Flagstar Financial Q4 2021 Earnings Call Transcript

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Provided by Quartr
January 26, 2022

Key Takeaways

  • Positive Sentiment: Community pledge: the combined NYCB-Flagstar commitment to deploy $28 billion over five years in loans and investments to minority and low/moderate-income communities is expected to support merger approval and social objectives.
  • Positive Sentiment: Q4 operating diluted EPS rose 15% year-over-year to $0.31, driving full-year EPS to $1.24 (a 43% increase) – the highest since 2005 – and record net income of $585 million.
  • Positive Sentiment: Loan portfolio expanded 7% to $45.7 billion, led by multifamily growth (+7% to $34.6 billion) and a 15% rebound in specialty finance, with a robust $2.2 billion Q1 pipeline suggesting further momentum.
  • Positive Sentiment: Funding improved as deposits climbed 8% to $35.1 billion, core deposits rose 20%, and banking-as-a-service balances reached $1 billion, reducing reliance on wholesale funding.
  • Positive Sentiment: Asset quality strengthened with nonperforming assets at just 7 bps of total assets, loan delinquencies down 85% QOQ, and principal-only deferrals cut by 47% to $479 million.
AI Generated. May Contain Errors.
Earnings Conference Call
Flagstar Financial Q4 2021
00:00 / 00:00

There are 12 speakers on the call.

Operator

Morning, everyone. This is Sal DiMartino. Thank you for joining the management team of New York Community for today's conference call. Today's discussion of the company's Q4 and full year 2021 results will be led by Chairman, President and CEO, Thomas Cangemi I'm joined by Chief Operating Officer, Robert Wann and the company's Chief Financial Officer, John Pinto. Before the discussion begins, I'd like to remind you that certain comments made today by the management team of New York Community may include forward looking statements within the meanings of the Private Securities Litigation Reform Act of 1995.

Operator

Such forward looking statements we make are subject to the Safe Harbor rules. Please review the forward looking disclaimer and Safe Harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us. With that, I would now like to turn it over to Mr. Cangemi. Tom?

Operator

Thank you, Sal. Good morning to everyone, and

Speaker 1

thank you for joining us today to discuss our Q4 and full year 2021 performance. In addition to Robert and John, also joining on the line are Sandra Donnello, President and CEO of Flagstar and Lee Smith, President of Flagstar Mortgage. Before we proceed with a discussion of our results, I'd like to refer you to the announcement of our community pledge agreement we made earlier this week. We announced a combined New York Community Flagstar commitment to provide $28,000,000,000 over 5 years in loans, investments and other financial support to communities and people of color, low and moderate income families and communities, the small businesses and the continuation of the expansion of our responsible multifamily lending practices. The pledge agreement was developed in collaboration with NCRC and its members, while locally we worked hand in hand with A and HD.

Speaker 1

We spent 9 months working on this agreement and that with nearly 80 member organizations across the country and came away very impressed by all they do their communities each and every day. This is a significant and far reaching agreement that both Sando and I believe will provide greater economic opportunities for those communities and bridge the racial wealth gap across the broader footprint of our pending new company. We would like to thank Jesse Van Talen, the CEO of NCRC and his team for their leadership and guidance during this process and to everyone at A and HD for their initiation and dialogue with the company. We are cautiously optimistic that this integral agreement will assist in paving the way to us receiving the remaining regulatory approvals necessary closing the merger as early as practical in 2022. Now, I would like to turn over to our results.

Speaker 1

Earlier this morning, we announced Q4 2021 operating diluted EPS of $0.31 a share, up 15% compared to the $0.27 a share in the Q4 of last year. For the full year, operating diluted earnings per share were $1.24 up 40 3 percent compared to operating diluted EPS of $0.87 in the full year 2020. The $1.24 is the highest diluted EPS we've reported since 2,005. While operating net income available to common stockholders of $585,000,000 is the highest amount we have ever achieved as a public company. This was a very strong quarter for the company capping off what was a solid year for us.

Speaker 1

Aside from double digit growth in net interest income and earnings per share, Our 4th quarter results include a record loan growth, a stable net interest margin, lower operating expenses and continued stellar asset quality, highlighted by a substantial improvement in delinquent loans. Our full year results were highlighted by a high single digit loan growth number, Double digit improvement in the net interest margin and a 17% increase in net interest income. Additionally, our expense discipline remained excellent as operating expenses rose $7,000,000 or 1% on a year over year basis. Turning now to the details of our performance. Starting off with the main highlight of the quarter, loan growth.

Speaker 1

Total loans were $45,700,000,000 at year end, up $2,900,000,000 or 7% compared to the last year and ahead of expectations. Most of this growth occurred during the Q4 as loans grew $2,100,000,000 compared to the Q3 of the year. This was the strongest growth quarter for Lenny since the Q1 of 2,006. The majority of this growth was in the multifamily portfolio, which increased $2,400,000,000 or 7 percent to 34,600,000,000 and $1,800,000,000 on a linked quarter basis. This was driven by increased activity on the part of both existing and new borrowers prompted by the outlook for higher interest rates, a significant uptick in property transactions and the company's proven ability to service and meet the needs of our borrowers.

Speaker 1

Growth in the specialty finance portfolio rebounded strongly. During the Q4, as the economy continues to improve, specialty finance loans increased 15% or $451,000,000 on a year over year basis and now total $3,500,000,000 while total commitments are $5,600,000,000 up 16% compared to last year. Of the $5,600,000,000 in commitment, 69% or $3,900,000,000 are structured as floating rate obligations. Additionally, given the amount of unused commitments, we believe that as the supply chain issues ease, borrowers will draw down on their unused lines, setting the segment up for a very strong loan growth anticipated for 2022 as well. Originations were also very strong during the Q4.

Speaker 1

Total 4th quarter originations of $4,600,000,000 up 55% compared to the Q3 of the year. Originations exceeded the prior quarter's pipeline by $1,900,000,000 Of the 4th quarter originations, 54% were due to property transactions, 24% were refinanced out of other banks' portfolios and 22% were refis from our existing portfolio. Additionally, the pipeline heading to the Q1 of 2022 is robust at $2,200,000,000 which bodes well for 1st quarter originations and anticipated growth. Of this amount, 61% of that portfolio is new money. Switching over to the deposit side.

Speaker 1

Deposits totaled $35,100,000,000 at year end, up $2,600,000,000 or 8% compared to year end 2020. We continue to make significant progress on several fronts with our deposit strategy, including increasing the level of core deposits, bringing in additional deposits from our borrowers and growing our banking as a service initiative. Core deposits increased 4.5 $1,000,000,000 or 20 percent on a year over year basis at $26,600,000,000 while CDs dropped $1,900,000,000 or 18 percent to 8,400,000,000 representing 24% of total deposits compared to 32% a year ago. Loan related deposits increased $475,000,000 or 14 percent to $4,000,000,000 compared to year end 2020. In addition, deposits Growth was driven by banking as a service related deposits, which ended the year at $1,000,000,000 Loan related deposits include business operating accounts, which increased 37% or $318,000,000 on a year over year basis and represents 30% of the overall loan related deposits.

Speaker 1

On the banking as a service side, we had a successful 1st year, winning several contracts in support of the U. S. Treasury's CARES Act related to EIP programs and contracts in New Jersey and Rhode Island in support of our technology partners' prepaid card programs. We have also developed an active and sizable pipeline of digital and banking as a service clients. These programs along with what we have in our current pipeline are anticipated to yield significant deposits and fee income opportunities in 2022 and beyond.

Speaker 1

Moving next to our income statement. 4th quarter net interest income increased 5% on a year over year basis, increasing 17% for the full year as we benefited from lower funding costs throughout 2021. Additionally, excluding merger related expenses, 4th quarter pre provision net revenue rose 11% on a year over year basis and 28% for the full year. In terms of our margin, for the Q4, it was 2.44 percent unchanged compared to the 3rd quarter and 2.47% for the full year. Excluding prepayment income, the 4th quarter and full year margin was 2.32% for both periods unchanged on a linked quarter basis, however, up 19 basis points for the full year.

Speaker 1

On the expense front, we are very pleased with our continued expense discipline. Operating expenses for the Q4 declined compared to both the Q3 of the year and the year ago Q4. For the full year, our operating expenses totaled $518,000,000 up only $7,000,000 or a mere 1%. This resulted in an efficiency ratio of about 38% for both the current quarter and the full year. Before I continue further, I'd like to update you on the New York City market as it pertains to our business.

Speaker 1

The New York City residential rental market continues to be very strong with demand outpacing supply. Manhattan market has rebounded and rents remain strong for residential units virtually across the board. And in general, rents are back to pre pandemic levels, while the non luxury rent regulated segment remains very robust. Outside of residential, the rest of the Manhattan real estate market is coming off its lows And we see encouraging signs as we head into the spring with many leasing concessions that were put in place in 2021, expiring and translating into increased cash flows borrowers in 2022. As far asset quality, our credit trends are positive and continue to rank among the best in the industry.

Speaker 1

Non performing assets were $41,000,000 or 7 basis points of total assets. And for the full year, we reported a net recovery of 2,000,000 More importantly, our delinquency trends improved dramatically. Loans 30 to 89 days past due decreased $380,000,000 or 85 percent on a linked quarter basis at $67,000,000 to $67,000,000 as the one relationship we've discussed last quarter returned to and status. In addition, as of December 31, 2021, principal only loan deferrals declined to 479,000,000 down $435,000,000 or 47 percent on a linked quarter basis. As of year end, the company had 0 full payment deferrals.

Speaker 1

Based on our strong results and the positive outlook for credit quality, the Board reinstated the company's share repurchase program, which have been suspended in 2020 due to the uncertainties regarding the COVID-nineteen outbreak. In reinstating the repurchase program, the Board took into consideration enhance earnings profile and capital levels as we reposition ourselves to partner with Flagstar. And based on our pro form a capital position, we have more flexibility in returning capital to shareholders. Also at yesterday's meeting, the Board of Directors declared a $0.17 dividend on our common shares. The dividend will be paid on February 17 to common shareholders of record as of February 7.

Speaker 1

Based on yesterday's closing price, this translates to an annualized dividend yield of 5.6%. Finally, I would like to take a moment to thank all of our employees whose hard work, dedication and diligence last year was unmatched. Our strong results would not have been possible without their commitment to our customers, shareholders and our company. Our employees continue to be a key contributor to the ongoing success of this organization. With that, we would be happy to answer any questions you may have.

Speaker 1

We'll do our very best to get to all of you within the time remaining, but if we don't, Please feel free to call us later today or during the week. Operator, please open the line for questions.

Speaker 2

Thank you. We will now be conducting a question and answer call. Call. Our first question has come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.

Speaker 1

Good morning, Abraham.

Speaker 3

Good morning, Dom. How are you?

Speaker 1

Good morning, Bob.

Speaker 3

Yes, just so the question first on the timing of the deal, I think I heard you say you feel good about closing it in 2022. Just wondering if you can narrow down that window given what Agreement that you achieved, we've seen other banks announce get Fed approval around their deals in recent weeks. Like is it could we see Approval happening within the next few weeks or is that too optimistic?

Speaker 1

Appreciate the question. Obviously, we were very Specific about where we are, I mean, obviously spending a lot of time on getting our community pledge agreement done, that was a major milestone for the company. I think we're pretty clear that this will pave the way for the approval process. We're very confident that we'll get the deal closed. As far as the timing, it's in the hands of the regulators, I wish I can give you more detail about that, but I think it was pretty clear.

Speaker 3

Understood. And I guess then Tom, Remind us around just rate sensitivity with the Fed expected to hike maybe as early as March, like how do we think about standalone NYCB margin in that backdrop? And also remind us what Flagstar balance sheet does for its sensitivity if we get multiple rate hikes for the next year or 2?

Speaker 1

I'll start the question and answer the question and I'll defer to John. But big picture is that we see absent Flagstar the continuation of margin expansion. Abraham, as you know, we have a sizable derivative that comes off this quarter that adds about $40,000,000 plus top line revenue to the company as that Just expired, so we continue to see margin expansion in the short term for NYCB ex Flagstar. And obviously, We've performed this both ways, so we're very comfortable with our position financially. I'm going to defer to John as far as the guidance on rate increases and the like.

Speaker 1

John?

Speaker 4

Yes. We are anticipating, of course, is that the Fed has telegraphed rate increases in our standalone forecasting and budgeting. But as Tom mentioned, we do see margin expansion in the Q1, primarily given the roll off of the interest trade swap that we have on our books in the middle of February. We expect that to be about 3 basis points in the Q1 from an expansion perspective. And then when you look at on a consolidated basis with Flagstar, Flagstar is substantially asset sensitive.

Speaker 4

So that will dramatically moderate The liability sensitive nature on our books as well as we hope our initiatives on the deposit on the banking as a service side, right? That's the goal is to limit the reliance on Home Loan Bank and on a standalone basis, try to moderate our own interest rate risk sensitivity. But the Flagstar transaction does that Pretty quickly once it's closed.

Speaker 1

Hey, Ram, I just wanted to just add to that point on funding. We've culturally changed the direction on how we look at lending. We lend with the Expectation that we receive the operating accounts and as many compensating balances as possible as we push our technology service that we can provide to our customer base. That has been a significant shift for the company. I believe it's around a 38% increase year over year on operating activity that's tied to the loan customers.

Speaker 1

If you remember when I have my first call as CEO. We talked about the low lying fruit. Our team, our Board, our entire culture has focused on getting that relationship lending in place. So we're very pleased about our 1st year's results, this sizable increase. Historically, if you know the company, it was a growth by acquisition company on the funding side.

Speaker 1

This year on a standalone basis, we've done a tremendous job on in 2021 on bringing in deposits. And these are operating accounts, these are relationship deposits. It's the focus of the change in the culture at the bank.

Speaker 3

And just two follow ups. John, you mentioned 3 basis points impact in 1Q. What's the full quarter impact as we think about the hedge roll off thinking about 2Q? And then The Banking as a Services, I think you mentioned $1,000,000,000 in year end deposits. I know you made a few hires over the last year.

Speaker 3

How big can that book get? How fast can it grow? And what's the rate sensitivity of those deposits that come through that banking as a service channel?

Speaker 1

So I'm going to change the orders. I'm going to just answer banking as a service and I'll throw the margin back to John. I mean, look, we're very excited what we're doing on BAS and we're also They have so much liquidity over at Flagstar. The fact that They have so much liquidity over the Flagstar. The fact that they're not truly taking advantage of that mortgage as a service business is because of their balance sheet concerns.

Speaker 1

They don't need the liquidity. On a combined basis, we will embrace that. So collectively, absent, Flagstar, we see some very strong initiatives. There are some significant items in the pipeline that we can't speak to yet because they're not public, but have pretty big wins that we anticipate getting that will lead towards this Very low stable cost of funds benefit for funding that could also drive fee income out possibility. As they get Approved and they've officially become public, we'll let the world be aware of that.

Speaker 1

But these are a unique focus for the bank. It's That coupled with the fact that we're also banking some of the smaller technology companies that as well as some of the smaller banks that are not going past the $10,000,000,000 urban threshold On a cards perspective, so we're looking for the excess liquidity to harbor on our balance sheet as an alternative solution to fund our balance sheet, which has been working out very well. On an average basis last year, the numbers were much more than $1,000,000,000 just because of the amount of activity that was that orchestrated by the government, but we have Further contracts that we believe would be very fruitful for our 2022 horizon in short term. Now this is going to be an ongoing build out of the business. We want to tie in some of our Fintech initiatives that we're working with, with our technology partners to also use banking as a service.

Speaker 1

So As you said, we have hired some people and we anticipate hiring more people as we build out the business. But again, this business was 0 deposits as of January 1, 2021, And now we're looking at a sizable opportunity and when you ratchet on mortgage as a service, that number could be significant. John, the margin or good. I'm not sure if we touched the margin side, so maybe John wants to maybe he can repeat the question to John on the margin.

Speaker 3

Yes. John, one, the full quarter impact as we look into 2Q from the hedge roll off, I know you mentioned 3 basis points. And secondly, if the deal is not closed, let's say, until June 30 and we get a March fed rate hike, do you still expect the margin to expand in the Q2?

Speaker 1

Look, I want to be very clear. I know John is the CFO and John could Specifically, but I will be very clear. We've always never give that long dated guidance. You know the culture here, Abraham. So we gave out the short dated guidance.

Speaker 1

We're very confident that we're positioned well and much better than today than we were in previous years. But when we rolled in Flagstar, this company has a significant earnings power that we're anticipating. Absent Flask, we're very comfortable with a very strong profitability on a standalone basis. We gave out the Q1, but I will tell you it's a good try to get John to give out Guidance beyond the Q1. Thank you for that.

Speaker 3

All right. Thanks for taking my questions.

Speaker 1

Go ahead.

Speaker 2

Thank you. Our next question has come from the line of Christopher McGratty with KBW. Please proceed with your questions.

Speaker 5

Good morning, Chris.

Speaker 6

Good morning. Hey, good morning. I'm looking at the slide deck from this morning and you referenced the 16% accretion from the deal, which Was announced last year. Obviously, rate expectations have changed a bit and the mortgage market is changing. So I'm interested if there Any change to that 16%?

Speaker 6

And also if you could provide some color, gain on sale margin that Flagstar were soft. I'm wondering if you can give a little bit of outlook Q1 and the intermediate term outlook? Thanks.

Speaker 4

Sure, Chris. This is John. I'll start and then I'll hand it over to Lee. When we look at when we announced the deal at 16%, we're very comfortable with the economics that we laid out at the time of the deal announcement. There's no doubt that the earnings from both institutions were stronger in 2021 than that was originally forecasted in that deal.

Speaker 4

And we believe 'twenty two will probably be the same, but we'll see depending on the rate environment. So I would say we're very comfortable with the accretion percentages that we put out. And if anything, the capital is probably a little bit higher right now, given the earnings contribution from both organizations, but especially from the Flagstar Organization? Lee, you want to jump in on mortgage banking?

Speaker 7

Yes. And I think the question was around margins. So thanks, John. What I would say on margins in the 4th quarter, There were some competitive factors and forces that came into play. And then you had the rising rate environment.

Speaker 7

And so People were trying to fill capacity and so that had an impact on margins. But also from our point of view, there was some RMBS Related margin impact. We went to market with a couple of deals And the market was saturated. We didn't quite get the execution that we were expecting. And then we had a pricing adjustment on non owner occupied loans After the FHFA lifted or suspended their caps on such loans.

Speaker 7

As we look forward into Q1, We believe that gain on sale revenues will be similar or slightly better than what you saw in Q4.

Speaker 6

And then maybe just a technical one. The borrowings you added in the quarter, what was the rate on those new borrowings, John?

Speaker 4

Yes. So we did a mixture of borrowings in the Q4. The longer term borrowings we put on were 3 year at approximately a 134%, 1.34% and then we did have some short term borrowings that were at overnight or weekly rate.

Speaker 8

Great. Thank you.

Speaker 2

Thank you. Our next questions come from the line of Steve Moss with B. Riley. Please proceed with your questions.

Speaker 8

Good morning, Steve. Good morning. Maybe just Following on loan growth here, curious, you sound pretty upbeat about loan growth Tom, and just wondering how you're thinking about 2022 here?

Speaker 1

Great, great question. I mean, yes, we're very upbeat. I will tell you that our people are really busy. The Q4 was an active quarter and it continues in Q1. So if you look at the pipeline north of $2,000,000,000 $2,200,000,000 which almost 70% of its new money pipeline.

Speaker 1

It's an active period. We're seeing significant activity on the anticipation of higher rates. We're hearing many property transactions that are in the market. That's a significant change that was going we didn't see that even pre pandemic. So the fact that property transactions are occurring, That's a very good sign.

Speaker 1

You talked a little bit about Manhattan, how the market has come back significantly. We really haven't done much on The pure CRE side, so multifamily has been our focus as well as specialty finance. But it feels like the market is seeing a lot more property transactions And our pipeline is very strong. As far as growth for the year, I mean, normally around this time, we kind of target 5%. I'm moving towards more upper single digits As we start the year, given the significant Q1 pipeline, which is not typical for us, typically, we have a strong Q4 like we anticipated '21 and then we kind of have a little bit of a slowdown in Q1 and we ramp up, but it's coming out of the gate very strong.

Speaker 2

Okay. And rates and rates

Speaker 1

and rates and the rate environment is strong. The spreads are between 185 to 200 over the 5 year for shorter duration paper, which has been very, very, very good for us given the shape of the curve. Even though it's come down a little bit in the back end, It seems like the portfolio lenders will have an advantage here versus GSE, just given the shape of the curve. Okay. That's helpful.

Speaker 1

That was going

Speaker 8

to be my next question. And then in terms of the pro form a combination with Flagstar, Just following up on the assumptions here since it's been a little bit delayed. I hear you on the buyback given higher capital levels. Just kind of curious Is there any other changes in terms of thoughts around balance sheet restructuring or things you may do as you combine here?

Speaker 1

Look, we're very excited about the opportunity. We talked about reactivating the repurchase activity. That's just a function of capital planning going forward. If you look at the pro form a capitalization, as John indicated, we have more capital based on their higher earnings profile since we announced the transaction. They made more money.

Speaker 1

The capital profits have built up. On a pro form a basis, we're just south of 11% on CET1. So that's a pretty big ratio that we're typically on a standalone basis not accustomed to. So that's going to give us a lot of capital maneuverability as we make choices and how we reallocate capital. So reactivating the buyback obviously was really a function of The marketplace and our vision as we allocate capital on a combined basis back to shareholders.

Speaker 1

We have a very strong dividend that At the same time, this company is going to generate a lot of capital. And as Mr. Pinto indicated, there's no adjusting towards the earnings profile on a combined basis. So if you think about what we talked about when we announced the deal, there's a lot of excess capital that's going to come out of this company on a combined basis. Okay.

Speaker 1

As far as we have turning it to And just go back to the restructuring side, we're going to look at it opportunistically. When the companies come together, we have a lot of flexibility depending on how Large mortgage as a service could actually become, I think it could be a material number as we dive into their clientele and look at the assets liquidity that's in the marketplace that we can harbor on our Combined balance sheets that can give us a lot of flexibility to get away from some of the other dependencies of fundings that were typically utilized historically. So I think we can have a more stable funding position as we roll out mortgage as a service. They do it now, but on a combined basis, it could be very material for the company and gives us lots of funding options as we combine.

Speaker 8

Okay, great. And then maybe just On the Flagstar side, a question for Lee. Just kind of as we think about just Where is the mix of purchase versus refi? And just kind of curious as to direct lending, I know there's pretty A healthy amount of volume and your highest gain on sale margin, just kind of color around some of the market dynamics there?

Speaker 7

Yes. No problem at all. I mean, if you look at the late Spanish Freddie and NBA forecast, they're forecasting a $3,000,000,000,000 market in In 2022, but the composition is flipping to being twothree purchase, onethree refi, And it was the opposite in 2021. It was 2 thirds refi, 1 third purchase. I think, look, the big variable in this is inflation, and the Fed has been very clear.

Speaker 7

This is their immediate priority, which could lead to additional interest rate hikes in 2022. And at some point, that could start to impact affordability. And again, a $3,000,000,000,000 mortgage market, while very strong, it's still a 25% reduction on 2021. So there is still Excess capacity in the system. We will continue to leverage our diversified mortgage business given we originate in all six channels.

Speaker 7

You mentioned direct lending. We're investing in technology to enable us to originate more purchase business in the direct lending channel. We're going to rely on our broad product offerings. The benefit we have of the execution optionality afforded to us by being a bank, Having a balance sheet, the RMBS program as well as the sale program, we've built a variable cost structure, 70% to 75% of that costs are variable or semi variable. And then coming back to what Tom said, You've then got all the benefits of merging with NYCB, bigger balance sheet, additional capital and a broader footprint.

Speaker 7

We feel pretty good about 2022, albeit we've got think we're all sort of looking at inflation and how the Fed is going to react to counteract that.

Speaker 8

All right. Thank you very much. Appreciate all the color.

Speaker 1

Sure.

Speaker 2

Thank you. Our next question has come from the line of Brock Vandervliet with UBS. Please proceed with your question.

Speaker 1

Good morning Brock.

Speaker 9

Thank you. Hey, good morning. Good morning. You mentioned cost base on the Flagstar side, Variable or semi variable, I noticed mortgage expenses dropped just $4,000,000 gain on sales under pretty heavy pressure here. Is there some offsetting expenses that we would expect to come out in Q1?

Speaker 7

Yes. Here's what I would say. Yes. Are you talking about on the mortgage side, Brock, specifically?

Speaker 9

Yes. Yes, specifically, yes.

Speaker 7

Yes. Here's what I'd say. As it relates to cost on the mortgage side, we will be proactive in adjusting capacity as necessary. We built this Flexible capacity model to scale up or down with volume that leverages third party vendors. We've cross trained our existing staff And 70% to 75% are variable, semi variable.

Speaker 7

And then we've got scale, right? And the beauty of our platform That helps a lot. And we've proven our ability historically to manage costs depending on where volumes and revenues are. What I would say to you though is in Q1, you don't want to react too quickly as you're going into spring volume season. And so we do want to sort of see how things play out in February March going into April See if that bump is there because as I mentioned earlier, we're still looking at a $3,000,000,000,000 market here and it's pivoting to purchase.

Speaker 7

So we want to watch that. But at the same time, we've got this variable cost structure in place, And we will manage costs accordingly and depending on what's happening to revenues.

Speaker 10

And if I could jump in here on this, this is Sandro. Page 14 of our deck has a chart there that shows the mortgage expense. And you can see it's relatively stable As a percentage of closings quarter over quarter, the thing I would remind you of is that Gain on sale is based on the lock date. Expenses come in when we close. So there's a little bit of an imbalance sometimes there.

Speaker 10

But overall, when you look at it from a 12 month perspective, Typically, the expenses are going to be in that 1% to 1.15% range of closings. And that, as Lee has said, that's been very, very stable historically. And so we will manage to that kind of expense level.

Speaker 9

I got it. And I don't mean to beat up on Flagstar expenses, because it's These mortgage trends we're seeing across the sector, I just I guess I'm struggling with the accretion Assumptions in the transaction in the merger given this diminished earnings power we're seeing Into well, Q4, but probably into

Speaker 1

Q4. Let me follow-up on that point. Remember when we came together With our joint press release when we announced the deal, we assumed 2022 forecast down 40% on our model And they had a tremendous 2021 year. If you forecast that into the run rate, we're very comfortable that our guidance out there is solid.

Speaker 9

Okay. All right.

Speaker 10

Yes. I would add that. I mean, if you look at overall Flatstar results, While there's certainly some disappointment with the mortgage results for Q4, the numbers overall are Strong, right. We didn't miss on earnings despite the level of revenue in the mortgage business. Return on equity was strong.

Speaker 10

No, we're not. Sometimes we're viewed as a mortgage company. We're not. We really are a bank and the returns that we've produced In times where mortgage is challenging, I would actually look back to 2018 2019 when the revenue in the mortgage business was More like what you saw in Q4. And we still had strong returns on equity.

Speaker 10

And we still have that in Q4. And if you look in between when the mortgage market was extremely robust

Speaker 1

and we

Speaker 10

had returns that were double our peers. So I don't think you should view the current situation in the mortgage business as one that causes Flagstar's to return Flagstar's returns to be less than what you would be satisfied with. We're completely confident that The company's performance is going to continue to be at the top end for the midsized bank range as a standalone company.

Speaker 1

That's right. I would also add to Sanjay's commentary that obviously in a rising rate environment, we will look to utilize our balance sheet The growth, I mean, obviously, the 400 locations on retail plus the 87 locations on origination that we expand upon in our product mix, we will start looking at portfolioing some of these higher yielding type loans on the balance sheet as well. And I think when you think about growth going back to our original Forecast results were de minimis when we pro form a this transaction back in April. As we get to know each other here through our merger integration process, we believe we have Significant potential growth together as we build out this business.

Speaker 11

Okay. Thank you.

Speaker 2

Thank you. Our next question has come from the line of David Rochester with Compass Point. Please proceed with your questions.

Speaker 10

Good morning, Kay. Good morning, guys.

Speaker 5

Just a quick question for Sandro and Lee. I know you guys have mentioned a normalized mortgage add per quarter of $115,000,000 is maybe more of a target or something you thought you could do. Just given the gain on sale hit that we've had this quarter to 91,000,000 And your guide for something similar, maybe a little bit better, it sounds like in 1Q. Are you thinking that $150,000,000 might actually end up coming in a little bit lower? And then part 2, just given your outlook on rates and your knowledge of seasonality of the business and whatnot, Are you expecting some kind of a pickup in that gain on sale in 2Q or is it too soon to tell at this point?

Speaker 10

So let me start and Lee can add if he'd like. Certainly, $150,000,000 is the target. And when you annualize that to get to $600,000,000 that's really where we would love to see it. But we believe that if it's less than that, then as I said in response to the previous call, That if that's what's going on in mortgage, then there's other things that are compensating for that in the other parts of the business. We're very confident About the growth of our banking business.

Speaker 10

Like Tom indicated with NYCB, our commitments are growing at a very strong level. Our pipeline is very, very robust. So as we look forward, we think that given the high quality of credit that we have, The control that we're maintaining over expenses overall as a percentage of our revenues are going to allow Flagstar regardless of whether Mortgage or gain on sale is 100 or 150 average per quarter, put us in a position, as I said previously, to continue the level of earnings that we reported previously. Because while all of this has been going on over the last 2 years with mortgage being extremely strong, We've been quietly building everything else in the company. So now we're positioned where we can still be very, very profitable in a quarter like Q4 where gas was pressured.

Speaker 10

Okay. And then

Speaker 5

in terms of how you're thinking about 2Q and maybe a pickup there?

Speaker 7

Yes. It's Lee. Let me

Speaker 10

Yes. Like Tom said, we won't go to 2Q. We can give you a little feeling about 1Q.

Speaker 7

Yes. No, I was going to just piggyback off Sandro's comments. I agree with that. I think the target that we put out, you can break it down to the Steve, it's really more of an annualized target if we can get to €550,000,000 €600,000 But As we said, right, we've got a variable cost structure. And so if it isn't there, we will manage the cost side appropriately.

Speaker 7

I think to Sandro's point, We've always had it when we built this diversified bank at Flagstar that has enabled us to produce Strong earnings, whatever is going on with mortgage. And when mortgage is hot, then our returns are outsized. We're going to be even more diversified when we come together with New York Community Bank. And I think that is the power of this transaction. This franchise together can be successful in any interest rate environment.

Speaker 7

I don't want to look into Q2 Because again, right now, there's just a lot going on from a macroeconomic point of view with And what the Fed is going to do to react to that. So we're just guiding to Q1 being similar or slightly better than Q4 from a gain on sale point of view.

Speaker 5

Great. Appreciate the color guys. And then Tom, what's the outlook on 1Q At this point, and I know you've occasionally talked about your full year view on expenses in the past. If you have any thoughts just on a standalone basis As to what that expense base could look like?

Speaker 1

Sure, Dave. Obviously, 2021, we came in better than we expected for the year. I don't see on a standalone basis any significant uptick in expenses. I mean for the year, we'll probably guide around $540,000,000 for the year in that range, which is probably conservative. But again, we're very hopeful that we closed Flagstar, this will be a moot point because we're going to be a much larger company.

Speaker 1

A standalone basis, $540,000,000 is probably a good guide. I would say for the Q1, our expenses is usually the high quarter of the year given FICA and payroll taxes to $135,000,000 guide for Q1 and then coming down in Q2 and you can kind of tie out the $540,000,000 for the year.

Speaker 5

Perfect. And then if you just give an update on what you're seeing on a new loan yield basis, multifamily, Spec Fin, that sort of thing and then maybe securities reinvestment rates. I know you're not growing the portfolio, but as you're sort of maybe stabilizing it, you're just curious where you're buying securities.

Speaker 1

Yes. I'll give some color on the loan side and I'll defer to John Pinto on the security side. I will tell you that we've been not really buying any securities at all. We've been keeping the powder dry for years. So there will be potentially an opportunity depending on market conditions, but we've been reluctant to take on duration risk given the current environment.

Speaker 1

I will tell you in the Q4, the gyration of the yield curve really, I think woke up a lot of our customers. So spreads have held in very nicely. We've had rates as high as 3.50 ish in the 5 year and down to as low as 3.8. So it's going to range. But that 185 to 200 basis point spread on our core model has been holding very well.

Speaker 1

So obviously, we watch the treasury curve every day. That's our business model and we really tie out as a portfolio lender. What's been interesting, David, is that when you think about the back end of the curve and you look at the choice of a portfolio loan versus an agency loan, looks like agency has been struggling just given the dynamics of the cost of coupon. So we've been winning a lot of good business. That continues.

Speaker 1

So spreads are holding up very nicely. We talked about the anticipation of probably more growth than we anticipated from the previous year going into 2022. Post COVID, this has been a very robust property transaction in the bottom. I talked to the brokers in the market, there are stuff that's transacting that is significant. A lot of transactions that are in place right now, we're seeing some great opportunities.

Speaker 1

Our customers have been very proactive leveraging their operating expense base to look at other markets. So we're choosing to work with our best customers outside of the New York market That is all kind of saturate and looking at other opportunistic markets and we're following them. So it's good to see some good transactions. As we talked about on a cash flow perspective, Cap rates are relatively stable and the spreads are holding up very nicely. So we're very ambitious about Seeing some good multifamily growth.

Speaker 1

We've been a little bit hesitant on the commercial real estate. We haven't seen a whole lot of CRE business. But from time to time, while we finance our current customer base, On the specialty side, we think we have tremendous pent up demand. I know in my opening comments, we talked about the outstanding commitments in totality, which is under 6,000,000,000 That business started from 0 a few years ago and it's been a great business model. I think there's opportunity there on potentially on the funding side that we hope to deal with over time.

Speaker 1

We're really a credit buy up shop there, but ultimately as we merge with Flagstar and we take their syndicate division collectively, we should be winning our own deals and maybe being a leader and putting deals together and controlling some of those deposit relationships. But we're excited about Specialty. I think Specialty had a year of 15%. I think we ran into the Q4 at 10%. That's been a big bump above the jump there.

Speaker 1

I think a lot of it has to do with pent up demand on the supply chain. That's going to be big for us in 2022. So there's a lot of money that's out there that's outstanding that hasn't been drawn down yet. That can also bode well for additional growth within specialty. So excited about the spreads there.

Speaker 1

Again, mostly floating rate type instruments on a rising rate environment will benefit from that. Think it's around 60%, 70% of the entire portfolio that reprices with rising rates. So the bank is somewhat differently positioned now than It's been as a traditional drift model. So we hope that as we get more towards neutrality with Flagstar, we see asset sensitivity, which would be a nice mix in the rising rate environment.

Speaker 5

All right. Sounds good. Thanks, guys.

Speaker 1

Just on the security side, Dave, just to go back to that, Yields are what they are. I mean, when they start getting closer to 3%, we'll probably wake up, but we've been very quiet on the security side.

Speaker 5

Yes. Okay, great. Thanks.

Speaker 2

Thank you. Our next question comes from the line of Peter Winter with Wedbush Securities. Please proceed with your

Speaker 10

question. Morning, Pete.

Speaker 1

Good morning.

Speaker 9

Good morning. Good morning, Tom. I wanted

Speaker 10

to ask about credit quality, which obviously is always a great story for you guys. You had another nice decline in the principal deferral loans. I'm just curious what happens with the remaining Like $480,000,000 of deferrals with the CARES Act getting exhausted in the next few months.

Speaker 1

Yes. Hey, great question. We looked is rolling into COVID-nineteen. We had about $8,700,000,000 We were very generous. When we looked at our CARES program, CARES Act program, we gave 6 months deferral right out of the gate, full deferrals.

Speaker 1

Many customers came back within a quarter and said we don't need it because there's been no change in the Non luxury market, people weren't exiting their apartments for the non luxury market. So we went through a very interesting journey during COVID. And where we stand today, come July, we should have close to 0 Because obviously the CARES Act runs out, when you think about that, it's been a very positive experience of working through the other side for our customers. I know in my opening commentary, we talked about lease ups. What we're seeing right now in the CARES Act that's remaining, I'd say, of The percentage of Manhattan is probably 90%.

Speaker 1

Is that right, John? Of course, the 90% of what's in deferrals is Manhattan. So outside of Manhattan, it's been a very strong recovery there on utilizing the CARES Act relief program. I envision that that will have 0 Loans on deferral come July, maybe June or July of this year. At the same time, when you think about what's going to happen As far as the pandemic, what does it mean for the overall asset quality of the bank?

Speaker 1

We have more than adequate reserves based on CECL. And we think we're going to probably deal with maybe $100,000,000 of stuff at the end of the day, which is pretty good for a $60,000,000,000 bank and we have $40,000,000 of NPAs. So we're very pleased with the asset quality. We had A little snafu last quarter with the customer and they worked itself out like we were very confident. We're very confident in our collateral.

Speaker 1

We are a low leverage lender. As you know, the LTVs historically are typically lower than the marketplace or an in place cash flow lender. Most of our businesses We'll call it rent stabilized and non luxury type market in the 5 boroughs. And we're very confident that in the event there is a hiccup, We have very good collateral to cover ourselves and believe me, we tested that in Q4 and we were we came out very strong given our positioning. As you can see, that relationship became current.

Speaker 1

So we're very bullish about where we are on asset quality and part of my discussion points in my opening remarks is that that's part of the rationale on coming out of COVID-nineteen. This portfolio is very strong. Got it. That's helpful.

Speaker 10

And then just as a follow-up question. You just give an update on the strategic partner with FIGR? Or does the real benefit really kick in when you close the merger with Flagstar and just how you're thinking about it in terms of maybe potential deposit growth

Speaker 1

So let me just be specific. We're not going to be explicit exactly what we're doing with things we're doing. Well, I was thinking it's We're working on a daily project. We have a lot of interesting things happening. As you saw recently, I'm sure you saw the USDF consortium has been formed officially.

Speaker 1

I believe we have 5 member banks now that are the founding members. We happen to be the lead there. That's going to be a very interesting view on Digital Markets via Stablecoin, USDF, Fiat Currency. So we believe that that working group is very powerful as we continue to add more members. It's an ongoing daily function both at compliance, audit, legal, our entire operating team is spending good efforts on making sure that we work with our regulators to come up with a solution to deal with this opportunity on Fiat currency.

Speaker 1

We've data tested multiple occasions on live transactions. It's been working out very well. We just did interoperability between multiple banks the same time, that's a big, plus. It's the first time it's ever happened in the banking industry. Although it's not a material transaction, but we did test inoperability amongst banks To move up from Minton Burn amongst each other banks, that's a big step towards solving for the USDF.

Speaker 1

At the same time, we deal directly with the on business use. We haven't been public specifically on what our business case use will be. We have a number of initiatives, as you mentioned, mortgage. We believe just on the financial transaction side, as Lee indicated, they do a lot of secondary market activity. Putting that on a blockchain is logical, Right.

Speaker 1

It's not on the agency side, but it's on the private label side. That's a very simplistic use of the Providence Blockchain via through our relationship with SIGINT Technologies. That's one of many things that we're working on. We believe there's going to be an opportunity to deal with potentially our customers where they can look at a more efficient way to make bill pay to rental payments to our borrowers. This is all part of our long term plans.

Speaker 1

We haven't specifically set out a business case use yet. This is an ongoing process, It's also a focus the most important focus is to ensure on a regulatory standpoint that we utilize the KYC, the Bank Super C View that we know our customers and I think that's the most important aspect of what we have to accomplish here and we've made tremendous progress there, Pete. I'm not going to give you specific numbers or guidance here. I can tell you every day we come up with new best use case ideas. It's evolving.

Speaker 1

It's a technology collaboration with a very strong Business and FIGR and others, by the way. It's not just FIGR, it's others that we're talking to on technology initiatives. We talked about My strategic plan when I became CEO is that we want to digitize the bank. This bank has a long way to go on digitization. So we're spending a lot of time with Our partner on Fiserv, they've been great as far as a true partnership.

Speaker 1

We're doing some good business relationships with them. At the same time, we're also rolling out a tremendous amount of digitalization. We believe that MyBankingDirect is going to be another catalyst for the company for another use case of bringing in funding at the consumer side. So That could tie into FIGR Technologies as well. So a lot of positive things to talk about.

Speaker 1

I'm not going to be specific until we actually have something that's live to talk about. But will tell you the energy level is very strong and it's fluid. Got it. Thanks for all that color, Tom. Sure.

Speaker 2

Thank you. Our next question has come from the line of Matthew Breese with Stephens. Please proceed with your questions.

Speaker 6

Good morning.

Speaker 1

Good morning, Matt. Hey, good morning.

Speaker 11

Hey, on the Flexstar deal, you mentioned that the community pledge agreement with the NCRC paves the way for the approval process. I guess I better I want to better understand that comment. Was there an issue on the CRA front? Or was there regulatory pressure in this area? And are there any other roadblocks we should be aware of?

Speaker 1

No, without getting specific, I want to be very clear about this. This is Not unusual for large transactions to embark upon a global pledge agreement. We took this, Sandra and I, with open arms. So we hit the ground floor running going back to the day after we signed the deal. It took a while to get to finalization, but no question deals of this nature tend to We tied to some very large community group project arrangement.

Speaker 1

I will tell you the importance of it is historic for us, given that we are a major force on multifamily lending And this multifamily lending business model will also expand into the markets of Flagstar. So we've done a lot of great work with A and HD over the years to be a responsible multifamily lender player here and because we're the largest portfolio lender. So the importance of this agreement is significant. As far as going forward, is important as far as getting our approval because this is something that we worked with our community groups without opposition. There was no opposition about us coming together.

Speaker 1

This was a joint effort with Sanjay and I personally. We spent hours on understanding the needs of our community. I think what's exciting about it is that we look at this as having the power of Flagstar's mortgage origination process to actually work with the agency to come up with solutions to better bank Communities in need and we think we have some really good initiatives that ultimately we can take this pledge arrangement into a very powerful industry standard that other banks can utilize to do good for America. And we truly believe that. This is an exciting time.

Speaker 1

And I will tell you that, it was a very fluid process, but ultimately, We got to the finish line and I truly believe and Sanjo, I don't want to speak to Sanjo, he's on the call. I truly believe this will pave the way for where we have to go to get our transactions moving towards the closing. As we all know, M and A has had somewhat of an extended time period, given the Biden executive order that came out in July and it is what it is and we work with our regulators and really can't get much into any more than other than that other than we're excited to come together and we'll work on a side by side together as a partner with Flagstar to get our deal closed.

Speaker 10

Yes. And just to answer your specific comment regarding CRA, Blackstar just had an outstanding CRA rating. So there is no CRA issue. But certainly getting An agreement of this nature done is an important part of the regulatory approval process.

Speaker 11

Okay. The other one just on the regulatory approval process. In the deal filings, there's several other approvals necessary for the deal, including Fannie, Freddie, Ginnie, the Department of Veterans Affairs, State of Texas and the State of Vermont. I don't know if that I've ever come across a deal requiring those institutions having a say. Can you just discuss the approval process for these other institutions and how do they compare to the standard kind of Fed and FDIC state approvals?

Speaker 1

I mean, maybe Lee can I believe we have retained those tools? So maybe Lee, do you want to expand the way we are with those tools on the mortgage side?

Speaker 7

Yes. No, absolutely, Tom. On the mortgage side as it relates to Fannie, Freddie, Ginnie, FHA, USDA, VA, We're in good standing. There isn't an issue. And the reason we need those is NYCB is the acquiring entity Because all those licenses are in Flagstar's name at the moment and they're obviously going to move over to New York Community Bank.

Speaker 7

They're all good. They're just waiting on the regulatory approval, but there's no issues. And that's the reason why we're having to take that step With this transaction because they're all in Flagstar's name at the moment and NYCB is the acquiring entity.

Speaker 11

Okay. So to be clear, those are more sounds like rubber stamp and does not have the same kind of rigor as the others?

Speaker 7

Yes. Primo, I would say that's mostly right, but it's not Just a rubber stamp. I mean, there was a lot of work questions that we needed to answer, and there was a lot of work that the teams did behind the scenes. It's a little bit more than a rubber stamp, but probably not as onerous as the regulatory approvals.

Speaker 11

Okay, understood. The last one for me, just going back to the FIGR partnership, earlier this month, You did a bank to banks digital market transaction. And I would assume over time there's more and more of these both kind of to customer within the bank and then across depository institutions as well. Are there any fee income benefits as these transactions take place? If so, could you outline that?

Speaker 11

And then to date, have you seen any encouraging signs on the deposit front from this technology?

Speaker 1

Yes. So we haven't yet put out a business a public business case use of the fee income that we would generate as the part of the consortium and as the bank that will be housing Hopefully, a substantial amount of deposits are tied to the activity, but clearly, that's part of our business plan as we develop it. It's not a public plan yet. Again, it's in beta testing. You mentioned that we did an operability that's going to continue with the other banks as well.

Speaker 1

They all have to make sure that that joined the consortium are doing the same type of technical awareness on how they could mint and burn collectively within each other's platform and then have that position in place. So yes, we've done one. We intend to do more testing as we move forward here. But I believe that ultimately as this takes on more energy and other banks enthusiasm towards joining the consortium. We feel there'll be a lot more banks looking to be part of this as a solution for what we're dealing with the system, which is a substantial amount of activity That's not currently housed in the banking system, right?

Speaker 1

So going back to KYC, it's going to go through our system. We own the KYC behind knowing In and out transactions on fiat currency, that is where I believe real value will be disseminated through the USDF. And at the same time, each bank will have its own business case use for how they look at the provenance blockchain depending on their business model. So It's evolving, Matt. I apologize for not being specific, but as you know, we have a lot of excitement.

Speaker 1

This is a technology build out with a substantial amount of regulatory dialogue that has to be done right.

Speaker 11

Understood. I appreciate it. That's all I had. Thank you.

Speaker 5

You're welcome.

Speaker 2

Thank you. Our next questions come from the line of Chris Marinac with Janney. Please proceed with your questions.

Speaker 6

Hey, thanks. Good morning. Tom, could you or Sandra just update us on how quickly you can integrate the back office Once you get approval, has that time sort of narrowed at all just because of this interim time since the announcement?

Speaker 1

No, Chris, it's a great point. And I'm glad we have Sanjay Lee on the call We've been working together for years now, but we do have separate companies and it's a lot to get to know each other. I think the most important aspect of a deal of this nature is culture, right? So my job is to ensure that the culture is aligned. At the same time, we're working with our teams independently because we're not one company yet To truly understand the opportunity of putting these cultures together, but culture is going to be key and that's my number one priority for the bank is to ensure that the culture is aligned properly.

Speaker 1

Sanjo is the ambassador of culture at Flagstar. He's done an amazing job under his leadership and I'm spending lots of time with Sanjo and I believe that The teams together are doing a phenomenal job. Unfortunately, we haven't called yet. So our focus was the Q3 of last year and now we're in the first We're very optimistic, but that's not in our control. We work real hard to get this deal done as soon as we practically can.

Speaker 1

At the same time, it doesn't go what day doesn't go by when we're not working on culture. We've assigned leadership at Flagstar and leadership at NYCB to manage The long term integration stream, we're working with 3rd party consultants to help bridge the gap there and we're geared up for a cultural integration. That's the most One aspect is this is going to be a very large mortgage concern as well that we have to ensure that we can cross the products and initiatives and make sure that people are aligned in the culture. So I don't know if maybe Sandra wants to add some color to that, but I think that's the focus for the Q and A.

Speaker 10

Yes. First, let me say that with respect to legal day 1, we're ready for legal day 1. So once the final regulatory approval comes forth, we'll be ready to go pretty quickly with the closing and be able to operate as a combined company pretty quickly. Now in terms of taking advantage of complete integration and conversion, obviously, as you've suggested, that takes time. And a lot of that you can't Quite get ready for until you get to legal day 1.

Speaker 10

So I don't think when you look at the conversion of the systems That the time necessarily narrows, because of the length of time it takes to get a regulatory approval. However, I will say as it relates to being ready with, let's say, marketing plans or for Bringing new products into the New York Community Bank branch offices. I think it does Give us the ability to be a little bit better prepared for that and hit the ground running. But in terms of totally narrowing the integration line between legal day 1 and complete conversion. I'm not sure there's a great amount of narrowing that takes place because of The timeframe related to the regulatory approval.

Speaker 10

And then with respect to culture, Tom is absolutely right. We're 2 different Companies, but we're trying to bring our people together, getting them to know each other. And that's maybe more important than allow people realize Relative to the success of a company because the more that your people care about the company, the better performance they will be And therefore the better results your company will have. And we are through our diversity, equity and inclusion program at Flagstar bringing New York Community Bank people into those events whenever we can. And the way that they have embraced it has really been fantastic.

Speaker 6

Great. Thank you both for that background. That's really helpful and thanks for all the information this morning.

Speaker 5

Sure.

Speaker 2

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing comments.

Speaker 1

Thank you again for taking the time to join us this morning and for your interest in NYCB. We look forward to chatting with you again at the end of April. We will discuss our performance for the Q1 of 2022.

Speaker 2

Thank you. This does

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