Flagstar Financial Inc (NYCB) 2005 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the New York Community Bancorp fourth quarter 2005 earnings conference call.

Today's call is being recorded.

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

Please go ahead.

Thank you.

Good morning, everyone, and thank you for joining the management team of New York Community Bancorp for today's discussion of our fourth quarter 2005 performance and strategy.

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

Also with us on the call 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.

These 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 markets, and changes in competitive pressures among financial institutions or from non-financial institutions.

In addition, our comments will include certain forward-looking statements regarding the impact of our recent transaction with Long Island Financial and our prospective acquisition of Atlantic Bank of New York.

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

You will also find in this morning's release a reconciliation of our GAAP and cash earnings and our GAAP and operating earnings on pages 14 and 15.

If you would like a copy of this morning's release, 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 for this morning's discussion of our fourth quarter performance and the actions we have taken to further strengthen our balance sheet and our earnings capacity.

Before I begin, I'd like to welcome those of you who have joined us through our recently completed acquisition of Long Island Financial.

We are very pleased to welcome our new shareholders, our new customers, and our new colleagues and to let you know that Long Island Commercial Bank has successfully made the transition into New York Commercial Bank.

Today's discussion will focus primarily on five aspects of our Company's performance, the improvements we've made to our balance sheet since June, 2004, which have been substantial, the impact of the flattened yield curve on our margin and the anticipated benefit of our pending transaction with Atlantic Bank of New York, the strength of our tangible capital and the contribution of cash earnings, our ongoing commitment to maintaining our quarterly dividend at the current rate of $0.25 per share, and our commitment to the fundamental components of our business model, multi-family loan production, asset quality and efficiency.

To begin, I'd like to take a brief look back to review the real improvements we have made to our balance sheet over the past six quarters.

As you know, in June, 2004, we embarked upon a series of actions to enhance our market and interest rate risk profile in the face of increasing interest rate volatility.

To that end, it was our intent to reduce our securities to 25% of total assets by the end of the past December and to use the cash flows from securities to grow our loan portfolio.

It was our intent to diversify and expand our sources of funding by reducing our wholesale borrowings and to expand and diversify our deposit base.

Our year-end 2005 balance sheet tells the tale of our progress.

At December 31, 2005, securities totaled $5.6 billion, represented 21.4% of total assets, a reduction of $8.2 billion or 60% since the end of June, 2004.

Loans totaled $17 billion, representing 65% of total assets, and were up $5 billion from the balance recorded at June 30, 2004.

The increase in loans largely reflects the record volume of organic loan production with originations totaling $9.2 billion over the last six quarters, including $6.3 billion in the year 2005.

Multi-family loans accounted for 73% of our total 2005 loan production and represent 1.3 billion, or 86% of our pipeline.

Wholesale borrowings totaled $9.7 billion at year-end, signifying a $5.4 billion or 34% reduction, while deposits totaled $12.1 billion, an increase of 1.7 billion or 17%.

The increase in deposits reflects, not only the acquisition of Long Island Financial which contributed $426 million in total deposits, but also a combination of in and out of branch deposit growth.

The out of branch deposits included brokered, negotiated, premier banking and online banking deposits.

Upon completion of our transaction with Atlantic Bank, which is currently on track for this quarter, we intend to reduce our highest cost sources of funds.

Accordingly, you may expect to see a reduction in higher cost negotiated deposits and wholesale borrowings while the transaction has taken place.

While the infusion of Long Island Financial's and Atlantic Bank's low cost deposits will enhance our mix of funding sources, we also expect it to help stabilize our net interest margin in the quarters ahead.

At September 30, 2005, Atlantic Bank had total deposits of approximately $1.8 billion, including core deposits of approximately $1.5 billion.

Non-interest-bearing deposits accounted for approximately $532 million of total deposits, representing 29%.

In addition, the loans we expect to acquire with Atlantic Bank tend to be higher yielding assets, reflecting the combination of lower cost funds and higher yielding assets.

Their last published net interest margin was 3.37%.

Our fourth quarter margin, by comparison, was 100 basis points lower at 2.37% Atlantic's margin includes a very high volume of low yielding investment securities.

While our margin experienced pressure throughout the year, as the 200 basis point rise in short-term interest rates resulted in a steadily flattening yield curve, the magnitude of our margin compression has declined steadily over the past nine months.

Although our financials now include $1 billion of extended wholesale borrowings and more than $1 billion of negotiated deposits, each with a cost of funds exceeding 4%, the cost of the new deposits we expect to acquire in the Atlantic Bank transaction is approximately 200 basis points less.

Thus, while we would expect to see continued margin compression in the current yield curve environment, the degree of compression is expected to be tempered by the Atlantic Bank transaction as well as by our continued shift to core deposits.

Another factor that has contributed to the compression of our margin has been the absence of any real refinancing activity in the multi-family lending market.

As we indicated in the release, prepayment penalties contributed $9.6 million to our 2005 interest income, a significant decline from $16.6 million and $31.9 million in 2004 and 2003.

Today we have the highest volume of re-financeable loans in our history.

Despite the decline in prepayment penalties, our yield on loans has increased in each of the past two quarters, a positive trend.

With an expected weighted average life of 3.3 years at the end of December, a good portion of our multifamily loans may be expected to refinance in the future, especially when a steady and meaningful rise in five-year interest rates is perceived to occur or ultimately with the scheduled repricing within our loan structure.

As of this date, we already have exceeded the full quarter's penalty income that we collected, and that is just a couple of weeks into the new year.

The same factors that contributed to the pressure on our margin contributed to the pressure on our earnings in 2005.

The Company recorded operating earnings of $70.9 million or $0.27 per diluted share for the fourth quarter and $326.1 million or $1.25 per diluted share for the full year.

These amounts exclude the impact of a merger-related non-cash after-tax charge of $34 million that was recorded in accordance with SOP 93 - 6.

A similar charge was recorded in connection with each of our previous mergers and reflects the merger-related allocation of ESOP shares.

While the charge reduced our fourth quarter diluted GAAP earnings per share by $36.6 million on a pretax basis, this amount was added back to tangible capital at the close of the quarter, along with certain other non-cash expenses that were incurred over the three month period.

As a result, while our GAAP earnings totaled 36.9 million or $0.14 per diluted share in the fourth quarter, our cash earnings totaled 79.6 million or $0.30 per diluted share.

In other words, our fourth quarter cash earnings contributed 116% more to tangible capital than our GAAP earnings alone.

In no other quarter has the distinction between our GAAP and cash earnings been more substantial or more indicative of the contribution that cash earnings represents to our tangible capital strength.

Of course, tangible capital represents our ability to pay our dividend and to grow both organically and through transactions.

The significant contribution of cash earnings to tangible capital should not be ignored.

At December 31, 2005, we reported tangible stockholders equity of $1.3 billion, up $110.2 million from the year earlier amount.

The 2005, 2004 balances were equivalent to 541 and 539 of tangible assets, excluding net unrealized losses on securities.

As we stated in this morning's earnings release, the growth in our tangible equity was fueled by 12 month cash earnings of $354.2 million.

When you add the cash earnings produced in the trailing year and a half to our 2005 cash earnings, you're looking at accumulated cash earnings of nearly $1 billion over the past 30 months.

These amounts are both significant and important to remember given that the amount of our dividend payment is based on the cash earnings we've produced, not only in the quarter, but also over this extended two and a half year period.

While the current rate environment will continue to pressure our earnings, we remain committed to maintaining our dividend at the current rate.

We expect that commitment to be supported by the strength of our cash earnings, which in turn will be supported by the strategic actions we have taken and will continue to take in the year 2006.

While the addition of a commercial bank platform represents an expansion of our business model, the fundamental components of our model are essentially unchanged.

We continue to be focused on multi-family lending and on the maintenance of stringent credit standards.

And we remain intently focused on operating with great efficiency.

Accordingly, multi-family loans represented 76% of total loans at the end of December, having risen 31% over the course of the year to $12.9 million.

Nonperforming assets represented 0.11% of total assets at the end of December, reflecting a linked quarter reduction of $6.8 million or 19%.

Excluding the non-cash merger-related charge from our fourth quarter 2005 operating expenses, our operating efficiency ratio for the quarter equalled 32.20%.

While 2005 was a difficult year, we reached its end a stronger institution with a higher quality mix of interest-earning assets and the expectation of soon achieving a lower cost mix of interest-bearing liabilities.

While the yield curve remains a challenge, we believe that the actions we have taken, including the additions of Atlantic Bank and Long Island Financial, will serve us well in 2006.

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

We will do our best to get to everybody.

But if we should miss you, please feel free to call either later today or during the course of the week.

We'll take questions now.

Thank you, gentlemen.

The question and answer session will be conducted electronically.

If you would like to ask a question, please press the star key followed by the digit one on your telephone.

For those of you joining us on a speakerphone, please remember to turn off your mute button before signalling for a question.

Once again, if you would like to ask a question, please press star, one now.

We'll take a moment to assemble our roster.

Our first question comes from Bear Stearns, Sal DiMartino.

Good morning, Sal.

Hi, good morning, guys.

Sorry about that mute button.

How are you, sal?

Good, Joe.

Couple of questions.

First on the balance sheet.

Can you help us out given this quarter's results?

How should we think about the balance sheet over the next couple of quarters, specifically in terms of the liability structure?

That's the first question.

The second question is are you willing to share with us what the margin progression was throughout the fourth quarter and also are you willing to share with us Long Island's margin when they came on?

And then a question on the pipeline.

I was actually pleasantly surprised with the originations and the pipeline.

And I was wondering if you're beginning to see any sort of new business or fallout from the Sovereign ICBC field.

I know in the past, when other multi-family lenders like Republic or Bayside Federal were acquired, you guys tended to benefit.

I think, answering the last question first, clearly we are lending within our niche.

We're clearly very pleased with the availability of quality product.

No question Independence's numbers look very different than our numbers.

And that could easily be a positive contribution to our opportunity.

With regard to Long Island Financial, we just don't have what their number was.

Sal, I would say it's consistent with the Atlantic model, significantly higher than where we are at 237.

So that should be additive towards the margin going forward.

And, Sal, respect to the balance sheet, just to give you some color there, we have been actively looking at extending our liabilities in this environment.

We pushed out approximately $1 billion over the past three or four weeks, at an average rate of 399 with a weighted average call date of approximately 2.5 years.

Obviously that's cheaper than short-term money, but we are extending that out.

As Joe indicated on the conference call, we were going to expect to paydown the highest cost of money when we close the Atlantic deal, which would be a form of various forms of financing, either retail, wholesale or whatever we have opportunities for at the highest cost.

The direction would be to extend out some liabilities because the curve is relatively flat.

And we're looking at balance sheet growth somewhere, I'd say, the high single-digits, excluding acquisition.

I think one of the other things that's important to think about is that with the addition of a commercial bank platform, the mix of deposits does, in fact, shift toward core.

And that is something that we would like to introduce throughout the whole bank, not just in the isolated Commercial Bank.

And, Joe, did I hear you correctly during your comments, prepenalty income?

Yes.

So far in January exceeded the fourth quarter levels?

Yes.

That's correct.

That's everything?

It's the income and the part that goes to interest income?

Correct.

Okay, thank you.

You're welcome.

Our next question comes from Janney's Rick Weiss.

Good morning.

Good morning.

I was wondering if you could talk a little bit about how the competition still looks with regard to the multi-family lending.

I think there's no question that this is continuing to be a highly competitive environment.

There are lots of people playing in this arena, as has always been the case.

There are some differences, I guess, as everybody talks about or would expect, and I haven't really heard directly from Allen, but I suspect that they're doing things somewhat differently than they had historically.

The good news, I think, for us is that the niche that we're in is allowing us to get access to high quality property owners and properties that we find very attractive to add to our portfolio.

Joe, are any competitors getting discouraged because their spreads are different now than they were, say, two years or three years ago and dropping out of the market?

Other than Independence , I'm not aware of anybody else that is changing what they're doing.

We don't see that much from others other than Independence.

But I'm not aware of anybody else that would be changing what they're doing with regard to spreads.

When you think about it, the rates that we're doing multi-family loans at, our niche, I'm not talking about other people, our niche, we're getting better returns on our assets today than we were getting a year ago or two years ago or three years ago.

So this is a very good environment for us to be lending on quality properties.

And then another question.

I was wondering if you could give any kind of thoughts on how the Atlantic Bank deal will be financed.

Yes.

Rick, it's Tom.

I would say that commonly we had the $1 billion shelf in place and it's effective with the SEC.

Obviously, as we get closer to closing the transaction, which we expect to close sometime towards the end of the quarter, we'll make the prudent decision on how we're going to finance it.

We've said publicly something between the debt and capital markets and the equity amount.

Somewhere in between will probably be the mix, but we haven't defined exactly where we're going to go with that until we get more closer to the closing of the transaction.

I think one thing that we might be able to say, Rick, is that it is improbable that we would be going to do a public offering of equity.

The chances are far greater that we would take large blocks or partner with regard to any equity that we're going to raise.

We're not going to go into the market and raise equity.

Okay, thank you.

Next in our queue is Tony Davis with Ryan Beck.

Good morning, Joe, Tom.

Hi, Tony.

How you doing?

Fine.

Fine.

Listen just a few things on the deposit side.

Any new developments, Joe, on the National Bank of Greece 365-day in deposit relationship?

No.

No new developments.

The last communication that we had with their CEO was that they were intent on maintaining their relationships with us.

We're not aware of any change in that deposit base at all to date.

And we have people that are very involved with responsible parties both in Greece and here, and the general sense I get is that we're going to likely do better than any of the projections that we had put out previously with regard to Greek deposits.

Okay.

Even if you take the Long Island balances out, I think you did, like, almost 20% annualized deposit growth here in the quarter, linked quarter.

Can you talk a little bit about some of the new deposit initiatives, Joe, and also what, if any, you've accumulated in the public sector at this point?

In the public sector?

What do you mean by that?

The state, municipal, public deposits.

Oh, I see.

Actually, given the -- what we're doing is we're closing down the municipal.

Over the course of this quarter we've been closing down our limited purpose commercial bank for the purpose of establishing our deposits with both Atlantic and Long Island commercial combined into New York commercial, so we really have no meaningful benefit from those deposits other than the state and city funds that were received by us, and that was many months ago.

So that is on the horizon.

Many of the things with regard to deposits are clearly out in front of us and not reflected in the quarter that we've just ended.

Tony, it's Tom.

I would say that Long Island commercial, the new New York Commercial Bank is very active on the municipal side to its new partner.

And they've brought over a team that managed the municipal book, and we've taken over those deposits as well.

To have the old municipal limited purpose bank is irrelevant compared to how we are going to go through the New York Commercial Bank to establish that.

That's just with the Long Island Commercial Bank franchise.

Then rolling into Atlantic, we'll have more opportunities there on the municipal side.

Finally, just any color you can give us on deposit pricing trends in your various borough markets, guys, in light of all the M&A activity right now?

I'd say, in light of the M&A activity, I don't know that there's been any difference in the deposit pricing, but there is clearly aggressive deposit pricing within our markets and that comes from the existing players.

The guys that are a little different than their historical stance might be Chase or City.

B of A is obviously a real player in this market.

But B of A has not been an aggressive deposit gatherer with regard to rate, mainly because they have other issues that they're dealing with.

I think from the standpoint of the markets generally, deposits are aggressive and also the deposits on the asset side is also an aggressive thing.

One of the good news aspects of what's going on with our deposit flows, however, is that, as has always been the case historically, we gain a fairly substantial amount of deposits from the transition of a thrift into North Fork.

And in the case of Green Point, we have been gaining more in the way of deposits over the course of the last many months, exceeding all other banks, that one bank alone, exceeding the next five banks combined.

There is a positive flow of deposits to us from some of the immediate players within our market which isn't so much rate driven as it is change in Company.

That's a good thing.

And then I guess, in the past, there's often been circumstances where those kinds of changes have resulted in opportunities for the remaining players.

This just happens to be an ongoing positive to us.

Thanks for the color.

You're welcome.

Next with a question is Mark Fitzgibbon with Sandler O'Niell.

Good morning, gentlemen.

Hi.

First question, I wondered if you could share with us what the average initial yield on the multi-family loans were you booked this quarter?

Mark, it's Tom.

We're still coming in at 150 over on average.

We're trying to hold that line.

Our offerings are never less than that, but it's been pretty much a flat curve all along.

So, we are putting them on about 150 off the five-year CMT.

Going into -- looking at the model of growing the balance sheet, we're holding pricing.

We're not going below that level.

And then secondly, I'm trying to get a better sense.

You'd made a couple comments about the margin with Long Island Financial in there, and it's unclear to me, are you suggesting that the margins should continue to come down a little bit here in the first quarter?

Mark, I guess what we are saying in that no question over the past nine, actually the past year, we've had declines in our margins starting from 30 bps down to 21 down to 15 now on a linked quarter basis.

We'll have another decline this quarter, but we're hoping to see the continuing trend worth less each quarter, and these two commercial bank transactions should add, will add to the second quarter margin.

However, obviously, you're predicated upon the impact on the Fed movement where we've been extended some significant liability to lock in some reasonable funding over two to three years.

I think we're getting close to the tail end of stabilization.

As indicated in the prior call, we said we'll be down in Q4 but less than Q3 and that's what's happened.

I think you're probably looking at something similar in the first quarter of '06.

But as far as the magnitude it's somewhat early, but we are hoping to be less than the prior quarter.

The last question I had for you is on acquisitions.

I'm curious how much capacity you think you might have to do these sort of deposit-rich kind of acquisitions during '06.

I think there's no question that, depending on how things evolve here and what we do with regard to capital, we should be very well-positioned to have favorable opportunities to acquire banks within our market.

It doesn't mean we're going to acquire everyone within our market.

It means that, when there are circumstances where we can do accretive deals, we'll go ahead and do so.

But until a particular transaction and the alignment of the stars, it changes from one quarter to another.

The alignment of the stars between various players is not something that is easy to anticipate.

The reality is that we are constantly aware of the marketplace.

We are constantly positioning ourselves and dialoguing with parties so as to be in a position to take advantage of opportunities when they arise.

And sometimes it's a matter of just having the wherewithal, the available partners, to make a good deal a reality, even though it might not seem, on the surface, like it's something that could happen.

So I think, when you look at the deals that we've recently announced, each of those deals have extraordinarily favorable metrics to the ongoing Company.

All of the deals that we have done always reflect strong metrics to the next investor.

So the opportunity to change our numbers dramatically by the environment we're in today is driven by the reality that somebody may decide that it's time to combine.

And if we do that under the appropriate terms, that will be a major plus for the Company.

Thank you.

You're welcome.

Next is James Ackor with RBC Capital Markets.

Couple of quick questions for you.

I was wondering, first of all, if you might comment on what, if any, purchase accounting adjustments you expect to make with these two transactions?

Not necessarily specific numbers but just general magnitude if at all.

I was also curious about what your one year GAAP position was at the end of the quarter.

And then also, Joe, if you might just comment broadly speaking on, not necessarily NYB specific credit trends, but maybe just general credit trends in the multi-family market as you see them.

Sure.

Jim, it's Tom.

The first question was regarding the PA accounting on LIC fee.

That was significantly immaterial. $500 million in total assets, it's going to be insignificant.

As far as Atlantic, their balance sheet is a very -- priced to the market more or less.

There's not going to be a whole lot of PA accounting adjustments there.

Roslyn was a different type of transaction.

They were structured as being significantly asset sensitive, we were liability sensitive, so the mark was material.

Both of these transactions should not have a material impact to '06 on the purchase accounting side.

Okay, great.

With regard to the marketplace, as has always been the case, and we have multiple cycles that we've been through, our assets perform differently than the loans that are out there broadly.

However, I think that we've been in a very positive credit cycle for an extended period of time and that there are many reasons why this cycle is going to turn.

The metrics that drive a turning cycle are at historical extremes here.

So when the cycle turns, and it may start with credit cards, and it may start with auto loans, and it may start with loans that are pressured because of a variety of economic reasons and also interest rate reasons, it will ultimately evolve into the entire market.

How fast that happens, I don't know.

But will it happen?

I think it's inevitable.

And I guess the point that I would make there is that we have -- since the time we became a public Company, we've recognized that the credit cycle turn represents the greatest distinction between our asset base and the asset base of the people we compete with, and we look at that as potentially the best opportunity to realign the stars to create value for shareholders.

Jim, in respect to the GAAP, my expectations right now is that, obviously, going into the Atlantic transaction we should get a significant benefit there.

As I indicated on the conference call, we've extended out some liabilities.

We actually did our first blended extension transaction with the Federal Home Loan Bank.

We picked up about 110 basis points in that transaction.

That's a new program offered to their member banks.

We will actively pursue that in the course of the next few months.

So I would say we're going to be up from the prior quarter this closing at 1231, but probably significantly lower come closing of Atlantic.

I'd say our pro forma GAAP with Atlantic is probably more in line with the September levels.

I'd say maybe high single-digits, which is typical for the Company.

We run it around between 8 to 10% on a negative side typically is where we run the Company because of our anticipation of refinancing on the multi-family side.

It's very difficult to expect the level of cash flows in the multi-family book of business and it could be material in any quarter.

That number is going to really be the one that would be in question going into '06, but we feel pretty optimistic in the back half of '06 in respect to re-financing.

That is going to, I'd say, sell in the hight single-digits on a negative side.

Okay, good deal.

Thanks for taking my questions.

Sure.

Next in our queue is Kevin Timmons with C. L. King.

Joe, I think you mentioned the margin at Atlantic for the most recent margin, I missed it.

What was that again.

100 basis points higher than ours, I think 337.

337 was the one that we had.

And I think what we also said that that also assumes substantial amount of low yielding securities that we expect to restructure, so that will also be a benefit as well.

Related to the last big acquisition, you're going to use some of the excess funding effectively to paydown higher costs of borrowing, CDs, whatever.

About what is the magnitude of that paydown do you expect?

Yes.

It's easily between 1 billion and 1.4 billion.

Keep in mind we're also going to -- it's not just a deposit base, we're restructuring the securities.

With the securities cash flow on both sides of the balance sheet, we'll have opportunities to paydown the highest cost of money.

Right.

Right.

Because right now I'd say, without any personal accounting, that would be a negative carry.

Okay.

The timing of the close, you're looking at the very end of the quarter pretty much for Atlantic?

Pretty much, yes.

I would say that, regardless of whatever the actual dates of availability, we typically look to close on the end of the month.

And in this case, it would be the end of the quarter.

It would be obviously beneficial to Q2 and beyond.

Again, I know that you won't know this real answer for a while yet, but do you have an order of magnitude of the amortization that will be hitting the books beginning in Q2?

Regarding?

The CDI for Atlantic.

It's going to be pretty [glim], right now it's about 3% for the loan commercial there, commercial banks.

I'd say around 3% of core.

Core deposits.

Okay.

On your deposits, in total deposits that you're looking at, can you tell us what happened with any kind of brokered or similar deposits during the quarter relative to Q3?

Kevin, I would add to that we're up on the negotiated side, as Joe indicated, but obviously we have significant loan growth, so we're going to fund either through the broker market or through the other negotiated types of instruments as well as borrowings.

We're trying to get away from increasing the borrowings side.

However, we probably put on maybe 3 to $400 million of additional brokered money with the expectation that that will be paid off.

So it's all short-term with the anticipation of closing of Atlantic.

What is the total brokered roughly at this point?

Negotiated, whatever you want to call it.

I think, if you take the negotiated items, it's probably 1.8, 1.9 billion.

It's about 1.2 billion.

Your Internet banking efforts, where do you stand there?

Do you track total deposits?

I think what we're looking at is we are looking all of those as part of the same thing.

They're all, premier banking, brokered deposits, negotiated deposits, it all comes in at a higher cost than other deposits, but it does represent an available source of funding that makes sense in specific circumstances such as we're facing today.

So 1.2 billion includes all of that?

I would tell you that we also have the opportunity, obviously, with the cash flow to pay off the either/or.

We can pay off the advance book that's coming due and/or the highest cost of money.

Right now, short-term money's in the highs 4 and we are locking in long-term money -- we just did $1 billion at 399 for an average life of -- actually averaged to the call of 2.5 years.

Those are opportunistic moves for our balance sheet right now, where we are positioned.

We'll have flexibility when we close Atlantic to paydown some debt and/or paydown the most expensive source of deposits.

The point of the question was how to get at what the real core [reachable] deposit base is doing.

You mentioned that your pricing on the multi-family originations remains about 150 over.

Right.

Has there been any other meaningful change to any other terms?

No.

Actually, the obvious availability of higher yielding assets does come from the commercial business as well as some of the other lines that we have existing in the Community Bank.

So our niche business hasn't really changed at all.

Okay.

And finally on financing the Atlantic deal, you mentioned ops, you've got the shelf with a bunch of different options there.

It sounds like you do anticipate that there will be some equity component to that, just not a public offering.

What I would say, Kevin, is that no question.

The shelf's in place.

We have some good flexibility right now.

We will time this accordingly with the closing of the transaction.

If the markets warrant a compelling opportunity on either/or side, debt or equity, we'll transact.

But no question, we went to the public markets with the expectation of doing an all debt deal worst-case scenario, and that's still out there, and rates are still relatively low.

We have good positioning in the marketplace right now.

We'd love to see a much higher level on the equity side to issue, and that's something that we'll weigh down the road.

But we still have the ability to issue $400 million in debt tomorrow at a reasonable price that makes sense for this Company and capital levels will still be very healthy.

Our AFS portfolio is substantially lower than where we were a year ago.

So we don't have the capital markets risk on the investment side.

We're very comfortable down here.

Again, we've taken our capital levels at lower territory to acquisition.

Over time, we believe when the market changes and our model starts to react to a growing earnings stream, we'll start building more capital.

So the answer there is that today it would be debt.

I'd say we're still flexible.

It's a combination of both.

It's too soon to tell, but I think we have the flexibility of doing a number of things in accordance with our omnibus shelf.

Thanks a lot.

Moving on now, we'll take a question from Thomas McGovern with Lehman Brothers.

Good morning, guys.

Morning, Tom.

Just to switch gears for a minute, I noticed that your construction loan portfolio declined on a link quarter basis and Bank North on their conference call had said that they were seeing strong repayments in construction loan portfolios because the houses were selling very quickly.

I was wondering if you were seeing similar trends and, if so, how long you think those trends would persist and what your general outlook is for the demand for newly constructed houses.

I think there's quite a difference between the various players.

Within our market there is a very, very strong demand for the houses that are being built by the people that we lend to.

We lend to very large community builders.

We don't do one family houses on a one-on-one basis.

So those houses have had very strong desire to get financing in the markets over the last several years.

We don't do end loans.

So we're not subject to some of the issues that other lenders might be subject to.

Our guys are the actual developers who in fact have, in most cases, multiple parties that are standing behind the acquisition of the house.

So they're moving their properties very, very quickly in any event.

We're not seeing that much difference there.

I would also add, it's Tom, that Prime Rate's up quite a bit now, so financing their deals are more a -- the best use of capital.

If you look at what's happening with some of our builders, they're very wealthy families that have a lot of money that can do a lot of these deals without financing and Prime Rate is at a much higher level.

You have that dynamic going on in our marketplace.

We're sticking to the same pool of families that do very good construction lending in our marketplace.

Great.

Thanks a lot.

You're welcome.

Next we have Duping Lee with Hanner Capital Management.

My question has been answered.

Thanks.

Thank you.

Our next question then comes from Bob Hughes with KBW.

Good morning, guys.

Good morning, Bob.

On the multi-family pricing, I know you indicated that you're still achieving sort of 150 over at origination.

I'm not hearing of anybody else in the market achieving that level of pricing.

Just to be clear, that doesn't assume some level of prepenalty income over the life of that loan and a higher -- ?

Bob, it's Tom.

What I would tell you that we've held the line at 150.

We're getting our business done at 150 and that excludes any refinancing points.

What we're seeing is that a lot of money is going into the longer term paper, which is not the market that we play in.

We tend to offer predominately five year structure and occasionally some seven year paper.

The ten-year market is extremely tighter than the five-year and the seven-year market and it's an arena that we do not playing.

Bob, if I may, one of the things that has been consistent about us, and this is not in the last quarter or even the last year but it's over the last many years, is that there is a consistency with what we do that doesn't necessarily reflect the market as a whole.

So many times exactly what we're doing isn't exactly what the market broadly is doing.

So I think the fact that you hear different things about what we're doing versus others is something that is going to likely be more common, in particular on ago forward basis, as the credit cycle turns and as people are rethinking where they want to be in their asset portfolio.

Bob, it's Tom again.

Just to give you color for the quarter, just on average, we put on our spread for our loans around 160, 162 over for all our products.

We're hitting that bogey and we're comfortable there.

In light of the funding side, we're getting squeezed on the funding side.

Asset yield is stabilizing but the funding is the challenge going into '06 and that's our focus right now.

No question we'll put on the spread off the five-year, but dealing with the cost of fund is where we really have to make sure we can stop the pain there.

That's where, no question, is the area of opportunity for us going into '06.

Okay, Tom.

As a follow-up, can you give us a sense, maybe -- your fourth quarter production what percentage was five-year versus seven-year product?

What percent are IOs?

We don't do much IO at all.

I would say the vast majority, I would probably the super majority is all five-year paper.

Okay.

And LTVs and debt service coverage consistent with where they have been historically?

Yes, I think it is in the press release, 60% on multis, around there?

The average for the portfolio is about 61%.

No, I understand.

I'm talking about the production during the quarter.

Yes.

I think the production during the quarter probably is a little higher than the portfolio.

That's why the number moves.

It shifts with each quarter.

But the reality is that we are seeing a good deal of product that matches exactly what it is that we'd like to have in our portfolio, so the people that we lend to, we're lending at LTVs that make a great deal of sense to us because of exactly how they handle the property as soon as either they refinance it or they acquire it.

The good news for us right now, Bob, is that a lot of our loans are properties that are being purchased, and they're going in and changing the cash flows on those properties as the two or three-year period evolves, there by having an opportunity to come back and virtually get more money.

I think also, Bob, if you look at the average yield in the multi-family right now, for our book it is around 520, 523-ish.

That's still below 150 over the five-year CMT in this marketplace.

Any new business we do should help that overall yield on the multi-family book.

As Joe indicated in the conference call, over the past two quarters we've had some increases in our asset yield.

Yet they're not material, but we stabilized the asset side.

Now we need to focus on the liability side.

What should we be assuming for an effective tax rate for 2006?

I'd say around 32, give or take.

I know we had some discussion last quarter about the impact of Roslyn purchase accounting adjustments.

Did that have a bearing on your margin compression this quarter and to what extent do you expect that to impact the margin going forward?

We don't disclose the extent, but it still has a bearing on it.

No question the prior year's was much more the benefit.

The benefit's significantly less, and we'll have that hanging around probably up until '08, predominately geared towards the borrowing book that we've acquired.

All the way through '08?

The borrowing book.

In otherwards, if you go back to the original deal we did with Roslyn, the Federal Home Loan Bank advances are typically long-term advances and we have to recognize that benefit, so that's what's predominantly left in the entire purchase accounting of Roslyn.

Everything else has burned off.

The burn-off has materially impacted the margin on a comparative basis because we had so much benefit in year one and two, that is now dissipating significantly.

Final question.

Just on the size of the charge this quarter.

That represents a little more than 50% of the total LIC fee transaction value.

It's really more than I expected.

Actually, this is consistent with every deal we've done historically.

Any deal we do for the Company our ESOP Trust has to release any accumulated dividends.

Accumulated dividends are the shares that are paid to the ESOP Trust that we don't own.

We don't own the ESOP Trust. it's for the Trust of the ESOP holders.

What happens over time, anytime we do a business combination, the shares of the accumulative dividend now gets released to the Trust and on an accounting perspective, it's a non-cash charge.

We get an actual capital benefit for that.

We picked up $2.5 million of tangible capital because we get the tax benefit of the cost basis charge of that, because now the dividend's become tax-deductible.

These are dividends that were from prior quarters in our plan, it consisted of Richmond, Haven, Roslyn and now the Atlantic Commercial Bank.

And there will be another one with Atlantic as well.

It's just the way that the plan documents read.

Got it.

Gentlemen, moving on and taking a question from FTN Financial Securities, Jeff Davis.

Good morning.

Thanks, but my questions have been answered.

Thank you.

Thank you, Mr Davis.

We'll now move on to Jim Abbott with Friedman Billings Ramsey.

Good morning.

Good morning.

Wandered if you could just touch on the tax rate.

That was one of my questions, too.

But a quick follow-on, you mentioned that it was $16.4 million worth of credits over seven years.

Can you describe how those are amortized in?

Is it front loaded?

Is it straight-line?

I'd say it's pretty much a straight-line over time.

A couple million bucks the first year and goes throughout the seven-year period.

So the fact that the tax rate --

It's a long-term benefit.

Okay.

And the tax rate at 30.5%, I think you stated in the press release, and that goes to 32%.

Is that simply a -- ?

It's an estimate so you guys can get comfortable on maybe in running models for the future, but we had obviously the fourth quarter we need to true-up our earnings stream.

We had significantly less income than we all expected for the 2005 numbers, so we at the fourth quarter have to true-up our effective tax rate to actual.

No question that we're going to bolster is up a little bit, just for conservatism purposes.

So 32 is an estimate going into '06.

But would the tax -- what's your ability to do more tax credits or is it done -- ?

It's a case-by-case basis.

The big one we receive is a process.

It's a very lengthy process that's doled out through the government.

We went into that process a few years ago.

We got approved last year.

When we recognize some benefits in '05 as well as through the next seven years, but that's a process.

There's other tax benefit opportunities out there, but, again, they're very difficult to find and we do a lot of due diligence to make sure that it's a very conservative structure.

Over the past year and a half, there's been a loss less product out there.

We're not banking on significant tax credits.

Right.

Jim, one of the things to recognize is that, based on the tax credit that we've recently talking about, we are a lender that has the kinds of assets that truly qualify for these federal programs.

So the availability of our lending to qualify makes it significantly easier for us to do this maybe than other people in the country.

But the program has to be there.

Right.

This was a direct yield with the Department of Treasury, unlike other tax programs that through various other programs that we kind of participate in, we participated directly with the U.S. Treasury.

Okay, appreciate that answer.

Moving on to one other question, the CDs.

The cost of the CDs was 323 in the quarter, and a couple of questions that come up in my mind.

What was the incremental cost of CDs during the quarter?

In otherwards, what did that new money come on at?

I think there was almost a 15% link quarter increase in CDs, excluding the purchase.

Yes.

Clearly the market is very aggressive with regard to CDs.

As you can see, our CD balances went up.

There's no question that we're participating in one of the hotter markets, so our cost of CDs is truly higher.

But as we go down the road, especially if in fact the rise in rate starts to slow or other things start to happen, we may shift our deposit mix somewhat.

Clearly one of the themes that we're going to be building upon with the Commercial Bank is shifting more toward core as a result of the difference in the model that we'll be operating under.

That's something that's going to be coming down the road.

So what you're seeing on the CD side is more temporary than indicative of how we'll play the quarters ahead.

I would say the dynamics now in funding is that longer term money is cheaper and we're looking at that as an alternative versus the Atlantic transaction that's coming on-board.

We have some flexibility on paying down either/or.

But looking right now, as indicated, we put out $1 billion under 4% with an average call to 2.5 years versus market money right now overnight at 460, 470.

No question that's attractive for our balance sheet.

Not for other balance sheets but for us.

When we position ourselves, we believe that's a benefit.

Sure.

But maybe if you could just go back.

Do you have roughly a number?

Was it 4.25 for the incremental production on CDs?

I's say that's a reasonable [level].

Know what you can use it as a guide, look at our Newsday, our local paper, it's very aggressive.

We're competing.

We're not competing that aggressively, but we're in the hunt for funding and we weigh our funding choices between the cheapest costs.

And CDs right now are expensive, but we did put on some CDs over the past year.

The brokered CDs, the cost on those?

Very consistent with regular CDs, give or take a couple -- .

On your web site, you've got, I think it's a four or five month CD at 4% and a 13 month CD roughly at 4.5% Is there pretty evenly dispersed between those two products is where the new money is coming in at?

Yes.

So it's balanced.

Yes.

All right, thank you.

That addresses that question.

The other question that I had was related to the prepayments and the speeds of those prepayments.

Could you give us the average seasoning of your loan portfolio?

Not the expected duration of the loans but the average life that's sitting on the balance sheet right now.

We haven't disclosed that, but I will tell you that we're cautiously optimistic towards the back half of '06, because '07 there's a lot of business to refinance.

As you know in '03 we ramped up the growth. '07 and '08 no question we'll have substantial refinancing, but we are hoping to get these customers to come a year or two early.

So this could be a significant benefit depending on what rates are in the back half of this year. '07 and '08 it's substantial.

We're at the cusp of that change and we're hoping to get some accelerated refi.

We don't disclose the actual scheduled maturities or repricing.

I guess as time moves on it's safe to say that the prepayment penalty dissipates over time, but the thought process here is that you just are hoping that you can convince them to refinance and then therefore -- ?

Actually, we don't do that at all.

The broker market is what drives that, and certainly -- there are many different dynamics here.

One, we'll get a lot of prepayment as a result of people having significant gain in the assets that they hold.

This market is very rich from the standpoint of the pricing of buildings, so some people are just selling their properties.

As a result, we're getting prepayments.

In the case of our typical refinancing of the niche, our niche refinances because the cash flow, the rent roll bills.

Our rent rolls are at historical highs.

The amount of money that we have out there, when you look over the last three or four years, we've had significant additions to our portfolio of loans that today have two years or three years left.

More and more and more of the dollars that are available to refinance in volume will add to the fees.

What you said about the dissipation, it's true that we get one point in the last year, two points in the fourth year, three points in the third year.

So if a person goes from year three to year five, there is two points less that we get.

And that is part and parcel of what's going on, excepting that the volume that is moving into those later periods is going up substantially.

I think also, Jim, the compelling opportunity here is that we have an average yield in multi around 523.

So where the five year is today, plus 150, we're seeing stabilization in the overall yield to the portfolio.

And then just to touch on that last point.

Is the yield in the prior quarter on multi-family also 520, 523 range or was it -- ?

It's up by maybe a basis point.

It's holding the line, but we're looking to see some significant opportunities in the future.

But the good news, in the beginning of '05 we had the bleeding on the asset side and the liability side.

We believe we stopped the bleeding on the asset side, which is a very, very favorable event for the Company, since we're driven by the price in the multi-family book and that book is now significantly below 150 off the current five-year CMT.

We can't predict where rates are going, we can't predict where the five-year is going, but we've been consistently putting our spread at 150 plus, exclusive of any prepayment penalty income.

Okay.

One other question on the borrowings.

Could you give us, maybe, just in order to help us kind of get a sense as to where borrowings are repricing and at what pace and so forth?

I understand what the average balance is and what the rate on the whole portfolio is, but how much of that comes due during the first quarter and what's the average rate of that?

Do you have any information like that that can -- ?

What I will tell you is that we always keep flexibility in the short book, so the short book is always refinanceable daily.

When we see opportunities in the yield curve environment to go long, we choose to do so.

In this environment, in which we did $1 billion at 399 with a 2.5 year average call, that's mostly ten-year non-call two-year structure and ten-year non-call three-year structure with the Federal Home Loan Bank.

What's interesting, the Federal Home Loan Bank has actually publicly announced a new program, which we've been working on with them for about two years now, to blend and extend our long-term liabilities.

So for example, we took about a $75 million structure that had a 625 coupon that we really couldn't do anything with that we refinanced 110 basis points lower without any consequence to capital Those are opportunities.

Granted we can't do a substantial amount of that, but when the opportunities arise, we work with the Federal Home Loan Bank as our partner to work on restructuring our cost of funding.

That will help us as well.

We had not quantified the magnitude, but we're looking forward to that particular program assisting our margin benefits.

And how much of the 10 billion, roughly, in borrowings are overnight?

I'd say it runs between anywhere from 400 million to 1 billion depending on loan production.

Okay.

It's not a tremendous amount.

We could probably move out another 1 billion.

Again, we have a substantial -- yes, over time.

For the quarter I would say we are going to move out some liabilities in this environment.

The yield curve is flat.

It's opportunistic to go out long, because we do have the Atlantic Bank deal coming on in the next foreseeable month that we can restructure the highest cost of money.

If it's paying off broker deposits or it's paying off high-cost CDs or if it's paying off wholesale money that's coming due, we're looking for the best incremental benefits of the bottom-line right now to hold the margin.

Sure.

And then the last question is on the debt and equity security portfolio.

I think the yield was up roughly 30 basis points, a little less than that, adds about 3 basis points to the margin, give or take.

Any comment on -- it's a pretty high yield.

Do you have any comments on what moved it up?

The balance didn't really change.

I would say the major increase is the Federal Home Loan Bank dividends.

Been up consistently over the year.

We had two pops in Q4, I think it was, Q3 and Q4, the catchups.

But mostly driven off the Federal Home Loan Bank dividend.

It is the most of the significant portion of the equity side, that we classify as equity.

Gentlemen, we have time for one following question, or actually one remaining question, coming from Bruce Harting with Lehman Brothers.

Through all the granularity we've discussed, I'm having a hard time processing with all the moving parts and the deals coming on.

What's your outlook for the margin, then again?

This is Tom.

And what's the best sort of rate scenario for '06 and '07 as you finish your restructuring?

Thanks a lot, Joe.

Bruce, it's Tom.

In respect to the margin, we've given some color.

The trend has been down and we expect to have another down quarter in the margin, but our goal is to have it down in the previous quarter.

So we were at 30 bps in 2115 on a sequential basis.

We're hoping to be less than 15 in Q1 '06.

But we expect, when we roll up Atlantic into the mix here, their margin is significantly higher than ours and they have a high concentration of securities.

That will be beneficial as well as some of the extension of our liability that we're doing in this flat yield curve environment.

By saying such, we believe that going into Q2, we should be close to stabilizing, stopping the bleeding in the overall margin.

That no guarantee in respect to where the Fed's going, but we're hoping to have stabilization hopefully going into Q2.

Most importantly, it's been an interesting environment for us over the past year and we're trying to manage that liability book.

And what's exciting here is that the asset book has stopped bleeding, and it's two quarters in a row we haven't had bleeding as far as losing yields on assets.

We've stabilized that side of the balance sheet.

Now we have to focus on the liabilities side.

And that's where the pressure is coming from.

It was 15 last quarter, we're hoping to be less than that in Q1 '06 and hopefully stabilize after that.

Thanks, Tom.

At this time, for closing remarks, I'll turn the conference over to Joseph Ficalora.

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

We appreciate the opportunity to discuss the distinction between our GAAP and our cash earnings and the significant contribution of our cash earnings to our tangible capital We welcome the addition of Long Island Financial to our banking family and look forward to the acquisition of Atlantic Bank of New York and the contributions it too is expected to make.

In the coming year, we expect to maintain our status as the leading multifamily lender in the New York City market and will strive to maintain our record of asset quality and efficiency.

We expect that there will be challenges and opportunities in the quarters before us and will continue to make the creation of shareholder value our first consideration in every action we take.

Thank you so much.

That does conclude today's conference call.

Thank you, everyone, for your participation.

Have a great day.