March 31, 2023, our ADC loans represented $2.2 billion or 2.7%, of total loans held for investment, reflecting an increase $207 million of compared to December 31, 2022.
Because ADC loans are generally considered to have a higher degree of credit risk, especially during a downturn in the credit cycle, borrowers are required to provide a guarantee of repayment and completion. In the three months ended March 31, 2023 and March 31, 2022, we did not have any ADC loan losses that were recovered through a guarantee. The risk of loss on an ADC loan is largely dependent upon the accuracy of the initial appraisal of the property’s value upon completion of construction; the developer’s experience; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property.
When applicable, as a condition to closing an ADC loan, it is our practice to require that properties meet pre-sale or pre-lease requirements prior to funding.
C&I Loans
At March 31, 2023 C&I loans totaled $23.4 billion or 28.3 percent of total loans held-for-investment. Included in this portfolio is $5.4 billion in warehouse loans that allow mortgage lenders to fund the closing of residential mortgage loans.
The non-warehouse C&I loans we produce are primarily made to small and mid-size businesses and finance companies. Such loans are tailored to meet the specific needs of our borrowers, and include term loans, demand loans, revolving lines of credit, and, to a much lesser extent, loans that are partly guaranteed by the Small Business Administration.
A broad range of C&I loans, both collateralized and unsecured, are made available to businesses for working capital (including inventory and accounts receivable), business expansion, the purchase of machinery and equipment, and other general corporate needs. In determining the term and structure of C&I loans, several factors are considered, including the purpose, the collateral, and the anticipated sources of repayment. C&I loans are typically secured by business assets and personal guarantees of the borrower, and include financial covenants to monitor the borrower’s financial stability.
Also included in our C&I portfolio is our national warehouse lending platform with relationship managers across the country. We offer warehouse lines of credit to other mortgage lenders which allow the lender to fund the closing of residential mortgage loans. Each extension, advance, or draw-down on the line is fully collateralized by residential mortgage loans and is paid off when the lender sells the loan to an outside investor or, in some instances, to the Bank.
Underlying mortgage loans are predominantly originated using the Agencies' underwriting standards. The guideline for debt to tangible net worth is 15 to 1. We have $5.4 billion outstanding warehouse loans to other mortgage lenders and have relationships in place to lend up to $11.6 billion at our discretion.
The interest rates on our C&I loans can be fixed or floating, with floating-rate loans being tied to SOFR, prime or some other market index, plus an applicable spread. Our floating-rate loans may or may not feature a floor rate of interest. The decision to require a floor on C&I loans depends on the level of competition we face for such loans from other institutions, the direction of market interest rates, and the profitability of our relationship with the borrower.
At March 31, 2023, specialty finance loans and leases totaled $4.8 billion or 6 percent of total loans held for investment, up $428 million or 10 percent compared to December 31, 2022.
We produce our specialty finance loans and leases through a subsidiary that is staffed by a group of industry veterans with expertise in originating and underwriting senior securitized debt and equipment loans and leases. The subsidiary participates in syndicated loans that are brought to them, and equipment loans and leases that are assigned to them, by a select group of nationally recognized sources, and are generally made to large corporate obligors, many of which are publicly traded, carry investment grade or near-investment grade ratings, and participate in stable industries nationwide.
The specialty finance loans and leases we fund fall into three categories: asset-based lending, dealer floor-plan lending, and equipment loan and lease financing. Each of these credits is secured with a perfected first security interest in, or outright ownership of, the underlying collateral, and structured as senior debt or as a non-cancelable lease. As of March 31, 2023, 80 percent of specialty finance loan commitments are structured as floating rate obligations which will benefit in a rising rate environment. All floating rate obligations are being transitioned from LIBOR to an appropriate LIBOR replacement index in accordance with the regulatory guidance provided around LIBOR cessation.
In the first quarter of 2023, the Company originated $1.3 billion of specialty finance loans and leases, representing 41 percent of total originations compared to $638 million for the same period in 2022, representing 18 percent of total originations.
Since launching our specialty finance business in the third quarter of 2013, no losses have been recorded on any of the loans or leases in this portfolio.
One-to-Four Family Loans
At March 31, 2023, one-to-four family loans represented $5.9 billion, including $1.1 billion of LGG or 8 percent, of total loans held for investment. As of March 31, 2023, the repurchase liability on LGG loans was $0.3 billion. As of December 31, 2022 total one-to-four family loans totaled $5.8 billion, with the increase being driven by the Flagstar acquisition. These loans include various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. We typically hold certain mortgage loans in LHFI that do not qualify for sale to the Agencies and that have an acceptable yield and risk profile. The LTV requirements on our residential first mortgage loans vary depending on occupancy, property type, loan amount, and FICO scores. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. As of March 31, 2023, non-government guaranteed loans in this portfolio had an average current FICO score of 741 and an average LTV of 54 percent.
Substantially all LGG are insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs. Nonperforming repurchased loans in this portfolio earn interest at a rate based upon the 10-year U.S. Treasury note rate from the time the underlying loan becomes 60 days delinquent until the loan is conveyed to HUD (if foreclosure timelines are met), which is not paid by the FHA until claimed. The Bank has a unilateral option to repurchase loans sold to GNMA if the loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) and can recover losses through a claims process from the guarantor. These loans are recorded in loans held for investment and the liability to repurchase the loans is recorded in other liabilities on the Consolidated Statements of Condition. Certain loans within our portfolio may be subject to indemnifications and insurance limits which expose us to limited credit risk. We have reserved for these risks within other assets and as a component of our ACL on residential first mortgages.
Other Loans
At March 31, 2023, other loans totaled $2.6 billion and consisted primarily of home equity lines of credit, boat and recreational vehicle indirect lending, point of sale consumer loans and other consumer loans, including overdraft loans.
Our home equity portfolio includes HELOANs, second mortgage loans, and HELOCs. These loans are underwritten and priced in an effort to ensure credit quality and loan profitability. Our debt-to-income ratio on HELOANs and HELOCs is capped at 43 percent and 45 percent, respectively. We currently limit the maximum CLTV to 89.99 percent and FICO scores to a minimum of 700. Second mortgage loans and HELOANs are fixed rate loans and are available with terms up to 20 years. HELOC loans are primarily variable-rate loans that contain a 10-year interest only draw period followed by a 20-year amortizing period. As of March 31, 2023, loans in this portfolio had an average current FICO score of 751.
As of March 31, 2023, loans in our indirect portfolio had an average current FICO score of 747. Point of sale loans consist of unsecured consumer installment loans originated primarily for home improvement purposes through a third-party financial technology company who also provides us a level of credit loss protection.
Loans Held for Sale
Loans held-for-sale at March 31, 2023 totaled $1.3 billion, up from $1.1 billion at December 31, 2022. The Signature Transaction added $360 million Small Business Administration ("SBA") loans to this increase. We classify loans as held for sale when we originate or purchase loans that we intend to sell. We have elected the fair value option for nearly all of this portfolio, except the SBA loans. We estimate the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans, where available, or by discounting estimated cash flows using observable inputs inclusive of interest rates, prepayment speeds and loss assumptions for similar collateral.
Lending Authority
We maintain credit limits in compliance with regulatory requirements. Under regulatory guidance, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 plus Tier 2 capital and any portion of the ACL not included in Tier 2 capital. We have a tracking and reporting process to monitor lending concentration levels, and all new commercial real estate credit exposures to relationships that exceed $200 million and all other commercial credit exposures to relationships that exceed $100 million must be approved by the Board Credit Committee of the Board. Exceptions to these levels are made to strong borrowers on a case by case basis, with the approval of the Board Credit Committee of the Board. Relationships less than the aforementioned limits are approved by the joint authority of credit officers and lending officers. The Board Credit Committee has authority to direct changes in lending practices as they deem necessary
or appropriate in order to address individual or aggregate risks and credit exposures in accordance with the Bank’s strategic objectives and risk appetites.
At March 31, 2023 and December 31, 2022, the largest mortgage loan in our portfolio was a $329 million multi-family loan, which is collateralized by properties located in Brooklyn, New York. As of the date of this report, the loan has been current since origination.
Asset Quality
All asset quality information excludes LGG that are insured by U.S government agencies.
The following table presents the Company's asset quality measures at the respective dates:
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| Non-performing loans to total loans | 0.20 | % | | 0.20 | % | | 0.13 | % |
| Non-performing assets to total assets | 0.14 | | | 0.17 | | | 0.11 | |
| Allowance for losses on loans to non-performing loans | 340.75 | | | 278.98 | | | 313.18 | |
| Allowance for losses on loans to total loans held for investment | 0.67 | | | 0.57 | | | 0.42 | |
Delinquent and non-performing loans held for investment and Repossessed Assets
The following table presents our loans, 30 to 89 days past due by loan type and the changes in the respective balances:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | March 31, 2023 |
| | | | | | | compared to |
| (dollars in millions) | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | December 31, 2022 | | March 31, 2022 |
| Loans 30 to 89 Days Past Due: | | | | | | | | | |
| Multi-family | $ | 72 | | | $ | 34 | | | $ | 23 | | | 112 | % | | 213 | % |
| Commercial real estate | 15 | | | 2 | | | 4 | | | 650 | % | | 275 | % |
| One-to-four family first mortgage | 20 | | | 21 | | | 7 | | | (5) | % | | 186 | % |
| | | | | | | | | |
| Commercial and industrial | 57 | | | — | | | — | | | NM | | NM |
| Other loans | 11 | | | 13 | | | — | | | (15) | % | | NM |
| Total loans 30-89 days past due | $ | 175 | | | $ | 70 | | | $ | 34 | | | 150 | % | | 415 | % |
A loan generally is classified as a “non-accrual” loan when it is 90 days or more past due or when it is deemed to be impaired because we no longer expect to collect all amounts due according to the contractual terms of the loan agreement. When a loan is placed on non-accrual status, we cease the accrual of interest owed, and previously accrued interest is reversed and charged against interest income. At March 31, 2023, our non-performing loans consisted of $13 million of loans 90 days or more past due and still accruing and $148 million were non-accrual loans. At December 31, 2022, all of our non-performing loans were non-accrual loans. A loan is generally returned to accrual status when the loan is current and we have reasonable assurance that the loan will be fully collectible.
We monitor non-accrual loans both within and beyond our primary lending area in the same manner. Monitoring loans generally involves inspecting and re-appraising the collateral properties; holding discussions with the principals and managing agents of the borrowing entities and retain legal counsel, as applicable; requesting financial, operating, and rent roll information; confirming that hazard insurance is in place or force-placing such insurance; monitoring tax payment status. advancing funds as needed; and seeking approval from the courts to appoint a receiver, when necessary to protect the Bank’s interests, including to collect rents, manage property operations, and ensure maintenance of the collateral properties.
It is our policy to order updated appraisals for all non-performing loans 90 days or more past due, irrespective of loan type, that are collateralized by multi-family buildings, CRE properties, or land, if the most recent appraisal on file for the property is more than one year old. Appraisals are ordered annually until such time as the loan becomes performing and is returned to accrual status. It is not our policy to obtain updated appraisals for performing loans. However, appraisals may be ordered for performing loans when a borrower requests an increase in the loan amount, a modification in loan terms, or an extension of a maturing loan.
The following table presents our non-performing loans by loan type and the changes in the respective balances:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | March 31, 2023 |
| | | | | | | compared to |
| (dollars in millions) | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | December 31, 2022 | | March 31, 2022 |
| Non-Performing Loans: | | | | | | | | | |
| Non-accrual mortgage loans: | | | | | | | | | |
| Multi-family | $ | 13 | | | $ | 13 | | | $ | 22 | | | — | % | | (41) | % |
| Commercial real estate | 21 | | | 20 | | | 35 | | | 5 | % | | (40) | % |
| One-to-four family first mortgage | 84 | | | 92 | | | — | | | (9) | % | | NM |
| Total non-accrual mortgage loans | $ | 118 | | | $ | 125 | | | $ | 57 | | | (6) | % | | NM |
Other non-accrual loans(1) | 30 | | | 16 | | | 6 | | | 88 | % | | NM |
| Total non-accrual loans | $ | 148 | | | $ | 141 | | | $ | 63 | | | 5 | % | | NM |
Loans 90 days or more past due and still accruing (2) | 13 | | | $ | — | | | $ | — | | | NM | | NM |
| Total non-performing loans | $ | 161 | | | $ | 141 | | | $ | 63 | | | 14 | % | | NM |
| Repossessed assets | 13 | | | 12 | | | 7 | | | 8 | % | | 86 | % |
| Total non-performing assets | $ | 174 | | | $ | 153 | | | $ | 70 | | | 14 | % | | NM |
(1)Includes Commercial and Industrial, Home Equity, Consumer and other loans.
(2)Commercial real estate loans.
The following table sets forth the changes in non-accrual loans over the three months ended March 31, 2023:
| | | | | |
| (in millions) | |
Balance at December 31, 2022 | $ | 141 | |
| New non-accrual | 17 | |
| Non-accrual acquired from acquisition | 13 | |
| Charge-offs | (2) | |
| Transferred to repossessed assets | (1) | |
| Loan payoffs, including dispositions and principal pay-downs | (2) | |
| Restored to performing status | (18) | |
Balance at March 31, 2023 | $ | 148 | |
At March 31, 2023 total non-accrual mortgage loans decreased $7 million to $118 million, while other non-accrual loans increased $14 million to $30 million compared December 31, 2022. Included in the March 31, 2023 amount were non-accrual loans of $13 million acquired in the Signature Transaction.
At March 31, 2023, NPAs to total assets equaled 14 basis points compared to 17 basis points at December 31, 2022 while NPLs to total loans equaled 20 basis points compared to 20 basis points at December 31, 2022.
Total NPLs at March 31, 2023 were $161 million, up $20 million or 14 percent compared to December 31, 2022, including $13 million of loans 90 days or greater past due and still accruing acquired in the Signature Transaction. Total NPAs were $174 million at March 31, 2023, up $21 million or 14 percent compared to December 31, 2022. Repossessed assets of $13 million were relatively unchanged compared to the $12 million recorded in the prior quarter.
Non-performing loans are reviewed regularly by management and discussed on a monthly basis with the Board Credit Committee, and the Board of Directors of the Bank, as applicable. In accordance with our charge-off policy, collateral-dependent non-performing loans are written down to their current appraised values, less certain transaction costs. Workout specialists from our Loan Workout Unit actively pursue borrowers who are delinquent in repaying their loans in an effort to collect payment. In addition, outside counsel with experience in foreclosure proceedings are retained to institute such action with regard to such borrowers.
Properties and other assets that are acquired through foreclosure are classified as repossessed assets, and are recorded at fair value at the date of acquisition, less the estimated cost of selling the property. Subsequent declines in the fair value of the assets are charged to earnings and are included in non-interest expense. It is our policy to require an appraisal and an
environmental assessment of properties classified as OREO before foreclosure, and to re-appraise the properties on an as-needed basis, and not less than annually, until they are sold. We dispose of such properties as quickly and prudently as possible, given current market conditions and the property’s condition.
To mitigate the potential for credit losses, we underwrite our loans in accordance with credit standards that we consider to be prudent. In the case of multi-family and CRE loans, we look first at the consistency of the cash flows being generated by the property to determine its economic value using the “income approach,” and then at the market value of the property that collateralizes the loan. The amount of the loan is then based on the lower of the two values, with the economic value more typically used.
The condition of the collateral property is another critical factor. Multi-family buildings and CRE properties are inspected from rooftop to basement as a prerequisite to approval. Furthermore, independent appraisers, whose appraisals are carefully reviewed by our experienced in-house appraisal officers and staff, perform appraisals on collateral properties.
In addition, we work with a select group of mortgage brokers who are familiar with our credit standards and whose track record with our lending officers is typically greater than ten years. Furthermore, in New York City, where the majority of the buildings securing our multi-family loans are located, the rents that tenants may be charged on certain apartments are typically restricted under certain rent-control or rent-stabilization laws. As a result, the rents that tenants pay for such apartments are generally lower than current market rents. Buildings with a preponderance of such rent-regulated apartments are less likely to experience vacancies in times of economic adversity.
Reflecting the strength of the underlying collateral for these loans and the collateral structure, a relatively small percentage of our non-performing multi-family loans have resulted in losses over time.
To further manage our credit risk, our lending policies limit the amount of credit granted to any one borrower, and typically require minimum DSCRs of 120 percent for multi-family loans and 130 percent for CRE loans. Although we typically lend up to 75 percent of the appraised value on multi-family buildings and up to 65 percent on commercial properties, the average LTVs of such credits at origination were below those amounts at March 31, 2023. Exceptions to these LTV limitations are minimal and are reviewed on a case-by-case basis.
The repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis of the property’s current income stream and DSCR. The approval of a CRE loan also depends on the borrower’s credit history, profitability, and expertise in property management. Given that our CRE loans are underwritten in accordance with underwriting standards that are similar to those applicable to our multi-family credits, the percentage of our non-performing CRE loans that have resulted in losses has been comparatively small over time.
Multi-family and CRE loans are generally originated at conservative LTVs and DSCRs, as previously stated. Low LTVs provide a greater likelihood of full recovery and reduce the possibility of incurring a severe loss on a credit; in many cases, they reduce the likelihood of the borrower “walking away” from the property. Although borrowers may default on loan payments, they have a greater incentive to protect their equity in the collateral property and to return their loans to performing status.
With regard to ADC loans, we typically lend up to 75 percent of the estimated as-completed market value of multi-family and residential tract projects; however, in the case of home construction loans to individuals, the limit is 80 percent. With respect to commercial construction loans, we typically lend up to 65 percent of the estimated as-completed market value of the property. Credit risk is also managed through the loan disbursement process. Loan proceeds are disbursed periodically in increments as construction progresses, and as warranted by inspection reports provided to us by our own lending officers and/or consulting engineers.
To minimize the risk involved in specialty finance lending and leasing, each of our credits is secured with a perfected first security interest or outright ownership in the underlying collateral, and structured as senior debt or as a non-cancellable lease. To further minimize the risk involved in specialty finance lending and leasing, we re-underwrite each transaction. In addition, we retain outside counsel to conduct a further review of the underlying documentation.
Other C&I loans generally represent loans to commercial businesses which meet certain desired client characteristics and credit standards. The credit standards for commercial borrowers are based on numerous criteria, including historical and projected financial information, strength of management, acceptable collateral, and market conditions and trends in the
borrower’s industry. These loans are generally variable rate loans in which the interest rate fluctuates with a specified index rate.
The procedures we follow with respect to delinquent loans are generally consistent across all categories, with late charges assessed, and notices mailed to the borrower, at specified dates. We attempt to reach the borrower by telephone to ascertain the reasons for delinquency and the prospects for repayment. When contact is made with a borrower at any time prior to foreclosure or recovery against collateral property, we attempt to obtain full payment, and will consider a repayment schedule to avoid taking such action. Delinquencies are addressed by our Loan Workout Unit and every effort is made to collect rather than initiate foreclosure proceedings.
Fair values for all multi-family buildings, CRE properties, and land are determined based on the appraised value. If an appraisal is more than one year old and the loan is classified as either non-performing or as an accruing TDR, then an updated appraisal is required to determine fair value. Estimated disposition costs are deducted from the fair value of the property to determine estimated net realizable value. In the instance of an outdated appraisal on an impaired loan, we adjust the original appraisal by using a third-party index value to determine the extent of impairment until an updated appraisal is received.
While we strive to originate loans that will perform fully, adverse economic and market conditions, among other factors, can negatively impact a borrower’s ability to repay. Historically, our level of net charge-offs has been relatively low in downward credit cycles, even when the volume of non-performing loans has increased. For the three months ended March 31, 2023, our net charge-offs were zero as compared to net charge-offs of $2 million over the same period in 2022.
The allowance for credit losses increased $157 million, equaling $550 million at March 31, 2023 from $393 million at December 31, 2022. The majority of the increase was related to the initial provision for credit losses of $132 million for the acquired loans in the Signature Transaction and an $18 million provision for loan losses primarily related to higher loan volume. The allowance for credit losses on loans and leases represented 341 percent of non-performing loans at March 31, 2023, as compared to 279 percent at the prior year-end.
Based upon all relevant and available information at March 31, 2023, management believes that the allowance for losses on loans was appropriate at that date.
The following table presents information on the Company's net charge-offs as compared to average loans outstanding:
| | | | | | | | | | | |
| Three Months Ended, |
| (dollars in millions) | March 31, 2023 | | March 31, 2022 |
| Multi-family | | | |
| Net charge-offs (recoveries) during the period | $ | — | | | $ | — | |
| Average amount outstanding | $ | 37,906 | | | $ | 34,799 | |
| Net charge-offs (recoveries) as a percentage of average loans | — | % | | — | % |
| | | |
| Commercial real estate | | | |
| Net charge-offs (recoveries) during the period | $ | — | | | $ | 4 | |
| Average amount outstanding | $ | 8,450 | | | $ | 6,670 | |
| Net charge-offs (recoveries) as a percentage of average loans | — | % | | 0.06 | % |
| | | |
| One-to-Four Family first mortgage | | | |
| Net charge-offs (recoveries) during the period | $ | 2 | | | $ | — | |
| Average amount outstanding | $ | 5,895 | | | $ | 152 | |
| Net charge-offs (recoveries) as a percentage of average loans | — | % | | — | % |
| | | |
| Acquisition, Development and Construction | | | |
| Net charge-offs (recoveries) during the period | $ | — | | | $ | — | |
| Average amount outstanding | $ | 2,110 | | | $ | 224 | |
| Net charge-offs (recoveries) as a percentage of average loans | — | % | | — | % |
| | | |
| Other Loans | | | |
| Net charge-offs (recoveries) during the period | $ | (2) | | | $ | (2) | |
| Average amount outstanding | $ | 16,412 | | | $ | 3,962 | |
| Net charge-offs (recoveries) as a percentage of average loans | (0.01) | % | | (0.05) | % |
| | | |
| Total loans | | | |
| Net charge-offs (recoveries) during the period | $ | — | | | $ | 2 | |
| Average amount outstanding | $ | 70,774 | | | $ | 45,807 | |
| Net charge-offs (recoveries) as a percentage of average loans | — | % | | — | % |
Securities
Total securities were $7.6 billion, or 6 percent, of total assets at March 31, 2023, compared to $9.1 billion, or 10 percent of total assets at December 31, 2022. At March 31, 2023 and December 31, 2022, all of our securities were designated as “Available-for-Sale”. At March 31, 2023, 15 percent of our portfolio are floating rate securities.
As of March 31, 2023, the net unrealized loss on securities available for sale was $566 million as compared to $626 million at December 31, 2022.
At March 31, 2023, available-for-sale securities had an estimated weighted average life of seven years. Included in the quarter-end amount were mortgage-related securities of $4.7 billion and other debt securities of $2.9 billion.
At the prior year-end, available-for-sale securities were $9.1 billion, and had an estimated weighted average life of six years. Mortgage-related securities accounted for $4.8 billion of the year-end balance, with other debt securities accounting for the remaining $4.3 billion.
During the three months ended March 31, 2023, the Company recorded a $20 million provision for credit losses, and subsequent charge-off, on a Signature Bank related bond holding.
The following table summarizes the weighted average yields of debt securities for the maturities indicated at March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-
Related
Securities | | U.S.
Government
and GSE
Obligations | | State,
County,
and
Municipal | | Other Debt Securities (2) |
Available-for-Sale Debt Securities: (1) | | | | | | | |
| Due within one year | 2.74 | % | | 3.35 | % | | — | % | | 4.53 | % |
| Due from one to five years | 3.34 | | | 4.29 | | | — | | | 5.93 | |
| Due from five to ten years | 2.93 | | | 1.55 | | | 3.73 | | | 4.86 | |
| Due after ten years | 3.60 | | | 2.20 | | | — | | | 5.51 | |
| Total debt securities available for sale | 3.54 | | | 2.12 | | | 3.73 | | | 5.41 | |
(1)The weighted average yields are calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values and are not presented on a tax-equivalent basis.
(2)Includes corporate bonds, capital trust notes, foreign notes, and asset-backed securities.
Federal Reserve and Federal Home Loan Bank Stock
At March 31, 2023, the Company had $827 million and $329 million of FHLB-NY stock, at cost and FHLB-Indianapolis stock, at cost, respectively. At December 31, 2022, the Company had $762 million and $329 million of FHLB-NY stock, at cost and FHLB-Indianapolis stock, at cost, respectively. The Company maintains an investment in FHLB-NY stock and, as a result of the Flagstar acquisition, FHLB-Indianapolis stock, partly in conjunction with its membership in the FHLB and partly related to its access to the FHLB funding it utilizes. In addition, at March 31, 2023, the Company had Federal Reserve Bank stock, at cost, of $200 million and $176 million at March 31, 2023 and December 31, 2022, respectively.
Bank-Owned Life Insurance
BOLI is recorded at the total cash surrender value of the policies in the Consolidated Statements of Condition, and the income generated by the increase in the cash surrender value of the policies is recorded in “Non-interest income” in the Consolidated Statements of Income and Comprehensive Income. Reflecting an increase in the cash surrender value of the underlying policies, our investment in BOLI rose $3 million to $1.6 billion at March 31, 2023 compared to $1.6 billion at December 31, 2022.
Goodwill
We record goodwill in our consolidated statements of condition in connection with certain of our business combinations. Goodwill, which is tested at least annually for impairment, refers to the difference between the purchase price and the fair value of an acquired company’s assets, net of the liabilities assumed. As of March 31, 2023 and December 31, 2022 goodwill was $2.4 billion.
Sources of Funds
The Parent Company has four primary funding sources for the payment of dividends, share repurchases, and other corporate uses: dividends paid to the Parent Company by the Bank; capital raised through the issuance of securities; funding raised through the issuance of debt instruments; and repayments of, and income from, investment securities.
On a consolidated basis, our funding primarily stems from a combination of the following sources: retail, institutional, and brokered deposits; borrowed funds, primarily in the form of wholesale borrowings; cash flows generated through the repayment and sale of loans; and cash flows generated through the repayment and sale of securities.
Deposits
Our ability to retain and attract deposits depends on numerous factors, including customer satisfaction, the rates of interest we pay, the types of products we offer, and the attractiveness of their terms. From time to time, we have chosen not to compete actively for deposits, depending on our access to deposits through acquisitions, the availability of lower-cost funding sources, the impact of competition on pricing, and the need to fund our loan demand. The vast majority of our deposits are retail in nature (i.e., they are deposits we have gathered through our branches or through business combinations).
Depending on their availability and pricing relative to other funding sources, we also include brokered deposits in our deposit mix. Brokered deposits accounted for $11.0 billion of our deposits at the end of this March, compared to $5.1 billion at December 31, 2022. Brokered money market accounts represented $2.5 billion of total brokered deposits at March 31, 2023 and $2.8 billion at December 31, 2022; brokered interest-bearing checking accounts represented $1.2 billion and $1.0 billion, respectively. At March 31, 2023, we had $7.3billion of brokered CDs, compared to $1.3 billion at December 31, 2022.
Our uninsured deposits are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000). These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes and excludes internal accounts. At March 31, 2023 our deposit base includes $29.2 billion of uninsured deposits a net increase of $9.6 billion as compared to December 31, 2022 due to the Signature Transaction. This represents 34 percent of our total deposits.
The following table indicates the amount of time deposits, by account, that are in excess of the FDIC insurance limit (currently $250,000) by time remaining until maturity:
| | | | | |
| (in millions) | March 31, 2023 |
| Portion of U.S. time deposits in excess of insurance limit | $ | 5,144 | |
| Time deposits otherwise uninsured with a maturity of: | |
| 3 months or less | 1,397 | |
| Over 3 months through 6 months | 1,100 | |
| Over 6 months through 12 months | 1,493 | |
| Over 12 months | 1,154 | |
| Total time deposits otherwise uninsured | $ | 5,144 | |
Borrowed Funds
The majority of our borrowed funds are wholesale borrowings (FHLB-NY and FHLB-Indianapolis advances) and, to a lesser extent, junior subordinated debentures and subordinated notes. At March 31, 2023, total borrowed funds increased $28 million to $21 billion compared to the balance at December 31, 2022.
Wholesale Borrowings
Wholesale borrowings at March 31, 2023 were $20.4 billion compared to $20.3 billion at December 31, 2022.
FHLB-NY and FHLB-Indianapolis advances accounted for $20.4 billion and $20.3 billion at March 31, 2023 and December 31, 2022, respectively. Pursuant to blanket collateral agreements with the Bank, our FHLB-NY, FHLB-Indianapolis advances and overnight advances are secured by pledges of certain eligible collateral in the form of loans and securities. At March 31, 2023 and December 31, 2022, $5.4 billion and $6.8 billion of our wholesale borrowings had callable features, respectively.
We had no federal funds outstanding at March 31, 2023 and December 31, 2022, respectively.
Junior Subordinated Debentures
Junior subordinated debentures totaled $576 million at March 31, 2023 compared to $575 million at December 31, 2022.
Subordinated Notes
At March 31, 2023, the balance of subordinated notes was $434 million, including $135 million assumed from the Flagstar acquisition.
See Note 11, “Borrowed Funds,” in Item 8, “Financial Statements and Supplementary Data” for a further discussion of our wholesale borrowings, our junior subordinated debentures and subordinated debt.
Liquidity, Contractual Obligations and Off-Balance Sheet Commitments, and Capital Position
Liquidity
We manage our liquidity to ensure that our cash flows are sufficient to support our operations, and to compensate for any temporary mismatches between sources and uses of funds caused by variable loan and deposit demand.
We monitor our liquidity daily to ensure that sufficient funds are available to meet our financial obligations. Our most liquid assets are cash and cash equivalents, which totaled $22.3 billion and $2.0 billion, at March 31, 2023 and December 31, 2022, respectively.
Cash and cash equivalents were $22.3 billion and $2.0 billion at March 31, 2023 and December 31, 2022, respectively. The $20.3 billion increase in cash and cash equivalents is primarily due to an increase in interest-bearing deposits at the Federal Reserve Bank to enhance and support short-term liquidity.
Our $42 billion of total ready liquidity (cash and cash equivalents, unpledged securities, and Fed Funds and FHLB borrowing capacity) reflects a significant amount of liquid assets and sufficient sources of readily-available funds that can be accessed to meet its obligations and unanticipated needs as they arise.
Additional liquidity stems from deposits and from our use of wholesale funding sources, including wholesale borrowings and brokered deposits. In addition, we have access to the Bank’s approved lines of credit with various counterparties, including the FHLB-NY. The availability of these wholesale funding sources is generally based on the amount of mortgage loan collateral available under a blanket lien we have pledged to the respective institutions and, to a lesser extent, the amount of available securities that may be pledged to collateralize our borrowings. At March 31, 2023 our available borrowing capacity with the FHLB-NY was $10.3 billion. In addition, the Bank had available-for-sale securities of $7.6 billion, of which, $6.8 billion is unpledged.
Furthermore, the Bank has agreements with the FRB-NY that enable it to access the discount window as a further means of enhancing our liquidity. In connection with these agreements, the Bank has pledged certain loans and securities to collateralize any funds we may borrow. The maximum amount the Bank could borrow from the FRB-NY was $1.0 billion. There were no borrowings against these lines of credit at March 31, 2023.
CDs due to mature or reprice in one year or less from March 31, 2023 totaled $16.9 billion, representing 87 percent of total CDs at that date. Our ability to attract and retain retail deposits, including CDs, depends on numerous factors, including, among others, the convenience of our branches and our other banking channels; our customers’ satisfaction with the service they receive; the rates of interest we offer; the types of products we feature; and the attractiveness of their terms.
Our decision to compete for deposits also depends on numerous factors, including, among others, our access to deposits through acquisitions, the availability of lower-cost funding sources, the impact of competition on pricing, and the need to fund our loan demand.
The Parent Company is a separate legal entity from the Bank and must provide for its own liquidity. At March 31, 2023 the Parent Company held cash and cash equivalents of $151 million. In addition to operating expenses and any share repurchases, the Parent Company is responsible for paying any dividends declared to our stockholders. As a Delaware corporation, the Parent Company is able to pay dividends either from surplus or, in case there is no surplus, from net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
Various legal restrictions limit the extent to which the Company’s subsidiary bank can supply funds to the Parent Company and its non-bank subsidiaries. The Bank would require the approval of the OCC if the dividends it declares in any calendar year were to exceed the total of its respective net profits for that year combined with its respective retained net profits
for the preceding two calendar years, less any required transfer to paid-in capital. The term “net profits” is defined as net income for a given period less any dividends paid during that period. As a result of our acquisition of Flagstar, we are also required to seek regulatory approval from the OCC for the payment of any dividend to the Parent Company through at least the period ending November 1, 2024. In connection with receiving regulatory approval from the OCC for the Signature Transaction, the Bank has committed that (i) for a period of two years from the date of the Signature Transaction, it will not declare or pay any dividend without receiving a prior written determination of no supervisory objection from the OCC and (ii) it will not declare or pay dividends on the amount of retained earnings that represents any net bargain purchase gain that is subject to a conditional period that may be imposed by the OCC. In 2023, dividends of $140 million were paid by the Bank to the Parent Company. At March 31, 2023, the Bank could have paid additional dividends of $2.3 billion to the Parent Company without regulatory approval.
At March 31, 2023, we believe the Company has sufficient liquidity and capital resources to meet its cash flow obligations over the next 12 months and for the foreseeable future.
Contractual Obligations and Commitments
In the normal course of business, we enter into a variety of contractual obligations in order to manage our assets and liabilities, fund loan growth, operate our branch network, and address our capital needs.
For example, we offer CDs with contractual terms to our customers, and borrow funds under contract from the FHLB-NY. These contractual obligations are reflected in the Consolidated Statements of Condition under “Deposits” and “Borrowed funds,” respectively. At March 31, 2023, we had CDs of $19.4 billion and long-term debt (defined as borrowed funds with an original maturity one year or more) of $10.4 billion.
We also are obligated under certain non-cancelable operating leases on the buildings and land we use in operating our branch network and in performing our back-office responsibilities. These obligations are included in the Consolidated Statements of Condition and totaled $119 million at March 31, 2023.
At March 31, 2023, we also had commitments to extend credit in the form of mortgage and other loan originations, as well as commercial, performance stand-by, and financial stand-by letters of credit. These commitments consist of agreements to extend credit, as long as there is no violation of any condition established in the contract under which the loan is made. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee.
The following table summarizes the Company’s commitments to originate loans and letters of credit:
| | | | | | | | | | | |
| (in millions) | March 31, 2023 | | December 31, 2022 |
| Multi-family and commercial real estate | $ | 93 | | | $ | 216 | |
| One-to-four family including interest rate locks | 1,977 | | | 2,066 | |
| Acquisition, development, and construction | 3,814 | | | 3,539 | |
| Warehouse loan commitments | 7,168 | | | 8,042 | |
| Other loan commitments | 10,822 | | | 7,964 | |
| Total loan commitments | $ | 23,874 | | | $ | 21,827 | |
| Commercial, performance stand-by, and financial stand-by letters of credit | 1,038 | | | 541 | |
| Total commitments | $ | 24,912 | | | $ | 22,368 | |
The letters of credit we issue consist of performance stand-by, financial stand-by, and commercial letters of credit. Financial stand-by letters of credit primarily are issued for the benefit of other financial institutions, municipalities, or landlords on behalf of certain of our current borrowers, and obligate us to guarantee payment of a specified financial obligation. Performance stand-by letters of credit are primarily issued for the benefit of local municipalities on behalf of certain of our borrowers. Performance letters of credit obligate us to make payments in the event that a specified third party fails to perform under non-financial contractual obligations. Commercial letters of credit act as a means of ensuring payment to a seller upon shipment of goods to a buyer. Although commercial letters of credit are used to effect payment for domestic transactions, the majority are used to settle payments in international trade. Typically, such letters of credit require the presentation of documents that describe the commercial transaction, and provide evidence of shipment and the transfer of title. The fees we collect in connection with the issuance of letters of credit are included in “Fee income” in the Consolidated Statements of Income and Comprehensive Income.
Based upon our current liquidity position, and ready liquidity of $42 billion, we expect that our funding will be sufficient to fulfill these cash obligations and commitments when they are due both in the short term and long term.
For the three months ended March 31, 2023, we did not engage in any off-balance sheet transactions that we expect to have a material effect on our financial condition, results of operations or cash flows.
At March 31, 2023, we had no commitments to purchase securities.
Regulatory Capital
The Bank is subject to regulation, examination, and supervision by the OCC and the Federal Reserve (the “Regulators”). The Bank is also governed by numerous federal and state laws and regulations, including the FDIC Improvement Act of 1991, which established five categories of capital adequacy ranging from “well capitalized” to “critically undercapitalized.” Such classifications are used by the FDIC to determine various matters, including prompt corrective action and each institution’s FDIC deposit insurance premium assessments. Capital amounts and classifications are also subject to the Regulators’ qualitative judgments about the components of capital and risk weightings, among other factors.
The quantitative measures established to ensure capital adequacy require that banks maintain minimum amounts and ratios of leverage capital to average assets and of common equity tier 1 capital, tier 1 capital, and total capital to risk-weighted assets (as such measures are defined in the regulations). At March 31, 2023, our capital measures continued to exceed the minimum federal requirements for a bank holding company and for a bank. The following table sets forth our common equity tier 1, tier 1 risk-based, total risk-based, and leverage capital amounts and ratios on a consolidated basis and for the Bank on a stand-alone basis, as well as the respective minimum regulatory capital requirements, at that date:
The following tables present the actual capital amounts and ratios for the Company:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Risk-Based Capital | | | |
| March 31, 2023 | Common Equity Tier 1 | | Tier 1 | | Total | | Leverage Capital |
| (dollars in millions) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| Total capital | $ | 7,969 | | 9.28 | % | | $ | 8,472 | | 9.86 | % | | $ | 9,943 | | 11.57 | % | | $ | 8,472 | | 9.18 | % |
| Minimum for capital adequacy purposes | 3,866 | | 4.50 | | | 5,154 | | 6.00 | | | 6,873 | | 8.00 | | | 3,691 | | 4.00 | |
| Excess | $ | 4,103 | | 4.78 | % | | $ | 3,318 | | 3.86 | % | | $ | 3,070 | | 3.57 | % | | $ | 4,781 | | 5.18 | % |
| December 31, 2022 | | | | | | | | | | | |
| Total capital | $ | 6,335 | | 9.06 | % | | $ | 6,838 | | 9.78 | % | | $ | 8,154 | | 11.66 | % | | $ | 6,838 | | 9.70 | % |
| Minimum for capital adequacy purposes | 3,146 | | 4.50 | | | 4,195 | | 6.00 | | | 5,593 | | 8.00 | | | 2,819 | | 4.00 | |
| Excess | $ | 3,189 | | 4.56 | % | | $ | 2,643 | | 3.78 | % | | $ | 2,561 | | 3.66 | % | | $ | 4,019 | | 5.70 | % |
The following tables present the actual capital amounts and ratios for the Bank:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Risk-Based Capital | | | |
| March 31, 2023 | Common Equity Tier 1 | | Tier 1 | | Total | | Leverage Capital |
| (dollars in millions) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| Total capital | $ | 9,288 | | 10.82 | % | | $ | 9,288 | | 10.82 | % | | $ | 9,769 | | 11.38 | % | | $ | 9,288 | | 10.08 | % |
| Minimum for capital adequacy purposes | 3,863 | | 4.50 | | | 5,150 | | 6.00 | | | 6,867 | | 8.00 | | | 3,688 | | 4.00 | |
| Excess | $ | 5,425 | | 6.32 | % | | $ | 4,138 | | 4.82 | % | | $ | 2,902 | | 3.38 | % | | $ | 5,600 | | 6.08 | % |
| December 31, 2022 | | | | | | | | | | | |
| Total capital | $ | 7,653 | | 10.96 | % | | $ | 7,653 | | 10.96 | % | | $ | 7,982 | | 11.43 | % | | $ | 7,653 | | 10.87 | % |
| Minimum for capital adequacy purposes | 3,142 | | 4.50 | | | 4,189 | | 6.00 | | | 5,585 | | 8.00 | | | 2,817 | | 4.00 | |
| Excess | $ | 4,511 | | 6.46 | % | | $ | 3,464 | | 4.96 | % | | $ | 2,397 | | 3.43 | % | | $ | 4,836 | | 6.87 | % |
At March 31, 2023, our total risk-based capital ratio exceeded the minimum requirement for capital adequacy purposes by 357 basis points and the fully phased-in capital conservation buffer by 107 basis points.
The Bank also exceeded the minimum capital requirements to be categorized as “Well Capitalized.” To be categorized as well capitalized, a bank must maintain a minimum common equity tier 1 ratio of 6.50 percent; a minimum tier 1 risk-based
capital ratio of 8 percent; a minimum total risk-based capital ratio of 10 percent; and a minimum leverage capital ratio of 5 percent.
RECONCILIATIONS OF SHAREHOLDERS’ EQUITY, COMMON STOCKHOLDERS’ EQUITY, AND TANGIBLE COMMON SHAREHOLDERS’ EQUITY; TOTAL ASSETS AND TANGIBLE ASSETS; AND THE RELATED MEASURES
While stockholders’ equity, common stockholders’ equity, total assets, and book value per common share are financial measures that are recorded in accordance with U.S. GAAP, tangible common stockholders’ equity, tangible assets, and tangible book value per common share are not. It is management’s belief that these non-GAAP measures should be disclosed in this report and others we issue for the following reasons:
1.Tangible common stockholders’ equity is an important indication of the Company’s ability to grow organically and through business combinations, as well as its ability to pay dividends and to engage in various capital management strategies.
2.Tangible book value per common share and the ratio of tangible common stockholders’ equity to tangible assets are among the capital measures considered by current and prospective investors, both independent of, and in comparison with, the Company’s peers.
Tangible common stockholders’ equity, tangible assets, and the related non-GAAP measures should not be considered in isolation or as a substitute for stockholders’ equity, common stockholders’ equity, total assets, or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP measures may differ from that of other companies reporting non-GAAP measures with similar names.
Reconciliations of our stockholders’ equity, common stockholders’ equity, and tangible common stockholders’ equity; our total assets and tangible assets; and the related financial measures for the respective periods follow:
| | | | | | | | | | | |
| At or for the Three months ended |
| (dollars in millions) | March 31, 2023 | | March 31, 2022 |
| Stockholders’ Equity | $ | 10,782 | | | $ | 6,909 | |
| Less: Goodwill and other intangible assets | (3,160) | | | (2,426) | |
| Preferred stock | (503) | | | (503) | |
| Tangible common stockholders’ equity | $ | 7,119 | | | $ | 3,980 | |
| | | |
| Total Assets | $ | 123,706 | | | $ | 61,005 | |
| Less: Goodwill and other intangible assets | (3,160) | | | (2,426) | |
| Tangible assets | $ | 120,546 | | | $ | 58,579 | |
| | | |
| Common stockholders’ equity to total assets | 8.31 | % | | 10.50 | % |
| Tangible common stockholders’ equity to tangible assets | 5.91 | % | | 6.79 | % |
| Book value per common share | $ | 14.23 | | | $ | 13.72 | |
| Tangible book value per common share | $ | 9.86 | | | $ | 8.52 | |
Market Risk
As a financial institution, we are focused on reducing our exposure to interest rate volatility, which represents our primary market risk. Changes in market interest rates represent the greatest challenge to our financial performance, as such changes can have a significant impact on the level of income and expense recorded on a large portion of our interest-earning assets and interest-bearing liabilities, and on the market value of all interest-earning assets, other than those possessing a short term to maturity. To reduce our exposure to changing rates, the Board of Directors and management monitor interest rate sensitivity on a regular or as needed basis so that adjustments to the asset and liability mix can be made when deemed appropriate.
The actual duration of held-for-investment mortgage loans and mortgage-related securities can be significantly impacted by changes in prepayment levels and market interest rates. The level of prepayments may, in turn, be impacted by a variety of factors, including the economy in the region where the underlying mortgages were originated; seasonal factors; demographic
variables; and the assumability of the underlying mortgages. However, the factors with the most significant impact on prepayments are market interest rates and the availability of refinancing opportunities.
We managed our interest rate risk by taking the following actions: (1) We have continued to emphasize the origination and retention of intermediate-term assets, primarily in the form of multi-family and CRE loans; (2) We have continued the origination of certain C&I loans that feature floating interest rates; (3) Increased the focus on retaining low costs deposits; and (4) Obtained new low cost deposits as part of the banking-as-a-service initiative (5) The use of derivatives to manage our interest rate position.
Uninsured Deposits
We manage our liquidity to ensure that our cash flows are sufficient to support our operations, and to compensate for any temporary mismatches between sources and uses of funds caused by variable loan and deposit demand. As a result, we have $42 billion of total ready liquidity (cash and cash equivalents, unpledged securities, and Fed Funds and FHLB borrowing capacity), which all together exceed our level of uninsured deposits. Our uninsured deposits are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000). These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes and excludes internal accounts. At March 31, 2023 our deposit base includes $29.2 billion of uninsured deposits a net increase of $9.6 billion as compared to December 31, 2022 due to the Signature Transaction. This represents 34 percent of our total deposits.
LIBOR Transition Process and Phase Out
The Company has certain loans, interest rate swap agreements, investment securities, and debt obligations whose interest rate is indexed to LIBOR. In 2017, the FCA, which is responsible for regulating LIBOR, announced that the publication of LIBOR is not guaranteed beyond 2021. In December 2020, the administrator of LIBOR announced its intention to (i) cease the publication of the one-week and two-month U.S. dollar LIBOR after December 31, 2021, and (ii) cease the publication of all other tenors of U.S. dollar LIBOR (one, three, six, and 12-month LIBOR) after June 30, 2023, and on March 15, 2021, announced that it will permanently cease to publish most LIBOR settings beginning on January 1, 2022 and cease to publish the overnight, one-month, three-month, six-month, and 12-month U.S. dollar LIBOR settings on July 1, 2023. Accordingly, the FCA has stated that it does not intend to persuade or compel banks to submit to LIBOR after such respective dates. Until such time, however, FCA panel banks have agreed to continue to support LIBOR. In October 2021, the Federal bank regulatory agencies issued a Joint Statement on Managing the LIBOR Transition that offered their regulatory expectations and outlined potential supervisory and enforcement consequences for banks that fail to adequately plan for and implement the transition away from LIBOR. The failure to properly transition away from LIBOR may result in increased supervisory scrutiny. The implementation of a substitute index for the calculation of interest rates under the Company's loan agreements may result in disputes or litigation with counterparties over the appropriateness or comparability to LIBOR of the substitute index, which would have an adverse effect on the Company's results of operations. Even when robust fallback language is included, there can be no assurances that the replacement rate plus any spread adjustment will be economically equivalent to LIBOR, which could result in a lower interest rate being paid to the Company on such assets.
The Alternative Reference Rates Committee (a group of private-market participants convened by the FRB and the FRB-NY) has identified SOFR as the recommended alternative to LIBOR. The use of SOFR as a substitute for LIBOR is voluntary and may not be suitable for all market participants. SOFR is calculated and observed differently than LIBOR. Given the manner in which SOFR is calculated, it is likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. Market practices related to SOFR calculation conventions continue to develop and may vary. Inconsistent calculation conventions among financial products may expose is to increased basic rate and resultant costs.
Other alternatives to LIBOR also exist, but, because of the difference in how those alternatives are constructed, they may diverge significantly from LIBOR in a range of situations and market conditions.
The Bank established a sub-committee of ALCO to address issues related to the phase out and transition from LIBOR. This sub-committee consists of personnel from various departments through the Bank including lending, loan administration, credit risk management, finance/treasury, including interest rate risk and liquidity management, information technology, and operations. The Company has LIBOR-based contracts that extend beyond June 30, 2023. The sub-committee has monitored the Bank’s LIBOR transition progress and substantially all contracts have been updated. In complying with industry requirements, the Bank has not offered new LIBOR-based products since December 31, 2021.
Interest Rate Sensitivity Analysis
Interest rate sensitivity is monitored through the use of a model that generates estimates of the change in our Economic Value of Equity (EVE) over a range of interest rate scenarios. EVE is defined as the net present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The EVE ratio, under any interest rate scenario, is defined as the EVE in that scenario divided by the market value of assets in the same scenario. The model assumes estimated loan and MBS prepayment rates, current market value spreads, and deposit decay rates and betas.
Based on the information and assumptions in effect at March 31, 2023, the following table sets forth our EVE, assuming the changes in interest rates noted:
| | | | | | | | |
| Change in Interest Rates (in basis points) | | Estimated Percentage Change in Economic Value of Equity |
| -200 over one year | | (8.82)% |
| -100 over one year | | (3.09)% |
| +100 over one year | | 2.59% |
| +200 over one year | | 4.65% |
The net changes in EVE presented in the preceding table are within the parameters approved by the Boards of Directors of the Company and the Bank.
Accordingly, while the EVE analysis provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income, and may very well differ from actual results.
Interest Rate Risk is also monitored through the use of a model that generates Net Interest Income (NII) simulations over a range of interest rate scenarios. Modeling changes in NII requires that certain assumptions be made which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NII analysis presented below assumes that the composition of our interest rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, and also assumes that a particular change in interest rates is reflected uniformly across the yield curve, regardless of the duration to maturity or repricing of specific assets and liabilities. Furthermore, the model does not take into account the benefit of any strategic actions we may take to further reduce our exposure to interest rate risk. The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the following table, due to the frequency, timing, and magnitude of changes in interest rates; changes in spreads between maturity and repricing categories; and prepayments, among other factors, coupled with any actions taken to counter the effects of any such changes.
Based on the information and assumptions in effect at March 31, 2023, the following table reflects the estimated percentage change in future net interest income for the next twelve months, assuming the changes in interest rates noted:
| | | | | | | | |
Change in Interest Rates (in basis points) (1) | | Estimated Percentage Change in Future Net Interest Income |
| -200 over one year | | (12.5)% |
| -100 over one year | | (6.1)% |
| +100 over one year | | 4.9% |
| +200 over one year | | 10.3% |
(1)In general, short- and long-term rates are assumed to increase in parallel instantaneously and then remain unchanged.
The net changes in NII presented in the preceding table are within the parameters approved by the Boards of Directors of the Company and the Bank.
Future changes in our mix of assets and liabilities may result in greater changes to our EVE, and/or NII simulations.
In the event that our EVE and net interest income sensitivities were to breach our internal policy limits, we would undertake the following actions to ensure that appropriate remedial measures were put in place:
•In formulating appropriate strategies, the ALCO Committee would ascertain the primary causes of the variance from policy tolerances, the expected term of such conditions, and the projected effect on capital and earnings.
•Our ALCO Committee would inform the Board of Directors of the variance, and present recommendations to the Board regarding proposed courses of action to restore conditions to within-policy tolerances.
Where temporary changes in market conditions or volume levels result in significant increases in risk, strategies may involve reducing open positions or employing other balance sheet management activities including the potential use of derivatives to reduce the risk exposure. Where variance from policy tolerances is triggered by more fundamental imbalances in the risk profiles of core loan and deposit products, a remedial strategy may involve restoring balance through natural hedges to the extent possible before employing synthetic hedging techniques. Other strategies might include:
•Asset restructuring, involving sales of assets having higher risk profiles, or a gradual restructuring of the asset mix over time to affect the maturity or repricing schedule of assets;
•Liability restructuring, whereby product offerings and pricing are altered or wholesale borrowings are employed to affect the maturity structure or repricing of liabilities;
•Expansion or shrinkage of the balance sheet to correct imbalances in the repricing or maturity periods between assets and liabilities; and/or
•Use or alteration of off-balance sheet positions, including interest rate swaps, caps, floors, options, and forward purchase or sales commitments.
In connection with our net interest income simulation modeling, we also evaluate the impact of changes in the slope of the yield curve. At March 31, 2023, our analysis indicated that a further inversion of the yield curve would be expected to result in a 5.26 percent decrease in net interest income; conversely, an immediate steepening of the yield curve would be expected to result in a 1.51 percent increase in net interest income.
Critical Accounting Estimates
Various elements of our accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain accounting policies that, due to the judgment, estimates and assumptions are critical to an understanding of our Consolidated Financial Statements and the Notes, are described in Item 1. These policies relate to: (a) the determination of our ACL, (b) fair value measurements and (c) the acquisition method of accounting. We believe the judgment, estimates and assumptions used in the preparation of our Consolidated Financial Statements and the Notes are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements and the Notes to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations and/or financial condition.
For further information on our critical accounting policies, please refer to our Form 10-K for the year ended December 31, 2022, which is available on our website, under the Investor Relations section, or on the website of the Securities and Exchange Commission, at sec.gov.