Flagstar Financial Inc (NYCB) 2014 Q3 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. Today's discussion of the Company's third-quarter 2014 performance will be led by 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 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 a number of factors, many of which are beyond its control.

Among those factors are: general economic conditions and trends, both nationally and in the Company's local markets; changes in interest rates, which may affect the Company's net income, prepayment penalty income, mortgage banking income, and other future cash flows, or 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 on page 7 of this morning's earnings release and in its SEC filings, including its 2013 Annual Report on Form 10-K and its first- and second-quarter 2014 reports on Form 10-Q. The release also includes reconciliations of certain GAAP and non-GAAP earnings and capital measures, which will be discussed during this conference call. If you would like a copy of the earnings release, please call 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 this call over to Mr. Ficalora, who will provide a brief overview of the Company's third-quarter performance before opening the line for Q&A. Mr. Ficalora?

Thank you, Leo, and thank you all for joining us this morning as we discuss our third-quarter performance, which was highlighted by continued loan and deposit growth, the exceptional quality of our assets, as well as our above-average efficiency. I'd like to begin by speaking to our earnings, which rose not only sequentially, but also year over year.

In the third quarter of 2014, we generated GAAP earnings of $120.3 million, as compared to $118.7 million and $114.2 million in the trailing and year-earlier three months. Furthermore, at $0.27 per diluted share, our current third-quarter earnings were $0.01 higher than the year-earlier level, and consistent with the level recorded at the second quarter of this year.

We also reported cash earnings of $129.6 million for the quarter, which is equivalent to $0.29 per diluted share. In view of the strength of our earnings and our solid capital position, the Board of Directors last night declared our 82nd consecutive quarterly cash dividend in general, and our 43rd consecutive quarterly cash dividend at $0.25 per share. The dividend will be paid on the 20th of November to shareholders of record as of November 7, 2014.

For the purposes of this morning's discussion, I'd like to focus the remainder of my comments on the third-quarter performance, as compared to our performance in the trailing three-month period. One of the factors contributing to the strength of our third-quarter earnings was a sequential increase in the net interest income, which albeit modest was no small achievement in the current rate environment.

The increase was largely attributable to a rise in prepayment penalty income, which was $25.4 million in the current third quarter, as compared to $19.3 million in the second quarter of this year. In addition, prepayment penalties contributed 24 basis points to our margin in the current third quarter, exceeding trailing-quarter amount by 6 basis points. As a result, our margin rose 3 basis points, quarter over quarter, to 2.69%.

Absent prepayment penalties, our margin would have declined 3 basis points from the trailing-quarter measure, consistent with the low end of the range provided on our last conference call. The increase in prepayments stem primarily from our multi-family credits and largely reflect an increase in the refinancing activity. Given the sequential increase in prepayment penalty income, it should not be surprising that our linked-quarter growth at the end of September was less robust than it was at the end of June, and for that matter, March. Nonetheless, multi-family loans rose $553 million sequentially to $22.9 billion. The nine-month increase was $2.2 billion or 13.9% annualized.

Much of the funding for our loans stems from our deposits, which have grown at an annualized rate of 13.8% since the end of last year. Deposits rose $2.6 billion during this time, to $28.3 billion, with nearly $1 billion of increase taking place in the last three months alone. Our deposit growth has enabled us to diversify our overall funding consistent with our focus on managing our funding costs. In fact, notwithstanding, the significant rise in deposits from the end of June, at the end of September the average cost of funds was reported for the current third quarter was consistent with our average cost in the second quarter of this year.

I also want to acknowledge the limited growth of our assets over the course of the quarter, after consecutive quarters of dramatic growth. As I've mentioned on previous conference calls, it is our intention to exceed the current SIFI threshold until we -- actually I should be very clear here: it is not our intention to exceed the current SIFI threshold until we engage in a transaction that is significantly earnings accretive, as well as accretive to our tangible book value per share. As I've also mentioned, we have the tools at our disposal to keep growing our primary asset, and generating earnings, while at the same time managing our balance sheet growth.

This was aptly demonstrated during the third quarter when we sold $109.2 million of one-to-four family loans that, at one time, had been held for investment, and reclassified $397.3 million of one-to-four family loans and C&I credits as held for sale at quarter end. You are likely to see a continued decline in our portfolio of C&I and one-to-four family loans held for investment, in tandem with an increase in held-for-investment multi-family and commercial real estate loans. As we indicated in this morning's release, we currently have a pipeline of about $3 billion, and loans held for investment comprise about $2.3 billion at that amount.

Moving on from asset growth to quality of our assets. I'd like to point out that the substantial decline in our non-performing assets since the end of December, as well as the fact that we once again recorded net recoveries. Non-performing non-covered assets represented 0.31% of total non-covered assets at quarter end, as compared to 0.4% at the end of December. And net recoveries represented 0.00% of average loans in the third quarter of this year. Meanwhile, non-performing, non-covered loans represented 0.25% of total non-covered loans at the end of June and September, in contrast to 0.35% at December 31, 2013. In view of this stellar quality of our assets, which we expect to continue, the modest linked-quarter rise in our allowance for non-covered loan losses was solely attributable to net recoveries.

Moving away from our balance sheet and back to our income statement, our earnings were also increased by a $2.6 million linked-quarter decline in operating expenses, as an increase in compensation and benefits expenses was exceeded by reductions in G&A, and occupancy and equipment expense. The linked-quarter growth of our earnings was tempered by a decline in non-interest income of $11.3 million, which for the most part was attributable to the $6 million gain we recorded on the sale of certain ORE properties in the second quarter of this year.

The impact of the linked-quarter decline in non-interest income was somewhat offset by the higher mortgage banking income and by an increase in revenues from our subsidiary, Peter B. Cannell & Company. With residential mortgage rates at their lowest since last year's second quarter, we've been pleased to see an increase in rate-lock commitments, as reflected in the pipeline of one-to-four family loans held for sale and reported today. Obviously, we are only a third of the way into the fourth quarter. But for now, at least, the demand for one-to-four family loans, and the potential for mortgage banking income, appears to be looking up.

On that note, I would now ask the operator to open the line for your questions. If we don't get to all of you within the time remaining, please feel free to call us later today or this week. Thank you. Leo?

(Operator Instructions)

Thank you. Our first question is coming from Ken Zerbe of Morgan Stanley.

Great, thank you. Good morning.

Good morning, Ken.

I guess, Joe, my first question is for you. In your prepared comments, you seem pretty confident that you won't cross the $50 billion without a deal. But as we all know, you are running out of time. So should we view this as a statement that you are more confident that you can get a deal done very soon, or that you are more confident that you can run at $49 billion for the next X number of quarters?

I think the important thing to note is that our balance sheet does lend itself to flexibility in managing our size. And there is a four-sequential-quarter lead time into the relevance of a $50 billion trigger. So we take the two together, we have quite a bit of time ahead of us. We are actively working with our regulators and doing the things that are appropriate for consideration of transactions.

It has been our consistent business model to grow by acquisition. And it continues to be our expectation that we will structure a well-designed transaction that will be highly accretive to earnings and to capital. And that when that is all put together, it should have a very reasonable market expectation that it will get regulatory consideration.

I think your question is extremely important. Everybody must have the same question -- how long can we do this? Well, we can conceivably do this for the next couple of years. The reality is that as long as we are able to build earnings and maintain the overall size of the Company within this range, I think we have a great deal of opportunity to make the decisions and do the necessary work, so as to not have this unique trigger of change in the position of the Company without change in the risk inherent in the Company.

Okay.

And then a question for Tom. At what point do you start thinking about locking in long-term funding? I mean, you are very liability sensitive. And given where rates are, it seems like now is probably a pretty decent time to start extending the duration of your liabilities. Are you making any progress on that? Or is it you really are kind of waiting for a deal to happen and then restructuring liabilities at that point?

Good morning, Ken. What I would say is that Company has made a concerted effort, starting in January, to push on into the retail platform on deposits. If you have noticed, we are up 13.8% for the nine month annualized. That is a pretty strong deposit growth story for our history.

Historically, we have been always the lower rate payor. So we have obviously moved the retail platform into bringing in some deposit funds. And this is obviously the CD market as well as operating account. That is the first initial step to try to re-diversify the balance sheet in respect to funding.

Going forward, now we are going to evaluate all options as the markets move around here. And we are clearly cognizant of our liability sensitivity. But if you look at what we have done in the past nine months, we have definitely changed the mix of our deposit base and funding base.

Yes, I definitely noticed that in the press release.

And then a final question just on mortgage banking. I think, Joe, you mentioned that you were -- seemed confident that you can kind of maintain this level -- sort of that $16-ish million of mortgage banking revenue going forward. Is that right, just given where rates are?

It's Tom.

What I would say with that is that obviously there has been a significant movement in interest rates. When the swing note rates drop below 4% -- I think it hit as low 3.67%, 3.70%-ish, our volume spiked 3 times -- 3 times multipliers -- which is a significant rush to refi. So what we saw in October was there is still refi demand within our portfolio.

We have a significant $20 billion MSR portfolio that we are servicing, which has a coupon that's close to 4%. So if you see a change in interest rates well below 4%, you will see some more refinancing activity. And we noticed that when we had that anomaly of a treasury rally.

What does that mean for the rest of the quarter? As Mr. Ficalora indicated, it is only one month into the quarter. But October looks pretty strong, given that the rates are much lower.

Now, if that continues throughout the fourth quarter, it is conceivable that you can have an up mortgage banking quarter. I like to be conservative. I would say it would be around the same level as Q3, assuming rates go back up to the 2.50%-ish level. But where we are today -- it's about 2.20% in a ten-year. -- you are still seeing some decent flows of lock volume.

Perfect. All right Thank you very much.

Yes.

Our next question comes from Bob Ramsey of FBR.

Good morning, Bob.

Hello, good morning.

How are you, Bob?

Doing well, thanks.

I was hoping maybe first you could talk about your margin outlook. You came in sort of at the better end of your guided range. We have seen rates move over the course of the quarter. So how you are thinking about it?

And then also maybe how slower growth impacts your margin. I mean, I don't know if you -- at the margin -- cut out some of maybe what would have been lower-yielding loans and that gives you a little bit more sense around margin if you are not having to grow as fast.

Yes. Bob, again, I am not going to go on a limb. We've had one quarter. I am going to guide for the Q4 around the same level as Q3, down 3 to 5 basis points.

And hopefully that will come in conservative, given the environment. We've had, once again, a significantly substantial change in the treasury curve, which really brought rates lower. So we have a low for longer again. So the scenario was almost like a Groundhog Day quarter because the rates did not go up here.

But the reality is that we are holding margin at a nice level and given a very challenging rate environment. But that being said, we have moved on some assets; and these are not high-yielding assets. But for example, the investment loans held for investment were all conforming ARMs that are below 3%.

So I think opportunistically when rates are this low, we have the opportunity to move on some balance sheet items that although are good assets and high-quality assets, they are not the highest-yielding assets. So it is not going to impact the margin negatively.

The good news for the portfolio we're putting on, our mortgage business is holding very strong on the multifamily side. We are getting higher spread, given this most recent rally in the treasury curve. What does that mean for us? We are still holding north of 3% for 5-year money; and between 7 and 10, it's more like 3.5%. So we are going to hold our overall yields.

And as far as the bleed on the yields that we had quarter over quarter, we saw less of a decline as far as what we are putting on and what we are originating, coming off. That is a favorable move, and that is what kind of keeping our margin within a reasonable range of 3 to 5 basis points.

Bob, the reality is that the indications from the quarter just ended are not aberrations. They are consistent with what we reasonably can expect for the quarters ahead. And therefore, it does look rather good, given the external environment and the impact that has on our margins and our balance sheet. We have a unique degree of flexibility here to continue to perform at levels that you see in front of you without growth. The idea that the balance sheet has to be bigger for us to have the better margin, or the balance sheet has to be bigger for us to have strong earnings, is not the case.

Bob, I just wanted to add, if you look at the whole year going through the nine months, we had significant front-loaded growth. We were well ahead of budget starting in the first quarter of 2014. If you look at the third quarter, we had good multifamily growth was still running at an annualized rate of 13% plus.

And as you know historically, you followed the Company for many years, third quarter is typically the slower closing quarter for the Company. So Q4 should be robust on the multifamily side.

Okay. And that's all helpful color.

And I know you said you don't want to go out on guidance beyond a quarter, which is fair given the volatility in rates. But how are you thinking about us with the curve where it is today and where, I guess, the competitive landscape is today? How close are we to the bottom, do you think today?

I have been saying that for a few quarters now. I would assume the bottom was two or three quarters behind us. It is just low for this long in a difficult environment. The good news, as far on the business side, the multifamily business. When spreads start to tighten, rates are higher. When spreads start to widen, rates are lower. So right now in a lower rate environment, the spreads are widening.

So we are not really changing the dynamic of getting reasonable returns for an asset on an average life of two to three years. I think that strategy is continuing. We are not seeing irrational pricing. Although there is one or two players that maybe pricing below the marketplace, it's reasonable.

If you look at the traditional savings bank portfolio, we charge prepayment penalties. The market, in general, is a yield maintenance market. So by offering that to the customer, they have the opportunity to put a reasonable rate in front of us. And they know what their exit strategy will be three to four years out. And I think that is still working here.

We are not seeing a significant impact to the actual rates that we are offering. So despite the fact that rates rode below 2% on the 10-year, we still have our mortgage business. So for example, our pipeline that we announced this morning is about 3.40% yield. It is slightly lower than last quarter, which was 3.41% on origination; but it's not below 3%. So we are still seeing reasonable returns, given the asset class. And obviously, the credit card, that class is very strong.

Okay. And then, maybe last question around loan yields.

I know one of your smaller multifamily competitors recently announced that they are not going to go below 3.25% on a rate, as sort of an absolute floor on what they are willing to put on their balance sheet. (Multiple Speakers). Have you all thought about something like that? (Multiple Speakers).

It is very possible. It depends on how many other things are happening in the market simultaneously and who the players are.

I think that's reasonable. I mean, obviously we are not going to be specific; but I think that makes sense.

Great. Thank you.

Very good.

Thanks, Bob.

Our next question comes from Dave Rochester of Deutsche Bank.

Good morning.

Good morning, David

So how are you thinking about thinking expenses ex amortization in 4Q? Are you thinking you can hold these levels here, or will we see a bit of an uptick for reg and compliance work you are doing?

We are building ourselves to be at that $50 billion level. And I wouldn't be surprised going to Q4 that trends will be slightly down. So once again, we are tightening our belt. We are focusing on the environment. We have made significant adds in previous years, and we are benefiting from that.

Even, just for example, the deposit change at the bank. Funding deposits versus funding to a home loan bank line is significant cost reductions in respect to regulatory costs. Your assessments go down materially. So if you look at where we are for Q4 versus Q3, we're probably going to be down $1 million, $1.5 million, maybe total G&A of $141 million ex CDIs.

Oh, okay. Now, I know you are still doing some work on the LCR front. How is your progress there?

And then second question. Given the new rules, how much liquidity do you think that you are going to need when you eventually cross through $50 billion?

Right. We are doing a lot of work on the LCR. I will tell you that, as you indicated, the final rules were published in September. And with that being said, that the positive is that it's not a daily close; it is a monthly close. In addition, the time frame as far as adaptation is going to be 2016 -- done in 2016 for adaptation. But for us, we are still below $50 billion. We are now in the phase of project planning. So by fourth quarter, our project plan will be in place.

Then we go into the -- we will call it the hiring stage; and the system stage will be in 2015. And until we cross the $50 billion, then we have to do the implementation of actual assets. So depending on the make-up of our assets, level I versus level 2, we have some strategies that we are working on. But clearly, we are going to be well-prepared for that.

We articulate that internally, and are working very hard to complete the project plan. But we expect that the actual project plan itself will be put in place in Q4 of this year. And implementation from now up to the crossing of $50 billion should not be an issue for us.

I know you talked about being very active on the multifamily side, and you grew that portfolio very decently this quarter. You have got a stronger pipeline going into 4Q. At what point do you feel like you need to constrain growth, even in the multifamily side, in order to prepare for the LCR before you cross through that $50 billion threshold? Or do you need to do that?

Bear in mind, we have a substantial amount of cash flow that comes in that multifamily portfolio. The origination stream is very strong. We have the ability to see prepayments come in at a very nice clip.

Last quarter was the highest level of prepays for the year. That is typically a fourth-quarter event. So you would assume fourth quarter is relatively active, depending on how much payoffs come. If there is a significant spike, you will probably have a mad rush to refi, which will benefit probably some of our balance sheet focus and having the ability to put on higher coupon loans.

This is a strategy that will go from time to time, quarter to quarter. As Mr. Ficalora indicated, it is a four-quarter lookback. We are not $55 billion today or $57 billion today, which would trigger the SIFI expectations. We are still below $50 billion. We have some room here to evaluate.

But more importantly, rates are very, very low right now. So we are not looking at 4% multifamily coupons to grow into a much higher rate environment. And we are dealing with a relatively short asset class.

So we feel pretty good that we can manage through this process over the next few quarters ahead and be very comfortable in continuing to be the number one player for the portfolio lender in multifamily.

Yes. Great. Thanks. Appreciate it.

Thank you.

Our next question comes from Collyn Gilbert of KBW.

Thanks.

Good morning. How are you?

How are you?

Good, thanks.

Good.

Tom, just a question. On this quarter's multifamily production, what was the split between 5-year and then more of that 7- to 10-year paper?

I would say probably 65% is more towards the traditional 5/1, and the remaining is between 7 and 10.

Okay. I am just curious how that ratio would have compared a few quarters ago?

I would probably say this quarter was a little bit more weighted to 7/1s, a seven-year type structure. But I will tell you in the previous quarters, it was mostly five-year structure, traditional stuff.

Okay. That's helpful.

And then just on the deposit side. I mean, you have said it all along that when it's time for you --

One other point on that -- I want to go back. If you look at the portfolio going into the current quarter, that is more five-year driven.

Right.

So you will see coupons a little bit lower because obviously we are getting less for the shorter duration.

Got it. Right. Okay, thanks.

And then on the deposit side, what specifically are you doing to really bring in those deposits? What are some of the initiatives you have out there?

I would say what we have been doing, which has been very effective, our retail volume managers are in the marketplace bringing in CDs at the market. Where historically -- and, Collyn, you've known us for a long time -- we have always been below the market. So we have very unique, unique deposit franchise throughout unique markets that have the ability to bring in significant funds. And we are competing with our marketplace on the CD side.

And savings are up.

And savings are up.

Things are up materially, Collyn.

Yes, that was a big shift this quarter.

And when you look at the numbers, savings is the largest growth in our deposits/

But the most was liquid CDs -- (Multiple Speakers).

Okay. Okay, that's helpful.

And I think, Tom, you sort of gave the color that I was looking for on this. But the volatility on the long end, how do you see that affecting your multifamily business in general?

Obviously if we go back to history, if there are spikes, you are going to have a spurt of refi. If it's thought to go lower, you will have an acceleration of refi. If you are running flat for a long period of time, things kind of slow down. So we have had volatility, and volatility is good for our business model. And we want higher rates in tong run, but having volatility creates -- (inaudible).

Yes. I think, Collyn, it is really important to recognize that for our particular business model, for our particular niche, the people who have built substantial value in the properties which they have financed with us have a great deal of flexibility in the timing of their refinancing. So it could very well be that because the market is so rich, the values are so high, that people will in fact choose to sell at great gain. For us, that is an automatic refi. That is an automatic prepayment.

So when you look at the multitude of factors affecting the moment in time, there is a great likelihood that our portfolio will have a great deal of churning or movement. And that is always good for us. So as we sit today, new rates approximate old rates. So rate isn't going to be a major contributor to change. But the opportunity to gain on prepay, and the opportunity to have substantial liquidity from this refinancing, is going to be very, very attractive.

Okay. Just one last quick question. The prepay income you saw this quarter, was that fairly broad-based? Or was there one credit, or a couple of large credits in particular, that drove that? (Multiple Speakers).

It was broad-based. There was no large, specific item.

Okay, great. That's all I had. Thanks.

Thanks, Collyn.

Our next question comes from Moshe Orenbuch of Credit Suisse.

Great. Thanks. Most of my question this morning have been asked and answered. But could you talk a little bit about the loan sales and how you kind of anticipate using that as you go forward?

Sure. Well, for the quarter we exited one line of business; the Medallion Business we decided to exit. And that was a small C&I book to business, sub 3% type yield, about $160 million. An the other actual sale that took place was that we moved over to held for sale was $236 million of 5/1 hybrid ARMs. These are our jumbo prime ARMs that we have on balance sheet.

Again, we looked at it historically as a placeholder versus securities in the years past. The market was very opportunistic as far as pricing. Obviously, this is low yielding paper, so it's sub 3%. So it's not going to impact the margin negatively as it exits since we put on higher-yielding multifamily credits.

Those two transactions will close in the fourth quarter, so that will be part of our balance sheet initiative. And we sold conforming paper, which is traditional for the mortgage banking business for us that we had on balance sheet that was the ARM conforming residential loans. (Multiple Speakers).

Right. (Multiple Speakers).

The -- (Multiple Speakers).

So you weren't really selling kind of your traditional business?

Oh, absolutely not. This is again, just bear in mind, it took us many years to put on residential loans on portfolio. If you know the history of the Company, we have been a multifamily CRE lender. We put on some, what we will call, residential loans, high-quality hybrid ARMs over time and built the portfolio and a portfolio that is pristine. But we did it opportunistically for balance sheet purposes.

Now, those assets are now being moved off the balance sheet and not at losses. But we are getting them off the balance sheet economically feasible to the Company, and these are sub 3% yields

And going back to the discussion of deposits, it sounds like it's a little bit a shift in terms of your kind of pricing parameters in terms of trying to not be a below-market rate payer. Can you just kind of talk through that a little more, like what led you to that and-- ?

There is no question. A different environment. We are still growing. We had significant front-loaded growth this year. So we have to fund. And if you look at the funding mechanism in this day and age versus pre-rate recession, there is a cost to borrowing versus deposit. So when you take in the all-in costs between the FDIC insurance premiums on our liability from the deposit base versus the liability from, let's say, the home loan bank or repo market, you need to effectuate those costs. And you'll see the savings on our expense side. So we price it accordingly.

Okay. Thanks very much.

Our next question comes from Matthew Kelley of Sterne Agee.

Good morning, Matt

Yes, hello. Just kind of staying on that topic of deposit growth, what is the promotional kind of liquid CD rate? And is that classified in the CD bucket or the savings? Because the CDs have actually been down, so it is a more -- (Multiple Speakers).

So the liquid CDs, I think it is a savings account -- (Multiple Speakers). I think it is $1 million that came in with a 50-basis-point promotional rate.

Okay. And that is where the bulk of the growth has come from?

Yes.

Okay.

If you take that into account, thinking about the FDIC costs versus going out to borrow money from the home loan bank, net-net it's cheaper going to the retail platform on that specific offering.

Right. Okay.

And it is a little bit stickier when rates start to rise.

Okay. Got it. (Multiple Speakers). With rates down just for the last couple of weeks here, could the fourth quarter decline in the securities portfolio actually be larger than what we saw in Q3?

Now, again, Q3 and Q4 -- very well-expected. We had some debentures that were slated to be called, and they were called. And we will probably see at least $145 million if we don't sell any securities, depending on market conditions, per the declines in Q4. So I am not envisioning substantial declines in the fourth quarter in securities.

But on a conservative note, $145 million can be the drop, excluding any repayments on CMOs. And potentially, if the marketplace has a significant treasury rally, we look at opportunistically to sell securities depending on market conditions.

Okay. And is that $145 million in a stable rate environment what we should expect into early next year as well on a quarterly basis?

No, no. It all depends on interest rates. If we have a substantial rally, it could be significantly higher. If there is a sell-off in the treasury market, there will be very little cash flow.

Okay.

So the yield in that portfolio is around 3.14%. The effective duration on the mortgage side is around 6.5 years. And we are very comfortable, given that we have a very strong DUST portfolio, which is multifamily loans, wrapped by Fannie Mae. And that particular structure is very strong in this environment. And it has been performing very well as far as value and the potential for additional income over time.

Okay. And then can you help us just understand and dig in a little deeper on how you been able to manage expenses. You have done a pretty good job keeping those numbers low. Help put some numbers around that in terms of head count reduction -- (Multiple Speakers).

The two large items are honestly the NPA book is significantly lower than it was two, three years ago. So the foreclosure expenses in large commercial real estate properties and multifamily are significant. That is substantially removed from the P&L.

In addition, as we shift away from advances and we look towards the deposit retail side, that is a substantial savings on assessments. Now, so you have a reduction of NPAs. Not only is that a reduction of foreclosure expenses, it is also a reduction of your overall assessment that is favorable portfolio.

In addition to that, going into the retail market versus the advanced market, that is a real FDIC savings there. So you are seeing significant drops, and those are the two large line items where you'll see drops.

Okay. And then just the last two or three years, you have suggested that and you have talked about you have had quite a bit of the costs related to regulatory and compliance that you have already incurred, and you have been able to offset that elsewhere. What would that dollar amount be that you have had to incur on those new expenses for compliance and regulatory --

Over time, Matt, over the past three-and-a-half years I'll call it, it's been tens of millions of dollars. So I would probably, for a fair estimate, well north of $30 million, easily north of $30 million over the past three-and-a-half years.

We started very early. We were very early on focusing to grow past $50 billion when the Dodd-Frank Act was put in place and all these new SIFI rules came into play. So we learn as we go.

We work with our partners. We have external partners and a lot of consulting fees. But a lot of that has been borne by the Company, and the infrastructure is -- we are not done -- but the infrastructure is in place to continue to grow. When we choose to go over $50 billion, there is going to be some expense there; but they will not be material based on our current assessment.

As I indicated last quarter, the LCR costs, although the project plan is in place, should not be material with the exception of changing the asset mix of the Company. That allows the add value as far as earnings because you are going to have put on more assets. But we are not in the position to be over $50 billion today, so that does not have to take place. So the expense build there is not going to be significant.

And dealing with living will, it is not going to be a huge undertaking for the Company because we are pretty simplistic. We will have some consulting fees. Our Legal Department will work together with the outsiders who come over with the living will. But it is not going to be a substantial undertaking, compared to a Citibank per se.

And as far as dealing with monthly reporting to Washington, dealing with the C-card change from below $50 billion de facto above $50 billion, you are looking at monthly reporting, some system changes and some personnel adds -- not material costs.

Okay. Do you have an ability to quantify what those would be in aggregate, all the item you just rattled off?

No. Again, I would say it is immaterial

Immaterial?

Yes.

Okay.

On the long run, over the next two-three years. Again, I don't envision this happening next quarter. If we do a transaction, we will have it in place. So we announce a transaction and we double the Company's size, you would assume we have it in place.

Okay. All right. Thank you.

Yes.

Our next question comes from David Darst of Guggenheim.

Good morning, David

How are you, David?

Good. Tom, could you maybe talk about the covered loan portfolio? I recognize that it has got a very attractive yield. But is there any flexibility to move some of those assets off the balance sheet or reduce the FDIC -- ?

Well, as you know, the good news is it is covered, right? It is a covered portfolio. The bad news is that you have to work with the FDIC in order to make any specific changes there.

So we manage it well. We have a very strong relationship with the FDIC there. We are very happy with the way things are working. And from time to time, we do have discussions about moving on assets. But clearly, it would have to be under the approval of the FDIC.

So --

And they are very sensitive to that. We took a very large sales bank and managed the FDIC loss share process very well. So they are pleased with the management. Our team has done a fine job out in Cleveland throughout the bank.

And that is good and bad. Because of you want to look at potential exit opportunities, you are going to have to think about the implications to the person who is putting the guarantee on that specific pool of loans. So we definitely are looking at the portfolio, but we have to work with the FDIC.

What do you think the remaining average life will be for the portfolio?

It really depends on interest rate. We have a significant amount of ARMs that are subject to payment shock down the road and depending on interest rates. If interest rates stay low for longer, the portfolio is performing well better than expected. And that has been the history since we bought the Company.

When we entered into the transaction, we assumed rates were going up. A few years thereafter, they haven't gone up. So customers have been able to have a very low payment in this environment, and they are paying their bills. Until they stop paying their bills, then we would be more concerned on operational side -- not on the credit side.

Okay. Got it. Okay. And then is anything changing now with the C&I business that you are doing in Boston? Are you back -- (Multiple Speakers)?

They are doing phenomenal work. I got to tell you, we are very pleased with the results there. The growth has been significant, slightly ahead of budget. So we will definitely probably exceed our budget expectations there.

The credit quality has been pristine; the yield returns are pristine. We are running well north of 3.5% type overall yield in a portfolio that is highly leveraged now because the expense base is put upfront from day one. We have a nice group of people that been doing this for many, many, many years.

And now we are well through with the profitability phase. So now every loan they put on, we now reap the profits combined, which is a good thing. So my guess is that we should probably hit a billion dollar number by the end of 2015 for sure.

Okay. And then one more question. Of they do raise the SIFI limit from $50 billion to $100 billion --

You mean $250 billion.

Or $250 billion. Wherever it goes above, would you consider restructuring your balance sheet and raising capital independently so you could re-accelerate organic growth?

Well, it gives us a great deal of flexibility as to what we would immediately do. We could do, for example, if they were to raise the limit, we might choose to do a $10 billion deal or a $5 billion deal. And in any deal, we would do restructuring. So the factors that exist at the moment in time this were to occur, would dictate the opportunity that we would take.

The good news is, there has been significant dialogue throughout the country about making some changes there. You can't rely on that, but there has been some positive movement that would -- we would definitely be a beneficiary there

I think the important reality here is that the lead regulators are in the forefront of the people discussing the appropriateness of making this change.

Right. Okay. Thank you.

Great.

Our next question comes from Steven Alexopoulos of JPMorgan.

Good morning, Steve

Good morning, everyone.

Joe, I wanted to follow-up on your earlier comments that you could potentially delay reaching $50 billion on an average four-quarter basis for several years. If we look, the commentary on looking for large deals goes back well over two years now. Is there a Plan B, if a deal does not materialize over the next two years? Or do you just remain patient and stay below $50 billion for as long as it takes?

I think that the environment is going to be fluid. The idea that anyone would be able to guess on the various factors that would be relevant to the changes that would impact both our decision process and also the likelihood that the marketplace presents opportunities. It would be very hard go to out two years and say that anyone knows exactly what is going to happen. I think the good news for us, is that we have a great deal of flexibility in the tools with which to make choices.

Those choices would include the assets we have put into the portfolio, the assets we take out of the portfolio, as well as the timing of a particular type transaction that we might execute. So we are very optimistic that the future choices we have will, in fact, ultimately materialize in a positive way. There are no reasons why we have concern about the immediate four-quarter, five-quarter, six-quarter period. We have a great deal of flexibility as to how we deal with those opportunities. And the balance sheet gives us a great deal of flexibility.

Maybe to follow up on that. As part of the strategy to slow balance sheet growth, are you adjusting pricing on multifamily to slow that organic growth into the bank?

Let me say this. We obviously have the opportunity to do that. And when we assess quarter by quarter where we are and what we want to do with regard to the marketplace, as well as with regards to the balance sheet, we will make choices.

We are not locked into any choice over any elongated period. We can make choices month over month; we can make choices quarter over quarter. The good news is, we have a great deal flexibility in the marketplace. We are gaining market share. We have the ability to make judgments, that would in fact fit into our overall business model quarter by quarter.

I would just add one other point, Steve. If you think about the history in the past five years, we had a situation where the balance sheet wasn't growing at all. We were making substantial returns to the mortgage banking operation and the like. And the prepayment activity, record levels, three years in a row. Given the fact that rates were so low, the cash flow in the portfolio was substantial, running in place was difficult.

So, yes, we had a little uptick in rates. And you saw some good we will call it front-loaded growth this year. We were well ahead of budget mid-year 2014, as far as where I expected the balance sheet to be at in September 30.

So I look at this year as somewhat front-loaded. It was relatively flat going into September quarter. And then in the fourth quarter, we will have some asset sales. So we will give some breathing room there.

But the good news is if rates stay where they are right now, we will have reasonable growth. So we will reallocate the asset mix. And we will continue dominating in our multifamily space.

As you know, the fourth quarter is traditionally the strongest quarter of the year. The pipeline is strong. Third quarter was a very strong origination quarter, but very typical for seasonality. We do less business in Q3s for the past decade.

I think the important thing is right in front of you. We, in fact, slowed our growth and increased our earnings. That is not magic. That is just the opportunity that this balance sheet represents in the environment that we are in.

Great, thanks.

And Tom, maybe just one final one. Can you talk about the linked-quarter decline in other assets, which seemed to take some pressure off balance sheet growth? And how much more flexibility you have down there to work down those balances? Thanks.

Other assets.

Are you talking about ORE, I guess?

No, actually other assets.

Okay. Steve, I have to get back to you on that particular question. I don't have it in at my fingertips. My guess is that it shouldn't be a material change quarter over quarter.

It went from $1.7 billion down to $1.57 billion.

Oh, that is the home -- (Multiple Speakers).

We could follow up, if you would like.

Yes, we will follow-up.

Yes, that would be good

All right. Thanks for the color.

Our last question comes from David Hochstim of Buckingham Research.

Hello, good morning. I wondered --

Good morning, David

Could you just verify, are you expecting a gain on the asset sales in the fourth quarter?

We are not expecting a loss, okay? (Laughter). (Multiple Speakers).

No, let's do this again. We have loans held for sale. Net-net, we had some of that were --old loans were sold above par, let's say that. But we have fees attached to some of them. So obviously, I would say it's a wash. But it's not going to be a loss.

And maybe another way to ask it, when you marked them to held for sale, was there some change in value?

Correct. Correct. It's pretty much a wash.

Okay. And then can you just give us a breakdown on mortgage servicing and the hedging gain on current loans on -- (Multiple Speakers).

For the quarter, we had $12.3 million of servicing fee income. The change in the MSR value was a negative $1.2 million. And the MSR hedge was a negative net $1.1 million. So the total mortgage servicing income for the quarter was $10 million, consistent with the previous quarter.

And spreads in October versus the third quarter, where are they on --?

It was relatively consistent. We ran around -- I would say upper 60 -- 63 to 65 basis points.

And it's about the same now?

Yes. Yes.

Okay.

Now, again, the market has changed so much; so we are evaluating our pricing. We had a significant uptick in October, but it's early. It is only one month into the quarter. And it is a much lower swing note rate in this environment, than it was going into the summer months.

Okay. And --

So we are hopeful.

Yes.

Okay. Good. And is there anything more you can say on competition in multifamily, in terms of other lenders being more --? (Multiple Speakers).

There is no question that there are many people that are vocal about their participation in the multifamily market. That is not necessarily relevant with regards to the magnitude of participation in the multifamily market. So we have had a consistent -- over the course of the last two, three, four quarters -- a consistent participation by new players. And in varying degrees, those that have been in the market have either taken a little more share or a little less share.

In all cases, we have had the opportunity to gain share. So I think most important, isn't how many names we compete with, but how readily we can in fact gain share and hold rate. And that is working out pretty well

Is the competition having any impact on underwriting or LTVs or -- ?

No. Well, as is always the case, the competition in this marketplace is often filled with people that have a priced benefit in either size or in rate because that's how they are compensated. And as a result, they may be a little more aggressive. But that's not new news. That is the way it has always been.

So there is no overt change in the quarter that has just ended or in the quarter that we are in that would suggest to us that there is going to be any material difference in how we position ourselves in this market.

Great. Thank you very much.

You're quite welcome.

And there are no further questions at this time.

Thank you. On behalf of our Board and management team, I thank you for your interest in the Company, our strategies, and our performance. And wish you and your families all the best as the holiday season draws near. We look forward to chatting with you again in January, when we report our earnings for the full year and the fourth quarter of 2014. Thank you.

Thank you. This does conclude today's Third-Quarter 2014 Earnings conference call with the management team of New York Community Bancorp. Please disconnect your lines at this time, and have a wonderful day.