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Executives

Ilene Angarola - EVP & Director, IR & Corporate Communications

Joseph Ficalora - President & CEO

Thomas Cangemi - Senior EVP & CFO

Analysts

Brad Ball - Evercore

Rick Weiss - Janney

Mark DeVries - Barclays

Collyn Gilbert - Stifel Nicolaus

Bob Ramsey - FBR Capital Markets

Moshe Orenbuch - Credit Suisse

Matthew Kelley - Sterne Agee

David Hochstim - Buckingham Research

Dave Rochester - Deutsche Bank

Tom Alonso - Macquarie

Steven Alexopoulos - JPMorgan

Ken Zerbe - Morgan Stanley

Mike Turner - Compass Point

New York Community Bancorp, Inc. (NYB) Q3 2012 Earnings Call October 24, 2012 9:30 AM ET

Operator

Good day everyone and welcome to New York Community Bancorp’s Third Quarter 2012 Earnings Conference 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 and Corporate Communications. Please go ahead.

Ilene Angarola

Thank you. Good morning and thank you all for joining the management team of New York Community Bancorp for our quarterly post-earnings release conference call. Leading today’s discussion of our third quarter 2012 earnings will be our President and Chief Executive Officer, Joseph Ficalora, together with our Chief Financial Officer, Thomas Cangemi. Also joining us on the call are Robert Wann, our Chief Operating Officer and John Pinto, our Chief Accounting Officer.

Certain of our comments 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 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 interest rates which may affect our net income, prepayment penalty income, mortgage banking income and other future cash flows, or the market value of our assets, including our investment securities; changes in the demand for deposit loan and investment products and other financial services; and changes in legislation, regulation and policies.

You will find more about the risk factors associated with our forward-looking statements on Page 8 of this morning’s earnings release and in our SEC filings, including our 2011 annual report on Form 10-K and our first and second quarter 2012 10-Qs.

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

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

Joseph Ficalora

Thank you, Ilene, and thank you all for joining us this morning as we discuss our third quarter performance which once again was highlighted by strong earnings, superior returns, solid capital measures, increased loan production and continued asset quality. The quarter was also notable for the contribution to earnings of our two-pronged approach to lending, a topic I'll expand upon later in the call, but first I would like to say a few words about our third quarter earnings as well as their contribution to our capital strength.

As we indicated in this morning’s release, we recorded GAAP earnings of $128.8 million or $0.29 per diluted share for the quarter providing a 1.29% return on average tangible assets and 17.10% return on average tangible stockholders equity. As those of you who follow the industry know, these returns are well above average and underscore our capacity to earn.

We also produced cash earnings of $139.2 million or $0.32 per diluted share in the quarter and cash earnings of $409 million or $0.93 per diluted share in the first nine months of this year. The nine month amount contributed $30.8 million or 8.1% more to tangible capital at the end of September than our nine month GAAP earnings contributed alone. As a result, our tangible stockholders equity rose to $3.2 billion at the end of September and represented 7.74% of tangible assets excluding AOCL.

Reflecting our continued capital strength and the ongoing strength of our earnings, the Board of Directors declared a $0.25 per share dividend at last night’s meeting. The dividend is payable on November 16th to shareholders of record at November 07, 2012.

Our ability to perform as well as we have a test to the soundness of our business model, which was designed to lessen the impact of interest rate as well as credit risk. Among the primary factors contributing to our solid third quarter performance were the level of mortgage banking income produced by our mortgage banking operation as the volume of one-to-four family loans originated for sales increased, the level of prepayment penalty income received as refinancing activity increased in the multifamily and commercial real estate markets and the continued improvement in our asset quality.

Speaking to the first of these factors, one-to-four family loans originated for sale totaled $2.9 billion in the current third quarter; that’s 10.3% higher than the volume produced in the second quarter and 61% higher than the volume produced in the third quarter of last year.

The vast majority of the loans we produced were sold to government sponsored enterprises consistent with our practice since assuming our mortgage banking operation in December of 2009. Today, NYC being a mortgage company ranks among the nation’s 15 largest residential mortgage aggregators and I do believe it’s fair to say there is room for us to grow.

Reflecting the volume of loans produced and sold, mortgage banking income totaled $52.6 million in the current third quarter more than double the level recorded in the third quarter of last year. Loans originated for investment meanwhile rose to $2.1 billion and included $1.6 billion of multifamily loans. As interest rates continue to fall, refinancing activity continues to drive our multifamily loan production and resulted in a near record level of income from prepayment penalties.

In the third quarter of 2012, prepayment penalties income contributed $31.5 million to total interest income supporting our 4.90% yield on average interest earning assets as well as our net interest margin of 3.17%. Our margin was also supported by an increase in the average balances of loans and interest turning assets and by the reduction in our average cost of funds. We attribute the drop in our cost of funds to deposit assumed in or bank transaction which you will recall was completed June 28th.

Third on the list of factors contributing to our strong third quarter performance was the quality of our assets which continues to improve. For example, non-performing, non-covered assets represented $290.5 million or 0.66% of total assets at the end of September, in contrast to $410.4 million or 0.98% at December 31st. The improvements stemming from the decline in non-performing, non-covered loans for the eight consecutive quarter, and from the fourth consecutive quarterly decline in other real estate homes.

Non-performing non-covered loans represented $246.6 million or 0.82% of total loans at the end of September as compared to $325.8 million or 0.98% at December 31st. In addition, net charge-offs represented a mere 0.03% of average loans in the current third quarter, down from 0.05% and 0.04% respectively in the trailing and year earlier three months.

Before I end my prepared remarks and open for questions, I would like to be very briefly return to the topic of loan production and acknowledge the record level of loans in the pipeline we reported today. Including $3 billion of loans held for sale and $2.2 billion of loans held for investment, we are looking today at a pipeline of $5.2 billion, that’s the highest level we have reported in any earnings release as a public company.

I would also like to take this time to point out that not all of our accomplishments are financial in nature. Certain of our achievements cannot be described in terms of dollars and cents. For example, in the third quarter of this year, we have completed the integration of our two operating systems, the one used by all of our branches in New York and New Jersey and the one used by all of our branches in Ohio, Arizona and Florida. The systems integration has enabled us to unify our product menu and the many services we offer our customers in each of the five states we serve. In less than three weeks, we will take another step towards unification when we restore the ticket symbol of our common stock NYCB.

Some of you may recall that NYCB was our ticket symbol during the last two years we were listed on the NASDAQ national market and that we lost the ‘C’ when we moved to the New York Stock Exchange in December of 2002. As I stated in this morning’s press release, we are proud to be a community bank and that's what the ‘C’ in our name stands for. New York Community Bank, NYCB.

As one of the nation’s 25 largest banks and one of its top performers, it is only right that our shareholders know us by the same four letters as our valued customers and the scores of communities we served. You may wish to note that the change in our symbol from NYB to NYCB will take place when trading begins on the 13 of November and that we will celebrate at the end of that day by ringing the closing bell at the exchange.

At this time I would like to open the phone for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will comes from Brad Ball of Evercore.

Brad Ball - Evercore

The NIM this quarter came in pretty in line with your guidance last quarter, I wonder if you could give us a view of the outlook for next quarter. What are your expectations for the NIM with and without prepayment penalties? Thanks.

Thomas Cangemi

Pretty much, it’s one at the same looking at Q2 versus Q3. Our guidance was down 12 to 15 and that came at the low end of our range. We were pleased that we came in at the low end of the range for Q3. My guess is that where we sit today, given where the interest rate environment is and looking at the pipeline, we probably are going to be on that same level. So probably down 12 to 15 in Q4 that’s prepay.

Brad Ball - Evercore

And any comment on prepays this quarter?

Thomas Cangemi

Prepays are going to be consistently strong, and we feel that this will be no question, our largest prepay here in the history of the company. We're on track to be in excess of 100 million. So things are moving well as expected.

Brad Ball - Evercore

Separately what are you seeing on the pricing side in the multi-family market, could you give us an update on where the coupons are coming in, where the spreads are?

Thomas Cangemi

I would tell you right now based on our pipeline, looking at it last night, we're looking at it around probably about 300 basis points spread up to [5]. It’s about 3.5%.

Brad Ball - Evercore

3.5%

Thomas Cangemi

3.5%. So if you look at that $2 billion pipeline, it's very, very strong and it's somewhere in the mid 3. So when you (inaudible) it’s predominantly 5 year on paper.

Brad Ball - Evercore

And have you fully benefited from the overall deposit transaction in terms of your decline in deposit cost this quarter? Do you expect to get further benefit?

Thomas Cangemi

Well, you’ll see the change in (inaudible) rates went down. That’s obviously driven by a row. So you will get some more continuation by the end of the year but it's not going to be a long-term strategy there, but it’s definitely continuing. Perhaps not the same amount of benefit in Q4 but probably half the benefit of Q4.

Operator

And we’ll take our next question from Rick Weiss with Janney. Please go ahead. Your line is open.

Rick Weiss - Janney

The pipeline, 2.2 billion, what percentage of that would be multi-family?

Thomas Cangemi

Like 80%. We are getting a tremendous amount of refinancing in the multi-family market today it’s really very consistent with the business models that we have had for many years.

Joseph Ficalora

And Rick we have a high percentage of new business so this will (inaudible) with our growth aspirations going into Q4.

Rick Weiss - Janney

Okay. And if you refinance the high level it would be strictly to think to the interest rate environment or is there more activity among the owners?

Joseph Ficalora

I think it’s probably the owners.

Thomas Cangemi

I think it’s the both, there is no escaping the fact that interest rates are very attractive for refinancing, but our people need to have the ability to buy product. As we saw in 2009 there was no activity because there was no product to be bought. Rates were arguably very low compared to the earlier years in 2009. So it’s not just rates it’s also the availability of product.

Rick Weiss - Janney

Okay, got it. I was wondering if you give a little bit color on possible M&A activity and if you are thinking has changed it all regarding going over to $50 billion (inaudible).

Thomas Cangemi

I think the reality is that this is a environment that necessitates a great deal of preliminary work in comparing for the crossover of a $50 billion plateau that changes regulatory requirements. So we are doing a lot of work to be prepared to be bigger than $50 billion, and as you might imagine there is money and people and external experts that are used for that purpose. So that is where our concentration is being prepare, so as to take advantage of the opportunities that may arise. Once we are over 50 billion than we can entertain any deal size, but we need to be compared to be bigger than 51st.

Operator

We will take our next question from Mark DeVries with Barclays. Please go ahead your line is open.

Mark DeVries - Barclays

Yeah, thanks. Joe I think you mentioned you still see room to grow the single family origination business. Can you comment on how much more capacity, you have there for - and with difference level?

Joseph Ficalora

Yeah, we have huge capacity there. I think the number is always high as $30 billion that they had at one time in their operations, and then we are significantly below that number today. So we have the ability to grow that dramatically over the time ahead.

Thomas Cangemi

I would just add the plan for next year is to roll up the FHA business that’s in process, hopefully sometime in next year we’ll have that in place. And addition as you know some of the larger place are exiting the corresponded business, and we are looking to capitalized on that. And we are also making some inroads on the hybrid on business for portfolio.

Mark DeVries - Barclays

Can you talk a little bit about your plan purchase versus refinance and what the implications might be for volume shifting every time from refinance.

Joseph Ficalora

Yeah, it’s been around 75-25 for the quarter. and we saw a major change in the product here, but it’s been (inaudible) going into October probably 80-20 in rates shriek up a little bit. So obviously at low rates, the swing rate goes below three in a quarter, if you are higher level of refi (inaudible). But once it goes north of 3.5 to 360, you are seeing more purchase activity. So it depends on the level of interest rate, but it’s been a noticeable change in the previous year.

Mark DeVries - Barclays

How would you expect your market share there to changes as we do shift eventually towards --.

Joseph Ficalora

We hope to continue expanding our market share; I mean we are holding where we are, since we took over operations in late 2009, and we are making significant inroads and spending significant dollars on building the platform and connecting the platform. We are committed to the business model and we have a tremendous operations in Cleveland and we will be expanding to some other markets to get our people to deal with the amount of flow that we are seeing. So we are committed to the business, while we think we have a unique opportunity here given that we went to the cycle probably in the worst time of the cycle. So we are capitalizing on some of the exits.

Mark DeVries - Barclays

Tom you just mentioned you are seeing players continuing to get out of the corresponding channel, is that actually taking capacity out which is supportive of your - given your sales margins here.

Thomas Cangemi

I think some of the larger players happen to have tremendous retail ops, so if you are dealing 96% of your volume on retail why waste your assets on correspondence. We are a correspondence [winner] and that’s what we do. We have the opportunity to do some really strong retail business as we go through this transition of writing this business, and I think over time retail can also contribute to our growth. We just don't do a lot of retail lending. We are just starting to get them.

Mark DeVries - Barclays

And one last question for me, do you still expect the [Clause 31] to prepay in the fourth quarter.

Joseph Ficalora

Yes.

Operator

We will take our next question from Collyn Gilbert with Stifel Nicolaus.

Collyn Gilbert - Stifel Nicolaus

Tom just on your comment about the on track for the $100 million in prepays for the year, does that imply it down for a quarter, because I guess if we look at…

Thomas Cangemi

No I wouldn't say that, just am being conservative Collyn, the reality is that prepay has been elevated, if you look at the past two quarters there were two record quarters that were pretty much flat quarter-over-quarter up to $30 million. We are in a very unique prepay environment. This could last for a while. The good news is that we have some good visibility as of October that we should be strong for the fourth quarter. As you know, fourth quarter is always our busiest quarter, so we are going to have lots of activity. In addition we actually grew the net loan booking from Q2 to Q3, which is unusual given the nature of the business following the seasonality of that. So going into Q4 we expect to see some good originations, some good new business and some good prepayment activity.

Collyn Gilbert - Stifel Nicolaus

And then just…

Thomas Cangemi

And I only say it take a [100 million] to make loss of [100 million] in Q1 so…

Joseph Ficalora

We have robust prepay. Obviously the $100 million at the time I said it seemed like an incredibly high number, but we can easily exceed that number.

Collyn Gilbert - Stifel Nicolaus

And then Tom I know you gave guidance on the margin, how are you thinking about just the absolute level of net interest income, I mean obviously you know.

Thomas Cangemi

You know, it is, I'm not going to give you a specific quarter but for the first time in probably three years I see visibility of trough in the margin. So we are looking at a very short-term and I could say short-term is well within 2013 we should see the bottom of the margin assuming its tough interest rate environment and that's a very positive view from our perspective knowing that it’s been many years before we saw visibility of where the margin will trough out. So the good news for us is that we are seeing some good growth, we believe we will continue to dominate the space in multifamily, the rates are reasonable if you look at the spread of the treasury curve and where pricing for liabilities are right now we have an opportunity to hopefully trough the margin out in 2013 hopefully sooner rather than later.

Collyn Gilbert - Stifel Nicolaus

That's interesting. I wouldn't have expected you to see a trough in the margin. So what's driving that specifically?

Thomas Cangemi

I just think if you look at how many billions of dollars of loans that we priced right in a portfolio you are at a point now where you always have refinancing of property transactions but the rate has come down dramatically for the absolute yield on the portfolio between security yields coming down and loan yields coming down or deposits are pretty close with the 60 somewhat basis points in all response to retail. We are looking at a putting the business on at a reasonable spread, its going to get close to a trough.

Joseph Ficalora

Remembering that the rates and the terms of our loan book very, very short-term so think back three years ago, three years ago rates were not that high, so rates have not been in the fives and beyond for the years that are immediately passed, so when those long-term of three fives they are going to be refined very close the way we are.

Thomas Cangemi

When I say trough on the margin I'm excluding any prepayment activity. Our prepayment activity has been a tremendous support to our margin. That's our business model.

Collyn Gilbert - Stifel Nicolaus

So I guess if we look at the loan yield is 511 this quarter and you new multifamily originations are going at what?

Thomas Cangemi

Yeah, that 511 includes prepayments. If you back up the prepayments that number is well below five. So we are at a point now where the bleed on the margin from asset yields coming down will significantly change. I think probably like the 470 type yield portfolio average yield. The support of the margin from prepay is the same regardless of the rate that’s going on.

Collyn Gilbert - Stifel Nicolaus

Right. But I am just trying to get the rate on new on current originations?

Thomas Cangemi

It’s around 3.5; I think I said in the last question, about 350. And again that’s this market that can change quickly. I mean obviously if rates (inaudible) we hope we get a bump up in rates. We like to see higher rates. That does impact the mortgage bank but obviously for the portfolio higher rates will be a good thing.

Operator

And we’ll take our next question from Bob Ramsey with FBR Capital Markets. Please go ahead. Your line is now open.

Bob Ramsey - FBR Capital Markets

I was wondering if you could talk about maybe any opportunities on the funding side to bring down borrowing cost. I know you guys have got a small amount of pretty expensive troughs out there that should be callable and some troughs that are still probably above market rate maybe not quite as expensive. Your thoughts there and maybe not a big balance restructuring but the opportunity to kind of chip away some of the higher cost borrowings as we go forward?

Thomas Cangemi

Yeah, Bob I would say, we've been pretty clear about it. Any substantial reshuffling of liability book will take place in context of an M&A transaction of any material benefit. So as we stand today, we have some liabilities rolling off next year which should be favorable to probably around just a $1 billion, not a material number. And to think about where the funding market especially grow our booking take on the funding, funding is relatively cheap compared to our average cost we have on the book.

So if you think about the opportunities, substantial transaction would result in a substantial restructuring that is kind of how we are looking at the bank advance book. As far as the trough, the trough is small and it’s immaterial. So we have a few new high cost pieces out there, nothing that’s going to move the needle but in the event we will evaluate as we look at our capital plan or the capital allocation in particular as the new requirements you lose the benefit of some of those troughs and we absolutely have some very low quest troughs as well at affording rate in this environment where there have been no reason.

Bob Ramsey - FBR Capital Markets

Right and I can appreciate looking for a bigger transaction to sort of really restructure the borrowings, so why not take some of the strength in mortgage banking or in every quarter to sort of we do a little bit at a time?

Thomas Cangemi

If you look at the big picture for us, we see overtime these liabilities will get closer to maturity, as they are closer to maturity the out of the money value will be less so you have less out of the money value, you have an opportunity to look at the restructuring if it’s reasonable for shareholders. Having a restructuring that’s going to be more than every say in excess of five years per say, I am not sure if that’s in the best interest right now absent the transaction, reshuffling the entire balance sheet. So we look at it every quarter Bob depending where the rates are, depending where the expectation of rates are, what was the value of these, out of the money value of the liabilities, if you have well north of 10 to 15 points out of the money it’s an expensive hit to capital.

Bob Ramsey - FBR Capital Markets

And then sort of shifting gears, could you talk about your expectations for expenses going into the next quarter and is there any cost benefit from the system conversion you guys cited earlier on the call?

Thomas Cangemi

I think in general, I am going to give you very short data types; we are going to come in really close to last quarter between 146 to 148 that’s the range. We are still battling with getting where some of these NPAs as they come here foreclosure expenses a significantly less in the previous year, that could be a very big benefit next year as the percentage of NPAs are down dramatically is come down every quarter since March of 2010, materially so we are seeing a very nice reduction of NPAs, so that we expect to see in 2013 less cost for further expenses, but obviously that's getting to the asset class and getting to the market and recovering from value there that’s pretty much where most of our costs have been of the up tick.

So I think we have a reasonable containment on expenses. I am not going to give any aggressive guidance here, I feel pretty confident of that range and we were pretty close to the previous quarter in the range and to 145 to 148 was the high end of the range driven mostly through foreclosure expenses, fourth quarter should be around that same level.

Bob Ramsey - FBR Capital Markets

Okay, that's helpful. And then with the mortgage banking and the servicing laws, what is the best way to think about that, is that the hedges or it was actually the MSR is it a refection of the 10 year, or prepayment activities or how should we think about the moving pieces on that going forward?

Thomas Cangemi

Yeah, if you look at the significant adjustment there, no question, you had a banner quarter and origination, again our sale margins are very robust, all end margins were close to 2%, if you look at our price margin and then we take out hedging and carry close to about 155ish. So that the business is very healthy in origination but as you know the MSR value was very volatile in respect to our interest rates and if you look at where [FMCL] was at quarter end and when [QV3] was put in place in the late part of the quarter that did have an impact on the prepayment speeds of the portfolio.

Prepayment speeds with lower average coupon right now is around the 4.07. So we still have vulnerability to prepayment, if rates it would be high to get the MSR where we capture some of that value, but as for some reason, they swing no vehicles back to 3% and let’s say close to 3%. We have the opportunity for significant refinancing, so being very conservative on the valuation of MSR.

Operator

And we will take our next question from Moshe Orenbuch with Credit Suisse. Please go ahead. Your line is open.

Moshe Orenbuch - Credit Suisse

I mean, if I look at the loan yields on your books and subtract out the prepayment income you get about 4.6%?

Thomas Cangemi

It’s 4.70%.

Moshe Orenbuch - Credit Suisse

Its 4.70%. So, I guess the question really is the concept of the traffic of margins, is it because some of your borrowers are sitting there and having refinanced recently so their prepayment penalties are too high. I mean because otherwise one would think you would be kind of approaching that 3.5% over next several quarters?

Thomas Cangemi

3.5% coupon with a funding, new business funding close to 50 bps, it’s a fairly reasonable spread and I mean you can get any reasonable, even get two to three year your money at a very low cost. If you are looking at incremental growth, that should benefit or stabilize some of the lost income from assets reprising at higher yields. What we see right now is that the bleed in 2009 and ’10 and ’11 is going to be less than ’13 because the average coupon is much lower, we are not going to have 580s burning off or the 620s burning off, you are going to have average 470 burning off and as each quarter goes down, the higher yielding coupons will prepay or at least refinance and that will pay us our point and we will put them into the market which is around 3.5%.

So assuming interest rate and we are assuming Bloomberg (inaudible) abysmal view of interest rates, we are assuming lower rates. We are seeing the trough sometime into ’13, let's say it’s a mid 2013 which is visibility, two to three years ago we had zero visibility because there's so much uncertainty of interest rates. I think what we can say today is that it’s fairly certain that rates are not rising in the short-term. So we are assuming that the visibility that we are seeing in when you run that visibility into our system and look at it our analytics we are seeing margins dropping out given that we are putting on reasonable spreads of the five year CMTs and our asset class is very short, its not a 10 year asset, or 20 year asset, this is a 3.2 year type average life, this portfolio churns very rapidly.

Moshe Orenbuch - Credit Suisse

Just a follow-up, could you talk a little bit about what you are planning to do going forward on the securities portfolio. You’ve got a nice yield on that. Can you, what, how long date of this at and how is that going to…?

Thomas Cangemi

The securities portfolio today is probably too small. We've been very cautious on growing it aggressively. We've been dealing with mostly accelerated call positions. We had a lot of callable debentures over the past four, five years and as we get into these positions, they’ve been called on an annual basis. We've been a fairly large player into the Agency DUS market. So you are looking at a seven to eight year type security with a 10 year final in the multifamily backed collateral, all backed by the government.

Principally, all our purchases have been at a discount apart, so we don’t have the prepayment risk there on any potential credit exposure to the DUS market. But that’s pretty much been a product of choice. We would like to be larger there’ we are just very uncomfortable in going along the curve and believe me, 10 years is very long, but what's out there is exotic products that are much longer than 10 years and we would use to go into that product, so we're trying to keep it very simple. I would say 99.8% of all our purchase are government backed, and which should be somewhere between 14% to 18% securities. If you see a little, the bump up we had in the quarter, a lot of that’s going to be paid off on calls in Q4. So we're trying to keep it flat.

Moshe Orenbuch - Credit Suisse

Got it and the yield and the stuff that you're buying roughly?

Thomas Cangemi

It's north of 250 and north of and we're trying to keep the yield obviously at least 2.5. We haven’t been too active as rates are obviously lower than that.

Operator

We’ll take our next question from Matthew Kelley with Sterne Agee. Please go ahead. Your line is open.

Matthew Kelley - Sterne Agee

Just kind of following up on the margin discussion; if you’re adding 350 incremental type yields, what type securities do you think you might be purchasing as that portfolio grows, where the yields……?

Thomas Cangemi

I think to answer the question on securities side, we are not looking to buy securities, in the events that markets happen to move in the right direction, we will put on billion in this environment; we need to be large on the securities side; we would like to be between 15% to 18% given the environment unless we see substantial loan growth next year which is possible depending where rates are, but given where we are sitting today, it’s not an attractive yields you go past a 10 year final. So we are being cautious to try to run it; we went as well as 9.9% and I think around 11% now, some of that we’ll pay off in Q4 so we are trying to run in play, if rates were to move north from here, we would be putting on a few billion dollars.

Joseph Ficalora

There is no question that the securities portfolio is far less relevant than the loan book, the loan book is far better return for far shorter period and has a low risk profile. So the loan book is where we concentrate.

Matthew Kelley - Sterne Agee

And then how should we be thinking about just the incremental profitability of the mortgage banking operation, obviously revenues were up really strong over the last couple of quarters, but haven’t seen a real conventional increase in the expenses in that business. Overtime, the Mortgage Bankers Association they come out with their updated forecast today, down I think 20% for originations, I think Freddie Mac is 15% to 20%. How should we be thinking about profitability; it seems like that’s an incredibly profitable business just looking at where the revenues have gone and not seeing a real commensurate move in expenses; can you talk about that for a minute?

Thomas Cangemi

We had a tremendous origination quarter; if you look at it, so we had a loss on service; we made a fairly large adjustment to the MSR valuation in this environment that will have to do where the interest rate environment as a point in time. But big picture, you talked about where the business will be next year; the reality is, if the [swing note] rate is 3% you will have a robust 2013; if the swing note rate happens to be closer to four, it will slowdown. Having said on the previous question, we are out of 4.09% weighted average coupon on our servicing books; as the entire portfolio could be financed especially with the California type weighted portfolio.

And Matt, you will see some pretty good refinancing at lower rate. Now where we are today business is strong; going into Q4, business is relatively strong, given QV3, given that rates are low, that's predominantly 75% to 80% refi. Purchase environment, the one thing we are noticing, if we look at, we originate in all the states, the purchasing environment, house purchases, home purchase are definitely improving. We are seeing a nice stabilization in the U.S. housing market, that will drive the mortgage business, no question about it.

Joseph Ficalora

Matt, there is no question that we are a very efficient operating bank generally across the board. The systems that we are using in this case are very well proven proprietary systems that have demonstrated a capacity to service twice the level of loans that they are currently servicing. And certainly, our origination capacity across the country is significantly higher than the level that we are at today. So the idea that we could operate prospectively very effectively and efficiently with a significantly higher volume is a matter of just gaining share. And then I think based on the changes we have seen in the marketplace, we should be able to do that.

Matthew Kelley - Sterne Agee

What are the expenses related to the mortgage banking operation? I know you guys got $58 million in the second quarter, $53 million in the third quarter for revenues; (inaudible) margins there?

Thomas Cangemi

Matt, when we filed the Q we showed segment reporting to help you get a better picture there.

Operator

And we’ll take our next question from David Hochstim with Buckingham Research. Please go ahead, your line is open.

David Hochstim - Buckingham Research

I wonder, just give us a sense of how the competitive environment is looking in the multifamily businesses?

Joseph Ficalora

There is no question that there are some additional players in that market, but as we said in the past, over the course of the last financing of much of the marketplace there were many very, very large structured debt lenders in the marketplace doing high volume lending and they are not there. So even though there are new names that people recognize in the marketplace, there is not anything near as much competition in the marketplace as existed in ’06, ’07, ’08.

So the reality is that the marketplace has a lot of visibility, but from the standpoint of opportunity, we should be able to, as the opportunity presents itself for our balance sheet to grow, we should be able to gain share in this market relatively easy, because we are consistently in the market, in a structure that our niche actually works well with.

So although there are other players in the marketplace and they may get some visibility, they are not necessarily doing what we do and they are not necessarily going to be relevant overtime, given the fact that they are basically replacing the structured debt lenders. They are not replacing us.

David Hochstim - Buckingham Research

And any of these new competitors more aggressive on rates or price?

Joseph Ficalora

Some of them are; some of them are aggressive on rates, some of them are aggressive on terms. The reality is when you are coming into a new market you have to have some way of gaining share. So some of the players are in fact doing things that are different than we would do, but that's not unusual. At the very same time, you could have two different banks talking about being multifamily lenders and we may never see that other bank in our niche. Our niche is unique. Multifamily in New York is huge, the whole world lends in New York, so many times you hear people talking about they are doing multifamily loans, they are not necessarily doing what we do.

Thomas Cangemi

David the good news is that we are seeing good economic spread between the five year CMT between 275 to 300 its been relatively stable, the five year has been bouncing around but it hasn't really gone to a level that don't make sense. But we are seeing reasonable economic returns, and I think everybody is pricing those returns within the 25 basis points ban.

David Hochstim - Buckingham Research

Can you just talk about what opportunity there exists lower CD costs, or your core deposit rates there.

Thomas Cangemi

No the core deposit rates probably have more opportunity than do CDs. CDs are highly competitive and everybody focuses on the marketing if you will of CDs. But the reality is over the course of the last 12 to 18 months, the place where the best opportunities actually reside would be in the large core deposit bases that actually have rates that are adjustable. There's very large difference between the rates being paid on core deposits.

David Hochstim - Buckingham Research

How much do you have, I mean, have you been, you have cut your CD rates like everybody else, but I mean, so…

Thomas Cangemi

Oh right yeah. On CDs we don't have that much room now.

Joseph Ficalora

Given the way the environment is in the next year we have about a 5 billion on 1%. So as rates go lower we will get more savings there, but its only 1% on that whole lot of savings. So you had a big benefit on the overall transaction, we see the drop on the quarter-over-quarter but we are at about $5 billion coming due at 1%.

Thomas Cangemi

And remember we have almost $20 billion at other rates. So that's where the real opportunity would reside.

David Hochstim - Buckingham Research

Just back to the MSR write down, if rates stay kind of where they are, would we have a much smaller impairment charge in Q4, do you think.

Thomas Cangemi

Yeah, I would say that's correct.

Joseph Ficalora

Rates would go up and (inaudible) moved yet away a little bit. Obviously like I said [47] weighted average coupon and if the same rate goes closer to 3, we could have accelerated prepayment activity. So again, its going to be driven on the value of the yield going in to the fourth quarter and what's the culture of the borrower that we have servicing because that portfolio moves around very rapidly.

David Hochstim - Buckingham Research

What was the impairment charge in this quarter?

Joseph Ficalora

Total yes (inaudible)

Thomas Cangemi

We market down $42 million and effective pre-hedging. So net of that we hedged a gain of 20 million. So net 20.

Operator

We’ll take our next question from Dave Rochester of Deutsche Bank. Please go ahead. Your line is open.

Dave Rochester - Deutsche Bank

Just back on the cost of deposits, I know you mentioned things are so competitive but with Hudson City out of picture now, I mean, aren’t you thinking, if you’ve got a little bit more room that you had previously to lower deposit cost.

Thomas Cangemi

Well, you know, it's not a matter of just one bank in the market. There were certain places where we close to Hudson City but many, many places where we had no affect whatsoever from Hudson City. So the reality is that there are opportunities in the market place and these opportunities exist all over our franchise, which includes Florida and Arizona and Cleveland and then as you might well imagine, there is differentiation between the rates that we pay and the rates that are being paid generally in the market place.

Dave Rochester - Deutsche Bank

Back on the loan pricing, are you seeing CRE still at 35 to 50 bps over multi family yields at this point, 4% or so?

Joseph Ficalora

Yeah, I mean, on average, it's about 25% to 35 bps. Coming back to the pricing, the good news in general, it feels like (inaudible) no one is breaking that 3% threshold for portfolio, which is good when you are looking at five year money. So we're around 275, 300 over, the economic returns for us on 3.3 (inaudible) is reasonable.

Dave Rochester - Deutsche Bank

So the 3% is basically a low for I guess in the (inaudible).

Joseph Ficalora

I know we are putting an outlook and its not 3%. The average closing for the quarter was probably more like 360ish, but we are having the pipeline to 3.5. And this feels like a very low rate and in prior quarters you have been holding it probably north of that. So it seems like most players are not breaking that level.

Dave Rochester - Deutsche Bank

Okay and lastly you talked about the (inaudible) City loan briefly. Can you just remind us how big that is today and what kind of prepayment penalty income you’d expect.

Joseph Ficalora

It’s just 500 or 600 million , the 580ish, and the numbers are going to be a substantial number, I think a couple of points. I will be in the range of $18 million.

Operator

And we will take our next question from Tom Alonso with Macquarie. Please go ahead your line is open.

Tom Alonso - Macquarie

Good morning, guys. Most of my questions have actually been answered at this point just real quick on the sort of the shift or I guess the perceived hit the wave from CRE this quarter was at you are dealing or just because you had more opportunity to originate on the multi family side.

Thomas Cangemi

Well its two fold, obviously our origination on the multi family side is very real, but also we are in the business of literally selling off pieces of the large commercial assets that we are doing. So we are getting good fee income from that and we are basically doing good loans of size and then we are trading some of those loans in the marketplace.

Tom Alonso - Macquarie

I got it. Okay. And then just back sort of on the M&A topic, are you guys still I guess for lack of a better term kind of geography agnostic where you just go where the opportunity presents in terms of the potential M&A.

Thomas Cangemi

Actually the place where there is clarity that the transactions create a better banks from the standpoint of its capacity to perform all of the operating metrics of the new bank are intended to be better than the existing bank and certainly that doesn’t leave out asset quality or the ability to have funding sources at good pricing or the ability to have performance metrics from the standpoint of accretion to earnings or accretion to tangible. We do a deal; it will be a good deal for shareholders.

Operator

And we will take our next question from Steven Alexopoulos with JPMorgan. Please go ahead, your line is open.

Steven Alexopoulos - JPMorgan

Hey, good morning, everyone.

I am calculating the earning asset yields without the prepaid is around 4.55% and with new loans coming in; you said 3.5% and securities 2.5%. I am trying to understand how it’s possible that by mid 2013, we can see earnings asset yields decline and this implies about a 100 basis point plus decline the relatively short time. So just maybe time you can walk us through?

Joseph Ficalora

I think I can assure you that on cash flow model obviously does not have the capacity of the multi family lending and the prepayments are on the one bucket very, very fast right now. So we have though assume and lot of that, needs four type of group (inaudible) past prepay penalty income and going into the market. Now if we are growing, we are assuming we are going to grow next year. We feel pretty bullish about that multi family loan growth next year. That will be our incremental growth. If you are putting on 250 and you are funding at 50 bps allows you 50 bps, so it’s average close to 64 on the deposit side, it’s margin accretive. Then you have more loan growth to get there, but we have pretty ambitious loan growth for next year based on what we are seeing.

On the security side again I don’t have the security book running up dramatically here, I will be dilutive to the margin. And I will now look in to put on security, it’s the bare minimum right now, it places a high (inaudible) security volume, so depending on the level of security that will probably dilute the margin.

Steven Alexopoulos - JPMorgan

Okay, but what should we think about the earning asset yield somewhere between where you are currently reinvest loans and securities, right.

Thomas Cangemi

Again security yields, I don't see them going substantially lower from here. We had a lot of lead over the past 2.5 years. We have been reluctant to grow that average balance to be frank. We have a nice warehouse down, it’s around $1 billion if the business picks up we would like to go that up materially from that, that’s adding to it, but the big picture is that the multifamily book is rapidly cash flowing. So the average life span is relatively short and we are getting a decent yield compared to incremental funding going forward.

Steven Alexopoulos - JPMorgan

Okay, and just one question, I know you answered quite a few questions on M&A, upon the comments that we also get sizeable transaction over the next year. We have seen a few out there recently from some of your competitors we know you don't necessarily get to look at everyone but are these ones that would fit either the strategic or financial criteria that you think about more broadly?

Thomas Cangemi

Yes, I would say so, I mean I would say we see most transactions and I think it’s fair to see we feel more transactions have traded.

Joseph Ficalora

Yeah all the big deals we've seen.

Thomas Cangemi

We are not surprised by transaction that is traded. I think the reality is that as Joe said it’s going to be a shareholder transaction where the value is created in combining the shareholders. It’s not about getting bigger and not putting strong returns, [elements] market for us would be highly to the shareholders, like I said previously we would definitely roll out repositioning of the liability book in conjunction with the transaction to deal with the high (inaudible) and that would also drive we believe drive our future earnings.

Joseph Ficalora

I think we are starting at a point where we have much better metrics today and we reasonably can expect that into the year ahead, we will have much better metrics than the banking industry. If we do a deal, those numbers alone would be better. So the idea that we would entertain the opportunity to do a deal is very real. But we are also very much aware that there are regulatory expectations that must be met by all banks and in particular by a bank that is going to crossover the $50 billion mark. So we are concentrating on preparing ourselves for that particular task. And certainly, once we have done that once we are at the point where our regulatory comfort levels are such that they would not preclude doing a deal will entertain the deals that are in the marketplace and available.

Operator

And we will take our next question from Ken Zerbe with Morgan Stanley. Please go ahead, your line is open.

Ken Zerbe - Morgan Stanley

Tom I know you mentioned this is only the servicing asset. I know you mentioned that you are being conservative there but what kind of assumptions are you making on prepayments or like life of the servicing asset and is there anyway to benchmark that…

Thomas Cangemi

I am not going to give specific into my assumptions. I will tell you that our capitalization rate right now is a 2.97 which is less than 1% on servicing fee of 25 basis points. If you want to go historically servicing transactions prior to the cycle was getting eight to 10 times. So we are valuing less than one. So I think that’s fairly conservative given that we have a 407 coupon and that could move quickly, so we want to prepare that rates go lower. We know we want to make sure we have a conservative view on valuation.

Ken Zerbe - Morgan Stanley

Do you know how that compares to other banks?

Thomas Cangemi

I would say probably at the low end of the valuation, we get definitely below end of the valuation. Again but depending on the nature of their portfolio, portfolios much newer, right? We have been doing this since the beginning of ’10 so rates will low other guys have a higher coupons or different types of collateral on their book. All what we know fairly new, all new originations that are under the new standards of Fannie and Freddie and its pretty rapid book, it moves pretty quickly. So you think it’s conservative? But again rates move around.

Operator

And we will take our next question from Mike Turner with Compass Point. Please go ahead. Your line is open.

Mike Turner - Compass Point

Just a follow-up from earlier, what was the average size of the mortgage warehouse this quarter?

Thomas Cangemi

Just about a $1.1 billion on average, so it’s a little bit as expected. We had a nice little bump up there based on origination volume for holding out that for the fourth quarter which should be nice.

Mike Turner - Compass Point

Thanks and then what are and I don’t know if I missed them in there, what’s kind of the environmental cost related to foreclosure in the quarter that you would have some opportunities to bring down in the future?

Thomas Cangemi

That’s more on the portfolio. It’s very large number that number last year was $40 million, $50 million last year. We don’t have those types of expenses running our business. So if you take that out of our run rate in 2013, it could be another $25 million to $35 million benefit next year in 2013.

Mike Turner - Compass Point

What was it this quarter?

Thomas Cangemi

I specifically don’t have, we haven’t disclosed that.

Mike Turner - Compass Point

Okay. And then I guess just may be some more clarity on the M&A, did I understand you right that you won’t do a deal until you are over $50 billion?

Joseph Ficalora

No, the likelihood is that we will do a very big deal and we will go over $50 billion, but the preliminary work in doing a big deal is ensuring that we have regulatory comfort in being bigger than $50 billion that’s the important thing. In this environment, there is pre-approval by the regulator of the new company and the new company will be bigger than $50 billion. So if that task is something that we by necessity we will do that first.

Mike Turner - Compass Point

And then just lastly on the securities yield I am a little confused it sounds like you said it’s not going to come down much more but your overall yield it looks like it’s around 370, 380 and you are reinvesting it 250, I was just a little confused?

Thomas Cangemi

I think, I guess, there is going to be some lead depending on how much of this tough cash flow out rapidly and gets called. I think we have seen a substantial amount of call dissipate over the past few quarters. If you back to 2009, 2010 it was [$2 billion] of cash will coming in at 6% and 5% and they were all agency. So we are not exposed to that level of the bleed, now its going to go lower but we are running in place so if you look at where we are today, I don't envision $1 billion of course, it will be a few hundred million in the fourth quarter and maybe less than on a quarter-over-quarter basis in 2013, but we are also seeing, we are not looking to grow the portfolio any material length until we see better value in the market right now, once [QV3] came into place there was less value, as the portfolio hold up the securities. So again what we are holding bare minimum for collateral purposes and our balance sheet liquidity dependency purposes.

Operator

And that's all the time we have for questions. I would like to turn the call back over to Mr. Ficalora for closing remarks.

Joseph Ficalora

On behalf of our board and management team, I thank you for your interest in the company and our third quarter 2012 performance. We look forward to talking with you again in January, when we report our fourth quarter 2012 earnings. In the meantime, please accept our sincere wishes for a healthy, happy and prosperous holiday season.

Operator

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

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