Good day, and welcome to the Flagstar Bank Fourth Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to David Urban, Director of Investor Relations. Please go ahead.

Thank you, Katy, and good morning. Welcome to Flagstar’s fourth quarter 2018 earnings call. Before we begin, I would like to mention that our fourth quarter earnings release and presentation are available on our website at flagstar.com. I would also like to remind you that any forward-looking statements made during today's call are subject to risks and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Slide 2 of today's presentation, in our press release and in our 2017 Form 10-K and subsequent reports on file with the SEC. We are also discussing GAAP and non-GAAP financial measures, which are described in our earnings release and in the presentation we made available for this earnings call. You should refer to these documents as part of this call. With that, I’d like to now turn the call over to Sandro DiNello, our President and Chief Executive Officer.

Thank you, Dave, and thank you everyone for joining us today. In addition to Dave, I’m joined this morning by Jim Ciroli, our Chief Financial Officer; Lee Smith, our Chief Operating Officer; Kristy Fercho, our President of Mortgage; Drew Ottaway, our President of Banking; and Steve Figliuolo, our Chief Risk Officer. As usual, I'm going to start the call by providing a high-level view of our performance for the quarter, and then I’ll turn the call over to Jim for details on our financial results. Lee will follow with a review of our business segments and strategic initiatives, and I’ll conclude with guidance for the first quarter before opening up the line for questions. On December 31st, we closed the books on a good quarter and a good year. For the quarter, we posted adjusted net income of $42 million or $0.72 per diluted share, up 20% from the adjusted results in the same quarter last year. For the full year, we achieved adjusted net income of $176 million or $3.02 per diluted share tapping our adjusted results for the full year 2017 by 23%. The adjustments for the quarter were attributable to two items. First, hedging gains; and second, expenses relating to the Wells Fargo branch acquisition. Take away that noise and we have solid operating earnings where we proved once again, as we have throughout 2018 that we can grow earnings in a challenging mortgage environment, because we have built a stronger more diversified franchise. In fact, we delivered an adjusted ROA of 0.91% in the quarter, even though our mortgage rate lock commitments were the lowest of the year, and our gain on sale revenue was the lowest since the early days of the financial crisis. Part of that diversification was a push into commercial and industrial,…

Thanks, Sandro. Turning to Slide 6, we are pleased with the quarter and our position at the end of 2018. Our adjusted operating net income this quarter was $42 million, $0.72 per share, up 20% from our operating results in the same quarter last year. This growth was consistent with our full year operating earnings growth. These operating results were driven by a stable but stronger level of net interest income adjusted for the outsized hedging gain this quarter. Each quarter as we continue to grow loans and deposits, we stabilize the level of net interest income. This quarter, despite 651 million in lower average balances from loans held-for-sale and warehouse loans, adjusted net interest income held steady declining only 1 million. This level of earning assets is supported by a stronger level of deposits from the communities we serve. At year-end these community deposits which exclude brokered and custodial deposits, supported 62% of total earning assets, up from 54% at the end of the third quarter. The result of this balance sheet transformation is that while our mortgage gain on sale revenue came in as low as we've experienced since the fourth quarter of 2008, we are still able to grow net income at a nice pace. Asset quality continued to be strong as net charge-offs were only 4 basis points. Our non-performing loan ratio improved yet again and our allowance coverage of the loan portfolio remained at 1.4% among the strongest in the industry. We're now less than a year away from seasonal adoption. And while we're not yet going to discuss its impacts on Flagstar, we feel that this coverage level positions us well for whatever that impact might be. Capital also remained strong after the Wells Fargo branch acquisition. While we await final capital regulations, we…

Thanks, Jim. And good morning, everyone. We are very pleased with our adjusted operating net income of $0.72 per diluted share for the quarter and $3.02 per diluted share for the fiscal year. 2018 was another successful year for Flagstar as we continued to execute on our strategic plan to deliver value for our shareholders. Some of the key highlights included: We grew average loans held for investment by 1.6 billion or 22%, and expanded our net interest margin by 23 basis points year-over-year after adjusting for the deferred hedging gains associated with the Wells Fargo Bank branch acquisition, which enabled us to grow adjusted net interest income by 78 million in 2018 versus 2017. The earning asset growth during the year was spread evenly across multiple commercial and consumer asset classes and included the acquisition of a warehouse lending business which we closed in the first quarter. Furthermore, during 2018, net interest income accounted for 53% of our total revenues, as compared to 45% in 2017. Average total deposits increased 2.9 billion during the year, and we saw robust growth across all deposit categories. Retail deposits grew 1.1 billion predominantly because of the acquisitions of the Desert Community Bank branches in March and the Wells Fargo Bank branches which we acquired in December. We also saw a healthy increase of 1 billion in company-controlled deposits because of the higher subservicing loan count, with increases in government and wholesale deposits accounting for the difference. Overall, we were very successful in 2018 creating liquidity to fund our future balance sheet growth. As of December 31st, we were servicing or subservicing 827,000 loans, which is an increase of 87% from where we started the year. We are now the sixth largest subservicer of loans in the country and expect to be servicing…

Thanks, Lee. Before I get into guidance for Q1, I would like to share some additional comments regarding the Wells Fargo branch acquisition we closed this quarter. Candidly this wasn’t our best moment. We underestimated the conversion costs. We underestimated the ongoing incremental operating costs. We stumbled out of the gate and the deposits that came to us at closing were less than we anticipated. I could give you a lot of reasons why that happened, but it really doesn't matter. What matters is that knowing all that I continue to believe that this is a very important step in the continuing transformation of our company to a true community bank. Adding 170,000 customers is not easy to do. I have been in these branches. I have seen the strong relationship the bank has had with their customer base. I have witnessed their high skill level and the way they performed under pressure was impressive. So, knowing everything I know today, I would do this still again in a heartbeat. Now let’s move to guidance for Q1 and we will open the call for questions-and-answers. Please turn to Slide 17. We expect net interest income will increase slightly on an improved margin, partially offset by a seasonal decrease in interest earning assets. We anticipate gain on loan sale income will increase 20% to 25% on higher mortgage locks and a modest increase in gain on sale margin. We expect the return on MSR to be flat. As Lee noted, we anticipate non-interest expenses to be between $185 million and $190 million and we expect the effective tax rate to be 18%. This concludes our prepared remarks and we will now open the call for your questions.

[Operator Instructions] We will now take our first question from Scott Siefers of Sandler O’Neill. Please go ahead.

I was just hoping if you could spend a quick second on sort of the nuance behind the better argument of sales performance expectation in the first quarter. I think only because -- I mean I can read the guidance of course but I think people generally just view the first quarter likely seasonally weaker one. But just curious as to what gives you confidence that we would see such a pronounced spring back in those revenues in the 1Q?

I will let Kristy dig into some detail but we saw margins get better as the quarter went on and we think that given the activity that we see currently and going forward we’re a little more optimistic about where margins might be in the first quarter. Kristy?

Yes, what I would add Scott is, we’ve maintained very strong discipline in Q4 in terms of some of the pricing discipline which really had some of that kind of follow on adjusted lock volume decrease, we're seeing some loosening of that as we enter into Q1. And so we're optimistic that based on some of the things that we're seeing there that we will be able to really drive that back in Q1.

And then just as I think about the size of the balance sheet, it’s kind of become a custom to you guys generating call it like a mid-teen year-over-year increase in the base of earning assets. So this might be a little more nuanced sort of question but earning assets were down in the fourth quarter, looks like they'll be down again in the first quarter. So to get back to the typical kind of trajectory on at least a year-over-year basis that you guys have been doing in the last couple of years, it would imply really, really strong acceleration in balance sheet growth through from call it second quarter through fourth quarter this year. Is that’s the right way to think about it or just given what happened in the fourth quarter and is likely to happen in the size of balance sheet in the 1Q, is 2019 going to be a bit more muted year-on-year just in terms of overall balance sheet growth?

Well, certainly it could be. I mean, I look at things on a 12-month rolling basis and I think the last 12 months have been pretty good for us in terms of our growth. And I'm optimistic that that'll still be the case as we go forward. You have to look for where the opportunities are in the markets, Scott, and I can't look too far in the future and understand where that might be. But I think, the fact that we've diversified the asset generating sources that we have over the years, because that’s an advantage over others, because you can move where the opportunity exists. Now that said, we're not going to grow just for growth sake, it's got to be profitable, it’s got to get the right returns. It's got to have the right credit quality. Now all those things have to line up. So the most important thing to make sure is that we keep a good solid clean balance sheet right now and from a quality point of view, I think we can do that. I'm happy to let Drew add a comment or two about what he is seeing in the commercial space.

Yes. Thanks, Sandro. I’d certainly echo your comments. I think, if you look at both the commercial and the consumer portfolios, they are far more diversified than they were historically. And so while you may get quarter-to-quarter some lumpier growth in any one of them, if you look at it overall for the year, we've been in very good shape. And I think at the end of the day and especially on the commercial side, it really is a relationship-based model. So it's the lenders that we bring over. It’s the relationships that they have, that have allowed us to continue the way we said we’ll grow that portfolio in a really meaningful and balanced way.

Scott, it's Lee. If you -- loans held for investment were up 1.6 billion or 22% year-over-year, that's where the commercial and the consumer loans, Drew was just talking about sits. When you're looking at overall interest earning assets, you're including assets held for sale. And given the size of our mortgage business, that number can fluctuate, because if we see opportunities to sell quicker to maximize gain on sale, we will do that.

Okay. Good. So it is that held for investment that’s probably the one that’s cluing on as opposed to that sort of the entirety of the base of earning assets. Okay. Good. And if I can sneak one, last one in there. Lee, in your prepared remarks, you talked about the margin continuing to expand. So clearly we'll get another boost from the full quarter of having these Wells branches in there. Is your sense that the margin could continue to expand thereafter in 2Q and beyond or would we reach sort of a steady state after we get the full quarter benefit in there?

Scott, so as you know, we don't go out there farther than a quarter. But I'll say this fundamentally, this is why I believe the transaction that we just executed on is so fundamentally important. So if rates in the marketplace continued to rise, if the Fed should continue to increase short-term rates, the impact on us will be much less than it would've been, had we not done this transaction. So, whether it’s 2 billion or 1.7 billion or 1.5 billion that’s that much less in the funding that we have interest sensitivity exposure to relative to Fed increases. So we certainly feel much better about the prospects of the margin behaving in a positive way but we're not going to speculate out farther than Q1.

We will now take our next question from Bose George of KBW. Please go ahead.

I just had a follow-up on the gain on sale margin guidance. The gain of sale margin trend sort of improved in the quarter after the rate rally in November because it did look like primary, secondary spreads got a little better after that.

Yes, it gradually improved after that point.

And then just on the balance sheet, in the loans held for investment category, the other consumer loans, can you just remind us what's in that bucket?

Bose, this is Jim. It’s largely the indirect marine/RV that we have.

And we also -- as part of the Wells transaction, we acquired a 105 million of unsecured loans that’s also in that bucket.

And then just one last one on the Wells Fargo purchase agreement, I forget, was there any price adjustment based on the attrition prior to the close?

Well the premium paid was based under deposits at close. So there was kind of an automated price adjustment based on that.

We will now take our next question from Steve Moss of B. Riley. Please go ahead.

Well following up on the Wells Fargo deposits, just wondering, do you think we’ve hit bottom here in terms of the attrition and that will stabilize going forward or could we see a bit more to go?

Well I don’t know, Steve, I mean we are working really hard on keeping the attrition at well below the 17% number that we had anticipated or modeled. And at this point, what do we say, 8%, 8.5%.

[8.5% yes].

We feel pretty good about where it’s at today. So to the extent we can keep it at there or better, it obviously makes the transaction more accretive to us. But the important point, I think more important point is that at once we’ve settled in and whatever attrition takes place happens then it's about moving forward and growing the relationships with these customers and that’s the other benefit as I already talked about the interest rate sensitivity benefit. But the other benefit is now we have 150,000, 160,000, 170,000 customers or whatever it is that we didn’t have a couple of months ago that we can sell products to and so grow deposits from. So what's more important to me than whether the attrition then sort of being 8%, 9% or 12% is what we do after things settle down and how we grow that business going forward.

Can I just jump on what Sandro said and just give you one fact which I think is important if you are looking at the attrition. So when you look at the deposits and what we announced originally, some of these deposits were what we would term out of footprint, so the primary addressees were not within the four states where these branches were located. When you look at the attrition that’s occurred pre-close and post-close, 82% of those out of footprint deposits have gone. So you're only left with a very small amount of those out of footprint deposits. That's where we’ve seen the majority of the attrition.

Okay, that’s helpful. And in terms of the mortgage warehouse lending here, commitments have declined again this quarter. Just wondering what transitioning in there? Looking from the deck, it seems spreads are holding up, but are you seeing pressure from competition?

It’s not so much pressure from competition, I’m not saying I wouldn’t say if there isn’t any pressure from competition, there's certainly is. But I think that commitments go down not because necessarily customers leave you, but if their business levels are lower than they had been in the past and they don’t need the level of lined they’ve had in the past, there is no reason for us to keep a large commitment out there. So we like the lines to be used, where we have adjusted commitments to be more aligned with the actual level of business that our customers are at these days. More important number really to look at is the outstandings and we know we're in a difficult time right now, not only is a seasonal point were our balances are going to be lower but originations are lower, then you’ve prospect for 2019 probably for a further decline in origination. So I think there is going to be pressure on the warehouse business but we’re a big player in that market and I’m confident that we will hold up.

Okay. And then if I just one more in terms on the Homebuilder Finance business, commitments are up nicely again quarter-on-quarter, spreads have come in a bit but just wondering what are your expectations for the business going forward especially given what seems to be slowing home sales?

Yes, thanks. This is Drew. I would say this, we still think there is a lot of room with that team, I think you’ve probably heard in prior calls that group that came over just a few short years ago, it’s been in the business a long time, has very established relationships. And so even we have seen pressure in the homebuilding industry, overall, they really continue to make good progress based on those relationships that they have. You still get a little bit of seasonality at year end with some of their larger borrowers. But generally speaking, the pipeline that's been in place and continues to be in place is a strong signal to me in terms of the continued growth that we hope to have there.

We have kind kept a lid on this business because we want to maintain safe concentration levels and so as the company has grown and as the capital has grown, we’ve allocated more capital to the line of business. And we’re continuing to see opportunities to bring new customers, strong new customers into the company because of the strong relationships that our team has and Drew and the team under Joe Hardy have been able to add a couple of people here. So that’s an area where we are very bullish on our ability to continue to grow that in a very smart way.

Yes. I’d just add, Sandro. I mean if you look at that portfolio, we now have direct relationships with six of the top 10 builders in over 40% of the top 100 builders. So these are large well-capitalized companies that turned very well during the downturn and needless to say I think that helps as we continue to grow that portfolio.

We will now take our next question from Kevin Barker of Piper Jaffray. Please go ahead.

In regards to the -- just a follow-up on the attrition rates. Could you give us an idea of how much attrition you saw in the first couple of weeks after the deal closed? And then what the attrition rates were like through January?

It's been pretty steady, it wasn't like -- it was 8% coming out of the gate and then has been flat, it's been pretty steady. Lee or Jim, you want to add to that.

Yes. I would -- what I would say though is we've definitely seen slowing down as we’ve moved into January versus December. So I would -- it was higher in December than it has been in January. So we have seen it begin to drop off a little bit.

I don't know how to recap Kevin, because we had the holidays in the middle there, it's really difficult, so with weird number of business days that we had. So, if you've got a conclusion you want to share with us, I'm happy to hear your opinion on what that means, because I don't know what that means.

I would also -- sort of balances normally kind of go lower around the end of the year. So we're at 8.7 right now and we're going to work hard to maintain that as low as we can.

I would think the attrition rates would be the fastest in the beginning and then slow down from there. Just trying to get an idea like the run rate that you're at right now and then also your expectations or how that's going to play out, I guess over the next two to three months, because it's such an important period in the transition from Wells onto the Flagstar?

No, Kevin, we get it. We are working hard to give the customers as good of experience as possible to minimize that attrition. And as you can tell based on the deposits we acquired at closing, there was a lot of attrition prior to closing.

One thing I can tell you, Kevin, as I’ve said in my prepared remarks, I've been to a few of the branches and I've seen the relationships, they're tight. These are customers that have banked with these bankers for a long time and the tenure of the bankers that came over to us from Wells Fargo on average is very long. So there is a history, there is loyalty. And so I think, once the sort of more mobile type customers find their way, wherever that is, I think the far, far, far majority are going to stick with the bankers and they're going to give Flagstar a chance. And so I'm very optimistic on where we'll end up here. But I don't have enough information to give you an estimate of what I think might happen.

And then follow-up on some of the mortgage banking comments. It seems like they’re fallout adjusted locks on a quarter-over-quarter basis declined in a much faster pace than maybe estimates for industry volumes and then also the decline in your held for sale portfolio and the warehouse lines. So it seems that you might be more sensitive to price right now as opposed to holding market share. Are you being a little bit more resilient there or just a little more disciplined around the pricing?

So if you want to compete on price, I can get you a big increase in locks real easily but you won't like the margin that it takes to do that. So we're trying to make sure that this business is profitable. So you can’t have your cake and eat it too. If you are going to cut expenses so that you protect yourself on the downside then you have got to make sure that the business you bring in profitable. That’s what we have been doing. That’s why you saw our margin expand in Q4. I think that’s consistent with what our history has been. We are not going to go out there and try to buy the business. Kristy, anything you want to add there?

Yes, the only other thing I would add Kevin is we are seeing some crazy pricing in the market and we have made a conscious decision to not chase that irrationality and to be really smart about where we were going to price and in fact in some cases which is why I think you saw the gain on sale margin go up, we just remained disciplined around our pricing and didn’t chase. But another thing that we did is we are getting really lot smarter about our analytics in terms of these different markets and really understanding where the competition is and where we can compete and this is where I think our long-term customer relationships and understanding those customers and what their needs are really paying off for us. But we are getting more analytical about different markets, different products and different customers and where we can price. It’s really allowing us to figure out where to get sensitive on price and then where we can actually take margin. And so we were really strategic in Q4. As Sandro said, we didn’t chase irrational pricing and so that’s why you saw the fallout adjusted locks go down but margin hold. And we are going to continue that discipline as we go into Q1. Some of the strategies that we’ve put in place in Q4 are going to come to fruition in Q1 which is why we feel strongly that you will see both net gain on loan sales and the locks increase quarter-over-quarter.

We will now take our next question from Chris Gamaitoni. Please go ahead.

Just I wanted to follow up on the corresponding competition commentary. Is there any -- do you have a sense of who are the most aggressive players? I'm not looking for names but is it the large national banks that are always in the business? Or is it more on the non-bank sector, just trying to understand the competitive dynamics?

Are you specifically asking about correspondent business Chris versus retail?

Yes, correspondent.

Yes, I think it’s mostly non-banks but I'll let Kristy answer.

Yes, we know the names. So yes, we are very clear about who it is and it is absolutely the non-banks that we are seeing in the correspondent channel as well the broker channel.

On your subservicing growth, if you could just give a sense of where this amazing growth is coming from? Don’t want any specific names but kind of what your value proposition is that’s leading to a lot of placements?

Yes, so -- well, Chris, it’s Lee. The value proposition is; one, we have a quality platform and as you know we have won the Fannie Mae STAR Award in the category of General Servicing three years running. We also have this one-stop shop, so not only can we subservice the loans, we offer MSR lending, servicing advance lending, recapture services. We are very well-capitalized. We have a robust risk and compliance infrastructure in place. So we are seeing as just being a very strong counterparty and people can also buy MSRs from us. And because we're producing so much given the scale of our mortgage business and may just leave them on our platform which is appealing for the big financial funds that are MSR buyers. What has happened over this last 12 months in particular is those financial funds that have buying MSRs from multiple parties, they just liked the service they’re getting. So, they are moving the portfolios to Flagstar and that's really why you’ve seen the 87% growth or 385,000 additional loans added to the platform in 2018.

Don’t under estimate, the regulatory comfort that these MSR owners get from Flagstar because there really aren't very many regulated banks that are in this space. And so if you can show that you can do the business and it’s took a while to prove it out but we did, now there is an advantage there that it's not financial but you know that the regulatory world has -- can change on a dime and you don’t want to be in a bad place if that should happen. And so I think that comfort that we provide is there's some real hidden value there.

And Drew, one nitpicky. Period end deposits looked like they were down about 8.4% quarter-over-quarter at the acquisition, if that’s the seasonality of custodial deposits or is there something else going on?

I didn’t catch the first part of your question.

Period end deposits.

Period end deposits.

Let’s take a look. That we don’t focus too much, it’s likely the custodial stress, that we …. As I mentioned earlier, it’s just seasonally all deposits categories typically go down around the end of the year.

Yes. We will get back to you on that Chris but I do think it was a fairly significant custodial deposit drop in Q4 quarter end to quarter end.

We will take our next question from Henry Coffey of Wedbush. Please go ahead.

Interesting quarter. Just a bunch of small things, I want to ask really stupid question with -- and I know some my colleagues that have done an excellent job on tracking this issue. But with deposit attritions -- attrition, is it the issue that you've got what I would call either commercial deposits or price sensitive money just waking up and saying okay, my bank is changing, I'm now open to a price bid and they walk out the door or is it angry, just satisfied customers because you I don’t know you make them mad over something or what is the mechanism by which people decide to leave their bank?

Well, I will speculate a little bit here. Lee already mentioned that 82% of the attrition was people that are no longer domiciled in the area where the branches are located. So that’s part of that obviously, they want a branch that they can go to, if they need to go to the branch. Number two, I think that competitors always come out with very interesting offers if you move your account when a new bank comes to town, will buy your checks, all that sort of thing. So there you have some of the price sensitive people that move and there’s people that just don’t like change and maybe they didn’t like how it all happens. So it’s a combination of things. And my experience is, you got to let things settle down and not get too excited over what happens right away, establish yourself, give your people a chance to get comfort -- comfortable themselves with the new company, and then get back on your feet and go forward. And that's why I'm focusing more on that than I am on whether we end up at 8%, 10% or 12% attrition. In the long run that's not going to matter, what’s going to matter is how we grow this business.

You've also done some of the smaller less visible deals on the West Coast. Can you compare and contrast your experience there versus this and taking on a major West Coast deal?

Yes, I mean, it's very different than what we saw with DCB, just because it's such a small -- the franchise is so much smaller. And so as you may recall, we didn't experience any attrition in the DCB acquisition. So it definitely makes a difference. Who the customer, where they're coming from? They're coming from a very large bank, they’re use to on kind of community bank type experience. Whether we take on something else? I mean we're not ready right now. We got a lot of work to do to prove this one out. But sure, at some point we'll take a look at what makes the most sense for our future and if the right situation presented itself, we would consider.

Certainly a whole bank acquisition would be a challenge given our trust preferred recognition.

Given the MBA Mortgage Index, frankly over the last three weeks up a lot and the primary, secondary spreads as well. And a lot of it is just market factors, not real business factors. What are your thoughts about what we've seen in January? I mean is that volume sustainable? Is that profitability sustainable or is it when we get back into February and March, we're going to be up against all those headwinds that have played in the industry for the last year or so?

I mean, I think it's going to be a tough year, right? If you look at the experts, the estimates are to be 100 billion smaller than last year, I think in terms of overall originations. So I think what we saw in 2018 is likely to continue in 2019. Now as capacity adjusts, we will have more of an opportunity to look at expanding spreads. But I wouldn't take anything you've seen in early January as some sort of trend. We haven't seen anything for long enough. And again, I think you get around the holidays, there’s a lot of things that happens, I just wouldn't take much from what’s happened thus far in January.

We will now take our next question from Daniel Tamayo of Raymond James.

Just a couple of modeling questions here on the expense side. First, the lower tax rate in the fourth quarter and lower tax rate guidance going forward. Is any of that -- is there, - you mentioned the tax strategy, is there any kind of offset in expenses there that we've seen or going forward that you're expecting?

No, no. We're not, typically you'd seen historical tax credits, so tax good guy and expense bad guy and that's [not] what's driving the expense -- effective tax rate lower.

Alright. And specifically looking at the first quarter, you mentioned the seasonal impact of the higher payroll tax and benefit costs with Wells Fargo branches now in the run rate, what are the -- in terms of dollar amount, do you have a ballpark for what that would be?

The dollar amount on the Wells branch operating expenses?

Yes, just on the total seasonal impact.

No, I don’t think we have given that in the past.

Here is what I would say that just high level because we don't get that specific. You can see the adjusted non-interest expense was 175 million in Q4. We have guided to 185 million, 190 million in Q1. You have got an extra two months of the Wells Fargo branches because we only had one month in Q4. You have got the seasonal adjustment for higher compen benefits. And then as you know we have guided to higher gain on sale. So there is an incremental piece for just the higher mortgage business as well. That's basically a breach without sort of giving you numbers for each of those categories.

And then finally just in terms of the 14 million in the fourth quarter. What was the breakout of where that came out of in the line items in the merger costs?

The 14 million of merger costs, Jim you know the line items are?

It was largely other and salary and benefits.

We will now take our next question from Scott Beury. Please go ahead.

I just had one quick follow-up question regarding the Wells Fargo branch acquisition. Was there any concentration if you will in the deposit attrition by market or just generally the regions? I mean obviously there was much less of the franchise in the Northern part, but I was just curious if there was any specific area where that really was more prevalent?

Well, just in the out of market Scott, that’s where the big concentration was. Within the footprints, while the percentages by area varied some, there wasn't dramatic differences between say, Northern Michigan and South Bend, it was within a fairly tight range across.

And then I guess similarly, as you look forward to more growth opportunities in with your expanded footprint in Indiana and in the North, do you have any general color on areas that you're looking to that would potentially be an attractive to expand, are there any specific business lines that you think would be good fits?

Well, I think there is going to be opportunity for our middle-market commercial both in the C&I as well as the CRE space. I mean in terms of dollars there is opportunity there. There is always opportunity with business banking but the dollar impact is less there. So I think all of those, sort of core commercial offerings, not to mention consumer loans are all opportunities. So whether there is more opportunity for one type of business in one market versus another, I can't speak to that. I don’t know if Drew if you have any thoughts about that?

No, I think you are exactly right. In addition to bringing over those branches, the deposits and the small amount loans that we brought over, there really is the great opportunity to leverage that footprint with respect to consumer lending, business banking, insurance and investment and mortgage because those are things that came over with it. So we believe that’s a big opportunity going forward.

We will now take our next question from Kevin Barker.

So in regards to the first quarter which we expect as far as the FHLB advances on like period end basis and on average basis, given the deposits that we’ve seen, there was a big drop in the long-term FHLB advances but do you still see somewhat of a decline? And then can you just give some near-term view on deposit growth in the first quarter?

Okay, I will let Jim take the advance question. In terms of deposit growth, so this is a tough one because the data that a lot of others have experienced have been much higher than ours have and we have been able to be conservative in the way we’ve approached deposit pricing because we knew that the Wells Fargo acquisition was coming and we were going to have those lower-cost deposits coming on to the balance sheet. So now that we’re past that, now we’ve got to look across the whole organization and we’ve got to make some decisions on how aggressive we want to be with that -- with pricing of deposits and how that compares to alternative funding sources. So, this is kind of like game-time decisions, you got to see what’s going on the market and you got to see what the opportunities are. There are a lot of people on the deposit side that are pricing irrationally just like they are on the mortgage side. So this is a fine line and it could be different in one market versus another. But I think our history shows that we’re pretty good, we’ve been pretty good at understanding where the opportunity is and keeping the betas at reasonable level. So that’s what we’ll work to continue to do.

Kevin in my prepared remarks I made a remark that not only that the Wells Fargo give us that direct benefit of lower-cost deposits and yes we’ve messaged that we would pay off FHLB borrowings and that's what you saw we do and we paid that off near the end of the year with the [FHLB] borrowings. But what I made -- the remark I made is that the deposits now we can see that primary benefit but the secondary benefit is exactly what Sandro said. We can be more disciplined because we have ample liquidity at this point. So we don't have to go out and get that extra deposit dollar, where our success doesn't hinge upon getting that. So we would be rather disciplined on the entire deposit franchise, not just Wells deposit franchise and how we manage the deposit costs.

So in the first quarter, would you expect any further decline in FHLB advances on a period end basis given the Wells Fargo deposits as it stand today?

I don’t think we’re going to be that specific with you on where we see the funding numbers at the end of the quarter. It depends on how much more attrition there is and how much we’re able to grow in other markets. So I don’t know but I would tell you this that the -- if we grow deposits it will be at a cost that’s less than what the alternative funding costs for FHLB or anything else would be.

It appears there are no further questions at this time. I would now like to turn the call back over to Sandro DiNello.

Thanks, Katy and thanks everyone for your interest in Flagstar. From a high level perspective, the fourth quarter was about fundamentals and the future. Fundamentals, because we have remained focused on expense discipline, strong credit quality and abundant capital. Additionally, we have embraced revenue diversification, which has delivered consistent earnings, despite the continued challenge for mortgage originations. The future, because we change in the face of our funding, grew our core customer base in a big way and significantly expanded our branch footprint. We move into 2019 with a strong business model and a level of core funding that we have never experienced before. Going forward, our strong capital gives us flexibility and durability. We will use these strengths to maximize returns and grow shareholder value. We look forward to the future with confidence and optimism. A very special thank you this quarter to the Flagstar team for the way you successfully overcame some very difficult challenges. So everyone else, thank you for your attention this morning. I look forward to reporting Q1 results in April.

This concludes today's conference call. You may now disconnect.