Flagstar Financial Inc (NYCB) 2003 Q2 法說會逐字稿

Good day, everyone.

Welcome to the New York Community Bancorp second quarter earnings conference call.

Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to the First Senior Vice President of Investor Relations, Miss Ilene Angarola.

Please go ahead, ma'am.

Thank you.

Good morning, everyone, and thank you for joining the management team of New York Community Bancorp for our second quarter earnings conference call.

This morning's discussion will focus on the highlights of our second quarter 2003 performance and our earnings projections for the whole year.

In addition, we'll be commenting briefly on our proposed merger with Roslyn Bancorp and the related pro firma earnings projections for 2004.

The discussion will be led by our President and Chief Executive Officer Joseph Ficalora, who is joined by Anthony Burke, our Senior Executive Vice President and Chief Operating Officer, Robert Wann, our Executive Vice President and Chief Financial Officer, and Thomas Cangemi, Executive Vice President in our Capital Markets Group.

Today's conference will be featuring several forward looking statements which are intended to be covered by the safe harbors provisions of the Private Securities Litigation Reform Act of 1995.

You will find a discussion of forward looking statements and the associated risk factors in our recent SEC filings and on pages 12 and 13 of this morning's earnings release.

If you need a copy, please call our investor relations department at 516-683-4420, or visit our web site, WWW.MYNYCB.com.

At this time, I would like to turn the call over to Mr. Ficalora, who will make a brief presentation before opening the lines for Q&A.

Thank you, Ilene.

Good morning, everybody.

Before I address our earnings release and our second quarter performance, I would like to thank you for joining us this morning in this conference and also acknowledge the warm reception our proposed merger with Roslyn Bankcorp has received from the investment community.

It is apparent that we are not alone in our excitement about the opportunity to build on our record of creating significant value to merger transactions with institutions whose strength complements our own.

Now onto our second quarter performance, which extended the company's record of solid earnings growth.

Diluted GAAP earnings per share rose to 53 cents, representing a 23% year over year increase.

And diluted cash earnings per share rose to 62 cents, representing an increase of 38%.

Net income rose 23%, to $72 million, generating a 2.36% return on average assets and a 43.16% return on average tangible stockholders equity.

On a cash basis, our earnings were up 37% to $85 million, generating a return on assets of 2.78% and a return on equity of 25.30%.

Driving the quarter's earnings growth and our strong performance measures with the same primary factors that have driven our growth in the past.

The significant level of multifamily loan production, the consistent quality of our assets, the efficiency of our operations, and the ongoing success of our leveraged growth strategy.

Capitalizing on the yield curve, which continues to be steep, our average interest earning assets rose 26% to $11 billion, boosting net interest income 14% year over year.

With interest rates at historic lows and prepayments at record volumes, we nonetheless recorded a 4.02% net interest margin in the second quarter of the year.

That we did so while replenishing our asset mix at lower yields and while engaging in a significant share repurchase program says much about our ability to hold margin during challenging times.

Revenue growth was further supported by a 20% rise in other operating income, which represents a 24% of total revenues in the second quarter of the year.

The combined 15% increase in total revenues was a meaningful factor in the 311 basis point improvement in our efficiency ratio to 23.89%.

Moving to the balance sheet, let me comment first on the mortgage loan production.

Six month origination exceeded $1.5 billion, including $1.2 billion in multifamily loans.

With a pipeline of $723 million two weeks into the current quarter, we are well on our way toward exceeding the record volumes we achieved in 2002.

Multifamily mortgage loans total $4.9 billion at the close of the second quarter, up 10% from the year-end balance, and on an annualized basis, matching our 20% growth target for the year.

Despite the growth in mortgage loans, we continued to see marked improvement in the already remarkable quality of our loan portfolio.

In addition to achieving our 35th consecutive quarter without any net charge-offs, we realized a $3.1 million reduction in non-performing assets and a $3 million reduction in non-performing loans.

At $13.4 million, non-performing assets equaled 0.11% of total assets at $13 million.

Non-performing loans equaled 0.23% of loans net.

Based on the strength of our second quarter results, we have increased our 2003 diluted GAAP earnings per share projections to a range of $2.04 to $2.10 from our earlier range of $2.00 to $2.06.

The new projection for 2003 explicitly excludes the impact of the proposed merger with Roslyn Bankcorp, which we expect to be completed in the fourth quarter of the year.

The combined company diluted GAAP earnings per share projection of $2.53 for 2004 remains as disclosed in the merger announcement and in our filings with the appropriate regulatory agencies.

As stated in the merger presentation, this projection includes a $3.5 billion downsizing of the securities portfolio, which will have the effect of enhancing the quality of our assets and earnings, while at the same time producing an impressive 10% earnings accretion to the first full year.

Our combined company projection also reflects the projected repurchase of up to 5 million more shares of the company stock as previously noted.

In addition, both Roslyn and we have the ability under the terms of the merger agreement to purchase our own and each other's shares.

Noting that our comments about the merger are of necessity, limited to what is already public, I would now be happy to take any questions you may have about our second quarter performance and our strategies for the remainder of 2003.

We’ll take questions now.

Thank you, sir.

The question and answer session will be conducted electronically.

Anyone who would like to ask a question, please press star 1 on your touchtone telephone.

We'll take your questions in the order you signal and as many as time permits.

Again, that is star 1 to ask a question.

We'll first go to Sal DiMartino of Bear Stearns.

Hi.

Good morning, guys.

Congratulations on another strong quarter.

Thank you, Sal.

Just two quick questions.

One, I think you can answer.

I don't know about the other one.

But given the -- you know, the yield curve, what's sort of your outlook on the leverage sight of the balance sheet?

Do we see it remaining relatively at this level prior to the deal?

That's the first question.

And the second question is does the shape of the yield curve now afford you different opportunities to restructure either the Roslyn balance sheet or the combined balance sheets at some later date?

Thanks.

I think the answer is yes, and I think the answer is yes.

We are likely to continue doing what we've been doing right through the close of the transaction, and certainly the restructuring opportunities do exist immediately as well as at the end of the process.

The good news is that the ability to consider opportunities by Roslyn is something that they have regardless of whether or not we proceed here.

There's every reason to believe, of course, that this transaction will close and the restructuring will have begun.

In fact, I guess, arguably, one could say it's already begun.

And just a follow-up question on your mortgage-backed portfolio available for sale.

What's -- I know I assume there was lots of prepayments that you noted that you put on new assets at lower yields during the quarter.

But what is the average duration now of your available for sale portfolio?

Right.

Tom will take that.

Hey, Sal.

Hey, Tom.

Right now the average life on the NBS is we estimate about 2.2 years.

Thank you.

You're welcome, Sal.

Next we'll hear from Jack Micenko of Lehman Brothers.

Hey, guys, how are you?.

Hey, Jack, how are you?

Okay, thanks.

Similar related question on the margin.

It trended down a little bit more than I had actually modeled it for the quarter and thought you were maybe still a little bit liability sensitive.

The earning asset growth looked okay.

Loan yields still hung in there pretty well.

I guess that was the reinvestment of the NBS that brought the margin down somewhat combined with some more leverage?

That as well as the stock repurchases.

The margin, of course, is impacted by the volume that is moved in any given quarter, and we did move an awful lot of assets during the quarter.

Right.

And then given what the O curve is, you probably expect this to rebound somewhat in the ensuing quarters.

I think the way we're looking at it right now, that's the case.

And then the fee income line, up from last quarter, but consistent with the fourth quarter of '02.

Anything in there that was unusual, or I guess I assume that was probably some prepayment penalties, that sortof thing?

The fee income line is probably consistent with the way we normally do business.

There was an internal operational change in some of the retail banking area because of the program that we were running that was not a fee income generating program.

It was basically a rebalancing of the deposit base somewhat.

So that did change activity with regard to fee income.

But we expect the quarter ahead to, you know, go back to our normal process.

Right.

Okay.

And then on the $3.5 billion reduction, I guess -- is that going to take place, I guess, before the close, or is that going to take place after the deal closes in the fourth quarter?

I think it's best to say it is very, very difficult at this juncture to be sure exactly what will happen.

It depends on what's happening in the market.

The good news is there's a tremendous amount of flexibility to either react quickly, should it be desirable to do so -- and we could do that through the assets of both companies.

Or we could do that at the very end of the process.

There's a huge amount of flexibility.

The cash flow is there.

The ability to downsize the portfolio is inherently built into the way it's structured.

So it's certainly something that we will monitor on a very close basis as the quarter proceeds.

Jack, this is Tom.

I want to add something.

Hey, Tom.

In light of the -- obviously, the opposite interest rate sensitivity, we're liability sensitive and they're extremely asset sensitive.

They are restructuring, as we speak, to the reinvestment of cash flow in a very large way.

So we have a lot of flexibility from now until closing.

Obviously, when we close a transaction, you know, we're subject to interest rates which could work to our advantage either way because it's all going to the good will numbers.

Okay, great.

Thanks, guys.

And next we'll hear from Mark Fitzgibbon of Sandler O'Neill.

Good morning, gentlemen.

First, I noticed recently that some of your brethren have been following you down into the Philadelphia and Maryland marketplace, and I'm curious if the pricing is substantially better on multifamily loans in those markets.

And then secondly, if you could also remind us what percentage of the total multifamily book comes from outside of metro New York.

I guess the good news is that we've had a fairly good amount of time to look at that market.

The pricing is not materially better.

The market had some explicit appeal to us with regard to the overlapping of some of the people that we have strong relationships here in New York with, who also own properties down there.

But we have opted not to actively enter Baltimore or the Philly market.

So, if anything, we've been closing far less in that region, and it's certainly a market that we've had past experience with and obvious opportunity to be active in.

So, Joe, would it be 5% to 10% of the portfolio maybe?

I think on the origination side it's significantly less than that.

What is remaining in the portfolio may be 1% or 2%, and that's mainly what had been done over the course of the Richmond county origination years.

So although we were, at the beginning, oh, maybe a year and a half ago, looking more closely at that market, the more we looked, the less we did.

So there's no question that we are certainly aware of that market.

But we've been more interested in focusing on the northern areas of New Jersey as well as the New York Metropolitan area, which obviously we're very active in.

Thank you.

You're welcome.

And next we'll hear from Rick Weiss of Janney Montgomery Scott.

Hi, guys.

Hey, Rick.

I was asking about multifamily loans in connection with the Roslyn deal, it looks to me like, as a percentage of total loans, it will be about 65% maybe of the portfolio, maybe 30% of total assets.

It sort of reminds me a little bit about what happened after Haven.

So, how long will it take for you to build back loans of multifamily to get 85%, say, of the loans?

That's a very good question, and, obviously, the analysis, the detail work that has to be done with regard to assets is in the process of being refined.

So we do not know how many assets will actually be staying in the portfolio, how many assets will be restructured within the portfolio.

We have some unique things, which I'm not exactly ready to talk about today, that we're looking at.

We've been looking at doing this for a while.

This particular opportunity may get more appealing for us to do it sooner and more aggressively.

But it's very, very hard to actually assess that.

It depends on market conditions as well as our willingness to restructure the portfolio at a point in time.

The direction will be clear.

We'll be increasing our multifamily portfolio consistently.

We'll be looking to increase the lending that is being done through the two groups that are working both at Roslyn and here, you know, with regard to the heavy construction lending that has been the case with Roslyn over the course of decades.

And, of course, our multifamily model will be actively turned up.

Let me -- I'm not sure if you can answer this one, but as best as you can tell, is Roslyn still putting on multifamily loans?

And if they are, are they using or starting to use your community bank's underwriting criteria?

I think the easiest way to put that is that Roslyn is continuing to do business.

They, in fact, have had numerous meetings with our people, and we are sharing a great deal of information with each other.

So they will be doing multifamily loans, and their lending practices and our lending practices will become more and more and more alike as the days and weeks ahead, you know, pass.

There's no question that, since the company is going to be producing these assets for the combined entity on a go-forward basis, there will be an alignment of how we lend.

Thank you very much.

You're very welcome.

And moving on, we'll next hear from Fred Zaino (ph) of Merger Insight.

Hello.

I just have a question pertaining to the Roslyn transaction, the option that you have, that you both have to buy in 19.9% of each other's stock.

I was curious, is there an exercise price on that option, or can you just explain how that works for me?

That's a pretty standard option.

The 19.9% is in many of the deals that actually occur.

The option is really not likely to be exercised at all, but it is there as a means of defining for any other party that should there be a breakup of the transaction, there would be a fairly substantial cost, something in the range of $47 to, I think, $60-odd million or there abouts.

Okay.

Fair enough.

Thank you very much.

You’re quite welcome.

And next we'll hear from Scott Valentin of FBR.

Good morning, gentlemen.

A couple questions for you.

One, we've heard numerous times -- and I guess it's nothing new -- but how competitive the New York multifamily market is.

Can you give us an idea of some of the terms, some of the rates, maybe on average of the multifamily loans originated during the quarter.

I would say the market is probably no more competitive than it's been over the course of many, many years, excepting for the fact that at this end of the cycle there are some changes in the activity levels of some of the guys that are not normally in the market.

But rates, because the market is so large and because the property mix is so different, rates vary, and, you know, they go from low-end lenders, such as Fannie or some of the spread lenders to high end rates that may range, I guess, from as low as 4 to as high as, I don't know close to 5.75 or something, depending on the property and who's the lender.

So the rates are quite varied.

The process by which we lend is very consistent, has been.

I guess, as I’ve said, many a time, a multifamily loan is, in fact, what destroyed Bowery and probably even City during the ‘88 to '92 period.

So multifamily loans come in a variety of shapes and risks.

We lost nothing in our multifamily loan portfolio at a time when others who had what appeared to be the same kind of loan were losing a fortune.

That's mainly because there's a huge difference in how these particular assets are handled.

Now, I don't want to go into too much detail exactly as to how we do it excepting that we're pretty consistent and our track record, I guess, speaks volumes for the benefit of the consistency that we follow.

No doubt your credit quality has been great.

I was just curious if there had been pressure by outside competitors trying to grab market share on increasing, say, moving from a 5.25 loan to more of a 10-year fixed rate loan, or if there has been waiving or modification of prepayment penalties, that type of thing.

There are certainly differences in prepayment penalties between the lenders, and there's also no question that there are some property owners that are going longer, seven years, ten years.

But we are still predominantly a five-year lender that does things the way we've done them over the course of decades, actually.

And one other follow-up question.

With the sharp move we had in the long end of the yield curve, the net accretion from the fair value adjustments on the merger announcement was about $63 million, I guess, projected.

How does the movement rates affect that value given that's a pretty big piece of the accretion?

Scott, it’s Tom, how are you?

Good, Tom.

How are you?

Basically, when we looked at the overall valuation of the entire company, we took in a rolling, three-month average on historical yield curves, so we have some cushion there.

And as you know, it's all market to market, so the goodwill will be greatly reduced or greatly increased depending on interest rates.

We believe that in light of the timing we have from today until closing, which we anticipate for fourth quarter, we're well protected there.

As Joe indicated on a previous discussion, the restructuring has already taken place.

The moving of interest rate either way, we could benefit because of the exact opposite balance sheet that we have.

So we're in a very good position to capitalize on a significant restructuring regardless where interest rates go from now until closing.

Okay.

Thank you.

Next we'll hear from Kevin Timmons of CL King Associates.

Just one question.

On the asset yield for the mortgage portfolio, 7.5% in Q2, can you break out what of that is core rate on the loan as opposed to how much is fee income?

Actually, the important thing to recognize there -- and this has been, I guess, consistent again over the decades.

Our yield on mortgage loans, which, in fact, is predominantly driven by the refinancing of multifamily loans, is, in fact, driven by a continually refinancing asset that has a term yield that is a composite, if you will, of the up front point, the coupon rate, and whatever points might be derived as a result of the refinancing of that asset.

And that, of course, you know, on a loan by loan basis runs for different periods of time.

It could run two years.

It can run four years.

It can run five years.

Also, as a result of the way we structure our lending, we do have a significant amount of flexibility in the refinancing of the loan.

So sometimes the available points are used to get a higher yield on the go forward refinanced piece of the property.

So there's no question that we never break out, for example.

It's always part of the yield on the loan, and it's either a component of the yield that we earn on the go forward new rate, on the new loan, or it's part of the term yield that we earned on the loan as a result of the original financing.

And that, by the way, has been the case for decades.

Yeah, I recognize that.

I guess maybe the question, I should rephrase and say is the component that's related to fees whether they're fees on new loans or on the refinance activity, has that changed in a material way relative to where it has been over the past, say, five years?

I'd say there's no question that on a loan by loan basis there's definitely a huge variety because in some cases there may be, you know, 3 points, and in other cases it may be 1 point.

But over the course of time, since it is a continually refinancing asset group, that is something that does move slightly when expectation that rates are going to be going up is present, or when expectation that rates have actually plateaued and they're about as low as they're going to get is present.

Sometimes that activity level increases slightly.

But the important thing to recognize is that, since this is a continually refinancing asset, every time there is a change in expectations, there is a change in activity.

So, you know, rates may be at a given level for six months, 12 months, and there's widespread expectation that rates over the course of the next 6 or 12 or 18 months are going to go up.

That increases the refinancing.

So uniquely, our assets wind up going up in yield when rates are going up, which is not usually the case, mainly because people are making judgments that are typically a 2-year judgment or 18-month judgment.

And they're basically looking at whether or not it would be more prudent for them to refinance their cash flow now, or wait the 6 months, the 12 months, when they believe rates will be higher.

So it doesn't necessarily matter where rates are at a given moment.

It matters here there is speculation rates will be at a future date.

Anything further, Mr. Timmons?

No, thank you.

Next we'll hear from Theodore Kovaleff of Sky Capital.

Good morning.

And good work.

Thank you, Ted.

Most of my questions have been already asked, but there's one that's sort of remains from the last conference call with regard to the Roslyn acquisition.

The overlapping branches -- there are roughly five of them or five pairs -- and I realize that in a couple of cases they're too small to have one of them take care of the increased pedestrian traffic, et cetera.

But roughly how many of these do you see being able to be closed and what sort of savings do you think can be --

Ted, I think the important thing to recognize is that the savings would be de minimis.

The likelihood that we close at this juncture – and you know, we've been actively looking at this -- obviously, even though this is an in-market deal, none of our transactions are ever driven by the ability to save money in the retail bank.

So there's little likelihood that there will be much savings there.

And also, as we've looked at those five pairs, at least three of them for sure, maybe four of them -- and maybe even five of them -- would not be, you know, resulting in any closure at all.

There's at least one pair that conceivably could result in our actually putting in place a larger branch that could accommodate the two, but that would be down the road.

So I think the most important thing to recognize here is that there will be very, very little in the way of retail bank closings or savings.

The deal is not being driven by an expectation that we're going to save money in retail.

Okay.

Thank you.

You're quite welcome.

I believe that was our last question.

We're very pleased that you've joined us.

Thank you again for your participation in this morning's discussion.

New York Community Bank's second quarter earnings and our prospects for the new year have been discussed here, and obviously we will be available on telephone, and interestingly enough, we will be visiting with many of our investors over the course of the weeks and months ahead.

We've had a great deal of interest in the company's story, and we're glad to share it.

Thank you again.

And that concludes the conference call for today.

We thank everyone for your participation.