Flagstar Financial Inc (NYCB) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the New York Community Bancorp fourth quarter 2008 earnings conference call.

Today's conference is being recorded.

For opening remarks and introductions, I would like to turn the call over to the Executive Vice President and Director 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 our quarterly conference call.

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

Also joining us on the call today 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 who currently anticipate, due to a number of factors, many of which are beyond our control.

Among those factors are general economic conditions in trends either nationally or in our local markets; 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; changes in legislation, regulation and policies, including those pertaining to banking, securities and taxation; changes in accounting principals, practices or guidelines; 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 loans.

You'll find a more detailed list of the risk factors associated with our forward-looking statements in our recent SEC filings and beginning on page 10 of this morning's earnings release.

The release also includes reconciliations of our GAAP and non-GAAP earnings, net interest income and capital measures, which will be discussed extensively during the conference call.

If you would like a copy of the earnings release, please call our Investor Relations Department at 516-683-4420, or visit the IR portion of our website www.mynycb.com.

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

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

Mr.

Ficalora?

Thank you, Ilene, and good morning, everybody.

We are very pleased to have you with us today as we discuss our fourth quarter 2008 earnings and the factors that contributed to our strongest financial performance in a number of years.

Although you've likely seen this morning's earnings release, the numbers bear repeating with fourth quarter GAAP earnings up 52% from the year earlier fourth-quarter level, and operating earnings up 37% during the same time.

On a per share basis, our GAAP earnings rose 43% year-over-year to $0.30 in the quarter.

During this time our diluted operating earnings per share rose 29% to $0.27.

We also reported a 45% increase in fourth quarter cash earnings to $115.6 million together with a 36% increase in diluted cash earnings per share to $0.34.

Our fourth quarter cash earnings exceeded our GAAP earnings by $13.4 million and contributed 13.1% more to capital at December 31, 2008.

The strength of the quarter's performance confirmed the merits of our business model, as well as a claim we've often made throughout our public life, that the qualities that distinguish us from other financial institutions would become increasingly apparent in a downward-cycle turn.

In the past 12 months, a time of unprecedented disarray in the housing and credit markets, we generated double-digit loan growth by increasing our loan production and expanded our net interest margin, despite a decline in prepayment penalties.

With revenues increasing, we improved the efficiency of our operation.

We also produced above-average asset quality measures and maintained our position of capital strength.

We also paid a $0.25 per share dividend in each of the year's four quarters, and last night declared the 20th consecutive quarterly cash dividend of this amount.

The dividend reflects the strength of our earnings and our confidence in the future, and will be paid on February 17th to shareholders of record as of February 6th.

Before I take your questions regarding the quarter's performance, I'd like to expand on each of these accomplishments.

Since multi-family lending is the heart of our business model, the growth of that loan portfolio is a great place to start.

Capitalizing on a continued decline in competition for product, we increased our multi-family loan production throughout 2008.

Originations rose nearly 30% year-over-year to $3.2 billion, including $854 million in the last three months of 2008.

Reflecting the higher volume of loans produced, and a decline in refinancing activity, the multi-family loan portfolio grew to $15.7 billion at the end of December, a nearly 12% increase from the year-earlier amount.

The spreads on our multi-family loans increased in tandem with the increase in production, with fourth quarter yields averaging 384 basis points above the average five-year CMT.

Driven by our emphasis on multi-family lending, total loans grew 9% year-over-year to $22.2 billion at December 31st.

Multi-family loans represented by far the largest portion of loans outstanding and accounted for 71% of the total portfolio.

Commercial real estate loans, a large portion of which are mixed-use multi-family, were a distant second accounting for 20.5% of outstanding loans at December 31st.

With real estate values declining and unemployment increasing, we chose to reduce our portfolio construction loans over the past four quarters, as well as our portfolios of one-to-four family loans and other loans.

Construction loans fell 32% year-over-year to $777 million, and represented just 3.5% of total loans at December 31st.

One-to-four family loans represented a mere 1.2% of loans outstanding, and other loans accounted for a modest 3.9% at year-end 2008.

Reflecting the significant increase in loans and a reduction in our funding costs as the Fed funds rate moved lower, our net interest margin measured 2.87% in the fourth quarter of 2008.

That's 19 basis points wider than our third quarter margin and 51 basis points wider than the margin recorded in the Fourth Quarter of 2007.

We're especially pleased by the degree of expansion, given the reduction in prepayment penalty income we recorded over the past 12 months.

Prepayment penalty income added three basis points to our current fourth quarter margin versus five and seven basis points in the trailing and year earlier three months.

The decline is more dramatic when you consider the 12-month amounts.

In 2007, prepayment penalty income totaled $58 million and added 22 basis points to the net interest margin.

In 2008, prepayments totaled $25 million and added just nine basis points.

The same factors that contributed to the improvement in our net interest margin contributed to an increase in our net interest income in 2008.

On a link-quarter basis, our net interest income rose 11% in the fourth quarter.

Year-over-year, the increase was a more significant 31%.

Reflecting the meaningful revenue growth we recorded in the fourth quarter, our operating efficiency ratio improved to 35.94% from 43.44% in the year earlier three months.

Our GAAP efficiency ratio equaled 35.09% in the quarter, and was well below the current SNL Bank and Thrift Index measure of 73.86%.

Among the beliefs we've often expressed, since our conversion to stock form, is that the quality of our assets would exceed that of our industry peers in a downward-cycle turn.

Our loan portfolio has not been immune to the impact of the widespread economic downturn, our measures of asset quality at the end of December confirmed our belief.

While net charge-offs totaled $3.4 million in the fourth quarter, the ratio of net charge-offs to average loans was a modest 0.016%.

Non-performing loans rose to $113.7 million at the end of December but represented a modest 0.51% of total loans.

Similarly, non-performing assets rose to $114.8 million on the 31st of December, but represented a modest 0.35% of total assets at that date.

If you read this mornings press release, you know that the measures for the SNL Bank and Thrift Index were substantially higher, with net charge-offs representing 2.41% of average loans in that quarter and non-performing loans and assets representing 2.18% and 2.03% of total loans and assets at year-end.

We will continue to be conservative and vigilant in our lending, going forward in keeping with our traditional focus on maintaining a superior level of asset quality.

As we reported in our release, our current pipeline is approximately $602 million and includes $403 million of multi-family loans.

The pipeline reflects the incomplete status of certain loans that are now being processed and the accelerated completion of certain loans into the fourth quarter of last year.

We're confident that the volume of loans produced in this and the quarters to follow will exceed today's amounts.

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

As we reported on January 13th, we opted to decline the opportunity to participate in the U.S.

Treasury's Troubled Asset Relief Program, in large part due to the strength of our balance sheet, our current regulatory capital position, and our confidence in our ability to create new capital in the periods ahead.

At December 31st, our subsidiary banks continued to exceed the minimum requirements for well-capitalized classification with leveraged capital ratios of 7.13% and 10.33%.

Furthermore, our ratio of adjusted tangible stockholders equity to adjusted tangible assets was 5.94% at the end of December, while our ratio of tangible equity to tangible assets was 5.66%.

The difference between the two is attributable to the accumulated other comprehensive loss, net of tax, recorded at the end of December, which included a $50.1 million non-cash unrealized loss related to pension and post-retirement plan obligations as the value of assets in the plans declined.

While last year's volatility has segued into a steady flow of discouraging economic data, we remain confident in our prospects for 2009.

We encourage you to consider the unique features of our business model and the strength of our fourth quarter performance, and to call us if you have any questions about our financial condition or business strategies.

At this time, I'd be happy to take your questions.

As always, we will do our best to get to everybody in time allotted.

But if we should miss you, please feel free to call our Investor Relations Department or leave a message for us and we'll do our best to get back to you this week.

As you may know, Tom and I are leaving the office shortly for Citi's Annual Financial Services Conference in Manhattan, where we will be meeting with investors the rest of today and through tomorrow night.

If you are not attending the conference and would like to listen to the presentation we'll be making at 2:00 p.m.

tomorrow, please log on to Investor Relations portion of our website and click on the conference link.

And now, the first question, please?

Thank you.

(Operator Instructions) Our first question today is from Ken Zerbe from Morgan Stanley.

Great, thanks.

Can you just talk a little bit about the, I guess, what drove your higher provision expense and charge-offs in the quarter?

I understand they're still well below industry averages, but it does seem to be a pretty big move on a sequential basis for you guys.

Yes.

I think the important thing to recognize is that in a portfolio of $22.5 billion, there are going to be loans that are occasionally either non-performing with an expectation that we're going to have to go through a process as a collection.

An important distinction between us and others is the significant amount of non-performing that may occur from time to time without there being a comparable amount of charge.

So even though we did charge a fairly large amount this quarter, it is not necessarily indicative of what we're likely to be charging over the periods ahead.

These are usually isolated cases where the particular circumstances of that particular property and owner suggests that we may, in fact, not realize the full value of that particular asset.

Would that imply that you're not expecting non-performing assets to continue to increase at this level?

I'd say that non-performing assets could move fairly dramatically, but I would suggest to you that I do not expect that we're going to have charges on an increasing basis or at the level that we're seeing today.

Now, obviously, there is, in fact, in our portfolio, a large number of assets that are not our traditional assets.

Where those assets exist from time to time, we're going to in fact take losses.

So, I'd say the easiest way to look at this, we do not believe that any charges that might arise in the quarters ahead or even the years ahead will be beyond the capacity of our earnings to amply cover them.

Of course.

And then can you just remind us what the remaining TruPS exposure you have is?

Hey, Ken.

It's Tom.

How are you?

Hey, Tom.

We have approximately on the pooled trust preferred, which we've been obviously tracking over the past three quarters, what's left on the total portfolio, we have about $18 million left on pooled and $3 million left on income.

So that's the total exposure remaining.

Okay, great.

All right, thanks a lot, guys.

Moving on, our next question comes from Tom Alonso from Fox-Pitt Kelton.

Hi, guys.

Just on sort of the pre-pays, if you could maybe give us a sense of what's driving that slowdown.

Is it just people are insure of what's happening in the current environment?

Any color you could provide I think would be great.

Yes.

I think, Tom, it's important to recognize that there's some dynamics here that are just unprecedented.

We have rates falling off to extremely low levels, and yet the risk premium is widening.

So the expectation with rates is very, very difficult for property owners to adequately assess, and, typically, when they're not sure whether rates are going up or going down that will impact their particular loan, they, in fact, delay.

Also, a lot of the people that we deal with are the very people that will buy real estate when, in fact, real estate comes down.

They're not likely to be buying real estate at this juncture, because real estate has not come down in the markets that they're likely to be in anything near what the future will hold.

There's going to be a significant change in real estate values in the New York market.

It will not be impacting us in the same way it is reflected in the market, but it will present opportunity, for the kinds of people we lend to, to be more interested in getting cash later, and they'll get that cash, not just to maintain their building, but also to redeploy into very nicely priced new properties, and I'm not talking about new buildings, but new purchases that they will make in the markets that will be deteriorating in the future periods.

Okay.

And then just to circle back up on your prior comments on credit, so non-performers, I expect it to increase given what's going on, but you won't see a commensurate increase in losses?

Yes.

I think the important thing to recognize here is that these are one-offs.

It's not as though we're talking about a portfolio of house loans where you could expect that if you have $200 million in non-performing house loans a very high percentage of those loans will ultimately result in loss.

In this circumstance, many of the properties that would ever fall into a non-performing status have substantial value, and those properties will either be refinanced out, sold, or otherwise result in our not having to take a loss.

That's why our losses are so low.

When you look at the number that we've just reported, our loss number is 0.016, even though the non-performing number is up dramatically.

Okay, great.

Thanks.

You're welcome.

And moving on, our next question is from Andrew Wessel from JPMorgan.

Morning.

Hey, good morning.

Thanks for taking my questions.

Just a couple -- on the lending opportunities you're seeing in the pipeline, should we be looking at the 384, 385 kind of spread going forward?

Are you still seeing some expansion there in your spread opportunity that you're pricing at?

Andrew, it's Tom Cangemi.

The -- what we quoted in the press release was the actual closing based on the average five-year treasury for the period.

We're seeing levels more closer to 500, although 450 to 475.

However the timing of the closing, those rates were quoted back in previous periods.

So what we're seeing in the late fourth quarter were spreads more closer to 500 over.

Great, okay.

Which around 6% coupon, 5.75% to 6% depending on the market.

Right, thanks.

And then, in terms of NPLs, was there any -- I might've missed this.

I probably just -- but was there any concentration really there in that growth?

Like, was that?

No.

Or was that spread across?

No, it's basically spread across, and to a great measure, it's not our core, it's other assets.

Sure, so that -- would that be the construction or mixed use or is it--

I think it varies and from time to time, it will vary.

What we're probably, we are very reluctant to do, is identify specifically what we're reserving on particular loans or in particular markets, mainly because, in every case, we are negotiating new deals.

So we don't want to be discussing what we're reserving against any particular assets.

So I think the important thing to recognize here is these are not trend-driven charges or changes in non-performing.

These are more isolated circumstances where a particular property owner, for whatever reason, has run into difficulty with that property and that unique property may be non-performing, even though we might have loans all around that that are perfectly fine.

Andy, you got to remember our average size of a multi is $3.9 million, so one or two loans gets you up there.

Right, sure.

(inaudible)

Right, understandable.

And then, in terms of the last question, in terms of the New York Federal Home Loan Bank, is there any concern about the dividend being positioned off for an extended period of time and kind of the draw against your earnings contribution from that?

I think the New York Federal Home Loan Bank has demonstrated that it is extremely well-positioned against all other Federal Home Loan Banks.

The idea that it can earn money even in a difficult period, I think, has been proven quarter by quarter by quarter.

The reality is that this market will impact, unless we have a meaningful realistic change in how certain measures of accounting are applied, the Federal Home Loan Bank systems will be impacted.

We expect that we should be in a position to continue to enjoy dividends at the New York Federal Home Loan Bank.

However, having said that, we don't decide that.

So I'm very confident about the dividend we pay.

I can't be as confident about the dividends others will pay.

Sure.

Great.

Well, thank you very much.

You're quite welcome.

(Operator Instructions) Our next question today comes from Mark Fitzgibbon from Sandler O'Neill.

Good morning.

Morning, Mark.

Hi, Mark.

Given the comments you made about spreads and multi-family loans today at 5.70% to 6% and where your funding costs were, it would seem that the margin should continue to expand pretty nicely.

Is that an accurate assumption?

That's correct, Mark.

Obviously,until the timing of our closing, we had a very good two quarters of significant growth.

We expected the third quarter to be around the high single digits.

We came in double digits.

Fourth quarter was to our double-digit expectations.

So, obviously, those loans that were put on the books in the latter part of the year will contribute going forward, and the marketplace is still very lucrative in respect to what we saw three years ago.

So we're looking at close to a 6% threshold in a very low interest rate environment, and funding, of course, has fallen through the floor.

Okay, and then, secondly, could you share with us what your 30 to 89-day delinquencies were for the quarter?

Oh, yes.

We're looking at probably around a $100 million.

Okay, great.

Thank you.

Yes, but that includes both the 30 and the 89.

Okay.

Thank you.

You're welcome.

Our next question is from Matthew Clark for Keefe, Bruyette and Woods.

Hey, good morning guys.

Good morning.

Can you discuss, I guess, what was going on -- what happened with the average securities yield in the quarter up about 27 basis points, and just your comments about the acceleration of cash flows on certain securities?

Just trying to better understand the underlying accounting and the types of securities there that experience this.

We typically -- we never buy premium bonds, only in very rare circumstances, so you had a lot of cash flow throughout this low interest rate environment.

Obviously we have more seasoned type collateral in certain pools that we own, as well as the average significant amount of debentures that are at deep discounts.

Obviously, back in 2007 and early 2008, we were not in the market buying low-yielding coupons.

We had very high-yielding coupons, which accelerated on the cash flows on those, which obviously takes a discount into income.

Great.

And then on the -- in terms of the borrowings that you, I guess, are adding more recently, it appears that you used the TJLP to replace some borrowings this quarter.

Yes.

Interestingly enough, we had -- obviously we had a maturity, if you'll recall, we had the Roslyn Senior Notes.

That was about $75 million that matured in November.

That was replaced with the TLGP program at he holding Company.

So we got rid of a 750 coupon and refinanced that, I believe, all of them cost somewhere in the high three's, low four's, all-in, certainly including all fees.

The other pool was a matter of liquidity.

What -- we were flushed with liquidity towards the end of the year, but expected knowing that we're not aggressive in the deposit market.

We looked at the opportunity to participate in TLGP program at very attractive levels versus CDs that are out there.

We have been refraining from being aggressive on deposit pricing.

If you look at our rates, we've always been historically low and we're very liquid currently.

We believe, in 2009, deposit pricing will be extremely low, which will be attractive for us to go back into that environment, but we look at the cost versus deposit and this really was an attractive program.

It's AAA.

It's no collateral being posted and it's a very attractive program for the banking industry as a whole.

Can you talk about the duration of the borrowings that you're adding here?

Is there -- do you, I mean, there's obviously an opportunity to go really short.

Is that something you guys would consider or--

Absolutely.

--in terms of mismatch?

What we've historically done, if you'll recall back in June, we locked in most of our borrowings fairly long, about 3.8 year average duration.

Going forward from then, we typically like to run a 20% short wholesale leverage book.

We thought of putting that particular strategy in place late in the third quarter, early onto the fourth quarter.

You'll see the continuation of that in this low interest rate environment.

So, anywhere from 30, 60, 90, sometimes we're allowed one-year, two-year, depending on market conditions, but we're not looking to lock in at 20% in the current marketplace because of the current interest rate environment.

We are enjoying some of the benefits there.

Okay, and then lastly on the -- can you just update us on the FDIC insurance premium increase, I guess, that goes into effect on January 1 and then another one on April 1st, in terms of--

Coming up, and it's tied to a loan, that's for sure.

We've been on top of this and we're spending a lot of time analyzing it.

We're assuming the worst case scenario for the Company, assuming what was proposed by the original FDIC proposal, probably looking at another $25 million increase into the 2009 expense line.

So, if you take FDIC, as well as additional pension costs, because of the devaluation of the capital markets, our expense base would've been flat going into '09 which is a challenge as far as keeping the holding in line but with good growth.

Backing that out, we would've been flat.

Adding that in, you're looking at probably another $35 million increase total, between FDIC and pension costs.

Okay, great.

Thank you.

Our next question is from Bruce Harting from Barclays Capital.

Joe, I just -- looking back to the last real estate recession in the early 90's, it seems like your NPL's to loans peaked at about 125 basis points, but dropped pretty quickly.

Couldn't find the charge-off data but, if memory serves, it was substantially less than that.

Yes and in the entire period, from I guess '85 to '95, it was like $1.4 million.

Okay, and, I mean, is that kind of performance, and the number in your release today of the 1.5 basis point, that was not an annualized number.

That was just, right, that was just the experience in the quarter, so.

That's right.

Yes, I think that for our core product, our experience should be just about the same, but as I've said many times, we also have other assets that we've acquired and we also have a Commercial Bank.

So, as a result, we are going to have losses which are not necessarily as bad as the rest of the industry, but are, in fact, reflective of the industry.

But for a $32, $33 billion bank to have losses that are comparable to a $3 billion bank, I think it's easy to say that we have more than enough earnings to accommodate those losses.

Right.

Why did, do you recall, I mean, NPL's looked like they dropped rapidly from the peak in '92 to '95.

They went from about 125 down to 40 basis points.

Is there something specific to your asset class or--

No.

I think what it comes down to is we occasionally have some very large loans that go non-performing, and if a very large loan goes non-performing, that number can change dramatically.

However, once that loan is resolved without loss, the actual charges that we have are indicative of the quality of the portfolio.

The non-performing status from moment to moment is only indicative of particular items that are in process.

I think the important thing, and you're touching upon something that is very important for people to understand, we could have a meaningful increase in non-performing loans without necessarily having a meaningful increase in charges against loans.

Now, having said that, it doesn't mean that we aren't going to have periodic charges that are consistent with the kinds of charges in the C & I portfolio, or the kinds of charges on some of the other loans that are in our portfolio.

But all of those charges combined will ultimately be substantially lower than the charges that would be experienced by a bank of our size.

So the ability for us to carry those losses is significantly higher than the ability of another bank to carry the losses that are being generated in their portfolio.

Okay.

Is the bar or -- the tenants in the rent-controlled, I understand.

What about the health of your borrowers and if they get in trouble, do you just foreclose and then you -- there's a ready buyer waiting?

Yes.

I think the interesting thing is, since we have a niche of very successful long-term builders of value in real estate, we have a lot of people that understand value and understand how to make, what in the hands of one person is a losing proposition, a winning proposition over time.

So I think that the good news will be that as we proceed through the cycle, we should increasingly distinguish ourselves against the marketplace by what we successfully accomplish.

Okay, ergo the potentially higher NPL but low--

That's right.

That's right.

Yes.

I think that when you go back and look, you'll see, as you rightly pointed out, there have been times when our non-performing loans moved up dramatically, but, over the course of months and quarters, our actual losses have consistently been de minimis.

And any comment on the CRE portfolio that will make that--

No.

There's nothing about that portfolio that is in any way indicative of being at greater risk.

Our greatest risk, with regard to loans, are those loans that are in C&I or in construction or otherwise the loans that are at greater risk because they're more vulnerable to a changing evolving cycle such as we're in.

Okay.

And any comment on the borrowing side, on the deposit market, and then the -- all the sort of media that the Federal Home Loan Banks are getting now.

Do you have a view on the health of the New York FHLB and their ability to continue to lend to you at favorable rates?

I'd say that the -- in the first instance, there is absolutely no question that the Federal Home Loan Bank system is in fact the liquidity source of banking, and the Federal Home Loan Bank system has appropriate credibility and support of government, because you cannot let the Federal Home Loan Bank system follow Fannie and Freddie.

The Federal Home Loan Bank system lends its money to banks and banks lend their money to everybody in the marketplace.

So, it is a crucial component of stability in this market.

So there will be appropriate, if needed, intervention to deal with any issue that might arise with regard to the Federal Home Loan Bank system.

I have full confidence that the people who make our decisions recognize this reality, and, therefore, the Federal Home Loan Bank systems will be available to provide liquidity to banking.

The last thing we need is a loss of liquidity.

Given all of the other things that have impacted the financial sector, the Federal Home Loan Bank system needs to be continued, and recognize that as is the case with all the largest entities in the country, the accounting rules are, in fact, having the most significant impact on the loss of capitalization and the representation of ongoing losses.

Those accounting rules, in fact, are currently under review for change.

There is no escaping the fact that accounting is supposed to reflect an ongoing business.

It's not supposed to be liquidation accounting and destroying ongoing business.

There is no escaping that, in this year, the people who need to make decisions will have to deal with this issue.

Yes, and on the deposit competition, if you just want to make a comment?

I think the good news there, the deposit competition periodically is irrational.

Some of the players get a little over zealous in what they'vere willing to pay, and then they fade away again or fade back into the norms.

Interest rates on deposits are much too high today, given where the Fed is, given where, in fact, U.S.

Treasury is.

People often take money out of the bank and they buy U.S.

Treasuries.

The differential is huge.

Banks are paying substantially more than a person could get on a U.S.

Treasury, and, for those banks that are well-capitalized and operating with a good balance sheet, there is absolute safety.

The performance of a deposit is significantly greater than the performance of most equity investments, so I think that we're going to see plenty of liquidity in the deposit markets.

Thank you.

Thank you.

We'll take our next question from Matthew Kelley from Sterne, Agee.

Morning, Matt.

Hi.

Hey, Matt.

How much of the $54 million sequential increase in non-performing loans was in your core multi-family product?

A fairly sizeable amount, but as I said to you a moment ago, we're really not going to discuss specific loans or specific categories.

The main reason being, as I've indicated, we have, from time-to-time, and down the road it'll become more relevant, we have from time-to-time a substantial amount of loans that we're actually negotiating, so we don't want to be discussing what are our global position looks like so that people perceive that, "Well, they have an advantage here or an advantage there." The good news is that we have every confidence that the business model that we, in fact, have in place is going to perform extremely well, and even though the numbers from time-to-time will go up, the most relevant thing for an investor is how much are we going to lose based upon the non-performance, and we, in fact, have historically lost substantially less.

Every single time that we've been involved in these things, we've lost substantially less than the marketplace generally would lose.

I guess what people are trying to clarify is did the increase in NPA's match kind of the distribution of the portfolio, I mean 70% of the loans--

No, not at all.

So it's more heavily weighted towards commercial real estate and construction, non-core loans?

As I just said, it obviously is in different places, but as I've said many times, our multi-family product is typically not a product upon which we lose any money.

So if we've had charge-offs, it's probable that those charge-offs are not on multi-family, but I don't want to go into the specifics.

Importantly, in making a decision as to whether or not this is a good investment, a person has to understand whether or not we're going to lose a lot of money.

The answer is, we're not, and we have every confidence in that regard because we have a clear understanding as to where the risks are and how we're going to deal with them.

I think what people are more concerned about, though, is the risks in the $5 billion of construction in commercial real estate, not your core product, in the sense--

I think it's important to recognize that we don't have $5 billion in at-risk assets, as you just suggested.

The commercial products that we have, if you look at the published information that we've put out, our commercial loans have an average life shorter than our multi-family loan book.

Our commercial loans have an average LTV lower than our multi-family book.

Our commercial loans are primarily multi-family loans.

Even though we have other loans in there, we have a significant amount of money that is retail on the first floor and multi-family on the next 10 or 15 floors, and, therefore, the stability of that particular loan is significantly greater than a commercial loan.

If you look at anybody else's commercial loan book, they write loans to match their leases over a 15-year period, a 20-year period.

Our loans have a 3.3 average life.

So our commercial loan book is, in fact, a very short book, because it's mostly multi-family which has the same attributes.

The loans are structured identical to multi-family loans.

So our commercial loan book is very, very, very much like our multi-family loan book.

Okay.

Just a question on your securities portfolio.

I know that in the held-to-maturity bucket, which obviously isn't running through your equity, at the end of the Third Quarter you had about $393 million in the other debt securities and, if I recall previous conversations, that's mostly kind of the senior debt type positions in large banks.

Wondering how that performed.

It was marked at $0.85 on the dollar in the third quarter.

What's that mark going to look like in the fourth quarter in that held-to-maturity bucket?

Matt, nothing's really changed as far as add to the portfolio.

Obviously 90% of the entire portfolio is GSE.

We haven't made any additions probably -- in probably over a year in anything but governments.

You're looking at the same portfolio.

We're very confident that these are good credits, long term and they're held to maturity and they're not going to the equity statements.

Okay, but you don't think there's any potential of OTTI on those securities and other debt securities in your call report?

As of 12-31, we took our OTTI, and it's the same that we dealt within the past three quarters.

Look, we were a little bit early on those particular issues.

I think a lot of the local competitors have similar instructions.

Dealt with them in 12-32.

We dealt with ours in June 30, '08.

So, it's -- we're down to hopefully the last of it, we're down, I believe, I said previously, approximately $18 million left in the pools.

$3 million left in income, though.

It's -- that's what we believe the risk is in the portfolio and we're hoping to see this come back in time, but we were on it a few quarters ahead and it's down to pretty much a de minimis number.

Right, now, I know that your TruPS positions are pretty low in the pools and the income notes of $21 million, but I'm referring to the $334 million that I thought was--

We haven't wrote down the Wells Fargo paper yet, no.

Okay.

And the bottom line, we have a lot of credits, we have other credits, but 90% of our entire portfolio is GSE.

Right.

So going back to our previous point, we're not adding to it.

We're dealing with the credits.

We did our OTTI testing.

This is what we have.

It's been the same issues quarter after quarter and we're coming down to almost a zero balance on those particular ones that we've been addressing, and we're comfortable now with our computations at year-end.

Okay, and just to confirm one other number from earlier in the call, what is the 30 to 89-day past due number?

It was approximately $100 million.

Okay.

Thank you.

Our next question today comes from David, excuse me, Darst from FTN.

Good morning.

Good morning.

Could you give us an idea of the extent that you've relied on the Broker Network to actually sell loans from your criticized list and--

We don't sell loans in the Broker Network.

We typically portfolio everything that we originate.

The only loans that never get to our portfolio are the consumer loans, our house loans that are issued through our PHAs, and we take no risk in those loans.

We just collect a fee in the process.

Okay, but I'm referring to loans from the portfolio that are maybe on your watch list or criticized list.

Yes, we haven't, oh, oh, oh, oh.

Before they become non-performing.

David, we haven't sold any loans.

Typically, they work themselves out.

Obviously, this market is very illliquid in respect of moving paper quickly.

We'll work through it.

We're very confident having deep LTVs.

As you can see, the level of charge-offs were very de minimis compared to the industry.

We did provide $5.6 million versus the $3.4 million we charged-off at the quarter.

Okay, and then do you expect a lower pipeline to translate into lower originations or lower growth in the first quarter?

No.

Actually, we're expecting ultimately the pipeline is going to build and may very well result, in 2009, being the best origination year since we've been a public Company, and I guess the best originations we ever had was about $6.5 billion or $6.7 billion.

Okay, so we should see considerable growth of prepayments?

We do expect--

Yes, David, it's Tom.

What you're seeing right now is a lack of prepayment activity.

So you have a higher average balance of the portfolio, but, most importantly, the major competitors have exited the space.

Last year was a conduit of business.

Now it's the large competitors.

You have an exit of Washington Mutual.

You have the exit, more or less, of Fannie Mae, and you have an exit of the old Independence Group.

There are a tremendous amount of opportunity in front of us here and what's interesting for us as a Company, we went to 150 over to almost 500 over in spread, and funding costs, we believe, will get lower.

So we're enjoying a very good opportunity to grow the portfolio back at historical high spreads and ultimately we'll see the prepayment activity.

All barring none, no prepayment activity happens, you still have a 550 average coupon in the portfolio.

So, if worst case scenario, people decide to roll, we're going to hold the asset yields.

We believe prepayment penalty activity will pick up as customers have to make a choice.

They can't delay forever.

They have to make a choice and that's something that we're looking forward to in 2009 and 2010.

Okay, thanks.

Our next question is from Rick Weiss from Janney.

Morning, Rick.

Morning.

Actually most of my questions have been answered.

Just let me ask something on housekeeping, I guess.

Do your multi-family loan originations, say it was $854 million this quarter, does that include refies?

Yes.

Okay, and, I guess, second, would -- nobody's talked about M&A opportunities yet, so I'll bring that up.

Like would you guys consider doing a deal now or is the environment just too harsh, too much uncertainty?

I think, as we've said many times, Rick, we are always interested in growing franchise, getting deposits.

We are very averse to taking on the risks that are represented by the asset pool of any bank.

So, the good news for us is that we don't have to do a deal, but should there be an opportunity to get a good deposit base without the assets, we'll be glad to do so.

Okay, also, I'm not clear.

If you were to buy somebody that was a participant in the TARP program, would that mean that therefore you become a participant?

Rick, it's Tom.

We did some research and it, obviously, they're changing the rules by the hour.

However, we believe there is some latitude to issue Tier 1 instruments, such as common or the like, to cure the government's position.

On the warrant side, that's another topic.

You're probably going to be stuck, most likely, with the warrant long-term, but I believe the underlying regulations will not carryover if you're buying someone with a TARP investment.

As long as you cure the top instrument, and typically it's a class of stock so when you're buying a Company you want to secure a class of stock, and that the first stock position will be cured.

Rick, there's also the opportunity, as we did with, Doral to buy branches without buying a bank.

If you don't buy the bank, you don't buy the TARP.

Okay, so it's -- basically things will be pretty flexible going forward?

That's right.

There are going to be circumstances where we just step away, because either the mix of the assets or the complications surrounding the TARP just make it an unattractive deal, and there will be other circumstances where there will be an opportunity to get a good franchise and mitigate the losses with regard to the assets because of either regulatory or other participation in the market to take those assets.

Rick, I think what hasn't changed is there was very little liquidity in other readily-available trading securities in respect to loans.

I mean, if you look at home equity loans, other types of securities, other types of loan securities that we wouldn't want to have on our books, it's not an easy transaction itself.

You would have to mark them to market, which is more than exit-price marking in this environment, which will hurt capital.

So that's part of the dilemma you have doing deals in this environment.

Okay, and just to kind of -- it looked like your NOW and money-market accounts on a quarterly basis increased pretty nicely.

The market is a rich place for deposits.

There's no question that people that had money either in treasuries or in some sort of an equity are putting their money back into banks.

Is it anything that especially you guys are doing in terms of advertising?

No.

We're not being at all aggressive here.

I mean, Rick, bear in mind, there has been a lot of consolidation in our market, with WaMu leaving the space and others.

Okay and thank you very much

All right, Rick.

And we'll take a question from Gary Gordon from Portales Partners.

Okay, thanks.

I've got a follow-up on lending.

Your prepayment penalty fees were quite low, suggesting the turnover in your bar portfolio is very low, yet you're getting good volume of new business.

I'm trying to figure out what is the character of these new buyers.

In this market, who's buying properties or refi'ing?

Well, I think, in many cases, we're not getting new buys.

We're getting refies from other portfolios.

The point you're touching on is something we talked about a little earlier.

A lot of the traditional lenders within our niche are keeping their properties and not necessarily buying new properties, but, having said that, some of our largest relationships have substantially greater sums of money elsewhere.

So there is a huge pool for us to draw from that includes exactly the very traditional product that we like to lend upon that is in the portfolio of somebody else and that will be coming to us.

So we're not talking here about a great deal of new acquisitions.

We're talking about getting share from the existing market.

And there's people who are refi'ing for a lower rate or cashing out?

No, no, no.

In many cases they are refi'ing because, remember, our average life is less than four years.

Our loans run between three and four years, and the reason they're that short is because the people who actually borrow from us have a business model of their own.

They have a rational expectation that they're going to improve their cash flow, their rent roll, in a short period of time and they refinance that improvement every three to four years.

Okay, thanks.

On other is--

You're welcome.

--the debt repurchase, what type of debt did you repurchase?

Preferred.

Okay, thank you.

You're welcome.

Moving on, we'll hear from Maclovio Pina from Morningstar Equity.

Good morning.

Good morning guys.

Morning.

Most of my questions have been answered, but there's still this lingering one on your tangible common equity ratio.

It seems a tad low at 5.66, coming down from 5.8 a year ago, so do you have any estimate on how long--

I think the big change for the quarter was the pension.

I mean, obviously, if you have a pension plan, we were substantially overfunded as of last year.

When you do a year-over-year comparison, the market collapsed.

Therefore, anybody with a pension has to book on the FAS 158 the adjustment to the marketplace and adjustment to all pensions has taken substantial declines in value.

Now that doesn't go through earnings, but it does go through capital.

We hope to get that back over time, but there's a significant reduction in all pension value of assets.

That's going to also impact the going-forward earnings in respect to expenses, but we believe we can mitigate some of that by funding the plan in 2009.

This is an accounting adjustment you have to take.

It does reflect book value.

It was a big adjustment for the quarter, unlike some very similar to many (inaudible) that had very large pension plans.

This is not a Company-specific issue.

This is an industry trend that you will see if you have a pension plan.

That was a big change for the quarter.

Okay, understood.

So you're comfortable with it then?

I think the number was about $50 million.

Yes.

Big swing.

Okay, good.

Thanks.

You're welcome.

And we'll take a question from Tony Davis from Stifel, Nicolaus.

Good morning, Joe, Tom.

Hey, Tony, I was wondering if you were still out there.

No, yes, I just was waiting in queue here.

I wonder if you got the 30, 89-day number as of September, Tom.

You mentioned it's about $100 million right now.

I gave it three times.

I'll give it for the fourth time.

$100 million, oh, but September was -- I think was around $60 million.

$60 million?

Approximately.

Okay, okay.

Joe, what percentage of the mortgage -- of the commercial mortgage book is actually mixed multi-family?

It's very hard to know the exact percentage.

What I would say to you is when you look at the metrics of the two portfolios, multi-family and commercial, and you realize that our actual, and these statistics are in our published data, the actual performance of our commercial book looks very much like, if not more so, like our multi-family book.

So the average life is 3.3 years.

The LTVs are about 55%, 56%.

You don't have a commercial portfolio that would have average numbers like that.

So, if we have some commercial product and some multi-family product and the entire portfolio, when combined, has averages that low, I think you have to assume that a very large percentage of that is, in fact, multi-family.

Can you talk about, in this environment, what you're seeing in terms of customer refi retention?

I think it's startling.

It's up actually.

I know it.

I would imagine it would be.

Can you give us some sense of how much it's up?

Yes, it's probably tripled in the past two quarters and we're still not where we need to be.

We're going to be, hopefully, over time, back to the 85% to 90% level, as there was less choices out there for our customers, and I want to reiterate.

We have a 5.5% average coupon in the book remaining, and there's a significant amount of refi that has to take place.

They need to make a choice.

The choice could be roll us and pay a point, or refi and take more dollars if they've improved the cash flows.

So we're in a very unique position here to hold yield at a very nice level in this environment.

So we plan to see good activity going forward and, in light of the long-term issue of the Company, we expect to retain substantial amount of that business.

Okay.

And, Tony, given that there's significant players have that exited the space--

Yes.

--we're in a very unique point now in our public life.

We're going to see good portfolio growth at much higher spreads and if you look back two years ago, it will come as 150 over.

This has been a very exciting time for the Company to put on very good quality assets.

If the tide is down, Tom, then we're looking at probably $5 billion or so in loans coming up for contractual maturity this year and about 90% roll to the CD book?

The CDs are always relatively short.

You're going to have consistent roll on CDs.

We still have high coupons in the portfolio.

You'll still see drop in funding cost.

Obviously much less of a drop, because I know there's been a significant change in the past six months.

What we're very excited about the funding market is that about two or three months ago, there were many irrational players in the industry.

A lot of those irrational players have been either wiped out.

They've been closed and/or consolidated into more rational players.

So we have an opportunity to see much lower funding costs.

We have an opportunity to see probably more towards the 40%, 45% roll in the portfolio over the next 18 months and consistent with what we've been saying at a very low coupon that's available for us to capitalize on.

So the interesting phenomenon now is they're not going to get that spread off the five-year treasury and it's not going to be an attractive alternative for them right now.

So they have to make a choice.

That's posing somewhat of a delay for them to make a decision.

All bearing, they have to make a decision when they roll.

Finally, M&A, I guess, just simply some comments, Joe, about the realistic possibility of end-market acquisitions near term and then the question of how far afield geographically are you willing to go to acquire--

I think the point to recognize is that we've demonstrated over the course of many years that we both have patience and that we prudently look at all opportunities that arise.

There is no question that we could've done many many deals in the last 15, 18 months, and there's no question that there are going to be even more deals to consider the period in front of us.

The criteria for us to do a deal is driven by our expectation that we will create a better bank.

Asset risk is not something that we're willing to tolerate in this market.

So that means that we will step aside on deals where we cannot get comfortable that we can deal with reasonably the risk to the asset portfolio.

Okay, thanks, guys.

And that's all the time we have for questions today.

Mr.

Ficarola, I'll turn the conference back over to you.

Excuse me, Ficalora.

Thank you.

On behalf of our Board and Management Team, I thank you for the opportunity to discuss our fourth quarter 2008 performance and the many accomplishments we achieved in the last three months.

The substantial growth of our GAAP cash and operating earnings, the significant expansion of our net interest margin as loan production increased and our cost of funds declined, the improvement in our efficiency as our net interest income increased, the comparative quality of our assets during a time of unprecedented economic decline, and our continued position of capital strength.

Thank you all.

That does conclude our conference call today.

Thank you all for your participation.