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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to the New York Community Bancorp Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I now like to turn the conference over to your host, Sal DiMartino. Thank you. You may begin.
Thank you and good morning, everyone. This is Sal DiMartino, Director of Investor Relations. And 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 second quarter 2019 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 the Chief Accounting Officer, John Pinto.
Before turning the call over to management, there are a few disclaimers we need to read. Certain comments made on this call will contain forward-looking statements that are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those the company currently anticipates due to a number of factors, many of which are beyond its control.
Among those factors are general economic conditions and trends, both nationally and in the company’s local markets; changes in interest rates, which may affect the company’s net income, prepayment income and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposits, loans and investment products and other financial services; and changes in legislation, regulation and policies.
You will find more about the risk factors associated with the company’s forward-looking statements in this morning’s earnings release and in its SEC filings, including its 2018 Annual Report on Form 10-K and Form 10-Q for the quarterly period ended March 31, 2019. The release also includes reconciliations of certain GAAP and non-GAAP financial measures that may be discussed during this conference call.
As a reminder, today’s call is being recorded. At this time, all participants are in listen-mode. You will have a chance to ask questions during the Q&A following management’s remarks. Instructions will be given at that time.
And now, to start the discussion, I will now turn this call over to Mr. Ficalora, who will provide a brief overview of the company’s performance, before opening the lines for Q&A. Mr. Ficalora, please go ahead.
Thank you, Sal. Good morning to everyone on the phone and on the webcast, and thank you for joining us today as we discuss our second quarter 2019 operating results and performance.
Earlier this morning, we reported diluted earnings per common share of $0.19 for the 3 months ended June 30, 2019, unchanged from the 3 months ended March 31, 2019. We are very pleased with our performance during the second quarter, which has highlighted the strong loan and deposit growth, a continued focus on lowering our operating expenses, a relatively stable net interest margin, and as always, our hallmark asset quality metrics.
Furthermore, we believe that the company is well positioned for a lower interest rate environment, given its liability-sensitive balance sheet and the changed landscape in the New York City rent-regulated multi-family real estate market, given our underwriting standards, our expertise and longevity in the market, and our long-term relationships with the borrowers and brokers in this segment of the market.
To that end, before talking about our financial performance this quarter, I would like to comment on the new rent regulations and how we are impacted.
In light of the new regulations, we have evaluated our underwriting and credit risk management practices, and we will continue to be an active participant in this market with underwriting guidelines appropriately calibrated to the new environment. And more importantly, we will continue to support our borrowers.
We have always been a conservative lender in this space; one who lends based on current, not projected, cash flows. And this conservatism has served us well in the 50 years in which we have been actively involved in this type of lending.
As you can see by some of the additional information provided this morning, we are a low LTV lender compared to many of our competitors. And therefore, our portfolio should perform much better under the new regulations.
Moreover, the bank has always been a main beneficiary of dislocation in the multi-family market; be it credit driven, like you’re in the Great Recession, or event driven. As other players exit this market, we will be there to take advantage of the dislocation and seek opportunities to grow our portfolio at wider spreads.
Now, moving to quick summary of our quarterly performance. Our overall loan portfolio grew 4% on an annualized basis, compared to the level at December 31, 2018. This was driven by our multi-family portfolio, which increased $582 million, including $534 million growth during the second quarter; and our C&I portfolio, which increased nearly $400 million on a year-to-date basis or 33% due to strong growth in our specialty finance business.
More importantly, our loan pipeline, heading into the third quarter of the year, is a robust $2 billion, including $1.4 billion of multi-family loans at a rate of just under 4%. Growth was funded by deposits, which continue to grow, increasing $1.6 billion year-to-date or 10% annualized.
The majority of the growth has been in [C&D] [ph] category. Going forward, we will continue to lower our deposit costs, once the Federal Reserve pivots to an easy environment. Our net interest margin for the quarter declined only 3 basis points to 2%, excluding prepayments, which rose 32% to $12.6 million during the second quarter, the margin would have been 1.89%, down 6 basis points.
Also, the margin was impacted by two additional items this quarter, which reduced it by an additional 3 basis points. Despite this, we believe that our net interest margin will benefit going forward from a combination of lower short-term interest rate environment and the substantial upward re-pricing of our multi-family and CRE loan portfolios.
Operating expenses continued to improve during the quarter. At $123 million, our operating expenses now translate into a run rate of less than $500 million. On the asset quality front, our metrics continue to be very strong and remain among the best in the industry.
Lastly, this morning, we also announced that the Board of Directors declared a $0.17 cash dividend of common share from the quarter. The dividend will be payable August 26 to common shareholders of record as of August 12.
Based on yesterday’s closing price, this represents an annualized dividend yield of 6.1%. Before turning the call over to the questions, I will add that we feel very good about our prospects going forward.
On that note, I 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.
Great, thank you.
Operator?
Great, thanks. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question here is from Ebrahim Poonawala from Bank of America. Please go ahead.
Good morning, guys.
Good morning, Ebrahim.
Good morning, Ebrahim.
So, I guess, I just wanted to start out in terms of the margin outlook, Tom. Obviously, so you called out the two items. But when you look at the core NIM at 1.89%, deposit costs, funding, debt costs still went up quarter-over-quarter. If you can just talk to us about your expectations for the core margin, if we bake in sort of a rate cut maybe this afternoon.
And how do we think about deposit rates and debt costs trending from here? Are they going lower or are we still have some lift higher for both those?
Right, so let me be very clear. Obviously, we were in a position to say that our margin, which we anticipated to start to rebound in 2020, assuming there is a rate cut this afternoon that will happen in 2019. So I’m updating my guidance positively for margin expansion in 2019, not 2020. That should occur between Q3 and Q4.
If this was a very short term position, we’re looking at maybe 1 to 2 basis points in Q3 versus Q2. And from there we shall rebound. Based on our funding cost and based on re-pricing of the assets, I anticipate that the margin will go up every quarter thereafter throughout 2020. So a very positive outlook, assuming there is a rate reduction.
We’re actually assuming in our internal models, 2 for 2019, one in December and one as of today. So we anticipate our margin outlook to be very favorable. More importantly, as far as the funding costs are concerned, we anticipate that the deposit cost and the borrowing cost have peaked at the end of the second quarter. So you’ll see reductions on the funding side, both in the borrowing and also on the retail deposit side as well.
So that’s helpful. And just in terms of prepay income, I think there is a fair amount of concern that prepay income, driven by the rent law changes could reduce – significantly reduce or go away like the loan growth was pretty strong in 2Q, was there a little bit of a catch up in 2Q? How should we think about, one, the sustainability of multi-family loan growth and as it relates to also prepay income going forward?
So, obviously, Q2 versus Q1 was a very favorable change. We were up over 30% on prepay, which is an exciting dynamic. However, given our dynamic of the portfolio coming due in the next 3 years, we have sizeable amount of refinancing to expect it. So for next year, for example, we have $4.4 billion coming due at a 3.13% coupon.
That clearly is not going to pay 8.25% quarter, which will be the current option rate that you’d have to pay in this environment. That is all refi. The question is what happens with the 2021 and 2022, which is also around $4 billion a year. Do they accelerate? If they accelerate prepay should stay relatively strong.
Let me give you some statistics as far as the pipeline is concerned. That pipeline that we have right now, I’d say 95% of it is all refi, between ourselves and others. It’s only a 5% purchase market right now. So obviously, they’re still contemplating what’s happening with the market in respect to the changes in rent law.
However, having the amount of refi coming from within our portfolio generates prepayments. But also a more encouraging aspect for growth is that, we’re now seeing loans gravitate to our portfolio from other banks, which is what we expect.
So if 30% today that should be higher as other banks exit the marketplace.
And what…
That is very consistent – I’m sorry – that very consistent with what happens in normal cycle evolution. We gain share during periods of difficulty, because others leave the market. So the people that are typically in our portfolio or have the ability to be a buyer in a decreasing valued market come to us and get financing.
Got it. And what are the new loan origination yields, Tom? And have you seen any spread widening coming out of the rent law changes at all?
Yeah, there’s no question that there’s been some economic value as far as spread widening. We are currently around [3 5/8, so 3.75, for the tier 1 type structure for 5-year money going out to 7 year type money. It’s closer to 4, 4, then 8] [ph].
If you think about the portfolio yield, right now, the portfolio yield all-in I believe is around 4.02%, 4.03%, going all in for the quarter. Of that total pipeline, $1.4 billion is a new money pipeline, so that’s obviously going to – should be very accommodating for our growth expectations of 5%.
So we’re not concerned about growth this year. Obviously, the 5% with the number that we came out early on, we’ll update in the latter part of the year. But clearly having a new money pipeline of $1.4 billion will bode well for our growth expectation, and obviously, the couponing around 4% and funding cost coming down should add to the margin as well.
Got it. And just one last question if I may, expenses you are running at $492 million annualized run-rate in 2Q. Talk to us in terms of like your previous guidance for low $500 million for this year, do you expect that to be – are you updating that for lower guidance just in terms of any expense outlook that you can give?
So, obviously, was very pleased with coming in better than expected. As far as our previous quarter’s guidance, we came in below the $125 million. I mean, for next quarter we’ll teet around this level. We hope to continue to slightly improve that number.
What’s interesting is that we’re going through a substantial conversion that will happen at the end of the year. And going into 2020 that will potentially bode well for further adjustments, depending on how much efficiencies will be driven from – being on one platform.
I won’t say – and I will give you – I’ll go into length for 2020. As far as guidance, we’re looking at probably low 40% type numbers for the efficiency ratio. That’s a substantial reduction coming off of specific threshold at $50 billion. So that number is – in the low-40s, is kind of what we projected a year-and-a-half ago. Now, it’s coming to fruition.
And if you don’t mind me…
Low 500s for 2020 should not be a problem. And that we’ll call it somewhere to the low 40% threshold for efficiency ratio.
Do you mind giving like a dollar number for what that low 40%, because there is the other side of the equation there like what does a low 40% assume in terms of the annual expense for next year?
I would – again, as a guestimate, $505 million to $510 million, probably more towards the low-end of that range.
Understood. All right, thanks for taking my questions.
Which is relatively flat year-over-year.
Got it. Thank you.
Yeah, you’re welcome.
Our next question is from Steve Moss from B. Riley. Please go ahead.
Good morning.
Morning, Steve.
Morning.
I just want to follow up on the loan growth expectations here. It seems like you’re implying an acceleration from second half of the year and just how do we think about the drivers there?
I mean, obviously, the pipeline is very strong, north of $2 billion. And we have a $1.4 billion new money pipeline. So although with lot of refi, the refi that actually taking advantage of the equity they’ve built within their own portfolio. That’s 70% of our own book with a 30% some others.
So I think that will probably be the, in my view, the trend over the next couple of quarters until there’s actual property transactions. But ultimately, there will be some value, where people will put on these building such rating again. In the meantime, we’re getting a very interesting amount of business from refi opportunities within the marketplace.
And going back to our portfolio, we have substantial refinancing coming. It’s $14.5 billion over the next 36 months, of which $4.4 billion next year is at the lowest rates we have in the portfolio. So that’s – well, if we put that to market, that’s a significant jump, going from 3, and let’s say, 3.13 to let’s say around 4, that’s a nice benefit for the margin for next year.
And this is something we’ve anticipated. They waited as long as they can, but they’re not going to take 8.25%. They’re going to have to exercise their option. The question is how many of the ones that are coming in 2021 and 2022, which is around $4 billion as well each year, decide to exercise early, which will generate prepayment and higher coupon. And they were all in the very low 3s.
So we’re excited about the opportunity. We’re very comfortable of the LTVs in that portfolio, given that they’re significantly lower than the market. And we’re an in-place cash flow lender. Now, these loans have originated 4 or 5 years ago, they built up the cash flow, they built up the value. They’re going to look to try to extract some value here, which will add to portfolio.
So we think that we’re going to have a very achievable 5% net loan growth. I know there has been some discussion that that’s not achievable in this environment. We started a 4% in the midyear, assuming things are going to be very challenging going into Q2. Now, we look at the specs and we’re having a very strong pipeline. So 5% is very achievable this year. And we’ll update the guidance as we get closer to yearend.
So I think it’s important to know that the changes in the marketplace have been significant and adverse. And therefore, the lesser players are vacating the space. As in all cycle turns, we fill the void. We do not have the same problems that others have. Many, many, many players took into account projected earnings that were significantly higher than now would seem attainable.
Therefore, there is problem with those people. And we in fact will fill the void. There are good property owners, who in fact do business with us on a regular basis, who are intending to buy at discount, properties in their proximity, because there will not be the kind of funding available to accommodate the loans that already exist in their markets.
And in terms of your exposure by markets, just wondering if you could update us the loan to values by borough and the debt service coverage, and how you’re thinking about…
So, Steve, the good news is that, obviously, we put out some additional disclosure. We filed an 8-K this morning, breaking out the dynamic of the multi-family book. And you can see on Page 14 of that 8-K, we break out the New York City boroughs by the 5 boroughs and break out the other markets.
As you look in – if you want to look at the – we’ll call it, the highly concentrated rent-regulated market, which is the 5 boroughs. Manhattan is at 48.42% LTV. Brooklyn at 52.49% weighted average LTV. The Bronx is at 52.9% and the Queens at 47.8%, and Staten Island, which is very little exposure there, at 57%.
So for the most part the New York City books around 52% on average, so that’s obviously a lot of coverage there. That’s an in-place cash flow LTV that was based on a current rent law and not future value. We do not lend towards MCI, we do not have any meaningful exposure in that regard. So we’re very comfortable that when these loans come due, and we’ll have more than adequate collateral to refinance with us, and potentially take us to more dollars depending on what value they create.
Okay. That’s helpful. And then, one last question in terms of just the funding costs here. I’m wondering, what are you marginal funding costs these days when it comes to borrowings and CDs, and just kind of thinking about how we should think each fed rate cut benefits or margin going forward?
So we’re going to be very aggressive on reducing our cost of funds, and then we feel highly confident that our costs of funds have peaked. So it’s also in the borrowing side as well as the CD side, retail CDs. So we’re very active on looking at our deposit base. We took in some extrta money last quarter knowing there will be some other deposit type sources that will go out of the bank, because we’re going to be aggressively reducing our cost of funds. So effective today, we dropped out rates again, so I believe our rates around 2% offerings.
On average some in the 175-ish, but that’s a significant adjustment from the September of this time last year, when it was a high lease cycle, we were close to 3%. So we have $13 billion coming due in over year, it’s around $3 billion to $4 billion per quarter, that’s going to be rolling on the CD side, and that’s going to roll down to the very low 2s, and that’s continues to ease that will be subtle. So we’re going to be very proactive and making sure that we get the benefit of the beta that we had on the way up, now we get on the way down. So we were obviously significantly [impaired the beta list] [ph] that we had given that we’re a retail shop. The fact that the retail CDs are going to react very quickly, we’re going to be very active.
So we’re not targeting 10% deposit growth, we’re going to target on a substantially drop in our cost of funds. In the borrowing market on the forward position will accommodate money in the mid to upper one. So we believe that’s going to clearly drive at deposit and borrowing costs were lower in 2019 and 2020 for sure.
All right. Thank you very much so.
Sure.
Our next question is from Steven Duong from RBC Capital Markets. Please go ahead.
Hey, good morning, guys.
Good morning.
Good morning. Just to get back on the borrowings, if you may. So how much in borrowings is due in 2020?
Yeah. So we have, what we believe, what’s going to mature in 2020 is about $3.4 billion from the Home Loan Bank and at average rate of 2.13%.
2.13%, is that right?
Yeah. That’s right. So we’ve been – so for example, last quarter we refinanced some structures like 170 was our now positions. And that was expected back in November to be around three. So significantly lower based on the expectations of the forward curve. So we put on [$755 million] [ph] in the last quarter at 170. I might say right now given where the rally in the bond market and where rates are offer in the forward curve, you probably 150 to 155 depending on the structure that we choose to go with.
Got it. Would it ever make sense, I think, you guys still have a decent amount of borrowings beyond that? Would it ever make sense to prepay those borrowings and just take the hit?
A lot of the stuff is relatively low cost, even when I looking at 3%, 4%, 5% money is still very low cost compared to historical norms, going out to 2021 to 240. And again most of the money is coming due in the next year-and-a-half. So this stuff is going to mature without any consequence to the capital. Yeah, another $2 billion come due at the rest of 2019, so that’s just under 2% 190. So that should be no negative impact for a cost of fund.
And depending on how much deposit flows come in and where the source of the funds comes from, but we’re going to be very active on pricing the best possible liability and it hopefully a declining rate environment. Assuming, if they’re winding down is still going to be a very favorable environment for us, because we’ve had so much headwinds as far as our modest concern. I don’t anticipate NII to go down post Q3, we should have NII up every quarter thereafter going to 2020, you do that with cost containment at the $500 million level, you’re looking at the EPS grow that is significant, when you look at year-over-year comps, because the company is not typically running at a 75 basis point ROA. We should be somewhere north of one.
Got it. And just getting to your pipeline it seems like your pipeline is pretty strong with the refi. Do you know what percentage of the refi is coming from new customers versus existing?
Yeah. I mean, as I said before, 70% of our refi book is ourself. That 30% is coming from others. That’s going to be a trend that we believe, I believe, it’s going to increase dramatically as many players that are no longer in the business or they’re shying away from the business, and we’re in business, this is what we do. This is our primary focus. So we’re excited about the opportunity. As Mr. Ficalora indicated, dislocation is where we make a lot of money, and we underwrite very conservatively and as if their loans are substantially above what we would lend, we would soon lend to them. So we’ll be a targeted low leverage lender and we’re going to be in the market at highest spread. The spreads have widened approximately 50 basis points at – right now $185 million to almost $200 million over depending on bay the curve, but that’s significantly higher than the $150 million that we have to compete.
Our large competitor right now is the government. Once the government realizes that giving away the shop, maybe they’ll widen that spread still, but that market is probably the most competitive market. And we clearly are looking at our unique opportunity of the portfolio lender and we have lots of very strong relationships that will tend to go to a portfolio lender versus going to the agency.
So the agencies are growing throughout the country, and there is no question that people in Washington are concerned about this and have for quite some time expressed the desire to have the agencies for less involved in the marketplace rather than absorbing every greater share throughout the country. So that change will be very good for us.
Understood. And just last one for me. There had been some questions about just like potential RWA is going up. Assuming cash flows on the collateral rent-regulated properties do not weaken. Is there any conceivable scenario in which are risk-weighted assets would increase from major market declines? Let’s just say something draconian, say, like a 70% drop in market values?
Yeah. So that’s very draconian. Look, we’ve done such a deep-dive since these large of input in place. We’ve analyzed at the loan level detail. Assuming, cap rate is going to probably gravitate a little bit higher here, they’re going to be more borough-specific, Manhattan cap rates versus the Bronx is dramatically different. So you have to look at it holistically as far as what is impacted more negatively, because of this change. But the reality is, we are low leverage lender.
We look at interest rates and cap rates, and we shop them up recently, significant, and we feel that that’s not going to impact that our capital position negatively. And we ran 15 different ways in where you look at this market, I’m not going to run a 70% drop in value that just probably a silly analysis. But if you run 8% is adjusting, and it’s very simple, 100 basis points cap rates probably going to be around 80% drop in value. If you raise interest rate 50 basis points is probably 9 basis points in the DSCR. So you do the simple math, it’s manageable when you’re running Manhattan is 48% LTV.
Understood.
And by the way, Manhattan has the lowest CapEx, because that was always due that the most upside potential. So as you can see from our statistics report we put out on Page 14 of our 8-K that’s where we are super concerned event. And by the way, a lot of our loans have mixed-use characteristic. We have a lot of opportunity on the ground floor, so it’s not just that if the building is rent-regulated, doesn’t mean that the ground floor is rent-regulated.
Great. Really helpful. Thanks, guys.
Sure.
Our next question is from Steven Alexopoulos from JPMorgan. Please go ahead.
Hey, good morning, everybody.
Good morning.
Good morning.
So first for the multi-family loans are you refinanced in the quarter? How much did you have kind of appraisals or values when issuing the new loans on average?
It depends on the timing of that. The reality is that we’re always proportionate to the actual market. We have the ability to recognize change in valuation, and as the market evolves there’s going to be a decrease in the value of this product. We’ve lent on this product for decades at much, much lower values. So the loan that we do has to be repayable, all of our existing loans based on how we structure them are repayable. All of our future loans will likewise be repayable, but they may be on a lower valued building. So for example, if somebody over lent and the building goes to default, and the value of the building collapses, we do a loan on the existing cash flows whatever they may be, and when we do that loan at a lower value, we are still going to be proportionately safe.
The ability for us to manage our risk is demonstrated by decades of success in doing so. So every new loan will be at a proper value based on the actual records. So we’re very confident that this is a good period for us despite the fact that there is change in the marketplace. Change in the marketplace as always given us greater share, greater return and greatest ability.
Steven, just bear in mind, obviously there’s always an abundance of caution when it’s a market shift like this. But the reality is that the way that it ought to be is what will change. We will be just writing our paper in those low weighted average LTV level. And more importantly in the event that we have our own customer that for example may go to that 50% to 100%. We’re going to charge them for it. And we’re going to – just because the loan, let’s say, 77% LTV on a debt service coverage is slightly below that criteria. They will have to pay. So I think, again, economic spread, I think, Joe’s prepared remarks, we prepared to benefit from highest spread in the business model, there will be highest spreads, it’s already starting. As probably transactions start to take place, which evenly haven’t indicating the pipeline 5% of our business is purchased, the rest is all refi.
On the purchase start to occur, the cap rates start to reset. My view is that you’ll see the ultimate spreads start to widen further, which eventually the government will catch up as well. So we’re excited about the opportunity, we’re not going to change to be aggressive or super conservative. We’re known as A lender in the space, and we’ll continue to be super conservative on our approach.
And then, Tom, I know credit quality is obviously very good again for multi-family in the quarter. But did you increase the reserve at all multi-family given the rent change and what is the specific reserve on multi-family?
So again, if you look at historical losses, which we have embedded in our [indiscernible] 7 basis points historical loss of allocation, and then you’re looking at a total reserve about 31 basis points that we have embedded in the portfolio of 24 basis point is qualitative. So no question that we have a very low list book, we follow GAAP, right. I mean, we make adjustments from time to time, and you assume we also made adjustments qualitatively, because its rent regulation changes. So that’s we have in our portfolio, 31 basis points.
31, okay. And then the prepayment penalty income, I know it was a focus for the call earlier it’s been very resilient versus peers. I think, I noticed the weighted average life has come down quite a bit, I think, on a 2.1 years in the multi-family book? Why has that come down so much?
People are sitting on the sidelines like I indicated we’re opportunistic about 2020, because we have $4.4 billion at 3.13% that’s going to 8% in the quarter. All I say 8%, they’re not going to pay 8%. They’re not going to pay this market, so market is around 4%. So as they wait on the sidelines, they have to come to market. At the same time prepay activity, we believe will be continuing to be relatively strong given that we have 2021 and 2022 credits that are coming up to the auction period. And those are all rolled in low-threes. So they’re not going to pay 8%, they’re not going to pay 7%, they’re going to pay the market, which is around 4%. So that would – so the fact that we have a significant portfolio refinancing with ourselves of substantial knowledge is indicated there are more refi within our portfolio, some are 0 point, some are 1% or 2%. They may not be the 3 or 4 points you’re accustomed to because of the pent-up demand on an increase side, but you always have choices being made by customers to lock in their financing.
I think the good news is – go ahead, Steven.
No, no. Go ahead, Joe. I just want to final one on NIM.
Yeah. I was just going to say it in the way we lend, everybody has value in the buildings that they’re managing today. We effected not over lend as many of our competitors did, so when they look at the opportunity to refinance, they don’t have to chasing after dollars that don’t exist. They already have the dollars in their cash flows. So the reality is that our portfolio has the ability to fund the acquisition of the market, as every cycle has demonstrated. Our people actually have value in the buildings that they manage, and therefore, they can get additional dollars from us on their actual rentals.
Okay. Okay. Just one final one on the margin. The fed cutting rates obviously will take pressure off your funding cost. I think the hope for all banks is that the intermediate part of the curve holds, right, as the fed cuts rates. Tom, let’s think about what the level of steepness ideally need of the curve to see the NIM expand more sustainably? Thanks.
Well, again, I’m running a very conservative model into 2020, and I have my margin going up every quarter, quarter-to-quarter by 2020, starting at the – between Q3 and Q4. And that’s assuming cut today and more likely another adjustment at the end of the year. So we’re very bullish, we’ll come in such a low pace. Our overall asset yields were at bottom and costs of funds were at peak. So I was very clear, and the positive environment was we believe that peak in Q2. So it will have the benefit of the deposit was coming down, borrowing was coming down. The forward curve is showing a much lower rate scenario. So that sticks to the rest of the year. We’ll lock in that funding at a lower cost on the borrowing side. And we’re going to be very proactive on adjusting our retail franchise aggressively as the fed goes through ease and/or neutral stance.
So we feel highly confident that our margin, but it’s very different than others, we’re not a LIBOR based lender. We’re landing in the belly of the curve. So we’re going to see margin expansion every quarter thereafter, and it’s going to be a very meaningful benefit to year-over-year comp and EPS. You’re looking at a sizable increase in earnings per share numbers from 2019 versus 2020 in a very conservative balance sheet growth, very conservative fed scenario. It’s assuming that we are – I mean, this is by the way in the new curve, so if the curve steepen that numbers will only get better for us.
Okay. Thanks for the color.
Sure.
Our next question here from Moshe Orenbuch from Credit Suisse. Please go ahead.
Great. Thanks. Most of my questions have been…
Good morning.
Good morning.
Good morning. Have been answered. Maybe could you just talk a little bit of how you see each of the next steps to play out in terms of the competitive environment in response to the rent changes like what happens over the next three months and over the next six months and over the next year? I think [Multiple Speakers] Yeah. Go ahead.
Yes. Well, it’s not only that people are afraid, their people have over lent. And the reality is, it will become more and more evident. The capacity of that particular property to accommodate the excess dollars will in fact fall away. So there is going to be value change in the marketplace is going to be significant losses taken by the excess lenders. That is all consistent with cycle turn is being driven by an act of government that has changed the pro forma income stream of this particular product. The good news for us, we always lend within the existing cash flows.
So we are not being impacted in the same manner, when in fact we refinance prospectively. We will likewise do the lending that we’ve done for decades, very conservatively and very consistently dependent upon the existing cash flows. So the dollars that are on the table for our new loans will be proportionate to the actual income stream that the property provides. So we are a lender that has a demonstrated track record, our performance during periods of adversity. The period ahead will represent adversity and many of the people that have over lent in this market will in fact we treat from the market. They won’t be providing new loans and the loans they have will be defaulting.
So the reality is this dislocation of the market works to our advantage, so prospectively we are highly confident that we’ll be able to grow our portfolio very nicely. And that we will be able to perform significantly better than the market and quite frankly to our great satisfaction.
Moshe, one thing I would add to Joe’s commentary that is a high probability of that customers may look to potentially go between 7 and 10 year money versus the traditional 5 year, just because we take a little bit loan and try to extract value, and that’s obvious – obviously that – then the agency becomes a more unique player as well as competition. But that’s possibly one of the scenarios that will play out, because of these changes.
And reality is that when they go to 7 and 10 years, we wind up getting higher yields. So this is definitely good for our prospect of margins.
Got you. And just what’s the factor that causes them to realize that decline in value, right? I mean, it’s not like they have to mark this stuff to market on a day to day basis?
Yeah. It’s very simple, the people that are making the payments, stop making the payments, when loans starts going into default, you don’t have to do an analysis, it’s pretty clear. They recognize the owners; recognize that their expectations with regards to income are not going to be met. And they make a decision as to whether they want to continue to pay that very high value property at a rate that they don’t particularly like for value, which is not sustainable. So people that have literally expose themselves to excess dollars whether they be the lender or the owner are going to make a decision that they do not believe, they can justify carrying that value into the future. So therefore they will default, that’s why the market is going to have significant change. The good news for us every time in the decade, every time the market has adjusted. We’ve gained share and we greatly outperform. This is not a bad period for us. It’s actually turns out to be based upon our conservative methods. It’s turns out to be the time that we are most distinguishably better than our competitors.
Thanks very much.
Sure.
Our next question is from Matthew Breese from Piper Jaffray. Please go ahead.
Good morning.
Good morning. Just, Tom, you mentioned several times that even running your very conservative model that every quarter in 2020 you have the NIM expanding. If you’re assuming exactly what’s in your model, can you give us some idea of what that NIM expansion could look like? Could your book ended for us?
I’m not going to give 2020 guidance. I will say from my scenario, it has 2 ratings, 2 weight adjustments, one is affected today, so going into the detail end of the Q3. And then you have one at the end of the year maybe coming off of what we call bottom margins, bottom peak funding costs and bottom asset yield. So that’s going to play out very nicely, when we repriced that multi-family portfolio and other assets that are repricing as far as growth, growth is going to very conservative. I’m running 5% growth, it’s early. I think that number is probably to be higher, but right now we are at 5%, I feel highly confident given the current pipeline 5% is very achievable for 2019.
There’s been a lot of discussion out there publicly that NYCB is not going to be able to grow 5% this year. I think, that’s still assessment given the current pipeline and even starting at 4% mid-year. So I think the growth is real. We feel confident of the growth, spreads are wider. So again, we’re assuming about probably a 180 spread in our model, it may go to 200, so relatively conservative, that’s where the market is right now.
And funding costs, I indicated, we’re going to be very proactive on dropping across the fund, affected today our rates are lower a lot, so open up the CD, probably 199, you open up the liquid CD, probably 175, so rates are coming down, I think the market is followed already. And I think the fact that again I go back to my previous statement. Our beta risk last year was high off the chart, two years in a row, we lost a money on NII, because of high beta. You have to give us credit on the way down, rates start to go lower.
We’ll see that same beta impact, the benefit of the retail franchise. $13 billion of CD is repricing at level that the highest level we had probably in a decade. They will be priced lower. And we’ll be proactive on adjustment. And by the way it is the positive rollout, just we place some borrowings. So it’s right now the forward curve is a lot cheaper than the borrowing cost, so very mindful of this transition when the fed is about easing and our neutral stance.
Right. So maybe we can focus in on that. So the cost of interest bearing liabilities, when and if the fed cuts and if we get one more, what would you expect the cadence of reduction of the cost of interest bearing liabilities that low-single-digit basis point or high-single-digit, just some color there would be helpful.
Yeah, I would say, if you think about a 25 basis point adjustment you probably looking at 85% of the move that we’re going to put to our retail franchise. So if I take some of that 250 is going to be more close to 230, it’s right now – we’re not at 250, so write down the 2%. The next move could bring it down 180 on average. You’re looking at a very proactive view on reducing our retail deposit process, we are very proactive coming off of the 50 threshold and growing the balance sheet. And we used retail funding to finance the balance sheet. So we’re going to be very proactive on reducing the cost of fund, it’s going to be very meaningful to us.
And as I indicated, I believe that Q2 was the peak of our cost of funds, both on the retail side as well as the wholesale side.
Okay. Understood.
And I’m not going to give 2020 guidance, it’s very too early, but we’re very optimistic that we’re going to have a very unique comparison, when you look at these dynamics. Looking at significant EPS comp year-over-year, even through don’t have 2020 guidance out there, you can win the model, you will see how this will react, and take into account these low coupons that are coming due that will be – refuse to go to the option period with 8%. No one pay the 8%, everybody refi. So we’re excited about that opportunity, and we talked about this last year, we thought that rates been higher. So you may lose about 4.5% now. We’re talking low 4s, the high 3s. But it’s still meaningful, better than 3.13% that’s coming due. I believe, there’s going to be more customers coming from the 2021 to 2022 option days coming in which will also pay as point on the way to the next refinance.
Understood. Okay. Joe, you’d mentioned that competitors have just simply over lent in this market, and some of your peers to protect themselves have not taken what appraisers would give them in terms of cap rates call it 350 cap rate or 4% cap rate if you something higher. Have you done something similar and could you give us some color around what the cap rate you would use versus the market to underwrite your multi-family?
I think the interesting thing is that the end result is the key to recognizing that we use lower cap rates that we in fact are – I’m sorry, we use higher cap rates and we are in a position to understand what makes the market change and how that will impact our values and have the ability for us to refi. So even during periods such as this, we have substantial refinancing and the ability for us to refi is the realization of the owner that that the rate in and of itself is not the only reason why they would come to refi. They in fact utilize their opportunity to gain dollars and use those dollars effectively to buy cheap, change in the marketplace is going to be very real. Values are going to come down.
So when we about time cap rates. You think about the fact that, I mean, the Manhattan and the Bronx are very different market, so right out of the gate, you’re looking at about 100 basis points differential between [indiscernible] coming out of Manhattan versus something that predominantly rent-regulated in the Bronx. So clearly the marketplace has embedded. So if you think about – we had a current LTVs that are out there. These are current weighted average LTVs. The lowest LTV, the company has is Manhattan and Queens. 48.40% for Manhattan, 47.8% for Queens, that’s embedded a very conservative view of that cash flow.
So other banks may be lending at 75% LTV, you can see based on the actuality LTVs that we have probably disclose that, we take a very conservative view towards cap rates, so cash flow for the upside potential. We don’t lend on the upside. We’re not giving them advance funding on major capital improvement. We view as the lender of the choice for conservative borrower that’s going to take a less dollar, and ultimately to what they’re finding when it improves rentals.
Now obviously, the rentals are not going to improve as fast and that’s given the current rent changes. However, we have a lot of embedded value, and I indicated if you’re banging the cap rate up a 100 basis point, it’s going to cost you probably about 18%, 19% in value. Interest rates go up 50 basis points. It’s probably going to be 9 basis points in an adjusted DSCR. So we’ve stressed this portfolio, we stress it up significantly and we feel highly confident that these customers will have a capacity that come back to us and get the next round of financing. That’s what important.
Okay. And given those dynamics cap rates potentially going up 100 basis points, that’s an 18% hit to the value. I guess, I’m trying to square that with the qualitative factors in your allowance, it doesn’t seem like there was much of a change or maybe you can provide some color there?
First of all, this is the hypothetical scenario, you don’t adjust your allowance a hypothetical scenarios, okay. So we don’t believe, when they – when something is purchased, we will finance that new purchase at the market, when some of the refinances will refinance that based on a new appraisal. But that loan that [indiscernible] before its options you do nothing, because the stuff is still – you don’t have to make that gap acceptance, so it comes due. So we’re very comfortable with that, and I indicated before risk-weighted going from 50% to 100%, if they happen to be in a position where they stay with us.
And the LTV, let’s say is slightly higher than what’s the regulatory mandate as far as 50% risk-weighted. We just charge them our interest, we’ll charge them a highest spread, and that’s how we get paid in value, because we’re comfortable that over time, we’ll work through this changing in the marketplace and our customers are well positioned to take advantage of as if they were indicated, dislocations, there will be dislocation, there will be dislocations for banks to lend on capital improvements – significant capital improvements. And they’ll have to figure out how to pay their bills on a monthly basis. If they default other types will come in and buy the asset based on its inherent cash flow and based on an IRR that suits them as an investor in real estate.
Understood. Okay.
I also – yeah, one thing if I want to take a look at. Page 12 of our presentation, it actually shows that over the course of the period 12/31/14 to June 30, 2019. we actually have a positive entry of the four versus zeroes in every year in charge-offs, we don’t have charge-offs as a typical of other lenders. This is just a fact.
I understand that the historically credit quality. I thought the quality factors were there to in fact take into account changes, significant changes perhaps in an industry. And therefore, this would be something rent regulation changes might be something that causes you just your qualitative factors.
We still do incur in our growth model, obviously it’s GAAP. So we’re going to, obviously, when CECL comes along we’ll adjust that. The risk in general for the market, CECL will be somewhat impact with the many institutions. We may have a little bit more of extension will no less that happens in that, Q3 is down the road. And we’ll have to do with having the asset a little bit longer. Other than that, this has been a major change in our philosophy as far as credit risk.
Understood. Okay.
The new originations, the current loans, but it’s all going to come due relatively short, it’s only put the new loans on. We have about 24 basis points in qualitative like adjustments in our loans for multi-family that take into account market conditions that will move around from time to time. But we have a very low leverage book, we’re in place cash flow lender. When the new loans come on, and the new loans come from other portfolios, we’re going to underwrite and probably more conservatively given that you’re not giving any potential view on upside potential, because the goal depending upon how much those rentals could possibly go up. So clearly to in place carefully should not be as impacted as others that are looking at upside potential.
Understood. That’s all I had. Thanks for taking my questions.
Our next question is from Austin Nicholas from Stephens. Please go ahead.
Good morning.
Hey, guys, good morning. I appreciate the comments on the risk-weighted assets and kind of the value. But I guess, maybe just thinking about the incremental risk-weighted assets, what you put from the multi-family book. And then I think more broadly you mention adjusting your underwriting guidelines, I think the word is appropriately may be just dive into the risk weighted assets, I guess the question first and then second talk about really what changes were made on the underwriting guidelines, the typical market, just kind of specifically of LTVs, debt service or cap rates?
Yeah. So obviously, our LTVs are very tight, but not changing the absolute LTV. I think, when you’re looking holistically at the future volume cash flow. They’re giving in a very little benefit of upside potential depending on the property. We’re not a luxury lender, so we have mixed-use properties, we have – properties have 50% rent-regulated, 50% non-luxury type market value rental. You look at it – you’re going at with an abundance of question going forward because of these rental potential changes, these actual changes in the law. So there’s no question that you’re going to have an abundance of caution when you look at a credit, as the appraisal well, we will evaluate it a very simple based on in place cash flows.
The big question is going to be when the market does adjust for transactions what is a willing buyer going to put a value on it, and have a value of their cash flow and what that hurdle rate of repayment. So the zero is not going to be – there is not going to be anymore zero returns of real estate to have some early returns and someone’s going to buy over the long term and invest. My guess is going to be significantly higher than it was two years ago, because of these rent regulation changes.
I think it’s important to know that we’ve been public for about 25 years now, and during that period of 25 years we’ve charged off 101 basis points. 101 basis points in 25 years, the bank interest index during that same period charge-off 2,350 basis points. The difference between us and others is glaring. It’s not a opinion, it’s a fact. And lo and behold, we have reason to believe prospectively this wide differential will continue to exist.
Understood. And then maybe you spoke about kind of the government guaranteed business. And kind of the attractiveness of that in this environment, I guess, maybe just speak to what you’re seeing from your customers and maybe demand for that longer-term government guaranteed product after these rent regulations changes? And then kind of any comments and how you’d expect that to play out over the next couple of years?
I would just comment, Joe will be more active in Washington, but I think that has been some real pressure on mission statement of the agency as far as their view on being such a dominant force in a multi-family space. But at the end of the day reality kicks in, if you have a cash flow that takes a little bit longer time to get more improvement, and you’ll tend to look longer in the curve to lock in low rates for a longer period of time. So 7 and 10 year money may come into play. We traditionally a 5 year type lender, 10 year or 5 year lease at average life of 2 to 3 years. That makes in a couple of years. We’re going to be in that market, doesn’t mean we’re going to be operating agencies, but we’re going to be a source to go potentially a little bit more, but if the a customer want to couple of more years of duration risk.
It’s just a function of the fact that they feel like their cash flow may take a little bit more time based on this changing rent law?
There is no escaping the fact, that the U.S. government does not compete with General Motors to manufacture Buicks. There is no way in the world they should be in the business of lending aggressively below the market. And they do.
And in the cycle that evolved most recently, they failed by September. Others were failing before them and certainly many failed after them, but they failed by September. The reality is they’re not the appropriate lender. They are the most aggressive lender in the marketplace. So that change may or may not occur.
Clearly, it is an active pursuit in Washington to make a change. And if that change occurs, we will be one of the beneficiaries.
Right, right.
Understood. That’s helpful. And then maybe just – you talked about being optimistic on a 5% growth number for next year. I guess, just within that, can you maybe break down for us what percentage of that you expect maybe come from multi-family versus then maybe more specifically on the specialty finance, and kind of your outlook for growth there?
So again, I’m not going to get specific on 2020. Again, 5% this year was a year of transition. Remember, we came over a very volatile $50 billion [50] [ph] line. Understand that we had no growth for many, many years. We were selling assets in previous years. It’s just to stable the $50 billion.
We came up with this 5% threshold and we can grow in what we can in light of slowdown in purchase activity, a potential change in – law change in the rent-regulatory world. We feel that we’re going to probably exceed 5%. But right for now it’s 5% net loan growth. And it was contemplated we couldn’t achieve that. So we feel highly confident we’ll achieve that for 2019.
When we deal with 2020, I think you got to think about, especially financial problems will grow probably in the 20% to 22% to 25% type CAGRs. And I think there’s going to customers that will probably move more towards [theory] [ph] opportunities, right? That maybe they’ll move some of their assets on 1031 exchanges, out of multi-family CRE. But the reality is – and by the way, we’ll be in other markets and other markets that are contiguous to our New York City market, New Jersey area that – outside of our metro area we’re very familiar with.
But we will some additional customers move that way to try to think about where they’re going to invest into, what they know very well, which is investing in apartment houses. And so, we’re going to continue being a part of with borrowers. So I think so – again, historically 5% is not a big number for us.
Our growth, when we deal with growth the acquisition strategy over the past multiple decades, we will grow in our CAGRs in the 25, 30 percentile when we had funding. So obviously, if that changes the mix and we happen to get an opportunity to acquire liabilities, we can move the number up significantly.
But absent an acquisition, mid-single loan growth is very conservative for us. Historically, it’s always been like around 9% to 10% CAGR of multi-family net loan growth.
Understood. And then, may just one last one strategic question. I guess, as you think about M&A, can you make just some comments on your strategic view there, and then any changes again in the rate environment, and then maybe also just the changes in the New York City multi-family market? Any…
So just, I’ll just comment on the M&A and, Joe, will go back into New York multi-family. I would say on the M&A front, our currency is not dead. When we have currency back, we’ll be very proactive. We always have to.
We said it multiple times probably. We’re not interested in doing the little tangible book value deal. So we’re open to business, hopefully, at a higher stock price. We have currency to utilize, to create tangible book value creation, getting great liabilities to offset some of the wholesale funding that we had and build value over time however immediate benefit to tangible book value.
That’s one of our primary goals in M&A and we’re going to be very proactive, but it has to make logical sense. It has to be immediately beneficial. Shareholders, which we are very large shareholders, have to be in a position that we create immediate value.
I think there is no escape in the fact that we have a demonstrated capacity to actually acquire banks very accretively and to put perform in the marketplace very successfully. Our price does not reflect the consistency of our balance sheet, the consistency of our performance.
And lo and behold it will ultimately readjust appropriately. We are not performing at levels as good as we performed in the past. We’re performing at levels better than the market continuously. So we should be literally trading at a significant premium to the market, and lo and behold, as we move more in that direction to utilize that stronger currency to do highly accretive deals.
I think – I would add to Joe’s comments. It’s exciting to look at 2020 versus 2019, given the current shape of the curve, given the anticipation of neutrality, we’ll look forward on a [bias believing] [ph] that we’re going to have very significant EPS growth, year-over-year comps. And that should bode well for our evaluation going forward.
So we’re excited about movement on the operating side. Well, there’s more work to go there and we’ll update our investors every quarter. But we’re razor focused on what we can control, which is operating expenses and obviously being a liability sensitive institution, if there is an adjustment towards the short end of the curve, we’ll benefit greatly from it.
Got it. Thanks for taking my question.
Sure.
Your next question is from Collyn Gilbert from KBW. Please go ahead.
Thanks. Good morning, guys.
Good morning, Collyn.
Good morning.
So just quickly on the loan growth outlook, Tom, 5% for the year, I know third quarter seasonably is slower. So should we still anticipate kind of that seasonal slowdown in the third quarter and then a reacceleration?
No, no.
No?
So, Collyn, obviously, I would say this year the dynamic is somewhat different. There’s always been Jewish holidays, all the Jewish holidays going to be there. But the reality is we had a real adjustment because of these rent regulatory changes. So obviously, having a $2 billion pipeline of that $1.4 billion is the new money pipeline. We typically pulled our pipeline.
So you’d assume that we’re going to continue to see growth, both in the third quarter and the fourth quarter. So we’re excited about that. Again, I think 5% is highly achievable and I’m not going to say we’re going to double that growth. But you can do the simple math. Depending on how much refinances, what we see right now of that portfolio, 70% is our own book refinancing and they’re taking out some more dollars, but they’ve traded value.
And that is going to add to the portfolio. I think there is going to be more adds from other portfolio. So we’re excited about the opportunity. We see about 30% of that coming today. That number will only increase. We’re going to be very mindful of what happens on property transactions. I don’t think 5% is an indication of what this on the purchase.
Eventually, there will be purchase model come back. And that will also fuel future growth into 2020, probably at lower prices. As Mr. Ficalora indicated dislocation will occur and we’re going to lend it on a cash flow basis. And it’s going to be based on, A, customer’s willingness to put money to work, on cash on cash and put leverage on it and it wouldn’t hurt our rate of return.
I don’t have the answer to what the current rate of returns going to be today. But ideally, it’s going to very conservative and we’re a conservative lender.
Okay. That’s helpful. And then…
We’re very optimistic about – we’re optimistic about 2019 on the growth side. But I’d love to say, what I can see in 2022 soon, but definitely for 2019 we feel very confident that – the only real change is it’s a change in margin. Our margin will go up sooner than my last discussion on the call. It will happen in 2019 versus 2020 and then you’ll see margin expansion every quarter thereafter going into 2020.
So you’re looking – if you do that dynamic and run it through your model, you’re looking at significant EPS comp up.
Got it. Okay. And, Tom, you had mentioned that maybe some of the borrower behavior shifts to longer duration structures. What is your all’s appetite for adding 10-year paper? How would you be thinking about incorporating that into your book?
Well, we will be opportunistic as it comes. I mean, I think we’ll wait and see. But, obviously, if someone wants a 7-year deal, we’ve always offered 7. And from time to time we offer 10, but, no, we’re not a competitor on a 10-year side.
So we’ll gauge that business. We’ll gauge our customer base. New business will probably be less than 5-0 for us, because we can go to the agency. But it’s on customer base and then locking in what they’ve created and they want a couple more years, we will accommodate that.
We have an appetite to be there for our customers, especially in times of dislocation. So we’ve done it before. We’ve adjusted terms before to be accommodated for them to create value. We’re going to have to do the same in this environment.
Okay. Okay, that’s helpful. And then just one final question, can you just tell us what the actual dollar amount is of funding that’s going to be indexed off of Fed funds, that’s going to reprice automatically when the Fed drops.
Yeah, I would say that, on the CD side it got to $4 billion or $5 billion.
About $4 billion or $5 billion, right out of the gate on the CD side and the borrowings are more forward here. So that’s a significant adjustment, day one. And I think what’d be more than exciting is that, every quarter it’s $3 billion to $4 billion that have to reprice. They aren’t getting 250 anymore and definitely not getting 285, so between 175 and the [two candid highest rate off] [ph] we have on the banking floor right now.
So that was 285 last year. So that’s a very exciting dynamic and that’s clearly – as the CD customers come to there, they then surely they have to roll their CDs. The highest rate we’re offering today is 2.10. The shorter duration is 2 or 1.99 and I’d say liquid type CDs are at 175 and that’s adjusted for today’s anticipated rate adjustment.
Okay. That’s great. I’ll leave it there. Thanks, guys.
Sure.
Thank you.
Our next question is from Peter Winter from Wedbush Securities. Please go ahead.
Good morning.
Good morning, Peter.
Good morning.
You guys have done a very nice job on the expenses. And I’m just wondering, you mentioned that expenses should be flat 2020 versus 2019. I was just under the impression that you guys still had some expense initiatives in the works.
So, Peter, it’s Tom. I would say that we’re very proud of what we’ve done. We came up with a $660 million run rate, put it down to the low 500s. And we’re going through a major system conversion occurring at the end of this year. And after that, we will re-evaluate the company’s dynamic of efficiencies and systems that we could further look at potential efficiencies in 2020.
But conservatively, that’s a big adjustment. I’d say that’s 25% adjustment over the past 18 months, and our comp structure – and overall operating expense structure, That’s substantial. We’re a very razor focused on looking at controlling expenses, given our current returns. Like I said before, we’re not a 70 basis point, 75 basis points return-on-asset company. We should be selling off the 1%.
The strategy that we’ve put in place over the past few years, given the dynamic of the Fed tightening, our goal is to get back to that 1% plus ROA. We feel highly confident and we’re moving that in right direction going into 2020. OpEx will be a focus of us. We’re being conservative.
We like to hopefully beat again. We came in this quarter; we came in better than expected, because we can control that. So I’m giving you a short-term guidance in Q3. It’s going to be around the same level. You may come in a little bit better. Definitely Q4 will be interesting, given that the conversion should occur.
We should be successful in getting it done. And then we’ll look at 2020 as being the next opportunity. And there will be certain point in time where – what is the true efficiency ratio for this company. Are we going to get in the low 30s? It’s possible, but already – I kind of guided for 2020 low 40% efficiency ratio for 2020, the meaningful adjustment coming from a high of 52%. 0.52, which is a significant drop over the past two years.
Okay. And then, Tom, just on that point, on the efficiency ratio for 2020, that’s a full-year number that you’re giving low 40s?
Yeah, yeah, yeah. Low 40s for full year 2020. Obviously, margins expand. We’re getting a lot of it from the top line, right? I told on the call that we’re going to see margin expand every quarter, assuming we have these two adjustments to short-term interest rate; one today, one at the end of the year.
If it doesn’t happen I may adjust it. But, clearly, that’s in my forecast for 2020. So you’re getting a lot of the benefit, not so much on the reduction of OpEx. You’re getting it from the NII finally going up. I think one of the analysts came out this morning talked about the 13 quarters of drop in our NII.
But the good news is we’re coming to the end of that. We’re going to see increase every quarter of NII. And that’s what’s going to drive the profitability of the bank.
All right.
So keeping that outlook progression in the margin and NII growth and the loan growth for 2020, do you think the efficiency ratio could drop below 40 by 4Q?
Yeah. I think it’s possible by the end of Q4. Yeah, I mean, the big picture is that I’m giving a conservative view, 2020. The thing is, if the curve happen to steepen, it’s going to be potentially lower than that. So that’s obviously a positive thing. But I’m looking at a relatively difficult interest rate environment.
And I’m giving you EPS comps that are substantial based on forecast. And it’s a forecast, obviously, and find a specific number of forecast, but if you do the simple math, margin going up every quarter, expenses relatively flat, asset growth, you’re going to have the efficiency ratio, let’s say, projected for 2020 low 40s, 43% to 45%. I think it’s more towards the low end of that range.
That’s great. Thanks, Tom.
Sure.
Next question here is from Brock Vandervliet from UBS. Please go ahead.
Hey, thanks for…
Good morning.
Good morning.
Good morning. Thanks for taking this question. There’s a story in The Journal this morning. I wondered if you could just react to it perhaps. Large transaction $1 billion plus 28 units, the sponsors are actually shifting from market rate units to rent stabilized, apparently to capture a New York tax break for rent stabilized units. Very unusual transaction I thought.
But do you think that type of thing, where people shift actually to rent stabilized to capture the tax break becomes more popular and a bit of a solution for landlords and valuations?
I think the circumstances building by building, it’s not going to – that’s right, it’s not going to always work. There may be unique circumstances where that works, but it doesn’t work everywhere.
But remember, you have the opportunities on tax credit out there for substantial real estate play right now that’s going to be utilized by many billionaires that look at them. They’re actually exempting themselves from tax status, which is the best possibility. And then you look at the fact that non-luxury, will be different in luxury. So the non-luxury is average rents, so let’s say, $2,500, on the $3,000, which is not so much different in rent stabilized, that may be an interesting dynamic.
They will do what it takes to make money. They will be in the marketplace looking at opportunity as real estate investors; like I indicated before when they heard of rate of return that works for them with leverage, the question how much leverage is where banks are willing to put out. We happen to be low leverage, so we’re going to be super conservative. But I truly believe that this is simple math.
It’s about cash flow, putting a capital ratio rate on it. And what is the NII as far as going forward. And is that NII going to be in [cash] [ph] blended, should look at it more conservatively now, because there may be some of erosion NII – for NOI. So that’s important to understand it. That you have to look at it with an abundance of caution given the change and we happen to be viewed in the marketplace as a low risk lender.
Great. Thanks very much.
You’re welcome.
This concludes the question-and-answer session. I’d like to turn the floor back to management for any closing comments.
Thank you. And certainly, we look forward to speaking with you again at the end of the next quarter. And the performance for the three and six months ended September 30, 2019 is now been presented. Thank you.
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you again for your participation.