Q3 2020 New York Community Bancorp Inc Earnings Call
[music].
Greetings welcome to the NYSE beat Threeq 2020 earnings Conference call. At this time, all participants are in a listen only mode a quick.
And and answer session will follow the formal presentation. If anyone should require operator system. During the conference. Please press star zero on your telephone keypad regional.
Please note this conference is being recorded.
Now I'll turn the conference over to your host Saudis.
Martina you may begin.
Thank you and thank you for joining the management team of New York Community Bancorp for today's conference call.
Today's discussion of the Companys third quarter 2020 performance will be led by our President and Chief Executive Officer, Joseph Ficalora, and Chief Financial Officer, Thomas Can't Jeremy together with the 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.
These non-GAAP financial measures should be viewed in addition to and not as a substitute for results prepared in accordance with GAAP.
Certain comments made on today's conference call will contain forward looking statements that are intended to be covered by the safe Harbor provision of this.
Private Securities Litigation Reform Act of 1995.
Such forward looking statements are subject to risks uncertainties and assumptions that could cause actual results to differ materially from expectations.
We undertake no obligation to and would not expect to update any such forward looking statements after todays 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 and it's actually see filings including.
2019 annual report on form 10-K, and the second quarter 2020, <unk> quarterly report on form 10-Q.
Right.
Let's start today's discussion I will now turn the call over to Mr. Ficalora, who will provide an overview of the company's performance before opening the lines to Q1 I mean.
The Galore. Please go ahead.
Good morning to everyone on the phone and on the webcast and thank you for joining us today.
Earlier. This morning, we reported diluted earnings per common share of 23 cents for the three months ended September Thirtyth, Twentytwenty, that's up 21% compared to the year ago quarter, and up 10% compared to the previous quarter.
We are very happy with our third quarter performance, especially given the uneven economic recovery and the lingering effects from the cold 19 pandemic not.
Not only did our fundamentals and operating results continue to improve.
Well, we also experienced better asset quality metrics.
See a decline.
Along with a significant decrease in the number of loans on deferral.
Our third quarter results reflect strong topline revenue growth and earnings per share growth on both a year over year basis and on a linked quarter basis.
This growth was driven by solid loan growth and continued double digit net interest margin expansion.
This along with well contained operating expenses led to higher levels of pre provision net revenues.
At the same time, our provision for credit losses declined compared to the prior quarter.
More importantly.
The amount of loans in deferral declined significantly.
As previously disclosed I wouldn't referral program is somewhat unique in that it is for an initial six month period as opposed to a three month period.
Accordingly, the overwhelming majority of loans on deferral, we're eligible to come off their deferral period during October and November.
From June Thirtyth 2022 October 22nd.
95% of the $3.1 billion of loan deferrals eligible to come off of their deferral period return the payment status.
Both multi family and theory deferrals dropped 48% compared to the levels at June Thirtyth with most of the improvement in D.C.R.E. portfolio occurring in the retail and mixed use segments.
As of October 22nd our deferrals represented 7.3% of total loans compared to 14.4%.
As of June Thirtyth 2020.
We attribute the substantial improvement in loan deferrals to our conservative underwriting guidelines.
And our proactive borrowers outreach program earlier.
During the pandemic.
Looking ahead, we have an additional $3.1 billion of deferrals scheduled to come off their deferral period.
2.9 billion, which are scheduled to do so during November.
Given octobers strong payment performance, we remain confident about deferral payment trend going forward.
Moving now to our third quarter results.
We experienced another quarter of strong margin expansion.
Excluding the impact from prepayment income the net interest margin expanded 11 basis points to 2.20% on a sequential basis and was up 32 basis points on a year over year basis.
This marks the fourth consecutive quarter of margin expansion.
It's bottoming in the third quarter of last year, our margin has improved 32 basis points.
The margin improvement continues to be driven by a substantial decline in our funding costs.
Our overall cost of funds during the third quarter declined 22 basis points on a linked quarter basis, and 80 basis points on a year over year basis.
The decrease in funding cost was primarily driven by the downward repricing of our Cds, which resulted in an average cost of deposits of 85 basis points down 31 basis points sequentially and 104 basis points year over year.
Sure.
At the same time loan yields declined only five basis points compared to the previous quarter, owing to continued stability in loan pricing.
Net interest income for the third quarter rose, 6% to $282 million compared to the second quarter and was up 19% compared to the year ago third quarter.
During the last easing cycle, our cost of deposits bottomed at 54 basis points.
Given the current rate environment and expectations, we believe that this cycle our deposit cost full bottom below the levels experienced during the last cycle.
Given this.
And further repricing opportunities on the funding side of our balance sheet, we are well positioned for additional improvement in both net interest income and margin.
On the expense front total non interest expenses were $129 million up 4% compared to the previous and year ago quarters.
The increase was largely due to our bank wide systems conversion and COVID-19 readiness.
As we reopened our branches and 25% of our employees return to their offices.
Despite the modest uptick in expenses the efficiency ratio improved to 43% during the quarter and we continue to benefit from positive operating leverage.
An important metric to focus on his prepared <unk> net revenues or P P and our pea.
Pp and are.
Third quarter was $167 million up $10 million, or 6% sequentially and up $30 million or 22% year over year.
On the balance sheet Friday total loans were $42.8 billion up 523 million or 5% annualized compared to the second quarter of the year.
Driven by continued growth in the multifamily portfolio and a rebound in specialty finance lending.
Offset by a decline in theory.
On a year to date basis total loans are up $935 million or 3% annualized.
The multifamily loan portfolio showed continued strong growth during the third quarter, increasing $504 million or 6% annualized compared to the second quarter.
Multi family loan growth has been higher in each quarter over the course of the year.
This growth is the result of the following factors.
Increased refinancing activity as many loans are nearing their contractual maturity date or option repricing day.
Higher retention rates.
And market share gains as some bank competitors have either retrench from this market or have de emphasized multifamily lending.
We were also pleased to see a rebound in the specialty finance portfolio during the quarter.
Specialty finance loans and leases increased $138 million compared to the second quarter of the year.
On a year to date basis. This portfolio has grown $438 million.
Our originations for the quarter were robust.
Total originations, excluding PPP loans were $3 billion, that's down 9% compared to the previous quarter, but.
<unk> up 31% compared to the year ago quarter.
Third quarter originations exceeded last quarters pipeline by $800 million or 36%.
As for our loan pipeline, we continue to see strong power demand how alone.
Our current pipeline heading into the fourth quarter is $1.8 billion.
Included in the current pipeline is 61% of new money.
On the funding side total deposits of $31.7 billion for relatively unchanged compared to both the previous quarter and to the levels at year end 2019.
In line with our strategy to reduce our cost of funds Cds declined $1.1 billion during the third quarter.
And $3.2 billion during the first nine months of the year.
The majority of this decrease was offset by growth in each of our other lower cost deposit account categories.
Our wholesale borrowings consisting primarily of federal home loan bank advances increased $675 million compared to the previous quarter. As we continue to take advantage of the low interest rate environment and favorable capital markets.
Issuance.
On the asset quality front, our credit metrics improved during the quarter, reflecting the underlying strength of our loan portfolio.
During the third quarter of Twentytwenty, our segment of the New York City real estate market. The non luxury rent regulated multifamily segment continues to hold up very well.
Right collections in this segment.
You need to be strong and have returned to pre pandemic levels.
Also we have not witnessed any material changes in residential vacancy rates in our multifamily portfolio.
They can see rates be low 3% as of September.
For the current quarter.
The provision for credit losses under Cecil was $13 million compared to $18 million in the prior quarter and $21 million in the first quarter of the year.
This quarters provision exceeded net charge offs by $14 million.
During the current quarter, we had a net recovery.
$901000 compared to net charge offs of $4 million or 0.01% of average loans last quarter.
Nonperforming assets as of September Thirtyth, 2024, $55 million compared to $63 million in the previous quarter.
This reflects 10 basis points of total assets compared to 12 basis points in the previous quarter.
Excluding nonperforming taxi medallion related assets and P.A.'s would have been $23 million or four basis points of total assets compared to $30 million in the prior quarter or five basis points of total assets.
Well.
We also announced that the board of directors declared a 17 cents cash dividend per common share the.
The dividend will be payable on November 17th to common shareholders of record as of November seven.
Based on Yesterdays closing price this translates into an annualized dividend yield of 8.2%.
Lastly, I'd like to end my formal comments by once again thanking all those who continue to serve on the front lines of this crisis and to our employees management and board, who have shown extra ordinary dedication and commit.
During this difficult time.
On that note I would now ask the operator to open the line for your questions. We will do our best to get to all of you within the time remaining but if we don't please feel free to call US later today or this week.
And at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question keep you May proceed aren't too if you like to remove your question from the queue for participants using speaker equipment. It may be necessary to begin <unk>.
Handset before pressing the star keys.
One moment, please while we pull for questions.
And our first question is from Ebrahim Poonawala.
<unk> with Bank of America Securities.
Good morning Ebrahim.
So.
So Oh Gee billion dollars zone that came up 157 ask for another.
Additional assistance he's got any reason why the next $3 billion. That's an amazing we should not see a similar outcome Barry 90, fives doesn't go back to paying so.
So that and yet and photos of about 80 basis points or at least less than 1% and bench. If you could add to that in terms of what's your expectation at all.
Oh, the outcome of the ones that need additional photos into couldn't do you. When do you want what's been lost content that on doors that you expect.
Hey, good morning, guys. Good morning, Abrahams Com. So let me just update you on classified so we as of last night, we have 97% that has paid that brings the number down to 90 million, which remains on pace and it's still probability that we'll collect on this money there will be no stuck around the front. So we're very optimistic that this typically runs in line with our.
Normal payment structure and what's not unusual after a month after quarter end. So we're very pleased with the outcome. They may be some customers that decide to work with us in summit I pay but the reality is that we do have flexibility under the Kazakh to deal with this 90 million. That's currently a unpaid and going forward.
Just to go back to your additional question. We are very optimistic given that we spent a lot of time on knowing what's ahead of us in the next three weeks of customers our reaction to the various communication that we send to them regarding pain pain and status. So we feel very optimistic that this will continue you know the first slug of money.
That came due which was that three probably 3 billion October the result, so much better than we all expected. So we're very pleased I think the reality is that the underwriting standards that are so strong and a low LTV and the fact that we are and we analyze and the cash flow. When is the request for additional relief is a very high bar now where the original.
COVID-19 relief was pretty much offered to all customers if they if they if they choose to so as I said in the previous call as an abundance of caution we were very liberal on allowing people to have the Kazakh relief, but going forward. The board is very high and we do a significant amount of cash flow analysis to assume that if they're going to get more relief.
They have they really need to release all the good news is that as Mr. ficalora indicated the payment structures that are coming in and the collections are very high delinquency is a very low right now for our core business model and we're very pleased with the with the current results of the first chunk of large defaults coming due by mid November we will pretty much be through 96% of all the.
Charles and we anticipate updating the market place by the end of the <unk> sometime by the end of November on those results. So we believe it will be consistent and so we're very pleased with what we're seeing right now.
That is helpful. And then I guess, just taking a step back Tom.
Oh, yes dogs on about 25% since July on things. So there's a lot of Novus Miss out on the New York City economy, and real estate market looking out next year.
Obviously, you've been going almost like how many book I think you mentioned Oh didn't go your collections are back to Pete pandemic levels, just talk to us as we kind of fast forward to the next six to 12 months.
What are you seeing from your borrowers as maybe people a lot of New York like what's the level of concern at all because I did and I think I used to I don't extend the new loans and just how we should think about the losses, but it might be.
So again, we feel that the losses will be de Minimis Weve, obviously adopted Cecil this year. So obviously, we're not typically ever have any real significant losses historically for the company, but we put up no sizable provisions for our historical charge.
<unk> charge off history. So clearly we feel highly confident that the provision will continue to be lower assuming that the macro economic backdrop continues to improve as we're seeing so as you can see from the first quarter of the year, where I see so adoption wasnt going forward each quarter, it's been slightly lower I can see I can see that trend continuing.
And possibly depending on how robust this collection that Fred and the VAT and the amount of loans that are no longer on the phone we may see some recoveries sooner than we expect given the magnitude of the other collection efforts and we really have a tremendous amount of people back on full payment status and that's not a guarantee for the future, but clearly what we're seeing in our.
Totally believe that trend will continue in November and as far as the overall risk we see I think the risk is just a little bit you know initially when we had signed up a lot of questions on the phone we write a little bit about mixed use and if you look where the mix uses right now I'm at the 701 million dollar commercial mixed use portfolio were down to 57 million on deferral that's it.
Pretty sizable reduction and we should hopefully work through that in the next month and then when you look at what's left on retail retail has dropped substantially as well we had 1.7 billion a retail and right now we have about a 189 million left on the for all what's pretty much will work itself out in November so that was not so that's I'd say the ship maybe into office, obviously office has been a lot of noise in office in the.
Okay cities. So we do have approximately $800 million left on the front office Ah interesting story with office, we had a large customer that you know we we had indication then he may have difficulty paying and we contacted that customer and at the end of the day. He paid 41% LTV family asset class. It is something that is his family.
Generated over time, and it's a very low LTV and ultimately we have buyers for the note. So if in the event for some reason we have to go that path. We have people lining up at par to take the asset. So you know we're a low leverage lennar in particular for in the New York City marketplace in Manhattan, and given that its been a little bit of shipped into office or retail has performed better than expected as it.
Next is so we're very pleased with the portfolio respects outside of our core product being multifamily as far as the multifamily is concerned it's been very robust in the collection side.
Got it and then if I can sneak one more in just on the margin outlook, you've given some disclosures around the debt and Cds maturity as well.
If you could one booked wasn't on the margin outlook for the fourth quarter and maybe looking out for that and what are the new Cds coming on that and whats the new debt coming on it. Thank you. So let let let me be clear I'm not going to go into 2021, yeah, Let's just get through 2020, and we said all along we anticipated for the year that have continued double digit margin expansion.
Throughout 2020, we believe in the fourth quarter was continue to see the similar trends will have double digit margin expansion going into the fourth quarter 2020, which is very encouraging driven by as we as Mr. Ficalora indicated the substantial drop in our cost of funds, both Cds and borrowings we have approximately $5.8 billion coming due in three months have won 46.
Cost of funds marketplace between 46, and 70 basis points that'll probably roll somewhere in between that level. We have 11 $26 billion coming due from 12 months on an outlook on Cds and a 121 you bring it down between 50 to 70 basis points, depending where interest rates go which we believe rates will be going lower depending on the <unk> you know the overall.
Economic climate in a lower for longer reality and interest rate. So that's the case and the non traditional banks continue to lower their overall cost of funds. We will enjoy that benefit. In addition to that as you indicated we have about a billion dollars of bonds coming due next year at 2.03% that money is anywhere from 30 to 70 basis points. It for refinance today, we haven't.
Another 725 million in the fourth quarter at 118. These are all positive attributes to the continuation of margin expansion, which we will enjoy in the fourth quarter and obviously you know going forward. We think that the spreads are holding up on the asset side, we're still getting north of 3% as far as the overall weighted average yield and that and that's a subject to other markets. So we're still getting around that 300.
<unk> basis point spread over five year treasuries for core product mix.
On the asset sale.
Right right.
That in every prior difficult market, we have substantially less losses than the marketplace actually realizes.
And when we look at our existing portfolio. There is a high probability that we continue to be paid on our portfolios and that the realization of the losses that we've already booked as reserves is highly improbable. There is no reason to look to.
Our history and suggest that those losses, which are Cecil accounting losses that those losses will ever be realized that's an important thing for us to recognize from the standpoint of future period performance.
We have high probability outperforming in the future period in the New York market, rather consistently with how we performed over every previous cycle. Yes. There are nuances and yes. There is a difference with regard to some of the properties that.
We have but still the.
The likelihood that we would realize these massive amounts of charges is highly improbable.
Got it thanks for taking my questions. Thank you Ebrahim.
Our next question is from Brock Vandervliet with you. Yes. Please proceed with your question.
Good morning Brock.
Good morning.
There was a lot of concern.
Initially going back to the to the Red Act and now certainly more focused with covert that lower building.
Valuations, especially in your core multi family space would make it much more difficult for you to.
You know pencil out when loans came up for refinancing.
Have you found valuations holding in and.
Talk about that.
So probably gets Tom good morning, I would say that for the most part cap rates are still remaining significantly lower than I guess, what was expected in the beginning of the year. So rig rates are still holding in there and the capitalization side values are obviously being subject to some regional declines. So obviously when you look at our peak to trough I mean look at sea so moderate downside scenario.
We're running a apartment houses down close to 30% office down 30% retail down 30%. So we're really looking at the impact of the cash flows and what's most important and we're actually receiving the cash flows from the customers as we work out these ones that are on deferral that coming off the federal.
You are able to pay the bills, which is telling me that that cash flow positive and any of them. We're gonna refinancing refinancing that cash flow positive, we'll be able to be able to do that with no real issue doesn't mean that every loans any cash flowing positive, but the result that we see here to get to that high bar standard of additional relief requests for the most part most customers are able to.
Be able to do that that service coverage ratio adequately you know they may not be at 167, maybe the right one for one at 1.2, but the reality is the money is coming through we gave him six months of balance sheet relief.
And now they have excess cash flow and they and they were very thankful for that because obviously it helped them out to work with their own custom is on the ground floor, especially on the on the commercial side. So I'd say that there is been no question you know obvious reason an adjustment in the marketplace, but given the low LTV that the company has we have a 47% LTV in Queens a 48.
Percent original LTV in Manhattan is a low LTV. So in the event that they come back to the bank and which they will because obviously, they're relatively short term assets, where we're very comfortable on refinancing them and you can see by the origination for we've been doing that our overall retention rate has been spot on all year north of 50%. The goal is to keep it at 50%.
You for that 5% net loan growth number for the year. This is coming from our own portfolio, we believe that they need to improve as we get into the fourth quarter. Because obviously, we see a lot of these customers coming to us in particularly at about $1 billion that are up for renewal. This this quarter, which is our own portfolio and we believe that all of these wells will have the ability to to be able.
To refinance within the portfolio. So we're very confident that.
Okay, and I heard your commentary on on loan yields holding in around 3% it seems to be somewhat at odds with.
The drumbeat of lower yields really across the sector and many different.
Loan types.
How is that a factor of the competitive environment.
Why are you so successful in holding yields north of three.
But I'd say on average if you look at where the five year to seven year trace tack on approximately 300 to that you're around 3%. So wouldn't you know slightly slightly north an input on average we're going to do very well competing obviously that the agency is a major force here, but the structure of an agency loan versus putting a portfolio alone has different nuances.
And we're very competitive there so if.
We have to shave a quarter 0.8 to <unk> 0.4 solid business will do so we're not going to do high LTV went out looking at if customers want to get financing it doesn't make sense of the bang, especially in the midst of a pandemic well, let the assets leave the bank, but the retention rate has been hitting a ball game, which is fabulous, we believe that will improve in the fourth quarter in particular and we feel.
Highly confident that well when they can average around 3% loan coupons, which when you run that through our model it bodes well for margin expansion.
In a very low interest rate environment, whereby where I think there's a disconnect is on the funding side is that bank.
Short term bank deposits are probably priced too high in the marketplace. The good news is that we're seeing some of the non traditional institutions lower their rates to more inclined to the market rates, where you know overall treasuries are trading plus a spread [laughter].
Got it and it's fun on the funding side Yep.
And our next.
Question is from Steve Moss with B. Riley Securities. Please proceed with your question.
Thanks, Steve Good morning.
Just following up on the borrowings here just wondering what is the ability to restructure any borrowings either in the fourth quarter and in the coming year.
Well, Steve I'd say that obviously, its always that opportunity that that we look at it obviously the cost of capital for that so we would evaluate that depending on profitability depending on the forward curve analysis, we do have approximately $1 billion at 2.03% coming due next year, so that to the pain in that to restructure is probably not significant because its due in one year.
Well, we evaluate that from time to time in the event that we've had let's say sizable economic benefits in a given quarter, we always look to monetize that opportunity on a core basis going forward to try to enhance future earnings going forward, but clearly the stuff in the backend is expensive we have some expensive borrowings going out to 2000 22029.
With around a two handle on that and I think that we'll be able but much more painful as far as cost of capital in the arm actually we do evaluate our ambac has.
Has to make logical sense to take that charge and we we we we evaluate that on a quarterly basis.
Okay. Appreciate that and then just thinking about loan growth here.
No on the especially finance portfolio good growth quarter over quarter kind of wondering what your expectations are for the upcoming fourth quarter and into 2021.
Well I say front for especially finance, we really expected that rebound in Q3, given the decline in Q2 from the from that from then literally being in in the in the epicenter of the pandemic well that was a nationwide drop in general So we have the recovery there on the auto side, which is a significant portion of our business is booming right now so there's a shortage of inventory.
We see a lot of good draw downs right now so we have a nice uncommitted or committed line of approximately $4.9 billion of outstanding of 3.3, it wouldn't be surprising you'll see more lines being drawn down and at the end of the S. So many economic recovery continues so I would say that they will continue to grow we're very optimistic of that group.
The credit is pristine we have zero loans on deferral, we don't anticipate we anticipate zero losses in that business and it's performing beautifully so what weve, what a very supportive of the business remember this does not come with funding so well work credit buyout shop, we choose what we want to finance as far as the customer book that we have right now we have 100%.
Can't pay him and we have a great portfolio that should just grow from the fact that we had a substantial commitment line, but we also anticipate to be active in the market to grow at levels that are consistent with a very high Cabot. So I would say, it's going to be hopefully continued growth.
That with the multifamily CRB right now it's been relatively flat to slightly down as as the marketplace given the lack of property transactions and deals happening in the New York City marketplace and that could change as it eventually as the as the economy recovers on the on the on the real estate side, but multifamily has clearly going to be to drive along with specialty finance in the future.
The company.
Okay. Appreciate that if I could sneak one last one in here I think the press release, the 2.8 million and branch Reopenings and corporate expenses, just kind of curious how to think about expenses on the fourth quarter.
So nothing we're probably a little bit off in Q3, you know we have the conversion we had some additional expenses they add the P.P. any cost as well as testing for employees and the reopening for both the headquarters at the multiple operations that we that we operate out as well as the branches is a lot of testing evolves. So there was expenses to get reopened in that number obviously went into.
The third quarter I would say, we'll probably going to be around 130 level by year end. So maybe up a couple of million by year end. So for the year will will probably stay about 507 million for 2020, which was significantly lower than our original projection going back to last year fivetwenty, we'd like to see lower but obviously, we never anticipated the pandemic and its cost associated with that.
Dennis not material cost, but clearly we saw a little bit of an uptick in Q3, and we're probably going to see around $130 million level in Q4.
All right. Thank you very much sure.
Yeah.
Yes.
Our next question is from can you maybe with Morgan Stanley. Please proceed with your question.
Morning, Thanks, Good morning, Tom and Tom do you guys. You guys mentioned that your loan yields I think were either around 3% or maybe 3% over the five year treasury, but your average more average loan yields on your portfolio. Currently around 360 is that 60 basis points the right amount of fat.
The yield compression that we should expect over time.
Well, Ken I would just bought you kinda back out pre pay right. So we reported 360, but when you back out pre pay it's like 349. So that's where we are as of they ended the quarter approximately and then when you're thinking about whats coming due with about a 343 41, that's coming due in the fourth quarter on a billion dollars. That's used to be 44. So yes, it's it's lower than the market.
Yes, but the pain is not as bad as it was a few years ago. So I think it's manageable given the deposit costs and the borrowing costs coming down materially from then given the repricing offset because most of the liability sensitive. So yeah. So I think that you know we're getting around the low threes on average and I'd say 300 basis points spread you know this in certain depending on the deal depending on the deal.
Operations 10 year versus five or seven I O versus non I O. It's all reflected to the market competition.
Competition is fierce with the agency, but we compete and we stand by our solid customers on the asset quality side at the same time I also want to make us very important statement. During this whole journey, a pandemic dealing with COVID-19, when we worked with these deferrals, we were very focused on making sure to ensure we have the cousins paying their rents grow.
Accounts, making sure that we have the operating accounts now in control. So when you've had they come back for potentially a second round deferral, we really understand the behavior pattern of that building because we have the cash flow if no longer how is that JP Morgan is house here and that's very important when we entered into these deferral agreement. So the fact that you know we have the ability to be a little bit more flexible on rate for the pods.
A relationship we're enjoying a nice shift into lower cost funds as well.
Which has been a cultural change or the bank historically, we've always been about the asset side and the deposit flows came from acquisitions right.
Got it no no I understood certainly and then with with the reserves are obviously I know your credits really really good. So there's no question about that but can you just talk about what the driver of the reserve build was this quarter I'm just given the thought here as you would have expected zero provision.
Well look you know we're in the midst of the pandemic, we have a history of pretty much zero loss, especially on the salary side. So when you think about CRC I'd say qualitatively and quantitatively, we have a 41 basis points quantitative reserve versus a 59 basis points qualitative reserve and when you add that up you know it's it's it's it's based on our history is considered a what we would say oh.
It's hard because we have a history of no losses, but we acknowledge the private property price declines in particular, our region, which is the New York City region. So, we probably reallocate or was it more towards the commercial real estate space probably in into the office books and also into the retail, but I will tell you. This given the history and the actual results out of the loans that have been.
Back on full payment status.
Probably more likely not going to see a reversal if if everyone's back on full time status. Because we took into account you know rating chefs revaluation of cash flows and the anticipation that a certain degree of these loans will be in a second round deferral, but the fact that we're seeing 97% as of today for the first bucket and full payment status and that continues you're probably looking at and then just.
And in the future that will be favorable for the bank.
Because of the adoption [laughter] yep.
Got it just wasn't one quick one on expenses the 130 million to get for fourth quarter is there anything unusual in that or is that sort of the new base level that we should grow on as we think about 2021.
No no I'm I'll give the street some guidance when we come out in January but I'm not going to give 2021 guidance.
Yes, I mean, we feel highly confident that the conversion is complete we have opportunity within the bank you're going to look at that very carefully in the fourth quarter and obviously as you know historically the company has always been very efficient we beat our overall expectations in 2919 and 20. So we budgeted 520, we came in at five or seven is anticipated five or seven so.
Only we hit 130 had ended the quarter hopefully that number is conservative but you know our goal is to be very efficient given the magnitude of the the carnage in the marketplace, we're going to be even I'm always belt tightening so well have some guidance for us in it for you guys next quarter, but clearly we're very pleased to be at or below 510, we'd like to be at 500 Bucks.
The the pandemic had some expenses and the post and pushing up the conversion for a year had some consequences in the other expense and I think that you know we should get the benefit of that going forward since all on one platform and lots of <unk> systems now could be reevaluated as far as the C where our potential expense savings will occur after a process that will go through the year end process and budget.
The forecast.
All right. Thank you.
Sure.
[laughter].
And our next question comes from Steven Dong with RBC capital markets. Please proceed with your question.
Morning, Steve.
Hi, good morning, guys.
Tom just your C.G. one ratio it dipped a little bit this quarter can you just explain what was going on with that.
I mean, well mostly growth right. We were growing with we continue to grow on a quarterly basis I'm very comfortable with our internal capital model our capital plans and again. This is solely driven from growth in our earnings are going higher which is great. We forecasted for the year at 20% EPS growth from 19 versus Twoq.
They were on target for that.
So we're very pleased with the growth trajectory of the capital build now so that's that's positive towards Overcapitalized, we are growing.
Got it okay.
And then just on your office exposure.
Yeah, the exposure by the different boroughs.
Yes, Manhattan Yeah.
So look I think Manhattan is the area that we are spending a lot of time on reevaluating these credits and cash flow and ratings, we re a reevaluation and I'll tell you that if you break it down to go back to the category as an excuse we had over 100 million going back to the previous quarter. We're now down to 40 million in mixed use it in English is commercial in Manhattan.
The retail is phenomenal at 99% pay we're down to 4 million retail in Manhattan, which is much better than we anticipated given the pandemic office right now is probably the high bar, where we have a total deferral of 800 million by now at 762 million that's in in in Manhattan.
We were going to work hard in the next few weeks to see how this all plays out but that is the area that has the highest percentage as president and the dollar amount that's on deferral multifamily as of the end of the quarter I've actually had ended October 22nd which is the update we gave you know investor deck, It's 530 million that's in Manhattan. So that's blended across the five boroughs.
In multifamily the next bar would be Brooklyn at that by 469 million for multifamily, but clearly on the office side. That's the area that I would be shift the energy level towards the deferral issue that we have to deal with.
Got it I appreciate it I guess, it's more just on on your office exposure what was your creek and done they coverage ratio.
So I'd say, we anticipate I can I have it it's been well bear with me one second here.
This we had.
About a one nine to just under 190 on debt service coverage ratio LTV of 52%.
Perfect.
I used. The example that we had an office, but very wealthy owner as an office has an office building and was due in October.
LTV was 41% you know we have to make sure. We know we got paid on this one we felt highly confident that this is a it's a flagship area effect flagship location in any event. The building was going to go through difficulties, we have people willing to work it out with the customer and we sell the note at par. So these are real coveted asset classes. This is family well.
So over many years some of them a 10 31 exchanges that has created long term wealth for property owners and they're not just going to walk away. So the fact that you know yet we gave him six months really that's a lot of balance sheet really six months cash flow on a large credit. This was a failure watch credits and we end up getting paid which is great and then I then that's our approach our approach is that the bar.
Going into the second round the fraud, if any is very high we go through a very rigorous program that the cash flow analysis has to be presented and we feel they have the ability to pay we're not going to give out relief when it's not justified.
Right right and so you pretend doesn't like you're at 190 and your minimums, one third is that correct.
Yeah on the commercial side that's correct.
Okay, Great I appreciate the color guys. Thank you sure.
Okay.
Our next question is from Matthew Breese with Stephens incorporated. Please proceed with your question good morning wanting that.
Good morning that hey, just touching on the expenses.
The uptick in June a how much of that was due to the systems conversion and is therefore permanent versus coated and subject to fluctuations.
I'd say, it's probably evenly split from the uptick I think I'd Guy there was a 120, John because I don't want to be off by a couple of million Bucks I'd say, probably a million a half of the conversion. The rest was PPD and testing and remember we have a lot more people going back to the to the various locations and.
Now is there is an expense that's associated with that dealing with getting the branches up and running so all the branches for the most part are all up and running for the time being depending on how the pandemic, but clearly with some expense there. So I'd say, it's split between a conversion and P.P. any.
Okay and then.
I interrupt you I'm sorry.
And testing as well and there is an expensive that we don't have we don't have doctors on staff. So we have to do high people to ensure the safety for our employees.
Got it and then you know could you just update us on the on the strategy around Securities where do you want it to be what are you what are the new yields and what kind of investments are you looking at there.
So in my guide up double digit for the quarter I anticipate the security yields have come down so our guide for the quarter is up and again once again double digit. So some 10 basis points up in fourth quarter, which is reasonable based on our modeling were assuming the current yields are coming down and securities I wouldn't be surprised to see another good oh something significant drop unsecured.
So probably looking at somewhere in the 235 to 30 type level and fourth quarter and were being very cautious given the marketplace. So our securities portfolio as a percentage of assets. It's probably it's it's been pretty much at the lowest level stand right nine like it's like 9.58%. So much on line 958, which is a.
About a 5.2 billion dollar book on a $54 billion balance sheet, Oh, low. So obviously, we don't want to jump into the securities market with significant investment now given that we have reasonable loan demand and we want to be very cautious given where yields are not just a wait and see moment and we can't control interest rates. So we think that yields in general are going to be relatively low.
Looking at reinvestment yields probably in the low ones and if not the opportune time to grow that portfolio. We may from time to time put on additional liquidity that will be a business decision that we decide that's how we manage our alco process, but clearly it's not an opportune time to grow the book.
Understood, Okay, and then I I.
Are you guys feel very comfortable in the deferral front.
Yeah curious sorry, what happened quarter over quarter to criticizing classified assets over the balances this quarter versus last and have you seen any risk rating migration.
Yeah, I'd say special mentioned when I bought because obviously you know when you go through this analysis and before you even get you get as much information you can from from the bars I go into the pandemic, we focused solely on the portfolio that was in deferrals. We've done a lot of work in that for regulatory reasons. That's what we should be doing and how we mix shifted a lot of these launches the special mention.
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Okay, but again the good news is that as they continue to pay to go back to full payment status and the cash flowing north of levels that we didnt expect we're gonna rolling out a special mention and then and that'll be the next phase of of the benefit of that so we will we do it as an abundance of caution and conservatism as we should.
And then the last one is just you mentioned cap rates are holding up better than one would've expected could you frame that a little bit better for US you know were multifamily office retail cap rates today versus a year ago.
I'd say consistent I don't see any movement at all I mean, we were initially our view initially was when the rent regulatory changes came in last year that we had a 30 to 75 basis adjusting depending on the borrow we write a much higher cap rate in the Bronx can be doing in a in the Bronx versus a Manhattan. So Manhattan cap rates were always lower in general So we have.
So much low LTV as an abundance of caution, but they haven't moved a whole lot. So you still in a in a low to mid fours, depending on regulatory versus non regulatory I'd say for when you look at some of the deals that were done in the past 12 to 18 months once since the change in rent more I'd say, a 5% handle on a 100% rent regulated building is not done and.
Usual, but when you throw in a commercial use space and other revenue streams, you start getting into that mid fours. So its been consistent so we do a deep dive you know every twice a year on rent regulatory stress testing and what we finally started so they look at the Oh, what's going on in the marketplace. The cap rates are going lower but we conservatively analyze it with an uptick.
And took the stressed the portfolio, but surprisingly it's been resilient.
Great. That's all I had thanks for taking my question.
And our next question is from Christopher Marinac, We seek partners. Please proceed with your question.
Hey, Thanks, Tom Tom and Joe You had mentioned earlier about the very strong credit quality on the specialty finance it looks like maybe 98% or more is pass rated so do you have to allocate the reserve at a higher level just given the pandemic or would you still kind of look at the reserve allocation similar to prior quarters the minimus allocation.
We're very comfortable this is all soup senior secured credits even when a credit goes to difficulties, but you know what secure by inventory equipment. So again, we're very comfortable that this portfolio has zero loss content.
Great Tom Thanks, very much for all the information this morning.
Backers.
Your next question is from Ebrahim Poonawala with Bank of America Securities. Please proceed with your question.
Hey, guys.
Yeah, just two quick follow up questions one on the loan to deposit ratio how high do you see that's running given just the attractiveness of the debt markets. If you can touch upon that.
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So I would say that you know historically the company had a loan to deposit ratio as high as 165. So we're not that we've had some improvement it's been a long time since the bank has executed on an M&A transaction and obviously our historical growth in deposit has been driven through M&A. So the goal here in the long run is that eventually as we continue to fall.
He has on our business model, which includes a you know putting businesses together and getting that funding side shored up on on through consolidation, that's always a possibility, but absent that I think you're going to see go public horrible called nominal deposit growth and muscle choose based on what's best for the shareholders as far as cost of deposits in duration.
Right now the whole Cellmark is a very attractive the more attractive than what's offered out there and work on the hot money CD market. Clearly you can put on five year money. Lower then you could on <unk> on the CD markets. If you go short you looking at between 25 to 38 basis points type cost of funds depending on.
Your duration rested you want to take so there is you know this this this business decision you have to make when it comes to a repricing in deposits aggressively for growth and again our growth is manageable. It's reasonable we're not targeting 10% type loan growth in asset growth will still shooting for that 5% net loan growth number driven by multifamily and specialty finance I'll step by the sea.
Our reduction so I think the reasonable growth in and our internal deposit analysis. We can now grow between a small portion of that on deposit growth as well as repricing the funds lower aggressively and benefit from a a unique opportunity on the wholesale side, which is cheaper than retail and in this current environment with the proviso that in the event that were Uh huh.
And to be able to put something together on the acquisition side well you know just business can mountain combination side, that's where this this model can change dramatically to have a different funding mechanism.
Got it and say why they have you just in the remaining $3 billion to football. There is no reason to believe why you think the expedience because there could be some pushback at all there's a higher risk loans in that portfolio. When you think about the remaining the photos is there any reason to believe I'd be it would behave differently than what you've seen so far.
Look I would say that these are the ones that filed for the.
For a later right, it's one month diner randomly.
The other ones I waited 30 days to come back to why wont the bank offered so.
We were all over these customers we understand the dynamic of it we're very optimistic.
The mistake that this will continue.
And you know I broke out of the area of risk I think we've shifted more towards office versus retail and mixed use which is a good thing and we'll deal with that as it goes along but he is office credits. All you know the average LTV than we originally joined with 52%. So it's it's better than the retail and and I'd say not as obviously mix use was the lowest LTV, but it's better than the retail on the retail.
Well surprisingly did outperform at $4 million.
<unk>, that's it sitting in Manhattan, right now, we feel pretty good about that the retail customers. It stepped up in it and pain payment status and the fact that we couldn't we shift our rapid now that office is the potential risk here the ltvs below the customers a very strong he is a large property owners and we focus on conservative underwriting and the debt service cover.
Ratios when generated were extraordinarily high.
Well thank you.
And our next question is from Collyn Gilbert with KBW. Please proceed with your question.
Collyn. Good morning, Good morning, Good morning, Tom Cornish out Tommy I, just want it I make sure I understand so on the expense side and you've given obviously good color, but so the elevation that you're going to expect in the fourth quarter and obviously, what we saw in this quarter attributed.
Attributable to the conversion costs as well as co that cost without specific so generally I mean are there should those expenses be coming down next year are there other investments you're going to need to make.
No I I think yeah, I'd say the investments were made on the conversion. We spent a lot of time effort and energy over years to get this this conversion done it was the largest conversion the bank ever went through its all systems do Pfizer. It was a partnership we collaborated together we work together is what what the banks needs were and we adjusted there.
GAAP offering and we worked with them over the past multiple years. So we feel that most of that expense has been absorbed going forward, we gonna happen I'm not going to give 2021 pilots yet, but again, we're efficient company, we want to get that efficiency ratio down to 42% and that was the goal for 2020 with equal hit it by the end of the.
Yeah.
And you also driving profitability up so if you look at where our EPS CAGR was 19 versus 20, we should be up around 20% EPS growth with significant margin expansion I think going on when I first came to my margin guide people felt I'm a dime I was way too aggressive that being a 225 margin I said, we came off of a low was 180 h. on 188 margin. So we.
Between you know 30, some odd basis points is reasonable. So here, we are coming into the fourth quarter I gave the guy for 10, Bips going into Q4, and it gets you to that to 30 number and hopefully I'm conservative and I think it all depends on what happens next year with cost of funds going forward and whether the shape of the curve is so the good news is that the spreads are healthy.
We have healthy spreads in our business model is if it's 275 or 300, it's not 110 like it was going to the financial crisis and I think the competition has waned a little bit I see people a little bit nervous to do lending in New York and we're we're open for business in New York, we're going to be there for our customers in these uncertain times and these are cash flowing assets and the collections are high and.
We're very comfortable on working with these these historical good property owners that have been doing business with us in good times and bad times.
Okay, great everything else is covered thanks, so much.
Thanks Scott.
And we have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.
Thank you again for taking the time to join US This morning and for your interest in N Y C. B, we look forward to chatting with you again at the end of January when we will discuss our performance for the three months ended December 31st 2020.
Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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