Flagstar Financial Inc (NYCB) 2017 Q3 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 third 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 in the company's local markets; changes in interest rates, which may affect the company's net income, prepayment 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 in this morning's earnings release and in its SEC filings, including its 2016 annual report on Form 10-K and Form 10-Q for the quarterly period ended June 30, 2017.

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 third quarter 2017 performance before opening the line for Q&A.

Mr. Ficalora, please go ahead.

Thank you, Sherry, and thank you all for joining us this morning as we discuss our third quarter 2017 performance.

Earlier this morning, the company reported net income of $110.5 million, down 4% from the $115.3 million we reported in the second quarter of the year.

Net income available to common shareholders also declined 4% from the prior 3-month period to $102.3 million or $0.21 per common share.

This translates into a 0.91% return on average assets and a 6.53% return on average common stockholders' equity.

Our tangible -- on a tangible basis, our return on average tangible assets was 0.96%, and our return on average tangible common stockholders' equity was 10.69%.

We also announced that yesterday, the Board of Directors declared a $0.17 per common share dividend for the quarter, representing a 5.3% dividend yield based on last night's closing price.

The dividend will be paid on November 21, 2017 to shareholders of record as of November 7, 2017.

Now turning to our quarterly results.

Our performance during the quarter was influenced by several items.

First and foremost was the sale of our mortgage banking business, including our MSR portfolio, which had in aggregate unpaid principal balance of $21 billion at closing to Freedom Mortgage Corporation.

This transaction closed at the end of September, so we expect to start seeing the benefits, including lower expenses beginning in the fourth quarter.

Earlier in the quarter, we closed on the sale of our one-to-four family residential assets covered under our loss share agreements with the FDIC to an affiliate of Cerberus Capital Management.

In connection with this transaction, we received cash proceeds of approximately $1.9 billion.

This resulted in the company having excess liquidity invested at low yields during the quarter.

Our overall cash position at the end of the quarter stood at $3.3 billion, which will be reinvested into higher-yielding assets going forward.

As we stated at the time of announcement, these transactions are consistent with our overall strategic objectives and allow us to focus on our core business model, including growth through acquisition.

On a combined basis, these 2 transactions generated a pretax gain of $82 million and were accretive to capital, with each of the company's regulatory capital ratios increasing compared to the levels at June 30.

On the asset quality side, we recorded a provision for loan losses of about $45 million related to the taxi medallion portfolio.

Our total taxi medallion-related exposure now stands at $106 million.

Aside from the medallion portfolio, the asset quality of our core multi-family and commercial real estate portfolios remained strong.

Absent the medallion related charge-offs, the company would have reported net recoveries this quarter.

In fact, we have recorded aggregate net recoveries in our core portfolio since year-end 2015.

On the lending front, we saw some positive trends during the quarter.

Our held-for-investment loan originations rose 24% to $2.3 billion from the previous quarter, including 50% growth in multi-family originations and 30% growth in CRE originations.

The growth reflects improved market conditions and increased demand, while we continue to adhere to our historically strict underwriting standards.

While some of this increase was offset by prepayments, we did enjoy modest loan growth during the quarter.

After nearly 3 years of no growth, total noncovered loans held for investment grew nearly 3% on an annualized basis.

Our pipeline currently stands at $2.1 billion, including $1.5 billion of multi-family loans.

Of particular note, the pipeline last quarter included $400 million of one-to-four family loans originated for sale compared to a mere $54 million this quarter.

Excluding one-to-four family loans originated for sale, this quarter's pipeline is the strongest pipeline in the last 2 years for the company.

This bodes well for the quarters ahead.

Given where the company stands today, we have the flexibility to grow the balance sheet by approximately $5.9 billion without breaching the $50 billion SIFI threshold based on the 4-quarter trailing average of our total assets.

Finally, on the regulatory front, we are encouraged with the progress being made regarding both regulatory and tax reform.

We believe these potential changes will be a positive for the company and beneficial to the industry as a whole.

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?

(Operator Instructions) Our first question is from Ebrahim Poonawala from Bank of America.

So I guess, if you can first start on loan growth, Joe.

One, like you talked about the pipeline being strongest in 2 years, is that a result of you getting more active, or have you seen changes in the market where you've seen a pickup in demand refi activity that's led to the strength in the pipeline?

I think because different banks have different opinions with regard to the market, it's best to say that our positioning in the market is such that we are gaining share as we desire to gain share.

As we look to the period ahead, we expect that we'll be highly competitive and present in the development of the product that we want most to have in our balance sheet.

Understood.

And when we think about balance sheet growth, you mentioned you have about $5 billion plus in capacity.

Like what's the right growth rate of loan growth to think about as we think about 4Q well into next year?

It's Tom Cangemi.

As we discussed in the previous quarter, we expected to resume the path towards growth as Mr. Ficalora indicated.

This is the first quarter of growth that we've seen in quite some time in our core business given that where balance sheet -- we were managing the balance sheet below the $50 billion threshold.

Having this flexibly going forward, with the expectation there will be some reform in the foreseeable future, we feel confident that we can continue to grow the book.

We believe that fourth quarter's growth should be greater than the third quarter, and we're positioning ourselves for, let's say, mid-single-digit growth going forward into 2018 and beyond.

At the same time, we have to redeploy our cash proceeds that we have from the transactions.

Now that came off about a 345, 350ish yield that needs to be redeployed.

So as yields start to rise, we will be putting some of this money in investment securities as we managed our portfolio to restore back to normalized levels.

At the current position where we stand today, we're at a 6.25% of securities to total assets, that's the lowest it's been as a public company.

So it's clearly well below what we need to be, so we can easily double that and still be below the industry norm as far as total securities to portfolio.

So Ebrahim, there's plenty of room for us to gain share in our niche.

There's no risk inherent in us growing by billions of dollars.

Had we closed on the last transaction, we would have grown by billions of dollars within our niche by the reallocation of the assets in the transaction.

We have been delayed in the restructuring of our balance sheet, but we are clearly focused on accomplishing that in any event.

Understood.

And Tom, just to your point on the $3.3 billion in cash, can you talk a little bit about the timing of how quickly you expect to deploy that cash, and how much of that probably goes into investments securities?

Or do you have any plans of paying down any of the Federal home loan bank debt in the short run to manage that cash?

Sure, so we have unique flexibility given that we have about $1.4 billion coming due at year-end and about $5 billion coming due next year of liability book that's predominantly home loan bank advances.

So we will evaluate the market conditions in respect to the current market and the redeployment and duration.

At the same time, it's fair to say that we need to start putting this money to work overtime.

The priority would be, as Joe indicated, our loan growth, and we expect to see continued loan growth going into the foreseeable future.

So between loan growth and securities growth, we should be in a redeployment mode as we speak.

Obviously, it's subject to the current yield curve.

The yield curve has opened up a little bit, but it's still been very, very difficult, and we expected the flattening that we saw over the past 3 months.

And just based on that, like what's your best sort of view on the margin from 2.53% this quarter, do we -- do you stay stable, or do we still see pressure as the Fed again raises rates potentially in December?

As you know, we don't give elongated guidance.

I will give some guidance for the quarter.

Our expectations for Q4 '17 is down probably about a $0.05 predominately just because of the reinvestment drag that we still have on the balance sheet and the rate hike that we're forecasting as of 12/15/2017.

I'm not giving forward guidance for '18, but there's obviously a high probability of additional rate hikes that we're modeling as well.

Our next question is from Mark Fitzgibbon from Sandler O'Neill + Partners.

Tom, could you help us think through what a good run rate for operating expenses might be in the fourth quarter with those businesses of mortgage out of there?

This is going to be an exciting time to rightsize the overall P&L going forward.

The mortgage operation inclusive of the FDIC assets that we manage, we estimate about $60 million of expense that we believe we could, I will say, conservatively flesh out in short order.

So with that being said, as you know, Mark, I don't give long-dated guidance, but for the quarter, I feel highly confident that we could be $10 million lower than the previous quarter, which brings us about $152 million.

But that's not a run rate.

There's more work to do in 2018, that's the beginning of our cost savings initiatives by exiting lines of businesses.

At the same time, we are in a belt tightening mode, the margins are still under pressure.

We want to make sure that we manage that portfolio going forward, and our expenses are more towards the historical norms.

We spent a lot of money over the past 6, 7 years on being a SIFI-ready institution.

So we're hoping that between technology efficiencies as well as less consulting fees going forward, we should have a better run rate at a level that's probably lower than the fourth quarter run rate.

So that $152 million number is not -- I would take it even further, lower for next year but we'll update in the quarters ahead.

And Tom, if the SIFI threshold were raised, how much do you think you could sort of reduce operating cost right away, is it another $5 million, $7 million a quarter or something in that neighborhood?

I don't want to be that specific because a lot of this money is in sunk cost, and we feel highly confident that you have to have these expenses that are embedded within the franchise.

But, clearly, on the consulting side, I'd say we spent probably close to now $160 million, $155 million, $160 million in total.

That's a lot sunk cost going forward.

I think we'll be able to be more efficient being able to use the technology aspect of what we built to streamline things.

I don't see additional costs being added as we grow the balance sheet.

Our efficiency ratio is way too high for our business model.

We're a very simplistic business model, we don't have a lot of lines of businesses and/or ancillary products.

So clearly, as we grow the balance sheet and restore our balance sheet growth, we should be able to see significant operating leverage within -- again, if you annualize the $152 million at $300 million, that's $100 million a quarter, $600 million a year, that's probably a conservative number.

So we should be able to drive those costs down further just using the benefits of the sunk cost that we put in place.

And lastly, I wonder if you could just share with us the average rates of a CRE multi-family pipeline?

Yes.

So right now, we're expecting to -- the pipeline that we have currently is -- the current portfolio is around 352, that's all-in multi CRE and the expectation for the pipeline coming in is going to be approximately 360, just under -- 357 that's in the pipeline.

I'd say that's probably an 1/8 tighter than the market, as the spreads starts to widen, and we hope to start getting the benefit of higher rates.

But what's interesting is that the actual bleed of the basis points when you look back on payoffs, it's been relatively neutral so that's a positive signal.

And so with that 1 basis point, when you look at the change.

Our next question is from Ken Zerbe with Morgan Stanley.

Just wanted to go back to the loan growth comments.

I think what it might come down to is sort of expectations versus sort of reality.

And I know when you guys last quarter, you talked about accelerating loan growth in the second half, and you did.

You actually took loan balances up this quarter, but I think it was a bit slower than I may have modeled in.

Tom, I think I heard you say 5, so it was a mid-single-digit growth that sounds like it's slower than kind of in the past where you could potentially get to double-digit growth once you reaccelerated your loan growth.

Is it just -- is those expectations, I guess, the slower growth just a function of the markets?

So, Ken, I would say that we've always grown our loan book historically.

We've been in about 3-, 3.5-year pattern where we were managing our portfolio to stay below the SIFI threshold, and that's been predominantly participation transactions, which we sold over $4 billion of multi-family paper to the marketplace.

So when you take that into account and add that back, we were pretty much, what we call, a high single-digit grower.

But remember, if you look at what transaction volume was within the New York City multi-family CRE space, it's down 42% year-over-year.

The year prior to that, it was down close to 28% to 30%.

So there's been a noticeable decline in activity.

Now obviously, the rate environment has been relatively stable, it hasn't really moved a whole lot.

3% to 3.5% has been the coupon for our principal product.

When you see a change in interest rates, which we haven't seen in a while, that could probably move a lot of activity.

So clearly, if rates start to rise, you'll see significant activity where customers will have to come to the table and get their next financing with the bank.

Ken, there's also a reality at this end of the cycle.

The parties that we compete with in many cases provide too many dollars, and that is obviously the case here today.

When values are extraordinarily high, there is an expectation that people can get more money when they go for a loan.

And as a result, we're seeing other people taking product out of our portfolio.

In other words, not just a matter of the new product that we get, it's also a matter of what we refinanced.

And if the market is providing dollars that we would not provide, there's going to be transition.

So this is a moment in time when the marketplace is being aggressive with dollars, not with rates, with dollars.

And as a result, there are people that are taking that opportunity and taking those dollars.

No question, when the market evolves to an adjustment, we, in fact, win big.

But we're in a period of time when there is some transition to the higher dollar availability the market is providing.

Got it.

And did you guys participate out any of your loans this quarter?

It was an insignificant amount, $30-some-odd million, very small.

The goal here is to grow the (inaudible).

I mean, you'll see the growth, as I said, in the previous calls, we'll have slight growth in the end of Q3, restore our growth in Q4 and then focus on '18 with more normalized growth for the company.

And looking at the current regulatory landscape, we feel that there's been some real positive momentum on the $50 billion threshold.

And we're not talking about going backwards, we're moving past that number.

So we're hopeful that there'll be some changes there.

At the same time, we have the flexibility on the balance sheet so we can grow this quarter $6 billion, so that's $5.9 billion, and not trip over.

So even putting on $2 billion a quarter, which is, I'm not saying that's our number, just statistically for the next 3 quarters, we still won't trip over.

We'll be -- it'll be mid-'18 before that happens.

So we have a lot of flexibility to show good loan growth without being a designated too big to fail under the SIFI designation.

Understood.

And then just last question on taxi, some of the other banks that have large taxi portfolios have put the entire portfolio on nonaccrual status.

Is there any reason that yours would perform different or that you chose not to put on nonaccrual this quarter?

Yes.

So Ken, we looked at the taxi, obviously, there's a lot of transaction activity this quarter.

We look at it every quarter.

We believe that we took a sizable adjustment to the portfolio, we brought it down to a level south of $300,000.

I think our all-in cost is $291,000-ish for a collateral valuation, disposition is probably like $280,000-ish, $277,000.

So that, we believe, is a number that is probably lower than most within the industry, and we're not the largest player in the industry, it's about $100 million book that we have.

Now going forward here, a lot of our customers are still paying.

We're hearing that there's financing out there, that there's good financing out there and people want to be in this business, a return to be made at these levels.

And at these levels, we may be able to start moving some of the assets that we have and other assets.

We have about $6 million, $7 million that we've taken in on repossession that we now can probably release readily down the road.

So I think this level seems like we're getting closer to the bottom, there's no guarantee, but we took a very focused view given the activity within the past few months and this is a level that we feel more positive about moving some of these assets off the book.

There's no question, the vast majority of our portfolio is performing at a much higher level.

So the cash flows that allow for the payments to be made, in fact, are at significantly higher levels than these adjustments are.

Our next question is from Collyn Gilbert with KBW.

Just a question on the pipeline.

So I know you guys have indicated obviously it's at $2.1 billion this quarter.

Now without the noise of selling loans, resi is out, where do you think the pull-through rate -- really kind of a normalized pull-through rate is on your pipeline as we start to look forward?

Look, Collyn, you've known us for a long time.

What we announced in our pipeline, we usually close north of that number.

So obviously, if you look historically, that's the current pipeline as we present to the public our numbers, but typically, it's a fourth quarter, fourth quarters are very active.

So we hope that we see stronger loan growth.

Based on what the pipeline report is, it's a very strong pipeline.

As Mr. Ficalora indicated, it's the highest pipeline we've had since 2 years.

So it's moving in the right direction, but it's fourth quarter, and fourth quarter typically is the most active quarter for the company.

Okay, okay.

And then just kind of going back to the growth outlook and tying that into your NIM outlook, Tom.

It sounded like you're delivering a message of caution as to what the NIM might do next year.

And, I guess I'm surprised by that, given the flexibility that you have here in the mix shift.

Now recognizing again, it sounds like your guidance on the loan growth is a lot lower than what we would have needed to have achieved to really deploy and kind of cause a neutral earnings effect of everything that you've done on these balance sheet changes.

I mean, I think that was I think where we all were kind of assuming that, at a minimum, the mix shift would help to offset kind of all the other pressures but it sounds like that's not going to happen now.

Collyn, I guess some of the thought process here is that obviously the back end of the curve hasn't moved a whole, and we're just starting to see some benefits there.

If you have, let's say, short-term movements on the front end and the back end starts to follow in a parallel shift, these numbers will change dramatically because we will be able to deploy our loan book and our securities portfolio at much higher yields.

So what we've seen in the past multiple years is that we're running between 3.25%, 3.5%, and that hits 4%, things change dramatically both for the bank as well as the customer's sentiment on refinancing.

So clearly, where we are today, we're just seeing some technical movements towards the 10-year treasury that's actually showing possibly higher rates.

That will be good for us, because obviously, we've taken a lot of pain in the short end, and we have rate hikes expected next year, we have one coming in our model, 12/15 in the next -- at the Fed meeting in December.

So I think we can easily manage that.

The question is how much more going forward, and what's the impact in the back end of the curve, is it a parallel shift, that will be a game-changer for our company, because we do land between the 5-year and the 10-year.

I guess just simplistically, though, just thinking about the fact of where you've got $3 billion-or-so sitting in cash, earning just over 1%, like regardless of where new loan originations are coming or what the curve -- I mean, just the reinvestment of that cash alone should suggest, I would think, NIM accretion next year?

I'm not going to (inaudible) next year.

And I think that's a good assumption but the impact of everything is what we factored.

But, again, timing of the reinvestment, we can put it out tomorrow at south of 3% or later, month or 2, and north of 3%, which would be better for the long-term value of the company.

So we're being very cautious.

We have a very strong loan pipeline that we're going into Q4.

We're hopeful for some good growth next year.

We have liquidity.

We like to put into our core product.

At the same time, we're acknowledging that we have to build the portfolio -- the securities portfolio.

We can't manage it at 6.25%, it's too low.

We have -- we can easily deploy this into LCR assets, that will be eligible, either we're non-SIFI or SIFI, that will have much higher yield than 125.

So we're being very cautious and we expect to when we deploy that, but you'd expect to see growth partially from securities growth as well as loan growth.

Collyn, there's no escaping the fact that restructuring our balance sheet by transaction is a proven overwhelmingly positive consequence to the balance sheet and the earnings of a company and we have not had the benefit of doing that literally since the end of '09.

That's a long time ago.

And we were literally structured for that to occur during last year.

We didn't get to do that.

So I think the important thing here is that our model is not broken, it's just been delayed dramatically, and we'll be in a place that we should be able to enjoy, if you will, the normal attributes of our business model in the period ahead.

Okay.

And then just tying that to the dividend, right, obviously, that's such an important part of the whole -- the story here for you all, okay.

So if we look at what could be settling out now at a lower earnings rate for next year, I mean, how are you thinking about the pressure that might put on the payout ratio?

And just how you're thinking about the dividend in general, maybe if you could sort of address that?

I think the important thing is that we have every expectation that our structuring and the way we perform will ensure that the dividend is a high point and a target that we, in fact, will constantly manage towards.

So we are already defined as one of the strongest dividend payers in the country and expect to continue to be so.

And, Collyn, I would just add to that, our capital levels here, if you look at the comps, we're above the comps right now in our peer group, and we're looking at a risk base of total capital as of 9/30, north of 14%, leverage capital approaching -- almost approaching 10%.

So we haven't grown in a while, so obviously that's part of the reason having this capital, but we believe we have the capital to grow and as we grow, earnings will improve.

As indicated in my previous commentary, expense reduction is going to be very real.

The mortgage banking operations would be -- covered portfolio is going to be a meaningful drop as well as other operating efficiency that we're identifying for '18.

So you're going to have reinvestment benefit, and you're going to have operating levers that we should be able to pull those triggers going into '18, which will help us continue to see earnings improvement overtime, which will solidify our ability to pay out dividend.

Okay, okay.

One just housekeeping question.

What occupancy expense on a linked-quarter basis was up from 23 to 25, just curious about that?

Was there something in the second quarter that caused that to be lower than it should have been?

My guess, I would say, mostly a higher depreciation given that we're reallocating resource into our Hicksville location, we have another headquarters here in Hicksville, so that's being utilized.

We have more PP&E, that was put in there, so we brought notes from expenses there on the depreciation side.

But (inaudible) the deal.

The deal (inaudible) yes.

I think again, my guidance on the expenses was 163, we came in at 161, so slightly better than I forecasted last quarter.

And my guess for -- not my guess, my estimates for Q4 '17 will be around 151 to 152 range, so down $10 million quarter-over-quarter.

And that's the beginning of our cost reduction predominantly driven off of the exit of the mortgage businesses.

Our next question is from Dave Rochester with Deutsche Bank.

Just on the expense front.

How much more spending do you guys think you need to do for SIFI prep next year?

Yes.

The good news there is that I think we spent quite a bit of dollars, David.

So again, I don't envision substantial cost here.

If anything, I'm hopeful for the operating leverage that we'll get from the amount of money we have spent as we move forward.

Again, I don't anticipate being a SIFI institution given the flexibility that we have.

It's possible that we'll be forced to be a SIFI institution.

If nothing happens, we have some other plans that we're evaluating to offset that.

But clearly, a lot that's been driven by the regulatory process.

But, clearly, as a SIFI institution -- if you were to be a SIFI institution, it's going to be not a substantial amount from here, but our goal is not to be a SIFI institution.

Clearly, the holding company structure there is a possibility of dissolving.

These other banks have been operating well above $50 billion that are not designated as SIFI.

AIG is no longer a SIFI.

So we don't we feel that we should be a SIFI institution.

So I think the way that I think the current political landscape is shaping up here, we're hopeful that $50 billion line in the sand will hopefully disappear.

If not, we believe we have some other levers that we think we can pull to operate like other institutions within our marketplace that are above $50 billion that are not designated as a SIFI institution.

Yes.

I think it's important to recognize that everyone of relevance in government has indicated that the $50 billion trigger is wrong.

So the majority of the house, the regulators themselves, they've all said this.

The vote in the Senate has been divided on party lines, and even the people in the Senate that are advocating that this be changed are, in fact, in the Democratic Party.

So I think it's very optimistic that there will be a positive change in the period ahead.

So it sounds like maybe you can sort of put that spending on hold for now, is that kind of the plan and maybe you can exercise...

Dave, I don't think it's on hold.

I think we've absorbed so much -- we were in the midst of crossing over with the Astoria transaction.

We had to spend the dollar and we were very comfortable spending the dollars because we want to get operating leverage as we grow the balance sheet through consolidation and continue the consolidation.

With that being said, the deal didn't close and we had the expenses, so now it's time for operating leverage.

And operating leverage will come as we grow the balance sheet and the expenses will be lower going forward.

So I gave you some guidance based on the quarterly outlook for the fourth quarter, we should get more savings in 2018.

Going back to my statement, reinvestment on the excess liquidity we have on the exit of the FDIC assets and other assets, and then you have the ability to see operating leverage, because we're growing the balance sheet and expenses should not grow in connection with the balance sheet.

Yes, okay.

And I'm just curious, would you be LTR compliant today with all the extra cash you have in the balance sheet right now?

We are.

We are.

We are LTR compliant if we were to be a SIFI institution.

Yes, okay.

And I know, Tom, you talked about the December hike in your model.

How many more rate hikes are you factoring in for next year?

And what are you guys expecting could be the impact of that hike in December on the NIM?

So Dave, you're trying to back me into giving you public guidance, but I'm not going to give the guidance.

I will tell you that ...

You didn't think you'd -- We'd recognize that, right, Dave?

But I will tell you, we're a simplistic business model.

We're predominantly a single-line business, multi-family CRE, and you can see where the spreads are.

We follow the Bloomberg consensus curve.

So as that curve changes, we adjust our modeling on a monthly basis.

So we're forecasting Bloomberg consensus.

Okay.

And just one last one real quick.

How much cash do you think you'll earmark for borrowing paydown versus investment in earnings assets just over the next year?

Yes, it's all going to be dependent on the marketplace.

We have about $1.4 billion coming due at 12/31, about another $5 billion coming due throughout 2018, so we have flexibility paying down versus spending.

So we want to make sure we manage within our Board-established limits and guidelines.

And that's the mandate, and obviously, depending on market conditions, we have some flexibility there, but clearly, it's depending on the shape of the curve.

If the curve happens to stay flat, we may decide to -- opt to go much longer.

If the curve starts to steepen dramatically, we may shorten up our liability exposure.

It all depends on the shape of the curve, Dave.

And obviously, we have a lot of money coming due, so we can make those decisions as we move along.

Our next question is from Erik Zwick with Stephens.

First maybe just another quick follow up on the fourth quarter expense guide.

Would most of that $10 million improvement come in the comp and benefits line or are there other categories that you would expect to show -- to move lower as well?

I'd say, mostly in that area, sure.

I mean, I think, overall, we'd be down in most of the categories, but the vast majority will be driven off comp costs.

Got it.

And then on deposits, the balances were flat quarter-over-quarter and you noted the mix shift taking place.

Maybe a two-part question.

One, what's driving the shift, is it pricing changes on your end or customer preference.

And then what are your expectations for deposits growth going forward?

So again, we have a lot of wholesale liabilities.

We moved some wholesale into retail at around the same cost.

So as some wholesale liabilities came due, we were out there in the CD market taking in our customer retail deposit, so it was really a wash.

We had some nice growth in retail, but we just had some wholesale lead the institution.

Got it.

And your expectations for deposit growth going forward?

I mean, obviously, depending on the growth of the balance sheet, we'd love to fund it with deposit growth.

So clearly, we don't have a deal pending.

The Astoria deal did not close.

Hate to repeat that, but that's the fact.

And the reality is that we would like to bring in funding from the retail franchise.

So depending on market conditions and utilization of our funding, we would like to fund with retail deposits.

Our next question is from Steve Moss with FBR.

I was wondering, following up on that last commentary there, what are your thoughts on the potential for a bank acquisition within the next 12 months?

Well, I'd say that the marketplace is rich with opportunity.

There needs to be a serious effort to try and define the circumstances under which we specifically would execute on a transaction.

I would say to you that there's no expectation that we have that we would execute on a very large transaction with our currency as weak as it is.

Our currency has never been this weak on a relative basis.

So in some ways, we're running a sale on our currency.

The reality is a small deal will greatly enhance our currency so that we could do a big deal.

So I think the likelihood for the period ahead is that we choose a very well situated smaller bank, execute on that deal, get the benefit from that deal and then execute on a larger deal.

And the exact timing of that is uncertain, but it is something that is clearly on the horizon.

Okay, that's helpful.

And then just wondering in isolation, does each -- is the impact from each Fed hike continue to be about 5 to 7 basis points to the margin?

It really is dependent and then, obviously, we have a lot of liquidity right now so we're getting some benefit of higher yields, so that's going to offset that $3 billion of the portfolio will have a bump if we keep it in cash.

The goal is not to keep it in cash.

But I would say it's between, I'd say, for this quarter, going forward, 3 to 4 basis points, that would be driven (inaudible) for future rate hike between 3 to 4 basis points.

Last year was more material.

We moved some liabilities longer so they're not as impacted.

Some of our wholesale liabilities now are more retail-driven, so they're not as impacted.

Obviously, the wholesale is instantaneous.

Retail, you have the ability to manage your customer base, so I'd say about 3 to 4 basis points.

Okay.

And then the $5 billion in FHLB borrowings coming due next year, is that towards the back part of the year or is that early on?

It's throughout the entirety, I would say, ratably.

The big slump with $1.4 billion coming at the end of this quarter, yes, about $1.4 billion, coming at the end of the quarter, '18 throughout the entire year.

Cost of that is around 160-ish on average.

And a lot of those liabilities are from our restructuring we did going into the Astoria transaction a few years back, so those are now coming due.

Our next question is from Christopher Marinac with FIG Partners.

Just wanted to follow up on deposit beta.

Tom, I know you covered a little bit of this on the previous questions, but are you thinking of a certain deposit beta these next several quarters and, in general, does the business model permit that beta, does it cause the deposit beta to inherently be high?

So we're very simplistic on the retail side.

We're predominantly the thrift model.

We don't have the commercial banking type deposit liability that we're gathering in the marketplace.

We do not pay people in the market to bring in liabilities.

We take it through the retail franchise.

We will probably be more ambitious in that front on shifting from wholesale to retail.

We have some significant liabilities that are considered wholesale that we can move into retail so they're going to be more stickier-type funding.

So if that's the case, the impact of rising rates will be less impactful because you're bringing in customers versus going to the wholesale markets.

So traditionally, as we have a rising rate environment, we tend to have more CDs, and that's pretty much the product mix that we're doing right now.

There is a shift and a push from our lenders to go out to large customers and gather deposits.

That's been somewhat successful, I think there's a lot of low-lying fruit that we can do a better job in, we've been talking about that for years.

But, clearly, we do not have enough of the wealthy customer base that has these substantial real estate assets or all their liabilities.

Now that's where I think there's some low-lying fruit that we can work on.

To what extent do the branches then become more critical for you in terms of also perhaps buying some branches from a potential small acquisition, as Joe alluded to.

Clearly, if that came to the market, we look at everything.

If there's across the river opportunity on funding side, of course, we're going to look at it.

One of the benefits we have is we have a lot of wholesale financing that could easily change dramatically to any type of transaction we do, either a depository transaction or an M&A transaction.

You can save probably close to 100 basis points just by taking a more stable core deposit by offsetting the wholesale liabilities.

That's really a potential benefit that would happen on any business combination, and that was one of the substantial attributes we'd have on our previous transaction with Astoria that did not close, there was significant benefit there to shift the wholesale to retail.

I think it's a proven fact, for decades, we have not acquired branches, we've acquired banks, and we get branches in the acquisition of the banks.

So in our model, the way we approach doing a deal, a very important component of what makes one choice better than the next is what are we getting in franchise.

And lo and behold, there are plenty of opportunities to actually enhance our franchise by acquisition.

Our next question is by Steven Alexopoulos with JPMorgan.

Tom, it sounds like you plan to remain relatively patient in terms of deploying the excess cash.

Can you help us think about what's reasonable in terms of the fourth quarter that you might add to the securities portfolio out of the $2 billion?

So, Stephen, we're not patient given that we just exited the loss share, it was not that long ago.

So the timing of that, it's pretty fresh.

So we want to look at the environment.

Our goal is to put it out in our core product, and we said publicly that we're going to resume our growth in our core business.

We're not selling assets anymore, we're retaining the portfolio.

That's the best avenue.

At the same time, we have to restore a reasonable level of securities that makes sense to run the institution.

We just -- we can't sit on all this cash.

We're going to deploy in some form of securities.

We're being very cautious given the shape of the yield curve.

If that happens to change to our advantage, we will be more active.

In any way, we're going to put some money to work in the short term, but the reality would be, tell me where the 10-year would be and we'd have more enthusiasm towards deploying the cash faster.

It's been a very interesting environment with the flattening of the curve.

So if does that change, we'd be more aggressive in putting money to work.

But Tom, to the degree you do put some more cash to work here, what yield and duration of securities are you looking at?

Again, depending on the qualification of securities, depending on our expectations of HQLA1 versus HQLA2, they're all going to be government bonds.

The question is do we go long within the curve or we keep it relatively short and keep it -- that has some adjustment feature to it.

So we're evaluating that.

I think that sub-3% is something that is not as attractive, so we've been reluctant to redeploy.

Sitting at 125 with that money going to 150 by December and waiting a little bit is not the end of the world.

But sub-3%, in my opinion, long-duration, is just we'd rather put the money to work in our loan book.

At the same time, we acknowledge we want to build the securities portfolio, but we're being very, as you said, patient.

Yes, yes.

And in terms of the comments around you can add $5 billion plus of assets and not trip the SIFI threshold, given you're already $48.6 billion, can you walk me through, I mean, I don't know I'm sure what time line you're talking about, how you could add such a significant level of assets and not cross the SIFI threshold.

So again, this is just really simple math.

Go back to my last 4 reported balance sheet numbers and divide that by 4, that comes out to an average of $48.6 billion.

In order to be over $50 billion, you'd have to put on $5.9 billion to trip over that average so in the next quarter.

So let's assume this quarter -- in the fourth quarter, we put on $5.9 billion.

As of 12/31, we'd be designated SIFI.

So again, I don't envision putting on $5.9 billion in the fourth quarter, but you could put on $2 billion a quarter for the next 3 quarters and you trip over in mid-2018.

We can put on $600 million for the next 6 quarters and not trip over until the end of '18, so we have some flexibility.

I mean, obviously, the securities deployment will impact that but again, depending on loan growth.

So we like to restore the loan growth next year back to our historical norms, which should be high single digits.

Market's a little bit softer than what we've seen because of this transactional activity but, clearly, being a high single-digit net loan grower, which is not uncommon for us.

And that -- so I think we have flexibility under the current balance sheet look back on the fourth quarter average to grow the portfolio and not trip over the SIFI threshold.

And just a final question, Joe, I know you're fairly plugged into Washington.

What are you hearing in terms of that $50 billion SIFI threshold, is there anything we should expect over the near...

Yes.

I think the good news is that there are people that are very, very high in the decision chain that have made it very clear that, that number is going to be changed, and that their expectations, I guess, [Hakone] said in an open meaning that I was at in Chicago last week, that the number was going to begin with a 2. So that's $200 billion, $250 billion, $275 billion.

The reality is that there is wide expectation that there will be change and that, that change is imminent.

And I think there's good reason to believe that the administrative changes in the consequence of reaching a plateau has also been discussed very openly and candidly by Tarullo for a period of 2 years before he departed, that there needs to be recognition, that there should not be serious consequences driven by size.

It should be driven by individual bank analysis that determines change in risk.

So we're a classic example of a bank that is significantly bigger today and having the same risk structure as we had when we were $1 billion in size.

So I think that there is good reason to believe that in the period ahead, and it's hard to know exactly when, in the period ahead, there will be changes, and those changes will all be beneficial to a bank such as ours.

Our next question is from Matthew Breese with Piper Jaffray.

Just wanted to go to the securities portfolio.

Obviously, a lot of them are between the 6% of assets today and even the low end of peers at 12%.

So I just wanted to get a sense for longer term perhaps at the point at which you do cross $50 billion, where do you envision that ratio being?

How big do you want that portfolio to be?

As you know, there is different consequences, and we expect to modify LCR versus LCR.

Being a SIFI institution, we would be subject to the LCR requirements.

Being a non-SIFI, we'd have a different perspective toward defining LCR, which should add more flexibility.

So clearly, it's fair to say that we would easily double the portfolio from here and still be slightly light in respect to the industry peer.

And recall, part of our downsizing strategy was to reduce some securities portfolio just from the payoff that happened.

We've had substantial cull that happened over the past few years.

So it helped us -- assist us in managing the SIFI threshold, as we were trying to get clarity on when -- would we foresee any changes and focus on our acquisition strategy.

So clearly, it's the lowest it's ever been.

It's not going to be much lower from here, and it needs to starts to be more normalized and doubling it 6% to 12%.

So doubling is clearly something that's reasonable and still probably below the industry norm.

But I think the important thing to recognize is that in the risk profile of the bank, the securities portfolio is deemed to be a stabilizing factor.

In our circumstance, there's no escaping the fact that we have better performing assets than securities.

Securities are vulnerable to rate change, and they could be changed in value dramatically.

As a result of rate change, we, in fact, have very stable assets that perform extraordinarily well for a period of 3 years.

That's short and that's, in fact, very, very desirable.

So I think that the needs of other banks' balance sheets, which have higher risk profiles are different than the needs of a bank that's structured such as we.

In fact, one of the points that was made by Tarullo, as big as we are, we are basically structured the same as we were when we were $1 billion in size.

So the reality is that we have a unique balance sheet and therefore, the numbers that are present in the bank that has high-risk assets offset by securities is different than the profile of our institution.

So Matt, just to follow up on that, if we were to be in the market, it'd be all government securities, with a focus on liquidity mandates based on regulatory expectations.

Understood.

And then just thinking about the cash a little bit, regardless of if the cash goes into securities or loans or to pay out borrowings, over what time frame do you envision using those proceeds for 1 of those 3 things?

Seems somewhat of a repetitive comment.

We're going to be very proactive.

Our goal is to put into loan growth.

Depending on the shape of the curve, if the curve steepens dramatically, we'll be more active.

We have some flexibility here and as you got off the last question, we're being patient.

We prefer to have a nice growing loan book.

We'd like to go back to our high single-digit net loan growth, so we want to have some liquidity to have to do that as well.

We'll be in the deposit market to fund that as well in 2018.

In the meantime, we have a little flush of liquidity right now.

And if the rates would, let's say, spike in back half, we may accelerate the purchases, and we may -- and if there is a spike in interest rate, you will see activity on the multi-family CRE side very aggressively.

So we'll have an influx of activity to deal within our managing our portfolio, but we haven't seen that.

So it's been relatively a 3.25%, 3.5% 5-year offering from our product mix.

And until that really moves precipitously higher, activity will begin.

So it's been, as we talked about, the overall volume within the marketplace.

It's been a very down-volume market for activity within the commercial real estate space in New York City.

We're not putting on construction loans, we're conservative.

Our portfolio is performing fabulous, as we talked about lack of any delinquencies in the portfolio.

It's a matter of activity has slowed down dramatically within the space.

Right, right.

And then the ten-year has seen some movement recently, from September to today, it's up quite a bit.

Have you seen any corresponding movement in the multi-family yields or spread?

I'd say within an aggregate view of the market, spreads have tightened, right?

So if you look at security yields and where they were in the beginning of September to where they are right now, spreads have tightened materially.

So there's a lot of money chasing these yields, and as the back end of the curve has risen, it's not a basis point to basis point benefit.

There's been a tightening going on which is -- that's not unusual, not unexpected, but we hope to see that at least consistent with, let's say, a spread that stays at the current level and when the rates goes up, you get the benefit of higher yields.

So I'd say maybe an 1/8 movement on the multi-family side is not material because of the tightening within the marketplace.

Security yields haven't moved a whole lot even though the 10-year has broken 240.

Understood.

And then just on the other side, trending -- deposit trends have been higher, the cost of deposits have been higher.

As we think about that incremental cost of funds, do you think this kind of pace of increase is what we should be expecting in at least...

No, I think the marketplace has the December rate hike within its deposit market, and there's an expectation that the Fed is going to do something in December.

And I think the marketplace that's offered within our competition is the market.

I think there's a built-in raise as of December within the deposit funding mix through our type of competition, which is traditionally the thrift model.

So that's -- if there is going to be a rate move in December, I don't think we can have another bump up in the funding side.

I think everyone's within that 120-to-150-type range within 1 year of deposits that are in at the retail franchise.

I think that's kind of indicative of where our Fed funds will be at year-end.

Our next question is from William Wallace with Raymond James.

I'm sorry to beat a dead horse, but to the prior analyst question, on the slight move in the curve over the past month, I'm curious if you've invested proceeds into the securities portfolio so far in October?

Yes, we have not.

We've been very cautious, I think, as I said to Mr. Steven from JPMorgan, that we've been patient, we're going to be patient.

We were encouraged by the current marketplace.

That continues, we may be more active, but clearly, we've been extremely patient.

Okay.

And the 5 basis point compression in margin guidance for the quarter, does that consider any investment under the current curve or does that consider that you remain patient for this quarter?

Remaining patient with the expectation of loan growth.

So obviously, (inaudible) we can offset some of that margin pressure.

And that may happen.

As we see rates spike, we may be more active.

Right, perfect.

So there's potential for upside if the curve continues to steepen?

We attempted to be conservative, that was the intent.

Understood.

Tom, I believe you said early on in the Q&A that you thought there was about $60 million of expense that you might be able to get out of the system related to the moves you've made over the past 2 quarters, is that right?

Yes, that's a conservative estimate, again, running off of $10 million linked quarter drop, you annualize that, that's $40 million for next year, add another $20 million, which is still, we believe, conservative.

So we're going to be very active on managing our bottom line.

Obviously, we spent a lot of money over the past 5 or 6 years, and as indicated, getting into almost a SIFI transaction, we spent a substantial amount of dollars to be SIFI-ready as we were ready to cross.

We didn't cross.

The deal didn't happen, but we spent the money, we believe we'll get some benefits of that, a substantial reduction in consulting, lot of the risk management practice that we've established are in-place going forward, it should be good operating leverage for what we spent in previous years.

Right.

But the $60 million -- so the additional $20 million, that's outside of a change in the SIFI barrier, is that correct?

Yes, that's assuming business as usual.

But by the way, Wallace, business as usual is that we could be a SIFI bank, but the rules haven't changed, so we still have to prepare for that, right?

But we're hopeful that, that will be -- again going back to my commentary, (inaudible) de-designated AIG and we're talking about being a SIFI.

So hopefully, there'll be rational thinking going forward, and we'll be able to be at least be identified as who we are, and if not, we can have the opportunity to look at other alternatives, as other institutions that are north of $50 billion that are not designated SIFI be given the corporate structure itself.

We're a bank holding company.

That's why we're designated potentially as a SIFI.

Do we have to stay as a bank holding company?

That's something that we have to -- as an option going forward.

Right.

And just so to think about kind of the $20 million difference, is that something you think you could get out pretty early in '18?

That's the goal.

Right.

And then, just one last question.

Going back to my point, operating leverage, lower expenses, reinvestment opportunity, growing the balance sheet.

All that's within our grasp.

And then just for clarity, Tom, did I hear you say, your taxi portfolio is now carried at about $290,000 per medallion?

Yes, so our collateral value that we looked at given the September activity and (inaudible) activity and some large (inaudible) a few transactions, we took it down to a collateral value of $291,000 and when you look, less disposition cost to sell, we're about 272.

So we think we're in a good place there.

I'm not saying right or wrong, people have higher values.

We're not a major player in this business.

It's $100 million book on a $48 billion balance sheet, so we think we have some flexibility there south of $300,000.

And our last question is a follow-up question from Collyn Gilbert with KBW.

I'm just trying to -- all right, so, Tom, just back to your point on the pipeline and the pull-through rate, I'm just struggling to connect that with your mid-single-digit loan growth.

So I mean the $2 billion pull-through, like how does that fold in over time, does that take a couple of quarters to come in?

Again, we've always closed our pipeline, I don't think we have ever not closed our pipeline.

But Collyn, there are (inaudible) loans that are paying off, we have loans that we don't retain every loan.

In the past few quarters, it's been a 50-50 split between retention versus what stays, what goes away (inaudible).

As Joe indicated, there's an aggressive lending going on in the New York City market, we're a conservative lender.

So with that being said, we'll pull through the pipeline, and we've always pulled our pipeline through, in essence, we've always exceeded that.

So we have our own internal growth expectations, the portfolio yield that's coming on is about 357.

The average portfolio that we have within the book right now is 352.

So the good news that the loans coming on are higher than the current coupon.

We like to see that closer to 4. And the bleed that we've seen between originations and payoffs, the actual spread change has been very, very favorable.

Right now, it's 4 basis points, when you look at the change between originations and payoff.

So it used to be 100 basis points in previous years.

So that's coming down to neutrality, so we're hopeful there.

Again, what we need to see is higher rates and higher rates will move the customers to do more business and rates have really not moved within our product mix, but our portfolio yield has come down within the markets, so we're at the market right now.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

I would like to turn the call back over to management for closing remarks.

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 January, when we will discuss our performance for the 3 months ended December 31, 2017.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.