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Executives

Joseph Ficalora - President and CEO

Thomas Cangemi - Chief Financial Officer

Robert Wann - Chief Operating Officer

John Pinto - Chief Accounting Officer

Analysts

Bob Ramsey - FBR

Mark Fitzgibbon - Sandler O'Neill

Moshe Orenbuch - Credit Suisse

Brad Ball - Evercore

Dave Rochester - Deutsche Bank

David Hochstim - Buckingham Research

Josh Levin - Citigroup

Brian Kleinhanzl - KBW

Matthew Kelley - Sterne Agee

Collyn Gilbert - Stifel Nicolaus

Steven Alexopoulos - J.P. Morgan

Mike Turner - Compass Point

New York Community Bancorp Inc. (NYB) Q4 2012 Results Earnings Call January 30, 2013 9:30 AM ET

Operator

Good morning. And thank you all for joining the management team of New York Community Bancorp for its Quarterly Post Earnings Release Conference Call. Leading today’s discussion of its Fourth Quarter 2012 Earnings will be the company’s President and Chief Executive Officer, Joseph Ficalora together with Chief Financial Officer, Thomas Cangemi. Also on the call are Robert Wann, Chief Operating Officer; and John Pinto, Chief Accounting Officer.

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 of the company’s currently anticipated 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 beginning on page six of this morning’s earnings release and in its SEC filings, including its 2011 annual report on Form 10-K and its first, second and third quarter 2012 10-Qs.

The release also includes reconciliations of certain GAAP and non-GAAP earnings and capital measures which will be discussed during this conference call. If you’d like a copy of the earnings release, please call the company’s Investor Relations Department at 516-683-4420 or visit ir.mynycb.com.

As a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. Later, you will have a chance to ask questions during the Q&A, instructions will be given at that time.

To start the discussion, I’ll now turn this call over to Mr. Ficalora, who will provide a brief overview of the company’s fourth quarter performance before opening lines for Q&A. Mr. Ficalora?

Joseph Ficalora

Thank you, Kevin. And thank you all for joining us this morning as we discuss our solid full year and fourth quarter earnings, and the strength and quality of our year end balance sheet.

As we reported earlier today, our fourth quarter GAAP earnings rose year-over-year to $122.8 million, representing a 1.24% return on average tangible assets and 16.61% return on average tangible stockholders equity.

For the 12 months ended December 31, 2012, we generated GAAP earnings of $501.1 million, providing a 1.28% return on average tangible assets and a 16.8% return on average tangible stockholders equity.

Our GAAP earnings rose year-over-year to $0.28 per diluted share for the quarter and to $1.13 for diluted share for the full year. We also reported fourth quarter cash earnings of $133 million, which contributed 8.3% more to tangible capital at the end of December than our fourth quarter GAAP earnings alone.

In the 12 months ended December 31, 2012, our cash earnings rose $542 million contributing 8.2% more to tangible capital at year end then our GAAP earnings alone. In addition, our cash earnings rose to $0.30 per diluted share for the quarter and a $1.24 per diluted share for the full year.

We reported our strong performance to three primary factors. First, our traditional business model, which emphasis production of multifamily loans on rent regulated buildings in New York City.

Second, the expansion of our business model to include the nationwide origination of one to four family mortgage loans for sale.

And third, the quality of our assets as reflected in the nominal level of net charge-offs recorded and the significant improvement in balance of nonperforming non-covered loans.

Before we move on to Q&A, I’d like to speak briefly to each of these factors starting with our robust multifamily loan portfolio. Notwithstanding the prepayment of our largest loan relationship at the end of November, multifamily loans rose 6.7% year-over-year to $18.6 million at December 31st. With market rates at record lows and a change in U.S. tax code expected production and our multifamily niche increased to a near record level in the last three months of the year.

To be precise, multifamily loan originations rose $1.8 billion in the fourth quarter, bringing the 12 months total of multifamily loans produced to $5.8 billion. We also produced commercial real estate loans of $664.2 million in the fourth quarter, boosting our 12-month volume to $2.4 billion. The features of our multifamily and CRE loans are very much consistent, not only in their quality and conservative underwriting, but also in their structure and their terms.

Furthermore, both loan types have the potential to generate substantial prepayment penalty income has certainly proved to be the case over the past two years. In fact, prepayment penalty income rose 39% from the level recorded in 2011 to a record of $120.4 million in 2012.

Of the later amount $39.3 million were recorded in the fourth quarter reflecting a year-over-year increase of 35.8%, reflecting prepayment penalty income and the growth of our average interest earning assets, net interest income totaled $290 million in the current fourth quarter and our margin was a very respectable 3.15%.

Despite the low level of interest rates and the replenishment of our portfolio with lower yielding credits our fourth quarter margin was just 2 basis points narrower than it was in the trailing quarter and 10 basis points narrower than it was in the year earlier three months. Yet another important benefit of our traditional business model has been the contribution of multifamily loans to our above average asset quality.

At December 31, 2012, non-performing non-covered assets represented 0.66% of total assets, an improvement from 0.98% at December 31, 2011 and from the peak of 1.77% at March 31, 2010.

Also of note was the improvement in our level of net charge-offs not only in the quarter but also for the year. Net charge-offs represented 0.01% of average loans in the fourth quarter and 0.13% of average loans in the 12 months ended December 31, 2012. This improvement is even more vivid when expressed in terms of dollars.

Net charge-offs totaled $41.3 million at 0.9% decrease from the $100.7 million at the prior year end. Loans 30 to 89 days delinquent also declined year-over-year, from $111.7 million to $27.6 million and from a peak of $273 million in 2009. As always, we attribute our asset quality to our conservative underwriting and to the unique nature of our primary lending niche.

The third of the factors contributing to our strong fourth quarter and full-year performance for the income we generated to the aggregation, sale and servicing of one to four family loans. In the fourth quarter of 2012, origination of loans held for sale totaled $3 billion, bringing the 12 month volume to $10.9 billion, largely reflecting the income produced by originations.

Mortgage-banking income more than doubled from the level recorded in 2011 to $178.6 million in 2012. Included in the 12-month amount was fourth quarter mortgage banking income of $32.6 million, reflecting a year-over-year increase and a linked-quarter decline. While the year-over-year increase was driven by refinancing activity and home sales as mortgage interest rates moved lower, the linked-quarter decline was attributable to these seasonality of the market as well as the rise in mortgage rates in the quarters lie ahead.

Looking ahead, our pipeline of loans currently totals $4 billion with loans held for investment and loans held for sale each accounting for $2 billion of that amount.

Before I move onto Q&A, I also would like to mention the steps we started taking in late December to enhance our margin in what continues to be a very low-rate environment. In the past four weeks, $6 billion of our funds were repositioned representing nearly half of the year-end balance and primarily consisting of advances from the Federal Home Loan Bank of New York.

In addition to extending the maturity and call date by approximately four years on average, the repositioning reduced the weighted average cost of these funds by 117 basis points. The repositioning of these funds reflects our focus on enhancing our earnings and will be reflected in our first quarter 2013 results and beyond.

As I mentioned at the start of this mornings discussion, our fourth quarter performance was notable not only for our earnings but also for the strength of our balance sheet. In addition to the growth of our loans and the above average quality of our assets, that strength is also apparent in the capital measures of the company in the banks, reflecting our continued capital strength as well as our solid earnings, the Board of Directors last night declared our 36 consecutive dividend of $0.25 per share.

The dividend is payable on February 22nd to shareholders of record at February 11, 2013. At this time, I would ask the operator to open the lines for questions. As always, we will do our best to get to everybody in time that remains. And now the first question please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Bob Ramsey with FBR. Your line is open.

Bob Ramsey - FBR

Hey, good morning guys.

Joseph Ficalora

Hi Bob.

Thomas Cangemi

Good morning, Bob.

Bob Ramsey - FBR

I was hoping you could talk a little bit about the mortgage origination income this quarter. Obviously, you were up year-over-year but it dropped pretty significantly even though originations were up. What are you guys seeing on the gain on sale front and what are some of the moving pieces this quarter?

Thomas Cangemi

Bob, this is Tom. I would say that overall we had a phenomenal year, I mean the fourth quarter definitely had somewhat of a slow down. Two factors, our weight loss volume was down $1.1 billion on a linked-quarter basis, and we had 20 basis points decline in all margins. We went from 143 down to 123 in the quarter. We saw some real seasonality effect in December. October and November was reasonable.

We had fairly large drop-off at the end of the month in December, that coupled with where rates are, had lot of significance that we’re a national wholesale aggregators not a retail provider and we do not participate in HARP. Those two points do have an impact. We react quickly to our rising rate environment on refinancing.

Now, the refinancing model was still very much intact throughout most of 2012, most of the second half and we had some of slow downs running through the fourth quarter. But we are hoping that the purchase market continues to improve and if that does continue to improve into 2013, we’ll see more purchase activity in the refi.

Bob Ramsey - FBR

And remind me, you all record the income at the time of rate lock. Is that the way the accounting works?

Thomas Cangemi

That’s correct.

Bob Ramsey - FBR

And what -- I know you said rate lock volume was down $1.1 billion. What was the actual volume this quarter?

Thomas Cangemi

We had about $3.1 billion.

Bob Ramsey - FBR

Okay. And then on the servicing side, what is the unpaid principal balance that you all are servicing at this point?

Thomas Cangemi

Right now, $17.6 billion UTV. We had about 0.83 multiples, 3.3 multiple or 23% cash. So again, as we believe a very conservative level at 3.3 multiple.

Bob Ramsey - FBR

Okay. Great. Thanks guys. I’ll hop back out.

Joseph Ficalora

Thanks, Bob.

Operator

And we’ll go next to site of Mark Fitzgibbon with Sandler O'Neill. Your line is open.

Joseph Ficalora

Good morning, Mark.

Mark Fitzgibbon - Sandler O'Neill

Good morning, John.

John Pinto

Hey, Mark.

Mark Fitzgibbon - Sandler O'Neill

As it relates to the repositioning, I think you said $6 billion. Could you give us a sense for what the size of the expected charge might be and what the impact on the capital ratios will like to be?

Thomas Cangemi

Yeah, Mark. This is a traditional blend-and-extend on the EITF 96-19 debt modification. So there is no economic hit to capital. Basically we’ve blended and extended the overall maturity out and put the call date out. So we have about $6 billion repositioning of our home loan bank, predominantly home loan bank of New York advances probably from 440 coupon down to 324, picking about 117 basis points.

Joseph Ficalora

It’s all positive, Mark.

Mark Fitzgibbon - Sandler O'Neill

Okay. And then, you had said in the past that you do your liability repositioning in conjunction with an acquisition. Should we interpret this to mean that there is not acquisitions on the horizon?

Thomas Cangemi

No, I think, Mark, what’s interesting about us, like I said, in every call, we look at this stuff every quarter, actually I should say pretty much every week. I mean, we have a lot going on and we expect the liability book, we had some liability maturing in 2013 about $760 million just under $800 million, $310, that will be going away in second quarter of 2013 but this liability analysis gets done on a monthly basis.

And when you look at where the valuation was on utilization of balance sheet both at the Street and at the home loan back. We felt it attractive when it broke to a 100. We haven’t seen a 100 basis points benefit in a while and we start seeing 120 on average, 110. So we ended up getting the trades done at 117. It just seems very attractive.

Again we feel that the value of a potentially restructuring is still there. We have another $7 billion that we can tap too. We have a lot on the Street. In addition, we believe we didn’t lose any value by extending that because we do want to restructure these liabilities in the future to a transaction that’s still eligible and we’re not going to take any pains. The pain is already embedded into the structure.

And there is really no economic difference that we’ve restructured this today. But we restructure yet from now, we believe that the pricing was attractive to take advantage of this opportunity. Again, it was market conditions that trade has gone today and the markets have moved dramatically in the past few weeks. So as the tenure went through about 2%, this are probably like a 60 basis points benefit. So on average 117, we thought was attractive.

Mark Fitzgibbon - Sandler O'Neill

And the last question I had is, could you share with us your outlook for the core NIM in coming quarters?

Joseph Ficalora

I don’t know it was going to coming in the first question. No, I would say obviously, this has a significant impact, about $70 million to the bottom line pretax. So based on where we were in the third quarter, I kind of gave guidance that we are going to probably see borrowing in our stabilization in mid-year 2013. I still feel that same way that we will stabilize in 2013 mid-way, but it will be at a higher level.

So short-term guidance, we are looking at probably three to five basis points down depending on market conditions. But this run up in rates that may bring us to stabilization a little bit sooner. So three to five for the Q1 is a reasonable estimate and stabilization will be as expected mid year but at a higher level.

Mark Fitzgibbon - Sandler O'Neill

Thank you.

Thomas Cangemi

And just, Mark, just another point that this adjustment to the repositioning of the borrowing has picked up about 55 basis points to the actually borrowing from line item and about 18 basis points for the margins but did help the margin.

Mark Fitzgibbon - Sandler O'Neill

Thank you.

Thomas Cangemi

You bet.

Operator

We’ll go next to side of Moshe Orenbuch with Credit Suisse. Your line is open.

Moshe Orenbuch - Credit Suisse

Great.

Thomas Cangemi

Good morning, Moshe.

Moshe Orenbuch - Credit Suisse

Good morning. Good morning. Could you just talk a little bit about the loan growth, obviously very strong, much stronger than we were looking for? Was there stuff deals trying to get done in 2012? Was it portfolio or do you think does that, has does it look so far in the month of January for 2013?

Joseph Ficalora

Yeah. I think it was a combination of many different things. We have been gaining share on a fairly consistent basis here over the course of the last couple of years but dramatic amounts, but genuinely gaining share in the marketplace.

The marketplace has had a lot of activity. Generally speaking because there is a product available for sale as well as the reality that there are people that are making decisions as to execution on their own sale in order to avoid potential tax consequences to the future period.

So there was a good deal of volume available in the market, and we in fact got a gain in share as we’ve been getting and therefore the numbers were up very nicely. One would expect that to continue.

Thomas Cangemi

And, Mosche, this is Tom. I would also add that honestly, Q1 is typically historically a lower quarter for us but given our pipeline is I believe is the largest Q1 pipeline for the history of the bank. So we are showing a $2 billion pipeline in both commercial and multi-family and we are very comfortable, but I think we are seeing some asset growth. So, bear in mind in fourth quarter, Co-op City paid off. It was a huge payoff and we still grew our loan book.

Moshe Orenbuch - Credit Suisse

Right. Just switching over to the mortgage bank for a second, you mentioned that you thought decline in volume was largely seasonal.

Joseph Ficalora

It had rates driven as well.

Moshe Orenbuch - Credit Suisse

I’m sorry and rate, right, right. So, I mean in the past you’ve kind of talked about adding some new products, some things to kind of build out. Is that something that we still can see add to volumes in ’13 or…?

Joseph Ficalora

I would say that we are always looking for opportunities. One area that we do not participate, I want to make you very clear. We are not a HARP participate. So if you look at the competition out there, 20% to 25% of volume is half driven. That’s going to fade out for the industry, probably in the next couple of quarters. We may or may not get into that business and have been an assistant to other banks that can’t get the volume done. But that is a major benefit for the industry over the past year of the HARP program.

So we look at the opportunities out there on the purchase side and obviously we will be putting on some much on both hybrid ons for portfolio at de minimus level. But as rates do rise here, that could be an attractive opportunity to do some more jumbo hybrid ons to the pipeline.

Thomas Cangemi

But we also are preparing ourselves to do significantly more retail than we’ve been doing in the past and there are additional relationships that we could establish that would add volume to this particular.

Joseph Ficalora

And we are still in the queue for the FHAV and that will take us while again through the process.

Moshe Orenbuch - Credit Suisse

Thank you.

Joseph Ficalora

You bet.

Operator

We’ll go next to side of Brad Ball with Evercore. Your line is open.

Joseph Ficalora

Hi, Brad.

Brad Ball - Evercore

How’s it going, guys? Just quick follow-up to that question. You said you are better positioned to do more retail, but was retail much of a component of originations?

Thomas Cangemi

No. Not at all.

Joseph Ficalora

We are in our infancy stages but the good news is that, outside of New York it’s been growing up very nicely for us. So now we are focused towards the New York, New Jersey marketplace. We have the systems in place. We have to now execute. We are predominantly a national wholesale aggregator.

Brad Ball - Evercore

Yeah. Wholesale and correspondent.

Joseph Ficalora

Correct.

Brad Ball - Evercore

Yeah. Okay. And then on the prepayment activity in the quarter, actually all year prepayment activity, much higher than sort of historic run rates. Do you expect that to come back in somewhat this year? Any sense as to the recent rise in rates, is that pushing a little more prepay activity as rates have gone up in some folks’ spaces?

Joseph Ficalora

The reality is that our portfolio refinances within typically a three to four-year period. Our prepay should be significantly enhanced by the willingness of the marketplace to trade these assets, and it is becoming pretty clear that there are various owners that are preparing to sell and there is plenty of interest in buying these assets. That will keep our prepay robust. Your question about the effect of the moving in rates, if there is a perception that genuinely rates are going to go up, there will be more activity in prepay.

Brad Ball - Evercore

So that might keep prepay levels little higher here this quarter given the recent moving rates.

Joseph Ficalora

It could be.

Brad Ball - Evercore

Okay. And then finally, deposit funding as a proportion of total funding is gaining. Part of that is some debt action, but do you see much opportunity to move that higher, that is deposits as a proportion of total funding?

Thomas Cangemi

I mean, what we will say we have about $5 billion come June in next four quarters on the CD side. Rate north of 150, slightly south of 95 basis points. So there is not that much room depending on the rates rising. I don’t think rates are going to rise in the short end. We are seeing a substantial move in the back end of the curve. But again, we aren’t paying higher rate. So, I think we are going to continue to work hard, bringing in core deposits. Our goal is to continue to grow the deposit base conservatively without overpaying.

How much we need the money? Right now, what we feel that we have adequate liquidity and capacity to be conservative on the rate side. And I think that -- the good news for us we get price in different markets. We have the Florida market, the Arizona market, Ohio and New York which gives us some flexibility. But I think the loan warrants move was taken a lot while ago, so even when you talk about the CD book below 100. So if you want to be aggressive, you guys paying more than 100.

Joseph Ficalora

I think there is a question that in some of the markets that we are in, we are actually paying significantly higher rates than the market. So our overall cost of deposit is about 66 basis points and then the average is in this New York market at about 44 basis points. So there is obviously room for movement.

Brad Ball - Evercore

Great. Thanks, guys.

Operator

We’ll go next to side of Dave Rochester with Deutsche Bank. Your line is open.

Joseph Ficalora

Good morning, David.

Dave Rochester - Deutsche Bank

So, I understand. Are you thinking that including the benefit from the borrowing restructuring this quarter, you think the core NIM ex-prepayment penalty income could be three to five basis points lower in 1Q versus 4Q?

Joseph Ficalora

To be conservative here, I mean just to give you some color on the previous call, we guided down 12 to 15. We came at down 10. So we are very pleased with the performance of the margin in Q4. It beat expectations on our public expectation. So we are guiding in the Q1 down three to five. But again, rates have backed up here. So there is a possibility that we can move the other way.

So, I think what’s positive is that you have a higher rate environment at the back end of the curve. Loan yield are holding very nicely and bear in mind, we have a very low loan yield on average for the month end portfolio.

We are at 458 right now for the loan book. It not 650, 850. So the yield will be less. We have done so many shuffling on the funding side and like I said before, it’s going to be at a higher level. So the stabilization will be higher, just like a small bleed right now given the market condition and I’m estimating about three to five basis points ex-prepay.

Dave Rochester - Deutsche Bank

Got it. And so if we just back up that benefit you were talking about the 18, 19 basis points, roughly, would that mean the underlying pressure outside of that was maybe in the 20 basis point range, given your?

Thomas Cangemi

Again, Dave, we gave guidance now 12 to 15, it came down 10 -- it’s been around 10 basis points a quarter. We are not changing our guidance about stabilization. We feel pretty confident that mid 2013 to stabilize, if rates go up quicker than expected, maybe we will get there sooner.

Dave Rochester - Deutsche Bank

Yeah. Just one last one, if the curve stays where it is over the next year, are there any opportunities you think to restructure more borrowings or do we need to see a further steepening if you are able to do that?

Thomas Cangemi

I think going with what we took advantage of in it given, actually very late in the end of the year, when there was a sizable move, just taking balance sheet worked into our advantage, both with the street, more so with the home loan bank, is that. We had an opportunity, there was, reasonable level that make sense economically.

We may have an opportunity rate were to spike to maybe move another $800 million, $900 million and pay (inaudible), that’s another opportunity. Now we are not going to get these around 4 percent type money, this is more like 1.5%, 2% type money, but it is still accretive to the margin. So there is a spike in rate from where we are today.

You may see close to $800 million being paid off close to par, at par or better, and you have, I guess, before about $800 million coming due in the second quarter, that’s three-ten, obviously we would pay that off as well, that for sure.

Dave Rochester - Deutsche Bank

Okay. Good. Sounds good. Thanks guys.

Thomas Cangemi

You bet.

Operator

We’ll go next to site of David Hochstim with Buckingham Research. Your line is open.

Joseph Ficalora

Good morning.

David Hochstim - Buckingham Research

Good morning. I wonder could you just remind us what the components of the mortgage servicing revenue were in Q3 and then that compares to Q4 in terms of servicing fees and the hedging and, all right?

Thomas Cangemi

Right. Right. I mean, net, net we had a -- Q3 we were down $13.9 million in mortgage banking servicing income versus a negative $1.1 million for the fourth quarter.

David Hochstim - Buckingham Research

Right.

Thomas Cangemi

The actual income from servicing fees for Q3 was $7.4 million and Q4 $8.8 million. We had a sizable mark in Q3 of $42 million negative it would against positive hedge again $20 million of Q3, so that’s actually $13.9. If you look at what happened in Q4, we had about $8.1 million negative mark on servicing and we had about a $1.8 million loss on the hedge, so net that get to the $1.1.

I mean, bear in mind our portfolio historically has been a very quick payer portfolio. So we believe that, we are being conservative at a very reasonable multiple of 3.3 times, but if rates continue to increase here, this mark should be viewed very conservative going into future quarters.

So, again, I just feel that we looked at this and fees have not changed in November and December, we have very active refinancing portfolio. Historically, the AmTrust portfolio has always been high refinancing piece of paper.

So given that there was going to, we call a precipitous move towards the back half of Q4, we did not experience the change in our fees, now those fees easily slowdown in Q1 and Q2, we should get benefit on the valuation of the multiple to servicing.

David Hochstim - Buckingham Research

So under accounting rules, you are obligated to write up the value of prepayments fees flow or?

Thomas Cangemi

We get independent valuation so we file our independent third-party valuation and our fees have not changed in Q4, so we believe we are conservative.

David Hochstim - Buckingham Research

Okay.

Thomas Cangemi

But, given where rates are, rates which has back down again, we should be at the right place, but rate go up substantially, this multiple should go up as well.

David Hochstim - Buckingham Research

But so the market go positive…

Thomas Cangemi

Correct.

David Hochstim - Buckingham Research

That’s why I’m asking. Okay.

Thomas Cangemi

Correct. Again, too soon to tell at the end of the quarter because…

David Hochstim - Buckingham Research

Right.

Thomas Cangemi

… fees haven’t changed.

David Hochstim - Buckingham Research

I’m sorry, could you just clarify again what happened with the gain on sales, so you had team like originated more loans, the gain on sale margin was down 20 basis points?

Thomas Cangemi

The gain on sale was down 20 basis point, so 143 in Q3…

David Hochstim - Buckingham Research

Right.

Thomas Cangemi

… down from 123 Q4, so tightened up a little bit down 20 bps and they loss at 1.1 billion.

David Hochstim - Buckingham Research

Until that reduces the gain on sales by half…

Thomas Cangemi

Okay. Total gross gain on sales that we reported 33.7 versus the previous quarter which was 66.5 substantial volume in previous quarter.

David Hochstim - Buckingham Research

Right. So the rate lock volume must been higher in Q3 as well?

Thomas Cangemi

Substantially higher.

David Hochstim - Buckingham Research

Okay. So not just the origination is the rate lock volume?

Thomas Cangemi

Yeah.

David Hochstim - Buckingham Research

Okay. And then, could you just share your thoughts about the prospects of large accretive acquisition at this point in time.

Joseph Ficalora

Well, the reality is that, we’ve been very vocal about our intention of preparing ourselves as best as possible to be in a position to do such a transaction. I can say to you that there is definitive transaction that we are about to announce, but I can say to you that we are much further down the road with regard the necessary work that needs to be done, so as to be in a position to take advantage of that when that arises.

It is our intention. It is the focus of many of the things that we are doing today. We are basically not looking at smaller transactions at all. So the likely that we do something is definitely in front of us, exactly when that will be, many, many different things will make that decision.

David Hochstim - Buckingham Research

Okay. And then finally could you just share your thoughts about the contribution to the margin and maybe in just the first quarter from prepayment penalty, you indicated that these are elevated but?

Thomas Cangemi

Well, David, I gave you guidance ex-prepay, I mean…

David Hochstim - Buckingham Research

Right.

Thomas Cangemi

… rarely ever give guidance, the only real guidance we gave on prepay was (inaudible) public refinancing delay, but that was in the fourth quarter, so we don’t typically give guidance on the level of prepayments, so what we want to do is give you some reasonable comfort on whether margin is heading in the short-term.

That being said, as Joseph Ficalora indicated, there is probably transactions are robust in New York City. There are deals that get done. If you don’t finance and they trade away, we fully get paid, every file we touch we get paid fee.

So there is good property transaction in New York City marketplace. It’s going to give us a significant spike in interest rates, my guess, that many bars will act to lock in before it’s too late.

So, we are seeing, again, I’m not going to give you any guidance at all on the level prepay. But I think we are still in that prepayment cycle. The last two years there been record year back to back. We did $120 million last year. The previous year was $86, sum of 87 million, those are significant increase in record year. So I think we are in that wave of cycle of prepayment activity.

David Hochstim - Buckingham Research

Okay. Thanks a lot.

Joseph Ficalora

You’re welcome.

Operator

We’ll go next to site of Josh Levin with Citigroup. Your line is open.

Josh Levin - Citigroup

Good morning.

Joseph Ficalora

Good morning, Josh.

Josh Levin - Citigroup

Good morning. Well, so if you were to do a big deal, and you are going to be substantially over $50 billion in assets, you would be one of the bigger banks in the country? On the last call you spoke about, regulatory comfort. With the regulators, do you think, base on your discussions be comfortable with your dividend payout ratio that much higher than your, what would be your larger peers.

Joseph Ficalora

I think there is no question that our larger peers that took TARP and lost substantial amount of capital in a very different place with regard to paying dividend. The whole concept does limiting dividend has to do with adequate capital has nothing to do with paying shareholders for investing in your company.

So the idea that that we would be governed by what other people can afford to pay is not consistent with anything that is historically happened in the marketplace. We in fact has demonstrated very clearly that during a period of great risk and great loss that we loose very, very little capital in fact we’ve not had to go to capital to meet any of the charges which is very common in those bigger bank that had zero dividend, that had zero capacity to payout, buy stock or pay dividend, those banks loss substantial amount of capital.

We in fact covered any losses during this entire cycle. We cover those losses with our earnings and we have no reason to believe that anything in the period ahead being a bigger bank or being the same bank we are today, would justify they are being concerned that we would actually be loosing capital.

So think that its necessarily moving in the wrong direction when you say, because, Bank A or Bank B, or Bank C, have limitations, Bank D should also have the same limitation. There is individual review of every bank with regard to capacities to pay.

And the limitation on capacity to pay is driven by the adequacy of your capital to deal with stress. There is no indication that we are way over capitalize based on the likely charges we would have to capital. So our ability to payout current earnings is significantly better than that of other bank.

Josh Levin - Citigroup

Okay. Thank you. And follow up on that, in terms of deal flow bankers, investment bankers bringing potential acquisition candidates to you. Has the deal flow changed or are you seeing more deals being brought to you or less or is that…

Joseph Ficalora

Well, I think we’re seeing more large deals. We are not seeing more small deals. Obviously, there are plenty of deals in the market place. I’m not going to get that the year ahead is going to have a lot of activity. We will not be actively looking at smaller deals but we are seeing plenty of large deals.

Josh Levin - Citigroup

Thank you very much.

Joseph Ficalora

You’re welcome.

Operator

We’ll go next to the site of Brian Kleinhanzl with KBW. Your line is open.

Brian Kleinhanzl - KBW

Okay. Good morning, Joe.

Joseph Ficalora

Good morning, Brian. How are you?

Brian Kleinhanzl - KBW

So last quarter, you guys talked about loan pricing been about 3.5% on the new loans, is that still holding this quarter. If you could give us a little bit of color, what’s happening this quarter?

Thomas Cangemi

I mean, obviously, as you know, it’s always looking back hindsight back, between 60 to 90 days but the total overall coupon in the pipeline is 340. So we’re holding pretty well, which is around 250 and 265 over these average CMTs over the past 90 days. So we are all holding coupons. That yields between commercial and multi. Multi is around 333 and commercial is around 383.

Joseph Ficalora

The important thing I remember is that the bulk of what we do is principally five-year paper but it has an average life of three to four years. That is not what is commonly in the case in the market.

Brian Kleinhanzl - KBW

And what were the LTVs on the new originations this quarter?

Thomas Cangemi

Probably in the 50s I would say.

Joseph Ficalora

I would guess.

Thomas Cangemi

Somewhere in the 60s.

Joseph Ficalora

We wish it really be more accurate with what we’re saying. I don’t know offhand and know that there is some offhand.

Brian Kleinhanzl - KBW

Okay. And then you said, last quarter, you’re looking for expenses right around the 146 to 148 and I came in a little bit above that and then you start looking for expenses kind of run rate out from here around?

Thomas Cangemi

I know, I think we spent some money last year on getting ourselves ready to be potentially a larger institution and we continue to spend the money there. But at the end of the day, I think it’s been going throughout the entire year of 2012 and probably less extent in the early part of ‘13. And we had the fourth quarter expense over the past two years and R&Ds were down dramatically from the peak of March of 2010. So I think we’re $148 million number is reasonable at CDR.

Brian Kleinhanzl - KBW

Okay. And as the rates have picked up a little bit, you mentioned on long hand, I mean, how aggressive do you want to intend to get a little bit more asset-sensitive here?

Thomas Cangemi

I think we made a little bit of move on the liability side. I think at the end of the day, we’ve been on the side lines through investing. Our portfolio was way too small from the institution of 10% or 11%. We should be more than 50% to 90%, which made more sense for the company. We’ve been reluctant to be in that market place but it is a sizable move, you’d expect us to be in the market at a higher level.

So we’re watching and hoping to move higher. Here we have plenty of cash to deploy and we also have a very strong loan pipeline. We probably want to close sooner rather than later because of the rising rate environment. We feel pretty good about the overall growth outlet. As you look at the 2013 net loan growth ex some very large credits paying off. We grew high single digits, which is a pretty good show given the market competition.

So we don’t have any large loans I could co-op really are expected to pay off in 2013. So hopefully we can perform better than those levels in 2013.

Brian Kleinhanzl - KBW

Okay. Great. Thanks for taking my question.

Operator

We’ll go next to the site of Matthew Kelley with Sterne Agee. Your line is open.

Joseph Ficalora

Good morning, Matt.

Matthew Kelley - Sterne Agee

Hi guys.

Thomas Cangemi

Good morning.

Matthew Kelley - Sterne Agee

Just a couple of clarification points on the blend-and-extend rate, what’s the remaining maturity on the $6 billion at 440 that you restructured?

Thomas Cangemi

The remaining maturity?

Matthew Kelley - Sterne Agee

Do you have like three or four years left, is that…

Thomas Cangemi

All those liabilities were basically in the position to the call today. So we now have approximately four years, the average duration -- probably like ‘17 -- 2017. We were like 2017 liability that were callable today was the improbability of a call given where rates are.

Matthew Kelley - Sterne Agee

Okay.

Thomas Cangemi

So we took advantage of an opportunity and I’ll tell you that this is something we’ve done quarter-after-quarter. We haven’t seen a 100 in a long time.

Matthew Kelley - Sterne Agee

Right.

Thomas Cangemi

And we sold 120, 125, we had to react.

Matthew Kelley - Sterne Agee

So 2017 final maturities of four years left and then the new borrowings that you have, the new $6 billion with the cost of 324…

Thomas Cangemi

We extend that four years.

Matthew Kelley - Sterne Agee

Is that four years beyond that? So it’s eight-year burnt money?

Joseph Ficalora

No, no, no.

Thomas Cangemi

Yeah. That’s right. Eight years.

Matthew Kelley - Sterne Agee

Okay. That makes sense. So really, it was like a 15% pretax charge that you baked into the new borrowing.

Thomas Cangemi

Depending on to which range in 12 to 15 points but I think it’s interesting when you look at these restructuring itself when we looked at it, the out of the money value on the balance sheet utilization we felt was a push. So we would have restructured these value year out, we felt it did not move any real value given that the utilization of the counterparties balance sheet was not charting a lot to do this straight.

So it made logical sense. We have the ability tomorrow or a year from now to do a further restructuring in conjunction with a deal and further reduce the cost of funds depending where market rates are. So I think that was a driving factor why do this now. I mean, this is clearly was not a 100 for while.

Matthew Kelley - Sterne Agee

Right. But I mean, why not do the rest of it right now without a deal? What does it have to do with the deal? I don’t understand why you have to be…

Thomas Cangemi

It’s a huge consequence of capital. We are not taking our capital down, hundreds of millions of dollars when we can take advantage of opportunity and see our margins holding up fairly well and in the event we do a large -- as Mr. Ficalora indicated, large merger transaction. We can look at our consolidated liability reshuffling and we would like to have less wholesale and more retail.

Matthew Kelley - Sterne Agee

Okay. Got you.

Thomas Cangemi

And then Matt, one of the point that in any event that we have earned back that’s inside of five years, three to five years and that because we’re attracting. We haven’t seen those economic shift. As every quarter those value get closer to the maturity, so the remaining liabilities and the liabilities that we’ve just restructured, any event the economic benefit inside the five years of restructured book value, okay, we will consider it but right now it’s not there.

Matthew Kelley - Sterne Agee

Right. But the real charge is the same. I mean, it’s $900 million, pretax 15% that you’re spending out over years now.

Thomas Cangemi

On EITF 96-19, there is no charge to capital.

Matthew Kelley - Sterne Agee

Understood. You’ve just baked into the new yield.

Thomas Cangemi

Right.

Matthew Kelley - Sterne Agee

Okay.

Thomas Cangemi

324 instead of a 440.

Matthew Kelley - Sterne Agee

Right. Option on your mortgage banking operation, my recollection is most of the economics are contained in fee income line. There is no leverage in operating expenses as volumes come down. There is any liability to take down expenses.

Thomas Cangemi

Yeah. Absolutely. We’ve been here before. It’s been an interesting ride since 2010. We react. We have a phenomenal operating team in Cleveland who do a phenomenal job. At the end of day, things shut down, we will react to operating expenses. The good news is that we have seasons better in drawing the business and we look at this everyday.

So in the event, there is a complete shutdown, we’ll address those issues. But again, I think the higher marketplace is addressing a reasonably strong purchase market. If you go back to the first quarter of 2012, purchase market was strong and robust. We had pretty good numbers in the EF. That was not mostly. It was a significant push towards purchase. So instead of buying a home at 325 or 375, they’re going to pay the rate.

So I think if we really truly believe that the housing markets recovering and we’re willing to have a real purchase market, we will participate and I saw these numbers down in the past (inaudible) statistics of $1.4 trillion in 2013. That sounds 20%. It is what it is. We don’t control those numbers. We will get our 0.67 share and hope we move that up to a 0.75 share.

Matthew Kelley - Sterne Agee

Got you. So how much in the 165 million of expenses this quarter is related to your mortgage banking operations. We understand the leverage as the revenue line item changes overtime.

Thomas Cangemi

I mean, when we file our K, we will put in the segment reporting. I don’t have that number right now.

Matthew Kelley - Sterne Agee

Okay. And last question, commercial real estate growth was still a pretty big chunk of total loan growth during the quarter. Obviously, you’re getting better yield than that which is attractive but how do you think about the incremental provisioning on your commercial real estate growth separate from the multifamily?

Thomas Cangemi

Yeah, well just to give you a couple of statistics there, LTV is substantial more than multifamily. Historical losses on the book has multifamily and we don’t have a whole losses in multifamily. So we look at it as a very attractive assets, very experienced lenders. We learned the business when it’s done correctly and we have a very strong loan book and you look at historical losses compared to our niche product which is a low less business, it’s half of that. So we are very comfortable where we are.

Matthew Kelley - Sterne Agee

Okay. All right. Thank you.

Thomas Cangemi

You’re welcome.

Operator

We’ll go next to the site of Collyn Gilbert with Stifel Nicolaus. Your line is open.

Collyn Gilbert - Stifel Nicolaus

Thanks.

Joseph Ficalora

Good morning, Collyn.

Collyn Gilbert - Stifel Nicolaus

Good morning, guys.

Thomas Cangemi

Good morning, Collyn.

Collyn Gilbert - Stifel Nicolaus

Before I get to my question, I’m intrigued by a comment you made, Joe, to the point of saying that you are seeing a lot of large deals and not small deals, which is interesting because it seems like there has been a lot more M&A activities at the low end of the market versus the larger end of the market. So can you just…?

Joseph Ficalora

So, I think what I tried to say was that there is going to be a great deal of activity. There are plenty of small deals in the market. We are just not looking at the small deals. As far as those, they aren’t small deals to be had, we are just avoiding it.

In other words, we made it very clear to the bankers that if they had something really big to talk about and sometimes we are talking about deals that are not necessarily very commonly expected. So the reality is that we are just not looking at the small ones. There are plenty of small deals in the marketplace.

Collyn Gilbert - Stifel Nicolaus

No, no. I get that, but I mean the fact that you are saying, you are seeing large deals. I guess I’m intrigued by that. I don’t know if you can expand on that at all or….

Thomas Cangemi

Hey, Collyn. This is Tom. I was saying that a lot of the small deals don’t make it to the corner office. They make it to my office but I know better we need to show because that’s not our focus. So there is a lot of deals in general. There is activity, as Joe indicated we believe there is going to be robust activity in the next 18 months. And there are some large opportunities that has come in the past six months that are seemed to be attractive.

Collyn Gilbert - Stifel Nicolaus

And is it kind of non-traditional at this point on the larger end?

Thomas Cangemi

Very.

Collyn Gilbert - Stifel Nicolaus

Okay. Okay. All right. And then just two points to clarify. One is the individual prepayment fee on the Co-op loan, what was that again? Was that 17…?

Thomas Cangemi

17 plus.

Collyn Gilbert - Stifel Nicolaus

17. Okay. And then I think you have kind of talked around this, Tom, and maybe you have talked to it, but I can’t process it fast enough. On the mortgage banking side, I mean how much of your sort of “lost revenue” that you saw in the first quarter. Do you think you can recoup going forward given all that you are saying, if we assume kind of a pickup in subsequent quarters, I mean, how much do you think you can recoup of what you didn’t see in the first quarter?

Thomas Cangemi

I think number of things went on in the first quarter. But obviously seasonality in December, it is what it is. Big picture here that the [FMCS] move around between 12 to 20 basis points in a given month and December was a very slow month for us. We are a corresponding wholesale aggregator. We react probably quicker than the retailers as well as the HARP participants. So we definitely had an impact in Q4. But that being said, as you go back and restate the statement, Q1 of 2012, purchased activity picked up.

So as we go into the selling season past January into the next few months, we believe activity will pick up. But if the rates are still relatively low. Now refi rates have moved dramatically from a 3% to a 350, 50 basis points move on a refi definitely slows down that weight. So you are not going to see the 80-20 split of the 90-95 split between refi and purchase. But you may see a 25% uptick in purchase and then that will start moving the mortgage banking opportunity for us.

Like I said before, we feel very confident. We will get our share of the mortgage markets but the [MDA] statistic was down 20%, that it is what it is. We can’t control that. We will get our share.

Collyn Gilbert - Stifel Nicolaus

What have you guys seen in the first three weeks of the year in terms of application?

Thomas Cangemi

Slight pickup, north of December. But again, it’s way too early.

Collyn Gilbert - Stifel Nicolaus

Okay. Okay. That was it. Thanks, guys.

Thomas Cangemi

Thank you.

Joseph Ficalora

Thank you.

Operator

We got a next question from the side of Steven Alexopoulos with J.P. Morgan. Your line is open.

Joseph Ficalora

Good morning, Steve.

Steven Alexopoulos - J.P. Morgan

Hey, good morning, everyone.

Thomas Cangemi

Hi, Steven.

Steven Alexopoulos - J.P. Morgan

Maybe just start, the potential large deal, I think you just said being very non-traditional. Are you saying…?

Joseph Ficalora

It could be traditional, non-traditional and we are not going to say any more to it.

Steven Alexopoulos - J.P. Morgan

Okay. I was just going to ask, that could be something that is completely outside of even a specialty finance lender that you would be looking at.

Joseph Ficalora

We are not going to comment. No.

Steven Alexopoulos - J.P. Morgan

Okay. In terms of the mortgage, is $33 million a decent run rate for us to be thinking about or you seeing more pressure on gain on sale here in 1Q and rate lock volumes continuedto fall?

Joseph Ficalora

It’s pretty soon to tell. But I will tell you, I’m going to reiterate the statistics. We’ll get our $0.67 share of the national mortgage markets and $1.4 trillion decimated by the MVA. At the end of the day, I think we are going to see hopefully. We hope for a continuation of purchase activity. My guess if rates spike, refinancing will slow down and purchasing is easy if economy does reasonably well and housing continues to recover. We’ll get more purchasing activity.

But again, I’m not going to give an estimate on mortgage banking. I never do and I will try to give some reasonable guidance and we will get our fair share. But we do in past few years a lot of refinancing. And our paper is relatively fast. So in the event there is a spike and it’s significant if the refinancing of our current $17 billion MSR will slowdown dramatically. We should get some value towards the servicing side.

Steven Alexopoulos - J.P. Morgan

Okay. And then, Tom, not to beat a dead horse on the margin but without the benefit of repositioning the borrowings, looks like the pressure on asset yield is picking up quite a bit here. Is this just because refis are running so high that you are just seeing incremental pressure on loan yield?

Thomas Cangemi

The big drop on Q4 and Q3 cost here was the $5.75 coupon and almost $600 million. That just had a negative impact. But as I stated before, our 458 coupon was probably the lowest coupon we’ve had in a while. So December end period with 458 on the average loan side, so it’s a 100 basis points plus lower than it was a year ago.

So in the event, we are putting on three on average 340 and going north if rates arising and funding cost in the short end are relatively stable. I think we gave you a pretty good guidance. We feel stabilization comment is not that far away. Besides it could be at a higher level this year given there is some repositioning and we are seeing some higher rates.

Now loan book modeling and old curve which has the wholly rates. So we may get there a little bit sooner depending on interest rate, but I don’t want to be too aggressive. So, I think we gave some guidance for Q4, down 12 to 15 we came in down 10. So, I think we try to give conservative guidance on Q1, down 3 to 5.

Joseph Ficalora

The significant change in rate is already behind us. The rates that were higher in our portfolio, they are already gone.

Steven Alexopoulos - J.P. Morgan

Okay. Thanks for the color.

Joseph Ficalora

We moved on close to $16 billion of paper over the past few years throughout the portfolio. That’s just complete turn and we are seeing step that wins. The guys that went to year six, they still have those big prepay opportunities for us. And rates despite, my guess is that they will move and they will pay and they will get a low coupon, but will get paid the prepayment opportunities.

Operator

We’ll go next to side of Kenneth Bruce with Bank of America. Your line is open.

Joseph Ficalora

Hi, Ken.

Unidentified Analyst

Hi. This is Cody (inaudible) for Ken Bruce. Just looking at multi-family competitions obviously really strong. I’m just trying to get a sense of, if things keep repeating how are you guys going to maintain market share? I mean, what are the niche deals that you guys are winning, the competitors are not getting?

Joseph Ficalora

I think the reality is that we’ve been consistently in this market and we’ve grown to be the largest lender in our niche. So the idea that other people are doing lending in the New York market and they are both doing multi-family lending has nothing to do with our niche. So despite the fact that there is some people that actually are by accident or otherwise winding up doing alone that we might do. There is not that much focused activity in competition with us for the quality asset that we like to have.

So, cycle after cycle after cycle, there have been people that have indicated that they are doing multi-family lending in New York. At many of the cycles that have unfortunately evolved had caused those people to go out of business because they did bad multi-family lending in New York. So, I think the idea that we are very, very focused has to the kind of people that we lend to and the kind of metrics that we use in putting a loan on our books gives us very consistent results and the people that we’re competing with the focused lenders have changed very dramatically. So where there used to be extraordinarily focused lending from independents and to a lesser degree from North Fork that doesn’t exists to the same degree today.

And although there are other lenders that actually do niche lending, they are not big volume lenders. And there are lenders that are doing lending in light type product for longer terms or for other circumstances where they may even give more dollars or otherwise terms that are different, they’re not necessarily competing for our share, of our very focus niche.

Unidentified Analyst

Okay. So that’s helpful. Just shifting gears real quick, looks like the security book bumped, this quarter, just wondering what level you’re comfortable with there as we look at that.

Thomas Cangemi

I’m going to give broke up on the call, what’s that questions again?

Unidentified Analyst

Sorry, just look at that security booked looks like a bumped up a bit in the quarter. And I was just wondering if, what level you are comfortable with there, how we should look at that?

Thomas Cangemi

Right. The average balance, we were probably down we had some forward transaction that caused for the back-end of the quarter but we haven’t got anything last than 2.5% and that’s pushing it. We’re just dealing with stuff that’s rolling off. The good news here I don’t see a lot of collectivity give the bump up. So in the events that rates were to rise, so from here we’re back in the market place.

We were on the sidelines right now. I think that if we had a sizable movie on the backhand of the curve, we’ll be back in and as discussed some of the other questions, we're looking at probably anywhere from 15% to 19% the percentage of assets is probably the right level. I mean, out there, we have a lot of room to go here, but we're going to be very cautious on duration length.

Unidentified Analyst

Okay. Thank you.

Thomas Cangemi

You’re welcome.

Operator

Your next questions from the site of Mike Turner with Compass Point. Your line is open.

Joseph Ficalora

Good morning.

Mike Turner - Compass Point

Good morning. Most of my question have been answer, just on the kind of NIM guidance what’s your sort of assumption for earning asset growth, I mean is there a mix in the …

Joseph Ficalora

Yearly 5%.

Mike Turner - Compass Point

Hello.

Thomas Cangemi

Yeah. Conservatively 5%.

Mike Turner - Compass Point

Okay. And then also just on gain on sale spread, I know it’s early we’re only one month in but how are primary, secondary spread seem to be compressing and then the GC increase, does that’s been having any impact on gain on sale premiums since to start of the year?

Thomas Cangemi

The GC increase we jammed a lot of production into November to make sure we got, the benefit of the economic value of that. So that definitely had some impact to Q4. It will take advantage of getting much funded back to the agencies. But again like I said we’re down 20% basis points linked-quarter.

I’m not going to give fuller guidance. It will move too early for greater margin. It’s going to seem like the margin is still relatively healthy. We haven't had type margin from there since then. So, I mean, for modeling purposes, I would use about buck 20, excluding any NII carries to the bank on a billion-dollar warehouse.

Mike Turner - Compass Point

Okay. Thank you very much.

Joseph Ficalora

You welcome.

Operator

And this will conclude our Q&A session. I’ll turn the program to Mr. Ficalora for any closing remark.

Joseph Ficalora

On behalf of our board and management team, I thank you for your interest in the company, our strategies and our performance. We look forward to chatting with you again in April, when we report our earnings for the first quarter of 2013. Thank you.

Operator

Thank you. This does conclude today’s fourth quarter 2012 earnings conference call with the management team of New York Community Bancorp. Please disconnect your lines at this time and have a wonderful day.

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