New York Community Bancorp, Inc.

Good morning, everyone. This is Sal DiMartino. Thank you for joining the management team of New York Community for today's conference call. Today's discussion of the company's second quarter 2022 results will be led by Chairman, President, and CEO Thomas Kangemi, joined by Chief Operating Officer Robert Wan and the company's Chief Financial Officer John Pinto. They are joined on the line by Sandro Dinello, President and CEO of Flagstar Bank Corp, and Lee Smith, President of Flagstar Mortgage. Before we begin the discussion, I'd like to remind you that certain comments made today by the management team of the New York community may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press release and investor presentation for more information about risks and uncertainties which may affect us. And with that, now I would like to turn it over to Mr. Kanjemi to begin today's conference call. Thank you, Sal.

Good morning to everyone, and thank you for joining us today to discuss our second quarter 2022 performance. First, however, I'd like to comment on our merger with Flagstaff. Both sides are fully committed to completing the transaction as soon as possible, and we feel very good about where we stand currently. Over the past 15 months, both companies have diligently worked together to get us to a strong position to close the deal quickly once all regulatory approvals are received. We're excited about the benefits of the deal today as we were when it was first announced. In addition to the both earnings per share and tangible value accretion, our merger with FlagSource significantly improves our overall funding profile and interest rate sensitivity. It shifts us away from relying on wholesale borrowings to being more significantly deposit funded and becoming assets sensitive as well. In addition, it provides for both geographic and product diversification and accelerates our plan to transform our business model to a more dynamic commercial bank model, driving strong financial performance and capital generation. As for our second quarter results, we are extremely pleased with the company's strong operating performance during the second quarter. By almost any measure, results exceeded expectations, despite higher interest rates and market volatility. We recorded record net income, another quarter of record deposit growth, year record loan growth, record originations, and a higher net interest margin, and stable operating expenses while asset quality remained stellar. These trends resulted in a solid year-over-year EPS growth. For the second quarter of 2022, we reported operating dilutive EPS of 35 cents a share, up 6% compared to 33 cents a share for the second quarter of 2022, and well ahead of the 32 cents analyst consensus. Turning now to the details of our quarterly performance. One of the primary highlights of this quarter's operating performance was our deposit growth. For the second consecutive quarter, deposits grew by approximately $3 billion. The growth continues to be driven by the banking as a service initiative and loan-related deposits. As I have discussed previously, one of my top strategies, if not the top, is to increase the bank's focus on deposit gathering and de-emphasize our need for wholesale borrowings and other less traditional funding sources. Longer term, our success executing on this strategy will result in higher net interest margins. The early results are quite positive. Since launching these initiatives early last year, total deposits have increased to $41 billion, up $8.8 billion, or 27%, while core deposits increased to $33 billion, up $11 billion, or 50%. At the same time, wholesale borrowings, primarily federal home loan bank advances, declined almost $2 billion, or 11%, to $13.7 billion. During the current quarter, Total deposits increased $3.3 billion and $6.2 billion through the first six months of the year. Our banking-as-a-service business was the biggest contributor to this growth. Banking-as-a-service deposits rose $2.3 billion or 43% on a linked quarter basis and $5.8 billion year-to-date. Banking-as-a-service deposits totaled $7.8 billion at June 30, 2022. which is significant progress considering we started this business from scratch in the first quarter of last year with virtually zero deposits. Our banking-as-a-service-related deposits fall largely into three categories. Traditional BAS, which primarily encompasses fintech-related deposits, totaling $5.5 billion. Government banking-as-a-service, serving municipalities and eventually the U.S. Treasury's prepaid debit card program, totaling $652 million. And mortgage-as-a-service, catering to mortgage banking and servicing companies and consisting of escrow accounts for P&I payments totaling $1.6 billion. We also are having great success in garnering deposits from our loan customers. Total loan-related deposits rose just under $500 million during the second quarter to $4.9 billion, up 44% annualized on a one-quarter basis. For the first six months of 2022, these deposits increased $921 million far surpassing the $475 million we generated for all of last year. All told, since we're focusing on this deposit source in the first quarter of last year, loan-related deposits have grown $1.4 billion, up about 40%. Moving now to lending. We also had a very strong quarter in lending. Loan growth during the quarter was $1.8 billion, second only to the record $2.2 billion of loan growth we generated in the fourth quarter of last year. This quarter's loan growth was driven by our multifamily portfolio, where we continue to make market share gains as competition abates along with heightened refinancing activity as market interest rates move higher during the quarter, forcing many borrowers to come to the table to refinance their property sooner rather than later. At June 30th, the multifamily portfolio was $36.8 billion, up $1 billion, or 11%, on an annualized basis compared to the previous quarter, while the specialty finance portfolio totaled $4.1 billion, up $806 million on a one-quarter basis, or 24%. It is important to note that we have approximately $6.8 billion of multifamily and CRE loans that come up on their contractual maturity date and or repricing between now and June of 2024, with an average weighted coupon of 3.74%. Multifamily loans with an average weighted coupon of 3.70% represent $5.3 billion of this amount, while CRE loans with an average weighted coupon of 3.89% represent the remaining $1.5 billion. The other driver was a significant growth in the specialty finance portfolio due primarily to higher utilization rates. At June 30th, the specialty finance segment had total commitments of $6.6 billion of 16% compared to $5.7 billion at March 31st. Of the June amount, 75% or $5 billion of these commitments are structured as floating rate obligations, which have and will continue to benefit us in a rising rate environment. Despite higher interest rates, we've had a record quarter for originations, and our current pipeline looks very good as we head into the third quarter. Loan originations set a new record as we originated $5.3 billion during the second quarter, up 49% compared to the previous quarter, and up 72% compared to the second quarter of last year. Second quarter originations far exceeded the prior quarter's pipeline by $2.8 billion, more than double last quarter's $2.5 billion pipeline. Of the current quarter's originations, 37% were refinancing from our own portfolio, 39% were refinancing from other banks' portfolio, and 24% were related to property transactions. As for the pipeline, the current pipeline heading into the third quarter of the year is a robust $2.5 billion on par with last quarter. Of this amount, $1.8 billion, or 72%, of the pipeline was new money to the bank. Moving now to asset quality. Our credit trends in asset quality remain stellar. and can huge rank NYCBA as among the best in the industry. Non-performing assets totaled $56 million compared to $70 million last quarter, and were nine basis points of total assets compared to 11 basis points last quarter. Early-stage delinquencies also declined, and principal-only loan deferrals are at a very manageable level, decreasing 51% from the prior quarter to $139 million. In addition, we had $7 million of net recoveries this quarter compared to net charge-offs of $2 million from last quarter. Before moving on to the next topic, I'd like to provide an update on the New York City real estate environment. New York City residential real estate remains healthy, and commercial real estate is improving gradually. Retail prices across the three boroughs of Brooklyn, Queens, and Manhattan have reached new highs. This has been due to low inventory and higher mortgage rates, which have pushed homebuyers to becoming renters. Medium residential rents in Manhattan are above $4,000 for the second straight month. with rents continuing to make new highs over the past five months. In Brooklyn, the median rent is $3,300, marking a new high for the borough for the second straight month, while in Queens, especially in Northwest Queens, which is closer to the proximity of Manhattan, rents are also at record highs. On the rent-stabilized side, the Rent Guideline Board approved rate hikes of 3.5% for one-year leases and 5% for two-year leases beginning in the fourth quarter. These increases mark the largest increases in almost a decade and will go a long way to offset some of the increases in operating costs. Office leasing activity is showing signs of life of 3.5% year-over-year, with demand for Class A space up 32% on a year-over-year basis. Moving now to the income statement. Second quarter net interest income totaled $359 million, up 28 million, or 8%, on a year-over-year basis, excluding impact from prepayment income, Net interest income on a non-GAAP basis increased $35 million, or 12%, to $339 million on a year-over-year basis. Our pre-provision net revenue was also very strong. Second quarter, PPNR increased $31 million, or 15%, to $239 million on a year-over-year basis. Excluding the impact from merger related expenses, PPNR grew $25 million, or 11%, to $243 million year-over-year. Moving next to the NIM. The NIM improved during the second quarter, despite the Fed aggressively raising interest rates several times to combat inflation. At 2.52%, the NIM was up nine basis points sequentially. Excluding the impact from prepayment income, the NIM was 2.38% up three basis points on the lean quarter basis and slightly better than expectations. Given that Flagstar is significantly asset sensitive and we are liability sensitive, we are very comfortable with the NIM on a pro forma basis. On the expense front, our non-interest expenses remained in check despite the companies continuing to invest in various businesses and hiring more people. Non-interest expenses were $138 million for the second quarter, which include $4 million of merger related expenses. Excluding this, operating expenses totaled $134 million unchanged from the previous quarter and up only modestly on a year-over-year basis. Additionally, our efficiency ratio came in at 35.57% down compared to both the prior and year-ago quarter. At this level, it is well below the peer average of approximately 55%. As you can see, we had a broad-based strength throughout the organization during the current quarter. This was all made possible by the hard work, dedication, and patience and part of all our employees. I would like to congratulate them for helping the company to achieve the strong performance this quarter. At yesterday's meeting, the board of directors declared a 17-cent dividend on our common shares. The dividend will be paid on August 18th to common shareholders of record as of August 8th. Based on yesterday's closing stock price, this translates into an annualized dividend yield of 7.2%. With that, we will be happy to answer any questions you may have. We will do our very best to get to all of you within the time remaining, but if we don't, please feel free to call us later today or during the week. Operator, please open the lines for questions.

Certainly. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Ibrahim Poonawalla from Bank of America. Your line is now live.