New York Community Bancorp Inc. Q4 2008 Earnings Call Transcript

Jan.27.09 | About: New York (NYCB)

New York Community Bancorp Inc. (NYB) Q4 2008 Earnings Call January 27, 2009 9:30 AM ET

Executives

Ilene Angarola – Director of Investor Relations

Joseph Ficalora – Chairman, President and Chief Executive Officer

Thomas Cangemi – Chief Financial Officer

Robert Wann – Chief Operating Officer

John Pinto – Chief Accounting Officer

Analysts

Ken Zerbe – Morgan Stanley

Thomas Alonso – Fox-Pitt Kelton

Andrew Wessel – J.P. Morgan Chase

Mark Fitzgibbon – Sandler O’Neill

Matthew Clark – Keefe, Bruyette & Woods

Bruce Harting – Barclays Capital.

Matt Kelley – Sterne & Agee

David Darst – Ftn Midwest Securities Corp.

Rick Weiss – Janney Montgomery

Gary Gordon – Portales Partners

[Marklovio Pena] – Morningstar Equity

Anthony Davis – Stifel Nicolaus & Company, Inc.

Operator

Welcome to the New York Community Bancorp 2008 Earnings Conference Call. Today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to the Executive Vice President and Director of Investor Relations, Miss Ilene Angarola. Please go ahead.

Ilene Angarola

Thank you. Good morning everyone and thank you for joining the management team of New York Community Bancorp for our quarterly conference call. Today's discussion of our fourth 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 today 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 our local markets, conditions in the securities markets 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, changes in legislation, regulation and policies, including those pertaining to banking, securities and taxation, changes in accounting principles, practices or guidelines and changes in the financial or operating performance of our customers' businesses, or changes in real estate values, which could impact the quality of the assets securing our loans.

You'll find a more detailed list of the risk factors associated with our forward-looking statements in our recent SEC filings and beginning on page ten of this morning's earnings release. The release also includes reconciliation of our GAAP and non-GAAP earnings, net interest income, and capital measures, which will be discussed extensively during the conference call.

If you would like a copy of the earnings release, please call our Investor Relations Department at 516-683-4420 or visit the IR portion of our Web site, www.mynycb.com. I'd now like to turn the call over to Mr. Ficalora who will speak to you briefly before opening the line for Q&A, Mr. Ficalora.

Joseph Ficalora

Thank you Ilene and good morning everybody. We are very pleased to have you with us today as we discuss our fourth quarter 2008 earnings and the factors that contributed to our strongest financial performance in a number of years.

Although you have likely seen this morning's earnings release, the numbers bare repeating with fourth quarter GAAP earnings up 52% from the year earlier fourth quarter level and operating earnings up 37% during the same time.

On a per share basis, our GAAP earnings rose 43% year-over-year to $0.30 in the quarter. During this time, our diluted operating earnings per share rose 29% to $0.27. We also reported a 45% increase in fourth quarter cash earnings to $115.6 million together with a 36% increase in diluted cash earnings per share to $0.34.

Our fourth quarter cash earnings exceeded our GAAP earnings by $13.4 million and contributed 13.1% more to capital at December 31, 2008. The strength of the quarter's performance confirmed the merits of our business model, as well as a claim we've often made throughout our public life, that the qualities that distinguish us from other financial institutions would become increasingly apparent in a downward cycle turn.

In the past 12 months, a time of unprecedented disarray in the housing and credit markets, we've generated double-digit loan growth by increasing our loan production and expanded our net interest margin despite a decline in prepayment penalties.

With revenues increasing, we improved the efficiency of our operation. We also produced above average asset quality measures and maintained our position of capital strength. We also paid a $0.25 per share dividend in each of the year's four quarters and last night declared the 20th consecutive quarterly cash dividend of this amount.

The dividend reflects the strength of our earnings and our confidence in the future and will be paid on February 17th to shareholders of record as of February 6th. Before I take your questions regarding the quarter's performance, I'd like to expand on each of these accomplishments.

Since multi-family lending is the heart of our business model, the growth of that loan portfolio is a great place to start. Capitalizing on a continued decline in competition for product, we increased our multi-family loan production throughout 2008.

Originations rose nearly 30% year-over-year to $3.2 billion, including $854 million in the last three months of 2008. Reflecting the higher volume of loans produced and a decline in refinancing activity, the multi-family loan portfolio grew to $15.7 billion at the end of December, a nearly 12% increase from the year earlier amount.

The spreads on our multi-family loans increased in tandem with the increase in production, with fourth quarter yields averaging 384 basis points above the average five year CMT.

Driven by our emphasis on multi-family lending, total loans grew 9% year-over-year to $22.2 billion at December 31st. Multi-family loans represented by far the largest portion of loans outstanding and accounted for 71% of the total portfolio.

Commercial real estate loans, a large portion of which are mixed use multi-family, were a distant second accounting for 20.5% of outstanding loans at December 31st. With real estate values declining and unemployment increasing, we chose to reduce our portfolio construction loans over the past four quarters, as well as our portfolios of one to four-family loans and other loans.

Construction loans fell 32% year-over-year to $777 million and represented just 3.5% of total loans at December 31st. One to four-family loans represented a mere 1.2% of loans outstanding and other loans accounted for modest 3.9% at year end 2008.

Reflecting the significant increase in loans and the reduction in our funding costs as the fed funds rate moved lower, our net interest measured 2.87% in the fourth quarter of 2008. That's 19 basis points wider than our third quarter margin and 51 basis points wider than the margin recorded in the fourth quarter of 2007.

We're especially pleased by the degree of expansion, given the reduction in prepayment penalty income we recorded over the past 12 months. Prepayment penalty income added 3 basis points to our current fourth quarter margin, versus five and seven basis points in the trailing and year earlier three months.

The decline is more dramatic when you consider the 12 month amounts. In 2007 prepayment penalty income totaled $58 million and added 22 basis points to the net interest margin. In 2008 prepayments totaled $25 million and added just nine basis points.

The same factors that contributed to the improvement in our net interest margin contributed to an increase in our net interest income in 2008. On a link quarter basis our net interest income rose 11% in the fourth quarter.

Year-over-year the increase was a more significant 31%. Reflecting the meaningful revenue growth we recorded in the fourth quarter, our operating efficiency ratio improved to 35.94% from 43.44% in the year earlier three months.

Our GAAP efficiency ratio equaled 35.09% in the quarter and was well below the current S&L Bank & Thrift Index measure of 73.86%. Among the beliefs we've often expressed since our conversion to stock form, is that the quality of our assets would exceed that of our industry peers in a downward cycle turn.

While our loan portfolio has not been immune to the impact of the widespread economic downturn, our measures of asset quality at the end of December confirmed our belief. While net charge offs totaled $3.4 million in the fourth quarter, the ratio of net charge offs to average loans was a modest 0.016%.

Non-performing loans rose to $113.7 million at the end of December, but represented a modest 0.51% of total loans. Similarly, non-performing assets rose to $114.8 million on the 31st of December, but represented a modest 0.35% of total assets at that date.

If you read this morning's press release, you know that the measures for the S&L Bank and Thrift Index were substantially higher with net charge offs representing 2.41% of average loans in the quarter and non-performing loans and assets representing 2.18% and 2.03% of total loans and assets at year end.

We will continue to be conservative and vigilant in our lending going forward in keeping with our traditional focus on maintain a superior level of asset quality.

As we reported in our release, our current pipeline is approximately $602 million and includes $403 million in multi-family loans. The pipeline reflects the incomplete status of certain loans that are now being processed and the accelerated completion of certain loans into the fourth quarter of last year.

We are confident that the volume of loans produced in this and the quarters to follow will exceed today's amounts. In addition to maintaining the quality of our assets, we continue to be focused on maintaining our capital strength.

As we reported on January 13th, we opted to decline the opportunity to participate in the U.S. Treasury's Troubled Asset Relief Program in large part due to the strength of our balance sheet, our current regulatory capital position and our confidence in our ability to create new capital in the periods ahead.

At December 31st, our subsidiary banks continued to exceed the minimum requirements for well-capitalized classification with leverage capital ratios of 7.13% and 10.33%. Furthermore, our ratio of adjusted tangible stockholders equity to adjusted tangible assets was 5.94% at the end of December, while our ratio of tangible equity to tangible assets was 5.66%.

The difference between the two is attributable to the accumulated other comprehensible loss, net tax recorded at the end of December, which included a $50.1 million non-cash unrealized loss related to pension and post-retirement plan obligations as the value of assets in the plans declined.

While last year's volatility has segued into a steady flow of discouraging economic data, we remain confident in our prospects for 2009. We encourage you to consider the unique features of our business model and the strength of our fourth quarter performance and to call us if you have any questions about our financial condition or business strategies.

As this time, I'd 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 or leave a message for us and we'll do our best to get back to you this week.

As you may know, Tom and I are leaving the office shortly for Citi's Annual Financial Services Conference in Manhattan where we will be meeting with investors the rest of today and through tomorrow night. If you are not attending the conference and would like to listen to the presentation we will be making at 2 pm tomorrow, please log on to investor relations portion of our website and click on the conference link.

And now, the first question please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ken Zerbe – Morgan Stanley.

Ken Zerbe – Morgan Stanley

Great. Thanks. Can you just talk a little bit about what [broke] your operation expense and charge-offs in the quarter? I understand they're still well below industry averages but it does seem to be a pretty big move on a sequential basis for you guys.

Joseph Ficalora

Yes, I think the important thing to recognize is that in a portfolio of $22.5 billion, there are going to be loans that are occasionally either non-performing with an expectation that we're going to have to go through a process for collection.

An important distinction between us and others is the significant amount of non-performing that may occur from time to time without there being a comparable amount of charge. So even though we did charge a fairly large amount this quarter, it is not necessarily indicative of what we're likely to be charging over the periods ahead.

These are usually isolated cases where the particular circumstances of that particular property and owner suggest that we may, in fact, not realize the full value of that particular asset.

Ken Zerbe – Morgan Stanley

Would that imply that you're not expecting non-performing assets to continue to increase at this level?

Joseph Ficalora

I'd say that non-performing assets could move fairly dramatically, but I would suggest to you that I do not expect that we're going to have charges on an increasing basis or at the level that we're seeing today.

Now obviously, there is in fact, in our portfolio, a large number of assets that are not our traditional assets. Where those assets exist, from time to time, we're going to, in fact, take losses.

So I'd say the easiest way to look at this, we do not believe that any charges that might arise in the quarters ahead or even in the years ahead will be beyond the capacity of our earnings to amply cover them.

Ken Zerbe – Morgan Stanley

Of course. And then can you just remind us what the remaining trust exposure you have is?

Thomas Cangemi

We have approximately on the pool trust deferreds, which we have been obviously tracking over the past three quarters, what's left on the total portfolio we have about $18 million left on pooled and $3 million left on income loss. That's the total exposure remaining.

Operator

Your next question comes from Tom Alonso – Fox-Pitt Kelton.

Tom Alonso – Fox-Pitt Kelton

Just on sort of the prepays, if you could maybe give us a sense of what's driving that slow-down? Is it just people are unsure of what's happening in the current environment? Any color you could provide there would be great.

Joseph Ficalora

Yes, I think, Tom, it's important to recognize that there are some dynamics here that are just unprecedented. We have rates falling off to extremely low levels and yet the risk premium is widening. So the expectation with rates is very, very difficult for property owners to adequately assess, and typically when they're not sure whether the rates are going us or going down that will impact their particular loan, they in fact delay.

Also, a lot of the people that we deal with are the very people that will buy real estate when in fact real estate comes down. They're not likely to be buying real estate at this juncture, because real estate has not come down in the markets that they're likely to be in anything near what the future will hold.

There's going to be a significant change in real estate values in the New York market. It will not be impacting us in the same way it is reflected in the market but it will present opportunity for the kinds of people we lend to, to be more interested in getting cash later, and they'll get that cash, not just to maintain their building, but also to redeploy into very nicely priced new properties. And I'm not talking about new building but new purchases that they'll make in the markets that will be deteriorating in the future period.

Tom Alonso – Fox-Pitt Kelton

Okay. Then just to circle back up on your prior comments on credit – so non-performers are expected to increase given what's going on but you won't see a commence or an increase in losses, is that what you're saying?

Joseph Ficalora

Yes, I think the important thing to recognize here is that these are our one offs. It's not as thought we are talking about a portfolio of house loans where you could expect that if you have $200 million in non-performing house loans, a very high percentage of those loans will ultimately result in loss.

In this circumstance, many of the properties that would ever fall into a non-performing status have substantial value and those properties will either be refinanced out, sold, or otherwise result in our not having to take a loss. That's why our losses are so low. When you look at the number that we just reported, our loss number is 0.016%, even though the non performing number is up dramatically.

Operator

And moving on, our next question is from Andrew Wessel – J.P. Morgan Chase.

Andrew Wessel – J.P. Morgan Chase

Good morning. Thanks for taking my question. Just a couple of questions, on the lending opportunities you're seeing in the pipelines, should we be looking at the 384, 385 kind of spread going forward? Are you still seeing some expansion there in your spread opportunity that you're pricing at?

Thomas Cangemi

Andrew, its Tom Cangemi, what we quoted in the press release was the actual closing based on the average five-year treasury for the period. We're seeing levels more closer to 500 over, like 450 to 475. However, the timing of the closing, those rates were quoted back in previous periods so what we're seeing in the late fourth quarter was spreads more closer to 500 over.

Andrew Wessel – J.P. Morgan Chase

Great, okay.

Thomas Cangemi

Which is around a 6% coupon, 5.75 to 6% depending on the market.

Andrew Wessel – J.P. Morgan Chase

Right. Thanks. And then in terms of NPLs, was there any, I may have missed this and I apologize, but was there any concentration really there on that growth, like was that, or was that spread across?

Joseph Ficalora

No, it's basically spread across and to a great measure it's not our core, its other assets.

Andrew Wessel – J.P. Morgan Chase

Sure, so would that be like construction or mixed use or is it?

Joseph Ficalora

I think it varies and from time to time it will vary. What we're probably, we are very reluctant to do is identify specifically what we're reserving on particular loans, or on particular markets, mainly because, in every case, we are negotiating new deals. So we don't want to be discussing what we're reserving against any particular assets.

So I think the important thing to recognize here is these are not trend driven charges or changes in non-performing, these are more isolated circumstances where a particular property owner, for whatever reason, has run into difficulty with that property. And that unique property may be non-performing, even though we might have loans all around that are perfectly fine.

Thomas Cangemi

And you've got to remember our average size of a [market] is $3.9 million so one or two loans gets you up there.

Andrew Wessel – J.P. Morgan Chase

Right, sure, understandable, and then in terms of the last question, in terms of the New York Federal Home Loan Bank, is there any concern about the dividend being positioned off for an extended period of time, and kind of the draw against your earnings contribution from that?

Joseph Ficalora

I think the New York Federal Home Loan Bank has demonstrated that it is extremely well-positioned against all of the federal home loan banks. The idea that it can earn money, even in a difficult period, I think has been proven quarter by quarter by quarter. The reality is that this market will impact, unless we have a meaningful, realistic change in how certain measures of accounting are applied, the Federal Home Loan Bank Systems will be impacted.

We expect that we should be in a position to continue to enjoy dividends at the New York Federal Home Loan Bank. However, having said that, we don't decide that. So I'm very confident about the dividend we pay; I can't be as confident about the dividends others will pay.

Operator

(Operator Instructions) Your next question comes from Mark Fitzgibbon – Sandler O’Neill.

Mark Fitzgibbon – Sandler O'Neill

Given the comments you made about spreads and multi-family loans today at 5.70 to 6% and where your funding costs are, it would seem that the margin should continue to expand pretty nicely. Is that an accurate assumption?

Thomas Cangemi

That's correct, Mark. Obviously, in total the timing of our [inaudible], we had a very good few quarters of significant growth, we expected the third quarter to be around high single-digits; we came in double-digits. The fourth quarter was to our double-digit expectation.

So obviously, those loans that were put on the books in the latter part of the year will contribute going forward, and the marketplace is still very lucrative in respect to what we saw three years ago. So we're looking at close to a 6% threshold in a very low-interest rate environment, and funding costs have gone through the floor.

Mark Fitzgibbon – Sandler O'Neill

And then, secondly, could you share with us what your 30 to 89 day delinquencies were for the quarter?

Thomas Cangemi

We're looking at probably around $100 million.

Mark Fitzgibbon – Sandler O'Neill

Okay, great. Thank you.

Thomas Cangemi

Yes, but that includes both the 30 and the 89.

Mark Fitzgibbon – Sandler O'Neill

Okay. Thank you.

Operator

Your next question is from Matthew Clark – Keefe, Bruyette & Woods.

Matthew Clark – Keefe, Bruyette & Woods

Can you discuss I guess, what happened with the average security yield in the quarter, up about 27 basis points, and just your comments about the acceleration of cash flows on certain securities? Just trying to better understand the underlying accounting and the types of securities there that experienced those–

Thomas Cangemi

We never buy premium bonds, only in very rare circumstances. So you have a lot of cash flow throughout this [inaudible] environment, so obviously we have more season type collateral in certain pools that we own, as well as we have a significant amount of [debentures] at a deep discount. So obviously, back in 2007 and early 2008, we were not in the market buying low yielding coupons. We had very high yielding coupons, which accelerated on the cash flow from those, which obviously takes a discount into income.

Matthew Clark – Keefe, Bruyette & Woods

And then in terms of the borrowings that you are adding more recently, it appears that you used the TGLP to replace some borrowings this quarter.

Thomas Cangemi

Yes, interesting enough, obviously we had a maturity, if you recall, we had the [Rosalind Senior Notes] that was about $75 million that matured in November. That was replaced with the TLGP program at the holding company. So we got rid of the 750 coupon and refinanced that, ball in cost somewhere in the high threes, low fours, all end for it including all fees.

The other pool was the matter of liquidity. We were flush with liquidity towards the end of the year, but expected, knowing that we're not aggressive in the deposit market. We looked at the opportunity to participate in the TLGP program at very attractive levels versus CDs that are out there. We have been refraining from being aggressive on deposit pricing. If you look at our rates, we've always been historically low, and we're very liquid currently.

We believe, in 2009, deposit pricing will be extremely low, which will be attractive for us to go back into that environment, but we looked at the cost versus deposit, and it clearly was an attractive program. It's AAA, it's no collateral being posted and it's a very attractive program for the banking industry as a whole.

Matthew Clark – Keefe, Bruyette & Woods

Can you talk about the duration though, the borrowings that you're adding here? There's obviously an opportunity to go really short, is that something you guys would consider in terms of mismatch?

Thomas Cangemi

Absolutely. What we've historically done – if you recall, back in June, we locked in most of our bonds fairly long. It was about a 3.8 year average duration. Going forward from then, we typically like to run a 20% short wholesale leverage, but we still had to put in that particular strategy in place late in the third quarter, early on for the fourth quarter.

You'll see the continuation of that in this low interest environment. So anywhere from 30, 60, 90. Sometimes we've allowed one year, two year depending on market conditions, but we're now looking to lock in at 20% in the current marketplace because of the current interest rate environment. So we are enjoying some of the benefits there.

Matthew Clark – Keefe, Bruyette & Woods

Okay and then lastly, can you just update us on the SEIC insurance premium increase? I guess that goes into effect on January 1, and another one on April 1st, in terms of–

Thomas Cangemi

It's going up, and it's not probably too low, that's for sure. We've been on top of this and we're been spending a lot of time analyzing it, we're assuming the worst case scenario of the company, assuming what was proposed by the original FDIC proposal, probably looking at another $25 million increase into the 2009 expense line.

So if you take FDIC, as well as additional pension costs because of the devaluation of the capital markets, our expense base would have been flat going into '09, which is a challenge as far as keeping the holding in line, but with good growth backing that out, we would have been adding that in, looking at probably another $35 million increase, total, between FDIC and pension costs.

Operator

Our next question is from Bruce Harting – Barclays Capital.

Bruce Harting – Barclays Capital

Joe, just looking back to the last real estate recession in the early '90s, it seems like your NPLs to loans peaked about 125 basis points, but dropped pretty quickly. Couldn't find the charge-off data, but if memory serves, it was substantially less than that.

Joseph Ficalora

Yes, and in the entire period, from I guess '85 to '95, it was like $1.4 million.

Bruce Harting – Barclays Capital

Okay and I mean, is that kind of performance – and the number in your release today of the 1.5 basis point, that was not an annualized number, that was just right, that was just the experience in the quarter.

Joseph Ficalora

That's right. Yes I think that, for our core product, our experience should be just about the same. But as I've said many times, we also have other assets that we've acquired, and we also have a commercial bank. So as a result, we are going to have losses which are not necessarily as bad as the rest of the industry, but are, in fact, reflective of the industry.

But for a $32, $33 billion bank to have losses that are comparable to a $3 million bank, I think it's easy to say that we have more than enough earnings to accommodate those losses.

Bruce Harting – Barclays Capital

Do you recall – I mean, NPLs look like they dropped rapidly from the peak in '92 to '95. They went from about 125 down to 40 basis points. Is there something specific to your asset class or?

Joseph Ficalora

No, I think what it comes down to is we occasionally have some very large loans that go non-performing, and if a very large loan goes non-performing, that number can change dramatically. However, once that loan is resolved without loss, the actual charges that we have are indicative of the quality of the portfolio. The non-performing status from moment to moment is only indicative of particular items that are in process.

I think the important thing, and you're touching upon something that is very important for people to understand, we could have a meaningful increase in non-performing loans without necessarily having a meaningful increase in charged against loans.

Now having said that, it doesn’t mean that we aren't going to have periodic charges that are consistent with the kinds of charges in the C&I portfolio are the kinds of charges on some of the other loans in our portfolio, but all of those charges combined will ultimately be substantially lower than the charges that would be experienced by a bank of our size.

So the ability for us to carry those losses is significantly higher than the ability of another bank to carry the losses that are being generated in their portfolio.

Bruce Harting – Barclays Capital.

Is the tenants, in the rent controlled I understand, what about the health of your borrowers, if they get in trouble do you just foreclose and then there's a ready buyer waiting?

Joseph Ficalora

Yes, I think the interesting thing is since we have a niche of very successful long-term builders of value in real estate, we have a lot of people that understand value and understand how to make what in the hands of one person is a losing proposition, a winning proposition over time.

So I think that the good news will be as we proceed through the cycle, we should increasingly distinguish ourselves against the marketplace by what we successfully accomplish.

Bruce Harting – Barclays Capital.

Ergo the potentially higher NPL, but low charging.

Joseph Ficalora

That's right. Yes, I think that when you go back and look, you'll see as you rightly pointed out, there have been times when our non-performing loans moved up dramatically, but over the course of months and quarters our actual losses have consistently been de minimis.

Bruce Harting – Barclays Capital.

And any comment on the CRE portfolio that will make that outperform?

Joseph Ficalora

No there's been nothing about that portfolio that is in anyway indicative of being at greater risk. Our greatest risk, with regard to loans, are those loans that are in C&I or in construction or otherwise the loans that are at greater risk because they're more vulnerable to a changing, evolving cycle such as we're in.

Bruce Harting – Barclays Capital.

And any comment on the borrowing side, on the deposit market, and then all the sort of media that the federal home loan banks are getting right now?

Joseph Ficalora

No.

Bruce Harting – Barclays Capital.

Do you have a view on the health of the New York FHLB and their ability to continue to lend to you at favorable rates.

Joseph Ficalora

I'd say that in the first instance, there is absolutely no question that the Federal Home Loan Bank System is in fact a liquidity source of banking, and the federal home loan bank system has appropriate credibility and support of government because you cannot let the Federal Home Loan Bank System follow Fannie and Freddie.

The Federal Home Loan Bank Systems lends its money to banks and banks lend their money to everybody in the marketplace, so it is a crucial component of stability in this market. So there will be appropriate, if needed, intervention to deal with any issue that might arise with regards to the Federal Home Loan Bank System.

I have full confidence that the people who make our decisions recognize this reality and therefore the Federal Home Loan Bank Systems will be available to provide liquidity to banking. The last thing we need is a loss of liquidity.

Given all the other things that have impacted the financial sector, the Federal Home Loan Bank System needs to be continued, and recognize as is the case with all the largest entities in the country, the accounting rules are in fact having the most significant impact on the loss of capitalization and representation of ongoing losses.

Those accounting rules in fact are currently under review for change. There is no escaping the fact that accounting is supposed to reflect an ongoing business. It's not supposed to be liquidation accounting and destroying ongoing business. There is no escaping that in this year; the people who make decisions will have to deal with this issue.

Bruce Harting – Barclays Capital.

Yes, and on the deposit competition, if you just want to make a comment?

Joseph Ficalora

I think the good news there; the deposit competition periodically is irrational. Some of the players get a little overzealous in what they're willing to pay and then they fade away again or fade back into the norms.

Interest rates on deposits are much too high today given where the fed is, given where in fact the U.S. Treasury is. People often take money out of the bank and they buy U.S. Treasuries, the differential is huge. Banks are paying substantially more than a person could get on a U.S. Treasury, and for those banks that are well capitalized and operating with a good balance sheet there is absolute safety.

The performance of a deposit is significantly greater than the performance of most equity investments. So I think that we're going to see plenty of liquidity in the deposit markets.

Operator

Your next question will come from Mathew Kelley from Sterne & Agee.

Matt Kelley – Sterne & Agee

How much of the $54 million sequential increase in non performing loans was in your core multi-family product?

Joseph Ficalora

A fairly sizable amount, but as I said to you a moment ago we're really not going to discuss specific loans or specific categories. The main reason being as I've indicated, we have from time to time and down the road it will become more relevant, we have from time to time made a substantial amount of loans that we're actually negotiating. So we don’t want to be discussing what our global position looks like, so that people perceive that, well they have an actual advantage here or an advantage there.

The good news is that we have every confidence that the business model that we in fact have in place is going to perform extremely well, and even though the numbers from time to time will go up, the most relevant thing for and investor is how much are we going to lose based upon the non performance? And we in fact have historically lost substantially less, every single time that we've been involved in these things; we've lost substantially less than the marketplace generally would lose.

Matt Kelley – Sterne & Agee

I guess what people are trying to clarify is did the increase in NPAs match the distribution in the portfolio? I mean 70% of loans are multi-family, so.

Joseph Ficalora

No, not at all.

Matt Kelley – Sterne & Agee

So it's more heavily weighted towards commercial real estate and construction, non core loans?

Joseph Ficalora

No, it obviously is in different places but as I've said many times, our multifamily product is typically not a product upon which we lose any money. So if we've had charge offs, it's probable that those charge offs are not on multi-family, but I don’t want to go in the specifics.

Importantly, in making a decision as to whether or not this is a good investment, a person has to understand whether or not we're going to lose a lot of money, and the answer is we're not. And we have every confidence in that regard because we have a clear understanding as to where the risks are and how we're going to deal with them.

Matt Kelley – Sterne & Agee

I think what people are more concerned about though is the risk in the $5 billion of construction and commercial real estate, not your core product, and it sounds like that's what–

Joseph Ficalora

I think it's important to recognize that we don’t have $5 billion in at-risk assets as you just suggested. The commercial products that we have, if you look at the published information that we've put out, our commercial loans have an average life shorter than our multi-family loan book. Our commercial loans have an average LTV lower than our multi-family book. Our commercial loans are primarily multi-family loans.

Even though we have other loans in there, we have a significant amount of money that is retail on the first floor and multi-family on the next 10 or 15 floors, and therefore the stability of that particular loan is significantly greater than a commercial loan. If you look at anybody else's commercial loan book, they write loans to match their leases over a 15 year period, a 20 year period.

Our loans have a 3.3 average life. So our commercial loan book is in fact a very short book because it's mostly multi-family, which has the same attributes; the loans are structured identical to multi-family loans. So our commercial loan book is very, very, very much like our multi-family loan book.

Matt Kelley – Sterne & Agee

Okay, just a question on your securities portfolio, I know that in the health and maturity bucket, which obviously isn't running through your equity, at the end of the third quarter you had about $393 million in the other debt securities, and if I recall previous conversations, that’s mostly kind of senior debt, debt positions in large banks.

Wondering how that performed, it was marked $0.85 on the dollar in the third quarter. What's that mark going to look like fourth quarter in that health and maturity bucket?

Thomas Cangemi

Matt, nothing's really changed as far as add to the portfolio. Obviously, 90% of the entire portfolio was GSE. We haven’t made any additions, probably in over a year in anything but government. You're looking at the same portfolio. We're very confident that these are [credit] for the long term and for the health and maturity, we're not going to the equity statements.

Matt Kelley – Sterne & Agee

Okay. But you don’t think that there is any potential OTTI on those securities and other debts security in your call report–

Thomas Cangemi

Thirty-one we took our OTTI and you know it’s the same issues that we’ve dealt with in the past three quarters, we were a little bit early on those particular issues, I think a lot of the local competitors that have similar structures dealt with them in 12/31, we dealt with ours in June 30 ’08. So we’re down to hopefully the last of it, we’re down I believe I said previously approximately $18 million left in the pool.

Three million dollars – that’s in income though. That’s where we believe the risk is in the portfolio and we’re hoping to see this come back in time, and we were on it three quarters and it’s down to pretty much a de minimis number.

Matt Kelley – Sterne & Agee

Right. No, I know that your trump positions are pretty low in the pools and the income notes, $21 million, but I’m referring to the $334 million that I thought was–

Thomas Cangemi

We haven’t wrote down the Wells Fargo on paper yet, no. Bottom line, we have a lot of credits – we have other credits but 90% of our entire portfolio is GSE. So going back to our previous point, we’re not adding to it, we’re dealing with the credits, we did our OTTI testing, this is what we have.

It's been the same issues quarter after quarter and we’re coming down to almost a zero balance on those particular ones that we’ve been addressing and we’re comfortable with our computations at year end.

Matt Kelley – Sterne & Agee

Okay, and just to confirm one other number from earlier in the call, what is the 30 to 89 day past due number?

Thomas Cangemi

There is approximately $100 million.

Operator

Your next question today comes from David Darst – Ftn Midwest Securities Corp.

David Darst – Ftn Midwest Securities Corp

Good morning, could you give us an idea the extent you’ve relied on the broker network to actually sell loans from your criticize list and–

Joseph Ficalora

We don’t sell loans using the broker network. We typically portfolio everything that we originate, the only loans that never get to our portfolio are the consumer loans or house loans that are issued through our PHH and we take no risk in those loans, we just collect a fee in the process.

David Darst – Ftn Midwest Securities Corp

Okay, I’m referring to loans from the portfolio, that are maybe on your watch list or criticize list that won't sell out, from non-performing.

Joseph Ficalora

David we haven’t sold any loans, typically they work themselves out, obviously, this market is very illiquid in respect of moving paper quickly. We’ll work through it, we’re very confident having [DLTVs], as you can see the level of charge also very de minimis compared to the industry.

We did provide $5.6 million versus the $3.4 million we charged off for the quarter.

David Darst – Ftn Midwest Securities Corp

Okay and then do you expect a lower pipeline to translate into lower originations or lower growth in the first quarter?

Joseph Ficalora

No actually we’re expecting ultimately the pipeline is going to build and may very well result in 2009 being the best origination year since we’ve been a public company. And I guess the best originations we ever had was about $6.5 or $6.7 billion.

David Darst – Ftn Midwest Securities Corp

Okay, so we should see considerable growth of prepayments.

Unidentified Corporate

We do expect –

Thomas Cangemi

David, Tom. What you’re seeing right now is the lack of prepayment activities, so you have a higher average balance of the portfolio. But most importantly, the major competitors have exited the stage. You know last year was a conduit business, now you see the large competitors you have an exit of Washington Mutual, you have the exit more or less of Fanny Mae, and you have the exit of you know the old Independence group.

There are a tremendous amount of opportunity in front of us here and what is interesting for us as a company, we went from 150 over to almost 500 over in spread and funding [inaudible] we believe will get lower. So we’re enjoying a very good opportunity to grow the portfolio, in fact as historical high spread and ultimately will see the prepayment activity, all barring none no prepayment activity happens, you still have a 550 average coupon in the portfolio.

So if worse case scenario people decide to roll, we’re going to hold the asset deals. We believe prepayment penalty activity will pick up as customers have to make a choice. They can’t delay forever, they have to make a choice, and that's something that we’re looking forward to 2009 and 2010.

Operator

Your next question is from Rick Weiss – Janney.

Rick Weiss – Janney Montgomery

Morning. Actually most of my questions have been answered this is something on housekeeping I guess. Do your multifamily loan originations; say it was $854 million this quarter, does that include re-fis?

Thomas Cangemi

Yes.

Rick Weiss – Janney Montgomery

Okay. And I guess second, I know we haven't talked about M&A opportunities yet so I’ll bring that up, like would you guys consider doing a deal on that or is the environment just too harsh, too much uncertainty?

Joseph Ficalora

I think as we said m any times Rick we are always interested in growing franchise, getting deposits. We are very averse to taking on the risks that are represented by the active pool of any bank. So the good news for us is that we don’t have to do a deal.

Should there be an opportunity to get a good deposit base without the assets, we’ll be glad to do so.

Rick Weiss – Janney Montgomery

Thanks gentlemen, so next if we were to buy somebody who was a participant in a TARP program would that mean that therefore you become a participant?

Thomas Cangemi

We did some research on it and obviously they're changing the rules by the hour. However we believe there is some latitude to issue tier one instruments, such as common or alike, to secure the governments positions. On the warrant side that’s another topic [inaudible] term.

But I believe the underlying regulations will not carry over if you’re buying someone with the top investment as long as you cure the top instrument. And typically the [inaudible] but when you’re buying company, you want to secure a [inaudible] stock position will be secured.

Joseph Ficalora

Rick there is also the opportunity as we did with [Derail], to buy branches without buying a bank. If you don’t buy the bank you don’t buy the tarp.

Rick Weiss – Janney Montgomery

Okay. So it’s basically things are going to be pretty flexible going forward?

Joseph Ficalora

There are going to be circumstances where we just step away, because either the mix of the assets or the complications surrounding the tarp just make it an unattractive deal. And there will be other circumstances where they’ll be an opportunity to get a good franchise and mitigate the losses with regard to the assets because of either regulatory or other participation in the market to take those assets.

Thomas Cangemi

Rick I think what hasn’t changed is that there's very little liquidity in other readily available trading securities in respect to loans, I mean if you look at home equity loans, other types of loan maturities we wouldn’t have on our books, it's not an easy transaction itself, you would have to mark them to market, which is more than exit price mark in this environment, which will hurt capital.

So that’s part of the dilemma you have doing deals in this environment.

Rick Weiss – Janney Montgomery

Okay. And just kind of, it looks like you’re now and money market accounts on a quarterly basis increase pretty nicely.

Joseph Ficalora

The market is a rich place for deposits. There is no question that people that have money either in treasuries or in you know in some sort of an equity are putting their money back into banks.

Rick Weiss – Janney Montgomery

Is there anything special that you guys are doing in terms of advertising campaigns or [inaudible]?

Joseph Ficalora

No. We’re not being at all aggressive here.

Thomas Cangemi

I mean Rick, bear in mind there has been a lot of consolidation in our market. You know with [inaudible] leaving the space and others.

Operator

Your next question comes from Gary Gordon – Portales Partners.

Gary Gordon – Portales Partners

Okay thanks. Again a follow upon lending, as your prepayment penalty fees are quite low suggesting the turnover in your bar of portfolios very low, yet you're getting good volume of new business, I’m trying to figure out what other character of these new buyers in this market who's buying properties or refi-ing?

Thomas Cangemi

Well I think in many cases, we’re not getting new buyers, we’re getting re-fis from other portfolios. The point you’re touching on is something we talked about a little earlier. A lot of the traditional lenders within our niche are keeping their properties and not necessarily buying new properties, but having said that some of our largest relationships have substantially greater sums of money elsewhere.

So there is a huge pool for us to draw from, that includes exactly the very traditional project that we like to lend upon that is in the portfolio of somebody else and that will be coming to us. So we’re not talking here about a great deal of new acquisitions, we’re talking about getting share from the existing market.

Gary Gordon – Portales Partners

And are these people who were refinancing for a lower rate or cashing out at all?

Thomas Cangemi

No, no in many cases they’re refi-ing because –remember our average life is less than four years, our loans run between three and four years, and the reason they are that short is because the people who actually borrow from us have a business model of their own.

They have a rational expectation that they are going to improve their cash flow, their rent role in a short period of time and they refinance that improvement every three to four years.

Gary Gordon – Portales Partners

Okay thanks, one more, the debt repurchase; what type of debt did you repurchase?

Joseph Ficalora

Re-preferred.

Operator

Moving on, we'll hear from [Marklovio Pena] –Morningstar Equity.

[Marklovio Pena] – Morningstar Equity

Most of my questions have been answered, but there's still this lingering one on your tangible column equity ratio. It seems a tad low at 5.66 coming down from 5.8 a year ago. So, do you have any estimate on how long can that go, or how comfortable you are with that?

Thomas Cangemi

I think the big change for the quarter was the pension. I mean obviously if you have a pension plan, we were substantially overfunded as of last year. When you do a year-over-year comparison, the market collapsed. So, anybody with a pension has to book under FAS 158 the adjustment to the market place, and that adjustment to all pensions had taken substantial declines in value. Now that doesn't go through earnings, but it does go through capital. We hope to get that back over time, but there's a significant reduction in all pension value of assets.

That's going to also impact the going forward earnings in respect to expenses, but we believe we can mitigate some of that by funding the plan in 2009. This is an accounting adjustment we had to take and it does reflect book value.

It was a big adjustment for the quarter, unlike some very similar to many thrifts that had very large pension plans. This is not a company specific issue, this is an industry trend that you will see if you have pension plan. That was the big change for the quarter.

[Marklovio Pena] -Morningstar Equity

Okay understood, so you're comfortable with it then?

Thomas Cangemi

I think the number was about $50 million.

Operator

And we'll take a question from Tony Davis – Stifel Nicolaus.

Thomas Cangemi

I was wondering if you were still out there.

Anthony Davis – Stifel Nicolaus & Company, Inc.

I was waiting in queue here, I wonder if you've got the 30 to 89 number as of September Tom, you've mentioned it's about 100 right now.

Thomas Cangemi

I gave it three times; I'll give it to you a fourth time, $100 million at September. September I think it was around 60.

Anthony Davis – Stifel Nicolaus & Company, Inc.

Sixty?

Thomas Cangemi

Approximately.

Anthony Davis – Stifel Nicolaus & Company, Inc.

Okay, Joe, what percentage of the commercial mortgage book is actually mixed multi-family?

Joseph Ficalora

It's very hard to know the exact percentage. What I would say to you is when you look at the metrics of the two portfolios, multi-family and commercial, and you realize that our actual, and these statistics are in our published data, the actual performance of our commercial book looks very much like, if not more so, like our multi-family book.

So, the average life is 3.3 years. The LTVs are about 55%, 56%. You don't have a commercial portfolio that would have average numbers like that. So, if we have some commercial product and some multi-family product and the entire portfolio when combined has averages that low, I think you have to assume that a very large percentage of that is in fact multi-family.

Anthony Davis – Stifel Nicolaus & Company, Inc.

Can you talk about in this environment what you're seeing in terms of customer re-fi retention, I think a start–

Joseph Ficalora

It's up actually.

Anthony Davis – Stifel Nicolaus & Company, Inc.

Yes, I know. I would imagine it would be. Can you give us some sense of how much it's up?

Thomas Cangemi

Yes, it's probably tripled in the past two quarters, and we're still now hoping to be, we're going to be hopefully over time back at the 85% to 90% level as now there is less choices out there for our customers, and I want to reiterate, we have a 5.5% average coupon in the books remaining, and it's a significant amount of re-fi that has to take place. They need to make a choice. The choice could be roll it and pay a point, or re-fi and take more dollars if they've improve the cash flow.

So, we're in a very unique position to hold yield at very nice levels in this environment. So, we plan to see good activity going forward and in light of the long-term issue of the company, we expect to retain substantial amount of that business.

But Tony, given that significant plans that have exited the stage, we're in a very unique point right now in our public life. We're going to see good portfolio growth at much higher spreads, and if you look back two years ago those numbers were 150 or over. This has been a very exciting time for the company to put on very good quality assets.

Unidentified Corporate Participant

I guess to tie this down, Tom, then we're looking at probably $5 billion or so in loans coming up for contractual maturity this year and about 90% roll of the CD book?

Joseph Ficalora

The CDs are always relatively short. You're going to have consistent roll in CDs. We still have coupons in the portfolio, you'll still see a drop in funding costs, obviously much less of a drop, because I know there's been a significant change in the past six months. But we're very excited about the funding market is that about two or three months ago there was many irrational players in the industry.

A lot of those irrational players have been either wiped out, or they've been closed, and or consolidating into more rational players.

So, we have an opportunity to see much lower funding costs. We have an opportunity to see probably more towards the I'd say 40%, 45% roll in the portfolio over the next 18 months, to keep consistent with what we have been saying at a very low coupon, that's available for us to capitalize on.

The interesting phenomenon is now that they're not going to get that spread off the five year treasury and it's not going to be an attractive alternative for them right now, but they have to make a choice. That's causing somewhat of a delay to them to make a decision. All bearing, they have to make a decision when they roll.

Anthony Davis – Stifel Nicolaus & Company, Inc.

Absolutely, I guess just simply some comments, Joe, about the realistic possibility of in-market acquisitions near-term, and then the question of how far of field geographically are you willing to go in that department?

Joseph Ficalora

The important thing to recognize is that we've demonstrated over the course of many years that we both have patience and that we prudently look at all opportunities that arise. There is no question that we could have done many, many deals in the last 15 to 18 months, and there's no question that there are going to be even more deals to consider in the period in front of us.

The criteria for us to do a deal, is driven by our expectation that we will create a better bank. Asset risk is not something that we're willing to tolerate in this market. So, that means that we will step aside on deals where we cannot get comfortable, that we can deal with reasonably the risk to the asset portfolio.

Operator

And that's all the time we have for questions today. Mr. Ficalora, I'll turn the conference back over to you.

Joseph Ficalora

On behalf of our board and management team, I thank you for the opportunity to discuss our Fourth Quarter 2008 performance and the many accomplishments we achieved in the last three months.

The substantial growth of our GAAP, cash, and operating earnings, the significant expansion of our net interest margin as loan production increased and our cost of funds declined, the improvement in our efficiency as our net interest income increased, the comparative quality of our assets during a time of unprecedented economic decline, and our continued position of capital strength. Thank you all.

Operator

This does conclude our conference call today. Thank you all for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!