Flagstar Financial Inc (NYCB) 2013 Q3 法說會逐字稿

Good morning and thank you for joining the management team of New York Community Bancorp for its quarterly post earnings release conference call.

Leading today's discussion of the Company's third quarter 2013 earnings will be President and Chief Executive Officer, Joseph Ficalora, together with Chief Financial Officer, Thomas Cangemi.

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

Certain of the comments made in the Company's management call will contain forward-looking statements which are intended to be covered by the Safe Harbor Provisions in 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 that the Company currently anticipates.

Due to the number of factors, many of which are beyond its control, among the factors are general economic conditions and trends, both nationally and at the Company's local markets.

Changes in the interest rates, which may affect the Company's net income, prepayment penalty income, mortgage banking income, and other future cash flows of the market value of its assets, including its investment securities, changes in the demand for deposit, loan, and investment products, and other financial services, and changes in legislation, regulation, and policies.

You will find more about the risk factors associated with the Company's forward-looking statements beginning on page 6 of this morning's earnings release and in the SEC filings, including its 2012 annual report on Form 10-K and its quarterly reports on Form 10-Q for the three months ended March 31 and June 30, 2013.

The release will also include 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 the Company's Investor Relations department at 516-683-4420, or visit IR.myNYCB.com.

After the prepared remarks, we'll have a question-and-answer period.

(Operator Instructions)

To start the discussion, I would now turn the call over to Mr. Ficalora, who will provide brief overview of the Company's third-quarter performance before opening the line for Q&A.

Mr. Ficalora?

Thank you, Steve.

And thank you, all, for joining us for this morning as we discuss our third-quarter performance which demonstrated the merits of our core business model, producing multifamily loans on rent-regulated buildings in New York City, and adhering to credit standards that support our asset quality.

Exceeding the record pipeline we announced going into the quarter, we originated $3.4 billion of loans held for investment, including $2.6 billion of multifamily loans.

This was the largest volume of multifamily loans we've produced in a single quarter and a lending niche we've been calling our own for more than 40 years.

In contrast to the residential housing market, where loan demand has significantly fallen, the demand for multifamily loans has been strong throughout this year.

The increase in demand and production has largely been driven by an increase in property transactions, as the economic environment in the Metro New York marketplace continues to be very robust.

This, in turn, has given rise to a solid stream of prepayment penalty income as reflected in the levels we've recorded to date in 2013.

In fact, prepayment penalty income accounted for $39.6 million of interest income on loans we recorded in the current third quarter, not all that far behind the record $44.4 million we recorded in the trailing three months.

For the first three months of this year, by the way, we are ahead of last year's record production of prepayment income.

Reflecting the contribution of prepayment penalty income to the average yield on our interest-earning assets, prepays accounted for 41 basis points of our current third-quarter margin, which was 3.04%.

The contribution of prepays has been especially important, given the steady decline in mortgage banking income over the course of this year.

With rate locked volume falling 50% on a link quarter basis, mortgage banking income fell 30.2% sequentially to $16.2 million in the third quarter of 2013.

These declines are consistent with those of other banks with mortgage banking operations and not at all unique to NYCB Mortgage Company.

Notwithstanding the decline in mortgage banking income, we generated solid earnings in the third quarter of 2013.

We attribute this primarily to our core business of multifamily lending and to the interest income we produced through these and our other held for investment loans.

In fact, we generated GAAP earnings of $114.2 million, or $0.26 per diluted share, in the current third quarter which provided a 1.11% return on average tangible assets and a 14.86% return on average tangible stockholders equity.

The benefit of our traditional lending niche can also be seen in the growth of our assets, which rose to $45.8 billion at the end of September from $44.2 billion at the end of June.

Notwithstanding a dramatic decline in held for sale loans to $281.3 million, the balance of outstanding loans rose $513.4 million sequentially to $32.4 billion, driven by a $1.1 billion linked quarter rise in held for investment loans.

At $29.2 billion, held for investment loans were up 4% from the June 30 balance and 6.9% from the balance recorded at year-end 2012.

Looking ahead, our pipeline loans is just about $3 billion with loans held for investment accounting for approximately $2.5 billion, or 82% of that number.

We also increased our securities over the course of the quarter, consistent with the intentions we mentioned at our last conference call.

At the end of September, securities represented $7.1 billion, or 15.5% of total assets, up from $5.9 billion, representing 13.4% of total assets at the end of June.

The securities we put on our balance sheet consisted entirely of GSE obligations, which represent 94.6% of total securities at quarter end.

In connection with the link quarter growth of our interest-earning assets, our balance of wholesale borrowings rose to $14.2 billion from $12.6 billion at the end of June.

The quarter was also notable for the quality of our assets with measurable decline in the balance of nonperforming loans, ORE, and loans 30 to 89 days delinquent, and a parallel improvement in our measures of asset quality.

Nonperforming, non-covered loans represented 0.43% of total non-covered loans at the end of September, in contrast to 0.60% at the trailing quarter end.

Similarly, the ratio of nonperforming, non-covered assets to total non-covered assets improved to 0.46% in the quarter, a contrast to the 0.61% at the end of June.

Meanwhile, the balance of past-due loans fell $29.8 million sequentially to $9.9 million, reflecting a link quarter decline of 70.6%.

The improvements in asset quality also extended to net charge-offs which at $4.4 million, represented 0.01% non-annualized of average loans.

Reflecting the strength of our earnings and the consistent strength of our capital position, the Board of Directors last night declared for the 39th consecutive quarter a quarterly cash dividend of $0.25 per diluted share.

The dividend will be paid on November 19 to shareholders of record at the close of business on November 7, 2013.

This concludes my prepared remarks.

So I would ask the operator to open the line for our questions.

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

Steven?

Our floor is now open for any questions.

(Operator Instructions)

Our first question is coming from Ken Zerbe from Morgan Stanley.

Your line is open.

Great.

Good morning, guys.

Good morning, Ken.

Tom, I was actually hoping you could answer a two-part question.

First of all, what are you seeing in terms of credit spreads or yields on the SIRI portfolio just given that we have seen a pullback in rates and how has that changed versus just a quarter ago?

And the second part of the question is given what we're seeing with rates, could you update us or comment on NIM compression or your outlook for NIM over the course of the next 12 months or so?

Sure, Ken.

So I guess big picture, we had I'd say a reasonably good closing quarter with respect to the average yield around 3.30% for the quarter, that drove that margin down as expected around 5 basis points.

That was the Q3 actual.

When you look at Q4, you have a much significant, I wouldn't say significantly higher, but a higher yield that's coming on approximately of 3.70% for the pipeline number that we reported in the press release.

That's a higher yield coming on.

Again, markets do change, rates have backed down, but that's what we have committed in the pipeline, a 3.7% yield.

So that being said, knowing that the new commitments that are coming out as of today, you're looking at around a 2% to 2.50% spread depending on commercial and multifamily, average 2.25%, you're still north of 3%.

But it's going to be some pressure with the next pipeline that we fought to rebuild as we get closing out the quarter.

So net that, my short data guidance for the quarter are probably going to be around the same level of 4 to 7 basis points quarter-over-quarter.

So similar trends that you saw in Q3 you'll see in Q4.

Again, getting very close to that bottom.

Again, maybe expect another 4 to 7 basis points decline in margins going into the end of the year.

And then any comments on 2014 NIM?

I'm not going to give any year guidance.

I will tell you that it feels like -- I mean, the big picture, with respect to the coupon for the portfolio, multifamily coupons now at 3.86% as we close out September.

That's a pretty low yield for us.

So that's the overall average yield for all of loans that we have in multis are 3.86% and the SIRI's around 4.40%.

So it comes down materially.

So that should give us some stabilization as these rates stay around this level.

Now, if rates significantly decline, you'll have the pickup on the mortgage bank offset some of the continuation of margins going down.

But the reality is that 2.50%, 2.60% level here in the 10-year, and you look at circulated spread between 5 and 10, you're probably looking at close to that 250ish level.

So we're not that far off there, all these margins.

That's excluding prepayment activity.

Got it, okay.

And then just one quick question.

On the SIRI portfolio, I know you had the big loan that ran off last quarter, but looks like balances were still down end of period again this quarter.

Any commentary on why the weakness there?

I don't think it's weakness.

We've had significant growth over the past few years.

Just thinking back to the bread and butter, multifamily business, we're doing a lot of good multifamily loans.

As you look at our pipeline, almost 80% of it is almost all multifamily.

So we're very comfortable that that's our core business model.

We do commercial as it comes along.

We're in the commercial real estate market.

And we see solid credits that we doing.

It's not an indication of the marketplace softening.

It's just a matter of the multifamily market being very robust.

Perfect.

Thank you.

You bet.

Our next question comes from Collyn Gilbert from CBW.

Your line is open.

Thanks.

Good morning, gentlemen.

Good morning.

So Tom, just back to the question around rates and your thoughts now, when the discussion about the bottoming of the core NIM was going to occur, I think it was the expectation that there would be tapering and that the long end would continue to move in an upward direction.

So looking now at maybe a core NIM in the 2.50% to 2.60% range, in order to keep the earnings momentum going, I would imagine you would need to offset some of that NIM compression with growth?

Yes, that's correct.

Obviously we had balance sheet growth and we have obviously expense containment.

Fourth-quarter expenses will be lower than in the third quarter.

We have right-sized the mortgage banking operations.

We'll continue to do so, everything positive, but if rates do go the other way, we're going to be originating a lot more mortgage loans.

I think at the end of the day, we're close to that bottom.

You know, felt like it was going to happen this year.

Still feels like it's going to happen by the end of this year, depending on where rates are.

But we have a very strong pipeline, as I indicated, the 3.70% coupon.

When I am writing paper today at 3.70%, because you look where the five-year is it's a little lower, but it's still north of 3%.

So that average coupon that did fall quarter-over-quarter 11 basis points for the coupon in the multifamily book, it's going to start to stabilize.

And when that happens, it feels like 2014 will be our stabilization.

I'm still calling for close to stabilization by the end of this year.

But again, if we go back to levels where we have sub-2% 10-year treasuries and the five-year is below 1%, then we'll have a mortgage banking ARM that will originate a lot of other income for the Company to offset some of the pressures.

Okay.

But then just in terms of loan growth, I mean, is -- do you think that the actual dollars of loan growth can be higher?

I think you guys were guiding to high single-digits maybe, or low double-digits.

I mean, what's your outlook there?

And I guess my question is maybe some of the other banks have been talking about that there's been a little bit of a pull through once again on loan activity in these quarters, just because of the volatility in rates.

So is this momentum going to continue?

And is it real?

And could we see, you know, 10% to 12% loan growth out of you guys you think next year?

Absolutely.

You think about the reality that fourth quarter for us, historically, are record quarters every year.

So, you know, went into a third quarter with very strong origination stream and very strong pipeline.

We have a similar pipeline coming off of a record amount of closings.

But fourth quarter is always an active quarter.

In addition to that, if you think about our projected growth that we had for 2013, we said we'll grow high single0digits.

We're there already.

So the reality is that we feel very confident that we'll have the high single-digit number for 2013.

And in the event of a slowdown for some reason on prepayment, we're not predicting a slowdown, that means the growth will be significantly higher.

We're assuming reasonable prepays on our assumptions.

And the prepays are kicking in very nicely.

And going into 2014, we should see similar types of activity and if there is a slowdown on prepay, you'll have more growth.

We'll get paid on the growth versus the prepay.

Okay.

That's helpful.

I'll hop back into the queue.

Thanks, guys.

And our next question comes from Bob Ramsey from FBR Capital Markets.

Your line is open.

Hey, good morning, guys.

Good morning, Bob.

Good morning, Bob.

I know, Tom, you said that expenses in the fourth quarter will be below where they were in the third quarter and you all had done some right sizing in the mortgage bank.

Just curious how much expense you think can come out of expenses, or how to think about that line item?

I mean, for conservatism, we booked $146 million for the third quarter.

That would be around $142 million-ish, $143 million.

Not a huge save, but we started the process.

Remember, we have a variable aspect to mortgage banking.

Again, the number's around just under 5% of net revenues.

So it's not a huge contribution to the gross income stream.

When you look at all loans that are based on, it's a commission-based business, so there's less variable costs.

We took out some fixed costs in late August that was really reflected in the fourth quarter, not so much the third quarter.

I would say about $3 million, $3.5 million.

Okay.

On a link quarter basis.

Again, FDIC costs should start to continue to go down.

Asset quality is improving.

And we'll be more efficient as we move into the next year.

Okay.

That's helpful.

And then you guys obviously did take advantage I'm guessing of higher rates earlier in the quarter to continue to build out the securities book a bit.

I'm just curious what the yield is on the securities that you all purchased in this quarter and how you're thinking about the securities portfolio and what the right size of that is?

Yes.

I guess some of that's got to be rate-dependent, but how you're thinking about the securities book?

We were pretty active in Q2, we were active in Q3 as well as into Q4.

We have slowed down since the significant rally here, but we're looking at around a low 3%s into Q3 and probably mid-3%s into Q4.

And which most of that is committed for already before the rate rally.

So we have a decent amount of expected closing of securities that's going to happen in Q4.

So we expect the balance sheet to be approximately south of 18%.

So high 17% of total assets as of year end.

And depending on market conditions, we'll look at that going forward.

But again, we're still catching up to where we were two years ago because we had a lot of run-off from calls.

So even if you look at the yields on Q2 to Q3, our yields should have been up.

We had a lot of securities that were called out at the end of Q2 that contributed to high yielding securities leaving the balance sheet.

I think you'll get a noticeable increase on the yield on securities quarter-over-quarter, Q4 versus Q3.

Okay.

Higher rates that we're putting on.

Great.

It will also help the margin obviously.

Yes.

And then I guess similar question on the other side of that, borrowings were up this quarter.

I'm just curious what the duration of the borrowings that you all have put on and what the cost is on that side?

Well, as you know, Bob, we extended just under $7 billion at the beginning of the year, out 2.5 year average life.

The stuff that we're putting on now is, and we'll call it somewhat temporary and short-term in nature, but the goal in the long-term is to replace it with a positive growth over time.

The positive market is very fluid.

As you see, many banks are being very active on growing their deposit book.

We are the lowest rate payer currently.

We can easily replace these liabilities that we have with the home loan bank, with market deposits in the various markets we serve.

So right now, it's short-term, within 90 days and the expectation is that as we move out towards more visibility and interest rates will start locking in some deposit funding to replace it.

Great.

That's helpful.

Thank you, guys.

You bet.

Our next question comes from David Hochstim from Buckingham Research.

Your line is open.

Hello, good morning.

Good morning, David.

Could you give us an update on what you're seeing in looking for large, accretive acquisition that you're likely to grow over $50 billion before you get there or --?

(laughter) It's always very hard to know that, David.

The reality is the marketplace is quite fluid, but not necessarily public.

There is a lot to be discussed, a lot to be considered and analyzed in many different ways.

The environment is quite different today than it might have been 12 or 24 or 36 months ago.

The reality is that there will be deals to be done and certainly we do in fact prepare ourselves and I think I've said this many times, in this environment, there is a significant amount of regulatory, preparatory work that must be done by every bank.

And all deals need to be discussed with regulators before they are discussed with investors.

So I think it's important for us to be quietly doing the appropriate things that need to be done in advance of having a meaningful public discussion about the outcome of a highly accretive deal.

And, Tom, could you give us a breakdown of what happened in mortgage banking?

The components of hedge gains and servicing income?

Sure, sure.

For the quarter, we have approximately $16.2 million of gross mortgage banking revenue that went to the P&L, of which $10.3 million of that was mortgage servicing.

The origination started with $5.8 million.

Obviously, rates had spiked during the quarter.

We had a nice recovery on the MSR value, as well as the write-up of the income stream that's slowed down given prepayment expectations.

Right now, it's down approximately 30% quarter-over-quarter.

I'm not going to give specific guidance in respect to the mortgage banking business for the fourth quarter other than it's reasonable to say we're going to have similar declines quarter-over-quarter.

So it's reasonable to say we may be down at the same percentage level Q3 versus Q4 given the market conditions.

And that can change, as you know, very quickly.

Being that the swing note rate is just around 4%, if the swing note 30-year rate drops below 4%, let's say 3.75%, 3.85%, you may see borrowers come back to the market to borrow money as well as refinance.

We do have a barbell strategy here, but remember, it's a much smaller strategy this year given that it's only approximately 4.8% of our net revenues.

Okay, and then would you just talk a little bit about the competitive environment in multifamily?

I mean, had you record originations.

What are you seeing --?

I think the consistency of where we are here has been quite compelling.

The reality is that there are plenty of new names in the market, but they are not necessarily doing anything close to the volume that had been done by other players who are no longer in the market.

And then I've mentioned this many times, that the structured debt lenders were very aggressive in the marketplace and they are no longer in the marketplace at all.

So there's a great deal of product that comes to the market that we in fact gained shared in.

That's why our numbers are up.

So despite the fact that others are seeing increases in what they lend in the New York City market, we are also seeing increases in what we lend in the New York City market, because of the void created by those that are no longer in the market.

So I think it's a very robust market.

We do expect to gain share.

As we've indicated time and time again, quarter after quarter, year after year now, we're gaining share, we're doing more lending, and we expect that to continue into the future.

Thanks a lot.

You're welcome.

Our next question comes from Rick Weiss from Boenning.

Your line is open.

Good morning, Rick.

Good morning.

Good morning, Rick.

Hello.

Just a follow-up on David's question about multifamily.

Is the market itself growing or are you taking more market share from others?

I think when you think about New York City, there are many, many markets and many, many different kinds of lenders in New York City.

In our niche, that market is not growing because we're basically dealing with rent regulated housing principally that is rent-controlled, although there is other forms of rent regulation.

But the reality is that those that had been lending, last time the property was on the market, the lenders in many cases were not those that are in the market today.

So the market's not growing, but the available funding of the market is changing.

So there are some new names in the market that are getting a lot of publicity because they are doing share of the market.

But it's a small number.

And therefore, when you put it all together, we're gaining share.

So we're the consistent guy.

We were there with the structured debt lenders and were there with the new lenders and we've been there historically with others.

The reality is we're lending aggressively in a market that is very rich and I think it's going to continue to be very, very resourceful.

There's no escaping the fact that there's going to be plenty of product for us to lend on.

Okay.

So even though it's not a growing market, there's still plenty of products for the foreseeable future?

That's right.

Okay.

Got that.

When you think about the size of the market it's not gaining in size, but when you think about the distribution of the refinancing of that market, we are in fact gaining share.

Okay, and then on terms of interest rates sensitivity, has your position changed since the 10-Q was filed for the June quarter?

I think it's fair to say, Rick, that obviously, as I indicated on one of the last comments, that we had some short-term borrowings, that's going to make it more liability sensitive.

I think the big picture is that when we feel rates are moving in a different direction here, we're going to be in the market to start bringing in low cost deposits.

We are the lowest rate bearer, I want to reiterate that.

We do not have an aggressive deposit campaign in the market.

Many banks do, so we feel very confident given that we have a very broad network of community bank models that can bring in deposits as needed.

We have not been in the market testing that aggressively.

So in the event that we feel we can swap wholesale for retail, and by the way, we grow through acquisitions.

So in the event there is an opportunity, and we always search for those opportunities to get rid of the wholesale liability to a retail platform, that's the tremendous benefit that we see.

But absent that acquisition, looking at the positive market, we feel it's very fluid.

There's a lot of money out there.

If we need to raise deposits, we will go in the market and raise deposits to offset that slight liability sensitivity.

I think it's obvious over the course of our entire public life that we've been structured to do acquisitions of deposits, and therefore, our balance sheet reflects that.

And that makes us different than others, but certainly consistent with regard to the speed with which we're able to absorb a transaction and integrate a bank into our balance sheet with success.

Okay, and you're the lower rate deposit payer in all your markets?

Pretty much, yes.

Okay.

Got it.

And finally, Joe, congratulations on your appointment as Vice Chairman of the Federal Home Loan Bank.

Thank you so much, Rick.

You bet you.

Our next question comes from Stephen Alexopoulos from JPMorgan.

Your line is open.

Good morning.

Good morning, guys.

Good morning.

I wanted to follow up on the expense comments.

As you get the bank ready now for stress testing, now that you've crossed $45 billion, actually almost $46 billion, are you using this as an opportunity to prepare for CCAR level stress testing and how should we be thinking about the incremental expense for that?

Yes, absolutely.

We've been very mindful going back to in the midst of the great recession when the larger banks were forced to get there from afar.

We obviously were an acquisition focused bank and we partnered with our regulators, we still partner by today with our regulators, trying to better understand what's best for the long-term business model.

We are an acquirer of businesses, so we've made significant investments over the past two years, two-and-a-half years.

And we'll have further investment.

But the good news for us, we started from the ground floor up.

Instead of being forced to do that test work, we were able to develop what's right for the Company for its growth model.

And our growth model is to go over $50 billion in the future.

So with that being said, a lot of expenses were paid up front.

We have a higher overhead cost, we have departments now that manage that, and we have more risk departments that are evaluating risk.

And we expect to see reasonable expenses going into 2014, but not near the level of 2012 and 2013.

So again, I want to just go back to my original comment, Q4 versus Q3, you'll see a lower expense base when we close out the year for the quarter.

And then probably stabilization next year, depending on profitability of the marketplace.

If markets are very vibrant, we'll be growing certain lines of our business.

If things are tough, we'll keep the expense line consistent with the history of the Company as being a top-efficient bank in the United States.

Okay.

That's helpful, Tom.

Maybe just one other question.

On Signature's call yesterday, they spoke of spike in refi activity as rates really moved up in August.

Was that your experience as well?

And now that rates have pulled back, are you seeing elevated refi activity really be extended here?

I got to tell you, the pipeline is strong.

We have very robust pipeline in Q3, and Q4 is right on top of it and Q4 is always an active quarter.

So it's been historically for the Company, I mean, last year we had Cardiff City paid off, that was a huge credit.

And we still grew our loan book.

So if you think about where we are going into the fourth quarter, you'll have growth, you'll have a very strong pipeline, similar to the last pipeline.

And quarter-over-quarter, we grew $1 billion on our held for investment book.

So we are on target to grow high single digits for 2013 and it's always reasonable to say, given the market conditions, that we could be a high single-digit grower next year, absent any real change in prepayment activity.

If prepayment activity changes to the negative, when things slow down, you will see significant growth.

Significantly more than 9%.

So we're assuming that next year should be another year of reasonable prepayment activity.

But that changes, that could also change our growth aspirations.

Okay.

Thanks for the color.

You're welcome.

Our next question comes from Josh Levin from Citigroup.

Your line is open.

Good morning, Josh.

Good morning.

So you've talked about growing the securities portfolio.

You have a pretty robust pipeline for loan growth.

So as you think about this growth, how do you think about funding it?

Yes, again, really what I just said in the previous two comments.

We are going to look at the deposit markets at the appropriate time.

The first slug of increase was, remember, we replaced our warehouse book.

We're down over a $1 billion on the held for sale warehouse from the mortgage banking operations.

So a lot of the securities replacement, that's been a replacement of that income stream.

At the same time, we also told the marketplace we would take advantage of the significant run-up in rates, well over 100 basis points, on the securities book that we watched fall over the past two years, so we're getting close to where we were two years ago.

So going back to my guidance for the quarter, we'll be around south of 18%, maybe high 17% as of quarter end.

So if you look at where we are Q3 versus what we expect to be Q4, maybe another $1 billion of securities growth approximately, and then we'll look at the balance sheet going forward and reset our position.

And then on the funding side, deposits are very fluid.

They are out there.

We can easily be in the marketplace by our various community banks, and implement a reasonable deposit campaign to replace these wholesale liabilities with strong retail to customer deposits.

Again, we're the lowest rate payer in our marketplace.

If we get back to the medium, we can see some declines in the wholesale book going forward.

But big picture, and I know Mr. Ficalora mentioned this specifically, we're a growth to an acquisition company.

In the event we can replace a significant degree of our wholesale, it would be through an acquisition.

Right.

That is the model we have followed 11 times now.

Okay, and along the lines, your tangible equity to tangible assets ratio came down a little bit this quarter.

Where are you comfortable with that ratio going to?

Again, I feel that we're still overcapitalized, given our overall risk profile.

And obviously, the marketplace is very fluid for growth.

So in the event we continue to grow significantly as acquisition, we'll be in the capital markets doing something that's creative.

You know, we're not bashful going to the capital markets and creating value for shareholders by utilizing a strong capital base.

But absent that, we're still way overcapitalized for our risk profile, in my opinion.

Thank you for taking my questions.

You bet.

Sure.

Our next question comes from Brad Ball from Evercore Partners.

Your line is open.

Hello, Brad.

Good morning, guys.

Actually, just a follow-up on the prepay comments.

Could you just describe the dynamic when rates go up, like we saw in the third quarter, you see a fairly robust level of prepay activity.

Do you expect that prepays would benefit from higher rates from here or lower rates, and how does that look for prepaid activity going into next year?

Yes, rate change is one of the components of what drives prepay, but not the only aspect of what drives prepay.

When there is available product, people do in fact prepay their existing loan so as to fund the acquisition of another property, or otherwise sell an existing property at a significant profit in order to buy other properties.

That activity creates a lot of prepay.

Also, expectation with regard to rate movement can accelerate prepay.

So a guy that is kind of not ready to buy, but concerned about where his rate is and where rates are going might go three, six, twelve months early in his refi.

So there are lots of things that will impact the level of prepay.

The good news about our portfolio is that it's strong and it's very viable for property owners to make those kinds of decisions and elect to prepay an existing loan in order to get a new property, or in order to better position themselves for two years out or three years out to be in the market to take on new properties.

So we've never tried to forecast prepay, because it's a very difficult thing to do.

Many factors change the activity levels.

But we do believe and have for the last couple of years, the strong belief that there will be a great deal of prepay activity even in the period in front of us.

I mean, would you say that the environment or the environment and the portfolio mix is such that prepays will just typically be higher than they were historically?

So the contribution to the --?

I think that's absolutely correct.

Prepays in this year are going to be higher than prepays last year, and that was a record year.

And prepays last year were higher than the year before.

So the reality is that this is a very strong period for prepay activity.

Brad, it's Tom.

I would also add to the fact that if you think about the borrower's sentiment of rising capitalization rate on the expected borrowing, and you have a little bit of that going on in Q3 because rates did spike materially, then they came back down, so there is that fear that if rates do start to rise in the future, their ability to borrow what they need to continue running their business model can change materially.

And obviously, cap rates are still very low in the environment and our having a significant spike there will alter their ability to borrow money, so I think that does also drive the borrower to make decisions.

Okay.

That's helpful.

Shifting to the mortgage bank real quickly, Joe or Tom, what proportion of your originations were refi versus purchased money in the third quarter?

As of the third quarter, 60/40 purchase, 60% purchase, 40% refi.

It was a complete flip from the previous year.

That's the marketplace.

Like I indicated previously on one of the last comments that we see that swing no rate go below 4%, we'll probably see a little bit more activity.

But there's been definitely a slowdown with the backup in rates in Q3.

That's both on purchase and refinancing.

And I'm surprised no one asked the question about margins, so I'll just talk about it.

That's where I was going.

Yes, margins are tighter, we're probably about 22 to 25 basis points lower than the previous quarter, so we're looking at [75 to 85] type margins in this environment to stay competitive.

We want to keep the machine moving in order to continue bringing some volume in and that could change overnight, because obviously rates have rallied a little bit here.

I think seeing a rate somewhere in the high 3%s could stimulate some activity.

And we'll just wait and see.

But definitely I'm predicting a lower mortgage banking quarter in Q4 compared to Q3.

How would you say your business model is situated for more of a purchase money market versus a refi market?

I think we're fine.

I think we have a nice client book.

And we'll get our share.

We want to at least hold share.

I think ultimately, you have to say sooner or later, some of the players will have to get saturated out of the market, given that the profitability of it will decline and there's a lot of players in the market that came into after the crisis.

So eventually, let's say mortgage for next year is a $1 trillion versus $1.7 trillion.

Year-over-year, it's down 70% based on the MBA statistic that they're forecasting for 2014.

Then we hope to get our normal share of that, 2013, 2014 number share, and going forward there's going to be some saturation and people will be outsized out of that business model.

There's been some rhetoric about some smaller players leaving the space.

You know, that's healthy and natural.

Great.

And then lastly, separately, any comment on or update on the Specialty Finance Company?

Doing fine.

Yes, they have been doing extremely well.

As of 9-30, the total outstanding is about $111 million, with lenders of credits about $132 million.

We have a nice commitment book, probably double the amount of volume of outstandings by the end of the year.

So it's growing as expected.

We should be somewhere north of $200 million by the end of the year.

So things are moving along very nicely.

Unfortunately, we've turned down 97% of the deals that were opt the review, that's the culture.

It's a credit buyout shop and they are looking at the best opportunities in the marketplace and taking a small piece of these larger deals with the large money center banks.

So the good news for us, we're on target.

It's, right now with fees, it's profitable, which is as expected.

We can take fees, it's around a 4% yield, take fees out, it's around 3%.

So it's contributing to the growth of the Company and our expectations are in the next seven to twelve months, we would be somewhere between $650 million to $800 million.

Okay.

How many people do you have up there?

13.

About 13.

13 people, okay.

I'm sorry, 7.

Target 13?

Target.

We'll say.

(laughter)

Okay.

Thanks very much, guys.

Things are moving very nicely there.

We're very pleased.

Great group of people and we're very pleased so far.

Okay.

Thanks.

Our next question comes from Dave Rochester from Deutsche Bank.

Your line is open.

Hello, good morning, guys.

Good morning, Dave.

Sorry if I missed this color earlier on the mortgage bank, but could you give the net hedging gain on the quarter in that line?

Net hedging gain for the quarter was, bear with me.

$3.9 million, was competitive.

Great.

What were the components of that?

We had $7.3 million of amortization and loan fees is $12 million of income coming in from the actual book, and a $3.9 million hedge gain.

So that nets to $10.3 million.

Great.

And earlier, you were talking about replacing short-term borrowings you took out ultimately with deposits at some point.

I was wondering why you chose not to use some of that cash on the balance sheet in a more meaningful way this quarter to fund some of that growth?

It just seemed like a good quarter to do that with deposit balances flat.

Dave, we're keeping elevated liquidity positions.

It's the world we're living in right now.

So we're keeping excess liquidity.

Obviously, we have a lot of unencumbered securities, so the goal was to rebuild over time the unencumbered book.

This is a changing regulatory environment, so we want to have excess liquidity on hand.

There's been significant changes in the industry regarding that specific issue.

So we had keeping excess liquidity.

As you know, the warehouse is significantly lower, right, so we went from $1 billion down to $200 million.

I'm hoping that's the baseline bottom for us, so you'll have some more growth in the future and that we feel at the appropriate time, we'll displace some of that cash over time.

Got you.

Just one last one, bigger picture question on growth.

If we get another strong asset growth quarter to tow, you will be pretty close to that $50 billion asset level.

So I was just wondering how we should think about growth in the context of that?

Are you planning on really managing asset growth to stay below that threshold until you find the deal you're looking for?

I mean, there's -- again, first of all, it's a four-quarter rolling period before you have to go into the lion's den, that's what?

$50 billion plus?

So it's really, if you hit $50 billion in the third quarter of 2014, doesn't mean you're subject to the $50 billion rule.

It's a four quarter, rolling four-quarter.

But I don't want to be specific about acquisition, but Mr. Ficalora is very clear, we are always looking for opportunities.

But in the meantime, we're managing our business and we are growing.

And we indicated that if the growth is very strong, we'll deal with capital levels and we'll keep strong capital levels, we'll keep at excess liquidity and we'll keep elevated capital levels, given the environmental change since the great recession.

So you wouldn't really try to stay below that $50 billion asset threshold then it sounds like?

That's material growth, where we are today going into the, let's say to the regulatory $50 billion.

That's a four-quarter rolling period of $50 billion plus.

I don't see that in the short-term, but I think in the short-term, there's also acquisition opportunities as well and as the time arises, we can always reach over tomorrow and do a transaction.

I think it's important to recognize that there is lead time to a transaction, but there's also lead time to the consequence of breaking $50 billion.

So we could be easily working both simultaneously and 12 months hence, both events could occur.

David, just bear in mind, we started to rebuild the securities book.

There's going to be a point where that's going to stabilize.

We're pretty close to that 17% projected, high 17%s as of 12-31 as the expected footings there.

And I think that's been a lot of the growth now.

We're rebuilding the loan book, putting on significant growth.

You grow that around high single-digits for 2014, it could be very interesting to see the dynamics of the balance sheet going into the potential of consolidation opportunities.

Okay.

Now focusing back on that wholesale liability book, in the event of an acquisition we would deal with the wholesale liability book.

So you can actually do a deal in strength below $50 billion.

Okay.

Great.

Thanks, guys.

You're welcome.

Our next question comes from Karti Bhatt with Merrill Lynch.

Your line is open.

Hello, good morning.

Good morning.

Just going back to prepays, is there anything different in the prepayment trends you're seeing between multifamily and CRE?

Nothing different, no.

I think that the reality is that our multifamily niche is larger, so we do get more from multifamily than we get from CRE.

But there is activity in both markets for sure.

I would just add the average life of the CRE book is probably about a year longer on estimate.

So you're looking at 3.2 versus 4.2.

So you may have a little bit less concentration of CRE prepayment activity and that's what we've been seeing.

Obviously the most recent quarter, it's been mostly all multifamily.

Great.

Okay.

And then when you look at the multifamily market given your comments that the pie's not really growing there, at what point do you guys see yourselves bumping up on the ceiling as far as share gains go?

As far as what?

Could you repeat that question?

I'm sorry.

In the multifamily, I mean, it looks like the pie's not really growing.

It's a fixed market there.

And you guys are gaining share.

But I was wondering --

You're getting, yes, you're asking the right question.

As I mentioned, there were large, very large structured debt lenders in the New York market that were lending on all type assets and including those assets that are in our niche.

So there is plenty of product available based on who is still in the market.

So relevant to our niche, independents or something there, North Fork or Capital One, Wamu or Chase, the difference between those who are active in our niche in the last three- to five-year period versus who is active in our niche today is dramatic.

There are significantly smaller players that we're competing with today, and therefore, we're gaining share of a market which in fact is very robust today.

So I think it's a very attractive period in front of us as well.

There's going to be a lot of activity and a lot of opportunity for us to increase our lending.

So I mean, if you put it sort of in terms of innings, do you guys think you're in the early innings of your share gains opportunities?

You're talking about share gain in our niche?

Yes.

Yes, I would say so, yes.

Okay.

And then last one for me, any color around the big decline you saw in the balance of loans past due in the quarter?

I think you guys called that out?

Again, it's such an insignificant number to the total, to the portfolio, refund with all the blow up above the numbers, it's just very positive development, but it's been a development since March of 2010.

Early stage delinquencies have not been an issue for the Company.

And our asset quality remains pristine and we feel pretty bullish about that continuation.

And I think that the Company has been, for the past four decades, known as a pristine producer conservatively of our niche business model, which if you look at the asset quality and the loss ratios that are associated with it, very low loss content business model.

This is very consistent with how cycle by cycle by cycle we've actually performed.

Obviously we're very pleased with it, but we're getting close to zero, so --

Okay.

Thanks for taking my questions.

You're welcome.

Our next question comes from Matthew Kelley from Sterne Agee.

Your line is open.

Good morning, Matt.

Good morning, guys.

Good morning.

Wonder if you just talked about the role of agencies reducing their presence in the market place?

They have a mandate to reduce their market share or their lending to the business.

I think we're seeing the impact of that with companies like Walker Dunlop and Beech Street selling.

How much of an impact is that having on your business as you regain market share from folks like that?

Yes, I think it will be on the national front more relevant than it is immediately in the New York market.

The impact that they have on us most obvious in the New York market is the rates that are actually being enjoyed by all lenders in this market.

They have not been a large player from the standpoint of our niche in the New York market.

So of those that we in fact negotiate loans with, meaning that there are people on the other side of our negotiation with the owner, there is very, very few occasions where Fannie and Freddie have been there.

But if in fact they do transition away from being a competitor in this market for multifamily, it will allow rates to rise on all of the commercial lending that we're doing in this market.

Are you not seeing them, because they do longer duration loans?

Is that the difference between, say factor --?

That's right.

They are structured differently than we are structured in this market.

So they are very active in and successful in other markets where there are not adequate lenders in those markets.

But in our market, they are not actively winning our niche deal.

They may be winning other deals, certainly in other places, but they are not winning anything from our niche in a meaningful way.

So that's not been a factor in your growth recently then?

No, no.

Okay.

Got you.

Matt, I would add to that, if you think about the dust program, and we'll get somebody who pool dust that's out there, the percentage of New York City paper is probably less than 10% in those pools.

Yes.

We can kind of validate that.

In addition, a lot of the banks are lending and they're doing 10-year financing.

We have to do a lot less 10-year financing.

So if a local property owner needs a borrowing, they may go to one of our competitors and go out a little bit longer, so they are doing some of that volume.

Got you.

Just a question on mortgage banking, in the $10.4 million of servicing, how much of that was a write-up in the MSR?

The write-up on the MSR, bear with me here.

It's about $3 million?

I got to get back to you on that one, Matt.

I think it's about $3 million.

I'll give you a confirmed number.

Okay.

And then last question, you had really solid credit quality, but as you grow the portfolio --

Matt, just want to go back to the MSR and give you some specifics.

Our market multiple right now, it's about a 4.4 multiple and a 25 basis point average servicing.

So that's the multiple.

We're pretty much slightly below the medium in the industry.

Okay.

Did you say it was roughly like a $3 million MSR write up?

Is that what you said?

For the quarter.

It wasn't a huge number.

But if you think about where we are on the balance sheet, $228 million of footings or outstanding capitalization, which correlates to a 4.4 multiple on 25 basis points servicing fee, which is slightly below the medium for all companies that are in this business.

And the $3.9 million hedge gain, that's separate.

So you have a $3 million MSR and then $3.9 million?

Right.

It all nets out for the mortgage servicing business for the quarter at $10.3 million.

The good news for the actual income stream among servicing fees, it's up about 20% quarter-over-quarter to $12 million.

Okay.

Got you.

And then just last question on reserve levels.

So clearly, charge-off, NPAs, delinquency trends have been positive.

But as you grow the book, are you looking to maintain that 50 basis points worth of coverage on non-covered loans or stable, up, down?

What do you see for reserve coverage levels?

I mean, we're probably very, very close to our high end to our range of reserves.

So we have to struggle with that.

We try to put an up to medium charge-offs, but we are seeing the assets that were classified leaving the portfolio without loss.

So that's significantly benefits your reserves.

We're in a position now that, depending on changes in credit, that I don't envision any significant changes to the provisions.

Okay.

If anything, you may see lower provisions given the performance of the portfolio and the fact that some of the credits that were classified are gone.

We went from a TDR book of a $1 billion down to under a $100 million.

So it's a significant decline.

All right.

It's not unusual for us to have at the end of a cycle a significant disposition of assets at our full book value or above our book value, and there are very, very, very few banks that actually have that kind of realization at the end of a cycle.

And the trend, I think, again, the 2014 trend, is that we expect to see lower MTAs given the vibrant marketplace, what we have in the pipeline as for disposition.

So things are still very favorable there.

Okay.

Actually, if I could ask one more.

On the expense front, if you have $142 million guidance range for 4Q, annualized gets you to $568 million.

If you were to be over $50 billion, how much do you think your expenses will go up simply for that fact?

I don't have a specific number in my back pocket, but I will tell you we've added quite a bit of expense over the past few years to get there.

A lot of it was up-front loaded to build the platform and we're very proud of what we've done so far.

We will get there at the appropriate time.

But a lot of that expense is taken in 2010, 2011, 2012, some in 2013.

Since 2008, we've been focusing on dealing with the heightened sense of change in regulatory and partnering -- we're partnering with regulators.

They are our partners.

That's how we look at the business going forward and they are evolving.

So I think we've hired a lot people, we built very strong systems to deal with the growth, and I think we're partnering with the regulators.

I think it's a good concept of that you're going to have additional costs and there may be additional capital allocations, but we're not going to $250 billion.

If you're a significantly large institution, the capital mandate will be much more difficult.

But I think given that bucket of slightly going over $50 billion, it would only be expense is going to be materially higher than what we are today.

Yes, I think it's important to recognize, Matt.

We're already spending that money.

The people are already on staff for us to be bigger than $50 billion.

Okay.

Thank you.

And our next question comes from Jeff Gagan from Milwaukee Private Wealth Management.

Good morning, Jeff.

Good morning.

Can you identify your percent share in the multifamily market?

Actually, we don't, we don't actually have a full number.

But we're thinking it's something in the range of about 20% of our niche.

Not the full New York City market, but 20% of our niche.

And who do you assume are the larger players by market share?

Well, it's always hard for us to know exactly who they may be.

But the people that are more active within our niche today, making new loans, that would include people such as Signature and Sovereign and Sovereign is actually shopping there today.

It would include Capital One because they had a very large portfolio that they had gotten.

And your strategy calls for increasing market share in this niche?

Yes, we truly believe that we are -- in fact, we know we're gaining market share.

Your current non-covered loan portfolio is 70% multifamily.

What do you assume happens to that number going forward as you increase your market share?

I think that number could go up.

That number has historically been as high as 90%-odd.

All right.

Thank you.

Good luck.

You're welcome.

And we'll take our final question from Colin Gilbert from KBW.

Welcome back, Collyn.

Thanks, guys.

I was the only one that abided by the one question, one follow-up rule.

(laughter) Actually, Joe, I think you may have just answered it in terms of the loan mix.

My question was going to be do you guys anticipate yourselves diversifying more as you become, exceed that $50 billion?

You've done -- you've got the commercial finance.

I know it's small.

Construction was up big.

I don't know.

I guess just curious to get your take on diversifying away from multifamily as you go through this next phase of growth?

Collyn, it's Tom.

Two aspects of that comment.

We are, you know, very committed to the niche.

So that's going to continue building over time and we're very proud of how we manage that.

But in particular, there's been some very small, we'll call it changes in specialty finance that we gave you some guidance there, between $600 million to $800 million next year total.

And then you have the residential, the jumbled prime business, which is hybrid ARM, we expect to originate around $50 million a month.

It's very challenging, because we are, our LTVs are significantly lower and our credit payments are very high.

So we have a book that doesn't have any late pays.

So again, we're very selective on our growth.

We're superconservative.

You'll see a little bit more add on the resi side, the hybrid ARM business and you'll see the speciality finance totals up.

You'll see some percentage growth, but again, to a level that's very manageable.

And you'll see the focus on our niche business being commercial real estate multifamily.

Okay.

It's clearly a low risk asset that we've had as a higher percentage of our outstanding assets, historically.

And certainly, we would be comfortable prospectively as well.

It is an asset class that for four decades we've proven can in fact rotate every three to four years, and literally sustain itself through difficult cycles.

So the idea that we would potentially do more of this is very, very real.

In particular, if we do a deal.

So as we sit today, we know that we do not do a lot of loans that we could do if we were in the midst of a deal and of course we always capitalize deals.

If we had more capital, we would do a lot of lending that would immediately take loans from those that are taking the loans today, because they are doing IO.

Lot of our competitors are doing IO lending on 100% basis.

We're not.

So if we did a deal, we would do that.

And then we would do that because the consequence to capital would be of less consequence because we would have significant amounts of capital in the deal.

Okay.

Okay.

That's helpful.

Thanks, guys.

You're welcome, sure.

And this concludes today's question-and-answer period.

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

On behalf of our Board and management team, I thank you for your interest in the Company, our strategies, and our performance.

We look forward to chatting with you again early in 2014 when we report our fourth-quarter earnings.

In the interim, I wish you and your families a best of Thanksgiving, a joyful holiday season, and the best of health and prosperity in the coming year.

Thank you.

This does conclude today's third quarter 2013 earnings conference call with the management team of New York Community Bancorp.

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