Flagstar Financial Inc (NYCB) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to this New York Community Bancorp second quarter 2005 earnings conference call.

Today's conference is being recorded.

For opening remarks and introductions, I would like to turn the conference over to the First Senior Vice President of Investor Relations, Miss 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 the Company's second 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.

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

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

You will find a more detailed list of the risk factors associated with forward-looking statements in our recent SEC filings and in this morning's earnings release beginning on page 11.

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

At this time, I'd like to turn the call over to Mr. Ficalora, who will make a brief presentation before opening the line for questions and answers.

Mr. Ficalora?

Thank you, Ilene, and good morning, everyone.

We appreciate you joining us this morning for this morning's discussion of our second quarter performance and the very real progress we've made in the year that has passed since we repositioned the balance sheet.

For the past four quarters, we've taken a four-pronged approach to enhancing our interest rate and market risk profile.

Reducing our securities, growing our loans, increasing our deposits and maintaining our capital strength.

At the same time, we've continued to pay a meaningful dividend to our investors.

As mentioned in the earnings release, our commitment to maintain the current dividend was reaffirmed at last night's meeting of the Board of Directors.

A dividend of $0.25 per share will be paid on the 16th of August to shareholders of record at August 1st.

Our ability to maintain the dividend at its current level reflects the strength of our GAAP and cash earnings and our confidence in the continued earnings capacity of the Company.

The Company generates earnings of $86.5 million with $0.33 per diluted share in the second quarter, and cash earnings of $92.6 million with $0.35 diluted share.

In accordance with Reg G, a reconciliation of GAAP and cash earnings can be found on page 15 of this morning's release.

We were pleased with our second quarter earnings despite the impact of the yield curve on our net interest margin and the level of the five-year CMT.

Our return on average tangible assets was 1.53% for the quarter and our return on average tangible stockholders' equity was 29.66%.

At 27.55%, our efficiency ratio continues to be solid; and we once again recorded a linked quarter decline in our operating expenses.

Last quarter, you may recall our expressing cautious optimism about the direction of the five year.

And, as it turns out, our sense of caution proved to be on the mark.

With the five-year rate falling below 4% on April 14th and remaining there throughout quarter, the slight increase in refinancing activity we experienced in the trailing quarter was reversed in the second quarter of the year.

Nonetheless, it is important to note that the average yield on our loans held solid, despite the fact that interest income stemming from prepayment penalties declined from 4.7 million in the trailing quarter to 2.1 million.

The average yield on loans was 5.48% in the second quarter, consistent with the yield recorded in the first quarter of 2005.

The impact of rising short-term rates is also reflected in our net interest margin, which at 2.73% represents a linked quarter drop of 30 basis points.

The current margin also reflects the extension of wholesale borrowings totaling $2 billion over the past two quarters to an average maturity of two years with an average cost of 3.37%.

With short-term rates still expected to rise, we made the decision to sacrifice some of our margin in the first and second quarter in order to enhance our margin in the quarters to come.

While there seems to be no uncertainty about the direction of short-term rates in the foreseeable future, the direction of intermediate rates more of a mystery.

We continue to price our multifamily loans between 150 and 175 basis points over the five-year CMT.

Our commercial real estate loans are somewhat higher yielding than our multifamily product, and our construction loans feature floating rates of interest tied to prime.

So let's talk about lending.

It continues to be our core business and one of our four components of our post-repositioning strategy.

In the second quarter of 2005, loan originations totalled $2 billion, a record.

Boosting our production to $3.8 billion for the year-to-date.

Multifamily loans represented 2.9 billion of the year-to-date total, including 1.5 billion in the second quarter of the year.

At the end of June, multifamily loans totalled $12 billion and represented 76% of the total loan portfolio.

In addition, multifamily loans are up 21% since the end of December and 40% year-over-year.

Multifamily loans represent 72% of the current pipeline, which today amounts to $851 million.

While the current pipeline is smaller than it was in each of the last two quarters, we're confident that we will exceed our internal targets for multifamily loan growth by the end of the year.

The size of the pipeline is indicative of our insistence on quality product, which currently seems to be in short supply.

In fact, for the last few months.

We continue to be hopeful that the five year rate will continue to -- its recent trend upward, as this would be expected to prompt an increase in refinancing activity.

The growth of our loan portfolio in the second quarter was funded through an increase in deposits and by cash flows produced by our securities portfolio.

Including the $5.1 billion of securities sold toward the end of last year's second quarter, we've reduced our securities portfolio 56% since the balance sheet repositioning took place.

Securities totalled $6 billion at the end of June 2005, and represented 23.7% of total assets.

In contrast, $13.6 billion representing 46.5% of total assets pre-positioning.

You may recall that our goal had been to reach 25% securities to total assets by the end of this coming December.

While we, therefore, are certainly comfortable with the current percentage, we will continue to reduce our securities over the next few quarters, depending on market conditions and other investment activities.

Another of our accomplishments over the past four quarters has been a significant shift in our funding strategy.

Deposits totalled $11.5 billion at the end of June 2005, representing a $1.1 billion year-to-date increase and an increase of $1.5 billion over the past 12 months.

In addition to funding the growth of our loans, the increase in deposits has from time to time been used to reduce our wholesale borrowings.

Wholesale borrowings totalled $9.3 billion at quarter end, down $356 million link quarter and down $5.8 billion from the level just prior to the balance sheet repositioning.

We are very excited about the actions we have taken to increase deposits and the initiatives we are about to put in place.

In the weeks ahead, our limited purpose commercial bank will be set to accept municipal deposits and other government moneys; and our banking department -- development district branch in Queens has already received a share of New York state and city funds.

We're also excited about the response to our nation -- new nationwide online banking service and by our recently established university partnerships.

In addition to gathering deposits from new incoming students, we've been able to offer beneficial payment solutions to colleges themselves.

We've also established a business banking group to increase our share of that market, and I'm pleased to say that that group is already producing results.

As indicated in this morning's release, we are in the process of forming a depository relationship with Co-op City and very shortly we'll be providing them with lock box and other business-related services.

We've also succeeded in putting in place a health services account program and expect to receive our first accounts within the next few months.

The initial response to these initiatives has been very gratifying, and we look forward to additional deposit growth as these programs mature and evolve.

In the interim and while awaiting regulatory approval of our limited purpose commercial bank later this quarter, we have also been using broker deposits to fund the significant growth in our loan portfolio.

Finally it's important to note that while growing our quarter business, we've also succeeded in strengthening our capital.

At June 30, 2005, tangible stockholders' equity equalled 5.44% of total tangible assets, excluding net unrealized losses, a year-over-year improvement of 44 basis points.

Including net unrealized losses, the ratio of tangible equity to tangible assets improved 80 basis points to 5.31%.

The increase in tangible stockholders' equity has also been impressive.

Tangible stockholders' equity was up 23.7% at the end of this quarter from the balance we recorded at June 30, 2004.

In short, we are very pleased with the progress we've made over the past four quarters to position ourselves for the future.

The extent to which we've done what we said we would do should be an indication of our viability of our core business model to support and sustain our earnings, despite a very volatile yield curve environment.

On that note, 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 this afternoon or during the week.

[OPERATOR INSTRUCTIONS].

Mark Fitzgibbon, Sandler O'Neill.

Good morning, gentlemen.

Good morning, Mark.

The first question have I for you, you had some real strong deposit growth in the quarter, almost $1 billion.

Could you tell us where that was coming?

What categories and -- and sort of how you were attracting it?

Right.

We actually did several of the things that I -- that I mentioned.

We're beginning to draw on -- on deposits from new sources, but most importantly, we also were building deposits in traditional way.

We actually ran a promotional program toward the end of the quarter and drew a significant amount of CDs into the bank.

It was an interesting program because it was actually advertised broadly, but not internally moving much money at all.

And it resulted in us having very positive flows from all of the banks that we compete with, some of which were rather significant flows.

Okay.

And then secondly, I wondered if you could share with us what the average initial yield was this quarter on your multifamily loans booked, and maybe if you could give us a sense for what percentage of the multi-loans you did were five-year versus maybe another term?

Mark, it's Tom.

On average for the quarter we've hit approximately about 160 basis points over the five-year CMT.

Overall yield was about 546, and I would say we're still -- the vast majority of our loans are five year paper.

Okay.

And then also on the tax rate, I think you had said you had some tax credits and those are going to be there for seven years or something.

Right.

We won a new market tax credit from the federal government.

That's a seven-year program and we'll probably see the effective rate somewhere between, I'd say, 32.7 to 33 for the remainder of the year.

Okay.

And then the last question, given your outlook for interest rates in -- in the curve, do you feel like the margin is at bottom at this point?

I think we're getting closer to stabilization, Mark.

The interesting point here, if you look at the -- the average balance sheet that we publicized in the press release, you'll see that the asset yields have stabilized, and we've mentioned that over the past three months that we expected to see stabilization on the asset side.

No question the cost of funds is going to be the challenge, but based on our projections, it appears that if the Fed's going to 4% we're prepared for that, and we're getting pretty close to stabilization.

We expect, over the next foreseeable quarters we will stabilize.

I' not saying that the margin is not going down, but I think the magnitude will be significantly less than it was Q2 versus Q1.

Great.

Thank you very much.

Thanks, Mark.

Rick Weiss, Janney.

Hey, guys.

Good morning, Rick.

Let me ask you a question.

I guess with asset quality and loan loss reserves and I know the accounts -- or don't like a targeted number.

But 50 bps, it seems like it's kind of getting to the point where if you grow loans, like what happens to the reserve?

Do you anticipate dividing at some point?

I think -- I think, Rick, we are so unique in our actual drawer on our reserves over the course of time.

What we're looking at in this quarter is indicative of our historical situation.

Many times a loan, for one reason or another, goes bad.

But extraordinarily rarely do we lose money.

So within the numbers that we reported this quarter, we have well over $18 million in properties that are worth significantly more than our penalty interest as well as our principle.

And we're expecting to resolve all of that during the course of this quarter.

So when -- when you look at the actual performance of our portfolio, there may be times when we initiate actions so as to push to resolution a loan that is not performing at the standards we would appreciate, but we do not have assets that are -- that are as vulnerable as that of many others.

And therefore instead of losing money, we will ultimately make more money than we would have made had the loan just been a performing loan.

Okay.

And -- I'm going to leave that subject.

And I thought I heard on the call that you said you're trying to use, like, the increase in deposits, one of the things is to reduce longer term borrowings.

Did I hear that correctly?

Yes.

Rick, it's Tom.

What we did in the -- over the past two quarters, obviously there was some significant gyrations on the short end of the curve -- actually, I said the medium term of the curve.

And we opted to put in some of our short term leverage that we had.

As you know, we went into the year at about $1 billion.

That number, as we grow the Company, was extending.

We locked in approximately 2 billion at an average life of two years with a 337 cost.

If you look back in Q1/Q2, that would be viewed as expensive, but in this market that is actually inexpensive money going into a rising rate environment.

So we opted to sacrifice some of the short term benefits of the margin to having a short-term leverage book, and actually omitted the short term leverage book, and went long.

And we thought that was the appropriate time to do so.

Okay.

So you'll be going long on the -- on the liabilities, but you still paid off some of the other longer ones?

Yes, any excess we received, any excess deposit flows was used to pay off some of our short-term debt -- short-term debt as well.

Now you're paying off the short-term debt.

Correct.

Oh, okay.

I thought I heard --

As well as growing the Company.

Our growth rate still is approximately 10%, so any growth in the Company has been fueled by deposit growth, not wholesale borrowings growth.

Okay.

Got it.

Thank you.

Jack Micenko, Susquehanna Financial.

Hi, guys.

Hey, Jack.

Question on the -- on the multifamily structure.

Obviously it's a 5-5 kind of structure and the way I'd always understood it was most of these borrowers refinance within the first five years, and you get a point.

And what's been happening is rates have been lower as the borrowers have not been willing to refinance, and that's obviously hit margin.

It's also hit prepayment income.

But as we -- I guess my question is, as -- as time goes on, are you getting to a point where some of these loans are hitting that mandatory five year up repricing point?

Will that affect margin to the positive at some point, and have you seen the average life of the portfolio increase over that time?

Yes.

I think you're -- you're touching on a couple of very valid points here.

Obviously the portfolio is far more seasoned today than it was, let's say, in '03 or in other earlier periods.

Meaning that the life of our existing portfolio has actually extended, even though the cash flow that is available to those property owners has increased robustly in the period that they've held the property.

The amount of time that they've waited has actually been increased.

Having said that, the likelihood that we are going to have a -- a build to a point of execution is greatly increased by the mere passage of time.

For two reasons.

One, the calendar necessitates that they refinance, because our loans never go into year six because they're 250, 275, 300, depending on the paper, over prime.

So obviously that is way beyond the market.

So our loans will refinance in -- in that 5th year or before.

Also, for those people that are actually building cash flow, they want access to that money so that they can redeploy that money.

The idea being that when they get access to those funds, they then redeploy the money into the properties and build additional cash flow.

One of the things that has been so difficult about the last four, five, quarters -- actually it's only the last four quarters.

The second quarter of '04 was a robust quarter with regard to refinancing because there was over expectation that rates were going up.

Therefore, when in fact rates did the opposite, there was a huge slow down in quarters three and four.

In the beginning of this year there was also the appearance that rates were going up, so we wound up facing another beginning of -- of refinancing.

However, as rates have done again the opposite of expectations, the refinancing activity has slowed.

But as each quarter passes, the likelihood that a portion of our portfolio, just as a matter of time, will refinance increases.

And also the willingness of individuals to refinance due to an array of issues.

We're going to have people who will sell their properties in this robust market.

We will have people who will do their refinancing because they have the opportunity to take large dollars due to the build and cash flow.

We'll have people that'll do other things that will give us the necessary refinancing of portfolio that enhances term yield.

That's all on the table.

It hasn't gone away.

It's just that it's been delayed.

Jack, it's Tom.

What I would add to that is that obviously for the first time, we've articulated how much of the prepayment penalty income is actually going through the P&L, and the numbers were extremely low this quarter.

Going forward obviously that's an opportunity for benefits, but on a comparative basis linked quarter we're down 44% so Q1 was encouraging because of the short-term pop in the five year.

It went away in the second quarter.

If you look over year-over-year quarter, we're down almost 68% and that was what Joe was indicating that very robust anticipation of higher rates back in June of last year.

So no question having a low level.

We're pretty close to the bottom in respect to seeing the level of prepayment income coming to the P&L.

So it's encouraging knowing that going into a potentially rising rate environment here, we can see some good benefits from the prepayment side.

Right.

Okay.

And then as a follow-up, there's been a lot of deposit gathering initiatives, I guess, over the past two or three quarters that should ultimately extend the duration and lower the cost of the funding side.

Have you guys quantified what the potential benefit you think you can get out of the muni business?

Out of the college business?

Out of anything?

I mean, is this -- is this something that's going to be a $1 billion of opportunity? $5billion?

I mean have you -- and obviously it's -- it's impossible to tell yet, but where do you think you could ultimately be with this -- with these initiatives?

I -- I'd say based on the conversations that we've had and the various other things that are going on, this is an opportunity that reaches into the billions for sure.

How much is in each of the buckets, I think the important thing to recognize is that we have several different buckets here.

So the bank as it was last year did not have four or five significant ways in which it's actually going to be accumulating deposits in the period in front of us.

So I think the -- the important thing is that we have a greater deal -- a much, much greater deal of flexibility in -- in how much we'll take from time to time; and we'll also have the ability to decide which components of our deposit base we want to enhance with some of the things that we're going to do.

I don't want to understate the fact that we are actively in market doing the normal bank activity things that have better service hours, better product offerings, and the kinds of things that will make it possible to build branch relationships.

And our people in branch are working hard at trying to make that reality.

But in addition to that, we have multiple vehicles now that are available to us.

Most of the technical pieces are in place.

The regulatory pieces are just about in place.

I mean, we're talking about a single letter is what we're waiting on on the side of the commercial bank municipal deposits we're gathering.

So I think the important thing is that as we go into the period in front of us, we'll have a -- a array of choices that'll give us great deal of the flexibility.

One of the important things to remember is that a lot of the funding on the wholesale side that we had was all collateralized funding.

A lot of the funding we're talking about now is not; and therefore, changes dramatically how much we can take into each piece.

Okay.

Thank you, guys.

Sal DiMartino, Bear Stearns.

Hi.

Good morning.

Good morning, Sal.

Three quick questions.

Based on your commentary on refi activity, can you give us any color on -- with the five year moving up to around 4% if you've seen any positive movement there?

Yes.

I think -- I think, Sal, there's no question that already early in the quarter we are aware of -- of our fee income going up.

The important thing is that this is something that we cannot forecast, we cannot talk about next quarter because the factors that impact it are going to be varied.

And although it inevitably gets the point where it has to happen, it's just not very clear whether it happens in the third quarter or the fourth quarter or the first quarter of next year or so on.

And then again it's -- it's a matter of degree.

If the factors that -- that move our portfolio are very favorable to such a refinancing of the portfolio, that number could be extremely high.

If the factors are -- are mediocre, fluctuating back and forth, that number will -- will slowly evolve into an ever greater number because it just has to, due to the movement of the calendar.

Sal, it's Tom.

I would just add that we are definitely encouraged by some of the trends.

No question that five-year CMT being closer to 4% is helpful, but looking at the average yield on the portfolio it's -- like we said last quarter, we believe it bottomed and no question it's stabilized, but we're still getting something slightly north of 150 over the five-year CMT and what's going to roll off is probably significantly less than market rates.

So that'll also will be a benefit if these loans particularly trade away into the conduit market for a longer-term financing.

So that's also positive to the margin going forward.

Okay.

And just as a follow-up question on the refi, do you know what percentage of your loans in your portfolio are, say, in year three or year four that could potentially refinance over the next 12 to 18 months?

It's a fairly large percentage.

I would say without getting specific there's a significant amount towards the latter part of this year that would be eligible to refi within that -- that one year window.

We call that at one year extra window, that four year average life and a three year average life.

It's getting closer.

But more importantly, I think what's happening is some of the lower yielding paper that was put on a few years ago is now being negotiated per the inquire from the brokers that are actually bringing paper to us.

It seems like there is somewhat of a slight trend starting.

Again, there's no guarantee that happens, but as Joe indicated, the portfolio's maturing and our average life is slightly down on a linked quarter basis.

So we feel pretty -- pretty optimistic if rates stay up a little -- somewhere north of 4%, around 4% in the five year, we have potentially good trends to occur.

Again, the numbers that we put in the second quarter will lower prepayment penalty income.

We haven't seen low levels like this since probably fourth quarter of last year which was our lowest.

So the trends are -- in our opinion will probably go up.

Right.

So a question on the borrowings.

Would the -- would the -- the 2 billion that you extended, how much do you have left in -- in that short-term on a 12-month bucket?

I would say right now we have very de minimis amount of short term leverage of the books.

We've locked in a lot of our long term -- short term money to go along.

But obviously, as we continue to grow the bank and deposit gathering is difficult to occur because of pricing, we'll manage that; but right now I'd say close to zero.

Okay.

And so what does -- what does that do to your GAAP position?

No question our GAAP position is going to be somewhat consistent to the first quarter.

We were very conscious of where we were going in the second quarter.

We wanted to make sure we're not as liability sensitive in a rising rate environment.

So we're trying to keep that gap somewhere between 5 and 6%.

So I think we're going to be in that realm for the Q2.

Okay.

Thank you.

Thanks, Sal.

Kevin Timmons, C.L. King.

Hi, guys.

Some of my questions were answered.

I've got a couple of quick ones here.

Brokered CDs, can you tell me the balance at the end of Q2 and end Q1?

At the end of Q1 it was probably -- I don't know, 35, $40 million.

Something like that.

At the end of Q2 it was about $400 million or so.

Okay.

Co-op City loan, you have some commentary in the press release.

Just wonder what the current rate is now.

I know there was a rate structure that changed a little bit.

Yes.

The rate itself is 5.20, but our -- our term yield on that for the first five year period which is now, I don't know, 16, 18 months into the period, our yield is actually higher.

Due to the fact that we've only advanced about 265, $268 million and we have a $300 million loan that is paying us.

So we're -- we're earning approximately 575 on that.

That's what I was looking for.

The change in your depository seeking banks, are the secured accounts, I assume, a cost subsidy that could be gained, or how does that work?

Yes, basically what that amounts to is there are -- there are 15,608 units in Co-op City.

There are well over 55,000 people in Co-op City.

What we've done is we've won from a major U.S. bank, the ability to handle their banking relationships.

That's extremely important.

Not only did we win that from maybe the number two bank in our market, from the provider there who services more properties than the current Co-op City represents, they're looking to move the rest of their business to us as well.

The good thing about that is that we've established a branch on site.

We've established relationships with the individuals that can do direct banking with us and lock box actually will become easier to our facility than it was previously.

So we're looking to build banking relationships with all of the tenancy and as well as to have the benefit of having very large account relationship that we're going to be managing over the course of time.

Good.

But then there's nothing reflected really in Q2's [inaudible]?

That's right.

That's right.

No, it was not reflected in the Q2.

It'll be reflected in the third quarter.

It was the -- the finalization of all that was at the end of Q2.

On the nonperforming loans, you mentioned this 10.7 million, and then you also mentioned a $7 million loan.

Right.

Which you expect to resolve by year end, roughly.

Can you give us any more color on those?

Yes, year -- year-end is certainly giving us a lot of breathing room to do that.

The -- the important thing about those loans, they were loans that were executed earlier on by -- by others.

We are in the position today of resolving those loans because they have significant value beyond the total dollar amount that is due to us.

And we will just get out of those loans in their entirety.

It is not all that uncommon for us to be able to do that with -- with properties.

Not to say that it'll happen with every loan, but typically when we see a property that has equity, and we know that the operation is not handling their responsibilities and making payments to us appropriately, we, in fact, move to have somebody else step in our shoes or otherwise get rid of the property.

Right.

Well, property valuation increases have certainly helped on that front.

That's right.

It makes it very -- it makes it very, very, very good for us.

In actuality, the disposition of these properties often results in us earning more money over the course of that process because we're actually earning a penalty rate of interest.

Right.

Not the booking interest, but we're actually --

[inaudible] I assume you're saying Rosalynn [ph] --

Right.

This Rosalynn loan?

That's right.

And I think they're -- at least the 10.7 million is characterized as a construction loan.

Is that actually still in the construction period?

Yes.

In actuality, the -- actually, for a variety of reasons, that particular location is worth significantly more, not just by what they have done, but also by what is going on around them.

Okay.

But there's obviously some kind of significant problem with that specific property, I guess, because it's still in construction [inaudible]?

Yes, I think -- I think the -- the issues are more on the side of -- of individuals, partners rather than the economics of the deal.

It's the relationships of the parties.

Okay.

Some kind of partnership blow?

Right.

Okay.

And on the -- the extension of the short-term borrowing, $2 billion, how much of the margin impact of that -- of those transactions was included in Q2 and is there going to be a further impact in Q3?

In other words, it'll happen late or early in the quarter?

Kevin, I would guess about between 4 to 6bps in -- in respect to Q2, however, the benefit is going to be in Q3 and Q4 because remember this money was short-term money that's repricing in conjunction with the Fed increases.

So we locked in -- like right now that money is consistent what short term money would cost us.

The next fed hike that's mostly expected in August we will get a benefit from because that money's now is locked in for two years.

So I would say for the -- Q2 is about 4 to 6bps.

Going on Q3 and Q4, it will be a benefit because now in our model, we're taking that money out and not repricing in the short end of the curve.

It's -- I understand it's the benefit relative to what would have been, but relative to the average cost that I'm looking at in this second quarter release, how much of an increase is that going to be?

We aren't going to give you color on the margin going forward.

We can give you a generalities that it would be no question accretive to the margin going into Q3 and Q4.

It was dilutive about 4 to 6 -- 4 to 6 basis points in Q2.

Because if you think about what we would borrow in Q3 to fund the short-term money, it would be fed funds plus an eighth, give or -- give or take a couple of basis points.

And if fed funds are at 350 plus an eighth, you see what the rates are going to be versus 336 that we locked in for the next two years.

So I think another way of saying that the -- the cost of this particular extension is almost entirely reflected in the quarter already.

So there's not going to be any increase in the cost in the third quarter from this particular extension.

Because it was done, actually, at the end of last quarter.

Not -- not -- [inaudible].

Okay.

Well, that's really the question [inaudible].

Your game plan on the muni deposits, are you putting people in place to do a major program there, or how --?

We have -- we have a lot of established relationships and people that are -- are just waiting in order to get the finalization of the approval.

Frankly, this has taken much, much longer than we had anticipated.

It's occurred across the state.

This is the only state in the Union where this kind of thing is happening, and therefore, the Federal Reserve had never seen it before because we're the only bank that's a Federal Reserve institution.

So that took some extra time, and then that filtered back down into redoing some things with other people.

So at the end of the day, this will be a very aggressive positioning for us.

It gives us a great deal of flexibility.

We have a lot of very good relationships, and the people that we have in place have very strong relationships in the communities that we serve.

I mean, we are a community bank.

And we've actually been asked by people to take deposits and that's the interesting thing.

So it's -- it's going to be a piece of what we do on a go-forward basis.

Kevin, I would add that we're also going after the operating accounts of the municipality.

That's where we believe we can be very helpful there.

No question the municipal deposits are fluid, however, the operating accounts will be very attractive for -- for future growth in deposits as well.

Thank you, guys.

Thank you.

[OPERATOR INSTRUCTIONS].

Adam Weinrich, Basswood Partners.

Good morning, gentlemen.

Good morning.

I going to ask you a question on the -- the purchase accounting effects of your -- of your current liabilities.

If I look at -- when I look at your 10K, you showed the economic rate was on your CDs and your borrowings at year-end and then I compared that to what the GAAP reported numbers were in the first quarter.

And so just to -- to point those out, the -- the economic costs of the debt, of borrowings at the end of the year were probably around 415 from what it said in the K, but the actual GAAP reported rate was -- was 338 in the first quarter.

In the CDs there's also a difference, but not as -- not as great.

I guess my question is, how quickly would we -- do we expect the rest of that purchase accounting to roll off and is it correct to assume that the -- the rate on these liabilities is going to have -- is going to have the trend from the 338 to something over 4, just as the purchase accounting rolls off and irrespective to what the yield curve does.

I will give you some color on that.

Not to be overly specific I would tell you that we're at a point now -- obviously the Rosalynn deal is quite some time away since we closed it.

The CD market's going to be rolling off shortly, and that's obviously being a significant negative because we're having less benefit from that.

As the CDs reprice, they're rolling off to other institutions or staying with us at a higher cost.

So unfortunately, that is somewhat of a negative, but the borrowings cost that we have going into the future years will probably be there till around 2008.

I would tell you that a substantial amount of securities marked from Rosalynn [ph] which was substantial at one point in time is pretty much all gone.

And it's really affecting the -- the margin negatively.

That -- so we've been bleeding the margin because of the rapid acceleration of cash flows in securities.

Securities have been paying off dramatically from the Rosalynn transaction over the past year and a half, so that number's probably going to be next to zero.

So what you have pretty much left by the end of this year is going to be the borrowings mark and that'll be with probably through 2008.

And how much do we expect to roll off between now and '08?

I mean, a good portion of that were repos.

I'm assuming --

It's going to be ratively [ph].

I mean, the way the rate environment is right now, we'd have to see, I would say, LIBOR somewhere between 560, 570 before this will be an issue as far as, let's say, disappearing.

I don't -- I don't foresee it disappearing.

We would like to see these liabilities disappear because they're very expensive on a cash basis, but unfortunately, the way the rate environment's structured right now, we're going to be living with these liabilities for quite some time.

And if I could ask another question, what -- what percent of the borrowings at the end of the -- at the end of the quarter or the average for the quarter were FHLB -- FHLB debt and at what rate are you putting -- are you paying for new FHLB debt?

I'd say right now I don't anticipate being into the market heavily in the Federal Home Loan Bank or the borrowers market as whole.

As Joe articulated, we are clearly focusing on deposit campaign.

So the last significant slug of money that we've taken, which is approximately 2 billion, was with the Federal Home Loan Bank.

Those were mostly ten -- 10-year non-call two year [ph], 10-year non-call three year [ph], some 18 month paper.

On average, we came in at two years and these were convertible advances with an average cost of 337 and they are collateralized borrowings.

But I would say that the -- what is it? 60%, John?

Approximately 60% of -- 60% of our debt is probably with the Federal Home Loan Bank.

And we have -- we have other debt out there with the -- the street, but we have not been in the market borrowing money.

We've actually been paying off our debt over the last 12 months.

Thank you very much.

Thank you.

Bob Hughes, KBW.

Hi, good morning, guys.

Good morning, Bob.

Quick question on prepayment penalty income, looks like for independents it was down about 20% linked quarter.

Did -- did you mention what that was down for you on a linked quarter basis?

Yes, Bob.

As -- for the first time we've actually put it in our press release, the actual level that we experienced.

On a linked quarter basis, we're down 44%.

We had a reasonably decent show in Q1.

So it was encouraging where the five year broke to four [ph].

But obviously, in Q2 it came right back down again and slowed down.

If you look back year-over-year we were down 68%.

The reason why we are stressing at this level is because we believe we're at the bottom.

We have some encouraging business coming at us this quarter that we'll probably see some potential growth there.

So no question the numbers are very low, and this will -- we believe will be a benefit going into the latter part of '05 and clearly into '06.

Okay.

And -- and then going back to the prior question on -- on purchase accounting adjustments.

Could you break down, perhaps, for us of the 30 basis points of margin compression this quarter, what -- what percentage might have been related to a -- a rolloff of purchase accounting adjustments?

I would say it's probably close to a good 10 to 12 bps easily just because we lost the -- a lot of cash flow came on securities.

They're disappearing.

I mean, we're at the point now where we're very confident that we are -- we're going to be at a securities to asset level that's going to be very encouraging to be back in line with the top 60 bank holding companies nationwide.

We expect the securities book to be probably between 21, 22% by year end.

Way ahead of our expectations of 25%.

That came at a cost because a lot of securities we had, the remnants of the Rosalynn transaction are burned off over the past two, three quarters; and we've been getting the benefit of those rolling off at accelerated paces through the managed income line item.

So I'd say that's approximately.

We're going to have the CDs rolling off, I would say, and then what we're going to be left with probably in '06 will be the borrowings mark, because that's -- in this -- in this rate environment we don't expect to see those -- that debt get called away.

Okay.

And maybe -- maybe asked another way, with the CD marks rolling off, maybe, in the third quarter, what kind of a lift do you expect to see to the average cost of those?

I -- I think it's going to be insignificant.

We've got the borrowings.

We're stuck with the borrowings for awhile, Bob, and this is something that is very painful to deal with, because we'd love to restructure them, but the cost is just so far on the money [ph] that we're going to just -- on a cash basis it's negative, but on a GAAP basis it's -- it's in line to the -- to the marketplace.

But I would say the -- it's negligible on the CD side.

Because all that money's -- in general, the past three, four years, banks have not been taking long term CDs.

It's pretty much two to three year type paper and we're at that point where it's going to be rolling off.

Okay.

And then trying to understand the borrowings -- in the market of borrowing again.

If you look at the cost of those borrowings at year end, that actually included a good proportion of short-term borrowings which have now extended.

So I don't totally understand why the bond --

The short-term bonds are not relevant to the Rosalynn transaction.

The Rosalynn transaction we -- we actually assumed mostly long term liabilities.

Those are marked at the market as of October 31, 2003, and the rate environment October 31, 2003, was at a very low rate environment as far as funding cost.

We had to deal with taking a hit to capital in respect to the mark and taking that average amortization -- actually accretion over time.

We expect the accretion to be over around 2008.

And all those -- all those numbers are -- are articulated in the -- the S1 filing.

That has not changed.

Okay.

And then one --

It's not being -- it's not accelerated.

It's going to continue to be at that pace.

Okay.

And then sort of a final question on the margin being near stabilization.

I -- I can see asset yields perhaps stabilizing, but funding costs are clearly going up.

So I don't understand how the margin will really be near stabilization.

I think -- I think what we've worked very hard this -- over the past four quarters is focusing on the balance sheet.

We're not looking at '05 as going to be an earnings growth story.

No question '06 we believe that our margin will stabilize in the foreseeable future.

What I did say earlier in one of the call -- in one of the questions that you are not going to see on a linked quarter basis the level of decline.

I'm not saying we're not going to decline in the margin.

We'll have some future declines.

But what -- we believe we're close to stabilization, absent the level of prepayment penalty income that we generate.

In this environment, we -- we feel pretty much encouraged going into -- into the third quarter and the fourth quarter based on where we're positioning ourselves and the average life of the portfolio to get some benefits there.

But absent those benefits, based on what we've done on the liability side -- we've put some money out long.

We -- we're in the market.

We took a significant amount of cost to grow our deposit base at $1.5 billion of additional moneys coming in over the year at a high cost.

We're not going to be as aggressive.

We're going to be in the market, but no question that money came at a cost.

So the stabilization is pretty close.

I'm not saying we've stabilized yet, but no question on the asset side of the balance sheet, we're very confident that the yields aren't going lower.

So depending on rates -- and I think we're at a level now that we're pretty confident that when money's rolling off to us, it's rolling off at a lower overall average yield, and that's going to be an -- an encouraging factor to the asset side of the balance sheet.

Of course the funds are going to be challenged for the sector, and I'm not disputing that.

But we won't see the 30 basis points decline quarter after quarter.

We're getting close to a bottom here.

Okay.

And I think our focus has been over the past 12 months to bring in a more viable balance sheet to the marketplace.

We feel more confident -- comfortable that capital's very strong.

We're very close to that 550 level, as indicated in prior quarters.

At that level we will continue buying back the stock in the open market.

So, we're getting close there. 550 has been our benchmark, and we're getting close in the AFS portfolio is significantly lower than what we'd expected a year and a half ago.

Okay.

Thanks.

Thank you.

James Abbott, Friedman Billings Ramsey.

Good morning, Jim.

Good morning.

Just to follow-up on the cost of funds issue, just can you give us some sense as to where you're issuing CDs right now, the general level that you're issuing?

I know on the average balance sheet it's about 2.5%.

What's the -- what's the new issuance price in general?

Right.

We have a variety of CDs that are offering -- Robert, do you have a break down the rates?

Yes.

We have in between 3 to 4 months, up to the 18 months.

Well, actually today we're in the market between the three month, four month and 18 month on CDs.

And we're running rates in the --

3.25 all the way to 4%.

Yes, between 3.25 to 4% for 18 months.

Okay.

Can you give us a sense as to where -- what the majority of that money is?

Is it majority -- I know that on the website it's 3.5% is the sort of the one that pops right up at us.

But what -- is that -- is that where most of the money's going?

Actually, it goes -- most -- most of the money -- Robert, do you have a breakdown on that, where it's going?

No, we can --

We can -- we can get you that after this.

We don't have the break down of the actual distribution that has occurred in the last three months or so.

But we can get you that.

We'll talk to you as soon as we put it together.

Sure.

Thanks.

The -- I guess then it's safe to say that you're probably going to look for a year from now probably something around 3.25 to 3.5% level as all of that stuff reprices by then.

Is that fair?

Yes.

That's fair.

On the money market accounts there was a huge jump linked quarter.

I'm wondering if there -- if that sort of cleared the decks, if you will, and that going forward we'll probably see some stability in that or -- ?

Well -- well, we've actually -- Yes.

We -- I think that you can't listen to television and pick up the newspaper or do anything without finding competition in money market accounts.

So we've been over the course of time competitive in that area in conjunction with some of our peers.

So we've actually had movements in that particular area.

One of the things you should know, we have competitors in this market that are paying 4% for money market accounts.

So there -- there is a -- a focus on that particular accumulation bucket that's occurring within the New York market.

So it's not just us.

It's actually a -- a wide number of -- of companies.

And there's a lot of shifting.

When we do money markets, our hope, of course, is that we build larger relationships over the course of that -- that contact -- that opportunity.

So there's -- there's going to be shifting within the population of deposits.

And there's obviously going to be shifting from one bank to another.

I think the -- the focus that we have is on building convenience and strength.

I mean, we're offering better than 70 to 80 hours of banking services in many of the communities that we service.

None of our peers are doing that.

And in fact, we're doing that with the lowest efficiency ratio in our market.

So it's -- it's a matter of -- of putting together an array of choices, besides rate.

So I think what we demonstrated over the course of the end of the quarter, we can -- we can buy rates along with anybody, and when we offer an attractive rate, we had a huge amount of influx.

We virtually had to pull away from that in order to avoid getting far more money than we needed.

So the -- the bottom line is, that there are multiple ways in which we will raise funding.

On occasion, we'll be targeting money markets; on occasion we'll be targeting other things.

We'll always try build relationships wherever that opportunity presents itself.

And many of the new initiatives, such as our safe pay and -- which is really driven by the idea that we want to have relationships with colleges and companies wherein a deposit relationship is established with the company in order to accommodate more efficiently the needs of the employee.

That employees will have a relationship with us that will significantly be better than what they're currently doing because they'll have a funded paycheck on a card in pocket at all times.

Meaning that -- that they will always have their pay available to them whenever, in fact, it occurs, in their wallet.

And -- and the important thing about that is that we've had a huge amount of receptivity to the concept.

And that builds a wider array of opportunities with regard to individuals.

So we have -- we have so many different initiatives that are going right now.

We're going to be shifting deposits from time to time.

The money markets clearly are an area where there's been a great deal of competition.

For us, we want to be sure that we get to the point where we're dealing with relationship opportunities on a go-forward basis, as many new ways in which to attract deposits as possible.

Well, I appreciate the color.

But is there any chance that -- I mean, what I guess I'm trying to get at is is that should we be expecting that to go to 3.5% a year from now?

Or would you think a year from now that that money market rate would remain close to the 215 level?

I would -- I would think that the money market rate should probably be more in line with the market.

Not the promotionals, the market.

What you should know is that many of our core rates today are the same as they were two years ago.

So the old rule of funding costs do reflect aggressive initiatives, but also reflect the fact that there's a great deal of stable money within the deposit base.

So as the -- as the program money moves out of money market, that costing will come down.

And hopefully we will -- we will have some of that in checking and we'll have some of that in other places.

But the -- the important thing is that we're looking at today an aggressive positioning on the liability side with regard to rates.

So even if rates stay approximately as expected going up 25 basis points over the course of the next couple of quarters, one or two or three times, we're still looking at -- at the opportunity for the rates within many of the deposit areas that have the largest amount of our deposits, not changing much at all.

Or maybe even in some cases, going down.

We'll run promotionals from time to time that will be at market.

But we will also have the -- the stable deposits within our deposit base that aren't going to be moving by much at all.

Okay.

I appreciate that.

The -- if -- just a couple of other quick questions.

On the brokered CDs, is -- can you give us a sense as to the duration on those?

The brokered -- the broker deposits were intentionally short so that our average -- remember, what we were looking at was a -- a significant up tick in our -- our lending over the course of the quarter.

So we expected to get a good deal of money from municipal deposits and other sources.

So it became apparent that we could actually get those brokered deposits at very favorable rates and pay them off in a relatively short order.

This way we would replace them with alternative types of funding.

That was -- the goal was not to -- to establish broker deposits long term, but merely to use them as a cost effective means of meeting our extraordinary growth in the loan portfolio, and at the same time not burdening our cost of funds over a long period.

Okay.

And the rate on that?

Those broker deposits.

I'd say it was probably --

I would say somewhere north of the mid threes.

So you're looking at potential benefit as they roll off into lower cost funds, Jim.

That's going to be short-term money between 4 to 6 months.

Okay.

Appreciate that.

That's good color.

And then I guess maybe last question is any support bonds left from the Rosalynn -- I know Rosalynn had a lot.

Actually -- actually they're gone.

All support bonds are gone?

Actually, I think we have one more left which is performing at since we acquired it.

But the one that was somewhat of an issue we were able to unload at a 20-point premium.

So that worked out very well.

And is that -- is that how -- is that why the mortgage related securities portfolio declined 35 basis points in yield?

Is that --?

No, there wouldn't be any mortgage back.

That would be in the investment income, and that is partial why the investment income declined.

I think while the mortgage income declined, obviously we had accelerated cash flow on the Rosalynn paper that burned away, so we had to accelerate the mark there.

That's gone.

So it was able to decline there.

We had a nice acceleration in Q1 over the low rates of Q4, but more importantly, we've also sold some securities that were I'd say averaged coupon of 550, which also had a negative impact to the mortgage backed security yield.

I -- I would say we're going to stabilize that yield there.

And obviously as the cash flow comes in, we're putting it out at probably well north of 100 basis points now.

Okay.

And -- and just to clarify on the support bond that remains, is that -- that's in the quote-unquote other security, that $2.1 billion.

Yes.

And how much is that of that --?

It's small.

It's small.

It's a -- probably around 10 million.

Okay.

All right.

Appreciate it.

Thank you very much.

Thank you.

Jim.

K.P.

Embrick [ph], Millennium.

I'm sorry, I didn't hear your name?

K.P.

Embrick, please go ahead.

And hearing no response, George Sacco, J.P. Morgan.

Good morning, George.

How are you?

Good morning.

Good, thanks.

Question on the prepayment penalties.

If I actually look at your loan portfolio on the multifamily side, based on the originations you gave, it looks like your liquidations were actually up about 25 or 30% from last quarter.

And I'm just wondering given that liquidations were up, with the fee income being down, are you doing something like waiving prepayment penalties or anything?

George, it's Tom.

What had happened in this particular quarter, we had some very unique structured multifamily paper that was actually much shorter than five years.

It was like a two, three year type financing that went away.

Those loans are structured off a spread.

Not up to five years.

It was a much shorter duration because they had to reprice in, I think, years two and three.

Those are gone and they traded out to the conduits, without prepayment penalty.

But those were structured loans that we knew were short term in duration that were well below in five years. [inaudible]

How much of your -- how much of your remaining portfolio is that?

I would say less than 1%.

Not a lot.

It was a unique situation for a very good customer that we accommodated a lending facility for, and we knew they would go in between two and three years.

They went a year early.

That was, I think, somewhere at a 475 coupon that rolled off.

Okay.

So you're not doing anything such as waiving prepayment penalties for the traditional product?

No, no.

No.

Yes, we've been -- we'e been probably more consistent with that than most.

Okay.

Okay.

Thanks.

You're welcome.

And that does conclude today's question and answer session.

Mr. Ficalora, I'll turn it back to you for any closing comments.

Thank you so much.

Well, I thank you all for joining us and participating in this discussion.

Your interest is appreciated and obviously we'd very much like to provide you with any further color that you'd like on a private conversation.

Thank you again, and we look forward to talking to you next quarter.

Thank you.

That does conclude today's conference.

Thank you all for joining.