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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, this is Sal DiMartino, Director of Investor Relations. Thank you all for joining the management team of New York Community Bancorp for today’s conference call.
Today’s discussion of the company’s first quarter 2020 performance will be led by President and Chief Executive Officer, Joseph Ficalora and Chief Financial Officer, Thomas Cangemi, together with Chief Operating Officer, Robert Wann and Chief Accounting Officer, John Pinto.
Today’s release includes a reconciliation of certain GAAP and non-GAAP financial measures that may be discussed during this conference call. These non-GAAP financial measures should be viewed in addition to and not as a substitute for our results prepared in accordance with GAAP. Also, certain comments made on today’s conference 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, uncertainties, and assumptions that could cause actual results to differ materially from expectations. We undertake no obligation to and would not expect to update any such forward-looking statements after today’s call.
You will find more information about the risk factors that may impact the company’s forward-looking statements and financial performance in today’s earnings release and in the company’s SEC filings, including its 2019 annual report on Form 10-K.
To start today’s discussion, I will now turn over the call 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.
Good morning to everyone on the phone and on the webcast, and thank you for joining us today. I hope that all of you are healthy and safe during this unprecedented time. Our immediate thoughts go out to all the individuals and communities impacted by this pandemic. We are also very grateful for the healthcare professionals and all those on the front lines who are battling this crisis every day.
Before I discuss this quarter’s performance, I would like to cover these two topics with you. First, I would like to share with you some of the actions we have taken across the bank to deal with the COVID-19 crisis. It goes without saying that the health and wellbeing of our employees, customers and shareholders is of the utmost importance to management and the board of directors. The company was very proactive during the very early stages of the crisis and immediately enacted a business continuity plan and pandemic preparedness procedures. By mid-March, close to 100% of our bank office employees were working remotely. In addition, we temporarily closed all of our in-store branches along with several of the locations converted to drive-up only and adjusted the hours at our remaining branches.
On the consumer side, we have enhanced our online banking and mobile capabilities temporarily waived certain retail banking fees for those customers who may be experiencing financial difficulties during this time, and offered 90-day payment forbearance to residential mortgage customers.
On the commercial side, we have proactively reached out to borrowers on a case-by-case basis to help them manage through this crisis as well. We put in place several risk mitigation strategies, including enhanced monitoring of certain credits, payment restructuring plans and deferral options consistent with regulatory guidance.
Second, I would like to clear up some misperceptions regarding trends in the rent-regulated multi-family market in New York City. We are not a newcomer to this market. If you recall, at this point we have been doing this type of lending for over 50 years. We have relationships with some of the largest property owners in the city and we have very strong ties to some of the biggest commercial real estate brokers, including the largest one servicing the New York City marketplace. We also have as directors several real estate professionals who participate in this market for a living providing us with a unique perspective on the multi-family market.
Over the past week or so, there has been some discussion about the level of rent collections on our market. With our conservative view on underwriting, we closely monitor a number of trends in the multi-family market, and when things change we reevaluate. During the month of April, we surveyed a wide gamut of our borrowers, including some of our top 20 borrowers. We spoke to brokers and we also reached out to a number of industry experts. Based on our market intelligence, April rent collections on the rent regulated buildings in our portfolio are estimated to be in a range of 80% to 85%. On the market rent properties, it is even higher. This is very encouraging given the impact on the New York City area given the COVID-19 pandemic.
While there are still many uncertainties regarding how the COVID-19 crisis will ultimately unfold, to what degree it will impact the economy over the long run, we believe that we are better positioned than most other financial institutions to navigate through it given our strong credit culture and low operating model. While no two economic cycles are alike, I would impress upon you the fact that throughout various cycles, our actual loan loss experience has been much lower than the rest of the industry.
With that out of the way, let’s turn to our quarterly results.
Earlier this morning, we reported diluted earnings per common share of $0.20 for the three months ended March 31, 2020 - that’s up 5% compared to the year ago quarter and ahead of consensus estimates. Despite what is usually a seasonally slower quarter, we had strong loan growth, a higher level of net interest income and net interest margin expansion, lower operating expenses, and stable asset quality metrics. We exited the first quarter with positive underlying momentum and we are in a strong capital and liquidity position.
Our results include a provision for credit losses of $21 million - that’s 0.05%, far below industry metrics, due to the application of CECL during the quarter. This reflects an additional reserve for the potential impact of COVID-19. This was slightly offset by an income tax benefit due to certain provisions under the CARES Act. That notwithstanding, we are very pleased with our first quarter performance.
We entered the year with strong fundamentals, building off of a solid performance in the fourth quarter of last year. One of the highlights of the quarter is the improvement in both net interest income and the margins. After reaching an inflection point last quarter when these two metrics both increased for the first time in five years, they increased again during the current quarter.
Net interest income excluding the impact of prepayment activity increased $9.3 million or 17% on an annualized basis compared to the previous quarter due to lower interest expense, as funding costs continued to decline. The net interest margin also continued its upward trajectory. Also excluding the impact from prepayment income, the first quarter margin would have been 1.92%, up two basis points and in line with expectations.
We are currently very well positioned for further growth throughout 2020 in both the margin and net interest income, albeit at a higher rate than we experienced during the current quarter. This is due to our liability-sensitive balance sheet, the Fed having lowered its target rate to near zero, and the significant re-pricing opportunities embedded within our funding mix, especially on the CD side. We also reported a strong increase in pre-provision net revenue. PPNR was $135.8 million for the first quarter, up $8.5 million or 6% compared to the year ago quarter.
On the expense front, total non-interest expense was $125.5 million, down 10% from the year ago quarter. The efficiency ratio in the first quarter was 48% and continues to reflect positive operating leverage.
Moving on to the balance sheet, despite the usual beginning of year seasonality, total loans increased almost $400 million or 4% on an annualized basis compared to the fourth quarter. Specialty finance lending and multi-family portfolio continued to be the primary drivers of this growth. The specialty finance business had strong growth this quarter. This portfolio rose $415 million to $3 billion on a linked quarter basis. Meanwhile, the multi-family portfolio increased $113 million to $31.3 billion sequentially.
As I alluded to earlier, given all that has transpired over the last two months, multi-family credit spreads have widened significantly due to market dislocation and less competition, similar to what has occurred in previous cycles. Origination activity was also strong as overall originations increased 35% on a year-over-year basis to $2.7 billion, with both multi-family and specialty finance originations increasing significantly compared to the year ago quarter. First quarter originations exceeded last quarter’s pipeline by $1.2 billion or 80%. Multi-family originations were $1.4 billion, and specialty finance originations were $957 million, both up 40% relative to first quarter of last year.
We continue to be encouraged by our potential loan growth over the course of this year. Our pipeline currently stands at $2.1 billion, 40% higher than the fourth quarter and year ago pipeline. Of the $2.1 billion, approximately 64% is new money.
On the funding side, our deposit growth continued into the first quarter as well. Total deposits rose $316 million or 4% annualized to $32 billion. Most of this growth was in lower cost savings and non-interest bearing checking accounts, while CDs declined modestly. Wholesale borrowings also increased as we took advantage of the low interest rate environment to replace matured borrowings with lower cost, longer duration borrowings. Borrowings increased $375 million to $14.3 billion during the current quarter.
On the asset quality side, as discussed in more detail in our earnings release, we reported a $21 million provision for credit losses, mainly driven by COVID-19. Net charge-offs totaled $10 million or 0.02% of average loans, $6.5 million of which was taxi medallion related loans. That portfolio continues to be in run-off mode and currently stands at $33.5 million. Importantly, we had no losses in our core portfolio. The adoption of CECL did not have a material impact on our asset quality metrics as they remained strong during the quarter.
Non-performing assets declined $15 million or 20% to $59 million compared to the level at year-end, or 11 basis points of total assets. As with charge-offs, the largest component of NPAs is taxi medallion loans. Excluding taxi medallion-related loans, NPAs would have been $36 million or 7 basis points of total assets.
As noted in today’s investor presentation, $18.7 billion or 60% of our total multi-family portfolio is subject to New York State rent regulation laws. The weighted average LTV on this piece of the portfolio is 53% compared to 57% for the overall multi-family portfolio, unchanged from the previous quarter.
Lastly, 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 May 19 to common shareholders of record as of May 9. Based on yesterday’s closing price, this represents an annualized dividend yield of 6.6%.
Before moving on to your questions, I would like to make a final comment. At NYCB, we are not just a community bank. We are a family, and when things get difficult, our family comes together. I am extremely proud of all the efforts every employee has made to ensure that we continue to service our customers. This has been a very challenging, stressful period for everyone, and I am proud at how the entire organization has come together and risen to the challenge. A very big collective thank you to all of our 3,000 employees throughout our franchise.
Lastly, our prayers go out to all those members of the NYCB family past and present who are suffering from COVID-19 and particularly those employees, their families and friends who have lost due to disease.
On that note, I would now ask the operator to open the line to your questions. We will do our best to get to all of you in the remaining time, but if we don’t, please feel free to call us later today or this week.
[Operator instructions]
Our first question is from Ebrahim Poonawala with Bank of America. Please proceed.
Good morning, Ebrahim.
Good morning. I guess just to follow up, Joe, on your comments about the multi-family borrower base, I guess my sense is we will probably see an uptick in rent deferrals when we look at the May 1 read data, so those numbers will probably go from 80% to 85% to something lower, so would love to get your thoughts on that, and additionally if you can talk about the strength of your customer base, given as the LTVs in the low 50s, what’s the risk in terms of, from a credit standpoint, to NYB and what level of payment deferrals have you provided to your clients in the last month or so?
Tom, you want to take that?
Yes, sure. Ebrahim, good morning, it’s Tom Cangemi. Joe can address the market, but I’ll clearly give the specifics on what we’ve done with our customers. We were very quick to react to obviously this pandemic and to support the customer base, so we offered right out of the--mid-March when the government shut down the country, the ability for customers to come to us and defer for a period of six months, and part of that deferral was they have to be current at the time they entered into a deferral agreement and they have to be also paying their escrow payments throughout that period.
That being said, actually as of yesterday, which is almost starting out of May, we have approximately $3 billion of multi or 9.63% of the entire multi portfolio that’s in a deferral agreement. If you’re thinking about the entire portfolio and add to it CRE, it’s approximately $4.8 billion and the CRE piece of that, I believe is approximately $1.8 billion, and total percentage of the CREs approximately 26%. All in, it’s about 12.6% of multi-family, CRE of $4.8 billion, and the LTV of that portfolio that’s on deferral is 57%, and that’s as of yesterday, so that’s real time.
And it’s a 90-day deferral, Tom. Is your expectation that--
That’s a six-month deferral. It’s 90 days on the residential side.
If we start seeing these lockdowns open up, let’s call it somewhere around June-July, is it your sense that most of these borrowers or all of these borrowers will go back to being current, looking out in the third quarter towards the end of the year?
Ebrahim, I don’t have a crystal ball, but I can give you the actual specific collections as of yesterday. We’re looking at, when you take into account deferrals as well as people that have not deferred, we’re up to 97.73% of April collections compared to all of the previous months around the same level. When you back out deferrals for the multi-family, that’s at 91% versus 97%, so we’re really not seeing a significant adjustment here on payments coming through, so we’re very pleased on the current collection efforts that are going on as of yesterday.
Understood. Just moving away from multi-family, Tom, when you look at the other CRE book, I think CRE retail is obviously under the scanner. Just talk to us in terms of the risk exposure there, particularly to any mall retail, high end, and also with any risk on the specialty finance book, which has grown a lot over the last couple of years.
Sure, so obviously the percentage of deferral is higher for commercial real estate, in particular looking at retail and office and the like, so we expected that, especially on the mixed use properties. I’d say the highest percentage would be the mixed use properties, where you have smaller buildings that have a higher concentration of retail on the ground floor and you have residential above that. That number is probably in the 40th percentile. When you think about what we call pure retail and office, 23% for office and professional buildings and retail is at 27%. When you blend those numbers in for the portfolio, it’s 26%.
But clearly the higher level is going to be, as expected, there’s no revenue coming in on the ground floor. On the multi side, we happen to have some very interesting statistics. The larger the buildings, the much lower the amount of deferrals, so buildings that have in excess of 100-plus families living in the building, that’s like a 6% deferral rate, so it’s much lower, so it’s 6% type versus the retail, which could be substantially higher because there’s no revenue coming through.
On specialty finance, I would tell you that as we stand right now, everything is current, no missed payments. We feel pretty confident on the portfolio given our senior security and our position, and we’ve been growing that portfolio very nicely. Again, we’re an asset-based lender, we feel that we don’t have significant exposure that’s COVID related. We do have some energy, a couple hundred [indiscernible] in energy, but that’s all super senior secured to very stable institutions. On the auto side, which is dealer floor plan, we believe that portfolio will do well given the PPP program, as well as the ability to get up and running towards the end of the year with their option to take on deferrals and eventually get these dealerships opened up again. We think that portfolio, we should have zero losses in the specialty finance business.
Got it, that’s helpful. Just one separately and last one on the margin. You have [indiscernible] funding coming up for refi. Just talk to us in terms of the new deposit rates offered, and if you can provide some cadence of [indiscernible] backdrop if it stays where it is, given the spread widening on the lending side. What level of margin expansion should we expect between now through [indiscernible] just one quarter, or if you can talk to the next few quarters, what is the level of margin you expect to end 2020.
Sure. I’d say big picture as we talked about, going back to 2019, we said there was an inflection point in the fourth quarter, the margin started to rise in Q4 with the anticipation of seeing significant rises going into 2020, with the exception obviously of substantial adjustments in interest rates. Obviously the Fed has intervened here, so it’s a little close to a near zero Fed fund rate; but that being said, we did hit our guidance for Q1 as expected of 2, but when you think about second quarter margin, we’re seeing more likely than not double-digit margin expansion.
We believe that throughout 2020, we anticipate double digit every quarter, so we’re going to have substantial margin expansion given our liability sensitivity balance sheet, and more importantly, we have a substantial amount of CDs coming due, as you can see form the press release, we put the numbers out there. It’s approximately $14.8 billion coming due in the second quarter, it’s $6 billion coming due out of 235, and in the event that you have a CD rolling off in this environment, you’re going to end up in a, probably more likely than not, a level well below 50 basis points.
If you think about the potential there, $6 billion in Q2, Q3 is almost $5 billion at 2.06, these rates are coming down well below 1%, so the margin is really going to be driven by a number of factors. We have the CD costs dropping materially, funding cost is dropping on the borrowing side. If you look at what borrowings are right now on two-year bullets at 74 basis points with a swap that’s close to effectively zero, and you think about the money coming through on the borrowing side, and if we’re growing the portfolio, depending on how we grow it with deposits and no borrowings, the cost is relatively cheap.
But more importantly, there’s been a real change in pricing in respect to the multi-family CRE space. I mean, no question that there’s been some dislocation with CMBS players on the sidelines, you have the agencies tightening up their standards, so we’re looking at north of 300 basis point increase in our product mix. If you were to come to the bank today with, we’ll call it an A-type credit, five-year structure, our typical bread and butter structure, you’re at a 3.5% coupon. That’s pretty attractive compared to where five-year treasuries are trading at right now, so we’re very bullish about the economic spreads on the product mix, we’re extremely bullish on the drop in the cost of funds, so we can see double digit margin expansion every quarter throughout 2020, and that would be assuming credit costs are in check, you’re looking at EPS growth in the mid-teens.
Got it. Thanks for taking my questions.
Sure.
Our next question is from Brock Vandervliet with UBS. Please proceed.
Morning Brock.
Brock, please check to see if your phone is muted.
Sorry.
Morning Brock.
Good morning. Could you kind of dive into the multi-family credit spreads? I think we all saw the dislocation in March. It seemed like the GSCs kind of pulled themselves out of the market. Why doesn’t this mean revert, and how much of that aggressive margin guide is based on the current pricing holding?
Again, we don’t have a crystal ball what happens with interest rates, but clearly it seems like rates are going to stay low for a while here, given the pandemic and the circumstances. We have in our run rate, we’ll just talk about 2020, the Fed not doing anything in 2020. At the same time, we’ve been through many crises and cycles and we’ve seen adjustments within the marketplace, and clearly--go back to the 2008 adjustment. You had massive dislocation. You had CMBS, you had the agency out of business back then. We’re not saying that the agency is out of business, but the agency has clearly tightened their standards. They’ve widened their spreads. There is a premium risk-reward that’s priced in the marketplace, and we’re enjoying that healthier spread.
I think what’s most important here when we talk about asset growth, we’re anticipating 5% net loan growth but we’re seeing substantial, savable results on retention as we ended up the quarter, so as we go into Q2 we think our retention level will be higher, and we have well over $15 billion in the next three years coming due from our own customer base, so we believe we’ll retain a high percentage of that, unlike we did last year.
So I think the fact that the competition has waned significantly, 300 basis point spread with funding costs coming down to zero, it can be a very powerful margin expansion story here at NYCB.
Okay, and you were going through these numbers very quickly. Could you just review again the CRE and multi-family forbearance percentage?
Sure - $3 billion as of yesterday that we’ve entered into agreements on forbearance for multi-family, $1.8 billion for CRE, which is office and retail predominantly, on a percentage basis that’s 12.6% in total, 9.6% multi, 26.4% on CRE. LTV in the total portfolio is 57% of that deferral.
Okay, great. Thank you.
Sure.
Our next question is from Steve Moss with B. Riley FBR. Please proceed.
Good morning. On the loan growth here, just want to see--you know, you talk about pretty strong pipeline here. Any updated thoughts around total loan growth here for the year?
You want to handle that one, Joe?
I think idea here is that, as always is the case, when the market is stressed, we get a greater share of the market. We do believe that we’ll be growing our loans at least at the levels of last year and well likely in excess of the levels of last year. The important thing is that in this crisis, our principle asset will greatly outperform and our ability to take share of the marketplace will increase. Both of those factors have always been the case in a stressed environment. We do believe that the period ahead will represent an environment where many of the other lenders in our niche will lend less and we will lend more.
Steve, I would just add some more color on our projections. Obviously we’re projecting a mid-single digit, which is 5%. We’re pretty bullish about the pipeline and more importantly, going back to my dialog as far as retention, it feels like our team has done a phenomenal job on really conveying that we’re really fighting for that retention, so we moved that retention rate back up to historical norms, which typically will happen when a lot of competition is waning. We should see the potential, as Joe indicated, of higher growth, but for conservative purposes we feel comfortable that 5% net loan growth is reasonable for the company. I think this year you’ll probably see more on the multi-family side than--you’ll still have strong growth on the specialty, but multi-family should be back loaded here, especially in Q2. Obviously Q2 is usually a strong quarter for us.
Great. Then just in terms of underwriting standards here, any changes as you’re getting new customers approaching the bank?
I would add that we have made some changes. Obviously given the marketplace, we’ve tightened the standards, in particular when cash money refi coming out of a transaction, we feel that we have a lot more flexibility now given the marketplace, so we’re actually--when we do a transaction with a cash-out type refi, we’re actually holding six months of both P&I and escrow payments in escrow with the bank, so that’s one of the major changes we’ve done in this environment.
Obviously you can imagine that when the environment gets tighter--you know, we’re one of the tightest underwriters in the marketplace, so we’re going to continue to be there for our customers but we’re going to be there at a very conservative level, and that’s the hallmark of the company.
Great. Then on funding costs here, interest bearing deposit costs down 12 basis points. I hear you in terms of significant re-pricing. Just wondering if you could put a little bit more in terms of what you would expect this quarter versus the first quarter.
I would say the continuation of substantial declines in deposit costs is real. We have a unique situation going in particular. We were in the epicenter, so it’s very difficult to go out to the branch and change their deposits when CDs are coming due, so many people are just very comfortable for safety reasons keeping their cash in the bank.
With that being said, people that were at 2.75 last year or 2.50 are going down to close to two basis points today, and so they come back to the branch or make a phone call and try to get a higher rate, and my guess is that given where the marketplace is, you’re looking at rates that are going to probably be south of 50 basis points for between one and two-year type periods. We do have an offering now but there’s no real takers on that type of coupon at 75 to 90 basis points, but the reality is we’re going to be continuing lowering our rates unless there’s a change in the market, because we’re looking at close to zero percent interest rates. Being a thrift, we’re very stable when it comes to targeting for some spread off of the U.S. treasury, which is at a very low rate, so we feel highly confident that the substantial amount coming due of $14.7 billion, in particular Q2 $6 billion in the middle of the epicenter, at 2.35 will drop materially lower for us.
Great. Then on the energy exposure that you just mentioned, Tom, you said a couple hundred million in energy, senior secured. Just wondering what type of loan it is and where it’s located.
It’s equipment for--Farmer J is our largest client there. They’re a household name, large institution. We’ve been lending to them for multiple years, since we started the business, and they’ve drawn down on some facilities, but it’s all senior secured and we have it at a pretty high rate on our scale. I think it’s about a 5, John, 4 or 5? It’s a high rated, internally classified asset, however we feel highly confident that it’s money good, and in particular it’s a household name that has very strong fundamentals, but more importantly it’s super senior secured, so it’s not a loan to [indiscernible] of the corporation but on its equipment.
Great, thank you very much.
You’re welcome.
Our next question is from Collyn Gilbert from KBW. Please proceed.
Morning Collyn.
Morning gentlemen. First question just on the pipeline, really strong pipeline obviously this quarter. Do you have a sense of how that is going to behave going into 2Q? Tom, I know you just mentioned you expect strong loan growth in 2Q, but just curious what your borrower behavior is, how closings are getting done, to maybe what the pull through rate is on that pipeline, and then also what the blended rate is on that pipeline [indiscernible].
Let me take the easy one first. The blended rate is about 3.26 as of yesterday, but if you think about how it evolved, when you go to the end of quarter, spreads widen out materially. We started with the rent regulatory changes in last year, where we went from 150 to 200 basis points because of the change in the rent control market, and then we hit the pandemic and now we’re north of 300, so it really was a change in the marketplace toward the back end of the quarter.
This is more of an evolving pipeline that we’re going to see throughout the year, but the business that we’re out there getting good flows of opportunity right now within our own portfolio and others, as you indicated, our new money pipeline is about 64%, you’re seeing a much higher coupon relevant to the current--the one I just cited at 3.25. It’s going to take some time to work through the bank, but clearly we’ve never--I don’t think we’ve ever closed less than what we’ve announced in our pipeline. I can’t remember ever where we announced the pipeline and we didn’t close at a minimum our pipeline.
So we’re looking at a $2.1 billion pipeline in Q2, so you can assume we’d close that and some. And Collyn, one thing I would say as a proviso, assuming that the market reopens, right? We had great closings in a very difficult environment where we had to get attorneys together, appraisers together. We get actual appraisals - we’re not--we are in the marketplace closing loans on a daily basis with all these operational issues out there. Assuming that the country reopens, that will only be better for us.
Okay, but your assumption that you close that pipeline, like let’s assume things don’t open, certainly not in New York City for, I don’t know--
Assuming the lawyers are in business and assuming the banks are still funding, we’ll be funding. We went through a pretty difficult March and April, right, so--and we had some very significant originations. We had substantial originations.
Okay, and then just on the amount that you deferred, you gave 57% LTVs on those loans. Would you know what the debt service coverage is on those loans?
Yes, sure. Debt service coverage at 1.74 for the--that’s the commercial real estate portfolio, and 1.53 for the multi.
And that’s for the deferred loans, or that’s for the broader book?
That’s only for the deferred loans, that’s right.
Okay, that’s helpful. Then of those deferred, how much of those were going to be coming due contractually anyway this year?
I don’t have that number for you. Again, I would guess probably not many, but I can follow up with you offline on that. I think what’s interesting about the program--you know, we were very active, and obviously it was publicized within one day that we’re doing this, so people, when you read the real deal, it’s public that we’re doing this program, and people call and we offered it, and more importantly we’ve done our own due diligence on each customer, and the fact that you have to have your escrows current, you have to be current on the payment, and we worked out a six-month arrangement, we think that liquidity backstop for them for the next six months will be very helpful to get to the other side of this problem we have, this pandemic in the United States. We think that six month time should be reasonable.
You know, we could have done a shorter period, but we think six months is more reasonable because it’s going to take a few months here to gather in particular on the ground floor for businesses, but we think it’s a reasonable time frame, that we can at least have the landlords work it out with their tenants so we can move forward and be supportive of them, given the crisis.
Okay. Along those lines, and you sort of answered it, but just broadly, obviously sitting in unprecedented times. Your book has not been tested to this degree, I don’t think--I wouldn’t even say 9/11 tested it like it does right now. How does that impact the way that you’re thinking about the reserve? I mean, it was a modest reserve build this quarter. Just broadly, given the risks that are out there, how are you thinking about [indiscernible].
Collyn, I’m going to actually defer the time test. Joe Ficalora has been with the bank well over 50 years. Joe, maybe you want to talk about the time tested as far as your experience and multiple decades more than I have?
Well, I think the good news, we are structured such that this adverse change, which of course was not anticipated, is not all that different than many other reasons why a marketplace deteriorates and payments are deferred or otherwise evaporate. The environment we’re in presents challenge, but none of this challenge actually changes the reasonable expectations that our owners will in fact remain stable, our buildings will remain stable, and much, much more importantly we cultivate relationships that are way bigger than isolated properties that are funded by us.
The very people that have each and every loan with us in many cases are extremely large players in the New York market, and they have long history with us and the opportunity that a deteriorating market represents, and in every deteriorating market the large players buy. In every circumstance when they’re buying in a deteriorating market, we fund. There is a very big difference between having a relationship with us and having a relationship with a giant bank or with another bank.
Many other banks literally vacate the space because they’re experiencing so much adverse performance, they’re not willing to continue to lend within the space. We are not having adverse performance and we gain share during periods of crisis. The period ahead will literally provide for us additional market share, and that additional market share will give us the ability to grow our book with good product and better than existing rates. The ability for us to earn on our principle asset go forward is actually better than it has been for a long period of time.
So Collyn, I’ll address the reserve point. Joe gave a good history of the bank, and obviously he’s been here for many decades. As far as the reserve is concerned, assuming COVID did not happen, we’d guided in the first quarter for CECL that there would really be no impact at all, other than a transitional adjustment that we took. If you take COVID out of the equation for the first quarter, you’re looking at probably close to a zero provision in first quarter 2020. That’s kind of how we looked at the COVID analysis.
In particular, we actually did some more quantitative adjustments just because of the Moody’s change as far as their view of unemployment going into 2020, in the second and third quarter. We’re a conservative institution that has a history of really no losses in the marketplace, and these are predominantly residential units that are housing people in the city of New York, so we feel highly confident that our loss content is low. But you know, we booked a sizeable adjustment that we didn’t anticipate because of COVID-19.
Okay, all right. Just lastly, I wanted to clarify, there is some confusion, at least to me, the way the press release was written. I know the share count move happened in the first quarter. What did you guys buy back this quarter?
It’s in the press release. I mean, we were slightly active, and we have a little bit left. We’ll evaluate the market depending on market conditions, but it’s really not a material number left as of--yes, it’s very small, a couple--what is it, 30 million left? So the buyback is not significant that’s left, but we did buy shares in the quarter given the price action in the quarter, sure.
Okay. The actual share number is in the press release, that you bought back this quarter?
I think the difference, right? We have the numbers on the second page, John? Yes, it’s in there, second page.
Okay, and you did not issue any shares then in the quarter?
Oh, just normal plan. You know, it’s netted against the plan. When you look at the share count in the back of the documentation, it’s netted against [indiscernible] for shares. I would say probably what we’ve bought back is what we’ve issued for MRP shares. No significant change there. We don’t have a material buyback in place. It’s insignificant.
Got it, okay. I will leave it there.
That doesn’t mean that we’re not buying back shares, right? We’re not halting anything. We feel very bullish about our business and we pay a very strong dividend. We’re comfortable that given the guidance I gave you, albeit credit issues which were unforeseen credit issues, we’re looking at significant EPS growth and, more importantly, double digit margin growth every quarter throughout 2020, and you’ll see growth continue through 2021 but I don’t want to get too ahead of myself. But clearly, this has been a significant change of our funding costs going forward, so you’ll see Q1 up 10 basis points Q1, versus up 2--sorry, Q2 versus up 2 in Q1. That’s a substantial change. We envision that change continuing in Q3 and Q4 as well.
Okay, very good. I’ll leave it there, thank you.
Sure.
Our next question is from Dave Rochester with Compass Point. Please proceed.
Morning guys. Just back on the CRE book real quick, what was the total retail exposure you had, how large is that segment roughly, and can you just talk about a rough breakdown of that, what that is, whether it’s mixed use, strip centers, whatnot?
Again, we have approximately a $1.7 billion of retail stores-slash-shopping centers, of which we indicated about $470 million of that is deferred. That LTV in that portfolio is, like, 56% with a 1.70 debt service coverage ratio. As far as further breakdown, we do have office and professional buildings in the CRE book, which is the vast majority of it. That’s about $3.5 billion, of which $830 million is deferred, which is 22%, and that LTV, I believe, is about a 52% with a 1.85 debt service coverage ratio, a lot of it mostly in the Manhattan region.
And pretty low LTVs too, that’s good.
Oh yeah. I mean, we have a handful of garages that there’s no people going to parking garages, so that’s going to be deferred, and it’s not material for us but you’d expect that to go for a deferral program until they start opening up the city again.
Yes. Then you guys gave some great color on the cash flow trends for the rent regulated multi-family piece, and I know you hold most of that at a 50% risk weight given the loans meet certain debt service coverage and LTV requirements. Was just wondering what those thresholds are for debt service coverage and LTV that they have to continue to meet in order to maintain that capital treatment, and then do the loans have to switch to 100% risk weight if you trigger one of those thresholds or do they have to trigger both? How does that work?
It’s 120 is the number - 120, and 80% LTV, 120. We’ve been in constant dialog with obviously our regulators, but the reality is this regulatory expectation under the CARES Act is to work with the customers. We’re getting some very good latitude now based on this change under the 50 versus 100%. We envision that after these customers come off of deferral, they’ll be treated as if they were 50% risk weighted. That’s what we’re expecting.
Could that change? Possibly. We don’t expect that to change. We believe that the CARES Act was very clear for the banking sector to work with your customers, so I believe that we’ll have some grandfathering in when we make these deferrals, and when they come back, we hope that there will be cash flowing north of that 120 and the LTVs will be well insulated. We don’t know if that’s going to be the final ruling, what the regulators decide a year from now, but clearly there’s a lot of regulatory guidance and we’ve been working directly with our regulators as far as some specific guidance given [indiscernible]. We feel highly confident that when we get to the other side, people will be living in Manhattan and the five boroughs and paying their rent.
If you have to restructure any of those and the restructured loan actually meets all the criteria, is it okay, or if because you’ve restructured it, it actually has to go to 100% risk weight?
I think that would be fine on the restructuring, but again I don’t want to put the cart before the horse. Again, we feel highly confident that as we get to the other side, people are going to be living and working in the city, and we believe that--you know, there’s still a housing shortage in Manhattan. There’s still a rent regulated shortage in Manhattan, so we think they’ll be fully occupied. We’re not in the luxury market. We’re non-luxury lenders, right, so even though our buildings have a blend of rent regulated, a lot of the piece is non-luxury for the most part.
We have a unique portfolio, so in the event the market was to re-price itself down as far as rentals, we’re insulated because we’re not looking after the luxury market, so we feel pretty confident. We don’t have a crystal ball. This is, as Collyn said, untested times, but we’re working with our customers and, given the percentage that has occurred, the good news in the past week or so, we haven’t seen any upticks of more people asking for deferrals, so we’re almost sitting here in May, we think a lot of that has been out already. We’ll monitor every month, and the next time we speak to you next quarter, we’ll have an update. But the good news is that here we are coming into May, and we don’t see the spike in additional requests.
Yes, okay. Then how often do you have to do that 50% test? Is that once a quarter, or once a year? When does that happen?
We do it every quarter, depending on what loan comes due as far as their review. Sure, quarterly. It’s a quarterly analysis, and it’s all automated quarterly.
Cool, okay. Maybe just one last one on expenses. How are you thinking about that trend at this point? I think you were talking about 515, maybe, for the year on the last call. Is that still a level you think you can achieve?
Yes, it seems that--look, I think that Q1 was better than expected. I think Q2 will probably be slightly better than expected internally, so anywhere from 128 to 129-ish, just slightly south of 130, and then maybe flat for the rest of the year. Again, we’re not seeing a ramp-up in expenses.
Now, we don’t anticipate substantial expense because of COVID-19, but we’ll evaluate that as we move along here. I would say based on absent the pandemic versus last year, I think our expense guide is still within that range. I don’t see any major change here. I would say the only real change is that we haven’t completed our conversion, and that would have probably added some savings, but it gets postponed because of the stay-at-home order. We anticipate to have that once New York opens up. Hopefully by the summer, we’ll be able to do the full conversion.
Okay. All right, thanks guys.
Sure.
Our next question is from Peter Winter with Wedbush Securities. Please proceed.
Morning Pete.
Tom, the ones that reach contractual maturity and then get refinanced, can you just talk about what’s happening to the LTVs with those loans, and also what’s happening with the cap rates versus the new rent regulation laws?
Yes, so we evaluated our cap rates post--I’d say pre-pandemic, and we actually saw a slight drop in cap rates, believe it or not. We didn’t change the way we viewed our stress testing because of that. We do it every six months. We evaluate the market, so from June 30 to 12/31, cap rates actually trickled down a little bit, believe it or not. In our internal analysis when we look at stress testing and how we look at the potential risks, we assumed--we kept it flat without decreasing it.
I would say that it’s too early to tell how that’s going to pan out in their environment, but interest rates - again, near zero. We have a higher spread, but you’re still talking about a mid-3% type coupon, so we haven’t seen any noticeable changes yet. Who knows what happens in the next two or three quarters out, but clearly no noticeable change in cap rates.
With that being said, when we have loans that come due to us, we haven’t seen any situations where customers can’t cash flow out on a refinance. If anything, customers are still actively taking down funding because they’ve improved their rent roll. They’ve been working--so these are, I would say, delayed refinancing. When you have an average life that this short, you’d assume that the portfolio is so short because people have delayed their refinancing, so they still have equity build and they’re still drawing down equity. Like I said, given this environment, given the nature of the difficulties in the environment, we’re actually tightening our standards on refi cash-out, where actually we’re holding in escrow both taxes and P&I payments for a period of six months as part of our strategy to mitigate risk.
Then can I just ask about how big the PPP program is, and with this downturn, is it an opportunity to take market share from the larger banks aside from the multi-family business?
Yes, so Pete, for us--look, you know we’re not a C&I lender, we’re a commercial real estate lender and mostly multi-family, so we got geared up. We were a little bit late on getting geared up, we worked with a third party provider, so we partnered with a third party provider, and we were very active on the second round, so our PPP numbers are going to be between $100 million to $200 million at best. However, a lot of the customers that we have internally we’re putting through the system and we’re getting great success. Our team has done a phenomenal job in getting it up and running.
But it’s interesting - these are more anecdotal, a lot of our, what we’ll call customers coming from other banks, Bank of America, JP Morgan, Citibank in particular, where they had no results. These are smaller businesses that were left behind on the first round. We put them through the second round and they were successful, and believe it or not, they’re switching their accounts to NYCB. You still have to go through the vetting process, you still have to go through the BSA process - there’s a lot of work, but many small businesses were left behind locally, so we’re there for them. We’re actively taking some new business. I won’t say it’s going to be material, but I think on an anecdotal basis, there’s no question that the larger players were protecting their book, and we were there to pick up a handful of [indiscernible] to help out the local community.
As Joe said this morning, it’s a family here. These are local businesses that need help, and we’re here to help the local community. It’s not a big number for us, but we are in the program.
Got it. Thanks Tom.
Sure.
Our next question is from Christopher Marinac from Janney Montgomery Scott. Please proceed.
Good morning. Thank you for all your information this morning. If we go back to the beginning of the call when Joe mentioned the implied survey of 85% collected in April, would that number get stronger in May and June, do you think, and does that ultimately square with the deferrals that you talked about this morning?
Joe, you want to handle that one?
I think that number does continue to strengthen. We’re in a very, very good place with the relevant players in our niche, so our ability to not only have a performing portfolio but a growing portfolio in the period ahead is quite real. It’s very consistent with how we perform in other stressed environments. We should assume the period ahead to be stressed, and during that period we will gain share of what we want from the marketplace, and therefore as has always been the case, during periods of difficulty, we do not just better than our peers but better than we historically have done. This environment presents opportunity for us to lend favorably in greater numbers in the environment in front of us.
I would just add to Joe’s commentary, big picture, our portfolio--you know, we’re a very large player in this marketplace, so we have 100-plus families in some of these large buildings and clutches of buildings. When you think about the percentage of deferral versus all the other deferrals, that’s the lowest percentage. That means we’re getting significant rent collections. These are very sophisticated billionaire property owners that have deep valued equity that are going to protect their investment, but more importantly they’re not even asking for deferrals. The program is out there, and only 6% has come to the table on the 100-plus family dwellings, which is very encouraging.
Now, the smaller ones, obviously it’s a higher percentage because you have that ground floor issue and you can have zero percent revenue coming in, so going through the next months ahead as the country opens up and the city opens up, and they start working out their lease arrangements with their tenants, we envision that, in the next six month period, to start to stabilize.
Great, that’s helpful. Just a follow-up, Tom, my impression has been that you still are sitting on enormous liquidity to deploy, and that liquidity really presents new opportunities for you, both on the investment side as well as loans, as you’ve documented. Will that get put to work in the next two quarters, or do you think it’s going to take into next year to really deploy your full horsepower?
Chris, we do have a lot of liquidity on the balance sheet. We have excess cash. We sold some securities going into the second quarter, actually middle of the first quarter given that we felt that rates were going to go much lower than they were. These were floating rate securities that would have been having close to zero percent yields - that was about $300 million, so that created a lot of cash for us. We believe that will be put right back into our core lending product, so we want to stay liquid, we want to have the [indiscernible] any risk reward opportunity there and put it into our loan portfolio, which as Joe said, as Joe indicated, if this continues and we’re in a difficult cycle, we tend to have significant growth. We’re only forecasting 5%, but you can easily see a substantial number of growth because of the retention that we’d have within our own portfolio and the lack of market players willing to step into this market.
Great Tom. Thank you again, appreciate it.
Sure.
Our next question is from Matthew Breese with Stephens. Please proceed.
Hey, good morning. Looking at the borrowings book, I’ve been surprised that the costs there haven’t come in more. Can you give us the breakdown between the structured advances and the classic advances, and help me better understand how the structured advance side behaves and re-prices relative to changes in the yield curve.
Yes, so we have about, what, $8 billion, John?
Yes, $8 billion in putables.
Eight billion in putables. It’s interesting because obviously in January, the environment was different than the end of March, right, so we had some money coming due at the beginning of the quarter, we refinanced that at lower cost based on what was coming off; however, where we are today, that number is close to zero if you hedge it, if you put a derivative against it, and if you just go with straight bullets you’re still at a number that’s probably, what, 50 basis points, 45, 50 basis points? We’re at 74 basis points for two-year bullets, so I think the cost is coming down materially.
We have been active when we look at the opportunity to get a unique swap opportunity, so that probably drives it maybe anywhere from 25 to 50, depending on the anomaly of the marketplace, and there’s been a lot of anomalies, so you could effectively borrow money, swap it out from float to fixed, fixed to float, and then you’re looking at a zero percent effective interest rate, which is unique.
But the reality is that it’s significantly lower than our current cost that’s coming due, which is around 2% in 2020, the remainder of 2020. We have about $1.2 billion coming to this quarter, another $300 million, $400 million in Q3, another $300 million at the end of the year, and they’re all around 2% - 1.85 is Q2, and then the back half of the year, it’s 2.38 and--it’s 2.38 for the six months ended. So again--
I’m sorry, are you putting that on at a--are you more apt to put on the structured with a swap at 50 BPs, or are you going to take the classic at 75?
You know, we may just keep it short and just borrow 45 basis points [indiscernible]. We have opportunities. We don’t see the Fed actively driving interest rates higher here, so we have options. But the options are still all well below 1%, so conservatively in our model, we have high cost--now, I gave you double digit margin expansion with expensive funding, so I’m assuming [indiscernible] funding will be cheaper. I’m hoping my guide on my margin is even conservative up double digits.
Is that the risk to that portfolio, that interest rates go higher and the Fed--the federal home loan has the right to call it?
Well, not if they call it. If rates go up 400 basis points, they're going to call it; but again, if you think rates are going up 400 basis points, that not what we’re running in our model. We have the Fed remaining flat this year. I’m not going to talk about 2021, I’m talking about 2020, and I don’t envision any real changes to policy given the current situation. But that being said, in the event a putable structure gets called and rates are up, you’ll have higher borrowing costs. That’s correct.
Okay, understood. Then what’s the incremental securities yield? That book on a quarter-over-quarter basis fell quite a bit. Just curious what the incremental--you know, what does it look like? If you do buy, what are you buying and what’s the yield on it?
Yes, so like I said, we’re not buying anything, we’re just keeping it flat, so we still get called out. We have some called expected, so let’s just say we may have a few basis point bleed next quarter. If not, it could be flat this quarter, depending on what pre-pays and speeds. We do have some mortgage-related securities, it’s all agency for the most part, so we’re not really in the market buying. I would say that unless we see a significant dislocation in security yields and there’s attractive opportunity, we’ll keep it flat.
Okay. Then I appreciate the retail exposure in the commercial real estate book. Just curious, is there any additional retail exposure in the specialty finance book, and what’s the health and characteristics of those borrowers, if there is any?
I would say we have a handful of maybe some grocers, household name grocers that have been very successful. Of course, their business is booming right now, so they’ve been drawing down on their facility, but I would say for the most part the specialty finance group has been performing. It’s stellar performance - you know, we haven’t had a delinquency since we’ve been in the business, and as far as our ratings, we’re very comfortable with all the credits we have. We’re very selective. We always talked about that, that what we see, 96% or 90% of it, we decline [indiscernible] you know, so we have large relationships - Amazon, Intel, paper, some very big large household names, but we’re not the lead bank. We participate in where we feel there’s low risk, and again this is not a high yielding portfolio but it’s a low risk portfolio, and it’s sup-senior secured.
I would say on a deferral perspective, you’re probably looking at maybe $200 million of deferrals on auto, but we think that the auto sector will be fine this year, and by the end of the year that stuff will go off of deferral and they’ll be back in business. And by the way, all these clients in auto have access to PPP and they’ve all been funded, so we feel pretty good about that.
Okay. Last one just on capital, how comfortable are you operating at these levels, especially as New York City is the epicenter and economic conditions do remain uncertain?
Again I would say very comfortable. Obviously we’re going to earn more money this year, assuming that credit holds itself. We’ve taken a sizeable provision for COVID-19. Absent COVID-19, we talked about CECL, we didn’t’ expect to have any real provision in the quarter other than the transitional adjustment, so we think that our portfolio performed very well in this environment.
We are not a C&I lender. We do have tenants that--landlords that have tenants that have retail and they have to work that out, but given the deferral program, we think that as they open up the city, as they open up America, we should be in a good place.
Got it. Great, that’s all I had. I appreciate you taking my questions.
You got it, Matt.
Our final question is from Ken Zerbe with Morgan Stanley. Please proceed.
Good morning. Just in terms of the margin, I guess I’m a little surprised that you don’t get more benefit, sort of near term, and it sounds like you get, as you said, double digit NIM expansion every quarter over the course of the year. Can you just talk about why it’s, I’m going to say so consistent over the course of the year? Is it just because of how your deposits are re-pricing?
Rates are zero, close to zero, so pretty much the entire liability side of the balance sheet is getting close to zero, so that’s the major driver. At the same time, we do have lots of loans coming due and we’re not getting bleed on the loan yields going forward, and the coupons are reasonable, they’re not spiking. But if you take the cost of funds close to zero, and pretty much all of our--most of our retail funding is tied to short term funds, right, so like I said, $6 billion plus this quarter is at 2.35, and there’s really no high cost opportunity in the marketplace. We don’t envision customers leaving the bank to go somewhere else.
That being said, we still have the ability to borrow funds that are close to zero, so I think that the funding cost is clearly driving this opportunity and at the same time, asset yields are holding up very nicely, so you’re going to have, like I said, double digit margin growth in the second quarter. We envision that happening in Q3 and Q4 as well. We talked about Q1 being up two basis points - we hit our guidance. The pandemic hit towards the middle of March, and the Fed starting cutting interest rates. We actively cut interest rates, and we’re going to see that benefit going right into Q2.
Again, we don’t know where the market is going to end up on short term funds, but given that where the country’s position is, my guess is that rates are going to stay relatively low in 2020. Most customers are not going to go past one year to restructure their CD portfolio. As we continue to build savings accounts and non-operating accounts, that will also benefit a very stable cost of funds for the bank.
Got it, but in terms of the timing--
Ken, I just want to go back. Just remember, we have five years of not seeing NII growth. We were positioned at the lowest returns this bank has experienced, so we’re in a upward trajectory, both the EPS growth and margin expansion. This will continue into 2021. We do not have the crystal ball what’s going to happen in 2021, and we’re talking about margin expansion here, but we think the margin bottomed out in the fourth quarter of 2019, we saw that inflection point that’s going to continue to significantly because of the Fed action. At the same time. the business model is getting a much higher spread than we’re accustomed to. When the competition is robust, Fannie, Freddie, CMBS, the whole world looking to get into the space, you’re 110 to 150 spread, right? So then we raised that to 200 after the rent laws changed, now we’re north of 300, so that’s a very healthy spread.
Got it. Back in terms of the timing, though, do you have just as much re-pricing in second quarter, down a couple hundred basis points, as you do in, say fourth quarter?
Yes, second quarter on the CD side, just under $5 billion, and that’s at 2.06. So it’s continuing, so you’re going to get the benefit from the re-pricing in Q2 going to Q3, and more benefit in Q3 as well. That continues throughout the whole year [indiscernible] on return on average tangible assets, you’ll see a very unique growth in earning story and growth in margin story that could continue throughout 2021. We’re only talking to ’20 right now, it’s short visibility, but for the short term in the second quarter, margin expansion double digits.
And is that margin expansion also premised on the view that your credit spreads stay above 300 basis points?
Yes, but again we have a 3.25 coupon coming on. It’s conservative. We have our pipeline, we’re feeding our pipeline through our model, right? The model is sophisticated. We just take the $2.1 billion pipe that we have, we have 64% new money, and that’s going on at 3.25. Now, new deals that we would offer you if you come to the bank tomorrow, you’re at 3.5 if you’re an A credit. If you’re a little less than A, you’re going to pay closer to 4.
Got it, okay. Great, thank you.
Ken, pleasure.
We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.
Thank you again for taking the time to join us this morning and for your interest in NYCB. We look forward to chatting with you again at the end of July when we will discuss our performance for the three months ended June 30, 2020. Thank you.
Thank you. This concludes today’s conference. You may disconnect your lines at this time, and thank you for your participation.