New York Community Bancorp Inc. Q3 2008 Earnings Call Transcript

| About: New York (NYCB)

New York Community Bancorp Inc. (NYB) Q3 2008 Earnings Call October 29, 2008 9:30 AM ET

Executives

Ilene Angarola - EVP and Director of IR

Joseph Ficalora - Chairman, President and CEO

Thomas Cangemi - SVP and CFO

Robert Wann - SVP and COO

John Pinto - EVP and CAO

Analysts

Mark Fitzgibbon - Sandler O’Neill

Ken Zerbe - Morgan Stanley

Theodore Kovaleff - Grant Capital Group

Rick Weiss - Janney Montgomery

Bob Hughes - KBW

Ken Bruce - Merrill Lynch

Matt Kelley - Sterne & Agee

James Abbott - FDR Capital Markets

Bruce Harting - Barclays Capital.

Gary Gordon - Portales Partners

Operator

Welcome to the New York Community Bancorp third quarter 2008 Earnings Call. Please be aware that today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Director of Investor Relations, Ms. Ilene Angarola. Please go ahead, ma'am.

Ilene Angarola

Thank you for joining the management team of New York Community Bancorp for our quarterly conference call. Today’s discussion of our third quarter 2008 performance will be lead by our Chairman, President and Chief Executive Officer, Joseph Ficalora, together with our Chief Financial Officer, Thomas Cangemi. Also joining us on the call are Robert Wann, our Chief Operating Officer and John Pinto, our Chief Accounting Officer.

Our comments today will feature certain forward-looking statements, which are intended to be covered by the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we currently anticipate due to a number of factors, many of which are beyond our control. Among those factors are; general economic conditions and trends either nationally or in all local markets.

Conditions in the securities market or the banking industry, changes in interest rates, which may affect our net income, prepayment penalty income and other future cash flows or the market value of our assets and changes in the financial or operating performance of our customer’s businesses or changes in real estate values, which could impact the quality of the assets securing a loan. You will find a more detailed list of the risk factors associated with our forward-looking statements in our recent SEC filings and on the present release beginning on page 11.

The release also includes reconciliation of our GAAP and non- GAAP earnings, net interest income and capital measures, which also will be discussed extensively on this mornings call. If you would like a copy of the earnings release, please call our Investor Relations department at 516-683-4420 or visit our website at www.mynycb.com.

I would now like to turn the call over to Mr. Ficalora, who will speak to you briefly before opening the lines for Q&A. Mr. Ficalora?

Joseph Ficalora

Thank you, Ilene, and good morning, everyone. We are pleased to have you with us for today's discussion of our third quarter performance, which was highlighted by an increase in both our cash and operating earnings, the expansion of our net interest margin, solid net loan growth, continued asset quality, and continued capital strength.

There's much to discuss and I do want to leave ample time for your questions. So, let me start with the operating and cash earnings growth which we realized in the third quarter of 2008.

Operating earnings totaled $84.8 million in the quarter, up $9.7 million or nearly 13% on a linked quarter basis and up $13.6 million or more than 19% year over year. On a diluted per share basis our operating earnings per share rose to $0.25 cents in the quarter from $0.23 in the trailing and year earlier three months.

We also reported third quarter cash earnings of $95.7 million, which were equivalent to $0.28 cents per diluted share. Our cash earnings exceeded or GAAP earnings by $37.6 million and on a per share basis were $0.11 cents higher than our diluted GAAP earnings per share.

As we anticipated, on September 16th in our 8 K filing, our third quarter 2008 GAAP earnings reflected a charge, for other than temporary impairment, of a minimal portion of our $6.1 billion securities portfolio. On an aftertax basis the charge amounted to $26.7 million. As a result we reported third quarter GAAP earnings of $58.1 million or $0.17 cents per diluted share.

The difference between our cash and GAAP earnings represented an additional contribution to tangible capital at the end of September and together with the proceeds of our common stock offering in the trailing quarter is indicative of our ability to uphold position of capital strength.

Among the significant factors contributing to the growth of our third quarter earnings were the meaningful expansion of our net interest margin, which rose 27 basis points year-over-year to 2.68%. With refinancing activity curtailed by the uncertainties in the market, prepayment penalty income added a modest five basis points to our current third quarter margin in contrast to 26 basis points in the third quarter of last year. Excluding the impact of prepayment penalty income in the respective quarters our margin rose 48 basis points year-over-year.

The linked quarter comparison of our net interest margin was also gratifying. Excluding the impact of prepayment penalty income and the debt repositioning charge recorded in the second quarter, our margin rose 22 basis points in the third quarter of this year.

The improvements in our margin were attributable to three primary factors. The first of these was the significant growth of our loan portfolio. Reflecting third quarter originations of $1.4 billion our loan portfolio grew to $21.5 billion, representing an annualized growth rate of 11.2%. Year-to-date originations totaled $4.4 billion and were 28.9% up from the year earlier amount.

With a current pipeline of $1.3 billion, including $915 million of multi-family credits, we are looking at continued double-digit loan growth in the quarter ahead. As opportunities to lend have increased over the past few quarters, so have the spreads at which our loans are being made. In the third quarter of 2008 the average yields on our multi-family and CRE loans were 275 basis points higher than the average five-year CMT and in recent weeks have moved up substantially.

Further reason for the expansion of our third quarter margin was the repositioning of our debt in the second quarter of this year. In May and June we replaced $4 billion of higher cost wholesale and other borrowed funds with $3.8 million of lower cost wholesale borrowings. The savings are reflected in our average cost of borrowed funds, which dropped 27 basis points on a linked quarter basis after the debt prepayment charge we recorded in the second quarter and 35 basis points year-over-year.

The third reason for our margin expansion was the ongoing reduction in our cost of deposits, as the FOMC continued to lower the fed funds rate. As a result, our cost of interest-bearing deposits declined 14 basis points on a linked quarter basis and 84 basis points year over year.

Reflecting the same factors that contributed to the improvement in our net interest margin, our net interest income rose to $181.9 million in the quarter, signifying a year-over-year increase of $27 million or 17.5%.

Earnings growth was also supported by a linked quarter reduction in operating expenses, which contributed to a 213 basis point improvement in our operating efficiency ratio to 38.01%. This was the first time in seven quarters that our operating efficiency ratio dipped below the 40% threshold and we intend to maintain this measure within that range. The improvement was not by chance, but the result of a focused campaign on cost containment and the growth of our net interest income. We would expect to see more of the same in the quarters ahead.

With the consolidation of our community bank processing system set for March and the automation of several back-office procedures in progress, we would expect to see a continued decline in our operating expenses. Given the continued decline in the economy and the ongoing disruption in the financial markets, I am very pleased to say that the quality of our assets continued to be very strong in the third quarter of 2008.

Our non-performing loans rose $29.3 million to $61.4 million over the course of the quarter. Delinquencies declined by $41.4 million to $51.4 million during the same time. The level of non-performing loans reflects the migration of loans that had been delinquent at the end of June to non-performing status at the end of September. The decline in the level of delinquent loans at the end of September suggests that delinquencies are slowing down at this time.

Non-performing loans represented 0.29% of total loans at the end of September, in contrast to the S&L Bank and Thrift index weighted average of 1.86%. Similarly, non-performing assets represented 0.19% of total assets at the end of September versus an S&L Bank and Thrift index weighted average of 1.06%.

I might also add that net chargeoffs totaled $1.1 million in the quarter with a single unsecured C&I loan that had been acquired in one of our business combinations, accounting for the bulk of that amount.

Again, our chargeoffs experience compares well with the industry index. Net chargeoffs equaled 0.005% of average loans in the third quarter as compared to the S&L Bank and Thrift index weight average of 1.69%. While not all banks and thrifts have reported their numbers when these statistics were compiled last evening, we are comfortable in stating that the quality of our assets continues to compare favorably with those of our industry peers.

Notwithstanding the weakness of the housing and financial markets, I am pleased to report that our multi-family niche continues to hold strong. We believe that the nature of that niche and our conservative underwriting standards will continue to support our record of asset quality in the quarters ahead.

I might also add that we have significantly limited our construction lending over the past three quarters and have augmented our credit risk management team. Maintaining our asset quality remains a key component of our business model and we are diligently working to identify any potential credit problems in order to insure that they are quickly addressed and wherever possible, resolved.

In addition to maintaining the quality of our assets, we are focused on maintaining our capital strength. Excluding the net impact of mark-to-market adjustments our tangible capital represented 5.92% of tangible assets. Including the mark-to-market adjustments the ratio was 5.85%.

In addition, our banks regulatory capital levels continue to be solid. And to exceed the minimal requirements [criteria] the highest classification well capitalized. The community bank had a leverage capital ratio of 7.49% at the end of September and the commercial bank had a ratio of 11.20%, reflecting both our capital strength and our third quarter performance.

The Board of Directors, last night declared a quarterly cash dividends of $0.25 cents per diluted share. The dividend will be paid on the 18th of November to shareholders of record as of November 7th.

We continue to be confident about our prospects for the future and in our ability to maintain the dividend at this level in the quarters ahead. At a time of unprecedented turmoil in the housing and financial markets, we are pleased to have produced the results we reported to you today.

These are challenging times for our industry and for our nation, and there can be no question that the metro New York market is already feeling the effects. We believe we are well positioned to face the challenges before us and to capitalize on the opportunities for continued loan and earnings growth.

We currently are in the process of assessing the ramifications of the programs that have been put in place by the government to stabilize the financial markets and are looking at the potential benefits of taking part.

These are admittedly difficult times for the investing public and especially for those who have invested in Banks and Thrifts. We encourage our shareholders to take the time to understand the distinctions between our institution and those that have been struggling and to call us if you have any questions about our financial condition or strategies.

On that note, I would be happy to take your questions. As always we will do our best to get to everybody in the time allotted. But, if we should miss you, please feel free to call our investor relations department. Leave a message for us and we will do our best to get back to you during the week.

Question-and-Answer Session

Operator

(Operator Instructions) We go first to Mark Fitzgibbon with Sandler O’Neill.

Mark Fitzgibbon - Sandler O’Neill

Good morning. Joe, I wonder if you could share with us your thoughts on participating in the TARP program?

Joseph Ficalora

I think the TARP program represents a unique opportunity to generate capital. However, all of the ramifications of participating are not necessarily clearly established and therefore we are not prepared to commit ourselves to that program yet. Obviously opportunities to do deals would make the use of those funds significantly more likely to find a home in our institution. But, having said all of that, the time will come later for us to actually make that decision.

Mark Fitzgibbon - Sandler O’Neill

Okay. Secondly, could share with us your outlook for the net interest margin, maybe some of the key dynamics driving it in coming quarters?

Joseph Ficalora

Well, the fact is that we do not normally talk extensively about our margins. However, what we have said is that, we do believe that the cost of our funding continues to go down and our assets should earn more. Tom has some comments.

Thomas Cangemi

Mark hey, this is Tom. What we are seeing right now is good opportunities on the multi-family side, we are looking at around 380 or over equivalent spreads in respect to the five-year CMT. That is a significant differential from prior years. So, you will probably see in the ongoing quarters continued margin expansion, cost of funds are continuing to decline, and our overall funding costs have dropped dramatically and continues to drop. We are excited about the benefits of much higher spread. So, that should result in higher margins in the fourth quarter and beyond.

Mark Fitzgibbon - Sandler O’Neill

Okay. Then since the conduits have really gotten out of the multi-family market, I am wondering if the average loan size that you-all are doing, rising relative to the average for the portfolio of about 3.8 million.

Joseph Ficalora

No.

Mark Fitzgibbon - Sandler O’Neill

Okay.

Joseph Ficalora

The conduits were the excess lenders. In many cases, they were lending far too many dollars. For those loans that actually are put into our portfolio they would be in our portfolio, with the dollars rational, whether we did it this year or we did it last year. Last year a property owner may have been able to get way more money than they should have, this year they are not going to get that. So we are not seeing an increase in size, because we are always limited by the availability of cash flow. Whereas, the conduits were not…

Mark Fitzgibbon - Sandler O’Neill

Lastly, you always have a good perspective on this, could you maybe share with us what your thoughts are for M& A in the New York Metro Market, is it likely to pick up soon?

Joseph Ficalora

I am not sure about soon. I think one of the drivers may very well be. There are two fundamental things here. If the accounting does not get fixed there is going to be significant decrease in capitalization in the financial sector broadly. The consequences of this as a result of impairment will just worsen the situation throughout this market and all other markets. Having said that, the steps being taken by the government may change the available life of some entities that otherwise would have gone out of business sooner.

My guess is that, consolidation is going to accelerate, in particular through the next two quarters and then depending on whatever else is happening over the period beyond that. Consolidation is inevitable and ultimately is healthy for the market.

Mark Fitzgibbon - Sandler O’Neill

Thank you.

Joseph Ficalora

You are welcome.

Operator

We will take our next question from Ken Zerbe with Morgan Stanley.

Ken Zerbe - Morgan Stanley

Morning.

Joseph Ficalora

Morning.

Ken Zerbe - Morgan Stanley

I was hoping you could tell us the carrying value and fair value of the remaining trust preferred exposure that you have?

Thomas Cangemi

Obviously the charges we have taken in respect to the previous OTTI, what is left is fairly small, the break down. In respect to the pool trust preferred exposure we actually feel we will be taking OTTI on, there is around $18 million left.

Ken Zerbe - Morgan Stanley

That is carrying value?

Thomas Cangemi

That is correct.

Ken Zerbe - Morgan Stanley

Okay.

Thomas Cangemi

On the income notes that we have remaining that we had previously taken OTTI on, that is about $13 million. We have one preferred stock instrument that we have taken previously OTTI on, which is actually HSBC bond, and we are comfortable with the credit, but we have to write that down because of market conditions, that is around $12 million. So in aggregate it is around $40 million I believe.

Ken Zerbe - Morgan Stanley

I think you may have mentioned it, but what is the unrealized loss on the $40 million now.

Thomas Cangemi

That is it.

Ken Zerbe - Morgan Stanley

That is the unrealized loss amounts?

Thomas Cangemi

That is the actual net loss. These have been written down already, that is in the previous two quarters of write downs.

Ken Zerbe - Morgan Stanley

Your entire trust portfolio has been written down to market as of the end of third quarter, there is no unrealized, you have taken all that through OTTI?

Thomas Cangemi

Yes. That is not what I said, the total portfolio obviously we have securities in held for maturity that are performing very well and we have no OTTI related to, and those are around $200 million. The point is that of the items that we have taken previously OTTI on, are the numbers I recited to you, the pool trust preferred as well income notes and the preferred stock.

Ken Zerbe - Morgan Stanley

Okay. The $40 million is the write down?

Thomas Cangemi

That is the net book value, and as far as the unrealized in this market it is very insignificant compared to the June 30 balance, it is pretty much consistent with the June 30 balance.

Ken Zerbe - Morgan Stanley

Okay, understood. In terms of loan growth actually more of the combination of the wider spreads that you are seeing right now, should we expect loan growth to accelerate from here, given pricing looks like it is much more attractive now than it was in prior quarters?

Thomas Cangemi

Absolutely. It would be fair to say we are going to continue to grow the loan book. We grew in excess. The multi-family growth was 12.3% in the previous quarter. We will see double digit loan growth in Q4 and you will see it at much higher spreads. Right now the current spread is 375 to 380 over, which we have not seen that since that probably the last cycle was around 400 to 500. So it is moving in the right direction.

If you recall last year we were around 150 over. If you look at the overall, we will call it, the coupon embedded in the ‘09 and 2010 rollovers, which we expect to see coming in this thing was like 535ish range. So we have significant potential for yield adjustment upward just on moving the paper from maturing to current refinancing. We are not seeing a lot of prepayment activity because of market conditions, so the portfolio is growing probably better than what we expected because of the lack of prepayment activity as well.

Ken Zerbe - Morgan Stanley

Okay, understood. Then just the last question, just in terms of the product or the lessening of product competition that you are talking about, was there any change specifically in third quarter or is this just a broader lessening that you have been talking about for the last year or so in terms of conduits drying up.

Thomas Cangemi

I would say it is a combination of both, but Joe could answer that.

Joseph Ficalora

Yes. I think the only significant difference during the third quarter was the changes that occurred with WaMu and Fannie Mae, that would include Sovereign. So there are going to be progressively less competitors within our particular niche, and we will have progressively better terms and better opportunities to gain share.

We expect that in the evolving cycle, no matter what and there is no escape the fact that the most relevant players within our niche are in fact less and less focused.

Thomas Cangemi

It is then fair to say right new we are seeing more of our bread and butter type lending, multi-family, rent control and stabilization. There is less players in the marketplace and the spreads are higher. We are prepared to benefit from that and we are excited about the quarters ahead.

Ken Zerbe - Morgan Stanley

Great.

Thomas Cangemi

Our pipeline looks pretty strong, we are looking for another double-digit quarter, which now for the past three quarters we have not seen these types of levels in about two and a half years.

Ken Zerbe - Morgan Stanley

Okay, perfect.

Thomas Cangemi

The loan growth.

Ken Zerbe - Morgan Stanley

Great, thanks a lot.

Joseph Ficalora

You are welcome.

Operator

Moving on we go to Theodore Kovaleff with Grant Capital Group.

Theodore Kovaleff - Grant Capital Group

Yes, good morning.

Joseph Ficalora

Morning.

Thomas Cangemi

Morning.

Theodore Kovaleff - Grant Capital Group

Question on your pipeline. I did not have a chance to look up last quarter's pipeline number, but I am wondering about the change there and then also whether you are looking forward to more activity, based on the fact that there was a lot less refinancing this quarter?

Joseph Ficalora

I think you are right in that assessment, Ted. There is no escaping the fact that the calendar cannot be denied. So our portfolio will be refinancing progressively as the quarters evolve. Our ability to do loans and what we call bread and butter is discipline. We could do significantly more lending today because there are far fewer lenders in the market. Everybody's talking about the inability to get money.

We have not only plenty of money, but we also have the ability to be prudent and disciplined, and lend when in fact we deem the amount is appropriate. So as we said before, we would expect that we will progressively lend more money in the quarters ahead, but we will continue to be disciplined as to whom we lend to, and how much we lend on each property.

Thomas Cangemi

Ted, it is Tom. I would think the pipeline is about maybe a hundred million dollars larger today than it was the previous quarter, but we also had a late Jewish holiday season, that is probably indicative why it is around the same. Typically fourth quarter happens to be a very strong growth quarter for the company historically. Third quarter is usually the quarter that we do not grow as much.

So, we are very pleased on the third quarter metrics. We expected around 8% to 9%, in Q3. We came out around 11 total net. So you are looking at another good double-digit quarter going ahead in fourth quarter growth, net loans.

Theodore Kovaleff - Grant Capital Group

Okay, thank you.

Joseph Ficalora

You are welcome.

Operator

Next we go to Rick Weiss with Janney.

Rick Weiss - Janney Montgomery

Good morning.

Joseph Ficalora

Morning Rick.

Rick Weiss - Janney Montgomery

I would like to go back to multi-family with loan pricing. Let me ask you first, is this still being still being driven by the same mortgage brokers and do you expect any changes to occur over at Meridian now that Sovereign was taken up by Santander?

Joseph Ficalora

No, I do not think Meridian will change. Meridian was always independent and was always capable of making its own decisions and drove loans that it deemed appropriate to drive. So I do not think the change to Santander changes Meridian. It certainly changes how much of production produced by Meridian will go to Fannie Mae or Santander, but it does not change Meridian.

Rick Weiss - Janney Montgomery

Okay. That is good news for you I think.

Joseph Ficalora

Yes, I think so.

Rick Weiss - Janney Montgomery

Second, with the decoupling of LIBOR rates from the treasuries, is there going to be any change in the way you price or borrow or be more willing if you wanted to price off a LIBOR?

Thomas Cangemi

Rick, it is Tom, I would say that right now we have historically been known as the in-market lender and we typically price at the five-year treasury. We have no pattern changing our pricing; it is more of a benchmark where things are being put in the marketplace. We are looking around [6.375] in this environment, which is attractive based on the current yield rolling off.

We always assess the marketplace as the business comes through. But, we are very pleased to see like I said previously the bread and butter deals consistent with discounted cash flow type loans with a nice strong pipeline.

What is really exciting about the future is you have a significant amount of loans that have to be repriced at much lower levels. We believe that in this market turmoil, you will see better yields going forward, because of the overall premium risk that we are going to command. Because many banks that are on the sidelines, because they are lending and they are not putting out significant dollars to the marketplace and our competition has waned dramatically. The conduit was the first that contributed to that now having significant players in the market that were consolidated.

So we are benefitting from a nice roll of business and we are looking at the potential of significant asset yields rising because of low embedded portfolio coupons that what we currently have. Then every quarter it is getting more attractive as we move along. Now we are getting close to the 400 basis point level which is very attractive for future margin growth.

Joseph Ficalora

I think Rick you have touch upon something that is very important to recognize here. Whatever the index, a lender may be using is distorted and less relevant. The availability of money and the awareness of risk will in fact create significantly higher expectations with regard to the rate that is paid over whatever index was previously being used.

Rick Weiss - Janney Montgomery

Okay. Will there be any changes in the prepayment penalty points that you are going to be looking at when you assess the borrowers?

Joseph Ficalora

I would say that if you look at the last cycle as it evolved, prepayments were consistent through that cycle. We in fact were being paid 1 to 1.5 points just to originate loans and we were getting paid up to 500 over the five year CMT. In a cycle when loss becomes consistent, there is going to be fewer lenders and there is going to be greater expectation that premiums will be paid. So there are various markets already where the rates are substantially higher than the rate we are talking about. So as this cycle evolves, rates are going to in fact become higher and higher, because there is no escaping the fact that the marketplace will have fewer and fewer willing lenders to lend at thinner margins.

Thomas Cangemi

Rick, it is Tom. Just then into the previous quarter look at what we actually reported for prepaid. They were de minimus, it was the lowest we have seen in years, probably since we started tracking them. So we are starting at a very low base. The good news, every loan we write has a contract, that has a prepayment penalty contract in the loan structure. We expect to see some good refinancing going forward, not just because of market conditions but these loans have to reprice, if not they go into years as a loan that is going to be repriced up, but with substantial spread significantly higher than the current coupon.

So we have that potential, we are not seeing borrowers rushing to refinance, regardless of their low coupon that they are currently are paying right now. We have about 5.875 next year that is rolling into the market and you have a marketplace that is a hundred basis points higher than that. So it is going to be a meaningful change to their cash flow and if rates continue to rise because of what I would call premium spread and credit spread, I would guess that over time borrowers will come back and take advantage of the current market and not put themselves at risk as far as paying a much higher coupon.

Rick Weiss - Janney Montgomery

Right. So it sounds like you will benefit from both volume and rate on that?

Thomas Cangemi

Absolutely. If not the prepaid will have much higher overall net loan book.

Rick Weiss - Janney Montgomery

One final question if you could, if you can give the percentages of the people that were refinancing with you at the time when the conduits were doing their heaviest volume versus where you would expect traditionally before the conduits got in the market.

Joseph Ficalora

I would say if you look at the 06-07 year we were refinancing loans probably in the 30s to 40% range. If he look at the depths of the cycle that preceded this one which ran, you know, from 87% to 92%, we were refinancing probably in the 90% to 92% range. That is indicative of our having money available when others do not, of our literally being willing to do sound lending to well established property owners. When the markets get irrational, such as we have had in the last several years, you wind up getting people sloppily throwing money all over the place and in some cases even good property owners just can not resist the extra dollars.

Rick Weiss - Janney Montgomery

Okay, got it, thank you very much.

Joseph Ficalora

You are welcome Rick.

Operator

Next from KBW we go to Bob Hughes.

Joseph Ficalora

Good morning Bob.

Bob Hughes - KBW

Good morning. Hey Tom, first question I was wondering if you can give us a sense for the level of contraction maturities you might see out of the multi-family book over 09, and 2010?

Thomas Cangemi

It is substantial. Obviously its fairly short overall loan book. Just give me a second. You are looking at close to 20% just in ‘09 standalone. If you go into 2010 and combine it together it probably closer to 40 % maybe 45% and these coupons somewhere like I said mentioned previously somewhere in the 5.375, which is a nice potential yield benefit going forward.

Bob Hughes - KBW

Okay great. With the roughly you call it $30 million increase NPL I wondered if you could shed a little light on what contributed to that linked quarter increase, was that multi-family, commercial real estate, construction etcetera..

Thomas Cangemi

It was all across the board Bob. Obviously you have one or two multi-family loans in there, we are confident we will work out these issues. With respect to what we transition, the migration is very real. We are dealing with the same issues we had in June, so that is more seasonal in our performance. We are very confident that we will work through these issues on the spread across the board. The vast majority being multi we issued a handful of loans that we are very comfortable and that we will get good cash out of these either sales or workouts.

Bob Hughes - KBW

Okay. You had some pretty solid deposit growth in the quarter. I am wondering the increase in CDs in the quarter, how much of that would you characterize as retail versus brokered?

Thomas Cangemi

It varies. I will tell you Bob, we are not aggressive in the retail front. If you look at our range is probably the lowest in the marketplace. We are not chasing. At the time of the third quarter we had a rate lock there you had some of the likes of others with outrageous rates. We are probably the lowest rate player right now in the market and we are very confident there. If we want to go out aggressively and raise rates, we will do so. The brokered market versus the retail CD market is even the same page in respect to the values.

As far as taking low cost funding that could change over time but we believe that rates are going to be generally lower going forward. We feel that overall CD rates should drop throughout the marketplace and there are some local competitors that are pricing too high, we are not going to participate in the overpricing of CDs in the marketplace.

Bob Hughes - KBW

Understood. With respect to the TARP that have you been given any preliminary guidance from your regulators on whether you would not be eligible for a TARP capital and then two whether accepting TARP capital would jeopardize the level of the dividend at all?

Thomas Cangemi

Bob, we are a very strong bank, we are very comfortable and the programs that are out there, we are evaluating them. Obviously, we are waiting for a lot of information that is been made public to the rest of the marketplace as far as what the agreements these larger banks have signed, and then we will make a decision on how it fits into our capital management tool. It is an attractive fund and we will evaluate. There is no question that the government is continuing to put out these programs and the programs keep changing. So once we start seeing some public documents that we have legal agreements to review, we will have a better handle on that.

Bob Hughes - KBW

All right, thank you. Got it.

Operator

Ken Bruce with Merrill Lynch, please go ahead, sir.

Joseph Ficalora

Good morning.

Ken Bruce - Merrill Lynch

Good morning. I wanted to follow up on the question related to your deposit cost not necessarily on the cost side, they are really in terms of how you are thinking about your funding strategy. You have got a fairly fickle capital market, and obviously that is creating a lot of volatility in terms of interest rates being charged and what not, across your liability structures. So could you just maybe elaborate on how you are thinking about funding your growth going forward please?

Thomas Cangemi

What we exchanged in the previous quarter, remember we locked in about 4 billion last quarter at a much lower rate long-term, so we are very comfortable in June of making that rate lock which helped us going forward. We have a nice low cost funding for a long period of time.

What changed in the current quarter is that LIBOR markets are distorted and the longer term fundings are expensive. So we thought to put around 10% of our wholesale book in short-term funding. That short-term funding is very attractive and going lower. Ultimately, over time, when the market stabilizes, which we believe they will over time, we will look at the attractiveness of locking that against multi-family overall average duration.

So you are probably looking at around 10% of our wholesale book going short and continuing to be proactive in the marketplace for the cheapest cost of funds until CD rates become more in line to reality. We believe rates will be lower and we will be able to compete with our competitors as far as putting out reasonable rates. We are not chasing this high cost CDs, WaMu had a 5% rate out there before they were seized. That rate is just way too high in this type of environment.

We are very comfortable with access to financing and we are very proactive on making those changes depending on market conditions. There has been a shift in the quarter which is putting a little bit of a wholesale into the short term, we had no short-term funding as of June.

Ken Bruce - Merrill Lynch

In terms of maybe putting more towards the deposits if you do not want to go organic growth in this market, would it be reasonable to assume that we have to wait until maybe, a consolidation wave begins to really take hold before you could begin to move more of your funding generally speaking towards deposits?

Thomas Cangemi

I think that is fair to say, but you keep in mind a lot of our CDs are still priced much higher than market rates. We have 52% of our money in six months that is priced well above the current offering rate that is a positive. We have almost 80% of our entire CD book that is coming due in one year at higher rates. So we will still see the benefit of lower funding cost.

Now are we going to pay above that rate, probably not. If we have to ratch it up a little bit, just to hold the line that is fair. We have flexibility to do so. It is fair to say we are looking at tremendous amounts of opportunities in the M&A environment, but again it all depends upon pricing and market conditions and as you know historically we will acquire our liabilities before we pay out for liabilities.

Ken Bruce - Merrill Lynch

Right, great, that helps me out. Thank you very much.

Operator

Matt Kelley with Sterne & Agee. Please go ahead.

Thomas Cangemi

Good morning, Matt.

Matt Kelley - Sterne & Agee

Hi. It looks like the hold the maturity securities were up about $560 million or so, what did you put on in the quarter?

Thomas Cangemi

Pretty straight obviously, predominantly, Fannie Mae, Freddie, all actually Fannie and Freddie CMO's.

Matt Kelley - Sterne & Agee

Okay.

Thomas Cangemi

For the past, year and a half all securities have been government backed. Currently the portfolio of $6 million consists of 90% government backed, exclusively guaranteed by either quasi or government agency securities.

Matt Kelley - Sterne & Agee

Why not let that run down and continue to fund loan growth?

Thomas Cangemi

I am sorry.

Matt Kelley - Sterne & Agee

Why not just let that run down and continue to fund loan growth at good spreads.

Thomas Cangemi

That is the plan going forward. I mean we are going to keep the book. We said in the previous quarters, we are going to keep those securities book below 20%, a range between 15% to 20%, right now about 18.9% and expectation over time if we get more loan growth, you will see security stay flat if not go down.

Matt Kelley - Sterne & Agee

Okay

Thomas Cangemi

The cash flow a little slow last quarter because of the shock in the market. I think cash flow also will start to pick up as the longer term lending rate for the consumer is more reasonable and you will see more cash flow out of the bond portfolio and that will shrink. There is no question we are going to keep that band. We do not want to go past the 20% band.

Matt Kelley - Sterne & Agee

Okay. Looking ahead, do you think that your provisioning expenses will allow some build in reserve levels; I mean they have been coming down a little each quarter on total loans and on NPAs. Are we going to reach an inflexion point is the question there.

Joseph Ficalora

The important consideration there will be, how do we assess our actual risk of taking losses. We have a huge amount of reserve today against our expectation that we will actually take loss. Although this may very readily compare differently to our sector, our actual performance over the course of decades with regard to troubled markets has demonstrated that we take significantly less in the way of loss.

So every single quarter we will assess, what is an appropriate amount to have in allocating funds to the potential, for losses in our portfolios. The good news is that we have a very well prepared group to do that work and they assess loan by loan and risk by risk and determine, whether or not we need to move some of our reserves from one place to another or otherwise add to our reserves. We meet our expectations very readily with the reserves that we have today.

Thomas Cangemi

Matt, just to give you some color on the actual chargesoffs 80%, of the chargeoffs was one loan and that was an Atlantic bank loan was acquired. It is what it is, a C&I loan. Taken into perspective its 80% of charge off, the auto book which was surprisingly resilient was only about 45,000 in the quarter. That was actually a surprise in upside, there is only about $32 million left in the portfolio, but it is a high yielding portfolio and performing much better than we expected.

So we looked at the overall charges for the quarter being one specific loan that a company had some problems and hopefully we will get some money down the road. But, based on the character of the particular loan we charged it off.

Joseph Ficalora

The important number to think about is that some portion of our exposures here, our outstanding loans, represents 70%, 80% of those loans or what we would call niche loans. We have not had a loss on a niche loan in multiple decades. So as this cycle evolves you are going to see statistics from other lenders change fairly dramatically that have more non-performing and more charges, because that is the way the cycle evolves for their particular business model.

Our cycle does not evolve that way, although we are vulnerable to and have been reporting losses in acquired assets, they represent a very small portion of our overall loan portfolio, and we have way more than enough in the way of reserves to accommodate a very small portion of losses.

Thomas Cangemi

Matt, what, encouraging this particular quarter, if you look at the overall delinquency trends there clearly was a clear migration from 30 to 60 to 90 in non-performing and if you look at the overall level, we actually put it in the press release table to give the marketplace some color there. There is a slight improvement on a linked quarter basis.

So clearly it was not migration, it was the same problems we had to deal with in June that happened to be a little more seasonal problem. We are very confident we can work through it, but that is a positive trend, the market is very challenging that we are not seeing substantial increases in delinquencies.

Matt Kelley - Sterne & Agee

Okay.

Thomas Cangemi

We are very pleased with that statistic.

Matt Kelley - Sterne & Agee

Fair enough, thanks.

Thomas Cangemi

You got it.

Operator

Moving on, we will go to James Abbott with FDR Capital Markets.

Thomas Cangemi

Good morning, Jim.

Joseph Ficalora

Hi Jim

James Abbott - FDR Capital Markets

Hi, good morning. A question on broader picture stuff, is your rent control rent stabilized properties as a percentage of the total multi-family loans today and give us some perspective where that was maybe a year ago?

Joseph Ficalora

It is always been very hard to make that determination. I would just guess that that number is going up as a percentage tucked down. We do not have an exact number, because when you think about it there are no buildings that are rent controlled. There are only individual apartments that are rent controlled and that number does change only going down. It does not change by going up. We could virtually put a loan in the portfolio that 80% of the units in that building are rent controlled and if it is a very large building that would have a meaningful change in the numbers for us.

I think the important thing to recognize, as we go into this cycle it will become progressively more clear that the people that we are lending to are cycle survivors. They are the people that will refinance their loans in the depths of the cycle, as it evolves and they are the people who will buy very cheap properties from market players that in fact are going to ultimately represent their opportunity to improve the value of the properties that they in fact invested. So the characteristics of the owners are the most dramatic differences between our loan portfolio and the loan portfolios of other institutions. So as the cycle evolves our portfolio only gets better.

Thomas Cangemi

Jim, it is Tom, I would also add that in the commercial book, commercial real estate book, a substantial amount, a large amount of those loans are mix used multis, given that they are 25% of the of rentals are commercial and a lot of the upstairs, floors two and higher are all rent controlled and stabilized, a substantial amount of loans. So you have to take that into consideration.

By a regulatory definition they are classified as commercial real estate loans, but in our view that is a true, a lot of rent controlled and stabilized stuff with the rent bowl on the residential side are substantially lower than the market. That is why they are classified there.

James Abbott - FDR Capital Markets

Okay. That is very helpful. Take us through a scenario of what employment levels you might have to see before the multi-family, not that you get a loss.

Joseph Ficalora

Jim, you just touched upon something that is fundamental to the difference between our portfolio and the market as a whole. Unemployment can go to 15%. The rent rolls in the city of New York could collapse. They did. Values collapsed in last cycle. The vacancy rates were extremely high in the last cycle.

Our buildings are typically full because they are rent controlled, rent stabilized and people typically do not give up those units even when they do not have a job. They find ways to continue to make their payment, because the single best asset they have is their rental apartment. Therefore our buildings in the depth of the cycle are 100 % performing.

Now, I am talking again about our niche, what is the most important component of distinction between us and others. In that niche, unemployment does not affect the actual availability of tenancy. If a person dies, loses their job and has no capacity to work and loses their apartment, there are plenty of people that want to live in that building.

So that vacant space gets filled very quickly, because it is significantly below the market, it comes to comparative space in the city. So even in the depths of a cycle we do extremely well because the cash flow in our buildings continues to pay, continues to improve.

James Abbott - FDR Capital Markets

Okay. So even at 15% unemployment in the Metro New York area you would not really expect a real deterioration in your non-performance…?

Joseph Ficalora

Not in our niche, no. It will affect, if we have significant unemployment in the New York area it will affect our commercial lending, it will affect, you know, the peripheral, but the degree to which our bank is affected by adversity will be significantly less than the degree to which other lenders would be affected.

James Abbott - FDR Capital Markets

The rent just – this is altogether the rent controlled is – you would estimate at 50%, 90%, somewhere between there?

Joseph Ficalora

I would say between 50 and 90 is about right.

Thomas Cangemi

I think it is a vast majority. I got to give you the comment about the commercial real estate book, we would assume a lot of that is rent controlled because of the low levels of income streams from residential.

James Abbott - FDR Capital Markets

Okay. All right, thanks very much.

Joseph Ficalora

You are welcome.

Operator

We will next move on to Bruce Harting with Barclays Capital.

Joseph Ficalora

Good morning, Bruce.

Bruce Harting - Barclays Capital.

Sir you sound like you are suffering. Not keeping well

Joseph Ficalora

I am sorry. I apologize, I am aware that you must feel that I am laboring through this a bit. I have a bit of a bout with pneumonia.

Bruce Harting - Barclays Capital.

Oh, feel better, dedication.

Joseph Ficalora

Thank you.

Bruce Harting - Barclays Capital.

As you think through the capital, the preferred from the TARP, I mean you, tend to analyze these things more than some others. What is your understanding in terms of the back end?

I mean can you simply pay this off from retained earnings after three years or have you concluded that you have to prepay it in the first three years you have to replace it with common. After that it does not seem as clear as to whether you can just pay it down or if there needs to be some amount of capital raised, on the back end.

Then, can you just share your thoughts a little more on, unintended consequences that you might see?

Joseph Ficalora

I will let Tom go first, but I have some opinions about this with regard to unintended consequences.

Thomas Cangemi

Bruce, I get the structure, very attractive on the economic side. What is intriguing for us as you know historically, we raised equity through common stock and that is what we do. We will buy companies and issue stocks and pay for them and that something that in the event we were to look at this particular instrument, tremendous amount of flexibility and paying it off in three years and the level of payoff as far as what you have to issue to get rid of the particular instrument if market conditions change dramatically, are very attractive to the issuer.

So, no questions, the economics of this particular instrument is attractive to all financial institutions, especially ones that have a tendency I think to recover, to use common stock to buy other banks. So, there is no question if there is opportunities in the marketplace, which we believe there will be.

Right now New York is very strong and outside of our markets, we are seeing a lot of institutions that are in trouble. We are not going to buy a troubled bank with the expectation of taking people's problems without the help of instruments to make it work.

Now, that being said, this particular instrument is very attractive in that regard. There was a large deal announced, the PNC deal, which used proceeds to effectuate an acquisition and make it very attractive so that the economic terms are real and more importantly they are easy to replenish with a fresh dose of straight common stock equity.

Joseph Ficalora

Bruce, when you go through the analysis and you realize that there is a need and there are many ways in which this actually accommodates the need, and the analysis could show that the economics are very favorable. This is not a new phenomenon.

Goodwill certificates met a need and dealt with an issue at a time when it was important to deal with the particular crisis. We need to be very mindful that this is not something that is necessarily in stone the day it is done, it is evolving every single day, it is being somewhat reinterpreted or modified and ultimately it is going to be two years or three years or four years or five years down the road before everybody will know exactly what are the issues surrounding the use of these certificates.

So, I would be very cautious with regard to establishing certainty as to what exactly we can expect with regard to interpretation or consequences of the ways in which these certificates can be used.

Tom Cangemi

Bruce, I would also add, obviously we are waiting, we are very anxious to see the filings from the larger banks that actually have the agreements with the government and see the actual legal terminology to make a better assessment of what the true contract actually reads. I think a lot of the market participants are awaiting that data. Clearly as I said, it is a cheap capital and could be very attractive. We have to make that evaluation and we will thoroughly go through the mathematics and make sure that it is right for shareholders.

Bruce Harting - Barclays Capital.

Thank you. Do you have any, I know you have expanded your footprint through acquisitions, do you have any de-novo branch opportunities, what is your view of branch extension…?

Joseph Ficalora

No, we do not have de-novo but there very well may be the opportunity for us to buy either a New York based component of a much larger bank. We do buy branches, but we do not open new branches.

Thomas Cangemi

Because we are being very, we are focusing on what is out there in the marketplace and I will assure you there are things that can be done. Price expectation you could come down, there has been a re-evaluation of the financial sector and we want to make sure anything that we embark happens to be substantially accretive to our shareholder base and more importantly, there are opportunities outside of our market that would have to be grossly substantial for us to make the move. That is something that, we will evaluate from time to time.

New York is pretty strong and the New York market we are not seeing much in the way of the New York market, we are seeing some opportunities outside the New York market. I would reiterate it has to be grossly accretive to the bottom line for us to make the move outside of our market in any meaningful way.

Bruce Harting - Barclays Capital.

I mean with the WaMu-JPM deal do you expect a fair amount of branches to come up for sale or what are you hearing.

Joseph Ficalora

We have not heard anything specific about that. That could happen. In every market where you have overlap, one of those overlapping branches will be closed.

Thomas Cangemi

There are some moments there is a good deposit opportunities in the surrounding area, but they are mostly deposit opportunities which for us are more attractive than taking people's loans problems. The last thing we want to do is take on credit risk.

Joseph Ficalora

Bruce, you have touched upon an important component of what the future may hold. It may not be whole deals, bank deals that make sense. They maybe just opportunities to take existing operating branches as sources of liquidity.

Bruce Harting - Barclays Capital.

Okay. Thank you.

Joseph Ficalora

Thank you.

Bruce Harting - Barclays Capital.

Okay.

Operator

We will take Gary Gordon with Portales Partners.

Gary Gordon - Portales Partners

All right. Thank you. Few follow up questions on commercial lending. One is obviously with the changing economy in New York, you being a cash flow lender are you changing your cash flow assumptions making commercial real estate or apartment loans.

Joseph Ficalora

I think that we are reassessing all of our relationships both from the standpoint of risk and also from the standpoint of reward. The expectation is that we must pay more for the inherent risks in lending that this environment represent and we must also take less and less risk as this environment evolves. So, on the commercial lending side we have been doing this, you know, for months and months. We are just going to do more of it in the period in front of us.

Gary Gordon - Portales Partners

Okay, thanks. Two I think you mentioned some of the competitors pulling out, I think you mentioned Fannie Mae did I hear that right and…?

Joseph Ficalora

That is within our niche. That is got to do with the obvious disruptions, you know, the single largest provider of Fannie Mae loans in the New York market is in fact Sovereign. And Sovereign is obviously going through change. Of the banks that were in our niche in the New York market was WaMu and they are going through change.

So I think that down the road exactly what Fannie Mae will be doing with regard to multi-family is very hard to know. They have many, many, many demands based on their explicit requirements under their mission and they have to deal with providing loans to one to four property owners especially in low to moderate income since that is their basic mission. So I am not sure that they are going to be aggressively in this market in the period ahead.

Gary Gordon - Portales Partners

Have they made any changes to date or you are just forecasting what seems logical?

Joseph Ficalora

I think it is just a logical assumption here. What we have seen to date could be disruption in a variety of ways. Remember, Fannie Mae is going through massive change as well as Sovereign. So, those changes are affecting people. The people that do the loans are in fact going to be somewhat less focused or less capable of getting through product.

Thomas Cangemi

Gary, its Tom. It is fair to say that pricing has changed dramatically since the beginning of the year. As indicated we are getting close to the 400 basis point mark, around 375, 380. That has a lot to do with the fact of what Fannie Mae is doing. We are not seeing that significant aggression going in there at 60 to 80 basis points higher than where the market provides for.

So the good news is that, the market has price and premium risk. We even look at government securities, there is lot of liquidity issues out there and you are seeing yields around six. So you are see multi-family yields something that is probably north of that and you price that against the five year treasury, that is a substantial spread to what we are accustomed to over previous years. It goes back to the last cycle where, 400 or 500 basis points was the norm.

Joseph Ficalora

Also another thing that can not be missed, this year, this year, Fannie Mae has been given the opportunity to do jumbo lending. So they have the ability to get paid 7.25, significantly more to do a 600,000 offer 700,000 loan on a house, which in fact is going to, in their view, be a much more attractive economic trade than doing a multi-family loan at a significantly lower rate when they have to pay for the servicing and everything else on the multi-family loan.

So I think that there are many changes that this market represents much of what will happen in the future will be driven by the evolving cycle and the positioning ultimately of Fannie Mae with regard to its own issues and the needs that the economy will present. There is a mandate for Fannie Mae to be providing funding in one to four family. There is no mandate for Fannie Mae to be providing multi-family loans.

Gary Gordon - Portales Partners

Makes sense. Okay, one last question. Just thinking of your customers and their incentive to refinance. Your prepayment income was pretty small suggesting why your own customers did not see opportunity to cash out etc.

Joseph Ficalora

Right.

Gary Gordon - Portales Partners

Yet you are getting good volume, obviously taking share, but what is the thinking of your current customers? What are they doing? Two, is it automatic at the end of five years, they have to refinance or…?

Joseph Ficalora

The automatic aspect of it is pretty consistent. In the course of decades very few people have ever gone into year six. The reality is that when people think about the refinancing of their multi-family product there are expectations as to what rates are actually going to do, are they going to come down, are they going to go up. As you well know, there is wide expectation that the fed may very well lower rates today. In some minds that mean that they are going to be paying less.

So a lot of people are thinking that rates will in fact be coming down. On this particular product, rates can very well go up, because the spreads were way too low in the depths during the last positive cycle which ran almost 13, 14, 15 years, depending on where you were, rates were dramatically too low. Lenders were not getting proper spreads. So people were often just thinking whatever the Fed will do is what in fact rates will do. That does not always happen. Evidence the fact that the Fed moved rates down 400 basis points and treasuries did not correspond or the Fed moved rates up 400 basis points and treasuries did not correspond.

So when you look at the evolving cycle, the rates that are going to be charged, are going to go up based upon available lenders, decreasing, there will be less money available for lending and the risk premium will become a larger and larger component of it. So rates are going up regardless of what the Fed does with regard to lending. That is going to impact all product, everybody is going to wind up seeing ultimately rates go up, unless it is government assisted. Now, if there are government assisted programs that will affect specific niches. It will not affect our niche.

Gary Gordon - Portales Partners

Okay, thank you.

Joseph Ficalora

You are quite welcome.

Operator

Ladies and gentlemen, that is all the time we do have for questions today. At this time I would like to turn the call back to Joseph Ficalora for any additional or closing remarks.

 

Joseph Ficalora

Thank you. On behalf of our Board and management team, I thank you for the opportunity to discuss our third quarter performance and the features that have distinguished us in this time of economic stress. The growth of our earnings on both the cash and operating basis, the expansion of our net interest margin, the growth of our loan portfolio as we see a return to traditional pricing and more favorable levels of loan production, the improvements in the efficiency of our operation, the quality of the loans we have made as reflected in our asset quality measures and the continuing strength of our capital position while we continue to pay a very attractive dividend to those who own our shares. Thank you.

Operator

With that ladies and gentlemen we do conclude today's teleconference. Thank you for joining us today, have a nice day.

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