Flagstar Financial Inc (NYCB) 2021 Q1 法說會逐字稿

Good morning, everyone. This is Sal DiMartino, Director of Investor Relations. Earlier this morning, we issued a joint press release and presentation announcing the acquisition of Flagstar Bancorp by New York Community Bancorp. Both companies also separately issued their respective first quarter 2021 earnings releases, which we will briefly discuss this morning. Please note that today's call will take the place of the previously scheduled earnings calls, which have been canceled. Today's releases and presentations have been posted on each company's Investor Relations' websites.

Before the discussion begins, I'd like to remind you that certain comments made today by the management teams of both New York Community and Flagstar, may include forward-looking statements within the meanings 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 releases and presentations for more information about risks and uncertainties which may affect us.

Now I would like to introduce New York Community's Chairman, President and CEO, Thomas Cangemi.

Thank you, Sal. Good morning, everyone, and thank you for joining us today, to discuss the great combination we announced earlier this morning, along with our strong first quarter results.

Joining me in Westbury are our Chief Operating Officer, Robert Wann; and our Chief Financial Officer, John Pinto. Also on the line is my new partner, Sandro DiNello, President and CEO of Flagstar, along with members of his executive leadership team.

Before launching into a discussion of the transaction, I would like to provide you with a brief overview of our strong first quarter results. This morning, we announced better-than-expected first quarter results of $0.29 per share, $0.02 ahead of consensus. The quarter was characterized by double-digit net income and EPS growth; strong growth in pre-provision net revenue; continued margin expansion; good loan growth; strong deposit growth; lower operating expenses; and a continuation of our market-leading superior asset quality.

For the 3 months ended March 31, 2021, our pre-provision net revenue increased $64 million or 47% to $200 million, driven primarily by an impressive 30% increase in net interest income due to lower interest expense.

On the net interest margin front, our first quarter margin was 2.48%. Prepayments were $20 million and added 15 basis points to the NIM. Excluding the impact from prepayments, the margin was 2.33%, up 3 basis points compared to the previous quarter and up 41 basis points compared to the year ago quarter. We are very happy with the trend in our efficiency ratio, as it continues to improve, declining to less than 40%.

Noninterest expenses was $132 million, slightly below last quarter's results and better than originally anticipated.

On the lending side, overall loans increased $242 million, up 2% annualized, led by specialty finance and commercial real estate. Although multifamily portfolio was relatively unchanged due to prepayments, first quarter multifamily originations of $1.5 billion exceeded last quarter's pipeline of $1.1 billion.

As I have articulated previously, one of NYCB's top goals has been to diversify our funding mix. During the quarter, we entered into a third-party relationship to bring in low-cost deposits, taking advantage of new capabilities provided by our ongoing systems and strategic transformation. To this end, total deposits rose 22% or $1.8 billion as of March 31, 2021, with $1.6 billion coming from this relationship. Importantly, most of these deposits were noninterest-bearing. We believe this, along with other initiatives we are working on will continue to diversify our deposit mix, and in time, will provide a stable source of on-balance sheet liquidity.

Lastly, our asset quality metrics remained strong. As NPAs decline, and then -- and we recorded net recoveries this quarter. Importantly, 100% of the loans on full payment deferral have now returned to payment status. Moreover, the vast majority of those loans currently modified and paying interest only are expected to come off their deferral period during the second quarter, at which time, we expect them to return to full payment status.

In terms of our regional economy, outlook is increasingly positive. With the rollout of a vaccine and additional fiscal stimulus, we are beginning to see green shoots in the New York City region. Our portion of the New York City real estate market, the non-luxury rent-regulated portion of multifamily market, continues to perform extremely well. Our borrowers have strong balance sheets, and rent collections are above pre-pandemic levels, hovering in the high 90% level. So we continue to be optimistic about the full reopening of the region.

Overall, this has been a very strong start to the year, and we believe these trends bode well for the remainder of the year on a stand-alone basis.

Not only am I excited about our first quarter results, I am thrilled about our combination with Flagstar announced this morning. When I was named President and CEO earlier this year, I outlined what my strategic priorities would be. One of my key priorities was to seek a like-minded partner who would provide us with a diverse revenue stream, improve our funding profile and accelerate our transition to a dynamic commercial banking organization. In Flagstar, we have found such a like-minded partner.

The merger of our 2 organizations will provide us a larger platform, a more robust product offering for our clients, a strong employee talent pool and significant balance sheet size to accelerate our combined transformation to a high-performing commercial bank. It provides for both product and geographical diversification, including a top 10 national mortgage origination and servicing business. It has a significant management expertise, greatly improves our funding mix and interest rate sensitivity and will substantially increase capital generation.

We are combining 2 great banks with similarly useful and risk-minded cultures, performance-based values and complementary business models positioning us to a strong institution for the future.

I am very bullish about what this combination will mean for our customers, our employees, our communities and our shareholders. In short, this partnership benefits us financially, strategically and culturally.

Before we go into a detailed discussion of the transaction, I'm very happy to introduce Sandro DiNello, and will turn it over to him for comments.

Thank you, Tom. You used the words like-minded partner in your comments to describe the combination of our 2 companies. I think the words apply equally to our own relationship and the way we work together to make this day a reality. It's been a real pleasure, my friend. Thank you too, for the opportunity to talk a little bit about Flagstar in the union of our 2 companies.

In a message to our employees earlier this morning, I described the combination of Flagstar and NYCB as a unicorn. We were doing great on our own, posting quarter after quarter of profits, reliably increasing shareholder value and executing on our business plan to become a true commercial bank. In fact, today, we announced another quarter of impressive results, reporting our second-best quarter ever.

But when the opportunity to join forces with NYCB came our way, and after considering it very carefully, we felt this was an outstanding way to accelerate our internal plans for the future. It's the right deal at the right time with the right partner. I can't wait to see it all unfold.

Now for our first quarter results. It was another standout quarter for Flagstar as we posted net income of $149 million or $2.80 per diluted share. If you back out the onetime expense associated with the HUD settlement, we earned $3.31 per diluted share for the quarter, making this one of the strongest quarters we have ever reported. On this basis, we returned 2.4% on assets and 31% on equity. While mortgage took center stage, revenue from banking and servicing continued to be strong, allowing us to deliver diversified earnings.

Here are a few highlights from the quarter. Our net interest margin increased 4 basis points. Credit continues to hold up extremely well, allowing a small ACL release while still maintaining a strong coverage ratio of 3.1%, excluding warehouse loans. Mortgage revenue was outstanding with gain-on-sale revenue of $227 million and a margin of 184 basis points. We saw growth of over 50,000 in loan serviced or subserviced. Capital ratios remained high, book value grew to $41.70 per share.

Looking at Q1 results for both companies, where we each excel and where together, each of us could be even better, I think you can see why this transaction was so compelling.

Now I'll turn this back to Tom to walk you through our investor presentation.

Thank you, Sandro. As I said earlier, I'm very excited about this transaction and what it does for both organizations. Turning to Slide 4 of the investor presentation. Let's talk about some of the key ways that this transaction will enhance shareholder value.

The combination accelerates our stand-alone plan to transform our business model to a commercial bank; creates a top-tier regional bank with significant scale and broader diversification; drives strong, sustainable financial performance and significant capital generation; improves our overall funding profile and interest rate positioning; combines a best-in-class multifamily lender with a top-ranked national mortgage originator and servicer; preserves each bank's unique low credit risk model; and combines 2 very strong management teams and Boards.

And in keeping with our financial discipline, this deal is immediately accretive to tangible book value and earnings per share. Importantly, our accretion numbers are based on very realistic modeling, including conservative cost saves and mortgage banking assumptions, no revenue synergies and no financial engineering such as share buybacks and balance sheet repositioning. Our projections capture an expected decline in mortgage originations over the next couple of years, reflecting that the transaction is strongly accretive, notwithstanding that decline.

From year-to-year, we have evaluated multiple alternatives to transition our business model to a commercial bank. It has been very clear that executing on this repositioning organically would require significant investment in personnel and resources and take a substantial period of time to execute. Partnering with Flagstar, which is already on its way to becoming a high-performing commercial bank, significantly accelerates this process, as I will discuss later, together with enhance our profitability metrics along with our national peers.

A notable feature of the transaction with Flagstar is the significant sustainable excess capital generated by the combined company. After the payment of dividends to shareholders, we estimate additional capital generation of $500 million annually. This provides the company with greater flexibility to grow the balance sheet, more capital management opportunities and resources to reinvest into various businesses, people, processes, and of course, technology, including platforms that serve growing consumer demand for digital services.

The transaction greatly improves our funding profile as we will have a larger percentage of our deposits in noninterest-bearing accounts. And from an interest rate sensitivity perspective, we will take advantage of the opportunity to transform a long history of being liability-sensitive to being asset-sensitive at the close, positioning ourselves for an expected increase in market interest rates over the next few years.

We are also combining 2 market-leading low credit risk lending businesses: rent-regulated multifamily; and national mortgage banking. Both Sandro and I see long-term value in our 2 banks' steadfast commitment to preserving strong asset quality. Our credit quality ratios remain strong with minimal losses in each of our loan books.

Additionally, our enhanced products and capabilities will provide multiple cross-sell opportunities, and I'm looking forward to working with Sandro in putting our 2 strong management teams and Boards together.

Slide 5 summarizes the key transaction terms. This deal is structured as a tax-free 100% stock deal with a fixed exchange ratio of 4.0151 NYCB shares for each Flagstar share. This works out to be 6.4x 2022 consensus EPS estimates, with fully realized cost saves, 115% of tangible book value per share and a 2.2% deposit premium.

Our new company will be headquartered in Long Island, New York with a regional headquarters in Troy, Michigan. The Board will be comprised of 12 directors, 8 from NYCB and 4 from Flagstar, including Sandro, who will become nonexecutive Chairman. Additionally, I'm very pleased to welcome Lee Smith and Reginald Davis to our executive leadership team as Senior Executive VPs. Lee will be President of Mortgage and Reggie, President of Banking.

Lee brings a wealth of knowledge and expertise in our new company. He joined Flagstar in 2013 from a private equity firm and served as Executive Vice President and Chief Operations Officer until he was appointed as Head of Mortgage in third quarter of last year.

Reggie has 35 years of extensive retail, commercial banking and commercial real estate experience at large regional banks, including Truist, RBC Bank U.S.A. and Wachovia.

Both of these highly qualified individuals will help us move forward in key areas of the new bank. I'm looking forward to working with both of them.

As Sandro and I finalize our integration plans, we will draw on the relative strengths of each company in bringing together the best talent from both organizations for the remaining key roles.

As discussed on previous calls, a hallmark of our M&A strategy is that deals must be accretive to earnings and tangible book value per share. As you can see on Slide 6, this transaction nicely meets this criteria. Financially, the transaction is very compelling, with expected double-digit EPS accretion of nearly 16% and immediately a 3.5% accretion to tangible book value per share using conservative modeling assumptions. Cost saves are estimated at $125 million, but given the fact that both companies are on the same core system, this estimate could prove to be conservative. It is also very conservative relative to other recently announced transactions.

Our capital ratios post close will also be very strong with a common equity Tier 1 ratio over 10%. We plan to maintain NYCB's strong dividend at $0.68 per share. Based on our pro forma EPS, the dividend payout ratio will decline to 47%. As previously mentioned, our ongoing capital generation will be significant.

And finally, our credit remains strong with estimated pro forma 3-year cumulative charge-offs of only 20 basis points. This metric would have been even lower if you exclude the tax and evaluated charge-offs, which have accounted for the majority of NYCB's modest charges over the past 3 years.

Slide 7 highlights the scale of our combined franchise. The company will have $87 billion in assets and operate nearly 400 traditional branches throughout 9 states and 87 retail lending offices in 28 states. Sandro and I see significant opportunities to put our much larger balance sheet to work, boosting existing and future lending and other capabilities across the extensive reach of our new retail and digital platforms.

Turning to the next slide. A few words about Flagstar's remarkable banking franchise. Flagstar, currently ranked as one of the leading regional banks in the country with a diversified relationship based business model, comprise of consumer, CRE and C&I lending with a low-risk credit profile and a low-cost core deposit base, along with strong market share in Michigan. Its mortgage business is the sixth largest bank originator nationally and is a leading sub service as well, handling payments and record keeping for nearly $250 billion of loans across almost 1.1 million accounts.

Sandro and his executive leadership team have done a great job in building and running an enormously successful organization over various cycles in the highly competitive markets, and I look forward to working together with them to build an even stronger commercial bank.

Next slide, Slide 9, highlights some of the combined company's complementary product offerings. As you can see, we are pairing commercial and retail capabilities that will enable us to better serve our customers' evolving banking needs. Although we are not modeling revenue synergies, it is a real opportunity over time for significant synergies. We have the leadership expertise and product set to accelerate our strategy and grow the business. Our enhanced scale and capital generation provides the combined company with greater capacity to lend and the opportunity to deepen our deposit relationships.

Combined, we will possess a comprehensive commercial banking offering. We will diversify our lending across multiple asset classes, and we'll further expand our footprint in contiguous markets to grow our regional and national business lines.

In addition, there is a tremendous opportunity within NYCB's branch network, which has historically been underutilized. Through the introduction of retail lending capabilities and fee-based products, we will leverage Flagstar's leadership expertise in retail banking to fully capture this opportunity.

To summarize our customer value proposition, we will benefit from the expanded scale and resources of the combined company.

Slide 10 shows a combined revenue profile. As you can see by the pie chart on the right, for NYCB, the contribution from fee income more than doubles to 35% of total revenues compared to 14% on a stand-alone basis; while Flagstar's mortgage fee revenues declines from 36% on a stand-alone to 20% combined.

Flagstar's mortgage platform is a market-leading business that will continue to perform well through the cycle with attractive growth opportunities in which we will invest. As we continue to grow and invest in our business over time, we do expect that the mix of our revenue and earnings will naturally shift towards a more commercially focused banking model.

Next slide outlines several of our key financial metrics on a pro forma basis. Both expected return on average assets and return on average tangible common equity improve on a combined basis. Our efficiency increases to about 50% given the operating margins in the mortgage banking business, but is still well below many of our peers while net charge-offs remain extremely low on a pro forma basis.

Slide 12 has a breakdown of our pro forma loan book. On a combined basis, we will meaningfully reduce the new company's relative dependence on CRE and residential mortgages. While our interest rate sensitivity migrates to an asset-sensitive position compared to our current liability sensitive position given a substantial balance of variable rate loans in Flagstar's portfolio and a better core funding mix, driven by higher concentration to low-cost deposits. Our CRE concentration drops to about 555% (sic) [550%] pro forma compared to 750% stand-alone and to less than 300% when you exclude the rent-regulated multifamily book.

In terms of credit quality, on Slide 13. We show that both companies operate a very low credit risk lending model, reflecting our 2 companies' strong credit risk management disciplines. Our relative historical credit metrics have always ranked among the best in the banking industry. 67% of the combined loan book is comprised of near zero credit risk assets. Both companies have significant expertise in their asset classes and both are experienced at managing these businesses over multiple credit cycles. Given our similar underwriting philosophies, we expect that credit quality will remain a hallmark of the combined company.

On the funding side, you will see on Slide 14, that on a combined basis, our funding mix improves substantially, and the cost of funding declines given a higher concentration of core deposits. In particular, noninterest-bearing deposits and less overall reliance on wholesale funding sources. In addition, we now have the flexibility to reduce our dependency on wholesale funding. Moreover, our increased balance sheet size gives us the ability to expand Flagstar custodial relationships.

On Slide 15, in terms of due diligence, both sides on this took a comprehensive due diligence process led by key executives from both organizations as well as our advisers and consultants.

Although we have been familiar with each other for quite some time, and NYCB has retained significant knowledge and expertise from its experience in the large-scale residential mortgage lending business from 2009 to 2017, our recent due diligence efforts cover all major functional areas and all major lending portfolios. We also reviewed integration plans and are very comfortable in our ability to execute them. Let me note again that both companies operate on the same core platform.

Lastly, on Slide 16, I mentioned earlier, our companies have shared values, including, among other things, a strong credit risk management discipline; common commitment to expanding and diversifying operations and balance sheets through this transaction; and moving forward into new channels for capturing and servicing the nation's banking needs. These values translate into a meaningful commitment to our employees, all of our customers and to every community which we serve.

Additionally, both companies see the transaction as an opportunity to strengthen our mutual commitment to a diverse, inclusive and culturally rich corporate environment.

Now I will turn it back over to Sandro for some additional comments. Sandro?

Thanks, Tom. There is a lot to love about this combination. For starters, we're both coming into this from a position of strength. Neither of us is a white knight trying to save the other. We're both successful and profitable.

Flagstar has been in the mortgage business since 1987. We have many customers who have been with us for decades. And as a bank, with the balance sheet, we have distinct advantages over nonbank mortgage lenders.

In a similar way, NYCB's dominance in multifamily real estate is unquestioned. The scale of its branch network is formidable. At its most basic, this combination is all about rounding each other out, unlocking the potential in each other's franchise and leveraging our bigger balance sheet to bring more to our shareholders, customers, employees and communities.

Take technology as an example. As a larger organization with more capital, we can invest in technology and offer customers multichannel options in doing business with us, face-to-face, telephony, digital and mobile. And that's just one example.

This is a special day. It's a great day for Flagstar and NYCB. I look forward to getting off the starting blocks and watching our 2 great franchises come together to knock it out of the park.

On that note, Tom and I will be happy to answer your questions. Melissa, please open the line for questions. We'll do our 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 this week. Melissa?

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

Congratulations on getting the deal done in such short order and what looks like a relatively attractive deal while maintaining the dividend. So good first step.

I guess, just as we dig into the deal, you talked a few times about the core systems being on the same platform. Just talk to us in terms of a little bit more detail around the deposit and the lending platform. What needs to be done from a systems conversion perspective? And has the decisions been made in terms of which set of systems you're going to operate with as a combined bank?

Yes. That's a great question, Ebrahim. I would say, without question, we are partnering with Flagstar. First, Flagstar's core DNA is on both companies' platforms. So that's an easy integration opportunity for us. So we partner with Flagstar and obviously, Sandro's team is partnering with Flagstar. So that's the core. And as far as the systems, we're going to go through a very detailed process from now to integration and to the quote and ultimately, to conversion, but we feel very optimistic that there's a tremendous amount of efficiency when it comes to systems but clearly, we're going to go and take the best systems for the bank and think about the benefits of technology and try to improve more towards the digitization of the entire banking platform, both on the consumer side, commercial and on the deposit side. So there's no question that when you think about the opportunity to bring the systems together, this is going to be a simplistic conversion on the core, but the plug-ins where things will be very interesting as we move into a different world in technology. So we're excited about that.

Got it. And I guess just moving to the balance sheet. Historically, NYCB's done transactions, run-off on the acquired entities' loan portfolio. Clearly, this is a very different type of deal. Just tell us in terms of is there anything on the deposit or the lending side that you expect will get restructured or runoff following the deal that we should be looking out for?

Ebrahim, this deal is all about 2 companies coming together with 2 strengths. They have tremendous strengths on both sides. They have tremendous businesses. We want to be in those businesses, diversification to this combined balance sheet. No question that the warehouse business is a very attractive business. It ties very nicely into the mortgage business. We believe that business can significantly increase on where it's today, just given the size of the capital structure. They have loan limitations for one customer. So think about taking the company close to $100 billion and what the capacity can actually be. So we're very comfortable with all their lines of businesses. We've diligenced tremendously all of the product mixes. And I think we are great complements to the company. So there's no expectation of rolling off any of the lives. If anything, I believe the synergies of growth is there. There's tremendous growth opportunities to roll this out throughout the entire platform.

We talked a little bit about back in the first -- in the beginning of the year about when we came out with the fourth quarter results. We need to build the plumbing. This establishes a new plumbing for the bank. This is no question going to roll through our retail franchise that has been underutilized from the beginning of time.

We want to transition away from the thrift balance sheet. Having the product mix, both on the commercial side, outside of multifamily and CRE, in addition to having a significant amount of consumer products. Once we start running these brands of these products through the branch network, it's going to be a very powerful opportunity to grow different lines of businesses on the balance sheet and we believe there's tremendous synergy there.

Got it. And then just one very quick one. Your cost-saving assumption, does it include any expectations for consolidation in the NYCB, New York branch footprint or no?

No, zero. It was -- look, 8% of the combined P&L, I believe that's very conservative. If you look at the Flagstar franchise, I believe it's 11% of the Flagstar franchise, 30% of their core banking franchise, we put zero cost savings applied to the mortgage banking house. So clearly, we think it's conservative. Obviously, we're going to look at the franchise going forward, and we'll look at the branding down the road, but no question that this franchise on a combined basis, is very powerful. It moves towards a national platform. And clearly, we will be able to, in my opinion, look at these cost saves as being -- look back and say it was very conservative. So $125 million, in my opinion, is conservative. We believe that it's highly achievable. They've been identified and we feel very comfortable that we'll be able to execute it in short order.

Our next question comes from the line of Mark Fitzgibbon with Piper Sandler.

And congratulations on a nice transaction.

Thank you.

Tom, I know you said your projections don't incorporate share repurchases, but do you expect the capital ratios will be high enough, maybe some point late in 2022 to contemplate buybacks?

So look, Mark, this company is going to generate a lot of capital. So at post close, we're looking at about $0.5 billion of excess capital after we pay our shareholders a very substantial dividend. And that's the total shareholder base. So this is a significant benefit for all sets of shareholders here. The capital generation is significant. We're going to look at all capital opportunities, obviously, including buybacks. But the reality is we want to also grow the business. We want to have this capital to grow this book, grow the business and be very flexible on, as I discussed in my prepared remarks, people, processes and technology.

So clearly, the buyback is definitely one of the focuses as we go forward in the future. But clearly, the fact that our dividend payout ratio is below 50%, we haven't seen that in quite some time, really strengthens our capacity to generate capital and to return it back to shareholders. There's no question that'll be part of our capital management tool as we go forward.

And then, Tom, 2 questions around the mortgage business. First, would you look to buy additional mortgage platforms? And second, I guess at the mortgage company, I'm curious how much of the operating costs are fixed versus variable? And if loan volumes decline, how fast can you sort of take down the cost structure?

Well, I'm going to defer that question to Lee Smith, who runs the mortgage business and why don't Lee just take that one. Lee?

Yes. Thanks, Tom. Thanks for the question. So let me do the last part of your question first. In terms of our cost structure on the mortgage side, 70% to 75% of that cost are variable or semi variable. And that's because we leverage third-party vendors. We utilize overtime and weekends. We've got commissions on the sales side so the good news is the volume flexes down a significant amount of the cost base also flexes down, and that's the way we've structured it.

In terms of growth, I think the big opportunity going forward are in the consumer direct channel and the broker channels. And we think that we can grow those organically and through lift-outs. We don't necessarily think we have to execute on mortgage acquisitions. We'll obviously be flexible, but we've already got a very big mortgage footprint. We're the sixth largest bank originator of mortgages in the country. We operate in all 6 channels. And we think that we can continue to grow in the consumer direct and broker channels, organically and through lift-outs, and that would be the plan.

Great. And then lastly, you mentioned in the slide deck the opportunity to do some liability restructuring. I'm curious, that will happen post-closing, presumably? And can you help us think through how much and what the timing might look like?

So Mark, what's interesting about that is that we have tremendous flexibility. This deal has no restructuring. It has no buybacks modeled in. Obviously, we're going to get a substantial amount of noninterest-bearing demand deposits. We're focusing on our own deposit initiatives as we stand today. We believe we have a number of things internally that we're rolling out, including working with our customers. Getting that deposit relationship going, making sure when we close loans, we're getting deposit flows. So that's all happening on top of our transition to put this merger together. So we're very excited about the opportunity to be less wholesale dependent.

If you look at what's coming due in the next 1.5 years, it's probably about $3 billion of FHLB that are coming due. And taking that FHLB balance and removing it just from the passage of time, which comes by the way without any charges, will significantly increase the NIM as well. The deposits that we're getting principally from the Flagstar organization has a high percentage of noninterest-bearing demand accounts. That's zero.

Putting zero against the 2, 3-year liability with the FHLB is a much better option for the company. Like I said in the beginning of the year, our goal is to reduce our dependence in wholesale deposits. In a perfect world, we would remove $15 billion of wholesale and make it all retail and have a noninterest-bearing component of that. That's going to, in my opinion, have a substantial benefit to the multiple of this company. We can look at 2 to 3 multiple turns just by changing our dependency on wholesale deposits.

So no question that there's an opportunity for restructuring. We're not modeling it. We will look at the market from time to time, depending on the amount of liquidity that we have. We have a lot of liquidity right now. As borrowing opportunities come due and potential restructurings, we may execute on that, but it's not in the numbers. It only should state that the pro forma number is higher.

Our next question comes from the line of Steve Moss with B. Riley Securities.

Congratulations, Tom and Sandro. Just want to start with maybe just in terms of common balance sheets on the asset side. Just wondering if you anticipate maintaining Flagstar's held-for-sale portfolio?

Absolutely. That is a great line of business. Obviously, when we ran the AmTrust mortgage business, that was a very high-yielding short-term piece of paper. And clearly, that is a significant source of liquidity and our goal is that it should stay, depending on the type of volume in the mortgage business as a material benefit to the combined company. It's substantially beneficial to the margin. And clearly, it's a liquid position. So no question, it's part of the mortgage banking platform. And absolutely, we'll hold that. Yes.

Okay. That's helpful. And then just, Tom, in terms of margin expectations for New York Community here going forward, it looks like a good quarter here on margin expansion. Just if you could discuss your expectations over the remainder of the year. It just appears 2022 consensus seems a bit low for you guys?

Yes. So look, we're very pleased to see the margin continue to expand. We believe it will continue to expand throughout the year. Obviously, we have an abundance of liquidity on the balance sheet from our deposit initiatives that we just put in place. I believe you can take out that excess liquidity, we'll see the margin up another 3 basis points this upcoming quarter. I think that will continue throughout 2021 with the anticipation that our -- on a stand-alone basis, our core deposit franchise could probably see, not including the Flagstar franchise, which has a lower cost of deposits, probably bottoming out around 35 to 38 basis points by August of 2021. So the continuation of lower funding costs throughout the bank, possibility of maybe paying off some debt along the way, which will definitely help the NIM, and we think that this will continue in '21.

What we'd like to see it happen. We'd like to see the back end of the curve start to continue to increase, so they can start getting better lending yields. That's been a challenge back and forth given the volatility there. But it seems like the path of direction's at higher yields in the back end and obviously, stable funding on the short end. So we still anticipate a further margin expansion in 2021.

Okay. And just last one for me. Just in terms of the EIP deposits that came on balance sheet this quarter. Just maybe give us more color on that relationship and maybe how big you think it could get going forward here?

So I'm going to defer that to Mr. Pinto. He's been working on the transaction for us.

Yes. Thank you. That's the first step in building out our relationships, as Tom has mentioned, with our technology providers to try to bring in more noninterest-bearing deposits on a stand-alone basis. So this is related -- we have relationships now that are really with all 3 of the economic impact stimulus plans, we have deposits related to that. So you do see swings in these deposit balances. They increased to about $1.6 billion at year-end. It continued to increase throughout this part in the second quarter. So we got up to around $3 billion, and then it's going to start to come down throughout the rest of the quarter, but there'll be a nice tail that will lag and stay with us for the rest of the year.

This is, once again, just the first step in that process. So as we bring in other types of relationships, we should see more stable funding from that. But this is a really good start and a good noninterest-bearing start to bring in those deposits.

Our next question comes from the line of Chris McGratty with KBW.

Kind of interested in the background on the regulatory process with this transaction. Maybe you could share some thoughts on conversations with the regulators leading into the announcement this morning?

Well, obviously, we can't speak specifically about regulatory competition other than you would expect that a transaction this size was tremendously vetted and discussed well before it was announced. And we're very comfortable as we move forward.

Okay. And then on the capital generation, it's going to be notable. There's been reports that other deposits may be available in the market from banks looking to sell. Does this preclude -- does this announcement this morning preclude you from looking at anything else in the next couple of quarters?

Chris, I'll tell you that, look, as I said on the previous calls, everything is on the table. If we can find great deposit sources that transition this bank away from wholesale funding, it's a win-win. So we're going to look at everything that comes our way. But more importantly, something that is strategic as Flagstar. Sandro and I had lots of conversation over the years. We've built a good relationship. We could execute such a significant strategic partnership to build the franchise, there'll be tremendous opportunities. We hope that we close this deal as soon as possible, obviously, right? The sooner the better, but it doesn't preclude us from looking at other opportunities.

Okay. And then if I could just sneak one last one in on the pro forma rate sensitivity. Do you have the fixed floating mix pro forma between the loan portfolios?

Well, not exactly. But as you can imagine, the percent of floating on New York Community's balance sheet is not that high, right? But what we have done in the past is we put a swap on to take $2 billion of our fixed rate loans and push it to floating. Flagstar has the same types of programs. They do the same types of balance sheet management on their end.

And the benefits on the interest -- on the NII sensitivity is not only from the variable rate lending, the true benefit's on the liability side. Those noninterest-bearing cost of funds, those low beta other deposit accounts is really what's helping to drive the NII sensitivity as well. So yes, there's definitely a higher variable percentage in the Flagstar franchise, which is beneficial. But it's really the entire balance sheet where we're seeing the NII benefits, especially on the deposit side.

I would add to that comment that at the end of the day, they have unique lines of businesses that price out their customers where they can go fix the float. Where we are just starting to go that direction, they have it. We'll do it together. And this could be a good fee income opportunity for the bank. But more importantly, culturally, we'll focus on getting away from just being a fixed rate lender to balance the balance sheet. So we're protecting ourselves from interest rate risk going forward.

Our goal in the long end down the road is to be mutual to the marketplace, not be dependent on short-term interest rates putting pressure on our NIM. So clearly, this gives us tremendous balance. They have some product mixes. They have capital markets activity. They structure their deals around their mortgage banking scenario. We can do the same thing structuring on the multifamily side.

So we look at these synergies. By the way, they're not baked into the model, but there's tremendous opportunity on fee income as well as balance sheet optimization.

Our next question comes from the line of Dave Rochester with Compass Point.

Congrats on the transaction, and it's great to hear about the deferrals as well. I just wanted to confirm something you said, Tom, just to make sure I heard it right. Did you say that you could take the combined company to $100 billion in assets just from the standpoint of raising the capacity constraints on the mortgage side of the business because the combined entity's larger?

Well, at the end of the day, we had -- combined is $87 billion, but think about the opportunity on growth. I mean, I would say that if you look at consensus growth out there, there really is not a lot of growth on our model, right? So we're growing right now a multifamily fresh CRE portfolio with specialty around 5% projected. And you think about where they have opportunities, the fact that we put these companies together, I keep focusing on the warehouse, that's a phenomenal business, low risk, tremendous fee opportunity there. Income is -- the spread on that is very attractive, and they have loan limitations based on their side. They have great relationships. We could easily put our capital to work and significantly increase that warehouse business, which happens to be a very attractive business pie to the mortgage banking operation.

So we are going to be able to utilize the platform with the capitalization to grow the bank, combined bank. So clearly, I think on an organic perspective, I think the growth rate will probably be higher. We're not going to give that growth, obviously, until we close the deal. But I think that thinking about us as a 4%, 5% grower is probably too conservative. If you think about multifamily facility, historically, this company has always been a high single-digit grower without transactional activity, right?

So this is a very large transaction. We'll have a lot of liquid funds as part of the transaction. And clearly, we can go into new markets here with our core platform, including multifamily CRE. So I think collectively, we will be able to grow the balance sheet combined at a faster pace.

Just on what you just said there regarding multifamily and commercial real estate, are you looking at doing lending outside of the New York City market?

Well, absolutely. I mean, they do a fine job. They have a very good run operation. We'll combine the operations and no question that we should take the model to different places throughout our organization. We're more of a national footprint here. And we're looking at other markets. We're in Florida. We're in Arizona. We're in Ohio. We do lending in those markets, and we're looking at contiguous markets adjacent to those markets. So there's no question that we can roll out our multifamily product mix throughout different markets to continue to fuel growth. We haven't done that yet. It's a very insignificant amount, but there's no question that we will roll out into some very conservatively into new markets.

Okay. And just one comment that you made on a previous call, just regarding the margin. I know you have a macro hedge out there that you had mentioned you could remove and that could add pretty decently to the margin in the beginning of '22. Is that still something that you're considering doing? And is that a definite that you're going to do that? Or are you still thinking about it?

So Dave, all options are on the table here. This is a pretty simple one. We make a decision when it comes due. We have that hedge on the balance sheet. When we come together, it may not be necessary. This company has a just different profile come next year given that liquidity on their end, the cost of funds and that interest rate risk positioning. So you would make the very simplistic view that, yes, it goes away because we're a new company, and that'll add to the margin for next year on a stand-alone basis. But on a combined basis, we just get so much flexibility by not being dependent on being a liability-sensitive institution. That history will change. We're focusing on being more neutral and potentially active, sensitive depending on where markets are.

Sounds good. Maybe just one last one. Tom, you mentioned for the year, looking at a range of $530 million to $535 million, but I know you talked about some potential improvement over that guidance this year. So I was just hoping to get an update on that and what you're looking at for 2Q?

For the expenses or?

No. Just expense.

Yes. So look, we had a great quarter on the expense side. It was better than expected, right? I think that we're doing a great job on bringing our expenses in line. So my guess it's going to be on or around the same as Q1, maybe $133 million to $134 million-ish and that's probably conservative. I think we've done a phenomenal job. Q1 is usually the high quarter. So the fact that we were slightly down is impressive.

Well, look, we have a lot going on internally. We're going to focus in on the integration. But at the same time, I think our expense run rate is very manageable here. I don't envision any substantial cost until we consolidate the franchise. We'll get that $125 million cost savings on a consolidated basis.

But more importantly, I think there's more efficiencies when you think about the combined entity. When you look at combining 2 large balance sheets, like I said before, there's zero cost saves in the mortgage business. We don't anticipate on touching the mortgage business. But just from putting these 2 complex organizations together, there has to be some more savings. So when you try to model a pro forma run rate on expenses, I think you can probably say that the number that we put up on the deal is probably very light, but they're highly achievable.

Our next question comes from the line of Steven Alexopoulos with JPMorgan.

So Tom, in the past, the success of merging a retail bank and commercial bank has been mixed at best due to the challenge of merging very different cultures together, and you also have a mortgage company in the middle of this. Do you plan to fully merge these cultures together or do you plan to just allow Flagstar to operate somewhat independently?

This is a transformational change on culture. That's been my desire. That's my goal. Like I said previously, we are not going to be running a thrift. This will get us there. This is a major step in changing who we are and where we're going. We're bringing on tremendous leadership. Lee Smith, Sandro, we have Reggie Davis, who's got a tremendous background in this, he's a proven entity. He will be very valuable to the organization. They are our partners. They will help me move forward to build a full-service commercial bank. This is one of the many steps that we'll do, is change the culture of this institution. We are not going to run a long-term view of being a thrift.

So this is a tremendous step towards changing the culture. So yes, we're going to embed the culture together. And clearly, this will be the transformational cultural change for the company. And we're very excited about it, very excited. It's going to be our leadership in people, having the right people in the right places. And maybe Sandro can add some color to that 'cause Sandro, obviously, has been there a long time doing that, with his current existing franchise.

Yes. Thanks, Tom. I think the key here is leadership. And Tom and I are 100% aligned in how we view culture of the organization from a social point of view as well as from a business point of view. And Tom has just done a terrific job of articulating all of the benefits that this transaction is going to bring to the combined organization.

So I'm not worried at all about the cultural fit. This is a powerhouse organization. And those of you that know Flagstar, I know a lot of the people on this call don't know Flagstar, know that we've been very good at doing what we say we're going to do and I'm confident in this combination with Tom and his team, that we're going to continue to prove that out. And what Tom has articulated here in terms of how we're going to bring these organizations together, how we're going to take the advantages of both companies to create an institution that can be successful regardless of what the economic conditions are, I can't imagine for us that there could be a better opportunity. And I appreciate the passion with which Tom speaks. And I'm just ready to go and work with him to build a really terrific organization.

Okay. That's good color. In terms of the mortgage business, Tom, what's your outlook for the contribution from mortgage? Do you plan to maintain this pro forma roughly 1/3?

Well, I'm going to -- I'm going to handle this in 2 ways. I'm going to give you my general view of it, and I'm going to pass it over to Lee because he runs the business. But no question when we looked at this business, consensus out there has, I think, 50% reduction in general because of the current peak of the mortgage, if you want to call it peak, or very heavy volume. So we've looked at it conservatively. I think the marketplace has them somewhere between 46% or 50% reduction in 2022 and further reduction into 2023. And that's modeled in our numbers.

So clearly, we believe that that's still a very significant contribution. When you look at the pro forma I think the pro forma is going to be around 20% on pro forma of the contribution to overall revenues to the company, which I think is a better balance when you look at approximately a $100 billion franchise or 88 -- just under $90 billion, and I think that's unique because, obviously, we're not betting on one line of business. We're not betting on multifamily CRE and we're not betting on just mortgage, we're a combined powerhouse.

With that being said, I'm going to defer to Lee to give some more color on the mortgage business because, obviously, he runs the business, and we're very excited to have him as being our President of that business. So Lee, if you want to take that?

Yes. Sure. Thanks again, Tom. Yes. I mean, look, from a volume point of view, we leveraged the MBA and the agency guidance. And if you look at 2021, they're still saying it's going to be a $3.6 trillion market. In 2022, it's $2.6 trillion and in 2023, $2.3 trillion. We've been pretty conservative in what we've modeled out over the 3 years, and the numbers still work.

And when I say we've been conservative, here's what I mean, and here are the opportunities, I think, for us from a mortgage point of view. We've seen the GSEs pulling back as it relates to non-owner-occupied and investor properties. They're also limiting the cash window at the end of this year. And I think with the combined bigger balance sheet and our RMBS securitization program, we can step into that void and benefit, especially through our bulk and correspondent channels.

I mentioned earlier that we want to grow the consumer direct and broker business. We're underweight in those channels, and those are 2 channels that we can grow organically.

And then the other thing that I haven't mentioned is we have $2.5 billion of EBOs on our balance sheet. We believe $1 billion of those will cure through the partial claim process and $1 billion of those will cure through modifications. This will add $103 million to gain-on-sale revenues in the second half of '21 and $54 million in 2022. So it's going to be $49 million in the second half of '21, $54 million in 2022. So we think that there's plenty of upside putting these 2 entities together for us to continue to grow from a mortgage point of view.

And then from a servicing point of view, we're already the sixth largest subservicer in the country. We've got 1.1 million loans on the book. We have the capacity to service or subservice 3 million loans. So we have plenty of room to grow. And there's lots of ancillary benefits from that business, the biggest of which Thomas mentioned are the escrow deposits.

Steve, just one other point on that. I just wanted to add. When we had the AmTrust franchise and we ran the mortgage business, we had a very unique program. Obviously, to diversify the balance sheet. We put on a hybrid ARM program for very wealthy customers that would look at financing as more of a financial light that they had to have some financing against their net worth. And clearly, low LTV, high FICO paper as a placeholder for diversification for this bank. We did it very successfully. We rolled out a program. We take the steps on what we wanted to have through the mortgage banking operations. And we never had a 30-day late pay. So we have these balance sheet optimization opportunities will come versus sitting on cash. We sit on a hybrid ARM loan that's a 40%, 50% LTV and always paid is a nice option that we don't have currently. This balance sheet then gives us tremendous amount of flexibility to optimize the balance sheet.

And as we had indicated on the capital in the market side, these guys have that capital markets capability on resi. Doesn't mean we can't move that over to commercial real estate as well. So we're really excited about the potential synergies that are out there that we're not modeling, but they're there.

So Tom, given the transformation that you're planning, what kind of bank do you see yourself building here from a revenue growth perspective? Is this a low single-digit grower, mid-single digit grower? Like what are we building here?

Well, I think conservatively, let's say we're looking for a high single-digit grower. But I think we're going to have to come together and close the deal first. You know us well, see, we've always grown up until a few years, our multifamily CRE book at high single digits absent any business combination. So this is a major business combination. It's the largest business combination that we've ever announced and we're very pleased about it, but the flexibility to grow the balance sheet and grow the asset classes conservatively is going to change the growth rate. I believe the market has us at a 4% or 5% growth rate. Now that is very conservative when you're thinking about the opportunity with balance sheet optimization. The capital generation of this franchise is significant, having an extra $500 million a year on capital generation, bringing the payout ratio down to levels that we can utilize capital for growth and/or flexibility, depending on market conditions, is a very unique opportunity for us.

I think when you think about the potential of more product mix, growing these lines of businesses, throughout the footprint and potentially taking it nationally into markets that we're comfortable, I think is a tremendous, tremendous opportunity. And maybe Sandro wants to add a few words. I know Sandro and I talk about this, about the lines of business. But all these lines of business we have are extremely well managed. We've diligenced them. And Sandro has done a great job in putting his team together. He bought in Reggie Davis as the President of Banking. He's going to rocket fuel the transformation for us. We're excited to have him on board.

And like I said, this is going to be about cultural change. This is a cultural change for the franchise. We're getting away from the thrift franchise. So maybe Sandro wants to add a few words to that.

Yes. Let me speak a little bit to the mortgage business. As Tom said in his prepared remarks, the capital generation for mortgage can be extremely significant. If you take a look at Flagstar, and let's compare 2018 to 2020. In 2018, we had $200 million of revenue from the mortgage business. In 2020, we had $971 million. Return on assets in 2018 still was 1.04%, and the return on equity that year was 12.67%. That's with $200 million of mortgage revenue. We had more than that in the last quarter.

So the power of the mortgage business is expressed by being able to take advantage of it when it's there. And so we jumped on it in 2020. We increased our mortgage revenue to $971 million and jumped our return on equity to 29% and our return on assets to 2%. This is the power of the mortgage business.

And the criticism on Flagstar has been that it's too much revenue as a percentage of your total. So by combining these companies, you now take that volatility in the mortgage business. You smooth it out because it becomes much less of the total, but it's still there, still regularly providing good returns. And then when those special opportunities present themselves, you jump on it needs and you generate just a tremendous amount of capital.

So this is terrific. And now we can continue to run this business, the way we run it. As Lee has said, we think even when the mortgage origination volume overall in the country declined, because we've got a couple of areas that we are underweight, that right now we're not pushing, we will push those, we will grow those, and everybody knows that direct-to-consumer is the way of the future. So the opportunity to take what is about 10% of our business in direct-to-consumer, up to 20%, 30%, 40% of our business protects us on the downside when mortgage originations decline. We will show you that we will maintain the contribution of this mortgage business on a steady basis. And then when that special opportunity is there, we'll jump on it, and we'll do what we did in 2020 and what we did in the first quarter of 2021.

Well said, Sandro.

Our next question comes from the line of Brock Vandervliet with UBS.

Just a follow-up on that one. And maybe this is another one for Sandro on the FBC. But I appreciate the guide on mortgage volumes. If you could also talk about your experience with gain on sale, what those expectations may be going forward. In addition to, if you could just give us color, for those of us that haven't covered Flagstar in the past, what your distribution channels look like? Because I think there's a lot of concern at the moment about, particularly the wholesale and correspondent gain on sale that perhaps you could talk to?

Well, let me start, and then Lee will fill in here. So relative to gain on sale, our margin in the first quarter was 184, it was down a little bit against the prior quarter, but not as much as some other organizations experienced in Q1. We did give you some guidance in our investor deck. I point you to that, so you can see what we're projecting going forward. So we do think there's going to be some narrowing in the margins over the next quarter. But not in a way that is going to cause the organization to not meet its expectations relative to earnings.

With respect to the distribution channel, we're largely TPO, 70% or so of our business is third-party originated, and -- from third-party originators, and we've been in this business since 1987. I'll tell you, when I first became CEO in 2013, I didn't know a lot about the mortgage business because I had been on the banking side of the organization. One of the first things I did was to go around the country with our regional executives and meet with not only our team but our customers. And the loyalty that exists out in the marketplace amongst third-party originators for Flagstar is unquestioned, and no one has that kind of loyalty. So we're very confident about being able to maintain the market share that we have in the TPO business, and it's been very consistent over the years.

The other 2 lines of business are retail and direct-to-consumer and retail is about, what, Lee, 20% of the total and direct-to-consumer about 10%

Yes, that's right. Yes. Let me jump in. Yes, to be more specific on the channel. So the TPO business consists of a bulk channel, correspondent delegated, correspondent non-delegated and a broker channel. And then we have a distributed retail channel and a consumer direct channel, which is also considered retail. The split, as Sandro said is 70% TPO, 30% retail, but the advantage is we are originating in all 6 channels. So we get to see how the market is moving. And because we have a diversified origination business, we can pick pockets where there's opportunity. And then you couple that with the fact that we're now going to have an almost $90 billion balance sheet, we have our own RMBS or securitization program. I think there's a lot we can do here to further leverage that distribution channel from the mortgage business.

I think what you're going to find as you look into Flagstar a little more as it relates to the mortgage business, it's a very sophisticated mortgage business. We just alluded to the RMBS. There's really -- other than the big money center banks, nobody is doing RMBS transactions at the rate and pace that Flagstar is. And I think what you'll find is that very few mortgage lenders have the number of channels and the levers that we can pull. So we're very, very opportunistic. We've been that way in terms of how we run the entire organization, and particularly in the mortgage business because we have those 6 different channels.

We'll go where the opportunity exists, and we'll jump on it, and that's what we've always done. You can go back and look at the record. It's steady, it's solid, and it will continue to be going forward.

Got it. And just a brief follow-up. In terms of MSR exposure, could you kind of run through that and talk about your hedging, how you look at that?

Tom, do you want us to take that?

Yes. Sandro, obviously, you guys are running the MSR book and we're very familiar but I'd rather you guys take that one. Sure.

Yes, I'm going to let Jim Ciroli, our CFO, take that one. The treasury team, which has been outstanding, reports under Jim, and he can be very articulate about what we do in MSR.

Right. No, we manage our MSR limitation. So as you are aware, there's a 25% limit that we have to hold on the balance sheet. Otherwise, it becomes very capital punitive. And from a hedging perspective, we made the decision back in 2016 to fully hedge that up, not just from a delta perspective, a change in interest rates. But from a vega perspective as well, and the correlation that the team's achieved from that point on has been around 99% between the hedge and the value of the MSR.

Got it.

Just to add to that commentary. Just bear in mind, when we combine the capitalization, the ability to put on more MSR to maximize the opportunity on the liability side is also a huge opportunity. We think it's a few billion dollars of non-interest-bearing demand deposits flow just by maximizing MSR. So clearly, that's not in the run rate, but there's that topic in interest bearing and a lot of more noninterest-bearing deposits into both on a combined basis. So there's no question, a significant change in the liability structure as we move forward as a much larger company with a bigger MSR.

Our next question comes from the line of Steven Duong with RBC Capital Markets.

Congrats on the deal. Tom, just on the commercial portfolio, you'll be around 9% of total loans. Can you share us where you'd like the portfolio to get to? And what are your thoughts about getting there?

Look, we've always been significantly allocate to multifamily CRE, and we have this opportunity to build up relationship lending. That's the key here. And Flagstar does a really nice job with that. If you look at their franchise, it's a tremendous balance of what they've done over the past few years by diversifying more towards commercial banking. I'd like to see some more C&I, I'd like to have at the positive relationship business roll out through the franchise. As we discussed in multiple occasions, Reggie Davis is going to be the leader there, and that's going to be the rollout for the company. I think we can do some great things there.

We've just started on the commercial relationship side, mostly on CRE, and we really don't have a C&I presence. So having a C&I presence with Flagstar, with people and talent and processes to build that is going to be opportunistic. We're in very unique markets, growth markets. Arizona, Florida, these are solid markets. And we're not on the field. So ultimately, we'll be in the field, bringing in that business so I'd like to see a better balance. It's not going to be just mortgage and multifamily. We're going to build a C&I conservatively and pick up top customers. And like I indicated, warehouse, the homebuilder business, these are all solid businesses, well-managed and I think they're constrained by the size of their capital position. And obviously, it's competitive. All these businesses are competitive, but we believe that with the right people, we can get some good lines of businesses growing at a much higher pace by putting a larger capital allocation towards those lines of businesses.

So I would say, over time, as we discussed in our prepared remarks, more of a commercial bank light balance sheet, along with more commercial bank revenue streams. We even discussing the fee income opportunities, but ultimately, fee income clearly is going to be outside of mortgage, a priority for the bank as well.

Understood. So I guess when you guys eventually fire on all cylinders the way you'd like, do you see your pro forma efficiency maybe eventually dipping below 50%?

It's interesting, as we indicated, a lot of their costs are variable, but they make a lot of money. Their returns on equity was 30% this quarter. And if you normalize that, say, you want to take it down to more of a normalized market, it's still very profitable. It's a very -- it's a focused business. You have to be able to hire and adjust when you need to adjust and invest. And I think they've done a phenomenal job on that.

So clearly, we have always been very prudent on expenses. We've been very focused as being efficient the way our business model was. I would say when we have scale, and you have the right technology investments, which we plan on investing in, over time, we will be efficient. And obviously, the hallmark for both companies is to be efficient. They're in a different business on the mortgage side. You have a lot of cost structure, but you also make a lot of money. And as Lee indicated, you can up and down that, depending on where you want to invest your opportunities. So clearly, they've invested. There's a lot going on the tech side that we're looking at. They are looking at a lot of items as well to be more efficient and be more digitized. And I think over time, we'll have a digitized platform for the product mix.

We need to figure out how to digitize that customer experience through the retail platform. That's clearly a priority goal for us. So I would say we could be efficient. We will be efficient. And even when you pro forma this company in the low 50s, it's still market-leading efficiency.

Our next question comes from the line of Matthew Breese with Stephens Inc.

I haven't heard otherwise, but just to be clear, are there any asset classes or loan segments that you plan to deemphasize or put in run-off mode with the transaction?

No run-off mode, this is going to be investing with the 2 cultures coming together and maximizing the opportunity. We're very comfortable what they have. We want to expand these businesses. And clearly, we believe there's opportunity for growth. So there is no plan to be restructuring and/or run-off mode.

Got it. Okay. And then for the Flagstar folks, Sandro, maybe provide some perspective on why you feel comfortable adding so much exposure to New York City. It's one of the hardest hit areas from COVID. The political situation has been challenging, especially with some of the new real estate legislation, potential for that to continue. So how did you get comfortable adding exposure here? And maybe provide some of the things you liked about the geography and see as additive to your core franchise?

Well, look, it's one of -- it's the largest metro area in the country. So I think it makes a whole lot of sense for us to take our retail offerings into that market. There's a lot of people that live there and a lot of people that we can sell banking services to.

As it relates to the exposure to New York generally. I mean, the credit history of NYCB is stellar. So where we've done extensive due diligence on their loan portfolio using outside advisers and speaking to experts in the field, and the dealing we came away with in a very, very strong way was that the portfolio has held up, and it's going to continue to hold up. And that's the key really is what's the exposure you have in the existing portfolio. The lending you do going forward will be based on the risk you're willing to take going forward. So looking forward is less important as it relates to the New York City COVID situation as opposed to the past. And we're very, very comfortable with the quality of the portfolio that the NYCB team has put forth.

And then, Tom, maybe just staying on the subject. There is new legislation on the floor related to eviction without good cause. Seems like they're taking a shot at market rate apartments this time? Just curious your thoughts on the severity of that legislation and the outcome of that legislation and your exposure to the market rate segment?

Now I don't believe it's on the floor, I think it's in the committee hands, but I think they're talking about a lot of interesting things to destroy value in real estate in general. But hopefully, this is obviously in preliminary discussions. It's not on the floor for a vote. It's in the committee levels on both sides. And everyone is looking at it. And obviously, we wouldn't -- we would have a very strong disagreement to go there because it would not be powerful for real estate in general.

So clearly, we're monitoring it. We can't control it, but no question that these are interesting times and regarding the real estate investing. And hopefully, they'll move in the direction that is somewhat stable instead of, we'll call it, irrational.

Right. Understood. Okay. Last one for me. Just in terms of the cost saves, could you just be a little bit more specific as to where they are, in fact, coming from?

Yes. John, you had that, right?

Sure. And as we mentioned, we believe they're readily achievable given 8% of the combined organization, especially given the fact that we are on the same systems conversion, the same system provider. So given that, not only with the savings and systems, but we'll have savings in other G&A, including in professional fees. And then also, we'll have some redundant back office. So it's really split amongst the franchise.

As Tom said, it will be -- this deal will be a change for us, a cultural change for us to continue to move towards the commercial bank strategy. So we'll see it amongst the different line items in noninterest expense, primarily in systems, some other G&A professional fees and then there were some redundant back office from a comp and benefits perspective.

Yes. And I would just add to that on a net perspective, we look at the opportunity here. And hopefully, there's other people listening in the marketplace. We're going to bring on some people. We're going to bring on some relationship type individuals that bring books of business to the bank, to explore into the C&I platforms. And Reggie Davis will be leading that charge for us. So we're excited about the team opportunities.

Do we have a handful of risk-outs coming? It's not indicative yet, but that's going to be the strategy over time; to put people into these very good markets and actually start to compete in the field. We don't do that here. So they've done a nice job there, and Reggie is going to work real hard to get us these great opportunities to ensure that we move towards the transition of a true commercial bank organization. And I think that's a very powerful statement from a franchise that did mostly all of its business through the broker channel. This is more diverse. We will have people out there bringing in deposit flows, lending on great deposit opportunities and focusing on a more diversified balance sheet.

I think that's where the opportunity, which, again, the synergistic part of it is now modeled out. This is a very powerful change in culture, and it's all about cultural change or getting away from the thrift model. And we think it's important timing with this. So clearly, like I said in previous calls, this is cultural change. We're very excited about the cultural change. And I'm assuming there's some people out there that want to potentially join a very unique opportunity. So we're open for business.

Our next question comes from the line of Ken Zerbe with Morgan Stanley.

Tom, I just wanted to go back to one of the answers that you gave about expanding outside of New York City. And I think you were talking about multifamily. I mean, New York City has always been such a great market for you guys. It definitely caters to the rent-stabilized niche that you guys are very focused on. I guess, I'm just a little confused in terms of why you would go outside of New York, when New York still probably offers a lot of growth opportunities for you and outside New York doesn't have the same sort of rent-stabilized markets that New York does.

Yes. So Ken, don't be confused, this is pretty simplistic. We are going to invest in our communities. There's no question that we're going to take the talent from both sides and have lending opportunities. They have a multifamily lending platform that's non-broker driven, right? They go out there and they meet the customers and they bring that business to the table, and it's a well-oiled focused on, we'll call it, conservative underwriting standards and doing conservative cash flow lending in good markets is prudent. So we're not going to do speculative lending. We feel that we have a very significant platform. Obviously, we're a substantial player in the 5 boroughs. But we have a team that looks at transactions with our existing clients on that outside of New York.

So there's nothing wrong with banking a customer who's been banking with us for 40 years that decides to go into Philadelphia or into the South Florida market. We're in the South Florida market. We have to lend on a regulatory perspective into these markets. So we're excited about having the tools and the people.

We have a very well-oiled machine when it comes to what we do, which is to the broker channel. And clearly, having a complementary business that has other means of sourcing these opportunities, both on the C&I side and the commercial real estate side is going to be additive. I think and also to be very focused on the team build in respect to these markets. We do not have people in the field in Florida. So having a group of seasoned people that bring deposit opportunities, that bring culture, commercial change where they're going to bring in the relationship lending to the table is important. They do it in Michigan. They do it in their market. They do it in where their branch structure is. Now we're going to expand it into all of our markets. I think that's the excitement of the balance sheet opportunity. So I'd call that optimization.

It's also going to be about bringing the right people. So we're going to really change the culture of how we look at opportunities within the market and focus on more being commercial bank like.

(Operator Instructions) Our next question comes from the line of Christopher Marinac with Janney Montgomery Scott.

I wanted to ask you about the pledge on the return on tangible common of 16. It would seem to me that if you can execute on the plan and the capital management goes as you'd like, that you can get above that over time. Is that a fair impression?

Look, you know what, we want to be optimistic, we also want to be conservative. That's the pro forma numbers that we talked about. There's no synergies baked into this deal. The cost savings are conservative. This is putting the 2 companies together as they stand today with a substantial adjustment to the mortgage business. I think we're going to have opportunities throughout the whole organization. I think the growth rate will be higher. I think the deposit gathering opportunity will be greater. I think more importantly, none of our modeling has the ability to maximize their mortgage business into our balance sheet, including bringing in a lot of noninterest-bearing core accounts. That number that comes in will be a reduction of our wholesale dependency, which drives the cost of our expense lower. So these are conservative numbers. We want to be conservative. We want to be in a position where we put the company together, and we focus on being a high-returning institution, but we also want to be conservative.

So clearly, if you look at the math, as we talked about in the prepared remarks, no buybacks forecasted, no synergies forecasted. We don't have any restructuring or repositioning forecasted, we're going to have lots of opportunities. As the balance sheet comes together, that'll lead to be a different environment with our accounts. We may be in a position where we're growing very fast, and we could be able to maximize the balance sheet because rates are dramatically high, and we have the ability to put a lot of this liquidity to work. So we're very pleased about the timing as such. We think that no one is going to get it right on the interest rate side, but so we're going to be better balanced. We're not going to be liability dependent. We're not liability-sensitive on a consolidated basis. We're going to be better balanced. I think having a better balance and having a -- I'll call it, a hyper focus on making this bank into a commercial banking enterprise is key, getting away from the traditional thrift model is where we believe the future is.

Great. And just a quick follow-up for Sandro. The distribution channels that Flagstar has historically had, how much of that are nonbanks, nonregulated institutions? This just seems a deep customer base that you serve?

Are you speaking about the mortgage business specifically?

Yes, correct.

Yes. So all of our -- almost all of our relationships in the third-party channel would be with nonbanks. Now we do provide services to small banks and credit unions as well. I don't know if Lee knows what amount that is. Last I knew it was 200 or 300 small banks and credit unions sell us product. But for the most part, it is nonbank originators.

Yes. And we deal with about 2,300 TPOs in total.

Great. So given the liquidity that's out there everywhere, this feeds right into that distribution?

Correct.

Thank you. Ladies and gentlemen, this concludes our time allowed for questions. I'll turn the floor back to Mr. Cangemi for any final comments.

Thank you, again, for taking the time to join us this morning. We are both truly excited about this transaction and looks forward bringing the best of both companies together, and more importantly, partnering with a great team over at Flagstar. Thank you all.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.