First Republic Bank (FRC) 2019 Q2 法說會逐字稿

Greetings, and welcome to the First Republic Bank's Second Quarter 2019 Earnings Conference Call.

(Operator Instructions) I would now like to turn the call over to Shannon Houston, Senior Vice President and Chief Marketing and Communications Officer.

Please go ahead.

Thank you, and welcome to First Republic Bank's Second Quarter 2019 Conference Call.

Speaking today will be Jim Herbert, the bank's Chairman, Chief Executive Officer and Founder; Gaye Erkan, President; and Mike Roffler, Chief Financial Officer.

Before I hand the call over to Jim, please note that we may make forward-looking statements during today's call that are subject to risks, uncertainties and assumptions.

For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please see the Bank's FDIC filings, including the Form 8-K filed today.

All are available on the bank's website.

And now, I'd like to turn the call over to Jim Herbert.

Thank you, Shannon.

It was a good quarter.

Growth continues to be very strong across our franchise.

In fact, in terms of loan originations, this was actually the best quarter we've ever had.

Let me share a few highlights.

Total loans were up 19% year-over-year, and they were up more than 6% in this last quarter.

Year-over-year total deposits have grown 15%.

The strong growth has led to good financial performance, particularly in the face of the challenging interest rate levels and yield curves that have occurred particularly, in this year since about November of last.

We'll talk more about net interest margin in a moment.

Year-over-year, total revenue grew 10%, net interest income was up 10%, and our tangible book value per share has increased 13%.

Credit quality remains very strong.

Net charge offs for the quarter were a nominal $1.2 million, while we added $21 million to our reserves.

Nonperforming assets ended the quarter up a bit, but only 14 basis points at quarter end.

Our capital also remains very strong.

Our Tier 1 leverage ratio was 8.69 as of June 30.

In early June, we did announce the departure of some wealth managers.

While this was, indeed, disappointing, it does not change our positive outlook for the wealth management business.

We'll talk more about this in detail in a couple of minutes.

In terms of the interest rate environment, since our last call, the 10-year treasury yield has fallen by approximately 50 basis points, with no move at all on the short end.

This has led to some pressure on NIM, which, of course, also impacts our efficiency ratio.

Mike will talk more about both net interest margin and our efficiency ratio in a moment.

Very importantly, economic conditions in our urban costal markets continue to be quite good.

Our clients remain very active, which is reflected in our continued strong growth and record loan volume.

It's important to remember that over half the growth of First Republic comes every year from existing clients.

As we enter the second half of 2019, our loan pipeline remains quite strong, and we continue to expect mid-teens loan growth for the full year.

In the current environment, we're doing what we do best, think and act for the long term.

In fact, there actually is no short-term version of First Republic's business model, which has been successful through many interest rate environments for the last three-and-a-half decades.

Now let me turn the call over to Gaye Erkan, President.

Thank you, Jim.

As Jim noted, loan origination volume was a record $9.4 billion during the quarter.

Single-family residential volume was also record at $4.1 billion during the quarter.

It was a very strong spring-buying season across all of our vibrant, urban coastal markets.

Purchase activity accounted for 52% of single-family residential loan volume for the quarter.

In terms of refinance volume, we are pleased that over half of the time we are acquiring new households from other financial institutions when we refinance their loans.

Our loan pipeline going into the third quarter is stronger than it was at the beginning of the second quarter and stronger than it was a year ago.

We expect to deliver mid-teens loan growth for the full year 2019.

Credit quality remains very strong, and we continue to maintain our conservative underwriting standards.

Our weighted average loan-to-value ratios for loans originated during the second quarter were 60% for single-family residential and 52% for multifamily and commercial real estate combined.

Loan yields, overall, were up 2 basis points from the first quarter.

Business banking also had a very strong quarter.

Business line commitments were up 23% year-over-year, primarily due to increased capital call lines of credit.

Business loan outstandings were up $1.1 billion during the quarter.

This was driven by an increase in line utilization rate from 33% to 37% as well as the aforementioned increase in commitments.

Turning to funding, we are pleased that deposits are up 15% from a year ago, even though the second quarter is typically the most challenging quarter for deposits due to the seasonality of tax outflows.

Importantly, checking deposits remain strong, representing 58% of our total deposits at quarter end.

We continue to maintain a diversified deposit funding base.

During the second quarter, our average rate on all deposits was 66 basis points, in line with the mid-60s spot rate at the end of the first quarter.

Our total liability cost was 93 basis points for the quarter, up from 79 basis points in the prior quarter.

Finally, I would like to comment on two of our most important metrics, household retention and household acquisition.

Our success in household retention is driven by our commitment to exceptional client service, which is reflected in a Net Promoter Score that continues to be more than double the industry average.

With regards to consumer household acquisition, our compounded annual growth rate since 2017 has been 17%.

That is more than double our historical run rate.

Our success in both household acquisition and retention is a testament to a number of factors, which include, compounding referrals from a growing base of satisfied clients, a successful millennial strategy and returns on our investments in technology and in the productivity of our colleagues, which allow us to scale our high-touch business model.

We are particularly pleased to be acquiring new client households at a very healthy pace, while keeping our existing clients happy.

Now I would like to turn the call over to Mike Roffler, Chief Financial Officer.

Thank you, Gaye.

Let me start with our wealth management business.

The departure of the wealth managers in the second quarter, which we announced on June 2, will have no material impact on earnings per share.

Of the $16 billion in assets that they managed, we expect to retain about $2 billion.

In the third quarter, we do anticipate a final outflow of approximately $4 billion in assets related to these wealth managers.

Even after this additional outflow, assets under management would have been up a strong 10% year-over-year at June 30.

As a result, we expect investment management fees to be approximately $83 million in the third quarter.

Such fees are based on assets under management at June 30 after fully accounting for this anticipated outflow.

Overall, in terms of wealth management, we're pleased with our assets under management and revenues.

First Republic's integrated banking and wealth management model continues to attract very successful wealth managers.

So far this year, we have welcomed 5 new wealth management teams to First Republic.

Our liquidity position remains very strong.

High-quality liquid assets were 13.3% of total average assets in the second quarter.

Net interest income, which we view as one of our key growth metrics, was up 10.2% year-over-year.

Let me take a moment to discuss the impact of the recent interest rate environment on both net interest margin and the efficiency ratio.

Net interest margin was 2.85 for the second quarter.

For the full year, we now expect net interest margin to be in the low end of our range of 2.85 to 2.95.

The net interest margin has been impacted by the inverted yield curve and highly competitive loan pricing, especially for single-family.

As a result of this NIM compression, our efficiency ratio was 64.5% for the second quarter.

It's important to note, our actual expense run rate in dollar terms was modestly lower than our expectations.

For perspective, if our net interest margin had been 2.90 in the second quarter, our efficiency ratio would've been 63.6%.

Turning to taxes, our effective tax rate for the quarter was 17.4%.

We now expect the bank's effective tax rate to be between 18% and 19% for all of 2019, slightly lower than our prior expectations.

Thank you.

And now I'll turn the call back over to Jim.

Thank you, Mike and Gaye.

It was a good second quarter, a bit challenging in some respects, but we have tremendous momentum going into the third and fourth quarters.

We're focused on the net interest margin, obviously, a bit out of our control, but we're focused as much as we can be, and we're also now focused on managing expenses to be sure to deliver consistent results in the current rate environment.

We remain very optimistic about growth opportunities, as Gaye said our client household acquisition rate is an all-time high.

Our client satisfaction levels continue to be twice the banking industry average and as always, this powers our safe, stable organic growth.

Now let me turn the call over for questions.

(Operator Instructions) Our first question comes from the line of Steven Alexopoulos with JPMorgan.

Maybe I'll start on NIM.

So when you think about the second half, organic deposit growth should improve, loan yields are likely going to be under pressure, I would guess, and then you have the Fed potentially cutting rates.

So for Mike Roffler, where do you see the the NIM bottoming?

So we think 2.85 for the year, which means we're a little bit below that in Q3 and Q4, and you hit the factors pretty well.

Competitive loan pricing is -- it's very competitive right now, and if the Fed were to cut rates a little bit, our variable rate lending would drop a little bit, about 4 basis points a quarter, and so we sort of think low 2.80s for the next couple of quarters looks good.

Okay.

And then Mike, once the Fed is actually cutting rates, what's your expectation for the NIM then?

I would think deposit cost would start to trend down with some delay.

Can you help us think through that?

Sure, yes.

On the -- there's a couple of places, on the deposit side, it would lag for about a quarter or so and then we would pick up the pace with the rate cuts, and as you all know banks are faster to reprice down than to reprice up.

So we would see some relief on the deposit side.

Okay.

So you would expect NIM at that point to be stable or slightly increasing, Gaye?

That -- so that also depends on the asset yields as well as the -- where the long end of the curve is going to be, obviously.

If the long end doesn't change but the short end slowed down, then we also have about 20% of our earning assets that is linked to the short end of the curve.

So it'll be a play between the two.

Going back to what Mike said for the year, it'll be around 2.85 if you only assume a cut or two on the short end and no changes to the long end.

Steve, to your point, the lag isn't really the issue.

And you've got about 2x adjustable priced liabilities to floating rate assets, roughly, and it takes some time -- takes time to catch up, but it will catch up.

The real issue is, if it stimulates the economy, does the long end go back up a bit and you've got a steeper yield curve.

Recently the curve would indicate maybe yes.

And then on the efficiency ratio, right?

So the NIM is putting on downward pressure, but then you have the Luminous assets moving out, which is going to help.

So Mike, how do you think about the full year efficiency ratio, are we still in the 63 to 64 range?

So I think we'll end up a little bit higher because the margin has gone to the low end of our range of 2.85.

And so right now, we think for the full year efficiency, we should be little bit under 65, but importantly our expenses, in a dollar standpoint, we're right on pace and even slightly better than we thought, so we have been able to contain it and we'll clearly look for opportunities if there are to reduce any places without sacrificing service to clients or long-term investment in the franchise.

Okay.

And then just one final separate question.

If we look at the increase in nonperformers in the quarter, I understand the base is still very low, but maybe can you have some color there?

And was any of that related to the new rent regulations impacting New York City?

None of -- yes, sure, I'll be glad to.

None of it was related to the new rents.

It's an issue in Southern California with one borrower.

It's quite -- it's completely idiosyncratic.

It's one borrower, a fellow that we've worked with for a number of years actually.

We've had 10, 12 loans quite successfully with him.

He's got some spec homes he built, we were in construction -- we are a construction lender.

We're in first positions.

We've got about a 60% loan-to-value ratio.

We do not see any risk of principal or interest whatsoever in the credits.

But it's 4 different properties, and he's got them up for sale, and he just reduced pricing on them, which was really holding it up.

So we're -- if -- I should say it's current as well.

He's paid -- we've never had a late from him and are not -- they're currently paid.

But he's had slow sales, he's dropping pricing to see what he can do to pick it up.

So it's a one-off.

It's a little under $100 million total exposure to him, and we think we'll be fine.

Our next question comes from the line of John Pancari with Evercore.

This is Raul Patil on behalf of John.

So the question I had was around the Luminous team.

So following the departure of Luminous team, I know you said it, no ongoing EPS impact, which kind of implies a pretty high comp expense ratio tied to this team.

I'm just wondering whether you are reevaluating compensation levels of existing wealth managers and new hires to kind of maintain the same talent retention in your wealth management business?

Thanks for your question.

No, actually we think that -- first of all, Luminous was an acquisition as opposed to a wealth management team.

It was the purchase of an RIA.

We've only done that a couple of times, and we generally avoid it for cultural reasons witness that -- this event, unfortunately.

But we also have maintained some assets that came with them.

And we've maintained, as Mike said, about $2 billion of other assets that were in there.

And so the earnings on the assets we retained equal about the earnings on the overall situation before.

This was a higher comp situation and associated with them more others are.

And that had to do with the nature of the acquisition as opposed to simply hiring a team.

We're actually very happy with the growth of the wealth management, and we're very happy with the hiring of the teams and generally it's working out very well.

They're very independent folks -- they're great people, and we're still working with them on the banking side.

But they're very independent people.

They want to run their own shop.

I would note they've even gone into 2 new firms instead of one.

So we wish them well, but it's unfortunate, but it's unlikely.

We don't think it'll happen again.

If it does, it is unlikely.

Got it.

And then just question on the expenses.

I know, Mike, you kind of alluded to the expense run rate -- is coming in better than what you had expected.

And in the past, you've talked about expectations of expense growth in the mid-teens for this year.

Is that still the case?

I'm just trying to get a sense for -- especially, given the expansion effort in Hudson City, Hudson Yards, San Francisco, additional hiring tied to these expansion efforts.

I'm just wondering if that mid-teens is still intact?

Yes.

So the first half of the year, our expenses were up just under 13%.

So we think sort of low to mid-teens makes sense.

Given the environment, we are going to take a little bit closer look, obviously, at cost containment and see if there are things that don't impact the long-term benefit of the franchise or client service that can either be done more efficiently or possibly pushed out.

Relative to Hudson Yards, the cost for that really doesn't come online until late 2020 or early '21, and so we do have a bit of a time with respect to that to be able to cover those costs once they start.

Our next question comes from the line of Erika Najarian with Bank of America.

This is Chris on the call for Erika.

I just have 2 quick questions as a follow-up to your margin commentary.

If the Fed were to cut rates 2x or 3x this year, can you just discuss the impact to your deposit pricing strategy?

Appreciate the color on the 4 basis point impact to variable rate loans, a little focused on the deposit side here.

Sure.

On the deposit side, it's seeming a rate cut in, let's say, at the end of July and one more before year-end, just hypothetically speaking.

It would take about a quarter lag.

So it would actually be more of a flat, maybe slightly down on the deposit rate and then catch up at the consecutive cuts afterwards on the deposit side.

Okay, great.

And then just one quick follow-up.

I noticed there's a 20 basis point quarter-over-quarter drop in your cash yield.

Is there anything to call out there?

Probably just mix of cash between what we hold at the Fed and other banks, and I think they also did maybe reduce the interest on excess reserves slightly in the quarter.

Our next question come from the line of Jared Shaw with Wells Fargo.

Just wanted to ask was there any one-time charge from reevaluation of the customer relationship intangibles associated with Luminous in the quarter?

No, there was not.

We retained enough revenue that it didn't require any charge.

Okay.

And then going forward we shouldn't expect any impact from that either the additional...

At this point we would not expect so.

Okay.

And then any early update on CECL?

Or when we can expect to see some preliminary thoughts on that?

And I guess, specifically how would you think the All-in-One program would bear under CECL given the limited track record?

Possibly the balance sheet.

Sure.

So we have -- maybe an update from last quarter.

We have largely ended model validation near completion.

We've run parallel a few times.

Based upon sort of the current results of that, we don't see us...

Still there?

I think we lost you there for a second, Mike.

Jared, can you still hear us?

I can hear you now.

But you said model validation was near completion, and then cut out from there.

Yes, sorry about that.

I think we cutout.

We've run parallel a couple of times, looks like no significant changes to the level of reserve at this point based on the current economic outlook.

A lot of that's driven by the bank's historical losses, which do have an impact over the life of loans.

When you look at portfolio, student loan refinance, to answer your question, we'll have a little bit higher allocation than it does today just because of the extended life compared to what we reserve on it today.

But you're right, there's not a lot of history.

Our next question comes from the line of Ken Zerbe with Morgan Stanley.

First question, Mike, you mentioned in 3Q, you expect wealth management fees to be $83 million.

I just want to make sure I have the right comparison.

Are we comparing that to the $120 million this quarter?

Or the advisory fees of $94 million?

No.

It's to the $94 million.

It was specific to the line item titled Investment Management Fees.

Got you.

Okay, so down by $11 million.

Understood.

And presumably, there's a corresponding expense reduction as well that flows into your -- I think, it was low to mid-teens expense growth?

That's correct.

The compensation associated with the Luminous individuals, much of that you had in Q2, you will not have in Q3.

Okay.

Perfect.

And then just last question in terms of the capital call lending, I heard you guys say that it was the main driver of your business banking, your business loan growth.

Can you just talk about the competitive environment there?

Obviously, there's some new entrants who are aggressively pursuing capital call lending.

What are you seeing from competition wise, from spread perspective?

How's the overall outlook?

Thank you.

The activity is very strong.

While there is competition, there's really enough for everyone, enough great business to do for everyone.

So from that perspective, the impact of competition isn't significant compared to the prior quarters.

It's very healthy activity, both in terms of deal activity and the valuations.

Our next question comes from the line of Aaron Deer with Sandler O'Neill and Partners.

Just looking, I guess at the compensation line, specifically, the salaries and benefits line, with the cost of the Luminous team going away, despite your other investments and new hires and such, is it reasonable to assume that, that line item is lower in the third quarter relative to the second quarter?

I don't think I'd go lower.

The growth that it has maybe, had in the past is probably not as significant because we started a lower base, but we have hired other teams, other relationship managers, and we're also supporting them.

The big drop, if you think about from Q1 to Q2, is seasonality of payroll taxes and benefits as a downward trend.

That big drop doesn't happen again for the next few quarters.

Okay.

And then looking at information systems line, I think you guys are in the midst of a core systems conversion and obviously, spending on quite a bit of areas related to technology.

Is that core systems conversion -- completed presumably sometime here in the back half of the year?

Can we expect some of those costs to go away?

So we're in the early phase of the project, and so we're still in the ramp-up of the cost.

So there's little bit in contract and IT and professional fees, but it'll actually start to probably increase later this year and into 2020.

Yes.

And it is the core conversion, which is going to take a couple of years because we want to do it methodically and without any distractions to clients or ourselves.

It is all baked into our expense outlook, number one.

Number two, given what we have discussed in the rate environment, we are focused on aligning expenses to deliver consistent returns in a volatile rate and yield curve environment.

Okay.

And then just maybe one last one related to deposit pricing.

You gave some color in terms of your expectations if rates come down, that there might be some relaxation there?

I know among some of the highest paying banks out there in the market, they've relaxed their pricing some -- maybe 5 or 10 basis points at the high-end.

Have you, at this point, made any changes to your price?

And are you really waiting to see what the Fed does before you make any moves on that front?

We'll be waiting for the Fed move.

And actually, we have, on the CD front and on the money market checking and savings a bit, they have started adjusting down.

There is some room for us to do so.

And then I would also note when I'm looking -- when we're looking at the other 3 banks that have reported before us.

The total liability cost, we're so much lower, we had 93 basis points of the total cost of liabilities compared to the average of the 3 banks at 144 basis points.

And with the rate cut, obviously, we will take action, which we have already started to some extent, modestly, which will lower down on the deposit rate.

Maybe a quarter lag that you'll see the impact, but with the consecutive cuts, it'll show itself.

Our next question come from the line of Casey Haire with Jefferies.

Guys, just a follow-up to Aaron's question about deposits.

Can you give us a sense of where -- what the spot rate was for deposits June 30?

June 30 spot rate was right around 70.

70 basis points.

So okay.

And so the idea is that post the cut you would ease -- you would exercise some of the flexibility you have on that pricing and we'd start to see the lag there?

Correct.

Correct.

Got you.

Okay.

Switching to the capital front.

Obviously, very strong loan growth.

The CET 1 ratio did get down below to around 10.2%.

I know you guys had talked about -- you'd be all set for capital this year, but just given the strong pace of loan growth, is that something that you guys would revisit this year?

We don't think so at this point.

Casey, it's remember we did a equity round of modest size, but we did an equity round in January right at year-end around the S&P add, which was, in fact, an early round for us.

It was opportunistic.

I think we're probably -- don't need any equity capital through to the end of next year, even with our growth rate.

If we needed some Tier 1, we might do a preferred, but I think we're fine.

Okay.

I mean, Jim, does that presume that you'd be willing to go below 10% Tier 1 common?

Well we might go a little bit below.

We might refocus a lot more on leverage, but we've run very solid for the risk in our portfolio, the risk of the balance sheet.

We run very, very solid capital.

We've got excess at all times, as you know.

And our growth rate is so solid that we're actually quite comfortable at this point.

Okay.

Understood.

And just last question.

Just some updated thoughts on the student loan program.

Are you -- as that program is what?

5 years old now and seeing very strong loan growth.

Are -- is that -- what kind of cross sell are you seeing as that program matures?

Well actually, it's a good question.

It has matured.

We've just actually received the early indications from an outside review of it, and it is meeting or exceeding our expectations.

The volume's running right around 8,000 to 9,000 per year of new clients.

The profile is very strong.

The profile of the current clients that we're getting in that program, in fact, is better than the profile of our single-family home loan clients.

And -- but simply -- but, obviously, they're younger.

And I say better in the sense that their deposit-to-loan ratio is stronger.

Their incomes at their age groups are stronger, their FICOs are the same, and their education levels are higher.

Our next question come from the line of Chris McGratty with Keefe, Bruyette, & Woods.

Mike, maybe just a clarification on the margin outlook.

I think, Gaye, you said if we get 2 cuts this year, the guidance would be low end of the 2.85 range.

So that would kind of infer like a mid-270 by the end of the year.

If we get 2 and kind of done and the economy kind of stabilizes, expectations for 2020 would be stability relative to that number?

Or do you think you might see some catch up in the deposits and maybe a little bit expansion in 2020?

It's -- I think the biggest thing on 2020 that's hard to say at this point is obviously, the shape of the curve and what it does to the competitive lending arena, right?

Because that -- we were very focused in talking about deposit pricing and impact, but where is the lending rates going to be on new production.

And so that's why, I think, the next 2 quarters, we feel pretty good about, lead us to 2.85 low end for the year of '19.

And it's probably too early to say on 2020 because of what's going to happen to lending rates.

Okay.

Okay, great.

And maybe on the investment portfolio, could you speak to what you maybe have bought in the quarter, what kind of yields?

And how they might have compared to prior quarters?

We have been opportunistic on the investment portfolio.

We bought some municipal bonds around 3.95 CY.

Our next question come from the line of Matthew Clark with Piper Jaffray.

Mike, you -- how many rate cuts do you have, if any, in your NIM guidance?

2.

Okay.

Great.

And then on the...

Sorry, one in July.

Got it.

And on the investment management fee lines, the guidance of $83 million.

Does that incorporate the mark at the end of June in terms of price appreciation?

And does it consider any inflows, new inflows from clients?

It's based on the June 30 assets we report for First Republic investment management you see in the press release of about $61 billion adjusted for the anticipated outflow that we talked about from Luminous, which is about $4 billion more.

Our next question come from the line of Lana Chan with BMO Capital Markets.

Just wondering -- I was surprised to see what the comments on the competitive loan pricing that your loan yields actually increased linked quarter.

Were there any prepayment fees in that number this quarter?

So it helped maybe 1 basis point compared to last, so not a big impact.

Okay.

And any color in terms of where the end of period spot rate was on the loan yields?

So at the end of the first quarter, I think it was about 3.69, and it's about the same this quarter.

Okay, great.

And I guess the other question is in terms of -- your loan-to-deposit ratio has increased to 98% given some of the seasonality with deposits this quarter, how do you feel -- 99%, how do you feel in terms of the ability to fund loan growth going forward with core deposit growth, while at the same time being able to potentially lower deposit rates if the Fed does cut?

Yes.

So we have -- actually, we feel comfortable.

I'm very pleased with the mid-teens deposit growth year-over-year.

We do not manage to a certain loan-to-deposit ratio.

In fact, between 2012 and 2015, we have been over 100%.

I would go back to the guidance in terms of the mid-teens loan growth and the low end of the NIM range just around 2.85 for the NIM outlook.

So very comfortable with the growth opportunities and diversification of the deposit base.

Our next question come from the line of Tim Coffey with Janney.

So I had a couple of questions.

One, on the mortgage business and the loans that you're putting on portfolios specifically, the jumbos.

Are you seeing any structural changes within that business as a result of the state and local income taxes?

Not really, Tim.

It's surprising to us a little bit, but no.

And of course, that's been our business for a very long time, and our markets -- now almost all of our markets are in this what they call Salt States.

And so I would expect that we might have, but, as Gaye said, we've been -- we did over 50% purchase in the last quarter, and this next quarter that may be a little more refinanced, but -- because it's picking up because of the rate drop, but nonetheless, we're still doing a lot of purchase finance.

So it seems to be going just fine.

Okay.

And then -- and fully understanding that the mortgage sales that you do, do have -- recorded are kind of balance sheet related.

Can you kind of explain what happened to the margin this quarter?

I think I wouldn't look at that as a trend.

It's a very limited amount of sales that we did.

So I don't think it's anything unusual or a trend, it's just a fact that there are still few loans delivered.

Okay.

All right.

And then -- and the CDs that you're bringing on, what are the typical terms of those?

How long are you going out?

We actually have shortened compared to a year ago, which was over a year, like about 18 months weighted average original term we shortened and given the rate environment to less than a year.

About -- it's around 6 months.

Which will be helpful in catching up as we go forward.

Correct.

It looks like we do get another question.

Our next question comes from the line of David Chiaverini with Wedbush.

So you mentioned that none of the increase in the NPLs was related to rent regulation law changes in New York City.

And I know your construction portfolio in New York is only $400 million, so very modest for you.

But conceptually, do you expect any stress or pressure on your construction portfolio in New York as a result of the law changes?

No.

We don't, actually.

In our permanent loan portfolio in the rent-controlled buildings is only about $1.2 billion, and they composite that loan-to-value ratio in those buildings is about 40%, 42%.

The debt service coverage ratio is about 240, so we're in very good shape.

We were carefully reviewing our going-forward strategy on those buildings, obviously.

But we have been, for quite a while, rather conservative.

Mr. Herbert, we have no further questions at this time.

I would now like to turn the floor back over to you for closing comments.

Thank you.

Thank you, everybody, very much for coming into the call today.

We appreciate it.

Have a good day.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.