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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 Third Quarter 2018 Conference Call. Today’s discussion of the Company’s third quarter 2018 performance will be led by President and Chief Executive Officer, 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 the 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 Report on Form 10-K and Form 10-Q for the quarterly period ended June 30, 2018. The release also includes reconciliations of certain GAAP and non-GAAP financial measures that 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 third quarter 2018 operating results and performance. This morning, we reported diluted earnings per common share of $0.20 for the three months ended September 30, 2018 unchanged to the $0.20 we reported for the three months ended June 30, 2018.
Before we turn to a discussion of our financial performance, I would like to share with you some positive recent developments. First and foremost, we received regulatory approval to buyback our stock. Accordingly, our Board of Directors authorized a $300 million common share repurchase program. The program will be funded through the issuance of a light amount of subordinated debt. Purchases will be made from time to time and open market transactions subject to market conditions.
The capital optimization plan we announced this morning will have a positive impact on our fundamentals going forward. It will be accretive to earnings per share, improve our return on equity, accelerate our internal capital generation and diversify our capital structure. At the same time, it will have no impact on either our total capital ratios or CRE concentration levels. Second, three weeks ago, we received final regulatory approval to merge our commercial banks subsidiary, New York Commercial Bank with – and into our primary subsidiary New York Community Bank. This merger is expected to close during the fourth quarter of the year and we expect to result in additional organizational and capital flexibility as well as operational efficiencies through the reduction of certain redundancies.
Additionally, we also announced that the Board of Directors declared a $0.17 cash dividend per common share for the quarter. The dividend will be payable on November 20 to common shareholders of record as of November 6. Based on yesterday’s closing price, this represents an annualized dividend yield of 7.2%.
Turning now to the highlights of the quarter. Our operating results and performance measures during the third quarter were impacted by two factors, higher short-term interest rates and the FOMC continued tightening and seasonality as the third quarter of the year is historically a slow quarter for us. These factors notwithstanding our performance during the quarter was still respectable and reflects the continuation of our three pronged strategy to increase earnings. One, while our loan portfolio at higher interest rates; two, redeploy our excess liquidity into higher yielding assets; and three, significantly reduced our operating expenses while keeping a sharp eye on asset quality.
During the current third quarter, we continue to grow our balance sheet with total assets now over $51 billion. Increase our loan portfolio with total loans currently just under $40 billion level. Reinvest our excess cash and further reduce non-interest expenses. In addition, we grew our deposit base $1.2 billion or 6% on an annualized basis, including $763 million or 10% annualized growth during the current quarter. Total assets increased $2.1 billion or 6% on an annualized basis since December 31, 2017, while total loans increased $1.5 billion or 5% annualized over the same timeframe.
Overall loan growth was once again the result of solid growth in our multifamily and C&I portfolios. The multifamily loan portfolio rose $1.5 billion or 7% annualized, compared to the balance at December 31, 2017, while our C&I portfolio, which are primarily the specialty finance related loans increased $287 million or 18% annualized to $2.3 billion compared to year end.
On the originations front, we originated $2.5 billion of new loans during the third quarter, which was reflective of our typical third quarter seasonality. On a year-to-date basis, we originated $7.9 billion of new loans up 36% compared to the nine months ended September 30, 2017. The current pipeline is approximately $1.3 billion comparable to the pipeline year ago quarter and includes $800 million of multifamily loans, $163 million of CRE loans, and $316 million of specialty finance loans. With interest rates increasing since the end of the third quarter, our current loan pricing has increased since the second quarter of the year.
Multifamily loan pricing is currently in a range of 4.5% to 4.75% and traditional CRE is in the 4.75% to 5% range with specialty finance and C&I loans pricing also try or short-term LIBOR. Also during the quarter, we continued our reinvestment strategy and redeployed some more of our excess cash into higher yielding investment securities. We will continue to use this strategy in the fourth quarter as well.
On the expense front, our operating expenses continued to decline during the third quarter. Non-interest expenses were $134 million down 3% compared to the second quarter of the year and slightly better than we expected. Compared to the third quarter of 2017, non-interest expenses declined $28 million or 17%. For the first nine months of the year, operating expenses declined $81 million or 16%. Our efficiency ratio increased to 49.35% from 48.19% in the previous quarter due to lower revenues.
Moving onto the net interest margin, the margin this quarter was 2.16% down 17 basis points compared to the second quarter of the year. This decline was due to higher funding cost as the Federal Reserve continue to increase short-term interest rates, a lower level of prepayments and the fact that we reinvested funds later in the quarter than anticipated. Excluding the 8 basis points contribution from prepayment income, the net-interest margin would have been 2.08% compared to 2.19% in the prior quarter, slightly below our expectations.
On the asset quality front, no surprise, our asset quality numbers remained excellent during the third quarter. Non-performing assets declined 20% on a year-over-year basis to $68 million or 13 basis points of total assets. Excluding non-accrual taxi medallion-related loans, NPA is declined $15 million or 36% to $27 million or 5 basis points of total assets.
Net charge-offs were $2 million or 1 basis point of average loans, excluding our core multifamily and CRE portfolios and our specialty finance portfolio, our loans continued to generate very little in the way of losses. In fact, this quarter we did not have charge-offs in those three portfolios.
I would like to conclude by stressing that we continue to prudently manage those factors under our control, namely, loan growth and operating expenses. We believe that these factors along with continuing to reinvest our excess cash, our common stock repurchase program will litigate the negative effects of the current interest rate environment.
On that note, I would now ask the operator to open the line for your questions. We will do our best to get to all of you within the time remaining, but if we don’t, please feel free to call us later today or this week. Operator?
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ebrahim Poonawala with Bank of America Merrill Lynch. Please proceed with your question.
Good morning, guys.
Good morning, Ebrahim.
Good morning.
I guess, just first, if we can talk about the buyback plan, it means, obviously, it’s a positive from a regulatory standpoint, in terms of being able to initiate that. But given where the stock is Joe, I know you mentioned, as you find the right opportunity like, can you talk a little bit more about the pace of buyback like should we expect all of these potentially getting done over the next couple of months before year-end? And if Tom, if you can sort of update us on what you expect in terms of the cost of the sub debt that you would have shown?
I think it’s pretty easy to say that our stock is, in our view, in extraordinarily good purchase. So for many, many good reasons, we would be anxious to buy our stock. It is the best way to enhance the value of our company as it trades today. And certainly, when you think about the various companies we can buy, it’s not a better buy than us. So we are going to be aggressively in the market buying our stock.
And I would just follow. Obviously, you can appreciate that we’re in this marketing efforts going forward here, so we’re going to put any specific goal – specific level of cost of that. But it’s a very attractive sub debt market and we’re enthusiastic about some of the indications we’ve seen. So very attractive market, and we feel very confident that it will be a successful process.
Understood. Just I guess shifting gears to the margins, obviously, the core margin pressure was a little more than, I guess Tom, you expected in July and then you saw the follow-up in prepay. I guess looking out in the fourth quarter, if you can remind us in terms of your funding plan deposit versus debt maturity, and what do you expect for the core margin? And if you can, on the prepay income in 4Q?
Yes. So big picture obviously we guided down 8, we came in down 11 for the quarter. So yes, we’re up by about 3 bps. As Joe indicated on his opening remarks, we were very cautious on putting the cash to work in the midst of the quarter. And obviously, as the loan starts to close, we’re seeing much higher coupons in the pipeline. So big picture for us is that for the quarter, it’s substantial development that all loans have closed for the quarter were above 4%. That’s compared to about 100 basis points above where we were closing loans this time last year. Last year November, your opening rates of – October or November were about 3% and 8%, now we’re 4.5% going into this quarter.
So that’s a significant change in the refinancing expectations for our customer base. So it’s very excited about that. The fact that we had a downward margin, again, 3 basis points, we believe was just net of impact on putting the cash to work at a rapid pace. We’re very enthusiastic about the pipeline as far as the current coupon in the portfolio. We had – although we have a very low rate at its coupon, that’s going to roll off into hopefully a much higher coupon this rising rate environment and ultimately, all our customers will have to react. So we have approximately $40 billion loan book that all has to go reprice somewhere north of the current coupon, which is about 3.48% in the portfolio.
So we’re enthusiastic about that. As far as to the quarter, as you know, we give short-term guidance in the quarter. We’re probably looking at around down 6 basis points for the quarter, and that is indicative of the most recent rate hike we just had. And we don’t have much on the debt refunding coming into the quarter, about $1.4 billion towards the end of December. The next year, we have a much highest further money coming due, about 4.6 and I’ve got a 174. After 2019, pretty much all our liabilities have been repriced at the current market. So we’re enthusiastic that eventually, the asset yields will be the catalyst to offset some of the pressure we’ve had in the funding side.
Got it. And any sense if prepay this is the watermark and it should flatten out from year of potentially rebound? Like any sense there.
Ebrahim, we don’t get specific comments on prepayment activity. But I will tell you that it was generally a very slow activity quarter given the substantial LIBOR interest rates coming from a 3% and 8% from a 12-month period to 4.5% is real, and customers are really trying to evaluate their options going forward. The good news in the past this time as it everyone gets positive at role. And as you know, the role is much more higher than 4.5%. That’s usually a 6%. So we’re enthusiastic about the fact that we have 3 points – $13.9 billion coming due in the contractually, plus another $11 billion based on our estimates of actual loans that we’ll have some more like the reprice in the foreseeable future. That will add at a much higher interest coupon going onto the portfolio. So that’s the opportunity. We don’t control when you decide to make that decision nor do we give specific guidance on prepay, but I think the fact that rates move up so dramatically in a short period of time, many customers are weighing their options as we speak.
Ebrahim, also, the third quarter is a quarter that has an inordinate number of lawyers, owners, brokers on vacation, and not actively involved in doing the business that we are principally involved in.
Understood. And just one last one. Tom, any line of sight NII, like are we close to a bottom? Do you expect any – NII to bottom out from a dollar standpoint first half of 2019?
Yes. Again, I guess we don’t give forward guidance. I think we’re encouraged to look at the fact that in our modeling, we have pretty much filed up Bloomberg forward curve. We see more likely than that that in 2019, if the Fed stops rising rate some time then, we should be in a position to benefit from a very good stabilization on the funding side, while setting that, I guess, we’ll have a much higher coupons that will have to be priced upwards. So obviously, the Fed continues to tighten that those have a negative impact to us, and we’re assuming total of six rate hikes, which is four in 2018 and two more in 2019. And that changes and if they stop sooner, that will be positive for us.
If they continue to go, we’ll continue to deal with this management of the margin. But the big question is when will the customers actually move on their current financing. Are they going to stay to 3% and 8% and go to year six. It’s unlikely. So we’re enthusiastic about that. We can’t control of that’s going to be clearly a substantial catalyst for the margin going forward.
Got it. Thank you for taking my questions.
Sure.
Thank you. Our next question comes from the line of Mark Fitzgibbon with Sandler O’Neill. Please proceed with your question.
Hey guys, good morning.
Good morning, Mark.
Good morning, Mark.
I wondered if you could update us on your outlook for operating expenses and also give us a sense for where you think the normalized effective tax rate will be?
Yes. So obviously, we’ve been doing a lot of work in the expense side. That was part of our strategy since the obviously going into the Dodd-Frank reform and exiting the mortgage business. So in 2017, while run rate was about $660 million a year, we brought – we guide it down to $560 for 2018. We’re going to come in around $546 for 2018. That will lead to fourth quarter somewhere around this level, 135-ish, 25 of the third quarter.
And in 2019, we’re really enthusiastic that we’re going to continue to drive our cost structure down. So it’s reasonable to say we’ll be in the low $500, and that’s almost $160 million over the 2017 run rate. That’s a substantial reduction as we go the balance sheet. As we hope to see the margin expansion as when the Fed ultimately stops rising interest rates. So we’re enthusiastic about the operating expense side. We can control that. And clearly, we’ve been very focused on delivering that number.
So going back to my point, Mark, if you think about where we were year and a half ago, in the midst of becoming a CCAR bank, it’s a big difference on the expense base. So we’re excited about where we are and where we’re going with that. On the tax side, we’ll probably end up for the year around 25, 50, that should be pretty much the effective rates for 2018. So 25.5 will be the appropriate rate for the fourth quarter.
And also, do you have a sense for the approximate timing of the sub debt issuance?
Obviously, we’re very enthusiastic to coming to market as soon as actively. We can’t really get specific timeframes on that, but it will be as specific lower indicated, we were very enthusiastic process. We feel like we have a very good value here given where our stock is right now. And obviously, at these levels, it’s entirely accretive.
There is no question. Anybody today can buy our stock and get a dividend of 7%-plus. It’s highly desirable for us to be able to buy that stock as well.
Thank you.
You bet.
Thank you. Our next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.
Good morning, Ken.
Good morning, Ken.
Great. Can you just remind us or talk a little bit more about the liquidity that you’re reinvesting in the securities? I mean, is this cash on hand or is this borrowings – is how borrowings tick up. I’m just trying to understand kind of where the money is coming from to grow the securities portfolio?
Sure, sure. Well, obviously, we’ve had a substantial cash on hand since the exit of the mortgage banking business and the exit of the loss share of range that we have the FDIC. So we’re still winding down the cash and deploying. It’s a high-yielding asset. As of the close of the quarter, we had about $1.7 billion on cash, the previous quarter, it’s $2.2 billion. If you look at a change from quarter-over-quarter, that’s pretty much the differences in our loan growth, right? So if you think about what we’re doing going forward, we really strength the balance sheet dramatically in order to avoid being a SIFI bank going back over the past two, four years.
Now we’ll be deploying that balance sheet back up. We’re not participating sales of assets. And we’re pretty much rebuilding our securities portfolio, hopefully, at much higher-yielding asset level. So with that being said, we’re still too slow on the security side. Right now we’re about 9% and 0.3% of total assets. My guess is it’s somewhere between 12% and 15% will end up, so it will lead to more security purchase coming into the quarter as well as coming next year as well.
But big picture that we funded the balance sheet for this year in addition to not only matter of wholesale, but really been the retail deposit and gathering efforts. It’s grown us deposit base for the first time in a public life, I would say, at these levels of 10% on linked-quarter basis and we’re running at a 6% annualized basis on deposit growth. That’s not typical for our strategy. We’ve always been a growth to acquisition story, but we recognize that now that we’re in a growth mode, we have to fund our growth. And given that it was successful in continuing to bring in deposits, it’s a substantially less costly than going into the wholesale markets through the – either the repo market or the home loan bank advanced market. So clearly, we have some refinancings coming due next year. It was successful on the deposit side. We used our deposits at lower cost to pay off some debt as well.
Got you, okay. And then with the securities that you’re buying, presumably, they’re longer – little longer duration, hence, the higher yielding that you’re getting at that. Can you just talk about like how you’re managing – how are you guys managing sort of the – sort of asset duration extension? And – because I don’t want – presumably, it makes you slightly more liability sensitive? Or how should we think about that overall?
So I would say, big picture, we’d assume that we’re going to change the mix. We have been changing the mix over the past years since we started rebuilding the portfolio. So it’s shying away from a longer duration securities. We’re buying some, I’ll say, we’ll call medium-size duration. But more importantly, a third of this portfolio that we’re building will be off floating rate.
So as the rates were increasing over the past few quarters, we’re getting a yield bump in those securities. So they are lower yielding initially, but as rates rise, they go up with a rising rate environment. So I would say, big picture, we’d like to have about a third to 40% of securities portfolio, which will be positive for interest risk management and a floating instrument, and then the rest will be medium – average duration, somewhere between four to five years in average duration, which is somewhere between 340 to 360, depending on market conditions on the fixed side and low 3% on the floating side all in.
Perfect, thank you very much.
Sure.
Thank you. Our next question comes from the line of Moshe Orenbuch with Credit Suisse. Please proceed with your question.
Great, thanks.
Good morning.
Good morning. I was hoping – if you look at your kind of rate table, if you look at the yield on – and I assume this includes the prepayment income, so that’s part of the explanation. But look at the yield from the second quarter to the third quarter, it’s down 6 basis points on a loan portfolio. So given the comments that you made about the rates kind of going up, when does – when do we see that kind of actually factor in materially?
Yes. So Moshe, what I would say, it’s interesting for the quarter, every month in the quarter, we closed north of 4% on our origination closing, which is a significant change in the previous two, three quarters. As you know, as we quote rates and we close the portfolio, it takes time to get through the system and get to the actual on to the balance sheet. So the very positive development for this quarter and the third quarter, and it’s continues throughout hopefully going forward here is that all loans close above 4% coupon.
So as you know, we have a relatively short duration portfolio, with a yield somewhere around 3.50%-ish on the multi-side, maybe 3.60% on the commercial side, but all loans now are being closed at north of 4% and quoted at 4.50% or higher. So the opportunity is that until we see real activity at the borrower side, it’s a much higher rate environment to our customer base.
So that 3% and 8% book loan will loan closing level in last year, of 2017, it’s now well over 150 basis points above that traditional five-year type multifamily bread-and-butter offering. So we’re excited about that. That took about six months to go through the balance sheet. As you remember, when rates are up in beginning of the year, we were still closing loans in the low 3s. Now we’re closing in the low 4s, soon to be the mid-4s.
Got it. And kind of in a similar vein, I mean, you talked about lower activity in Q3 because of a couple different reasons, rising rates and the way some of the schedules fell out. Does that – do you get that activity back in Q4? Is it something you’ll see in 2019? How do we think about that?
we should actually start seeing that in the fourth quarter and, of course, all through 2019. This is not an unusual evolution of the cycle. This is the way things typically evolve when rates are changing and our portfolios are restructuring themselves based on the owners desire to lock in lower rates than our clearly anticipated into the future period.
Moshe, just a follow-up on that onetime and you had just want to clear. On a loans – on the quarter-over-quarter basis, are up 2 basis points. So we’re seeing it’s a large portfolio. We actually saw loan yield ex prepay go up 2 basis points for the quarter. That’s a move in the right direction. And bear in mind, we do have a substantial amount of new loans coming off in specialty finance, which is two-thirds floating rate. So that’s also going to help. This is a natural change into the coupons and a rising rate environment to be more favorable for us.
Got it. Thanks.
Sure.
Thank you. Our next question comes from the line of Dave Rochester with Deutsche Bank. Please proceed with your question.
Hey, good morning, guys.
Good morning, David.
On the NIM guide for 4Q, is that assuming the rest of the cash is deployed in securities or loan growth? And then how much can you bring that cash balance down? I think you were around 17 this quarter. Can you bring that down below $1 billion?
Yes. My range is between $800 million and $900 million, so that for say, $800 million will be my level of having liquidity. We had some tragedies on our portfolio, which is kind of moved their loan yields down a little bit, the security yields down a little bit. Those are real low yielding. That’s going to put into securities as well. So I think, at the end of the day, $800 million, $900 million of total cash on hand and the rest will be deployed into loans and securities.
And is that also assuming that the sub-debt issuance you’re talking about as well, the 6 basis points down?
None of these numbers include this sub-debt at all.
Okay, got you. And then on the $1.4 billion that you talked about rolling this quarter, I guess, in December and then the 4.6 for next year. What’s the average cost of that at this point?
The average cost for the 2019 to 1.75.
Okay. And then the $1.4 billion…
We have about $1.4 billion coming due at the end of the quarter, that’s about $1.60 billion, but we may take that off depending on how actively or successfully on the deposit side. We’ve had a very strong deposit push, because now we’re all growing the balance sheet. Until we acquire liabilities, we need to fund our growth, and funding the growth to deposits, building organically is more attractive than wholesale. So that’s always on the table.
And so then – go ahead. Sorry.
Go right ahead. Go right ahead.
I was just going to say, so hopefully, I guess you can pay off some of that $1.4 billion with deposits. But then, for the 4.6 next year, just trying to get a sense for what the pricing is on the borrowings that you’re looking at to roll into it at this point, just given the duration that you want?
Yes. So again, depending on how much we bring in deposit growth, it’s going to be somewhere between 2.20 to 2.60 depending on wholesale markets versus retail market. We’ve been very active and successful on bringing our customers to the table, both new money and existing money, that’s rebuilding the accounts at attractive rates. These rates are market rates. And that were above the market. We’re in the market, money market rate in every Community Bank in the country. We’ve always had a issue of paying at lower rate. So 1.75, the money market is not uncommon in this environment. I think I said in the previous call, although betas are high for our retail franchise, all money is going to be rewarded with a higher-rate opportunity in this environment.
So all bank will catch up to this level. So it’s a 1.75 money market and a CD rate somewhere between 2 and 2.40, that’s the range of the marketplace and we’re just being successful because historically, we have not actively marketed the branches, and we have 250 branches that we can actively market in different regions of the country. We would be very pleased with having growth of 10% on a linked-quarter basis, and our budgets are around 4% to 6% deposit growth. And if things are more actively were able to grow faster, we’ll just ramp up our deposit efforts.
And then, I guess – go ahead.
Well, basically whether as I said this has nothing to do with your discussing. But the reality is that we have in excess of $5 billion of loans that we’re participating with others. That represents to us a huge additional enhancement in refinanceable assets. That’s going to come in the period in front of us. No question besides whatever is in the market. We have this existing participation tool that has a huge benefit to us with regard to refinancing. So that’s going to be a very significant asset enhancement to us.
Yes. Okay, just one last one, real quick, if I could, on loan growth. You mentioned seeing slower activity this quarter, and that would explain why the pipeline looks a bit lower this quarter. But I guess, just given a lower pipeline, does that imply less growth in 4Q? Is that what you’re expecting? I know 4Q tends to be generally stronger for you guys, so just trying to marry that with pipeline?
So Dave, what I would say with certainty, we’ve been very laser-focus as far as what our targeted growth was for the business this year. We’ve had – over the past two or three conference calls, we plan to grow our net loan portfolio mid-single digits. We’re on target with that. We’re very pleased with the activity, we’re on more enthusiastic not – we’re going hit our targets, but I’m more enthusiastic that we have a very low weighted average coupon in the portfolio. And as customers realize that financing costs can go dramatically higher in the future, they need to come to the table.
And we will be very active on bringing them to the table. That means you have, like I indicated, north of 4% closing, now the rate offerings its 4.5%, if that continues to significantly increase interest rates and the yield curve cooperates with this into parallel shift, funding cost can be significantly higher. So customers will ultimately have to come to the table. I want to point out a very significant driver for this company. We have a substantial amount of loans coming due in the next 36 months. If you put a reasonable prepayment assumption on that, that can be well north of $20 billion. $20 billion of paper that’s going to go from a 3.40-ish, 3.50 coupons. That some way in the mid was higher. That’s a very positive impact to stabilize some of the margin especially you had as the funding cost quality and price instantaneously.
Are you seeing any pickup in refi activity right now? Just given the uptick in well in pricing we’ve seen.
I will say it’s a significant conversation with all our customers that have large portfolios of realizing that 3% and 8% is substantially lower than where the market. So the guys that are 14 and 15 originations have had significantly just take into account that you have a higher rate environment. So if they going to go to year six, year six is much more punitive than refinancing today.
Yes, okay, great. Thanks, guys.
Sure, thank you.
Thank you. Our next question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.
Hey, good morning.
Good morning.
Good morning.
Just a couple of questions on the deposit side. First, why was this such a sharp drop in the interest bearing checking and money market accounts this quarter?
I think – so I would say naturally it’s going to be this opportunity to move some of your money into higher yielding benefit for the customer base. We are not actively trying to push our money market accounts into a – we’ll call it a premium type level of benefit for the customer, but it’s always that shift of deposit. I use the example that no matter where your money is, you can pay 6 basis points not pay attention and it’s broker’s fee, but account or you can get 2% at the same we’ll call a large broker dealer. So that is often throughout the country. At the same time, you think where treasury rates are right now, both short and medium term treasuries, is very attractive for someone who are getting a tax benefit in New York’s upstate investment opportunity by buying a treasury bill.
So, we kind of price of the treasuries and slightly south of that. So that’s where the market is and we saw some significant movement in those funds. But the bank has been really pushing towards having our customers, bring the money in, take their money out from your bank at JPMorgan and come back to NYCB at a comparable rate. So I think that’s what we’re seeing in the market. There is no magic to and we’ve been never an aggressive deposit gatherer. We have 250 branches that we’re going to actively pursue deposit growth.
If we actively pursue deposit as a thrift type company, remember retail deposits, we will be successful at the current environment. Now, what we’ve historically done successfully is bringing the deposit through acquisition. Now that’s all the long-term strategy. Hopefully that comes sooner rather than later, but we’re making significant strive in funding balance sheet now because see growth and we have been growing them many years, so we want to fund the growth.
We have more grandmothers than CEOs.
So if we look at the sharp growth in the CDs this quarter, what do you estimate came from your current customers migrating into that product versus new money raise?
Yeah, we just did do maybe the lot of work and if I’d say path 50:50 new money versus renewals and…
Okay, got you. And how do we think about the deposit cost increase you saw this quarter? Do you view that as a good proxy for what we should expect over the next quarter or two? But do they get worse from there or better? What do you – how do you see that’s playing out?
And obviously, I think right now we have – our raise – we were probably one quarter ahead of the market to bring in the money knowing we had a good November growth and the like and that will actually growing and looking at the offsets from borrowing costs versus deposit costs. But clearly we’re at the market, I don’t envision as raising rates here and we’re still concept on a daily basis bringing in significant deposit volume. So I think we had a good place with our current rate offerings and then we will adjust depending on market conditions.
Okay, then a final question. I mean you guys called out quite a few times, now this rise we’ve seen in multi-family rates and you have been in the business forever. As you look out over the next year, what impact do you think this has on volumes?
I think it will have a noticeable impact, but it will – for the people that we deal with, and then we deal with a different type owner than the market broadly. New York is a very diverse place. The sources of funding come from the world, from the biggest banks in the nation. From many little banks that have, in some cases, very, very small appetite, but they’re in the market. With all the lenders that are available here, there’s going to be a tremendous amount of activity that will accommodate the needs of new buyers and the existing people to refinance their loans. So this is going to be in the period ahead of great deal of activity. And I think for us, we expect that we will make money on this activity.
As I mentioned earlier, we have something that we’ve never had before. We have over $5 billion of participations that actually add great dollar value to us with regard to every loan that we refinanced that’s in that pool.
Yes. I would just add to Joe’s commentary that for big picture for us, it’s not just volume, it’s also rate. That’s clearly the rate is so low for the average coupon that we feel very confident we’ll grow the book, but at the same time, the real opportunity is may be re-pricing the portfolio. If this is a substantial portfolio that’s super-short duration, and like I indicated multiple times this morning, very few people with 20 stake, it’s the only stake that’s punitive. So as they come due in 2019, 2020 and 2021, it’s a substantially higher rate, assuming rates continue to be at around these levels, that’s a very attractive re-pricing mechanism for the margin.
Okay, great. Thanks for taking my questions.
You’re welcome.
Thank you. Our next question comes from the line of Brock Vandervliet with UBS. Please proceed with your questions.
Good morning.
Good morning.
Good morning.
Good morning. I just wanted to rattle through these numbers again. So the debt coming due in – at the end of Q4 is $1.4 billion, and that’s costing 160 bps right now?
Yes.
Okay. And it’s $4.6 billion, what’s that, the middle of next year?
Regularly throughout the whole year.
Okay, throughout the whole year.
I would spread it out evenly per quarter.
Okay. And the NIM guide for Q4, that is exclusive of the cost for the sub-debt issuance or does that include that?
Yes. That’s correct. We did not pro forma that into these numbers. Obviously, when we looked at the potential transaction that we would do the feed ins of that cost regarding the buyback is probably a third versus may be given the current market value. So obviously, there’s already a raise, one third will be diffused by buying back of shares.
Okay. And what do you think the rate will be on that sub debt?
We’re not going to comment on market conditions. Obviously, we are just launching the process, but I will say we’re starting to see a very attractive sub-debt market and it’s been some very good transaction in the market and there’s a substantial appetite for this type of transaction to be accomplished.
Okay. And lastly, is it reasonable – as we sort of dimension implications of that, those resetting debt levels at the end this year and next, that right now, it would be roughly between 2.20 and 2.60, depending on whether you’re funding that on a core basis or have to use some borrowings to back stop?
That’s fair. I mean, obviously, if we were to bring in, let’s say, substantial financing through the deposit acquisition, that can change the game tomorrow, but that’s not currently announced yet. But obviously, if we were to put on a strategic initiative of a deposit transaction that would clearly – would adjust that large pool of funding that has to come to be refinanced.
So we think that – it’s reasonable. That level that you discussed, but more importantly, the deposit efforts could maybe bring it a little bit lower, depending on how successfully are. More importantly on the commercial side, it was successful on bringing deposit from our commercial customers, which we have a substantial opportunity in front of us that can bring the costs lower. That’s obviously that we’ll lost of developments as we move along into 2019.
Got it, okay. Thank you.
Sure.
Thank you. Our next question comes from the line of Christopher Marinac with FIG Partners. Please proceed with your question.
Thanks, good morning.
Good morning.
So there’s long-term benefits with reducing 5% or 6% of the share count through the buyback. And I’m just curious, as you look into next year and beyond. Would you consider kind of a trade-off between less retained earnings going back to dividends or other measures and more towards buyback, just given the opportunity in the stock today in the pricing?
No, I don’t think that is where we’re thinking. Obviously, it’s in simple terms, we’re paying a 7% dividend today on every share repurchase and whatever caused us to repurchase that, we’re going to have a very favorable effect.
And as we take a look, that is a tax deductible cost of financing. Now the big picture we look at is the opportunity here that we haven’t seen, you know, this is unfortunately where the valuation is right now. This is an unique opportunity, but more importantly, the messaging of capital return back to our shareholders that had been approved by our regulators is still significant.
This is not, this is a post Dodd-Frank adjustment here. This is something that came after Dodd-Frank has changed from 50 to 250. We believe that the fact that we’re able to distribute substantially more than 100% of our capital generation back to shareholders is a testament for asset quality of the portfolio and our direction going forward.
Everything, we do going forward on capital distribution gets approved by our regulators. So, that’s a positive development. That coupled with the fact that our commercial bank has now consolidated into the community bank, is another long way to development for the company. So, we’re very excited about the future that we can start to grow our business again. And hopefully grow through acquisition will be the priority as we go into 2019.
There’s no bank in the marketplace that we could buy that is better than the bank were buying. Especially given this immense savings we get on the dividend.
Right. I’ll follow that. Thank you for the clarification. Now Tom, just a quick follow-up.
And I would just reiterate the point it has been the strategy, we have always been a very strong dividend payer and the fact that we have the ability to pay out more than 100% here is a good indication of where we see the future for the Company’s earnings and prospects going forward.
This is a unique opportunity. Obviously we’re not happy where the stock price is, but as if you could buy the shares down here, this could create some value long-term. We look at for the next five years the value versus not the next five quarters. This is a great opportunity to be able to buy back shares.
Great. Thanks again. And, and just a quick follow-up on the charter consolidation, what type of savings does that give you, is it simply small, incremental, or is there something more substantial as next year?
So, we’ve been very active on managing our cost structure. This is all part of our internal plans as we have other internal plans that we roll out as we go along to 2019, but we had $660 million run rate as we tried to become a city bank. And that obviously changed the rules, changed and we were very active on exiting the mortgage banking operations given the low profitability there. So, we shaved over 110 million, and our guide is about 100 going into 2018. And our plan has always been to the low 500 into 2019. So we’re going to be very active and very razor focused on something we can control, just cost containment initiatives as we grow the balance sheet and try to get operating leverage opportunities.
Once the margin stabilizes and we start seeing the margins hopefully grow, we will then get a tremendous operating leverage play as far as the runway for this company, but more importantly, our efficiency ratio will go back to levels that we’re used to running, which will be in the low forties, not the upper forties, low fifties. That’s where this company should be running. Unfortunately, the revenue side is depressed on the margin, but that will ultimately stabilize as the loan book yield starts to reprice into the current marketplace.
Got it. Thank you, Tom. Thank you, Joe. Appreciate it.
You’re welcome.
Thank you. Our next question comes from the line of Matthew Breese with Piper Jaffray. Please proceed with your question.
Good morning everybody.
Good morning.
I just wanted to go back to the borrowings that are repriced this year and next year and the types of borrowings you’re likely to put back on to replace them. I think you said that all-in, the cost will between 2.20 and 2.60. Looking at where classic advances are right now that seems awfully cheap. And so I’m just curious, are those going to be short duration borrowings or convertibles?
Obviously, we’ll probably look at all options within the marketplace. Like I indicated, deposit market is the most attractive market for us. So we had our, what we call, our best case scenario. We love to put all that money into deposits. When we were to go into that puttable market with the home loan bank and to other repo market, is a very active market right now both the street is still in business and we can be very active there.
And that’s going to be at that range I gave you. So no question that we have options. The best option is paying it off, right. Or actually should say the best option is replacing with someone else’s deposit base. That’s the historical strategy for the company. Now this is the end of all of the $11 billion that we restructured to do the Astoria deal. That’s behind us now. There’s a legacy that’s left to reprice. After next year, it’s all repriced. All of our LIBORs are repriced to be closed to the current market. So that’s going to abate some future margin pressure going forward.
So this is just, 2019 will be the last leg. And hopefully, as we move into the years past that, we’ll be able to bring in some real core deposits with the traditional M&A transaction, which clearly will adjust the funding side. The fact that the length and the duration is somewhere between two to three years, and we feel highly confident that we’ll be very active in the marketplace on looking at other deposit sources, either deposit acquisitions, deposit opportunities around customer base but more importantly, growth through M&A. That’s our historical growth in deposits.
That’s an important point not to miss. The reality is that over the public life of the company, which is now 25 years during November, we’ve in fact proven time and time again that we can make great sums of money for our shareholders by acquiring other banks deposit basis. And lo and behold, in this unique moment, we’re actually able to buy our own stock at extraordinary pricing. So, the multiple things that are on the horizon all add value to the currency of this company and therefore we’re very optimistic that we’re in a very unusual bad place today, but moving toward a much better place tomorrow.
Understood, okay. Maybe going back to the multifamily pricing. You noted new rates 4.50 to 4.75 is that where the majority of new loans are being booked. And you noted that it takes a while for the pipeline to kind of flow through.
Yes. You’re correct, yes.
Just curious, how long do you honor prior rate commitments for?
We have a history of being very flexible with our customers. We’re a handshake bank, we’re not putting out a derivative against that offering. We’ve been doing this for – as you know, the leader for decades. We have a handshake type relationship with our customer base. So as we look to the portfolio today, we will do, let’s say, sign up a deal tomorrow at 4.50 somewhere between the next 90 to 120 days, that will come onto the portfolio.
I think what’s important is that when you look back to the early of 2018, those 3% coupons, they’re all done. They’re all on – now we’re looking at 4%, north of 4% and above. So the most exciting and encouraging point for the loan book for July, August and September that everything closed north of 4%. Okay, that’s, all loans put on the portfolio going forward here the new rate offerings 4.5% and higher. So as we go into the commercial space, we are now branching about north of 5%. So these are all significant changes to the interest rate environment from 12 months ago, this will have significant consequences if customers don’t realize that 5% becomes 6%, they’re going to have to come to the table and we’re going to be very accommodated to bring them to the table.
So not only we’re going to get volume as a benefit for us going forward, we also assume rate is going to be a significant catalyst, seriously changed the loan book going forward, in spite of 150 basis points to the market or 14 or 15 origination that’s significant. So it’s not a small portfolio, it’s a relatively short portfolio. We have $40 billion of opportunity in front of us. And the fact that wholesale liabilities are pretty much close to the market as of the end of 2019, we looked for the benefit on the asset side.
I think if you spend some time on the asset side, you realize that every contract we write, they’ll have to be a decision made within reasonable short time periods. Worst case scenario, five years, average scenario, three years, they’ll have to come to the market and coming to the market with a higher coupon will benefit the old loan coupon and you’ll start to see asset yield start to rise.
Right. So we’re no longer booking multifamily loans with any sort of three handle on it.
That’s correct. Again, like I really treat in the call July, August, September all in north of 4%. The previous quarters we were still dealing with rates will offers in late 2017 going into early 2018 and going through the system. Now it’s all 4% north, which is a positive development for us.
Understood.
Sure.
Cobbling together the stuff that raised the buyback, the CRE concentrations, it seems like given where the payout is, you will continue post the sub that raise to march higher on CRE concentrations towards the 850% Fed limit. Is there any discussion around cutting the dividend to keep the balance sheet sustainably below 850% long-term?
I mean, we just announced a substantial capital returned to our shareholders, that should give you some good comfort that not only we can pay a very strong dividend, but we can be very proactive on rewarding our shareholders, we’re doing the right. In this environment, our dividend is very important. It’s a strategy path forward for decades and our dividend is not on the table. What’s on the table that returning more capital back to shareholders and optimizing our capital position. If that markets are relatively cheap on an after tax basis is an attractive way to buyback our shares in a very attractive price.
If the market conditions have changed and we wanted to make sure we reward our shareholders – what we’re hearing from our shareholders and our regulator is allowing us to move forward. This is a very positive signal of where we are.
Understood. That’s all I had. Thanks for taking my questions.
Sure.
You’re welcome.
Thank you. Our next question comes from the line of Steve Moss with B. Riley FBR. Please proceed with your question.
Good morning.
Good morning, Steve.
I was wondering here just in terms of the loan portfolio, how much do you expect to refinance in 2019 and kind of what is that coupon rolling off?
Right. So I would say that we have a public slides, we do give you some guidance as far as where we actually see contractual maturity. So in the next three years, 36 months, we have a 3.37 weighted average coupon that could potentially roll off or refinance away, that’s about $14 billion. At the same instance as we also run 18 months, our CPR in that book is probably about $7 billion to $11 billion. So you can arguably say, north of $20 billion over the next three years could easily be potentially repricing at coupons in the low 3s.
But that being said, we have no idea when customers will come back to the table. If rates go to 6% they come back a lot quicker. All we know with certainty that the average coupon in the portfolio is dramatically below the current market and that’s the opportunity. And customers will realize that these are not long-term data loans, the loans typically on average life is about three years.
And as each year they don’t refis one year closer to the roll and the roll is very punitive. Very few customers will pay prime plus a very large margin. So it’s not in their best interest to go to year six. So we’re very excited that customers will realize that the rate environment is what it is, it’s not 3% and 8% anymore it’s in the 4%s, and maybe in the 5%, going forward they will have to react and we will work with them very actively to move that portfolio to the market. So we’re going to be very active with our customer base to get them to the current market, which will help alleviate some of the margin pressure that we’ve seen in the past year and a half.
Okay. And then on the CD side, what is the duration you’re targeting for CDs these days?
I would say the market in general very few customers are going past two years. So I’d say on average it’s 14 months.
Okay. Thank you very much.
This has been typical for the past decade given the low interest rate environment.
Great, thanks.
Thank you. Our next question comes from the line of William Wallace with Raymond James. Please proceed with your question.
Hey, good morning, guys. Tom just – I apologize, if you answered this already, but the guide for the fourth quarter NIM down 6 basis points. Does that assume that you deploy the rest of the cash liquidity in the fourth quarter?
Portion of it, but that is depending on market conditions, there is a certain portion of that. Yes. I mean, not all of it.
Okay, thanks. And then when you talk about getting your expense for 2019 down to that low $500 million range. Do you anticipate that the opportunities to take cost out will be frontend loaded, backend loaded or kind of spread throughout the year?
I think for modeling purpose Wally, I would just go B2B throughout the year. It was very active on looking at cost containment initiatives. As I said, everything’s on the table. We’re looking at some branch opportunities, some opportunities within the overall process, within the banks coming from a future C-Corp bank. We are not C-Corp bank that does change things. We have significant opportunity amongst just the amount of money we spend over the time. On the system side, that we should get some benefits from the process. I mean, we’ve spent a lot of money and efforts to BSE-Corp bank and now that we’re going to enjoy that – the change is on regulatory. There’s been insignificant pendulum shift to the middle and banking that we hope to enjoy, going back to somewhat of a normalized level. So we look at our efficiency ratio in a book or a more normalized environment somewhere in the low 40s. We hope to get there as soon as we can.
Okay. And just for clarification, I think, you said this last quarter, but when you talk about low $500 million, you’re talking about for the full year, not a run rate – not a quarterly run rate by the end of the year?
That’s correct. Yes, again, you’re not going to see expenses start going up here. We’re going to be very, very focused on management expense structure. So if we just take where we are right now. For 2018, we will coming in a $546 million assuming with my fourth quarter guidance, my initial guidance was $566 million over that $660 million run rates. We hope to get some benefits on the FDIC, on the discipline that should be a benefit of all banks in 2019. We expect that to come. So we’re halfway there to get to the low $500 million. So we feel pretty good about that.
Okay, thanks. And then my last question is just looking at the third quarter, tax rate was significantly lower than the guidance from last quarter. Where there any credits or anything in the tax expense this quarter?
We had some stewards from the substantial tax reform from the previous year. Obviously, it was a major tax reform and we had some additional adjustments that we had to pick up for the year 2018 versus 2017. So it came through in the third quarter. But the run rate, I think, I indicated to this given will be 25.50 for the year. 25.50 normalized level, which is by the way about 150 basis points better than we expected in the beginning of the year as we delve into the tax reform act.
Thank you. I appreciate it.
Thank you. Our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.
Good morning guys. I will make this pretty quick. Just couple of quick questions, one on the – what was the blended rate on the CDs that you added in this quarter?
For the third quarter 2.31% was blended, 2.31%.
That’s the new rate, yes.
Okay. And then just, I hear what you’re saying obviously, on the multi-family side, for loan growth outlook. How are you thinking about the CRE book? I mean, it’s been down. Now it’s kind of four quarters in a row. Do you see an opportunity to reverse that and grow that portfolio or how are you thinking about CRE trends?
Hey, Collyn. I would say that, this is not by design, this is a matter of – they’re a little bit longer in average duration, right? So as other – as far as sitting on the silence, trying to get sales transactions done, accomplish a transaction, they haven’t had a little bit of a longer duration portfolio and as credit in general start to become less available for those types of opportunities, which is very super conservative on the underwriting side. So if someone’s willing to put dollars on the table that I won’t do. We will let it straight away, if it’s okay. We’re very focused on having pristine asset quality. And then whenever as every cycle change here, we should get the benefit of adding a very pristine portfolio of solid loan books. We underwrite at a very conservative level. So if there’s more dollars being offered. We’re not going to lose it because of the rate, we’re going to lose it because of dollars. So we would assume with what you see loans leaving the portfolio is not because of rate, we can be very competitive on the interest rate side. We’re not going to be aggressive on the dollars. So very conservative, that is a hallmark of NYCB.
It’s very clear. Other lenders are paid on dollars. We don’t pay our people on dollars. We pay our people on the results and for us results are not losing any money on the assets that we actually put on the books.
Got it. Okay, and then how about just your outlook on the C&I side in especially finance?
So they’ve been doing a phenomenal job, our good friends [indiscernible] really crushing it and we’re very pleased on their results. We grew that book, I believe it’s around 18%, the CAGR on that over – since we put it in session, it’s probably like a 40% some odd percent CAGR and we are very selective. I think I’ve mentioned in many conference calls, we turn down about 95% or 96% of what we see. So when we do these deals, that’s really like club deals, it’s the best asset quality opportunities and it’s relatively strong market out there. We’re very selective. So we will never change our underwriting standards there. We’re not leaving these deals. So unfortunately, they do not come with a deposit balances traditionally, if someone who has that type of business where they’re managing the lead transaction. But we definitely participate in deals were highly confident as far as duration and yield that makes sense for the bank.
So I feel highly confident these guys can grow for us, high teens which is reasonable. And that’s comes from probably zero, our total commitments all in it’s about $3 billion. So we’ve done a good job in building a book that our board in conjunction with all operators created a great portfolio. Now we could have bought that portfolio, which traded away to another bank, but we took the people that generate the assets and they’ve done a phenomenal job for the bank. And we’re very excited about it. And two-thirds of that business is a floating rate, which is good for interest rate risk.
So there’s no question. We’re talking about people that are lending at a 100% performance. Every asset that they’ve put out is 100% performance.
We never had a delinquency or late pay.
Got it. Okay, all right. I’ll leave it there. Thanks guys.
Thank you. And that concludes our question-and-answer session. I’d like to turn the floor back to Mr. Ficalora for any final comments.
Thank you again for taking the time to join us this morning. And we look forward to chatting with you again at the end of January, when we will discuss our performance to the three and 12 months ended December 31, 2018.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.