Flagstar Financial Inc (NYCB) 2017 Q1 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 first quarter 2017 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 that 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 the company's local market; 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 10 of this morning's earnings release and its SEC filings, including its 2016 annual report on Form 10-K.

The release also includes reconciliations of certain GAAP and non-GAAP financial 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 this call over to Mr. Ficalora, who will provide a brief overview of the company's first quarter 2017 performance before opening the line for Q&A.

Mr. Ficalora, please go ahead.

Thank you, Michele, and thank you all for joining us this morning as we discuss our first quarter 2017 results.

This morning, we reported net income available for common shareholders of $104 million, or 21 cents per diluted common share.

Our results were influenced by the trends in place since mid-November, when market interest rates first began to increase.

This, along with our stated intent to temporarily stay below the current SIFI threshold, has constrained our overall asset growth.

At the same time, and as anticipated, our operating expenses rose as we continued to invest in the infrastructure needed to become a SIFI-ready institution.

These factors notwithstanding, we still had a solid quarter in terms of loan production and asset quality.

One of the highlights of the quarter was the $515-million preferred stock offering we executed in March.

This bolstered our already strong regulatory capital ratios to the point where they are now greater than those of our regional bank peers and, more importantly, enables us to increase our lending even as the SIFI threshold remains a temporary barrier to our growth.

By issuing additional capital, we also reduced our CRE concentration and facilitated our strategy of selling participants in the multi-family and commercial real estate loans.

This strategy, which has been in place since the fourth quarter of 2014, allows us to maintain our leading multi-family market share position while remaining below the SIFI threshold.

On that topic, I would like to note that our expectation for transitioning to SIFI status has not changed.

We still expect that it will occur in connection with a large-merger transaction.

However, we continue to carefully monitor the ongoing discussion regarding the SIFI threshold for any changes in the regulatory environment that could alter our plans.

Turning now to our first quarter results.

As mentioned earlier, we reported first quarter net income available to common shareholders of $104 million, or $0.21 per diluted share.

Our earnings provided an 85-basis-point return on average assets and a 6.76 return on average common stockholders' equity.

On a tangible basis, our profitability was also solid, with returns of 0.90% and 11.20% on average tangible assets and average tangible common stockholders'' equity.

As for loan production, we originated $2.2 billion of loans during the first quarter, including $1.7 billion of loans originated for investment.

Multi-family loans represented $955 million of the first quarter's volume, and commercial real estate loans represented $250 million.

At the end of the quarter, multi-family loans represented $27.1 billion of total loans held for investment, a $92-million increase from the balance at December after loan participation sales of $122 million.

Commercial real estate loans represented $7.5 billion of total loans held for investment, down $191 million from the December 31 balance, reflecting loan participation sales of $93 million.

Our current pipeline amounts to $2 billion, with the majority consisting of held-for-investment loans.

Moving on the asset quality, our quarter-end measures continue to be very solid and to rank among the best in the industry despite $9.2 million increase in nonaccrual New York City taxi medallion loans from the year-end amount.

Specifically, nonperforming, non-covered loans represented 0.16% of total non-covered loans at the end of the first quarter, compared to 0.15% at December 31.

Nonperforming, non-covered assets represented 0.15% of total non-covered assets at the end of March, compared to 0.14% at the end of December.

Despite the uptick in charge-offs related to New York City taxi medallion loans, the ratio of net charge-offs to average loans was a mere 0.01% for the quarter, which evidences the strength of our core portfolio, which generated no losses.

At March 31, the New York City taxi medallion loan portfolio totaled $146.7 million, representing a 0.39% of total held-for-investment portfolio.

Now, moving on to our income statement.

Our net interest income declined modestly compared to the trailing quarter, primarily due to the lower loan production and prepayment penalty income, and an increase in our cost of funds.

The net interest margin declined 15 basis points to 2.71% on a linked-quarter basis, (inaudible) the increase in prepayment penalty income.

Prepayment penalty income contributed 11 basis points to the current first quarter margin, compared to 20 basis points in the trailing 3-month period.

Excluding prepayment penalty income, net interest margin declined 6 basis points on a linked-quarter basis to 2.60%, within management's guidance of being down 5 to 8 basis points.

Our first quarter non-interest income was relatively unchanged from the amount recorded in the trailing quarter, as a $3.3 million increase in FDIC indemnification, expensed in modest decline in other categories, was offset by the $6.5 million increase in mortgage banking income.

The FDIC and mortgage banking income was driven by an $8.4 million improvement in servicing income to $4.8 million, as compared to $3.6 million loss in the fourth quarter of '16.

Also impacting our earnings in the current first quarter was a higher level of non-interest expenses, which, excluding merger-related expenses in the trailing quarter, rose $2.3 million sequentially.

Compensation and benefits expense accounted for the majority of the linked-quarter increase, which was largely driven by expenses related to our preparations to comply with the regulations for a SIFI bank and by the normal beginning-of-year increase in payroll taxes.

Reflecting our earnings and capital, the board of directors last night declared a $0.17 per share dividend for the quarter, representing a 4.9% dividend yield based on last night's closing price.

The dividend will be paid on May 19, 2017 to shareholders of record as of May 8.

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 comes from the line of Ken Zerbe with Morgan Stanley.

It's going to be tough to limit myself to one question, but maybe just start off with the margin.

I totally get that prepaids were the main cause of the margin compression, and your core was in line with your guidance, and that's fine.

But just given, in sort of the higher -- the presumption for higher Fed funds, given you're liability-sensitive, given that we're waiting, still, for a large deal to happen, is there anything that you guys can do in terms of -- to be able to limit some of your liability sensitivity while we're waiting for a deal?

Yes, good morning, Ken.

It's Tom.

I will tell you that historical, going back to Q1, the actual results, the margin was impacted by, obviously, the rate increase and our extension of liabilities, of which 2 basis points was from the extension of liabilities and about 5 basis points was driven by -- or 4.5 basis points driven by the rate increase.

So obviously, that's going to have an impact in the second quarter.

My guidance [with] Q2 is solely driven off this most recent rate increase; it's going to be about 5 to 6 basis points down in Q2.

And then from there, we hope to see some stabilization depending on the magnitude of rate increases.

We're forecasting another rate increase in '17, and I think we have another one in '18, and hopefully you'll see some stabilization as we get closer to year-end.

But clearly the short-term nature of the liability base being somewhat liability-sensitive, we do have impact on rising rates.

So clearly, that's -- as we moved from quarter to quarter, we have been extending liabilities, and that is the plan for 2017, and we have approximately just under $3 billion of liabilities that we can extend out, and we will take advantage of that as we go through the quarterly analysis each quarter to take advantage of extension opportunities.

And from there, we should get to stabilization.

Ken, it's also important to note that the balance sheet was prepared for the consolidation of our balance sheet with the Astoria balance sheet.

Significantly different outcomes would have arisen as a result of that transaction.

So we are in the process of making those adjustments to the balance sheet, but there's a very big difference between adjusting the balance sheet as it stands versus as it would have been combined.

I would say, Ken, also, to add to that.

The encouraging aspect is that loan yields are higher in the pipeline, so we're looking at about 3.68% forward pipeline coupon, and if you look at what's rolling off or what's left in the portfolio, the multi-family yield's around 3.39% and the CRE is 3.94%.

So if you average that in, it's about 3.15%.

So we would hope to see a positive impact on the asset side.

As you're aware, we have not added to any securities balances in a long period of time.

Ultimately, as we start to replenish the security balances, as well as we prepare ourselves to cross over the SIFI threshold, we will need to start rebuilding that balance sheet.

So clearly, we're much smaller than expected, and I think the other encouraging aspect going into Q2 is that mid-quarter update was sitting at a -- I won't call it a surge, but nice uptick in applications.

And the yields are clearly higher in the pipeline than they were in the previous 2 quarters.

Got you.

And does the stable in third quarter assume any additional liability extension or duration extension?

Yes, we have about $1 billion coming due in Q2, and then I think we have the remaining of that $2.8 billion I've mentioned in the latter part of the year., So clearly, we're going to push out those liabilities as they come due, and we're trying to get to a more neutral level as far as asset sensitivity is concerned.

We like to be neutral.

And then, as Mr. Ficalora indicated, the growth will be down the road, where we can actually see significant growth through an acquisition, not so much normal organic growth.

But I will tell you that, given where we are today, we have nice room to manage our business of seeing the loans come on the books without tripping over the SIFI threshold.

If you do the mathematics, over the next few quarters, we could put on $1.5 billion a quarter and not trip over till the end of the year.

So I think we have some room to see some good second-half growth.

And hopefully that will come a little sooner and we'll start seeing it at the -- towards the end of Q2, our multi-family --

Got it, okay.

And then just one last question.

Just in terms of potential acquisition as you're looking for deals, obviously your stock price continues to diverge versus the rest of the bank space, broadly speaking.

Is there any structures, any kind of -- I'm going to say alternative deals, something where it can actually be a lot more accretive than just simply looking at, say, your stock price versus a normal, other bank stock price or valuation?

I think you're raising an appropriate question.

The important thing to note, however, is that if, in fact, we announce a deal, our stock price should adjust materially rapidly.

Because the value of our company and the value of pro forma, whatever that company may be that we create, will in fact dictate the price of the stocks you trade at.

So a good deal that has all the kinds of attributes that we put into a deal would make an adjustment to the stock rapidly.

And obviously, the significant short position that we carry would [cover] rapidly.

And Ken, just bear in mind, if you look at the balance sheet and the liability structure, we have a lot of liabilities that, compared to the peer group, are significantly higher.

And if we were to do a deposit-type transaction, just pure deposits, an influx of lower-cost deposits, that will change the margin materially going forward.

So clearly, it's not just putting businesses together, but deposit opportunities in the marketplace that have lower cost of funds.

And our currently higher cost of funds peer comparison would be of benefit to the margin in a go-forward basis.

So clearly, we would look at those opportunities as well.

Thank you.

Our next question comes from the line of Collyn Gilbert with KBW.

So, Tom, just talking a little bit more about the pipeline and kind of what you see in the market.

It looks like the pipeline is higher at the end of this quarter than it was in the fourth quarter.

Sort of, how do you see that unfolding?

And I know, obviously, you have to manage within the constraints of the balance sheet.

But just kind of overall market trends in general, and just kind of the behavior of your borrower, how do you see that sort of unfolding this year and in next year?

So, Collyn, obviously we've been very cautious as far as managing the $50-billion special.

But the good news in this typical -- in 2017, we have some room here.

And as you can see the previous quarter, there was not a lot of growth.

Typically, Q1s are traditionally slow for the company as far as growth.

And given the pent-up demand over the multiple years of an increase in commercial real estate values, there's been somewhat of a slowdown.

But the reality is that we're seeing a ramp-up of applications in mid-quarter update.

So we have a nice pipeline going in at a higher yield than we've seen in I'd say, in the past 2 or 3 quarters, although it's not a substantially higher yield.

3.67 for us compared to a 3.39 coupon on the book is encouraging.

We haven't seen the surge in interest rates in Mr. Ficalora's commentary regarding the press release that since November, there's been a bump-up in rates, but not a surge.

So people are sitting back and they're kind of evaluating the marketplace.

I think they're evaluating the marketplace in respect to tax planning and what's going to happen as far as managing your financial assets in respect to the political landscape.

So there's been somewhat of a pullback, but I think the encouraging aspect is we did see somewhat of a pickup in applications, and we are clearly in a position with our most recent capital that we raised, that we have a lot of room to put on some nice growth and hopefully a higher yield.

So that's encouraging, but it looks like it came a little bit later than we expected.

And hopefully we'll have a nice growth showing towards the end of the second quarter as far as loan growth is concerned.

Okay.

That's helpful.

And then, just on the borrowings that are coming due, and your intention to extend, just kind of broadly, how are you seeing the terms of potential extensions?

Are you going out 3, 4, 5 years?

And kind of what are the rates that you're expecting to have to incur [to extend]?

Again, the marketplace is fluid; 10 years, I think, is surprising everybody, relatively inexpensive.

We're looking about a 1.25 that's coming due, and we're looking at anywhere from 1.30 to 1.55-ish kind of refinancing going out 18 months to 24 months to 36 months, that range.

So depending on market conditions, we will evaluate that.

Obviously, rates are flattening in the back end of the curve.

So clearly, on the liability side, extension seems -- it'll be more attractive than it was when we first modeled off the extension going back in the fourth quarter versus where rates are today.

Okay.

That's helpful.

And then just one final question.

Obviously, the large deal -- we've been talking about this for a while, and it's such a big part of the strategy, and a necessary part of the strategy.

Is there a point, though, where you guys, given the environment, given maybe limited options that you think about yourselves partnering with a larger organization?

I mean, kind of turning the -- kind of changing course here?

You know, I think, Collyn, it's something that has always been considered over the course of our entire public life.

We're motivated by what is in the best interest of our shareholders, as we are all shareholders, so we will always do what is in the best interest in our shareholders.

Saying that, there has never been a time in the past when partnering with somebody was actually better than acquiring somebody.

We have a very strong track record of success in creating value by doing acquisitions.

That doesn't mean that there couldn't be a circumstance where a partnering would actually be of great value to our shareholders, and therefore, we would entertain it.

And Collyn, I would just add to that commentary.

The roadmap has been [set]said.

The expenses are clearly higher than we expected.

There's no question about that.

We went into a very large strategic business combination that did not close given the timing of such, and we have now a roadmap that has some expenses attributed to that, so we have to get through this roadmap.

And as you can see, the Q1 expense results were ahead of our original guidance given the (inaudible) cost that was unanticipated.

There's some more ahead.

But I think in respect to overall, looking at the OpEx going forward, hopefully we'll see a little bit of relief in Q2 compared to Q1.

So my guidance says about $165 million, which hopefully we'll incorporate what we plan to continue to put in place to get to the roadmap of becoming SIFI-ready.

And then, once we get to that level of being SIFI-ready, we think that we have a tremendous operating leverage opportunity when we put on assets.

The ability of the infrastructure to be considered SIFI-ready, this expense base at around 50% efficiency ratio is typically not how we run our business.

So we have the infrastructure, we're building toward SIFI-readiness.

And hopefully when we do put on the assets, we'll be able to leverage those SIFI costs as affiliated with a significant expense bill.

Okay, that's helpful.

I'll leave it there.

Thanks, guys.

Thank you.

Thank you.

Our next question comes from the line of Bob Ramsey with FBR.

Tom, I just want to be sure I heard you correctly.

Did you say $165 million next quarter?

Again, I'm shaving it down from Q-over-Q from $166.8 million down to $165 million.

And we have some -- we'll call it one-time expenses that were driven because of SIFI readiness and the roadmap that we have to achieve.

So I'd say in Q2, we're looking around $165 million level.

And then going forward, hopefully we can stabilize there.

But I think at that pace, we should be in the position to at least have an expense base that would be at a level, if you run that out 4 quarters, at a SIFI-readiness level.

And from there, the goal would be to, when we do cross over and become a SIFI bank, somewhere down the road -- and when that happens, it happens; either through an acquisition or through organic down the road -- we should be able to get the operating leverage opportunity, given that we've built a significant infrastructure to accommodate the roadmap.

Okay, got it.

Thank you.

And then, it's been a while since we've been in a rising-rate environment.

I know prepayment penalty income is near impossible to predict, but what is the right way to think about prepayments as rates are rising, kind of at a higher level?

Well, under normal circumstances, when rates are rising and there's confidence that rates are rising, people have a tendency to accelerate their refinancing.

So we see an acceleration when there's clarity that rates are rising.

But as you know, there is no clarity as to what rates are going to do.

There's great speculation and a great deal of disbelief, in some cases, as to the consequence, as to where rates are today and where they're actually going to go.

So I think with the uncertainty surrounding rates, there is no decision-making at the -- property owners are very -- at least, our property owners are very conservative.

And with all of this uncertainty with regard to rates, I don't think that's a driving force in what they're deciding.

So down the road, if things become clearer, then it'll have a more discernible impact.

But right now, things are not very clear.

There are people that are speculating, and then certainly, in many cases, uncertain at all as to why rates are literally performing the way they are.

Rob, let me just add to that commentary.

If you look at where -- despite the fact that short-term rates are up and they are projected to go up and forecasted to go up, the back end of the curve and the belly of the curve really hasn't moved a whole lot.

There's been somewhat of a flattener.

Our coupon's around 3.5, and that's a substantial increase from, we'll say, 2 quarters ago, around 3, 3.125.

It's encouraging to see the movement upwards.

But that's not a precipitous move, as Mr. Ficalora indicated, to get the sentiment of the borrower to really rush to the table in order to deal with the rising cap rates and rising market rates.

So market rates, in the belly of the curve, which we landed at, the bread-and-butter of the business model for us is the 5- to 7-year-type belly of the treasury curve where we are landing most of our proceeds.

And we're not seeing a significant rise there.

If that was to directionally move in coordination with short-term rates, then I think you'd see an acceleration of prepayment opportunities.

Okay, great.

Last quick question.

Maybe you could give a little more color around the mortgage servicing?

Obviously that looked a lot better this quarter.

I'm curious if there was any valuation adjustment or any other factors there.

I'd say overall, the Q-over-Q was encouraging, but still, the business itself is still under somewhat pressure.

We're seeing -- the competition is fierce.

The spread's around between 65 and 70 basis points on gain on sale margins.

Servicing did very well this quarter; we net -- the net adjustment to the hedge is about negative 8.4.

So servicing made about $5 million on income.

So when you take that, coupled with the mortgage origination of $5 million, the net result of mortgage banking was 9.8.

So there was a substantial -- we'll call this -- volatility was, I would say, more reasonable, up until March 31.

We're in a different quarter now, and as you can see, what's going on in the back end of the curve.

But for Q1, I'd say the volatility was reasonable, and the hedge effectiveness was more successful than the previous quarter.

The last quarter with the election being Q4 was very challenging, so we had a significant adjustment to the MSR hedge with a negative $16 million, so that really impacted the results in Q4.

So we've clearly had a positive result.

But the actual flow of business is not as expected, given that the selling (inaudible) should be seeing more volume.

So I think it's more in the pricing and the fact that there's some unregulated players in there, in our business, that maybe are not hedging their positions.

So when you look at pricing, they have somewhat of a slight advantage, given that we are hedging off MSR.

MSR is a significant asset, so we want to make sure we hedge it to the best of our ability.

There are other institutions that are non-public companies that have that capacity to run unhedged, and they can get some pricing advantages.

Okay.

And so, how were you thinking about mortgage banking, sort of all in, as we go forward?

I mean, volume should be up sequentially.

Does servicing kind of stay around this level?

The overall gross loan servicing fee is around $[13] million; that should be consistent.

And then hopefully, if the volatility is reasonable through the quarter, we should see reasonable results.

And again, it depends on the quarter-end mark and how extreme things can be as of June 30, but it seems like things are stabilizing.

I would like to tell you that we're seeing more volume, but that's very competitive right now, so we're evaluating unique product mixes to try to offset some of that.

But we're still a conservative institution.

The way we dial this run rate is that we originate loans that are very attractive for the government, and for a portfolio, super, super, prime-type assets.

So we're not an aggressive player in this space.

And when we put loans on a balance sheet, it is at pristine type asset quality.

So I'd say, on a comparative basis, I would like see a slight uptick from Q1 versus Q2; that's in our forecast.

And hopefully we'll see some slight increase there.

Great, thank you.

Sure.

Thank you.

Our next question comes from the line of Steven Alexopoulos with JP Morgan.

I'm curious, if expenses are now at the required level for you guys to be SIFI-compliant, why not just cross organically here and go back to growing the balance sheet, which would help offset some of this margin pressure?

Yes, I think that's a very good question.

The reality is, there is no required level.

The fact is that we have an ongoing need to constantly be adding people and systems and otherwise accommodating the evolving expectations with regard to being a SIFI.

And the concept of merely organically doing it is something that we've considered long and hard for a number of years now.

So I think we've made the conclusion that it is far better to do this with a transaction than not.

And then there are lots of good economic reasons for that.

And Steve, I would just add to that commentary that obviously, it's a fluid political landscape right now regarding the SIFI level and how they're handling these types of institutions, given that we're on the cusp of $50 billion.

So clearly, we're watching that very carefully.

And as I indicated, we will see some growth this year; unfortunately, it wasn't the first quarter.

We feel confident that we'll see some growth in the quarters ahead.

And if we do have growth, we have about $1.5 billion per quarter of net loan growth or net asset growth we can put on and not trip over the SIFI threshold.

So we have some growth that we can put on this year.

We're going to watch and monitor the political landscape.

And hopefully there'll be some relief for the community regional banks, which we kind of categorize ourselves in with a simple business model.

And hopefully we'll get an actual adjustment to that level.

If not, we're preparing ourselves to be ultimately becoming a SIFI bank.

In terms of wanting to still cross in connection with a deal, can you give us a sense as to the pipeline of sellers?

Are you having many conversations today about this?

Yes, I think there's no question.

There are many people interested in entering into transactions.

We're not seeing very many transactions, but that doesn't mean that there isn't a significant amount of interest within the board rooms of banks of all sizes across the country.

Okay.

Thanks.

If I could just ask one other question.

Given the new constraint that you guys outlined in the 10-K, which is to keep the CRE concentration below 850, which looks like it prompted the preferred raise, I know you just declared another dividend at $0.17.

But given this new constraint, does this impact your thoughts around retaining more capital organically via a lower dividend?

How do you think about that?

Thanks.

So, Steve, so let me just give you some color on capital.

Where we stand today, as of that [spot right] on March 31, our leverage ratio is 9.24.

Our peer group, which actually incorporates 5 CCAR banks, is 9.20.

When you look at our total risk-based capital, which is where the most constraints have been in the past, given that a lot of our loans are not -- they're not considered 50% eligible -- some will be 100% eligible -- so risk-based capital is very important to us.

We're at 13.69% post the preferred.

When you look at the peer group, which includes, as I indicated, 5 CCAR banks, 13% is the comparison.

So that, coupled with Tier 1 Risk-Based Capital, add up to 12.20, versus our peer group that we comped was 11.20.

When I saw peer group, we're not peer-grouping ourselves to JP Morgan or Citigroup, M&T Bank, HBAN, Fifth Third, Comerica, the smaller CCAR banks.

We clearly have what we believe is significant capital.

So clearly, we're constraining our growth right now.

We're constraining the ability to generate higher returns as we monitor the SIFI situation, and we expect that could be to our advantage.

But once we start growing, we think some of this capital returns will be leveraged, these capital [balance] will be leveraged, and we'll start seeing some growth and earnings in the future.

So I think, as far as the preferred, I just want to go back to your statement about that was driven off of the CRE.

We've been talking about a preferred issuance for the past year and a half.

And the reality was, our (inaudible) 3 capital that was eliminated from our balance sheet because of our size, due to the trust preferred and our eligibility, was a replacement mechanism.

So this is not a surprise for the marketplace as far as the preferred stock is concerned.

But clearly, having these capital levels compared to our peer groups, we feel highly confident that we have adequate capital, as well as the concentration.

The numbers are in the low 700s now, and we do have an 850 understanding or written arrangement with our regulators, but we still have a lot of room.

[And you put] reasonable growth, which is high-single-digit growth, over multiple years, you're not going hit that 850.

And Steven, you haven't been with the company for most of its public life.

But the reality is that over the course of many decades, we've never charged capital as a result of a cycle turn with the losses that have destroyed banks.

So having capital levels at the same level of banks that lose massive amounts of capital is not typical for our business model.

Clearly, when we were trading at 11x tangible in the beginning of 2004, we had a capital level of 365, and the street was perfectly comfortable paying huge premiums for our company because we don't charge capital as a result of our losses.

So I think the good news is that we have a very distinctively different, better business model that actually performs well even during adverse cycle, and therefore, our needs to capital differ than that of the industry as a whole.

So we're at the highest capital levels in our history.

And when I say that, I'm talking about many, many, many decades.

So we're at the highest capital levels in our history, and there's nothing within our business model that suggests that we're going to be charging capital as a result of losses in the next cycle turn.

Yes.

Joe, I guess the difference, though -- BankUnited, on their call yesterday, mentioned that the regulators are not fans of CRE here.

They specifically called out multi-family in New York City.

They set (inaudible) pricing and rising cap rates.

So when you think about the new environment ahead, it's less about credit risk of that asset class; it's more about regulatory scrutiny.

That's why I was wondering if that's changing your thoughts around t the dividend level.

Because at some point, you're going to keep running up to this concentration limit, right?

You'll need to address it with capital.

Thanks.

So, Steven, if we run up to the 850, that means the balance sheet is substantially larger and our growth is significant, and we'll be in the marketplace being proactive to make sure that we stay below it.

There's no question that, if you think about having that type of level, it's not -- there's maybe one other bank, which is much smaller than us, that's even close to that level.

So there's at least a reasonable level of confidence that we could run at a much higher level than companies that have been in the business for very few years.

So this is a lifelong business model niche that we've established ourselves in.

And if you look at the credit metrics and the history, we have a history of no losses in this space.

And our CRE book has 50% less losses than our traditional rent-regulated portfolio.

So we're very proud of having a unique, niche business model, and we also are spending significant dollars to really be in a position to be an industry leader as far as managing our credit risk.

And that's important as we become a SIFI bank in the future, if that -- if $50 billion is the line in the sand.

So we're very pleased to be the number-one portfolio player in the niche, and we have a very long track record of success in the niche.

I think the important thing to note, we would never sacrifice our dividend in order to accommodate capital.

We have the capacity to go into the market and raise capital at will.

So if we need capital prospectively, we'll do it by going into the marketplace, not by reducing our dividend.

Got you.

Okay, I appreciate all the color.

Our next question comes from Dave Rochester with Deutsche Bank.

On the expense side, how much of that additional $5 million to $7 million in personnel expense you guys mentioned last quarter that you were expecting would come from SIFI prep is actually in the run right now?

And is there any update or change to that number?

I would say, look, they're going to hire key positions and they're going to build departments.

We have key players that have been put in place.

I think going forward, there'll be some support behind the players, but at much lower levels; mid-level management and the like, as well as staffing, different lines of defense, first, second and third line.

Clearly this is, as we move forward towards our roadmap, we think this 155-ish level should be the run rate in the short term.

The goal is that when we put on growth, that is the level, and we'll start getting our efficiency ratio more in line to our historical norm.

As I indicated previously, we are not typically an institution, given our business model, and the unique product mix that we have should not be at a 50% efficiency ratio.

This is the highest we've ever been as a public company.

So we believe that we will get the benefit over time on operating leverage, given the level of expenses.

These are significant expense bills for the company.

A lot of it is consulting and setup expenses that are not recurring, but they're going through the P&L.

And unfortunately, when you think about the go-forward, let's say 2, 3 years out, we should stabilize.

And hopefully we'll stabilize in '17 at this level, and then get the benefit of operating leverage, which we hope to see as we take the balance sheet past $50 billion.

And sorry if I missed this, but on our plans to cross at $50 billion in assets, you guys are still planning on organically growing through that in 4Q, right?

Isn't that the plan, assuming you don't get a deal done?

I think what we were saying specifically is that when you take the average, and you look back, we have lots of room to run, some growth here, and be very mindful of the political landscape.

So with that being said, the math calculates $1.5 billion a quarter and kind of puts you into a fourth quarter position to make a decision.

So clearly, we have some flexibility.

The goal is to start seeing some growth in, hopefully, Q2 and in the second half, and monitor the situation with respect to where the government will be in respect to the asset size for SIFI.

I think there's no escaping the fact that it is clearly economically better for us to actually cross over $50 billion with a sizeable transaction.

As you know, the opportunities that that creates are significant, and in the past, based on our relative size to the deal, there's been the opportunity to create great value for shareholders by doing those kinds of deals.

That is also case -- even in this environment, that is also the case.

Many, many different things that are positive occur in a large deal.

Yes, got it.

Understood.

Thank you for that.

And just one last one.

On the deposit side.

I just wondered if you guys were seeing any pickup in deposit pricing competition, post the March hike specifically.

We're just hearing about competitive pressures in New York.

And then if you could just talk about how you're thinking about deposit growth expectations for this year given that, that'd be great.

So David, I would say that when you look at the marketplace and look at short-term money, we've got between -- not your traditional operating account -- it's around [112] to [125].

So of course, if you look at the forward curve and futures in respect to Fed fund, it's already priced in the 1-year deposit market, so it's significantly higher.

As a result, if you look at our cost of funds, going from 49 basis points at quarter end, December 31, 2016, we're 60 BPS going into the first quarter.

So clearly, it was impacted by rising rates.

We have deposits that are tied to Fed funds.

And when Fed funds move rapidly, we are impacted by that.

So I believe I said, in the last quarter, almost 5 basis points of the 6-basis-point reduction on margin was contributed to the deposit base.

We believe there will be at least one more rate increase, and that will have a negative impact on guiding down Q2 by between 5 and 6 basis points because of that effect, solely because of cost of funds.

We're hopeful that the margin will get some benefit as higher-yielding assets come onto the balance sheet, given where rates are and where our current coupons are.

So clearly, the funding of our balance sheet is under pressure on modest levels of margin compression due to short-term interest rates.

Is your (multiple speakers) long-term outlook still factoring in deposit growth, though?

We always have a long-term outlook for deposit growth, as the mission statement for the bank is growth through acquisition.

The history of the bank in deposit-gathering has been through acquiring liabilities.

But in respect to the marketplace, there is a tax we pay on wholesale leverage versus deposit market, right?

It's about 18 basis points of cost embedded in our operating expenses to FDIC assessment for our wholesale leverage.

So clearly, we're going to evaluate that every time we make a decision on bringing deposits.

And we do have a plan this year to bring in deposits, not so much as to be looking at the wholesale markets, because of that 18-basis-point tax that we pay in our operating expenses to fund the balance sheet for FDIC assessment.

Great.

All right, thank you, guys.

You're welcome.

Thank you.

Our next question comes from the line of Scott Valentin with Compass Point.

We haven't heard from you in a long time, Scott.

Welcome.

Thanks, thanks.

Just a hypothetical question.

Tom, you mentioned the fluidity of the political environment and then the SIFI threshold.

If you were to see an increase in the SIFI threshold to $250 billion, how fast could you -- would you expect to roll back expenses?

And if so, how fast could you do it?

We'll be very respectful to answer this question with the proper tone, but obviously it would be very positive for the company, and we would be very active on growing our balance sheet if it goes to $250 billion.

I think it's important to note that, based on our history of creating value in deals, there are plenty of banks that know that they have a great opportunity if they combined with us.

And certainly those kinds of changes would make our business model as we know it to be the most driving force in whether or not somebody would combine with us.

So the current uncertainty with regard to the application of SIFI is one of the problems that we all face.

But in the period ahead, hopefully that becomes somewhat clearer.

Okay, that's all I had.

Thanks for answering my questions.

Sure.

Thank you.

Our next question comes from Matthew Breese with Piper Jaffray.

Just following up on the last question.

In regards to your comment that if $50 billion moves, you'd have the potential to combine with a lot of your competitors, wouldn't it make sense at least to potentially cross organically, get a CCAR stress test behind you, inspire some confidence, and then do those kinds of transactions?

I guess I don't fully understand why you wouldn't cross $50 billion organically if you're ready expense-wise.

I think the bank organically is a very different institution than a bank would be in combination with a large other entity.

The structure itself is demonstrably better for a large company.

No question, the Astoria deal was an extraordinarily good deal.

It did many, many, many good things to Newco's balance sheet.

They were rarely discernible.

Any deal that we announce will be discernibly a better bank prospectively.

So the good news is we have a long track record of combining institutions to create value.

And it's automatically discernible before you even combine.

You know what you have.

And the ability to take what you have and create a better bank is something that you can demonstrate.

So I think it's important to recognize that a good deal -- because we're never going to do a bad deal -- a good deal would be of great value to our shareholders.

Okay.

And then, can you update us on the commercial real estate's total risk-based concentration post a preferred equity raise?

And then the limitation, or the agreed-upon limit, the 850%.

How should we be thinking about that if you were to cross $50 billion?

Is that a good threshold pre- and post-$50 billion, or do you think there will be some changes there?

Well, again, we can't predict the future in respect to how they're going to treat us as a SIFI bank, a non-SIFI bank, in respect to this particular area But obviously, having an 850 threshold, and now we're running in the low 700s right now, post preferred equity raise, clearly it's a -- I'll say a vote of confidence given that we have multiple decades of history of no losses in a very unique market niche, being rent-regulated properties.

You know, 90% of our assets in the New York City market have some form of rent regulation attached to the asset class.

So we have -- that's our niche.

That's our business model.

So I think the fact that we have a much higher threshold than other companies that may be operating -- because they may not have that history and the performance metrics -- is a positive statement.

Having no threshold is obviously the best scenario.

But we have a threshold, and we were very proactive to make sure that we would not impair our business model, and now we have room within that threshold.

Like my statement had said, we were going to go high single digits for the next 2 to 3 years.

We're still not going to break that 850, because we're going to support the bank with the appropriate capital metrics and we're not -- as Mr. Ficalora indicated, we're not bashful to raise good equity to run the business model towards growth.

And we hope to resume our growth in the future, and I'm going back to this whole concept of SIFI monitoring.

We're sitting here, going into May, and hopefully by the end of the year we'll have better direction where the government is going to handle $50 billion.

And if that's going to be the line in the sand forever, then we'll have to readjust.

But each quarter that goes by, closer towards the end of the year, we'll render our decision.

I think what's positive today, in the short term, is that we have some room to grow, and we're seeing a -- I won't call it a resurgence of applications; we're seeing a nice buildup of our pipeline.

And in the mid-quarter, we're seeing some good activity to see the balance sheet start to grow in our traditional, core multi-family marketplace.

I think it's important also to note that the head regulator at the Washington Fed, the chairman of the FDIC, the chairman of the OCC, and Barney Frank himself, have all said that that $50 billion plateau is not correct, and it should be raised rather substantially.

So I think that the tone has already been set by the regulators, as well as by many, many people in the Congress.

So I think it's inevitable that there will be a consensus that that number is not the right number.

And certainly, for us, that'll have a very positive effect.

Understood.

That's all I had.

Thanks for taking my question, guys.

Sure.

Thank you.

Our next question comes from the line of Peter Winter with Wedbush Securities.

Just two quick housekeeping.

The increase in net charge-offs -- what was the increase besides the taxi medallion?

All taxi medallion.

Substantially taxi, yes.

I'd say, substantially taxi medallion.

The portfolio as far as asset quality is concerned is pristine.

I would move towards the -- more the definition of stellar portfolio in respect to the multi-family and CRE portfolio.

But clearly, we're dealing with the taxi book.

Our reserve on the taxi is around 8%, consistent to the previous quarter, and we're managing through a very tough cycle for this line of business.

And the good news for us is that it's a balance that is not significant to the company; it's about $147 million of outstandings.

And as borrowers are coming back to the bank to either renew or try to work things out, we're working with them.

Okay, because if I just look at the slide, it shows there was $5.7 million in net charge-offs, and $2.9 million was the taxi medallion.

Yes.

The other adjustment was related to a company that's not even in business, so we have financing with a medallion company that does business in that line of business.

So clearly that is -- I'll call that a medallion charge-off as well, even though it's classified differently.

It's a medallion-related charge-off.

Got it.

And then, just quickly.

The net gain on loan sales.

If the expectation is to grow the loan portfolio $1.5 billion a quarter, would we expect that line to improve in fee income?

Just to market conditions, obviously if we have a substantial rally here in treasury rates, we may decide to optimize that.

But given that the pipeline is relatively strong, and if it gets stronger, we may decide to sell into the marketplace.

So we have that option.

Last quarter, the volatility was extreme, and we did one trade for about $200 million, and it wasn't the typical economics, given the volatility in interest rates.

So if rates happen to come down significantly in coupons, and we're selling higher coupons, and there's some substantial gains to be recognized as a participant, and we're controlling the participation, we'll consider that.

But again, we are trying to resume ourselves back into growth in the core niche, and if there are real desires for other banks to participate, we will consider that.

But it has to economically make sense for us.

Got it.

Okay.

Thanks.

Thank you.

Thank you.

There are no further questions at this time.

I would like to turn the call back over to Mr. Ficalora for any closing remarks.

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

We look forward to chatting with you again during our last week of July, when we discuss our performance for the 3 months ended June 30, 2017.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.