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spk13: Good morning, everyone. This is Sal DiMartino, and thank you for joining the management team of New York Community for today's conference call. We apologize for the long wait time for the call, but we were having technical issues with our vendor. Today's discussion of the company's 2022 results will be led by President and CEO Thomas Angemi, along with the company's Chief Financial Officer John Pinto and Lee Smith, President of Mortgage. 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 may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and investor presentation for more information about risks and uncertainties which may affect us. Now, I would like to turn the call over to Mr. Kanchemi.
spk10: Thank you, Sal. Good morning, everyone, and thank you for joining us today. This morning, we're going to focus on four topics, the Flagstar acquisition, the decision to restructure the mortgage business, and our operating performance, along with our outlook for the new Flagstar. 2022 was a watershed year for the New York community, culminating in our acquisition of Flagstar. our largest acquisition to date, which closed on December 1st. As you have heard me say many times on these calls and in one-on-one meetings, this is a transformational acquisition for us, and we're already seeing some of the benefits you've outlined when the transaction was first announced. The transaction to a dynamic commercial banking model is underway with a more diversified balance sheet, which was evident at year-end as commercial loans represented 33% of total loans compared to 24% before the merger announcement. Legacy Flagstaff brings a number of new lending-related businesses to the new company, most of which are C&I businesses. All of these are higher margin businesses, and they are typically tied to floating interest rates. These new businesses include a nationally recognized mortgage warehouse business, where we currently rank number two in the country based on $11.5 billion of commitments outstanding. Building Finance is another great business, where we do business with 70% of the top 100 builders nationwide. These spreads in this marketplace is approaching 400 basis points in that particular business. In addition, Flagstaff has a significant wholesale banking operation focusing on several verticals. These loans are conservatively underwritten and also generate significant fee income that legacy NYCB did not have. Going forward, we plan to allocate more capital to these higher margin businesses. The same is also true on the funding side. Legacy Flagstaff contributes a significantly lower cost deposit base, including traditional retail deposits and a large amount of commercial balances related to mortgage businesses, including escrow balances. Additionally, both companies have a very strong market share position within each of the respective core markets, which will aid in acquiring more deposits as we grow. The benefits of Flagstaff's deposit base are already evident in the fourth quarter results, as non-interest-bearing deposits increased at 21% of total deposits, compared to 9% prior to the merger announcement. Another important benefit is to our interest rate sensitivity. Our sensitivity to interest rate changes has improved materially due to the acquisition. As you will recall, Legacy New York Community has historically been liability sensitive, while Legacy Flaxville was significantly asset sensitive. On a combined basis, the new company will have a more balanced interest rate sensitivity position, and we will have more flexibility in managing our sensitivity to market rate changes. Given the nature of our new asset classes paired with lower cost funding mix, the new company will be able to enjoy a stronger margin going forward. As for our mortgage business, we disclosed early today actions aimed to optimize our mortgage platform. The substantial and aggressive shift in Fed monetary policy over the past year resulted in significantly higher mortgage rates. This rapid increase has stifled refinancing activity and also dampened purchase activity. While Legacy Flagstaff was proactive throughout 2022 in right-sizing its mortgage business, the mortgage market is expected to remain challenged in 2023, with annual origination volume expected to decline by 25% year-over-year to $128 trillion after dropping 46% last year compared to 2021. Therefore, shortly after the transaction closed, we made the strategic decision to explicitly restructure the business, which occurred late last week. To better reflect demand and align to where our strengths lied, Our distributed retail channel will shift to a branch footprint-only model, resulting in a 69% reduction in the number of retail home lending offices. Mortgage origination headcount is expected to be declined to less than 800 FTEs compared to a high of 2,100 FTEs in 2021. Headcount reduction represents approximately 10% of total employees at the Devine Company's previous structuring. These decisions are among the most difficult our senior leadership team has to make. However, they are necessary to ensure the long-term success and viability of our mortgage business. These actions are expected to improve profitability in the mortgage business during the current down cycle, while still allowing us to participate in the upside in the event the interest rate environment becomes more favorable. Despite these actions, we remain one of the top players in the mortgage business. We are a leading bank originator for the mortgages, the sixth largest subservicer, and the second largest warehouse lender. In addition, we continue to lend in all six channels, and remain committed to the correspondent and broker business. Turning now to our 2022 operating performance. Despite the significant shift in Fed policy last year, 2022 was still another record year for the company. On a non-GAAP basis, we reported fully diluted EPS of $1.23 for full year 2022, relatively unchanged compared to the $1.24 we reported for 2021. Net income available to common stockholders as adjusted totaled $603 million, for full year 2022 compared to $585 million in 2021. Our net income in 2021 was a record at that time, and in 2022 we broke that record. Although financials were impacted by one month of combined results, Legacy New York Community performed extremely well with strong organic growth in loans and deposits. Multifamily loans increased $3.5 billion or 10% to $38.1 billion compared to 2021. with virtually all of the growth coming organically. Specialty finance loans rose $912 million, or 26%, during the year to $4.4 million. At the same time, organic deposit growth was $7.6 billion, up 22%. This includes about $3 billion in growth during the fourth quarter related to our government banking as a service business. Our fourth quarter managers margin improved six basis points to 228 compared to the prior quarter. Excluding the impact from prepayment income, the fourth quarter margin was 224, up nine basis points compared to the previous quarter, which is better than our original guidance. Our credit quality metrics remain solid and reflect the strong credit culture of both legacy organizations. MPAs to total assets equal 17 basis points, while MPLs to total loans were 20 basis points, continuing to rank us among the best in the industries. These metrics are proof positive that our conservative underwriting standards have served us well over various business cycles. This along with our high-quality balance sheet should serve us well in the event of a downturn in the economy. As for real estate trends in our primary New York City market, the residential rental market remains healthy despite some moderation in the effective median rent due to weaker performance in the luxury market, while our bread-and-butter non-luxury rent regulation niche remains very strong. Manhattan monthly median rent in November rose nearly 20% year-over-year to $4,033, up month-over-month following three straight months of decline, and was up 15.2% above the pre-pandemic levels. On the office front, Manhattan direct asking rent in the fourth quarter decreased 0.6% from the third quarter to $74.29 per square foot, while the office availability rate was up 18.7% or 30 basis points. Manhattan retail average asking rents recorded a 2.2% uptick quarter over quarter to $607 per square foot, the first increase since the fourth quarter of 2016 due to a resurgence in travel and tourism and consumer demand. Also, as of year end, our capital ratios remain very strong. Accordingly, last week our board of directors declared a quarterly cash dividend of $0.17 per share in the company's common stock. The dividend is payable on February 16th. The common share was erected on February 6th. Based on last night's closing price, this reflected dividend yield of approximately 7%. Looking forward to 2023, this is what you can expect from the new company throughout the year and into 2024. First, we're going to have one brand across the combined organizations. The divisional bank concept has worked well for legacy NYCB. We're mostly in the New York City metro region. Now that we are one of the largest regional banks in the country with 395 branches in nine states, along with a national presence in several businesses, We are confident that a unified brand will position us to thrive. We will have one bank, one brand, one culture. A new brand will be Flagstar. While the Flagstar name will remain, the associated brand, look, feel, logo, purpose, and what the name stands for will change. We plan to officially roll out the new logo and brand publicly in late 2023. But it will not be fully operational and used externally until systems conversion, which is scheduled to occur during the first quarter of 2024. As for guidance, given the current outlook, we expect average loan growth of 5%, first quarter NIM to expand from fourth quarter levels to a range of 255 to 265, including prepayments, which are expected to have less of an impact on the NIM going forward. First quarter gain-on-sale mortgage loans of 18 to 22 million, full-year non-expense range of 1.3 billion to 1.4 billion, excluding merger-related expenses and intangible asset amortization, and a full-year tax rate of approximately 25.5%. Finally, I would like to send a big shout out to all of our employees at both banks. None of what we've accomplished so far would have been possible without their patience, support, and hard work. Their commitment to our customers and borrowers over the past several years has truly been remarkable. A sincere thanks to them all. With that, we would be happy to answer any questions you may have. We will do our very best to get to all of you within the time remaining, but if you don't, please feel free to call us later today. Operator, please open the line for questions.
spk02: Thank you. 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.
spk06: One moment, please, while we poll for your questions. Our first question has come from the line of Ibrahim Poonawalla, Bank of America.
spk02: Please proceed with your question.
spk01: Good morning, Ibrahim. Good morning. Good morning. I guess maybe the first question, if I heard you correctly, Tom, I think you mentioned systems conversion, but until first quarter of 24 sounds a bit longer than usual. Just wondering if there are any reasons why it's going to take that long to do the systems conversion. And secondly, Just remind us in terms of the cost savings from the franchise and where you think the expense base resets once you have all the expense savings tied to the deal. Maybe as we think about post-conversion, what it looks like.
spk10: Let's start with the latter question, President. By the way, we apologize for the long delay this morning. That was unfortunate, but we do apologize for that. Let's just talk about the overall expense run rate going forward. We gave out a guidance level of $1.3 billion to $1.4 billion for 2023. Bear in mind, you know, we continue to put the companies together through synergies. When we first announced the transaction, we estimated about $125 million of merger-related cost benefits exclusive of the mortgage business specifically. So we kind of carved that out when we looked at the combined operation. So we're assuming that obviously we're restructuring mortgage going into 2023. That is taking place as we speak. So in addition to that, we also have the ongoing continuation of synergies throughout 2023 and also a substantial benefit, most likely in the first quarter of 2024, going back to the actual system conversion, which we have planned. This is a full blown conversion of all systems. So this is going to be a substantial undertaking for the bank. We feel very confident that's the right appropriate timeframe, but it's going to be our largest conversion. And a lot of I'll call it upgrade systems that we're getting on a combined basis will be part of that conversion. So we're taking this process obviously very seriously. We want to make sure that we have the appropriate time to integrate. So clearly first quarter of 2024 is where we're targeting. I would not expect that to become any earlier than that. So first quarter of 2024 is the date. But a lot of work has been done as far as choices on systems, a substantial amount of decision-making is done into what's best for the customer. And we're changing a lot on the NYCB side to upgrade ourselves to be more in the regional bank space into other technology systems that we don't currently have. So it goes all into that upgrade. So we're super excited about, you know, the opportunity, but it's going to take a little bit of time. And at the same time, I mentioned in my prepared remarks, we're also going to be rebranding into the first quarter as well. So going back to the cost structure, I feel highly confident that that range is very reasonable. But, you know, we feel that historically the company has been an integrative institution. We have a great roadmap here. We spent a lot of time getting to know each other. At the same time, we're building an institution that's going to be very diverse and in our run rate has some build out of additional we'll call cost standards that are going to drive revenue opportunities on a combined basis. And I think that range is a reasonable range, given that we are restructuring mortgage on a combined basis. So I think the range that we gave you, 1.3, 1.4, hopefully will come in towards the front end of the range. But we feel pretty confident about that.
spk01: I guess, Tom, given all the investments you're making, and I think it all makes sense, is it fair to assume that's a steady state? You might get some savings for the systems conversion next year, but then you're also investing in the franchise.
spk10: That's a fair statement, Abraham. We didn't give out 2024 guidance, but you assume that a lot of the system conversion will result in significant overlap on technology as well as the benefits to cost. Maybe, Jonathan, if you want to add some more color to that.
spk15: Yeah, I think that's right. You know, you'll see some of those, that 125 in savings, come through over the next couple of months as part of the process we're going through. And then there'll be more, as Tom just mentioned, that'll come once the system's conversion is done in Q1 of 2024. So I think, Abraham, you're right. That makes a lot of sense as to where we can kind of see a steady state going forward, at least in 2023 and 2024.
spk10: So, Abraham, just to go back to the concept of the conversion, this is really a transformational transaction for the bank. We've said that all along. We're moving towards a commercial banking model. And with that commercial banking model, there are a lot of technology tools that we are going to implement as part of the combined new cup. That's what's pushing out the diversion, maybe a quarter or two, and that's why we feel very confident that the date makes sense for us. This is not the historical NYCB thrift model. We are going to a commercial banking model with unique technology tools that are consistent with regional banks of our size.
spk01: Understood. That's helpful. And just on a separate question, you gave the first quarter name guide. How do we think about the net interest margin under two scenarios in a world where rates just stay higher for longer? How do you think the NIM plays out? And then on the other hand, if rates get cut, do you still expect the balance sheet to be liability sensitive and benefit from the NIM benefiting from rate cuts? Thanks.
spk10: I'll start the conversation. I'm going to defer to John. But big picture, we're assuming that we're going to have probably two more hikes coming in the short term and probably a pause. And probably looking at the forward curve, an adjustment towards November is for the first cut. That's really much playing through the forward curve. But the reality is that where we stand today on positioning, we're probably maybe 4% or 5%-ish liability-sensitive going into this most likely pause situation in Q1. We have the capacity to move plus or minus 5% very easily. So right now, just by putting the balance sheet together without any restructuring, without any sales of assets, we're sitting here just probably slightly liability-sensitive. and we have the ability to pivot very quickly. So maybe, John, if you want to add some more color towards the sensitivity on the market rate.
spk15: Yeah, and just to highlight what Tom said, you know, now that we're not as significantly liability sensitive as NYCB has been historically, it just gives us the opportunity, you know, to be able to manage towards a neutral asset base depending on market conditions. So, you know, slightly liability sensitive now. We are forecasting the two rate hikes in February and March which is really what's impacting the margin in 2023. The cut at the end of the year really doesn't have much of an impact in the 2023 guide.
spk01: And Tommy mentioned restructuring of the balance sheet. Should we be expecting any meaningful restructuring once there's clarity on the path of Fed interest rates?
spk10: I think the reality is that we put the companies together at year end. We have an opportunity to look at some of the assets that, in particular mortgage related, that we can structure into a opportunity for liquidity. And liquidity is expensive right now. So if we go into cash or short-term securities, we're not going at zero anymore. It's around, you know, approaching close to five, assuming two more rate increases. So we have flexibility here. We believe that eventually when the securitization markets open, we have lots of liquidity we can pour through given the assets that were acquired through the flat-to-transaction, some of those residue portfolios and other asset classes. But the reality goes back to the opportunity to really deploy capital into higher margin businesses. We're being very cautious in respect to pricing. We have a very interesting opportunity in front of us regarding yields. If you think about our multifamily business, they're averaging in the threes and the market's closer to six right now. We're not seeing a lot of refinance activity. We're not seeing a lot of purchase activity, but what we are seeing is that we still have about $8 billion over the next few years repricing, mandatory repricing. They have to make a decision, and that market is a much higher rate environment. Assuming the Fed holds it for longer, I think our customers will have to just go into a different option, which will be a higher interest rate, to do nothing. So we'll manage to do that very carefully. We're seeing about half of those loans go right into our new product, which is a SOFR product, which is a floating rate product, which is great for interest rate risk. We're endorsing that as a company. But we feel very confident that we can move the portfolio to a higher yielding asset class. At the same time, be very focused on the best yielding opportunities in the marketplace because we have diversification. This bank now has a very well-diverse vertical opportunity, and we're going to make sure that we maximize our capital spend to ensure better margins going forward. Starting the year off with a much stronger margin with the opportunity to redeploy capital into higher-margin businesses is an attractive position to be in.
spk01: Got it. Thanks for taking my questions.
spk02: Thank you. Our next questions come from the line of Mark Fitzgibbon with Piper Sandler. Please proceed with your questions.
spk08: Good morning, Mark.
spk04: Hey, guys. Good morning, and congrats. Tommy, I wonder if you could help us think about total fee income in, say, the first quarter. I know it's volatile given mortgage bumpiness, but help us think about the combined company's fee income capabilities.
spk10: So, look, we have a lot of moving parts here that's new to the company, particularly the capital markets activity. I think that that's going to be, again, it's not modeled in, it's not anticipated as part of the synergies of the merger, benefits of the merger, but we think that now that we have a capital markets division that's going to look at options for our customer base to put on derivative synthetic positions to hedge their loan products, I think that's going to be a great benefit to the bank. In addition to that, we could also be creative for our multifamily customers as well to offer those similar products, and we're not going to put on long-duration paper without any synthetic position, which drives into fee income. At the same time, I'm going to defer to Lee Smith because he's obviously running the mortgage business, and that's always going to be a very interesting opportunity if the mortgage business does start to pick up. But the reality is that we're starting at probably the low point. So we're hoping it doesn't get much worse than this, but we're starting at the low. So maybe Lee Smith could add some color on fee income between servicing and mortgage production. Lee?
spk00: Yeah, thanks, Tom. And we provided this in the guidance. So we're guiding for Q1 gain on loan sale to be between $18 and $22 million. And then the net return on the MSR asset is, we're guiding eight to 10%. I think we'll be at the top end of that range. So if you combine those two numbers, we're sort of in the 45, 50 million range from a fee income point of view on the mortgage origination side. And then we've obviously got loan admin income on the servicing side, given our significant subservicing business. Now from a gap accounting point of view, there is an offset. as it relates to the interest we pay on escrows, which should really be up in the net interest income line. And so we're going to get a benefit from that, even though you don't quite see it from a gap point of view. When we break out the servicing P&L, you do see that fee income, given the significant subservicing business we have.
spk10: Yeah, so with that being said, just to add on to Lee's commentary, assuming there is a Fed pause and it moves the other way, say towards the end of this year, that will also generate higher fee income because now the cost of that liability becomes much lower as we manage that servicing portfolio.
spk04: Okay, great. And then, Tommy, could you share with us sort of the timing and cost associated with rebranding?
spk10: So we're not going to throw a cost number out there. It's ongoing. We feel very comfortable that we've done a ton of work over the past two years now on really setting the new code, which is going to be the new flag star. A lot of spend has been already taken place. As far as the branding efforts for the future, more towards 24 than 23, I'd say where the dollar outlay will come in. But where we stand right now, money has been spent on setting up the brand itself, our vision, our mission, obviously our position in the marketplace, and obviously there'll be new signage for all of the 395 locations. It's all going to be, as we said, one cohesive brand, one culture, one name, and that'll start towards the back end of 2023 and with maybe some marketing dollars going into 2024 run rate.
spk04: And last question I had for you was on the loan-to-deposit ratio. Is there a level at which you'd sort of cap that, wouldn't exceed?
spk10: Thank you. So, Mark, I would say big picture is that our passion, as you can see over the past few years, we've done a significant shift in how we're funding the balance sheet. There's been a lot more deposit growth. We're looking at alternative solutions to fund our business. That's going to be part of our DNA going forward. We are focusing on funding this balance sheet very differently than it was historically. We want to get away from our dependency on nontraditional funding. We believe that various mortgage as a service businesses, the government as a service business are focused at really trying to take the embedded nature of mortgage and go after the clientele as a $90 billion organization can put us in a very unique position to gather more deposits. We were very successful a few years back when we started the mandatory initiative of if we're going to lend you money, we need to have a deposit relationship. That's going to be the culture going forward. So our passion here is to be less funded wholesale, be funded more traditional in nature, And we're looking at all avenues to bring in a mix of funding that lights us better so we can have a much better cost of fund and better stability on our funding mix. If you think about the magnitude of our wholesale book of liabilities, if you replace that with what we'll call true core deposits, it's a game changer for multiple. So the goal here is to be less dependent on mortgage, less dependent on wholesale, and focus on multiple expansion over time. And that's our passion. That's how a business model every day is within our DNA. It's not going to happen overnight. We said that when I took over as CEO. This is culturally where we're going, and we're making that long-term vision of trying to change the dynamic of the traditional thrift model towards a commercial banking model.
spk06: Thank you. Sure, Mark. Thank you. Our next question has come from the line of Dave Rochester with Compass Point.
spk02: Please proceed with your questions.
spk14: Hey, good morning, guys, and congrats on the deal. It's been a long time, David, but we're very pleased to be here. Yeah, yeah, absolutely. Glad to see it. Just on the puttable advances you guys have, is it fair to say that the margin result this quarter and the guide for next quarter includes the repricing of all the, like, a billion or so of those advances that you have at this point, so you're not really expecting a cliff repricing of that in 2Q or beyond?
spk15: Yeah, if you look at, I mean, we do have a lot of borrowings coming due in, you know, in 2023, so, you know, when you look at that amount, we have... probably just under $7 billion coming due in 2020 in the first quarter of 23. And that's in the guidance. The cost of that is in the $330 range, $340 range. So there'll be a bit of a lift there, but nothing significant. There are puttables on the books, as you mentioned, but they're spread out on what their lockout dates are. So We don't expect to have the cliff issue that we had in the third and the fourth quarter of 2022.
spk10: You know, Dave, I would just say, just for John's point, we want to have some flexibility to go into 2023, depending on our balance sheet maneuverability, you know, depending where rates start to normalize here. And we have an opportunity to really look at the assets that we've acquired and see what assets we're going to hold. There has been no restructuring as of year end. We priced, you know, we looked at the marketplace. We believe when the marketplace becomes more opportunistic for us to think about maybe reshifting our proceeds into maybe a debt reduction or a debt restructure that's always on the table, we'll look at what makes sense in the marketplace. But clearly, having the optionality is going to be important, especially with most likely a pause coming. And perhaps if the back end of the curve continues to be steep like this, we may have some opportunity to take on some cheaper funding at the same time, keep some money relatively short to pay down some debt, because obviously the short-term money is very expensive right now. So we have that optionality on the table.
spk14: Yep. Well, to your point on reducing the debt, just on the deposit side, you guys have obviously been working on a number of deposit initiatives that you talked about earlier and in prior calls. I was just wondering if you can size the new opportunities that you now have posted deal close? I know you talked about the warehouse customer deposit that you could go after previously. Once you close the deal, if you could just kind of size that, how big that opportunity is at this point, and then hit on any other areas that you could point to.
spk10: I always said when we announced the transaction, I envisioned the embedded nature of just mortgage alone as a $10 billion opportunity. I felt highly confident that with Lee Smith's business regarding the escrow business, loans that we service for others as well as the warehouse business. It's a tremendous opportunity in respect to the type of credit facility that we offer some of our clients given our size now. Our balance sheet at $90 billion managing this business has been number two in warehouse in the country. It gives us a good shot at really bringing in real funding opportunities for the bank. That being said, we still have a very interesting opportunity to take the technology that NYCB currently has that's going to improve when we combine it with Flagstaff to make further improvements to start banking the mortgage business. I think the mortgage business, given the magnitude of our positioning, could have a lot more deposits attached to it. Maybe, Lee, if you want to add some color to the opportunity here on the mortgage side. But this is really what we saw from day one, that we could easily build that up. In addition to the other lines of areas that we're building up, which includes government as a service, doing some technology deposit opportunities, as well as going after the legacy NYCB customers to ensure that we make loans with deposits. So maybe, Lee, if you want to add some color on the deposit gathering opportunity on the mortgage side.
spk00: Yeah, I think to Tom's point, and he's mentioned mortgage as a service for 18 months now. I mean, we have today about $4.2 billion of escrow deposits from our servicing and subservicing book. And NYCB has at least a couple of billion of escrow deposits. And so we can bring more of those deposits in from, the people that we're subservicing for, not just the deposits attached to the loans that we're subservicing or subservicing, but other escrow deposits that they have with other institutions. And then to Tom's point, given the technology the New York Community Bank has that we haven't had at Flagstar, there's an opportunity to go and raise core deposits from our TPO base. And remember, we're dealing with about 3,000 TPOs, correspondence brokers, by having this sort of technology that allows them to do their business banking with New York Community Bank. And I think that's a big opportunity, and we can also take that technology to our warehouse customers as well, which we haven't done previously. So I think we can go and bring more escrow deposits in, as well as core deposits as a result of the enhanced technology.
spk10: And like I indicated, we are a major credit provider for some of these clients. And when you get to that point where we are their primary credit facility, we should have a shot out of all of the deposit opportunities that they typically utilize in the marketplace. Not a guarantee, but clearly the more money you have on the table, the more opportunity you have to really drive the relationship opportunity. In addition to that, thinking about the CNI opportunity, you know, we have a long history here of not being in the market with boots on the ground on a stand-alone basis legacy NYCB. Flagstaff has made that transition. The goal here on a combined basis is to have boots on the ground, focus on CNI, mid-market type companies, and given that we've been in this business since 1840, say the mid-1800s, we have a shot of really catapulting a deposit growth initiative when it comes to boots on the ground on CNI side. So all our CNI activity that's being done at Flagstar is being integrated into NYCB. We have, like I indicated in our opening commentary, a lot of verticals here that's going to be deposit-driven. As we start focusing on the lending facilities, we're going to focus on deposit growth. And deposit growth is going to be core value to our DNA to improve the balance sheet metrics of this company.
spk14: Sounds good. Maybe one last quick one. Just back on your comment that you're upgrading systems. What are some of the bigger systems that you're going to be upgrading?
spk10: We're going into a complex platform with Pfizer. We have a DNA platform. They have architect. We'll have a hybrid version of something very unique, best opportunity as a core. But what's interesting to that, we also have a relationship with – they have a relationship with Salesforce. on a business development opportunity that could be very powerful for the company. I think that's very unique that we haven't had here at NYC that we can utilize throughout the entire organization. For example, even the front end system on loan process, you know, their front end is very advanced, more in line with the regional bank model. They use Encino. We don't have Encino. So there's opportunities here that are significantly ramping up ourselves to a regional player when it comes to technology utilization. At the same time, we've also given Flagstaff on the commercial services side an opportunity to really upstart the treasury function, the treasury capability of our current relationship that we have with Fiserv on commercial services, which has been very successful for us. We've been really growing our core deposit base for our customers with the commercial services technology platform, where five years ago that was not an offering. And that has changed our ability to solidify the relationship lending on the deposit side. So that's going to be, I think, a big win for us. the folks over at Flagstar to utilize that technology. So collectively, there's a lot of moving parts here, but we are, like I said, moving away from a traditional thrift model to more of a commercial regional model when it comes to tech, the tech stack. And there's probably 10 other items that I can't disclose. I did throw a couple of names out there, but there's a lot of moving parts here today that's going to really enhance the experience of the customer regarding the new Flagstar.
spk14: Sounds good. Thanks, guys. Appreciate it.
spk02: Sure. Thank you. Our next questions come from the line of Brody Preston with UBS. Please proceed with your questions.
spk07: Good morning, everyone. Hey, Tom, I just wanted to follow up on the expense commentary. I'm sorry if I missed it, but could you tell us what the cost savings are from the mortgage restructure and the timing of when those kind of work in to 2023? And then separately, kind of what's a good run rate for operating expenses for the first quarter of the year?
spk10: So obviously the first quarter is going to be the highest quarter because it's always the highest quarter of the year with payroll taxes and the like. But we embarked upon the mortgage repositioning and restructuring of that line, that channel, in late January. So you'll see that benefit going through towards the back end of Q1. The number is significant. As I indicated on our opening commentary, we're taking it down from around 800 FTEs, where before at the high in 21, that was 2,100s. So it's a significant downsizing when it comes to a line of business. That being said, there is a benefit there on cost reduction. At the same time, we took into account the revenue offset of that as well, right? So because you're taking out an on-use balance sheet opportunity, so you have to look at the revenue side. And we also went into a call of shared services tied to embedded mortgages. So all in, that number is well over $100 million standalone. But at the same time, we also have our own cost structure set that we have to focus on, on a combined basis, on just the synergies of the companies combining. And that number, as indicated back when we announced the deal, is about 125. Lee Smith has done a phenomenal job over the past year and a half managing a very tough business. He's always managed a business well, but 2022 was a challenging year. So they've been cutting and cutting and cutting. At the end of the day, we looked at the business at the fourth quarter and we wanted to make sure that this business is not losing any money. So we think that at this stage of the game where we focus on mortgage, we're at a position where we have optionality to make a lot of money in the mortgage market changes, but we're not going to be losing money in the current environment. That's important as we set the stage for the run rate. And think about the concept I was explaining on the call is that we want to be in a position where our multiple is not tied solely to mortgage and our multiple is tied to a balanced revenue stream. Having this unique structure on mortgage traditionally consistent with a lot of the regional banks of our size, and having an embedded nature in mortgage, we have a great opportunity to look at the multiple as more of a commercial bank, like multiple as we transition to a true commercial bank from a thrift model on the funding side. So clearly we want to focus on multiple expansion. We think this is one of the pieces to the puzzle to get there, and we acted promptly right after the closing, given the conditions in the marketplace. So when it comes to cost structure, You know, I gave guidance at $1.3 to $1.4 billion. We hope to be on the low end of that guide, but clearly we think it's a number that's achievable for us and that the cost structure starts to see discernible adjustments starting in February. I apologize for the long answer, but there's a lot of moving parts here because you have to look at both mortgage revenue and mortgage expense. Maybe, Lee, if you want to add some commentary on the mortgage... You've been through this journey, and this is your hard work and effort, which we want to commend for the effort as well.
spk00: Yeah, thanks, Tom. I mean, it's a significant restructuring. There is going to be noise in the first quarter because we're still running off the pipeline as it relates to the branches that we're closing down. We're paying severance. and then there's going to be some payments as we exit certain leases. We will isolate that as a restructuring charge, but there is going to be noise in the first quarter as a result of that from a cost point of view. When I think it'll be very clean will be April 1, but having said that, and as Tom alluded to, we're going to start seeing benefits from what we've done as soon as February, given we executed on this restructuring last Thursday. Got it.
spk07: Okay. And, Tom, maybe just one follow-up on the expenses. Just given the conversion isn't happening until the first quarter, I guess what percent of the 125 should we think about being more 2024-oriented versus 2023?
spk10: Brody, I'd say half. But, again, we've done a lot of transactions in our lifetime. We have hit the ground running hard. We know what we have to do as far as integration goes. You know, this is typical when we look at transactions, and there's an opportunity here. You know, on a standalone basis, like I indicated, we looked at the business ex-mortgage when we announced the deal. We looked at, you know, a run rate was probably like $1.6 billion to bring almost $1.7 billion total cost structure, and we tacked on about $125x mortgage. But mortgage has changed. As I indicated, we've taken out a lot of costs in 22. We think this is it. This is where we feel very confident that we're leaner. I think this is probably the lowest headcount that Flagstaff has had in probably close to probably maybe eight, nine years now. I think we're in a very good position to really capitalize. A lot of investment in technology has been made by Flagstaff. On the mortgage side, we can benefit here. The servicing platform is substantial. This is a great opportunity to think about cost selling some product on the servicing side, both on a HELOC loan position as well as deposit gathering efforts. We're in a good spot. It's a difficult decision when you have to make these types of significant restructuring efforts. But at this stage of the game, at that type of FT, with this magnitude of the business in our presence, we have an opportunity here to really drive revenue at the appropriate time if there's a resurgence in opportunity in the mortgage business.
spk07: Got it. And then maybe just switching over to the next one.
spk10: One other point. The goal here was not to bleed. We don't want to hemorrhage red as we come together. And Lee was challenged last year. Every quarter was a challenge when it comes to the changing interest rate environment. And we're going through quarterly repositioning on FTEs to a point where we looked at the business versus balance sheet versus not balance sheet utilization. And we really want to go back to the traditional mortgage banking model where you use balance sheet very selectively and we are getting our gain and sale opportunity and we build a servicing portfolio as a revenue stream. So we have a barbell strategy over time depending on market interest rates.
spk07: Got it. And then maybe if I could just switch to the deposit base real quick. You've mentioned the forward curve a couple times on the call today, Tom. So I wanted to ask near term kind of where do you see your cost of interest bearing deposits or your deposit beta going as the Fed kind of continues to hike early in the year and then pauses? And then secondarily, just given that the back end of the forward curve is starting to head down, how are you thinking about structuring your deposits from a maturity perspective?
spk10: I'm going to defer that question to John Pinto, our CFO. John?
spk15: Yeah, so we look at deposit betas, you know, the balance sheet's really broken out into two different types, right? If you're looking at our deposits tied to either mortgages as a service, banking as a service, some of the brokered business, you know, that's high beta. It's remained high beta since the beginning of the rate hike cycle. And then if you look at the more retail, the more stable piece from both Legacy NYCB and Legacy Flagstar, they have been, you know, much, much lower betas, of course, than that. They've started to tick up, I think, like just about everyone I've seen, other banks have seen over the last couple of quarters. So we'll monitor that as well. But when you look at where the curve is, it gets, I think, what Tom was talking about a little bit earlier. You know, we do have a lot of flexibility in the borrowing base as well. So we'll be able to look at both where our deposits are funded and how they're funded as well as borrowings to ensure we're ready for either of those positionings, right? Either liability sensitive, slightly liability sensitive, or if we needed to move, we could move that to asset sensitivity without too much difficulty with some shrinkage on the asset side. So I think we have the opportunity to do both there. And I think our deposit base, like I mentioned, is kind of split between what's in normal retail and what we have in the banking as a service business.
spk10: So Brody, just Tom, just to follow up on that, I made a very clear commentary probably about a year and a half ago that, you know, if you go from zero to a much higher rate environment, now we'll just reiterate the point zero to let's say 5%. I don't think you're hiding from people getting paid on excess liquidity. So that's the marketplace. So this is, It's a phenomenon in the financial services business right now that money is very expensive right now and people want to get paid. The reality here is that this company we have now is not going to be 20%, 30% liability sensitive. We're going to be closer to neutral. I think that's the game changer for us as we look at this combined business of Flax or NYCB that we're going to position ourselves to not be vulnerable to rates going up. We want to take advantage of rates up and down as a business model. And that's the uniqueness of the verticals, the type of assets we're going to have at a floating rate, and having a better funding mix. So I think that's really the benefit of the merger that we're super excited about today. And I think, you know, like I said, we put the banks together and we're around 4% or 5% liability-sensitive without any repositioning or any assets. And we think that we have a lot of liquidity if we want to tap liquidity at the appropriate time, assuming market conditions warrant that. So I think having optionality is good here, and I think that the new flagstaff is a much bigger balance sheet with a lot of great clients that we can service. I'll call them the five-star clients that we're going to go after and bank them and go after the funding opportunity. But our DNA is going to focus on getting great deposits to fund this institution very differently than the traditional thrift model.
spk07: Got it. Thank you very much, everyone.
spk02: Thank you. Our next question has come from the line of Manan Ghasalia with Morgan Stanley. Please proceed with your question.
spk09: Morning. Hi, good morning. You noted the $3 billion contribution from banking as a service product for government entities. Can you talk a little bit more about the growth opportunity there, especially given that those are lower-cost deposits?
spk10: So we've done a really solid job on partnering with our fintech providers, and this has been a very good line of business for the bank as an alternative solution for funding the balance sheets. This particular program in the fourth quarter was driven off the California inflation stimulus benefit that was out there. We were the bank partner, the bin provider, along with a very large tech company that partnered into the Money Network card business. That will dissipate, but that was another program that we rolled up. Bear in mind, we've also made mention that we are the U.S. Treasury bin provider for Money Network cards going forward and anything that the Treasury does on the card side. So we have the opportunity. opportunity to continue to build the business, as well as other municipalities at the state level for a lot of the unemployment funds that we process under the Money Network Card business. So that business is going really well. We have a bunch of onboarding happening in 2023. I will tell you that it's hard to predict what quarter they come in, so we don't really tout them because they come in and they're fairly large. And what's interesting about this model is that not only did we ramp up the opportunity to work with our technology providers. But we're also able to get our bankers into the municipal side of things and start the actual core deposit banking. So some of these relations resulted in a pure deposit relationship, either payroll for a state, doing some operating activity for the state, and it's been meaningful in respect to the deposit opportunity. This is something that we go up to the top institutions in the country, along with the top technology companies, and it's an RFP process. And we've been very successful over the past year and a half, but it does take time to onboard. So I don't want to give any, uh, we'll call it a aggressive vision of how much can come on, but when they do come on, it becomes meaningful. So for example, California was about a $3 billion average balance. And the cost of that was zero. We have some other programs that are coming in this year. depending on how quickly we ramp up U.S. Treasury, that could be depending on what program is actually endorsed by the government, and we would be then the company that's ready to go to issue cards at their will when they're ready to make a decision on funding. So it's an interesting program. It's a good line of business. It's one of our three pillars of the banking as a service business that we carved out, along with mortgage and tech, and it's been very successful. It started out back during the pandemic, And we were a very large balance sheet provider for stimulus payments. And we were able to hold some nice balances for a considerable period of time on the card side and to continue to leverage off of that.
spk09: Got it. And can you just remind us of the seasonality within the banking as a service portfolio?
spk10: You know, I think it's, I mean, there's obviously the three components. The one that's very seasonal is obviously escrow payments. When you have mortgages coming in and out, you have tax payments, but We think that's going to be something that we could really drive further deposit opportunity. Like I indicated in my previous commentary, on the leaseness business, there's tremendous opportunity to really be focused on managing the P&I payments and the tax payments for our large customers that we do business with, both on the warehouse side as well as on the servicing side. And that number can, you know, it goes up and down depending on when the payments go back to the municipalities on the tax side. But there's always the P&I thing that's coming through. And we have a long history under AmTrust Mortgage to manage that. So I think we have a few billion dollars pre-consolidation with Flagstar, as Lee indicated. I think he was at four, so probably around six now. But I see a $10 billion opportunity there just by the current client base as we go after it. It's very volatile in respect to interest rates. There's a cost to that, but as things start to normalize on the interest rate side, we have an opportunity to have a different funding mechanism versus traditional, non-traditional wholesale funding that the bank has been accustomed to. So another source of opportunity. And the ones that we have credit with, I really feel the clients that we have credit with, I feel that we could do a better job on banking that client. And that's what we're going to go after, as Lee indicated. the true operating activity that we could be helpful given our size and balance sheet and our technology offerings as well.
spk09: Great, thank you.
spk06: Sure.
spk02: Thank you. Our next question has come from the line of Stephen Alexopoulos with J.P. Morgan. Please proceed with your question. Hey, good morning, everyone.
spk14: Stephen, how are you?
spk11: Good. How are you, Tom? I wanted to start on NIM, so I appreciate the 1Q23 guidance, but Tom, what does it mean in the release? Here you say you expect 2023 margin above where you ended the year. I would think that would be on a spot basis, maybe consistent with 1Q23 guidance. Can you talk through that?
spk10: I'll give a broad discussion up front. John, we'll go into the details, but we're kind of indicating that we have one month of flag spot at the fourth quarter going into our current NIM on a historical look-back basis for Q4, and we're in the low 220, was it 228, John? 228. So you think about our guide for Q1 at 255 to 265, we have the benefit of a lot more floating rate assets, different verticals that are priced to floating rate indices. At the same time, we have a significant amount of customers that are rolling into their option period. So for example, in Q4, we had about a half a billion dollars of multifamily loans that went to sell for plus 225, 250, coming off a 3% coupon. So that's adding to the benefit of repricing. When you think about the choices going forward, after the funding side, on the asset side, we really do have a unique opportunity to have a lot more assets repricing into the marketplace, as well as a much more, we'll call it higher yielding offering when it comes to the floating rate instrument, and more of a focus to allow our customers to utilize derivatives to finance their loan terms as an alternative solution than traditional fixed rate terms. So we've been proactive on running out the capital markets activity to their customers to some of our larger multi-family players that are doing larger transactions we want to synthetically structure for the balance sheet. So we really do have an interesting series of choices on the verticals to really drive capital into businesses that are higher yielding businesses. That being said, the funding is where you have still pressure. Obviously, I indicated about a 4% or 5% liability sensitivity as we close the books at year end, but that's going to have a couple more rate hikes, and obviously the follow-up curve has paused for a while, so we're going to deal with that. But ultimately, we think we can move that 5% to neutrality very quickly, depending on where we want to position some of these assets. So I think we're going to have higher margins, going back to my point. We're starting in the low twos, and we're already in the mid twos, and it's about the year, so It's a different margin business given that we have new asset classes going into 2023. And with the focus of really building out more C&I business as a, as a homework for the company, in addition to our legacy businesses, which we're going to support, we'll have a lot more choices, Stephen, which will drive margin.
spk11: Yep. Do you think you can hold it? Because the next quarter is going to be the first quarter where we have the new company, right? For the full quarter. Do you think you can hold them in this one Q range? beyond the first quarter through the rest of the year?
spk10: You're not going to get me to a point to give public guidance in the margin. This is a good try. We typically give a three-month outlook on margin. I think the unique opportunity here is that we have a different balance sheet, we have a different positioning, we have unique asset classes, and we're still challenged, as all banks are challenged, on the funding side. If we could be successful in moving some of these wholesale liabilities forward, into true core deposits, then it's a game changer for a multiple. That's the strategy. That's not going to be an overnight strategy. We've done a lot of work over the past two and a half years. But we're starting the year very strong with a solid margin compared to stand on NYCB with the benefits of a much higher average margin for the year, knowing that we're going to have probably an increase tomorrow and another increase in March, which will hit all banks in respect to excess liquidity, including NYCB. And we still have to contend with our liability funding on the wholesale side. That's repricing. And then it'll stabilize.
spk15: Tom, if I could follow up. The only other item, and we mentioned it earlier on the government as a service deposits, right? We had that program really kick off at the end of 2022. And then now we start to see really the utilization of those funds. So we're seeing that start to roll down as we would have expected in the first quarter. And that is not interest-bearing accounts. So that's just another item that we'll see that's beneficial in the first quarter that we lose a lot of that benefit when we go forward.
spk10: Yeah, I would add internally when you look at the business, even on the multifamily side, going back to 2012, 2013, We had a high fee income opportunity, and the actual yield on that asset class was much higher because of the propensity of prepayment. We ended the year this year at the lowest level of prepayment activity compared to the financial crisis, literally, if you go back. It was significantly lower than we had anticipated, and we had a very strong year. We had another record year in earnings. The multiple is what it is. We were liability sensitive, but if you think about where we ended up, about $45 million in total losses. prepayment activity, if you go back to 13, that number was $140 million. So, you know, we're off by over $100 million and the portfolio is probably substantially larger than it is today than it was back in 13. So there's tremendous opportunity to really get that coupon from a 3% coupon to the market and be very cognizant of the fee embedded in that structure to drive margin. But we have a very conservative estimate in our forecast internally, even though we don't go out the full year, of how this asset class will react because the asset class is very stable right now. There is no activity on prepay. There's no large purchase transaction activity. we think that'll change once rates start to become more expected based on the borrowing base. Right now, customers are not doing a whole lot, so we're kind of having a larger balance sheet with lower yields, and as they reprice, we're getting a nice benefit on that particular core asset class.
spk11: Got it. Tom, if I could also ask, so if I look at the guidance, the average loan growth of around 5% for full year 23, which doesn't make sense because you have Flagstar for the full year of 2023. What's the base that you're comparing that to?
spk10: We're very conservative right now. It's early in the year. Last year, we had 10% net growth on multifamily. A lot of that was driven because market conditions have changed. Like I indicated, we're not going to have the activity until customers are comfortable pulling down equity and buying and selling asset classes. That's not happening in the marketplace today. So you're going to have a larger asset class for longer. But I think we have a conservative model that we're going to be very focused on making sure we get the best economics given the market condition. And Stephen, as you know, it's expensive right now to finance short term. So when you look at, let's say, a three-year average life financing against a multifamily credit with a three-year average life, we need to get paid economically. And that number is around 6% in the market, 225 off the five-year treasury. And that's where we're holding our line. I think that's the right economics for us as we look at the lines of businesses that So when you think about 5% net loan loading, that's reasonable. We always come out with a conservative estimate. If it changes, it changes, but it's early on. And given that most customers are really kind of sitting on the sidelines trying to figure out what their fundings needs are going to be in a very unique changing interest rate environment, I think it's reasonable. Warehouse could change dramatically, dramatically if rates go down. If for some reason we're in a different rate environment towards the back end of this year, we have $11.5 billion warehouse book that has about $3 billion outstanding. That number could double very quickly. So we have an opportunity at very high spreads along with some of the other lines of businesses. So we really are being conservative and we want to be conservative. So 10% was a big year for us on a standalone basis and If you take Flagstar's health for investment portfolio out of the revenue side, they were relatively flat or down slightly for the year, given the challenge in the mortgage business.
spk11: Got it. Okay. So just to clarify, you're assuming 5% over full year 2022 average loan?
spk05: It's an early guide. Okay.
spk11: Thanks for taking my questions.
spk10: Sure, sure.
spk02: Thank you. Our next question has come from the line of Chris McGrady with KBW. Please proceed with your questions.
spk03: Hey, good morning. Hey, good morning, everybody. John, just make sure I'm clear on the expenses. The midpoint of your guide is pretty good to consensus. I call it $50 or $60 million. The amortization expense, I need a little help there. It looks like it was $5 million, which would annualize to about $60. Is that about the right amortization expense for the year?
spk15: Yeah, it is. When you look at this change in the interest rate environment, not only did it have impacts on the purchase accounting adjustments for loans and securities, but also for CDI. I think originally we expected CDI to be a much lower number when we announced the deal, but it's definitely changed given this interest rate environment. So yeah, when you look at that All intangible amortizations, that $5 million a month is a good run rate for 2023.
spk10: Yeah, on the 1.3 to 1.4, that excludes amortization of CDI. That's exclusive of amortization.
spk03: Yeah, that makes sense. It looks like they offset each other. In terms of the accretion, John, what's the accretable yield that might be considered in the guide, or how should we think about accretion income as a margin contributor?
spk15: Yeah. Yeah. So the way to think about it is, you know, we have benefits coming in from accretion from the loan and the security side, and that's partially offset from CD sub debt and the trust preferreds. So you're looking probably on average in the $10 million range, I would say, from an accretion perspective per month, that we'll probably see. The hard part about getting exact guidance on that is when you look at the Flagstar loan portfolio, especially, and even some of the securities portfolios, the floating rate pieces are marked pretty close to par, if not really at par from an interest rate risk perspective. Some of the more fixed rate items have much deeper discounts. So it really depends on the speeds that start to come in on those. So, you know, we're trying to be conservative as to the speed in which those discounts will come back to us. But you could see some swings in that as payoffs come because you've got to recapture some of those pretty big discounts as you go forward.
spk10: Yeah, again, just to put my accounting hat on, offsetting that in 2024, assuming most of the CDs are short-term, and that discount, that premium will be gone, so you have the possibility of higher accretion in the following.
spk15: Yeah, the CD mark is definitely a little bit shorter than the security and the loan mark, yes. Okay, but Judson.
spk03: 10 million a month will flow through the margin. And that's included in the guidance, correct? Okay. And then I just want to come back to Steve's question just to make sure I'm totally buttoned up. The held for sale loans were about a billion. I guess question one, is that about plus or minus where we should think about held for sale? And the guide for mid single digit, I'm looking at your average balance sheet. Is that off a $56 billion base? Is that what you're using?
spk15: The mid-single for the loan growth? That's gross. Yeah, it's based off of the spot loan balance at 1231, so 69. So we're doing it 1231, the 5%, 1231.23, to get back to the previous question, as compared to the 1231.22, spot to spot.
spk10: As far as the loans, so maybe Lee Smith can hit some color on the business since we got Lee on the call.
spk00: Yeah, no, I think that's a billion dollars that you mentioned. You can expect us to be in that zip code, a billion, a billion and a half throughout 23. Obviously, we're in one of the toughest mortgage markets of the last 25 years. And so when we look at where activity is now, I think that billion to a billion five is a good estimate for the remainder of 23 for available for sale.
spk06: Okay, great. Thank you.
spk02: Thank you. Our next question has come from the line of Peter Winter with DA Davidson. Please proceed with your questions.
spk16: Good morning, Peter. Thanks. Good morning, Tom. Can you just give an update on the capital priorities going forward and maybe some thoughts on share buybacks?
spk10: I'll start out with the first priority. Our dividend will continue at the current rate, and that's been a priority historically, and we're very confident there. Obviously, we had a substantial accounting event at year-end. Markets have changed, and we had to deal with that in respect to capital. So we traded some of the book value benefits to the earnings accretion going forward on the capital side, but that did have an impact. That being said, I'll defer to John specifically on how we're going to get that back and obviously where our capital stack currently sits. But going back to my priorities, we're going to continue to pay the current dividend rate for the combined shareholder base.
spk15: Historically, the company has had a multifaceted capital plan when it's from payback to shareholders with dividends and years ago, stock repurchases, of course. First, the use of capital, as Tom said, is the dividend. The second is for growth. Any excess capital that we have after those two things, we would absolutely look at down the road a potential buyback as market conditions dictate.
spk16: Okay. Thanks. Real quick, just on the $3.4 billion office exposure, just can you give a little bit more color on an update from a credit perspective on office?
spk15: Yeah, well, both on office and really, you know, throughout the CRE and portfolio has been unbelievably strong from a credit perspective. We've seen, you know, we've seen no transition into the 30-day, 89-day buckets or delinquency buckets. Really no real concerns even that have come out of the deferred loan process that we went through. Payments have been, you know, as we would have expected. So we've really started to see a little bit of occupancy kick up there as well. So the performance in that portfolio has been, you know, has been better than we originally expected coming out of the pandemic.
spk10: I would just add to John's commentary, strong sponsorship, very low LTV, very comfortable with the relationship, long-term relationship. lending, you know, tied to some of the multifamily investment as well. So there's a lot of history there on the NYPD standalone. We picked up some commercial real estate from the Flagstaff folks as well on office. Not a material amount. It's maybe about a billion, John, total. Is it total or less than a billion? So, yeah, total office is $3.4 billion. $3.4 billion. And, again, it goes back to the history, as John indicated. We're not seeing any negative trends, and the LTV is relatively low. And in the event that we have to sit down and deal with a situation that has maybe some of credit deterioration, we think we're well protected as a sponsorship as well as overall value. We haven't seen any negative trend speed. It's been very, very solid.
spk16: And when those loans come up for refinance, can you just maybe update LTVs or debt service coverage ratios when they come up for refinance?
spk10: We'll tell you, I think we have about a billion and 23 that's coming up in total CRE. That's not off. And that cut out to five 68 coupon. That coupon is probably closer to seven and change now. And then next year in 24 is about another billion. So we don't have a ton of money. Let's say it's 50% of the CRE book over the next two years coming due. And next year, I think it's a 5% coupon. So again, we think we have an up, up rate potential on repricing them, but, When you look at the average LTV, I'm not sure if you have that on you, John. It's a pretty low average LTV. Yeah, 56% average LTV. On office. On office. And I think we feel pretty confident that, again, we haven't seen at all any deterioration. As John indicated, the 30-day bucket, the 250 buckets are zero.
spk06: Zero.
spk10: We feel pretty good about that, given the current environment. But in the event, even during the pandemic, we had a handful of customers that were thinking about maybe having issues, and we gave them some balance sheet, we gave them some relief, and ultimately we got them to the other side. And in the event there was any maneuverability on their end, we're very comfortable in exiting the asset class. And there's plenty of investors that will look at these assets as, we'll call them unique New York City assets that would love to be owned by investors that are comfortable on taking the keys from the bank if necessary. We haven't had to have that problem, right? But in the event we do, we have low leverage and we have strong sponsorship. So hopefully the sponsors stay strong, and if they have to kick in some more equity to keep them going, that's the expectation.
spk16: And they've been willing to kick in the equity if needed?
spk10: We haven't had those conversations yet, but we're very focused on conservative underwriting, and that's how we look at our book. We don't have a huge portfolio relevant to the total balance sheet, but what loans we do have, they're relationship sponsorship type transactions that we're very comfortable that historically in the past we have seen customers buy checks. We've had a handful over the past six to nine months, and these are very large families that are comfortable on keeping their coveted asset classes in their family's business.
spk16: Got it. Thanks, Tom. Congratulations on closing this deal. Thank you, Peter.
spk10: It's been a journey, but we're looking to the future, and we're super excited.
spk02: Thank you. Our next questions come from the line of Matthew Brees with Stevens. Please proceed with your questions.
spk12: Hey, good morning.
spk15: Good morning.
spk12: Just to clarify, the $10 million a month of accretable yield, is that just for the first quarter of, I'm assuming, the fourth quarter of this year, the first quarter of 23? And if it's not, could you give us some sense of for the cadence of accretable yield in 23, usually it's pretty front-end loaded. I just want to get a sense for the cadence there.
spk15: Yeah, I mean, it can be front-end loaded, no doubt, but that's the average. That's what I would assume for 2023. You know, you will have, like I said, when you have some deep discounts and you do have some payoffs, you can have some spikes, you know, here and there. But no, I don't expect it to be dramatically different than that in 23. CD runoff will start really in 24, which will benefit 24's members as well.
spk12: Okay. And then just on the core NIM components, could you give us the year-end spot rate on interest-bearing deposits? And then what are incremental multifamily and commercial real estate yields coming on it today?
spk10: I'll go to the yield. So, Matt, we're looking at, like I indicated, we're pushing towards 225-ish over the five-year. We're trying to hover around 6% on a traditional five-year deal. Commercial is probably another 50 bits above that. We're not really doing any long-term financing. And if we do long-term financing, we're really pushing our capital markets group to sit down with the customer and structure something synthetically, which does change the economics for the bank as well as for the customer. So we're giving them more choices. I indicated a lot of our customers that aren't doing a whole lot, they have an option, and the option was a very expensive option. We gave them a third option, which is a SOFR option, which is $250 off a SOFR, and SOFR has been rising. So it's not as attractive as it was six months ago, but it's an alternative, and we're seeing probably half our customers on the multifamily side opt into that choice, which we like that for interest rate risk, balance sheet management perspective. But a much higher coupon, I think I indicated the commercial side, what's repricing. But in 23, we have about another $2.5 billion, around $3.88 on the multi side. And if you take in over the next two years, it's about $6 billion on multi with like a $3.70, $3.75 coupon. And market yields are around six, assuming they all go into a five-year structure. Not doing a whole lot of 7-year or 10-year. Reluctant to do that as we look at the marketplace. And in general, I think people are sitting on the sidelines right now. So we're getting the benefit of repricing just from the optionality of them making a choice. And in very rare circumstances, you're seeing property transactions. So we could have a higher balance for longer because there's less activity. As indicated in my previous comments, there's very little economics in our internal forecast for prepayment activity. I think we had probably one of our worst years last year. We still had a record year on earnings. We had $46 million of prepay, going back to the high of about $140 million in previous years, going back to 2013. So we have the opportunity here for great economic if the marketplace changes, but we're assuming that it's going to be relatively benign. So even on our first quarter guide, we said the prepayments are not going to be impactful in any meaningful way going forward in this current rate environment.
spk12: Great, I appreciate that. And then on the spot rate on interest-bearing deposits at year-end, quarter-end?
spk15: Yeah, at year-end, the spot rate on interest-bearing deposits is 217.
spk10: You know, Matt, just one point. So I want to talk about some of the other lines of business. I mean, we have a great builder finance business. That number is close to 400 spread off of, you know, repricing off of sulfur indices. We have fees involved in those types of businesses. We have the warehouse business that's a substantial spread in the 200 basis point spread. We look at that as a great opportunity because we know that business very well. We're very comfortable with that business, clearly a very attractive yielding business. And we have other C&I businesses that are part of the legacy flash that are coming over that we think we're going to grow very nicely on a combined basis. Those spreads are very high. They're not near what we are typically accustomed to. They're floating rate. They have fees. They have structure behind them. and they have very good incremental benefits to the margin, which is going to be a capital deployment opportunity in 2023 and beyond. That is the game changer that we're putting together here. So we're not just that one bank that does one thing. So we have many, many verticals with different opportunities, and we're going to be very cautious, given the rate environment, to deploy capital to ensure we have the best capital allocation story to talk about as we build a new Flagstar.
spk12: Understood, Tom. I appreciate all that. I did want to also touch on the government as a service deposits. Just consider it comes in in lumps, and then it sounds like as it's spent, it winds down. Could you give us a sense for the pace of attrition on the government as a service deposits? And is it expected to roll off to a near zero towards the end of the year, or is this something that holds a residual balance and can grow off of that residual year over year?
spk10: So I'm going to start. I'm going to defer to John. We've done a lot of work around on expectation and modeling and doing regression analysis on how this would react. And we actually have an experience with the stimulus payments and how long they've held on now. More than we expected, we conservatively model it, which is in our model. So we had a large benefit in the fourth quarter that came from the California stimulus opportunity that we would have been provided for. It's holding better than expected, probably will be there for longer than expected, but we might remodel it conservatively. Ultimately, that will go down to a tail to a point, and John can get into some details on the tail. At the same time, we have other ones ramping up in 2023. Although not the same type of program, they'll be consistent with unemployment programs that we've managed. We have a large relationship with Jersey and others. We just picked up a big win recently with California, which will be a substantial benefit for the bank once it gets geared up. But again, it's the timing of it, Matt. It could happen in Q2, Q3. It really is as quick as government gets it up and running and we're ready to react. But it's been a good business for us and there's some fees involved. But more importantly, the average cost of those liabilities are very low, near next to zero in most cases. And John, if you want to talk about some of the... Yeah, we've tried to model it.
spk15: It's been pretty close to the modeling we saw with the economic impact stimulus payments. So There is a tail that will sit around, but, you know, the bulk of the deposits do go pretty quickly. And then you have like a slow draw after that. So, yeah, we will have deposits, you know, as of I would assume at the end of the year. I don't think it's going to be that material of a number by then. But the first quarter will still have a really nice average balance. Then we'll start to come down from there.
spk12: Okay. Understood. And then what are the remaining one-time costs from the deal and the mortgage restructuring? And then could you give us a sense for timing throughout the year when they'll be taken?
spk10: Well, let Lee talk about the mortgage restructuring. John, we'll get into some estimates on what we think we have left. Go ahead, Lee.
spk00: Yeah, sure. So the cost with the restructuring that we've just actioned, we estimate to be $12 million to $13 million. And that is predominantly severance. But as I mentioned earlier, there are some leases that we need to get out of, so there's some costs associated with that. There's a couple of contracts that we are also going to exit. We're going to isolate that as a restructuring charge, and we will take that in the first quarter. In addition, we probably need 60 days, that's what we're estimating, to work off the pipeline, those loans that are not yet closed, of those offices that we've closed down. So that'll take us through the end of March. And that's why earlier I mentioned that even though you're going to start seeing cost savings starting in February, there is noise as a result of the one-time restructuring charge, the runoff of the pipeline, and I expect us to have a real clean run rate beginning April 1.
spk15: And then on the merger-related charges, we'll see some as, you know, in the next couple of quarters when it comes to primarily severance and, you know, just some consulting work to get through the, you know, to get through the consolidation of the two companies. So, you know, you'll see that as well in the coming quarters. And then there'll be some charges when we get to Q1 of 2024 when we get to the conversion date.
spk12: Got it. Okay. Last one for me is just overall capital levels, tangible common equity at 6.4%. Your total risk-based capital ratio is sub 12. Should we be contemplating any sort of common equity raise or sub that raise to bolster these ratios? That's all I had. Thank you.
spk15: Yeah. Thanks, Matt. I think, you know, given where the capital ratios are and just given the credit nature of the two balance sheets, two legacy banks balance sheets and the, and the limited risk really from a charge off and a, And a provisioning perspective, you know, we're comfortable where the capital ratios are, you know, with a common equity tier one ratio over nine. You know, that's a good spot for us to be given the loss content in those portfolios. So it's something we're going to, of course, continue to manage. And we believe the best use of the capital right now is primarily dividends. Then, of course, the fund growth. And then going forward, we can look at other capital initiatives depending on market conditions.
spk06: Thank you.
spk02: Our next question has come from the line of Christopher Maranek with Jannie. Please proceed with your questions.
spk05: Hey, Tom and John. I have a similar question on the capital. So does the 906 likely grow from here, or is there a scenario where it may dip a little bit as the balance sheet is considered quarter to quarter? I think it would grow.
spk15: Yeah, I mean, the goal is to grow. I mean, it depends a little bit. You know, one of the one of the things we look at when we put both companies together is, you know, there's a large portion of the assets, but even though they have, you know, really low loss content in them, including multifamily mortgage warehouse, um, they're a hundred percent risk weighted assets. So, you know, we do have that, that we have to kind of work through from a capital perspective, but you know, the goal is over time to ensure our capital ratios are, you know, where we want them to be in our capital target. So, You know, that's no doubt the plan.
spk10: Obviously, we're planning strong earnings growth as well to increase our capital position. Clay, the last question. Just to be clear, we've traded off, you know, capital for accretion on the adjustment given the changes in interest rates. So you're getting a lot of, as John indicated, benefit as far as the marks on the assets and liabilities. So that does have an impact. You get that back over time. So we think you'll see some nice earnings per share growth as well.
spk05: Got it. And then last question, John, just has to do with how the banking as a service and government as a service, you know, reprices over time. Do you have to have an absolute Fed cut before you can lower those rates, you know, thinking out just a couple quarters from now?
spk15: Well, the government as a service deposits are primarily non-interest bearing or, you know, if there are, they're really specific as to exactly what those costs would be. On the banking as a service deposits, To see big cuts, you probably have to see big drops in those rates. You probably have to see some Fed cuts, especially in this environment. But, you know, times change and sooner or later the spreads can narrow a little bit on what you're paying for a lot of those products. But I think we'd have to start to see a Fed pivot before we start to see some significant savings there.
spk05: Okay. And are those banking as a service still like maybe, you know, three quarters or two thirds of the Fed moves? Is that about right?
spk15: Yeah, I mean, they're a range. You know, some are 100% betas and some are in that 75% range. So on the banking as a service side, it's a range of what's tied to the change.
spk05: Got it. Great. Thanks for taking all my questions.
spk02: Sure. Thank you. Our next question has come from the line of Abraham Hunawala with Bank of America. Please proceed with your questions. Abraham, you're back.
spk01: Hey, I'm back. Sorry, I know it's been a long call. Just one question, Tom. I think you mentioned multiple times around becoming a commercial bank, multiple expansion for the stock. Give us a sense of what you think this combined franchise, as we look beyond systems conversion next year, if you have any sense of where you think the bank is from a ROTC, ROE perspective, what the franchise should be earning in a steady state environment.
spk10: Well, look, I mean, this is obviously going to be a block and tackle year. We're super excited about putting these companies together, the rebranding effort that's going to take place. We are transitioning to some great technology that's going to really assist our customer base as we move towards commercial banking. We've got to work a lot on the funding side. And, you know, the company is going to be, you know, historically over the past couple of years, and, you know, we're earning just under 15% TCE. We should be in the high teens. And I think the reality in the high teens on a traditional multiple perspective with return of assets well north of 1%, 110, 120-ish over time, it's going to take some work here. But the reality is that the balance sheet has changed dramatically. If you think about the lines of businesses that we're going to have, the verticals that will be priced, very different than historical fixed rate lender that had vulnerabilities to rising interest rates. We want to be better balanced. At the same time, we're going to get our cost structure right. We have work to do going back to 23 as a block and tackle year, and we look at 24 in hopefully a different rate environment. We'll be able to take advantage of a better funding mix. We're going to go after the deposit funding. If we move that positioning to having better funding as a core competency of our number one priority, that will change multiple. We feel very strongly that mortgage on a percentage basis, because the bank is much larger, will be less – less of a concentration on total income streams. So we want to have less dependency on mortgage, less dependency on wholesale finance. We believe that will give us a better blended multiple. Multiple expansion is going to be key as we look at the transformation to a commercial bank. You know, we have all the plots in place. It's going to take time to block and tackle, but we have, you know, the roadmap and, you know, the system conversion will be done in the first quarter of 24. At the same time, we're going to be, you know, rolling out the verticals. proving to the marketplace that we're allocating capital to different lines of businesses that are better margin businesses. And now at the point, as a company, we're looking at loan-by-loan detail on a total return basis, and we'll allocate capital accordingly. And that's something very different when you have choice now. We have choice on a combined basis, where historically we had limited choices when we had our business model. So we're excited about the business model. We think we have a great story to tell. This has been a long time in the waiting, a lot of planning, and we're super excited about launching out the new Flaxel and the new brand.
spk01: Got it. Thank you.
spk02: Thank you. That is all the time we have for our question and answer session. I would now like to hand the call back over to management for any closing comments.
spk10: Thank you again for taking the time to join us this morning. If you're interested in NYCB, we are creating a unique, multifaceted financial services organization that will no longer be reliant on any one particular business with a very exciting future. Thank you all.
spk02: Thank you. This does conclude today's teleconference. We do appreciate your participation. You may disconnect your lines at this time and enjoy the rest of your day.
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