Flagstar Financial Inc (NYCB) 2004 Q3 法說會逐字稿

Good day everyone, and welcome to the New York Community Bancorp third-quarter 2004 earnings conference call.

Today's call is being recorded.

For opening remarks and introductions I will now turn the call to the first Senior Vice President of Investor Relations, Ms. Ilene Angarola.

Please go ahead.

Thank you.

Good morning everyone, and thank you for joining the management team of New York Community Bancorp for the Company's third-quarter 2004 earnings conference call.

Our comments today will feature several forward-looking statements, which are intended to be covered by the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

You will find a discussion of forward-looking statements and the associated risk factors in our recent SEC filings and on page 15 of this morning's earnings release.

If you need a copy, please call our Investor Relations department at 516-683-4420 or visit our website, www.myNYCB.com.

Today's call will be led by our President and Chief Executive Officer, Joseph Ficalora, who is joined by Robert Wann, our Senior Executive Vice President and Chief Operating Officer;

Thomas Cangemi, our Senior Executive Vice President and head of our capital markets group, and John Pinto (ph) First Senior Vice President in the capital markets group.

Unfortunately our Chief Financial Officer, Michael Puorro is unable to be with us this morning due to the passing of his mother earlier this week.

While we intend to answer your questions about earnings during today's discussion, we expect Mike to be back in the office next Monday and you may wish to contact him then.

At this time I would like to turn the call over to Mr. Ficalora, who will make a brief presentation before opening the line for questions and answers.

Thank you, Ilene, and good morning everybody.

Today we're going to talk about three primary topics.

The quality of our repositioned balance sheet at the end of September, our third-quarter performance in the linked quarter impact for the repositioning of the balance sheet that took place at the end of June, and the current market conditions and their impact on our business and our outlook.

Once we have completed our discussion of these topics, there will be ample time to answer your questions.

To start, let's look at the quality of our balance sheet.

The quality of our balance sheet is improving.

In fact, we have made significant progress toward each of the goals we spoke up in July.

The first of these goals was loan growth, which has been ongoing.

Loans rose to $12.6 billion at the end of September representing 53 percent of total assets and its annualized growth rate of 26.3 percent since December 31, '03.

Our greatest growth has been in our primary niche of multi-family lending.

Multi-family loans rose $1.9 billion to $9.2 billion since the end of December, signifying an annualized growth rate of 33.5 percent.

The second goal was the reduction in our securities portfolio.

We reduced our securities portfolio by $945 million over the course of the quarter and utilized the cash flows to grow our loans.

At $7.5 billion securities represented 31.8 percent to total assets, putting us somewhat ahead of schedule with regard to our goal of 30 percent by the end of this year.

Our third goal was a reduction in wholesale borrowings.

Wholesale borrowings were down $773 million on a linked quarter basis, representing 38.7 percent at quarter end while the bulk of the cash flows from securities were deployed into loan reduction, the excess was used to reduce our wholesale funding over the past three months.

During this time we also succeeded in increasing our deposits as we realigned our position in the markets.

Deposits grew to $10.2 billion at the end of September signifying an anualized growth rate of 7 (technical difficulty).

The increase stemmed from a rise in core deposits of $6.4 billion representing 63 percent of total deposits at quarter end.

These positive trends have continued into the current quarter and we believe will likely carry through to our fourth-quarter end results.

With the current pipeline of $1.3 billion we expect that our goal of 25 percent net loan growth will be verified by the end of this year.

Securities as mentioned should approximate 30 percent to total assets and provide us with an anticipated funding to grow our loan portfolio.

We are also maintaining our focus on growing our deposits in line with the growth of our core mortgage business.

Our capital base has also strengthened during the quarter.

At quarter end annual stockholders equity represented 5.12 percent of total assets, a 61 basis point increase.

At the same time our leverage capital ratio rose to 7.94 percent, up 142 basis points since the end of June.

Having touched upon our balance sheet, let me turn to our third-quarter performance which reflected the full year benefit of last year's merger with Roslyn Bancorp and the record volume of loans the Company produced over the past twelve-months.

Originations totaled $6.6 billion over the last four quarters, including 1.5 billion in the third quarter of 2004.

At the same time, we maintained our asset quality with nonperforming assets representing 0.12 percent to total assets, we are pleased to report that the senior citizens facility acquired in the Roslyn merger, which was our largest nonperforming asset, was sold to $13 million without any loss being incurred by the Company.

We also maintained our efficiency during the quarter with third-quarter ratios at 23.91 percent.

The positive trends in the quarter were tempered by two offsetting factors.

The repositioning of the balance sheet at the end of the second quarter and the significant flattening of the yield curve over the past three months.

The impact of these factors is readily apparent in the linked quarter comparison of our third-quarter results.

While average interest-bearing liabilities declined by $3.8 billion, the average cost of funds rose 54 basis points at the same time.

The shrinkage on the funding side was paralleled by a $4 billion decline in average interest-earning assets, accompanied by a 5 basis point decline in the average yield.

The net effect was a linked quarter decline in net interest income accompanied by a reduction in our spread and margin.

So the compression of our spread and margin was clearly expected in the quarter, the impact of the yield curve was significant.

At 3.34 percent, our margin was 49 basis points narrower than the linked quarter measure.

The extension of liabilities at the end of the second quarter accounted for 19 basis points of that decline.

Despite the fact that our pricing spreads on new loans were noticeably better this quarter than they had been earlier in the year, the benefit was dramatically outweighed by the decline in long-term rates during the three-month period and by the result in flattening of the yield curve during this time.

While short-term rates rose 100 basis points, just ahead of expectations, long-term rates declined at the same time when they were expected to go up.

And while we originated $1.1 billion in multi-family loans, nearly doubling last year's third quarter production, new loans represented a higher percentage of the loans we produced than refinancings, causing a lower-than-expected volume of prepayment penalty fees.

In view of the volatility of interest rate, of the interest rate environment and the impact of the yield curve on our core business, we have revised our 2004 diluted GAAP earnings per share projections to a range of $1.34 to $1.36.

This range includes the 35 cent per diluted share repositioning charge in the second quarter of the year.

After the charge, our 2004 diluted GAAP earnings per share projections range from $1.69 to $1.71.

As we stated in this morning's press release, we expect to see continued loan growth in 2005, funded by cash flows from our securities portfolio and an increase in deposits together with continued tight control of expenses and strong credit quality.

However, due to the uncertainty of the timing and direction of long-term interest rates, which has a significant effect on our spread and margins, we will no longer provide an earnings outlook for 2005 diluted earnings per share.

We are confident in our capacity to generate earnings despite the competitiveness of our market and the present volatility of interest rates.

Our proven business model is generating solid earnings in an environment that is likely to challenge mortgage portfolio lenders nationwide.

As a sign of our commitment to shareholder value we have again declared quarterly cash dividend of 25 cents per share.

We are committed to maintaining the dividend at its current level while we position our business model for future earnings growth.

On that note, I would like to open the line to your questions.

We will do our best to get everybody, but if we should miss you, please feel free to call us individually this afternoon or during the week.

(OPERATOR INSTRUCTIONS) Mark Fitzgibbon from Sandler O'Neill.

My first question is, I think that the securities portfolio shrinkage in wholesale deleveraging you guys did this quarter made a lot of sense, I wondered if opportunistically you will continue to shrink that if interest rates stay low or are we likely to see a more gradual decline in those?

My answer to that question would be more in line with the previous quarter.

In the event that we have a loan demand and the market is right (indiscernible) we will do so.

But clearly we feel comfortable with the (technical difficulty) position.

Obviously we are slightly ahead of expectations, we expect to our 30 percent target and we are going to maintain that position.

In the event that loan demand is there, we need the cash flow where we can deal without loss we will focus on doing that.

Okay, and then the second question I had for you with your capital ratios building I'm curious when you think you might be able to restart your buyback program.

I think there is no question that we have the authority to buy shares as mentioned in the press release, given the market conditions we can start buying at any time.

We are not looking to do a significant amount of buyback due to the fact that we are very focused on maintaining our tangible position.

Okay and then the last question one of your competitors yesterday on their conference call indicated that they are seeing some loans in the marketplace today that sort of "require a little leap of faith on the credits, and that is a new development" -- I'm wondering if you are seeing that trend, as well.

I think the market that we are in always has a mix of good loans and bad loans.

There's no question that at a time like this at the back end of a cycle you get an awful lot of lenders who will lead on almost anything.

The consistency with which we look at assets has I guess protected us over the course of decades from being affected by the bad loans that are in the market.

Not to say that we are immune but to say that there is no change in our positioning with regard to lending.

So even though there may be speculation that the market has a good deal of overpriced or dollars that shouldn't be advanced, that has been the case in the years past.

And certainly it has also been the case in cycles past, and we are typically very diligent about avoiding those excesses.

Thank you.

Salvatore DiMartino of Bear Stearns.

Good morning, guys.

Just kind of a follow-up to Mark's question on lending.

Could you remind us about if there is any seasonality in the multi-family business, one.

Number two, can you talk a bit about the rates that you are originating on current production and then I have a question on deposit growth.

Assuming that the yield curve remains flat, should we continue to see deposit growth at this level?

Sal, I think there are several questions you have asked.

I will go backwards and maybe you can reiterate your questions as we go.

On the deposit side first, we will be positioning ourselves in the market to grow deposits as those funds are needed in comparison to the available funding that we get from the securities portfolio, which of course was greater than expected during this last quarter or the available alternative funding that might be in the market.

So our securities portfolio did provide more money this quarter, and our deposit growth was somewhat less.

Albeit a significant turn for us.

I think that for the earlier periods, probably going back almost four years, we were very differently positioned in the marketplace.

We are repositioning ourselves in the marketplace today, and we would expect to be able to grow deposits as needed over the course of the periods ahead.

Now with regard to -- which question would you like me to answer next, Sal?

The question on rates, on current production.

Our current production, we obviously see the market moving down in expectation on rates.

What is at the table today for closing is still rates well in excess of 5 percent.

So those rates are literally coming into the portfolio.

The newer loans will be undoubtedly lower than that if rates continue to move down or stay at the level they are at today, this very day.

Is that the coupon rate or the term yield?

No, no, no, that is only the coupon.

The term yield is always higher, Sal.

But of course we can't factor that into today.

We can look at the term yield when the loan is actually refinanced or paid off, we can look at the term yield at that time, but for the new production we can only look at the actual coupon.

And the seasonality of the business?

Third quarter is usually one of our lightest quarters.

As was indicated earlier, this quarter was substantially beyond the third quarter of last year.

So on a historical basis there is difference.

Now, the marketplace will change based on what is actually happening with regard to rates, and more importantly, with regard to rate expectations.

So even though there are seasonal changes and there are lots of holidays during this third quarter and other things, that typically make the third quarter a less productive quarter, other market factors do impact us.

So this quarter was extraordinarily good on a comparative basis; the third quarters in preceding years.

So if you back out the Co-op City loan for the quarter, then more in line with historical?

No, actually it still would have been greatly beyond historicals.

The Co-op City loan only reflects the $300 million of that loan.

It doesn't reflect the rest of the loan.

So not to say that that's not a sizable amount of money, but the fact is that without the Co-op City loan we still would have been substantially beyond third quarters of prior years.

Okay, thanks.

Rick Weiss with Janney.

The first question has to do with the Co-op City loan.

Large loan relative to your total capital.

And here, I guess my question is going to be what is the size of your next largest loan?

The next largest loan is a loan of about $174 million, and that loan is on Broadway and Manhattan.

That is a more traditional, undervalued apartment.

The Co-op City loan is a substantially under market co-op complex that has probably, I mean the loan at the current advance level is about a 20-odd percent LTV.

And at a full advanced level down the road 4 or so years it would be at about a 33 percent LTV.

Obviously the people in the Co-op City loan are individuals who own properties that if they were to go to market would be possibly as much as 4 times greater in value to them individually than they currently are.

Do the Co-op City owners, do they have any other loans with NYB?

No, no, this is actually an underlying mortgage.

We are not doing the loans on the Co-op individual department (ph) units.

We are doing the loan on the complex.

This is an underlying Co-op loan.

Meaning that we are lending on the entire value of the complex.

So the current valuation of this property is at about 1.2 billion, and as improved it is about 1.5 billion.

It is a huge complex, 15,370 odd individual apartment units, not rooms, whole apartment units.

Okay, also another question has to do with fee income, which declined on a linked quarter basis.

Clearly, as you look at the portfolio, we have had a significant amount of increased lending over the recent past.

So the current interest rate environment is such that a good deal of people are virtually waiting to see what actually happens with rates, not moved by the anticipation, but by the actual movements in rates.

Many people who might have considered refinancing are not.

Plus, the portfolio will automatically have people in a more favorable position for refinancing in the quarters in front of us, rather than in the immediate quarter.

So in the previous quarter when it jumps up to about 18 million, that (inaudible) more refi's in the second quarter?

That's right.

When there is street expectations that are pretty consistent across the board, the refinancing increases because the people that are refinancing have a sense of certainty that rates will be going up.

Rates have fallen back, so that certainty has dissipated somewhat so people are being patient and awaiting further clarity with regard to rate.

So I think that the geopolitical situation and the economic situation is such that there is enough uncertainty out there that people are not making these large decisions in front of further news or possibly even the outcome politically.

One last question.

Would you think if interest rates don't change, would this kind of represent the bottom of your net interest margin or is it still declining a little bit in the fourth (ph) quarter?

If interest rates don't change at all, the question will be what is the actual volume in asset generation versus -- there are always two factors that affect this.

How many new assets you wind up putting on at whatever the market rates may be at a given time.

So volume will be part of that factor, as well.

So if interest rates stay the way they are and the volumes are in fact favorable, we should in fact improve.

If volumes are less favorable, and rates stay exactly where they are, then of course we might be exactly in line with these expectations.

There are lots of things that come into play, and I think the unfortunate reality is that these changes are going to be occurring daily, weekly.

And this, by the way, is not just going to impact us.

It is going to impact everyone.

Anyone that is in the lending business is going to have significant deviation from expectation based on actual occurrences within the economy, and with regard to interest rates.

Okay.

Thank you.

Matt Kelly, Moors & Cabot.

I was wondering if you could just talk about your expectations for total balance sheet growth over the next year.

I mean, if you keep in the payout ratio, kind of on the Q4 guidance you are essentially providing it’s about a 70, 75 percent payout going forward over the next quarter or so.

It doesn't leave a ton of room in terms of excess capital to really grow the balance sheet.

So what are your expectations for net balance sheet growth over the next year?

As we are looking at the balance sheet, we are expecting double-digit growth in the balance sheet over the year ahead.

We clearly do believe that our business model is well positioned in this environment to continue to grow.

And your assessment with regard to earnings is very important.

We would expect that we would be better positioned to pay our dividend in the year ahead than the numbers would have reflected in the year just ended.

So there's no question that we are looking at growth in the balance sheet, double-digit and we are also looking at earnings growth in the year ahead.

I think the important thing here, Matt, is that the magnitude of change that has occurred in the last 90 days or so suggests this company is going to have to get realigned in the marketplace in the way that the strength of our business model can come to the surface, so the greatest aspect of our story is '06 versus '05, rather than '05 versus '04.

But from the standpoint of adequacy to pay the dividend, there is no question that we believe we have plenty of room in our earnings to pay the dividend.

Okay, just to follow-up on that.

Can you remind us then, how low you would be willing to take the tangible equity to tangible asset ratio as you start to build this model?

If there is going to be double-digit balance sheet growth and a 65 percent payout ratio, and you also referenced earlier the possibility of buybacks, how low will you take that number, will you take that back to 4 percent?

I think that the important thing there is that depending on what is actually happening and I think the thing that we've learned in the last 90 to 120 days is that expectations aren't anything close to reality in some cases.

So what is actually happening may in fact result in our capital position going up.

Or in the event that it is prudent for us to be buying back stock or doing other things with our growth, we may in fact wind up having our capital position in the 4 to 5 percent range, which is where we've been on a variety of occasions, very successfully.

The important thing on capital with regard to our particular business model is that we have far less risk of having a need to utilize that capital to meet charge-offs during cycle turns.

Obviously cycle turns are very, very important with regard to available capital in companies that lose money during credit cycle turns.

During the last credit cycle turn we were making money while the entire sector was losing money.

So I think that the business model itself has a significantly lesser need for capital -- let's just say a credit card company that obviously earns an extremely high interest rate during the best of times so that they have sufficient capital during the worst of times to actually make charges against their earnings to the point where they are actually charging it to capital.

So the need for capital is different in our case.

Last question to follow-up on Mark's question from earlier, talking about other participants in the marketplace suggesting that pricing on kind of a conventional multi-family product 5-year type loan has been 150, 180 basis points over the five-year treasury.

I wonder if you can comment if that is what you're seeing, and also give us maybe a history lesson on where those spreads have been historically?

And I guess what we are trying to figure out here is when do you start adding multi-family production to the portfolio that is actually margin accretive?

I think the rates that we're looking at today are probably very typical of the back end of the cycle.

I am sure that you realize that during each cycle turn that occurs, multi-family lenders typically take the greatest amount of losses.

So over, for example, the last cycle the losses in multi-family lending resulted in people not being willing to put any new multi-family loans into the portfolio.

Just because of the magnitude of size.

City, by example could not do a 20 percent LCD loan as a result of the requirements on capital by the FDIC due to the higher risk ratings that multi-family loans have.

So I would say that we're looking at a situation here where people are lending aggressively in the market because credit today is not an issue.

But as we go down the road we will see a change, in that in particular as rates move up we will see a significant difference in the willingness of lenders to lend.

A more typical environment would have us getting a point upfront end rates that would be higher relative to other available lending opportunities.

So rates today at the 150, 180 range are probably about as low as they go in this environment.

As we go down the road and credit becomes part of the discussion whenever that actually happens, you know, rates would in fact and margins would in fact improve with regard to this kind of lending.

An important thing that distinguishes us, however, from others is the consistency with which we generate term yield.

Term yield is ultimately what builds capital over time.

So it's not a matter of what are you earning just today, but what will you earn over time?

And the way our loans are structured, we earn over the term of the loan typically significantly more than peers are earning over the course of the same timeframe.

So if you are talking about a three-year or a four-year timeframe and you look at well what assets were in the portfolio bank A and us, our assets typically will earn more as a result of the actual impact of the full earnings that we derive from the points, as well as coupon, that we get in the loan.

So it is somewhat difficult to assess growth from the standpoint of credit quality and also from the standpoint of actual derived earnings.

What is actually going to happen over the course of the loans history in the company.

We will in fact get paid more over the course of the loan's history than our peers typically both from the standpoint of interest and also from the standpoint of ultimate credit pay.

We get typically paid better on the loans that we do than our peers.

That is the quality of the performance, the credit quality of the loan.

Okay.

Thank you for your time.

Jack Micenko from Susquehanna.

When I am thinking about the yield curve and the flattening obviously its had an impact on the margin, was greater than I think everybody expected, is there also a potential benefit in which the securities portfolio, the remix of the balance sheet maybe is occurring faster than expected, and is that phenomenon what is driving your favoring the new money originations this quarter versus refi, number one.

And number two, is there a reasonable sort of ten-year yield -- given that your assets price of five-year units -- is there a reasonable ten-year yield that you're more comfortable with the liquidity from the securities portfolio kind of moving into loans that would maybe stabilize the bleeding on the margin side?

Let me address the first question.

Obviously we had a significant reduction in the five-year CNT (ph) from the latter part of June for the 90 days preceding that.

Clearly it was a dramatic shift but if you look at our pricing, we have actually seen visibility on pricing in the multi-family product better than expected.

So that is a positive trend.

Fortunately, the dramatic shift and sliding of the curve impact all mortgage lenders.

So in respect to that side of the business, we have a significant amount of cash flow coming in at somewhere around high 4's, let's say about 450 to 480 on the cash flow getting plowed into a multi-family production at rates slightly north of that.

Obviously when that opens up that will be a very positive impact to the margin.

Clearly the cash flow has accelerated as expected.

When the rates are lower, we're going to see a little bit more cash flow.

For the quarter we have seen a nice opportunity to fund our loan production via by moving some of the assets off the balance sheet.

We are clearly committed to get our securities portfolio inline with our peer group.

So as I indicated 30 percent was our target at year end, we're running close to that target as of September 30.

So clearly the impact in interest rates had a dramatic benefit on the quality of our balance sheet.

Again, that is going to be the focus moving into '05.

If rates stay low for a while we're going to have continued cash flow.

And our goal is to lend (indiscernible) multi-family production.

Obviously on the deposit side, deposits came in at a pace that was more of a turnaround in strategy -- moving towards a deposit to bring in positive flows on the positive set of negative outflows.

But the need for cash right now is generated from the mortgage business and it is coming from the security side of our balance sheet and it’s been a very favorable trend for our quality of the balance sheet in the third quarter.

Jack, what was your second question?

Along those lines with the excess liquidity coming out of the securities portfolio, is that deriving some favoritism towards the new money originations versus refi's, if in fact borrowers are sitting on the sidelines waiting to figure out where rates are going on the refi trigger.

I think that that has no direct impact on that, Jack.

Clearly our securities portfolio and what is happening with the cash flow on the securities portfolios is of no interest to potential borrowers.

But they are waiting on the sideline in many cases because there is no immediate expectation that rates will verify up at the levels that have been previously discussed.

So I think the important thing for us to recognize is that some of the typical refinancing is kind of building up and being put off into future periods.

This uncertainty with regard to rates is driven by the actual changes.

So people who are looking at their positioning are hesitating.

And this is happening in many places in the marketplace.

But specifically in our particular markets there are people who normally would be active refinancing in their particular business model, hesitating because they do not necessarily feel confident that rates will be dramatically higher six months out or nine months out or at a period that today is not very visible based on the actual movements in rates and the degree to which uncertainty is moving in front of us all.

So I am going to guess that we will see some hesitation in the immediate future.

When there is greater clarity with regard to actual rate movements, we will see some acceleration in that kind of refinancing.

Okay, great.

The commercial real estate book has been growing -- I guess other loans are about 25 percent originations have been there for some time.

Can you give sort of a slice of what that product is?

Is it office, is it owner occupied its New York region, million -- non average loan balance -- can you just give us some sense of what it is?

I think what we've been doing there and I have mentioned this on other occasions -- our committee is made up of a great depth of knowledge in market of a variety of things, obviously the thing that has been most apparent with regard to our history is our multi-family lending expertise.

But we also have an ever-growing awareness of the commercial markets.

And one of the unique things that came to us from the CFS or the Haven transaction was a member of our mortgage committee who is an active participant in the commercial business market and has been for many years and is very successful in doing that.

That has created an environment wherein we are actively creating loans that we have a good depth of understanding of.

And are typically in the New York market commercial properties, all of which are structured in the same way that we typically structure our loans, five-year fixed with the back five at rates that are 200 or 250 over prime, which are typically not going to result in a person in the first instance taking that loan if they expect to be a long-term holder of the paper.

And secondly, typically people do not go into that second period unless there was some extraordinary circumstance with regard to interest rates that cause that to be an attractive rate.

So we are definitely dealing with less than five-year paper.

I think on the commercial side its averaging a little over four years.

And it is typically again based on the structure of our lending.

People that are willing to look at these properties as relatively short-term deficit taking.

So the properties are nice, low LTVs on average; our LTVs are very attractive.

As indicated in our release when you look at the differences between our multi-family lending and our commercial lending, some of those numbers look very much the same.

When you consider that the business model is different, you realize that even though the business model is different, we are typically writing this paper with people who are comfortable with a five-year expectation that the rate will be acceptable to them.

So I think that when you look at our commercial loans overall they are of credit quality comparable to our multi-family loans.

They do not have the same impetus for refinancing, but obviously at the get-go the people who are choosing to do these loans are looking at a structure that would suggest that they are prepared to be refinancing for their own business purposes within a five-year horizon.

Okay.

Thank you.

Midwest Research, Al Savastano.

Two questions for you.

One, I was hoping you could give us a little color on some of the lawsuits that's been filed and what is the bank's position?

And then on second, on the dividend I know you guys are committed to the dividend, but what would it take for you to reconsider that?

I think that on the dividend first, what I would say is that we are not just committed to it, we are very confident that we have sufficient earnings to continue to justify paying the dividend at the level that we are paying it at.

And as has been the case in the past, as we go down the road and looking at this as a long-term business model as we go down the road we would be looking to raise our dividend in similar fashion as we have done in the past.

Now there are some things are obvious.

You cannot be sure what will be 9 months out or 18 months out, but if you look at the track record of the company over time, despite the fact that on a stand-alone basis we do some very good things, on a combined basis we do even better things.

The consolidation of the industry over time will certainly allow for some opportunities, I would suggest.

And our expectation with regard to earnings is such that we feel very confident that we can both pay the dividend and grow the company.

And therefore, the dividend is absolutely solid.

With regard to lawsuits, I don't know how much I could actually say about that other than the fact that these lawsuits are very common in our industry.

Several of our peers have had similar lawsuits.

We do not expect this to have any impact on us of a material basis other than the fact that we must be responsive to dealing with the claims that are made.

Do you have any idea of timing?

I know it is still very early.

Actually we haven't even received -- much of what is out there is beyond what we've received.

So it is very hard to know how this will evolve in timing.

I would say that since this is more of a legal matter, not a matter of great concern to us from the standpoint of its impact on our operations, it is just a matter of fact that these suits are common within the equity markets whenever there is significant change.

And we are very confident that we are going to be positioning ourselves to deal with this well.

Great.

Thank you.

Bob Hughes with KBW.

With respect to the Co-op City loan I understand that the loan-to-value on a fully funded basis still looks extremely low.

Can you talk about what that service coverage looks like there?

I think the debt service coverage is about 1 to 8 and I think that all of the necessary approvals with regard to the funding for the loan are in place.

They have been in place for several months.

And an interesting thing with regard to Co-op City, there is actually a better performance likelihood with regard to tenancy in Co-op City and performance because these are owners, and the owners are dealing with each other in an environment wherein deficiencies in payment typically don't go beyond two months.

We don't necessarily see that in rentals.

So the mix of factors with regard to Co-op City that make it a very attractive loan deal with the fact that this particular property is going to have a substantial amount of improvement as a result of how we are funding the four-year period ahead.

And the way the ownership is structured, they are substantially below the market.

And that makes it very attractive to owners to do what they can to keep their property ownership.

They own these units.

These are not rentals.

They own these units.

So it is a very attractive thing from the standpoint of a lender to have the owners in a position to have substantial benefit over the foreseeable future 4 years, 7 years, 10 years out.

They can see that the property is both being improved and that their relative positioning with regard to value is extraordinarily discounted to the market.

This is not like, let's say, a building that is rent-controlled where the owner gets the value increase due to the increased rental or cash flow.

In this case, each of the owners are the Co-op owners.

And they have deeply discounted values that they own today.

Okay.

Follow-up question, Joe.

With your revised guidance that seems to suggest maybe a fourth-quarter estimate of 35 to 37 cents, down from the third quarter, perhaps you could talk a little bit more about the drivers of that.

It kind of seems to me like the trend on the margin will continue to be down.

And correct me if I'm wrong, but the loans you are originating today are probably coming on a lower yield than they were from the portfolio currently.

I think that the market has provided us with lower yield than we would have anticipated at this point.

The good news about the portfolio is that we are always basically 3 months or so behind, so the rates that are at the table today that are closing are the rates that were generated during the course of the last 3 months, not the current period.

So the rates that are going to be closing in the first quarter of next year will be the rates that are actually in market today.

So rates are lower than expected.

Rates are going to go down from here.

And we would expect that the portfolio will grow, in any event, as a result of the current market conditions that we are experiencing.

Okay, so getting back to the original question, is the primary driver behind that, do you think, probably margin compression?

Yes, I think that would -- that's correct.

Tom, I would answer that keep in mind we're being very conservative on visibility in respect to refinancing.

And obviously a lower rate environment, the way we run our business, we'd see less refinancings.

When rates start to rally on the upside, we start seeing a lot more business on the refi side.

And obviously that trend is factored into fourth quarter of the current rate environment, which is very low.

That will have an impact, depending on where the rates end up throughout the quarter.

So the actuality is there will be less of that in the number that is why the number is under pressure.

It doesn't mean that we won't ever get it.

It just means we are not going to get it in this quarter.

Got you.

I would imagine there is going to be continued upward pressure on deposit costs and I was hoping maybe you could give us a breakdown of your borrowing structure today.

The good news is that there has been no change in our borrowing structure.

And Tom can talk specifically about the details of that, if you would like.

Just briefly, Tom, I mean repurchase agreements, what stakes at this point --. (multiple speakers)

We had about $1 billion that we expected to be able to pay off, we already paid off well over 700 million in the -- throughout the third quarter.

And we do have some (indiscernible) pay off some short-term funding as short-term funding rises, is increasing.

So clearly the cash flow needs or deposits is more consistent with our mortgage product -- I mean that cash flow coming out of securities.

As indicated in one of the previous questions, securities cash flow should be pretty reasonable in this rate environment.

So as securities cash flow comes in we are going to utilize that to fund our loan growth.

We are making a positive carry even in this lower rate environment, we are moving securities into loans.

But in respect to our deposit base, as you know, we restructured well over $2 billion as part of our repositioning after three-year money and in addition to that we have principally I'd say, all of our liabilities that are viewed as long-term as to maturity.

So we are pretty comfortable that our funding is locked in on the wholesale side.

And in our model and within the short time horizon we're not releveraging the company.

We are positioning the company to -- as expected we had about $1 billion of room to pay down some debt, and as needed.

Clearly, we had a nice cash flow coming from securities (indiscernible) into loan, the net reduction went right to pay off some of the wholesale.

Wholesale costs on the short end in rising.

We started from 1 percent, up to 2.25 now, so we are getting the benefit of paying that off without incurring the margin negative impact of a rising rate environment on the short end.

All right.

Thanks, guys.

Ted Kovaleff with Sky Capital.

Without wanting to get partisan earlier on you made a comment about the uncertainty of election, etc.

Certainly I don't what to get into the price action as a result of that, but I am wondering about if you could be a little bit more specific about potential effects on earnings.

I think that if we -- I don't want to be partisan either.

What I want to say is that there are relatively significant things within this environment that could move the confluence of factors that suggest rates are going up or down on almost daily news.

We have a very fine hairline between the direction in which rates have been moving over the course of the last three months.

People, if they had gone to sleep in April or May of this year and then woke up today, they would be shocked at what they are seeing in actual change in rates.

And yet, this changing is going to be occurring in the quarters and the months ahead based on just the weighting of the confluence of factors.

The negative factors and the positive factors are almost in balance, therefore it doesn't take that much to move rates on a given day or in a given week or in a given quarter.

So I am suggesting, I think, that we are going to see a period of uncertainty that will change based on a variety of factors that will be either significantly perceived at the moment -- example, oil change.

Oil change has been very dramatic.

Its impact has been assessed in a variety of ways, yet the availability of oil could change extraordinarily dramatically as a result of an event.

You know, these kinds of things will impact rates and how we all perform on a period basis.

So I'd suggest that we are in a period of great uncertainty.

Our business model is very consistent.

The greatest risk to any Bank is credit, not interest rate.

Interest rate always has an impact on earnings.

But the greatest impact on capital comes from credit.

So as we look at the period in front of us, there is a great deal of uncertainty.

It has to ultimately be factored into the daily performance of every company, but trying to guess what it's going to be, I think is nothing more than a guess and we should just all acknowledge that.

Fair enough.

Kevin Timmons with CL King.

Earlier question referred to the guidance decline that Q4 looks like -- I think the person said a range of 35 to 37 (inaudible).

I am (inaudible) that number as being about 34 plus or minus a penny.

I think that is about right.

I think your number is about right.

Okay, so to go back over that again, so we got roughly a 4 cent decline from Q3 to Q4?

That's correct.

(indiscernible) margin compression, is that margin compression really the full quarter reflection of what happened gradually during the course of Q3, or does it also -- (inaudible) step us right up to today?

Are we really capturing everything as of today as far as you can tell?

Kevin, this is Tom.

I would suggest that obviously we saw some some widening in our spread during the third quarter but clearly throughout the beginning of our third quarter we had some very low yields in conjunction with the treasury curve.

That indicative of what is on the portfolio we lived with for a while but going forward we are seeing a reasonable rate.

However, refinancing activity clearly has not shown up in the past three months so therefore being conservative on the refinancing opportunities in the marketplace.

That is reflected in our fourth-quarter guidance.

Okay, so the full quarter impact of what occurred is actually maybe even a little bit more negative than the 4 cents and a little bit offset by some positive things but still try to be conservative?

I think when we run these numbers we want to be conservative in respect to dealing with what we have in the pipeline, what we know is going to close and what is on the portfolio.

The portfolio we live with, the pipeline we hope to close.

Those factors are projected in our fourth-quarter numbers, and as we get additional refinancing activity that will be a bonus for us but obviously we are being very conservative now because of the current rate environment.

Historically this company has originated a lot of refinancing activity in a rising rate environment.

This is not unfortunately -- it's rising in the short end, but not in the area that we lend.

We had a dramatic flattening in the curve.

And if you do the mathematics, it is a significant flattening for the mortgage business as a whole.

And you know, we are dealing with that, we are getting very good spreads on our principal products, just that the asset yields are much lower than expected at the beginning of, at the end of June.

Right.

Has the change in the rate environment caused you to have to make any changes in the purchase accounting adjustments that were originally made for the Roslyn deal?

My answer to that question would be that we are consistent.

We had low rates for a while.

The short end has changed dramatically, but the long end is moving around here and there, and it is pretty consistent on what we are dealing with.

A lot of that accounting benefits are gone.

They are going away very rapidly, so I think you look at the company going forward.

It is a core earning stream.

It is a better quality earning stream.

Obviously our focus of less concentration of securities, less concentration on leverage is there.

We are building our capital base up clearly with the benefits of not growing the balance sheet in an environment that is not conducive to growth.

The spread in the marketplace right now is very tight on an arbitrage basis.

We're not doing that right now.

We're clearly looking at building our core business.

As far as (indiscernible) concern a lot of the PA (ph) accounting is burning off and will be burned off very shortly.

So if I compare the original numbers to where you are now, there's less of a benefit from that then (multiple speakers).

Absolutely, and as we do this with the best of time, in light of the rate environment that we close the deal, that will burn off very rapidly.

I mean clearly going into the fourth quarter there is some of that effect.

But if clearly the major impact of the fourth-quarter is the marketplace, the interest rate environment we are living with right now.

The portfolio of loans that we put on are very good loans on a spread basis, but the asset yields compared to the movement in the curve is dramatically different than we expected as of June.

There is no question that if you look where the five-day was at the end of June which is close to 4 percent, we're covering around 3 percent, it is 320 right now, 325, that is a dramatic impact because we are not getting the opening in the curve from the actual increases in our Fed funds here.

We're actually getting an inversion to that effect; they are actually reducing the long end but flattening the curve.

That is going to impact all mortgage lenders.

But the reason I ask the question is that the -- just some of the pressure you guys are facing is less on a I will call it a cash basis spread then (multiple speakers)

I agree with that.

Compression has hurt you more than if you hadn't had that issue going in.

No question if we had another deal following the Roslyn deal that would not be as much of an issue.

But clearly purchased accounting is what it is, it is GAAP accounting and you deal with the proper recognition of incremental expense.

One final question here with the payout ratio -- understand where you were and I agree with Joe that credit is the big issue for banking not interest rates as much as that may be hurting right now.

But in a stabilized world, Joe, what range of dividend payout ratios would you be comfortable with? (multiple speakers)

I think we're always looking at cash earnings -- I'm sorry I missed the last words you used.

Where would you rather be in terms of a payout range?

I think the payout range should always be flexible to deal with the environment.

Obviously, we have historically been paying out in the range of about 40 percent or so.

We obviously have gone significantly higher than that from time to time and even lower than that on some occasions.

We are a strong payer of dividends, so we typically over time build our earnings and build our dividend so that we are constantly paying in the 40, 45 percent range with comfort.

Kevin, I would also add to that, I mean obviously the market has changed with respect to returning back to shareholders.

People are very aggressive buyback of their shares over the past decade and clearly having the ability to get a tax benefit treatment for our shareholders via through a dividend is an attractive alternative so we try to blend the two as being a way to manage our capital base.

Obviously having a capital base now above 5 percent is a level that we are very comfortable with and as that capital level builds we can do a combination of both.

Thank you, guys.

Brian Long with Chesapeake Partners.

My question has been answered, thanks.

At this time I will turn the conference back to Mr. Ficalora.

Thank you again for participating in this morning's discussion.

To recap, there are three important things we want you to know about the Company.

We have made great progress in repositioning and improving the quality of the balance sheet.

Our loan originations continue to be strong, and our proven business model is generating solid earnings.

We appreciate the opportunity to discuss our business model and the earnings outlook with you today, and obviously on a go forward basis if there's any further questions, please do call.

Thank you so much.