Flagstar Financial Inc (NYCB) 2016 Q2 法說會逐字稿

Good morning and thank you all for joining the management team of New York Community Bancorp for its quarterly conference call. Today's discussion of the Company's second-quarter 2016 results will be led by the President and Chief Executive Officer, Joseph Ficalora, together with Chief Financial Officer, Thomas Cangemi. Also joining in on the call are Robert Kwan, the Company's Chief Operating Officer, and John Pinto, the Company's Chief Accounting Officer.

Certain comments made on this call will contain forward-looking statements that are intended to be covered by the Safe Harbor Provisions of the Private Security 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 the Company currently anticipates due to a number of factors, many of which are beyond its control.

Among those factors are general economic conditions and trends, both nationally and in the Company's local markets; changes in the interest rates which may affect the Company's net income, prepayment income, mortgage banking income and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposit, loan and investment products and other financial services; changes in legislation, regulation and policies; and the Company's ability to complete the proposed merger with Astoria Financial Corporation, which is pending the receipt of regulatory approval at this time.

You'll find more about the risk factors associate with the Company's forward-looking statements on page 9 of this morning's earnings release and its SEC filings, including its 2015 annual report on form 10-K. The release also includes reconciliations of certain GAAP and non-GAAP measures which will be discussed during the conference call. If you'd like a copy of this morning's release, please call the Company's Investor Relations department at 516-683-4420 or visit ir.mynycb.com. As a reminder, today's call is being recorded.

(Operator Instructions)

To start the discussion, I will now turn the call over to Mr. Ficalora, who will provide a brief overview of the Company's second-quarter 2016 performance before opening the line for Q&A. Mr. Ficalora?

Thank you, Michele, and thank you all for joining us this morning as we discuss the second-quarter of 2016's earnings. Among the more notable features of our second-quarter performance were: the strong earnings we produced, the continued high-volume production of our principle asset, the strength of our net interest margin and the exceptional quality of our assets as reflected in our quarter-end measures.

In our press release this morning we reported second-quarter earnings of $126.5 million, or $0.26 per diluted share, with the dollar amount of representing a 1.04% return on average assets, an 8.39% return on average equity and a 1.10% return on average tangible assets and a 14.12% return on average tangible stockholders equity.

In the second quarter of 2016, total prepayment income from loans and securities contributed $26.4 million to interest income, a $2.5 million increase from total prepayment income of $23.7 million in the (technical difficulty) quarter. Reflecting these amounts, total prepayment income contributed 24 basis points to our second-quarter net interest margin as compared to 22 in the trailing three months.

On a GAAP basis, our net interest margin was 2.99% in the current second quarter, five basis points wider than the trailing quarter margin. Mortgage banking income contributed $7 million to our second-quarter earnings, reflecting a $2.8 million sequential increase. The increase was largely due to a reduction in the loss on servicing during the current quarter, most of which was attributable to a change in our MSR valuation model assumptions in the first quarter and to a lesser extent a decline in hedge effectiveness during the period of unusual interest rate volatility.

Moving to our balance sheet, total assets increased $520.2 million quarter over quarter, reflecting strong loan production, offset by strategic loan sales and a $244.2 million decline in securities. Consistent with our short-term goal of managing our assets under the SIFI threshold of $50 billion, we sold $1 billion of loans largely, through participations from January through June, including multifamily loans of $426.4 million and $19.9 million of CRE loans in the second quarter of this year.

Year to date, the sale of multifamily loans amounted to $865.3 million, while CRE loan sales totaled $160.8 million. Absent these sales, multifamily loans would have grown at an annualized rate of 11.7% and CRE loans would have grown at an annualized rate of 7.1% in the quarter.

Reflecting the decline in securities and loan sales in the amount of $446.3 million, our assets totaled $49 billion at the end of the second quarter, bringing our four-quarter average to $49.2 million at that date compared to $49.1 million at the end of the first quarter of 2016. As was the case last quarter, the timing of when New York Community crosses the SIFI threshold could coincide with the completion of the Astoria transaction, which is currently pending regulatory approval.

As we reported in this morning's release, our pipeline is currently $2.8 billion with the vast majority of loans in that pipeline consisting of held-for-investment loans. The environment for our primary lending niche remained competitive during the second quarter. Notwithstanding the competitive landscape, and as our current pipeline shows, we are still able to originate our fair share of high-quality loans. This is due in large part to New York Community's long-standing relationship with the broker community and with its farmers.

In the second quarter of 2016 we originated $2.7 billion of loans held for investment, including $1.7 billion of multifamily loans and $466 million of CRE loans. During the first six months of 2016, we originated $4.9 billion of loans held for investment, including $3.3 billion of multifamily loans and $546 million of CRE loans.

At June 30, held-for-investment loans totaled $36.8 billion, with multifamily loans accounted for $26.8 billion of that amount. Notably, this quarter marked a milestone for our specially -- specialty finance business. We originated $341 million in specialty finance loans during the second quarter and as a result surpassed $1 billion in total debt balances.

The quality of loans we produce continues to be a Company hallmark and our current asset quality measures prove that fact. On a year-to-date basis we recorded net recoveries rather than charge-offs and our measures of asset quality remained among the lowest we have reported since 2008. Specifically, nonperforming non-covered assets represented 0.12% of total non-covered assets at the end of the second quarter and nonperforming non-covered loans also represented 0.12% of total non-covered loans at that date.

Overall, this was another solid quarter for the Company despite a challenging environment for the industry as a whole. Reflecting both our earnings and capital strength, the Board of Directors last night declared a $0.17 per share dividend payable on August 19 to shareholders of record as of August 8. The dividend represents a 4.6% dividend yield based on last night's closing price.

On that note, I would now ask the operator to open the line for your questions. We will do our best to get all of your -- get all of you within the time remaining, but if we don't please feel free to call us later today or this week. Michelle?

(Operator Instructions)

Ebrahim Poonawala, Merrill Lynch.

Good morning, Ebrahim.

Just first question, I'm trying to understand sort of the loan part of space in this quarter. Is it fair to assume that even though the [CCAR] timing is no longer an issue you do not want to organically cross the $50 billion asset mark outside of the closing of the deal, which is why you would likely we continue to do loan part of space and keep asset balances below $50 billion?

Ebrahim, it's Tom. I would say we were crystal clear on Joe's commentary that the Company is expected to time the cross over with the Astoria transaction, which is pending regulatory approval. We're pretty close in respect to the original guidance we gave from the previous year on a timing of the merger.

Obviously, we're midyear. We're going to the third quarter and we having nice room in respect to the actual crossover. If you look at the four-quarter look-back for the Company, we have about $3.1 billion of growth that we can put onto the balance sheet before we actually trip over the SIFI line. We believe that is reasonable.

At the same time, we're very active on looking at participating with some local institutions on the multifamily and CRE funds and it has been very effective. Since the program was put in place back in 2014, the Company had executed on $3.6 billion of business. These are participation agreements. These are relationships that are staying with the Company managed by the Company, so we believe in the long-term this will be a great opportunity as these loans come back to refinancing the future.

Understood. Tied to that, Tom, if you can give us an update on how we should think of the requirement to meet with the liquidity coverage ratio. Does the timing of this, assuming you close Astoria in the fourth quarter, and I believe there is some update from the regulator that could push out that timeline.

Yes, Ebrahim, it's a very good point. These are sitting patiently and waiting for the final guidance on the 12th CFR part 249. However, there haven't been yet any specific adaptation on the guidance yet. We anticipate that the guidance should be -- we hope that it is out by the end of this quarter because after July 1 banks have to comply with the disclosure obligation and in the disclosure obligation is a carve out for banks crossing over $50 billion. Obviously, we don't control the guidance so we're waiting patiently as are analysts and investors.

With that being said, assuming there is no change and assuming we have to be compliant as of the transaction of Astoria the next day, we believe that the securities that had rolled off in the beginning of the year, which is approximately $2.2 billion will be replaced with them level 1 assets. Those are level 2 assets, mostly callable securities, and the security portfolio from Astoria, which is a $[5.28] billion of securities, when they're remarked will be looked at for evaluation of LCR1 versus LCR2 and their current yield on their portfolio was around 2.5% to 2.48%, so market yields are I'd say hovering around [2.25% to 2.3%] so that is a mark-to-market adjustment on Astoria and an asset redeployment pan on the Astoria. You're looking at technically buying the replacement securities that we had in the beginning of the year that rolled off and marketing to market securities and evaluating Astoria's portfolio upon consolidation.

Ebrahim there's no escaping the fact that the bank has a business model that has been very consistent over the course of actually our two decades of being a public company. The execution of transactions has a meaningful impact on all of the relevant metrics of the Company, including our concentration numbers and so on.

With the closing of the Astoria deal our concentration number goes back to where it was all the way before the concentration rules were put in place. The impact of this deal is going to be very substantial on many of the things that we will do and certainly all of the relevant metrics of the Company.

Understood. A last question tied to Joe on what you alluded to in terms of how should we think about -- we've heard some comments from your competitors around what the impact of the regulatory scrutiny of pricing competition in the market may have on the loan growth in the back half of the year. When you look at both those elements in terms of the scrutiny from the regulators, how does that change for you today versus 12 months ago? Has the competitive environment gotten better or worse as a result of that?

I would say that the regulators have been very focused with regard to concentration on us because we have always had one of the highest concentration numbers in the industry. Last year we started hearing that the regulators were speaking very publicly about their concerns about concentrations throughout the banking industry.

The obvious and then very appropriate concerns they have is that there are many banks that are concentrating in an asset class that they do not understand. The reality is that with the closing of the deal, our concentration actually goes back to the beginning of concentration concerns. We go back to 2006 numbers with the closing of the deal.

The good news for us that we've had a continuous ongoing business model that takes into account risk and takes into account the idea that we are very concentrated in a very, very good market that we understand very well. The other players in this market, many of whom come from outside our market, always get very active during the upside of a cycle and always lose a lot of money during the downside of a cycle. So the discussion, whether it be initiated by regulators or just sound, prudent banking, is that we have a very, very consistent, clear business model that we follow and we expect there to be cycle turns and we have seen many, many cycles turns. The good news is, we have never charged capital during a cycle turn as a result of losses in our concentrated assets. That is a very, very strong thing for us to be able to say.

Ebrahim, it's Tom. I just would follow up with some of Joe's commentary. Bear in mind the obvious public pressures that we're hearing and they're very real, the reality is that spreads are widening. Loan offerings are now pricing in some more of that risk.

More importantly, I would say that the [IO] pressure to originate has subsided significantly and you are seeing less availability within the market place itself. So clearly the message is out there and we will respond and obviously have seen nicer spreads going in to this very challenging banking environment would be attractive for the margin going forward.

In every single cycle turn, our presence in the market has increased, mainly because the more irrational lenders in the market, and I'm not talking about specific competitor banks, but the irrational lenders in the market vacate the space because they are taking massive losses during the cycle turn. So it is not just the growth of the number, it is the inability to establish a business model that actually can go through a cycle turn without massive loss.

Most people wind up losing huge amounts of money during a cycle turns, in particular in the New York market. Those that learn that market -- and by the way, as we all know there are plenty of buildings in New York City at market, but there are also plenty of buildings in Miami, or in the last cycle in Las Vegas or where ever else at market.

Market lenders are overwhelmingly at the greater risk. So we're in a very good place here and not a place that we are unfamiliar with. We have been down this path many times and we prepare ourselves for an adverse cycle turn. All of this discussion, I think, is actually healthy for us.

Understood. Thanks for taking my questions.

Thank you.

Ken Zerbe, Morgan Stanley.

Good morning, Ken.

Why don't we start of with expenses. It looks like expenses ran a fair bit higher than your prior guidance. Could you just talk about what is in there and whether or not the $161 million level is sustainable at this point?

Ken, I would say that the given the historical quarter, the previous quarter, we had some one-time items. We had a small litigation reserve that we put in place, about $1.4 million. We had a merger-related about $1.2 million. We had some increase in consulting fees as we get closer to our SIFI crossover.

I'm give you specific guidance for Q3. We're going to run probably around $160 million, ex CDI. We think that is reasonable. As we get closer towards, the SIFI crossover we are seeing some uptick in the consulting side is we prepare ourselves, as well as personnel.

Got you. Okay. So $160 million ex CDI.

Bear in mind, Ken, we also an adjustment. We had a nice adjustment in obviously first-quarter payroll one apparel versus -- payroll taxes versus Q2 was down very nicely. That was probably about $3.5 million of adjustment going the other way. That was clearly offset by the items I previously discussed.

Of course. In terms of loan growth, Tom you mentioned I think you had $3.1 billion of growth possible, right, before you cross over the SIFI threshold. Given growth this quarter may have been slightly on the lighter side, does the $3 billion imply that you may accelerate growth over the next couple of quarters as you approach the deal closing or are you going to keep a fair bit of buffer in there just in case deal gets delayed?

Ken, let me be pretty clear as far as the growth. We said having a low-double-digit growth rate is a very attractive position to be in. We've delivered that for many years despite the fact that we sold $3.7 billion of participation to the marketplace in so our inception of our short-term strategy to manage ourselves at the SIFI threshold.

That being said, bear in mind Q1 versus Q2, the interest earning average balance is down $1.1 billion. That was solely from securities. That is probably about $0.01, $0.015 per share that impacted the quarter.

We expect to replace those securities as we get closer to the LCR compliance and obviously we're still growing our loan book. We are growing our loan book with pre-loan sales. So when you look at the run rate for the Company, we're still putting up low-double-digit net loan growth pre-loan sales.

We will be in the market from time to time selling loans, managing the balance sheet and like I indicated, $3.1 billion is our current room. We want cross SIFI prematurely. We're just too close to be in a crossover position to drop the ball on the goal line here.

Ken, the benefit is so de minimus with the with regard to the extra few hundred million dollars that we might actually play with as a result of taking the chance of going over the $50 billion trigger. We're not going to do that.

We're staying far enough away so that we're not going to wind up triggering a material adverse consequence for a de minimus positive benefit. The deal itself will make it very compelling, but we're not going to know that as we actually did the approval and that is out there someplace will be decided.

Ken, bear in mind, like I indicated, this public position about oversight regulatory views on concentration and theory as a whole, low CapEx rates, low interest rates, we are in a position now to see higher rates on our offering. Our current portfolio yields are around a 3.4%-ish coming into the market in that pipeline, but more importantly the spread in that business, because treasuries have been very volatile in the past quarter, we're looking at a five-year treasury on [1.16%], our spreads are around 2.20% are over.

Our coupons are higher than they were in the previous quarter going into Q3, so we're seeing an attractive offering out there and I believe that risk is being reprised into the marketplace. As I indicated there's expectation that interest-only loans are less prevalent among portfolio lenders and it appears that in the bread and butter type lending, five-year, seven-year money for multifamily has moved from 2.2% or 2.4% respectively for five-year and seven-year. Those are attractive spreads that we haven't seen in quite some time.

Our concentration numbers are greatly exaggerated only to the degree that we are awaiting the closing of the transaction, which changes those numbers extraordinarily. Therefore the important thing for us is to be poised for the benefit of what happens when the deal closes rather than for us to run the risk that we trigger adverse consequences prematurely and then the deal doesn't close for some period thereafter.

Got it. The Last quick question, are you guys -- do you have any more securities that are eligible to be called?

Ken, it's Tom. The good news there is that we envision no more than $100 million in Q3 and that should be the end of all our callable position. That's assuming the entire portfolio is called away. We had a substantial amount of cash flow coming back to the Company in Q1.

The volatility of interest rates during the February marketplace and going into Q2 with Brexit, so we believe it is de minimus going forward. Our intentions are to replace the securities as we get closer to the closing of the Astoria and file for LCR, but it is going to be a de minimus impact to the balance sheet. The good news is that we're not seeing the -- and by the way, these are not higher-linked securities so the impact of the margin is not material, obviously.

As Tom is suggesting, the realignment of our securities portfolio comes with the SIFI size and clearly that will happen at some point in the future. We believe that given market conditions, it is far better for us to wait for that to actually happen.

Okay. Thank you very much.

Bob Ramsey, FBR Capital Markets.

Hey, good morning, guys. Wondering if you could just maybe touch on the expected closing of the Astoria transaction. Is it fair to model it at the end of the third quarter, start of the fourth? What sort of communication have you had with regulators?

This is a process that is rather complex. We're not just talking about closing a deal. We are talking about the birth of a SIFI. If there are many, many different people that are involved in this delivery.

It is very, I think, difficult to try and ascertain when this will actually occur, because there are many different people involved from different perspectives. One of the things that you should know is, we have five different regulators that truly involved in making this decision, so it is an involved process that will take some period of time that is uncertain. I don't know that anyone should try and actually fix a date.

Bob, it's Tom. I would give -- obviously the actual update is that in the previous -- in the current quarter, which is -- actually the Q2, we actually received our shareholder approval both at the Astoria side and the NYCB side as we progress towards our expectation of closing. Previous public discussion back when we announced the deal was a fourth-quarter close. We're in the third quarter and we continue to plug away through our operating plan.

Okay. All right. Fair enough. Maybe you could talk for a minute about mortgage banking. I guess in this environment I would've thought it would be in sort of a great environment for the production side of things. You definitely saw a nice rebound from the first quarter but not quite as strong as I would've expected with a drop in rates. Any thoughts there and outlook?

I think we are well positioned going into Q3. Obviously we have been working with a number of nuances in respect to the MSR valuation. Right now our MSR capitalization rate is a [0.88]. That is down 10 basis points quarter over quarter. That is a reasonable. It's not -- it's below a [1.0] so we feel that the recalibration of our model was a first-quarter event and a second-quarter event. However, the actual income items are up almost 70% quarter over quarter.

We had a, I will call it, a dismal Q1 because of the impact of that and we had less of a dismal Q2 but however was still up almost 70% and it is fair to say going into Q3, given where the purchase market, money market is, right, and purchase for mortgage loans are in the marketplace versus refi, we're seeing around a 70% purchase versus a 30% refi. But more importantly, we're seeing the opening of our gain on sale margins, so margins I'd say in this environment is around 90 basis points, about up 10 BPs from the previous quarter at 80, so we're probably setting ourselves up for a nice bump up and a continuation increased profitability in the mortgage banking arm that we manage.

Obviously, we put up around $7 million of mortgage banking income, Q2, versus $4.1 million in Q1. We can set ourselves up potentially for a double going to Q3 here so (technical difficulty) we can look at somewhere north of the doubling the current income stream from Q2 versus Q3.

Okay. Great. That is helpful.

Bear in mind, Bob, depending on market conditions, it is highly sensitive to interest rates and managing the MSR and hedge effectiveness.

That's fair. Mortgage banking can be volatile. Last question and I will hop out, I know you guys already touched on expense guidance for the year. I guess with -- or sorry, for the quarter. The G&A improvement this quarter, was that all the sort of seasonality that you highlighted and as you sort of look at expenses going forward is that comp line going to stay relatively flat to where it is this quarter on a go-forward basis?

Again, I gave some guidance going into Q3. We're looking at around $160 million ex CDI. We had about a $3.5 million reduction on comp and benefits quarter over quarter. That is predominately due to payroll. We're not downsizing. We're adding staff. We continue to add staff as we move along, especially as we get closer to the SIFI crossover.

G&A was up. We had a couple of one-time items. We had some merger-related. We had a litigation reserve. When you back that out, those costs will probably be, my guess, those couple million dollar amounts will probably go towards payroll expenses as we add more staff to get to the SIFI crossover.

I have said over the past few years, the increase in staff is not going to be a material adjustment to our P&L going forward, although it is going to increase our operating expenses. We're taking it over time. We spend significant dollars going back to 2011 and here we are going into 2017 to be ready and in position to bridge the gap as a SIFI bank. That will continue. Again, it is manageable. We feel highly confident that it is not going to be a material number at this stage.

Okay. Thank you.

Sure.

Steven Alexopoulos, JPMorgan.

Good morning, Steven.

I wanted to -- first of all, regarding the uncertainty you talked about regarding closing the Astoria deal, could you just share thus far in the process, is everything going basically as expected? Have there been any surprises that could lead to it taking longer than expected to close?

I would say no from the standpoint of surprise. This is a first-time experience for us and principally, in the case of many of these individuals that are directors, a first-time experience for them. Even though there has been a SIFI created, it was not the same kind of thing as we're talking about here.

There are no surprises here. There is reality that it is a process that involves far more people than normal and has far more expectations with regard to the ability to ascertain whether or not a SIFI is what in fact the combined Company becomes. A SIFI has a whole criteria of different metrics and expectations and therefore they have to do an awful lot of work in order to get there. I don't think anybody can gage exactly when this all happens. Within weeks or months it could happen or could happen over a longer period of time.

Okay. That is fair. Tom, following up on the commentary that pricing has gotten a little bit better on the multifamily loans, could you give us your outlook for the core margin here as the going to 3Q?

Last quarter we got, I think it was, flat to down a few basis points. We actually were up 3 basis points quarter over quarter. Obviously we had a substantial shift in the balance sheet. We had some securities that were rolled off.

Loan yields are up going into the quarter so we expect that will be helpful but bear in mind, if you look at where funding costs are in this environment, we have a notable move on the LIBOR markets had -- we saw 25 basis points on one-year LIBOR financing. We've seen 26 basis points and that is from the beginning of the year to today. 26 basis points on 6-month and 23 basis points on 3-month, so borrowing costs are seeing some pressure. There are no question that the home loan bank system is pricing in higher cost to borrow money and even on the, we'll call the nontraditional wholesale deposit market is seeing some pricing given the change in effective fed funds.

With that being said, my guidance for the quarter is probably flat to down maybe 2 basis points and we hope to be conservative there. We're not seeing any significant change in the margin, as I said, in the previous quarter so we're balancing through this.

Where there will be a change in margins when become a SIFI bank and we deal with the LCR requirements. That will have an impact. However, it will be top-line beneficial because our plan is to put on a positive carry when we finance our securities transaction.

Okay. That's great. Maybe if I could just ask one follow-up to an earlier question. The bank that Ebrahim was referring to implied that the regulatory environment around CRE concentrations was about to get lot more difficult for non-OCC banks. Are you guys seeing a shift in the way your regulators view your concentration? Is there any change there?

I'd say that the visibility with regard to concentration has been evolving since last year. Although there is more conversation about it, as you've noted, that doesn't mean there hasn't been a behind the scenes conversation about this for the last several quarters.

The reality is that we've always had a very high concentration number so for the last several years, before rule even went in place, we've always had regulators who have not been familiar with our business model question the size of our concentration. I think from our perspective, the discussion around concentration with regulatory focus is very appropriate and very typical of the kinds of concerns that should exist at the back end of a positive credit cycle.

We are cycle players. We anticipate cycle turn and during cycle turn we always do better. Concentration is merely one way of assessing the magnitude of risk you have in a given market. We always are risk-averse with regard to how we lend and we always concentrated in a particular class of asset in the New York market.

We are a very strong consistent supporter of low-income housing in York City. The reality is that every single cycle we increase our lending in the concentrated markets. So if you look at us cycle by cycle, we've actually been increasing our position in a period of adverse risk that takes in some cases banks out of the business.

We talked of this many times (inaudible). Banks that have been around for many, many years go out of business during credit cycle turns. Concentration is merely one way of talking about the exposure that you have to a particular class of asset. This particular class of asset in the New York market is something for 45 years we have been involved in and over that 45-year period we have never had a charge to capital as a result of cycle turn based on our concentration in this asset class. There are no banks that have lent $6 billion or $7 billion in this market and not had a charge to capital as a result of cycle turn.

The facts, the numbers, the reality of how we lend has stood the test of cycle turn. So being concentrated in an asset that greatly outperforms is an attribute, not a burden, for us. By the way, we've had to discuss this and explain this to every examiner that has come to the bank for the first time because it is just so different than what you would see in anybody else's balance sheets.

So yes, the discussion is national and the regulator is very, very appropriately recognizing that there is a significant increase in this particular class of assets around the country in the New York market and for those lenders that are not comfortable or otherwise that have not demonstrated a capacity to reasonably expect that they would perform well in the cycle turn, there are limitations. Those limitations at this moment are regulatory. The limitations in the cycle turn are market.

The reality is that we lend more during cycle turns not because the regulator tells our peers not to lend, it is because our peers are going out of business. It is because banks are virtually losing so much money on this class of asset that we are doing a larger share of the market.

This is not having the same kind of impact upon us as it has on others, only because if people actually look at our numbers, it is pretty apparent that we don't have an undue unexpected risk that has no justification for being. We have a risk that has been managed very well for decades.

Steven, it's Tom. I would just add to Joe's commentary that obviously, given our size and the marketplace and where technology is and [DFAS] and stress testing, the heightened sense of awareness for all institutions, including ourselves, is focusing on risk management controls around concentration and that's where we have to be best in class and we have to focus on that. There is no question that there's a heightened sense of awareness there and enterprise this management around on CRE concentration is key and we need to be best in class there. So we focus on that and that, in my opinion that is for the larger banks in order to be in this business have to be best in class there.

Great. That is really good color. Thanks, guys.

Collyn Gilbert, KBW.

Thanks. Good morning, guys. Just back -- Tom, quickly on your comments about kind of the outlook on NIM and funding pressures, if we put the wholesale market aside and what is happening there, where do you see kind of the retail deposit pricing trending? Is the market getting more competitive or less competitive? How do you see sort of the pricing differential New York City versus what you are seeing out in Florida?

What I'll tell you then obviously just is you go on the Internet and look at the bank offerings, it's -- they're higher than they were six months ago. Pretty much all retail customers are not going out to two to three, four years but within a one-year to 18-month bucket and those numbers are higher as far as the cost of funds. That being said, as is borrowing cost.

So clearly there has been an impact but again, it is not a material impact. That has been an impact that banks as they add more on-balance sheet liquidity and look at funding cost and fix costs they need more money. We're seeing maybe one or two basis points into our margin there. Is not a substantial change, but we have to be mindful of that.

If you feel that rates are going up significantly from here, that would impact our margin. Given where rates are and where the expectation of rates are going, we're not envisioning a substantial move to impact the funding cost of the bank.

That being said, I want to hone in -- back in on the loan pricing side. We move billions of dollars of paper on a quarterly basis and the fact that there has been this concept of, we'll call, higher risk in respect to the space of CRE and multifamily, in particular CRE, with low cap rates and interest rates where they are, we're getting better loan pricing. We anticipate to continue to get better spreads there. We think it is a balance.

Going back to the substantial adjustment to the securities book that $2.2 billion that rolled off in Q1, that was a 2.78% yield, so we didn't loose [350]. I think what is notable for the quarter, we're seeing a much less of a change between we originated and what paid off. I think this particular quarter was about 50 basis points of a negative. Two or three years ago, that was 180 basis points negative.

So the pain is less going forward and the actual coupon in the multifamily portfolio is around 3.42% and market's around just about or 3.375% or 3.75% so blended of 3.42%. In the event the spreads continues to widen and interest rates in the back end put the price in more risk, in particular as I indicated interest only, people are pricing in more risk as a cost of capital. It's a 100% versus 50% so there is a cost of the capital. That should be possible to positive towards the Company's interest earning asset yields.

Okay, that's helpful. Within your multifamily originations that you are seeing, do you know what the split is between purchase and refi? Just trying to get a sense of what the borrowers are doing.

No. I think it varies. Depends on --

Quarter on quarter.

-- who the people are on in a given quarter that are actually the refi-ing their product or otherwise buying their product. In other words, as we sit today, the marketplace is evolving and the risk taking by non-banks is always greater than the risk taking by banks. The reality is that the lenders are not driving this market as of right now.

Collyn, just to bear in mind, we saw a nice bump up in actual loan prepayments and when you look at the quarter, quarter over quarter it is not is notable because we had security prepays as well as loan repays and we had a significant change Q1 from the securities that paid off. That was about $12 million versus $8 million, quarter over quarter, a draw but we made that up on loan payment activity. (Technical difficulty) activity is encouraging.

Q2 we had an encouraging shift to positive prepayment month over month. Each month prepayments fully increased at a higher level and we're seeing some activity going into third quarter, so that is another positive impact towards the Company's actual margin, not excluding for prepayment.

There is also a very, very big difference between at market buildings and the kinds of buildings that we lend on. We have a particular niche that is well below the market.

The market lenders are the guys that are either here in other markets that are aggressive such as, let's say, Miami where they are seeing change already. In our actual niche, there is not that much change. There may be somewhat change in who is providing the financing but there is not change from the standpoint of the owners or the people that are bringing the product, brokers.

Okay, that's helpful. Just one final question. Can you guys just give us what your acquisition thoughts are post the Astoria close? You've obviously -- once you cross $50 billion the key is going to be scale that even more. Can you just talk about either from a business --

I think that you know us well. It is our business model to grow by acquisition. We're not just going to just grow. We are in an elongated period.

The concentration numbers go up until we do an acquisition and then the numbers come down and then over a period of time they go up again and then they come down, they go up again. We are in an elongated period, so our concentration numbers are higher today than normally they would be if in fact we had executed on two transactions in the last six or seven years. So as we look for the future period, we would expect that we would continue to effectively grow.

Remember, when the market turns and the FDIC is looking for a buyer, we're on the top of the list as available buyers to take troubled properties off the hands of the FDIC. And that is because our balance sheet is much stronger and better positioned to deal with adversity. That is a good thing. That is not a bad thing.

Okay. Just -- but outside of the FDIC deals, maybe traditional bank deals, do you feel like you would want to supplement maybe with a more traditional bank portfolio versus a heavily real estate concentrated one like you have done historically?

I will share with Joe's commentaries that obviously we have various beachheads and obviously we've waited a long period of time to find the right acquisition, the right merger partner to do the $50 billion crossover. We believe the Astoria transaction is low risk, we believe out of all the deals we've looked at the past three or four years, the lowest risk transaction. As we move forward, that was our mission statement to get over $50 billion.

Going forward, we're in Florida, we're in Arizona, we're in Ohio, we're in New York, New Jersey. We have the opportunities in the -- for the long-term business model to be proactive as we look at other opportunities.

We believe there will be substantial consolidation in the next 5 to 10 years given -- even before that, the next 2 to 5 years, given the change of the environment. This is a unique opportunity. We think there's lots of consolidation. It's starting. I don't think it's I think it's the end. You'll see significant opportunities within the marketplace. The good news for us, we're in multiple markets so we expect to continue to evaluate the multiple markets, but most importantly, we have a very large deal pending, so obviously that is the priority for the Company.

Okay. All right. Thank you very much.

There are no more questions in the queue. I would like to turn the call back over to Management for any closing comments.

Thank you again for taking the time to join us this morning. We look for to discussing our third-quarter 2016 performance with you, which most likely will be during the last week of October. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.