Flagstar Financial Inc (NYCB) 2003 Q3 法說會逐字稿

Good day everyone and welcome to the New York Community Bancorp first 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, madam.

Thank you and good morning every one and thank you for joining the management team of New York Community Bankcorp for our quarterly First Earnings Conference Call.

Today's call was focussed on the highlights of our third quarter 2003 performance.

Our 2003 standard earning projection and obtaining merger with Larsen Bank Inc.

The discussion will be lead by our President Chief Executive Officer Joseph Ficalora, who by the way will be appearing later today on Bloomberg TV and radio.

Mr. Ficalora is joined on today's conference call by Anthony Burke, our Senior Vice President and Chief Executive Officer.

Robert Juan, our Executive Vice President and Chief Financial Officer and Thomas Cangemi, our Executive Vice President in the Capital Markets Group.

This morning's conference will feature several forward looking statements which are intended to be covered bit safe harbor prices and the private securities litigation reform act of 1995.

We will find the discussion of the statements and risk factors in the SEC filings and on pages 14 and 15 of the earnings release.

If you need a copy, call the investor relations department or visit our Web site www.mncyb.com.

At this time like to turn the call over to Mr. Ficalora who will be making a brief presentation before opening the line up for your questions.

Joseph Ficalora Thank you, Ilene.

Good morning, everybody.

We're glad that you could join us this morning for the discussion of our third quarter earnings, which are likely to be the last earnings we issue before our merger with the Roslyn Bancorp.

Subject to shareholder approval at next week's special meeting, we would expect the merger to take place at the close of business, the 31st of October, at which time Roslyn will merge with and into NYCB.

The balance sheet clearly reflects the preparations for the merger, our performance is just as indicative as the company's stand-alone strength.

The net knock rose 20% year over year to $72 million equivalent to a 20% rise in diluted earnings per share of 53 cents.

Net income was up 25% to $80 million, representing a 26% rise in diluted cash earnings per share to 58 cents.

Our returns on average stockholders equity showed similar improvement rising to 22.05% on a GAAP earnings basis and to 24.54% on the basis of cash.

A reconciliation of our GAAP and cash earnings and the related measures appears on page 20 of the earnings release.

As solid as our earnings were, they would have been even higher had the federal home loan bank of New York not suspended the dividends for the third quarter of in year.

The impact of the suspension was $2.2 million after taxes equivalent to a 2 cents per share loss.

Nonetheless, it is important to note that we met the street expectations, and of greater importance that we expect to exceed our previous stated projections for 2003.

Despite the two penny impact of the suspension this time around and the potential for a repeat in the fourth quarter, we are upping the stand-alone diluted earnings per share projections to a range of 2.06 to 2.11.

These estimates exclude the impact ofcourse of our two pending transactions, the merger of Roslyn Bancorp and the sale of the South Jersey Bank division to Sun National Bank.

The latter transaction is expected to general rate after tax income of approximately $26 million when it is completed in the fourth quarter of this year.

Since the third quarter was likely, our last as a standalone institution, I would like to focus briefly on the company's strengths it revealed.

The first of these was the level of mortgage local production in general and in particular, the volume of multifamily loans produced.

Mortgage originations exceeded $818 million during the quarter, boosting total year to date production near the $2.4 billion mark.

Multifamily loans represented $580 million of the third quarter production and $1.8 billion of the loans originated year to date.

To put these numbers in perspective, consider our 2002 originations which total $2.6 billion, including $2.1 billion in multifamily loans with a stand-alone pipeline of $1.5 billion at October 21, including multifamily loans of approximately $1.1 billion.

It is apparent that we will exceed last year's production and establish a new company record by the end of this year.

Our Multifamily lending remain the primary focus, we continue to take advantage of the highly attractive yield curve to profitably leverage the growth of our balance sheets.

At quarter's end, securities totals $5.7 billion, including $3.9 billion of mortgage backed securities.

Although our balance sheet will look very different following the merger, its current configuration reflects the investment of borrowed funds into two to three year assets with characteristics that support our aversion to both interest rate and extension risk.

It also reflects the reinvestment of cash flows produced through a record volume of prepayments into assets featuring higher yields than the assets being replaced.

The benefits of these strategies are most apparent in our third quarter net interest income, which rose not only year over year, but also sequentially.

At $116 million net interest income was up 7% on the link quarter basis and 17% year over year.

While the increase in net interest income was certainly substantial, it would have been greater were is not for the suspension of the federal home loan dividend.

Had the third quarter dividend been received as we expected, the net interest income would have totaled $119 million, dignifying a 10% link quarter increase and 20% year over year increase.

Another third quarter highlight was the link quarter growth of the net interest margin which rose two basis points to a respectable 4.04%.

Once again, the suspension of the federal home loan bank dividend had an impact on the performance.

Had the dividend been paid, the margin would have reflected a 14 basis point increase linked quarter to 4.16.

The fact that the measures improved despite the impact of the suspension is another indication of the fundamental strength.

In the quarters ahead, we expect to see further expansion of the net income and margin as we re-initiate the restructuring of the post merger balance sheet.

Another fundamental strength that was evident during the quarter was the level of efficiency with which we operate.

At 24.18%, the efficiency ratio was 346 basis points below the year earlier measure.

At the same time, our ratio of operating expenses to average assets improved 23 basis points to 1.11%.

Given Roslyn's well known efficiency, we look forward after the merger to the --maintaining our long-held status as one of the nation's most efficient thrifts.

Another of the strong points is the quality of our assets.

As reflected in the performance of the loan portfolio.

In addition to marking our 36th consecutive quarter without any net charge offs, we recorded an $898,000 reduction in the balance of non-performing assets and a like reduction in the balance of non-performing loans.

At quarter's end, non-performing assets totaled $12.5 million, representing one-tenth of 1% of total assets.

At the same time non-performing loans totaled $12.4 million, representing 0.21% of loans net.

In a recent interview, I was asked what I considered to be our greatest characteristic, and I believe that my response, was perhaps our aversion to risk.

This trait is not only reflected in the quality of our assets, it is reflected in virtually every management decision we make.

It is apparent in our emphasis on multifamily lending and the way we manage our assets and liabilities, it is apparent in our decisions regarding branch operations, and in our decisions regarding combinations with other companies.

It is in fact one of the reasons we are so excited about the pending merger and the actions we will be taking once it's completed to profitably restructure the balance sheet.

We believe that the resultant company will reflect the strengths of both organizations and will create a far greater value for the combined shareholder base.

On that note and reminding you that our comments about the merger are of necessity, limited to what is already public.

I would now be happy to take questions, you may have about our third quarter performance or the strategies for the remainder of 2003.

Thank you, sir. [operator instructions]

Our first question will come from Sal DiMartino of Bear Stearns.

Hello.

Good morning, guys.

Hello, Sal.

How are you?

Good.

Joe, I was wondering if maybe you can talk about your outlook for multifamily originations.

I mean, clearly rates have risen and you're talking about rest pipelines and record originations.

I guess my question is, where is the growth coming from next year.

It is it just the question of garners a larger share of wallet.

Will you be entering new markets or is it vir u of you being a bigger player in the market?

I think, it's, Sal, it's going to be a combination of all of those things.

The reality is that it is a very large marketplace, and the players come and go and the strategies followed by some change.

We are very focused on how we lend and who we lend to.

And the markets that we're in, obviously, keep producing significant dollar volumes that are probably at least in our case every single quarter now that we are actively involved record numbers.

We might emphasize here the fact that during the third quarter, we were actively involved in doing the necessary due diligence and preparation for the activities that will consolidate the two banks.

So, despite the fact that a lot of our resources were being utilized in analyzing the structure of the loans of our two companies, and how we would ultimately move forward, we still were able to generate $818 million in loans.

So, I would say that as has been the case in the past, despite change, in both participants, interest rates, and how people conduct themselves, we have been consistently capable of produce producing loans as needed, and certainly the quality is always very, very consistent.

Thank you.

Thank you, Sal.

Moving on, we'll next go to Mark Brenen (ph) of Omega.

Good morning, guys.

Hi, Mark, how are you?

Good.

Joe, could you flush out a little bit just so I understand the record pipeline of a billion five, how that was affected with the holidays in September and what it means for closings --the timing on the closes of those loans and what percent of them actually do close.

I think in our case, our pipeline historically is always closed typically by the end of the quarter.

If you look back at the pipeline that we suggested, quarter after quarter after quarter, we typically wind up closing approximately that number or something I greater than that.

So, unlike, I guess the pipelines reported of some, our pipeline is actually definitive check contracts that we are already entered into with regard to closing.

And the numbered, does not include, for example, some of the loans that might have closed in the first two weeks of this quarter.

So, our pipeline is consistently handled in the same way, and the results of our announcements would reasonably -- can reasonably be expected to have a January report that will show that we will close at least that number.

OK.

Thanks a lot.

You're quite welcome.

The next question will come from Rick Weiss of Janney Montgomery Scott.

Hi, guys.

Hey, Rick, how are you?

Fine, I just want to follow-up with a little bit, from the multi family with the originations, it looks like, on a link quarter basis, the multi families seem pretty flat due to prepayments or what exact exactly happened?

Right.

I think that's a series of things that impact that.

One of the obvious things here is that a great number of the loans that had been refinanced during the quarter were refinanced both from the portfolio and from outside the portfolio, but many of the loans that had been in the portfolio also moved.

So, the net-net change, because there's a lot of activity occurring in a variety of places, the net effect of that was that the originations reflected a significantly higher number than the growth in the portfolio.

And that is -- although possible on a go-forward basis, has not historically been the case, and this quarter may be more of an aberration.

We're still confident that with the numbers that we have in the pipeline, we will make for the year, a 20% growth in the loan port folio.

OK.

With -- you think that it was off just a little because of attention given to the Roslyn portfolio.

Last year, I noticed -

I think that's partially correct.

That was one of the things that I meant about -- see, in order to do that work, we have to use resources that otherwise would have been originating loans.

So, to be frank, there's no question that you can't go through a process as complex and as important as the integration of two banks without there being some diversion of resources.

And we did have diversion of resources during that quarter.

So, there's the big difference between originating -- I guess we had suggested that we -- suggested that we would do $750 million in the third quarter.

We actually originated 818.

In the fourth quarter, we're suggesting we'll do about $1 billion 500 million, that's a record in all of the quarters that we have been out there.

The only large quarter that we ever had that was that disproportionate to the rest was I guess, the second quarter of last year.

And we had about $1.1 billion in the pipeline.

So, I'd say that we are refocusing ourselves on the market, on the lending, so the -- the longer term transition and the longer term building of the loan portfolio, is in fact going to be very evident during the quarters ahead.

Remembering none of the numbers that we had opted for this year and none of the numbers that we are reflecting for next year actually include some of the positive effects of the interest rate environment that we're in.

We expect the interest rate environment that we're in to have very positive effects on our '04 number, but we are not in a position to put together all of the pieces yet.

But there's plenty of public information that, you know, would suggest that we obviously have a significant amount of cash flow available to redeploy into assets, all of which whether they're in the securities portfolio or the loan portfolio will earn at better yields than the yields that were in our projection for 2004.

OK.

Is it also out of bounds to ask, would your target be for borrowings to asset ratio.

We couldn't say for the '04 year what specifically any of the numbers were going to be.

Sorry about that

That's fine.

Anything further, Mr. Weiss?

No, that's it.

Thank you.

The next question comes from Jack Micenko of Lehman Brothers.

Good morning, guys.

Hi, jack.

Have a question.

Wondering if you can talk about anything that you have done to reduce your exposure to the federal home loan bank?

It's been my understanding that without the offset of the dividend payment, the cost of federal home loan advances is somewhat higher on the repo (ph) stuff that if you would just go straight to Austria (ph), that you moved My rated some of that funding, and second, have you sort any federal home loan stock and taken a hair cut on that, because it is a 15%, 20% contribution to the equity account.

This is Tom.

How are you?

Basically, what we have done since the announcement from the federal home loan bank, we reduced our exposure dramatically, particular those on the lending on the actual borrowing itself going directly to Wall Street, because we have a substantial amount of our liabilities that are short-funded.

We're able to move a lot of that debt over to Wall Street.

Secondly, we reduced the actual investment in stock from redemption at par, so, we have not had any losses from the redemption, and we continue to reduce our exposure until obviously we get further clarity on the federal home loan bank going into '04.

One thing, jack, I had to added, there's no reason to ever believe that we would lose money on the stock.

And certainly, the federal home loan bank is positioned to continue paying dividends on a go-forward basis.

The decision that they made not to pay this dividend was rather abrupt and had a rather overt effect on expectations, and everybody that normally, you know, receives the dividend.

But on a go-forward basis, there is little likelihood that they will have any losses similar to that which they have taken here.

I -- I would suggest that we look at the reality that they took very substantial losses because the quality of the assets that they disposed of was so different than the assets that historically the federal home loan bank had been involved with.

If those assets were sitting at chase, they probably would still be there today.

If those assets were sitting at another institution, they might have been sold over time at a different rate.

The federal home loan bank was very quick in resolving a dissatisfied position they had in an asset, and loan behold on a go-forward basis, we believe that they have structured their assets well, and that they have a keen understanding that dividends are an important part of what their business is all about.

They cannot be at a disadvantage in competing with Lehman or anybody else.

They have to pay dividends.

They have to consistently provide a better pricing, as Tom indicated, it is very easy for to us go to the street and find alternative financing, and there's no question that the ability for us to change the portfolio structure is in fact immediately in front of us.

OK. --, on the margin, you did a good job of breaking out some of the impact of the dividend on the margin.

I know that you guys account for your prepaid penalties up in the margin as they service yield sort of yield maintenance.

Could you take a stab at talking about what the margin would have been ex prepaid penalties?

Yes, I think it -- it wasn't ex prepayment penalties?

Yes.

Company break downer.

I think we have been asked that question several times.

We have been very, very consistent.

I think that this discussion of removing the prepayment penalties from the margin is an effort by some who are either not following FASBI 91 or otherwise do not have income that is justifiable.

We don't electively do this.

This is required.

So, if somebody actually has income that belongs in interest income, it should be recorded there.

And, and behold, there's been an awful lot of discussion about this that my margin would look different, and I have actually had some people state that unlike NYB, we dont record as the interest income some of the fees that we collect.

The fees that we collect, based upon the actual structure of the loan are appropriately being recorded where they are.

And we don't have the ability to break those fees out.

What we do have is an absolute certainty that under FASBI 91, paragraph 12 we are explicitly doing the right thing.

The SEC just did a review.

Regulators over the course of decades have reviewed what we do.

We're 100% confident that what we're doing is appropriate.

So, you know, trying to, it's a kind of like saying, well, can you break out the amount of interest you get from a particular kind of a security that you have in your portfolio?

We can't do that.

The bottom line is, it is a complex matter, and in some cases, the fees are in fact part of the field maintenance and in some cases, the fees merely change the yield that we get on the new asset that we create.

But in all cases, there's a consistency in how we structure our loans and a consistency in how we report them.

So, there's no reason to break out interest income, which is interest income.

In connect that's the point here.

For those that are going in the other direction that's almost story.

Whatever their reasons may be for going in the other direction.

That's their issue, not our issue.

OK great.

And I don't know if it's out of bound for '04, but are you talking to anybody about a target loan to asset mix post-Roslyn or is that off limits for this call?

I think that there would be off limits.

Obviously, you know we very rarely set target, but the bottom line is we can't talk specifically about numbers that are going to be combined, actual numbers that are going to be combined.

OK guys, thanks.

Thank you.

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

Good morning, Jeff.

Hello Mark, how are you?

Fine, thanks.

My first question, there's about $2.5 million link quarter increase in fee income.

I wonder if could you give a break out what that's attributable to.

Well, in some cases that's actually the income that we are talking about in this prepayment fees.

Some of those prepayment fees are in that number and there's no question that number is reflecting the kind of activity that had occurred.

It's not a great deal, but it is part of that number.

OK.

And then secondly, do you happen to have a net interest margins were for, you know, July August and September.

During the months?

OK, I don't -- I mean , after the call, I can get to you on that, but I don't have that available.

Would you say they were increasing consistently each month.?

This is Tom, I would say that over the course of the quarter, we saw dramatic increases in the latter part of the quarter and we expect as Joe indicated, the pipeline of loans and pipeline of securities that much higher yields that the margin would improve into the fourth quarter again.

Yes, Mark you know, one of the points is that the normal impact on margin you know, from quarter to quarter to quarter would have had the impact of our margin going up to 416.

So, the expansion in our margin had it not been for the fact that we took out interest --income, the dividends from the Federal Home Loan Bank, all other things being consistent, our margin would have expanded by 16 basis points.

Thank you.

And also, can I hear, Joe, that the earnings guidance that you gave of 2.06 to 2.11 does not include the Roslyn deal

That's right.

If the deal is accretive, the numbers ought to be better than that.

That's right.

The good news here is that in all of our projections, with regard to this transaction, we looked at a much stronger likelihood that we would not have the benefit of the accretive deal for two full months in the last quarter.

We felt it was far more probable that we would have one month or maybe no months, so the move in interest rates and the earlier clothings are all favorable to clothings are all favorable to the earnings and the contribution to capital that will result from this deal.

Thank you.

You're welcome.

Our next question will come from Scott Valentin of Friedman Bills, Ramsey.

Good morning, gentlemen.

Good morning, Scott.

How are you?

Doing well, a question on the securities portfolio.

Two parts.

There was movement within the available for sale categories, if could you describe what the thesis is there on choosing whether held materially or available for sale.

And secondly Can you talk about the bonds that you mentioned that you are taking advantage of the steep yield curve, all know no one expect as sharp rise in rates.

What actions would you take to limit the damages ans securities in the portfolio.

As far as ACM, on a combined bay circumstance we looked at both Roslyn and NYB.

What we put into the portfolio, we actually shortened average life of the HTM portfolio dramatically.

Again it's a vanilla paper, we have a tendency to be risk avers in respect to expansion risk and interest rate risk.

It's the sim Lear structure that we are doing in the last three or four months, 15 year collateral with an average life of 2.5 to 4 years at the health and maturity level.

AFF level is short about a year shorter may be 2.9 to 3.1 five year have it's nice structure, but again, you know, either agency or triple A and it's very big quality paper without the overreaching for the higher yields.

We're focusing on structure high cash flow.

It's our decision to put it in HDM, a lot of it has to do with the combined balancing, which we will address in the fourth quarter when we put Roslyn on the books.

Can you address the borrowing side, the liability side of the funding of the securities if short term rates move up sharply how would you address the pending spread compression?

Well, if rates actually moved up sharply, they would move up sharply on the borrowing.

They would not move up sharply on the deposit funding.

What we would do is we would depending on what we saw in the market it place, prior to the move, we would adjust how we are funding.

If we really felt that there was a sustainable increase that was going to occur in rates, we would change the term over which we would hold some of those liabilities.

The good news is that we already have a structure that has a significant amount of longer liabilities out there, and the shorter liabilities that we have would be the ones that would be immediately affected by the change.

So, in essence, the managing of the liabilities side of the balance sheet would not be a large piece of our funding.

It's relatively speaking a small component.

The other point we want to add here is come year-end, that balance sheet will be dramatically different and obviously looking at the pieces individually.

I mean, clearly, we are focusing toward gearing up for the planned restructuring of the combined companies.

So, going into the fourth quarter, those numbers will clearly have a different impact when we put the companies together, in particular, on the securities side.

OK.

Thank you very much.

Thank you.

I'm going to have to say due to other things we must do, we are going to take one more question, going to take one more question, if that's okay.

Put through that question.

The last question will come from Albert Savastano of Midwest Research.

Good morning, gentlemen.

Can you comment on your relationship with Meridian and if that's changed at all.

Do you expect it to change most-merger.

In actuality, the relation relationship with Meridian has been long-standing.

The merger will have absolutely no impact on that relationship, and I guess the most important thing is that we have had a very, very positive relationship with them for all of these decades.

If anything, they have proven over the course of the last several years to be a substantial source of quality loans for us.

They have a very keen understanding that this is a win-win relationship between them and quality lenders.

We're not the only lender they deal with, but there's no question that we do get a fair amount of business through them.

Thank you.

You're quite welcome.

Thank you all.

I very much appreciate your join us today.

The transaction that we're talking about closing, obviously is going to have a significant impact on the company, not just for the quarter, but obviously for all of the quarters ahead and we're very excited about the possibility of reporting to you in January how well that is going.

Thank you again, and we'll be talking with new the future.

Thank you.

That will conclude today's conference.

We thank everyone for your participation.