Flagstar Bank, National Association: Form 10-Q for the period ended Sep 30, 2023

EXECUTIVE SUMMARY

At September 30, 2023, total assets were $111.2 billion, up $21.1 billion compared to December 31, 2022. Total deposits were $82.7 billion at September 30, 2023, up $24.0 billion from December 31, 2022. These year-to-date increases were primarily due to our March 20, 2023, assumption of a substantial amount of the deposits and certain identified liabilities and the acquisition of certain assets and lines of business of Signature Bridge Bank, from the FDIC as receiver for Signature Bridge Bank (the “Signature Transaction”). See Note 3 “Business Combinations” to the Consolidated Financial Statements for further information regarding the Signature Transaction

For the three months ended September 30, 2023, net income was $207 million as compared to $413 million for the three months ended June 30, 2023. Net income available to common stockholders for the three months ended September 30, 2023 was $199 million, compared to $405 million for the three months ended June 30, 2023. Diluted EPS totaled $0.27 for the three months ended September 30, 2023 compared to $0.55 for the three months ended June 30, 2023.

Third quarter 2023 and second quarter 2023 net income and diluted EPS were impacted by merger related expenses of $91 million and $109 million, respectively, related to both the Signature Transaction and the Flagstar acquisition.

Loan Portfolio

At September 30, 2023, total C&I loans were $24.4 billion compared to $12.3 billion at December 31, 2022. The majority of the increase is attributable to the $10.0 billion of C&I loans acquired in the Signature Transaction along with growth in specialty finance and MSR lending, partially offset by seasonally lower mortgage warehouse balances.

The multi-family loan portfolio was $37.7 billion at September 30, 2023, down slightly compared to $38.1 billion at December 31, 2022. At September 30, 2023, multi-family loans represented 45 percent of total loans, compared to 55 percent at December 31, 2022, further demonstrating the reduction of our concentration in this asset class.

Commercial loans (commercial real estate and acquisition, development and construction loans) increased $2.9 billion at September 30, 2023 to $13.4 billion compared to $10.5 billion at December 31, 2022 largely attributable to the Signature Transaction and growth in our home builder finance portfolio.

One-to-four family residential loans totaled $5.9 billion at September 30, 2023, representing seven percent of total loans compared to $5.8 billion or eight percent of total loans at December 31, 2022. Other loans totaled $2.6 billion at September 30, 2023 compared to $2.3 billion at December 31, 2022. The other loan portfolio consists mostly of HELOC and other consumer loans.

Loans held-for-sale at September 30, 2023 totaled $1.9 billion, up from $1.1 billion at December 31, 2022, which reflects seasonally lower balances and the continued impact of higher mortgage rates.

Deposit Base

Deposits at September 30, 2023 totaled $82.7 billion up $24.0 billion compared to $58.7 billion at December 31, 2022 primarily driven by the Signature Transaction.

Our deposit base includes $31.3 billion of uninsured deposits at September 30, 2023 a net increase of $14.8 billion as compared to December 31, 2022 due to the Signature Transaction. This represents 37.8 percent of our total deposits. These amounts were determined based on the same methodologies and assumptions used for regulatory reporting purposes and exclude internal accounts. We also have $31.2 billion of total ready liquidity (cash and cash equivalents, unpledged securities, and FHLB borrowing capacity). Our total ready liquidity approximately matches the balance of our uninsured deposits.

Net Interest Income

For the three months ended September 30, 2023, net interest income totaled $882 million, down $18 million or 2 percent compared to the three months ended June 30, 2023. The decrease was driven by lower average earning assets, partially offset by a six basis point increase in net interest margin and lower average interest-bearing liabilities.

For the three months ended September 30, 2023, net interest margin was 3.27 percent up six basis points compared to the three months ended June 30, 2023. We continued to benefit from the higher interest rate environment and recently acquired loans, which positively impacted the yields on our assets.

Asset Quality

At September 30, 2023, NPA to total assets equaled 0.40 percent compared to 0.21 percent at June 30, 2023 while NPL to total loans equaled 0.52 percent compared to 0.28 percent at June 30, 2023. The increase in NPLs were primarily related to two commercial real estate loans in the office sector that added $139 million in the third quarter of 2023 and multi-family increased $91 million of which the largest individual loan was $42 million. Repossessed assets of $12 million were slightly lower compared to $13 million in the prior quarter.

Recent Events

Declaration of Dividend on Common Shares

On October 24, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.17 per share on the Company's common stock. The dividend is payable on November 16, 2023 to common stockholders of record as of November 6, 2023.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is our primary source of income. Its level is a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by various external factors, including the local economy, competition for loans and deposits, the monetary policy of the FOMC, and market interest rates.

The cost of our deposits and borrowed funds is largely based on short-term rates of interest, the level of which is partially impacted by the actions of the FOMC.

While the target federal funds rate generally impacts the cost of our short-term borrowings and deposits, the yields on our held-for-investment loans and other interest-earning assets are not as sensitive to intermediate-term market interest rates.

Another factor that impacts the yields on our interest-earning assets—and our net interest income—is the income generated by our multi-family and CRE loans and securities when they prepay. Since prepayment income is recorded as interest income, an increase or decrease in its level will also be reflected in the average yields (as applicable) on our loans, securities, and interest-earning assets, and therefore in our net interest income, our net interest rate spread, and our net interest margin.

It should be noted that the level of prepayment income on loans recorded in any given period depends on the volume of loans that refinance or prepay during that time. Such activity is largely dependent on such external factors as current market conditions, including real estate values, and the perceived or actual direction of market interest rates. This impact is most prevalent in our multi-family and CRE portfolios, and to a lesser extent in our C&I and ADC portfolios.. In addition, while a decline in market interest rates may trigger an increase in refinancing and, therefore, prepayment income, so too may an increase in market interest rates. It is not unusual for borrowers to lock in lower interest rates when they expect, or see, that market interest rates are rising rather than risk refinancing later at a still higher interest rate. The impact of prepayments on the current quarter and year was minimal.

Comparison to Prior Quarter

Net interest income for the three months ended September 30, 2023 was $882 million, down $18 million or 2.0 percent compared to the three months ended June 30, 2023 primarily due to the following:

• Interest income on cash and cash equivalents decreased $84 million driven by a decrease in the average balance of $7.5 billion due to a decrease in custodial deposits associated with the Signature Transaction partially offset by a 28 basis point increase in the average yield to 5.3 percent.
• Interest expense on average interest-bearing deposits increased $50 million to $491 million during the three months ended September 30, 2023, driven by a 35 basis point increase in the average cost of interest-bearing deposits due to rising interest rates and competition for deposits.
• Interest income on loans and leases increased $90 million primarily from rising commercial loan rates and increased income from acquired loans.
• Interest expense on borrowed funds decreased $18 million or 11.5 percent to $139 million primarily driven by a $2.6 billion or 14.3 percent decrease in the average balances partially offset by a 6 basis point increase in rates.

Comparison to Prior Year to Date

For the nine months ended September 30, 2023, net interest income totaled $2.3 billion, up $1.3 billion or 130 percent compared to $1.0 billion for the nine months ended September 30, 2022. The year-over-year increase was primarily the result of the Flagstar acquisition, which closed late last year, and the Signature Transaction, which closed in late March of this year and were not part of the Company in the first three quarters of 2022.

• Interest income on mortgages and other loans was driven by a $33.4 billion or 70.8 percent increase in average loan balances to $80.6 billion. This is primarily driven by the December 2022 acquisition of Flagstar and the March 2023 Signature Transaction. Additionally, we had a 187 basis point increase in the average loan yield to 5.4 percent in the current year quarter due primarily to the rising interest rate environment.
• Interest income on securities was positively impacted by a 168 basis point increase in the average yield to 4.11 percent from 2.4 percent along with a 3.5 billion or 50.3 percent increase in the average securities balance to $10.3 billion primarily driven by the nine month contribution from the Flagstar acquisition.
• Interest-earning cash and cash equivalents reflected a 399 basis point increase in the average yield to 5.1 percent driven by higher short-term market rates and an increase in the average balance of $8.8 billion driven by the Signature Transaction.
• Interest expense on average interest-bearing deposits increased $1.0 billion to $1.2 billion during the nine months ended September 30, 2023, driven by a 223 basis point increase in the average cost of interest-bearing deposits due to rising interest rates. Average interest earning deposits grew $20.9 billion, or 60.8 percent, to $55.3 billion. The balance growth primarily reflects the December acquisition of Flagstar and the March Signature Transaction.
• Interest expense on borrowed funds increased $281 million or 133.18 percent to $492 million driven by a 168 basis point increase in rates in addition to a $3.3 billion or 21.8 percent increase in the average balance to $18.7 billion primarily driven by the December acquisition of Flagstar.

Net Interest Margin

The following table sets forth certain information regarding our average balance sheet for the periods indicated, including the average yields on our interest-earning assets and the average costs of our interest-bearing liabilities. Average yields are calculated by dividing the interest income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the interest expense produced by the average balance of interest-bearing liabilities. The average balances for the periods are derived from average balances that are calculated daily. The average yields and costs include fees, as well as premiums and discounts (including mark-to-market adjustments from acquisitions), that are considered adjustments to such average yields and costs.

(dollars in millions)

(1) Amounts are net of net deferred loan origination costs/(fees) and includes loans held for sale and non-performing loans.

(2) Amounts are at amortized cost.

(3) Includes FHLB stock and FRB stock.

(dollars in millions)

(1) Amounts are net of net deferred loan origination costs/(fees) and includes loans held for sale and non-performing loans.

(2) Amounts are at amortized cost.

(3) Includes FHLB stock and FRB stock.

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) the changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) the changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

(in millions)

Comparison to Prior Quarter

The Company's net interest margin for the three months ended September 30, 2023, was 3.27 percent, up six basis points compared to the three months ended June 30, 2023. The increase was driven by both a higher level of average earnings assets due to the Signature Transaction, along with higher yields on those assets.

Average loan balances increased $1.9 billion, or 2%, to $85.7 billion compared to the previous quarter, while the loan yield increased 27 basis points on a quarter-over-quarter basis to 5.82%. Average cash balances decreased to $10.8 billion during the third quarter compared to $18.3 billion during the second quarter, while the average yield rose 28 basis points to 5.31% from 5.03%.

Average interest-bearing liabilities decreased $3.4 billion, or 4%, to $74.1 billion on a quarter-over-quarter basis with the average cost increasing 27 basis points to 3.37% compared to 3.10%. Average interest-bearing deposits decreased $755 million, or 1%, to $58.5 billion, while the average cost rose 35 basis points to 3.33%. Average borrowed funds declined $2.6 billion, or 14%, to $15.6 billion, while the average cost of borrowed funds increased six basis points to 3.53%. Average non-interest-bearing deposit balances rose $1.1 billion, or 4%, to $25.7 billion compared to the previous quarter.

Comparison to Prior Year to Date

For the nine months ended September 30, 2023, the net interest margin was 3 percent, up 66 basis points compared to the nine months ended September 30, 2022. The year-over-year increase was primarily the result of a larger balance sheet driven by both the Flagstar acquisition and the Signature Transaction, and due to organic loan growth, along with the impact of higher interest rates. Average interest-earning assets increased $45.8 billion, or 81 percent, on a year-over-year basis to $102.5 billion for the nine months ended September 30, 2023, while the average yield rose 195 basis points to 5.27 percent.

Average loan balances rose $33.4 billion, or 71 percent, to $80.6 billion while the average loan yield rose 187 basis points to 5.43 percent on a year-over-year basis. Average cash balances increased $8.8 billion to $11.1 billion, while the average yield rose to 5.11 percent from 1.12 percent. Average securities increased $3.5 billion, or 50 percent, to $10.3 billion, while the average yield improved to 4.11 percent from 2.43 percent.

Average interest-bearing liabilities increased $24.2 billion, or 49 percent, to $73.9 billion while the average cost increased to 3.09 percent from 1.06 percent. Average interest-bearing deposits rose $20.9 billion, or 61 percent, while the average cost of deposits increased to 2.94 percent compared to 0.71 percent. Average borrowed funds increased $3.3 billion to $18.7 billion while the average cost rose to 3.52 percent from 1.84 percent. Average non-interest-bearing deposits rose $16.9 billion to $21.2 billion.

Provision for Credit Losses

Comparison to Prior Quarter

The three months ended September 30, 2023 the provision for credit losses totaled $62 million compared to a $49 million provision for the three months ended June 30, 2023.

During the third quarter 2023, we incorporated the commercial loans and unfunded commitments acquired in the Signature Transaction in the Company's allowance for credit loss models which resulted in a net provision benefit of $13 million.The $75 million provision on the remainder of the portfolio was driven by increases to our estimated loan loss and unfunded commitment reserves as a result of changes in the macroeconomic environment, specifically the inflationary pressures leading to sharp increases in interest rates and a slow-down of prepayment activity leading to longer weighted average lives on the balance sheet. In addition, the increase reflects unfavorable market conditions in the CRE portfolio (primarily office). During the quarter we had net charge-offs totaling $24 million.

The second quarter 2023 provision of $49 million included increases of $13 million related to specific reserves for new non-accrual loans and the remainder was driven by changes in the macroeconomic forecast.

Comparison to Prior Year to Date

The nine months ended September 30, 2023 provision for credit losses was $281 million compared to $9 million for the nine months ended September 30, 2022. The 2023 provision includes a $132 million initial provision for credit losses related to the initial ACL measurement of non-PCD acquired loans from the Signature Transaction and a $20 million provision for credit losses on legacy Signature Bank debt securities held by the Company prior to the transaction. The remaining $129 million was driven by increases to our estimated loan loss and unfunded commitment reserves as a result of changes in the macroeconomic environment discussed above. During the nine months ended September 30, 2023, we had net charge-offs totaling $23 million.

For additional information about our methodologies for recording recoveries of, and provisions for, credit losses, please refer to Critical Accounting Policies in our Form 10-K for the year ended December 31, 2022, which is available on our website, under the Investor Relations section, or on the website of the Securities and Exchange Commission, at sec.gov.

Non-Interest Income

We generate non-interest income through a variety of sources, including—among others—fee income (in the form of retail deposit fees and charges on loans); net return on our MSR asset; net gain on loan sales and securitizations, net loan administration income (including loan subservicing income); income from our investment in BOLI; and “other” sources, including the revenues produced through the sale of third-party investment products.

The following table summarizes our non-interest income for the respective periods:

(in millions)

Comparison to Prior Quarter

For the three months ended September 30, 2023, non-interest income totaled $160 million as compared to $302 million in the second quarter, primarily due by the following:

• There was no income impact related to the bargain gain as compared to $141 million in recorded in the second quarter related to the Signature Transaction.
• Net loan administration income totaled $19 million for the three months ended September 30, 2023 compared to $39 million for the three months ended June 30, 2023 driven by a reduction in subservicing income related to a decrease in loans being serviced for the FDIC related to the Signature Transaction.
• The net return on mortgage servicing rights was $23 million or 8.0 percent for the third quarter compared to $25 million or 9.7 percent for the second quarter.
• Third quarter 2023 non-interest income includes a gain on loan sales of $28 million compared to $25 million during the second quarter, with a gain on sale margin of 59 basis points compared to 51 basis points last quarter.

Comparison to Prior Year to Date

Non-interest income increased $2.5 billion for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to the bargain purchase gain of $2.1 billion related to the Signature Transaction. Increases in non-interest income were also driven by the inclusion of the Flagstar acquisition and Signature Transaction including $116 million increase in fee income, net return on mortgage servicing rights of $70 million, gain on loan sales of $73 million and loan administration income of $65 million.

Non-Interest Expense

Comparison to Prior Quarter

For the three months ended September 30, 2023, non-interest expenses totaled $712 million, up $51 million, or 8 percent compared to the three months ended June 30, 2023.

Total operating expenses for the three months ended September 30, 2023 were $585 million, up $70 million compared to $515 million for the second quarter 2023. The increase was primarily driven by higher compensation and benefits due to the impact of recently added private banking teams and revenue-driven performance.

Comparison to Prior Year to Date

Non-interest expense increased $1.4 billion for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Total operating expenses for the nine months ended September 30, 2023 were up $1.1 billion compared to the nine months ended September 30, 2022. Both increases were primarily due the inclusion of Flagstar and Signature activity.

Income Tax Expense

Comparison to Prior Quarter

For the three months ended September 30, 2023, the Company reported a provision for income taxes of $61 million compared to $79 million for the three months ended June 30, 2023. Income tax expense for both the current quarter and for the second quarter 2023 was impacted by the Signature Transaction and Flagstar acquisition. The effective tax rate was 22.7 percent for the third quarter 2023.

Comparison to Prior Year to Date

For the nine months ended September 30, 2023, the Company reported a provision for income taxes of $141 million, compared to $164 million for the nine months ended September 30, 2022. Income tax expense for the current year was impacted by the Signature Transaction and Flagstar acquisition.

FINANCIAL CONDITION

Balance Sheet Summary

Total assets increased $21.1 billion to $111.2 billion as of September 30, 2023, compared to $90.1 billion at December 31, 2022 due to the Signature Transaction, which closed on March 20, 2023, and organic loan growth.

The Company acquired approximately $12 billion of loans, net of purchase accounting adjustments ("PAA"), $34 billion of deposits, net of PAA, and $2 billion of other liabilities related to the Signature Transaction.

Total loans and leases held for investment were $84.0 billion at September 30, 2023 compared to $69.0 billion at December 31, 2022. The increase was driven by the aforementioned loans acquired from the Signature Transaction and organic loan growth.

The securities portfolio totaled $8.7 billion at September 30, 2023, compared to $9.1 billion at December 31, 2022. As of September 30, 2023, the Company has no held-to-maturity securities portfolio and all of the Company’s securities were designated as “Available-for-Sale”, unchanged from December 31, 2022.

Total deposits grew $24.0 billion, or 41 percent to $82.7 billion at September 30, 2023 compared to $58.7 billion at December 31, 2022 primarily driven by the deposits assumed in the Signature Transaction. Included in the September 30, 2023 balance are $2.0 billion in non-interest-bearing custodial deposits related to the Signature Transaction.

Wholesale borrowings at September 30, 2023 were $13.6 billion compared to $20.3 billion at December 31, 2022, reflecting the use of some of the cash acquired from the Signature Transaction to reduce the level of FHLB-NY borrowings.

Loans held-for-investment

The following table summarizes the composition of our loan portfolio:

(dollars in millions)

The following table summarizes our production of loans held for investment:

(dollars in millions)

Multi-Family Loans

The multi-family loans we produce are primarily secured by non-luxury residential apartment buildings in New York City that feature rent-regulated units and below-market rents.

The multi-family loan portfolio was $37.7 billion at September 30, 2023, down slightly compared to $38.1 billion at December 31, 2022 due to a combination of higher interest rates and our loan diversification strategy.

The majority of our multi-family loans were secured by rental apartment buildings.

At September 30, 2023, $21.5 billion or 57 percent of the Company’s total multi-family loan portfolio is secured by properties in New York State, many of which are, subject to rent regulation laws. The weighted average LTV of the New York State rent regulated multi-family portfolio was 59 percent as of September 30, 2023 as compared to 61 percent at December 31, 2022.

In addition to underwriting multi-family loans on the basis of the buildings’ income and condition, we consider the borrowers’ credit history, profitability, and building management expertise. Borrowers are required to present evidence of their ability to repay the loan from the buildings’ current rent rolls, their financial statements, and related documents.

While a percentage of our multi-family loans are ten-year fixed rate credits, the vast majority of our multi-family loans feature a term of ten or twelve years, with a fixed rate of interest for the first five or seven years of the loan, and an alternative rate of interest in years six through ten or eight through twelve. The rate charged in the first five or seven years is generally based on intermediate-term interest rates plus a spread.

During the remaining years, the loan resets to an annually adjustable rate that is indexed to CME Term SOFR or Prime, plus a spread. Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the FHLB-NY, plus a spread. The fixed-rate option also requires the payment of one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five-or seven-year term. As the rent roll increases, the typical property owner seeks to refinance the mortgage, and generally does so before the loan reprices in year six or eight.

Multi-family loans that refinance within the first five or seven years are typically subject to an established prepayment penalty schedule. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed-rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve. For example, a ten-year multi-family loan that prepays in year three would generally be expected to pay a prepayment penalty equal to three percentage points of the remaining principal balance. A twelve-year multi-family loan that prepays in year one or two would generally be expected to pay a penalty equal to five percentage points.

Because prepayment penalties assessed to the borrower are recorded as interest income, they are reflected in the average yields on our loans and interest-earning assets, our net interest rate spread and net interest margin, and the level of net interest income we record. No assumptions are involved in the recognition of prepayment income, as such income is recorded when the cash is received.

Our success as a multi-family lender partly reflects the solid relationships we have developed with the market’s leading mortgage brokers and generational direct relationships, who are familiar with our lending practices, our underwriting standards, and our long-standing practice of basing our loans on the cash flows produced by the properties. The process of producing such loans is generally four to six weeks in duration.

We believe our underwriting quality of multi-family lending is distinctive. This reflects the nature of the buildings securing our loans, our underwriting process and standards, and the generally conservative LTV ratios our multi-family loans feature at origination. Historically, a relatively small percentage of the multi-family loans that have transitioned to non-performing status have resulted in actual losses, even when the credit cycle has taken a downward turn.

We primarily underwrite our multi-family loans based on the current cash flows produced by the collateral property, with a reliance on the “income” approach to appraising the properties, rather than the “sales” approach. We also consider a variety of other factors, including the physical condition of the underlying property; the net operating income of the mortgaged premises prior to debt service; the DSCR, which is the ratio of the property’s net operating income to its debt service; and the ratio of the loan amount to the appraised value (i.e., the LTV) of the property.

In addition to requiring a minimum DSCR of 120 percent on multi-family buildings, we obtain a security interest in the personal property located on the premises, and an assignment of rents and leases. Our multi-family loans generally represent no more than 75 percent of the lower of the appraised value or the sales price of the underlying property, and typically feature an amortization period of 30 years. In addition, our multi-family loans may contain an initial interest-only period which typically does not exceed two years; however, these loans are underwritten on a fully amortizing basis. Exceptions to these levels are made to borrowers on a case by case basis and approved by the joint authority of credit and lending officers and when necessary, the Board Credit Committee of the Board.

We continue to monitor our loans held for investment portfolio and the related allowance for credit losses, particularly given the economic pressures facing the commercial real estate and multi-family markets. While our multi-family lending niche has not been immune to downturns in the credit cycle, the limited number of losses we have recorded, even in adverse credit cycles, suggests that the multi-family loans we produce involve less credit risk than certain other types of loans. In general, buildings that are subject to rent regulation have historically tended to be stable, with occupancy levels remaining more or less constant over time. Because the rents are typically below market and the buildings securing our loans are generally maintained in good condition, they have been more likely to retain their tenants in adverse economic times. In addition, we generally exclude any short-term property tax exemptions and abatement benefits the property owners receive when we underwrite our multi-family loans.

The following table presents a geographical analysis of the multi-family loans in our held-for-investment loan portfolio:

(dollars in millions)

Commercial Real Estate

At September 30, 2023, CRE loans represented $10.5 billion, or 12.5 percent, of total loans held for investment, reflecting a $2.0 billion increase when compared to $8.5 billion at December 31, 2022. Approximately $1.9 billion of CRE loans were acquired in the Signature Transaction.

CRE loans represented $280 million, or 5.7 percent, of the loans we originated in the third quarter 2023 as compared to $278 million, or 5.6 percent in the second quarter 2023.

The CRE loans we produce are secured by income-producing properties such as office buildings, retail centers, mixed-use buildings, and multi-tenanted light industrial properties. At September 30, 2023, the largest concentration of CRE loans were secured by properties in the metro New York City area. Refer to the Geographical Analysis table included below for additional details.

Approximately $3.4 billion of the CRE portfolio are office properties with an average balance of approximately $10 million and located primarily in the New York metro area.

The terms of more than half of our CRE loans are similar to the terms of our multi-family credits which primarily feature a fixed rate of interest for the first five years of the loan that is generally based on intermediate-term interest rates plus a spread. In addition to customary fixed rate terms, we now also offer floating rates advances indexed to CME Term SOFR. These products are generally offered in combination with interest rate cap or swaps that provide borrowers with additional optionality to manage their interest rate risk. Following the initial fixed rate period, the loan resets to an adjustable interest rate that is indexed to CME Term SOFR or Prime, plus a spread. Alternately, the borrower may opt for a fixed rate that is tied to the five-year fixed advance rate of the FHLB-NY plus a spread. The fixed-rate option also requires the payment of an amount equal to one percentage point of the then-outstanding loan balance. In either case, the minimum rate at repricing is equivalent to the rate in the initial five- or seven-year term.

Prepayment penalties apply to certain of our CRE loans, as they do our multi-family credits. Depending on the remaining term of the loan at the time of prepayment, the penalties normally range from five percentage points to one percentage point of the then-current loan balance. If a loan extends past the fifth or seventh year and the borrower selects the fixed rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten or eight through twelve.

The repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis of the property’s current income stream and DSCR. The approval of a loan also depends on the borrower’s credit history, profitability, and expertise in property management, and generally requires a minimum DSCR of 130 percent and a maximum LTV of 65 percent. In addition, the origination of CRE loans typically requires a security interest in the fixtures, equipment, and other personal property of the borrower and/or an assignment of the rents and/or leases. In addition, our CRE loans may contain an interest-only period which typically does not exceed three years; however, these loans are underwritten on a fully amortizing basis.

The following table presents a geographical analysis of the CRE loans in our held-for-investment loan portfolio:

(dollars in millions)

Acquisition, Development, and Construction Loans

At September 30, 2023, our ADC loans represented $2.9 billion, or 3.5 percent, of total loans held for investment, reflecting an increase of $914 million compared to December 31, 2022.

Because ADC loans are generally considered to have a higher degree of credit risk, especially during a downturn in the credit cycle, borrowers are required to provide a guarantee of repayment and completion. The risk of loss on an ADC loan is largely dependent upon the accuracy of the initial appraisal of the property’s value upon completion of construction; the developer’s experience; the estimated cost of construction, including interest; and the estimated time to complete and/or sell or lease such property.

When applicable, as a condition to closing an ADC loan, it is our practice to require that properties meet pre-sale or pre-lease requirements prior to funding.

C&I Loans

At September 30, 2023 C&I loans totaled $24.4 billion or 29.1 percent of total loans held-for-investment. Included in this portfolio is $5.6 billion in warehouse loans that allow mortgage lenders to fund the closing of residential mortgage loans.

The non-warehouse C&I loans we produce are primarily made to small and mid-size businesses and finance companies. Such loans are tailored to meet the specific needs of our borrowers, and include term loans, demand loans, revolving lines of credit, and, to a much lesser extent, loans that are partly guaranteed by the Small Business Administration.

A broad range of C&I loans, both collateralized and unsecured, are made available to businesses for working capital (including inventory and accounts receivable), business expansion, the purchase of machinery and equipment, and other general corporate needs. In determining the term and structure of C&I loans, several factors are considered, including the purpose, the collateral, and the anticipated sources of repayment. C&I loans are typically secured by business assets and personal guarantees of the borrower, and include financial covenants to monitor the borrower’s financial stability.

Also included in our C&I portfolio is our national warehouse lending platform with relationship managers across the country. We offer warehouse lines of credit to other mortgage lenders which allow the lender to fund the closing of residential mortgage loans. Each extension, advance, or draw-down on the line is fully collateralized by residential mortgage loans and is paid off when the lender sells the loan to an outside investor or, in some instances, to the Bank.

Underlying mortgage loans are predominantly originated using the agencies' underwriting standards. The guideline for debt to tangible net worth is 15 to 1. At September 30, 2023, we had $5.6 billion outstanding warehouse loans to other mortgage lenders and have relationships in place to lend up to $11.6 billion at our discretion.

The interest rates on our C&I loans can be fixed or floating, with floating-rate loans being tied to SOFR, prime or some other market index, plus an applicable spread. Our floating-rate loans may or may not feature a floor rate of interest. The decision to require a floor on C&I loans depends on the level of competition we face for such loans from other institutions, the direction of market interest rates, and the profitability of our relationship with the borrower.

Specialty Finance

At September 30, 2023, specialty finance loans and leases totaled $5.2 billion or 6 percent of total loans held for investment, up $753 million or 17 percent compared to December 31, 2022.

We produce our specialty finance loans and leases through a subsidiary that is staffed by a group of industry veterans with expertise in originating and underwriting senior securitized debt and equipment loans and leases. The subsidiary participates in syndicated loans that are brought to them, and equipment loans and leases that are assigned to them, by a select group of nationally recognized sources, and are generally made to large corporate obligors, many of which are publicly traded, carry investment grade or near-investment grade ratings, and participate in stable industries nationwide.

The specialty finance loans and leases we fund fall into three categories: asset-based lending, dealer floor-plan lending, and equipment loan and lease financing. Each of these credits is secured with a perfected first security interest in, or outright ownership of, the underlying collateral, and structured as senior debt or as a non-cancelable lease. As of September 30, 2023, 82 percent of specialty finance loan commitments are structured as floating rate obligations which will benefit in a rising rate environment.

In the third quarter of 2023, the Company originated $2.2 billion of specialty finance loans and leases, representing 45 percent of total originations compared to $1.6 billion for the same period in 2022, representing 41 percent of total originations.

Since launching our specialty finance business in the third quarter of 2013, no losses have been recorded on any of the loans or leases in this portfolio.

One-to-Four Family Loans

At September 30, 2023, one-to-four family loans represented $5.9 billion, including $925 million of LGG, or 7 percent, of total loans held for investment. As of September 30, 2023, the repurchase liability on LGG loans was $362 million. As of December 31, 2022 one-to-four family loans totaled $5.8 billion. These loans include various types of conforming and non-conforming fixed and adjustable rate loans underwritten using Fannie Mae and Freddie Mac guidelines for the purpose of purchasing or refinancing owner occupied and second home properties. We typically hold certain mortgage loans in LHFI that do not qualify for sale to the Agencies and that have an acceptable yield and risk profile. The LTV requirements on our residential first mortgage loans vary depending on occupancy, property type, loan amount, and FICO scores. Loans with LTVs exceeding 80 percent are required to obtain mortgage insurance. As of September 30, 2023, non-government guaranteed loans in this portfolio had an average current FICO score of 741 and an average LTV of 53.

Substantially all LGG are insured or guaranteed by the FHA or the U.S. Department of Veterans Affairs. Nonperforming repurchased loans in this portfolio earn interest at a rate based upon the 10-year U.S. Treasury note rate from the time the underlying loan becomes 60 days delinquent until the loan is conveyed to HUD (if foreclosure timelines are met), which is not paid by the FHA until claimed. The Bank has a unilateral option to repurchase loans sold to GNMA if the loan is due, but unpaid, for three consecutive months (typically referred to as 90 days past due) and can recover losses through a claims process from the guarantor. These loans are recorded in loans held for investment and the liability to repurchase the loans is recorded in other liabilities on the Consolidated Statements of Condition. Certain loans within our portfolio may be subject to indemnifications and insurance limits which expose us to limited credit risk. We have reserved for these risks within other assets and as a component of our ACL on residential first mortgages.

Other Loans

At September 30, 2023, other loans totaled $2.6 billion and consisted primarily of home equity lines of credit, boat and recreational vehicle indirect lending, point of sale consumer loans and other consumer loans, including overdraft loans.

Our home equity portfolio includes HELOANs, second mortgage loans, and HELOCs. These loans are underwritten and priced in an effort to ensure credit quality and loan profitability. Our debt-to-income ratio on HELOANs and HELOCs is capped at 43 percent and 45 percent, respectively. We currently limit the maximum CLTV to 89.99 percent and FICO scores to a minimum of 700. Second mortgage loans and HELOANs are fixed rate loans and are available with terms up to 20 years. HELOC loans are primarily variable-rate loans that contain a 10-year interest only draw period followed by a 20-year amortizing period. As of September 30, 2023, loans in this portfolio had an average current FICO score of 750.

As of September 30, 2023, loans in our indirect portfolio had an average current FICO score of 745. Point of sale loans consist of unsecured consumer installment loans originated primarily for home improvement purposes through a third-party financial technology company who also provides us a level of credit loss protection.

Loans Held for Sale

Loans held-for-sale at September 30, 2023 totaled $1.9 billion, up from $1.1 billion at December 31, 2022. The Signature Transaction contributed $360 million of Small Business Administration ("SBA") loans to this increase. We classify loans as held for sale when we originate or purchase loans that we intend to sell. We have elected the fair value option for nearly all of this portfolio, except the SBA loans. We estimate the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans, where available, or by discounting estimated cash flows using observable inputs inclusive of interest rates, prepayment speeds and loss assumptions for similar collateral.

Lending Authority

We maintain credit limits in compliance with regulatory requirements. Under regulatory guidance, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15 percent of Tier 1 plus Tier 2 capital and any portion of the ACL not included in Tier 2 capital. We have a tracking and reporting process to monitor lending concentration levels, and all new commercial real estate credit exposures to relationships that exceed $200 million and all other commercial credit exposures to relationships that exceed $100 million must be approved by the Board Credit Committee of the Board. Exceptions to these levels are made to borrowers on a case by case basis, with the approval of the Board Credit Committee of the Board. Relationships less than the aforementioned limits including those discussed throughout the loans held for investment section of this document, are approved by the joint authority of credit officers and lending officers. The Board Credit Committee has authority to direct changes in lending practices as they deem necessary or appropriate in order to address individual or aggregate risks, including regulatory considerations, and credit exposures in accordance with the Bank’s strategic objectives and risk appetites.

At September 30, 2023 and December 31, 2022, the largest mortgage loan in our portfolio was a $329 million multi-family loan, which is collateralized by properties located in Brooklyn, New York. As of the date of this report, the loan has been current since origination.

Asset Quality

All asset quality information excludes LGG that are insured by U.S government agencies.

The following table presents the Company's asset quality measures at the respective dates:

Delinquent and non-performing loans held for investment and Repossessed Assets

The following table presents our loans, 30 to 89 days past due by loan type and the changes in the respective balances:

(dollars in millions)

A loan generally is classified as a “non-accrual” loan when it is 90 days or more past due or when it is deemed to be impaired because we no longer expect to collect all amounts due according to the contractual terms of the loan agreement. When a loan is placed on non-accrual status, we cease the accrual of interest owed, and previously accrued interest is reversed and charged against interest income. At September 30, 2023 and December 31, 2022, all of our non-performing loans were non-accrual loans. A loan is generally returned to accrual status when the loan is current and we have reasonable assurance that the loan will be fully collectible.

We monitor non-accrual loans both within and beyond our primary lending area in the same manner. Monitoring loans generally involves inspecting and re-appraising the collateral properties; holding discussions with the principals and managing agents of the borrowing entities and retain legal counsel, as applicable; requesting financial, operating, and rent roll information; confirming that hazard insurance is in place or force-placing such insurance; monitoring tax payment status. advancing funds as needed; and seeking approval from the courts to appoint a receiver, when necessary to protect the Bank’s interests, including to collect rents, manage property operations, and ensure maintenance of the collateral properties.

It is our policy to order updated appraisals for all non-performing loans 90 days or more past due that are collateralized by multi-family buildings, CRE properties, or land, if the most recent appraisal on file for the property is more than one year old. Appraisals are ordered annually until such time as the loan becomes performing and is returned to accrual status. It is not our policy to obtain updated appraisals for performing loans. However, appraisals may be ordered for performing loans when a borrower requests an increase in the loan amount, a modification in loan terms, or an extension of a maturing loan.

The following table presents our non-performing loans held for investment by loan type and the changes in the respective balances:

(dollars in millions)

(1) Unpaid principal balance.

(2) Includes home equity, consumer and other loans.

The following table sets forth the changes in non-accrual loans over the nine months ended September 30, 2023:

(in millions)

At September 30, 2023 total non-accrual mortgage loans increased $225 million to $350 million, while commercial and industrial increased $62 million to $65 million and other non-accrual loans increased $6 million to $19 million compared December 31, 2022. The increase in NPLs were primarily related to two commercial real estate loans in the office sector that added $139 million in the third quarter of 2023 and multi-family increased $91 million of which the largest individual loan was $42 million.

At September 30, 2023, NPAs to total assets equaled 0.40 percent compared to 0.21 percent at June 30, 2023 while NPLs to total loans equaled 0.52 percent compared to 0.20 percent at December 31, 2022. Repossessed assets of $12 million were relatively unchanged compared to the $13 million recorded in the prior quarter.

Non-performing loans are reviewed regularly by management and discussed on a monthly basis with the Board Credit Committee, and the Board of Directors of the Bank, as applicable. In accordance with our charge-off policy, collateral-dependent non-performing loans are written down to their current appraised values, less certain transaction costs. Workout specialists from our Loan Workout Unit actively pursue borrowers who are delinquent in repaying their loans in an effort to collect payment. In addition, outside counsel with experience in foreclosure proceedings are retained to institute such action with regard to such borrowers.

Properties and other assets that are acquired through foreclosure are classified as repossessed assets, and are recorded at fair value at the date of acquisition, less the estimated cost of selling the property. Subsequent declines in the fair value of the assets are charged to earnings and are included in non-interest expense. It is our policy to require an appraisal and an environmental assessment of properties classified as OREO before foreclosure, and to re-appraise the properties on an as-needed basis, and not less than annually, until they are sold. We dispose of such properties as quickly and prudently as possible, given current market conditions and the property’s condition.

To mitigate the potential for credit losses, we underwrite our loans in accordance with credit standards that we consider to be prudent. In the case of multi-family and CRE loans, we look first at the consistency of the cash flows being generated by the property to determine its economic value using the “income approach,” and then at the market value of the property that collateralizes the loan. The amount of the loan is then based on the lower of the two values, with the economic value more typically used.

The condition of the collateral property is another critical factor. Multi-family buildings and CRE properties are inspected from rooftop to basement as a prerequisite to approval. Furthermore, independent appraisers, whose appraisals are carefully reviewed by our experienced in-house appraisal officers and staff, perform appraisals on collateral properties.

In addition, we work with a select group of mortgage brokers who are familiar with our credit standards and whose track record with our lending officers is typically greater than ten years. Furthermore, in New York City, where the majority of the buildings securing our multi-family loans are located, the rents that tenants may be charged on certain apartments are typically restricted under certain rent-control or rent-stabilization laws. As a result, the rents that tenants pay for such apartments are generally lower than current market rents. Buildings with a preponderance of such rent-regulated apartments are less likely to experience vacancies in times of economic adversity.

Reflecting the strength of the underlying collateral for these loans and the collateral structure, a relatively small percentage of our non-performing multi-family loans have resulted in losses over time.

To further manage our credit risk, our lending policies limit the amount of credit granted to any one borrower, and typically require minimum DSCRs of 120 percent for multi-family loans and 130 percent for CRE loans. At origination, we typically lend up to 75 percent of the appraised value on multi-family buildings and up to 65 percent on commercial properties. Exceptions to these DSCR and LTV limitations are minimal and approved by the joint authority of credit and lending officers and when necessary, the Board Credit Committee of the Board.

The repayment of loans secured by commercial real estate is often dependent on the successful operation and management of the underlying properties. To minimize our credit risk, we originate CRE loans in adherence with conservative underwriting standards, and require that such loans qualify on the basis of the property’s current income stream and DSCR. The approval of a CRE loan also depends on the borrower’s credit history, profitability, and expertise in property management. Given that our CRE loans are underwritten in accordance with underwriting standards that are similar to those applicable to our multi-family credits, the percentage of our non-performing CRE loans that have resulted in losses has been comparatively small over time.

Multi-family and CRE loans are generally originated at conservative LTVs and DSCRs, as previously stated. Lower LTVs provide a greater likelihood of full recovery and reduce the possibility of incurring a severe loss on a credit; in many cases, they reduce the likelihood of the borrower “walking away” from the property. Although borrowers may default on loan payments, they have a greater incentive to protect their equity in the collateral property and to return their loans to performing status.

With regard to ADC loans, we typically lend up to 75 percent of the estimated as-completed market value of multi-family and residential tract projects; however, in the case of home construction loans to individuals, the limit is 80 percent. With respect to commercial construction loans, we typically lend up to 65 percent of the estimated as-completed market value of the property. Credit risk is also managed through the loan disbursement process. Loan proceeds are disbursed periodically in increments as construction progresses, and as warranted by inspection reports provided to us by our own lending officers and/or consulting engineers.

To minimize the risk involved in specialty finance lending and leasing, each of our credits is secured with a perfected first security interest or outright ownership in the underlying collateral, and structured as senior debt or as a non-cancellable lease. To further minimize the risk involved in specialty finance lending and leasing, we re-underwrite each transaction. In addition, we retain outside counsel to conduct a further review of the underlying documentation.

Other C&I loans generally represent loans to commercial businesses which meet certain desired client characteristics and credit standards. The credit standards for commercial borrowers are based on numerous criteria, including historical and projected financial information, strength of management, acceptable collateral, and market conditions and trends in the borrower’s industry. These loans are generally variable rate loans in which the interest rate fluctuates with a specified index rate.

The procedures we follow with respect to delinquent loans are generally consistent across all categories, with late charges assessed, and notices mailed to the borrower, at specified dates. We attempt to reach the borrower by telephone to ascertain the reasons for delinquency and the prospects for repayment. When contact is made with a borrower at any time prior to foreclosure or recovery against collateral property, we attempt to obtain full payment, and will consider a repayment schedule to avoid taking such action. Delinquencies are addressed by our Loan Workout Unit and every effort is made to collect rather than initiate foreclosure proceedings.

Fair values for all multi-family buildings, CRE properties, and land are determined based on the appraised value. If an appraisal is more than one year old and the loan is classified as either non-performing or as an accruing TDM, then an updated appraisal is required to determine fair value. Estimated disposition costs are deducted from the fair value of the property to determine estimated net realizable value. In the instance of an outdated appraisal on an impaired loan, we adjust the original appraisal by using a third-party index value to determine the extent of impairment until an updated appraisal is received.

While we strive to originate loans that will perform fully, adverse economic and market conditions, among other factors, can negatively impact a borrower’s ability to repay. Historically, our level of net charge-offs in our multifamily and specialty finance portfolios have been relatively low in downward credit cycles.

For the three months ended September 30, 2023, our gross charge-offs were $26 million and net charge-offs were $24 million, compared to gross charge-offs of $3 million and net recoveries of $1 million for the three months ended June 30, 2023. For the nine months ended September 30, 2023, our gross charge-offs were $34 million and net charge-offs were $23 million, compared to gross charge-offs of $5 million and net recoveries of $5 million over the same period in 2022.

The allowance for credit losses on loans and leases increased $226 million from December 31, 2022 to September 30, 2023. The day 1 impact of the Signature Transaction that closed on March 20, 2023 added $138 million to the reserve. The remaining net increase of approximately $88 million consisted of a $111 million provision partially offset by net charge-offs of $23 million. The $111 million provision was driven by changes in the macroeconomic forecasts, specifically the inflationary pressures leading to sharp increases in interest rates and a slow-down of prepayment activity leading to longer weighted average lives on the balance sheet. In addition, the increase reflects unfavorable market conditions in the CRE portfolio (primarily office). The allowance for credit losses on loans and leases represented 143 percent of non-performing loans at September 30, 2023, as compared to 279 percent at the prior year-end.

The Bank is subject to extensive regulation, examination, and supervision by the OCC, as its primary federal regulator, and the FDIC, as the deposit insurer. The regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies and controls with respect to the classification of assets and the establishment of adequate allowance for credit losses for regulatory purposes. Any increase in the loan loss allowance or in loan charge-offs as required by such regulatory authorities could have a material adverse effect on our financial condition and results of operations and, among other things, our ability to pay dividends.

Based upon all relevant and available information at September 30, 2023, management believes that the allowance for credit losses on loans and leases represents a reasonable estimate based upon our judgment as of that date.

The following table presents information on the Company's net charge-offs:

(dollars in millions)

29

The following table presents information on the Company's net charge-offs as compared to average loans outstanding:

(dollars in millions)

Securities

Total securities were $8.7 billion, or 8 percent, of total assets at September 30, 2023, compared to $9.1 billion, or 10 percent of total assets at December 31, 2022. At September 30, 2023 and December 31, 2022, all of our securities were designated as “Available-for-Sale”. At September 30, 2023, 15 percent of our portfolio are floating rate securities.

As of September 30, 2023, the net unrealized loss on securities available for sale, net of tax, was $863 million as compared to $626 million at December 31, 2022, reflecting the rising interest rate environment.

At September 30, 2023, available-for-sale securities had an estimated weighted average life of six years. Included in the quarter-end amount were mortgage-related securities of $5.7 billion and other debt securities of $3.0 billion.

At the prior year-end, available-for-sale securities were $9.1 billion, and had an estimated weighted average life of six years. Mortgage-related securities accounted for $4.8 billion of the year-end balance, with other debt securities accounting for the remaining $4.3 billion.

The following table summarizes the weighted average yields of debt securities for the maturities indicated at September 30, 2023:

(1) The weighted average yields are calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values and are not presented on a tax-equivalent basis.

(2) Includes corporate bonds, capital trust notes, foreign notes, and asset-backed securities.

Federal Reserve and Federal Home Loan Bank Stock

At September 30, 2023 the Company had $578 million and $329 million of FHLB-NY stock, at cost, and FHLB-Indianapolis stock, at cost, respectively. At December 31, 2022, the Company had $762 million and $329 million of FHLB-NY stock, at cost and FHLB-Indianapolis stock, at cost, respectively. The Company maintains an investment in FHLB-NY stock and, as a result of the Flagstar acquisition, FHLB-Indianapolis stock, partly in conjunction with its membership in the FHLB and partly related to its access to the FHLB funding it utilizes. In addition, the Company had Federal Reserve Bank stock, at cost, of $203 million and $176 million at September 30, 2023 and December 31, 2022, respectively.

Bank-Owned Life Insurance

BOLI is recorded at the total cash surrender value of the policies in the Consolidated Statements of Condition, and the income generated by the increase in the cash surrender value of the policies is recorded in “Non-interest income” in the Consolidated Statements of Income and Comprehensive Income. Reflecting an increase in the cash surrender value of the underlying policies, our investment in BOLI at September 30, 2023 rose $15 million to $1.6 billion compared to December 31, 2022.

Goodwill

We record goodwill in our consolidated statements of condition in connection with certain of our business combinations. Goodwill, which is tested at least annually for impairment, refers to the difference between the purchase price and the fair value of an acquired company’s assets, net of the liabilities assumed. As of September 30, 2023 and December 31, 2022 goodwill was $2.4 billion.

Sources of Funds

The Parent Company has three primary funding sources for the payment of dividends, share repurchases, and other corporate uses: dividends paid to the Parent Company by the Bank; capital raised through the issuance of securities; and funding raised through the issuance of debt instruments.

On a consolidated basis, our funding primarily stems from a combination of the following sources: retail, institutional, and brokered deposits; borrowed funds, primarily in the form of wholesale borrowings; cash flows generated through the repayment and sale of loans; and cash flows generated through the repayment and sale of securities.

Deposits

Our ability to retain and attract deposits depends on numerous factors, including customer satisfaction, the rates of interest we pay, the types of products we offer, and the attractiveness of their terms. From time to time, we have chosen not to compete actively for deposits, depending on our access to deposits through acquisitions, the availability of lower-cost funding sources, the impact of competition on pricing, and the need to fund our loan demand. The vast majority of our deposits are retail in nature (i.e., they are deposits we have gathered through our branches or through business combinations).

Depending on their availability and pricing relative to other funding sources, we also include brokered deposits in our deposit mix. Brokered deposits accounted for $8.1 billion of our deposits at September 30, 2023, compared to $5.1 billion at December 31, 2022. Brokered money market accounts represented $2.3 billion of total brokered deposits at September 30, 2023 and $2.8 billion at December 31, 2022; brokered interest-bearing checking accounts represented $0.7 billion and $1.0 billion, respectively. At September 30, 2023, we had $5.1 billion of brokered CDs, compared to $1.3 billion at December 31, 2022.

Our uninsured deposits are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000). These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes and excludes internal accounts. At September 30, 2023 our deposit base includes $31.3 billion of uninsured deposits a net increase of $14.8 billion as compared to December 31, 2022 due to the Signature Transaction. This represents 38 percent of our total deposits.

The following table indicates the amount of time deposits, by account, that are in excess of the FDIC insurance limit (currently $250,000) by time remaining until maturity:

(in millions)

Borrowed Funds

The majority of our borrowed funds are wholesale borrowings (FHLB-NY and FHLB-Indianapolis advances) and, to a lesser extent, junior subordinated debentures and subordinated notes. At September 30, 2023, total borrowed funds decreased $6.7 billion to $14.6 billion compared to the balance at December 31, 2022 primarily driven by the paydown of wholesale borrowings with cash received in the Signature Transaction.

Wholesale Borrowings

Wholesale borrowings at September 30, 2023 were $13.6 billion compared to $20.3 billion at December 31, 2022.

FHLB-NY and FHLB-Indianapolis advances accounted for $13.0 billion and $20.3 billion at September 30, 2023 and December 31, 2022, respectively. Pursuant to blanket collateral agreements with the Bank, our FHLB-NY, FHLB-Indianapolis advances and overnight advances are secured by pledges of certain eligible collateral in the form of loans and securities. At September 30, 2023 and December 31, 2022, $3.2 billion and $6.8 billion of our wholesale borrowings had callable features, respectively.

We had $547 million of federal funds outstanding at September 30, 2023. At December 31, 2022, there were no federal funds outstanding.

Junior Subordinated Debentures

Junior subordinated debentures totaled $578 million at September 30, 2023 compared to $575 million at December 31, 2022.

Subordinated Notes

At September 30, 2023, the balance of subordinated notes was $437 million, including $135 million assumed from the Flagstar acquisition, as compared to $432 million at December 31, 2022.

See Note 11, “Borrowed Funds,” in Item 8, “Financial Statements and Supplementary Data” for a further discussion of our wholesale borrowings, our junior subordinated debentures and subordinated debt.

Liquidity, Contractual Obligations and Off-Balance Sheet Commitments, and Capital Position

Liquidity

We manage our liquidity to ensure that our cash flows are sufficient to support our operations, and to compensate for any temporary mismatches between sources and uses of funds caused by variable loan and deposit demand.

We monitor our liquidity daily to ensure that sufficient funds are available to meet our financial obligations. Our most liquid assets are cash and cash equivalents, which totaled $6.9 billion and $2.0 billion, at September 30, 2023 and December 31, 2022, respectively. The $4.9 billion increase in cash and cash equivalents includes custodial deposits related to the Signature Transaction.

At September 30, 2023, our total ready liquidity (cash and cash equivalents, unpledged securities, and FHLB borrowing capacity),was $31.2 billion , approximately matching the balance of our uninsured deposits.

Additional liquidity stems from deposits and from our use of wholesale funding sources, including wholesale borrowings and brokered deposits. In addition, we have access to the Bank’s approved lines of credit with various counterparties, including the FHLB-NY. The availability of these wholesale funding sources is generally based on the amount of mortgage loan collateral available under a blanket lien we have pledged to the respective institutions and, to a lesser extent, the amount of available securities that may be pledged to collateralize our borrowings. At September 30, 2023 our available borrowing capacity with the FHLB-NY was $16.9 billion. In addition, the Bank had available-for-sale securities of $8.7 billion, of which, $7.4 billion is unpledged.

Furthermore, the Bank has agreements with the FRB-NY that enable it to access the discount window as a further means of enhancing our liquidity. In connection with these agreements, the Bank has pledged certain loans and securities to collateralize any funds we may borrow. The maximum amount the Bank could borrow from the FRB-NY was $1.0 billion. There were no borrowings against these lines of credit at September 30, 2023.

CDs due to mature or reprice in one year or less from September 30, 2023 totaled $15.7 billion, representing 90 percent of total CDs at that date. Our ability to attract and retain retail deposits, including CDs, depends on numerous factors, including, among others, the convenience of our branches and our other banking channels; our customers’ satisfaction with the service they receive; the rates of interest we offer; the types of products we feature; and the attractiveness of their terms.

Our decision to compete for deposits also depends on numerous factors, including, among others, our access to deposits through acquisitions, the availability of lower-cost funding sources, the impact of competition on pricing, and the need to fund our loan demand.

The Parent Company is a separate legal entity from the Bank and must provide for its own liquidity. At September 30, 2023 the Parent Company held cash and cash equivalents of $160 million. In addition to operating expenses and any share repurchases, the Parent Company is responsible for paying any dividends declared to our common and preferred stockholders. As a Delaware corporation, the Parent Company is able to pay dividends either from surplus or, in case there is no surplus, from net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

Various legal restrictions limit the extent to which the Company’s subsidiary bank can supply funds to the Parent Company and its non-bank subsidiaries. The Bank would require the approval of the OCC if the dividends it declares in any calendar year were to exceed the total of its respective net profits for that year combined with its respective retained net profits for the preceding two calendar years, less any required transfer to paid-in capital. The term “net profits” is defined as net income for a given period less any dividends paid during that period. As a result of our acquisition of Flagstar, we are also required to seek regulatory approval from the OCC for the payment of any dividend to the Parent Company through at least the period ending November 1, 2024. In connection with receiving regulatory approval from the OCC for the Signature

Transaction, the Bank has committed that (i) for a period of two years from the date of the Signature Transaction, it will not declare or pay any dividend without receiving a prior written determination of no supervisory objection from the OCC and (ii) it will not declare or pay dividends on the amount of retained earnings that represents any net bargain purchase gain that is subject to a conditional period that may be imposed by the OCC. In the nine months ended September 30, 2023, dividends of $430 million were paid by the Bank to the Parent Company. At September 30, 2023, the Bank had $555 million available for additional dividends, excluding bargain purchase gain from retained earnings.

At September 30, 2023, we believe the Company has sufficient liquidity and capital resources to meet its cash flow obligations over the next 12 months and for the foreseeable future.

Contractual Obligations and Commitments

In the normal course of business, we enter into a variety of contractual obligations in order to manage our assets and liabilities, fund loan growth, operate our branch network, and address our capital needs.

For example, we offer CDs with contractual terms to our customers, and borrow funds under contract from the FHLB-NY. These contractual obligations are reflected in the Consolidated Statements of Condition under “Deposits” and “Borrowed funds,” respectively. At September 30, 2023, we had CDs of $17.3 billion and long-term debt (defined as borrowed funds with an original maturity one year or more) of $7.7 billion.

We also are obligated under certain non-cancelable operating leases on the buildings and land we use in operating our branch network and in performing our back-office responsibilities. These obligations are included in the Consolidated Statements of Condition and totaled $456 million at September 30, 2023 an increase of $334 million compared to $122 million at December 31, 2022 driven by the Signature Transaction.

At September 30, 2023, we also had commitments to extend credit in the form of mortgage and other loan originations, as well as commercial, performance stand-by, and financial stand-by letters of credit. These commitments consist of agreements to extend credit, as long as there is no violation of any condition established in the contract under which the loan is made. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee.

The following table summarizes the Company’s commitments to originate loans and letters of credit:

(in millions)

The letters of credit we issue consist of performance stand-by, financial stand-by, and commercial letters of credit. Financial stand-by letters of credit primarily are issued for the benefit of other financial institutions, municipalities, or landlords on behalf of certain of our current borrowers, and obligate us to guarantee payment of a specified financial obligation. Performance stand-by letters of credit are primarily issued for the benefit of local municipalities on behalf of certain of our borrowers. Performance letters of credit obligate us to make payments in the event that a specified third party fails to perform under non-financial contractual obligations. Commercial letters of credit act as a means of ensuring payment to a seller upon shipment of goods to a buyer. Although commercial letters of credit are used to effect payment for domestic transactions, the majority are used to settle payments in international trade. Typically, such letters of credit require the presentation of documents that describe the commercial transaction, and provide evidence of shipment and the transfer of title. The fees we collect in connection with the issuance of letters of credit are included in “Fee income” in the Consolidated Statements of Income and Comprehensive Income.

Based upon our current liquidity position, and ready liquidity of $31.2 billion, we expect that our funding will be sufficient to fulfill these cash obligations and commitments when they are due both in the short term and long term.

For the three months ended September 30, 2023, we did not engage in any off-balance sheet transactions that we expect to have a material effect on our financial condition, results of operations or cash flows.

At September 30, 2023, we had no commitments to purchase securities.

Regulatory Capital

The Bank is subject to regulation, examination, and supervision by the OCC and the Federal Reserve (the “Regulators”). The Bank is also governed by numerous federal and state laws and regulations, including the FDIC Improvement Act of 1991, which established five categories of capital adequacy ranging from “well capitalized” to “critically undercapitalized.” Such classifications are used by the FDIC to determine various matters, including prompt corrective action and each institution’s FDIC deposit insurance premium assessments. Capital amounts and classifications are also subject to the Regulators’ qualitative judgments about the components of capital and risk weightings, among other factors.

The quantitative measures established to ensure capital adequacy require that banks maintain minimum amounts and ratios of leverage capital to average assets and of common equity tier 1 capital, tier 1 capital, and total capital to risk-weighted assets (as such measures are defined in the regulations). At September 30, 2023, our capital measures continued to exceed the minimum federal requirements for a bank holding company and for a bank. The following table sets forth our common equity tier 1, tier 1 risk-based, total risk-based, and leverage capital amounts and ratios on a consolidated basis and for the Bank on a stand-alone basis, as well as the respective minimum regulatory capital requirements, at that date:

The following tables present the actual capital amounts and ratios for the Company:

(dollars in millions)

The following tables present the actual capital amounts and ratios for the Bank:

(dollars in millions)

At September 30, 2023, our total risk-based capital ratio exceeded the minimum requirement for capital adequacy purposes by 397 basis points and the fully phased-in capital conservation buffer by 147 basis points.

The Bank also exceeded the minimum capital requirements to be categorized as “Well Capitalized.” To be categorized as well capitalized, a bank must maintain a minimum common equity tier 1 ratio of 6.50 percent; a minimum tier 1 risk-based capital ratio of 8 percent; a minimum total risk-based capital ratio of 10 percent; and a minimum leverage capital ratio of 5 percent.

Other Recent Developments

In May 2023, the FDIC proposed a special deposit insurance assessment on banking organizations with greater than $5 billion in assets to recover the costs associated with bank failures that have occurred since March 2023. As proposed, the special assessment would be collected by the FDIC over an anticipated total of eight quarterly assessments beginning with the first quarter of 2024. The comment period for the proposed rule has ended and the final rule is expected to be issued later in 2023. While the ultimate impact of the special assessment will be dependent on the final rule, the Company has estimated that its special assessment under the provisions of the proposed rule would be approximately $36 million, which is expected to be recognized in earnings upon issuance of the final rule. The Company continues to monitor regulatory changes related to these developments which have also increased regulatory and market focus on the liquidity, asset-liability management and unrealized securities losses of banks.

On July 27, 2023, the Federal Banking Agencies, the FDIC, the Federal Reserve, and the OCC, released a notice of proposed rulemaking that would make significant amendments to the Basel III Capital Rules applicable to both the Company and the Bank. In general, the proposed rule would align the regulatory capital calculation methodology for Category III and IV banking organizations with the methodology applicable to Category I and II banking organizations. In addition to calculating risk-weighted assets under the current U.S. standardized approach, the proposal introduces a new “Expanded Risk-Based Approach,” including standardized approaches for credit risk, operational risk and credit valuation adjustment risk, as well as a new approach for market risk that would be based upon internal models and standardized supervisory models. If adopted as proposed, the Company would be required to calculate its risk-based capital ratios under both the current U.S. standardized approach and the Expanded Risk-Based Approach and would be subject to the lower of the two resulting ratios for each risk-based capital ratio. In addition, the proposal would require banking organizations to recognize most elements of AOCI in regulatory capital, including unrealized gains and losses on available-for-sale securities, and lower thresholds for deductions from CET1 capital for mortgage servicing assets and deferred tax assets, among other things. The proposal, if enacted, would have an effective date of July 1, 2025, with certain elements, such as the recognition of AOCI in regulatory capital and changes in risk-weighted assets calculated under the Expanded Risk-Based Approach, having a three-year phase-in period. We are in the process of evaluating this proposed rulemaking and assessing its potential impact on the Company and the Bank if adopted as proposed.

Market Risk

As a financial institution, we are focused on reducing our exposure to interest rate volatility, which represents our primary market risk. Changes in market interest rates represent the greatest challenge to our financial performance, as such changes can have a significant impact on the level of income and expense recorded on a large portion of our interest-earning assets and interest-bearing liabilities, and on the market value of all interest-earning assets, other than those possessing a short term to maturity. To reduce our exposure to changing rates, the Board of Directors and management monitor interest rate sensitivity on a regular or as needed basis so that adjustments to the asset and liability mix can be made when deemed appropriate.

The actual duration of held-for-investment mortgage loans and mortgage-related securities can be significantly impacted by changes in prepayment levels and market interest rates. The level of prepayments may, in turn, be impacted by a variety of factors, including the economy in the region where the underlying mortgages were originated; seasonal factors; demographic variables; and the assumability of the underlying mortgages. However, the factors with the most significant impact on prepayments are market interest rates and the availability of refinancing opportunities.

We managed our interest rate risk by taking the following actions: (1) Continue to increase the Investments portfolio with an overall shorter duration profile; (2) The use of derivatives to manage our interest rate position; (3) Increased the focus on retaining and increasing our branch deposits base.

Uninsured Deposits

We manage our liquidity to ensure that our cash flows are sufficient to support our operations, and to compensate for any temporary mismatches between sources and uses of funds caused by variable loan and deposit demand. As a result, we have $31.2 billion of total ready liquidity (cash and cash equivalents, unpledged securities, and FHLB borrowing capacity), approximately matching the balance of our uninsured deposits. Our uninsured deposits are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000). These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes and excludes internal accounts. At September 30, 2023 our deposit base includes $31.3 billion of uninsured deposits, reflecting a net increase of $14.8 billion as compared to December 31, 2022 due to the Signature Transaction. This represents 38 percent of our total deposits.

Interest Rate Sensitivity Analysis

Interest rate sensitivity is monitored through the use of a model that generates estimates of the change in our Economic Value of Equity (EVE) over a range of interest rate scenarios. EVE is defined as the net present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The EVE ratio, under any interest rate scenario, is defined as the EVE in that scenario divided by the market value of assets in the same scenario. The model assumes estimated loan and MBS prepayment rates, current market value spreads, and deposit decay rates and betas.

Based on the information and assumptions in effect at September 30, 2023, the following table sets forth our EVE, assuming the changes in interest rates noted:

The net changes in EVE presented in the preceding table are within the parameters approved by the Boards of Directors of the Company and the Bank.

Accordingly, while the EVE analysis provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income, and may very well differ from actual results.

Interest Rate Risk is also monitored through the use of a model that generates Net Interest Income (NII) simulations over a range of interest rate scenarios. Modeling changes in NII requires that certain assumptions be made which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NII analysis presented below assumes that the composition of our interest rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, and also assumes that a particular change in interest rates is reflected uniformly across the yield curve, regardless of the duration to maturity or repricing of specific assets and liabilities. Furthermore, the model does not take into account the benefit of any strategic actions we may take to further reduce our exposure to interest rate risk. The assumptions used in the net interest income simulation are inherently uncertain. Actual results may differ significantly from those presented in the following table, due to the frequency, timing, and magnitude of changes in interest rates; changes in spreads between maturity and repricing categories; and prepayments, among other factors, coupled with any actions taken to counter the effects of any such changes.

Based on the information and assumptions in effect at September 30, 2023, the following table reflects the estimated percentage change in future net interest income for the next twelve months, assuming the changes in interest rates noted:

(1) In general, short- and long-term rates are assumed to increase in parallel instantaneously and then remain unchanged.

The net changes in NII presented in the preceding table are within the parameters approved by the Boards of Directors of the Company and the Bank.

Future changes in our mix of assets and liabilities may result in greater changes to our EVE, and/or NII simulations.

In the event that our EVE and net interest income sensitivities were to breach our internal policy limits, we would undertake the following actions to ensure that appropriate remedial measures were put in place:

• In formulating appropriate strategies, the ALCO Committee would ascertain the primary causes of the variance from policy tolerances, the expected term of such conditions, and the projected effect on capital and earnings.
• Our ALCO Committee would inform the Board of Directors of the variance, and present recommendations to the Board regarding proposed courses of action to restore conditions to within-policy tolerances.

Where temporary changes in market conditions or volume levels result in significant increases in risk, strategies may involve reducing open positions or employing other balance sheet management activities including the potential use of derivatives to reduce the risk exposure. Where variance from policy tolerances is triggered by more fundamental imbalances in the risk profiles of core loan and deposit products, a remedial strategy may involve restoring balance through natural hedges to the extent possible before employing synthetic hedging techniques. Other strategies might include:

• Asset restructuring, involving sales of assets having higher risk profiles, or a gradual restructuring of the asset mix over time to affect the maturity or repricing schedule of assets;
• Liability restructuring, whereby product offerings and pricing are altered or wholesale borrowings are employed to affect the maturity structure or repricing of liabilities;
• Expansion or shrinkage of the balance sheet to correct imbalances in the repricing or maturity periods between assets and liabilities; and/or
• Use or alteration of off-balance sheet positions, including interest rate swaps, caps, floors, options, and forward purchase or sales commitments.

In connection with our net interest income simulation modeling, we also evaluate the impact of changes in the slope of the yield curve. At September 30, 2023, our analysis indicated that a further inversion of the yield curve would be expected to result in a 0.9 decrease in net interest income; conversely, an immediate steepening of the yield curve would be expected to result in a 1.6 percent increase in net interest income.

Critical Accounting Estimates

Various elements of our accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain accounting policies that, due to the judgment, estimates and assumptions are critical to an understanding of our Consolidated Financial Statements and the Notes, are described in Item 1. These policies relate to: (a) the determination of our ACL, (b) fair value measurements and (c) the acquisition method of accounting. We believe the judgment, estimates and assumptions used in the preparation of our Consolidated Financial Statements and the Notes are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements and the Notes to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations and/or financial condition.

For further information on our critical accounting policies, please refer to our Form 10-K for the year ended December 31, 2022, which is available on our website, under the Investor Relations section, or on the website of the Securities and Exchange Commission, at sec.gov.

Signature Transaction - Certain Financial Information

In accordance with the guidance provided in Staff Accounting Bulletin Topic 1:K, “Financial Statements of Acquired Troubled Financial Institutions” (“SAB 1:K”) the Company has omitted certain financial information on the Signature Transaction required by Rule 3-05 of Regulation S-X and Article 11 of Regulation S-X. SAB 1:K provides relief from the requirements of Rule 3-05 and Article 11 of Regulation S-X under certain circumstances, including a transaction such as the Signature Transaction, in which the registrant engages in an acquisition of a troubled financial institution for which historical financial statements are not reasonably available or relevant and in which federal assistance is an essential and significant part of the transaction.

Reportable Segment and Reporting Units

We operate in a single reportable segment and have identified one reporting unit which is the same as our operating segment. Following the acquisition of Flagstar Bank, N.A. and closing the Signature Transaction, we are currently in the process of reassessing our reportable segments and reporting units, which may result in a change to either or both in future reporting periods.

A discussion regarding our management of market risk is included in "Market Risk" in this report in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" which is incorporated herein by reference.

(a) Evaluation of Disclosure Controls and Procedures

As of September 30, 2023, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), an evaluation was performed by the Company’s Management, including our principal executive and financial officers, regarding the design and effectiveness of our disclosure controls and procedures. Based upon that evaluation, the principal executive and financial officers have concluded that our current disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms as of September 30, 2023.

(b) Changes in Internal Controls.

Certain assets and liabilities of Signature Bridge Bank were acquired on March 20, 2023. We have extended oversight and monitoring processes that support internal control over financial reporting to include the acquired operations. There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(d) of the Exchange Act) during the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Please see “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and the Company’s Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023 for information regarding risk factors that could materially affect the Company’s business, financial condition, or future results of operations. Other than as set forth below, there have been changes with regard to the risk factors disclosed in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and the Company’s Form 10-Q for the quarter ended March 31, 2023.

The Company, entities that we have acquired, and certain of our service providers have experienced information technology security breaches and may be vulnerable to future security breaches. These incidents have resulted in, and could result in, additional expenses, exposure to civil litigation, increased regulatory scrutiny, losses, and a loss of customers , any of which could adversely impact our financial condition, results of operations, and the market price of our stock.

Communication and information systems are essential to the conduct of our business, as we use such systems, and those maintained and provided to us by third-party service providers, to manage our customer relationships, our general ledger, our deposits, and our loans. In addition, our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we, and entities we have acquired, take and have taken protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks, as well as the security of the computer systems, software, and networks of certain of our service providers, have been , and may in the future be, vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that have had and could have an impact on information security. With the rise and permeation of online and mobile banking, the financial services industry in particular faces substantial cybersecurity risk due to the type of sensitive information provided by customers. We, and our third-party service providers, have been and may in the future be subject to cybersecurity incidents, including those that involve the unauthorized access to customer information affecting other financial institutions and industry groups. Our systems and those of our third-party service providers and customers are regularly the subject of attempted attacks that are increasingly sophisticated, and it is possible that we or they could experience a significant event in the future that could adversely affect our business or operations. In addition, breaches of security have in the past and may in the future occur through intentional or unintentional acts by those having authorized or unauthorized access to our confidential or other information, or that of our customers, clients, or counterparties. Certain previously identified cyber incidents have resulted, and future such events could result, in the breach of confidential and other information processed and stored in our computer systems and networks. These events could cause interruptions or malfunctions in our operations or the operations of our customers, clients, or counterparties. Further, we may not know that an attack occurred until well after the event. Even after discovering an attempt or breach occurred, we may not know the extent of the impact of the attack for some period of time. This could cause us significant reputational damage or result in our experiencing significant losses.

While we diligently assess applicable regulatory and legislative developments affecting our business, laws and regulations relating to cybersecurity have been frequently changing, imposing new requirements on us. In light of these conditions, we face the potential for additional regulatory scrutiny that will lead to increasing compliance and technology expenses and, in some cases, possible limitations on the achievement of our plans for growth and other strategic objectives. We may also be required to expend significant additional resources to modify our protective measures or investigate and remediate vulnerabilities or other exposures arising from operational and security risks, including expenses for third-party expert consultants or outside counsel. We are currently subject to litigation regarding cyber incidents, and we also may be subject to future litigation and financial losses that either are not insured against or not fully covered through any insurance we maintain or any third-party indemnification or insurance. We believe that the impact of any previously identified cyber incidents, including those subject to ongoing investigation and remediation, will not have a material financial impact.

In addition, we routinely transmit and receive personal, confidential, and proprietary information by e-mail and other electronic means. We have discussed, and worked with our customers, clients, and counterparties to develop secure transmission capabilities, but we do not have, and may be unable to put in place, secure capabilities with all of these constituents, and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of such information. We maintain disclosure controls and procedures to ensure we will timely and sufficiently notify our investors of material cybersecurity risks and incidents, including the associated financial, legal, or reputational consequence of such an event, as well as reviewing and updating any prior disclosures relating to the risk or event. While we have established information security policies, procedures and controls, including an Incident Response Plan, to prevent or limit the impact of systems failures and interruptions, we may not be able to anticipate all possible security breaches that could affect our systems or information and there can be no assurance that such events will not occur or will be adequately prevented or mitigated by our policies, procedures and controls if they do.