New York Community Bancorp's (NYCB) CEO Joseph Ficalora on Q4 2015 Results - Earnings Call Transcript

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New York Community Bancorp Inc. (NYSE:NYCB)

Q4 2015 Earnings Conference Call

January 27, 2016, 08:30 AM ET

Executives

Joseph Ficalora - President and Chief Executive Officer

Thomas Cangemi - Senior Executive Vice President and Chief Financial Officer

Robert Wann - Senior Executive Vice President and Chief Operating Officer

John Pinto - Executive Vice President and Chief Accounting Officer

Analysts

Ken Zerbe - Morgan Stanley

Ebrahim Poonawala - Merrill Lynch

Bob Ramsey - FBR

Mark Fitzgibbon - Sandler O'Neill

David Darst - Guggenheim

Steven Alexopoulos - JPMorgan

Peter Winter - Sterne Agee

Collyn Gilbert - KBW

Matt Kelley - Piper Jaffray

Operator

Good morning, and thank you all for joining the management team of New York Community Bancorp for its quarterly conference call. Today's discussion of the company's fourth quarter 2015 results will be led by President and Chief Executive Officer, Joseph Ficalora; together with Chief Financial Officer, Thomas Cangemi. Also joining on the call are Robert Wann, the company's Chief Operating Officer; and John Pinto, the company's Chief Accounting Officer.

Certain comments made on this call will contain forward-looking statements, which are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could also cause actual results to differ materially from those the company is currently anticipates due to a number of factors, many of which are beyond its control.

Among those factors are: general economic conditions and trends, both nationally and in the company's local markets; changes in interest rates, which may affect the company's net income, prepayment penalty income, mortgage banking income and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposit, loan and investment products, and other financial services; changes in legislation, regulation and policies; and our ability to complete the proposed merger with Astoria Financial company, which [technical difficulty] the receipt of shareholder and regulatory approval.

You will find more about the risks and uncertainties, risk factors associated with the company's forward-looking statements on Page 9 of this morning's news release and in its SEC filings, including its 2014 Annual Report on Form 10-K, its first, second and third quarter 2015 10-Qs and the registration statement filed with the SEC on December 17, 2015.

The release also includes reconciliations of certain GAAP and non-GAAP measures, which will be discussed during this conference call. If you would like a copy of this morning's release, please call the company's Investor Relations department at 516-683-4420 or visit ir.mynycb.com.

[Operator Instructions] To start the discussion, I will now turn this call over to Mr. Ficalora, who will provide a brief overview of the company's fourth quarter 2015 performance, before opening the line for Q&A. Mr. Ficalora?

Joseph Ficalora

Thank you, Kevin. And thank you all for joining us this morning, as we discuss our fourth quarter results and the strategic actions we have taken to benefit our current capital position and to increase our earnings in 2016 and beyond.

As I stated in this morning's release, the quarter was a pivotal time in our evolution, as we announced plans to engage and what will be our largest merger with Astoria Financial Corporation, together with a strategic debt repositioning and an offering of our common stock.

Together these actions will be 20% accretive to our pro forma 2017 earnings and 6% accretive to our tangible book value per share at the merger's close. The merger will enable us to leverage the cost of becoming a SIFI and it will create the pre-eminent community bank in Metro New York region, with 9.2% pro forma deposit market share.

As a result of the strategic debt repositioning, which was completed in the fourth quarter, we prepaid $10.4 billion of wholesale borrowings and reduced the cost of those borrowings by 50%. This action loan is expected to add $100 million after-tax annually to our earnings, beginning in 2016.

We also added $83.7 million more to our capital than originally expected, when the one-time after-tax debt repositioning charge we incurred in the fourth quarter was exceeded by the proceeds of our common stock offering. In addition, to setting the stage for earnings and capital growth to these strategic actions, we also set the stage by pursuing our core business model, originating multi-family loans of exceptional quality.

Consistent with the capital plans we announced along with the debt repositioning, the capital raised and the Astoria merger, our Board of Directors last nigh declared a $0.17 per share dividend, which is based on last night's closing price, represents a 4.6% dividend yield.

The dividend will be payable on February 19 to shareholders of record as of February 8, 2016. The dividend reflects the strength of our fundamental earnings, and more importantly the strategic decision to reallocate some of our capital towards the future, as we capitalize on additional opportunities for growth.

Before we get to our Q&A portion of this morning's discussion, I would like to briefly review some of the more essential features of our fourth quarter performance, after the impact of the one-time after-tax debt repositioning charge of $546.8 million and the $3.2 million of after-tax merger-related expenses we incurred.

Excluding these items, we generated non-GAAP earnings of $145.2 million or $0.31 per diluted share in the fourth quarter, providing a 1.24% return on average tangible assets and a 17.26% return on average tangible stockholders equity. For the 12 months ended December 31, 2015, we generated non-GAAP earnings of $502.8 million, providing a 1.09% return on average tangible assets and a 15.01% return on average tangible stockholders equity. The 12 month non-GAAP amount was equal to $1.11 per diluted share.

In accordance with accounting guidance, the bulk of the debt repositioning charge was recorded as interest expense, thus impacting our net interest income and margin with the remainder of the charge being recorded in non-interest expense. Excluding the debt repositioning charge, we reported adjusted net interest income of $324.6 million and adjusted net interest margin of 2.95% in the fourth quarter of 2015.

Prepayment penalty income accounted for $25.9 million of interest income we recorded and contributed 24 basis points to our fourth quarter margin. Excluding the impact of debt repositioning charge as well as the contribution of prepayment penalty income, our adjusted net interest margin amounted to 2.71% in the fourth quarter of 2015.

Moving on to our balance sheet. Held for investment loans rose $2.7 billion year-over-year to $35.8 billion, representing an increase of 8.3%. Multi-family loans accounted for $2.1 billion of the increase and totaled $26 billion at December 31. The growth of our portfolio is even more substantial, when you consider the $1.9 billion of multi-family and CRE loans we sold over the course of the year.

We also realized meaningful growth in specialty finance loans and leases. In less than three years our portfolio has grown to $882.9 million and the quality of that portfolio has been consistently pristine. While the growth of our loan portfolio in 2015 was impressive, we nonetheless maintained our total assets below the current threshold for a SIFI bank. By the way, it's a four quarter average of $50 billion. So the fact that we're over $50 billion is not relevant until added to the next quarter's numbers.

Notwithstanding the fact that our assets totaled $50.3 billion at the end of December, our fourth quarter average look back was below the $50 billion mark and expected to be there at the end of this quarter as well. Reflecting this goal, which I've spoken to extensively over the past four quarters, we sold $1.2 billion of multi-family loans, largely through participations and $632.7 million in the commercial real estate loans in much the same way over the course of the year.

Absent the sales, we engaged in last year, the multi-family loan portfolio would have grown to $27.2 billion, representing a year-over-year increase of 13.6%. The growth of our loan portfolio was attributable to the record volume of loans held for investment we produced in both the quarter and the year.

Originations of held for investment loans totaled $12.7 billion in 2015, including $3.7 billion in the fourth quarter, and primarily reflecting a record amount of multi-family loans. In 2015, originations of multi-family loans amounted to $9.2 billion, including a record $2.8 billion in the last three months of the year.

The volume of CRE loans we produced was also very substantial with originations of $492.9 million in the fourth quarter, bringing the 12 month total to $1.8 billion. As of this morning our pipeline of loans was approximately $2.4 billion, with loans held for investment accounting for about $1.9 billion of the total and one-to-four family loans out for sale accounting for the remaining $500 million.

Like the record volume of loans we produced and the loan growth we accomplished, the quality of our assets was also exceptional in 2015. At the end of December, our non-performing non-covered assets and loans were at the lowest levels we've reported since the second quarter of 2008, in other words, 31 quarters ago.

Non-performing non-covered assets decline $78 million or 56.2% year-over-year to $60.9 million and represented 0.13% of total non-covered assets at December 31. Our non-performing loans fell significantly from the year-over-year balance. The bulk of the reduction was in other real estate owned, reflecting the sale of two ORE properties, which generated net gains of $12.4 million. ORE declined to a modest $14.1 million at the end of the year.

While there are other aspects of our results, of which I'd like to make mention, I expect that there are many of you with questions you'd like to ask. Accordingly, 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. Kevin?

Question-and-Answer Session

Operator

[Operator Instruction] Our first question today is coming from Ken Zerbe from Morgan Stanley.

Ken Zerbe

Tom, first question for you. Just in terms of the debt restructuring, could you just review the timing of when that was done? And also, when we think about net interest income heading in the first quarter, what level should that be, like how much is already in this quarter's NII number?

Thomas Cangemi

So obviously, the restructuring was ongoing from the day of announcement up until literally the last week of the closing of the year. So I'll give you a specific guidance for the quarter, being the impact on the fourth quarter of the debt restructuring. So when you look at the total margin after you breakout prepayment activity, both on DUS payment as well as multi-family and CRE credits, margin was 2.71%. If you back out the impact, if we were to not have the restructuring at all in the quarter, the margin would have been 2.37%.

If you recall back, when we gave guidance at the end of our Q3 conference call, we guided around 2.34%, that's a little up about 3 basis points ahead of management's expectation for Q4. That being said, I'll give specific guidance for Q1, given that we have a material change in our liability positioning and our guidance will be approximately 2.71% for Q1, which will be up 34 basis points off the core NIM x prepay and DUS.

Ken Zerbe

So 2.71%, so relatively flat. So it sounds like most of the benefit was already in this quarter's numbers?

Thomas Cangemi

There was a lot of them. Obviously, it takes an increase in interest rate at the end of the quarter that also impacts the Q1, the increase of interest rates and the short end of the curve in Q1. So that's also taken into account for the 2.71%. Correct.

Ken Zerbe

Second question is just in terms of expenses, I think, obviously a little bit higher this quarter, but you mentioned in the press release something like, I think, it was $5.4 million of, and I quote, non-income related taxes on the debt restructuring?

Thomas Cangemi

Yes.

Ken Zerbe

I guess two different questions. One, could you talk about guidance for expenses going forward? But also, two, how much sort of non-called-out unusual expenses are still in numbers that you did not back out of your [multiple speakers].

Thomas Cangemi

So look, obviously, we didn't had income in the quarter, we had a loss. So when we look at the accounting on taxation, we have a tax item that goes into the G&A or into the tax line item, which is $5.1 million in the quarter. So that was obviously a direct correlation to the repositioning charge. We had a substantial loss in the quarter. Obviously, that is you want to back that out. As far as guidance for the next quarter, we're guiding approximately on expense side about $156 million for Q1.

Ken Zerbe

And how much was professional fees sort of, call it, investment banking fees related to all this or was that [multiple speakers]?

Thomas Cangemi

They haven't hit yet. That will be overtime. Obviously, that's based on success of closing of the transaction. The most of the merger-related expenses are going to be ongoing. We had some in the fourth quarter, as we indicated $3.8 million that will be ongoing under the accounting standards, as we recognize the actual payment of those expenses upon the closing of the transaction.

But as far as for the quarter we had higher professional fees. In general, I'd say anywhere from $2.5 million and $3.5 million of additional professional fees, as we continuously go through a maturity toward a SIFI bank in the quarter.

Ken Zerbe

That's in the $156 million, perfect.

Thomas Cangemi

Yes.

Operator

Our next question today is coming from Ebrahim Poonawala from Merrill Lynch.

Ebrahim Poonawala

So I guess, the first question, if we can talk about just -- thanks for sharing the pipeline at the end of the quarter. It's obviously down compared to where we were in October. As we look into '16, like can you sort of comment in terms of what's your outlook on balance sheet held for investment growth in '16 in the context of the cooling that we've seen at the high-end condo market in New York? And I recognize you are not a big player there, but just in terms of as you look into '16, based on that the regulatory and sort of guidance that came out in December scrutinizing banks on CRE. How do you think about, Joseph, held for investment growth for the balance sheet?

Joseph Ficalora

So let me start by saying that obviously we do not want to be aggressive in the first quarter. The most relevant consequence of this quarter's activities would be somehow we tripped over the $50 billion plateau, so we're definitely not going to do that. Now, that doesn't mean the whole year is going to be represented by what we do in the first quarter. It's only the first quarter that is going to impact the timing of when we're going to be SIFI oriented. Whether we close the deal with the Astoria by June 30 or June 30 of next year, it has no bearing. It's the size of the company on a fourth quarter average, and we're going to do that as of April 1 and beyond.

So the important thing for us is that we're very consistent in our business model. We are not affected by the high-end of the New York market. We're not being affected at all by some of the activities of the aggressive players in our market. We in fact are very, very consistent with how we lend and our exposure to our markets in the best of times and in the worst of times is consistently better than that of our peers as well as those that are not necessarily very prudent about how they lend in New York.

So the New York market is going to change over the period ahead, but we will continue to have a growing share of this market in the period ahead and we will have consistency in our performance metrics, despite substantial downturn in the economics of New York city, should that occur. Every single turn, including the largest most recent turns, we've had substantial continuance of our performance, because we lend on a discounted cash flow that doesn't change during the cycle term.

Thomas Cangemi

Ebrahim, I would just add to that, obviously, we've been very clear, when we were going to -- when we put up the Astoria transaction and the capital initiative as well as the repositioning. We made it crystal clear that we're going to resume our growth. So obviously, we had substantial growth in Q4, as you recognize, putting the balance sheet over $50 billion.

And the four quarter average still gives us room, so we're looking at another good growth quarter and our capacity is about a $1.5 billion, if you look at the four quarter mathematics going into Q, finishing up Q1 into Q2. But from there we're going to resume our growth, and we're very confident that this company has the ability to grow its portfolio. And if you look at the press release and you back out the loan sales, our net loan book for multi-family last year grew 13.6%. And as Joe indicated, it's predominately rent-controlled and stabilized cash flows.

Ebrahim Poonawala

And next question just in terms of on the other side of the balance sheet. The loan to deposit ratio went up, I believe 233%. Like how should we think about in terms of deposit growth as the year progresses? And will that come in conjunction with sort of a trending higher in the cost of deposits?

Thomas Cangemi

So what I would say there is, we're going to be very proactive in the market, the bear market. We have a substantial acquisition that's coming on to our balance sheet and hopefully short order. So that our company's history of growth through acquisition and we have the largest deal the company has announced in the pipeline. So that's going to afford a significant flexibility for cash flow management as well as changing some of those numbers overtime, given that the cash flows that are coming back to the institution combined will be very attractive to fund on balance sheet.

And there's no question that the marketplace is very volatile and we're going to look at all opportunities to fund our balance sheet. But more importantly, our growth through acquisition strategy, which is in place and we have a pending transaction and we'll look forward a very strong flexibility in the quarters ahead.

Joseph Ficalora

I think it's really important to recognize what Tom just said. Our business model is to create significant liquidity in the closing of a transaction and significant deposit ratios improvement in the closing of a transaction. That will be the case here. It's just a matter of when it happens, but it's inevitably in the foreseeable future. We're only talking quarters down the road we'll have a very substantial positive.

Ebrahim Poonawala

On this sort of if I could back on one last question to that. You guided for the fourth quarter close of the deal, given sort of recent M&A announcements we've seen the smaller timeline. What's the likelihood that we see a close somewhere around June or July of this year around the deal?

Joseph Ficalora

Sorry, Ebrahim, what I would say is obviously it's a subject to regulatory approval. And obviously, it's beyond our control. We're going to work real hard to close as soon as possible, but obviously it's subject to regulatory approval and we were conservative. Obviously, the merger agreement provides to December 31, 2016 close, so we were conservative.

Operator

Our next question today is coming from Bob Ramsey from FBR.

Bob Ramsey

First question I have for you is on the expense guidance. I know you all pointed to $156 million. It seems like a bit of a step up from I guess the last guidance you had given was $148 million. Just curious on the $156 million, it does exclude the CDI amortization?

Joseph Ficalora

Yes.

Bob Ramsey

And what is it that's driving that higher, is it mostly the investment as you build towards a SIFI bank or are there are other pieces in there?

Thomas Cangemi

Obviously, we typically have a higher Q1 anyway, given they have the taxes and payrolls in the given quarter. So hopefully we're conservative there. But there is no question that we continue to add additional cost as we matriculate into a SIFI bank, and as professional fees involve. So I think we hope to be conservative. I think $156 million sounds pretty reasonable based off the previous quarter and that's our current guidance in the short-term.

Bob Ramsey

And then on net interest margin, I know you all mentioned that the impact of a little bit increasing rates was a piece of the margin guide. Just kind of curious, if you could isolate that part of it, how much of an impact the shift in rates had on the margin or had and will have in the first quarter?

Thomas Cangemi

I would say I'm not going to give you a specific number. But clearly the fourth quarter we had, I'd say, a week of hitting the home loan bank, short-term borrowings was immediately affected; some of our short-term instrument that we have in our balance immediately affected; and some of our deposits balances will be affected in Q1 over the passage of time. So we accounted for a true impact in Q1, and that's being substantially offset by the $10.4 billion repositioning, which we pick up significant reduction on cost of funds.

So all that being said, if you look at where we are as of Q4 and you want to normalize that margin at 2.37% x the repositioning, it should be around 34 basis points to 35 basis points higher. Q1 was scheduled at about 2.71%. But again, it wasn't a material impact in Q4, given the timing of the first movement. By this time, it is more profound in Q1. But I'm not going to break out the amount.

I think the total amount is between $36 million to $38 million of the impact, assuming we didn't do the restructuring at all for the fourth quarter. But that was not -- as I indicated previously, it was ongoing from the day of announcement up until the last week of the closing of the quarter. So we were opportunistic, depending on market conditions.

Bob Ramsey

And you mentioned maybe a little bit of deposit pricing pressure in the first quarter. Could you talk about where you all are seeing movement in pricing?

Thomas Cangemi

I think, look we have, again, lower rates again. I mean this is a very unique environment, again. We have the first fed increase, and given to where the treasure curve rates are dramatically lower, where we were going into December. So I think as far as our business model, this will probably be positive in the short-term for our funding cost. But we're trying to be conservative here.

We have in our own internal model a couple of rate hikes, but who knows what happens in '16. But we runoff the Bloomberg forward curve and that was first half past March. So for the quarter we had that one increase, which took place in December. And for our internal modeling, a second, we have a couple of rate hikes based on the Bloomberg forward curve going out to '16. I would say that in general that this reckless environment for retail deposit holders, there's not a lot of additional increases expected in the short-term, given the treasury curve and interest rate as a whole.

Bob Ramsey

Last question. On the mortgage servicing income, just curious if you can break out the actual servicing fees versus maybe any change in MSR valuation this quarter?

Thomas Cangemi

Sure. So for the quarter, we had $13.6 million in loan servicing fees that came into income. The net change of MSR was a negative $7.3 million. And total, just to give you the origination on as well, mortgage origination revenue was $5.9 million. When you total those numbers up, you get to $12.3 million, which is on the P&L, total revenue. So up about 64% over a very dismal Q3. So again, pretty much in line with what we expected. We thought between $10 million to $13 million of mortgage banking revenue. In Q4, we came in at $12.3 million.

Bob Ramsey

And an outlook into the first quarter?

Thomas Cangemi

Again, seasonality is always a big issue. But I'm going to say, flat-to-stable, given the interest rate environment interest rates continue to grind lower, we may see an uptick. So it's a very challenging mortgage market out there. There's only so many times the customers go into refinance.

Operator

Our next question today is coming from Mark Fitzgibbon from Sandler O'Neill.

Mark Fitzgibbon

Just one question to clarify on the margin. Tom, your guidance of 2.71% for the first quarter incorporates the full impact of the restructuring. But I didn't catch whether you said that was exclusive of prepayment penalty income as well?

Thomas Cangemi

We never guide for prepayment activities. That's assuming no prepayments coming in. Obviously, we have a substantial portfolio, where every loan that we underwrite has the prepayment penalty assessment built into their loan doc. And we're also enjoying the benefit of significant DUS prepayment activity through the portfolio, which is $2 billion. So that's always a additive number that we do not guide. So that excludes any prepayment activity and any activity from the DUS portfolio.

Mark Fitzgibbon

And then the second question. I wondered if you could share with us the approximate duration of the new $10.4 billion of borrowings that you put on.

Thomas Cangemi

Yes, sure. It's approximately three years.

Mark Fitzgibbon

Three years?

Thomas Cangemi

And we took that all the putable risks in the $10.4 billion and we went with stated maturities in the form of bullets.

Operator

Our next question today is coming from David Darst from Guggenheim.

David Darst

Just following-up on the borrowings. What percentage of the $15 billion is overnight?

Thomas Cangemi

I'd say probably it was about $3 billion. But, David, bear in mind, we have a material acquisition that's pending. And if you go back in the original release that we put out on the transaction, we still have the flexibility to look at the Astoria combined with NYCB. And in that guidance that we gave on consolidation, we plan on looking at their liability base consolidated and obviously pushing out some more liabilities upon closing. We're just being very flexible right now, pending the transaction.

David Darst

As you restructure their balance sheet, you're going to then extend again their borrowings to build on there?

Thomas Cangemi

Yes. And again, that's more of a mark-to-market opportunity. And obviously, they had short liabilities as well and while we assess a consolidated company and look at the markets as they come at that point in time, and they have a marked balance sheet. So it has a lot more flexibility, but it all goes into capital.

Joseph Ficalora

The commodity company and the quarter that follow the close is going to have a great deal of flexibility.

David Darst

And so what point would you begin building your liquidity position and increasing the size of securities portfolio. Would you do that before the deal closes or afterwards?

Thomas Cangemi

So again, this all goes back into the whole LCR concept and when it implies to us, and obviously we're very focused on that. That was operationally, our systems are in place, our people are hired, we've set as a platform, we are prepared to move forward. There has been some new guys, they came out of the fed, which looks at bank that are crossing over the $50 billion, and it's us for comment, I believe February 2 is when the common period expire, and understanding that they're going to push that off for a year. As far as full implementation assuming that goes passed, but we're prepared to move in the summer.

And more likely than now we would prefer to move into the Astoria transaction, because we get a lot more flexibility. But obviously, this amendment on the modification of LCR goes to [ph] February, it gives us an extra year of putting on these securities, if that's the choices that we do. Obviously, having a large balance sheet of flexibility on LCR, we're having many more maneuvers into the Astoria transaction to solve that equation.

David Darst

But what you're propensity to build the securities portfolio in the first and second quarter?

Thomas Cangemi

Again, I think it's going to be depending on LCR. Obviously, as Mr. Ficalora indicated, the most important decision this quarter is to not step over at the SIFI thresholds, because we're at the finish line here. So we want to go to the next quarter. Our intention and hope has always been to be in the second quarter of 2016, when we cross over. So this is our final quarter.

With that being said, marketing condition securities are not that attractive. If anything we're receiving good cash flows and being paid down, helping us growing, the management, that balance sheet below the threshold. Obviously, when we cross over, we'll look at the market and the securities may be an option. And predominantly generally for LCR and not so much the collateral reasons, because you structured a liability basis, it's not a mandate as we stand today, but more LCR-driven going forward.

Joseph Ficalora

But it's really important to recognize that the way the rules are written and the way we are structured, regardless of the date that we close the Astoria deal, we are not going to be to subjected to the full impact of being a SIFI until '18. So we're going to go over the number by the second quarter of this year. And whenever we add Astoria to the bank, we're still going to be subjected under the rules to meeting all the requirements of being a SIFI during the year '18.

Thomas Cangemi

That would be the CCAR requirements. So we'll actually file our CCAR plans in 2018. That's our expectation.

Operator

Our next question today is coming from Steven Alexopoulos from JPMorgan.

Steven Alexopoulos

I'd like to start with the $156 million of expenses, Tom, that you guided to in the quarter, which is up a $2 billion. As you look at the process ahead right in the year ahead to become a SIFI, is there any need for that to step up materially or do you see that as a pretty good run rate?

Thomas Cangemi

That's the run rate. Obviously, I'm accounting for that step up. We're being very cautious. As I said, were coming to the goal line here. So we are planning as we cross over. So that is in my numbers.

Steven Alexopoulos

And then separately on the $0.17 dividend, which was declared. Here you clear that, we're not going to go through CCAR until 2018. Well what's the process at this point to get that dividend approved?

Thomas Cangemi

It's very similar to what we've done in the past. The regulators review what we're going to do before we do it. And certainly before the Board acts, there has been clarity with the regulator that we are doing the thing that the regulator wants.

Joseph Ficalora

But Steven to be technical, we have the fed non-objection for the next probably four quarters. It was obviously the impact of -- and we went through that process, and obviously we announce the dividend.

Steven Alexopoulos

And then just finally one technical one. So I guess in terms of participating out loans, first quarter '16 will be the last quarter you need to do that to manage the balance sheet and then you could just hold everything on in portfolio.

Thomas Cangemi

Well, again, I would say from time-to-time we're going to be proactive. We have a great opportunity in front of us here, depending where interest rates go. We have a unique position in the marketplace. And the gain-on-sale moment have been very attractive for the company and we come to the market on time-to-time. You can expect more activity this quarter, obviously, to straddle the SIFI threshold. But going forward, we're going to be opportunistic, depending on market conditions.

Our growth has been very strong over the years. And if we back out the loan sales, this portfolio is growing at, we'll call it, low-double digits in a very unique environment, but predominantly in the rent control and stabilized marketplace, and we're very confident in our asset quality metric. So we have a unique position that we can capitalize on.

Joseph Ficalora

We're very, very consistent at how we lend. It's extraordinarily important to recognize that depending on the marketplace is not going to drive how we lend. We lend the same in strong markets and in weak markets. We are very conservative. And the results demonstrate that even as the markets change dramatically. We have significantly better performance metrics.

Thomas Cangemi

So Steven, the one thing I would add, there is truly a CRA need in the markets that we serve, and we have substantial CRA capacity based on our origination. So when we do sell these and participate in these types of credits, there's a uniqueness behind the asset classes that has the CRA attributes, which many banks would need to have in their balance sheet. Yes, 86% of the assets we have are in LMI-qualified areas.

Operator

Our next question today is coming from Peter Winter from Sterne Agee.

Peter Winter

I was just wondering, now you've had another couple of months to look at the Astoria acquisition. I was just wondering how you feel about that deal, any positives or negatives, and then the opportunities to maybe exceed the cost take-out, which is 40%?

Thomas Cangemi

So obviously, we're in registration, we're going through the process and we're not going to change our initial guidance of assumptions. But we're very pleased that the M&A environment has continued to be robust. I mean, obviously, it was a very large announcement yesterday, which leaves you to believe that there is an understanding that M&A is now a part of the fabric of the market, and I think it's a positive.

With that being said, we're working real hard to get everybody onboard, so we can close the deal based on our expectations and timeframe, and we're not changing our guidance. But I will tell you that obviously historically we've never missed a cost savings estimate in the history of this company and we're confident on our approach.

Peter Winter

And just one small item, but can you just give an update on the taxi medallion portfolio?

Thomas Cangemi

Sure. So obviously we have a slight decline in portfolio. Where we stand as of today, we're approximately $157 million in total of the loan portfolio that's 226 units. We've had our first charge-off historically, it was $30,000, so it's insignificant. But as far as the total non-performance, it's three loans, about $1.8 million and the rest is 100% performing. So we have a very strong portfolio.

I would say the positive aspects of it, there's been some transactions in the previous months that were north of $700,000 and we have a very strong position of New York City medallion. So all our medallions are in New York City, and we feel fairly confident that we keep moving along here. The portfolio was approximately 1.3% of the total loan booking, very manageable.

Joseph Ficalora

And as is always the case, we're very conservative in the origination of the loans. So OREO CDs are very low. Obviously, the portfolio is performing extraordinarily better than most portfolios that are out there.

Thomas Cangemi

And I would say that the vast majority, Peter, of the medallions are individual medallion loans. I think it's about 65% is the individual, the rest is mini fleets.

Operator

Our next question today is coming from Collyn Gilbert from KBW.

Collyn Gilbert

Just a quick follow-up on the taxi medallion comment. What reserve do you guys are you holding against that $157 million?

Thomas Cangemi

So look, we don't give specific reserves on our portfolio ever. It's just something that we just don't do by a matter of policy. But again, looking at the delinquencies, we have three loans that are non-performing, the rest is 100% performing. And we believe that we have more than additive reserves in the portfolio, when we view it every quarter.

We've been more specific, given the change in the environment, so every quarter as we watch the transactions hit the marketplace. When these things go to the market, they move quickly. They go to auction, they're gone, they're sold at some clearing price, and we monitor that every quarter. So I'm not going to give you specific reserves of valuation there, because we just don't do that as a company policy. But we're very confident that given the quality of the nature of the portfolios, very uniquely different as far as the concentration, the 100% New York, and we're very confident that it's very manageable.

Joseph Ficalora

Tom recognized that with all the discussion on medallions and all the losses being taken by our peers on medallion, over the course of this period, this last 12 month period, we've had a total charge of $30,000. So the numbers again demonstrate that even though we may be a New York lender and we may be a medallion lender, we do lend differently than others.

Thomas Cangemi

And Collyn, I want to thank your firm for doing a wonderful piece on that industry. It was well-written.

Collyn Gilbert

Moving on from that, because it's such a small part of your business. You talk about liquidity event coming with Astoria and optimizing that franchise. How do you see sort of a longer-term or what do you think, Tom, the longer-term optimal loan to deposit ratio is?

Thomas Cangemi

I will tell you, in this environment this is probably our most improved level than many decades for the company. So historically, the company has always had a much higher loan to deposit ratio. Obviously, as we graduate to a much higher balance sheet position and we deal with CCAR planning and being a SIFI bank, we're going to pay attention to that. But we're a growth through acquisition company and this is what we do. And hopefully, as we move forward, we continue operating our business model as we continue to bring on the positive acquisition overtime.

That is always being adjusted by each and every transaction that we do. So it does not in our model represent the kind of risk that it might represent others. We're going to alter that every time we do a deal. So Collyn, after the AmTrust transaction, we really haven't done a material deal. We've been grinding along on competing into the positive market, and when you compete those it does impact the cost of funds.

However, we have the largest transaction we have publicly announced in the pipeline. So that's going to give us lots of flexibility and we're very pleased with that. And as far as the Astoria deposit base, their cost of fund is significantly below our cost of fund. So there is opportunity there. And given our market share of medallion, in particular, significant benefit that we believe we can combine as far as maximizing value within our current markets we serve.

Joseph Ficalora

It may very well be one of the best deposit transactions that we've done.

Collyn Gilbert

No, I understand. And you guys, qualitatively you've laid this out clearly and strategically. You've been very clear. I'm just trying to get a better sense quantitatively, as you look and recognize the environment that we're in, where you think that number would be by the end of next year, given everything that [multiple speakers]?

Thomas Cangemi

Well, obviously, it's going to be very impactful where rates are, right. So if you look at where funding is, and we probably said this in numerous calls, there is an assessment on funding outside of retail funding and deposit funding. So there is a cost and you see in our cost structure, we are paying a price for wholesale liability.

There is a higher assessment cost. And obviously, bringing in deposits will bring that assessment slightly down, given that we're not paying that elevated assessment, as we grow the balance sheet. So clearly we're going to be opportunistic in the market. And if rates for some reason continue to grind lower here, that just makes it more attractive for us to bring in deposits, if we have to.

Collyn Gilbert

And then just a question on kind of the reserve trend and provisioning trend. I mean I understand, again, I totally get the quality of your portfolio and your historic lost rates. Understand all of that. But where do you see that reserve trending over the next two years, as we see perhaps a change in some of the economic environment or certainly maybe --

Thomas Cangemi

So Collyn, obviously, it depends on losses, but look at our performance metrics, look at our delinquency, $60 million of total non-performing assets on a $60 billion balance sheet. I'm not sure if there's many institutions that have those types of statistic and we look at that on every quarter, as we go through a process. And obviously it's based on our loss expectation, and we're very mindful of that. As we grow the balance sheet, we continue to do that assessment. But the company has a long-term, multi-decade history of very unique asset quality metrics and that's been factored into our reserve analysis.

Collyn Gilbert

I mean do you think you can continue to believe that -- I mean, again, I'm trying to [multiple speakers].

Thomas Cangemi

I'm not saying -- again, I haven't given guidance yet for the year. We're in a process of forecasting and budgeting right now, as we speak today. And clearly, for growing the balance sheet materially, we will look at the reserve requirements on new assets that we put on. But in the past year-and-a-half, almost two years, the balance sheet really hasn't grown much.

We saw a lot of participations and our non-performance has dropped substantially. So we're down to levels, pre-crisis levels, and that balance sheet is substantially larger. So we're very confident on the portfolio, and we feel very good about the books and we're very proud to have a $60 million non-performing number on a $50 billion balance sheet. So as indicated, we have long track record, multi-decades of asset quality metrics that we believe are unique and different to the marketplace.

Joseph Ficalora

So in the last 12 months, Collyn, we had in excess of $12 million in recoveries on the disposition of assets. So the reality is, our metrics are discernibly different than others. And how we reserve, obviously, is very conservative and takes into account the determinable risks that we have in our portfolio. But our risks are substantially below those of others and that demonstrated time and time and time again.

Operator

Our next question today is coming from Matt Kelley from Piper Jaffray.

Matt Kelley

So right now, you have a $6 billion securities portfolio, Astoria has about a $3 billion of a portfolio. So just kind of pro forma today, call it, $9 billion. If the deal closes on time at the end of this year, what would you anticipate the size of the securities portfolio being? And then second question, what would you anticipate kind of the pro forma type of yield that you envision, assuming that there is some LCR transition type of purchases on the way?

Thomas Cangemi

So, Matt, bear in mind, their balance sheet gets mark-to-market, so whatever the market will prevail at that in point that's the yield on Astoria. So you see where our yield is, is to bear in mind our yield is slightly elevated this quarter, because we had a substantial amount of prepayments on DUS portfolio. When you back that out, the yield is probably up a 2 basis points. So you can carve into the number. And I think you'll have to really depend upon where the market is in interest rates for the securities portfolio for Astoria at the time of closing.

With that being said, and I don't want to go over this again, but we're going to need to soften LCR, and having that portfolio gives you more flexibility without going into the market, so we're transitioning. So depending on where rates are, that's where our securities yields will ultimately fall out. You have the short-term curve, you have the long-term curve that you could maximize value in LCR.

You have the liability base, where you can spend some time on trying to extract value from LCR. So clearly, it's going to be part of our exercise. We're not in a position to give guidance, because it's unknown. But there's no question that if rates are higher, we'll have a higher yield.

And then you can come to the mark-to-market, which will go through the capital on their end, but we will be there putting on securities of high yields. Right now yields are low and the market yields are extremely low, when you look at the backend of the curve. So you really have this uniqueness of, again, low for longer in the marketplace.

Joseph Ficalora

Well, I think the important thing is that we'll have all of '17 to actually adjust our numbers.

Matt Kelley

I guess, what I was thinking about is, I guess, option A would be you take down your DUS bonds and just replace them with something more liquid, lower yielding or you could just add to the portfolio more LCR compliance-type assets, something bigger than $10 billion. What type of pass do you think it would go down?

Thomas Cangemi

We have multiple pass. We haven't publicly disclosed the fact that we're ultimately execute on, but the DUS portfolio happens to be a phenomenal performing portfolio. Most of them were either at well below par as far as our purchase price with significant yield maintenance opportunities and we've been enjoying the benefits of that.

Think about the fact that you have your credit, they get wrapped up into the security and they have yield maintenance. And as they transact and they sell their building in, which is in the market, still a market, where activity is on the sale side, we're enjoying very unique returns on that portfolio, which is substantially better performing in traditional portfolio.

The negative is that's a level II asset, not a level I asset. But it's a fabulous portfolio and we enjoy the benefit of a high return on that portfolio. But it something we will consider from time-to-time, when we get closer to filing for LCR.

Matt Kelley

Over the next year or two, would you envision raising any preferred capital, putting some preferred into the capital stack and maybe using the proceeds of that to buy some LCR compliant type assets?

Thomas Cangemi

Again, obviously, we don't comment on future capital issues, but there's no question at the company's capital stack. It's fairly clean. We have no sub-debt. We have no preferred stock. The trust preferred portfolio has been more that stays out on the Basel III going forward. So clearly we have a very simplistic capital stack and we'll be opportunistic depending on the market conditions.

Matt Kelley

And then a question on just the reserve policy. I think we're all pretty clear on your views on what type of provisions are needed for your core rent-stabilized, rent-controlled multi-family type portfolio, which has had great credit metrics through cycles. But I'm curious on just the commercial real estate and also the specialty lending segments, what type of incremental provision do you think is necessary on those books?

Thomas Cangemi

So we look at the CRE book as, historically, the loss content in that is lower than our traditional multi-family. Why is that? A substantial amount of credit that are associated with 1031 exchange business. So the LTV by default are significantly lower that there are predominantly people parking their network that they've created in a different form of asset class. We have a high concentration of that, which always -- when we stress that to portfolio and you look at the loss content, it actually shows up to be a much lower than our traditional multi-family rent-controlled number.

As far as specialty finance, we have a portfolio that has never missed their payments. It's 100% performing. We've never had a delinquency. Now, we have a reserve that we've allocated, as we build the business. But again, our performance metric, we're super senior secured. We turned down 97% of the business that we see. We are very selective and it's a new business. So the growth looks significant. But remember the market is huge and we're playing at a very small level.

So we're taking pieces of deals that were highly confident that we're in a very unique position not to lose money. And prior to the team coming on board has done a fabulous job for us. I think their lifetime losses and they've put on billions of dollars. I think its $1.4 million and that worth one credit doing a great recession.

So we feel pretty good about the specialty finance business. We didn't give you a whole a lot statistics about it, because obviously the percentage is smaller, but we're getting closer to $1 billion now, and obviously the return on that business to watch is very high. A lot of it's a floating rate and we're enjoying the fees on that business.

Matt Kelley

And then just last question. Just so we're clear on the progression of the size of the balance sheet. Do you anticipate going back under $50 billion in the first half of '16 is that kind of what I heard earlier?

Thomas Cangemi

No. Let me be crystal clear. It's a pretty simple math. We have about $1.5 billion of net growth we can put on without stripping the SIFI cap, that's Q1. We've said in the third quarter, when we announce the deal, any deal that we were going to announce we were going to increase our growth to cross over in the second quarter of 2016.

So this quarter that we're in right now, we still have room for growth, expect growth. However, expect is not the cross over and tripped ourselves into SIFI qualification. In second quarter a SIFI bank by definition by the fourth quarter look back, it will be applicable in the second quarter, not the first quarter. And then from there we'll resume our growth as a company.

Operator

That is all the time we have today for questions. I'll now turn the floor back over to Mr. Ficalora for some closing comments.

End of Q&A

Joseph Ficalora

Thank you again for taking the time to join us this morning. We look forward to discussing our first quarter 2016 performance with you in April, and see the initial beneficial results on the actions we spoke about on this call today. Thank you very much.

Operator

Thank you again for your participation in New York Community Bancorp's fourth quarter 2015 conference call. You may now disconnect your lines.

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