Flagstar Financial Inc (NYCB) 2019 Q3 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 third quarter 2019 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.

Certain comments made on this 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 and uncertainties that could cause actual results to differ materially from those the company currently anticipates due to a number of factors, many of which are beyond its control.

Among these factors are: general economic conditions and trends, both nationally and in the company's local markets; changes in interest rates, which may affect the company's net income, prepayment income and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposits, loans and investment products and other financial services; and changes in legislation, regulation and policies.

You will find more about the risk factors associated with the company's forward-looking statements in this morning's earnings release and in its SEC filings, including its 2018 annual report on Form 10-K and Form 10-Q for the quarterly period ended June 30, 2019.

The release also contains reconciliations of certain GAAP and non-GAAP financial measures that may be discussed during this conference call.

As a reminder, today's call is being recorded.

(Operator Instructions)

To start the discussion, I will now turn the call over 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.

Thank you for joining us today as we discuss our third quarter 2019 operating results and performance.

Earlier this morning, we reported diluted earnings per common share of $0.19 for the 3 months ended September 30, 2019, unchanged from the 3 months ended June 30, 2019.

We're pleased with the company's third quarter performance given the economic and interest rate backdrop in place during the quarter.

The main highlight in the quarter was the stabilization of both our net interest margin and our net interest income.

With the FOMC lowering short-term interest rates twice so far during the quarter, and the high probability of another rate cut later today, we are starting to see a benefit on our funding costs, which given our liability sensitive balance sheet, is a positive for us going forward.

Turning now to our financials for the third quarter.

We were very pleased with our net interest margin for the quarter.

At 1.99%, the margin was down only 1 basis point compared to the previous quarter and in line with our expectations.

Excluding the impact from prepayments, which rose 12% to $14.1 million, the margin would have been 1.88%, also down 1 basis point compared to the previous quarter.

At the same time, net interest income of $236 million was relatively unchanged compared to the previous quarter as our asset yields remained stable while our funding costs declined modestly.

We believe that this quarter marks an inflection point in the net interest margin and net interest income, and we expect further improvements as our funding costs continue to trend lower.

On the lending side, our loan portfolio was up nearly $700 million or 2% on an annualized basis compared to the level at the 7/31/2018.

Led by our multifamily and specialty finance loan portfolios but on a linked quarter basis, total loans held for investment declined modestly.

During the quarter, a number of multifamily loans refinanced away from us as other financial institutions were willing to provide them with more credit than we were willing to extend, given our stringent underwriting criteria.

However, on an average basis, average loan balances increased 5% annualized to $40.8 billion compared to the prior quarter.

That notwithstanding, our loan pipeline remains very strong heading into the last quarter of the year.

Our current pipeline is $2.2 billion, up 10% compared to the pipeline at the end of the second quarter.

The weighted average yield on the multifamily and CRE pipelines was approximately 3.7%.

Looking at our funding.

As detailed in our press release, our deposits were lower this quarter as we strategically decided to let approximately $1.6 billion in higher-cost institutional deposits roll off.

Opting instead to focus on lower-cost retail deposits and other relatively less expensive funding sources.

This had only a modest positive impact on our deposit cost during the quarter, but will have a more meaningful impact in the upcoming quarters.

In addition, most of our deposit growth over the past year has been centered in CDs.

The majority of these CDs are short term and mature in under 1 year.

Given the interest rate environment, this should provide a benefit to us going forward.

Likewise, our wholesale borrowing costs have been positively impacted by lower market interest rates.

We should continue to benefit from this over the next 5 quarters.

Moreover, we continue to aggressively manage our funding costs lower and are proactively reducing higher cost deposit relationships.

Moving on to our expenses.

As you know, we have been extremely focused on reducing our operating expenses over the past 6 quarters, and our operating expenses this quarter declined further.

Excluding certain items related to severance costs of $1.4 million, total noninterest expense on a non-GAAP basis would have been $122 million, down 4% annualized compared to the prior quarter.

And adjusted efficiency ratio would have been 46.83%, down 137 basis points compared to the prior quarter.

Compared to our peak annualized run rate of $660 million in the second quarter of 2017, our operating expenses are down 26% based on this quarter's annualized run rate.

On the asset quality front, our asset quality metrics remained solid during the third quarter.

Nonperforming assets totaled $68 million or 13 basis points of total assets, while nonperforming loans were $56 million or 14 basis points of total loans.

More importantly, we are not seeing any negative credit trends in the rent-regulated portion of our multifamily portfolio after the passage of new rent control laws in June.

The weighted average LTV for our total multifamily portfolio was 57.16% at September 30, 2019, while the weighted average LTV for the rent-regulated portion of this portfolio was 53.54%.

Lastly, this morning, 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 November 25 to common shareholders of record as of November 11.

Based on yesterday's closing price, this represents an annualized dividend yield of 5%.

On that note, I would now ask the operator to open the line for your questions.

We will do our best to get to all of you within the time remaining.

But if we don't, please feel free to call us later today or this week.

Operator?

(Operator Instructions) Our first question comes from Ebrahim Poonawala, Bank of America.

So I guess first question.

If you could just start with the sort of margin outlook, Tom, in terms of -- Joe mentioned the runoff in deposit this quarter didn't really show up in the funding side in terms of the cost.

So if you could give us a sense of: one, your expectations for the margin in the fourth quarter and maybe a little bit ahead as you think about the October cut all of this flowing through into 2020 that would be helpful; and just the magnitude of what we should expect on the cost of interest-bearing liabilities heading into 4Q?

Sure, Ebrahim.

I would say that obviously, we're pleased that our guidance still holds.

We will see margin expansion starting in the fourth quarter.

So that's been a significant shift as far as the fundamentals of a constant decline over the multiple years.

So our guidance as far as guidance for the fourth quarter, our margin will be up.

NII will be up as well in the same quarter, which is a very favorable shift for the balance sheet metrics.

We're looking at probably anywhere from let's say conservatively 2 basis points in Q4 of a margin update but what's interesting as you recall we're going to have -- we had 2 rate reductions forecasted in the middle of the year.

Obviously, that's not 3, more likely, with today's expected cut.

And next year we have an additional one and one-and-done.

So that's going to bode very well for 2020 as far as the continuation of a quarterly margin expansion every quarter throughout 2020, based on a flat curve.

So assuming that the yield curve does steepen -- that's one of the scenarios, you can see more of a powerful benefit to the margin.

But clearly, even with the flat yield curve environment with another cut today and possibly one in the first quarter, we're seeing margin expansion every quarter throughout 2020 in a pretty meaningful way.

Got it.

And you said 2 basis points of expansion is what you expect in the fourth quarter, Tom?

Yes.

Conservatively, up 2 for Q4 with NII going up as well, which is -- was consistent with what we talked about in the previous quarters with the additional one quarter -- with an additional one rate adjustment is also a favorable outlook for that.

So having another rate cut is going to help that as well.

And what's the debt -- you mentioned about $5 billion at 2.06%.

What is that repricing at over the next 5 quarters?

What should we assume for that?

So I would say right now you're looking at -- without using any options, you're looking at let's say the upper 1s, let's say 1.60% to 1.70%.

If you put options against that low ones, we did some restructuring throughout the summer and like 1.15% was the rate that we financed over a finite 2-year period.

So clearly, a much more attractive rate than what's coming due.

We have approximately $1.6 million -- $1.6 billion coming due in the fourth quarter at a 1.90% and if you look at 2020, that's about a total of $3.4 billion at about 2.15%.

So there is clearly upside for having more liability repricing on the cost of funds for the home loan bank advantage that we foresee coming due.

But I think the real opportunity here is on the CD side.

We have substantial CDs coming due.

I know in Joe's commentary, we had the vast majority of all our CDs within 1 year.

We just lowered our rates this morning, so the best offering we have in the long end of the CD offering is about 1.35% going out 12 months and the short end is a 3-month offering at 1.65%.

Money markets around 1.5%.

So that's going to meaningfully adjust our cost of funds and that will be clearly one of the catalysts for 2020 in this rate environment.

We had significant beta risk on -- when rates were tightening.

Now that we have an easing strategy going to FOMC, this would benefit some of that beta coming back to us favorably as far as higher net interest income as result of lower cost of deposits.

Got it.

And just moving to loan growth.

So we had slightly negative loan growth during the quarter.

Just talk to us in terms of like -- I was reading something this morning.

Sales activity is down 30%, 40% in the 5 boroughs.

Just in terms of what gives you confidence of getting to 5% loan growth this year and looking into 2020 given what's happening with the market and the competitive landscape?

Yes.

I think in Mr. Ficalora's commentary about the fact that we had underwriting standards outside of the bank.

When we see where bonds are going at dollars that we're not willing to finance is a real indication of our conservative yield of credit.

So clearly, we typically refi close to 80% to 85% of our current portfolio.

We saw a much lower refi rate.

That number was in sub-40% in the third quarter.

That had a lot to do with absolute dollars.

It's not rate, it's really absolute dollars, and we're not going to sacrifice our credit underwriting standards because of dollars.

We're going to be very clear about that.

With that being said, DUS refinance had a very strong quarter and year-end as they're growing very nicely for us.

But we're going to be mindful that this is 1 month -- one quarter after the rent control law changed.

So obviously, there's people trying to figure the marketplace as far as their directional move.

We've had very little purchase activity.

So absent purchase activity, significant refi away because of absolute dollars that we're not willing to support because the math just doesn't work for us on the underwriting standards, we're cautious.

However, with that being said, it's only one quarter post the rent reg.

So we think that eventually the fourth quarter activity (inaudible) should tick up a little bit here.

The pipeline is relatively strong north of $2 billion, $2.2 billion.

And we typically are the place to refinance especially in a yield curve environment that has a slope in the 5-year belly of the curve.

So any event that the agency backs off a little bit where the customers look towards what's portfolio opportunities, we're a very attractive offering for them at the appropriate dollars.

So I would say the growth rate may be slightly lower as of this year.

Obviously, if you do the simple math, we're growing at around 2%, 2.5% as of 9/30 annualized.

We like to hold this.

We would like to see some growth by the end of this year.

And next year, we'll reassess our growth expectations.

But mid-single-digit growth is reasonable level for us given our dominance in the space.

There's no question there's been a material change in the value of this class of assets.

And many people, as we sit today, have nonperforming assets.

The reality is there are owners that will not pay a loan that they know is at a higher value than the property is.

So properties have had readjustments in value.

We have a totally performing portfolio because we lend at the existing values.

So we're not being jeopardized.

But many of our peers have nonperforming assets.

Many buildings are going to be foreclosed.

Values in this sector are down.

So the refinancing levels will be down and we're likely to continue as in the past, have a widening between us and our peers during periods of stress and this period in front of us will clearly stress this segment of the market.

There's going to be losses taken by many lenders that were overzealous in giving too many dollars.

We're not going to lose dollars because we lent on the existing cash flows.

All those other lenders are today, more likely than not, looking at nonperforming assets or those assets have already gone to The Street as foreclosed.

So that's going to continue in the period ahead.

In every cycle turn -- regardless of the reasons why they begin, in every cycle turn, we typically lend more money because we lose less money.

So we are a lender in the cycle.

Whereas others lose so much money, in some cases, they're actually driven out of business.

So that is on the future horizon.

The values in this niche are going to go down.

There are excessive lenders that are already looking at significant losses in their portfolio.

Expect headlines.

We're not going to be among the headlines as a loser.

We will be a funding source through the cycle.

Our next question comes from Steve Moss with B. Riley.

On the loans that refinanced away, just wondering where those were located and were they rent-controlled or nonrent-controlled buildings?

I am going to assume that the vast majority of our portfolio is rent-controlled, so -- rent-regulated.

So clearly it's a wide mix.

But the government isn't very active.

The yield curve environment was obviously at a lower level during the quarter.

So we had a much lower opportunity for them to get a lower cost of financing through the government and that were -- they were very active.

We also had pent up demand with the government as far as filling out their annual cash.

So clearly there's been some work there where they're going to the agency.

And interesting enough a lot of smaller institutions are taking some of these credits at levels that really didn't make sense for the buildings cash flow expectations.

So we're not going to lose the credit on interest rate.

We will lose it on dollars and I would be sure to tell you that most of these loans left us because of absolute dollars.

Okay.

And then on loan spreads.

Just wondering if you have any updated thoughts as to where spreads are today and where they could go given the change in rent control?

Yes.

I think what's exciting for us here is that since the rent regulatory changes, there's been a meaningful widening of the spread.

So we're looking at consistently being at around 200 basis points off the 5-year.

Historically, during the environment where the rent control laws were in place although much different than today, that was more like 150 and when things were very aggressive right before the crisis of the great recession, that was at 110.

So we're seeing a very nice economic spread, 200 basis points over the 5-year, 7-year, 10-year.

That -- those are meaningful spreads that were much different than it was in previous years.

And when you model that forward, given that we have a substantial amount of our loans coming due next year, about $4.1 billion of multifamily loans at a 3.16% rate, that's a still -- that current offering is still in the money rates for our margins, so we're excited about that.

But no question that the rent law change does -- has impacted spreads favorably for the company.

And we're going to be there for our customers at higher spreads, which we indicated back in the summer that this -- we look at it as an opportunistic economic benefit given that the spreads have widened somewhat.

That's helpful.

And then one last question.

On the CD repricing, most of it's in less than a year.

Just wondering if it's evenly spread out or if there's any weighting to a particular quarter?

Yes.

I would say it's going to be like about $1 billion per month.

It's almost around $13 billion over the next 12 months.

It's a significant benefit, $13.5 billion with an average rate of 2.35%.

If you recall back this time last year that was our highest offering.

We had a 2.85% offering back in October of 2018.

That offering is in the 1s now.

So the highest rate yields that are going out past 12 months that we're offering right now is 1.35%.

So I think the reality is that all these customer deposits, which by the way are holding very well, will probably end up going into the shorter-term buckets, 3- to 5-month type bucket and that ranges from 1.65% to 1.85% within our portfolio.

And eventually, if they continue to be an easing strategy, they just roll down to lower interest rates.

Our next question comes from Mark Fitzgibbon with Sandler O'Neill.

I'm curious on the expense front.

Is it reasonable to think that you can hold operating costs in 2020 at a similar level to 2019?

Mark, we've been very proactive on keeping expenses under tight control.

We've had a substantial rise, as Mr. Ficalora indicated in his opening discussion that we had a $660 million run rate when going into CCAR and SIFI.

Now that's behind us and $500 million was always the target, low 500s has been the target.

We met our target at this tight balance sheet with the anticipated growth going forward.

Even if we hold that level we'll still get significant operating leverage.

So we've been estimating around $125 million a quarter.

I guess for the fourth quarter somewhere between $123 million to $125 million will be the number.

But again, it's been consistently stable throughout 2019 calendar year and I don't envision significant increase in cost next year as we complete our conversion and we focus on more efficiencies over time.

But that level with a revenue growth on operating leverage and margin expansion, you'll see the efficiency ratio, hopefully, dip into the low 40s.

Right now we're below 50%, which is a breath of fresh air for us.

We have a lot more work to do as far as on the revenue side.

And the revenue side for us will come from margin expansion and NII growth, which will definitely benefit the efficiency ratio.

So we can run an efficiency ratio somewhere between 42% to 43%, 44% next year.

That will be a very good, obviously, result to the bottom line.

So no question margin expansion, operating leverage and more importantly EPS growth for the first time in a long time that we will be in a very unique spot.

All volume of credit discussion.

Obviously, I don't want to predict the future but our credit book is holding extremely well.

Assuming that continues to hold well, we should add some very strong EPS growth when you look at '19 versus '20.

And then secondly, I know that there haven't been a lot of transactions yet in the multifamily buildings.

But can you give us a sense for how much you think multifamily values have changed since the change in rent regulations?

And how you can...

Yes.

That's not overly easy to accomplish but it depends on where the building is and the exact nature of the building.

It's a 10-unit building, it's a 150-unit building.

The reality is there have been changes in the market trade valuations.

People who had product for sale saw the buyers disappear for some period of time reassessing for likely appropriate values.

So all values are down and the reality is that some existing loans have already gone to nonperformance.

You're not going to see that until there is a financial statement generated that actually shows those kinds of losses or otherwise significant change in valuation.

We know that the market has already devalued.

The important thing for us is that we are at levels that are driven by cash flows not by market speculation.

Hey, Mark, it's Tom.

I would just add to Joe's commentary that the lowest cap rate we saw was more likely not in the Manhattan market.

Our lowest LTV is the Manhattan market.

So we'll give out a public disclosure this morning for that on Page 10 on our investor presentation material that the Manhattan market our rent -- our entire portfolio, which includes rent-regulated and nonrent-regulated, is at 47.9%.

That's our LTV, those are current LTVs.

So my guess is that in this environment, the absence of lots of transactions is really hard to gauge how much that cap rate had moved.

But when you think about interest rates and cap rates in general throughout the U.S., you probably had some movement a little bit in the boroughs depending on the type of properties.

And even the dynamics of the actual streets in Manhattan, each area has a different uniqueness as far as value, but there's no question anywhere from 25 to 75 basis points of cap rate movement is reasonable.

Now I wouldn't expect a substantial change in the Bronx versus Manhattan given the dynamics of the upside potential in the Bronx versus the upside potential in Manhattan.

But clearly, the absence of property transactions is giving appraisers -- they're scratching their head to try to figure out what truly is the adjustment in value.

But what's good about NYCB's portfolio is as you can see from our disclosures we're well insulated for an adjustment.

And when there is an adjustment there will be opportunity for buyers to come in at the price they can buy on a cash flow basis that makes sense for their portfolio.

A lot of that stuff is a tax-driven transaction.

Predominantly, long-term generational holders have the 1031 exchange benefits that want to tax defer their next transactions.

So they build up to buy assets on a cash flow basis that works for them, based on cap rates and hurdle rate of returns.

And then lastly, guys.

Given the average life of your CRE and multifamily portfolio has shortened up, do you expect the prepayment penalty income will continue to rise in coming quarters?

Mark, we have been pretty excited throughout the year.

I mean I know a lot of our competitors have been saying that prepay is gone, but we think it can be relatively consistent.

So here we are in mid-quarter and seems like it's been consistent, so we're excited that the prepay levels are within reasonable range of that $10 million to $15-type million a quarter.

And it's lower than we would normally expect given the maturity of the portfolio.

These loans have waited a long time to refi like I indicated a few minutes ago.

In 2020, we have $4.1 billion that has to -- they have to reset.

To 3.16%.

A lot of those loans will not have prepayment penalties with it, but they'll have a rate that goes to 8% if they choose to go to the market.

So they're not going to go to 8%.

They're going to go to somewhere at market, which will be for us 200 basis points off the 5 year.

In the event the curve starts to steepen, that will be a meaningful benefit to the asset yield.

So we have both deposit costs going down, borrowing costs coming down and loan yields now still rising.

This could be a good opportunity for 2020 to have good benefits to the margin because of that.

Our next question comes from Steven Duong with RBC Capital Markets.

Just getting back to the alternative lenders.

Can you just give us some color on the terms that they were offering?

And how long do you see this dynamic playing out for?

There's no question we're at the beginning of a cycle turn.

The revaluation of this market is going to continue over the period ahead.

As I mentioned, there are many properties today that, in fact, are not paying on their loans.

So there are a lot of foreclosures out there that you're just not aware of yet.

In normal cycle turn, and it doesn't matter what the trigger may be, the consequence of cycle turn is a revaluation of the marketplace.

Those lenders -- and there are many, those lenders that lend on future values have portfolios of nonperforming loans today.

They're not necessarily talking about it.

They may have 1 month, 2 months, 3 months of nonpayment, but the reality is the market is devaluing down.

So new trade, new buys are at lower values because the owners know that their asset is less valuable.

And the lenders, whoever they may be, know that their assets are less valuable.

The important thing for us is no change.

We've never lent on the market trade value.

We've always lent on the actual cash flows.

That's why we're so different than everybody else during the cycle.

What makes us better than our competitors is the consistency with which we do not take risk.

The consistency with which we actually understand the fundamental value of the asset that we're taking into our portfolio.

So the reality is, you're going to see, prospectively, evidence of significant losses in this niche.

You want to know how much money is going to be lost?

Go and check how the value of trade has occurred.

What is the difference between what properties we're selling for last year versus this year.

The change is discernible.

The meaningful adverse change in the future values of this real estate has been governed by a political decision that was extraordinarily bad that changed the relationship between parties.

Look, owners are citizens just like tenants are citizens.

The reality is that tenants were given significant benefit over the owners.

That changes the value of that relationship to the owner.

Understood.

And then just want to -- I just want to make sure I heard it right.

Did you say you guys are putting -- on your coupon was 3.61%.

Was that right?

Yes.

The actual portfolio coupon, that's for the actual current pipeline portfolio.

(inaudible) We're looking at approximately -- I think the average of all of our loans is about 3.70%.

I'd say right now the current portfolio of coupon for -- is running at about 3.69%, 3.70%.

Pipeline's about -- yes, pipeline rate is about 3.77%.

So a nice healthy spread versus the current treasury curve.

3.77%.

Very nice.

What was it last quarter?

So last quarter's it's probably a 4%, close to 4%, closer to 4%.

We have had a significant shift on the yield curve environment from -- yes 4.09% was the last one, to be precise, 4.09% versus 3.76%.

But I think given the dynamic today that could be -- obviously, if the curve starts to steepen, we're getting 200 spread and customers start to back off of going to the 10-year I/O program that's out there with the government, more towards the portfolio lenders.

That could bode well to get more of our customers in that 5-year bucket.

Great and then can you just remind us what was the 2015 vintage that was coming -- that's coming off?

It's significant.

I mean I would say the vast majority of that 2020 number that we talked about that $4.1 billion, most of that is 2015 vintage.

And that's the one that will be scheduled to reprice at a 3.16% yield.

Our next question comes from Peter Winter with Wedbush Securities.

As you guys lower the deposit cost can you just talk a little bit about your deposit strategy going forward?

Yes.

So, Peter, this is pretty focused.

Obviously, we have to be very aggressive in the rising rate environment because we were growing for the first time in a long time coming out of the $50 billion threshold issue that we dealt with for multiple years.

And we had to fund the balance sheet.

So we were proactive on dealing with a very low-cost deposit base in a rising rate environment, and we were growing.

So we had a combination of retaining the customer at the market and we were at the high end of the market for retention because everyone was in the market very aggressively.

What's changed today is that the beta risk that we had in the tightening environment should benefit us in a, we'll call it, neutral to easing type environment.

So it's very good success that we see today that the customer deposits are sticking very nicely.

We were strategically targeting in Q3 the exit of very high cost money in respect to what these relationships wanted to bid us out as far as the benefits of this environment.

So for example, if we were Fed funds flat for a mortgage provider with those warehousing and whatnot, they were looking for a Fed funds plus 3/8.

So we borrow that money of 114 versus 250.

So those are really significant adjustments towards our strategy to get -- exit out the higher cost funding, focus on the true retail deposit base, which is the customer, the mom and pop in the neighborhood.

And those deposits have been growing very nicely for the past 2.5 years.

So that's the focus of the company going forward.

We like to do more for the commercial real estate side.

That's an ongoing phenomenon for us for multiple years.

There's so much opportunity there, but that's going to be an all hands-on concept of really putting real investment into that, and we're looking at that over time.

But clearly we have less deposits with our commercial customers and we are by nature a thrift, where most of those fundings are coming from the retail franchise.

And with the CDs maturing next year is the expectation that you'll retain mostly?

Yes, absolutely.

I mean we're within the middle of the range.

I don't see us losing CDs.

And we're very -- and we're tracking it on a daily basis and it's been performing very nicely.

And we've been pretty much proactive with the FOMC adjustments.

We reduced our rate this morning.

Like I said previously, the highest rate if you want to go into 3-month product is 1.65%, but they cut a few more times actually going lower, maybe 85% of the move of the Fed expectation.

So if you want to go along you're 1.35%.

So we're still all sub-2% now, where last year, as I indicated, our rate offering was 2.85%, and we were taking your money at 2.85%.

That's all being repriced very aggressively lower as we go into 2020.

So there's no question that, of course, the funds will drop significantly next year, which will benefit our EPS growth, the margin expansion.

We envision margin expansion every quarter throughout 2020, assuming a flat yield curve.

If the curve steepens that's -- it'll only be better for us assuming the short end stays at currently where it is.

Got it.

And then separately, Joe, I was wondering if you can give an update on the M&A environment, especially with the improvement in your value.

I'd say there's no question there are people that are very smart out there that look at their business model and recognize that they would be better suited to be part of a viable, large entity.

We do compare well with regard to choices banks can make.

So there's no question we're having active dialogue with the marketplace and there are many people that would like to join the team.

This happens to be the best of times to join because the difference between us and others with regard to equity performance widens during cycle turn and we are in the beginning of a cycle turn.

So as I've indicated, there are many banks today that have embedded losses in their portfolio that they may be aware of, but The Street is not yet aware of.

So the nonperformance of their assets is something which is evident to them but not necessarily evident to the market.

Values have changed.

The day-to-day trade in the market has already changed.

There are foreclosures that are occurring.

There are nonperforming assets, in particular, in this large class of assets that is quite evident to the lender.

The reality is we are not having nonperformance because we never lent on the future values.

So we're going to be in a very good place prospectively, not having the kinds of losses others have.

By example, over our public life, that's about 26 years, we have charged off 103 basis points.

That compares to our peers that in the same period of time charged off 1,198 basis points and the SNL Bank and Thrift Index charged off 2,356 basis points.

That is not a year's performance.

That is performance over 26 years, a 103 basis points compared to 2,356.

That is a meaningful difference in performance over an extended period of time.

Prospectively, we see the exact same thing happening.

Our next question comes from Ken Zerbe with Morgan Stanley.

I guess, Tom, is there a way to quantify -- I don't know if you guys even think about it this way, the extra prepayment income that came from those multifamily loans that refi-ed out to the nonbanks?

Quantify in dollar amount or...?

Yes, dollar amounts would be fine.

I'm just...

So, Ken, what I would say we categorize it that we are pleased that we're getting the prepayment opportunity.

I think where more of the uniqueness is that they are seasoned loans.

They're not 1, 2 years with a cash -- where they're coming back at you very rapidly.

This is getting closer to their roll date, so you're getting less economics because as you get closer to the repricing turn, they go to 0, right?

So next year, like I indicated, we have a substantial slug of both commercial real estate and multifamily coming due as a matter of maturity or repricing at a very low rate.

So we will get them to go from a 3.16% to somewhere, hopefully, north of 3.5%.

That's beneficial.

However, they're not going to be paying point as they waited for the last minute.

And if they don't refinance they're going to be paying 8% type interest rates, which is going to be very temporary.

So I would say that the categorization of the prepay has been less prepay on a percentage basis per loan, but still we're active because as you can see we had a lot of activity.

We've had good originations.

Our origination numbers have been very strong every quarter, but when you have more refi and it's going away from us because of dollars it's not indicated in the growth.

However, the prepays tend to be lower as a percentage basis because they're more seasoned loans that are prepaying.

Got it.

Okay.

And just sticking with the nonbanks.

Are they still being as aggressive in October as they were back in 3Q?

No.

I would say I categorize that the I/O program is very attractive for our customers if they want to go to the government and/or other means of getting financing.

We typically do not allow a second mortgage as a matter of policy.

So you think about how we look at our lending.

We're a first lean lender.

We focus on lower LTV.

So I would say being the A type lender for -- then we have this -- these customers in our portfolio for multiple, multiple years, multiple refinancing cycles.

We have their information.

We understand the dynamics of that building.

We really know what that building can actually support.

When it goes elsewhere to get, let's say, a dollar bid that information is in our files.

They're going to have to trying to get financing, they may be looking for an opportunity to get more dollars.

And again, we're going to be extremely conservative as a matter of culture to ensure that we have impeccable credit quality.

So that will drive some of these customers trying to get those absolute dollars and more importantly the government's facilitating that at an I/O perspective.

It could move to the government.

However, when rates start to spike a little bit on the back end, they tend to go back to the 5- and 7-year structure, which as a portfolio lender is an attractive alternative than going through the government process.

But remember the government failed in 2008.

Fannie and Freddie went under.

The reality is that all lenders that are lending aggressively are, in fact, looking at nonperforming portfolios.

It is not necessarily evident to you but to the people that are buying and selling these properties they know they can't get funding as readily as before.

There will be fewer and fewer lenders in the market.

We always lend up during cycle turn because the other lenders disappear.

So as we look to the period ahead, next quarter, the quarter after, you're going to see more and more example of 2 things: people that are in the market last year won't be in the market next year.

People that are in the market taking losses are going to be reporting those losses.

In every cycle, as we see in this cycle, we are not going to be reporting losses.

We, in fact, have fully performing portfolios even with this egregious change in prospective valuation because we don't lend on the prospective valuation.

We lend land on the actual.

So the reality is what makes us different is performance during adverse periods.

And we are on the verge of a significant downturn in the valuation of a very large segment of the New York market.

Got it, understood.

And then maybe one last question.

In terms of the NIM, obviously, your guidance is 2 basis points higher in fourth quarter.

But when we think about 2020, and I understand you don't give 2020 guidance, but should we expect a similar pace of NIM improvement over the course of the year?

Or is there any kind of acceleration or deceleration in terms of the NIM as we progress over time?

Yes.

I would say it will be a higher acceleration given that we have the multiple rate adjustments that all took place in the back end of 2019.

So that's going to bode very well what's coming due on the liability side for 2020.

So the magnitude of the increase in the margin will be higher.

I believe that's going to be a quarterly phenomenon each quarter.

I'm seeing -- we're running numbers with flat curve, sloping curve, inverted curve, all different scenarios but in a reasonable scenario you can have a meaningful margin uptick every quarter throughout 2020.

I'm not going to give specific guidance, but we've had a lot of pressure on our margin.

We're not going to earn 76 basis points on assets -- on tangible assets, going forward.

That's not a traditional way to make money.

We were always at something north of 1%.

And we're seeing -- we think that deposit cost had peaked in the second quarter of 2019.

We trend that going back well over 7, 8 years.

That's the peak of our deposit cost.

And now we're going to enjoy the benefits of that beta risk on the way down where we'll get benefits of the lower rate environment given the current short end of the curve.

So I think it's going to be meaningful.

We have a lot of borrowings coming due as well and it will be meaningful there.

And obviously, if we're able to look at the funding mix slightly different over time, historically, the company's growing its deposit base through acquisitions.

So we haven't had a closed transaction in quite some time.

So we're in a very unique spot as a public entity.

But we were always were able to change our deposit mix via through other funding sources, through other retail franchises.

That's -- so we're still battling with that change in the business model going into SIFI and CCAR.

That's behind us.

So we're very optimistic that this will be a margin -- up margin year next year, up EPS growth year or volume credit.

In the credit, as Joe said, the credit book is holding very strong.

We're pleased.

And we're going to be patient on making sure we make the right loans at the appropriate time.

Our next question comes from Steven Alexopoulos with JPMorgan.

So first on the deposits.

If we look at the quarter-over-quarter decline that you guys called out, exiting several large relationships.

Who are you seeing competition from in the quarter?

Were these banks or nonbanks?

A cadre of many players, Steven.

I would say that from the largest banks in the country that are looking at these types of relationships.

So for example the mortgage relationship, we're a small player there.

We were a player in the business.

We've been out of the business for a while.

So we've lost that relationship just given the expectation of what their economics were and what they expected from us.

However, when they latch on to let's say a major player, it's different type of economics what they share as a partner.

So that's one of the large relationships that went through the -- one of the largest mortgage providers in the United States.

At the same time, a lot of smaller community banks that are aggressively looking at bringing in some funding and people are optimizing on opportunity.

And again, like I said Fed funds plus 3/8 versus Fed funds flat.

And that's just too expensive for us.

So there's a cadre of players, not so much the JPMorgan of the world.

But there's other players that have been large institutions that are enjoying this mortgage-related business and they have different unique lines of business where they can create a value proposal to them better than we can put forth for those past partnerships.

Because we're not in the mortgage residential business.

Okay.

And then I'm trying to understand the connection between the pipeline and originations.

So if you look at the prior quarter 2Q, you saw a big increase in the pipeline for multifamily loans right away from $833 million to $1.4 billion last quarter.

But multifamily originations were $1.2 billion this quarter, down from $1.8 billion last quarter.

How do we connect those 2?

Do you just have a much higher percentage of loans in the pipeline not close?

No.

We actually -- as far as total loans that we anticipated for the quarter, we closed our origination.

I think like I said in our opening commentary, a lot of loans refi-ed away.

And these are loans that typically would stay with us.

However, the economic dollars didn't make a whole lot of sense.

And I go back to the concept that we know these buildings.

They're in our portfolio.

We have the financial information.

If it's $10 million, it shouldn't be $20 million, but it goes away for $20 million, that's not -- we're not going to lend on those types of relationships.

So there's been interesting dynamics there.

But having a typical retention rate for us in a normal environment of 80% go below 40%?

That's why the portfolio hasn't had a significant growth on quarter-over-quarter.

I'm assuming that dynamic is not going to be an ongoing trend.

However, that's pointing out why we didn't have the meaningful growth.

There's very little purchase activity.

So you take lack of purchase activity, refinance away because of dollars and a very strong pipeline of originations, you're going to be relatively flat.

So the pipeline is not driven by a date.

The pipeline is driven by what happens to be available to close within that 90-day prospective period.

The reality is a loan could go into the pipeline on the last day of, let's just say, the last quarter and not come out of the pipeline for 8 months.

The difference is real.

It's not a pipeline that says every loan in that pipeline was made during that quarter.

It stays this is what we expect to close during that quarter whenever it might have begun.

It's process.

So don't misunderstand.

These are not fixed to a date.

These are loans isolated, individual relationships that will take a varying amount of time to close.

Yes, I will just expand on that.

I can't remember a time where our origination number that we closed was less than what we reported in the previous pipelines.

We've all historically reported our pipeline even though as Joe indicated, it could be a cadre of the other loans from the previous pipeline.

You have the holiday season right now, the Jewish holidays impact the timing of the closings.

But we clearly have -- I don't ever remember missing the closing numbers versus the pipeline numbers.

So again, I think our pipeline reported is $2.2 billion, we'll close at least $2.2 billion.

Tom, in terms of loans being refi-ed away, it seems more customers are now going to the agencies, right, which are offering longer terms, seems like they are...

Combination of both, Steven.

I'd say combination of both.

I wouldn't be that clear.

There's been some smaller players that make these mistakes.

We've seen this movie happen before when banks that are now growing this book of business, they see some other players exiting, they moving into this space.

Again, we're very conservative on the dollar side.

The agency is the agency.

They have a very big appetite.

Let's hope they try to tone that down as they deal with their mission statement.

But smaller banks have played overall on making mistakes and we have to be mindful of that.

We're not going to sacrifice credit, especially after coming off of a substantial change in the rent regulation market.

This is only 90 days post the period when this was changed.

This is going to have a meaningful impact and customers are still assessing where they're going to take their cash flows.

Some customers may take their cash flows, may sell their buildings and go to other markets as a 1031 opportunity.

But clearly, the city has been adjusted for this rent control change and customers are trying to figure out their multibillion dollar portfolios and where they're going to put their proceeds.

There's no question the federal government does not fund Buicks and the federal government should not be funding multifamily loans.

The reality is there are meaningful players in this administration that have previously in their early life tried to restrain the excesses of Fannie and Freddie and are prospectively likely to again try to restrain the excesses of Fannie and Freddie.

Let's recognize Fannie and Freddie is not immune.

They went bankrupt and took the money from the Treasury.

In 2008, they can overlend, they certainly do not have a license to dominate or steal marketplace.

So the change in their activity is a decision made by a government entity that just says, we're going to do less.

There's no profitability driving Fannie and Freddie to the Treasury.

The reality is that this is a moment in time -- prospectively in particular, a moment in time in which Fannie and Freddie can be restrained.

There is no legitimate reason for Fannie and Freddie to take the market.

Good.

I just want to ask one follow-up question on the M&A commentary earlier.

If we look at M&A deals more broadly, whether it's a small deal or larger MOE deal it really doesn't matter.

The stocks of the acquirers are not reacting the way they did in the past, really none of them have reacted well even for well-priced deals.

Doesn't that change your thinking our M&A as a long-term strategy?

I think it certainly evidences the reasons for doing a deal have to be solid.

We do not do bad deals.

Every deal we've ever done has created a better bank.

Substantively, if we do a deal, it's not going to be size, it's not going to be street trade expectations, it's going to be to create a better bank.

And we have high confidence that we understand what will create a better bank.

So we could do a very big deal, we could do a very small deal.

The issue is the relationships of currencies decide the economics of the deal.

But the substantive reason for doing a deal is, have we created a better bank prospectively to create better value for shareholders?

We know how to do that.

We've done that many, many times.

We're not accidentally the best-performing stock, even though over the last period and in particular since we were denied the ability to close Astoria we, in fact, have not been valued as we've historically been valued.

So the good news for us is that we have the open opportunity to do a good deal.

When you see it, you'll know it.

It will be a good deal because of the bank we create.

Our bank will be better because of the deal we do.

Steven, I would just -- one other additional comment to Joe's discussion is that obviously tangible book value.

We're not going to go down on the transaction.

We've been very clear as we evaluate opportunities we're protected about tangible book value dilution.

There haven't been many deals that have been announced whether it's been tangible book value creation.

So I think that also bodes well for our strategy.

And I think the marketplace understands that, and if we do something that's meaningful, it will have a meaningful benefit to our book value, tangible book value.

Our next question comes from Moshe Orenbuch with Crédit Suisse.

Most of my questions have been -- so I guess to -- at the risk of kind of re-asking pieces of questions that have been asked a few times before and recognizing that from a fairness standpoint we all agree that the GSE should be limited, but that process takes a long time.

And I guess looking at that $4 billion that you've got that's repricing next year, I mean the question is, given your comments, Tom, is -- are you going to see a rate -- retention rate of 80% or retention rate of 40%?

And how should we think about that?

I mean the -- they don't have some of those triggers that you alluded to -- that you've alluded to in terms of the signals from the market I guess.

So I mean can you just talk a little bit how do you think that progresses?

Moshe, I would say that obviously the rate environment does also play a factor.

When you have a very attractive interest-only product, which we tend not to be an interest-only players at NYCB.

We're very more inclined to traditional amortization transaction, 5-year type structure, sometimes 7, but we're not really a long-term lender when it comes to this product mix.

So we've been shying away from being the I/O provider versus dealing with the government who has a very attractive I/O structure.

So depending on the shape of the curve, if you look at what happened in the third quarter, rates have come down significantly.

It made the -- that particular bucket very attractive to go out long and get financing equivalent to a 5-year structure given that the rally in the 10-year.

So we're pricing this spread over the 10 year and what the government was offering and then putting through a DUS program and whatnot and investors are taking on the -- the seller is taking on the risk and the government is basically providing liquidity.

It was an attractive alternative in doing a portfolio loan.

But what's interesting is the dynamic of the competition.

It went through also some of the smaller players, which I was surprised to see some of the smaller players that really haven't shown up that much in the past few years have shown up.

Some of our traditional competition has publicly backed off, which is expected, which should be a benefit for us to getting more share.

So you are seeing a lot of loans coming from other portfolios based on our cash flow dynamics.

We feel the building is valued at and what's comfortable on our perspective of underwriting.

But the government definitely played a role here and I think it's been a unique opportunity here going forward in the event that depending where the curve ends up next year, we have a very attractive [offer].

We may put more money in the 7-year bucket.

But we have to make a decision, if you want to be an I/O provider.

And historically, that becomes where people are taking a little bit more undue risk.

So I think there is a possibility that, that 40% type refinance rate was something to do with the timing of the rent control laws coming into place and some of the nuances of the market.

I wouldn't call it a trend yet, it's way too early to call that.

But we've been doing this for a long time.

Historically, it's been between 65% to 85%.

So let's hope that just doesn't become a trend, but we're monitoring it and we're going to be still, and we're not going to sacrifice our underwriting standards.

And that's something that we'll deal with.

I mean absent any real growth, the company's going to have EPS growth next year and margin expansion.

You throw some operating leverage and growth, it becomes much more powerful EPS story.

So we are -- we historically grow the book around between 5% to 10% a year.

We believe we can do that next year, but we know the jury will be out as we get closer towards the fourth quarter, end of the fourth quarter and we report in January.

And we'll have some more color there.

But the reality is that we feel that we have always been in the market.

We are the portfolio player in the market, and we're committed to the market.

I think our spreads have widened, maybe that has something to do with it.

We're not going to be aggressive on the spread side.

We should be getting better economics consensus and a change in the dynamic of the rent control market.

So the 150 is no longer 150, it's more like 200.

And I think that's -- many of the larger banks are at those spreads, too.

So we you think that there will be more of a repricing of that opportunity, and this should bode well for the current coupon we have in the portfolio with or without growth.

So we hope to have growth.

We run the bank for growth expectations and mid-single-digit loan growth is not out of the realm of possibility to next year.

I mean, obviously, this year is almost wrapped up.

We're running around 2%.

We'll hope to hold the portfolio up a little bit at the end of the year, but we'll see how that all pans out as we monitor these refi's away.

Our next question comes from Collyn Gilbert with KBW.

Just on balance sheet, Tom.

So you, obviously, just gave a lot of color as to what you're expecting on the loan growth side.

Cash securities, do you anticipate to hold at those levels going forward where they are this quarter?

Just talk about how you're seeing those segments unfold?

Yes.

So we have too much cash right now.

So we're going to put it out to work, and we've been very reluctant to put on very low treasure -- low security yields.

So we've been mindful of that.

But we said that it is an opportunity in the securities market we'd want to, at least at a minimum, hold the securities portfolio.

That's been the strategy over the past 3 or 4 months.

We've had a lot of calls that came through in the third quarter.

Was significant.

So we replaced, I think it was at 330.

40 rolled off.

We put on a 280 on structure, more structured paper, not callable paper.

I mean we want to hold that portfolio and in the event there was a steepening of the curve, we like to grow the securities book to between 14%, 15%.

So we have some work to do there, but we're going to be patient.

I think on -- in respect to the portfolio characteristic is predominantly government out which we have about 1/3 of that portfolio that's fully raised, so as rates were declining, that did impact the security yields negatively.

But it's floating rate for interest rate risk reasons.

And then the other 2/3 is fixed rate.

So we hope that we evaluate that and opportunistically, if there is a sloping curve we'll put more money to work.

Okay.

Okay.

That's helpful.

And then just on the CDs side.

So you had indicated that their highest rate that you're paying now is 1.35%, if I heard you correctly?

Well, 1.65% in the 3-month category.

It's more of an attractive rate for someone who wants to go relatively short.

But if you want to go out 1 year, it's 1.35% and if you want to look at something in the 9-month category, it's 1.85%.

So that's significantly lower than what we were doing a year ago, about 100 basis points lower.

So our entire portfolio is pretty much coming due within a year.

So it's about $1 billion per month that's repricing within the new rate term.

And we're seeing customers gravitate to the 5-month and/or the 3-month structure, which is significantly lower than the current coupon.

And what was your offering?

1.65% for 3-month money.

No, no, no.

Sorry, I just wanted to compare that to what you were offering earlier in the quarter.

Like at what point did you drop it to those rates?

And where had you been offering it throughout the majority of the third quarter?

So that's I'd say probably 20 basis points higher, a little below 2%.

I mean we've been pretty active with the FOMC adjustments as they adjust.

We've adjusted within -- we've adjusted our rate this morning, to be frank, as we anticipate given the probability there will be a rate cut.

So we're going to be very proactive.

We said probably.

We took a lot of deposit money in, in the second quarter knowing we had this significant outflow expectations of high-cost money leaving the banks.

We took in some retail deposits in Q2, knowing the outflow.

We're going to probably end up the year around 4% type deposit growth, which is why we're on budget until we start growing the balance sheet aggressively, with loan demand, we'll manage that accordingly.

Okay.

Okay.

And I appreciate the thought of not necessarily giving NIM guidance for next year.

But obviously, that's a big part of the story, it's a big driver of earnings.

I mean as we look at it and as you -- you indicated, obviously, the refinancing dynamic on the funding side is going to drive NIM acceleration.

I mean is it unreasonable to think you guys could achieve like 2.25% NIM or 2.15% core NIM by the end of next year?

I don't think it's unreasonable depending on the shape of the curve, Collyn.

So again, we don't give forward guidance, but I've a pretty bullish view of what's going to happen on a quarterly basis.

I'm envisioning the margin going up every quarter throughout 2020 based on a flat yield curve environment.

So let's get a slope n there and that will be even better.

Our next question comes from Christopher Marinac with FIG Partners.

I want to ask about the changes on the deposit mix towards more retail and less wholesale.

Is that going to give you relief on some of your regulatory -- liquidity ratios?

And just curious if that's a positive by-product?

Again, I don't think it's going to be a negative by-product because the reality is that we are very confident given our business model, our structure, who we are, our traditional thrift model.

We fund most of our liabilities through the home loan bank and the retail platform.

Like I indicated, we'd like to get more from the commercial customers but this is nothing new.

This has been how we have always ran the institution.

When rates go low, we tend to have a liability-sensitive position that benefits very greatly in a declining rate environment.

We paid a significant price when rates are rising.

We had about $200 million top line negative impact towards revenues because of the tightening cycles.

We should get a lot of that back.

Sounds good.

And Joe, you had mentioned the changes in LTVs and just valuations in general.

Does New York Community's LTV get reset every quarter?

Do you do that once a year?

What's the time frame on how you look at values?

Yes.

We do that all the time.

There's no question that we're constantly reassessing the market.

Let me just be clear.

That's the current LTV.

So on an annual basis, we receive financial information from our customers.

We revaluate those financial statements and we update our LTVs on an annual basis.

Okay.

Great.

And there's still a meaningful chunk, I think, 40% of your loans have a 50% risk weighting.

So that's not going to change.

No, no, no.

We've actually had a slight improvement quarter-over-quarter but no question we've always been known as a 50% risk weight manager.

That's kind of the sweet spot when you think there's opportunities.

So when you think -- talk about capital, we're very mindful of our risk weighted capital as more of a determinant versus other metrics because, obviously, we can have -- if we were lending let's say aggressively against the government in the I/O market, those are mostly 100% risk-weighted loans.

Yes.

The best property owners we have know us over the course of long periods of time.

They don't come to us to get the most dollars.

Never.

At this time, I would like to turn the call back over to management for closing comments.

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 January, when we will discuss our performance for the 3 and 12 months ended December 31, 2019.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time, and have a great day.