Flagstar Financial Inc (NYCB) 2009 Q3 法說會逐字稿

Good day, everyone.

Welcome to New York Community Bancorp third quarter 2009 earnings conference call.

Today's call is being recorded.

At this time, all participants have been placed in a listen only mode.

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

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 third quarter 2009 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 today is 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 these factors are economic conditions and trends both nationally and in our local markets, 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, 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 legislation, regulation and policies, including those pertaining to banking, securities and taxation.

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

The release also includes reconciliations of certain GAAP and non-GAAP earnings and capital measures which will be discussed during this 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 Investor Relations portion of our website at 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 everyone.

We appreciate your joining us for this morning's discussion of our third quarter 2009 performance which was highlighted by earnings growth on a GAAP operating and cash earnings basis, the expansion of our margin both linked quarter and year-over-year, higher net interest income fueled by lower funding costs and continued loan production, a linked quarter decline in net charge-offs coupled with an increase in our loan loss provision, and increasingly strong measures of tangible capital.

I'll be glad to take your questions on these topics as well as any other topics pertaining to this quarter's performance following the conclusion of my opening remarks.

To begin I'd like to comment on our GAAP earnings which totaled $98.6 million in the quarter and were 69.8% higher than the year earlier amount.

Along the same lines our diluted GAAP earnings per share rose to $0.28 in the quarter from $0.17 in the third quarter of 2008.

Our operating earnings rose 6.4% during this time to $90.2 million, equivalent to $0.01 increase in diluted earnings per share to $0.26.

This increase in earnings is particularly gratifying given that it occurred despite a sizeable increase in our provision for loan losses and a significant increase in our FDIC insurance premiums.

Importantly, our cash earnings rose 19.4% year-over-year to $114.3 million, equivalent to $0.05 rise in diluted cash earnings per share to $0.33.

Earnings growth was primarily driven by our fundamental business of producing multi-family loans in New York City in accordance with conservative credit standards while managing our funding costs and our operating expenses.

Loan originations exceeded $921 million during the quarter, including $706 million of multi-family and commercial real estate loans.

The average yield on such loans was 5.85% in the quarter, exceeding the average five year CMT by 338 basis points.

Average interest earning assets rose 5.6% year-over-year to $28.8 billion, offsetting the impact of a 25 basis point drop in the average yield to 5.60%.

While average interest bearing liabilities rose 6.5% during this time, the impact was exceeded by a 79 basis point decline in our cost of funds to 2.58%.

Including non-interest bearing accounts, the average cost of deposits declined to 1.31% in the quarter from 2.44% in the third quarter of 2008.

The decline in our cost of funds reflects our ability to capitalize on the steepness of the yield curve by replacing certain higher cost funding with lower cost funds obtained through various facilities.

Reflecting the decline in our funding costs and the growth of our average interest earning assets our net interest income rose 24.5% year-over-year to $226.4 million.

On a linked quarter basis, the increase was 4%.

At 3.17%, our net interest margin was 49 basis points higher than the year earlier measure, and 11 basis points higher than the measure recorded in the second quarter of this year.

The degree of margin expansion achieved to date is especially worth noting, given that it has been constrained by the decline in prepayment penalty income, and by the reversal of interest [on] increasing volume of non-performing loans.

Non-performing assets rose to $475.7 million in the third quarter, and represented 1.45% of total assets.

Non-performing loans accounted for $460.4 million of the total, and represented 2% of total loans at quarter end.

These ratios are still below the highs we saw in the early 1990s, yet indicative of the continuing weakness in the markets we serve.

They also are well below the average asset quality measures being reported for our industry as a whole.

At September 30, 2009, the ratio of non-performing assets to total assets was 3.05% for the SNL Bank & Thrift Index.

Similarly, the ratio of non-performing loans to total loans for the SNL Bank & Thrift Index was a substantially higher 4.13%.

Multi-family loans represented 60% of the non-performing loans at the close of the quarter, a statement in our favor, given the historical difference between the volume of non-performing loans we record and the actual losses we realize in the final disposition of such loans or the underlying properties.

In addition, in contrast to non-performing loans which increased over the quarter, the level of net charge-offs we recorded actually declined.

At $6.4 million, net charge-offs were $2.8 million lower than the trailing quarter level, and represented a mere 0.03% of average loans.

This measure of asset quality was also well below the S & L Bank & Thrift Index average, which was 0.81%.

Among the primary reasons for the differences between our asset quality measures and the average industry measures are our underwriting standards and the loan to value ratios on our multi-family and commercial Real Estate loans.

The average multi-family loan had an LTV of 61% at the end of September, and the average commercial loan had an average of 54%.

In deference to the continued weakness in our market, we increased our loan loss provision to $15 million in the last three months.

As a result, our loan loss allowance totaled $106.7 million at the end of September, more than five times the level of net charge-offs we recorded year-to-date.

We are keenly aware of the importance of asset quality to our overall performance, and are actively engaged in monitoring and managing our loan portfolio.

Our confidence and our ability to manage through credit cycle is also reflected in our continuing dividend policy.

Last night our Board of Directors declared a $0.25 per share dividend for the 23rd consecutive quarter, payable on November 17th to shareholders of record at November 6th.

Reflecting the benefit of our recent bonuses unit exchange as well as the issuance of shares through the direct purchase component of our dividend reinvestment and stock repurchase plan, tangible stockholders equity rose to $1.8 billion at the end of September, while the ratio of tangible equity to tangible assets rose 42 basis points, linked quarter to 6.25%, excluding other comprehensive loss.

Including other comprehensive loss, our tangible equity represented 6.03% of tangible assets representing a linked quarter increase of 44 basis points.

Before ending my prepared remarks and opening up for questions, I would like to add a comment on the improvement in our operating efficiency.

Our operating efficiency ratio was 35.85% in the current third quarter, a year-over-year improvement of 216 basis points.

This improvement was achieved despite the increase in FDIC insurance premiums which are at $34.7 million higher than last years nine month charge.

Our efficiency is likely to improve in the quarters before us as the conversion of our community and commercial banks to a single data processing system enables us to further reduce our overhead costs.

In closing, while economic stability will likely take several more quarters, we continue to be positive about our current performance and our prospects for the quarters ahead.

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

As always, we will do our best to get to everybody in a timely manner.

In the event that your question doesn't get a chance to be asked, we will be available later today and certainly over the week.

And now, the first question, please?

The floor is now open for questions.

(Operator Instructions).

Our first question comes from Rick Weiss with Janney.

Good morning.

Good morning, Rick, how are you?

Good.

Let me ask the question regarding the net interest margin and what do you see going forward?

Rick, it's Tom.

Hi, Tom.

Actually we've been experiencing very nice results regarding the reduction of our funding costs throughout the year and that's been driving the margin obviously up.

And we continue to experience that.

We believe we'll continue to experience that going forward, so we're still expecting to see margin expansion driven predominantly by funding cost reductions.

We're waiting to have the benefit on the asset side that has not happened for a number of factors.

Obviously rates are much lower and more importantly, the level of NPAs that come on have the reversal of interest income that comes off the P & L.

So that's obviously impacting the asset side but with that being said, we still envision additional margin expansion here.

Okay, and I'm sorry, I have to ask one follow-up, with the prepayment penalties and fees, where do you see that going?

It's been insignificant, so obviously for the third quarter was very small, slightly up a bit off of Q2 but the numbers have been dismal.

Rick, it's reasonable to assume that prepayment penalties will increase in the quarters ahead.

We are virtually three quarters in a row at extremely low levels.

Even though this quarter, the third quarter, is the best for the year, these numbers are still extremely low and likely to rise in the quarters ahead.

Okay, thank you very much.

You're welcome.

Thank you.

Our next question comes from Thomas Alonso with FPK.

Good morning, Tom.

Good morning, guys.

Just real quickly, I'm kind of following up on that prior question, do you have a dollar amount of either CDs or liabilities that are going to be repricing in the Fourth Quarter and maybe into the first half of next year?

Actually, I think we have that in the release.

(multiple speakers) The 12 month CD repricing is in the release.

Okay, and then sort of just on sort of what's going on in the market with the J51 stuff, do you guys, have you sort of -- I assume you've looked at that.

Do you have any thoughts about the potential impact?

Obviously our people have taken a close look at our portfolios.

Fundamentally, we are a rent controlled rent stabilized lender on cash flows that are well below market.

The two relevant triggers here are income triggers and also rentals above $2000, and those incidents are comparatively very very low in our portfolios, so we constantly are refinancing and our portfolios continue to include rent controlled units well below those levels.

Okay, and just any bigger picture thoughts on how this might impact the market in general?

I'd say that it depends on the property.

Properties that are mature in their process of going to market or closer to market will have a far larger impact than other properties in the market.

This market is filled with lots of property that has no impact at all from this kind of a change.

And obviously, the Amicus brief that was filed by the rent controlled Board suggested that there was no breach in their mind of the J51 and their authority to authorize rent changes, so there may very well be additional actions.

Certainly in any other building an action would have to occur and the facts and circumstances case-by-case may somewhat differ.

So I think that this is certainly a big deal from the standpoint of discussing a potential change, but it is not likely to be a big deal to our cash flows and importantly, when you look at this marketplace, there are many many lenders on multi-family buildings that are very different than we are, and those lenders are going to have a bigger impact as they do when the cycle turns than we will have.

And Tom, I would add I would just focus mainly on the Manhattan market here because obviously rents are much higher than the outer boroughs.

Terrific.

Thanks, guys.

Thank you.

Our next question comes from Mark Fitzgibbon with Sandler O'Neill.

Good morning guys.

Actually this is [Alex Twordal].

I was just wondering if you could give us an update on your M & A front and your views towards FDIC assisted deals versus a regular deal in your market?

The good news is that we've kind of been preparing for this since 1993 and the inevitable evolution of the cycle is increasing rather rapidly the number of opportunities that are out there to be considered, so we definitely have a keen interest in doing a well-structured deal with the regulator and we believe it will be highly beneficial to our shareholders and our bank as a whole to effectively do that.

How far outside of your footprint would be willing to --

I think the important thing for us and this is consistent in our business model, we're not driven by the obtaining of assets.

We're driven by funding so as to focus on the lending that we're expecting to gain share of in the New York market.

So in this market as in every cycle, we will do more lending as the market deteriorates, we will do more lending under better terms down the road, so we are desirous of getting the deposit franchise.

There is very little risk in the deposit franchise, and certainly we've demonstrated by our efficiencies that we can combine a banking operation very effectively.

So whether it's South Jersey or South Florida or Southern California, the running of the franchise for us because we use the local people, we continue the local franchise and we lend in that market to the customers through conduits and we have already lined up the necessary conduits.

On the asset side we won't be selling the assets but the cash flows from those assets will be considerable and the cash flows from those assets will ultimately support the growth in our in-market New York market loan growth.

And at the same time, there is a significant mitigation of risk, so the loss share component is a very strong positive in any relationship.

Great.

Thank you.

You're welcome.

Thank you.

Our next question comes from Andrew Wessel with JPMorgan.

Good morning.

Yes, good morning.

Just a quick question on the NPLs.

Is it possible for you to kind of give the average size or the range of loan sizes in that total bucket, just trying to figure out if there's anything that's big or lumpy that could be coming.

I'd say that as we said many times, we do very large loans.

A loan going into non-performing could be for any number of reasons and going in and coming out it could make a change, so there could be lumpy movements.

But what is important to recognize is these are not necessarily portfolio trends.

These are more driven by the reality that there are so many individual properties, if a couple of large ones go into non-performing that will change the number in a big way.

When those large ones come back into performing, that will also change the number in a big way.

So I think our portfolio more than others can have statistical change that is sizeable from quarter to quarter without it being indicative of a trend.

That's fair enough, thank you.

You're welcome.

Thank you.

Our next question comes from Matthew Clark with KBW.

Good morning guys.

Can you update us on Co-op City, I think it's up for repricing this quarter.

That's already happened.

That loan has gone up to 6 20 yield to us.

It is obviously an extraordinarily good loan based on the fact that all the metrics in that property today are better than we were when we did the loan five years ago.

They have online now their new power plant and that power plant of course reduces the costs to the tenants, not just to buy their heat, their electricity and their air conditioning but also it reduces their overall cost of carry, so it's a very positive component and although it came later than expected, meaning that there were delays in getting it online, it is now online.

Okay and I guess that's about 100 basis point pick up in yield?

That's right.

Yes, about that.

Along the lines of Co-op City and really, for the rest of your portfolio, do you guys update all of your appraisals upon renewal so as your credits renew--

Whenever a property is going to be renewed, we do a whole new appraisal.

So we refinance -- during the worst of times, we refinance a large portion of our portfolio.

During the best of times we refinance a small portion of our portfolio, because in the worst of times you have the worst loans being made, and there are many examples of this throughout the New York market where way too many dollars were lent on properties by others.

So in 2006 and 2007, we were refinancing in the 30 odd percent of our portfolio and in the depth of the cycle, back in 1991, 1992, we were refinancing 91-92% of our portfolio, so we will see a increasing likelihood that we will be refinancing larger shares of our portfolio and we'll also see our presence in financing the trades or the refinanceable assets from the portfolios of let's say what used to be North Fork, what used to be Independence, a lot of those loans were probably refinanced through us.

And what's your experience been I guess in the last -- call it 12 to 18 months when you've gotten these updated appraisals and could you argue that -- are you seeing kind of reductions in values and could you argue for--

Well (multiple speakers) there's no question that the appraisals of this market are going down.

Our appraisals are far less vulnerable to that because we do cash flow lending, whereas many of our peers -- to give you an example, in the case of Riverton, we had that in our portfolio at $11 million.

The last appraisals that were done on that carried a loan for 250, and that has a mezzanine piece of 25 and a $225 million loan.

Many many loans that were in our portfolio that were at much much lower levels than the market was willing to lend were fully appraised by us, so we're not seeing dramatic differences in our appraisals.

Okay and then the Co-op City credit was that still about $480 million?

Yes, 480, I think we're just about at that level today.

By the way that credit transition -- that was one of those loans where we were adding to the loan over time as a result of improvements that were being made to the property, so hundreds of millions of dollars in the five years that have passed have been spent improving that property including putting in place the new Electric plant.

Okay, great.

And then maybe just one quick one, Tom.

Could you just update us on your positioning for rising rates?

I guess as far as position for rising rates, we're positioned in respect to the funding side where most of our liabilities have been within between the six to 18 month position and a lot of customers are looking to go into that one year to 18 months so we are seeing some customers move out a little bit on the CD front.

We have the flexibility of locking in on the funding side and wholesale very attractive levels in the event that rates do rise but I'd say we have about maybe $1 billion to $1.8 billion of short-term financing that's tied to wholesale excluding CDs.

Okay.

Thank you.

You're welcome.

Thank you.

Our next question comes from Ken Zerbe with Morgan Stanley.

Good, thanks.

My question is on loan growth and competition.

Looks like loan growth is still positive but slowing the last couple quarters versus where it's been in the past.

You made the comment that you'd expect to see stronger loan growth in weaker times and I would certainly argue now is a weaker time.

Maybe just comment on why loan growth has slowed recently.

Is it driven by capital or is it driven by your outlook for acquisitions that you just want to hold of for now?

I think it's driven by a couple of the unique aspects of the moment in time.

We're at a period here where people that actually have properties and have cash flow availability are not drawing on that cash flow because they aren't buying properties.

Despite the fact that many properties have defaulted, a default in a structured debt instrument takes much longer to ultimately resolve, so the remarketing of that property will take longer, so many people are waiting for real estate to come to the market at pricing that they would be willing to buy.

The actual trades in real estate year-to-date are at historical lows.

In other words, people are not buying properties.

People are not selling properties.

Obviously in a circumstance where you're going through this kind of transition, the sellers are reluctant to sell at the property values offered and the buyers are offering much lower prices with the expectation that prices are only going to go down.

So we're in a transition period here.

There will be a period down the road where properties will not be sold by the owners, they will be sold by their bank because they will be sold by the regulator and those sales are always faster and at lower pricing.

We also have a seasonality aspect to our business model, typically the third quarter is the slowest quarter of the year and it picks up dramatically in Q4 so the holidays kick in, the ethnic holidays as a result of the end of September.

Okay.

That's been the history of the bank.

Great, and then just in terms of the competition has that picked up at all?

No, none of the really large competitors that are focused on our niche are aggressively in our niche today.

The only entity that has been lending and this has been very erratic over the course of the year, recognizing that Fannie Mae and Freddie Mac are in receivership, they're going through some gyrations over there that will decide how they're going to be allocating their funding.

They are today actively in the market at below market-rates but I don't know how long that will last.

The reality is that the marketplace has many new participants, small trade type participants and there's going to be activity that is going to be at the margin.

The real activity pick up will come when property owners or whoever replaces them is in the market selling, and that has to be after settlement of what are complex structures, many of the properties that were sold in the New York market and elsewhere through structured debt will result in complex foreclosures which will take time.

Okay, thank you.

Okay.

Thank you.

Our next question comes from Bob Ramsey with FBR Capital Markets.

Good morning Bob.

Good morning guys.

Could you give me a little more color on the direct stock purchase plan that you all used this quarter to raise 65 million, maybe how it works, why you decided to use it now, when you've used it in the past, just a little background?

Bob, its Tom.

Basically this has been put in place -- I think it's about a year and a half now where we actually put in place.

The maximum authorized I believe is 15 million shares total of which -- we used it in the third quarter, more as a rationale towards looking at the capital levels from 5% to 6%.

We've been very public, Joe and I about TCE levels at approximately 6%.

That's been the focus given the climb in the common marketplace as well as the opportunities on regulatory deals that we're seeing, so having a little extra capital right now in this environment is not a terrible thing and we've always looked at the 5% level as a reasonable level for our franchise for TCE and we bumped it up to 6%.

Okay, that's helpful.

And then do you anticipate using it further as you go forward, you got a little more capacity there or as long as the TCE is over 6% you plan to stay put.

Depending on market conditions -- as I said, there's a lot of activity on the deal front.

I think Joe alluded to that earlier in the call, we're seeing a lot of opportunities and having capital is key for some of these regulatory deals.

There's no question that in the event that we do a large deal, we will go to the market and raise a lot of capital and there are many many investors that have indicated a strong desire to be involved in our issuance of capital on a highly accretive basis, so there's a good likelihood in a deal we will raise capital.

Okay, and then if I could ask just one more.

You all mentioned that you had a large multifamily property in New Jersey that you foreclosed on this quarter.

Could you just talk about did you have to take any charge on that?

Was the loan to value when you ordered the new appraisal down how much or flat from when--

No, the bad news is that we had to foreclose on the property.

The good news is it was underwritten such that we don't have -- even with the new appraisals we don't have any immediate charges.

That property is literally being improved as we speak and exactly how it moves, I do not know at this moment but there's definitely an opportunity there in that cash flow to carry the property and to either sell it or otherwise be in a position to avoid having any meaningful losses there.

And is there a material increase in the number of foreclosures you all are initiating just given market trends?

I think we are always a very aggressive lender, so we initiate foreclosures based upon our non-performing so when our non-performing goes up our foreclosure actions go up, but the foreclosure is never the ideal way for us to resolve issues in our portfolio, so in many cases, we negotiate directly with the party either they or working through a plan where they are going to make that property whole or we in fact sell that loan to somebody else or we in fact ultimately sell the property or they sell the property.

So the likelihood of loss as the numbers actually demonstrate -- over long periods of time, we have very little loss in our portfolio because the actual capacity of the property to carry our loan is there.

Okay, thank you very much.

You're quite welcome.

Thank you.

Our next question comes from Ken Bruce with Banc of America.

Good morning Joe and Tom.

I would like for you to expand a little on the lack of exposure to the J51 court decision.

I assume that you are lending on properties that benefit from that tax benefit and is it that the properties you're lending on are not going through this market-rate conversion that basically is kind of the real hot button here or what is it that--

Let me start from the beginning.

J51 doesn't exist on every property in the market.

When we do property lending, we do not lend with the benefits from a J51 calculated into our financials, so properties that have J51s may with more aggressive lenders have more relevance and they get more dollars from other lenders so we don't necessarily have any large share of them.

Secondly, the decision that was made here was that in the literal reading of the law, the court decided that you would not be able to raise rents in a situation where there was a tax favored status on the property.

The rent control board did not agree with that, so obviously, as we go down the road there will have to be any number of other actions taken in order for anyone to get any benefit from the interpretation.

Now, with our particular portfolio, we in fact are consistently lending to people who have long term views of how they're going to keep their property and improve their property.

If you go over long periods of time, the bulk of our properties are eligible to stay in our portfolio mainly because they are not moving their cash flows over $2000 a month in rentals and mainly because they are not buildings that would be eligible for tenants that would be earning over $175,000 a year.

So those two classes, that's what's covered by the lawsuit.

We don't have a have a lot of that and therefore, when we look at our portfolios we do not believe that we have any significant impact from this decision.

I would also add bear in mind that going back to the Manhattan issue, this is predominantly in our opinion a Manhattan issue and our loan portfolio has approximately 27% of our multifamily loans that are in Manhattan with an average balance of $4 million.

So given the value of $4 million property in Manhattan versus having a de-controlled property which will be worth significantly higher than that we feel pretty confident this is driven towards obviously the much larger properties.

And I think it will be more transparent in some of these conduit loans that are out there in the CMBS market.

Again the distinction between who the lenders are in the market is going to be very clear with regard to J51.

In the case of the J51 decision, it's going to impact dramatically many of the Stuyvesant Town, where this action was taken.

I mean just consider that that property had been in the Met Life portfolio for decades and they sold it for $5.4 billion.

The property was probably never worth more than maybe $2 billion and God knows what it's worth today.

That's a major change in valuation, but that has nothing to do with the fundamental cash flows of the property or the fundamental cash flows of properties throughout the city.

They did not change as a result of the decision of some parties to lend extravagant amounts.

Every single cycle, lenders overlend at the back end of the positive cycle, so the marketplace is going to have a lot of loss, but as has been the case for the last 30 years, we've not had any loss in our niche.

And that's because our actual property owners are smart, long term holders of properties that they virtually increase slowly the cash flows in over time.

That's why they refinance so short.

Our average life is 3.7 years.

They're refinancing short because they virtually are not overborrowing the first instance, and they are improving their cash flows in short periods of time and it's all within or below the range that we're talking about here.

Okay, thank you, that was helpful and as just a follow-up, could you elaborate on what your out of footprint strategy would be if you were to acquire a deposit franchise say in Southern California?

It's pretty obvious you've got a very strong franchise within the New York market.

I'd like to better understand how you will manage an out of footprint deal.

Sure.

The fundamental reality is that retail banking is in fact run locally.

The people who run our divisions today are all people from those communities, people that have had longstanding relationships with their customers.

We had for example, Southern New Jersey in our portfolio a few years back, and we ran that extremely well.

We sold all their assets, and we in fact ran the franchise and it was a strong growing franchise.

Ultimately we sold it when we acquired the deposit franchise from Roslyn, and we sold it at a great profit.

So the important thing is that running a deposit franchise is not something that we do not have experience in, and certainly running it outside of our market is something we don't have experience in.

So we can do this very effectively and we can do it in any number of markets because the people that will actually be performing within that market are the people from that market.

Thank you and good quarter guys, thank you.

Our next question comes from Thomas Kahn with Kahn Brothers.

Good morning.

I want to congratulate you on the Co-op City loan because I remember when you put it on the books you took a lot of heat.

Yes.

A lot of analysts some of whom are on the call now -- and it certainly has turned out to be a great loan.

So congratulations on that.

Thank you.

Another loan you talked about in the past was the Belnord on 86th and Broadway.

And I wondered since we're talking about multi-family Manhattan loans and those that might go over 2000, was that a J51 deal and would that be one that would fall into that category?

Well let me say with pleasure, we're not in that loan.

Oh, good.

We in fact offered to refinance that loan maybe a couple years ago now and I guess it was JPMorgan, we offered a maximum of 195 and JP offered 325 and I guess it was Credit Suisse did a loan for 375.

Perfect example of what I'm talking about (multiple speakers) overlending --

Got you.

(multiple speakers) One more thing on that.

I sense the decision is essentially one on double dipping that you can't take the J51 and also do the market vacancy de-control.

Right.

I would assume that if I owned a building and I took advantage of J51, I could refund all of the tax benefits I got with interest and get out of J51 and take advantage of vacancy de-control.

In other words I couldn't double dip and have it both ways.

Tom, I've got to tell you, as the period in front of us evolves there are going to be additional lawsuits and decisions and maybe even more clarity in how the rules are written.

But the interpretation of the rent control board, not the landlords was that J51 never prohibited changes in the rental--

I got that, Joe, but the highest quarter--

No, I know that.

They said they were wrong.

Right.

But what I'm saying is the highest court said that the literal language of the law is going to say that it was wrong to do that for the last 18 years.

That doesn't mean that each and every case, this is not the end all case.

Each and every case that would have to be initiated go forward on a property by property basis--

I understand, Joe.

While I'm not a lawyer and this is the deep end of the pool I shouldn't be in, it strikes me that if the whole contention of the highest court in the State is one of double dipping you can dip one or the other but you can't go both ways.

Well I think the point that you're making may very well be part of whatever future litigations may occur.

Right.

I don't want to speak to how people are going to position themselves to deal with this issue in court other than to say that there would need to be specific actions taken property by property with the facts and circumstances in each.

In our circumstance though the important thing is J51 was never used for us to value the particular cash flow so people that had a J51 were more likely to go to a lender who would have given more money as a result of their lesser tax burden.

We never lent that way, so we are not a likely place for J51 loans to exist.

So the good news for us is that this on our portfolio as a whole should have a relatively de minimus effect.

And in many ways just like when you look at the losses being realized in this market over the course of decades the losses realized in this market are not reflective of the losses we realized the impact of J51 to our particular property owners will be less than it is to the market as a whole.

I understand.

Now the last call you walked us through the $50 million I think it was credit where the borrower is not paying because he has problems with other properties and that was extremely helpful.

I wonder if you could, with the increase in the non-performers, perhaps walk us through one or two of the larger increases in the non-performers so we could get a little color on those?

Well, I guess the reality is that in any particular circumstance, whatever the last month reasons why something is occurring may not be the same two months or three months or four months down the road, it's difficult.

We certainly don't want to talk about particular properties especially since they may be going into and out of non-performing, it is compromising to the interest of a owner to have let's say the marketplace aware of the fact that he's selling or he's in the middle of a negotiated deal and for whatever reasons his loan is not current.

The important thing for us to recognize is broadly our properties have substantive values that more than need to cover our existing outstanding balances.

So in other words if I took all of the increase, the delta in non-performers quarter-over-quarter, and I went to an outside appraiser and said I'm going to pay you -- appraise all of these buildings if I knew which ones they were.

What you're saying is given current market appraisals in general we're in good shape with these?

I'd say that's a good statement.

Generally speaking the impact of non-performing is an immediate loss of earnings, so our yield in our existing portfolio of loans is pressured by the amount of money that enters non-performing.

That's maybe three or four months worth of earnings gets reversed, so the money that's coming in is having the worst impact on our earnings.

Once it's there then it's having a monthly impact on our earnings.

Once it comes out we get a kick.

In most cases we wind up getting back the earnings which means that we get back three, four months of earnings.

So at this end of the cycle, non-performing has an immediate impact on earnings and the numbers that you see, our increasing earnings, reflect the substantial increase in our non-performing.

As we go down the road, the non-performing pool depending on how it's disposed of or how these loans go current can actually be a source of increased earnings.

Got you.

Thank you very much, very helpful.

You're quite welcome, Tom.

Thank you.

Our next question comes from [Andy Dinn] with RBC.

Good morning, Joe.

Good morning, Andy.

You guys have done a really good job managing this credit cycle and I'm curious about because it's been almost 20 years since we've gone through something like this, what have you done about your work out process?

In other words, have you been hiring people, who's driving your work out process?

Yes, interestingly, you touch upon a very valid point.

We are a very efficient operating bank and certainly, we've been able to lend at very high volumes without increasing our staff of lenders by very much; however, when you've had zero losses for as many years or as many quarters as we've had specifically in this real estate niche, you don't have teams of people to work on the real estate that inevitably when you go non-performing, there is significant additional work we do, so the greatest increase in staff in this bank has been in the teams of people that are working on these loans and on these assets.

And could I just get clarity on the last question, because you kind of threw me for a loop there.

The loans in non-performing, none of them are paying, so no interest is being accrued.

Well even if they're paying, we don't accrue interest, so sometimes a property winds up where they could pay or we've decided that we'll accept payments.

We have properties for example, in non-performing where we refuse to take a payment if there's a foreclosure action in place, so the important thing to know is on the accounting side, we reverse the prior three months worth of earnings, and we do not recapture that until that loan goes into a performing status that is acceptable.

So the important thing to know is that over the course of long periods of time, each and every other cycle, we've had significant movement in and out of non-performing.

When we have a beginning and we are virtually in the beginning periods of a cycle, when we have a beginning of a cycle we will lose earnings on those assets that go non-performing in a disproportionate manner.

When in fact property by property there is resolution, we very often, not everybody does this, this is not common to most lenders.

Most lenders never get back to any of their earnings.

Most lenders in fact lose substantial amounts of their principal.

But our historical pattern has been that when these loans go back to performing we wind up getting back a substantial amount of the earnings and we of course then have a current performing loan.

So the cycle period that we're in today is causing us to lose earnings.

The cycle period as it evolves will cause us to realize the recapture of some of those earnings.

That's a very positive, nobody ever wants to have non-performing, but if you have non-performing that results in very little loss and you wind up getting recovery of the earnings that you haven't been realizing, that's a good thing.

Okay.

And then just the last thing is, is there any correlation to the increase in non-performing assets and a depletion in that loan's interest rate reserve?

No.

Not typically.

There easily could be a property.

We do not have interest rate reserves on most of our properties, so the headlines, for example, Riverton had a sizeable interest rate reserve that carried the property.

The depletion of that reserve ultimately resulted in the absence of a payment, so the way a loan is underwritten at the get go drives that.

That's not our issue.

Okay, keep up the good work.

Thanks a lot.

Thank you so much, Andy.

Thank you.

Our next question comes from David Hochstim with Buckingham Research.

Good morning.

Good morning David.

Just wondering if you could, I guess following up on Ken's question about J51 and what the impact might be on new business or on property values in the segment of the market that you're in.

Yes.

You're touching upon a very real component of the rest of the market.

As I indicated, we were never a lender that gave value to the J51 tax benefit, which means that we were not the choice lender for a property that had J51, so the likelihood that those properties that already have a J51 in place would refinance with us is much lower than that they would go finance with somebody else, so I think that again, there were many distinctions between our property owners and our portfolio and the rest of the market.

The presence of J51 may be very high in the portfolios of very aggressive lenders, the presence of J51 in our portfolio is much less because we didn't give them value for it so the chances are that guys that were anxious to get the most money they can get would go to somebody else.

So is it reasonable to expect that the segment of the market where you're lending the values might not decline at all?

Absolutely.

-- even though the J51 Market is collapsing?

Yes.

As has been the historical reality.

Our loan book refinances up even in the depths of the cycle because the people that we lend to have been reasonably conservative and they improve their properties such that they've actually improved their rent rolls, but we're talking about going from $800 a month to $1000 a month.

That is well below the $2000 plateau.

And is there any way to quantify or estimate the loans where there is -- in your portfolio where there is some J51 exposure what kind of stress it might place on the borrower?

That would be a very time consuming effort and not likely to have great relevance to us, since we didn't give benefit to the J51, the chances that it would have a meaningful effect in our portfolio is slight.

I think that it's also relevant to look at the average balance size of the Manhattan properties which is around $4 million and we should focus on the Manhattan market because that's where the higher rents would actually occur.

And is that average balance different than in the other boroughs?

Slightly higher, but obviously--

But well below a property that would be relevant to have rentals above $2000 a month.

Right and if a borrower had a problem I guess it's the same old story, your property is secured by the equity?

That's right.

And might just have to work it out?

That's right.

That again is another indication of why our losses over the last 30 years haven't existed in our niche because the properties themselves actually have sufficient values to cover our loan.

I guess finally one last question, just as charge-offs seem to have flattened out this quarter--

Yes, no one could ever say from one quarter to a next what will be happening in a portfolio such as ours.

What I will say to you is that the aberration of the earlier quarter was an extraordinarily different situation for us.

The likelihood that charges could go down is there, but the reality is we could also increase our charges.

If we find that we have properties that are not properly valued in our portfolio, we will charge off the excesses, but those are not likely to be substantial components of our portfolio, as the numbers demonstrate.

So would you expect that you continue to build reserves at the same rate as in this quarter?

I think we're building reserves, we're going to build capital.

Those two factors are by choice.

We're going to build capital as a decision we've made and we're going to build our reserves as a decision we've made.

They aren't driven by, in many cases when you look at other banks, big banks, JPMorgan as an example, they are writing huge amounts of their reserve because they are taking huge amounts out of their reserve and when you consider over the last 12, 18 months how much money we've taken out of our reserve compared to what we've put into our reserve there's a huge difference between us and other banks because the actual loss experience in other portfolios is dramatically higher than the loss experience in our portfolio.

Very little banks that are losing 45, 75 basis points, we lost three basis points, so -- and by the way, a bank that loses 45, 50 basis points is considered doing well and we've lost three.

So I think there is a hypersensitivity understandably because we are in a market that everybody understands is going down in value and there's a lot of headline risk here.

There are very big multi-family properties that are going down in value dramatically.

That's not our portfolio.

That wasn't our portfolio in 1990 or 1991 and the fact is that the headlines drove the market.

When people looked at the New York market with 12% unemployment and massive losses taking banks out of existence, everybody thought multi-family was a high risk asset to be in.

The fact is, we lost nothing in that cycle and we were able to increase our lending during that cycle.

We would expect something very similar in the period ahead of us.

Okay, thanks very much.

You're welcome, David.

Thank you.

Our next question comes from Christopher Nolan with Maxim Group.

Hi.

Thanks for taking my call.

Hi, Chris.

A quick question.

What is the cap rates that you are using for new underwriting and for reappraisal of these non-performing assets?

The cap rates obviously vary by property to property, location to location but they're probably in the 6% to 9% cap rates.

Okay, great and follow-up.

Joe last quarter you spoke about a particular relationship greater than $50 million that was NPA.

This quarter are there any other similarly large singular loans which contribute to the growth of NPAs?

There may be a singular loan.

The only reason and maybe I should not have done it but the only reason we talked about the relationship was because we weren't specifically talking about a given property.

It would not be proper for us to talk about a particular loan especially since the circumstances from one property to another property could be very different.

If somebody is actively negotiating let's say to sell a property it would be wrong for their lender to be openly talking about the status of that property, so we will refrain from talking about a particular property.

We just happen to talk about that one because it was a whole mix of properties wherein we knew that the carry on those properties was very high.

It's kind of like the statistics that recently came out where they looked and they said well there's a very large increase in non-performing house loans where the owner didn't lose their job and their auto loan and their credit card was performing fully.

You know, the reality is that on a case-by-case basis there will be circumstances where a property or even a group of properties go into non-performing and then based on the facts of that particular circumstance, there will be a relatively quick resolution or there could be a longer term resolution and in the case of the mix that I talked about there can be several properties that resolve very quickly and other properties that resolve over longer periods of time.

I think that it's important to recognize that our discussion of the whole portfolio is a relevant thing, not a particular loan or a particular group of loans.

Okay, thank you.

You're welcome, Chris.

Thank you.

Our next question comes from Theodore Kovaleff with Horowitz & Associates.

Hi, Ted, how you doing?

Just fine, thank you.

And I have one question for you with regard to the percentage of your rent stabilized rent controlled mortgages.

Now, I know that a lot of your commercial Real estate is actually also having above the stores some rent controlled rent stabilized et cetera, but on the other hand, you have something like that southern New Jersey holding which clearly wasn't rent controlled rent stabilized.

Those properties are more the exception to what we do rather than the rule for what we do.

That property was a group of two floor units that laid out over a fairly large piece of land.

Okay, but overall, what is the percentage of your assets that are backed by rent controlled, rent stabilized?

Ted, it's Tom Cangemi.

The vast majority of all our multifamily credits are in the five boroughs, so if you look at the five boroughs, that's typically where we would be doing multi-family lending at a discounted rent roll basis because of the rent controlled and rent stabilization laws.

So as I indicated previously, 27% of all of our loans are in Manhattan.

That's approximately $5 billion and that's one borough, and we have a significant presence in Queens and Brooklyn and the Bronx as well.

But I think the number that you're asking for, we've never actually accumulated that number because the reality is there are rent controlled, rent stabilized units, individual apartments and that number can change so we never accumulate and hold that number but when we do the loan, it's an important component of how we decide whether we will lend a dollar or we will lend $1.10.

The important thing for us is that we are below the market in which the loan is being made so if we're doing the loan, we're assessing the actual cash flow of that property against the market that it's in and its relevant capacity to actually hold that cash flow, so that's why so many of our buildings have rent controlled or rent stabilized units within the building.

And we do this as you know every two years, three years, four years because these properties are coming up for revaluation.

Our properties have relatively short appraisal lives because they're relatively short loans.

Our loan book is much shorter than most loan books whether they be multi-family, commercial or otherwise.

Our loan book is short which means the appraisal is far more recent than the appraisal would be on the bulk of the marketplace.

So the exact number of rent controlled rent stabilized we don't have, but the fundamental way in which we lend is on under the market rent rolls that include large percentages of rent controlled, rent stabilized units.

Okay, thank you.

Thank you, Ted.

Thank you.

Our next question comes from Matthew Kelly with Sterne Agee.

Hi guys.

Thanks for taking my questions.

Good morning.

Just getting back to the discussion on cap rates, the 6 to 9% current cap rates -- how does that compare to the original cap rates?

What's that migration been?

Well, again, we're pretty consistent in how we lend so we're not driven by market factors.

When you look at somebody that can lend $100 million more than we can lend, they're using significantly lower cap rates and they're justifying their loan by any number of other gyrations.

That's not us, so looking for change in cap rates, the market will tell you that cap rates have changed dramatically and therefore, properties that were literally the beneficiary of a structured debt loan with a 3% cap rate can't be refinanced, so whether you're looking at the cap rate or you're looking at some other excuse for lending more money than the property was worth, those guys are the ones that are losing the property.

Those guys have defaulted loans, but that's not what you are going to find in our case.

I guess what I was getting at is if your cash flows are stable and clearly they are on the rent regulated type collateral, but your cap rates are up one or 200 basis points, it's a pretty material change in value and I'm just trying to--

You're 100% correct.

But that's not our experience.

In other words, why did we let so much of our own portfolio refinance away from us?

Because people were using lower cap rates, so there is a material change for their loan, but that's not our loan, so we don't have material changes in our cap rates from 2005 to today.

The marketplace is having material changes in cap rates because the excess lenders were using extremely low cap rates.

Okay, so back in the bull market in credit you were using 6 to 9% rates then on the cash flows that you were estimating --?

Again it depends on the property by property.

Okay and just one other question.

What percentage of the multifamily portfolio has interest only features -- you know, for the first couple of years --?

Very very few.

Again, multi-family in New York maybe different.

The distinctions between us and others is in the specifics of the loan that we actually have issued property by property, and those distinctions overall are consistently, we were more conservative in how we lend than other lenders so the marketplace is going to go through massive devaluation, massive losses.

We anticipated that in 1993.

We've been consistent in positioning ourselves so as to sustain our outstanding loan book during a downturning cycle.

We talked about this, Matt, years ago.

You were in many meetings where we talked about how we lend and why we're lending fewer dollars on the same properties that others were lending massive dollars on.

All those reasons are exactly what you're talking about.

You're talking about the fact that there is in this market extreme examples of excess lending.

That's not us.

Okay, could you quantify the percentage with interest only features?

As I say it's not a principal way in which we lend.

You may go to a conduit and then may say interest only is the biggest part of our lending.

That's not us.

Just last question.

Could you quantify just how many loans you have over $25 million and also maybe comment on exposure to Stellar Management and Larry Gluck, I know that's one of the guy sin the marketplace who was pretty active in the space, particularly over-leveraged properties, taking it out of the rent regulated type programs and being aggressive in some of the assumptions, clearly Riverton is an issue and you let that one go smartly but what about projects like Central Park West and other exposure to Gluck?

Well I think the important thing as I've said before we're not likely to talk about specific properties or for that matter specific owners, but be confident that our lending to anyone that may have had in excess loan as the example you pointed to Riverton, we were there and we opted not to do the more excessive loans that ultimately were placed by Northfork and Credit Suisse in that case.

There are many examples of that, Matt, where other lenders have come in and lent substantial amounts of money beyond what we would reasonably do.

What about remaining exposures in the portfolio?

I'd say that at least from our own valuations and discussions with people, we believe we have very very few situations where the property is at risk.

Okay, thank you.

You're welcome, Matt.

Thank you.

That's all the time we have for questions today.

At this time I'd like to turn it back to our speaker, Joseph Ficalora for any closing remarks.

On behalf of our board and management team I thank you for the opportunity to discuss our third quarter 2009 performance.

We look forward to discussing our fourth quarter performance with you in January 2010.

Thank you.

Thank you.

This does conclude today's New York Community Bancorp third quarter 2009 earnings conference call.

Please disconnect your lines at this time and have a wonderful day.