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Executives

Ilene Angarola - Director IR

Joseph Ficalora - Chairman, President and CEO

Thomas Cangemi - CFO

Analysts

Mark Fitzgibbon - Sandler O'Neill

Andrew Wessel - JPMorgan

Gary Gordon - Portales Partners

Tom Alonso - Fox-Pitt Kelton

Matthew Clark - KBW

Thomas Kahn - Kahn Brothers

Greg Ketron - Citigroup

James Abbott - FBR Capital Markets

David Darst - FTN Equity

Matthew Kelley - Stern

Christopher Nolan - Maxim Group

New York Community Bancorp Inc. (NYB) Q1 2009 Earnings Call April 29, 2009 9:30 AM ET

Operator

Good day everyone, and welcome to the New York Community Bancorp's First Quarter 2009 Earnings Call. Today's call is being recorded. At this time all participants have been placed in a listen-only mode.

For opening remarks and introductions, I would like to turn the call over to Ilene Angarola, Director of Investor Relations. 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 first quarter 2009 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 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, both nationally and in our local markets; changes in the financial or operating performance of our customer's businesses or changes in real estate values which could impact quality of the assets securing our loans; changes in interest rates which may affect our net income, prepayment penalty income, and other future cash flows or the market value of our assets; and changes in legislation, regulation, and policies, including those pertaining to banking, securities, and taxation.

You will find a more detailed list of the risk factors associated with our forward-looking statements in our recent SEC filings, and on page 8 of this morning's earnings release. That release also includes reconciliation of our GAAP and non-GAAP earnings and capital measures which will be discussed during this conference call.

If you would like a copy of the earnings release, please call our Investor Relations department at 516-683-4420 or visit the IR portion of our website 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 pleased to have you with us this morning for the discussion of our first quarter's 2009 performance which exceeded our year-earlier performance in several significant ways.

In addition to discussing our year-over-year earnings growth and the factors contributing to it, we'll also be talking about our tangible capital measures, our first quarter loan production and the quality of our assets which continues to exceed that of our industry as a whole.

Following my brief remarks, I'll be happy to take your questions on these topics as well as any others pertaining to our March 31st balance sheet and our first quarter 2009 results.

To begin, we were very pleased to report a significant year-over-year increase in our first quarter GAAP and operating earnings, as well as a significant increase in our diluted GAAP and operating earnings per share.

On a GAAP basis our earnings rose 22.5% from the year earlier level. On an operating basis the increase was even higher at 26.4%.

Furthermore, our GAAP and operating earnings both equaled $0.26 per diluted share in the quarter, an 18.2% increase from the $0.22 per diluted share in the first quarter of 2008.

We also realized an increase in our first quarter 2009 cash earnings, as well as our diluted cash earnings per share. At $99.9 million our cash earnings were 22.2% higher than the year ago first quarter level, and were equivalent to $0.29 per diluted share, a 16% increase.

As a result, the contribution of our cash earnings to tangible capital exceeded the contribution of our gap earnings by $11.2 million, or 12.6%.

Reflecting the contribution of our first quarter 2009 cash earnings, tangible stockholders equity rose $22.3 million to $1.7 billion over the course of the quarter. And our ratio of adjusted tangible capitals with adjusted tangible assets rose 5 basis points to 5.99%.

Including the impact of AOCL on our tangible capital and tangible assets, the ratio rose 9 basis points to 5.75% since year-end 2008.

In addition, the community bank and the commercial bank continue to exceed regulatory requirements for well capitalized classification, including leveraged capital ratios of 7.11% and 11.28%.

Given the strength of our earnings and our tangible capital measures, we last night declared our 21st consecutive quarterly cash dividend of $0.25 per share. Our ability to grow our capital while maintaining our dividend at this level is an indication of our confidence in our continued earnings capacity.

The growth of our earnings was driven by a better than 28% increase in net interest income to $207 million, and the expansion of our net interest margin which rose 48 basis points year-over-year to 2.89%.

These improvements were in turn fuelled by the growth of our interest earning assets largely reflecting loan production and by the strategic reduction in our funding costs.

The average balance of loans rose more than 9% year-over-year to $22.1 billion. During this time, the spreads on our multi-family and CRE loans also rose significantly.

In the first quarter of 2008, the yields on our multi-family and CRE loans exceeded the five-year CMT by 302 basis points on average. In the current first quarter, the yields on these loans exceeded the five-year CMT by an average of 438 basis points.

The increase in average loans reflects the volume of loans we produced in the past four quarters with fourth quarter 2008 originations of $1.5 billion, representing the largest quarterly amount.

In fact, the lower level of loans we produced in the current first quarter was in large part a result of the accelerated closing of loans in the trailing three-month period.

The reduction in our cost of funds reflected the strategic decline in our higher-cost wholesale and retail funding, and the replacement of such higher-cost funds with lower-cost wholesale borrowings.

It also reflects the benefit of last year's strategic debt repositioning. The same factors that contributed to the growth of our net interest income contributed to a 48 basis point improvement in our margin to 2.89%.

This increase was achieved despite a decline in the prepayment penalty income to $1.2 million from $10.3 million, in fact, the prepayment penalty added just one basis point to the current first quarter margin, in contrast to the 15 basis points in the first quarter of 2008. This may be the lowest recorded prepayment quarter that we've ever had.

Largely reflecting the growth of our net interest income, our GAAP efficiency ratio declined 486 basis points year-over-year to 36.63%. On an operating basis, the improvement in our efficiency ratio was even greater at 543 basis points.

It is worthy of note that the improvements in our first quarter performance were achieved despite an increase in our FDIC assessment, together with higher pension expenses and a loan-loss provision of $6 million.

In addition, our effective tax rate rose year-over-year as expected, adding an additional $3.2 million to our income tax expense.

The year-over-year improvements in our earnings were all the more gratifying when you consider the challenges we like so many others in the industry and our customers are facing, as the recession extends in to its second year.

I am pleased to say that despite the increase in net charge-offs and the non-performing loans, the quality of our loan portfolio was once again distinguished by our asset quality measures, particularly in comparison with those of our peers.

For example, while our non-performing loans represented 0.79% of total assets at the end of March, the comparable SNL Bank and Thrift Index measures reflected 2.31% during the same time.

Similarly, our net charge-offs represented 0.02% of average loans in the current first quarter in contrast to the bank and Thrift Index measures of 163 basis points. Although the increase in non-performing loans, included loans from each of our lending segments, none of the loans we charged off were organically produced multi-family or CRE loans.

This experience has been consistent with our long-held expectation that our primary focus on multi-family and CRE lending would result in a better record of asset quality. Another measure of the quality that we consider worthy of mention is the ratio of net charge-offs to average loan-loss reserves. Although our net charge-offs were $5.1 million in the quarter, this amount represented a modest 5.37% of our average allowance for loan losses.

For the SNL Bank and Thrift Index the comparative percentage was 19.23%. In other words, our loan-loss allowance was 19 times greater than our first quarter 2009 charge-offs. For the SNL Bank and Thrift Index the loan-loss allowance was five times the volume of loans that were charged-off.

Not withstanding the increase in our non-performing loans and assets, our experience suggests that we should expect fewer of our non-performing loans to result in losses than our industry peers. This was very definitely the case during the nation's last significant credit crisis, which began in 1987 and continued through 1992.

We believe that this distinction will continue in the coming quarters, even if our non-performing loans and assets continue to rise.

Going forward, you can expect us to continue lending, as the changes in our competitive landscape provide us with new opportunities with $851 million of loans in our pipeline, we expect to see continued loan growth throughout the year.

We also would expect to see continued net interest income and margin expansion with $6 billion of CDs with an average rate of 2.80%, due to mature in the next four quarters, it is likely that our cost of funds will continue to fall at the same time, as the average balance of our interest-earnings assets continues to rise.

At this time, I'd like to take 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 one day at a time. And now for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the side of Mark Fitzgibbon with Sandler O'Neill.

Mark Fitzgibbon - Sandler O'Neill

I wondered if you could share with us the $62 million increase in non-performers, how much of that came from multi-family and commercial real estate loans?

Thomas Cangemi

Total percent is around 42% or $76 million is the total percentage of multi-family.

Mark Fitzgibbon - Sandler O'Neill

Okay. You had said during the quarter that the FHLB borrowings were much more attractive from the rate standpoint in the deposits that were available, which is a little different than what we are seeing in a lot of other banks. Could you share with us what kind of FHLB borrowings you booked and at what rate and how that compare to may be your deposit rates?

Thomas Cangemi

With respect to the overall funding base, we're obviously managing our funding cost at a focus level to get these at least cost effectiveness to the balance sheet, but it's in P&L. If you look at where the Federal Home Loan Bank short-term borrowings are, you are looking at some 50 basis points. We have high costs liquid deposits that are somewhere between 1.5% to 2%. That is clearly not as attractive. And the balance sheet clearly is not growing in the first quarter, so we opted to go with the lower cost structure.

Joseph Ficalora

Mark, we have a significant amount of outstanding borrowings at much longer terms, so I think the unique opportunity that the current situation presents is that we are able to use a reasonable amount of money to actually enjoy these lower rates.

Thomas Cangemi

Mark, I think what is exciting about 2009, we have about $6 billion in the next year going forward that is going to be new pricing, of which that rate is approximately 2.8%. So we should be in good shape to get some benefits there on the CD side as well.

Operator

Next we'll go to the side of Andrew Wessel with JPMorgan.

Andrew Wessel - JPMorgan

Good morning, thanks for taking my question. I guess one question and a follow-up. The first question is on assets, in terms of loan pipeline, can you give some color in terms of what you are seeing right now. Obviously competition remains low for you, and what kind of opportunities you are seeing right now and what kind of spreads those are presenting themselves at?

Joseph Ficalora

I think the good news is that the spreads are continuing to reflect the risk premium that is built in to this market. There is a broad awareness that lending is extraordinarily risky in the New York market or in the country as a whole. So, we are seeing very conscious efforts on the part of the very good property owners, or the people that are taking advantage of opportunities in the market to buy low to do things that are prudent.

The important thing with regard to this market is that although we may gain share, we are going to be very cautious in how we lend. And certainly when we look at the marketplace, we realize that many of the larger property owners are also being cautious as to when in fact they enter this market.

The opportunity to buy at lower pricing levels is certainly going to be in front of us all, and I think we're evidencing some of the people just delaying in their refinancing of portfolio, as well as in their acquisition of new properties.

Thomas Cangemi

I would add going back to the point on spreads, last quarter we closed out 438 basis points above multi-family and CRE. There is always a lag as far as what we have in the pipeline and what we close, but over the past four quarters of spreads that we actually booked to the balance that are much higher.

So we're seeing those types of levels going into Q2, and as the pressure was indicated, our pipeline is up 40% over the significantly lower pipeline that we recorded in January from the last release. So we'll see this continuation of increased spreads, and obviously competition has [waned] dramatically.

Andrew Wessel - JPMorgan

Great, thanks. And one follow-up, if we can have any comments around the legislation currently in front of the state assembly in regards to rent control, any thoughts on valuation or how that's going to affect either your in-place portfolio or how you look at loans going forward if any of that was picked back?

Joseph Ficalora

I think the important thing is what you just said in the end. The reality is there has been proposals year after year after year that would be detrimental to the real estate markets in New York. These proposals as in fact they have been passed by the assembly are not good for New York real estate or for tax revenues or whatever, in the City of New York.

The bottom line is, I think that there are enough people in the Senate who recognize that these would not be constructive new changes at a time when the New York economy is going to come under pressure, and when the budget in the city and the state is under pressure. So I do think that the Senate will ultimately ensure that none of the bills as in fact proposed by the assembly will be passed.

Operator

Thank you. And next we'll go to the side of Gary Gordon with Portales Partners.

Gary Gordon - Portales Partners

Okay, thank you, two questions. One is obviously you've had conservative underwriting standards overtime, considering the change in the market, have you changed your own standards in light of where the real estate prices or rent may be going?

Joseph Ficalora

No, I think the important thing is we've tried to be consistent over the course of decades. The business model that we're following here and the way we lend, basically was set back in '93 for the purpose of being prepared to deal with a cycle turn.

We've always been consciously aware that there would be a credit cycle turn, and real estate values would deteriorate. So we do believe that the bulk of our loans are well structured and will conservatively get through this cycle.

Having said that there is always inevitably going to be some loans that are in our portfolio that will not perform as expected. We believe that number is extraordinarily small given the size of our portfolio and certainly manageable.

Gary Gordon - Portales Partners

Okay, great. Two, you've got about $4 billion of agency mortgage-backed with the government making a pretty strong bid for those assets. There are thoughts about selling some of the portfolio effectively to the government?

Thomas Cangemi

Gary, its Thomas. With respect to the portfolio, we've been challenged as far as keeping it at a very nice level. We've come from a very significant amount of securities-backed in 2003, now we're hovering around 17%. Therefore, the focus has been ranging between 15% to 19%, keeping it under 20%. The challenge has been as you indicated a lot of that being brought back by the government.

And with that being said, the yields in the marketplace are extremely low. Our focus is to therefore, keep securities portfolio now at levels that now a more collateral purposes. So we've been managing it for collateral, we haven't been selling, we've been just enjoying nice yields from the portfolio that season.

However, we do expect significant cash flow from our securities portfolio with the expectations that our pipeline and loans will climb dramatically in the out years. We're expecting to see the portfolio grow, we're expecting to see our margins grow as well, so we put on loans, as well as the fact that our corporate funds will be dropping.

But looking at the pipeline going forward, we're going to utilize this cash flow to put on good solid multi-family credit.

Gary Gordon - Portales Partners

Okay. So I think as you said, then you will see some shrinkage in the [ordered facts] in order to grow the loan portfolio?

Thomas Cangemi

No need to back it, absolutely. Obviously there is a lot of cash flow out there, a lot of people are refinancing, we do have a lot of agency debentures and that's also been coming back to us very rapidly as expected but we do expect to see the loan growth.

So in reality, could we keep the portfolio at this level for a few quarters? Possibly. The range is going to be between 15% to 19%, we don't have them going above that 19% levels.

Operator

And next question we'll go to the side of Tom Alonso with Fox-Pitt Kelton. Your line is open, please go ahead.

Tom Alonso - Fox-Pitt Kelton

Good morning guys. I missed the number you gave on Mark's question about NPA's. You said 42% of total NPA, non-performing loans was multi-family?

Thomas Cangemi

Tom, 42% of the total non-performing assets was multi-family, so $76 million of the $176 million.

Tom Alonso - Fox-Pitt Kelton

Perfect. Okay, thanks. And then on the prepays, just your sense of maybe what it's going to take to get that turned around to maybe shake some people off the sidelines?

Joseph Ficalora

I think it's kind of like it's building behind a dam. There is no question that we're getting a lot of reload in the prepay, even though that we're not getting prepayment, a lot of the loans that we have are virtually going to a 5, 4, 3, 2, 1 prepay that will come in the period ahead. The important thing for us to recognize is that we're not refinancing our portfolio, anything near normal, and that's mainly because people are waiting for better circumstances which they clearly can see on the horizon.

And as you might expect, better circumstances for the people I'm talking about would be deterioration in real estate values in the New York market. The people that are in our portfolio during a credit-cycle turn typically have fully performing assets and have the necessary cash flow refinancing their performing assets to buy at deep discount other assets that become available in the market.

Thomas Cangemi

Tom, its Tom. I would tell you that we're budgeting very little expectations, so we still feel very confident that our margin will continue to increase. We're hopeful that we'll see 3% hopefully in Q2 which was nowhere in there now. And the reality is if you look at last year, we were $15 million in Q1 versus $1.2 million this quarter. So this is at lowest, we hope this is the lowest it can get. These are very nominal numbers, so we're budgeting very low numbers going forward. Hopefully, this is close to the bottom on prepays and we'll see some nice benefit going forward, but into 2010.

Joseph Ficalora

And I think we may have just experienced the bottom. I can't imagine that it could ever be lower than the number it is, I could easily say to you that there is good reason to believe it is the lowest that we're likely to see.

The fact is that on a go-forward basis, the contribution from prepay should ultimately accelerate. The fact that it has delayed has had a damping effect on some of our yield and in some of our earnings, but ultimately it can't be denied.

Tom Alonso - Fox-Pitt Kelton

Okay, great. And then if I could just get one more, on the expenses I know you guys mentioned that you've been trying to hold the line. Any kind of color you can give in terms of a run rate?

Thomas Cangemi

Yeah, Tom, I would tell you that obviously efficiency ratio is very low compared to the industry. The big cost at this particular quarter with [all banks] has been the FDIC assessment. We have had an uptick on pension costs because of the change in the market value of the obligation.

We're still over-funded in the pension plan, so we're comfortable there, but I guess to say going forward you're going to have an uptick next quarter on FDIC premiums in addition to we had in the first quarter, just for averaging basis I would use approximately $87 million on average per quarter.

So we're going to see a little bump up in Q2 driven by FDIC, but on average I'd say about $87 million if you want to run that for the whole year, which is a total approximately (inaudible) for the year.

Operator

And we'll go next to the side of [Theodore Kovaleff with Broad Street].

Theodore Kovaleff - Broad Street

Question for you with regard to the fact that you declined TARP, and I am wondering whether regulators might hold this against you in any assisted acquisition?

Joseph Ficalora

I have no indication that that would be the case. It would certainly be irrational for the regulators to do that. The regulator wants to create the most stable banking environment they possibly can create, and I would expect that the absence of TARP would have no bearing at all on their willingness to participate with a particular institution in creating a better, safer bank.

Thomas Cangemi

Ted, it's Tom. We work actively with the regulators on opportunities throughout the country. And I will tell you that it is very competitive, and we're looking at everything. However, in the event we do find institutions that have TARP funds, you would assume that we would look to pay that off as part of a transaction.

Operator

Thank you. And next we'll go to the side of Matthew Clark with KBW.

Matthew Clark - KBW

Can you give us the 30 days to 89 days past due number, please?

Joseph Ficalora

Yeah, we're looking at as far as going in to this quarter Q1; we're approximately $200 million for 30 days to 89 days.

Matthew Clark - KBW

Okay. And is it possible that we could see more significant reserve building here, if we see further increases in non-accruals, despite your expectation for limited loss? I guess similar to what we saw last cycle?

Joseph Ficalora

I think the important thing to recognize with regard to reserve is the adequacy of the reserve to meet the charges and I think we have tried in a variety of ways to articulate the differences between our non-performing 30 days, 89 days and our actual charges against the reserve.

When you go back to for example to the last cycle, in the last cycle we had 248 basis points in non-performing and zero charges for the whole year. In this cycle, we are seeing some of the weaker loans that are in the portfolio, and there is a variety of ways in which these loans have been created, show signs of weakness early. So, we are going to have some of the weaker loans [fall out] of the portfolio very early in the cycle. We still have very strong confidence that the portfolio as a whole will greatly perform.

The metric which you should think about is the one that we gave earlier, the comparison of what our portfolio reserve represents. When you think about the fact that some banks are charging off against their reserve, 85%, 95% of their reserve and then replenishing it and increasing it and other banks are charging off on an average, what represents nearly 20% of their reserve. We're charging off something close to 5%.

So the actual charges against the reserve would suggest that our reserve has viability significantly greater than that of the industry as a whole. Now having said that, we have demonstrated a willingness to add to the reserve and we did add $6 million this quarter, and we are likely to add additional amount in each of the quarters ahead, but we believe that we can mange the amount of money that we need to put in to the reserve, so as to continue to see the strong earnings that we have been demonstrating.

Thomas Cangemi

Matt, it's Tom. I would also add, if you look at the quarter's charge-off, as Joe indicated on his opening discussion points, we had zero charges related to any multi-family and our CRE loans originate by the bank, which is the vast majority of our portfolio. All of the acquired assets in the C&I bookings is a stuff that fairly seasoned and what is left is de minimis compared to the entire balance sheet.

Matthew Clark - KBW

Okay, great. Can you just talk about how much in the way of extensions you are seeing in the second phase of the multi-family product? And whether or not we're seeing any of that? I believe you guys do get a point on that role. I'm just curious if we are seeing any of that in loan yield today and if there is an opportunity for that going forward?

Joseph Ficalora

I think the good news is that that opportunity represents an immediate reloading of prepayments, so when people go in to year six, and historically that has not been the case, but here we are seeing some people go in to year six. Their prepayment penalty immediately goes in that year to five points, and then it's five, four, three, two and one.

So, we are not giving them any new dollars, but they, in fact, potentially giving us significant benefit, because they are paying a point upfront, they are paying at rate no lower than the rate that they were paying, and they in fact are likely to be paying us more in the immediate period ahead, remembering that when they get in to year five, their prepayment penalty is only one point.

We have now had the opportunity to increase as this cycle evolves; the good loans in our portfolio are going to refinance in order to take advantage of the evolving credit cycle. The evolving credit cycle will present discounted opportunities to buy real estate. The good property owners, many of whom are in our portfolio, will be in a position to do that and when they do that, because they are getting an asset at a deep discount, paying a three point or four point prepayment penalty to us doesn't become a problem.

Operator

We'll go next to the side of Thomas Kahn with Kahn Brothers.

Thomas Kahn - Kahn Brothers

Hi. If the decision on the Tishman Speyer, Peter Cooper, Stuyvesant Town J-51 matter is upheld in appeal, what effect would that have on you folks in terms of a properties that have availed themselves of J-51, but may have increased their rents and they may have to give refunds and may not be able to increase going…

Joseph Ficalora

I think, Tom, the important thing to recognize here is that at least from the lawyers that we have talked to, under the law with the amicus filing that were made by the city or state agencies, it seems highly improbable that something, which has existed for the last 17 years, 18 years would be overturned by this action. So the likelihood that it goes the other way seems to be a very prudent thing to consider.

However, with J-51's we never calculate the property using the J-51 benefit that they are deriving. So when we calculate the actual cash flow on the property, we're not using the benefit of J-51.

However again depending on how the ultimate outcome is determined, if the cash flows of the property are decreased to whatever extent that would impact and we believe it's a relatively small amount of our portfolio to whatever extent that would impact a particular property, that could cause pressure until such time that the J-51 expires.

So for example, we have properties that had J-51 in place the day we did the loan, and two years or three years later it was gone. We had properties that had J-51 in place for long periods before we did the loan, and there is only one or two years that's left in it. And we have other properties that may have J-51's in place. Importantly, we do not calculate the carry on the property with the J-51 numbers.

Operator

And next we'll go to the side of Greg Ketron with Citigroup.

Greg Ketron - Citigroup

Good morning, guys, thanks for taking my questions. I had one about the pipeline, I know Joe you talked about the pipeline saying $850 million or $900 million this quarter versus maybe $1.5 billion in the past quarter. And maybe with the trends that you've seen in March, maybe into April, where do you think the pipeline could approach? If we could get back to that $1.5 billion type level?

Joseph Ficalora

I think the good news is that as we go down the road, we expect the opportunity to do good lending to increase. That may sound counterintuitive because a lot of people are looking at losses and significant concerns about commercial properties and multi-family properties.

Remember that during the last cycle, multi-family properties virtually destroyed (inaudible) American greater dollar. It's important to recognize that in a very, very difficult period, we in fact were lending more money on fully performing assets.

We would expect that as this period evolves, we're going to have the opportunity to lend more money. We're virtually in a unique period where everything is slowed down, and I think everybody recognizes that the events that are circulating around us are extraordinary, and people are rethinking their jobs, their investments, what they are going to do with real estate.

Investors in real estate in the New York market have reason for pause, that doesn't mean that they are going to leave the market entirely. The good investors will be buying properties at discounted prices in the future period.

Greg Ketron - Citigroup

Okay.

Joseph Ficalora

And by the way, just so I can reiterate. We did in fact close $666 million. That was above the pipeline that we had projected for the first quarter, and of course the existing pipeline is significantly above that number. And as we go quarter-by-quarter beyond that, we would likewise expect that we would be seeing increases in the loans that we would be [closing].

Greg Ketron - Citigroup

Okay. In other pricing you alluded to five-year CMT plus over 400 basis points. Does that put yield at about 6%?

Joseph Ficalora

It puts close to that, that's right.

Greg Ketron - Citigroup

Okay. And do you know the roll off yield?

Joseph Ficalora

It varies.

Thomas Cangemi

But currently current roll off yield is crossing 558, 560.

Greg Ketron - Citigroup

Okay. And then if I could ask one last question on the NPL formation, are you seeing any trends, any particular situations that's kind of becoming a theme on the NPL build or on the increase in early-stage delinquencies?

Joseph Ficalora

No, not really. The interesting thing there is that when you consider non-performing loans, you need to realize that more so in a portfolio such as ours, it's the unique circumstance of that particular property owner, and that particular property. So we have a significant uptick in 30-day non-performing.

That's not the same as a 1,000 homeowner, not making their payments and likely to as lost their job or otherwise evolve into a significant loss for the company. It could be a relatively small number of properties that wind up for one reason or another not making a payment, but otherwise will in fact resolve favorably with the existing property owner because the inherent value of the property hasn't been lost.

The existing property owner in many cases will rectify their inability to pay slow one or two months. And in other cases because of the way we've underwritten the loan, our actual loss is even at disposition of the property, may be substantially lower or non-existent. We've had numerous cases where a property has gone into non-performing, evolved into or actually disposing of the property, and we get back all of our interest and all of our principle.

So the important thing to recognize is that the industry numbers are not our numbers, and it's not an easy thing to try and make those comparisons. But the reality is when you look at our portfolio, it has a long track record of greatly outperforming even when there is slow payments, we wind up getting an increase ultimately in the value derived from either the disposition of the property or even the refinancing of the property under favorable terms.

Thomas Cangemi

Greg, its Tom. I would just add also going back to any trends. If you look at your CRE book, significantly low. We have about a $4.6 billion CRE book with $25 million NPA. So we're very pleased on the performance of that portfolio.

Greg Ketron - Citigroup

Okay. It sounds like an early-stage delinquencies. You guys expect CRE of those to be substantially higher than we may see in the situation?

Joseph Ficalora

I think that is a very, very reasonable assessment. Given that in most non-performing portfolios, the amount of loss is five or ten times our loss. The ability to cure a evolving non-performing portfolio is very different for most of the industry than it is for us.

Operator

And next we'll go to the side of James Abbott with FBR Capital Markets.

James Abbott - FBR Capital Markets

Couple of questions on the non-performing assets just leading off that last question. Take us through the process, when a loan moves to non-accrual status, tell us little bit about how you process that loan? I generally understand how it works but I wanted to understand a little bit more precisely how you do it.

Joseph Ficalora

I think when a loan goes into non-performing or maybe even before it goes in to non-performing, we have people that are typically discussing with the property owner the current circumstance for that particular property owner's decision not to make a payment. In that sense it sometimes is after the fact, the guy doesn't make his 30-day payment, but often it's before.

So there could be a variety of reasons why an individual property owner is not making the payments on his property. We will treat each and every property uniquely because the circumstances in many, many, many cases are distinguishable, and therefore deserve direct intervention by the appropriate people at the bank to determine what it is that we are dealing with and how we best can resolve the issue.

James Abbott - FBR Capital Markets

And when do you get a new appraisal?

Joseph Ficalora

We get the new appraisal as soon as it goes in to non-accrual, because there are rules that are followed that allow for us to assess what we are dealing with. In some cases it's very evident, in other cases it's not evident for may be even some time, but the process of getting appraisals or financials is one, in fact, which we follow pretty consistently.

James Abbott - FBR Capital Markets

Okay. So tell us, if you can, as you have seen a lot of appraisals come in on these new non-performers, what are you seeing in terms of the value depreciation?

Joseph Ficalora

This would be dependent upon, which property it is. There are all kinds of properties that are affected, and some of them are appraised at values that are substantially above where we are. And others are appraised at values that suggest that there has been deterioration in the value, and maybe even put us in jeopardy. That's how we wind up with the taking of reserves.

Thomas Cangemi

I would add with respect to our total non-performing assets and the appraised value, the appraised value is substantially higher than the current [loan balance].

James Abbott - FBR Capital Markets

Yeah, I understand that. I was just trying to understand versus the original appraisal.

Thomas Cangemi

Just trying to give you some color there.

James Abbott - FBR Capital Markets

No, I appreciate that. I was just trying to understand, let's say original loan was put on in 2006. What would be the approximate price depreciation that you would have seen?

Joseph Ficalora

Yeah, Jim it's very hard to say that. In other words, there are not enough of them to say these are the approximate numbers across the board. The values of individual properties are uniquely tied to their cash flows. Their full appraisal decides their value. So when in fact a property doesn't make a payment, it's yet another appraisal that's going to decide their appropriate value at that moment in time. There are no averages that I can give you that would be relevant.

James Abbott - FBR Capital Markets

Okay. And then the other question on a related note, and then I'll hop off, is the non-performers, some of them been there, perhaps for a little while, six months or longer. When do you reappraise those loans at that point?

Joseph Ficalora

They are reappraised early in the process. For example, we may have added another house loan. The timing with regards to multi-family and house loans is very different. It could take a fairly long time to get a one to four family property, but I would be pretty quick with regard to a multi-family or commercial properties.

Thomas Cangemi

I guess, the question is do we have a second appraisal? We haven't had that situation because we don't typically have a lot of NPAs.

James Abbott - FBR Capital Markets

Right.

Thomas Cangemi

It is difficult selling it right now in this environment because of market conditions, but we haven't had a situation where we had NPAs to multiple years on the same credit.

James Abbott - FBR Capital Markets

Are you seeing a lot of NPAs then moving out of the non-performing they are being resolved actively?

Joseph Ficalora

Yeah, that's a pretty consistent effect of our handling of our portfolios. We see change in our portfolio quarter-by-quarter. Every single quarter there are properties that resolve, and there are new properties that come in. So even when the number goes up, it doesn't mean that no one resolved, it means that there is a change reflecting the additions and the subtractions. So, it's not as though people go in to non-performing and stay there until final resolution and disposition, in many cases in our portfolio, there is a one or two or even a three-payment, non-payment ultimately resolved.

Thomas Cangemi

That will go to the point as far as to REO. We only have 1.4 million in REO. So obviously we are not foreclosing these properties. Take a while, due to foreclosure, we're not seeing that yet.

James Abbott - FBR Capital Markets

Okay. So there were a lot of loans that were resolved in the quarter, but just even more that…

Joseph Ficalora

Yeah. That's what happens from quarter-to-quarter. And again, Jim, without going in to specific loans, we have some large loans. So a number can change dramatically because a large loan goes in to non-performing. When that loan resolves, there will be another positive change, or if that loan holds for an extended period of time, we could wind up carrying one loan with an ultimate disposition that we already accounted for, and once it is resolved that is also out of the non-performing portfolio.

Thomas Cangemi

And an encouraging note here that for the first quarter 2009, we had zero charge-offs for multi-family and CRE originated by the bank.

Operator

Next, we'll go to the side of David Darst with FTN Equity.

David Darst - FTN Equity

Joe, could you give us the balance of the loans that you consider to be non-organic, or those that were acquired?

Joseph Ficalora

It's relatively small, but I don't know exactly what it is. Clearly 71% of our portfolio is multi-family, and the bulk of that is within our niche, 21% is commercial, again, the bulk of that is within our niche. And then there were other loans that were either generated by others for whatever reasons not within our niche play, and that's a relatively small number. When I say small, small compared to the portfolio, it is certainly tens of millions of dollars, but I just don't know exactly what that number is.

Thomas Cangemi

Just to give you some color on our Commercial Bank, which is obviously a lot of that hasn't acquired. Our total non-accrual there, including 30 days to 89 days is about [$14] million, which is a very small amount of loans.

David Darst - FTN Equity

Okay. It looks like you have given us the multi-family non-performing loans of $76 million CRE of $25 million.

Thomas Cangemi

That's right.

David Darst - FTN Equity

So, the remaining NPLs, close to $75 million are attributed to…

Thomas Cangemi

Our construction is $45 million, our one to four to small [$13] million. Again it is spread out towards the category, the largest being multi-family at 43%, construction at 25%, and CRE at 14%.

Operator

Next, we'll go to the side of Matthew Kelley with Stern.

Matthew Kelley - Stern

Hi. Can we go back to the subject of reserves? I know that you mentioned how this business has migrated through cycles. I mean, if you go back to 1994, for yourselves, you guys had reserve coverage on your multi-family portfolio of about 111 basis points.

Joseph Ficalora

Right.

Matthew Kelley - Stern

According to the most recent 10-K, that's 28 basis points today. So, I guess the question is what makes you feel comfortable having a quarter of the reserve levels, as we head in to the cycle this time compared to the early '90s.

Joseph Ficalora

Yeah, I think it is important if we go back to 1994 that you look at how much we charged against that reserve. That reserve was suggested by the people who were taking us public. So, we set up a significant reserve even though we had de minimis charges against our reserve. In 1996, we had to recapture $2 million from our reserve. In 1998, we recaptured another $2 million from our reserve. There are too many banks that set up reserves and have to recapture from them.

The fact is that the comparison you are making has no relevance to our perception of risk. As we became a public company, we in fact increased our reserves for the perception that you are touching upon, the perception of the market was that banks were losing huge amounts of money.

I think in our initial conversations with the Street, we had 111 years worth of reserve coverage at the time that we did that. So obviously, it was a significant positive that we had such a huge reserve, but also it was evident that we didn't need that reserve, and certainly it has no bearing on where we are today.

We believe that the numbers that we've shared with you suggest that we have significantly greater coverage in our reserve than the industry as a whole, and for that matter most of the banks that you cover.

Our reserve based on the charges against our reserve is substantially greater than the reserve at almost all of the banks that are in our marketplace, and certainly many of the banks throughout the country.

Matthew Kelley - Stern

Okay. And then is there any discrepancy between the non-accrual rates in your $16 billion multi-family portfolio between loans that have collateral, that are regulated versus market rents?

Joseph Ficalora

I don't think there is anything such as that. There is no reason for that to be, and certainly I don't think there is any evidence for that.

Matthew Kelley - Stern

Okay. And how does that portfolio split between rent-regulated assets versus market-rent assets on the $16 billion multi-family?

Joseph Ficalora

I'd say that the vast majority, we don't have an exact number, but the vast majority of our loans are written against what we call below-market rents, meaning that even if a relatively small percentage of the units are rent controlled or rent stabilized evenly at markets when you take the full rent roll into consideration, it's below the market.

So that is just the way we lend. It's very consistent no matter what market we're in. There are markets that we've lent in outside of New York, but there is no rent control or rent stabilization. And even there an important component of our willingness to lend is that the rent roll is below the market.

Our desire and our focus has always been on dealing with a credit cycle term, so we want to be below the market with regard to rent rolls so that people within the marketplace during a period of stress are more likely to move into the buildings that we have a loan on, rather than the opposite.

And that's how over the course of stressful periods we've had fully performing multi-family buildings. It doesn't mean we always, always will have that, but certainly it is a component of how we lend.

Matthew Kelley - Stern

Okay. I asked in a different way, I mean how much of the portfolio is actually rent-regulated by the rent guidelines board in New York?

Joseph Ficalora

We don't actually have that number. It's a fairly large, but we don't know that number.

Thomas Cangemi

And Matt, I'll share with you that. 3.7% of our entire multi-fully is outside of our market. Almost 97% of all our loans are in our backyard.

Matthew Kelley - Stern

Okay, alright. Getting back to a question earlier about your thoughts on what pricing could do in this asset class with [NOI] down, rents down, and cap rates way up, what do you think we're going to see for price declines for multi-family buildings in metro New York?

Joseph Ficalora

You touched upon a few of the reasons why there will be price declines but there will be even more reasons than that. There is going to be a significant movement in real estate due to the extraordinary excesses that occurred during the preceding cycle. We've been in a very long robust cycle where in many loans were made that are totally irrational. They can't possibly be repaid, and those loans are going to default.

So there is going to be a large influx of rental properties coming into the market, and that will of course cause depreciation in values. The ones that were handled properly, the ones that were virtually, good property owners making rational decisions and getting rational loans, they are going to continue to perform. The guys that were excessive, they are going to default.

The opportunity for us is that we have the good owners likely to not only refinance but also to take new loans on those opportunities.

Thomas Cangemi

No matter, I would expect to see the CMBS market a crack here and most likely as Joe indicated, there is a lot of liquidity on the sidelines, a lot of pent-up cash flows in our portfolio. For example, we have very low LTV despite any devaluation in the marketplace. They utilize their [potential] value to buy distressed real estate with CMBS.

Matthew Kelley - Stern

Right. But any guess at the percentage decline for the asset class regardless of who provided the financing, whether it was on balance sheet banks or securitization?

Thomas Cangemi

I will tell you that he has probably spend most of your time looking at the CMBS market, and that's where a lot of the mistakes were made.

Joseph Ficalora

The bigger properties would be the more likely ones to be defaulting here. And mainly because the bigger properties were attractive, structured debt lenders went for the bigger properties.

Matthew Kelley - Stern

Right. So, you don't see any collateral damage for you guys then as those are large two or three refinancing…

Joseph Ficalora

There will be very little damage to our niche, very little damage because as I've said when the city had 12% unemployment, when real estate values fell off of the table, when vacancies were extremely high, our niche was fully performing refinancing and buying. So that is reasonable for us to expect.

Outside of our niche, there will be losses. That's what we have been taking. We have been taking losses outside of our niche. If you take 71% and 21%, representing our niche, that's 92% of our loans. I think that's a pretty comparatively strong number, against other banks that have been lending all over the country or lending in a variety of ways that differ from the niche that they may have been very good at. A lot of people in this positive cycle went outside of their market, went outside of what they were comfortable with and do some things that ultimately hurt.

Matthew Kelley - Stern

Okay. Just last question, the doubling of the past dues, where did that really occurs? $103 million at the end of the year, and went to $200 million, what is the composition of that growth?

Thomas Cangemi

I would say it is consistent. Multi-family is around 40%. That's been consistent with the actual non-performing asset levels throughout the board.

Matthew Kelley - Stern

Okay.

Thomas Cangemi

Obviously, the encouraging note there, construction is relatively flat.

Matthew Kelley - Stern

Okay. And if I could just ask one more on the $4.6 billion commercial real estate, how much of that is backed by some form of multi-family?

Thomas Cangemi

I would tell you that a lot of that is 1031 and issues, and it's very encouraging to see that we had zero charge-offs in that book. It's a very interesting statistic. Our (inaudible) extremely low. We don't give out the percentage of that by mixed use. We're very encouraged by the trends on CRE. Zero charge-off in a few quarters.

Matthew Kelley - Stern

Right.

Thomas Cangemi

And we're very encouraging by the current trends and the overall NPA levels are very low as well.

Joseph Ficalora

Matt, we can certainly spend more time talking to you offline, but that is your forth question and we should move on to the next caller…

Operator

I will move next to the side of Christopher Nolan with Maxim Group.

Christopher Nolan - Maxim Group

Quick question, since a large portion of your portfolio is rent-stabilized multi-family housing and given that the rent increases from year-to-year are mandated by the government.

Joseph Ficalora

Right.

Christopher Nolan - Maxim Group

What do you take in to your modeling in terms of projecting forward cash flows for a property? Do you take that mandated rent increase assuming that the property owner will be getting that full increase from year-to-year?

Joseph Ficalora

Yeah, the interesting thing is, the mandated increases are very, very difficult to know because it has got to do with the taxes, it has got to do with the cost of oil, it has got to do with the ultimate market conditions. They are always very low. That's why rent controls or rent-stabilized buildings have much lower rents. They go up very slowly, and the only differential comes from improvements to the property where in the actual tenant agrees to an increase in rents. That's definitely is a positive, but something you can't really assess. So we don't really go there.

Thomas Cangemi

We typically underwrite on a current cash flow. On very rare circumstances, we'll deal with property owners that have a home owner's plan that's started by their tenants, but typically most of our loans are underwritten based on the current rent volume coming in to the cash flow when you evaluate the transaction.

Christopher Nolan - Maxim Group

Great. And a follow-up question is for the rising NPAs within the multi-family portfolio, what is the source of distress here? Is it cash flow from operations? From an ongoing property? Is it refinancing problems?

Joseph Ficalora

No, I think it's again, unique to the individual property. I don't want to go in to specifics on individuals, but the reality is, that a property owner may have more than one property. He may have a need that drives him to make a payment elsewhere, where he has a deficiency, and make a slow payment, let's say to us. So it's a mix of issues and I think that case-by-case, it will be resolved. There are some cases where multi-family is pretty consistent, but there are other loans where there could be loss of tenancy on a commercial property or otherwise.

Thomas Cangemi

I would add when you are starting close zero, I mean if you look at the portfolio of $15.9 billion of multi-family loans on the balance sheet, and you had a $76 million total non-performing base, and in this environment, we are very (inaudible) levels and again, it looks like an increase, but you are starting with such a low base, so we're very pleased on the current results, and also we'll see the trends of the delinquencies. There are uptick here, but relevant to the size of the portfolio and in this type of economic climate, we are very pleased on our performance.

Operator

And that's all the time we have for questions today. I will turn the floor back over to Mr. Ficalora for closing remarks.

Joseph Ficalora

Thank you so much. On behalf of our Board and our Management team, I thank you for the opportunity to discuss our solid quarter 2009 performance, and the continued strength of our balance sheet. Thank you, and good bye.

Operator

Thank you. This does conclude today's New York Community Bancorp's first quarter 2009 earnings conference call. Please disconnect your lines at this time, and have a wonderful day.

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Source: New York Community Bancorp Inc.Q1 2009 Earnings Call Transcript
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