New York Community Bancorp, Inc. (NYB) 2012 UBS Financial Services Conference May 8, 2012 10:30 AM ET
Joseph Ficalora – President & Chief Executive Officer
Thomas Cangemi – Senior Executive Vice President & Chief Financial Officer
Okay, we’ll go ahead and get started on our next presentation. We’re very pleased to have New York Community Bancorp with us: Josephe Ficalora, who’s President and CEO; Tom Cangemi, who is the CFO. I’m sure a lot of you are familiar with the NYB story but it’s been a very successful story through this cycle, currently paying a 7.5% dividend that’s supported by a very strong capital base. They dominate the multi-family market here in the New York City area which continues, so they’re very well positioned to benefit going forward.
With that I’ll turn it over to Joe.
Good morning, all. These are the legal requirements of course, which I’m sure you’re all familiar with. In any event, the bank is now a $43 billion bank. We are the 21st largest bank holding company in the nation. Our deposit base represents the 23rd largest deposit base – we have about 276 branches. Our multi-family loans represent about $17.8 billion. Over the course of the last decade we’ve probably originated something in the range of $36.5 billion in multi-family loans. The important thing to know is that the consistency of our business model allows for every three to four years our loans actually refinance. That is not very common.
Obviously our market capitalization is on March 31st at $6.1 billion – we’re at a bargain today. Our total return on investment is in excess of 3000%. Most people do not understand how we can have a total return in excess of 3000% but that’s taking into account the benefit of our dividend, which has been large for the entire time that we are a public company, as well as the fact that we’ve split our stock nine times. So the stock has provided significant returns, probably better returns to investors than any bank that I’m aware of.
We’re in the states indicated here. Obviously we believe that we’ve established a franchise in Ohio, Arizona and Florida that happens to be a very effective operating franchise. In fact, we do an analysis each quarter to determine the operating efficiency of each and every branch in the bank; and overwhelmingly Florida is the most efficient operating franchise that we have, and Arizona is the second most efficient operating franchise that we have.
Our Q1 numbers indicate that we had an earnings per share of $0.27. We had a total return on tangible assets of 124. Our margin stability at 324 has been pretty consistent as anticipated. It’s moved, and certainly our efficiency ratio continues to be among the best efficiency ratios in the nation with regard to banking. Our balance sheet reflects a loan to asset ratio of 71%. Our securities total assets is at about 11.3 – that’s up just a little bit from year end. You can see that our deposits are at about 53.3 – also up a little bit, and our core deposits are up to 67.3, also up. So the changes are favorable.
On this side we have our asset quality measures and they continue to compare quite favorably to those of the industry as a whole. As you can see from March 31st we’re at about a 1.15 – the industry’s at about a 2.25 on nonperforming loans. Our nonperforming assets are at 0.93 whereas the industry’s at 1.70, and our charge offs were at 0.05 while the industry was at 0.34. We continue to maintain strong capital positions – 795, in the March 31st period we were 779, and we have tangible stockholders’ equity at $3.1 billion – the change in the numbers is primarily from the growth in the assets.
The community bank and the commercial bank both have extraordinarily attractive capital positions. As you can see there, 840 and 1301 at the end of the year, and we’re at 847 and 1335 on March 31st. The total capital is at 1709 for the commercial bank and 1342 for the community bank at the end of the year, and we’re up to 1755 and 1327.
So our business model has consistently focused on building value; multi-family lending is the principle business of the bank. We’re at about 67% of our loan portfolio in that product. Our strong credit standards and superior asset quality continues over the course of probably four decades that we’ve been tracking this. We have a residential mortgage banking platform that has generated significant income for the bank. We have aggregated $21.2 billion of one- to four-family loans in the short period that we’ve been doing this, and that really is during January of ’10 is when we actually started creating these loans.
The efficiency ratio has consistently ranked in the top 1% and we have a growth through acquisition strategy that has been consistent. We became a public company back in ’94 with the intent of acquiring other companies, in particular when in fact their business model resulted in them taking significant losses. Over the course of many decades that has actually happened with consistency and therefore presents an opportunity. So the greatest opportunity for us is in front of us with regard to doing larger, highly accretive deals.
Our focus on multi-family lending and rent regulated buildings has enabled us to distinguish ourselves from the industry peers based on how we actually perform doing this business. 64.2% of the rental housing in New York City is subject to rent regulation. We have focused on that for decades, and therefore we’re doing business in a market that has taken out many other banks. Many banks have gone out of business on rent regulated housing. We in fact lose extraordinarily small amounts on rent regulated housing.
So our focus on multi-family lending is the niche that we principally build our asset base with. Each time we do an acquisition we typically dispose of the assets that the other bank had and we in fact increase our lending in the multi-family arena. Our multi-family loans are less costly to produce and service and therefore that contributes greatly to our efficiency ratio.
Multi-family and commercial real estate loans feature the same structure, the terms are identical; in many ways the people that we deal with are basically the same people, not to say there aren’t exceptions. There are, but for the most part the structure of our loan is the same, the overall metrics, the performance metrics are basically the same; and over long periods of time the benefit of being consistent in how we choose to lend has given us a significant comparative benefit against other banks.
We are the leading producer of multi-family loans in the New York metropolitan area. As you can see there we’re at about $17.8 billion in portfolio. The percentage is about 67%; the average principal is about $4.1 million. Our expected weighted average life has actually dropped below three years. We went to the longest average life a couple of years back in 2009 – we went to about 4.2 and now we’re at 2.9. The originations in Q1 were at $1.1 billion on the multi-family platform, and our multi-family loans are located primarily in the New York City area, about 80% of them.
Our CRE likewise, 28.5% of the portfolio. Our average principal balance is $4.3 million, expected weighted average life is 3.1 years, and our Q1 originations was $916 million. The reality is that in many ways, our CRE portfolio is an extension of our multi-family loan portfolio. Many of the properties are specifically retail on the lower floor and multi-family on the higher floors, so a fairly large percentage of what we call CRE is actually multi-family. Not to say there aren’t you know, genuine CRE loans in there, but a good portion are also multi-family mixed use.
The quality of our assets has improved dramatically since 12/31/10. As you can see in this slide, our nonperforming loans to total loans had a 148 basis point improvement year-over-year. Our nonperforming assets are at an 83 basis point improvement year-over-year, and as you can see, the number has come down dramatically. So nonperforming was at 2.63 on 12/31/10 and today it’s at 1.15, and our nonperforming assets were at 1.77, today they’re at 0.93.
So we have been distinguished by our low level of net charge offs in a downward credit cycle and by 52 consecutive quarters with no losses on assets generated by the company. That was during a prior period, but 52 consecutive quarters on no losses on any loan that we created. There are very, very few banks that do that. You can see here that in the last credit cycle we had cumulatively in that five-year period a loss of 17 basis points. In the period that includes 2008 through Q1 here, we’ve had 4.25 year-to-date, actually our losses were 77 basis points – so that’s four and a quarter years is what that is.
The quality of our loan portfolio continues to exceed that of the industry. This is looking at us compared to the rest of the banking industry. As you can see, in the last cycle we performed very well in comparison to others; in this cycle we continue to do the same. That consistency runs cycle over cycle over cycle. So if you go back in the 40-year period, in that 40-year period we had consistency of outperforming other banks cycle after cycle after cycle.
Historically and currently few of our nonperforming loans have resulted in charge offs, and this slide gives you some sense of how those numbers actually line up. And the comparisons are pretty significant. When you take a look at the nonperforming loans to total loans, those numbers are well better than the industry; but certainly when you consider that what we actually lose on our loans is indicative of the difference in the way we originate our loans – originating our loans the way we do for decades has resulted in value being there even when the cycle turns.
So since there is real value, since we’re a cash flow lender, that value gives us the ability to actually with consistency outperform our industry. Most other bank business models lose a substantial amount of money during cycle turns – that’s when they lose the most amount of money. We, with consistency, cycle to cycle to cycle, have lost significantly less because of the way we choose to lend. So because of the consistency in how we lend we’ve actually had significantly better outcomes.
There’s no question, everybody wants to have good outcomes, but the reality is that many of our peers lend with an expectation of loss – in fact, there are even accountant gurus who are suggesting that everybody who does a loan should make a determination at the time they do the loan how much they’re going to lose on the loan. Well, that’s not the way we lend, and certainly accountants shouldn’t be telling anybody what they should be recognizing in losses, even at the origination of the loan. But unfortunately we’ve had this evolving situation where there are people who are making judgments and deciding how we should all perform based on no real experience but just a hypothetical.
The quality of our assets reflects the nature of our multi-family lending niche – our strong underwriting standards with consistency, conservative underwriting, active Board involvement. Our Board is conceivably more involved in the lending process than the Board of any bank that we’re aware of. We hear this all the time from everybody. Our Board actually approves the loans, does inspections of properties, makes sure that people understand that they’re not paid for volume, they’re not paid for their contribution to earnings – they’re paid for the completeness of their preparation, their underwriting so as to ensure that we are less likely to take future losses.
Over time it is our belief that it is far better to earn less during the period of performance and lose less during the period of nonperformance. That consistency doesn’t exist in most banks. Many banks will take the highest interest rate and take the greatest risk so as to have the best possible numbers today. We’re perfectly willing to take a lesser loss tomorrow, and therefore over time we are basically a cycle player. We believe that the credit cycle is extremely important in deciding the viability of a bank and lo and behold, the credit cycle basically determines when it is best to buy another bank.
So the differentiation between us and others widens in the worst of times. When the credit cycle is in a downturn, the differentiation between us and others should widen so as to create the opportunity to buy other banks. That’s basically the premise that has led to the ten acquisitions that we’ve done to date. So we do accretive deals, and certainly when we do those deals, the opportunity for investors to get in on the deal and benefit from the change in the overall valuation of the company is a major positive.
So we’re risk averse. The mix of our loans held for investment is indicated in that lower right-hand corner: multi-family is about 67% or so and CRE, which I have indicated to a great degree is multi-family is 28.5%. C&I is only 2.2%, [ADC] is only 1.7%, and one- to four-family is 0.4%. So we have a very, very different mix of assets than most other banks, maybe even than all other banks.
The fact that we understand our market and we still have multiple appraisals of all properties adds to the content of value even in the cycle turn. If we do it right in the beginning it performs better over time, and much, much more importantly, it performs better in the worst of times. So that distinction is something that we have been able to demonstrate over the course of many, many, many years now. So the loans and ORE-acquired in our FDIC assisted transaction are covered by loss sharing agreements, thus mitigating credit risk. We have the last 95/5, we did that in March of ’10 with Desert Hills. We have an 80/20 and a 95/5 on all of our covered assets, and we’re very confident that we’re doing this work properly.
We’re very proud of the fact that we’ve been considered best-in-class in how we do this work, and that’s important, not just for the assets that we hold but for the future opportunity that we would have in doing additional deals with the FDIC or for that matter in-servicing loans for others.
So our residential mortgage banking platform is a leading aggregator of agency-conforming one- to four-family loans. As I mentioned earlier we’ve originated a significant amount of these loans and we sell them typically in about 13 days. Our new one- to four-family loan registrations in Q1 2012 were $3.3 billion. We sold 98% of those loans to GSEs; the rest were sold to other banks or other entities. Our FICOs average about 773; our average loan to value ratio is about 68%, and this is in the current period. Our rank among US residential loan aggregators is 14th, and our Q1 mortgage banking income from originations was about $40 million. So the bank has a very real and very profitable platform that represents a very low risk profile.
We feature loans that can be originated or purchased in all 50 states. Our loan production is driven by our proprietary real-time, web-accessible mortgage banking technology platform; a platform that we went to the market with and clearly, many large, well-respected lenders found our platform to be highly desirable. It was so desirable by others we decided to keep it.
So our proprietary business process securely controls the lending process, while mitigating business and regulatory risks. As a result our clients cost effectively compete with the nation’s largest mortgage lenders. So this is a real business that is providing significant contributions and there’s really no reason to believe that it is limited. We’ve begun to offer a jumbo product and certainly we expect that that will gain share as time passes.
We have 950 approved clients which includes community banks, credit unions, mortgage companies and mortgage brokers. We have 100% of our loans are funded and are fully documented. We take this business very seriously. We explicitly want to ensure that we’re not creating an undue future risk. The way we lend for portfolio is the way we lend here, so we’re doing this with an expectation that we are not going to be getting back loans as a result of mistakes that were made in the origination of those loans. And as I understand it we’ve had maybe a handful in the 70,000 or so, 80,000 – every day the number goes up.
So we are doing this with a very serious amount of attention to mitigating the nature of the risk that this business represents. There’s no question we could do a lot more of this lending, make a lot more money doing this lending but we would be taking a greater risk in doing so. So our efficiency as indicated here continues to be extraordinarily strong. Obviously the efficiency of all banks has unfortunately gone up, and that’s to a great degree because of the change in law and the change in regulation, the amount of effort that has to go into demonstrating that compliance with requirements takes a significant amount of effort and a significant amount of money. But overall we’ve been very, very consistent at being more efficient than other banks over our entire public life. So we are in the top percentiles of efficient banks for our entire public life.
So growth through acquisition – we have completed ten acquisitions since 2000. As a result of doing those ten acquisitions we’ve also split our stock nine times. As you can see we’ve done a variety of ways and certainly we’ve doubled our bank several times in the process, so we have a demonstrated track record of effectively consolidating with other banks both efficiently and in a timely manner without there being any slippage. We have not, as many of the big banks had major systems problems that delayed a conversion or otherwise compromised a conversion. I’m sure you’re all aware of some of the bigger banks that have had difficulties in combining. Let’s face it – [Manny and Chemical] had to delay their combination because they couldn’t get their systems to work well.
The fact is that we are very confident that the way we are positioned today we can do highly effective combinations with other banks. As you can see here, our deposit growth has been largely through acquisition – that is the business model of the company. The [Kagers], total deposits up 17.2% on a compounded annual growth rate. Our core deposits are up 21.7% and our demand deposits are up 24.5%. Loans, likewise have grown significantly over time. As you can see, the multi-family loans are up 19.8% and total loans are up 19%. That is a compounded annual growth rate for the years indicated.
Our total return on investment, I mentioned this earlier: our total return to the day indicated, which is at the end of the quarter that we’re reporting on, was over 3000%. And how do we get over 3000%? The answer is that for every 100 shares that a person purchased they now have 2700 shares. There aren’t any banks that were able to return that many additional shares to people. So 2700 shares for every 100 means that basically on investment, people are getting more back in dividend than they paid to buy the stock; and certainly the consistency of the dividend has been an incredibly beneficial reality for those that choose to buy the stock.
The ability to do this, to actually split our stock nine times, to create this kind of value for investors is driven by the fact that the company has grown its earnings, and size really doesn’t matter – it’s what you do with it. And the fact is, we’ve demonstrated that we can create real value for investors by doing transactions that are highly accretive. We’ve turned down significantly more deals than we’ve been willing to do, and the reason that has been beneficial to shareholders is that we’ve turned down deals that likely would have been less accretive or would have created a greater risk. The greater risk in assets is what we avoid best. So we have less loss during cycle turns which means we have accumulated more capital over time.
So the company actually does its best in more difficult times than in the best of times. Many, many companies have very strong earnings during the best of times, and I’m sure you’re all aware of the fact that there were lots of lenders that were lending huge amounts of money, way, way, way more than properties were worth, and those lenders lost huge amounts of money when the cycle turned. We do not have that reality in our past, and this is a long past that we do not have that reality in, and therefore the likelihood that this evolving cycle that we’re in right now will have a meaningful adverse effect on us is significantly lower than it is for other banks because the fact is the fact, that even when the cycle turns our assets consistently outperform those of others.
Now, there are many people who are in business lines that we have no connection to whatsoever, but it’s also true that many of the people who are in multi-family lose large amounts of money. So many of you in the room remember Bowery and [Grainer] and American and Dollar and other banks that all went out of business on multi-family loans in New York, and when they were losing their bank we were actually making more money and making more loans in the very same market that they were losing the bank in. So it’s not a matter of we think we might be well positioned for tomorrow; the fact is we have been extraordinarily well positioned and our performance is the best indicator of how in fact we handle cycle turns and adversity.
So in the last cycle, not the one that started in 2008 but the one that started in ’87, unemployment in New York City was over 12%, vacancies were extremely high. There were all kinds of problems in the marketplace that were causing significant losses to banks throughout New York. We were not plagued by that because of the consistency in our business model.
So obviously we have some time; I know that I’m supposed to take some questions here as well as we’ll have a break and we’ll be able to do questions in that room for anybody that would like to follow. Any question at the moment?
Does anybody have any questions out there? If not, I’ll start it off by Joe, just looking at the New York rent regulated markets, some of the cases that have come up in court and just the general environment – are there any challenges or changes that you see in the rent regulated market in New York?
Well, the good news is that many of the more relevant changes or court cases have occurred and their effects have already been put into the marketplace. We are not adversely affected anything close to the same degree as others by some of the things that have happened, and we’ve been able to demonstrate that our values hold despite even some of the changes that impacted other companies. So Stuyvesant Town for example was involved in a litigation which caused serious concern about tax benefits and how that was impacting their overall valuations and so on. We don’t use that when we use our calculations so we are far less exposed to that.
So the reality is that rent control and rent stabilization is not going anywhere. This environment is not going to pass law that changes that. If it did the value of all of our real estate would go up, but the likelihood that there would be such a change is extraordinarily remote. There’s no question that there could be things done that could make the markets stronger but as we sit right now today, the New York market is probably stronger than it’s been for most of the years past. There are some that think there are certain segments of the market that are stronger than the market was in ’07 or ’08. New York is highly desirable; the world wants to invest in New York. The world wants to live in New York and the world has a lot more money in many respects.
So New York did not get hit as hard as other cities or other states, and certainly New York has created significant value for investors. Any other questions? Yes, sir.
Thank you. Obviously New York is your core market that you understand the best. As you are expanding into these other markets – Ohio, Miami, etc. – can you just expand a little bit about the controls that you have on the process given that’s outside of your core area?
Right. I think the important thing which is part of our consistent model is that or principle assets are here and they’ll continue to be generated here. We generate loans in all of those other markets but we typically generate those loans for sale, so we go out of our way to make sure that our depositors are able to get loans, and that the markets that we’re in – whether we’re in Arizona, Florida or in Cleveland – that we generate loans within those markets again for sale.
So the important thing is that if you look at our asset base today it does not have a significant or an exposure that anyone should be concerned about to assets that are not typical. In fact, the in-New-York ratio of mortgages is actually higher than it was two years ago or four years ago and that’s a good thing we think because the New York market is a very stable market. So in the interest of investors as well as in the interest of the viability of the bank we generate for portfolio, principally assets that we believe are safe. And this market we believe presents that opportunity to a great degree that doesn’t exist in other markets. But I want to be sure that everyone realizes we are lending in Cleveland and we are lending in Florida, and in even Arizona; but we’re not lending for portfolio.
Can I ask you a question about… You mentioned the cycles and you have to manage through these cycles. Can you talk about where you think we are in the cycle and where your sort of midpoint normalized earnings are relative to the normal businesses and where you think you’re earning now?
Sure. Unfortunately, cycles aren’t things that come out of a book or otherwise are prescribed in advance. Cycles can be positive and they can be negative, and they can be transitional. And certainly we are in an elongated negative cycle. The New York market is benefiting from some of the positives I discussed earlier, so the New York market is genuinely a better market than exists in most of the country. The significant difference in this particular cycle turn is the magnitude of government intervention into one- to four-family around the country.
So we’ve had judicial intervention which is not at all historically the case in a very meaningful way. We’ve had law that has been written I guess going back into the ’06 to ’08 period – law to break the law between a mortgagee and a mortgagor; other kinds of incentives to basically compromise the interest of the holder of the debt rather than the individual that stops making the payment. All of that changes the speed with which the market can recover. So the real estate markets are plagued by a reality that they are taking far, far longer to stabilize because of the significant government intervention into the process and that creates vulnerability.
So whether or not there is actually a fall back or not in some markets the reality is that the recovery is much, much, much, much slower than normal. So if you think about the impact of uncertainty we have a material crisis here in confidence. So worldwide, in the US, there’s a significant crisis in dealing with the uncertainties that are presented by changes in accounting rules; the uncertainties that are presented by changes in law, changes in regulation, changes in court interpretation. All of these changes change the willingness of people who are willing to take risks and lend money to do so.
So the FICOs are significantly higher today in all loans. The down payments are significantly higher today in all loans. The analysis that is done with regard to risk is significantly different today than it was. All of that means there are fewer qualified buyers in the marketplace. With fewer qualified buyers, values cannot recover fully and the marketplace is vulnerable to turn, negative turn. So I think there’s a great deal of uncertainty in the period ahead and that uncertainty breeds the opportunity for psychological or other reasons why the markets could be pressured greatly.
So the good news about what we do, the banking model that we follow, is that it’s very consistent and it’s based upon sound expectations with regard to the value of the assets. The reality is that the future period is very uncertain. I think I’ve run out of time and I know we’re going to a breakout session for anybody that would like to join.
Yeah, the breakout section is in the Louis XVI East room on the 4th floor. Please join me in thanking Joe and Tom for presenting today. Thank you.
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