Flagstar Financial Inc (NYCB) 2016 Q4 法說會逐字稿

Good morning, and thank you all for joining the Management Team of New York Community Bancorp for its quarterly conference call.

Today's discussion of the Company's fourth-quarter and full-year 2016 performance will be led by President and Chief Executive Officer Joseph Ficalora, together with Chief Operating Officer Robert Wann; Chief Financial Officer Thomas Cangemi; and John Pinto, the Company's Chief Accounting Officer.

Certain comments made on this call will contain forward-looking statements that are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those the Company currently anticipates due to a number of factors, many of which are beyond its control.

Among those factors are general economic conditions and trends, both nationally and in the Company's local markets; changes in interest rates, which may affect the Company's net income, prepayment income, mortgage banking income, and other future cash flows, or the market value of its assets, including its investment securities; changes in the demand for deposit, loan, and investment products and other financial services; and changes in legislation, regulation and policies.

You will find more about the risk factors associated with the Company's forward-looking statements on page 9 of this morning's earnings release and in its SEC filings, including its 2015 annual report on Form 10-K.

The release also includes reconciliations of certain GAAP and non-GAAP measures that may be discussed during this conference call.

If you would like a copy of this morning's release, please call the Company's Investor Relations Department at 516-683-4420 or visit ir.mynycb.com.

As a reminder, today's call is being recorded.

(Operator Instructions)

To start the discussion, I will now turn the call over to Mr. Ficalora, who will provide a brief overview of the Company's fourth-quarter and full-year 2016 performance before opening the lines for Q&A.

Mr. Ficalora, I will now turn the call over to you.

Please go ahead.

Thank you, Kevin.

And thank you all for joining us this morning as we discuss our fourth-quarter and full-year 2016 results.

I would like to begin by noting that it's our desire to control the Company's growth below the SIFI threshold in conjunction with perspective changes that may occur in the future.

While our merger agreement with Astoria Financial Corporation was mutually terminated, a large transaction is still the best way for us to become a SIFI bank.

Therefore, it would be fair to expect that our transition to SIFI status will still occur in conjunction with a large deal.

Until such time as that occurs, we will continue to do what we do best -- produce multi-family loans while maintaining our high credit standards, while at the same time diversifying our loan portfolio and our funding mix.

We also expect to invest more of the Company's resources into becoming a SIFI compliant, while monitoring any changes in the regulatory environment that could influence our plans.

Now I'll turn to our fourth-quarter and full-year performance.

This morning we reported earnings of $113.7 million, or $0.23 per diluted share, for the fourth quarter, and $495.4 million, or $1.01 per diluted share, for the full year.

For the quarter, our earnings provided a 92-basis-point return on average assets and a 7.43% return on average stockholder's equity.

For the full year, we reported a 1% return on average assets and an 8.19% return on average stockholders' equity.

On a tangible basis our profitability was also solid, with returns of 0.97% and 12.36% on average tangible assets and stockholders' equity for the quarter, and returns of 1.06% and 13.75% for the full year.

Our results this quarter also reflect the strength of our business model, including solid loan production, high-quality assets, and continuing efficiency.

These positive factors were somewhat offset by the impact of the post-election rise in market interest rates.

Starting with our loan portfolio, we originated $3.1 billion of loans during the fourth quarter, which pushed the volume of loans produced in 2016 to $13.8 billion.

Included in the full-year amount were $9.2 billion of loans held for investment, including $5.7 billion of multi-family loans.

Held-for-investment loans represented $2 billion of our fourth-quarter originations.

And of that amount, $1.2 billion were multi-family loans.

In fact, multi-family loans represented $27 billion of total loans held for investment at the end of December, a $972 million increase from the balance at the end of 2015.

Commercial real estate loans accounted for $288 million of the quarter's loan production and $1.2 billion of the full-year amount.

At the end of December, commercial real estate loans represented $7.7 billion of total loans held for investment, down $133 million year over year.

In the last quarter of the year, loan growth was impacted by the rise in market interest rates, as previously noted, and by the sale of loans through participations.

In keeping with our short-term strategic goal of managing our assets under the current SIFI threshold of $50 billion, we sold $320 million of multi-family CRE and ADC loans in the last three months of the year.

The 12-month total was $1.7 billion of multi-family CRE and ADC loans.

As a result, multi-family loans rose 3.7%, to $27 billion, and CRE loans dropped 1.7%, to $7.7 billion.

Absent sales of $1.3 billion over the last four quarters, the multi-family loan portfolio would have grown $2.3 billion, representing a year-over-year increase of 8.8%.

Likewise, CRE loans would have grown 2.6%, to $8.1 billion, absent loan sales of $339 million over the course of the year.

Our current pipeline amounts to $1.5 billion with the majority consisting of held-for-investment loans.

Moving on to asset quality, our year-end measures continue to be stellar and continue to rank among the best in the industry.

They also continue to be among the lowest we have reported in nearly ten years.

Specifically, non-performing, non-covered loans represented 0.15% of total non-covered loans at the end of December, compared to 0.12% at the end of the trailing quarter.

Non-performing, non-covered assets represented 0.14% of total non-covered assets at the end of December, also compared to 0.12% at the prior quarter end.

Despite a modest uptick in chargeoffs related to the New York City taxi medallion loans, the ratio of net chargeoffs to average loans was 0% for both the year and the quarter due to our having recorded a nearly comparable amount of recoveries.

Now moving on to our income statement, net interest income declined modestly compared to the prior quarter, primarily due to lower yields on the investment securities portfolio.

Our net interest margin declined 5 basis points, to 2.86%, on a linked-quarter basis, largely reflecting an increase in the cost of interest-bearing deposits as short-term rates rose.

Prepayment income contributed 20 basis points to the current fourth-quarter margin, which was consistent with the trailing-quarter amount.

Higher interest rates also impacted our fourth-quarter non-interest income, particularly mortgage banking income produced by originating and servicing loans held for sale.

Mortgage banking income decreased $10 million from the previous quarter, with demand for residential mortgage loans waning as interest rates rose.

In addition, the increase in interest rates adversely impacted our hedging.

As a result, we recorded a servicing loss in the fourth quarter in contrast to servicing income in the trailing three-month period.

Also impacting our earnings in the current fourth quarter was a $9 million linked-quarter increase in non-interest expense.

While a portion of the increase was due to a rise in merger-related expenses, compensation and benefits expense also rose linked quarter.

Reflecting our earnings and capital, the Board of Directors last night declared a $0.17 per share dividend for the quarter, representing a 4.2% dividend yield based on last night's closing price.

The dividend will be paid on February 22 to shareholders of record as of February 7.

On that note, I would now ask the operator to open the line for your questions.

We will do our 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 this week.

(Operator Instructions)

Our first question today is coming from Mark Fitzgibbon from Sandler O'Neill.

Please proceed with your question.

Good morning, gentlemen.

This is Nick Cucharale filling in for Mark.

First, I was hoping you could share with us your thoughts on the lending environment.

Have you seen any change in the Metro New York City market lately or any pull back from competitors?

There have been changes, obviously, over the course of the year in the players in the marketplace.

There's some that are doing less lending in our market, and of course there are others that are coming into the market that haven't been here before.

So, the market place is changing from the standpoint of the players, and also with regard to the product mix.

So, I think that we are typically at the back end of a long positive cycle, and, as a result, the marketplace is showing some of those signs.

Okay.

And then you posted nice growth in the specialty finance segment this quarter.

How large do you foresee this category getting over time?

It can actually grow rather nicely.

It's Tom Cangemi.

Good morning.

We've been very focused on building that portfolio.

It's a fairly new business for us, it's a few years old, and it's been a superior track record over Mr. Chipman's history.

He's been with us for a few years now building the book of business and you see very nice growth.

What's nice about the portfolio, it's priced more to a shorter-term index, so a lot of that product is priced off of LIBOR within a two-to-three-year window.

So, we're looking to see that portfolio grow very nicely as a complement to other assets that we put on the balance sheet.

So, clearly we can see another 20% to 25% growth, conservatively, depending on market conditions.

That business for us is a credit [buyout shop] business.

It's not a business where we're out there entertaining clients trying to gather their deposit relationship.

This is clearly a credit buyout shop.

We turn down approximately 97% of what we want to buy.

And obviously it's driven off of asset quality.

So, this molds right into the culture of the Bank as far as asset quality is concerned.

I think that last statement is the paramount reason why we're doing this business with Mr. Chipman.

He has a 25-year record that actually is comparable to ours with regard to loss content.

And, therefore, we're very confident that the way he does his business does, in fact, result in the kinds of outcomes that we would expect.

Great.

Thank you.

And then, just lastly, could you share with us your outlook on the net interest margin, please?

Obviously this most recent interest rate change did have an impact, which we alluded to in the previous quarter, the first increase in quite some time, in December.

It added a few basis points to the margin.

We also saw some slight bleeding in the margin on the securities, as well.

As you can realize, some of our large security portfolios have been paying off, therefore those are fairly high-yielding securities.

So, our guidance for the short-term in Q1 will be down between 5 to 8 basis points depending on market conditions and how much we extend on our liabilities, depending on where the movement of interest rates are.

So, we do plan on moving some of our liabilities longer as we go into 2017 given the rising rate environment, so we're assuming some movement there on the liability side to lengthen some liabilities that are currently short term.

Great.

Thank you for taking my questions.

Thanks.

Our next question today is coming from Ebrahim Poonawala from Bank of America Merrill Lynch.

Good morning, guys.

First question, and this is the first public call since the termination of the Astoria deal, I would love to get a better understanding.

You mentioned in your press release about becoming SIFI compliant and working towards that.

The one question I've been getting is what do we need to do to get SIFI compliant in the meantime while the rules remain in place, either from an expense standpoint and from a balance sheet restructuring standpoint?

I would like to get some color on both of those.

Ebrahim, good morning.

It's Tom.

I would say, for big picture here, obviously when we announced the transaction, on a monthly basis the bar was raised, so we just continued to deal with the raising bar as far as regulatory expectations.

And we learned as we move along here this has been a journey for the Company for many years now.

We do expect to see some, as we indicated on the press release, additional costs involved to cross over when we do prepare to cross over.

My estimate for 2017 on the comp side, between the $5 million to $7 million.

I will guide slightly higher for compensation expenses as well as additional SG&A expense for the quarter.

I say comp will be about $155 million ex TDI going into Q1.

A lot of that has the increased compliance costs that we believe that we need to put in place in order to make that cross over.

Clearly, as we went through this journey of getting approval, we've continued to go through that process working with the relative regulatory bodies as far as what their expectations are.

And clearly we have to make some investment here.

If we go out correctly, that's $165 million in the first quarter, and overall you would expect comp to be higher, $5 million to $7 million relative to the fourth-quarter number?

That's on average for the year.

So around that level should be -- as we cut costs in some other areas of the Bank, this is the reasonable run rate for the Company, that $165 million-ish.

If you look back a year ago, I would tell you that our expense would be lower in 2017 but obviously this has the embedded additional cost structure to manage a SIFI-compliant institution.

Understood.

And is it fair to assume that until we actually see a definitive passage of a law that pushes the SIFI threshold higher, you're unlikely to reengage in a deal in the meanwhile also?

Again, we wouldn't talk specifically about any type of merger opportunity, but it's fair to say as opportunities arise we will evaluate them.

But clearly it's a fluid environment and specific law they want to expand on the environment as far as regulatory but this is --.

I think the important thing to know -- and I think you already know this -- the reality is that the marketplace is filled with all kinds of opportunities.

However, the uncertainty and time with regard to how the regulatory process evolves is an important component of start and finish of a deal.

Obviously the Astoria deal is a perfect example of that.

The reality is that the environment is potentially on the verge of changing somewhat.

We don't know when and if that is going to happen.

So, I suggest that we should not be trying to gauge some reasonable time frame within which a deal is either identified or actually closed.

But that we are definitely open to the consideration of doing highly viable good deal when such does present itself.

But there is absolute clarity that without there being certainty with the actual closing of a deal, no one knows.

And then there's many deals that are in the marketplace that have been announced and then run a period of time, such as ours did, without there necessarily being a conclusion that historically would have always been the case.

Yes.

I would just add that as far as early on, on an average basis, $48.9 billion on average in the four-quarter lookback, that gives us safety.

If we were to grow $3.6 billion in Q1 we would be a SIFI bank as far as on the average perspective.

So, we have some room to continue to grow in 2017.

Even on an average basis, $700 million of growth per quarter will keep us to a non-SIFI bank until the last quarter of the year.

So, we have some flexibility.

I think the reality is that we believe there's going to be some focus on some regulatory reform in 2017.

So, we're going to be very patiently awaiting and hopefully we'll see the positive movement for our Company.

If there is a change on the regulatory front, we can react very quickly.

But there's no question that as far as the core business model, we still expect to grow our multi-family SIRI book, net loans before loan sales at approximately high single digits, which we've been doing for the past three years.

Understood.

That is helpful.

And just a second question around capital management.

In the meantime everything about 2017 on an organic basis, should we expect any capital actions either on preferred issuance or any other tweaks in terms of boosting the leverage issue and also in terms of --?

What I would say with that, Ebrahim, and I've been saying this for the past four or five quarters, we really want to replace the Dodd-Frank capital that we lost, which is about $500 million, all the trust deferred that were eligible as tier 1 and now is no longer tier 1 capital.

So, that is something that we're definitely considering in the future, depending on market conditions.

Okay.

So, it's something that you could still look to replace even without a deal sometime in 2017?

It's obviously, they were good capital for tier 1 and they moved over to tier 2. So, if that happens, the market is attractive in that environment, we'll look to replace what we lost in the Dodd-Frank.

Understood.

Thanks for taking my questions.

Thank you.

Our next question today is coming from Ken Zerbe from Morgan Stanley.

Please proceed with your question.

Good morning.

Just in terms of a deal, I have to say, when you guys announced the Astoria acquisition, your stock was really high.

It turned out using your currency was the right move.

Since then your stock has taken a bit of a hit.

Everything else has run up a little bit.

How do you feel about your ability to find attractive opportunities given your relative stock price versus everyone else?

I think the good news is that the fundamental reasons why we've been a very successful buyer over the course of the two decades we're public is that we have a very strong business model that has the ability to create value per shareholders.

The momentary consequences of some of the things that are happening, either externally -- and there are many things you could point too, either interest rates or regulatory or other things that are happening in the marketplace -- the things that are happening externally do impact timing and maybe even momentary performance.

But the fundamentals of this Company are solid and have been very consistent and our ability to do highly accretive deals prospectively is still out there.

So I think there will be very attractive opportunities in the period ahead, and we'll be one of the best available companies to consolidate with so as to create value.

Momentary pricing changes, as I guess we all know.

The pricing of our stock went up very big because of the realization of what the combined company could be.

The pricing of our stock is down disproportionately now because of where we are at this moment in time.

We have not fundamentally changed.

No, understood.

It's just more the self-feeding prophecy of, if your stock is low, it's harder to do deals, therefore the stock stays low.

I was just wondering if there's anything that is within your control, other than just continue to perform very well, that might get the stock price.

Ken, I would just add one other point to Mr. Ficalora's commentary.

Our tangible book value is very faultless calculation when we look at deal opportunities.

When we look at merger opportunities and we typically do stock to stock deals, when we look at book value creation versus book value destruction, it's very important that we hold tangible book value.

So, having a superior tangible book value multiple is very important to the Bank as we look at these opportunities in the future.

And we still have a superior multiple to the market.

And then I think the reality is that the stock being low doesn't mean the stock will stay low when the new deal has been identified.

Deals have in of themselves inherent values, and we bring to a deal a tremendous capacity to create value.

Understood.

Okay.

And then just a really quick question just in terms of -- Tom, you mentioned extending your liability duration.

When you do that, is there any additional charges or restructuring costs?

No.

This is a matter of -- remember, we always have some short-term money that has to be extended.

I think the reality, as we waited for the Astoria deal, we positioned for the Astoria closing, which didn't take place.

We will be emphasizing deposit growth.

We'll be emphasizing growth within our commercial business lines, in particular the multi-family.

There's a lot of low-lying fruit there that we hope to see some non interest-bearing type money coming back to the Bank.

In addition to that, we'll be looking at the deposit campaign for the Bank.

And if that is not as attractive as we grow the balance sheet -- because we do expect some growth this year as we manage the SIFI threshold -- we will extend some liabilities to manage interest rate risk.

And we don't expect to have charges regarding the extension.

This is a matter of short-term money going long.

Got it.

But the extension of the liability duration could put incremental pressure on the margin beyond the 5 to 8 basis points.

I think that's reasonable.

Again, I don't give long-term guidance on the margin.

5 to 8 is Q1 assuming we do some extension, and depending on how much deposit growth we have and the cost of deposits versus the costs of borrowing from the Home Loan Bank and the Street.

Okay.

Perfect.

Thank you very much.

I think what's most notable, Ken, is we're at a precipice as far as the coupon of the portfolio.

Our multi-family portfolios run at 3.4%.

And if you look at the post-election pipeline -- I say post-election because there was a lot of activity pre-election -- but once the election came out and rates moved dramatically higher, we have a portfolio of about 360 in the post-election pipeline.

And where the current market is for us is about 3.75 on average between commercial and multi-family.

It's about 180 basis points better So that's encouraging when you have a 3.40 coupon embedded in the portfolio.

It's going to take some time to move the boat because we have a very large portfolio.

We still anticipate customers to react to these changes of interest rate.

If it's more profound in the short term, you'll see some more activity.

And that would be encouraging to see some of the after side of the yields to pick up.

As indicated in my previous commentary, we can't control what happens in the DUS market for securities.

That's beyond our control.

But our customers are reacting to these higher interest rates, and we believe that will be to our advantage over time.

This doesn't happen in 90 days.

It may happen in two or three quarters.

But clearly the direction of interest rates back into the current moving up will be very good for the portfolio as far as average yield because we're at such a low current coupon.

All right.

Thank you for the answers.

Thank you.

Our next question today is coming from Bob Ramsey from FBR Capital Markets.

Please proceed with your questions.

Good morning, guys.

Thanks for taking the question.

If I understand you correctly, until the regulatory environment changes, you will not grow past the $50 billion without a deal.

With that said, how high a priority is looking for a deal?

I know you said you were open to opportunities but I'm just curious how actively you are seeking them out.

I think deals are not things you have to seek.

They have a tendency to seek us out.

And that has been, in the 12 different arrangements we've had, that's the way it's typically gone.

There are plenty of people in the marketplace that actually are professionally monitoring availability of buyers and sellers.

And as I'm sure you know, we have contact with all of them.

So, I think the evolution here of what might be the best next choice and when that will occur is somewhere down the road.

Okay.

I know it hasn't been long, but do you have any sense yet of potential sellers, how they think about the difficulty in getting timely approval on the Astoria deal, if that influences the way they think about partnering with New York Community?

I don't know that it's New York Community specifically.

The reality is that the marketplace is what it is and everybody is aware -- it's not as though this is top secret information -- everybody is aware as to how these deals evolve.

So, I think people will go into their next decision of this magnitude with full knowledge of what to expect.

Bob, I would just add -- it's Tom -- I would just say we understand the roadmap.

We're very focused on getting to that roadmap.

And if we happen to get there much sooner than what we need to get done in the short term.

We had a mutual termination.

We still focused on closing the deal.

We mutually agreed to terminate the Astoria transaction.

Going forward, this Company will be SIFI compliant in short term and will be focused on making the Company viable as an acquiror.

But this is a different environment and we also truly believe there will be regulatory reform coming.

And we have to be very mindful of that in the political aspect.

We're in a unique position as a country, so we have to take a step back and understand that we have a core business that will be growing on a quarterly basis.

It may not be growing at 10% asset balances but we will grow very nicely into the expectation and make a business decision if the regulatory changes.

And we believe the regulatory changes will be positive for regional banks as a whole.

Okay.

And if there aren't regulatory changes and if you do become SIFI compliant in the short term, would you, a year from now if there's not a deal, would you reassess and say maybe we do do it organically?

We always reassess.

Yes, yes.

You're 100% correct.

As Tom says, we're constantly aware of the kinds of choices that we can make.

The most relevant change on the horizon is what might actually happen with regard to the $50 billion plateau.

If something happens there, it changes the game rather dramatically.

Fair enough.

Last question and I'll hop out.

I know you all mentioned on the margin one of the factors in the fourth quarter was an uptick in deposit costs.

Did you all have any promotions or anything?

I know you mentioned that's the plan as you go forward but I'm just curious if that was a factor in the fourth quarter, or what were the factors driving up the deposit costs in 4Q?

Again, I would say that going forward we will have many promotions.

We're going to look to the deposit market to fund the growth in the balance sheet.

It's going to be a diversification shift from history for the Company.

We typically were never the high rate payer.

We're usually the low rate payers in the market.

And historically we've grown our deposit base through acquisitions.

Astoria was a substantial deposit base that would greatly enhance the deposits overall balance at the Company for future growth.

So, clearly we're looking to be in the market.

We will actively looking to grow our deposit base.

We'll be actively looking to go to our borrowers to get some good low-cost money as we accommodate great lending relationships.

But we will be active in an environment where, in the history, we're not as active.

If you look at where the highest rate payers, we typically are never the highest rate payers.

We have to be more competitive on the balance sheet.

And there is a cost versus advances and repo versus deposits.

There's a 20 point assessment charge that we pay on the FDIC side to bring in wholesalae funding.

We have to weigh that cost versus going to the retail market.

And we feel that we'll go through that exercise and we'll try to get the best funding for the Bank as we advocate towards that $50 billion level.

I think the important thing to note, we were clearly positioned to take benefit from the consolidated company that we, in fact, had every expectation would be the topic of this press release.

We'd be talking about the consolidated company.

And everything in our balance sheet was geared towards that consolidated company.

We're going to adjust ourselves in the period ahead and be prepared for the next opportunity.

Thank you.

Thanks.

Our next question today is coming from Collyn Gilbert from KBW.

Please proceed with your question.

Good morning, gentleman.

Tom, could we just start on getting a little bit more granular on the securities book and how you intend to manage that through the next year or two years or whatever that's going to look like?

Sure.

Obviously the yield is still a very attractive yield in the portfolio.

Our current yield is approximately, ex the prepayments, we get a lot of DUS income from the portfolio, it's around 3.40-ish average coupon on the book, average yield in the book.

And going forward we have an added security that many years we have shown the portfolio in the billions.

I'd say since 2014, we were down $3.7 billion through a combination of repayment sales and calls.

As we await the SIFI threshold crossover, there has been a new development in the previous year, the fourth quarter, where LCR-compliant institutions will now have that one year to comply to the liquidity mandates.

So, that clearly was part of our old strategy that we deal with the crossover as a $50 million institution, we would have to significantly growth up the balance sheet to solve for LCR.

We get another one-year time period to solve for that equation.

So that's a positive.

Now, given that we've publicly said, as in this conference call, that the SIFI crossover is not going to happen in the short term unless there's regulatory change, you won't see long-dated GNMA bonds in the portfolio and wholesale leverage to pay for that.

That's not in the cards in the short term.

What's in the cards in the short term is that, if rates were to rise significantly and we're managing our balance sheet growth, we will be in the securities market depending on the yield environment.

So, clearly if there's been a significant spike, you'll see us go back into the market at the appropriate time to replenish the securities that are not on the portfolio.

Our securities to total assets is around 7.8%.

That's the lowest we've been in our public life.

So, clearly if you compare us to the industry, we're probably at the lowest level securities to total assets.

So, we have significant growth that we expect to have in the future years.

But in the short term, it's going to be very focused on loan growth, as we talked about multi-family CRE, specialty finance and, to a lesser extent, some jumbo hybrid loans that we've been putting onto the residential platform which has been a nice churning asset.

Even though it hasn't been a significant growth for us, it's been an attractive asset quality asset that we've been putting on.

This is high FICO, low LTV, no late pays.

It's been a good business model for us.

Clearly securities are something that's secondary for us as we manage that $50 billion line.

But once we determine that we're going to go past it, you have to add securities to the portfolio.

Okay.

So, it's safe to say that the complexion, that 7.8% composition won't change much then this year.

I think that's fair.

I think you'll see more loan growth.

The goal here is to continue to grow our loan portfolio.

High yielding is what we do best.

And obviously when we have the securities on, depending on what the mandate is on the SIFI side, we may have to put on a substantial amount of security to qualify for level one.

So, we have to be very cautious with that.

Okay.

And then just tying that into your comments on the mortgage side, how are you thinking about the outlook for mortgage banking, and then balancing that maybe with, as you mentioned, perhaps portfolio and some more mortgages?

Post election yields, a significant spike.

There was no question we saw a dramatic decline in activity.

It's been a challenged Q4 versus Q3, down substantially.

We had less profitability in the portfolio.

The good news is that the servicing book has value and we continue to muddle through a very tough interest rate environment for a correspondent lender.

We're a wholesale correspondent, so we see more of an impact negatively than the retail channel sees.

And it's been a challenge but we're focused towards monitoring the purchase market.

We're still a very big player in the refi market but the refi on the aggregated total production has been very low, when you look at what is going on in the US.

Clearly it's down significantly, over 50% in production.

A very dismal quarter.

But, again, as far as the materiality to the P&L, it's insignificant.

We hope to see that rebound when the spring comes and the selling season kicks in.

Okay.

That's helpful.

And then just one final question on the acquisition discussion.

Given your comments about needing to, or desire to diversify the asset mix a bit, is it safe to say that whatever this next acquisition is that the structure of it and the complexion of it is probably going to be different than what you've done historically?

No

I would say no.

I think the important thing to note is there are no people we can buy that look like us.

Everybody that we buy is going to change our metrics in a way that certainly is great flexibility to meeting regulatory or other expectations.

So, anybody that we buy gives us a great deal of flexibility as to how we restructure newco.

Newco will be a better bank in many different perspectives.

That's the way we are designed.

Newco, every time we've done a deal, has created great value for shareholders.

97% of our shareholders voted to do this deal.

97% is not a small number.

Collyn, I would just add that as far as diversification is concerned, we've always been cueing to the market that we're going to build this specialty finance group.

It just takes time.

It's a new business for us.

And have done a phenomenal job.

Going back to the resi book, the jumbo hybrid ARMs are in demand.

As rates rise, they'll be more in demand and we think it's an attractive asset class.

But the true core of the Company is the multi-family rent-regulated, rent-stabilized portfolio.

And we're committed to that portfolio.

So, we will grow all three books and we'll manage that growth with respect to the SIFI threshold with potential loan sales in the future.

Just a point on the loan sales, fourth quarter, the market had significant volatility in interest rates.

So, if you have a transaction that you queued up to close in Q4, interest rates moved up dramatically, 50 to 70 basis points as to pricing, and we still were able to effectuate transactions at a gain, although it wasn't as consistent to the previous gains in previous quarters because of the flatness in the curve.

This was a change in interest rates.

So, we have to monitor that as we go along.

We may do some deals on the table funding perspective going forward.

Clearly we have a tremendous amount of partners that want the product and they want us to service the product and partner with us.

So, we're optimistic there.

But obviously higher interest rates could be very uniquely calibrated to deal with our customers to react to how they do their next refinancing.

So, we're still waiting for significantly higher rates.

I will tell you that the day after the election, rates spiked and we had a tremendous amount of applications.

It's waning a little bit, but now as we go back towards the back end of January, we're starting to see a pick up again.

So, the good news, the rates are higher.

And I want to just reiterate, our coupon in the portfolio being 3.4% is a historical low coupon for the Bank.

So we're mindful over time that that coupon should start to see the benefit of a higher rate environment if rates continue to rise.

Okay.

That's helpful.

Sorry, just one really quick final question.

It's small numbers but on the reserves, first time, I think, that the reserve to loan ratio has picked up in many years.

Anything in particular that is causing that?

Or where do you see the direction of that reserve going?

Obviously, my short-term guidance on that has been the medallion book.

We're dealing with a medallion portfolio of about $150 million in total unpaid principal balance.

We have a reserve about 7.8% against that.

I think that's consistent with some of the other industry players.

We've looked at the collateral on a quarterly basis.

We were very focused on this particular asset class.

We worked with our customers.

We put up some reserves there.

We have the highest reserve I think we have at the Bank on an asset, is the medallion book.

So, the collateral value we value somewhere in the low 5s on a single issuer and on a mini fleet we're at about $1.1 million.

It's reasonable within the marketplace.

But it's something we pay attention to.

Outside of that, we've had no losses for the year in 2017 in multi-family, zero.

So, we're very pleased about the performance of the portfolio.

And Mr. Ficalora's commentary in the press release is about asset quality.

The portfolio is performing pristine outside the medallion book, and the medallion book is a couple million dollars of potential provisions down the road.

Got it.

Okay.

Thank you very much.

Thank you.

Our next question today is coming from Steven Alexopoulos from JPMorgan.

Please proceed with your question.

Good morning.

Regarding the commentary that you still expect to use a transaction across the SIFI threshold, what exactly was it about the Astoria deal that didn't make sense for you to use that one to cross the threshold?

I don't think it was anything with regard to the Astoria deal.

It's just a matter of the environment in and of itself.

We're not the only bank that has gone through an elongated process with regards to getting a transaction approved.

So, I'd suggest that the environment is what it is.

To some degree, we do not control the environment.

We must participate in the environment.

So, the Astoria deal, all the public information about the Astoria deal is very clear.

That was a highly accretive, very strong transaction for all shareholders, theirs and ours, and from the standpoint of all of their staff and all of our staff a very good transaction.

With that said, Joe, we don't exactly know why the deal was terminated.

What color can you give us on this?

I would say the only color I can give you is this is the environment.

The fact is that the passage in time in getting deals from announcement to close has greatly elongated.

And, generally speaking, for the industry as a whole.

So, that process has evolved differently than it might have been two years ago, five years ago, ten years ago.

Steven, it's Tom.

Just bear in mind, the two boards could not mutually agree to extend the deal.

We were at a point where we failed to get an extension on the deal.

We felt very confident over time the deal would have closed.

We just failed to secure an extension from both boards.

We also recognized that there are consequences to a selling institution that are detrimental.

Time is not a good thing for a seller.

It's not a good thing for a buyer either, but particularly bad for a seller.

So, subjecting your staff, your employees to an elongated uncertain period is a very difficult thing.

And a lot of consequence occurred in 14 months.

Okay.

So at this juncture, Joe, would you just prefer to wait on the sidelines and see what happens to the SIFI threshold?

It doesn't seem to make much sense to announce a deal before we see what happens with that one.

I think that the specific circumstances will determine what we do and when.

The fact is that the environment could change, relatively speaking -- and, by the way, this could be administratively or by an act of Congress -- the environment could change down the road in ways that aren't discernable.

To the degree that that might happen, that might change the expectations with regard to time.

Absent a change, there may be other perceptions or reasons why a capacity to be more comfortable with a shorter time line from start to finish.

The good news for us and the bad news for us.

We spent a lot of money and a lot of time preparing to close this deal.

As was evident, there are many consequences of having gone through this process, both to us and to Astoria.

And the reality is that we'll both recover from the consequences of this 14-, 15-month period.

But that will take us a little time.

Fundamentally, this Bank is still one of the best buying institutions in the marketplace and has a balance sheet that is not matched by any of our competitors.

In many ways, we are, in fact, still today one of the best buyers in the market.

So leaving that said as it is, the environment is going to evolve and we will, in fact, be in a position down the road to do what is in the explicit circumstances as they change, the best for our shareholders.

We will attempt at all times to do what is in the best interest of our shareholders.

Okay.

Thanks for all the color, guys.

I appreciate it.

Thanks.

Our next question today is coming from Dave Rochester from Deutsche Bank.

Please proceed with your question.

Good morning, guys.

Just so I understand the time line, sorry to belabor this point, it sounds like you're fine with waiting a year to cross through the SIFI threshold to see what happens on the regulatory front.

If at that point nothing is happening, I would think in 2018 you would think to cross organically.

Is that the time frame you're thinking about?

Dave, I think it's fair to say we've been going through this journey as far as managing the balance sheet below $50 billion since September of 2014.

We have a very fluid landscape in respect to the potential regulatory changes that may benefit regional banks.

Our deal has been terminated mutually by both sides.

We're in a unique spot.

We will see some asset growth but we're going to manage it in the short term to better understand the direction of these changes to regional banks.

And from there we'll have to reassess.

As Mr. Ficalora said, we're going to reassess at all times.

But clearly this is the most fluid of times we've seen in the past eight years.

So, we're very focused and we're very mindful.

We have a roadmap.

We went through a journey through this process of trying to get a deal done.

And the bar, as I indicated, has been lifted month after month after month and we have a roadmap.

Okay.

And then you think you can get SIFI compliant, it sounded like, maybe in the next couple of quarters?

Is that fair?

We've always expected to be able to close the deal, so obviously we have the roadmap.

And we're going to emphasize management's complete focus to be prepared when the opportunity arises.

So, we are working very intently on being SIFI compliant.

And there's a few items going forward that we believe can be done in due course.

But obviously there's changes on the regulatory front.

We may get some enhancement to a balance sheet, that maybe $100 billion or $250 billion is the number, not $50 billion.

And that may change the expense base and how you manage your risk.

You mentioned the personnel expense.

Are there any other system enhancements or buildouts that need to be done at this point or is it just personnel?

Again, I would say my guidance for the year is going to be between, I'd say, $5 million to $7 million on average.

And then you have some additional G&A for consulting fees as we go through this process, continue to go through this process.

It's been a long process.

We started in 2011.

So, it's not an easy process.

But we learn as we go along.

And I think my guidance I gave you on the expense build, that $165 million-ish number has these embedded costs.

And, like I said in my previous commentary, a year ago I would say that would be way too high for the expense build.

But you learn as you go along here.

And clearly there's been an expectation for a higher regulatory cost.

Okay.

And then just switching to multi-family market, I know in the past you guys have talked a spike up in rates typically drive more refi activity, coming back to the market to lock in rates as well as lower cap rates.

Any evidence of that just on the fringe happening at this point or do you expect that that might be something we see later on in the year?

I know you alluded to it in your comments earlier.

I think a lot of people are making the decisions with regard to rates as things evolve.

There is no market urgency with regard to change in rates.

Rates have not been moving rapidly up or causing there to be decisions.

Just remember, there are different players affected by rates.

The people that own buildings that are looking to refinance the building in, let's just say, 12 or 18 months down the road, are not necessarily believing that between here and 18 months later the rate that they're going to be looking at is in the 100 to 150 basis points more.

It may be 25.

It may be 75.

Whatever their perception may be, it may not be moving them so rapidly to making that decision.

There is a wide variety of expectation with regard to the speed with which rates will change and the degree to which rates will change.

But, Dave, just bear in mind, before post election 3 to 3-1/8 was the market.

Now we're at 3.75 to 3-7/8.

So there's been a notable change.

Is it enough to move the customer to rapidly come back to their bank to make sure they lock in the next three to four years?

We're getting there.

That's a pretty sizeable move.

I think if it continues, there will be more activity.

Okay.

Great.

And then just one last one -- Tom, do you have the components of the MSR adjustment and the hedging impact on the quarter that was embedded in mortgage banking?

Yes, I have that for you, Dave.

Total for the quarter, we had $6.9 million in mortgage origination revenue.

Loan servicing fee revenue was $12.4 million.

The net adjustment to the MSR hedge was negative $16 million.

So, the net mortgage banking revenue was $3.3 million.

Perfect.

All right.

Thanks, guys.

Thank you.

Our next question today is coming from Matthew Breese from Piper Jaffray.

Please proceed with your question.

Good morning, everybody.

Just a couple of quick points of clarification.

On the margin outlook the down 5 to 8 basis points for next quarter, does that include prepayment penalty fees or is that on a quarterly?

No.

That's ex prepayment.

We don't give guidance on prepayments since we don't control prepayments.

Okay.

And then on the potential preferred capital raise, I think you mentioned $500 million.

When you say replace the trust preferreds, does that mean you would extinguish the trust preferreds or would the preferreds be on top of that?

Again, when I say replace, in other words, the tier 1 capital is no longer tier 1 capital.

It was nice to have that tier 1 eligibility in trust preferreds.

It was phased out under the Dodd-Frank Act.

So, clearly we may look at all of our capital structures.

But when I say replace, just get back to tier 1 capital levels that were taken away from us because of the Dodd-Frank Act.

And we may keep them on the balance sheet because they're good level 2, tier 2.

Understood.

Okay.

And then just touching on the C&I portfolio, a lot of growth there year over year.

Can you talk about what's driving that growth and what types of loans are being put on there?

Again, this has been a mission of the Company over time as we build the business.

We started this business a few years ago.

There's so much capacity out there.

Like I said before, we were a credit buyout shop.

We do not dictate the market.

We're not the lead player in the market.

We just evaluate credit.

We pick and choose the best credits and we're able to put on growth.

Clearly this has been a very good business model, as we talked about the history of the people running that business with no losses for a decade.

So, as we turn down 97% of what we see, that 3% of what we actually do is high-quality assets -- asset-based lending, (inaudible), financing for large corporations.

These are very secure type positions.

They're not deposit positions, they're not relationship positions.

It's the credit buyout opportunity that has a very low cost to manage with zero credit losses.

So you can see it's conceivable for us to grow this business very easily 20% a year, 25% a year.

We manage our growth.

We look at our balance sheet.

We're going to manage that $50 billion line between CRE growth and multi-family and particular rent-regulation properties and the C&I business.

Clearly we would like to put on more residential jumbo but they're hard to find.

It's an in-demand product.

So we put on maybe $20 million, $30 million a month because we're very selective on our asset quality metrics.

We have super high FICOs and very low LTVs.

These are pristine assets that we put on our books.

We have very high credit standards in order to put it on our balance sheet.

And they're ARM loans, so if rates were to rise significantly, we believe the ARM market will be very attractive to us as more customers will gravitate back to ARM type financing.

Do you think the pace and growth from 2015 to 2016 in the C&I portfolio is something we can expect going forward?

Somewhere between 20% to 35% depending on the product flow and what we see.

Okay.

And then I wanted to talk about two ratios that stand out for me.

One commercial real estate to total risk-based capital and also you loan-to-deposit ratio.

Can you talk about how you expect these ratios to be managed and how you expect them to trend over the next year or so given some of your outlook?

Again, we don't give specific guidance as far as any regulatory ratios.

We've been mindful of that.

Historically the Company has been the largest multi-family rent-regulated portfolio lender in the country and we have a history of much higher ratios.

We're very cognizant of the focus in respect to the white papers that are out there and the various emphasis on CRE concentration.

But we're in the 800s and we've been higher levels.

We obviously talked about potentially bringing in some tier 1 capital, which will bring that number down and we'll manage through it.

As far as the Company's focus, we're not going to change our business model.

We have a very strong asset quality with no credit losses and we apply capital to the risk profile.

Again, when you do that exercise you realize that a rent-regulated building in the city of New York has very low risk compared to other assets classes in other parts of the United States.

I think the good news is that over the two decades we were a public company, those ratio adjust most overtly positively in transactions.

So, there's no question we understand how our balance sheet is structured, and that we clearly are going to be favorably impacted by the transactions that we do.

12 of them have all demonstrated by their metrics that those metrics that you're specifically asking about are greatly improved by the transaction.

And just the other ratio, loan to deposits, the Company has been at a much higher loan to deposit ratio in its history.

Clearly on an acquisition perspective those ratios changed materially.

But, more importantly, the Company has always had a very high large wholesale finance book to manage its balance sheet into transaction.

So, clearly this is not unusual for us.

We have risk management [factors] around that.

And we'll manage through an opportunity to evaluate that as we bring in more deposits over time.

But, again, this is not unusual for the Company to have a 1.33 loan to deposit ratio.

Yes.

It goes all the way back to the beginning of time with us.

Transactions definitely have a very positive effect on those numbers.

And historically every time we've done a transaction, we see a very positive movement in those numbers.

Okay.

And then just my last one, as we think about the preferred capital raise, what will that do to the securities portfolio?

Will it be mostly utilized to build it out in terms of getting ready for LTR compliance?

I think I gave some detailed color on Collyn's question on securities.

I think it was probably long winded.

But, look, we've seen a portfolio drop dramatically.

We're balancing this balance sheet below $50 billion since the early part of 2014.

So we have had the luxury of significant bonds being called away from the Bank.

All our callables are gone.

As the DUS securities get called out, we get paid very nice yield maintenance provisions on that, so it's been very attractive for the overall margin for the Company when you include that into the margin.

But big picture here is that we have to rebuild over time.

We're more happy to build that portfolio in a much higher rate environment, especially funded with deposits.

So, clearly, that's the long-term plan.

In the short term we're going to manage $50 billion.

I would not expect to see significant securities growth.

I would see loan growth to manage the $50 billion in the short term.

And in the longer term, when we go into the market to solve for LCR, depending on what that level will be, we'll have a one-year opportunity to prepare as a Company when it's mandated for us to comply, and hopefully that will be at a much higher interest rate.

And potentially we may not even see that SIFI threshold level but the SIFI threshold may be dramatically higher than $50 billion and it may not apply to banks of our size.

So we're mindfully watching and monitoring the potential regulatory changes that may impact the regional bank as we stand today.

Understood.

That's all I had.

Thank you.

Thank you.

Our next question today is coming from Christopher Merinac from FIG Partners.

Please proceed with your questions.

Thanks, Joe and Tom.

If the corporate tax rate were to fall 2018 or whatever, would you report all of that or would you use a portion of that to reinvest into some of the changes that you're talking about today?

Again, I would love to comment on where the corporate tax rate is going to go.

But either way, I will say this one statement -- we pay one of the highest tax rates in the country as a regional bank.

And we would benefit greatly from any movement downward in the corporate tax rate for regional banks.

Bear in mind, also, we have a deferred tax liability on our balance sheet, which would also add to capital, so we don't have to recognize any adjustment to capital.

So, we have a unique position.

We would be welcoming a lower corporate tax rate because it will be very favorable for the company, and it would clearly be a significant boost to our earnings moving forward.

That's why I can't really comment on it because obviously you can do the simple math.

We pay the highest rates.

Our effective rate is going to be pro forma somewhere in the upper 30%s -- 36% to 37% for 2017.

So if you bring that rate to 15% to 20% at the federal level, we'll get a substantial benefit, we believe.

I think that's another example of what is different between us and our competition.

Most of our competition has had massive losses over time.

So, their benefit on the tax side is going to be diminished by what they have taken as losses over all of those years.

We don't have losses over all of those years.

So for us, the tax benefit is going to be significantly greater than it would be for others.

Great, guys.

Thank you for the color.

Much appreciated.

Thank you.

Our final question today is coming from David Chiaverini from Wedbush Securities.

Please proceed with your question.

Hi.

The first question relates to your comment about diversifying the loan portfolio.

Is this strategy based on guidance or feedback from regulators to diversify away from multi-family CRE?

Or do you believe it's a better risk-adjusted return?

No.

This is Tom.

This is not a change in strategy.

We opened up the business years ago.

They're just kicking in on high on all eight cylinders right now.

They're doing a phenomenal job.

We expected to see growth over time.

That business has the opportunity for significant growth in the years ahead.

On the resi book, we grew that book at one point in time to $700 million.

We ultimately sold the resi portfolio to accommodate the SIFI threshold.

So, we're rebuilding that book because it's a great asset class to have.

They're a hard asset to find because, like we talked about previously, the overall credit on the writing standards we have is very high standards.

We're doing low-risk assets.

We're going to put on low risk with reasonable duration.

But it's not a change in strategy whatsoever.

We've been doing this for quite a few years now.

I think the important thing to recognize is that we have a longstanding risk averse nature.

And the fact that Mr. Chipman's group joined with us is indicative of our high appreciation of their longstanding risk-averse nature, as well.

So, the idea that there will be more and more of those assets in our portfolio is driven by the confidence we have that that book can grow with little risk of loss.

And as a follow-up to that, in addition to this specialty finance jumbo hybrid resi, going to where you're seeing some uptick in losses in the taxi medallion portfolio, given the disruption that's occurring in that industry, do you plan on exiting that portfolio or growing it?

What are your plans there over time?

It's Tom.

I would say big picture here, we have a $150 million unpaid principal balance on a $50 billion balance sheet.

We're very comfortable on that level.

We will accommodate our customer base.

We are not going to be buying taxi medallions.

We're not going to be in the market as being originators of taxi medallions.

We're going to accommodate customers through this very difficult environment.

It's been a very difficult environment, competition in New York City.

So we understand evaluation.

We have to monitor the evaluation of the value of those assets.

And we have around an 8% reserve against it.

And, again, like I indicated, most of the Company's losses right now in the past few years have been coming from medallion, but they've been very manageable, they've been de minimus.

And if you look at the past four quarters, the multi-family series has been zero, as well as the residential, as well as the C&I.

So, clearly, this is the asset focus as we see the buildup of the reserve.

And we're managing it with our customer base with the expectation that they're going through a difficult time.

Many of our customers on the fleet side are wealthy customers.

They have multiple relationships.

They're in this business for many years, going back 40, 50 years.

So, clearly, this is something that's a shock to New York City but the values in New York City are dramatically different than the values in other parts of the United States.

There's still many Yellow Cabs out there and people who are willing to drive a Yellow Cab.

Thanks very much.

Thank you.

We have reached the end of our question-and-answer question.

I would like to turn the floor back over to management for any further or closing comments.

Thank you again for taking the time to join us this morning.

We look forward to chatting with you again during the last week of April when we will discuss our performance for the three months ended March 31, 2017.

Thank you all.

Thank you.

That does conclude today's teleconference.

You may disconnect your line at this time.

Have a wonderful day.

We thank you for your participation today.