Flagstar Financial Inc (NYCB) 2018 Q4 法說會逐字稿

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

Today's discussion of the company's fourth quarter and full year 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 those factors are general economic conditions and trends, both nationally and in the company's local markets; changes in interest rates, which may affect the company's net income, prepayment income and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposit, loan and investment products and other financial services; and changes in legislation, regulation and policies.

You will find more about the risk factors associated with the company's forward-looking statements in this morning's earnings release in its SEC filings, including its 2017 annual report on Form 10-K and Form 10-Q for the quarterly period ended September 30, 2018.

The release also includes reconciliations of certain GAAP and non-GAAP financial measures that may be discussed during this conference call.

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 lines 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 today as we discuss our fourth quarter and full year 2018 operating results and performance.

This morning, we reported diluted earnings per common share of $0.19 for the 3 months ended December 31, 2018 compared to $0.20 for the 3 months ended September 30, 2018.

For the full year 2018, we reported $0.79 per diluted common share compared to $0.90 for the full year 2017.

Please note that in 2017, our results included a number of items related to the sale of our covered loan portfolio, the sale of our mortgage banking operations and tax reform that should be considered in any analysis of the company's year-over-year performance.

Adjusting for these items, full year 2017 earnings per diluted share would have been $0.77.

Before turning to the financials, I'd like to point out a number of other positives, which occurred during the fourth quarter.

First, we received regulatory approval to merge our Commercial Bank subsidiary into our Community bank.

This merger closed as of November 30.

Second, we were notified by our regulators that we are no longer subject to a CRE concentration limit of 850%.

And third, the Federal Reserve Board approved our $300 million share repurchase program.

Under this program, we repurchased 16.8 million shares at an average price of $9.57 per share.

We were very proactive in repurchasing shares given market conditions during the fourth quarter.

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

The dividend will be payable on February 26 to common shareholders of record as of February 12.

Based on yesterday's closing price, this represents an annualized dividend yield of 6.3%.

Turning now to the financial highlights of the quarter.

The company's performance in 2018 is reflective of 2 major factors.

First, it reflects the successful execution of the strategy we put into place in late 2017; and second, it reflects the changed regulatory environment since early 2018, which arose from the passage of the Economic Growth, Regulatory Relief and Consumer Protection Act.

The act, among other things, redefine the matter by which banks are designated as a SIFI by increasing the asset threshold to qualify for the designation to $250 billion from $50 billion.

This was an important change for the company, as we were one of only a few banks, which were hovering just under the $50 billion threshold over the past few years.

With this passage, instead of selling loans to stay under $50 billion, we resumed our loan growth and increased the level of securities on our balance sheet.

We were also able to reduce our operating expenses, especially those costs related to regulatory compliance for SIFI banks.

In 2018, we grew the balance sheet through the addition of loans and securities, originated $10 billion of loans, up $1.1 billion or 13%, redeployed over $2 billion of cash into higher-yielding securities and reduced our operating expenses by a significant amount.

Total assets increased $2.8 billion or 6% over 2017 levels and now stand at just under $52 billion.

Total loans rose $1.8 billion or 5% to $40.2 billion, while securities increased $2.1 billion or 60% to $5.6 billion.

Our loan growth continues to be driven by our flagship multi-family product and by our specialty finance loans.

Multi-family loans increased $1.8 billion or 6% on a year-over-year basis to $29.9 billion, while our portfolio of specialty finance loans increased $405 million or 26% to $2 billion.

The current pipeline is approximately $1.1 billion comparable to the pipeline for the prior quarter and includes $800 million of multi-family loans, $94 million of CRE and $182 million of specialty finance loans.

While market interest rates declined over the course of the fourth quarter, our current loan pricing remains relatively stable.

New multi-family loans are currently pricing at an average coupon of 4.375%, approximately 180 basis points over the 5-year treasuries, while new CRE loans averaged about 4.5% during the quarter.

As our multi-family and CRE portfolios come up on their contractual repricing date, we are looking forward to a coupon on these loans increasing by approximately 100 basis points above existing portfolio coupons.

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

The average yield on our securities is currently 3.88%, and securities currently represent 11% of total assets.

Additionally, 1/3 of the portfolio is now adjustable rate.

Another positive for us in 2018 has been deposit growth.

Throughout 2018, it has been the company's strategy to increase deposits organically.

To this end, total deposits increased $1.7 billion or 6% on a year-over-year basis to $30.8 billion.

Turning now to operating expenses.

The total noninterest expenses for 2018 declined $95 million or 15% to $547 million compared to full year 2017.

The $547 million was better than management's expectation of down $100 million compared to our peak operating expenses run rate of $660 million as of second quarter 2017.

Now onto the net interest margin.

The margin this quarter came down at 2.09%, down 7 basis points compared to the third quarter of 2018.

Prepayment penalty income added 8 basis points to the margin, while our sub-debt issuance in November reduced the margin by 3 basis points.

Excluding these 2 items, our fourth quarter net interest margin would have been 2.04%, down only 4 basis points compared to the previous quarter's margin and slightly better than management's expectations.

On the asset quality front, our asset quality metrics improved over the course of 2018.

Nonperforming assets decreased 38% to $56 million or 11 basis points of total assets.

Excluding nonaccrual and repossessed taxi medallion-related assets, nonperforming assets decreased 64% to $12.6 million or 2 basis points of total assets.

Net charge-offs were $16 million or 4 basis points of average loans for the 12 months ended December 31, 2018.

The majority of net charge-offs arose primarily from taxi medallion-related loans.

As of December 31, 2018, our remaining taxi medallion exposure was $73.7 million.

Excluding taxi medallion, the asset quality metrics of our core portfolio remained pristine and ranked among the best in the industry.

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, first question.

Tom, when we look at sort of the -- on the NIM -- the core NIM, ex-sub- debt, let's call it 2.01% and prepaid stayed the same.

Two questions, I think.

Given what Joe said about the loan yields coming in between 4%, 3.75%, 4.5%, what's the cost of average deposits coming in right now?

Is it around 2.25%, 2.5%?

Like what's the expectation there?

And we saw Signature have a decent uptick in prepaid income when they reported results.

You didn't.

Like, is there anything going on?

Should we expect prepaid to pick up over the next quarter or so?

Let me start back.

Obviously, on the prepaid side, it was relatively flat from quarter-over-quarter, but we're seeing an uptick going into Q1 already, so that's encouraging.

So a lot of, I guess, deals that were scheduled to be done in fourth quarter are now coming through in the first quarter as prepayment.

That's a positive signal.

So we're seeing a slight uptick on prepay, and generally, typically Q1 is slow prepaid quarter so it's unusual to fall out to Q1.

But given the volatility that we had in the fourth quarter, with markets in general, I think it was just a slow quarter overall.

With respect to the overall cost of funds and, obviously, the significant funding mix for our liability side on the retail has been predominantly CDs.

2018, for the year, a cost that we bought in was about 2.12%.

So if CDs came on at 2.12% for the entire year, and I'd say the ramp to growth in 2018, in the second half, CDs came on about 2.34%.

So if you look at that as a proxy of what we see going forward, assuming there is not a significant change in interest rates, somewhere between 2.30% to 2.40% is kind of the level that we see right now in the CD market, assuming that Fed is not going to be further tightening.

But that being said, we haven't raised our interest rate offering since September, so we've been holding steady since the September rate hike.

So obviously, the fourth quarter rate hike that should take place in December, we did not change our CD offering rates.

Just to give you some proxy of what type of cost of funds that we're seeing -- delivering on the retail side.

On the wholesale side, obviously, that's a uniqueness given the shape of the curve.

And, obviously, if there is less pressure on tightening, perhaps the wholesale market was thought to see lower cost of funds going forward as well.

Got it.

Tom, I know you've given previously the margin outlook on the core NIM for the forward quarter.

Just wondering with the debt maturity in December in 1Q, where you expect the margin to be relative to like the 2.01% in 4Q?

Yes.

So obviously, we were pleased giving fourth quarter results.

It was slightly better than what we anticipated in Q4, about 2 to 3 basis points better than management's expectation.

Going into Q1, we have the rate hike that happened in December.

We had the sub-debt that we issued, which is a 5.90% coupon.

That being said, I will give short-term guidance.

The margin may be down 6 basis points for the quarters, consistent to the previous guidance from last quarter.

But again, depending on loan growth, depending on how much money we put to work, we still have lots of liquidity left on the balance sheet that we really have to deploy over time.

And as you saw in the previous quarters, we're building up that securities book to a more of an industry-norm level.

By now we're sitting at around 11%, but I would say probably maybe $0.5 billion a quarter for the next 2 quarters of growth there.

And anticipation, and again, this is early in the quarter, but loan growth is the same in single digits again.

And so we see better direction on visibility for production, but that's a reasonable assumption.

That's helpful.

And just one separate question, I guess, for Joe.

We saw MOE strategic transaction being announced earlier this week.

When you -- you talked about a lot of regulatory relief that you guys have received last year.

As you think about potential for such transactions in market, can you just talk through like a CRE concentration still an issue when you think about this?

And is it too soon for us to think about NYB getting involved with some sort of a transaction over the coming quarters?

No.

I think that, clearly, we are poised to execute on a highly beneficial transaction.

That has been our business model for our public life.

We've had a very long period that did not have the benefit of restructuring our balance sheet through a transaction.

That is on the horizon for sure.

And the benefits that we've derived in the past are certainly probable in the future.

There are many choices.

And we don't need the NIM market choice in order for it to be highly accretive.

So the likelihood that we do something in the period ahead is high.

And concentration is not going to be an issue because in all transactions that we do, we dispose most of their assets in any event and we create more of the assets that are well received by everyone, including our regulator.

So as the only bank that does not have a concentration limit, we, in fact, would look to keep our asset quality as pristine as it has been.

And in every deal, we've done, we've effectively accomplished that by disposing of the assets of others and creating more of the assets that we're totally comfortable with.

Ebrahim, I'll just follow-up on Joe's commentary that, obviously, it's refreshing to see transactions that are done in the market where you looked at it as a one-on-one is a 3 scenario, not a premium-type transaction, so doing market deals in the market where you see no premium transactions and looking at coming together on an early perspective is very encouraging.

I say, for our perspective, what we will look at somewhat different is that we really look at the protection of tangible book value dilution.

So clearly, as our currency evolves going forward, we are very focused on not diluting our tangible book value on a business combination basis, but clearly, the no-premium MOE concept is a true value creator with the right partner.

The reality is that we've never had such an opportunity to create newco with a performance currency that moves up ours significantly, because we've never been so discounted to the market.

So when we look at transactions prospectively, the currency that matters is the acquiring currency.

And our currency is at the lowest plateau it's ever been at.

And therefore, an accretive transaction will be received extraordinarily well, and our currency will react in the way it has historically always reacted.

And therefore, the upside to a deal is pretty clear-cut.

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

I know as a part of your NIM guide, you have to roll those borrowings.

So I was just curious, can you remind us what the rate is on the borrowings that are maturing?

And then what the new rate is, that you're looking at, if you're going for overnight sort of like 2- to 3-year type stuff?

Yes.

So again, $4.6 billion in 2019, that's a large slug of what's left in the lower-cost funding that we have in the balance sheet.

So that's interesting, given the direction of the remaining portfolio.

So that's the lowest level that we have.

When that burns down and gets refinanced throughout 2019, we're -- obviously, depending what happens on interest rates here on -- with the tightening cycle, if it's done with the tightening cycle, we're in a position to see our NII grow towards the end of the year given what we have left in maturing.

And we say that -- as indicated in many, many quarters of NII down as we had some pressure given the -- margin pressure given rising rate environment with the liability sent to the balance sheet.

So encouraged by, obviously, the change in sentiment for tightening, but in the event, the Fed does not move on interest rates we can look at NII growth towards the end of the year and margin expansion may be late 2019, early 2020.

So that puts the rest as far as the lower cost funding, and after that pretty much the liability book is around the market.

So if rates go lower, then we get a bigger benefit.

If they stay flat and stay around this level and you'll see NII growth in 2020 versus '19 margin expansion.

Yes.

Based on what you're looking at in terms of whether it's overnight or 2- to 3- year type stuff that you want to roll into, what's the rate differential in the stuff coming off versus the stuff coming on that you're replacing with?

As I said on my previous commentary, the offering at the home loan bank and The Street is looking at the forward curve, looking at the marketplace, it's relatively expensive to retail CD.

So we were being very proactive in the deposit market.

As I indicated last year, in 2018, we took in, on an average basis 2.12% with our CD cost on moving the old CDs into new rates and new CDs coming on.

So with that being said, if you're looking at, let's say, a short-term liability with the home loan bank is somewhere between 2.50% to 2.70% or 2.80% as high, I think being the market with CDs, maybe 20, 30 basis points below that.

So we're focused on bringing money at 253 locations at the branch level and, obviously, as we -- if there is a shortfall, then we'll have to go to home loan back to borrow money or The Street depending on what's more attractive.

Okay.

And it looks like the cash may have been a little bit higher than you were expecting this quarter.

Are you guys expecting the rest of that to be deployed in 1Q as you grow the securities?

I was just wondering what you're assuming in your NIM guide for that?

So in my NIM guide, I have no securities growth.

So, obviously, if you put on securities from cash, you have a better NIM.

I think -- bear in mind, we took on a 5.90% coupon in Q4 for the sub-debts.

If you back that out, you're looking at almost a flat margin quarter-over-quarter.

So we're getting close to margin being flat.

The last rate hike had a negative impact.

It's, obviously, liability-sensitive.

But clearly, going forward here, it's getting to a point where we think that depending on what happens with the short-term interest rates, it remains relatively flat, we're getting close to that stabilization, and it's been a long time waiting.

So clearly, we're in a unique position with our fundings book.

And as far as cash, we're very clear on what we're going to deploy last year.

Q3, Q4 we said a $1 billion per quarter.

I'm giving you guidance at Q1 that we anticipate approximately $0.5 billion, but in our current NIM guide, there's no growth on securities.

So that'll enhance the possibility of benefits here.

And then when do you guys see...

Markets have changed, Dave, significantly and as far as securities.

We were very proactive at a much higher rate environment, so we're taking a step back and reassessing the interest rate environment right now.

Okay.

Yes.

That was my next question is where you're seeing those securities reinvestment rates today?

And then, what are you a generally buying?

Is it the dust paper that you've had historically or other stuff?

We've been pretty much focused on trying to reorganizing the portfolio to model floating-rate instrument.

So we really, historically, have had a fixed-rate structure throughout our public life.

We move towards now 1/3 of the assets are now floating rate.

So it's a blended security yield.

The security yield is very attractive where we are today.

We were very proactive in Q2, 3 and 4 last year, taking advantage of the anticipation of a higher rate environment, so our security yields on the floating side were attractive.

That environment now has tightened, right, because there's been a somewhat of a change in sentiment.

So we've been more inclined to buy floating-rate securities when available, and we've been staying out of the fixed rate market because we feel that the yields are not as attractive given the shape of the curve and it's all been predominantly government.

Okay.

Got it.

so for the variable rate stuff, what are you guys seeing today for that pricing?

.

So today is probably in the high 2s.

And last quarter was in the low 3s.

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

Not to sort of belabor the point, but Tom, your 6 basis points a quarter in expansion, like I think you were very clear, you're not assuming any redeployment of cash into securities, but you also were very clear that you will definitely redeploy cash into securities.

So is it fair to assume -- I mean, we should be benchmarking some...

Well, Ken, let me make it clear.

What we're sitting in cash.

Cash is an attractive yield 6 months -- while we were up quite a bit on interest rate so we're going from cash to securities.

Cash were earning approximately 2.40%, 2.45%.

So you have to take that into consideration, you're not sitting at a 0% yielding asset.

You have about a 2.5% yielding asset.

That's my point.

So you got to take that into consideration just for movement of cash to securities.

So I think (inaudible) more in securities.

So you would earn more?

That's right.

Agreed.

We were earning a lot more 2 quarters ago, but there was an expectation of a much higher rate environment so we took advantage of that as I indicated with the growth.

So there's a possibility we put on $500 million and that will be anywhere from where the current cash is currently yielding at versus where the new market of securities yields are, which are lower than the previous quarters, just given the incentives.

So it's less of a benefit, but still some benefits so the core NIM down 6% is probably something like core NIM down 4%.

Like assuming you do the full $500 million.

You quoted that exactly.

Fair enough.

We can do -- we can all do the math.

So I just want to make sure we're...

I mean, I'm trying to being conservative, Ken.

We're hopeful that will lead into a point that NII will start seeing growth towards the end of the year in this current rate environment and we're talking about margin expansion next year, so even as the back end of 2019 potentially.

All right.

And then, just in terms of the share buybacks.

Congrats in getting that thing started.

Can you talk about your desire, how quickly you may want to repurchase the remaining part of the $300 million?

I think we're going to be very proactive given market conditions.

It was a very volatile fourth quarter, as Mr. Ficalora's commentary was on his prepared remarks.

We had our stock trade at levels we've never seen before.

So we were very proactive on buying back the shares, which on a long-term we'll look back as a tremendous opportunity.

If that continues, we'll be finishing it up.

If it's slightly where we are today, we'll still be active, but we were much more proactive when the stock was below $10.

Got it.

And then, is there any restriction on you guys for -- like, let's say -- let's presume that you buy back the remaining 300 -- the full 300 million this quarter.

Could you be back in the market in second quarter with another buyback?

Or is there any restrictions on your ability to repurchase more?

Ken, again, Ken, please bear in mind, the restrictions that we have is that you always go to your regulators for any capital instrument that you're going to anticipate on issuing and/or utilizing that in the capital markets.

So clearly, that will take any -- it'll take regulatory approval.

But clearly, we went to the Fed and they were very accommodative for us, and there's always a possibility with our capital planning process.

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

Tom, if you could just kind of walk through the debt repricing.

It seems a little surprising that you could actually see some lift in the margin by the end of the year.

But clearly, the debt repricing is a key part of that.

So if you could just kind of go through the amount you've got to do and the cadence of repricing, that would be really helpful.

No.

Again, I'm not going to get into any specific quarterly detail, but we have 1.74% cost of funds for 2019 for our maturing borrowings.

And I would just spread that over 4 quarters to be reasonable and compare it to market conditions.

I think what we have to take stock is that you have a change in the coupons of the multi-family CRE portfolio.

So we have -- say for example, in Q4 we had a 50 basis points uptick in what originated and what paid off.

That's the highest we've seen in years.

So we've been struggling over the past 3, 4 years of a much substantial decline.

This is the largest movement from what we had paid off versus what originated.

So we originated 4.33% in the quarter, we paid off 3.82% with a 50 basis point delta there.

Very favorable.

That trend, we believe, will continue.

More importantly, if you look at the portfolio on aggregate and you take the current coupon to the current offering yield, that's 100 basis points on a portfolio that has about $14.4 billion of multi-family CRE with -- that has an average coupon of 3.37%, that's expected to come up to their option.

That's not prepayment, that's just coming up to their option and maturity.

So we believe that as each year goes by, we don't see as much significant prepayments, eventually, everybody will have to pay a higher coupon given where the average coupon is in the portfolio.

Unless rates go down 100 basis points from here, every loan that we've originated in the past 3 years are below the water.

That's a tremendous upside pricing opportunity for the average asset yield that is coming on in the future.

Even if the portfolio remains flat, our asset yields are going up.

Okay.

That's helpful.

Just as a follow-up, you mentioned the CPR speeds in the deck.

With the Fed looking like they may be stepping aside here, what's the -- what's been the incremental feedback from some of your borrowers in terms of their level of engagement and willingness to prepay and come to market ahead of the repricing date?

I'm going to say big picture.

We saw a unique change in January versus the fourth quarter.

So fourth quarter was very slow, volatility.

I would say, in general, business was slow given the market condition; however, we did see quite a few prepayments coming in, and a lot of them going to the agency.

Obviously, agency is attractive offering right now.

I mean, they are our probably largest competitor.

If the slope of the curve start to shift and we start seeing a more normalized curve, that should benefit us greatly.

And I believe customers will react very aggressively and trying to lock in the next 5 to 7 years of financing.

There's no question that the shape of the curve is to the advantage of the government offering, which predominantly is an interest-only type structure, and we tend to do very little interest-only type structure.

We're a traditional amortization play when it comes to the bread-and-butter multifamily portfolio.

There's no question that the Fannie and Freddie participation in this market is, in fact, detrimental to all bank participants.

The reality is that there is a defined expectation that Fannie and Freddie will be changed with regard to its positioning in this marketplace.

When that happens, however, is not certain.

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

Just to start on the deposits.

If I look at the average balances, savings, and money market declines around $260 million in the quarter.

CDs were, obviously, up very sharp.

First, are you deemphasizing growth in money markets here?

And how much of the $990 million growth of CDs was from your current customers just moving balances over?

I would say we've been very focused on being in the market, not above the market.

And, historically, the company has been over its public life a low-rate payer.

So for the first time in our public life, given that we're now growing post the $50 billion change to bring in funding as an alternative and going to the wholesale markets, that we have a meaningful presence in the markets that we serve.

So that being said, being in the market for a brand structure that has long history, very solid retail presence, we've been very focused on bringing in the additional money within that marketplace.

There's been consolidation in our backyard, which is to our advantage, we believe.

It's probably about half.

50% of the money coming in is probably new money versus existing customer base.

And I think it's been an attractive alternative in this environment given the shape of the curve and the other offerings as an alternative financing vehicle for our business model.

Obviously, if we had our -- our priority focus is what we can do.

Growth through acquisition has been the company's historical means of getting funding.

And we believe that we're well positioned today than previous years to be more active in that market as we evolve into the changing regulatory landscape.

There's no question that $50 billion or $250 billion for us is a significant benefit.

So we have a unique opportunity ahead of us.

Obviously, our currency is not that attractive, but we sought to regain some of our currency, we could be in a very unique environment to augment the funding mix through acquisition.

The transition you're observing, however, is very consistent with the past when CD rates are being very competitive in the thrift sector, in particular.

People move from money market into CDs, which are demonstrating a significantly better return than their existing money market.

This is not an usual occurrence.

Yes, I will give you color as far as the coupon.

But right now we try to be within the eighth within treasuries.

So on the short end of the curve, we're probably an eighth below treasuries.

In the back end of the curve, we're probably close to treasuries.

So that's a choice.

A customer has a choice to go -- buy a treasury or put a CD that's insured, and it's been relatively consistent throughout 2018.

And we've had some good deposit growth as a business strategy for us.

Yes.

Okay.

That's helpful.

I wanted to follow up.

Looking at the loan repricing slide that you guys have in the deck.

So if the current coupon rate on the $14.4 billion is 3.37%, the 2 options you outlined look very expensive, right?

One's over 8%, one's over 6%.

How much risk are you at if these loans just pay down?

I don't understand why customers won't just pay off their loan and with a flat curve just go with Fannie and Freddie?

They may, they may.

And that's -- depending on their needs, right?

If they have a business model that has cash flow that's going to be significantly higher based on working the cash flow, they're probably going to avoid the agency because they -- because getting out of an agency loan of a long-term structure is very expensive.

Doing a traditional portfolio loan along with NYCB or our competitors is very accommodative to them so they can access the capital given the current environment.

If they're building cash flow, the last thing you want to do is go back to the Fannie and Freddie 3 years out and pay 12 points to exit new financing.

So we're very accommodative.

5, 4, 3, 2, 1 is an accommodating structure for the ramp-regulated cash flow players.

At this end in the cycle, people that are making these kinds of decisions need to recognize, and do, that the marketplace is likely to change and they're going to have the opportunity to acquire in a discounted marketplace, and a Fannie loan is much more costly to get out of to refinance than our loan.

So our loan is very attractive from the standpoint of available funding for acquisition.

Our guys are the winners in cycle turn.

And clearly, our structure lends itself to successful being able to do that.

Yes.

Steve, I just wanted to expand upon that one point.

The Delta between origination payoffs is 50 basis points.

That's a significant change from down 150 2.5 years ago.

So this is a unique situation where all loans in the portfolio, on average, are substantially below the current market coupon.

So that 100 basis points change between what's on the book versus what the market is, is very attractive to us.

So with growth and without growth, you're going to have an asset yield change going forward because everybody has to pay on the way out if they stay with us -- or either they stay with us or they go out so that we will see an asset yield shift upward in this environment.

And then just one final one, Joe.

I want to follow up on the M&A commentary.

Some other banks have said seller expectations appear high.

I'd be curious on your thoughts there.

And then also, I mean you guys have had among the best credit quality in the industry.

What are your thoughts on combining with another bank this late in the economic cycle?

I think the important thing is that, in every acquisition we've made, we've greatly disposed of the assets acquired.

So whatever troubled assets that have existed in the acquired bank, we've priced them before we closed the deal.

And for the most part, we've sold them as soon as the deal closed.

So the ability to have the type of portfolio that we're comfortable with is not something we have to wait 2 or 3 years for.

In many cases, we've accomplished that within the first few months of the consolidated entity.

So to your point, very valid.

This is a bad time to be picking up other people's losers.

But at a particular price -- given all the other metrics we have, at a particular price, we can make that work, and we've demonstrated time and time again that we have.

So I don't want to be overly specific as to the whose, but we've acquired banks that had very bad assets.

And we dispose of those assets priced into the deal.

We knew what we were selling them at, when we did the deal.

So the likelihood that Newco is going to be structured with bad assets, assets below the quality that we are comfortable with, is extraordinarily remote.

But Joe, if you're talking favorably about an MOE, is it realistic you could do an MOE and dispose of that -- the other bank's assets?

It seems relative for a small deal, but you think even for an MOE that's a feasible option?

Sure.

We've actually done that.

In other deals, we've acquired banks bigger than us and dispose of their assets.

They had more assets than we had.

We dispose of their assets, restructured the Newco asset base and created a great return for shareholders.

So I'll just make it very simple.

The very first deal we did, they had a portfolio of very bad assets.

We dispose of all of their asset -- not all, but almost all of their assets in the first months of the transaction.

And then we redeployed that over the period ahead and we created great value for shareholders.

Our next question comes from the line of Jordan Hymowitz with Philadelphia Financial.

You mentioned that the margin could stabilize, slightly expand by the end of this year.

If there's no more rate increases, what type of margin expansion could there be in 2020?

I mean, is 10 to 15 basis points too much?

Could it be as much as 20?

Obviously, Jordan, I share your enthusiasm.

I don't want to be too forward looking as far as 2020.

But obviously, it's been a very difficult struggle with having a liability-sensitive balance sheet over the past few years and the Fed tightening very aggressively here.

So obviously, this could be a meaningful shift in 2020 versus '19.

So it would be very much dependent upon the behavior pattern of the loan book, right?

As I indicated, everyone's under water right now.

So if there's a sloping curve, it could be a very meaningful difference from '19 versus '20.

If the curve stays where it's at today, we still should see margin expansion.

So I'm going to go and have a saying depending on the slope of the curve in that period will really dictate how meaningful the change would be because right now the curve is relatively...

And what would be very meaningful?

I'm not going to back into a specific number, but I appreciate your enthusiasm.

I'm enthusiastic as well.

This has been a few years of a relatively difficult environment watching NII go down.

But clearly, to go -- look back 3 years ago, we were struggling with keeping the balance sheet flat and not to cross over $50 billion.

So that's behind us.

We're very excited about growing the business.

We are the largest portfolio lender for the rent-regulated market in New York City.

We intend to be -- continuing to be the largest player.

And we're seeing some good opportunities, but, obviously, at a much higher rate and at a very difficult slope in the curve.

So if rates start to move and it's more normalization, we have a reasonable slope, a parallel shift or even from here, very attractive in future periods.

Because, historically, the company's return on average asset was substantially higher than where we are today.

So we think we're at a low point.

Okay.

And on to the expense side for a second.

We're now getting down to Dodd-Frank levels of efficiency ratios.

But by 2020, what do you think a normalized range could be?

So again, I gave some guidance last year of what our expense base would probably end up in 2019.

I think we have more room to go lower here on a year-over-year comparison.

I quoted last year low 500s.

I stand by that for 2019.

And from there, I think, it would stabilize.

So I mean that's probably the low point from there.

We have a much bigger balance sheet, we should get a better efficiency ratio.

So long term efficiency ratio should be in the low 40s where we stand right now.

We're being pressured by NII.

So as NII starts to grow, assets start to grow, I think, our expenses will bottom out somewhere in the low 500s in '19 and from there very nominal expense growth.

And we'll see, hopefully, revenue growth offset these potential additional expenses in future years.

But we've shaved over $100 million year-over-year on our expense base.

Now a substantial amount of that was due to the mortgage banking exit.

But in addition to that, we're still enjoying the benefits of a different regulatory environment, okay?

We're not a CCAR bank.

We're not subject to the LCR mandate.

So regulatory changes has occurred, and we intend to continue to be viewed upon as a non-CCAR bank.

So all of the technology build outs that we've done in the past, you want to start getting efficiencies from.

So a lot of money has been spent into technology and processes.

We should be able to get some more efficiency from that in the years ahead.

So by -- to sum up, by 2020, there really should be almost no expense growth?

And the margin growth could be material by your words?

Material, I would imagine, is more than 5 to 10 basis points and certainly more value?

I'd say material, you say material.

I would say that because the category has long-term issue to the bank.

We're not used to running on ROA below 100 basis points.

It's not customary for us.

This has been always a high performer.

And we're in a very unique spot in our public life.

And we hope that as the assets start to churn again, we will see a very meaningful change in yields on assets.

And funding cost should, over time, stabilize to more normalized levels, especially if we're able to effectuate the ability to change the funding mix to a deposit acquisition, some form of a funding mix there.

That's a game changer for us.

I think the important thing to recognize is that we have a long history of restructuring our balance sheet through acquisitions.

Every acquisition that we've done has been accretive.

Every acquisition we've done has facilitated, not only the change in the assets of the acquired, but also the assets of the whole.

Meaning that our assets are also very favorably impacted by the opportunity to deploy large amounts of money into Newco.

The upside to a deal for us has never been greater than it is at this moment in time because we've never been trading at such a discount as we are trading today.

And, Jordan, I would just share on Ficalora's commentary that we have this very large wholesale liability book.

We would love to swap that with core deposits.

That would be a game changer for any partnership.

So that is clearly an immediate benefit if we were to associate ourselves with a very large funding mix and change the wholesale to retail and true customer deposits.

That will be a meaningful benefit towards the bottom line.

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

I really just wanted to focus on the securities book.

Yields quarter-over-quarter went up 17 basis points to 3.88%.

And so kind of a two-parter.

So one, was that mostly driven by the floating rate portion repricing with the Fed hike?

Or are there other securities being put on at accretive yields?

And what were they?

Yes.

So the number one factor is that no question that we put on some floating rate early on in the year, that we had 2 rate hikes there, so that helps.

It's a 50 basis points movement on a very large meaning -- portion of the portfolio.

And secondly, the home loan bank had a very attractive dividends.

We do have a very large investment in the home loan bank.

And that also had a positive impact towards the overall yields for the securities portfolio.

Okay.

What was the size of the dividend?

And how often did they occur?

I think it was a 6.90% total dividend for the year -- yes, for the quarter.

So I think if you normalize that, we're probably about a 3.47% ex prepayments that we received on our DUS portfolio, which is insignificant, 2 basis points and the home loan bank dividend, which is -- if you take that home loan bank out of the equation, we're on a 3.47%.

How often does those occur?

Every quarter.

Every quarter.

They have a very consistent means of literally paying this very-high dividend, but they are extraordinarily well positioned to earn.

So they pay quarterly dividend.

Obviously, it's been relatively attractive over the few years.

So -- and then they tend to be -- if you look at where they are economically in the marketplace, they are a little bit expensive, so they're doing well right now.

So they can afford to pay a stronger dividend.

Okay.

All else equal, no Fed -- no additional Fed hikes and the floating-rate paper you're putting on, we should assume securities yield start to come back in, correct, just given what you're putting into it?

Again, it's not going to be a meaningful change.

I think I gave guidance of $500 million depending on market conditions.

We may buy none and we may buy $600 million, depending on market conditions.

They have a very attractive market in Q3 and into Q4 rates are much higher.

We took advantage of that.

We had a preset public position that we're going to put $1 billion a quarter for the next 2 quarters.

And those investments were very attractive.

We hit -- we believe we hit the market at a good position on timing.

And right now, the yields are well.

So we're going to be very mindful of where we are.

The $500 million in securities portfolio is not going to meaningfully change the entire portfolio yield.

But we're going to be proactive.

We want to try to look at the floating rate market as a balance for interest rate risk going forward.

Understood.

Okay.

Then turning to the borrowings.

Borrowings are up $360 million, $370 million quarter-over-quarter, but you also had, I think, $1.4 billion of reprice.

So what were the types of borrowings you put on?

And what were the rates they were put on at?

The average -- I think the average for the quarter we put on here -- we have that here, John?

2%.

Third quarter was -- I think low 2s in the fourth quarter.

We did some [printables] at The Street, so like really low 2s, 3-year structure, [10 noncore 3].

It doesn't mean we're going to put on a magnitude of that going forward.

It's an option for us over time.

Okay, okay.

So as we think about 2019, is that a product that you're clearly leaning to or go more towards fixed-rate advances?

We're going to -- it will be blended depending on market conditions.

Obviously, we're very excited about the retail deposit growth.

Remember, the retail deposit that we bring in is less of an FDIC expense on the assessment.

So we're moving -- of that $1.6 billion we brought in last year is not taxed per se from the FDIC as wholesale liabilities.

So that does give us a better overall bottom line benefit.

So when we look at deposit pricing versus wholesale liabilities pricing, we take into account the assessment tax we get for wholesale versus retail.

So we're going to -- it's going to be blended.

Okay.

And then thinking about your expense guide for 2019, the low $500 million range, when do we start seeing you get to that level on a run-rate basis?

Should we see a substantial step down on the first quarter or more gradual throughout the year?

I would say, typically, as you can go back historically, the fourth -- the first quarter is always the high point for the quarter.

So we're going to probably be around $133 million, $134 million, let's say, for first quarter 2019.

And that should be the high point.

We have a number of initiatives that we believe will benefit throughout 2019.

And we should be at a run rate.

We should be in the low 500s as an absolute number by the end of the year.

Is it $510 million?

Is it $505 million?

We're working real hard to make this bag more efficient and focus on where we could -- focus on what we built in technology and processes.

And we hope to continue to focus on every aspect of the institution to drive cost lower, especially given the current profitability for the bank.

Like I said before, we're not accustomed to running institutions sub-100 basis points in ROA.

So we think we have some meaningful benefit there.

There'll be a point where the end of '19 where we can no longer drive expenses down, and we'll run flat from there.

And when you look at that with revenue growth going into the end of '19 to 2020, the efficiency ratio that you start to see a meaningful shift lower.

So somewhere in the low 40 percentile is where we should historically go into the new norm for us as a $50 billion institution.

We're not a CCAR institution performer anymore.

So that clearly is going to give us a much better expense base to manage from.

Understood.

Okay.

And then just going back to M&A, obviously, it sounds like you're much more positive on that front.

If you look back quarters ago, the types of deals you were talking about ranged from small to big.

But given some of the changes on the regulatory front, would you think the likelihood of a larger deal is higher today than it was 6 months ago?

And is that...

You know, it's all a matter of relativity.

It's got to do with our currency versus the currency of the target.

It's got to do with the upside that the new balance sheet creates.

There are many reasons why we buy bank A versus bank B. And lo and behold, taking all of those nuances into consideration, we could do still a smaller deal first and then follow with a big deal.

Or because of the difference in currencies, we could elect to do a larger deal because it's still a highly accretive deal.

And the opportunity for us to restructure our balance sheet is such that with the greater volume of dollars that we have available to us, we feel that, that makes more sense.

So every deal is considered relative to alternatives in the market at that time.

We don't care what happened 3 years ago or 5 years ago or 10 years ago.

We're looking at the restructuring of Newco in the period ahead.

And each deal represents a different opportunity.

Pricing relativity matters, but there were also opportunities with regard to the assets that can be created and the assets that need to be disposed of.

So I will say to you that we probably have more deals in consideration today than at any time.

And we've always had deals in consideration.

But there is clarity that there are plenty of banks that have expressed a desire to consider literally having the benefit of our currency.

Our currency is deep discounted, and people that are in the business know that.

So getting our currency at its current pricing levels is a significant upside to anybody that participates in Newco.

Okay.

Understood.

Last one is just the tax rate to the past 2 quarters has been a little bit lower than anticipated.

What should we be using for 2019?

Is it still that 25% to 25.5%?

With the conservativeness, I would run with a 25% effective tax rate for 2019 all in for the year.

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

Tom, did you say it was 25% for tax rate this year?

Yes.

25% is a reasonable range for the 2019 calendar year.

Perfect.

When you look at the consolidation of the 2 charters, to what extent is that going to drive the cost lower in Q1?

Or is it something going to just blend into the other normal FICO cost that you have to endure seasonally?

So Chris, it's all part of our big picture plan of being more efficient, right?

That's part of the reason why we did the consolidation.

It took us a long time to get it done, but we have -- we're very pleased that we're able to get that transaction completed at the end of the last year.

But clearly, it's not a meaningful benefit, but it is a -- there is a cost benefit there.

It's part of our 2019 initiative of getting to that low $500 million level.

And that was part of our long plan.

That was actually a plan 3 years ago.

The rationale was just more efficient.

That's one less regulatory process we have to go through, and there's one -- call reporting and people and processes.

It's just -- it's a whole another bank that we have to manage.

So that gets consolidated into the Community Bank.

So good reason, good business purposes.

And we're very pleased that it's behind us.

And there will be further efficiencies in 2019.

Not a material one, but, clearly, adds to our overall budget and forecast for 2019.

I think exclusively what Tom is saying is it also makes our operating executives more efficient, and that they only have to focus upon one regulatory process rather than 2. The effort is significant and, certainly, it's clear to us that our people need to manage the bank and need to be in conformance with regulatory expectations.

Having 2 banks meant that there was a significant amount of extra effort at every level, including the executive level.

So I think this is a very good thing for the future.

And clearly, as you might imagine, we're very pleased to have this behind us.

Got it.

And just to follow-up on your capital approval by the Fed.

Does that last you through this year?

Or does that only last you for the $300 million buyback?

I think my initial reaction when we publicly announced it in the fourth quarter was that we wanted to seize the cost initially depending on market conditions, which was $100 million.

We accelerated that given market conditions.

So we did about 2/3 of it already given the stock was below $10.

That was a very attractive long-term opportunity to buy the stocks at those levels, given the dividend yields that we're paying on the shares and what we're financing to do the buyback, right.

The math works very nicely for us.

So we have about 1/3 left.

So that -- depending on market conditions we'll be very active, in worse conditions maybe less active until better conditions.

So it's about 1/3 that's remaining and will be subject to market conditions.

Our next question comes from the line of Mark Kehoe with Goldman Sachs.

It's Mark Kehoe here from Goldman Sachs Asset -- it's Mark Kehoe from Goldman Sachs Asset Management.

Just a question.

When I look at your kind of deployment of capital, whether it be loan growth, you posted kind of [SIFI] destinations, stock buybacks or M&A.

Can you talk to maybe where the floor is on your TCE ratio and your commitment to the IG rating, particularly at Moody's?

So I'd say it's a big picture with capital.

We look at adjusted capital based on credit risk.

So we have a very proud history of a very low credit loss -- history of losses.

So we look at adjusted for the risk space in respect to potential risk within the portfolio.

And as you know, historically, you can match that against any institution in the country.

We have, by far, the best asset quality in -- historically for the multi-family space.

So we're very pleased with that.

So when you look at the absolute capital levels, we think we have a very good capital process.

We have a very high threshold.

We have more room to grow the balance sheet.

And clearly, we just did -- doing the sub-debt opportunity was also illustrated by the acceptance from our regulator that we have adequate capital to in addition not only pay a very strong dividend, but also in excess of that go out in the market and buy back shares at a very attractive level.

So I'm not going to give an absolute capital level position, but I will tell you we look at more the risk-adjusted based capital in particular for risk-based capital for us as a meaningful number, given that every loan we try to originate, we get a 50% risk weighting on our position.

So traditional commercial real estate lenders are 100% risk-weighted lenders.

We're traditionally a 50% risk-weighted lenders.

So we're more focused on the risk-based capital position of the bank.

And then just kind of the follow-up in terms of the commitment to the investment-grade, particularly kind of retaining the Moody's rating?

We want to have the best possible rating agencies.

Obviously, we made a business decision when we looked at the marketplace in the fourth quarter and we had a downgrade from the other rating agency.

But clearly, our goal is to get us all of the rating agency of that investment-grade over time.

That's our goal.

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

I just have one quick question as a follow-up.

Tom, earlier on in the Q&A, when asked about M&A, you said that protection of tangible book value dilution is really a key determinant.

Could you help us quantify what level of dilution you would accept?

I guess, the best way would probably be in terms of payback.

So I will tell you, Wally.

You can go back and look at all our deals.

We've never done a tangible book value dilutive deal, so the tolerance is 0. Obviously, we're very protective of that.

And we look for partnerships.

Partnerships are important.

We pay a very high dividend.

A small institution that merges with us and look at our currency, we may have institution that may be trading at a lower price to tangible book value.

We can create real value that way and it's a partnership opportunity.

So we look at the reshuffling of the balance sheet.

On an announcement basis, we will look at -- on a stock-for-stock basis, tangible book value should go up, always being neutral, not down.

We're not looking to talk about earn back.

We don't want to have a conference call, let's say, 6 months down the road, we're talking about how many years we're going to earn back something that we purchased with our stock.

That's not who we are.

We're very large shareholders.

We're very protective of our tangible book value.

And I think the most recent deal that was announced, which is a fairly large transaction for 2019, the merits of that is interesting.

You have 2 large companies coming together at a no premium.

That makes a lot of sense and there is value creation there.

If you can imagine that scenario with tangible book value creation, where is your downside risk?

So as long as you can execute and consolidate and, ultimately, strip out the risk of the combined company, we don't think we have a lot of asset risk.

So we'll be really looking at the assets of the target.

We think there's some good value that can be created there.

We've done it historically.

It's been a long time since we've announced and closed an acquisition.

But clearly, our discipline has not changed.

We're not going to be aggressive on pricing transactions.

We'll be patient.

I think there's no escaping the fact that we've never had as much upside potential in the Newco as we have today.

Our currency is at a deep discount.

So the opportunity to create real value in an accretive deal is something that smart partners understand.

Bankers all get it.

The people that, clearly, are considering and made it clear to us and others that they would be very pleased to be a partner understand that upside for us is extraordinarily real.

And their contribution to that upside means they participate in the value creation.

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

I'd touch through a follow-up question on the expenses.

I know you've got some seasonality in the first quarter, but you gave that guidance of about $133 million to $134 million.

But it does imply a big step down for the rest of the year like a quarterly run rate roughly $125 million to get to that low $500 million for the full year.

Can you just give some more color about the drivers to lowering that expenses?

Yes, we have a number of initiatives, Pete.

I can't say it publicly, but we have some very unique opportunities in front of us.

In particular, bear in mind, Q1 is always a high quarter for us.

That should be the highest quarter of the year.

And then we have, again, just given on a year-over-year basis, the regulatory cost will be lower.

The DUS fund is fully funded right now, so we all get a benefit as a banking industry.

We continue to, like I said, grind down the opportunity to look at past CCAR requirements versus non requirements for a sub $250 billion bank.

We have a number of technology initiatives going on at the bank that's going to be meaningful towards the expense run rate for the company.

And we believe -- and again, depending on what your number is -- I didn't say $500 million to the buck.

I said low 500s.

So again, I'm going to go back to '17.

It's important to understand.

At the height of the -- when we were dealing with the Astoria transaction and trying to become a SIFI bank, our run rate was $660 million.

We said publicly after that the deal did not happen.

And we felt there was a meaningful shift in SIFI to a higher level.

We took it down by $100 million.

That number came in probably about down $125 million or $120 million.

So we really met our goals.

We feel highly confident that we'll run in the low 500s this year.

So $505 million to $515 million is the range.

I hope to be at the bottom end of that range.

It's a little early now, but we have a number of very real initiatives at the bank to drive our cost structure lower.

And we've been razor-focused with that for the past 3 years given that we've had a significant ramp-up of expenses to accommodate the expectations of a CCAR bank.

Those are real dollars that -- shareholder value that's left the portfolio -- it's gone.

A lot of money has been spent.

But however, some of that investment has been made within the systems and processes that we believe we can capitalize on.

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

We saved the best the last, Collyn.

Was that what that was, Tom?

Okay.

Anyway, well, I'm glad I got my question in.

So just to go back to the securities discussion.

So the fact that you guys are exempt from LCR, I guess, I'm trying to understand, Tom, why grow the securities -- why still be committed to that $500 million a quarter in securities growth?

So Collyn, you buy to put in loans, right?

So depending on the growth in the securities portfolio, rest is loan growth.

So we think we can grow our loan book mid-single digits.

That's the goal typically, unless markets change.

In the meantime, we'll be proactive on getting our portfolio back to more normality.

We're still only 11% of total assets.

So if you look at the industry as a whole, we're probably one of the lower securities portfolios that we see amongst banks over $50 billion, I would imagine.

So we're 11%.

Remember, we drove down that portfolio from the 20s just by being smaller.

We opted to not replace those securities to stay below $50 billion for years as we try to assess when Congress was going to make the change.

So the change occurred last year and -- at the end of the first quarter, and we're going back to replenishing the portfolio.

And the difference this time is that we're not putting on the fixed-rate structure.

So we're being more proactive on interest rate risk and managing that accordingly.

So we've been more selective and looking at adjustable rate securities depending on market conditions.

So we've been very pleased with the first, we'll call it, $2 billion of the replenishment.

And we have more to go in 2019.

Okay, okay.

And then just, obviously, a big crux to the whole story is the loan dynamic -- the loan repricing dynamic that you're seeing facing you guys.

So of that $14.4 million you put in the slide deck over the next 3 years, what -- how does that -- can you give us a little bit more granularity on what that looks like each of the next 3 years?

I mean, is that all -- is that coming?

I would say in 2020, okay, it's very meaningful, less meaningful in '19.

I think it's probably more than what probably 2/3 of it's coming within -- in the first 2 years.

So 2020 could be a very interesting dynamic for us because many of our customers will have to make a decision.

Either they stay with us, they go, they're paying a higher rate.

Assuming rates are flat where they are today, it is a slope in the curve.

It will be meaningful higher.

They'll be forced to accelerate every pricing.

So this is only what's contractually coming up to their option in maturity.

The reality is when there's a real change in interest rates, customs will react in that 4 to fifth year.

And yes, some customers are going to year 5 and we're not seeing the benefit of prepay.

But what we are seeing the benefit is taking a 3/8 to the market of 4.25, 4.50.

So as Mr. Ficalora's commentary, 100 basis point is conservative based on the current portfolio.

That's assuming a very flat curve.

If rates haven't steep in, there will be bigger benefits for us.

But there is no question that as each year goes by with the passage of time, that number gets larger.

And when I had a long duration play on this, on the loan book, all loans typically are traditional, 5-year bread-and-butter-type multi-family rent-regulated cash flows.

So we should take the 5-year asset as worst case, right?

On average life 3 years.

So within that construct, right, so this is implying significant refinancing pressure to the borrower that the industry is not seeing in its cycle certainly in the last 20 years.

How do you guys see that impacting the industry?

Again, I would comment on the fact that where we are with interest rate, interest rate is still extremely low.

Cap rates are extremely low.

I think there is a very unique opportunity for customers to look at the agency market as an attractive alternative if they are not building cash flow.

The government is the most active player right now given where rates are, right?

If that changes, they will be very back to the portfolio of lenders.

In the meantime, we still grew our multi-family book last year 6%.

We did over $10 billion in origination.

So we're still very meaningful player in the game, and our biggest competitor is the government.

So we start to see steepening, I think the government will see less products in the back end of the curve and customers will go back to the shorter duration taper, because it's just an absolute -- because it's cheaper for them.

There's no question that this is a unique time in the environment.

We will say buyers have increased dramatically over the past decade.

There's been so much of a pull back now given this uncertainty, but rates are still very, very low.

So customers are still on the sideline.

Prepays were dismal last year.

So we should have a better prepay year going into the future years ahead, if there's acceleration of sentiment.

Having sitting on the sidelines does not bring prepay.

Activity that generates either sale transactions and/or the concern of their next refinancing will generate prepayment activities.

So our fourth quarter prepay is just probably the lowest you've seen in years, but we think that, that could change.

It could change very quickly, and it's beyond our control.

Okay.

Okay.

And then just one final question.

So CRE loans have been kind of continually declining.

What's driving that?

And what's your outlook for CRE loans in '19?

I would say overall -- I'd say, we'll probably build a multi-family book faster than CRE.

CRE maybe flat to stable, depending on market conditions.

Obviously, as I indicated, we've had a 10-year variable [bus run] in valuation to a very selective on our CRE portfolio.

Our average LTVs in CRE are dramatically lower than multi-family.

The historical loss history of our CRE is half that of multi-family, and multi-family losses are de minimis.

So we're very selective.

A lot of that is driven off the transaction and where you want exchange side business.

So there's not a lot of transactions in the 1031 area.

You're not seeing general transactions -- generally not seeing a build up of CRE.

In other words, as cash comes in for a borrower, they have to put the money to work.

So it's either commercial real estate/multi-family, and, obviously, it's been less transaction, so that will also drive the CRE deal having less transactions in the marketplace.

We have reached the end of our question-and-answer session.

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

Thank you, again, for taking the time to join us this morning, and we look forward to chatting with you again at the end of April when we will discuss our performance for the 3 months ended March 31, 2019.

Thank you.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.