Flagstar Bank, National Association (FLG) Earnings Call Transcript & Summary

So your next presentation is with New York Community Bancorp, CEO, Joe Ficalora is here to tell you about them discreetly. They're a $54 billion asset bank, they're headquartered in the New York City market and they specialize in multifamily lending in that market. Joe?

Thank you. Good morning. Glad to be with you today. All right. So who are we? We are a leading producer of multi-family loans in the New York City marketplace. Our niche within this market focuses on non-luxury apartment buildings that are rent-regulated featuring below-market rents. This has been our niche probably for 45, 50 years. Our expertise is this particular lending niche, and it arises from a consistent presence in this market for 50 years. We have a long-standing relationship with our borrowers. Many of them have become very wealthy while doing business with us over the course of decades. The execution capabilities are very well noted. Decades-long relationships with top commercial mortgage brokers in the New York City market is a very, very good place to be given the desire we have to be in a low-risk profile asset. In addition, we originate commercial real estate loans, and to a much lesser extent, acquisition, development and construction loans. We'll also originate commercial and industrial loans, including specialty finance loans. We've actually, in the last few years, originated several billion dollars of this particular product. We operate in over 230 branches in 5 states, with leading market share in many of the markets we operate in. We are a conservative lender across all of our loan portfolios, and the results over the course of decade demonstrate very strongly that we are very consistent with how we approach risk. We maintain an efficient operation. We complement our organic growth with accretive acquisitions. Total assets just shy of $54 billion, 78% of which are loans. Our total loans are $41.7 billion, including $31.2 billion in multi-family loans. Our deposits are $31.7 billion. Our total market cap is at about $5.5 billion. And our total return and dividend yield is in the 4,281 percentile. There aren't many banks that have had that total return or anything close to it. The average is about 600%, and we're in excess of 4,000%. Our current dividend yield is 5.8%, but without the risk of large banks' risks that typically during cycles become quite apparent. Our asset quality metrics compare very favorably to both SNL Bank and Thrift Index and our regional bank peers. Net charge-offs to average loans for NYCB through 12/31/19 is 0.01%; SNL Bank and Thrift Index is 0.40%; and our peers are at about 0.17%. The cumulative losses for us, and that's over a period starting with our public life 25 years ago in 1993. So we've had 104 basis points of charges. SNL Thrift Index is about 2,345, and our peer group is at about 1,215. So very noticeably different results for us compared to others. Net -- the NPAs to total assets, we're at about 14%. The SNL Bank and Thrift is at 0.58%, and the peers are at 0.57%. The nonperforming loans to total loans, we're at 0.15%, SNL is at 0.81% and our peers are at 0.79%. These differentials are consistent. And certainly, in the worst of times, they can be the difference between survival and failure of our peers and, more importantly, opportunity for us. So in looking at our strong capital position, it's important to note the emphasis on capital by regulators has been driven by concern that banks go out of business when they have had sufficient charges to their capital that their capital positions have gone down materially. The important thing to note with regard to us in the last 25 years, we've not charged capital during the worst of times, the best of times or any times. We do not lose enough money to charge capital. And other banks go out of business because they've charged capital so much that they don't have sufficient capital to survive. We have not even charged capital in 25, 30 years. So we are very, very distinctively different than our peer groups. And the metrics on this page, likewise, confirm that. So loans, our mix has not changed significantly since our IPO. These are roughly the numbers that we've been used to operating with. And you could see that multi-family is 74% of our loan book, and that's by choice. So the majority of our portfolio are focused on low-risk multi-family loans, on non-luxury rent-regulated buildings. This is who we are and consistently over the course of decades, market leader in this asset class having developed strong expertise and industry relationships over the last 5 decades; consistent lending strategy that has not changed significantly since our IPO. The low-risk credit culture and business strategy has resulted in a superior asset quality through past cycles. Since 1993, that's when we went public. Since 1993, losses have aggregated 16 basis points on multi-family and 10 basis points on CRE, primarily a fixed rate portfolio, but weighted average life of less than 3 years. So leading multi-family rent-regulated lender in the New York Metro region. These numbers, as you see here, important. Multi-family portfolio statistics at or for the 3 months ended 12/31/19, 74.4% of total loans, 60% of originations. 77.9% of loans are in the Metro New York area. Average principal balance, $6.4 million. Weighted average life, 2 years. Weighted average LTV, 57%. Weighted average LTV on New York State rent-regulated housing, 53.17%. The numbers that you see below those are real numbers, 0. We actually got back money in '15, 0, 0, 0, 1. So for the years depicted, we're ahead by 3. Best-in-class credit underwriting, conservative underwriting is what we've done very consistently. The results are the reality that we understand our market and the owners and the consequences of change in our market sufficiently so that we have very, very consistent performance metrics. You will see in the period ahead when, in fact, New York goes through its normal cycle change, massive losses. There will not be massive losses for us. So the differential between us and others widens during difficult periods. So we have active Board involvement. The Mortgage Committee and the Credit Committee approve all mortgage loans greater than $50 million and all other C&I loans greater than $5 million. And Credit Committee also approves all specialty finance loans greater than $15 million. Remember, the Mortgage Committee participates in inspections on multi-family loans and in excess of $7.5 million, and CRE and ADC loans in excess of $4 million, all loans of $20 million or more originated by the community bank. So we have multiple appraisals. This goes back decades. All properties are appraised by independent appraisers. All independent appraisals are reviewed by in-house appraisal officers. The lead trustee of the bank for 40-plus years was a generational owner of an appraisal company. He was instrumental in dominating our process with external and internal appraisal. So a second independent appraisal review is performed on loans that are large and complex. That matters. That has been one of the major reasons why the results are so dramatically different than everybody else, because the effort, what we actually do is so dramatically different than everybody else. So this is not happenstance. This is not occasional. This is who we are and, for decades, how we've operated. Our multi-family portfolio is well insulated against recent changes in the rent regulation laws, $18.7 billion or 60% of the multi-family portfolio is subject to New York state rent regulations. On this proportionate number, the multi-family portfolio is 53.17% or 369 basis points below the overall multi-family portfolio. We have $12.9 billion of loans with rent-regulated units greater than 50% of total units. We lend on current in-place flows and not on future or projected cash flows. The greatest risk in the portfolio of our peers is the values at which they choose to lend. We know for a fact that the only time we lose a loan is because somebody else is giving them too much money. And this happens on a regular basis. So this is where we are, total multi-family as of 12/31/19 in Manhattan, Brooklyn, Bronx, Queens, the percentage of the market. In one case, there in Manhattan, we've got 25% of the market. The reality is our multi-family vacancies, the residential units are at 2.87%. So commercial real estate is a logical extension of our multi-family niche. We take great care in ensuring that we do this right. So you can see here, 16.9% of total loans, 9.9% of originations. Our CRE portfolio statistics in the 3 months ended 12/31/19, 85.7% of loans in the Metro New York area; average principal balance, $6.6 million; weighted average life, 2.3 years. That's important. Our exposure is short. That's the weighted average life. That's not what we write it for. That's what the loan exists for. So our Specialty Finance business is another high-quality lending niche. As you might imagine, we spent a great deal of time speaking with our principles, the people that know product and know relationships and have demonstrated over the course of time that they have no losses. We have no losses in this portfolio. They've had no losses for many, many years preceding working for us. So the numbers here show the growth. The CAGR is 34%. So we've gone from nothing to $2.746 billion as of 12/31/19, and we continue to grow this portfolio. So it's syndicated asset-based and dealer floorplans loans. The equipment loan and the lease financing is one of the components of what we do. The client characteristics, large corporate obligors, mostly publicly traded, investment-grade or near investment-grade ratings, participants in stable nationwide industries, floating rates tied to LIBOR, fixed rates at a spread over treasuries. So the risk-averse credit and underwriting standards, we require a perfected, first-security interest in or outright ownership of the underlying collateral. Loans are structured as senior debt or as noncancelable leases. Transactions are reunderwritten in-house, underwriting documentation reviewed by consent. The important number, net charge-offs will be used, listed there '14 through '19, 0, 0, $2.746 billion. Our asset quality in any credit cycle has consistently been better than our industry peers. These are the comparative numbers. The little one appears to be a gray line, which in most cases, you can't see, but in some cases, it's obvious there. In 2010, we actually had some losses. But the important thing, the comparative numbers are always, always favorable. So this year, a very few of our nonperforming loans have resulted in actual losses. So this, obviously, better than this, okay, nonperforming loans, and these are net charge-offs. So for most of those years, you see nothing. And then you see those little bars that are NYCB. So our net charge-offs compared to the industry are, in fact, stellar. There is no real comparison here. If other banks could perform the way we do, they would. But obviously, they don't. So the consistent profitability over various business cycles is due to the low credit cost and highly efficient business model that shows how the return on average assets since our IPO has actually been compared. So NYCB in this case is the taller bar or certainly within the grasp of the industry. They take different risks. They have different returns. Obviously, we compare quite favorably. Highly efficient operator with effective business model. The efficiency ratio of the company is at 48.51%. That's not a bad number. We've been in the 30s historically. The reality is that we would reasonably expect to be able to improve that number in the period ahead. Deposit composition. This is our typical, over a course of time, normal deposit composition. And you see the deposits generated through retail and commercial channels, presence in several large markets. We're in Metro New York, New Jersey, Ohio, Florida and Arizona. The average cost of interest-bearing deposits is 1.76%. The average deposit per branch is $146 million. So focusing on what we can control. 3 levers for future earnings growth. Total loans grew $1.7 billion or 4% year-to-date. The significant repricing opportunities, there are $15.6 billion of loans with an average coupon of 3.43%, contractually maturing or reaching their option repricing date over the next 3 years. We have $14.2 billion of CDs maturing over the next 4 quarters at a weighted average rate of 2.25%, actively managing deposit costs lower and proactively reducing higher cost deposit relationships. We also have approximately $3.7 billion of wholesale borrowings on an average rate of 2.11%. We're talking 50 to 100 basis points opportunity to lower our cost of funds, and that can happen relatively quickly. So further improvements in our operating expenses continued to focus on expense contamination. We've gone from over 6 to just about 5, and that is a very substantial reduction in the cost of doing business. So growth levers. Loan repricing is higher, funding pricing is lower, reinvestments of cash contained operating expenses as a result, higher NIM, lower efficiency ratio, higher operating leverage. Definitively, these are our expectations. So back in growth mode. Asset growth prior to and since Dodd-Frank was enacted. So you can see here, unfortunately, we've had much lower CAGRs because we haven't had the opportunity to close deals. These numbers are the actual numbers. So repricing opportunities. Over the next 3 years, approximately $15.6 billion of multi-family and CRE loans with an average coupon rate of 3.43% are reaching their contractual maturity date or their option repricing date. If the borrower does not refinance or pay us before the contractual maturity or option repricing date, they will have 2 options: convert to variable rate loan at prime plus 275 or 300 basis points; or convert to a fixed rate loan indexed to the 5-year Federal Home Loan Bank plus 275 to 300 basis points and a 1% fee to exercise the option. Approximately $14.2 billion of CDs maturing over the next 4 quarters at an average rate of 2.25%; approximately $3.7 billion of wholesale borrowings at an average rate of 2.11% maturing over the next 4 quarters. So the portfolio coupons may have bottoms. Historical weighted average portfolio coupons, these are the actual coupon rates. Our efficiency ratio has increased significantly since the enactment of Dodd-Frank. So as you can see, in 2009 and even before, we're at 36% and sometimes actually post closing a deal in the 20s, upper 20s, typically in the lower 30s. We are more prone now to operating in the sub-50 percentile, maybe even going over that a little bit. And that's mainly because of the difference in how we pay for the regulatory business that is conducted, the kinds of things that we do to accommodate others rather than the kinds of things we do to manage our own risks. Very big difference between our discernible risks and the risks that other banks have. So our business model grow through acquisition. These are the actual transactions that we've executed. Unfortunately, you see the last date posted here, June of 2012. Unfortunate, not very much. We expect to change this prospectively. And therefore, we expect to have the benefit of a business model designed to deliver long-term shareholder value. So our peer group is the kind of bluish line. And, of course, it's obvious that we greatly outperform our peers. And we expect this to only get better in the period ahead. As a result of 9 stock splits between 1994 and 2004, our charter shareholders have 2,700 shares of NYCB stock for each 100 shares they originally purchased. That says a lot about the value created. Imagine that, 2,700 shares for every 100 that they bought. So that's the multiplier of the dividend, that's the value of the stock, that's over time the true value created on a year-to-year basis as well as in over time basis for people who chose to invest in the business model of this company. So key investment highlights. Largest New York Metro headquartered regional bank by assets; leading producer of multi-family loans in the New York City, with an expertise on non-luxury rent-regulated segment, proven track record of superior asset quality, consistent profitability over various business cycles due to low credit cost and highly efficient business model. Strong capital position, strong capital position. 50 years, we have not charged capital. 50 years, we have a strong capital position. It accommodates regulatory expectations for the banking sector. It doesn't have anything to do with reality. When we became a public company, I remember, they told us we had to raise our reserves, and we did. And in my first meetings with the public, I would say, our reserves represent 111 years of charges, 111 years of charges. I mean the reality is we have demonstrated for decades, decades that we do not need these large reserves and long behold there have been many banks, Bowery, Dollar, Greater many banks that have gone out of business during that period of time on actual losses. We don't have actual losses. The environment is so bad that really well respected, well-established banks have lost so much money, they run out of business. And during that period of time, we haven't even charged capital. So I can't overemphasize that the difference between us and others is the incredible absence of actual losses or charges on assets. We're a bank. We take risk every day lending money. We have not even charged capital in decades. So we're very disciplined. We have a very consistent, strong management team. We have way excess of strong capital position. We're consistently profitable on various business cycles due to low credit cost and highly efficient business model. We have a proven track record of superior asset quality. We're a leading producer of multi-family loans in New York City with an expertise in the non-luxury, rent-regulated segment for decades, for decades. And we're the largest New York Metro-headquartered regional bank by assets. So visit our websites. I'd be glad to take any questions, should you have some. Anyone who would like to probe.

Joe, I'd like to ask just one question. You emphasized on the change in rent-regulated apartments in New York. Can you talk a little bit about how those changes -- how do you expect them to impact this segment in New York City? Not just for you because you guys lend more constructively, but for the peers.

Right. I think it's important to note that these changes are not in any way truly in the interest of tenants or property owners. This will more, in particular, impact those people that lend on future values. And many, many, many people in the market lend on future values. So the speed with which rents will adapt or adjust prospectively have been dramatically lowered. We don't lend on future values. We lend on the existing value of the rent roll. So this does not impact any of our existing properties. And now this is just a number. So let's say, we have an exposure on a building at 50% of the rent roll. The fact that rent roll is not going to be going up by the same percentile as previously was anticipated isn't changing our position. Our position hasn't changed at all. So all of our existing portfolio is not impacted by the change. The price at which buildings will sell has been impacted. The willingness of various types of buyers has changed. The viability of an excessive lender getting repaid has changed dramatically. So there are going to be headlines in the market that properties in the New York City market rent-regulated buildings are, in fact, going into foreclosure and will, in fact, be abandoned, and they'll become drug and sex havens. That's not good news over the course of all the time that we've been discussing, and it happened. Real estate in New York City has in fact gone through cycle turn that has been extraordinarily bad in rent-regulated housing during that entire period of disaster, during that period during which banks like Bowery and Dollar and Dry Dock went out of business. We did not charge at them. So a difficult period for us is not reflected in substantial change in our loss profile, a fact. This is not, trust me, tomorrow, this is fact, if we use a fact, we in fact lend appropriately, so even when the cash flows of the 3 units that surround us have changed, we performed because we never created a risk for ourselves that exceeded the existing cash flows. None of the changes will reduce rent. They will change how rents will go up. We lend properly, 3 years from now, 3 days from now, 3 months from now, we lend properly. The speed with which rents will go up has already been ascertained by us appropriately, without giving a change in the law. So the reality is we're not lending on tomorrow's potential, we're lending on today's actual, and because we do that with consistency we do not take the risks that others invariably will have. That consistency is, in fact, in the numbers.

Yes. I appreciate it. We're out of time.

Okay. Thank you all.

Thanks, Joe.