Q3 2019 Earnings Call

Thank you all for joining in the management team in New York Community Bank Calc for today's conference call.

Today's discussion of the company's third quarter 29 feet performance will be much like president and Chief Executive Officer Joseph Ficalora.

Chief Financial Officer, common scan chummy, together with Chief operating Officer, Robert Lawn, and Chief Accounting Officer John .

Certain comments made on this call will contain forward looking statements that are intended to be covered by the safe Harbor provisions on the private Securities Litigation Reform Act of 1995.

Such forward looking statements are subject to risks and uncertainties that could cause actual results could differ materially from those the company currently anticipate due to a number of factors many of which are beyond its control.

Among these factors are general economic conditions and trends both nationally and then the company's local markets.

Changes in interest rates, which may affect the company's net interest 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 deals and investment products and other financial services.

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 it's actually see filings, including its 2018 I know report on Form 10-K , and Form 10-Q for the quarterly period ended June Thirtyth.

29 tea.

The release also contains 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.

This time, all participants are in listen only mode.

You will have a chance to ask questions during the Q when they following management's prepared remarks.

Structures will be given at that time.

To start the discussion I will now turn the call over.

The second Laura will provide a brief overview of the company's performance before opening the line for Q1 night Sycamore. Please go ahead.

Thank you for joining us today as we discuss our third quarter 2019 operating results.

Earlier. This morning, we reported diluted earnings per common share of 19 cents a three month ended September Thirtyth 2019.

Age from a three month.

June Thirtyth 2019, we're pleased with the company's third quarter performance, given the economic and interest rate backdrop in place during the quarter.

The main highlights in the quarter was the stabilization of both our net interest margin and our net interest income.

With the ethylene see lowering short term interest rates twice so far during the quarter.

And the high probability of another rate cut later today, we are starting to see a benefit our funding costs, which given our liability sensitive balance sheet is a positive.

Going forward.

Turning now to our financials for the third quarter, we were very pleased with our net interest margin for the quarter and one point, 99%. The margin was down only one basis point compared to the previous quarter and inline with our expectations except.

Moving the impact from prepayments, which rose 12% to $14.1 million. The margin would have been one point, 88% also down one basis point compared to the free this quarter.

At the same time net interest income of $236 million was relatively unchanged compared to the previous quarter as our asset yields remain stable, while our funding cost declined modestly.

We believe that this quarter marks an inflection point in the net interest margin and net interest income and we expect further improvements as our funding costs continue to trend lower.

On the lending side, our loan portfolio was up nearly $700 million work Huber said on an annualized basis compared to the level at December 31st 2018.

Led by our multifamily and specialty finance loan portfolios, but on a linked quarter basis total loans held for investment declined modestly during the quarter I never multifamily loans refinanced away from us and other financial institutions, we're willing to provide them with more.

Then we will relate to extent given our stringent underwriting criteria.

However, on an average basis average loan balances increased.

5% annualized to $40.8 billion compared to support our core.

That notwithstanding our loan pipeline remains very strong heading into the last quarter or the here.

Our current pipeline is $2.2 billion up 10% compared to the pipeline at the end of the second quarter.

The weighted average yield on the multifamily and theory pipeline was approximately 3.7%.

Looking at our funding as detailed in our press release, our deposits or lower this quarter as we strategically decided to let approximately $1.6 billion in high school institutional deposits walk.

Thank you said to focus on lower cost retail deposits and other relatively less expensive funding sources.

I had only a modest positive impact on our deposit costs during the quarter, but we'll have a more meaningful.

In the upcoming course.

In addition, most of our deposit growth over the past here has been centered in Cds. The majority of the Cds are short term and mature in under one year.

Given the interest rate environment. This should provide a benefit to us going forward.

Likewise, our wholesale borrowing costs have been positively impacted by lower market interest rates, we should continue to benefit from this over the next five quarters.

Moreover, we continue to aggressively manage our funding costs lower and proactively we do see higher cost deposit relationships.

Moving onto our expenses as you know we have been extremely focused on reducing our operating expenses over the past six course, and our operating expenses this quarter decline for.

Excluding certain items related to severance cost a $1.4 million total non interest expense on a non-GAAP basis would've been $122 million down 4% annualized compared to the park water and adjusted efficiency ratio would have been.

46.83%.

137 basis points compared to the prior quarter.

Compared to our peak annualized run rate of $660 million into second quarter of 2017 operating expenses are down 26% based on this quarter's annualized run rate.

On the asset quality front, our asset quality metrics, we made solid during the third quarter nonperforming assets totaled $68 million was 13 basis points of total assets, well nonperforming loans were $56 million or 14 basis points.

Of total loss.

More importantly, we're not see any negative credit trends in the right regulated portion of our multifamily portfolio. After the passage of new weight control laws in June .

The weighted average LTV for total multifamily portfolio was 57.16% at September Thirtyth 2019, while the weighted average LTV or the right regulated portion of this portfolio was 53.54%.

Lastly.

This morning, we also announced at the board of Directors declared a 17 cents cash dividends per common share core the dividend will be payable on November 20 cents to common shareholders of record as of November 11th.

Based on Yesterdays closing price this represents an annualized dividend yield of 5%.

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, many many but if we know please feel free to Paulus later today well this week.

Great.

Thank you at this time, we will conduct a question answer session. If you would like to ask a question. Please press star one well your telephone keypad.

Information told indicate your line is in a question in queue you make press star to remove your question from the Q4 participants uses speaker equipment. It may be necessary to pick up your handset before present, the starkey one moment well be poll for first question.

Our first question comes from Ebrahim Poonawala Bank of America. Please proceed with your question.

Good morning, and wanting even more in line.

So I guess first question. If you go to start with the margin outlook Pall Mall.

In terms of Joe mentioned around often deposit golf balls up this quarter didn't really show up in the funding side in terms of the cost for if you could give us a sense of one your expectation for the margin in the fourth quarter and maybe a little bit ahead of you think about the October caught all of this flowing through into 2020 that would be helpful and.

Just the magnitude of walk you should expect on the cost of interest bearing liabilities Oh heading into Fourq Hill.

Sure and good morning, I would say that I'm. Obviously, we're pleased that are guiding still holds one that we will see margin expansion starting fourth quarter. So that's been a significant shift as far as the fundamentals of other constant decline over multiple years, so our guidance as far as guidance for the fourth quarter I wasn't will be up and I will be up as well.

In the same quarter, which is a very favorable shift for the balance sheet metrics I'm looking at probably anywhere from let's say conceivably two basis points in Q4 of them want an uptick but what's interesting as you recall, we don't have thought we had to weight reduction forecasted in the middle of the on obviously, that's not three well.

Likely what today's most respected cod and actually we have an additional one and one and done so that's going to bode very well for 2020 as far as the continuation of a quarterly margin expansion every quarter throughout 2020 based on a flat curve, so assuming that you'll crept a steep and if that's one of the scenarios you can see.

See more of a powerful oh, that's the modular clearly even with a flat yield curve environment with another cod today and possibly one in the first quarter, let's see margin expansion every quarter throughout 2020 in a pretty meaningful way.

Got it and you said to be a sequence of expansion is what you expect in the fourth quarter, though yeah conservatively today, probably about two for Q4, and what the and I going up as well what sort of.

It was consistent what we talked about in previous quarters, what the and the additional one quarter well. The additional one rate adjustment was also a favorable outlook for that having another rate cuts in to help out as well.

Oh and what's the debt you mentioned about 5 billion outdoor six what does that see pricing add to what the next frame quarters, what should we assume for that.

So I would say right now you're looking at 'em without using any options you're looking at in let's say the upper one so let's say 160 to 170, if you put options against that low ones, we've been some restructuring throughout the.

Summer I know like once 15 was the rate that we finance over over a a finite two year period. So clearly a much more attractive rate than what's coming do we have approximately 1.6 million billion coming due in the fourth quarter and a 190 and look at 2020, that's about a total of 3.4 billion out about two.

To 15, so there's clearly upside for having a more liability pricing on the cost of funds for the home loan bank advantage that that that we foresee coming due but I think the real the opportunity here us on the Cds, probably have substantial Cds coming deal I know one Joe's commentary, we had not in the vast majority of all our cities within one year or we just slowed our.

This morning, so the best often we have in the long end of of the CD off into about a 135 going out 12 months in a short and is a three month offering at 165 money markets round one of the half that's going to meaningfully adjust our cost of funds and that'll be clearly one of the catalyst for 2020. This rate environment, you know we had significant beta.

First on the weight when rates were tightening now do we have an easing a strategy going to that someone to see this would benefit some of that data coming back to us favorably as far as high a net interest income as a result of lower cost of deposits.

Got it and this moving to don't go too we had slightly negative loan growth during the quarter stocked wasn't domes off.

I was reading from this morning scenes activity is down 30, 40% in the fibers just in terms of what gives you confidence from getting to fight, but some loan growth. This year I'm looking to 2020 , given what's happening with the market and the competitive landscape.

I think what did you Miss the cigarettes commentary about the fact that we had no underwriting standards outside of the paying what we see when bonds are going at the dollar that were not wanting to finance is a real indication of about conservative view of of credit. So clearly we typically be flights close to 80% to 85% about current portfolio. We saw a much lower lease by rate that no.

But wasn't you know sub 40% in a third quarter not allowed to do in absolute dollar spot rates, it's really absolute dollars and we're not going to sacrifice our credit underwriting standards because of dollars, we're going to be very clear about that but that being said, especially for Dan had a very strong quarter end year and has been growing very nicely for us, but we're going to be mindful that now this is.

A one month one quarter after the rent controlled what changed so obviously it as people trying to figure the marketplace as far as they directional move.

We've had very little purchase activity, so absent purchase activity significant rifai away because of absolute dollars out there that we're not willing to support that that the masses doesn't work for us on their underwriting standards, but caution however, with that being said, it's only one quarter out you know post the run rate. So we think that eventually the fourth quarter activity such should.

Pick up a little bit here. The pipeline is relatively strong north of 2 billion 2.2 billion and you know we typically 'em, we typically ought to place to.

Refinanced our she will enter into your covered bond that had a slow and in the five year belly of the crops. So any event that the agency backed off a little bit where the customers look to watch whats portfolio opportunities well very attractive often for them at the appropriate dollar. So I would say the growth rate, maybe slightly lower as of this year harvest season, do a simple math well going into.

Around two two and a half a cent as of Oh, that's a 930 annualized we'd like to hold SMB I'd like to see some growth by the end of this year and actually it will be assessed on both expectations, but mid single digit growth is reasonable level for us given our dominant in the space there's.

To me there's no question, there's been a material change in the value Oh This class of assets and many people as we sit today have nonperforming assets. The reality is there are owners that will not pay alone that they know is at a higher value and the property is.

So properties have had we adjustments in value we have a totally before me a portfolio because we land at the existing that is so we're not being jeopardize, but many of our peers have nonperforming assets. Many buildings are going to be foreclose that.

I used in this sector are down so the refinancing levels will be down and we're likely to continue as in the past have a widening between us and our peers during periods of stress and this period in front of us well clearly stress.

This segment of the market, there's going to be losses taken by many lenders that will overzealous in getting too. Many dollars, we're not going to lose dollars because he lives on the existing cash flows all those other lenders are today more likely than not looking at nonperforming assets or.

Those assets have already gone through the street as for close so that's going to continue in the period ahead in every cycle turn well regardless of the reasons why they began in every cycle turns we typically led more money because we lose less money. So we are a lender in the cycle where.

As others lose so much money in some cases, they're actually driven out of business. So that is on the future horizon. The values. In this niche are going to go down there or excess lenders that are already looking at significant losses in their portfolio expect headlines.

Uh huh.

We're not going to be among the headlines as a loser we will be a funding source through this cycle.

Got it thanks for taking my questions.

Thank you on next question comes from Steve Moss with B. Riley. Please proceed with your question.

Good morning.

On the loans that refinanced away, just wondering where those were located and where they rent control or nonresidential buildings.

I I mean, you would assume.

Vast majority of our portfolio is rent controlled so read regulated so clearly it's a wide Max but no. The government has been very active the yield curve environment was obviously at a lower level and it during the quarter. So we had a much lower opportunity for them to get a lower cost of financing through the government and that when they were very active on the also had pent up demand what the.

The government as far as filling out there I know capsule clearly there's been some work their way. They go into the agency and interesting enough a lot of smaller institutions are taking somebody's credits that level that really didn't make sense will you know the buildings cash flow expectation. So you know, we're not going to lose the credit on on interest rate, we will lose it on dollars and I wouldn't I would be.

I'd be shorter time that most of these laws left us all because of absolute dollars.

Okay, and then on loan spreads just wondering if you have any updated thoughts as to know where spreads are today and where they could go given the change and rent control.

I think what's exciting for us here is that enough since the regulatory changes it's been a meaningful widening of the spread so we're looking at consistently being at around 200 basis points off the five year. Historically, there I guess you lend you money when the rent control was right in place that are much different than today that was more like 150, and when things were very.

Yes.

Right before the crisis of out you know that then it's a great recession and that was at one time, so let's take a very nice economic spread 20 basis points of the five year seven year tenure that those a meaningful spreads over a much different than it was in previous years and when you modeled that forward given that we have a substantial amount of our bonds coming due next year about $4.1 billion or more.

That family of all the 3.16% rate that's still in that currently still in the money raised for <unk> for our margins. So we're excited about that but no question that the a the retinal change does the had impacted spreads at favorably for the company and we're gonna be there for customers that highest spread which we indicated back in the summer that this we look at.

An opportunistic.

Economic benefit given that you know the spreads have widened somewhat.

That's helpful. And then one last question on the C.D. repricing most of it wasn't a year just wondering if it's a evenly spread out or if there's any a waiting to a particular quarter.

Yeah, I would say if it's going to be like about a billion dollars per month is over $13 billion over the next.

12 month, it's a significant asset 13.5 billion with an average rate of 235 do you recall back and this time last year that was a highest offering we had to 85 walking back in October 2018 that offerings in the ones now so you know the highest rate.

Looking out past 12 months of offering right. Now is 135. So I think the reality is that all these look all these the customer deposit which by the way a hold them very well, we'll probably end up going into the shorter term buckets three to five months I buckets and that ranges from 165 to 185, and then I'll portfolio and eventually if they continue to be in an easing strategy well just raw.

All down to lower interest rates.

Alright, Thank you very much.

Sure well.

Our next question comes from Mark Fitzgibbon with Sandler O'neil. Please proceed with your question wondering like every month good morning, guys.

I'm curious on the expense front is it reasonable to think that you can hold operating costs in 2020 at a similar level to 29 <unk>.

Oh, a mark we've been very proactive on keeping expenses you know on the tight control we've had a substantial lives as mr. ficalora indicated in his opening discussion that we had a $660 million run rate one going into seek on safety now that's behind US and 500 was always the target low 500, it's been the targets we met our talk.

Good.

At this time balance sheet with the anticipated growth going forward, even if we hold that level will forget significant operating leverage so we've been estimating around 125, a quarter I guess for the fourth quarter somewhere between 123 to 125 will be the number all but again, it's been consistently stable throughout 2019 calendar year now and I don't.

Envision significant increasing costs next year as we complete conversion that we focus on more efficiencies over time, but that is that that level, what the revenue growth on on operating leverage and margin expansion, you'll see the efficiency ratio hopefully templeton into low fortys right now were booked well below 50, which is a breath of fresh efforts, we have a lot more work.

So as far as on a revenue side and the revenue side for us will come from margin expansion and an anti growth, which will definitely benefit the efficiency ratio. So we can run an efficiency ratio someone between 42 to 40 344 next year that will be a very good.

We'll see a result to the bottom line. So no question Martin Spansion operating leverage and more importantly, EPS growth for the first time in a long time that we will be in a very any spot all they're all buying a credit discussion obviously no one can predict the future, but our credit book is holding extremely well assuming that continues to hold well we should have some very strong EPS growth when you look.

At 19 versus 20.

And then secondly, I know there haven't been a lot of transactions yet in the multifamily buildings, but can you give us a sense for how much you think multifamily values are changed since the change in right regulations.

And how you.

Yeah, that's not overly easy to accomplish 'cause it depends on whether the building is and the exact nature of the building. Its a 10 unit building is 150 unit building. The reality is there have been changes in the market trade valuations people, who had product or so.

Sal saw the buyers disappear for some period of time reassessing, the likely appropriate values. So all that use our down and the reality is that some existing loans have already gone to nonperformance, you're not going to see that until there is.

A financial statement is generated that actually shows those kinds of losses or otherwise a significant change in valuation we know that the market has already devalued. The important thing for US is that we are at levels that are driven.

By cash flows not by market speculation in markets, Tom I would just add to Joe's commentary that you know the lowest cap rate. We saw was probably is more likely not in the Manhattan market. Our lowest LTV is the Manhattan market. If you look it up a public disclosure this mentally put us on page 10 on investor presentation material that the Manhattan market or rent.

Our entire portfolio includes rent regulated nonregulated that 47.9%, that's our LTV and those are current LTV I'm. So my guess is that you know in this environment. The absence of lots of transactions is really hard to gauge how much that cap rates have moved well you're thinking about interest rates and cap rates in general throughout the U.S., you probably have some movement a little bit.

In the borrows depending on the type of our properties and even though the dynamics of the I'm pleased to the the actual streets in Manhattan. Each each area has a different uniqueness as far as value, but there's no question anywhere from 25 of 75 basis points a cap rate movements is reasonable I wouldn't expect a substantial change in the Bronx versus Manhattan.

Given the dynamics, so the upside potential in the block, especially the upside potential in Manhattan, but clearly the absence of property transaction is giving a appraisers a this scratching their head to trying to figure out what truly is the adjustment in value, but what's good about am I see these portfolios as you can see from our disclosure as well well insulated one adjustment and why.

There isn't adjustment they'll be opportunity for buyers to come in at the prices that they can buy on a cash flow bases that makes sense for that portfolio and a lot of that stuff is a tax driven transaction. He's a predominantly long term generational holders have deep 10, 31 exchange benefits that want to taxes for the next transactions they'll love to buy assets on a on a cash.

Hello base that works for them based on cap rates and hurdle rate of returns.

And then lastly, guys given the average life your Syrian multifamily portfolio shortened up you expected prepayment penalty income will continue to rise in coming quarters.

So what we've been pretty side is right yeah, no a lot about competitors and sandy prepaid is gone, but you're thinking about relatively consistent so you know haley or mid quarter. When it seems like it's been consistent so website and that's a prepaid levels on a within reasonable range of that another 10 to 15 tied million dollar corner and its lower than we would normally expect given that the mature either.

Portfolio is going to have waited a long time to refile like I indicated a isn't a few minutes ago 2020, we have 4.1 billion that has to do.

They have to reset it's a 3.16 lot of those bonds will not have prepayment penalties with it but they'll have a rate that goes to 8% if they choose to go to the market. So they're not going to go a percent, they're gonna go to somewhere at market, which will be for US 200 basis points off the five year any event. This because the curves left to steepen thatll be a meaningful benefit.

To the asset yields so we had both deposit costs going down borrowing costs going down in loan yield now still rising this could be a good opportunity for 2020 to have good benefits to the margin because of that.

Thank you.

Sure.

Our next question comes from Stephen Dunn with RBC capital markets. Please proceed with your question.

Hi, Good morning, guys boarding I'm, just getting back to the alternative lenders can you.

Give us some color in terms that they were offering and how long do you see this dynamic playing out for.

Well, there's no question, where at the beginning of a cycle turn they feed valuation as this market is going to continue over the period ahead as I mentioned there are many properties today that that are not paying on their loans. So so there are a lot of foreclosures out there.

That you're just not aware of yet a in normal cycle turn and it doesn't matter what the trigger maybe the consequences cycle turn is a revaluation of the marketplace. Those lenders and there are many those lenders that lend on future values have portfolios of nonperforming.

Loans today, they're not necessarily talking about it they may have one month to month three months of non payment, but the reality is the market is evaluating down so new trade new buys alright, lower values because the owners know that their asset is less valuable and Lee.

Lenders whoever they maybe no that their assets are less valuable the important thing for us. There's no change we've never left on the market trade value. We've always Len on the actual cash flows that's why we're so different than everybody else during the cycle what makes us.

It's better than our competitors is the consistency with which we do not take risk that consistency with which we actually understand the fundamental value of the assets that we're taking into our portfolio. So the reality is you're going to see prospect.

Currently.

Evidence of significant losses in this niche you want to know how much money is gonna be lost going check how the value of trade has occurred what is the difference between what properties were selling for.

Last year versus this year the change is discernible the meaningful adverse change in the future values of this real estate has been governed by political decision that was extraordinarily bad that changed the relationship between huh.

Parties.

Owners are our citizens just like you know tenets of citizens. The reality is the tenants for given significant benefit over the owners that changes the value of that relationship to the owner.

Understood and then just wanted to Ah I just want to be sure I heard of right did you say you guys were putting on your coupon was a 361 was that right.

The the actual portfolio coupon that's for the for the actual current pipeline portfolio there wasn't good.

Well looking at approximately.

I think the hours of all of our loans as well.

I'd say right now the current portfolio coupon for a woman is about Threesixty nine 370.

Okay.

And.

Yes.

Yeah, Hi, partnering is about 3.77, so so nice healthy spread based versus the time to try to recur.

Having said I pretty nice there what was it last quarter.

Oh I'm sorry of course, probably is probably a fourth form a step up before closer to four okay. Okay. And then you might like to significant shift on the the yield curve environment from a friend comical that's one of them even sites for nine versus 376.

Right I think maybe that dynamic today that could be obviously, but if this is the curves thought to steepen you know, we're getting 200 spread and customers start to back off of go onto the tenure I O program. That's out there with the government more towards the portfolio lenders basketball wells and get more of our customers in that five year bucket.

Great and then can you just remind us what was the 2015 vintage that was coming out that's coming off.

Uh huh.

<unk>.

Yeah.

It's significant I mean, I would say the vast majority of that 2020 number that we talked about that $4.7 billion most of that as 2015 vintage and that's the one that will be scheduled to be price.

3.16%, a yieldco yield.

Great I appreciate the color guys.

Sure.

Our next question comes from Peter Winter with Wedbush Securities. Please proceed with your question.

Let me Peter morning be <unk> as you guys lower the deposit cost can you just talk a little bit about your deposit strategy going forward.

God, So subpoenas it pretty pretty focus I mean, obviously, we'd have to be very aggressive in the rising rate environment, plus we will roll into the first time in a longtime coming out of the $50 billion threshold issue that we dealt with for multiple years and we have to fund the balance sheet. So we were proactive on dealing with a very low cost deposit base in a rising rate environment.

And we were rolling so we had the combination of retaining the customer at all at the market and we were at the high end of the markets retention because everyone was in the market very aggressively what's changed today is that you know the beta rights that we had in a tightening environment should benefit us in enable go neutral to easing type environment. So it's very good success that we see.

The customer deposits are sticking very nicely, we must strategically targeting in Q3, the exit a very high cost money in respect to what these relationships wanting to bid us out as far as the the benefits of this environment. So for example, if we were fed funds flat for a mortgage providers, who goes you know where.

Housing and whatnot they were looking for fed funds plus three eight so you know that we would be bar that money have 114 ethanol versus 250. So those are really significant adjustments towards our strategy to get exit out of the higher cost of funding focused on the true retail deposit base, which is a customer the mom and pop in the neighborhood and.

Those deposits have been going very nicely over the past two and a half years. So that's the focus of the company going forward, we like to do more for the but commercial real estate side, that's an ongoing phenomenon fronts for multiple years of so much opportunity there, but I've done that and I'll be a in all all hands on a concept of really putting real investment into that.

I don't go but looking at that over time, but clearly we have less deposits with our commercial customers and we are by nature thrift, where most of those fun, it's coming from the retail franchise.

And with the with the Cds maturing next year <unk> is the expectation that you'll retain.

Yeah, absolutely well well within the middle of the range I don't see us, losing a C.D. them, a very well we're tracking on daily basis that it's been performing very nicely and we've been pretty much proactive what the with the with the affluent see adjustments, we we reduced our rates. This morning like I said previously you know the highest rate if you want to go into three.

My thought it was 165 well they caught a few more times that's going lower was you know maybe 85% of the move of the the fed expectation. So you know what do you want to go long you won 35, so what's the oil sub 2% out where last year as I indicated already often was to 85 and we were taking your money a 2.85, that's all being be priced.

Very aggressively lower as we go into 2020. So there's no question that our cost of funds will drop significantly next year, which will benefit all here, yes growth.

Hey margin expansion.

And then.

Pete we envision margin expansion every quarter throughout 2020, assuming a flat yield curve.

If the curve steepens, that's the only be better for us something that you know the short end stage currently where it is.

And then separately Joe just I was wondering if you could give an update on the M&A environment, especially with the improvement in your value I'd say, there's no question. There are people that are very smart out there that looked at their business model and recognize that they would be better suited to be part of a viable large.

Entity, we do compare well with regard to choices banks can make.

So there's no question, we're having a active dialogue with the marketplace and there are many people that would like to join the team. This happens to be the best of times two to join because the difference between us and others with regard to equity performance widens during.

Cycle turn and we are in the beginning of the cycle turn so as I've indicated there are many banks today that have embedded losses in their portfolio that they may be aware of but the street is not yet aware of so so the nonperformance of their assets is something which is evident to them.

But not necessarily evidence to the market values have changed the day to day trade in the market has already changed there are four clothes shoes that are occurring there our nonperforming assets in particular in this large class of assets.

But that is quite evident to the lender. The reality is we're not having nonperformance because we never left on the future values. So we're going to being a very good place prospectively not having the kinds of losses, others that by example over our public flight.

That's about 26 years, we charged for 103 basis points that compares to appears that in the same period of time far saw 1198 basis point and the SNL Bank and Trust index charge, So 2356 basis.

Points that is not a year's performance that is performance over 26 years 103 basis point compared to 2356 that is a meaningful differences in performance over an extended period of time prospectively, we see.

The exact same thing happening.

Great. Thanks, a lot.

Our next question comes from Ken Zerbe with Morgan Stanley . Please proceed with your question.

Good morning. Thanks.

Hi, Tom why don't I guess Thomas is there way to quantify it I don't know if you guys. Even think about it this way, though to the extra prepayment income that came from those multifamily loans the re fight out to the non banks.

Quantifying dollar an outdoor yeah, and all dollar amounts to be fine.

Yes, because I I missed.

I I suppose the camera I would say been categorizing that you know we're pleased that we're getting the prepayment opportunity I think were more the uniqueness is that they are seasoned loans are not wanting to use when the cash when they are coming back at you very rapidly. This is getting closer to their role days, you're getting less economics, because as you get closer to the repricing.

In terms they they go to zero right. So next year like I indicated we have a substantial slug of both commercial real estate and multifamily coming due as a matter of maturity you want me pricing.

Very low rate. So we will get down to go from Oh, 3.16 to somewhere hopefully north of three and a half.

Beneficial however, they're not going to be paying pointed they wait for the last minute and they don't refinance about they're going be paying 8% type interest rates, which is it's really very temporary so I would say that the categorization of the prepays been less pre pay at on a on a percentage basis profile, but still active because as you can see we had a lot of activity.

You know, we've we've had good originations origination numbers have been very strong every quarter, but when you have more Wi Fi and it's going away from us because of dollars I find indicated in the growth. However, the prepays tend to be lower as a percentage basis, because they more seasoned loans that are preparing.

Got it okay, and just thinking sticking with the non banks are they still being as aggressive in October as they were back in three Carol.

I I would say I categorize it as the Io program is very attractive for customers. If they want to go to the government and or other means of getting financing you know, we typically do not allow us second mortgage as a matter of policy. So you thinking about how we look at all any were first lien lender, we focus on low LTV, So I would say being the age.

Hi lender for <unk>, then we have as these customers in our portfolio multiple multiple years multiple refinancing cycle. We have their information we understand the dynamics of that building, we really know what that building can actually support when it goes out elsewhere. They get a let's say the dollar bid. That's a nation has an hour files. They go out there trying to get financing they maybe look.

<unk> was an opportunity getting what dollar and again, we're going to be extremely conservative as a matter of culture to ensure that we have impeccable credit quality. So that will drive somebody's cost is trying to get those absolute dollars and more importantly governments facilitating that I I O perspective, or it could move to the government.

However, when rates start to spike a little bit on the back end they tend to go back to the five and seven years structure, which as a portfolio. When there was an attractive alternatives then go into the government process, but remember the government failed in 2008, Fannie and Freddie went under the reality is that all lenders that are lending aggressively are in fact looking at large.

Performing portfolios it is not necessarily evident to you but to the people that are buying and selling leased properties. They know they can't get funding as readily as before they will be fewer and fewer lenders in the market, we always lend up during cycle turn.

Let's see other lenders disappear. So so as we look to the period ahead next quarter the quarter after you're going to see more and more example of two things.

People that are in the market last year won't be in the market next year people that are in the market taking losses are going to be reporting those losses in every cycle as we see in this cycle, we're not going to be reporting losses. We in fact have fully performing portfolios even with this regis change.

In prospective valuation because we don't lend on the prospect of valuation we land Ali actual so the reality is what makes us different is performance during adverse periods and we are on the verge of a significant downturn in the VAT.

The way should have a very large segment of the New York market.

Gotcha and understood and then maybe one other question in terms of ins NIM.

Obviously your guidance two basis points higher in fourth quarter. So when we think about 2020 and I understand you don't give 2020 guidance, but should we expect a similar pace of NIM improvement over the sort of the course of the year or is there any kind of acceleration or deceleration in terms of.

The NIM as we progress overtime I would say it would be a higher acceleration given that we have the multiple rate adjustments at all took place in the back end of 2019, So that's kind of bodes very well, what's coming through on a liability side for 2020. So you know that the magnitude of the increase in the margin will be higher.

You know and I believe that's gonna be a quarterly phenomena each quarter. Its you know I'm I'm seeing we're running numbers were flat for the sloping curve inverted curve all different scenarios, but in a reasonable scenario you can have a meaningful margin optic every corner throughout 2020, I'm going to give specific guidance, but we've had a lot of fresh on a margin we're not going on around 76 basis points on assets on 10.

As of last is going forward, that's not traditional way to make money, we always at somewhere north of 1% and we're seeing yeah, we think that deposit costs and peaks in the second quarter of 2019, we know we try not going back you know well over 70 years, that's the peak about deposit costs and that we're going to enjoy the benefits of the beta risk on the underway.

Now on where we'll get benefits of a lower rate environment given that we're trying to short end of the curve. So I think it's going to be meaningful or we have a lot of bonds coming due as well and will be meaningful there and you know obviously, if I'm, we're able to look at the fund they make slightly different you know over time, you know historically the company has grown as deposit base to.

Acquisition. So we haven't had a closed transaction in quite some time. So we know we're in a very any spot as as a public entity, but we've always were able to change our deposit makes via through a other funding sources through other retail franchise is that some so we're still battling with that change in the business model going into Syfy in it and see cost.

That's behind US. So we're very optimistic that this will be a march up margin year next year up Dps growth here you know all barn credit you know under credit as Joe said the credit book is holding very strong we're pleased and we're going to be patient on making sure. We didn't make the right most of the appropriate time.

Alright, great. Thank you.

Well.

Our next question comes from Stephen I like schools with JP Morgan. Please proceed with your question Hey, Good morning warning wanting to do.

First on the deposits if we look at the quarter over quarter decline you guys called out exiting several large relationships where are you seeing competition from another quarter, where these banks are non bank.

Cadre of many players as Stephen I would say that from the largest banks in the country. That's out there looking at these types of relationship. So for example, the mortgage relationship. We're a small player that we want a player in the business we've been out of the business for a while so we've lost that relationship just given that the expectation or what their economics, Ron on what the.

That's it from US however, when they.

Latch onto let's say a major player is different type of economics, where they share as a partner so that one of the one of the large relationships that went to the one of the largest mortgage providers in the United States at the same time a lot of smaller community banks that are aggressively looking at you know, bringing in some funding and people to optimize that opportunity and.

Again, like I said fed funds, plus three a's versus fed funds flat and that's just too expensive for us. So that you know a cadre of players I'm not so much the JP morgans of the world, but there's other players that I've been a large institutions that are enjoying this this mortgage related business and they have different unique lines of business, where they can create value.

As opposed to them that if we can put forth for that goes let's past partnerships because we're not in the mortgage residential business.

Okay, and then I'm trying to understand the connection between the pipeline and origination. So if you look at the prior prior quarter to choose a big increase in the pipeline for multifamily loans right went from 833 million to 1.4 billion last quarter. When multifamily originations were 1.2 billion this quarter down from 1.8 billion last quarter.

How do we connect those two do you just have a much higher percentage of loans in the pipeline not close.

Oh, we actually got as far as total loans that we anticipated for the quarter. We closed our origination costs I think like I said in our opening commentary you know a lot of laws. We fight away you know and these are loans that typically would stay with us. However, the economic dollars. It makes a whole lot of sense and I go back to the concept that we know these buildings were not portfolio.

I have the financial information.

It's it's 10 million shouldn't be 20, but it goes away for 20, that's not we're not going to London on those types of relationships. So there's been interesting IMAX death, but having a typical retention rates rather than normal environment of 80% go below 40, that's why the portfolio hasn't had a significant growth on quarter over quarter I'm assuming that.

Tom it's not going to be in ongoing trend. However, that's you know pointing out why we didnt have the meaningful goal is there's very little purchase activity. So you take lack of purchase activity refinanced away because of dollars and a very strong pipeline in originations you're going to be you know relatively flat. So so the pipeline is not driven by a day.

Pipeline is driven by what happens to be available to close within that 90 days prospective period. The reality is alone could go into the pipeline on the last day of let's just say the last quarter and not come out of the pipeline for eight months the difference.

This is real it's not a pipeline that says every loan in that pipeline was made during that quarter. It says. This is what we expect to close during that quarter whenever it might have begun it's process. So so don't misunderstand either not fixed to a day. These are.

Alone isolated individual relationships that will take a very amount of time to close I would just expanding I can't remember a time, where our origination number that we close was less than what we put in the previous pipe. So we've always historically close our pipeline, even though I show indicate it could be no casualty other loss coming from the previous pipeline.

You have the holiday season, right now the Jewish holidays do impact the timing of the closings, but we clearly have I'm not only got them I don't remember missing the closing numbers versus the pipeline number. So I think our pipeline report is 2.2 billion, who hold at least 2.2 billion.

But Tom in terms of loans being refined away. It seems more customers are now go into the agencies right, which are offering longer term seems like a combination of both Steve and I'd say combination of old I wouldn't be thought that clear there's been some smaller players I'd make these mistakes. We've seen is this this movie happened before where banks that are now growing this book of business. They see some other plays.

Actually make that they're moving into this space again were very conservative on the dollar side. The agency. The agency they had a very big appetite, let's hope they try to tone that down and they deal with their mission statement, but smaller banks have played a role on making mistakes and we have to be mindful of that we're not going to sacrifice credit, especially.

After coming off of a substantial change in the rent regulation markets. This is only 90 days post a this is a period. When this was not change. This is going to have a meaningful impact and customers still assessing where theyre going to take their cash flows. Some customers may take the casuals may sell their buildings and go to other markets as a tenthirty wanted the opportunity but clearly.

No. The city has been a adjusted for this rent control change and customers just trying to figure out a multi billion dollar portfolios, where they're going to put the proceeds.

Good question, the federal government does not fun Buick and the federal government should not be funding multifamily loans. The reality is there a meaningful players in this administration that have previously in the early life tried to restrain the access is a fannie and Freddie and our prospectively likely to again.

Try to restrain the excesses of Fannie and Freddie, let's recognize Fannie and Freddie is not immune they went bankrupt and.

And took the money from the Treasury.

In 2008, they can overall Len, they certainly do not have a license to to dominate or steel marketplace. So so the change in their activity is a decision made by the government entity that just says we're going to do less there's no.

Profitability, driving Fannie and Freddie to the Treasury. The reality is that this is a moment in time prospectively in particular, a moment in time, then we expanding in freight he can be restrained. There is no legitimate reason for Fannie and Freddie to take the market.

Alright. Thank you I just want to its one follow up question on your M&A commentary earlier, if we look Germany feels more broadly whether it's a small deal larger in Maui deal really doesn't matter. The stocks of the acquirers are not reacting the way they did in the past really not forget react well even for well priced deals doesn't that major thinking around M&A is a long term.

How did you.

I think it certainly evidences the reasons for doing a deal have to be solid we do not too bad deals every deal we've ever done has created a better bank substantively. If we do a deal it's not going to be size, it's not going to be street trade expectations, it's going to be to create a better by.

Okay, and we have high confidence that we understand what will create a better back. So we can do a very big deal that you do very small deal. The issue is the relationships of currencies decide the economics of the deal, but the substantive reasons for doing a deal is have we created a better.

Hey, prospectively to create better value for shareholders, we know how to do that we've done that in many many times when I accidentally the best performing stock, even though over the last period and in particular since we were did denied the ability to close the story if we in fact have not been bad.

As we've historically been valued so the good news for US is that we have the open opportunity to do a good deal when you see you'll know it it will be a good deal because of the banks, we create our bank will be better because of the deal. We do see when I was just one other additional compact Joe's.

A discussion that obviously tangible book value is not going to go down the transaction, even very clear as we evaluate opportunities.

Because of our tangible book value dilution, there hasn't been many deals, but I've been announced whether it's been a tangible book value creation. So I think that's also bodes well for our strategy and I think the marketplace understands that I mean, if you do something that's meaningful it'll have a meaningful benefit to our book value tangible book value.

Fair enough. Thanks for taking all my question.

Sure. Thank you.

Our next question comes from mostly we bought credit Suisse. Please proceed with your question.

Thanks, most of my one question warning paperboard and what are your gentlemen, so I guess you know to at the risk of kind of re asking pieces of questions that have been asked a few times before.

And and recognizing that you know from a fairness standpoint, we all agree that suggests you should be limited, but that process takes a long time, but I guess you know looking at that 4 billion, but you've got you know that's repricing next year I mean, but you know there. The question as you know given your comments Tom as you know is are you going to see.

A rate you know retention rate of 80 or retention rate of 40, <unk>. How should we think about that I mean that you know that they don't have some of those triggers that you kind of alluded to.

You know you said you've alluded to in terms of you know the.

Signals from the market I guess, so everyone gets a little bit how you think that progress, which I would say that obviously the rain mine because also play a factor. When you have is very attractive interest only product, which we tend not to be an interest only player and I'm like TV. We're very much what clients are traditional amortization transaction five year Uh huh.

Structure sometime seven but when I really a long term lender when it comes to this product mix I'm. So we've been shying away from being the idle provider versus dealing with the government who has a very attractive idle structure. So depending on the shape of the current as you look at what happened in the third quarter rates have come down significantly it maybe a that particular bucket.

Very attractive to go out along and get financing equivalents, who will find its structure given the rally in the tenure Soviet pricing that this despite all the tenure and what the government was offering and they're putting through with US 12, and whatnot and investors are taking on the cell is taking on the rest of the government's is basically providing liquidity wasn't attractive.

<unk> alternative than doing a portfolio loan, but what's interesting is the dynamic of the competition and went through also some of the smaller plants, which I was surprised to see some of the smaller players I really haven't shown up that much in the past few years have shown up some of our traditional competition has probably backed off which is not expected what should be a benefit for us to getting more share. So you are seeing a lot of loans.

Coming from other portfolios based on our cash flow dynamics, we feel the building is is valued at and whats comfortable on our perspective underwriting, but you know the government definitely played a role here and I think it's been a unique opportunity here going forward any event that depending where the current ends up next year, we haven't very attractive walk who may put more money in a seven year bucket.

But we have to make a decision do you want to be a an io provider and historically that becomes when people are taking a little bit more undue risk. So I think there's a possibility that that that 40% type of refinance rate was something to do with the the timing of the rent control was coming into place and some of the you wanted to the market I wouldn't call. It a trend yet it's way too.

On the call that but we've been doing this for long time historically its been between 65% to 85%. So let's hope that just doesn't become a trend, but you know we're monitoring and we're going to be sold and the when I'm going to sacrifice, our underwriting standards and rail and engine.

And then and that's something that we'll deal with I mean absent any real growth. The company's gonna have EPS growth next year margin expansion you throw some operating leverage and growth it becomes much more powerful S. Story. So we are we historically grown a book around between 5% to 10% a year. We believe we can do that next year, but we're not able to Joe.

It'll be outlets and get closer towards the fourth quarter ended the fourth quarter report in January and we'll have some world color there, but the reality is that we feel that you know we've always been in the market as we all the portfolio player in the market and we're committed to the market. I think you know our spreads have widened maybe that has something to do that we're not going to you know be aggressive on the spread side.

We should be getting better economics can since there's been a change in the dynamic on the my controller and saw the 150 is no longer 150, it's more like 200, and I think Thats you know many of the larger banks or at those spreads too. So we think that there will be more of a repricing of that opportunity and this should bode well for a common coupon we have in the portfolio with or without growth. So we hope to have rolled.

We won the bank loan growth expectation and mid single digit logos is not out of that I'm a possibility for next year. I mean, obviously was this years almost wrapped up running around 2%, we'll hope to hold the portfolio up a little bit at the end of the year, but we'll see how that all pans out as we monitor these army finds a way.

Got it thank you.

Sure. Thank you I'm next question comes from Collyn Gilbert with KBW. Please.

Thanks, Good morning to Illinois.

Just on the balance sheet. Tom. So you obviously just gave a lot of color as to what you're expecting on the loan growth side.

Cash Securities do you anticipate to hold at those levels I'm going forward, where they are this quarter just talking about how you're seeing those [laughter] segments unfold.

So yeah, we had we have too much cash right now so we're going to put it up to work in that we've been very reluctant to put on very low treasure Todd low security yields. So we've been mindful that but no. We said that it is an opportunity in the securities market, we want to at least at a minimum hold the securities portfolio. That's been the strategy over the past three or four months, we've had a lot of call.

All that came through in the third quarter of a significant so we replaced it with a 334 that rolled off to put on a 280 on structure more structured taping out all the paper or we want to hold on portfolio in any event. There was a steepening of the curve like a grown securities book, losing 14, 15%. So we have some work into that but we're going to be paid.

I think on in respect to the the portfolio characteristic is predominately government, which we have about one third of that portfolio. That's floating rates was rates were declining that did impact the security yields negatively but its floating rate interest rate risk reasons and then the other 2006 right. So we hope that we evaluate data.

And the Opportunistically as if there's a sloping curve will put more money to work.

Okay. Okay. That's helpful. And then just on the CD side. So you had indicated that their highest rate that you're paying now is 135, if I heard you correctly not well once 65 and a three month category. It's more of a an attractive rate for someone wants to go round two re short, but if you want to go out one years 135, and if you want to look at something in the nine month carries what might.

Nine month category to 185, so that's significantly lower than what we would doing a year ago about a 100 basis points lower so our entire portfolio is pretty much coming due within the year. So it's about a billion dollars per month thats repricing within the new rate time, and we've seen customers gravitate to the five month and there was a three month structure, which is significantly lower than that.

On a coupon okay and whatnot.

No 165, a three month money.

No sorry, I just wanted to I just wanted to compare that to what you were offering earlier in the quarter like at what point did you drop it to those rates and where have you been offering it throughout the majority of the third quarter.

Well, I'd say, probably 20 basis points higher.

Okay bloated.

We've been pretty active would that would the excellence huge oftentimes they adjust we've adjusted within <unk>. We will just told me this morning to be Frank as we anticipate given the probability they'll be a rate cut so we're going to be back like we said, probably we took a lot of deposit money in the second quarter. Knowing we have is.

Yes, again outflow expectations of high plus money, leaving the banks, we took in some retail deposits in Q2, knowing the outflow, we're going to probably end up the around 4% type deposit growth, which is right on budget. So we start going the balance sheet aggressively with love them animal we'll manage that according to <unk>, Okay and I. Appreciate you know the thought of not necessarily.

Giving NIM guidance for next year, but obviously, that's a big part of the story, it's a big driver of earnings I mean, as we look at energy you indicated obviously the refinancing dynamic on the funding side is going to drive you know NIM acceleration I mean is unreasonable to think you guys could achieve like a 225 NIM or to 15 core NIM by the end of next year.

I don't think is unreasonable depending on the shape of the curve column. So again, we don't give forward guidance, but I'm pretty bullish view of what's going to happen on a quarterly basis I'm I'm envisioning the margin going up every quarter.

2020 based on a five you'll kind of environment, So, let's get a slope in l., even though.

Right, Okay, all right I'll leave it there thanks guys sure they.

Our next question comes from Christopher Marinac with Fig Partners. Please proceed with your question [laughter]. Thanks. Good morning, I Wonder if you wanted to ask about the changes on the deposit mix going towards a more retail and less wholesale is that kind of give you relief on some of your regulatory liquidity ratios are just curious if that's a positive.

Okay.

I I don't think it's going to be a negative by five in the reality is that now we're very confident given no our business model a structured who we are traditional thrift model. We fund most of our our liabilities of these of home loan bank in the retail platform I'm like I indicated we like to get more from the commercial customers, but this is nothing new.

This has been how we've always ran institution or when but when when rates go low we tend to have a liability sensitive position that benefits vary greatly in a declining rate environment, we pay a significant price when rates are rising we had about a 200 million dollar topline a negative impact towards revenues because of the tightening cycle you should get a lot of that back.

Sounds good thanks for that Tom and Joe You had mentioned the the changes and Ltvs and just valuations and general does near communities LTV I'll get reset every quarter or do you do that once a year, what's the timeframe on how you look at values Oh, Yeah, we do that all the time, there's no question that we're constantly reassessing the modest gross yeah, but let me just.

Clearly that's a crime LTV so on an annual basis, we see financial information from our customers, we reevaluate those financial statements and we update our ltvs on annual basis.

<unk>.

Okay, great and there's still a meaningful charts I think 40% of your loads or have a 50% risk weightings. So that's not going to change it's called out its Ashland, yet you actually had a slight improvement quarter over quarter, but no question, we've always been known as a 50% risk weight lender, that's kind of the sweet spot, we think as opportunity. So when you think you talk about capital we're very mindful.

All of our risk weighted capital as more of a determining versus other metrics. Because obviously, we can have no. If we were lending lets say aggressively against the government and the Io markets those are mostly 100% risk weight alone.

The best property owners, we have no us over the course of long periods of time, they don't come to us to get the most dollars never.

Sounds great guys, thanks, very much Hello.

Thank you at this time I would like to turn call back over to management for closing comments.

Thank you again for taking the time to join US This morning and for your interest and then my CB. We look forward to chatting with you again at the end of January when we will discuss our performance for the three and 12 months ended December 30, Onest 2019.

I.

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time and evergreen.