Flagstar Financial Inc (NYCB) 2018 Q2 法說會逐字稿

Good morning, and thank you all for joining the management team of New York Community Bancorp for its Second Quarter 2018 conference call.

Today's discussion of the company's second 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 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 2017 Annual Report on Form 10-K and Form 10-Q for the quarterly period ended March 31, 2018.

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, operator.

Good morning to everyone on the call and on the webcast, and thank you for joining us as we discuss our second quarter 2018 operating results and performance.

This morning we reported diluted earnings per common share of $0.20 for the 3 months ended June 30, 2018, unchanged compared to the $0.20 for the 3 months ended March 31, 2018.

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

The dividend is payable on August 21 to common shareholders of record as of August 7. Based on yesterday's closing price, this represents an annualized dividend yield of 6%.

Starting off with the news from the regulatory front.

As you already know, the Economic Growth, Regulatory Relief and Consumer Protection Act was signed into law late May.

We are pleased with the passage of this long-anticipated bill and believe that it is a game changer for us and expect to benefit going forward from this -- from its enactment.

Not only do we benefit from the SIFI threshold being raised to $250 billion, but regulatory relief for us also means the DFAST is no longer required.

We are also immediately exempt from LCR requirements.

We will not be subject to resolution planning.

And it exempts us from any CCAR requirements.

Some of these benefits are already evident in our second quarter results.

Others will become evident over time and will provide us with greater flexibility with our corporate structure and further help to reduce our operating expenses.

Turning now to some of the quarter's highlights.

Our performance during the quarter -- the current second quarter reflects the strategies we have communicated in the past.

That is, to grow our assets, redeploy our excess liquidity and reduce our operating expenses.

During the quarter, our total assets increased to $50.5 billion.

We saw continued growth in the loan portfolio.

We redeployed some of the excess liquidity on our balance sheet.

Operating expenses decreased further.

The net interest margin came in within our expectations, and asset quality remained stellar.

With the SIFI threshold being lifted this quarter, total assets increased to $50.5 billion, up $1.3 billion from year-end 2017 and up $814 million or 7% annualized from the prior quarter.

Our loan portfolio showed strong growth during the second quarter.

Total loans held for investment grew $1.1 billion from December 31, 2017, to $39.4 billion and $558.4 million or 6% annualized compared to the balance at March 31, 2018.

The growth of both periods was driven by our multifamily and C&I portfolios.

Multifamily loans grew $556 million or 8% on an annualized basis compared to the prior quarter, while the C&I portfolio, which consists primarily of our specialty finance business, grew $134 million or 26% on an annualized basis.

Originations increased substantially during the quarter.

The company originated nearly $3 billion in new loans this quarter, up 58% on a year-over-year basis and 22% on a linked-quarter basis.

With the exception of one-to-four family and ADC loans, originations increased across the board on a sequential basis, including double-digit growth in the multifamily CRE and specialty finance categories.

Our current loan pipeline is approximately $1.8 billion, comparable to the pipeline at the end of last year's second quarter and includes $1.2 billion of multifamily loans, $254 million of CRE loans and $165 million of specialty finance loans.

With the SIFI threshold increased to $250 billion as well as with our originations volume and pipeline, we expect continued loan growth going forward.

At this point, I would like to spend a few minutes discussing the New York City CRE market.

We have been an active participant in the rent-regulated nonluxury subsegment of this market for nearly 50 years.

As such, we have an unparalleled view into this marketplace.

We have strong, long-standing relationships with many of the brokers this market as well as with many of the top owners of the properties who value us for our service and expertise.

When we went public 25 years ago, our loan portfolio was about $700 million, with the majority of those loans being CRE, including in this multifamily segment.

Today, our loan portfolio is more than 50x as large, and our multifamily CRE portfolio continues to represent the majority of our loans.

This consistency has served us well for a quarter of a century.

Since our IPO, we have originated $81 billion of our niche multifamily loans, and our cumulative losses are only 18 basis points.

This is no accident.

We have best-in-class underwriting standards which haven't changed over time.

Others may have changed.

We have not changed.

We are cash flow-based lender based on current NOIs.

Our average loan size is small relative to the market value of the property.

In fact, when we do lose a loan to a competitor, it is because we are unwilling to lend more dollars than we are comfortable with, and our pricing also remains consistent.

Our current pricing on new multifamily loans is in the 4% to 4 1/4% range, and CRE is in the 4.5% to 4.75% range, while our commercial loans are priced off the either prime or LIBOR.

Historically, when in some players' view this market becomes irrational, that's when rational players like New York Community are able to step in and gain market share without taking on undue risk.

Turning back to our balance sheet.

During the quarter, we initiated our reinvestment strategy and started redeploying a portion of our excess cash into higher-yielding, shorter-duration, variable-rate investment securities.

We expect to redeploy our remaining excess cash position into higher-yielding loans and securities throughout the rest of the year.

Moving on to the expenses.

We witnessed further improvements in our operating expense base.

Excluding a $1 million write-down of taxi medallions held as repossessed assets, operating expenses would have declined $26.6 million or 16% compared to the year-ago quarter of $137 million, which is in line with expectations.

For the first half of this year, operating expenses declined $53 million compared to the first 6 months of 2017.

Our efficiency ratio increased modestly to 48.19% from 47.45% in the previous quarter due to lower revenues during the quarter.

The company remains on track to meet or exceed the $100 million of expense reductions in 2018, which we have previously discussed.

In addition, with Dodd-Frank reform completed, we expect additional opportunities to reduce operating expenses further over the next 18 months.

Moving on to the net interest margin.

The margin this quarter was 2.33%, down 9 basis points relative to the first quarter of this year.

Of note, prepayment income on loans rose 34% on a sequential basis, contributing 14 basis points to the margin.

On the asset quality front, our asset quality metrics remained pristine during the second quarter.

During the quarter, NPLs declined 23% to $57 million or 14 basis points of total loans compared to the previous quarter.

Excluding nonaccrual taxi medallion-related loans, NPLs declined $16 million sequentially or 54% to $13 million or 3 basis points of total loans.

Net charge-offs were $5 million or 1 basis point.

Excluding taxi medallions, our core portfolio continues to generate little to no losses.

In fact, we had net recoveries this quarter, excluding taxi medallion-related charges.

Lastly, we believe that this quarter shows that we are poised to benefit from regulatory relief and that we are focused on controlling what we can control.

Despite the current interest rate environment, we have several levers to generate further earnings growth: balance sheet growth, significant reinvestment opportunities and further improvements in operating expenses.

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

We will do our best to get to all of you within the time remaining.

But if we don't, please feel free to call us later today or this week.

Operator?

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

I guess just first question.

If I can touch upon expenses.

One is, Tom, you mentioned that 1Q was the high watermark for this year.

It should continue to trend lower.

So, one, I think just would be -- any clarity you can give in the back half of '18 expenses?

And tied to that, I know you don't like to give guidance beyond the quarter, but given, as Joe mentioned, this was like a game-changing event with the SIFI threshold being moved, what's your outlook relative to the $550 million in annualized expenses in 2Q as we think about 2019?

So I would tell you that, obviously, when we look at the high quarter in the previous year, which is running at a $660 million run rate, I mean, we [walked] upon the exit of the mortgage banking operation and, obviously, expense control management, we anticipated a $100 million adjustment from that $660 million, which gets us to the $560 million.

We're on target right now to be slightly below $550 million.

So obviously, we would guide on Q3 slightly down off of the second quarter number.

So I'd say about $135 million for Q3, and then that will continue slightly lower into Q4.

That should get you below the $550 million, which will be probably about $10 million to $12 million better than we expected from our initial $100 million guide from the previous year.

And I would say with that being said, as you indicated, this -- the changing on the regulatory front is very favorable for a bank of our size because you are giving us the potential to be a CCAR bank.

So we anticipate further reduction into 2019.

And we don't give elongated guidance, but I'll give you some clarity as far as the cost containment initiatives that we're focusing on right now would be generally driving that number somewhere into the low 500s.

So continued expense reduction as we grow the balance sheet, which ultimately will be operating leverage going into the -- into 2019 as well.

So we're still driven on the operating leverage.

Obviously, we have the margin pressure, but we see good balance sheet growth.

And we talked about reinvesting the cash flows from both the excess cash that we have on the balance sheet with rates trending higher on our loan book as well as security yields higher, we're anticipating good balance sheet growth going into 2019, with continued operating leverage and expense management.

Helpful and very clear.

I guess -- and moving on to the margins you mentioned.

One, I would love to get an update on what -- where you think the margin lands as we look into third quarter.

And tied to that, it feels like you had about $2.2 billion in cash sitting on the balance sheet at the end of June.

How much of that do you expect to redeploy?

And what's the duration and the yield that this has been redeployed at?

So we envision in the short term -- obviously, we don't give long-term margin guidance.

We think the margin will come in down better than the previous quarter.

So we're probably looking around 8 basis points.

Last quarter, it was 10, and it came in line with our expectations.

That assumes, obviously, we had the rate increase that happened in June that's impacted in Q3.

And we're being, obviously, competitive on the deposit cost front to continue bringing in funding to fund our growth.

So clearly, looking at the opportunity on the investment side, we believe that this cash position will be deployed throughout the year.

Obviously, loan growth has been the key, and that's been consistent slightly north of 5%.

We still stand to that number somewhere between 5% to 6% net loan growth, which if you look at the multifamily space that number is running around 8%.

So we have higher yields coming off the portfolio.

What we're seeing is interesting toward the end of the second quarter was that the WACC that was put on was about a 3.85% in June.

The average WACC for the quarter was 3.78%.

That's up 21 basis points quarter-over-quarter.

So that's unfortunate.

It's not moving as fast enough, but it's moving in the right direction.

So that elongated view analysis that -- which we discussed with our shareholders is that we've had such low rates for so long we have a very low weighted average coupon that's embedded in the portfolio.

It's about 3.47%.

We think it's a great opportunity as far as we'll have to be contractually positioned to refinance and/or take out some more funding at higher rates.

As Mr. Ficalora's commentary was, we're north of 4% in the market for current rates, that would probably start hit the portfolio as we get towards the second half of this year, and that'll be very favorable to the margin stabilization.

And what is it assumed term of that $2.2 billion?

Like how low can that number go over the next quarter or 2?

Well, I envision our cash position probably somewhere between $800 million to $1 billion, and it will probably hold in that range.

Let's say $800 million we'll hold in total cash.

So we have most of that money being deployed into both securities and loans.

And bear in mind, we had -- we reduced our securities portfolio as we [managed] the SIFI threshold for years.

So we have to replenish that.

So my -- our guess is that $1 billion per quarter on securities growth is reasonable and that, that will -- right now, we're at 8%.

By the end of the year, that could be 12%.

So it's moving in the right direction.

We plan on building that portfolio over time, but we're still well below the median average throughout the industry.

And loan growth is coming in as expected.

So just one last final question on that.

So I guess as you add securities every quarter, obviously, that's going to impact the NIM.

Like do you feel we are at a point where NII, which you reported at $264 million, that's close to a bottom or can it begin to floor now?

Or do we still have downside to the NII?

Again, I would have to -- again, I'm not going to give you elongated guidance on NIM.

I will say that, obviously, the Fed increases do impact our funding base.

However, we're very bullish about the opportunity of the portfolio repricing.

We haven't seen that U-shaped curve become a V. When it becomes a V, it becomes a very dynamic position for the portfolio because our average life of multifamily and CRE loan is about 3.1 years.

And when you think about the speed that we're running, the CPR speeds are very slow.

In the event that speeds up and is a reaction to changes in interest rates, that could be a game changer for the margin.

So obviously, when you're dealing with an elongation of time and customers are kind of waiting this out over time and if they do react to the changes in interest rates, we're here to finance that.

We had a significant origination quarter where some of that was refi and the quarter -- and the weighted average coupon is building up slowly.

It's not building up quickly enough, but we're very optimistic that as we get to -- each quarter, as we get closer towards maturity, this could be a very powerful driver towards stabilization of the margin.

Ebrahim, in simple terms, we have the capacity to grow the assets, which means we have the capacity to grow the earnings.

All growth in our assets will result in increased earnings.

We've been, for years, restrained in a way that obviously also restrained our earnings.

So just the simple fact that we will be able to add earning assets to the balance sheet means we will add earnings to the bottom line.

Our next question is from Ken Zerbe with Morgan Stanley.

I guess -- in terms of the balance sheet growth, I can certainly appreciate the increased flexibility you have to grow.

But can you just address the funding side of that?

Because, I mean, part -- I get the curve is kind of leading to downward pressure on the margin, but I'm curious on how you plan to fund the incremental balance sheet growth and...

Yes.

Sure, Ken.

So I would say obviously the margin was impacted over the past few quarters because we had significant borrowings coming due.

We had about $1.5 billion that came due in Q2.

That has -- at a much higher cost than the current marketplaces -- CDs and other deposit instruments that we used to fund the bank.

That number came in, I believe, at 2.34% on $1.5 billion.

Next quarter, we have very little coming due.

So Q3 will have very little borrowings to be [repriced].

I think it's about $200 million towards at the end of the quarter at about a 1.65-ish rate.

And we'll deal with more of that pressure towards the end of the year, which is about another $1.4 billion that would come due.

So obviously, that [going to] also putting pressure on the funding side of the balance sheet.

As far as the CD market, we're competitive.

And obviously, we try to get ahead of the rate hike, but the marketplace has changed dramatically.

Rates are up throughout the entire retail spectrum, and we are predominantly a retail-funded franchise.

So in the marketplace, the average cost of money that came on, on the CD front was around 2.05-ish for the quarter.

In this current market, you're looking at anywhere from 2.20% to 2.30% depending on competition, and it's been very competitive.

In addition to the competition for the traditional retail bank, money center banks are competing.

So that's the marketplace.

So we're going to be in the marketplace bringing in deposits opportunistically and at the same time trying to manage our funding cost and looking at ways to bring our cost down over time.

Clearly, the repricing of the whole [Sabonis] book is pretty much in public as far as the total [value on that], about $4.6 billion next year, and we'll deal with that as it comes due.

And the reality is that there's always a spread between the cost of our liabilities and the earnings on the new assets that we deploy.

We have a very high confidence that we'll be able to get a better return on the assets than we pay for the liabilities.

Ken, I would just add we have substantial potential loan repricing that will impact -- offset this issue.

So we'll have to look at both sides of the balance sheet.

Yes, we were -- we're liability sensitive in the current environment where our speeds are very slow.

If the speed do pick up on refinancing and repricing, that will be a substantial change towards the impact to the margin favorably.

So we can't make that call yet because we haven't seen that reaction yet by customers.

But as each quarter goes by, we're 1 quarter closer to the contractual maturity of a very large portfolio.

And the average coupon is in the low 3s, and market's in the low 4s.

That should benefit us.

Got you, okay.

And then just my other question.

In terms of loan growth, we've heard from a number of banks this quarter that the CRE market is just getting irrational from a pricing standpoint, specifically nonbank lenders.

Can you just talk about sort of your expectations to hit your loan growth targets given where just a meaningfully increasingly irrational CRE market?

Because I know you guys tend to be very disciplined in terms of what you put on.

I think you ask an appropriate question.

And over the course of long periods of time, we are a rational, consistent player with known successful participants in our market.

The irrational lenders are going to lend to new owners or owners that are opportunistically going to take advantage of rate.

We're a long-term player that actually has rollover in our assets on a very favorable basis.

People are willing to take the rates that we offer, even though they can get more money from somebody else or they can get a lower rate from somebody else, because with the consistency of what they put into their portfolio given our funding they know that they have the ability when the market turns to actually get additional money from the loan they have with us.

And we've done this time and time again.

And therefore, there has been benefit to the best owners in the market where they can actually buy a declining marketplace because they have available funding in the portfolios they have with us.

So this is not a new concept.

This is what we've done time and time again over many, many decades actually.

And then the fact is that we're very optimistic that we will have appropriate share of the marketplace.

Our next question is from Brock Vandervliet with UBS.

Just a follow-up on one of your prior responses.

The $4.6 billion in wholesale repricing next year, what's the plan there?

Is that going to be rolled into additional wholesale?

Or is the plan to rotate take that into CDs or other forms of funding?

Obviously, the historical plan was that we would transition our balance sheet through growth or acquisitions.

But absent any transaction on the table, we will have to look at that next year.

And more likely than not, if we don't bring in the deposits, we'll roll the [VARs] into the current market, whatever the market will bear at that time.

But I still [say] we -- we've look at the funding base as we've grown the bank from $1 billion to $50 billion through growth through acquisition.

That's been the historical trend.

It's been obviously many years since our last growth acquisition, but clearly that's been the historical position of the company.

I think one of the way for us is going to be significant consolidation of the marketplace.

And those transactions will lend themselves to our business model.

So the likelihood that we have the opportunity to grow the bank, grow the earnings and benefit from a consolidated market is in front of us.

Okay.

And I noticed there was an increase sequentially in noninterest-bearing deposits this quarter.

Could you speak to that?

I would say on average probably we have no -- obviously, we have lots of escrow relationships.

We focus on building the deposit base.

We've had a full-court press internally to focus on bringing in core deposits, including relationship deposits with our customers.

And then we have, obviously, real estate relationships as well that have significant escrows.

So obviously, the goal here is to bring in deposits.

And deposits are very important as we do not have a pending acquisition to revamp the funding.

So clearly, deposit growth is important to the bank, and we will continue to focus on the marketplace in all areas both -- noninterest bearing will be much better than interest bearing, but in all areas deposit growth.

That is the focus of the bank.

Our next question is from Dave Rochester with Deutsche Bank.

Just real quick on the cash that you talked about earlier.

It sounds like you guys are thinking that, that will be gone by year-end or, I guess, down to that $800 million to $1 billion level where you think you're going to keep that, is that right?

That's fair.

Yes.

I think, obviously, we have -- we put some of this money into floating-rate instruments.

So if rates do continue to rise, we'll get the benefit of that.

The first $800 million to $1 billion will go on floating-rate securities broken up in various tranches but clearly a repricing asset.

The next slug of money may be a little bit more longer in durations given where yields are.

We really haven't gone long durations at all given that rates are still very difficult to start getting past that 3% 10-year level that we're hopeful for.

But clearly, we put the first slug of the money into a floating-rate instrument, which is good for interest rate risk and obviously gives us probably about 110 basis points more than what we're earning on the cash.

That average yield came on around 3%.

The next slug of money will be somewhere between 350 and 400 depending on market conditions.

That's going to be the trend in each quarter: continue putting out -- replenishing the securities portfolio with the expectation that the -- to put the money into loans.

Obviously, loans is the priority, but we pretty much feel comfortable that we can hit our 5% net loan target, which has other asset classes slightly being reduced.

Especially, the finance business is running very well for us.

It's been a nice growth engine.

That business started at 0. We're running about a $2 billion book that's committed for.

We have CAGRs over 67% since the beginning of our expected growth, and we think we can grow that business 25% a year.

And that -- and those coupons are significantly higher, but a lot of it's high 2 at current floating-rate marketplace.

So all things being equal, we have this unique situation.

We have a pipeline about $1.8 billion, and the yields on that pipeline is about a 4.18%, 4.19%, which is slightly higher than the previous quarter.

I think what's encouraging, if you look at the latter part of our quarter the WACC that was put on in multifamily is a 3.85%.

So we're getting close to closing loans north of 4%.

It takes time from originating a loan to closing a loan, and I know that even if you look into one of these loans in our transition, I think by the end of the year it'll start transitioning to that 4% coupon, and that should be very helpful as we have such a significant short-duration portfolio in our multifamily CRE book.

Is the thought at this point that the rest of the cash is going to go into securities?

I know you talked about loans as well, but that's not going to go to repay borrowings at this point, right?

You're just going to roll the borrowings?

Again, yes, like I said, we have very small money coming due in Q3, like $200 million at the end of the quarter, and a slug of money toward the end of the fourth quarter, in December.

So obviously, we anticipate to utilize that cash to put into both loan growth and securities.

And we'll be as laser focused at what's the best use of that cash, and we're going to keep on a certain level of liquidity.

Obviously, we're a big bank that has liquidity mandates, and we think somewhere between $800 million to $1 billion will be the ultimate number that will -- these are the -- (inaudible) most of this money is coming from the sale of real estate loans in the form of FDIC-backed assets that we sold like back in '17.

So we should expect to see like another $500 million, $700 million or whatever in growth in the securities book in the next quarter as well?

I'd say maybe $1 billion in Q3 between...

$1 billion?

Well, yes.

Again, we're way too small as far as the size of assets.

We should be somewhere between 12% to 18%.

Right now, we're 8%.

Yes.

I think the bottom line is that this change is only beneficial to the bottom line.

Yes.

Top line revenue growth, obviously, it does have impact to the margin, but top line revenue does grow.

And our efficiency ratio will come down, obviously.

And just real quick on the expenses.

When you guys are talking about the low 500s next year, I guess that $135 million guidance for next quarter equates to $540 million annualized.

So you're thinking you can shave off another $10 million or $20 million annualized on that?

Is that the thought?

Again, I think the trend has been lower each quarter.

I expect the trend to continue throughout 2018.

We're going to really focus on a full plan going into '19 regarding the changing of the regulatory framework for banks of our size.

Now with that being said, having in the low 500s is very reasonable for us.

You have -- obviously, you have the [DIF] fund also contributing to benefits in 2019 for all banks.

That's helpful.

In addition to that, we are going to be laser focused on expense control management and somewhere in the low 5s.

It could be $510 million.

It could be $505 million.

It could be somewhere in that range.

But it's going to be another operating leverage story that continues into 2019 as we grow the balance sheet.

Yes.

You mentioned the surcharge.

How much are you expecting to save on that?

I would say $13 million, $14 million.

That's our estimate.

Okay.

And then the rest of it coming from...

That will also contribute to the reduction for 2019 expenses.

Yes.

And then are you also thinking about headcount reductions or branch consolidation or anything like that as a part of this?

David, we're looking at everything.

Our next question is from Steven Alexopoulos with JPMorgan.

I wanted to start on commercial real estate and -- just to follow up on the environment turning irrational.

You guys clearly have one of the best views into the gray market.

Why do you think competition is getting so much worse here?

Is it just -- is the flow of good deals slowing?

I think it's the incredible length of this particular cycle.

There are realities that markets allow for prices to go up for a period of time.

They stabilize and then they go down.

We've been in the elongated value-creating environment.

And therefore, the market itself is making the appropriate adjustments.

They make those adjustments relatively slowly when in fact they're making it without panic.

In cycle, they make the adjustments aggressively and rapidly.

And that's a very, very different outcome.

So this market is, in fact, a seasoned market that is making the appropriate adjustments blended in the market but somewhat changing.

You get irrational, uninformed lenders provide too many dollars under circumstances that cannot be necessarily sustained.

They have an impact on the market.

And then you have the traditional, existing lenders who are very consistent.

We are a very consistent lender in our market.

So this market is very, very seasoned.

It has had a long time to virtually get to plateaus.

And you look around the world and you look in markets all over the place, this market is one of the more expensive markets in the world.

This market has had value appreciation that is extraordinary and is likely to have value adjustment.

The main reason we're so consistently good at avoiding losses is because we don't lend at market.

And as a result, our portfolios perform through cycles substantially better than market lenders.

So the people that are willing to lend at these plateaus are not necessarily the most informed.

And certainly, they believe they're doing the right thing, but they don't understand sufficiently the risks that they're taking.

It is inevitable.

It happens every cycle.

There's no question that there will be an adjustment ultimately in the market.

Steven, just to add to Joe's commentary.

Obviously, the asset class that we lend to is a refinancing asset class.

So our customers are going to refinance regardless.

So we have a really good opportunity to maintain that business and work with our customers as they have to finance their needs.

So it's a refinancing asset class.

It's not a construction ADC-type opportunity for us.

We're refinancing a very good asset class.

Yes, yes, that's helpful.

On the expenses, many of the smaller SIFIs that are now out of CCAR, they're basically guiding the market to not expect much in the way of cost saves.

They basically have said they'll continue doing many of the SIFI practices such as stress testing.

Can you give some color examples of where you're actually going to see cost savings here?

So -- look, it's crystal clear.

As we went through this journey of becoming a potential CCAR bank, we had raised our expense base in the previous year at a level of a $660 million run rate.

That is not sustainable for our business model given that we sell -- obviously, we need to have substantial asset growth to justify that.

Many banks in the country I would say that to be a CCAR bank they have to add hundreds of billions of dollars to justify the expense to be a CCAR bank.

We're coming off of a very unique place because we were on the cusp of becoming a CCAR bank with a potential transaction that was expected to close.

Those costs are being unwound.

A lot of advisory fees, a lot of technology builds going into the future for the company.

We have a very unique spot here because this company has always been one of the most efficient institutions in the marketplace.

So we're not saying we're going to go back to a 38% efficiency ratio, but somewhere in the low 40s makes sense, not in the low 50s.

If you do the financial math, that is somewhere where I'm guiding on expenses.

So we're laser focused to continue to go back to the way we ran the company, which is an efficient provider.

We do not have complex business models.

We're the premier multifamily real estate lender in rent regulation in the New York City marketplace.

So we don't have a lot of complexities around what we do.

So we feel very confident we'll deliver very good expense management control going into the future periods ahead.

But most importantly, we're doing this with operating leverage as we're finally growing the balance sheet.

We haven't grown our balance sheet in almost 5 years.

So operating leverage and expense reduction will have a benefit to the bottom line.

That's helpful.

Maybe just one final one with the SIFI threshold now lifted.

In terms of M&A, are you guys now back in the market?

Are you more active talking to potential sellers here?

I think there's no question that this raises -- the business model of this company is to grow by acquisition.

This raises the opportunity not just for us but for banks generally across the nation that have a capacity to grow by acquisition.

We are, in fact, actively discussing with any number of people the possibilities of combinations that would be beneficial to all shareholders.

Our next question is from Matthew Breese with Piper Jaffray.

I know you don't typically go out more than a quarter on the NIM guide, but there's some moving pieces here.

And given the pace of contraction recently, I was hoping you could just give us some idea of the fluctuation in market contraction we might see as we look out the next few quarters.

And do you see the pace of 5 to 10 basis points of contraction per quarter?

Is that going to abate in 2019 at some point?

Look, tell me where interest rates are going and the [shape] of the curve and I'll have visibility with that.

But obviously, as you indicated, we don't go out on the margin past a very short period of time.

I think we're very bullish about the portfolio that when it reprices it'll definitely help stabilize our situation.

And we're growing the balance sheet.

So as Mr. Ficalora indicated, we're going to have top line growth.

Margins may be under pressure because we're putting on funding at a higher cost, but we're going to grow the balance sheet and cut costs.

So I think as far as the NIM guide, it was a good attempt, but I'm not going past one quarter.

And we'll talk about it in the next quarter that's coming up.

Okay.

You mentioned that 12% to 18% of the balance sheet will go into securities.

Just wanted to get a sense for timing of that.

Over what time frame do you think you can accomplish...

Yes, I think I said it in one of the previous commentaries, I'm not sure if you heard me, but about $1 billion per quarter for the next few quarters ahead.

We did approximately $1 billion, $800 million that we put on right towards the tail end of the quarter in June, and then we had a couple of hundred million dollars already started this quarter.

We envision about $1 billion this quarter, perhaps another $1 billion depending on market conditions in the fourth quarter.

So that's -- we're slowly getting to where we need to replenish what we watched rolled down as we managed the SIFI threshold not crossing over $50 billion.

We need to put those assets back to work.

We have the cash to do it.

And we anticipate to do that within a very short order as the cash is earning us less money than all other asset classes.

Understood, okay.

My last one.

Tax rate just came in a little bit lower than I was expecting.

Can you give us an outlook there?

I think the tax rate -- we're probably looking at a rate of approximately 25.3%-ish for the third quarter.

It has a lot to do with obviously the tax planning.

Clearly, with the change in the tax law, many banks of our size are going through the complexities around the benefits.

And we clearly are one of the biggest beneficiaries of that.

We were one of the highest tax rate payers in the county.

So I think we estimate about 25%, 35% going forward throughout the -- from the third quarter and throughout the rest of the year.

And after that -- that's a specific guide to your model there, 25%, 35%.

Our next question is from Collyn Gilbert with KBW.

So Tom, not to just belabor this point on expenses but just trying to reconcile.

So the $500 million or so, low $500 million that you're targeting, I mean, that's obviously very low.

I don't think you guys have been at that level since like 2009.

I hear your conviction in your voice.

What do you -- do you think then that would suggest your ability to get back to below a 40% efficiency ratio?

Well, Collyn, let me address that statement.

We had a mortgage bank that did significant volume that had substantial expenses.

The mortgage bank alone we carved out about $60 million of operating expense.

When you carve that out and you go into previous years, that's very reasonable for us.

I feel -- I think $500 million is too high for the company, to be frank.

And obviously, we know it's a different environment.

We have to be very mindful of that.

But bringing it down to the low 500s is very reasonable.

We're going to probably end somewhere south of $550 million this year, and we're still getting the benefit of, finally, some regulatory reforms.

So I -- we're pretty bullish about looking at the holistic view of expenses at the bank and throughout the retail franchise and looking at what makes sense to run this business.

And like you said, we've been the most efficient franchise for decades.

We're not used to running at a 50% efficiency ratio.

Obviously, it's hard to [quote] efficiency ratios when the revenue on the top line is being squeezed.

But absolute operating expenses is going to go lower, and that is the plan as we go into the end of this year and into the next 18 months.

Eventually, we'll be at a point where maybe it's the low 5s where we stabilize.

But at the same time, we hope that we have more margin stabilization and we have margin growth in 2, 3 years.

But clearly, that's been the strategy.

We're very bullish on getting there.

We deliver, and we'll deliver expense control throughout this year.

I gave you specific guidance in Q3, $135 million.

And I'll say Q4 comes in a little bit lower, and that's going to be the expense operating leverage story as we deal with some of the margin pressures that we're seeing.

Okay.

In order -- do you anticipate any kind of large initiatives happening that would relate -- result in certain charges to get that expense base down?

Or that's just going to be natural?

Yes, I'd say most it's going to be natural.

Too soon to tell.

We're going to be laser focused.

I mean, we have a very unique opportunity here.

If SIFI changes and game changes, Mr. Ficalora's commentary is it is a game changer for us because -- you quote 2009.

2009 is when they introduced the Dodd-Frank Act.

And yes, it did impact us negatively.

It was many, many years of expense build to try to get everyone comfortable for us to be a CCAR bank.

And obviously, that's changing now.

So we have the luxury of being under $100 million for the first 18 months.

And after that, it becomes $250 billion, $250 billion.

So I think we're very pleased that Congress was able to deliver something that makes sense for our institution, and we believe we should benefit the most given where we were over the past few years, just under the $50 billion level.

So we're excited about it.

Okay.

And then just to the funding part of the strategy.

What are you targeting for deposit growth?

I think deposit growth is anywhere from 4% to 6% depending on market conditions.

And if we can't bring it in, we'll borrow in the marketplace.

That's been -- the good news is that we're in the market, Collyn.

We're definitely in the market to bring in deposits.

Unfortunately, when we go in the market, others come in at a higher rate.

So that's the competitive landscape that we're living through, including the money center banks, which is interesting.

So we feel deposit cost is going up throughout the entire retail platform for all banks, and we're going to be competitive there.

Are you seeing much differentiation among your different geographies in terms of deposit -- ability to generate deposits?

Yes, yes.

Yes, that's fair, yes.

I mean, obviously, New York is New York.

Arizona is a different market.

Florida is obviously a retirement market.

So yes.

But overall, we've done very well on the asset class that came in.

Are you employing different strategies in those markets?

I mean, do you see better opportunities to get funding out of those markets?

I think that's part of our strategy.

There's no question we have the opportunity to do this.

Shame on us if we don't.

Being in a very distinguishable alternate market is a plus.

Our next question is from Christopher Marinac with FIG Partners.

Do you have flexibility on the loan-to-deposit ratio as you enter this new environment?

Well, I...

Joe, I mean, my -- I'll handle that.

I mean, obviously, we've always had a very high loan-to-deposit ratio, and we would bring that number down materially when we consolidate other institutions.

So it's been the strategy over decades that we were [about] to bring down through consolidation, and we've been very effective with that.

But we are who we are.

We always had historically a very high loan-to-deposit ratio, and we feel very confident that we can grow our loan book at a very nice high single-digit level when the markets start to stabilize going further.

We do very well in down-turning environments on the lending side.

So if there is potentially that everyone is worried about CRE and CRE is going to be a problem, if there is a problem we'd step up, and we do very well in downward-turn markets.

And that's something that we look forward -- not that it's a good thing, but we look forward to being there for our customers when they need us the most.

So we're very bullish about growing the loan book.

And as I said on multiple quarters, we do not have a pending transaction, so we're going to be in the deposit market to fund it.

Let's take a step back for a second and recognize that loan/deposit ratios are problematic for banks that lose money on lending.

We, in fact, have demonstrated a risk model that overperforms over the course of decades.

We lose very little money on lending.

So a very high loan-to-deposit ratio in our circumstance does not represent the same kind of issues as it does in the rest of banking.

And historically for all of our public life and even the decades before we were public, our loan ratio is extremely high because that is principally the assets of the business.

Our business is lending.

We manage that business well through positive cycles and negative cycles.

It does not represent an unreasonable risk.

What it represents in banking is not what it represents for our balance sheet.

It is a proven fact.

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

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

Thank you again for taking the time to join us this morning, and we look forward to chatting and -- with you again at the end of October when we will discuss the performance of our 3 and 9 months ended September 30, 2018.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time, and thank you for your participation.