Flagstar Bancorp : Q1 2021 Flagstar Bancorp Earnings Conference Call Transcript

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EDITED TRANSCRIPT

NYCB.N - Q1 2021 New York Community Bancorp Inc and Flagstar Bancorp Inc Earnings and to Discuss the Acquisiton Call

EVENT DATE/TIME: APRIL 26, 2021 / 12:30PM GMT

OVERVIEW:

On 04/26/21, NYCB announced acquisition of Flagstar Bancorp Inc. NYCB reported 1Q21 EPS of $0.29. Flagstar reported 1Q21 net income of $149m and diluted EPS of $2.80.

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APRIL 26, 2021 / 12:30PM, NYCB.N - Q1 2021 New York Community Bancorp Inc and Flagstar Bancorp Inc Earnings and to Discuss the Acquisiton Call

C O R P O R A T E P A R T I C I P A N T S

Alessandro P. DiNello Flagstar Bancorp, Inc. - President, CEO & Director

James K. Ciroli Flagstar Bancorp, Inc. - Executive VP & CFO

John J. Pinto New York Community Bancorp, Inc. - Senior EVP & CFO

Lee Matthew Smith Flagstar Bancorp, Inc. - President of Mortgage of Flagstar Bank

Salvatore J. DiMartino New York Community Bancorp, Inc. - Senior MD and Director of IR & Strategic Planning Thomas Robert Cangemi New York Community Bancorp, Inc. - President, CEO & Chairman of the Board

C O N F E R E N C E C A L L P A R T I C I P A N T S

Brocker Clinton Vandervliet UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap Christopher Edward McGratty Keefe, Bruyette, & Woods, Inc., Research Division - MD

Christopher William Marinac Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst David Patrick Rochester Compass Point Research & Trading, LLC, Research Division - MD, Director of Research & Senior Research Analyst Ebrahim Huseini Poonawala BofA Securities, Research Division - Director

Kenneth Allen Zerbe Morgan Stanley, Research Division - Executive Director

Mark Thomas Fitzgibbon Piper Sandler & Co., Research Division - MD & Head of FSG Research

Matthew M. Breese Stephens Inc., Research Division - MD & Analyst

Stephen M. Moss B. Riley Securities, Inc., Research Division - Analyst

Steven A. Alexopoulos JPMorgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks Tu Duong RBC Capital Markets, Research Division - Analyst

P R E S E N T A T I O N

Salvatore J. DiMartino - New York Community Bancorp, Inc. - Senior MD and Director of IR & Strategic Planning

Good morning, everyone. This is Sal DiMartino, Director of Investor Relations. Earlier this morning, we issued a joint press release and presentation announcing the acquisition of Flagstar Bancorp by New York Community Bancorp. Both companies also separately issued their respective First Quarter 2021 earnings releases, which we will briefly discuss this morning. Please note that today's call will take the place of the previously scheduled earnings calls, which have been canceled. Today's releases and presentations have been posted on each company's Investor Relations' website.

Before the discussion begins, I'd like to remind you that certain comments made today by the management teams of both New York Community and Flagstar, may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in today's press releases and presentations for more information about risks and uncertainties which may affect us.

Now I would like to introduce New York community's Chairman, President and CEO, Thomas Cangemi.

Thomas Robert Cangemi - New York Community Bancorp, Inc. - President, CEO & Chairman of the Board

Thank you, Sal. Good morning, everyone, and thank you for joining us today, to discuss the great combination we announced earlier this morning, along with our strong first quarter results.

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APRIL 26, 2021 / 12:30PM, NYCB.N - Q1 2021 New York Community Bancorp Inc and Flagstar Bancorp Inc Earnings and to Discuss the Acquisiton Call

Joining me in Westbury, our Chief Operating Officer, Robert Wann; and our Chief Financial Officer, John Pinto. Also on the line is my new partner, Sandro DiNello, President and CEO of Flagstar, along with members of his executive leadership team.

Before launching into a discussion of the transaction, I would like to provide you with a brief overview of our strong first quarter results. This morning, we announced better-than-expected first quarter results of $0.29 per share, $0.02 ahead of consensus. The quarter was characterized by double-digit net income and EPS growth. Strong growth in pre-provision net revenue, continued margin expansion, good loan growth, strong deposit growth, lower operating expenses and a continuation of our market-leading superior asset quality. For the 3 months ended March 31, 2021, our pre-provision net revenue increased $64 million or 47% to $200 million, driven primarily by an impressive 30% increase in net interest income due to lower interest expense.

On the net interest margin front, our first quarter margin was 2.48%. Prepayments were $20 million and added 15 basis points to the NIM. Excluding the impact from prepayments, the margin was 2.33%, up 3 basis points compared to the previous quarter and up 41 basis points compared to the year ago quarter. We are very happy with the trend in our efficiency ratio, as we continue to improve, declines of less than 40%.

Noninterest expenses was $132 million, slightly below last quarter's results and better than originally anticipated. On the lending side, overall loans increased $242 million, up 2% annualized, led by specialty finance and commercial real estate. Although multifamily portfolio was relatively unchanged due to prepayment, first quarter multifamily originations of $1.5 billion exceeded last quarter's pipeline of $1.1 billion. As I have articulated previously, one of NYCB's top goals has been to diversify our funding mix. During the quarter, we entered into a third quarter relationship to bring in low-cost deposits, taking advantage of new capability provided by our ongoing systems and strategic transformation. To this end, total deposits rose 22% or $1.8 billion as of March 31, 2021, with $1.6 billion coming from this relationship. Importantly, deposits were noninterest-bearing. We believe this, along with other initiatives we are working on will continue to diversify our deposit mix, and in time, will provide a stable source of on-balance sheet liquidity.

Lastly, our asset quality metrics remained strong. As NPAs decline, and then -- and we recorded net recoveries this quarter. Importantly, 100% of the loans on full payment deferral have now returned to payment status. Moreover, the vast majority of those loans currently modified and paying interest on are expected to come period during the second quarter, at which time, we expect them to return to full payment status. In terms of our regional economy, outlook is increasingly positive. With the rollout of a vaccine and additional fiscal stimulus, we are beginning to see green shoots in the New York City region. Our portion of the New York City real estate market, the non-luxuryrent-regulated portion of multifamily market continue to perform extremely well. Our borrowers have strong balance sheets, and rent collections are above pre-pandemic levels, hovering in the high 90% level. So we continue to be optimistic about the full reopening of the region. Overall, this has been a very strong start to the year, and we believe these trends bode well for the remainder of the year on a stand-alone basis.

Not only am I excited about our first quarter results, I am thrilled about our combination with Flagstar announced this morning. When I was named President and CEO earlier this year, I outlined what my strategic priorities would be. One of my key priorities was to seek a like-minded partner who will provide us with a diverse revenue stream, improve our funding profile and accelerate our transition to a dynamic commercial banking organization. In Flagstar, we have found such a like-minded partner. The merger of our 2 organizations will provide us a larger platform, a more robust product offering for our clients, a strong employee talent pool and significant balance sheet size to accelerate our combined transformation to a high-performing commercial bank. It provides both product and geographical diversification, including a top 10 national mortgage origination and servicing business. It had a significant management expertise, greatly improves our funding mix, and interest rate sensitivity and will substantially increase capital generation. We are combining 2 great banks with similarly useful and risk minded cultures, performance-based values and complementary business models positioning us to a strong institution for the future.

I am very bullish about what this combination will mean for our customers, our employees, our communities and our shareholders. In short, this partnership benefits us financially, strategically and culturally. Before we go into a detailed discussion of the transaction, I'm very happy to introduce Sandro DiNello, and will turn it over to him for comments.

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APRIL 26, 2021 / 12:30PM, NYCB.N - Q1 2021 New York Community Bancorp Inc and Flagstar Bancorp Inc Earnings and to Discuss the Acquisiton Call

Alessandro P. DiNello - Flagstar Bancorp, Inc. - President, CEO & Director

Thank you, Tom. You used the words like-minded partner in your comments to describe the combination of our 2 companies. I think the words apply equally to our own relationship and the way we work together to make this day a reality. It's been a real pleasure, my friend. Thank you too, for the opportunity to talk a little bit about Flagstar in the union of our 2 companies. And a message to our employees earlier this morning, I described the combination of Flagstar and NYCB as a unicorn. We were doing great on our own, posting quarter after quarter of profits, reliably increasing shareholder value and executing on our business plan to become a true commercial bank.

In fact, today, we announced another quarter of impressive results, reporting a second best quarter ever. We win the opportunity to join forces, with NYCB came our way, and after considering it very carefully, we felt this was an outstanding way to accelerate our internal plans for the future. It's the right deal at the right time with the right partner. I can't wait to see it all unfold.

Now for our first quarter results. It was another standout quarter for Flagstar as we posted net income of $149 million or $2.80 per diluted share. If you back out the onetime expense associated with the settlement, we earned $3.31 per diluted share for the quarter, making this one of the strongest quarters we have ever reported. On this basis, we returned 2.4% on assets and 31% on equity. While mortgage took center stage, revenue from banking and servicing continue to be strong, allowing us to deliver diversified earnings. Here are a few highlights from the quarter. Our net interest margin increased 4 basis points. Credit continues to hold up extremely well, allowing small ACL release while still maintaining a strong coverage ratio of 3.1%, excluding warehouse loans. Mortgage revenue was outstanding with non sale revenue of $227 million and a margin of 184 basis points. We saw growth of over 50,000 in loan serviced or subserviced. Capital ratios remained high, book value grew to $41.70 per share. Looking at Q1 results for both companies, where we each excel and were together, each of us could be even better, I think you can see why this transaction was so compelling.

Now I'll turn this back to Tom to walk you through our investor presentation.

Thomas Robert Cangemi - New York Community Bancorp, Inc. - President, CEO & Chairman of the Board

Thank you, Sandro. As I said earlier, I'm very excited about this transaction and what it does for both organizations. Turning to Slide 4 of the investor presentation. Let's talk about some of the key ways that this transaction will enhance shareholder value. The combination accelerates our stand-alone plan to transform our business model to a commercial bank creates a top-tier regional bank with significant scale and broader diversification, drive strong, sustainable financial performance and significant capital generation. Improves our overall funding profile and interest rate positioning, combine the best-in-class multifamily lender with a top-ranked national mortgage originator and servicer, preserves each bank's unique low credit risk model and combines 2 very strong management teams and boards. And in keeping with our financial discipline, this deal is immediately accretive to tangible book value and earnings per share. Importantly, our accretion numbers are based on very realistic modeling, including conservative cost saves and mortgage banking assumptions, no revenue synergies and no financial engineering such as share buybacks and balance sheet repositioning. Our projections capture an expected decline in mortgage originations over the next couple of years, reflecting that the transaction is strongly accretive, notwithstanding that decline.

From year-to-year, we have evaluated multiple alternatives to transition our business model to a commercial bank. It has been very clear that executing on this repositioning organically would require significant investment in personnel and resources and take a substantial period of time to execute. Partnering with Flagstar, which is already on its way to becoming a high-performing commercial bank significantly accelerates this process. As I will discuss later, together with, enhance our profitability metrics along with our national peers. A notable feature of the transaction with Flagstar is a significant sustainable excess capital generated by the combined company. After the payment of dividends to shareholders, we estimate additional capital generation of $500 million annually. This provides the company with greater flexibility to grow the balance sheet, more capital management opportunities and resources to reinvest into various businesses, people, processes, and of course, technology, including platforms that serve growing consumer demand for digital services.

The transaction greatly improves our funding profile. As we will have a larger percentage of our deposits in noninterest bearing accounts. And from an interest rate sensitivity perspective, we will take advantage of the opportunity to transform a long history of being liability-sensitive to being asset sensitive at the close, positioning ourselves for an expected increase in market interest rates over the next few years. We are also

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APRIL 26, 2021 / 12:30PM, NYCB.N - Q1 2021 New York Community Bancorp Inc and Flagstar Bancorp Inc Earnings and to Discuss the Acquisiton Call

combining 2 market-leading low credit risk lending businesses, and regulated multifamily and national mortgage banking. Both Sandro and I see long-term value in our 2 banks steadfast commitment to preserving strong asset quality. Our credit quality ratios remained strong with minimal losses in each of our loan books. Additionally, our enhanced products and capabilities will provide multiple cross-sell opportunities, and I'm looking forward to working with Sandro in putting our 2 strong management teams and boards together.

Slide 5 summarizes the key transaction terms. This deal is structured as a tax-free 100% stock deal with a fixed exchange ratio of 4.0151 NYCB shares for each Flagstar share. It works out to be 6.4x 2022 consensus EPS estimates with fully realized cost saves, 115% of tangible book value per share and a 2.2% deposit premium.

Our new company will be headquartered in Long Island, New York with a regional headquarters in Troy, Michigan. The Board will be comprised of 12 directors, 8 from NYCB and 4 from Flagstar, including Sandro, who will become nonexecutive Chairman. Additionally, I'm very pleased to welcome Lee Smith and Reginald Davis to our executive leadership team as senior Executive VP. Lee will be President of Mortgage and Reggie President of Banking. Lee has been a wealth of knowledge and expertise in our new company. He joined Flagstar in 2013 from a private equity firm and served as Executive Vice President and Chief Operations Officer, until he was appointed as Head of Mortgage in the third quarter of last year. Reggie has 35 years of extensive retail, commercial banking and commercial real estate experience as large regional banks, including Truist, RBC Bank U.S.A. and Wachovia.

Both of these highly qualified individuals will help us move forward in key areas of the new bank. And looking forward to working with both of them. And Sandro and I finalize our integration plan, we will draw on the relative strength of each company and bringing together the best talent from both organizations for the remaining key roles.

As discussed on previous calls, a hallmark of our M&A strategy is that deals must be accretive to earnings and tangible book value per share. As you can see on Slide 6, this transaction nicely meets this criteria. Financially, the transaction is very compelling, with expected double-digit EPS accretion of nearly 16% and immediately a 3.5% accretion to tangible book value per share using conservative modeling assumptions. Cost are estimated at $125 million, but given the fact that both companies are on the same core system, this estimate could prove to be conservative. It is also very conservative relative to other recently announced transactions. Our capital ratios post close will also be very strong with a common equity Tier 1 ratio of over 10%. We plan to maintain NYCB's strong dividend at $0.68 per share. Based on our pro forma EPS, the dividend payout ratio will decline to 47%. As previously mentioned, our ongoing capital generation will be significant. And finally, our credit remains strong with estimated pro forma 3-year cumulative charge-offs of only 20 basis points. This metric would have been even lower to exclude the tax and related charge-offs, which have accounted for the majority of NYCB's modest charges over the past 3 years.

Slide 7 highlights the scale of our combined franchise. The company will have $87 billion in assets and operate nearly 400 traditional branches throughout 9 states and 87 retail lending offices in 28 states. Sandro and I see significant opportunities to put up much larger balance sheet to work, boosting existing and future lending and other capabilities across the extensive reach of our new retail and digital platforms.

Turning to the next slide. A few words about Flagstar's remarkable banking franchise. Flagstar currently ranked as one of the leading regional banks in the country with a diversified relationship based business model, comprise of consumer, CRE and C&I lending with a low-risk credit profile and a low-cost core deposit base, along with strong market share in Michigan. Its mortgage business is the sixth largest bank originator nationally and is a leading sub service as well, handling payments and record keeping for nearly $250 billion of loans across almost 1.1 million accounts.

Sandro and his executive leadership team have done a great job in building and running an enormously successful organization over various cycles in the highly competitive markets, and I look forward to working together with them to building even stronger commercial bank. Next slide, Slide 9, highlights some of the combined company's complementary product offering. As you can see, we are pairing commercial and retail capabilities that will enable us to better serve our customers' evolving banking needs. Although we are not modeling revenue synergies, it is a real opportunity over time to significant synergies. We have the leadership expertise and product set to accelerate our strategy and grow the business. Our enhanced scale and capital generation provides the combined company with greater capacity to lend and the opportunities keep in our deposit relationships. Combined, we will possess a comprehensive commercial banking offering. We will diversify our lending across multiple asset classes, and we'll further expand our footprint in contiguous markets to grow our regional and national business line.

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