New York Community Bancorp, Inc.
Q4 2016 Earnings Call Transcript

Published: 25 Jan 2017

[Operator:]

Good morning and thank you all for joining the management team of New York Community Bancorp for its quarterly conference call. Today’s discussion of the Company’s Fourth Quarter and Full Year 2016 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 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 which could 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, mortgage banking income and other further 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; changes in legislation, regulation and policies. You will find more about the risk factors associated with the Company’s forward-looking statements on page nine of this morning’s earnings release and in its SEC filings, including its 2015 Annual Report on Form 10-K. The release also includes reconciliations of certain GAAP and non-GAAP measures that may be discussed during this conference call. If you would like a copy of this morning’s release, please call the Company’s Investor Relations department at 516-683-4420 or visit ir.mynycb.com. As a reminder, today’s call is being recorded. 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 the discussion, I will now turn the call over to Mr. Ficalora, who will provide a brief overview of the Company’s fourth quarter and full year 2016 performance before opening the lines for Q&A. Mr. Ficalora, I’ll now turn the call over to you. Please go ahead.

[Joseph Ficalora:]

Thank you, Kevin. And thank you all for joining us this morning as we discuss our fourth quarter and full year 2016 results. I’d like to begin by noting that it’s our desire to control the Company’s growth below the SIFI threshold in conjunction with perspective changes that may occur in the future. While our merger agreement with Astoria Financial Corporation was mutually terminated, a large transaction is still the best way for us to become a SIFI bank. Therefore, it will be fair to expect that our transition to SIFI status will still occur in conjunction with the large deal. Until such time as that occurs, we will continue to do what we do best, produce multi-family loans while maintaining our high credit standards while at the same time diversifying our loan portfolio and our funding mix. We also expect to invest more of the Company’s resources into becoming SIFI a compliant, while monitoring any changes in the regulatory environment that could influence our plans. Now, I’ll return to our fourth quarter and full year performance. This morning, we reported earnings of $113.7 million or $0.23 per diluted share for the fourth quarter, and $495.4 million or $1.01 per diluted share for the full year. For the quarter, our earnings provided a 92 basis-point return on average assets and a 7.43% return on average stockholders’ equity. For the full year, we reported a 1.00% return on average assets and 8.19% return on average stockholders’ equity. On a tangible basis, our profitability was also solid with returns of 0.97% and 12.36% on average tangible assets and stockholders’ equity for the quarter, and returns of 1.06% and 13.75% for the full year. Our results this quarter also reflect the strength of our business model including solid loan production, high-quality assets, and ongoing efficiency. These positive factors were somewhat offset by the impact of the post-election rise in market interest rates. Starting with our loan portfolio, we originated $3.1 billion of loans during the fourth quarter, which pushed the volume of loans produced in 2016 to $13.8 billion. Included in the full year amount were $9.2 billion of loans held for investment including $5.7 billion of multi-family loans. Held for investment loans represented $2 billion of our fourth quarter originations and of that amount $1.2 billion were multi-family loans. In fact, multi-family loans represented $27 billion of total loans held for investment at the end of December, a $972 million increase from the balance at the end of 2015. Commercial real estate loans accounted for $288 million of the quarter’s loan production and $1.2 billion of the full year amount. At the end of December, commercial real estate loans represented $7.7 billion of total loans held for investment, down $133 million year-over-year. In the last quarter of the year, loan growth was impacted by the rise in market interest rates, as previously noted, and by the sale of loans through participations. In keeping with our short-term strategic goal of managing our assets under the current SIFI threshold of $50 billion, we sold $320 million of multi-family CRE and ADC loans in the last three months of the year. The 12 months total was $1.7 billion of multi-family CRE and ADC loans. As a result, multi-family loans rose 3.7% to $27 billion and CRE loans dropped 1.7% to $7.7 billion. Absent sales of $1.3 billion over the last four quarters, the multi-family loan portfolio would have grown $2.3 billion, representing a year-over-year increase of 8.8%. Likewise, CRE loans would have grown 2.6% to $8.1 billion absent loan sales of $339 million, over the course of the year. Our current pipeline amounts to $1.5 billion with the majority consisting of held for investment loans. Moving on to asset quality, our year-end measures continue to be stellar and continue to rank among the best in the industry. We also continue to be among the lowest we have reported in nearly 10 years. Specifically, non-performing, non-covered loans represented 0.15% of total non-covered loans at the end of December, compared to the 0.12% at the end of the trialing quarter. Non-performing, non-covered assets represented 0.14% of total non-covered assets at the end of December, also compared to 0.12% at the prior quarter end. Despite a modest uptick in charge-offs related to the New York City taxi medallion loans, the ratio of net charge-offs to average loans was 0% for both the year and the quarter due to our having recorded a nearly comparable amount of recoveries. Now moving on to our income statement. Net interest income declined modestly compared to the prior quarter, primarily due to lower yields on the investment securities portfolio. Our net interest margin declined 5 basis points to 2.86% on a linked quarter basis, largely reflecting an increase in the cost of interest bearing deposits, as short-term rates rose. Prepayment income contributed 20 basis points to the current fourth quarter margin, which was consistent with the trailing quarter amount. Higher interest rates also impacted our fourth quarter non-interest income, particularly mortgage banking income produced by originating and servicing loans held for sale. Mortgage banking income decreased $10 million from the previous quarter with demand for residential mortgage loans waning as interest rates rose. In addition, the increase in interest rates adversely impacted our hedging. As a result, we recorded a servicing loss in the fourth quarter in contrast to servicing income in the trailing three months period. Also impacting our earnings in the current fourth quarter was a $9 million linked quarter increase in non-interest expense. While a portion of the increase was due to a rise in merger-related expenses, compensation and benefits expense also rose linked quarter. Reflecting our earnings and capital, the Board of Directors last night declared a $0.17 per share dividend for the quarter, representing a 4.2% dividend yield, based on last night’s closing price. The dividend will be paid on February 22nd to shareholders of record as of February 7th. On that note, I would now ask the operator to open the line for your questions. We will do our best to get all of you within the time remaining, but if we don’t, please feel free to call us later today or this week. Thank you.

[Operator:]

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Mark Fitzgibbon from Sandler O’Neill. Please proceed with your question.

[Nick Cucharale:]

Good morning, gentlemen.

[Joseph Ficalora:]

How are you, Mark?

[Nick Cucharale:]

This is Nick Cucharale filling in for Mark. First, I was hoping you could share with us your thoughts on the lending environment. Have you seen any change in the metro New York City market lately or any pullback from competitors?

[Joseph Ficalora:]

There have been changes obviously over the course of the year in the players in the marketplace. There are some that are doing less lending in our market and of course there are others that are coming in to the market that haven’t been here before. So, the marketplace is changing from the standpoint of the players and also with regard to the product mix. So, I think that we are typically at the backend of a long positive cycle. And as a result, the marketplace is showing some of those signs.

[Nick Cucharale:]

Okay. And then, you posted nice growth in the specialty finance segment this quarter. How large do you foresee this category getting, over time?

[Joseph Ficalora:]

Well, it can actually grow rather nicely.

[Thomas Cangemi:]

We’ve been very focused on -- it’s Tom Cangemi. Good morning. We’ve been very focused on building that portfolio; it’s a fairly new business for us; it’s few years old and it’s been a superior track record of Mr. Chipman’s history. He’s been with us for few years now, building a book of business and we see very its nice growth. What’s nice about the portfolio is it’s priced more to a shorter term index, so a lot of that product is priced off a LIBOR and within a two, three-year window. So, we’re looking to see that portfolio go very nicely, as they complement to other assets, so we put on the balance sheet. So clearly, we can see another 20% to 25% growth conservatively, depending on market conditions. That business for us is a credit buyout shop business. It’s not a business we’re there entertaining clients trying to gather their deposit relationships, this is clearly a credit buyout shop. So, we turned down approximately 97% of what we want to buy and obviously it’s driven off of asset quality. So, this molds right with the culture of the Bank; as far as asset quality is concerned.

[Joseph Ficalora:]

I think that last statement is paramount reason why we’re doing this business with Mr. Chipman. He has a 25-year record that actually is comparable to ours with regard to loss content. And therefore, we’re very, very confident that the way he does his business does in fact result in the kinds of outcomes that we would expect.

[Nick Cucharale:]

Great. Thank you. And then just lastly, could you share with us your outlook on the net interest margin, please?

[Thomas Cangemi:]

So, obviously, this is most recent interest rate change did have an impact, which we alluded to in the previous quarter. The first increase in quite sometime in December had a few basis points to the margin. We also saw some slight bleeding margin on the securities as well, as you can realize, some of our large DUS security portfolios having paying off. Therefore those are fairly high yielding securities. So, our guidance for the short-term in Q1 will be down between 5 basis points to 8 basis points, depending on market conditions and how much we extend on the liabilities, depending on where the movements of interest rates are. So, we do plan on moving some of our liabilities longer as we go into 2017, given the rising rate environment. So, we are assuming some movement there on the liability side to lengthen some liabilities that are currently short-term.

[Operator:]

Thank you. Our next question today is coming from Ebrahim Poonawala from Bank of America Merrill Lynch. Please proceed with your question.

[Ebrahim Poonawala:]

So, I guess first question and this is the first sort of public call since the termination of the Astoria deal. I would love to sort of get a better understanding; you mentioned in your press release about becoming SIFI compliant and working towards that. I guess, the one question I’ve been getting is what do we need to do to get SIFI compliant in the meantime, while the rules remain in place, either from an expense standpoint and from a balance sheet release structuring standpoint? It would be great to get some color on both of those.

[Thomas Cangemi:]

Ebrahim, good morning. It’s Tom. I would say for big picture here, obviously when we announced the transaction, on a monthly basis the bar was raised. So, we just continue to deal with the raising bar as far as regulatory expectations, and we learn as we move along here. This has been a journey for the Company for many, many years now. And we do expect to see some as we indicated on the press release additional cost involved to cross over when we do prepare a crossover. My estimate for 2017 on the comp side is between the $5 million to $7 million. So, I will guide slightly higher for compensation expense as well as additional G&A expense for the quarter. I think comp will be about $165 million, ex-CDI, going into Q1. And a lot of it has the increased compliance cost that we believe that we need to put in place in order to make that crossover. Clearly, as we went through this journey of getting approval, we continued to go through that process working with the relative regulatory bodies as far as what their expectations are and clearly we have to make some investment here.

[Ebrahim Poonawala:]

So, if I heard that correctly, this $165 million in the first quarter and overall you would expect comp to be higher $5 million to $7 million relative to the fourth quarter number or…

[Thomas Cangemi:]

That’s on average for the year; so, around that level should be -- as we cut cost in some others areas of the Bank, this is the reasonable run rate for the Company, 165ish.

[Ebrahim Poonawala:]

Perfect. So, that’s…

[Thomas Cangemi:]

If you look back a year ago, I would tell you that our expense would be lower in 2017, but obviously, this has the embedded additional cost structure to manage a SIFI compliance situation.

[Ebrahim Poonawala:]

Understood. And is it fair to assume that until we actually see a definitive passage of a law that pushes the SIFI threshold higher, you are unlikely to reengage in a deal in the meanwhile also?

[Thomas Cangemi:]

Again, we wouldn’t talk specifically by any type of merger activity, but it’s fair to say, as opportunities arise, we’ll evaluate them. But clearly, it’s a fluid environment, specific law they want to spend on the environment as far as regulatory, but this is a...

[Joseph Ficalora:]

I think the important to know -- and I think you already know this. The reality is that the marketplace is filled with all kinds of opportunities. However, the uncertainty in time with regard to how the regulatory process evolves is an important component of start and finish of a deal. Obviously, the Astoria deal is a perfect example of that. The reality is that the environment is potentially on the verge of changing somewhat. We don’t know when and if that’s going to happen. So, I suggest that we should not be trying to gauge some reasonable timeframe within which a deal is either identified or actually closed, but that we are definitely open to the consideration of doing a highly viable good deal, when such does present itself. But there is absolute clarity that without there being certainty with the actual closing of a deal, no one knows. And there are many deals that are in the marketplace that have been announced and then went period of times such as ours did without there necessarily being a conclusion that historically would have always been the case.

[Thomas Cangemi:]

I would just add, as far as early on average basis, the $48.9 billion on average in the four-quarter lookback, that gives us safety. If we were to go to $3.3 billion in the Q1, we will be a SIFI bank as far as on the average perspective. So, we have some room to continue to grow in 2017. Even on an average basis, $700 million of growth per quarter will keep us a non-SIFI up until the last quarter of the year. So, we have some flexibility. I think the reality is that we believe there is going to be some focus on some regulatory reform in 2017. So, we’re going to be very-patiently waiting and hopefully, we’ll see the deposit movement for our Company. If there is a change on a regulatory front, we can react very weekly. But there is no question that as far as the core business model, we still expect to grow our multi-family CRE books, net loans before loan sales of approximately high single digits, which we’ve been doing for the three years.

[Ebrahim Poonawala:]

Understood, that’s helpful. And just second question around capital management like, in the meantime like everything about 2017 on organic basis, should we expect any capital actions either on preferred issuance or any other sort of tweaks in terms of boosting the leverage ratio and also in terms of I realize the dividend is…

[Thomas Cangemi:]

So, what I would say Ebrahim, I’ve been saying for the past four, five quarters, we really want to replace the Dodd-Frank capital we lost, which is about $500 million, that all the trust preferreds that we’re eligible as Tier 1 and now with more longer Tier 1 capital, so that’s something that we are definitely considering in the future and depending on market conditions.

[Ebrahim Poonawala:]

Okay. So, it’s something that you could still look to replace even without a deal sometime in 2017?

[Thomas Cangemi:]

Obviously it was good capital for Tier 1 and then moved over to Tier 2. So if that happens, if the market is attractive and the environment, we’ll look to replace what we lost in the Dodd-Frank.

[Operator:]

Thank you. Our next question today is coming from Ken Zerbe from Morgan Stanley. Please proceed with your question.

[Ken Zerbe:]

I guess just in terms of the deal, obviously, when you announced the Astoria acquisition, your stock was really high and it turned out using your currency was the right move. I guess since then, your stock has taken a bit of hit, everything else has run up a little bit. Like, how do you feel about your ability to find attractive opportunities, given your relative stock price versus everyone else?

[Joseph Ficalora:]

I think the good news is that the fundamental reasons why we’ve been a very successful buyer over the course of the two decades we’re public is that we have a very strong business model that has the ability to create value for shareholders. The momentary consequences of some of the things that are happening either externally and there are many things you could point to, either interest rates or regulatory or other things that are happening in the marketplace, the things that are happening externally do impact timing and maybe even momentary performance. But the fundamentals of this Company are solid and have been very consistent. And our ability to do highly accretive deals prospectively still is out there. So, I think that there will be very attractive opportunities in the period ahead, and we will be one of the best available companies to consolidate with so as to create value.

[Ken Zerbe:]

Okay.

[Joseph Ficalora:]

Momentary pricing changes, as I guess we all know. The pricing of our stock went up very big because of the realization of what the combined Company could be. The pricing of our stock is down disproportionately now because of where we are at this moment in time. We’ve not fundamentally changed.

[Ken Zerbe:]

No, understood. I guess it’s just more that the sort of the spur of or the self feeding processes of -- if your stock is low, it’s harder to do deals, therefore the stocks stays low. I was just wondering if there is anything that’s within your control, I mean other than just continuing to perform very well that might get stock price...

[Thomas Cangemi:]

We cannot. [Ph] Let me just add one of the points to Mr. Ficalora’s commentary. Our tangible book value is very faultless calculation when we look at deal opportunities. So, when we look at merger opportunities and we typically do stock-to-stock deals, when we look at book value creation versus book value destruction, it’s very important that we hold tangible book value. So, having a superior tangible book value multiple is very important to the Bank as we look at these opportunities in the future. And we still have a superior multiple to the market.

[Joseph Ficalora:]

And then, I think the reality is that the stock being low doesn’t mean the stock will stay low when the new deal has been identified. Deals have in and of themselves inherent values. And we bring to a deal a tremendous capacity to create value.

[Ken Zerbe:]

Understood, okay. And then, just a really quick question, just in terms of, Tom, you mentioned the liability or extending your liability duration. When you do that, is there any additional charges or restructuring costs?

[Thomas Cangemi:]

This is a matter of -- remember, we always have some short-term that have to be extended. I think the reality is as we awaited for the Astoria deal, we positioned for the Astoria closing which didn’t take place, we’ll be emphasizing deposit growth, we’ll be emphasizing growth within our commercial business lines, in particular the multi-family; there is a lot of low lying fruit there that we hope to see some non-interest bearing type money come back to the Bank. In addition to that, we will be looking at the deposit campaign for the Bank. And if that is not as attractive as we grow the balance sheet because we do expect some growth this year as we manage the SIFI threshold, we will extend some liabilities to manage interest rate risks. And they will not -- we don’t expect to have charges regarding the extension; this is a matter of short-term money going long.

[Ken Zerbe:]

Got you, but the extension of the liability duration could put incremental pressure on the margin beyond that 5 to 8 basis points?

[Thomas Cangemi:]

I think that’s reasonable. Again, I don’t give long-term guidance on the margin. So, 5 to 8 is the Q1, assuming we do some extension and depending on how much deposit growth we have and the cost of deposits versus the cost of borrowing from the Home Loan Bank and the Street.

[Ken Zerbe:]

Okay, perfect. Thank you very much.

[Thomas Cangemi:]

I think what’s most notable, Ken, is we’re at precipice as far as the coupon of the portfolio, our multi-family portfolio is on 3.4%. And if you look at the post-election pipeline, I say post-election because there was a lot of activity pre-election. But once the election came out and rates moved dramatically higher, we have a portfolio of about 360 in the post-election pipeline and where the current market is, it’s about 375 on average between commercial and multi-family; it’s about 180 basis points spend over five-year. [Ph] So that is encouraging when you have a 340 coupon embedded in the portfolio. So, it’s going to take some time to move the boat because we have a very large portfolio. We still anticipate customers to react to these changes of interest rates. If it is more profound in the short-term, you will see some more activity. And that will be encouraging to see some of the asset side of the yields to pick up. As indicated in my previous commentary, we can’t control what happens in the DUS market for securities; that’s beyond our control, but our customers are reacting to these higher interest rates and we believe that will be to our advantage over time. It just doesn’t happen in 90 days; it may happen in two or three quarters. But clearly, the direction of interest rates in the back into the current [ph] moving up will be very good for the portfolio as well as average yields, so, it’s right, such a low current [ph] coupon.

[Operator:]

Thank you. Our next question today is coming from Bob Ramsey from FBR Capital Markets. Please proceed with your question.

[Bob Ramsey:]

If I understand you correctly, until the regulatory environment changes, you will not grow past the $50 billion without a deal. I guess, with that said, how high a priority is looking for a deal? I know you said you were kind of open to opportunities, but I’m just kind of curious how actively you’re seeking them out?

[Joseph Ficalora:]

I think the deals are not things you have to seek; they have a tendency to seek us out. And that has been in the 12 different ranges we’ve had; that’s the way it’s typically gone. There are plenty of people in the marketplace that actually are professionally monitoring availability of buyers and sellers. And as I’m sure you know, we have contact with all of them. So, I think the evolution here of what might be the best next choice and when that will occur is somewhere down the road.

[Bob Ramsey:]

Okay. And do you have any -- I know it hasn’t been long, but do you have any sense yet of potential sellers, sort of how they think about I guess the difficulty in getting timely approval on the Astoria deal, if that influences the way they think about partnering with New York Community?

[Joseph Ficalora:]

I don’t know that it’s New York Community specifically. The reality is that the marketplace is what it is and everybody is aware. It’s not as though this is top secret information. Everybody is aware as to how these deals evolve. So, I think people will go into their next decision of this magnitude with the full knowledge of what to expect.

[Thomas Cangemi:]

Bob, I would just say, it’s Tom. I would just say we understand the roadmap; we’re very focused on getting to that roadmap. And if we happen to get there much sooner than what we need to get done in the short-term, we have a mutual termination, we still on focus of closes deal, we mutually agreed to terminate the Astoria transaction. Going forward, this Company will be SIFI compliant in short-term and we’ll be focused on making the Company viable as an acquirer. But, this is a different environment and we also truly believe that there we will be regulatory reform coming, and we have to be very mindful of that. In a political aspect, we’re in a unique position as a country. So, we have to take a step back and understand that we have a core business model that will be growing on a quarterly basis. It may not be growing at 10% asset balances but we will grow very nicely into the expectation and take decision if regulatory changes. And we believe the regulatory changes will be positive for regional bank as a whole.

[Bob Ramsey:]

Okay. If there aren’t regulatory changes and if you do become SIFI compliant in the short-term, would you -- a year from now, if there is not a deal, would you reassess and say well, look, maybe we do, do organically?

[Thomas Cangemi:]

We always reassess.

[Joseph Ficalora:]

Yes. You’re 100% correct. It’s not -- as Tom said, we’re constantly aware of the kinds of choices that we can make. The most relevant change on the horizon is what might actually happen with regard to the $50 billion plateau. If something happens there, it changes the game rather dramatically.

[Bob Ramsey:]

Fair enough. So, last question and I’ll hop off. But I know you all mentioned on the margin one of the factors in the fourth quarter was an uptick in deposit costs. Did you have any promotions or anything? I know you mentioned that’s a plan, as you go forward, but I’m just curious if that was a factor in the fourth quarter or sort of what were the factors driving up the deposit costs in 4Q?

[Thomas Cangemi:]

I would say that going forward, we will have many promotions. We’re going to look in to the deposit market to fund the growth in the balance sheet. It’s going to be a diversification shift from history for the Company. We typically were never the higher rate payer; we’re usually the lower rate payers in the market. And historically we’ve grown our deposit base for acquisition. Astoria was a substantial deposit base that greatly enhances deposits, overall balances at the Company for future growth. So, clearly, we’ll be in the market. We will be actively looking to grow our deposit base; we will be actively looking to go to our borrowers to get some good low cost money as we accommodate great lending relationships. But, no, we will be active in an environment where in history we were not as active. So, if you look at we are the highest rate payers; we typically were never the highest rate payers. We have to be more competitive on the balance sheet. And there is a cost versus advances and repo versus deposits; it’s a 20 basis-point assessment charge that we pay on the FDIC site to bring in wholesale funding. We have to weigh that cost versus going to the retail market. And we feel that we will go to that exercise and will try to get the best funding for the Bank as we navigate toward the $50 billion level.

[Joseph Ficalora:]

So, I think the important thing to note, we were clearly positioned to take benefit from the consolidated Company that we in fact had every expectation would be the topic of this press release. We would be talking about the consolidated Company. And everything in our balance sheet was geared toward that consolidated Company. We’re going to adjust ourselves in the period ahead and be prepared for the next opportunity.

[Operator:]

Thank you. Our next question today is coming from Collyn Gilbert from KBW. Please proceed with your question.

[Collyn Gilbert:]

Tom, could we just start on getting a little bit more granular on the securities book and how you intend to sort of manage that through the next year, two years or whatever that’s going to look like?

[Thomas Cangemi:]

Sure. So, obviously, the yield is still a very attractive yield in the portfolio. Our current yield is approximately ex the prepayments and we get a lot of DUS income from the portfolio. It’s 340ish average coupon on the growth average yield in book. And going forward, we haven’ added securities in many, many years. We shrunk the portfolio in the billions. I would say since 2014, we were down $3.7 billion through a combination of repayment sales and calls. So, as we await the SIFI threshold to cross over, there had been a new development in the previous year, the fourth quarter where LCR compliant institutions will now have that one year to comply to the liquidity mandate. So that clearly was part of our old strategy that we see with the cross over as a $50 billion institution. We’d have to significantly gross up the balance sheet to solve for LCR. We get another one year time period to solve for that equation. So that’s a positive. Now, given that we’ve publicly said as in this conference call that SIFI crossover is not going to happen in the short-term unless there is regulatory change but that we won’t see long-dated Ginnie Mae bonds within the portfolio and wholesale leverage to pay for that. That’s not in the cards in the short-term. What’s in the cards in the short-term is that if rates were to rise significantly and we’re managing our balance sheet growth, it will be in the securities market depending on the yield environment. So, clearly, it has been a significant spike. We’ll see us go back into the market at the appropriate time to replenish the securities that are not on the portfolio. Our security to total assets is around 7.8%; that’s the lowest we’ve been in our public life. So clearly, if you compare us to the industry, we’re probably at the lowest levels security to total assets. So, we have significant growth that we expect to have in the future years. But in the short-term, it’s going to be very focused on loan growth as we talked about multi-family CRE, specialty finance, and to a lesser extent some jumbo hybrid loans that we will be putting on to the residential platform, which has been a nice earning asset. Even though it hasn’t been a significant growth for us, it’s been attractive asset quality asset that we’re putting on. This is high FICO, low LTV, no late pays; it’s in a good business model for us. So clearly, security is something that’s secondary for us as manage that $50 billion line. But once we determine that we’re going to past it, we have to add securities to the portfolio.

[Collyn Gilbert:]

Okay. So, it’s safe to say that the completion, that 7.8 composition won’t change much then this year?

[Thomas Cangemi:]

I think that’s fair, I think you see more loan growth. I mean, the goal here is to continue to grow our loan portfolio. Higher yielding is what we do best and obviously when we to put securities series on, depending what the mandate is on the SIFI side, you may have to put on a substantial amount of securities to qualify the level one. So, we have to be very cautious with that.

[Collyn Gilbert:]

Okay. And then just tying that into your comments on the mortgage side, how are you thinking about the outlook for mortgage banking and then balancing that maybe with as you mentioned perhaps portfolio for more mortgages?

[Thomas Cangemi:]

So post-election yields, significant spike; there was no question, we saw a dramatic decline in activity. So, it’s been a challenged Q4 versus Q3 down substantially. We had less profitability in the portfolio. The good news is that the servicing book has value and we continue to muddle through a tough interest rate environment to a correspondent lender; we’re wholesale correspondent. So, we see more of an impact negatively than the retail channel sees. And it’s been a challenge, but we’ll focus towards monitoring the purchase market. We’re still a very big player of the refi market, but the refi on the aggregate of total productions is very, very well. I mean look at what’s going on in the U.S. So, clearly, it’s down significantly, over 50% in production, very dismal quarter. But again, as far as the material of the P&L insignificant, we hope to see that rebound when the spring comes and the selling season kicks in.

[Collyn Gilbert:]

And then just one final question on the acquisition discussion. Given your comments about meeting -- or desire to diversify the asset mix a bit, is it safe to say that whatever this next acquisition is that the structure of it and the complexion of it is probably going to be different than what you’ve done historically because…

[Thomas Cangemi:]

No. I would say no.

[Joseph Ficalora:]

Yes. I think the important thing to note, there are no people we could buy that look like us. Everybody that we buy is going to change our metrics in a way that certainly gives great flexibility to meeting regulatory or other expectations. So, anybody that we buy, gives us a great deal of flexibility as to how we restructure Newco. Newco will be a better bank in many different perspectives. And that’s the way are designed. Newco, every time we’ve done a deal, has created great value for shareholders. 97% of our shareholders voted to do this deal, 97% is not a small number.

[Thomas Cangemi:]

So, Collyn, I would just that as far as the diversification is concerned, we’ve always been chilling to the market that we’re going to build the specialty finance; this just takes time; it’s a new business for us and has done a phenomenal job. Going back to the revenue book, the jumbo hybrid ARMs are in demand. As rates rise, there will be more in demand. And we think it’s an attractive asset class. But the true core of the Company is the multi-family rent-regulated, rent-stabilized portfolio, and we’re committed to that portfolio. So, we will grow, all three books and will manage out growth in respect to the SIFI thresholds with potential loan sales in the future. Just a point on the loan sales. Fourth quarter, the market has significant volatility in interest rates. So, if you have a transaction that you queued up to close in Q4, interest rates moved up dramatically, 50 to 70 basis points as to pricing and we still were able to effectuate transaction at a gain. Although, it wasn’t as consistent to the previous gains in previous quarters because of the flatness in the curve, this was a change in interest rate. So, we have to monitor that as we go along. We may do some deals on a table funding perspective going forward. We clearly have tremendous amount of partners that want the product and they want us to service the product and partner with us. So, we’re optimistic there but obviously higher interest rates could be very uniquely calibrated to deal with our customers to react to how they do their next refinancing. So, we were still waiting for significantly higher rates. As I will tell you, the after the election, rates spiked and we had the tremendous amount of applications. It’s waning a little bit but now, as we go back into towards the backend of January, starting to see a pickup again. So, the good news is rates are higher and I want to just reiterate our coupon in the portfolio being 3.4% is a historical low coupon for the Bank. So, we are mindful over time that coupon should start to see the benefit of a higher rate environment if long-term rates continue to rise.

[Collyn Gilbert:]

Okay, that’s helpful. And sorry, just one really quick final question. It’s small numbers but just on the reserve, first time I think that the reserve to loan ratio has picked up in many, many, many years. Anything in particular that’s causing that or where do you see the direction of that reserve going?

[Thomas Cangemi:]

Obviously my short-term guidance on that has been the medallion book. We’re dealing with the medallion of portfolio $150 million in total unpaid principal balance. We have a reserve about 7.8% against. I think that’s consistent with some of the other industry players. We’ve looked at the collateral on a quarterly basis; we were very focused on this particular asset class. We work with our customers where we put up some reserves there. So, we have -- the highest reserve I think we have at the Bank on asset is the medallion book. So, the collateral value, we value somewhere in the low 5 on single issuer and on a mini fleet we’re at about 1.1 million; it’s reasonable within the marketplace. But it’s something we pay attention to. Outside of that, we’ve had no losses for the year in 2017 in multi-family CRE, zero. So, we are very pleased about the performance of the portfolio. And Mr. Ficalora’s commentary in the press release is about asset quality. The portfolio is performing pristine outside the medallion book. And the medallion book is a couple of million dollars of potential provisions down the road.

[Operator:]

Thank you. Our next question today is coming from Steven Alexopoulos from JP Morgan. Please proceed with your question.

[Steven Alexopoulos:]

Regarding the commentary that you still expect to use the transaction across the SIFI threshold, what exactly was it about the Astoria deal that didn’t make sense for you to use that one to cross the threshold?

[Joseph Ficalora:]

I don’t think there was anything with regard to the Astoria deal. It’s just a matter of the environment in and of itself. We are not the only bank that has gone through an elongated process with regard to getting a transaction approved. So, I’d suggest that the environment is what it is. And to some degree, we do not control the environment; we must participate in the environment. So the Astoria deal, all the public information about the Astoria deal is very clear that that was a highly accretive, very strong transaction for all shareholders, theirs and ours, and from the standpoint of all of their staff and all of our staff, a very, very good transaction.

[Steven Alexopoulos:]

So with that said, Joe, we don’t exactly know why the deal was terminated. What color could you give us on this?

[Joseph Ficalora:]

I’d say that the only color I could give you is this is the environment. The fact is that the passage of time in getting deals from announcement to close has greatly elongated, and generally speaking, for the industry as a whole. So that process has evolved differently than it might have been two years ago, five years ago, 10 years ago.

[Thomas Cangemi:]

Steven, it’s Tom. Just to remind, the two boards could not mutually agreed to extend the deal. We were at a point where failed to get an extension on the deal. We felt very confident over time the deal would closed; we just failed to secure an extension from both boards.

[Joseph Ficalora:]

We also recognize that there are consequences to a selling institution that are detrimental; time is not a good thing for a seller, not a good thing for buyer either, but particularly bad for a seller. So, subjecting your staff, your employees to an elongated uncertain period is a very difficult thing. And a lot of consequences occurred in 14 months.

[Steven Alexopoulos:]

So at this juncture, Joe, would you just prefer to wait on the sidelines and see what happens to the SIFI threshold? It doesn’t seem to make much sense to announce a deal before we see what happens with that line...

[Joseph Ficalora:]

I think that the specific circumstances will determine what we do and when. The fact is that the environment could change, relatively speaking. And by the way, this could be administratively or by an active Congress. The environment could change down the road in ways that are discernible. To the degree that that might happen, that might change the expectations with regard to time. Absent a change, there may be other perceptions or reasons why a capacity to be more comfortable with a shorter timeline from start to finish; the good news for us and the bad news for us. We spent a lot of money and a lot of time preparing to close this deal. As it is evident, there are many consequences of having gone through this process, both to us and to Astoria. And the reality is that we both recover from the consequences of this 14, 15-month period, but that will take us a little bit time. Fundamentally, this bank is still one of the best buying institutions in the marketplace and has a balance sheet that is not matched by any of our competitors. In many, many ways, we are in fact still today one of the best buyers in the market. So, leaving that said as it is, the environment is going to evolve and we will in fact be in a position down the road to do what is in the explicit circumstances, as they change, the best for our shareholders. We will attempt at all times to do what is in the best interest of our shareholders.

[Operator:]

Thanks. Our next question today is coming from Dave Rochester from Deutsche Bank. Please proceed with your question.

[Dave Rochester:]

Hey. So, just so I understand the time line, sorry to belabor this point, but -- so, it sounds like you are fine with waiting a year to cross through the SIFI threshold to see what happens on the regulatory front. If at that point nothing is happening, I would think in 2018, you would think to cross organically; is that kind of a timeframe you’re thinking about?

[Thomas Cangemi:]

So, Dave, I think it’s fair to say, we’ve been going through this journey as far as managing the balance below $50 billion since September of 2014. We have a very fluid landscape and we expect to the potential regulatory changes that may benefit regional banks. Our deal has been terminated mutually by both sides. We’re in a unique spot and we will see some asset growth, but we’re going to mange it in the short-term to better understand the direction of these changes to regional banks. And from there, we’ll have to reassess. As Mr. Ficalora said, we’re going to reassess it at all times. But clearly, this is the most fluid of time we’ve seen in the past eight years. So, we’re very focused and we’re very mindful; we have a roadmap; we went through a journey through this process of trying to get a deal done. And the bar, as I indicated has been lifted the month after month after month, and we have a roadmap.

[Dave Rochester:]

And then, you think you can get SIFI compliant it sounds like maybe in the next couple of quarters, is that fair?

[Thomas Cangemi:]

We’ve always expected to be able to close the deal. So, obviously, we have the roadmap. And we’re going to emphasize the management’s complete focus to be prepared when the opportunity arises. So, we are working very intently on being SIFI compliant. And there is a few open items there going forward that we believe can be done in due course. But obviously, there is changes on the regulatory front. We may get some enhancements to a balance sheet that’s maybe 100 billion or 250 is the number, not 50. And that may change the expense base and how you manage your risk.

[Dave Rochester:]

And you mentioned the personnel expense. Are there any other systems enhancements or build-outs that need to be done at this point, or is it just personnel?

[Thomas Cangemi:]

Again, I would say, again, my guidance for the year is going to be comp between I’d say $5 million to $7 million on average and then you have some additional G&A for consulting fees as we go through this process -- continue to go through process; it’s been a long process; we started in 2011. So, it’s not an easy process, but we learn as we go along. And I think my guidance I gave you on the expense build-out 165ish number has these embedded costs. And I just said in my previous commentary, a year-ago, I’d say that would be way too high for the expense build. But you learn as you go along here. And clearly there has been an expectation for a higher regulatory cost.

[Dave Rochester:]

And then, just switching to multi-family market, I know in the past, you guys have talked spike up in rates typically drives more refi activity, guys coming back to the market to lock in rates and as well as lower cap rate. Any evidence of that just on the fringe happening at this point, or do you expect that that might be something we see later on in the year? I know you alluded to it in your comments earlier. I just…

[Thomas Cangemi:]

I think a lot of people are making their decisions with regard to rates as things evolve There is no market urgency with regard to change in rate. Rates have not been moving rapidly up or causing there to be decisions. Just remember, there are different players affected by rates. The people that are on buildings that are looking to refinance a building in let’s just say 12 or 18 months down the road, are not necessarily believing that between here and 18 months later, the rate that they are going to be looking at is 100 basis points to 150 basis points more. It maybe 25, it maybe 75, whatever their perception maybe, it may not be moving them so rapidly to making that decision. There is a wide variety of expectation with regard to the speed with which rates will change and the degree to which rates will change.

[Joseph Ficalora:]

Well, Dave, just bear in mind, We saw post-selection 3 to 3.375 was the market; now we’re at 3.75 to 3.875; so there has been a notable change. It’s enough to move the customer to rapidly come back to the banks, make sure they lock in the next three to four years. We are getting there. I mean that’s the pretty sizeable move. I think if it continues, they’ll be more activity.

[Dave Rochester:]

And then, just one last one. Tom, do you have the components of the MSR adjustment and the hedging impact on the quarter that was embedded in mortgage banking?

[Thomas Cangemi:]

Yes, I have that. Total for the quarter, we had $6.9 million in mortgage origination revenue; loan servicing fee revenue was $12.4 million; the net adjustment to the MSR hedge was negative $16 million; so, the net mortgage banking revenue was $3.3 million. [Ph]

[Operator:]

Thank you. Our next question today is coming from Matthew Breese from Piper Jaffray. Please proceed with your question.

[Matthew Breese:]

Just a couple of quick points of clarification; on the margin outlook the down 5 to 8 basis points for next quarter, does that include prepayment penalty fees or is that on a core…

[Thomas Cangemi:]

No. That’s ex prepayment.

[Matthew Breese:]

Okay.

[Thomas Cangemi:]

We don’t give guidance on prepayments, as we don’t control prepayments.

[Matthew Breese:]

And then on the potential preferred capital raise, I think you mentioned $500 million. When you say replace the trust preferreds, does that mean you would extinguish the trust preferreds or would the preferreds be on top of that…

[Thomas Cangemi:]

When I say replace, in other words, the Tier 1 capital is no longer Tier 1 capital. It was nice to have that Tier 1 eligibility and trust preferreds. It was phased out under the Dodd-Frank Act. So, clearly, we may look at all our capital structures, but when I say replace, just get back to Tier 1 levels that was taken away from us because of Dodd-Frank Act. And so, we have those trust preferreds. And we may keep them on the balance sheet because they have good level too, Tier 2.

[Matthew Breese:]

Understood, okay. And then just touching on the C&I portfolio, a lot of growth there year-over-year. Can you talk about what’s driving that growth and what types of loans are being put on there?

[Thomas Cangemi:]

Again, this has been a mission of the Company over time as we build the business. We started this business a few years ago. There is so much capacity out there. Like I said before, we were a credit buyout shop. We do not dictate the market; we’re not the lead player in the market. We just evaluate credit; we pick and chose the credit; and we’re able to put on growth. Clearly, this has been a very good business model as we talked about the history of the people running that business with no losses for a decade. So, as we turn down 97% of what we see, that 3% of what we actually do is high quality assets, asset based lending, securitized [ph] financing for large corporations. These are very, very secure type positions, they’re not deposit positions, they’re not relationship positions, it’s the credit buyout opportunity that has a very low cost to manage with zero credit losses.

[Matthew Breese:]

Understood. Okay. And then…

[Thomas Cangemi:]

So, it’s conceivable for us to grow this business, very easily 20% a year, 25% a year. We manage our growth, we look at our balance sheet. We’re going to manage that $50 billion line between CRE growth and multi-family, in particular that regulation properties and the C&I business. Clearly, we would like to put on more residential jumbo on, but it’s hard to define; it’s an in demand. So, we put on maybe $20 million, $30 million a month, because we’re very selective on our asset quality metrics, we have super FICOs and very low LTVs. These are pristine assets that we put on our books. So, we have very high credit standards in order to put it on our balance sheet, and they are ARMs loans. So, if rates were to rise significantly, we believe the ARM market will be very attracted to us where customers will gravitate back to ARM type financing.

[Matthew Breese:]

Do you think the pace of growth from 2015 to 2016 in the C&I portfolio is something we can expect going forward?

[Thomas Cangemi:]

Somewhere between 20% to 35%, depending on the product flow, what we see.

[Matthew Breese:]

And then, I wanted to talk about two ratios that stand out for me, one commercial real estate to total risk based capital and also your loan deposit ratio. Can you talk about how you expect these ratios to be managed and how you expect them to trend over the next year or so given some of your outlook?

[Thomas Cangemi:]

We don’t give specific guidance as far as any regulatory ratios. We’ve been very mindful that historically the Company has been the largest multi-family rent-regulated portfolio lender in the country and we have a history of much higher ratios. We are cognizant of the focus in respect to the white papers that are out there and the various emphases on CRE concentration, but we’re in the 800s, and we’ve been at higher levels. We obviously talked about potentially brining in some Tier 1 capital which will bring that number down and we’ll manage through it. As far as the Company’s focus, we are not going to change our business model. We have a very strong asset quality with no credit losses, and we apply capital towards our risk profile. And we do that exercise; you realize that a rent-regulated building in the city of New York has very low risk compared to other asset classes in other parts of the United States.

[Joseph Ficalora:]

I think the good news is that over the two decades we’re a public Company, those ratios adjust most overtly positively in transactions. So, there is no question we understand how our balance sheet is structured and that we clearly are going to be favorably impacted by the transactions that we do. 12 of them have all demonstrated by their metrics that those metrics that you are specifically asking about are greatly improved by a transaction.

[Thomas Cangemi:]

And just the other ratio, loan to deposits, the Company has been at a much higher loan to deposit ratio in its history. Clearly on an acquisition perspective, those ratios change materially, but importantly the Company has always had a very high large wholesale finance book to manage its balance sheet into transaction. So, clearly, this is not unusual for us. We have risk management factors around that and we’ll mange through an opportunity to evaluate that as we bring in more deposits over time. But again, this is not unusual for the Company to have a 133 loan to deposit ratio.

[Joseph Ficalora:]

Yes. It goes back all the way to the beginning of the time of this. Transactions definitely have a very positive effect on those numbers; and historically, every time we’ve done a transaction, we see a very, very positive movement in those numbers.

[Matthew Breese:]

And then just my last one, as we think about the preferred capital raise, what will that do to the securities portfolio; will it be mostly utilized to build that out in terms of getting ready for LCR compliance?

[Thomas Cangemi:]

So, I think I gave some detailed color on I guess Collyn’s question on securities; I think it was probably long-winded. But, look, we’ve seen a portfolio drop dramatically; we’re balancing this balance sheet below $50 billion since the early part of 2014. So, we’ve had the luxury of significant bonds being called away from the Bank, all our callables are gone. As the DUS securities get called out, we get paid very nice yield maintenance provisions on that. So, it’s been very attractive for the overall margin for the Company when you include that into the margin, but big picture is that we have to rebuild over time. We’re happy to build that portfolio in a much higher rate environment such that we fund it with deposits. So clearly, that’s the long-term plan. The short-term, we’re going to manage $50 billion, I would not expect to see significant securities growth. I would see loan growth to manage the $50 billion in the short-term. And in the longer term when we go into the market to solve for LCR, depending what that level will be, we’ll have a one year opportunity to prepare as a company when it’s mandated for us to comply and hopefully that would be at a much higher interest rate. And potentially, we may not even see that SIFI threshold level because the SIFI threshold maybe dramatically higher than $50 billion and it may not apply to banks of our size. So, we’re mindfully watching and monitoring the potential regulatory changes that may impact the regional banks as we are seeing today.

[Operator:]

Thank you. Our next question today is coming from Christopher Marinac from FIG Partners. Please proceed with your question.

[Christopher Marinac:]

If the corporate tax rate were to fall 2018 or whatever, would you report all of that or would you use a portion of that to reinvest into some of the changes that you’re talking about today?

[Thomas Cangemi:]

So, again, I would love to comment on where the corporate tax rate is going to go, but either way, I will say this one statement, we pay one of the highest tax rates in the country as a regional bank. And we would benefit greatly from any movement downward in the corporate tax rate for regional banks. Bear in mind, also, we have a deferred tax liability on our balance sheet which would also add to capital, so we don’t have to recognize any adjustment to capital. So, we have a unique position, we will be welcoming a lower corporate tax rate because it will be very favor for the Company and it would clearly be a significant boost to our earnings going forward. And that’s why I really can’t comment on it because obviously you can do the simple math where pay the highest rates. Our effective rate is going to be pro forma somewhere in the upper 30s, 36% to 37% for 2017. So if you bring that rate to 15% to 20% at the federal level, we’ll get a substantial benefit we believe.

[Joseph Ficalora:]

I think that’s another example of what is different between us and our competition. Most of our competition has had massive losses over time. So, their benefit on the tax side is going to be diminished by what they have taken as losses over all those years. We don’t have losses over all those years. So, for us, the tax benefit is going to be significantly greater than it would be for others.

[Operator:]

Thank you. Our final question today is coming from David Chiaverini from Wedbush Securities. Please proceed with your question.

[David Chiaverini:]

So, the first question relates to your comment about diversifying the loan portfolio. Is this strategy based on guidance or feedback from regulators to diversify away from multi-family CRE or do you believe it’s better risk-adjusted return…

[Thomas Cangemi:]

No. This is not a change in strategy; we opened up the business years ago; they’re just kicking in on high -- on all eight cylinders right now. They’re doing a phenomenal job. We expected to see growth over time. That business has the opportunity for significant growth in the years ahead. On the resi book, we’ve had that -- we grew that book at one point in time to $700 million. We ultimately sold the resi portfolio to accommodate the SIFI threshold. So, we’re rebuilding that book, because it’s a great asset class to have, they’re hard assets to find because like as we talked about previously, the overall credit underwriting standards we have is very high standard. So we’re doing low risk assets, so we’re going to put on low risk with reasonable duration, but it’s not change in strategy whatsoever. We’ve been doing this for quite a few years now.

[Joseph Ficalora:]

I think the important thing to recognize is that we have a longstanding risk-averse nature. And the fact that Mr. Chipman’s group joined with us is indicative of our high appreciation of their longstanding risk averse nature as well. So, the idea that there will be more and more of those assets in our portfolio is driven by the confidence we have that that book can grow with little risk of loss.

[David Chiaverini:]

And as a follow-up to that in addition to the specialty finance jumbo hybrid resi, going to where you are seeing some uptick in losses the taxi medallion portfolio, do you plan -- given the disruption that’s occurring in that industry, do you plan on exiting that portfolio or growing it or what are your plans there over time?

[Thomas Cangemi:]

I would say, big picture, here we have $150 million unpaid principal balance on a $50 billion balance sheet. We’re very comfortable at that level. You will accommodate our customer base; we are not going to be buying taxi medallions; we’re not going to be in the market as being originator of taxi medallions. We’re going to accommodate customers, so very difficult environment; it’s been a very difficult environment competition New York City. So, we understand evaluation. We have to monitor evaluation of the value of those assets. And we have around 8% reserve against it. And again, like I indicated, most of the companies’ losses right now in the past few years have been coming from medallion, but they’ve been very manageable, they’ve been de minimis. And if you look the past four quarters, the multi-family CRE has been zero, so as well as the residential, as well as the C&I. So clearly this is the asset focus; that’s why you see the build-up of the reserve; and we’re managing with our customer base with the expectation that they are going through a difficult time. Many of our customers on the fleet side are wealthy customers; they have multiple relationships and they are in this business for many, many years, going back 40 to 50 years. So, clearly, this is something that is a shock to New York City but the values in New York City are dramatically different than the values of the parts of the United States. There is still many yellow cabs out there and the people want to drive yellow cabs.

[Operator:]

Thank you. We’ve reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

[Joseph Ficalora:]

Thank you again for taking the time to join us this morning. We look forward to chatting with you again during the last week of April when we will discuss our performance for the three months ended March 31, 2017. Thank you all.

[Operator:]

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.