New York Community Bancorp Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.23.13 | About: New York (NYCB)

New York Community Bancorp (NYSE:NYCB)

Q3 2013 Earnings Call

October 23, 2013 9:30 am ET

Executives

Joseph R. Ficalora - Chief Executive Officer, President, Director, Chief Executive Officer of New York Commercial Bank, Chief Executive Officer of New York Community Bank, President of New York Community Bank, President of New York Commercial Bank, Director of New York Community Bank and Director of New York Commercial Bank

Thomas Robert Cangemi - Chief Financial Officer, Senior Executive Vice President, Chief Financial Officer of New York Community Bank, Chief Financial Officer of New York Commercial Bank, Senior Executive Vice President of the New York Community Bank and Senior Executive Vice President of the Commercial Bank

Analysts

Ken A. Zerbe - Morgan Stanley, Research Division

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

David S. Hochstim - The Buckingham Research Group Incorporated

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Josh Levin - Citigroup Inc, Research Division

Bradley G. Ball - Evercore Partners Inc., Research Division

David Rochester - Deutsche Bank AG, Research Division

Karti Bhatt

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

Operator

Good morning, and thank you for joining the management team of New York Community Bancorp for its Quarterly Post Earnings Release Conference Call. Leading today's discussion of the company's third quarter 2013 earnings will be President and Chief Executive Officer, Joseph Ficalora; together with Chief Financial Officer, Thomas Cangemi. Also joining in on the call are Chief Operating Officer, Robert Wann; and Chief Accounting Officer, John Pinto.

Certain of the comments made in the company's management call will contain forward-looking statements, which are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those that the company currently anticipates due to the number of factors, many of which are beyond its control. Among the factors are: general economic conditions and trends, both nationally and at the company's local markets; changes in the interest rates, which may affect the company's net income, prepayment penalty income, mortgage banking income and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposit, loan and investment products and other financial services; and changes in legislation, regulation and policies.

You'll find more about the risk factors associated with the company's forward-looking statements beginning on Page 6 of this morning's earnings release and in the SEC filings, including its 2012 Annual Report on Form 10-K and its quarterly reports on Form 10-Q for the 3 months ended March 31 and June 30, 2013. The release will also include reconciliations of certain GAAP and non-GAAP earnings and capital measures, which will be discussed during this conference call. If you'd like a copy of the earnings release, please call the company's Investor Relations department at (516) 683-4420 or visit ir.mynycb.com.

[Operator Instructions] To start the discussion, I will now turn the call over to Mr. Ficalora, who will provide brief overview of the company's third quarter performance before opening the line for Q&A. Mr. Ficalora?

Joseph R. Ficalora

Thank you, Steve, and thank you all for joining us this morning as we discuss our third quarter performance, which demonstrated the merits of our core business model, producing multi-family loans on rent-regulated buildings in New York City and adhering to credit standards that support our asset quality. Exceeding the record pipeline we announced going into the quarter, we originated $3.4 billion of loans held for investment, including $2.6 billion of multi-family loans. This was the largest volume of multi-family loans we've produced in a single quarter. In a lending niche, we've been calling our own for more than 40 years.

In contrast to the residential housing market, where loan demand has significantly fallen, the demand for multi-family loans has been strong throughout this year. The increase in demand and production has largely been driven by an increase in property transactions as the economic environment in the Metro New York marketplace continues to be very robust. This in turn has given rise to a solid stream of prepayment penalty income as reflected in the levels we've recorded to date in 2013. In fact, prepayment penalty income accounted for $39.6 million of interest income on loans we recorded in the current third quarter, not all that far behind, the record $44.4 million we recorded in the trailing 3 months. For the first 3 months of this year, by the way, we are ahead of last year's record production of prepayment income. Reflecting the contribution of prepayment penalty income to the average yield on our interest earning assets, prepays accounted for 41 basis points of our current third quarter margin, which was 3.04%.

The contribution of prepays has been especially important given the steady decline in mortgage banking income over the course of this year. With rate-lock volume falling 50% on a linked-quarter basis, mortgage banking income fell 30.2% sequentially to $16.2 million in the third quarter of 2013. These declines are consistent with those of other banks with mortgage banking operations and not at all unique to NYCB Mortgage Company.

Notwithstanding the decline in mortgage banking income, we generated solid earnings in the third quarter of 2013. We attribute this primarily to our core business of multi-family lending and to the interest income we produced through these and our other held for investment loans. In fact, we generated GAAP earnings of $114.2 million or $0.26 per diluted share in the current third quarter, which provided a 1.11% return on average tangible assets and a 14.86% return on average tangible stockholders' equity. The benefit of our traditional lending niche can also be seen in the growth of our assets, which rose to $45.8 billion at the end of September from $44.2 billion at the end of June. Notwithstanding a dramatic decline in held for sale loans to $281.3 million, the balance of outstanding loans rose $513.4 million sequentially to $32.4 billion, driven by a $1.1 billion linked-quarter rise in held for investment loans. At $29.2 billion, held for investment loans were up 4% from the June 30 balance and 6.9% from the balance recorded at year end 2012.

Looking ahead, our pipeline loans is just about $3 billion, with loans held for investment accounting for approximately $2.5 billion or 82% of that number. We also increased our securities over the course of the quarter, consistent with the intentions we mentioned at our last conference call. At the end of September, securities represented $7.1 billion or 15.5% of total assets, up from $5.9 billion, representing 13.4% of total assets at the end of June.

The securities we put on our balance sheet consisted entirely of GSE obligations, which represent 94.6% of total securities at quarter end. In connection with the linked-quarter growth of our interest-earning assets, our balance of wholesale borrowings rose to $14.2 billion from $12.6 billion at the end of June. The quarter was also notable for the quality of our assets with measurable decline in the balance of nonperforming loans, ORE and loans 30 to 89 days delinquent and a parallel improvement in our measures of asset quality. Nonperforming, non-covered loans represented 0.43% of total non-covered loans at the end of September, in contrast to 0.60% at the trailing quarter end. Similarly, the ratio of nonperforming, non-covered assets to total non-covered assets improved to 0.46% in the quarter, a contrast to the 0.61% at the end of June.

Meanwhile, the balance of past due loans fell $29.8 million sequentially to $9.9 million, reflecting a linked-quarter decline of 70.6%. The improvements in asset quality also extended to net charge-offs which at $4.4 million represented 0.01% non-annualized of average loans.

Reflecting the strength of our earnings and the consistent strength of our capital position, the Board of Directors last night declared for the 39th consecutive quarter, a quarterly cash dividend of 0.25 cents per diluted share. The dividend will be paid on November 19 to shareholders of record at the close of business on November 7, 2013.

This concludes my prepared remarks, so I would ask the operator to open the line for our questions. As always, we will do our best to get to everybody in the time that remains. David?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Ken Zerbe from Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

Tom, I was actually hoping you can sort of answer a 2-part question. I guess, first of all, what are you seeing in terms of credit spreads or yields on the CRE portfolio just given that we have seen a pullback in rates. And sort of how's that changed versus just a quarter ago? And I guess the second part of the question is given what we're seeing with the rates, could you update us or comment on NIM compression or your outlook for NIM over the course of the next 12 months or so?

Thomas Robert Cangemi

Sure, Ken. So I guess big picture, we had a -- I'd say a reasonably good closing quarter in respect to the average yield around 3.30 for the quarter. That drove that margin down as expected around 5 basis points. That was the Q3 actual. If you look at Q4, you have a much -- I would say significantly higher, but a higher yield that's coming on at approximately at 3.70 for that pipeline number that we reported in the press release. That's a higher yield coming on. Again, markets do change the rates to back down but that's what we have committed in the pipeline of 3.7% yield. So that being said, knowing that the new commitments that are coming out as of today, you're looking at around 200 to 250 spread depending on commercial and multi-family, average 225. You're still north of 3%, but there's going to be some pressure with the next pipeline that we thought to rebuild as we get closing of the quarter. So my short data guidance for the quarter will probably going to be around that same level of 4 to 7 basis points quarter-over-quarter. So similar trend that you saw in the Q3 you'll see in Q4. Again, getting very close to that bottom. So, again, maybe expect another 4 to 7 basis points decline in margins going into the end of the year.

Ken A. Zerbe - Morgan Stanley, Research Division

And then any comments on 2014 NIM?

Thomas Robert Cangemi

I'm not going to give you guidance. I will tell you that it feels like, I mean, the big picture on with respect to the coupon for the portfolio, multi-family coupons now at 3.86 as we closed out September. That's a pretty low yield for us. So that's the overall average yield for all of the loans we have in the multi is 3.86 and CRE's around a 4.40. So it comes down materially. So that should give us some stabilization as these rates stay around this level. Now if rates significantly decline, you'll have -- the pick up on the Mortgage Banks will offset some of the continuation of margins going down. But the reality that 250, 260 level here in the 10-year [indiscernible] spread between 5 and 10, you're probably looking at close to that 250-ish level. So we're not that far off there. That's the excluding prepayment activity.

Ken A. Zerbe - Morgan Stanley, Research Division

Got it, okay. And then just one quick question. On the CRE portfolio, I know you have the big loan that ran off last quarter but it looks like balances were still down end of period again this quarter. Any commentary on why the weakness there?

Thomas Robert Cangemi

I don't think it's weakness, we've had significant growth over the past few years. Just thinking over back to the bread-and-butter multi-family business, we're doing a lot of good multi-family loans. As you look at our pipeline, almost 80% of it is all multi-family. So we're very comfortable that -- that's our core business model. We do commercialize that's come along. We're in the commercial real estate market and as we see solid -- credits we do them. So it's not an indication of the marketplace softening, it's just a matter of the multi-family markets being very robust.

Operator

Our next question comes from Collyn Gilbert from KBW.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

So, Tom, just back to the question around rates and kind of your thoughts now. I mean, when the discussion about the bottoming of the sort of the core NIM was going to occur, I think it was the expectation that there would be tapering and the long end would continue to move in an upward direction. So looking now at maybe a core NIM at a 250 to 260 range. In order to keep the earnings momentum going, I would imagine you'd need to offset some of that NIM compression with growth.

Thomas Robert Cangemi

Yes, that's correct. And obviously, we have balance sheet growth and we have, obviously, expense containment. Fourth quarter expenses will be lower than the third quarter. We've rightsized the mortgage banking operation. We'll continue to do so as the things soften. But if rates do go the other way, we're going to be originating a lot more mortgage loans. So I think at the end of the day, here we're close to that bottom. I felt like it was going to happen this year. I still feel like it’s going to happen by the end of this year depending on where rates are. But we have a very strong pipeline as I indicated at 3.70 coupon. We're not writing paper today as 3.70. Cause if you look where the 5-year is, it's a little bit lower there but it's still north of 3%. So that average coupon that did fall quarter-over-quarter 11 basis points for the coupon in the multi-family book is going to start to stabilize. And when that happens, it feels like '14 will be our stabilization. So I'm still calling for close to stabilization by the end of this year. But again, if we go back to levels where we have sub-2% 10-year treasuries and the 5 years below 1%, then we we'll have a mortgage banking [indiscernible] we'll originate a lot of other income for the company to offset some of the pressures.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. But then just in terms of loan growth, I mean, is -- do you think that the actual dollars of loan growth can be higher? And I think you guys are guiding to like high single-digits maybe or low-double digits. I mean, what's your outlook there? And, I guess, my question is maybe some of the other -- some other banks have been talking about that there's been a little bit of a pull through once again on loan activity in these quarters just because of volatility in rates. So, I mean, is this momentum going to continue? And is it real? And could we see 10% to 12% loan growth out of you guys do think next year?

Thomas Robert Cangemi

Absolutely. I mean, if you think about the reality, fourth quarters for us historically are record quarters every year. So we went into the third quarter with a very strong origination stream and a very strong pipeline. We have a similar pipeline coming off of a record amount of closing, but fourth quarter is always an active quarter. In addition to that, if you think about our projected growth that we had for '13, we said we'd grow several high single digits we're there already. So the reality is that we feel very confident that we'll have the high single-digit number for 2013. In any event of a slowdown, for some reason on prepayment, I'm not predicting a slowdown, that means the growth will be significantly higher. So we're assuming reasonable prepays on our assumption and the prepays are kicking in very nicely. And going into '14, we should see similar types of activity and if there was a slowdown in prepay, you'll have more growth -- we'll get paid on the growth versus the prepay.

Operator

Your next question comes from Bob Ramsey from FBR Capital Markets.

Bob Ramsey - FBR Capital Markets & Co., Research Division

I know, Tom, you said that you -- that expenses in the fourth quarter will be below where they were in the third quarter. You all had done some rightsizing in the Mortgage Bank. Just curious how much expense you think can come out of expenses or how to think about that line item.

Thomas Robert Cangemi

I mean, for conservatism, we booked 146 for the third quarter, [indiscernible] huge stay -- but we still have the [Audio Gap] process. Remember, we have a variable aspect to Mortgage Banking. So as the -- and again the numbers around just under 5% of net revenues. So it's not a huge contribution to the gross income stream. When you look at all loans that are based on commission-based business, so there's less variable cost. We took out some fixed costs in late August that was really reflected in the fourth quarter, not so much in the third quarter. I'd say about $3 million, $3.5 million on a linked-quarter basis. And again, FDIC questions start to continue to go down, asset quality improving and we'll be more efficient as we move into the next year.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay, that's helpful. And then you guys obviously did take advantage I'm guessing of higher rates earlier in the quarter. So you can sort of build out the securities book a bit. I'm just curious what the yield is on the securities that you all purchased in this quarter. And how you're thinking about the securities portfolio, what the right size of that is. I guess some of that's got to be rate dependent but how are you thinking about the securities book?

Thomas Robert Cangemi

Yes, we were pretty active in Q2 -- active in Q3 as well as into Q4. We have slowed down since the significant rally. But we're looking at around low 3s into Q3 and probably mid-3s into Q4, and what most of that is committed really before the rate rallies. So we have a decent amount of expected closing the securities that's going to happen in Q4. So we expect the balance sheet to be approximately south of 18%. So high 17 percentage of total assets as of year-end. And depending on market conditions, we look at that going forward. But again, we're still catching up to where we were 2 years ago. We got a lot of runoff from call. As you look at the yields from Q2 to Q3, we had a -- our yields should have been up. We had a lot of securities that were called out at the end of Q2 that contributed to high-yielding securities leaving the balance sheet but I think you'll also get a noticeable increase on the yield on securities quarter-over-quarter, Q4 versus Q3. Higher rate that we're putting on. It will also help the margin, obviously.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay, great. And then, I guess, similar question on the other side of that, being the borrowings were up this quarter. I'm just curious, what sort of the duration of the borrowings that you all have put on and what the cost is on that side?

Thomas Robert Cangemi

Well, as you know, Bob, we expanded just on the $7 billion -- beginning of the year [indiscernible] -- the stuff that we're putting on now and we'll call it somewhat temporary and short term in nature. But the goal in the long term is to replace it with a positive growth over time. Deposit market is very fluid, as you can see many banks are being pretty active on growing the deposit book. We are the lowest rate payer currently. We can easily replace these liabilities that we have with the home loan bank with market deposits in the various markets we serve. So right now it's short term, within 90 days. And the expectation is that as we move out towards more visibility and interest rates, we'll start locking in some deposit funds to replace it.

Operator

Our next question comes from Dave Hochstim from Buckingham Research.

David S. Hochstim - The Buckingham Research Group Incorporated

Could you give us an update on what you're seeing and looking for large accretive acquisition -- you likely to grow over $50 billion before you get there or...

Joseph R. Ficalora

It's always very hard to know that, David. The reality is the marketplace is quite fluid but not necessarily public. There is a lot to be discussed, a lot to be considered and analyzed in many different ways. The environment is quite different today than it might have been 12 or 24 or 36 months ago. The reality is that there will be deals to be done. And certainly, we do, in fact, prepare ourselves. And I think I've said this many times, in this environment, there is a significant amount of regulatory, preparatory work that must be done by every bank. And all deals need to be discussed with regulators before they're discussed with investors. So I think it's important for us to be quietly doing the appropriate things that need to be done in advance of having a meaningful public discussion about the outcome of a highly accretive deal.

David S. Hochstim - The Buckingham Research Group Incorporated

And, Tom, could you give us a breakdown of what happened in mortgage banking -- the components that's gained everything income?

Thomas Robert Cangemi

Sure, David. For the quarter, we had $16.2 million of gross mortgage banking revenue that went to the P&L, of which $10.3 million of that was mortgage servicing. The originations, that was a $5.8 million. Obviously, rates had spiked during the quarter. We had a nice recovery on the MSR value, as well as the write-up of the income stream that's slowed down given prepayment expectations. But right now, it's down approximately 30% quarter-over-quarter. I'm not going to give specific guidance in respect to the mortgage banking business with the fourth quarter other than it's reasonable to say we going to have similar declines quarter-over-quarter. So it's reasonable to say we may be down at the same percentage level, Q3 versus Q4 given the market conditions. But that can change, as you know, very quickly -- being that the swing note rate is just around 4%. If the swing note 30-year rate drops below 4%, let's say, 3.75%, 3.85%, you may see borrowers come back to the market to borrow money as well as refinance. So we do have a barbell strategy here but remember, it's a much smaller strategy this year given that it's only approximately 4.8% of our net revenues.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And then could you just talk a little bit about the competitive environment in multi-family? I mean, you had record originations. What do you think...

Joseph R. Ficalora

I think the consistency of where we are here has been quite compelling. The reality is that there are plenty of new names in the market, but they're not necessarily doing anything close to the volume that had been done by other players who are no longer in the market. And I've mentioned this many times that the structured debt lenders were very aggressive in the marketplace and they are no longer in the marketplace at all. So there's a great deal of product that comes to the market that we, in fact, gain share in. That's why our numbers are up. So despite the fact that others are seeing increases in what they lend in the New York City market, we are also seeing increases in what we lend in the New York City market because of the void created by those that are no longer in the market. So I think it's a very robust market. We do expect to gain share. As we've indicated time and time again quarter after quarter, year after year now, we're gaining share, we're doing more lending and we expect that to continue into the future.

Operator

Our next question comes from Rick Weiss from Boenning.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Just a follow-up on David's question about the multi-family. Is the market itself growing or you're taking more market share from others?

Joseph R. Ficalora

When you think about New York City, there were many, many markets and many, many different kinds of lenders in New York City. In our niche, that market is not growing because we're basically dealing with rent-regulated housing, principally that is rent-controlled although there is other forms of rent regulation. But the reality is that those that had been lending, last time the property was on the market, the lenders in many cases were not those that are in the market today. So the market is not growing but the available funding of the market is changing. So there's some new names in the market that are getting a lot of publicity because they're doing share of the market. But it's a small number. And, therefore, when you put it all together, we're gaining share. So we're the consistent guy. We were there with the structured debt lenders and we're there with the new lenders and we've been there historically with others. The reality is we're lending aggressively in a market that is very rich, and I think it's going to continue to be very, very resourceful. There's no escaping the fact that there's going to be plenty of product for us to lend on.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Okay. So even though it's not a growing market, there's still plenty of products for the foreseeable future?

Joseph R. Ficalora

That's right. When you think about the size of the market, it's not gaining in size. But when you think about the distribution of the refinancing of that market, we're in fact gaining share.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Okay. And then in terms of interest rate sensitivity, has your position changed since I guess the 10-Q was filed for the June quarter?

Thomas Robert Cangemi

I think it's fair to say, Rick, that as I indicated in one of the last comments that we have some short term borrowing -- that's going to make it more liability sensitive. I think the big picture is that when we feel rates are moving in a different direction here, we're going to be in the market to start bringing in low-cost deposits. We're the lowest rate payer and I want to reiterate that. We do not have an aggressive deposit campaign in the market. Many banks do, so we feel very confident given that we have a very broad network of community bank model that can bring in deposits as needed. We have not been in a market testing that aggressively. So when the event that we feel that we can swap wholesale for retail, and by the way, we grow through acquisitions. So in the event there is an opportunity and we always search for those opportunities to get rid of the liabilities for retail platform. Now that's the -- the tremendous benefit that we see. But absent acquisition, looking at the deposit market, we feel it's very fluid. There's a lot of money out there and if we need to raise deposits, we'll go in the market and raise deposits. To offset that liability sensitivity.

Joseph R. Ficalora

I think it’s obvious over the course of our entire public life that we've been structured to do acquisitions of deposits, and therefore, our balance sheet reflects that. And that makes us different than others but certainly consistent with regard to the speed with which we're able to absorb a transaction and integrate a bank into our balance sheet with success.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Okay. You're the lower rate deposit payer in all your markets?

Thomas Robert Cangemi

Pretty much, yes.

Operator

Our next question comes from Steven Alexopoulos from JP Morgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

I wanted to follow-up on the expense comments. As you get the bank ready now for stress testing, now that you have crossed $45 billion, actually almost $46 million. Are you using this as an opportunity to prepare for CCAR [ph] level stress testing? And how should we be thinking about the incremental expense for that?

Thomas Robert Cangemi

Yes, absolutely. We've been very mindful going back -- in the midst of the great recession when the larger banks were forced to get there from afar. We, obviously, were an acquisition-focused bank, and we partnered with our regulators and we still partner today with our regulators trying to better understand what's best for the long-term business model. We are an acquirer of businesses. So we've made significant investments over the past 2 years, 2.5 years. And we will have further investment. But the good news for us, we started from the ground floor up instead of being forced to do that test. We were able to develop what's right for the company for its growth model. And our growth model is to go over 50 in the future. So with that being said, a lot of expenses were paid upfront. We have a higher ORE cost -- we have departments now that manage that. We have more risk departments that are evaluating risk. And we expect to see reasonable expenses going into 2014 but not near the level of '12 and '13. So again, I want to just go back to my original comment, Q4 versus Q3, you'll see lower expense base when we close out the year for the quarter and then probably stabilization next year depending on profitability of the marketplace. So if markets are very vibrant, we'll be growing certain lines of our business. If things are tough, we'll keep the expense line consistent with the history of the company as being a top efficient bank in the United States.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

That's helpful, Tom. Maybe just one other question on Signature's call yesterday, they spoke of a spike in refi activity as rates really moved up in August. Was that your better experience as well I know that rates are pulled back? Are you seeing elevated refi activity really be extended here?

Thomas Robert Cangemi

I got to tell you, the pipeline is strong. We have very robust pipeline in Q3. In Q4, it's right on top of it. And Q4, is always an active quarter. So it's been historically for the company. And then last year, we had Co-op-City paid off, that was a huge credit and we still grew our loan book. So if you think about where we are going into the fourth quarter, you'll have growth, we'll have a very strong pipeline similar to the last pipeline and Quarter-over-quarter, we grew $1 billion on our held for investment book. So we are on target to grow high single digits for '13. And it's always reasonable to say given the market conditions that we could be a high single-digit growing next year absent any real change in prepayment activity. If prepayment activity changes to the negative where things slow down, you will see significant growth, significantly more than 9%. So we're assuming that next year should be another year of reasonable prepayment activity. But if that changes, that can also change our growth aspirations.

Operator

Our next question comes from Josh Levin from Citigroup.

Josh Levin - Citigroup Inc, Research Division

So you know you've talked about growing securities portfolio. You have a pretty robust pipeline for loan growth. So as you think about this growth, how do you think about funding it?

Thomas Robert Cangemi

Yes, again, I'm going to reiterate what I just said in the previous 2 comments, we are going to look at the deposit markets at the appropriate time. The first slug of increase was remember, we replaced our warehouse book. We were down over $1 billion on the held-for-sale warehouse from mortgage banking operations. So a lot of the securities replacements have generated placement of that income stream. At the same time, we also told the marketplace we would take advantage of significant run-up in rates are well over 100 basis points on the securities book than we've watched fall over the past 3 years. So we're not even -- we're getting close to where we were 2 years ago. So going back to my guidance for the quarter will be around south of 18%, maybe high 17% as of quarter end. So if you look at where we are Q3 versus what we expect to be at Q4, maybe another $1 billion of securities growth approximately. And then we'll look at the balance sheet going forward and reset our position and then on the funding side, deposits are very fluid. They're out there, that we can easily be in the marketplace by our various community banks and implement an reasonable deposit campaign to replace the wholesale liabilities with strong retail customer deposits. Again, we're the lowest rate payer in the marketplace. If we get back to the medium, we can see some declines in the wholesale book going forward. But big picture, and I know that [indiscernible] mentioned specifically, we're a growth and acquisition company. In the event we can replace a significant degree of our wholesale it would be through a acquisition.

Joseph R. Ficalora

Right. That is the model we followed 11 times now.

Josh Levin - Citigroup Inc, Research Division

Okay. And along those lines, your tangible equity to tangible assets ratio came down a little bit this quarter. Where are you comfortable with that ratio going to?

Thomas Robert Cangemi

Well, again, I feel that we're still overcapitalized given our overall risk profile. And obviously, the marketplace is very fluid for our growth, though even then we continued to grow significantly as acquisition will be in the capital markets doing something that is creative. We're not bashful on going to the capital markets and in creating value for shareholders by utilizing a strong capital base. But absent that, we're still way overcapitalized to our risk profile in my opinion.

Operator

Our next question comes from Brad Ball from Evercore Partners.

Bradley G. Ball - Evercore Partners Inc., Research Division

Actually, just a follow-up on the prepaid comments. Could you just describe the dynamic when rates go up like we saw in the third quarter, you see a fairly robust level of prepay activity. Do you expect that prepays would benefit from higher rates from here or lower rates? And how does that look for sort of prepaid activity going into next year?

Joseph R. Ficalora

Yes, rate change is one of the components of what drives prepay but not the only aspect of what drives prepay. When there is available product, people do, in fact, prepay their existing loan so as to fund the acquisition of another property or otherwise sell an existing property at a significant profit in order to buy other properties. That activity creates a lot of prepay. Also, the expectation with regard to rate movement can accelerate prepay. So a guy that is kind of not ready to buy but concerned about where his rate is and where rates are going might go 3, 6, 12 months early in his refi. So there are a lot of things that will impact the level of prepay. The good news about our portfolio is that it's strong, and it's very viable for property owners to make those kinds of decisions and elect to prepay an existing loan in order to get a new property or in order to better position themselves for 2 years out or 3 years out to be in the market to take on new properties. So we've never tried to forecast prepay because it's a very difficult thing to do. Many factors change the activity level. But we do believe and have, for the last couple of years, the strong belief that there will be a great deal of prepay activity even in the period in front of us.

Bradley G. Ball - Evercore Partners Inc., Research Division

Is any -- would you say that the environment or the environment and the portfolio mix is such that prepays will just typically be higher than they were historically so the contribution that has been. . .

Joseph R. Ficalora

You're absolutely correct. Prepays in this year are going to be higher than prepays last year, and that was a record year. And prepays last year were higher than the year before. So the reality is that this is a very strong period for prepay activity.

Thomas Robert Cangemi

Brad, it's Tom. I would also add to the fact that if you think about the borrower's sentiment over the rising capitalization rate on their expected borrowing and you have a little bit of that going on in Q3 because rates did spike materially then they came back down. So there is that fear that if rates do start to rise in the future their ability to borrow what they need to continue running their business model can change materially. And obviously, cap rates are still very low in the environment and as having a significant spike there will alter their ability to borrow money. So I think that does also drive the borrower to make decisions.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay, that's helpful. And then just shifting to the mortgage bank real quickly, what, Joe or Tom, what proportion of your originations were refi versus purchase money in the third quarter?

Thomas Robert Cangemi

Okay. As of the third quarter, 60% purchase, 40% refi. It's a complete flip from the previous year. That's the marketplace. Like I indicated previously on one of the last comments, that we see that swing no rate go below 4%. It'll probably see a little bit more activity but it's been definitely a slowdown with the back up in rates in Q3. So that's both on purchase and refinancing. And I'm surprised no one asked a question about margins. So I'll just talked about it.

Bradley G. Ball - Evercore Partners Inc., Research Division

Yes, that's where I was going.

Thomas Robert Cangemi

Yes, margins are tighter. We're probably about 22 to 25 basis points lower than the previous quarter. So we're looking at 75 to 85 type margins in this environment to stay competitive. We want to keep the machine moving in order to continue bringing some volume in and that could change overnight cause obviously rates have rallied a little bit here. I think seeing a break somewhere in the high 3s could stimulate some activity and we'll just wait and see. But definitely I'm predicting a lower mortgage banking quarter in Q4 compared to Q3.

Bradley G. Ball - Evercore Partners Inc., Research Division

Yes. How would you say your business model is situated for a more of a purchase money market versus a refi market?

Thomas Robert Cangemi

I think we're fine. I think we have a nice client book. And we'll get our share, we won our leased hold share. I think ultimately, you have to say sooner or later some of the players will have to get saturated out of the market given that the profitability of it will decline, and there's a lot of players in the market that came in to after the crisis. So eventually, let's say mortgage for next year is $1 trillion versus $1.7 trillion, year-over-year it's down 70% based on the M.B.A. statistics and they're forecasting for 2014 then we hope to get our normal share of that '13, '14 number share. And going forward there's going to be some saturation and people will be outside out of that business model. There's been some rhetoric about some smaller players leaving the space. That's healthy and natural.

Bradley G. Ball - Evercore Partners Inc., Research Division

Great. And then lastly, separately, any comments on or update on the Specialty Finance company?

Thomas Robert Cangemi

Yes, they're doing extremely well as of 9/30, the total outstanding is about $111 million -- with letters of credit about $132 million. We have a nice commitment book, probably double the amount of volume of outstandings by the end of the year. So it's growing as expected. We should be somewhere north of $200 million by the end of the year. So things are moving along very nicely. Unfortunately, we've turned down 97% of the deals that we've -- we were out to review, that's the culture. It's a credit buy-out shop and they're looking at the best opportunities in the marketplace taking the small piece of these larger deals with the large money center banks. So the good news for us, we're on target. Right now what's seen is profitable which is as expected. If we could take [indiscernible] around a 4% yield [indiscernible] right take fees out it's around a 3%. So it's contributing to the growth of the company. And our expectations are in the next 7 to 12 months, we'd be somewhere between $650 million to $800 million.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. How many people do you have out there?

Joseph R. Ficalora

13. I think 13.

Thomas Robert Cangemi

Yes, about 13.

Bradley G. Ball - Evercore Partners Inc., Research Division

13 people. Okay.

Thomas Robert Cangemi

Pardon 7.

Bradley G. Ball - Evercore Partners Inc., Research Division

Target 13?

Joseph R. Ficalora

[indiscernible] we will see.

Thomas Robert Cangemi

Things are moving very nicely there. We're very pleased and great group of people and we're very pleased so far.

Operator

Our next question comes from Dave Rochester from Deutsche Bank.

David Rochester - Deutsche Bank AG, Research Division

Sorry if I missed this in the color earlier on the mortgage bank. But could you just give the net hedging gain on the quarter in that line?

Thomas Robert Cangemi

Net hedging gain for the quarter was, bear with me, $3.9 million.

David Rochester - Deutsche Bank AG, Research Division

And what were the components of that?

Thomas Robert Cangemi

We had $7.3 million of amortization and loan fees as $12 million of income coming in from the actual book and a $3.9 million hedge gain. That's net to $10.3 million.

David Rochester - Deutsche Bank AG, Research Division

Great. And earlier, you were talking about replacing short-term borrowings. You took out ultimately with deposits at some point. I was just wondering why you're choose not to use some of the cash on the balance sheet in a more meaningful way this quarter to fund some of that growth? It just seemed like a good quarter to do that with deposit balances flat.

Thomas Robert Cangemi

Dave, we're keeping elevated liquidity positions it's the world that we're living in right now so we're keeping excess liquidity, obviously, we have a lot of unencumbered securities. So the goal was to kind of rebuild over time the unencumbered book. This is a changing regulatory environment so we want to have excess liquidity on hand that's been significant changes in the industry regarding that specific issue. So we have been keeping excess liquidity. As you know, the warehouse is significantly lower, right, so we went from $1.2 billion down to $200 million. I'm hoping that's the baseline bottom for us, so you'll have some more growth in the future and that we feel at the appropriate time we'll deploy some of that cash over time.

David Rochester - Deutsche Bank AG, Research Division

Got you. Just one last one, bigger picture question on growth. If we get another strong asset growth quarter or 2, you will be pretty close at that $50 billion asset level. So I was just wondering how we should think about growth in the context of that. Are you planning on really managing asset growth to stay below that threshold until you find the deal you're looking for?

Thomas Robert Cangemi

I mean, again, first of all, it's a 4-quarter rolling period before you have to go into the lion's den that's with $50 billion plus. So it's really --if you hit $50 billion in the third quarter of 2014, it doesn't mean you're subject to the $50 billion rule, it's a 4-quarter, rolling 4-quarter. But again, I don't want to be specific about acquisitions but Mr. Tikolo [ph] was very clear, we are always looking for opportunities. But in the meantime, we're managing our business and we are growing. And we indicated that if the growth is very strong, we'll deal with capital levels and we'll keep strong capital levels, we'll keep excess liquidity and we'll keep elevated capital levels given the environmental change since the great recession.

David Rochester - Deutsche Bank AG, Research Division

So you wouldn't really try to stay below that $50 billion asset threshold then it sounds like?

Thomas Robert Cangemi

That's material growth is where we are today going into the, let’s say, to the regulatory $50 billion. That's a 4-quarter rolling period of $50 billion plus. I don't see that in a short term, but I think in the short term, there is also acquisition opportunity as well. And as the time arises, we can always reach over tomorrow through a transaction.

Joseph R. Ficalora

Yes, I think it's important to recognize that there is lead time to a transaction but there's also lead time to the consequence of breaking $50 billion. So we could be easily working both simultaneously and in 12 months hence, both events could occur.

Thomas Robert Cangemi

David, just bear in mind, we started to rebuild a securities but there's going to be a point where that's going to stabilize. We're pretty close to that 17%, projected high 17% as of 12/31 is the expected footings there and I think that's been a lot of the growth now, rebuilding a loan book, putting on significant growth, we grow that around high single digits for 2014. It could be very interesting to see the dynamics of the balance sheet going into the potential of consolidation opportunities. Now focusing back on that wholesale liability book, in the event of an acquisition, we would deal with a wholesale liability book. So you can actually do a deal with strength below $50 billion.

Operator

Our next question comes from Karti Bhatt from Bank of Bank of America Merrill Lynch.

Karti Bhatt

Just going back to prepays. Is there anything different in the prepayment trends you're seeing between multi-family and CRE?

Joseph R. Ficalora

Nothing different, no. I think that the reality is that our multi-family niche is larger so we do get more from multi-family than we get from CRE. But there is activity in both markets for sure.

Thomas Robert Cangemi

I'm going to say the average line of the CRE book is probably about year longer on estimate so you're looking at 3.2 versus 4.2 so you may have a little bit less concentration of CRE prepayment activity, and that's what we've been seeing. So obviously, the most recent quarter, it's been mostly all multi-family.

Karti Bhatt

Great. And then I guess when you look at the multi-family market, I mean, I guess given your comments on the pie is not really growing there. At what point do you guys see yourself bumping up on the ceiling as far as share gains go?

Joseph R. Ficalora

Can you repeat that question?

Karti Bhatt

Sure, I mean, in the multi-family, it looks like the pie is not really growing, it's a sort of a fixed market there. And you guys are gaining share. But I was wondering...

Joseph R. Ficalora

What we're getting, yes, I think you're asking the right question. As I mentioned, there were large, very large structured debt lenders in the New York market that were lending on all type assets and including those assets that are in our niche. So there is plenty of product available based on who is still in the market. So relevant to our niche, independents are [indiscernible] there, North Fork or Capital One, WaMu or Chase, the difference between those who were active in our niche in the last 3 to 5 year period versus who's active in our niche today is dramatic. There are significantly smaller players that we're competing with today. And, therefore, we're gaining share of a market which, in fact, is very robust today. So I think it's a very attractive period in front of us as well. There's going to be a lot of activity and a lot of opportunity for us to increase our lending.

Karti Bhatt

So I mean, if you put it sort of in terms of innings, you guys still think you're in the early innings of your share gains opportunity?

Joseph R. Ficalora

If you're talking about share gains in our niche, yes, I'd say so, yes.

Karti Bhatt

And the last one for me. I guess, any color on the big decline you saw on the balance of loans past due in the quarter? Can you guys call that out?

Thomas Robert Cangemi

Again, it's such a insignificant number to the total to the portfolio. When you're starting with [indiscernible] numbers it's a very positive development but it's been a development since March of 2010. Early phase delinquency that have not been an issue for the company and asset quality remains pristine, and we feel pretty bullish about that continuation. And I think that the company has been, for the past 4 decades, is known as a pristine producer conservatively of our niche business model, which if you look at the asset quality and the loss ratio that is associated with it, very low loss content business model.

Joseph R. Ficalora

This is very consistent with how cycle by cycle by cycle we've actually performed.

Thomas Robert Cangemi

We're obviously very pleased with it but we're getting close to 0 so.

Operator

Our next question comes from Matthew Kelley from Sterne Agee.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Wonder if you just talked about the role of agencies reducing their presence in the marketplace. They have a mandate to reduce their market share, their lending to the business and I think we're seeing the impact of that with companies like Walker Dunlop and Beech Street selling. How much of an impact is that having on your business as you regain market share from folks like that?

Joseph R. Ficalora

Yes, I think it will be, on the national front, more relevant than it is immediately in the New York market. The impact that they have on us most obvious in the New York market is the rates that are actually being enjoyed by all lenders in this market. They have not been a large player from the standpoint of our niche in the New York market. So of those that we in fact negotiate loans with, meaning that there are people on the other side of our negotiation with the owner, there is very, very few occasions where Fannie and Freddie have been there. But if, in fact, they do transition away from being a competitor in this market for multi-family, it will allow rates to rise on all of the commercial lending that we're doing in this market.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Are you not seeing them? Because they do longer duration loans? Is that the best...

Joseph R. Ficalora

That's right. They are structured differently than we are structured in this market. So they are very active in and successful in other markets where there are not adequate lenders in those markets. But in our market, they are not actively winning our niche deals. There may be winning other deals certainly in other places, but they're not winning anything from our niche in a meaningful way.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

So that's not been a factor in your growth recently then?

Joseph R. Ficalora

No, no.

Thomas Robert Cangemi

I would answer that. If you think about the DUST problem that they had and look at some of the pool DUST that's out there, the percentage of New York City paper is probably less than 10% in those pools. You can kind of validate that. In addition, a lot of the banks are lending and are doing 10 years financing we happen to do a lot less 10 years financing. If a local property owner needs the borrowing, they may go to one of our competitors and go out a little bit longer so they're doing some of that volume.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Got you. Just a question on mortgage banking. In the $10.4 million of servicing, how much of that was a write-up in the MSR?

Thomas Robert Cangemi

The write-up on the MSR, bear with me here. I have to get back to you on that one. I think it's about $3 million, but I'll give you a confirmed number.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

And then last question, you've had really solid credit quality but as you grow the portfolio..

Thomas Robert Cangemi

Matt, just want to go back to the MSR, and give you some statistics. Our market multiple right now it's about a 4.4 multiple at a 25 basis point average servicing. So that's the multiple which is pretty much slightly below the medium in the industry.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay. did you say it's roughly like a $3 million MSR write-up?

Thomas Robert Cangemi

For the quarter, it wasn't a huge number but if you think about where we are on the balance sheet, $228 million of footings of outstanding capitalization, which correlates to a 4.4 multiple on 25 basis points servicing fee, which is slightly below the median for all companies that are in this business.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

And then the 3.9 hedge gain that's separate so you have $3 million MSR, then a 3.9

Thomas Robert Cangemi

That's right -- it all nets out for the mortgage servicing business sat for the quarter at 10.3. The good news for the actual income stream and loan servicing fees is up about 20% quarter-over-quarter to $12 million.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Got you. And then just last question on reserve levels. So clearly charge-off, NPAs, delinquency trends have been positive. But as you grow the book, are you looking to kind of maintain that 50 basis points worth of coverage on non-covered loans or stable, up, down what do you see for reserve coverage levels?

Thomas Robert Cangemi

I mean, we're probably very, very close to a high-end to our range of reserves. So we have to struggle with that. We tried to put in up immediate charge-offs but we are seeing the asset that had it will classify leaving the portfolio without loss. So that's significantly benefits your reserves. So we're in the position now that depending on changes in credits that -- I don't envision any significant changes to the provisions. If anything, you may see lower provisions given the performance of the portfolio and the fact that some of the credit that were classified are gone. On the TDR book over $1 billion down to under 100. So it's a significant decline.

Joseph R. Ficalora

It's not unusual for us to have at the end of a cycle significant disposition of assets at our full book value or above our book value. And there were very, very, very few banks that actually have that kind of realization at end of the cycle.

Thomas Robert Cangemi

And the trend I think again, the 2014 trend is that we expect to see lower NPAs given the vibrant marketplace what we have in the pipeline as a disposition I think they're still very favorable there.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay. One more. So on the expense front, if you have $142 million guidance range for 4Q annualized into the $568 million, if you were to be over $50 billion, how much do you think your expenses will go up simply for that fact?

Thomas Robert Cangemi

I don't have specific number into my back pocket but I will tell you that we've added quite a bit of expenses over the past 2 years to get there. A lot of it was upfront loaded just to build a platform. And we're very proud of what we've done so far. We will get there at the appropriate time. But a lot of that expense is taken in '10, '11, '12, some in '13. Since '08, we've been focusing on dealing with a heightened sense of change in regulatory and partnering -- we're partnering with our regulators. They are partners. That's how I look at the business going forward. And they're evolving. So I think we've hired a lot of people, we've built some real, very strong systems to deal with the growth and I think partnering with regulators I think it's a good concept of that. You're going to have additional cost and there may be some additional capital allocation. But we're not going to 250 . So if you're a significantly large institution, the capital mandate will be much more difficult. But I think given that bucket of slightly going over $50 billion, it would only be expense is going to be materially higher than what we are today.

Joseph R. Ficalora

Yes, I think it's important to recognize, Matt. We're already spending that money the people are already on staff for us to be bigger than $50 billion.

Operator

And our next question comes from Jeff Geygan from Milwaukee Private Wealth Management.

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

Can you identify your percent share in the multi-family market?

Joseph R. Ficalora

Actually, we don't actually have a full number but we're thinking it's something in the range of about 20% of our niche. Not the full New York City market but 20% of our niche.

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

And who do you assume are the larger players by market share?

Joseph R. Ficalora

Well, it's always hard for us to know exactly who they may be. But the people who that are more active within our niche today making new loans, that would include people such as Signature and Sovereign, and Sovereign is actually [indiscernible] today. It would include Capital One because they had a very large portfolio that they had gotten.

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

And your strategy calls for increasing market share in this niche?

Joseph R. Ficalora

Yes, we truly believe that we're -- in fact we know we're gaining market share.

Jeffrey Richart Geygan - Milwaukee Private Wealth Management, Inc.

Your current non-covered loan portfolio is 70% multi-family. What do you assume happens to that number going forward as you increase your market share?

Joseph R. Ficalora

I think that number could go up. That number has historically been as high as 90-ought [ph] percent.

Operator

And we'll take our final question from Collyn Gilbert from KBW.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Anyway, just actually, Joe, I think you may have actually answered it in terms of the loan mix. My question was going to be do you guys anticipate yourselves diversifying more as you become -- exceed that $50 billion. You've done -- you've got the commercial finance. I know it's small, construction was up big, I don't know. I guess, just curious to get your take on diversifying away from multi-family as you kind of go through this next phase of growth?

Joseph R. Ficalora

No.

Thomas Robert Cangemi

Collyn, it's Tom. There's 2 aspects to that. We are very committed to the niche, so that's going to continue building over time. And we're very proud of how we manage that. But in particular, it's been some very small we'll call changes in Specialty Finance as we gave you some guidance there between $600 million to $800 million next year total. And then you have the residential the jumbo client business, which is [indiscernible] we expect to originate around $50 million a month. It's very challenging because we are -- our LTVs are significantly lower and our credit standards are very high. We have a book that hasn't had any late page. So again, we're very selective on our growth, we're super conservative. So you'll see a little bit add on the RESI side, to the [indiscernible] business and you'll see that the Specialty Finance build -- you'll see some percentage growth but again to a level that's very manageable and you'll see the focus on our niche business being commercial real-estate multi-family.

Joseph R. Ficalora

It's clearly a low risk asset that we've had as a higher percentage of our outstanding assets historically. And certainly, we'd be comfortable prospectively as well. It is an asset class that for 4 decades we've proven can in fact, rotate every 3 to 4 years and literally sustain itself through difficult cycles. So the idea that we would potentially do more of this is very, very real. In particular, if we do a deal. So as we sit today, we know that we do not do a lot of loans that we could do, if we were in the midst of a deal and, of course, we always capitalize deals. If we had more capital, we would do a lot of lending that would immediately take loans from those that are taking the loans today because they're doing IO. A lot of our competitors are doing IO lending on a 100% basis, we're not. So if we did a deal, we would do that. And we would do that because the consequence to capital would be of less consequence because we would have significant amounts of capital in the deal.

Operator

This concludes today's question-and-answer period. I'd like to turn the call back over to Joseph Ficalora for any closing remarks.

Joseph R. Ficalora

On behalf of our board and management team, I thank you for your interest in the company, our strategies and our performance. We look forward to chatting with you again early in 2014 when we report our fourth quarter earnings. In the interim, I wish you and your families a best of Thanksgiving, a joyful holiday season and the best of health and prosperity in the coming year.

Operator

Thank you. This does concludes today's third quarter 2013 earnings conference call with the management team of New York Community Bancorp. Please disconnect your lines at this time, and have a wonderful day.

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