Flagstar Financial Inc (NYCB) 2005 Q1 法說會逐字稿

Good day.

Welcome to the New York Community Bancorp First Quarter 2005 Earnings Conference Call.

Today's call is being recorded.

For opening remarks and introductions I will turn the call over to First Senior Vice President of Investor Relations Miss Ilene Angarola.

Thank you for joining the management team of New York Community Bancorp for the company's first quarter 2005 earnings conference call.

Today's call will be led by our President and Chief Executive Officer Joseph Ficalora, who is joined by Robert Wann, our Senior Executive Vice President and Chief Operating Officer, Thomas Cangemi, our Senior Executive Vice President and Chief Financial Officer, and John Pinto, our Executive Vice President and Chief Accounting Officer.

Our comments today will feature certain forward-looking statements which are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we currently anticipate, due to a number of factors, many of which are beyond our control.

Among those factors are changes in interest rates, which may affect our net income or future cash flows, changes in deposit flows and the demand for deposits, loan and investment products and other financial services in our local market, and changes in competitive pressures in financial institutions or from non-financial institutions.

You will find a more detailed list of risks and uncertainties in our recent SEC filings and pages 9 and 10 of this morning's earnings release.

If you need a copy, please call the investor relationless department at 516-683-4100 516-683-4100 or visit our website at www.mynycb.com.

At this time, I'd like to turn the call over to Mr. Ficarola who will make a brief presentation before opening the line Q&A.

Good morning.

I would like to start out by welcoming Tom in his new capacity as Chief Financial Officer, a position he held at Richmond County Financial and at two other financial institutions before joining us in July of 2001.

Many of you met and spoke with Tom during our many road trips and meetings, and are already very familiar with all he brings to the table and his unique combination of strengths.

I would like to welcome John in his new capacity as Chief Accounting Officer.

This is a newly created position that underscores our recognition of the need for and importance of strong financial controls.

Like Tom, John has a high level of expertise that developed during his years at Richmond County as well as several years experience with the one of the big four public accounting firms.

In parting, I would like to acknowledge the contributions made by Mike Puorro, who left us earlier this month to pursue a variety of personal interests.

We thank him and wish him all the best.

Now on to our results.

As I said in this morning's release, We are pleased with our first quarter performance.

Net income rose to $91.1 million in the quarter from 83.5 million in the fourth quarter of last year.

The increase stemmed from a combination of factors, including higher fee income, Lower operating expenses, and a $4 million after tax gain on two bank owned properties.

Reflecting these factors, our earnings rose on a linked quarter basis to $0.35 from $0.32.

We also realize a linked quarter improvement in the key performance numbers.

Our return on average tangible assets rose 10 basis points to 1.64% and our return on average tangible stockholders equity rose 179 basis points to 32.20%.

We are also pleased with the progress we made toward achieving the goals we established when we repositioned the balance sheet 9 months ago.

Specifically, we are focused on increasing our multi-family loan portfolio by continuing to [INAUDIBLE] the deployment of cash flows from the securities into lending, maintaining the quality of our assets, operating efficiently and further strengthening our balance sheet.

Each of these goals is tied to our primary mission, building value for our investors in 2005 and beyond.

I would like to take a few moments to talk about the progress and some of the things we will be doing over the course of this year.

In the first quarter of 2005, loan originations totaled $1.8 billion including 1.4 billion of multi-family loans.

That represents a 95% increase in multi-family loans produced on a year-over-year basis, and by the way last year was a record year for the production of loans, and a 52% increase in the course of three months.

Obviously the volume of loans we produce is subject to various factors, so while our first quarter volume and pipeline are clearly indicative of our capacity for loan production, they are not necessarily indicative of the volume we will produce in the quarters to come.

At $10.9 billion, multi-family loans now represent 75% of loans outstanding.

And with 1.5 million in our pipeline as of yesterday, we believe that we are well on the way toward another year of double-digit portfolio growth.

Our asset quality continues to be solid, with charge-offs totaling $8,000 in the quarter, non-performing assets representing 0.14% of total assets and non-performing loans representing 0.23% of total loans.

The charge-offs consisted of consumer loans that were acquired in merger transactions in 2002 and 2003, and those are loans that are outside our primary niche.

While our portfolio has expanded year after year, the quality of our assets has been noticeably stable, due to the ongoing emphasis on multi-family loans.

Multi-family loans continue to be solid performers with more than 20 years having passed since we had a loss in this portfolio.

The loans that we are making today are in some instances larger than those we made as a much smaller institution, a reflection of our larger size and capacity.

Nonetheless, our credit standards are the same today as they were when we started in this business.

We continue to lend to long term property owners who utilize the funding provided to reinvest in their buildings and thus increase the cash flows they produce.

Moving on to efficiency.

We were pleased to report a link quarter reduction in the operating expenses reflecting lower levels of compensation and benefits and G&A expenses.

Reflecting this improvement, our effiency ratio improved 229 basis points in the quarter to 26.54%.

The increase in fee income was largely due to meaningful uptick in refinances, indicative of the fact that the 5-year CMT rose on average during the three month period.

While we are encouraged by the significant rise in pre-payment penalties during the quarter, we are cautiously optimistic about the future, given the ongoing volatility in market interest rates.

The increase in refinancings was also reflected in the yield on our average assets which rose 10 basis points from the fourth quarter of 2004 level of 5.39%.

And while our net interest margin dropped 12 basis points on the link quarter basis, It was within our range of expectations of 3.03%.

Through the repositioning of our balance sheet and subsequent actions we have taken, we believe we reduced the vulnerability to market and interest rate risk.

To further strengthen our balance sheet, we are focused on three main objectives: increasing deposits, continuing the planned reduction of our securities portfolio and maintaining the strength of our tangible capital levels.

Deposit growth continued in the first quarter, driven by an increase in [INAUDIBLE] money market accounts.

Core deposits were up nearly 12% from year earlier levels and nearly 4% from the level recorded at December 31.

The first quarter of 2005 was our third consecutive quarter reflecting an increase in deposits, and it is our intent to continue that trend over the period ahead.

You have probably read in recent weeks about our application to establish a limited purpose commercial bank.

This is just one of the many ways we plan to diversify and grow out deposit base in 2005.

There are in fact many more.

First, as a result of the branch expansion, the area has been designated a business development district, which will further support our efforts to gather public funds.

In addition, our private banking group has doubled its intake in the past quarter and we look forward to their generating additional deposit growth from our borrowers in the quarters ahead.

We are also very excited about a new depository relationship we established with the primary IT processor, [Bysis] which is the largest processor of insurance products in the United States.

As a result of the new relationship, we will become the primary depository for health savings accounts and insurer benefit accounts, and other services provided by their non-depository clients.

The benefits of these relationships are expect tod evolve over the months ahead.

We will also be offering our customers a proprietary bill pay management system which has been developed by another service provider, Customers First Business Solutions.

I might also mention that just last month, we moved one of our in-store branches to a path mark in Co-op City.

To capitalize on the recognition we received within the complex we are operating our newest in-store branch under the name New York Community Bank.

That is the only branch that is actually operating under that name.

With regard to the planned reduction in securities, we have made measurable progress.

Securities represent the 26.8% of total assets at the end of the first quarter, putting us well within reach of the year-end target of 25%.

As for capital strength of the company, that continues to be solid.

At quarter end, our tangible stockholders equity equaled 5.21% of tangible assets.

Excluding the unrealized losses, the ratio improves to 5.45%.

We also are very pleased with the Bank's capital levels which continue to exceed requirements for well capitalized classification.

For example, the bank had a leverage capital ratio of 8.68% at March 31.

Reflecting the strength of our capital and our first quarter GAAP and cash earnings we maintained our quarterly cash dividend of $0.25 per share.

The dividend will be paid on May 17 to shareholders of record on May 2 and provide the yield of 5.7% based on last night's closing price.

We are committed to maintaining the dividend as we have previously stated and to maintaining our capital strength.

On that note, I would like to open the line to your questions.

We will do our best to get to everybody.

If we should miss you, please feel free to call us individually this afternoon or during the week.

We will be here.

Thank you. [OPERATOR INSTRUCTIONS] We will go first to Mark Fitzgibbon, Sandler O'Neill.

Good morning, gentlemen.

Joe, I wonder if you could you share with us what kinds of -- maybe what the average initial yield was this quarter on the multi-family loans that you were putting on the balance sheet?

I think that the obvious increase in the yield indicates that the loans -- well first off, at the beginning of the quarter, loans that were going on in January, have been originated sometime in October, November, December of the prior quarter.

I think probably, most importantly, we have been maintaining this 150 over the 5-year CMT.

I have heard of some, and I know that there are competitors are the marketplace, that are going below that level, some of them being rather aggressive and certainly some of the conduits and Fannie and such, maybe at significantly lower levels, but from the standpoint of our process we are staying at about that 150 level.

So, the important thing to remember here is the date we commit the loan to the date we close the loan, rates gyrate, so the important thing is that our rate is approximating something between 5 3/8 and 5 5/8 over the course of the last several months.

Mark, it's Tom.

I would add that for the quarter we've probably outperformed slightly the average 5-year CMT plus 150.

Okay.

Then the second question I had was how much of your production do you think is the 5-year adjustables and then how much maybe 7 years or 10 years?

I would say it varies depending on you know, by volume, there is no question that we are primarily a 5-year lender.

Occasionally we do 7 year loans and there are circumstances where the 7-year loan has characteristics that would suggest to us we are going to be refinancing a piece of that sooner or all of it sooner.

It is primarily a 5-year loan that we do.

The last question, I wonder if you could help us get our arms around, directionally, where the margin is headed, if we were to assume the curve holds where it is.

I would say one of the things we have been very -- talking about the future is a very difficult thing.

In particular talking about the margin into the future without the certainty of rates is particularly difficult.

What I would say to you is our margin is doing what we would expect it to be doing while interest rates are gyrating.

In particular, the short rates are going up and the long rates are going up and down and up and down over the course of days and weeks and months.

We do need to be relatively careful about you know, what the margin is going to do.

I think the margin is, in fact, demonstrating it has the ability to sustain a very attractive comparative position despite the fact that we are losing yield on our assets, you know, in a way that exceeds the way in which we are gaining cost on our liabilities.

Well, maybe ask a slightly different way, if you assume the curve were to hold here, do you think we are getting close to the bottom on the margin?

Yes, I would say that.

Mark, I would add that we have been pretty much cautiously optimistic back in the third quarter that we expected the margin to hover at this level, give or take 10, 15 basis points.

We believe we actually outperformed in Q1, '05.

But we are clearly focusing on the deposit side.

Liabilities are expensive so we have to manage liabilities.

No question that our loan pipeline is strong, and if you look at the loan yields right now.

They're very low on the portfolio What we are putting on is incrementally accretive to the portfolio.

Thank you very much.

You are welcome.

We'll go next to Sal DiMartino, Bear Stearns.

Good morning.

Couple of quick questions.

I think Mark covered most of my questions on the loan yields.

I guess for Tom, Tom, you had about 2 billion in short term borrowings coming to in the first quarter.

Can you give us a little bit of color how you handled those when they repriced.

Our goal going forward is to gather the deposit strategy throughout the '05 and '06 years and beyond, but this particular quarter we pushed out about a billion for the latter part of the quarter.

We felt that was an attractive level to lock in some long term funding in order to manage our asset liability function prudently.

We pushed out about a billion have about a billion short, give or take.

We will run that throughout the year until we can ratchet up and run that on the deposit side.

On the billion that you expended how far out did you go?

Approximately 22, 23 months.

Okay.

Second question, you know, securities portfolio continues to decline significantly since the peak in '04.

Given that you are about 27% and your goal is 25, how comfortable are you with getting below 25 by the end of the year?

Well, we are extremely optimistic in that regard.

We are way ahead of schedule.

Cash flow is performing very nicely for the company.

If you look at the top 50 bank holding companies in the U.S., the average is about 22%.

We are shooting for 25%.

We're probably going to come in six months ahead of schedule.

But no question, if the loan demand is strong, we could get to the top 50 level which is 22% by year end.

Depending on the current environment.

We are very optimistic in that front.

The good news is we have greater flexibility here than we might have.

Okay.

One last question, you made some comments in the press release about refinancing activity improving in the quarter or picking up in the quarter, and I know it is probably still too early to tell given what is going on with the 5-year, could you add a little bit more color on what you are seeing.

Did the refinancing improve, you know late in the quarter?

And then secondly on the pre-payment penalties, how much was that at a contributor to the margin and how much was in fee income?

Okay, starting with you know, when it was all happening, obviously in this decision process, and the decisions are made by the property owners, not by us, in this decision process, you know, people need to develop a sense of rates that are actually going to be sustainably moving in an upward direction.

That helps in our unique case.

And I know that there are some that do not understand us well enough to grasp this.

But the bottom line is, in our unique case, we do see an increase in our refinancings when in fact rates are perceived to be consistently moving up.

So, during the course of the quarter, there was several individuals or property owners who made decisions that it was time to refinance segments or individual properties that they owned.

So, it varied Sal, even though the decision may have been made on December 15 or they may have been made on January 31st or they may have been made -- it varies, because by the time the process evolves to a closing, there is a good deal of time that passes.

So we did definitely see what we expected to see, an increase in activity and we did in fact see, a pipeline for example.

It is not, it is not simply the first quarter.

It is the first two quarters.

Our pipeline is very rich as well.

And I think that is what you know, you could expect to see as in fact you know, people are looking at the portfolios and the environment, people will, in fact, refinance.

In our unique case, since our loans are refinancing typically within you know, a 5-year timeframe meaning that we were running an average of three and a half.

The average is running a little bit longer now, based on the way the last 6 or 9 months have gone, we are looking at this from the standpoint of it builds.

There are people that need to refinance their growing cash flows and they will refinance those growing cash flows in the months and quarters ahead.

They just have to pick the time that makes the most sense for them.

The good news for us is the build in available cash flow has been substantial in our portfolio.

We have never had so much money in the portfolio as we have today, that is actually at a very substantial build in cash flow.

That's a good thing for future refinancing.

Exactly when it will happen is very hard to ascertain.

I would add to that, in respect to the numbers, we're not going to give specific dollars, on a percentage basis we have probably seen over in excess of 100% improvement on a link quarter basis and on a year-over-year basis, probably like a 65% improvement.

In general, we are up and in that specific area but more importantly the split between refi and staying with the company and going away, it is 50/50.

Half would go to the margin and half to the income.

Okay.

As of kind of follow on question, of the multi-family pipeline, how much is refi?

I know it is all refi, how much is it refinancing out of your own portfolio that you are keeping and --

I think doing the pipeline, and we try to do the pipeline in a way that we are reasonably comfortable that we will retain the dollar levels that are in the pipeline, but getting overly specific about the pipeline maybe more inappropriate than we would like to be.

I think the amount of refinancing in the pipeline is going to vary over the course of the days, weeks, and months ahead.

Mainly because people are going to change.

We are going to get additions and deletions from the number.

And I would be reluctant to say it is a specific number.

Okay.

We'll go next to Tony Davis, Ryan Beck Brokers.

Hi, good morning, guys.

Hi, Tony.

Maybe a different slant on this.

Joe, can you give us an idea of the contribution of refis to the margin last quarter or alternatively in your estimation what is the approximate size of the refi pool today?

I mean it has to be big?

The approximate size is, let's think of it from the standpoint we can't get overly exact but the entire portfolio of multi-family loans will refi in the quarters in front of us.

The question is how much of that will refi in three months versus three quarters versus three years.

So the pool of refinancings is a growing pool.

The degree to which it is slower than usual and even the first quarter here is slower than usual, the degree to which it is slower than usual, adds to the likelihood that there will be more refinancings in future quarters.

Inevitably they all have to refinance.

The loans that we do are on properties that have existed in many cases for decades.

So these loans are going to refinance based on the business model followed by the individuals we lend to and the people we lend to, and this is why our numbers act differently than others.

The people we lend to typically have an expectation that they will be refinancing their growing cash flows.

Because of that, they are you know, positioning themselves to do this based on their actual success in building value and also their, when I say building value, it is building their actual cash flow, their rent roll, and their expectation that they are at an advantage in refinancing next quarter rather than next year.

And that comes from the effect of rate change on cap rates.

And the dollar distribution and so on.

So it's a complex matter and very hard to be explicitly specific as to how much will happen in any given time frame.

Okay.

Tom, you wouldn't want to take a stab at that in what prepay fees contributed to the incrementally to the margins this quarter?

We have been sound to that aspect.

It changes quarter to quarter.

As Joe indicated on his conference call earlier, we are being cautiously optimistic going into the volatile interest rate environment.

We have seen the 5-year trend higher here, we can continue to see activity, but no question that it will be revolving on the expectations of rates in the future.

We have to be very careful how we budget into '05 and beyond.

Can you talk a little about about decline in retail deposit fees.

I think just in general, focusing gathering deposits will be more focused on gathering deposits and not losing deposits.

We were slightly down on budget basis but made it up on the fee side on prepays.

So net-net, our goal going into this year is going to be deposit growth.

So there might be pain there.

By the way, it also includes some of the fees we normally would collect as the result of the sale of the annuities third party sales.

So the third party sales are down, just for example, what we are doing for send ins as all lenders in the multi-family business are noticing, there is a reduction in the amount of the refinancing going on there.

So, those fees are down.

And also the fees that we get on the sale of fixed annuities and other mutual fund type products, those fees are down.

It is not just the deposit fees it is the composite fees we add to the income stream.

Final question, Joe, on this agreement with Bysis, the timing of that and a little more detail on exactly the terms of the arrangement or in terms of sharing.

Yes, I guess the easiest way to put it, we are the largest user of Bysis product in the country with regard to deposit services.

We have had a long relationship with them that has been very mutually beneficial and we have come together to agree that it makes good sense for us to be their depository with regard to variety types with people accumulating deposits that they cannot accommodate because they cannot create assets.

We have a partition, in essence, we have a capacity, the equivalent of the rest of the entire Cherry Hill processing for all of the banks in the northeast region.

That was designed between them and we as a means of allowing for the growth of the company.

So with all of this capacity sitting there, it just makes great sense that we in fact become the depository for growing relationships that are in the market as we sit.

For example health savings accounts are long term relationships that are building.

Companies make those decisions.

In this particular case, we for example, our company, through Cigna, with be establishing health savings accounts for our employees.

That is not one account that is an entire company's account.

That's what we are talking about.

Those kind of relationships we are in, we will be establishing depository services for a larger population that goes outside of our traditional area.

So for example in the weeks and months ahead, we are going to be doing what especially Emigrant is doing and others are doing from the standpoint of providing NYCB Direct.

We have other relationships that we are discussing with other parties that will again represent additional sources of funding.

So when you look at the overall spectrum of funding sources, there are many.

And we are very low comparatively to some of the guys out there that have negotiated for example, Commerce has municipal deposits, those are all negotiated deposits.

And those deposits are not walk in the door, those deposits are negotiated.

What we are talking about, is having both negotiated deposits and company relationships, wherein we have the ability to bring the entire company's staff to the table as a deposit.

An additional product that we'are offering is Safe Pay.

Our Safe Pay card will marry very well to the other relationships we are establishing.

Thank you much.

You're welcome.

We will go next to Jack Micenko, Susquehanna Financial Group.

How are you?

I am great, how are you?

Most of the previous callers banged out the majority of my questions.

I wanted to ask you about the private banking group.

That is bankers that [INAUDIBLE] from existing borrowers?

Yes, basically, it as special service that has been intended to build on the relationships that already exist with the bank.

Meaning, that we have a service group than is available 24 hours, 7 days a week that accommodates the largest relationship that is the company has.

That would include the builders who are building communities on Long Island.

It would include the property owners that have a billion dollars worth in properties.

You know, throughout the bank -- the metropolitan area.

The good news about that.

It is up 100% in just its first three months.

So we are very pleased with the effect it is having on attracting good service relationships that build a variety of additional things.

This is the for the person's personal funds as well as the person's company funds.

So that build is going cross lines that make us a more you know, vibrant provider of services.

Okay Three follow ups.

A is, I guess that sounds like a standard cash management program, B, can you quantify what you think internally is the opportunity?

And C, would you ever make the deposit relationship a condition of approval towards building pipe pipeline of refi we have coming.

No.

Clearly one of the things we have been consistent with.

We believe our assets are in fact incredibly important.

And we do not, although many of our competitors do, we do not require bank relationships as a result of a loan.

The loan stands on its own and we want people to find out that it is worth their while to have a bank relationship with us after the fact.

So we go through the trouble of you know, identifying what we can do for them and certainly soliciting their use of our bank services, but we do not make it a condition of our lending.

And lo and behold, it demonstrates that we are able to provide clarity, that we can provide may many different services that a property owner might not have expected.

Where we are working for example with Co-op City, very large, 500, 600 units.

Very large relationship on a variety of ways, in which we could accommodate as their depository many of the things they do today.

Care to make an estimate on the size of the opportunity?

Well, yeah, I think we will see.

I say that it is better to assume that directionally we are moving in the right direction and we are seeing where the successes are and where the challenges are and we are dealing with both.

The important thing is we have a variety of approaches.

Obviously we have a combination product offering in the market today which is traditional competition with regard to everybody else that is in the market.

As everybody knows, people you know, advertise rates and products all the time.

We have the capacity to be there and do that with the best of them.

But, this is a series of unique relationships that build you know, outside of the norm.

And I think we are very excited about the fact that we are going to be doing this in a way that adds variety to the deposit growth we get.

Final follow up, I mean, is the buildout of this and several of the other deposit gathering initiatives is that already in the declining or improving efficiency ratio we are seeing?

Is it scalable from here or expect more expenses?

No, these expenses are mostly behind us.

For example the Bysis relationship, as I mentioned, one of the unique things about that is that relationship already exists.

It's, for them and for us, a very efficient way of meeting a market need.

The wonderful aspect of that is we already have the capacity to do all the things that need to be done to provide the services that we're talking about there.

I would add, on the expense, actually the expense is relatively flat throughout the year.

We don't see significant growth in expenses.

We are going to work hard by maintaining the efficiency.

I would not see any significant upticks.

Thanks.

Trends are encouraging.

Thanks.

We'll go next to James Ackor, RBC Capital Markets.

Good morning, Jim, how are you.

Fine, thanks, how are you.

Good.

I wonder, Joe, if you might comment, you mentioned the typical or average spread over the five years is 150 basis points.

A lot of anecdotal stuff flying around about sub-100 basis points in a 5-year, or 110 and some as low as 50 in some instances.

Will you comment on exception policies to the target of 150 and whether or not you actually --

I am very glad to.

I am glad you asked that question.

Over the course of time, there are lots of people who assess reasons why they do not succeed in getting a loan, and they make determinations as to what their competitor is doing.

What I will tell you with certainly and we are not going to do an audit.

But what I will tell you with certainty, is that a lot being said with the market is absolutely nothing to do with how we lend.

How we lend is very consistent over the course of time.

Obviously we are not getting 225 basis points over the 5-year, we are getting our 150 and that 150 is an approximate number because the number keeps changes.

And what I mean by that is, we do the loan at 150 over and you know, if it is 147 or 142, because you know, rates change between the closing and the date we did it, that's what it is.

But, this discussion of 50 over and such, that does exist, there are competitors who are in fact, undercutting the market.

There are some people that you know, spread lenders who actually have incredibly low rates but that has nothing to do with us.

I think the implication that our success is driven by our rate, is absolutely wrong.

And although we are in an in-market lender, I will tell you that our yield on the assets we are producing is better than our in-market competitors in many cases.

Not every case, but in many cases, and the extremes, all although they exist, I am not aware of a bank I would attribute those extremes to.

More the spread lenders than other.

More the Fannie type loans than others.

Not something we are seeing ourselves.

I would add to that, keep in mind our portfolio of the multi-family loans is at the lowest yield ever.

So obviously if we're paper on at 150 on average.

We look at the average 5-year CMT per quarter.

We believe we exceeded that for the quarter, so that is going to be margin accretive to the loan side.

Okay.

Curious about commentary what we heard from ICPC on the call yesterday, suggesting that because the commercial mortgage backed security spreads versus treasuries have tightened so much that the conduits are becoming active and are actually somewhat competitive with Fannie May, in terms of lending in your space Is that something you are seeing as well?

See, we don't lend in that space.

The reality is it does impact [INAUDIBLE].

It impacts us to a lesser degree.

There is always, you know, some of the people we lend to, based on their own particular business model, will take product from any number of providers.

The people we try to focus upon are intending on refinancing relatively short and therefore, they are they are not going to be interested in those spreads in 10 and 15 year spread paper.

This is a very, very big market.

There are an awful lot of players in the market.

What impacts one lender is different to another only to the degree that there is a definitive focus on who we want to lend to.

We are very focused on the kinds of loans we like to do.

It doesn't mean there isn't variation from property A to property B. But the loans that we do are not necessarily appealing to people who are taking Fannie paper.

So when the conduits get aggressive, there is an adverse consequence to Fannie lenders.

It has no immediate consequence to us.

Fair enough.

Thanks for the answers.

Thank you, Jim.

Next is Kevin Timmons, C.L. King.

Most of my questions are were answered but maybe a couple of things.

Talking to clients recently.

There is some questions about Co-op City.

If you could give us an update on that.

Co-op city, I am not sure how much detail you really want.

What I would say most importantly about Co-op City is that it is an extremely favorable situation in that the people who pay the loan, the individual co-op owners are the ones who pay the loan, they are in a very unique position that in just a short number of years, they will be able to go to market.

So they are highly motivated owners of their particular units.

Their particular units are well, well below the market.

They have a very unique opportunity to enter into a regeneration of their power.

They had -- and remember, this is a complex that was built almost 40 years ago.

And as a result, they had a power station that ran into disrepair and was not producing for them electricity, heat or air conditioning.

There are active discussions with a multitude of providers where in they can get significantly more efficient electric production through some very high powered GE generators that will produce electricity in their environment at lower cost than most other environments because they have the ability to use the power generating their electricity to provide their air conditioning and to provide their heat.

They have the ability to actually go into cogeneration relationships with other grid participants, meaning they can sell electricity into the market rather than being a buyer of electricity.

So think of it this way.

If the normal unit is running at about 860 or $890 maintenance fees a month and that is a five room unit, and you are talking about in that particular area, you know, studio apartments going for $1,100 in the community, not in Co-op City, but in the proximity and you are looking at the possibility that the single largest cost other than carry of debt, the single largest cost which is the cost of maintaining their heat, electricity and their air conditioning is going to go down substantially.

If they wind up successfully entering into a cogeneration relationship, then it will go down even more so and over the course of the period into the future, that would be a tremendous benefit to the people who pay our loan.

So, you know, when you do a lending, you want to be sure that the people you are lending the money to have the capacity to pay you back.

In this unique circumstance, Co-op City is a rent controlled type, below market regulated environment, that has the ability to come to a market valuation with extraordinarily beneficial cost to carry.

So I am very happy about how things are evolving in Co-op City.

Our relationship with the management group as well as the co-op itself is extremely favorable.

We have two very important groups that are involved in insuring that the improvements to Co-op City are being handled properly.

And we have a long term plan here.

It runs out over a 5-year period, wherein there is going to be significant improvement to the facility.

So it is all part of the plan.

Just so on the maintenance, some of the deferred maintenance issues.

How far are you from getting the parking garages and so forth?

The initial draw was on the $300 billion.

Although there have been several requests for additional draw, that is moving on target but moving probably, last I heard, something in the range of 30, $40 million is the additional draw.

Now, that is against the 300 that we have already advanced.

So in other words, we have been holding the differential on that.

Right.

One other question on the issue of the conduit lending versus what you are doing, what are the couple of primary characteristics which you know, keep that from being the type of lending that you are doing.

It is primarily term.

Yes, conduit lenders, they need to hedge their position over time.

You know, so conduit lenders are looking at a very different, you know, market.

Guys that, literally, want to hold their paper, for 10 years or 15 years go to conduits.

Guys that want to refinance in a relatively short period of time come to people such as us.

Thanks.

We'll go next to Rick Weiss of Janney.

Give us an overview of where we are in the credit cycle.

Not necessarily [INAUDIBLE], but just --

Yes, I would say that most of the obvious market indicators would suggest that we are in the back end of the a very positive credit cycle.

In essence we have about 11 years of a positive credit cycle that has some of the makings of what would be the beginning of a turn.

And what I mean by that is valuations through the cycle have peaked.

We are at levels higher than they were in '86 and '87.

So we are at record levels of value and we are at record lows in interest rates.

Rates are lower than they were in 40 or 45 years.

So you can recognize that over the course of 45 years, there have been multiple credit cycle turns.

One of the precipitators of the turn is high value and continuous movement up in interest rates.

When the rates move up, the shift occurs from the principle to the interest.

So therefore, the next buyer has to, literally, put himself in a position where they are going to have to meet their carry, putting more of their money to interest than to principle.

So they pay less for the property.

That has not occurred yet, but invariably it will occur if rates actually move up consistently over time.

So your guess is as good as mine as to when rates might actually move consistently for 3, 5, 7, 10 quarters.

Over time.

But there is no question that we are in a positive credit cycle, and our great he is attributes are in the negative cycle.

Are you guys starting to walk away from any potential deals in regard to commercial real estate.

Not the multi-family stuff.

We walk away from deals all the time.

There is no question that every offering to us is considered based on the environment and the individual attributes of the property.

More often than not, we do not look at market conditions as a deciding factor.

The strength of the property's attributes have to carry it.

We are dependent on valuations going up.

We do not lend on future values.

We are a cash flow lender on what is in the property today.

That works out very well for us.

The other question, can you give us color on the sale of the two bank properties.

Yes, basically, they were, and in fact, we have several more.

There is no question, that we have accumulated an awful lot of property over the course of multiple transactions, and in some cases we have found that this market is very attractive to be selling property into.

We are looking at a variety of things.

I think, in fact what I will say to you is CitiCorp has just looked into doing a sale and lease-back of a building in Queens here.

We are looking a t the possibility of doing those kind of things as well.

Are they former bank branches or real estate?

It varies.

In some cases they were properties of one of our predecessor companies, in other cases they were -- for example, one of the properties was an American Savings Bank branch that we had gotten through the RTC and the Gap has been operating in the branch for that many years and it seemed implausible for us to carry the property because we have two branches on the same street.

You know, one of the old Roslyn branches and one of our branches, so we didn't need the property anymore and we realized a very nice profit on it.

Okay.

Thank you very much.

You're welcome.

We will go to James Abbott, FBR.

How are you, Jim.

Very well thank you.

I was wondering if you could touch on -- I appreciate the detail in the press release.

Touch on the loans, the life of the loans and it appeared to extend a little bit, 3.9 years.

Right.

It went from 3.5 to 3.9.

That, as I mentioned earlier, was partially the result of the refinancing that haven't been occurring.

We have indicated, I guess, over the last couple of quarters the refinancings have slowed down and there is no question that that does have an impact on the life of the portfolio.

Okay.

So that's essentially the refinancing slowing down a little bit and not particularly an extension of 7-years.

Right.

It has slowed down and there is a build in that.

In other words, just like when we lend, it takes you know 60 to 90 days to do a new loan, the impact of the things on the portfolio take time as well.

What we are looking at here is an increase, as I mentioned earlier, movement in rates helps us to get pre-payment fees because we see more refinancings when rates are actually.

You know perceived to be going up.

Earlier this year, there is no question that people were looking at rates as definitively going up.

So we actually saw an increase in the refinancings.

Now the important thing is that rates are being very erratic.

So rates will slow and accelerate from time to time.

Our portfolio is extraordinary in comparison to others because it has a very definitive 5-year, 60 month period.

Year 6 does not occur in our world.

So our loans, you know, when they extent, in the worse case, they could extend to 5 years, our loans have never extended to 5 years.

The average of the loans based on the nature of the person who we lend to runs between 2 years and 4 years, and we are averaging you know, something in that 3 plus range.

So, when we have a delay in refinancing, that merely defers to next quarter or the quarter after or the quarter after that.

It doesn't defer multiple years.

It defers multiple quarters.

So, in the third and fourth quarter of last year much we we had a definitive slow in refinancing.

That is going to pick up in the quarters in front of us.

I appreciate that.

On the average loan balance size, it has increased to 3.2 million from 2.9.

I noticed in the 10-K that you described, in the past anyway, the number of loans you have done in excess of 10 million.

Can you characterize that for the quarter.

I think, obviously, when our published numbers come out I think it has more detail in it.

But the fact is that we have had very long relationships with some extraordinarily good property owners and in some cases they have some fairly large properties.

So, we are doing both pools of loans as well as just individual large property loans that wind up being you know, larger than our normal size and that's why the averages are going up.

The important thing and this is extraordinarily important, the important thing is that the attributes of every property we lend on them are the same.

That's the cash flow in that property has a definitive capacity to meet our repay.

The party that we lend to is often, not always, but often a person we know that does not -- we haven't had a charge-off in 20 years.

There aren't any banks that you can say that, that includes multi-family loans.

My point is the people we lend to haven't lost a property.

That's the key.

It is not as though we are brilliant.

We go out of our way to lend to people who do not lose their properties.

I guess what, maybe another way to ask it, the origination volume during the first quarter was due to loans in excess of $10 million was it a third or?

Offhand, I don't know that number, but certainly if you call back later, we probably could find that out.

I don't know offhand.

Okay.

Can you give us the weight average yield of the pipeline that was.

I think that somebody asked that question of I guess, it was asked of Sal.

Okay.

We can't give you the weighted average yield of the pipeline.

What I would say to you is our pipeline has a higher yield than the quarter that is just just passed, and it is much safer in this gyrating environment to recognize that directionally we are looking at much higher rates than is in the portfolio, much higher rates than we have from the standpoint of our securities portfolio.

And we have the additional benefit of the pot to yield that comes from the refinancing at the time of each refinancing.

So that's a very important thing that people miss.

Not just the coupon, it is the term yield.

Term yield in our case is relevant.

I understand that.

I was wondering -- So you are essentially saying that the weighted average yield of the pipeline is in excess of 5 1/2% which is where the weighted average yield of the portfolio is now.

The weighted average yield of what we are going to do for the second quarter should be better than the average weighted yield than the first quarter.

Could you give us the weighted average yield of the first quarter.

I would add that we articulated previously that first quarter, 5-year CMT average we out-performed that plus 150.

That's an indication of where we are going.

Thanks.

On the debt and equity securities, the yield on that was up about, a little over 70 basis points, link quarter, about 10% of the earning asset base.

I was curious as to what happened there.

We had some acceleration on bonds that were actually stepped up in value.

Therefore, we increased the recognition of income on certain securities that were actually being conservatively reserved against, because of the performance.

The performance metric actually out performed.

So is that a recurring increase?

Should we expect that every year.

I think it is performing better and increased the income recognition on certain securities.

You would expect it to stay at 615 level if I am interpreting.

Give or take.

You are going to see a shrinkage overall, depending on as calls continue to come in.

We had some very attractive calls throughout the quarter.

That's why our securities portfolio on a health and maturity basis actually shrunk more than expected.

Obviously if rates hover around here there might be future calls and that would be very beneficial for the balance sheet.

But again, that's no guarantee it is going to happen.

But depending on interest rate environment, if we get rapid calls that might offset it a little bit.

We had significant call throughout the quarter that actually on a year basis were somewhat I'd say margin neutral because of putting loans on or about that rate, but it's giving us the cash flow metrics.

I would say, that we're going to hover, slightly south of that number but not necessarily south of that.

So the increase link quarter was due to an one time write-up.

Not one time, it is a continuation.

This is a multiple month benefit.

But not going to be a continuation of that same level of benefit.

I think we are going to hold yield pretty well throughout the year depending on calls.

We have some calls and if the 5-year happens to rally here as far as price.

We might see some more calls, which would give us more cash to fund the multifamily side of the business.

Fantastic.

And the last question, two more.

The weighted average life of the borrowing portfolio.

I've indicated we extend another billion dollars in the quarter.

We're trying to be proactive on the front.

Managing on our overall GAAP position.

So no question we are cognizant of that.

And we pushed out some liabilities approximately 22 months.

We are probably going to remain consistent with year-end levels.

At our 10K will be consistent where we are for the Q.

And last question is on the securities, the unrealized loss on the health and maturity portfolio.

Do you have that number with you.

It should be in the press release, is that correct?

No, we don't disclose that.

Okay.

The health and maturity is on the balance sheet at a specific level when it was transferred from available for sale to health and maturity.

That was the assets that were moved from available for sale to health and maturity and that is a declining number as it cash flows out.

Cash flow has been no question better than expected throughout the last 9 months.

But that number will go out as cash flow continues to come back to the company.

What I will say about the overall market and the interest rate environment for our portfolio.

We look at our portfolio daily and the good news that our exposure to capital market risk is significantly reduced from our position last year.

Up 300 basis points with the and there are capital level will be above four%.

Looking at the risk of the portfolio in respect to capital markets, we are very comfortable right now with the size of the portfolio and obviously that portfolio is shrinking.

Thanks for your time.

You got it.

Matthew Kelley, Moors and Cabot.

Hi.

I just wonder if you could give a breakdown, the 1.4 billion in multi-family originations by kind of 5-1, 7-1, anything longer than that in terms of contractual, kind of a --

There is almost what I would say to you, there are a couple of loans that go longer.

Very rare.

They are definitely 7-1s in the mix.

The predominant loans we do is 5-1.

And actually, it's wrong to call them 5-1s or 7-1s, because that sounds like small family But, there are 5 years before they will refinance or 5 years before they will refinance based on the rate becoming you know, 250 over prime or 275 over the 5-year CMT, meaning that the person who took the loan in the first instance has expectation of refinancing sometime in the time frame in any event.

I mean, can you quantify how much was 7-1.

Was it 20% or 30%.

Actually offhand, I don't know the number.

I would say the vast majority the loan are 5-year product.

Then as you kind of manage interest rate risk here and extend some borrowings.

I was wondering if you could update us on your rates.

It is changing by the day, it's very difficult for everybody, but what are you factoring in.

Matt, going in a short term, just running off the consensus right now.

We expect Fed fund rates to increase.

We are being cautious on our short term liability structure.

We want to push out the money long.

So in the event they continue to raise rates, we will be better positioned than than we were back in '04.

We are going with the consensus.

There's no rate calls here, we are just focusing on managing through our business model and in the event we have short term liabilities and if we can lock it in long.

We will lock it in long.

We believe that lending at market rates, given the volatility of rates makes great sense.

In particular, since we are lending a short asset.

So, we are not backing away from the lending in this market.

Rates that we are lending at in the first and second quarter are substantially higher than our market was providing loans, you know, a year ago, a year and a half ago.

So, these are extraordinarily good rates compared to the portfolio.

So, I think that you know, some of the people are saying they are backing away from lending.

I am not sure that has anything to do with rates.

It has more to do with other factors and certainly it is not our situation whatsoever.

We are actually lending at better rates today than we were lending at 9 months ago, 12 months ago, 18 months ago.

As a follow up point on the liability side.

No question you want to keep some of the money for deposit efforts.

We are focused towards gathering deposits over the years ahead as well as quarters ahead, but having the flexibility of [INAUDIBLE] down and increasing our overall deposit base is going to be the focus.

It will be dependent on the level of security cash flow and marketplace in general.

Right.

Take a look at the current Blumberg rate forecast on [INAUDIBLE] 375, on so if that does pan out, you know consensus does become reality on the Fed action, where would we find the inflexion point in the margin roughly.

It is all dependent on the refinancing activity.

Let's say the Fed continues to move, and let's say the 5-year has a normalized level between spread between Fed fund and the 5-year CMT, we believe our customers will have to refi.

So the refi number, which is the intangible number which we are not giving too much color on, could be a significant pop to the margin.

We had a nice show in the first quarter and it is all dependent on the direction of rates.

Assuming the direction of rates is going to what consensus is overall, this could be beneficial.

It could happen in the latter part of this year or potentially in early '06.

It all depends on the actual perception of rates and more geared toward the 5-year CMT, not so much Fed funds, but we look at the historical average between Fed funds rate and the five year CMT in the spread basis.

And it appears that we are getting more of a realistic approach that rates are going to be slightly higher.

I guess, you know, there is some building consensus that we maybe closer to the end.

The tightening cycle, it may not be quite as aggressive as it as worked out in the past.

Then being liability sensitive will only help our numbers.

Could some of the action we have seen in terms of production in the first quarter than some of the you know, prepayment activity that you would expect to see as rates rise.

I would clearly say we had strong show on originations and obviously our pipeline is very strong in Q2.

We are focusing on managing through this process on a business model perspective of having good growth.

Doesn't mean we are going to grow at every level.

We are going to have, I believe, pretty good growth the first half of the year.

Doesn't mean we are going to have rampant growth the second half.

However, if you add it all in throughout the year, those numbers will be consistent with our historical growth and that's what we are trying to target for.

In the event that just through the passage of time.

Refis will ultimately have to kick in and roll into their sixth year.

It will be the benefit of that.

That will obviously force out the refi for the latter part of the year.

In the interest there are gyrations in the interest rate environment, we will get reasonable activity.

Last question.

You know for product being originated for very low spreads over the CMT, 50 to 100 basis points.

Are you seeing --

We're not doing that --

For something like that or specialty type finance lenders.

I would have to say no question it is very competitive.

Our product is being priced at 150.

What the other guys are doing as well as other conduit markets, it's what they're doing.

It is not what we are doing.

We are clearly disciplined on that.

It is a direction by the company to move in that direction.

Our goal is to to increase the spread on our lending.

It is going to take a significant rise in rates to get the impact there. but no question our goal is to maintain the 150.

Good news in the first quarter, We maintained it and the 5-year was all over the place, we put on a coupon basis.

We out-performed the 150 off the CMT.

Okay.

Thanks.

Thank you, Matt.

Your next is Bob Hughes, KBW.

Hey, Bob.

Not to belabor the part.

Part of the story you have been selling is that there is, you know, a sizeable sort of pent up demand, refi demand built into your portfolio and prepay income could really provide material with a margin to earnings.

Why do you guys not disclose these figures and how would you expect us to gain comfort with that theses if we don't know what the contribution to earnings is today.

Probably first off, this is the thesis is verified over the course of many years.

The actual number, though is a very difficult number to ascertain in any given quarter, because there are multiple factors.

Not only is it driven by volume, but also driven by the age of the particular loan that is actually refinancing.

So if a loan is going to give us three-points versus giving us one point.

That creates a very different effect.

So even though we may have, let's just use a number 10.

If we have 10 loans at refi, it is not just 10 times 1 it may be 10 times 1.9 or 2.7 or some other number.

Depending on the life of the loan.

So trying to be exact in this is very, very precarious.

It is not something that can be done.

It is much better to be broader in perception of how it will occur over time and let it happen as it happens.

It is not something that can be you know, accurately measured.

Okay.

Some of your competitors do disclose the numbers and it would help us to work up the frame work of the potential impact to be.

Something to consider.

The final question, Joe, is on the quarter.

If I look at the increase in the average size of from what 2.9 million to 3.2 this quarter.

You know, if you do some math on that.

It kind of looks like over the billion plus loans you added during the quarter, the average principal balance must have been significant to drive that number up.

Can you give us a sense for what the average size of the loans you added during the first quarter was.

All right.

I don't have the number you know in front of me here.

If you call back, I am sure we can get you that number.

The assessment is correct.

The average size for the quarter was larger than the change in the average size of the portfolio.

And that is driven partially by the fact that we are doing, as I mentioned we are doing larger loans with parties that are often people we have known for long periods of time.

In some cases we are reporting loans as an individual loan.

Even though it may be cross collateralized by multiple properties.

I mean, we have a capacity to do smart lending with good property owners today that didn't exist for us nor for most of our competition.

Many of our competitors do not have the comfort or the depth of understanding to deal with these kinds of composite relationships.

We are very, very confident that the credit standards that we are following are impeccable and our record demonstrates this.

I find it interesting that there are people out there trying to interpret us by other people's views of us rather than just talking to us and looking at what we do.

What we do is very consistent over time.

Even though the size is larger, the risk is not driven by the size.

It is driven by the property owner and the properties actual attributes.

And lo and behold, we are dealing with qualified people who do not lose their properties and therefore the certainty that they are going to make the payment is driven by their expertise.

Okay.

Thanks a lot, guys.

You're welcome, Bob.

We'll go next to Will Waller, Phillips Capital.

Could you comment on what the accretion discount related to the mark to market adjustments for the Roslyn merger was during the quarter?

The number is declining rapidly.

We don't disclose the number specifically, but it is in the original S-1 that we filed regarding the deal.

We don't break that out.

Okay.

I could kind of assume if it was in the $11 million dollar range at the end of the fourth quarter, you have it decelerating --

It is declining.

Obviously, as the deal goes past-- as far as the duration of the deal since we closed the transaction.

Further out from closing, the number shrinks dramatically.

So it's probably less than 5 percent of pre-tax income--

I am not going to give a specific number, but it is significantly less than last year and each quarter declines dramatically.

Thank you.

We'll take a follow-up from James Ackor, RBC.

Jim, you got two.

You probably also be the last.

What is going on here.

A lot of talk and a lot of focus on price competition and duration 5-year, 7-year, etcetera.

I was wondering, Joe, if you might give us a little bit of broad commentary on what if any other competition or competitive forces are doing to other terms such as points and prepayment penalties etcetera.

There is no question, we are at the back end of the a positive credit cycle.

At this end of the cycle, all lenders get more aggressive, that is good lenders and bad lenders.

We have seen it before and it will happen here today.

No question that there are people putting too many dollars on the table.

People are walking away from all kinds of things.

We in fact today are lending at the lowest benefit that we in fact derive over the course of a decade or two decades and what I mean by that, is that we are not getting up front points.

We normally would get, let me step back.

In 1994, we had you know, spreads and margins over 5.

We were coming off of the back end of the pretty horrific credit cycle.

In that market, very few people were interested in doing multi-family loans.

We were getting 225, 250 over the 5-year.

We were getting points up front.

We were getting a tremendous amount of refi activity and tremendous amount, I mean tremendous for us based on our size at the time.

And the environment we are in today, it is the least beneficial to a lender such as us.

So the numbers that we are producing today are with our particular product mix at its least attractive capacity.

So we are not getting the up front.

We occasionally get a quarter or half.

But we do more car loans than not.

We are always getting our points but not necessarily getting the points as paid on a refi we're sometimes getting our points part of the yield on a go forward basis.

So we are renegotiating in some cases.

The points are always included.

Not many of our competitors do that.

Many of the guys that are in the market for the first time.

Guys that are one year or two year.

Remember, we are decades doing this.

They may be sacrificing points with every loan and they may not be getting anything from the standpoint of structure that would give them the likelihood that they are going to get a refi.

They maybe lending to market property owners.

There are more market property owners than cash flow property owners.

We are a cash flow lender.

For our unique people, there is ample opportunity to get alternative financing.

Remembering that almost every building that we lend on, someone else previously had the loan.

So, the reality is that our relationship as we establish it, loan by loan by loan, is a short term relationship that should go one year, two years, three years, four years and refi, and most of our loans refi with us.

Not all of them.

If we do a very large package of loans, and that package is going to go away, that will change the ratio and then we actually have it.

We have the capacity to do 18 month financing.

And that's a very good thing for us to do.

So, the reality is that our portfolio is today producing less return than it normally does.

When I say normally, over the course of a long period of time.

Ten year stretch.

And it will continue to produce less as long as we are in a positive credit cycle.

This doesn't get better until the pain of losses starts to show up.

When banks start losing money because they have done bad loans, There will be fewer lenders being aggressive and we will continue to lend under better terms.

Over the course of other cycles, our best positioning is when other lenders are backing away because they are sustaining losses and they don't want to be in the very business that we in fact are very focused on.

They are different lenders than we and therefore, they have different results than we.

All right.

That's very good.

Thanks.

Thanks, Jim.

There are no other questions.

Gentlemen, if you have any closing comments I will turn the call back to you.

Thank you again for participating in this morning's discussions we appreciate to discuss our business model with you and we focus on building value for your share by focusing on our niche and our balance sheet.

Thank you.

And this does conclude today's conference.

Thank you for your participation.

You may disconnect at this time.