Good morning, everyone. This is Sal DiMartino. Thank you for joining the management team of New York Community for today's conference call. Today's discussion of the company's fourth quarter and full year 2021 results will be led by Chairman, President, and CEO, Thomas Cangemi, joined by Chief Operating Officer Robert Wann, and the company's Chief Financial Officer, John Pinto. Before the discussion begins, I'd like to remind you that certain comments made today by the management team of New York Community may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. With that, I would now like to turn it over to Mr. Cangemi. Tom?
Thank you, Sal. Good morning to everyone, and thank you for joining us today to discuss our fourth quarter and full year 2021 performance. In addition to Robert and John, also joining on the line are Sandro DiNello, President and CEO of Flagstar, and Lee Smith, President of Flagstar Mortgage. Before we proceed with a discussion of our results, I'd like to refer you to the announcement of our community pledge agreement we made earlier this week. We announced a combined New York Community Flagstar commitment to provide $28 billion over 5 years in loans, investments, and other financial support to communities and people of color, low and moderate-income families and communities, to small businesses, and the continuation of the expansion of our responsible multifamily lending practices. The pledge agreement was developed in collaboration with NCRC and its members.
While locally, we worked hand in hand with ANHD. We spent 9 months working on this agreement and met with nearly 80 member organizations across the country and came away very impressed by all they do for their communities each and every day. This is a significant and far-reaching agreement that both Sandro and I believe will provide greater economic opportunities for those communities and bridge the racial wealth gap across the broader footprint of our pending new company. We would like to thank Jesse Van Tol and the CEO of NCRC and his team for their leadership and guidance during this process, and to everyone at ANHD for their initiation and dialogue with the company.
We are cautiously optimistic in that this interim agreement will assist in paving the way to us receiving the remaining regulatory approvals necessary to closing the merger as early as practical in 2022. Now, I would like to turn over to our results. Early this morning, we announced fourth quarter 2021 operating diluted EPS of $0.31 a share, up 15% compared to the $0.27 a share in the fourth quarter of last year. For the full year, operating diluted earnings per share were $1.24, up 42% compared to operating diluted EPS of $0.87 in the full year 2020. The $1.24 is the highest diluted EPS we've reported since 2005.
While operating net income available to common stockholders of $585 million is the highest amount we have ever achieved as a public company. This was a very strong quarter for the company, capping off what was a solid year for us. Aside from double-digit growth in net interest income and earnings per share, our fourth quarter results included record loan growth, a stable net interest margin, lower operating expenses, and a continued stellar asset quality, highlighted by a substantial improvement in delinquent loans. Our full year results were highlighted by a high single-digit loan growth number, double-digit improvement in the net interest margin, and a 17% increase in net interest income. Additionally, our expense discipline remained excellent as operating expenses rose $7 million or 1% on a year-over-year basis. Turning now to the details of our performance.
Starting off with the main highlight of the quarter, loan growth. Total loans were $45.7 billion at year-end, up $2.9 billion or 7% compared to last year and ahead of expectations. Most of this growth occurred during the fourth quarter as loans grew $2.1 billion compared to the third quarter of the year. This was the strongest growth quarter for lending since the first quarter of 2006. The majority of this growth was in the multifamily portfolio, which increased $2.4 billion or 7% to $34.6 billion and $1.8 billion on a linked quarter basis.
This was driven by increased activity on the part of both existing and new borrowers, prompted by the outlook for higher interest rates, a significant uptick in property transactions, and the company's proven ability to service and meet the needs of our borrowers. Growth in the specialty finance portfolio rebounded strongly. During the fourth quarter as the economy continues to improve, specialty finance loans increased 15% or $451 million on a year-over-year basis, and now total $3.5 billion. While total commitments are $5.6 billion, up 16% compared to last year. Of the $5.6 billion in commitments, 69% or $3.9 billion are structured as floating rate obligations.
Additionally, given the amount of unused commitments, we believe that as the supply chain issues ease, borrowers will draw down on their unused lines, setting the segment up for a very strong loan growth anticipated for 2022 as well. Originations were also very strong during the fourth quarter. Total fourth quarter originations of $4.6 billion, up 55% compared to the third quarter of the year. Originations exceeded the prior quarter's pipeline by $1.9 billion. Of the fourth quarter originations, 54% were due to property transactions. 24% were refinances out of other banks' portfolios, and 22% were refis from our existing portfolio. Additionally, the pipeline heading to the first quarter of 2022 is robust at $2.2 billion, which bodes well for first quarter originations and anticipated growth.
Of this amount, 61% of that portfolio is new money. Switching over to the deposit side. Deposits totaled $35.1 billion at year-end, up $2.6 billion or 8% compared to year-end 2020. We continue to make significant progress on several fronts with our deposit strategy, including increasing the level of core deposits, bringing in additional deposits from our borrowers, and growing our banking-as-a-service initiatives. Core deposits increased $4.5 billion or 20% on a year-over-year basis at $26.6 billion, while CDs dropped $1.9 billion or 18% to $8.4 billion, representing 24% of total deposits compared to 32% a year ago. Loan-related deposits increased $475 million or 14% to $4 billion compared to year-end 2020.
In addition, deposits growth was driven by banking-as-a-service related deposits, which ended the year at $1 billion. Loan-related deposits include business operating accounts, which increased 37% or $318 million on a year-over-year basis and represents 30% of the overall loan-related deposits. On the banking-as-a-service side, we had a successful first year, winning several contracts in support of the U.S. Treasury's CARES Act related to EIP programs and continuing contracts in New Jersey and Rhode Island in support of our technology partners' prepaid card programs. We've also developed an active and sizable pipeline of digital and banking-as-a-service clients. These programs, along with what we have in our current pipeline, are anticipated to yield significant deposit and fee income opportunities in 2022 and beyond. Moving next to our income statement.
Fourth quarter net interest income increased 5% on a year-over-year basis, increasing 17% for the full year as we benefited from lower funding costs throughout 2021. Additionally, excluding merger-related expenses, fourth quarter pre-provision net revenue rose 11% on a year-over-year basis and 28% for the full year. In terms of our margin, for the fourth quarter, it was 2.44% unchanged compared to the third quarter and 2.47% for the full year. Excluding prepayment income, the fourth quarter and full year margin was 2.32% for both periods, unchanged on a linked-quarter basis, however up 19 basis points for the full year. On the expense front, we are very pleased with our continued expense discipline.
Operating expenses for the fourth quarter declined compared to both the third quarter of the year and the year-ago fourth quarter. For the full year, our operating expenses totaled $518 million, up only $7 million or a mere 1%. This resulted in an efficiency ratio of about 38% for both the current quarter and the full year. Before I continue further, I'd like to update you on the New York City market as it pertains to our business. The New York City residential rental market continues to be very strong with demand outpacing supply. The Manhattan market has rebounded and rents remain strong for residential units virtually across the board. In general, rents are back to pre-pandemic levels, while the non-luxury rent-regulated segment remains very robust.
Outside of residential, the rest of the Manhattan real estate market is coming off its lows, and we see encouraging signs as we head into the spring with many leasing concessions that were put in place in 2021 expiring and translating into increased cash flows for borrowers in 2022. As for our asset quality, our credit trends are positive and continue to rank among the best in the industry. Non-performing assets were $41 million or 7 basis points of total assets, and for the full year, we reported a net recovery of $2 million. More importantly, our delinquency trends improved dramatically. Loans 30-89 days past due decreased $380 million or 85% on a linked-quarter basis to $67 million as the one relationship we've discussed last quarter returned to current status.
In addition, as of December 31, 2021, principal-only loan deferrals declined to $479 million, down $435 million or 47% on a linked-quarter basis. As of year-end, the company had zero full payment deferrals. Based on our strong results and the positive outlook for credit quality, the board reinstated the company's share repurchase program, which had been suspended in 2020 due to the uncertainties regarding the COVID-19 outbreak. In reinstating the repurchase program, the board took into consideration the enhanced earnings profile and capital levels as we reposition ourselves to partner with Flagstar. Based on our pro forma capital position, we have more flexibility in returning capital to shareholders. At yesterday's meeting, the board of directors declared a $0.17 dividend on our common shares.
The dividend will be paid on February 17 to common shareholders of record as of February 7. Based on yesterday's closing price, this translates to an annualized dividend yield of 5.6%. Finally, I would like to take a moment to thank all of our employees whose hard work, dedication, and diligence last year was unmatched. Our strong results would not have been possible without their commitment to our customers, shareholders, and our company. Our employees continue to be a key contributor to the ongoing success of this organization. With that, we would be happy to answer any questions you may have. We'll do our very best to get to all of you within the time remaining, but if we don't, please feel free to call us later today or during the week. Operator, please open the line for questions.
Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your 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. One moment please while we poll for your questions. Our first question has come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.
Morning, Ebrahim.
Good morning, Tom. How are you?
Very well.
Yes. Just so the question first on the timing of the deal, I think, I heard you say you feel good about closing it in 2022. Just wondering if you can narrow down that window given what agreement that you achieved. We've seen other banks announce, get Fed approval around their deals in recent weeks. Like, is it, could we see approval happening within the next few weeks or is that too optimistic?
We appreciate the question. Obviously, you know, we were very specific about where we are. I mean, obviously spending a lot of time on getting our community pledge agreement done, that was a major milestone for the company. I think we're pretty clear that, you know, this will pave the way for the approval process. We're very confident that we'll get the deal closed. As far as the timing, it's in the hands of the regulators, Ebrahim. I wish I can give you more detail about that, but I think it was pretty clear.
Understood. I guess, Tom, remind us around just rate sensitivity with the Fed expected to hike maybe as early as March. Like how do we think about standalone NYCB margin in that backdrop? Also remind us what Flagstar balance sheet does for rate sensitivity if we get multiple rate hikes over the next year or two.
Great. I'll start to answer the question. I'll defer to John. Big picture is that we see absent Flagstar, the continuation of margin expansion. Ebrahim, as you know, we have a sizable derivative that comes off this quarter that adds about $40 million plus top line revenue to the company as that just expires. We continue to see margin expansion in the short term for NYCB ex Flagstar. Obviously, we've performed this both ways, so we're very comfortable with our position financially. I'm gonna defer to John as far as the guidance on rate increases and the like. John?
Yeah. We are anticipating, of course, as the Fed has telegraphed rate increases in our standalone forecasting and budgeting. But as Tom mentioned, we do see margin expansion in the first quarter, primarily given the roll-off of the interest rate swap that we have on our books in the middle of February. We expect that to be about 3 basis points in the first quarter from an expansion perspective. And then, you know, when you look at on a consolidated basis with Flagstar is substantially asset sensitive, so that will dramatically moderate the liability sensitive nature on our books. As well as we hope our, you know, our initiatives on the deposit on the Banking-as-a-Service side, right?
That's the goal, is to limit the reliance on home loan banks and on a standalone basis, try to moderate our own interest rate risk sensitivity. The Flagstar transaction does that pretty quickly once it's closed.
Ebrahim, I just wanted to add to that point on funding. We've culturally changed the direction on how we look at lending. We lend with the expectation that we receive the operating accounts and as many compensating balances as possible as we push our technology service that we can provide to our customer base. That has been a significant shift for the company. I believe it's around a 38% increase year-over-year on operating activity that's tied to the loan customers. If you remember when I had my first call as CEO, we talked about the low-hanging fruit. You know, our team, our board, our entire culture has focused on getting that relationship lending in place. You know, we're very pleased about our first year's results, this sizable increase.
You know, historically, if you know the company, it was a growth by acquisition company on the funding side. This year on a standalone basis, we've done a tremendous job in 2021 on bringing in deposits. These are operating accounts, these are relationship deposits. It's the focus of the change in the culture at the bank.
Great. Just two follow-ups. John, you mentioned 3 basis points impact in 1Q. What's the full quarter impact as we think about the hedge roll-off, thinking about 2Q? The banking-as-a-service, I think you mentioned $1 billion in year-end deposits. I know you made a few hires over the last year. How big can that book get? How fast can it grow? What's the rate sensitivity of those deposits that come through that banking-as-a-service channel?
I'm gonna change the order. I'm gonna just answer Banking-as-a-Service, and I'll throw the margin back to John.
Sure.
I mean, look, we're very excited what we're doing on BaaS, and we're also super excited what we're gonna do with MaaS, which is mortgage-as-a-service, which I believe is gonna be a significant benefit to the company when we combine with Flagstar. They have so much liquidity over at Flagstar. The fact that they're not truly taking advantage of that mortgage-as-a-service business is because of their balance sheet concerns. They don't need the liquidity. On a combined basis, we will embrace that. Collectively, absent Flagstar, we see some very strong initiatives. There are some significant items in the pipeline that we can't speak to yet because they're not public, but they're pretty big wins that we anticipate getting that will lead towards this very low, stable cost to fund benefit for funding that could also drive fee income possibilities.
As they get approved and they officially become public, we'll let the world be aware of that. These are a unique focus for the bank. That coupled with the fact that we're also banking some of the smaller technology companies that as well as some of the smaller banks that are not going past the $10 billion Durbin threshold on a cards perspective. We're looking for the excess liquidity to harbor on our balance sheet as an alternative solution to fund our balance sheet, which has been working out very well. On an average basis last year, the numbers were much more than $1 billion just because of the amount of activity that was orchestrated by the government.
We have further contracts that we believe would be very fruitful for our 2022 horizon, in short term. Now, this is going to be an ongoing build-out of the business. We wanna tie in some of our FinTech initiatives that we're working with our technology partners to also use, banking as a service. As you said, we have hired some people, and we anticipate hiring more people as we build out the business. Again, this business was 0 deposits as of January 1, 2021, and now we're looking at a sizable opportunity. When you ratchet on bank, mortgage as a service, that number could be significant. John, the margin or good.
I'm not sure if we touched the margin side. Maybe you can repeat the question to John on the margin.
John, on the full quarter impact as we look into 2Q from the hedge roll-off. I know you mentioned 3 basis points. Secondly, if the deal is not closed, let's say until June thirtieth, and we get a March Fed rate hike, do you still expect the margin to expand in the second quarter?
Look, I want to be very clear because I know you, John's the CFO, and John could specifically talk to this, but I will be very clear. We've always never given long-term guidance. You know the culture here, Ebrahim. We gave out the short-term guidance. We're very confident that we're positioned well and much better today than we were in previous years. When we roll in Flagstar, this company has a significant earnings power that we're anticipating. Absent Flagstar, we're very comfortable with a very strong profitability on a standalone basis. We gave out the first quarter. I will tell you it's a good try to get John to give out guidance for beyond the Q1. Thank you for that.
All right. Thanks for taking my questions.
Go ahead.
Thank you. Our next question has come from the line of Christopher McGratty with KBW. Please proceed with your questions.
Go on, Chris.
Hey, good morning. I'm looking at the slide deck from this morning and, you know, you referenced the 16% accretion from the deal which was announced last year. Obviously, rate expectations have changed a bit and, you know, the mortgage market's changing. I'm interested if there's any change to that 16%, and also if you could provide some color, gain on sale margins at Flagstar were soft. I'm wondering if you can give a little bit of an outlook for the first quarter and the intermediate-term outlook. Thanks.
Sure, Chris. This is John. I'll start, and then I'll hand it over to Lee. You know, when we look at when we announced the deal at 16%, we're very comfortable with the economics that we laid out at the, you know, at the time of the deal announcement. There's no doubt that the earnings from both institutions were stronger in 2021 than that was originally forecasted in that deal. We believe 2022 will probably be the same. You know, we'll see, depending on the rate environment. I would say we're very comfortable with the accretion percentages that we put out. If anything, you know, the capital is probably a little bit higher right now given the earnings contribution from both organizations, but especially from the Flagstar organization.
Lee, you wanna jump in on mortgage banking?
Yeah. I think the question was around margins. Thanks, John. What I would say on margins in the fourth quarter, there was some competitive factors and forces that came into play. Then you had, you know, the rising rate environment, and so people were trying to fill capacity, and so that had an impact on margins. But also, from our point of view, there was some RMBS-related margin impact. We went to market with a couple of deals, and the market was saturated. We didn't quite get the execution that we were expecting. Then we had a pricing adjustment on non-owner-occupied loans after the FHFA lifted or suspended their caps on such loans.
As we look forward into Q1, we believe that gain on sale revenues will be similar or slightly better than what you saw in Q4.
Okay. Maybe just a technical one. The borrowings you added in the quarter, what was the raise on those new borrowings, John?
We did a mixture of borrowings in the fourth quarter. The longer-term borrowings we put on were three-year at approximately a 1.34%, 1.34%, and then we did have some short-term borrowings, you know, that were at overnight or weekly rate.
Great. Thank you.
Thank you. Our next question's come from the line of Steve Moss with B. Riley. Please proceed with your questions.
Morning, Steve.
Good morning. Maybe just following on loan growth here, curious, you know, you sound pretty upbeat about loan growth expectations, Tom, and just wondering, you know, how you're thinking about 2022 here?
Great question. I mean, yes, we're very upbeat. I will tell you that our people are really busy. The fourth quarter was an active quarter, and it continues in Q1. If you look at the pipeline, you know, north of $2 billion, $2.2 billion, of which almost 70% of it is new money, new money pipeline, it's an active period. We're seeing significant activity on the anticipation of higher rates. We're hearing many property transactions that are in the market. That's a significant change that you didn't see even pre-pandemic. The fact that property transactions are occurring, they're that's a very good sign. You talked a little bit about Manhattan, how the market has come back significantly.
We really haven't done much on the CRE, the pure CRE side, so multifamily has been our focus as well as, specialty finance. It feels like the market is seeing a lot more property transactions and our pipeline is very strong. As far as growth for the year, I mean, normally around this time, we kind of target 5%. I'm moving towards more upper single digits as we start the year, given the significant Q1 pipeline, which is not typical for us. Typically, you know, we have a strong Q4 like we anticipated in 2021, and then we kind of have a little bit of a slowdown in Q1 and we ramp up. It's coming out of the gate very strong.
Okay. That's helpful.
Rates are going.
Yeah.
The rate environment is strong. The spreads are between 185-200 over the 5-year for shorter duration paper, which has been very good for us given the shape of the curve. Even though it's come down a little bit in the back end, it seems like the portfolio lenders will have an advantage here versus GSE just given the shape of the curve.
Okay. That's helpful. That was gonna be my next question. Then in terms of you know the pro forma combination with Flagstar, maybe just following up on the assumptions here since it's been a little bit delayed. You know, I hear you on the buyback given higher capital levels. Just kind of curious if there are any other changes in terms of thoughts around balance sheet restructuring or things you may do as you combine here.
Yeah, look, we're very excited about the opportunity. We talked about, you know, reactivating the repurchase activity. That's just a function of capital planning going forward. If you look at the pro forma capital position, as John indicated, we have more capital based on their higher earnings profile. Since we announced the transaction, they made more money, the capital buffers have built up. I think on a pro forma basis, we're just south of 11% on CET1, so that's a pretty big ratio that we're typically on a standalone basis not accustomed to. That's going to give us a lot of capital maneuverability as we make choices on how we reallocate capital. Reactivating the buyback obviously was really a function of the marketplace, and our vision as we allocate capital on a combined basis back to shareholders.
We have a very strong dividend that'll continue. At the same time, this company is going to generate a lot of capital. As Mr. Pinto indicated, there's no adjustment towards the earnings profile on a combined basis. If you think about what we talked about when we announced the deal, there's a lot of excess capital that's going to come out of this company on a combined basis.
Okay.
As far as returning.
That's helpful.
You know, look, again, just go back to the restructuring side. We're going to look at it opportunistically. When the companies come together, we have a lot of flexibility depending on how large mortgage as a service could actually become. I think it could be a material number as we dive into their clientele, and look at the excess liquidity that's in the marketplace that we can harness on our combined balance sheets. That can give us a lot of flexibility to get away from some of the other dependencies of fundings that we typically utilize historically. I think we can have a more stable funding position as we roll out mortgage as a service.
They do it now, but on a combined basis could be very material for the company and gives us lots of funding options as we combine.
Okay, great. Maybe just on the Flagstar side, a question for Lee. Just kind of as we think about, you know, just where's the mix of purchase versus refi, and just kind of curious as to direct lending. I know there's a pretty healthy amount of volume and, you know, your highest gain on sale margin. Just kind of color around some of the market dynamics there.
Yeah, no problem at all. I mean, if you look at the latest Fannie Mae, Freddie Mac, and MBA forecast, they're forecasting a $3 trillion market in 2022, but the composition is flipping to being 2/3 purchase, 1/3 refi, and it was the opposite in 2021. It was 2/3 refi, 1/3 purchase. I think, look, the big variable in this is inflation, and the Fed has been very clear, this is their immediate priority, which could lead to additional interest rate hikes in 2022. At some point, that could start to impact affordability. Again, you know, $3 trillion mortgage market, while very strong, you know, it's still a 25% reduction on 2021, so there is still excess capacity in the system.
We will continue to leverage our diversified mortgage business given we originate in all six channels. You mentioned direct lending. We're investing in technology to enable us to originate more purchase business in the direct lending channel. We're gonna rely on our broad product offerings, the benefit we have of the execution optionality afforded to us by being a bank, having a balance sheet, the RMBS program, as well as the sale program. We've built a variable cost structure. 70%-75% of our costs are variable or semi-variable. Then coming back to what Tom said, you've then got all the benefits of merging with NYCB, bigger balance sheet, additional capital, and a broader footprint.
You know, we feel pretty good about 2022, albeit you know, I think we're all sort of looking at inflation and how the Fed is going to react to counteract that.
All right. Thank you very much. Appreciate all the color.
Sure.
Thank you. Our next question has come from the line of Brock Vandervliet with UBS. Please proceed with your question.
Morning, Brock.
Oh, thank you. Hey, good morning. Good morning. You mentioned the cost base on the Flagstar side, you know, variable or semi-variable. I noticed mortgage expenses dropped just $4 million-
Gain on sales under pretty heavy pressure here. Is there some offsetting expenses that we would expect to, you know, come out in Q1?
Yeah.
Lee
Here's what I would say.
Yeah.
Yeah. Are you talking about on the mortgage side, Brock, specifically?
Yeah. Yes.
Yeah.
Specifically, yes.
Yeah. Look, here's what I'd say. As it relates to costs on the mortgage side, we will be proactive in adjusting capacity as necessary. We built this flexible capacity model to scale up or down with volume that leverages third party vendors. We've cross-trained our existing staff, and 70%-75% are variable or semi-variable. And then we've got scale, right? And the beauty of our platform is that helps a lot, and we've proven our ability historically to manage costs depending on where volumes and revenues are. What I would say to you though is, in Q1, you don't want to react too quickly as you're going into spring buying season. We do want to sort of see how things play out in February and March, going into April to see if that bump is there.
Because as I mentioned earlier, we're still looking at a $3 trillion market here, and it's pivoting to purchase. We want to watch that. At the same time, we've got this variable cost structure in place, and we will manage costs accordingly and depending on what's happening to revenues.
If I could jump in here on this. This is Sandro. Page 14 of our deck has a chart there that shows the mortgage expense. You can see it's relatively stable as a percentage of closings quarter-over-quarter. The thing I would remind you of is that gain on sale is based on the lock date. Expenses come in when we close, so there's a little bit of an imbalance sometimes there. Overall, when you look at it from a 12-month perspective, typically the expenses are gonna be in a 1%-1.15% range of closings. That, as Lee has said, that's been very stable historically, and we will manage to that kind of expense level.
I got it. You know, I don't mean to beat up on Flagstar expenses, because it's, you know, these mortgage trends we're seeing across the sector. I just, I guess, I'm struggling with the accretion assumptions in the transaction in the merger given, you know, this diminished earnings power we're seeing into-
So-
You know, into well, Q4, but probably into 2022.
Brock, let me follow up on that point. I mean, remember when we came together with our joint press release when we announced the deal, we assumed 2022 forecast down 40% on our model, and they had a tremendous 2020 or 2021 year. If you forecast that into the run rate, you know, we're very comfortable that our guidance out there is solid.
Okay. All right.
Yeah, I would add that. I mean, if you look at overall Flagstar results, while there's certainly some disappointment with the mortgage results for Q4, well, the numbers overall are strong, right? We didn't miss on earnings despite the level of revenue in the mortgage business. Return on equity was strong. You know, we're not. Sometimes we're, you know, viewed as a mortgage company. We're not. You know? We really are a bank. The returns that we've produced in times where mortgage is challenging, I would ask you to look back to 2018 and 2019, when the revenue in the mortgage business was more like what you saw in Q4, and we still had strong returns on equity. We still have that in Q4.
If you look in between when the mortgage market was extremely robust and we had returns that were double our peers. I don't think you should view the current situation in the mortgage business as one that causes Flagstar's returns to be less than what you would be satisfied with. We're completely confident that the company's performance is gonna continue to be at the top end of the midsize bank range as a standalone company.
Yeah, that's right, Brock.
Okay. I appreciate you both.
I would also add to Sandro's commentary that obviously in a rising rate environment, we will look to utilize our balance sheet for growth. I mean, obviously the 400 locations on retail plus the 87 locations on origination that we expand upon in our product mix, we will start looking at portfolio-ing some of these higher yielding type loans on the balance sheet as well. I think when you think about growth, going back to our original forecast, the growth was de minimis when we pro forma'd this transaction back in April. As we get to know each other here through our merger integration process, we believe we have significant potential growth together as we build out this business.
Okay. Thank you.
Thank you. Our next questions come from the line of David Rochester with Compass Point. Please proceed with your questions.
Morning, Dave. Morning, guys. Just a quick question for Sandro and Lee. I know you guys have mentioned a normalized, you know, mortgage add per quarter of $150 million. It's maybe more of a target or something you thought you could do. Just given the gain on sale hit that we've had this quarter to $91 million. Your guide for something similar, maybe a little bit better, it sounds like, in 1Q. Are you thinking that $150 million might actually end up coming in a little bit lower? Part two, just given your outlook on rates and your knowledge of seasonality of the business and whatnot, are you expecting some kind of a pickup in that gain on sale in 2Q, or is it too soon to tell at this point?
Let me start and Lee can add if he'd like. Certainly $150 is the target. And when you annualize that to get to $600, that's really where we would love to see it. But we believe that if it's less than that, then as I said in response to the previous call, that if that's what's going on in mortgage, then there's other things that are compensating for that in the other parts of the business. We're very confident about the growth of our banking business. Like Tom indicated with NYCB, our commitments are growing at a very strong level. Our pipeline is very robust.
As we look forward, we think that given the high quality of credit that we have, the control that we're maintaining over expenses overall as a percentage of our revenues are gonna allow Flagstar, regardless of whether mortgage or gain on sale is 100 or 150 average per quarter, put us in a position as I said previously, to continue the level of earnings that we've reported previously. Because while all of this has been going on over the last two years with mortgage being extremely strong, we've been quietly building everything else in the company. Now we're positioned where we can still be very, very profitable in a quarter like 2024, where gains was pressure.
Okay. In terms of how you're thinking about 2Q, maybe a pickup there?
Yeah. Yeah, Lee, let me,
Well, 2Q. Yeah. Like Tom said, we won't go to 2Q. We can give you a little feeling about 1Q.
Yeah. No. I was just gonna piggyback off Sandro's comments. I agree with that. I think the target that we put out, you can break it down to the $150, but it's really more of an annualized target if we can get to $550-$600. But as we said, right, we've got a variable cost structure, and so if it isn't there, we will manage the cost side appropriately. I think to Sandro's point, we've always had it when we built this diversified bank at Flagstar that has enabled us to produce strong earnings, whatever's going on with mortgage. When mortgage is hot, then our returns are outsized. We're gonna be even more diversified when we come together with New York Community Bank.
I think that is the power of this transaction. This franchise together can be successful in any interest rate environment. I don't wanna look into Q2 because again, right now, there's just a lot going on from a macroeconomic point of view with inflation and what the Fed is gonna do to react to that. We're just guiding to Q1 being similar or slightly better than Q4 from a gain on sale point of view.
Great. Appreciate the color, guys. Tom, what's the outlook on NYCB expenses at this point? I know you've occasionally talked about your full year view on expenses in the past. If you have any thoughts just on a standalone basis, as to what that-
Yes
expense base could look like.
Sure, Dave. Obviously, 2021, we came in better than we expected for the year. I don't see, on a standalone basis, any significant uptick in expenses. I mean, for the year, we'll probably guide around $540 for the year, that range, which is probably conservative. Again, we're very hopeful. Actually, post-Flagstar this will be a moot point 'cause we're gonna be a much larger company. On a standalone basis, $540 is probably a good guide. I would say for the first quarter, our expenses is usually the high quarter of the year given FICA and payroll taxes to $135 guide for Q1, and then coming down in Q2, and you can kind of tie out to $540 for the year.
Perfect. If you just give an update on what you're seeing on a new loan yield basis, multifamily, specialty finance , that sort of thing, and then maybe securities reinvestment rates. I know you're not growing the portfolio, but as you're sort of maybe stabilizing it here, I was just curious where you're buying securities.
Yeah. I'll give some color on the loan side, and I'll defer to John Pinto on the security side. I will tell you that we've been not really buying any securities at all. We've been keeping the powder dry for years. There will be potentially an opportunity depending on market conditions. We've been reluctant to take on duration risk given the current environment. I will tell you in the fourth quarter, the gyration of the yield curve really I think woke up a lot of our customers. Spreads have held in very nicely. We've had rates as high as 3.50%-ish in the 5-year and down to as low as 3.125%, so it's been a range.
That 185-200 basis points spread on our core model has been holding very well. So obviously, you know, we watch the Treasury curve every day. That's our business model when we tie out as a portfolio lender. What's been interesting, David, is that when you think about the back end of the curve and you look at the choice of a portfolio loan versus an agency loan, it looks like agency has been struggling just given the dynamics of the cost of coupon. So we've been winning a lot of good business. That continues. So spreads are holding up very nicely. We talked about the anticipation of probably more growth than we anticipated from the previous year going into 2022.
You know, post-COVID, this has been a very robust property transaction environment. Talk to the brokers in the market. There is stuff that's transacting that is significant. A lot of transactions that are in place right now, we're seeing some great opportunities. Our customers have been very proactive leveraging their operating expense base to look at other markets. So we're choosing to work with our best customers outside of the New York market that are kind of saturated. They're looking at other opportunistic markets, and we're following them. So it's good to see some good transactions. As we talked about on the cash flow perspective, you know, cap rates are relatively stable and the spreads are holding up very nicely. So we're very ambitious about seeing some good multi-family growth.
We've been a little bit hesitant on the commercial real estate. We haven't seen a whole lot of CRE business, but you know, from time to time, we'll refinance our current customer base. On the specialty side, we think we have tremendous pent-up demand. I know in my opening comments we talked about the outstanding commitment in totality were just under $6 billion. That business started from 0 a few years ago, and it's been a great business model. I think there's opportunity there on potentially on the funding side that we hope to deal with over time, but we're really a credit buyup shop there.
Ultimately, as we merge with Flagstar and we take their syndicate division, collectively, we should be winning our own deals and maybe you know being a leader and controlling some of those deposit relationships. We're excited about specialty. I think specialty had a year of 15%. I think we went into the fourth quarter at 10%, so that's been a big bump above the jump there. I think a lot of it has to do with pent-up demand on the supply chain. That's gonna be big for us in 2022. There's a lot of money that's out there that's outstanding, that hasn't been drawn, that hasn't been drawn down yet, that can also bode well for additional growth within specialty. Excited about the spreads there.
Again, mostly floating rate type instruments in a rising rate environment will benefit from that. I think it's around 60%-70% of the entire portfolio that reprices with rising rates. The bank is somewhat differently positioned now than historically it's been as a traditional thrift model. We hope that as we get more towards neutrality with Flagstar, we see asset sensitivity, which would be a nice mix in the rising rate environment.
All right. Sounds good. Thanks, guys.
Just on the securities side, Dave, just to go back to that, yields are what they are. I mean, when they start getting closer to 3%, we'll probably wake up, but we've been very quiet on the securities side.
Yep. Okay, great. Thanks.
Thank you. Our next questions come from the line of Peter Winter with Wedbush Securities. Please proceed with your questions.
Morning, Peter.
Morning.
Morning.
Good morning, Tom. I wanted to ask about credit quality, which obviously is always a great story for you guys. You had another nice decline in the principal deferral loans. You know, I'm just curious what happens with the remaining, like, $480 million of deferrals with the CARES Act getting exhausted in the next few months.
Yeah. Pete, great question. You know, we looked at this when we went into COVID-19. We had about $8.7 billion. We were very generous when we looked at our CARES program, CARES Act program. We gave a six months deferral right out of the gate, you know, full deferrals. Many customers came back within a quarter and said, "We don't need it," 'cause there's been no change in the non-luxury market. People weren't exiting their apartments for the non-luxury market. We went through a very interesting journey during COVID. Where we stand today, come July, we should have close to zero. 'Cause obviously the CARES Act runs out. When you think about that, it's been a very positive experience of working through the other side for our customers.
I know in my opening commentary, you know, we talked about lease ups. You know, what we're seeing right now in the CARES Act that's remaining, I'd say of the percentage of Manhattan is probably 90%. Is that right, John? Close to 90% of what's in deferrals is Manhattan. Outside of Manhattan, it's been a very strong recovery there on utilizing the CARES Act relief program. I envision that that will have, you know, zero loans on deferral come July, maybe June or July of this year. At the same time, when you think about what's gonna happen when as far as the pandemic, what does it mean for the overall asset quality of the bank?
You know, we have more than adequate reserves based on CECL, and we think we're gonna probably deal with maybe, you know, $100 million of stuff at the end of the day, which is pretty good for a $60 billion bank, and we have $40 million of NPA. So we're very pleased with the asset quality. You know, we had a little snafu last quarter with a customer, and it worked itself out. Like, we were very confident. We're very confident in our collateral. We are a low leverage lender. You know, as you know, the LTVs historically are typically lower than the marketplace. We're an in-place cash flow lender. Most of our businesses, you know, we'll call it, rent stabilized and non-luxury type market in the five boroughs.
We're very confident that in the event there is a hiccup, we have very good collateral to recover ourselves. Believe me, we tested that in Q4, and we came out very strong given our positioning. As you can see, that relationship became current. We're very bullish about where we are on asset quality, and part of my discussion points is, or my opening remarks is that that's part of the rationale on coming out of COVID-19. This portfolio is very strong.
Got it. That's helpful. Just as a follow-up question, can you just give an update on the strategic partner with Figure? Or does the real benefit really kick in when you close the merger with Flagstar, and just how you're thinking about it in terms of maybe potential deposit growth, as well?
Let me just be specific. We're not gonna be explicit exactly what w e're doing a lot with Figure Technologies. We're working on daily projects. We have a lot of interesting things happening. As you saw recently, I'm sure you saw the USDF Consortium has been formed officially. I believe we have five member banks now that are the founding members. We happen to be the lead there. That's going to be a very interesting view on digital markets via stablecoin, you know, USDF, fiat currency. We believe that working group is very powerful as we continue to add more members. It's an ongoing daily function, both at compliance, audit, legal.
Our entire operating team is spending good efforts on making sure that we work with our regulators to come up with a solution to deal with this opportunity on fiat currency. We've data tested multiple occasions on live transactions. It's been working out very well. We just did our interoperability between multiple banks at the same time. That's a big plus. That's the first time it's ever happened in the banking industry. Although it's not a material transaction, but we did test interoperability amongst banks to move from mint and burn amongst each other banks. That's a big step towards solving for the USDF. At the same time, you know, we deal directly with the principal at Figure on business use.
You know, we haven't been public specifically on what our business case use will be. We have a number of initiatives, as you mentioned, mortgage. We believe on the financial transaction side, as Lee indicated, they do a lot of secondary market activity. Putting that on a blockchain was logical. It's not on the agency side, but it's on the private label side. That's a very simplistic use of the Provenance blockchain via our relationship with Figure Technologies. That's one of many things that we're working on. We believe there's going to be an opportunity to deal with potentially our customers, where they can look at a more efficient way to make bill pay to rental payments to our borrowers.
This is all part of our long-term plans. We haven't specifically set out a business case use yet. This is an ongoing process, but it's also a focus. The most important focus is to ensure on a regulatory standpoint that we utilize the KYC, the Bank Secrecy Act that we know our customers. I think that's the most important aspect of what we have to accomplish here, and we've made tremendous progress there, Pete. I'm not gonna give you specific numbers or guidance here. I can tell you every day we come up with new best use case ideas. It's evolving. It's a technology collaboration with a very strong business in Figure and others, by the way. It's not just Figure. It's others that we're talking to on technology initiatives.
We talked about my strategic plan when I became CEO is that we wanna digitize the bank. This bank has a long way to go on digitization, so we're spending a lot of time with our partner on Fiserv. They've been great as far as a true partnership. We're doing some good business relationships with them. At the same time, we're also rolling out a tremendous amount of digitalization. We believe that, you know, My Banking Direct is going to be another catalyst for the company for another use case of bringing in funding at the consumer side. That could tie into Figure Technologies as well. A lot of positive things to talk about. Not gonna be specific until we actually have something that's live to talk about.
I will tell you the energy level is very strong, and it's fluid.
Got it. Thanks for all that color, Tom.
Sure.
Thank you. Our next question has come from the line of Matthew Breese with Stephens. Please proceed with your questions.
Good morning.
Morning, Matt.
Hey.
Morning.
Hey, on the Flagstar deal, you mentioned that the community pledge agreement with the NCRC paves the way for the approval process. I guess I wanna better understand that comment. Was there an issue on the CRA front, or was there regulatory pressure in this area? Are there any other roadblocks we should be aware of?
Matt, without getting specific, I wanna be very clear about this. This is not unusual for large transactions to embark upon a global pledge agreement. We took this, Sandro and I, with open arms. We hit the ground running, going back to the day after we signed the deal. It took a while to get to finalization, but no question deals of this nature tend to be tied to some very large community group pledge arrangements. I will tell you the importance of it is historic for us, given that we are a major force on multifamily lending, and this multifamily lending business model will also expand into the markets of Flagstar. We've done a lot of great work with ANHD over the years to be a responsible multifamily lender player here, and because we're the largest portfolio lender.
The importance of this agreement is significant. As far as going forward, it is important as far as getting our approvals, because this is something that we worked with our community groups without opposition. You know, there was no opposition about us coming together. This was a joint effort with Sandro and I personally. We spent hours on understanding the needs of our community. I think what's exciting about it is that we look at this as having the power of Flagstar's mortgage origination process to actually work with the agency to come up with solutions to better bank communities in need. We think we have some really good initiatives that ultimately we can take this pledge arrangement into a very powerful industry standard that other banks can utilize to do good for America.
We truly believe that. This is an exciting time, and I will tell you that, it was a very fluid process, but ultimately we got to the finish line. I truly believe, and Sandro, I don't wanna speak for Sandro, he's on the call. I truly believe this will pave the way to where we have to go to get our transaction moving towards the closing. As we all know, M&A has had somewhat of an extended time period given the Biden Executive Order that came out in July, and it is what it is, and we work with our regulators.
We really can't get much into any more than other than that, other than we're excited to come together, and we'll work on a side by side together as a partner with Flagstar to get our deal closed.
Yeah.
Understood.
Answer your specific comment regarding CRA. Flagstar's just had an outstanding CRA rating, so there is no CRA issue. Certainly getting an agreement of this nature done is an important part of the regulatory approval process.
Okay. The other one, just on the regulatory approval process. You know, in the deal filings, there's several other approvals necessary for the deal, including Fannie, Freddie, Ginnie, the Department of Veterans Affairs, State of Texas, and the State of Vermont. I don't know if I've ever come across a deal requiring those institutions having a say. Can you just discuss the approval process for these other institutions, and how do they compare to the standard kind of Fed and FDIC state approvals?
Well, I believe we have retained those approvals, so maybe Lee, if you wanna expand on where we are with those approvals on the mortgage side.
Yeah. No, absolutely, Tom. On the mortgage side, as it relates to Fannie, Freddie, Ginnie, FHA, USDA, VA, we're in good standing. There isn't an issue. The reason we need those is NYCB is the acquiring entity, because all those licenses are in Flagstar's name at the moment, and they're obviously gonna move over to New York Community Bank. They're all good. They're just waiting on the regulatory approval, but there's no issues. That's the reason why we're having to take that step with this transaction because they're all in Flagstar's name at the moment, and NYCB is the acquiring entity.
Okay. To be clear, those sound more like rubber stamp and, you know, do not have the same kinda rigor as the others.
Yeah. Pretty much, I would say that's mostly right, but it's not, you know, it's not just a rubber stamp. I mean, there was a lot of work questions that we needed to answer. There was a lot of work that the teams did behind the scenes. It's a little bit more than a rubber stamp. Probably not as onerous as the regulatory approvals.
Okay. Understood. The last one for me, just going back to the, you know, Figure partnership. You know, earlier this month, you did a bank-to-bank, you know, digital asset transaction. I would assume over time there's more and more of these, you know, both kinda customer to customer within the bank and then across depository institutions as well. You know, are there any fee income benefits as these transactions take place? You know, if so, could you outline that? Then, you know, to date, have you seen any encouraging signs on the deposit front from this technology?
Yeah. We haven't yet put out a business, a public business case use of the fee income that we would generate as a part of the consortium and as the bank that we'll be housing, hopefully, a substantial amount of deposits are tied to the activity. Clearly that's part of our business plan as we develop it. It's not a public plan yet. You know, again, it's in beta testing. You mentioned that we did an interoperability. Interoperability, that's gonna continue with the other banks as well. They all have to make sure that they that join the consortium are doing the same type of technical awareness on how they could mint and burn collectively within each other's platform and have that position in place. Yes, we've done one.
We intend to do more testing as we move forward here. I believe that, ultimately, as this takes on more energy and other banks' enthusiasm to joining the consortium, we feel there'll be a lot more banks looking to be part of this as a solution for what we're dealing with the system, which is a substantial amount of activity that's not currently housed in the banking system, right? Going back to KYC, it's gonna go through our system. You know, we own the KYC behind knowing the customers in and out transactions onto our currency. That is where I believe real value will be disseminated through the USDF. And at the same time, each bank will have its own business case use for how they look at the Provenance blockchain depending on their business model. It's evolving, Matt.
I apologize for not being specific, but as you know, we have a lot of excitement. This is, you know, a technology build-out with a substantial amount of regulatory dialogue that has to be done right.
Understood. I appreciate it. That's all I had. Thank you.
Sure.
Thank you. Our next questions come from the line of Chris Marinac with Janney. Please proceed with your questions.
Hey, thanks. Good morning. Tom, could you or Sandro just update us on how quickly you can integrate the back office once you get approval? Has that time sort of narrowed at all just because of this interim time since the announcement?
You know, Chris, it's a great point, and I'm glad we have Sandro DiNello on the call because we've been working together for years now. We are separate companies, and it's a lot to get to know each other. I think the most important aspect of a deal of this nature is culture, right? My job is to ensure that the culture is aligned. At the same time, we're working with our teams, independently, 'cause we're not one company yet, to truly understand the opportunity of putting these cultures together. Culture is going to be key, and that's my number one priority for the bank is to ensure that the culture is aligned properly. Sandro DiNello is the ambassador for culture at Flagstar.
He's done an amazing job under his leadership, and I'm spending lots of time with Sandro, and I believe that the teams together are doing a phenomenal job. Unfortunately, we haven't closed yet. You know, our focus was the third quarter of last year, and now we're in the first quarter, and we're very optimistic. You know, that's not in our control. We worked real hard to get this deal done as soon as we practically can. At the same time, a day doesn't go by where we're not working on culture. We've assigned leadership at Flagstar and leadership at NYCB to manage the long-term integration stream. We're working with third-party consultants to help bridge the gap there, and we're geared up for a cultural integration.
That's the most important aspect, because this is going to be a very large mortgage concern as well, that we have to ensure that we can cross our products and initiatives and make sure that people are aligned in the culture. I don't know if maybe Sandro wants to add some color to that, but I think that that's the focus of this bank.
First, let me say that with respect to legal day one, we're ready for legal day one. Once the final regulatory approval comes forth, we'll be ready to go pretty quickly with the closing and be able to operate as a combined company pretty quickly. Now, in terms of taking advantage of complete integration and conversion, obviously, as you've, you know, suggested, that takes time. A lot of that you can't quite get ready for until you get to legal day one. I don't think, when you look at the conversion of the systems that the time necessarily narrows, because of the length of time it takes to get a regulatory approval.
However, I will say as it relates to being ready with, let's say, marketing plans or for bringing new products into the New York Community Bank branch offices, I think it gives us the ability to be a little bit better prepared for that and hit the ground running. In terms of totally narrowing the integration timeline between legal day one and complete conversion, I'm not sure there's a great amount of narrowing that takes place because of the timeframe related to the regulatory approval. Then with respect to culture, Tom's absolutely right. You know, we're two different companies, but we're trying to bring our people together, getting them to know each other.
That's maybe more important than a lot of people realize relative to the success of a company, because the more that your people care about the company, the better performance they will be, and therefore, the better results your company will have. We are through our Diversity, Equity, and Inclusion program at Flagstar, bringing New York Community Bank people into those events whenever we can. The way that they have embraced it has really been fantastic.
Great. Thank you both for that background. That's really helpful. Thanks for all the information this morning.
Sure.
Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing comments.
Thank you again for taking the time to join us this morning and for your interest in NYCB. We look forward to chatting with you again at the end of April, when we will discuss our performance for the first quarter of 2022.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.