Flagstar Bank, National Association: Form 10-Q for the period ended Mar 31, 2024

Net Income (Loss) | Net Income (Loss) Available to Common Stockholders

New York Community Bancorp reported a first quarter 2024 net loss of $327 million compared to a net loss of $2.7 billion in the prior quarter and net income of $2.0 billion in the year ago quarter. The net loss available to common shareholders in the current quarter was $335 million, or $0.45 per diluted share, compared to $2.7 billion, or $3.76 per diluted share, in the prior quarter and net income of $2.0 billion, or $2.87 per diluted share, in the year ago quarter. The prior quarter net loss and diluted EPS included goodwill impairment of $2.4 billion. Net income for the three months ended March 31, 2023 included a bargain purchase gain of $2.0 billion arising from the Signature transaction.

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.

From December 31, 2023 to March 7, 2024, we experienced $9.7 billion in core deposit runoff following the rating agency downgrades of our Company's credit ratings in February and March 2024. On March 6, 2024 we announced a $1.05 billion capital raise, after which, deposits stabilized and runoff was immaterial for the remainder of the first quarter 2024. We funded the deposit runoff, and increased our on balance sheet liquidity, primarily through $4.1 billion in brokered CD’s and $5.5 billion of wholesale borrowings.

The following table sets forth certain information regarding our net interest income and average balance sheet for the periods indicated: 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.

(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 on each separate line.

(in millions)

Comparison to Prior Quarter

The Company's net interest margin for the three months ended March 31, 2024, was 2.28 percent, down 54 basis points compared to the three months ended December 31, 2023. The reduction is primarily driven by higher cost of funds with the average rate on borrowings costs increasing 85 basis points and the impact from a deposit mix shift from lower cost interest-bearing checking and MMA to higher cost certificates of deposits. The decline in lower rate deposits was primarily driven by withdrawals of uninsured deposits following the rating agency downgrades of our Company's credit ratings in February and March 2024. These elevated withdrawals of uninsured deposits resulted in us raising liquidity through the use of higher cost deposits and borrowings. Subsequent to announcing a $1.05 billion capital investment on March 6, 2024, our deposits stabilized and then remained around $75 billion for the remainder of the first quarter 2024, down from $81.5 billion at December 31, 2023.

Net interest income for the three months ended March 31, 2024 was $624 million, down $116 million or 15.7 percent compared to the three months ended December 31, 2023 primarily due to the following:

• Interest expense on borrowed funds increased $155 million or 94.5 percent to $319 million primarily driven by a $10.0 billion or 55.0 percent increase in the average balances as we took actions to proactively manage our liquidity needs along with an 85 basis point increase in rates as long-term lower cost borrowings matured.
• Interest expense on average interest-bearing deposits increased $27 million to $570 million during the three months ended March 31, 2024, driven by a 23 basis point increase in the average cost of interest-bearing deposits due to the impact from a deposit mix shift from lower cost interest-bearing checking and MMA to higher cost certificates of deposits.
• Interest income on loans and leases decreased $37 million primarily driven by a $1.5 billion, or 2% reduction in average loan balances led by lower consumer loans due to the sale of the marine and RV portfolio, as well as lower multi-family and warehouse loan balances.

partially offset by:

• Interest income on cash and cash equivalents increased $107 million driven by an increase in the average balance to $7.5 billion to proactively manage liquidity and a 24 basis point increase in the average yield to 5.52 percent.

Comparison to Prior Year to Date

For the three months ended March 31, 2024, the net interest margin was 2.28 percent, down 32 basis points compared to the three months ended March 31, 2023. The year-over-year decrease was primarily the impact of higher interest rates on the cost of funds with the average cost of borrowed funds increasing 143 basis points and the average cost of interest-bearing deposits increasing 145 basis points, partially offset by higher earning asset yields which increased 71 basis points.

For the three months ended March 31, 2024, net interest income totaled $624.0 million, up $69.0 million or 12.4 percent compared to $555 million for the three months ended March 31, 2023. The year-over-year increase was primarily the result of the following:

• Interest income on mortgages and other loans increased $326 million driven by a $13.3 billion or 18.9 percent increase in average loan balances to $84.1 billion. This is primarily driven by the current period including a full quarter of the Signature Transaction that closed on March 20, 2023. Additionally, we had a 76 basis point increase in the average loan yield to 5.68 percent in the current quarter due primarily to the impact of rising rates and the higher yield of our portfolio due to loans acquired in the Signature Transaction.
• Interest income on securities increased $19 million, driven by a 44 basis point increase in the average yield to 4.30 percent from 3.86 percent. Additionally, there was a $726 million or 6.7 percent increase in the average securities balance to $11.6 billion. The yield on securities is improving over time as lower rate securities mature and are replaced with higher rate securities, consistent with the increase in interest rates.
• Interest income on cash and cash equivalents increased $145 million reflecting higher cash balances as a result of actions to proactively manage liquidity needs along with a 56 basis point increase in the average yield to 5.52 percent.

partially offset by:

• Interest expense on average interest-bearing deposits increased $287 million to $570 million during the three months ended March 31, 2024. Average interest earning deposits grew $11.6 billion, or 24.3 percent, to $59.5 billion primarily due to a full quarter of the Signature Transaction. We also experienced a 145 basis point increase in the average cost of interest-bearing deposits primarily due to the impact from a deposit mix shift from lower cost interest-bearing checking and MMA to higher cost certificates of deposits.
• Interest expense on borrowed funds increased $123 million or 62.8 percent to $319 million driven by a 143 basis point increase in rates in addition to a $3.4 billion or 22.2 percent increase in the average balance to $25.7 billion primarily reflecting actions to proactively manage liquidity needs in the first quarter of 2024.

Provision for Credit Losses

For the three months ended March 31, 2024, the provision for credit losses totaled $315 million compared to a $552 million provision for the three months ended December 31, 2023, and a $170 million provision for the three months ended March 31, 2023, which included a $132 million initial provision for credit losses for the loans acquired in the Signature Transaction. The increase reflects changes in market conditions and interest rates that are expected to affect portions of our portfolios that are subject to current market stresses.

Net charge-offs totaled $81 million for the three months ended March 31, 2024, compared with $185 million for the three months ended December 31, 2023. Net charge-offs on a non-annualized basis represented 0.10% and 0.22% of average loans outstanding for the three months ended March 31, 2024, and for the three months ended December 31, 2023, respectively. First quarter net charge-offs were $104 million lower compared to the prior quarter. Commercial real estate charge-offs were $64 million during the first quarter 2024 compared to $42 in the fourth quarter 2023. Multifamily net charge-offs were $11 million in the first quarter 2024 compared to $5 in the fourth quarter 2023. The fourth quarter 2023 also included a $112 million charge-off of a co-operative loan.

Non-Interest Income

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

(in millions)

Comparison to Prior Quarter

For the three months ended March 31, 2024, non-interest income totaled $9 million as compared to $127 million for the three months ended December 31, 2023. The first quarter includes a reduction in the bargain purchase gain of $121 million related to the final adjustment to the fair value of assets received and liabilities assumed, including the in-transit and other shared accounts of the Signature Transaction as compared to an $11 million reduction in the fourth quarter of 2023.

The net return on mortgage servicing rights was $21 million or 7.6 percent for the three months ended March 31, 2024 compared to $33 million or 12.0 percent for the three months ended December 31, 2023 primarily driven by unfavorable hedge performance.

First quarter 2024 non-interest income includes a gain on loan sales of $20 million compared to $16 million during the fourth quarter 2023. The current quarter included a net gain of $6 million related to the sale of a loan we moved to held-for-sale in the prior quarter and the sale of the RV/Marine portfolio, both of which closed during the current quarter.

Loan administration income was relatively flat for the three months ended March 31, 2024, as compared to the three months ended December 31, 2023. FDIC servicing income declined $10 million from $20.2 million in the fourth quarter of 2023 to $10.4 million in the first quarter of 2024. This was offset by higher net subservice fee income driven by a lower volume of subserviced custodial deposit activity. Our servicing agreement with the FDIC ended in March 2024 and is no longer expected to generate loan administration income in future periods.

Comparison to Prior Year to Date

Non-interest income decreased $2.1 billion for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily due to the bargain purchase gain of $2.0 billion related to the Signature Transaction. Excluding the bargain gain impacts, non-interest income increased $33 million For the three months ended March 31, 2024, compared to three months ended March 31, 2023.,The increase was driven by a full quarter of the Signature Transaction and higher loan administration fee income as a result of higher FDIC subservicing income.

Excluding the bargain purchase gain adjustment of $121 million in the first quarter 2024 and $2.0 billion in the first quarter 2023 related to the Signature transaction, non-interest income increased $33 million compared to the first quarter 2023 primarily driven by $18 million higher other income, $9 million higher net loan administration income, and $7 million higher fee income. Net mortgage gain on sale margin decreased 28 basis points to 48 basis points compared to 76 basis points in the first quarter 2023.

Non-Interest Expense

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

(in millions)

Comparison to Prior Quarter

Total operating expenses for the three months ended March 31, 2024 were $621 million, up $14 million compared to $607 million for the fourth quarter 2023. The increase was primarily driven by higher compensation and benefits due to seasonal factors such as payroll taxes, 401(k) match resets and merit increases, coupled with lower incentive compensation in the fourth quarter 2023 driven by accrual reversals related to executive compensation as a result of Company performance. General and administrative costs were down $18 million primarily due to the FDIC special assessment recorded in the fourth quarter of 2023.

Comparison to Prior Year to Date

Total operating expenses for the three months ended March 31, 2024 were up $229 million compared to the three months ended March 31, 2023 . This increase was largely attributable to the impact from the Signature transaction, which closed in late March of 2023 along with a $28.1 million increase in FDIC insurance expense driven by a higher asset base and assessment rate.

Income Tax Expense

For the three months ended March 31, 2024, the Company reported a benefit for income taxes of $54 million compared to a benefit for income taxes of $112 million for the three months ended December 31, 2023 and an income tax expense of $1 million for the three months ended March 31, 2023 . The benefit for the three months ended March 31, 2024 was driven by the higher book loss for the quarter, primarily attributable to the loan loss provision. The effective tax rate difference was due to current period changes in non-tax deductible expenses and the bargain gain, in proportion to the pre-tax loss. The effective tax rate for the three months ended March 31, 2024, was 14.3 percent compared to 4.0 percent for the three months ended December 31, 2023 and less than one percent for the three months ended March 31, 2023 .

FINANCIAL CONDITION

Balance Sheet Summary

Total assets decreased $1.2 billion to $112.9 billion as of March 31, 2024, compared to $114.1 billion at December 31, 2023.

Total loans and leases held for investment were $82.3 billion at March 31, 2024 compared to $84.6 billion at December 31, 2023. The decrease was primarily driven by lower consumer loans due to the sale of the marine and RV portfolio and a slight net decrease in multi-family and commercial loans due to run-off and lower originations.

The securities portfolio totaled $9.4 billion at March 31, 2024, compared to $9.2 billion at December 31, 2023. Our securities portfolio is classified as available-for-sale with low credit risk U.S government agency bonds comprising over 90 percent of the total portfolio at March 31, 2024 and December 31, 2023. These instruments are recorded at fair value and unrealized gains and losses driven by changes in market interest rates are recorded in other comprehensive income. An allowance for credit loss is established for any credit-related impairments. At March 31, 2024 and December 31, 2023 the total allowance for credit losses on our securities portfolio was immaterial.

Total deposits decreased $6.7 billion, or 8 percent to $74.9 billion at March 31, 2024 compared to $81.5 billion at December 31, 2023. From December 31, 2023 to March 7, 2024, we experienced $9.7 billion in core deposit runoff following the rating agency downgrades of our Company's credit ratings in February and March 2024. On March 6, 2025 we announced a $1.05 billion capital raise, after which, deposits stabilized and runoff has been immaterial for the remainder of the first quarter 2024.

Wholesale borrowings at March 31, 2024 were $25.7 billion compared to $20.3 billion at December 31, 2023, reflecting actions to proactively manage the liquidity needs of the Company.

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 loan portfolio was $36.9 billion at March 31, 2024, down slightly compared to $37.3 billion at December 31, 2023 due to a combination of higher interest rates and our loan diversification strategy.

The majority of our multi-family loans are secured by rental apartment buildings. At March 31, 2024, $20.6 billion or 56 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, to varying degrees. The weighted average LTV of the New York State rent regulated multi-family portfolio using origination-date values was 59 percent as of March 31, 2024 as compared to 58 percent at December 31,

2023. Since their origination date, property values in this loan segment are down substantially due to unfavorable market conditions.

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.

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 125 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 either the Management Credit Committee or the 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. Although occupancy levels have historically tended to be stable due to below market rents, rent-regulated loans that are resetting are incurring debt service levels that, when combined with inflationary pressure on operating costs and limits on the ability to increase rental rates, will approach or exceed some properties’ net operating income and may require borrower support until elevated interest rates subside.

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 March 31, 2024, CRE loans represented $10.3 billion, or 12.5 percent, of total loans held for investment, reflecting a $147 million decrease when compared to $10.5 billion at December 31, 2023.

CRE loans represented $212 million, or 4.5 percent, of the loans we originated in the first quarter 2024 as compared to $225 million, or 3.0 percent in the fourth 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 March 31, 2024, 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 $3.1 billion of the CRE portfolio are office properties with an average balance of approximately $14 million and located primarily in the New York metro area. Occupancy levels for office space have declined substantially over the past three years which has an impact on borrowers net operating income and their ability to cover debt service. These unfavorable market conditions also lower the value of underlying collateral and have resulted in higher current LTVs in this loan segment as compared to those at their origination date.

The terms of more than half of our CRE loans 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.

We originate CRE loans in adherence with 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 primarily 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 at origination of 70 percent, but is tiered to more conservative metrics based upon the inherent risks associated with specific asset types. 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, certain of 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 March 31, 2024, our ADC loans represented $3.2 billion, or 3.9 percent, of total loans held for investment, reflecting an increase of $295 million compared to December 31, 2023.

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 March 31, 2024 C&I loans totaled $24.4 billion or 29.7 percent of total loans held-for-investment. Included in this portfolio is $5.2 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 March 31, 2024, we had $5.2 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 March 31, 2024, specialty finance loans and leases totaled $4.8 billion or 6 percent of total loans held for investment, down $397 million or 8 percent compared to December 31, 2023.

We produce our specialty finance loans and leases through a subsidiary that 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. These loans 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 March 31, 2024, 84 percent of specialty finance loan commitments are structured as floating rate obligations.

In the first quarter of 2024, the Company originated $1.1 billion of specialty finance loans and leases, representing 23 percent of total originations compared to $1.3 billion for the same period in 2023, representing 41 percent of total originations.

One-to-Four Family Loans

At March 31, 2024, one-to-four family loans represented $5.8 billion, including $882 million of LGG, or 7.1%, of total loans held for investment. As of March 31, 2024, the repurchase liability on LGG loans was $376 million. As of December 31, 2023 one-to-four family loans totaled $6.1 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 March 31, 2024, non-government guaranteed loans in this portfolio had an average current FICO score of 742 and an average LTV of 52.

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 Department of Housing and Urban Development (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 March 31, 2024, other loans totaled $1.7 billion and consisted primarily of home equity lines of credit, 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 March 31, 2024, loans in this portfolio had an average current FICO score of 751.

As of March 31, 2024, loans in our indirect portfolio had an average current FICO score of 643. 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 March 31, 2024 totaled $1.0 billion, down from $1.2 billion at December 31, 2023. 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. 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.

Credit Quality

To mitigate the potential for credit losses, we underwrite our loans in accordance with credit standards that we consider to be prudent as described more fully in our annual report on form 10-K for the year ended December 31, 2023.

The Company conducted a thorough review of its largest 350 real estate loans at the end of the first quarter of 2024. This review included both internal collateral valuation analysis, and obtaining third-party estimates of collateral values, given the potential reliance on the underlying assets as part of the Borrower’s ability to repay debt. The review also included analysis of the most currently available borrower financial information to evaluate the ability of the underlying collateral to generate sufficient cash flow as the primary source of repayment. The Company downgraded certain loans in the first quarter of 2024 as a result of this review. The downgrades were principally related to loans with upcoming maturities or repricing where the estimated property net operating income would not be sufficient to fully cover pro-forma debt service when applying current market rates and terms, and the underlying collateral values are estimated to have declined to at or below the loan carrying amount. These downgrades increased loans classified as substandard or worse by $2.3 billion. Downgrades to substandard or below reflect the potential a loss may occur if deficiencies in the primary source of repayment for these loans are unable to be corrected. Refer to Note 6 for additional details.

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.

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 March 31, 2024 and December 31, 2023, 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.

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.

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.

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.

Asset Quality Measures

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:

19

Non-Performing Loans

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.

At March 31, 2024 total non-accrual mortgage loans increased $341 million to $704 million from December 31, 2023 and C&I non-accruals increased $30 million to $73 million. The increase in NPLs was primarily driven by two loans in the CRE office sector and two multi-family loans.

The following table sets forth the changes in non-accrual loans over the three months ended March 31, 2024:

(in millions)

At March 31, 2024, repossessed assets of $13 million were relatively unchanged compared to $14 million at December 31, 2023.

Delinquencies

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)

Allowance for Credit Losses

The following table sets forth the allocation of the consolidated allowance for losses on loans, at each period-end:

(dollars in millions)

At March 31, 2024, the allowance for credit losses on loans and leases was $1.2 billion compared to $992 million at December 31, 2023, up $223 million reflecting changes in market conditions over the quarter. In the first quarter we completed an in-depth review of our largest multi-family and commercial real estate loans, which in combination with our modeling, suggested credit losses as of March 31 had increased. We now expect market interest rates to be higher for a longer period of time which is expected to put additional pressure on the ability for some borrowers whose rates reset to current levels to cover debt service because, when combined with inflationary pressure on operating costs and limits on the ability to increase rental rates, debt service levels may approach or exceed some properties' net operating income, which increases the risk of loss. We also have continuing pressure in the office portfolio due to remote working and other factors leading to a decline in occupancy levels that reduces operating income and has led to declining property values.

The allowance for credit losses on loans and leases to total loans held for investment ratio increased to 1.48 percent at March 31, 2024, compared to 1.17 percent at December 31, 2023. Excluding loans with government guarantees and warehouse loans, the allowance for credit losses was 1.59 percent at March 31, 2024, compared to 1.26 percent at December 31, 2023.

Charge-offs

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

(dollars in millions)

22

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 $9.4 billion, or 8 percent, of total assets at March 31, 2024, compared to $9.2 billion, or 8 percent of total assets at December 31, 2023. At March 31, 2024 and December 31, 2023, all of our securities were designated as “Available-for-Sale”. At March 31, 2024, 16 percent of our portfolio are floating rate securities.

As of March 31, 2024, the net unrealized loss on securities available for sale, net of tax, was $651 million as compared to $581 million at December 31, 2023, reflecting the increased interest rate environment.

At March 31, 2024, available-for-sale securities had an estimated weighted average life of six years. Included in the quarter-end amount were mortgage-related securities of $7.1 billion and other debt securities of $2.2 billion.

At the prior year-end, available-for-sale securities were $9.2 billion, and had an estimated weighted average life of six years. Mortgage-related securities accounted for $6.6 billion of the year-end balance, with other debt securities accounting for the remaining $2.6 billion.

The following table summarizes the weighted average yields of debt securities for the maturities indicated at March 31, 2024:

(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 March 31, 2024, the Company had $1.0 billion of FHLB-NY stock, at cost and $329 million of FHLB-Indianapolis stock, at cost. At December 31, 2023, the Company had $861 million of FHLB-NY stock, at cost and $329 million of FHLB-Indianapolis stock, at cost. The Company maintains an investment in FHLB stock partly in conjunction with its membership in the FHLB and partly related to its access to the FHLB funding it utilizes. The increase in FHLB-NY stock was primarily related to increased borrowings in the first quarter of 2024. In addition, at March 31, 2024 and December 31, 2023, the Company had $203 million of Federal Reserve Bank stock, at cost.

Sources of Funds

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 majority of our deposits are retail in nature (i.e., they are deposits we have gathered through our branches or through business combinations) however, we also utilize brokered deposits depending on their availability and pricing relative to other funding sources. Our uninsured retail deposits declined approximately $14.5 billion during the three months ended March 31, 2024, following the rating agency downgrades of our Company's credit ratings in February and March. We replaced these deposits with a funding mix that included a higher level of brokered deposits, CDs and borrowed funds as further described below. During the quarter, more than 30 private banking teams, made up of approximately 200 employees whose responsibilities include the acquisition and retention of customer deposits, have left the Company. The deposits related to those teams and the private bank have remained stable.

Brokered deposits accounted for $12.9 billion of our deposits at March 31, 2024, compared to $9.5 billion at December 31, 2023. Brokered money market accounts represented $1.6 billion of total brokered deposits at March 31, 2024 and $1.3 billion at December 31, 2023; brokered interest-bearing checking accounts represented $0.7 billion and $1.6 billion, respectively. At March 31, 2024, we had $10.7 billion of brokered CDs, compared to $6.6 billion at December 31, 2023. The increase in brokered CDs was primarily related to funding our core deposit run-off experienced before the March 2024 capital infusion.

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 March 31, 2024 our deposit base includes $14.8 billion of uninsured deposits a net decrease of $14.5 billion as compared to December 31, 2023 primarily due to a decline in uninsured deposits during the first quarter 2024 and a shift to insured custodial deposits. This represents approximately 20 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 consist of wholesale borrowings, including FHLB advances, the Bank Term Funding Program of the FRB of New York, repurchase agreements, and, to a lesser extent, junior subordinated debentures and subordinated notes. At March 31, 2024, total borrowed funds increased $5.5 billion to $26.7 billion compared to the balance at December 31, 2023 primarily driven by the decline in deposits and actions to proactively manage our liquidity needs.

Wholesale Borrowings

Wholesale borrowings at March 31, 2024 were $25.7 billion compared to $20.3 billion at December 31, 2023.

FHLB advances accounted for $22.8 billion and $19.3 billion at March 31, 2024 and December 31, 2023, respectively, secured by eligible collateral in the form of loans and securities, under blanket collateral agreements with the FHLB. At March 31, 2024 and December 31, 2023, $0.8 billion and $2.0 billion of our wholesale borrowings had callable features, respectively. Additionally, $1.0 billion was drawn on the Bank Term Funding Program, secured by eligible securities. The increase in FHLB advances at March 31, 2024 compared to December 31, 2023 was driven by actions taken in the first quarter to proactively manage our liquidity needs.

Repurchase agreements outstanding at March 31, 2024, were $2.0 billion and we did not have any of these agreements outstanding at December 31, 2023. These agreements primarily use GSE obligations as collateral and were entered into with either the FHLB or specific brokerage firms.

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 protect against temporary mismatches between sources and uses of funds caused by variable loan and deposit demand.

We monitor our liquidity daily and, in times of stress, throughout the day. Our most liquid assets are cash and cash equivalents, which totaled $12.9 billion and $11.5 billion, at March 31, 2024 and December 31, 2023, respectively. The $1.4 billion increase in cash and cash equivalents was driven by actions to proactively manage our liquidity needs.

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. 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 March 31, 2024 our available borrowing capacity with the FHLB was $1.0 billion.

Furthermore, the Bank has agreements with the FRB 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 was $14.8 billion. There were no borrowings against these lines of credit at March 31, 2024. In April of 2024, we drew $4 billion on this line to increase on balance sheet liquidity by increasing cash.

At March 31, 2024, our total liquidity (cash and cash equivalents, high-quality liquid assets and borrowing capacity), was $33.3 billion. Total liquidity was $18.5 billion greater than our net uninsured deposits of $14.8 billion.

The Parent Company is a separate legal entity from the Bank and must provide for its own liquidity. At March 31, 2024 the Parent Company held cash and cash equivalents of $671 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 three months ended March 31, 2024, dividends of $67 million were paid by the Bank to the Parent Company. We have reduced our dividends to common stockholders to $.01 per common share and we do not anticipate a material amount of dividends from the Bank to the Parent Company in the near future until the Company is able to achieve a return to repeatable operating income.

At March 31, 2024, we believe the Company has sufficient liquidity and capital resources to meet its cash flow obligations over the next 12 months.

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. These contractual obligations are reflected in the Consolidated Statements of Condition under “Deposits” and “Borrowed funds,” respectively. At March 31, 2024, we had CDs of $26.8 billion and long-term debt (defined as borrowed funds with an original maturity one year or more) of $16.8 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 in other liabilities and totaled $437 million at March 31, 2024 a decrease of $9 million compared to $446 million at December 31, 2023.

At March 31, 2024, 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 cash and cash equivalent balance of $12.9 billion and our total liquidity position of $28.6 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 March 31, 2024, 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 March 31, 2024, we had no commitments to purchase securities.

Regulatory Capital

The Company is a bank holding company subject to regulation, examination and supervision by the Federal Reserve. The Bank is national bank subject to regulation, examination, and supervision by the OCC. The Company and the Bank are each subject to the Prompt Corrective Action regulatory capital framework that establishes five categories of capital adequacy ranging from “well capitalized” to “critically undercapitalized.” An institution’s capital category affects various matters, including legal requirements for regulators to take prompt corrective action and the level of a bank’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 weighting assets, among other factors, and the regulators have discretion to require that institutions maintain capital in excess of minimum levels.

The quantitative measures established to ensure capital adequacy require that banks and bank holding companies 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 March 31, 2024, our capital measures continued to exceed the minimum federal requirements for a bank holding company and for a bank. The following tables set forth the common equity tier 1, tier 1 risk-based, total risk-based, and leverage capital amounts and ratios for the Company on a consolidated basis and for the Bank on a stand-alone basis, as well as the respective minimum regulatory capital requirements, as of the dates shown:

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

(dollars in millions)

At March 31, 2024, our total risk-based capital ratio exceeded the minimum requirement for capital adequacy purposes by 509 basis points. After considering the capital conservation buffer that represents an additional 2.5 percent of risk weighted assets, our total risk-based capital ratio exceed this limit by 259 basis points. The increase from December 31, 2023 was primarily driven by a $1.05 billion capital investment in the first quarter 2023 which resulted in a net $413 million increase to common equity tier 1 capital through the issuance of common stock and warrants and a net $595 million increase to tier 1 capital from the issuance of convertible non-cumulative perpetual preferred stock. The net $595 million in tier 1 capital will convert to common equity subsequent to an increase in registered common shares, subject to shareholder approval. As converted, our common equity tier 1 ratio would have been 10.14 percent. Refer to Note 17 for additional details.

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

(dollars in millions)

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

On November 16, 2023, the FDIC published in the Federal Register its final rule that imposes special assessments to

recover the loss to the Deposit Insurance Fund. The final rule calls for the FDIC to collect special assessments

at an annual rate of approximately 13.4 basis points, over eight quarterly assessment periods beginning with the first quarterly assessment period of 2024 (i.e., January 1 through March 31, 2024, with an invoice payment date of June 28, 2024).

Included in total operating expenses for the three months ended December 31, 2023, is a $49 million expense for the FDIC special assessment that includes the assessment issued by the FDIC in February 2024. The FDIC continues to provide an updated estimate of each institution’s quarterly and total special assessment expense and while we expect this may result in an increase, we do not expect the increase to be material.

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 total liquidity of $33.3 billion which exceeds the balance of our uninsured deposits by $18.5 billion. 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 March 31, 2024 our deposit base includes $14.8 billion of uninsured deposits, reflecting a net decrease of $14.5 billion as compared to December 31, 2023 due to decreases in uninsured deposits and a shift to insured custodial deposits. Uninsured deposits, which represents approximately 20 percent of our total deposits at March 31,2024, decreased following our earnings announcement and subsequent Rating Agency downgrades of our Company's credit ratings in February and March 2024. Our deposits have remained stable since the announcement of the $1.05 billion capital raise.

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 March 31, 2024, 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.

Subsequent to March 31, 2024 we terminated all of our derivatives that were designated in a cash flow or fair value hedge relationship. This action reduced our asset sensitivity resulting in a relatively neutral position.

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 March 31, 2024, 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. Subsequent to March 31, 2024 we terminated all of our derivatives that were designated in a cash flow or fair value hedge relationship. This action reduced our asset sensitivity resulting in a relatively neutral position.

In the event that our EVE and net interest income sensitivities were to breach our internal policy limits, we would plan to undertake the following actions:

• 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 March 31, 2024, our analysis indicated that a further inversion of the yield curve would be expected to result in a 2.1 percent increase in net interest income; conversely, an immediate steepening of the yield curve would be expected to result in a 2.4 percent decrease 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) valuation of mortgage servicing rights 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, 2023, 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. 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.

Evaluation of Disclosure Controls and Procedures

Under the supervision, and with the participation, of our Chief Executive Officer and Chief Financial Officer, our management evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2024 because of the material weaknesses in internal control over financial reporting described below. Notwithstanding the material weaknesses, based on additional analyses and other procedures performed, management concluded that the financial statements included in this report fairly present in all material respects our financial position, results of operations, capital position, and cash flows for the periods presented in conformity with GAAP.

Per Rules 13a-15(e) and 15d-15(e), disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Material Weaknesses in Internal Control over Financial Reporting

In connection with the review of our financial statements as of and for the period ended March 31, 2024, with the participation, of our Chief Executive Officer and Chief Financial Officer, our management identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified relate to the fact that we did not design or maintain an effective control environment commensurate with our financial reporting requirements. This deficiency in our control environment contributed to the following material weaknesses related to control activities and information and communication within our internal control over financial reporting:

Control environment: Our Board of Directors did not exercise sufficient oversight responsibilities, which led to us lacking a sufficient complement of qualified leadership resources to conduct effective risk assessment and monitoring activities.

Risk assessment: We lacked effective periodic risk assessment processes to identify and timely respond to emerging risks in certain financial reporting processes and related internal controls, including internal loan review, that were responsive to changes in the business operations and regulatory and economic environments in which the Company operates.

Monitoring: Our recurring monitoring activities over process level control activities, including internal loan review, were not operating effectively.

Control activities: We did not sufficiently maintain effective control activities related to internal loan review. Specifically, our internal loan review processes lacked an appropriate framework to ensure that ratings were consistently accurate, timely, and appropriately challenged. These ineffective controls impact the Company’s ability to accurately disclose loan rating classifications, identify problem loans, and ultimately the recognition of the allowance for credit losses on loans and leases.

These control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis, and therefore we concluded that the deficiencies represent material weaknesses in our internal control over financial reporting and our internal control over financial reporting was not effective as of March 31, 2024.

Remediation Status of Reported Material Weaknesses

The Company is continuing to actively work to remediate the material weaknesses described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weaknesses. During 2024, the Company has taken various actions to strengthen our internal control over financial reporting, including:

• Appointed several new members to the Board of Directors with extensive experience as financial experts in our industry and backgrounds in risk management, including a new Lead Independent Director, a new chairman of the Audit Committee and a new chairman of the Risk Assessment Committee. Additionally, the majority of the members of the Board of Directors as of December 31, 2023 resigned.
• Appointed a new Chief Executive Officer, Chief Financial Officer, General Counsel, Chief Risk Officer and Chief Audit Executive. We are in the process of identifying and appointing a new Director of Loan Review who has prior large bank commercial loan experience.
• Increasing the frequency and nature of reporting from our internal loan review team and first line business units to the Risk Assessment Committee to support the Board's risk oversight role.
• Expanding the use of independent credit analysis and reducing the Company's reliance on tools and analysis prepared by our lines of business.
• Improving the internal loan review team's ability to independently challenge risk rating scorecard model methodologies and results.
• Assessing the adequacy of staffing levels and expertise within the internal loan review program, taking into account, among other things, the size, complexity, and risk profile of the Company's loan portfolio.

Changes in Internal Control over Financial Reporting

Except for the material weaknesses in internal control over financial reporting noted above, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s 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, 2023 and below 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 no other 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, 2023.

Liquidity Risk

Failure to maintain an adequate level of liquidity could result in an inability to fulfill our financial obligations, could subject us to material reputational and compliance risk, and could lead to financial failure of the Company.

Our primary sources of liquidity are the retail and institutional deposits we gather or acquire in connection with acquisitions, and the brokered deposits we accept; borrowed funds, primarily in the form of wholesale borrowings from the FHLB-NY and various Wall Street brokerage firms; cash flows generated through the repayment and sale of loans; and cash flows generated through the repayment and sale of securities. In addition, and depending on current market conditions, we may have the ability to access the capital markets from time to time to generate additional liquidity. Deposit flows, calls of investment securities and wholesale borrowings, and the prepayment of loans and mortgage-related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived; local and national economic conditions; and competition for deposits and loans in the markets we serve. Deposit outflows can occur for a number of reasons, including clients seeking higher yields, clients with uninsured deposits may seek greater financial security or clients may simply prefer to do business with our competitors, or for other reasons. The withdrawal of more deposits than we anticipate could have an adverse impact on our profitability as this source of funding, if not replaced by similar deposit funding, would need to be replaced with more expensive wholesale funding, the sale of interest-earning assets, other sources of funding, or a combination of them all. In extreme situations, withdrawals could exceed our capacity to fund the withdrawals and lead to financial failure of the Company. As of March 31, 2024, approximately 20 percent of our total deposits of $74.9 billion were not FDIC-insured.

In addition, large-scale withdrawals of brokered or institutional deposits could require us to pay significantly higher interest rates on our retail deposits or on other wholesale funding sources, which would have an adverse impact on our net interest income and net income. Furthermore, changes to the FHLB-NY’s underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our ability to borrow, and therefore could have a significant adverse impact on our liquidity. A decline in available funding could adversely impact our ability to originate loans, invest in securities, and meet our expenses, or to fulfill such obligations as repaying our borrowings or meeting deposit withdrawal demands. Downgrades of the credit ratings of the Company and the Bank, such as those announced by certain credit rating agencies in February, March and May 2024, could result in an acceleration in deposit outflows and additional collateral needs, They could adversely affect our access to liquidity and capital, and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to us or to purchase our securities. This could affect our growth, profitability, and financial condition, including our liquidity.

Credit Risk

Our allowance for credit losses might not be sufficient to cover our actual losses, which would adversely impact our financial condition, regulatory capital ratios and results of operations.

In addition to mitigating credit risk through our underwriting processes, we attempt to recognize such risk through the establishment of an allowance for credit losses. The process of determining whether or not the allowance is sufficient to cover potential credit losses is based on the current expected credit loss model or CECL. CECL may result in greater volatility in the level of the ACL, depending on various assumptions and factors used in determining the ACL principally through mathematical modeling. If the judgments and assumptions we make with regard to the allowance are incorrect, our allowance for losses on such loans might not be sufficient, and an additional provision for credit losses might need to be made.

Depending on the amount of such loan loss provisions, the adverse impact on our earnings could be material.

Furthermore, bank regulators have the authority to require us to make provisions for credit losses or otherwise recognize loan charge-offs following their periodic review of our loan portfolio, our underwriting procedures, and our allowance for losses on such loans. 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.

Our concentration in multi-family loans and CRE loans could expose us to increased lending risks and related loan losses.

At March 31, 2024, $36.9 billion or 44.8 percent of our total loans and leases, held for investment portfolio consisted of multi-family loans and $10.3 billion or 12.5 percent consisted of CRE loans. These types of loans generally expose a lender to greater risk of non-payment and loss than one-to-four family residential mortgage loans because repayment of the loans often depends on the successful operation of the properties and the sale of such properties securing the loans. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential loans. Also, many of our borrowers have more than one of these types of loans outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential real estate loan. In addition, if loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.

The CRE loans we make are secured by income-producing properties such as office buildings, retail centers, mixed-use buildings, and multi-tenanted light industrial properties. At March 31, 2024, $3.1 billion, or 30.1 percent of our commercial real estate loan portfolio was secured by office buildings. We may incur future losses on commercial real estate loans due to declines in occupancy rates and rental rates in office buildings, which could occur as a result of less need for office space due to more people working from home or other factors.

Our New York State multi-family loan portfolio could be adversely impacted by changes in legislation or regulation which, in turn, could have a material adverse effect on our financial condition and results of operations.

On June 14, 2019, the New York State legislature passed the New York Housing Stability and Tenant Protection Act of 2019. This legislation represents the most extensive reform of New York State’s rent laws in several decades and generally limits a landlord’s ability to increase rents on rent regulated apartments and makes it more difficult to convert rent regulated apartments to market rate apartments. As a result, the value of the collateral located in New York State securing the Company’s multi-family loans or the future net operating income of such properties could potentially become impaired which, in turn, could have a material adverse effect on our financial condition and results of operations.

Economic weakness in the New York City metropolitan region, where the majority of the properties collateralizing our multi- family, CRE, and ADC loans, and the majority of the businesses collateralizing our other C&I loans, are located could have an adverse impact on our financial condition and results of operations.

Our business depends significantly on general economic conditions in the New York City metropolitan region, where the majority of the buildings and properties securing the multi-family, CRE, and ADC loans we originate for investment and the businesses of the customers to whom we make our other C&I loans are located. Accordingly, the ability of our borrowers to repay their loans, and the value of the collateral securing such loans, may be significantly affected by economic conditions in this region, including changes in the local real estate market. A significant decline in general economic conditions caused by inflation, recession, unemployment, acts of terrorism, extreme weather, or other factors beyond our control, could therefore have an adverse effect on our financial condition and results of operations. In addition, because multi-family and CRE loans represent the majority of the loans in our portfolio, a decline in tenant occupancy or rents, due to such factors, or for other reasons, such as new legislation, could adversely impact the ability of our borrowers to repay their loans on a timely basis, which could have a negative impact on our net income. Furthermore, economic or market turmoil could occur in the near or long term. This could negatively affect our business, our financial condition, and our results of operations, as well as our ability to maintain the level of cash dividends we currently pay to our stockholders.

Legal and Regulatory Risk

Inability to fulfill minimum capital requirements could limit our ability to conduct or expand our business, pay a dividend, or result in termination of our FDIC deposit insurance, and thus impact our financial condition, our results of operations, and the market value of our stock.

We are subject to the comprehensive, consolidated supervision and regulation set forth by the FRB and the OCC. Such regulation includes, among other matters, the level of leverage and risk-based capital ratios we are required to maintain. Depending on general economic conditions, changes in our capital position could have a materially adverse impact on our financial condition and risk profile, and also could limit our ability to grow through acquisitions or otherwise. Compliance with regulatory capital requirements may limit our ability to engage in operations that require the intensive use of capital and therefore could adversely affect our ability to maintain our current level of business or expand. Furthermore, it is possible that future regulatory changes could result in more stringent capital or liquidity requirements, including increases in the levels of regulatory capital we are required to maintain and changes in the way capital or liquidity is measured for regulatory purposes, either of which could adversely affect our business and our ability to expand. For example, federal banking regulations adopted under Basel III standards require bank holding companies and banks to undertake significant activities to demonstrate compliance with higher capital requirements. Any additional requirements to increase our capital ratios or liquidity could necessitate our liquidating certain assets, perhaps on terms that are unfavorable to us or that are contrary to our business plans. In addition, such requirements could also compel us to issue additional securities, thus diluting the value of our common stock. In addition, failure to meet established capital requirements could result in the FRB and/or OCC placing limitations or conditions on our activities and further restricting the commencement of new activities. The failure to meet applicable capital guidelines could subject us to a variety of enforcement remedies available to the federal regulatory authorities, including limiting our ability to pay dividends; issuing a directive to increase our capital; and terminating our FDIC deposit insurance.

Our results of operations could be materially affected by the imposition of restrictions on our operations by bank regulators, further changes in bank regulation, or by our ability to comply with certain existing laws, rules, and regulations governing our industry.

We are subject to regulation, supervision, and examination by the following entities: (1) the OCC; (2) the FDIC; (3) the FRB-NY; and (4) the CFPB, as well as state licensing restrictions and limitations regarding certain consumer finance products. Such regulation and supervision govern the activities in which a bank holding company and its banking subsidiaries may engage, and are intended primarily for the protection of the DIF, the banking system in general, and bank customers, rather than for the benefit of a company’s stockholders. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including with respect to the imposition of restrictions on the operation of a bank or a bank holding company, the imposition of significant fines, the ability to delay or deny merger or other regulatory applications, the payment of dividends, the classification of assets by a bank, and the adequacy of a bank’s allowance for loan losses, among other matters. Failure to comply (or to ensure that our agents and third-party service providers comply) with laws, regulations, or policies, including our failure to obtain any necessary state or local licenses, could result in enforcement actions or sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have a material adverse effect on our business, financial condition, or results of operations. Penalties for such violations may also include: revocation of licenses; fines and other monetary penalties; civil and criminal liability; substantially reduced payments by borrowers; modification of the original terms of loans, permanent forgiveness of debt, or inability to, directly or indirectly, collect all or a part of the principal of or interest on loans provided by the Bank. Changes in such regulation and supervision, or changes in regulation or enforcement by such authorities, whether in the form of policy, regulations, legislation, rules, orders, enforcement actions, ratings, or decisions, could have a material impact on the Company, our subsidiary bank and other affiliates, and our operations, including restrictions on the operation of a bank or a bank holding company and changes in FDIC deposit insurance premium assessments. In addition, failure of the Company or the Bank to comply with such regulations could have a material adverse effect on our earnings and capital. See “Regulation and Supervision” in Part I, Item 1, “Business” earlier in this filing for a detailed description of the federal, state, and local regulations to which the Company and the Bank are subject.

As a Category IV banking organization with over $100 billion in assets, we are subject to stringent regulations, including reporting, capital stress testing, and liquidity risk management. Non-compliance could result in regulatory risks and restrictions on our activities.

As a result of the Signature transaction, our total assets exceeded $100 billion and therefore we became classified as a Category IV banking organization under the rules issued by the federal banking agencies that tailor the application of enhanced prudential standards to large bank holding companies and the capital and liquidity rules to large bank holding companies and depository institutions under the Dodd-Frank Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act. As a Category IV banking organization we are subject to enhanced liquidity risk management requirements which include reporting, liquidity stress testing, a liquidity buffer and resolution planning, subject to the applicable transition periods. If we were to meet or exceed certain other thresholds for asset size, we would become subject to additional requirements. Failure to meet these requirements could expose us to compliance risks, higher penalties, increased expectations, and limitations on our activities. As a Category IV banking organization, we are required to implement and maintain an adequate liquidity risk management and monitoring process to ensure compliance with these requirements, and our failure to ensure compliance may have adverse consequences on our operations, reputation and future profitability. We anticipate incurring significant expenses to develop policies, programs, and systems that comply with the enhanced standards applicable to us.

Our enterprise risk management framework may not be effective in mitigating the risks to which we are subject, based upon the size, scope, and complexity of the Company.

As a financial institution, we are subject to a number of risks, including interest rate, credit, liquidity, legal/compliance, market, strategic, operational, and reputational. Our ERM framework is designed to minimize the risks to which we are subject, as well as any losses stemming from such risks. Although we seek to identify, measure, monitor, report, and control our exposure to such risks, and employ a broad and diverse set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited because they cannot anticipate the existence or development of risks that are currently unknown and unanticipated. For example, economic and market conditions, heightened legislative and regulatory scrutiny of the financial services industry, and increases in the overall complexity of our operations, among other developments, have resulted in the creation of a variety of risks that were previously unknown and unanticipated, highlighting the intrinsic limitations of our risk monitoring and mitigation techniques. As a result, the further development of previously unknown or unanticipated risks may result in our incurring losses in the future that could adversely impact our financial condition and results of operations. Furthermore, an ineffective ERM framework, as well as other risk factors, could result in a material increase in our FDIC insurance premiums.

Legislative and regulatory focus on data privacy and risks can subject us to heightened scrutiny and reputational damage.

Data privacy and cybersecurity risks have become a subject of heightened legislative and regulatory focus in recent years. Federal bank regulatory agencies have proposed regulations to enhance cyber risk management standards, which would apply to us and our third-party service providers. These regulations focus on areas such as cyber risk governance, management of dependencies, incident response, cyber resilience, and situational awareness. State-level legislation and regulations have also been proposed or adopted, requiring notification to individuals in the event of a security breach of their personal data. Examples include the California Consumer Privacy Act (CCPA) and other state-level privacy, data protection, and data security laws and regulations. We collect, maintain, and use non-public personal information of our customers, clients, employees, and others. The sharing, use, disclosure, and protection of this information are governed by federal and state laws. Compliance with these laws is essential to protect the privacy of personal information and avoid potential liability and reputational damage. Failure to comply with privacy laws and regulations may expose us to fines, litigation, or regulatory enforcement actions. It may also require changes to our systems, business practices, or privacy policies, which could adversely impact our operating results. Privacy initiatives have imposed and will continue to impose additional operational burdens on us. These initiatives may limit our ability to pursue desirable business initiatives and increase the risks associated with any future use of personal data. New privacy and data protection initiatives, such as the CCPA, may require changes to policies, procedures, and technology for information security and data segregation. Non-compliance with these initiatives may make us more vulnerable to operational

failures and subject to monetary penalties, litigation, or regulatory enforcement actions.

We are subject to various legal or regulatory investigations and proceedings.

At any given time, we are involved with a number of legal and regulatory examinations as a part of reviews conducted by regulators and other parties, which may involve banking, securities, consumer protection, employment, tort, and numerous other laws and regulations. Proceedings or actions brought against us may result in judgments, settlements, fines, penalties, injunctions, business improvement orders, consent orders, supervisory agreements, ratings downgrades, restrictions on our business activities, changes in FDIC deposit insurance premium assessments or other results adverse to us, which could materially and negatively affect our business. If such claims and other matters are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services as well as impact customer demand for those products and services. Some of the laws and regulations to which we are subject may provide a private right of action that a consumer or class of consumers may pursue to enforce these laws and regulations. We are currently subject to stockholder class and derivative actions which seek significant damages and other relief, and may be subject to similar actions in the future. Any financial liability or reputational damage could have a materially adverse effect on our business and, in turn, on our financial condition and results of operations. Claims asserted against us can be highly complicated and slow to develop, making the outcome of such proceedings difficult to predict or estimate early in the process. As a participant in the financial services industry, it is likely that we will be exposed to a high level of litigation and regulatory scrutiny relating to our business and operations. Although we establish accruals for legal or regulatory proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal or regulatory proceedings where we face a risk of loss. Due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal and regulatory proceedings, amounts accrued may not represent the ultimate loss to us from the legal and regulatory proceedings in question. As a result, our ultimate losses may be significantly higher than the amounts accrued for legal loss contingencies.

Oversight and Operational Risk

The Company recently experienced turnover in its Board of Directors and executive management team and is embarking upon a new strategic plan, which creates uncertainties and could harm its business.

The Company has experienced significant changes in its Board of Directors and executive leadership during 2024. On or shortly after March 11, 2024, Thomas Cangemi, James Carpenter, Leslie Dunn, Lawrence Rosano Jr, Ronald Rosenfeld, Lawrence Savarese, David Treadwell and Robert Wann resigned as directors of the Board. Additionally, in February 2024, Toan C. Huynh and Hanif (Wally) Dahya resigned as directors of the Board. Four directors who were serving on the Board as of December 31, 2023 continue to serve on the Board: Alessandro P. DiNello, Marshall J. Lux, Peter Schoels, and Jennifer R. Whip. Additionally, on or shortly after March 11, 2024, five new directors were appointed to the Board: Former Treasury Secretary Steven Mnuchin, Joseph Otting, Milton Berlinski, Allen Puwalski and Alan Frank.

The Company has also recently appointed seven new members to its executive management team, including: Craig Gifford, SEVP, Chief Financial Officer; Bao Nguyen, SEVP, General Counsel & Chief of Staff; Scott Shepherd, SEVP, Head of Commercial Real Estate Lending; George F. Buchanan III, EVP, Chief Risk Officer; Colleen McCullum, EVP, Chief Audit Executive; and James Simons, EVP, Special Advisor to the CEO.

Changes to strategic or operating goals, which can often times occur with the appointment of new Board members and new executives, can create uncertainty, may negatively impact the Company's ability to execute quickly and effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are often difficult as the new executives gain detailed knowledge of the Company's operations. Management turnover inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution. If the Company does not integrate new executives and Board members successfully, the Company may be unable to manage and grow its business, and its financial condition and profitability may suffer as a result.

In addition, the Company’s future success will depend on the ability of the Board and the executive management team to effectively develop, implement, and execute a strategic plan. There are risks and uncertainties associated with the creation, implementation and execution of any strategic plan, including the investment of time and resources, the possibility that such strategic plan will ultimately be unprofitable or unsuccessful, and the risk of additional liabilities associated with such strategic plan. The Company’s successful execution of any strategic plan will require market conditions that will allow the Company to achieve its strategic goals. To the extent the Company is unable to successfully develop, implement, and execute a strategic plan, or if it experiences delays in the development, planning and implementation process, the Company’s business, financial condition, and results of operations may be adversely affected.

Completing the diversification of the Company’s loan portfolio may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the plan may not be realized.

The Company is pursuing a plan to diversify its loan portfolio, which contemplates reducing its commercial real estate concentration, and allow other non-strategic assets to be run off or sold. Implementing and completing this plan is expected to take a considerable amount of time and attention of management and staff as they work to identify, negotiate and execute upon opportunities to reposition the loan portfolio, divest certain assets and effect potential transactions.

It is possible that the process of diversifying the Company’s loan portfolio could result in substantial disruption of the Company's business and operations, as the Company may face the unexpected loss of key employees that it relies on to assist with the transition or to work on the Company’s continuing operations, disruption of its ongoing businesses, higher than anticipated costs, adverse impacts to its relationships with its customers and employees, or a failure to achieve the anticipated benefits and/or cost savings. If difficulties with diversifying the Company’s loan portfolio are encountered, the anticipated benefits may not be realized fully or at all, or may take longer to realize than expected. The process of diversifying the Company’s loan portfolio will also divert management attention and resources, and could have an adverse effect on the Company’s ability to operate efficiently as well as its results of operations and financial condition during the transition period and beyond.

The process of effecting the run off or sale of non-strategic or other assets of the Company could also result in substantial disruption of the Company's business and operations for similar reasons as stated above. Further, for any sales or divestitures of assets, the Company’s ability to effect such divestiture or sale will depend upon various factors, such as the Company’s ability to identify interested counterparties, counterparties’ willingness to negotiate and enter into transactions with the Company, the potential of required regulatory approvals associated with such divestitures, and the prices and other terms upon which any counterparty would be willing to transact with the Company. No assurances can be made that the Company will be able to enter into or complete any sale or divestiture of any assets or that the failure to do so may have a negative impact on the Company’s business, operations, liquidity and financial condition.