Flagstar Financial Inc (NYCB) 2021 Q3 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 third quarter 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 meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and Safe Harbor language in today's press release and Investor presentation for more information about risks and uncertainties which may affect us.

With that, now I would like to turn it over to Mr. Cangemi.

Thank you, Sal. Good morning to everyone, and thank you for joining us today to discuss our third quarter 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.

As you may have already seen, Flagstar reported third quarter results today as well, which were also very strong. Before launching into a discussion of our third quarter results, I would like to provide you with a brief update on our pending merger with Flagstar.

As you know, both sets of shareholders overwhelmingly approved the planned merger in early August. At this point, it appears that regulatory approval will not be received in time to close the merger during the fourth quarter. We now estimate an anticipated closing as soon in 2022 as we can obtain regulatory approval.

In the interim, both banks continue to work closely together, and we are making significant progress on the integration and planning front. Both sides are looking forward to consummating the merger and creating a top-tier regional banking franchise with significant size and scale across multiple business lines as well as providing a comprehensive line of commercial and retail banking offerings to all customers across our footprint.

Moving now to our results. Earlier this morning, we announced third quarter 2021 diluted earnings per share of $0.30 a share, up 30% compared to the third quarter of last year. Excluding merger-related expenses totaling $6 million, diluted EPS was $0.31 a share on a non-GAAP basis, up 35% year-over-year.

For the first 9 months of 2021, we reported diluted EPS of $0.90 a share, up 43% compared to $0.63 a share for the same period last year. On a non-GAAP basis, we reported $0.93 a share, up 47% compared to the first 9 months of 2020. Both of these metrics are the best voted EPS we have reported for the first 9 months of -- since 2010.

This was another solid quarter for the company, highlighted by higher year-over-year preprovision net revenue, continued margin expansion, strong deposit growth, stable operating expenses and solid credit quality.

Total loan growth was modest, but the multifamily segment increased 4% on an annualized basis compared to the previous quarter.

Turning now to the details of our performance. Our pre-provision net revenues rose 19% to $198 million compared to the year ago quarter. Excluding merger-related expenses, PPNR rose 22% to $204 million compared to the third quarter of last year.

The net interest margin came in at 2.44%, down 6 basis points compared to the second quarter of the year, but up 15 basis points on a year-over-year basis. The linked quarter decline was primarily due to a decline in prepayment income from very strong levels during the previous quarter.

Prepayment income for the third quarter totaled $16 million and added 12 basis points to the margin. In contrast, last quarter's prepayments totaled $27 million and added 20 basis points to the margin. Excluding the impact from prepayments, the margin on a non-GAAP basis increased 2 basis points sequentially to 2.32% and 12 basis points compared to the prior year.

Moving on now to deposits. We continue to make significant progress on the deposit front, both in increasing the level of core deposits while decreasing the percentage of higher-cost CDs. Total deposits grew $444 million or 5% annualized compared to the previous quarter. This reflects growth in both our Banking-as-a-Service business, which was launched earlier this year and continued success in gathering deposits from our commercial borrowers.

Banking-as-a-Service deposits totaled $1.4 billion at the end of the third quarter, all of which are noninterest-bearing accounts. We've had several wins since we launched this initiative early in the year. In addition to previously disclosed relationship with our technology partner, the company is actively responding to requests for proposals from states for banking services and/or reloadable benefit card solutions.

To date, we have been awarded the banking service agreement for the New Jersey Department of Labor and will be the bank supporting the reloadable benefit costs for the state of Rhode Island. These are just the first relationship we have signed, and we are encouraged by the early success of our initiative and by the number of pending relationships we have in our pipeline.

In addition to Banking-as-a-Service deposit growth, we also was driven by the increase in deposits from our multifamily and commercial real estate borrowers. These loan-related deposits totaled $4.2 billion at the end of the third quarter, up $652 million since the beginning of the year and $265 million during the quarter.

On the expense front, our operating expenses continue to be well contained. Excluding merger-related expenses of $6 million, operating expenses totaled $129 million, unchanged compared to both the previous quarter and the third quarter of last year.

Our efficiency ratio of 39% remains strong as well. On the lending side, while total loans held for investment increased $112 million compared to the previous quarter, total loans increased $858 million on a year-over-year basis.

Despite the modest overall loan growth, we had good growth in the multi-family segment. The multi-family portfolio increased nearly $300 million or 4% annualized compared to the previous quarter, partially offset by declines in the other segments.

On a year-over-year basis, multi-family loans have risen $738 million. Our pipeline heading into the end of the year is robust. It currently stands at $1.9 billion, the second highest level of the year. And as a reminder, we always originate much more than we traditionally have in our pipeline.

As for our credit quality, our credit metrics remain solid and continue to rank among the best in the industry. Nonperforming assets declined compared to the second quarter levels and at $37 million represents 6 basis points of total assets, while we had no charge-offs in the quarter.

Additionally, principal deferrals declined 8% to $914 million compared to the previous quarter, while full payment deferrals remain at 0. Compared to the third quarter of last year, total deferrals are down $4.9 billion or 84% compared to $5.8 billion in the third quarter of last year.

During the quarter, loans 30 to 89 days past due increased to $447 million, practically all of which was related to 1 borrower and consists of several multi-family and mixed-use properties. All of the delinquencies are in the 30-day bucket.

We are working with the bar, and he has taken advantage of our CARES Act loan modification program. The loans have the original weighted average LTV of 57%, and the bank is well secured. Therefore, we do not expect to incur any losses on this relationship.

Before moving on, I'd like to take a few moments to comment on the New York City economy. Four of the cities 5 borrowers have been doing very well since early this year. Now Manhattan is coming back as the reopening gains momentum.

Schools and businesses have reopened, restaurants are open and allowed to operate at 100% capacity (inaudible) reopened last month and tourism has increased. We're not fully back to normal, Manhattan is definitely on the path of normalization.

The Manhattan residential real estate market has rebounded strongly while our segment of the market, the nonluxury, rent-regulated multi-family market has proven to be very stable.

Lastly, during the quarter, we announced our investment and entered into a partnership with Figure Technologies. One of the leading fintech companies focused on payment systems and lending via the blockchain technology. We are very excited about this partnership and believe it will support our strategic initiatives, as I outlined earlier this year.

With that, we will be happy to answer any questions you may have. We will do all the 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 during the week. Operator, please open the line for questions.

(Operator Instructions) Our first question is coming from Ebrahim Poonawala of Bank of America.

I guess just first on credit. So obviously, you mentioned you don't expect any losses tied to the NPA increase, but give us some sense of what did you anticipate that this was coming down the pike over the last few months?

And should we expect more of these - some of these deferrals roll off and customers take, like, actual assessment of where things stand cash flow-wise?

Ebrahim, still obviously, we have a long-stated issue of really having any to link with, we don't anticipate something like this, but obviously, we feel very comfortable on the level of LTV that we have on the original LTV of this particular cluster of loans.

We're very confident that we are working closely with the borrower and we feel confident that by the end of the year, he will be in a status of current.

So again, we feel highly confident that we're in a good position here. We don't anticipate because historically, we get paid on all our loans. So this is not something that we anticipated at all. However, we are working very closely with our customer, and we feel highly confident that he will be current by the end of the year.

As far as overall, and I would categorize it just to be specific, this is Manhattan-based property. So I believe when you think about the borrowers and we talked about my comments upfront about the 5 borrowers, Manhattan is definitely coming back very, very strongly, in particular, in the multi-family, rent-regulated and nonluxury marketplace. So clearly, we're seeing a supply and demand situation where there's not enough supply and there's tremendous demand for on the housing side.

So we feel highly confident since these are blended building, some of them and mixed use, some of them are just pure rentals, but feel highly confident as he has to re-up his leases, they're coming into the market, which is significantly high when they were during the pandemic.

Understood. Okay. And I guess just moving on to the margin. When we think about the core NIM, I think your guidance was 3 to 5 bps adjusted for a couple of bps last quarter, I think you said in the middle of that. Just talk to us in terms of how much more margin expansion is there to go as you think about funding cost leverage?

And also, you made some pretty decent banker hirings on the deposit side during the quarter. Just give us if you can a framework around how big that noninterest-bearing bucket can get over the next few quarters, next year? And what mix do you think just organically ex-Flagstar that could look like as we think about the next year or so?

So Ebrahim, obviously, ex-Flagstar this division of deposit gathering is significantly changed here at the company effective January 1. We're focusing on gathering core deposits, focusing on working with our customers, getting our operating accounts in line when we close these loans, and it's working. It's a cultural shift that's working, and we're seeing good success on that.

In addition to that, as I indicated, we are very actively pushing Banking-as-a-Service as a product line here, and we have resources behind that and we are seeing the results of that. And in my prepared remarks, we'd won some nice unique business throughout the quarter, but throughout the year, it's been growing very nicely.

I think we're close to $2 billion as of today. So it's growing very nicely, and the pipeline is building. So I think when you think about that type of money, it's traditionally 0 cost, very stable and noninterest bearing. So I think that's a solid book of business.

What we want to do, obviously, on a stand-alone basis, is build a better core funding base when we looked at our company and be less dependent on wholesale funding. So we think these initiatives, both on the commercial side is key as well as building out a line of business such as Banking-as-a-Service and utilize our balance sheet to gather more liabilities that are more stable than the nontraditional wholesale mechanism to fund the business.

So we're pretty excited about that. I'm not going to give deposit growth as far as for next year because obviously, when you put Flagstar and NYCB together, it's significant because they have a tremendous amount of liquidity that they don't need right now given the use of funds. We will be very powerful on a combination in respect to total funding base on a blended basis.

So we're excited about that opportunity. But on a stand-alone basis, that is the strategy right now, and we're seeing very good results throughout the year, and we're continuing to focus on the cultural shift on mandating the operating accounts that we secured the deposits when we close our loans, and that's a priority for us.

Sure. And outlook for the margin, Tom?

Again, I think we're getting to a point now where our CD costs are probably on like in 40 basis, 45 basis points. So you're not going to see much on the CD side. I would say that you're probably going to be in line with what we saw last quarter, a couple of basis points per quarter of margin expansion, ex the combination of Flagstar, but with Flagstar combined and with going into next year as we reposition ourselves for interest rate risk, continued margin expansion.

So clearly, we're confident that the cost of funds will continue to go lower, albeit smaller. However, as the yield curve starts to steepen here, we have an opportunity to deploy a lot of liquidity, and we're sitting on a lot of cash, right?

So we're not buying assets, and we believe this quarter should be the highest quarter for growth. We have a very strong pipeline. In addition to the close to $2 billion of a pipeline that we have, we have a significant amount of (inaudible) in the pipeline. So I would envision the fourth quarter being the highest growth quarter of the year for net loan growth, which should help the margin as well.

Our next question is coming from Brock Vandervliet of UBS.

So just you could follow up on that comments -- those comments on loan growth. Just talk about the fourth quarter, your comfort level with the mid-single-digit guide I think, we're expecting fourth quarter pickup. If you could just kind of frame that out a little bit more?

So the good news is the pipeline, as you can see, the numbers are public. It's the strongest -- one of the strongest pipelines we had through the year. We have a lot of loans that were amping up right now that's in process for approval.

So we feel pretty good about where we are in respect to the momentum. We're going into November here, and then we see the growth, which is favorable. So we will have a growth -- net loan growth quarter. I think what was somewhat of a disappointment is that when the specialty finance business -- and it sounds like a cliche, but -- when you think about the supply chain, that does impact our book of business, right?

So we have probably an extra $1 billion of commitments that are not being drawn down because the customers that are in that portfolio and these are all single AA-type credits, are not drawing down on the line. So clearly, we're sitting there with great opportunity.

However, the supply chain is having impact on the specialty finance book. So typically, the specialty finance book has been growing around 20% on average. I think our CAGR is close to 25% since we put it in inception. So this is probably the worst year we had in -- since we started the business, and that's a 10% net growth, which is not terrible given the environment.

We think that could pick up, assuming there is some release on the supply chain as we go into the fourth quarter. That's the unknown. So if you add that plus a very strong commercial borrowing opportunity here, both on multi-family and also on the commercial side, we feel pretty optimistic that we will have growth absent changes in the supply chain. If the supply chain starts to ease up a little bit, then the growth will be stronger.

Got it. Okay. And just a question for Lee. You mentioned he was on the call. Flagstar gain on sale looked very strong this quarter. If you could just break down how much of that was EBO and any Q4 guide you wish to provide, that would be helpful?

Yes, sure. This is Lee. Well, first of all, we're very pleased with our Q3 mortgage results. We guided to $160 million to $180 million, and we came in at $169 million, about $18 million of that was EBO.

And I think the strong earnings was in large part due to our diversified mortgage model. And we saw 5% more retail locks in Q3 versus Q2 as a percentage of overall originations and retail is a higher-margin channel.

And we executed on 5 RMBS deals in the quarter, which made us the second-largest RMBS issuer in the quarter behind Chase. We also kept costs under control. Mortgage costs actually declined $6 million quarter-over-quarter and mortgage expense as a percentage of closed loan volume declined from 1.02% to 1.00%.

So we feel good about the flexibility and optionality, our model affords us together with a good cost control and discipline we execute with. Looking into Q4, we're guiding to $120 million to $140 million gain on sale.

The main reasons for the decline in Q4 versus Q3 are just normal seasonality, and we're seeing that in the agency and NBA volume forecasts. The Fed tapering discussions of increased bond yield and mortgage rates and we have seen a slight compression in primary secondary spreads. And then the FHFA reversal of certain PSPA provisions was a slight negative to us. Given we're a bank and an aggregator, we were able to step into the void, the GSEs were leaving.

And then we're planning on 3 RMBS deals in Q4 versus the 5 that we executed on in Q3, and we're planning on executing on 6 in Q1 2022. As we look further forward into '22, the agency and MBA forecast are saying it's going to be a $3 trillion market in '22, $2.5 trillion market in '23.

Any time the market is over $2 trillion, that's healthy. As I mentioned, we're planning on 6 RMBS deals in Q1, and we'll continue to leverage that program, utilize our diversified mortgage model and find pockets of opportunities.

We have the balance sheet, which gives us the AFS, HFI and MSR flexibility and that RMBS program gives us execution optionality. Finally, with the bigger balance sheet as a result of the merger, it gives us growth opportunities across all of our sales channels across the HFI portfolio products, holding more MSRs, which benefit us from a deposit point of view.

The RMBS program, as I've mentioned, and supporting the 238 NYCB branches and customers. As I've said before, we're trying to generate more consistent and predictable mortgage earnings using all the levers that I've just discussed that we have at our disposal.

Our next question is coming from Dave Rochester of Compass Point.

You already highlighted a number of positives on the Flagstar quarter that was pretty impressive. I noticed the warehouse was also up nicely in that, that's out to trend for a lot of the banks out there. So just any comments on that front would be great. And if you could just remind us everything done prior to the close of the deal here to really hit the ground running on day 1 post the close on the warehouse front?

I know you've reached out to a lot of your top accounts to let them know that larger lines could be available. So if you can just talk about that? And then I know on the deposit side, you really haven't targeted that pool of deposit you just maybe size what that opportunity is there, that would be great?

That question is directed to Lee Smith and/or Sandro. Yes?

Yes, let me -- this is Sandro. Let me take it. Yes, so we've just been executing in the fashion that we told you that we would and that was number one, to continue to expand our relationships and take more market share as the mortgage market itself shrinks, and we've been successful in doing that.

One of the ways we're doing that ex the anticipated merger is to do more syndications on the Flagstar side, where we're leading opportunities with bigger organizations, taking bigger positions and then sharing them with other banks. And then as we do think about the upcoming merger, while still staying within our loan concentration limits, which we've always been very conservative and disciplined around as the market itself shrinks, rather than just lose relationships or levels of outstanding in terms of the amounts drawn on lines, what we're doing is expanding relationships with our best customers because we're more comfortable taking larger positions with them.

And again, as I said, still staying within our conservative and disciplined concentration levels, both in terms of the overall size of the warehouse portfolio as well as on an individual credit basis. So it's just really what we've been doing for a long time here for the last 5, 7 years as we've focused on growing the warehouse business, taking advantage of the opportunities, doing it well from a service perspective and getting paid fairly for what we do.

And as a result of that, the business has held very strong, and we're very optimistic about it being able to continue with that kind of strength going forward.

Maybe, Lee, you want to talk about the deposit initiatives tied to the Flagstar portfolio, given the potential business combination?

Yes. So as it relates to the servicing or subservicing business, there's a lot of custodial deposits tied to that. And just given the size of our balance sheet, we had excess custodial deposits that we have put with other institutions. Given the merger, we're able to bring those custodial deposits back given we're going to have the bigger balance sheet.

And so that's going to be an advantage from a funding point of view. And then just having the bigger balance sheet, I think given the relationships we have with MSR funds, with warehouse borrowers, it gives us the opportunity to go and bring in more deposits than we've been able to with a smaller balance sheet.

So we think that is going to be another big advantage of this combination and having a $90 billion balance sheet.

Yes. Just to expand on the reference we made to warehouse customers. We do not seek escrow deposits from warehouse customers because we just don't need them. We do have regular deposit relationships with our warehouse customers and that's relatively significant.

But the opportunity to take in escrow deposits is, it's hard for me to estimate what that is, but I know that it's significant because it's never been something that we've needed to do. But we are telling our warehouse customers that we will be in a position to show some interest in that post merger, but it's really difficult for me to tell you how much, but I do think it's meaningful, if that's helpful?

Yes. Yes. I appreciate that. And then, Tom, I got 1 for you just on the multi-family side of things. I know historically, you've seen your borrowers coming back to the banks to refinance when the 5-year jumps and there's an expectation that it'll keep going higher. We've heard that from you guys, we've heard from other banks and from the brokers that we talked to in the market as well.

Are you seeing any start of that, any sign of that at this point? And if not, what do you expect you would need to see in that 5-year moving higher to start seeing that kind of concern amongst your borrowers?

Dave, it's a great point. This is clearly a change in the shape of the curve. The back end has moved up considerably and the 5 years also gravitated higher. This is actually great for our business because the decision to go agency versus portfolio makes it more towards the portfolio, which is favorable.

We're seeing that. So I would say with conviction that we are getting more opportunity to be more competitive there. And I think on the rate side, you're at a higher level. So I think this is going to get people focused in respect to the next financing alternative that usually is a relatively short asset. If the tapering does take place and does have an impact on the back end of the curve as well as the value of the curve, it will be very favorable for our business.

We see some good property transactions occurring in the 5 borrowers, which is very favorable. We also see various, we'll call it, seasoned players, not exiting, but expanding their operations into new demographics that we're following. So that's also going to be part of our growth.

So we're very bullish about this pandemic hopefully coming to a better place and seeing Manhattan out and about and the foot traffic is significant, we think this is going to bode into a significant opportunity as the customers that are on this finally will have to make decisions. These are short-dated assets, they're not long-dated assets.

And it seems that we'll see more and more of the traditional 5-, 7-year-type stuff coming out when rate start to rise. So we're very optimistic there.

Our next question is coming from Ken Zerbe of Morgan Stanley.

In terms of the deal getting pushed out just a little bit towards first quarter, can you just talk about like what are the regulators looking for or asking for or just any kind of color behind why this seems to be getting pushed just a little bit?

I would just be very clear. I had in my opening remarks, it's very clear, it's in a position that it's with our regulators. We're waiting for approval. We're very optimistic about the merger. However, it's in the regulatory hand. So we clearly are working towards our common goal of getting this transaction closed as soon as possible. As you know, Ken, we can't specifically discuss the process.

Understood. I thought I'd ask nonetheless. I guess, my second question...

We appreciate the question, but as you can imagine, it is what it is.

Yes. No, I understand. Just going back to that large borrower in Manhattan. I get that you're very well secured. Obviously, really low LTVs. But can you just provide a little more color, like why is he having problems at this point? Because obviously, the New York market is coming back...

So, yes, I'll give you very specific. We were very generous from day 1 with the CARES Act. And many customers took at an abundance of caution that relief. He was one of the few customers that did not take relief. He was paying all through the depth of the pandemic, which really could have bolstered his balance sheet.

That decision was made. And obviously, when you look back, he probably leased up at a lower level to realize that the pandemic was worse than we expected. And the end result is that he needs release now.

And ultimately, as you know, Ken, we don't typically have loans that go past 30 days. And these are low leverage type properties, and we could sell the notes in a very short order and be out of this relationship, we're very comfortable given the CARES Act relief that we provided to him and the fact that we have an ongoing dialogue, and we feel highly confident that we will be in a current position by the end of the year.

So again, it is what it is. It's unfortunate that he did not take advantage of what the bank had offered. Many of our customers did, by the way. And literally, during the phase of the first 6 months of no pay, they came back and started paying, so they didn't want to put the money in the back end.

So I think he's 1 of the few customers who did not take advantage of the CARES Act early on. And where we -- and the good news is that when you look at where the market is and these leases that are coming back for renewal, they're going to be much higher than they were when they leased them out in the middle of the pandemic. These are not long-dated leases. So we're highly confident that we'll be in a good position here.

Our next question is coming from Chris McGratty of KBW.

I want to follow up on the deposit growth that you've seen, particularly the noninterest-bearing that you cite with the Banking-as-a-Service. I guess maybe I missed this, but expectations for noninterest-bearing deposits to continue to grow. I think there's a view in the market that most banks will not see as much growth in noninterest-bearing given the move up in rates and kind of some parked money, but interested in your thoughts specific to that?

Yes. So Chris, this is the type of deposit focus on. This is -- these are preloaded card business. It's very sticky. It's driven off of some of the stimulus payments that are out there, including the new ones that are coming and who knows what's coming in the future.

So these are interesting programs. They are technology provided. So the technology out there that does play in the space need to have a bank behind them on a win perspective when you deal with tying into your system.

So we are providing that. We are also looking at putting our own (inaudible) proposals throughout the country for that business, and it's not just in the local areas throughout the country. So we're very active on expanding that.

But I also want to be very clear, we've spent some real effort here and brought in some new people on Banking-as-a-Service and focusing on technology initiatives, which will result in us probably having some technology wins with companies that are in the space that are challenger banks, banks that have access to substantial funding, but they're not FDIC insurers. We will use our balance sheet to be able to enjoy the opportunity to provide insured deposits that I believe that the marketplace will be requiring to have when you deal with some of these challenger bank situations.

And a lot of those players are smaller players that are capped out at $10 billion for reasons on the fee side, and we can partner with them. So we are clearly focused on that. We think it's going to be a significant potential for the bank.

I'm not going to give a number on it, but right where we started at 0 now with $2 billion, it's only been around 10 months. So that's a pretty good track record. And we have so many opportunities in the pipeline that we're bullish about. Now you're not going to win every one, and you're not going to want every request for proposal, but we are reaching out to some major challenger players out there and not -- they need partners in the marketplace to house this liquidity event, and we're willing to work with them.

And in addition to that, we're also focusing on a planning perspective with Flagstar to use this escrow opportunity as a tremendous way to structure term. We've done this before. We had -- when we had the mortgage business, we had structured turn where some of the large players that we've done business on the conduit basis, we're structuring out very cheap low-cost deposits and term perspective, and they are comfortable going out more than just, we'll call it, a short-term position, but taking a longer-term position with us. as a partnership.

So that's kind of how we're thinking about it, and we kind of classify the all Banking-as-a-Service as well as that we continue to drive into the technology initiatives that's out there, we think they'll pay dividends for us. And by the way, this is a strategy to the bank. This is going -- focusing on better funding the balance sheet as we change the dynamic of the company.

Nice, that's great. Just I want to follow up on just overall rate sensitivity given the markets, the move up in rates. Could you help us with kind of a longer term and it seems like there's a funding advantage when Flagstar comes on.

And I know when the deal was announced, you talked about the balance sheet be better positioned. But if we think out the markets pricing in a couple of hikes by the end of next year into '23, how should we be thinking about margin development pro forma?

So let me start off. I'll just take a big picture and then I'll hand it over to Mr. Pinto. Big picture is that NYCB combination with Flagstar, they're asset-sensitive or reliability-sensitive for the most part. They're mostly an adjustable rate pipeline that we're mostly fixed. When you blend that, we are in a very good position and managed very well. That's the big picture.

So we -- and that's part of the merits of the transaction. We feel highly confident when these companies come together, the balance sheet has a very different position on interest rate risk. With that being said, I'll have Mr. Pinto just go dive into some of the details on a stand-alone basis where we stand.

Yes. I mean, as you know, on a stand-alone basis, we have been and continue to be liability sensitive. But on the NII side, that has begun to change a little bit and moderate. But as Tom mentioned, that's been moderating because of the potential deposits we can bring in on the noninterest-bearing side and limit our reliance on wholesale funding, right? That's the goal to continue to take that $15 billion of wholesale borrowings and pay it down when we can with with core deposits.

So that will be the big generator for us to continue to limit the liability-sensitive nature of our stand-alone balance sheet. And until we're closed with Flagstar where that NII sensitivity turns to more of a positive perspective given the amount of floating rate loans and the asset structure at Flagstar.

Yes, I would just add to John's point, if you think about the fourth quarter, we have about $373 million coming due from a wholesale position, that's at a cost of [257]. That's pretty expensive in this environment. I mean you go out the, I would say, the full year 2022 is another $2 billion. That's just about 1.5%, it's still considered very expensive in this environment.

And when you go out to '23, it's $3 billion at about 1%. So on blended, we have an opportunity here to take advantage of a much lower rate environment. We believe there will be probably some changes in the year ahead, but not enough to really take away the opportunity to restructure or revalue, reposition that close to $5.5 billion. We know what's coming due in the quarter, and that will probably get paid off with cash. So we have 0 cost money that will pay off the 257 .

When you think about '22 and '23 and you think about the business combination with Flagstar, the opportunity to look at the entire liability book on a holistic basis is clearly to our advantage. So we're excited about that opportunity. We think there's going to be real value there. We haven't put a number on it yet, no will until we close the transaction. But clearly, we think it's a great opportunity.

And then just a follow-up. The 1 regulator approval, can you just specify which regulator you're right now?

The way our structure is, we're FDIC state, so we have not received our FDIC and state approvals yet. And after that, it would then go to the Fed. It's just -- it's the process of our regulatory structure.

Our next question is coming from Steven Alexopoulos of JPMorgan.

So first, regarding the past dues and the $377 million relationship, how many other relationships do you have in that size range? And what's the house limit in terms of loan concentrations to a single relationship?

So we don't disclose the house limits, but we do have -- we have always had sizable relationships to very wealthy property owners that have significant locations, all collateralized individually. So we do not have a -- I'm not going to disclose my house limit, but we do have large relationships. And we've been doing that as part of our business model.

I think the good news about that as we start building this mandate on the deposit side, we're seeing the growth in our deposits from these long-term large relationships. But clearly, going back to that 1 specific customer, I'm going to say it again, we feel very confident that we will be current by the end of the year. And more importantly, we have adequate collateral to deal with it for some reason we're not in a position at the end of the year to be current.

So we feel pretty good about it. But clearly -- and Steven, you know the business model, we deal with significant families throughout 5 borrowers as well as the expanding outside of the 5 borrowers now for a number of reasons, and we're very comfortable with our relationship lending.

Okay. Okay. That's helpful. Tom, on the margin, so regarding the sizable decline in the prepayment penalty fees in the quarter, was that attributable just to rates moving up a bit? And do you expect to see refinance activity further slow?

Again, Steven, rate does make a difference. So there was a real steepness in the curve, I think many customers will react. They've been enjoying a relatively low coupon as they make their decisions. And obviously, with the pandemic that has slowed things down considerably. It seems like there's a pickup here. We're hearing about transactions. There are many players on the sidelines with significant liquidity, looking to buy assets.

And the math does -- it's still compelling. The math is a double-digit return, if bought right, with cap rates that are holding up between 4.5% to 5.5%. So I think at the end of the day, I think you're really looking at a market that's ripe for a rebound, assuming that the Manhattan has a stronger recovery.

I will be very clear the 5 borrowers, the last frontier is Manhattan. We're seeing significant positive movement there. We are seeing our customers -- I will tell you with conviction, there are deals in the pipeline that are purchased as well as refi.

But I think if rates moves here, given the tapering that's potentially out there and as well as a theory that rates are going to be higher, that will make customers rethink about their opportunities and probably come to the table sooner, which would generate not only prepayment income, but also potential loan growth.

Okay. That's helpful. And finally, Tom, could you give color on the decline in the securities yields in the quarter, was off quite a bit quarter-over-quarter? And then just from a spot rate view, where are new loans and securities going in today?

So we really haven't been buying any securities for a while. John, was that right?

Yes, that's right.

And you've seen the balance just continue to kind of drop quarter-over-quarter, and that's just some of the higher-yielding securities coming off. The Home Loan Bank has lowered it's rate slightly over the -- when you look quarter-over-quarter as well.

And then we're also in the -- if you remember, in the second quarter, we had significant prepayment fees on our securities portfolio as well. So that's what's generating the actual top line miss. When you look at it ex those prepays, it's not down anywhere near as much, but we are still seeing some pressure there, right?

We're trying to limit security purchases here to avoid putting on duration in this interest rate environment. And that's why we'll be sitting on a little extra cash for the time being until we're ready to put some of that money to work, hopefully, in loans, and of course, in securities as as market conditions dictate.

We have probably an ample cash position by design. We were not going to put into duration risk right now. It's -- we believe it's a waiting game. If there is a significant move in the back end, and we can see opportunities we'll put some money to work. Right now, we have a lot of 0-cost money that we can easily earn and put on in the market, but we don't think it's the right decision right now.

We're going to be patient. And in addition to that, we're also looking at the opportunity to put these 2 business models together with Flagstar and look at the holistic view of the entire portfolio, which would be a reshuffling. So we are not going to exhaust the liquidity today until we see truly a significant movement of interest rates, and then we'll take advantage of that.

Okay. And the spot yield on new loans?

It's north of 3%, like 3.25% to 3.5% now, so that's a good movement. I will tell you, fourth quarter is less of a challenge than it was in Q2 and Q3. So we like the fact that the yield curve has moved very nicely for us, like I indicated.

I think the customers are contemplating what they want to do now as they come closer to their role, which is good for us because it's at a higher rate. So it seems that -- and that's also going to impact the decision to go agency versus portfolio.

So any time this curve starts to steepen like this and spokes to our advantage, the customers tend to think about a shorter duration and go to the portfolio lenders.

Our next question is coming from Steve Moss of B. Riley Securities.

Maybe just following up on credit here. modifications coming down, kind of curious, obviously, (inaudible) you have the expect to cure, but just how we think about the reserve and provision expense going forward here?

Yes, I'll talk the Big picture. I'll turn the CECL conversation back to Pinto. Big picture, I think you're going to see in a short order, a lot of this stuff that's given a roll-off the CARES Act, obviously, assuming Congress is done with providing relief under the CARES Act, we believe this $900-some-odd million will come down substantially in the quarters ahead, probably a substantial adjustment by next time when we reports to the marketplace in January, you should see a noticeable reduction.

And I guess by the time March or April comes that CARES Act will be exhausted. And we're probably going to be left with some bucket full of loans, but very manageable and highly reserved given our CECL components when we put that together. And with that, I'll go to John in respect to the big picture on the reserve side.

Yes. But right now, as you saw with our CECL results and our small benefit this quarter, we expect to be in that range, of course, depending upon loan growth as well. So if we do have substantial loan growth, of course, on the CECL, you have to provide for that in the quarter.

But besides that, we don't see anything in the economic environment substantially changing. It's been quarter-over-quarter getting better, and improving based on the Moody's forecast that come out. So we're not seeing anything that would give us any pause that we see larger provisions coming down the road. If anything, we're in that small recovery depending on loan growth. We just don't see anything in the portfolio today that would drive anything else.

Okay. That's helpful. And then just in terms of expenses here, it came in a little bit better than expected. Kind of thoughts on expenses for the fourth quarter for you guys going forward here?

Yes. I think expenses for the fourth quarter will be flat to the third quarter. We don't expect any real pickup in the fourth quarter. We're very comfortable in this $130 million range right now.

That's ex merger-related, obviously.

Correct. Ex-merger-related.

Our next question is coming from Matthew Breese of Stephens.

Going back to the regulatory approval front. First, I'd assume you need New York State approval, but who is Flagstar regulated by at the bank level? And how does that factor in here?

Their OCC and the applications with NYCB. So we would -- we would need FDIC and state and after that happens, we get the Fed and then we close.

Got it. So it really is not a factor?

Correct.

Okay. And then just to hone in, if you close down the timing a little bit, do you anticipate this being like a first half of '22 event? I think someone said first quarter, but I don't remember reading or hearing that from you or in the release?

And Matt, I was very clear. Obviously, this is in the hands of our regulators. It's going through the application process, and we're anticipating closing as soon as we can in 2022. Other than that, I can't get specific.

Okay. Understood. And...

And I apologize for not being able to expand upon that, but it's in the hands of our regulators.

I completely understand. I was also hoping you could talk a little bit about the partnership with Figure. There's a couple of data points out there. Mr. Cagney has suggested that you're providing Fed settlement for them, credit and sponsorship, you did the private securities transaction this quarter. What are some of the economics for you in these partnerships and transactions? What are the balance sheet and income statement impacts as this progresses?

It is a very interesting co-collaboration agreement with Figure. We're invested in the company as we publicly disclosed. We're very excited about working with the engineers over the Figure with a combined resources. So we're both combining our resources.

We believe there's a tremendous opportunity as we continue to beta test. So we did a small transaction with them that was the beta test and it continues to develop the solution on the blockchain on clearing through the AML KYC process of banking solutions, at the same time, being very cognizant of the regulatory needs out there to deal with the changing banking world.

So dealing with someone who's innovative as Mike and working with us and focused on looking at our balance sheet opportunities, we think there's tremendous liquidity opportunity on the deposit side, and we believe there'll be seeing some opportunities and ultimately, potential lending opportunities.

And if you think about the big picture, when you put NYCB and Flagstar together, we believe that a lot of the business opportunities on mortgage banking, mortgage lending will ultimately be on the blockchain. So we think that the blockchain could really create a lot of efficiencies. It's really probably a more seamless way to do business when it comes to mortgage lending, and we're exploring with that, both on the back end and in the front end.

So these are exciting times. Right now, Matt, it's beta testing and beta testing and automated testing. And this is -- we're not going to give out any business metrics because it's not going to be something we could speak to until we publicly launch an initiative. So we're still in the beta testing mode.

It's been dynamic. I'll call it, innovative and it's exciting. And we're all hands on deck, but clearly, with a focus towards trying to find out the solutions. I mean you're very familiar with what's going on in the banking space.

And I think treasury, I think that all regulatory world is trying to figure out how do we get this massive amount of liquidity out there to be AML KYC to the banking system, and we're working with them. I think it's exciting.

And again, through the private close blockchain solution. So there's a lot happening. Stay tuned, and we're excited to be partnering with them.

Great. Okay. And then last 1 for me. In the past, you've discussed the combined entity New York Community Flagstar being able to generate double-digit type loan growth. And you touched on warehouse already. But I feel like we're going to have to see more significant multi-family and commercial real estate growth to get to that kind of level. I'm just curious what the strategy is there to expand that business. Is it more New York City? Is it a nationwide Strategy, and maybe just...

So great point. We're excited about it. When the transaction closes, ultimately, we feel highly confident that when we have people in the field, it's going to be a cultural change, right? The NYCB does not lend on the field in any meaningful way.

Flagstar has people -- they're direct lenders. So we have an indirect business with NYCB. You have the direct business with Flagstar. Collectively, we're bringing out to the table substantial opportunities in markets that are very robust. New York, we don't direct land, Florida, Ohio, the Midwest, they're doing a great job on growing. So we think we can have an opportunity to have to put people in the field, focusing on deposit growth in combination with C&I with the right people. And we are going to do this with precision as we hire up collectively as a combined entity to roll out a direct strategy. direct and indirect will work together, but we think there's some great growth opportunities.

At the same time, we don't really run products to our branches. So we're taking all of the Flagstar lending products and putting the -- we turn them on after legal day 1, and we have the opportunity to do business in our branches where our customers will have tremendously more products. And that's the beginning. So as we transition to truly a commercial banking enterprise with a wide array of products, that's the opportunity that we're all excited about. So we feel highly confident between the fact that they're a mortgage player and a dominant mortgage player, #6 in origination, #6 in servicing, number top 2, top 3 in warehouse lending with a much bigger balance sheet, we could do a lot more there.

And these are exciting businesses because, obviously, it's consumer-related. And we're not a consumer-focused entity on a stand-alone basis. So we think we'll have some good growth there in addition to a very strong C&I presence.

Our next question is coming from Steven Duong of RBC Capital Markets.

Tom, I guess maybe if we just get back to Figure. When we go through their white papers, it looks like they're achieving cost savings on the mortgage side of around 125 basis points from the origination all the way through the securitization.

And when you bring on Flagstar on there, Flagstar is pretty much touching on literally every part of that process. And I guess, have you guys started to size up roughly like how much of that 125 basis points you could actually realize? So like out of -- Flagstar is doing 150 gain on sale, is it possible for you to add on another 50 basis points from this partnership with Figure.

So let me just be clear, and I'm going to turn this back to Lee Smith. I will tell you that they have done a great job being Flagstar to be relevant in the private label mortgage market, right? So what Mike has done at over, I think what they've done transactions on the chain. These are private label transactions that are not through the agency, right?

And that's the long-term future. But ultimately, as we continue to be significant in the RMBS space, Lee Smith has indicated, fixed deals that's going to happen in Q1, they're going to do, I think, 3 or 4 deals in Q4.

But then I think top 2 or 3 in the country this year on RMBS, and these are sizable transactions. If done through the chain, I think there will be reduced costs materially. So I think there's opportunity there as we grow the business.

And I wouldn't underestimate that opportunity. But in the meantime, the front end and the back end, that's a long-term solution when it comes to an agency player, but the nonagency opportunity where large, we'll call it, portfolio managers that buy these types of assets are very comfortable transacting on the chain.

So maybe Lee -- and Lee if you want to maybe give some color as well to the opportunity. Obviously, without putting numbers to, but just some big picture theory there.

Yes. No, absolutely. And good question, Steven. Look, you can't put any numbers to it because it's a new relationship for NYCB. We haven't closed that deal. As soon as we do, we can start working on these more and trying to figure out and quantify the opportunity. As you know, with the blockchain.

Blockchain is an ecosystem, particularly if you're talking to end mortgage. And so the big numbers that you just quoted, you're going to need a number of players within that ecosystem to start to realize some of those benefits. As Tom just alluded to, as it relates specifically to RMBS, and we're the second biggest player in RMBS, if you look at Q3, there's some very discrete advantages.

So if you think that the blockchain is a trustless ledger, you don't have to do diligence every single loan in an RMBS transaction. If you're comfortable with the way the blockchain is working.

So there's obviously immediate savings from a due diligence point of view, transfer and payment is instantaneous. And so I think from an RMBS point of view, that would be the more immediate opportunity. But as Tom said, it's very much in the early stages and the exploratory stages. And -- but it's an opportunity, and that's how we're looking at it.

I appreciate that, Lee. And I guess maybe just from your experience, do you see this blockchain eventually leading to kind of like an overall industry shift on the cost front? And do you guys see this as an opportunity being a first mover?

Possibly. I mean, look, I think there's a lot of technology solutions out there. And all mortgage companies are looking at ways to get more efficient, do things quicker and improve the customer experience.

And if the blockchain enables that, then that's a good thing. There's a number of fintechs and technologies out there that we're constantly looking at. This is one of them. And I know that Tom and his team are doing the same on the New York Community Banking side. So I think it is an opportunity. And we're plugged in and one of the front runners should it prove to be something that we and ultimately the industry can take advantage of.

I appreciate that. And then just one last one for me. Just on the CDs running off. I guess how -- just like the current rates right now on your CDs, like how low do you think they can get to? And are the CDs basically moving over into, say, savings accounts?

Yes, I think that's probably the case. I mean, obviously, we're at a point now where we've enjoyed multiple years of expanding margins, right, since the shift of policy by the Fed Reserve and where rates are close to 0. So I think we're at the point now where the next $10.3 billion coming due is still in the mid-40 basis points.

So some are going to savings and some -- but I think let's just call it flat -- and that's -- I think that's the strategy here. But ultimately, the shift of culture into noninterest-bearing, the shift in culture to go after commercial customer accounts, which we have, which I believe is all right as the lender, and that's a cultural strategy shift that we're enforcing at the top of -- at the Board level all the way down to the rank and file, the team memberships. And it's working.

So I think that culture of the historical view of NYCB thrift model is moving more towards the traditional commercial model, that should drive the margin as well, which I think will be significantly driven by the combination of Flagstar, that's what they do.

At the same time, when you think about fixed rate lending versus floating rate, it's a very unique blended opportunity to bring these businesses together culturally. And ultimately, as we go out in the field and have direct lenders that go after those C&I opportunities, it's deposit first, lending second. I think that's the cultural shift that we're going through right now, and we're super excited to do it with Sandro DiNello's team because he's done a phenomenal job in growing it. So we're doing it together once we combine and we're excited about that opportunity.

Our next question is coming from Christopher Marinac of Janney Montgomery Scott.

Tom, could you or Lee or Sandro talk about the nonqualified market? How much more opportunity exists here? And is that another source of revenue as the merger closes?

I would -- Sandro, do you want to handle that one?

Well, I don't know the answer to that, but I will tell you this and our history supports what I'm going to say, if there is an opportunity there, we will certainly jump on it. And as Lee mentioned in his comments, the key, I think, to our mortgage business is that we've got a lot of different delivery channels and levers we can pull to take advantage of whatever the opportunity is out there.

So I don't know the answer. I'm not going to speculate on how much of an opportunity there might be because I don't know what the market conditions are going to be. But I know with full confidence that if there is an opportunity there, we will seize it.

Yes. So I'll just add to that point on Sandro and then Lee, I'm sure you want to chime in. But assuming there is a real change in the slope of the curve and rates start to gravitate higher, we will balance sheet residential lending, we will balance sheet prime-type loans on the portfolio, we will have other products to utilize the balance sheet, which will also -- and going back to my other point, which I missed that's another contribution to potential growth of our assets by just being able to balance sheet high-quality loans for portfolio as well.

And then that tends to be the case when rates are in a different perspective and customers focus more on an addressable rate feature. We're very comfortable putting on type loans on the portfolio. We've done it before very successfully. And with Flagstar's distribution, we can do it in a much more material way. Maybe, Lee, if you want to add more color to that?

Yes. No, I think you covered most of that. I was going to say if there is an opportunity, we can take advantage of it. We have a balance sheet. We have the RMBS program. So we have different ways that we can execute on these loans and different methods of either holding them or dispersing them. And then as Tom mentioned, we have the sales force across multiple channels, whether it's TPOs, distributed retail, direct lending. And so if it is something that is an opportunity, we can ramp up pretty quickly given the number of sales channels and sales teams that we have.

And this just put a finer point on that comment. We have very strong origination teams and channels in the higher cost areas of the country where that product is more likely to exist. So principally out of what has grown through the Opus Advisors acquisition we did a few years ago. We -- and as you can see from the securitizations we've done, our access to those markets is very, very, very strong.

So to the extent, again, as I say, that the opportunity is there, we'll take advantage of it. Historically, we have at times put those loans on our books as well, but the private securitization opportunity in recent quarters has just been so interesting that we've gone that route.

But at times, the market might not be as strong, and in which case, there'll be more consideration. I'm talking about Flagstar independent here where we would portfolio it you get into post merger, it's a different dynamic because the balance sheet is going to be much, much bigger and much different than it looks like just Flagstar today.

Great. It's really, really helpful. And Tom, just a final question. When you look at the sort of stock repurchase opportunities post regulatory approval in closing? Is it still as good as you thought back in April when the merger was announced?

Well, look, obviously, we are very pleased with Flagstar's results. They've actually outperformed our internal forecast when we sat down and talked about putting the company together and pro forma the company. So on a common equity perspective, it's probably going to be more given the earnings profile, which is very attractive for additional tangible book value creation on the transaction. The company is going to earn on a combined basis a lot of money, and we're going to have a substantial reduction in our overall dividend payout ratio because of that.

So we'll have more flexibility on capital management tools. As I indicated in the previous quarters, we're not going to be talking about repurchases in the midst of the transaction. But once the company has put it's capital together and its earnings power, we invest in people, systems, the business itself and at the same time, paying a very strong dividend, we will also consider the capital opportunities on the buybacks.

And clearly, if the market is attractive for that, we will consider all options. But clearly, this company is a different profile when it comes to capital generation when we enjoy the benefit of create capital. They have significant capital on a stand-alone basis. We have to pay a very large dividend.

Collectively, the blended payout ratio goes down materially. And ultimately, as I said, their performance has been much better than what we expected in 2021 that will be modeled. And as you know from the original presentation of the deal, we modeled a, I think, it was about half, a 50% reduction in the mortgage business going into 2022. And obviously, that's pretty severe. So -- and it still generates significant earnings accretion with significant capital generation.

So we're very pleased about where they are today, and we're looking forward to enjoying that opportunity in the future.

At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Thank you again for taking this time to join us this morning and for your interest in NYCB. We look forward to chatting with you again at the end of January 2022, when we will discuss our performance for the fourth quarter and full year December 31, 2021, period.

Ladies and gentlemen, thank you for your participation and interest in New York Community Bancorp. You may disconnect your lines at this time or log off the webcast, and enjoy the rest of your day.