Flagstar Financial Inc (NYCB) 2004 Q2 法說會逐字稿

good day everyone and welcome to the New York Community Bancorp's second-quarter 2004 earnings conference call.

Today's call is being recorded.

For opening remarks and introductions I would like to turn the call over to the First Senior Vice President of Investor Relations, Ms. Ilene Angarola.

Please go ahead, ma'am.

Thank you.

Good morning everyone, and thank you for joining the management team of New York Community Bancorp for our second-quarter 2004 earnings conference call.

Today's discussion will be led by Joseph Ficalora, our President and Chief Executive Officer.

Also with us today are Robert Wann, our Senior Executive Vice President and Chief Operating Officer;

Thomas Cangemi, Senior Executive Vice President and Head of our Capital Markets Group; and Michael Puorro, our Executive Vice President and Chief Financial Officer.

Today's call will feature several forward-looking statements which are intended to be covered by the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

You will find a discussion of forward-looking statements and the associated risk factors in our recent SEC filings and on page 14 of this morning's earnings release.

If you need a copy, please call our investor relations department at 516-683-4420 or visit our website, www.mynycb.com.

At this time I like to turn the call over to Mr. Ficalora, who will make a brief presentation before opening the lines for Q&A.

Mr. Ficalora?

Thank you Ilene and thank you all for joining us this morning.

On today's call we're going to talk about the events leading to our strategic review and our decision to reposition the balance sheet, as well as the current status of the Company.

We're also going to allow ample time to answer your questions once I have completed my initial remarks.

There are three main points we would like to make during this discussion.

First, the strategic review we announced in May has been completed.

After a comprehensive analysis of a variety of options, we determined that our best course of action would be to reposition the balance sheet and generate future earnings on the basis of the fundamental business model on which this Company was built -- originating multi-family loans, maintaining high credit standards, and operating a highly-efficient and profitable branch network.

Second, our repositioning is complete.

We have taken actions we needed to take, reducing our leverage and reducing our exposure to market and interest rate risk.

The result in a very solid balance sheet.

Third, we are generating earnings through our proven business model.

After the repositioning we produced an excellent second quarter and our outlook for the remainder of 2004 and 2005 reflects our fundamental strengths.

Before we move forward on each of these points, I would like to take a few moments to discuss the events that led up to our strategic review.

As you know, the Company under my leadership has pursued a well-publicized strategy of leveraged balance sheet growth and repositioning through multiple business combinations over the past 4 years.

In January 2004, the Company generated $400 million in additional equity through a follow-on offering and disclosed its intention to leverage the proceeds in order to defease (ph) the dilutive impact of the issued shares.

The capital raised was intended to provide funding significant for multi-family loan production, to boost our capital strength and flexibility, and to position us well for a future M&A activity.

While our capital was more than adequate to operate our core business, the additional capital would assist us in the event that the opportunity for a transaction were to arise.

Over the course of the first quarter, the Company pursued a number of initiatives which would have better positioned us for a rapid rising interest rate environment.

As a result of the overt change in rate expectations that occurred in the second quarter, we were no longer well-positioned to complete the initiatives we had started to pursue.

Consequently, we came to believe that it would be in our shareholders' best interest to conduct a comprehensive review of our strategy.

Accordingly, we issued our May 9th announcement indicating that we had launched a review of our strategic options with the help of 3 advisers and the active involvement of our Board.

The benchmark for our strategic review was long-term shareholder value.

What strategy would produce the greatest shareholder value for investors over time?

We concluded that the best action would be to go forward on the basis of our fundamental strengths, generating earnings by sticking to our knitting -- loan production, asset quality, and efficiency.

We determined that this strategy would produce better returns to our shareholders over time than any other option, including the sale or merger of the bank.

Once we determined to stay the course, it was clear that the first step in the process would be to improve the market and interest rate risk profile of the Company.

We thus decided to reduce our leverage position, and at the same time extend the maturities of our wholesale borrowings.

The result is a solid balance sheet that continues to generate earnings, while at the same time reducing our vulnerability to market and interest rate risk.

That brings us to where we are today.

In the past few months we know that many of you have felt deeply the substantial decline in our stock price, and we want you to know that we very much share the frustration and disappointment that you feel.

That decline has been contrary to everything our Board and management team have strived for in a 10.5 year public life.

With the repositioning behind us, we're now focused on our business model which has delivered superior value for shareholders over the years and we're convinced will do so again.

Dividends have always been a key component of the value we created, and we are confident that the earnings that we produce going forward will support our ongoing commitment to a strong dividend.

We're uniform in believing that we have taken the appropriate actions and that the Company is now positioned to return to levels of financial performance that you and we have come to expect.

In that regard, let me continue the discussion by focusing on the merits of our repositioned balance sheet.

First, as a result of our deleveraging securities totaled $8.5 billion at the end of the second quarter and represented a 35 percent of total asset, a percentage that will be further reduced over time.

Reflecting the repositioning charge, our earnings amounted to $42.8 million or 16 cents per diluted share in the second quarter.

Absent the charge, our second-quarter earnings totaled 137.6 million or 51 cents per diluted share.

The repositioning also reduced our balance sheet to $24.1 billion with the reduction in securities being partly offset by the growth of our loan portfolio.

In the quarters ahead the cash flows generated by the securities portfolio will be redeployed into our loan growth.

We also expect to fund our loans with an increase in deposits, building on our expanded footprint in our marketplace.

With net loans up $1.4 billion year-to-date and a current pipeline of $1.3 billion, we are very much on track to grow loans at least 25 percent in 2004.

Multi-family lending continues to be our primary business and we continue to be the leading lender in our marketplace.

I want you to know that we are making the same kinds of loans today as we have for decade without any compromise to our market pricing or credit quality.

At quarter end, multi-family loans totaled $8.5 billion, signifying an annualized increase in excess of 30 percent.

The average multi-family loan in our portfolio had a principal balance of $2.7 million and a loan-to-value ratio of 59 percent.

The expected average weighted life was a fairly short 3.8 years.

Our record of 39 consecutive quarters without any net charge-offs is a strong indication of the credit standards we consistently maintain.

The largest non-performing asset on our books, a loan that Roslyn had reserved for more than 2 years ago, should be gone by the end of this quarter when the underlying property is expected to be sold without any loss.

At the same time, we would expect to maintain the efficiency of our operation with the efficiency ratio that continues to rank among the industry's best.

We will also generate revenues through the sale of third party investment and lending products, thereby serving our customers without incurring attendant credit and interest rate risk.

As a result of the actions taken last month, we're better positioned for future rate increases with a positive 1 year gap of 0.2 percent.

Our 1-to-3-year and 3-to-5-year gaps also show improvement, amounting to a positive 6.4 percent and a positive 18.2 percent.

I would also like to say a few words about our capital levels.

Our capital ratios were well in excess of the minimum federal requirements at the close of the quarter and are expected to grow steadily over the course of this year and the next.

As we indicated in this morning's release, the bank continues to be a well-capitalized institution, and we expect to continue to be so classified.

As I have said, our exposure to market and interest rate risk has been reduced through the actions we have taken.

In fact, we have tested our balance sheet against rising rates and are confident that even under a shock scenario our tangible equity ratio will continue to improve over the course of the year.

Again, I would like to convey our confidence in our business model and in our ability to once again generate the kind of financial performance and returns to shareholders that for so many years have been the hallmark of this Company.

I would now like to open the line to your questions.

We will do our best to get to everybody, but if we should miss you please feel free to call us individually after the call.

Thank you.

(OPERATOR INSTRUCTIONS) Mark Fitzgibbon, Sandler O'Neill.

First question I had, assuming that there isn't any additional interest rate increases this quarter, could you give us a sense where you think the net interest margin will end up?

Obviously as we've restructure the Company, we do believe that the margins and the spreads will in fact over the course of the next several quarters compress.

However, if there is no movement in rates over the course of the remainder of this quarter, it will go up.

It will go up?

Yes.

Secondly, what should we be using for an effective tax rate for the Company?

Is about 34.5 percent the right rate?

I think the rest of the year we should use about 33.5, and for next year between 34 and 34.5.

Just as a follow-up on the first question, that if there is no more further interest rate rises the margin would perform slightly better than if there is.

But certainly it would be decreased from what we announced in the second quarter.

The next question I had was with respect to the multi-family loan pricing.

Today where would you say the 5-year products are being priced?

Actually we were at a meeting yesterday and they were in the range to 5.5 to 5.75.

Last question.

Joe, you talked a little bit about in the press release that you're really focused on growing deposits.

Could you maybe share with us some of the things you're doing; your sort of strategy for growing deposits?

In actuality over the last 4 years we've had a strategy of removing from the deposit base a lot of the accumulated, what we considered hot money, that was generated as a result of promotionals during branch openings and such.

The fact is that we have come to a conclusion in the restructuring of our balance sheet.

The restructuring of our balance sheet included both the assets and the liability, so whereas we were allowing deposits that were CDs primarily to roll into fixed annuities and in many cases build our core base to a ratio that today is about 62 percent, we in fact on a go forward basis our now prepared to build deposits from the general marketplace, bringing in new money with CDs and other type offerings that will include gift programs and the typical things that are done by banks to be competitive against one another.

Thank you.

Rick Weiss, Janney Montgomery Scott.

I was wondering if you could talk a little bit about your capital management strategy, specifically I guess with stock repurchases, buy-backs?

Clearly the positioning of the Company today is that we have an available 1.6 million shares that we can buy.

Obviously when of the circumstances are right we may in fact buy some of that stock.

But over the course of the near-term we're going to be building capital and concentrating on the payment of our dividend as a principal way of returning share value.

So there's an ability to buy stock, but there is not the same degree to which we've been buying stock in the past on the immediate horizon.

Makes sense.

I guess -- it could be real brief -- has the multi-family lending business changed over, say, the last 5 years; gotten more competitive with the refi business?

Are people still going to refi even though the rates are extremely low now?

I'd say probably the best way to address that, we are principally in a continually refinancing business because we deal with deeply-discounted cash flows that are expected to constantly be refied because the principal borrowers from us are redeploying funds into their building to build rentals.

Therefore, they're putting money in the buildings for the purpose of creating new kitchens, new bathrooms, new windows, those things that will allow them to raise the rentals, which raises the overall cash flow, and therefore the ability to borrow in that building.

So whether rates are going up or going down, we've historically -- and this is over the course of decades -- we have found that we in fact continue to refinance the loans that we principally do.

This is not necessarily common to all lenders.

This is not necessarily common in a way that other people handle this.

But in our particular case the refinancing of loans is something that we do on a continuous basis regardless of interest rates, or for that matter regardless of whether the marketplace has changed dramatically.

During, for example, the years '88 through '92 we were heavily refinancing our products, even though most of our competitors were losing large sums of money on the multi-family product they had in their portfolio.

Many people were not, in fact, willing to do multi-family loans.

So we've had a consistent record of being there in the best part of the cycle, as well as the worst part of cycle.

So the last 5 years has in fact created an environment where many people have moved away from the perception that it's important to be credit-oriented.

Many of the people who lend money at this end of the cycle wind up putting too many dollars of the table because they are desperate to find loans.

We've been very consistent in how we lend.

We've been very consistent in the particular niche that we try to focus upon.

Therefore, we have a business model that proves itself during periods of credit cycle turn, as well as during periods of interest rate cycle.

So the good news is that even in what is for us a more competitive environment, a more difficult environment to lend in, the last 3 to 5 years represents for a bank such as we, a bank that is risk-averse that lends very conservatively, it makes it more difficult for us to lend when all kinds of lenders are in the market throwing dollars at properties.

In our particular case, because of the efficiencies and the track record and the business model that we follow, we're able to lend in what is the most difficult part of the cycle for us to lend in.

As we evolve into a change in the cycle, we in fact will be better positioned to be a competitive lender because we will in fact have the same kind of experience that we've historically had; far less in the way of credit loss than most of the people that we compete with.

Therefore, we will have far more likelihood that we will be a competitive lender in the periods ahead.

Thank you very much.

Salvatore DiMartino, Bear Stearns.

I guess Mark and Rick beat me to the punch on most of my questions.

But I have a question on kind of funding strategies. (inaudible) the outlook for loan originations going forward for the second-half of '04 and '05?

And your deposit strategy notwithstanding, would you consider now an alliance with Fannie Mae similar to one that your competitors have?

Given our positioning in the market and the fact that we would be funding through both deposit growth and the cash flow out of the securities portfolio, it is not likely that we would look to do a Fannie Mae program.

We, as I guess has been the case over the last many years, we've been very well aware of the availability of Fannie and others who would love to have us originate loans for them.

We believe that we're creating the best asset in the market, and we would much rather have that asset in our portfolio than to provide that asset to others.

So if you think about it, Fannie Mae does not provide funding;

Fannie Mae takes assets that you otherwise would be able to hold in your portfolio.

So they're not a funding source; they're in income source as a result of diverting some of your intellectual and other resources to the production of a product that is not going into your portfolio.

So Fannie Mae would not be used for us to generate more portfolio assets.

Just a follow-on question to Mark's question on the multi-family pricing.

You said 5.5 to 5.75.

Is that what rates were in the second quarter or going forward?

I think you have touched upon a very valid point.

The comment that I made was that just yesterday I was at a meeting that in fact where we were doing loans.

Over the course of the last several weeks rates have been moving rather rapidly up and down, and therefore there is a consistency in which we lend.

So without a question, we're going to see rates moving back and forth, depending on how in fact market rates do change.

But we move more slowly than the day's change in the rate.

So the rates that I articulated are the rates that in fact the committee was improving for actual contract, meaning that we had gotten to the point where these loans where actually going to be accepting a check.

One other question on the multifamily originations.

We had heard that there was a couple of, for lack of a better word marquee properties, multi-family properties in New York City or the outer boroughs that were sold during in the quarter.

I was wondering how much of that was in the portfolio or in the originations number, if in fact I'm correct?

I'm not sure if the specific properties you heard of are in the number.

What I would say to you is that as a larger company we've been able to participate in much larger funding than at anytime in the past.

So we have been involved in some very large transactions over the course of the last quarter and the last year.

And we do have some very large transactions that we consider on a go forward basis as well.

But in balance, as I had mentioned earlier, the average portfolio -- this is that average portfolio after all the transactions are taken into account -- the average multi-family loans on the portfolio is $2.7 million.

So the breadth of our portfolio, the breadth of what we do, is still in the range of about $2.7 million.

Thanks.

Jim Ackor, RBC Capital Markets.

A couple of questions.

Are you guys going to disclose, or would you be willing to disclose, period end margin as opposed to the average margin for the quarter?

I don't think that -- does anybody do that?

Some do and many don't, but it typically (multiple speakers)

I don't know that we've ever really considered that.

Certainly we would consider looking at that.

I think that what we've been doing is relatively consistent with what we believe our immediate peers do and what we've been doing.

That's fair enough.

Next question.

I don't know if anybody there could in simple English explain the fairly sizable jump in the deferred tax asset and sort of where that comes from and what the implications are for earnings on a go forward basis.

It looked like the deferred tax asset was up to about 308 from 214 at the end of the prior quarter.

The deferred tax asset changes rather significantly up or down, predominantly by the unrealized loss component of the FASB 115.

So that's really it in a nutshell.

When the FASB 115, as it moves up or down you offset a deferred tax asset or deferred tax liability.

That explains it perfectly.

Thank you.

One more quick question, if I could.

Would the charge, the $157 million I think it was in the net securities line item, is that all just losses on securities?

Is there anything else in there?

Just securities.

That's just securities.

Thank you very much.

Jack Micenko, Susquehanna.

A couple of questions, and I hopped on a little late so I apologize if we're being redundant.

Just looking at the capital levels and looking at the sort of 20 percent growth in multi-family loans, assuming (indiscernible) the deposit growth out of the equation, it seems like by default securities balances need to come down to keep the loan growth and going.

Absent the deposit growth expectations, have you guys given out sort of expectations of where you think loans and securities will be, either on a year-end or goal basis and then sort of how that ties to where you're looking at a tangible capital ratio before you would consider buying back stock or moving forward on the dividend again?

And then lastly, if you just could touch base on the core deposit mix.

I think I caught you saying you're looking to sort of grow all deposits now.

Do you look for the core mix to stay at 62 percent or do you think that maybe slips a little bit?

I will answer the last question first.

The core deposit mix, obviously we're always interested in growing cores.

So some of the initiatives that we have actively out there are intended to actually bring in core money.

And the good news is that we've actually demonstrated that we can grow core in a program, in an incentive program.

So we are looking to as best as we can grow core.

But as deposits changes over the course of time, there's no question that that is not going to always be the case into next year and such.

For the first two questions you have, I think it would be best if Tom takes those 2 questions.

Obviously this is his area of responsibility.

In respect to the securities portfolio, as you know in our press release we indicated that we expect in our model that rates would go up about 200 basis points on the short end.

So we're assuming a rise of 200 basis points.

And we believe that our securities portfolio by year's end '04 should be down just around 30 percent, give or take a couple of basis points.

Going into '05, we will still see a great degree of cash flow because principally the portfolio is made up of CMO or CMO-type related securities of approximately 24.9 to 25.5 percent at the end of '05, assuming a rising rate environment.

Now, if rates don't go up quickly you might get a little bit more cash, but clearly the focus is to have the balance being reduced over time through principal repayments of the cash flow from the book of business that we have in the securities side.

Okay, great.

In respect to capital levels, as you know our capital level on a Q1 basis is very high.

We believe that over the next few months we're going to be adding to capital and the goal is to continue to add to capital.

As Joe indicated, a buy-back is always an opportunity, depending on market conditions.

But our focus now is to generate capital for the Company to operate.

But you just haven't come out and said we want to do a 5.5 tangible ratio or a 6 or no firm goals?

I think to go back to the capital side, we posted a 450 on a Tier 1 basis projected.

It's very, very high at the bank level.

We would see an improvement in the tangible capital ratio even with a shock in the interest rate environment, based on our expectations of a rising rate environment.

So in our analysis going onto the end of the year, we see our capital ratios improving greatly with a shock and paying out a very nice dividend to the shareholders.

Okay.

Jerome Kaplan, Value Line.

Most of my questions have been answered.

Mike, only question is you anticipated doing a merger deal and you borrowed in anticipation of this.

Since you didn't have a deal on a table or finalized isn't that an impractical decision?

I'd say in looking back there's no question that the way we approached the opportunity to position the Company to do a deal or deals in the future presented for us a problem that was not resolvable once in fact rates started to change.

As we were in the quarter, in the first quarter, we considered, as I mentioned earlier, several different strategies.

Some of those strategies were acquisitions of other companies which were actively being discussed, as well as strategies that would have repositioned our balance sheet.

The fact is that as we began the month of April, we were still in discussions with both bankers and with other participants as to how to best execute.

The change necessitated that we withdraw and start to consider whether or not we should be restructuring quickly or opting to do one of the lesser transactions that were immediately presented to us.

The fact is that the positioning of the Company would have created very highly accretive transactions had we in fact gone through with any one of the ones that we were considering.

The good news for our shareholders would have been an immediately highly accretive deals to both tangible and to earnings.

And for the shareholders of the companies that we might have combined with, it would have been a highly accretive deal as well.

But the important thing here is that we could not sustain the positioning of our balance sheet with the immediacy of the rate change.

So that's why we went into the strategy mode and decided that we had to pick the best strategy that would build share value over time.

Obviously during that process the situation clearly evolved into what tells us that the Company needed to accept that we would restructure as we were because that would be the best way to build value over time.

If you look back at how we've built value in the past, in many cases we were both leveraging the Company.

In fact, in each of the transactions that we had completed, immediately following Haven we were leveraging the Company and we're preparing ourselves for the next deal.

Within four months of closing that deal we announced another deal.

After closing the Richmond deal we in fact went out and did a secondary offering.

We raised additional capital.

We well-positioned to the Company, and then ultimately announced yet another deal which was highly accretive.

So the fact is that the strategy had worked over the course of a 4-year period very effectively 3 times.

The change that occurred in rates necessitated that we not hold to our strategy -- but obviously could have in many respects -- the use of the analysts who came to judge the best balance that we might strike with regard to keeping assets and disposing of assets; made a judgment that this balance is the right place to put the Company to concentrate on building value using our business model.

Our business model over the last 11 years has created far more value for shareholders than any other business model.

The business model in fact the way it's currently positioned should be able to create value over time.

We're not a quarterly player.

We are in fact over time going to build value because we have a fundamental business strategy that actually does work.

The use of our securities portfolio was always an interim piece of our business model.

It was never intended to be an ongoing component of our business model.

So the restructuring as it is today should well-position us to build value on a go forward basis quarter by quarter.

And obviously over the course of time when the stars align themselves appropriately to add value through transactions, we will do so.

The next question is on dividends.

Your press release said that you intend to pay dividends, but you did not mention specifically that it would be maintained at the current 25 cent quarterly rate.

Clearly I cannot, and certainly the Board cannot, pre-declare dividends.

No public company can do that.

But what I would ask you to look to is our track record.

Over the course of time we've been one of the best payors of the dividend on the growth in our earnings overtime.

We genuinely believe that the business model that we have provides us with the ability to build share value through the growth in earnings and the ultimate growth in our dividend.

The current situation with our dividend is such that our earnings have now been reduced so the pay-out ratio is high.

But we're confident that we will build our earnings over time, and therefore we will create an ever-safer capacity and not only pay the dividend that we're paying but ultimately to pay a better dividend than we're paying.

Our willingness to pay a dividend has been demonstrated by our actual actions.

And lo and behold, the Board's confidence in the restructured Company is demonstrated by the declaration of our dividend.

Our confidence that we in fact have sound, solid earnings upon which to build is demonstrated by our willingness to take the dividend at this ratio and demonstrate that we're willing to pay a strong dividend to our shareholders.

Thank you.

Matthew Kelley, Moors & Cabot.

Just curious.

Tom had mentioned the ideal goal is to kind of reposition securities into loans over the next couple of quarters here, possibly getting securities-to-assets down to 30 percent by year-end '04.

Curious about as we head into '05, if you have thought out that far, what a longer-term goal is in terms of getting that ratio to?

Based on our projections, again assuming a 200 basis point rise over the next short period of time -- I think we had 100 basis points going in '04, another 100 (multiple speakers) '05 -- we expect that our portfolio will probably flit around 25 percent approximately, give or take a few basis points.

The goal clearly is to reduce the balance.

As indicated previously, the principal balance of the (indiscernible) of both the health and maturity and the AFS (ph) portfolio is principally CMO and mortgage-backed related securities.

The will be a constant prepayment of cash flow coming in.

Obviously it will be up and down, but clearly based on shock in the portfolio we feel pretty comfortable that that balance will be reduced greatly over the next 16 to 18 months.

I was wondering if you might be able to give us an update on the net portfolio value model provided in the 10-Q, what that might be looking like now after the restructuring.

I know in the first quarter you are up 200 basis points, you reduced NPV (ph) by 22 percent.

And I assume the post-restructuring that has been improved a little bit?

It probably improved I would say 40 to 50 percent better than we had disclosed (ph) at a minimum. (multiple speakers)

It has definitely improved, as Tom said, 40 to 50 percent.

Of the 1.5 billion of multi-family originations in the second quarter, I am just curious how much had a contractual life greater than 7 years.

Very, very, very small amount.

The principal lending that we do is actually five years, although we do loans at 7 and we do very few loans at 10.

The vast majority of loans that we do are 5-year loans.

Might you be able to quantify what it was in the quarter?

I really can't give you an exact number.

What I can say to you is that we are very rarely willing to do a 10-year loan.

And I'm going to be just guessing if I throw out a number, but if we do 100 loans I am going to guess no more than 1 in 100 might be 10 years; 1 in more than that might be 10 years.

It's a very, very small number in actuality.

Just curious on the dividend -- last question.

Have the credit agencies kind of signed off on your dividend policy in their thinking about ratings?

We have not met with the credit agencies yet.

We are planning on meeting with them in the weeks ahead.

But obviously the paying of dividends is in fact an important part of how we look at capital management.

I don't know if Tom wants to talk about that a little more.

I think what Joe indicated is correct.

We plan to meet with all the rating agencies.

But more importantly, based on our capital models we're shocking the portfolio pretty aggressively into the year-end.

And we see capital improvements as far as the levels.

Our Tier 1 levels are significantly higher, almost approaching double-digits over the next year and a half.

And on a pure tangible basis, yes it is that level that at 4.5 we've been lower in the past with much higher ratings.

So I think the concept is you'll probably see an improvement intangible ratio.

As Joe indicated, the focus will be more towards dividends, not buying back stock.

But depending the market conditions, our goal is to improve the capital ratios.

In respect to tangible, you'll see a quarter-to-quarter improvement over time with a rising rate environment.

Obviously if the rates go up significantly we would have to reanalyze the model.

But clearly on a reasonable increase in marketplace and rates, you shock the portfolio, we see capital increases to tangible and we are comfortable at the capital levels that we will have at year-end, as well as into '05.

In your model, up 100 business points this year, the 4.5 percent tangible equity on a GAAP basis should be kind of the low point.

(multiple speakers) it should grow actually.

And that assuming a payment of the current dividend stream.

Thank you very much.

Ted Kovaleff, Sky Capital.

Got a question about the policy with regard to the various security investments because you projected throughout last year, etc., the 75 to 100 basis point increment in interest rates for '04, and yet it seems that the investment action that you took was somewhat contrary to those expectations.

And I'm wondering exactly what it was that, if I am correct in that assumption, what it was that led you to take the different position.

I would add just in respect to the pre-restructured balance sheet, the cash flow that we had come in clearly came and at a much higher pace.

So as far as the strategy, loans on the multi-family side were clearly coming in as expected, if not above expectations, as well as cash flow from securities.

For example, we received close to $2 billion in the first 6 months of the year just on pure cash flow.

So the securities that were purchased paid down and actually coming on at higher yields from the prior year.

So in respect to the strategy, cash flow from the MBS (ph) portfolio continues to pay down.

On a pre-restructured basis we had a significant amount of cash flow, as well as a significant lending stream to cash flow into.

So I think the concept of that yes we reduced to the overall balance of securities at a much earlier date and the projections going into '05 and '06 will probably be at the levels that we are today, but clearly we're here earlier because of the precipitous anticipated rise in interest rates.

And we wanted to be able to deal with a better balance sheet in respect to a significant rising interest rate environment and a focus on stabilizing our PE when it's necessary to focus on our core banking earnings.

Our actual earnings in the first 6 months exceed our expectations and the expectations of the Street based on the actual changes in rates, which occurred mostly in the level where we lend, not where we borrow money.

The changes that we've made in our strategy deal with the reality that the changes that are going to occur in the period ahead may result in a flattening of the yield curve, and certainly our funding costs would be the ones that would be vulnerable and going up.

So the actual change that we anticipate is what had caused the change in the balance sheet.

The 6 months of this year have provided us with better earnings than we had previously model.

So the contributions to capital for the year ex the restructuring our greater than the capital contributions would have been without the changes in rates that have actually occurred.

So the restructuring -- and this was part of the analysis -- the restructuring is dealing with the anticipated environment, not the actual environment.

And therefore, we're positioning ourselves so as to be less vulnerable to adverse change in interest rates.

I want to get back to before restructuring, though.

Were there any hedging activities to protect --?

No, typically we did not hedge.

The natural hedge for us has always been our loan portfolio.

The size of our loan portfolio and how it reacts in the changing interest rate environment over the course of time has been a benefit that most companies do not have.

We continually refinance our loan portfolio even during periods of interest rate change.

And that reality, the fact that we continually refinance when interest rates are changing, usually having the benefit of moving our yield up more rapidly than the yield of competitors based on how our assets because of the use of points -- how our assets actually refinance, given that reality we move up our yield typically faster than others when interest rates are moving up.

That's obviously a very good thing.

So we do not have any other hedging mechanisms in place.

That has never been a practice of the Company.

One last question.

That is going forward absent the securities that have been wound out clearly there's going to be some loss of income from them.

Can we get some type of a quantification?

I think the numbers that we've projected for '04 and '05 specifically identify the loss of that income.

No question that when you take $5 billion in securities out of your income stream, you wind up losing a substantial amount of earnings.

So the numbers -- we've done something extraordinary.

When you think about the fact that none of our peers project numbers with the amount of specificity that we have in our release today, none of our people and we never projected the year ahead 18 or more months in advance.

We did all of that because we wanted to make sure that we provided sufficient clarity that the restructuring of the balance sheet is going to reduce our earnings by the amount that we've identified.

So the positioning of ourselves for the future with regard to earnings takes into account an uncertain environment wherein we may or may not have changes in rates that are more adverse than contemplated.

And certainly it takes into account the fact that we don't have $5 billion in earnings assets that we had a month ago.

So the numbers are quantified, just so you can be sure about that.

It's in our '05 number and in our '04 number.

Thank you.

James Abbott, FBR.

I wanted to ask 2 or 3 different questions; 1 is sort of related to the dividend.

And that is what is your cash earnings per share number?

I know in the cash flow statement there's a discussion about discount amortization, and I was wondering if you could touch on that as to what you expect --

I think you have touched on something that in our case has always been very relevant.

We actually build our capital with our cash earnings.

So the contributions to our capital position come from cash.

I think for this particular report we indicated, and if somebody can help --?

I think it is something in the range of $38 million extra was added to our capital position as a result in of cash earnings.

The ongoing capacity of the Company to build capital is greatly enhanced by the actual cash earnings that we have.

It was approximately 3 cents for the quarter.

3 cents is the discount accretion number per quarter?

No, that's the composite of everything.

That's between cash and reported.

On page 17 there's a reconciliation of GAAP and cash earnings.

That reconciliation kind of identifies some of the larger components of that number.

The second question that I had is related to basically trying to get back to that question on large deals that are involved in the pipeline.

Can you tell us how many deals that are in excess of $20 million?

Frankly, I don't know.

What I would say to you is that we have done some larger deals over the course of time, and I think that there are some large deals that are being considered today that are in the pipeline, but I can't quantify exactly how many are over $20 million.

What I can say to you it is that the actual impact on our portfolio is that we have an average loan size of $2.7 million.

So if you have a portfolio of $11 billion and you do a large loan for 20 million, it doesn't have much of an impact, is the point.

Is that to say that you don't track those loans?

No.

I think there's no question that there are regulatory people that are specifically responsible for tracking large loans, and that is done.

Offhand I just don't now what the number of $20 million loans might be.

But certainly I can look that up and I can get that to you if you like.

That would be wonderful.

On a related note, historically you have done somewhere between 90 percent and 120 percent or so of your pipeline the following quarter.

It has deviated a little bit outside of those ranges, but that's usually the range.

Do you expect it to be towards the higher end of the range or the lower end of the range in the third quarter?

It's always hard to predict that, mainly because depending upon legal process and other things that are going on with the parties sometimes loans carry over from one quarter to the next.

So the reality is that when we give our pipeline, these are loans that we actually have in process; loans that we've actually taken checks on.

And when we take a check on the loan, ultimately that loan closes.

There's a very, very small fall-off in loans that we've gone through the process of taking the check on.

So it's just a matter of whether it closes on the last day of the quarter or some time in the weeks following the quarter.

So we have deviation from quarter, and we really don't control it.

It's not as though we manage it.

We're always working diligently to be an efficient closer of loans as quickly as we're reasonably can, but there are always factors that take -- 1 loan, for example, might take 95 days; another loan might take 45 days.

So it's very hard to say, Jim.

Okay, but you would expect it to fall at least within that range?

Definitely.

I think the range you've established sounds about right.

Sounds about right.

How much prepayment penalty income is embedded in the net interest margin?

Within the margin?

I'm not sure if we know the exact number in the margin.

But I know that (multiple speakers)

Certainly in the second quarter because of the volume of transaction it was higher than the first.

And the third would probably fall a little bit less because the first and the third are historically slower quarters in terms of volume.

The second and the fourth would be more.

I'm sorry to pester you on this, but is there any way to quantify that?

It is harder for me to model the --

I think from the standpoint of modeling it, Jim, it's not an easy thing to model, just like it's not easy for us to tell you how much we have in the way of rent-controlled buildings, rent-controlled units in a particular building.

It's a changeable number depending upon exactly what happens with a particular loan.

So if a loan is refinancing with us the penalty income or the yield to us on that loan is different if their refinancing with us versus if the loan is actually trading away.

So the amount of income that we get -- term yield is significantly better for us than term yield is for other kinds of lenders because of the consistency with which we wind up accumulating that particular component.

But the actual amount that goes into the realized yield benefit on the loan that is leaving versus the yield that we get on the loan on a go forward basis -- because remember, we might actually negotiate a better above-market yield on a go forward loan, in which case we're not going to get penalty income at all.

What we're going to get is we're going to get a better-than-market yield on that loan on a go forward basis.

So it's a very hard measure.

It's not something that is easily quantifiable.

The good news is that when you look at the yield on our assets, specifically our multi-family loans, the yield on our multi-family loans has typically been better than the yield that most others derive over term.

Not coupon, over term.

And that's because there are multiple factors that are in our business model in how we handle the points.

So in the simplest of ways of putting it, we might have no penalty interest recognized at all, but we might get an extra 50 or 75 basis points on a go forward loan, and therefore we're getting an above-market yield on a go forward loan, but we're not recognizing any points.

If you're looking to equate the amount that goes into the actual yield, I would say probably on average in the case that we're actually receiving a check for prepayment penalty, it probably ranges on average 2 to 3 points.

We take that over the average life of a typical multi-family loan, you could equate that to actually yield above the coupon.

But for your modeling purposes, Jim, it's going to be very difficult to actually quantify that.

The best way to look at it is the yield in the asset portfolio.

Also, on the deposits side you talked about trying to get rid of some of the hot money.

Is there a way to -- can you provide some information, some color on the money market accounts that exceeds -- the amount of money market accounts where the account exceeds 100,000?

You're talking about the balance of the money market accounts?

Correct.

The balance of money market accounts -- well, I can't offhand give you that number here.

But what I'd say to you is that over the course of the last several years a lot of people have been accumulating money in the bank, and not because rates have been great, but because their alternative choices have been such that they have decided that they want to keep a safe place for their money.

We have a lot of very large accounts.

The ability for us to move money from CDs into money markets has been something that over the course of time -- meaning the last 4 years or so -- has resulted in our reducing the percentage of CDs in our portfolio.

On a go forward basis here, we're actively going to be marketing to the Street.

Given the efficiencies of our model and how we in fact operate, we are very well positioned to be a competitive rate-payer on a go forward basis.

So we're going to literally be positioning our offerings so as to attract money, new money, to the bank.

And I guess maybe the simple way to look at this -- over the course of the 1.5, 2 years before Roslyn became part of our Company, Roslyn was an accumulator of deposits.

So the business model that we have today is significantly -- on the retail side significantly better positioned to provide both services and convenience to our customer base.

So it's not just rates; it's also the number of locations you have in proximity to the customer and the number of hours you're willing to service the customer (multiple speakers)

I'm sorry.

What I was trying to get at, though, was the dollar amount on those accounts, if they're in excess of $100,000.

And I was actually going to look for the interest rate on those accounts, if you can provide that.

That will help me gauged the interest rate sensitivity or at least what I think (multiple speakers) obviously you guys have your own opinion.

That's right.

What I would say to you is it's not an easy thing to gauge.

We probably have -- and I don't over sure -- we probably have something in the rate of about 20 or 23 or 24 different money market account offerings.

Our customer base is a composite of 7 different banks, which has a difference in the way people have been treating the deposit base.

So how that deposit base has accumulated in each of our divisional banks is somewhat different.

Obviously the makeup of a deposit base in a low income area is very different than the makeup of the deposit base in a very wealthy community.

And we have both.

We have both.

So it is not a simple math computation, I'm afraid.

Maybe we can cut to the chase on where you can find some of the information.

In our FDIC call (ph) report we give you the balances in accounts of over $100,000.

You can go back to the prior call report or wait till June 30th it's filed, which will be in relatively short order.

I guess what I'm -- I think that that's for CDs.

You can go up to the Company's website and pull off our current rate, which would detail all the different types of money market and the rates that we're currently paying, which may be a little higher of late because we're on a campaign than what we were paying during the last 3 to 6 months.

I think all the information is there.

Certainly if you want to go take a look at it, then feel free to call myself back.

And if you can't find it, they will direct you in the right spot.

An important thing to remember is that when we offer a program, we're offering a rate on a new product.

So the existing deposit base, as I mentioned there may be 20 or 25 different kinds of products that are out there that are paying different rates.

So it's not a simple math thing.

It's not as though we have only 6 or 8 products to choose from.

I'm aware of that.

Thank you very much.

Wayne Goldstein, Endicott.

It's actually Mahiel Vora (ph).

Could you please possibly detail for us what component of your margin came from purchase accounting adjustments?

And how much was the premium amortization on the securities for the quarter?

There is no premium amortization at all.

We don't have premium bonds in our portfolio.

For the most part, over the course of the last many years we don't buy premium bonds.

However -- and this isn't something that is inconsistent with the Haven transaction and with the Richmond transaction and now the Roslyn transaction -- the purchase accounting that exists in the balance sheet at any given time is greatly affected by the removal of the assets or the liabilities from the portfolio.

So when we first do a deal, we can say it's X. But as we've been 1 or 2 quarters or 3 quarters into the process, that number is significantly down.

What I can say to you with certainty is the purchase accounting firm Richmond and Haven is all gone, or just about all gone.

The purchase accounting from the Roslyn transaction is greatly reduced by the significant volume that we've had in asset pay-off, including sale, as well as the significant volume in CDs that were maturing.

They had a tremendous amount of assets and liabilities that were paying off in the last 6 or 7 months.

Therefore, that number is greatly reduced.

So the go forward number is significantly less than it was when we first stated it, and certainly it's going to continually decrease and have less and less of an impact on the future.

In terms of an actual number for the quarter -- for example, yesterday ICBC said in their press release 32 basis points of the margin came from purchase accounting.

I think what I was saying was you can identify that at the time you're doing the deal because that is a well-defined number that you have just worked-up and you can put into number.

But as you have gone -- and we have had a record of restructuring the balance sheet.

Therefore -- and when I say that, I'm talking about what we have consistently done over the last 4 years -- we've been taking assets of the demising companies, those assets that have been marked, and we've been removing them from the balance sheet.

We've been taking the deposits -- in many cases it's the CD deposits, which have been the heavy marks in a purchase accounting transaction -- and they've been either maturing or otherwise removed from the liability base.

So as you go down the road that becomes a cloudier and cloudier or picture, and it's not something that remonitor or restate each time you do it, it's just done.

Al Savastano, FTN Midwest Research.

First, can you tell us the size of your largest lending relationship?

That I can easily do.

Why don't I do that first and then you can ask your second question?

Our largest lending relationship is a particular loan in Manhattan that we have the benefit of getting hold of about 2 plus years ago.

We got that actually from one of our larger market competitors.

That loan is a loan that is today $50 million larger than it was when we got it 2 years ago.

And the reason for that is that it has an incredibly deeply discounted cash flow or rental income stream that has been going up extremely rapidly.

The lowest rental in that building is $890 a month and the highest rental in that building is $25,000 a month.

And that building is extraordinary, but that is the largest loan we have.

And the ability for them to refinance on our standards from 2 years ago at a $50 million increase in their eligible financing came from the fact that they have they have a large dollar amount of change in their cash flow or their rental income.

So that loan is the largest loan, and it is today, as indicated by those numbers, 890 to 25,000, it is today deeply discounted to its potential.

So you said a $50 million increase, but what is the size of the relationship?

Can you give me that number?

You're talking about the relation -- every one of our -- we don't do -- what I should say is our principal way of lending is on the collateral in the real estate.

So we don't do our lending based on the personal capacity of an individual to pay.

So each of our relationships stands on its own.

And there's no question that as a result of that we have a direct capacity to call on the loan.

So I really don't know -- this property is the largest loan that we have.

I don't know the largest relationship that we have.

Fair enough.

And I was just wondering if you could walk me through a thought process of one of the borrowers.

What's their incentive to refinance in rising rates if cap rates are rising as well?

Does that imply a change in known to value (ph) standards?

I think there's no question that you're correct in that.

The motivation on the people that are truly long-term builders of the cash flow to refinance is that if they're planning on refinancing -- remembering that our loans have an average life of less than 4 years, and it ranges between 3.3 to 4.2.

But on average, our loans are very short loans because of the fact that people are constantly looking at refinancing their increasing cash flow.

So in order for them to get maximum dollars, they've got to get the dollars when in fact they're eligible to recognize the increased rental.

So if you think about contemplation of rate change, they're not looking at "am I going to make a decision for 15 years or 20 years"; they're looking at, "do I change my rates or do I refinance my loan today for 15 months from today or 30 months from today".

The bottom line is if they have spend the money under the rent control or rent stabilization rule they're in a position to recognize that their rental income is up, they can draw more dollars.

Drawing those dollars at current rates when rates are anticipated to be higher will pay them more dollars.

So the cap rates and the other factors that decide how many dollars they get to redeploy very well may make it much, much more desirable for them to do it today rather than to do it 18 months down the road when speculation is that rates might be 200 basis point higher.

So the ability to draw dollars on the property is more relevant than the actual rate that is being paid on the prior lending versus the rate that is in market today.

So when they assess the actual cash flow moment in time against how many new dollars that cash flow will get them with today's rate against how many dollars it might get them against a expectation that rates are going up, they make the decision to refinance sooner.

And that has happened over and over again in the course of decades now.

We've been doing this kind of lending -- and again, this is not every loan in the portfolio obviously, and certainly this is not construction lending or commercial lending; this is our principal niche product.

The attributes of other type loans are driven by the conservative nature of our credit risk analysis, but it's not driven by this particular opportunity to benefit from a willingness of the borrower to recognize the available cash flow in his property to generate a new dollar mark in how much she has available to reinvest.

Thank you.

And our final question today comes from shareholder Erwin Cohen (ph).

I've been shareholder with you from day 1, and quite happy up until recently, of course.

A few questions.

Most of them were answered already.

The rating agencies have not yet changed their ratings at this point?

No, we have not had a change in any rating agency as of right now.

We are on a watch by the rating agencies.

The important thing about the rating agencies, the rating agencies have absolutely no impact on the bank's deposit base.

It's not like we're talking about the regulators from the New York Sate Bank Department, the Federal Reserve.

The rating agencies are utilized for fixed income that we might issue.

So as you look at what we've done over the course of time, a very small piece of what we do is we've had 2 secondary offerings, and the change in the rating from the rating agency will affect not what's in the portfolio, but what we might do at a future date.

And typically, and despite the fact that over the last 10 years, Erwin, we've been the best performing large thrift in the country, we have had a rating substantially below banks -- commercial banks because typically thrifts do not get the same ratings as larger commercial banks.

That's just natural.

That's the way the market is.

So the rating agencies will affect our ability to borrow money in the future or to issue debt in the future, not from the standpoint of are we going to get it but at what price.

This is only impacting the holding company's ability to raise money in the capital market.

So it does not have any impact on the rest of what we do.

My second question would be there's been so much negative information out.

How can the individual separate the information?

I would like to see the Directors perhaps step up at these reduced prices and show a great interest.

And I'm not referring to options;

I'm referring to outright purchases of the shares.

They are now half of what they were several months ago.

I think maybe the best way for me to address that is all of the executive management at this table has put substantially more new dollars into the stock than we're paid.

Substantially more new dollars have gone into the stock this year then we're paid.

Several of our Directors have put -- when you exercised options you have a significant amount of tax burden.

You've got to pay the taxes.

When you exercised options and you actually keep the stock, you're virtually putting new dollars on the table.

You're investing new dollars in the Company.

So not every director -- and as you well know, not everyone of our Directors is in a position that they can be making the kind of investment.

But the confidence of our Directors and our management over the course of the last 6 months has been very clear.

We have been putting new dollars into the stock over the course of the public life of this Company.

I thought about this.

Someone asked me the question is it in fact fair to say that your compensation level is high.

I guess it was Forbes -- I'm not sure who it was -- identifies that on a compensation basis, on the lease paid for the performance of the Company in a year-to-year comparison, the reality is that I've put more money into the stock year-after-year over the last 11 years of our public Company than I've received in pay.

And that of course builds a tremendous opportunity.

But the concentration of the executive management and the Board as a percentage of their value, all of us have a very, very high percentage invested in the Company.

So the last few months has been extraordinarily painful to the people that are making the decisions that we're talking about today.

We are very, very focused.

Over the last several years we've said that we have a very high percentage of the stock -- for a company of our size a very high percentage of the stock is held by our Directors, our executive officers, our staff, and the immediate families thereof.

So we all care very deeply about the performance of the stock.

And I think in the best of times those words had meaning; in the worst of times, those words have significantly more meaning.

Erwin, I genuinely can tell you that the depreciation and the value of our stock has been very well felt by everybody that is in this room, as well as that is in the management of this Company.

Thank you very much, Joe.

That concludes the question and answer session today.

At this time I will turn the conference back over to Mr. Ficalora for any closing remarks.

Thank you so much.

I think that what we've demonstrated today is that the Company is back on track, that we've completed our strategic review we have announced in our May release; that we've now set stage to move forward and the repositioning of the Company is such that we're going to be generating earnings through the proven business model that has been well-established.

We're not reinventing the bank.

What we're doing it is what we've been doing over the last 10, 11 years.

We clearly have a business model that outperforms.

We just need the time to breathe.

If we do that, we will be fine.

Thank you so much for joining us, and I hope that the next conference call we will have plenty of good news to discuss.

That concludes today's conference.

We do thank you for your participation.

You may now disconnect.