Q4 2019 Earnings Call

Today's discussion on the company's fourth quarter and full year 2019 performance will be like like President and Chief Executive Officer Joseph Ficalora.

Chief Financial Officer, Tom can Jeremy.

Together with Chief operating Officer, Robert <unk>, Chief Accounting Officer, John Doe.

Today's release includes a reconciliation of certain GAAP and non-GAAP financial measures 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 gas.

In addition, certain comments made on todays conference call will contain forward looking statements that are intended to be covered by the safe Harbor provision. So 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 risks factors that may impact the company's forward looking statements and financial performance in todays earnings release.

In its FCC filings, including its 2018 annual report on Form 10-K .

Form 10-Q for the quarterly period ended September Thirtyth 2019.

To start this 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 called for Q1 night.

That's a good Laura please go ahead.

Good morning, everyone on the phone.

And on the web cast and thank you for joining us today as we discuss our fourth quarter or the full year 2019 operating results or performance.

Earlier. This morning, we reported diluted earnings per common share 20 cents. A three month ended December 31st 2019 that is up 5% compared to both the previous quarter end the year ago core and slightly ahead of consensus.

We are extremely pleased with the company's performance during the fourth quarter in many ways. It wasn't strong this quarter or 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 three times during the second half of last year 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 were 4% on a year over year basis.

Multifamily and specialty finance lending drove the loan growth during the year end of quarter.

Multifamily loans increased $893 million, we're 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 it's an outstanding year as the portfolio increased $690 million, what 36% on a year over year basis.

Origination activity also we bought rebounding 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, well see originations of 227 million increased 6%.

This was the highest combined level of multifamily Siri 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 the strong origination activity during the fourth quarter, we also opportunistically repurchased $771 million a multifamily loans previously originated by us and sold so other financial institutions.

These loans were originally so by us in order to stay below the SIFI threshold.

Overall this was one of the strongest quarters for loan growth in over two years.

And we continued to be encouraged by the potential loan growth in 2020 as the pipeline started the year off strongly.

Currently stands at $1.5 billion, all 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.

Year over year growth was led in large part by Cds, which increased $2 billion for 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 alternatives during the past quarter.

On the revenue front.

We were very pleased to see topline revenue growth returned this quarter net interest income increased $6.6 million or 11% annualized compared to the previous quarter as interest expense decline.

We also witnessed an improvement in net interest margin during the fourth quarter as it rose five basis points compared to the third quarter.

Excluding the impact from prepayment fees, the fourth quarter margin would have been 1.90% up two basis points and inline with expectations.

This was driven by a 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 feds current interest rate policy, and the 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 a year ago quarter.

The efficiency ratio in the fourth quarter was 48 point, 51% compared to 47.37% during the previous quarter and 49 point, 92% during the year ago quarter.

Over the past two and a half years, we've 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 the quarter end the year.

Nonperforming assets totaled $74 million or 14 basis points of total assets, well nonperforming loans were $61 million or 15 basis points of total loans.

Net charge offs remain at low levels totaling five basis points of average loans for the year and only one basis point of average loans during the fourth quarter.

The 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 right regulation laws for six months and to date, we're not seeing any negative asset quality trends in the rent regulated segment of our multifamily loan portfolio.

As noted on page 10 of today's Investor presentation, 60% or $18.7 billion of our total multifamily portfolio is subject to New York State regulation laws. The weighted average LTV on this portion of the multifamily portfolio.

Ill is 53% about 400 basis points.

Less than a weighted average LTV on the entire multifamily portfolio.

Lastly, this morning.

Also announced that the board of directors declared a 17 cents cash dividend per common share for the quarter. The dividend payable on February 24 to common shareholders of record as of February 10.

Based on Yesterdays 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 well if we don't please feel free to close later today or this week. Thank you.

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

Hey, confirmation told indicate your line is another question Q.

Do you make press star too if you like to remove your question from the Q for participants distance between equipment. It may be necessary to pick up your handset before person to Starkey one moment why people for first question.

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

Good morning, everyone wanting ever.

I guess the first question just sit on loan growth the only if I.

Yeah, two bought to stay away to one if I did go below $771 million in poetry is don't go up I guess on organic basis.

Seemed a little soft so would love to yours, just in terms of your loan growth outlook for the multifamily and the auto loan book when do you Wendy and I think the last time you updated on participation wasn't when do you 16, where you had about $3 billion to $4 billion in loans that had been participate. It. So if you could you remind us how much additional opportunity that is to repurchase mortgage loans back.

Okay.

Hi, good I had about $2 billion more than we 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 every man, it's Tom I would I have to Johns commentary that obviously you know the focus here is to analyze the in the market were very effective in the market, we see very strong economic spreads compared to the previous year since the rent was changed.

But more importantly, when you take some of the one off transactions that we anticipate to go away in the fourth quarter versus Q3, which is a very volatile quarter. We saw our retention rate improved slightly which is a good signal. Our goal for 2020 is to go back to that no predictable. We can't hear me, historically, which will be much higher when compared to the Pat the second.

Half of my 2019, when you're thinking about that in your model. It not modeling a mid single digit long growth is very reasonable for our appetite in the market.

Got it mid single digits on growth and well I guess, the Dol more on the core margin rate went up two basis points. So inline with your guidance how should we think about the margin going forward in Oh, just in terms of where the CD book is the pricing relative to 27 cost in the fourth quarter.

I realize you know at all going a little more than three months and then why didn't go down is a very interesting the buyer, but clearly we have the inflection point out of the expected in fourth quarter 2019, and we continue to see very strong visibility throughout the full year 2020 with margin expansion every quarter as well as the department and I are so and I in fact in 2009.

In Q4 as expected up two basis points in the fourth quarter I would state for them for the first quarter, we'll have a higher and I expansion and probably another two basis points in the margin and that's assuming no changes in interest rates and access excludes any prepayment penalty income.

So.

The continuation of margin expansion throughout 2021 liability sensitive and we have a substantial amount as you indicated Cds that will reprice, it's about 14.2 billion and its throughout the entire year. This is the lowest quarter of the repricing actually the second last quarter was the first quarter 2.8 billion, a 2.29% right and then Q.

Two was about four and a half billion at children's into 40 rate. So you really have a lot of be pricing expectations going forward, given where current interest rates off if you look U.S. Cds are coming on its just slightly south of 2% I think the number was like 188 in the fourth quarter.

[laughter]. So I guess just to be clear told me you expect the margin expansion of two basis points.

Is it safe to assume given what you said that that accelerate Felicia I know you don't want to give guidance beyond the month, but all else equal it should we see that two basis points become full five things like an accelerated after 2020 progress is it because that's kind of wave street expectations are.

Yeah, I guess I feel really good that we have inflection point I'm not going to give long dated guidance, but no I was very clear that I see margin expansion throughout the year, but more importantly, the and I love is significant for US we haven't seen that since the first second that first half of 2016, so if I should point as here liability sensitive.

Have a lot of liabilities, we price and so on a liability side when it could benefit in addition to the borrowings into Cds, we have the bonds, which has material for us and borrowing rates compared to what's coming off is significantly attracted to us in 2020 and 21.

Got it. Thank you. Thanks, a lot for taking my questions sure. Thank you.

Our next question comes from Brock Vandervliet with <unk>. Please proceed with your question.

Well I'm wondering why.

Morning, guys, Okay say covered the a the C D aspect on the on the wholesale borrowings I know I'm sure you were pretty creative last year and using some of these hybrid FHLB structures, the the borrowing costs ticked down a bit.

This quarter, what should we look for in the near term in terms of relief on the on the borrowing costs.

I'll just be specific what the actual numbers were 3.7 billion a comes due in 2020 211 rate we put on a trade yesterday at about 147 that was about a half a billion dollars and that was based on LIBOR on bank floating libel and we swapped out for three years, where they a.

Swap that what that 147, so a lot 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 gonna we look at west short term funding. It it's probably a 35 basis points benefit to lock it out and swapping out attitude to have the three years. So we'll take advantage.

That opportunity given the shape of the curve and when you go into 2021, you have another 823 million attitude 40 rate. So for the next two years, we have some high cost money compared to the market, that's what we repriced lower.

Okay and near term is there any anything we should be aware of for for Q1 on that front.

I think it's continuing I think I think it's going to be an ongoing benefit each month, we have its you know staggered throughout the throughout the quarter just like the Cds I think in Q2 for the Cds will have a substantial better given its almost double the amount in Q1 and it's at the highest cost of the year. So to 38, the highest cost that we have rolling off in Q2 for Cds.

And that money is coming the already off from right. Now is a 165 three month, a nine month I want to 85, and that's all been liquid Cds at 150 Sofia tack on a few basis points, you really customized you still well below 2% you're going to get a nice benefit on the CD funding for the run rate next year.

Got it okay I'll jump back in the queue. Thank you.

Thank you.

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

Good morning.

I guess, Tommy you certainly laid out the case for love opportunity on the for the liabilities to reprice slower, but I guess, we've heard this for a few quarters now in your core NIM is only going up about two basis points per quarter can you just walk us through the other side of the balance sheet I mean, obviously with the five year, Yeah Treasury like 144, I mean is it just simply a matter.

The loans are repricing, a lot lower that that offsets lots liability benefit.

Yes County, because I didn't give any guidance other than past Q1 on the margin. So that's your expectation, but now we're very bullish about the fact that the funding costs are going well and our yields for the most part should be in good position dependent about interest rates go we really don't know where rates are going to be at the end of the yet, but we have a sizable book of business that's coming due in 2000 2021.

The multifamily portfolio is about 3.3 billion that a 318 coming due in 2000 2021 to 3.8 billion at 332, when you look at those rates compared to markedly.

We saw at least seen a lot of volatility you're right. We've been effectively pricing on multifamily see every business at a healthy spread than patch. It was a year ago. So that 200 basis points spread is real yes rates have come down, but we're still we still had a very good offering out there whether the very competitive I think the plan for 2020 is to.

Focus on our retention will only be very focused on bumping that retention rate up to historical norms, you've had a nice improvement when you take someone a one off deals from Q3 versus Q4 Q3 in 2019, we had lots of Oh retention go away and a lot of that was because of a we'll call it aggressive underwriting and aggressive agencies isn't.

Me razor focused to move that retention when you move the retention to a higher percentage for one o'malley for and why CB, you'll see the loan growth kick and that's all bode for 20 at the same time you see when the markets on security you'll have a very small securities portfolio is really not a whole lot of benefit right now to place a capital and liquidity to work at these levels will be.

Mindful of keeping its relatively flat until we see opportunities.

Gotcha, Okay. So if I paraphrase that sounds like you're going to get NIM expansion, but most of the and I grew up it's going to come from the balance sheet growth rather than the NIM side.

Yeah.

Turning depending when interest rates, obviously, if you would categorize that you know what core rates move dramatically higher I look where rates one today, but they move around quite a bit Evans army affected to get that one basis point spread that's a much healthier spend we've seen and probably a good post crisis because pre crisis. It was a 110 spread and went back to 150.

And then ultimately when the rent control the ones that change we believe the 200 basis points more of a fast spreads and we're seeing some good activity. There I'll when people are very busy our focus is on making sure. We have strong retention. We have all the data we have all alone files, we know what's coming deal I'm going to work very hard to maintain our share at the same time, we're very optimistic in the previous.

Quarter to take advantage of some other people that are looking at divesting their position in multifamily, including some of applies on participation will be added there as well.

Gotcha, Okay, and then switching gears, just a little bit in terms of expenses looks like they're a little bit above your guidance from.

You gave last quarter.

The 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 controlled way back two years, it's been a very difficult to used to keep those expenses down significantly. So we had obviously a very strong expense number right in Milan, all guys you probably beat for the most quiet and throughout the year, but for the most probably came I'd say five.

You bet and when that is expected for the expense guidance for 2019 as far as 2020, no. We believe that it's going to be relatively stable I went to one I don't want to go one of them yet, but I think it's fair to say that stabilization on expenses are going to be cheap cost containment. We have a few items that I don't want to increase our expanded slightly we've instituted a falling came after the first.

First time as a public company, we've increased our minimum wage while not show a custom metro employees to $15 analysis will be competitive because it is that changing the for us in the New York Metro area as far as compensation costs and we've also released a salary freezes office. So my guess is probably looking at maybe another $10 million expenses. When you look at year over year when you.

Normalized expense base for 2019, so although we printed a higher number you normalize that you're looking for like five or five to 515, another 10 million as far as potential a run rate for next year for 2020.

Oh, sorry, five team.

The by the way no.

And just make sure we gotta right, but the 515 includes that $10 million increase.

That's fair Okay. So again, you know what we were doing a lot on.

We're going to grow this year again, I've said anticipation I believe had I'm a lot of cost containment initiatives over the past few years and will that still be efficient on conversion yet has not completed we anticipate the have that by Q2, that's probably dragging a little bit we'll get some benefit there in 2020, I don't want to be too aggressive on on the guide.

Okay. Thank you very much.

Sure.

Our next question comes from Stephen malls with B. Riley. Please proceed with your question.

Good morning.

One of the 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.

Well, we have approximately $3.3 billion of multifamily loans at a 3.18% that would be contractually maturing. This year they have to come to that come to the table at the same time in 2021 books about another 3.8 billion at 332 that have to come to the table in the next in the next year at the next two years, so we feel obligated.

Very opportunistic thatll be elevated prepayment activity, depending on the economic dollars depends on when they decide to prepay and we refinanced with us away from us that being said we had a relatively strong Q4 on prepay activity was strong Q3 rescue for I'd say with a very healthy quarter origination stream was was very strong.

I've missed it take or indicated a very strong origination quarter, we anticipate to have a very strong follow through as we go through 2020, given the dynamics of the marketplace. There was some interesting deals I hit the market and when you look at what would with buyers are looking at transaction the hurdle rate of return at a higher but they're getting done so there's been.

And then zero activities faton to move slowly towards buyers and sellers, yes. It's a Q4 activity always happens on Q4, but we see deals being done which is which is interesting because the hurdle rate. We tried are reasonable and he's a 100% tie multifamily rent regulated buildings being being transacted at levels that are reasonable tap into very reasonable.

Not elevated so I'd say the reaction to the rent control what changes that hurdle return hurdle rate of return so long term property on a higher again some transactions on and we believe that will continue as we move no further away from the enactment of any changes a lot.

Okay. That's helpful. And then Tom I think you also said that the second quarter CD buckets. The largest just wondering how large that bucket is and repricing.

Q2 was about flat billion confined to to 38 coming due.

Okay, and then just in terms of new money yields here, just wondering where you're seeing spreads for multifamily in theory. These days.

And we have been holding the solid at 200, probably another in eight to a quarter above that the theory, a you know we're going to adjust to be competitive, but we've we've done fine job since June on making our presence knowing that we need to get paid a higher premium dependent historical premiums over that 150 spread on the treasury. So it's still hovering around 200.

I'll give or take you know one eighth year in there, but it's been very healthy.

Alright, Thank you very much.

Sure.

Our next question comes from Stephen I'm, not suppose with JP Morgan. Please proceed with your question Hey, good morning, everybody.

Morning.

All right first on the 771 million of loan repurchase isn't in the quarter I assume that was done at par.

Right.

I might even be specific on that Frank but obviously this this papers is probably two years left so it's all a top line it's underwriting our standards, we control the transaction I'll be very proactive so I would say approximately that level, but given taken that will be specific on the actual dollars, but well. It's opportunistic we think that there's a few more out there and what do we hear.

To accommodate these are no longer lead originated we have all the filed the data and we will be proactive in the event other partners looking to move away out of this line of business and the one decide to be more focus on cnine.

So we we know we might be better mines, even when we put this in place we weren't as SIFI threshold criteria that we could not grow the bank. So we don't have billions of dollars that had to go to the marketplace and our partners our friends and out in the marketplace. A very accommodative consists of our asset quality metrics. So we're very pleased to be able to offer that and all back.

Balance sheet to get it back high probability we will refinance most of these loans and I think what's important about that the way the transactions originally structure a lot of this retention that we've done the originated as someone had lets say paraffin Suez 70, 525, we have the 25, we only 25, so as we take this out we have more potential for growth.

And that was far on an ongoing thing over the past few years. We've had many players that gets refilled on refinancing that we're actually getting less of the deal because of the transaction that we struck with them on the original sale right, but what would be the yield of these seven seven somewhat under 71 million.

Probably by just under 3.3 40.

Okay, and then why you like I said, that's in two years life left it's not two years average life to get life left that you have 2015 14 origination bucket.

Right I don't actually on evident by the way, we don't have to replace that what tied to suit turns out now we decide what to do what the refinance right and then a 2 billion. That's remaining Richard good repurchase could you repurchase all back tomorrow, if you want to two or their time restrictions or other restrictions on that there's no time restrictions I mean loved it is what it is.

If someone's willing to now we would love to have the opportunity to take all lines back as we believe in our credit metrics do those loans has gone very opportunistic time and that the well underwritten and low LTV. So clearly I'm I'm not leading go that's why the number and from time to time will be there for the market I don't want to give you false expectations. You know, we lead with the best selling to them.

I'm going to be the wrong, so well more than one go comedy.

If the yields are not bad and the credit quality is good why are your partners looking to divest fees.

There's a number of reasons I mean, obviously you know you see many public.

Statements made by a lot of the compare that diversifying their balance sheet to see in either doing other things in their business model. We are a multifamily see every Monday. This is our business model, we focus in the rent regulated rent control marketplace. That's what we do we do not when I'm going to try to say world commercial bank doing see an eye lending. This is out for business model. So we won't be there for our customers like I said.

Initially from when the rent was what changed at highest spread.

We are far more comfortable with these assets then 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. Yes. It is you guys are seem to appraisals on multifamily loans, how much evaluations contracted post the run rate.

Election, another six months.

Yes, so I wouldn't I would comment what does that didnt happen that a lot of deals that have been done, but you probably read this the same or publications that we will be reviewed a lot of information not correct because they don't take the full picture of the transaction as most of the deals how they commercial use our components of the total rent roll as well as the rent control aspect, but the the cap rates that have come.

And I'm not yeah, what they do the fear was when the rent was were put in place. So let's still seeing you know low fives to mid fives versus you know high fours in certain markets like I said you have to look at each market each street each area differently, each borrow month for us in Manhattan, certain pockets of Manhattan versus others.

Doctors Manhattan, the diversity of the of the income stream. So happy to held in very well you can you want if you want to do some statistical analysis, maybe important were 25 to 30 basis points moving in the cap rate, which is not no near what they feel was initially some of the publications that what these numbers that made no sense down 40%, it's not reality.

They they literally carved out the commercial use space on the income stream, we add that back it's not even on a reasonable decline on value adjustment because of the really the driven off the turtle that hurdle rate of return. He this is not you know when you think about the business model some of them put the capital up and they'll be financing behind it.

If they can get high single digit it's attractive under 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 we try and when it was at its peak was zero because they will improving our units constantly. So the fact that you don't became high single digits. There is a markets.

That when you put idle features into when it comes out the mid teens. So to me on an amortization, you're probably looking at high single and would that with iOS mid teens, well, it's really important to recognize.

The change that has occurred has impacted future values, we never lend on future that use we lend on existing values. So the our portfolio has not had any adverse effect of the change and our prospective opportunity is going to be based upon whatever the numbers maybe what is.

Back we're projecting the value of the asset that is going to be consistent with our past 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 one I older our ability to lead because we lend on the existing values that are in the portfolio that actually doing exists that particular building. There is no concerns that we have that our assets are going to start nonperforming because we overlap.

Many many many many people in the market and everybody knows this.

If your lending more dollars unwilling your 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 prospects is that you will be less it doesn't threaten our ability to be repaid as Stephen I was just had one additional commentary that it's very.

Encouraging to see large transaction hit the marketplace and being to end up being financed no. You know, there's some of them all where financing other financing, but the reality is there are people stepping up looking at the long term and getting a 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 and then b.

Somewhat different they're looking for loopholes based on the rent rate changes in particular bit they'll leave units vacant and try to like a joined the the join unit next door, that's something that some of the wealthier players can do what they have capacity and have that want to do so I think you're seeing a lot of that and it's probably less units hitting the marketplace than ever before the cost of these changes.

Which unfortunately will be negative for the city, but you know these large plays will continue to trend that.

Joe if I could change directions, especially one final question. So we saw another ammo, we announced earlier in the weak and you've talked about wanting to do a deal for while now do you feel any sense of urgency to trying to get something announcing dawn before the release approval for the presidential election.

No I don't really urgency to do that but I would suggest that we are at 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 like 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 openly suggest to you that we're in active discussions to do transactions because thats, what we do.

Okay fair enough. Thanks for taking all my questions sure.

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

Good morning, Wednesday morning feet.

Just curious last quarter, you talked about the efficiency ratio for 2020 in the low Fortys I'm, just wondering for still comfortable without range.

I'd kind of thing I hate to going on now not go specifically, but I gave you the expense tied up 10.

Based on normalized 19, obviously, you know prepaid does play a factor is I'm not give you any guidance on prepaid, but we should have a relatively.

Healthy prepayment world in 2020, given the duration of the portfolio at the same time I think that we have the then I'm going up every quarter. So so we should see improvements on the overall efficiency ratio or you know our goal would be to bring in the low fortys, but hopefully no mid to low fortys is kind of our target it's going to take a few.

Positive changes in the marketplace to make that happened, but it's not an unreasonable given the fact that we've had been in a cost containment mill. So many years and that will grow in the balance sheet and our Eni is now moving into right direction, we had a strike a compressed eni for many many years. So this inflection points you about what bode well for the for the the and the other atrophied.

Of the calculation of the efficiency ratio. So it should be should help us improved the ratio.

Okay.

And I was just looking at securities to assets, that's going on in a pretty consistent range last couple of quarters sort of 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 to the high teens somebody stick I think it's fair to say that P. back ended as they look where spreads are right now.

Had a lot of the benches pay off over the past six to 12 month cash flows are flying into into the bank as far as you know structured mortgage paper. So we will get very much das player and that's not has been very nice as far as overall yield to the bank, but at the end of the day yields have come down materially. So we're going to allocate our resources. So the loan book in the event the mortgage.

Changes and we start seeing a slow, but probably bought a highest hoping the coke well get to that level and it takes some time in this market goes given where interest rates all but if we go back to a healthy occur I will be more proactive.

Okay and then my last question.

Can you talk about what your expectations are for deposit growth in 2020, and how you think about you know the balance between deposit growth than they used to wholesale borrowings.

I mean, it but we're gonna be obviously in the model the deposits. The goal is a commensurate with asset growth you know if you look back for the full year 2019, we grew deposits almost as it's consistent with our asset growth, we had a little bit more wholesale for the ended the quarter fourth quarter because of the fact that we shifted a lot of a higher cost relationship as a bank in Q3, but when you look.

Overall absolute deposit go they had a good year deposit growth in 2019, that's the plan for 2020, Commencer with asset growth and will we adjust depending on market conditions at the San Carlos substantially when they also that but right now short term money is expenses depends a you know if you look at the belly of the crime and pushing it out a few years I like I said previously.

We locked in solid funding and at the low let's say 151, 47 150 versus short term rates that are out there I had high high one so it's it's attractive both sides are attractive given that were liability sensitive, but the more attractive aspect is the refinancing of our current liabilities right.

Got it.

Thanks, Tom.

Sure.

Our next question comes from Christopher Marinac with Fig Partners. Please proceed with your question.

Thanks, Good morning.

Tom a joe they the success you've had on the specialty finance the past year in the pipeline looks really strong could you remind us the differences and yield on that portfolio and then the types of things that you do and also types of things that you avoid in specialty finance.

So with that as you can we talked about our team has done a phenomenal job I'm very pleased on that production. We believe that can have another strong 2020, and we support that you know with it within the team members have done an incredible job focusing on asset quality no lately is no delinquencies no defaults no real credit hiccups to be to speak of and.

Very well diverse block the book is broken out between three categories.

So back loans equipment financing dealer floor plan asset backed around 700 million outstanding with a 25% percentage of total outstandings compared to the total dollar amount 2.8 billion equipments about 1.3 billion at 40% of the total and deal flow planning, which has been very attractive in this environment at 775, which is 27.

Yes, the yield on the paper is slightly higher than our multifamily yield on when you take into account fees that we did we amortized to that to the to the yield. It's about 3.66 I will then be active I think what's most important is that what we see is we turned down most of what we see so with that there'll be doing about 10% hit rate on a 100%.

And what we see so 90% is what we don't do not because its credit it could be yield to be various reasons, our boy may not be happy with it but the other various counterparties, but at the end of the day you know, we typically been turning down 90% of what we see it has been growing the bulk around 25% on the CAGR basis. So we were very pleased to allocate capital there.

I've said many previous conference calls it doesn't come with deposit relationships when non intrusive to the to that to the lead bank loan credit by up shop and no. So what we're going to be very Ah well will be a good partner for some of the largest players, but we're not bookings deposit relationship that that's the down that's one of the negative aspects of the business, we're not reading and funding for this type of.

Yes.

Okay. Great. That's that's really helpful. Thanks are going through that I've been speaking your deposits. It seemed that the core deposits ex cities had another 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 sort of in your deposit pipeline.

No we think that it's going to be continuing similar to the trends that we saw in the fourth quarter Oh, no restart dramatically lower than me why you know a year ago. When there was when the fed wasn't a tightening mode right. So a highest off and raising the three month category will bring the highest cost money into the short end of the driver for three months at 165, and I think customers a lot.

Looking at that as a viable alternative and going out to a year over the longer given where rates or a one year offering on a liquid Cds around one of the half so well clearly enticing customer to go into the shorter duration on nine month money is a 185 and you're seeing that yet so customers achieving inside a one year I've been consistent for the past decade, and we think that if the fed.

Happens happens to reduce rates will benefit further in the meantime defense stays flat for the yes, there should be very well you know plan for 2020 to take advantage of those higher costs Cds coming do throughout the year, which way, which I mentioned in the previous.

In the previous commentary.

Right sounds good thank you to appreciate it.

Sure.

Our next question comes from Matthew Breese with Stephens. Please proceed with your question.

Hi, good morning, everybody.

Well I was hoping you could talk about Cecil what the day one trip reserve would look like and then on a go forward basis could you help us.

Oh I understand what types of growth you're 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.

I'd say, our respect to the onetime adjustment, but looking at probably 25% to 30% increase in up overall reserve, which is about $15 million to $30 million. Yes. It is when it gets into the attendance went against that in the 20%.

Again, we don't division is having a material it back to our company given that we're I real estate lender and move in this in our duration very very short compared to other types of loans. If you look at our average life at 2.1 years for them for the book is very short, albeit in a macroeconomic changes to that to the environment. It's hard to predict what can happen to three years from now.

But we all multifamily lending it has a relatively short duration book and should not have the material impact going forward. The tip. The capital is probably between three to six basis points up front I'm not material.

[laughter].

And then sticking with the capital question, you know 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 taking capital levels of potentially lower and.

Do you see any need to adjust the dividend or potentially down the road raise any sort of common equity.

I'm going to go to the dividend question at this stage the games can move and we've been doing this for quite some time, obviously, you know commensurate with ER and IR gross margin expansion always comes Dps growth. So you know like I said in previous quarters, and I think she will say, we should have low double digit EPS growth, which is reasonable and that's conservative so I think that.

Well in a positive spots in respect to build some capital for the first time in a while as earnings improve but this dynamic of the margin and I are expanding so I think we're encouraged by that I was very comfortable our capital position. We have no losses are we had a history of no losses, we have a history of having the best asset quality in the country. So that's why you when you.

Allocate capital goods that has zero losses, we have very little allocation towards the impact of a provision for high quality low leverage lending. So we're very comfortable our capital position a dividend is solid and we've always been standing by our dividend and that's been a the home to the company.

Okay.

And then going back to your mid single digit number of common the pipelines down 30% quarter over quarter, just wanted to get a sense for how much of the growth you anticipate being from organic versus repurchase activity. If you could give us a breakdown I I wouldn't even budget be purchase activity and I go again, we are laser.

Focus to increase our retention rate, which we will do in 2020 and more importantly, if you look at the idea of $3 billion a business in the fourth what the Q1 is down on seasonality. It's a seasonality quarter. You know so we're very excited about what's ahead of us to our guys extremely busy you know the pipeline that we announces the committed pipeline the pipeline.

We have as much higher because the loans are coming in and we're laser focused on managing that retention rate managing that four but that that that is that six $7 billion a business coming due in the next two years, we have the files. We have the data we will make sure that we get first crack at our customers.

[noise] understood and then just last one for me is.

So we get to see the press releases, we don't see behind the scenes, what's going on with Ltvs and Reappraisals like 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 had been valuations that have come in lower have you seen any LTV instead of tripped over 80% if they if they do what does borrower behavior or people willing and actively bringing catch to the table to maintain low LTV, just some sense rumford around them or would be some years and and enlighten lower valuation.

So I'm not I'm at a time have Leer mine is by the end of that say were a low leverage lender and we don't see these types of number that that they're concerned about at today's environment, which were two quarters pass the rent control was that would bring us that it's going to take some time to see what this impacts or in other parts of the boroughs, but at the end of the danger low leverage.

And in buyers and sellers are coming together and then putting a hurdle rate of return that people can agree with it they will be transaction will finance it based on a very conservative policy and we lose loans were losing because other banks are being aggressive we play against the government. We play against you know a lot of large banks, but we are very targeted towards super concern.

It of underwriting so what we're seeing right now you'll you'll see a lot of information in the current a trade publications about deals I get done we're not doing all those deals because it because it doesn't make sense run balance sheet, but you know you may have to extend a little bit longer in this environment was property owners. They want an extra couple of years or the five you may go to seven maybe some 10 year money you make.

Try to tweak some IR structure from you don't know while to maybe two three year, while that will you'll be competitive but it all comes down to that we're not going to lose deals the cost of rate, we will lose deals because of dollar amount and that's always been the hallmark of the company. So when times are difficult they'll be activity bias will come in and by opportunity then we'll finance that opportunity set.

Well not there yet you know you know the good news is that some of the nontraditional players not equity equity finance years or bridge finance years are getting diluted on the ideal it's got they're not working but that's not all book. So that's positive because you're not seeing the losses, yet in a handful of.

Customers that are in a not all cousin to the handful of customers that are in the in the Fannie Mae structurally the Freddie Mac structure that are coming in in some difficulties and when it goes to the special servicer, it's put out the sell some little by that I hurdle rate, which I referred to them and it's not much much less worried global finance it.

Understood Okay.

Obviously, one of the 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 you know businesses is relatively strong because of that.

That's all I had thanks for taking my questions.

Good luck.

Next question comes from Stephens, along with RBC capital markets. Please proceed with your question.

Morning equally good morning, guys.

So.

Just getting back to the competitive environment can you can give us some color to what you're seeing today versus what you saw last quarter in terms of the G.S. cheese and other non banks and what are the factors driving those differences.

Oh, I I would say, it's Tom I would say that the GE as he is very real ebrahim harsh and that should be always the relevant player and thus players will be very active and I always is a very attractive alternative for customers, who want to bring their payments lower and try to drive.

Hi return to them on the into potentially over 10 year period, we've been very proactive and trying to avoid that type of model, we take but when we structure I always tend to be hybrid I'll play I may be 123 years, my while but if you have a solid low leverage transaction with a very good long term customer you may have to playing that landscape what the basket era.

Fossett rates go up in the back end the GE said the agencies are less relevant so right now they're relevant but we'll compete a and that I'd say the government has the biggest act for the transactions in the marketplace and at the same time, you know like I said, we want to be very active on managing that book this coming due and making sure that we get first crack at all our customers.

Appreciate that 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, probably just again seasonality escrows yearend I wasn't thinking as I said, it's not a targeted plan [laughter]. This is what we're running a very large deposit buffer we do have some seasonality.

Got appreciate it thank you guys.

Sure.

Our next question comes from Collyn Gilbert with KBW. Please proceed with your question.

Oh my.

Good good morning, Dannielynn Didnt think I was going to get on here. Okay. My first question yet.

[laughter] just first on the funding side, so Tom I appreciate some of the rates you're offering that you're 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're at below market rates.

We had well over a large institution, we have lot of branches in different markets I guess, how many do operate a hybrid elite customer base, maybe a few basis points with customers, who are going to analyze that's a five or six basis points to retain it but at the end of the day, we've been very competitive there whatnot and we're not only a massive growth campaign right now if we believe the book.

In a normal growth campaign at the market does change in 5% becomes 10% growth on a loan side then we'll go into lake and both campaign, but to be in the market were like you said in the middle of the range and I think you know slightly south of 2% on average is where the overall market is I think by the way. The Mako is too high if you look when treasuries are trading right now I think a lot of liquidity was put in place yearend.

Because of the balance sheet requirements. Some of the larger money center banks were pushing your balance sheet requirements, but at the if you think about where rates are right now and in rates have come down quite a bit you blew out 185, and I'm honored to reasonable rate, probably too high and if the fed cuts rates alone, but meantime, all model has an old fed it changes we assumed depends on hold for the year and now we're in.

You need spot to benefit from a liability sensitive balance sheet and see some good and I grew up from that.

Okay weaken said very quickly.

Okay. That's helpful. And then just so Tom you 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 [laughter], we will look at both in the wholesale markets as well as the the pockets like before the wholesale markets instruction, probably is very attractive right. Now there is somewhat of the uniqueness in return and when you look at the belly of the carbon in the short end of the curve a shortened financings expenses compared to doing a three or four you lock.

With you know when you've been putting a swap on so we've been doing that from time to time the basis versus law, we think it's a reasonable execution and we've been very proactive there bullets from time to time, depending on the marketplace, but you know we're putting money on 150 right now on on versus a 190 on Cds. So there's definitely a reasonable.

Delta to move towards wholesale.

Okay. Okay. That's helpful and just also tierpoint right. So retention is gonna be so key to sort of 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 it in a press release said the pipeline had 66% new money. This quarter do you have what that percentage wise for from last quarter's pipeline.

No. It so I would say it I think we've always put in that maybe look back at remember very especially if you always trying to tout. The old overall, you money pipeline new money has been around two thirds you know some 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 finance their themselves out even go into the.

Bank, because our mortgage transferred that doesn't have to deal with.

The expense of doing a transaction in New York to use their credit facility, which was cheaper and getting money from the bank that happens from time to time do we take advantage of those one off and try to carve out what happened in the quarter I think our retention has improved slightly we have a long way to go I like to have that retention rate going back going on so towards the normality, which was significantly higher than we.

In the previous six months see sort drop off when the rent control or put in place. We had a lot of volatility in Q3 Q4, we had good stabilization healthy yield curve in Q4, very attractive buying and selling it wasn't it wasn't that blockbuster corner as far as transaction, but there was some transactions and things are getting done so I like the fact that.

You know, there's a predictable fan right now more or less for the year and I think that customers are realizing that a lot of money has to be dealt with in the next two years. So they have to finance and with that we're open for business [laughter]. Okay. Okay. And then so just kind of along the lines of you know the 3.3 billion of originations net gross putting the purchase aside with.

280 million, so just trying to sort of I mean, obviously better understand bridging that gap and and I think when when you talk about.

On the outlook for pre pays a not dynamic in 2020, I guess I'm. If there are contractually maturing if you've you know the numbers you've laid out are contractually maturing this year why or why would they prepay <unk> I wouldn't think they would pre pay right. So when you prepay income be significantly less.

Like I said, depending on what bucket comes due its very important we know that 2020, if they wait the last second they're not going to 8% on their financing right. So pay them on and let's see the market screen at sea of a 3.18% going to three and a half still good for the bank, Yes, you don't get a prepayment what they're rolling into the next financing, but those low.

And have no choice, but to come due the ones that are in 2020, 122 is where the opportunity will arise they decide to lock in the next seven years instead of five they may choose to do so based on their own internal decisions based on financing their entire portfolio loans, we're going to be very active on working with our customers to get into the table soon.

Oh, we do that all the time, but in this particular case our goal is to maintain higher retention. So we know what's coming do we know what's coming due in the night for the next five years, but for the next two years, there's an opportunity to take those lower yielding loans and not put them in a position. They go to a much higher right. There's no one knows where rates are going to be a year for now.

They may opposite finance today, and with so we can be proactive with the portfolio.

Okay. Why my question 11, Okay. Sorry, one last question you <unk> you know the retention rate and 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 so so the reality is that all goals and get back to historical levels, which is well above 50%, okay well.

They are yet to Q3 was probably the worst you've seen we bumped it up by 10% when you call about certain loans that we knew were going to handle the not willing to finance I mentioned, one in particular, because it was a large loan or $100 million that use their credit facility to finance himself. He take those one off we probably improved retention rate by 10%. So 30.

For the comes 44, we need to be well over 50 and moving towards 62020, that's the goal.

Okay that that's helpful. I'll leave it there thanks very much sure. Thank you.

They have a follow up question from Brockman would you be yes. Please proceed with your question.

Hi, Thanks for taking hey.

I know you talked about the day, one seasonal impact we heard a lot of banks kind of walking up a net charge off guides for a variety of reasons I'm you know how should we think about 2020 as far as you know net charge offs is this still 85 basis point kind of.

A number or should we be thinking or something more given the shift into a especially finance or what have you. So lots of all that well I would say if you carve out them in diagnose zero is probably good number for us. It's really the history you know the history of the company all credit quality medallion has been a most of the charges we've seen.

Taking 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 the bottom there you never predict when the bottom is when you take out Medina losses. They don't have any losses as far as specialty finance. It's been a you know we have we haven't seen a 30 day ever so I think rent a very good spot I wouldn't want to harden understanding on difference between a credit quality because what you know this is what we do.

Oh, I remember a rent regulated multifamily see every lender, but a history of no losses, I think Oh I see every book is half the losses, we've had a multi family which is the minimis. So yes. The categories do change we're going to take a fun changing the provision because we have to into the rightsides a onetime adjustment the capital impact the balance between three to six basis points, but after that.

Business as usual and unless there's a change in the marketplace on duration goes from two years. The 10, I don't envision any real material changes for us.

And then finally I'd read out in are down dramatically yeah, that's not part of our business that that certainly we actually negotiated to sell and we were getting out of that consistently over the period past.

Got it okay. Thank you.

Sure.

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 Illinois' TV, 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 40.

Thank you.

This concludes today's teleconference. You may disconnect your lines at this time and have a great day.