Flagstar Bank, National Association Q4 FY2021 Earnings Call

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 the combined New York Community Flagstar commitment to provide $28 billion over five 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 work hand-in-hand with ANHD. We spent nine months working on this agreement 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, 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 that this integral 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. Earlier 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 43% 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 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 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 the 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 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 pipeline 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 initiative. Core deposits increased $4.5 billion or 20% on a year-over-year basis to $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, deposit 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 represent 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 CARES Act related to EIP programs and 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 create 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. Manhattan market has rebounded and rents remained strong for residential units, virtually across the board and 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 to 89 days past due decreased $380 million or 85% on a linked quarter basis to $267 million, as the one relationship we 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 uncertainties regarding the COVID-19 outbreak. In reinstating the repurchase program, the Board took into consideration an enhanced earnings profile and capital levels as we reposition ourselves to partner with Flagstar and based on our pro forma capital position, we have more flexibility in returning capital to shareholders. Also, 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’ll now be conducting a question-and-answer session. Our first question is from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.

Good morning, Ebrahim.

Good morning, Tom. How are you?

Doing well.

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 and get Fed approval around their deals in recent weeks. Could we see approval happening within the next few weeks? Or is that too optimistic?

We appreciate the question. Obviously, we were very specific about where we are. We spent a lot of time on getting our community pledge agreement done. That was a major milestone for the company. And I think we’re pretty clear that 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 could give you more detail on that, but I think it was pretty clear.

Understood. And I guess, then, Tom, remind us around this rate sensitivity with the Fed expected to hike maybe as early as March. How do we think about standalone NYCB margin in that backdrop? And also remind us what Flagstar balance sheet does or creates in sensitivity if we get multiple rate hikes over the next year or two?

Great. I’ll start the question — answer the question, then I’ll defer to John. But 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 of top-line revenue to the company as that just expires. So we continue to see margin expansion in the short-term for NYCB ex-Flagstar. And obviously, we’ve modeled this both ways. We’re very comfortable with our position in financials. I’ll defer to John as far as the guidance on rate increases and the like. John?

Yes. We are anticipating, of course, that 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 swaps 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 when you look at on a consolidated basis with Flagstar, Flagstar is substantially asset sensitive. So that will dramatically moderate the liability-sensitive nature on our books as well as we hope our initiatives on the deposit on the Banking as a Service side. The goal is to limit the reliance on the Federal Home Loan Bank 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 want to add to that point on funding. We’ve culturally changed the direction and 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 services 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-lying fruit. Our team, our Board, our entire culture has focused on getting that relationship lending in place. So we’re very pleased about our first year’s results and the sizable increase. Historically, the company 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. And these are operating accounts, these are relationship deposits. It’s the focus of the change in the culture at the bank.

And 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? And then the Banking as a Service, I think you mentioned $1 billion in year-end deposits. How big can that book get, how fast can it grow? And what’s the rate sensitivity of those deposits that come through that Banking as a Service channel?

I’m going to change the order. I’ll answer Banking as a Service and then I’ll let John address the margin. We’re very excited about what we’re doing on BAS. And we’re also excited about what we’re going to do with Mortgage as a Service, which I believe is going to be a significant benefit when we combine with Flagstar. They have so much mortgage origination capability and liquidity. The fact that they’re not truly taking advantage of that Mortgage as a Service business is because of balance sheet constraints. On a combined basis, we will embrace that. So collectively, absent Flagstar, we see some very strong initiatives. There are some significant items in the pipeline that we can’t speak to because they’re not public, but they have pretty big wins that we anticipate getting that will lead towards a very low, stable cost of funds benefit for funding that could also drive fee income. When they get approved and become public, we’ll let the market know. But these are a unique focus for the bank. That, coupled with the fact that we’re also banking some smaller technology companies and smaller banks that are not over the $10 billion threshold, on a card perspective. So 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 well. On an average basis last year, the numbers were more than $1 billion because of the amount of activity orchestrated by the government, but we have further contracts that we believe would be very fruitful for 2022 in the short term. This will be an ongoing build-out. We have hired people and we anticipate hiring more as we build out the business. But again, this business was zero deposits as of January 1, 2021, and now we’re looking at a sizable opportunity. And when you add Mortgage as a Service, that number could be significant. John, on the margin?

John, one, the full quarter impact as we look into 2Q from the hedge roll-off — I know you mentioned 3 basis points. And secondly, if the deal is not closed until June 30, and we get a March Fed rate hike, do you still expect the margin to expand in the second quarter?

I want to be very clear. John is the CFO and can speak to specifics, but we’ve never given dated guidance. We gave short-term guidance. We’re very confident that we’re positioned well and much better than in previous years. When we roll in Flagstar, this company has significant earnings power that we’re anticipating. Absent Flagstar, we’re very comfortable with strong profitability on a standalone basis. John?

All right. Thanks for taking my questions.

Thank you. Our next question is from the line of Christopher McGratty with KBW. Please proceed with your questions.

Good morning, Chris.

Hey, good morning. I’m looking at the slide deck from this morning, and you referenced the 16% accretion from the deal, which was announced last year. Obviously, rate expectations have changed a bit and the mortgage market is changing. So 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 outlook for the first quarter and the intermediate term outlook. Thanks.

Chris, when we announced the deal at 16% accretion, we were very comfortable with the economics we laid out at that time. There’s no doubt that earnings from both institutions were stronger in 2021 than originally forecasted in that deal. We believe 2022 may be similar, depending on the rate environment. So I would say we’re very comfortable with the accretion percentages that we put out. If anything, capital is probably a little bit higher right now given the earnings contribution from both organizations, especially Flagstar. Lee, do you want to jump in on mortgage banking?

Yes. On margins in the fourth quarter, there were competitive factors and the rising rate environment led people to try to fill capacity, which impacted margins. Also, there were some RMBS-related margin impacts. We took a couple deals to market and the market was saturated, so execution was not what we expected. We also had a pricing adjustment on non-owner occupied loans after FHFA lifted or suspended their caps on such loans. Looking into Q1, we believe that gain on sale revenues will be similar or slightly better than what you saw in Q4.

And then maybe just a technical one. The borrowings you added in the quarter, what was the rate on those new borrowings, John?

We did a mixture of borrowings in the fourth quarter. The longer-term borrowings we put on were three years at approximately 1.34%, and we also had some short-term borrowings at overnight or weekly rates.

Great. Thank you.

Thank you. Our next question is from the line of Steve Moss with B. Riley. Please proceed with your questions.

Good morning, Steve.

Good morning. Maybe just a follow on loan growth here. Curious, you sound pretty upbeat about loan growth expectations, Tom. How are you thinking about 2022 here?

Great question. We’re very upbeat. Our teams are really busy. The fourth quarter was an active quarter and activity continues into Q1. If you look at the pipeline, north of $2 billion, $2.2 billion, almost 70% is new money. We’re seeing significant activity on anticipation of higher rates. There are many property transactions in the market. That’s a significant change; property transactions are occurring at a level we didn’t see even pre-pandemic. The Manhattan market has come back significantly. We really haven’t done much on pure CRE; multifamily has been our focus as well as specialty finance. It feels like the market has a lot more property transactions and our pipeline is very strong. As far as growth for the year, typically we target around 5%. I’m moving toward upper single digits as we start the year, given the significant Q1 pipeline, which is not typical for us. Normally we have a strong Q4 and a little slowdown in Q1, but this is coming out of the gate very strong. Spreads are between 185 to 200 over the five-year for shorter duration paper, which is favorable given the curve shape. Portfolio lenders will have an advantage here versus GSEs given the curve dynamics.

That’s helpful. My next question: in terms of the pro forma combination with Flagstar, maybe just following up on the assumptions here since it’s been a little delayed. I hear you on the buyback given higher capital levels. Are there any other changes in terms of thoughts around balance sheet restructuring or actions you may take as you combine?

We’re excited about the opportunity. We reactivated the repurchase activity as part of capital planning. On a pro forma basis, we’re just south of 11% CET1, which gives significant capital maneuverability. That enables choices on capital allocation, reactivating buybacks, and continuing a strong dividend. The combined company should generate a lot of capital. We’ll look at restructuring opportunistically. When the companies come together, depending on how large Mortgage as a Service becomes, it could materially change funding needs. It gives us options to reduce reliance on some historical funding sources and provides a more stable funding position as we roll out Mortgage as a Service.

Okay. Maybe just on the Flagstar side, Lee, as we think about mix of purchase versus refi and direct lending. There’s healthy volume and your highest gain on sale margin. Just color around market dynamics there.

If you look at the latest Fannie, Freddie and MBA forecast, they’re forecasting a $3 trillion market in 2022, but the composition is flipping to being two-thirds purchase, one-third refi, whereas in 2021 it was the opposite. The big variable is inflation and how the Fed reacts, which could lead to additional rate hikes and start to impact affordability. A $3 trillion mortgage market is still a 25% reduction from 2021, so there is excess capacity in the system. We will leverage our diversified mortgage business since we originate in all channels. We’re investing in technology to enable more purchase business in the direct lending channel. We’ll rely on our broad product offerings, the benefit of being a bank with a balance sheet, RMBS program, and sale program. We’ve built a variable cost structure where 70% to 75% of costs are variable or semi-variable. Combined with New York Community Bank’s balance sheet and footprint, we feel good about 2022, while watching inflation and Fed actions.

All right. Thank you very much. Appreciate all the color.

Thank you. Our next question is from the line of Brock Vandervliet with UBS. Please proceed with your question.

Good morning, Brock.

Thank you. Hey, good morning. You mentioned the cost base on the Flagstar side, variable or semi-variable. I noticed mortgage expenses dropped just $4 million while gain on sale was under heavy pressure. Is there some offsetting expenses that we would expect to come out in Q1?

Yes. On the mortgage side, we will be proactive in adjusting capacity as necessary. We built a flexible capacity model to scale up or down with volume leveraging third-party vendors. We’ve cross-trained staff and 70% to 75% of costs are variable or semi-variable. We’ve proven our ability to manage costs depending on volumes and revenues. In Q1, you don’t want to react too quickly heading into spring buying season. We want to see how February and March play out. We’ve got a variable cost structure and will manage costs accordingly.

If I could add, page 14 of our deck shows mortgage expense relatively stable as a percentage of closings quarter-over-quarter. Gain on sale is based on the lock date, expenses come in at closing, so sometimes there’s an imbalance. Over a 12-month perspective, expenses are typically in the 1% to 1.15% range of closings, and we will manage to those expense levels.

Got it. I don’t mean to beat up on Flagstar expenses because these mortgage trends are sector-wide. I’m struggling with the accretion assumptions in the merger given diminished earnings power we’re seeing into Q4 and probably into 2022. Any thoughts?

Brock, when we announced the deal in our joint press release, we assumed 2022 forecast somewhat lower on our model and Flagstar had a tremendous 2021. If you forecast that into the run rate, we’re comfortable with the guidance we provided.

If you look at overall Flagstar results, while mortgage was challenged in Q4, the numbers overall are strong and we didn’t miss on earnings despite mortgage revenue pressure. Return on equity was strong. Flagstar is a bank, not just a mortgage company. Even in prior periods when mortgage revenue was similar to Q4, returns were strong in 2018 and 2019. We’re confident in the company’s performance as a stand-alone.

I’d add that in a rising rate environment, we will utilize our balance sheet for growth. With our retail and origination locations, we will look at portfolio opportunities and higher-yielding loans. Historically, our original growth assumptions were de minimis when we performed the transaction in April, but as we get to know each other through integration, we believe we have significant potential growth together.

Okay. Thank you.

Thank you. Our next question is from the line of David Rochester with Compass Point. Please proceed with your questions.

Good morning guys. Quick question for Sandro and Lee. You’ve mentioned a normalized mortgage add per quarter of $150 million as a target. Given the gain on sale hit this quarter to $91 million and guidance for similar or a bit better in Q1, are you thinking that $150 million might end up coming in a little bit lower? And secondly, given your outlook on rates and seasonality, are you expecting a pickup in gain on sale in Q2 or is it too early to tell?

Let me start and Lee can add. Certainly, $150 million is the target. Annualized to $600 million is where we would like to see it. If it’s less, there are other compensating items in other parts of the business. We’re confident about growth in our banking business; commitments are growing and the pipeline is robust. Given our high-quality credit and expense control, even if mortgage gain on sale averages 100 versus 150 per quarter, Flagstar can still produce strong earnings. We’ve been building other parts of the company quietly and are positioned to be profitable even in a quarter like Q4 where gain on sale was pressured.

I agree with Sandro. The $150 million should be viewed as an annualized target if we can get to $550 million to $600 million. We have a variable cost structure and will manage costs if volumes aren’t there. The diversified bank has enabled us to produce strong earnings regardless of mortgage cycles. We’ll be even more diversified when combined with New York Community Bank. We won’t forecast Q2 now — we’re guiding to Q1 being similar or slightly better than Q4 from a gain on sale point of view.

Appreciate the color. Tom, what’s the outlook on 1Q expenses at this point? You’ve occasionally talked about full year views. Any thoughts on a standalone expense base?

2021 came in better than we expected on expenses. On a standalone basis, I don’t see a significant uptick. For the year, we’d probably guide around $540 million for operating expenses, which is conservative. Once Flagstar closes, that will change due to scale. For Q1, Q1 is usually the high quarter given FICA and payroll taxes — guide about $135 million for Q1, then coming down in Q2, tying to about $540 million for the year.

Perfect. If you can give an update on new loan yields — multifamily, specialty finance — and securities reinvestment rates. I know you’re not growing the securities portfolio much, but where are you buying securities?

We’ve been mostly not buying securities; we’ve held powder dry. Potential opportunity depending on market conditions, but reluctant to take on duration risk in the current environment. In the fourth quarter, the shift in the yield curve woke up many customers. Spreads have held in well; we had rates as high as ~350 basis and as low as ~380 over time, so ranges depend on deals. The 185 to 200 basis point spread on our core model has been holding nicely. The back end of the curve has made portfolio loans advantageous versus agency loans given coupon dynamics. We’ve been winning good business. We’re seeing robust multifamily growth and borrowing activity. We’ve been cautious on CRE generally but will finance our current customer base where appropriate. Specialty finance has pent-up demand — total commitments are just under $6 billion. That business started from zero and has been strong; much of it is floating-rate, which benefits in a rising rate environment. Approximately 60%–70% of the portfolio reprices with rising rates, so the bank is positioned differently than historically as a traditional thrift model. As we merge, Flagstar brings asset sensitivity to the combined balance sheet, giving us nice balance in a rising rate environment.

All right. Sounds good. Thanks.

Thank you. Our next question is from the line of Peter Winter with Wedbush Securities. Please proceed with your questions.

Good morning, Pete.

Morning, Tom. I wanted to ask about credit quality. You had another nice decline in principal-only deferral loans. I'm curious what happens with the remaining $480 million of deferrals with the CARES Act expiring in the next few months?

Pete, great question. During COVID-19 we were generous with relief programs and had about $8.7 billion in deferrals at one point. Under the CARES program we gave six-month deferrals. Many customers returned early because they didn’t need it due to recovering markets. Today, coming into June or July when CARES Act protections end, we expect close to zero deferrals because most customers have recovered. A large portion of the remaining deferrals are in Manhattan; outside Manhattan recovery has been strong. Based on our CECL reserves, we have more than adequate reserves and we think we may deal with perhaps $100 million of credit losses at the end of the day, which is reasonable for a ~$60 billion bank. We have $40 million of NPAs. Asset quality remains strong; we’re low-leverage lenders with lower LTVs and strong collateral coverage. We tested that in Q4 and performed well. We’re confident in our positioning and credit quality.

Got it. That’s helpful. A follow-up: an update on the strategic partner relationship with Figure. Does the real benefit kick in after the Flagstar merger? How are you thinking about potential deposit growth from the technology?

We won’t be explicit on business case metrics publicly yet, but we are engaged in active technology testing and initiatives. We’re lead in the USDF consortium with several founding banks and continuing to test interoperable bank-to-bank digital transactions. That work included successful live interoperability tests among banks to move on-chain and off-chain balances. It’s an important step. We are working with Figure on use cases, including mortgage-related transactions on private label assets that could be efficient on blockchain. We’re exploring improved methods for customer bill payments and rental payments, among other use cases. The regulatory compliance, KYC and Bank Secrecy Act work is critical and a focus. We’re making progress daily across compliance, audit and legal to ensure the solution meets regulatory expectations. There are many initiatives with Figure and other technology partners and with Fiserv on digitization. We plan to digitize the bank, build out Banking Direct and tie in fintech partners. The business case will become clearer as pilots move into production, and we’ll share more when appropriate.

Got it. Thanks for the color, Tom.

Thank you. Our next question is from the line of Matthew Breese with Stephens. Please proceed with your questions.

Good morning. On the Flagstar deal, you mentioned that the community pledge agreement with NCRC paves the way for the approval process. Was there an issue on the CRA front or regulatory pressure in this area? Are there other roadblocks we should be aware of?

No, let me be clear. It’s not unusual for large transactions to develop community pledge agreements. We and Flagstar engaged with community organizations and regulators as part of diligence and outreach. This agreement is important because we are a major multifamily lender and Flagstar brings a broader footprint. We worked closely with ANHD and NCRC; this collaborative process was constructive and, we believe, helpful for regulatory approvals. M&A can take time; we’re working with regulators and are optimistic about our path to approval.

To answer the CRA-specific question, Flagstar recently had an outstanding CRA rating. So there is no CRA issue, but getting an agreement of this nature done is an important part of the regulatory approval process.

Okay. In the deal filings there are several other approvals necessary including Fannie, Freddie, Ginnie, VA, State of Texas and State of Vermont. I don’t recall deals requiring all these. Can you discuss those approvals and how they compare to Fed, FDIC and state banking approvals?

On the mortgage side, Fannie, Freddie, Ginnie, FHA, USDA and VA approvals are required because NYCB is the acquiring entity and those licenses and vendor relationships are in Flagstar’s name currently. We are in good standing with those agencies. There is a lot of work and documentation, but there are no outstanding issues. Those approvals are part of the process but are not expected to be onerous beyond the usual regulatory diligence.

Understood. Back to the Figure partnership: you did a bank-to-bank digital market transaction. Over time more of these could happen intra- and inter-bank. Are there fee income benefits as these transactions scale? Any encouraging signs on deposit growth to date from this technology?

We haven’t provided a public business case on fee income yet. We’re in pilot and interoperability testing and will determine fee structures and deposit economics as the consortium and solutions mature. The goal is to provide regulated, bank-grade digital fiat solutions with proper KYC and compliance. As more banks join the consortium and pilots scale, we expect more use cases and potential deposit inflows tied to activities, but we’ll be specific when we have live production cases to disclose.

Understood. Thanks.

Thank you. Our next question is from the line of Chris Marinac with Janney. Please proceed with your question.

Hi, thanks. Good morning. Tom, could you or Sandro update us on how quickly you can integrate the back office once you get approval? Has that timeline narrowed given the interim time since the announcement?

Chris, great point. We’ve been working together and learning each other’s operations even though we’re separate companies. The most important aspect is culture alignment. My priority is ensuring culture alignment and leadership integration. We’ve designed leadership teams and are working with third-party integration consultants. Our people have been engaging across both companies and that groundwork helps readiness for legal day one, though some conversion tasks can only occur after regulatory close. We’re focused on being ready operationally and culturally.

Let me add: for legal day one, we’re ready. Once regulatory approval occurs, we’ll be ready to operate as a combined company quickly. Full system conversions and complete integration take time and usually can’t be fully executed until legal day one. The extended regulatory timeline doesn’t necessarily shorten conversion time between legal day one and complete conversion. However, in terms of marketing plans and bringing new products into NYCB branches, the extended timeline allows us to be better prepared to hit the ground running. Culture is very important, and we’re bringing people together through events and DE&I programs; that’s been embraced and is helping alignment.

Great. Thanks both for that background.

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.