Flagstar Bank, National Association (FLG) Earnings Call Transcript & Summary

Greetings, and welcome to the New York Community Bancorp conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sal DiMartino, Director of Investor Relations. Thank you. Please go ahead.

Thank you, Donna, and good morning, everyone, and thank you all for joining New York Community Bancorp's management for this morning's conference call. Today's call will be led by Chairman, Sandro DiNello, along with the newest member of our management team and incoming CEO, Joseph Otting, and the company's Chief Financial Officer, John Pinto. A little housekeeping before the discussion begins, I'd like to remind you that certain comments made today by our management may include forward-looking statements within the meaning of the Private Securities Litigation 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 our press release and presentation for more information about risks and uncertainties which may affect us. And with that, now I would like to turn the call over to Mr. DiNello.

Thanks, Sal. Good morning, everyone, and thank you for joining us today. I'm happy to be here to talk to you about the significant injection of capital that we were able to secure yesterday as well as the meaningful changes to our leadership team and Board of Directors. Let me begin with our investment agreements to raise over $1 billion of capital. This is a substantial action for Flagstar anchored by Liberty Strategic Capital, who will invest $450 million. As you likely know, Liberty is led by the 77th Secretary of the Treasury, Steven Mnuchin. After the Secretary and his team completed their due diligence, they concluded that with a significant strengthening of its balance sheet, this company has the ingredients needed to become a prominent regional bank. We are in great markets, and we are big enough to compete yet small enough to be nimble. The fact that Liberty came to this conclusion is an incredible vote of confidence, not only in our new leadership team and reconstituted Board, but also in our ability to continue the transformation set in motion a month ago. In addition to Liberty's financial commitment, we secured capital commitments from an impressive set of distinguished investors, backed by some of the most respected and talented people in the industry for another $600 million of capital. With this additional capital, we now have a fortress balance sheet, and along with our strong liquidity position, better aligns ourselves with our large bank peers. Rest assured, we will take the necessary actions to improve earnings and profitability and drive enhanced client and shareholder value. Moving to management. As we reported yesterday, Joseph Otting, the former comptroller of the currency and a highly respected bank executive has joined the bank and will succeed me as CEO. I'll speak a little bit more about Joseph in a moment. The strengthening of our board in conjunction with this transaction is also important. To that end, we announced 4 new directors. Joining Steven and Joseph on our Board will be Allen Puwalski as well as Milton Berlinski, who is managing partner of Reverence Capital. Each brings a high degree of financial expertise to our company and a significant understanding of the banking industry. We look forward to their contributions. Back to Joseph. When I was appointed Executive Chair on February 6, my job was to step in, stabilize the bank, start to turn around, hand it over to someone else and then return to my role as nonexecutive Chair. So this solution works perfectly for me, and I'm excited that effective April 1, Joseph will begin a new chapter as CEO of Flagstar. I got to know Joseph when I was Flagstar CEO, and he was Comptroller. In that role, Joseph oversaw nearly 1,400 banks, ensuring their strict adherence to compliance, safe and sound operations. I found him to be a pragmatic leader and someone that was really interested and ensuring that the banking industry was doing its job, supporting communities across the country. As a banker himself, he has been through many market cycles, and as you will recall, he served as CEO of both OneWest Bank and CIT, where he was no stranger to navigating challenges. I'm confident that he has the requisite expertise, variance and acumen and is the right person to steer Flagstar's go-forward strategy. I look forward to working with Joseph and Steven and the rest of our new Board to build a truly great bank. Finally, I also want to thank all my wonderful teammates across the bank for being so kind to me during my sabbatical from retirement. The love I felt from so many is unbelievably humbling. With that, let me turn it over to Joseph.

Great. Thanks, Sandro. I appreciate the introduction. And as Sandro said, we have known each other for a long time. I have great respect for him on both a personal and professional level. So I think this partnership, I'm very excited about. I would say the whole team, I think, is excited to join Flagstar Bank at such a pivotal moment in its history and to work alongside him and the team to improve earnings and drive value for our shareholders. As we refresh the organization, we will continue to create a culture as one team and one bank that our teammates are proud of and that empowers them to provide excellent service to our clients. I plan to get right to work digging into the business further and working with Sandro to build on the steps he and the team have taken during this interim period. I think very important is that we're not starting from scratch. We'll continue to enhance our capital position and liquidity profile as well as our credit management practices. We'll evaluate opportunities to reduce our CRE concentration and to continue to build on our regulatory and compliance focus. As Sandro said, New York Community Bank has a long and storied history getting back to 1859. Today, the company has more than 9,000 dedicated teammates who are committed to building a first-class, top 30 diversified full-service banking franchise. And that's exactly what we plan to do. By injecting over $1 billion of capital into the company, as Sandro said, anchored by Liberty, Hudson Bay and Reverence, we have the opportunity to build even a greater organization together. I would point you to our SEC filings, including the investor presentation we put out this morning for additional details on the various forms of capital in this transaction. I would also say needless to say the transaction is significant as it is the impact it will have on the company and our go-forward strategy. We enter this next phase with confidence. We expect to close this transaction next week on Monday, March 11. I'd like to also add to support the business and further strengthen its capital base, the holding company determined it will reduce its dividend to $0.01 per share as part of this transaction. Now let me take a step back. Steven and I worked together closely over the years, and we are able to get to know each other in the company during our tenure at OneWest Bank. We have both admired and closely followed the bank for more than a decade. So when this opportunity presented itself, I knew it was exciting and one where we could make a meaningful impact. I've spent a fair amount of time getting to know the organization from afar and then a significant amount of time conducting due diligence on the portfolio and the balance sheet since then. And here are a few things that became clear to me during the diligence process that I took part in. First, Community Bank now has a strong balance sheet and liquidity position that is fortified by this transaction, and we have several levers to pull if needed as we continue to strengthen the foundation. The equity investment bolsters our capital ratios, including our pro forma CET1 to 10.3%, which is in line with our category 4 peers. Second, this financial strength is supported by a diversified and retail concentrated deposit base. Despite the many challenges Flagstar has faced over the last several weeks, the company's total deposits as of last night are more than $77 billion, down only 5% from the end of 2023. This demonstrates, I think, the resilience and the relationship-driven nature of the deposit base. Third, I believe the actions taken under Sandro's leadership over the last few weeks to stabilize the company are the right ones and I'm confident in our ability to build upon them. As I assume the CEO role, I think the company will continue to enhance its risk framework and we recently added a new Chief Risk Officer and Chief Audit Executive with both large bank and public company experience. I look forward to working alongside them. It is for all these reasons that I have conviction in the opportunity ahead for New York Community Bank. As we chart the best path forward for the bank, I'll be working closely alongside the new Board and leadership team as well as my teammates across the organization. I look forward to sharing more details about our path forward and our successes. With that, Sandro, John and I would be happy to answer any questions you may have. And so operator, would you please open the line for questions, we'd appreciate it.

[Operator Instructions] Today's first question is coming from Ebrahim Poonawala of Bank of America.

Joseph, welcome to the call. I guess just the first question. Over the last few weeks, the uncertainty on NYB has been tied to the legacy multi-family CRE book. So I would love to hear the level of due diligence, Steven, yourself. I know Sandro was doing a deep dive review of the loan book in determining what the loss content could be tied to that book as opposed to benchmarking to peers, as you framed it in the presentation, putting some money aside. I think, the question is, do you have enough visibility on the loss content of the multi-family book and the work you and Sandro, if you want to add the work that's been done so far in the last 2 to 3 weeks?

Yes. Thank you very much for the question. We obviously spent a significant amount of time with the team in the bank going through the large [indiscernible] in the portfolio and refreshing what we thought occupancies and lease rates and all of those respective activities and then walked away from that of building a model that gave us comfort that we understood the portfolio. As you know, market conditions continue to change. Cap rates continue to change, interest rates have volatility and those affect valuations in the portfolio. But we'll continue to do that due diligence as we move forward and continue to manage the credit risk aspects of the portfolio. But I'm confident that at this point, we have a good vision into that portfolio.

Got it. And just a separate question. When we look at the deposit update, loan-to-deposit ratio at 110% from everything I can tell, the regulators want more liquidity, lower loan-to-deposit ratios. Just give us a sense of, as you think about the turnaround sort of reigniting the earnings power of the company, how do you get this 110% down to something maybe -- I don't know if you already have a view around where the right level of loan-to-deposit ratio for this company should be. And the strategy around either you selling off loan portfolios or deposit growth?

Yes. I think all those tools are available to us. And as we get closer into the bank and have a chance to have further due diligence, I think ultimately, we'll come back with recommendations to the Board on how we would handle that. But I -- what I would say the fundamental thing that we've historically focused on is building relationships. And I think there's a solid base that's been proven by this deposit base. Clearly, if we look forward, one of the areas that my background, and we've proven historically to build out a fairly sizable commercial and industrial portfolio of middle market companies, and that will be part of one of our strategies. And as you know, that generally will result in relationship deposits that would come into the bank. So we'll be doing a lot of that analysis in the days ahead and be able to share probably more with you when we get together for the first quarter earnings.

The next question is coming from Dave Rochester of Compass Point.

Thanks for doing this call and congrats on the raise. On the deposit data that you guys provided, it looks like that was as of March 5. I was wondering if you had that update at the end of yesterday as well that we captured just all the stock price volatility. And then in addition, I was hoping you could give some color on the underlying dynamics in those trends in the non-CD core deposit bucket versus maybe CDs and broker deposits, that will have a decent impact on NIM and NII going forward. So I was just wondering what that looks like at this point.

Sandro, do you -- would you like to take that question?

The first question with regard to yesterday, without providing specifics, what I can tell you is that our recent experience in deposits going back to last week, beginning of last week was very good up through Thursday when we had the 8-K filed and then Friday was not a great day. And then Monday, over the weekend and Monday and Tuesday deposits were strong again. And one of the reasons for that is starting a week ago, Monday, we felt like things had stabilized enough in terms of some of the confidence in the bank that we could go out with a deposit win-back campaign and particularly in the private bank side of the company, we saw some good activity, positive activity, Monday through Thursday last week, and as I mentioned, also on Monday and Tuesday this week. Yesterday in the afternoon, when the story was out there, there certainly were some people that lined up to withdraw but in the morning and then in the later afternoon once the press release was out, it was back to normal. So we were very, very pleased with the performance of the deposit base yesterday. And I think now that we've got the capital in place. And I think the stability of the company has been secured. I'm confident that the positive growth that we saw recently can continue in a more significant way going forward. And I want to re-emphasize the fact that I think Joseph had it in his opening comments, you think about everything this company has been through over the last 2 months, a difficult fourth quarter with the provision, a cut in the dividend, the downgrades that we experienced from both Fitch and Moody's, the 8-K we filed last Thursday. That's a lot of tough stuff. And yet, we are only down 5% and our branches are actually flat over that period of time. I think that's unbelievably outstanding performance by our team. And I've been telling them how great of a job they've been doing in the face of all of this. It's not easy when you have that kind of bad news over and over. But the resilience of this portfolio should give investors confidence that now that we have the security of the bank in place with a significant capital infusion that we're going to go hard forward. And Joseph has got a great track record of building core deposits. And we've got a great start on that here. And I'm sure that he's going to be able to take that forward along with Regi Davis, president of our bank. And we're going to -- we're excited about the opportunity ahead of us for deposits.

Appreciate that. And maybe one unrelated question. Just given the significant management changes here and the recent volatility, how are you guys managing your relationships with the former Signature and First Republic bankers? And what's your commitment to that business model that these bankers signed up for when they joined the bank last year?

Sandro, do you want to take that question?

Yes, sure. Look, it was -- that transaction with Signature was a terrific transaction for the company when you look at what it did for the interest rate risk position of the organization, and it still remains that. Yes, it's a little smaller now. But now we're at a jumping point where, as I just finished saying, there's confidence. And these customers that did leave and there were some people that left, they didn't necessarily close their accounts. Because of their experience at Signature, they played it safe and they -- when they were concerned that something might happen here, they took their money out, but they didn't sever their relationship with the organization. They didn't sever their relationship with their account representatives. So we are definitely committed to the Private Bank as an important part of the deposit franchise of this company going forward. I've spent time with the private bank. I went to the headquarters in Manhattan. I think the second week that I was in this role, maybe even the first week because I wanted them to know that we were committed to this part of our company. The overall cost of funds that comes through the private bank is very attractive. And so why wouldn't we want to support that going forward. I know it's been a rough time for them. They probably had the toughest time in the company because of what they went through last March. But I think, and I hope that they know that we are supportive of what they're doing. And I think one of the first things I'll tell Joseph, when he gets into the chair here, is figure out what they need that we haven't given them yet. And if there's something that they need that we haven't given them yet, let's figure out a way to give that to them so they can do some great things for us. So there's no hesitancy in me, for sure, and the importance of this part of our organization. And you take that, coupled with the tremendous retail franchise we have. I think it's a powerful, powerful deposit franchise going forward.

The next question is coming from Chris McGratty of KBW.

The loan sales, potential securitization, maybe talk about what portfolios might be off limits, on limits, timing. Seemingly you had the Signature book that's been marked in short duration. You've got the resi book that could be put into a CRT. Just how are you thinking about the timing of those potential actions?

Yes, Chris, I think it's a little early for us to comment on that. I think Sandro has started to do some work and analyzing that. And I think we'll spend the next 30 or 60 days kind of strategically going through that and then making a recommendation to the Board of what our actions would be. And I would say when we come back in April, we should have a fairly good definitive plan that we can share with you.

Yes, Chris, I might -- as I said, these capital deals come together very quickly. And so to think that we could possibly come to you today and say, "Hey, here's how everything is going to be going forward," that would be unrealistic. The key thing is that we've got the capital in place and now we can, in fact, put together a strategy that makes sense. So we've got a couple of months that Joseph and I will work together to come, as you said, come forward to the Board with a recommendation on a business plan going forward. And then when we get to the earnings call in late April, we're going to share it with you. You know my history is to be pretty transparent when it comes to providing guidance. I think Joseph agrees with that. And so just give us a little time here. We'll come forward with something that's going to make a lot of sense.

Absolutely. And just a quick one on the warrants. The pro forma tangible book and capital ratios, do those include the impact of warrants? Can you just also help us on the capital and share count impact if they were converted?

Okay. John, why don't you take that question for Chris?

Sure. Thanks Joseph, Chris. Yes, the information we put in the deck is exclusive of the warrant, that $6.65 tangible book value per share. If you look at where we are at the close of yesterday and get the impact of the warrant in there, we would be at $6.22.

The next question is coming from Casey Haire of Jefferies.

So follow-up to an earlier question about the deposit franchise and just overall funding costs. So I was just wondering, I mean, the deposit franchise sounds like it's been pretty resilient given all the news, but wondering what has been the marginal cost of new deposits? And where is sort of the spot deposit cost versus that [ $262 million ] we saw in the fourth quarter?

Sandro, do you want to take that?

Yes. We'll come up with more specifics at the end of the first quarter. Let me just say -- I'll just say this. It's not -- we didn't do anything crazy relative to deposit pricing. That's not the reason that the decline is modest. We were business as usual. Other than paying a lot of attention to depositors, I can't tell you how many depositors I spoke to in an effort to give them confidence in the company. But we didn't go out and offer 6% CDs or something like that in order to make the numbers look good if that's what you're concerned with.

Yes. No, I am just trying to get a sense of funding costs and what NIM looks like going forward. So okay, I guess switching to credit, you guys put out some sensitivities on the ACL. And one of your priorities is obviously credit risk management. Just wondering how aggressive you'll be with reserve building and credit resolution in the near term?

Yes. I don't think we're pointing to any numbers by isolating that, Chris (sic) [ Casey ]. I think when you think about the portfolio, the 2 kind of historically bulletproof sectors that New York Community Bank competed in, which was the multifamily and the Manhattan office are obviously seeing stress. And so we will continue to deploy what I think are good risk management and credit management practices. And as new information comes in, we'll continue to do desktop analysis of those credits. And we'll, at this point in time, continue to look at that and feel comfortable that the book is being managed properly and we'll come back as we look at that number in April and to give you a good indication of where we see the loan loss reserve being.

Let me add that. You asked about credit resolution. I think this is an important point. I think the company has been relatively accommodative in the past. And the approach that we've taken over the last month is the start to think about how we might more aggressively manage the portfolio to get a better long-term results and help us reduce the dollar concentration level of this portfolio more quickly than maybe most think we can. And I can't be specific yet for you. But at the end of the first quarter, we will be a little bit more specific in that regard. And the last point is, that's why we raised capital, right? And all the people that I've spoken to in the last month, the first question is always about credit. And we want to put to bed the concern that we can't handle whatever that might be. And as Joseph said, we don't know, but we're going to be ready for whatever we need to do.

Okay. Very good. Just real quick, the coupon on the Series B and Series C preferred?

John, do you want to answer that question?

Yes, 13%.

The next question is coming from Steven Alexopoulos of JPMorgan.

I want to start, Joseph, so you come from other banks and you're going into a bank that's working through a challenging internal controls. And we've had other situations going back to the financial crisis where you get a new CEO, a new Chief Credit Officer, and they say to us, "We don't know where the problems are because the systems here are terrible." Could you tell us what's your evaluation of the systems? When you said diligence was done on loan portfolio, do you know cash flow of the buildings, what valuation should be ability to repay the loan? Just tell us your assessment, which will give us a better handle in terms of how much diligence you've done and what the quality of the portfolio is right now?

Yes. First of all, I think you're exactly right, is do you have the systems, but also do you have the information available to you. And I think in this case, we spent a significant amount of time with the top borrowers, both in the multifamily and the office building and down to the level of understanding debt service -- current debt services coverage is what we thought the estimated current loan to values were vacancies, lease rates. And we took that down to those individual obligations. And then we had discussions with both the internal team and the investor group. So I think, obviously, you can always get better at that. But we are in a position where I think we'll continue to gather that data, evaluate it. One of the beauties is if you've seen multiple systems in your career, you can kind of quickly, I think, identify where we can have improvements. And I can give you more feedback on that. But I think we got to a point collectively in the due diligence where we're able to get that information and I think be able to model out what off of that information where we thought the reserves and loan to values were and the appropriate risk ratings on those credits.

Got it. Okay. And based on what the diligence that's done to so far, can you go out to the market today and say that given the credit challenge that we see where reserves are, where capital is, that you don't see to raise additional outside capital at this stage, you could manage through strategic actions? Or are you still in the discovery phase that we won't find that out until next earnings?

Well, I think obviously, the level of capital that was raised was intended to build a fortress balance sheet that would allow us all to go back and focus on running the business and growing the business. And so -- but the things that control that really are outside the control of the banks, how bad can markets get, how bad can real estate local market segments get will drive that ultimate decision. But we feel, obviously, based upon our review, that capital levels that we raised were quite successful and will allow us to go back and focus on running the business and help our depositors have confidence the bank has the appropriate level of capital and liquidity to serve them.

Got it. Okay. If I guess what follow, does that imply that you're not considering additional strategic actions to raise capital in other ways? Or are those all still under evaluation today? Because ultimately, it's about the earnings power of the company, and that's why I'm asking the question.

Totally. And what I would just ask you is to give us a little bit of time now that we've come together with the organization to spend time developing a plan, getting the Board involved in that process and then be able to come back and communicate both a capital plan, but also how do we see the growth of the bank occurring. The real opportunity here, obviously, we've demonstrated historically the ability to build relationship banking businesses. I think, obviously, New York Community Bank and the Flagstar franchises have also done that. And so I think if we can continue to serve both consumers and businesses in a relationship manner, I think that will really unleash some real strong earning powers for the future of the organization.

The next question is coming from Bernard Von Gizycki of Deutsche Bank.

So look, post the rating downgrade by both Fitch and Moody's, there were concerns over the custodial deposits potentially leaving. It looks like on Slide 6 of the deck, that they increased from year end. Does the ratings change have no contractual impact? Just can you give us any update on the status of those deposits?

Sandro, you want to take that question?

Yes, we were able to get waivers from the agencies that allowed us to maintain those. And now I think given this capital raise, we're hopeful that, that relationship continue to be the way it is. So we've been able to work through that just fine thus far.

Okay. Got it. And look, just given the announced changes from -- on the CEO and the rebalance of the Board of Directors, are there any updates on changes of any of the strategic initiatives on building capital, liquidity, reducing CRE concentration? It seems from the prepared comments, and obviously, looking at the deck, there's no changes, but I would like to hear your perspective.

Yes. I think clearly, we will come back with kind of like the vision of the way we see the future of the bank. We just need a little bit more time to be able to do that. I think, obviously, commercial real estate stands out, and it's something that has both management of the banks and the investors' attention, the concentration of commercial real estate. We've always felt, I think, the right balance sheet for an organization is to look 1/3 of it being in consumer-related businesses, 1/3 in commercial banking type relationships and 1/3 of it in real estate. And I think you can kind of probably see a path for us to head in that direction organizationally because I think that diversification works well through economic fluctuations. So -- but we will obviously come back, we're going to work hard over the next 30 days to be able to put that together where we can share that with you with the first quarter earnings.

The next question is coming from Steve Moss of Raymond James.

Just wondered here if we could talk a little bit about the structure of the multi-family portfolio. And in particular, if you guys could give a little more color around the interest-only portfolio, how much is to which is rent-controlled units? And what is the full debt service coverage of that portfolio?

I think the most recent information that we've released on that is -- and I'm going to point to John here, but I think it's in the last earnings deck, John, did we update anything on that?

Yes. In the last investor presentation, what we really broke out for the multi-family portfolio was the percentage rent regulated. So the 100% rent-regulated units, which totals the $5.1 billion, that piece we broke out. And then we broke it out in the buckets from a percentage perspective so we can see -- you can get a sense of the information by unit rent regulation as compared to the total building.

So John, will there be anything to reference in the 10-K?

Sorry, Sandro, I missed that.

Yes. When we file the 10-K, will there be any additional information? Or will we expand on that in any way?

Yes. We have separate disclosures in the 10-K, and we can absolutely add some additional information that breaks out some of the rent regulated and some of the IO pieces that Steve was just mentioning.

Okay. Okay. So we'll get some of that in the 10-K. And just curious, by any chance do you have offhand, John, the debt service coverage on a full P&I basis for the entire multi-family portfolio?

I do not have that in front of me right now.

Okay. And just one follow-up in terms of maybe just a little color around the internal control disclosure that we saw in last week's 8-K. Just curious here, does that relate to the reserve build that we saw in the fourth quarter? Or does that relate to some of the data that you all had on the portfolios?

Sandro, do you want to take that question?

Yes. I think, John, you've got that, right?

Yes. I'll take that one. So when we looked at the material weakness on the internal loan review side, it's something that the company identified, we took it into account when we went through our fourth quarter CECL processing. When you think through the portfolio that had the most significant stress, the multifamily and the CRE, when we talked about on the earnings call as well, was that when we look at the information is what's important. So the information that goes into the model that we're using to calculate CECL, not the actual rating. The rating of course, is important and the identification of emerging risks and the oversight of that process. But as more and more data got -- came to us in the fourth quarter, we realized that we had some weaknesses during that process. We started the remediation plan in the fourth quarter, and we made sure we addressed what we needed to in the fourth quarter allowance and then we're going to continue that remediation plan along with the new hires that we brought in, especially on the Chief Risk Officer side to ensure that we fully remediate this material weakness quickly.

The next question is coming from David Smith of Autonomous Research.

Are there any timing restrictions on the preferred and the warrants? Or could they be exercised and converted right after the deal closes?

John, do you have that? I think there are timing, but I'm not that -- I'm not that close to it.

Yes. So the warrants have a 7-year term and then the preferreds, they can be converted into common when certain measures are met and approvals obtained. The information that you see in the deck is all on a fully converted basis. So yes, that -- once those are done, the preferreds we expect to be done within 6 months and the warrants, as I mentioned, has a 7-year term.

And so they could be exercised anytime within the next 7 years or they would have to wait 7 years?

Any time within the 7 years.

All right. And can you give us a sense of where we are in the review of the -- I think it was top 250 loan review that you're undertaking. Is it still like early innings, middle innings towards the end? Any update there would be helpful.

I'll take that, Joseph. Yes, we'll be done with it in time to do the proper analysis at the end of the quarter. So we're moving along. I don't want to be specific about how many. I'm not sure I know exactly how many, haven't been personally working on it day to day, but there's a team of people working. And as you could imagine, there's a lot of data to collect when you're looking at things that closely and that deeply, but the progress has been good and the information is coming in that we need, and we'll be ready to -- I mean, we'll have everything we need to do the proper valuation for the ACL at the end of the first quarter.

Any early takeaways you can share so far from that?

Not really. Honestly, all I can tell you is the team has made a lot of progress, and we'll have what we need, and we'll be in a position to properly evaluate the ACL at that time.

The next question is coming from Mark Fitzgibbon of Piper Sandler.

Joseph, I know it's early days, but is it likely that the balance sheet will shrink a lot? And does getting below $100 billion really matter to you?

Yes. I think we need to look at that in a holistic manner. And we've tried to comment on is that really a lot of that work will get done, Mark, I think, in the next 30 to 60 days as we kind of lay out where is the organization strength in relationship to being a top bank in the U.S. in comparison to our peers and were we ready for that move and in light of what the portfolio looks like. There's just tremendous opportunity here to move in a lot of different directions. And I think we just need to sit down and map that out and then collectively within the bank and the board make those decisions.

Okay. And then when the investors sort of modeled out this transaction, how long did it contemplate getting the company to a profitability level that looks sort of something like what peers -- peer banks are at?

I think when you look at -- when you're like changing the direction somewhat. And as I talked a little bit about trying to have a vision of the bank looking at 1/3, 1/3, 1/3, that transition can start. But usually, it's a couple year transition to where you start to see the fruits of that investment. And I think that would follow a very similar pattern here. We do have a good earnings powered organization here, and we can just kind of enhance that, I think, as we move forward, looking more like a regional bank, acting like a regional bank. And then putting our resources and investments in that direction.

The next question is coming from David Chiaverini of Wedbush Securities.

I was curious about brokered deposits. Are you able to share those balances as of December 31 versus March 5?

I don't think they're much different. We haven't provided that detail, but I'm pretty sure they're not particularly different. So again, if you're thinking that's why we maybe didn't have a more significant deposit decline, that's not the case.

Got it. And then housekeeping on the warrants. How many warrants are there? You mentioned the 60% coverage. What does that translate to in terms of shares?

315 -- 315 million shares, 60% of the 525 million.

The next question is coming from Matthew Breese of Stephens.

I was curious on the CRE concentration, it's something you've brought up a couple of times on this call. Even with the capital raise, the gap between yourselves and $100 billion bank plus peers remains substantially wide. And so I'm curious Joseph, your view on the plus 400% CRE concentration. And is that something that needs to be more in line with peers closer to 100% that are over $100 billion in size? Is that part of the go-forward plan?

It definitely will be, yes. We feel bringing that concentration down will definitely be part of our strategic plan going forward.

Is that something that can be done organically and/or in an expedited fashion via securitizations, the Freddie Q program, things like that?

I think it's a combination of all of the above. As some of those loans mature and people want to extend out or look for fixed rate options longer than what we're comfortable with or want to cash out, we'll be looking at all those options as those loans come up. But then it is a fairly robust market today. People are interested in buying assets specifically outside the banking industry. And so it is a time that there's lots of liquidity chasing opportunities for loan portfolios. And so I do think it's a good time to kind of do an assessment and then be able to kind of not only act in the short run but also strategically as we look to try to move the bank -- I use this again 1/3, 1/3, 1/3, where we can kind of start to formulate what the bank looks like in the future.

Just one more on this topic. I mean there are some wild estimates out there of what pure-play rent-regulated multifamily is down valuation-wise, pre and post the rent law changes in 2019. Do you have any view on what that change in valuation actually is to help us kind of calibrate potential loss content here?

Yes. Obviously, there's been a lot of headlines in that area with examples of the Wall Street Journal about some investments that parties have made. And then liquidating [indiscernible] what the impact. I wouldn't say that the universal thing you will see, some of those people were buying those properties to obviously convert them or move them into nonsubsidized housing, but we've done a fairly detailed look at that portfolio. Obviously, market conditions can continue to change. But I think overall, we feel pretty good about where we are with that book of business. And Sandro or John, I don't know if you want to add any additional comments to mine.

Yes. Look, we talked about this back on February 7, the resilience of that portfolio has been pretty darn good, too. While the level of classified assets have gone up substantially, delinquencies have not shown up. So people are paying. And I think that one of the reasons for that is that the underwriting on these loans was extremely conservative. So when you start from a place where the LTVs at origination were 50% or 60%, you can have a lot of value decline and the portfolio or the loan still covers the loan amount. Similarly, on the debt service coverage ratios at origination, they were relatively high. And I do think that NYCB, as I studied the history of the underwriting compared to other multi-family lenders, many of them anyways, was much more conservative in their views. So even though the entire multi-family book has been impacted in terms of cash flows, not just the rent regulated, I mean, think about inflation. They've all been affected to some degree. But when you start at a really high level of coverage, you can lose a lot of coverage and you're still above one. So while we're not telling you what it is overall, but the educated view is -- would be, if you looked at all the data that supports what I've been commenting on here, you can maybe understand why the migration from classified to delinquent just hasn't happened. And who knows whether that will eventually happen. But certainly, based on my experience, in the types of commercial lending that Joseph and I have been involved in, in our careers, this is highly unusual that you're not seeing a level of -- I mean, no delinquencies, right? It's not even like a low level, there just aren't any in the portfolio.

Understood. Just last one quick for me. You have a kind of sensitivity analysis on the reserve in the presentation. Should we assume in our modeling that there is a $500 million to $750 million increase from this capital raise in the reserve this quarter?

No, you should not.

The next question is coming from Peter Winter of D.A. Davidson.

Congrats on getting this deal done. I wanted to just go back to that question about $100 billion in assets. If you were to shrink the balance sheet and go below $100 billion, would that take you out of the category 4 bank and give you some breathing room to prepare like, for example, you don't have to go through the DFAST exam, if that were the case.

Yes. Obviously, that is the bright line in the regulatory world. So -- and clearly, that will be something that we'll evaluate. And it does obviously take you out of a specific category from the enhanced regulatory requirements that are imposed of the category 4 banks. So that is an option that we'll continue to look at and then assess the organization's ability to function as a category 4, but also what's the impact to us from an advantage if we do shrink below that number.

Got it. And then just to ask on the private banking teams. And in the press release, it shows 134 teams. But have you lost any teams? And I'm just curious when the retention bonus gets paid and maybe there's a risk that after that gets paid, the potential for people leaving on the Signature private bank side.

Yes, I'll take that, Joseph. We haven't seen anybody -- any teams leave -- I mean I can't say there's been 1 or 2, but the things that left, left early on after the deal took place in March. In terms of fear of loss, I think this team is going to be pretty energized by what we just did here. And I think they're going to view this as the best place to be. I honestly don't know when the retention payments happen but I'm not worried about it based on the time that I've spent with those teams, the e-mails, many, many, many e-mails that I received from people in the last month and in the last 24 hours about how excited they are about the future of our organization. I'm just not concerned that that's going to happen.

The next question is coming from Jon Arfstrom of RBC Capital Markets.

On the Matt Breese question, 2 questions ago, on that Slide 7, we all understand that allocation between capital and reserves, but why not just tell us you're going to take a large provision, push up reserves and just take that question off the table. Those are big numbers, the $500 million and $750 million. So why put that in there and why not just say, "Hey, we are going to move some money from capital to reserves?"

Yes. Because Jon, that hasn't been determined. What we were trying to show on that slide was what flexibility this capital raise provided the bank and hopefully give you some comfort that in the event that we did have to take additional reserves that the bank would clearly be in a position to be able to support that.

Okay. Can you get through all this initial work that you want to do by April? And what do you want to share with us on the first quarter call to get people a bit more comfortable?

Yes. I do think we can, Jon. There's going to be a lot of work. Clearly, I am dedicated to it. I know Sandro is dedicated to it. And in my experience of dealing with the team, they are all prepared to help us. And I think we'll have a lot of work to kind of lay out a lot of the questions that you said, I think here today is what is the strategic direction of the company? What does the company look like in the future? What are the profitability metrics that can be derived from that strategy? What businesses do we want to be in, what businesses we don't want to be in? And I think it's a realistic thing that we may not be 100% through that by April, but we're going to be pretty far down the path.

Good. I know you don't start until Monday, so maybe Sandro, this question. What are your -- what do you have for your risk officer working on and your audit executive working on? And what do you expect from them in terms of their early priorities and their assessments?

Well, what they're doing right now, of course, is getting up to speed. While we were waiting for them to come, we haven't been just doing nothing. The deputy and the risk area has been working very hard and he has actually done a really, really nice job. And we had an interim person brought in on the audit side and Kevin Ryan has been doing a wonderful job there as well. So the job for George and Colleen is to pick it up and build a first-class elite risk organization. Joseph and I both believe that the spine of the company is the risk organization, and we will make sure that it is the best. And in order to be a successful CEO, you must have that. If you don't have that, that's where you trip things. That's where you make mistakes. As I've already told, George, because he's been in the house a few days, and I've had a chance to speak to them a little bit if you see something that doesn't look right, you make sure that I know about it. And of course, he'll do that with Joseph when he gets in the seat. So make no mistake about it, we will build the absolute best risk organization in the regional banking sector.

Okay. I meant to say Joseph earlier by the way but thanks guys, appreciate it.

The next question is coming from Christopher Marinac of Janney Montgomery Scott.

Just a quick one on the rating agencies and sort of the roadmap to get back in front of them. Is there a scenario where you can have an accelerated conversation and perhaps have them revisit given the capital and liquidity deposit changes this month?

Yes, that is our intent.

Great. And then just a quick one, Joseph, on sort of rebuilding the deposits and loans on the middle market channel. Do you see that happening in the existing Flagstar NYCB footprint or with technology, can you look at various areas around the country, including regions that you've been successful in past banks?

If you look at the markets that we participate in today, it's coastal markets and the Midwest. And that's where a tremendous amount of the C&I activity in our country is located. So I do think we are going to be able to leverage the markets in geographic areas that we're currently in and then hopefully adding resources in those markets to pursue those strategies and opportunities.

This brings us to the end of the question-and-answer session. I would like to turn it back over to Mr. DiNello for closing comments.

Yes. Thanks, Donna, and thanks to all of you, of course, for joining us. This is the beginning of a new chapter for Flagstar. And I'm really excited that we've put the company in a solid position to build from. And I'm happy that I'm going to be able to continue to be a part of it and thrilled that Joseph is going to take the reins from me and thrilled about the people that we've got on this Board that are going to challenge us and make sure that management does the right things, and I couldn't be more excited about the future of this company. So thanks again to everyone. And finally, to all the Flagstar teammates across the country, we've got a lot of fun stuff coming ahead gang. So be ready.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.