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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and thank you all for joining the management team of New York Community Bancorp for its Second Quarter 2018 Conference Call. Today’s discussion of the Company’s second quarter 2018 performance will be led by President and Chief Executive Officer, Joseph Ficalora together with Chief Operating Officer, Robert Wann; Chief Financial Officer, Thomas Cangemi; and the Company’s Chief Accounting Officer, John Pinto.
Certain comments made on this call will contain forward-looking statements that are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those the Company currently anticipates due to a number of factors, many of which are beyond its control.
Among these factors are general economic conditions and trends both nationally and in the Company’s local markets; changes in interest rates, which may affect the Company’s net income, prepayment income and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposit, loan and investment products and other financial services; and changes in legislation, regulation and policies.
You will find more about the risk factors associated with the Company’s forward-looking statements in this morning’s earnings release and in its SEC filings, including its 2017 annual reports on Form 10-K and Form 10-Q for the quarterly period ended March 31, 2018. The release also includes reconciliations of certain GAAP and non-GAAP financial measures that maybe 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 this call over to Mr. Ficalora who will provide a brief overview of the Company’s performance before opening the line for Q&A. Mr. Ficalora, please go ahead.
Thank you, operator. Good morning to everyone on the call and on the webcast and thank you for joining us as we discuss our second quarter 2018 operating results and performance. This morning, we reported diluted earnings per common share of $0.20 for the three months ended June 30, 2018 unchanged compared to the $0.20 for the three months ended March 31, 2018.
We also announced that our Board of Directors declared a $0.17 cash dividend per common share for the quarter. The dividend is payable on August 21 to common shareholders of record as of August 7. Based on yesterday’s closing price, this represents an annualized dividend yield is 6%, starting off with the news from the regulatory front.
As you already know, the Economic Growth, Regulatory Relief, and Consumer Protection Act was signed in late May. We are pleased with the passage of this long anticipated bill and believe that it is a game changer for us and expect to benefit going forward from this enactment.
Not only do we benefit from the SIFI threshold being raised to $250 billion, but Regulatory Relief for us also means that DFAST is no longer required. We are also immediately exempt from LCR requirements. We will not be subject to resolution planning and it exempts us from any CCAR requirement.
Some of these benefits are already evident in our second quarter results, others will become evident over time and will provide us with greater flexibility with our corporate structure and further help to reduce our operating expenses.
Turning now to some of the quarter’s highlights. Our performance during the quarter, the current second quarter reflects the strategies we have communicated in the past, that is, to grow our assets, redeploy our excess liquidity and reduce our operating expenses.
During the quarter, our total assets increased to $50.5 billion. We saw a continued growth in the loan portfolio. We redeployed some of the excess liquidity on our balance sheet. Operating expenses decreased further. The net interest margin came in within our expectations, and asset quality remains stellar.
With the SIFI threshold being listed this quarter, total assets increased to $50.5 billion, up $1.3 billion from year-end 2017, and up $814 million or 7% annualized from the prior quarter. Our loan portfolio showed strong growth during the second quarter.
Total loans held for investment grew $1.1 billion from December 31, 2017 to $39.4 billion and $558.4 million or 6% annualized compared to the balance at March 31, 2018. The growth of both periods was driven by our multifamily and C&I portfolios. Multifamily loans grew $556 million or 8% on an annualized basis compared to the prior quarter, while the C&I portfolio, which consists primarily of our specialty finance business grew $134 million or 25% on an annualized basis.
Originations increased substantially during the quarter. The Company originated nearly $3 billion in new loans this quarter, up 58% on a year-over-year basis and 22% on a linked quarter basis.
With the exception of one-to-four family and ADC loans originations increased across the board on a sequential basis, including double-digit growth in the multi-family CRE theory and specialty finance categories.
Our loan pipeline is approximately $1.8 billion comparable to the pipeline at the end of last year's second quarter and includes $1.2 billion of multi-family loans $254 million of CRE loans and $165 million of specialty finance loans. With the SIFI threshold increased to $250 billion as well as our originations volumes and pipeline, we expect continued loan growth going forward.
At this point, I would like to spend a few minutes discussing the New York City CRE market. We have been an active participant in the rent-regulated, non-luxury, sub segment of this market for nearly 50 years. As such we have an unparalleled view into this marketplace. We have strong longstanding relationships with many of the brokers in this market as well as with many of the top owners of the properties, who value us for our service and expertise.
When we went public, 25 years ago, our loan portfolio was about $700 million with the majority of those loans being CRE including in this multi-family segment. Today, our loan portfolio is more than 50 times as large and our multi-family CRE portfolio continues to represent the majority of our loans. This consistency has served us well for a quarter of a century.
Since our IPO, we have originated $81 billion of our niche multi-family loans and our cumulative losses are only 18 basis points. This is no accident. We have best-in-class underwriting standards, which haven't changed over time. Others may have changed. We have not changed.
We are cash flow based lender based on our current NOIs. Our average loan size is small relative to the market value of the property, in fact when we do lose a loan to a competitor, it is because we are unwilling to lend more dollars than we are comfortable with and our pricing also remains consistent.
Our currency pricing on new multi-family loans is in the 4% to 4.25% range and CRE is in the 4.5% to 4.75% range, while our commercial loans are priced off the [indiscernible] LIBOR. Historically, what is in some players view, this market becomes irrational that’s when irrational players like New York Community are able to step in and gain market share without taking on undue risk.
Turning back to our balance sheet, during the quarter, we initiated a reinvestment strategy and start redeploying a portion of our excess cash into higher yielding, shorter duration variable rate investment securities. We expect to redeploy our remaining excess cash position into higher yielding loans and securities throughout the rest of the year.
Moving onto the expenses, we witnessed further improvements in our operating expense base, excluding a $1 million write-down of taxi medallions held as repossessed assets. Operating expenses would have declined $26.6 million or 16% compared to the year-ago quarter of $137 million, which is in line with expectations. For the first half of this year, operating expenses declined $53 million compared to the first six months of 2017.
Our efficiency ratio increased modestly to 48.19% from 47.45% in the previous quarter, due to lower revenues during for quarter. The Company remains on track to meet or exceed the $100 million of expense reductions in 2018, which we have previously discussed. In addition, with Dodd-Frank reform completed, we expect additional opportunities to reduce operating expenses further over the next 18 months.
Moving on to the net interest margin, the margin this quarter was 2.33%, down 9 basis points relative to the first quarter of this year. Of note, prepayment income on loans rose 34% on a sequential basis contributing 14 basis points to the margin. On the asset quality front, our asset quality metrics remain pristine during the second quarter. During the quarter, NPLs declined 23% to $57 million or 14 basis points of total loans compared to the previous quarter. Excluding non-approval taxi medallion-related loans, NPLs declined $16 million sequentially or 54% to $13 million or 3 basis points of total loans.
Net charge-offs were $5 million or 1 basis point. Excluding taxi medallions, our core portfolio continues to generate little to no losses. In fact, we had net recoveries this quarter, excluding taxi medallion-related charge-offs. Lastly, we believe that this quarter shows that we are poised to benefit from Regulatory Relief and that we are focused on controlling what we can control. Despite the current interest rate environment, we have several levers to generate further earnings growth, balance sheet growth, significant reinvestment opportunities and further improvements in operating expenses.
On that note, I would now ask the operator to open the lines for your questions. We will do our best to get to all of you within the time remaining, but if we don’t, please feel free to call us later today or this week. Operator?
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Ebrahim Poonawala from Bank of America Merrill Lynch. Please proceed with your questions.
Good morning, guys.
Good morning, Ebrahim. How are you?
Good. Thanks. I guess just first question, if you can touch upon expenses. One is, Tom you mentioned that 1Q was the high watermark for this year; it should continue to trend lower. So one, I think just would be any clarity you can give in the back half of 2018 expenses? And tied to that, I know you don't like to give guidance beyond the quarter, but given as you mentioned this was like a game changing event with the SIFI threshold being moved, what's your outlook relative to the $550 million in annualized expenses in 2Q as we think about 2019?
Good morning, Ebrahim. So I would tell you that, obviously, when we look at the high quarter in the previous year, which is running at $660 million run rate, I mean , you walked upon the exit of the mortgage banking operation, and obviously expense control management. We anticipated a $100 million adjustment from that $660 million, which gets us to the $560 million.
We are on target right now that would be slightly below $550 million, so obviously we will dive into Q3, slightly down versus the second quarter numbers, so I’d say about $135 million for Q3 and then I will continue slightly lower into Q4 that should get you below the $550 million, which will be probably about $10 million to $12 million better than we expected from our initial $100 million guide in the previous year.
I would say with that being said as you indicated, the changing on the regulatory front is very favorable for a bank of our size which you are gearing up to potentially be a CCAR bank. So we anticipate further reduction into 2019 and we don’t give elongated guidance, but I’ll give you some clarity as well as the cost containment initiatives that we are focusing on right now. We would be generally driving that number somewhere into the low $500 million. So continued expense reduction as we grow the balance sheet which ultimately will be operating leverage going into 2019 as well. So we are still driven on the operating leverage.
Obviously, we have the margin pressure, but we see good balance sheet growth and we talked about reinvesting the cash flows from both the excess cash that we have on the balance sheet with rates trending higher on a loan book as well as the security goes higher, we are anticipating a good balance sheet growth going into 2019 with continued operating leverage and expense management.
Helpful and very clear, I guess on – moving on to the margins you mentioned. One, I would love to get an update on what – where you think the margin lands as we look into third quarter and tied to that it feels like you had about $2.2 billion in cash sitting on the balance sheet at the end of June? How much of that do you expect to redeploy and what are the duration and the yield that this has been redeployed at?
So we envision in the short-term obviously we don’t give long-term margin guidance. We think the margin will come in down better than the previous quarter. So we’re probably looking around 8 basis points.
Last quarter, it was 10, came in line in our expectations. That assumes obviously we had a rate increase that happened in June that’s impacted in Q3 and we're being obviously competitive on deposit front to continue bringing in funding to fund our growth.
So clearly looking at the opportunities on the investment side, we believe that this cash position will be deployed throughout the year. Obviously loan growth has been the key and that’s been consistent sliding of the 5%.
We’re still staying for that numbers somewhere between 5% to 6% net loan growth, which if you look at the multi-family stay that numbers running around 8%. So we have high yield coming out the portfolio.
What we're seeing is interesting towards the end of the second quarter was that the rack that was put on was about 3.85% in June. The average rack for the quarter was 3.78%, that’s up 21 basis points quarter-over-quarter. So that’s unfortunate not moving fast enough, it’s moving in the right direction.
So that elongated view now, which we discussed with our shareholders that we’ve had such lower rate for so long. We have a very low weighted-average coupon that’s embedded in the portfolio to about 3.47%. We think its great opportunity as far as we have to be contractually positioned to refinance and/or take out some more funding at higher rate.
As that was on the commentary was – we’re north of 4% in the market for current rate. Now started – to started hit the portfolio as we get towards the second half of this year. Now be very favorable to the margin stabilization.
And what have it assumes Tom of that $2.2 billion, like how low can that number go over the next quarter or two?
Well, I envision our cash position probably somewhere between $800 million to $1 billion and we'll probably hold in that range. Let’s say $800 million will hold total cash. So we have most of that money being deployed into both securities and loan.
And bear in mind, we reduced our securities portfolio as we manifest the SIFI threshold for years. So we have to replenish that. So our guess is that $1 billion for a quarter on securities growth is reasonable. And right now we’re at 8% by the end of year that could be 12%. So it’s moving in the right direction. We plan on building that portfolio over time. But we're still well below the median average throughout the industry, and loan growth is coming in as expected.
So just one last final question on that, so I guess as you add securities every quarter, obviously that would impact the NIM like – do you feel we're at a point where NII, which you reported at $264 million that's close to a bottom or can begin to grow now? Or do we still have downside to the NII?
Yes. I would have to – again, I'm not going to give you elongated guidance on NIM. I will say that obviously the Fed increases do impact our funding base. However, we’re very bullish about the opportunity of portfolio repricing.
We haven’t seen that U-shaped curve become a V. When it becomes V, becomes a very dynamic position for the portfolio, because average like multi-family CRE loans about 3.1 years, and we think about the speed that we’re running, the speed is very slow. And even that we speeds up and it’s a reaction to changes in interest rates that could be a game changer for the margin.
So obviously, we're dealing with an elongation of time and customers are kind of laying this out over time, and if they do react to change in interest rates, which you had to finance that, we had a significant origination quarter, which some of that was re-fi and the quarter – and the weighted average coupon is building up slowly, start building up quickly enough. We're very optimistic that as we get – each quarter, as we get closer towards maturity, this could be a very powerful drive towards stabilization of the margin.
Ebrahim, in simple terms, we have the capacity to grow the assets, which means we have the capacity to grow the earnings. All growth in our assets will result in increased earnings. We've been for years, restrained in a way that obviously also restrained our earnings. So just a simple fact that we will be able to add earning assets to the balance sheet means we will and earnings for the bottom line.
Got it. Thanks for taking my questions.
Our next question is from Ken Zerbe with Morgan Stanley. Please proceed.
Good morning, Ken.
Thanks. Good morning, Tom.
How are you?
In terms of the balance sheet growth I can certainly appreciate the increased flexibility you have to grow. But can you just addressed the funding side of that because I mean part I get the curve is kind of leading to downward pressure on the margin, but I'm curious on how you plan to funds that the incremental balance sheet growth? Thanks.
Sure, Ken. So I would say obviously the margin within impacted over the past few quarters because we had significant volumes coming due. We had about $1.5 that came due in Q2. That has a much higher cost in the current marketplaces of CD's and other deposit instruments that were used to fund the bank that number came in I believe it $2.34 on a $1.5 next quarter we have very little coming due. So Q3 will have very little borrows we pricing in the not $200 towards the end of the quarter at about $1.65-ish rate.
And then we'll deal with more that pressure towards the end of the year which is about another $1.4 that would come do. So obvious that will saw putting pressure on the funding side of the balance sheet. I saw of the CD market, we are competitive, obviously what we try to get ahead of the rate I expect you know the marketplace has changed dramatically, rates are up throughout the entire week especially when we are predominately retail funded franchise.
So in the marketplace the average cost of fund that came on, on the CD fund is around $2.05-ish for the quarter. In the current market you’re looking at any reference $2.20 and $2.30 depending on competition and it’s been very competitive. In addition, to the competition for the traditional retail bank, money center banks are competing. So that that the marketplace.
So we're going to be in the marketplace, pending in deposits, opportunistically and at the same time trying to manage our funding costs and looking at ways to bring our cost down over time. Fairly, the repricing of the wholesale volumes both is pretty much in public as far as the total amount about $4.6 billion next year and will be deal with that comes due.
And then the reality is that there's always a spread between the cost of our liabilities and the earnings on the new assets that we deploy. We have a very high confidence that will be able to get a better return on the assets then we pay to the liabilities.
Ken, again, we have substantial potential price miller impact what stress issue. So we have to look at both sides of the balance sheet, yes, we are where liability sensitive in the current environment speed diverse well. If the speed will take up on refinancing and repricing that will be a substantial change towards the impact of the margin favorably. So we can make that point because we haven’t seen that reacting by customers by this quarter those by one quarter profit to their contractual maturity of a very large portfolio and the average coupon is in a low-3s and markets in the low-4's that should benefit us.
Gotcha. Okay. And then just may have a question, in terms of loan growth. We heard from a number of banks this quarter that the Siri market is just getting irrational from a pricing standpoint specifically non-bank lenders? Can you just talk about to your expectations to hit your loan growth targets given just a meaningful increasingly irrational Siri market? Because I know you guys tend to be very disciplined in terms of what you put on? Thanks.
I think you ask an appropriate question and over the course of long periods of time we are a rational consistent player with known successful participants in our market. The irrational lenders are going to lend to new owners or owners that are opportunistically going to take advantage of rate. We have a long-term player that actually has rollover in our assets on a very favorable basis people are willing to take the rates that we offer.
Even though they have to get more money from somebody else where they can get a lower rate from somebody else because with the consistency of what they put into their portfolio given our funding they know that they have the ability when the market turns to actually get additional money from the loan they have with us and we've done it time-and-time again and therefore there's been benefit to the best owners in the market where they can actually buy a declining marketplace because they have available funding in the portfolios they have with us.
So this is not a new concept this is what we've done time-and-time again over many, many decades actually. And then fact is that we're very optimistic that we will have appropriate share of the marketplace.
All right. Thank you.
Our next question is from Brock Vandervliet with UBS. Please proceed for your question.
Good morning.
Good morning.
Good morning. Thanks for taking my question. I just follow-up on one of your prior responses, the $4.6 billion wholesale repricing next year, what's the plan there is that you are going to be rolled into additional wholesale or is the plan to rotate that into CDs or other forms of funding?
Obviously, the historical plan was that we would transition on balance sheet through go to acquisition, but absent any transaction on the table, we will have to look at that next year. And more likely than not, we don’t bring in deposits – to the current market, whatever the market will bear at that time.
Got it.
But still – we’ve looked at this funding base as we grown the bank from $1 billion to $50 billion through go to acquisition. That’s been a historical trend. It's been obviously many years since our last acquisition, but still it’s been the historical position of the Company.
Okay.
I think the way for market is going to be significant consolidation of the marketplace and those transactions will lend themselves to our business model. So the likelihood that we have the opportunity to grow the bank, grow the earnings, and benefit from a consolidating market is in front of us.
Okay. And I noticed there was an increase sequentially in non-interest bearing deposits this quarter, could you speak to that?
No, I would say a lot of escrow relationships. We focus on building the deposit base. We've had a full court press internally to focus on bringing in core deposits, including relationship deposits for the customers. And then we have, obviously, real estate relationships as well that has significant escrows.
So, obviously the goal is to bring in deposits. And deposits are very important as we do not have a pending acquisition to revamp the funding. So clearly, deposit goal is important to the bank, and we continue to focus on the marketplace and then in all areas, both on non-interest bearing will be much better than interest-bearing, but in all areas deposit growth. That is the focus of the bank.
Okay. Thank you.
You are welcome.
Our next question is from Dave Rochester with Deutsche Bank. Please proceed.
Good morning, Dave.
Good morning. Just a real quick on the cash. You talked about earlier, it sounds like you guys are thinking that that will be gone by year end or I guess down to that $800 million to $1 billion level, where you think you're going to keep that, is that right?
Yes. I think, obviously we have – we’ll be putting some of this money at the floating rate instruments. So if rates do continue to rise, we’ll get the benefit of that. The first $800 million to $1 billion will go to a floating rate securities, broken up by various tranches, but clearly a repricing asset. The next slug of money maybe a little bit more longer in duration given where yields are.
We really haven't gone long duration at all given that rates are still very difficult to slug getting past that 3% 10-year level that we're hopeful for. But clearly, we put the first slug of money into a floating rate instrument, which is good for interest rate risk, and obviously gives us probably about 110 basis points more running on the cash. So I think the average came around 3%.
The next slug of money will be somewhere between 3.50% and 4% depending on market conditions. That’s going to be the trend each quarter. Continued putting out replenishing the securities portfolio with the expectation that to put the money into loan, obviously, going through the priority, but we pretty much feel comfortable that we could hit 5% net loan target which has other classes slightly be reduced, especially, finance business is running very well for us. It's been a nice growth engine. That business started at zero. We're running at about $2 billion both that's committed to us.
It had CAGR over 67% since the beginning of our expected growth and we think we can grow that business 25% a year. And those coupons are significantly higher, but lot of it’s high 2s at current floating rate marketplace.
So all things being equal, we have this unique situation of the pipeline about $1.8 billion, and the yield on that pipeline is about 4.18, 4.19 which is slightly higher than the previous quarter. I think what’s encouraging, if you look at these in the latter part of our quarter; the lag that was put on the multifamily is at 3.85, so we are getting close to closing loans at 4%. It takes time from originating loan to closing loan.
And I know that when you look into one of these loans on a transition, I've been finding that transitioning to that 4% coupon and that will be very helpful as we have such a significant short duration portfolio in our multifamily CRE book.
Is a thought at this point that the rest of the cash is going to go into the securities? I know you talked about loans as well, but that's not going to go to repay borrowings at this point, right? You’re just going to roll the barrowings?
Yes. Like I said, we have a very small money coming due in Q3 that $200 million at the end of the quarter.
Okay.
Slug of money at the end of the fourth quarter, so obviously, we anticipate to utilize the cash to put into both loan growth and securities and we'll be as laser-focused as what's the best use of that cash and we're going to keep on a certain level, obviously, we're a big bank that has liquidity mandates.
And we think somewhere between $800 million to $1 billion will be the ultimate number that will – this line is coming from the sale of real estate loans in the form of FDIC-backed asset that we sold back in 2017.
So we should expect to see like another $500 million, $700 million or whatever in growth in the securities book in the next quarter as well?
I'd say maybe $1 billion in Q3.
$1 billion?
Again we'll wait as long as the size of assets. We should be somewhere between 12% to 18%, right now we’re at 8%.
Yes.
I think the bottom line is that this change is only beneficial to the bottom line.
Yes, topline revenue growth, obviously it does have impact to the margin, but topline revenue does grow, and our efficiency ratio will come down obviously.
And just real quick on the expenses, when you guys are talking about the low 500s next year, I guess that $135 million guidance for next quarter equates to [540] annualized. So you're thinking you can shave off another $10 million or $20 million annualized on that? Is that the thought?
Again, I think the trend has been low each quarter. I expect that trend to continue throughout 2018. We're going to really focus on a full plan going into 2019 regarding the changing of the regulatory framework for banks of our size.
Yes.
Now that being said, having in the low $500 million is very reasonable for us. You obviously have a discount also contributing to benefit in 2019 for all banks that's helpful. In addition to that, we were going to be laser-focused on expense control management and somewhere in the low 5. It could be 5.10, it could be 5.05, it could be somewhere in that range. But it’s going to be another operating leverage story that continues into 2019 as we grow the balance sheet.
Yes, you mentioned the surcharge. How much you expect to save on that?
I would say $13 million, $14 million, approximate.
Okay, and then the rest of it coming from…?
That will also contribute to the reductions for 2019 expenses.
Yes. And then we're also thinking about headcount reductions or branch consolidation or anything like that as a part of this?
David, we're looking at everything.
Okay, it sounds good. All right guys. Thanks.
Have a good day.
Our next question is from Steven Alexopoulos with JPMorgan. Please proceed.
Good morning, Steven.
Good morning everybody.
Hi, Steve.
I wanted to start on commercial real estate and just to follow up on the environment turning irrational. You guys clearly have a one of the best views into the market. Why do you think competition is getting so much worse here? Is it just a flow good deal slowing?
I think it's in the incredible length of this particular cycle. There are realities that markets allow for prices to go up for a period of time. They stabilize and then they go down. We've been in the elongated value creating environment and therefore, the market itself is making the appropriate adjustments.
They make those adjustments relatively slowly when in fact they were making it without planning. In cycle, that make the adjustments aggressively and rapidly and that's a very, very different outcome.
So this market is in fact a seasoned market that is making the appropriate adjustments, blended in the market, but some are changing, you get the irrational uninformed lenders, provide [$20] under circumstances that cannot be necessarily sustained. They have an impact on the market.
And then you have the traditional existing lenders who are very consistent. We are a very consistent lender in our market. So this market is very, very seasoned. It has had a long time to virtually get to plateaus and when you look around the world and you're looking in markets all over the place, this market is one of the more expensive markets in the world.
This market has had value appreciation that is extraordinary and is likely to have value adjustment. The main reason we're so consistently good at avoiding losses is because we don't lend at market. And as a result, our portfolios performed through cycles substantially better than market lenders.
So the people that are willing to lend at these plateaus are not necessarily the most deformed and certainly, they believe they're doing the right thing, but they don't understand sufficiently the risks that they're taking. It is inevitable. It happens every cycle. There's no question that there will be adjustment ultimately in the market.
Steven, just to add to Joe's commentary, obviously, the asset class that we went to is the refinancing asset class. So our customers are going to refinance regardless. So we have a really good opportunity to maintain that business and work with our customers as we have to finance their needs. So it's a refinancing asset class. It's not the construction ADC type opportunity for us. We're refinancing in very good asset class.
Yes, that’s helpful. On the expenses, many of the smaller CDs that are now out of the CCAR, basically guided the market should not expect much in the way of cost savings. They’re basically said continue doing many other SIFI practices such as stress testing? Can you give some color examples of where you're actually going to CCAR savings here?
It's crystal clear as we went through this journey of becoming the potential CCAR bank we had raised our expense base in the previous year at a level of $660 million run rate. That is not sustainable to our business model given that we felt obviously we need to have substantial assets growth to justify that. Many banks in the country I would say that you know to be a CCAR bank and they had hundreds of millions of dollars to justify the expense to be a CCAR bank.
We're coming off of a very unique place as we were on the cost of becoming a CCAR bank with a potential transaction and were expected to costs. Those cost of being a lot of advisory fees, a lot of technology build going into the future for the company. We have a very unique spot here because this company has always been one of the most efficient institutions in the marketplace.
So we're not saying we're going to go back to a 38% efficiency ratio, but somewhere in the low 40s make sense not in the low-50s. If you do the financial math, that is somewhere where I am guiding on expenses, so we're laser focused to continue to go back to the way we ran the company, which is an efficient provider. We do not have complex business model.
We're the premier multi-family real estate bank regulation in the CD marketplace. So we don't have a lot of complexities around what we do. So we feel very confident with a – very little expense management control going into the future periods ahead. The most importantly, we're doing this with operating leverage. We're finally growing the balance sheet. We haven't grown our balance sheet in almost five years. So operating leverage and expense reduction will have a benefit to the bottom line.
That’s helpful. Maybe just one final one with the SIFI threshold now lifted. In terms of M&A, are you guys now back in the market, are you more active talking to potential sellers here?
I think there's no question that this raises – the business model of this company is to grow by acquisition. This raises the opportunity, not just for us but for banks generally across the nation that have the capacity to grow by acquisition. We are, in fact, actively discussing with any number of people, possibilities of combinations that will be beneficial to all shareholders.
Okay. Great. Thanks for all the color.
Our next question is from Matthew Breese with Piper Jaffray. Please proceed.
Good morning, Matt.
Good morning everybody.
Good morning, Matt.
I know you don't typically go out more than a quarter on the NIM guide, but there is some moving pieces here and giving the pace of contraction recently, I was hoping you could just give us some idea of the fluctuation in market contraction we might see as we look out the next few quarters. And do you see the pace of 5 to 10 basis points contraction per quarter? Is that going to abate into 2018 at some point?
Interest rates are going into the strength of the curve, I have visibility with that. But obviously, as you indicated, don't go out on the margin past a very short period of time. I think we're very bullish about the portfolio that reprices it will definitely help stabilize our situation and we're growing the balance sheet. So as Mr. Ficalora indicated, we're going to have topline growth, maybe under pressure because we're putting on funding at a high cost, but we are going to grow balance sheet at cost. So I think as far as the NIM guide, it's a good attempt. But I'm not going past three quarter and we'll talk about it in the next quarter that's coming up.
Okay. You mentioned that 12% to 18% of the balance sheet will go to securities. I just wanted to get a sense for the timing of that, over what timeframe do you think you're going to keep that. Is that right?
Yes, I think I said it in one of the previous comments. I'm not sure if you've heard me. But about $1 billion per quarter for the next quarters ahead. We did approximately $1 billion, $800 million that we put on right towards the tail end of the quarter in June and then we had a couple of hundred million dollars already started this quarter.
We envision about $1 billion this quarter – another $1 billion depending on market conditions in the fourth quarter. So that's slowly getting to where we need to replenish what we lost down as we manage the SIFI threshold not crossing over $50 million. We need to put those assets back to work, we have the cash to do with, and we anticipate to do that within a very short order at the cash is earning is less money than all other asset classes.
Understood. Okay. My last one tax rate just came in a little bit lower than was expecting, can you give us an outlook there?
I think the tax rate - we're probably looking at a rate of approximately 25.3%-ish for the third quarter. It has a lot to do with obviously the tax planning clearly with the change in the tax law; many banks have all decided going through with the complexities around the benefits. And we clearly are one of the biggest beneficiaries of that. We were one of the highest tax rate payers in the county. So I think you know estimated about 25, 35 going forward from third quarter throughout the rest of the year.
Thank you.
This is specific guide to your model there 25, 35.
Our next question is from Collyn Gilbert with KBW. Please proceed.
Thanks. Good morning, gentlemen.
Good morning.
So Tom, not to just believe at this point on expenses, but just trying to reconcile, so the $500 million or so low 500 that you are targeting I mean that’s obviously very low. I don't think you guys have been at that level since like 2009. I hear your conviction in your voice. What – what do you – do you think that would suggest your ability to get back to below a 40% efficiency ratio?
So Collyn, let me address that statement. We had a mortgage bank that did significant volume that had substantial expenses. The mortgage bank alone, we carve that about $60 million of operating expense. When you carve that out and you go into previous years that are very reasonable for us. I think $500 is too high for the company to be frank. And obviously, it's a different environment; we have to be very mindful of that.
But bringing it down to below $500 million is very reasonable, we're probably going to end somewhere south of $550 this year and we are still it’s getting the benefit of finally some regulatory forms. We’re pretty bullish about looking at the holistic view of expenses at the bank in throughout the retail franchisee and looking what make sense to run this business and like you said we’ve been the most efficient franchise decade.
We are used to running at 50% efficiency ratio, obviously it hard to core efficiency ratios when the revenue on the topline is being split, but absolute operating expenses is going to go lower and that is the plan as we go into the end of this year and into the next 18 months.
Eventually, we'll be at a point where maybe it's the low-5 where we stabilize, but at the same time we hope that we have more than stabilization that we have margin growth in two or three years. But clearly, that's been the strategy, but we're very bullish on getting there.
We deliver and we'll deliver our expense control throughout this year. I gave you specific guidance in Q3, $135 million and I think Q4 comes in a little bit lower and that's going to be expense operating leverage story as we deal with some of the margin pressures that we're seeing.
Okay. Do you anticipate any kind of large initiatives happening that would relate you know result in certain charges to get that expense base down or that's just going to be natural?
I'd say most is going to be natural. Too soon to tell. We're going to be laser focused. I mean, we have a very unique opportunity, if SIFI changes and game changes – Mr. Ficalor commentary it is a game changing for us because he quote 2009. 2009 when I introduce Dodd-Frank act. And yes it did impact this negatively. It was many, many years of expense still trying to get everyone comfortable plus to be a CCAR bank and obviously that’s changing now. So we have a module being 100s for the first 18 months and after that it becomes [$250 billion].
So I think we're very pleased that congress was able to deliver something that makes sense for our institution and we believe we should benefit the most given the way we were over the past few years just under the $50 billion level. So we're excited about it.
Okay. And then just to the funding part of the strategy. What are you targeting for deposit growth?
I think deposit growth anyway from 46% depending on market conditions and we can bring it in will borrow in the marketplace. We are actually the good in that we are in the market Collyn what would definitely in the market to bringing deposits unfortunately when we go in the market others in a higher rates. So that the competitive landscape that we're living through, including the money center banks which is interesting. So we feel deposits of course growing up throughout the entire retail platform for all banks and we're going to be competitive there.
Are you seeing much differentiation among your different geographies in terms of deposit ability to generate deposits?
Yes, yes.
Because it’s fairly asked obviously New York is New York have kind of a different market, far as obviously a retirement market. So yes. But overall we are going to very well…
Are you employing different strategies in those markets I mean do you see better opportunities to get funding out of those markets?
I think that’s part of our strategy. There's no question we have the opportunity to do this Shame on as if we don't. Being in a very distinguishable market is a plus.
Okay. All right, very good. Thanks guys.
Our next question is from Christopher Marinac with FIG Partners. Please proceed.
Hi, guys, good morning.
Good morning.
Do you have flexibility on the loan to deposit ratio as you enter this new environment?
Obliviously we’ve always had a very high loan to deposit ratio and we will bring that number down materially when we consolidate other institutions. So it's been in the strategy over decades that we run it up and bring it down to consolidation and we’ve been very effective with that.
But we always had historically a very high loan to deposit ratio and feel very confident we can grow our loan book at a very nice high single-digit level, when the market starts to stabilize going further. We do very well in down turning environments on the lending side, so if there is potentially that everyone's worried about CRE, and CRE is going to be a problem.
If there is a problem, we step up and we do very well in downward trend markets and that’s something that we look forward. It’s a good thing. We look forward to being there for our customers when they need us the most. So we are very bullish about growing the loan book. And as I said on multiple quarters, we do not have a pending transaction, so we're going to be in the deposit market to fund it.
Let's take a step back for a second and recognize that loan deposit ratios are problematic for banks that lose money on lending. We in fact have demonstrated a risk model that over performs over the course of decades; we lose very little money on lending. So a very high loan-to-deposit ratio in our circumstance does not represent the same kind of issues as it does in the rest of banking.
And historically, all of our public life and even the decades before we go public, our loan ratio is extremely high because that is principally the assets of the business. Our business is lending. We manage that business well through positive cycles and negative cycles. It does not represent an unreasonable risk. What is represented in banking is not what it represents to our balance sheet. It is a proven fact.
That’s great guys. Thank you, Tom, and thank you, Joe. I appreciate the feedback on that.
Thank you, Chris.
Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.
Thank you, again for taking the time to join us this morning and we look forward to chatting with you again at the end of October when we will discuss the performance of our three and nine months ended September 30, 2018. Thank you.
This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.