NYCB, Flagstar’s EVP on the company’s future with Signature

flagstar bank, It is a top 25 mortgage lender in the US and has recently participated in two M&A transactions.

In December 2022, the bank completed its merger with new york community bancorp After waiting more than a year for regulatory approval. In March 2023, Flagstar surprised the market by acquiring several assets, liabilities and deposits amid the financial crisis. signature bank from Federal Deposit Insurance Corporation (FDIC).

So what do these transactions add to Flagstar?

Lee Smith, executive vice president and president of mortgages, said the Flagstar-NYCB transaction has created a “bigger bank with greater scale, little overlap and a more diverse business model.” increase.

Meanwhile, Signature has won wealthy customers, kept its loan-to-deposit ratio below 90%, and strengthened the bank’s balance sheet.

Smith, who believes the banking crisis has now calmed down considerably, said Flagstar’s current priority is to merge NYCB and Signature and explore synergies in integrating the systems, such as through real estate consolidation. I was.

“There will be cost synergies, but I wouldn’t just think in terms of layoffs,” Smith said.

As for the mortgage business, Smith expects the market to rebound in 2023 with interest rates at the 5% level. However, according to his executives, Flagstar has built a diversified mortgage business to win in the market whether interest rates rise or fall. This includes businesses such as origination, services, sub-services and warehousing.

“It’s what we call the one-stop-shop mortgage model,” he said.

In light of the recent M&A deal, Mr. Smith spoke to Housingwire from his office in Troy, Michigan, to explain the company’s business model.

Flavia Furlan Nunes:What was the rationale behind the merger with New York Community Bank?

Lee Smith: The transaction was announced in April 2021 and closed on December 1, 2022. Looking at his M&A deals for banks, it’s a typical time.

The benefit of merging these two organizations is that it created a $90.1 billion bank by the end of 2022. Flagstar has a large mortgage business, community banks, bank branches, commercial lending including warehouse lending, and homebuilder financing.

NYCB has been very focused on multifamily lending, especially in the New York area. Merging the two organizations has created a larger bank with greater scale, little duplication of operations and a more diverse business model.

Together, NYCB and Flagstar have 435 bank branches. We have very diverse branches. NYCB and Flagstar have known each other for a long time. It was a natural conversation. It was an opportunity to grow.

Nunes: Why did Flagstar acquire Signature’s assets, liabilities, and deposits while you were still integrated with NYBC?

Smith: Most recently, in March, there was a banking crisis. Three Banks – and a Fourth Bank First Republic – Affected by silver gate, Silicon Valley Bank, and signature banks. Signature Bank is a New York bank, so I was familiar with it. We operate in the same market, with the same customers, sometimes competing with each other as friendly competitors and sometimes collaborating.

Unfortunately, they were seized by the FDIC on Sunday after Silicon Valley. When you foreclose on a bank, the FDIC goes through a process to sell your assets and liabilities as soon as possible. So they hired a banker.

Knowledge of the bank allowed me to participate in the process and submit bids. Ultimately, $25 billion in cash and he ended up buying his $38 billion in assets, including a $13 billion loan. And we assumed deposits of $34 billion.

Nunes: What are the economics behind the deal, given Signature’s loan and the assets Flagstar acquired?

Smith: The signature business, again, doesn’t overlap much. We didn’t take their multifamily loan because we already have a multifamily business in NYCB. not.

But we took on most of the other businesses. These businesses complement what we have because they serve high net worth customers. They had an asset business that we don’t have. They had a broker-dealer.

In the case of a sale from a trustee, the economics are different. Of course, it’s happening quickly, as opposed to the usual process that takes months. And the transaction changed the funding mix and the liability side of the balance sheet. The loan-to-deposit ratio is now below 90%. And before the deal he was over 100%. So it really changed our balance sheet.

Nunes: Why does Flagstar get Signature instead of NYCB?

Smith: All will be Flagstar brand. NYCB operates under many names due to its history of acquisitions.and tom [Thomas Cangemi, NYCB president and CEO] We realized we had to come together and have one name. Flagstar is already nationally known for its mortgage servicing business and certain other lending businesses. And it makes sense to make everything Flagstar.

So we’re a $124 billion bank right now. Also, there are businesses that thrive in an environment of rising interest rates and businesses that thrive in an environment of falling interest rates. So we are in balance.

Nunes: How is the integration of all these businesses going? Are there any layoffs resulting from these integrations?

Smith: we are working on it. The Flagstar and NYCB system integration, he said publicly, will be completed in the first quarter of 2024. Remember, you got loans and deposits by signing. It’s a little different than the NYCB merger as it’s not a full consolidation. It’s about getting rid of loans and deposits and putting them into our system. It’s easy in theory.

Our current focus is on completing the integration. Cost synergies can be realized in many ways, such as real estate consolidation when consolidating multiple systems and he migrates to one system. There are cost synergies, but don’t just think in terms of layoffs. There are many ways that bringing an organization together can be cost effective.

Nunes: What to expect from a banking crisis? Will Flagstar buy another bank?

Smith: Things are much calmer. The reason, again in my opinion, is that when you look at the banks that were seized, they were more idiosyncratic banks like Silicon Valley, Signature and First Republic. They were concentrated in specific areas. The deal with First Republic is completed, JP Morgan, I think we should be in more calm waters now. We certainly want to digest what we have.

Nunes: How’s your mortgage situation? What to expect in 2023 and 2024?

Smith: Back in 2020 and 2021, the size of the mortgage market was over $4 trillion. Last year it was $2.4 trillion. Looking at the latest forecast MBAs, fannie mae and freddie mac – $1.7 trillion on average this year. The Federal Reserve Raised Interest Rates Rapidly. At 3% he could take out a 30-year mortgage when the market was $4 trillion. We are currently looking at 6.5%.

It’s a big change in a short period of time. It definitely put a lot of pressure on the mortgage market. That is why the market size has shrunk significantly. You reported on it and it’s out in the open, we’ve certainly made headcount reductions. You can’t get a big market share without profitability.

Maybe not in late 2023, but in 2024 I think rates will start to come down and we’ll see 30 year fixed rates instead of 6.5%. Being visible in 5% will generate more activity.

Nunes: How is Flagstar prepared when the market changes?

Smith: In terms of origination, we have diversified. We start with 6 channels. Four are TPO channels. Delegated Correspondent, Non-Delegated Correspondent, Broker and Bulk. The two retail channels are distribution retail and direct-to-consumer.We are a bank, so we have a balance sheet and can issue our own RMBS [residential mortgage-backed securities].

When we originate a loan, we are creating a mortgage servicing right and we like the asset. If you look at the balance sheet at the end of the first quarter, there’s just over $1 billion of his MSR. The MSR asset is a hedge to the origination business.

But here’s where it gets interesting for us. We are also a large sub-servicer with 1.5 million loans and nearly $5 trillion in mortgages. that generates income. In an environment of rising interest rates, the number of loans increases because the payoff is less. And the other thing that business does is create escrow deposits that fund our balance sheet because we are a bank.

And that brings me to the next part of the flywheel: We are the second largest warehouse lender in the country. This team is highly focused on mortgage companies in terms of introducing deposits and providing treasury and cash management services.

Because from a mortgage standpoint, we’re hedged. It’s what we call the one-stop-shop mortgage model.

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