Flagstar Bank, a top-25 U.S. mortgage lender, recently participated in two M&A deals.
In December 2022, the bank concluded the merger with New York Community Bancorp after waiting for regulatory approvals for over a year. In March 2023, Flagstar surprised the market amid the banking crisis by acquiring some assets, liabilities and deposits of Signature Bank from the Federal Deposit Insurance Corporation (FDIC).
So what do these transactions add to Flagstar?
Lee Smith, senior executive vice president and president of mortgage, said the Flagstar-NYCB transaction created a “bigger bank with scale, very little business overlap, and a more diversified business model.”
Meanwhile, Signature brought in high-net-worth customers and took the loan-to-deposit ratio to less than 90%, strengthening the bank’s balance sheet.
Smith, who thinks the banking crisis is much calmer now, said Flagstar’s current priority is integrating NYCB and Signature and looking for synergies when bringing systems together, including through real estate consolidation.
“There’ll be cost synergies, but you wouldn’t just think about them in terms of layoffs,” Smith said.
Regarding the mortgage business, Smith anticipates that the market will recover in 2023, with rates at the 5% level. But, according to the executive, Flagstar has built a diversified mortgage business to win in the market whether rates increase or decrease. This includes, among other businesses, origination, servicing, subservicing and warehouse lending.
“We are what we call a one-stop shop mortgage model,” he said.
In light of the recent M&A deals, Smith spoke to HousingWire from his office in Troy, Michigan, to explain the company’s business model.
This interview has been condensed and lightly edited for clarity.
Flávia Furlan Nunes: What was the rationale behind the merger with New York Community Bank?
Lee Smith: That is a transaction we announced in April of 2021, and we closed it on December 1, 2022. That’s something that had been in the works for 20. months. If you look at any bank M&A deal, that’s a typical time.
The beauty of bringing those two organizations together is it created a $90.1 billion bank at the year-end 2022. At Flagstar, we have a heavy mortgage business, a community bank, bank branches, commercial lending, including warehouse lending, and homebuilder finance.
NYCB was very concentrated in multifamily lending, particularly in the New York area. By bringing those two organizations together, you created a bigger bank with scale, very little business overlap, and you had a more diversified business model.
Together, NYCB and Flagstar have 435 bank branches. We’ve got a very diversified branch footprint. 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 some Signature assets, liabilities and deposits when you were still integrating with NYBC?
Smith: More recently, we saw the banking crisis hit in March. Three banks – and a fourth with First Republic – were affected by that, Silvergate, Silicon Valley Bank, and Signature Bank. We knew Signature Bank well because they’re a New York bank. We are operating in the same market, same customers, sometimes competing against each other as just friendly competitors, sometimes working together.
Unfortunately, they were seized by the FDIC on the Sunday after Silicon Valley. When it seizes a bank, the FDIC runs a process to sell the assets and liabilities as quickly as possible. So, they hired bankers.
We were able to, given our knowledge of the bank, get involved in the process and submit a bid. We ended up buying $38 billion of assets, which included $25 billion of cash and $13 billion of loans. And we assumed $34 billion of deposits.
Nunes: What are the economics behind the transaction, considering Signature’s loans and assets acquired by Flagstar?
Smith: The signature business – again – has not much overlap. We didn’t take their multifamily loans because we already have a multifamily business at NYCB. We obviously didn’t take the crypto business loans and we didn’t take the venture loans.
But we took pretty much most of the other businesses. These businesses complement what we have because they’re dealing with high-net-worth customers. There are different industries that they’re focused on. They had a wealth business that we don’t have; they had a broker-dealer.
The economics are different when it’s a sale out of receivership. Of course, it’s happening quickly versus a normal process, which takes months. And the transaction transformed our funding mix and the liability side of the balance sheet. It took our loan-to-deposit ratio to less than 90%. And we were over 100% prior to the transaction. So, it really transformed our balance sheet.
Nunes: Why is Flagstar acquiring Signature and not NYCB?
Smith: It’s all going to be brand Flagstar. NYCB operated under a number of names because they’ve been acquisitive historically. And Tom [Thomas Cangemi, NYCB president and CEO] realized we’ve got to come together and have one name. Flagstar is already known nationally, just given our mortgage servicing businesses and certain other lending businesses. And it just made sense to make everything Flagstar.
So, we’re now a $124 billion bank. And we’ve got certain businesses that can be successful in a rising rate environment and businesses that will be successful in a declining rate environment. So, we’re balanced.
Nunes: How has been the integration of all these businesses? Will you have layoffs resulting from these integrations?
Smith: We’re working through that. We’ve talked publicly that the systems integration for Flagstar and NYCB will be completed in Q1 2024. Remember, with Signature, we’ve acquired loans and deposits. It’s a little different than the merger of NYCB because it isn’t like a full integration. It’s more about lifting loans and deposits and putting them into our systems. It’s easier, in theory.
The focus right now is on completing the integration. The cost synergies can come in a number of ways, including real estate consolidation as we bring systems together and move to one system. There’ll be cost synergies, but you wouldn’t just think about them in terms of layoffs. There are lots of ways you can realize cost benefits from bringing organizations together.
Nunes: What do you expect of the banking crisis? Would Flagstar acquire another bank?
Smith: Things are much calmer. The reason for that – and, again, this is my opinion – is, if you look at the banks that were seized, so Silicon Valley, Signature, and First Republic, it was more idiosyncratic; they had concentrations in certain areas. With the transaction done with First Republic and JPMorgan, I think we should be in much calmer waters now. We certainly want to digest what we’ve got. That’s our immediate goal right now.
Nunes: How is the landscape for mortgages? What do you expect for 2023 and 2024?
Smith: If you go back to 2020 and 2021, the mortgage market was in excess of $4 trillion in size. It was $2.4 trillion last year. If you look at the latest forecast – MBA, Fannie Mae and Freddie Mac – it’s on average $1.7 trillion this year. The Fed has raised rates quickly. When the market was $4 trillion, you could get a 30-year mortgage for 3%. Now you’re looking at 6.5%.
That’s a big change in a short time. It undoubtedly put a lot of pressure on the mortgage market. That’s why you’ve seen this big reduction in the market size. You’ve reported on it, and it’s public, we’ve certainly had headcount reductions. We’ve reduced the size of our mortgage origination business because we’re focused on profitability. We’re not about having a big market share if you’re not profitable.
It might not be the second half of 2023, but I think in 2024, you’re going to start to see rates come down, and you’ll start to see the 30-year fixed rate, instead of being 6.5%, we’re going to see in the 5%, and then that’s going to generate more activity.
Nunes: How is Flagstar getting ready for when the market turns?
Smith: From an origination point of view, we’ve diversified. We originate in six channels. Four are TPO channels—delegated correspondent, non-delegated correspondent, broker and bulk. Two are retail channels—distributed retail and direct to consumer. Because we’re a bank, we have a balance sheet and can issue our own RMBS [residential mortgage-backed securities].
As we originate loans, we’re creating mortgage servicing rights, and we like that asset. If you look at our balance sheet at the end of Q1, we have just over a billion dollars of MSRs. The MSR asset is a hedge against the origination business.
But then, here’s where it gets interesting for us. We’re also a big subservicer, with 1.5 million loans and almost half a trillion dollars of mortgages. That generates income. In a rising rate environment, there are fewer payoffs, so the loan count increases. And the other thing that that business does is creates escrow deposits that fund our balance sheet because we’re a bank.
And then that brings me to the next part of the flywheel: We’re the second largest warehouse lender in the country. And then we pick up as part of the Signature deal this treasury and cash management team that’s very focused on mortgage companies in terms of bringing in deposits and offering treasury and cash management services.
I tell you all that because, from a mortgage point of view, we’re hedged. We are what we call a one-stop shop mortgage model.
