New York Community Bancorp, Inc.
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Good morning and thank you all for joining the management team of New York Community Bank Corp for its Quarterly Conference Call. Today's discussion of the Company’s first quarter 2017 performance will be lead by President and Chief Executive Officer, Joseph Ficalora together with Chief Operating Officer Robert Wann, Chief Financial Officer, Thomas Cangemi and John Pinto the Company's Chief Accounting officer. 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 anticipate due to a number of factors. Many of which are beyond this control. Among those factors are General Economic conditions and trends both nationally and the Company's local markets, changes in interest rates which may affect the Company's net income prepayment income mortgage banking income and other future cash flows or the market value of its assets including its investment securities, changes in the demand for a 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 on Page 10 of this morning's earnings release and it's SEC filings including its 2016 annual report on Form 10-K. the release also includes reconciliations of certain GAAP and non-GAAP financial measures that maybe discussed during this conference call. If you would like the copy of this morning's release, please call the company's Investor Relations depart at 516-683-4420 or visit ir.mynycb.com. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only-mode. You will have a chance to ask questions during the Q&A following management's prepared remarks. Instructions will be given at that time. To start that discussion, I will now turn this call over to Mr. Ficalora, who will provide a brief overview of the Company's first quarter 2017 performance before opening the line for Q&A. Mr. Ficalora, please go ahead.

[Joseph Ficalora:]

Thank you [Michele] (Ph) and thank you all for joining us this morning as we discuss our first quarter 2017 results. This morning, we reported net income available for common shareholders of $104 million were $0.21 per diluted common share. Our results were influenced by the trends in place since mid-November when market interest rates first began to increase. This along with our stated intent to temporarily stay below the current SIFI threshold as constrained our overall asset growth. At the same time and as anticipated, our operating expenses rose as we continue to invest in the infrastructure needed to become a SIFI ready institution. These factors notwithstanding, we still had a solid quarter in terms of loan production and asset quality. One of the highlights of the quarter was the $550 million preferred stock offerings we executed in March. This posted our already regulatory capital ratios to the point where they are now greater than those of our regional bank peers and more importantly enables us to increase our lending even as the SIFI threshold remains temporary barrier to our growth. By issuing additional capital, we also reduced our CRE concentration and facilitated our strategy of selling participants in the multifamily and commercial real-estate loans. This strategy, which has been in place since the fourth quarter of 2014 allows us to maintain our leading multifamily market share position while remaining below the SIFI threshold. On that topic, I would like to note that our expectation for transitioning to SIFI status has not changed. We still expect that it will occur in connection with a large merger transaction. However, we continue to carefully monitor the ongoing discussion regarding the SIFI threshold for any changes in the regulatory environment that could alter our plans. Turning now to our first quarter results. As mentioned earlier, we reported first quarter net income available to common shareholders of $104 million or $0.21 per diluted share. Our earnings provided an 85 basis point return on average assets and a 6.76 return on average common stockholder's equity. On a tangible basis our profitability was also solid with returns of 0.90% and 11.20% on average tangible assets and average intangible common stockholder's equity. As for loan production, we originated $2.2 billion of loans during the first quarter including $1.7 billion of loans originated for investment. Multifamily loans represented [$955] (Ph) million of the first quarter's volume and commercial real-estate loans represented $250 million. At the end of the quarter, multifamily loans represented $27.1 billion of total loans held for investment, a $92 million increase from the balance at December of the loans participation sales of $122 million. Commercial real-estate loans represented $7.5 billion of total loans held for investment down $191 million from the December 31st balance, reflected loan participation sales of $93 million. Our current pipeline amounts to $2 billion with the majority consisting of held for investment loans. Moving on to asset quality, our quarter-end measures continue to be very solid and to rank among the best in the industry despite $9.2 million increase in non-accrual New York City taxi medallion loans from the year-end amounts. Specifically, non-performing, non-covered loans represented 0.16% of total non-covered loans at the end of the first quarter, compared to 0.15% at December 31. Non-performing, non-covered assets represented 0.15% of total non-covered assets at the end of March, compared to 0.14% at the end of December. Despite the uptick in charge offs related to New York City taxi medallion loans, the ratio of net charge offs to average loans was a mere 0.01% for the quarter, which evidences the strength of our core portfolio, which generated no losses. At March 31, the New York City taxi medallion loans portfolio totaled $146.7 million representing a 0.39% of total held for investment portfolio. Now, moving on to our income statement. Our net interest income declined modestly compared to the trailing quarter primarily due to the lower loan production and prepayment penalty income and an increase on our cost-to-funds. The net interest margin declined 15 basis points to 2.71% on a linked quarter basis [marking] (ph) the increase in prepayment penalty income. Prepayment penalty income contributed 11 basis points due to current first quarter margin compared to 20 basis points in the trailing three months periods. Excluding prepayment penalty income, net interest margin declined six basis points on a linked quarter basis to 2.60% within management's guidance of being down five to eight basis points. Our first quarter non-interest income was relatively unchanged from the amount recorded in the trailing quarter as a $3.3 million increase in FDIC indemnification expense and modest decline in other categories was offset by the $6.5 million increase from mortgage banking income. The FDIC and mortgage banking income was driven by an $8.4 million improvement in servicing income to $4.8 million as compared to $3.6 million loss in the fourth quarter of 2016. Also impacting our earnings in the current first quarter was the higher level of non-interest expenses, which excluding merger related expenses in the trailing quarter rose $2.3 million sequentially. Compensation and benefits expense accounted for the majority of the linked quarter increase, which was largely driven by expenses related to our preparations complied with the regulations for SIFI bank and by the normal beginning of year increase in payroll taxes. Reflecting our earnings and capital, the board of directors last night declared a $0.17 per share dividend for the quarter representing a 4.9% dividend yield based on last night's closing price. The dividend will be paid on May 19, 2017 to shareholders of record as if May 8th. 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 and if we done, please feel free to call us later today or this week.

[Operator:]

Thank you. We will now be conducting a Question-and-Answer Session. In the interest of time, we ask that you please limit yourself to one question. [Operator Instructions]. Our first question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

[Kenneth Zerbe:]

Great, thank you, good morning. It's going to be tough to limit myself to one question, but maybe just to start-off with the margin. I totally get that prepays were the main cause of the margin compression and your quarter was in line with your guidance and that's fine. But just given the sort of the presumption for higher Fed funds, given your liability sensitive, given that we are waiting still for a large deal to happen. Is there anything that you guys can do to be able to limit some of your liability sensitivity while we were waiting for a deal?

[Thomas Cangemi:]

Good morning Ken, its Tom. I will tell you that historical going back to the Q1 the actual results the margin was impacted by obviously the rate increase and our extension of liabilities of which few basis points were form the extension of liabilities and about five basis points was driven by or 4.5 basis points driven by the rate increase. So obviously that's going to have an impact in the second quarter. Our guidance for Q2 is solely driven of this most recent rate increase, it's going to be about five to six basis points down in Q2 and then from there we hope to see some stabilization depending on the magnitude of rate increases. We are forecasting another rate increase in 2017 and we have another one in 2018 and hopefully you will see some stabilization as we get closer to the year-end, but clearly the short-term nature of the liability base being somewhat at liability sensitive, we do have impact on rising rates. So clearly that as you move from quarter-to-quarter, we have been extending liabilities that is the plan for 2017 and we have approximately just under three billion of liabilities that we can extend out and we will take advantage of that as we go through the quarterly analysis each quarter to take advantage of extension opportunities and from there we should get to stabilization.

[Joseph Ficalora:]

Ken, it's also important to note that the balance sheet was prepared for the consolidation of our balance sheet with the Astoria balance sheet. Significantly different outcomes would have risen as a result of that transaction. So we are in this process of making those adjustments to the balance sheet, but there is a very big difference between adjusting the balance sheet as it stands versus as it would have been [indiscernible].

[Thomas Cangemi:]

I would say Ken also to add to that. The encouraging aspect is that loan yields are higher in the pipeline, so looking at about a 3.68% forward pipeline coupon and if you look at what is rolling off or what is left in the portfolio the multifamily yields are on a 339 in the CREs 394, so if you average that into about 3.51%, so we hope to see a positive impact on the asset side. As you are aware, we have not added to any securities balances in a long period of time. Ultimately, as we see start to replenish the security yield and security balances as well as we prepare ourselves across over the SIFI threshold we will need to probably building that balance sheet. So clearly we are much smaller than expected and I think the encouraging aspect going into Q2 is that mid-quarter update was seeing a - I wouldn’t call it a surge but a nice uptick in applications and the yields are fairly higher in the pipe than anyone in previous two quarters.

[Kenneth Zerbe:]

Got you and does the stable in the third quarter assume any other additional liability extension or duration extension?

[Thomas Cangemi:]

What we have about a $1 billion come in due in Q2 and then if you could have the remaining of that two points, I have mentioned in the later part of the year. So clearly we are going to push out those liability as they come due and we are trying to get to a more neutral level as far as asset sensitivity is concerned, we like to be neutral and then as Mr. Ficalora indicated the growth would be down the road where we can actually see significant growth through an acquisition, not so much, normal organic growth. But I will tell you that given where we are today, we have nice room to manage our business to start seeing the loans come on the books without tripping over the SIFI threshold. If you do the mathematics, over the next few quarters we could put it on $1.5 billion a quarter and match it over to the end of the year. So I think we have some room to see some good second half growth and hopefully they will come a little sooner and we will start seeing it towards the end of Q2 on multifamily.

[Kenneth Zerbe:]

Got it, okay. And then just one last question, just in terms of potential acquisition as you are looking for deals. Obviously your stock price continues to diverge versus the rest of the banks space broadly speaking. Is there any structures, any kind of I'm going to say alternative deals something where it can actually be a lot more accretive than just simply looking at to say your stock price versus a normal other bank stock price or evaluation?

[Thomas Cangemi:]

I think that you are raising an appropriate question. The important thing to know however, is that is that if in fact we announced a deal, our stock price should adjust materially rapidly, because the value of our Company and the value of pro forma whatever that Company may be that we create will in fact dictate the price the stock should trade at. So a good deal that has all the kinds of attributes that we put into a deal would make an adjustment to the stock rapidly and obviously the significant short position that we carry would hover rapidly.

[Joseph Ficalora:]

And Ken just bear in mind, if you look at the balance sheet and the liability structure, we have a lot of liabilities that compared to the peer group but significantly higher. And if we were to join deposit transaction just pure deposits an influx of lower cost deposits that will change the margin materially going forward. So clearly, it's not just putting businesses together, but deposit opportunities in the marketplace that have lower cost-to-funds and are currently higher cost-to-funds, peer comparison will be a benefit to the margin on a go forward basis. So clearly we would look at those opportunities as well.

[Kenneth Zerbe:]

Alright, great. Thank you very much.

[Thomas Cangemi:]

You are welcome.

[Operator:]

Thank you. our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.

[Joseph Ficalora:]

Good morning Collyn.

[Thomas Cangemi:]

Good morning.

[Collyn Gilbert:]

Good morning gentlemen. So, Tom just talking a little bit more about the pipeline and kind of what you see in the market. It looks like the pipeline is higher at the end of this quarter than it was in the fourth quarter. Sort of how do you see that unfolding and I know obviously you have to manage within constraints of the balance sheet. But just kind of overall market trends in general and just kind of the behavior of your borrower, how do you see that sort of unfolding this year and in next year?

[Thomas Cangemi:]

So Collyn, I was bust and very cautious as far managing the $50 billion threshold, but the good news is typically in 2017 we have some room here. And as you can see the previous quarter, there wasn't a lot of growth. Typically Q1 has traditionally [indiscernible] the company as far as the growth and given the pent up demand within multiple years of increase in commercial real-estate value has been somewhat of a slowdown. But the reality is that we are seeing a ramp up of applications in mid-quarter update, so we have a nice pipeline going into the higher yield than we have seen I would say in the past two or three quarters. Although it's not a substantially higher yield, [367] (Ph) for us compared to a [339] (pH) coupon on the book is encouraging, we haven't seeing the surge in interest rate and in Mr. Ficalora commentary regarding the press release that since November has been a bump up in rates but not a surge. So people are sitting back and if not are evaluating the marketplace, I think they are evaluating the marketplace with respect to tax planning and what is going to happen as far as managing your financial assets in respect to the political landscapes. So there has been somewhat of a pullback, but I think with the encouraging asset, is we have just seen somewhat of a pickup in applications and we are clearly in a position with our most recent capital that we raised that we have a lot of room to put on some nice growth and hopefully a higher yield. So that's encouraging, but it came a little bit later than we expected and hopefully will have a nice set of growth showing towards the end of the second quarter as far as loan growth is concerned.

[Collyn Gilbert:]

Okay, that's helpful. And then just on the borrowings that are coming due and your intention to extend, just kind of broadly how are you seeing the terms of potential extensions, are you going out three, four or five years and kind of what are the rates that you are expecting have to incur at expense?

[Thomas Cangemi:]

Marketplace is [Indiscernible] relatively and inexpensive, we are looking about a 125 that’s coming due and we are looking anywhere from 130 to 155ish kind of refinancing going out in 18 months to 24 from 24 months to 36 months that range. So depending on market conditions, we will evaluate that. Obviously rates are flattening in the back end of the curve, so clearly on the liability side extensions themes will be more attractive than it was when we first modeled out the extension going back in the fourth quarter. That’s where we can talk today.

[Collyn Gilbert:]

Okay that's helpful. And then just one final question. Obviously the large deal, we have been talking about this for a while and then such a big part of the strategy and in necessary part of the strategy. Is there a point though where you guys given the environment, given maybe limited options that you think about yourself partnering with the larger organization, I mean kind of changing course here?

[Thomas Cangemi:]

I think Collyn, it's something that has always been considerable over the course of our entire public life. We were motivated by what is in best interest of our shareholders as we are all shareholders, so we will always do what is in the best interest of our shareholders. Saying that there has never been a time in the past when partnering with somebody was actually better than acquiring somebody. We have a very strong track record of success in creating value by doing acquisitions. That doesn’t mean that it couldn’t be a circumstance where a partnering would actually be of great value to our shareholders and therefore we would entertain it.

[Joseph Ficalora:]

And Tom, I would just add to that commentary. The roadmap has been set, the expenses are clearly higher than we expected, there is no question about that. We went to a very large strategic business combination that did not close given the timing of such and we have now a roadmap that some expense attributed to that, so we will have to get to this roadmap and as you can see the Q1 expense results were ahead of our original guidance given the [indiscernible] that was unanticipated there is some more ahead but I think in respect to overall looking at the OpEx going forward hope hopefully we will see a little bit of relief in Q2 compared to Q1. So my guidance is about a $165 million which hopefully wouldn’t cooperate, but we plan to continue to put in place to get to the roadmap of becoming SIFI ready and then once we get to that level of being SIFI ready, we think that we have a tremendous operating leverage opportunity when we put on assets. I mean to build the infrastructure and be considered SIFI ready is expense base around 50% efficiency ratio is typically not how we run our business. So we have the infrastructure of building towards SIFI readiness and hopefully when we do put on the assets, you will be able to leverage those SIFI cost that was affiliated with the significant expense [tool] (Ph).

[Collyn Gilbert:]

Okay, that's helpful, I’ll leave it there. Thanks.

[Joseph Ficalora:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Bob Ramsey with FBR. Please proceed with your question.

[Bob Ramsey:]

Good morning guys. Tom just want to be sure I heard you correctly. Did you say a $165 million next quarter?

[Thomas Cangemi:]

Again I'm shaving it down from quarter-over-quarter form $166 going down to $165 and we have some we will call that onetime expenses that were driven because of SIFI readiness and the roadmap that we have to achieve. So I would say in Q2 we are looking around the $165 level and then going forward hopefully we can stabilize there, but I think at that pace we should be in a position to at least have a expense base that would be at a level if you run that out four quarters at a SIFI readiness level. And from there, the goal would be to when we do cross all that and become a SIFI bank somewhere down the road and when that happens it happens, we get to an acquisition of organic down the road we should be able to get the operating leverage opportunity given that we have built a significant infrastructure to accommodate the roadmap.

[Bob Ramsey:]

Okay got it, thank you. And then you know it’s been a while since we have been in a rising rate environment. I know prepayment penalty income is near impossible to predict but what is the right way to think about prepayments as rates are rising kind of at a higher level?

[Joseph Ficalora:]

Under normal circumstances when rates are rising and there is confidence that rates are rising, people have the tendency to accelerate their refinancing. So we see an acceleration when there is clarity that rates are rising. And as you know, there is no clarity as to what rates are going to do. There is great speculation and a great deal of disbelief in some cases as to the consequence as to where rates are today and where they are actually going to go. So I think with the uncertainties surrounding rates, there is no decision making at the - property owners are very conservative, at least we spot property owners are very conservative. And with all of this uncertainty with regard to rates, I don't think that they driving pause in what they are deciding. So down the road, if things become clearer then they will have a more discernable impact. But right now things are not very clear, there are people that are speculating and then certainly in many cases uncertain at all as to why rates are literally performing the way they are.

[Thomas Cangemi:]

Bob I would add to that commentary, if you look at the where despite the fact that short-term rates up and they are projected to go up and forecasted to go up. That that end of the curve and the belly of the curve really hasn't moved a whole lot, so we have been somewhat of a fattener. Our coupons are around 3.5 and as such substantial increase from w will say two quarters ago around three and 3.8. it's encouraging to see the movement upwards, but that’s not a precipitous move. As Mr. Ficalora indicated, the sentiment of the borrower to really rush to the table in order to deal with the rising cap rate and rising market rates. so market rates in the belly of the curve which we landed at, the bread and butter business model for us is the five to seven year type belly of the treasury curve where we are lending most of our proceeds and we are not seeing a significant rise there. if that was the directionally move in coordination with short-term rate. And I think it's the acceleration of prepayment opportunities.

[Bob Ramsey:]

Okay great. Last quick question, just maybe you could give a little more color around the mortgage servicing, obviously that looked a lot better this quarter. I’m curious if there was any evaluation adjustment or any other factors there?

[Thomas Cangemi:]

I would say overall the quarter-over-quarter was encouraging but still the business itself is still under somewhat pressure, we are seeing the competition is fierce, the spreads are around between 65 and 70 basis points on gain on sale margins, servicing did well this quarter, the net adjustments the hedge of about negative 8.4 so servicing made about $5 million on income. So we can take that couple with the mortgage origination of $5 million the net result of mortgage banking was 9.8. so there was substantial [indiscernible] volatility was I would say more reasonable up until March 31. We are in the different quarter now. And as you can see what is going on in the back end of the curve, but Q1 I would say the volatility was reasonable and the hedge effectiveness was more successful than the previous quarter. The last quarter with the election being in Q4 was very challenging, so we had significant adjustments to the MSR hedge with the negative $16 million so that really impacted the results in Q4. So we clearly had a positive results, but the actually flow of business is not as expected given that the selling season should be seeing more volumes. So I think it's more in the pricing and the fact that there are some unregulated players in there in our business that maybe are not hedging their position, so when you look at pricing they have somewhat of a slight advantage, given that we are hedging up MSR, MSR is a significant assets, so we want to make sure we hedge it to the best of our ability. Other institutions that are non-public companies that have that capacity to run un-hedged and that they can get some pricing advantages.

[Bob Ramsey:]

Okay, and so how are you thinking about mortgage banking sort of all in as we go forward, I mean volume should be up sequentially, does servicing kind of stay around this level?

[Joseph Ficalora:]

I mean the overall gross loan servicing fee is around 30 million that should be consistent and then hopefully if the volatility is reasonable to the quarter, we should see reasonable results and again it depends on quarter end mark and how extremely it can be as of June 30th, but it seems like things are stabilizing, I would like to tell you that we are seeing more volume but that's very competitive right now, so we are evaluating unique product mixes and try to offset some of that. But we are a super conservative institution, the way we dialed this is that's one rate is that we originated loans that are very attractive for the government and for portfolio is super, super prime type assets. So we are not an aggressive player in the space and when we put loans on balance sheet it is a pristine type asset quality. So I would say on a comparative basis, I would like to see a slight uptick from Q1 versus Q2 that's in our forecast and hopefully we will see some slight increase there.

[Bob Ramsey:]

Great, thank you.

[Joseph Ficalora:]

Sure.

[Operator:]

Thank you. Our next question comes from the line of Steven Alexopoulos of JP Morgan. Please proceed with your question.

[Steven Alexopoulos:]

I’m curious if expenses are now at the required level of you guys to be SIFI compliant, why not just cross organically here and go back to growing the balance sheet which would help to offset some of this margin pressure?

[Joseph Ficalora:]

Yes, I think that's a very good question. The reality is there is no required level. The fact is that we have an ongoing need to constantly would be adding people and systems and other wise accommodating the evolving expectations with regard to being a SIFI. And the concept of really organically doing it is something that we have considered long and hard for a number of years now. So I think we have made the conclusion that it is far better to do this with a transaction than not and then there are lot of good economic reasons for that.

[Thomas Cangemi:]

And Steve I would just add to that the comment to tell you that obviously it’s a fluid political landscape right now regarding the SIFI level and how they are handling these price of institutions given that we are on a cost of a $50 billion, so clearly we are watching that very carefully and as I indicated we will see some growth this year. Unfortunately it wasn’t the first quarter, we feel confident that we will see some growth in the quarters ahead and if we do have growth we had about a $1.5 billion per quarter of net loan growth or net asset growth we can put on and not trip over the SIFI threshold. So we have some growth that we could put on this year, we are going to watch and monitor as well as the landscape and hopefully there will be some of the relief for the community regional banks which we kind of categorize ourselves in with a simple business model and hopefully we will get an actual adjustment to that level, if not we are preparing ourselves to be ultimately becoming a SIFI bank.

[Steven Alexopoulos:]

In terms of wanting to still cross in connection with the deal. Can you give us a sense as to the pipeline of sellers are you having many conversations today about this?

[Joseph Ficalora:]

Yes, I think there is no question. There are many people interested in entering into transactions, we are not seeing very many transactions, but that doesn't mean that there isn’t a significant amount of interest within the board rooms of banks of all sizes across the country.

[Steven Alexopoulos:]

Okay, thanks. If I could just ask one other question. Given the new constraint that you guys outlined in the 10-K which was to keep the [indiscernible] concentration below [850] (Ph) which looks like you prompted the preferred raise, I know you just declared another dividend at $0.17, but given this new constraint, does this impact your thoughts around retaining more capital organically via a lower dividend, how do you think about that? Thanks.

[Joseph Ficalora:]

So Steve, let me just give you some color on capital. Where we stand today as of as slight March 31, our average ratio is 924 our peer group which actually incorporates five key corp banks is 920. Using our total risk based capital which is where the most constraints have been in the past given that a lot of our loans are not considered 50% eligible some will be 100% eligible. So risk based capital is very important to us. But a 13.69% post the preferred, when you look at the peer group which include that they indicated five key corp banks 13% in the comparison. So that coupled with tier-one risk based capital out of 1220 versus our peer group that we comp to as a 1120. When I say peer group, we are not peer group in ourselves to JPMorgan or Citigroup, MC Bank, H-Bank Fifth-Third, Comerica the smaller CCAR bank, we clearly have what we believe is significant capital. So clearly, we are constraining our growth right now, we are constraining the ability to generate a higher return as we monitor the SIFI situation and we expect it could to our advantage, but once we saw it growing we think some of this capital returns will be leveraged this capital balance will be leveraged and we will start seeing some growth and earnings in the future. So I think as far as the preferred, I just want to go back to your statement about that we have driven off of the tree. We have been spoken about it before issuance for the past year and half. And the reality was our Basel III capital that was eliminated from our balance sheet because of our size given the trust preferred and eligibility was a replacement mechanism. so this is not a surprise for the marketplace as far as the [indiscernible] stocks concerned. But clearly having new capital levels compared to our peer groups, we feel highly confident that we have adequate capital, as well as the concentrations. The numbers are in the low 700s now and we do have 850 understanding written arrangements with our regulators, but we still have a lot of room and we put reasonable growth which is high single digit growth for multiple years you are not going to hit that 850.

[Robert Wann:]

And Steven you have been with the company for most of its public life. But the reality is that over the course of many decade we have never charged capital as a result of cycle turn with the losses that have destroyed banks. So having capital levels at the same level of banks that loose massive amounts of capital do not typical for our business model. Clearly when we were trading at a 11 times tangible at the beginning of 2004, we had a capital level of 365, and the street was perfectly comfortable paying huge premiums for our company because we don't charge capital as a result of our losses. So I think the good news is this that we have a very distinctively different better business model that actually performs well even during adverse cycle. And therefore our needs to capital differ than that of the industry as a whole. So we are at the highest capital levels in our history. And when I say that I'm talking about many, many, many decades. So we are at the highest capital levels in our history, and there is nothing within our business model that suggests that we are going to be charging capital as a result of losses in the next cycle term.

[Steven Alexopoulos:]

Joe I guess the difference though Bank United on their call yesterday mentioned that the regulators are not [indiscernible], they specifically called out multi-family New York City that says then pricing rising cap rates. So you think about the new environment ahead, its less abound credit risk of the asset class, it's more about regulatory scrutiny. So that's why I was wondering if that's changing your thoughts around the dividend level, because at some point you are going to keep running up to this concentration limit right. You will need to address it with capital. Thanks.

[Joseph Ficalora:]

So Steven as we run up to the 850 that make the balance sheet substantially large enough, growth is significant and we will be in the marketplace being proactive to make sure that we stay below it. I mean there is no question that if you think about having that type of level there is not as there as maybe one other banks which is much smaller than or even close to that level, so there is at least a reasonable level of confidence that they could run at a much higher level than companies that have been in the business for a very few years, so this is a lifelong business model niche that we have established ourselves and if you look at the credit metrics and the history there is the history of no in the space. And our CRE growth has 60% less losses than our traditional rent regulated portfolio, so we are very proud of having an unique niche business model and we also are spending significant dollars to as to really be in a position to be a industry leader as far as managing our credit risk, and that's important as we become a SIFI bank in the future if that's we think the billion has the line in the sand. So were very pleased to be the number one portfolio player in the niche and we have a very long track record of success in the niche.

[John Pinto:]

I think the important thing to note. We would never sacrifice to our dividends in order to accommodate capital, we have the capacity as we going into the market and raise capital [indiscernible] so if we need capital prospectively we will do it by going into the marketplace not by reducing our dividend.

[Steven Alexopoulos:]

Got you. Okay, I appreciate all the color.

[Operator:]

Thank you. Our next question comes from the line of Dave Rochester with Deutsche Bank. Please proceed with your question.

[Dave Rochester:]

Good morning guys. On the expense side how much of that additional $5 million to $7 million of personal expense you guys mentioned last quarter that you are expecting would come from SIFI practice actually in the run rate now and is there any update or change to that number?

[Thomas Cangemi:]

I would say look you are going to higher key positions and then going to build departments we have key player that have been put in place. I think going forward there will be some support of high note, the players were at much lower levels mid-level management and like as well staffing, different lines of defense for the secondary line. Clearly this is as we move forward towards our roadmap we think this 165ish level should be the run rate in the short-term. The goal is that when we put on to the road that is the level and we will start getting our efficiency ratio more in line to our historical norm. As I indicated previously, we are not typically an institution given our business model and the unique product mix that we have should not be at a 50% efficiency ratio. This is the highest we have ever been as a public company. So we believe that we will get the benefit overtime on operating leverage given the level of expenses. These are significant expense those with the company, a lot of it is consulting and set-up expenses that are not re-occurring but they are going through the P&L. And unfortunately when you think about they will go forward that will take two, three years out we should stabilize and hopefully we will stabilize in 2017 at this level, and then get the benefit of operating leverage which we hope to see as we take the balance sheet pass 50 billion.

[Dave Rochester:]

And sorry if I missed this. But on your plans across to 50 billion assets you guys are still planning an organically growing through that in 4Q right, isn’t that the plan assuming you don’t get a deal done.

[Thomas Cangemi:]

I think what we are saying specifically is that when you take the average and you look back we have lots of room to run some growth here and be a very mindful of the political landscape, so with that being said the math calculates $1.5 billion a quarter and kind of puts into a fourth quarter positions to make a decision. So clearly we have some flexibility, the goal is to start seeing some growth in hopefully Q2 in the second half and monitor the situation with respect to where the government will be in respect to the assets size of SIFI.

[Robert Wann:]

No escaping the fact that it is clearly economically better for us to actually cross over 50 with the sizeable transaction. As the opportunities if that creates our significant and in the past based on our relative size to the deal there has been the opportunity to create great value for shareholders by doing those kinds of deals. That is also the case even in this environment that is also the case. Many, many different things had a positive occur in a large deal.

[Dave Rochester:]

Yes got it understood. Thank you for that. And just one last one on the deposit side, I was just wondering if you guys were see any take up in deposit pricing competition post the March hike specifically. We are just hearing about competitive pressure in the New York. And then if you could just talk about how you are thinking about deposit growth expectations for this year given that will be great.

[Joseph Ficalora:]

So David, I would say that when you look at the market size and look at short-term money we will use that between not the traditional operating accounts it's around 112 to 125. So of course if you look at the forward curve futures and expect the hedge fund its already priced in one year deposit market. So it's significantly higher as a result [indiscernible] cost-to-funds going from 49 basis points at quarter end December 31, 2016 with 50 bps going into first quarter. So clearly we do have by rising rates. We have deposit that are tied to Fed funds, and when Fed funds move rapidly we are impacted by that. So I believe I said in the last quarter almost five basis points of the six basis points deduction on margin which contributed to the deposit base. we believe there will be at least one more rate increase and that will have negative impact on guiding down Q2 by between five and six basis points because of that effect, solely because of cost-to-funds. We are hopeful that the margin will get some benefits as the higher yielding assets come on to the balance sheet given where rates are or kind of coupons are. But clearly the funding of our balance sheet is under pressure and it's at modest levels of margin compression due to short-term interest rates.

[Dave Rochester:]

Is your [indiscernible] outlook, still factoring in deposit growth though?

[Joseph Ficalora:]

We always have long-term outlook for deposit growth as the mission statements of the bank is go through acquisition and the history of the bank [indiscernible] have been to acquiring liabilities. But in respect to the marketplace there is a tax we pay on wholesale leverage versus deposit market right, it's about 18 basis points of costs embedded in your operating expenses [indiscernible] assessment for the wholesale leverage. So clearly we are going to evaluate that every time we make a decision to being deposits. And we do have a plan this year to bring in deposits, not so much as to be looking at the wholesale market, because of that 18 basis points tax that we pay and our operating expenses to fund the balance sheet to fund the balance sheet [indiscernible] assessment.

[Dave Rochester:]

Great, alright, thank you guys.

[Operator:]

Thank you. Our next question comes from the line of Scott Valentine with Compass Point. Please proceed with your question.

[Scott Valentine:]

Hi good morning guys.

[Thomas Cangemi:]

Good morning Scott, [indiscernible] long time Scott, welcome.

[Scott Valentine:]

Thanks. Just a hypothetical question. Tom, you mentioned the [indiscernible] of a political environment and the SIFI threshold. If you were to see a increase in SIFI threshold of $250 billion. how fast could you - I mean would you expect to rollback expenses and if so how fast could you do it?

[Thomas Cangemi:]

It will be very respectful to ask the question and with the proper tone, but obviously it will be very positive for the company and we will be very active on growing our balance sheet if it goes to 250.

[Joseph Ficalora:]

I think it's important to note that based on our history of creating value and deals there are plenty of banks that know that they have a great opportunity if they combine with us. And certainly those kinds of changes would make our business model as we know it to be the most driving force whether or not somebody would combine with us. So the current uncertainty with regards to the application of SIFI is one of the problems that we all face. But in the periods ahead, hopefully that becomes somewhat clearer.

[Scott Valentine:]

Okay that's all I had. Thanks for answering my questions.

[Thomas Cangemi:]

Sure.

[Operator:]

Thank you. Our next question comes from Matthew Breese with Piper Jaffray. Please proceed with your question.

[Matthew Breese:]

Good morning guys. Just following-up on the last question. In regards to your comment that you know 50 billion moves you have a potential to combine with the lot of your competitors. Where does it make sense that leads to specifically cross organically get a Ccar stress as behind you inspire some confidence, and then due to those times the transactions. I guess I don’t fully understand why you wouldn’t cross 50 organically if you are ready expense wise.

[Joseph Ficalora:]

I think the bank organically is a very different institution than a banks would be in the combination with a large other entity. The structure itself is just measurably better for our large company, no questions the Astoria deal was an extra ordinarily good deal it is many, many good things to new close balance sheet. They were really designable. Any deal that we announce will be discernibly a better bank prospectively. So the good news is we have a long track record of combining institutions to create value and it's automatically discernible if fully you can combine you know what you have and then the ability to take what you have and create a better value is something that you could demonstrate, so I think it's just important to recognize that a good deal, because we are never going to do a bad deal. A good deal would be of great value to our shareholders.

[Matthew Breese:]

Okay, and then can you update us on the commercial real-estate the total risk based concentration posted differed equity raise and then. The limit regionally agreed upon the 850% how should we be thinking about that if you are across 50s is that a good threshold pre and post 50 billion or do you think there will be some changes there.

[Thomas Cangemi:]

No again we can't predict the future in respect that how they are going to treat us as a SIFI bank and a non-SIFI bank in respect to this particular area but obviously having an 850 threshold and now we are running in the low 700s right now post preferred equity raise. Clearly it's a I will say word of confidence given that we have multiple decades of history of no losses and a very unique market niche being regulated property. 90% of our assets in the New York City market will have some form of rent regulation attached to the asset class. So that's our niche, that's our business model so I think this fact that we have a much higher threshold than other companies that maybe operating because I mean I don’t have history in the performance metric is a positive statement. Having no threshold is obviously the best scenario, but when we have a threshold and we were proactive to make sure that we will not impel our business model and now we have room within that threshold. As my statement is said we all are going to grow high single-digits for the next two to three years. We are still not going to break that 850 because we are going to support the bank with the appropriate capital metrics and we are not as [Indiscernible] good equity to run the business model towards growth. And we hope some reasonable growth in the future and I'm going back to this whole concept of SIFI monitoring, we are sitting here going into the May and hopefully by the end of the year we will have better direction where the government is going to handle 50 billion, and if that 's going to be a line in the central avenue will have to readjust but each quarter that goes very close to towards the end of the year will render our decision. I think what is positive today in a short-term is that we have some room move to grow and we are seeing a - I will call it a resurgence of applications, we are seeing a nice build-up of our pipeline and in the mid-quarter we are seeing some good activities to hold to see the balance sheet start to grow in our traditional core multifamily marketplace.

[Robert Wann:]

I think it's important to also to note that the hedge regulator at the Washington said the chairman of the FDIC the Chairman of the OCC and [Brian] (Ph) Frank himself have all said that that $50 billion plateau is not correct and it should be raised substantially. So I think that the tone is already been set by the regulators as well as many, many people in the congress. So I think it's just inevitable as there will be a consensus that that number is not the right number. And certainly for us that will have a very positive effect.

[Matthew Breese:]

Understood. Thanks all I have, thanks for taking my questions guys.

[Robert Wann:]

Sure.

[Operator:]

Thank you. Our next question comes from the line of Peter Winter with Wedbush Securities. Please proceed with your question.

[Joseph Ficalora:]

Good morning Peter, how are you doing?

[Peter Winter:]

Very good. Just two quick housekeeping, the increase in net charge offs, what was the increase besides the taxi medallion?

[Thomas Cangemi:]

They are all taxi medallion. Substantially taxi medallion, [indiscernible] I will move towards the definition of scalar portfolio in respect to the multi-family and [indiscernible] portfolio. But clearly we are dealing with the taxi book, our reserve in the taxi is around 8% consistent to the previous quarter. and we are managing through a very tough cycle for this line of business. And if we didn’t trust that it’s a balance that is not significant to the company it's about $147 million of outstanding and as borrowings are coming back to the bank to either renew we'll try to working that we are working with them.

[Peter Winter:]

Okay. So if I just look at the slide it shows there was $5.7 million in net charge offs and 2.9 what was the taxi medallion?

[Thomas Cangemi:]

Yes the other adjustment was related to a company that's in the [indiscernible], we have financing with a medallion company that does business in that line of business. so clearly that is still - I'll call that a medallion charge off as well, even though its classified differently. It's a medallion related charge offs.

[Peter Winter:]

Got it. And then just quickly the net gain on loan sales, if the expectation is to grow the loan portfolio $1.5 billion a quarter, would we expect that line to improve in fee income?

[Thomas Cangemi:]

Subject to market condition, obviously if we have a substantial rally here in treasury rates, we decide to optimize that, but given that the pipeline is relatively strong, if it gets strong we may decide to sell them to the marketplace. So we have that option. Last quarter the volatility was extreme and we did one trade of about couple of $100 million and it was in the typically economic given the volatility interest rates. So rates happen to come down significantly in coupon and we are selling higher coupon and there is some substantial gains to be recognized as a participant and we are controlling the participation we will consider that, but again we are trying to resume ourselves back into growth in the core niche and if there are real desires for other banks to participate we will consider that but it has to economically it make sense for us.

[Peter Winter:]

Got it. Okay, thanks.

[Thomas Cangemi:]

Thank you.

[Operator:]

Thank you. There are no further questions at this time, I would like to turn the call back over to Mr. Ficalora for any closing remarks.

[Joseph Ficalora:]

Thank you again for taking the time to join us this morning. We look forward to chatting with you again during our last week of July when we discuss our performance for the three months ended June 30, 2017.

[Operator:]

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.