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 as 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. Early 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 nine 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 nine months of 2020. Both of these metrics are the best diluted EPS we have reported for the first nine months since 2010. This was another solid quarter for the company, highlighted by higher year-over-year pre-provision net revenue, continued margin expansion, strong deposit growth, stable operating expenses, and solid credit quality. Total loan growth was modest, but the multi-family 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 cards 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 multi-family 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 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 multifamily segment.
The multifamily 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, multifamily 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. Non-performing assets declined compared to the second quarter levels, and, at $37 million, represents 6 basis points of total assets, while we had no charges in the quarter.
Additionally, principal deferrals declined 8% to $914 million compared to the previous quarter, while full payment deferrals remained at zero. 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 30-89 days past due increased to $447 million, practically all of which was related to one borrower and consists of several multifamily and mixed-use properties. All of the delinquencies are in the 30-day bucket. We are working with the borrower, and he's 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 city's five boroughs 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. Broadway reopened last month and tourism has increased. While not fully back to normal, Manhattan is definitely on the path to normalization. The Manhattan residential real estate market has rebounded strongly, while our segment of the market, the non-luxury rent-regulated multifamily market, has proven to be very stable. Lastly, during the quarter, we announced our investment in 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 our very best to get to all of you within the time remaining. If we don't, please feel free to call us later today or during the week. Operator, please open the line for questions.
Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tone will indicate the line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to register a question at this time. Our first question is coming from Ebrahim Poonawala of Bank of America. Please go ahead.
Morning, Ebrahim.
Morning, Tom. I guess just first on credit. Obviously you mentioned you don't expect any losses tied to the NPA increase. Give us some sense of, one, did you anticipate that this was coming down the pike over the last few months? Should we expect more of these as some of these deferrals roll off and customers take like actual assessment of where things stand cash flow-wise?
Ebrahim, obviously we have a long-standing history of very rarely having any delinquencies.
Sure.
Clearly, we don't anticipate something like this. 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. 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, I would categorize it just to be specific, this is all Manhattan-based property. I believe when you think about, you know, the borrowers, and we talked about my comments up front about the five boroughs, Manhattan is definitely coming back very, very strongly, in particular in the multifamily rent-regulated and non-luxury marketplace. Clearly we're seeing a supply and demand situation where there's not enough supply and there's tremendous demand for it on the housing side. We feel highly confident since these are blended buildings, some of them are mixed use, some of them is just pure rentals.
I feel highly confident as he has to re-up his leases; they're coming into the market which is significantly higher than they were during the pandemic.
Understood. Okay. I guess just moving on to the margin. When we think about the core NIM, I think you guided for 3-5 basis points, adjusted for a couple of basis points 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. Also, you made some pretty decent banker hirings on the deposit side during the quarter. Please 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?
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. You know, 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. As my prepared remarks, we've won some nice unique business throughout the quarter. Throughout the year, it's been growing very nicely. I think we're close to $2 billion as of today. It's growing very nicely, and the pipeline is building.
I think when you think about that type of money, it's traditionally zero cost, very stable and noninterest- bearing. I think that's a solid book of business. What we wanna do, you know, obviously, on a standalone basis, is build a better core funding base when we look at our company and be less dependent on wholesale funding. 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 non-traditional wholesale mechanism to fund the business. We're pretty excited about that.
I'm not gonna 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 that they use the funds. We will be very powerful on a combination in respect to total funding base, on a blended basis. We're excited about that opportunity. On a standalone basis, that is the strategy right now, and we're seeing very good results throughout the year. We're continuing to focus on the cultural shift on mandating the operating accounts to least secure deposits when we close our loans, and that's a priority for us.
Outlook for the margin, Tom?
Again, I think we're getting to a point now where our CD costs are probably, John, like in the 40- 45 basis points. You're not gonna see much on the CD side. I would say that you're probably gonna be in line what we saw last quarter in a couple of basis points per quarter of margin expansion. Ex, you know, ex the combination of Flagstar. With Flagstar combined and with going into next year as we reposition ourselves for interest rate risk, continued margin expansion. 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? We're not buying assets. 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 in the pipeline that we have, we have a significant amount of apps that are in the pipeline. 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.
Got it. Thanks for taking my questions.
Sure.
Thank you. Our next question is coming from Brock Vandervliet of UBS. Please go ahead.
Morning, Brock.
Hey, good morning. Good morning. Yeah, Tom, just to follow up on that, those comments on loan growth. Just talk about the fourth quarter, your comfort level with the mid-single digit guide. I think we all were expecting, you know, a fourth quarter pickup. If you could just kind of trend that out a little bit more?
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 we're wrapping up right now, that's in process for approval. We feel pretty good about where we are in respect to the momentum. You know, we're going into November here, and then we see the growth, which is favorable. We will have a growth net loan growth quarter. I think what was somewhat of a disappointment is that, you know, when the specialty finance business and it sounds like a cliché, but when you think about the supply chain, that does impact our book of business, right?
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 A A- type credits, are not drawing down on the line. Clearly, we're sitting there with great opportunity. However, the supply chain is having impact on the specialty finance book. Typically, the specialty finance book has been growing at around 20% on average. I think our CAGR is close to 25%, since its inception. This is probably the worst year we had 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. If you add that plus a very strong commercial borrowing opportunity here, both on multifamily 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. Just a question for Lee. You mentioned you 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'd be helpful?
Yeah, sure. This is Lee. Well, first of all, we're very pleased with our Q3 mortgage results. We guided to $160 million-$180 million, and we came in at $169 million. About $18 million of that was EBO. I think the strong earnings was in large part due to our diversified mortgage model. We saw 5% more retail locks in Q3 versus Q2 as a percentage of overall originations. Retail is a higher margin channel. We executed on five 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.
Mortgage expense as a percentage of closed loan volume, it declined from 1.02%- 1.00%. We feel good about the flexibility and optionality our model affords us together with the good cost control and discipline we execute with. Looking into Q4, we're guiding to $120 million-$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 MBA volume forecast. The Fed tapering discussions have increased bond yields and mortgage rates, and we have seen a slight compression in primary-secondary spreads. 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.
We're planning on three RMBS deals in Q4 versus the five that we executed on in Q3, and we're planning on executing on six in Q1 2022. As we look further forward into 2022, the agency and MBA forecasts are saying it's gonna be a $3 trillion market in 2022, $2.5 trillion market in 2023. Anytime the market's over $2 trillion, that's healthy. As I mentioned, we're planning on six 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.
Got it. Okay. More than I bargained for. Thank you.
Thank you, Lee.
Thank you. Our next question is coming from Dave Rochester of Compass Point. Please go ahead.
Morning, Dave.
Hey, good morning, guys. Hey, you already highlighted a number of positives on the Flagstar quarter, that was pretty impressive. I noticed the warehouse was also up nicely, and that bucked the trend at a lot of the banks out there. Just any comments on that front would be great. If you can just remind us everything that's done prior to the close of the deal here to really hit the ground running on day one 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. If you could just talk about that, and then I know on the deposit side you really haven't targeted that pool of deposits.
Can you just maybe size, what that opportunity is there? That'd be great.
I think that question is directed to Lee Smith.
Yeah.
or Alessandro DiNello.
Yep.
This is Sandro . Let me take it. 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, excluding 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.
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 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. 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.
It's just, you know, what, really what we've been doing for a long time here for the last, you know, five, seven 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. 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?
As it relates to the servicing or subservicing business, there's a lot of custodial deposits tied to that. Just given the size of our balance sheet, we had excess custodial deposits that we've put with other institutions. Given the merger, we're able to bring those custodial deposits back, given we're gonna have the bigger balance sheet. That's gonna be an advantage from a funding point of view. 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 the smaller balance sheet. We think that is going to be another big advantage of this combination and having a $90 billion balance sheet.
Yeah. Just to expand on the reference Lee 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 it's relatively significant. The opportunity to take in escrow deposits is 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. We are telling our warehouse customers that we will be in a position to show some interest in that post-merger. It's really difficult for me to tell you how much, but I do think it's meaningful, if that's helpful?
Yeah. I appreciate that. Thanks for all the color there. Then Tom, I got one for you, just on the multifamily side of things. I know historically you've seen your borrowers coming back to the banks to refinance when the five-year jumps, and there's an expectation that it'll keep going higher. We've heard that from you guys, we've heard it from other banks and from the brokers that we're talking to in the market as well. Are you seeing any start of that, any sign of that at this point? And if not, like, what do you expect you would need to see in that five-year moving higher to start seeing that kind of concern amongst the borrowers?
Dave, that's a great point. This is clearly a change in the shape of the curve. The back end has moved up considerably and the five-year has also gravitated higher. This is good. This is actually great for our business because the decision to go agency versus portfolio makes it more edged towards the portfolios, which is favorable. We're seeing that. I would say with conviction that we are getting more opportunity to, you know, be more competitive there. I think on the rate side, you know, you're at higher levels. 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 belly of the curve, it'll be very favorable for our business. We see some good property transactions occurring in the five boroughs, 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. That's also gonna be part of our growth. We're very bullish about, you know, this pandemic hopefully coming to a better place and seeing Manhattan, you know, out and about, and the foot traffic is significant. We think this is going to bode into significant opportunity as the customers that are on the sideline will have to make decisions.
These are short-dated assets. They're not long-dated assets. It seems that we'll see more and more of the traditional five, seven-year type stuff coming at us when rates start to rise here. We're very optimistic there.
Great. All right. Thanks, guys.
Thank you. Our next question is coming from Ken Zerbe of Morgan Stanley. Please go ahead.
Morning, Ken.
Hi, Ken. Thanks.
Good morning, Tom. 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? Thank you.
I would just be very clear. I made it very clear in my opening remarks. You know, 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 hands. 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 what we do with our regulators. Obviously it's in the hands of the regulatory process.
Understood. Thought I'd ask nonetheless. I guess my second question-
We appreciate the question, but as you can imagine, you know, it is what it is.
Yeah, no, I understand. Just coming back to that large borrower in Manhattan. I get that you're very well secured, obviously really low LTVs. 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.
I'll give you very specific. You know, we were very generous from day one with the CARES Act, and many customers took it 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 depths 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 he expected. The end result is that he needs relief now. Ultimately, as you know, Ken, we don't typically have loans that go past 30 days. These are low leverage type properties.
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'll be in a current position by the end of the year. 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. Literally during the phase of the first six months of no pay, they came back and started paying because they didn't want to put the money in the back end. I think he's one of the few customers who did not take advantage of the CARES Act early on.
The good news is that when you look at where the market is and these leases that are coming back to for renewal, they're gonna be much higher than they were when they leased them out in the middle of the pandemic. These are not long-dated leases. We're highly confident that we'll be in a good position here.
All right, great. Thank you.
Sure.
Thank you. Our next question is coming from Chris McGratty of KBW. Please go ahead.
Morning, Chris.
Hey, good morning, everyone. 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. Interested in your thoughts specific to that.
Yeah. Chris, this is the type of deposit we're focused on. These are prepaid 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. 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 BIN perspective when you deal with tying into your system. We are providing that. We are also looking at putting our own requests for proposals throughout the country to that business.
It's not just in the local area, it's throughout the country. We're very active on expanding that. But I also wanna be very clear. You know, 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 that have access to substantial funding, but they're not FDIC insured. We will use our balance sheet to be able to enjoy the opportunity to provide insured deposits that I believe the marketplace will be required to have when you deal with some of these challenger bank situations.
A lot of those players are smaller players that are capped out at $10 billion for Durbin reasons on the fee side, and we can partner with them. We are clearly focused on that. We think it's gonna be a significant potential for the bank. I'm not gonna give a number on it, but you know, right at where we started at zero, now we're $2 billion, and it's only been around 10 months. That's a pretty good track record. We have so many opportunities in the pipeline that we're bullish about. Now, you're not gonna win every one and you're not gonna win every request for proposal, but we are reaching out to some major challenger players out there.
Not, you know, they need partners in the marketplace to house this liquidity event, and we're willing to work with them. 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. You know, we've done this before. When we had the mortgage business, we had structured term where some of the large players that we've done business on the conduit basis were structuring out, you know, very cheap cost, low-cost deposits in a term perspective, and they were comfortable, you know, going out more than, you know, just a, we'll call it a short-term position, but taking a longer-term position with us as a partnership. That's kinda how we're thinking about it.
We kinda classify that all as Banking as a Service, as well as how we continue to drive into the technology initiatives that's out there. We think they'll pay dividends for us. By the way, this is a strategy shift for the bank. This is focusing on better funding the balance sheet as we change the dynamic of the company.
No, that's great. Thank you. Thank you for that color. Just, I wanted to follow up on just overall rate sensitivity, given the market's you know, move up in rates. Could you help us with kind of a longer term? It seems like there's a funding advantage when Flagstar comes on. I know when the deal was announced, you talked about the balance sheet being better positioned. If we take out, you know, the market's pricing in a couple hikes by the end of next year into 2023, how should we think about margin development pro forma?
Let me start off, and I'll just say big picture, and I'll hand it over to Mr. Pinto. Big picture is that NYCB combination with Flagstar, they're asset sensitive, liability sensitive for the most part. They're mostly an adjustable rate type lender. We're mostly fixed. When you blend that, we are in a very good position to manage very well. That's the big picture. That's, you know, 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 standalone basis where we stand.
Yeah. I mean, as you know, on a standalone basis, we have been and continue to be liability sensitive. On the NII side, that has begun to change a little bit and moderate. 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 core deposits. That will be the big generator for us to continue to limit the liability sensitive nature of our standalone 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 in the asset structure at Flagstar.
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 2.57%. That's pretty expensive in this environment. I mean, you go out to the, let's say, the full year 2022, it's another $2 billion. That's just about 1.5%. It's still considered very expensive in this environment. And when you go out to 2023, it's $3 billion at about 1%. In blended, you know, 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, you know, take away the opportunity to restructure or revalue, reposition that, you know, close to $5.5 billion. We know what's coming due in the quarter, and that will probably get paid off with cash. We have zero cost money. That'll, you know, pay off the 2.57%. When you think about 2022 and 2023, 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. 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, nor will we until we close the transaction.
Clearly, we think it's a great opportunity.
Thank you very much. Just to follow up, the one regulator approval, can you just specify which regulator you're waiting on?
Well, the way our structure is we're FDIC state, so we have not received our FDIC and state approvals yet. After that, it would then go to the Fed. It's just the process of our regulatory structure.
Great. Thank you.
Sure.
Thank you. Our next question is coming from Steven Alexopoulos of JPMorgan. Please go ahead.
Hey, good morning, Tom.
Morning, Steven. How are you?
Good. 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?
We don't disclose the house limit, but we do have. You know, we have always had sizable relationships to very wealthy property owners that have significant locations, all you know, collateralized individually.
Right.
We do not have a. Well, I'm not gonna disclose my house limit, but you know, 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. You know, clearly, going back to that one specific customer, I'm gonna say it again, we feel very confident that we'll be current by the end of the year. More importantly, we have adequate collateral to deal with it if for some reason we're not in a position at the end of the year to be current. We feel pretty good about it. Clearly, and Steven, you know the business model.
We deal with significant families throughout the Five Boroughs, as well as they're expanding outside of the Five Boroughs now for a number of reasons, and we're very comfortable with our relationship lending.
Okay. Okay, that's helpful. Tom, on the margin, 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?
You know, again, Steven, again, rate does make a difference, so if there is 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. 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. The math does work. It's still compelling. The math is a double-digit return if bought right, with cap rates that are holding up between 4.5%-5.5%. 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 five boroughs, the last frontier is Manhattan. We're seeing significant positive movement there. We are seeing our customers, you know. I will tell you with conviction, there are deals in the pipeline that are purchase as well as refi. I think if rates moves here, given the tapering that's potentially out there, you know, 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.
Mm-hmm. Okay. That's helpful. Finally, Tom, could you give color on the decline in the securities yields in the quarter? It was off quite a bit quarter-over-quarter. Then just from a spot rate view, where are new loans and securities going in today? Thanks.
We really haven't been buying any securities for a while. John, was that right?
Yeah. 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 its rate slightly when you look quarter-over-quarter as well. And there were also, if you remember, in the second quarter, we had significant prepayment fees on our securities portfolio as well. You know, 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.
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 market conditions dictate.
Yeah, we have probably an ample cash position by design. We were not going to put into duration risk right now. 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, you know, we have a lot of zero cost money that we can easily earn, you know, and put on in the market, but we don't think it's the right decision right now. We're gonna be patient. In addition to that, we're also looking at the opportunity to put these two business models together with Flagstar and look at the holistic view of the entire portfolio, which would be, you know, a reshuffling.
What we are not going to exhaust the liquidity today until we see truly a significant movement of interest rates, and we'll take advantage of that.
Okay. The spot yield on new loans?
It's north of 3%, it's like 3.25%-3.5% now. That's a good movement. Fourth quarter is less of a challenge than it was in Q2 and Q3. 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 roll, which is good for us because it's at a higher rate. It seems that that's also going to impact, you know, the decision to go agency versus portfolio. Anytime this curve starts to steepen like this and slopes to our advantage, the customers tend to think about a shorter duration and go to the portfolio lenders.
Got you. Okay. Thanks for all the color.
Sure.
Thank you. Our next question is coming from Stephen Moss of B. Riley Securities. Please go ahead.
Morning.
Maybe just, you know, following up on credit here, you know, obviously you have the 30-day event delinquency expected cure, but just how we think about the reserve and provision expense going forward here?
I'll talk big picture, and I'll turn the CECL conversation back to Pinto. Big picture, I think you're gonna see in a short order, a lot of this stuff that's gonna roll off the CARES Act. Obviously, assuming Congress is done with providing relief under the CARES Act, we believe this $900 million will come down substantially in the quarters ahead. Probably a substantial adjustment by, you know, next time we report to the marketplace in January, you should see a noticeable reduction. I guess by the time March or April comes, that CARES Act will be exhausted. We're probably gonna be left with some bucket full of loans, but very manageable and highly reserved given our CECL components when we put that together.
With that, I'll go to John in respect to the big picture on the reserve side.
Yeah. 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. If we do have substantial loan growth, of course, under CECL, you have to provide for that in the quarter. 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. You know, 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. You know, we just don't see anything in the portfolio today that would drive anything else.
Okay. That's helpful. Just in terms of expenses here, you know, came in a little bit better than expected. Kind of thoughts on expenses for the fourth quarter, for you guys going forward here?
Yeah, I think expenses for the fourth quarter will be flat to the third quarter. We don't expect, you know, any real pickup in the fourth quarter. We're very comfortable in this $130 million range right now.
That's ex-merger related.
Correct. Ex-merger related.
Right. Okay, great. Thank you very much. Appreciate that.
A pleasure.
Thank you. Our next question is coming from Matthew Breese of Stephens. Please go ahead.
Hi. Good morning.
Morning, Matt.
Hey, just going back to the regulatory approval front. You know, 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?
They're OCC and the application is with NYCB. We would need FDIC and state, and then after that happens, we get the Fed, and then we close.
Got it. It really is not a factor?
Correct.
Okay. Just to home in on the deal closing down the timing a little bit. Do you anticipate this being like a first half of 2022 event? I think someone said first quarter, but I don't remember reading or hearing that from you or in the release.
Matt, I was very clear. Obviously, you know, 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.
I apologize for not being able to stand upon that, but it's in the hands of our regulators.
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. You know, Mr. Cagney has suggested that you're providing Fed settlement for them, credit BIN sponsorship. You did the private securities transaction this quarter. You know, 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's a very interesting collaboration agreement with Figure. We're invested in the company, as we publicly disclosed. We're very excited about working with the engineers over at Figure and combining resources. We're both combining our resources. We believe there's a tremendous opportunity as we continue to beta test. We did a small transaction with them. That was the beta test, and we continue to develop this solution on the blockchain on clearing through the AML, the KYC process of the banking solutions. At the same time, being very cognizant of the regulatory needs out there to deal with the changing banking world.
Dealing with someone who's as 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 fee income opportunities and ultimately potential lending opportunities. You know, 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. We think that the blockchain could really create lots of efficiencies. It's really probably a more seamless way to do business when it comes to mortgage lending. We're exploring with that, both on the back end and in the front end. These are exciting times.
Right now, Matt, it's beta testing and a lot of beta testing. You know, this is we're not gonna give out any business metrics because it's not going to be something we could speak to until we get, you know, publicly launch an initiative. We're still in the beta testing mode. It's been, you know, dynamic. I'll call it innovative and it's exciting. We're all hands on deck, but clearly, with a focus towards trying to find out the solutions. I mean, you're very familiar what's going on in the banking space.
I think Treasury, I think that you know, all regulatory world is trying to figure out you know, how do we get this massive amount of liquidity out there to be AML/ KYC through the banking system, and we're working with them. I think it's exciting. Again, to the private close to blockchain solution. There's a lot happening. You know, stay tuned, and we're excited to be partnering with them.
Great. Okay. Last one for me. You know, in the past, you've discussed the combined entity New York Community and Flagstar being able to generate, you know, double-digit type loan growth. You touched on warehouse already, but I feel like we're gonna have to see more significant multifamily 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? Maybe just-
Yeah. Yeah, Matt, great point. You know, we're excited about it. You know, when the transaction closes, ultimately, we feel highly confident that when we have people in the field, it's gonna be a cultural change, right? NYCB does not lend on the field in any meaningful way. Flagstar has people, they're direct lenders. We have an indirect business with NYCB. You have a direct business with Flagstar. Collectively, we're bringing to the table substantial opportunities in markets that are very robust. New York, we don't direct lend. Florida, Ohio, the Midwest, they're doing a great job on growing. We think we can have an opportunity here to put people on the field focusing on deposit growth in combination with C&I with the right people.
We are gonna 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 through our branches. We're taking all of the Flagstar lending products and putting them. We turn them on, you know, after legal day one, and we have the opportunity to do business in our branches where our customers will have tremendously more products. That's the beginning. 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.
You know, we feel highly confident between, you know, the fact that they're a mortgage player and a dominant mortgage player, number six in origination, number six in servicing, number top two, top three in warehouse lending with a much bigger balance. We could do a lot more there. These are exciting businesses because obviously it's consumer related, and we're not a consumer-focused entity on a stand-alone basis. We think we'll have some good growth there, in addition to a very strong C&I presence.
Great. I'll leave it there. Thanks for taking my questions.
Always a pleasure. Thank you.
Thank you. Our next question is coming from Steven Duong of RBC Capital Markets. Please go ahead.
Morning, Steven.
Hey, good morning, guys. Tom, I guess maybe if we just get back to Figure. You know, when you go through their white papers, it looks like they're achieving cost savings on the mortgage side of around 125 basis points, you know, from the origination all the way through the securitization. You know, when you bring on Flagstar on there, you know, Flagstar is pretty much touching on literally every part of that process. I guess, you know, have you guys started to size up roughly like how much of that 125 basis points you could actually realize? Like out of, you know, if Flagstar is doing a 150 gain on sale, is it possible for you to add on another 50 basis points from this partnership with Figure?
You know, let me just be clear, and I'm gonna turn this back to Lee Smith. I will tell you that, you know, they have done a great job being Flagstar to be relevant in the private label mortgage market, right? What Matt has done over at Figure is they've done transactions on the chain. These are private label transactions. They're not through the agency, right? That's their long-term future. Ultimately, as we continue to be significant in the RMBS space, Lee Smith has indicated fixed deals that's gonna happen in Q1. They're gonna do, I think three or four deals in Q4. They're, I think, top two or three in the country this year on RMBS. These are sizable transactions. If done through the chain, I think they will reduce costs materially.
I think there's opportunity there as we grow the business. I would not underestimate that opportunity. In the meantime, the front end and the back end, that's a long-term solution when it comes to an agency player. The non-agency opportunity where large, we'll call it portfolio managers that buy these types of assets are very comfortable transacting on the chain. Maybe Lee, if you wanna maybe give some color as well to the opportunity, obviously without putting numbers to, but just some big picture theory there.
Yeah, no, absolutely. Good question, Steven. Look, you can't put any numbers to it because, you know, it's a new relationship for NYCB. We haven't closed that deal. As soon as we do, we can start working on this more and trying to figure out and quantify the opportunity. As you know, with the blockchain is an ecosystem, particularly if you're talking end-to-end mortgage. The big numbers that you just quoted, you're gonna 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, you know, the second biggest player in RMBS. If you look at Q3, you know, there's some very discrete advantages.
If you think that the blockchain is a trustless ledger, you don't have to do due diligence every single loan in an RMBS transaction if you're comfortable with the way the blockchain is working. There's obviously immediate savings from a due diligence point of view. Transfer and payment is instantaneous. I think from an RMBS point of view, that would be the more immediate opportunity. As Tom said, you know, it's very much in the early stages and the exploratory stages. It's an opportunity, and that's how we're looking at it.
Well, thanks. I appreciate that, Lee. I guess maybe just from your experience, you know, do you see this blockchain eventually leading to kind of like an overall industry shift, you know, on the cost front? 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. All mortgage companies are looking at ways to get more efficient, do things quicker and improve the customer experience. If the blockchain enables that, then, you know, 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. I know that Tom and his team are doing the same on the New York Community Banking side. I think it is an opportunity. You know, 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. Thank you. Just one last one for me. Just on the CDs running off. I guess just like the current rates right now on your CDs, like how low do you think they can get to? Are the CDs basically moving over into, say, savings accounts?
Yeah. Yeah, 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 zero. I think we're at the point now where the next $10.3 billion coming due is still in the mid-40 basis points. Some are going to savings, some, you know, but I think the—let's just call it flat, you know, 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 our right as the lender.
That's a cultural strategy shift that we're enforcing at the board level all the way down to the rank and file, the team memberships, and it's working. 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 with Flagstar. That's what they do. You know, 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. 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. We're super excited to do it with Sandro DiNello's team because he's done a phenomenal job in growing it. We're doing it together once we combine, and we're excited about that opportunity.
Great. Thank you, Tom. Appreciate you taking my questions.
Sure.
Thank you. Our next question is coming from Christopher Marinac of Janney Montgomery Scott. Please go ahead.
Chris, how are you?
Thanks, Tom. Good, how are you? Could you or Lee or Sandro talk about the non-qualified market? How much more opportunity exists here, and is that another source of revenue as the merger closes?
Alessandro, do you wanna 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 gonna say. If there is an opportunity there, we will certainly jump on it. 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. I don't know the answer. I'm not gonna speculate on how much of an opportunity there might be because I don't know what the market conditions are going to be. I know with full confidence that if there is an opportunity there, we will seize it.
Yeah. I'll just add to that point on Sandro then Lee. I'm sure you wanna chime in. You know, assuming there is a real change in the slope of the curve and rates start to gravitate higher, you know, we will balance sheet residential lending. We will balance sheet, you know, prime type loans on the portfolio. We will have other products to utilize the balance sheet, which will also. Going back to my other point, which I missed, was that that's another contribution to potential growth of our assets by just being able to balance sheet high quality loans for portfolio as well. That tends to be the case when rates are in a different perspective and customers focus more on an adjustable rate feature.
We're very comfortable putting on ARM- type lend, loans on the portfolio. We've done it before very successfully. With Flagstar's distribution, we could do it in a much more material way. Maybe, Lee, if you wanna add more color to that?
Yeah, no, I think you covered most of that. I was gonna 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. As Tom mentioned, we have the sales force across multiple channels, whether it's TPOs, distributed retail, direct lending. 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.
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. Principally out of what has grown through the Opes 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 strong. 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, you know, so interesting that we've gone that route.
At times, you know, that market might not be as strong, in which case there'd be more consideration. I'm talking about Flagstar, you know, independent here, where we would portfolio it. You get into post-merger, it's a different dynamic because the balance sheet is gonna be much bigger and much different than it looks like, just Flagstar today.
Great. Thank you all for that background. It's really, really helpful. Tom, just a final question. You know, when you look at the sort of stock repurchase opportunities post regulatory approval and 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 forecasts when we sat down and talked about putting the company together and performing the company. On a common equity perspective, then there's probably gonna be more given the earnings profile, which is very attractive for additional tangible book value creation on the transaction. The company's gonna earn, on a combined basis, a lot of money, and we're gonna have a substantial reduction in our overall dividend payout ratio because of that. 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.
Once the company has put its 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. Clearly if the market is attractive for that, we will consider all options. Clearly this company is a different profile when it comes to capital generation when we enjoy the benefit of their capital. They have significant capital on a standalone basis. We happen to pay a very large dividend. Collectively, the blended payout ratio goes down materially. Ultimately, as I said, their performance has been much better than what we expected in 2021 that will be modeled.
As we know from the original presentation of the deal, we modeled, I think it was about half, a 50% reduction in the mortgage business going into 2022. Obviously that's pretty severe, and it still generates, you know, significant earnings accretion with significant capital generation. We're very pleased about where they are today, and we're looking forward to enjoying that opportunity in the future.
Thanks, Tom. I appreciate all your comments.
Sure.
Thank you. 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 31st, 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.