Flagstar Bank, National Association Q4 FY2022 Earnings Call

Good morning, everyone. This is Sal DiMartino. Thank you for joining the management team of New York Community for today's conference call. 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 Cangemi, 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. Cangemi.

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 New York Community, culminating in our acquisition of Flagstar, our largest acquisition to-date, which closed on December 1. 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've already seen some of the benefits you outlined when the transaction was first announced. The transition into 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 Flagstar brings a number of new lending-related businesses to the new company, both 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. Builder finance is another great business, where we do business with 70% of the top 100 builders nationwide. Spreads in this marketplace are approaching 400 basis points in that particular business. In addition, Flagstar has a significant wholesale banking operation focusing on several verticals. These loans are conservatively underwritten and also generate significant fee income that legacy New York Community 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 Flagstar 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 Flagstar's deposit base are already evident in the fourth quarter results, as non-interest-bearing deposits increased to 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 Flagstar 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 a lower cost funding mix, the new company will be able to enjoy a stronger margin going forward. As for our mortgage business, we disclosed earlier 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 cycled refinancing activity and also dampened purchase activity. While legacy Flagstar was proactive throughout 2022 in rightsizing 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 $1.8 trillion after dropping 46% last year compared to 2021. Therefore, shortly after the transaction closed, we made the strategic decision to swiftly restructure the business, which occurred late last week. To better reflect demand and a line where our strength lies, 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 decline to less than 800 full-time equivalents compared to a high of 2,100 FTEs in 2021. Headcount reduction represents approximately 10% of total employees at the combined company pre-restructuring. 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 mortgages, the sixth largest sub-servicer and the second largest warehouse lender. In addition, we continue to lend in all six channels and remain committed to the correspondent 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. While our financials were impacted by one month of combined results, legacy New York Community performed extremely well with strong organic growth in loans and deposits. Multi-family 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 billion. 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 net interest margin improved six basis points to 2.28% compared to the prior quarter. Excluding the impact from prepayment income, the fourth quarter margin was 2.24%, 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. Non-performing assets to total assets equaled 17 basis points, while non-performing loans to total loans were 20 basis points, continuing to rank us among the best in the industry. These metrics are proof positive that our conservative underwriting standards have served us well over various business cycles. This 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 rents 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 rents 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 on the company's common stock. The dividend is payable on February 16 to common shareholders of record on February 6, and based on last night's closing prices reflects a 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 organization. The divisional bank concept has worked well for legacy New York Community, but 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 2.55% to 2.65%, including prepayments, which are expected to have less of an impact on the NIM going forward. First quarter gain on sale of mortgage loans of $18 million to $22 million; full year non-interest 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 have 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. My 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 we don't, please feel free to call us later today. Operator, please open the line for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question has come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.

Good morning, Ebrahim.

Hi. Good morning. Congrats on closing the deal. I guess, maybe the first question, if I heard you correctly, Tom, I think you mentioned systems conversion not until first quarter of 2024, 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?

All right. Let's start with the latter question. And by the way, we apologize for the delay this morning. That was unfortunate, but we do apologize for that. I should have talked about the overall expense run rate going forward. We gave out guidance level, $1.3 billion to $1.4 billion for 2023. Bear in mind, we continue to put these 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 called 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 systems 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 time frame, but it's going to be our largest conversion. And a lot of, I'll call it, upgraded 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 has gone 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 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 in the first quarter as well. So going back to the cost structure, I feel highly confident that that range is very reasonable. But we feel that, historically, the company has been an integrated 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 the run rate has some build-out of additional cost centers 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 billion to $1.4 billion. Hopefully, we'll come in towards the front-end of the range, but we feel pretty confident about that.

I guess, given all the investments you're making, and I think it all makes sense, is it fair to assume like that's a steady state? Like you might get some savings towards the systems conversion next year, but then you're also investing in the franchise?

That's a fair statement, Ebrahim. We didn't provide 2024 guidance, but you do have that, and a lot of the systems conversion will result in significant technology overlap as well as cost benefits. Maybe John can add some more color to that.

Yeah, I think that's right. You'll see some of that $125 million 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 will come once the systems conversion is done in Q1 of 2024. So I think Ebrahim, 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.

So, Ebrahim, just to go back to the concept of the conversion. This is really a transformational transaction for the bank. We 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 NewCo. 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.

Understood. That's helpful. And just on a separate question. You gave the first quarter NIM guide. How do we think about the net interest margin on the two scenarios in a world where rates just stay higher for longer, how do you think the NIM plays out? And then, 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.

Yes. I'll start the conversation, and I'm going to defer to John. But big picture, we're assuming two more hikes in the short term, then a pause, and, based on the forward curve, the first cut is expected around November. That largely reflects what the forward curve is pricing. As of today, our positioning is about 4 to 5 percent liability-sensitive going into the likely pause in Q1. We can shift our position by roughly five percentage points in either direction very easily. So right now, simply with the balance sheet as assembled, and without restructuring or selling assets, we are slightly liability-sensitive and can pivot very quickly. John, maybe you can add some more color on sensitivity to market rates.

Yes. And just to highlight what Tom said, now that we're not as significantly liability-sensitive as NYCB has been historically, it just gives us the opportunity to be able to manage towards a neutral asset base depending on market conditions. So, 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. That cut at the end of the year really doesn't have much of an impact in the 2023 guide.

And Tom, you mentioned the restructuring of the balance sheet, like, should we be expecting any meaningful restructuring once there's clarity on the path of Fed interest rates?

Look, I think the reality is that we put the company together at year-end. We have an opportunity to look at some of the assets, in particular mortgage-related assets, that we can structure into an 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 approaching close to 5%, 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 pull through, given the assets that were acquired through the Flagstar transaction, some of those residential portfolios and other asset classes. But the reality is it 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. And if you think about our multi-family business, they're averaging in the 3s and the market is closer to 6 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. And they have to make a decision, and that market is a much higher rate environment. Assuming the Fed holds this 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 through 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, and we're endorsing that as a company. We feel very confident that we can move the portfolio to a higher-yielding asset class, and 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-diversified 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 at a much stronger margin with the opportunity to redeploy capital into higher margin businesses is an attractive position to be in.

Got it. Thanks for taking my questions.

Thank you. Our next question comes from the line of Mark Fitzgibbon with Piper Sandler. Please proceed with your question.

Good morning Mark.

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?

So look, we have a lot of moving parts here that are new to the company, in particular the capital markets activity. I think that that's going to be, again, it's not modeled in and it's not anticipated as part of the synergies or benefits of the merger. But we think that now that we have a capital markets division that will look at options for our customer base to put on derivative synthetic positions to hedge their loan products, that will be a great benefit to the bank. In addition, we can be creative for our multifamily customers as well and offer those similar products. And we're not going to put on long-duration paper without any synthetic position, which flows into fee income. At the same time, I want to refer to Lee Smith, because he's obviously running the mortgage business, and that will be a very interesting opportunity if the mortgage business does start to pick up. But the reality is that we're starting at probably low points, so we're hoping it doesn't get much worse than this, but we're starting at the low. Maybe Lee Smith could add some color on fee income between sourcing and mortgage production. Lee?

Thanks, Tom. As we noted in our guidance, we're forecasting a Q1 gain on loan sales of $18 million to $22 million. We're also guiding a net return on the MSR asset of 8% to 10%, and I expect we'll be near the top of that range. Combined, those two items imply roughly $45 million to $50 million of fee income on the mortgage origination side. We also generate loan administration income on the servicing side because of our substantial sub-servicing business. From a GAAP accounting perspective, there is an offset related to the interest we pay on escrows that would more properly sit in net interest income, so we'll receive a benefit there, although it doesn't fully show up in the GAAP servicing P&L. When we break out servicing results, however, you do see the fee income given our significant sub-servicing business.

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 the cost of that liability becomes much lower as we manage that servicing portfolio.

Okay, great. And then, Tommy, could you share with us the timing and cost associated with rebranding?

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 NewCo, which is going to be the new Flagstar. A lot of spend has already taken place. As far as the branding efforts for the future, more towards 2024 than 2023, 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 to all of the 395 locations. It's all going to be, as we said, one cohesive brand, one culture, one name, and that will start towards the back end of 2023 and with maybe some marketing dollars going into 2024 run rate.

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? 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, right? 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 non-traditional funding. We believe that various mortgage-as-a-service businesses, the government-as-a-service business are focused at and really trying to take the embedded nature of mortgage and go after the clientele as a $90 billion organization, could put us in a very unique position to gather more deposits. We were very successful a few years back when we started the mandate 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 traditionally in nature and we're doing and we're looking at all avenues to bring in a mix of funding that, lower cost is 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 true core deposits, it's a game changer for net interest margin. 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 our business model every day. It's within our DNA. It's not going to happen overnight. And I 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.

Thank you.

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

Good morning.

Hey, good morning, guys and congrats on the deal.

Been a long time, David, but we're very pleased to be here.

Yes. Yes, absolutely. Glad to see it. Just on the callable 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 $1 billion or so of those advances that you had at this point? So you're not really expecting a cliff repricing of that in 2Q or beyond?

Yes. I mean, we do have a lot of borrowings coming due in 2023. When you look at that amount, we have probably just under $7 billion coming due in the first quarter of 2023, and that's included in the guidance.

In the guide. Yes.

Yes. And that's in the guidance. That's in the guidance. The cost of that is in the $330 million to $340 million range. So there'll be a bit of a lift there, but nothing significant. There are callable borrowings on the books, as you mentioned, but they're spread out on what their lockout dates are. So we don't expect to have that cliff issue that we had in the third and the fourth quarter of 2022.

Yes.

Dave, I would just say, to John's point, we want to have some flexibility going into 2023 depending on our balance sheet renewability and where rates start to normalize. We have an opportunity to really look at the assets we’ve acquired and decide which assets we’re going to hold. There has been no restructuring as of year-end. We priced and looked at the marketplace. We believe when the market becomes more opportunistic we may consider reshaping our proceeds into debt reduction or a debt restructure. That’s always on the table and we’ll look at what makes sense in the marketplace. Clearly, having optionality is going to be important, especially with most likely a pause coming. If the back end of the curve continues to be this steep, we may have an opportunity to take on some cheaper funding while keeping some money relatively short to pay down debt, because short-term money is very expensive right now. So we have that optionality on the table.

Yeah. 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. But I was just wondering if you can size the new opportunities that you now have post the deal close? I know you talked about the warehouse customer deposits that you could go after previously once you close the deal, if you could just size that, how big that opportunity is at this point and then hit on any other areas that you could point to?

I always said when we announced the transaction; I envisioned the embedded nature of just mortgage alone is a $10 billion opportunity. I felt highly confident that with Lee Smith's business regarding the escrow business, the loans that we service for others, as well as the warehouse business, it's a tremendous opportunity in respect to the type of deposit balances that we offer some of our clients given our size now. Our balance sheet at $90 billion, managing this business as being number two in warehouse in the country, gives us a good shot at really bringing in meaningful funding opportunities for the bank. That being said, we still have a very interesting opportunity to take the technology that NYCB currently has that will improve when we combine with Flagstar 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.

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 sub-servicing 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 sub-servicing for, not just the deposits attached to the loans that we're servicing or sub-servicing but other escrow deposits that they have with other institutions. And then to Tom's point, given the technology, 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, correspondents, brokers. By having this technology that allows them to do their business banking with New York Community Bank 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.

And like I indicated, we are a major credit provider for some of these clients. And when you get to the point where we are their primary credit facility, we should have a shot at 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 C&I opportunity, we have a long history here of not being in the market with boots on the ground on a stand-alone basis, legacy NYCB. Flagstar has made that transition. The goal here on a combined basis is to have boots on the ground focused on C&I, mid-market type companies. And given that we've been in this business for a long time, we have a shot at really catapulting deposit growth initiatives when it comes to boots on the ground on the C&I side. So all our C&I activity that's being done at Flagstar is being integrated into NYCB. As I indicated in our opening commentary, a lot of verticals here are 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.

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?

I would just say, we're going into a complex platform with Fiserv. We have a DNA platform architect. We'll have a hybrid version of something very unique, best opportunity as our core. But interesting to that, we also 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 NYCB that we can utilize throughout the entire organization. For example, even the front-end system on loan process, their front end is very advanced, more in line with the regional bank model. They use Encompass; we don't have Encompass. So, there's opportunities here that are significantly ramping us up to a regional player when it comes to technology utilization. At the same time, we've also given Flagstar, on the commercial services side, an opportunity to really upstart the treasury function, the treasury capability. Our current relationship that we have with Fiserv 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 the folks over Flagstar, to utilize that technology. So, collectively, there's a lot of moving parts here. But we, like I said, are moving away from a traditional thrift model to more of a commercial regional model when it comes to 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, Dave, that's going to really enhance the experience of the customer regarding the new Flagstar.

Yes, sounds good. Thanks guys. Appreciate it.

Sure.

Thank you. Our next questions come from the line of Brody Preston with UBS. Please proceed with your questions.

Hey, good morning everyone.

Good morning.

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 savings work into 2023? And then separately, what's a good run rate for operating expenses for the first quarter of the year?

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 in our opening commentary, we're taking a ton from around 800 FTEs, where before at the high, in 2021, that was 2,100. 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 unused balance sheet opportunity, you have to look at the revenue side. And we also went into shared services tied to embedded mortgages. So, all-in, that number is well over $100 million stand-alone. But at the same time, we also have our own cost structure that we have to focus on, on a combined basis on just the synergies of the companies combining. And that number is, as indicated back when we announced the deal, about $125 million. Lee Smith has done a phenomenal job over the past 1.5 years managing a very tough business. He's always managed the 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 if 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 with 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 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 of the puzzle we get there, and we acted promptly right after the closing, given the conditions in the marketplace. So when it comes to cost structure, like guidance at $1.3 billion 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. 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 this journey, and this is your hard work and effort, which we want to commend for the effort as well.

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's going to be noise in the first quarter as a result of that from a cost point of view. When I think it will 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. 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 million should we think about being more 2024 oriented versus 2023?

Brody, I'd say about half. But again, we've done a lot of transactions in our lifetime. We're going to — we've hit the ground running hard. We know what we have to do as far as integration. This is typical when we look at transactions, and there's an opportunity here on a stand-alone basis. As I indicated, we looked at the business excluding mortgage when we announced the deal. We looked at a run rate that was probably around $1.6 billion to almost $1.7 billion in total cost structure, and we tacked on about $125 million excluding mortgage. But mortgages changed; as I indicated, Lee has taken out a lot of cost in 2022. We think this is it. This is where we feel very confident that we're lean. I think this is probably the lowest headcount that Flagstar has had in close to eight or nine years. So I think we're in a very good position to really capitalize. A lot of investment in technology has been made by Flagstar, so on the mortgage side we can benefit. The servicing platform is substantial. There's a great opportunity to cross-sell some products on the servicing side, both on HELOC loan positions as well as deposit-gathering efforts. So 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 FTE, with this magnitude of the business and our presence, we have an opportunity to really drive revenue at the appropriate time if there's a resurgence in the mortgage business.

Got it. And then maybe just switching over to the deposit base real quick. You mentioned the forward curve a couple of times on the call today, Tom. So I wanted to ask, near-term, where do you see your cost of interest-bearing deposits or your deposit beta going as the Fed continues to hike early in the year and then pauses? And then secondarily, just given the back end of the forward curve is starting to head down, how are you thinking about structuring your deposits from a maturity perspective?

I'll defer that question to John Pinto, our CFO. John?

So yes, if we look at deposit betas, the balance sheet is really broken out into two different types, right? If you're looking at our deposits tied to either mortgage-as-a-service, banking-as-a-service and some of the brokered business, 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 much, much lower betas, of course, than that. They started to tick up, I think like just about everyone has 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, 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.

This is Tom, just to follow up on that. I made a very clear commentary probably about 1.5 years ago, that if you go from zero to a much higher rate environment, now we'll just reiterate the 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 a phenomenon in the financial services business right now. That money is very expensive right now and people want to get paid. The reality is that this company we have now is not going to be 20% to 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 Flagstar and 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 unique to some 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, like I said, we put the banks together and we're around 4% to 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 Flagstar is a much bigger balance sheet with a lot of great clients that we can service — we're calling 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.

Got it. Thank you very much everyone.

Thank you. Our next questions come from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.

Good 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?

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 sheet. This particular program in the fourth quarter was driven off the California inflation stimulus benefit that was out there. We were a bank partner and the 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 partner for certain money network card programs going forward and anything that the Treasury does on the card side. So we have the opportunity to continue to build the business, as well as other municipals at the state level for a lot of the unemployment funds that we process under the money network cards business. So that business is doing 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 count them because they come in and they're fairly large. And what's interesting about this model is that not only do 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, so the actual core deposit banking. So some of these relationships 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 and give the top institutions in the country and all the top technology companies, and it's an RFP process. And we've been very successful over the past 1.5 years, but it does take time to onboard. So I don't want to give any aggressive vision of how much can come on. But when they do come on, it becomes meaningful. So, for example, California was about $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 they ramp up. If the U.S. Treasury ramps programs, that could be significant depending on what program is actually endorsed by the government, and we would be then the company that's ready to go if the government is ready to make a decision on funding. So it's an interesting program. It's a good line of business. 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 cards side, and we continue to leverage off of that.

Got it. And can you just remind us of the seasonality within the banking-as-a-service portfolio?

I think there's obviously the three components. The one that's very seasonal is obviously escrow-related 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 Lee Smith's 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 go up and down depending when the payments go back to the municipalities on the tax side, but there's always the P&I payments coming through. And we have a long history to manage that. So, I think we have a few billion dollars of pre-consolidation with Flagstar. As we indicated, I think it was at $4 billion. So we're probably around $6 billion now. But I see a $10 billion opportunity there, just by the current client base as we go after it. It's very volatile with 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 will be a 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 we indicated, the true operating activity, we could be helpful, given our size and balance sheet and our technology offerings as well.

Great. Thank you.

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

Hey, Good morning, everyone.

Steven, how are you?

Good. How are you, Tom? I wanted to start on NIM. So I appreciate the 1Q 2023 guidance. But Tom, what does that 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 1Q 2023 guidance. Can you talk through that?

I'll give a broad discussion up front and John will go into the details. But we're kind of indicating that we have one month of Flagstar at the fourth quarter going into our current NIM on a historical look-back basis for Q4, and we've been in the low 2.20s. We ended the quarter at 2.28. So if you think about our guide for Q1 at 2.55 to 2.65, 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 $0.5 billion of multifamily loans that went to repricing for plus 2.50 coming off a 3% coupon, so that's adding to the benefit of repricing. When you think about the choices going forward, absent 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 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 long term as an alternative solution to traditional fixed rate terms. So we've been proactive on running out the capital markets activity that Flagstar offers 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 high-yielding businesses. That being said, the funding is where you have still pressure. Obviously, I indicated about a 4% to 5% liability sensitivity as we closed the books at year-end, but that's going to have a couple more rate hikes. And obviously, the forward curve has a pause 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 forward. We're starting in the low 2s and we're already in the mid-2s at the start of 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 hallmark for the company, in addition to our legacy businesses, which we're going to support, we'll have a lot more choices, Steven, which will drive margin.

Do you think you can maintain that, since the next quarter will be the first in which the new company is in place for the full period? Can you maintain NIM in this first-quarter range beyond that quarter and through the rest of the year?

You're not going to get me to give forward guidance on the margin, but it's a good try. We typically provide a three-month outlook on margin for Q1. I think the unique opportunity here is that we have a different balance sheet, different positioning, and unique asset classes. We're still challenged, as all banks are, on the funding side. If we can successfully move some of these wholesale liabilities into true core deposits, that would be a game changer for our multiple. That's the strategy. It is not an overnight strategy, but we've done a lot of work over the past two and a half years. We're starting the year very strong with a solid margin compared to standalone NYCB and with the benefits of a much higher average margin for the year, knowing that we're likely to have an increase tomorrow and another increase in March, which will affect all banks with respect to excess liquidity, including NYCB. We welcome the opportunity to address our liability funding on the wholesale side as it reprices, and then it will stabilize.

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 we see now we start to see really the utilization of those funds that we're seeing that start to roll down as we would have expected in the first quarter, and that is non-interest-bearing accounts. So that's just another item for that we'll see that's beneficial in the first quarter that we lose a lot of that benefit when we go forward.

Yes, I would add that internally, when we look at the business even on the multifamily side, going back to 2013, we had a high fee income opportunity and the actual yield on that asset class is much higher because of the propensity of prepayment. We ended the year this year at the lowest level of prepayment activity compared to the past decade. If you go back, it was significantly lower than we had anticipated. We had a very strong year and another record year in earnings, but the multiple is what it is. We were liability-sensitive. We ended up with about $45 million in total prepayment activity; if you go back to 2013 that number was $140 million. So we're off by over $100 million and the portfolio is probably substantially larger today than it was back in 2013. There is 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. We have a very conservative estimate in our internal forecast, 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 prepayment and no large purchase transaction activity. We think that will change once rates become more favorable. Right now, customers are not doing a whole lot. We're starting with a larger balance sheet with lower yields, and as they reprice we're getting a nice benefit on that particular core asset class.

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 2023, which doesn't make sense because you have Flagstar for the full year 2023. What's the base that you're comparing that to?

Look, we're very conservative right now. It's early in the year. Last year, we had 10% net loan 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 on 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 loan growth. 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 Steven, 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 to average life, we need to get paid economically. 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. So when you think about 5% net loan growth, I think 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 side and trying to figure out what their funding needs are going to be in a very unique changing interest rate environment, I think it's reasonable. Warehouse could change dramatically if these rates go down. If for some reason we're in a different rate environment, at 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 held-for-investment portfolio out of the residential side, they were relatively flat or down slightly for the year given the challenge in the mortgage business.

Got it. Okay. So just to clarify, you're assuming 5% over full year 2022 average loan?

It's an early guide.

Okay. Thanks for taking my questions.

Sure, sure.

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

Hey, good morning. John, just to make sure I'm clear on the expenses. The midpoint of your guide is pretty close to consensus, call it, $50 million or $60 million. The amortization expense, need a little help there. It looks like it was $5 million, which would annualize to about $60 million. Is that about the right amortization expense for the year?

Yes, 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 core deposit intangible. I think originally, we expected core deposit intangible to be at a much lower number when we announced the deal, but it's definitely changed given this interest rate environment. So yes, when you look at that intangible amortization, that $5 million a month is a good run rate for 2023.

On the $1.3 billion to $1.4 billion, that excludes amortization of core deposit intangible. That's exclusive of amortization.

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?

Yes. So the way to think about it is we have benefits coming in from accretion from the loan and the security side, and that's partially offset from CDs, subordinated debt and the trust preferreds. So you're looking probably on average in the $10 million range 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 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.

Again, just to put my accounting hat on, offsetting that in 2024, assuming most of the CDs are short-term, that discount will be gone and you have the possibility of higher accretion in the funnel.

$10 million a month will flow through the margin and that's included in the guidance, correct?

That's right.

Okay. I want to return to Steve's question to make sure I'm completely clear. The held-for-sale loans were roughly $1 billion. First, is that about where we should expect held-for-sale to be, plus or minus? And regarding the mid-single-digit guidance, looking at your average balance sheet, is that calculated off a $56 billion base? Is that what you're using?

The mid-single for the loan growth? The way we think about loan growth is spot-to-spot based off the 12/31 balances. So the 5% is based off the 12/31 2022 spot.

As far as the loans held-for-sale, Lee can add color on where we think we'll be on held-for-sale balances.

Yeah. I think that $1 billion that you mentioned, you can expect us to be in that zip code, $1 billion to $1.5 billion throughout 2023. Obviously, we're in one of the toughest mortgage markets for the last 25 years and so when we look at activity now, I think that $1 billion to $1.5 billion is a good estimate for the remainder of 2023 for held-for-sale balances.

Okay, great. Thank you.

Thank you. Our next questions come from the line of Peter Winter with D.A. Davidson. Please proceed with your questions.

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?

I'll start out with the first priority. Our dividend will continue at the current rate. 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 benefit to the earnings accretion going forward under the capital side, so that did have an impact. That being said, I'll defer to John specifically on how we're going to get that back and where our capital stack currently sits. But going back to my priority, we're going to continue paying the current dividend rate for the combined shareholder base.

Historically, the company has had a multifaceted capital plan when it's grown — from payback to shareholders with dividends and years ago, stock repurchases, of course. So first, the use of capital, as Tom said, is the dividend and the second is for growth. So 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.

Okay. Thanks. And then just real quick on the $3.4 billion office exposure, can you give a little bit more color on an update from a credit perspective on office?

Well, both on office and really throughout the CRE portfolio, performance has been unbelievably strong from a credit perspective. We've seen no transition into the 30- to 89-day delinquency buckets or similar buckets, really, no real concerns even that have come out of the deferred loan process that we went through. Payments have been 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 better than we originally expected coming out of the pandemic.

I would just add to John's comments, a strong sponsorship, a very low loan-to-value, very comfortable with the relationship, long-term relationship lending tied to some of the multifamily investment as well. So there's a lot of history there. We picked up some commercial real estate from the Flagstar folks as well. The total office book is $3.4 billion. And again, it goes back to the history, as John indicated, we're not seeing any negative trends and the average LTV is relatively low. And in the event that we have to sit down and deal with a situation that has some credit deterioration, we think we're well protected as a sponsorship, as well as overall value. We haven't seen any negative trends in delinquencies. It's been very, very solid.

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?

We have about $1.23 billion that's coming up in total CRE over the next year or so. And that kind of coupon is probably closer to 7% and change now. Next year in 2024 is about another $1 billion. So we don't have a ton of money due in the immediate term relative to the entire portfolio. The average LTV on the office book is 56%. We feel pretty confident that we have an up-rate potential on repricing them. But we haven't seen any significant deterioration. As John indicated, the 30-day buckets are essentially zero. So we're comfortable with the positioning. Historically, we've seen sponsors add equity when necessary to keep assets performing, and we expect similar behavior if any were needed.

Got it. Thanks, Tom. Congratulations on closing this deal.

Thank you, Peter. It's been a journey, but we're looking to the future, we're super excited.

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

Good morning Matt.

Good morning. Just to clarify: is the $10 million a month of accretable yields just for the first quarter, or is that the run rate for 2023? And if it's not, could you give us some sense for the cadence of accretable yield in 2023? Usually, it's pretty front-end loaded. I just want to get a sense for the cadence there?

Yes, I mean it can be front-end loaded, no doubt, but that's the average. That's what I would assume for 2023. You will have, like I said, when you have some deep discounts and you do have some payoffs, you can have some spikes here and there. But no, I don't expect it to be dramatically different than that in 2023. Core deposit runoff will start really in 2024, which will benefit.

Okay. And then just on the core NIM components, can 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 at today?

I'll go to the yield. So, Matt, we're looking at, like I indicated, we're pushing towards 225-ish at the five-year; we're trying to have around 6% on a traditional five-year deal. Commercial is probably another 50 basis points above that. We're not really doing a lot of 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 of 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 of our customers on the multifamily side opt into that choice, which we prefer from an interest rate risk balance sheet management perspective, and it results in a much higher coupon. I think I indicated that on the commercial side what's repricing. But in 2023, we have about another $2.5 billion on the multifamily side repricing and over the next two years it's about $6 billion repricing. The market yields are around 6%, assuming they all go into a five-year structure. We're reluctant to do longer tenor given the marketplace. So we're being conservative and customers are largely sitting on the sidelines right now.

Great. I appreciate that. And then on the spot rate on interest-bearing deposits at year-end quarter end?

At year-end, the spot rate on interest-bearing deposits was 217 basis points.

Matt, just one point. We have a great builder finance business. That number is close to 400 basis points spread off repricing for SOFR 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 Flagstar 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 change that we're putting together here. So we're not just one bank that does one thing. We have 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.

Understood, Tom. I appreciate all that. I did want to also touch on the government-as-a-service deposits. 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 near zero towards the end of the year, or is this something that holds a residual balance that can grow year-over-year?

So I'm going to start and then refer to John. We've done a lot of work around expectation and modeling and doing regression analysis on how this would be active and we actually have experience with the stimulus payments and how well they held on the balance sheet. It has held better than we expected, but we model 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; there will be consistent with unemployment programs that matter. We have large relationships with several states. 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. If it happened in Q2 or Q3 it really is as quick as government gets it up and running and we're ready to react. 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, often net to zero. And John, if you want to talk about some of the trends.

Yes, we've tried to model it. 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 the bulk of the deposits do go pretty quickly, and then you have a slow draw after that. So yes, we will have deposits as of the end of the year, but I don't think it's going to be a material number by then. The first quarter will still have a really nice average balance then it will start to come down from there.

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?

I'll let Lee talk about the mortgage restructure and John will get into some estimates on what's left on merger-related expenses. Lee?

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 that we will take in the first quarter. In addition, we probably need 60 days to work off the pipeline — that's what we're estimating to work off the pipeline for those loans that are not yet closed for the offices that we've closed down. So that will 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 and the runoff of the pipeline and I expect us to have a real clean run rate beginning April 1.

On the merger-related charges, we'll see some in the next couple of quarters when it comes to primarily severance and just some consulting work to get through the consolidation of the two companies. So 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.

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 common equity raise or subordinated debt raise to bolster these ratios? That's all I had. Thank you.

Thanks, Matt. I think given where the capital ratios are, and just given the credit nature of the two balance sheets, two legacy bank balance sheets and the limited risk really from a charge-off and provisioning perspective, we're comfortable where the capital ratios are with a common equity Tier 1 ratio over 9%. 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, to fund growth. And then going forward, we can look at other capital initiatives depending on market conditions.

Thank you. Our next questions come from the line of Christopher Marinac with Janney. Please proceed with your question.

Hey Tom and John, I had a similar question as Matt on the capital. So is the $906 million likely to 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 will grow. Obviously, we're planning strong earnings growth as well to increase our capital position.

Just to be clear, we've traded off some capital for accretion on the adjustment given the changes in interest rates. So you're getting a lot of earnings benefit from the marks on the assets and liabilities. That does have an impact initially. You get that back over time. So we think you'll see some nice earnings-per-share growth as well.

Last question, John, just has to do with how the banking-as-a-service and government-as-a-service reprices over time. Do you have to have an absolute Fed cut before you can lower those rates thinking out just a couple of quarters from now?

Well, the government-as-a-service deposits are primarily non-interest-bearing or 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 some Fed cuts, especially in this environment. But over time, spreads can narrow a little bit on what you're paying for a lot of those products. But I think we have to start to see a pivot before we start to see some significant savings there.

Okay. And are those banking-as-a-service betas maybe three-quarters or two-thirds of the Fed moves? Is that about right?

Yes, there is a range. Some are 100% beta, then some are in that 75% range. So on the banking-as-a-service side it's a range of what's tied to the rate changes.

Got it. Great. Thanks for taking all my questions.

Thank you. Our next questions come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.

Ebrahim, you're back.

Yes, I’m back. I feel 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? Like, if you have any sense of where you think the bank is from a ROTCE, ROE perspective, what the franchise should be earning in a steady-state environment.

Look, 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 you move towards commercial banking, we've got to work a lot on the funding side. And the company is going to be, historically over the past couple of years, had a lower return on tangible common equity. We believe we should be in the high teens over time. I think the reality is on a traditional return on assets perspective well north of 1% — 1.10% to 1.20% 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 repriced, very different than the historical fixed-rate lender that had vulnerabilities to rising interest rates. So we want to be better balanced. At the same time, we're going to get our cost structure right. We have work to do in 2023 as a block-and-tackle year and we look at 2024 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 of a concentration on total income stream. So we want to have less dependency on mortgage and less dependency on wholesale, and 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. We have all the parts in place. It's going to take time to block and tackle, but we have the roadmap and the systems conversion will be done in the first quarter of 2024. At the same time, we're going to be rolling out the verticals, proving to the marketplace that we're allocating capital to different lines of businesses that have better margin businesses. At this point, as a company, we're looking at loan-by-loan detail on a total return basis, and we'll allocate capital accordingly. That's something very different when you have choices 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 planning. And we're super excited about launching the new Flagstar as a new brand.

Got it. Thank you.

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.

Thank you again for taking the time to join us this morning and for your interest in New York Community. We are creating a unique multifaceted financial services organization that will no longer be reliant on any one particular line of business, with a very exciting future. Thank you all.

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.