New York Community Bancorp, Inc.

to the New York Community Bancorp, Inc. Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. I would now like to turn the conference over to Sal DiMartino, Chief of Staff and Vice President of Investor Relations. Please go ahead.

Thank you, Regina, and good morning, everyone. Thank you all for joining the management team of New York Community Bancorp for today's conference call. Today's discussion of our fourth quarter and full year results will be led by President and CEO Thomas Kangemi, who will be joined by the company's Chief Financial Officer, John Pinto, along with our President of Banking, Reggie Davis, and the President of Mortgage, Lee Smith. Before the discussion begins, I'd like to remind you that certain comments made today by the management team of New York Community Bancorp may include certain 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. Now, I would like to turn the call over to Mr. Kangemi. Thank you, Sal.

Good morning, everyone, and thank you for joining us today. Before we go into the details of this year's results, I would like to provide some commentary to put the past year into perspective. When I was appointed President and CEO three years ago, We embarked upon transforming the legacy New York Community Bank business model from a monolined thrift to a dynamic, diversified, full-service commercial bank. 2023 was an important inflection point. We built on the momentum created by the Flagstaff acquisition that closed in December of 2022 and continue to successfully execute our transformation strategy while establishing a clear path for future growth. We reported $2.3 billion in net income available to common stockholders, up from $617 million in 2022. We significantly diversified our balance sheet, with commercial loans representing an increasingly greater percentage of total loans. Similarly, the percentage of non-interest-bearing deposits, the total deposits, have nearly quadrupled since just before we closed the FLAGSR acquisition. We began the FLAGSR integration successfully, meeting every milestone throughout the year, with the system's conversion set for mid-February. We also unveiled a rebranding campaign that will launch shortly after the systems conversion is completed, which has been well received both internally and externally. And we acquired select financially and strategically complementary assets and liabilities of signature bank, which strengthened our balance sheet by adding a significant amount of low cost deposits and added a middle market business supported by over 130 private banking teams. Importantly, the addition of Signature Bank catapulted us to over $100 billion in total assets, placing us firmly in the Category 4 large bank class of banking institutions between $100 billion and $250 billion in total assets. The last three years were all a buildup of this moment, and since the closing of the Flagstaff acquisition in particular, we have been preparing to cross this important threshold. When the opportunity to acquire Signature presented itself, and we were honored to be selected as the winning bidder by the FDIC, the benefits were clear. This acquisition allowed us to advance our strategy while strengthening and diversifying our balance sheet. However, this acquisition also meant we would become a $100 billion plus bank sooner than we had anticipated, subjecting us to enhanced financial standards, including risk-based and leveraged capital requirements, liquidity standards, and requirements for overall risk management and stress testing. Alongside the integration of three banks, NYCB, Signature, and Flagstar, And as we prepare for our first capital plan submission in April of this year, we have pivoted quickly and accelerated some enhancers that come with being a Category 4 bank. Specifically, we are taking decisive actions to build capital, strengthen our balance sheet, and risk management processes, which better aligns us with the relevant peers for a bank of our largest size and complexity. These actions include investing to strengthen our risk management capabilities to align with the enhanced credential standards applicable to Cat 4 banks as set forth under Reg YY, building our reserve levels, which brings our ACL coverage more in line with peer banks, including Category 4 banks, and adding on-balance sheet liquidity as we prep for regulation of YY compliance. We believe these actions are another prudent step in enhancing our risk management infrastructure. I will go on to more detail in a moment on how these actions impacted our results in the fourth quarter. We are also accelerating our capital build by reducing our common stock dividend to 5 cents per share. We understand the importance and the impact of this decision to our stockholders. This was not made lightly. While NYCB remains well capitalized under all applicable regulatory requirements, resetting our capital allocation priorities was a necessary step to accelerate the building of our capital. We are confident that the actions we took in the fourth quarter and the continued execution of our strategy will position the company to deliver enhanced value over the long term. We successfully grew into a $50 billion plus bank in 2018, and we believe the actions we are taking now are building the foundation to make our transition to a $100 billion plus bank even more successful. Moving now to the results. The company reported $2.3 billion in net income available to common stockholders in 2023, or $3.24 per diluted share. On an operating basis which excludes merger-related charges, a $2.2 billion bargain purchase gain related to signature transaction and a one-time special FDIC assessment of $39 million reported net income availed to common stockholders of $609 million or 80 cents per diluted share. As I said earlier, the actions we undertook impacted several items during the fourth quarter. In the fourth quarter of 2023, we reported a net loss of $252 million or 36 cents per share. On an operating basis, the company reported a net loss of $193 million or 27 cents per share. Our fourth quarter results were impacted by the actions we undertook, including a $552 million provision for credit losses. Let's begin with asset quality. Non-performing loans were stable in the fourth quarter as compared to the third quarter of the year. Despite some continued weakness in the commercial real estate sector, At December 31st, 2023, non-performing loans totaled $428 million and represented 37 basis points of total loans, compared to $435 million, or 40 basis points, in the previous quarter. During the fourth quarter, we significantly built our reserves to address office sector weakness and an expected increase in criticized loans due to repricing risk in the multifamily portfolio, which better aligns NYCB with our relevant tiers banks, including Category 4 banks. At December 31, 2023, the allowance for credit losses was $992 million up, $370 million compared to the previous quarter, and represented 1.17% of total loans, up from 74 basis points compared to the previous quarter. Excluding loans with government guarantees and lower risk mortgage warehouse loans, the ACO coverage was 1.26% in the fourth quarter, compared to 80 basis points in the previous quarter. Since the third quarter of 2022, we have built our reserves by $774 million. Net charges for the quarter were 185 million or 22 basis points of average loans, driven by two loans. First, we had one co-op loan with a unique feature for pre-funded capital expenditures. Although the borrower is not in default, we transferred the loan to help for sale in the fourth quarter and expect it to be sold during the first quarter. Importantly, this loan is a one-off, and our review did not uncover any other co-op loans similar to this one. Second, we had an additional charge-off of an office loan that became non-accrual in the third quarter, based on an updated evaluation. This loan was more than we originally expected, and we responded by recalibrating our qualitative factors in the office portfolio to address the issue and increase the ACO coverage on the office portfolio. Collectively, these two loans accounted for the bulk of the charges we took during the fourth quarter. The other major action we took was regarding our on-balance sheet liquidity. During the fourth quarter, we began preparing to be regulation YY compliant. While this was earlier than we originally anticipated, we thought it prudent to be ready to meet the enhanced liquidity requirements that apply to Category 4 banks. Therefore, we had monetized some of our contingent liquidity sources and started to build our on-balance sheet liquidity during the fourth quarter, which has continued into Q1. We realize that this will negatively impact our net interest margin in the short term, but it is essential that we, as a newly minted $100 billion bank, prudently manage our liquidity. Moving next to net interest margin, the fourth quarter net interest margin came in at 282, down 45 basis points compared to the third quarter. This was 18 basis points lower than our guide, down 27 basis points. The 18 basis points variance to the guidance was largely due to actions related to increase our on-balance sheet liquidity and higher deposit costs. On the lending front, total loans held for investments were up to $624 million, or 3% annualized, compared to the third quarter of 2023, to $84.6 billion. Most of the growth occurred in the C&I portfolio, partially offset by a decline in multifamily, while the rest of the C&I portfolio remained unchanged. At December 31st, 2023, total commercial loans represented 46% of total loans, while multifamily loans represented 44% of total loans, representing significant diversification from a year ago. Turning now to deposits. Total deposits at year-end were $81.4 billion, compared to $82.7 billion at the end of the third quarter. The decrease was primarily driven by an expected $1.8 billion decrease in custodial deposits related to the signature transactions. Excluding these deposits, the total deposits increased 457 million, or 2% annualized, compared to the third quarter, primarily driven by growth in CDs, partially offset by lower non-interest-bearing deposits. The shift to higher-cost CDs was due to increased competition in customer behavior. Deposits from legacy signature teams, excluding deposits to the loan portfolio we did not retain, increased $1.5 billion since the end of March. Moving now to expenses, excluding non-court expenses, which this court included the FDIC special assessment of $39 million, total OPEX for the three months ended December 31st, 2023 were $557 million, down $28 million compared to $585 million for the three months ended December 30th, 2023. The decrease was primarily driven by compensation and benefits expense due to lower incentive compensation expense, partially offset by higher professional fees. Turning now to our full-year 2024 guidance. In the past, we have typically provided just quarterly guidance. However, in order to provide more transparency and to be more in line with industry peer practices, we are providing expanded full-year guidance in which we have summarized in our investor presentation on slides 36 and 37. In 2024, we expect period-ending total loans to decline 3% to 5% compared to December 31, 2023. Period-ending total deposits to increase between 3% to 5%. Cash and security balances to increase $7.5 billion on a combined basis. An interest margin 2.4% to 2.5% for the full year, inclusive of actions to increase on-balance sheet liquidity for Regulation YY compliance. Non-interest income in the range of $570 million to $620 million, which includes mortgage-related income of $220 million to $260 million. Operating expenses in the range of $2.3 to $2.4 billion due to a full-year impact from signature banks the full-year impact of 13 private banking teams from the former First Republic Bank, signature bank integration deferral to 2025 in order to minimize customer impact, and additional costs related to becoming a Category 4 bank, normal compensation and benefit expense increases, and approximately $60 million of conversion-related savings from Flagstar. We expect our CET1 regulatory capital ratio for the holding company to be at 10% by year-end 2024, and a 23% full-year tax rate. We entered 2024 having taken prudent balance sheet actions as we become a Category 4 bank. Importantly, the bank has a solid foundation in place and a proven track record across business cycles. We believe we are positioned well to navigate our growth and development as an organization and deliver for customers, and we are confident that it will enable us to deliver long-term value for stockholders. I would like to say a special thank you for all of our teammates. We have a fantastic team, and as always, we deeply appreciate the dedication and commitment to our clients, customers, and communities. With that, we'd be happy to answer any questions you may have. Operator, please open up the line for questions.