Joe Ficalora - President and Chief Executive Officer
Tom Cangemi - Chief Financial Officer
New York Community Bancorp Inc. (NYCB) 2013 Barclays Investor Conference Transcript September 9, 2013 2:00 PM ET
We're going to start. Next up we have New York Community Bank. The company is the 20th largest bank holding company in the U.S. with about $44 billion in assets in over 270 branches. Pleased to be joined today by Mr. Joe Ficalora, President and Chief Executive Officer and Tom Cangemi, Chief Financial Officer.
Thank you. Thank you all for being here. Obviously, I'll be going through presentation. There will be time for questions at the end and then we have a breakout session. There will be a private room that you can come and join us in and we will continue with your questions.
This is legal material which you will all need to read and the test will be brief but comprehensive. The company as I think many of you know is a little over $44 billion company. We've deposits in the $25 billion range. Multi-family loans, they are in the $20 billion range. Our market cap is something in the $6 billion range.
Our total return on investments over the course of our public life is 3,415%. We're very, very pleased with that number. It demonstrates, I guess, the near 20 years, I guess, November 23rd of this year will be 20 years old. And over the course of that time, we’ve had the benefit of creating great value for shareholders and growing the bank from being less than $1 billion to about $44 billion.
These are the states we are in today, about 274 branches in five different states. The branches that in fact are most efficient and effective for us from the standpoint of how they do retail banking or the branches that are in Florida. And the second most efficient branch operations we have are in Arizona. And third that comes down to tie between New York and Ohio, while New Jersey is the least efficient banking operations that we do.
But for those that were concerned about the idea that we would be moving out to markets outside of New York, there is no question that in fact we’ve proven that our concerns or the concerns of others actually were not warranted. We do sound banking in those markets. People can go into a branch in Arizona and do activity on their branch in New York City account and people actually do that often from New York to Florida in particular with many people in New York that have large deposits with us also have homes in Florida or go to Florida for the winter.
So the second quarter solid earnings performance. As you can see here our GAAP earnings was at about $122, this is in the second quarter of ‘13 and our cash earnings are about $132 million, earnings per share of $0.28 and $0.30 respectively, the return on average tangible assets 121 and 128, while the return on tangible stockholders’ equity was at 15.90 and 16.85.
The net interest margins is about 315 in both periods and our efficiency ratio is at about 41.71 in GAAP earnings and 40.17 on a cash earnings basis. Our balance sheet reflects continued strength, loans net to total assets are at about 71.6%, while the securities to total assets is at about 13.4%. We have core deposits of about 68.7. Obviously we see the changes in the numbers are actually quite favorable period over period and the wholesale borrowings at 28.6%, down from 29.6%.
Our assets quality measures continue to compare favorably with those of our industry and this has been consistent over decades before we were a public company and over the two decades that we are a public. And as you can see here the numbers for the bank had nonperforming loans to total loans 0.60 while the industry is at 1.95 and the net charge-offs average loans is 0.01 compared to an industry of 0.19.
We continue to maintain strong capital. The tangible stockholders equity to the tangible assets excluding accumulated other comprehensive loss is at 787 for the current June 30 period versus 790 a year ago. We have at June 30 8.25 on a leverage capital ratio basis in the Community Bank, 10.95 in the Commercial Bank. We are a multi-bank holding company. The Tier 1 risk based capital is a 12.56 while the commercial has 16.44 and likewise the total risk based capital ratio of 13.31 versus 16.99 for the commercial bank.
Our business model has consistently focused on building value for investors, multi-family lending is our principal asset and $19.2 billion represents about 68.6% of our total non-covered loans.
The net charge also represented 0.01% of average loans and then when you look at the residential banking, since January 2010 our residential mortgage banking operation has originated $33.2 billion in 1- to 4-family loans for sale and generated mortgage banking income of almost $500 million. Importantly of the $33 billion that we originated we’ve already had in this three year period roughly $13 billion that is already refinanced.
So those loans are no longer outstanding loans not subject to any potential risk whatsoever. They have just refinanced or gone away one way or the other is actually very good for our efficiency. Our ratio has consistently ranked in the top 3percentile of all banks interest and that 41.71% in the second quarter.
Our growth through acquisitions we went from $1.9 billion to $44.2 billion since our first acquisition closed in November of 2000, we actually announce that in March 27, 2000 and that was our first deal and it more than doubled the bank, our first deal.
Multi-family loan production, we went on rent regulated buildings. This has enabled us to distinguish ourselves from the industry and our peers. The particular niche that we are in is rather unique both from the standpoint of the owners and the type of assets that we actually lend on. We lend in ways that are different than our peers and that’s most evident in the outcome.
So when you think about what in fact distinguishes a bank as a lender is how much money it loses on the assets that it chooses to take risk with and we have proven time and time and time again through many, many cycles that we actually have less loss than all of our peers, because we do our lending far more conservatively than our peers. So lots of people talk about being in same niche that we're in and there in New York. And in fact banks that had been around for a 100 plus years (inaudible). All those banks were multifamily lenders and they went out of business on significant losses during a period that we had near no loss and in fact we were actually lending more money.
So we were filling the vacuum when other banks were in fact not able to lend. So as you can see in these little bullet points, we deal with rent regulated buildings. If you do it right, that is a very, very good asset to be in. There is no escaping the fact that that particular asset has far, far less downside, if in fact you structure the loan right in the beginning.
People have difficulties because they lend too many dollars on an asset often assuming a market value rather than a cash flow value of that asset. If you're lending on the cash flow, the rent roll and that rent roll is a discounted rent roll then you are always well below the market, whether the market is robust or the market is collapsing, it doesn’t matter. If you are lending on a below market rent roll, you are significantly safer when the market turns. We've proven this for 40 plus years, that it actually works. And as a result, the difference between us and others is that others lend too many dollars often during the best of times and then wind up losing money in the worst of times only to find out that we can refinance the very same property that they lost on at a profit value.
So because we do that, we virtually have the opportunity to create value for shareholders because we're taking less risk. Even in the best of times we're taking less risk and therefore having paid better outcome in the worst of times. So we consider ourselves a niche lender. We lend to a particular kind of owner, on a particular kind of product, at a particular structure that has a very conscious awareness of the actual value of the prescribed cash flow.
So the cash flows in our buildings do not typically go down during the cycle terms. The cash flows in our buildings actually continue to go up even when there are great vacancies in the market place and unemployment is extremely high in the New York market and so on. We in fact see our buildings actually increasing in value because their rent rolls actually increase. That has happened time and time again and the reality is, although there are some that would suggest, well, no guarantee, tomorrow be the same as yesterday. That's absolutely true but the good news for us is that we’ve actually had a multi-decade approving that the way we lend actually has superior outcomes.
So we are a leading producer of multi-family loans and the numbers vary, but in our public life, we may have originated $90 billion odd in multi-family loans. That’s a huge amount of lending and we’ve lost extraordinarily small amounts of money, we’ve actually had 52 consecutive quarters, wherein we’ve had zero losses on the assets that we had created.
There aren’t too many banks that have business models that have zero losses over an extended period of time, and certainly in each cycle we lose money. This last cycle we loss more money than we had lost in any other cycle. In this last cycle one of the facts, without dispute is that we had assets and portfolio that will residue from other transactions that we executed.
So we had other people’s assets, most of which we sold that was still in our portfolio and during a period of stress we lost some money on them. Not to say we didn’t lose money on assets that we created ourselves because we did. But we significantly lose less money than other banks lose on the assets they choose to create. So the portfolio statistic at June 30, 68.6% non-covered loans held for investment, average principal balance 4.3 million, with [something] to hear about multi-family. An expected weighted average life three years, the second quarter originations $1.4 billion in multi-family loans on the quarter. The percentage of our multi-family loans located in the metro area 91.4%.
Now on the commercial real estate loans which in some cases are multi-family in essence we do mix used lending as well. So for example it maybe 10 stories of rent, controlled rent, subsidized housing above and in Manhattan pay a street level of retail space that they get paid a lot of money on that’s not rent regulated and everything above is rent regulated. Those assets and other type typical commercial assets likewise have a significant in our case it represents about 26% of our portfolio, but the average principal is about %4.6 million a little bit more not multi-family. The expected weighted average life 3.3 years, a little bit more and the second quarter originations 670 million that’s less.
Percentage of our CRE loans located in the near area 95.1%, and our CRE loans are typically collateralized by office buildings, retail centers, mixed used buildings and multi-tenanted light industrial properties.
So our asset quality, the quality of our assets has improved dramatically since the peak of non-performance March 31, 2010. Year-over-year improvement were down 35 basis points in non-performing loans, about 14 basis points in non-performing assets, non-performing assets resolve takes longer to resolve non-performing assets than non-performing loans, but we are very pleased with the progress that we are making on the non-performing assets and in the period ahead we are going to see the disposition of a good deal of what we have in that portfolio and we are very, very pleased with the direction that that’s moving in. We expect that will be a very positive outcome.
As you can see here, the non-performing loans versus the non-performing assets has been changed from March 31, ‘10 to today to about 60 to 61 basis points (inaudible). The fact is that we have been distinguished by our low level our net charge-offs and down with credit cycles and this comparison in the period 89 to 93 those are the actual numbers. So you can see there that we have 17 basis points in charge-offs in that five year period, if you expand that on either side to make it 10years, we had about 17 basis points in charge-offs in that 10 year period.
If you look at the current period 2008 to ‘13 the first half, still have the year longer. That number is about 88 basis points, but over the period that we had 88 basis points in losses, the banking industry on average had 1081 basis points in losses. And again if you expand that further, we had substantially in ‘07,’06, and ‘05 [lessen] losses and everybody else with the past.
The quality of our asset has improve dramatically since the peak of non-performance which was [3-31-’10], this is for us not necessarily industry and these are the comparative numbers here. Looks to me like that slide was at 54. Asset quality, the commercial real estate, am I going in the wrong direction. On me. There is a back button here.
So the non-performing loans and total loans as you can see here, these are the comparisons both in the period 89 to 93 and the period ‘08 to the first half of ‘13 and low and behold these numbers likewise are superior to the industry as a whole. But much more important then whether or not the status of loans are performing or non-performing is the ultimate disposition. How much money in disposition do you actually loose on the asset? And importantly, our track record in actually losing money is significantly less than everybody else.
Despite the fact that we may have assets go non-performing. So we had a particular property owner that we round up having $50 million in non-performing assets with that property owner, because that property owner was going bankrupt and that property owner might have had $300 million with Citi and Chase and others. And we lost 0, in final disposition we lost 0 on that property owner. And other banks lost 40% and 50% of their investment, with that very same property owner.
So the difference between us and others on assets and disposition is extremely important, because even when you are in the same market dealing with even with the same owner, it always matters how much money you have at risk. And because we have less money at risk, we have a better outcome in final disposition.
So historically and currently, few of our non-performing loans have resulted in charge-offs and as you could see here, these are the numbers. At ’04 the 12 months ended December 31, the last credit cycle and current credit cycle, there’s differences between non-performing loans and net charge-offs. These are how the outcomes actually are reported.
So the quality of our assets reflect the nature of our lending niche and our strong underwriting standards, conservative underwritings. We have loan to value ratios, which are significantly better than that of our peers. We lend and are regulated in many cases by the very same people as all of our bank peers. We lend maximum dollars that our business model allows us to lend than others might lend, 10 or 20 or $100 million more on the same property, I mean, if we're talking about a big property.
We've had that actually happen. The best loan on our portfolio, we had upsized it several times, refinanced it several times, went from $82 million to an offer of $195 million on that property, only to have a major bank offer $325 million, and then they went with Credit Suisse. We actually offered them $375 million. So the reality is that although we supposedly all use the same type of appraisers, the outcomes are very different.
So at the time of origination, you can have great disparity in the amount of risk taken on a loan, and that really matters at time of disposition, whether that loan can or can’t survive. So we had very, very significant players involved in (inaudible), $5.4 billion on that property, which today, they in fact made that loan could not be repaid and in actuality, billions of dollars were lost and they were lost by the people that actually funded that loan, not by the people that made the loan.
And the reality is that that happens time and time again, these significant losses that were taken during this last cycle in the New York market were taken by people, in other countries, taken by people that actually were pension funds, or they were hospitals or they were universities, all thinking that they had quality paper, knew nothing about the underlying asset and wound up getting this massive surprise when in fact the asset didn’t perform and the assets in the New York market, the assets had been in that case in Metlife's portfolio for decades is really good asset. But at that value and that’s the biggest example of what I have been talking about. That you can take a really, really good asset in the New York market and make it into a very, very bad loan.
And that happens far more often that people realize, they realize after the fact, when the loan doesn’t pay, when in fact in this position there is massive loss. So we do multiple appraisals, we are very conservative, we are very consistent, we in fact are risk averse, when you think about our portfolio, 67% or so of our portfolio is a multi-family 26% of CRE which mixes even with multi-family.
So ADC 1.5% one-to-four family 1.3 commercial and industrial 2.4, extraordinarily low risk to the consumer, very, very, very few banks in this market have such a small amount of risk to the consumer. That’s an important thing to recognize given that a significant unknown into the future is how in fact people will look at consumer loans. So I think that the risk profile of the bank five years ago, 10 years ago was in fact very low when compared to our peers. The risk profile of the Bank prospectively is even lower compared to our peers because of the magnitude of difference between our risk as a Bank to consumers.
So loans in what we acquired in our FDIC assisted transaction these are the covered assets as you can see those assets are going down in over $3.1 billion on June 30th the percentage of our total assets is going down as well we are down to about 7% and we expect that that number will continue to down as we see it, it represents a very, very low risk to our earnings and a very substantial return to our bottom-line based on how those assets have been marked and structured.
So our residential mortgage banking operation is a leading aggregator of agency conforming one-to-four family loans $33 odd billion we've originated in the three years that were public that’s $33.2 billion since January of 2010 that’s a 127,000 one-to-four family loans most of which almost all of which we sold.
The reality is that we're one of the larger aggregators in the country of one-to-four family product but we sell almost the entire portfolio to Fannie and Freddie. As of June 30th 99.8% of all funded loans were current, in this environment over the last three years 99.8% of all funded loans are current. The companies loan repurchased exposure is comparatively low as we benefit from the industry's more stringent credit and documentation standards, which have been in effect, since we entered the residential mortgage banking business in January of 2010.
Our exposure in mortgage banking basically this will take hold until the end of 10, so reinvest have been lending to have a mortgage banking portfolio that was servicing that is been created principally since the end of 10.
We have generated mortgage banking income of about $500 million including about $50 million or so in the first half of 13. Our proprietary mortgage banking platform give us the capacity to expand our revenues market share from product line, this particular platform had well over $30 billion, in loan that it was servicing a number of years ago, it certainly has significant upside.
Our mortgage banking income has supported the stability of our return on average tangible assets even in times of interest rate volatility. The prepayment penalty income this is consistent to entire public life that actually goes back to before we were public company. Prepayment income is for us, a number that generates real benefits during period is going when we are losing yield or gaining in prepayment income.
So our prepayment income is typically higher, while rates are going down and that is obviously to our bottom line at most opportunity time. So you can see here on this slide, the prepayment penalty income is the yellow markings of how many is out here. Mortgage banking income is what you see in gray, so the prepayment income has been robust in the recent period and we intend that it would be continuing to be some. Our mortgage banking operation generated 38.1% of non interest income and 7% of total revenues in the first half of 13.
At or for the three months ended June 30, that represents a $2.1 billion in originations, a percentage sold that you have fees about 95% we've only that begun to portfolio a small percentage of what we deem to be extremely attractive loans as you can see the average FICO on the loans we're producing is 767, the average loan to value ratios at about 72% and the second quarter mortgage banking income was $23.2 million.
The loans can be originated, purchased in all 50 states, loan production is driven by our proprietary real estate having real time web access from mortgage banking technology platform very attractive used nationally, our proprietary platform securely controls the lending process, which gives us a high degree of confidence that we have a limited amounts of exposure. It's not just the outcomes the process, as a result our clients cost effectively compete with the nation's largest mortgage lenders, 900 plus approved clients in two community banks, credit unions, mortgage companies and mortgage brokers.
The vast majority of the loans funded, our agency eligible one-to-four family loans, 100% of the loans funded are full documentation prime credit loans. Our efficiency ratio over the course of our public life, we've been within the top 3% on an efficiency basis and we continue to be a highly efficient bank. The cost of doing business is higher because we are virtually explicitly involved, being qualified to be a bigger than $50 billion bank. There is a lot of time and effort and money that goes in to that process. It's a regulatory process that we in fact feel is well worth doing. The idea being that we want to be ready to be a bigger than $50 billion bank.
Our multi-family and commercial real estate lending are both broker driven with the borrower paying fees and the mortgage broker paying firm, paying fees. The products and services are typically developed by third-party providers and the sale of these products generates additional revenues. 39 of our branches are located in-store. In-store branches are typically far more efficient than other type lending, I mean retail banking. We acquire our deposits primarily through earnings accretive acquisitions. That is our business model.
So we grow by buying banks. We've done 11 deals. We typically buy banks for the purpose of creating a retail franchise that operates more efficiently than our competitors and thereby provides us with the funding that is more attractive than our competitors usually have. These are the 10 deals that we did, as you can actually 11, the transaction includes savings banks, commercial banks, just branch acquisitions, FDIC-assisted deals and just deposit deal.
So we've done a rather broad mix of transactions over the course of the years. We're very pleased with the outcomes on all of these deals, some of them extremely beneficial. As you see deal number one, two and three, extremely large deals where we more than doubled ourselves in a very short period of time, we did that with the very first deal that we did. We were about a $1.6 billion bank when we negotiated the deal with Haven. They had assets of $2.7 billion. So each of those deals were typically with banks that were either the same size as we are bigger than at the time we put them together.
And then of course, we do a whole series of additional deals. So as you can see our deposit growth has been largely acquisition driven. We identify the transactions that occurred in proximity to the reflected periods here and in every case. The deposit growth was driven by the acquisition that is our business model.
As you can see our loans outstanding likewise grew in proximity to these transactions and we grow our portfolio rather rapidly, but we grow our portfolio by actually doing loans, we don’t buy loans from others.
So our total return on investment, this is what we’ve actually created for shareholders over time. As you can see here the compounded annual growth rate since our IPO is just about 28%, that means 28% compounded annual growth rate in return. Our overall return at June 30 was about 3415%, that total return includes both the appreciation in the stock as well as the dividend paid.
An important component of that is what you see down below as a result of the nine stock splits that we took, nine stock splits and doing deals between 1994 and 2004. Our shareholders who had the stock before were able to get 2700 shares for every 100 share that they purchased. That’s a huge benefit to shareholders. Now that doesn’t happen everyday, but that actually happens as a result of us doing highly accretive large deals, and as we sit today it our intention that our next deal will be a large deal and that is mainly driven by the reality that there is a new plateau, a $50 billion plateau that changes the rules of the game. So we don’t want to tiptoe over 50, we want to go over 50 in a meaningful way and we want the benefit of spending our time consolidating a large deal.
So that’s what we are structuring ourselves, that’s what we are spending money and time preparing ourselves for to actually be in the best possible to position to do a large deal and thereby create real value for shareholders by making it highly accretive to earnings and highly accretive to assets. So that being our intent, I think I am allowed for enough for the questions and then as I said we will be going to a breakout session at the end of all of this.
Great now before open it to audience questions we do have audience [response] that we are going to put up here in a moment and if you wouldn’t mind participating with the handheld controls in front of you. Question one if you currently dealt on shares of NYCB or under rated stock what would cause you to change your mind press one for a higher interest rate environment; two, loan growth acceleration; three, lower valuation; or four, improved asset quality.
And far and away it’s number three lower valuation. Second highest is loan growth acceleration, and move it on.
How do you use the specially finance business opportunity for NYCB positively neutral or negatively?
And relatively even split number two neutral is the most, but pretty even across the boards. So moving on, so in the 6 to 12 months what do you expect will happen to your exposure to NYCB increase, maintain, decrease or remain uninvolved?
And it’s remain uninvolved so. All right I think we have time to open for some questions in the audience now.
This is new I have never seen this before.
Some more color on your next deal, are you going to stay in your footprint to look to expand beyond?
I think the deal that we did with AmTrust demonstrates pretty clearly that our footprint is irrelevant. As we operate today overwhelmingly the most efficient retail banking we do is in Florida, and the second most efficient retail banking we do is in Arizona. So being out of our footprint in our particular case does not represent undue risk, it actually represents and opportunity to have a better funding source that we can manage to our advantage and that’s when we can change rates for example in Arizona and have actually no impact on our deposit base in New York. So that gives us a greater deal of flexibility to deal with changing interest rate environments. And the desire to actually acquire deposits by rate.
And you said more than once in your prepared in March that your first couple of deals actually doubled so as your banks. So good luck on your next $45 million now available.
We'd love to do it.
Can you talk about the outlook for your net interest margin and I guess consequent to that your dividend any potential color on the stability end or to change in your dividend policy?
Yeah. Our dividend policy has been very consistent and we would expect that it would continue to be so into the period ahead. Our margin as our Chief Financial Officer has indicated it coming to the point where we should be stabilized in the immediate period ahead. So, the moving interest rates and what has been leaving our portfolio what is continually less in our portfolio would suggest that was most likely going to happen.
But that margin numbers are ex prepayment activity.
Recently there was some commentary from FHFA regarding multifamily and the reduction of the GSEs in the business, you have any thoughts on that. You guys see that it's an opportunity.
Clearly, when in 2008, When Fannie and Freddie are in somewhat disarray and pulled out of the market a bit, interest rates moved up dramatically. So there is a very smart asset that we've otherwise would have been refinancing in that market. Even though they do not take a big share of the New York market. They do more lending outside of the New York markets than obviously in the New York market. They have a meaningful impact on the rates that everybody gets nationally, whether it's on one to four family, or some multi-family.
So when they are less active, rates will automatically move up and the period ahead is most likely going to see a significant change in what Fannie & Freddie actually does in both multi-family and one-to-four family and as a result of that, I would think that rates will in fact move up in both of those asset classes.
Alright, we will have a breakout session in the Madison Suite but please remain in thanking Joe and Tom for spending the time with us today.
Thank you all.