Flagstar Financial Inc (NYCB) 2013 Q4 法說會逐字稿

Good morning.

And thank you all 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 fourth quarter and FY13 performance will be President and Chief Executive Officer, Joseph Ficalora; together with Chief Financial Officer, Thomas Cangemi.

And also in the call are Chief Operating Officer Robert Wann and Chief Accounting Officer John Pinto.

Certain of the comments made by the Company's management today will contain forward-looking statements, which are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

Among those factors are: general economic conditions and trends, both nationally and in the Company's local markets; changes in the interest rates which may affect the Company's net income; pre-payment penalty income; mortgage banking income; and other future cash flows; or the market value or 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 on page 7 of this morning's earnings release form, and its SEC filings, including its 2012 annual report on Form 10-K and its quarterly report on Form 10-Q for the three months ended March 31, June 30, and September 30, 2013.

The release will also include reconciliations of certain GAAP and non-GAAP earnings and capital measures, which will be discussed during the conference call.

If you would like a copy of these earnings release, please call the Company's Investor Relations department at 516-683-4420, or visit IR.myNYCB.com.

(Operator Instructions)

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

Mr. Ficalora, please.

Thank you, Steve.

And thank you all for joining us this morning as we discuss our fourth-quarter performance, which capped off a year that once more confirmed our fundamental strengths: the quality of our assets, the vitality of our lending, and of course, the efficiency with which we operate.

Take, for example, our balances of non-performing loans and assets, both of which improved dramatically year over year.

Specifically, our non-performing non-covered loans fell more than 60% to $103.5 million at the end of December, while the ratio of total non-covered loans improved by 61 basis points to 0.35%.

Similarly, the ratio of non-performing, non-covered assets to total non-covered assets improved to 0.40% at the end of December, in contrast to 0.71% at December 31, 2012.

Net charge-offs also declined year over year to a modest $2.4 million in the fourth quarter, representing a mere 0.01% of average loans, non-annualized.

Total delinquencies, meanwhile, amounted to $212 million, reflecting a year-over-year reduction of $106.2 million, or 33.4%.

The quality of the loans we produce stems from two distinct factors: our conservative standards and our primary lending niche.

Reflecting heightened activity in the New York City real estate market, originations of multifamily loans totaled $1.9 billion in the fourth quarter, and $7.4 billion over the course of the year.

As a result, our portfolio of multifamily loans grew year over year to $20.7 billion, representing an increase of $2.1 billion, or 11.3%.

While the multifamily loans we produce have long been our primary asset, we complement that portfolio with commercial real estate loans.

In fact, commercial real estate loans represented $838.4 million of loans we produced in the fourth quarter, and $2.2 billion of loans we produced in 2013 overall.

All told, our portfolio of held-for-investment loans totaled $29.8 billion at the end of December, reflecting a $2.6 billion, or 9.4%, increase from the balance recorded at December 31, 2012.

Looking ahead, our total pipeline of loans is approximately $2.4 billion, with loans held for investment accounting for approximately $2 billion, and loans held for sale accounting for the rest.

While our multifamily and CRE loans contribute to the quality of our assets, so too do they contribute to our net interest income, which includes the pre-payment penalties paid when such loans pre-pay.

In 2013, pre-payment penalty income rose $16.5 million year over year to $136.8 million, establishing a new record for the third consecutive year.

Included in the current 12-month amount was fourth-quarter pre-payment penalty income of $33 million, which, in just about any other year, would make for a stand-out quarter.

But in 2013, a year when pre-pays exceeded all previous levels, it was $6.6 million less than the trailing-quarter volume, and $6.3 million less than the volume recorded in the fourth quarter of 2012.

As a result, pre-payment penalty income contributed 32 basis points to our margins in the fourth quarter of 2013, as compared to 41 and 43 basis points, respectively, in the earlier three-month periods.

Primarily reflecting the decline in pre-payment penalty income, our margin fell 12 basis points on a linked-quarter basis to 2.92% in the fourth quarter of this year.

Excluding pre-pays, the linked-quarter reduction would have been 3 basis points.

Notwithstanding the decrease in pre-payment penalty income, our net interest income rose modestly, both year over year and linked quarter, to $297.3 million in the fourth quarter of 2013.

The increase was largely attributable to the growth of our interest-earning assets, which averaged $40.8 billion in the current fourth quarter, as compared to $38.8 billion and $36.9 billion, respectively, in the trailing and year-earlier three months.

In addition, the rise in net interest income was attributable to a decline in our average cost of funds to 1.40% in the quarter, even as the average balances of borrowings and deposits rose to accommodate the growth of our loan and securities portfolios.

While net interest income has long been our primary source of income, this was increasingly the case throughout 2013.

As residential mortgage interest rates rose, and refinancing activity faltered, the contribution of mortgage banking income to total revenues declined.

Reflecting a substantial decline in rate-lock volume, mortgage banking income fell from $32.6 million in the year-earlier fourth quarter to $12.8 million in the fourth quarter of 2013.

To some extent, the impact of the decline in mortgage banking income was also offset by a reduction in operating expenses, as the quality of our assets improved, and the costs of managing foreclosed real estate properties declined.

While the benefit of that decline was somewhat offset by a rise in Dodd-Frank Act-related expenses, we reduced our operating expenses both year over year and linked quarter to $146.4 million in the fourth quarter of 2013.

Operating expenses thus represented 1.27% of average assets in the current fourth quarter, and contributed to an efficiency ratio of 43.56%.

Reflecting these primary factors, our fourth-quarter 2013 GAAP earnings were a solid $120.2 million, or $0.27 per diluted share.

Our cash earnings, meanwhile, amounted to $129.7 million, and were equivalent to $0.30 per diluted share.

For the 12 months ended December 31, 2013, our GAAP and cash earnings were, respectively, $475.5 million and $515.3 million, equivalent to earnings of $1.08 and $1.17 per diluted share.

Reflecting the strength of our earnings and their capital contribution, the Board of Directors last night declared our 40th consecutive dividend of $0.25 per share.

The dividend will be paid on February 21 to shareholders of record as of the close of business February 10.

I would like to point out that it's now been 10 years since we first increased our dividend to the current $0.25-per-share level.

The first time we paid $0.25 per share was in February 2004.

The consistency of our dividend has, in large part, been due to that of our business model, which has served us well in a difficult time, as well as in the good times.

On that note, I would ask the operator to now open the line for your questions.

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

The floor is now opened for questions.

(Operator Instructions)

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

Great.

Thanks.

If Tom's around, I would love to ask about NIM.

On a core basis, so ex all the prepays, looks like NIM was down a couple basis points, a little bit better than what we were looking for.

But going forward, what's the outlook for NIM?

Are you finally seeing some stabilization?

I know we've been talking about stabilization for the last several quarters or that it eventually will happen.

But just given where rates are, given spreads, hoping you can comment on the outlook.

Thanks.

Good morning, Ken.

Obviously last quarter, we guided down I believe it was 4 to 7. We came down ex prepaid 3 basis points.

So we did beat expectations slightly by a few basis points.

Rates have changed recently.

But given what we see as far as visibility, we are very close to stabilization.

My guess is that we're looking at a reasonable decline here in the current quarter, maybe down 4 to 8 or 5 to 8 basis points similar to the previous quarter with the expectation that the pipeline that we have currently is at about a 3.79% yield.

So when you look at what's rolling off on -- the actual coupon in the multifamily book which is also 3.79%, we're getting very close to getting away from that yield bleed on the asset side.

So it's reasonable to say that we're getting close to the bottom here.

My guess for the quarter, down 4 to 8 basis points, 5 to 8 basis points for the quarter, and margins should for the year should be somewhere bottoming between [2.45%] to [2.50%-ish].

Got it.

Okay.

And that includes, Ken, ex prepayment activity.

Yes, of course.

All in core.

And then just in terms of the expenses, looks like if you, reported expenses were relatively flat at $150 million.

I know you were looking for them to be down a little bit this quarter.

What surprised you?

What changed or came in different than expectations?

I don't think it's a surprise.

I think the reality was during the fourth quarter, we were preparing -- we're very razor focused on moving forward the Dodd-Frank Act expense that we have to absorb.

It's a full push ahead here to get ready for the EFAST filing which is going to happen as of March 31.

We've had some additional expenses associated with our regulatory, in particular, Dodd-Frank.

Is that something that's likely to decline as we go into first quarter or early next year?

I would say it's reasonable to say we will have a decline going into 2014.

I think the reality is we've been gearing up for the past three years.

We've had elevated expenses regarding our potential for growth strategies to prepare for a bigger bank.

So we've started taking on additional expenses going back three years ago.

We're hoping we're at the point where we will see some expense saves going into 2014.

As indicated in the previous calls, we've taken some expense initiatives throughout the bank.

We've also added a lot of personnel as well, a lot of consulting fees to get through the regulatory hurdles that are required to be a larger bank.

Great.

Thank you.

You bet.

Our next question comes from Collyn Gilbert from KBW.

Your line is open.

Thanks.

Good morning, guys.

Good morning, Collyn.

Could you just give your outlook for growth in terms of loan growth?

And just if we think about it like a year ago, your pipeline stood at about $4 billion.

Now the pipeline's at $2.4 billion.

Can you just kind of give us a little bit more color as to where you think that growth can go?

Do you see it accelerating beyond your prior sort of low double-digit projections?

Just some color around that.

Collyn, it's Tom.

I will say that we're very pleased with the current -- previous quarter's growth.

We guessed during the beginning of the year that we'd have high single net loan growth excluding the mortgage bank, excluding the covered portfolio, and we grew 9.4%.

Multifamily threw grew north of 11% for the year.

We had very strong growth given the environment and very early on in 2014, but we're expecting high single digit growth again going into 2014, and that could be conservative depending on the level of prepayment activity and interest rates.

So there's a significant amount of activity out there.

We're very bullish about loan growth, and we're committed to building our core niche product.

I think the good message is that the market is very strong, Collyn, and not only will we have growth, but other lenders in this market will have growth.

We will be more selective than some, but certainly we will have the opportunity to participate in a very rich market.

Bear in mind, we had a record year in prepayment activity, and we also grew our net loan book for multifamily 11.8%.

Despite the fact that we had significant amount of prepayment activity, which some loans do trade away, we still grew the book in double-digits.

Bear in mind we had a substantial decline in mortgage banking.

That was over $1 billion of held for sale portfolio declining, so that has to be taken into account.

We're starting close to zero going into 2014.

My guess is that you're not going to go much lower than we are today in mortgage banking in respect to the held for sale portfolio.

We should see some good growth for 2014.

That's helpful.

Thanks.

Just one quick follow-up.

As you guys kind of look at the investments that you've made over the last three years, Tom, that you spoke about in terms of getting prepared for the regulation and look at other banks' platforms, do you feel as encouraged by what may ultimately fold into your franchise through another acquisition?

Yes.

I will tell you that we're very pleased on management, the team, putting the effort in, the expenses that we've outlined, partnering with our regulators.

We brought them in very early.

They worked with us.

They gave us very strong guidance on what's expected of a bank of our size.

We've expended a lot of money over the last three years.

I would say a lot of banks that are small enough could be making that expense now.

Being close to $50 billion, in the $10 billion to $50 billion range, we have significant obligations that have to be taken into account going into the first quarter of 2014, and we're very much ready for the challenge.

Okay.

And even outside of regulation, I guess just thinking about First Niagara's comments about reinvesting in the bank over the next couple of years.

There's been a couple other banks that have kind of stalled growth and said, you know what, we've got to --

We've always been investing in infrastructure.

We're an acquisition Company.

Being at $1.9 billion from our history, going to almost as large as $50 billion through acquisition, we've made significant investments over the course of a decade.

Collyn, we've proven time and time again that we integrate banks extremely well, and systems is one of the places that we really are outstanding.

We find every single time we do a deal that we provide significantly better priced, better performing systems than the banks that we acquire.

That's a very, very strong part of what makes us so efficient on a go forward basis.

That's great.

That's helpful.

Thanks, guys.

Our next question comes from Bob Ramsey from FBR.

Good morning, Bob.

Hello, good morning, guys.

I was hoping you could talk a little bit about the securities purchases in the quarter.

Obviously the securities book is small, but it has been growing.

And I'm just curious if the plan is to continue to add to that portfolio or if it was the right environment that prompted the buys this quarter, just any color you could give there.

Bob, there's a lot of moving parts.

We've been very public over the past three years that we were shrinking our portfolio given the environment.

Up until probably the second quarter of 2013, markets have changed.

We wanted to replenish where we were on a definitive assets basis.

The range we've given guidance in the previous years of a 17% to 20% range of total assets.

Right now we're at the low end of the range at 17%.

Markets are not ripe to be reinvesting right now, but we put assets on starting in October.

I think the last time we bought a bond was in October.

We've been out of the market for quite some time.

We have put some assets on; predominantly I'd say 95% of our purchases were agency paper, multifamily at an average yield around 3.50%, all backed by government backed securities.

Okay.

That is helpful.

And then I was hoping you could talk a little bit about prepayments.

I know you never really know in any quarter where that's going to go.

But what was, if you looked at just the multifamily book, prepayment speeds in 2013 and sort of how are you thinking about the prepayments, the pace of prepayments in 2014?

I think the idea that we are in a period of robust prepayment is very, very evident from the numbers that we've been producing quarter after quarter after quarter.

The reality is that the marketplace has become extremely rich in pricing, so a lot of the people that we lend to, and we're very consistently a cash flow lender, and others obviously are intent on doing market deals.

So a lot of our people have the opportunity to sell their properties in the period ahead, and at this point in the cycle, we see that often where our people are selling and we're getting paid prepayments very, very attractively because they're getting paid huge profits on properties that are in the marketplace actively being traded at very rich pricing.

So I think the good news for us is that the period ahead should see continued pricing activity, pricing driving that activity.

And as has been the case in the past, our guys sell very high and then they do 1031 exchanges, and they buy into like type multiuse properties, and they wind up being in the best position during the next cycle turn, whenever that may be.

So I think that we should have a lot of activity in the year ahead.

I would just to the fact we had a nice mix over the past few years between multi-family and commercial real estate loans that were prepaying.

The reality is the commercial real estate book could see a sizable amount of sale activity, no question about it.

We had some nice credits there that are ripe to be sold, and I think they're in the conversation to be sold.

That could be interesting as far as additional added value of prepayment activity adds more toward the commercial side in 2014, which could also be a very positive catalyst for just activity.

Back in 2007, the funding was different.

The funding in today's environment is real equity funding for transactions, whereas, when the market was overheated, overall transactions were in my opinion very structured, very -- it was a very risky type of structure versus a pure equity structure that we're seeing today.

What Tom is saying there is the pricing today is as rich as it was, but the funding is more restrained than it was.

So therefore, there will be better deals, but there will still be very good deals for the seller.

Okay.

Let me ask too, as I think about the prepayment penalty structure, obviously the younger a loan is, the bigger the fees are.

I know you all have talked in the last year or two about the life of your average loan being longer than it had been historically, as there had been less activity, which now seems to be picking up.

I'm just curious if you could tell me, give any color about the average life of a loan on your books today versus, say, a year ago, to give some sense of what the prepayment opportunity may be.

It's about three years is what it's running, which is really at the low end of the scale.

Over the course of 40, years we've been running between three and four years and we are at just about three years right now.

So I think that that's very consistent with this end of this cycle, and certainly we don't expect that to change dramatically.

Typically the commercial real estate book's a little longer as Joe indicated, around three years on average.

But the multi's around 2.9, and the CRE book is about 3.3 years average.

That is the average of the existing book or the average expected of originations for the quarter?

That's existing book.

I will tell you when we try to model prepayment activity or behavior, mentality of the [pumper], it's very difficult to model.

Sure.

I would say if we can get within 50% it's close.

The cash flows are very robust.

We see that in the portfolio.

We've grown our loan book like I said previously 11.8% multifamily on significant prepayment activity.

We are originating a significant amount of activity.

But we also have the challenge of loans paying off.

I think the good news is we have a significantly larger portfolio and therefore, there's going to be billions and billions of dollars available to trade.

Great.

Last tiny housekeeping question, and I will let you guys go.

But do you have the average balance of loans held for sale in the quarter?

I think you all had given that in the release last quarter and I couldn't find it this quarter.

I would say, again, we can probably talk offline specifically, my guess is probably $240 million, in that range.

Small number.

Great.

Thank you guys.

Yes.

Our next question comes from Brad Ball from Evercore Partners.

Your line is open.

Good morning, Brad.

Thanks, good morning.

Just a couple of clarifications.

Tom, if we're going to have the NIM ex-prepays bottom in the 2.45% to 2.50% range, that's about 15 basis points from here, do you think that we really have about two more quarters of compression and then we start to see stabilization in the second half on the NIM?

I think it's very reasonable to say that.

I think the reality is that rates have backed up here a little bit.

Going into the beginning of the year rates, we're looking at around a 3% 10-year.

Things have come in a little bit.

We're conservative on our guidance.

We hope to continue to be conservative, given the outlook until we see rates really start to spike and we can be a little bit more bullish on -- of margins going up.

We're so close to stabilization, given the environment, but obviously you can see where the bond market is trading five years ex 1.54% right now.

So if we're getting around a 200 basis point spread, 220, 215 on multi, you're in that mid-3 level.

We'd like to see that higher.

As indicated, our multifamily coupon at 3.79%, that's the current coupon, we're down 7 basis points linked quarter.

That's what we're offering currently to our customers.

We're at a point now where we should see stabilization albeit there's been a somewhat change in the marketplace.

Again, I know it's early discussion about interest rates in January, but if rates do start to rise, our margin can go up from there.

Okay.

And you also mentioned on the expense question that there is room for expense improvement in 2014.

Would you care to give us a number for the first quarter and --

I'd say for the first quarter, $144 million, maybe down $2 million from the linked -- from the previous linked quarter.

In that range quarterly throughout this year?

Yes.

Pretty flat.

We don't see significant increases there.

We're going to focus on cost containment.

The mission here is to make sure we continue to partner with our regulators, make sure we are tight on Dodd-Frank and ready to go through our EFAST process, and we're excited about it.

We spent a lot of money.

We have some great partners outside of the bank that are working with the Company, and we feel we've put a very strong effort to get ready for this very important process for the bank.

It's also important to note that we have expensive but highly qualified people on staff that are going to be with us right through this entire period.

Got it.

And then on mortgage banking, what was the gain on sale this quarter, and are you retaining more of your originations on balance sheet as opposed to HFS?

We've been very consistent with the strategy.

We went in two years ago with the ARM, the hybrid ARM book.

It's doing very nicely for us.

We're not hitting our target as far as expected growth of $50 million a month.

We're probably putting around $30 million, $35 million.

The ARM market is very competitive.

Right now, we have about $0.5 billion dollars of ARMs.

We haven't had one loan that went 30 days.

Very proud of the underwriting standards.

The gain on sale margins have tightened, as we all know.

The industry's very challenging right now.

We're running between 65, 75 basis points, being the high end of the range, 60 being the more realistic given the competitive environment.

We are seeing some benefits on the servicing side.

For example, loan servicing fees for the quarter was $13 million.

After you've taken that out of the hedging activities, we netted $10.7 million in servicing income for the quarter, and we had about $2 million in originations.

We're suffering a little bit on the origination side.

You're dealing with seasonality, but we're hopeful going into Q2 that the purchase season will start to pick up, and hopefully Q1 should be hopefully the bottom for mortgage banking income.

I will say mortgage banking income, gross income for the quarter should be down another 20%, similar to the previous quarter.

Bear in mind we gave guidance in Q4 down 35%.

We came in better than expected predominantly on the servicing side.

What's your servicing book right now?

How many billion are you servicing?

Right now we have $20.4 billion of unpaid principal balance.

It's actually accounted for at a 4.65 multiple.

Or 1.18%, which is $240 million on the books.

Excellent.

And last question, on the C&I business, how's that going?

It looks like you ramped from obviously a small base, but you ramped up pretty heavily in the quarter.

Any comments about C&I?

We're very excited about our new group in Foxboro; they're doing a great job for us.

We will see good growth there, again a great portfolio, 100% performing, no delinquencies.

We're very proud of the deals that we see.

We're very selective.

We probably turn down close to 90% or 97% of deals.

The deals that we do, we're very pleased.

High fee income based business which goes through the margin.

We're looking at a yield that's higher than our current CRE and multifamily yield, just south of 4%.

We're looking at a business that should see doubling type growth.

So, for example, at year end, we were close to $200 million.

We could easily be $400 million, $500 million in the next six months from here.

It's growing.

But again, we're very selective on the credit that we put on.

Great.

Thanks very much.

You bet.

Our next question comes from Rick Weiss from Boenning & Scattergood.

Your line is open.

Good morning, Rick.

Good morning, Rick.

Hi, Joe.

Could you guys talk a little bit about asset liability strategy and what you're doing to protect against interest rate risk?

The idea that we'd be protecting against interest rate risk, I'm not sure exactly.

If you're talking about the liability side, obviously we are --

What I would add to that statement is that right now, we're positioned for 2014 to look at the deposit market as a great opportunity for us.

We have great branches throughout the country now, in selected markets that we could reasonably price our additional liabilities coming back to the Company for a strategy for growth.

Obviously there is -- it's very fluid in the marketplace for liabilities.

So we feel fairly confident that we can grow our liability base in the deposit marketplace.

But bear in mind, the multifamily CRE book has so much intense cash flow.

When you're looking at our balance sheet, despite the fact that we have a very large wholesale liability book, we have a propensity to see significant cash flow from the loan book.

With that being said, you have that general characteristics which helps dramatically to mitigate interest rate risk, given that you have constant reinvestment of the multifamily CRE book.

Net-net, the rate environment is very, very challenging as indicated previously.

We have a rate environment that should have been higher for multiple years.

Everyone's struggling there.

But the reality is that we have a very low interest rate environment in the short end of the curve, and we're lending within the belly of the curve.

On the borrowings that you're putting on over the quarter and with the -- are you matching the durations of the borrowings with the investment securities that you're putting on, or are they shorter than the investments?

Not currently.

I think the strategy would be in 2014 to see a real deposit growth effort.

Our goal is to transition from wholesale financing through into retail.

At the end of the day, we have the opportunity here to -- rates are low.

Again, we believe rates will stay low for a reasonable period of time.

But eventually they will rise.

When that does take place, we feel very confident that we could transition into a more stable source of funds.

You know us for many years.

Our business model is to grow deposits by acquisition, not to grow deposits in ways that other banks spend a great deal of effort doing.

So I don't think that you should be looking for us to do something materially different in the period ahead than we've done in the past.

Our traditional means of growing deposits is by acquisition.

And certainly that would be our expectation in the future as well.

Okay.

Joe, in terms of acquisitions, are you still looking for a larger one versus --

I think the environment is such that it's pretty clear to us that we are today spending the money and time doing those things that would literally with our regulators put us in a place where we're over $50 billion in any event.

So whether we go over $50 billion by $2 billion or we go over $50 billion by $25 billion, it doesn't really matter.

We're going to be basically doing the same kinds of things in the period immediately ahead whether we do a really big deal or a small deal.

So the big question is do we want to be involved in a small deal that precludes us from doing a large deal.

That may not be the case.

We could conceivably do a small deal and a big deal down the road.

Not tomorrow, obviously.

But the important thing is that we're preparing ourselves for the opportunity to follow our business model, which is to grow by acquisition.

Just to go back to your initial point on asset and liability management, in the event there would be a transaction in place, we would definitely deal with restructuring our liability book in conjunction with the expectation of rates being higher in the future.

okay, got it.

One kind of clean-up question.

When you're talking about your loan pipeline, what percent is that would be multifamily?

70%-odd.

About 80%.

It depends from quarter to quarter.

But typically the portfolio is reflected in what we do on a prospective basis as well.

From time to time we get a very, very large commercial loan that changes the ratio for a particular quarter.

But over the course of time, you don't see a major change in the ratios, so over the year ahead, the period ahead, it will be roughly the same as it's been in the year past.

Okay.

Got it.

Thank you.

Our next question comes from Dave Rochester from Deutsche Bank.

Good morning, David.

Good morning.

Hello, good morning, guys.

You mentioned this earlier, but I think I missed the number.

Was just wondering what that MSR valuation adjustment was this quarter, and then the net hedging gain or loss, whatever that was this quarter.

The change in MSR value was $5.5 million positive.

The net loss on hedging was $7.8 million.

When you net that against the $13 million of servicing fee income, we booked a $10.7 million revenue stream from servicing.

That's the reconciliation.

It was actually a net hit of $2.3 million?

Yes.

Got it.

And was just wondering, with your guidance on operating expenses of $144 million, kind of going through, being pretty flat through 2014, should we take that to assume that you guys think you wouldn't have to spend any more to prepare for an actual CCAR exam versus the $10 billion to $50 billion stress test?

Let's get through EFAST first.

CCAR's a different situation.

We're focusing on our responsibilities as a sub $50 billion bank.

But obviously the regulators have been partnering with us.

They have been giving us significant guidance, and we're very pleased where we are as a Company.

But that's -- When we're over $50 billion, we will deal with that when we get there.

but I think the important thing to know is that we have to be prepared for that.

You can't consider doing bigger deals unless in fact you're contemplating what is the impact of that.

Got you.

And just one last one.

Any concerns -- you mentioned pricing driving the market and volumes for next year.

Is there any concern that there could be any local policy shifts with the new mayor that might impact any of that?

No, not really.

I mean, the new mayor has many different things that he says, but the market is so well-established that it's highly improbable that the mayor or anybody else will do something material that would adversely affect real estate in the New York market.

The last thing the mayor wants to do is destabilize the New York City real estate markets.

If we were to see the five year shoot up meaningfully over the next 6 to 12 months call it maybe through 2%.

Maybe that's not meaningful enough.

Maybe 2.25%.

Do you think that could potentially spur another re-fi boom in the market?

Yes.

Yes.

No question about it right now.

We saw the surge going towards the end of the summer with the activity we had in, Q3 which is typically unprecedented for the Company.

We ran it through Q4 as additional activity.

That was driven off of a real movement in interest rates.

We went literally 100 basis points from the beginning of the summer, towards the end of the summer on the five-year Treasury.

Right now we're hovering around 150.

That goes to 2%, my guess you will see some real activity, in my opinion.

Great.

Thanks, guys.

You're welcome.

Our next question comes from David Hochstim from Buckingham Research.

Good morning, David.

Just wondering if you could talk a little about pricing and competitive environment and multifamily, and then in I guess commercial and --

I think there's no question that the marketplace is highly competitive.

Certainly more competitive than it is with regard to one to four family.

The reality is that we are getting bigger and bigger share of our niche.

That's the important thing to us.

It will likely be that in the period ahead, additional players come into the marketplace.

When you think about who was here three years, five years ago, they were not some of the banks that are here today.

But they were in fact replacing -- the banks today are replacing significant structured debt lenders who were taking greater share of the marketplace.

So there's more there for all of us to share because those big players are not there.

And that in the end just creates a better market, and certainly we will get a bigger share of the whole market, and that's evident from our numbers and our expectations for the period ahead.

And is there any update on consumer loans?

On jumbos?

I would say the update is that our forecast is trying to put on $50 million per month as a strategy.

We've been slightly south of that, around $30 million, $35 million.

It's been challenging because it's very competitive.

It's an asset class that many banks are focusing on.

But our underwriting standards are much tighter.

Like I indicated in the previous question, we don't have one loan that's been past 30 days delinquent.

We have a $500 million book, approximately, where 100% is performing without one 30 day delinquency.

The goal is to continue in that strategy.

But the reality is that our underwriting standards are more conservative.

We're comfortable building at that level.

If rates do spike, my guess is that you will see more activity on the hybrid loan book which will be helpful for balance sheet growth.

I think the good news is that we will spend less carrying that portfolio than others might because of the stellar way in which it performs.

And then tell us on the C&I book, is that all being originated in the New York area or is there some geographic (multiple speakers) --?

No, no.

That's our new business model, especially with the specialty finance group; it's all over the country.

But again, selectively, it's a credit buyout shot that we take small positions in very large household name type companies where we are very selective on those types of credits and we're very comfortable on building that book.

The guidance there is going to be significant growth portfolio.

My guess is that you're going to see a couple of hundred million dollars in probably Q1 and maybe another couple hundred million dollars growth in Q2.

We're going to see a nice quarter-over-quarter growth.

That will be a growth business for the Company, but again, a very manageable business.

Are many of the commercial real estate loans now being made outside New York?

No, the CRE loans are all predominantly in the New York Metro region.

Yes.

Most of everything that we did in 2013 was in the New York market.

The entire book, the entire household investment portfolio I believe is around 97% in market.

Maybe 3.5% out-of-the-market.

Great.

Thanks a lot.

Our next question is from Josh Levin from Citigroup.

Good morning.

Good morning.

This is actually Arjun Sharma on for Josh.

Good morning.

How are you guys?

Good.

Thanks for taking our question.

Just wanted to find out where do you guys stand on the LCR that's currently proposed?

We're evaluating it.

It's obviously in draft format.

Doesn't apply to us yet' with our $50 billion plus.

But we are evaluating it and it's part of our monthly [opo] discussions, and we evaluate it.

And just I mean, any color in terms of -- I understand you guys are evaluating it.

But let's say you did have to comply with it today.

Would you -- in that hypothetical, would you have to meaningfully manage your balance sheet in a different way?

I would say that I would have a public disclosure, yes, because it doesn't apply to us.

But in the event we have to grow, let's say, through an acquisition, we would factor that into our pricing model of an acquisition.

Until we get over that level, we're evaluating it.

We have no specific comment publicly to address that.

Okay, great.

And then just one last one.

On the DTA ratio, just noticed that that dropped a little bit quarter-over-quarter.

Can you give us a sense of what level you guys are comfortable running at from that perspective?

Could you repeat the question?

What was the -- ?

On the tangible equity, tangible asset ratio.

We have a very low risk business model.

Tangible capital has never been an issue for the Company.

As you know historically, we've grown the capital base via acquisition.

We're very comfortable with our capital levels, we're very comfortable with our growth expectations.

Obviously we're a growth Company through acquisition.

We haven't had a deal in a few years.

But at these levels, we believe we still have some good room to grow, ex acquisition and ex capital raise.

Something that people often miss is that over the course of decades, through multiple cycles, we've never had to charge to capital our principal asset losses, and that's something that very few banks could ever say.

We've never charged to capital losses on our principal assets.

When you think about the need for capital, we do not use capital to accommodate losses and have not over the course of the elongated period which covers many different cycle turns.

And that's a fact, by the way.

That's not an assumption or something that -- that's a fact.

I would just add one other point.

Going through this stress test process and the EFAST and getting prepared, we're very confident in our cap capital levels, we're very comfortable with our in house trigger levels.

Where we stand today given our low risk profile, we're pleased to go through this process.

Again, I'm going to mention once again, we work with our regulators, they understand our business model.

We spent a lot of effort in articulating that to third parties.

We're very confident that we have the ability to withstand very challenging environments without any, as Mr. Ficalora said, charge to capital.

Thank you very much.

You bet.

You're welcome.

Our next question is from Steven Alexopoulos from JPMorgan.

Good morning.

Good morning, Steven.

Good morning, guys.

Joe, there was a lot of talk in 2013 about your desire to do a larger transaction that obviously didn't materialize.

As you look back on the year, did the sellers you're expecting not put their hands up?

Were pricing expectations too high?

What essentially happened?

I think there are many reasons why deals do not occur, and in 2013 I think there was a huge amount of uncertainty as to what the environment was actually going to be.

So Boards were not in a position to actually decide that they would in fact go forward with the deal because they weren't sure of what the outcome might actually be.

So I think when we talk about the period ahead, all the players that were there in 2013 are still there.

And the opportunity to do deals will be very real; as we go further and further down the road, the greater likelihood is that deals will occur.

I would just add, obviously a few years ago, a very large in market deal was announced that hasn't yet closed.

That is a very unique telling tale of what's going on in the industry, and everyone's mindful of that.

Obviously going back to the process of making sure that we're in a very good position, jumping into a transaction and not being able to close the transaction is not where we want to be.

Okay.

That's helpful.

One of your local competitors booked some nice size multifamily loan packages in the fourth quarter in roughly $200 million range each.

Did you guys get a look at any size credits in that range?

Maybe you could talk about some of the larger credits that you booked in the quarter.

The reality that there's some large plays that have occurred is indicative of the absence of the structured debt lenders and the ability of those banks that are rapidly or readily tracked by you to have activity that sounds impressive, and certainly it's there.

We will do deals when in fact they meet our criteria.

And as is indicated, we grew -- our principal loan book grew by over 11%.

That's a very attractive growth record in a year in which there were lots of other people that were also doing active lending.

I would just add the reality is some of those transactions were probably from our portfolio that were sale transactions that we would not finance given the levels of financing.

So we probably had a shot at them but it just didn't work for our underwriting criteria.

The good news is that the marketplace is extremely rich, and we can be selective as to what we choose.

Doesn't mean that we're not going to take things that are otherwise qualified for our portfolio.

Each deal represents itself differently.

We're in a very good place today and very optimistic about the kinds of opportunities that the period ahead holds.

And for the quarter, it was very granular.

Average balances were typical for the bank.

There weren't any large one-off transactions.

A lot of great activity.

Okay.

And if I could, just one follow-up.

Tom, I didn't understand your question to the question on the wholesale borrowings.

What was the term of what you added in the quarter, and what are you paying for those borrowings?

Right now, anything that we're borrowing in the wholesale market are considered short-term borrowings.

So it could range from 30 days to 120 days.

Anywhere from 37 basis points to 55 basis points.

Okay.

Thanks for the color.

Our next question is from Matthew Kelly from Sterne Agee.

Good morning, Matt.

Good morning Matt.

The loan to deposit ratios ticked up a little bit.

Tom, you mentioned earlier for Rick's question that you're working on some deposit strategies, is going to be a big focus.

Excluding deals, where would you like to see the loan or deposit ratio go over the next year?

Matt, again, the deposit strategy is absent an acquisition, the Company's going to grow its balance sheet.

We grow typically 4% to 7% a year for multiple years depending on market conditions.

So if you want to run a reasonable model, let's say 5% type asset growth for the next two years or the next year we would go into the -- because right now you can fund literally pretty close to where the Home Loan Bank is through the deposit market.

We could be reasonable in the Arizona market, the Ohio market or the Florida market to bring in some of that funding, and it would not cost the bank significantly to its cost of funds.

I think there's going to be unique mix going into 2014.

In addition, I think we have a great opportunity to bank our customers on the multifamily side, and that's going to be a real push for the Company.

But I think it's going to be a general shift from some more retail to wholesale.

It's been the case for the decade that we've been public.

We in fact grow the deposit base when we do deals, and we in fact have a very, very high ratio of loans.

So our loan to deposit ratio is always very high because our principal asset is in fact conservative loans that perform well in all periods and, therefore, the likelihood that we have a high deposit -- I mean a high loan to deposit ratio is our business model.

That's not inconsistent with who we've been for the 20 years.

Got you.

I guess bigger picture here, you've got cash down.

Using that excess cash to buy securities, loan growth up medium term duration, securities up.

And then funding short.

What are the thresholds you'd like to maintain on your plus 200 basis point parallel shift and II sensitivity?

September, it was negative 5%.

Where would you like to maintain that?

I would say between worst case 8% to 10%.

But that reasonable, 5% on both sides, 5% up or 5% down.

Worse case, 10%.

okay, got it.

What was the average duration of the DUS bonds that you added during the quarter?

The vast majority, the average life is probably 7.7 to 8.2 years type average duration.

Got it.

All right.

Thank you.

Our next question is from Moshe Orenbuch from Credit Suisse.

Your line is open.

Great.

Thanks.

Most of my questions have actually been --

Hi.

Most of my questions have been asked and answered.

Just wanted to talk briefly about the mortgage bank and your thoughts.

You pointed out the low level of origination income and possibly another notch down in --

Yes.

-- First quarter.

What steps can you take to kind of make that business more competitive -- market share, products, can you talk a little bit about that?

I think the big picture, we're running off the NBA statistics for 2014 and 2015.

They're down, obviously.

They're predicting a 35% decline in broad-based financing for 2014.

We're going to model off that.

But the reality is we do not do a significant amount of lending at the retail level.

We have that opportunity.

So it's wide open for the Company.

We made some slight inroads.

That could be a catalyst for the Company over time.

We believe that we're going to continue to right-size the cost structure.

We've already taken some initiatives going back to August of 2013.

So we're profitable every month.

The goal is to be profitable.

The goal is to start seeing some purchase activity build up into Q2, and then we will re-evaluate.

The reality is they service a significant amount of our loans, and we have a unique platform.

In the event we're a consolidator in the industry, we have a huge infrastructure to benefit from.

We're well positioned in 2014.

Again, it feels like we're close to the bottom here.

Q4 was a tough quarter.

But we outperformed based on management expectations down 20 versus down 35.

We will probably see similar declines of down 20 again in Q1.

Hopefully that could be the bottom for the run rate for the Company on the mortgage banking ARM, and hopefully we will see a pickup from there as activity picks up.

Meanwhile, the retail platform is wide open for the Company.

There's no question we have that potential.

We've made some slight in-roads.

We can do a lot better job there.

What actually has to happen for that?

it's going to be gradual buildout, picking the right people, the right managers by region and really thinking about structuring the ability to bring in loans from the retail platform versus the wholesale markets.

We're a wholesaler.

We're not a retailer.

It's probably less than 3% of our volume on the retail side.

We have a wide open opportunity.

We have a significant presence in these markets, and we're not lending at the branch level.

There's no question that could help.

Got it.

Thanks.

Also bear in mind, we also committed to the hybrid ARM portfolio at a very conservative underwriting standard.

Capital business are being originated by our residential guys.

They're doing a fabulous job of that.

Our next question is from Kenneth Bruce from Bank of America-Merrill Lynch.

Hi, guys, it's Karti Bhatt on for Ken Bruce.

Back on the funding cost, looks like you got some good benefit this quarter.

I guess looking forward, ex an acquisition, do we still see room for lowering funding costs ahead?

I would say in the short term only on the wholesale liability side, not so much on the retail side.

We're probably pretty much on the low end of the spectrum for a thrift.

When you look at the commercial bank arena, we have that opportunity to regionally price some of our commercial bank opportunities, in particular the multifamily New York market.

If we do take liabilities from let's say the money center banks from our customer base as a push towards bringing in liabilities, that could be helpful.

But the reality is if you compare our cost of funds on the deposit side, we're in the lower end of the spectrum.

Got it.

Okay.

I guess looking at the borrowed funds, the decline in the quarter, was that just because the shorter duration, so that's where you continue to see the benefit ahead?

Yes.

Okay.

And then just real quick, I guess in the non-interest income, looks like the other income was up $2 million or so quarter-over-quarter.

Was there something going on there?

Probably from our investment advisors.

We had a very strong year, obviously markets were up materially.

So we do manage a $2 billion asset portfolio for high wealth individuals, and we had a stellar year.

We actually outperformed the S&P 500, so we had 30% plus year up.

That obviously realized more fees.

Okay.

Thank you.

Our next question is from David Darst from Guggenheim.

Good morning, David.

Good morning.

Joe, as you're talking about the types of deals you've done in the past, really emphasize they were done for funding purposes.

Should we expect that type of transaction in the future, or you're really going to think about or do something that really diversifies the Company?

I think there's always diversity in choice, depends on the deal, where it may be.

Obviously we could do a deal anywhere in the nation.

The question is, when and what would be the driver of the deal.

Fundamentally, the deal has to be accretive to earnings.

It has to be accretive to tangible, and then everything else just falls into place.

So we could have different choices.

One could be a very local deal and have attributes that are on the liability side.

And another could be very distant and have attributes that are on the asset side, either what we're able to dispose of quickly or asset classes that we want to be in for some good reason.

So each and every opportunity presents itself differently, and it would be very hard for us to say what will drive the next deal.

It may be down the road and driven by totally different things than the last deal we did.

Remember, the last deal we did was at the end of 2009.

That was driven itself by very different dynamics than the deal that we did immediately before that.

So I think there's all kinds of opportunities out there.

And exactly when and what we do will depend on the facts and circumstances at that time.

It sounds like you're making some suggestions about developing your retail platform out a little bit more.

Is that something you're willing to take on in an acquisition?

I think the good news there is retail for us has never been a problem.

We integrate banks into our systems extremely well, better than the biggest banks in the country.

We do that not only cost effectively but systemically it works out extremely well.

So our people in Arizona are able to do the exact same things that our people in Westbury can do.

The reality is that the ability for us to bring retail to a platform that works no matter where it may be is something that we're very proud of and have had great success in.

But does that include like developing more of a sales culture and a larger product set, or -- ?

Again, if we're talking about getting a bank that's next door, everything is going to be basically the same.

The culture will be identical.

If we're talking about getting a bank that's in a state that's far removed from here, that has a long track record of interfacing with their customers differently than we do, we could still do that with the systems that we have available to us in a way that makes them highly competitive and certainly does not present either regulatory or operating issues to us.

We've proven that.

How well we've integrated for example very different markets, Ohio, Florida, and Arizona.

Very different markets.

And they were integrated extremely well on the retail side, that's working out extremely well.

Great.

Then just on the commercial real estate comments you've made and the origination volume growth we saw this quarter, should we see more commercial real estate growth relative to multifamily from you this year?

I think that varies.

The commercial opportunities sometimes are very large, so in a given quarter or maybe even in a four quarter period, we might grow our commercial book rapidly or we might actually pay down large segments of our commercial book.

When you look back over the last 12 to 24 months, we've had some very big deals come into our portfolio and leave our portfolio.

At the moment that those transactions occur, they change ratios a little bit.

So the reality is that in the period ahead, we could have these little shifts, but they're not driven by an intent.

It's Tom.

I would just add, as previously discussed about prepayment activities, the sales opportunity in the New York market is very real.

You could have large commercial real estate on sale and it could be putting on some decent growth.

That will offset the growth.

The reality is we have a lot of cash flows coming from multi and CRE, but last year, it was more driven off of multi.

So we have this opportunity in front of us on the property sale transaction, so despite the activity that we will do in origination, you're still going to be challenged with property transactions.

And depending on the financing of those property transactions -- I know one of the analysts had a great question about larger deals in the market going to different players.

We are a very conservative underwriter.

If it doesn't meet our underwriting standards, we won't do the loan.

We will collect the prepayment fees on the way out, but if someone else is buying the building and they're going to finance it outside of our standards, it will move on to another portfolio.

Okay.

Great.

Thank you.

You're welcome.

We will take our final question from Collyn Gilbert from KBW.

Hey, Collyn, you're back.

I am.

I was hoping I was going to get back in the queue.

Two quick follow-ups.

I want to make sure that I heard you correctly when you talked about acquisition appetite.

And before you were commenting on the economies to go well above $50 billion.

But that could change.

You could do a deal that would take you only modestly above $50 billion.

Yes.

I think the idea that we could do a smaller deal is definitely possible.

The reality is that we're growing very, very quickly to a $50 billion market in any event.

So whether we do a deal or not is going to be driven by the nature of the opportunity, not by whether we pass $50 billion or we don't pass $50 billion.

We're doing a lot of work to be ready to be over $50 billion because even without a deal, we could cross over $50 billion in the not too distant future.

I would just add that the possibility of doing a deal, keeping us below $50 billion is also very real given that our desire to look at our liability opportunities in the marketplace where potentially rates can go up in the future, a small transaction keeping things under $50 billion is also a possibility.

And then just final follow-up to that.

You guys have been clear in commenting on sort of the external environment, which has kept you from getting a deal done.

Is there anything internally that has kept you from doing a deal to this point?

No.

I would just say that, again, partnering with our regulators, regulators are very important in this environment.

As you can see, there has been some transactions that have been announced that haven't closed.

They are critical going forward.

We've spent significant dollars, effort and time, hired many people to be positioned to benefit from this change.

We're excited about the March filing.

We will move on.

That will be one step towards growing the balance sheet, growing the Company, and being positioned to be hopefully in the future an acquisition opportunity down the road.

I think there's no question that the March filing is extraordinarily important to the positioning of an institution such as ours, to actually be able to do deals.

That filing is very, very, very important, and certainly we're spending a lot of time and effort in being prepared to do that properly.

Okay.

This has been a three year effort for the Company, so we're very proud of where we are, and we're very proud of partnering with our regulators to help us along the way.

That's helpful.

Thanks.

This does conclude today's question-and-answer session.

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

Great.

Thank you.

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 in April when we report our earnings for the first quarter 2014.

Thank you.

Thank you.

This does conclude today's fourth quarter and FY13 earnings conference call with the management team of New York Community Bancorp.

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