Flagstar Financial Inc (NYCB) 2018 Q3 法說會逐字稿

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

Today's discussion of the company's third quarter 2018 performance will be led by President and Chief Executive Officer, John Ficalora (sic) [Joe 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 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 projects 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 June 30, 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 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 the 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 third quarter 2018 operating results and performance.

This morning, we reported diluted earnings per common share of $0.20 for the 3 months ended September 30, 2018, unchanged from the $0.20 we reported for the 3 months ended June 30, 2018.

Before we turn to a discussion of our financial performance, I would like to share with you some positive recent developments.

First and foremost, we received regulatory approval to buy back our stock.

Accordingly, our Board of Directors authorized a $300 million common share repurchase program.

The program will be funded through the issuance of a light amount of subordinated debt.

Purchases will be made from time to time in open-market transactions, subject to market conditions.

The capital optimization plan we announced this morning will have a positive impact on our fundamentals going forward.

It will be accretive to earnings per share, improve our return on equity, accelerate our internal capital generation and diversify our capital structure.

At the same time, it will have no impact on either our total capital ratios or CRE concentration levels.

Second, 3 weeks ago, we received final regulatory approval to merge our commercial bank subsidiary, New York Commercial Bank, with and into our primary subsidiary, New York Community Bank.

This merger is expected to close during the fourth quarter of the year, and we expect it to result in additional organizational and capital flexibility as well as operational efficiencies through the reduction of certain redundancies.

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

The dividend will be payable on November 20 to common shareholders of record as of November 6. Based on yesterday's closing price, this represents an annualized dividend yield of 7.2%.

Turning now to the highlights of the quarter.

Our operating results and performance measures during the third quarter were impacted by 2 factors: higher short-term interest rates, as the FOMC continued tightening; and seasonality, as the third quarter of the year is historically a slow quarter for us.

These factors, notwithstanding, our performance during the quarter was still respectable and reflects the continuation of our 3-pronged strategy to increase earnings: one, grow our loan portfolio at higher interest rates; two, redeploy our excess liquidity into higher-yielding assets; and three, significantly reduce our operating expenses while keeping a sharp eye on asset quality.

During the current third quarter, we continue to: grow our balance sheet, with total assets now over $51 billion; increase our loan portfolio, with total loans currently just under $40 billion level; reinvest our excess cash; and further reduce noninterest expenses.

In addition, we grew our deposit base $1.2 billion or 6% on an annualized basis, including $763 million or 10% annualized growth during the current quarter.

Total assets increased $2.1 billion or 6% on an annualized basis since December 31, '17, while total loans increased $1.5 billion or 5%, annualized over the same time frame.

Overall loan growth was, once again, the result of solid growth in our multifamily and C&I portfolios.

The multifamily loan portfolio rose $1.5 billion or 7% annualized compared to the balance at December 31, 2017, while our C&I portfolio, which are primarily the specialty finance-related loans, increased $287 million or 18% annualized to $2.3 billion compared to year-end.

On the originations front.

We originated $2.5 billion of new loans during the third quarter, which was reflective of our typical third quarter seasonality.

On a year-to-date basis, we originated $7.9 billion of new loans, up 36% compared to the 9 months ended September 30, 2017.

The current pipeline is approximately $1.3 billion, comparable to the pipeline the year-ago quarter and includes $800 million of multifamily loans, $163 million of CRE loans and $316 million of specialty finance loans.

With interest rates increasing since the end of the third quarter, our current loan pricing has increased since the second quarter of the year.

Multifamily loan pricing is currently in a range of 4.5% to 4.75% and traditional CRE is in the 4.75% to 5% range, with specialty finance and C&I loans pricing off of prime or short-term LIBOR.

Also during the quarter, we continued our reinvestment strategy and redeployed some more of our excess cash into higher-yielding investment securities.

We will continue to use this strategy in the fourth quarter as well.

On the expense front our operating expenses continued to decline during the third quarter.

Noninterest expenses were $134 million, down 3% compared to the second quarter of the year and slightly better than we expected.

Compared to the third quarter of 2017, noninterest expenses declined $28 million or 17%.

For the first 9 months of the year, operating expenses declined $81 million or 16%.

Our efficiency ratio increased to 49.35% from 48.19% in the previous quarter due to lower revenues.

Moving on to the net interest margin.

The margin this quarter was 2.16%, down 17 basis points compared to the second quarter of the year.

This decline was due to higher funding costs as the Federal Reserve continue to increase short-term interest rates, a lower level of prepayments and the fact that we reinvested funds later in the quarter than anticipated.

Excluding the 8 basis point contribution from prepayment income, the net interest margin would have been 2.08% compared to 2.19% in the prior quarter, slightly below our expectations.

On the asset quality front, no surprise.

Our asset quality numbers remained excellent during the third quarter.

Nonperforming assets declined 20% on a year-over-year basis to $68 million or 13 basis points of total assets.

Excluding nonaccrual taxi medallion-related loans, NPAs declined $15 million or 36% to $27 million or 5 basis points of total assets.

Net charge-offs were $2 million or 1 basis point of average loans.

Excluding our core multifamily and CRE portfolios and our specialty finance portfolio, our loans continue to generate very little in the way of losses.

In fact, this quarter, we did not have charge-offs in those 3 portfolios.

I would like to conclude by stressing that we continue to prudently manage those factors under our control, namely loan growth and operating expenses.

We believe that these factors, along with continuing to reinvest our excess cash, our common stock repurchase program will mitigate the negative effects of the current interest rate environment.

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

I guess, just first, if you can talk about the buyback plan.

I mean, obviously, it's a positive from a regulatory standpoint, in terms of being able to initiate that.

But given where the stock is, Joe, I know you mentioned, as you find the right opportunity, like -- can you talk a little bit more about the pace of buybacks, like should we expect all of this potentially getting done over the next couple of months before year-end?

And if, Tom, if you can sort of update us on what you expect in terms of the cost of the sub-debt that you would issue?

I think it's pretty easy to say that our stock is, in our view, an extraordinarily good purchase.

So for many, many good reasons, we would be anxious to buy our stock.

It is the best way to enhance the value of our company as it trades today.

And certainly, when you think about the various companies we could buy, there's not a better buy than us.

So we're going to be aggressively in the market buying our stock.

And I would just follow up.

Obviously, you can appreciate that we're in these marketing efforts going forward here, so we're not going to put any specific goal -- a specific level of cost of that.

But it's a very attractive sub-debt market and we're enthusiastic about some of the indications we've seen.

So very attractive market, and we feel very confident that it will be a successful process.

Understood.

And just I guess shifting gears to the margins.

Obviously, the core margin pressure was a little more than, I guess, Tom, you expected in July and then we sort of fall off in prepay.

I guess, looking out in the fourth quarter, if you can remind us in terms of your funding plan, deposits versus debt maturity, and what you expect for the core margin and, if you can, on the prepay income in 4Q?

Yes.

So big picture.

Obviously, we guided down 8, we came in down 11 for the quarter.

So yes, we were off by about 3 bps.

As Joe indicated on his opening remarks, we were very cautious in putting the cash to work in the midst of the quarter.

And obviously, as the loans start to close, we're seeing much higher coupons in the pipeline.

So big picture for us is that for the quarter, a substantial development that all loans that were closed for the quarter were above 4%.

That compares to about 100 basis points above where we were closing loans this time last year.

Last year, in November, the offering rates of late October, early November were about 3 1/8%; now were 4.5% going into this quarter.

So that's a significant change in the refinancing expectations for our customer base.

So we're very excited about that.

The fact that we had a downward margin, again, [2] basis points, we believe was just a matter of impact on putting the cash to work at a rapid pace.

We're very enthusiastic about the pipeline as far as the current coupon in the portfolio.

We had -- although we have a very low [rate as] coupon, that's going to roll off into hopefully a much higher coupon in this rising rate environment and ultimately, all our customers will have to react.

So we have an approximately $40 billion loan book.

That all has to go -- be priced somewhere north of the current coupon, which is about a 3.48% in the portfolio, so we're enthusiastic about that.

As far as for the quarter, as you know, we give short-term guidance in the quarter.

We're probably looking at around down 6 basis points for the quarter, and that is indicative of the most recent rate hike we just had.

And we don't have much on the debt refunding coming into the quarter, about $1.4 billion towards the end of December.

But next year, we have a much higher [splurge] of money coming due, about $4.6 billion and that's at a 1.74%.

After '19, pretty much all our liabilities have been repriced to the current market.

So we're enthusiastic that eventually, the asset yields will be the catalyst to offset some of the pressure we've had on the funding side.

Got it.

And any sense of prepay, is this the lower margin, at least it should flatten out from here or potentially rebound?

Like any sense there?

Ebrahim, we don't give specific comments on prepayment activity.

But I will tell you that it was generally a very slow activity quarter given the substantial rise in interest rates coming from a 3 1/8% from a 12-month period to 4.5% is real, and customers are really trying to evaluate their options going forward.

The good news in the past is just timing; that everyone gets closer to that roll, and as you know, the roll is much more higher than 4.5%.

They choose to go to year 6. So we're enthusiastic about the fact that we have 3 points, $13.9 billion coming due in the -- contractually, plus another $11 billion based on our estimates of actual loans that we'll have to more likely reprice in the foreseeable future.

That will add at a much higher interest coupon going onto the portfolio.

So that's the opportunity.

We don't control when they decide to make that decision, nor do we give specific guidance on prepay, but I think the fact that rates moved up so dramatically in a short period of time, many customers are weighing their options as we speak.

Ebrahim, also, the third quarter is a quarter that has an inordinate number of lawyers, owners, brokers on vacation, and not actively involved in doing the business that we are principally involved in.

Understood.

And just one last one, Tom.

Any line of sight in NII, like are we close to a bottom?

Do you expect any -- NII to bottom out from a dollar standpoint first half of '19?

Look, yes, again, I guess you know we don't give forward guidance.

I think we're encouraged to look at the fact that in our model, we have pretty much followed the Bloomberg Forward Curve.

We see more likely than that, that in 2019, if the Fed stops raising rates sometime then, we should be in a position to benefit from a very good stabilization on the funding side.

And offsetting that, you'll still have a much higher coupon that will have to be priced upwards.

So obviously, as the Fed continues to tighten, that does have a negative impact to us.

And we're assuming a total of 6 rate hikes, which is 4 in 2018 and 2 more in '19.

And if that changes and if they stop sooner, that will be a positive for us.

If they continue to go, we'll continue to deal with this management of the margin.

But the big question is when will the customers actually move on their current financing.

Are they going to stay to 3 1/8% and go to year 6?

It's unlikely.

So we're enthusiastic about that.

We can't control it, but that's going to be clearly a substantial catalyst for the margin going forward.

Our next question comes from the line of Mark Fitzgibbon with Sandler O'Neill.

I wondered if you could update us on your outlook for operating expenses?

And also give us a sense for where you think the normalized effective tax rate will be?

Yes.

So obviously, we've been doing a lot of work in the expense side.

That was part of our strategy since the -- obviously, going into the Dodd-Frank Reform and exiting the mortgage business.

So in '17, when our run rate was about $660 million a year, we brought -- we guided down to $560 million for '18.

We're going to come in around $546 million for '18.

So that will leave the fourth quarter somewhere around this level, $135-ish million, and I'd say flat off the third quarter.

And in '19, we're really enthusiastic that we're going to continue to drive our cost structure down.

So it's reasonable to say we'll be in the low $500 million, and that's almost $160 million off of the '17 run rate.

That's a substantial reduction as we go to the balance sheet, as we hope to see the margin expansion as -- when the Fed ultimately stops raising interest rates.

So we're enthusiastic about the operating expense side.

We can control that.

And clearly, we've been very focused on delivering that number.

So going back to my point, Mark, if you think about where we were 1.5 years ago, in the midst of becoming a CCAR bank, it's a big difference on the expense base.

So we're excited about where we are and where we're going with that.

On the tax side, we'll probably end up for the year around 25.50%, and that should be pretty much the effective rate for 2018.

So 25.5% would be the appropriate rate for the fourth quarter.

And also, do you have a sense for the approximate timing of the sub-debt issuance?

Obviously, we're very enthusiastic.

We'll be coming to the market as soon -- actively as in we can't really give specific time frames on that, but it will be, as Mr. Ficalora indicated, with a very enthusiastic process.

We feel like we have a very good value here given where our stock is right now.

And obviously, at these levels, it's entirely accretive.

There's no question that anybody today could buy our stock and get a dividend of 7%-plus.

It's highly desirable for us to be able to buy that stock as well.

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

Can you guys just remind us or talk a little bit more about the liquidity that you're reinvesting into securities?

I mean, is this cash on hand or is this borrowings?

Because I saw borrowings tick up.

I'm just trying to understand kind of where the money is coming from to grow the securities portfolio?

Sure, sure.

Well, obviously, we've had substantial cash on hand since the exit of the mortgage banking business and the exit of the loss share arrangement that we have with the FDIC.

So we're still winding down that cash and deploying it to high-yielding assets.

As of the close of the quarter, we had about $1.7 billion on cash; the previous quarter was $2.2 billion.

So you look at the change on quarter-over-quarter, that's pretty much the difference between our loan growth, right?

So if you think about what we're doing going forward, we really shrank the balance sheet dramatically in order to avoid being a SIFI bank going back over the past 3 or 4 years.

Now we're redeploying that balance sheet back up.

We're not participating in sales of assets.

And we're pretty much rebuilding our securities portfolio, hopefully, at much higher-yielding asset levels.

So with that being said, we're still too small on the security side.

Right now, we're about -- I think about [9.3%] of total assets.

My guess is to have somewhere 12% and 15% we'll end up, so there'll be some more security purchase coming into the quarter as well as some in the next year as well.

But big picture is that we've funded the balance sheet for this year in addition to a nominal amount of wholesale, which really has been the retail deposit and gathering efforts.

We have grown our deposit base, for the first time in a public life, I would say, at these levels, at 10% on a linked-quarter basis and we're running at a 6% annualized basis on deposit growth.

That's not typical for our strategy.

We've always been a growth-to-acquisition story, but we recognize that now that we're in a growth mode, we have to fund our growth.

And given that if we're successful continuing to bring in deposits, it's substantially less costly than going into the wholesale markets through the -- either the repo market or the home loan bank advance market.

So clearly, we have some refinancings coming due next year.

If we're successful on the deposit side, we'll use those deposits at lower cost to pay off some debt as well.

Got you.

Okay.

And then with the securities that you're buying, presumably, they're longer -- a little bit longer duration, hence, the higher yielding that you're getting at that.

Could you just talk about like how you're managing -- how are you guys managing sort of the sort of asset duration extension?

And -- because I don't want -- presumably, it makes you slightly more liability-sensitive?

Or how should we think about that overall?

Yes.

So I would say big picture, we've assumed that we're going to change the mix.

We have been changing the mix over the past years since we started rebuilding the portfolio.

So we're shying away from the longer-duration securities.

We're buying some, I'll say, we'll call it, medium-sized duration.

But more importantly, 1/3 of this portfolio that we're building will off floating rate.

So as the rates were increasing over the past few quarters, we're getting a yield bump in those securities.

So they're lower yielding initially, but as rates rise, they go up with the rising rate environment.

So I would say, big picture, we'd like to have about 1/3 to 40% of the securities portfolio, which will be positive for interest rate risk management in a floating rate instrument.

And then the rest will be medium or average duration, somewhere between 4 to 5 years in average duration, which is somewhere between 3.40% to 3.60%, depending on market conditions on the fixed side and low 3% on the floating side all in.

Our next question comes from the line of Moshe Orenbuch with Crédit Suisse.

I was hoping -- if you look at your kind of rate table, if you look at the yield on -- and I assume this includes the prepayment income, so that's part of the explanation.

But if I look at the yield from the second quarter to the third quarter, it's down 6 basis points on the loan portfolio.

So given the comments that you made about the rates kind of going up, when does -- when do we see that kind of actually factor in materially?

Yes.

So, Moshe, what I would say is interesting for the quarter, every month in the quarter, we closed north of 4% on our origination closings, which is a significant change in the previous 2, 3 quarters.

As you know, as we quote rates and we close the portfolio, it takes time to get through the system and get to the actual for -- on to the balance sheet.

So the very positive developments for this quarter, in the third quarter, and it continues throughout, hopefully, going forward here is that all loans close above 4% coupon.

So as you know, we have a relatively short-duration portfolio, with a yield somewhere around 3.50%-ish on the multi-side, maybe 3.60% on the commercial side, but all loans now are being closed at north of 4% and quoted at 4.50% or higher.

So the opportunity is that until we see real activity at the borrower side, it's a much higher rate environment for our customer base.

So that 3 1/8%, we'll call it, low closing level last year, of 2017, is now well over 150 basis points above that for your traditional 5-year type multifamily bread-and-butter offering.

So we're excited about that.

That took about 6 months to go through the balance sheet.

As you remember, when rates are up in the beginning of the year, we were still closing loans in the low 3s.

Now we're closing them in the low 4s, soon to be the mid-4s.

Got it.

And kind of in a similar vein, I mean, you talked about lower activity in Q3 because of a couple different reasons, rising rates and the way some of the schedules fell out.

Does that -- do you get that activity back in Q4?

Is it something you'll see in '19?

How do we think about that?

Well, we should actually start seeing that in the fourth quarter and, of course, all through '19.

This is not an unusual evolution of a cycle.

This is the way things typically evolve when rates are changing and our portfolios are restructuring themselves based on the owners' desire to lock in lower rates than are clearly anticipated into the future period.

Moshe, just to follow up on that one comment you had; I just want to be clear.

On our loans, on the quarter-over-quarter basis, are up 2 basis points.

So we're seeing it's a large portfolio.

We actually saw loan yield ex prepay go up 2 basis points for the quarter.

That's a move in the right direction.

And bear in mind, we do have a substantial amount of new loans coming off in the specialty finance, which is 2/3 floating rate.

So that's also going to help this natural change into the coupons in a rising rate environment to be more favorable for us.

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

On the NIM guide for 4Q, is that assuming the rest of the cash is deployed in securities or loan growth?

And then how much can you bring that cash balance down?

I think you were around $1.7 billion this quarter.

Can you bring that down below $1 billion?

Yes.

My range is between $800 million and $900 million, so let's just say $800 million will be my level of having liquidity.

We have some treasuries on our portfolio, which has kind of moved the loan yields down a little bit, about -- the security yields down a little bit.

Those are real low-yielding.

That's going to be put into securities as well.

So I think, at the end of the day, $800 million, $900 million of total cash on hand and the rest will be deployed into loans and securities.

And is that also assuming the sub-debt issuance you were talking about as well, the 6 basis points down?

No, none of these numbers include the sub-debt at all.

Okay, got you.

And on the $1.4 billion that you talked about rolling this quarter, I guess in December and then the $4.6 billion for next year, what's the average cost of that at this point?

Yes, so the average cost for the '19s are [175].

Okay.

And then, the $1.4 billion?

We have about $1.4 billion coming due at the end of the quarter, that's about 160, but we may take that off depending on how active we are successfully on the deposit side.

We've had a very strong deposit push because now we are growing the balance sheet.

Until we acquire liabilities, we need to fund our growth, and funding the growth through deposits, building organically is more attractive than wholesale.

So that's always on the table.

And so then -- and so.

Oh, go ahead.

Sorry.

No, go ahead.

Go right ahead.

Oh, I was just going to say, so hopefully, I guess you can pay off some of that $1.4 billion with deposits.

But then, for the $4.6 billion next year, just trying to get a sense for what the pricing is on the borrowings that you're looking at to roll into at this point, just given the duration that you want?

Yes.

So again, depending on how much we bring in deposit growth, it's going to be somewhere between [220 to 260] depending on wholesale markets versus retail markets.

We've been very active and successful on bringing our customers to the table, both new money and existing money, at rebuilding the accounts at attractive rates.

These rates are market rates.

They're not that we're above the market.

We're in the market.

Our money market rates (inaudible) in every community bank in the country, just that we've always had a history of paying a lower rate.

So 1.75% for money market is not uncommon in this environment.

I think I said in the previous call, although betas are high for our retail franchise, all money is going to be rewarded with a higher-rate opportunity in this environment.

So all banks will catch up to these levels.

So it's at a 1.75% money market and at a CD rate somewhere between 2% and 2.40%, that's the range of the marketplace.

And we're just being successful because historically, we have not actively marketed the branches, and we have 250 branches that we can actively market in different regions of the country.

We're very pleased with having growth of 10% on a linked-quarter basis, and our budgets have around 4% to 6% deposit growth.

And if things are more active, we'll be able to -- and we grow faster, we'll just ramp up our deposit efforts.

And then, I guess -- go ahead.

Well, basically, what I was going to say, this has nothing to do with what you're discussing.

But the reality is that we have in excess of $5 billion of loans that we're participating with others.

That represents to us a huge additional enhancement in refinanceable assets.

That's going to come in the period in front of us.

No question besides whatever is in the market, we have this existing participation pool that has a huge benefit to us with regard to refinancing.

So that's going to be a very significant asset enhancement to us.

Yes.

Okay.

And just one last one, real quick, if I could, on loan growth.

You mentioned seeing slower activity this quarter, and that would explain why the pipeline looks a bit lower this quarter.

But I guess, just given that lower pipeline, does that imply less growth in 4Q?

Is that what you're expecting?

I know 4Q tends to be generally stronger for you guys, so just trying to marry that with the pipeline?

So Dave, what I would say with certainty, we've been very razor-focused as far as what our targeted growth was for the business this year.

We've said over the past 2 or 3 conference calls we plan to grow our net loan portfolio mid-single digits.

We're on target with that.

We're very pleased with the activity.

Where I'm more enthusiastic not -- we're going to hit our targets, but I'm more enthusiastic that we have a very low weighted average coupon in the portfolio.

And as customers realize that financing costs could go dramatically higher in the future, they need to come to the table.

And we will be very active on bringing them to the table.

That means you'll have, like I indicated, north of 4% closing, now the rate offering is 4.5%.

The second thing is to significantly increase interest rates and the yield curve cooperates with this and it's a parallel shift, funding costs could be significantly higher, so customers will ultimately have to come to the table.

I want to point out a very significant driver for this company.

We have a substantial amount of loans coming due in the next 36 months.

And if you put a reasonable prepayment assumption on that, that could be well north of $20 billion.

$20 billion of paper that's going to go from a 3.40-ish, 3.50% coupon to somewhere in the mid-4s or higher.

That's a very positive impact to stabilize some of the margin pressure we've had as the funding costs all reprice instantaneously.

Are you seeing any pickup in refi activity right now just given the uptick in loan pricing we've seen?

I will say it's a significant conversation with all our customers that have large portfolios and realizing that 3 1/8% is substantially lower than where the market is.

So guys that have 14 or 15 originations have to significantly take into account that you have a higher rate environment.

So if they're going to go to year 6, year 6 is much more punitive than refinancing today.

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

Just a couple of questions on the deposit side.

First, why were there such a sharp drop in the interest-bearing checking and money market accounts this quarter?

I think -- Steve, it's Tom.

I would say naturally, it's going to be this opportunity to move some of your money into a higher-yielding benefit for the customer base.

We are not actively trying to push our money market accounts into a -- we'll call it a premium type level of benefit for the customer, but there's always that shift of deposits.

I use the example that no matter where your money is, you could pay 6 basis points and not pay attention in, let's say, a broker's fee account or you could get 2% at the same, we'll call it, large broker-dealer.

So there is offerings throughout the country.

At the same time, if you think where treasury rates are right now, both short- and medium-term treasuries, very attractive for someone to get a tax benefit in New York's upstate investment opportunity by buying a treasury bill.

So we kind of price off of treasuries and slightly south of that.

So that's where the market is.

And we saw some significant movement in those funds.

But the bank has really been pushing towards having our customers bring their money in, take their money out from your bank at JP Morgan and come back to NYCB and at a comparable rate.

So I think that's what we're seeing in the market.

There's no magic to it.

We've never been an aggressive deposit gatherer.

We have 250 branches that we're going to actively pursue deposit growth.

If we actively pursue deposit as a thrift type company, remember, retail deposits, we will be successful at the current rate environment.

Now where we've historically done successfully is bring in deposits through acquisition.

That's our long-term strategy.

Hopefully, that comes sooner rather than later, but we're making significant strides in funding the balance sheet now because we see growth and we haven't grown in many years, so we want to fund the growth.

We have more grandmothers than CEOs.

So if we looked at the sharp growth in the CDs this quarter, what do you estimate came from your current customers migrating into that product versus new money raised?

Yes.

We just did the -- we did a lot of work on this.

I'd say half, 50-50, new money versus renewals in there.

Yes, yes.

Tom, when you think about the deposit cost increase you saw this quarter, do you view that as a good proxy for what we should expect over the next quarter or two?

No.

Could it get worse from there, better?

What do you -- how do you see that playing out?

I mean, obviously, I think right now, we have -- our rates are where we are.

We were probably 1 quarter ahead of the market to bring in the money, knowing we had a good loan book to close and the like, and that we're actually growing and looking at the offsets from borrowing costs versus deposit costs.

But clearly, we're at the market.

I don't envision us raising rates yet.

And we're still very successful on a daily basis, bringing in significant deposit funds.

So I think we're in a good place with our current rate offerings and we'll adjust depending on market conditions.

Okay.

Then a final question.

I mean you guys called out quite a few times now this rise we've seen in multifamily rates, and you've been in the business forever.

As you look out over the next year, what impact do you think this has on volumes?

I think it'll have a noticeable impact, but it will -- for the people that we deal with, and we deal with a different type owner than the market broadly, New York is a very diverse place.

The sources of funding come from the world, from the biggest banks in the nation.

From many little banks that have, in some cases, very, very small appetites, but they're in the market.

With all the lenders that are available here, there's going to be a tremendous amount of activity that will accommodate the needs of new buyers and the existing people to refinance their loans.

So there's going to be, in the period ahead, a great deal of activity.

And I think for us, we expect that we will make money on this activity.

As I mentioned earlier, we have something that we've never had before.

We have over $5 billion of participations that actually add great dollar value to us with regard to every loan that we refinance that's in that pool.

Yes.

I would just add to Joe's commentary that for big picture for us, it's not just volume, it's also rate.

Because clearly, the rate is so low on the -- for the average coupon that we feel very confident we'll grow the book, but at the same time, the real opportunity is going to be repricing the portfolio.

If -- this is a substantial portfolio that's super-short duration, and like I indicated multiple times this morning, very few people with 20-year stake.

If you go to year 6, that's punitive.

So as they come due in '19 and '20 and '21, it's a substantially higher rate.

Assuming rates continue to be at around these levels, that's a very attractive repricing mechanism for the margin.

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

I just wanted to rattle through these numbers again.

So the debt coming due in -- at the end of Q4 is $1.4 billion, and that's costing 160 bps right now?

Yes.

Okay.

And it's $4.6 billion, what's that?

The middle of next year?

No.

Throughout -- ratably throughout the whole year.

Okay.

Throughout the whole year.

Right.

And I would spread it out evenly per quarter.

Okay.

And -- okay.

And the NIM guide for Q4, that is exclusive of the cost of the sub-debt issuance or does that include that?

Yes.

That's correct.

We did not pro forma that into these numbers.

Obviously, when we looked at the potential transaction that we would do, is the fees in sub-debt cost regarding the buyback is probably 1/3 versus -- given the current market value.

So obviously, for every dollar they raise, 1/3 would be fees by buying back the shares.

Okay.

And what do you think the rate will be on that sub-debt?

We're not going to comment on market conditions.

Obviously, we are just launching the process, but I will say with certainty it's a very attractive sub-debt market and it's been some very good transaction in the market and there's substantial appetite for this type of transaction to be accomplished.

Okay.

And lastly, is it reasonable, as we sort of dimension implications of that, those resetting debt levels at the end this year and next, that right now, it would be roughly between [220 and 260], depending on whether you're funding that on a core basis or have to use some borrowings to back stop?

That's fair.

I mean, obviously, if we were to bring in, let's say, substantial financing through deposit acquisition, that can change the game tomorrow, but that's not currently announced yet.

But obviously, if we were to put on a strategic initiative of a deposit transaction, that would clearly -- would adjust that large pool of funding that has to come to be refinanced.

So we think that it's reasonable at that level that you discussed, but more importantly, the deposit efforts could maybe bring it a little bit lower, depending on how successful we are, more importantly on the commercial side.

If we're successful on bringing deposits from our commercial customers, which we have a substantial opportunity in front of us, that could bring the cost lower.

That's -- obviously, that -- we'll watch those developments as we move along into '19.

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

So there's long-term benefits with reducing 5% or 6% of the share count through the buyback.

And I'm just curious, as you look into next year and beyond, would you consider kind of a trade-off between less retained earnings going back to dividends or other measures and more towards buyback, just given the opportunity in the stock today and the pricing?

No, I don't think that is where we're thinking.

Obviously, in simple terms, we're paying a 7% dividend today on every share we purchase and whatever it cost us to repurchase that, we're going to have a very favorable effect.

Yes, and [as with typical earnings], that's a tax-deductible cost of financing.

But big picture when you look at this opportunity here that we haven't seen -- this is unfortunately where the valuation is right now, this is a unique opportunity.

But more importantly, the messaging of capital return back to our shareholders that had been approved by our regulators is significant.

This is not -- this is a post Dodd-Frank adjustment here.

This is something that came after Dodd-Frank gets changed from $50 billion to $250 billion.

We believe that the fact that we're able to distribute substantially more than 100% of our capital generations back to shareholders is a testament for asset quality of the portfolio and our direction going forward.

Everything we do going forward on capital distribution gets approved by our regulators.

So that's a positive development.

That, coupled with the fact that our Commercial Bank has now consolidated into the Community Bank, it's another long-weighted development for the company.

So we're very excited about the future that we can start to grow our business again and hopefully, grow through acquisition will be the priority as we go into '19.

There's no bank in the marketplace that we could buy that is better than the bank we're buying, especially given this immense savings we get on the dividend.

Right.

I follow that.

Now Tom, just a quick follow-up on...

Yes.

And I would just reiterate the point.

It's been the strategy.

We've always been a very strong dividend payer and the fact that we have the ability to pay out more than 100% here is a good indication of where we see the future for the company's earnings and prospects going forward.

This is a unique opportunity.

Obviously, we're not happy where the stock price is, but if we can buy the shares down here, this could create some value long term.

We look at for the next 5 years the value versus not the next 5 quarters, this a great opportunity to be able to buy back shares.

Great.

And just a quick follow-up on the charter consolidation.

What type of savings does that give you?

Is it simply small, incremental?

Or is there something more substantial as next year?

So we've been very active on managing our cost structure.

This is all part of our internal plans.

As we have other internal plans that we'll roll out as we go along to '19, but we had a $660 million run rate as we tried to become a SIFI bank.

And that obviously changed, the rules changed, and we were very active on exiting the mortgage banking operations given the low profitability there.

So we shaved over $110 million and our guidance was about $100 million going into '18.

And our plan has always been for the low $500 million into '19.

So we're going to be very active and very razor-focused on something we can control, which is cost-containment initiatives as we grow the balance sheet and try to get operating leverage opportunities.

Once the margin stabilizes and we start seeing the margins hopefully grow, we will then get a tremendous operating leverage play as far as the run rate for this company, but more importantly, our efficiency ratio will go back to levels that we are used to running, which will be in the low-40s, not the upper-40s, low-50s.

That's where this company should be running.

Unfortunately, the revenue side is depressed on the margin, but that will ultimately stabilize as the loan book yield starts to reprice into the current marketplace.

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

I just wanted to go back to the borrowings that'll reprice this year and next year, and the types of borrowings you're likely to put back on to replace them.

I think you said that all in, the cost would be between [220 and 260].

Looking at where classic advances are right now, that seems awfully cheap.

And so I was just curious, are those going to be short duration borrowings or convertibles?

Obviously, we'll probably look at all options within the marketplace.

Like I indicated, the deposit market is the most attractive market for us.

So if we had our, we'll call it, best case scenario, we'd love to put all that money into deposits.

But if we were to go into the puttable market with the home loan bank and/or the repo market, it's a very active market right now, while the Street is still in business, and we can be very active there.

And that's going to be at that range I gave you.

So no question that we have options.

The best option is paying it off, right?

Or actually, I should say the best option is replacing it with someone else's deposit base.

That's the historical strategy for the company.

Now this is the end of all of the $11 billion that we restructured to do the Astoria deal.

That's behind us now.

That is the legacy that's left to reprice.

After next year, it's all repriced.

All of our LIBORs have repriced to -- we'll call it to the current market.

So that's going abate some future margin pressure going forward.

So this is just -- '19 will be the last leg.

And hopefully, as we move into the years past that, we'll be able to bring in some real core deposits with a traditional M&A transaction, which clearly will adjust the funding side.

The fact that the length and the duration is somewhere between 2 to 3 years, and we feel highly confident that we'll be very active in the marketplace on looking at other deposit sources, either deposit acquisitions, deposit opportunities within our own customer base but, more importantly, growth through M&A.

That's our historical growth in deposits.

That's an important point not to miss.

The reality is that over the public life of the company, which is now 25 years during November, we've, in fact, proven time and time again that we can make great sums of money for our shareholders by acquiring other banks' deposit bases.

And lo and behold, in this unique moment, we're actually able to buy our own stock at extraordinary pricing.

So the multiple things that are on the horizon will add value to the currency of this company, and therefore, we're very optimistic that we're in a very unusual bad place today but moving toward a much better place tomorrow.

Understood.

Okay.

Maybe going back to the multifamily pricing.

You noted new rates, 4.50% to 4.75%.

Is that where the majority of new loans are being booked?

And you noted that it takes a while for the pipeline to kind of flow through.

Just kind of curious...

Yes.

You're correct, yes.

Yes.

Just curious, how long do you honor prior rate commitments for?

We have a history of being very flexible with our customers.

We're a handshake bank.

We're not putting out a derivative against that offering.

We're -- we've been doing this for -- as you know, the leader for decades.

We have a handshake-type relationship with our customer base.

So as you look into the portfolio today, if we were to, let's say, sign up a deal tomorrow at 4.50%, somewhere between the next 90 to 120 days, that'll come onto the portfolio.

I think what's important is that when you look back to the early of 2018, those 3% coupons were all done.

They're all on the -- now we're looking at 4%, north of 4% and above.

So the most exciting and encouraging point for the loan book for July, August and September, is that everything closed north of 4%.

Okay, that's all loans put on the portfolio.

Going forward here, the new rate offering's 4.5% and higher.

So as we go into the commercial space, we are now brushing about north of 5%.

So these are all significant changes to the interest rate environment from 12 months ago.

This will have significant consequences; if customers don't realize that 5% becomes 6%, they're going to have to come to the table and we're going to be very accommodative to bring them to the table.

So not only are we going to get volume as a benefit for us going forward, we also assume rate is going to be a significant catalyst to seriously change the loan book going forward.

We priced up 150 basis points to the market off of a '14 or '15 origination, that's significant, but it's not a small portfolio.

It's a relatively short portfolio.

We have $40 billion of opportunity in front of us.

And the fact that all our wholesale liabilities are pretty much, we'll call it, closed to the market as of the end of '19, we look for the benefit on the asset side.

I think if you spend some time on the asset side, you'll realize that every contract we write, there'll have to be a decision made within reasonable short time frames.

Worst case scenario of 5 years.

Average scenario 3 years.

They'll have to come to the market.

And coming to the market with a higher coupon will benefit the overall loan coupon and you'll start to see asset yields start to rise.

Right.

So we're no longer booking multifamily loans with any sort of 3 handle on it?

That's correct.

Again, like I reiterated 3x in the call, July, August, September, all are north of 4%.

The previous quarters, we were still dealing with rates that were offered in late -- I'll say late '17 going into early '18 and going through the system.

Now it's all 4% north, which is a positive development for us.

Understood.

Cobbling together the sub-debt raise, the buyback, the CRE concentrations, it seems like given where the payout is, you will continue post the sub-debt raise to mark higher on CRE concentrations, towards that 850% Fed limit.

Is there any discussion around cutting the dividend to keep the balance sheet sustainably below 850% long term?

No, I mean...

No.

Realistically, we just announced a substantial capital return to our shareholders.

That should give you some good comfort that not only we can pay a very strong dividend but we can be very proactive on rewarding our shareholders for doing the right thing.

In this environment, our dividend is very important.

It's a strategy we've had for decades.

And our dividend is not on the table.

What's on the table is that we're returning more capital back to shareholders and optimizing our capital position?

The debt markets are relatively cheap.

On an after-tax basis, this is an attractive way to buy back our shares and a very attractive price.

So market conditions have changed and we wanted to make sure we reward our shareholders with what we're hearing from our shareholders.

And our regulator's allowing us to move forward, this is a very positive signal for where we are.

Our next question comes from the line of Steve Moss with B. Riley FBR.

I was wondering here just in terms of the loan portfolio, how much do you expect to refinance in 2019?

And kind of what is that coupon rolling off?

Right.

So I would say that we have a -- on our public slides, we do give you some guidance as far as what -- where we actually see contractual maturity.

So in the next 3 years, 36 months, we have a 3.37 weighted average coupon that could potentially roll up or refinance away.

That's about $14 billion.

At the same instance, since we also run a -- over 18 months, our CPR on that book is probably about $7 billion to $11 billion.

So you can arguably say north of $20 billion over the next 3 years could easily be potentially repricing at coupons in the low 3s.

But that being said, we have no idea when customers will come back to the table.

If rates go to 6%, they may come back a lot quicker.

All we know with certainty is that the average coupon in the portfolio is dramatically below the current market, and that's the opportunity.

And customers realize that if they -- these are not long-term-dated loans.

And the loans typically on an average life, is about 3 years.

And as each year if they don't refi, it's 1 year closer to the roll.

And the roll is very punitive.

Very few customers will pay prime plus a very large margin.

So it's not in their best interest to go to year 6.

So we're very excited that customers will realize that the rate environment is what it is, it's not 3 1/8% anymore.

It's in the 4s and maybe in the 5s going forward.

They will have to react and they will react.

And we will work with them very actively to move that portfolio to the market.

So we're going to be very active with our customer base to get them to the current market, which will help alleviate some of the margin pressure that we've seen in the past 1.5 years.

Okay.

And then on the CD side, what is the duration you're targeting for CDs these days?

I would say the market, in general, very few customers are going past 2 years.

So I would say on average, it's 14 months.

Okay.

This has been typical for the past decade given the low interest rate environment.

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

Tom, just I apologize if you've answered this already, but the guide for the fourth quarter NIM, down 6 basis points, does that assume that you deploy the rest of the cash liquidity in the fourth quarter?

A portion of it.

But we've got -- that is depending on market conditions.

I'd say there's a certain portion of that, yes, but not all of it.

Okay, okay.

And then when you talk about getting your expense for '19 down to that low $500 million range, do you anticipate that the opportunities to take cost out will be front-end loaded, back-end loaded or kind of spread throughout the year?

I think for modeling purposes, Wally, I would just go ratably throughout the year.

We're very active on looking at cost-containment initiatives.

As I said, everything's on the table.

We're looking at some branch opportunities, some opportunities within the overall process within the bank, coming from a future CCAR bank to a non-CCAR bank.

That does change things.

We have significant opportunity amongst just the amount of money we've sent -- spent over the time -- on the system side that we should get some benefits from, just the process.

I mean, we've spent a lot of money and effort to be a CCAR bank and now that we're going to enjoy the changes on regulatory.

There's been a significant pendulum shift to the middle in banking that we hope to enjoy going back to somewhat of a normalized level.

So we look at our efficiency ratio in a norm -- we'll it call it a more normalized environment, somewhere in the low-40s.

We hope to get there as soon as we can.

Okay.

And just for clarification, I think you said this last quarter, but when you talk about low 500s, you're talking about for the full year, not a run rate, not a quarterly run rate by the end of the year?

That's correct.

Yes, again, you're not going to see expenses start going up here.

We're going to be very, very focused on managing our expense structure.

So if you just take where we are right now for '18, we're coming in at $546 million, assuming with my fourth quarter guidance, my initial guidance was $560 million off of that $660 million run rate.

We hope to get some benefit from the FDIC on the DIF fund.

That should be a benefit to all banks in 2019.

We expect that to come.

So you're halfway there to get to the low $500 million.

So we feel pretty good about that.

Yes, okay.

And then my last question is just looking at the third quarter tax rate.

It was significantly lower than the guidance from last quarter.

Were there any credits or anything in the tax expense this quarter?

We had some true-ups from the substantial tax reform from the previous year.

Obviously, it was a major tax reform and we had some additional adjustments that we had to pick up for the year '18 versus '17, so it came through in the third quarter.

But the run rate, I think I indicated to Mr. Fitzgibbon, is going to be 25.5% for the year, 25.50%.

Normalized rate, which is, by the way, about 150 basis points better than we expected in the beginning of the year as we delve into the Tax Reform Act.

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

I will make this pretty quick.

Just couple of quick questions.

One on the -- what was the blended rate on the CDs that you added into the -- added in this quarter?

For the third quarter, 2.31% was blended.

2.31%.

That's the new rate, yes.

Yes.

Okay.

And then just -- I hear what you're saying, obviously, on the multifamily side for loan growth outlook.

How are you thinking about the CRE book?

I mean, it's been down now kind of 4 quarters in a row.

Do you see an opportunity to reverse that and grow that portfolio?

Or how are you thinking about CRE trends?

Collyn, I would say that this not by design.

This is a matter of -- they're a little bit longer in average duration, right?

So as other borrowers are sitting on the sidelines trying to get sales transactions done or accomplish a transaction, they're having to have a little bit of a longer-duration portfolio.

And as credit in general starts to become less available to those types of opportunities, we're just very super conservative on the underwriting side.

So if someone's willing to put dollars on the table that I won't do, we'll let it trade away.

It's okay.

We're very focused on having pristine asset quality.

And then whenever the cycle change here, we should get the benefit of having a very pristine portfolio of solid loan growth.

We underwrite at a very conservative level.

So if there is more dollars being offered, we're not going to lose it because of rate, we're going to lose it because of dollars.

You would assume if you see loans leaving the portfolio, it's not because of rate.

It can be very competitive on the interest rate side.

We're not going to be aggressive on the dollar.

It's going to be very conservative.

That is the hallmark of NYCB.

Okay.

And then how about...

The difference between us and others, Collyn, is very clear.

Other lenders are paid on dollars.

We don't pay our people on dollars.

We pay our people on results.

And for us, results are not losing any money on the assets we actually put on the books.

Got it.

Okay.

And then how about just your outlook on the C&I side in the specialty finance?

So they've been doing a phenomenal job, our good friends up at Foxboro, Mass are really crushing it and we're very pleased on their results.

We grew that book.

I believe it's around 18%.

The CAGR on that over the -- since we put it into inception is probably like a 40-something-odd percent CAGR.

And we're very selective.

I think I've mentioned in many conference calls, we turn down about 95% or 96% of what we see.

So when we do these deals there, it's really like club deals, it's the best asset quality opportunities and it's a relatively strong market out there.

But we're very selective, so we never change our underwriting standards there.

We're not leading these deals, so unfortunately, do not come with the deposit balances traditionally as someone who has that type of business where they're managing the lead transaction.

But we definitely participate in deals where we're highly confident as far as duration and yield that makes sense for the bank.

So I feel highly confident that these guys could grow for us high-teens, which is reasonable.

And that's starting from 0, our total commitments all-in is about $3 billion.

So we've done a good job in building a book that our board, in conjunction with our operators, created a great portfolio.

We could have bought that portfolio or traded away to another bank, but we took the people that generate the assets and they've done a phenomenal job for the bank.

And we're very excited about it.

And 2/3 of that business is floating rates, which is good for interest rate risk.

So there's no question.

We're talking about people that are lending at 100% performance.

Every asset that they've put out is 100% performing.

And we never had a delinquency or a late pay.

And that concludes our question-and-answer session.

I'd like to turn the floor back to Mr. Ficalora for any final comments.

Thank you again for taking the time to join us this morning, and we look forward to chatting with you again at the end of January when we will discuss our performance for the 3 and 12 months ended December 31, 2018.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.