Q1 2020 Earnings Call
Good morning to South Dimartino director of Investor Relations. Thank you all for joining the management team of New York Community Bancorp for today's conference call.
Today's discussion of the company's first quarter two.
2020 performance will be led by President and Chief Executive Officer, Joseph Ficalora, <unk>, Chief Financial Officer, Thomas Can't Jeremy together with Chief Operating Officer, Robert won and Chief Accounting Officer, John Pinto.
Today's release includes a reconciliation of certain GAAP and non-GAAP financial measures that may be discussed during this conference call.
These non-GAAP financial measures should be viewed in addition to and not as a substitute for our results prepared in accordance with gap.
Also certain comments made on todays conference call will contain forward looking statements that are intended to be covered by the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Such forward looking statements are subject to risks uncertainties assumptions that could cause actual results to differ materially from expectations.
We undertake no obligation to and would not expect to update any such forward looking statements after today's call.
You will find more information about the risk factors that may impact the company's forward looking statements and financial performance in todays earnings release, and the company's SCC filings, including its 2019 annual report on form 10-K.
To start today's discussion I will now turn over to the called the Mississippi, The Laura who will provide a brief overview of the company's performance before opening the line <unk> Q1 night.
[laughter] Sycamore. Please go ahead.
Good morning, everyone on the phone.
And on the web cast and thank you for joining us today.
I hope that all of you are healthy and safe during this unprecedented times.
Our immediate thoughts go out to all the individuals and community is impacted by this pandemic.
We're also very grateful for the health care professionals and all those on the front lines or battling this crisis every day.
Before I discuss this quarter's performance I would like to cover topics with you.
These two topics first.
I would like to share with you some of the actions we've taken across the bank to deal with covert 19 crisis.
It goes without saying that the health and wellbeing of our employees customers and shareholders.
As of the utmost importance to management and the board of Directors. The company was very proactive during the very early stages of the crisis and immediately enacted a business continuity plan.
And pandemic preparedness procedures.
Good morning, close to 100% of our bank office employees working remotely.
In addition, we temporarily closed all of our installed branches along with several other locations converted some to drive up only and adjusted the hours at our remaining branches.
Oh, the consumer side, we've enhanced our online banking and mobile capabilities temporarily wave certain retail banking fees, because those customers who made the experiencing financial difficulties. During this time and offered 90 day.
Aiming for parents to resume <unk> residential mortgage customers.
On a commercial side, we have proactively reached out to borrowers on a case by case basis to help them manage to this crisis as well.
We put in place several risk mitigation strategies, including enhanced.
Monitoring of certain credits.
Aim at restructuring.
Plans.
And deferral options.
<unk> with regulatory guidance.
Second.
I would like to clear up some miss perceptions regarding trends in the rent regulated multi family market in New York City.
We're not a newcomer to this market.
If you recall at this point, we had been doing this type of lending for over 50 years, we have relationships with some of the largest property owners in the city.
And we have very strong ties to some of the biggest commercial real estate brokers, including the largest one servicing the New York City marketplace.
We also have a as directors several real estate professionals, who participate in this market for a living providing us with a unique perspective on the multifamily market.
Over the past week or so there has been some discussion about the level of right collections in our market.
With our conservative view on underwriting we closely monitor a number of trends in the multifamily market and when things change we reevaluated.
During the month of April we surveyed a wide gamut of all borrowers, including some of our top 20 bars, we broke we spoke to brokers.
And we also reached out to a number of industry experts.
Based on all market intelligence.
April rent collections on the rent regulated buildings in our portfolio are estimated to be in a range of 80% to 85%.
On the market rent properties it is even higher.
This is very encouraging given the impact on the New York City area, given the cobot 19 endemic.
Well there are still many uncertainties regarding how over 19 crisis will ultimately unfold.
To what degree it will impact the economy over the long run.
We believe that we're better positioned than most other financial institutions to navigate through it given our strong credit culture and low operating model.
Well no to economic cycles are like I would impress upon you. The fact that throughout various cycles. Our actual loan loss experience has been much lower than the rest of the industry.
With that out of the way, let's turn our to our quarterly results.
Earlier. This morning, we reported diluted earnings per common share of 20 cents. A three months ended March 31st 2020, that's up 5% compared to the year ago quarter and ahead of consensus estimates.
Despite what is usually a seasonally slower quarter, we had strong loan growth.
Hey, higher level of net interest income.
Net interest margin expansion low operating expenses and stable asset quality metrics.
We have acted.
The first quarter with positive underlying momentum.
And we are a strong capital and liquidity position.
Our results include a provision for credit losses of $21 million, that's 0.05% far below industry metrics due to the application of Cecil during the quarter.
This reflects an additional reserve.
What's the potential impact of covert 19.
It's a slightly offset by an income tax benefit due to certain provisions under the cares Act.
That notwithstanding we're very pleased with our first quarter performance.
We ended the year with strong fundamentals building off of a solid performance in the fourth quarter of last year.
One of the highlights of the quarter is the improvement in both net interest income and the margin.
After reaching an inflection point last quarter. When these two metrics both increased for the first time in five years.
They increased again during the quarter.
The current quarter.
Net interest income, excluding the impact of prepayment activity increased $9.3 million or 17% on an annualized basis compared to the previous quarter due to lower interest expense has funding costs continued to decline.
Net interest margin also continued its upward trajectory.
Well, so excluding the impact from deep prepayment income the first quarter margin would have been one point, 92% up two basis points.
And inline with expectations.
We are currently very well positioned for further growth.
Throughout 2020 in both the margin and net interest income, albeit at a higher rate than we experienced during the current quarter.
This is due to our liability sensitive balance sheet, the fed having lowered its target rate to near zero and they significant repricing opportunities embedded within our funding mix, especially on the C.D. side.
We also reported a strong increase in pre provision net revenue PPNR was $135.8 million for the first quarter.
Up $8.5 million were 6% compared to the year ago quarter.
On the expense front total non interest expense was $125.5 million down 10% from year ago quarter.
The efficiency ratio in the first quarter was 48% and can.
Continued to reflect positive operating leverage.
Moving onto the balance sheet. Despite the usual beginning of years to seasonality total loans increased almost $400 million or 4% on an annualized basis compared to the fourth quarter.
Specialty finance lending and multifamily portfolio continued to be the primary drivers of this growth.
The specialty finance business had strong growth this quarter.
This portfolio rose $415 million to $3 billion on a linked quarter basis.
Meanwhile, the multifamily portfolio increased $113 million to $31.3 billion sequentially.
As I alluded to earlier, given all that has transpired over the last two months multifamily credit spreads have widened significantly due to market dislocation and less competition.
Similar to what has occurred.
Cycle.
Origination activity was also strong as overall originations increased 35% on a year over year basis to $2.7 billion with bulk multifamily and specialty finance originations increasing significantly come.
Paired to the year ago quarter.
First quarter originations exceeded last quarter's pipeline by $1.2 billion or 80%.
Multifamily originations were $1.4 billion and specialty finance originations were $957 million both up 40%.
Relative to first quarter of last year.
We continue to be encouraged by our potential loan growth over the course of this year.
Our pipeline currently stands at $2.1 billion, 40% higher than the fourth quarter and year ago pipeline.
Of the $2.1 billion, approximately 64% is new money.
On the funding side, our deposit growth continued into the first quarter is well total deposits rose $316 million or 4% annualized to $32 billion. Most of this growth was in lower cost savings.
Noninterest bearing checking accounts well see these declined modestly.
Wholesale borrowings also increased as we took advantage of the low interest rate environment to replace matured borrowings with lower cost longer duration borrowings.
Borrowings increased $375 million to $14.3 billion during the current quarter.
On the asset quality side as discussed in more detail in our earnings release, we reported a 21 million dollar provision.
For credit losses, mainly driven by covert 19.
Net charge offs totaled $10 million was 0.02% of average loans, six and a half million dollars, which was taxi medallion related loans.
That portfolio continues to be in runoff mode and currently stands at $33.5 million Importantly, we had no losses in our core portfolio.
The adoption of Cecil did not have immaterial impact on our asset quality metrics as they remained strong during the quarter.
Nonperforming assets declined $15 million or 20% to $59 million compared to the level at year end or 11 basis points of total assets.
As with charge offs, the largest component of Npis is taxi medallion loans.
Excluding taxi medallion related loans, npis would've been $36 million or seven basis points of total assets.
As noted in today's investor presentation at $18.7 billion, where 60% of our total multifamily portfolio is subject to New York State regulation loss.
The weighted average LTV on this piece of the portfolio is there is 53%.
Compared to 57% to the overall multifamily portfolio unchanged from the previous quarter.
Lastly, we also announced that the board of directors declared a 17 cents cash dividend per common share for the quarter.
The dividend movie payable on May 19th to common shareholders of record as of May nine.
Based on Yesterdays closing price this represents an annualized dividend yield.
6.6%.
Before moving on to your questions I would like to making final comment.
Had NYSE B, we're not just a community bank.
We are a family and when things get difficult our family comes together.
Hi, I'm extremely proud of all the effort everyone. Every employee has made to ensure that we continue to service. Our customers. This has been a very challenging stressful period for everyone and I am proud.
At how the entire organization has come together and residences a challenge a very big collective. Thank you to all of our 3000 employees throughout our franchise.
Lastly, our pres go out all those members of the NYSE be family, passing President who are suffering from covert 19, and particularly those employees their families and friends who have lost.
To the disease.
On that note I would now ask the operator to open the line your questions. We will do our best to get all of you within the remaining time, but if we don't please feel free to close later today, where this week.
Thank you if he would like to ask a question. Please press star one on your telephone keypad and confirmation Tele indicate your line is in the question kill you May press star to if he would like to remove your question from the Q and for participants you seen speaker equipment, it may be necessary to pick up the handset before prestige.
Sorry, he is.
Our first question is from Ebrahim Poonawala with Bank of America. Please proceed.
Good morning, everyone.
Good morning and going.
So I guess just to follow absorb.
Coleman, it's about the multifamily.
Oh, Oh or being I guess my senses, we probably see an uptick in Oh the photos when you look at the me supposed to be data.
So somebody told me go from 80 to 85 to something nowhere, So would love to get your thoughts on that and Additionally, you can talk about just the sentence your customer base.
Even as the MTV is a little skis, what's the risk and domes, all committed standpoint, do and baby and what level even before those have you go why did you all clients at the last month or so.
I'm trying to take that.
Yeah sure saving in the mornings Tonkin, Jamie I'll have Joe can address the market, but I'll give you the specifics on what we've done with our customers are we were very quick to react to the obviously this is pandemic <unk> to support the customer base, we offer a right out of the right.
<unk> mid March when the government shutdown the country the ability for customers to come to us and defer or for a period of four bucks six months and part of that deferral was they have to be current as a time they've entered into a deferral agreement and they have to be also paying their escrow payments throughout that period that being said we.
Actually as of yesterday, which is almost one starting at <unk>, we have approximately $3 billion, a multi well nigh point, 60% or the entire multiport for that's in a deferral agreement.
Thinking about the the entire portfolio and they had to its theory.
It's approximately 4.8 billion and the see every piece of that and I believe is approximately 1.8 million.
Total Senator the series approximately 26% so all in its about 12.6% of multifamily theory of 4.8 billion and the LTV that portfolio. That's wonderful is 57%.
And so that's my answer and that that does and that type of yesterday's. That's you know real time.
And I need to 90 days before it was going on like what do you Didnt like what is your expectation that the 66 month six month 90 days on the presidential side, that's right and if we thought seem to be locked down kind of open up let's call. It summit at all in the June July.
Youre, saying that most of these loans all of these bars go back to being caught in coming looking all can be sold quarter towards the end of the air.
So I mean, I mean, not a crystal ball, but I can give you actual specifics collections as of yesterday, well, noting that when you take an accountant deferrals as well as people that I have not the for up to 97 point, 70% of April collections compared to an all of the previous months around the same level when you back out the Charles So the multifamily that's at 91 versus.
97, so we're really not seeing a significant adjustment here on payment on payments coming through so we're very pleased on the current collection efforts going on and as of yesterday.
Understood and this morning, albeit for multifamily told well anything in when you look at the other CRD book I think CRT D.
On the scanner or just talk wasn't on the risk exposure, there, particularly to any more detail Hi Inn and also what they need this call on especially finance book, which has grown a lot over the last couple of years.
Sure, So obviously and leave the percentage of the federal client for commercial real estate.
Particularly looking at retail and office and alike. So we expected that especially on the mixed use properties not to the highest percentage would be put the mixed use properties. We have smaller buildings that have a higher concentration of retail on the ground floor. You have residential above that are that numbers in probably in a 40 percentile you think about pure pure retail and all.
Office, 23% for Ah office in professional buildings are retails at 27% when you blend that those numbers in for the portfolio was 26%, but clearly the higher levels going to be as expected. There's no revenue coming in in the ground floor on the multi site. We happened to have some very interesting statistic the launch of the buildings the much lower the amount of deferral system.
Turning to have an excess of 100 plus families living in the building that's like a 6% from wait so it's much lower so it's you know 6% type versus the retail what does it can be substantially high there's no revenue coming through.
My specialty finance I would tell you that we stand right now everything is current I know what missed payments, we feel pretty confident in the portfolio given our senior security and opposition and we've been growing that portfolio very nicely and again, where it was an asset base. Linda we know what we feel that we don't have significant exposure, that's called and related we do have some energy.
Couple of hundred million dollars, an energy, but that's all super senior secured to very stable institutions on the auto side, which is dealer floor plan. We believe that portfolio will do well given the P.P.P. problem as well as the ability to you don't get up and running towards the end of the year, what's the yeah with their option to take on deferrals and eventually get the dealerships open up against.
We think that that portfolio, we should have a zero losses in the specialty finance.
Business got it that's helpful. In just one separately and last one on the margin well. So you have done looks like something coming up for all these but do you feel I just don't wasn't don't have the new deposits. Each all flawed and if you can quite some cadence so seem to see backdrop, if it stays where it is given to spread widening of the lending side.
Like walk.
What level of margin expansion should we expect between now.
[laughter] goodwill just one quarter, but what do you. If you can talk to just the next few quarters like what's the live enough margin you expect Jordan or when do you Wendy.
So I'd say big picture as we talked about going back to 2019, we said, there's an inflection point in the fourth quarter. The margin starts to rise in Q4, what the anticipation seeing significant rise is going to 2020 with exceptionally substantial adjustments in interest rates.
I see this that has intervened yes, all around so look also at near Zero Fed fund rate, but that being said, we did hit our guidance for Q1 as expected up too, but you think about second quarter margin, we're seeing more likely not double digit margin expansion. We believe that throughout 2020, we anticipate double digit every quarter. So we're gonna have substantial.
Margin expansion, given a liability sensitivity balance sheets and more importantly, we have substantial amount of Cds coming do you as you can see from that from the press release, we put the then I'm is out there it's about certainly.
$14.8 billion coming due and then second quarter, its 6 billion coming due at a 235 and any event that you have a CD rolling off in this environment, you're going to end up in a probably more like they're not level well below 50 basis points. So I think you think about that potential that 6 billion Inc. in Q2, Q3's, almost $5 billion that you all six he's waste the coming.
Now well below 1% so the margins really driven by a number of factors we have the CD costs dropping materially funding cost is dropping on the on the borrowing side.
Okay went borrowings are right now on to your bullets at 74 basis points, where the swap as cost effectively zero and you think about you know the money coming through on on the borrowing side, if we growing the portfolio depending on how we grow with deposits are no borrowings the cost is relatively cheap, but more importantly, there's been a real change in pricing in.
In respect to the multifamily theories space I mean, no question that there's been some dislocation with CMBS players are on the sidelines you have the agencies tightening up the standard. So we're looking at you know what the 300 basis points increase not part of make so so if you view at the comes in the bank today when they look on a type credit five years structure.
Typical bread and butter structure, you had a three and a half a cent coupon that's pretty attractive compared to where five year treasury to trading out right. Now. So we're very bullish about the economic spreads on the product mix were extremely bullish on the drop in the the cost of funds. So we we can see double digit margin expansion every quarter throughout 2020.
And that would be even assuming credit cost or in check you're looking at escrowed you know in the mid teens.
Got it thanks for taking my question.
Sure.
Our next question is from Brock Vandervliet, what you'd be S. Please proceed.
On a brock.
Rob Please check your mute your phone if you did.
Oh, sorry <unk>.
Good morning Dock.
Good morning.
Could you kind of dive into the.
Multifamily credit spreads I think we all saw the dislocation in March.
She is kind of pulled themselves out of the market why doesn't this.
Vert and how much of that aggressive margin guide is based on.
The current pricing holding.
So all of them. So again, we don't have a crystal ball what happens with interest rates, but clearly it seems like weights are gonna stay low for a while here given the the pandemic in the circumstances. So we have enough in our run rate for.
Well. That's this is well just talking about 2020 fed not doing anything in 2020 at the same time and we've been through many crisis in cycles, and we've seen adjustments within the marketplace and clearly I'll go back to the 2008 adjustment you had massive dislocation you had CMBS you had the agency out of business back then so it's it doesn't I'm not saying that they just had a busy.
But the agency is clearly tightened their standards a widening of spreads are there was a premium risk reward that's bites in the marketplace and we're enjoying that healthiest spread I think what's most important yeah. We talk about no asset growth, we weren't anticipating 5% net loan growth, but you know we're seeing substantial favorable results on retention as we ended up the caught us as we go once.
Q2, we think our retention level will be higher and we have oh, well over 13 $16 billion. The next three years coming due tomorrow and customer base. So we believe will retain a high percentage of that unlike we did last year. So I think the fact that the competition as Wayne significantly 300 basis points spread was funny cost coming down to zero. It can be a very powerful margin.
Spansion story here at MIT base.
Okay.
You are going through these numbers very quickly could you just.
Review again.
And multifamily.
For parents percentage.
Sure $3 billion that as of yesterday that we've entered into agreements on for Barents for multifamily a 1.8 billion for CRV, which is office and retail predominantly on a percentage basis, that's 12.6% totaled 9.6% multi 26.4% on CRB LTV in the total portfolio is 57%.
Not that deferral.
Okay, great. Thank you sure.
Our next question is from Steve Moss with B. Riley FBR. Please proceed.
Hi, good morning.
Hum.
On the loan growth here I, just want to see you know what you're talking about pretty strong pipeline here any thoughts any updated thoughts around you know toll on growth here for the year <unk>.
So just wanted to handle that one job.
I think the idea here is that as as always is the case when the market is stressed we get a greater share of the market. We do believe it will be growing our loans or at least at the levels of last year, and and well likely in excess of the levels of last year. So so the the.
For the thing is that in this crisis.
Our principal asset.
We will greatly outperform.
And our ability to take share of the marketplace will increase.
Both of those factors have always been the case in a stressed environment. We do believe that the period ahead will represent an environment, where many of the other lenders in our niche will lend less and we will lend more.
See I would just any more commentary some color on all our projections, obviously, we're projecting a mid single digit which is 5% I'm pretty bullish about the pipeline and more importantly, going back to my dialogue as far as retention. It feels like our team has done a phenomenal job one really conveying that what we're really.
Fighting for that retention. So we moved that retention rate backup to historical norms, which typically will happen when the when a lot of competition is waning, we should see the potential as Joe indicated of higher growth, but for a conservative purposes, we feel comfortable that 5% net loan growth is reasonable for the company and I think the she you'll probably see more on the multifamily side, then you'll still have strong.
A growth on the specialty but multifamily should be no backloaded here, especially in Q2, obviously Q2 is usually strong quarter for us.
Great and then just in terms of you know underwriting standards here any changes as you're getting new customers are approaching the bank.
So so I would add that we've had made some changes obviously given the marketplace. We've tightened the standards in particular, one cash money Wi Fi coming out of a transaction, we feel that we have a lot more flexibility now given the marketplace. So we were actually up it when we do a transaction with a cash out hybrid fiber actually holding.
Six months of both Pmnine escrow payments and in escrow, what the bank. So that's one of the major changes we've done in this environment and obviously you can imagine that you know when you find that gets kinda. We know we're one of the tightest underwriters in the marketplace. So we're going to continue to be you know there for our customers, but we're going to be that I'm very conservative level and that's the hallmark of the company.
Great and then on funding costs your interest bearing deposit costs down 12 basis points I hear you in terms of significant repricing. Just wondering if you could put a little bit more in terms of what you would expect a this quarter versus the first quarter.
So I I would say the continuation of substantial declines in deposit cost is real we have you know a unique situation going in particular, we were on the epicenter. So it's very difficult to go out to the branch and changer deposits when it when Cds are coming due so many people are just very comfortable for safety reasons, keeping their cash in the bank.
With that being said you know that some people that we had to 75 last year about 250 are going down to close to two basis points today until they come back to the branch and well make a phone call and try to get a higher rate and my guess is that given where the marketplace as you're looking at rates I'm, probably be you know south of 50 basis points for you know between one or two years Hyperion, we do have us in Iowa.
Offering now, but it doesn't know what real takers on that type of of a have a coupon I 75 to 90 basis points, but the reality is we're going to be continuing rolling our rates unless there's a change in the market because we're looking at close to zero percent interest rates and being a thrift a we've moved very stable when it comes to targeting to some spread off of the U.S.
As you, which is not a very low rate. So we feel highly confident that so does that substantial amount of coming due a 14.7 billion in particular Q2 6 billion in the middle of the epicenter to 35, well dropped materially lower for us.
Great and then just Oh, the energy exposure that you just mentioned Tom you said a couple of hundred million in energy senior secured just wondering what type of loan it is and personal could it's a it's equipment for summer Jay the largest client there. It's you know there there are no household name large institution, you've been listening to them for multiple years since we spoke.
Out of the business and they they've brought down in some some facilities, but it's all senior secured and Oh, we have another pretty high rated and a high rated scaling it for the five China <unk> five.
It's a high rated the high rated internal in classified asset. However, we feel highly confident that you know its money. Good in particular its you know a household name that has very strong fundamentals and more importantly, it's two senior secured so it's not a and then a alone so summer Jay The Corporation my thoughts on its equipment.
Great. Thank you very much.
Sure well.
Our next question is from Collyn Gilbert with KBW. Please proceed.
One of the wind Alan.
First question just on the pipeline you know really strong pipeline. Obviously this quarter do you have a sense of sort of how that's going to behave going into Twoq you. Tom I know you just mentioned you're stuck strong long life insurance, you, but just curious kind of where you're you know what your borrower behavior is how closings are getting done.
So maybe what the pull through rate is on that pipeline and that also what the blended rate yes.
On that so let me an easy one for us the blended rates about 326 out of a as of yesterday, but you know if you're thinking about how is it evolved and go to the ended the quarter <unk> spreads widen that materially we started when he ran regulatory changes in last year. When we went from 150 to 200 basis points because of the change in there.
In control markets and then we hit the pandemic now and what the 300. So it really wasn't change in the marketplace for the back ended the quarter. So you know this is more of an evolving pipeline that we're going to see throughout the year, but you know the business that were out there getting good good flows of opportunity right now within our own portfolio and others as you indicate any money pipelines about 64% you're seeing.
You know a much higher coupon relevant to the current the want to decide at 325, it's going to take some time to work through the due to the bank, but clearly we've never I don't think we'd have a close less than what we've announced in our pipeline I can't remember ever where we we announced the pipeline we didn't close it at a minimum our pipeline. So it was looking at a 2.1 billion dollar pipeline and.
Q2, so you're assuming we close that ends on.
Okay.
And then in Collin I was wondering I would say the provisos, assuming that the market reopens ride. This we did this we had great closings in a very difficult environment, where we had to get attorneys together appraisal together you know we get actual appraisals when I you know when I get it but we are in the marketplace closing loans on a daily basis with all these operational issues that are out there I assume.
I mean that becomes the country reopened that will only be better for us.
Okay, but your assumption that you close that pipeline like what's the thing would think don't open on certainly not New York [laughter] I don't know assuming assuming the lawyers are in business and assuming that the banks is still funding will be funding.
I went through a pretty rifle call March and April right. So we had some very significant originations we had substantial originations.
Okay. Okay, and then just on the I mean, nothing your deferred you know you gave a 57% LTV is on on those loans would get what the debt service coverage is on Oh, yeah. They don't yet short them would that service covers a 174 for the talk for the that's the commercial real estate portfolio and 153 for them all.
Okay.
And that's why the deferred longer that's for the broader but that's only for the deferred loan that's right. Okay. Okay. That's helpful. And then although of those deferred how much of those work gonna be coming due contractually anyway. This year.
No I don't have that number for you I would I was again I would guess probably not many but all I can follow up on you know offline and that.
I think I think what's interesting about the program you know we were very active in and obviously that when it was publicized within one day that we're doing this so people you know you read the real deal its public that we're doing this program and people call and the offered it and more importantly, we've done around due diligence on each customer right and you know the fact that you have to have your I. Suppose currently you have to be calling on the payment.
And we work at a six month range, we think that liquidity backstop for them. So the next six months, we'll be very helpful to get to the other side of this of this problem. We have is pandemic in the United States and we think that six month time should be reasonable we could have done a shorter period within six months is more reasonable because it kind of take a few months here to get us in particular on the ground floor for businesses.
But you know we think it's a reasonable timeframe that we can at least have the landlord work it out with your tenants. So we can move forward and be that they'd be supportive of them given the crisis.
Okay.
You know along those lines and you sort of answered it but just broadly right. So obviously sitting an unprecedented times you know that your book has not been tested to this degree I don't think I.
I wouldn't even say 911 like it does right now how did that impact the way you're thinking about the reserves I mean, it was a modest reserve build this quarter I'm just kind of broadly given their risks that are out there. How are you thinking about so call. It I'm I'm gonna I'm going to the actually the first at the time tested to just take longer than what the bag well over 50 years, Joe maybe.
Well go by the time tested as far as Youre experienced in multiple decades more than I have [laughter] well I think the good news.
We are structured such that that this adverse change which of course was not anticipated it's not all that different than many other reasons, why a marketplace deteriorate and payments our deferred or otherwise.
You know he evaporates, the environment, where he and presents challenge, but none of this challenge actually change is the reasonable expectations that our owners well in fact remain stable our buildings will remain stable and much.
Recently, we cultivate relationships that are way bigger than isolated.
You know properties that are funded by us.
The very people that have each and every loan with us in many cases are extremely large players in the New York market and they have long history with us.
And and the opportunity that is deteriorating market represents and in every deteriorating market. The large players by and in every circumstance when they're buying into deteriorating market. We fund there is a very big difference between having a relation.
And ship with us and having a relationship with a giant bank well with another bank. Many other banks literally vacate space because they're experiencing so much adverse performance, they're not willing to continue to lend within the space, we're not having adverse performance.
And we gain share during periods of crisis. The period ahead, well literally provide for us additional market share and that additional market share will give us the ability to grow our book with good product and better than exist.
The rates the ability for us to earn on our principal asset go forward is actually better than it has been for a long period of time.
Okay, and I'll address the reserved or <unk> point, then that Joe did the good history of the bank and novice he's been here for many decades.
As far as reserves consuming Colby did not happen no. We guided in the first quarter for Ses, but I wouldn't really be no impact at all other than the transitional adjustment that we took so just the if you if you take hold it out of the equation for first quarter, you're looking at probably closer to zero zero provision in 2000 in first quarter 2020. So you know that's kind of how we looked at.
The the cobot analysis in particular, we actually did some more quantitative adjustments just because of the Moody's change on as far their view of unemployment going into 2020 in the second third quarter. So you know we're conservative institution that the history of really no losses in the in the marketplace and these are predominately residential units at a housing and people.
On the city of New York, So we feel highly confident that our loss content is low, but obviously, we booked a sizable adjustment that we didn't anticipate the cost of cold at 19.
Okay, all right and just lastly, I wanted to clarify there's some confusion to me the way. The press release was written and I know the share count what happens in the first quarter, what well I mean, what did you guys my back this quarter.
Oh, it's in the that's in the that's supposed to be we were slightly active and we have a little bit left and know how will evaluate the market depending on market condition, but it's really not but it's not a material number left.
Ah, yes, sorry, small hiccup wasn't 30 million lab.
So getting the buyback is not significant that's left so we did by second quarter, given the given given the price action in the quarter sure.
Okay. They need the actual fair number isn't the press release that you bought back then.
I think the difference right we have their numbers on the second page John.
Yeah, it's in their second page.
Okay, and you do not issue any shares ending the quarter <unk> Oh, just normal plant went on the internet. It against the plan when you look at the the share count in the back of the documentation is netted against what is your shares. So I would say their problem. What we've bought back is what we've issued the for for a M. P shares.
No significant change that you don't have we'll have a material buy back in place. It's it's insignificant.
Got it okay I will leave it there does that doesn't does it doesn't mean that we're not buying back shares right. So we're not holding anything we feel very bullish about our business and obviously varies and it'll be paid very strong dividend. We're comfortable that I'm you know given the guidance I gave you won't be it credit issues, which we you know unforeseen credit issues when looking at significant EPS growth and.
Importantly, double digit margin growth every quarter throughout 2020, and ash and you'll see growth continue through 2021, but I don't want to get to ahead of myself, but clearly this has been a significant change about funding costs going forward. So you'll see Q1 up 10 basis points Q1, brushing up to and I'm, sorry, Q2 of US is up two in Q1, that's a substantial.
Changed we envision that change continue in Q3 in Q4 as well.
Okay very good I'll leave it there thank you sure.
Our next question is from Dave Rochester with Compass point. Please proceed.
Hey, guys.
Just back on the theory book Real quick what was the total retail exposure you had how large that segment roughly can you just talked about like a rough breakdown about what that is whether it's mixed use strip centers or whatnot.
So I I. So again, we have approximately 1 billion seven of retail stores planned shopping center.
Which we have indicated about 470 million of that is deferred.
That LTV in that portfolio like 56%, where the 170 debt service coverage ratio.
As far as further breakdown, we do have office in professional buildings and this theory, but much of the vast majority of it that's about three and a half billion of which.
830 million is preferred which is 23% and that LTV I believe is about 52% what are the ones 85 debt service coverage ratio. So a lot of it mostly in the Manhattan region.
And for in pretty low Ltvs to.
That's good Oh, Yeah, Oh, yes, and I mean, we haven't had we have a handful of garage is that it you know there's no people going parking garage. So that's gonna be deferred and not material right. Now these you'd expect that to go for the phone program until they start opening up a city again.
Yep.
And then you guys gave some great color on a cash flow trends for the run by the way to multifamily piece I know you hold most about a 50% risk weight given the loans meet certain debt service coverage and LTV requirements was just wondering what those thresholds or for debt service coverage and LTB that they have to continue to meet in order to maintain that capital treatment energy.
Yeah, and then do the ones have to switch to 100% risk weight. If you trigger well know older. They have to target both how does that work yet. So it's 120 is the number 120 and 80% LTV 120, and we've been in constant dialogue with obviously, our regulators, but the reality is this just a regulatory.
ER expectation to the Kazakh is to work with the customers well getting some very good latitude now based on this change under the 50 versus 100%, we envision that no. After these customers come off a deferral they'll be treated as if they what 50% risk weighted that's what what's the we're expecting a could that change, possibly we don't expect that the change we believe that the.
Yes that was very clear for the banking sector to work with your customers. So I believe that we'll have some grandfathering in when we make is the fraud when they come back we hope that don't <unk> no cash flowing it on north of that Ah ones, one in the LTV easily well insulated.
We should have we not because we don't know that's gonna be the final ruling what the regulated aside a year from now, but clearly there's a lot of regulatory guidance that we've been working directly with a a regulated as far as some specific guidance given our business model and it appears down to the Kazakh is a there's a mission here for the banking sector to step up and do right by the customer base given our LT.
These given our business model, we feel highly confident that these when we get together side people will be living in Manhattan.
And the five euros and paying thereafter.
And if you have to restructure or any of those and the restructured loan actually meets all the criteria is that okay or because you restructured it it actually has to go to 100% risk where I I think I think that we'll be fine on the restructuring, but again I don't want to get the cart before the horse. The I guess, we feel highly confident that as we get to the other side people are going to be.
Living and working in the city and we believe that it was a there's still a housing shortage in Manhattan is still a rent regulated shortage of Manhattan. So we think there will be fully occupied and we went out in the luxury market, but non luxury lenders right. So even though our buildings have a blend of of rent regulated the other put the pieces non luxury for the most part so we have a unique portfolio does any event.
The market wants to be price itself down as far as rentals were insulated because we're not looking after the luxury market. So you feel pretty confident you know we don't have a crystal ball. This is a <unk> like as Colin said untested times, but you know, we're working with our customers and given the percentage that it's across the good news in the past week or so we haven't seen any uptick so more people asking for the <unk>.
So did well almost sitting here in May we think you know a lot of that's been out already so we'll monitor every month and and the next time, we speak to you in next quarter, we'll have an update but the good news that he'll be you are coming into May and we don't see the spike in additional request.
Okay, and then how often do you have to do that 50% test is that once a quarter or once a year and when does that.
We do whatever we do it every quarter, depending on what loan comes due as far as they are you sure quarterly currently it out.
That's all I know, it's all automated quarterly [laughter].
Oh, Okay, and maybe just one last one on expenses how are you thinking about that trend at this point is that you were talking about 515, maybe for the for the year in the last call is that still level, you think you're going to channels. So yeah. It seems that book I think that Q1 was better than expected I think Q2 will probably by the better than expected internally so anywhere from 128 to 120.
Nine is just slightly south of 130, and then maybe flat for the rest of the year again, we're not seeing a ramp up in expenses now we don't anticipate substantial expense because of covert 19, but we'll evaluate as we move along here, but I would say based on a absent the pandemic versus last year I think our expense guidance that.
So within that range I don't see any major change here.
I would say the only real change that having completed our conversion and that wouldn't probably added some savings, but it gets done it gets pulled a postpone the cost of the stay at home order.
We anticipate the have that wants the once New York opens up hopefully by the summer, we'll be able to do the full conversion.
Okay, Alright, thanks, guys.
Sure.
Our next question is from Peter Winter with Wedbush Securities. Please proceed.
Oh accordingly.
Okay.
Tom.
Reach contractual maturity and then get leased on refinance can you talk about what's happening to the LTV with those loans.
Well, so what's happening at the cap rates Oh, the new regulation loss.
Yeah. So we've evaluated our cap rates post I say pre pandemic and we actually saw a slight drop in cap rates believe it or not we didn't change the way be viewed our stress testing because of that we do it every six months, we evaluate the market cellphone June thirtyth to 12, 31 cap rates actually will trickle down a little didn't believe it or not so when our internal.
1000 to look at stress testing and how we look at the no the potential risk we would assume we kept it flat without decreasing it I would say that it's too early to tell how that's going to pan out in this environment, but interest rates again near zero, we have a higher spread but you're still talking about a mid 3% side coupon. So we haven't seen any noticeable changes yet.
I wasn't habits, and that's two or three quarters out, but clearly no noticeable change in cap rates and but that being said when we originally when we have loans that come due to us we haven't seen any situations where customers can cash flow out on <unk> on a refinance if anything customers are still actively taking down funding because they've improved their rent roll you know they've been working there.
These are these are I would say delayed rent the delayed refinancing it should have and when you have an average life. That's a short you'd assume that the portfolio social because they people have delayed their refinancing so they still have equity built in there so drawn down equity and like I said, given this environment given the nature of the of the the difficulties in nearby were actually tightening austan.
It is on recent on Wi Fi cash out we were actually we're holding escobal taxes, and P. and I payments for appear to six months as as part of our strategy so to mitigate risk.
And then I just ask about how big the TPG program is and.
Now with this downturn.
You know is an opportunity to take market share from a larger banks aside from the multifamily business.
Yeah. So some people smoke what do you know went out to see an eye lender. So what lubricant <unk> commercial real estate, Linda mostly multifamily. So we we got geared up to a little bit laid on getting geared I. We work with a third party providers, we partner with a third party provider and we were very active on the second round. So odd PPP numbers are going to be between 100 to 200 million at best However.
A lot of the customer that we have internally, we're putting through the system and we're getting great success. Our team has done a phenomenal job and getting it up and running but the it's interesting. These more anecdotal a lot of a well look all customers come to some other banks Bank of America JP Morgan City Bank in particular, where they had no results. He is a smaller businesses that were left behind on the.
First round you know, we put them through the second round and there was successful and believe we're not then switching their accounts them I see me you still have to go to the vetting process you still have to go to the b as they process. There's a lot of work, but many small businesses will left behind locally so well there for them. We're actively taking some new business, but I won't say somebody material, but I think on an anecdotal.
Basis. There's no question that are the larger players are protecting their book and we were they had a pick up a handful of promise you wanted to help out the local community as Joe said. This morning, you know, it's a family here, there's a local businesses I need help and we're gonna here to help the local community and I'm you know not not a big number for <unk>, but what we are in the program.
Got it.
Thanks, Bob.
Sure.
Our next question is from Christopher Marinac with Janney Montgomery Scott. Please proceed.
Hey, good morning, Thank you for but for all your information. This morning I'm. If we go back to the beginning of the call with Joe mentioned, the sort of implied survey of 85% collected in April what that number gets stronger in May and June do you think and does that ultimately kind of square with the deferrals that you've talked about this morning.
Joe you want to handle that one.
I think that that number does you continue to strengthen we're in a very very good place with the relevant players in our niche so our ability to not only have a performing portfolio, but a growing portfolio in the period ahead is quite real and.
And is very consistent with how we perform in other stressed environments. We should assume the period ahead to be stressed and during that period, we will gain share of what we want from the marketplace and therefore as has always been the case.
During periods of difficulty, we do not just better than our peers, but better than we historically have done and this environment presents opportunity for us to lend favorably.
In greater numbers.
In the environment in front of us.
Not so great Jokers I would just.
And to Joe's commentary Big picture portfolio, you know, we're a very large player in this market base we have.
Hundred plus families in some of these large buildings and clutches a building I mean think about the percentage of deferral versus all the other deferral. That's the lowest percentage that means we're getting significant rank collections. These are very sophisticated billionaire property owners that have devalued equity that are going to protect their investment, but more importantly, they're not even asking for deferral.
So what is the programs out there only 6% has come to the table on the 100 plus family dwellings, which is a very encouraging now the smaller ones. Obviously, it's a higher percentage because you had that ground floor issue and you can have a zero percent revenue coming in we're going to the next.
Months ahead as the country opens up in the city opens up and they start working out their lease arrangements with the tenants we envision that thought open in the next six month period to start to stabilize.
Great. That's helpful. In just a follow up Paul My impression is going to your store or sitting on enormous liquidity to deploy and that that liquidity really presents new opportunities for you, but what about on the investment side as well as long as you documented so well that kind of get put to work in the next two quarters or do you think it's going to.
Take into next year, when we deployed kind of your full horsepower.
So Chris we do have a lot of liquidity on the pull on the balance sheet, we have excess cash we sold some securities going into a into the into the second quarter actually ended the middle of the first quarter. Given that you know we felt the rates were going to go to that much lower they while these are floating rate securities that would have been having close to zero percent deal that was about 300 million to create a lot of cash Ross we build.
That'll be put right back into a into a core lending products. So we want to stay liquid we want to have the liquidity and the cash to fund all net loan book I don't think there's a lot of value when the securities market right. Now there was maybe a one or two week blip. There on the ended the quarter as the market dislocated, but it seems that given where the the treasury is very active on buying all asset classes.
We will probably be keep the securities portfolio relatively flat because they don't even any real any risk reward opportunity there and put it into our loan portfolio, which as Joe said as Joe indicated if this continues and we're in a difficult cycle, we tend to have significant growth well only forecasting 5%, but you can easily see a substantial number of drove because.
So if the retention that we'd have within our own portfolio and the lack of market play as we want to step into this market.
Great Tom Thank you again appreciate it.
[music].
Our next question is from Matthew Breese with Stephens. Please proceed hey, good morning, wanting a warning.
Looking at the borrowings books, you know I've been surprised at the cost there haven't come in more can you give us the break down between the structured advances on the classic advances and how many better understand how the structure defense I'd behaviors and reprices relative to changes in the yield curve.
Yes. So we have one about 8 billion. John There are 8 billion available April 8 billion a portable its interesting because obviously in January the environment was different than in the March right. So we have some money coming due in the beginning of the quarter or do we refinanced at lower cost based on what was coming off. However, wherever you are today that number is close to.
Well, if you hedge it what's what's up you put a derivative against and if you just go astray bullets you still at a number that's probably what 50 basis points 45, 50 basis points was 74 basis points, a two year bullets. So I think the cost is coming down materially we would've been active when we look at the opportunity to get a unique swap opportunities that probably drives the navy anywhere from 20.
Five to 50, depending on the anomaly of the marketplace and has been a lot of anomalies. So you could effectively borrow money swap it out of <unk> from float the fixed fixed the phone and then you're looking at a <unk> as a zero percent effective interest rate, which is unique but the reality is that a significantly lower than our current cost of.
That's that's coming due which is around 2% in 2020. The remainder of 2020, we have about 1.2 billion coming to this quarter or another 304 400 million in Q2, three another 300 million at the end of the of the year and they're all in all around 2% 185 stuff is Q2 and in the back half of the S to 38 and to 32 30.
For the six months ended.
Sorry are you putting that I'm at a or are you more apt to put on the structured with a swap at 50 Bips are you going to take the classic at 75, you know I mean, we made just keep it shortens ball 45 basis points normal bank I mean, we have opportunities we don't see the fed actively driving interest rates higher here. So we have options by but the options are still all well below 1%. So.
Conservatively on our model, we have high cost I know I gave a double digit EPA double digit margin expansion with expenses funding. So I'm, assuming aucs funding will be cheaper. So I'm, hoping my guide on my margins, even conservative up double digits.
And is that the risk to that portfolio that interest rates go higher and the fed has the federal home loan has the right to call it.
Well, there's no they call it yeah. They basis, if rates go up 400 basis points, they're going to call. It [laughter], but again, if you think rates are going up 400 basis points. That's not what we know we're running at all model. We have the fed remaining flat this year I'm not going to talk about 2021, and talking about 2020, and I don't envision any real change is the policy given the.
Current situation, but that being said any advantage portable structure gets it gets call in rates, Rob you have to have higher borrowing costs a threat okay understood.
And then what's the incremental securities yields that book I mean on quarter over quarter basis fell quite a bit just just curious what the incremental what does it look like if you do by what are you buying and what's the yield on it yeah. So like I said, we're not buying anything we're just we're just keeping it flat. So if we do get called out we have some calls expected. So let's just say you may have.
A few basis points bleed next quarter, if not could be flat this quarter, depending on what what does what prepayment speeds. We do have some a mortgage related security. It's all agency for the most bought so when I really in the market buying so I would say that unless we see a significant dislocation in security yields and as attractive opportunity well keep it flat okay.
And then I appreciate the a the retail exposure in the commercial real estate book Oh, just curious is there any additional retail exposure in the specialty finance book and what's the helping characteristics.
Those borrowers are found any I would say I mean, we have a handful of maybe some grocers and household name grocers that had been very successful cost that business is booming right now so they've been drawing down on that facility, but I'd say for the most part, especially finance group has been performing it's stellar performance, we haven't had a delinquency since we've been busy.
And as far as our ratings you know, we're very comfortable with all the credits we have a very selective we always talked about that said, what we see 96% or 90% of the we decline you know so we have you know large relationships Amazon awesome.
Tell pay breast Im very happy large household names that went out the lead bank. We participate when we feel is low risk and again. This is not a high yielding portfolio, but it's a low risk portfolio and its stoop senior secured I would say on a deferral perspective, you're probably looking at maybe 200 million of deferrals on auto, but we think that the auto sector will be fine this year and by the end of the year that's helpful.
Off a deferral and they'll be back in business and by the way all these clients in the auto have access to PPP and there wasn't funded so we feel pretty good about that okay.
Last one interest on capital how comfortable are you operating you know at these levels, especially as New York City is the epicenter in economic conditions do remain uncertain.
So again I would say very comfortable well you know what you know obviously, we're going to earn more money. This year, assuming that credit holds itself a we've taken a sizeable provision for cold in 19 absent covert 19 talked about d.. So we didn't expect to have any real provision in the quarter other than the transitional adjustment. So we think that up with a portfolio performed very well in excess.
We are not a C and Highlander you know, we do have tenants that that vandals that have tenants that have retail and they have to work that out but given a deferral program, we think that as they open up the city as they open up America, we should be in a good place.
Got it.
That's all I had I appreciate taking my questions.
Yeah.
And our final question is from Ken Zerbe <unk> Morgan Stanley. Please proceed.
I'm wondering can be good morning.
Just in terms of the margin a I guess im a little surprise to you don't give more benefit sort of near term and it sounds like you get as you said double digit NIM expansion sort of every quarter over the course of the year can you just talked about like why it's I must say so consistent over the course of the or is it just because of how your deposit rate reenter the rates a zero.
[laughter] cost as you know so pretty much the entire liability side of the bounce off the balance he is getting close to zero. So that's the major driver at the same time you know we do have lots of loans coming deal when we're not getting bleed on the loan yields going forward in the coupons are reasonable than not spiking, but if you take the cost of funds close to zero.
I'm pretty much all about most of our retail funding is tied to no short term funds right. So like I said 6 billion plus this quarter is that to 35, and there's really no no high cost opportunity in the marketplace. We don't envision customers, leaving the bank to go somewhere else, so and if that being said we still have.
The ability to borrow funds that are close to zero. So I think that the funding costs is clearly driving this opportunity at the same time asset yields are holding up very nicely. So you're going to have like I said double digit margin growth in the second quarter, we envision that happening in Q3 in Q4 as well.
We you know we talked about Q1 being up two basis once we hit our guidance he pandemic hit in towards the middle of March and if that started cutting interest rates. We actively cut interest rates a and then we're going to see that benefit going right into Q2 again, we don't know where the mark is going to end up on short term funds, but given that the where the country's <unk> position as my.
Yes that rates are going to stay relatively low and 2020 and most customers are not going to go past one year to our <unk>. The restructure this CD portfolio and as we continue to build savings account and and not operate on operating accounts that will also benefit a very stable cost of funds for the bank.
Got it but in terms of the time [laughter] can I go back just remember we had five years I've not seen Eni grows we will position at the lowest returns this bank as experience doing upward trajectory, both EPS growth and margin expansion. This will continue into 2021 I will not have the crystal ball, what's going to happens it doesn't want.
In one and we're talking about margin expansion, yeah, but we think the margin bottomed out in the fourth quarter of 2019, we saw that inflection point, it's going to continue significantly because the fed action at the same time the business model is getting a much higher spread that work custom till you know when the competition is robust Fannie Freddie CF.
Yes, the whole well look into getting to the stage 110 to 150 spread right. So when we raised that the 200. After the rent was changed now and what the 300, so that's a very healthy spread.
Got it and it back back in terms of the timing, but did you have just as much repricing in second quarter down couple hundred basis, Yes, you didn't say for record second quarter second quarter on the CD side, just under 5 billion and that's a two or six though it's continuing so you get the benefit from the repricing in Q2 going to Q3 or more benefit in Q3 is.
Well that continues throughout the whole year.
So I guess I feel highly confident we're going to have a very nice.
Okay, and I growth, Okay, topline growth EPS growth, assuming and I'm not talking about the potential credit because that's you know the unknown out there and I I understand that but clearly be run that analysis, given where our profitability was which was sub 1% on return on average tangible assets you will see a very unique growth and earnings story and grow.
The margin story that could continue throughout 2021, and we're only talking to 20 right now it's short term visibility, but for the for the short term and the second quarter margin expansion double digits.
And is is that margin expansion also premised on the view that your credit spread stay above 300 basis points, yeah, but yeah, but again, we have a three in the quarter coupon coming on I would if it's conservative we have our pipeline with feeding our pipeline to model right. The models sophisticated we just take the 2.1 billion dollar pipe that we have we have 64% new money and.
It's going on at three 325.
Now new money is coming on new deals that we would offer you come to the bank them all your three and a half if you're in a credit if you a little less than they are going to pay closer to four.
Got it okay, great. Thank you.
Ken pleasure.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing remarks.
[noise]. Thank you again for taking the time to join US This morning and for your interest and then why CV. We look forward to chatting with you again at the end of July when we will discuss our performance for the three month ended June Thirtyth 2020.
Thank you.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
Hello.
Hello.
Hello, Hi.
Hi, everybody else disconnected.
Yeah.