Flagstar Financial Inc (NYCB) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to New York Community Bancorp's third quarter 2008 earnings conference call.

Please be aware today's conference is being recorded.

For opening remarks and introductions, I would like to turn the call over to Director of Investor Relations Ms.

Ilene Angarola.

Please go ahead, ma'am.

Thanks.

Good morning, everyone, and thank you for joining the management team of New York Community Bancorp for our quarterly conference call.

Today's discussion of our third quarter 2008 performance will be led by our Chairman, President, and Chief Executive Officer, Joseph Ficalora, together with our Chief Financial Officer, Thomas Cangemi.

Also joining us on the call are Robert Wann, our Chief Operating Officer; and John Pinto, our 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 general economic conditions and trends, either nationally or in our local market, conditions in the securities markets or the banking industry, changes in interest rates which may affect our net income, prepayment penalty income and other future cash flows or the market value of our assets, and changes in the financial or operating performance of our customers; businesses or changes in real estate values which could impact the quality of the assets securing our loan.

You will find a more detailed list of the risk factors associated with our forward-looking statements in our recent SEC filings and in the press release beginning on page 11.

The release also includes reconciliations of our GAAP and non-GAAP earnings, net interest income and capital measures which also will be discussed extensively on this morning's call.

If you would like a copy of the earnings release, please call our investor relations department at 516-683-4420, or visit our web site, www.mynycb.com.

I'd now like to turn the call over to Mr.

Ficalora who will speak to you briefly before opening the line for Q&A.

Mr.

Ficalora?

Thank you, Ilene, and good morning, everyone.

We're pleased to have you with us for today's discussion of our third quarter performance which was highlighted by an increase in both our cash and operating earnings, the expansion of our net interest margin, solid net loan growth, continued asset quality, and continued capital strength.

There's much to discuss and I do want to leave ample time for your questions, so let me start with the operating and cash earnings growth we realized in the third quarter of 2008.

Operating earnings totaled $84.8 million in the quarter, up $9.7 million or nearly 13% on a linked quarter basis and up $13.6 million or more than 19% year-over-year.

On a diluted per share basis, our operating earnings per share rose to $0.25 in the quarter from $0.23 in the trailing and year earlier three months.

We also reported third quarter cash earnings of $95.7 million which were equivalent to $0.28 per diluted share.

Our cash earnings exceeded our GAAP earnings by $37.6 million, and on a per share basis, or $0.11 higher than our diluted GAAP earnings per share.

As we anticipated, on September 16 in our 8-K filing our third quarter 2008 GAAP earnings reflected a charge for other than temporary impairment of a minimal portion of our $6.1 billion securities portfolio.

On an after tax basis the charge amounted to $26.7 million.

As a result we reported third quarter GAAP earnings of $58.1 million, or $0.17 per diluted share.

The difference between our cash and GAAP earnings represented an additional contribution to tangible capital at the end of September and together with the proceeds of our common stock offering in the trailing quarter is indicative of our ability to uphold position of capital strength.

Among the significant factors contributing to the growth of our third quarter earnings were the meaningful expansion of our net interest margin which rose 27 basis points year-over-year to 2.68%.

With the refinancing activity curtailed by the uncertainties in the market prepayment penalty income added a modest 5 basis points to our current third quarter margin in contrast to 26 basis points in the third quarter of last year.

Excluding the impact of prepayment penalty income in the respective quarters, our margin rose 48 basis points year-over-year.

The linked quarter comparison of our net interest margin was also gratifying.

Excluding the impact of prepayment penalty income and the debt repositioning charge recorded in the second quarter, our margin rose 22 basis points in the third quarter of this year.

The improvements in our margin were attributable to three primary factors.

The first of these was the significant growth of our loan portfolio.

Reflecting third quarter originations of $1.4 billion, our loan portfolio grew to $21.5 billion representing an annualized growth rate of 11.2%.

Year-to-date originations totaled $4.4 billion and were 28.9% up from the year earlier amount.

With a current pipeline of $1.3 billion, including $915 million of multi-family credits, we are looking at continued double-digit loan growth in the quarter ahead.

As opportunities to lend have increased over the past few quarters so have the spreads at which our loans are being made.

In the third quarter of 2008, the average yields on our multi-family and CRE loans were 275 basis points higher than the average five-year CMT and in recent weeks have moved up substantially.

Further reason for the expansion of our third quarter margin was the repositioning of our debt in the second quarter of this year.

In May and June, we replaced $4 billion of higher cost wholesale and other borrowed funds with $3.8 billion of lower cost wholesale borrowings.

The savings are reflected in our average cost of borrowed funds which dropped 27 basis points on a linked quarter basis after the debt prepayment charge we recorded in the second quarter and 35 basis points year-over-year.

The third reason for our margin expansion was the ongoing reduction in our cost of deposits as the FOMC continued to lower the Fed funds rate.

As a result, our cost of interest bearing deposits declined 14 basis points on a linked quarter basis and 84 basis points year-over-year.

Reflecting the same factors that contributed to the improvement in our net interest margin our net interest income rose to $181.9 million in the quarter, signifying a year-over-year increase of $27 million or 17.5%.

Earnings growth was also supported by a linked quarter reduction in operating expenses which contributed to a 213-basis-point improvement in our operating efficiency ratio to 38.01%.

This was the first time in seven quarters that our operating efficiency ratio dipped below the 40% threshold and we intend to maintain this measure within that range.

The improvement was not by chance, but the result of a focused campaign on cost containment and the growth of our net interest income.

We would expect to see more of the same in the quarters ahead.

With the consolidation of our community bank processing system set for March and the automation of several back office procedures in progress, we would expect to see a continued decline in our operating expenses.

Given the continued decline in the economy and the ongoing disruption in the financial markets I am very pleased to say that the quality of our assets continued to be very strong in the third quarter of 2008.

While nonperforming loans rose $29.3 million to $61.4 million over the course of the quarter delinquencies declined by $41.4 million to $51.4 million during the same time.

The level of nonperforming loans reflects the migration of loans that had been delinquent at the end of June to nonperforming status at the end of September.

The decline in the level of delinquent loans at the end of September suggests that delinquencies are slowing down at this time.

Nonperforming loans represented 0.29% of total loans at the end of September in contrast to the S& L bank and thrift index weighted average of 1.86%.

Similarly, nonperforming assets represented 0.19% of total assets at the end of September versus an S&L bank and thrift index weighted average of 1.06%.

I might also add that net charge-offs totaled $1.1 million in the quarter with a single unsecured C&I loan that had been acquired in one of our business combinations accounting for the bulk of that amount.

Again, our charge-offs experience compares well with the industry index.

Net charge-offs equal 0.005% of average loans in the third quarter as compared to the S&L bank and thrift index weight average of 1.69%.

While not all banks and thrifts had reported their numbers when these statistics were compiled last evening, we are comfortable in stating that the quality of our assets continues to compare favorably with those of our industry peers.

Notwithstanding the weakness of the housing and financial markets, I'm pleased to report that our multi-family niche continues to hold strong.

We believe that the nature of that niche and our conservative underwriting standards will continue to support our record of asset quality in the quarters ahead.

I might also add that we have significantly limited our construction lending over the past three quarters and have augmented our credit risk management team.

Maintaining our asset quality remains a key component of our business model and we are diligently working to identify any potential credit problems in order to ensure that they are quickly addressed and wherever possible resolved.

In addition to maintaining the quality of our assets, we are focused on maintaining our capital strength.

Excluding the net impact of mark-to-market adjustments, our tangible capital represented 5.92% of tangible assets.

Including the mark-to- market adjustments the ratio was 5.85%.

In addition, our bank's regulatory capital levels continue to be solid and to exceed the minimal requirements under FDICIA, the highest classification well capitalized.

The Community Bank had a leveraged capital ratio of 7.49% at the end of September and the Commercial Bank had a ratio of 11.20%.

Reflecting both our capital strength and our third quarter performance, the board of directors last night declared a quarterly cash dividend of $0.25 per diluted share.

The dividend will be paid on the 18th of November to shareholders of record as of November 7.

We continue to be confident about our prospects for the future and in our ability to maintain the dividend at this level in the quarters ahead.

At a time of unprecedented turmoil in the housing and financial markets we are pleased to have produced the results we reported to you today.

These are challenging times for our industry and for our nation and there can be no question that the metro New York market is already feeling the effects.

We believe we are well positioned to face the challenges before us and to capitalize on the opportunities for continued loan and earnings growth.

We currently are in the process of assessing the ramifications of the programs that have been put in place by the government to stabilize the financial markets and are looking at the potential benefits of taking part.

These are admittedly difficult times for the investing public and especially for those who have invested in banks and thrifts.

We encourage our shareholders to take the time to understand the distinctions between our institution and those that have been struggling, and to call us if you have any questions about our financial condition or strategies.

On that note, I would be happy 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 our investor relations department, leave a message for us and we will do our best to get back to you during the week.

(OPERATOR INSTRUCTIONS) We go first to Mark Fitzgibbon with Sandler O'Neill.

Good morning.

Joe, I wonder if you could share with us your thoughts on participating in the TARP program?

I think the TARP program represents a unique opportunity to generate capital.

However, all of the ramifications of participating aren't necessarily clearly established and, therefore, we are not prepared to commit ourselves to that program yet.

Obviously, opportunities to do deals would make the use of those funds significantly more likely to find a home in our institution, but having said all of that the time will come later for us to actually make that decision.

Okay.

And then, secondly, I wondered if you could share with us your outlook for the net interest margin, maybe some of the key dynamics driving it in coming quarters?

Well, the fact is that we don't normally talk extensively about our margins.

However, what we have said is that we do believe that the cost of our funding continues to go down and our assets should earn more.

Tom has some comments.

Mark, hey, Tom.

What we're seeing right now is some very good opportunities on the multi-family side.

We're looking at around 380 (inaudible) relative to the spread in respect to the (inaudible) That's a significant differential from prior years.

You will probably see in the ongoing quarters continue margin expansion, cost of funds are continuing to decline, and our overall funding costs have dropped dramatically and continues to drop.

We're excited about the benefits of much higher spread.

So that should result in higher margins in the fourth quarter and beyond.

Okay.

And then since the conduits have really gotten out of the multi-family market I'm wondering is the average loan size you all are doing rising relative to the average for the portfolio of about $3.8 million.

No.

The conduits were the excess lenders.

In many cases they were length far too many dollars.

For those loans that actually are put into our portfolio they would be in our portfolio because the dollars were rational whether we did it this year or we did it last year.

Last year a property owner may have been able to get way more money than they should have, this year they're not going to get that.

So we're not seeing an increase in size, because we're always limited by the availability of cash flow, whereas the conduits were not.

Okay.

And lastly, you always have a good perspective on this, could you maybe share with us what your thoughts are for M&A in the New York metro market, is it like lie to pick up soon?

I'm not sure about soon.

I think one of the drivers may very well be, there are two fundamental things here.

If the accounting doesn't get fixed there's going to be significant decrease in capitalization in the financial sector broadly.

And the consequences of this as a result of impairment will just worsen the situation throughout this market and all other markets.

Having said that, the steps being taken by the government may change the available life of some entities that otherwise would have gone out of business sooner.

My guess is that consolidation is going to accelerate, in particular, through the next two quarters and then depending on whatever else is happening over the period beyond that.

Consolidation is inevitable and ultimately is healthy for the market.

Thank you.

You're welcome.

We will take our next question from Ken Zerbe with Morgan Stanley.

Morning.

Morning.

I was hoping you could tell us the carrying value and fair value of the remaining trust preferred exposure that you have?

Yes, we have obviously the charges we have taken in respect to the previous OTTI and what's left is fairly small.

Break down, in respect to pooled trust deferreds that we actually previously taken OTTI on is about $18 million left.

That's carrying value?

That's correct.

Okay.

On the income notes that we have remaining that we previously taken OTTI on that's about $13 million.

And we have one preferred stock instrument that we have taken previously OTTI on which is actually HSBC bond, we're comfortable with the credit, but we had to write that down because of market conditions, and that's around $12 million.

So in aggregate it's around $40 million, I believe

On the $40 million in total what's, I think you may have mentioned it, but what's the unrealized loss on the $40 million now?

That's it.

That's the unrealized loss amount?

That's the actual net book value.

These have been written down already, so that's in the previous two quarters of write down.

So everything, your entire trust portfolio has been written down to market as of the end of third quarter, there's no unrealized, you have taken all that through OTTI?

That's not what I said, the total portfolio, obviously, we have securities in held to maturity that are performing very well and we have no OTTI related to, those are around $200 million.

The point is the items we have taken previously OTTI on are the numbers I cited to you, the pool trust deferreds, as well as income notes, and the preferred stock.

Okay.

And the $40 million is the write down --

That's the net book value.

As far as the unrealized in this market it's very insignificant compared to the June 30 balance, it's pretty much consistent with the June 30 balance.

Okay.

Understood.

And then just in terms of loan growth, actually more the combination of the wider spreads that you're seeing right now, should we expect loan growth to accelerate from here given pricing looks like it's much more attractive now than it was in prior quarters?

Absolutely.

It would be fair to say we're going to continue to grow the loan book.

The multi-family growth was 12.3% in the previous quarter.

We will see double-digit loan growth in Q4 and you will see it at much higher spreads.

Right now the current spread is around 375 to 380 over, which we haven't seen that since probably the last cycle, it was around 400 or 500.

It's moving in the right direction.

If you recall last year we were around 150 over.

If you look at the overall, we will call it the coupon embedded in the '09, 2010 rollovers, which we expect to see coming in like 535 range.

We have a significant potential for yield adjustment upward just on moving the paper from maturing to current refinancing.

We're not seeing a lot of prepayment activity because of market conditions, so the portfolio is growing probably better than what we expected because of the lack of prepayment activity as well.

Okay, understood.

Just the last question, just in terms of the product, or the lessening of product competition that you're talking about, was there any change specifically in third quarter or is this just a broader lessening that you have been talking about for the last year or so in terms of conduits drying up?

I would say it's a combination of both, but Joe could answer that.

Yes.

I think the only significant difference during the third quarter was the changes that occurred with WaMu and Fannie Mae, that would include Sovereign.

So there are going to be progressively less competitors within our particular niche and we will have progressively better terms and better opportunities to gain share.

We expect that in the evolving cycle no matter what and there's no escaping the fact that the most relevant players within our niche are, in fact, less and less focused.

Ken, it's fair to say right new we're seeing more of our bread and butter type lending, multi-family rent control and stabilization.

There's less players in the marketplace and the spreads are much higher.

We're prepared to benefit from that and we're excited about the quarters ahead.

The pipeline looks pretty strong, we're looking for another double-digit quarter.

For the past three quarters, we haven't seen these types of levels in about two and a half years.

Great, thanks a lot.

You're welcome.

Moving on we go to Theodore Kovaleff with Granta Capital Group.

Yes, good morning.

Morning.

Question on your pipeline.

I did not have a chance to look up last quarter's pipeline number, but I'm wondering about the change there and then also whether you are looking forward to more activity based on the fact that there was a lot less refinancing this quarter?

I think you're right in that assessment, Ted.

There's no escaping the fact that the calendar cannot be denied, so our portfolio will be refinancing progressively as the quarters evolve.

And our ability to do loans and what we call "bread and butter" is discipline.

You know, we could do significantly more lending today because there are far fewer lenders in the market.

Everybody's talking about the inability to get money.

We have not only plenty of money, but we also have the ability to be prudent and disciplined and lend when, in fact, we deem the amounts appropriate.

So as we've said before, we would expect that we will progressively lend more money in the quarters ahead, but we will continue to be disciplined as to who we lend to and how much we lend on each property.

Ted, it's Tom.

I would think the pipeline is about maybe $100 million larger today than it was the previous quarter, but we also had a late Jewish holiday season, so that's probably indicative of why it's around the same.

Typically, the fourth quarter happens to be a strong growth quarter for the Company historically, and the third quarter is usually the lean quarter that we don't grow as much.

We're very pleased on the third quarter metrics.

We expected around 8% to 9%, in Q3 we came out around 11% total net.

So you're looking at another good double-digit quarter going ahead for fourth quarter growth, net loans.

Okay, thank you.

You're welcome.

Next we go to Rick Weiss with Janney Montgomery.

Good morning.

Morning, Rick.

I would like to go back to multi-family with loan pricing.

Let me ask you first, is business still being driven by the same mortgage brokers and do you expect any changes to occur over at Meridian now that Sovereign was taken out by Santander?

No, I don't think Meridian will change.

Meridian was always independent and was always capable of making its own decisions and drove loans that it deemed appropriate to drive.

So I don't think the change at Santander changes Meridian.

It certainly changes how much of production produced by Meridian will go to Fannie Mae or to Santander, but it doesn't change Meridian.

Okay.

That's good news for you, I think.

Yes, I think so.

And second, with the decoupling of LIBOR rates from the treasuries, is it going to be any change in the way you price or borrow or be more willing if you wanted to price off of LIBOR?

Rick, it's Tom.

I would say right now we have historically been known as the in-market lender and we typically price the five-year Treasury.

We have no plans on changing our pricing.

It's more of a benchmark where things are being put in the marketplace.

We're looking around 6-3/8% in this environment which is attractive based on the current yield rolling off.

We always assess the marketplace as the business comes through.

We're very pleased to see, like I said previously, the "bread and butter" deals consistent with discounted cash flow type loans with a nice strong pipeline.

What's really exciting about the future is you have a significant amount of loans that has to refi or reprice at much lower levels.

We believe that in this market turmoil you will see better yields going forward, because of the overall premium risk that we're going to command.

There's many banks that are on the sidelines because they are not lending and they are not putting out significant dollars to the marketplace and our competition has waned dramatically.

The conduit was the first contributor to that and now having significant players in the market that were consolidated.

We're benefiting from a nice lower business and looking at the potential of significant asset yields rising because of low embedded portfolio coupon that NYB currently has.

Every quarter it's getting more attractive as we move along.

Now we're getting close to the 400-basis-point level which is very attractive for future margin growth.

I think, Rick, you have touch upon something that's very important to recognize here.

Whatever the index a lender may be using is distorted and less relevant.

And the availability of money and the awareness of risk will, in fact, create significantly higher expectations with regard to the rate that is paid over whatever index was previously being used.

Okay.

And will there be any changes do you anticipate to the prepayment penalty points that you're going to be looking at when you assess the borrowers?

I'd say that if you look at the last cycle as it evolved, prepayments were consistent through that cycle.

We, in fact, were being paid 1 to 1.5 points just to originate loans and we were getting paid up to 500 over the five-year C&P.

In a cycle when loss becomes consistent there is going to be fewer lenders and there's going to be greater expectation that premiums will be paid.

So there are various markets already where the rates are substantially higher than the rate we're talking about.

So as this cycle evolves rates are going to, in fact, become higher and higher, because there's no escaping the fact that the marketplace will have fewer and fewer willing lenders to lend at thinner margins.

Rick, it's Tom.

Just [staring] into the previous quarter and look at what we actually reported for prepaids, it was de minimis, it was the lowest we have seen in years, probably since we started tracking them.

We're starting at a very low base.

The good news is that every loan we write has a contract, it has a prepayment penalty contract in the loan structure.

We expect to see some good refinancing going forward not just because of market conditions but these loans have to replace, if not they go into the [sticks] as a loan that's going to be priced over prime plus a substantial spread, significantly higher than the current coupon.

So we have that potential, we're just not seeing borrowers rushing to refi regardless of their low coupon they're currently paying right now.

We have about a 5-3/8% next year that's rolling into the market and you have a marketplace that's a hundred basis points higher than that.

So it's going to be a meaningful change to their cash flow and if rates continue to rise because of premium spread and credit spread I would guess that over time borrowers will come back and take advantage of the current market and not put themselves at risk as far as paying a much higher coupon.

Right.

So it sounds like you will benefit from both volume and rate.

Absolutely.

And if you don't see the prepaids we will have much higher overall net loan books.

Okay.

One final question, if you could, if you can give kind of the percentages of the people that were [refi-ing] with you, I guess, at the time when the conduits were doing their heaviest volume versus where you would expect traditionally before the conduits got into the market?

I'd say if you look at the '06-'07 year we were [refi-ing] loans probably in the 30%s to 40% range.

If he look at the depths of the cycle that preceded this one which ran from '87 to '92, we were [refi-ing] probably in the 90%, 92% range.

That is indicative of our having money available when others do not, of our literally being willing to do sound lending to well established property owners.

When the markets get irrational, such as we have had in the last several years, you wind up getting people sloppily throwing money all over the place, and in some cases even good property owners just can't resist the extra dollars.

Okay, got it, thank you very much.

You're welcome, Rick.

Next from KBW we go to Bob Hughes.

Good morning, Bob.

Good morning guys.

Tom, first question, I was wondering if you can give us a sense for the level of contractual maturities you might see out of that multi-family book over '09 and 2010?

It's substantial.

It's obviously a fairly short overall loan book.

Let me get my details here, Bob.

Give me a second.

You're looking at probably close to 20% just in '09 alone.

If you go into 2010 and combine them together it's probably closer to 40%, maybe 45%.

These coupons, like I mentioned previously, are somewhere in the like the 5-3/8% which is a nice potential yield benefit going forward.

Okay, great.

With the roughly, you call it $30 million increase in NPL, I wonder if you could shed a little light on the -- on what contributed to that linked quarter increase?

Was that multi-family, commercial real estate, construction, et cetera?

It was across the board, Bob.

Obviously, you have one or two multi-family loans in there, we're very confident we will work out these issues.

With respect to what we transition the migration is very real.

We're dealing with the same issues we had at June, just at more season now than our performers.

We are very confident we will work through these issues.

They're spread out across the board.

The vast majority of being multi which is a handful of loans that we're very comfortable that we will get good cash out of either sales or work outs.

Okay.

You guys had some pretty solid deposit growth in the quarter.

I'm wondering the increase in CDs in the quarter, how much of that would you characterize as retail versus brokered?

It varies.

I would tell you, Bob, we are not aggressive in the retail fund, if you look at our rates we're probably the lowest in the marketplace.

We are not chasing, at the time of the third quarter we had WaMu out there and you had the likes of others with outrageous rates.

We're probably the lowest rate payer right now in the market, and we're very confident there.

If we want to go out aggressively and raise rates we will do so.

Brokered market versus the retail CD market is not even on the same page in respect to value.

Same thing with the wholesale market.

If you look at short wholesale funding right now compared to, we will call it a six-month CD offering from our competitors, they're well through the 10-year Treasury.

So we're opting to be very opportunistic in this environment as far as taking low-cost funding.

And that could change over time, but we believe that rates are going to be generally lower going forward.

We feel that overall CD rates should drop throughout the marketplace and there are some local competitors that are pricing too high, and we're not going to participate in the overpricing of CDs in the marketplace.

Understood.

And one final question, I was just curious with respect to the TARP have you guys been given any preliminary guidance from your regulators on whether you would, one, be eligible for a TARP capital and then, two, whether accepting TARP capital would jeopardize the level of the dividend at all?

Bob, we're a very strong bank, and we're very comfortable with the programs that are out there.

We're evaluating them.

Obviously, we're waiting for a lot of information that's been made public to the rest of the marketplace as far as what the agreements that these larger banks have signed, and then we will make a decision on how it fits into our capital management tools.

It's an attractive fund, and we'll evaluate it.

There's no question the government is continuing to put out these programs and the programs keep changing.

Once we start seeing some public documents that we have legal agreements to review we will have a better handle on that.

All right, thank you, guys.

Ken Bruce with Merrill Lynch, please go ahead, sir.

Morning.

I wanted to follow-up on the question related to your deposit costs, not necessarily on the cost side but really in terms of how you're thinking about your funding strategy.

You have a fairly fickle capital market, obviously, that's creating a lot of volatility in terms of interest rates being charged and what not across your liability structures.

Could you just maybe elaborate on how you're thinking about funding your growth going forward, please?

I guess, Ken, it's, Tom.

What we've changed from the previous, remember we locked in about $4 billion last quarter at much lower rates long term, so we're very comfortable in June of making that rate lock which helped us going forward.

We have a nice low cost funding for along period of time.

What changed in the current quarter is that LIBOR markets are distorted, and the longer term fundings are expensive.

So we opted to put around 10% of our wholesale book in short-term funding.

That short-term funding is very attractive and going lower.

Ultimately over time when the market stabilizes, which we believe they will over time, we will look at the attractiveness of locking that against multi-family overall average duration.

You're probably looking at around 10% of our wholesale book going short and continuing to be proactive in the marketplace for the cheapest cost of funds until CD rates become more in-line to reality.

We believe rates will be lower and we will be able to compete with our competitors as far as putting out reasonable rates.

We are not chasing these high cost CDs.

WaMu had a 5% rate out there before they were seized.

That rate is just way too high in this type of environment.

We're very comfortable with access to financing and we're very proactive on making those changes depending on market conditions.

But there has been a shift in the quarter which is putting a little bit of our wholesale into the short terms, because we had no short-term funding as of June.

In terms of maybe putting more towards deposits if you don't want to go organic growth in this market, would it be reasonable to assume that we have to wait until maybe a consolidation wave begins to really take hold before you could begin to move more of your funding generally speaking towards deposits?

I think that's fair to say, but keep in mind a lot of our CDs are still priced much higher than market rates.

We have 52% of our money six months that's priced well above the current offering rate, that's a positive.

We have almost 80% of our entire CD book that's coming due in one year at higher rates.

So we will still see the benefit of lower funding costs.

Now are we going to pay above that rate, probably not.

If we have to ratchet it up just a little bit just to hold the line that's fair, we have flexibility to do so.

It's fair to say we are looking at tremendous amounts of opportunities in the M&A environment, but, again, it all depends on pricing and market conditions, and as you know historically we will acquire our liabilities before we pay off our liabilities.

Right, great, that helps me out, thank you very much.

Matthew Kelley with Sterne, Agee.

Please go ahead.

Morning, Matt.

Hey guys.

It looks like the held-to-maturity securities were up about $560 million or so, what did you put on in the quarter?

Straight [covies], predominantly Fannie Mae, Freddie, all actually, Fannie and Freddie, CMOs.

Okay.

We haven't bought -- for the past, I guess, year and a half all securities structures have been government backed.

Currently, the portfolio of $6 billion consists of 90% government backed guaranteed by either quasi or government agency securities.

I guess -- fund loan growth.

I'm sorry?

Why not let that run down and continue to fund loan growth at good spreads?

That's the plan going forward.

We will keep -- look, we said in the previous quarter we will keep securities book below 20%, it ranged between 15% to 20%, right now about 18.9%.

The expectation over time is that we'll have more loan growing you will see securities stay flat, if not go down.

The cash flow was a little slow last quarter because of the shock in the market.

I think cash flow will start to pick up as the longer term lending rates for the consumer is more reasonable and you will see more cash flow out of the bond portfolio and that will shrink.

But no question we are going to keep that band and don't want to go past a 20% band.

Okay.

Then looking ahead do you think that your provisioning expenses will allow some build in reserve levels, I mean they have been coming down a little each quarter on total loans and on NPA's, are we going to reach in inflection point is the question there?

I guess the important consideration there will be how do we assess our actual risk of taking losses.

We have a huge amount of reserve today against our expectation that we will actually take loss.

And although this may very readily compare differently to our sector, our actual performance over the course of decades with regard to troubled markets has demonstrated that we take significantly less in the way of loss.

So every single quarter we will assess what is an appropriate amount to have in allocating funds to the potential for losses in our portfolios.

And the good news is that we have a very well prepared group to do that work, and they assess loan by loan and risk by risk and determine whether or not we need to move some of our reserves from one place to another or otherwise add to our reserves.

We meet our expectations very readily with the reserves that we have today.

Matt, just to give you some color on the actual charge-off itself, 80% of the charge-off was one loan, and that was an Atlantic Bank loan we required.

It is what it is, it's a C&I loan.

But taken into perspective 80% of all the charge-offs.

Our auto book, which was surprisingly resilient, was only about $45,000 in the quarter.

That was actually surprise on the upside.

There's only about $33 million left in the portfolio, but it's a high yielding portfolio and it's performing much better than we expected.

So we looked at the overall charges for the quarter being one specific loan that a company had some problems and hopefully we will get some money down the road.

Based on the character of the particular loan we charged it off.

The important number to think about is that some portion of our exposure here, our outstanding loans represent 70%, 80% of those loans are what we would call niche loans.

We haven't had a loss on a niche loan in multiple decades.

So as this cycle evolves, you're going to see statistics from other lenders change fairly dramatically that have more nonperforming and more charges because that's the way the cycle evolves for their particular business model.

Our cycle does not evolve that way, although we are vulnerable to and have been reporting losses in acquired assets, they represent a very, very small portion of our overall loan portfolio.

And we have way more than enough in the way of reserves to accommodate a very small portion of losses.

Matt, what was encouraging this particular quarter, if you look at the overall delinquency trends, there clearly was a clear migration from the 30 to 60, 90 and nonperforming, and if you look at the overall level we actually put in table to give the marketplace some color there, there's actually a slight improvement on the linked quarter basis.

Clearly, it wasn't migration, it was the same problems we had to deal with in June that happened a little more season problem.

We're very confident we can work through it, but that's a positive trend, the market is very challenging that we're not seeing substantial increases in delinquencies.

Okay.

We're very pleased with that statistic.

Fair enough, thanks, guys.

You got it.

Moving on, we will go to James Abbott with FBR Capital Markets.

Morning, Jim.

Good morning.

A question on broader picture stuff, is your rent control rent stabilized properties as a percentage of the total multi-family loans today, give us some perspective where that was maybe a year ago?

It's always been very hard to make that determination.

I would just guess that that number is going up as a percentage, not down.

But we don't have an exact number, because when you think about it there are no buildings that are rent controlled.

There are only individual apartments that are rent controlled.

That number does change only going down.

It doesn't change by going up.

But we could virtually put a loan in the portfolio that 80% of the units in that building are rent controlled.

If it's a very large building that would have a meaningful change in the numbers for us.

But I think the important thing to recognize as we go into this cycle it will become progressively more clear that the people that we are lending to are cycle survivors.

They're the people that will refinance their loans in the depths of the cycle as it evolves, and they're the people who will buy, very cheap, properties from market players that, in fact, are going to ultimately represent their opportunity to improve the value of the properties that they, in fact, invest in.

So the characteristics of the owners are the most dramatic differences between our loan portfolio and the loan portfolios of other institutions.

So as the cycle evolves our portfolio only gets better.

Jim, it's Tom.

I would also add that in the commercial book, the commercial real estate book, a substantial amount, a large amount of those loans are mixed use multi's given that their 25% of the rent rolls are commercial and a lot of the upstairs, of floors two and higher, are all rent controlled and stabilized, a substantial amount of loans.

So you have to take that into consideration.

By a regulatory definition they are classified as commercial real estate loans, but in our view that's a lot of rent control and stabilized stuff with the rent rolls on the residential side are substantially lower than the market.

That's why they're classified there.

Okay.

That's very helpful.

And could you take us through a scenario of what sort of employment levels you might have to see before the multi-family, not that you --

Jim, you just touched upon something that is fundamental to the difference between our portfolio and the market as a whole.

Unemployment can go to 15%.

The rent rolls in the City of New York could collapse.

They did.

Values collapsed in the last cycle, the vacancy rates were extremely high in the last cycle.

Our buildings are typically full because they're rent controlled, rent stabilized and people typically do not give up those units even when they don't have a job.

They find ways to continue to make their payment, because the single best asset they have is their rental apartment.

And, therefore, our buildings in the depths of the cycle are 100% performing.

Now I'm talking again about our niche, what is the most important component of distinction between us and others.

And in that niche unemployment doesn't affect the actual availability of tenancy.

If a person dies, loses their job and has no capacity to work and loses their apartment, there are plenty of people that want to live in that building.

So that vacant space gets filled very quickly because it is significantly below the market, it comes to comparative space in the city.

So even in the depths of a cycle we do extremely well because the cash flow in our buildings continues to pay, continues to improve.

Okay.

So even at 15% unemployment in the metro New York area you wouldn't really expect a real deterioration in your --

Not in our niche, no.

It will affect, if we have significant unemployment in the New York area, it will affect our commercial lending, it will affect the peripheral.

But the degree to which our bank is affected by adversity will be significantly less than the degree to which other lenders will be affected.

And the rent, just to put this all together, the rent controlled is estimated it at 50%, 90%, somewhere between or --

I'd say between 50% and 90% is about right.

The vast majority, and I have to comment about the commercial real estate book, we'd assume a lot of that is rent controlled because of the low levels of income streams from residential.

Okay.

All right, thanks very much.

You're welcome.

We will next move on to Bruce Harting with Barclays Capital.

You sound like you're suffering.

I'm sorry.

I apologize, I'm aware that you must feel that I'm laboring through this a bit.

I have a bit of a bout with pneumonia.

Oh, feel better, dedication.

Thank you.

As you think through the capital, the preferred from the TARP, I mean, you guys tend to annualize these things more than some others.

What is your understanding in terms of the back end, I mean can you simply pay this off from retained earnings after three years or have you concluded that you have to replace, I mean, it looks to us like if you prepay it in the first three years you have to replace it with common.

After that it doesn't seem as clear as to whether you can just pay it down or if there needs to be some amount of capital raised on the back end.

And then can you just share your thoughts a little more on sort of unintended consequences that you might --

I will let Tom go first, but I have some opinions about this with regard to unintended consequences.

Bruce, I guess the structure is very attractive on the economic side.

What's intriguing for us, as you know, historically we have raised equity through common stock.

That's what we do.

We will buy companies and issue stocks to pay for them.

That's something that in the event we were to look at this particular instrument tremendous amount of flexibility in paying it off within the three years and the level of payoff as far as what you have to issue to get rid of the particular instrument if market conditions change dramatically are very attractive to the issuer.

No question the economics of this particular instrument is attractive to all financial institutions, especially ones that have a tendency, I think, to recover, to use common stock to buy other banks.

There's no question there's opportunities in the marketplace, which we believe there will be.

Right now New York is very strong and outside of our markets we're seeing a lot of institutions that are troubling.

We're not going to buy a troubled bank with the expectation of taking people's problems without the help of instruments to make it work.

Now, that being said, this particular instrument is very attractive in that regard.

There was a large deal announced, the PNC deal which used proceeds to effectuate an acquisition and make it very attractive so the economic terms are real and more importantly they're easy to replenish with a fresh dose of straight common stock equity.

You know, Bruce, when you go through the analysis and you realize that there is a need and there are many ways in which this actually accommodates the need, and the analysis would show that the economics are very favorable.

This is not a new phenomenon.

Goodwill certificates met a need and dealt with an issue at a time when it was important to deal with the particular crisis.

We need to be very mindful that this is not something that is necessarily in stone the day it is done.

It is evolving every single day.

It is being somewhat reinterpreted or modified and ultimately it's going to be two years or three years or four years or five years down the road before everybody will know exactly what are the issues surrounding the use of these certificates.

So I would be very cautious with regard to establishing certainty as to what exactly we can expect with regard to interpretation or consequences of the ways in which these certificates can be used.

Bruce, I would also add, obviously, we're awaiting, we're very anxious to see the filings from the larger banks that actually have the agreements with the government and see the actual legal terminology to make a better assessment of what the true contracts actually read.

I think a lot of the market participants are awaiting that data.

Clearly, as I said, it's cheap capital and it could be very attractive, but we have to make that evaluation and we will thoroughly go through the mathematics and make sure it's right for shareholders.

Thank you.

And do you have any, I know you've expanded your footprint through acquisitions, do you have any de novo branch opportunity, what's your view of branch expansion?

Well, we wouldn't do de novo, but there very well may be the opportunity for us to buy either a New York-based component of a much larger bank.

We do buy branches, but we don't open new branches.

Bruce, we're being very, I guess, we're focusing on what's out there in the marketplace, and I will assure you there are things that can be done, price expectation needs to come down.

There's been a re-evaluation of the financial sector, and we want to make sure anything that we embark has to be substantially accretive to our shareholder base.

And more importantly there are opportunities outside of our market that would have to be grossly substantial for us to make the move.

And that's something that we will evaluate from time to time.

But New York is pretty strong, the New York market, we're not seeing much in the way of the New York market, but we're seeing some opportunities outside of the New York market.

I'll reiterate, it has to be grossly accretive to the bottom line for us to make the move outside of our market in any meaningful way.

With the WaMu, JPM deal do you expect a fair amount of branches to come up for sale or what are you hearing?

We haven't heard anything specific about that.

That could happen.

In every market where you have overlap, one of those overlapping branches will be closed.

There's some [rumors] that there's some good deposit opportunities in the surrounding areas, but they're mostly deposit opportunities which for us are more attractive than taking people's loan problems.

The last thing we want to do is take on credit risk.

Bruce, you have touched upon an important component of what the future may hold.

There may not be whole deals, bank deals that make great sense.

There may just be opportunities to take existing operating branches as sources of liquidity.

Thank you.

Thank you.

Okay.

We will take our next question from Gary Gordon with Portales Partners.

Thank you.

Follow-up questions on commercial lending.

One is, obviously, with the changing economy in New York, your being a cash flow lender, are you changing your cash flow assumptions making commercial real estate or apartment loans?

I think that we're reassessing all of our relationships, both from the standpoint of risk and also from the standpoint of reward.

The expectation is that we must pay more for the inherent risks in lending that this environment represent and we must also take less and less risk as this environment evolves.

So on the commercial lending side we have been doing this for months and months.

We're just going to do more of it in the period in front of us.

Okay, thanks.

Two, I think you mentioned some of the competitors pulling out, I think you mentioned Fannie Mae.

did I hear that right?

That is within our niche.

That's got to do with the obvious disruptions.

The single largest provider of Fannie Mae loans in the New York market is, in fact, Sovereign, and Sovereign is, obviously, going through change.

And the single, one of the banks that was in our niche in the New York market was WaMu and they're going through change.

So I think that down the road exactly what Fannie Mae will be doing with regard to multi-family is very, very hard to know.

They have many, many, many demands based on their explicit requirements under their mission, and they have to deal with providing loans to one-to-four-family property owners, especially in low to moderate income since that is their basic mission.

So I'm not sure that they're going to be aggressively in this market in the period ahead.

Have they made any changes to date or you're just forecasting what seems logical?

I think it's just a logical assumption here.

What we have seen to date could be disruption in a variety of ways.

Remember, Fannie Mae is going through massive change, as well as Sovereign.

So those changes are affecting people.

And the people that do the loans are in fact going to be somewhat less focused or less capable of getting through product.

Gary, it's Tom.

It's fair to say that pricing has changed dramatically since the beginning of the year.

As we're getting close to the 400-basis-point mark, that has a lot to do with the fact where Fannie Mae is.

We're not seeing that significant aggression on going in there at 60 to 80 basis points tighter than where the market provides for.

So the good news is that the market has price and premium risk.

Even look at government securities there's a lot of liquidity issues out there, you're seeing yields around 6.

So you're going to see multi-family yields slightly north of that.

If you price that against the five-year Treasury that's a substantial spread from what we're accustomed to over previous years.

It goes back to the last cycle where 400 or 500 basis points was the normal.

Also another thing that can't be missed, this year, this year Fannie Mae has been given the opportunity to do jumbo lending.

So they have the ability to get paid 7-1/4, significantly more to do a $600,000 or $700,000 loan on a house which, in fact, is going to, in their view, be a much more attractive economic trade than doing a multi-family loan at a significantly lower rate when they have to pay for the servicing and everything else on the multi-family loan.

So I think that there are many changes that this market represents.

Much of what will happen in the future will be driven by the evolving cycle and the positioning, ultimately, of Fannie Mae with regard to its own issues and the needs that the economy will present.

There is a mandate for Fannie Mae to be providing funding in one-to-four family.

There is no mandate for Fannie Mae to be providing multi-family loans.

Makes sense.

One last question, just thinking of your customers and their incentive to refinance.

Your prepayment income was pretty small suggesting a lot of your own customers didn't see an opportunity to cash out or (inaudible), et cetera.

Right.

Yet you are getting good volume, obviously, taking share, but what is the thinking of your current customers, what are they doing?

And, two, is it automatic at the end of five years they have to refinance or --

The automatic aspect of it is pretty consistent.

In the course of decades very few people have ever gone into year six.

The reality is that when people think about the refinancing of their multi-family product there are expectations as to what rates are actually going to do.

Are they going to come down, are they going to go up.

As you well know, there's wide expectation that the Fed may very well lower rates today.

In some minds, that means that they're going to be paying less.

So a lot of people are thinking that rates will, in fact, be coming down.

On this particular product, rates can very well go up because the spreads were way too low in the depths during the last positive cycle, which ran almost 13, 14, 15 years, depending on where you were, rates were dramatically too low.

Lenders were not getting proper spreads.

So people were often just thinking whatever the Fed will do is what, in fact, rates will do.

That does not always happen.

Evidence the fact that the Fed moved rates down 400 basis points and Treasuries didn't correspond, or the Fed moved rates up 400 basis points and Treasuries did not correspond.

So when you look at the evolving cycle the rates that are going to be charged are going to go up based upon available lenders decreasing, there will be less money available for lending, and the risk premium will become a larger and larger component of it.

So rates are going up regardless of what the Fed does with regard to lending.

That's going to impact all product, everybody is going to wind up seeing ultimately rates go up unless it's government assisted.

If there are government assisted programs that will affect specific niches, it won't affect our niche.

Okay, thank you.

You're quite welcome.

Ladies and gentlemen, that is all the time we do have for questions today.

At this time, I'd like to turn the call back to Joseph Ficalora for any additional or closing remarks.

Thank you.

On behalf of our board and management team, I thank you for the opportunity to discuss our third quarter performance and the features that have distinguished us in this time of economic stress.

The growth of our earnings on both a cash and operating basis, the expansion of our net interest margin, the growth of our loan portfolio as we see a return to traditional pricing and more favorable levels of loan production, the improvements in the efficiency of our operation, the quality of the loans we have made as reflected in our asset quality measures and the continuing strength of our capital position while we continue to pay a very attractive dividend to those who own our shares.

Thank you.

With that, ladies and gentlemen, we do conclude today's teleconference.

Thank you for joining us today.

Have a nice day.