New York Community Bancorp, Inc.
Q3 2015 Earnings Call Transcript

Published: 31 Oct 2015

[Operator:]

Good afternoon. And thank you all for joining the management team of New York Community Bancorp for its Third Quarter 2015 Earnings Conference Call. Today’s discussion of the company’s third quarter 2015 performance will be led by President and Chief Executive Officer, Joseph Ficalora, together with Chief Financial Officer, Thomas Cangemi. Also present on the call are Chief Operating Officer, Robert Wann and Chief Accounting Officer, John Pinto. Certain comments made by the company’s management today will contain forward-looking statements, which are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those the company currently anticipates due to a number of factors, many of which are beyond its control. Among those factors are

[Joseph Ficalora:]

Thank you, Kelly. And I apologize to all of you that unfortunately being subjected to the burden that resulted from a provider difficulty this morning with regard to the telephone services. I thank you for joining us today. And this is a discussion that we’re going to have on performance for our third quarter 2015. If you were among those able to listen into the call we had at 8

[Operator:]

[Operator Instructions] Thank you. Our first question comes from the line of Ken Zerbe with Morgan Stanley. Your line is open.

[Ken Zerbe:]

Great. Thanks very much.

[Joseph Ficalora:]

Hi Ken.

[Ken Zerbe:]

Good afternoon. First question, just in terms of the core margin, obviously we had a pretty sharp decline, I think it was in the DUS portfolio prepayments. But on a go forward basis, I know it’s not part of your core NIM, but on go forward basis, like is this portfolio continuing to grow such that it will continue to have prepaid income? I’m just trying to get sense of like what magnitude of prepays we should see from that.

[Thomas Cangemi:]

So Ken, it’s Tom. So I will tell you that we have a sizeable Fannie Mae DUS portfolio as well as Freddie Mac backed mortgage backed securities base for multi-family loans that have the substantial amount of potential of the yield maintenance provision that is embedded in the structure. So, in the event these loans happen to payoff, they would be subject to significant yield maintenance provisions, which we benefit from. Since the vast majority of all securities are either at call or at discount, we will enjoy the benefit of yield maintenance regarding that portfolio. That number is approximately $2 billion of assets that we have no control over in respect to prepayment. However, if they do prepay, those go to the margin because it’s yield maintenance. So with that being said, we called out for the analyst community in the press release how much is contributed to Q3 as well as Q2. So, if you go back to the press release, $5.4 million was the benefit to the margin in Q2 and $1.4 million was the benefit to the margin in Q3; for the year, it’s been around $11 million. So, it’s been an ongoing contributor. However, we just want to make note of that that does go through the margin as yield maintenance provision.

[Ken Zerbe:]

Got it, understood, alright. So we should expect…

[Thomas Cangemi:]

And in addition to that, that’s also part of the adjustment to the investment securities yields you see quarter-over-quarter.

[Ken Zerbe:]

Yes, understood. On the expense side, obviously it came down a huge amount, pretty sizable amount this quarter and I think you attributed it to franchise taxes and FDIC insurance premiums being lower. Why were they lower and what changed that might keep them lower going forward?

[Thomas Cangemi:]

Let me just give you -- we have a -- this is a second call, so I just want to reiterate the full disclosure. We will give guidance for the quarter for Q4, we expect our overall expense base to approximately $148 million. So it’s within that range between 146 million to 150 million that we’ve been seeing throughout the year. But as far as the expectations are, or call it regulatory, if you look at the basis of the company, we have sizable amount of wholesale funding. And when that wholesale funding somewhat repositions, there is a different, call it a regulatory taxation on the type of funding that we have. So, obviously as the company continues to grow and we hope to see the continued deposit growth over time, it is a different assessment regarding your liabilities funding for the franchise. So, we’re enjoying that benefit as we got into the second half.

[Ken Zerbe:]

Got it. Understood. Okay, and is that because your fund duration has been shrinking on the liabilities or…?

[Thomas Cangemi:]

It has a lot to do with the makeup of the liabilities in addition to that as well as the level of non-performing assets. The company has – I believe as Mr. Ficalora indicated, the lowest level of anything we’ve had in the seven years. So that’s also contributed to a lower assessment as well, as well as other factors.

[Ken Zerbe:]

All right. That was good. Thank you very much.

[Thomas Cangemi:]

You bet.

[Joseph Ficalora:]

Thank you, Ken.

[Operator:]

Our next question comes from the line of David Hochstim with Buckingham Research. Your line is open.

[Joseph Ficalora:]

Good afternoon David.

[Thomas Cangemi:]

Hi David.

[David Hochstim:]

Good afternoon. Hi, a couple of things, I wonder, do you have any update on the outlook for an acquisition? I guess, you’re saying you’re not going to go over 50 billion till the second quarter; that suggests, you don’t expect to close on any transaction before then or should I read…?

[Joseph Ficalora:]

I think it’s important to note that we have been preparing to be over $50 billion since the end of ‘11. And therefore our efficiency ratio has gone from the mid-30s to the mid-40s and we’ve had years of interaction with all of our regulators, and all of our external consultants, and all of the people necessary to prepare us to actually be a SIFI. And one of the main reasons that began at the end of ‘11 was we were going to do a very large deal. And one of the main reasons we are so diligent about our attempts to actually be prepared here is because we wanted to do a very large deal. In the best interest of everyone, our business model works best through consolidation. And we are actively involved in this environment that is demonstrating that there’s going to be significant consolidation in the period ahead and we will be participating in that. However, there is absolutely no certainty of the exact timing of specific conclusion and therefore we’re prepared to manage our size to stay below 50 billion until the second quarter of next year, which gives us the consequential effect of being bigger than $50 billion in the year of ‘18. Now, if we actually negotiate and announce a deal sometime before that, then the expectation would be that we’d meet all the requirements of being bigger than $50 billion at the close of such a deal. And of course all of that would have been embedded with our regulators in advance of announcing the deal and certainly as part of the process that would evolve into the actual closing of the deal. So, definitely, this market is rich with opportunity; definitely we’ve been spending a great deal of time and money and interface with the respected regulators that will be involved in this process. And there is a very, very strong likelihood that we will manage our balance sheet as effectively as we can until such time that we’re actually going to effectively close the deal.

[David Hochstim:]

Okay, thanks, and is there any prospect of that 50 billion threshold increasing in the next few months, do you think?

[Joseph Ficalora:]

You know, I think the interesting thing there is, if we take the public positioning of the regulatory leadership from [Indiscernible] to the Chairman of the OCC, to the Chairman of the FDIC, they all openly express the desire to have that bar moved to some number higher than 50. And there is ample evidence that leadership in the Congress and in the Senate also would like to see that number moved. But the politics or the reality of situation and there is no way that anyone knows when there is a confluence of factors that brings together enough voting members to the House of Senate, so as to make that happen. So do I think it’s going to happen? I think it should happen, I think it’s highly probable that they will be an effort to make it happen but I have no way of knowing whether it actually will happen.

[David Hochstim:]

And then Tom, could you just give us the components of mortgage banking revenue again?

[Thomas Cangemi:]

Sure. So obviously in the quarter, we had a substantial reduction in total revenue in mortgage banking as reported this morning. The mortgage origination line item was down 29% from the previous quarter; 7.5 million was the reported number on origination. The total loan servicing fees that we’ve recognized for the quarter was up approximately 4.4%, the 12.8 million versus the previous quarter of 12.3. The MSR hedge had an adjustment of a positive 14.9 million. However, the change in the MSR value had a substantial adjustment, down 27.8 million, which matches 12.9. So net-net that gets you the total mortgage banking revenue of 7.5 million.

[Joseph Ficalora:]

Listen, just one more comment, just bear in mind, we had a significant adjustment on again our sale margin. We had about 20% adjustment from our 97 basis points in Q2 versus 77 basis points of margin in Q3. So that was another down, 20% and that was also impactful to profitability for the quarter on mortgage banking as well.

[David Hochstim:]

And where is that margin today?

[Joseph Ficalora:]

I would say it’s around that level. We’re hopeful and the good news is that as we go into Q4, we’re hopeful that we can get somewhere back to where we were in Q2 and that will be a sizeable adjustment going into year-end. But we had a substantial MSR adjustment in respect to managing our hedge position. I am looking at where the five-year swap curve was trading at and where the five-year treasury curve was trading at and hedging that was very challenging in the given quarter, specifically running up towards the end of the quarter given that you had an inverse between two components, which was something unusual; we call it an anomaly.

[David Hochstim:]

Then maybe one last question if I might, just can you give us an update on pricing of multi-family and CRE loans and…

[Thomas Cangemi:]

Yes, pricing has been very, very strong. We’ve been holding ourselves well north of 3%. And as indicated in the conference call, we had a very sizeable portfolio going to $3 billion in total for portfolio coming into an investment. The average yield in that portfolio weighs around 3.48%, 5% coming on. What’s interesting is that the average yield on the multi-family book, the coupon as of the third quarter was 3.34%. If you take that and look at what paid-off in the given quarter were 3.82, had about 48 basis points of lead with respect to the current environment. And that’s the lowest we’ve seen in a while. Three years ago that number was 150 basis points. So going back to our thinking that margins appearing to be stabilizing, given the current environment where our coupons are on the portfolio.

[David Hochstim:]

Okay. Thanks a lot.

[Thomas Cangemi:]

Always a pleasure.

[Joseph Ficalora:]

Thank you.

[Operator:]

Our next question comes from the line of Dave Rochester with Deutsche Bank. Your line is open.

[Dave Rochester:]

Hi good afternoon guys.

[Joseph Ficalora:]

Hi Dave.

[Dave Rochester:]

Just back on the 148 million in expense guidance, how much of that franchise tax benefit is expected to be in that in 4Q? And then it sounds like you’re saying that’s going to roll-off in 1Q; is that right?

[Thomas Cangemi:]

Yes, I would say about $1 million benefit, approximately. Yes.

[Dave Rochester:]

Okay, great. And then regarding the prep for LCR, is there anything left to do there? I know you were testing systems recently. And then I guess just outside of a deal scenario, when do you expect to see you guys start to build that HQLA and by when would you like to have that completed?

[Thomas Cangemi:]

So, we’re very pleased to be where we are in respect to the system, the consulting work that was conformed, the people that have been hired. We’re in a position now to implement the actual asset build and we ultimately crossed as indicating in Mr. Ficalora’s commentary, we expect to cross in the second quarter of 2016. Therefore I would guess by third quarter you will start seeing the build up and will be in compliance by Q3 2016.

[Dave Rochester:]

Okay. So, you would have to be fully compliant by 3Q then, just along that glide path?

[Thomas Cangemi:]

More or less, I guess 90%, but…

[Dave Rochester:]

Okay.

[Thomas Cangemi:]

Just to be clear that would be again contributing to additional asset growth on top of normal net loan growth that we expect to have next year.

[Dave Rochester:]

Yes, got it. Okay, and then I know you guys have some lumpier securities calls coming up in 4Q. Can you talk about the amount of those and the rate? And then, is the plan to keep the securities folks stable by replacing those or should the portfolio shrink?

[Joseph Ficalora:]

So, where we’re today we’ve been calling out around 400 million as an average yield of 250 which will help the margin and that’s given the current environment. So, we have the environment flat and rates do not go materially lower from here, we don’t expect to have significant calls from that 400 million. But in the event we have a sizable adjustment downward on [Indiscernible] say the 10-year treasury, you could potentially see more call at lower yields coming to the bank. There will be a point in time where we will have to put certain securities on to stabilize just general requirements for liquidity as well as margin requirements for our portfolio. But I would say 400 million is very manageable and that’s already expected to happen in October at 2 .5% yield.

[Dave Rochester:]

Got you. So, it sounds like you’d aim to keep the securities look relatively stable then for 4Q?

[Joseph Ficalora:]

Yes, I don’t envision adding securities to the company until we have to be LCR compliant, unless we’ve a sizable change in the yield curve, which drives securities, cash flows to accelerate and we’ve to replace just for collateral reason.

[Dave Rochester:]

Got you, great. And just one last one, a quick question for you on [Indiscernible] count; is there any interest on your part for getting a piece of that?

[Joseph Ficalora:]

What was that? Oh, no.

[Thomas Cangemi:]

No, no, no.

[Dave Rochester:]

There is lot to go around I’m sure.

[Joseph Ficalora:]

That’s a very, very, very big loan but that is not structured at all the way we would plan.

[Thomas Cangemi:]

I think our private equity investments are predominantly in that structure. I don’t see us -- no.

[Dave Rochester:]

Got you. All right, great. Thanks guys.

[Joseph Ficalora:]

It was a pleasure.

[Operator:]

Our next question comes from the line of Steven Alexopoulos from J.P. Morgan. Your line is open.

[Steven Alexopoulos:]

Hi everyone.

[Joseph Ficalora:]

Steve, how are you?

[Steven Alexopoulos:]

Good. To start, assuming you guys cross the SIFI line in the second quarter, it wouldn’t be subject to CCAR till 2018, we get that. But could you walk us through the new compliance areas in addition to LCR that you will be subject to, once you actually cross the line?

[Thomas Cangemi:]

So Steven, the biggest issue in dealing with 2018 is filing your capital plan which we internally have filed capital plans. We’ve done this exercise for numerous years now. And the big adjustment will be putting on the LCR assets to comply. And so, it’s not on the CCAR, that’s not us just being a bank north of $50 billion under the [indiscernible] rule. So absent all those exercises, we’ve been in the place where we’re in a position of SIFI readiness as of today. We feel pretty confident that we bridge the gap and we’re comfortable, although we wouldn’t be targeting to the second quarter 2016 to crossover. We’re very comfortable based on crossing over in 2016 on a SIFI readiness perspective.

[Steven Alexopoulos:]

Okay, got you. And Tom, what’s the estimated size at this point of the HQLA portfolio that you think you will need to build? And can you talk about how you plan to fund it?

[Joseph Ficalora:]

In a perfect world, our best expectation would to be we announced the transaction that we fund our HQL through a restructuring of the combined entity the target. That’s obviously what we’ve talked from all the years. But absent that, we’ll look to either treasuries and/or Ginnie Mae securities that are qualifying assets to fill the hole. And we haven’t publicly put out a number. So, I’m not going to give a specific number but it is a number that we have to evaluate both on the liability side and on the investment side. We have other securities that could either be sold into the market [as we move] to file for LCR. So at this point in time a very simplistic exercise will be [indiscernible] for the balance sheet and we would have to fund it probably with a slight mismatch of duration through home loan bank borrowing and deposit growth over time.

[Steven Alexopoulos:]

Very good, okay. And then just quick on the loan side, given the plan to cross SIFI in 2Q, so you’ll need to continue constraining growth. Is that right way to think about this just until the first quarter and then you want to meet...?

[Thomas Cangemi:]

So here is how we would think about it. So the interesting point is that we’re getting much closer to that second quarter of 2016. So where we stand today, if we were to grow $5.4 billion in the fourth quarter, we would trip over SIFI. We don’t plan on putting on $5.4 billion in Q4. However if we add $1 billion a quarter for the next two quarters, we’ll be very close to tipping over in the second quarter of 2016. So, the fact that we have a potential of $1 billion asset growth in Q4 and another $1 billion asset growth in Q1 of 2016, the growth is going to accelerate as indicated in the previous quarter. If you look back to Q2 versus Q3, our loan book has grown, however in the previous quarter it has declined due to actual asset sale. We will continue to review asset sales from time to time given market condition. And I think I said this morning, if you look at where rates are, [Indiscernible] it’s very attractive given the desire for the numerous banks who acquire assets at reasonable yields and the yields in this environment are very attractive given our product mix. So, we are looking at all aspects of that. But clearly as I said in Q2 and I will say it again in the Q3 call, we are back to growing the net loan book going forward.

[Steven Alexopoulos:]

Okay. Very helpful. I appreciate all the color.

[Joseph Ficalora:]

It is a pleasure.

[Operator:]

Our next question comes from the line of David Darst with Guggenheim Securities. Your line is open.

[David Darst:]

Good afternoon.

[Joseph Ficalora:]

Hi David.

[David Darst:]

Great. So, just on $1 billion you referenced, just looking that $1 billion of kind of core loans net of runoff and the covered book and then you could even fund some of that with securities and these costs in the fourth quarter?

[Thomas Cangemi:]

That’s right. Yes.

[David Darst:]

Okay, got it. And then Joe, just you mentioned the terms of the participation agreements. Where does the prepayment income go and what are we looking at maybe….

[Thomas Cangemi:]

So David, basically, as we always said in the past, we are servicing the asset, we control the asset, the prepayments are [part of it] with the participant.

[Joseph Ficalora:]

A negotiated aspect of every transaction that we do, and although there are nuances between the transactions, not everyone is exactly the same. So, there are things that are common.

[Thomas Cangemi:]

So theoretically, if I told you 50% participation and $1 million comes in, we both enjoy $500,000 of income.

[David Darst:]

Okay, got it. Okay, and then you know, what happens – and I appreciate your confidence in getting an acquisition done but if you don’t have an acquisition by April, should we expect to see some type of balance sheet restructuring and capital raise independent?

[Joseph Ficalora:]

It would obviously depend upon the environment at that time, but it seems to me that it would be highly improbable that we would go that far without there being some better clarity as to what we would be doing in the environment that actually exists at that time.

[Thomas Cangemi:]

In other words, I think Mr. Ficalora indicated that we expect to cross over sometime in second half of next year, but the M&A environment is very fluid right now and we’re somewhat optimistic that things could be very opportunistic in the short term.

[David Darst:]

Okay. And then in your mortgage company, you know, with a lower volume outlook. Do you have an opportunity to take some cost out of the mortgage business and then kind of redirect that into the spending you need to keep building up the base?

[Joseph Ficalora:]

You know, that’s a tough one. Where we are today, obviously we’re disappointed in the actual results for the quarter regarding mortgage but it’s a long history of a lot of success. So, over time this company had a pretax income to the bank of $440 million, after tax of $271 million to the company since inception. And this was probably the worst quarter we’ve seen but again this is -- I think we’re geared up for low volume right now. So, when we had some downsizing a few years back, we had $3 billion pipeline on a monthly basis coming in and shutdown. So we’re not in that position. And we’re dealing with obviously enhanced regulatory aspects in respect to residential, so we’re beefing up there as well. I think the cost structure is relatively lean. So we are going to manage through this. We hope to get some of this devaluation back next in the fourth quarter, if we get some of that back, it’s a sizable improvement from the previous quarter. So we’re pretty confident that given the anomaly between where we were on hedging, hopefully we will not have repeat in Q4.

[David Darst:]

Got it, okay. Thank you.

[Joseph Ficalora:]

Great.

[Operator:]

Our next question comes from the line of Collyn Gilbert with KBW. Your line is open.

[Joseph Ficalora:]

Hi Collyn.

[Collyn Gilbert:]

Thanks. Good afternoon gentlemen. Joe, just want to go back to your comments and obviously you too Tom, on your confidence on the loan side and the origination side, just trying to kind of put that in perspective. I mean if we were to look at -- you did 9 billion of originations year-to-date you back out the 1.5 billion that you’ve sold, 7.5 billion but your net growth in those nine months is only 840 million, so suggesting obviously significant pay down. What do you see changing as you look out over the next few quarters and then in next year; is it that your origination volumes can increase or do you paid downs coming down?

[Joseph Ficalora:]

So, I think the only thing that we actually control is origination. And I think historically -- and this has been improving time and time again over the years, when in fact we have reason to grow our portfolio significantly, our niche has the capacity to provide 40% CAGR in the growth of our loan portfolio and how was that? Some of the very largest participants within our niche have extraordinarily large portfolios. So, when the opportunity presents itself for us to take larger share of the market, we have a built in opportunity with people who actually have a very common business model to ours that in fact we are the likely closer on their portfolio. So, the ability for us to gain share of the market is often driven by the capacity we have to actually grow our book. So, as indicated in the last few years, we’ve been growing our loan book more rapidly than most. And then although there has been discussion about the inability of some to actually to grow their assets and so on, there hasn’t been much discussion about the fact that we do grow our loan book more rapidly than others. And in this unique environment, we’re participating a share of our growth in the market share. So, the reality is that we have every expectation that given the opportunity to restructure a combined balance sheet, we will grow our loan book at significant numbers.

[Collyn Gilbert:]

Okay. And I can probably find a way to sort of back into this, but you guys might know this number off hand, the 9 billion or so and if we break that down in the multi-family originations, do you know sort of what percent that is of the overall multi-family originations in the New York market? Do you guys segment that…?

[Joseph Ficalora:]

No, we don’t know. I think that as best as we can tell, and again the New York City market is much larger than our niche for the component of the market that we would actually participate in.

[Collyn Gilbert:]

Right.

[Joseph Ficalora:]

But our guess has been and then -- there is no full way to understand this where we’ve actually developed this. We think we have about 20% or so of our niche, that’s not 20% of the New York market, that’s 20% of our niche.

[Collyn Gilbert:]

Okay. That’s helpful and then just one question tying to that, how should we think about kind of the provisioning as you start to put on some of this new loan growth? And maybe you can give us some color to what you’re currently providing with each new loan origination?

[Joseph Ficalora:]

I think the important thing to recognize is that we’ve had a decade of consistency in how we actually perform with regard to our niche and our niche has not changed. New York changes in cycles, and the reality is that the changes during the course of a positive cycle represents market value trade. We’re not a market value lender. We don’t lend on properties that are at market value, we lend on cash flows that are in many cases fixed. So, these differences make it possible for us to be very, very consistent through the cycle. And our share of what is available in our niche has consistently been growing because of people who could make the decision to go to us, to go to somebody else; often make the decision when in fact we’re available to go to us because they’re cycle players and we’re cycle players and their familiarity with our business model and our familiarity with their practices is such that it’s very easy to bring us together when it’s mutually beneficial.

[Thomas Cangemi:]

So, Collyn, when we went out on a limb early on beginning of 2015 with the expectation that there wouldn’t be any provisions in 2015 assuming nothing comes out of the ordinary that we’re not prepared for and we still feel consistent to that approach for the rest of this year. You know, as far as we go into next year, we’ll deal with that as we get into 2016, but for 2015, nothing has changed.

[Joseph Ficalora:]

So, a different metric, just so you have this Collyn, our overtime charges represent 0.4%. Our reserve would cover many, many, many, years based upon those historical charges. During a cycle, when in fact things are negative, we obviously will lose more like everybody else. And during a cycle when things are positive, we may lose nothing. So as evident by the last many quarters, we’re actually returning money to the reserve, our reserve is growing. We’re not charging our reserve. Our reserve is growing because we’re disposing off asset at values greater than we were carrying them at. So that is where they are unique.

[Collyn Gilbert:]

Okay. All right. Thanks.

[Joseph Ficalora:]

Thanks.

[Operator:]

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back to Mr. Ficalora for closing remarks.

[Joseph Ficalora:]

On behalf of our Board and management team, I thank you for your interest in the company, our strategies and our performance. We look forward to discussing our fourth quarter and full year performance with you in the New Year. In the meantime, wish you and your loved ones the best holiday season. Thank you.

[Operator:]

Thank you. This does conclude today’s third quarter 2015 earnings conference call with the management team of New York Community Bancorp. Please disconnect your lines at this time and have a wonderful day.