Flagstar Financial Inc (NYCB) 2018 Q1 法說會逐字稿

Good morning, and thank you all for joining the management team of New York Community Bancorp for its First Quarter 2018 Conference Call.

Today's discussion of the company's first quarter 2018 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 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 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 the 2017 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 the 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, operator, and thank you all for joining us this morning as we discuss our first quarter 2018 performance.

Earlier this morning, we reported diluted earnings per common share of $0.20 for the 3 months ended March 31, 2018.

This translates into a return on average assets of 0.87% compared to 0.85% in the first quarter of 2017, and a return on average common stockholders' equity of 6.26% compared to 6.76% in the year-ago quarter.

On a tangible basis, the return on average tangible assets for the current first quarter was 0.92% compared to 0.90% in the year-ago first quarter, while our return on average tangible common stockholders' equity was 10.21% compared to 11.20% in the first quarter of 2017.

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

The dividend is payable on May 22 to common shareholders of record as of May 8. Based on yesterday's closing price, our annualized dividend yield is 5.2%.

Now I will take you through some of the highlights of the quarter.

Since the middle of 2017, we have discussed only the resumption of the company's organic balance sheet growth strategy.

This growth began in the second half of last year and has carried over into 2018.

Our first quarter performance picked up where our fourth quarter's 2017 performance left off, marking the third consecutive quarter of balance sheet growth.

During the quarter, we continued to grow our loan portfolio.

Our asset quality remains stellar.

The net interest margin held up relatively well despite a sharp increase in retail deposit rates, and operating expenses declined further.

Turning first to our loan portfolio.

Our loan growth continued into the first quarter of the year with total loans held for investment increasing $501 million or 5% on an annualized basis.

As of last quarter, loan growth this quarter was driven by growth in our core multifamily business.

Total multifamily loans rose $582 million from the prior quarter or an 8% annualized rate and $1.6 billion or 6% from the year-ago first quarter.

Our loan growth this quarter reflects another solid quarter in origination volumes.

We originated $2.4 billion in loans held for investment during the first quarter, up 46% on a year-over-year basis, but down 22% from the seasonally strong volumes during the fourth quarter.

The year-over-year growth in originations was driven by multifamily loans and growth in our specialty finance business.

Our pipeline currently stands at $2 billion, including $1.3 billion of multifamily loans, $279 million of CRE loans and $319 million of specialty finance loans.

Given our average total consolidated assets stood at the end of the quarter, the company has the ability to grow balance sheet by approximately $3 billion without breaching the current SIFI threshold based on the fourth quarter trailing average of total assets.

This gives us ample room to grow the balance sheet over the course of 2018, as we wait for regulatory reform to pass and the anticipated increase in the SIFI threshold to $250 billion.

Moving on to asset quality.

Our asset quality metrics were strong again this quarter.

During the first quarter, net charge-offs were $6.5 million or 0.02% of average loans, while our total nonperforming loans were relatively unchanged compared to the prior quarter.

Our NPAs declined modestly to $89 million or 18 basis points of total assets compared to $90 million or 18 bps at the end of 2017.

Third, on the net interest margin front, the current quarter's margin came in at 2.42%, down 6 basis points on a sequential basis.

Excluding the 13 basis point contribution from prepayment income, the net interest margin would have come in at 2.29% compared to 2.37% in the fourth quarter.

In addition to the impact from two 25 basis point rate increases in December and March, the margin was also impacted by the industry-wide increase in retail deposit rates.

Fourth, we had continued improvement in our operating expenses.

Our total noninterest expenses declined $9 million or 6% compared to the fourth quarter of last year and $28 million or 17% compared to the first quarter of 2017.

The year-over-year and linked-quarter improvements are the result of us successfully executing on the cost savings from existing mortgage banking business and continued efforts on extracting additional cost savings from our operations.

Reflecting the lower level of expenses, our efficiency ratio improved to 47.45% as compared to 50% in the fourth quarter and 51% in the first quarter of last year.

We believe that throughout the remainder of the year, there will be further opportunities to reduce our overall level of noninterest expenses, grow the balance sheet, and thus, drive operating leverage.

Finally, on the regulatory front.

As you know, the Senate passed regulatory relief legislation last month, which included a provision to increase the SIFI threshold to $250 billion from the existing $50 billion plateau.

The bill has now moved on to the House Financial Services Committee for their approval to bring it to the full House for a vote.

We are hopeful that it will receive the same bipartisan support in the House as it did in the Senate.

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 Mark Fitzgibbon with Sandler O'Neill.

First question I have for you is on G&A expenses.

They were down about $11 million from the linked quarter.

What were the major items that sort of drove that decline?

Mark, it's Tom Cangemi.

The execution of the mortgage banking exit was very successful.

Obviously, we had -- our expectation was to have it completely finished by the first quarter of 2018.

That was done with precision and we continue to grind further into the interrelated departments that had an overlap regarding mortgage banking.

So big picture, I'd say, mortgage banking was better-than-expected.

Typically, the first quarter is the high quarter on expenses.

I would probably guide for next quarter down a couple of million from here, so probably around $137 million-type number.

And from there, flat for the year, so that would probably give us a run rate between $550 million to $560 million.

But our original guidance was around $560 million, with a $100 million of expense reduction coming off the $660 million from last year at the high run rate.

So I think the good news is that we continue to grind down our expenses as we manage the bank and we see some more opportunity.

We're trying to be conservative here, but clearly the first quarter should be the high quarter, like I said in the previous conference call.

So $139 million being the high quarter in Q1.

We're probably looking at another couple of million dollars down in Q2, and then hopefully, while we continue to extract more cost reductions as we get the benefit from less consulting expenses and other related expenses, as we went through the Astoria transaction in the previous years that was embedded in our previous year's run rates.

Okay.

And then while we're -- we stay on sort of the margin outlook, how you're thinking about the margin based on a couple more rate hikes?

I wish I can say it's flat, but my guide right now would be down another 10.

And that's driven slowly with an expectation of another rate hike in June.

We also have another anticipated rate hike at the end of the year.

And we're just modeling with consensus with a 3% Fed funds rate going into the first quarter of 2020.

So clearly, the guide down -- is down 10, driven predominately due to the borrowing costs that are coming due and increase in the retail deposit floor that we see throughout the U.S.

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

Just a follow-up on the core margin.

What's happening on the asset side of the balance sheet, for an informational perspective?

So I think, the good news, obviously -- we missed our previous quarter guide by about 3 bps, of which was defiled by very late closings in the quarter.

Most of our loan closings closed towards the back end of the quarter.

I mean, we didn't invest in the securities market.

We had opportunities, we opted to keep the balance sheet smaller, as we continue to wait for the SIFI transition.

We're optimistic there, but as we talked in previous conference calls that when the $250 billion number becomes a number, we'll grow more aggressively here.

We have a 6% -- 6.9% securities-to-assets.

We should be more than double of that amount right now and that -- those yields are about 100 basis points higher than they were about a year ago.

So that's a positive, but we haven't really put those funds to work.

So we're sitting in excess cash, which also held back the margin a little bit, and we anticipate to put that money to use, hopefully in the foreseeable quarters ahead.

In the event that there is some real movement here and the House does approve the bill with -- along with the Senate, we will be more active on growing the balance sheet.

We have to be mindful that we do not want to do a SIFI crossover in the wrong quarter.

So obviously, if we -- to grow the balance sheet, let's say, $500 million to $700 million per quarter for the next couple of quarters, that will put us into the fourth quarter, and that will be the transition in the event for some reason, they don't change the SIFI rule.

So we have flexibility there.

But clearly, we're allocating our proceeds towards multifamily CRE loan growth, with very good pipeline, very good strong growth quarter.

On that multifamily, loans were up 8%.

As I discussed in the previous quarter, 5% net loan growth is reasonable, it's expected.

And obviously, when they do anticipate to see the cap get raised as far as the $250 billion, we will be more active on growing the balance sheet.

In particular, on the securities side.

The important thing to recognize is the way the bill has been written, there could be a different consequence of being bigger than $50 billion before the bill is written versus going to $250 billion after the bill is written.

So that puts a little restraint on the speed with which we're willing to grow, absent the way that is being prepared or the possibility that there could be language that will be detrimental based on timing, but we are being a little more restrained in that regard.

So Pete, are we clear?

For the next few quarters, you will see us grow every quarter.

That's the plan.

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

Two questions, I guess, start off with the first one.

Tom, just going back to what you're saying about the securities growth rate.

SIFI -- let's say -- again, SIFI threshold gets raised, you grow through securities.

But how are you funding that?

I mean, what change -- because I saw on the release, you said that you're putting a lot of CDs at this point.

Is that the funding strategy for your securities growth after the SIFI threshold gets raised?

Well, there's 2 strategies, right?

On the current strategy it’s sitting on -- in an abundance of cash and liquidity, right?

So we have treasury bills.

We have short-term notes.

We have well over $2.6 billion of cash earning a very low return as we await and -- to put that money to work.

We've been allocating most of those resources towards loan growth.

This is the replacement of the loans that we sold from the previous year, when we exited loss share with the FDIC.

Big picture is that as we grow the balance sheet, we'll look at the wholesale market, look at the retail deposit market.

Right now, for the NYCB strategy, retail deposits are a more viable alternative given the cost of money in the wholesale market.

So for example, these -- we are actually growing actively our CD book right now, which is significantly lower than the cost of funds borrowing from the wholesale market.

So that's the current strategy until the company is in a position to announce a depository transaction, we will be in the market raising retail deposits.

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

So Tom, just leveraging off your last question.

Are there additional sort of customer deposits that you've not been able to obtain that could therefore be a relative low-cost option for you on funding?

Or just keep it on the wholesale market?

I would say, all options were on the table to bring in good deposit sources.

We have been a focused bank on the asset generation side.

We are going to be very focused on the deposit generation side in 2018 and beyond.

The company has a growth need and the growth need has to be funded.

And the funding expectations are like, we'll call it, less expensive in the retail market than the wholesale market.

So we will be very active in market deposits.

Remember, we are in many markets: we're in Arizona, Ohio, Florida, New York, New Jersey.

So we have the ability to regionally price our deposit mix to ensure that we have adequate funding.

The good news is that we've had a nice pick up in our CD book, and we continue to -- as we're in mid-quarter right now, we're seeing nice growth in CDs and they continue.

So we hope to continue to showing some more profound growth throughout the year.

And as we do that, we also have significant amount of borrowings coming due for -- it's very successful and I am not going to give guidance on what the expectations could be, but if we were to be able to pay down some of those borrowings, it's had significant cost savings, plus the reinvestment on the borrowing side is probably about 80 to 90 basis points above the CD market for the duration.

Got it.

And then just a quick follow-up on the prepayments this quarter.

Was there anything unusual about this -- from the seasonal perspective on the level that you had in Q1?

Yes, I'd say, it's seasonally slow.

Obviously, we don't control prepayment activity, but if you look at the loan prepayments, it was about $11.8 million.

Total prepayments at $14.7 million, some of that was security-related, but for us, that's not a significant number.

So the good news is that we hope to see better prepayments in the future.

We're very optimistic about the fact that we have a little bit of a higher rate environment right now.

We saw a slight jump up in January, which is very favorable for apps coming in and then it pulled back in February.

So where we are today, we raised our current loan offering rates twice in the past couple of weeks, about 4.8% and 4.25% for 5-year typical multifamily.

Commercial real estate now is hovering close to 5%.

So that's a significant change from the past 8 weeks, I'd say.

And we believe that, that could be a tipping point for customers to react to higher rates.

There's no question when you look at the 2-year and the 5-year and where the current treasuries are trading, it's dramatically higher than the previous year.

And as every loan becomes one year more mature, the option to prepay will be more viable for the -- our customer base.

So we're a little bullish about elevated prepayment.

We can't guarantee what happens with the customer base, but no question Q1 is typically the slowest quarter of the year when it comes to prepayment activity.

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

Just a real quick one on the NIM.

I was just wondering at what rate you guys are rolling borrowings at this point?

And then what's the roll-off rate there?

You mentioned the pricing was 80 to 90 bps above CDs.

So just curious where that actual rate was on the borrowings and the CDs at this point that you're seeing?.

Yes, so we have about -- for the next year -- for the remainder of the year, about $2.6 billion coming off at about 1.66%.

For the second quarter, it's about $1 billion and it goes to $200 million for Q3, in the fourth quarter -- in the back end of the fourth quarter, it's $1.4 billion.

So that is coming due this year.

And in the next year, we have approximately another $4.6 billion coming in 2019.

So it's an ongoing expectation of dealing with these borrowings as they come due.

We've been pushing money out, so for example, since the expectation of the Astoria deal was not going to close, we moved $5.95 billion loan at the rate of 2.14%.

So a lot of this money has been moved along already since the restructuring, so at a 2.14% rate, which when you look at market rate, that's reasonable compared to the current market.

So we've been very actively managing our interest rate risk by pushing our liabilities out longer.

But for the bank and the profitability and more for the franchise, we'd rather see some of these deposits being offset by retail customers.

So there's been a push at the retail level to bring in core deposit accounts.

Yes.

So are you seeing -- so where is CD pricing now?

Look, from 1.65% to 2.10%, depending on the duration.

We've been pretty successful with the 12 and 13 months.

And occasionally, we look at the 18 months as well, but I think, in general, I don't think customers are ready to go 2, 3, 4 years yet.

So it's still that shorter-term type maturities, which is pretty much the industry standard throughout the U.S.

So would the 2.10% be more like 13 months?

Or is that 2-year type stuff?

Look, I'd say more like 13 to 15, depending on markets.

We're in various markets.

Just bear in mind, 1-year treasury is trading at 2.25% and the 2 years at 2.50%.

You can go to treasury direct and get 2.5% tax [-free CD] if you choose to.

So it's going to be a competitive deposit market and that is what typically happens when short-term rates rise.

Typically, you don't raise rates where you have the biggest bulk of deposits that are maturing.

You raise rates into new offerings.

And then you basically keep rates as low as possible in the rollover rate, as you know.

And then on the borrowings that you're rolling into, what's the general duration and rate on those at this point?

So like I mentioned previously, over the past year and a half, we moved about $6 billion at 2.14%.

The average life has been approximately 2.4 years depending on the tranche that we moved over.

I would say, we were very fortuitous going into the beginning of this quarter.

If we look at the portable market, there was some attractive optionality there, so we're able to get very well cost of funding for the 3-year type portable transaction.

But the most of our stuff has been straight bullets.

And if you go -- bullets are expensive right now.

So depending on what's out there available to the bank, we've opted for the first tranche to be -- in a -- with some type of optionality in the form of convertible bonds and the second tranche going into -- and the previous tranche that we first went into with bullets, so 2-year, 3-year type bullet structures.

And those would be like mid- to high 2s percent, I guess, at this point?

Look, like, I said, it's the first $6 billion was at 2.14%, the vast majority of that 5 bullets, so you had (inaudible) much, much lower (inaudible) with long-term money at 3 years, below 2% a year ago.

Got it.

And then the cash balances seemed to be pretty elevated this quarter.

What's your interest in using a chunk of that to just fund some of these borrowings maturities or just deploying some of that into securities to help defend the NIM at this point?

That's generally the plan.

Obviously, we are very, very cautiously evaluating the securities market.

We believe that there's going to be an opportunity and we are being very cautious there.

We have a 6% securities to assets on the balance sheet, which is the lowest we've ever had as a public company.

So we are positioned to put on growth.

We will -- we'll look at this, the loan pipeline, which is significant.

Q1 is typically a slow quarter where we grew 8% net multifamily growth.

So as the company moves into its loan product and evaluate the securities market, we are going to deploy cash.

At the same time, in rising interest rates on short-term funding, we're getting a much higher kick on the investable yields.

So, for example, 3-month treasuries or 3-month term notes that we are getting that our cash and cash equivalents are dramatically higher than they were a year ago.

So we're being very cautious here, because we don't want to get stuck in a duration trap, and we will put the money where we feel comfortable, but it's not going to be a one-and-done quarter.

We're going to gradually build the portfolio.

In the event that for some reason we get regulatory relief in respect to SIFI threshold, we'll accelerate that.

But the good news here is that a year ago, at this time last year, you picked up 100 bps on the securities market.

So it's been a favorable movement, actually probably more favorable than loan spreads, right?

So the -- but the good news on the loan side, we're seeing, I would say, an industry repricing upward as far as the coupons.

Rates are higher, we are going to be at the market, and the market needs to have some reasonable spread over the 5-year.

So anywhere from 120 to 140, that should be our spread and that gets you north of 4% on the loan market.

And like I said, if you look at where the coupons are, our coupons are at bottom.

So the good news, every month and every quarter, we elevated our current coupons in the portfolio, so we believe that the portfolio yields or the coupons have bottomed in 2017.

We look forward to seeing that either an U-shape recovery or a V-shape recovery in the actual coupons.

That's going to be the exciting dynamic to offset some of this margin pressure.

In the event the customer with a 3% mortgage realizes 4.5% and -- is the current market, they maybe opt to accelerate their prepayment activity in order to lock in now before it's too late.

We're patiently awaiting that opportunity.

We believe that's a real viable option for us.

I know your name NIM guide includes the -- obviously the March hike that we've just had.

Given that you're also assuming a June hike, are you thinking about similar pressure in 3Q that you're expecting for 2Q?

No, I don't give a go past one-quarter guidance on the NIM, it was a good try.

So again, do you think they're going to raise them over the summer?

I don't see it.

I see, maybe, it is a possibility in September, but the reality is we're kind of following Bloomberg consensus and that's a 3% Fed funds rate going into the first quarter 2020.

That's up -- was June this quarter and then we have another one at the end of the year and the same pattern next year.

And then one more in the first quarter of '20 and to get you the 3% on Fed funds.

Now that could change tomorrow depending on economic landscape, but you don't have a crystal ball and obviously, we are liability-sensitive.

We're working real hard to look at the best dynamic on the funding side and this is clearly an opportunity for us to be competitive on retail deposits, which would offset some of the funding costs.

The borrowing costs are expensive when you run the model and in our model, we have a lot of this funding going out to more expensive type financing on the wholesale market.

If we're successful, that could change the NIM on our own guidance more favorably.

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

Just going on the NIM guide, I wanted to make sure I had the core guidance correct for next quarter.

Is it down 10 basis points?

Is that accurate?

That's correct.

Let me repeat it again, I said down 10.

Yes.

Got it.

And is that because you have...

That excludes prepayment activity.

That's just NIM excluding any prepayment activity.

Right.

So that's a higher ramp than prior quarters.

It used to be 5 basis points.

I just wanted to get a sense, is that because you have a greater...

My response to that is we had the March and with interest based on June.

So the collective nature of those 2 increases plus the fact that we have $1 billion coming due on the wholesale markets and we're assuming reasonable, we'll call it, a cost of funds on the reinvestment side there, we're guiding down to 10.

That could change depending on how successful we are on the deposit side and also depending on what happens in June.

But I truly -- we have the impact of the March and the previous December rate hike into the quarter for sure, 100% of that.

So I just wanted to...

And by the way, we did have a very, very conservative view on cash deployment.

If we decide to put the cash deployment to work tomorrow in the securities market, that rate -- at that time will be lower.

That's going to then to be a business decision as we evaluate the securities market, because we are sitting in an abundance of cash.

Right.

So I just wanted to better understand the components and isolate the variables a little bit.

So the increase from used to be 5 to 10, how much of that $1 billion of borrowings being repriced contributes to greater margin compression?

I'm not going to -- yes, I wouldn't get into that much specificity.

It's about $1 billion per quarter.

We have a little bit of repeat in Q3, it's $200 million, I gave you by quarter.

And the fourth quarter is $1.4 billion.

So that's a breakdown for 2018 by quarter, of which the average for the entire year is a $166 million that's coming due.

Where we have some higher cost coming due in this quarter, so wouldn't be as much of a bleed and I'd say the lower cost coming due towards the middle of the year, which is, again, but a smaller amount.

So we're going to be very focused on the retail deposits.

That should be an opportunity for the bank, because obviously, we could afford to bring in this given that we have a lot of rollover of the wholesale bank -- the wholesale deposit market and repo market that's going to be at a higher cost, so we can offset some of that.

That could offset some of the margin pressure.

I mean, all else equal, do you think -- does the flatter yield curve have any impact on your ability to maintain margin -- or manage margin compression, is that the takeaway?

I think that's there with the lack of accelerated prepayment activity, but the good news is that the pipeline is strong.

We have, we'll call it a pipeline close to 4% coming on to the balance sheet.

What is more exciting is the current rate offering.

There's a timing difference, it's between 60 to 90 days before you see the realization of these higher loans coming into the balance sheet.

So I mean, we can easily put this money to securities tomorrow at the current closing rate that's in our pipeline.

The markets are close to 4% now and the loan book's coming on around 3.87-ish percent for the quarter, but the current rate offering is, what, north of 4%.

So as that resonates to the customer base, there will be an acceleration of activity and hopefully, we'll see more prepayment activity.

So we're encouraged by what we're hearing from our lending people that there is a lot of chatter about, when is the right time to refinance?

And every file that gets touched, we get paid a fee and that should drive in the bottom line.

Right, okay.

And then just curious on the funding side, the funding strategy.

Obviously, the loan-to-deposit ratio is at 133%.

As you think about the attractiveness of the deposit market versus the wholesale market, should we be thinking about a lower loan-to-deposit ratio going forward?

Or a maintenance of that?

Or just give us some color as to the incremental billion dollars of loans, what that will be funded with?

So again, the mathematics is pretty simple.

We're doing commercial real estate multifamily.

We are very proud of our asset quality.

We're -- that's our focused business model, especially finance business is going to grow with the seasonal adjustment in Q1, which should grow that business between 20% to 25% this year.

That's at higher yields.

The reality is we have a very unique opportunity here to be very active on looking at the prepayment mix, which -- and we -- like we said in the previous quarter, 5% net loan growth is a reasonable run rate.

At the same time, we're not growing our balance sheet 10%.

So, obviously, we have some cash here, we'd like to deploy.

We're being very cautious, but I'm not going to get into specifics in respect to how the margin components will move, but there is a drag in the back end of the curve, because rates have been artificially lower compared to the short end of the curve.

If that starts to widen, that's a very favorable event for the company.

And we're patiently awaiting that opportunity to deploy future closings into that -- into the higher-rate environment.

If it does -- if this -- if the curve stays where it is right now, I think many customers are going to have to make real business decisions given where their current coupons are.

As I said in the previous quarter, we bottomed out on multifamily and CRE on the coupons in '17.

So there's upside potential, the question is, is it a U-shape recovery on the asset yields or a V-shape?

Right now, we're seeing a U-shape.

Each month, our rate has gone up every month, that's a favorable dynamic, but it's not -- it's obviously not keeping up pace with the cost of fund.

Eventually, there'll be -- cost of funds should stabilize over time and we should be thinking we're going to get the 10-year down figure on multifamily CRE coupons, will be hopefully a very long opportunity on the upside from U-shape and/or V-shape.

Our next question comes from the line of Brock Vandervliet with UBS.

Could you -- I may have missed this in your prepared remarks, but the $9.6 million provision, was that for taxi medallions?

Or some other factor?

So we had -- the good news about the total portfolio asset quality is pristine and we will define as being stellar.

We had 2 specific loans, one an ADC loan and one a pure CRE loan that we had to charge down.

One is off the books, that's about $2.2 million, that was the ADC loan.

The other was $3.2 million in respect to a CRE loan.

And so our taxi medallion that was insignificant, is about $1.5 million of related charges to -- from taxi medallion.

Our taxi medallion portfolio, obviously relevant to our balance sheet, is dramatically small than our competitors.

It's about $95 million all-in total exposure to the industry, of which we have a valuation in the -- in, like, around $265-ish million is our current valuation for the portfolio.

So we're seeing positive trends in the medallion.

We've actually -- for the first time, we actually sold 1 and that we close in April.

Over $325 million was the actual purchase price, and we have 2 pending sales, so that's encouraging.

We haven't really done much in years as far as getting rid of some of these repossessed assets, but it's encouraging to see some stabilization.

I'm not going to define any expectation on value, but the good news is that we've actually transacted on 1, closed, and we have 2 that are pending our exit from the repossessed portfolio.

Got it.

And within the -- so you said there's CRE?

And what was the other one?

It's an ADC loan, construction.

Got it.

Got it, okay.

Any other color on the CRE loan?

Just, there's a typical unique situation, I will call, an anomaly for our asset quality metrics.

The great news for the portfolio is that if we carve out all of the nonperforming multifam -- nonperforming medallion loans, we're at a percentage of, it's like $30 million [of that and PAs] on a $50 billion balance sheet.

So we're very proud of the fact that we've such a de minimis amount of nonperforming assets.

Don't expect to see any uptick, currently.

It's a big question mark on the medallion side, but as far as the CRE and the multifamily, it's performing stellar.

And also there is a possibility that your provision will probably anticipate to be lower depending on the medallion business, going into these new quarters ahead.

(Operator Instructions) Our next question comes from the line of Collyn Gilbert with KBW.

Tom, just curious, talking about kind of loan pricing and the borrowers wanting to come in and refinance before rates move higher to materially higher, whatever the case might be.

What do you think that level is?

Like, when you said -- made the comment, before it's too late, like what do you think that rate level is that's going to cause the slowdown in refinancing activity?

Let me give you specificity around what happens around the quarter.

In the beginning of January, we're probably in the mid-3s percent, towards the end of January, we ticked 4%.

That created a lot of activity, then we went back down to 3.78%, plus market volatility in February brought rates lower and market yields had come down.

We are back north of 4%.

Rates are higher.

We're getting a lot of chatter, a lot of discussion.

Our lenders are very active right now.

All it takes is activity as people try to realize, is it the time to do something with their portfolio now or they wait a year or they wait for a higher rate.

The average coupon is such a low-average coupon that market rates moving 100 basis points is meaningful for the next round of financing.

This typically is another 5 years they're going to lock in.

So we're very pleased on this flurry of activity that happened in January.

It slowed down in February and the flurry is back up again.

And we raised rates, I believe, in the past 10 days twice.

So right now our current offering for, what I'll call our cherry-type 5-year multifamily papers, 4.8% (sic) [4.00%] and 4.25%.

If we look at the commercial market, we're close to 5% -- 4.75% to 5%.

Those are meaningfully higher than the current portfolio coupons.

So the good news is that we're very bullish about the fact that there's been a flurry of activity in January.

We saw a new flurry of activity recently and if that continues with a higher rate, we believe that will be an ongoing positive benefit for the company.

Collyn, we've been a public company for 25 years and consistently over that time, we've told everyone that we do not try to anticipate prepayment.

Prepayment is very erratic and there are many, many different factors that impact the dollar volumes in any given quarter.

So it's not as though it's directional, as interest rates might be on CDs and the balance of decisions that are made are very determinable.

Prepay is very erratic, and therefore, we've never tried to anticipate prepay.

Okay, okay.

And then just tying that into just broader market activity rate, I mean, it's impossible to gauge, but it's just -- there seems to be so much commentary and discussion that demand -- loan demand is slowing, real estate demand is slowing, so just trying to sort of gauge what's that -- what's the rate trigger that really starts to see that activity start to fall off a little bit.

Collyn, bear in mind, the government is typically played at the back end of the curve.

The fact that we have a 10-year that's now is north of 3% -- approximately 3%, that does impact the DUS market, it impacts the agency market and it tends to bring customers back to the portfolio lenders.

So the fact that we have a higher rate environment is very favorable for portfolio lenders.

We look forward to continuing seeing that, because there's an option, go to the government longer-term funding and lock in a different type of structure or go back to your portfolio lender.

So we're pleased to see this slight movement in the back end of the curve, is typically a favorable event for a portfolio lender, and we are portfolio lenders.

And again, another thing that is maybe a little atypical here.

There is clearly a change in market participants.

Some people that are ordinarily in our market aggressively, are not in our market at all.

And there's no question that there are people in our market that do not belong in our market.

The government is the government and the government is an active player in our market and has demonstrated that consistently, but the other players in our market are rather erratic.

So the people we compete with will change over the period ahead.

And therefore, the way, in which we compete, will be consistent from our perspective, but not consistent from what is available in the marketplace.

And Collyn, I would just add to Joe's commentary that it's clearly going to be a growth story in our core business model.

We talked about the 5% net loan growth, multifamily is up 8%, we feel very confident in our expectations given the current pipeline.

That will continue.

As I mentioned, we will start growing the balance sheet a little bit more, we'll call it, accelerated depending on what happens down in Washington.

But at a minimum, we'll continue to grow the loan book, which, in the previous 3 years, we were not growing the loan book, we were selling assets.

We're not in the market selling assets currently.

Okay.

Okay, that's helpful.

And then just on the securities side, your securities book is yielding, blended yield 3.95%, really healthy yield.

What are you seeing in terms of new securities purchases?

And I hear you're messaging that you're going to hold off perhaps for as long as you can on purchasing securities in event of LCR.

But just trying to kind of get a sense of -- it seems like there's still going to be some mixed dilution occurring when you have to start building for -- building that securities book.

On our portfolio -- obviously, our portfolio is dramatically small than historical norms, right?

We're at 6% of total assets, of which we have a very substantial amount of borrowings that have -- that are held at the home loan bank, which we have home loan bank stock and they pay a very sizable dividend, which -- we enjoy that sizeable dividends.

So when you look at our portfolio yield, that does impact some of the benefits of being a member of the New York Home Loan Bank.

At the same time, if we look at the current portfolio that we have, we'll call it the mortgage-related portfolio, that is on a 3.25% yield and markets there are higher.

So if we were to try to increase the portfolio, absent the home loan bank, that's a dividend that gets paid, we have an opportunity to increase the yield in the securities portfolio as well.

So for example, in this environment, you're close to 4%, anywhere from 3.60% to, we'll call it, 3.90% is kind of the range depending on your duration and how much risk you want to take on duration.

We think that this is a positive change from the previous year, it's about 100 bps change and that's a very positive impact when we decided to double the securities portfolio.

Now we could do that tomorrow with the cash, at least the portion of it with the cash that we have in our balance sheet.

In the meantime, we can continue just to keep a lot of the cash in short-term instruments, predominantly treasuries and money with the Fed, and as we see this rate environment continue to rise, we should be able to deploy this at a much higher rate than our current portfolio ex the home loan bank investment.

Our next question comes from the line of William Wallace with Raymond James.

I just have 2 quick follow-ups.

One on the taxi, the sale that you did in April and the 2 pending sales, are those going off your balance sheet or are you financing those for the buyers?

Finance.

We would like to say they were off the balance sheet, but -- and these are actually with new potential -- new customers.

So the good news is that people are looking for opportunities and we financed it with 100% financing.

It is what it is, and we can -- and we are pleased to be able to at least get a transaction done, and we have 2 more pending as I discussed.

Okay.

And then, I apologize, Tom, I think, I heard 2 different things when you were talking about the noninterest expense guidance.

You said, down a couple of million to about $137 million in the second quarter and then I heard, I thought, I heard, flat from there.

But then I thought, I heard, maybe, there's opportunity to take more out in the back half.

I typically don't give long-term guidance, Wally, so big picture, typically the first quarter is the high quarter of the year given FICA liabilities and the like and payroll taxes.

So we have $139 million Q1, we think that it could be around $137 million Q2.

I don't give long-term guidance, but $137 million, if you run that out for the rest of the year, you come at $550 million.

So the range between $550 million and $560 million, I think, is very reasonable.

We called $560 million last year and we think we're going to achieve that, we may be able to achieve around that $550 million, maybe even better, but I don't want to give long-term guidance on the expense side.

We're razor-focused to continue to improve the operations of the institution.

We want to leverage the money spent on being ready to be a larger institution.

A lot of money was spent during the expectation of closing Astoria.

We hope to benefit from that.

You'll see a dramatic reduction of consulting fees that were put in place to try to get us to the finish line of closing the deal.

Obviously, the deal didn't happen, but we have the cost there.

We think, you'll see some efficiencies going forward.

In the event, CCAR has changed and 2.50% happens, there'll be some savings, but it's not going to be material.

But remember, we founded that the company's mortgage operation was a fairly large platform.

It was in every state, it was a major operation in Cleveland.

We have exited that.

We had $21 billion of UPB in servicing.

We're out of the servicing business.

There's a lot of cost that we run out of that.

To the tune, between $60 million to $65 million on that alone.

So we feel very bullish that we can get back -- where our goal is to get somewhere between 45% to 46% efficiency ratio by year-end and then set us up for '19 with a much lower efficiency ratio, because of growing the balance sheet and we have operating leverage that -- so getting back much of the core historical norm how we operate.

We're not saying we're going to be in the 30s percent, because it's a new landscape, we acknowledge that.

But we should definitely be somewhere in the mid-40s percent, not in the low 50s percent to run this franchise given our product mix.

Thank you.

There are no further questions at this time.

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

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

We think that our results show that 2018 is off to a good start and look forward to chatting with you again at the end of July, when we will discuss our performance for the 3 and 6 months ended June 30, 2018.

Thank you.

Thank you.

This concludes today's conference.

Thank you for your participation.

You may disconnect your lines, and have a wonderful day.