Flagstar Financial - Q4 2020

Transcript

Salvatore J. DiMartino (Director of Investor Relations)

Good morning, everyone. This is Sal DiMartino, Director of Investor Relations. Thank you for joining the management team of New York Community Bancorp for today's conference call. Today's discussion of the company's Q4 and full year 2020 performance will be led by President and Chief Executive Officer Thomas Cangemi and Chief Financial Officer John Pinto, together with Chief Operating Officer Robert Wann. Today's release includes a reconciliation of certain GAAP and non-GAAP financial measures that may be discussed during this call. These non-GAAP financial measures should be viewed in addition to, and not as a substitute for, our results prepared in accordance with GAAP. Also, certain comments made on today's conference call will contain forward-looking statements that are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from expectations. We undertake no obligation to and would not expect to update any such forward-looking statements after today's call. You will find more information about the risk factors that may impact the company's forward-looking statements and financial performance in today's earnings release and in its SEC filings, including the 2019 annual report on Form 10-K and its Q3 2020 quarterly report on Form 10-Q. Now, to start the discussion, it is my pleasure to turn this call over to Mr. Cangemi, who will provide an overview of the company's performance before opening the line for Q&A. Mr. Cangemi, please go ahead.

Thomas Cangemi (President and CEO)

Thank you, Sal. Good morning to everyone on the phone and on the webcast, and thank you for joining us today. Before turning to the financial details, I would like to take the opportunity to introduce our new CFO, John Pinto, to everyone on the call. As you know, John Pinto was named CFO at the end of last year, succeeding me in that position as I transitioned to the role of President and CEO. John and I have worked together for 22 years, going back to the time with Richmond County Bancorp, and we have worked very closely since we both joined New York Community in 2001. Going forward, John will be spending more time with the analyst and investment community. Please join me in wishing him well, as I know that he will do a terrific job as the company's new CFO. Now, turning over to the results.

Early this morning, we reported diluted earnings per common share of $0.39 on a GAAP basis for the three months ended December 31, 2020, up 70% compared to the year-ago quarter and up 95% compared to the previous quarter. For the full year, we reported $1.02 per share on a GAAP basis, up 32% compared to last year. These numbers included an income tax benefit of $55.3 million for the quarter and $68.4 million for the year related to certain tax provisions of the CARES Act. On a Non-GAAP basis, our Q4 earnings were $0.27 per share, a penny better than consensus estimates, and our full year earnings were $0.87 per share, up 13% compared to 2019. We are pleased with the company's financial performance over the course of 2020.

As everyone knows, last year was a challenging year due to the lingering effect of the COVID-19 pandemic and its impact on the local and national economy, our customers, and our employees. Despite these challenges, we turned in strong operating results, highlighted by double-digit EPS growth, continued net interest margin expansion, a strong 23% increase in pre-provision net revenue, and strong growth in origination volumes. Additionally, our asset quality metrics continued to improve as non-performing assets fell, and to date, our loan deferral program has proven to be very successful, as virtually all our loans eligible to come off deferral have returned to payment status. As we previously disclosed, our deferral program is somewhat unique in that it is for an initial six-month period as opposed to a three-month period.

Accordingly, the vast majority of our loans on deferral are eligible to come off their initial deferral period during the Q4, primarily during the months of October and November. As of December 31st, total multifamily and CRE loans deferred dropped 99% to $80 million, or 0.2% of total outstanding loan balances, compared to $5.9 billion, or 15.5%, at June 30, 2020. Multifamily deferrals were $74 million, compared to $2.3 billion at June 30th, while CRE deferrals declined to $6 million compared to $2.3 billion at June 30th. Office deferrals at the end of the year were zero, while retail and mixed-use deferrals were each about $1 million. Most of the remaining deferrals are eligible to come off deferral during the first two months of the year.

Despite all the economic challenges during the Q4, our segment of the New York City real estate market, the non-luxury rent-regulated portion of the multifamily market, continues to hold up extraordinarily well. Our borrowers continue to pay us, and rent collections have remained above pre-pandemic levels. Moreover, the vaccine rollout and additional fiscal stimulus by the new administration should help the local economy, and that should support multifamily and CRE properties in our region. We patiently look forward to the eventual reopening of the five boroughs, putting New York City on par with the rest of the state. These trends are not only evident in our deferral numbers but are also evident in our overall asset quality metrics. Non-performing assets declined $9 million, or 16% to $46 million, compared to the Q3, representing eight basis points of total assets. The majority of our NPAs are taxi medallion-related.

Excluding taxi medallion-related loans, NPAs would have been $21 million at the end of the year or four basis points of total assets. Another highlight was the net interest margin. Excluding the impact on prepayment income, the net interest margin improved 40 basis points to 2.30% during the Q4, as compared to the Q4 of last year. The margin improvement continues to reflect lower funding costs as our overall cost of funds dropped 88 basis points to 1.06% during the quarter compared to the Q4 of last year. The decline in our funding costs was primarily driven by repricing of our CD portfolio. The average cost of CDs declined 129 basis points to 1.04%, driving our overall cost of deposits down 115 basis points to 0.61%. This was partially offset by 37 basis points year-over-year decline in average yields to 3.47%.

Some of this decline is attributed to lower yields on loans and securities, given the low market-rate environment. We also added liquidity during the Q4, as you will see by the year-over-year increase in our cash balances and the quarter-over-quarter increase in securities. With interest rates at historically low levels over the past year in a flat yield curve environment, we intentionally kept these balances low, but now we are rebalancing our cash and securities position to more appropriate levels as we prepare for a potentially steeper yield curve environment. Moving on to the other major highlights of the quarter, pre-provision net revenue. PPNR for the Q4 increased 42% to $189 million on a year-over-year basis, and it was up 13% compared to the Q3. For the full year, PPNR increased 23% to $650 million.

This was driven by a combination of revenue growth as net interest income rose based on higher margins, loan growth, and lower funding costs, along with flat operating expenses. Turning now over to the lending side, total multifamily loans increased $1.1 billion, or 3%, to $32.3 billion compared to last year. During the current Q4, multifamily loan growth was impacted by market conditions which favored GSE financing as opposed to portfolio lending. This resulted in a higher-than-normal level of loans which we financed away from us. However, this was offset by higher prepayment income during the quarter, which at $20.9 million was the highest quarterly level of the year. Our specialty finance portfolio continued to grow over the course of 2020 as specialty finance loans and leases increased $439 million, or 17%.

At year-end 2020, outstanding specialty finance loans and leases totaled $3.1 billion, while total commitments were $4.8 billion. Origination volumes continue to be strong. Total originations in 2020 were $12.9 billion, up 21% compared to the 2019 origination volumes. As for our loan pipeline, our current pipeline going into the Q1 of 2021 is $1.5 billion, including $1.1 billion of multifamily loans, of which 61% is new money. On the funding side, total deposit year-end was $32.4 billion, up $780 million, or 2% compared to the previous year. Throughout 2020, as market rates declined, we lowered our CD rates, and not surprisingly, CD balances declined.

However, this decline was largely offset by growth in each of our other deposit categories, which carry lower rates, including savings accounts increasing $1.6 billion to $6.4 billion, non-interest-bearing accounts up $648 million to $3.1 billion, interest-bearing checking and money market accounts growing $2.4 billion to $12.6 billion. Before going into Q&A, I'd like to make a few comments since I was named as the new President and CEO of New York Community. Many of you have opined on what this move means for the strategic direction of this company. Let me frame it for you this way. We have a business model with an unprecedented track record of strong asset quality, which goes back over 50 years and spans multiple business cycles. We will not deviate from that business model that has proven successful over five decades.

Going forward, we will take that same level of energy and commitment and apply it to the funding side. Historically, we have funded ourselves as a traditional thrift. However, with our recent partnership with Flagstar and new competitive cash management solution, we will be better able to change our funding mix by improving our processes geared towards attracting more core deposit relationships. Focusing on liabilities side of the balance sheet does not mean that there will be less of a focus on our loan book. On the lending side, we see continued growth within the multifamily business, which demonstrated its resilience during the pandemic, both from within our current borrower base and from new customers. We will also look at both new and complementary lines of businesses as opportunities present themselves similar to what we did with our specialty finance business. Another opportunity for us lies within our branch network.

This is a blank canvas for us, and we will be in another area of extreme focus under my responsibility. All of this will be done through a combination of organic growth and or lift outs from other financial institutions or through like-minded M&A partners. We will consider all opportunities that make sense for shareholders. All options are on the table. Lastly, I'd like to end my formal comments by thanking all of our employees who worked so diligently throughout 2020, whether it was remotely or in person. Our results would not have been achieved without their commitment to the company and to our customers. I cannot be more proud of how our entire organization performed last year, given all the challenges from the pandemic. On that note, I would now ask the operators to open the line for your questions.

We will do our very best to get to all of you within the time remaining. If we don't, please feel free to call us later today or the week. Operator? Thank you.

Operator (participant)

We will now be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we poll for your questions. The first questions come from the line of Ebrahim Poonawala of Bank of America Securities. Please proceed with your question.

Ebrahim Poonawala (Head of North American Banks Research)

Good morning, Tom.

Thomas Cangemi (President and CEO)

Morning, Abraham. How are you?

Ebrahim Poonawala (Head of North American Banks Research)

Good.

So first of all, congrats on the CEO appointment. And just talk to us about expense outlook. I know expenses ticked up higher in the Q4, but I heard you talk about some potential for brand savings. And I understand that you may not be ready to have all the details on that, but just give us a sense of where expenses should trend as we look forward into the next quarter, over the next year, if you can talk to 2021. Okay.

Thomas Cangemi (President and CEO)

Yeah, sure, Ebrahim. So I would say that, yes, we had some movement on the expense in the Q4. Again, driven from my previous commentary, the movement from classified assets for us, obviously, there's a cost to that. We're very comfortable with managing through this difficult time on the classification side. However, that does come at a cost.

So after I see expenses on an accrual basis have elevated significantly over the past, we'll call it, six months, that had a significant contribution to the Q4, as well as some taxi medallion-related expenses, about $1.8 million on taxi medallion. The differential, I'd say, off of my guide was driven off of FDIC costs. Those costs will continue. So I'd say for the, we'll just give the Q1 guide. $134 is my estimate, so it's pretty much flat off of the Q4. And typically, Q1 is the quarter high for the bank. So I'd say Q1 is around $134. You can kind of think about annualization somewhere between $530, $535-ish, $530- $535. And I think that's a reasonable run rate.

Again, I'm not yet prepared to give that as a full guide for 2021, but on a quarterly perspective, I think we're going to be pretty much close to Q4. And obviously, that typically is our quarter high in Q1 versus previous years when we compare.

Ebrahim Poonawala (Head of North American Banks Research)

And how soon should we expect you to have an update just around branch rationalization and what you want to do? What's a reasonable timeframe when we should expect an update?

Thomas Cangemi (President and CEO)

So look, we look at the branches all the time. It's part of our business model. We're very focused on the real estate side. We had a handful of branches that we evaluated last year. I think it was a total of 14 branches that we put on the table for potential reshuffling, and that continues. And we're going to go through all our operations.

Obviously, the world is changing regarding banking, and we're going to look at our branch structure, and if we see deficiencies in that, we'll move opportunistically, so I would say stay tuned, don't expect to see a major restructuring on the branches unless we have a major deal to announce, but from time to time, we do go through our leases that come due, we look at the run rate as far as the economics of exiting one, and we will be opportunistic depending on market conditions.

Ebrahim Poonawala (Head of North American Banks Research)

Got it, and I guess just moving to the margins, so I think you still have—you flagged a fair amount of high-cost CDs coming up and debt coming up for maturity. Just tell us in terms of the refi costs for these and just your expectation on the core margin going forward. Yeah.

Thomas Cangemi (President and CEO)

So look, as everyone knows, we had a lot of opportunities in 2020, given where we were and where we are today. I still believe that we're going to see historical lows in our cost of funds, in particular on the retail side. So I would say with certainty in Q1, we will be at our historical low. I believe that was around 50 basis points was our historical low. We'll probably break that in Q1. That's going to be an ongoing phenomenon throughout the year, assuming rates stay close to zero. So I think it's fair to say that given the level of excess liquidity we put on, given the balance sheet and what we expect to redeploy some of that excess cash, it probably costs us about two basis points in Q4 and probably two basis points in Q1.

I can safely guide between three to five basis points improvement in the Q1. Obviously, it's all been at a slower pace than the previous year, but given the magnitude of the drop of the CD book, and the CD portfolio, as well as overall cost of deposits, should decline, my guess is by the Q3, somewhere below 40 basis points. It could be 35-38 basis points, depending on how many of these customers go into a much lower liability instrument, so I think we're going to see margin expansion throughout 2021, throughout the year. We guide up for the quarter, three to five basis points in Q1, and I think what's on the table now is what happens with the shape of the yield curve. We had some nice gyration in the Q4.

If that continues and the back end starts to improve here, our customers will probably come to the table and look to accelerate refinancing. And we'll be there to serve a nice spread in this environment in a healthy multifamily market. The multifamily market has been extremely healthy despite the pandemic. So if you look at all the asset classes, people are paying their rents. We're predominantly a niche player in the rent-regulated space, and there's refinancing happening on a daily basis. So we hope that we see a better yield curve that could also drive the margin higher.

Ebrahim Poonawala (Head of North American Banks Research)

Got it. And if I can just squeeze in one more on the multifamily market, you mentioned GSEs got more competitive towards the end of the year. Just give us the outlook.

Do you see this multifamily portfolio growing, and what's kind of the feedback you're getting from your borrower base in terms of what they're looking to do?

Thomas Cangemi (President and CEO)

Well, 2020 was a very interesting year. The GSEs were very competitive before the pandemic. They put us to compete at a very significant level in January, February, March. Pandemic hit, they disappeared. Literally, we were in business in Q2, and spreads gapped out. We were doing some really solid business. We had good growth. But Q1 of 2020 was competitive. And I'd say for Q2 and Q3, they were kind of trying to fill their role of their quota versus tightening up their underwriting standards, thinking through the pandemic and social distancing and figuring out remote origination. And then by Q3, Q4, they kind of figured that out in a very strong way and had to fill their coffers.

And Q4 was very noticeable as many customers evaluated the rate environment. A lot of those commitments were probably done in Q3. They closed in Q4. We did a really strong job on protecting the loan book. So we've actually executed with some of our larger customers to protect these great relationships, and we competed against the GSEs. However, there were some loans that went away given the market conditions. The yields were low, and the dollars were heavy. And again, we protect the credit of the portfolio. It's all about the long-term credit metrics of this bank. And clearly, looking at some of the deals that were on the table, we let them go. And you can see the elevation of prepayment activity. As we stand today in January, it appears that there's less storybook loans going away to the GSEs as of today.

They filled their coffers last year, and we'll see what happens as we go forward here. But if there's a sloping yield curve and the back end starts to spike up higher, typically what happens is customers go back to the portfolio lenders. Five and seven-year money becomes more of the product du jour, and we tend to be very competitive there. So right now, it seems like we're setting ourselves up for growth as we go into 2021. 3%-5% tight net multifamily loan growth is reasonable. I'd like to be around 5%. I think it's achievable. However, the shape of the yield curve will really depend on the level of activity. If there's a spike in the yield curve, we think a lot of these customers that are coming due will accelerate refinance and will be ready to lend.

Ebrahim Poonawala (Head of North American Banks Research)

Got it. Thanks for taking my questions.

Operator (participant)

Sure. Thank you. Our next question has come through the line of Mark Fitzgibbon of Piper Sandler. Please proceed with your questions.

Thomas Cangemi (President and CEO)

Morning, Mark.

Mark Fitzgibbon (Head of FSG Research)

Hey, guys. Good morning, Tom. Congrats to you and John on your new roles.

Thank you.

Thomas Cangemi (President and CEO)

Thank you, Mark.

Mark Fitzgibbon (Head of FSG Research)

First question I had, Tom, just to clarify on that three-to-five basis points guide on the NIM that you gave, I assume that excludes prepayment penalty income?

Thomas Cangemi (President and CEO)

That's correct, Mark. We don't guide prepayment penalty income. That's correct.

Mark Fitzgibbon (Head of FSG Research)

Okay and then secondly, it sounded like from your comments that we'll see some changes on the liability side of the balance sheet. Are there also some new lending niches that you'd consider, and I guess I'm curious what those might be?

Thomas Cangemi (President and CEO)

So Mark, look, there's a level of excitement here. Culturally, we've always been all about the credit, and it's served us extremely well.

But there's an opportunity here. I've been saying this for many years. The low-hanging fruit of the full relationship lending is out there. I'd say complementary lines of business, for example, if you have a very wealthy family who's looking for a line of credit, and we tend not to service lines of credit, that's an easy exercise for us. We know the customer. We know the opportunity. We're very comfortable with the history. No reason we should not have a line of credit with a strong borrower. That relates into more relationship lending, more deposit flows. We're getting better deposit flows historically, but we have so much work to do. That is my emphasis. I believe that our loan book has not yet been fully tapped in respect to relationship lending. And the Fiserv conversion that we embarked last year was a major core system conversion.

But more importantly, our cash flow management system is right on par with the largest commercial banks. So there's no excuses that our system does not compare to a Capital One or a local commercial bank that we compete against. And so we feel very comfortable there. Look, we may have to tweak a little bit on the service side, tweak on the relationship lending side. That will happen over time. But I think there's tremendous low-lying opportunity that we will aggressively go after. So I do hope that our customers are on the line here because we have a commitment. We want to bank you full service. It comes down to at least the amount that comes onto the lease agreements we should be getting as a matter of course, the operating accounts, and the full relationship. So there's going to be a push.

I save funding on a daily basis here. I think my staff is getting sick of hearing it, but that's where I'm at. I think this is the opportunity to change the thrift model on the funding side and look at the pure commercial banking opportunity within our customer base. As far as new lines of businesses, I'd say it's going to be complementary to our customer base. We do lend commercial and multifamily for these families. But lines of credit, opportunities that arise, we're going to bank them. But more importantly, and I said this with clarity, we are looking at all unique things in the marketplace. And we're very comfortable, like we did with Specialty Finance, bringing in a team of people from the outside, management lift outs. These are things that we're looking at today.

We have no problem bringing on lines of business that we're comfortable on managing as to credit risk. So we are clearly looking to a diversification over time. It's not going to be a build-out from scratch. I can assure you that. I'm not going to make an announcement that we're investing in the residential market and we're setting up a new residential portfolio. We're going to partner. Partnerships will get it done a lot quicker, and it'll make rational sense.

Mark Fitzgibbon (Head of FSG Research)

Great. And then I guess, does your expense guide of $530-$535 imply much hiring, or will that be incremental as you sort of over time go through?

Thomas Cangemi (President and CEO)

Yeah. I'd say the big expense will come when we do something strategic. So it's going to be blended in a creative opportunity. I'd say we're going to reshuffle the deck. We're looking at lines of business.

I'm going through the entire bank right now. We're going through all aspects of how we lend, the processes. We'll do some reshuffling. And look, we may be service people, relationship people. By the end of the day, I think it's not going to be a material adjustment to that guide I gave you. I think it's going to be more indicative towards revenue generation. So I would say that that guide has some reshuffling internally. There'll be no real restructuring of the employee base. We have a huge opportunity on the system side, and we have a lot of people that can be utilized in other departments to work with the customer side. So we're going to try to catch a balance and hopefully keep the expenses tight in these difficult banking environments, but also focus on revenue opportunities within the franchise.

So I think maybe we'll get a few hires here and there down the road on the service side. But ultimately, I want to reemphasize there's low-hanging fruit here that needs to be picked, and we will pick it.

Mark Fitzgibbon (Head of FSG Research)

Thank you.

Thomas Cangemi (President and CEO)

Sure.

Operator (participant)

Thank you. Our next question has come from the line of Chris McGratty with KBW. Please proceed with your questions.

Thomas Cangemi (President and CEO)

Morning, Chris.

Christopher McGratty (Head of U.S. Bank Research)

Hey. Good morning. Thanks for the question. Tom, maybe you could start with just the change in the balance sheet and the securities portfolio and the cash position. Given the build in the quarter, how should we think about the progression of that, the non-loans going?

Thomas Cangemi (President and CEO)

Chris, I'm going to defer this call to John. John, I'll just direct the question to John. Go ahead, John.

John Pinto (CFO)

Sure. Thanks, Chris.

So as Tom mentioned in his opening statements, we did add some cash and started to increase our securities portfolio in the Q4. Over the last couple of quarters and years, that securities portfolio has drifted down pretty significantly to drop below 10% of securities to assets. So we wanted to take advantage of the rate environment at the time, put on some term borrowings at the end of the Q4 to enhance our liquidity position, and over time put that into securities and partially into loans, depending, of course, on loan growth. And we expect to do that in the Q1 and into the first half of the year.

Christopher McGratty (Head of U.S. Bank Research)

Great. And then on the strategic side, I mean, historically, acquisitions have been primarily funding-related. I'm interested in with the change in the leadership.

Are there opportunities for notable funding to drop onto the balance sheet and improve, or is it more of an asset availability today?

John Pinto (CFO)

I would say a combination of both. I would tell you that we're looking at everything that's available. Deposit opportunities are real, they exist. We're going to be very carefully evaluating those opportunities, as well as businesses that focus on deposit gathering efforts. There's an interesting amount of unique opportunities out there that have the ability to gather liability. Either these are non-FDIC and short institutions, or they have a business that has a bank that may own this type of business that is shredding that type of business. So clearly, looking at everything, we've bid on stuff in the past. We've lost. We're not a, we'll call it an aggressive buyer of anything, but we do look at a lot of stuff.

Clearly, like I indicated, the deposit side of the balance sheet here, if we refocus the energy, I believe we can get two to three multiple turns on the stock if we change our funding mix. Being so dependent on wholesale finance as a thrift without doing a large transaction for over a decade impacts our multiple. I believe if we turn that multiple into more of a core deposit opportunity, you can see a two to three multiple turn and get that valuation back. We're razor-focused there. It doesn't mean we're going to be successful on winning opportunities, but we are very much looking at deposit opportunities as well as whole bank M&A. I mean, there's no question that we're in an environment that mergers and acquisitions makes a lot of sense. The scale is important.

We believe we have a very unique system upgrade where other banks in our own backyard have not done it yet. They're going to have to do it in the next two or three years. So it's very interesting just to join the family and the systems here, and we can prosper together over time. I think that opportunity exists. So, we're excited about that. And go back to the cash flow management solutions. That's really exciting because historically, that was some of the pet peeves we've had where there was criticism on not being able to have the same technology as some of the larger commercial banks. Well, now we have that technology. No reason to not have the full deposit relationship. So, we have a lot of enthusiasm on the system side. Our people work very hard. This was a three-year project in the making.

So if one's thinking about making this conversion, it's a three-year project. And we did it in the middle of COVID. We actually closed the conversion in August of 2020, even though it was postponed year after year to do it right. This was a major upgrade for the company. So we're excited about that and this will help us on consolidation as well.

Christopher McGratty (Head of U.S. Bank Research)

Great. And then if I could, just given the newness of your seat in the internal focus, announcing a deal or a strategic transaction, you'd be comfortable doing that kind of in the first part of the year given everything that's going on?

John Pinto (CFO)

Been doing this a long time. I'm very comfortable on strategic business combinations. This is not about ego. This is about shareholder value. We will be very shareholder-oriented. That's my history. That's my background.

I've been doing this for multiple decades alongside with Mr. Ficalora. Now, as you said, there's new leadership here, and clearly, we put the egos aside. This is all about doing the right thing for shareholders.

Christopher McGratty (Head of U.S. Bank Research)

Great. Thanks for the question.

John Pinto (CFO)

Sure.

Operator (participant)

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

Thomas Cangemi (President and CEO)

Morning, Brock. I guess we lost Brock. Brock, is your phone on mute?

Brock Vandervliet (Analyst)

Sorry about that. That always helps. So good morning. I wondered if we could go to expenses. I guess I'm struggling a little bit with the guide here, which was very clear, and I just want to understand kind of what's changed versus basically flat expenses or very little growth on the expense side.

Thomas Cangemi (President and CEO)

Oh, look, I think, Brock, there's no question that this is, by the way, slightly higher than the previous year.

We had some one-timers last year. But the change in the run rate is that we have FDIC costs affiliated with banks that are now, I mean, loans that are now criticized. We have a bucket of loans that went through COVID, went through the CARES Act, and we reevaluate those credits, and they go into special mention, substandard, and we have to apply an FDIC assessment against that risk. Very comfortable, by the way, managing that risk. Very comfortable as far as dealing with the loan books. However, there is a cost to that. So I'd say the elevation of FDIC loans got to be between $10 million and $12 million minimum. And we hope that that starts to stabilize by first, Q2.

And then from there, as these loans get back to filling their leases, getting tenants back into these units and/or storefronts, you start to get them back out of a watch class asset. So I think that's really what's driving year over year. At the same time, we've always been monitoring our expenses. We're very efficient as a company. And I think we're going to see the benefit on an efficiency ratio perspective because the margin's stronger, better efficiency ratio numbers. But clearly, going back to, and I'll reiterate back to when we were trying to become a SIFI bank, our expenses were a $660 million run rate. We knocked it down to the low fives. We're still operating in the low fives. But that investment that we made in systems and risk management, we have tremendous back office function that we built to be a much bigger bank.

We have not yet grown the bank through acquisition, so we're very confident that when the opportunity arises, we have the back office and platform to leverage the expense base, but the guide is what it is. I think it's reasonable. Don't expect to see a major reinvestment because with the system conversions done, money's been put into the systems. There's opportunities, but they're going to be, from time to time, maybe some small lift outs from here to there, local banks that we can shake out some deposit gatherers that we'll probably go after aggressively, and I don't think it's going to be meaningful enough to change my guide because I'll reshuffle within the organization.

Brock Vandervliet (Analyst)

Got it, and could you just revisit the GSE dynamic? We can see the, depending on your, I look at 2s 10s, for example. That's steepened pretty materially. It did so in Q4.

What's driving that competitiveness? And is some of it the fact that landlords are looking for any way to materially control costs, including interest costs, given the aftermath of the Rent Act? Is that driving it, or is it just the GSEs are back in big?

Thomas Cangemi (President and CEO)

A number of factors, right? I mean, obviously, let's start with rate. Rate is rate. If you can get a coupon sub 3% and take it over IO for 10 years, it's a competitive rate, right? So if you think about how this process works, you're going to size up a deal, let's say it was Q2, end of Q2, and close it in Q4. So you really need to look at the rate environment throughout the COVID scenario, right? So I go back to what happened in the Q1 of 2020. They were competitive out of the gate.

We still grew our portfolio Q1 of 2020. And then Q2, we went in business with higher spreads. We fine-tuned our underwriting, and we did some great business because the GSEs, I think, were distracted. Because it was COVID. It was figuring out how to remote originate. Our guys have the ability to do paperless remote origination. That was a major upgrade for the company. That was back in the end of 2019. We had the new gen system, so it's all remote. So our people are open for business on a daily basis, doing great originations. But we capitalized on Q2. And then rates were generally low in general in Q3. And that's why at the end of Q2 into Q3, I think a lot of the larger customers looked at the market and said, "Rates are low. There's no real purchase and sale activity.

So let's lock in long and put the money on the shelf for the GSEs." And it's a competitive rate. And by the way, we've competed with some of those great customers to ensure we don't lose that business. So we've had some large transactions, and we faced fierce competition in Q4 because we sized it up in the middle of the year, gave it anywhere from three to six months to close. And my guide talking to shareholders throughout the end of the year was flat to down, and we squeaked out some growth in Q4. So, we were very pleased. But that was a fierce quarter in Q4. And the good news today is that when I speak to my lending people on a daily basis, it seems that we have no sizable deals going away. We have a nice pipeline.

We have a nice new money pipeline. So we should be back in the position of growth. And the GSEs filled a lot of their coffers last year, and they had to fill at the end of the year. And they start from scratch again. So let's hope that we'll be competitive. But nothing new here. We've always competed with the government. And if rates start to tick up, I think the product mix will be five and seven-year money, and the spreads are healthy. If I can get 300 basis points of 275 to 300 on a five-seven-year money on a risk-adjusted basis, we can do good business there. Because the credit losses are de minimis. It's not zero.

Brock Vandervliet (Analyst)

Right. Okay. Thanks, Tom.

Thomas Cangemi (President and CEO)

Sure.

Operator (participant)

Thank you. Our next questions come from the line of Steven Alexopoulos of J.P. Morgan. Please proceed with your questions.

Thomas Cangemi (President and CEO)

Hey, good morning. How are you?

Steven Alexopoulos (Equity Analyst)

Good morning. Thanks, Tom. I wanted to start, Tom, regarding your vision to improve the funding base of the company. It sounds like you might need an M&A deal to move the needle. With that said, you no longer have a premium currency. Are you still committed to a deal needing to be tangible book value accretive out of the gate?

Thomas Cangemi (President and CEO)

Look, holistically, we looked at that as value creation. So I would say to you there's going to be a two-prong approach. We're going to work within the franchise, as we discussed, within our own operations. We think there's a tremendous low-hanging fruit opportunity. That's priority number one. We're open for opportunities.

I mean, to change the diversity of the lending book and try to take on new products that are new to the bank and really try to drive this into a commercial enterprise, it'll be an M&A transaction that does so. Depending on market conditions, I look at the environment historically as that we like to do no premium-type transactions where Tangible Book Value is preserved. But we could be flexible. I mean, at the end of the day, if we can put a highly accretive transaction on the table and the earn back is de minimis, we would consider that. But I would still say fundamentally, taking Tangible Book Value down is not the best idea of creating value. We'll be open to interesting ideas. It depends on the opportunity, right? It depends on the earnings power of the partner. And I don't call them targets.

I call them partners. We don't do targets because at the end of the day, we have to bring the people over from the other side to become partners. The best transactions are done when you have partners at the table. We build a table. Everyone sits around who's our partner, and if we have good partnerships, you can create real value. I think that's the approach. Nothing's changed here other than we had some leadership change, and as I said before, the reality is that we run this company for our shareholders, and we look at the opportunities in the marketplace. It's a shareholder-driven opportunity. There's been some large M&A transactions where low to no premium deals make a lot of sense, especially with the technology build that's going on out there, so we're very focused on doing the right thing for our shareholders.

Steven Alexopoulos (Equity Analyst)

Okay. That's helpful.

Then on the deferrals, if I look at the $6 billion of deferrals that are now current or paid off, were any of those rolled into the 6% of loans, I guess around $2.5 billion, that are now IO? And what types of loans are in that $2.5 billion bucket of IO?

Thomas Cangemi (President and CEO)

Absolutely. Again, I'm going to go back to the point about the GSEs. A lot of these loans that went into IO also could go to the GSEs on a 10-year IO structure. No question that was the market. When we looked at the loans that came off the CARES Act and literally went back to payments out, that was fabulous. At the same time, we're acknowledging that you have this unique phenomenon. I'll call it a Manhattan phenomenon as the city starts to reopen.

Of all the boroughs, Manhattan is having the most difficult time on this, we'll call it getting back to somewhat of a normal. If you look at Queens, Brooklyn and the Bronx in particular, it's doing extremely well. For us, I'd say that's the type of these assets are the ones that have more of a concentration of less rent regulation. So they happen to have some more market rate apartments. You have storefronts that are retail/office that will have more difficulties in Manhattan than they would in Brooklyn, the Bronx, and Long Island, for sure.

So the five boroughs, I'd say the area that we see impact is Manhattan. And I'd say of that portfolio, I'll just be specific. $2.5 billion, you have approximately $1.6 billion multifamily and about $800 million of commercial CRE. And on the office side, it's about $400 million. And the retail is about $200 million.

And the LTV on the office is 51%. Blended for all of the CRE is 54%. And if you look at multi, it's about 53%. And when you look at these on a cash flow basis, as you apply a debt service coverage ratio on a cash flow basis, they're still north of a one-for-one. So they could pay the service on it. And they also can leave the bank and go to the GSEs if they choose to do so. So there's some of those types. There's others that have to lease up again. And we're working through that, utilizing the CARES Act and getting paid on a monthly basis. As I said, we have 99% of all our loans are out of the non-pay status, which is pretty impressive given the pandemic.

But more importantly, I think what I'm finding here when I dive into the portfolio and we mine the data, you look at the fact that the higher percentage of loans that have less rent regulation are the ones that are the IO potential, right? Because the ones that have 100% rent regulation, they're paying. They're collecting, and there's no issue. It's a resilient market for that niche business. And we're going to continue being a dominant force for portfolio in that niche.

Steven Alexopoulos (Equity Analyst)

Great. Maybe if I could squeeze one more in. In your opening comments, you said everything was on the table. And as we think about banking in the digital age, what's your view on preserving this local brand model you've had for years versus maybe consolidating everything under NYCB? Thanks.

Thomas Cangemi (President and CEO)

Stephen, you're getting really deep there, so. Okay.

I'll tell you that, look, at the end of the day, given our franchise, we have 246 branches. We're in Arizona, Ohio. We're down in Florida, down in the south area of South Florida, New York, New Jersey. We have a very unique brand. But we also have a multiple brand concept, right? So it all depends on the partner. It depends on the size of the transaction and the market. So if it's a Florida transaction, well, that's easy. If it's a New York transaction, it becomes a little more complicated. But again, it comes down to what's right for shareholders, right? What's best for the shareholder? What makes logical sense? And we're going to be very logical, and we're going to be disciplined. However, we have multiple brands in multiple markets. If you go to Ohio right now, we have Ohio Savings Bank.

That used to be AmTrust. We rebranded back to Ohio. Down in South Beach, Florida, it's AmTrust. AmTrust does very well down there. Doesn't mean we're wedded to anything. The reality is if we're going to create something that's a regional platform, we have to do what's right for shareholders, which makes the most value creation. So we're open to all opportunities.

Steven Alexopoulos (Equity Analyst)

Okay. Great. Thanks for all the color, and congrats, Tom.

Thomas Cangemi (President and CEO)

By the way, Steven, I will tell you one before you go. When Han and I make an investment on the rebranding, we will do it through a transaction.

Steven Alexopoulos (Equity Analyst)

Yeah. Got it. Thank you.

Operator (participant)

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

Thomas Cangemi (President and CEO)

Good morning, Steve.

Steve Moss (Senior Research Analyst)

Good morning. Just want to start maybe on credit costs here for the quarter.

Wondering how much is driven by the credit downgrades versus perhaps a little bit of an extension in the loan portfolio here.

John Pinto (CFO)

You're saying you repeat the credit costs, you said? The provision, you said? The drivers of the provision.

Steve Moss (Senior Research Analyst)

That's right. Yes.

John Pinto (CFO)

So the actual charges we have is, oh, I believe, 100% medallion-driven. As we grind the medallion, yeah. Primarily medallion-driven on the charge-offs. On the provision we booked, which was lower than the Q3 and has been the trend each quarter in 2020 with lower provisions. The macro environment did get a little bit better. Housing prices got a little bit better, but we did have the increases in the classified and criticized assets that Tom mentioned. So from a qualitative perspective, we want to ensure that we cover those potential increases. We don't see a huge risk of loss there, as Tom mentioned earlier.

But from the [guess] perspective, we wanted to make sure we were covered.

That's right.

Thomas Cangemi (President and CEO)

It was interesting what John had said. I would just follow up on that commentary. And usually, every quarter, I kind of isolate the risk that we're seeing. And a few quarters back, it was retail. Then I said, "We'll see. We'll watch the office portfolio." Look, we're paying attention very closely to Manhattan. It is what it is. It's the last borough that really is having a difficult time. And if you look at where we are on substandard special mention, it's 80% Manhattan, right? And we've isolated down to a handful of loans. All in, it's about $449 million of multifamily and about $300 million of CRE broken out, literally an 80% split to Manhattan. So I think that we have a good hands on this.

Historically, when we do a Manhattan transaction, it typically is the lowest leverage we have on the portfolio, historically, Manhattan and Queens. And when you look at the ones that migrate into what's called a classified situation, the LTV on the multi is about, I believe that number is around 56%. And the overall CRE portfolio on LTV, I believe, is about 58% as well. So yes, for us, that's slightly higher than the 40-something. But for obvious reasons, it needs a little bit more help. And when you apply an IO structure to these loans, they continue to cash flow out and also one-for-one for the most part. Some don't, but for the vast majority, do. And we're working through it. But no one's knocking on the door and returning their keys.

They have real embedded value as well as very strong sponsors that are willing to work it out. These are not CMBS pools. This is a unique way we lend. And if there's any risk at all, we tend to get a lot more hooks into the opportunity where we will have real strength upon the eventual liquidation. Believe me, there's plenty of people loving to buy these assets, but they're not for sale. They're working through a difficult environment, and they're paying interest only. And they're all on payment status, and they're paying their taxes to the city. So it's an encouraging outlook for us. I kind of ringfenced it now to Manhattan, and we're razor-focused on it.

We believe that as the reopening starts to take place, hopefully sooner rather than later, there should be hopefully the area that we'll talk about hopefully by the end of the year that's stabilizing. But there's no guarantee that could happen, right?

Steve Moss (Senior Research Analyst)

Right. Just on those IO mods, just kind of curious what the interest-only period is and if you ask for any additional collateral.

Thomas Cangemi (President and CEO)

Yeah. Typically, what we do is the ones that came through the CARES Act and paid, they just continue. They go back to P&I. The ones that need a little bit of help, they've requested. We offered six months. So we'll take another hard look at them on April and May again. April and May comes around.

I think that if the reopening starts to take place, a lot of these guys are on the cusp of going to the agency too. So we want to protect our business. Like I said before in my opening comments, the agency is a fierce competitor. So some of these loans could go there, even though they are considered on the cusp of what we'll call a special mention type asset because of the lease-up of the ground floor in particular. But I think a lot of these loans are in a very good spot where they actually can make these payments and protect their assets from going to, well, asset purchases. There's a tremendous amount of money out there that would love to buy these assets in the event things go sideways six months from now. So right now, we're working through it.

Steve Moss (Senior Research Analyst)

Okay. That's helpful.

And if I could squeeze one last question in, just on the securities purchases here for the quarter, just kind of curious, what are the yields? What kind of stuff and yields are you purchasing these days?

John Pinto (CFO)

It's dismal.

Thomas Cangemi (President and CEO)

The yields are.

Go ahead, John. Why don't you go expand the point?

Steve Moss (Senior Research Analyst)

Yeah. I mean, if you're looking at agency-type paper, which is what we look at, you're in the mid-1s in the 150 range for good quality structured paper.

John Pinto (CFO)

Yeah. And if you think about it, we have obviously a tremendous amount of liquidity. We have $2 billion cash on the balance sheet, zero. So that's going to be deployed hopefully into our loan book as well as securities. So, in my margin guide, I'm very conservative on the deployment of that excess cash. But we do have excess liquidity.

We put out some money long as a matter of taking advantage of the structure of the curve. We still have a lot of wholesale financing that had to be restructured over time. Going forward, even in this quarter, we have about $325 million out of $236 million, market's 50 basis points. That's something that we've looked to probably lock in long. They haven't said it going overnight. Then I think the next big slug of money comes in 2022, which is about a $140 million. We have time on that. We're not going to restructure that. It's too far out of the money. What's really interesting in 2020, the beginning of 2022, is that we have $2 billion on macro hedge against fixed versus the float on the multifamily side. If rates stay lower for longer, we'll just remove it.

That's another 10-12 basis points on our margin for 2022. So we're hedged there. And as we grind through 2021, that'll also be upside for the margin, depending on interest rates. We may keep it on if rates are rising for some reason and we're in a strong economy and everything is behind us. But my view is that that's probably not going to happen in 12 months. And that hedge could be something that's also beneficial to the margin.

Steve Moss (Senior Research Analyst)

Great. Thank you very much for all that color.

John Pinto (CFO)

Sure.

Operator (participant)

Thank you. Our next question has come from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

Thomas Cangemi (President and CEO)

Good morning, Ken.

Ken Zerbe (Equity Research Analyst)

Great. Good morning. Just in terms of the taxes, given the change in the administration, if we do get a tax increase, um what does that imply for your overall tax rate?

And have you or can you do anything to kind of minimize that hit versus in terms of tax strategies?

Thomas Cangemi (President and CEO)

So that's a pretty simple question. Obviously, if the rates go up, we pay more taxes. That's possible. I think it's more of a 2022 phenomenon. I hope it's not a 2021 phenomenon. But they took it down to 2021, and from 2028, there's talk about 2028 from a much higher level. And that would impact a bank such as ours to a point where, is it going to be dollar for dollar? I would say that we're going to be very proactive on managing our tax structure, which we're very focused on. But no question that higher taxes means less profitability. Right, John? If you want to add anything to that.

John Pinto (CFO)

Sure.

Ken Zerbe (Equity Research Analyst)

Actually, I should have been more clear in my question.

If it does go from 2021 to 2028, that's a 7% increase. What is the percentage increase in your effective tax rate? Thanks.

John Pinto (CFO)

Yeah. It would be just below the 7%, right? So it would probably be in the mid-sixes. It would go up and that's excluding any other tax planning items that we would do. Right.

Ken Zerbe (Equity Research Analyst)

Right. Got it. But just to be clear, is there any other tax planning items that you can do? And how meaningful would those strategies be?

Thomas Cangemi (President and CEO)

Yeah. We haven't played much on the federal side in the past. I mean, you can see that in our rate currently, right? So that's not something we would normally look at but as we've looked at in the past, we'll do it in the future.

Ken Zerbe (Equity Research Analyst)

All right. Thank you.

Thomas Cangemi (President and CEO)

Let's hope we get through 2021 where they don't raise tax, but they do.

It is what it is. And 2022 is probably more probable. If it happens, then we'll do with it. That's what we're hearing right now, right? Is that not in the middle of the pandemic, but it could be in 2022?

Ken Zerbe (Equity Research Analyst)

All right. Thanks. That's right.

Thomas Cangemi (President and CEO)

Sure.

Operator (participant)

Thank you. Our next questions come from the line of Dave Rochester with Compass Point. Please proceed with your questions.

Hey. Good morning. Dave.

David Rochester (Managing Director, Director of Research)

Good morning. Great, thanks. Hey, Tom, you'd mentioned the NIM expansion beyond Q1 as well for the rest of this year. I was just wondering if you think that three to five basis points for Q1 were a good pace per quarter, given what you're looking at now and your expectations on rates.

Thomas Cangemi (President and CEO)

Dave, you know me for a long time. I don't give yearly guidance on the margin, so. Good try.

I know you try. But I will tell you that it's a lot going to depend on the shape of the yield curve. We had some excitement in the Q4 with a bump up in interest rates. I think that'll get the attention of many of the customers. If it spikes significantly, this margin expansion could outperform what we expect. But meanwhile, when we run models, we're running it conservatively. It's pretty much a flat curve environment. And we're showing the Q1 up a little bit here. I think we've probably lost about 200 basis points on the excess liquidity. If we put it out faster, we'll get it back. As you know, we've kept our securities portfolio below 10%, which is, if you look at the median peer group, that's probably the lowest in the peer group.

It had to have a little bit of a bump here as we position ourselves to go longer out in the funding side and anticipate opportunities as we start to redeploy the balance sheet. I don't think we're going to take it significantly from there. Let's say it goes from maybe 10%-11%. The cash position is very high right now. We'd like to put some of that money to work. That's going to impact the margin, hopefully favorably, coming off of a zero return on cash.

David Rochester (Managing Director, Director of Research)

Yep. Okay. Maybe just on the loan side, where are you seeing new money yields now on multifamily and the finance?

Thomas Cangemi (President and CEO)

Yeah. The pipeline yield, I believe, what is that, John? About 350? New money pipeline? New money pipeline.

John Pinto (CFO)

Bear with me here. Right there. 350.

Thomas Cangemi (President and CEO)

Yeah, so again, low threes, competing tight on low threes. Durations is somewhat shorter. But we've been hovering around 3%. If you apply that to the spread, it's a little bit tighter than we would like. But I think it's coming off of the agency's desire to be more prolific on the lending side. That, again, the spread has been healthy between 275-315, depending on the size of the yield that we look at. And I think we're getting that 3% net. And then that's important. But the payoff was high. The last quarterly payoff was a 375. It originated 304. We're still holding three. The interesting modeling question we would have, what happens in 2021 if the yield curve steepens? Does that three go back to 350 if we see a nice spike in the back end? So that could happen. There's no guarantee.

We're modeling more of a conservative scenario, and we're still seeing margin expansion.

David Rochester (Managing Director, Director of Research)

Yeah. Okay. How much do you think you need the long end to move up before the GSE competitiveness does start to decline?

Thomas Cangemi (President and CEO)

I think when you—I really would spend time looking at the 10-year move. With the 10-year, the spreads between 2s and 10s start to move significantly here. I think customers will realize that economically, it may make sense just to go to the portfolio lenders. And we're evaluating opportunities as far as synthetically getting them to stay with the bank on swap opportunities. We do not have a specific swap program internally, something that we are considering as a preventative edge to keep some customers from going to the GSEs to synthetically do that and get some fees upfront. It's something that's on the table.

But no question that spread between (I think Brock had said it) between 2s and 10s is where you spend time evaluating. That has been a nice move in the Q4. If that continues, given the expectation of substantial deficit spending and there's this view that rates are going higher in the back end, that will move customers back to the five and seven-year portfolio lenders space.

David Rochester (Managing Director, Director of Research)

Yeah. Okay. And where were you guys adding borrowings for the quarter? And then what are you seeing for rates now on the term side?

Thomas Cangemi (President and CEO)

I'd say two and a half to three and a half years, anywhere from 48 to 58, that spread. So it's cheap overall funding. And if we can't bring it on the funding side, we will look to rebalance interest rate risk by taking on an opportunity, which is three-year money around 50 basis points, which is pretty cheap.

David Rochester (Managing Director, Director of Research)

Yeah. Okay. And just switching to expenses, that extra $10 million-$12 million in additional FDIC expense this year that you mentioned, that should be dropping out of the run rate in 2022, right?

Thomas Cangemi (President and CEO)

I would hope so. Yeah. It all depends on how bad the pandemic extends itself. And if New York City reopens and the foot traffic starts and people go back to work and you'll see some pent-up demand to release, I think that's the key. And I think that we're being an abundance of caution, moving assets into a classified bucket, as we should be doing. And the biggest consequence today on that is that it costs us money on the FDIC insurance.

David Rochester (Managing Director, Director of Research)

Yeah. Yep. That makes sense. And then on the loan growth outlook, appreciated your thoughts there on the multifamily side. I think you said 3%-5% there. What were your thoughts on the rest of the portfolio?

Thomas Cangemi (President and CEO)

I think, look, we had a substantial reduction last year on CRE, just a matter of the market. That may be stabilizing a little bit. It's something that we look at other areas on the CRE side. But let's just say CRE's flattened down 1-2%. I think we're going to see a nice uptick on specialty finance, given the amount that's outstanding and what's committed. It's close to $5 billion committed, $3.8 billion outstanding, $3.1 billion. $3 billion outstanding. So there's a nice spread there of takedowns. We haven't seen the takedowns in Q4. We hope to see more takedowns as we go into the year. So their CAGRs have been off the charts since we built that business last year with a 17% CAGR. So I expect nice growth, probably hopefully consistent to the previous year.

That was probably one of our worst years, the pandemic. We grew 17%, so we want to take a conservative look at that, 17%, 15%-18% there, and then you think about multifamily. If there is a change in the yield curve, we are going to retain a lot more business, and I think our guys have done an amazing job on retaining the business. We're data mining the portfolio. We're working with the brokers. We're ensuring that we have a good fair shot at these customers before they leave to go to the agency, and we'll be competitive. Do we have to do a little bit more IO? Absolutely. That's the market, but we're going to be selective there. We try to be viewed as a hybrid IO lender. We're not big on long-term IO.

From time to time, we make those decisions depending on the customer relationship and the deposit relationship. We did a very large relationship in Q4 that was IO because of a substantial depository relationship. One of our very strong customers was pricing us against the agency, and we competed. And we lost a little bit on the risk-weighting side because it becomes a different risk-weighting category. However, it's a great loan, great relationship, and tons of deposits with it. So we have to be a fierce competitor in this environment.

David Rochester (Managing Director, Director of Research)

Yeah. Okay. And then assuming that you guys continue to grow deposits, are you thinking that the securities growth should continue as well?

Thomas Cangemi (President and CEO)

I guess on the securities side, and John may want to expand on it. Go ahead, John.

John Pinto (CFO)

Yeah.

We would expect it would grow, but not dramatically from here, given what the cash position is and the securities. We expect maybe a little bit of growth in the Q1 and then hopefully keep it pretty flat from there, depending on deposit growth.

David Rochester (Managing Director, Director of Research)

Great. And maybe just one last one.

John Pinto (CFO)

Dave, on the deposit side, it's not going to be a traditional retail push. It's going to be the business push, which is close to zero cost of deposit. That's the difference. Yep. Yep.

David Rochester (Managing Director, Director of Research)

Yep. No, that sounds good. And then maybe just one last one on fees. You had a good step up there in the Q4. What's your outlook for fee growth in the first half or maybe just for 2021?

John Pinto (CFO)

Yeah. We're assuming right now it's pretty flat to the Q4. We're not assuming a big increase in fees. Yeah.

The Q3 had a lot more of the fee waivers during the pandemic than the fourth. But we're being conservative with what we're forecasting there. We don't expect a big increase. It'll probably be right around that Q4 number.

Thomas Cangemi (President and CEO)

So Dave, that goes back to the point of the blank canvas. We don't have a lot of fee income. So eventually, if we start bringing products, that's where the opportunity arises. We have a very large branch structure where we don't sell a lot of products to the branches. So when you think about M&A and business partnerships, that's where a tremendous opportunity is. That blank canvas that we can paint with new products going through the system.

These are legacy branches going back, in some cases, to the 1800s that we really have a lot of goodwill within the community that could have these lines of businesses that are normal commercial bank lines of businesses that we don't have.

David Rochester (Managing Director, Director of Research)

Yep. Sounds good.

Thomas Cangemi (President and CEO)

All right. Thanks, guys. Congrats again. Thank you.

Operator (participant)

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

Peter Winter (Managing Director and Senior Research Analyst)

Good morning.

Thomas Cangemi (President and CEO)

Good morning. How are you?

Peter Winter (Managing Director and Senior Research Analyst)

Hey. Tom, with this focus on deposit growth, what do you think you're going to generate in terms of deposit growth this year? And where do you think the loan-to-deposit ratio could go to?

Thomas Cangemi (President and CEO)

Yeah. I'm not even going to go there. It's just going to be a passionate push to look at processes, a passionate push to look at the low-lying fruit.

And we're going to update you guys on a quarterly basis because it really is not going to be a public plan. It's going to be an emphasis towards culture, right? And culture here has been uniquely different when it comes to the lending side versus the deposit side. I want to reiterate the concept that we have so much low-lying opportunity for these relationships that needs to be nurtured and mined and obviously shown the technology that we have, and we should win more business with the existing customer base. At the same time, as we bring in new business, we did $12.9 billion originations last year. We should be able to get on every single loan a deposit relationship as well as the potential full-service deposit relationship. If we get 50% of it, we won. So I'm a guy about 100. I like 100.

But if we get 50% there, we win. So we do a lot of volume feed, as you know, and the portfolio is relatively short. But we found when we evaluated the book, there's a lot of customers that stay with us that are within other portfolios because it's difficult to move all your accounts. And if you have a good relationship with a good relationship manager, they tend to. It's not as portable if you can win over that business. So, I think we think about the volume we do, think about the duration of the portfolio. It's truly opportunistic here, and it's more cultural. And the culture has been clear. The liability term comes out of my mouth at least seven, eight times a day. And that's where we are. So, I'm not going to give you numbers that are fantasy.

I'm going to give you numbers that are reality. And you'll see the growth over time. And if we don't do that, we'll fine-tune it until we get there. We're going to get it right.

Peter Winter (Managing Director and Senior Research Analyst)

Okay. That's fair. And then if I could just ask, on the M&A front, the thoughts on maybe a bolt-on fee income acquisition to add some diversification and take market share that way?

Thomas Cangemi (President and CEO)

Yes. Like I said, we're looking at all opportunities. I mean, obviously, we'll do accretive transactions. We don't want to do a transaction that's going to take down the earnings profile of the company. But we like to change the funding mix. We like to change the—we augment the fee income opportunity. We like to start driving products through the branches.

And we also like to look at the big picture that if we do this with a solid partnership that has all these array of products, then we can accelerate that something can happen in five-to-seven years. We can do it overnight. So like I said on my opening comments, all options are on the table. We're very shareholder-focused. We have a very unique franchise. We have a diverse franchise when it comes to geographic. And we can do a lot of things with it. So we're excited about opportunities. We're seeing a lot of great opportunities, both on the deposit side as well as on strategic M&A.

Peter Winter (Managing Director and Senior Research Analyst)

Got it. All right. Congrats, Tom and John, for the promotions.

[crosstalk] Thank you, Peter. Thank you. Thank you.

Thank you. Our next questions come from the line of Steven Duong with RBC Capital Markets. Please proceed with your questions.

Thomas Cangemi (President and CEO)

Good morning, Steve.

Steven Duong (Equity Research Analyst)

Hi. Good morning, guys.

Thomas Cangemi (President and CEO)

Good morning.

Steven Duong (Equity Research Analyst)

Just on the funding side here, recognizing that you're now focused on growing core deposits, in the meantime, as your CDs and borrowings roll off, is there a preference between one or the other?

Thomas Cangemi (President and CEO)

A combination of both, for sure. I mean, we have $10.5 billion rolling off in 12 months at 79 basis points. This quarter, we have $4 billion at 1.07%. Market's between 40 and 50 basis points on the retail platform. Some of the customers are not going to go into a CD instrument. They may just hide in a money market account at 2 basis points or 2 to 10 basis points. So we'd rather have them go to the lowest cost of funds. And assuming that we're not in a rising rate environment on the short end, they'll hide there for a while.

They may be opportunistic if they want to take an 18-month CD or a one-year CD. The cost versus the wholesale market is pretty much on top of each other. Either/or. We'd rather bring in, obviously, customer accounts, for sure. If you saw the transition of the deposit base where CDs went into money market and other hybrid funds that are viewed more as an operating-type account, it's a lower cost, right?

Steven Duong (Equity Research Analyst)

Yeah. Yeah. How much in borrowings is rolling off this quarter?

Thomas Cangemi (President and CEO)

We have $325 million rolling off at a 236 coupon. Then next quarter, I believe we have $300 at 93 basis points. Very small in Q3, about $25 million. The Q4 of the year, it's a decent-sized amount of money, $373 at 2.57%. On average for the year, it's about $1 billion at 2.03.

Steven Duong (Equity Research Analyst)

Got it. Got it. Appreciate that. And then just your strategy on the core deposit growth in the long term, I guess, how are you thinking about doing that with the brokers on the origination side?

Thomas Cangemi (President and CEO)

We've already had conversations. I'm not going to, we're not going to announce a secret sauce to that. But we have great relationships with our brokers. And historically, it was about process. Now we're going to change the process internally. It's a matter of getting ahead of the closings. We close a lot of volume. Loan docs require, we require the operating accounts and the loan docs. So you waive a lot less, and you get them to the table, and you get the relationship guys in front of the customers at the closing table. When they want their $50-$100 million, they have to open up the account and get the relationship going instead of waiving it.

It's about repositioning and dealing with process and people. That's the goal here. That fine-tuning alone will probably move the needle. At the same time, we need to get this technology build-out that we've invested in out to the customers to see what we have. That's going to be helpful.

Steven Duong (Equity Research Analyst)

Was it the case before that you weren't able to do that because you didn't have the capabilities, and now that you do?

Thomas Cangemi (President and CEO)

No. No. Absolutely not. I would say it's twofold, right? We just did the biggest conversion of the bank in August in the middle of the pandemic under the Fiserv DNA core processing system. We've had partnered with Fiserv throughout the entire platform for all our major systems that plug in through Fiserv. We have a - let's call ourselves a very strong partnership with Fiserv.

We co-collaborated on the commercial side as well. So the commercial cash flow management solutions program that we have is a Fiserv product. It's a Fiserv product that's used throughout the entire country. And that was not the same product that was there in July. So this is a fairly new opportunity that we believe is not an excuse that our system is not compatible. So I think we have a very good solution. And now there's a push. And by the way, this has been. This is only since August, right? So we're just starting the year. It's not even a year old, but we have the solution. And now it's a matter of getting the customers on board, onboarding them, training them, and focusing on the push at the top level. This is at the board level all the way down to the staff.

This is where we should be going with the franchise, getting away from the traditional thrift funding.

Steven Duong (Equity Research Analyst)

Got it. I appreciate the color. Thanks and congratulations, Tom.

Thomas Cangemi (President and CEO)

Thank you. Thank you.

Operator (participant)

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

Matthew Breese (Managing Director and Senior Equity Research Analyst)

Good morning.

Thomas Cangemi (President and CEO)

Hey, Matt.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

Yeah. I don't think I saw in the release. Just curious, what were the criticized and classified loan balances this quarter versus last?

Thomas Cangemi (President and CEO)

I think we disclosed that, John. I'll go through the substandard. I think I went through that in detail. We had a total of $449 million substandard and multifamily. We had a total of CRE at $314 million, of which I believe I identify as 80% being the Manhattan market. I think I went through the LTVs, but I'll go through them again.

The LTVs on that book is about 56% for multi and 58% for CRE. And as I discussed, looking at that portfolio, a lot of these, most of these customers still, when we put some of these customers in an IO structure for six months, they're north of a one-for-one capacity to continue making these payments. We will reevaluate them as we get into the April/May period when that six-month roll comes due and see where they're at. And we're working with them. And clearly, like I said, Manhattan is the area of focus because we see more of these loans coming out of the Manhattan market, not so much the other boroughs.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

Got it. Okay. So it's a six-month structure as well. Yeah. Six-month IO.

Thomas Cangemi (President and CEO)

Yep. And also, escrow, all the taxes as well. They're all paying escrow. Yeah. All paying escrow. That's right.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

One thing you had mentioned. I just wanted a little bit more color on explanation. You mentioned the 2022 hedge, the potential for that to roll off. Can you just remind me what that was, why it was put on, the size, and how does it benefit the NIM 12 bps?

Thomas Cangemi (President and CEO)

Yeah. It was a $2 billion total notional hedge that we did that swapped from fixed to floating against our loan portfolio on a last-of-layer hedge. So, it was a three-year swap that we did. So that matures in February of 2022. So, if we do not re-up or get into another transaction like that, we will see those loans, which are right now, in essence, pricing off a three-month LIBOR, go back to their fixed rate on our books. So, you'll see a big pickup on that $2 billion back to the normal fixed rate of those loans.

I would categorize that as an interest rate risk hedge. Right. Okay.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

All right. Thank you, and then the last one for me, just in regards to expenses. I hear you loud and clear. I just wanted to make sure the message was that in terms of new hires or going into new verticals, you feel like what you have in place, the 500 and 35 million in annual expenses, that's a good run rate, and that you feel like the NIE to assets ratio sub 1% is a place that's something you can maintain.

Thomas Cangemi (President and CEO)

I think it's a fair estimate where we are today. I feel comfortable with those numbers. I mean, obviously, we're elevated on FDIC. We strive for a very strong efficiency ratio. I think we met our goals last year on efficiency ratio despite the slight upticks, and we've identified what they were.

We had the FDIC costs. We had some medallion-related expenses as we took in some REO pieces on the medallion side. Going forward, bringing in some customer service people is not going to move the needle. Reallocating resources internally towards the concept of the push towards full relationship lending is, we're not going to change the game tomorrow. This is not going to happen where we're going to change the product mix. The product mix will change as we pick partners, right? The low-hanging fruit will be harvested here. We're going to work very hard in harvesting with the relationship with the brokers, the lenders, as well as our deposit gatherers together as a team. We're going to work as a team to try to harvest that low-hanging fruit that we've always talked about, but now we're going to put into action.

I think the system really helps us do it. That system conversion was extremely key for us. And I'm going to reemphasize a lot of our competitors that are on a, we'll call it, inferior system with the same vendor are going to re-up down the road. So doing it through, well, joining the family makes a lot more sense. Understood.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

Okay. That's all I had. Thank you.

Thomas Cangemi (President and CEO)

Sure. Thanks.

Operator (participant)

Thank you. Our final questions come from the line of Christopher Marinac with Janney Montgomery Scott. Please proceed with your questions.

Christopher Marinac (Director of Research)

Hey. Thanks for taking my question, Tom and John. I just wanted to ask about the deposit specialists that, Tom, you alluded to. Would these be possible hires in other markets besides New York? And is that a strategy to kind of incent them well and just individually kind of stack up a team?

Thomas Cangemi (President and CEO)

Absolutely.

Ohio, Florida, Jersey, New York, Long Island, we're going to be very proactive to try to create value here by looking at these opportunities. And no question that these people are portable. And we've seen it happen in our backyard. And most of our competitors are very successful at it. We're going to give it a shot as well. But it's not going to be a major restructuring expense build. It's going to be done in a methodical way. And I think we have to just utilize the platform and the system. And ultimately, the true change will come when we paint the canvas with new products. And that will be full-service commercial banking-type products over time, typically through a partnership. And like I indicated, I think we spent the effort on the conversion. We spent the effort on getting our cash flow management system solutions correct.

Now it's a matter of looking at what we have with the current existing relationships, working with the brokers, working with the customer base, and perhaps changing some of the type of products within typical opportunities within a customer's book of business. We've always done multifamily and CRE. No reason why we can't do lines of credit for these wealthy customers that want that. And that's why they're banking with another bank, and we don't have all their deposits. So, we have to be mindful of that. It's opportunistic. That's not a difficult change for our system to run those types of products. Like I said, we're not going to do a residential loan book from scratch, right? We're not going to open up a credit card business from scratch.

But if we have a unique opportunity within the M&A marketplace where people can bring partnerships to the table, we would evaluate that. And then hopefully have a full-service branch platform. Right now, it's a very thrift-like, which over time, and again, I'm going to make a statement, and people may not hear this. But when you think about the traditional thrift model, I've never seen a thrift convert themselves organically, doing it successfully. It has to be done through traditional M&A transactions that make sense on a partnership perspective.

And I will never call it acquisitions because acquisitions are difficult. Partnerships work. Acquisitions could be challenging. When you partner with the right partner that's willing to put their expertise on the table and their wealth on the table, everyone has common goals.

Christopher Marinac (Director of Research)

Great. And these specialists are out there. It's not just a focus issue. It's now happening. So thanks.

That's right. Great. Thanks for all the time this morning, guys. Appreciate it.

Thomas Cangemi (President and CEO)

I think that's the last question. So 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'll discuss our performance for the three months ended March 31, 2021. Thank you all.

Operator (participant)

That does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.