Flagstar Financial Inc (NYCB) 2012 Q3 法說會逐字稿

Good day everyone and welcome to New York Community Bancorp's third-quarter 2012 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 and thank you all for joining the management team of New York Community Bancorp for our quarterly post earnings release conference call.

Leading today's discussion of our third-quarter 2012 earnings will be 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 provision 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 market; changes in interest rates, which may affect our net income, prepayment penalty income and mortgage banking income and other future cash flows or the market value of our assets, including our investment securities; changes in the demand for deposit loan and investment products and other financial services; and changes in legislation, regulations and policies.

You'll 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 2011 annual report on Form 10-K and our first- and second-quarter 2012 10-Qs.

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 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.

Thank you, Ilene, and thank you all for joining us this morning as we discuss our third-quarter performance, which once again was highlighted by strong earnings, superior returns, solid capital measures, increased loan production and continued asset quality.

The quarter was also notable for the contribution to earnings of our two-pronged approach to lending, a topic I will expand upon later in the call.

But first I would like to say a few words about our third-quarter earnings, as well as their contribution to our capital strength.

As we indicated in this morning's release, we recorded GAAP earnings of $128.8 million or $0.29 per diluted share for the quarter providing a 1.29% return on average tangible assets and a 17.10% return on average tangible stockholders equity.

As those of you who follow the industry know, these returns are well above average and underscore our capacity to earn.

We also produced cash earnings of $139.2 million or $0.32 per diluted share in the quarter, and cash earnings of $409 million or $0.93 per diluted share in the first nine months of this year.

The nine-month amount contributed $30.8 million or 8.1% more to tangible capital at the end of September than our nine-month GAAP earnings contributed alone.

As a result, our tangible stockholders equity rose to $3.2 billion at the end of September and represented 7.74% of tangible assets, excluding AOCL.

Reflecting our continued capital strength and the ongoing strength of our earnings, the Board of Directors declared a $0.25 per share dividend at last night's meeting.

The dividend is payable on November 16 to shareholders of record at November 7, 2012.

Our ability to perform, as well as we have a test to the soundness of our business model, which was designed to lessen the impact of interest rate as well as credit risks.

Among the primary factors contributing to our solid third-quarter performance were the level of mortgage banking income produced by our mortgage banking operation as the volume of one-to-four-family loans originated for sale increased.

The level of prepayment penalty income received as refinancing activity increased in the multi-family and commercial real estate markets, and the continued improvement in our asset quality.

Speaking to the first of these factors, one-to-four-family loans originated for sale totaled $2.9 billion in the current third quarter.

That is 10.3% higher than the volume produced in the second quarter, and 61% higher than the volume produced in the third quarter of last year.

The vast majority of the loans we produced were sold to government-sponsored enterprises, consistent with our practice since assuming our mortgage banking operation in December of 2009.

Today NYCB Mortgage Company ranks among the nation's 15 largest residential mortgage aggregators.

And I do believe it is fair to say there is room for us to grow.

Reflecting the volume of loans produced and sold, mortgage banking income totaled $52.6 million in the current third quarter, more than double the level recorded in the third quarter of last year.

Loans originated for investment, meanwhile, rose to $2.1 billion and included $1.6 billion of multi-family loans.

As interest rates continue to fall, refinancing activity continued to drive our multi-family loan production and resulted in a near-record level of income from prepayment penalties.

In the third quarter of 2012 prepayment penalties income contributed $31.5 million to total interest income, supporting our 4.90% yield on average interest earning assets, as well as our net interest margin of 3.17%.

Our margin was also supported by an increase in the average balances of loans and interest earning assets and by the reduction in our average cost of funds.

We attribute the drop in our cost of funds to deposits assumed in the Aurora Bank transaction, which you'll recall was completed June 28.

Third on the list of factors contributing to our strong third-quarter performance was the quality of our assets, which continues to improve.

For example, nonperforming, non-covered assets represented $290.5 million or 0.66% of total assets at the end of September in contrast to $410.4 million or 0.98% at December 31.

The improvements stem from a decline in nonperforming, non-covered loans for the eighth consecutive quarter and from the fourth consecutive quarterly decline in Other Real Estate Owned.

Nonperforming, non-covered loans represented $246.6 million or 0.82% of total loans at the end of September as compared to $325.8 million or 0.98% at December 31.

In addition, net charge-offs represented a mere 0.03% of average loans in the current third quarter, down from 0.05% and 0.04% respectively in the trailing and year-earlier three months.

Before I end my prepared remarks and open for questions, I would like to be -- very briefly return to the topic of loan production and acknowledge the record level of loans in the pipeline we reported today.

Including $3 billion of loans held for sale and $2.2 billion of loans held for investment, we are looking today at a pipeline of $5.2 billion.

That is the highest level we have reported in any earnings release as a public company.

I would also like to take this time to point out that not all of our accomplishments are financial in nature.

Certain of our achievements cannot be described in terms of dollars and cents.

For example, in the third quarter of this year we completed the integration of our two operating systems -- the one used by all of our branches in New York and New Jersey and the one used by all of our branches in Ohio, Arizona and Florida.

The systems integration has enabled us to unify our product menu and the many services we offer our customers in each of the five states we serve.

In less than three weeks we will take yet another step toward unification when we restore the ticker symbol of our common stock, NYCB.

Some of you may recall that NYCB was our ticker symbol during the last two years we were listed on the NASDAQ National Market, and that we lost the C when we moved to the New York Stock Exchange in December of 2002.

As I stated in this morning's press release, we are proud to be a community bank and that is what the C in our name stands for -- New York Community Bank, NYCB.

As one of the nation's 25 largest banks and one of its top performers, it is only right that our shareholders know us by the same four letters as our valued customers and the scores of communities we serve.

You may wish to note that the change in our symbol from NYB to NYCB will take place when trading begins on November 13, and that we will celebrate at the end of that day by ringing the closing bell at the exchange.

At this time I would like to open the phone for questions.

Thank you.

(Operator Instructions).

Brad Ball, Evercore.

Tom, the NIM this quarter came in pretty in line with your guidance last quarter.

I wonder if you could give us a view of the outlook for next quarter?

What are your expectations for the NIM with and without prepayment penalties?

Thanks.

It is Tom.

Pretty much it is one of the same.

Looking at Q2 versus Q3 our guidance was down 12 to 15 and thus we came in at the low end our range.

We are pleased that we came in at the low end of the range for Q3.

My guess is that where we sit today, given where the interest rate environment is and looking at the pipeline, we are probably going to be on that same level, so probably down 12 to 15 in Q4, ex pre-pay.

And any comment on pre-pays this quarter?

The pre-pays are going to be consistently strong, and we feel that this will be no question our largest pre-pay year in history of the Company.

We are on track to be in excess of $100 million, so things are moving well as is expected.

Okay, and then separately what are you seeing on the pricing side in the multi-family market?

Could you give us an update on where the coupons are coming in, where the spreads are?

I will tell you right now based on our pipeline, looking at it last night, we are looking at around probably about 300 basis point spread of the 5 -- it is around 3.5%.

3.5% coupons?

3.5%.

If you look at that $2 billion pipeline it is very strong and it is going to mid-3s.

So when you price off the Treasury curve it is predominantly five-year on paper.

And have you fully benefited from the Aurora deposit transaction in terms of your decline in deposit cost this quarter or do you expect to get further benefits?

Well, you see the change in the CD rates went down; that is obviously driven by Aurora.

So you get some more continuation by the end of the year, but it is not going to be a long-term strategy there, but it is definitely continuing.

We will have some -- not the same amount of benefit in Q4 but it is probably half the benefit in Q4.

Okay, thank you.

Rick Weiss, Janney.

The pipeline, it is $2.2 billion, what percent of that would be multi-family?

Like 80%, plus 80.

Yes, we are getting a tremendous amount of refinancing in the multi-family market today.

It is really very consistent with the business model that we have had for many, many years.

And, Rick, we have a high percentage of new business, so this will help us with our growth aspirations going into Q4.

Okay, and if the refinance -- the high level -- it could be strictly, do you think, to the interest-rate environment or is there more activity among the (multiple speakers) owners?

I think it is both.

I think it is both.

There is no escaping the fact that interest rates are very attractive for refinancing, but our people need to have the ability to buy product.

As we saw in 2009 there was no activity because there was no product to be bought.

Rates are arguably very low compared to the earlier years in 2009.

So it is not just rates, it is also the availability of product.

Okay, got it.

And then I was wondering if you can give a little bit of color on possible M&A activity and if you're thinking it has changed at all regarding going over the $50 billion SIFI limit?

I think the reality is that this is an environment that necessitates a great deal of preliminary work in preparing for the crossover of a $50 billion plateau that changes regulatory requirements.

So we are doing a lot of work to be prepared to be bigger than $50 billion.

And as you might imagine, there is money and people and external experts that are used for that purpose.

So that is where our concentration is, on being prepared so as to take advantage of the opportunities that may arise.

Once we are over $50 billion then we can entertain any deal size, but we need to be prepared to be bigger than $50 billion first.

Okay, I understand.

Thank you very much.

Mark DeVries, Barclays.

Joe, I think you mentioned you still see room to grow the single-family origination business.

Can you talk about how much more capacity you have there distributed with your current platform?

Yes, yes, yes, we have huge capacity there.

I think the numbers are as high as $30 billion that they had at one time in their operations, and then we have significantly below that number today.

So we have the ability to grow that dramatically over the time ahead.

I would just add the plan for next year is to rollup the FHA business; that is in process.

Hopefully, sometime mid next year we will have that in place.

In addition, as you know, some of the larger players are exiting the correspondent business and we are looking to capitalize on that.

And we are also making some inroads on the hybrid ARM business for portfolio.

Got it.

Could you talk a little bit about your percent purchase versus refi mix and what the implications might be for volume shifting over time from refi to purchase?

It has been around 75/25 for the quarter.

We saw a major change from the prior year, but it has been ranging I would say in this.

Going into October it is probably 80/20 given rates tweaked up a little bit.

So, obviously, if lower rates -- the swing rate goes below 3.75%, you would see a higher level of refi to swing that way.

But once it goes north of 3.5% to 3.60%, you were seeing more purchase activity.

So it depends on the level of interest rates, but it has been a noticeable change from the previous year.

How would you expect your market share there to change as we do shift eventually towards (multiple speakers)?

Well, we hope to continue expanding our market share.

I mean, obviously, we are holding where we were since we have took over operations in late 2009.

And we are making significant inroads of spending significant dollars on building the platform, enhancing the platform.

We are committed to the business model.

And we have tremendous operations in Cleveland, and we are expanding into some other markets to get our people to deal with the amount of flow that we are seeing.

So we are committed to the business model.

We think we have a unique opportunity here given that we went into the cycle probably in the worst time of the cycle, so we are capitalizing on some of the exits.

Okay.

And, Tom, I think you just mentioned you are seeing players continue to get out of the correspondent channel.

Is that actually taking capacity out, which is supportive of your gain on sale margins here?

Yes, I think some of the larger players happen to have tremendous retail ops.

So if you are doing 96% of your volume on retail, why waste your efforts on correspondent?

We are a correspondent lender; that is what we do.

We have the opportunity to do some really strong retail business as we go through this transition of running this business, and I think over time retail can also contribute to our growth.

We just don't do a lot of retail lending.

We are just starting to get there.

Okay.

And just one last question from me.

Do you still expect the Co-op City loan to pre-pay in the fourth quarter?

Yes.

Yes.

Okay, thank you.

Collyn Gilbert, Stifel Nicolaus.

Tom, just on your comment about the -- you know, on track for the $100 million in pre-pays for the year, does that imply a down four quarter, because I guess if we look at --?

No, I wouldn't say that.

I would just say I am being conservative.

The reality is that pre-pay has been elevated.

If you look at the past two quarters they were two record quarters.

We were pretty much flat quarter-over-quarter at north of $30 million.

We are in a very unique pre-pay environment.

This could last for a while.

The good news is that we have some good visibility as of October that we should be strong for the fourth quarter.

As you know, fourth quarter is always our busiest quarter, so we are going to have lots of activity.

In addition, we actually grew the net loan book from Q2 to Q3, which is unusual given the nature of the business model and the seasonality of that.

So going into Q4 we expect to see some good originations, some good new business and some good prepayment activity.

Okay, okay.

And then just --.

And, again, I only say $100 million, because Mr. Ficalora said $100 million in Q1, so (technical difficulty).

Plus I said we would have robust pre-pay.

And then obviously the $100 million at the time I said it seemed like an incredibly high number, but we could easily exceed that number.

That's right.

Okay, okay.

And then, Tom, I know you gave guidance on the margin.

How are you thinking about just the absolute level of net interest income?

Obviously, you know there is some --.

No, I think it is interesting.

I'm not going to give you a specific quarter, but for the first time in probably three years I see visibility of a trough in the margin.

So we are looking at in the very short term -- and I can say short-term is well within 2013 -- we should see the bottom of the margin, assuming this tough interest rate environment.

Now that is a very positive view from our perspective knowing that it has been many years before we saw visibility of where the margin will trough out.

So the good news for us is that we see -- we are seeing some good growth.

We believe we will continue to dominate the space in multi-family.

The rates are reasonable if you look at the spread of the Treasury curve.

And where pricing for liabilities are right now we have an opportunity to hopefully trough the margin out in 2013, hopefully sooner rather than later. .

So that is interesting.

I wouldn't have expected you to see a trough in the margin.

So what is driving that specifically?

I just think if you look at how many billions of dollars of loans that we priced already in the portfolio you are at a point now where -- you know, you always have refinancing on property transactions, but the rate has come down dramatically for the absolute yield in the portfolio.

Between security yields coming down and loan yields coming down, our deposits are pretty close -- within 60 some odd basis points in all-in cost of funds for retail.

We are looking at putting new business on at a reasonable spread.

It is going to get close to a trough.

Remembering that the rates in the terms of our loan book -- very, very short-term.

So think back three years ago.

Three years ago rates were not that high.

So rates have not been in the 5s and beyond for the years that are immediately passed, so when those loans come up to refi they are going to be refi'ing very close to where we are.

When I say trough to margin I am excluding any prepayment activity.

Right, right, that is fine.

Prepayment activity has been a tremendous support to our margin; that is our business model.

Okay, so I guess if we look to the loan yield as 5.11% this quarter and your new new multi-family originations are going on at what?

Yes, that 5.11% includes prepayments.

If you back out the prepayments that number is well below 5%.

So we're at a point now where the bleed on the margin from asset yields coming down will significantly change.

I would say probably like a 4.70% type yield on the portfolio, average yield.

And new originations are coming (multiple speakers).

And supported the margin by -- that is right.

The support of the margin from pre-pay is the same regardless of the rate that is going on.

Right, right, right.

But I'm just trying to get the rate on new -- on current originations.

It is around 3.5% I think I said on the last question.

About 3.50%.

And again that is this market.

That can change quickly.

Obviously, if rates spike we will hopefully get a bump up in rates.

We would like to see higher rates.

That does impact the mortgage bank, but obviously for the portfolio higher rates will be a good thing.

Okay, that is it.

Thanks.

Bob Ramsey, FBR Capital Markets.

I was wondering if you could talk about maybe any opportunities on the funding side to bring down borrowing costs.

I know you guys have got a small amount of pretty expensive TRuPS out there that should be callable and some TRuPS that are still probably above market rate, maybe not quite as expensive.

Your thoughts here?

And maybe on -- maybe not a big balance sheet restructuring, but the opportunity to chip away at some of the higher cost borrowings as we go forward.

Bob, I would say we have been pretty clear about this.

Any substantial reshuffling of a liability book will take place in context of an M&A transaction of any material benefit.

So as we stand today we have some liabilities rolling off next year, which should be favorable to probably around just south of $1 billion -- not a material number.

And if you think about where the funding market is today, if we grow our book and take on new funding, funding is relatively cheap compared to our average cost that we have on the book.

So if you think about the opportunities, a substantial transaction would result in a substantial restructuring.

That is how we are looking at the Home Loan Bank advance book.

As far as the TRuPS, the TRuPS are small.

I mean, it is immaterial.

So we have a few high cost pieces out there, nothing that is going to move the needle.

But in the event -- we will evaluate that as we look at our capital plan.

And we have got capital allocation in particular -- as the new requirements you lose the benefit of some of those TRuPS.

And we have some very low-cost TRuPS as well at a floating rate in this environment where there would be no reason to call them.

Right, and I can appreciate looking for a bigger transaction to really restructure the borrowing, so why not take some of the strength in mortgage banking earnings every quarter to redo a little bit at a time?

If you look at the big picture for us, we see -- over time these liabilities will get closer to maturity.

As we get closer to maturity the out of the money value will be less.

So you will have less out of the money value.

You will have an opportunity to look at a restructuring if it is reasonable for shareholders.

Having a restructuring that is going to be more than I would say in excess of five years per se -- I am not sure if that is in the best interest right now absent a transaction, you know, reshuffling the entire balance sheet.

So we look at it every quarter, depending where rates are, depending where the expectation of rates are, what was the value of these -- the out of the money value of the liabilities.

If you are well north of 10 to 15 points out of the money, it is an expensive hit to capital.

Yes.

And then shifting gears, could you talk about your expectations for expenses going into the next quarter, and is there any cost benefit from the system conversion you guys cited earlier on the call?

I think in general, I'm going to give you some very short dated guidance now.

We are going to come in pretty close to last quarter between $146 million to $148 million -- that is the range.

We are still battling with get getting rid of some of these NPAs as they come.

We have foreclosure expenses.

It is significantly less than the previous year.

That could be a very big benefit next year as the percentage of NPAs are down dramatically.

We have come down every quarter since March of 2010 materially, so we are seeing a very nice reduction of NPAs.

So we expect to see in 2013 less cost of foreclosure expenses, but obviously that is getting to the asset class and getting it to the market and recovering some value there.

That is pretty much where most of our costs have been of the uptake.

So I think we have a reasonable containment on expenses.

I'm not going to give you any aggressive guidance yet.

I feel pretty confident that range -- I mean, we are pretty close to the previous quarter on the range, as the $145 million to $148 million was the high-end of the range, driven mostly through foreclosure expenses.

Fourth quarter should be around that same level.

Okay, that is helpful.

And then with the mortgage banking servicing loss what is the best way to think about that?

Is that the hedges or is it actually the MSR?

Is it a reflection of the 10-year or prepayment activities or how should we think about the moving pieces on that going forward?

If you look at the significant adjustment there, no question we had a banner quarter on origination.

The gain on sale margins were very robust.

Our all-in margins were close to 2%.

If you look at our price margin, and we take out hedging and carry costs, about 155-ish.

So the business is very healthy on origination.

But as you know, the MSR value is very volatile in respect to our interest rates.

And if you look at where the FNCO was at quarter end -- and when QE3 was put in place in the late part of the quarter that did have an impact on the prepayment speeds of the portfolio.

Prepayment speeds, our average coupon right now is around a 4.07%, so we still have vulnerability to prepayment.

If rates were to be higher here the MSR would recapture some of that value.

But if for some reason the swing note rate goes back to 3%, or let's say close to 3%, we have the opportunity for significant refinancing, so we're being very conservative on valuation of MSR.

Okay, great.

Thank you.

Moshe Orenbuch, Credit Suisse.

If I look at the loan yield on your books and subtract out the prepayment income, you get about 4.6%.

It is 4.70%.

Okay, 4.70%.

So I guess the question really is the concept of the troughing of margins, is it because some of the -- some of your borrowers are sitting there and having refinanced recently so their prepayment penalties are too high?

Because otherwise one would think you would be approaching that 3.5% over the next several quarters.

A 3.5% coupon with a funding -- new business funding close to around 50 BPs, it is a fairly reasonable spread.

You can get in reasonable -- you can get 2 to 3 year money at a very low cost.

So if you are looking at incremental growth that should benefit or stabilize some of the lost income from assets repricing at higher yields.

What we see right now is that the bleed in 2009 and 2010 and 2011 is going to be less than 13, because the average coupon is much lower.

We are not going to have the 5.80%s burning off or the 6.20%s burning off, you're going to have average 4.70% burning off.

And after each quarter goes down the higher-yielding coupons will pre-pay or at least refinance, and they will pay us our points and we will put them into the market, which is around 3.5%.

So assuming interest rates -- and we are assuming Bloomberg forward curve, a dismal view of interest rates, we are assuming low rates, we are seeing the trough sometime in 2013.

Let's say it is mid-2013, which is visibility.

Two, three years ago we had a zero visibility, because there is so much uncertainty of interest rates.

I think what we could say today is that fairly certain that rates are not rising in the short term.

So we are assuming that is the visibility that we are seeing.

And when you run that visibility into our system and look at it -- our analytics -- we are seeing margins troughing out, given that we are putting on reasonable spreads off the five-year CMT.

Remember, our asset class is very short.

It is not a 10-year asset or 20-year asset, this is a 3.2-year type average life.

This portfolio turns very rapidly.

Right.

Just to follow-up, could you talk a little bit about what you're planning to do going forward on the securities portfolio?

You have got a nice yield on that.

Can you -- how long dated is that and how long -- how is that going to --?

The securities portfolio today is probably too small.

We have been very cautious on growing it aggressively.

We have been dealing with mostly accelerated call positions.

We had a lot of callable debentures over the past, four or five years, and as we get into these positions they are being called on an annual basis.

We have been a fairly large player into the agency [dust] market, so you're looking at a 7- to 8-year type security, with a 10 year final in multi-family backed collateral, all backed by the government.

Principally all our purchases have been at a discount or par, so we don't have the prepayment risk there on any potential credit exposure to the dust market.

But that has pretty much been our product of choice.

We would like to be larger there.

We are just very uncomfortable in going along the curve.

And, believe me, 10 years is fairly long, but what is out there is exotic products that are much longer than 10 years and we refuse to go into that product.

So we are trying to keep it very simple.

I would say 99.8% of all our purchases are government-backed, and we should be somewhere between 14% to 18% securities.

If you see the little bump up we had in the quarter, a lot of that is going to be paid off on calls in Q4, so we are trying to keep it flat.

Got it.

And the yield of the stuff that you're buying roughly?

It is north of 2.50% or north of -- we're trying to keep yield bogeys at least to 2.5.

So we haven't been too active because rates are obviously lower than that.

Right.

Matthew Kelley, Sterne Agee.

Just following up on the margin discussion, if you're adding at 3.50% incremental type yields, what type of securities do you think you might be purchasing if that portfolio grows?

Would it yield (multiple speakers)?

I think I answered the question on the security side.

We are not looking to buy securities.

In the event that markets happen to move in the right direction, we will put on [billions] in this environment.

We need to be larger on the security side.

We would like to be between 15% to 18%, given the environment, unless we see substantial loan growth next year, which it is possible, depending where rates are.

But given where we are sitting today, it is not an attractive yield to go past a 10-year final.

So we're being cautious.

We are trying to run it -- I mean, we went as low as 9.9%.

I think we're around 11% now.

Some of that will pay off in Q4, so we are trying to run in place.

If rates were to move north from here we would be putting on a few billion dollars.

Right.

There is no question that the securities portfolio is far less relevant than the loan book.

The loan book is far better return for far shorter periods and has a low risk profile, so the loan book is where we concentrate.

Yes.

How should we be thinking about just the incremental profitability of the mortgage banking operation?

Obviously, revenues were up really strong over the last couple of quarters, but I haven't seen a real commensurate increase in the expenses in that business.

Over time the Mortgage Bankers Association, they came out with their updated forecast today, down I think 20% -- 25% -- 20% originations and Freddie Mac is 15% to 20%.

How should we be thinking about profitability?

It seems like that is an incredibly profitable business just looking at where the revenues have gone, and not seeing a real commensurate move in expenses.

Could you talk about that for a minute?

We had a tremendous origination quarter.

If you look at where -- so we had a loss on service, and we made a fairly large adjustment to the MSR valuation in this environment.

But it all had to do where the interest rate environment is at as a point in time.

But big picture, you could talk about where the business will be next year.

The reality is if the swing note rate is 3% you will have a robust 2013.

If the swing note rate happens to be get closer to 4% it will slow down.

As I said on the previous question, we are at a 4.09% weighted average coupon in our servicing book.

That entire portfolio could refinance, especially if it is a California type weighted portfolio.

Matt, you will see some pretty good refinancing at lower rates.

Now where we are today business is strong.

Going into Q4 business is relatively strong, given QE3, given that rates are low.

That is predominantly 75% to 80% refi.

Purchase environment -- the one thing we are noticing here -- if you look at -- we originate in all the states -- the purchasing environment, house purchases, home purchases are definitely improving.

We are seeing a nice stabilization in the US housing market.

That will drive the mortgage business, no question about it.

There is no question that we are a very efficient operating bank generally across the board.

The systems that we are using in this case are very well-proven proprietary systems that have demonstrated a capacity to service twice the level of loans that they are currently servicing.

And certainly our origination capacity across the country is significantly higher than the level that we are at today.

So the idea that we could operate prospectively very effectively and efficiently with a significantly higher volume is a matter of just gaining share.

And I think based on the changes we have seen in the marketplace we should be able to do that.

What are the expenses related to the mortgage banking operation?

You guys got $58 million in the second quarter, $53 million in the third quarter for revenues (multiple speakers) pretax margins there.

Matt, when we file the Q we show segment reporting, so we'll have it and you can get a better picture there.

Okay, all right, thank you.

David Hochstim, Buckingham Research.

I wonder, could you just give us a sense of how the competitive environment is looking in the multi-family business?

Has it gotten (multiple speakers)?

There is no question that there are some additional players in that market.

But as we have said in the past, over the course of the last financing of much of the marketplace, there were many very, very large structured debt lenders in the marketplace doing high-volume lending, and they're not there.

So even though there are new names that people recognize in the marketplace, there is not anything near as much competition in the marketplace as existed in 2006, 2007, 2008.

So the reality is that the marketplace has a lot of visibility, but from the standpoint of opportunity we should be able to -- as the opportunity presents itself for our balance sheet to grow we should be able to gain share in this market relatively easy because we are consistently in the market in a structure that our niche actually works well with.

So although there are other players in the marketplace, and they may get some visibility, they are not necessarily doing what we do.

And they are not necessarily going to be relevant over time, given the fact that they're basically replacing the structured debt lenders, they are not replacing us.

And are any of these new competitors more aggressive on rate or price?

Some of them are.

Some of them are aggressive on rate, some of them are aggressive on terms.

The reality is when you're coming into a new market you have to have some way of gaining share.

So some of the players are in fact, doing things that are different than we would do, but that is not unusual.

At the very same time you could have two different banks talking about being multi-family lenders and we may never see that other bank in our niche.

Our niche is unique.

Multi-family in New York is huge.

The whole world lends in New York.

So many time you hear people talking about they are doing multi-family loans, they are not necessarily doing what we do.

The good news is that we are seeing good economic spreads between the five-year CMT between 275, 300.

It has been relatively stable.

The five-year has been bouncing around here, but it hasn't really gone to a level that -- it only looks substantial.

We are seeing reasonable economic returns and I think everybody is pricing those returns within a 25 basis point band.

Okay.

And then can you just talk about what opportunity there exists to lower CD costs or core deposit rates (multiple speakers)?

Core deposit rates probably have more opportunity than do CDs.

CDs are highly competitive and everybody focuses on the marketing, if you will, of CDs.

But the reality is over the course of the last 12, 18 Months the place with the best opportunities actually reside would be in the large core deposit basis that actually have rates that are adjustable.

There is very large difference between the rates being paid on core deposits.

And how much do you have -- have you been -- you have cut your CD rates like everybody else, but so (multiple speakers).

Right, yes, on CDs we don't have that much room.

David, I would say given where the environment is within the next year we had about $5 billion on 1%.

So if rates go lower we will get some more savings there, but if they hold at 1% there's not a whole lot of savings.

So if you had a big benefit from the Aurora transaction, you see the drop on the quarter-on-quarter, but we at about $5 billion coming due at 1%.

But remember, we have almost $20 billion at other rates.

So that is where the real opportunity would reside.

Right, okay.

And then just back to the MSR write-down.

If rates stay where they are, would we have a much smaller impairment charge in Q4 do you think?

Yes, I would say that is correct.

Okay.

If rates would go up they would move the other way a little bit.

Obviously, like I said a 4.07% weighted average coupon, and if the swing rate goes closer to 3%, we could have accelerated prepayment activity.

So, again, it all depends -- it is going to be driven on the value of the assets going into the fourth quarter and what is the culture of the borrowers that we have servicing, because that portfolio moves around very rapidly.

Right.

And so what was the impairment charge this quarter?

The total (inaudible).

We marked it down $42 million, and invested pre-hedging.

So net of that we hedged a gain of $20 million, so net $20 million.

Okay, thanks.

Dave Rochester, Deutsche Bank.

Just back on the cost of deposits, I know you mentioned things are still competitive, but with Hudson City out of the picture now aren't you thinking you have got a little bit more room than you had previously to lower deposit costs?

Well, you know, it is not a matter of just one bank in the market.

There were certain places where we were close to Hudson City, but many, many, many places where we had no effect whatsoever from Hudson City.

So the reality is that there are opportunities in the marketplace, and these opportunities exist all over our franchise, which includes Florida and Arizona and Cleveland.

And as you might well imagine, there is differentiation between the rates that we pay and the rates that are being paid generally in a given marketplace.

Okay.

And back on the loan pricing, are you seeing CRE still at 35 to 50 BPs over multi-family yields at this point, so maybe around 4% or so?

Yes, just south of that, yes.

On average it is around 25 to 35 BPs.

Okay, and then just one last one.

Going back to the pricing, the good news, I think, in general, it feels like a line in the sand has been drawn and no one is breaking the 3% threshold for a portfolio, which is good when you are looking at five-year money.

So we are around 2.75%, 3.00% over, the economic returns for us on a 3.3-year average light life is reasonable.

So 3% is basically a well for, I guess, (multiple speakers)?

I know what we are putting on our book and it is not 3%.

The average closings for the quarter was probably more like 3.60%-ish.

What we have in the pipeline is 3.5%, so it is still -- and this feels like a very low rate environment.

And in prior quarters we have been holding it slightly north of that, so it seems like most players are not breaking that level.

Okay.

And, lastly, you talked about the Co-op City loan briefly.

Can you just remind us how big that is today and what kind a prepayment penalty income you would expect?

It is just south of $600 million to $580 million-ish.

And the number is going to be a substantial number, it is a couple of points.

It will be a least -- it will be in the range of $18 million.

Okay, great.

Thanks, guys.

Tom Alonso, Macquarie.

Most of my questions have actually been answered at this point.

Just real quick, on the shift or I guess the perceived shift away from CRE this quarter, was that your doing or just because you had more opportunity to originate on the multi-family side?

It is twofold.

Obviously, our origination on the multi-family side is very real.

But also we are in the business of literally selling off pieces of the large commercial assets that we are doing.

So we are getting good fee income from that.

And then we are basically doing good loans of size, and then we are trading some of those loans in the marketplace.

Okay.

(multiple speakers).

I got you, okay.

Then just back on the M&A topic, are you guys still, I guess for lack of a better term, kind of geography agnostic where you just go where the opportunity presents itself in terms of potential M&A?

Yes, clearly the place where there is clarity that the transaction creates a better bank from the standpoint of its capacity to perform, all of the operating metrics of the new bank are intended to be better than the existing bank.

And, certainly, that doesn't leave out asset quality or the ability to have the funding sources at good pricing or the ability to have performance metrics from a standpoint of accretion to earnings or accretion to tangible.

We do a deal, it will be a good deal for shareholders.

Okay, fair enough.

Thanks, guys.

Steven Alexopoulos, JPMorgan.

I am calculating the earning asset yields without the pre-pays around 4.55%.

And with new loans coming in at you said 3.5% and securities 2.5%, I am trying to understand how it is possible that by mid-2013 we could see earning asset yields decline as this implies about 100 basis points plus decline in a relatively short time.

Just, maybe, Tom, you could walk us through that.

I think, again, I can assure you that your cash flow model probably does not have the capacity of the multi-family lending.

And the prepayment speeds on the book is very, very fast right now, so you have to assume a lot of that, we will call it mid-4% type coupon, will run on past prepayment penalty income and go into to the market.

Now if we are growing -- we are assuming we are going to grow next year -- we feel pretty bullish about net multi-family loan growth next year.

That will be on incremental growth.

If you are putting on 3.50% and you are funding at 50 BPs or at 60 BPs, because that is an average cost of 64, on the deposit side it is margin accretive.

Now you need a lot more loan growth to get there, but we have pretty ambitious loan growth for next year based on what we are seeing.

Okay, but we should assume --

Now, on the security side, again, I don't have the security book running up dramatically here.

That will be dilutive to the margin.

We are not looking to put on securities.

It is the bare minimum right now.

If rates are higher, we could put on more security volume.

So depending on the level of security that would probably dilute the margin.

Okay, but we should be thinking about the earning asset yield somewhere between where you are currently reinvesting loans and securities, right?

Again, security yields, I don't see them going substantially lower from here.

We had a lot of bleed over the past 2.5 years.

We have been reluctant to grow that average balance, to be frank.

We have a nice warehouse balance.

It is around $1 billion.

If the business picks up we would like to grow that up materially from that.

That is adding to it.

But the big picture is that the multi-family book, it is rapidly cash flowing, so the average life on that is relatively short and we're getting a decent yield compared to incremental funding going forward.

Okay.

Just one question.

I know you answered quite a few questions on M&A and following up on the comments that we will see a sizable transaction over the next year.

We have seen a few out there recently from some of your competitors.

We know you don't necessarily get a look at every one, but are these ones that would fit either the strategic or financial criteria that you think about more broadly?

Yes, I would say so.

I would say we see most transactions, and I think it is fair to say we saw most transactions that is traded.

Yes, all the big deals we have seen.

We are not surprised by transactions that are traded.

I think the reality is that, as Joe said, it is going to be a shareholder transaction where value is created in combining for shareholders, not about getting bigger and not getting strong returns.

A [deal limits] market for us would be highly accretive to shareholders.

Like I said previously, we would definitely rollout a repositioning of the liability book in conjunction with a transaction to deal with the high-cost [dust], and that would also drive -- we believe, drive future earnings.

I think we are starting at a point where we have much better metrics today.

And we reasonably can expect that into the year ahead we will have much better metrics in the banking industry.

If we do a deal, those numbers will only be better.

So the idea that we would entertain the opportunity to do a deal is very real.

But we are also very, very much aware that there are regulatory expectations that must be met by all banks, and in particular by bank is going to crossover the $50 billion mark.

So we are concentrating on preparing ourselves for that particular task.

And, certainly, once we have done that, once we are at the point where our regulatory comfort levels are such that they would not preclude doing a deal, we will entertain the deals that are in the marketplace and available.

Okay, thanks for that color.

Ken Zerbe, Morgan Stanley.

Tom, I know you mentioned -- this is on the servicing asset again.

I know you mentioned that you're being conservative there, but what kind of assumptions are you making on prepayments or, I guess, life of the servicing asset?

And is there any way to benchmark that?

I am not going to get specific into my assumptions.

I will tell you that our capitalization rate right now is at 2.97%, which is less than 1% on a servicing fee of 25 basis points.

Do you know how that compares --?

If you want to go historically, servicing transactions prior to the cycle was getting done 8 to 10 times.

So we are valuing it less than 1. So I think that is fairly conservative given that we have a 4.07% coupon and that could move quickly, so we want to be prepared.

If rates go lower we want to make sure we have a conservative view on valuation.

Do you know how that compares to other banks?

I would say probably in the low-end of the valuation.

Definitely at the low-end of the valuation.

Again, but as you know, depending on the nature of their portfolio.

Right off if the portfolio is much newer -- right, we have been doing this since the beginning of 2010, so rates were lower.

Other guys have higher coupons or different types of collateral on their book.

Ours is all fairly new -- all new originations that are under the new standards of Fannie and Freddie and it is a pretty rapid book and it moves pretty quickly.

So we think it is conservative, but, again, rates move around.

All right, great.

Thanks.

Mike Turner, Compass Point.

Just following up from earlier, what was the average size of the mortgage warehouse this quarter?

Just about $1.1 billion on average.

It is a little bit as expected.

We had a nice little bump up there based on origination volume.

We are hoping that will hold for the fourth quarter, which will be nice.

Thanks.

And then what are -- I don't know if I missed them in there -- what is the environmental cost related to foreclosure that -- in the quarter that you would have some opportunity to bring down in the future?

That is more on the portfolio.

It is a fairly large number.

That number last year was --.

We had close to $100 million last year (inaudible).

About $40 million, $50 million last year.

We typically don't have those types of expenses running our business.

So if you take that out of our run rate in 2013 it could be another $30 million -- $25 million to $35 million benefit next year in 2013.

What was it this quarter?

I specifically don't have -- haven't disclosed that.

Okay.

And then, I guess, just maybe some more clarity on the M&A.

Did I understand you right that you won't do a deal until you are over $50 billion?

No, no, no.

The likelihood is that we will do a very big deal, and we will go over $50 billion, but the preliminary work in doing a big deal is ensuring that we have regulatory comfort in being bigger than $50 billion, that is the important thing.

In this environment there is preapproval by the regulator of the new company.

And the new company will be bigger than $50 billion, so that task is something that we -- by necessity we will do that first.

Okay, thank you.

That makes some sense.

And, just lastly, on the securities deal, I was a little confused.

It sounds like you said it is not going to come down much more, but your overall yield, it looks like it is around 3.70%, 3.80% and you are reinvesting at 2.50%, I was just a little confused.

I think we are -- I guess there's going to be some bleed depending on how much of this stuff cash flows out rapidly and gets called.

I think we have seen a substantial amount of calls dissipate over the past few quarters.

If you go back to 2009, 2010 it was $2.5 billion of cash flow coming in at 6% and 5% and they were all agency.

So we are not exposed to that level of the bleed.

Now it is going to go lower, but we are running in place.

So if you look at where we are today I don't envision billions of dollars of calls.

It could be a few hundred million in the fourth quarter and maybe less on a quarter-over-quarter basis in 2013.

But what we are also saying, we are not looking to grow the portfolio any material length until we see better value in the market right now.

Once QE3 came into place there was less value as a portfolio holder of securities.

So, again, we are holding bare minimum for collateral purposes and on balance sheet liquidity dependency purposes.

Okay, thank you very much.

That is all the time we have for questions.

I would like to turn the call back over to Mr. Ficalora for closing remarks.

On behalf of our Board and management team I thank you for your interest in the Company and our third-quarter 2012 performance.

We look forward to talking with you again in January when we report our fourth-quarter 2012 earnings.

In the meantime, please accept our sincere wishes for a healthy, happy and prosperous holiday season.

Thank you.

This does conclude today's third-quarter 2012 earnings conference call with the management team of New York Community Bancorp.

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