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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. 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 on the company's fourth quarter and full year 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 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.
In addition, 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 its SEC filings, including its 2018 Annual Report on Form 10-K and Form 10-Q for the quarterly period ended September 30, 2019.
To start today's discussion, I will now turn the call over to Mr. Ficalora, who will provide a brief overview of the company's performance before opening up the call 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 as we discuss our fourth quarter and full year 2019 operating results and performance. Earlier this morning, we reported diluted earnings per common share of $0.20 for the three months ended December 31, 2019 that is up 5% compared to both the previous quarter and the year ago quarter and slightly ahead of consensus.
We are extremely pleased with the company's performance during the fourth quarter. In many ways, it was the strongest quarter of the year for us and marks a significant inflection point in terms of improved fundamentals. We are encouraged by the strong rebound in loan growth during the quarter, as well as the linked quarter improvement in net interest income and net interest margin. With the federal reserve lowering short term interest rates 3 times during the second half of last year, the expected benefit to our net interest margin and the net interest income has started as both of those metrics improved during the current quarter.
Turning now to our financial performance. As I mentioned earlier, our loan growth rebounded nicely during the fourth quarter as total loans increased $1 billion compared to the third quarter of the year, and rose $1.7 billion or 4% on a year-over-year basis. Multifamily and specialty finance lending drove the loan growth during the year and the quarter. Multifamily loans increased $893 million were on a linked quarter basis and $1.3 billion or 4% on a year-over-year basis.
Our specialty finance business had another strong quarter and an outstanding year as the portfolio increased $690 million or 36% on a year-over-year basis. Origination activity also rebounded strongly during the fourth quarter of 2019. We originated $3.3 billion of loans during the quarter that's up 45% compared to the previous quarter. And on a year-over-year basis, total originations were up 5%.
Multifamily originations totaled $2 billion this quarter, up 69% compared to the prior quarter, while CRE origination of $227 million increased 6%. This was the highest combined level of multifamily CRE originations since the fourth quarter of 2017. We also originated almost $800 million of specialty finance loans this quarter, that's up 25% compared to the previous quarter.
In addition to strong origination activity during the fourth quarter, we also opportunistically repurchased $771 million of multifamily loans previously originated by us, and sold to other financial institutions. These loans were originally sold by us in order to stay below the SIFI threshold. Overall, this was one of the strongest quarters for loan growth in over few years. And we continued to be encouraged by the potential loan growth in 2020 as the pipeline started the year off strongly. Currently, it stands at $1.5 billion, of which 66% is new money.
As a reminder, the pipeline is at a point in time we typically originate more than what is in our pipeline as was the case this quarter. On the funding side, total deposits were relatively unchanged compared to the previous quarter, and were up $893 million or 3% year-over-year. The year-over-year growth was led in large part by CDs, which increased $2 billion or 17% in 2019 but declined modestly compared to the previous quarter.
Our wholesale borrowings rose $931 million on a linked quarter basis and was primarily used to fund our loan growth during the fourth quarter as wholesale funding was a more attractive funding alternative during the past quarter. On the revenue front, we were very pleased to see top line revenue growth return this quarter. Net interest income increased $6.6 million or 11% annualized compared to the previous quarter as interest expense declined.
We also witnessed an improvement in net interest margin during the fourth quarter as it rose 5 basis points compared to the third quarter. Excluding the impact from prepayment fees, the fourth quarter margin would have been 1.90%, up 2 basis points and in line with expectations. This was driven by decline in our overall cost of funds and marks the first time since the fourth quarter of 2015 that both net interest income and the margin increased. We expect both of these measures improving throughout 2020 given our liability sensitive balance sheet, the fed's current interest rate policies, and these significant repricing opportunities embedded within our CD portfolio and wholesale borrowings.
Moving on to operating expenses. Total non-interest expenses were $126.1 million compared to $123.3 million in the prior quarter and $135 million in the year ago quarter. The efficiency ratio in the fourth quarter was 48.51% compared to 47.37% during the previous quarter and 49.92% during the year ago quarter. Over the past two and half years, we have reduced our operating expenses by approximately $150 million and we'll continue to focus on cost containment going forward.
On the asset quality front, our asset quality measures remained strong during quarter and the year. Nonperforming assets totaled $74 million or 14 basis points of total assets, while nonperforming loans were $61 million or 15 basis points of total loans. Net charge offs remain at low levels, totaling 5 basis points of average loans for the year and only 1 basis point of average loans during the fourth quarter.
Majority of our charge offs this year were related to taxi medallion loans, that portfolio has been in runoff mode over the last two years and now stands at $55 million. Importantly, we have now been operating under the new rent regulation laws for six months and to-date we are not seeing any negative asset quality trends in the rent regulated segment of our multifamily loan portfolio.
As noticed on Page 10 of today's investor presentation, 60% or $18. 7 billion of our total multifamily portfolio is subject to New York State rent-regulation laws. The weighted average LTV on this portion of the multifamily portfolio is 53%, about 400 basis points less than the weighted average LTV on the entire multifamily portfolio.
Lastly, this morning, 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 February 24th to common shareholders of record as of February 10th. Based on yesterday's closing price, this represents an annualized dividend yield of 5.80%.
On that note, I would now ask the operator to open the line for your questions. We will do our best to get to all of you within the time remaining. But if we don't, please feel free to call us later today or this week. Thank you.
Thank you. At this time, we will conduct a question-and-answer. [Operator Instruction] Our first question comes from Ebrahim Punawala with Bank of America. Please proceed with your question.
So I guess the first question just around loan growth if I, two part to it. One, if I take out the $771 million in purchased loan growth, I guess call it organic basis, seemed a little soft. So would love to hear just in terms of your loan growth outlook for the multifamily and the overall loan book for 2020. And I think the last time you updated on participations was in 2016 where you had about $3 billion to $4 billion in loans that had been participated. So if you could remind us how much additional opportunity there is to repurchase more of those loans back?
We only have about $2 billion more that we can do that. But the thing is the market is strong and we'll have the ability to originate well within our appetite for the period ahead.
Ebrahim, it's Tom. I would add to Joe's commentary that obviously, the focus here is to analyze, be in the market. We're very effective in the market. We see very strong economic spread compared to the previous year since the rent was -- have changed. But more importantly, when you take some of the one off transactions that we anticipated to go away in the fourth quarter versus Q3, which is a very volatile quarter, we saw our retention rate improve slightly, which is a good signal. Our goal for 2020 is to go back to that predictable retention rate historically, which will be much higher when we compare to the past, the second half of 2019. So when you think about that and you model it, modeling a mid-single digit loan growth is very reasonable for our appetite in the market.
Got it, the single digit loan growth. And I guess Tom, on the core margins, it went up 2 basis points in line with your guidance. How should we think about the margin going forward? And just in terms of where the CD book is repricing relative to the 2.37 cost in the fourth quarter?
Ebrahim, as you know I don't go on a limb more than three months in the market, because I would say it's a very interesting environment. But clearly, we have the inflection point as we expected in fourth quarter 2019, and we continue to see very strong visibility throughout the full year of 2020 with margin expansion every quarter, as well as the NII. So NII inflection in 2019 Q4 as expected up 2 basis points in the fourth quarter.
I would say for the first quarter, we'll have a higher NII expansion and probably another 2 basis points in the margin, and that's assuming no changes in interest rate and excludes any prepayment penalty income, so the continuation of margin expansion throughout '20. We're liability sensitive and we have a substantial amount, as you indicated, CDs that will reprice to about $14.2 billion and it's throughout the entire year. The lowest quarter of the repricing -- actually second lowest quarter is the first quarter was $2.8 billion at 2.29% rate and Q2 was about $2.5 billion at 2.40% rate.
So you really have a lot of repricing expectations going forward given where current interest rates are. And if you look at where CDs are coming on, it's just slightly south of 2%. I think the number was like 1.88 in the fourth quarter.
So I guess just then to be clear, Tom, you expect the margin expansion of 2 basis points. Is it safe to assume, given what you said that that accelerate so we should see -- I know you don't want to give guidance beyond three months. But all else equal, should we see that 2 basis points become 4 basis point, 5 basis points, 6 basis points, and accelerated as 2020 progresses, because that's kind where street expectations are?
Again, I feel really good that we have the inflection point. I'm not going to give long dated guidance. But I was very clear that I see margin expansion throughout the year, but more importantly the NII growth is significant for us. We haven't seen that since the first half of 2016. So the inflection point is here, the liability sensitive, we have a lot of liabilities repricing. So on the liability side, we get good benefit. In addition to the borrowings and the CDs, we have the borrowings, which is material for us and borrowing rates compared to what's coming off is significantly attractive to us in 2020 and '21.
Our next question comes from Brock Vandervliet with UBS. Please listen to the question.
So we covered the CD. On the wholesale borrowings, I know you were pretty creative last year in using some of these hybrid FHLB structures. The borrowing costs ticked down a bit this quarter. What should we look for in the near term in terms of the refund on the borrowing costs?
I'll just be specific with the actual numbers. We have $3.7 billion that come due within 2020 at 2.11 rate. We put on a trade yesterday at about 1.47 and that was about $0.5 billion, now it's based on LIBOR, Home Loan Bank floating LIBOR, and we swapped it out to three years with a swap, which of course after 1.47, so we're locked in there for three years with very little basis risk.
So that's kind of what we've been doing recently. So we'll continue doing that as depending on market opportunities. We're not going to -- we look at where our short term funding is. It's probably a 35 basis point benefit to lock it up and swap it out after two and half to three years. So we'll take advantage of that opportunity given the shape of the curve. And when you go into 2021, you have another $823 million at a 2.40 rate. So for the next two years, we have some high cost money compared to the market that could be repriced lower.
And in near term, is there anything we should be aware of for Q1 on that front?
I think it's continuing. I think it's going to be an ongoing benefit each month. We have -- it's staggered throughout the quarter. Just like the CDs. I think in Q2 for the CDs, we'll have a substantial benefit given that's almost double the amount in Q1 and it's at the highest cost of the year. So 2.38 the highest cost that we have rolling off on Q2 for CDs, and that money is coming -- already offering right now is 1.55 three month and nine month at 1.85 and at 12 month CDs at 1.50. So if you tag on a few basis points to your early customers, it's still well below 2%. So we may get a nice benefit on the CD front for the run rate next year.
Our next question comes from Ken Zerbe with Morgan Stanley. Please proceed with our question.
I guess Tom, you certainly laid out the case for a lot of opportunity on the, sort of liabilities to reprice lower. But I guess we've heard this for a few quarters now and your core NIM is only going up about 2 basis points per quarter. Can you just walk us through the other side of the balance sheet? I mean, obviously with the five year treasury, like 1.44. I mean it just simply a matter that the loans are repricing a lot lower that that offsets lot of this liability benefit?
Ken, let me clear. I didn't give any guidance within the past Q1 on the margin. So that's your expectation. But no, we're very bullish about the fact that the fund costs are going well and our yields for the most part should be in good position and where our interest rates go. We really don't know where rates are going to be at the end of the year, but we have a sizeable book of business that's coming due in 2020 and '21, the multifamily portfolio is about $3.3 billion out of 3.18 coming due in 2020, '21 to $3.8 billion at 3.32.
When you look at those rates compared to market rates, we've seen a lot of volatility in rates. We've been effectively pricing that multifamily CRE business at a healthy spread compared to it was a year ago. So that 200 basis point spread is real. Yes, the rates have come down but we still have a very good offering out there and we're going to be very competitive.
I think that the plan for 2020 is to focus on our retention. We're going to be very focused on pumping that retention rate up to historical norms. You had a nice improvement when you take some of the one off deals from Q3 versus Q4. But Q3 in 2019 we had lots of retention go away, and a lot of that was because of what we call aggressive underwriting and aggressive agencies.
We're going to be razor focused to move that retention. When you move to retention to a higher percentage with more normality for NYCB, you'll see the loan growth kick in, that's our goal for '20. At the same time, you see where the market is on security, you'll have a very small securities portfolio. There's really not a whole lot of benefit right now to put capital and liquidity to work at these levels. So we're being mindful of keeping it relatively flat and so we see opportunities.
So if I paraphrase that, it sounds like you're going to get NIM extension, but most of the NII growth is going to come from the balance sheet growth rather than the NIM side, if I understand that…
Yes, again depending where interest rates are. Obviously, if you would categorize that middle of the fourth quarter rates were dramatically higher, look where rates are today but they move around quite a bit and will very effectively get that 200 basis point spread. That's a much healthier spread we've seen, probably a good post crisis, because crisis it was a 110 spread and went back to 150.
And ultimately when the rent control was at change, we believe that 200 basis points is more of a fair spread, and we're seeing some good activity there. Our lending people are very busy. Our focus is on making sure we have the strong retention. We have all the data, we have all the loan files, we know what's coming due and we're going to work very hard to maintain our share. At the same time, we were very opportunistic in the previous quarter to take advantage of some other people that are looking at divesting a position in multifamily, including some of our partners on participation and we'll be active there as well.
And then switching gears just a little bit in terms of expenses, looks like they were a little bit above your guidance from -- that you gave last quarter. Any reason for the increase this quarter and what do you think about expenses going into first quarter?
So number one, I would say, I commend the entire team on the expense containment control we've had for two years. It's been very difficult two years to you to keep those expenses down significantly. So we had obviously a very strong expense number clearly one within our guidance. We probably see for the most part throughout the year, but for the most probably came I would say slightly better than what management expected for the expense side in 2019.
And across 2020 we believe that it's going to be relatively stable. I don't want to go on a limb yet, but I think it's fair to say that the stabilization in our expense is going to be key cost containment. We have a few items that are going to increase our expenses slightly. We've instituted a 401k match for the first time as a public company. We've increased our minimum wage for our metro employees to $15 an hour. So we're being competitive, but it is a changing universe in the New York metro area as far as compensation costs. And we've also released the salary for offices.
So my guess is probably looking at maybe another $10 million of spending when you look at year-over-year, when you normalize the expense base for 2019. So although we printed a higher number and you normalize that you're looking for 505 to 515 now the $10 million as far as potential run rate for next -- for 2020.
Just to make sure we got it right. But the 515 includes that $10 million increase?
Yes, I think that's fair. And again, we're doing a lot on -- we're going to grow this year again, that's anticipation. But we've had a lot of cost containment issues over the past few years, and we're going to still be efficient. Our conversion yet has not completed we anticipate to have that by Q2, that's probably dragging a little bit. We'll get some benefit there in 2020 and I don't want to be too aggressive on the guide.
Next question comes from Steve Moss with B. Riley. Please proceed with your question.
On prepayments, I just wondering what expectations are for the full year. I missed how much you said, Tom that was coming due in terms of loan maturities this year?
We have approximately $3.3 billion of multifamily loans, 3.18% that would be contractually maturing this year, they have to come to the table. At the same time, the 2021 books about another $3.8 billion at 3.32 that has to come to the table in the next or the next two years. So we feel very opportunistic that there'll be elevated prepayment activity depending on the economic dollars, depends on when they decide to prepay and we refinance with us or away from us.
But that being said, we had a relatively strong Q4 on prepay. Activity was strong. Q3 versus Q4, I'd say was a very healthy quarter. Origination stream was very strong, as Mr. Ficalora indicated, a very strong origination quarter. We anticipate to have a very strong follow through as you go through 2020, given the dynamics of the marketplace, there was some interesting deal that hit the market. And when you look at what buyers are looking at transaction, the hurdle rate of return is a higher but they're getting done. So there has been that deal activity is starting to move slowly towards buyers and sellers. Yes, it's a Q4 activity, it always happens on Q4. But we see deals being done, which is interesting because the hurdle rate of return are reasonable.
These are 100% type multifamily rent regulated buildings being transacted at levels that are reasonable. Cap rates are very reasonable. They're not elevated. So I'd say the reaction to the rent control changes that hurdle rate of returns for long term property owners are higher, they're getting some transactions done and we believe that will continue as we move further away from the enactment of the new change in the law.
And then Tom, I think you also said that the second quarter C-bucket's the largest. Just wondering how large that bucket is in re-pricing.
Q2 is about $4.5 billion that's [indiscernible] to 2.38 coming due.
And then just in terms of new money yields here, just wondering where you're seeing spreads for multifamily and CRE these days?
We've been holding solid at 200, probably another eight to a quarter above that to CRE. We're going to adjust to be competitive. But we've done a fine job since June on making our presence known that we need to get paid a higher premium compared to historical premiums of that 150 spread on the trading. So it's still hopping around 200 give or take rates here and there but it's been very healthy.
Our next question comes from Steven Alexopoulos with JP Morgan. Please proceed with your question.
First on the 771 million of loan repurchases in the quarter, I assume that was done at par. Correct?
I'm not going to be specific on the price. But obviously this tape is probably two years left. So it's all loan. So it's under -- as we control the transaction, we're going to be very proactive. So I would say approximately that level, but give and take I'm not going to be specific on the actual dollar. But we're opportunistic. We think that there's a few more out there and we're here to accommodate. These are the loans that we've originated. We have all of the files the data and we will in the event other partners are looking to move away out of this line of business and/or decide to be more focused on C&I.
So bear in mind, Steven, when we put this in place, we were in a shifting threshold criteria we could not grow the bank. So we had billions of dollars that had to go to the marketplace and our partners, our friends out in the marketplace are very accomodative of our asset quality metrics. So we are very pleased with be able to offer that in our balance sheet to give it back.
And probability, we will refinance most of these loans.
And I think what's important, the way the transaction is originally structured, a lot of this retention that we've done we've originated, if someone has to take [indiscernible] at 75/25, we have the 25, we only keep 25. So as we take this out, we have more potential for growth and that was part of the ongoing thing over the past two years. We've had many players that get refilled on these financing that we are actually getting less of the deal because of the transaction that we struck with them on the original sale.
What would be the yield of the $771 million?
Probably just under 240, 340…
340, okay…
And as I said it's got two years life left it's not two years average life, two years life left, so that 2015 and 2014 origination bucket. They grow and they're going to go on most year and half. And by the way, we don't have to replace with tied to suit terms and so that need to start to do with the refinance.
And then the $2 billion that's remaining which you could repurchase. Could you repurchase all that tomorrow if you wanted to, or are there time restrictions or other restrictions on that?
There is no time restrictions. I mean, look, it is what it is. If someone is willing to, we would love to have the opportunity to take our loans back as we believe in our credit metrics. If those loans are done at a very optimistic time and that's well underwritten as well LTV. So clearly, I'm not leading to go to as far as numbers, but from time-to-time we will be there for the market. I don't want to give you false expectations. You know, the best loans in the market we think are our loans. So we're more than willing to accommodate.
But if the yields are not bad and the credit quality is good, why are your partners looking to divest these?
There's a number of reasons. I mean, obviously, you see many public statements made by lot of competitors. They are diversifying their balance sheet and C&I, and they're doing other things with their business model. We are a multi-family CRE lender. This is our business model. We focus in the rent regulated rent controlled marketplace, that's what we do. We do not -- we're not -- we're going to try to say we're a commercial bank doing C&I lending. This is our core business model. So we will be there for our customers, like I said initially from when the rent was changed at highest spread.
We are far more comfortable with these asset and people that have never originated these assets. So for us, the future period is not an unusual concern. This is going to work out very well for us.
And then as you guys are seeing new appraisals on multi-family loans. How much of valuations contracted post new rent regulation, now that you have six months?
So I would comment, there hasn't been a lot of deals that have been done, but you've probably read the same publication that we go, you have a lot of information that's not correct, because they don't take the full picture of the transaction, as most of these deals have a commercial use component to the total rent rule as well as the rent control aspect. But the cap rates that are coming in are not near of what the fear was when the rent rules were put in place.
So we are still seeing low 5 to mid 5 versus high 4s in certain markets. Like I said, you have to look at each market, each street, each area differently, each borrow, France versus Manhattan, certain pockets of Manhattan versus other pockets of Manhattan, the diversity of the income stream. So cap rate have held in very well.
You want to do some statistical analysis maybe a quarter, 25 to 30 basis points movement in the cap rate, which is not near what the fear was initially. Some of the publications have put these numbers that made no sense, down 40%. It's not reality. They've been literally carved out of the commercial use space of the income stream. When you add that back, it's not unreasonable decline on value adjustment, because of the -- really the driven of the hurdle, the hurdle rate of return.
This is not -- when you think about the business model, some of them put their capital up and they'll be financing behind it, if they can get high-single digit, it's attractive either a long term property owner and you have thousands of units that you manage, and you're willing to put your money up at a high-single digit return. That return, when it was at its peak, was zero, because they were moving units constantly.
So the fact that, zero became my single digits, there is a market for that. When you put IO features into it, it comes out to mid-teens. So on amortization you're probably looking at high single with IO, its mid-teen.
But it's really important to recognize the change that has occurred has impacted future values.
We never lend on future values. We lend on existing values. So that our portfolio has not had any adverse effect of the change and our prospective opportunity is going to be based upon whatever the numbers may be, when in fact we're projecting the value of the asset. That is going to be consistent with our tax practice.
We've never used the future value and therefore, the trade in the real estate, six months from now, 12 months from now, is not going to impact when I order our ability to lend, because we lend on the existing values that are in the portfolio that actually doing this in that particular building. It is no concern that we have, that our assets are going to start non-performing, because we over lend many, many, many, many people in the market and everybody knows this.
If you're lending more dollars than we're lending, you're lending on the value other than the existing cash flow. We only lend on the existing cash flow. So even though this change has occurred and the prospective value will be less, it doesn't threaten our ability to be repaid.
And Steven, I would just add one additional commentary that it's very encouraging to see large transactions hit the marketplace and being financed. There's -- some of them are well financing others are financing, but the reality is there are people stepping up looking at the long term and getting us the reasonable rate of return on their money, and willing to be in this business. And a lot of the nuances between how they manage these units now are going to be somewhat different.
They're looking for loophole based on the rent rate changes, in particular they'll leave units vacant and try to join the adjoining unit next door. That's something that some of the wealthier players can do, but they have capacity and have network to do so. So I think you have seen a lot of that and it's probably less units hitting the marketplace than ever before because of these changes, which unfortunately will be negative for the city. But you know these large players will continue to transact.
And Joe, if I could change direction, just actually one final question. So we saw another MOE announced earlier in the week and you've talked about wanting to do a deal for a while now. Do you feel any sense of urgency to try and get something announced and done before the release approved before the presidential election?
No, I don't feel any urgency to do that. But I would suggest that we are actively in discussions in the marketplace with a variety of people to accomplish the goals that we have articulated. Over the course of our entire public life, we've made it very clear that we have the ability and have the desire to grow by acquisition and create value for shareholders. So there is going to be a transaction on the horizon that will be exactly in line with the kinds of things that we've done in the past. So I would ultimately suggest to you that we are in active discussions to do transactions, because that's what we do.
Our next question comes from Peter Winter with Wedbush Securities. Please proceed with your question.
I was just curious. Last quarter, you talked about the efficiency ratio for 2020 in the low 40s. I'm just wondering if you're still comfortable with that range.
I kind of -- I hate to go on a limb to go specifically. But I gave you the expense guide up 10 based on normalized 19. Obviously, prepay does play a factor so I'm not giving any guides on prepay, but we should have a relatively healthy prepayment world in 2022 given the duration of the portfolio. At the same time, I think that we have the NII going up every quarter. So we should see improvement from the overall efficiency ratio.
Our goal would be to bring in the low 40s but hopefully, mid to low 40s is kind of our target. It's going to take a few positive changes in the marketplace to make that happen. But it's not an unreasonable given the fact that we've been in a cost containment mode for so many years and that will flow in the balance sheet and our NII now moving in the right direction. And we have a compressed NII for many, many years. So this inflection point should bode well for the other attribute of the calculation of the efficiency ratio. So this should help us improve the ratio.
And I was just looking at securities to assets that's been in a pretty consistent range last couple of quarters at 11%. I'm just wondering if you're thinking about growing the securities portfolio, because I think you'd like to get it at some point at the high teens from…
Yes, I think it's fair to say that piece, but at the end of the day, you look where spreads are right now. We've had a lot of the bank just pay off over the past six to 12 months. Cash flows are flying into the bank as far as structured mortgage paper. So we were very large Dutch player and stuff has been very nice as far as overall yield to the bank. But at the end of the day, the yields have come down materially.
So we're going to allocate our resources through the loan book, in the event the market changes and we start seeing a slope -- we'll call it, highest slope and we'll get to that level, it's going to take some time in this market given where interest rates. But if we go back to a healthier curve, we'll be more proactive.
And then my last question, just can you talk about what your expectations are for deposit growth in 2020? And how you think about the balance between deposit growth and the use of wholesale borrowings?
I mean, we're going to be obviously in the market with deposits, the goal is to commensurate with asset growth. If you look back for the full year 2019 we grew deposits almost as consistent with our asset growth. We had a little bit more wholesales towards the end of the quarter and fourth quarter, because of the fact that we shifted a lot of the higher cost relationships out of the bank in Q3.
But when you look at overall absolute deposit growth, we had a good year deposit growth in 2019 that's the plan for 2020 commensurate with asset growth and we'll readjust depending on market conditions at the same cost substantially when they're ultimate. But right now short term money is expenses compared to, if you look at the belly of the curve and pushing it out a few years, like I said previously, we locked in solid funding at the low, I'd say 150 -- 147 and 150 versus short term rates that are out there at high one. So it's attractive. Both sides are attractive given that we're reliability sensitive, but the more attractive aspect is the refinancing of our current liabilities.
Our next question comes from Christopher Marinac with FIG Partners. Please proceed with your question.
Tom and Joe, the success you've had on the specialty finance the past year and the pipeline looks really strong. Could you remind us the differences in yield on that portfolio, and then the types of things that you do and also types of things that you avoid in specialty finance.
As you have talked about, our team has done a phenomenal job and we're very pleased of the introduction. We believe they're going to have another strong 2020 and we support with the team members that have done an incredible job focusing on asset quality.
No late pays, no delinquencies, no defaults, no real credit hiccups that we could speak of and very well diverse book. The book is broken out between three categories, asset-backed loans, equipment finance deals with flow planning asset-backed around $700 million outstanding with 25 percentage of total outstandings compared to the total dollar amount of $2.8 billion. Equipment is about $1.3 billion that's 48% of the total and deal flow funding, which has been attractive in this environment at $775 million, which is 27%.
The yield on the paper is slightly higher than our multi-family yield when you take into account fees that we amortize to the yield. It's about 3.66%. We're going to be active. I think what's most important is that what we see is we turn down most of what we see. So effectively doing about 10% rate on 100% of what we see. So 90% is what we don't do, not because this credit to be yield that could be at various reasons our board may not be happy with the various counterparties. But at the end of the day, we typically have been turning down 90% of what we see, we've been growing the book around 25% on the CAGR basis.
So we are very pleased to allocate capital there. Like I said in my previous conference calls, it doesn't come with deposit relationships. We are not intrusive to the lead banks, but we are a credit buy up shop. And so we are going to be very -- we will be a good partner for some of the largest players but we're not bookings deposit relationship, that's a down -- that's one of the negative aspects of the business. We're not bringing in funding in this type of business.
Okay, great. That's really helpful. Thank for going through that. And then, speaking of deposits, it seem that the core deposits ex CDs had a solid quarter, and was stronger than the total. What do you see for this year? I know it's still a challenging environment. But what sort of been your deposit pipeline?
We think that is going to be continuing similar to the trend that we saw in the fourth quarter. Rates were dramatically lower than a year ago when the Fed was in a tightened mode. So highest offering rates in the three month category will be highest cost of money into the short end of the curve. For three months at 165, and I think customers are looking at that as a viable alternative and going out to a year longer given where rates are, a one year offering on the liquid CDs around 1.5. So we are clearly enticing customer to go into the shorter duration.
Our nine month money is at 185 you are seeing that yet. So customers are keeping inside of one year has been consistent for the past decade. And we think that as the fed happens to reduce rates we'll benefit further. In the meantime, if the fed stays flat for the year, this should be very well planned for 2020 to take advantage of those higher cost CDs coming due throughout the year, which I have mentioned in the previous commentary.
Our next question comes from Matthew Breese with Stephens. Please proceed with your question.
I was hoping you could talk about CECL, what the day one trip reserve would look like. And then on a go forward basis, could you help us understand what types of growth you are talking about if we should expect that reserve to increase or decrease? Or just any sort of commentary on day two as well would be helpful.
So I'd say, on respect of the one-time adjustment, we are looking at 25% to 30% increase in overall reserve, which is about $15 million to $30 million -- and 10% to 20%. Again, we don't envision its having a material impact to our company given that we are real estate lender and our duration is very, very short compared to other types of loans. If you look at our average life at 2.5 years for the book, it's very short, albeit macroeconomic changes to the environment. It's hard to predict what could happen two, three years from now. But we are a multifamily that has a relatively short duration book, and should not have a material impact going forward. The capital is probably between 3 basis points to 6 basis points upfront and not material.
And then sticking with the capital question. Over the last year, year and a half, we've seen capital is measured by tangible common equity grind slowly lower. Given the kind of growth outlook you're talking about the NIM expansion. How comfortable are you with taking capital levels potentially lower? And do you see any need to adjust the dividend or potentially down the road raise any sort of common equity?
I am not going to go to the dividend question at this stage of the game is doing, because we've been doing this for quite some time. Obviously, commensurate with NII growth, margin expansion [indiscernible] EPS growth. So like I said in the previous quarters and I think I'd say we should have the double EPS growth, which is reasonable and that's conservative. So I think that we're in a positive -- in respect to build some capital for the first time in a while as earnings improve with this dynamic of the margin and NII spend. So I think we're encouraged by that.
I was very comfortable with our capital position. We have no losses. We have a history of no losses. We have a history of having the best asset quality in the country. So as far as when you allocate capital [indiscernible] has zero losses, we have very little allocation towards the impact of provisioning for high quality, low leverage lending. So we're very comfortable with our capital position. Our dividend is solid and we've always been standing by our dividend and that's been the hallmark of the company.
And then going back to your mid-single digit loan growth comment, the pipeline is down 30% quarter-over-quarter. Just want to get a sense for how much of the growth you anticipate being from organic versus repurchase activity, if you could give us the breakdown.
I wouldn't even budget repurchase activity and I know organic. We are razor-focused to increase our retention rate, which we will do in 2020 and more importantly, if you look at the $3 billion in business in the fourth quarter, the Q1 is down on seasonality, it's a seasonality quarter. So we're very excited about what's ahead of us. Our guys are extremely busy. The pipeline that we announced is a committed pipeline, the pipeline that we have is much higher because the loans are coming in and we're razor-focused on managing that retention rate, managing that $6 billion, $7 billion of business coming due in the next two years. We have the file. We have the data. We will make sure that we get first crack at our customers.
And then just last one from me is we get to see the press releases. We don't see behind the scenes what's going on with LTVs and reappraisals like you do on the multifamily side. And so I was hoping you could just walk us through where there have been reappraisals? Where there have been valuations that have come in lower? Have you seen any LTVs that have tripped over 80%? If they do, what is borrower behavior? Are people willing and actively bringing cash to the table to maintain low LTV? Just some sense of comfort around borrow behaviors and analyze lower valuation?
So I am not going to stand heavily about this. By the end of the day, we're a low leverage lender and we don't see these types of numbers that you're concerned about at today's environment. We're two quarters past the rent control laws that's been in effect. It's going to take some time to see what the impacts are in other parts of the borrowers. But at the end of the day, if you're low leverage lender and buyer themselves are coming together and then putting the hurdle rate of return that people can agree with, there will be transactions.
We'll finance it based on a very conservative policy and if we lose loans, we're losing because other banks are being aggressive. We play against the government, we play against a lot of large banks but we are very targeted toward super conservative underwriting. So what we're seeing right now, you'll see a lot of information in the current trade publications about deals that get done.
We're not doing all those deals, because it doesn't make sense for our balance sheet. But you know you may have to extend a little bit longer in this environment, because property owners they want an extra couple of years with a five you may go to seven, you may do some 10 year money, you may try to tweak some IO structure from no IO maybe Q3 of IO, but you'll be competitive. But it all comes down to that, we're not going to lose deals because of rate, we will lose deals because of power. And that's always been the hallmark of the company.
So when times are difficult, there'll be activity. Buyer will come in and buy opportunity. Then we'll finance that opportunity. So we're not there yet. The good news is that some of the non-traditional players that are equity financiers or bridge financiers are getting dilutive on their deals, because they're not working, but that's not our book, so that's positive because you're not seeing the losses yet. It's a handful of customers that are in the -- not our customers, the handful of customers that are in the Fannie Mae structure or the Freddie Mac structure that are coming into some difficulties. And when it goes to the special servicer he's put out the sale, someone will buy that at a hurdle rate of return that works for them. And if the numbers are right for us, we'll finance it.
Understood, okay.
And I'll just say one other point. Cap rates are not moving aggressively. Cap rates are holding very nicely. Interest rates are relatively low compared to last year, so you still have a very low cap rate and you have a low interest rate environment. So business is relatively strong because of that.
Our next question comes from Steven Duong with RBC Capital Markets. Please proceed with your question.
So just getting back to the competitive environment. Can you give us some color to what you're seeing today versus what you saw last quarter in terms of the GSEs and other non-banks? And what are the factors driving those differences?
I would say that, it's some. I would say that GSE is very real and very large and it's going to be always a welcome player, and the Dutch players will be very active. And IO is a very attractive alternative for customers who want to bring their payments lower and try to drive higher returns to them potentially over 10 year period. We've been very proactive in trying to avoid that type of model. When we structure IO, we tend to be hybrid IO play, maybe one, two, three year type IO.
But if you have a solid low leverage transaction with a very good long term customer, you may have to play in that landscape. What the best scenario for us is rates go up in the back end, the agencies are less relevant. So right now they're relevant but will compete. And I'd say the government has the biggest acts for the transactions in the marketplace. And at the same time, you know like I said, we're going to be very active on managing that book that's coming due and making sure that we get first crack at all our customers.
And then just last question, your noninterest bearing deposits had a nice uptick in the quarter. Can you just give some color on that?
I would say, just again seasonality, escrow year end, I wouldn't think any of this because it's not a targeted plan. It's just we're running a very large deposit book but we do have some seasonality there.
Our next question comes from Collyn Gilbert with KBW. Please proceed with your question.
Just first on the funding side. So, Tom I appreciate some of the rate you are offering, that you are putting out there on the CD market now. It seems like some of those CD rates are probably below market or sort of at market. I mean you still have confidence in your ability to grow the deposit book even if you are below market rates on CD?
A - Thomas Cangemi
We're a large institution, we have a lot of branches in different markets. Like I said, we do offer a hybrid elite customer base, maybe a few basis points of customers who are going to penalize us for 5 or 6 basis points to retain it. But at the end of the day, we have been very competitive there. We are not in a massive growth campaign right now. We're going to go to growth campaign if the market does change and the 5% becomes 10% growth on loan side, then we will go into a growth campaign mode. But if you’re in the market, where like you said, in the middle of the range and I think slightly south of 2% on average is where the overall market is. I think by the way the market is still high. If you look at where treasuries are trading now. I think a lot of liquidity was put in place because of balance sheet requirement, some of the larger money centered banks were pushing their balance sheet requirement. But as we think where rates are right now, and rates have come down quite a bit, we’re at 1.85 in nine months, it’s a reasonable rate, probably too high and the fed cuts rates were lower. But in mean time, our model has no fed changes, we assume fed’s on hold for the year and we’re in a unique spot with benefit from a liability sensitive balance sheet and see some good NII growth from that, very quickly.
Okay. That's helpful. And then just so Tom you had indicated deposit growth commensurate with loan growth. How about if you do see more opportunistic loan purchases? How do you intend to fund those?
We will be -- we will look at both the wholesale markets as well as the deposit markets. Like I said before, the wholesale market if structured properly is very attractive right now. There is somewhat of uniqueness when you look at the value of the curve and short end of the curve, short end financing is expensive compared doing a three or four year lockout with putting a swap on. So, we have been doing that from time-to-time. The basis risk is low. I think it’s a reasonable execution and we have been very proactive there, bullish from time-to-time depending on the market place, but we're putting money on 1.50 right now versus the 1.90 on CDs so it’s definitely have a reasonable delta to move towards wholesale.
Okay. Okay. That's helpful. And just also to your point, right. So, retention is going to be key to sort of a loan growth outlook. Just a couple of questions on that. So, you had indicated and I think this is the first time you guys put in the press release, so the pipeline has 66% new money this quarter. Do you have what that percentage was from last quarter's pipeline?
So, I would say, I think we have always put it in, maybe if I look back I remember various press releases we’re always trying to tout the overall new money pipeline. New money has been around two-thirds and that’s been pretty consistent. I think what's interesting is that, you know when you have certain deals that are going to go for good reason, we had some customers that financed themselves rather than going to the bank because of mortgage transfer tax. They didn’t have to deal with the expense of doing a transaction in New York. So they used their credit facility which was cheaper than getting money from the bank. That happens from time-to-time. So, you take advantage of those one-offs and try to carve out what happened in the quarter, I think the retention has improved slightly. We have a long way to go. I would like to have that retention rate going back towards the normality which was significantly higher than we were in the previous six months. So, you sort of drop off when the rent control laws are put in place. We had a lot of volatility in Q3. Q4, we had good stabilization that helped the yield curve in Q4, very attractive buying and selling. It wasn't a blockbuster quarter as far as transaction but there was some transactions and things are getting done. So, I like the fact that there’s a predictable fed right now more or less for the year and I think that customers have realized that a lot of money has to be dealt with in the next two years so they have to finance and we’re there, we’re open to business.
And then so just kind of along the lines of the $3.2 billion of originations, net growth, putting the purchase aside was $280 million. So just trying to sort of, I mean obviously better understand bridging that gap and I think when you talk about the outlooks for prepays and that dynamic in 2020, I guess I'm -- if they're contractually maturing, if you've -- the numbers you've laid out are contractually maturing this year, why would they prepay? I wouldn't think they would prepay, right. So wouldn’t prepay income be significantly less?
Like I said, depending on what bucket comes due, it’s very important. We know that in 2020, if they wait the last second, they're not going to pay 8% on their financing, right. They will pay the market. Let's say the market is 3.5%. So the 3.18% going to 3.5%. It’s still good for the bank. Yes, you don't get a prepayment, but they're rolling into the next financing. But those loans have no choice but to come due. The ones that are in 2021, '22 is where the opportunity will arrive. They decide to lock in for the next seven years instead of five and they choose to do so based on their own internal decisions, based on financing their entire portfolio of loans.
We're going to be very active on working with our customers to get into the table sooner. We do that all the time, but in this particular case, our goal is to maintain higher retention. So we know what's coming due, we know what's coming due in the next -- for the next five years. But for the next two years it’s an opportunity to take those lower yielding loans, and not put them in a position to go to a much higher base because no one knows where rates are going to be a year from now. They may opt to finance today, and with so we could be proactive with the portfolio.
Okay. Sorry, one last question, the retention rate. Did you -- can you tell me -- tell us what that was this quarter and where -- how that compares to what you've been running previously or what your goal is?
So the reality is that our goal is to get back to historical level, which is well above 50%. Okay. We are not there yet. The Q3 was probably the worst we've seen. We've bumped it up by 10%, when you carve out certain loans that we knew were going and were not willing to finance. I mentioned one in particular because it was a large loan over a $100 million that used the credit facility to finance themselves. And you take those one-offs, we probably improved our retention rate by 10%. So 34 becomes 44. We need to be well over 50 and moving towards 50 in 2020. That's the goal.
We have a follow-up question from Brock Vandervliet of UBS. Please proceed with your question.
I know you talked about the day one CECL impact. We've heard a lot of banks kind of walking up net charge-offs guides for a variety of reasons. How should we think about 2020 as far as net charge-offs, is this still a 5 basis point kind of a number, or should we be thinking something more given the shift into specialty finance or what have you?
No, Brock. What I would say if you carve out the medallion, zero is probably the number for us. It’s really the history, you know the history of the company, our credit quality. Medallion has been most of the charge we've taken over the past few years. The good news there, there are some major players circling to look at acquiring most of those assets in the marketplace. So it sounds like we're getting close to bottom there. You never predict where the bottom is. When you take out medallion losses, they don't have any losses, as far as specialty finance, it's been a -- we haven't seen a 30 day ever.
So I think we're in a very good spot. I wouldn't work too hard in understanding odd difference between a credit card because we’re -- this is what we do. We're a rent-regulated multi-family CRE lender with a history of no losses. I think our CRE book is half the loss we've had in multi-family, which is de minimis. So yes, they can avoid the change. We're going to take a upfront change in the provision because we have to, to rightsize the one-time adjustment, the capital impact of that is between 3 basis points to 6 basis points. But after that, it’s business as usual and a less of a change in the marketplace and duration goes from two years to 10, I don't envision any real material changes for us.
Medallions are down dramatically. That’s not part of our business. It's something we had actually negotiated to sell. We'll be getting out of that consistently over the period past.
Thank you. At this time, I would like to turn the call back over to Mr. Ficalora for closing comments.
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 April, when we will discuss our performance for the three months ended March 31st '20. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. And have a great day.