Flagstar Financial Inc (NYCB) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to the New York Community Bancorp third quarter 2006 earnings conference.

Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the conference over 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 today's discussion of our financial performance for the third quarter of 2006.

Today's conference call will be led by our President and Chief Executive Officer, Joseph Ficalora, and Thomas Cangemi, our Senior Executive Vice President and Chief Financial Officer.

Also with us on the call are Robert Wann, our Senior Executive Vice President and Chief Operating Officer, and John Pinto, our Executive Vice President and Chief Accounting Officer.

Our comments today will feature certain 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 we currently anticipate due to a number of factors, many of which are beyond our control.

Among those factors are changes in interest rates which may affect our net income, prepayment penalties and other future cash flows, changes in deposit flows and the demand for deposits, loan and investment products and other financial-services in our local markets and changes in competitive pressures among financial institutions or from non-financial institutions.

You will find a more detailed list of the risk factors associated with all of our forward-looking statements in our recent SEC filing beginning on page 9 of this morning's earnings release.

The release also includes a reconciliation of our GAAP and non-GAAP earnings which will also be discussed on this morning's call.

If you'd like a copy of the earnings release, please call our Investor Relations department at (516)683-4420 or visit our website, mynycb.com.

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

Mr. Ficalora?

Thank you, Ilene, and good morning everyone.

We appreciate your joining us for this morning's discussion of our third quarter performance which will focus on three topics in particular.

First, our net interest margin which has held up well despite the continued inversion of the yield curve.

Second, the strength of our balance sheet and our capital position, and third our ability to maintain our dividend at the current level, not only in this quarter but we believe in the quarters ahead.

That ability stems in part from the strength of our cash earnings, which amounts to $69.7 million, in the current third quarter, exceeding our GAAP earnings by $7.2 million or 11.5%.

On a diluted per-share basis we reported third quarter cash and GAAP earnings per share of $0.24 and $0.21 respectively.

I'd like to start our discussion by talking about our margin, which was 2.24% in the current quarter as compared to 2.29% in the second quarter of the year.

These measures reflect classification of all prepayment penalties on loans as interest income consistent with current industry practice rather than splitting them between interest income and fee income our previous approach.

Absent our decision to begin classifying all prepayment penalties as interest income our margin would have equaled 2.18% in the current third quarter as compared to a link quarter measure of 2.22%, thus on an absolute basis an improvement of 6 and 7 basis points respectively.

Three factors contributed to the relative stability of our third quarter margin.

First, our asset yields which have risen incrementally over the past 4 quarters, largely reflecting the higher yields being produced by our loans.

While the current rate environment has precluded aggressive loan production, we have nonetheless been able to build our portfolio of high-quality credits at attractive yields.

As a result, our average yield on loans was 5.94% in the current quarter, a linked quarter increase of 9 basis points.

Although we have not done this in the past, and we do not expect to do so on a regular basis, going forward, the multifamily loans we produced in the third quarter were at yields that averaged 170 basis points above the average 5 year CMT.

During the quarter, originations totaled $1.1 billion, exceeding the pipeline we reported three months ago by just about $400 million.

We've continued to find opportunities to lend profitably in our market, and I might add, without sacrificing our solid credit standards.

At the present time, our pipeline is approximately $618 million, multifamily loans representing approximately $393 million of the current pipeline or 64%.

Next, our margin has been supported by our commercial bank transactions, which are providing us with an infusion of lower cost core deposits and enabling us to stabilize our cost of wholesale borrowings.

Wholesale borrowings represented 35.6% of total assets at the end of September, the lowest percentage we've recorded since the third quarter of 2002.

Third, our level of prepayment penalties was unchanged over the course of the quarter.

Though well below the levels we would expect, given our history and the size of our loan portfolio while prepayment penalties totaled $5.3 million in both the current and trailing quarters, we recorded prepayment penalties of $13.2 million in the third quarter of 2005.

With the classification of all prepayment penalties as interest income, we would expect to see an increase in our margin when the yield curve steepens and a more typical level of refinancing activity resumes.

That said, it is likely that the yield curve will continue to exert downward pressure on our margin in the immediately foreseeable future.

The magnitude of that pressure and its duration are largely dependent upon the shape of the curve.

While we believe that over the long term our business model will create greater value, the current rate environment continues to pose a challenge to us as to most of our peers.

Looking at our balance sheet at the end of September, loans totaled $19.8 billion and represented 68% of total assets while securities totaled $5.2 billion, representing a very comfortable 18%.

Multifamily loans now represent 74% of total loans at $14.7 billion, signifying an annualized growth rate of 19.1%.

While business loans have exhibited significant growth reflecting our expansion into commercial banking, they nonetheless represent a modest 3% of our loan portfolio.

The liabilities side of our balance sheet reflects the benefit of our recent acquisitions, which increased our core deposits and enabled us to pay down some of our higher cost borrowings.

While attracting deposits in the current rate environment also continues to be a challenge, we are excited about the better than precedent level of retention we have enjoyed with regard to our Atlantic Bank deposits, as well as the new deposits we are attracting in our expanded marketplace.

In the coming weeks, we will complete the integration of our commercial bank data processing systems, which will enable our customers to benefit from one of banking's most sophisticated service platforms, with the completion of that project, we will turn our focus to cross selling and the opportunity it represents to enhance our revenue stream.

We expect to see benefits of these actions in commercial banking franchise as well as in our much larger community bank.

The strength of our balance sheet extends as well to our capital position with the quality of our asset mix and the stability of our funding sources contributing to the strengthening of our capital over the past 9 months.

At 5.63%, our ratio of tangible equity to tangible assets excluding after-tax mark to market adjustments was 22 basis points higher than the year-end 2005 measure.

Including the mark to market adjustments, the ratio rose 24 basis points to 5.43% over the past 9 months.

While enhancing the strength of our capital, we have also been providing our shareholders with a meaningful dividend payment and our commitment to maintaining that dividend was extended at last night's meeting of the board.

On November 15th we will pay a $0.25 per share dividend to shareholders of record close of business, November 3rd.

Our ability to pay this dividend stems from three primary sources.

The contribution of our cash earnings to capital as previously stated, the strength of our balance sheet and capital levels, and our net profits for the current and previous two calendar years.

We continue to be intently focused on our ultimate goal of enhancing share value by producing loans of quality, expanding our funding sources, containing our expenses, and maintaining our capital strength.

At this time, I would like to take your questions.

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

Questions, please.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question will come from Mark Fitzgibbon with Sandler O'Neill.

Good morning and thank you for taking my question.

Good morning, Mark.

First, I wondered if you could give us a sense whether they--the third quarter expense level is a good run rate going forward or are there--is it likely you'll be able to extract more costs out of the Atlantic deal?

Mark, it's Tom.

I would suggest going forward that you can use that as a guide, but we expect to see some cost savings when we complete the Commercial Bank integration.

I think it's a fair run rate going forward for the next two or three quarters.

Okay.

And then secondly, we had heard on another conference call that Meridian Capital was no longer selling loans to other players.

They were basically putting it all on Sovereign's balance sheet.

So I guess I'm curious, what your experience has been and how much of your production traditionally has come from Meridian?

Yes, I think the--I have no idea where you might have heard that, but the reality is our relationship with Meridian hasn't changed at all and although their relationship with Sovereign is a larger relationship, meaning that they're going to be doing loans, as I understand it, in Boston, Chicago, Florida, California, their relationship and they're providing us with loans here hasn't changed at all.

The marketplace is somewhat different.

There's no question that there are very good loans in the marketplace that are in ways that are obvious at the end of a cycle going to people that are not consistent in the way they lend.

There are lots of players in the marketplace taking loans, but Meridian is not redirecting anything extra to Sovereign.

Sovereign has loans that they've had in their portfolio, and we have loans that we've had in our portfolio, and we continue to have the same kinds of relationships.

The people who take loans are the people that are throwing way too many dollars on the table who are otherwise doing things that are irrational with regard to rates.

Okay, and lastly, Joe, I wonder if you have a sense for how much you think rates need to move before we see this big wave of refinancing activity?

That is a very, very hard thing to measure.

There is no consistency in expectations with regard to rates.

Everyone knows that from one month to another there is a significant deviation in expectation and with regard to refinancing, people need to have a conviction that they're refinancing because they genuinely believe they know that rates have either hit a bottom or in fact rates are definitely moving up for some other reason.

As we've gone through the last several quarters, there has been anything but conviction available.

Whenever there is a sense of that, we see a significant uptick in the activity.

As I've said many times, there are some things that are inevitable and the calendar will necessitate that large amounts of our portfolio will ultimately refinance.

But having said that, there is no way of knowing when there is sufficient conviction that will drive a number of our loans to refinance.

As mentioned in the call so far, we had $13.5 million in prepayment penalties one year ago.

What was that environment like?

Certainly the portfolio was a lot smaller that had the opportunity to refinance at that time.

So the number will vary dramatically, and one of the drivers, one of the drivers will be expectations.

The actual place where rates may be is not as important as expectations with regard to rates, because as you well know, rates could easily have been lower a year ago, two years ago, and during those periods we might have actually had more refinancing because people felt with some degree of conviction that rates were in fact at a low point and therefore they were ready to refinance.

We just don't know when people will get convinced as to regard to rates.

What we do know is that it is inevitable that a large portion of our portfolio will refinance.

And next we'll hear from Salvatore DiMartino with Bear, Stearns.

Joe, I think the last part of Mark's question covered mine.

But just to make sure I have it clear, last quarter you said that over the next 18 months you expect about 40% of your multifamily portfolio to contractually refinance, and has anything there changed?

I would think not.

I think whatever we might have said last quarter is probably about the same except with the changes in the quarter.

Obviously, the amount that was on the table three months ago is changed by the amount that comes on and the amount that goes off.

Approximately that's where we're at.

Sal, it's Tom.

I would also add that the portfolio yield that's embedded in the multi is about 537 now so the upside is very real.

The refi over the next two years will range from 517 to 531.

So these coupons that we are rolling off into the current marketplace is in this environment north of 6%.

That should add to--at least to the asset side of the yields--asset yields.

Are you willing to disclose what the--what the yield is of the loans in the pipeline, and secondly, I guess historically, the fourth quarter has been one of your stronger quarters for originations and do you see [just there]?

Yes, Sal, the actual pipeline yield we couldn't give you, what I could tell you is that as mentioned, over the course of the last three months, we were 170 basis points above the five year CMT.

And most people were lending well below that number.

And I know that the loans that I'm seeing, at the table in the last week or two weeks are 6.25, 6.5 and so on.

But that is going to be delivered sometime in the next, 60 to 120 days.

So the rates have, in fact, given us the opportunity to get a better return on assets exactly how it plays out based on change in rates is very hard to know.

But we have been very disciplined.

I can tell you that in the last 3 to 9 months, we've been turning down an awful lot of loans at the table, and that is not a common event for us.

And more often than not, it has nothing to do with credit.

It has to do with the excesses of other lenders.

Their providers providing in some cases, twice the dollars that we would reasonably provide or rates that are 50 to 75 basis points below the rates that we lend at.

So that is, in fact the marketplace,

Okay.

Thanks, Joe.

Thank you, Sal.

We'll now hear from Tony Davis with Ryan Beck.

Good morning.

Joe?

Tony, how are you?

Fine.

Compared to a year ago, could you elaborate a little bit more on this pricing environment you're seeing.

I've gathered from the discussions in the market that structure credits that we're seeing today from private equity funds, the cap rates that are being offered out there, is your competition materially different in terms of the names and pricing versus a year ago?

I would say you're right on point.

The players in the market at the back end of the cycle often become people that were never in this market in the past and some of the people that you're talking about have a different perspective, a different regulatory framework and lend far more dollars and take far less in yield, so their risk reward is out of proportion.

So this market is worse than it was a year ago from a standpoint of the excesses of some of the market participants.

However, the availability of good product is still evident, I mean, as indicated, we did $1.1 billion despite the fact that we've walked away from large dollar volumes of loans that we might have done.

So the good news for us is that the market is still a vibrant marketplace that has a lot of opportunity.

The bad news is that there are lots of players in the market that are being irrational in their approach.

The good news for us is that we believe that based on our current structure we can develop a sufficient flow of loans to meet our expectations that have all of the credit attributes that will serve us well as, in fact, the next cycle ultimately turns, and that is an important thing to be mindful of.

We are clearly at the back end of a cycle turn.

The magnitude of the turn and all the other factors that may become relevant in the quarters ahead is something that will be determined by a confluence of factors that are not yet materially available to us.

But the inevitable is there.

Joe, I surmise that the recent decision by some of your competitors to sell has been predicated in part by the belief that maybe this is not cyclical but a structural change in the market.

What makes you confident that it will come back?

Yes I think that the past experiences would suggest that the cyclical nature of real estate and the cyclical nature--I mean, we've had in our public life we've had two inversions preceding the current inversion.

This inversion has a 12-month history already.

The preceding ones were 12 and I guess 16 months, 18 months.

The reality is that those inversions were less relevant to banks that are structured like we because they did not have a 40 or a 45 year low in interest rates that had existed for a long period of time.

The serious problem that is created in the last 12 months or so by this inversion is driven by the reality that short rates have moved up by 425 basis points.

While other rates have not moved much at all.

So it is clearly worse than other inversions but it is not the proximity of long and short rates to each other as much as it is the amount that the liability rates have moved, and that's been very dramatic in a very short period of time.

And therefore, margins and spreads on banks that are structured as we, have moved dramatically.

The good news is that the embedded rate in our liability base is significantly higher today.

So as we've said in the last quarter and this quarter, the margins that we, in fact, are seeing are, in fact, far more stable now than they were because the move in liability cost is already approaching the rates that are in the marketplace.

Thanks.

Thank you.

We'll now move on and hear from Kevin Simmons with CLK.

Good morning.

A couple of data points that haven't been answered can you disclose the online CD portfolio how significant that is at this point?

The online--it's immaterial we're not actively--we have the necessary tools in place and we certainly may at some date choose to use that particular vehicle to generate the positives.

We have not been an active player there, so the rate or the dollars are very small.

We are far more inclined to building relationships with commercial banks and others through our commercial bank subsidiary.

And some of the things that we're hearing there are very, very attractive.

But they will come down the road.

Okay, on construction lending.

We talked about this in the past, but just given the current environment, can you tell us a little bit about your thoughts today and what the outlook is for that over the next, say, two or three quarters?

I'd say in the next two or three quarters, we are being very, very diligent in how we approach construction lending.

We are dealing with the best builders that are in the marketplace.

We are dealing with people that are very, very astute in what it is that they're trying to accomplish and what time frame they're trying to accomplish it in.

We are literally turning down opportunities that might have made sense in a different environment.

We're, for example, we could have done a multi hundred million dollar loan that would have been a high quality building, but it was way, way beyond our risk tolerance to be '08, '09 in a delivery of a high end property.

So we would not do that loan at all, and then there have been many others that we've turned down because we look at that particular opportunity as a higher risk at this point in the cycle than we are willing to take

And now we'll hear from Bob Hughes with KBW.

Good morning, guys, going back to the first question, I was wondering, Joe, if you could tell us what percentage of your origination volume does come from Meridian?

It's fairly high, but I don't know exactly what percentage, we don't bother to track that because it changes from period to period.

But the reality is that Meridian has been very consistent with us.

Over the course of the last many years, that Meridian has existed, they have, in fact, consistently primarily did the kinds of loans that are in our niche if you will it.

Between us and Independence, which is now Sovereign.

Sovereign has a broader focus so they may be doing more loans with Sovereign outside of our niche, but they're not changing how they approach the kinds of relationships, and by the way, this is--it's a very, very relationship oriented business, not only do we have relationships and other lenders have relationships, but obviously the brokers have relationships.

So we are not seeing any change in Meridian's approach to having--as their Chairman has often said, you only have a--one wife, but you never have one bank and they make it very clear that they want to have a strong relationship with us over the course of the future period, despite whatever they may be doing with anybody else.

Can you give us a sense for what that's ranged historically, is it 50%, 60%?

I guess, and I'm guessing here, but I'm going to guess that it ranges from 40 to 60 or maybe even more on certain rare occasions.

Because it could be, for example, as you well know, we have done some very large loans.

So if that loan happened to come through Meridian, that period would be a very high percentage, but it is a mix.

All right.

And within, say, the loans that you originated in the third quarter and your current pipeline, what is the mix between, say, 5, 7, 10 year products?

It's always 5.

Even though we rarely do 7s, we very, very rarely do 7s.

We also very rarely do 10s.

So the loans that we're doing are five-year loans, and when you look at those loans, you recognize that we're doing those loans at rates that are typically higher than many of the rates that are being discussed in the marketplace.

So we're not the right bank for all opportunities, and it is very clear that as I've mentioned, at this end of the cycle, there are lots of people that are being very, very aggressive.

Many of the people who are most aggressive are not typically in this sector doing this kind of lending, but they're carving it up and shipping it out to others so they're not particularly concerned about what it is that they're doing.

We're a portfolio lender, and we are literally going to live with the paper that we write for a period of time, and therefore, we are very diligent about the kind of risk we're willing to take.

Tom, can you give us a sense for what proportion of your CDs might be rolling over in the next couple of quarters?

I would tell you that in the marketplace right now everyone's pretty much keeping their maturity relatively short.

So you're looking at a one year to 18 month period for most portfolios.

The good news is that we've taken a lot of pain over the past year and half as the feds started moving rates up in the short end, so I'm looking at maybe 25 to 35 basis points for probably 60% of our CDs, in the next 9 to 10 months that will have to be renewed at that marketplace.

That's where we are currently.

We can't predict where the rates will be in the future, but we're getting close to that 5% level.

So we've taken a lot of pain on our margins for the repricing effect of CDs.

So we feel pretty comfortable that yes, they'll be continued pressure on CD repricing but the magnitude is much less that was in the previous quarters.

Okay.

All right.

I'll jump out of queue and get back in.

We'll now hear from Rick Weiss with Janney.

Good morning.

Good morning, Rick, how are you?

I'm okay, but I'm sitting here in a fire drill so I apologize for any kind of noise that's going by.

I was wondering when you're talking about the commitment to paying the dividend, point number three were the net profits from the current and previous two years of capital, can you tell us what amount that is?

The amount is a varying amount, I guess, depending on a lot of timing factors and other things.

You want to talk about that a little?

The way it's calculated is based off the subsidiary banks earnings less any dividends that that bank had up to the holding company in the previous two calendar years and including the current years net income with dividends.

So you look at both 2004 and 2005 as well as 2006 full year projection.

Okay, the last place I looked was in the annual report, the 10K and it was about a $500 million figure if I'm not mistaken.

Is it still around there would you think?

No, it's a little smaller than that.

When you look at 2004, the number's in the high two hundreds, and when you look in 2005 the number's just under 100 million.

Under 100 million?

Right, and you have the combination of both of those amounts that can be used in 2006, also including 2006 current year profits.

Okay, thank you very much

Will now hear from Jim Abbott with Friedman Billings.

Good morning, Jim.

Good morning.

A couple of quick questions on the construction portfolio to see if we can elaborate on that a little bit.

Are those direct or broker sourced, the construction loans?

No, the construction loans very, very interesting.

Our construction loans are primarily driven by the long standing relationships that we've had with primary builders in our marketplace.

So those are typically direct.

They're not broker.

All of our other loans are broker, so the difference in dealing with construction is the long standing relationships with very sophisticated, very successful builders.

Okay, and can you give us--thank you--can you give us a sense on what the yield of those loans would be roughly for the quarter?

You had a pretty good growth out of that--

Yes, I think those yield much higher.

(multiple speakers) depending on the customer.

And those loans are short loans typically 18 months and those loans are constantly moving with rates.

So they do provide a very attractive return to us.

And you get points on that as well?

Yes, typically we get a point.

Is it typically one point amortized over 18 months, I guess?

Yes.

And then I guess are those primarily multifamily rehabilitation projects?

No, there was, a period where people were doing that, we're not typically doing that.

In many of these circumstances, these are--what I should say, there is a mix, but primarily these are whole communities that are being built, mostly here on Long Island.

And these communities are virtually sold out extremely quickly and it's worked out extremely well for both the builder and for us, in that it literally focuses on a market 55 and older.

So there's a large number of people that are looking to live in these unique communities that have been extremely successful in building value for the owner over time as well as effectively selling out very, very quickly for the builder.

And they're detached units, is that correct?

Some are detached, some are attached.

In other words, there are some of the buildings that are attached on one side so it's a mix, again, of buildings that stand alone as one family, and others that are basically two families in one building.

But no condos?

No,

And typically what the average size of the loan is?

It again varies depending on the builder and the particular opportunity.

Jim, it's usually a project loan, it usually could be between $2.5 million to $3.5 million depending on how much money is embedded into the land.

Typically the people we deal with have substantial equity into the land when they come to us for financing on the construction phase.

And the loan, you measure it loan to value, loan to projected value, loan to cost, what do you do the loan, or whatever ratio you underwrite it.

It is always written based on the actual, in other words we never advance money beyond the value of the land.

In other words, we might do a vacant land advance, we may start at the beginning.

So we're always lending on the value of the land and then were lending on the value of the land plus the improvements.

So we don't lend in advance of contracts, for example on units.

So basically what that means is that the builder builds the building, sells the building, and he has a contract in hand.

We don't do the end loan, but we do the additional advances that will accommodate the completion of the building.

We do a lot of contract lending as well.

As the contracts come in we'll lend on the actual value of the contract, typically, in these types of buildings, we have a lot of back up contracts behind the building.

But in all those cases, we're not taking the end loan, we're merely lending on the completion of the building and then the individual is getting financing from somebody--somebody else.

Is it something like maybe 80% loan to cost, or 70% loan to value--loan to projected value?

No, I think it's typically less.

Less than 70.

Less than 70% loan to value or loan to cost?

Value.

Value, got it.

Sorry to pester you there.

I appreciate that.

The--and then one other question is you have some repurchase agreements that are structured types of stuff and you're cost of borrowings is 418 this quarter.

Can you tell us whether you put some additional borrowings on during the quarter and what interest rates we need to look for before we get concerned that those rates might go up?

Where we stand on the wholesale side is that we've been very proactive on managing our funding costs throughout 2006. 2007 will have additional pressure depending where rates are, but what we intend to do is continue to utilize the Federal Home Loan Bank system as well as the repo market to look at some (inaudible) two year structure, that's pretty much how we fund our multifamily business, we're off by about 18 months assuming an average life of about 3.5 years, so to answer your initial question, over the past quarter we haven't really done much at all, because we lost a lot of our funding in the previous two or three quarters.

We will be looking into that into '07 and that's depending on interest rates--where rates are.

We do not have a large short book, it's pretty much, in essence longer than one year and our goal is to maintain somewhat of a mismatch between 1.5 year on new multifamily offerings, now, if you look at that, the rates in the current environment's probably around 430 to 440, depending on where the 10 year CMT trades at.

What rate would have to move and how far would it have to move before some of those borrowings are at risk of being called?

We always have a risk of things being called, we had some calls early in the year, but when they were called, we extended that money out long.

So we actually had a benefit during the inverted yield curve so depending on the shape of the curve, Jim, it's very hard to determine what the impact would be on your margin and we do stress the model in all different scenarios.

But we know in an inverted yield curve there's some value by going long in the curve and putting on some optionality lists.

And we've done that in the past and its working in some circumstances it works against us.

But where we stand today, we do have some risk there, and we're going to manage through like we always do.

Would a 450--assuming the yield curve stays pretty constant, would 450 cost of borrowings by the end of 2007 be a reasonable assumption?

That's probably too high.

We held it pretty well I think over the course of the year if you look our average balance sheet, look at the cost of funds on the wholesale side.

We're holding our cost of funds in wholesale and going back to our initial analysis of the margin, we should talk about that, if you look at the asset yields, they're repricing upwards, cost of funds on wholesale is pretty much flat but were still getting a little pressure of the retail side in mostly CDs and that's going to continue for a little bit, but we believe that we're going to be close to market.

Our CD costs have come down over the past two months, that's a benefit for us.

We were much higher than we were in June and July.

Now it's coming down dramatically.

When I say dramatically, I say 25, 30 basis points which is a huge number of $5 or $6 billion.

So that's a positive development recently.

And I think the competition in general has come down.

If you look at the posted rates, you'll see that a lot of the banks have maybe backed off 25, 30 basis points in the marketplace, which will help us.

Do you have a thought on the margin for the fourth quarter?

I think we're pretty close to 5, give or take 5 or 10 basis points under pressure depending on prepaid, so I don't think it's--our margin, our balance sheet has been positioned for the past 2.5 years for a tough rate environment.

Unfortunately, were not seeing margin expansion, but the compression in the margin hasn't been--the magnitude has been much less than our peer group.

You may see another 5 or 10 depending on where the shape of the curve is, however if we get prepays, that can easily be absorbed and see margin expansion with prepayment income coming in.

We'll now hear from Thomas McGovern with Lehman Brothers.

In terms of prepayment income, I noticed there was a strong amount of repays during the quarter, but you say your prepayment income has not really moved up.

Are these loans that are repaying, are they repaying without prepayment fees, and if they are, are they repaying with New York Community or are they going to another lender?

You could have construction loans that refi during the quarter, we can have our business loans that refi during the quarter so total refinancing contributes multifamily, business loans, construction loans.

As you know, our construction portfolio is relatively short, that move is constant.

But it varies, we have certain structures that may have less prepayment penalty than normal.

But what we like to say is that right now, having a 537 average coupon embedded in the portfolio with substantial prepayment opportunity will help this margin in the future.

The question is getting those loans to the table a couple of years earlier than they actually have to--they lose that 1% prepay.

When they go into the sixth year there is no prepay penalty.

So our goal is to get them to do it maybe a year or two early, and that will help the margin.

Okay, so I guess the loans that are scheduled to refinance, those are ones that are pretty much going to refinance in the 60 with no--

That's correct, that assumes that they wait for the last second and they pay no points.

Typically, if they need the money, they're going to come and they're going to work that prepayment penalty into the new refinancing they do with us or with someone else.

There's also, as Tom suggested there, there is also an awful lot of loans that are refinancing that are just construction loans that have that normal, run off.

If they're running as a short loan, they run through the portfolio in a 5 year time frame, maybe three or four times, we could have construction loans reach their end point.

So in terms of the trend of loans that have repaying though, has it been relatively easy to keep them repaying and refinancing within your community, or you seeing runoff--

No, I think we see that happens--we have loans that refinance away from us and we have loans that come to us from other people and again, that will vary, depending on which--a given property has a particular place within its own income stream development.

So for our niche, and we're not talking here just generally about the real estate market, but for our niche there are properties which are very, very below the market from the standpoint of the income stream generated by rent controlled units or rent stabilized units, and then there are other properties that are very, very close to the market because they've been improved over the course of many, many years, and those properties are virtually going to refinance differently than properties that are going to be refinanced with an expectation of active improvement in the rent roll.

So there's obviously 10 and 15 year paper out there, availability of funding.

We have people that, and this is not just a current phenomenon, but we have people that will lend at rates for 10 years below the rates we lend for five years.

That would be more appealing to a person that is very close to this very rich market with regard to the income stream so those people would go to a longer-term at a lower rate and certainly that happens.

So this environment is, in fact, a very good environment for people that have rental properties because there's no question that they are seeing a significant amount of uptick in the value of their rent roll.

That is very good for us, but it is also very good for other lenders.

The difference between us and others is that their people that are coming in and buying with low rates, long returns, and then carving it up and shipping it out to others, that happens.

So the reality is, the best time for us is actually during a credit cycle turn.

The worst time for us is the period that we've been going through in the past two years or so.

As I mentioned earlier, there is a very, very big difference when an inversion has a starting point that is extraordinarily low on the liability side and moves up rapidly on the liability side.

You can have an inversion as a result of the long rates falling and the short rates staying in the same place.

You can also have an inversion like we currently have where the liability rates have moved up dramatically and the long rates have failed to move.

That presents a unique amount of pressure on banks that are structured such as we and other thrifts.

And that's evident in the numbers.

So one of the reasons we are actively pursuing the development of our commercial bank relationships is so that we have the ability to both attract deposits and also create assets conservatively that will, in fact, not be burdened by the same problems that face our current balance sheet.

Got it, thanks.

You're welcome.

We will now hear from Jeff Davis with FTN Midwest Securities.

Good morning.

Good morning, Jeff.

Joe, could you speak to the multifamily market and what has happened to the valuations of properties this year and maybe more recently, the last three-four months versus early in the year and a year ago, cap rates up or down?

Just a general comment.

I'd say generally there are participants in this market that are using irrational cap rates.

There are some players that are throwing way, way too many dollars on the table.

Valuations across the board from the standpoint of change in the market have not really gone up very much.

But dollars available in the market have gone up dramatically in some cases.

So the market place, and a lot of the headlines that you can read, there are many sources of information that talk about rental income versus condo availability and so on, but the reality is that some of the market participants today are truly irrational from the standpoint of the number of dollars they're willing to put on the same income stream, so by example, we might have a loan that we'd be glad to do at $100 million and somebody else comes in and does it at $200 million, so obviously we're not going to compete with that.

So sometimes you just need to be disciplined through this end of the cycle.

When, in fact, the cycle turns, the bad lenders disappear, and that actually is the best of times for us.

As I've mentioned in the past when you look at the depth of the last cycle, '90-'91, we were getting in some cases 500 over the five year CMT and 100 to 150 basis points just to do the loan.

That's because the bad lenders aren't in the market and good property owners still have to refinance their cash flows.

So, but if we looked at just from the borrower's perspective--irrespective of who might financing it, is--are cap rates for multifamily properties, and I realize that's a broad category, are the typically 7% today for properties that change hands versus 8% a year ago and 10% four years ago?

I'd say that the cap rates are approximately the same as they were a year ago or so for banks that lend with consistency.

However, there are much lower cap rates being used by some lenders that aren't even banks.

Some of the worst players in the market with regard to valuation are not banks at all, they don't even have the same regulators.

So a lot of the concerns that the regulators have been very vocal about are very justified by the action in the marketplace.

But their concerns in some cases aren't at all going to impact the most aggressive lenders in the market because they're not banks.

And do those tend to be the life insurance companies?

Not so much life insurance companies but hedge funds and equity players, guys that are virtually looking to move money and finding whatever sources of assets they can find.

They are much more aggressive than typically regulated or banks that have been in this market for any period of time.

So you got a lot of replays, a lot of hedge funds that are moving money so that stuff is very, very different and very differently regulated, and the only way that that comes to change is when in fact the cycle turns

Very good, thank you.

We'll now hear from Matthew Kelley with Sterne.

Hi, guys I'm just going to follow up on some of the earlier questions about the construction loans.

Is that coming from the Holiday Organization, the old kind of Roslyn relationship?

Some of it is, absolutely.

Jerry Mauther is still an active player although his son does a lot of the footwork, Jerry is still out there.

Right, and I'm just kind of curious if you could walk us through the thought process, you've got that portfolio net up about $170 million but still no provision, it's a higher risk asset class, certainly relative to your core multifamily portfolio, but it seems like there is certainly some case for a type of provision with that higher yielding higher risk type portfolio.

Matt, it's Tom, I would suggest that a lot of the advances are coming out recently, obviously the projects go out and we have commitment lines that are out there.

And they take down advances and they pay off over time, and usually the average life's about 18 months.

My expectation is that the portfolio in this environment will not grow dramatically because of the fact that rates are much higher and construction is slowing down in general.

So I don't envision a significant growth in the portfolio although I will expect to see them take down what's available under their lines to finish their projects.

Matt, another reality is that we do allocate more of our reserves to construction loans than we allocate to our core niche product.

As you're well aware, in our niche, we haven't had a charge for 25, 26, 27 years that's not days, weeks, months, quarters, that years.

So an $85 million loan loss reserve is a lot of money to have when we're charging off as small amounts as we are.

So yes, there is a larger risk in segments of our portfolio, certainly the new kinds of lending that we're doing are higher risk than the old kinds of lending that we do, but we have the available funds to allocate appropriately to risk.

Okay, and then just in terms of the total balance sheet, it does sound like net balance sheet growth is going to be a little bit more modest.

Would you expect over the next 12 months that kind of net balance sheet growth could be in the low to the mid single digits?

Is that reasonable?

Yes, Matt, it's Tom, what I would utilize for modeling purposes is going to be depending on the shape of the curve.

Obviously if we stay inverted for a while, we're not going to grow the balance sheet aggressively here, we're going to be prudent because the spreads not there.

As you can see on a link quarter basis, we've grown less than 1% on a quarter to quarter basis.

That's pretty much the theme now we will refrain from doing aggressive growth in this environment.

If the yield curve changes and there's some attractive spreads to be made, we have the capital to build a balance sheet and earn more money on the balance sheet, we're being very prudent right now on growth.

Our goal is to continue to work the commercial bank to get these good quarter products to stay with us and build it.

Over time if the yield curve moves in the right direction, we'll see some significant balance sheet growth, normally accustomed to the Company's history.

In addition to that, we're always looking in the marketplace for growth through acquisition because we believe growth through acquisition is a very good means to generate good return to shareholders if priced properly.

But you see, Matt, that is an important thing when you look back to consider.

All of the significant growth of this company has been through acquisition and the environment that we're in should represent opportunity to create real value for both our partners, shareholders, as well as our own by doing transactions.

Transactions are more likely in the period in front of us to provide growth than any thing that we might do de novo.

And just along those lines can you remind us of the region that you go trolling for acquisitions and opportunities that make sense and how far you're willing to go?

Well I'd say the easiest way to look at that is if the economics of a deal makes sense, it doesn't have to be a franchise deal.

Now, that gives us a great deal of latitude.

The South Jersey acquisition was a great deal for the shareholders.

It was not a franchise deal and certainly the first two deals that we did, we had no overlapping franchise at all, and those deals resulted in extremely beneficial shareholder returns.

So the important measure of whether we will do a deal is whether it makes sense to shareholders, not whether or not it's next door to an existing branch.

Matt, it's Tom.

What's also unique about where we stand today is that we have the dual structure, we have the commercial bank franchise and a thrift franchise and we'll be focusing on both avenues there to build the Company through acquisition and growth.

What's interesting in this environment is having a significant inversion out there, we believe there's more opportunities in our immediate surrounding region, and that's promising for us.

I mean, would it potentially extend beyond the tristate area?

I would say the short-term it's not necessary, there's enough products within the tristate area.

I think it's safe to say and I don't think we're saying anything that's inconsistent with what we've been saying, the amount of activity today is far, far greater than it's been at any other time.

Although we've always been a bank that is actively in dialogue, we're spending significantly more time talking to very interesting prospects today than we ever did in the past.

Fair enough, thank you.

We'll now hear from Ted Kovaleff with Sky Capital.

Hi there.

Hey, Ted, how are you?

Okay, thanks.

I'd like to go back to the question of the dividend, and I realize that you can say that this is a hypothetical, however, were one to go 6 to 7 quarters forward with similar results, as we have seen in the past two, would the dividend still be able to be paid at the $0.25 level?

It's --

It's Tom, I would say mathematically we have a substantial amount of retained profits that can be and will be utilized in this environment.

And obviously you have to look at what you're earning on a pure cash basis as well because we are contributing to capital.

We're not growing the balance sheet aggressively, and our capital's well above 5% and we've held that level.

So we feel pretty confident that on a pure capital basis at the tier 1 level, at the bank and we can divvy it up to the holding company, we have more than ample ability to continue at this level.

Now obviously we can't make a prediction for the future, but we feel pretty confident that there is some excess there that if we have to tap into, we will, in order to maintain this level.

One of the things, Ted, that shouldn't be missed is that although no one knows where rates will be or even the shape of the curve will be 7 or 8 quarters out, I think it's fairly safe to say that we will have had opportunities in 7 or 8 quarters to do things that would make it much, much more likely that we are better positioned to deal with the environment.

Plus the reality that the inversion has taken the worst of its toll on us in the last 8 quarters is unmistakable.

The fact that rates have moved up dramatically on the short end and on the liability side has caused us a significant contraction, but that rate is already where it's at.

So we're very, very close to the point where any continued deterioration from the liability side is somewhat dampened by the obvious benefit on the asset side.

Remembering that a lot of the assets that went into our portfolio 8 quarters ago or 6 quarters ago were during a time when rates were much, much lower so I think there are some good things on the horizon.

There are obviously challenges on the horizon, but a hypothetical 7 or 8 quarter time frame has to take into account the significant likelihood that there will be changes in the overall bank structure.

Who is this bank going to be 8 quarters down the road?

It could be very much the same as it is today.

It could be very much larger than it is today.

The chances are far greater that we do transactions in 8 quarters.

And now will hear from George Sacco with J.P. Morgan.

Good morning.

Can you tell us what the dollar amount of callable FHLB advances you have on the balance sheet?

I would say it ranges typically and is highly dependent on the use of the Federal Home Loan Bank and the structure anywhere from 50 to 60% of the structure is considered callable where we feel that we would have to manage it proactively in any rate environment.

So I'd say it could range from as high as 70%.

I'd say right now probably 50 to 60% of the portfolio would be impacted over the next 12 months.

So right now 50 to 60% your debt is callable Federal Home Loan Bank deposits?

We had some impact in '07, '08 no question because we're typically going out two years.

So if we're using the 10 year knock off two year structure, it's a 24 month--we call a 24 month borrowing and we have to deal with that every two years.

As you know, we restructured the balance sheet back in '04.

A lot of that is now coming due so it's a challenge every month, we work through it, we try to be proactive when the curve is inverted to lock in some good low rates in this time frame and we were very successful over the past year-and-a-half on getting some good funding, but again, its optionality risk that were taking, but we've been running this model this way historically and we believe that having the five-year structure on the multifamily loan, which should have an average life of 3.5 years puts our risk at about a 1.5 year mismatch between multifamily paper and the current offerings in the Federal Home Loan Bank and/or the repo market..

That is assuming that those FHLB advances do get called away from you?

Yes, they may not.

But we do assume in our modeling we assume a very conservative scenario that they're going to be called and we look at them as they're going to be called and when we put the money on the books, we assume they're gone at that call date.

And that's where we are very proactive, knowing if there's an inversion in the curve which it had been over the past year, we were very protective on pushing money out long and capitalizing on a low 10 year Treasury rate.

We're putting money on for two years below 4%, and that will help us going into next year, but we have money from the prior two year's that are coming, that are in the upper three's that will hurt us.

So in balance, it's something that we're very proactive, we believe that we held our wholesale funding course pretty much flat throughout the year which was a milestone for us.

But there's no guarantee that it can stay flat.

There'll be some pressure depending on the shape of the curve, but it's highly dependent on the shape of the yield curve.

Can you say what the rate on those '03 advances that are coming off?

Are they--the advances you just mentioned that'll be coming off in '07, what the rate on those is right now?

We don't disclose that.

Okay, what about the current--the rate on current borrowings as you do it today relative to other borrowings?

If you go on to their website you'll see anywhere from 45 to 46 basis points off the 10 year, that's pretty much the going rate if you do 10 year now called twos, and you can price it right off the internet.

It's widely available.

And at this time I'll turn the conference back over to you for any additional or closing remarks.

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

We appreciate the opportunity to discuss the key components of our third quarter performance with you and look forward to discussing our fourth quarter results three months from now.

While the current rate environment continues to pose a challenge, the quality of our balance sheet and the strength of our capital position will continue to serve us well in the quarters ahead.

Thank you.

And that does conclude today's conference call.

We thank you for your participation and have a wonderful day.