Flagstar Financial Inc (NYCB) 2019 Q4 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 on the company's fourth quarter and full year 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.

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.

In addition, 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 its SEC filings, including its 2018 annual report on Form 10-K and Form 10-Q for the quarterly period ended September 30, 2019.

To start this -- today's discussion, I will now turn the call over to Mr. Ficalora, who will provide a brief overview of the company's performance before opening up the call 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 as we discuss our fourth quarter and full year 2019 operating results and performance.

Earlier this morning, we reported diluted earnings per common share of $0.20 for the 3 months ended December 31, 2019, that is up 5% compared to both the previous quarter and the year ago quarter and slightly ahead of consensus.

We are extremely pleased with the company's performance during the fourth quarter.

In many ways, it was the strongest quarter of the year for us and marks a significant inflection point in terms of improved fundamentals.

We are encouraged by the strong rebound in loan growth during the quarter as well as the linked-quarter improvement in net interest income and net interest margin.

With the Federal Reserve lowering short-term interest rates 3 times during the second half of last year, the expected benefit to our net interest margin and the net interest income has started, as both of those metrics improved during the current quarter.

Turning now to our financial performance.

As I mentioned earlier, our loan growth rebounded nicely during the fourth quarter, as total loans increased $1 billion compared to the third quarter of the year and grows $1.7 billion or 4% on a year-over-year basis.

Multifamily and specialty finance lending drove the loan growth during the year and the quarter.

Multi-family loans increased $893 million or -- on a linked-quarter basis and $1.3 billion or 4% on a year-over-year basis.

Our specialty finance business had another strong quarter and an outstanding year as the portfolio increased $690 million or 36% on a year-over-year basis.

Origination activity also rebounded strongly during the fourth quarter of 2019.

We originated $3.3 billion of loans during the quarter, that's up 45% compared to the previous quarter.

And on a year-over-year basis, total originations were up 5%.

Multi-family originations totaled $2 billion this quarter, up 69% compared to the prior quarter, while CRE originations of $327 million, increased 6%.

This was the highest combined level of multi-family CRE originations since the fourth quarter of 2017.

We also originated almost $800 million of specialty finance loans this quarter, that's up 25% compared to the previous quarter.

In addition to the strong origination activity during the fourth quarter, we also opportunistically repurchased $771 million of multi-family loans previously originated by us and sold to other financial institutions.

These loans were originally sold by us in order to stay below the SIFI threshold.

Overall, this was one of the strongest quarters for loan growth in over 2 years, and we continue to be encouraged by the potential loan growth in 2020 as the pipeline started the year off strongly.

Currently, it stands at $1.5 billion, of which 66% is new money.

As a reminder, the pipeline is at a point in time, we typically originate more than what is in our pipeline, as was the case this quarter.

On the funding side, total deposits were relatively unchanged compared to the previous quarter and were up $893 million or 3% year-over-year.

Year-over-year growth was led in large part by CDs, which increased $2 billion or 17% in 2019, but declined modestly compared to the previous quarter.

Our wholesale borrowings rose $931 million on a linked-quarter basis and was primarily used to fund our loan growth during the fourth quarter as wholesale funding was a more attractive funding alternatives during the past quarter.

On the revenue front, we were very pleased to see top line revenue growth return this quarter.

Net interest income increased $6.6 million or 11% annualized compared to the previous quarter as interest expense declined.

We also witnessed an improvement in net interest margin during the fourth quarter as it rose 5 basis points compared to the third quarter.

Excluding the impact from prepayment fees, the fourth quarter margin would have been 1.90%, up 2 basis points and in line with expectations.

This was driven by a decline in our overall cost of funds and marks the first time since the fourth quarter of 2015 that both net interest income and the margin increased.

We expect both of these measures improving throughout 2020, given our liability-sensitive balance sheet, the Fed's current interest rate policies and the significant repricing opportunities embedded within our CD portfolio and wholesale borrowings.

Moving on to operating expenses.

Total noninterest expenses were $126.1 million compared to $123.3 million in the prior quarter and $135 million in the year ago quarter.

The efficiency ratio in the fourth quarter was 48.51% compared to 47.37% during the previous quarter and 49.92% during the year ago quarter.

Over the past 2.5 years, we have reduced our operating expenses by approximately $150 million, and we'll continue to focus on cost containment going forward.

On the asset quality front, our asset quality measures remained strong during the quarter and the year.

Nonperforming assets totaled $74 million or 14 basis points of total assets, while nonperforming loans were $61 million or 15 basis points of total loans.

Net charge-offs remain at low levels, totaling 5 basis points of average loans for the year and only 1 basis point of average loans during the fourth quarter.

The majority of our charge-offs this year were related to taxi medallion loans.

That portfolio has been in run-off mode over the last 2 years and now stands at $55 million.

Importantly, we have now been operating under the new rent regulation laws for 6 months, and to date, we are not seeing any negative asset quality trends in the rent-regulated segment of our multi-family loan portfolio.

As noticed on Page 10 of today's investor presentation, 60% or $18.7 billion of our total multi-family portfolio is subject to New York State rent regulation laws.

The weighted average LTV on this portion of the multi-family portfolio is 53%, about 400 basis points less than the weighted average LTV on the entire multi-family portfolio.

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 February 24 to common shareholders of record as of February 10.

Based on yesterday's closing price, this represents an annualized dividend yield of 5.80%.

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.

Thank you.

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

So I guess the first question is just around loan growth.

Like, if I -- 2 parts to it.

One, if I take out the $771 million in purchased loan growth, I guess, on an organic basis, it still seemed a little soft.

So would love to hear just in terms of your loan growth outlook for the multifamily and the overall loan book for 2020.

And I think the last time you updated on participation was in 2016, where you had about $3 billion to $4 billion in loans that had been participated.

So if you could remind us how much additional opportunity there is to repurchase some of those loans back?

We only have about $2 billion more that we can do that.

But the thing is, the market is strong, and we'll have the ability to originate well within our appetite over the period ahead.

Ebrahim, it's Tom.

I would add to Joe's commentary that, obviously, the focus here is to analyze -- be in the market.

We're very effective in the market.

We see very strong economic spreads compared to the previous year, since the rent laws have changed.

But more importantly, when you take some of the one-off transactions that we anticipate to go away in the fourth quarter versus Q3, which is a very volatile quarter, we saw our retention rate improves slightly, which is a good signal.

Our goal for 2020 is to go back to that predictable retention rate historically, which will be much higher when compare to the past -- the second half of 2019.

So when you think about that and you model it, modeling a mid-single-digit loan growth is very reasonable for our appetite in the market.

Got it, but single-digit loan growth.

And I guess, Tom, on the core margin, it went up 2 basis points in line with your guidance.

How should we think about the margin going forward?

And just in terms of where the CD book is repricing relative to the 2.37% cost in the fourth quarter?

Right.

Ebrahim, as you know, I am not going on a limb more than 3 months in the margin because I won't say, it's a very interesting environment.

But clearly, we had the inflection point as we expected in fourth quarter 2019, and we continue to see very strong visibility throughout the full year 2020 with margin expansion every quarter as well as the growth in NII.

So NII inflected in 2019, Q4 as expected, up 2 basis points in the fourth quarter.

I would say for the first quarter, we'll have a higher NII expansion and probably another 2 basis points in the margin.

And that's assuming no changes in interest rates and excludes any prepayment penalty income.

So...

The continuation of margin expansion throughout 2020.

We're liability-sensitive, and we have a substantial amount, as you indicated, CDs that will reprice to about $14.2 billion, and it's throughout the entire year.

The lowest quarter of the repricing -- actually, the second lowest quarter is the first quarter, which is $2.8 billion at a 2.29% rate.

And Q2 was about $4.5 billion at 2 -- almost 2.40% rate.

So we really have a lot of repricing expectations going forward, given where current interest rates are.

And if you look at where CDs are coming on, it's just slightly south of 2%.

I think the number was like 1.88% in the fourth quarter.

So I guess just to be clear, Tom, you expect the margin expansion of 2 basis points.

Is it safe to assume, given what you said that, that accelerates?

So we should see -- I know you don't want to give guidance beyond 3 months.

But all else equal, should we see that 2 basis points become 4, 5, 6, like and accelerate as 2020 progresses because that's kind of where Street expectations are?

Yes.

Again, I feel really good that we have the inflection point.

I'm not going to give long-dated guidance, but I was very clear that I see margin expansion throughout the year.

But more importantly, the NII growth is significant for us.

We haven't seen that since the first -- second -- first half of 2016.

So inflection point is here.

We're liability-sensitive.

We have a lot of liabilities repricing.

So on the liability side, we get good benefit.

In addition to the borrowings -- the CDs, we have the borrowings, which is material for us.

And borrowing rates compared to what's coming off is significantly attractive to us in 2020 and '21.

Our next question comes from Brock Vandervliet with UBS.

Okay.

So you covered the CD aspect.

On the wholesale borrowings, I know you were pretty creative last year in using some of these hybrid FHLB structures.

The borrowing cost ticked down a bit this quarter.

What should we look for in the near term in terms of relief on the borrowing cost?

I'll just be specific with the actual numbers.

We have $3.7 billion that comes due in 2020 at a 2.11% rate.

We put on a trade yesterday at about 1.47%, that was about $0.5 billion, and that was based on LIBOR -- home loan bank floating LIBOR, and we swapped it out for 3 years with a swap, which got, of course, down to 1.47%, so we're locked in there for 3 years with very little basis risk.

So that's kind of what we've been doing recently.

So we'll continue doing that as depending on market opportunities.

We're not going to -- we look at where short-term funding is, it's probably a 35 basis points benefit to lock it out and swap it out after 2.5 to 3 years.

So we'll take advantage of that opportunity, given the shape of the curve.

And when you go into 2021, you have another $823 million at a 2.40% rate.

So for the next 2 years, we have some high-cost money compared to the market that's to be repriced lower.

Okay.

And near term, is there anything we should be aware of for Q1 on that front?

I think it's continuing.

I think it's going to be an ongoing benefit each month.

We have -- it's staggered throughout the quarter, just like the CDs.

I think in Q2, for the CDs, we'll have a substantial benefit, given it's almost double the amount in Q1, and it's at the highest cost of the year.

So 2.38% is the highest cost that we have rolling off in Q2 for CDs.

And that money is coming low -- already offering right now is the 1.65% 3-month and 9-month at 1.85%, and our 12-month liquid CD is at 1.50%.

So if you tag on a few basis points of yearly customers, it's still well below 2%.

So you may get a nice benefit on the CD front for the run rate next year.

Our next question comes from Ken Zerbe with Morgan Stanley.

I guess, Tom, you certainly laid out the case for a lot of opportunity on the -- for the liabilities to reprice lower.

But I guess we've heard this for a few quarters now and your core NIM is only going up about 2 basis points per quarter.

Can you just walk us through the other side of the balance sheet?

I mean obviously, with the 5-year treasury like 1.44%.

I mean is it just simply a matter that the loans are repricing a lot lower that offsets a lot of this liability benefit?

Yes, Ken, let me be clear, I didn't give any guidance on that in past Q1 on the margin.

So that's your expectation.

But no, we're very bullish about the fact that the funding costs are going lower, and our yields, for the most part, should be in a good position to tell you where our interest rates go.

We really don't know where rates are going to be at the end of the year, but we have a sizable book of business, that's coming due in 2020 and '21.

The multi-family portfolio is about $3.3 billion at 3.18% coming due in 2020; '21 to $3.8 billion at 3.32% million.

When you look at those rates compared to market rates, we saw -- we've seen a lot of volatility in rates.

We've been effectively pricing our multi-family CRE business at a healthy spread compared to what it was a year ago.

So that 200 basis point spread is real.

Yes, rates have come down, but we still have a very good offering out there, we'll be very competitive.

I think that the plan for 2020 is to focus on our retention.

We're going to be very focused on pumping that retention rate up to historical norms.

We've had a nice improvement when you take some of the one-off deals from Q3 versus Q4, but Q3 in 2019, we had lots of retention go away.

And a lot of that was because of, we'll call it, aggressive underwriting and aggressive agencies.

We're going to be razor-focused to move that retention.

When you move the retention to a higher percentage for more normalities at NYCB, you'll see the loan growth kick in.

That's our goal for '20.

At the same time, you see where the market is on security yields, we have a very small securities portfolio.

It's really not a whole lot of benefit right now to put capital and liquidity to work at these levels.

So we're being mindful of keeping it relatively flat until we see opportunities.

Got you.

Okay.

So if I paraphrase that, it sounds like you're going to get NIM expansion, but most of the NII growth is going to come from the balance sheet growth rather than the NIM side, if I understand that?

Yes.

Ken, depending where interest rates are.

Obviously, if you would just categorize that in the middle of the fourth quarter, rates were dramatically higher, right?

Look, where rates are today.

But they move around quite a bit, and we're very excited to get that 200 basis point spread.

That's a much healthier spread we've seen and probably a good post crisis because precrisis it was a 110 spread and went back to 150.

Then ultimately, when the rent control laws have changed, we believe that 200 basis points is more of a fair spread.

And we're seeing some good activity there.

Our lending people are very busy.

Our focus is on making sure we have strong retention.

We have all the data.

We have all the loan files.

We know what's coming due, and we're going to work very hard to maintain our share.

At the same time, we were very opportunistic in the previous quarter to take advantage of some other people that are looking at divesting their position in multifamily, including some of our partners on participation, and we'll be active there as well.

Got you.

Okay.

And then switching gears just a little bit.

In terms of expenses, it looks like they were a little bit above your guidance from -- that you gave last quarter.

Any reason for the increase this quarter?

And what do you think about expenses going into first quarter?

So number one, I would say, I commend the entire team on the expense containment control we've had for 2 years.

It's been a very difficult 2 years to keep those expenses down significantly.

So we had, obviously, a very strong expense number, right?

We're monitoring our guys who you probably speak for the most part in -- throughout the year.

But for the most part, we came, I'd say, slightly better than what management expected for the expense guide for 2019.

As far as 2020, we believe that it's going to be relatively stable.

We're going -- I don't want to go on a limb yet, but I think it's fair to say that stabilization of expenses are going to be key cost containment.

We have a few items that are going to increase our expenses slightly.

We've instituted a 401(k) match for the first time as a public company.

We've increased our minimum wage for our metro customer -- metro employees to $15 an hour.

So we're being competitive because it is a changing unit for us in the New York Metro area as far as compensation costs.

And we've also released salary freezes for officers.

So my guess is probably looking at maybe another $10 million of expenses when you look at year-over-year, when you normalize the expense base for 2019.

So although we printed a higher number, you normalize that, you're looking from like $505 million to $515 million, another $10 million as far as potential run rate for the next -- for 2020.

So $515 million...

Sorry about the long-winded answer, by the way.

No.

It's totally fine.

Just make sure we got it right.

But the $515 million includes that $10 million increase.

Yes, I think that's fair.

It's fair.

Again, we're doing a lot on -- we're going to grow this year again, that's anticipation.

But we've had a lot of cost containment initiatives over the past few years, and we're going to still be efficient.

Our conversion yet has not completed.

We anticipate to have that by Q2, that's probably dragging a little bit.

We'll get some benefit there in 2020.

But I don't want to be too aggressive on the guide.

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

One is on prepayments, I'm just wondering what expectations are for the full year.

I missed how much you said, Tom, that was coming due in terms of loan maturities this year?

So we have approximately $3.3 billion of multi-family loans at about 3.18% that will be contractually maturing this year.

They have to come to the table.

At the same time, in 2021, books about another $3.8 billion at 3.32%.

That has to come to the table in the next year or the next 2 years.

So we feel very opportunistic that there'll be elevated prepayment activity.

Depending on the economic dollars, depends on when they decide to prepay and refinance with us or away from us.

That being said, we had a relatively strong Q4 on prepay.

Activity was strong.

Q3 versus Q4, I'd say, was a very healthy quarter.

Our origination stream was very strong, as Mr. Ficalora indicated, a very strong origination quarter.

We anticipate to have a very strong follow-up to as we go through 2020, given the dynamics of the marketplace.

There was some interesting deals that hit the market.

And when you look at what buyers are looking at transactions, the hurdle rate of returns are higher, but they're getting done.

So there's been -- that deal of activity has gotten to move slowly towards buyers and sellers.

Yet, it's a Q4 activity, always happens in Q4, but we see deals being done, which is interesting because the hurdle rate of returns are reasonable.

And these are 100% tight multi-family rent-regulated buildings being transacted at levels that are reasonable.

Cap rates are very reasonable.

They're not elevated.

So I'd say the reaction to the rent control law changes that hurdle rate of returns for long-term property owners are higher.

They're getting some transactions on, and we believe that will continue as we move further away from the enactment of the new change of the law.

Okay.

That's helpful.

And then, Tom, I think you also said that the second quarter CD bucket is the largest.

Just wondering, how largest that bucket is in repricing?

Q2 was about $4.5 billion.

It would be compounded 2.38% coming due.

Okay.

And then just in terms of new money yields here, just wondering where you're seeing spreads for multifamily and CRE these days?

Yes.

We've been holding solid at 200, probably another 0.125 to 0.25 above that for CRE.

We're going to adjust to be competitive, but we've done a fine job since June on making our presence known that we need to get paid a higher premium compared to historical premiums of about 150 spread on the treasury.

So it's still hovering around 200, give or take an 0.125 here and there, but it's been very healthy.

Our next question comes from Steven Alexopoulos with JPMorgan.

To start, first, on the $771 million of loan repurchases in the quarter, I assume that was done at par, correct?

I'm not going to be specific on the price.

But obviously, this paper has probably 2 years left.

So it's all loans.

It's underwritten on our standards as we control the transaction.

We're going to be very proactive.

So I would say approximately that level.

But give and take, I'm not going to be specific on the actual dollar amount.

But it's opportunistic.

We think that there's a few more out there, and we had to accommodate.

These are the loans that we've originated.

We have all the files, the data and we will be proactive in the event other partners are looking to move away out of this line of business and/or decide to be more focused on C&I.

So we -- bear in mind, Steven, when we put this in place, we were in that SIFI threshold criteria that we cannot grow the bank.

So we've had billions of dollars that had to go to the marketplace and our partners, our friends out in the marketplace are very accommodative because of our asset quality metrics.

So we're very pleased to be able to offer that in our balance sheet to get it back.

High probability, we will refinance most of these loans.

Yes.

And I think what's important about that, the way the transaction was originally structured, a lot of it's retention that we've done, we've originated.

If someone has, let's say, pari passu of 75-25, we have the 25, we only keep 25.

So as we take this out, we have more potential for growth.

And that was part of an ongoing thing over the past few years, we've had many players that gets refilled on refinancing that we're actually getting lesser of the deal because of the transaction that we struck with them on the original sale.

All right.

But what would be the yield of the $771 million?

Probably about just under 3.40%.

3.40%, okay.

And why...

And like I said, it has actually 2 years life left, it's not 2 years average life, 2 years life left.

That's a 2015 and '14 origination bucket.

That we're all going to go in next 1.5 years.

And by the way, we don't have to replace that with pari passu terms.

This is how -- now we decide what to do with EV finance.

Right.

And then the $2 billion that's remaining, which you could repurchase, could you repurchase all of that tomorrow if you wanted to?

Or are there time restrictions or other restrictions on that?

There's no time restrictions.

I mean, look, it is what it is.

If someone is willing to -- we would love to have the opportunity to take our loans back, as we believe in our credit metrics.

If those loans are done at a very opportunistic time and they're well underwritten and low LTV.

So clearly, I'm not leading to go there as far as the number.

I mean from time to time, it will be there for the market.

I don't want to give you false expectations.

We -- the best loan in the market we think are our loan.

So we're more than willing to accommodate.

Yes.

But if the yields are not bad and the credit quality is good, why are your partners looking to divest these?

Oh, there's a number of reasons.

I mean, obviously, you see many public statements made by a lot of the competitors.

They're diversifying the balance sheet, the C&I.

They're doing other things with their business model.

We are a multifamily CRE lender.

This is our business model.

We focus on the rent-regulated, rent-control marketplace, that's what we do.

We do not -- we're not -- we're going to try to table a commercial bank doing C&I lending.

This is our core business model.

So we will be there for our customers.

Like I said, initially, from when the rent laws were changed at higher spreads.

We were far more comfortable with these assets than people that have never originated these assets.

So for us, the future period is not an unusual concern.

This is going to work out very well for us.

Yes.

And as you guys are seeing new appraisals on multi-family loans, how much evaluations contracted post new rent regulation now that you have 6 months?

Yes.

So I would comment -- there hasn't been a lot of deals that have been done, but you probably read this -- the same publications that we've all been reviewed, a lot of the information is not correct because they don't take the full picture of the transaction.

Because most of these deals have a commercial use component to the total rent law as well as the rent control aspect.

But the cap rates that I have commented are not near what the fear was when the rent laws were put in place.

So we're still seeing low 5s to mid-5s versus high 4s in certain markets.

Like I said, you have to look at each market, each street, each area differently, each borrow from us versus Manhattan, certain pockets of Manhattan versus other pockets of Manhattan, the diversity of the income stream.

So cap rates have held in very well.

You can -- if you want to do some statistical analysis, maybe a quarter with 25 to 30 basis points movement in the cap rate, which is no near what the fear was initially.

Some of the publications that put these numbers, that made no sense, down 40%.

It's not a reality.

They've been literally carved out the commercial use space of the income stream.

If you add that back, it's not an unreasonable decline on value adjustment because of the -- really the driven of the hurdle rate of return.

This is not -- when you think about the business model, some of them put their capital up and they'll be financing behind it, if they can get high single digits, it's attracted to get a long-term property owner and you'll have thousands of units that you'd manage and you're willing to put your money up at a high-single-digit return.

That return, when it was at its peak was 0 because they were improving the units constantly.

So the fact that 0 became high single digits, there is a market for that.

When you put I/O features into it, it comes out to the mid-teens.

So on an amortization, you're probably looking at high single, with I/O, it's mid-teens.

But it's really important to recognize, the change that has occurred has impacted future values.

We never lend on future values, we lend on existing values.

So our portfolio has not had any adverse effect of the change, and our prospective opportunity is going to be based upon whatever the numbers may be when, in fact, we're projecting the value of the asset.

That is going to be consistent with our past practice.

We've never used the future value, and therefore, the trade in the real estate, 6 months from now, 12 months from now, is not going to impact one iota our ability to lend because we lend on the existing values that are in the portfolio that actually do exist in that particular building.

There is no concern that we have that our assets are going to start nonperforming because we over-lent many, many, many people in the market, and everybody knows this.

If you're lending more dollars than we're lending, you're lending on the value other than the existing cash flow.

We only lend on the existing cash flow.

So even though this change has occurred and the prospective value will be less, it doesn't threaten our ability to be repaid.

And Steve, I would just add one additional commentary, that it's very encouraging to see large transactions hit the marketplace and being financed.

Some of them are we're financing, others are financing, but the reality is there are people stepping up, looking at the long-term and getting a reasonable rate of return on their money and willing to be in this business.

And a lot of the nuance is between how they manage these units now are going to be somewhat different.

They're looking for loopholes, based on the rent rate changes, in particular, they'll leave units vacant and try to join the -- they join unit next door.

That's something that some of the wealthier players can do because they have capacity and they have network to do so.

So I think you've seen a lot of that, and it's probably less of our units hitting the marketplace than ever before because of these changes, which unfortunately will be negative for the city, but these large players will continue to transact.

Yes.

Yes.

And Joe, if I could change direction, just as a one final question.

So we saw another MOE announced earlier in the week, and you've talked about wanting to do a deal for a while now.

Do you feel any sense of urgency to try and get something announced and done before the release approved before the presidential election?

No, I don't feel any urgency to do that.

But I would suggest that we are at actively in discussions in the marketplace with a variety of people to accomplish the goals that we have articulated over the course of our entire public life.

We've made it very clear that we have the ability and have the desire to grow by acquisition and create value for shareholders.

So there is going to be a transaction on the horizon that will be exactly in line with the kinds of things that we've done in the past.

So I would openly suggest to you that we are in active discussions to do transactions because that's what we do.

Our next question comes from Peter Winter with Wedbush Securities.

I was just curious, last quarter, you talked about the efficiency ratio for 2020 in the low 40s.

I'm just wondering if you're still comfortable with that range.

Well, I kind of -- I hate to go on a limb.

I'm not going to go specifically.

But I gave you the expense guide of $10 million based on normalized '19.

Obviously, prepaid does play a factor.

I'm not giving you any guidance on prepaid, but we should have a relatively healthy prepayment world in 2020, given the duration of the portfolio.

At the same time, I think that we have the NII going up every quarter.

So we should see improvements on the overall efficiency ratio.

Our goal would be to bring it in the low 40s, but hopefully, mid- to low 40s is kind of our target.

It's going to take a few positive changes in the marketplace to make that happen, but it's not unreasonable given the fact that we've been in a cost containment mode for so many years, and that will grow in the balance sheet, and our NII is now moving in the right direction.

We had a straight -- a compressed NII for many, many years.

So this inflection point should bode well for the other attribute of the calculation of the efficiency ratio.

So this should be -- this should help us improve the ratio.

Okay.

And I was just looking at securities to assets, that's just been in a pretty consistent range last couple of quarters, at 11%.

I'm just wondering if you're thinking about growing the securities portfolio.

Because I think you'd like to get it at some point to the high teens from that statement?

Yes.

I think it's fair to say that, Pete, but at the end of the day, you look where spreads are right now.

And we've had a lot of debentures pay off over the past 6 to 12 months.

Cash flows are flying into the bank as far as the structured mortgage paper, so we were a very large DUS player, and that stuff has been very nice as far as overall yields to the bank.

But at the end of the day, the yields have come down materially.

So we're going to allocate our resources to the loan book in the event the market changes, and we start seeing a slow rhythm, we'll call it, highest slope in the curve, we'll get to that level.

It's going to take some time in this market because given where our interest rates are.

But if we go back to a healthier curve, we'll be more proactive.

Okay.

And then just my last question.

Just can you talk about what your expectations are for deposit growth in 2020?

And how you think about the balance between deposit growth and the use of wholesale borrowings?

I mean we're going to be, obviously, in the market with deposits.

The goal is to commensurate with asset growth.

If you look back for the full year of 2019, we grew deposits almost as consistent with our asset growth.

We had a little bit more wholesale towards the end of the quarter -- fourth quarter because of the fact that we shifted a lot of higher cost relationship out of the bank in Q3.

But when you look at overall absolute deposit growth, we had a good year of deposit growth in 2019.

That's the plan for 2020 to commensurate with some asset growth, and we'll readjust depending on market conditions at the same costs substantially when they alternate.

But right now, short-term money is expensive compared to -- if you look at the belly of the curve and pushing it out a few years, like I just said previously, we locked in solid funding and at the low, I'd say, 1.50%, 1.47% and 1.50% versus short-term rates that are out there at a high one.

So it's attractive.

Both sides are attractive given that we're reliability-sensitive, but the more attractive aspect is the refinancing of our current liabilities.

Our next question comes from Christopher Marinac with FIG Partners.

Tom and Joe, the success you've had on the specialty finance the past year, and the pipeline looks really strong.

Could you remind us the differences in yield on that portfolio and then the types of things that you do and also types of things that you avoid in specialty finance?

So as you know we talked about, our team has done a phenomenal job, and we're very pleased with the production.

We believe they're going to have another strong 2020, and we support that, with the team members that have done an incredible job focusing on asset quality.

No late pays, no delinquencies, no defaults, no real credit hiccups to speak of and very well diverse book.

The book is broken out between 3 categories: asset-backed loans, equipment finance and deal flow planning.

The asset-backed is around $700 million outstanding with a 25% percentage of total outstandings compared to the total dollar amount of $2.8 billion.

Equipment is about $1.3 billion at 48% of the total, and the deal flow planning, which has been very attractive in this environment, at $775 million, which is 27%.

The yield on the paper is slightly higher than our multi-family yield when you take in account fees, that we amortize to the yield, it's about 3.66%.

We're going to be active.

I think what's most important is that what we see is we turned down most of what we see.

So we're effectively doing about 10% hit rate on 100% of what we see.

So 90% is what we don't do.

Not because this credit could be yielded, it could be in various reasons.

Our Board may not be happy with the various counterparties.

But at the end of the day, we typically have been turning down 90% of what we see, and we've been growing the book around 25% on a CAGR basis.

So we were very pleased to allocate capital there.

Like I've said in many previous conference calls, it doesn't come with deposit relationships.

We're not intrusive to the lead banks, but we're a credit buy-up shop.

And so we're going to be very -- we'll be a good partner for some of the largest players, but we're not booking deposit relationship.

That's a down -- that's one of the negative aspects of the business.

We're not bringing in the funding for this type of business.

Okay.

Great.

That's really helpful.

And then speaking of deposits, it seemed that the core deposits ex CDs had a solid quarter and was stronger than the total.

What do you see for this year?

I know it's still a challenging environment, but what's sort of in your deposit pipeline?

No.

We think that it's going to be continuing similar to the trends that we saw in the fourth quarter.

Rates are dramatically lower than they were a year ago when the Fed was in a tightening mode, right?

So the highest offering rates in the 3-month category will bring the highest cost money into the short end of the curve.

So 3 months at 1.65%, and I think customers are looking at that as a viable alternative in going out to a year or longer, given where rates are.

Our 1-year offering on a liquid CD is around 1.5%.

So we're clearly enticing customers to go into the shorter duration.

On 9-month money, it's at 1.85%, and you're seeing that yet.

So customers are keeping inside of one year, has been consistent for the past decade.

And we think that if the Fed happens to reduce rates, we'll benefit further.

In the meantime, if the Fed stays flat for the year, it should be very well in our plan for 2020 to take advantage of those higher-cost CDs coming due throughout the year, which I mentioned in the previous commentary.

Our next question comes from Matthew Breese with Stephens.

I was hoping you could talk about CECL, what the day 1 trip reserve would look like?

And then on a go-forward basis, could you help us understand what the types of growth you're talking about, if we should expect that reserve to increase or decrease?

Or just any sort of commentary on day 2 as well would be helpful.

So I'd say on -- with respect to the onetime adjustment, we're looking at probably 25% to 30% increase in our overall reserve, which is about $15 million to $30 million.

Yes, 10% to 20%.

It's 10% to 20%.

Again, we don't envision us having a material impact to our company, given that we're a real estate lender, and our duration is very, very short compared to other types of loans.

If you look at our average life at 2.1 years for the book is very short, albeit macroeconomic changes to the environment.

It's hard to predict what could happen 2 or 3 years from now.

But we are multi-family lender that has a relatively short duration book.

And should not have a material impact going forward.

The capital is probably between 3 to 6 basis points upfront and not material.

And then sticking with the capital question.

Over the last year, 1.5 years, we've seen capital is measured by tangible common equity grind slowly lower.

Given the kind of growth outlook you're talking about, the NIM expansion, how comfortable are you with taking capital levels potentially lower?

And do you see any need to adjust the dividend or potentially down the road raise any sort of common equity?

I'm not going to go to the dividend question at this stage of the game.

We're still moving -- we've been doing this for quite some time.

Obviously, commencement with NII growth, margin expansion comes EPS growth.

And so like I said in the previous quarters, I think people would say, we should have double-digit EPS growth, which is reasonable, and that's conservative.

So I think that we're in a positive aspect -- respect to build some capital for the first time in a while as earnings improve with this dynamic of the margin and NII expanding.

So I think we're encouraged by that.

We're very comfortable with our capital position.

We have no losses.

We have a history of no losses.

We have a history of having the best asset quality in the country.

So as far as when you allocate capital, business has 0 losses.

We have very little allocation towards the impact of provisioning for high-quality, low-leverage lending.

So we're very comfortable with our capital position.

Our dividend is solid, and we've always been standing by our dividend, and that's been the hallmark of the company.

Okay.

And then going back to your mid-single-digit loan growth comment.

The pipeline is down 30% quarter-over-quarter, just want to get a sense for how much of the growth you anticipate being from organic versus repurchase activity, if you could give us a breakdown?

I wouldn't even budget repurchase activity.

And I know, organic, we are razor-focused to increase our retention rate, which we will do in 2020.

And more importantly, if you look at the -- we had $3 billion of business in the fourth quarter.

The Q1 is down on seasonality.

It's a seasonality quarter.

So we're very excited about what's ahead of us.

Our guys are extremely busy.

The pipeline that we announced is the committed pipeline, the pipeline that we have is much higher because the loans are coming in, and we're razor-focused on managing that retention rate, managing that 4 -- that $6 billion, $7 billion of business coming due in the next 2 years.

We have the files, we have the data.

We will make sure that we get first crack at our customers.

Understood.

And then just last one for me is, we get to see the press releases, we don't see behind the scenes, what's going on with LTVs and reappraisals, like you do on the multi-family side.

And so I was hoping you could just walk us through where there have been reappraisals, where there have been valuations that have come in lower.

Have you seen any LTVs that have tripped over 80%?

If they do, what is borrower behavior?

Are people willing and actively bringing cash to the table to maintain loyalty fees?

Just some sense of comfort around borrow behaviors and analyze lower valuation.

So I'm not going to stand heavily about this.

By the end of the day, we're a low leverage lender, and we don't see these types of numbers that you're concerned about at today's environment, we're 2 quarters past the rent control laws that in effect.

It's going to take some time to see what these impacts are in other parts of the borrowers.

But at the end of the day, if you're a low leverage lender and buyers and sellers are coming together and then putting a hurdle rate of return that people can agree with, there'll be transactions.

We'll finance it based on a very conservative policy.

And we lose loans, we're losing because other banks are being aggressive.

We play against the government.

We play against a lot of large banks, but we are very targeted towards super conservative underwriting.

So what we're seeing right now, you'll see a lot of information in the current trade publications about deals that get done.

We're not doing all those deals because it doesn't make sense for our balance sheet.

But you may have to extend a little bit longer in this environment because property owners they want it, actually a couple of years.

So the 5 here may go to 7, maybe some 10-year money.

You may try to treat some I/O structure from no I/O to maybe 2, 3-year I/O but you'll be competitive.

But it all comes down to we're not going to lose deals because of rate, we will lose deals because of dollar amount.

And that's always been the hallmark of the company.

So when times are difficult, there'll be activity.

Buyers will come in and buy opportunity, then we'll finance that opportunity.

So we're not there yet.

The good news is that some of the nontraditional players that are equity financiers or bridge financiers are getting diluted on their deals because they're not working, but that's not our book.

So that's positive because you're not seeing the losses yet.

There's a handful of customers that are in the -- not our customers, a handful of customers that are in the in the Fannie Mae structure or the Freddie Mac structure that are coming to some difficulties.

And when it goes to the special services, it's put out the sale, someone will buy that at a hurdle rate of return that works for them.

And if the numbers work for us, we'll finance it.

And obviously, one other point.

Cap rates are not moving aggressively, cap rates are holding very nicely.

Interest rates are relatively low compared to last year.

So you still have a very low cap rate and you have a low interest rate environment.

So business is relatively strong because of that.

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

So just getting back to the competitive environment, can you give us some color to what you're seeing today versus what you saw last quarter in terms of the GSEs and other nonbanks?

And what are the factors driving those differences?

Well, I would say -- it's Tom.

I would say that the GSE is very real, very large, and it's going to be always a relevant player.

And the DUS players will be very active.

And I/O is a very attractive alternative for customers who want to bring their payments lower and try to drive higher returns to them on -- in potentially over a 10-year period.

We've been very proactive in trying to avoid that type of model.

When we structure I/O, we tend to be a hybrid I/O player, maybe 1-, 2-, 3-year type I/O.

But if you have a solid low leverage transaction with a very good long-term customer, you may have to play in that landscape.

What the best scenario for us as rates go up in the back end, the GE side that the agencies are less relevant.

So right now, they're relevant, but we'll compete.

And that -- I'd say that the government has the biggest acts for the transactions in the marketplace.

And at the same time, like I said, we're going to be very active on managing that book that's coming due and making sure that we get first crack at all our customers.

Appreciate that.

And then just last question.

Your noninterest-bearing deposits had a nice uptick in the quarter.

Can you just give some color on that?

I would say probably -- just again, seasonality, escrow, year-end, I wouldn't think in it -- it's not a targeted plan.

This is -- we're running a very large deposit book but we do have some seasonality there.

Our next question comes from Collyn Gilbert with KBW.

Didn't think I was going to get on here.

Okay.

My first question...

We won't forget you, Collyn.

Just first on the funding side.

So Tom, I appreciate some of the rates you're offering that you're putting out there on the CD market now.

It seems like some of those CD rates are probably below market or sort of at market.

I mean you still have confidence in your ability to grow the deposit book, even if you're below-market rates on CDs.

We have -- we're a large institution, we have a lot of branches in different markets.

Like I said, we do offer a hybrid elite customer base, maybe a few basis points of customers who are going to analyze us for 5 or 6 basis points to retain it.

But at the end of the day, we've been very competitive there.

We're not in a massive growth campaign right now.

If we -- we get a normal growth campaign, if the market does change, then 5% becomes 10% growth on the loan side, then we'll go into a growth campaign mode.

But to be in the market, we're, like you said, in the middle of the range.

And I think slightly south of 2% on average is where the overall market is.

And I think, by the way, the market is too high, if you look at what treasuries are trading right now.

I think a lot of liquidity was put in place year-end because of the balance sheet requirements.

Some of the larger money center banks were pushing their balance sheet requirements.

But if you think about where rates are right now, and the rates have come down quite a bit, we're at 1.85% for 9 months.

It's a reasonable rate.

Probably too high.

And as I said, Fed rates were lower.

But in the meantime, our model has no Fed changes.

We assume the Fed's on hold for the year.

And we're in a unique spot to benefit from a liability-sensitive balance sheet and see some good NII growth from that.

Collyn, we can adjust that very quickly.

Okay.

That's helpful.

And then just -- so Tom, you'd indicated deposit growth commensurate with loan growth.

How about if you do see more opportunistic loan purchases?

How do you intend to fund those?

We will be -- we will look at both the wholesale markets as well as the deposit markets.

Like I said before, the wholesale market, if structured properly, is very attractive right now.

There is somewhat of a uniqueness in return -- when you look at the value of the curve and the short end of the curve, short end financing is expenses compared to doing a 3- or 4-year lockout with putting a swap on.

So we've been doing that from time to time.

The basis risk is low.

I think it's a reasonable execution, and we've been very proactive there.

Bullish from time to time, depending on the marketplace.

But we're putting money on 1.50% right now on -- versus 1.90% on CDs.

So there's definitely a reasonable delta to move towards wholesale.

Okay.

Okay.

That's helpful.

And just also, to your point, right, so retention is going to be so key to sort of the loan growth outlook.

Just a couple of questions on that.

So you had indicated, and I think this is the first time you guys put it in the press release, so the pipeline had 66% new money this quarter.

Do you have what that percentage was from last quarter's pipeline?

No.

So I would say, and I think we've always put in it.

I'd maybe look back I remember various press releases, we always trying to tout the overall new money pipeline.

New money has been around 2/3.

It's been pretty consistent.

I think what's interesting is that you know when you have certain deals that are going to go for a good reason.

We have some customers that finance there -- themselves rather than going to the bank because of mortgage transfer tax.

They're going to have such deal with the expense of doing a transaction in New York.

So they use their credit facility, which was cheaper than getting money from the bank.

That happens from time to time.

So we take advantage of those one-offs and try to carve out what happened in the quarter.

I think our retention has improved slightly, but we have a long way to go.

I'd like to have that retention rate going back towards the normality, which was significantly higher than we were in the previous 6 months.

So you saw it drop off when the rent control laws were put in place.

We had a lot of volatility in Q3.

Q4, we had good stabilization.

The healthy yield curve in Q4, very attractive buying and selling.

It wasn't a blockbuster quarter as far as transaction, but there were some transactions, and things are getting done.

So I like the fact that there's a predictable Fed right now, more or less, for the year.

And I think that customers are realizing that a lot of money has to be dealt with in the next 2 years, so they have to finance.

And we're there, we're open to business.

Okay, okay.

And then -- so just kind of along the lines of the $3.3 billion of originations net growth, putting the purchase aside, was $280 million.

So just trying to sort of -- I mean, obviously, better understand bridging that gap.

And I think when you talk about the outlook for prepays and that dynamic in 2020, I guess, I'm -- if they're contractually maturing, if you -- the numbers you've laid out are contractually maturing this year, why would they prepay?

The -- I wouldn't think they would prepay, right?

So wouldn't prepay income be significantly less?

You'll have, like I said, depending on what bucket comes due.

It's very important.

We know that in 2020, if they wait the last second, they're not going to pay 8% on their financing, right?

They'll pay the market.

Let's say the market 3.5%, so you have a 3.18% going to 3.5%.

It's still good for the bank.

Yes, you don't get a prepayment because they're rolling into the next financing.

But those loans have no choice but to come due.

The ones that are in 2021, '22 is where the opportunity will arise.

And they decide to lock in for the next 7 years instead of 5, they may choose to do so based on their own internal decisions, based on financing their entire portfolio of loans.

We're going to be very active on working with our customers to get into the table sooner.

We do that all the time.

But in this particular case, our goal is to maintain higher retention.

So we know what's coming due.

We know what's coming due in the next -- for the next 5 years.

But for the next 2 years, there's an opportunity to take those lower-yielding loans and not put them in a position to go to a much higher rate because no one knows where rates are going to be a year from now.

They may opt to finance today.

And with so, we could be proactive with the portfolio.

Okay.

One last question...

Which they will be, which they will be.

Yes?

Okay.

Sorry, one last question.

You -- the retention rate.

Did you -- can you tell me -- tell us what that was this quarter?

And where -- how that compares to what you've been running previously?

Or what your goal is?

So the reality is that our goal is to get back to historical levels, which is well above 50%, okay?

We're not there yet.

The Q3 was probably the worst you've seen.

We bumped it up by 10%, when you carve out certain loans that we knew were going and were not willing to finance.

I mentioned one in particular, because it was a large loan of $100 million that used their credit facility to finance themselves.

And you take those one-offs, we probably improved our retention rate by 10%.

So 34% becomes 44%.

We need to be well over 50% and moving towards 60% in 2020.

That's the goal.

We have a follow-up question from Brock Vandervliet with UBS.

I know you talked about the day 1 CECL impact.

We've heard a lot of banks kind of walking up net charge-off guide for a variety of reasons.

How should we think about 2020 as far as net charge-offs?

Is this still a 5 basis point kind of a number?

Or should we be thinking something more given the shift into specialty finance or what have you?

So Brock, what I would say is, if you carve out the medallion, 0 is probably the number for us.

It's really the history, you know the history of the company, our credit quality.

Medallion has been -- most of the charge we've taken over the past few years.

The good news there today are some major players certainly to look at acquiring most of those assets in the marketplace.

So it sounds like we're getting close to the bottom there.

You never predict where the bottom is.

When you take out medallion losses, they don't have any losses.

As far as specialty finance, it's been a -- we haven't seen a 30-day ever.

So I think we're in a very good spot.

I wouldn't work too hard on understanding odd difference between a credit card, I think, because we're -- this is what we do, right?

We're a rent-regulated multi-family CRE lender, with a history of no losses.

I think our CRE book is half the losses we've had in multifamily, which is de minimis.

So yes, they can go as new change.

We're going to take a front change in the provision because we have to, to right size the onetime adjustment, the capital impact of that is between 3 to 6 basis points.

But after that, it's business as usual.

And unless there's a change in the marketplace and the duration goes from 2 years to 10, I don't envision any real material changes for us.

And then by the way, medallions are down dramatically.

That's not part of our business.

That is something we had actually negotiated to sell, and we've been getting out of that consistently over the period past.

At this time, I would like to turn the call back over to Mr. Ficalora 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 April when we will discuss our performance for the 3 months ended March 31, '20.

Thank you.

This concludes today's teleconference.

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