Flagstar Financial Inc (NYCB) 2017 Q4 法說會逐字稿

Good morning, and thank you all for joining the management team of New York Community Bancorp for its fourth quarter 2017 conference call.

Today's discussion of the company's fourth quarter and full year 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 the company's Chief Accounting Officer, John Pinto.

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 these 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 September 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 performance before opening the line for Q&A.

Mr. Ficalora, please go ahead.

Thank you, Melissa, and thank you all for joining us this morning as we discuss our fourth quarter and full year 2017 performance.

Earlier today, we reported diluted earnings per common share of $0.26 for the 3 months ended December 31, 2017, up 24% compared to the prior quarter and up 13% compared to the year-ago quarter.

For the full year, the company reported diluted earnings per common share of $0.90, down 11% from the $1.01 reported for the full year 2016.

For the current quarter, this translates into a return on average assets of 1.13% and a return on average common stockholders' equity of 8.21%.

For the full year, the comparable numbers are 0.96% and 7.12%.

On a tangible basis, the return on average tangible assets for the quarter was 1.19% and our return on average tangible common stockholders' equity was 13.45%.

For the full year, the comparable numbers were 1.01% and 11.72%.

We also announced that the Board of Directors declared a $0.17 per common share dividend for the quarter.

The dividend will be paid on February 27 to common shareholders of record as of February 13.

Based on last night's closing price, our dividend translates into an annualized yield of 4.9%.

Now turning to the highlights of the quarter.

The company's fourth quarter performance was built on the performance we achieved in the third quarter of the year and is noteworthy in several ways, including: our strong loan growth; a stable net interest margin; lower operating expenses; and pristine credit quality.

First, on the lending front.

We originated $3.1 billion of loans held for investment during the quarter.

That's up 34% from the previous quarter and 52% from the year-ago quarter.

Our multifamily originations jumped 42% compared to the prior quarter and 76% from the year-ago quarter.

Commercial real estate originations also rose, increasing 39% and 21%, respectively, from the prior quarter and the year-ago quarter.

The strong origination volumes translated into high single-digit annualized loan growth of 9%.

Total loans held for investment increased to $38.4 billion, up $882 million from the prior quarter and $1 billion from the year-end 2016.

The main engine of this growth continues to be in our core multifamily portfolio.

As we have previously discussed, multifamily loans grew at an annualized rate of 4% in the third quarter and then grew by an even greater amount in the fourth quarter, increasing at an annualized rate of 14% or $930 million to $28.1 billion.

Importantly, as you can see by the various metrics in our press release, our underwriting has not changed.

We continue to lend, as we always have, both prudently and conservatively.

Our pipeline currently stands at $2.3 billion, including $1.6 billion of multifamily loans and $290 million of CRE loans.

This is up about $200 million from our pipeline last quarter, which at the time was the highest in 2 years.

The pipeline gives us comfort about continued loan growth in the quarters ahead.

Given where we stood at the end of the year, the company has the capacity to grow its balance sheet by approximately $5 billion without crossing over the $50 billion SIFI threshold based on the fourth quarter trailing average of our total assets.

This gives us ample room to grow the balance sheet over the course of the year as we wait for regulatory reform to pass and the SIFI threshold to be lifted.

Importantly, after 3 years of not growing the balance sheet, we're currently well positioned to resume our organic balance sheet growth.

Second, the net interest margin came in at 2.48% in the current quarter, down 5 basis points sequentially.

Excluding the 11 basis point contribution from prepayment income, the net interest margin would have been 2.37%, stable with the third quarter level and better than management's expectations.

Moreover, with market interest rates trending higher, we are seeing current coupons in our traditional 5-year multifamily product of 3.75% compared to portfolio yield of 3.42%.

While deposits and wholesale borrowings rose modestly, on a sequential basis, the majority of the growth during the fourth quarter was funded by cash, which was provided by the proceeds from the sale of our covered loan portfolio and mortgage banking operations.

We will continue to primarily utilize this cash to fund our loan and securities growth this year.

Third, on the expense side.

Our total noninterest expense has declined $14 million or 8% from the prior quarter's level and $22 million from the year earlier quarter.

This was also ahead of management's expectations.

The decline was primarily attributable to lower compensation and benefits expense given the sale of our mortgage banking operations in the third quarter.

Moreover, as anticipated, we also experienced a drop in G&A expense on both the linked quarter and the year-over-year basis.

Our efficiency ratio for the fourth quarter was 50% compared to 42% in the prior quarter.

Excluding the $82 million gain on sale of our covered loans and mortgage banking operations, our third quarter 2017 efficiency ratio would have been approximately 53%.

On that basis, our efficiency ratio improved by 300 basis points during the fourth quarter.

We believe that in 2018, it will be opportunities to drive operating leverage as we continue to grow the balance sheet and further reduce our overall level of noninterest expenses.

Our credit quality metrics remain solid and continue to rank among the best in the industry.

For the fourth quarter, net charge-offs were a mere 0.01% of average loans.

For the full year, excluding the charge-offs we took for taxi medallion related loans, we would have reported net charge-offs of less than 1 basis point for all of 2017.

On the income tax front, our income tax rate for the fourth quarter was about 6%, due to onetime net tax benefits of $42 million arising from the Tax Cuts and Jobs Act.

This included the remeasurement of our deferred tax liability using a lower federal tax rate.

In 2018, we expect that our effective tax rate will be about 26.5%.

Finally, on the regulatory front, we remain guardedly optimistic by what is coming out of Washington since last quarter and are encouraged by the progress which has been made on regulatory reform and the SIFI threshold.

We believe that in the current form, the potential changes will be a positive for both New York Community and the banking 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 Instructions) Our first question comes from the line of Ebrahim Poonawala with Bank of America Merrill Lynch.

So I was wondering if you could just start on expenses, Joe.

So you mentioned the opportunity for positive operating leverage in '18.

When we look at the $149 million expense run rate for fourth quarter [to onlay], if you can tell us in terms of where you see that going into 1Q and beyond that, where do the expense savings could come from and where that number could actually be headed by the end of '18?

So I would say that, obviously, Q1 is typically a high point for the typical calendar year, so I would guide for Q1 at about $145 million, so downward for Q4 considerably and, obviously, this being the high point in Q1, we expect to see further reduction throughout 2018.

So it's fair to say that 2018 versus '17, you'll see a significant expense reduction.

If you look at where the high point was for the company, it was about $660 million run rate.

That was the high point.

We estimated that we can -- we be guided a couple of quarters ago, down $60 million for mortgage banking.

That number is close to $100 million now, when you look at the high point of $661 million versus the potential of a much lower run rate going into 2018 and beyond.

That gives us the target for the efficiency ratio should be back to the mid-40s.

So somewhere between 45 to 46 by the end of '18, we should end up as far as the efficiency ratio.

Excellent.

So all right, so the $660 million minus $100 million gets you about $560 million annual run rate?

Look, for the quarter our specific guidance for Q1 is about $145 million, so down for Q4, but bear in mind Q1 is simply the high point of the year given payroll taxes and the like.

Understood.

And separately, just in terms of the core margin held up, we saw some outflow of loan interest-bearing deposits at the end of the year, not sure if that was some seasonal or tax-change related.

But as you think about the margin for first quarter and next year term, I would love to get your thoughts there and if you can give us sort of a sense of what's the debt maturity coming up over the next few quarters?

So we had some shuffling given the mortgage banking operation.

We had settled up with our partners, and we expect to escrow and the like, so that has an impact towards the movement of various deposit balances, but we are going to be in the market for deposits in 2018.

But that being said, as you can see, we do have some term liabilities that have to reprice.

We estimate approximately $4.6 billion that would have to be priced in 2018 on the liability side, and actually $4.1 billion this year and $4.6 billion next year.

So for '18 it's about $4.1 billion, and that's going to be ratably per quarter, so about a $1 billion per quarter approximately.

We will be repricing within the marketplace depending on how they extend that duration.

If you're looking at the 2-year market, if we do not raise deposits for that, that should run at 250 type cost of money, 245 to 250.

If we raise deposits, debt's going to be probably somewhere just slightly south of 2%, depending on where rates are.

As far as margins are concerned, I would say, given that the rate hike came in late in the end of the Q4, so we're going to get the full impact of the most recent rate hike, possibility of another rate hike coming in the next few weeks in March.

We're looking at probably down another $0.05 going into Q1, and like I said in my previous calls, each rate hike has about 5 basis points of a negative impact to our go-forward margin.

Last quarter, we had some benefits as far as the loan coupon, was probably better than expected.

I think that's kind of going to be the story for 2018 and beyond.

The loan coupon appeared that it has bottomed.

We did a 10-year analysis of our loan book and it looks like the 3.41% was the historical low for the company.

We produced a 3.42% this particular month, as we look forward with a coupon in the pipeline at 3.69% as the current yield, and as Mr. Ficalora indicated, we have about a 3.75% offering rate out in the market.

That's up twofold in the past 8, 4, 5 weeks.

So it seems like rates are rising in this phase, which should be beneficial for the opportunities to raise the coupons in the portfolio.

So we're hopeful for that as well as putting the cash to work.

We've been putting the cash to work actively.

We're being very patient, but you could have saw the securities book increase about $500 million link-quarter basis.

That will be an ongoing increase as we rebalance our securities portfolio to normalization, which should be beneficial towards yield as well, given our churn rate.

So is that the pace of the -- means, I guess, you had about $2.5 billion in cash at the end of the year.

So is $500 million per quarter the right way to think about in terms of investing securities?

No, I guess we were very cautious on putting the money to work in the securities.

We have a very strong loan pipeline.

The pipeline was strong.

It's actually very strong going into Q1.

So obviously, our priority is to continue to utilize the cash to put into our loan book and then ultimately start growing the balance sheet further.

With that being said, there were some good opportunities in the securities markets towards the latter part of the year, and in the current environment, those opportunities look even greater.

So we will put on, over time, an increased balance.

We're not going to do it all in one quarter.

We'll do it over time, but for the big picture, we should be somewhere between 15% to 17%, not 6%, 7%.

So as you recall, we look at the peer group.

20% is the typical peer group for our industry with respect to securities to total assets; we're still well below that.

So we have to deploy it over time.

We like the fact that rates are higher.

We like the fact that we're able to swap up and below yielding securities that we exited during the quarter to enhance the coupon of the portfolio.

We actually had a bump up of about 6 basis points in the securities yield at quarter-end just by moving around the portfolio.

So we've been very active.

Though you don't see the growth in the portfolio, we've been active.

And what's the yield, Tom, like if you went to the market today for the type of securities you are buying?

What would be the coupon on those?

So right now, it's still in the low 3s, but 2 quarters ago, that was high 2s.

So it's a nice bump up.

So low 3s.

Our next question comes from the line of Ken Zerbe with Morgan Stanley.

Joe, you've talked about being well positioned to grow the balance sheet for the last few quarters.

But I know growth accelerated a little bit this quarter, but still, let's call it modest on a net-net basis.

Should we, at this point, really only expect meaningful growth or show growth over the $50 billion if the SIFI threshold gets raised?

I think there's no question that there is a variety of possibilities out there, that the final rules, when written, will in fact have an impact that would be different on banks that are already over $50 billion versus banks that will be coming over $50 billion.

So we're being somewhat cautious in our approach of the $50 billion mark, but we do believe that we have room to grow, as has been indicated, I guess, for several quarters now.

We have billions of dollars of growth that we could average into that will in fact enhance our earnings and not trigger our being characterized as being a SIFI-designated institution.

So it's important for us to manage that reasonably well.

But I think the important message here is that we are going to grow by billions and that growth is not going to trigger something precipitous.

Oka,y and I would just add to Joe's commentary that, bear in mind, the first phase of our growth is net portfolio growth.

We're utilizing the excess cash liquidity from the sales of mortgage banking operations in the covered asset portfolio.

That was about a $3.2 billion balance; now we're in the low 2s.

That will be to a point where we have enough liquid cash in the balance sheet, then we'll start moving to portfolio growth.

With that being said, we have our expectation to grow the balance sheet every quarter and be very mindful of tripping over the SIFI threshold.

As we indicated in Joe's prepared remarks, we can go up $5 billion this quarter and trip over SIFI, so we have room this quarter.

We can blend that throughout the year and have room throughout the year before we trip over the SIFI threshold.

We're very hopeful that there is some movement in Washington and that threshold is moved.

And if that happens, it will be of a faster pace of growth.

Got it.

And then Tom, if I heard you correctly, just on the answer to one of the last questions.

Did you say that if you actually grow using deposits versus borrowings to reprice the $4 billion [north of] liabilities, your deposit cost would be just under 2%?

That seems a little bit high.

Is there anything unusual with that?

Just quoting market yields, Ken.

As you go into the market right now, if you look at the CDs, we're a traditional thrift model.

CD cost is just around 2%, so it's 1.5% [to 2% yield] type money.

New deposits, not portfolio.

New deposits, not the current portfolio.

So we would be looking -- comparing that to the federal home loan bank offering of 250 for the same duration plus 12 basis points for FDIC assessment fees, it's more attractive they're bringing in deposits.

Got it.

Understood.

And then last question.

Joe, can you just talk a little bit more about the broader CRE multifamily market?

Like, I know you guys are disciplined.

That goes about saying, but I'm curious, what's happening in the rest of the market?

Is the market getting better, worse, more aggressive, not?

I think that as a market elongates, and this has been a very long positive market, you have various changes in valuations depending on the plateau at which the properties are being discussed.

There are properties in our market that are way overpriced.

There are people that are lending in our market that are aggressive and have been for years.

Those properties are going to wind up in some difficulty.

We've been very, very consistent for actually decades in how we lend, and there were no deviations in the product type and in the valuations in our portfolio.

So even though the market changes, we do not change.

And therefore, the ability for us to appeal to certain property owners is very consistent.

They are property owners that are willing to take less from us today so as to have more available tomorrow, so as to refinance to buy.

They don't buy the property they're in; they already have that property.

They want to use their cash flows in our portfolio that will be refinanced to buy discounted, foreclosed properties in the marketplace.

It inevitably happens and the people that have the greatest portfolios for us to lend upon, in fact successfully have done this cycle after cycle.

So I think we're in a very, very good place.

And I'd say to you that this cycle has been elongated by all of the positive obvious things that are happening with the economy.

The elongation of the positive cycle does not in any way change the inevitable.

The cycle will turn.

And when that occurs, we'll be well positioned to lend more money.

It's not something that we're failing to anticipate; it's very consistent with our expectations.

Our next question comes from the line of Dave Rochester with Deutsche Bank.

For your efficiency ratio guidance, what you guys assuming for rate hikes in the year?

Is it just that March hike you mentioned or are you including others?

I mean, again, we expect it's going to be ongoing rate increases, 2 to 3 this year, so in our current model it's 2 rate hikes in 2018 and may go to 3. If it's 3, then we have another 5 basis points of potential compression.

It all depends how does the loan coupon react to that, Dave.

So, obviously, the sloping curve has been encouraging, but we were surprised to see the pickup in couple of basis points in respect to the overall loan yield to the quarter, so that actually helped us beat, based on our original expectations on margin guidance in the previous quarter.

So we really have a unique situation, given the magnitude of potential refinancings within our own portfolio.

Given the low coupon, if that coupon starts to get closer to 4%, we believe customers will react favorably, which will help mitigate some of this pressure.

But again, right now it's 2. If its 3 to 4, it's going to -- it's anybody's guess right now.

So it's a very moving target, but I would say for internal modeling purposes, we were expecting 2, and more likely than not, I think the 3 is probably coming, so depending -- there maybe 1 in March and maybe 1 in June and then perhaps another 1 at the end of the year but it's all -- again, we're watching this as closely as you are.

So is the guide for the NIM in 1Q, 5 bps down or is it just the rate hike impacts you're expecting?

Again, I don't give elongated guidance for the NIM.

I've been pretty consistent over the few years.

I would at least expect that we have 5 basis points NIM compression this quarter, driven by the most recent rate hike, as well as some other moving parts, in particular, liabilities.

We have about $4.1 billion coming due this year.

We have to put out a longer term given where our interest rate risk position is, and we've been pushing that out longer in the curve.

If that is replaced with lower cost deposit that could also be a potential benefit for us.

So we're studying that very carefully.

We believe that we will be active in the deposit market.

This will be probably the first year in a number of years where you see deposit growth, because over the past 3.5 years, we haven't grown the balance sheet.

The balance sheet has been pretty much just under $50 billion for that long, so we've been holding our growth.

We've been selling assets, which hopefully those assets that we participated will be coming back to participations we'll put on our portfolio at higher yields.

And you mentioned on the deposit growth front, do you expect deposit growth?

I guess, you don't expect deposit growth to exceed loan growth because you've got a lot of cash you can invest in loans.

So would you expect the loan-to-deposit ratio to continue to increase this year?

We're very comfortable with that.

The strategy is to exhaust the excess liquidity resources from the sale of the mortgage banking operations and the covered portfolio and then start to grow the balance sheet funded by deposit growth.

That's the plan for 2018.

And how much of that cash do you think that is left that you can invest in it?

Do you have to keep any of it on the balance sheet or can you invest all of it?

Probably we have another $1 billion to $1.5 billion of liquidity that we can put into loan and securities.

So depending on the pace of that, obviously, the security market is attractive.

We'll be more active in the securities market at the same time and loan, simultaneously.

But in particular this quarter, you saw that we moved the cash balances down but part of that was attributed to securities and loans.

Right.

So I would think by the end of this year, that excess cash would be gone and invested, right?

Hopefully, by the end of the quarter.

Let me be just clear with that, the pipeline that we announced this morning, 82% of that is new money.

So depending on what's amortized and pays off, we have a very strong new money pipeline.

It's not a refinancing pipeline.

That's negative for prepayment but very positive for portfolio growth.

So having an 82% net new money pipeline going into Q1, which typically is the slow quarter for the company, that's very encouraging for future growth of the portfolio.

Yes.

And where are you guys seeing securities purchase yields at this point following the uptick in rates?

Most recently, we've upped the coupon, we've sold some low-yielding portfolio assets in the fourth quarter, and we replaced it with higher-yielding.

So net-net, the portfolio picked up about 6 basis points on approximately $3 billion of assets, which is a nice low-yield pickup going into 2018.

We do have some lower-yielding securities and may swap that into higher-yielding securities, but as the market continues to be attractive, we will invest very patiently.

This is not going to be a 1 quarter activity.

This is going to be an ongoing analysis of a rising rate environment.

We see the curve start to shape very nicely for us and the securities yields are approaching to the low 320-ish.

That's a lot more attractive than it was 2 or 3 quarters ago, which was in the high 2s.

Yes.

And then just one quick one on the back on the expense guide.

Where are you seeing more of the cost save opportunities going forward to drive that OpEx figure down to $145 million.

Are you consolidating branches at all or making any other.

. . go ahead.

The first -- 2/3 of the initial phase was exiting the mortgage banking business in the credit loan book.

(inaudible) substantial operation.

That is going to be completely finished this quarter, so that's 100% of the cost synergies will be done in Q1 2018.

So going forward, we'll get more benefit from that.

But more importantly, we've spent substantial dollars getting ready and positioned to close on the Astoria transaction, getting the company SIFI-ready, and obviously, that did not happen, so we were at a $660 million run rate at the high point.

That is not indicative of how we can run this franchise.

It's just too high for the type of business that we model here for the company.

So having a $660 million run rate bringing it down to the $560 million run rate, that's $100 million off the high run rate, which is kind of where we were thinking when we actually exited the mortgage business.

So that's an achievable number for us.

So we've done some good work in Q4.

We're guiding down lower in Q1 '18 as far as the $145 million run rate.

That should be the high for the year.

So hopefully we'll continue to be very proactive in reducing consulting expenses.

A lot of expense is related to preparing ourselves to cross over.

The cross over hasn't happened and it appears to me that Washington will be pulling back a little bit on regulatory intervention and this should be very favorable for the banking business as we know it.

So SIFI cap gets raised, enhanced credential standards mean somewhat different for a bank of our size versus someone with 250.

We should get some benefit there.

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

Coming out of the third quarter, you were looking for mid-single-digit loan growth for 2018.

And I'm just wondering, given the strong growth at the end of the year, what the outlook is for '18, if it's improved?

So obviously, we are very mindful of the balance sheet and given the current position in Washington.

If Washington's acceleration on moving the cap happens sooner, then we may change our focus.

The mid-single digits for net multifamily loan growth is very reasonable.

But bear in mind, our C&I book is growing at 75% CAGR over the past 5 years for specialty finance.

So we're up 22% year-over-year in that business and they've done a phenomenal job up in Foxborough, Mass.

for us.

It's been a phenomenal business for us.

It's growing very nicely and we'll see some good growth there.

But clearly, the big end for the bank given the size of the portfolio is the multifamily book.

And we're seeing some good pipeline for those right now.

So as I indicated, 82% of that is new money.

I don't want to give a full year guidance, but I think it's reasonable to model a mid-single-digit growth rate for multifamily.

Remember, the balance sheet is growing around 4% or 5% based on just normal modeling based on the cash position we have.

That could change depending on the view of $50 billion.

So that happens to be an accelerant and that goes away sooner than we expect, we could be growing the balance sheet more actively.

Obviously, growing the balance sheet is growing the earnings.

They go hand in hand.

So it is highly desirable for us to do this sooner rather than later.

Going back to the previous 3, 3.5 years, the securities portfolio has been cut substantially from 20% down to 6% for the low.

We have to replenish that over time.

We should be somewhere between 15% to 17%, in that range, maybe 12% to 15%, not 6%, 7%, so that's going to be balance sheet growth, and we utilize the reduction of that portfolio to manage ourselves very carefully around the SIFI threshold.

So as that SIFI threshold eventually gets lifted, we were hopeful we could then restore the balance of securities and continue to see signs of good loan growth, which will have nice balance sheet growth as well.

Great.

And then Joe, just with regards to M&A, we've heard from a few banks already that M&A activity has kind of taken a pause as potential sellers are trying to reassess what the impact is from tax reform, and I'm just wondering what you're seeing on the M&A side?

I'd say in the broad picture, the environment is such that there are many, many banks that have been buyers and sellers over the course of the period behind us who are assessing the changing environment in front of us.

There will be a place at which many banks will decide to do combinations that are beneficial to their shareholders, we among them.

The reality is that when that exactly occurs may be driven in many, many ways by the external factors, where the regulatory world is based on the law, as the law changes, and so on and so forth.

So I think that you will find that when the opportunity presents itself, there'll be plenty of people who have the opportunity and the desire to combine.

It's just that we're all in the waiting game here.

And it will take a little while for that to evolve.

Peter, I would just add to Joe's comments.

Tax was the fourth quarter waiting game.

Now it's fair to say that, if they make some movement here on the threshold, that will also be a very unique position for M&A players to assess.

And in fact, it's going up significantly, you'll see more activity.

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

I want to start on expenses.

Given the commentary around moving expense levels down in 2018, are you guys not expecting to reinvest any of the tax benefits back into the business for items like tech spend, minimum wage, et cetera?

So look, big picture, we're still licking our wounds from the expense bills for the past 3.5 years.

So again, even knowing the franchise, $660 million run rate for the company is just way too high.

It is not how we run our business.

So we have substantial amount of opportunity to not have reoccurring costs that were kind of onetime or, we'll call it, unique investment expenses that were put in place to get ourselves to a position to close and move forward into a SIFI threshold position.

That's behind us, we believe, for the most part.

And, obviously, as we talked about the fact that costs relating to regulatory oversight, our opinion will be somewhat diminished as the regulatory world starts to look at larger banks different than our banks of our size.

Given the threshold movement and the like, and enhanced credential standards being shifted towards the largest institutions, we believe there's a lot of room there.

But that being said, the company is very focused on getting back its lower efficiency ratio.

That's the priority for stockholders right now.

We have had a very difficult '17.

We're looking forward to that transition going into '18 of growth on operating leverage, and we're going to continue with the operating leverage plan, which is reducing expenses and managing ourselves back to a better profitable position.

Got you, okay.

On the New York City multifamily market, we've had several banks fairly recently exit the market.

BankUnited was the most recent example.

Their call, they cited and I'm quoting, terrible margins as behind their decision to exit the business.

So 2 questions: One, can you comment on the margins for your business?

Do you get materially better margins than other banks which are exiting?

And two, with these banks leaving, does that then give you a better opportunity to grow the book?

I think there's no question that their departure, whatever their reasons may actually be, is favorable to us.

And the evidence is, they're discussing why they're not doing lending in our niche.

And we're discussing record levels of lending in our niche.

So the obvious is there.

As they depart the market, we will do more in the market.

Their departure has nothing to do with the way we lend or the kinds of properties we lend on.

The reality is that we're very, very consistent.

The most important people in our market are the people that have been in our portfolio for decades.

Most important people in our market are the people that actually take less from us rather than getting more somewhere else.

And they're the people that will be refinancing with us in the period ahead as the cycle evolves.

So I think the business model that we've consistently articulated is sound, and we are demonstrating that we can grow in this market as it's evolving.

Whatever the reasons may actually be for other people leaving the market, that's their issue, not our issue.

Their departure, however, clearly means they're not doing loans.

And if they're not doing loans in our niche, they may be doing other loans.

But if they're not doing loans in our niche, it's just more for us.

Steven, I would just talk about spreads and margins.

I mean, the big picture is that we'd love to get a 150 spread.

We're probably around 125-ish, and that's pretty attractive when you're putting out a 3.5 year average life or 3.2 year average life and looking where the yield curve is.

The bump up in the yield curve has been attractive for us in the past few weeks here, and again, it's no guarantee that's going to be the current curve going forward, but 3.75% coupon is reasonable when you compare it to other types of investment yields.

And given the pristine asset quality, if it's underwritten prudently, we believe that this business model, spreads will be somewhere between 120 to 150.

Typically, you've seen 5 years ago when the 5-year was 67 basis points, spreads were wider, they got 3%.

So it's been somewhere between 3% to 3.75%, and as the agency market, which is really pricing their product at the back end of the curve starts to not be as attractive, you will see more customers go back to the portfolio lenders because of the absolute coupon from the government is just too high.

So I think that's another encouraging sign of more potential business for us in the quarters ahead.

Right.

Tom, given the recent sharp move in the 5-year, are you seeing a rush to refi?

Is that happening or have rates not moved up enough there?

A part of what we're seeing, with the increase in the interest rates offering in the past 2 or 3 weeks, there's been a rush of applications.

So these customers are mindful that the offering is no longer 3.5%, it's 3.75% for the [fork off] pristine 5-year type quality paper, 4.25% for type -- normalized commercial-type paper, 5-year duration.

So I think if you think about the movement in the rate of offering, it's getting attention and it's not just NYCB, it's all of the banks are raising their rates because the marketplace is much higher as far as spreads and coupon.

So I think this is encouraging.

It's a short period of time but if this continues throughout the spring into the summer, my guess is that customers will realize that 3.75% could be 4% and that may be the significant catalyst to come back to at least get your next lock of refinancing for the next 3 or 4 years.

So I think the important thing to recognize here, prepay tells you the speed of refi.

Our prepay is very, very low so it's not rapid refi.

We're gaining share of market because of what we discussed earlier, so we're taking share of market because others are not lending in the market.

And we're not seeing prepay.

Prepay may come later, but at this particular point in time, owners are not rushing to refi.

So prepay is the single best indication of whether or not people are actively looking at rates going up and literally being willing to pay a prepay against a potential for a future higher rate.

But if you accelerate an [out] bill, it is definitely a positive trend that we're seeing.

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

Just to quickly follow up on that comment, Joe and Tom, obviously.

But with your mid-single-digit loan growth outlook for 2018, and Tom, given sort of the landscape that you've just described, what are you assuming in sort of paydowns or prepayment activity?

Just broadly, I know you're not -- I'm not asking for tight projections, just broadly...

We've said this for decades, we cannot actually foretell the speed with which prepay will occur.

There's so many complex reasons why individual owners choose to pay a penalty to refinance their loan.

And in the current environment, our prepay has been very low.

Prospectively, it could very well be that we will not see the acceleration in prepay for some reasonable period of time.

But having said that, we have plenty of access to good quality assets, and we expect that we will increase our loan portfolio over the period ahead because we do believe that we are in a very good place to competitively win deals.

Yes.

So Collyn, I would say, obviously, less prepay means higher loan growth, right?

So 5% becomes a higher number but the prepayments are less than expected.

Again, as Joe indicated, it's very difficult to estimate who's going to pay off.

But we have a good indication of how much is coming due that actually went to the final year, and those loans typically they are going stay with us or go elsewhere.

They have to do something in this period of time, at a higher coupon, by the way, which is always a positive thing.

What's encouraging is the coupon in the portfolio went from 341 to 342.

We haven't seen an uptick in a decade, which is a really positive sign for a very large book of business.

That will continue, we believe, at these current market rates.

If the market rates go higher, that will be more of a profound effect to help stabilize the margin, given our interest rate risk position, and help us move the shift towards a positive direction towards margin stabilization.

So we're encouraged by the 10-year trend of a downward coupon to the first signs of an upward coupon in a higher-rate environment, so we're very optimistic about that portfolio yield changing.

I believe that as rates continue to rise, you'll see customers react favorably, and like I said before in my previous commentary to the last caller, we're seeing a very strong out bill based on the sentiment that rates are going to be higher, which is good for us.

Okay, that's helpful.

And then kind of along those lines, I guess I'm a little surprised, Tom, that the core NIM projection or guidance or talk or whatever for the first quarter even -- at least in the near term, at the beginning part of this year, is not higher, right?

Just because, as you said, you've got $1.5 billion of cash sitting at 1 -- just over 1%.

I would think that reinvestment of that would certainly offset any of the funding pressure you expect to come in the first quarter.

So I reckon...

Let me address that and give you more specificity around what happened in that quarter.

Obviously, we had a late rate increase in December.

That impacts a substantial amount of our deposits flows.

In addition to that, we moved about $2.3 billion of maturities of home loan bank events out -- 2 years out, so that also impacted the future quarter.

So 5 basis points is reasonable.

Let's hope that we once again exceed our guidance and perform a better number, but we trying to be conservative.

We want to make sure we're comfortable that, given the new launches on the moving costs in our balance sheet, we have a lot of cash to put into work.

If they accelerate quicker then the margin will stabilize.

Then 5 maybe 4 or 3. But we had a pretty good showing when we had a 5 basis points expectations for Q4, but we came in flat.

There's been some interesting dynamics in respect to the loan book.

If that continues, that will be part of the -- hopefully the upside surprise.

And meanwhile, we like to -- we want to be conservative.

We want to go into 2018 as the transition year from '17 and going into growth in the balance sheet and growth into the loan book.

We have $5 billion of paper that we participated out to the marketplace.

That $5 billion has right to come back in the next 12 to 18 months.

We should get the lion share of that refinancing and hopefully that will continue to be favorable towards stabilizing the margin.

Those are all in the low 3s, those types of coupons.

So we're cautiously optimistic, but we want to be conservative in respect to our guidance.

Okay, that's helpful.

And then you'd mentioned the cost of the borrowings that you -- the $4.1 billion that are coming in to reprice this year.

You mentioned maybe where they would, the pricing would go to, but where are they currently -- what is the current cost of some of those?

For '18, it's about a 160 on average.

A blended 160 on that 4 point...

So that's what in our guide down to the margin.

Okay, right.

So that's coming in, either repricing is going to be -- is costing.

And I indicated it was successful in bringing in deposit funds to offset some of that.

That will also benefit the margin.

Because obviously, when we bring in that money on the home loan bank and on the other repo market, it also cost 12 bps of an FDIC assessment fee given the nature of the liability.

So it's definitely more attractive to bring in deposit funds to grow the balance sheet in addition to dealing with repayment of the current flows of home loan bank advantage.

Yes, okay, that's helpful.

And then just lastly, the securities outlook, right, I mean, 16% to 17% at some point of assets.

I know you said it's going to take time, but obviously, that's a big balance sheet build.

So -- and I didn't even have the fraction of that in my estimates for '19, but are we. . .

Yes, we had a big balance sheet shrink.

So we're trying to just restore ourselves.

Absolutely, right.

But my next question is capital, right?

So that's going to -- that's obviously going to eat into capital.

So how are you thinking about kind of the capital structure and maybe where you would add to it as you look out over the next -- this year and next?

So again, we were at the highest capital position on -- in 8 years for the company, so we're very...

In history.

Way beyond history.

It was very comfortable that -- and we should address, if we're going into the securities market, that's a 20% risk-weighted asset, not a 100% risk-weighted asset.

Obviously, the priority for the company is to restore its loan book, restore securities book over time.

We could easily build a securities book very rapidly.

We're being very cautious given a long history of lower interest rates.

We understand that the impact of the securities portfolio and its duration risk, so we're being very cautious on that growth.

We will readily be into the market over time.

The priority for the company is to build the loan book and put the cash flow that we have -- that were in previous loans into our core loans, which is multifamily rent-regulated apartment houses.

That's the strategy.

At the same time, we will -- over the next few quarters ahead, you'll see gradual build of securities book depending on market conditions.

If, for example, rates are substantially higher, we may be more opportunistic on the securities side, but we're going to be very, very cautious as we continue to enjoy a better sloping curve and a higher-yield environment.

Okay.

But even, I mean, you'll still need to comply with LCR once you cross $50 billion, regardless?

We're hoping that $50 billion LCR, all that stuff will be sorted out in the next quarter or so with Washington and there'll be some positive changes for banks of our size, but we are running on...

So you're hoping that the LCR component will change, because to my understanding...

We're running a modified LCR component as we speak today.

We're approximately a 100 -- we are 96% compliant to that in our current balance sheet form.

As we put on selected securities, we modify the view of that.

It's all liquidity to us.

So we believe over time that if they do change the SIFI threshold, that will address our LCR concerns, and we should be hopefully under the modified version of that and we should be fine.

So I'm sorry, so Tom, you're 96%...

Very, very fluid, as far as once you determine $50 billion versus 250 or 100, whatever the size the new threshold will be.

If it stays $50 billion, we will deal with LCR requirements.

So right now, we're assuming there's going to be some real regulatory reform in the quarters ahead.

Our next question comes from the line of Matthew Breese with Piper Jaffray.

I was just hoping you could talk a little bit about the commercial real estate multifamily environment from a transaction perspective.

I read a lot about transaction volumes being down significantly in 2017.

But just wanted to get a more recent update from what you are seeing in 2018 and late 2017.

So back then, obviously, we had some -- a landmark tax reform package put in place in the fourth quarter of 2016 -- '17.

That's a tremendous amount of, we'll call it, real estate math one has to determine in order to be looking at moving portfolios around.

I mean, having a -- the 1031 survive, having the fact that depreciation has been significantly accelerated for commercial real estate investors, the fact that the commercial real estate investor is the substantial winner of the tax reform package is very positive for commercial real estate.

But that being said, you had years of significant transaction activity going into the end of '17.

So there was a clear 40% slowdown in activity.

We believe we're hoping that this will now see some life towards the real estate market because it's a very attractive, tax-advantaged business to be in, given the most recent changes in the tax code.

So we're very encouraged by that.

We don't drive that.

We just lend to it and we're seeing some very positive signals that people are looking at opportunities in that environment, so we think property transactions will start to pick up if you compare '18 versus '17.

I was just going to say, there will be plenty of opportunities for us to actually lend into this evolving marketplace.

The good news is that the methods by which we value assets are going to be favorably impacted by some of the changes which are now been put in place.

This is going to be good for us in lending.

And do you have a view on, given the backup in rates and substantially low cap rates across your footprint, what the impacts would be there and potentially devaluations down the road?

I mean, obviously, simple math, right?

If cap rates go up aggressively, valuations come down.

But again, the coming interest rates are going to be 2 years from now and will give you a better view in cap rates.

I think in general, rates are still relatively low.

As it goes to 4.5%, 5%, it's still relatively low when you look a at historical basis.

World interest rates are still relatively low.

So I think borrowers are still excited that they can borrow money at a reasonable rate.

Cap rates are not -- they're not moving up, lock, stock and barrel with the bell -- with the shape of the curve.

It's been -- there's always a significant lag there and I think that's the catalyst for customers to react.

The expectation that they're going to miss the opportunity to take what they've created, which is value creation on enhanced rent roll because of the cap rate move and valuation decline, they will transact sooner rather than later, we will get more points sooner rather than later, and we will see growth.

Currently, it's encouraging.

We're lending to the rent-regulated space.

If you look at the NOI build over the past 20, 30 years, there's only been 1 year of a decline in the NOI, which was after 9/11.

So you have a unique niche market.

We're not lending to the market rates.

We're not lending to market rent roll in New York City, we're lending to a very unique niche which has a very long historical nature of NOI build year-over-year despite changes in the economy, despite interest rate movements.

So we're encouraged by the fact that customers will react if rates go higher.

There'll be enough lag time on the cap rate to get the broker to bring the bar to the table to get their next refinancing.

Assuming they're building their NOI, which has always been part of our assumption, that's our business model.

We lend to NOI build knowing that there's going to be upside potential.

Right, got it, okay.

And then could you just remind us of where you are from a commercial real estate concentration standpoint?

And given your outlook for growth, are there any limitations on what you can add there, given the agreed-upon cap?

So we do have a public cap.

You know what that number is, and right now, we're well below that cap.

So we believe that with our current cap position, assuming we make no additional capital, assuming there is no income in excess of what we pay out on our dividends, we still have room for well over 15% growth of the portfolio.

So we're not growing 15% this year, although we plan to grow 15% this year, but it gives us confidence that we have room under the cap, and we also plan to make an excess money than what we're being paying out in dividend.

So there'll be some capital build there.

So we're comfortable with where we are.

We wish we didn't have a cap, but it is what it is, and we manage to a threshold slightly below that internally, and we are very comfortable that we have room within our current capital position to continue growing the business.

Our next question comes from the line of Christopher Marinac with FIG Partners.

Just wanted to ask about deposit mix.

And is that something that you can influence this year, just given the discussion this morning on deposits and [the beat] there?

Yes.

So it's Tom.

I'd say we have to be proactive on looking at our growth.

The first phase of the growth is going to be cash deployment.

Second phase will be growing the deposit base.

As I said in multiple previous commentaries, that the home loan bank and the repo market is expected compared to the deposit market, and we have to look at that in a true cost position.

Paying the actual FDIC expense for that drives our operating expenses up.

So we are very active looking at being in the marketplace in all aspects of that.

What we haven't been too successful on, which we like to be better on, is getting deposits from our customers.

We have tremendous relationships, and we have low-lying fruit that's out there.

It's a possibility with something that will be the best source of funding.

Absent that, we have a traditional thrift franchise, and typically traditional thrifts tends to be in the CD market when they're looking to grow their deposit book.

And, obviously, savings and the like would be a much lower cost of funds, but if we wanted to readily grow the deposit base, we will be in the CD market in the market, which will be probably at the high end of the market range.

So if 2% happens to be the high cost of money, we will be at 2%.

If it's 1.80%, we'll be at 1.80%.

We're not going to be at 1.40% and expect to grow deposits.

So we're going to be proactive.

The good news there is that, if we're very proactive and we pay down some of our borrowings, it's accretive to the margin because our margin has expectation for much higher cost on repricing our federal home loan bank advancing the repo book as well.

But I think there's an important thing to recognize.

We have the unique benefit of 5 markets in which we compete for deposits.

So the cost of deposits because of the competitor across the street may be very, very different in Manhattan versus in Arizona.

So that is a tool that we actually have that gives us some measure of flexibility as to the cost of deposits as we go down the road.

Yes, just to be clear, the best source of deposits historically for the company has been through acquisition.

So that's been the model.

We haven't successfully closed on the Astoria transaction.

That's behind us, but that would have been a very unique source of deposits for us.

So clearly, historically, that's been the source of funds for the bank and our acquisition model, but we have to be in the current environment where we are, and we're expecting to grow this year and there's not a deal announced, so we have to make sure we could fund ourselves through deposit growth.

And guys, along the same lines, are their initiatives you could field with your existing team of picking cash management and all those things with your existing customers that doesn't commit you to major expense initiatives, which I know you don't want to do?

Or are there things you could do right now that make a difference?

So we're going to be as active as we possibly can to lure our current strong customer base to do more banking business with us.

We're not going to tell the marketplace that we are the business bank consistent with some of the models out there; that's not who we are.

Our efficiency ratio reflects that.

We're not changing the culture of the bank overnight, but clearly, we have very substantial relationships that should be doing more business with the bank and we expect the deposits from it.

That's been a push.

We've been somewhat successful, but it hasn't been material to the company.

We would like to see some better results in the go-forward quarters and years ahead.

Our next question comes from the line of Ebrahim Poonawala with Bank of America Merrill Lynch.

And sorry if I missed this.

Just wondering if there was any update on the consolidation of the commercial bank charter?

And are we moving on that?

Or are we waiting to see what happens with SIFI before taking our next steps?

I think the process is in the hands of others.

We've done all that we need to do.

We're not expecting to do anything additional here.

This will evolve depending on the activities of other people.

Thank you.

Mr. Ficalora, there are no further questions at this time.

I'd like to turn the call back to you for any closing comments.

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

We believe that we had a good quarter, and are laying the groundwork for a solid performance in 2018.

We look forward to chatting with you again during the last week of April when we will discuss our performance for the 3 months ended March 31, 2018.

Thank you.

This concludes today's teleconference.

You may now disconnect your lines at this time.

Thank you for your participation.