Q3 2021 New York Community Bancorp Inc Earnings Call

Good morning, everyone. This is Sal dimartino.

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 Kim Xiaomi 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.

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. Ken Jimmy.

Thank you Sal and.

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 Sondra, Danilo President and CEO of Flagstar, and Lee Smith President of Flagstar mortgages.

As you may have already seen flagstar reported third quarter results today, as well, which we're also very strong.

Before launching into a discussion about third quarter results I would like to provide you with a brief update on our pending merger with flagstar.

As you know both sets of shareholders overwhelmingly approved the planned merger in early August at this point. It appears that regulatory approval will not be received in time to close the merger during the fourth quarter.

We now estimate an anticipated closing as soon in 2022 and you 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 <unk> 30 cents, a share up 30% compared to the third quarter of last year, excluding merger related expenses totaling $6 million diluted EPS was <unk> 31 cents a share on a non-GAAP basis up 35% year over year.

For the first nine months of 2021, we reported diluted EPS of <unk> 90, a share up 43% compared to 63, a share for the same period last year.

On a non-GAAP basis, we reported 93, a share up 47% compared to the first nine months of 2020.

Both of these metrics are the best Buda. The EPS, we had 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.

Table operating expenses and solid credit quality.

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

Turning now to the details of our performance.

Pre provision net revenues rose, 19% to $198 million compared to the year ago quarter, excluding merger related expenses P. PNR rose, 22% to $204 million compared to the third quarter of last year.

The net interest margin came in at 244% down six 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 pre payments totaled $27 million and added 20 basis points of the margin.

Excluding the impact from prepayments the margin on a non-GAAP basis increased two basis points sequentially to $2, three 2% 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 one $4 billion at the end of the third quarter, all of which are noninterest bearing accounts.

<unk> had several wins since we launched this initiative early in the year. In addition to the previously disclosed relationship with our technology partner the companies actively respond to requests for proposals from states for banking services <unk> 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 cost for the state of Rhode Island.

These are just the first relationship you have signed and we are encouraged by the early success of our initiatives and by the number of pending relationships, we have in our pipeline.

In addition to banking as a service deposit growth. We also was driven by the increase in deposits from our multifamily commercial real estate borrowers.

These won't related deposits totaled $4.2 billion at the end of the third quarter up 652 million since the beginning of the year and $265 million during the quarter.

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

Our efficiency ratio of 39 defense 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 remains solid and continues to rank among the best in the industry nonperforming assets decline compared to the second quarter levels and at $37 million represents six basis points of total assets, while we had no charge offs in the quarter. Additionally.

Additionally, principal deferrals declined 8% to $914 million compared to the previous quarter, while full payment deferrals remain 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 last year.

During the quarter loans 30 to 89 days past due increased to $447 million frankly, all of which was related to one borrower and consist of several multifamily and mixed use properties. All of the delinquencies are in the 30 day bucket we are.

We're working with the bar and he has taken advantage of our cares Act loan modification program. The loans have the original weighted average LTV of 57% and the bank is well secured and 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 in 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.

We're not fully back to normal Manhattan is definitely on the path to normalization than Manhattan residential real estate market has rebounded strongly while our segment of the market. The non luxury rent regulated multifamily mark has proven to be very stable.

Lastly, during the quarter, we announced our investment in and entered into a partnership with figured technologies one of the leading fintech companies focus 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 but if we don't please feel free to call US later today during the week operator, please open the line for questions.

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 he 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 Thats star one to register.

A question at this time, our first question is coming from Abraham <unk> of Bank of America. Please go ahead.

Good morning, everybody.

Good morning, Tom.

I guess just first of all.

On credit. So obviously you mentioned you don't expect any losses tied to the NPA increase but give us some sense of what did you anticipate that this was coming down the pike over the last few months and should we expect more of these days.

Some of these deferrals roll off in customers take like actual assessment of where things stand cash flow wise.

So obviously, we have a long stated history very very rarely having any delinquent. So clearly we don't anticipate something like this but obviously, we feel very comfortable on the level of LTV that we have on the original LTV of this particular.

Cluster of loans were 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 in a in a in a status of current so again, we feel highly confident that we're in a good position here, we don't anticipate because historically, we get paid on Hawthorne. So this is not something that we anticipated it.

However, we are working very closely with our customer and we feel highly confident that youll be card by the end of the year as far as overall.

I would categorize it just to be specific this is old Manhattan based property. So I believe when you think about the borrowers when we talked about my my my.

My comments upfront about the five boroughs and Hatton is definitely coming back very very strongly in particular in the multifamily rent regulated and non luxury marketplace. So clearly, we're seeing a supply and demand.

Situations, where there's not enough supply and there's tremendous demand for the on the housing side. So we feel highly confident since these are blended building. Some of them are mixed use some of them is just pure rentals, but feel highly confident as he has to re up his leases that are coming into the market, which is significantly higher when they award during the pandemic.

Understood, Okay, and I guess, just moving on to the margin when we think about the core NIM I think your guidance was three to five bps adjusted for a couple of this last quarter I think you said in the middle of that.

Just talk to us in terms of how much more margin expansion is there to go as you think about funding cost leverage and also you made some pretty decent a banker hiring is on the deposit side during the quarter just give us if you can a framework around how big that loan anticipating bucket can get over the next few quarters next year and what.

<unk> do you think just organically ex flagstar that could look like as we think about the next year or so.

So everyone's obviously ex flagstone. This division of deposit gathering has significantly changed here at the company effective January one we're focusing on gathering core deposits focusing on working with our customers getting our operating accounts in line. When we close these laws and it's working it's a cultural shift that's working and we're seeing good success on that.

In addition to that as I indicated we are very actively pushing banking as a service as a product line here and we have resources behind that and we are seeing the results of that.

My prepared remarks, you'd want to have some nice unique business throughout the quarter, but throughout the year. It's been growing very nicely I think we're close to $2 billion as of today. So it's growing very nicely and the pipeline is building. So I think when you think about that type of money. It's traditionally zero cost very stable and noninterest bearing so I think that's a solid book of business.

What we want to do obviously on a standalone basis is build a better core funding base and when we looked at our company and be less dependent on wholesale funding. So we think these initiatives both on the commercial side is key as well as building out a line of business such as banking as a service and utilize our balance sheet to gather more liabilities at a more stay.

Well then that it doesn't in the non traditional wholesale mechanism to fund the business. So we're pretty excited about that I'm not going to give the deposit growth as far as for next year, because obviously when you put flagstar and NYSE be together, it's significant because they have a tremendous amount of liquidity that they don't need right now given that they use to funds we will be very powerful combination in respect to total.

Funding base.

On a blended basis. So we're excited about that opportunity, but on a standalone basis that is the strategy right now and we're seeing very good results throughout the year and we're continuing to focus on the cultural shift on mandating the operating accounts lease securities deposits. When we close our loans in that setting that as a priority for us.

And outlook for the margin.

Again, I think we're getting to a point now where our CD costs are probably child in the 40% 40 basis 45 basis points, so that you're not going to see much on the CD side I would say that you're probably going to be in line. What we saw last quarter and a couple of basis points per quarter of margin expansion.

X X the combination of flagstar, but with flagstar combine and going into next year as we position ourselves for interest rate risk continued margin expansion. So clearly.

<unk> confident that the cost of funds will continue to go lower albeit smaller however, as the yield curve starts to steepen here, we have an opportunity to deploy a lot of liquidity and we're sitting on a lot of cash right. So we're not buying assets.

We believe this quarter should be the highest quarter for growth. They have a very strong pipeline. In addition to the close to $2 billion of the pipeline that we have we have a significant amount of apps that are in the pipeline. So I would envision the fourth quarter being the highest growth quarter of the year for net loan growth, which should help the margin as well.

Got it.

For taking my questions sure.

Thank you. Our next question is coming from Brock Vandervliet of UBS. Please go ahead.

Morning Rock Hey, good morning, good morning.

I was just you.

Follow up on that.

Comments and 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.

Fourth quarter pick up if you could just kind of frame that out a little bit more.

So the good news the pipeline as you can see the numbers are public the strongest one of the strongest pipelines we had through the year. We have a lot of loans that were wrapping up right now that's in process for approval. So we feel pretty good about where we are in respect to the momentum. We know we're going into November here and then we see the growth, which is which is favorable. So we will have a growth net loan growth quarter I think.

It was somewhat of a disappointment is that when the specialty finance business and it sounds like a cliche, but when you're thinking about the supply chain that does impact our book of business right. So we have a probably an extra $1 billion of commitments that are not being drawn down because of the customers that are in that portfolio and these are all single double a type credits are not drawing down on the line. So clearly.

That's where we're sitting there with great opportunity. However, the supply chain is having impact on the specialty finance book. So typically the specialty finance book has been growing.

Around 20% on average I think our CAG is close to 25% since we put at inception. So this is probably the worst year, we had and since we started the business and that's a 10% of that growth, which is not terrible given the environment. We think that could pick up assuming there is a some some relief on the supply chain as we go into the fourth quarter. That's the unknown. So if you add that plus our very strong.

Commercial borrowing opportunity here, both on multifamily and and also on the commercial side, we feel we feel pretty optimistic that we will have growth absent changes in the supply chain. The supply chain starts to ease up a little bit then the growth will be stronger.

Got it Okay and just a question for Lee you mentioned us on the call.

Flagstar gain on sale looked very strong this quarter.

Could just breakdown how much of that was Epo and any <unk>.

Q4 guide you wish to provide that would be helpful. Yes.

Yes sure. This is Lee well first of all we're very pleased with our Q3 mortgage results, we guided to $160 million to $190 million and we came in at $169 million about $18 million of that was <unk> and I think the stronger earnings was in large part due to our diversified mortgage model.

We saw 5% more retail locks in Q3 versus Q2 was a percentage of overall originations our retirees are higher margin channel and we execute on.

Our mdx deals in the quarter, which made us the second largest RMB ex issue in the quarter behind Chase. We also kept costs under control mortgage costs actually declined 6 million quarter over quarter, our mortgage expense as a percentage of closed loan volume declined from 1.0 to.

Percent to 1.00%. So 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 to $140 million gain on sale. The main reasons for the decline in Q4 versus.

Q3, or just normal seasonality and we're seeing that in the agency and MBIA volume forecast the fed tapering discussions of increased bond yields and mortgage Reits and we have seen a slight compression in primary secondary spreads and then the FHFA reversal of certain PSP I provisions was <unk>.

<unk> negative to us given where our bankers and in aggregate, we were able to step into the void the gse's were leaving.

And then we're planning on three RMB X deals in Q4 versus the five that we executed on in Q3, and we're planning on executing on six in Q1 2022.

We look further forward into 'twenty two.

The agency and MBA forecast assign it is going to be three trillion dollar market in 'twenty two to fall at Trillium, marking 23 any time the markets over two trillion that's healthy.

As I mentioned, we're planning on six RMB X deals in Q1 and will continue to leverage that program utilize our diversified mortgage model and find pockets of opportunities. We have the balance sheet, which gives us the FX, hi, chip boy and MSR flexibility in that RMB X program keeps us exit.

Houston 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 <unk> portfolio products, holding more MSR, which benefit us from a deposit point of view the our MBS programmers have mentioned on supporting the 238 and <unk> branches and customers.

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 that disposal.

Got it okay more than our target for thank you.

Thank you Lee.

Thank you. Our next question is coming from Dave Rochester of Compass point. Please go ahead.

Good morning, Dave Hey, good morning, guys.

You already highlighted a number of positives on the flagstar a quarter that was pretty impressive I noticed the warehouse was also up nicely and that's that Buck the trend.

A lot of the banks out there. So just any comments on that front would be great and if you could just remind us everything done prior to the close of the deal here to really hit the ground running on day, one post the close.

On the warehouse front I know you've reached out to a lot of your top accounts.

Let them know that larger lines could be available. So you can just talk about that and then I know on the deposit side.

You really haven't targeted that.

Pool of deposits, you're just maybe size what that opportunity is there that'd be great.

That question is directed to at least Smith.

Sandra.

Yep, Yeah. Let me this is Sandra let me take it yes.

Yes so.

We've just been executing in the fashion that we told you that we would and that was number one to continue to expand our relationships and take more market share as the mortgage market itself shrinks and we've been successful.

And doing that one of the ways, we're doing that ex the anticipated merger is to do more syndications on flagstar side, where we're leading opportunities with bigger organizations, taking bigger positions and then sharing them with other banks and then as we do think about the upcoming merger.

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 loose.

Relationships or.

Levels of outstanding in terms of the amounts drawn on lines. What we're doing is expanding relationships with our best customers, because we're more comfortable taking larger positions with them.

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 the individual credit basis. So it's just.

Really what we've been doing for a long time here for the last five seven years as we focused on growing the warehouse business, taking advantage of the opportunities do in a well.

Our service perspective, and getting paid fairly for what we do and as a result of that.

The business has held very strong and we're very optimistic about 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.

The potential business combination.

Yes so.

As it relates to the servicing or sub servicing business Theres a lot of custodial deposits tied to that just given the size of our balance sheet.

We had put with other institutions given the merger we were able to.

Bring those custodial deposits back given we're going to have the bigger balance sheet and so that's going to be an advantage from a funding point of view I mean, just having the bigger balance sheet I think given the relationships, we have with MSR phones with warehouse.

Borrowers.

It gives us the opportunity to go in bringing more deposits.

We've been able to with the smaller balance sheet. So we think that is going to be another big advantage of this combination and having a $90 billion balance sheet.

Yes, just to expand on that.

The reference we made two warehouse customers, we do not seek.

Escrow deposit.

Deposits from warehouse customers, because we just don't need them, we do have.

Regular deposit relationships.

With our warehouse customers in and that's relatively significant but.

But the opportunity to take an escrow deposits is it's hard for me to estimate what that is but I know that it's significant because it's never been something that we've needed to do but we are telling our warehouse customers that we will be in a position to show some interest in that post merger.

But it's really difficult for me to tell you how much but I do think it's meaningful if that's helpful.

Yeah.

Uh huh.

Thanks for all the color there and then Tom I got one for you just on the multifamily.

A lot of things I know historically, you've seen borrowers coming back to the banks to refinance when the five year jumps in there is an expectation that will it'll keep going higher we've heard that from you guys have heard from other banks and brokers that we talk to them in the market as well.

Are you seeing any start of that any sign of that at this point and if not what do you expect.

You would need to see in that five year moving higher to start seeing that kind of that concern amongst your borrowers.

Dave It's a great. It's a great point. This is clearly a change in the shape of the curve. The backend has moved up considerably in the five years also gravitated higher. This is because this is actually great for our business because of that because the decision to go agency versus portfolio makes it more towards the portfolios, which is favorable we're seeing that so.

I would say with conviction that we are getting more opportunities to be more competitive there and I think on the rate side.

At a high level. So I think this is going to get people.

Focused in respect to the next financing alternative that usually is a relatively short asset if the tapering does take place and does have an impact in the back end of the curve as well as the belly of the curve it will be very favorable for our business. We see some good property transactions occurring in the five boroughs, which is very favorable we also see very we'll call it season players.

That's exiting but expanding their operations into new demographics that we're following so that's all I was going to be part of our growth. So we're very bullish about.

This this this pandemic hopefully coming to a better place and seeing Manhattan.

And about in the foot traffic is significant we think this is going to bode into a significant opportunity as the customers that are on the sideline will have to make decisions. These are short dated assets and not long dated assets and 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. So we're very optimistic there.

Okay, Great alright, thanks, guys.

Thank you. Our next question is coming from Ken Zerbe of Morgan Stanley. Please go ahead.

Great. 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 are asking for or just any kind of color behind why do this.

It seems to be getting pushed just a little bit. Thank you.

I would just be very clear I had my in my opening remarks is very clear. It's in it's in a position that is with our regulators we're waiting for approval.

We're very optimistic about the merger however, it's in the regulatory hands. So we clearly are working towards a common goal of getting this transaction closed as soon as possible.

As you know can we can't specifically discuss what we do with our regulators. So obviously, it's in the hands of regulatory process.

Understood. So I thought I'd ask Nonetheless, I guess my second question. If we appreciate the question, but as you can imagine it is what it is.

No I understand.

Come back to that that large borrower in Manhattan.

Got it.

Very well secured obviously really low ltvs.

But can you just provide a little more color like why is he having problems at this point because obviously, the new York market, but I'll give you a very specific we were very generous from day, one with the cares Act and many customers took it took at a 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 and the end result is that he needs relief now and ultimately as you know Ken we don't typically have long ones that go past 30 days and these although lab.

Rich type properties and we could sell the notes in in a very short order and be out of this relationship will have a very comfortable given the cares act. We think that we've 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. So I guess it is what it is it's unfortunate that.

He did not take advantage of what the bank at work for many of our customers did by the way in and literally during the phase of the first six months of no pay they came back and started paying so didn't want to put the money in the back and so I think he is one of the few customers who did not take advantage of the cares Act early on and where we and the good news is that when you look at where the market is in these leases that are coming that are coming back to for renewal they're going.

To be much higher than the one when they leased them out in the middle of the pandemic isn't that long dated leases. So we're highly confident that we'll be in a good position here.

Alright, great. Thank you.

Sure.

Thank you. Our next question is coming from Chris Mcgratty of K BW. Please go ahead.

Good morning, Chris.

Hey, good morning.

I wanted to follow up on the deposit growth that you've seen particularly the noninterest bearing that you cite what the banking as a service.

I guess, maybe I missed this but expectations for now.

Noninterest bearing deposits to continue to grow and I think there's a view in the market that most banks will not see as much growth in noninterest bearing given the move up in rates and kind of some parked money, but interested in your thoughts specific to that yeah. So.

So Chris this is the type of deposit focused on this as you know these are causing preloaded card business at its very sticky its driven off of some of the stimulus payments that are out there, including the new ones that are coming and who knows whats coming in the future. So these are interesting programs. They are technology provided so the technology out there that does play in this space need to have.

Hank behind them.

On a on a bin perspective, when you deal with are.

Tying into your system. So we are providing that.

We're also looking at you know, putting our own kressler proposals throughout the country for the that business.

It's not just in the in the local areas throughout the country. So we're very active on expanding that.

I want to be very clear, we 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.

Having some technology wins with.

Companies that are in this space that are challenger banks less banks that have access to substantial funding, but theyre not FDIC insured. So 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 and a lot of those players or smaller players that are capped out at $10 billion for Durbin reason on the fee side and we can partner with them. So we are really focused on that we think it's going to be a significant.

The potential for the bank I'm not going to give a number on it but.

He started at zero and now with $2 billion. So it's only been about 10 months. So that's a pretty good track record and we have so many.

Opportunities in the pipeline that we're bullish about and you're not going to win everyone in and you're not going to win every request for proposal, but we are reaching out to some major.

Challenge of players out there and not you know they need partners in the marketplace to houses liquidity event, and we're willing to work with them and in addition to that we're also focusing on on a planning perspective with flagstar to abuse.

This ESCO opportunity as a tremendous way to structure term. We've done this before we had when we had the mortgage business. We had structured term with some of the large players that we've done business on the conduit basis restructuring out <unk>.

Very cheap cost of low cost deposits and a term perspective, and they are comfortable going out more than just a quarter or a short term position, we're taking a longer term position with us as a partnership so that's kind of how we're thinking about it and we kind of classify that was banking as a service as well as how we continue to drive into the to technology initiatives that's out there.

We think they will pay dividends for us.

And by the way this is a strategy shift in the bank. This is going focusing on better funding the balance sheet as we changed the dynamic of the company.

No. That's great. Thank you. Thank you for that color just wanted to follow up on just overall rate sensitivity given the markets.

The move up in rates.

Could you help us with kind of a longer term it seems like there's a funding advantage when flex. So it comes on and I know when the deal was announced you talked about the balance sheet being better position, but if we think the market is pricing in a couple of hikes by the end of next year into 'twenty, how should we be thinking about margin development pro forma so let me start off that I'll, just say big picture.

And I'll hand, it over to Mr. Pinto Big picture is that M. I C. B combination with flagstar their asset sensitive or liability sensitive for the most part they're mostly in adjustable rate pipeline, there where most effects. When you blend that we are in a very good position to manage very well that's the big picture. So we and that's part of the merits of the transaction we feel highly confident.

When these companies come together the balance sheet has a very different position on interest rate risk that being said our husbands depends on just go dive into some of the details on a standalone basis, where we stand.

As you know on a stand alone basis, we have been and continue to be liability sensitive, but on the NII side that has begun to change a little bit in moderate but as Tom mentioned and that's been moderating because of the potential deposits. We can bring in the noninterest bearing side and limit our reliance on wholesale funding right. That's the goal to continue to take that 15 billion.

Wholesale borrowings and pay it down when we can win with core deposits. So that will be the big generator for us to continue to limit the liability sensitive nature of our stand alone balance sheet and until we're closed the flagstar, where that NII sensitivity turns to more of a positive perspective, given the amount of floating rate loans and the asset structure.

So I would just add to John's point, if you think about the fourth quarter, we have about $370 million coming due from our wholesale position.

That's at a cost of $2 57, that's pretty expensive in this environment and when you go out to the let's say the full year 2022 is another $2 billion. That's just about a one 5% and it's still considered very expensive in this environment.

And when you go out to $23 3 billion at about 1%. So on a 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 take away the opportunity to restructure where we value we position that close to $5 $5 billion, we know.

What is coming due in the quarter and that will probably get paid off with cash. So we have zero cost money that'll that'll pay off the $2 57, when you're thinking about 'twenty two 'twenty three when you think about the business combination with flagstar the opportunity to look at the the.

The entire liability book on a holistic basis is clearly to our advantage. So we're excited about that opportunity, we think theres going to be real value. There. We haven't put a number on it yet nor will we until we close the transaction, but clearly we think it's a great opportunity.

Thank you very much and then just to follow up the one regulator approval can you just specify which which regulator you're waiting on.

Well the way our structure as we were FDIC states. So we have not received our FDIC and state approvals yet and then after that it would then go to the fed.

It's the process of a regulatory structure great.

Great. Thank you.

Sure.

Thank you. Our next question is coming from Steven Alexopoulos of J P. Morgan. Please go ahead.

Hey, good morning morning, Steven how are you.

Good.

So first regarding the past dues in the $377 million relationship how many other relationships do you have in that size range and whats the house limit in terms of loan concentrations to a single relationship.

So we don't disclose the house limit of what we do have what we have always had sizable relationships too.

Very wealthy property owners that have significant locations all caught in a collateralized individually. So Frank we do not have a.

I'm not going to disclose my house limit, but we do have large relationships and what we've been doing that as part of our business model I think the good news about that as we start building. These this mandate on the deposit side, we're seeing the growth in autopilot is from these long term large relationships, but now clearly going back to that one specific customer.

I'm going to say it again, we feel very confident that we'll be current by the end of the year and more importantly, we have adequate collateral to deal with it for some reason we're not in a position at the end of the year to be current so we feel pretty good about it but clearly you.

You know that the business model, we deal with significant families throughout the five boroughs as well as the 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 so regarding the sizable decline in the prepayment penalty fees in the quarter was that attributable just to rates moving up a bit and do you expect to see refinance activity further slow.

You know again Steven.

Right. It does make a difference, though if they miss a real steepness in the curve I think many customers will react they've been enjoying a relatively low coupon as they make their decisions and obviously with the pandemic that has slowed things down considerably. It seems like there is a pickup here. We're hearing about transactions. There are many many players on the sidelines with significant.

Liquidity looking to buy assets and the math does what it's still compelling the math is a double digit return if bought right with cap rates that are holding up between four and a half to five 5%. So I think at the end of the day I think it really looking at a market that's right for a rebound assuming that the Manhattan has a stronger recovery I will be very clear.

The five boroughs the last frontier isn't Manhattan, we're seeing significant positive movement. There we are seeing our customers I will tell you with conviction. There are deals in the pipeline that are that are purchased and as well as refi, but I think if rates moves here given.

Given the tabling, that's potentially out there then as well as a theory that rates are going to be higher that will make customers. We think about their opportunities and probably come to the table sooner, which would generate not only prepayment income, but also potential loan growth.

Okay.

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

We really haven't been buying any securities for awhile genre is that right yes.

And you've seen the balance just continue to kind of dropped quarter over quarter and that's just some of the higher yielding securities coming off.

The home loan bank has lowered its rates slightly over the when you look quarter over quarter as well.

And there were also in the in the if you remember in the second quarter, we had significant prepayment fees on our securities portfolio as well. So that's what's generating the actual top line Miss when you look at it ex those prepays.

Not down anywhere near as much but we are still seeing some pressure there right. We're trying to limit security purchases year to avoid putting on duration in this interest rate environment and that's why we'll be sitting on a little extra cash for the time being until we're ready to put some of that money to work hopefully in loans and of course in securities is as market conditions dictate we haven't probably.

And ample cash position by design, we're not going to put it into duration risk right. Now. It's we believe it's a waiting game. If there is a significant move in the back end and we can see opportunities will put some money to work right. Now we have a lot of zero cost money that we can easily earn.

And put on in the market, but we don't think it's the right decision right now we're going to be patient.

In addition to that we'll 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 a reshuffling. So we are not going to exhaust the liquidity today and until we see truly a significant movement of interest rates and then we'll take advantage of that.

And despite yield on new loans.

It's north of three three in the quarter to three and a half now so that's a good movement I.

I will tell you fourth quarter is less of a challenge than it was in Q2 and Q3. So we like the fact that the yield curve has moved very nicely for us like I indicated I think the customers are contemplating what they want to do now as they come closer to their role which is good for us because it's at a higher at a higher rate. So it seems that and that's also been impacting our decision to go agency versus portfolio. So.

Anytime the curve starts to steepen like this and folks to our advantage.

The customers tend to think about a shorter duration and go to the portfolio of lenders.

Got it okay. Thanks for all the color.

Yeah.

Thank you. Our next question is coming from Steve Moss of B Riley Securities. Please go ahead.

Good morning.

Maybe just.

Following up on credit here modifications coming down kind of curious.

38.

Do you expect to cure, but just how we think about the reserve and provision expense going forward here.

I'll I'll talk Big picture and I'll turn the conversation back to paint the Big picture I think youre going to see in a short order a lot of this stuff that's going to roll off the cares Act obviously, assuming Congress has done with providing relief under the cares Act. We believe this 900, some odd million dollars will come down substantially in the quarters ahead.

<unk> substantial adjustment by next time, when we report to the marketplace. In January you should see is noticeable reduction and I guess by by the time March or April comes that cares act will be exhausted and we probably going to be left with some some bucket full of loans, but very manageable and highly reserving given the seasonal components.

When we put that together and with that I'll go to Jon in respect to the Big picture on the reserve side, Yes, right now as you saw with our with our seasonal results in a small benefit this quarter, we expect to be in that range of course, depending upon loan growth as well. So if we do have substantial loan growth of course in the seasonally you have to provide for that in the quarter, but besides that.

We don't see anything in the economic environment substantially changing it's been quarter over quarter getting better improving based on the Moody's forecast that come out. So we're not seeing anything that would give us any any pause that we see larger provisions coming down the road. If anything we are in that small recovery depending on loan growth.

We just don't see anything in the portfolio.

Today that would drive anything else.

Okay. That's helpful. And then just in terms of expenses here came in a little bit better than expected.

Thoughts on expenses for the fourth quarter.

Where are you guys going forward here.

Yes, I think expenses for the fourth quarter will be flat to the third quarter, we don't expect.

Any real pickup in the fourth quarter were very comfortable in this $130 million range right now that's ex merger related correctly ex merger related.

Right. Okay, great. Thank you very much I appreciate that.

Our pleasure.

Thank you. Our next question is coming from Matthew Breese of Stephens. Please go ahead.

Hi, Good morning, good morning, Matt.

Going back to the regulatory approval front first I'd assume you need New York State approval, but who is flagstar regularly by at the bank level and how does that factor in here.

OCC in the applications with NYSE base, So we would be we'd need FDIC and state and then after that happens we get deferred and then we close.

Got it so it really isn't accurate correct. Okay, and then just to hone in the deal closed down the timing a little bit do you anticipate this being like a first half of 'twenty. Two event I think someone said first quarter, but I don't remember reading or hearing that from you or in the release.

Very clear obviously you know this is in the hands of our regulators, it's going through the application process and we would anticipate 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 expand 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.

Mr. <unk> has suggested that you are providing that settlement for them credit bin sponsorship.

The private securities transaction this quarter, what are some of the economics for you in these partnerships and transactions what are the balance sheet and income statement impact.

As this progresses.

Very interesting co collaboration agreement with figure we're invested in the company as we publicly disclosed we're very excited about working with the engineers over to figure when combined resources of both combining our resources. We believe is a tremendous opportunity as we continue to beta test. So we did a small transaction with them that was the beta test and they continue that.

Develop.

This solution on the block chain.

Clearing through the MLP at KFC process of banking solutions at the same time being very cognizant of the regulatory needs out there to deal with the changing banking world. So.

Dealing with someone who has innovative as Mike and working with us and focused on looking at our balance sheet opportunities. We think there's tremendous liquidity appetite on the deposit side and we believe there'll be fee income opportunities and ultimately potential lending opportunities.

And if you think about the big picture when you put NYSE being flashed out together, we believe that a lot of the the business opportunities on mortgage banking mortgage lending will ultimately be on the blockchain. So we think that the blockchain can really create a lots of efficiencies.

Really a probably a more seamless way to do business when it comes to mortgage lending and we're exploring with that both on the backend than in the front end. So these are exciting times right now, Matt its beta testing and beta testing and automated testing.

This is we're not going to give out any business matches, because it's not going to be something we could speak to until we get publicly launch and initiatives. So we're still in the beta testing mode has been dynamic.

Call it innovative and it's exciting and we're all hands on deck, but clearly with a focus towards trying to find out with solutions.

You're very familiar what's going on in the banking space and I think treasury I think that you know all regulatory world is trying to figure out how do we get this massive.

Massive amount of liquidity out there to be AML <unk> T to the banking system, and we're working with them and I think it's exciting and again through to the to the private close to a blockchain solution. So there's a lot happening stay tuned and we're excited to be partnering with them.

Great. Okay, and then last one for me.

In the past you've discussed the combined entity, New York community Flagstar being able to generate double digit type loan growth and you touched on warehouse already but I feel like we're going to have to see more significant multifamily commercial real estate growth to get to that kind of level I'm. Just curious what the strategy is there to expand that business as it is it more New York City use at a nationwide.

Strategy.

Great Great point, we're excited about it.

When the transaction closes ultimately we feel highly confident that when we have people in the field, it's going to be a cultural change right. The NYSE does not lend in the field in any meaningful way flagstar has people at their direct lenders. So we have an indirect business with <unk> you have the <unk>.

Direct business with flagstar collectively we're bringing out to the table substantial opportunities in markets that are very robust New York, We don't direct land in Florida, Ohio, The Midwest, they're doing a great job on growing. So we think we can have an opportunity here to put people in the field focusing on deposit growth and combination C&I with the right people and we are.

We're going to do this with precision as we hire up collectively as a as a combined entity to rollout a direct strategy direct and indirect we'll work together, but we think there's some great growth opportunities at the same time, we don't really run products to our branches. So we're taking all of the flagstar lending products and putting them, we turn them on <unk>.

<unk> day, one and we have the opportunity to do business in our branches, where our customers will have tremendously more products and that's the beginning so as we transition to truly a commercial banking enterprises with it with a wide array of products. That's the opportunity that we're all excited about so we feel highly confident between the fact that there are mortgage player and a dominant.

Mortgage player number six and origination number sixth in servicing number top two top three and warehouse lending with a much bigger balance sheet. They can do a lot more there and these are exciting businesses, because obviously its consumer related and one out of consumer focused entity on a standalone basis. So 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.

Thank you.

Thank you. Our next question is coming from Steven Zhong of RBC capital markets. Please go ahead.

Good morning.

Hey, guys.

Tom I guess, maybe if we just get back to you to figure.

When you go to their white papers, it looks like they're achieving cost savings on the mortgage side of around 125 basis points from the origination all the way through the securitization.

And when you bring on flagstar on their flagstar is pretty much touching on literally every part of that process.

And I guess have you guys started to size up roughly like.

How much of that 125 basis points, you could actually realize though like slack.

Flagstar is doing 150 gain on sale is it possible for you to add on another 50 basis points from this partnership with vigor.

Let me just be clear.

Turn it back to Lee Smith, I will tell you that they have done a great job being flashed ought to be relevant in the private label mortgage market right. So what Mike has done it over I think of as they've done transactions on the chain. He is a private label transaction then not to the agency right and that's the long term future, but ultimately as we continue to be significant and the army's space.

At least Smith has indicated fixed deals that's going to happen in Q1, they're going to do I think three or four deals in Q4, but then I think top two or three in the country. This year on R&D. Yes. These are sizeable transaction if done through the chain I think they will we reduce cost materially. So I think there's opportunity there as we grow the business.

And I wouldn't underestimate that opportunity, but in the meantime, the front end and the back end. That's a long term solution. When it comes to an agency player, but the non agency opportunity, where large will call a portfolio manager that buy these types of assets are very comfortable transacting on the chain and maybe Lee if you want to maybe give some color as well to the opportunity honestly without without putting.

Numbers too, but just some big picture theory, there yeah, no absolutely and good question Steven.

Look you can't put any numbers to it because it's a new relationship framework ICP, we haven't closed that deal as soon as we do we can start working on the small and trying to figure out and quantify the opportunity as you know with a blockchain blockchain is an ecosystem, particularly if you're talking into a mortgage and so the big.

Numbers that you just quoted you're going to need a number of players within that ecosystem to start to realize some of those benefits as Tom just alluded to as it relates specifically to our MBS.

And we're the second biggest player in our MBS. If you look at Q3.

I'm very.

Discrete advantages. So if you think that the Chinese are trustless lecture.

You don't have to do diligence every single loan in our NPS transaction, if youre comfortable with the way the block Chinese working so there's obviously immediate savings from a due diligence point of view.

Transfer and payment is instantaneous and so I think from an <unk> point of view.

That would be the more immediate opportunity, but as Tom said.

It's very much in the early stages in the explorer exploratory stages.

It's an opportunity and that's how we're looking at it.

Well, thanks, I appreciate that Lee and I guess, maybe just from your experience.

Do you see this blockchain eventually leading to kind of like an overall industry shifts.

No.

On the cost front and do you guys see this as an opportunity being a first mover.

Possibly I mean look I think there's a lot of technology solutions out there.

And all mortgage companies are looking at ways to get more efficient do things quicker and improve the customer experience.

Blockchain enables that then that's a good thing there's a number of Fintech and technologies out there. We're constantly looking at VIX is one of them.

And I know that Tom and his team are doing the same on the New York community banking solid so I think it isn't it is an opportunity.

What plug Dean.

And one of the front runners should it prove to be something that we.

And ultimately the industry can take advantage off.

I appreciate that thank you and then just one last one for me just.

The Cds running off.

I guess.

Hum.

Just the.

The current rates right now are new Cds like how low do you think they can get to.

And are the Cds basically moving over into say savings accounts.

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 the shifts of policy.

The fed reserve and where rates are close to zero. So I think we're at the point now where the next 10 $3 billion coming due is still in the mid 40 basis points. So some are going to savings, but I think that let's just call it flat.

And Thats I think thats the strategy here, but ultimately the shift of culture into noninterest bearing the shifting culture to go after commercial customer accounts, which we have which I believe is a right as the lender and that's I'd say, that's a cultural strategy shift that we're enforcing at the top at the board level, all the way down to the rank and file the team members.

Ships and it's working so I think that culture of the historical view of Myc be thrift model is moving more towards the traditional commercial model that should drive the margin as well, which I think it will be it will be significantly driven by the combination of a flag. So that's what they do.

At the same time, when you think about fixed rate lending versus floating rate. It's a very unique blended opportunity to bring these businesses together culturally and ultimately as we go out in the field and have.

Direct lenders that go after those C&I opportunities, it's deposit first lending second and I think that's the that's the cultural shift that we're going through right now and we're super excited to do it with Sandoz and Ellis team because he has done a phenomenal job on growing it. So we're doing it together and once we combine that we're excited about that opportunity.

Great. Thank you Tom I appreciate you taking my questions.

Sure.

Thank you. Our next question is coming from Christopher Meronek of Janney Montgomery Scott. Please go ahead.

Chris how are you.

Good how are you could you would only or Sandra will talk about the nonqualified market how much more opportunity exists here and is that another source of revenue as the merger closes.

Sam do you want to handle that one.

Well I don't know the answer to that but I will tell you. This in our history supports what I'm going to say if there is an opportunity there we will certainly jump on it and as Lee mentioned in his comments.

Key I think to our mortgage businesses that we've got a lot of different delivery channels and levers we can pull to take advantage of whatever the opportunity is out there. So.

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

Yeah. So I'll just add to that point on Sandoz I didn't leave I'm sure you want to chime in but if somebody there is a real change in the slope of the curve and rates start to gravitate higher we will balance sheet residential lending, we will balance sheet prime type loans on the portfolio. We will have other products to utilize our 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 and then and 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 on pipeline on loans on the portfolio they've done it before very successfully and with Flagstar is distribution and we can do it at a much more material way, maybe Lee if you want to add more color to that.

Yeah, No I think you covered most of that always going to say if there is an opportunity. We can take advantage of it we have a balance sheet. We have the RMB X program. So we have different ways that we can execute on these loans and different different methods will be the holding them or disperse and I mean, it's tough.

Mentioned, we have the salesforce across multiple channels, whether it's <unk> distributed retail direct lending and so if it is.

Some think that is an opportunity we can ramp up pretty quickly given the.

The number of sales channels.

<unk> teams that we have.

And mistakes.

A finer point on that comment we have very strong originations.

Origination teams and channels in the higher cost areas of the country, where that product is more likely to exist. So principally part of what has grown through the Opus advisors acquisition, we did a few years ago.

And as you can see from the Securitizations, we've done already.

Access to those markets is very very very strong so to the extent again as I say that the opportunity is there we'll take advantage of it historically, we have at times put put those loans on our books as well.

But the private securitization opportunity in recent quarters, it's just been.

So.

So interesting that we've gone that route but at times.

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

Just flagstar today.

Great. Thank you all for that background is really really helpful and Tom just a final question. 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.

Oh look I, obviously, we are very pleased with flagstar results, they've actually outperform our internal forecast when we sat down and talked about putting the company together in pro forma the company. So on a on a common equity perspective, there's probably going to be more given the earnings profile, which is very attractive for additional tangible book value create.

<unk> on the transaction.

The company is going to earn on a combined basis, a lot of money and we're going to have a substantial reduction in our overall dividend payout ratio of the cost of that so we'll have more flexibility on capital management tools.

I indicated in the previous quarters, we're not going to be talking about repurchases in the midst of the transaction, but once the company has cut 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 and clearly if the market is attractive for that we will consider all options, but clearly this company has a different profile when it comes to capital generation when we enjoy the benefit of that.

Capital they have significant capital on a standalone basis, we have to pay a very large dividend collectively the blended payout ratio goes down materially and ultimately as I said their performance has been much better than what we expected in 2021 that will be modeled and then if we know from the original presentation of the deal we modeled a I think it was about a half.

50% reduction in the mortgage business going into 2022, and obviously, that's a pretty severe so and it still generates significant earnings accretion with significant capital generation. So we're very pleased about where they are today and we're looking forward to enjoying that opportunity in the future.

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 <unk>. We look forward to chatting with you again at the end of January 2022, when we will discuss our performance for the fourth quarter and full year December 31, 2021 period.

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

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