Flagstar Financial, Inc. (FLG) Q3 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to New York Community Bancorp’s Third Quarter 2011 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.

Thank you. Good morning everyone and thank you all for joining the management team with New York Community Bancorp for our quarterly post-earnings release conference call. Today’s discussion of our third quarter 2011 earnings will be led by 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 provision 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 defer 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 deposit flows and in the demand for deposit loan and investment products and other financial services; and changes in legislation, regulation and policy. 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 2010 Annual Report on Form 10-K, and our first and second quarter of 2011 10-Q. The release also includes reconciliations of certain GAAP and non-GAAP earnings and capital measures, which will be discussed during this conference call. If you 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 the call over to Mr. Ficalora, who will provide a brief overview of our third quarter performance before opening the line for Q&A. Mr. Ficalora?

Thank you, Ilene and thank you all for joining us this morning, as we discuss our third quarter 2011 performance, which was notable for a variety of reasons including solid earnings driven in part by increased mortgage banking income and excluding prepayment penalty income, a stable net interest margin, continued capital strength, meaningful loan growth, improved asset quality and continued efficiency. To begin, we reported GAAP earnings of $119.8 million in the current third quarter, which generated a 1.27% return on average tangible assets and a 16.43% return on average tangible stockholders’ equity. We also reported operating earnings of $117.1 million in the quarter, which generated returns of 1.25 and 16.08 respectively. At $0.27 per diluted per share our third quarter GAAP earnings was consistent with those reported in the trailing quarter. Our operating earnings were also equivalent to $0.27 per diluted share and we are a penny higher than those reported in the trailing three month period. The modest difference between our GAAP and operating earnings was primarily attributable to net securities gain. We also reporting cash earnings $130.2 million for the quarter which contributed 10.5 million more to tangible stockholders’ equity than our GAAP earnings and we are equivalent to $0.30 per diluted share. Excluding accumulated other comprehensive loss from the calculation, our ratio of adjusted tangible stockholders’ equity to adjusted tangible assets was 7.92% at quarter end. Given our earnings capacity and the strength of our capital position, the board of directors last night declared our 31st consecutive quarterly cash dividend of $0.25 per share. The dividend will be paid on the November 17th to shareholders of record on November 7th. Returning to the third quarter performance, I’d like to start with linked-quarter increase in mortgage banking income which was driven by was attributable by a significant…

The floor is now open for questions. [Operator instruction]. Our first question will come from Bob Ramsey with FBR. Your line is open. Bob Ramsey – FBR: Hey, good morning guys.

Good morning, Bob. Bob Ramsey – FBR: I was hoping you could provide a little more breakout on the mortgage banking sort of split out the servicing versus origination income, talk about gain on sale trends in the quarter and then, maybe talk to the sort of your outlook for this business particularly as you got some of the larger banks pulling out of the wholesale mortgage challenges as that create opportunities.

All right. Hey Bob, it’s Tom. Couple of items obviously we had a nice bump up in the overall flow of business given the rates were throughout the quarter. We did have the two major components being mortgage and service and we’ll break it out, net was 24 million, debt 30.9 million – approximately $31 million origination income. Servicing was at loss about 6.6, the net was 24.2. The net differential clearly had an adjustment to servicing. So, if you back the servicing with that the actually mortgage banking income will be higher. So, obviously going forward into a higher rate environment, hopefully, we’ll see some benefit there in the future quarters. But obviously, rates have changed dramatically since the third quarter. So, in respect to overall new business we are thinking about somewhere between Q1, Q2 as far as economics in going to Q4. As far as the gain on sale levels, we’re around about 125 on gain on sale margins. So, up substantially from the previous quarter but again that will probably adjusted going into Q4 depending on the level of interest rates. Bob Ramsey – FBR: Okay. And then, sort of what you see is the outlook big picture for the industry as you got some of the big guys pulling out of the wholesale channel or the corresponding…

We are seeing a lot of changes and we are just watching from the sidelines here and we are still focused. We’re making significant investment in this business. We are committed to it and the good news about it is as other larger players come out we’re still in the business. So, we hope to gain share. We still have a very strong initiative towards to the jumbo prime market. Obviously, that’s been very slow. It’s slowed down so far. We are working with some future partners. We hope to get that ramped up. The volume was in the material but we are closing a handful of loans in that arena. We believe that in the future to be another catalyst for at least additional volume growth. Bob Ramsey – FBR: And then, maybe just a little more color on what drove the servicing loss for this quarter.

It was adjustment on prepayment activity on MSR portfolio. The acceleration – our overall portfolio was high quality portfolio, a very hi-fi go, very well structured, the highest quality type bars and when rates move this quickly, you have a substantial amount of movement on the MSR and the level of fallout was probably higher than we modeled initially going to quarter, model adjustment. Bob Ramsey – FBR: Okay. Thank guys. I’ll back out and get back in if I have more questions.

We’ll go next to Rich Weiss with Janney Montgomery. Your line is open. Richard Weiss – Janney Montgomery: Okay. Good morning.

Good morning, Rich. Richard Weiss – Janney Montgomery: I was wondering if you could give a little bit more color on the net interest margin where you see it going and also why the prepays were off, something that due to season factors.

Rich, on the margin side we holding up it pretty well. If you remember the last quarter, we guided between five to 10 basis up or down. We came down one as prepay. Looks like we are looking at a margin down maybe five basis points in environment. We still see some good loan growth. We intend to grow the net loan book. So, I think in reality rates are significantly lower than it was a few quarters ago. So, we are looking at some margin pressure. But then, it kind of stabilizing that margin ex prepayments and prepayments as we always talked about very hard to predict. Although the level was strong, it wasn’t as strong as Q2. We did reasonably prepays. We expect to have a reasonable prepays in the cycle. So, it’s fair to say over the next year or two, prepayments should be very active and part of our business model. However, it’s very hard to budget on the quarter-to-quarter basis what we’re going to expect.

Rich, the third quarter is a quarter that many of the people that are in our business are not available. So, a lot of sat that would have occurred in prepayments that go along with those did not occur. Richard Weiss – Janney Montgomery: Okay, got it. Thank you very much.

You are welcome.

Our next question is from Matthew Clark with KBW. Your line is open. Matthew Clark – KBW: Hey, good morning guys.

Good morning, Matt.

Good morning. Matthew Clark – KBW: On the expense side, can you give us a sense for how we should think about those. There has been I think in recent article about some headcount reductions you guys have done and it doesn’t seem like to be a bigger number. But, just curious on how you’re thinking about expenses ex-CDI

I won’t give specific guidance for the fourth quarter [inaudible] expenses. Obviously, we worked real hard to be efficient. We had obviously having a larger OREO book. We have some more foreclosures expenses we hope that may going forward. But reasonably guidance for Q4 is about 143 million ex CDI. Matthew Clark – KBW: 143?

Yeah, 143. Matthew Clark – KBW: Okay. And on the securities portfolio, can you give us a sense for maybe the updated duration of that portfolio what you may – what you guys were doing during the third quarter and how we should think about that deal – that point of deal maybe going forward obviously we expect pressure but just the magnitude and timing.

I will tell you that we worked very hard not to be in the market on buying actively securities in this environment. Rates are extremely low, we are not that comfortable putting on positioning here. We’ve done a fine job in moving the cash into warehouse book. As you know the warehouse went up to $1 billion as expected. We probably run the warehouse somewhere between 750 to 1 billion depending on activity regarding the mortgage banking. So, obviously we had an opportunity to move our cash hold into a high-yielding assets. In this environment, we are not that active. We think it is a short, the rates start to move up here, holds up putting money to work and unfortunately durations are little bit longer than we expect. We are probably looking between four to six years instead of shorter type duration opportunities. But, we are not looking to grow the portfolio materially. My guess is that it depending on rates obviously you want to between 12% and as high as 16% depending where absolutely are. And we are only buying agency securities. Matthew Clark – KBW: Okay. Thank guys.

We have next question from Collyn Gilbert with Stifel Nicolaus. Your line is open. Collyn Gilbert – Stifel Nicolaus: Thanks. Good morning gentlemen.

Good morning.

Good morning, Collyn. Collyn Gilbert – Stifel Nicolaus: Can you guys just talk a little bit about what you are seeing currently in the multifamily market kind of where you’re seeing the opportunity, where is the pressure. And then, the same kind of commentary on the CRE side.

Yeah. There is no question that the New York market is strong and there is opportunity that is coming from the unraveling if you will of lot of the structure debt defaults. So, that is still in the marketplace and coming for sale. So, if anything we continue to believe that quarters ahead will continue to present opportunity for us to grow our actual lending and we are seeing that. So, the marketplace is very strong. The competition is very, but, the competition is significantly less than it was during the let’s say six, seven period when you had all that structure debt that was way, way, way overvalued and taking large share of the marketplace. So, the guidance in the market that is most aggressive with regard to rates and maybe even structure is Fannie Mae. If Fannie Mae stays in the multifamily market, it will continue to put pressure on what can we earn in this sector. If Fannie Mae returns to omission and provides funding for the production of new multifamily housing rather than 50 or 75 old housing, then there will be a significant difference in the rates that we derive. Collyn Gilbert – Stifel Nicolaus: Has the spread narrowed between your rates and Fannie and Freddie on the multifamily side.

It’s basically yes. The numbers are the same as they have been. We in fact are looking at 300 basis points over a hour measure which is the five-year CMT and certainly Fannie has the ability to change because remember they are not dealing with a profit motivation necessarily. They have the ability to commit tax payers to paying the bills down the road. So, as they do with one-to-four family where they create assets that banks can portfolio, they are virtually trying to do the same thing in multifamily. Holding rates below where they should be and creating a product that virtually is not appropriate for this marketplace.

Collyn, I would add to that. Since the U.S. downgrade spreads are widen a little bit as far as the offerings to the cost of capital. If you are looking at for us, we held the line above 4% even though the five year really fell dramatically. So, we are able to get higher spreads there. So, that’s been the favorable event for us and given the current quarter but the third quarter we put loans on a net average coupon around 4.5% which was slightly better than we expected. If you take the average five year treasury of market well 275 that was obviously below that. So, we did pretty well and we expect to holding our over asset deals. Collyn Gilbert – Stifel Nicolaus: Okay, that’s great. And then, just along those lines because you guys have seen some good growth on the CRE side. Is that – do you expect that momentum to continue and kind of what’s driving that.

Yeah, the market is definitely strong. There is an awful lot of funds available to invest in this market and obviously they want good loans to go along with their significant down payments. So, the marketplace as strong as it is represents a good opportunity for us to gain share there as well. And by the way, those yields are little higher. Collyn Gilbert – Stifel Nicolaus: Okay, okay. Great, thanks.

You’re welcome.

Your next question is from Mark DeVries with Barclays Capital. Your line is open. Mark DeVries – Barclays Capital: Yeah, thank you.

Good morning.

Good morning. Mark DeVries – Barclays Capital: Could you give us some sense of how much elevated mortgage banking activity is benefitting your name and how much incremental benefit you might be able to get in the fourth quarter.

I won’t be specific for the fourth quarter. We did have some benefit in Q3, obviously we bumped up the warehouse quite a bit. The warehouse was obviously a significant opportunity for us. We felt going – coming out of Q2 the low the warehouse is about 250 million on an average basis, we made up to over a billion on average going into third quarter. We should see elevated levels in Q4. So, assuming we are north of 4% given what security yields are. So, security yields are already loss in the mid threes. It will be somewhat added just to margin. But, it just again we are not getting a specific benefits there with respect to the actual results of Q3. The reality is that we move security cash holds into our warehouse business which actually was at a higher overall average yield. Mark DeVries – Barclays Capital: Okay, that’s helpful. When you value your servicing rights in the mortgage business, is that based on realized prepayments or is it based on rate. What I’m getting is just trying to get a sense for if rates are stable to higher but realized prepayments are also in the fourth quarter. Is that like that you get written up or down.

Well, our capitalization right now is 0.81 which is 3.2 multiple on a servicing which is very low, it’s the lowest you have since we started into the business. So, I think given where – again, going back to commentary we have a very high quality book of business. So, these high quality bars have access to the refinancing market. When rates drop 4%, a lot of our own customers went out to the marketplace and refinanced. So, we had a significant adjustment to the and obviously we hedged that but obviously the hedge was off by certain percentage. Going forward, if rates were stay around here, we’ll probably have some more fallout in October and probably stabilization in November and December. So, I think we feel pretty good about the overall quality of the portfolio. But, bear in mind it’s the highest quality barrower getting loans in this environment. So, any of that we have a 50 basis move downward in interest rates. It seems customers that are refinancing six months ago will hit the refi market again. And that’s what we saw in Q3 more so late in the quarter which we made an adjustment to our model. So, I think our evaluation stands today being the lowest spend since we’ve got into the business. We are comfortable that we have some reasonable protection there rates with stay around as well. If they go higher, then the valuation improve. Mark DeVries – Barclays Capital: Okay, great. And then, finally could you give us little color on what types of CRE you have in the quarter.

Basically, the loans that we deemed to be low LTVs and strong below the market type rentals. Even when we do CRE we do it with an expectation that the ability to repay is driven by the current cash flows in the properties. Mark DeVries – Barclays Capital: Okay, thank you.

You are welcome.

And we’ll go next to Brad Ball with Evercore. Your line is open. Bradley Ball – Evercore: Good morning, guys.

Good morning. Bradley Ball – Evercore: Could you – where did your FDIC expense come in this quarter compared to last and is there any update on your conversation regarding FDIC premiums.

I will tell you that in the second quarter we probably were very conservative as we budgeted very large number after we went through the actual analysis in Q3 and came out with our actual expense. It was lower this quarter. Probably about $2.5 million lower, maybe $3 million lower given that the generation of that was more driven by the fact that we have covered loans and cover loans are handled differently. The non-performing loans are handled differently. They are backed by the FDIC. So, that was adjusted for the quarter. So, I think with the expense number I gave you for Q4 should be a good run rate. I think it’s a conservative run rate going into next year. We want to be extremely efficient. We made a lot of investment in system. So, we are working on further efficiencies. I’m not ready to give any more guidance past Q4, but for Q4 number which is slightly down from the previous quarter is where we should be running. That assumes that FDIC assessing that’s more in line to reality. Bradley Ball – Evercore: So, I think it was around 16 million last quarter. So, we are talking kind of 13 million.

That’s right. Bradley Ball – Evercore: So, that’s your guidance for the fourth quarter.

And obviously as the portfolio improves and asset quality will get some benefit going forward. As you noticed we had a significant favorable benefit over the past few quarter on asset quality and hopefully that churn – we believe that churn will continue. We are very bullish on asset quality. Bradley Ball – Evercore: Okay. And then, any update on conversations with the regulators, anything new on that front. Last call, you guys addressed I think there has been some questions about the dividends anything to update us on in that respect.

I will just say, we follow the guidelines. It’s crystal clear that we follow FED guidelines. We are no longer following New York state guidelines as far as paying the dividend. Bradley Ball – Evercore: But, that’s a VS [ph].

Yeah, VS. But – so since 2009, it’s been consistent and we are earning our dividend and we continue to pay our dividend. Bradley Ball – Evercore: Great. And then, just finally on the competitive environment there has been lot of folks talking about entering or re-entering the New York area multifamily market. Are you seeing that yet those folks started to put pressure any of your markets.

I think the reality is that people come and go in New York all the time and the New York market is significantly larger than just our niche. Within our niche there are some players that are on the fringe meaning that they do have some activity but no meaningful activity. The relevant player in our market today as it was in the years past is Fannie Mae. Other than that, we had significant players in the terms that were there from independent and from Norfolk which was a composite of several players from one niche. So today, there are no players of that size or that caliber who are in the market. So, despite the fact that lots of people talk about it there are fewer players in the market today than they were in six or seven and although, there may be some headline conversations they are not in any meaningful effecting our lending. Bradley Ball – Evercore: Great. Thank you.

You are welcome.

And we will move next to the side of Mark Fitzgibbon with Sandler O’Neill. Mark Fitzgibbon – Sandler O’Neill: Good morning.

Good morning, Mark. Mark Fitzgibbon – Sandler O’Neill: Just clarify from an earlier question. I thought you had said Tom that the NIM should be down about five basis points and then, stabilize. Is that excluding prepayment penalty.

That’s correct Mark. Excluding prepayment penalty income we probably looking at maybe down five basis points in this environment. And again, last quarter it was down five to 10, we came in net down one. So again, that’s reasonably guidance when we see the book right now and going forward, I don’t want to give future NIM guidance but it seems like we are getting close to stabilization now excluding prepayment activity. Now, that number can move around quite a bit with prepaid that you seen in the past three, four quarters.

Yeah Mark, there has always been for years and years and years we’ve tried to avoid any guidance with regard to prepayment because prepayment is a number that varies dramatically just from one quarter to the next. Mark Fitzgibbon – Sandler O’Neill: Okay. And then, secondly, when you look perspective acquisitions, are you looking to fill in any particular holes in franchise or business or is it intentionally driven.

No, I think that consistently over the course of our public life, the main drivers of transactions come from the shareholder benefit to be derived. If we can create a better bank, we do a deal. It doesn’t matter where the franchise actually sits. It matters where in fact the numbers come in. So, there are plenty of opportunities that will come down the road in the marketplace for years to come and those opportunities we’re willing to be patient for. Mark Fitzgibbon – Sandler O’Neill: Thank you.

You are welcome.

We move next to David Darst with Guggenheim Capital. Your line is open.

Good morning, David. David Darst – Guggenheim Capital: Good morning. Just following up on the NIM and cost of funds. You should have the ability to improve the mix little bit for your DDA growth in the fourth quarter, Shouldn’t you?

I think going back to the cost of funds. We are pretty low on the cost of funds environment. I would tell you if you look at us compared to all our competitors, we are probably the lowest in the industry. We have a focus towards being a low rate payer in the environment. There is some opportunity on CD side. We are working real hard to bring in low-cost deposits. I think the message on this call is that deposits are fluid in the marketplace. We need to bring in money and the close and significant we can go to the deposit market and bring in significant funds. The reality is that we play a very low rate which is more of a culture of the bank and we could bring in more non-interest-bearing cost it is obviously more favorable to the bottom line. We do have some room on the CD side. But, each quarter as we go into slow rate environment it becomes less material. So, I think in the last quarter about 135 was the average coupon on the CDs of we running our 128 right now. Probably about 5.5 billion over the next 12 months. That will continue to reprise lower depending on where rates. If rates are in this environment for a considerable period of time that number could be 50 to 80 basis points. If rates are to spike up, you may be running at 1%. There is some room, but, it gets to point where the absolute level of cost of funds are getting close to zero. David Darst – Guggenheim Capital: How about on the FHLB advances? Do you have any significant maturities or anything that you might consider prepay?

The only significant I will call on the liability side and I wouldn’t call it significant about $0.5 billion in fourth quarter is paying up our TLGP debt to the FDIC. Absent that, this small amounts of maturities are absent a significant restructuring, through a transaction, we will get substantial benefits there. But, overall if you look at our overall cost of funds, it is significant lower than most thrifts in the industry obviously not commercial banks. But, if you look at our deposit there, 76 basis points which is fairly in my opinion very well. David Darst – Guggenheim Capital: Okay. So, it sounds like for now you are willing to carry the higher cost of the FHLB advances?

We are not looking to restructure our liability book. David Darst – Guggenheim Capital: Okay.

Any material way. That will constitute a significant hit to capital. David Darst – Guggenheim Capital: Correct. Okay, thanks. And then, on the OREO, do you have any contracts for the fourth quarter that would bring that balance down. We are working very actively on some significant transactions and we expect to move on the asset quality very actively. We’ve been very active over the past year and half of moving these assets and that that would speak for OREO as well.

The strength in the marketplace definitely works to our advantage. David Darst – Guggenheim Capital: Okay, great. Thank you.

You’re welcome.

We’ll take our next question from the site of Tom Alonso from Macquarie. Your line is open. Tom Alonso – Macquarie: Good morning guys.

Good morning Tom. Tom Alonso – Macquarie: Just be the mortgage banking breakdown that you gave earlier in the call. I just missed that, it was 31 million.

$31 million on the origination side and servicing was a loss of 6.6. So, the net is 24.2. Tom Alonso – Macquarie: Okay, perfect. Thanks, that’s all I had.

We’ll move next to site of Christopher Nolan from CRT Capital. Your line is open.

Good morning, Chris. Christopher Nolan – CRT Capital: Hey Joe, hey Tom.

Hi Chris. Christopher Nolan – CRT Capital: Quick question. On the – we’re seeing less pre-purchase, excuse me, less refinancing activity on the multifamily side more purchase activity.

I think the seasonal effect as we mentioned earlier definitely had an impact on this quarter. Many of the people that normally are active in our niche were not available. They were away on holiday. So, some of that activity just doesn’t rise to the surface during a third quarter. So, over the course of years the third quarter is definitely lighter than the fourth quarter is heavier.

I would also add, last quarter on our pipeline we said it was mostly new business, this particular quarter is probably looking at like 60-40. 60% new business, 40% refinancing in our portfolio. So, the good news is that things like elevated on activity and we believe fourth quarter is typically a good growth quarter for us. Year-end transactions always take place and we typically have fairly strong fourth quarter and we expecting that long growth. That coupled with fact that we have a decent amount of already identified satisfactions and we are refinancing within the portfolio. Prepayment income, we don’t budget specifically it should be at elevated levels. Christopher Nolan – CRT Capital: Great. Tom, what rate are you provisioning for these new loans?

We go through a whole complication by category, by region, by classification. We’re at a high-end of the range and we went analysis of general valuation allowance. So again, I don’t see specifically what the provision would be category but we are clearly given that the NPAs are starting to leave the portfolio, we have little 114 analysis left, because obviously those loans are now moving either to OREO or off the books. So, what we have a very clean performing portfolio and we are consistent with our assumption, which we look on a quarterly basis based on historically trends and loans history. Christopher Nolan – CRT Capital: Great. Thanks for taking my question.

By the way, your question with regarding to growth. The 10.4% annualized growth rate for the quarter probably the best we’ve had in several quarters and that was the despite the fact that it was the September quarter. Christopher Nolan – CRT Capital: Great. Thank you very much.

We’ll go next to the site of Ken Bruce from Bank of America. Your line is open.

Good morning, Ken. Kenneth Bruce – Bank of America: Good morning. How are you? Couple of questions as it relates to the net interest margin. Could you provide some additional detail on how much the warehouse contribute in dollars to the quarter?

We actually had that question previously and we want to not to provide that number. Kenneth Bruce – Bank of America: Okay.

But, I gave you some color. It was 250 to the low and billion being the high. And that is coming from and that’s coming from – around 0.18% type rate, versus a security yield that is probably in the mid three. So, that was the some of the benefit. But, may be 50, 60 basis points in that change helped the margin. Kenneth Bruce – Bank of America: I suspect that as long as the mortgage banking activity remains high that you can continue to run a fairly high warehouse in that case.

Yeah again, based on my margin guidance I gave you in Q4, I have the warehouse coming down slightly but it’s reasonable. I don’t see it’s falling off the cliff. We have a significant pipeline to fund by quarter end. So, that will help the margin for Q4. Kenneth Bruce – Bank of America: Right. And just in terms of where loans are coming in today, it looks to me as if you are going to be writing new multifamily loans around 4% of that. Is that…

That’s probably too conservative. I would say, last quarter we closed our book at 4.5. Given where rates are, you look at the five-year treasury, take the average, we are north of 1%. We are getting slightly above 3%, the commercial is about 20 basis about that. If I were look at let’s say low four to mid four depending on rates. It changes every day, Ken and I think the reality is that despite the fact that it is competitive, we got to bear in mind Fannie and Freddie have the higher cost of capital. So, they have opened – they have widened their margins to make money. So the reality is that we over 300 basis points. We are holding line at 4%. Rates are significantly lower in August and September, but we held the line at 4%. So hopefully, we’ll see higher levels going forward. Kenneth Bruce – Bank of America: I guess, looking at yields in the mortgages today are still around 5 to 5.5 round numbers…

You got to call that prepayments, that’s right. Kenneth Bruce – Bank of America: So, that’s going to continue to just lower I suspect. I’m just trying to understanding in the absence of the warehouse contributing favorably how the margins are going to compress more.

We’ve run our analysis on a very detailed basis and I’m pretty comfortable with around 5 basis points reduction in Q4 and again, that to be conservative. I think looking at the business it moves around pretty quickly. Two quarters ago, we were looking at high forward, below five. So, things do move around. Obviously, it’s a lower rate environment. We can’t control the rate environment. But, we manage the marketplace and we still think that we’re going to have net loan growth.

The average rates in each of the preceding quarters coming out of the portfolio are obviously higher than the average rates will be prospectively. Kenneth Bruce – Bank of America: Okay. And maybe looking more at mortgage banking for a moment, can you give us some detail on again on sale spreads that were…

Net including services were about 125. We’ve increased it from Q2. Q2 was the tough quarter for us. We dropped our margins quite a bit to compete. We were able to widen our margins given the influx of volumes that we saw in Q3. So, it’s around 125ish and that include servicing. Kenneth Bruce – Bank of America: The amount of loans sold in the quarter, please?

It was funded be billion – billion 8 funded. That’s billion 8. Kenneth Bruce – Bank of America: Great.

It was well over 4 billion, the total pipeline. Kenneth Bruce – Bank of America: Okay. In this just kind of pull back for a moment. You’ve been looking at an evolution of your business model here in the last year much more oriented around mortgage banking just as the opportunity has grown there. How do you think about, Joe, the balance between the mortgage banking-driven business and your traditional portfolio approach towards generating.

We are very consistent with our expectation that we’ll be growing our portfolio and market conditions will decide how rapidly that occurs. The fact that the mortgage banking business is a business that changes from one quarter to another. We don’t drive that. That’s automatically a result of what’s happening in the marketplace. As Tom mentioned earlier, we are offering more products to more end users. People are buying product from us. So, as that grows the share will grow in that line. But, we are not looking to shift things. It’s a matter of these two businesses operate independently and certainly we have every reason to believe that the primary business is going to grow in the period ahead. The business that supplements our earnings is going to be very dependent upon what’s happening in the marketplace. So, for example, it’s rate driven today. It could be driven by changes in rules and regs. Some of the changes that occurred at the beginning of this year adversely affected the business. If there are positive changes that will positively affect the business. So, I think the absence of other competitors is actually going to work to our advantage down the road. So, it’s an additional supplement. But, it is not our primary business by any stretch.

I will just add to that we look at barbell strategy. Obviously have the additive income on mortgage banking revenue on a percentage basis, it’s not a material number but it’s obviously a nice number when margins are under pressure in the industry. When rates are collapsing, we have an opportunity to generate some decent fee income. Again, the bottom line, we are multifamily vender in the New York marketplace and we have a nice business that we believe is one very conservatively in respect to NYCB mortgage. We are comfortable on expanding that business on a conservative basis. As we talked about the potential of doing jumbo prime loans, it’s been a very slow go. The marketplace has been very difficult in getting product. But, we are prepared and the future to have a broad array of product to deliver to many customers outside of a traditional Fannie and Freddie business. Kenneth Bruce – Bank of America: I understand. I guess we see these tectonic plates moving around where multifamily continues to be an area of keen interest for many competitors though it seems that this is going to get more crowded in your traditional core business where most are moving away from the single family mortgage banking model which presents a lot of opportunities for you. You’ve clearly exploited those here recently. I am just wondering how you think about…

I think it’s important to realize that in particular the New York market is huge. The world has always lend in the New York market. When you think the about the very large players that have been in and out of this market, they were very aggressive for example in the period five, six and seven. They in fact are coming back into the market. Their presence does not necessarily impact our niche. Their presence impact the New York market. So, many of the things which are typical to the New York market in multifamily are not necessarily reflective of us. So, in a period of significant devaluation of multifamily, 87 to 92, we in fact were not having any devaluation of our niche product and that differentiation is extremely important even in the origination of product on a go-forward basis. So, even though there are lots of headliners that are saying, they want to be in multifamily, they can easily find product that has nothing to do with our niche. Kenneth Bruce – Bank of America: Great, thank you for your comments.

I’ll move next to the site of David Hochstim with Buckingham Research. Your line is open.

Good morning, David. David Hochstim – Buckingham Research: Good morning.

Hello, David. David Hochstim – Buckingham Research: Hi. I wonder can you tell us what product expansion has done to mortgage banking volume. Is there…

It’s a material there, we probably closed 14 to 20 million of jumbo prime. It has been very slow. David Hochstim – Buckingham Research: Okay. On then mortgage servicing charge because what the gain was roughly and what the write down of the MSR was roughly?

The gain was approximately 32 million and write down was – it was marked at about 45. David Hochstim – Buckingham Research: Okay. And how much MSR is left at this point.

Right now, we have about 11.8 billion as unpaid principal balance, which [inaudible] out at a 0.81 numbers, about $95 million on the books. But I think that is a very conservative valuation. So given the September mark is significantly different from where it is today. But obviously, we took a look at the portfolio and we were very conservative in respect to the speed. You know, we have a high quality book that has had the opportunity to refine, the rates were in the third quarter, they refined. David Hochstim – Buckingham Research: Right. And I guess if you look at the gain generated in the quarter, how much of that would be cash and how much would be related to like?

Probably 20 basis points, the best of the gain [inaudible]. David Hochstim – Buckingham Research: Okay. Could you just talk again about the thinking about the margins, a follow-up so if asset yields are coming down, asset yields are below your current average yield, you added a lot of non-interest-bearing deposits in Q3. Can you keep doing that and drive the funding cost down?

I think we’re modeling reasonable, more reasonable management expectations on deposit growth. We are not – I keep extracting that. We focus on low cost deposit funding. Its liquid deposits out there, its liquid funds out there. We are very comfortable, you know with our guidance. We’ve always guided conservatively, historically regarding margins and spreads. And I think that, you know, given that 5 basis points which you know, last quarter was 5 to 10, I think it’s reasonable expectation based on fully analyzing entire portfolio, pricing our loan book, you know, given the amount of new loans coming on and securities rolling on. We had a substantial amount over the past year and half that security we paying. We were very reluctant to go back into the securities market and take on the rational risk. So, we’re trying to be a little slow on security side. We have a great opportunity to put on good solid core loan growth of bread and butter product. And we do look at of course the funds are and where those offerings are, margins are not significantly negative impact. David Hochstim – Buckingham Research: I mean, if we look beyond the fourth quarter though, would there be more of an impact or do you have?

I’m not to give guidance for next year but I think we’re very comfortable that we’re close to, you know, close to bottoming the depending where rates go. We have a 5-day, 50 basis points in shares.

You know I think it’s important to recognize that we got to deposit, we have many players, it weren’t five distinct markets. There are many players in those markets that are significantly below us with regard to the rates that they’re paying. Even though there were some that are aggressive payers, the aggressive payers are likely to start to come down in the period ahead. So, the opportunity to actually lower our cost to funding does exist based on the market place. If you look at each market, there are differences depending on who you’re looking at. Some of the biggest players in our markets pay significantly lower rates than we do. Even though we are a typical low rate payer, we have people out there that are paying well below us in savings rates and money market rates. David Hochstim – Buckingham Research: Right. So, I mean. I think what people are concerned about is that we can see the asset yields coming down, and it’s hard to see where the…

You’re 100% correct. It’s certainly something that represents opportunity to consider how we’ll position ourselves in the period ahead.

Well, David I will add a given the business model and how we conducted ourselves to the recession on margins had extremely well. Historically we have a substantially higher margin in both our competitive players. So, if we look at the business model, our assets are relatively short. We have a lot of activity we expect to see significant volume on refinancing and origination going forward. We are not lending more than that in the curve. David Hochstim – Buckingham Research: Right, okay. Good luck lowering the funding costs.

Yep. David Hochstim – Buckingham Research: Thanks a lot.

You’re welcome.

And we can go next to the site of Ken Zerbe from Morgan Stanley. Your line is open. Ken Zerbe – Morgan Stanley: Good, thanks. Hey, guys.

Hi Ken. Ken Zerbe – Morgan Stanley: Tom, I’m certainly not going to ask you to provide long-term NIM guidance. But given the number of questions that we have all asked about NIM and sort of a longer-term impact, I think my estimates are down 25, 30 basis points by the end of 2012. Maybe a different way of asking the question, what are missing, right and that includes prepays. Are we not understanding, you know, the value of mortgage banking or there were two loan prepays?

Let me interject by saying Ken, I’m not going to give guidance for the next year. But I can tell you that we’re not going to give guidance on prepays. So, your number has prepay, my number excludes prepay. And I don’t have the magnitude of the decline that you’re showing. Again, given where rates are, we’re running with the Bloomberg incentives on rates, if that changes, we don’t have the crystal block for the future on interest rates, we’re Bloomberg incentives. And based on our runway consensus, I’m not as bearish as you in respect to the margin next year. Ken Zerbe – Morgan Stanley: But in terms of why? I mean, that is what we are trying to get at, is if your loan portfolio is running off at a ballpark 100, 150 basis points lower on new loans; securities are running off; and you have limited room on liabilities. Why are you not as bearish as we are?

I think the security of the probably close to stabilization right now. I don’t see much more of a decline, and that’s three four quarters out, given that we have substantial run-off already. And I will roll yields on the asset side, you say 150, I’d say probably more like less than 100. You know, depending where we’re waiting for that moment looking at the five day treasure, at that point in time. We put on 450 this quarter and that’s not 150 basis points because you had to call out the prepayment benefit that goes into our margin that’s reported on our average balance sheet. So, I think again, those are extreme scenario and that may make the difference of the 25 basis points between your numbers and my numbers. But again, we wanted specifically on a detailed level and get in funding close to 76 basis points for our interest bearing deposits. And it’s close to 72%, you know, you’d be putting out at that, that level, new business is not margin dilutive. It’s not substantially margin dilutive when you look at to bring in deposit funding in this environment where rates are, it’s not a dilutive asset that go in the books. We expect to grow on that loan book. You know, granted we in the securities market, we’re trying very hard not to take on ration list to much smaller. We can be much larger, we could have much more margin compression, if we put in the securities market we chose not to do. And again, indicating going back to where the warehouse was in Q2 versus Q3, we expected significant benefits on the warehouse as expected. So, we have the luxury of not re-investing, we had the luxury of less reinvestment risk. And the cash flow is coming out, securities work flow. That will it be like it evaded last year. It was comfortable that its rate were higher, we’ll make a little bit more money on the margin side. But in the mean time, what we are pretty gloomy forecast to interest rates, our margins are going to be less under pressure and most.

You know, one of the thing that’s really important to recognize. If we were talking about a portfolio one to four family housing, where the yields in the portfolio were 150 basis points higher than the yields that we were replacing with, there would be no supplemental benefit to us with regard to the replacement asset. But because our assets are significantly in commercial assets, literally multifamily and other assets that collect prepayments, those prepayment fees are initiatory [ph] to the margins. So depending on what actually happens in the given quarter, those fees add between 10 and 30 basis points to each and every quarter prospectively as assets are coming off the balance sheet. So, I think that we have more insulation because we have a specific source of earnings that is tied directly to the refinancing of those assets at lower rates. Ken Zerbe – Morgan Stanley: Okay, all right. Thank you very much.

You’re welcome.

We can go next to the site of Mike Turner from Compass Point. Your line is open.

Hello Mike. Mike Turner – Compass Point: Hi, good morning.

Hello Mike. Mike Turner – Compass Point: Just a question on the credit side, I mean, credit seems to be improving nicely. What historically you have had an allowance, that reserve ratio of 40 basis points to 70 basis points. What is a potential floor, I mean, where you are at now, 55, kind of the?

No, I think it’s important to know that we are proactive in analyzing the reserves based upon every single quarter’s activities and what we expect that the future might hold. So, we maintain reserves for losses. We don’t maintain reserves along those are metrics over the course of decades, are significantly different that other banks. So, we don’t need to have a reserve that’s in line with other banks, losses. We need to have a reserve that’s in line with our reasonable expectation of the portfolio moment in time. So, it’s a very timely analysis that is accurately done and as I think, the evidence is in the numbers. You can look at our reserve and recognize that the reserve has been more than adequate to meet the demands upon it in fact, significantly better than other banks. Other banks have had their entire reserves absorbed in the given quarter. We never have that. Our reserve, if we take the charges to it, can literally represent years of coverage. Many other banks during the cycle which has just ended lost their entire reserves in one period and had to replace the entire reserve in that period. That is common in banking but not common to our portfolio. So, our numbers are indicative of reasonable quarterly assessment of risks inherent in the portfolio. Mike Turner – Compass Point: So arguably then, I mean, if credit continues to improve, that absolute level of reserves, I mean, it can’t go to zero. But should continue to come down?

No, no, no, that’s right. If anything realistically, our reserves are far than we really need for the losses that we have. And that’s been over the course of time. When we first became a public bank, our reserves represented 111 years of coverage, and that was in ‘93. So, the reality is that that our reserves are very different than everybody else’s reserves.

The good news is that, our asset class continues to improve and we expect to see continued improvements in the out quarters. Mike Turner – Compass Point: Okay, thank you.

You’re welcome.

And we can go next to the site of Matthew Kelley from Sterne, Agee. Your line is open.

Good morning, Matt. Matthew Kelley – Sterne Agee: Hey, guys.

Hello Matt. Matthew Kelley – Sterne Agee: It appears that it’s pretty clear you are going to grow through some of the core margin challenges that would be in place if you had a static balance sheet and were just re-pricing your asset book lower. So, I mean, as commercial real estate continues to grow at a pretty rapid clip, should we expect to see, you know, similar levels of incremental reserve building, relative to what we saw in the first half of the year where you bled by $16 million; then it went to a $5 million, you know, increase this quarter. Should we expect to see something more similar to that, given the fact that you are kind of indicating that you feel very confident on your ability to continue to grow, and that will help offset some of the margin issues?

I mean, obviously Matt depending on the level of charge-offs, we’re feeling pretty I’ll say bullish about credit in general. But you never know what’s in the future. So, I think in reality, you know, we can look at the charge-off in the quarter, we look at the asset quality of the bank as you saw a significant drops into the high of 2010 as well as the overall average balance of MTA. You know, we see the REO book that we have now, we believe we’re going to move that down rapidly. So, the quality of the portfolio will improve. And again, I don’t think we have a meaningful adjusting on a quarter-over-quarter basis. But obviously, depending on charge-offs, you know, asset quality has been a quarter to quarter benefit of a multiple, multiple quarters. And we’ve been talking about that last year that we expected to see the resolution of some of these cash falling assets. The good news of that, we’re seeing going forward, the continuation of resolution, so that when the obviously less credit cost. You know, bear in mind, in addition to these costs you have, a high degree of foreclosure expense that goes to the P&L that will also be a benefit in the future period ahead as we have less MPAs, less REO assets, well, that less cost going to the P&L for foreclosure and REO expenses. Matthew Kelley – Sterne Agee: Right. No, I mean obviously…

You know, I think the foreclosure recognize that we have basically in three and half years, the numbers that we’re reporting here in September are the best numbers for the entire credit cycle with regard to non performing. That’s a long time. That’s three and half years. So, the trend is glaringly obvious that our performance metrics are improving dramatically. Matthew Kelley – Sterne Agee: Right. I mean the existing loss content on your current book.

That’s right. Matthew Kelley – Sterne Agee: That was built over the last couple years has been low. But what I am looking at is, you know, the 20% to 25% growth in commercial real estate just over the last nine months and the incremental provision...

All right, but it’s important Matt, it’s important to recognize unlike other banks, we do not lend with the expectation of losing money. We lend with the expectation of not losing any money. And over the course of four decades, we’ve demonstrated that our lending model is different than other lenders. And therefore we have lost significantly less over long periods of time. So, just because we’re lending more, it doesn’t mean that we’re losing more. We tend not to lose. We lend to actually be repaid. And the record shows that we are repaid on huge percentages of what we put out there.

I think the average of these in the cash during apex during fell dramatically. So, if we look at the average of commercial and multi, they’re in the mid to low 50s. It’s a high quality portfolio. You know, we focus on, you know the best opportunities in the marketplace. We are not an aggressive lender historically that’s our track record. And if there is great opportunities in the marketplace we’re going to land more portfolio, and we’re not doing securitization deals. So, we’re in alternatively if someone is looking at the securitization market, plus we’re doing a portfolio deal. And we’re one of the larger portfolio lenders in the marketplace. And those guys are comfortable on a portfolio of respect, they typically have low leverage. Matthew Kelley – Sterne Agee: Okay, and then where are you seeing, going back to multifamily, where are you seeing Fannie Mae coming in on rates relative to your 4.25%, 4.50% type rates or 3.25%, 3.50% over the five year?

I mean, again, Fannie Mae, we have a savings bank offering. So, we do not have the season close unlike the agency. So, if you look at, you know the price decisions versus our prepayments larger scale, if I’ll be looking at maybe 20 to 30 basis points of an improvement to do a portfolio deal. And that’s a very interesting beneficial of ours because they don’t have to take on the risk of defeasance. And they want to take on the 5, 4, 3, 2, 1 structure. And most of the stuff is going to the agencies 10 year money and IO structure which we’re really not in the IO market but a lot of IO case has gone to the agency.

With regard to that, the niche that we’re in which reifies in three to four years is significantly better off with us rather than having the reasons. So, even though if Fannie Mae be in some cases, you know, 40 to 80 basis points below us, they’re defeasance is a very high cost. And therefore it’s unattractive to people that are actually planning on improving the property in a short period of time. We lend on a rent roll that’s being improved. And that’s why it’s refinanced in three to four years. That is different than people that want 10 or 15 year loans that are rolling to let’s say go to Fannie for a 10 year loan, because they in fact are not worried about defeasance because they’re planning on holding that loan for 10 years, our guys are not.

Matt, I would also add, if you look at some of the deals that are on the market and these are mostly public yields as the date is out there. A lot of these yields are outside of New York. There is a lot of lending outside of the New York. The New York market was seeing less intuition on actual originations of Fannie. However the rate offering is that they’re also an alternative for the customer. A lot of the deals are being done outside New York. So, if you follow some of these securitization deals with Fannie & Freddie, the percentage of New York pay is very low compared to the outside of the New York market. Matthew Kelley – Sterne Agee: Yes. I know; actually we heard from some of the smaller lenders in the multifamily space, though, they said that they were seeing coupons go below 4%, you know, during the quarter.

Yeah. Matthew Kelley – Sterne Agee: And I guess the question would be, are you seeing better yields on larger loans? Is that part of the reason you are getting better pricing?

No, no.

Sometimes that’s the case but not always.

If anything, they’ll be more competitive.

Right, well, in some cases but not in all cases. Matthew Kelley – Sterne Agee: Okay.

We’re seeing good bread and butter book of business going into Q4 which is nice and mostly multifamily which is a positive signal for us. Matthew Kelley – Sterne Agee: And just give us a little historical context here going back, you now, 5, 10, 15 years. How that 300 to 350 spread compares to what you have seen historically over the five year?

The pre-recession, we were 150, right. So, it’s a better environment if you look pre-recession. So, we know we’re around 300 basis points over the five year. Funding cost is very cheap. The curve is still steep although it’s not as steep as it as it was three quarters ago. It’s still very steep. And it’s a much better environment for the margin to pay at the pre-recession.

In the years, one through six, pretty consistently for those five years, we were 150, implored at 150. But in the last cycle turn, we were as high as five, you know, 500 basis points was the differentiation. And that’s in a period of difficulty. Periods of difficulty actually presents better returns to a lender such as us. Matthew Kelley – Sterne Agee: So if rates went up 100 to 200 basis points, would you expect the spread over the five-year CMT to go up or down?

I mean, I don’t think we’re going to get 200 basis points benefit, we’ll probably get maybe 50% of the move, but still a positive. Matthew Kelley – Sterne Agee: But not the absolute rate; the spread.

Exactly, exactly.

The more important is more important is to what happens with the move is who is in the game. If there are a lot of irrational players in the game, if Fannie is in the game, the rates will not move as much. If Fannie is out of the game, then the rates will move significantly. I think the move in rates was extraordinary. I think we talked about this in other calls, where the move was extraordinary in ‘08, when Fannie was erratic and out of the market, our rates jumped significantly, overnight almost.

Doubled actually. Matthew Kelley – Sterne Agee: Okay, all right. Thank you.

You’re welcome.

And our next question, we have a follow up from Bob Ramsey from FBR. Your line is open.

Hey Bob. Bob Ramsey – FBR: Hey, thanks for taking the follow-up.

Hello Bob. Bob Ramsey – FBR: Just hoping you could give maybe a little more color on the bump-up in REO this quarter. You know, sort of how granular or not was the increase. And I did hear you mention that you all are hoping to work that down a bit in the fourth quarter. But I missed some of the detail there?

Yeah, I think the important thing to recognize there is, there are just a couple of properties that represent that change. And one of those in particularly is already moving. So, the reality is that it’s going to be bumpy, you know, as it’s always the case. When you’re a large vendor as we, you can have a relationship of size go non-performing. And lose no money on it. Or you could have a particular property that goes into ORE with the expectation that is going to be sold.

Bob, the good news that we have is that we have control of the asset we have multiple business on both of those properties. So, we’re very comfortable that given that, you know, our REO book is now under our control. We believe we’ll get great value for the properties. And we have multiple bidders on the property. Bob Ramsey – FBR: Okay. And then you did also mention that obviously will be reflected in a little bit higher REO expense. Is that already baked into the $143 million?

Yeah, absolutely. I would tell you that, you know, as these REOs go away and it’s blocking less stuff coming in and the portfolio shrinks, we’ll have less expenses next year. You know, if we continue to move on the assets, it’ll be less foreclosure expenses and less REO expenses. We take on a profit fairly large, we take on the tax escrows that haven’t been paid. It becomes a material adjustment for any given quarter. So, we’ve had an elevated expense given the credit cycle. But compared to other institutions, it’s much smaller but it has affected our efficiency ratio. That will be a positive going forward as the NTA books continues to decline. Bob Ramsey – FBR: Great. Thank you, guys

You’re welcome.

At this time, I’ll turn the floor back over to Joseph Ficalora for additional or closing remarks.

Thank you. On behalf of our board and management team, I thank you for your interest in our company and our third quarter 2011 performance. As the next time we discuss our results, we’ll be in the New Year. Let me take this opportunity to wish you all a joyful Thanksgiving and happy holidays.