Flagstar Financial Inc (NYCB) 2005 Q3 法說會逐字稿

Good morning, everyone, and welcome to the New York Community Bancorp third quarter 2005 earnings conference call.

As a reminder, today's call is being recorded.

And now, for opening remarks and introductions, I would like to turn the call over to the First Senior Vice President of Investor Relations, Ms. Ilene Angorola.

Please go ahead.

Thank you.

Good morning and thank you for joining the management team of New York Community Bancorp for the Company's third quarter 2005 earnings conference call.

Today's call will be led by Joseph Ficalora, our President and Chief Executive Officer, Thomas Cangemi, our Senior Executive Vice President and Chief Financial Officer.

Also on the call with us today are Robert Wann, our Senior Executive Vice President and Chief Operating 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 deposits, loan, and investment products and other financial services in our local market.

And changes in competitive pressures among financial institutions or from nonfinancial institutions.

In addition, the release includes certain forward-looking statements regarding our prospective acquisitions of Long Island Financial Corp and Atlantic Bank of New York.

You will find more details on the risk factors associated with all of our forward-looking 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 Q&A.

Mr. Ficalora.

Thank you Ilene.

And good morning, everyone.

We appreciate your joining us this morning for this morning's discussion, which will focus not only on our third quarter highlights but also on the exciting prospects for the Company in the year that lies ahead.

We believe we've come a long way in the past 15 months as the earnings release notes and the extent of our progress is reflected in our balance sheet at the quarter end.

Since June 2004 we've reduced securities by 58% to $5.6 billion and used the cash flows from sales and redemptions to grow our loans.

Loans rose 32% during this time to $15.9 billion, including a 41% increase in multifamily mortgage loans, our primary niche.

Our current pipeline, by the way, is 1.2 billion.

Of this amount 81% consists of multifamily loans, reflecting the $4.8 billion of loans produced year to date as well as our pipeline we are very much on target to achieve our internal growth expectations for the year.

Loans represented 63% of total assets at the close of the current third quarter.

And securities declined to 22.6%.

Deposits rose 11% to $11.1 billion over the past five quarters, and wholesale borrowings fell 35% since early June.

Notwithstanding the linked quarter decline in deposits, which I will comment on shortly, these changes reflect a meaningful shift in our approach to funding and have enhanced the quality of our earnings and our balance sheet.

These improvements will be reinforced in the coming quarters with the acquisition of Long Island Financial, expected to take place by the end of December, and the acquisition of Atlantic Bank, expected to occur in the first quarter of 2006.

To meet the challenges and opportunities that surely lie before us, we believe it is essential to take strategic actions that reduce our exposure to credit, market, and interest rate risk.

The acquisition of these two banks with their well structured mix of assets and high concentration of core deposits are indicative of our focus and are expected to enhance our earnings and our positioning.

As a result of these transactions, and the pro forma balance sheet repositioning to follow, we expect to have a 19% ratio of securities to total assets and a ratio of total loans to total assets of 64% in early 2006.

Deposits are expected to total $13.4 billion upon completion of the transactions with core deposits representing 66% of that amount.

Reflecting the addition of 29 commercial banking branches we look forward to further building our core deposits and to reducing, as appropriate, our use of wholesale funds.

We also look forward to the addition of a commercial banking platform to our business model, which will continue to emphasize multifamily loan production, asset quality, and efficiency.

In the third quarter of 2005, as this morning's earnings release indicated, we recorded a temporary reduction in deposits from the balance recorded in the second quarter of the year.

You may recall that in the trailing quarter we utilized broker deposits and other liquid funding sources to support the record volume of loans we produced.

With further increases in short-term rates likely, and an infusion of core deposits expected from our transactions, as well as our stand-alone efforts; we decided to run off the broker deposits we had added in the trailing quarter.

And to replace a portion of the liquid money market accounts we had accumulated over the past few quarters with a more stable source of funds.

Thus, while now in money markets declined 21% over the course of the quarter, the balance of CDs rose 14%.

The increase in CDs and in noninterest bearing accounts reflect the success of our various programs to increase deposits.

We are very pleased with the response to mybankingdirect.com, our Online banking service.

And with the continuing response to our largest borrowers to the efforts of our Premier banking group.

The group was formed at the start of the year to generate deposits from our borrowers and property openers and accounted for $350 million of deposit growth over the course of the year to date.

We're also seeing a rise in deposits in response to our smart student package, and are drawing closer to the implementation of our program to attract health service account.

Although the increase in short-term interest rates contributed to the decline in our net interest margin; the degree of margin compression has, as expected, begun to taper off.

The average yield on our assets remained fairly stable in the quarter and we were pleased to see an increase in the average yield on loans.

As we indicated in the last week's announcement of the Atlantic Bank acquisition, we fully expect our net interest margin to benefit from our transaction and from the resultant shift in our asset and deposit mix.

Another item worthy of mention, in which we know you have an interest, is the level of prepayment penalties recorded in the past three months.

Prepayment penalties rose $8 million on linked quarter basis to $13.2 million.

Of this amount only $1.8 million, or 14%, went to our net interest margin.

The remaining $11.4 million, or 86%, was recorded in fee income, contrary to our typical split, which tends to reflect a greater balance between the two.

Net income totaled $77.6 million in the quarter or equivalent to diluted earnings per share of $0.30.

On a cash basis our earnings amounted $83.8 million or $0.32 per diluted share.

In accordance with Reg G, a reconciliation of our GAAP and cash earnings can be found on page 14 of this morning's press release.

In view of the current rate environment, we were reasonably pleased with these numbers and certainly comfortable enough to maintain our commitment to our quarterly cash dividend of $0.25 per share.

As announced last week, our next dividend will be paid on the 16 of November to shareholders of record at November 1.

Given the expected benefits of our prospective transactions, our commitment to maintaining the dividend has every reason to be strong.

As we approach the end of the year, we are very excited about the strategic actions we have taken and looking forward to seeing the benefits in the quarters that lie ahead.

We have a strong business model, which will be enhanced by the addition of our new commercial banking platform and fortified by the acquisitions of LICB and Atlantic Bank.

We believe that the future holds challenges and opportunities for our entire sector and we look forward to meeting both head on.

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

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] With Sandler O'Neill we have Mark Fitzgibbon.

Hi, Joe.

Thank you for taking my question.

I wondered if you could tell us whether you think this trend in prepayment penalties was an anomaly in the third quarter or is it likely that we're going to start to see steady increases in prepayment levels?

I think, Mark, one of the reasons over the course of time that we've been reluctant to talk about prepayment penalties is because, one, they're erratic from period to period.

And two, the distribution between what affects the margin and what affects other income is also very erratic.

As this quarter indicates, a very substantial portion of the money that we derived, albeit three times more or four times more than we had earned in the prior quarter, went to other income.

So the margin and the spread did not get any benefit from that.

But having said that, as we go down the road and rates continue to stay above that 4% plateau in the five-year rate bucket, we believe that we will see an increase in the penalty income that we derive over the course of the quarters in front of us.

But it's very, very hard to speculate as to exactly how much will come in any given quarter.

And how much of that will be beneficial to spread and margin versus just other income.

Okay.

And the second question I had for you, Joe, relates to the capital ratio.

I know with the Atlantic Bank deal you had indicated that you would your capital ratio down about 4.5%.

I'm curious, how low would you be comfortable taking that?

Would you go lower than 4.5% if other opportunities presented themselves?

I think the important thing is that, as we indicated in that release, that would be the extreme that we would go to.

The number that we're using there indicates if we, in fact, use absolutely no equity in the deal at all and market conditions may change that number either favorably or less favorably.

I think the important thing in laying out that number was not that that is our target or our expectation but rather that even in the most extreme circumstance we expect that the number would be in that range.

So, we're not looking at this as a targeted position from which to operate.

We're looking at this as; in assessing the pros and the cons of doing a daily, we're very comfortable that even if we went to that low level we would be able to regain equity rather quickly.

We are a cash earnings builder capital.

And I guess the available for sale and the held to maturity adjustment that we get, we had another $6.5 million of that increased capital just from that bucket alone.

Which is not reflected in any of our numbers.

That's a number that is going to be there for the quarters in front of us as well.

So, I think what I'm saying is that we do not have a targeted number down there.

We will build capital and we've been rather diligent at avoiding buying back stock.

In this particular transaction instead of buying back stock we're just not issuing stock.

And virtually we're creating I think great value for our shareholders by doing that.

Thank you.

Thank you, Mark.

Thank you.

We'll move on to tone a question from Tony Davis with Ryan Beck.

Good morning, Joe, Tom.

Good morning, Tony.

How are you?

Good.

On that prepayment issue, can you describe in terms of the percentage of loans what your typical prepayment percentage is throughout a cycle?

Is is it 30%, is it 40%, is it 50% of loans?

And where are you right now?

I think we're well below normal prepayment and in fact, there is no real typical.

In other words, as I was saying, it is rather erratic.

One of the things about the amount of money that went into other income here is the fact that we had a rather large composite of loans that we knew we were going to be refinancing out.

And as a result, that all went into other income.

So, it's very, very hard to actually gauge this.

What I will say is that the inevitable is that we will have more refinancing because of the structure of our loan in the quarters in front of us.

And that's mainly driven by the fact that we've had less in the way of refinancing in the quarters that have passed.

So, we are well below our normal averages with regard to refinancing.

I would just also add to that, Tony, that typically the way our mortgage department works we collect our points.

So no question, if there's a point to be had had we will go aggressively after it and put it into our income stream instead of just throwing it into another structure.

Can you give us any more color on the progression of the margin in the quarter, kind of perhaps where it is today versus where it was July?

I think in the conference call Joe indicated that we're seeing some positive results on the asset side of the balance sheet, no question that the asset yields have stabilized.

Toward the latter part of the quarter it's fair to say that in that this environment, with the five-year above the 4% level, we're seeing some good acknowledgement of higher yields to the asset side.

So that's a favorable event.

The unfavorable event, is obviously short-term rates are rising and we're getting squeezed on the funding side.

But we're very positive with respect to the asset side and we'll deal with the funding side as rates continue to rise and hopefully stabilize over time.

Tony, I'd add to that, that each of the transactions that we've announced recently, substantially do two things.

One, in hard numbers, they add substantially to our noninterest bearing checking accounts and to our core deposit base.

And they have a lower costing of funds embedded in their entire portfolio of deposits.

But two, it also gives us the ability make available in the quarters ahead products that will have similar attributes throughout our branch network.

And that additional capacity to do deposits for small businesses is going to, in fact, help deal with the quarters - - it is very, very difficult for any bank today to ascertain exactly where rates will be.

And the impact over the course of the last several quarters is likely to continue to filter into the deposit base of all banks, where competition for deposits will, in fact, be vigorous.

So, the idea that we're going to be building upon a lower cost structure of deposits is a significant contribution to the quarters in front of us.

Got it.

Thanks, much.

You're welcome.

Moving on, we'll take a question from Rick Weiss with Janney.

I was wondering - - just to the margin for a second.

Maybe could you give a little bit more explanation why - - I guess the asset yields didn't increase on your investment securities during the quarter at all.

It looks like they pretty much flat-lined.

Right, Rick.

That was due to the chew up of the Federal Home Loan Bank stock dividend that was announced after our earnings release went out last quarter.

So we add two quarter catch-up in Q2 versus Q1.

So you have a drop off in Q3.

And we're assuming that rate is going to stay current.

Okay.

Also, I guess with multifamily lending, two questions.

First, loan growth certainly slowed up this quarter.

Is that a normal seasonality thing for you, or - -?

There is a seasonality aspect.

The third quarter is normally a lighter quarter, but as is, I think, been widely discussed, the markets are literally reflecting the back end of a positive credit cycle.

So the mix of risk and reward is driving a less aggressive lending posture for most institutions.

Even institutions that say they're being less aggressive than we are, are lending more than we.

So, we're not lending as much as we could.

Mainly because we believe that the market, as it is currently structured, has a need for very discretionary and very controlled lending.

So as we go down the road, I think that the attributes of our balance sheet, the strength of our loan portfolio, will enable us to become a more aggressive lender as other lenders become less and less involved in the market.

And that doesn't happen until we're actually in a turn in the cycle and there's actual change.

So, as we sit today, we are more than happy with the lending that we're doing.

In fact, we closed more loans in this quarter than we had originally intended on closing.

So, I think that when we look to the markets this is not a time to be overly aggressive.

Rick, I would add, it's Tom that we're holding the line on pricing.

No question that 150 pricing has been our line in the sand.

And we've been getting pricing actually slighting better than that on average.

And when you look at our portfolio, currently we have an overall coupon in multi at 5.25.

Going into year end knowing that the five-year is now above 4%, you add 150 to that and hopefully get some points as we go along that.

That could be very attractive to our balance sheet coupons going forward into '06.

So no question, we're above the 4% level.

This should have a positive influence towards the average yield on the asset side.

Again - - not being - - going back to conservatism, we're still focusing on the funding side.

Funding is being squeezed.

The good news is that we're getting closer to stabilization.

Yes, the margin was down but we expected the margin to be down around this level.

And most likely the margin will be down going into fourth quarter but at a lesser level than Q2 versus Q3.

Okay.

One final question.

If I want to assume that the five-year Treasury is going to go up, goes higher, is there a lag, and how long is that lag before that is reflected in your margin?

Yes, it takes at least 30 day, and more likely 90 days from the time that an individual has actually filed for a loan to the actual closing of the loan.

So if a loan closes on the first day of a quarter, it will be fully reflected in that quarter.

But if a loan closes on the 70 day, there are only going to be 20 days that you're going to get benefit from it.

So from a quarter to quarter comparison the differences could be as much as six months.

From a quarter to quarter comparison depending on what the activity occurred and what the rates were, we could be talking about as little as 60 days.

I can tell you that we've had had had occasion to close loans in 30 or 45 days but those are extraordinary circumstances.

So, I'd say that it is better to consider that the benefits on the lending side will be reflected one quarter after another, more likely by looking at the averages for the preceding quarter.

And then considering what those averages, when you add the 150 to, might be, put that benefit in the next quarter.

Not in the quarter in which the rates occurred but in the quarter that follows.

Great.

Rick, it's Tom.

I would add to that.

The encouraging point is that over the past three-quarters we've been hitting that average in the current quarter.

If you look at the five-year average we've been well above - - not well above but north of 150.

So it's fair to say, modeling the Company's earnings stream, as an analyst, you can take that five-year C&P, assume loan production and net loan growth and picking it up about 150 over the 5 C&C on average for the quarter.

Got it.

Thank you.

Thanks, Rick.

Gentlemen, next we'll move on to Salvatore DiMartino with Bear Stearns.

Hi, guys.

I was on another call and missed most of your comments, Joe, but I have a quick question.

I don't know if you covered this.

Given the two pending acquisitions, is there any change on your strategy on your deposit initiatives?

That's number one.

And number two, with these acquisitions and the core deposits that are coming over, where do you see yourself positioned - - where are you positioning yourself in the marketplace over the next quarter or two on deposits, on CDs?

I think the important thing with regard to the acquisitions, we do believe that each of these acquisitions are going to be beneficial to both the mix of deposits and the cost of deposits.

Therefore, we are being somewhat less aggressive in doing some of the things that we believe will add to our deposit base.

From the standpoint of periodically running favored rate off, we do that based on the marketplace and other factors.

One of the things that the last quarter demonstrates very clearly is; that if we choose to we can pull from the marketplace.

We had a positive deposit flow from every bank that we were matched against over the course of the last quarter.

In some cases, we had a very substantial deposit flow against some of our immediate competitors in the marketplace.

So the ability to compete within the market is, in fact, very rate sensitive since we are well established and we have a better hours than almost everybody that we compete with, of service.

So, I think that we're going to see a realignment of our deposit base in the necks couple of quarters with the expectation that we will build on our deposits in a very constructive way in the period once the New York Commercial Bank has been established.

So, is the - - is it fair to say that deposit growth, given what you just said and given the loan growth, deposit growth will kind of be muted going forward?

I'd say it would be less active in the immediate period, more active in the first and second quarter of next year.

Our intention is not to build deposits for the sake of building deposits.

But rather to have deposits appropriately adding to the mix when we find that an attractive component of our funding costs.

Sal, it's Tom.

I would add to that beginning of the year our projection was around a 9% run rate on growth of deposits.

There's no question that if you take where we are as of the third quarter and run it throughout the year, we'll be at 9%.

I think that that's pretty much the model that we're running internally and we feel comfortable that we're going to achieve that.

That's X acquisition, by the way.

Going into '05, you meant?

That's finishing up '05.

Obvious we haven't talk about '06.

But in our analysis going into the year, we feel comfortable between cash flows of securities and other flows that are - - our loan portfolio, has all of the deposit growth we've modeled approximately between 7% to 9% based on the third quarter numbers.

You run that out to fourth quarter will be around 9% annualized basis.

And I think obviously, as Joe indicated, we were well expected of having a much slower loan growth quarter in Q3, as planned.

Because we had significant growth in Q2, which we funded with very hot money in the brokered market as well as money market arena.

And just getting back to the lending for a second on the multifamily side.

I know, Tom, you mentioned that new loans are coming on at higher rates than the embedded yield in the portfolio.

But I'm just trying to get a sense.

When your lenders are out there talking with customers and talking with the brokers.

With the five-year kind of hanging in there well above four for most of the quarter what's the broker's perception of what borrowers want to do?

Do you guys think this is another head fake, or do they believe this is the real thing now?

Sal, this is such a confusing environment.

We could talk about ten people and six of them today may think it's going one way, and tomorrow, six of them will reverse completely and think it's going another way.

So I think that the uncertainty with regard rates is throughout the entire marketplace.

And, therefore, there is no conviction as of today with regard to the actual moment in which rates are going to change or with some certainty that rates are going to change.

So we are not as of today seeing the kind of activity that is indicative of;

I'm attempting to capture the bottom or I'm afraid of what rates will be two quarters or three quarters down the road that.

That is yet in front of us.

I think that until there is some consistency with regard to the expectations of the market, I don't think that people will be driven by rate.

Of course, there's no question that we've had very sizable movements in our portfolio, as a result of expectations that people are taking off the table, certain product.

And that's where we had this disproportionate amount of other income from penalty income.

Those were loans that were packaged and brought to us on a very short term basis, very good lending on our part.

Very beneficial for us to have short assets, a little over a year, that wound up paying us rather nicely.

But they went away, so they're not reflected in our spreads and our margins.

Down the road we will get more of what is our niche, our core refinancing of the existing cash flows that are building in our portfolio.

As that occurs, we will see more and more refinancing.

Okay.

Thanks.

Thanks, Sal.

We'll next move on to Robert Hughes with KBW.

Hi, good morning, guys.

Good morning.

Did you happen to comment on your loan pipeline?

I didn't see that in the press release.

Yes.

It's actually 1.2 billion.

And we apologize.

It actually was not in the press release.

It's a number that we've always put in the press release.

So it's important that we say it here and certainly make that available.

It's $1.2 billion in the pipeline.

Of that how much is multifamily would you say?

About 81%.

With respect to kind of shift in deposits, maybe you can give us a sense for what the cost of those brokered deposits was that ran off?

And then maybe what kind of CD campaigns you might be running out there now?

I think it was rather mixed.

I think some of the deposits were - - they came into the portfolio at different times, so they had different rates.

And obviously on a go forward basis, when we look at the various campaigns that we're running, we're running some CD programs.

That's why the CD portfolio went up.

Those CD programs are varying between relatively short CDs and 13 and 14-month CDs.

Tom's got some numbers with regard to the actual cost of them.

Bob, I would just assume it's funds plus an 1/8.

So, whatever the Fed fund rate is, plus an 1/8, approximately.

Okay.

All right.

And, Joe, just a clarification on your comment on the dividend, in case I missed something earlier.

I noticed in the press release you said that you were comfortable in maintaining the quarterly cash dividend.

Should we read anything into the use of past tense there, or do you think $0.25 is realistic to sustain given some of the pressures?

I think there's no question that our commitment to the dividend has been very evident over the course of our entire public life.

And when we look at that time period in front of us we believe that we will have more than sufficient earnings to justify the continuance of this dividend.

Our commitment to the dividend is very real.

And our capacity, based on the future earnings streams, to continue paying the dividend is also very real.

So the desire and the capacity are both intact to sustain a strong dividend payment.

And lo and behold although it is you know appropriate to forecast dividends into the future, I think our actions have demonstrated very clearly that we have every intention of maintaining a strong dividend.

Okay.

Thank you, guys.

You're welcome.

Gentlemen, we will now move on to Kevin Timmons with C.L.K.

I missed the very first part of the call.

Hopefully you didn't address this stuff but cut me off if you did.

On the fee income line, I know the prepayments were up substantially during the quarter but the fee income line itself was only up about $3.2 million.

I guess part of that reflects there was a one-time gain in Q2.

Is there any other one-time items reflecting that?

That's right, it's the absence of something that was in 2, I don't remember what the item was.

We had gains on securities in Q2. about $2.9 million. $3 million - - if you carve out 3 million on linked quarter basis compared to Q3.

But no other one-time things in either quarter?

No.

The brokered CDs, can you give ne balances in total brokered CDs as of June 30 and then end of September?

I'd say it was around 400 million.

I think now it would probably about 200.

So that, coupled with the fact that we had some hybrid money market money that ran off pretty actively without us chasing rates, that was the differential.

Keep in mind we've taken about a $100 million cash flow from securities.

We knew our pipeline was going to be much slower than the prior quarter, so our need for funding was not as strong as Q2.

So in Q2, we had a tremendous pipeline to fund and we funded it with both the hot money brokered CDs as well as some fluid money market style accounts.

Kevin, something that a been very common to this last year and a half or so is that a lot of the hottest competition for deposits is in money markets, not in CDs.

And that has evolved over the course of the last couple of years while rates have been extraordinarily low.

So, by example we've had in our market competitors offering 5% for money market accounts, albeit for relatively short period of time.

But those are extraordinary rates, and over the course of the last couple of years there have been competitors in the markets that have been paying rates that are higher than three and four-year CD rates for money market accounts.

So, I think a lot of the competition in this market is in the money market arena.

And that is obviously a very fluid deposit base.

So I think that there's going to be periodic movement there.

And you'll see a lot of that movement within our deposit base as well as others.

I think just to add to that we're going grow deposits as a need to fund our loan growth.

And no question with the expectation of a much slower third quarter versus Q2, knowing we had a significant raise in net loan growth finishing up the end of the second quarter.

With the expectation that we'll meet our targets by year end, we've been targeting all along a certain level of net loan growth.

And there was no way we could sustain the amount of originations in net loan growth that we had in Q2 throughout the remainder of the year.

So, we were cash flow managing our ability to bring in flow in order to fund loan growth.

We're still bringing in about 100 million a quarter, actually a little bit north of 100 million a quarter on securities cash flow.

And it should be consistent.

So, I think the good news there is; on the balance sheet side, our securities initiative is to bring it down.

And we're way ahead of expectation.

Our capital levels, no question stronger than we expected when we did our repositioning.

And loan growth is very strong.

In the press release, when you talk about the money market accounts, you also say NOW, strategic runoff of NOW and money markets.

What do you see in the NOW account base?

Are those not - -?

We just happen to categorize them together.

How much was NOW - - NOW is mostly older deposit types.

There aren't too many programs in the marketplace that are actually featuring NOW accounts.

So, when we use the words in the release NOW and money market, it was basically driven by the reality that they're just packaged in the same place.

Not so much that we were seeing particular activity in NOW.

It is not very low cost.

Okay.

Can you refresh me, the purchase accounting adjustments related to the Roslyn deal, are they pretty much washed out now?

My comment on that - - we have not publicly put a number on - - at the impact on the margin.

That we always reference back to the public filings that we had on the Roslyn deal.

I will tell you that going into '06 what should be left is just the mark on the borrowing side.

into '06 - - going into the next year, will be the borrowings mark to market.

And you can reference back to the S-4 that we filed.

But then that's still providing a benefit, then?

Absolutely.

Unfortunately, it was a significant hit to capital when we took it.

So it comes out of capital, goes back to earnings over time.

Tom, can you address the change in the number from Q3 to Q2?

There's no way I can get at it.

Again, I think what's left now you still have some CDs running off.

And that's going to probably taper off by the end of the year.

And what's left is mostly the borrowings.

I think if you go back to the S-4, you can get a good indication.

In addition to that, as far as the premium to discount on securities, it's immaterial.

That's mostly gone.

In respect to the Roslyn mark.

So, you're really looking at the borrowing side and CDs.

And CDs will be gone most likely by the end of the year.

I understand that.

But the question really is Q2 versus Q3, does the purchase accounting mark have - -

It's around the same level.

a contribution to the change in the margin?

It's around the same level.

We're getting less of a benefit as time goes on.

Okay.

The comment earlier about the margin looking into Q4, you still see decline, obviously won't - - pretty much everybody else out there, but do you see the magnitude of decline as still being double-digit quarter to quarter?

I think what's interesting is that we're pretty close to stabilizing, all depending on how much we bring into the margin on fee income, on refinancing.

But we had a very dismal amount of income coming into the margin this quarter.

And we came in with an expectation.

So, I think we're forecasting rates going up throughout the year.

I think that's the consensus is.

So, we're running with consensus to - - on interest rates, both on the ten-year and the five-year as well as Fed funds rate.

So, we feel pretty confident that the decline will be less than it was in Q2 versus Q3, as indicated in the past conference call.

The good news is that it's slowly going to a lower level.

We started at 30, this quarter was 21, we're going to be down again in Q4.

But we believe it will be less than it was on the prior quarter.

Obviously we're not forecasting the benefits from Atlantic and Long Island Commercial Bank, that will contribute to the margin.

The question is the timing of the transaction closing and the impact on the interest rate environment timing close.

Because obviously we have to deal with the mark to market and that point in time.

No, question we are looking at potential significant benefit in the event our portfolio refis actively.

Having the five-year north of 4%, around 4.25 is very favorable to our asset yield.

We're still challenged by the funding side.

And as Fed funds keep moving up, we're tied to that rate as well.

In the two-year and the Fed fund rate is pretty much on top of each other.

And that's no question, very expensive funding in this environment.

okay.

And finally, I'm asking this because I get the question every time I talk to investors but can you just give us an update on the Co-op City loan and the Co-op City situation resolved?

Sure, Co-op city is doing exactly what we had expected it to do.

There has been continuing progress in improving the facility.

The more important initiative with regard to cogeneration is now under contract.

And the plan is to significantly improve the costing to the overall Co-op by having the ability to sell into the grid a substantial amount of electricity over the course of every single month.

The capacity well exceeds - - I think they're at a maximum, they go about 23 megawatts of power, in use.

And they normally use about 12.

The capacity that is being lined up here is going to be exceeding 40.

So the ability for the Co-op to generate not just a lower cost of operation, but to actually add income to the Co-op's bottom line is going to be better than expected.

We are, in fact, operating with a full lockbox service to Co-op City.

This lockbox service is being serviced for us by Long Island Commercial Bank.

They had an excess capacity.

Turned out that it was an incredibly good benefit to us to use our soon to be partner as the servicer.

And on a go forward basis we will be continuing to add lockbox for other relationships that we're continuing to establish.

So the exciting thing about Co-op City is it fits perfecting into the environment that we are today enhancing with regard to commercial bank services.

And the people who live there are moving ever closer to a point where they have not just a better place to live, but a more efficient place to live.

Both from the standpoint of monthly costs and also from the reality that they're coming closer to the end of the Mitchell Llama program.

On that front Joe, what is the timing of that again?

The Mitchell Llama program I guess would be running off here in another three years or so.

Something in the range of about three years depending on exactly when we close this.

Because the payment of the first $224 million met the obligations of the State.

So that is complete.

Okay.

And all the units will come out of the program at once, or is there some stagger?

That's right, the entire complex comes out at one time.

Okay.

Thank you.

You're welcome.

Next question comes from James Ackor with RBC Capital.

Good morning, Jim.

Good morning, guys.

Was wondering, Joe, if you might be able to tell us at what point will you make it clear or let us know how you're going to finance the acquisition of Atlantic Bank?

I assume that that would have to be made public at some point.

Yes.

I think that we've been having some very interesting discussions with lots of people, both on the equity side and on the debt side.

And because there is opportunity in both directions, I think we'll make that decision when, in fact, we have clarity that the decision we're making is the right one in choosing between the two.

And it will be more likely than not it will be a mix.

But until we actually have all of the information, I think it would be better that we not speculate on that.

Okay.

Fair enough.

Thanks a lot.

You're welcome.

Next, we're moving to Jed Gore with Sunova Capital.

Thanks for taking my question.

And good a quarter, good work on the balance sheet.

I had a housekeeping question and a strategic question.

The housekeeping question is;

I missed the dollar number of prepays that you had in multifamily in the quarter?

And what percentage was fee income and what went into the margin?

It's actually - - 8 million - - no actually we increased the number by 8 million.

But we had about 1.8 go into margin and the rest went into fee income.

The total was 13.2 million.

So 11.4 was in fee income.

And 1.8 was in interest income.

Thank you.

It's a very unusual mix.

Thank you for that.

And then I just - - a strategic question.

Trying to understand the dynamics of your loan growth.

And particularly in the context of one of your competitors is quoted reporting linked quarter growth that was in the high double digits, and you guys were flat.

So, is it the runoff in the securities portfolio and the cash flow from that, that's driving how much you're willing to grow your multifamily loans?

Is it market conditions?

Are guys holding the line on pricing?

I'm just trying to get a sense of this 1.2 billion in your pipeline, what's actually going to close, that you're willing to fund.

I think the 1.2 in the pipeline will close.

But one of the reasons the numbers were different in the third quarter is mainly because we actually originated more loans than we had anticipated.

But we also satisfied more loans than we had anticipated.

So the growth in the portfolio for the quarter, approximated what we were looking for.

Because remember, we were running substantially beyond our expected growth in the portfolio for the year.

You had a great quarter.

Yes, that's right.

So we did not expect the third quarter to be a robust growth quarter.

So, as we look to the period in front of us, depending on market conditions and other factors with regard to our balance sheet; we may or may not be more or less aggressive in lending.

The 1.2 billion though, that's in our pipeline, feel pretty confident that we will actually originate those loans.

I guess my question is around, you mentioned other factors around your balance sheet.

Does that mean the capital is part of your consideration of what you're willing to grow the portfolio?

This is Tom.

I would add that, obviously capital is extremely important to us.

And when we set out the repositioning back in '04, our target at this time was a 5% capital ratio.

We are significantly ahead of that.

Obviously, we're being very focused on being prudent, on maintaining good capital levels in addition to our acquisition strategy.

So as indicated on the Atlantic transaction, we're trying to hold the line at 450 in the event we finance it fully with debt.

So, capital is critical to us.

And no question that we're cognizant of keeping strong capital levels in a changing interest rate environment.

But most importantly the capital allocation that we're currently putting up to the shareholders is in the formation of a dividend.

We're not buying back stock.

But if you look at our peer group, in size, who's doing what and how they're allocating capital; we're probably pretty close on a total allocation of capital towards one capital management plan being the dividend versus the buy back.

We are now well above our target of 5% and rolling into the Atlantic transaction.

We looked real hard at the Atlantic transaction versus buying back stock and we believe that the Atlantic transaction adds a lot of value long-term for our shareholders.

And knowing that, we're going to be very prudent on keeping the capital levels at levels we were comfortable in operating the Company with.

Our tier one at the bank levels are extremely strong.

But going into '06, with the hopefully a stabilizing margin and hopefully a margin that will eventually taper up.

We're pretty bullish on our capital levels.

I think an important thing to recognize is the positioning of the balance sheet in the beginning of next year has been materially positively affected by the two transactions that we've recently announced.

So the ability for us to deal with those opportunities is partially driven by our not being overly aggressive and growing the Company as it stands preclosing of each of those deals.

So the bank is expected, as indicated in our release, to be about $27 billion in size.

That is a significant amount of growth in the Company.

But that $27 billion bank will, in fact, have a significantly better mix of assets and liabilities.

Thanks for the clarification.

Congrats on the deal.

Thanks.

Next from J.P.

Morgan we have George Sacco.

You mentioned in the press release that much of the increase in prepayment fees came from one loan.

How much of the increase came from that loan and how large was that loan?

Yes, what we were talking about there, it was a package of loans that had had been put together and was intended to go into the conduit market.

It was literally with us for a little over a year.

It was probably - - 100 plus million?

$140 million.

Yes, it was about $140 million package.

And we did, in fact, get four points on that.

For a little over a year.

That's right.

Okay.

Thank you.

You're welcome.

Our final question today will come from Matt Kelley with Moors & Cabot.

Hi, guys.

Just to clarify on the capital issue, 4.5% is the level you are seeking to have at the time the deal closes in the first quarter of next year, is that correct?

That assumes a bunch of assumptions.

Obviously, no question that - - depending if we issue straight holding Company to finance this deal, it will bring our capital level to 1.2 billion strength on a combined basis to 4.5% as of March 31.

But again, that was a level that we put out as a typical funding scenario in the event we choose to use debt.

Now, there's significant alternatives besides straight debt to finance this transaction.

We wanted to pose a worst case scenario to capital to our investors to understand that we believe that putting a deal in front of the shareholders with the intention to protect capital at that level was more of our direction.

Now, going into next year this could be a higher number if we use equity or if we use an equity derivative type security.

But we are looking at significant ways to finance this transaction.

And one most important way that we're not going to finance the transaction is take it from the our subsidiary bank, so to protect the bank's capital.

So, no question we will hit the capital markets to finance the Atlantic deal.

Because that - - in the long-term benefit for our shareholder is the best way to go.

If you were coming up with a pro forma tangible book of somewhere around 4 to 4.25, why wouldn't you issue straight equity at those levels, at those types of premiums, tangible book?

In our analysis we looked at this many, many ways.

And no question that at higher levels it's something to consider but not at these levels.

Four times tangible book?

We look at our capacity to earn.

We look at capacity over time to earn on an earnings per share basis.

And obviously our earnings right now are being hampered by the current interest rate environment.

Now, if the market changes we will consider that.

But at these levels - - I think at much higher levels it's something to talk about but not at these levels.

Okay.

And if you could comment on pro forma reserve levels, I mean, with these two deals it looks like heading into '06 you will drop below 50 basis points of coverage on total loans.

Yet the asset mix will become much more commercial bank-like.

A couple of points there.

Number one, in respect Atlantic we have actually took their numbers and we've pro formad provisioning into the run rate for Atlantic.

So they have a pretty good track record over the past few years, as far as the level of charge-offs.

So, we have that embedded in the run rate for Atlantic.

In respect to the combined balance sheet, typically when we buy companies, we look at all the assets, classes of loans that we're uncomfortable with owning.

And if it's not going to hamper the deposit franchise, we will probably opt to transact and sell in the open market assets that we're uncomfortable in holding.

To build a better reserve ratio to the total asset - - to total loans.

Matt, when you plook at the holding Company's total loans, it will include the mix of assets that are in the community bank as well as the assets that are in the commercial bank.

So as Tom is indicating, we'll be reserving in the commercial bank but we will not be reserving in the community bank.

Mainly because the community bank has had such a minuscule amount of is losses over the course of many, many years now.

So I think that the reserving that we will be doing will be more than adequate against the actual assets for which we're reserving.

And as Tom said, to some degree we may actually move assets out.

And in the past with other transactions that we've done, we've actually moved out the assets that we perceived to be the potential greatest risk.

And therefore we've not been burdened by those losses, nor has our reserve been charged for any of that.

Would it be fair to say at the time you make an announcement on your - - the way that you intend to finance the deal you'll also make a final announcement on what's actually going to come and the decisions you'll make on asset selections?

I would say no because obviously we - - everything gets mark to market, number one.

So, everything is at the market when we close the transaction.

And we're going to look at classed that we're uncomfortable with and we'll look to see if assets that we can move efficiently and effectively to the marketplace that we're uncomfortable holding, we'll turn to the cash.

And most likely plow into other forms of lending.

It could be on the thrift side, it could be on commercial bank side.

But we're a risk averse Company and we're not going to take on assets that we're uncomfortable in holding.

So, that's a process that typically goes on after closing.

Occasionally if there's, for example, if they add large pool of one to four family loans, which they do not have, we might have been in the securitization mode already.

But that's not the balance sheet makeup of both Atlantic as well as on Long Island Commercial.

So, somewhat a little more unique as far as the commercial aspect of it.

But we'll look at all the loans.

Okay.

And finally, I know in that some previous conversations, you've kind of talked about net balance sheet growth in the mid single digits just on an organic basis.

Is that still a number that you think is reasonable up until the time that these deals are about to close?

I think that's fair to say.

X out Long Island Commercial Bank, that's coming on in the fourth quarter, we're going to grow at that mid level for the year.

Obviously, it's more growth as we're taking on Long Island Commercial.

But if you take out the acquisition that's a fair assessment.

And going into '06, it's too soon to tell.

Depending where interest rates are, I'm not sure if the industry is going to grow at all.

But if interest rates become more attractive to us and the environment is more indicative to growth, then we'll choose to grow.

Capital levels, no question, are where we're focusing on right now.

To maintaining strong capital levels to sustain our dividend capacity and also to manage the bank prudent in a changing interest rate environment.

And then the 27 billion number that was mentioned earlier in terms of the pro forma asset size, that's pre kind of a sale of securities and pay-down of borrowings?

That's net.

If you take Long Island Commercial and us we're about 26.2, 26.3.

If you put on Atlantic, about 3 billion, take out 1.3 billion, on a pro forma basis it's somewhere in the low 27's.

Our target is approximately 27 billion.

Because we're going to take any additional cash flows and most likely pay off wholesale fund and go off high cost money that's dragging the margin.

Okay.

Thank you.

You're welcome.

That does conclude our question-and-answer session.

I'll now turn the conference over to Mr. Ficalora.

Please go ahead, sir is.

Thank you again for participating in this morning's discussion.

We appreciate the opportunity to discuss what we believe are our strong prospects for the future and the actions that we have taken to position ourselves to meet the challenges and the opportunities that no doubt lie ahead.

Thank you for your interest.

And that does conclude today's conference call.

Thank you for your participation.