Q2 2020 New York Community Bancorp Inc Earnings Call

Good morning, this south Dimartino director of Investor Relations. Thank you all for joining the management team of New York Community Bank Corporate today's conference call.

Today's discussion of the company's second quarter.

2020 performance will be led by President and Chief Executive Officer Joseph Ficalora.

<unk> Chief Financial Officer, Thomas can't Jeremy.

Together with our Chief operating Officer, Robert Lawn, 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 sport results prepared in accordance with gap.

Also certain comments made on today's conference call will contain forward looking statements that are intended to be covered by the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

Such forward looking statements are subject to risks uncertainties 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 that's financial performance in todays earnings release and in our SCC filings, including our 2019 annual report on form 10-K, <unk> first quarter 2020.

Quarterly report on form 10-Q.

Now to start the discussion I would like to turn the call over to Mr. Ficalora, who will provide an overview of the company's second quarter performance before opening up the like the Q1 night.

The Laura Please go ahead.

Thank you so.

Good morning, everyone on the phone.

And on the web cast and thanks for joining us today.

I hope that everyone is doing well and hopefully some sense of normalcy is returning to your daily lives.

Earlier. This morning, we reported diluted earnings per common share of 21 cents. A three month ended June thirtyth, twentytwenty up 11% compared to the year ago quarter, and up 5% compared to previous quarter.

Diluted earnings per share what you said the head of analysts' consensus estimates.

We're very pleased with our results this quarter, despite significant pandemic related challenges economic uncertainty and social unrest during the quarter. The company performed well as we continued to execute on our time that strategy.

Before I discuss our second quarter results in more detail I would like to provide some color on our deferral program.

After an expected initial surge in payment deferrals in April.

The pace of new deferral requests slowed dramatically during the second quarter.

I want to Pearl program is somewhat unique.

And that is for an initial six month period as opposed to a three month period. Therefore, any positive changes will not be evident until the fourth quarter of the year.

As noted in todays presentation at June Thirtyth multi family in theory full payment deferrals totaled $5.9 billion or 15.5% of outstanding balances and weighted average LTV was 56%.

Specifically multifamily deferrals or $3.7 billion or 11.7%.

Oh, the portfolio and had an LTV of 57% well see our E deferral or $2.2 billion were 32.5 per se.

Portfolio and had an LTV of 52%.

Company has gone through many economic cycle and while this one is indeed different our stringent underwriting guidelines.

And how the longevity in the market, which have served us well during previous cycles are serving us well now.

Today, The New York City real estate market, especially our.

Non luxury rent regulated multifamily niche has held up extremely well.

Right collections continue to be about levels, we experienced in the second quarter.

In fact, we have seen month over month improvements throughout the second quarter and into the third quarter.

Moreover, New York City has recently entered phase four Oh, its reopening and many people already turning to work and many businesses are also starting to real.

This along with state right subsidies to landlord is having a positive impact on all the bars cash flow.

We remain optimistic.

As we get deeper into phase four and business an economic activity in all market begins to increase the number of borrowers in deferral well declined dramatically.

We look forward to sharing our results during our third quarter earnings call at approximately 96% of all bars on the far programs come off their deferrals in October and November.

Moving now to our second quarter results.

Our second quarter performance was very strong and reflects significant expansion in our net interest margin.

Topline revenue growth and lower operating expenses.

This led to double digit creep vision net revenue growth, which is a good indicator of how well position we are in the current environment.

At the same time, our provision for credit losses declined compared to the first quarter, while our asset quality metrics remain strong and multifamily loan growth continue.

We also announced that the board of directors declared a 17 said cash dividend per common share dividend will be payable on August 18 to common shareholders of record as of August the eight.

Based on Yesterdays closing price this translates into an annualized dividend yield of 6.6%.

The major highlight of our second quarter performance is a substantial double digit improvement in our net interest margin.

The net interest margin, excluding the impact from prepayment income was 2.09% up 17 basis points sequentially and up 20 basis points on a year over year basis.

We were especially pleased with the progress made on our funding costs.

Our cost of deposits declined 1.46% during the second quarter down 36 basis points on a linked quarter basis, and down 60 basis points year over year.

This was driven by a decline in our average cost of deposits, mostly due to the downward repricing of our Cds.

Net interest income also excluding the impact from Pete prepayment income rose $21 million or 9% compared to the previous quarter and $29 million were 13% compared to the year ago quarter.

We continue to be well position further improvements in both the margin and net interest income given the repricing opportunities embedded within our funding mix.

On the expense right, our operating expenses continue to trend lower.

Total non interest expenses were $124 million down, 2% compared to the prior quarter and relatively unchanged compared to a year ago quarter.

The efficiency ratio was 44% and continues to reflect positive operating leverage.

I would like to point your attention to our pre provision net revenue number.

Where we showed strong double digit improvements compared to the first quarter of this year and compared to the year ago second quarter.

PPNR for the second quarter was $158 million up 16%.

And 19% respectively.

We view this number as an important metric to focus on as it shows the earnings power of the company and our ability to absorb credit costs generate capital and supports our commitment to the dividends.

Moving on the balance sheet.

Total loans were $42.3 billion relatively unchanged compared to the previous quarter as good growth in multifamily portfolio was offset by declines in the C Ari and specialty finance portfolio.

On a year to date basis total loans are up $412 million or 2% annualized.

After seeing some modest growth in multifamily portfolio in the first quarter total multifamily loan growth was stronger this quarter, increasing $325 million on a sequential basis to 31.6 billion or up 4% annualized.

However, this was tempered by a $114 million sequential decline in the specialty finance portfolio and a $105 million decline in this theory portfolio.

The linked quarter decrease in the specialty finance portfolio was primarily due to commercial borrowers reducing inventory and some larger bars accessing the public markets to raise capital and using the proceeds to pay down debt.

Despite this we see the specialty finance business reverting to for next quarter.

Origination activity continued to be very strong as total loan originations, excluding PPP loans increased 21% on a linked quarter basis to $3.3 billion led by multifamily originations, which increased 70%.

Two $2.4 billion.

Second quarter originations exceeded last quarter's pipeline by $1.2 billion for 60%.

Speaking of the pipeline, we continue to see strong demand from our borrowers as our current pipeline is $2.2 billion, 5% greater than the first quarter pipeline.

Importantly included in the pipeline is approximately $1.3 billion, where 60% of new money.

On the funding side total deposits declined $243 million or 3% on an annualized basis compared to the prior quarter.

Continuing the trend from the prior quarter.

E Comm declined $2.1 billion, primarily due to the drop in market interest rates at the end of the first quarter and the company's strategy to significantly reduce the rates in office on Cds.

Most of this decline was offset by solid growth in other lower cost deposit categories.

Our wholesale borrowings increased modestly compared to the previous quarter as advances from the federal home loan Bank of New York increased $75 million.

On the asset quality side, our overall asset quality metrics continue to be very strong we reported they provision for credit losses under Cecil of $18 million down from the $21 million, we reported in the first quarter of the year.

This exceeded net charge offs by $14 million and led to an increase in the allowance for loan losses.

We had no charge offs in either quarter in our core portfolios.

Net charge offs totaled $4 million or 0.01% of average loans compared to $10 million was 0.02% of average loans in the prior quarter.

Majority of the charge offs in both periods, where taxi medallion related.

Nonperforming assets were relatively stable, increasing $4 million, where 70% compared to the first quarter level.

This translates into 12 basis points of total assets compared to 11 basis points last quarter.

Excluding nonperforming taxi medallion related assets and P.A. would have been $30 million or five basis points of total assets compared to $28 million last quarter also five basis points of total assets.

Lastly.

I'd like to end my formal comments by once again thinking all those who continue to serve on the front line of this crisis, the doctors and nurses and all other first responders and to our employees management and board.

Here at near community, who have shown extra ordinary dedication during this most difficult time.

On that note I would now ask the operator, let's open the line your questions. We will do our best to gets all of your with all your questions within the time remaining but if we don't please feel free to call US later in the week.

Operator.

Thank you.

I would like to ask a question. Please press star one on your telephone keypad and confirmation Tele indicate your line is in the question Q you May press star to if he would like to remove your question from the Q.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the started he is.

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

Good morning.

Good morning, everyone. I guess first so if you could just does it's on the net interest margin ready so this quarter.

CD cost in that 2%, Tom just stopped wasn't don't love your previous guidance at double digit margin expansion every quarter. This year do you still expect that and what are you seeing on the multifamily loan yields and see because as we look into the back half of the here.

That's good morning, Abraham So that's right we had a improved margin in Q2, obviously on the margin was a beat we expected the margin to be up 10 basis points. It was up 17.

Going into Q3, and Q4, we still anticipate double digit margin expansion for each quarter throughout the remainder of 2020.

We're very bullish about the margin improving further from here given that we still have a substantial amount of Cds repricing as well as Barnes repricing and overall spreads in the multifamily side is still very strong.

If you think about in the next three months, we have about 5.4 billion of Cds repricing at 1.99% and going out for the next 12 months is 12.7 billion, that's going to reprice at 1.69% ICANN offering rate right now in the market a highest rate of 65 basis point, that's a settlement CD and many customers are just going in.

So the short term city, which is three months at 50 basis points and many circumstances. Many customers are just ending up in post maturity as to given the pandemic and that's a two basis points.

Cost of funds and that type of course maturity number. So we've been really getting significant improvements there as far as overall yield on the multifamily style. Even if we were fortunate to have that very nice spread throughout the pandemic. So still around that 300 basis points spread, albeit there's been some competition as of late from the agency so mindful of that but the economics, but clearly is.

A much better spread than it was from the previous year.

Got it like I was just moving to the multifamily stand so talk to us and domes off do you expect like if.

Hey activity you gave pipeline numbers, but just what's the health of the market that you think about coming out of this oh, all but clearly a lot of concerns that all the New York City economy.

They do you really expect a lot of activity in bias coming into good enough price discovery happening so give us some color how is that enjoyed a patient. So I think with that I think what's encouraging is that you know we've improved our retention rate as expected. This year above the 50 percentile. So the goal here to get to a 5% net.

Loan growth story for 2020 was to get all people focused on what's coming due as you know aware of this significant amount of money coming due in the next few years, so well targeting those types of customers and anticipating a very high retention rate as compared to the previous year, Although 50% 50, I think the number was 52% for the quarter, we anticipate that the country.

<unk> throughout the year that is key for how expectation to continue our net loan growth story for 2020 as far as purchase and sales transactions as you can imagine during the cold and pandemic. There wasn't any we're hearing this from deals that are coming through in Q3 in Q4 and will be mindful of that so we believe that the second half will be the opportunity to see some activity in the marketplace.

But it's been pretty much.

Zero level throughout the second quarter because of the colder pandemic that being said, we have a very strong pipeline.

$2.2 billion, what 60% of that as new money and the yield is still very strong I believe the overall pipeline yield coming out into the into the third quarter is about a 324 yield. So that's an impressive deal. It is still hovering around that 300 basis points, but.

Well, thanks for taking my questions.

Right.

Okay.

Our next question is from Mark Fitzgibbon with paper Sandler. Please proceed.

<unk>.

Oh, I wondered if where she can give us a central what rent collections look like today on your rent regulated non rent regulated multifamily buildings.

Yes, so mark I would tell you that no edge up.

No I was just going to say that that are ranked collections have been quite strong.

Despite the expectations or the headlines that are occurring with regard to other lenders in our circumstance where in a very good place and it's not atypical for us to have.

Tenants that have every expectation and capacity to stay in there there are pockets. So so we're getting a very good flow of payments from our tenants.

So mark I would say specifically when you look at quarter over quarter was well above that 85 to 90 percentile on rent collected from.

The obviously the multifamily so that is very strong each month as we evaluate that it's becoming stronger as we go through the summer months here so as far as.

The third quarters concern, obviously, what it it's the beginning of.

And the July.

Let me see some very strong.

Numbers coming to us was collections as far as the overall portfolio when you're thinking about the deferrals and you look think about what's going on with the multifamily side I believe approximately 42% of those loans that are in deferral have 100% rent regulated on the multifamily side and the total multifamily side I believe 62% has some form of rent regulation. So we're mindful.

That given the magnitude of the rent stabilized portfolio and the level of the payments of that's coming in we feel very confident that those those customers will revert back to full payment status as we get back to the at the second half of the because our payment the for all program. It starts to kick in in into October November So we're mindful of that.

Timeframe change however, the good news here is that the collection that we seek they have the operating accounts were seeing the money coming in on a monthly basis. So we're very pleased with the overall cash flows.

Okay, and then I know asset quality is really been amazing there over time, but does it make sense to continue to build reserves given the uncertainties today in the world.

Well Mark you know the to the history. The company's history has a pristine asset quality metrics. So if you think about.

We adopted Cecil in Q1 quantitative versus qualitative I would allocate two thirds of our reserve is is at this point in time qualitative my third as quantitative because we don't have a history of any significant losses do you think about the magnitude of the rent stabilized portfolio, we bis Vietnam as a high for us. So obviously, we would we were very public about.

Our guidance that Q1, we felt that wasn't going to be the largest obvious articles adoption of seasonal as we monitor the macroeconomic backdrop, you know that will change over time, but it appears that given where the current portfolio is leaning towards we anticipate the has a very manageable.

Transition as we go towards the end of the and hopefully as a city comes back to full phase four I will start to see better performance metrics, but it's it's a godless, it's too soon to tell but the overall macro economic backdrop, when they want to draw Cecil calculations on its mostly qualitative.

Okay, and then lastly, I think you said the release you have $103 million PPP loans held for sale.

What are the economics of holding those loans versus showing them today look like in is that the plan to sell those three Q.

Yeah, it's immaterial to 100 million on 1% type return that it's not going to be in material number that plus the fees are insignificant for the company, we will Oh Gee imagine most of our customers were not eligible property owners given the structure, we're not eligible to tap the PPP funds. So we were there for our customers that had eligibility and also for customers that were not getting noncash.

Customers that were not getting access to PPP to the money center banks. So we stepped in locally as like as a community player. However, we did not to a whole lot of PPP. We had the program in place, but most of our cousins will not eligible.

Thank you.

Sure.

Our next question is from Steve Boss with B. Riley FBR. Please proceed.

Hi, good morning.

I just want to start just on lumber upfront or do you you mentioned in terms of a corner expecting they definitely working a rebound in the specialty finance portfolio kind of wondering what drives comfort there and then just for the back half of your pipeline.

Looking pretty good it's kinda like [noise].

Do you still think you're close to mid single digit for 20 to 2020 is as good or maybe just a little bit bloom.

Yes, so Steve I would say, let's do feel very confident the second half will be stronger than the first half I'm. Obviously, you know we're coming out of the depth of the pandemic respect the specialty finance. That's it's obvious you know many companies where buckling down their cash position. They were harboring no managing inventory differently given the lack of economic activity that will pick up capital markets are very.

Strong for that business. So many of these is a rated companies that access to very attractive alternative financing to the capital markets and they paid and they accumulate lots of cash and pay down some of their shorter term liabilities, we anticipate him to join down some cash as they build up more inventory for anticipated better economic activity as the <unk> the country comes out of the pandemic.

So we believe that 'em, we should be on tracking in the growth has been phenomenal and specialty finance over the years I believe it will still be on track for that 25% to 20% type net net growth in on specialty finance I think if you look away. We are today, what 20% annualized so we should see some growth for specialty finance for the second half of the year as far as multi multi family.

Is driven for now, but only right now from within our own portfolio as well as getting other transactions within the marketplace refinancing, it's not purchase and sales. We believe eventually there will be the opportunity whereby themselves come together and we will participate in the financing of that so it's been very slow in Q2 as expected we've been doing.

Bunch of non deal Roadshows, Joe and I and we've been very public that Didnt expect to see a whole lot of growth. We're very pleased that we did have net multifamily growth for the quarter, we anticipate that the pickup and second half that means for us based on a retention of north of 50% of our own portfolio, we should be in line to get that low to mid local mid single digit net loan growth.

Okay.

That's helpful and that just in terms the provision this quarter or kind of curious as to what the economic assumptions and the drivers were there.

I mean pretty much you know obviously were more inclined to deal with the issues from costars economic forecasts. We have the most recent costars baseline forecast that's something that was released as of April 28 as of March 31st Let me have the a the Moody's economic scenario, which is the baseline forecast.

At least on June 9th as it may 31st So those are the the current forecast that we run what I'd say for US it's more driven off of property price declines are real estate based but not a C and I lender. So you think about unemployment and bankruptcies or a like that really drives some of those see an eye players. So when you look at the overall act backdrop economic landscape that will use.

And we still have a substantial amount of this cecil calculation that sets qualitative just because of the history of the bank. It has no losses as we look at the portfolio, but clearly a property price declines will then drive our C store more so than unemployment factor.

Alright, Thank you very much sure.

Our next question is problem Collyn Gilbert with KBW. Please proceed.

Thank you gentlemen.

[laughter] deferrals do you.

Providing the vacancy rates I'm into multifamily Buck with Super helpful. Thank you for that in the slide deck, but just curious how those vacancy rates might look on the deferred loans do you have that by any chance.

So so what we're going to be one quarter behind everybody else given the nature of our program coincides as if thats. The glor indicated in his prepared remarks, you have a six month program I will tell you with certainty where we stand today the conversations we're having with our customers is getting out of the program because they're ready to pay so we haven't had any adverse.

As discussions about people don't you know looking for expansion, but it's too early to tell that being said, we did a relatively deep dive into the portfolio that we have it's wonderful we looked at US theory book on retail little done CR, Let's see every book an office and what we've determined when we pulled the files and we went back to the customers and tried to evaluate the cash flows. He was that when we look at the retail.

Portfolio, we have we viewed approximately 90% of us theory retail deferrals and 74% of those loans reviews have rents coming from a central businesses, a 54% of those loans are viewed have 50% or more of the rents coming from the central businesses. So that gives us encouragement that despite the pandemic they were still collecting the booking sales obviously.

They have the capacity to pay some form back to the bank and as far as debt service coverage in respect to off its little bit different viewed approximates during the process will leave open we review the proxy 70% of the theory office deferrals and know that 80% of those loans are viewed have rents coming from a central businesses of which 31% of the launch of you'd have more than.

50% coming from central businesses. So there's still opened I mean, not everyone's open let them, we're getting interface for and we feel that overall, we should have a good showing at the end of the year with a lot of these particular credits coming off deferral, just another note down, especially finance side, 100% of especially finance loans coming off the scroll in July made their payment.

So we had approximately 200 million in total.

I believe 90 million as we have 90 million then paid in July we believe the rest will be the acute in August. So we're very confident that it has very little was no loss content in the spend especially finance business.

Okay, that's very helpful.

And just kind of along those lines right. If we if we play this out everything that's happening in New York City in understanding obviously things are starting to open up but it's so the city is just obviously so different than what it was before if we if we play this through I mean, where do you. When you you know some of your borrowers where it wouldn't vacancy rates need to go to really start to.

Stress some of your borrowers.

No. It's interesting point, obviously, our desktop that coverage ratios upon origination of very strong obviously that's change there's no income coming in so you think about the weighted average debt sub debt service coverage ratio in respect to Oh Cree portfolio I believe that number that a 170, so thinking about the coverage that we typically underwrite and a more conservative.

Well as Mr. Ficalora indicated the average LTV is low 51.92% and we look at the areas that when you want to say may have more difficulty, let's say for example, commercial mix use or what you have more of a concentration or business is struggling to reopen and you have less residential above that that LTV that fin, 48%. So you really have.

Real deep equity embedded in these and he's in these credits and a lot to walk away from so no one's knocking on the door and saying here take my keys, we don't have a 40% LTV. So we're in a very good spot. We believe that it's going to take a little time, because some of those other types of credits. However, when you look at the majority of the portfolio, which is multifamily bank collections are high.

I mean, as they've done 90, percentile, which is pretty impressive and I'll bet will bear in mind, we have lots of stimulus within the it within the government intervention today, and probably more to come which will continue to help people pay their rents.

And then we have high unemployment pockets within the city different different aspects of the city in particular, the Bronx, and you know I would say on an LTV perspective, we were very cautious in Manhattan. So our overall ltvs in Manhattan always lower you know that numbers or just more at more attractive as far as how we lend in Manhattan to me doing the Bronx, because of now what we're very cautious about cap rates.

And the in the values expansion over the past 20 years. So we think that you know we have a very low leverage portfolio with that's backed by about a substantial amount of wealthy property owners that have real long term equity built into the game here.

Okay, that's really enrolled.

Yeah. The rent rolls are very stable in our buildings because the people themselves. The tenants have rent control rent stabilization. They can't move to a new building and get that same benefit. So they want to maintain that apartment. They want to maintain rent control. So we have a very high cost.

Tracing of people tenants that are inclined to stay in the buildings there in because they have huge economic advantage that really plays extremely well even in an environment such as this.

Okay, and then just one follow up just another kind of broad question and in terms of your pipeline right. You said, 60% as new money, what's kind of it what's the sort of the background or the dynamic of that.

Those borrowers coming in.

Just just getting business from other banks right. We're in we're in this space. This is our core business model no. Other banks that are going through their own issues and struggling we focus in this multifamily theory niche in this particular marketplace. So clearly getting getting on some other banks that are coming up for until you can imagine how much is out there that has to be renewed we have a substantial amount of promos that have to be renewed and.

Next year and a half so that's going to be the focus until the property transaction start to occur. We believe that will eventually pick up in the good news day, you're starting from zero, so well drilling with no property transactions when the market does pick up we believe will be a participant there and do solid credits.

Okay. Okay. That's helpful I'll leave it there thanks guys.

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

Okay. Thanks.

Hey, Tom in terms of the your expectation for the low to mid single digit loan growth. This year is is that could be driven by either a rebound, especially finance or more of the multifamily side.

I'd say, both I mean, obviously you know we were slightly down in Q2 once on specialty finance.

We've been historically going it very nicely we've turned down a lot of deals was more pricing this quarter, but we had as I indicated significant at just to the capital markets and given the pandemic. Many businesses were slow to react and they were hovering cash utilized as the economy opens up the these businesses will draw down we have some other businesses that were drawing down because there was very busy.

Do you like for example in Albertson for example, it taking down financing because they have a tremendous amount of selling of grocery. So there is an example of one taking down credits where others are harboring credits. We think we'll see some good momentum on the the caused an inventory as this now there's a tremendous demand is it's no inventory out there to sell caused but I think for the most bought any all of our costs.

<unk> businesses in the specialty finance was thought at least accessing credit on the I wanted to have a very significant line. If you look at the.

Both are one of our reserve we had a large commitment contingency built on Cecil because of the substantial client because we had so many payoffs, but we think that will improve in it and as far as multifamily we think that well continue to grow throughout the year hopefully at a stronger pace in the second half and Cree is on the table Korea start one up here in the Evan I don't envision a lot of Cree growth, but a pure creek.

But multifamily and specialty finance should be the need the at the they can contribute in fact is towards the feed the plug for that potentially mid single digit net loan growth that we plan to achieve for the end of the year.

Got it Okay and then it sounds like your borrowers are in fairly good financial health, but just check your I'll see if they did come to October and or November are do you have the ability to put them on another six months deferral or or does it have to come off.

Sure well you know it is there's a lot of flexibility by not because we're still in a and then a black Swan event, a pandemic thats being supported by the government as well as the regulators. We believe will be some further yes diagnosed as we move along throughout the year, but you know, we're just one quarter behind Ken and that's it's something if someone's put us in a competitive disadvantage when you talk about.

The book, because I'd love to give you more information about the our customers are just midway through their deferral program. We believe that on the multifamily side given the magnitude of cash flows coming in that we see every day because we have the bank accounts, we see the operating accounts and the cash flow coming in we talk to the largest customers the collections a high.

And as I indicated a lot of government stimulus that's it assisting that as far as office NCR retail and commercial mix use that it's going to be a matter of the reopening phase and the strength of the bars and given that we're very frugal on a lending and we are very focused that being conservative stringent underwriters, we have a lot of de value equity. So we believe.

If they do need help we can give them help on its going to be a case by case basis.

I know a lot of our overall customers I don't know lets a book on the smaller mom and pop neighborhood type businesses will be supported by the cut by the tenants as they come back into the city, but the city is still going through this phase four reopening it it's going to take a little time.

So we do efforts by the way we also yeah, there's just so I could add.

We also have a higher rate of interest on every dollar we differ so when when you take massive amounts of money that are being deferred at rates that we could not get in the marketplace.

It's very attractive to the bottom line.

Yeah, Hey, Ken they'll give ICANN I'm going to repeated again, it's important that took the conversations we're having right now is that they don't want to accrue anymore interest they want to pay their bills because they have the cash flow. So as you give them six months, our balance sheet time to bring collections in and they have an abundance of cash is still accruing interest. So they want to stop the accrual of interest and paid and get back.

Back to normal payment status for the be collecting most of your rents I remind you have the capacity to pay that's the conversations were happening. So we're excited as we go into Q3 and the beginning of Q4, we should be in a position to see substantial rollback of these deferrals and whatever has to be dealt what we'll deal with it as it comes along in particular under the Kazakhs is lots of flexibility.

Got it Okay. That's really quick last question in terms of expense outlook, obviously expenses came in lower than your guidance for this quarter. How are you thinking about it for the rest of the year.

Yeah. So it's interesting we will obviously given the pandemic, we're spending less money for the most bought but we we are definitely focused on efficiency and the good news that we anticipate by the end of year, we can hit that 42% efficiency ratio at not on a full year average, but hopefully by the by the quarterly average and that was the original play.

Plan, So we probably beat our plan by $10 million to $15 million recall back to last year's guidance. We assume 2020 will be between 510 520 weaker Bobby at 500 million. So I'd say, it's it's reasonable to bring that down for the year, the 500 million, which will be flat year over year. So right. We're very happy about where we are for the quarter Q3 will probably be around 125, or we've won 20.

Last quarter, which should be around the same. So we're very pleased with the can the containment efforts that we were showing here as a business, but whats well contained hopefully, whereas we have drilled will have operating leverage with significant margin expansion as we going through a throughout 2020.

I wanted margins holding up very nicely and we still are still we still feel highly confident that we'll have that double digit margin expansion every quarter. This year.

Now we want a lot of margin in what a lot of margin in Q2 more than I expect to 70% better than guidance, but that had a lot to deal with the dynamic of the marketplace an accelerant.

Well fed adjustments that were taken place and as we can all realize we are liability sensitive double digit liability sensitive institution. So we should benefit from lower along the scenario by the fed.

All right I appreciate it thanks.

Our next question is friends TV down with RBC capital markets. Please proceed.

Hi, Good morning, guys I warning.

Morning.

The on the risk weighting for your Ah multifamily portfolio can you remind us again, we'd for loans that adjust the the LTV threshold is 75%.

And is that there's a crack the debt service coverage is 115.

Now I believe it's 80% they yeah right yeah fixed rate.

That's right.

Once one is the coverage ratio.

Okay, and that's for adjust adjustable rate loans is that right or fixed.

Fixed rate any effect.

Yeah 125 on.

And then just like how are you guys will stay let me let me get let me just expand upon that Steve just to just to be clear we are in under the Kazakh. We believe we have flexibility right now because you haven't building the has no cash flow you're not going to be penalize. The previous years financial statement, if no one's pay if it's so if the business is close so we think will be flexibility. There. We've actually had you know cancer.

Suitable dialogue regarding that but throughout the industry. When we reopened fully and we look at the new cash flows. We believe that you know there's some good coverage for in the most part our coverage is very high I indicated that will oneseventy on on a on a CR rebook I believe our multifamily but that was in deferral was at 153, so there's a lot of room.

Yeah.

As we get to that stage.

That's good color into a new loans, how are you guys approaching the appraisals given I guess, the lack of transactions and the shutdown like I'm just trying to understand like how you guys. Given that you can imagine its with an abundance of caution obviously I'm I would tell you that when when customers are pulling down some.

Money that cash Abilify, we're very conservative we're holding back multiple months of proceeds were holding back escrow a holding back any any items that we felt needs to be escrow and as far as as we get to depend then we're also taking at a certain percentage of an adjustment based on appraised value just because it isn't a bundle.

As of caution and if you're not selling your building and you want to be you have to refile. You think you have real value wounds, the dealer cash out Wi Fi, but at a lot much lesser amount now we may lose deals because of that and that's that's fine because we'll be more an abundance of caution type lender. That's the history of the company.

Great. Thanks, and then just moving on your loan spreads are are still pretty high.

If rates are.

Permanently at this level would you expect the spreads remain where they are.

No the we're going to be in the market. So you know obviously, we had a good shot in Q2 as the agencies pullback aging the back today. So there's no that's not fool ourselves that we do compete with the government. The government is probably the largest player in the marketplace and they've tightened up this spread but they also are hovering on you'll maintenance. If you are comfortable would yield maintenance then you'll may go.

With the government some of the largest players will go with the government and put that loan on the on on the shelf for an extended period of time, but for the most part of the portfolio Atlanta, given that what flexibility as far structure personal guarantees as well as dealing with the cross collateralization, we have the ability to be competitive and I'd say the biggest via today is that yet.

With the government and the government rates tend to be tightened when they have a large appetite and their appetite as significant but we'll compete and that we have to be a little bit less than 300 will be within the market.

Got it and just one last one from me Joe you'd mentioned that people are head back to work with reopening in New York market.

Roughly your opinion, where are we in terms of activity versus a year ago.

Well you know, it's very hard to say, because there's not consistency and how this evolves, but I I would say to you that that the marketplace today and prospectively represents depending on the nature of the asset the kind of asset we're talking about.

A period of uncertainty that has the potential for some of the revenue sources to dissipate most important however for us.

Is that we have the vast majority of our people our tenants that have extraordinarily attractive rents and they want to maintain those relationships. They are highly motivated to do that so so despite the fact that there could be a.

A first floor.

That tenant that that is not deriving revenue because there are not in a sufficient numbers of people in the marketplace using their store.

The vast majority of the rents we collect are not driven by that so I'd say that we're in a good place.

And we will continue over the course of this evolving cycle to be in a place where the vast majority of our revenue is in fact continuing.

We don't have tenants that even for example, if a person is in a rent controlled apartment.

And and they virtually have a loss of their job.

They would borrow money to stay in that apartment because that apartment is the most valuable asset they possess.

The idea that we will have ongoing revenues from the properties that we lend on is extraordinarily high.

And different bend, the vast majority of lenders in the New York market.

So so that distinction needs to be fully grasped has occurred cycle. After cycle. That's why our assets continue to perform even in difficult periods. So when massive foreclosures are occurring.

Our assets performing our owners are actually able to go out by the foreclosed properties. So so this is not atypical from the standpoint of the consistency of performance in the unique differences in our asset mix.

But this is a period, which will continue to provide opportunity for the owners of our buildings to take advantage of those buildings that were way over priced that did not have a stable. Good tendency that did not have you know.

And control and stabilization as a significant component of the revenue stream.

That is for us a distinguishing characteristic.

So anyway I'm very pleased that art current situation is demonstrating the uniqueness of our business model and I think as we go quarter by quarter into the future it'll be more and more obvious in the differences between how we perform and how others before.

Great appreciate the color.

Sure.

Our next question is from Matthew Breese with Stephens. Please proceed.

Good morning, wanting that owning that hey, just to follow up on the appraisal process. What are you seeing for for a new rent regulated New York City multifamily cap rates, how they have been adjusted or or the appraisers are just in cap rates not adjusting cap rates in adjusting ranch or performer rents just just curious how on their side. Thanks.

Changed and what the implied valuation changes of multifamily could be.

So Matt I'd say the transactions that you reflect was back in the third and fourth quarter last year. We had some notable large 100% rent regulated buildings that traded and those cap rates around 5% I believe that's still consistent there hasn't been an adjustment despite lower interest rate. Despite the direction of interest rate should you think that they can actually on a quarter over quarter base.

It is from Q3 to Q4 last year. It was a slight drop but with an abundance of question. When you look at the appraisals you tend to be re reappraising internally and you tend to put a U.S. stop gaps on certain aspects of the of the rent roll in order to be more conservative, but I don't think you saw any magnitude adjustment yet in the cap rates. However.

It definitely correlated to low and lower interest rates. So that has not changed much. So the fact that rates are low cap rates have held constant over the past six months.

Got it Okay, and then just looking at the geographic breakdown of your multifamily exposure through their 6 billion outside of the state of New York Just curious how this segment for the portfolio was held up and if there's any major are notable differences in rent collection.

Yes, so we did a deep dive on the the portfolio regarding the leading the magnitude of the deferral. It was just talking about the deferrals and when you think about the breakdown and I'd say, we have a billion dollars. That's in the Bronx, another little less than $1 billion in Manhattan.

All locations approximately 3.6 billion most of the deferrals are coming from the five boroughs as far as outside the city. It's insignificant the deferrals that kind of gives you an indication that the city was probably hit the hardest and we spent two people that it looked for relief as an abundance of caution I truly believe that many customers that have multiple assets with the bay.

Thank you know looked at the marketplace when when cobot hit that their belief was there let's use the release see how we make out and as the cash flow continues to come in every month and their balance sheet lots of small with excess cash they were drilling interest. So I feel highly confident on the multifamily side that they're going to see a substantial amount of the furloughs come off the for all come up.

And one in November one that being said you know you have a we don't have a whole lot of exposure outside of the five boroughs and the New York City marketplace. So we do have a credits in New Jersey, we have some in Philly in Baltimore area mainline Philly, but again, if you think about the magnitude of the portfolio. It is really New York City dependent yeah.

Okay.

You mentioned, a commercial mixed use as a category that seeing some stress could you just talk about why that asset class particular, you might be or its more exposed in the current environment is it just simply the nature of that bottom floor commercial tenant and then the amount disclose which a super helpful is that's solely sheer remixed fusion I'm just curious.

There's additional mixed use in the multifamily bucket. So we've identified you know and we'll just within a fight again, it's in our in Iraq.

Public the filing this morning that the commercial piece was approximately 334 million of the 706 names. We have 706 million of commercial mix use which is where we believe may have some additional difficulties given the magnitude of the rent roll that's still in the process of reopening when you think about that as a percentage of the portfolio.

Well, that's 47% of that book is looking for some help because these businesses were completely shut down for the most part however, the LTV in that book is 40%. So it's a very low leverage portfolio with a very high debt service coverage ratio upon pre coven, and obviously of 65% of the revenues coming from the ground floor.

Or let's say for example, you have a five storey walked up you know they're going to need maybe additional help down the road that there's no question. That's a possibility. We don't know it's too soon but just logical to assume that given that's the highest percentage deferral is where the area of focuses.

And is there additional mixed use in the multifamily portfolio.

Yes.

But remember the way, we categorize as multifamily versus commercial that's all of a certain percentage. It goes into commercial so over 60%, 50% goes into into a commercial less than that you. Many buildings have some component of ground floor revenue that's come from commercial got it okay.

Oh I think just lastly could you just talk about M&A in this environment you do have a currency advantage or are there any discussions taking place and and if so I'm just talking about that a little bit and then remind us of what you're looking for in terms of geography size balance sheet profile in a partner.

All you want to I think.

Yeah, I think there's no escaping the fact that we have a long history of being informed as to the kinds of opportunities that the market place presents.

Our currency is very well suited in many cases, not all but in many cases, our currency is very well suited to create accretive transactions.

So there are partners who have.

Short dialogue, so as to understand whether we do or do not and under what circumstances, we might be willing to do a transaction.

It is part and parcel of how we look at the value creation that weve accomplished over our public life and that we intend to accomplish into the future. There were no banks that we've combined with that didn't wind up having a substantially.

The better performing.

Currency their investment in their company paid them far more by investing with us. So so as you very well may imagine there are many people that are very familiar with and then I'm talking about not just Ceos, but also bankers.

That a very familiar with our track record and our desire to do accretive deal.

So you could assume that we have opportunities that are being analyzed and that there is good reason to believe that the future period will present adequate opportunity for us to execute on an accretive deal.

Fortunately, we will do deals that are good for our shareholders. The only reason we ever do a deal is because we believe it creates greater value for shareholders. There were no deals that we've ever done that didn't create greater value for our shareholders. So yes in this period and then the peers.

Good which may become more difficult into the future they will be opportunities, where the differential between our currency and a targets currency should be sufficient to be an obvious.

Value creation for all of US there's only one currency in a deal that's the surviving currency and every deal we have ever done has created a greater value for those that took our currency.

And Matt I was just had to Joe's commentary that we're not going to do a transaction are going to take down tangible book value. So that's one of our limiting factors. So as you can imagine as the stock. We improves then we will be more.

Desirable to do something here, but given where our current is right now as Joe indicated certain transactions just can't happen because of the of the partners currency. It has to be tangible book value accretive. That's just something that we feel very strongly about.

Got it I appreciate it thanks for taking my questions.

Sure.

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

Good morning, Ladies wondering Peter.

Good morning.

I was curious how much exposure can you guys have to the 10 31 extreme and the reason I our skin.

If Joe Biden, our where to win.

Part of his tax plan is to eliminate or the 10 31 exchange tax incentive.

Right. So so Pete let me, let me handle that one so obviously, we do not have a tender you might change business, but our customers do play in that space. So the value creation. That's been created through the near to the real estate market has been through the 10 31 exchange as you're fully aware the deferral of taxation through literally generational holdings is the is the end.

Put us on many players being.

Grading more valuable time over time over generational holdings as they utilize the tax code under the Trump administration. They locked in that 10 31 exchange for real estate or other lines of businesses were excluded from that so we do not having business out of the 10 31 exchange business. Other banks do that business. We just participate in the in the purchase and sales.

Facilitates the transaction.

So I will say when with clarity that does happen, it's not good for real estate.

Right Okay.

Good afternoon My question.

My question.

Great.

Thanks.

Probably wrong by the way on [laughter].

Our next question is from Christopher Marinac with Janney Montgomery Scott. Please proceed.

Hey, Thanks, Good morning, I appreciate all the information. This morning I just wanted to ask about the C.T. one ratio under this scenario. The Joe was just talking about merger.

Lower bad to where you may take that just temporarily on a closing and then obviously it will improve as you've retained earnings.

No I would say going to look like we talked about capital of King for US. We don't we have a very strong capital allocation process could we have a little risk tank, but the last time you want to do is due transaction and take our ratios down. So if we want to be successful in announcing a transaction you'd assume that ratio would improve right out at announcement in a closing a that's clearly one of our this.

Siding fact doesn't them and looking at combining two institutions together improving capital position.

Okay, Great. That's helpful. And then just a quick one I know you talked a lot about asset yields but is there any relation to the history back in 2000, not intend on rates reset to how the asset yields are held up then it just seems that they're holding up better now and maybe that's an advantage for you.

Well be all noticed it is interesting you mentioned that so obviously, let me just go back to 2014 2014, and the end of 13 is where we had no the low for longer scenario with the fed they have rates close to zero for extended period of time, which is kind of where we are today and our cost of deposits was 50, the lowest 50 basis point I think right now at 116 on.

Cost of deposits. So we have a lot of room there on the asset side, you know we had a much stronger asset yield because those rates are coming down for a much higher plateau. The negative is that you have re fi yields coming down to literally slightly less than where they were a year ago. So the 320 to 30 is being refinanced at 3% 310 to 15, you're not getting there.

Benefit, but the cost of funds drop is significant.

It's conceivable that we can go below the cost of deposits scenario, where we were in 13 and 14, if the fed continues to keep their rates close to zero. That's a very that's a reasonable scenario. So you will make it up on the cost of funds side, we have and during that period, our borrowing costs are dramatically higher so we have approximately.

975 million remaining in 2020 at a 178 on the on the on the wholesale side.

In 2021, we have about 1 billion won at 2.03% have you thinking where the market is on let's say two year bodes three a bullets. It's 40 50 basis points could potentially going lower so I think they know that does the deposit of here is that we're going to do as much as Mckenzie gig reasonable spreads we can't control the market, but we will be lending, but the cost of liabilities for our mom.

No, it's coming down significantly in a zero for longer scenario.

Great Tom that's helpful. Thank you again.

Well.

Our next question is from Dave Rochester was caught this plane. Please proceed.

Morning, David Good morning, guys.

I appreciate all the guidance on the expense side I'm, just wondering about the lower comp expense. This quarter is that we're from a reduction of the workforce or lower bonus accruals or some combination of that if you think there's more capacity for more steps on that front the back half the year.

Or even next year and then maybe on the branch network would you guys can do there if anything to capture some expenses there.

Let me, let me address the comment on the straight out those older driven up for payroll taxes Q1's always the high quarter for the year you have to true up so security and payroll expenses. So that's the high point I'm on payroll should be relatively consistent. So what you saw last quarter should be consistent in Q3, and probably Q4 on as far as branch opportunities. We're always open to.

Looking at leases that are coming due and coming available rather not take charge. We took one of the beginning of the year that we felt was appropriate.

Looked at some of these opportunities and as they come along closer to their renewal, we evaluate the profitability and we will consider that does that during the down the road, but clearly we're not looking to take additional charges for that.

Yep.

And then just one question on the into the whole deferral process. If you guys have any multifamily or commercial real estate in deferral that come off would be into that period and they aren't cash flow and you have to call. Those TDR as more goes I know you guys are really well position from an LTV basis, but how do you more it goes if there arent any appropriate real transaction.

You can use in the market at that point or if there are deals going on at much lower prices because assets are coming out of structures and headed lower bids.

Yeah, I got a lot of the prior month.

David I'm asking him down to just.

The PDR. The TDR then obviously you're correct me if there is no cash for the financial wherewithal from the bar can't supported you're going to carry no.

At the at the the appraised value.

Right.

So and there really no good transactions going on and I mean, you're obviously using transactions to figure out where you value. Those assets is be were raised degree of the appraisal get updated appraisals you go through that process.

I think I would say you're more inclined to deal with that on the office and retail side and maybe the mixed use but on the multifamily side you still have you know a lot of customers here that I getting flush with cash so you're correct is going.

No one is coming out of this unscathed is going to be.

Loans that have to be dealt with after the process goes through the multiple opportunities of giving them. Some relief, but we don't really know exactly when that will cost for us we feel very strongly that we're going to have very strong statistics to discuss at the end of year bear in mind, a one quarter behind the entire banking spaces, we felt it prudent to give them six months relief.

In the epicenter of the pandemic, we've accrued right now I.

I can tell you with certainty as we've gotten the for interface for businesses are opening right now.

The conversations like I've discussed, we're having is and I don't want to pay I don't want to crude it's interesting when I want to pay I want to pay you. So I don't have an interest accrual and that's the ongoing conversation there will be some that we'll have a difficult time and given the low leverage we deal with will work it out and hopefully we won't be material number.

Did you guys set up any kind of a reserve for free interest income for some of those loans that are on deferral, where you think they might not be able to come off that successfully.

Nothing material.

Okay, and then I guess, just lastly, what are the prospects that actually being able to extend deferrals again.

Come October for some of those loans are having trouble still roof referred from some banks that account they don't allow that they might force the TDR classification, but.

Just curious where you've got better.

I'd say that there is flexibility and I'm, hoping we don't have the go there, but if we do have to go that is lots of flexibility or any black Swan pandemic event that has to be dealt with with has significant government support here.

So in the event the businesses is forced to shut down for extended period of time I'm, assuming there's some flexibility under the Kazakh they can't reopened because the government says you can open well they elect not to opened is going to be some flexibility.

We'd be doing a lot of large borrowers they have a lot of large buildings at a rent regulated also have lot lot large credits and those laws credits. So many uniquely position, but some of the smaller players.

May have the issue of reopening and the capacity we have to deal with that and as that comes to a point, where we have to sit down and discuss the next round of the FFO will be we'll we'll deal with that but there's no question that this flexibility and it's important to note that what we're hearing from the industry that there'll be more flexibility coming I will tell you that all our people are sitting on a number of.

Channels of potential.

Hi, Ritzy on how to deal with this after six months I believe by the time six months comes around you'll probably have more clarity.

From the industry.

Sounds good thanks, guys appreciate it.

Yup.

Yeah, we extended our question and answers they should I would like to turn it back over to management for closing remarks.

Thank you I want to thank you all for joining us today and hopefully we provided some insight into what keeps us unique. However, we will be available for those that have additional questions over the course of the day in the period ahead. Thank you all.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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