Flagstar Financial Inc (NYCB) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to New York Community Bancorp's third-quarter 2011 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 and Corporate Communications.

Please go ahead.

Thank you.

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

Today's discussion of our third-quarter 2011 earnings will be led by our President and Chief Executive Officer, Joseph Ficalora, together with our Chief Financial Officer, Thomas Cangemi.

Also joining us on the call are Robert Wann, our Chief Operating Officer, and John Pinto, our Chief Accounting Officer.

Certain of our comments will contain forward-looking statements which are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we currently anticipate due to a number of factors, many of which are beyond our control.

Among those factors are -- general economic conditions and trends both nationally and in our local markets; changes in interest rates, which may affect our net income, prepayment penalty income, mortgage banking income, and other future cash flows; or the market value of our assets including our investment securities; changes in deposit flows and in the demand for deposit loans and invested products and other financial services; and changes in legislation, regulation, and policy.

You will find more about the risk factors associated with our forward-looking statements on page 8 of this morning's earnings release and in our SEC filings including our 10-K -- no, I'm sorry, our 2010 annual report on Form 10-K and our first- and second-quarter 2011 10-Qs.

The release also includes reconciliations of certain GAAP and non-GAAP earnings and capital measures which will be discussed 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 us on the Web at ir.myNYCB.com.

To start the discussion I will now turn this call over to Mr.

Ficalora, who will provide a brief overview of our third-quarter performance before opening the line for Q&A.

Mr.

Ficalora?

Thank you, Ilene, and thank you all for joining us this morning as we discuss our third-quarter 2011 performance, which was notable for a variety of reasons, including solid earnings driven in part by increased mortgage banking income and, excluding prepayment penalty income, a stable net interest margin; continued capital strength; meaningful loan growth; improved asset quality; and continued efficiency.

To begin, we reported GAAP earnings of $119.8 million in the current third quarter, which generated a 1.27% return on average tangible assets and a 16.43% return on average tangible stockholders equity.

We also reported operating earnings of $117.1 million in the quarter, which generated returns of 1.25% and 16.08%, respectively.

At $0.27 per diluted share, our third-quarter GAAP earnings were consistent with those reported in the trailing quarter.

Our operating earnings were also equivalent to $0.27 per diluted share, and were a penny higher than those reported in the trailing three-month period.

The modest difference between our GAAP and operating earnings was primarily attributable to net securities gains.

We also reported cash earnings of $130.2 million for the quarter, which contributed $10.5 million more to tangible stockholders equity than our GAAP earnings and were equivalent to $0.30 per diluted share.

Excluding accumulated other comprehensive loss from the calculation, our ratio of adjustable tangible stockholders equity to adjusted tangible assets was 7.92% at quarter end.

Given our earnings capacity and the strength of our capital position, the Board of Directors last night declared our 31st consecutive quarterly cash dividend of $0.25 per share.

The dividend will be paid on the 17th of November to shareholders of record on November 7.

Returning now to the third-quarter performance, I would like to start with the linked-quarter increase in mortgage banking income, which was driven by a significant rise in originations of 1- to 4-family loans for sale.

Over the course of the quarter, mortgage banking income more than doubled to $24.3 million as homeowners took advantage of the substantial decline in residential mortgage interest rates.

While the decline in residential mortgage interest rates had a significant impact on our mortgage banking income, our net interest income and margin were minimally pressured by the linked-quarter decline in market interest rates.

Prepayment penalty income contributed 14 basis points to our net interest margin in the current third quarter, a contrast to 30 basis points in the second quarter of this year.

At 3.33%, our net interest margin was 17 basis points narrower on a linked-quarter basis, with 16 of those basis points stemming from the decline in prepayment penalties.

Hence, excluding prepayment penalty income, the margin declined 1 basis point.

Reflecting third-quarter originations of $1.9 billion and a linked-quarter decline in repayments, our portfolio of noncovered held-for-investment loans rose $638 million linked-quarter to $25.1 million at the end of September, representing an annualized growth rate of 10.4%.

Included in the held-for-investment loans were multifamily loans of $17.3 billion and commercial real estate loans of $6.6 billion, up $215.4 million and $449.9 million, respectively, from the balances recorded at the end of June.

The linked-quarter increase in held-for-investment loans occurred in tandem with a $513.5 million rise in one-to-four family loans held for sale to $1 billion, reflecting the increase in originations, and a $135 million decline in the balance of covered loans to $3.9 billion as such loans were repaid.

We reported a pipeline of approximately $3.8 billion as of this morning, including one-to-four family loans held for sale of approximately $2.3 billion and approximately $1.5 billion of held-for-investment loans.

Another important feature of our third-quarter performance was the improvement in our asset quality at September 30.

At 1.44%, our ratio of nonperforming noncovered loans to total loans is the lowest we have seen since the first quarter of 2009.

In other words, in 10 consecutive quarters -- and well below the peak we recorded at March 31, 2010.

Similarly, loans 30 to 89 days past due fell to a 14-quarter low of $37.8 million, which is $235.2 million below the peak we recorded at December 31, 2009.

Although our real estate owned increased to $102.7 million at the end of September, total delinquencies were down $411.4 million or 42.5% from the peak we recorded at March 31, 2010, to $557.3 million at September 30, 2011.

Also of importance, our net charge-offs fell more than 50% to $13.1 million linked-quarter, and at 0.04% of average loans reflected three-month improvement of 5 basis points.

At a time when economic uncertainty continues to rise and the level of unemployment shows no sign of improving, the improvements in our asset quality over the quarter were certainly gratifying and indicative not only of the care with which we originate loans but also the care with which we manage our delinquencies.

Our other feature worthy of note was the linked-quarter improvement in our operating efficiency ratio.

Though higher than we would like to see, our third-quarter ratio at 41.65% was 56 basis points below the trailing-quarter measure, securing our status as one of the nation's most efficient bank holding companies.

At this time, I would like the operator to open the lines for questions.

As always, we will do our best to get to everybody in the time that remains.

And now the first question, please.

(Operator Instructions) Bob Ramsey, FBR.

Hey, good morning, guys.

I was hoping you could provide a little more breakout on the mortgage banking, sort of split out the servicing versus origination income.

Talk about the gain on sale trends in the quarter, and then maybe talk too to your outlook for this business, particularly as you have got some of the larger banks pulling out of the wholesale mortgage channel; does that create opportunities?

Right.

Hey, Bob, it's Tom.

A couple items.

Obviously, we had a nice bump-up in the overall flow of business given where rates were throughout the quarter.

We did have -- the two major components being mortgage origination and servicing, we break it out.

Net was $24 million.

We had about $30.9 million or approximately $31 million of origination income.

Servicing was at a loss, about $6.6 million.

But net we are $24.2 million.

The net differential clearly had an adjustment to servicing.

So if you back the servicing loss out, the actual mortgage bank income would have been higher.

So obviously going forward into a higher rate environment, we hopefully will see some benefit there and in future quarters.

But obviously rates have changed dramatically since the third quarter, so in respect to overall new business we are thinking about somewhere between Q1, Q2 as far as economics in going into Q4.

As far as the gain on sale levels, we ran about 125 on gain on sale margins, so up substantially from the previous quarter.

But again that will probably be adjusted going into Q4 depending on the level of interest rates.

Okay.

Then sort of what you see as the outlook, big picture for the industry as you've got some of the big guys pulling out of the wholesale channel or the correspondent channel?

We are seeing a lot of changes.

We are just watching from the sidelines here.

We are still focused.

We are making significant investments in the business.

We are committed to it.

The good news is that as other larger players come out, we are still in the business so we hope to gain share.

We still have a very strong initiative towards the jumbo prime market.

Obviously that has been very slow.

It is slow go so far.

We are working with some future partners.

We hope to get that ramped up.

The volume was immaterial, but we are closing a handful of loans in that arena.

We believe that in the future could be another catalyst for at least additional volume growth.

Then maybe just a little more color on what drove the servicing loss this quarter?

It was adjustment on prepayment activity on the MSR portfolio.

The acceleration -- our overall portfolio is a high-quality portfolio, a very high FICO, very well structured, the highest-quality type borrowers.

And when rates move this quickly you have a substantial amount of movement on the MSR; and the level of fallout was probably higher than we modeled initially going into the quarter.

Okay.

(multiple speakers) a model adjustment.

Okay.

Thanks, guys.

I will hop back out and get back in if I have more questions.

Rick Weiss, Janney Montgomery Scott.

Okay, good morning.

I was wondering if you could give a little bit more color on the net interest margin, where you see it going.

Also why the prepays were off -- is some of that due to seasonal factors?

Rick, on the margin side, we have been holding up pretty [loss].

You remember the last quarter we guided between 5 and 10 basis points up or down; we came in down 1 as prepay, but probably looking at a margin down maybe 5 basis points in this environment.

We still see some good loan growth, so we intend to grow the net loan book.

So I think in reality, rates are significantly lower than they were a few quarters ago, so we are looking at some margin pressure.

But I think we are kind of stabilizing that margin ex-prepayment.

Prepayments, as we always talk about, very hard to predict.

Although the level was strong it wasn't as strong as Q2.

We did reasonable prepaids.

We expect to have reasonable prepays in the cycle.

So it is fair to say over the next year or two prepayments should be very active and part of our business model.

However, it is very hard to budget on a quarter-to-quarter basis what we are going to expect.

Rick, the third quarter is a quarter that many of the people that are in our business are not available, so a lot of the sat that would've occurred and prepayments that go along with those did not occur.

Okay.

Got it.

Thank you very much.

You're welcome.

Matthew Clark, KBW.

Hey, good morning, guys.

On the expense side, can you give us a sense for how we should think about those?

There has been, I think, a recent article about some headcount reductions you guys have done.

It doesn't seem like to be a big number.

But just curious on how you are thinking about expenses ex-CDI going forward.

I would give some specific guidance for the fourth quarter; that's as far as I'm going to go on expenses.

Obviously we're working real hard to be efficient.

We had -- obviously having a larger OREO book you have some more foreclosure expenses.

We hope that will abate going forward.

But reasonable guidance for Q4 is about $143 million ex-CDI.

$143 million?

$143 million.

Okay.

On the securities portfolio, can you give us a sense for maybe the updated duration of that portfolio?

What you may -- what you guys were doing during the third quarter, and how we should think about that yield, that blended yield, maybe going forward.

Obviously we expect pressure, but just the magnitude and timing.

I will tell you that we worked very hard not to be in the market on buying active-lease securities in this environment.

Rates are extremely low.

We are not that comfortable putting on positioning here.

We have done a fine job in moving the cash flows into our warehouse book.

As you know, the warehouse went up to $1 billion, as expected.

We will probably run the warehouse somewhere between $750 million to $1.1 billion depending on activity regarding the mortgage bank.

So obviously we had an opportunity to move our cash flows into higher yielding assets.

In this environment we are not that active.

We think that there is a shot that rates start to move up here; we'll start putting money to work.

Unfortunately duration is a little bit longer than we expected.

You are probably looking between four to six years instead of shorter type duration opportunities.

But we are not looking to grow the portfolio materially.

My guess is that, depending where rates (inaudible) between 12%, as high as 16%, depending where the absolute rates are.

And we are only buying agency securities.

Okay.

Thanks, guys.

Collyn Gilbert, Stifel Nicolaus.

Thanks.

Good morning, gentlemen.

Can you guys just talk a little bit about what you are seeing currently in the multifamily market?

Where you are seeing the opportunity, where is the pressure?

And then on the same kind of commentary on the CRE side.

Yes, there is no question that the New York market is strong and there is opportunity that is coming from the unraveling, if you will, of a lot of the structured debt defaults.

So that is still in the marketplace and coming for sale.

So if anything, we continue to believe that the quarters ahead will continue to present opportunity for us to grow our actual lending.

And we are seeing that, actually.

So, the marketplace is very strong.

The competition is varied.

But the competition is significantly less than it was during the, let's say, '06/'07 period when you had all that structured debt that was way, way, way overvalued and taking a large share of the marketplace.

So the guidance in the market that is most aggressive with regard to rates, and maybe even structure, is Fannie Mae.

If Fannie Mae stays in the multifamily market it will continue to put pressure on what can be earned in this sector.

If Fannie Mae returns to a mission and provides funding for the production of new multifamily housing rather than 50- or 75-year-old housing then there will be a significant difference in the rates that we derive.

Has the spread narrowed between your rates and Fannie and Freddie on the multifamily side?

Basically yes.

The numbers are the same as they have been.

We in fact are looking at 300 basis points over our measure, which is the five-year CMT.

And certainly Fannie has the ability to change.

Because remember, they are not dealing with a profit motivation necessarily.

They have the ability to commit taxpayers to paying the bills down the road.

So as they do with one-to-four family, where they create assets that banks can't portfolio, they are virtually trying to do the same thing in multifamily, holding rates below where they should be and creating a product that virtually is not appropriate for this marketplace.

Collyn, I would also add since the US downgrade, spreads have widened a little bit as far as their offerings, to their cost of capital, so you are looking at for us -- we held the line above 4% even though the five-year really fell dramatically.

So we are able to get higher spreads there.

So that has been a favorable event for us.

And given the current quarter, for the third quarter we put loans on, on a net average coupon around 4.5%, which was slightly better than we expected given where if you take the average five-year Treasury and mark it off of 2.75%, that was obviously below that.

So we did pretty well in respect to holding our overall asset yields.

Okay, that's great.

Then just along those lines, because you guys have seen some good growth on the CRE side, is that -- do you expect that momentum to continue?

And what is driving that?

Yes, the market is definitely strong.

There's an awful lot of funds available to invest in this market, and obviously they want good loans to go along with their significant down-payments.

So the marketplace, as strong as it is, represents a good opportunity for us to gain share there as well.

And by the way, those yields are a little higher.

Okay, okay.

Great, thanks.

Mark DeVries, Barclays Capital.

Could you give us some sense of how much elevated mortgage banking activity is benefiting your NIM, and how much incremental benefit you might be able to get in the fourth quarter?

I wouldn't be specific for the fourth quarter.

We did have some benefit in Q3.

Obviously we bumped up the warehouse quite a bit.

The warehouse was obviously a significant opportunity for us.

We felt going -- coming out of Q2 the low of the warehouse was about $250 million on an average basis.

We made it up to over $1 billion on average going into the third quarter.

We should see elevated levels in Q4.

So assuming we are north of 4%, given where security yields are, so if security yields are running off in, say, the mid-3s it will be somewhat additive to the margin.

But just again we are not going to give specific benefits there in respect to the actual results for Q3.

The reality is that we move security cash flows into our warehouse business which actually was at a higher overall average yield.

Okay.

That's helpful.

When you value your servicing rights in the mortgage banking business, is that based on realized prepayments or is it based on rate?

What I am getting at is just trying to get a sense for -- if rates are stable to higher, but realized prepayments are also higher in the fourth quarter, is that likely to get written up or down in the (multiple speakers) ?

I think, look, our capitalization right now is a 0.81, which is a 3.2 multiple on our servicing, which is very low.

It's the lowest we've had since we started into the business.

So I think given where -- again, going back to my commentary, we have a very high-quality book of business.

So these high-quality borrowers have access to the refinancing market.

When rates broke 4%, a lot of our own customers went out to the marketplace and refinanced.

So we had a significant adjustment to the MSR.

And obviously we hedged that.

But obviously the hedge was off by a certain percentage.

Going forward, if rates were to stay around here, we will probably have some more fall out in October and probably stabilization November/December.

So I think we feel pretty good about the overall quality of the portfolio.

But bear in mind, it is the highest quality borrower getting loans in this environment.

So in the event we have a 50 basis point move downward in interest rates, these same customers that are refinancing six months ago will hit the refi market again.

And that is what we saw in Q3, more so late in the quarter, which we made an adjustment to our model.

So I think where our valuation stands today, being the lowest it has been since we got into the business, we are comfortable that we have some reasonable protection there if rates were to stay around these levels.

If they go higher, then the value should improve.

Okay, great.

Then finally, could you give us a little color on what types of CRE loans you had in the quarter?

Basically, they are loans that we deemed to be low LTVs and strong below-the-market type rentals.

Even when we do CRE we do it with an expectation that the ability to repay is driven by the current cash flows in the properties.

Okay, thank you.

Brad Ball, Evercore.

Could you -- where did your FDIC expense come in this quarter compared to last?

Is there any update on your conversations regarding the FDIC premiums?

I will tell you that in the second quarter we probably were very conservative, as we budgeted a very large number.

After we went through the actual analysis in Q3 and came up with our actual expense, it was lower this quarter.

Probably about $2.5 million lower, maybe $3 million lower.

Given that the generation of that was more driven by the fact that we have covered loans, and covered loans are handled differently.

They are not -- the nonperforming loans are handled different.

They are backed by the FDIC, so that was an adjustment for the quarter.

So I think the expense number I gave you for Q4 should be a good run rate.

I think it is a conservative run rate going into next year.

We want to be extremely efficient.

We have made a lot of investments in systems, so we are working on further efficiencies.

I am not ready to give any more guidance past Q4.

But for the Q4 number, which is slightly down from the previous quarter, it is where we should be running -- that assumes an FDIC assessment that is more in line to reality.

So I think it was around $16 million last quarter.

So we are talking kind of $13 million-ish?

That's right.

That's right.

So that is your guidance for the fourth quarter?

Okay.

And obviously as the portfolio improves in asset quality we will get some benefit going forward.

As you can notice we had a significant favorable benefit over the past few quarters on asset quality, and hopefully that trend -- we believe that trend will continue.

So we're very bullish on asset quality.

Okay.

Then any update on conversations with the regulators?

Anything new on that front?

Last call you guys addressed -- I think there has been some questions about the dividend.

Anything to update us on in that respect?

I would just say we follow the guidelines.

It is crystal clear that we follow Fed guidelines.

We are no longer following the New York State guidelines as far as paying the dividends.

But that is over the years.

Over the years, but so -- since 2009, it has been consistent.

And we are earning our dividend and we continue to pay our dividend.

Great.

Then just finally on the competitive environment, there have been a lot of folks talking about entering or reentering the New York area multifamily market.

Are you seeing that yet?

Have those folks started to put pressure on any of your markets?

I think the reality is that people come and go in New York all the time, and the New York market is significantly larger than just our niche.

Within our niche there are some players that are on the fringe, meaning that they do have some activity but no meaningful activity.

The relevant player in our market today, as it was in the years past, is Fannie Mae.

Other than that, we had significant players in the terms that were there from Independence and from North Fork which was a composite of several players from our niche.

So today there are no players of that size or that caliber who are in the market.

So despite the fact that lots of people talk about it, there are fewer players in the market today than there were in '06 or '07.

And although there may be some headline conversations, they are not in any meaningful way affecting our lending.

Great, thank you.

Mark Fitzgibbon, Sandler O'Neill.

Good morning.

Just to clarify from an earlier question, I thought you had said, Tom, that the NIM should be down about 5 basis points and then stabilize.

Is that excluding prepayment penalties?

That's correct, Mark.

Excluding prepayment penalty income, we are probably looking at maybe down 5 basis points in this environment.

Again, last quarter I was down 5 to 10; we came in net down 1.

So again, that is reasonable guidance where we see the book right now.

And going forward, I don't want to give future NIM guidance; but it seems like we are getting close to stabilization there, excluding prepayment activity.

Now that number can move around quite a bit with prepaid, as you've seen in the past three, four quarters.

Yes, Mark, there has always been -- for years and years and years we have tried to avoid any guidance with regard to prepayment because prepayment is a number that varies dramatically just from one quarter to the next.

Okay.

Then secondly, when you look at prospective acquisitions are you looking to fill any particular holes in your franchise or business?

Or is it (technical difficulty) driven?

No, I think that consistently over the course of our public life the main drivers of transactions come from the shareholder benefit to be derived.

If we can create a better bank, we do a deal.

It doesn't matter where the franchise actually sits.

It matters where in fact the numbers come in.

So there are plenty of opportunities that will come down the road in the marketplace for years to come.

And those opportunities we are willing to be patient for.

Thank you.

David Darst, Guggenheim Capital.

Good morning.

Just following up on the NIM and on the cost of funds, you should have the ability to improve the mix a little bit further through your DDA growth in the fourth quarter.

Shouldn't you?

I think going back to the cost of funds, we are pretty low on the cost of funds environment.

I mean I would tell you if you look at us compared to all our competitors, we are probably the lowest in the industry.

We have a focus towards being a low rate payer in the environment.

There is some opportunity on CD side.

We are working real hard to bring in low-cost deposits.

I think the message on this call is that deposits are fluid in the marketplace.

And to bring in money and the growth is significant, we can go to the deposit market and bring in significant funds.

The reality is that we pay a very low rate, which is more of a culture of the bank.

If we can bring in more non-interest-bearing cost, it is obviously more favorable to the bottom line.

We do have some room on the CD side, but each quarter as we go into this low rate environment it becomes less material.

So I think last quarter it was about 1.35% was the average coupon on the CDs; we are probably running around 1.28% right now.

Probably about $5.5 billion over the next 12 months.

That will continue to reprice lower depending where rates are.

If rates are in this environment for a considerable period of time, that number could be 50 to 80 basis points.

If rates start to spike up, we may be running at 1%.

There is some room, but it gets to a point where the absolute level of cost of funds are getting close to zero.

How about on the FHLB advances?

Do you have any significant maturities or anything that you might consider prepaying?

I mean, the only significant -- we'll call it -- on the liabilities side -- and I wouldn't call it significant; it's about $0.5 billion.

It's fourth quarter, is paying off our TLGP debt to the FDIC.

Absent that, there's small amounts of maturities.

Absent a significant restructuring, through a transaction, we would get substantial benefits there.

But overall if you look at our overall cost of funds, it is significantly lower than most thrifts in the industry.

Obviously not commercial banks.

But if you look at our deposit-bearing costs, 76 basis points, which is fairly --- it's my opinion -- very low.

Okay, so it sounds like for now you are willing to carry the higher cost of the FHLB advances.

We are not looking to restructure our liability book in any material way.

That would constitute a significant hit to capital.

Correct, okay.

Thanks.

Then on the OREO, do you have any contracts for the fourth quarter that would bring that balance down?

We are working very actively on some significant transactions.

We expect to move on the asset quality very actively.

We have been very active over the past year and a half on moving these assets, and that would speak for OREO as well.

The strength in the marketplace definitely works to our advantage.

Okay, great.

Thank you.

Tom Alonso, Macquarie.

Good morning, guys.

The mortgage banking breakdown that you gave earlier on the call, I just missed it.

It was $31 million?

$31 million on the origination side and servicing was a loss of $6.6 million.

So that nets to $24.2 million.

Okay, perfect.

Thanks.

That's all I had.

Christopher Nolan, CRT Capital.

Quick question, on the -- are we seeing less prepurchase -- excuse me -- less refinancing activity on the multifamily side, more purchase activity?

I think the seasonal effect, as we mentioned earlier, definitely had an impact on this quarter.

Many of the people that normally are active in our niche were not available.

They were away on holiday.

So some of that activity just doesn't rise to the surface during the third quarter.

So over the course of years, the third quarter is definitely lighter and the fourth quarter is heavier.

I would also add, last quarter on our pipeline we said it was mostly new business.

This particular quarter is probably looking at like 60/40 -- 60% new business, 40% refinancing within our portfolio.

So the good news is that it seems like it is elevated on activity, and we believe fourth quarter is typically a good growth quarter for us.

Year-end transactions always take place, and we typically have fairly strong fourth quarters in respect to net loan growth.

That, coupled with the fact that we have a decent amount of already identified satisfactions into our -- refinancing within the portfolio, prepayment income, even though we don't budget it specifically, should be at elevated levels.

Great.

Tom, what rate are you provisioning for these new loans?

We go through a whole computation by category, by region, by classification.

Where we are at a high end of the range, we want to -- I'll announce a general valuation allowance.

So again I don't say specifically what the provision would be by category, but we are clearly -- given that the NPAs are starting to leave the portfolio, we had very little 114 analysis left, because obviously those loans are now moving either to REO or they are off the books.

So what we have is a very clean, performing portfolio and we are consistent with our assumptions, which you look on a quarterly basis, based on historical trends and loss history.

Great.

Thanks for taking my question.

By the way, your question with regard to growth, the 10.4% annualized growth rate for the quarter, probably the best we have had in several quarters.

And that was despite the fact that it was the September quarter.

Great.

Thank you very much.

Ken Bruce, Bank of America.

Good morning.

How are you?

A couple questions as it relates to the net interest margin.

Could you provide some additional detail on how much the warehouse contributed in dollars to the quarter?

We actually had that question previously.

We want to -- not to provide that number.

Okay, and --

But I gave you some color.

We went from $250 million to the low to $1 billion being the high.

And that is coming from around a 4 1/8, we will call it 4.18% type rate, versus a security yield that is probably in the mid-3s.

So that was some of the benefit.

So maybe 50, 60 basis points and that change helped the margin.

Okay.

I suspect that as long as the mortgage banking activity remains high that you can continue to run a fairly high warehouse in that case.

Again, based on my margin guidance I gave you for Q4, I have the warehouse coming down slightly, but it is reasonable.

I don't see it falling off the cliff.

We have a significant pipeline to fund by quarter end.

So that will help the margin for Q4.

Right.

Just in terms of where loans are coming in today, it looks to me as if you are going to be writing new multifamily loans around 4%.

Is that --?

That is probably too conservative.

I would say last quarter we closed our book at 4.5%.

Given where rates are, you look at the five-year Treasury, take the average, we are north of 1%.

We are getting slightly above 3%; the commercial is about 20 basis points above that.

You're probably looking at -- let's say low 4%s to mid 4%s, depending on rates.

It changes every day, Ken, and I think the reality is that despite the fact that it is competitive, you got to bear in mind, Fannie and Freddie have the higher cost of capital today.

So they have opened -- they have widened their margins to make money.

So the reality is that we are over 300 basis points.

We are holding the line at 4%.

Rates were significantly lower in August and September, but we held the line at 4%.

So hopefully we will see higher levels going forward.

Yes.

I guess then looking at the yields in the mortgages today are still around 5%, 5.5% round numbers, so --

You got to carve out prepayments.

That's right.

(multiple speakers)

So that is going to continue to drift lower, I suspect.

So I am just trying to understand in the absence of the warehouse contributing favorably how the margin is not going to compress more.

We run our -- we've run our analysis on a very detailed basis and we are pretty comfortable with that, around a 5 basis points reduction in Q4.

And again, that could be conservative.

I think looking at the business, it moves around pretty quickly.

Two quarters ago we were looking at high 4%s, low 5%s.

So things do move around.

Obviously it is a lower rate environment.

We can't control the rate environment.

We lend into the marketplace, and we still think that we are going to have net loan growth.

The average rates in each of the preceding quarters coming out of the portfolio are obviously higher than the average rates will be prospectively.

Okay.

Maybe looking more at mortgage banking for a moment, can you give us some detail on the gain on sale spreads that were (multiple speakers) --?

Yes.

Net-net including services, about 125.

We have increased it from Q2.

Q2 was a tough quarter for us.

We dropped our margins quite a bit to compete.

We were able to widen our margins given the influx of volumes that we saw in Q3.

So it is around 125-ish and that includes servicing.

Okay.

The amount of loans sold in the quarter, please?

I think it was funded $1.8 billion that we sold, $1.8 billion funded.

About $1.8 billion.

Great.

The pipeline was well over -- (multiple speakers) 4 billion in the total pipeline (inaudible) rate locked.

Okay.

Just to pull back for a moment, you have been looking at an evolution of your business model here in the last year, much more oriented around mortgage banking just as the opportunity has grown there.

How do you think about, Joe, the balance between the mortgage banking-driven businesses and your traditional portfolio approach towards generating --?

We are very consistent with our expectation that we will be growing our portfolio, and market conditions will decide how rapidly that occurs.

The fact is that the mortgage banking business is a business that changes from one quarter to another.

We don't drive that.

That is automatically a result of what is happening in the marketplace.

As Tom mentioned earlier, we are offering more products to more end- users.

People are buying product from us.

So as that grows, the share will grow in that line.

But we are not looking to shift things.

It's a matter of these two businesses operate independently, and certainly we have every reason to believe that the primary business is going to grow in the period ahead.

The business that supplements our earnings is going to be very dependent upon what is happening in the marketplace.

So, for example, it's rate-driven today.

It could be driven by changes in rules and regs.

Some of the changes that occurred at the beginning of this year adversely affected the business.

If there are positive changes, that will positively affect the business.

So I think the absence of other competitors is actually going to work to our advantage down the road.

So it's an additional supplement, but it is not our primary business by any stretch.

I would just add to that, that we look at a barbell strategy.

Obviously having the additive income on mortgage banking revenue on a percentage basis it's not a material number; but it is obviously a nice number when margins are under pressure in the industry.

When rates are collapsing we have an opportunity to generate some decent fee income.

Again at the bottom line, we are a multifamily lender in the New York marketplace.

And we have a nice business that we believe is run very conservatively in respect to NYCB mortgage, and we are very comfortable on expanding that business on a conservative basis.

As we talked about the potential of doing jumbo prime loan, it's been a very slow go.

The marketplace has been very difficult in getting product.

But we are prepared in the future to have a broad array of products to deliver to many customers outside of a traditional Fannie/Freddie business.

I understand; I guess we see these tectonic plates moving around where multifamily continues to be an area of keen interest for many competitors, though it seems that that's going to get more crowded in your traditional core business, where most are moving away from the single-family mortgage banking model, which presents a lot of opportunities for you.

You have clearly exploited those here recently.

I am just wondering how you think about (multiple speakers).

I think it's important to realize that in particular the New York market is huge.

The world has always lent in the New York market.

When you think about the very large players that have been in and out of this market, they were very aggressive for example in the period '05, '06, '07.

They in fact are coming back into the market.

Their presence does not necessarily impact our niche.

Their presence impacts the New York market.

So many of the things which are typical to the New York market in multifamily are not necessarily reflective of us.

So in a period of significant devaluation of multifamily, '87 to '92, we in fact were not having any devaluation of our niche product.

And that differentiation is extremely important, even in the origination of product on a go-forward basis.

So even though there are lots of headliners that are saying they want to be in multifamily, they can easily find product that has nothing to do with our niche.

Great.

Thank you for your comments.

David Hochstim, Buckingham Research.

Good morning.

Wonder, can you tell us what the product expansion has done to mortgage banking volume?

Is there --?

It's immaterial, David.

I mean we probably closed between $14 million and $20 million in jumbo prime.

It has just been very slow.

Okay.

Then on the mortgage servicing charge, can you tell us what the gain was roughly and what the writedown of the MSR was, roughly?

Yes, the gain was approximately $32 million.

The writedown was -- the mark [to] about 45.

Okay, and how much MSR is left at this point?

Right now we have about [eleven twenty] billion of unpaid principal balance, which (technical difficulty) at a 0.81 number it's about $95 million on the books.

We think that is a very conservative valuation.

So given the September mark is significantly different from where it is today, but obviously we took a look at the portfolio and we were very conservative in respect to the speed.

We have a high-quality book that has had the opportunity to refi; and where rates were in the third quarter, they refi-ed.

Right, and I guess -- look at the gain generated in the quarter, how much of that would be cash and how much would be related to like (technical difficulty)?

Servicing probably 20 basis points.

The rest is gain, gain on sale.

Okay.

Could you just talk again about the -- thinking about the margins, a follow-up.

So if asset yields are coming down, asset yields are below your current average yield, you added a lot of non-interest-bearing deposits in Q3.

Can you keep doing that and drive the funding cost down?

I think we are modeling reasonable -- we will call it reasonable management expectations on deposit growth.

We are not a high-rate payer, I keep stressing that.

We focus on low-cost deposit funding.

There is liquid deposits out there, there's liquid funds out there.

We are very comfortable with our guidance.

We have always guided conservatively historically regarding margins and spreads.

And I think that given that 5 basis points, which last quarter was 5 to 10, I think it is reasonable expectation based on fully analyzing our entire portfolio, repricing our loan book.

Given the amount of new loans coming on and securities rolling off, we had a substantial amount over the past year and a half of securities prepaying.

We were very reluctant to go back into the securities market and take on duration risk.

So we're trying to be a little bit small on securities side.

We have a great opportunity to put on good solid core loan growth, our bread-and-butter product.

And if we look at where our cost of funds are and where those offerings are, margins are not significantly negative impacted.

I mean if we look beyond the fourth quarter, though, would there be more of an impact?

Or are you (multiple speakers)?

I'm not going to give guidance for next year.

But I feel pretty comfortable that we are close to bottoming, depending where rates go.

If we have a five-year Treasury at 50 basis points things change.

(multiple speakers) about 100.

I think it's important to recognize that with regard to deposits we have many players in the -- we are in five distinct markets.

Right.

There are many players in those markets that are significantly below us with regard to the rates that they are paying.

Even though there are some that are aggressive payers, the aggressive payers are likely to start to come down in the period ahead.

So the opportunity to actually lower our cost of funding does exist based on the marketplace.

If you look at each market, there's differences depending on who you are looking at.

Some of the biggest players in our markets pay significantly lower rates than we do.

Even though we are a typical low-rate payer, we have people out there that are paying well below us in savings rates and money market rates.

Right.

So I mean I think what people are concerned about is that we can see the asset yields coming down, and it's hard to see where the (multiple speakers) --

You are 100% correct.

It is certainly something that represents opportunity to consider how we will position ourselves in the period ahead.

David, I will add that given the business model and how we conducted ourselves through the recession, our margins held in extremely well.

Historically we have a substantially higher margin than most of our competitive thrifts.

So if you look at the business model our assets are relatively short.

We have a lot of activity.

We expect to see significant volume on refinancing and origination going forward.

We are not lending long out in the curve.

Right, okay.

Good luck lowering funding costs.

Yes.

Thanks a lot.

Ken Zerbe, Morgan Stanley.

Good, thanks.

Hey, guys.

Tom, I am certainly not going to ask you to provide long-term NIM guidance.

But given the number of questions that we have all asked about NIM and sort of the longer-term impact, I think my estimates are down 25, 30 basis points by the end of 2012.

Maybe a different way of asking the question is -- what are we missing?

Right?

And that includes prepays.

Are we not understanding the value of mortgage banking?

Or that (multiple speakers) on prepays?

Let me interject by saying, Ken, I am not going to give guidance for the next year.

But I will tell you that we are not going to give guidance on prepay.

So your number has prepay; my number excludes prepay.

And I don't have the magnitude of the decline that you are showing.

Again given where rates are, we are running with Bloomberg consensus on rates; that changes.

We don't have the crystal ball for the future on interest rates.

We are running with Bloomberg consensus.

And based on (inaudible) consensus I am not as bearish as you in respect to the margin next year.

But in terms of -- why?

So that is what we are trying to get at, is -- if your loan portfolio is running off at ballpark 100, 150 basis points lower on new loans; securities are running off; and you have limited room on liabilities.

Why are you not as bearish as we are?

I think security yields are probably close to stabilization right now.

I don't see much more of a decline in the next three, four quarters out, given that we had substantial runoff already.

And overall yields on the asset side, you say 150; I would say it is probably more like less than 100, depending where rates -- because everyone is looking at the five-year Treasury at a point in time.

We put on 450 this quarter, and that is not 150 basis points because you have to carve out the prepayment benefit that goes into our margin that is reported on an average balance sheet.

So I think you really -- again those are extreme scenarios.

That may make the difference of the 25 basis points between your numbers and my numbers.

But again we run it specifically on a detail level.

And given where (technical difficulty) funding costs at 76 basis points for our interest-bearing deposits and all-in costs are funded 2%, if you are putting money out at that level, new business is not margin dilutive.

It is not substantially margin dilutive, when you look at if you are bringing in deposit funding in this environment where rates are, it is not a dilutive aspect of growing the book.

We expect to grow our net loan book.

Granted will we -- in the securities market we are trying very hard not to take on duration risk, so we are much smaller.

We could be much larger.

We could have much more margin compression if we were in the securities market.

We chose not to be.

Again indicating going back to where the warehouse was in Q2 versus Q3, we expected significant benefits from the warehouse, as expected.

So we had the luxury of not reinvest -- we had the luxury of less reinvestment risk on the cash flows coming out of the securities portfolio.

That will abate, like it abated last year.

We are comfortable that if rates were higher we will make a little bit more money on the margin side.

But in the meantime, we have pretty gloomy forecasts for interest rates, and our margins are going to be less under pressure than most.

One of the things that's really important to recognize -- if we were talking about a portfolio of one-to-four family housing where the yields in the portfolio were 150 basis points higher than the yields that we were replacing them with, there would be no supplemental benefit to us with regard to the replacement asset.

But because our assets are significantly in commercial assets, literally, multifamily and other assets that collect prepayment, those prepayment fees are all insulatory to the margin.

So depending on what actually happens in a given quarter, those fees add between 10 and 30 basis points to each and every quarter prospectively, as assets are coming off the balance sheet.

So I think that we have more insulation because we have a specific source of earnings that is tied directly to the refinancing of those assets at lower rates.

Okay, all right.

Thank you very much.

Mike Turner, Compass Point.

Hi, good morning.

Just a question on the credit side.

Credit seems to be improving nicely.

What -- historically you have had an allowance, the reserve ratio of 40 basis points to 70 basis points.

What is a potential floor?

Is where you are at now, 55, kind of the --?

No, I think it is important to know that we are proactive in analyzing the reserves based upon every single quarter's activities and what we expect that the future might hold.

So we maintain reserves for losses.

We don't maintain reserves for loans because our metrics over the course of decades are significantly different than other banks.

So we don't need to have a reserve that is in line with other banks' losses.

We need to have a reserve that is in line with our reasonable expectation of the portfolio, moment-in-time.

So it's a very timely analysis that is accurately done.

And as I think the evidence is in the numbers, you can look at our reserve and recognize that the reserve has been more than adequate to meet the demands upon it.

In fact, significantly better than other banks.

Other banks have had their entire reserve absorbed in a given quarter.

We never have that.

Our reserve, if you take the charges to it, can literally represent years of coverage.

Many other banks during the cycle which has just ended lost their entire reserve in one period and had to replace the entire reserve in that period.

That is common in banking, but not common to our portfolio.

So our numbers are indicative of reasonable quarterly assessment of risks inherent in the portfolio.

So arguably then, if credit continues to improve, that absolute level of reserves -- I mean, it can't go to zero.

But should continue to come down?

No, no, no, that's right.

That's right.

If anything, realistically our reserves are far more than we really need for the losses that we have.

And that has been over the course of time.

When we first became a public bank our (technical difficulty) represented 111 years of coverage and that was in '93.

So the reality is that our reserves are very different than everybody else's reserves.

The good news is that our asset quality continues to improve and we expect to see continued improvement in the out-quarters.

Okay, thank you.

Matthew Kelley, from Sterne, Agee.

Hey, guys.

It appears that it's pretty clear you are going to grow through some of the core margin challenges that would be in place if you had a static balance sheet and were just repricing your asset book lower.

So as commercial real estate continues to grow at a pretty rapid clip, should we expect to see similar levels of incremental reserve-building, relative to what we saw in the first half of the year where you bled by $[16] million; then it went to a $5 million increase this quarter.

Should we expect to see something more similar to that, given the fact that you are indicating that you feel very confident on your ability to continue to grow, and that will help offset some of the margin issues?

Obviously, Matt, depending on the level of chargeoffs (inaudible) we are feeling pretty, I would say, bullish about credit in general.

But you never know what is in the future.

So I think in reality we look at the chargeoff levels for the quarter.

We look at the asset quality of the bank.

As you saw a significant drop since the high of 2010 as far as the overall average balance of NPAs.

We see the OREO book that we have now; we believe we're going to move that down rapidly.

So the quality of the portfolio will improve.

Again, I don't think we have a meaningful adjustment on a quarter-over-quarter basis.

But obviously depending on charge-offs, asset quality has been a quarter-to-quarter benefit over multiple, multiple quarters.

We have been talking about that probably the last year that we expect to see the resolution of some of these cash flowing assets.

The good news is that we are seeing going forward the continuation of resolution.

So that would be obviously less credit costs.

Bear in mind, in addition to these credit costs you have a high degree of foreclosure expense that goes through the P&L.

That will also be a benefit in the future period ahead.

As we have less NPAs, less OREO assets, we will have less costs going to the P&L for foreclosure and OREO expenses.

Right.

No, I (multiple speakers) --

I think it's important to recognize that we have basically in 3.5 years -- the numbers that we are reporting here in September are the best numbers for the entire credit cycle with regard to nonperforming.

That is a long time.

That is 3.5 years.

So the trend is glaringly obvious that our performance metrics are improving dramatically.

Right.

I mean the existing loss content on your current book --

That's right.

-- built over the last couple years has been low.

But what I am looking at is the 20% to 25% growth in commercial real estate just over the last nine months and the incremental provision (multiple speakers).

Right, but it's important -- Matt, it's important to recognize -- unlike other banks we do not lend with the expectation of losing money.

We lend with the expectation of not losing any money.

And over the course of four decades, we have demonstrated that our lending model is different than other lenders.

And therefore we have lost significantly less over long periods of time.

So just because we are lending more it doesn't mean that we are losing more.

We lend not to lose.

We lend to actually be repaid.

And the record shows that we are repaid on huge percentages of what we put out there.

I think also the average LTVs in the past year and a half have fell dramatically.

So if we look at the average LTV in both commercial and multi, they are in the mid to low 50s.

It's a high-quality portfolio.

We focus on the best opportunities in the marketplace.

We are not an aggressive lender historically; that is our track record.

If there is great opportunities in the marketplace, we are going to lend.

We are a portfolio lender.

We are not doing securitization deals.

So we are an alternative for someone looking at the securitization market, especially doing a portfolio deal.

And we are one of the larger portfolio lenders in the marketplace.

And those guys are comfortable in a portfolio [respect].

They typically have low leverage.

Okay, then where are you seeing -- getting back to multifamily, where are you seeing Fannie Mae coming in on rates relative to your 4.25%, 4.50% type rates?

Or 3.25%, 3.50% over the five-year?

Again, keeping in mind we have a savings bank offering so we do not have defeasance cost, unlike the agency.

So if you look at the price of defeasance versus our prepayment sliding scale, you are probably looking at maybe 20 to 35 basis points of an improvement to do a portfolio deal.

Now that is a very interesting benefit for a borrower, because they don't have to take on the risk of defeasance; and they are willing to take on a 5, 4, 3, 2, 1, sliding scale structure.

Most of the stuff that is going to the agency is 10-year money.

A lot of IO structure, which we are really not in the IO market, but a lot of IO paper has gone to the agency.

With regard to that, the niche that we are in, which refis in three to four years, is significantly better off with us rather than having defeasance.

So even though Fannie may be in some cases 40 to 80 basis points below us, their defeasance is a very high cost and therefore it is unattractive to people that are actually planning on improving the property in a short period of time.

We lend on a rent roll that is being improved, and that is why it's refinanced in three to four years.

That is different than people that want 10- or 15-year loans that are willing to, let's say, go to Fannie for a 10-year loan, because they in fact are not worried about defeasance, because they are planning on holding that loan for 10 years.

Our guys are not.

Matt, I would also add, if you look at some of the deals that are out in the market, and these are mostly public deals, the data is out there.

A lot of these deals are outside of New York.

There is a lot of lending outside of New York.

The New York markets, we are seeing less intrusion on actual originations of Fannie.

However the rate offering is out there, so it is an alternative for the customer.

But a lot of the deals are being done outside New York.

So you follow some of these large securitization deals with Fannie and Freddie, the percentage of New York paper is very low compared to outside of the New York market.

Yes.

I know; when we heard from some of the smaller lenders in the multifamily space, though, they said that they were seeing coupons go below 4% during the quarter.

I guess the question would be -- are you seeing better yields on larger loans?

Is that part of the reason you are getting better pricing?

No, no.

Sometimes that is the case, but not always.

If anything, the large loans, they would be more competitive.

Right.

Well, in some cases, but not in all cases.

Okay.

We are seeing a good bread-and-butter book of business going into Q4, which is nice.

And mostly multifamily, which is a positive signal for us.

Just give us a little historical context here going back five, 10, 15 years.

How that 300 to 350 spread compares to what you have seen historically over the (multiple speakers) five year?

Look, prerecession we were 150, right?

So it's a better environment when you look prerecession.

So we're around 300 basis points off the five-year.

Funding cost is very cheap.

The curve is still steep.

Although it is not as steep as it was three quarters ago, it is still very steep.

And it is a much better environment for the margin compared to prerecession.

In the years one through six, pretty consistently for those five years we were 150.

We floored at 150.

But in the last cycle turn we were as high as 5.

500 basis points was the differentiation, and that is in a period of difficulty.

Periods of difficulty actually present better returns to a lender such as we.

So if rates went up 100 to 200 basis points, would you expect the spread over the five-year CMT to go up or down?

I mean I don't think we are going to get 200 basis points benefit.

We will probably get maybe 50% of the move, but still a positive --

But not the absolute rate; the spread.

Exactly, exactly.

(multiple speakers) I think more important as to what happens with the move is who is in the game.

If there are a lot of irrational players in the game, if Fannie is in the game, the rates will not move as much.

If Fannie is out of the game, then the rates will move significantly.

I think the move in rates was extraordinary; I think we have talked about this in other calls.

'08.

Where the move was extraordinary in '08, when Fannie was erratic and out of the market.

Our rates jumped significantly, overnight almost.

Doubled actually.

Okay.

All right.

Thank you.

Bob Ramsey, FBR.

Hey, thanks for taking the follow-up.

Just hoping you could give maybe a little more color on the bump-up in [REO] this quarter.

How granular or not was the increase?

I did hear you mention that you all are hoping to work that down a bit in the fourth quarter.

But I missed some of the detail there.

Yes, I think the important thing to recognize there is there's just a couple of properties that represent that change.

And one of those in particular is already moving.

So the reality is that it is going to be bumpy, as is always the case when you're a large lender as we.

You can have a relationship of size go nonperforming and lose no money on it; or you can have a particular property that goes into ORE, with the expectation that it's going to be sold (multiple speakers).

Bob, the good news is that we have control of the asset.

We have multiple bidders on both of those properties.

So we are very comfortable that, given that our REO book is now under our control, we believe we will get great value for the properties.

And we have multiple bidders on the properties.

Okay.

Then you did also mention that obviously will be reflected in a little bit higher REO expense.

Is that already baked into the $143 million?

Absolutely.

I will tell you that as these REOs go away and there is less stuff coming in and the portfolio shrinks, we will have less expenses next year.

If we continue to move on the assets, there will be less foreclosure expenses and less REO expenses.

We take on a profit fairly large -- you take on the tax escrows haven't been paid.

It becomes a material adjustment to any given quarter.

So we have had elevated expenses given the credit cycle.

But compared to other institutions it is much smaller, but it has affected our efficiency ratio.

That will be a positive going forward as the MPA book continues to decline.

Great.

Thank you, guys.

At this time I will turn the floor back over to Joseph Ficalora for additional or closing remarks.

Thank you.

On behalf of our Board and management team I thank you for your interest in our Company and our third-quarter 2011 performance.

As the next time we discuss our results we will be in the new year, let me take this opportunity to wish you all a joyful Thanksgiving and happy holidays.

Thank you.

This does conclude today's New York Community Bancorp's third-quarter 2011 earnings conference call.

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