Flagstar Financial Inc (NYCB) 2021 Q4 法說會逐字稿

Good morning, everyone. This is Sal DiMartino. Thank you for joining the management team of New York Community for today's conference call. Today's discussion of the company's fourth quarter and full year 2021 results will be led by Chairman, President and CEO, Thomas Cangemi; joined by Chief Operating Officer, Robert Wann; and the company's Chief Financial Officer, John Pinto.

Before 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. 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?

Thank you, Sal. Good morning to everyone, and thank you for joining us today to discuss our fourth quarter and full year 2021 performance. In addition to Robert and John, also joining on the line are Sandro DiNello, President and CEO of Flagstar, and Lee Smith, President of Flagstar Mortgage.

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 the combined New York; Community Flagstar commitment to provide $28 billion over 5 years in loans, investments and other financial support to communities and people of color, low and moderate income families and communities, to 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 work hand-in-hand with ANHD. We spent 9 months working on this agreement and that was nearly 80-member organization across the country and came away very impressed by all they do for their communities each and every day.

This is a significant and far-reaching agreement that both Sandro and I believe will provide greater economic opportunities for those communities and bridge the racial wealth gap across the broader footprint of our upcoming new company. We would like to thank Jesse Van Tol, the CEO of NCRC and his team for their leadership and guidance during this process and to everyone at ANHD 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 to closing the merger as early as practical in 2022.

Now I would like to turn over to our results. Earlier this morning, we announced fourth quarter 2021 operating diluted EPS of $0.31 a share, up 15% compared to the $0.27 a share in the fourth quarter of last year. For the full year, operating diluted earnings per share were $1.24, up 43% 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 2005, while operating net income available to common stockholders of $585 million is the highest amount we have ever achieved as a public company.

This was a very strong quarter for the company, capping north, for what was a stellar year for us. Aside from double-digit growth in net interest income and earnings per share, our fourth quarter results included record loan growth, a stable net interest margin, lower operating expenses and a 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 million 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. Total loans were $45.7 billion at year-end, up $2.9 billion or 7% compared to the last year and ahead of expectations. Most of this growth occurred during the fourth quarter as loans grew $2.1 billion compared to the third quarter of the year. This was the strongest growth quarter for lending since the first quarter of 2006. The majority of this growth was in the multifamily portfolio, which increased $2.4 billion or 7% to $34.6 billion and $1.8 billion 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.

Growth in the specialty finance portfolio rebounded strongly. During the fourth quarter as the economy continues to improve, specialty finance loans increased 15% or $451 million on a year-over-year basis and now total $3.5 billion, while total commitments are $5.6 billion, up 16% compared to last year. Of the $5.6 billion in commitments, 69% or $3.9 billion 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 fourth quarter. Total fourth quarter originations of $4.6 billion, up 55% compared to the third quarter of the year. Originations exceeded the prior quarter's pipeline by $1.9 billion. Of the fourth quarter originations, 54% were due to property transactions, 24% were refinances out of other banks, portfolios and 22% were refis from our existing portfolio. Additionally, the pipeline heading into the first quarter of 2022 is robust at $2.2 billion, which bodes well for first quarter originations and anticipated growth. Of this amount, 61% of that portfolio is new money.

Switching over to the deposit side. Deposits totaled $35.1 billion at year-end, up $2.6 billion 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 initiatives.

Core deposits increased $4.5 billion or 20% on a year-over-year basis to $26.6 billion, while CDs dropped $1.9 billion or 18% to $8.4 billion, representing 24% of total deposits compared to 32% a year ago. Loan-related deposits increased $475 million or 14% to $4 billion compared to year-end 2020. In addition, deposits growth was driven by Banking-as-a-Service-related deposits, which ended the year at $1 billion.

Loan-related deposits include business operating accounts, which increased 37% or $318 million on a year-over-year basis and represents 30% of the overall loan-related deposits. On the Banking-as-a-Service side, we had a successful first year. Winning several contracts in support of the U.S. Treasury's CARES Act related to EIP programs and in contracts in New Jersey and Rhode Island, in support of our technology partners prepaid card programs. We've also developed an active and sizable pipeline as digital and Banking-as-a-Service clients. These programs, along with what we have in our current pipeline, are anticipated to yield significant deposit and fee income opportunities in 2022 and beyond.

Moving next to our income statement. Fourth 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, fourth 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 fourth quarter, it was 2.44% unchanged compared to the third quarter and 2.47% for the full year. Excluding prepayment income, the fourth 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.

On the expense front, we are very pleased with our continued expense discipline. Operating expenses for the fourth quarter declined compared to both the third quarter of the year and the year ago fourth quarter. For the full year, our operating expenses totaled $518 million, up only $7 million or 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. The New York City residential rental market continues to be very strong with demand outpacing supply. Manhattan market has rebounded and rents remained 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 for borrowers in 2022.

As for our asset quality, our credit trends are positive and continue to rank among the best in the industry. Nonperforming assets were $41 million or 7 basis points of total assets. And for the full year, we reported a net recovery of $2 million. More importantly, our delinquency trends improved dramatically. Loans 30 to 89 days past due decreased $380 million or 85% on a linked quarter basis at $267 million, as the 1 relationship we've discussed last quarter returned to current status.

In addition, as of December 31, 2021, principal-only loan deferrals declined to $479 million, down $435 million or 47% on a linked quarter basis. As of year-end, the company has 0 full payment deferrals. 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-19 outbreak. In reinstating the repurchase program, the Board took into consideration enhanced earnings profile and capital levels as we reposition ourselves to partner with Flagstar. And based on our pro forma 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. 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. 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.

(Operator Instructions) Our first question has come from the line of Ebrahim Poonawala with Bank of America.

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?

We 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. And 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, Ebrahim. I wish I can give you more detail about that, but I think it was pretty clear.

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 stand-alone NYCB margin in that backdrop? And also remind us what Flagstar balance sheet does create sensitivity if we get multiple rate hikes over the next year or 2?

Great. I'll start the question -- answer the question, I'll defer to John. But big picture is that we see absent Flagstar, the continuation of margin expansion. Ebrahim, as you know, we have a sizable derivative that comes off this quarter. That adds about $40 million plus top line revenue to the company as that just expires. 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 in financial. I'm going to defer to John as far as the guidance on rate increases and the like. John?

Yes, we are anticipating, of course, is that the Fed has telegraphed rate increases in our stand-alone forecasting and budgeting. But as Tom mentioned, we do see margin expansion in the first quarter, primarily given the roll off of the interest rate swaps that we have on our books in the middle of February. We expect that to be about 3 basis points in the first quarter from an expansion perspective.

And then when you look at on a consolidated basis with Flagstar, Flagstar is substantially asset sensitive. 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 stand-alone basis, try to moderate our own interest rate risk sensitivity. But the Flagstar transaction does that pretty quickly once it's closed.

Ebrahim, I just wanted to 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 received the operating accounts and as many compensating balance 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 38% increase year-over-year on operating activity that's tied to the loan customers.

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 first year's results, this sizable increase. Historically, if you know the company, it was a growth by acquisition company on the funding side. This year on a stand-alone basis, we've done a tremendous job 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.

And just 2 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-Service, I think you mentioned $1 billion in year-end deposits. I know you made a few hires over the last year. 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?

I'm going to change the order. 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 BaaS. And we're also super excited about what we're going to do with MaaS, which is Mortgage-as-a-Service, which I believe is going to be a significant benefit to the company when we combine with Flagstar. They have so much liquidity over Flagstar. The fact that they're not truly taking advantage of that Mortgage-as-a-Service business is because of the balance sheet concerns. 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 you because they're not public, but they 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 possibility. As they get approved and they officially become public, we'll let the world be aware of that. But these are a unique focus for the bank. 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 billion 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 billion 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 the 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. 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 with 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, on the margin. I'm not sure if we touch the margin side. So maybe John wants to -- maybe you can repeat the question to John on the margin.

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 second quarter?

Look, I want to be very clear. I know John is the CFO, and John could specifically talk this, but I will be very clear. We've always never give out on dated guidance. You know the culture here, Ebrahim. So we gave out the short-dated guidance. We're very confident that we're positioned well and much better than today than we were in previous years. But when we roll in Flagstar, this company will have a significant earnings power that we're anticipating. Absent Flagstar, we're very comfortable with a very strong profitability on a stand-alone basis. They gave out the first quarter. But I will tell you, it's a good try to get John to give our guidance beyond Q1.

Our next questions come from the line of Christopher McGratty with KBW.

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's any change to that 16%? And also if you could provide some color -- gain on sale margins at Flagstar were soft. I'm wondering if you can give a little bit of outlook for the first quarter and the intermediate term outlook.

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. And we believe '22 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?

Yes. And I think the question was around margins. So thanks, John. What I would say on margins in the fourth quarter, there were some competitive factors and forces that came into play. And then you had the rising rate environment and so people were trying to fill capacity, and so that had an impact on margins. But also from our point of view, there were 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 nonowner-occupied loans after the FHFA lifted or suspended their caps on such loans. 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.

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

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

Our next questions come from the line of Steve Moss with B. Riley.

Maybe just a following up on loan growth here. Curious, you sound pretty upbeat about loan growth expectations, Tom. And just wondering how you're thinking about '22 here.

Great question. I mean, yes, we're very upbeat. I will tell you that our people are really busy. The fourth quarter was an active quarter and it continues in Q1. So if you look at the pipeline, north of $2 billion, $2.2 billion, of which almost 70% of its new money, new money pipeline, 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 -- you didn't see that even prepandemic. So the fact that property transactions are occurring, is a very good sign.

We 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 in '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. It is very strong.

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 GSEs, just given the shape of the curve.

Okay. That's -- that's helpful. That was my next question. And then in terms of the pro forma combination with Flagstar, maybe 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 if there are any other changes in terms of thoughts around balance sheet restructuring or things you may do as you combine here?

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 forma capital position, as John indicated, we have more capital based on their higher earnings profile. Since we announced the transaction, they made more money. The capital corporates had built up. I think on a pro forma basis, we're just south of 11% on CET1. So that's a pretty big ratio that would typically on a stand-alone 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. .

We have a very strong dividend that will continue. At the same time, this company is going to generate a lot of capital. As Mr. Pinto indicated, there's no adjustment 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.

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 excess 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 utilize historically. So like that 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, could be very material for the company and gives us lots of funding options as we combine.

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

Yes. No problem at all. I mean if you look at the latest Fannie, Freddie and MBA forecast, they're forecasting a $3 trillion market in 2022, but the composition is flipping to being 2/3 purchase, 1/3 refi, and it was the opposite in '21. It was 2/3 refi, 1/3 purchase. I think, look, the big variable in this is inflation and the Fed has been very clear. 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 trillion 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 6 channels. 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. So we feel pretty good about 2022, albeit we've got -- I think we're all sort of looking at inflation and how the Fed is going to react to counteract that.

Our next questions come from the line of Brock Vandervliet with UBS.

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

Yes, are you talking about on the mortgage side, Brock, specifically?

Yes, typically, yes.

Yes. Here's what I'd say. As it relates to costs 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% of variable, semi-variable. And then we've got scale, right, and the beauty of our platform is that helps a lot. And we've proven our ability historically to manage cost 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 going into spring buying season.

And so we do want to sort of see how things play out in February or March going into April to see if that bump is there because as I mentioned earlier, we're still looking at a $3 trillion market here, and it's pivoting to purchase. 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.

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. But overall, when you look at it from a 12-month perspective, typically, the expenses are going to be in the 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 expansion levels.

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 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...

Let me follow up on that point. I 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.

Okay. All right.

Yes. I would add that, I mean, if you look at overall Flagstar 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. 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 ask you to look back to 2018 and 2019, when the revenue in the mortgage business was more likely what you saw in Q4, and we still had strong returns on equity, and we still have that in Q4.

And if you look in between when the mortgage market was extremely robust, and we 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, so Flagstar's returned 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 with a midsized bank range as a stand-alone company.

I would also add to Sandro's commentary that obviously, in a rising rate environment, we will look to utilize our balance sheet for growth. I mean, obviously, these 400 locations on retail plus the 87 locations on origination that we expand upon in our product mix. We will start looking at portfolio in 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, the growth was de minimis when we pro forma 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.

Our next questions come from the line of David Rochester with Compass Point.

Just a quick question for Sandro and Lee. I know you guys have mentioned a normalized mortgage add per quarter of $150 million as 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 million in your guide for something similar, maybe a little bit better, it sounds like in 1Q, are you thinking that $150 million might actually end up coming in a little bit lower?

And then it's a part 2, just given your outlook on rates and your knowledge of seasonality of the business and whatnot, are you expecting kind of a pickup in that gain on sale in 2Q? Or is it too soon to tell at this point?

So let me start, and Lee can add if he likes. Certainly, $150 million is the target. And when you annualize that to get to $600 million, 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.

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 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 GoS was pressured.

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

Yes. Yes, it's Lee. Let me...

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

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 $150 million, but it's really more of an annualized target if we can get to $550 million, $600 million. 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. I think to Sandro's point, we've always had it when we built this diversified bank as 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. 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 inflation 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.

Great. Appreciate the color, guys. And then, Tom, what's the outlook on 1Q expenses 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 stand-alone basis, as to what that expense base could look like.

Sure, Dave. Obviously, 2021, we came in better than we expected for the year. I don't see, on a stand-alone basis, any significant uptick in expenses. I mean for the year, we'll probably guide around $540 million for the year in that range, which is probably conservative. But again, we're very hopeful as we close Flagstar, this will be a move point because we're going to be a much larger company. But on a stand-alone basis, $540 million is probably a good guide. I would say for the first quarter, our expenses is usually the high quarter of the year given FICA and payroll taxes to $135 million guide for Q1 and then coming down in Q2, and you can kind of tie out to $540 million for the year.

Perfect. And then if you can 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 in here, I was just curious where you're buying securities.

Yes. I'll give some color on the loan side, then 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. I would tell you, in the fourth quarter, 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 been a range. But that 185 to 200 basis point spread on our core model has been holding very well. So obviously, we watch the treasury curve every day. That's our business model when we tie up 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, it 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. 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 environment. Talk 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.

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 are kind of saturated. They're 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. 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, when 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 commitment in totality, we're just under $6 billion. 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, but we're really a credit buyer shop there. But ultimately, as we merge with Flagstar, and we take the syndicate division, collectively, we should be winning our own deals and maybe being a leader and putting the 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 went into the fourth quarter at 10%. So that's been a big bump, a bulk of jump there. 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. Again, mostly floating rate type instruments in a rising rate environment, we'll benefit from that. I think it's around 60%, 70% of the entire portfolio that reprices with rising rates. So the bank is somewhat differently positioned now than historically it's been as a traditional thrift model. So we hope that as we get more towards the neutrality with Flagstar, we see asset sensitivity, which would be a nice mix in the rising rate environment.

All right. Sounds good.

And 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.

Our next questions come from the line of Peter Winter with Wedbush Securities.

I wanted 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 million of deferrals with the CARES Act getting exhausted in the next few months?

Pete, great question. We looked at this. When we went into COVID-19, we had about $8.7 billion. 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. Many customers came back within a quarter and said we don't need it because there's no change in the nonluxury market. People weren't exiting their apartments for the nonluxury 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% -- is that right, John, of close to 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, now we have more than adequate reserves based on CECL. And we think we're going to probably deal with maybe $100 million of stuff at the end of the day, which is pretty good for a $60 billion bank, and we have $40 million of NPAs. So we're very pleased with the asset quality. We had a little snafu last quarter with the customer and it worked itself out. Like, we were very confident. We're very confident in our collateral. We are a low leverage lender.

As you know, the LTVs historically are typically lower than the marketplace. We're a 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 common. 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-19. This portfolio is very strong.

Got it. That's helpful. And then just as a follow-up question. Can you just give an update on the strategic partner with figure, 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 as well?

So let me just be specific. We're not going to be explicit exactly what we're doing with things. We're doing a lot -- 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. 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 stable coin, 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.

We've data tested multiple occasions on live transactions. It's been working out very well. We just did interoperability between multiple banks at 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 intra-operability amongst banks to move from in and burn amongst each other banks. That's a big step towards solving for the USDF.

At the same time, we deal directly with the principal figure on business uses. We haven't been public specifically on what our business case used to 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. 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 Figure Technology. 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 payments, to rental payments to our borrowers. This is all part of our long-term plans. We haven't specifically set out a business case use yet. This is an ongoing process, but it's also a focus -- the most important focus is to ensure, on a regulatory standpoint, that we utilize the KYC. The bank secrecy 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 could tell you, every day we come up with new best use case ideas, it's evolving. It's a technology collaboration with a very strong business in Figure and others, by the way, it's not just Figure, but others that we're talking to on technology initiatives. We talked about my strategic plan when I became CEO was that we want to digitize the bank. This bank has a long way to go in digitization. So we're spending a lot of time with our partner on Fiserv. They've been great as far as a true partnership. 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 my banking direct 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 Figure Technologies as well. So a lot of positive things we talked about not going to be specific until we actually have something to -- that's live to talk about. But I will tell you the energy level is very strong, and it's fluid.

Our next questions come from the line of Matthew Breese with Stephens.

On the Flagstar 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?

No, without getting into specific, I want to be very clear about this. This is not unusual for large transactions to embark upon a global price agreement. We took this, Sandro and I, with open arms. Totally, we hit the ground for 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 be priced from very large community group arrangement.

I will tell you the importance of it is historical 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 ANHD over the years to be a responsible multifamily lender player here and because we have the largest portfolio lender. So the importance of this agreement is significant as far as going forward. It is important as far as getting our approvals because this is something that we worked with our community groups without opposition. There was no opposition about us coming together. This was a joint effort with Sandro 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. 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 Sandro -- I don't want to speak to Sandro, he's on a 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&A has had somewhat of an extended time period. So given the buying executive order that came out in July, and it is what it is and we work with our regulators, and we really can't get much into any more other than that. We're excited to come together, and we'll work side-by-side together as a partner with Flagstar to get our deal closed.

Yes. And just to answer your specific comment regarding CRA, Flagstar 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.

Okay. The other one, just on the regulatory approval process. In the deal filings, there are 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?

I think maybe Lee can -- I believe we have retained those approvals. So maybe Lee, if you want to expand on where we are with those approvals?

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. 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 are all in Flagstar's name at the moment and NYCB is the acquiring entity.

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

Yes, pretty much. I would say that's mostly right, but it's not just a rubber stamp. I mean there's a lot of work questions that we needed to answer. And there was a lot of work that the team sees behind the scenes. So it's a little bit more than a rubber stamp but probably not as onerous as the regulatory approvals.

Okay. Understood. The last one for me, just going back to the Figure partnership. Earlier this month, you did a bank-to-bank's digital market transaction. And I would assume, over time, there's more and more of these, both kind of customer-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 them? And then to date, have you seen any encouraging signs on the deposit front from this technology?

Yes. So we haven't yet put out a business -- a public business case use of the fee income that we would generate as part of the consortium and as the bank that we'll be having, hopefully, a substantial amount of deposits that's 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 intra-operability, that's going to continue with the other banks as well. They all have to make sure that a joint consortium are doing the same type of technical awareness on how they could maintain burn collectively within each other's platform and 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 will 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?

So going back to KYC, it's going to go through our system. We own the KYC behind knowing the customers in-and-out transactions onto our 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 of how they look at the Provenance Blockchain depending on their business model. So it's evolving that. I apologize for not being specific, but as you know, we have a lot of excitement. This is technology build-out with a substantial amount of regulatory by law that has to be done right.

Our next questions come from the line of Chris Marinac with Janney.

Tom, could you or Sandro 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?

Chris, it's a great point, and I'm glad we have Sandro, Lee on the call because we've been fully on 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. It is to really understand the opportunity of putting these cultures together. But culture is going to be key, and that's my #1 priority for the bank is to ensure their culture is aligned properly.

Sandro is the ambassador culture of Flagstar. He's done an amazing job under his leadership, and I'm spending lots of time with Sandro. And I believe that the teams together are doing a phenomenal job. Unfortunately, we haven't closed yet. So our focus was the third quarter of last year, and now we're in the first quarter, and 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. But at the same time, it doesn't go -- a day doesn't go by where we're not working on culture. But we've designed leadership at Flagstar and leadership at NYCB to manage the long-term integration stream. We're working with third-party consultants to help bridge the gap there, and we're geared up for a cultural integration. That's the most important aspect because this is going to be a very large mortgage consortium as well that we have to ensure that we can cross-sell products and initiatives and make sure that people are aligned in the culture. So I don't know if maybe Sandro wants to add some color to that, but that's the focus of the banks.

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 for us, 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 suggested, that takes time. And a lot of that, you can't quite get ready for until you get to legal day 1. 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 time 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 time frame related to the regulatory approval.

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 you 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.

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

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

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.