Flagstar Financial Inc (NYCB) 2020 Q1 法說會逐字稿

Good morning. This is Sal DiMartino, Director of Investor Relations. Thank you all for joining the management team of New York Community Bancorp for today's conference call. Today's discussion of the company's first quarter 2020 performance will be led by President and Chief Executive Officer, Joseph Ficalora; and Chief Financial Officer, Thomas Cangemi; together with Chief Operating Officer, Robert Wann; and Chief Accounting Officer, John Pinto.

Today's release includes a reconciliation of certain GAAP and non-GAAP financial measures that may be discussed during this conference call. These non-GAAP financial measures should be viewed in addition to and not as a substitute for our results prepared in accordance with GAAP. 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 and assumptions that could cause actual results to differ materially from expectations. We undertake no obligation to and would not expect to update any such forward-looking statements after today's call. You will find more information about the risk factors that may impact the company's forward-looking statements and financial performance in today's earnings release and in the company's SEC filings, including its 2019 annual report on Form 10-K. To start today's discussion, I will now turn over the call to Mr. Ficalora, who will provide a brief overview of the company's performance before opening the line for Q&A.

Mr. Ficalora, please go ahead.

Good morning to everyone on the phone and on the webcast, and thank you for joining us today. I hope that all of you are healthy and safe during this unprecedented time. Our immediate thoughts go out to all the individuals and communities impacted by this pandemic. We are also very grateful for the health care professionals and all those on the front lines who are battling this crisis every day. Before I discuss this quarter's performance, I would like to cover topics with you. These 2 topics.

First, I would like to share with you some of the actions we have taken across the bank to deal with COVID-19 crisis. It goes without saying that the health and well-being of our employees, customers and shareholders is of the utmost importance to management and the Board of Directors. The company was very proactive during the very early stages of the crisis and immediately enacted a business continuity plan and pandemic preparedness procedures. By mid-March, close to 100% of our bank office employees were working remotely. In addition, we temporarily closed all of our in-store branches along with several other locations, converted some to drive-up only and adjusted the hours at our remaining branches.

On the consumer side, we have enhanced our online banking and mobile capabilities, temporarily waived certain retail banking fees for those customers who may be experiencing financial difficulties during this time and offered 90-day payment forbearance to residential mortgage customers.

On the commercial side, we have proactively reached out to borrowers on a case-by-case basis to help them manage through this crisis as well. We put in place several risk mitigation strategies, including enhanced monitoring of certain credits, payment restructuring plans and deferral options consistent with regulatory guidance.

Second, I would like to clear up some misperceptions regarding trends in the rent-regulated multifamily market in New York City. We are not a newcomer to this market. If you recall, at this point, we have been doing this type of lending for over 50 years. We have relationships with some of the largest property owners in the city, and we have very strong ties to some of the biggest commercial real estate brokers, including the largest one servicing the New York City marketplace. We also have a -- as directors, several real estate professionals who participate in this market for a living, providing us with a unique perspective on the multifamily market. Over the past week or so, there has been some discussion about the level of rent collections in our market. With our conservative view on underwriting, we closely monitor a number of trends in the multifamily market. And when things change, we reevaluate.

During the month of April, we surveyed a wide gamut of our borrowers, including some of our top 20 borrowers. We broke -- we spoke to brokers, and we also reached out to a number of industry experts. Based on our market intelligence, April rent collections on the rent-regulated buildings in our portfolio are estimated to be in a range of 80% to 85%. On the market rent properties, it is even higher. This is very encouraging given the impact on the New York City area given the COVID-19 pandemic.

While there are still many uncertainties regarding how COVID-19 crisis will ultimately unfold, to what degree it will impact the economy over the long run, we believe that we are better positioned than most other financial institutions to navigate through it, given our strong credit culture and low operating model. While no 2 economic cycles are alike, I would impress upon you the fact that throughout various cycles, our actual loan loss experience has been much lower than the rest of the industry.

With that out of the way, let's turn to our quarterly results. Earlier this morning, we reported diluted earnings per common share of $0.20 for the 3 months ended March 31, 2020. That's up 5% compared to the year ago quarter and ahead of consensus estimates. Despite what is usually a seasonally slower quarter, we had strong loan growth, a higher level of net interest income and net interest margin expansion, lower operating expenses and stable asset quality metrics. We enacted the first quarter with positive underlying momentum, and we are -- a strong capital and liquidity position. Our results include a provision for credit losses of $21 million, that's 0.05%, far below industry metrics due to the application of CECL during the quarter. This reflects an additional reserve for the potential impact of COVID-19. This was slightly offset by an income tax benefit due to certain provisions under the Cares Act. That notwithstanding, we are very pleased with our first quarter performance.

We entered the year with strong fundamentals building off of a solid performance in the fourth quarter of last year. One of the highlights of the quarter is the improvement in both net interest income and the margin. After reaching an inflection point last quarter when these 2 metrics both increased for the first time in 5 years, they increased again during the quarter -- the current quarter. Net interest income, excluding the impact of prepayment activity, increased $9.3 million or 17% on an annualized basis compared to the previous quarter due to lower interest expense as funding costs continued to decline. The net interest margin also continued its upward trajectory. Also excluding the impact from prepayment income, the first quarter margin would have been 1.92%, up 2 basis points and in line with expectations.

We are currently very well positioned for further growth throughout 2020 in both the margin and net interest income, albeit at a higher rate than we experienced during the current quarter. This is due to our liability-sensitive balance sheet, the Fed having lowered its target rate to near 0 and the significant repricing opportunities embedded within our funding mix, especially on the CD side. We also reported a strong increase in pre-provision net revenue. PP&R was $135.8 million for the first quarter, up $8.5 million or 6% compared to the year ago quarter. On the expense front, total noninterest expense was $125.5 million, down 10% from a year ago quarter. The efficiency ratio in the first quarter was 48% and continues to reflect positive operating leverage.

Moving on to the balance sheet. Despite the usual beginning of year seasonality, total loans increased almost $400 million or 4% on an annualized basis compared to the fourth quarter. Specialty finance lending and multifamily portfolio continue to be the primary drivers of this growth. The specialty finance business had strong growth this quarter. This portfolio rose $415 million to $3 billion on a linked-quarter basis. Meanwhile, the multifamily portfolio increased $113 million to $31.3 billion, sequentially. As I alluded to earlier, given all that has transpired over the last 2 months, multifamily credit spreads have widened significantly due to market dislocation and less competition, similar to what has occurred in previous cycles.

Origination activity was also strong as overall originations increased 35% on a year-over-year basis to $2.7 billion, with both multifamily and specialty finance originations increasing significantly compared to the year ago quarter. First quarter originations exceeded last quarter's pipeline by $1.2 billion or 80%. Multifamily originations were $1.4 billion and specialty finance originations were $957 million, both up 40% relative to first quarter of last year. We continue to be encouraged by our potential loan growth over the course of this year. Our pipeline currently stands at $2.1 billion, 40% higher than the fourth quarter and year ago pipeline. Of the $2.1 billion, approximately 64% is new money.

On the funding side, our deposit growth continued into the first quarter as well. Total deposits rose $316 million or 4% annualized to $32 billion. Most of this growth was in lower cost savings and noninterest-bearing checking accounts, while CDs declined modestly. Wholesale borrowings also increased as we took advantage of the low interest rate environment to replace matured borrowings with lower cost, longer duration borrowings. Borrowings increased $375 million to $14.3 billion during the current quarter.

On the asset quality side, as discussed in more detail in our earnings release, we reported a $21 million provision for credit losses, mainly driven by COVID-19. Net charge-offs totaled $10 million or 0.02% of average loans, $6.5 million of which was taxi medallion-related loans. That portfolio continues to be in runoff mode and currently stands at $33.5 million. Importantly, we had no losses in our core portfolio. The adoption of CECL did not have a material impact on our asset quality metrics as they remained strong during the quarter.

Nonperforming assets declined $15 million or 20% to $59 million compared to the level at year-end or 11 basis points of total assets. As with charge offs, the largest component of NPAs is taxi medallion loans. Excluding taxi medallion-related loans, NPAs would have been $36 million or 7 basis points of total assets.

As noted in today's investor presentation, $18.7 billion or 60% of our total multifamily portfolio is subject to New York state rent regulation loss. The weighted average LTV on this piece of the portfolio is 53% compared to 57% for the overall multifamily portfolio, unchanged from the previous quarter.

Lastly, we also announced that the Board of Directors declared a $0.17 cash dividend per common share for the quarter. The dividend will be payable on May 19 to common shareholders of record as of May 9. Based on yesterday's closing price, this represents an annualized dividend yield of 6.6%.

Before moving on to your questions, I would like to make a final comment. At NYCB, we are not just a community bank, we are a family. And when things get difficult, our family comes together. I am extremely proud of all the efforts everyone -- every employee has made to ensure that we continue to service our customers. This has been a very challenging, stressful period for everyone, and I am proud at how the entire organization has come together and risen to the challenge. A very big collective thank you to all of our 3,000 employees throughout our franchise. Lastly, our prayers go out to all those members of the NYCB family, past and present, who are suffering from COVID-19 and particularly those employees, their families and friends who have lost to the disease.

On that note, I would now ask the operator to open the line for your questions. We will do our best to get to all of you within the remaining time but if we don't, please feel free to call us later today or this week.

(Operator Instructions) Our first question is from Ebrahim Poonawala with Bank of America.

So I guess just to follow-up to your comments about the multifamily borrower base. I guess my sense is we'll probably see an uptick in rent deferrals when we look at the May 1 week data. So those numbers probably go from 80% to 85% to something lower. So would love to get your thoughts on that. And additionally, if you can talk about just the strength of your customer base. You've given us the LTVs in the low 50s. What's the risk in terms of -- from a credit standpoint to NYB? And what level of payment deferrals have you provided to your clients in the last month or so?

Tom, do you want to take that?

Yes, sure. So Ebrahim, it's Tom Cangemi. Joe can address the market, but I'll clearly give you the specifics on what we've done with our customers. We were very quick to react to, obviously, this pandemic to support the customer base. So we offered right out of the -- mid-March, when the government shut down the country, the ability for customers to come to us and defer for a period of 4 -- 6 months. And part of that deferral was they have to be current at the time they've entered into a deferral agreement, and they have to be also paying their escrow payments throughout that period. But that being said, we -- actually, as of yesterday, which is almost starting of May, we have approximately $3 billion of multi or 9.63% of the entire multi portfolio that's in a deferral agreement. If you think about the entire portfolio and add to it CRE, it's approximately $4.8 billion and the CRE piece of that, I believe, is approximately $1.8 billion. And the total percentage of the CRE is approximately 26%. So all in, it's about 12.6% of multifamily CRE of $4.8 billion, and the LTV of that portfolio that's on deferral is 57%. And that's as of yesterday. So that's real time.

And it's a 90-day deferral, Tom, like, what do you say, like, is your expectation...

That's a 6-month deferral, 90 days on the residential side. That's right.

And if we start seeing these lockdowns kind of open up, let's call it, somewhere around in June, July, is your sense that most of these borrowers or all of these borrowers would go back to being current coming looking out into third quarter, towards the end of the year?

So Ebrahim, we don't have a crystal ball, but I can give you actual specific collections as of yesterday. We're looking at, when you take into account the deferrals as well as people that had not deferred, we're up to 97.73% of April collections compared to all of the previous months around the same level. When you back out deferrals for the multifamily, that's at 91% versus 97%. So we're really not seeing a significant adjustment here on payments coming through. So we're very pleased on the current collection efforts that is going on as of yesterday.

Understood. And just moving away from multifamily, Tom, anything when you look at the other CRE book, I think CRE retail is obviously under the scanner, or just talk to us in terms of the risk exposure there, particularly to any more retail, high-end? And also, is there any risk on the specialty finance book, which has grown a lot over the last couple of years?

Sure. So obviously, the percentage of deferral is higher for commercial real estate, in particular, looking at retail and office and the like. So we expected that, especially on the mixed-use properties. Let's say, the highest percentage will be the mixed-use properties where you have smaller buildings that have a higher concentration of retail on the ground floor, and you have residential above that. That number is in -- probably in the 40 percentile. When you think about pure, we'll call pure retail and office, 23% for office and professional buildings and retail is at 27%. When you blend that, those numbers in for the portfolio, it's 26%. But clearly, the higher level is going to be, as expected, there's no revenue coming in, in the ground floor.

On the multi side, we happen to have some very interesting statistics. The larger of the buildings, the much lower the amount of deferrals. So it's the buildings that have in excess of 100-plus families living in the building, that's like a 6% deferral rate, so it's much lower. So it's 6% [type] versus the retail, which is -- could be substantially high because there's no revenue coming through.

On specialty finance, I would tell you that as we stand right now, everything's current. I don't know what's missed payments. We feel pretty confident in the portfolio given our senior security and our position. And we've been growing that portfolio very nicely. And again, we're an asset-based lender. We feel that we don't have significant exposure that's COVID-related. We do have some energy, a couple of hundred million dollars in energy, but that's all super senior secured to very stable institutions.

And on the auto side, which is dealer floor plan, we believe that portfolio will do well, given the PPP program as well as the ability to get up and running towards the end of the year with the -- with their options to take on deferrals and eventually get these dealerships open up again. So we think that portfolio, we should have 0 losses in the specialty finance business.

Got it. That's helpful. And just one separately and last one on the margin. So you have a ton of, like, funding coming up for refi. Just talk to us in terms of the new deposit rates offered. And if you can provide some cadence of the interest rate backdrop, if it stays where it is given the spread widening on the lending side, like what level of margin expansion should we expect between now [going] on just one quarter? But if you can talk to just in the next few quarters, like what's the level of margin you expect to end 2020?

So I'd say big picture, as we talked about going back to 2019, we said there's an inflection point in the fourth quarter, the margin starts to rise in Q4 with the anticipation of seeing significant rises going to 2020, with the exception of substantial adjustments in interest rates. Obviously, the Fed has intervened here, so around a little close to a near 0 Fed fund rate. With that being said, we did hit our guidance for Q1, as expected, up to. But when you think about second quarter margin, we're seeing more likely a double-digit margin expansion. We believe that throughout 2020, we anticipate double-digit every quarter. So we're going to have substantial margin expansion, given our liability sensitivity balance sheet. And more importantly, we have substantial amount of CDs coming due as you can see from the press release, we put the numbers out there, it's approximately $14.8 billion coming due. And in the second quarter, it's $6 billion coming due at a [235]. And in the event that you have a CD rolling off in this environment, you're going to end up in a probably, like it or not, a level well below 50 basis points. So I think if you think about the potential there, $6 billion in Q2, Q3 is almost $5 billion at [206]; these rates are coming down well below 1%. So the margin is really going to be driven by a number of factors. We have the CD costs dropping materially. Funding cost is dropping on the borrowing side. If you look at where borrowings are right now on 2-year bullets at 74 basis points where the swap is close to effectively 0. And you think about the money coming due on the borrowing side, and if we're growing the portfolio, depending on how we grow with deposits and no borrowings, the cost is relatively achieved.

But more importantly, there's been a real change in pricing in respect to the multifamily CRE space. I mean, no question that there's been some dislocation where CMBS players are on the sidelines. You have the agencies tightening up their standards. So we're looking at north of 300 basis points increase in our product mix. So if you were to come to the bank today, where they, we'll call it an A-type credit, 5-year structure, our typical bread and butter structure, you're at a 3.5% coupon. That's pretty attractive compared to where 5-year treasuries are trading at right now.

So we're very bullish about economic spreads on the product mix. We're extremely bullish on the drop in the cost of funds. So we can see double-digit margin expansion every quarter throughout 2020. And that will be -- assuming credit costs are in check, you're looking at EPS growth in the mid-teens.

Our next question is from Brock Vandervliet with UBS.

Could you kind of dive into the multifamily credit spreads? I think we all saw the dislocation in March, it seemed like the GSEs kind of pulled themselves out of the market. Why doesn't this mean revert? And how much of that aggressive margin guide is based on the current pricing holding?

So again, we don't have a crystal ball what happens with interest rates. But clearly, it seems like rates are going to stay low for a while here given the pandemic and the circumstances. So we have in our run rate for let's -- we'll just talk about 2020, Fed not doing anything in 2020. At the same time, we've been through many crisis and cycles, and we've seen adjustments within the marketplace. And clearly, go back to the 2008 adjustment. You had massive dislocation. You had CMBS. You had the agency out of business back then. So it doesn't -- and we're not saying that the agency's out of business, but the agency has clearly tightened their standards. They've widened their spreads. There is a premium risk reward that's priced in the marketplace, and we're enjoying that healthier spread. I think what's most important here, when we talk about asset growth, we're anticipating 5% net loan growth.

But we're seeing substantial favorable results on retention as we ended up the quarter. So as we go into Q2, we think our retention level will be higher, and we have well over 13 -- $16 billion in the next 3 years coming due from our own customer base. So we believe we'll retain a high percentage of that unlike we did last year. So I think the fact that the competition has waned significantly, 300 basis point spread with funding costs coming down to 0, it can be a very powerful margin expansion story here at NYCB.

Okay. And you were going through these numbers very quickly. Could you just review again the CRE and multifamily forbearance percentage?

Sure. $3 billion as of yesterday that we've entered into agreements on forbearance for multifamily. A $1.8 billion for CRE, which is office and retail, predominantly. On a percentage basis, it's 12.6% in total, 9.6% multi, 26.4% on CRE. LTV in the total portfolio is 57%, of that deferral.

Our next question is from Steve Moss with B. Riley FBR.

On the loan growth here, I just want to see -- you're talking about pretty strong pipeline here. Any thoughts -- any updated thoughts around total loan growth here for the year?

So Joe, do you want to handle that one, Joe?

I think the idea here is that as always is the case when the market is stressed, we get a greater share of the market. We do believe that we'll be growing our loans at least at the levels of last year and well likely in excess of the levels of last year. So the important thing is that in this crisis, our principal asset will greatly outperform and our ability to take share of the marketplace will increase. Both of those factors have always been the case in a stressed environment. We do believe that the period ahead will represent an environment where many of the other lenders in our niche, will lend less, and we will lend more.

Steve, I would just -- some color on our projections. Obviously, we're projecting a mid-single-digit, which is 5%. We're pretty bullish about the pipeline. And more importantly, going back to my dialogue as far as retention, it feels like our team has done a phenomenal job on really conveying that we're really fighting for that retention. So we moved that retention rate back up to historical norms, which typically will happen when a lot of competition is waning, we should see the potential, as Joe indicated, of higher growth. But for conservative purposes, we feel comfortable that 5% net loan growth is reasonable for the company. And I think this year, you'll probably see more on the multifamily side, then you'll still have strong growth on the specialty, but multifamily should be the back-loaded here, especially in Q2. Obviously, Q2 is usually a strong quarter for us.

Great. And then just in terms of underwriting standards here, any changes as you're getting new customers approaching the bank?

So I would add that we've had made some changes, obviously, given the marketplace, we've tightened the standards, in particular, when cash money refi coming out of a transaction, we feel that we have a lot more flexibility now given the marketplace.

So we're actually -- when we do a transaction with a cash out type refi, we're actually holding 6 months of both P&I and escrow payments in escrow with the bank. So that's one of the major changes we've done in this environment. And obviously, you can imagine that when the environment gets tighter, we're one of the tightest underwriters in the marketplace. So we're going to continue to be there for our customers, but we're going to be there at a very conservative level, and that's the hallmark of the company.

Great. And then on funding costs here, interest-bearing deposit costs down 12 basis points. I hear you in terms of significant repricing. Just wondering if you could put a little bit more in terms of what you would expect this quarter versus the first quarter?

So I would say the continuation of substantial declines in deposit cost is real. We have a unique situation going, in particular, we were in the epicenter, so it's very difficult to go out to the branch and change their deposits when CDs are coming due. So many people are just very comfortable for safety reasons, keeping their cash in the bank. With that being said, that's people that were at [2.75%] last year or [2.50%] are going down to close to 2 basis points today until they come back to the branch and or make a phone call and try to get a higher rate. And my guess is that given where the marketplace is, you're looking at rates that are going to probably be south of 50 basis points for between 1 or 2-year type period. We do have an offering now, but there's no real takers on that type of coupon at 75 to 90 basis points. But the reality is we're going to be continually lowering our rates unless there's a change in the market because we're looking at close to 0% interest rates. And being a thrift, we're very stable when it comes to targeting to some spread off of the U.S. treasury, which is at a very low rate. So we feel highly confident that the substantial amount of coming due of $14.7 billion, in particular, Q2, $6 billion in the middle of the epicenter at 235 will drop materially lower for us.

Great. And then just on the energy exposure that you just mentioned, Tom, you said a couple of hundred million in energy senior secured. Just wondering what type of loan it is and where it's located?

It's equipment for -- Schlumberger is our largest client there. They're household name, large institution. We've been lending to them for multiple years since we started the business, and they've drawn down on some facilities. But it's all super senior secured, and we have it at a pretty high rated in our scale. I think it's worth a 5, John? 4, 5? It's a high-rated internally classified asset however, we feel highly confident that it's money good, and in particular, it's a household name that has very strong fundamentals, but more importantly, it's super senior secured. So it's not a loan to Schlumberger the corporation, it's on its equipment.

Our next question is from Collyn Gilbert with KBW.

First question, just on the pipeline, really strong pipeline, obviously, this quarter. Do you have a sense of sort of how that's going to behave going into 2Q? Tom, I know you just mentioned you expect strong loan growth in 2Q. But just curious kind of where your -- what your borrower behavior is, how closings are getting done? So maybe what the pull-through rate is on that pipeline and then also what the blended rate is on that pipeline?

So let me take the easy one for us. The blended rate is about 3.26% as of yesterday. But if you think about how it evolved, when you go to the end of the quarter, spreads widened out materially. We started with the rent regulatory changes in last year, where we went from 150 to 200 basis points because of the change in the rent control markets. And then we hit the pandemic, now we're north of 300. So it really was a change in the marketplace towards the back end of the quarter. So this is more of an evolving pipeline that we're going to see throughout the year. But the business that we're out there getting good flows of opportunity right now within our own portfolio and others, as you indicate, our new money pipeline is about 64%, you're seeing a much higher coupon relevant to the current -- the widest side at 3.25%. It's going to take some time to work through the bank. But clearly, we've never -- I don't think we've ever closed less than what we've announced in our pipeline. I can't remember ever where we announced the pipeline, and we didn't close it at a minimum of our pipeline. So we're looking at a $2.1 billion pipeline in Q2. So you'd assume we close that and some.

And Collyn, one thing I would say as a provisor, assuming that the market reopens, right? We did this -- we had great closings in a very difficult environment, where we had to get attorneys together, appraisers together. We get actual appraisals. We're not -- we are in the marketplace, closing loans on a daily basis with all these operational issues that are out there. Assuming that the country reopens that will only be better for us.

Okay. But your assumption that you close that pipeline, like let's just say things don't open, certainly not New York City for, I don't know...

Assuming the lawyers are in business and assuming that the banks are still funding, we'll be funding. We went through a pretty difficult March and April, right? So -- and we had some very significant originations. We had substantial originations.

Okay. Okay. And then just on the amount that you deferred, you gave the 57% LTVs on those loans. Do you know what the debt service coverages are on that?

Yes. Yes, sure. Debt service covers at [1 74] for the -- that's the commercial real estate portfolio and [1 53] for the multi.

And that's for the deferred loans or that's for the broader book.

That's only for the deferred loans. That's right.

Okay. Okay. That's helpful. And then of those deferred, how much of those were going to be coming due contractually anyway this year?

I don't have that number for you. I would -- again, I would guess probably not many, but I can follow-up on you off-line on that. I think what's interesting about the program. We were very active. And obviously, it was publicized within one day that we're doing this. So people -- when you read the real deal, it's public that we're doing this program and people call and we offered it. And more importantly, we've done our own due diligence on each customer, right? And the fact that you have to have your escrows current, you have to be current on the payment, and we work out a 6-month arrangement. We think that liquidity backstops for them, for the next 6 months, will be very helpful to get to the other side of this problem we have, this pandemic in the United States. And we think that 6-month time should be reasonable. We could have done a shorter period. We think 6 months is more reasonable because it's going to take a few months here to guide us, in particular, on the ground floor for businesses, but we think it's a reasonable time frame that we can at least have the landlords work it out with their tenants. So we can move forward and be there -- and be supportive of them given the crisis.

Okay. And along those lines, and you sort of answered it, but just broadly, right, so obviously, sitting in unprecedented times, your book has not been tested to this degree, I don't think -- I wouldn't even say 9/11 tested it like it does right now. How does that impact the way you're thinking about the reserve? I mean it was a modest reserve build this quarter. Just kind of broadly, given the risks that are out there, how are you thinking about that?

So Collyn, I'm going to actually defer the time-tested to Joe Ficalora, he's been with the bank well over 50 years. Joe, maybe you want to talk about the time-tested as far as your experience in multiple decades, more than I have?

Well, I think the good news, we are structured such that this adverse change, which, of course, was not anticipated, is not all that different than many other reasons why a marketplace deteriorates and payments are deferred or otherwise evaporate. The environment we're in presents challenge. But none of this challenge actually changes the reasonable expectations that our owners will, in fact, remain stable, our buildings will remain stable and much, much more importantly, we cultivate relationships that are way bigger than isolated properties that are funded by us. The very people that have each and every loan with us, in many cases, are extremely large players in the New York market and they have long history with us and the opportunity that a deteriorating market represents. And in every deteriorating market, the large players buy. And in every circumstance, when they're buying in a deteriorating market, we fund. There is a very big difference between having a relationship with us and having a relationship with a giant bank or with another bank. Many other banks literally vacate the space because they're experiencing so much adverse performance they're not willing to continue to lend within the space. We are not having adverse performance, and we gain share during periods of crisis. The period ahead will literally provide for us additional market share, and that additional market share will give us the ability to grow our book with good product and better than existing rates. The ability for us to earn on our principal asset go forward is actually better than it has been for a long period of time.

Collyn, I'll address the reserve point. Joe did a good history of the bank. And obviously, he's been here for many decades. As far as the reserve is concerned, assuming COVID did not happen, we guided in the first quarter for CECL that we wouldn't -- there'd be no impact at all other than the transitional adjustment that we took. So just if you take COVID out of the equation for the first quarter, you're looking at probably close to a 0 provision in first quarter 2020. So that's kind of how we looked at the COVID analysis. In particular, we actually did some more quantitative adjustments just because of the Moody's change on as far as their view of unemployment going into 2020 in the second, third quarter. So we're a conservative institution that has a history of really no losses in the marketplace. And these are predominantly residential units that are housing people in the city of New York. So we feel highly confident that our loss content is low. But we booked a sizable adjustment that we didn't anticipate because of COVID-19.

Okay. All right. And just lastly, I wanted to clarify, there was some confusion, at least to me, the way the press release was written, and I know the share count move happens in the first quarter. What was -- how many -- what did you guys buy back this quarter?

It's in the press release. We were slightly active, and we have a little bit left, and we'll evaluate the market depending on market conditions, but it's really not -- it's not a material number left as of -- yes, it's very small. A couple, is it $30 million left? So in the buyback is not significant, that's left. But we did buy shares in the quarter given the price action in the quarter. Sure.

Okay. The actual share number is in the press release that you bought back this quarter?

I think the difference, right? We have the numbers on the second page, John? Yes. It's in there. Second page.

Okay. And you did not issue any shares then in the quarter? Isn't there...

Just normal plan-plan. It's netted against the plan. When you look at the share count in the back of the documentation, it's netted against what's issued to shares. So I would say the probably what we bought back is what we've issued for MRP shares. No significant change there. We don't have a material buyback in place. It's insignificant.

It doesn't mean that we're not buying back shares, right? So we're not halting anything. We feel very bullish about our business. And obviously, very -- and we pay a very strong dividend. We're comfortable that given the guidance I gave you, albeit credit issues, which were unforeseen credit issues, we're looking at significant EPS growth, and more importantly, double-digit margin growth every quarter throughout 2020. And you'll see growth continue through 2021, but I don't want to get too ahead of myself. But clearly, this has been a significant change of our funding cost going forward. So you'll see Q1 up to 10 basis points Q1 versus up to -- I'm sorry, Q2 versus up 2 in Q1. That's a substantial change. We envision that change continuing in Q3 and Q4 as well.

Our next question is from Dave Rochester with Compass Point.

Just back on the CRE book real quick. What was the total retail exposure you had? How large is that segment roughly? And can you just talk about like a rough breakdown of that, what that is, whether it's mixed-use, strip centers, whatnot?

So again, we have approximately $1.7 billion of retail store class shopping center, of which we have indicated about $470 million of that is deferred. That LTV in that portfolio is like 56% with a [1:70] debt service coverage ratio. As far as further breakdown, we do have office and professional buildings in the CRE book, which is the vast majority of it. That's about $3.5 billion, of which $830 million is deferred, which is 23%. And that LTV, I believe, is about 52% with a [1:85] debt service coverage ratio. So a lot of it mostly in the Manhattan region.

Yes. And pretty low LTVs, too. That's good.

Yes. I mean, we have a handful of garages. There's no people going -- parking garages, so that's going to be deferred. And it's not material for us, but you'd expect that to go for deferral program until they start opening up the city again.

Yes. And then you guys gave some great color on the cash flow trends for the rent-regulated multifamily piece. And I know you hold most of that at a 50% risk weight given the loans meet certain debt service coverage and LTV requirements. I was just wondering what those thresholds are for debt service coverage in LTV that they have to continue to meet in order to maintain that capital treatment? And then do you have -- and then the loans have to switch to 100% risk weight if you trigger 1 of those thresholds? Or do they have to trigger both? How does that work?

Yes. So it's [1:20] is the number, 1:20 and 80% LTV, 1:20 . And we've been in constant dialogue with, obviously, our regulators, but the reality is this regulatory expectation under the Cares Act is to work with the customers. We're getting some very good latitude now based on this change under the 50% versus 100%. We envision that after these customers come off a deferral, they'll be treated as if they were 50% risk-weighted. That's what we're expecting. Could that change possibly? We don't expect that to change. We believe that the Cares Act was very clear for the banking sector to work with your customers. So I believe that we'll have some grandfathering in when we make these deferrals. When they come back, we hope that there'll be cash flowing north of that 1:20 and the LTVs will be well insulated. So we should have -- we don't know if that's going to be the final ruling what the regulator decide a year from now. But clearly, there's a lot of regulatory guidance, and we've been working directly with the regulators as far as some specific guidance given our business model. And it appears that under the Cares Act, there's a mission here for the banking sector to step up and do right by the customer base. Given our LTVs, given our business model, we feel highly confident that these -- when we get to the other side, people will be living in Manhattan and the 5 boroughs and paying their rent.

If you have to restructure any of those and the restructured loan actually meets all the criteria? Is it okay? Or if because you've restructured it, it actually has to go to 100% risk weighted?

I think that will be fine on the restructuring. But again, I don't want to get the cart before the horse here. Again, we feel highly confident that as we get to the other side, people are going to be living and working in the city, and we believe that there's still a housing shortage in Manhattan. There's still a rent-regulated shortage in Manhattan. So we think they'll be fully occupied. And we're not in the luxury market. We're nonluxury lenders, right? So even though our buildings have a blend of rent-regulated, the other -- the piece is nonluxury for the most part. So we have a unique portfolio. So any event the market was to reprice itself down as far as rentals, we're insulated because we're not looking after the luxury market. So we feel pretty confident about. We don't have a crystal ball. This is a -- as Collyn said, untested times, but we're working with our customers and given the percentage that has occurred. The goodness in the past week or so, we haven't seen any uptick of more people asking for deferrals. So we're almost sitting here in May. We think a lot of that's been out already. So we'll monitor every month and the next time we speak to you in next quarter, we'll have an update. But the good news is that here we are coming into May, and we didn't see the spike in additional requests.

Yes. Okay. And then how often do you have to do that 50% test? Is that once a quarter or once a year? And when does that typically have...

We do it every quarter, depending on what loan comes due as far as they review. Sure. Quarterly, quarterly announced. By the way, it's all automated quarterly.

Cool. Okay. And then maybe just one last one on expenses. How are you thinking about that trend at this point? Is that -- you were talking about [5 15,] maybe for the year in the last call. Is that still a level you think you can achieve?

So yes, it seems that, look, I think Q1 was better than expected. I think Q2 will probably be slightly better-than-expected internally, so anywhere from [1 28] to [1 29-ish] is just slightly south of [1 30] and then maybe flat for the rest of the year. Again, we're not seeing a ramp-up in expenses now. We don't anticipate substantial expense because of COVID-19, but we'll evaluate that as we move along here. But I would say, based on absent the pandemic versus last year, I think our expense guide is that still within that range. I don't see any major change here. I would say the only real change is that we haven't completed our conversion, and that would have probably added some savings, but it gets postponed because of the stay-at-home order. We anticipate to have that once New York opens up, hopefully, by the summer, we'll be able to do the full conversion.

Our next question is from Peter Winter with Wedbush Securities.

Tom, the loans that reach contractual maturity and then get refinanced. Can you just talk about what's happening to the LTVs with those loans? And also what's happening with the cap rates post the new rent regulation loss?

Yes. So we've evaluated our cap rate post, I think, prepandemic, and we actually saw a slight drop in cap rates, believe it or not. We didn't change the way we viewed our stress testing because of that. We do it every 6 months, we evaluate the market. So from June 30 to 12/31, cap rates actually trickled down a little bit, believe it or not. So in our internal analysis, when we look at stress testing and how we look at the potential risk, we assume we kept it flat without decreasing it. I would say that it's too early to tell how that's going to pan out in this environment. But interest rates, again, near 0, we have a higher spread, but you're still talking about a mid-3% type coupon. So we haven't seen any noticeable changes yet. Who knows what happens in the next 2 or 3 quarters out, but clearly, no noticeable change in cap rates.

And with that being said, when we have loans that come due to us, we haven't seen any situations where customers can cash flow out on a refinance. If anything, customers are still actively taking down funding because they've improved their rent roll. They've been working -- so these are, I would say, delayed refinancing. It should have -- and when you have an average life that's just short, you'd assume that the portfolio is so short because the people have delayed their refinancing. So they still have equity built, and they're still drawing down equity. And like I said, given this environment, given the nature of the difficulties in the environment, we're actually tightening our standards on refi cash out, where we're actually holding escrow both taxes and P&I payments for a period of 6 months as part of our strategy to mitigate risk.

Got it. And then can I just ask about how big the PPP program is. And with this downturn, is it an opportunity to take market share from the larger banks aside from the multifamily business?

Yes. So Pete, for us, look, you know we're not a C&I lender. So we're a commercial real estate lender and multifamily. So we got geared up. We were a little bit late on getting geared up. We worked with a third-party provider. So we partnered with a third-party provider, and we were very active on the second round. So our PPP numbers are going to be between $100 million to $200 million at best. However, a lot of the customers that we have internally, we're putting through the system, and we're getting great success. Our team has done a phenomenal job in getting it up and running. But the -- it's interesting, this is more anecdotal. A lot of our -- we'll call customers from other banks, Bank of America, JPMorgan, Citibank, in particular, where they had no results, these are smaller businesses that were left behind on the first round. We put them through the second round, and they were successful. And believe it or not, they're switching their account NYCB. You still have to go to the vetting process. So we'll have to go to the BSA process. There's a lot of work but many small businesses were left behind locally. So we're there for them. We're actively taking some new business, but I won't say it's going to be material, but I think on an anecdotal basis, there's no question that the larger players were protecting their book. And we were there to pick up a handful of crumbs here and had to help out the local community. As Joe said this morning, it's a family here, these are local businesses that need help, and we're going to -- here to help the local community. And not a big number for us, but we are in the program.

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

If we go back to the beginning of the call, when Joe mentioned the sort of implied survey of the 85% collected in April. Would that number get stronger in May and June, do you think? And does that ultimately kind of square with the deferrals that you've talked about this morning?

Joe, you want to handle that one?

Yes. I think that number does continue to strengthen. We're in a very, very good place with the relevant players in our niche. So our ability to not only have a performing portfolio, but a growing portfolio in the period ahead is quite real and is very consistent with how we perform in other stressed environments. We should assume the period ahead to be stressed. And during that period, we will gain share of what we want from the marketplace. And therefore, has always been the case, during periods of difficulty, we do not just better than our peers, but better than we historically have done. And this environment presents opportunity for us to lend favorably in greater numbers, in the environment in front of us.

Yes. So Chris, I would just add to Joe's commentary. Big picture, our portfolio, we're a very large player in this marketplace. So we have hundred plus families in some of these large buildings and clutches of buildings. When you think about the percentage of deferral versus all the other deferral, it's the lowest percentage; that means we're getting significant rent collections. These are very sophisticated billionaire property owners that have deep valued equity that are going to protect their investment. But more importantly, they're not even asking for deferral. So of the programs out there, only 6% has come to the table on the 100-plus family dwellings, which is very encouraging. Now the smaller ones, obviously, it's a higher percentage because you have that ground floor issue, you can have 0% revenue coming in. So going to the next months ahead as the country opens up and the city opens up, and they start working out their lease arrangements with their tenants, we envision that in the next 6-month period to start to stabilize.

Great. That's helpful. And just a follow-up, Tom. My impression has been that you still are sitting on enormous liquidity to deploy. And that liquidity really presents new opportunities for you, both on the investment side as well as loans as you documented. So will that kind of get put to work in the next 2 quarters? Or do you think it's going to take into next year to really deploy kind of your full horsepower?

So Chris, we do have a lot of liquidity on the balance sheet. We have excess cash. We sold some securities going into the second quarter, actually end of the -- middle of the first quarter, given that we felt the rates were going to go much lower than where they were. These are floating rate securities that would have been having close to 0% yield. That was about $300 million to create a lot of cash for us. We believe that will be put right back into our core lending product. So we want to stay liquid, we want to have the liquidity and the cash to fund our net loan book. I don't think there's a lot of value in the securities market right now. There was maybe a 1 or 2 week blip during the end of the quarter as the market dislocated. But it seems that given where the treasury is very active on buying all asset classes, we will probably keep the securities portfolio relatively flat because we don't need any risk reward opportunity there and put it into our loan portfolio, which, as Joe said, as Joe indicated, if this continues and we're in a difficult cycle, we tend to have significant growth. We're only forecasting 5%, but you can easily see a substantial number of growth because of the retention that we have within our own portfolio and the lack of market players willing to step into this market.

Our next question is from Matthew Breese with Stephens.

Looking at the borrowings book, I've been surprised that the costs there haven't come in more. Can you give us the breakdown between the structured advances and the classic advances? And help me better understand how the structured advance side behaves and reprices relative to changes in the yield curve?

Yes. So we have what, about $8 billion, John. That's...

Yes. $8 billion in puttables.

Yes, $8 billion in puttable. It's interesting because, obviously, in January, the environment was different at the end of March, right? So we had some money coming due in the beginning of the quarter. We refinance that at lower cost based on what was coming off. However, where we are today, that number is close to 0 if you hedge it, if you put a derivative against it. And if you just go with straight bullet, you're still at a number that's probably, what, 50 basis points, 45, 50 basis points or 74 basis points for 2-year bullets. So I think the cost is coming down materially, we would have been active when we look at the opportunity to get a unique swap opportunity. So that probably drives it maybe anywhere from [25] to [50], depending on the anomaly of the marketplace and there's been a lot of anomalies. So you could effectively borrow money, swap it out from float to fix -- fix to float, and then you're looking at a 0% effective interest rate, which is unique. But the reality is that it's significantly lower than our current cost of that's coming due, which is around 2% in 2020, the remainder of 2020. We have about $1.2 billion coming to this quarter, another $300 million and $400 million in Q3, another $300 million at the end of the year, and they're all around 2%, $185 million is Q2 and then the back half of the year's $238 million -- so $238 million for the 6 months ended. So again...

I'm sorry, are you putting that on -- at are you more apt to put on the structured with a swap at 50 bps? Or are you going to take the classic at 75?

We may just keep it short in this ball, 45 basis points in home loan bank. I mean, we have opportunities. We don't see the Fed actively driving interest rates higher here. So we have options, right? But the options are still all well below 1%. So conservatively, in our model, we have high cost. I gave you double-digit margin expansion with expensive funding. So I'm assuming our funding will be cheaper. So I'm hoping my guide on my margin is even conservative, up double digits.

And is that the risk to that portfolio that interest rates go higher and the Fed has -- the federal home loan has the right to call it?

Well, it's not that they call it. Yes, if rates go up 400 basis points, they're going to call it. But again, if you think rates are going up 400 basis points, that's not what we're running in our model. We have the Fed remaining flat this year, I'm not going to talk about 2021, I'm talking about 2020, and I don't envision any real changes to policy given the current situation. With that being said, in the event a puttable structure gets called and rates are up, you have to have a higher borrowing costs. That's correct.

Okay. Understood. And then what's the incremental securities yield? Debt book, I mean, on a quarter-over-quarter basis fell quite a bit. Just curious what the incremental -- what does it look like? What -- if you do buy, what are you buying and what's the yield on it?

Yes. So like I said, we're not buying anything. We're just keeping it flat. So if we still get called out, we have some calls expected. So let's just say, we may have a few basis points bleed next quarter, if not could be flat this quarter, depending on what -- what prepays and speeds. We do have some mortgage-related securities. It's all the agency for the most part. So we're not really in the market buying. So I would say that unless we see a significant dislocation in security yields and is attractive opportunity, we'll keep it flat.

Okay. And then I appreciate the retail exposure in the commercial real estate book. Just curious, is there any additional retail exposure in the specialty finance book? And what's the health and characteristics of those borrowers, if there is any?

I would say, I mean, we have a handful of maybe some grocers, some household and grocers that have been very successful, of course, their business is booming right now. So they've been drawing down on their facility. But I'd say for the most part, especially finance group has been performing its stellar performance. We haven't had a delinquency since we've been in the business. And as far as our ratings, we're very comfortable with all the credits we have, we're very selective. We always talked about that, that what we see 96% or 90% of the re-decline. So we have large relationships, Amazon, some Intel papers, some very big large household names. But we're not the lead bank. We participate on where we feel it's low risk. And again, this is not a high-yielding portfolio, but it's a low-risk portfolio. And it's super senior secured. I would say on a deferral perspective, you're probably looking at maybe $200 million of deferrals on auto. But we think that the auto sector will be fine this year. And by the end of the year, that stuff will off of deferral, and they'll be back in business. And by the way, all these clients in the auto have access to PPP, and they've all been funded. So we feel pretty good about that.

Okay. Last one, just on capital. How comfortable are you operating at these levels, especially as New York City is the epicenter and economic conditions do remain uncertain?

So again, I would say very comfortable. Obviously, we're going to earn more money this year, assuming that credit holds itself. We've taken a sizable provision for COVID-19. Absent COVID-19, we talked about CECL, we didn't expect to have any real provision in the quarter other than the transitional adjustment. So we think that our portfolio performed very well in this environment. We are not a C&I lender. We do have tenants that -- that bandwidth that have tenants that have retail and they have to work that out. But given the deferral program, we think that as they open the city, as they open up America, we should be in a good place.

And our final question is from Ken Zerbe with Morgan Stanley.

Just in terms of the margin, I guess I'm a little surprised that you don't get more benefits sort of near term. And it sounds like you get, as you said, double-digit NIM expansion sort of every quarter over the course of the year. Can you just talk about like why it's, I must say, so consistent over the course of the year?

Is it just because of how your deposits are...

So rates are 0, close to 0. So pretty much the entire liability side of the balance sheet is getting close to 0. So that's the major driver. At the same time, we do have lots of loans coming due, and we're not getting bleed on the loan yields going forward, and the coupons are reasonable. They're not spiking, but if you take the cost of funds close to 0, and pretty much all of our -- most of our retail funding is tied to short-term funds, right? So like I said, $6 billion plus this quarter is at [235], and there's really no high-cost opportunity in the marketplace. We don't envision customers leaving the bank to go somewhere else. So -- and as that's being said, we still have the ability to borrow funds that are close to 0. So I think that the funding cost is clearly driving this opportunity. And at the same time, asset yields are holding up very nicely. So you're going to have, like I said, double-digit margin growth in the second quarter. We envision that happening in Q3 and Q4 as well. We talked about Q1 being up 2 basis points. We hit our guidance. The pandemic hit towards the middle of March and the Fed started cutting interest rates. We actively cut interest rates, and then we're going to see that benefit going right into Q2. Again, we don't know where the market is going to end up on short-term funds. But given that where the country's position is, my guess is that rates are going to stay relatively low in 2020. And most customers are not going to go past one year to restructure their CD portfolio. And as we continue to build savings accounts and operating accounts, that will also benefit a very stable cost of funds for the bank.

Got it. But in terms of the timing...

Ken, just want to go back. Just remember, we had 5 years of not seeing NII growth. We were positioned at the lowest return this bank has experienced. So we're in an upward trajectory, both the EPS growth and margin expansion. This will continue into 2021. Now we do not have the crystal ball what's going to happen in 2021, and we're talking about margin expansion here, but we think the margin bottomed out in the fourth quarter of 2019. We saw that inflection point that's going to continue significantly because of Fed action. At the same time, the business model is getting a much higher spread than we're accustomed to. When the competition is robust, Fannie, Freddie, CMBS, the whole world looking to get into the space, [110] to [150] spread, right? So then we raised that to [200] after the rent laws changed. Now we're north of [300]. So that's a very healthy spread.

Got it. And back in terms of the timing, though, I mean, do you have just as much repricing in second quarter down a couple of hundred basis points as you do and say for the second quarter?

Yes. Second quarter on the CD side, just under 5 billion. And that's at [206]. So it's continuing. So you're going to get the benefit from the repricing in Q2 going to Q3 and more benefit in Q3 as well. That continues throughout the whole year. So again, I feel highly confident that we're going to have a very nice NII growth okay, top line growth, EPS growth, assuming you're not talking about the potential of credit because that's the unknown out there, and I understand that. But clearly, if you run that analysis, given where our profitability was, which was sub-1% on a return on average tangible assets, you'll see a very unique growth and earnings story and growth in margin story that can continue throughout 2021. And we're only talking to '20 right now, it's short-term visibility. But for the short-term in the second quarter, margin expansion, double digits.

And is that margin expansion also premised on the view that your credit spreads stay above 300 basis points?

Yes. But yes, but again, we have a 3.25 coupon coming on. It's conservative. We have our pipeline. We're feeding our pipeline through our model, right? The model is sophisticated. We just take the $2.1 billion pipe that we have. We have 64% new money, and that's going on at 3.25. Now new money has come on new deals that we would offer you if you come to the bank tomorrow, you get 3.5 credit if you're in A credit. If you're a little less than A, you're going to pay closer to 4.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Thank you again for taking the time to join us this morning and for your interest in NYCB. We look forward to chatting with you again at the end of July when we will discuss our performance for the 3 months ended June 30, 2020. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.