Flagstar Financial Inc (NYCB) 2006 Q1 法說會逐字稿

Welcome to the New York Community Bancorp, first quarter 2006 earnings conference call.

Today's call is being recorded.

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

Please go ahead ma'am.

Thank you, good morning, everyone and thank you for joining the management team of New York Community Bancorp for today's discussion of our first quarter 2006 performance and our upcoming acquisition of Atlantic Bank of New York.

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.

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 effect 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 pressure amongst financial institutions or from nonfinancial institutions.

In addition, our comments will include certain forward-looking statements regarding the benefits of the Atlantic Bank acquisition which we expect to complete at the end of this week.

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 nine of this morning's earnings release.

The release also includes a reconciliation of our GAAP and cash earnings and our GAAP and operating earnings which will also be discussed on this morning's call.

If you would like a call of the earnings release, please call our investor relations department at 516-683-4420, or visit our website mynycd.com, at this time I would like to turn the call over to Ficalora who will make a brief presentation before opening the line for questions and answers.

Thank you Ilene and good morning, everyone.

We appreciate you're joining us this morning for a discussion of our first quarter performance, our recent common stock offering and our soon to be completed acquisition of Atlantic Bank.

To make the most of our time, I would like to start by focusing on the actions we took during the quarter and more recently to further enhance our balance sheet to improve our interest rate risk profile and to reinforce our capital strength.

After that, I will be talking about our first quarter earnings and the benefits of the Atlantic Bank transaction which we expect to complete this Friday, April 28.

Regarding to enhance our balance sheet, we continued to use the cash flows from security sales and repayments to fund the growth of our loan portfolio.

Securities declined to $5.4 billion at the end of March and represented 19.9% of total assets while loans rose to $18.1 million and represents 66.9% of assets.

Originations totaled $1.8 billion through the end of March and included $1.4 billion of loans secured by multifamily buildings.

Reflecting the volume of our loans produced and the 47 basis point rise, the five year CMT over the course of the quarter, the average yield on our loan portfolio rose 11 basis points on a link quarter basis to 5.62%.

We also realized a link quarter rise of 10 basis points in the average yield on our assets to 5.42%.

While growing our loan portfolio, we also improved the quality of our assets.

In fact, our asset quality measures at quarter end were among our best to date.

At March 31 2006, nonperforming assets equalled 0.10% of total assets.

At the same time, nonperforming loans equalled 0.14% of total loans.

While our portfolio has grown significantly over the past decade, our underwriting procedures and credit standards have remained consistent.

A fact that has contributed significantly to our record of solid asset quality.

Additional funding for our loans stem from an increase in deposits which rose $188 million to 12.3 billion from the balance recorded at December 31.

While our use of wholesale funding was also up at the end of March, we expect to see the balance decline in the coming quarters.

As we have stated consistently since announcing the Atlantic Bank transaction last October, we plan to reduce our high cost sources of funds, with the cash flows generated through the repayment and sale of securities through the combined portfolio.

To reduce our exposure to interest rate risk we have positioned $3.4 billion of wholesale borrowings since late December including 1.7 billion that were extended at -- and 1.7 billion that were modified.

As a result, these borrowings now feature an extended maturity and a lower rate of interest contributing to a lower cost of fund and an improvement in our measures of interest rate sensitivity.

Most of this benefit by the way will take place in the second quarter and beyond.

For example, while our interest rate sensitivity table will not be available until our first quarter 2 is filed, we do know hat our one year GAAP will improve from a negative 10.19% at the end of December, to a negative 7.76% at March 31.

With our acquisition of Atlantic Bank, expected to take place at the end of this week our interest rate sensitivity measures are expected to reflect further improvement in the second quarter of the year.

Our capital strength is another matter of real importance to us.

A fact that was clearly underscored by our decision to finance the Atlantic Bank acquisition with a common stock offering.

The offering enabled us to raise $400 million to fund the acquisition and will enhance our level of tangible stockholders equity.

The accretion expected to stem from the Atlantic Bank acquisition will be slightly reduced as a result of our issuing stock rather than debt.

But the sacrifice was a small one given the degree to which our tangible capital will be strengthened and the opportunity it represents to further enhance our earnings to our business loan.

Moving away from the balance sheet, I would like to turn to our income statement which reflects a linked quarter increase in loan and asset yields as previously stated.

A $4.8 million or $0.90 rise in prepayment penalties to $10.2 million and the first quarter link quarter rise to net interest income we've seen since the second quarter of 2004.

While admittedly small, the increase in net interest income reflects the benefit of the quarter's loan production and the increase in the five year CMT over the past three months.

We also recorded a link quarter increase in other income, primarily reflecting an increase in revenues from our investment advisory firm, Peter B. Canal which currently has assets under management of approximately $1.5 billion.

As positive as these features are, they were nonetheless overshadowed by the continuing contraction of our net income margin as the significant rise in short-term rates coincided with the increase in our retail and wholesale funding sources resulting in a 35 basis point rise in our cost of funds.

As a result, our margin contracted 23 basis points during the quarter.

While we expected our margin to decline, the extent of the contraction partially has to do with the classification of the prepayment penalties we received in our multifamily loan portfolio.

Of the $10.2 million in prepayment penalties we recorded through March, over $8 million are recorded in noninterest income.

The opposite allocation would have been more typical and would have added approximately 7 or 8 basis points to our margin.

During the quarter, the bulk of the loans that prepaid had properties that were sold to new property owners who sought their funding elsewhere or were deemed by our lenders to fall outside of our requirements with regard to pricing or credit quality.

Accordingly, while our net income reflects the benefit of the increase in prepayments, the increase has less of a benefit on our interest income asset yields and net interest margin.

While our earnings from ongoing operations were equivalent to $0.26 per diluted share in the first quarter, we reported first quarter GAAP earnings of $0.25 per diluted share.

The difference was attributable to an after tax loss of $3.6 million on the mark to market of interest rate swaps.

In 2003, you may recall we entered into four interest rate swap agreements to hedge the interest rate inherent risk in certain of our Junior subordinated debentures.

Like others in our sector have recently done, we redesignated three of the swaps as fair value hedges under the long haul accounting method under SFAS number 133 and classified one of the swaps as a trading position at the end of the quarter.

There was no impact on our cash flows as a result of this change.

Of greater importance than either our GAAP or operating earnings were the cash earnings we recorded in the first quarter of 2006.

Our cash earnings represent the total contribution to tangible capital provided during the quarter and amounted to $71.9 million or $0.27 per diluted share.

In other words our cash earnings added 5.5 million or 8.3% more to tangible capital than our GAAP earnings alone.

As mentioned, on last quarter's conference call, and worthy of repeating, our tangible capital gives us the ability to grow organically and through business combinations and to pay a strong dividend to those who have invested in this company.

Based on the strength of our capital, which was fueled by our first quarter cash earnings, we were pleased to declare a quarterly cash dividend of $0.25 at last night's meeting of the Board.

The dividend will be paid on the 16, of May to shareholders of record on the 5, of May.

We are confident in our ability to maintain the dividend at the current level given the historical strength of our earnings, the contribution to capital of our cash earnings and the fact that we are about to enhance our earnings capacity with the acquisition of Atlantic Bank at the end of this week.

With the addition of Atlantic Bank, we are gaining more than 17 full service branches.

We will be gaining a commercial bank franchise with assets of approximately $2.6 billion including loans of $1.2 billion with higher yields than our own portfolio.

We will be gaining an established franchise with deposits of $1.8 billion including $1.5 billion of core deposit accounts with a lower cost funds.

With a first quarter margin of 3.26% on average interest earning assets of about $2.5 billion, we expect that the addition of Atlantic Bank will assist in improving our margin and contribute to its expansion when the rate environment turns around.

Margin expansion will also stem from an increase in refinancing which we would expect to see once a meaningful rise in the five year rates is perceived to occur.

While the current rate environment has limited refinancing activity and therefore hindered the growth of our earnings, we believe that our patience and yours will be rewarded once the yield curve begins an upward slope.

In anticipation of that time, we continue to do what we have always done.

Originate loans of quality within our local market.

Maintain an efficient operation and take advantage of opportunities to enhance our earnings capacity by growing our niche business.

We also will continue to manage our balance sheet to enhance our interest rate and market risk profile to further strengthen our capital measures and to stand up to the challenge posed by an adverse rate environment.

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

We will do our best to get to everybody.

But if we should miss you, please feel free to call us individually this afternoon or later in the week.

[OPERATOR INSTRUCTIONS] Our first question comes from Salvatore DiMartino at Bear Stearns.

Good morning, guys.

Good morning, Sal.

Just a couple quick questions.

First, can you give us a little bit more color on the -- what you did to the borrowings this quarter in terms of what sort of rate you've locked in and for how long and if you have done any further structuring post the quarter?

That's number one.

And number two, can you talk about -- well, Joe, you made comments about not kind of giving away the shop on lending.

Can you talk about pricing on the multifamily loans this quarter?

It's Tom, we'll go over the borrowings first and Joe will head into the lending side.

As indicated in the release, 1.7 billion of funding was extended out, that was primarily short-term liability.

That was obviously priced close to fed funds around close to 5%, 4.75 to 5%.

That money was pushed out on an average basis about a two year average life call.

And I would say that rate is around 4% even.

The other 1.7 billion was a repurchase agreement we had out there that were coming due to be called this year.

Potentially.

And we transacted in response to an inverted yield curve.

Pushed that money out its call date for another two years and we were able to lock in cheaper funding somewhere around the low 4s as well.

I would say 3.4 billion all in is probably somewhere in the very low 4%.

On the lending side, Sal, obviously we were talking about this frankly, for years now, that we are in the back end of a positive credit cycle.

And as that elongates, the activity in the marketplace continues to increase the dollars that are being made available and at the same time provide a narrow benefit so the reward and risk shift and they typically continue in that way until we get to the end of the cycle.

So in the quarter in front of us, the quarter that we are in, we have a tremendous amount of opportunity with regard to the balance sheet and the assets and liabilities as we are going to be integrating the two companies so we have a smaller pipeline as we start this quarter than we have had in the past, recent past.

And that's intentional.

We do believe that we are in a very good place here to create some very good assets and to rebalance the liabilities that are matching against our assets in favorable ways.

So the marketplace is still filled with opportunities.

Some of those opportunities are going to other banks because frankly they have terms that are not necessarily at this stage of the cycle the kind of things that we would want to do.

And just, Joe, just can you comment on the pricing that you're seeing on your product?

Yes, we are being very consistent with regard to our pricing.

It's been this year for quite sometime now.

We are getting 150 over the five year CMT.

So our committee just yesterday, all the loans that were in front of the committee were being approved at six and a quarter or six and three-eighths.

That sort of the rate in the pipeline more or less?

Yes.

That's exactly correct.

As we've indicated many times in the past, many of the loans that are closed in a given quarter were actually originated in the preceding quarter.

So these loans that added to our yield were not loans that had the benefit of six and a quarter or six and three-eighths.

They were loans that had lower rates from the preceding quarter.

Sal, this is Tom.

All things being equal for the quarter, our average origination yields that were on the book was about a 172.

So it was higher than the 150 average by the CMT but that also combines the construction portfolio and the CRE portfolio as well as multifamily.

Okay.

And, Tom, you didn't mention if you were planning on doing any further restructuring of fewer borrowings.

Sal, obviously we said on multiple occasions in respect to the Atlantic Bank transaction, we will be shrinking the portfolio substantially upon combination and we believe that is the -- it's the best environment to do so now and that will contribute dramatically to lower cost of funds in borrowings.

We will be exploring that upon combination of the Atlantic franchise with us and that number's somewhere between 1 billion to 1.3 billion of additional liability reshuffling.

Thanks.

Next up is Jim Ackor, RBC Capital Markets.

Couple of questions.

Tom, you said low 4s on two year borrowings.

I don't necessarily understand.

The ten year maturity with a two year call.

So if you look at the ten year noncall two paper and the ten year noncall three paper we did an average during the quarter, way back in January that was an inverted yield curve and we capitalized on the fact that we had a significant inversion and were able to transact on a significant amount of our funding.

We locked in as we did in the fourth quarter of 2005 we put money on a 398 if you recall in the last weeks of December.

Money was extremely cheap going long into the curve, obviously that's not there now but we believe we transacted at the appropriate time.

Okay.

And some of that money actually comes into the pipeline at the end of the quarter even though it's transacted earlier it actually impacts the number.

Jim, the modified structure all came in at the end of March.

That was negotiated back in January and February to be closed as of the end of March.

That will get a complete benefit going into April and obviously the second quarter and beyond.

So would the impact of this reshuffling of some of the liabilities as well as the acquisition close here shortly that being margin accretive, would it be fair to say that the bottom is put in on the margin?

Yes, no question.

As said on the last call, we expected that the first quarter of 2006 should be the bottom both on earnings and margin.

We feel very confident that we see good visibility in respect to the margin.

Depending on interest rate curve.

We can't make predictions on interest rates but for the first time in a long time bank looks pretty good going forward.

Good.

One last question then.

In terms of the impact of the offering of the acquisition, you guys have a pro forma tangible book number that you could throw at us.

We won't disclose that on the call but no question, we believe that the combination will have a book value accretive deal.

We are doing some balance sheet reshuffling.

Until we reshuffle the balance sheet and produce the consolidated balance sheet, that would be the appropriate time.

I will tell you that capital is going up from here.

On a tangible basis.

Very good.

Thank you.

Moving on to Rick Weiss at Janney.

Question, was wondering if you can kind of quantify incremental operating expenses and fee income that you expect to pick up from Atlantic Bank.

Rick, we're not going to give any guidance right now.

Obviously out policy in the past year and a half has been we are going to go quarter at a time.

We feel very confident that we are going to meet our cost savings expectations.

They were very modest.

Not a cost savings transaction.

Obviously Atlantic has some information that you could gather and you could assume a 20% cost savings which is what we outlined in our October announcement of buying the company.

Again, it's a very conservative transaction in respect to cost savings.

We are tightening our belts here.

We are an efficient operation.

You don't see a significant amount of expenditures increasing for the Company but keep in mind Atlantic Bank is a commercial bank and we are going to run it as a commercial bank.

No question they will have a higher cost structure, we're not going to mimic the community bank but we feel very confident that we will meet our targeted savings.

So then I guess if you, Tom, if you are thinking of running it like a commercial bank and the efficiency ratio provably will pick up from your historical levels?

No question.

You should look at the two banks separately.

We have a community bank and a commercial bank.

The commercial bank structure has a higher degree of cost to run it.

But when all things being equal we feel very confident on the community bank level we'll hold the line on expenses but when you take on Atlantic operations they just have a higher cost structure.

But take their cost structure and knock down 20% upon consolidation that's where we should be and we usually are conservative with our estimates on cost carvings.

Got it.

Thank you.

Got it.

We will go to Tony Davis at Ryan Beck.

Joe, or Tom, what was the actual percentage prepayment rate last quarter?

What's your thought about where it is right now?

And is there any reason not to expect that the traditional 70 to 80% of prepayments will be with you and therefore booked into interest income?

I think one of the reasons for years we were reluctant to be discussing prepayment is because prepayments were erratic.

Although we could talk broad brush, that as in fact people become more comfortable with the concept that rates are going up in the five year CMT, there will be an increase in that kind of activity.

There is no guideline that I would be able to give you that would be exact.

Broad brush, no question, we are going to have more refinancing in the quarters in front of us both because of rate expectations as well as the build in the cash flow that's in the portfolio as well as the normal passage of time which necessitates in our case refinancing because of the structure of our loan.

So having said all of that, from one quarter to another quarter prepayments will vary and certainly the amount of prepayments resulting in margin benefit will also vary.

The important thing to recognize is, even when it doesn't go to the margin, it goes to the bottom line.

So from the standpoint of the Company's capacity to perform and build earnings, prepayments are always beneficial to us.

There is some recent discussions surrounding whether or not prepayments are all going to go to the margin.

That is something that we just recently heard about, I don't know how that is going to ultimately evolve.

But what we should all recognize is prepayments always go to the bottom line.

Doesn't matter whether they are in the margin or in other income, they go to the bottom line.

On deposit, Joe, given the fixation on margin it's probably more important--.

Oh, yes, I agree with you.

You are 100% correct.

People have the tendency to look at the margin.

This particular metric in our case has the potential as we said many times to be a very significant contributor to our bottom line.

And although historically has been primarily in the margin, there is no way in the world to know for sure whether it will or won't.

The important thing is whenever it's generated, it goes into capital.

Tony, it's Tom.

In the comparative basis over the past two quarters looking back very insignificant levels have been going into the margins.

We look at that as a positive going forward.

Things change a little bit and we have a higher weighted percentage into the margin that will be anice benefit for us going forward.

Two quick follow-ups.

If you can comment on the status of the 365 million National Bank of Greece deposits and the odds of you being able -- keeping that and secondly, if you can give us a rough estimate on the accumulated cash earnings today available for dividends?

Okay, I think the -- two points.

One, our relationship with the National Bank of Greece has been quite encouraging over the course of the months since we have been publicly discussing our positioning.

Jerry Lucinas who will be the President of the Atlantic Bank division is very involved in the Greek community and has had very encouraging discussions with many prominent people within the community.

So I would say that if anything we are very encouraged by the relationship that is building with the Greek community, both in Athens and in the United States.

And we would suspect that over the course of the period in front of us we are going to see a building relationship rather than a decreasing relationship.

The numbers that we keep talking about, $365 million, that was always a very changeable number.

It would always go up and it would go down, mainly because it typically represented very large transactions between Greece and the United States.

On a go-forward basis, we would hope that we're going to have significant additional deposits that will in fact represent alternative funding from the Greek community.

So we are very pleased with where we stand.

We think that there have been some very encouraging discussions between the Greek community and some of our key people.

And we look to go forward.

Jerry clearly has been very measured in his approach because until we close the deal, we didn't want to get overly visible here.

But on a go-forward basis we are vert pleased with our position.

Understood.

Thank you.

Any comment on the accumulated earnings?

I guess the accumulated earnings and I don't know if you are speaking of -- in order to pay a dividend, you pay your dividend out of the accumulated earnings for the two and a half years preceding the declaration of every dividend.

So whatever that number is and frankly I don't know that we have that number immediately available but it's a very large number.

So it is in fact whatever our actual published numbers are.

And is available to us.

Thanks.

You're welcome.

Question now from George Sacco at J.P. Morgan.

Good morning.

The last conference call you had back in January, you had mentioned that prepayment fees this quarter at that point in time had already exceeded the fourth quarter number.

And by my math that implies that you were probably somewhere between 5.5 to 6 million at that point in time.

That would imply that fees have slowed during the quarter.

As we try to model this out for the next couple of quarters, I guess my first question, is that a typical seasonal pattern?

No, I think very, very important and I guess I have said this over the course of the years, prepayment penalties are so difficult to try and model that it is best not to try and put in a hard number with regard to prepayments because that activity -- so, for example. there was some very, very large transactions that occurred in the very beginning of the quarter.

So that's why we were so confident immediately that we had already exceeded the numbers.

The fluctuation in activity can be extraordinary based on the actual size of certain facilities that wind up prepaying.

So by example, we had loans prepay that were only 13 months in the portfolio.

We get 4 points for that.

We have other loans that prepay when we get point.

So the deviation from quarter to quarter can be extreme.

And although in broad brush, points add to our yield and add to our bottom line, there is going to be a degree of variance that can change dramatically one quarter's performance over a longer term performance.

George, it's Tom.

I would just add also when we have a limited ability on the yields that are on the table that's going to be financed, we have an expectation of how much business we could keep.

What happens typically is that they make choices.

They want to go along or they may want to take a lot of dollars.

We always hold our credit standings.

But if a deal is going to be considered very let's say high LTV or a number that we are not willing to lend upon, we will let that loan go away and we'll still collect the prepayment penalty income.

That decision is not made until the borrower decides what they want from us or somebody else and that's something you won't be able to measure until the closing day comes.

Okay.

Thank you.

You're welcome.

Moving on to James Abbott, FBR.

I was wondering if you could just touch on the size of the average incremental loan during the quarter?

I was just piggybacking off of that last question.

You mentioned there was some large deals that prepaid at the beginning of the first quarter.

What's the typical deal for New York Community these days?

I think again that varies depending on who we are dealing with and what the specific loan is.

But it is typically running something less than $4 million on average.

And that's per loan, per incremental loan produced?

Right.

That's for the whole portfolio?

That's exactly right.

The average size of the whole portfolio is 3.5?

Yes.

I think the average size of the -- you talking about the multipayment portfolio or the whole portfolio?

Just multifamily?

Right.

I think the multifamily portfolio the average size is about 3.6 million is it.

I think it's about 3.6 million.

And that is comparable to what the incremental production is as well?

I think that varies.

And again, when you talk about our lending activities, we may have some very large loans or large pools of loans that go into the portfolio.

Amongst the loans or the properties that are in that pool, there may be lots of loans that are $2 million or $1 million or $8 million or $10 million.

But on average, our portfolio is at about $3.6 million or so.

Okay.

Thank you.

And another question, I was surprised to see the cost now on money market accounts go up as much as they did.

I guess up 60 some-odd basis points sequentially.

Can you characterize what drove that and what you--?

I think one of the things that we have been saying is that there is going to be a great deal of activity in our market in particular if we are going to compete with regard to the rates that are available in our market, we are going to be adding at much higher rates than our portfolio rates.

And as a result, in preparation for what we now have, we now have the deal closing and we now have the ability to pay off the highest cost funding that are -- that is out there.

We did take the opportunity to aggressively build on the liability side and we will have the benefit of the full transaction and all of the other things that we are looking at doing in the months ahead.

So the distortion there is more driven by the fact that we had large amounts of money that were moving into what is in fact a higher cost class of deposits.

And likewise, that money can move out of that segment as well.

Should we think about a stability going forward from this level a 3% level?

Should we think that?

Or should we think another--?

I think it will depend on how much change actually occurs in the marketplace.

I mean, obviously rates will dictate a great deal.

But how much change actually occurs in the marketplace from the standpoint of competition and how much we shift within our own balance sheet.

Jim, it's Tom, I would add that you should expect stability in the margin for sure and most importantly looking at the first quarter of '06 going into Q2 with Atlantic you will start seeing some good benefits of the transaction as Joe has alluded to.

Funding costs will go up in the marketplace.

We are competing very aggressively to close our pipeline.

A had a huge pipeline that closed in Q1 and we had to fund it.

The good news here is that we had a deal closing Friday that we are going to pay down the highest cost of money to offset some of that cost.

Okay.

Thank you very much.

Thank you, Jim.

Next from Sandler O'Neill, this is Mark Fitzgibbon.

First question I have for you, what was the percentage of your multifamily in commercial real estate originations in 1Q '06?

It resets with periods greater than five years.

Very little.

Are you talking about that we actually put on the books?

Exactly, seven or ten year paper.

No ten at all and very little seven.

Then secondly, I could have misheard this earlier.

Am I correct in assuming you have no more borrowings that are callable for the remainder of '06?

No, that's not correct, Mark.

What we did was we had, obviously we were positioning to close Atlantic actually at the end of March, we're closing at the end of April, and with that we had a significant short-term book which was costing us a lot of money.

That was about 1.7 billion at a point in time, just around $2 billion.

We extended out when the curve was inverted 1.7 billion at very attractive funding for approximately two years.

So we took care of that particular position.

That's still callable, but it's callable two years from now not today.

Unlike having short-term funding.

In addition to that we had about a 1.7 billion of repo with the Street that we were able to reposition in respect to extend out the current call provision and lock in an inverted yield curve a very attractive rate for a lock for a good two years.

Some of that is floating but the vast majority is fixed and we're very comfortable that will assist us in driving down funding costs on the wholesale side.

We still have funding costs increasing on the retail side because the market is much higher.

But assuming that rates are at levels that are more manageable and going forward we can't predict interest rates but we feel pretty confident that with Atlantic funding and our most recent movements on the wholesale side we see some pretty good stabilization here.

But as far as do we have callable advances, of course we have callable advances we just pushed it out further.

Instead of being all set up in '06 and '07 we moved it out to '07 and '08.

So you're saying there's not much left than in callables.

We have plenty of high cost money that's callable but keep in mind we will be very focused when we close Atlantic and we will transact on trying to do the best thing for shareholders as far as funding and we have a tremendous opportunity here to downsize the securities portfolio of Atlantic and take that cash proceeds and pay off high cost funding.

That could be a material benefit for us.

We are looking forward to doing so.

The last question I had for you, I'm wondering how long you think it will take you to integrate Atlantic and when you think you might be ready to do additional acquisitions.

I think from the standpoint of -- Atlantic is literally going to be combining on the commercial bank platform.

So in essence, for the Community bank, it doesn't impact our operation in the Community bank, so we are in a position to do acquisitions as we sit today.

It doesn't mean that we are going to.

It just means that these are both relatively small transactions.

And the building of that platform, of course, will better position us to take commercial banks into the franchise.

And we virtually could take a commercial bank even before the full integration of that because in any deal you have six to nine months anyway to get the deal closed.

So I would say that when we look at the marketplace, we consider the opportunities that are there and when we have the ability to align the stars such that it's a good investment, we will go ahead and do the transaction.

Mark, it's Tom, I would add that obviously funding is very important to us in this environment so we see deposit rich franchises that are attractive in nature we will be in the game.

Thank you.

Question now from Bob Hughes at KBW.

I have a couple questions.

It looked to me like the average LTD in the multifamily portfolio moved up pretty significantly in the quarter to now about 64% from 61% last quarter.

Just kind of doing some quick math, it looked like the average LTV on new loans in the quarter might have been something close to 90%.

Would you comment on that or perhaps share with us what that--?

I think obviously, math can run any number.

But it's a matter of what comes out of the portfolio as well as what goes into the portfolio.

So the end result is that the LTV did change, but that's a combination of the exiting LTVs which would have been much lower and new LTVs which would have been somewhat higher and therefore the number did move up to 64.

But that doesn't mean that we were doing LTVs at 90%.

Would you share with us what the LTVs were on new loans in the quarter?

I can't give you the average for the quarter.

What I can tell you is that our typical lending is in this market at the 75% LTV level.

Okay.

But you're suggesting there are exceptions to that?

There may be.

Individual loans with regard to specific attributes may have initial LTVs that would be different, but they have the ability by the time we close or otherwise in very short order to move to much lower LTVs.

When we give you LTVs, we are giving you the LTV at the time the loan goes to the committee and is being approved.

In actuality, all of our LTVs are significantly lower than the reported LTV that you are looking at because all of our LTVs are improved over the course of the months and the years that the loan is in the portfolio because the cash flows improve.

Because we're a cash flow lender, the LTVs are actually significantly better than the number that we are reporting to you.

Okay.

Next question, I was wondering if you could give us an update on how you have done gathering deposits through the My Banking direct channel perhaps how much you have today, and then also--?

We aren't actively looking to gather deposits there.

We have that channel available.

Whether or not we look to gather a significant amount there will depend upon other factors.

Right now it does provide us with the flexibility to have another source of funding should that be desirable.

And it is available for those people that like to have the ability to do their banking online.

But it is not a vehicle that we are looking to move aggressively.

Bob, it's Tom, I would tell you that we have not been throwing the advertising dollars at the program but we do have a nice rate.

However, if you want to turn the stick it is more than generated by advertising dollars.

How much have you raised so far there?

I think it's about 55 million as we sit today.

Very small.

Okay.

Incremental broker deposits in the quarter?

I think the number there changes rapidly during the course of the quarter.

Some of goes away and some of it comes in.

Bob, what we have done in the quarter is we had to obviously fund a substantial pipeline in anticipation of closing Atlantic.

So we were not going to sacrifice our core savings rate, our core banking retail structure for the sake of closing a quarters pipeline knowing we had substantial liquidity with the Atlantic transaction closing at the end of April.

Yes, we went back to the market and took the most liquid source of the funds, the callable loans, with the expectation in the end of April to pay off in excess of $1 billion of the high cost money.

When we consolidate the two banks you will see a substantial benefit due to the shrink of the debt portfolio and potentially shrinking some of the wholesale, retail.

That's fair.

And how much did you have in broker deposits at the end of March?

Couple hundred million.

Probably about 1.7 billion total, 1.8 billion.

One final question as it relates to Atlantic Bank, it looks to me like there has certainly been some erosion in the balance sheet and earnings power of Atlantic.

If you annualize fourth quarter results kind of strip down it looks like about a 22 million annual run rate and you guys projected 32 when you announced the deal.

Can you comment on that?

I will tell you that so far we are on track of what the expectations are in Atlantic.

We have been planning some of the downsizing in advance, so, yes, the portfolio is down a couple hundred million, but that's also we expect to shrink the combined portfolio by 1.3 billion.

That number is going to be less obviously because some of it has already started at the Atlantic franchise.

They have been actively moving the cash flows out of security and shrinking their balance sheet in anticipation of the closing of our deal.

Okay.

So when you projected the 32 million run rate for Atlantic, are you saying that--?

It assumes a much larger portfolio.

We already started shrink during the interim phase.

In essence, the portfolio will include loans not securities.

They're strengthening their existing securities portfolio.

Okay.

As well as their loans and deposits.

That's right.

By design.

And then on a related topic there, I was wondering if you could tell us what Tom O'Brien's plans are, whether you've executed a noncompete with him and to what extent you've locked up other Atlantic employees.

We have several employees that have entered into agreements with us and Tom is planning on transitionally working with us.

He will continue in a capacity at the Commercial Bank as the interim President of the Commercial Bank.

Okay.

How long do you expect him to be around?

It depends on how things go, both in his life as well as with the bank.

He is very open to that idea right now and we're certainly looking forward to working with Tom.

But no noncompete with Tom?

Well, his agreement wouldn't necessitate that he not to compete.

He is being paid under contract which will in fact make him part of our company.

During his continued employment.

That's right.

Thank you guys.

You're welcome.

Moving on to Matthew Kelley at Sterne Agee.

I was wondering if you might be able to just comment on where you'd see the securities portfolio as a percentage of total assets once all the repositioning is done on the second half of the year.

I had been looking for that kind of in the high teens and was wondering if that's still an area that you see that drifting towards?

It's Tom.

I would tell you that we are still ahead of expectation, over the past year we have seen more cash flow out of the portfolio.

When we close the Atlantic deal we will probably be 19% but at 18.5 and 18.75 upon consolidation that's between the shrink or the portfolio and from there we are going to continue to cash flow out.

But I don't see a significant downward trend from there.

Somewhere in the mid teens is probably the right level for the Company.

Keep in mind we do have a lot of these securities that are pledge for collateral purposes that will have a portfolio.

If you look at the combined balance sheet, we like where we are.

We have a strong capital level.

Our debt portfolio will be in the low 30s where it was as high as 45 at one point in time.

We will have the securities portfolio in the upper to the mid teens.

Those are metrics where we want to be to grow the Company and we are very confident that our balance sheet is a lot more attractive today than it was two years ago and this is a good place to be in this environment.

So the Atlantic transaction is a meaningful benefit to the Company on the balance sheet perspective as well as earnings.

Okay, and then just a follow-up on a question from earlier, of the $155 million in total CD growth again, how much came from the on-line channel?

How much was brokered just during the quarter?

I would say the vast majority--.

None of that--.

Vast majority was brokered.

Not CDs.

We have some brokered coming on.

We have very little in the on-line.

We have not as indicated previously we are not advertising that campaign.

If we were to advertise the campaign, we believe that we can increase flows dramatically.

We have approximately $50 million in the My Banking direct account currently without advertising.

But that's 50, that's in the money market account, not the CDs?

Right.

The CDs are typically competitive within the market.

155 was generated primarily through brokered--?

Mainly from north Fork and other banks within our market that we have had positive flows and deposits from.

We have typical positive deposit flows from the banks that we are competing with.

In particular when we are running promotionals.

When you look at our overall deposit makeup we are actually gaining deposits from most of the people that we compete with in this market.

Is most of that money kind of going into 12 month or less type products?

Yes, a lot of it is going into CDs.

Some of it is going into money market.

Some of it is going into -- in other words, it starts in one particular account and then it goes into many different accounts.

Matt, it's all in the one year bucket.

No one is really going past one year right now.

It's not attractive for the consumer.

And the just 103 million in now in money market accounts where did that come from during the quarter?

What channel?

Same basic idea.

It's a mix of sources.

All right.

So the retail channel then you are saying?

Through your branch network?

It's a mix.

Some of it is coming through other sources of funding.

Matt, as I discussed previously we have a significant pipeline to funds and we have a significant acquisition that's closing and we are going to pay off the highest cost of money in very short order.

Some of that is retail, some of that is wholesale.

We have a CD market right now.

We are competitive.

We are within the marketplace.

In respect to the wholesale market, the wholesale market is extremely competitive and extremely expensive.

In the event we pay down cost of funds we are going to choose to pay down the highest cost of funds going into Q2.

Okay.

Then just to follow-up on James question from earlier on the now money market kind of rate during the quarter of 3%.

Could you just clarify again where you anticipate that drifting over the next couple of quarters from 3% this quarter?

Well, obviously the rates will depend on what's happening in the marketplace, Matt.

So we are not going to decide the marketplace.

The marketplace will fluctuate depending on who is deciding to be active and where rates are actually going.

So anticipating rates here would not be a good thing to do.

I would add though, on the wholesale side our funding costs should decline.

As a result of the restructuring.

The restructuring, merging Atlantic, we have done a lot since the fourth quarter of '05 all things being equal it is probably close to $5 billion of repositioning including Atlantic, that's going to have a material impact to our wholesale funding costs.

We still have a sizable brokered portfolio that we have to address down the road and we are going to have an opportunity to do so as we build our deposit base.

What's most important here is that we are making significant strides towards lowering the cost of funds in an environment where fed funds are rising dramatically.

We are impacted in higher rates right now.

The asset yield in the portfolio are up this quarter but it's not up in excess of where our funding costs are coming and that's always been our issue over the past year and a half.

Addressing it for one quarter at a time.

And then just last question, the second half of the year, once the bulk of the repositioning is done through the closing the Atlantic deal, would you anticipate funding most of the incremental growth in the balance sheet through kind of the CD and money market-type funding sources?

We would love to do it organically.

That would be our plan.

Again, depending on competition we have to compete and the competition right now is very difficult as everybody knows, pick up your local paper, rates are high.

We'll use the best rates that are available in the marketplace, Matt.

All right, thanks.

We'll take a question now from Kevin Timmons at C.L. King.

Hey, guys.

A few different thing for you.

On the brokered CDs, if I could just clarify that.

At December 31, they were 1.4 billion, they were around 1.7 to 1.8 at March 31.

That's correct.

Kevin, we had a very large pipeline to fund.

Right.

The restructuring of the borrowings.

Can you tell us with the incremental change, and I know there's lots of other ins and outs, but as of the date you locked in the transactions, about how much was incremental change cost?

Very little to Q1.

The vast majority of the reposition borrowings with the Street was effective the last week of March so we will get the full impact in Q2.

The 1.7 billion that we extended on the wholesale side which was short term money had a benefit for this quarter.

I would say half of it is going to help assist Q2, I'm sorry, all of it will be in Q2, half was in Q1.

Great.

The question, though, is what was the full benefit?

Was it 25 basis points?

Or was it 100?

Or was it 2?

I think some of them were 100, some of them were--.

It varies.

I'd say in all things being equal in this environment you probably picked about 50 bips, 60 bips.

You got about half of that in the first quarter?

Right, again, it's not lapping on January 1.

It was throughout the quarter.

I understand.

The big benefit is going to be on the Street repo that we repositioned that all more or less is going to assist us in Q2.

So 1.7 billion is starting April 1, more or less.

So the dollar impact to NII is really going to be in the Q2?

Right, but keep in mined, Kevin, also we have a sizable CD portfolio that's priced into the marketplace.

That's helping offset some of that negative benefit of higher rates, negative impact of higher rates.

Only way I can figure it out at all though is look at it piece by piece.

In terms of your remaining borrowing portfolio, you did a lot of restructuring here.

How much do you have left that is maturing or callable within say six months?

Very little.

There's a lot that is callable but it's not going to be called because it's significantly out of the money, but we look at that as opportunity when we close the Atlantic transaction.

I don't want to go into too much specific until we actually transact, but no question the highest cost of money in this environment will not be called.

So the stuff that would have been called is pushed out.

So the money that could be called and maybe called in our expectations will not be called because of the high cost structure.

Which we will address when we combine with Atlantic.

Joe, can you give me a quick update just real quick on call up study.

Anything going on there?

Nothing other than the fact that the -- we are moving along -- we are on schedule for the implementation of the new electric generation capacity.

But that obviously is going to take time.

This is a very sophisticated installation and it will have significant benefit.

But that will come over time.

But all of the current situation expectations are being met and we are pleased with how that loan is performing.

Okay.

And then finally, just try to figure this one out, the expenses excluding the amortization expense were up about $5.5 million and then the press release you attribute that to, [One Out] financial.

I don't understand that because the last run rate for expenses was about 16 million and the 5.5 with annualized 22 million.

So I'm trying to figure out what's going on with that.

Kevin, I would also expect for growing the balance sheet.

You look at reasonable growth expected maybe 1 to 2% annually for the combined company.

We are very efficient.

We are an efficient operation.

Probably one of the most efficient operations in the country for a thrift.

So to hold the line is a challenge but we are focusing on holding the line.

We did not have a lot of cost saves that are going on with commercial.

The one on commercial is a small commercial bank that will be integrated within to Atlantic Bank to the New York Commercial division, of which we are going to utilize their people so that was not a cost savings transaction.

I would tell you that look at the first quarter on the community bank basis and look -- and with commercial which is very small as far as expenses and use that as a guide going into throughout the year and maybe 1 to 2% expense growth on the average balance sheet that we put out.

$5.5 million increase.

We had a significant growth in the quarter as well.

In assets.

I understand that, but in the press release you attribute the increase to One Out financial but in fact only part of it is due to that; is that correct?

That's correct, yes.

Thank you.

We have a follow up question from Sal DiMartino.

Hi, guys.

Just two quick follow-up questions.

One, on your private banking initiative, can you tell us where you stand there in terms of deposits and whether you see any opportunities now with having niches in Manhattan?

And two, just kind of housekeeping, I'm looking at your balance sheet on a sequential basis.

It looks like the loan loss allowance increased about 1.7 million.

Can you comment on that?

That had to do with the transaction of Long Island commercial.

And with regard to the premier banking, that is in the range of about $600 million already.

That will be greatly enhanced by the consolidation of our commercial bank operations which will include Manhattan based branches and their existing population of people and the greater access that we will have to the audience that we are truly working with.

Having a Manhattan franchise will definitely help in being convenient for many of the very large property owners who in fact we are working with.

Okay.

Just, Joe, on the allowance with -- what was the impact then specifically from Long Island?

I thought it was in there at December 31.

The only change from December 31 was about $100,000 which we referenced was charge off of a loan acquired in a previous transaction.

Are you looking at an average balance maybe?

No.

Period end?

I'm looking at your fourth quarter press release says the allowance was [Inaudible].

There was a change between the earnings release and our 10-K.

If you look at the 1231 number and that was due to the allowance that came over from the Long Island Commercial, it was about 1.6 million so you look at our 10-K, that's where the adjustment was made.

It was an additional?

That's correct.

It would be allowance that came over from Long Island Commercial Bank.

Okay.

You will see something very similar to that with the Atlantic Bank transactions as well.

Thanks.

Thank you, Sal.

There are no further questions holding.

I would like to turn things back over to you Mr. Ficalora for additional or closing remarks.

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

We appreciate the opportunity to discuss our first quarter performance with you.

And the rationale for our recent common stock offering.

We look forward to the addition of Atlantic Bank to our banking family and to reaping the benefits of its higher yielding assets and lower costing in liabilities.

As always, we are committed to creating value for investors and will continue to be driven by that overriding mission in the quarters ahead.

Thank you.

Thank you again for joining us everyone.

That will conclude today's conference call.

Have a good day.