Flagstar Financial Inc (NYCB) 2006 Q2 法說會逐字稿

Good day everyone and welcome to the New York Community Bancorp second quarter 2006 earnings conference call.

Today's calling 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, Ms. Ilene Angarola, please go ahead, ma'am.

Thank you.

And good morning, everyone and thank you for joining the management team of New York Community Bancorp for today's discussion of our financial performance for the second quarter of 2006.

Today's conference call will be lead by our President and Chief Executive Officer-- excuse me-- Joseph Ficalora 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 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.

You will find a more detailed list of the risk factors associated with all of our forward-looking statements in our resent SEC filings and on page nine of this mornings earnings release.

The release also includes a reconciliation of our GAAP and non-GAAP earnings which will also be discussed on this mornings' call.

If you'd like a copy of the earnings release, please call our investor relations department at 516-683-4420 or visit our website, mynycd.com

At this time I'd like to turn the call over to Mr. Ficalora who will make a brief presentation before opening the lines for q&a.

Mr. Ficalora?

Thank you, Ilene, and good morning, everyone.

We appreciate you joining us this morning for this morning's discussion of our second quarter performance which reflects the benefit of our Atlantic Bank acquisition at the end of April and the subsequent repositioning of our assets and liabilities.

In addition our performance was supported by three fundamental components of our business model; loan production, asset quality and efficiency.

I'd like to start today's discussion by looking back at the rational for our Atlantic Bank transaction and the goals we expected to achieve.

Among those goals were the diverse indication of our asset mix, an increase in our lower cost core deposits, the expansion of our geographic footprint through our commercial bank franchise and the enhancement of our interest rate risk profile in a rising rate environment.

I'm pleased to report that each of these goals was accomplished in the second quarter and that the integration of Atlantic Bank into our banking family is progressing right on track.

Let's start our assets, which totaled $28.7 billion at the end of the quarter, and included $19.4 billion of mortgage and other loans.

At the date of the acquisition, Atlantic Bank had total loans of $1.2 billion, including $406 million of a commercial business loans.

While multi-family lending continues to be our principal business, we welcome the diversification afforded by the acquisition and by the addition of CNI Lending to our business plan.

The transaction also provided us with $1.8 billion of deposits including $1.4 billion of low-cost core deposits.

As a result, total deposits rose 10.7% to $13.6 billion over the course of the quarter with the largest increase occurring in our balance of non-interest bearing accounts.

At $1.3 billion non-interest bearing accounts represented 9.8% of total deposits at the end of the second quarter.

Six years ago, before the first of our five acquisitions was completed, non-interest bearing accounts totaled $44.3 million and represented 4.3% of total deposits.

As for our commercial bank franchise, we now have 29 New York Commercial Bank branches complementing our 137 branches of New York Community Bank.

Of the 17 locations acquired in the Atlantic Bank transaction, 5 are in Manhattan, enhancing not only our presence as a lender in this highly attractive market, but also the opportunity to generate both deposit and revenue growth.

As for our ability to enhance our interest rate risk profile, you may recall our announcing plans to reduce our higher cost funding sources utilizing the proceeds from the post merger sale of securities.

I'm pleased to report that in May we sold $1.2 billion of securities in total, including $1 billion that were acquired in the Atlantic Bank transaction and another $200 million that were acquired in the Long Island Financial Corp transaction, which closed at the end of 2005.

As a result, securities has declined to $5.3 billion and represented 18.5% of total assets at the end of the current quarter as compared to $6 billion or 23.7% at the end of June 2005.

It's worthy of note that the current ratio is lower than both the state and national industry averages, and in line with the percentages reported by our local peers.

Consistent with the plans we announced in connection with the Atlantic Bank transaction we utilized the proceeds from securities sales to reduce our broker deposits by $261 million and to prepay $886 million of wholesale borrowings with an average rate of 5.93%.

We also extended $1.2 billion of wholesale borrowings during the quarter bringing the total that have been extended or modified over the past six months to $4.1 billion.

The benefit of these actions, is reflected in our net interest margin, which rose 8 basis points to 2.22% on a link quarter basis.

The first such improvement since the first quarter of 2004.

The achievement is not a small one, given that the yield curve, and-- and has been flat and inverted over the course of the past three months.

By the way, this increase in margin does not reflect any reclassification of prepayment penalties as interest income.

As in the past, a portion of the prepayment penalties we received during the quarter were classified as interest income and remain as fee income.

Although de minimus and [inaudible] variable, the margin would have been 2.29%, had all of the prepayment penalties been put into interest income.

While the improvement in our margin was, perhaps, the most significant of highlight of the quarter there are others worthy of mention in this conference call.

First among these is the 14.2% increase in loans outstanding since the end of December, which was, as much due to organic production as to Atlantic Bank loans we acquired.

Originations totaled $2.9 billion in the first half of this year, including $1 billion in the second quarter.

The link quarter reduction in volume was not at all unexpected, given the planned growth of our portfolio, with respect to the Atlantic Bank transaction and the intensity of competition among financial institutions for a limited number of credits at a time when refinancing activity has slowed.

Reflecting the inversion of interest rates, most of the loans we're producing today consist of new product rather than existing loans that are being refinanced.

Thus, while our average yield on loans rose 14 basis points to 5.76% on a link quarter basis, the improvement would have been greater were it not for the $1.3 million decline in interest income stemming from the prepayment penalties.

The decline in prepayment penalties also impacted our second quarter fee income, which dropped $2.1 million over the course of the quarter as a $3.6 million decline in prepayment penalties recorded as non-interest income offset a link quarter increase in fees produced by depository accounts.

Notwithstanding the impact to the yield curve on refinancing, our current pipeline totals, $604 million, including $383 million of multi-family loans.

Another achievement that is worthy of note is the quality of our assets, which has not only been consistent, but consistently strong.

Non-performing assets represented 0.11% of total assets at the end of June, and at the end of December while non-performing loans represented 0.16% of loans at the respective dates.

While quality of assets may be challenged in the future, we believe we will continue to outperform our peers.

We continue to originate our loans in accordance with our long-established credit standards, and to carefully monitor the adequacy of our loan-loss reserves.

I also want to comment on the efficiency of our operation, which has been fairly consistent despite the growth of our franchise and the addition of a second subsidiary.

While a significant portion of core savings to be derived from the Atlantic Bank transaction have already been realized, we expect to realize additional efficiencies in the coming quarters.

Following the upgrade of our current Commercial Bank data processing system and the integration of Atlantic Bank system with our own ladder this year.

With the integration of our systems completed, we will be well equipped to intensify our focus on growing deposits and on enhancing our revenues through third-party product sales.

The potential for growth is considerable.

In our estimation, and we are excited by the opportunities our Commercial Bank franchise represents.

Of course our overriding goal continues to be the the enhancement of share value, which can best be achieved by enhancing the earnings of a company.

While the post merger repositioning of our liabilities reduced our diluted GAAP and cash earnings by $0.06 per share in the second quarter, our operating and adjusted cash earnings amounted to 24 and $0.26 per diluted share respectively.

In light of the latter numbers and our confidence in the Company's future performance the board of directors last night declared a $0.25 share dividend, payable on the 15th of August to shareholders of record at the close of business on August 4th.

We're comfortable with the decision to maintain the dividend at the current level given the strength of our earnings from ongoing operations, the improvement in our balance sheet matrix, which we expect will fuel our future earnings, and the net profits produced by our subsidiary banks over the last 2.5 years.

Among the measures we were most pleased with at the end of the second quarter were those pertaining to our tangible stockholders equity.

At the end of June, our tangible equity equaled 5.69% of tangible assets, excluding after-tax net unrealized securities losses, a 40-basis point increase from the measure recorded at the end of March.

Including such losses, the ratio rose 38 basis points on a link quarter basis to 5.41%.

On that note, I would now like to open the line to your questions, we will do our best to get to everybody, but if we should miss you, please feel free to call us individually this afternoon or during the week.

Questions, please.

Thank you.

The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] Our first question will come from Mark Fitzgibbon with Sandler O'Neill.

Good morning, gentlemen.

Morning, how are you, Mark?

Terrific.

The first question relates to prepayment penalties.

I think you had almost $1 billion in prepayments during the course of the quarter and yet prepayment penalties were down a lot from 1Q.

I'm wondering, do you think we're getting close to that big wave of prepayment penalties that we've sort of been hoping for for a while?

I think the prepayments are still in front of us.

The actuality-- the amortization satisfaction and other activity in the quarter changes the loan portfolio, but the actual realization of prepayment penalties, comes from very specific activity with the assets that are in the portfolio.

A lot of the assets that we put into the portfolio during the quarter were brand new assets to the portfolio.

The-- the second question I had is relating to the margin.

Assuming that the yield curve holds where it is, and there is no more balance sheet restructuring, do you think we've seen the bottom on the margin here?

Mark, it's Tom.

My comment on that, obviously we're in a tough environment and the yield curve is currently inverted, given another rate hike, which is potentially probably in the next foreseeable future, we'd probably see the margin hang around here, give or take a few basis points.

We only have two months of the Atlantic into the second quarter so we'll get three months of Atlantic franchises into the NYB consolidated in Q3.

But I think it's going to be at a stable [inaudible] point right now in this environment, now if the yield curve was to start showing a slow up in the curve, that will be -- that will benefit the margin.

And lastly, it looked like from last quarter to this quarter your average cost on borrowings went down a basis point or two and yet you extended out a fair amount of borrowings, that 2.5 year bucket, what kind of borrowings did you buy that you were sort of able to reduce the absolute rate?

Typically what we do-- we like to go out and try to -- we mismatch our assets by about a year to 18 months in multi-family, so we're putting on five year paper with an average life about 3.5 years, we're looking at anywhere from a 10 year [indiscernible] three-year type structure predominately from the [inaudible] home loan bank, so-- and those levels are around somewhere in the mid-4s.

Thank you.

Thank you.

Next we'll go to Ryan Beck, Tony Davis.

Good morning.

Good morning, Tony.

I was under the impression that-- are you now accounting for prepayment fees as interest income and not non-interest income?

No.

In this quarter we did not do that, Tony.

What I had mentioned earlier, was that had we actually done that this quarter, the margin would have been 2.29%.

We will be doing that.

In other words, the margin will get the benefit from that down the road, it's just a matter of whether it happens in the third quarter or the fourth quarter, but year end is the most probable time for financial purposes to actually implement that.

But for those that are looking at comparative numbers, had the points been in the margin, it would have been 2.29%.

Joe, any comment on the National Bank of Greece deposits?

We're doing very well with those.

And in fact we're very pleased with the additional benefits being derived as a result of Jerry [indiscernible] involvement with the Greek community.

And have you signed employment contracts with the remaining execs there?

Yes.

Everybody that's on board today has a -- not every employee but everybody that's in the executive management has a contract.

Finally, I just wondered if you could comment on your interest perhaps in any of the Bank of New York Morgan branches that might be available?

The bottom line is we haven't been made aware of those that may be coming available.

Obviously, there's going to be some circumstances where it's obvious because there's a Chase and a Bank of New York on the same corner, but down the road we'll just have to wait and see whether or not the pricing or the circumstances justify.

Good deal.

Thanks.

Thank you, Tony.

Our next question will come from Salvatore Dimartino with Bear Stearns.

Good morning, guys.

Morning, Sal.

Two quick questions, if I recall correctly you originated a lot of multi-family loans in '02 and '03.

Correct.

And to the extent that they're still in the portfolio, do you have a feel for the amount of loans that contractually have to refinance next year, let's say?

Yes.

The numbers are-- are at record levels.

There's no question that there's going to be a significant amount of refinancing based on the structure of our loans.

What are those numbers, Tom?

I would estimate the next 18 months we're looking at in excess of 40% approximately will be -- the multi-family portfolio that has to contractually mature, and that does not assume any assumptions for acceleration or refinancing.

Sal?

Yes.

The important thing that Tom just said is that 18 months they're -- they're contractually maturing, in actuality they could actually refinance anytime earlier than they're maturing.

Okay.

And my second question, I guess now that you have a community bank and a commercial bank, your loan portfolio, as you said is more diversified, but if we were looking out 12 months from now, can you give us a little bit of color of how you envision the split between multi-family, commercial business and commercial real estate loans?

I think in the broader sense, Sal, we will always be predominately a multi-family lender, but the exact changes would be very, very hard for us to ascertain.

I don't expect 12 months out there'll be dramatic changes in ratios.

But we will be doing -- as big as we are we'll be doing a very substantial amount of CNI and commercial lending, even though it may not penetrate the percentages dramatically.

It will very well likely be more than had previously been done by the team that is in place.

Thanks, Joe.

Thank you, Sal.

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

Thank you, good morning, guys.

Good morning, Jim.

Joe, I was wondering if you might be able to comment-- I'm trying to figure out whether or not there has been any material deterioration in any of the-- the underwriting standards of competitors, maybe even non-bank competitors that are looking for multi-family exposure in the metro New York market.

Maybe you could comment on, A pricing which we all know is intensely competitive?

But B, also maybe terms extending out 10, 15 years, any kind of-- that debt coverage ratio, slippage or anything like that that you might be seeing the market?

Yes.

I think, Jim, you are touching upon a reality that was evident two years ago, 12 months ago, 4 months ago.

We are clearly at the back end of an elongated positive credit cycle, and as is typical at this point in the cycle, there are many, many lenders who have far less experience in a given market, who are anxiously attempting to get assets and they, therefore, are putting on the table far too many dollars with other terms in their agreement that are not necessarily driven by risk reward that would be acceptable in this industry.

So, yes, there-- there are people that are lending today under terms that are less than desirable, and it's probably more so than it was just a quarter ago, or six months ago, and-- and although we could have had this conversation, as I mentioned, a year and a half ago, the reality is, by-- by small measures it keeps getting somewhat worse.

As is the obvious, we are-- are very diligent about maintaining our standard.

And therefore, although 150 over the 5-year CMT is a low point for us over the course of time that is not where we normally lend from a standpoint of rate, that is the point that we are in fact enjoying at the juncture.

And as I'm sure you are aware, the rate that we literally price off of is the 5-year CMT and that gives us 650 to 675 over the course of this last quarter which is a very attractive rate compared to where rates were a year ago, two years ago, three years ago.

The good news is that we are definitely earning more on our assets, and you can see that, the bad news is there are lots of lenders in the market.

The New York market in particular is one of the most attractive markets for lenders all over the world, so you will find lots of people in the market that are doing things that are not necessarily standards that our normal participants would operate under, and therefore, for those that are actually willing to-- to step into that competitive environment, they are going to face bad terms.

Okay.

Thanks a lot.

Thank you, Jim.

Thank you.

We'll go next to Rick Weiss with Janney.

Good morning.

Morning, Rick.

I was wondering if you could talk a little bit about the loan pipelines, specifically with multi-family?

It looks like it's at a pretty low level even though I know it's seasonally this is your low point.

I think the important thing, Rick, is that, in line with what I was just saying and the environment that we're in, one of the things that will be good for us is that many of the properties in our portfolio will, in fact, be sold at significant profits.

That will precipitate activity that will take the loan out of our portfolio but give us points.

Over the course of this year, unusual percentage of the activity that has generated points for us has been driven by high profitable sales by some of the very knowledgeable property owners that are in our portfolio.

So since people are looking to sell, they are not following to the same degree their normal refinancing of cash flows.

They are packaging up pools of properties in some cases and selling them at very high profits, and we will not finance those very high-priced properties.

So when it comes right down to it, this market is, in fact, different than the market was, let's say in '91 or '92, in the middle of a cycle things are very, very different than they are at the back end of a cycle, and we have been lingering for a long time here at the back end of a very rich credit cycle.

Okay.

Got it.

Can I follow-up on Tony's question with the net interest margin?

I think that confused me a little bit.

Okay.

In the first quarter were prepayment penalties included in the margin?

The prepayment penalties have always been both in the margin--

I mean 100% included, I'm sorry.

No.

No.

No.

They were not.

Okay.

So it's the same method that you're using for the margin?

That's right.

In essence, the changes which have occurred will allow us to put all of our prepayment penalties into the margin, and-- and certainly as of the year end, they will appear there and certainly on a go forward basis, the comparisons will be easier because everybody will be in the same place.

So that will be a benefit to margin, and certainly as we go down the road the amount of prepayment penalty should definitely be a plus as well.

But as we sit today, we have not changed the way we are handling prepayment penalties.

So, some of them are in margin and some of them are in other income.

Got it.

And just one more question, the Atlantic Bank, are there any purchase accounting adjustments that made their way through into the margin this quarter?

Rick it's Tom, the amount of purchase accounting for Atlantic is immaterial.

The numbers are very, very small.

Okay.

Thank very much.

Thank you.

We'll go next to Bob Hughes with Keefe, Bruyette, Woods.

Good morning, guys.

Morning, Bob.

Couple questions.

I was wondering if you'd be willing to tell us where your margin might be been on a stand alone basis without the impact of Atlantic this quarter?

Bob, I guess I would allude to the fact that, we're at point now where the Community Bank, although slightly under pressure in the second quarter, Atlantic Bank did help the margin see growth here on a linked quarter basis, on a co-operating basis.

But the good news on the Community Bank is that we restructured a lot of our debt, we pushed a lot of debt out long, we paid down some of the high cost volumes that we had on the balance sheet and all things being equal here, we feel that the Community Bank was very close to stabilization.

Obviously, Atlantic helped that.

They brought to the table a lot of non-interest bearing accounts that really helped the margin into very attractive deposit base.

We know that there's some positive signs at the Community Bank, but if you add in the Commercial Bank transaction, no question it's helped fuel the margin on a link quarter basis.

Without a doubt.

But I'm sure the restructuring did as well too.

Is it possible to quantify the impact?

A couple basis points.

I would say we're probably down maybe a few basis points on a link quarter basis.

We had a significant decline from Q4 versus to Q1 of this year on the Community Bank and then we rolled in Atlantic you'd see a pop of about 7, 8 basis points here, I would say it's probably maybe 4 or 5 basis points down approximately on a stand alone.

Okay.

And there's been a lot of movement in the borrowings, Tom, I was wondering if you could tell us what your cost of borrowings looked like at quarter end to help us with some modeling purposes?

I don't have that in front of me right now.

I'll tell you that the good news on the borrowing side, Bob, is that we restructured and extended a lot of our debt, we feel fairly confident that we're going to hold the line on the wholesale borrowing cost.

Obviously, retail liabilities are very expensive in the marketplace, but we've - we feel a bunch of things happening right now in the margin.

We have asset yields going up at a nice clip right now without the prepayment penalty income that we're not enjoying currently.

And we have the benefit of a stable wholesale borrowings costs.

Retail funds are expensive.

And that's an ongoing trend until rates have stabilized and that could-- depending on where the market goes in interest rates that could stop next quarter or continue to rise.

But two of the three components of our margin are moving in the right direction.

As was discussed in the last call, we've expected to see the two of the three components move in our favor.

Over the past two years all three components were going against us.

Okay.

And I'm curious, it appears that all of your competitors in the market have reclassified prepayment penalty income as a component of interest income.

Why-- why did you choose not to this quarter?

It kind of feels like a somewhat discretionary action to help profit margin in the future quarters.

I think it's more in clarity.

We has a restructuring charge in conjunction with the acquisition.

I think for clarity, no question you can actually look at our numbers and see the asset yields going up on a core operating basis.

This is only upside for the margin going forward, we're at the lowest point of the Company prepayments historically.

So we look at that as only upside, there's not a whole lot of downside to the margin here.

So let's communicate to the investment community that our asset yields are moving in the right direction, we do-- it all goes through the bottom line any way, and we're very comfortable with the accounting going forward, however we want to make clarity to the marketplace.

And no question, throwing a -- and again, the number about was about 5.3 million consolidated versus a significant number in the first quarter.

So I think it will be more of an explanation to figure out what actually happened on the margin, this is much more of a clearer response to what's going on with the balance sheet right now.

If I could ask one final question?

It looked like, based on the release, you guys originated $130 million of commercial business loans this quarter, is that correct?

Yes.

Was that coming from [indiscernible] or Atlantic?

The combination but mostly from Atlantic.

Atlantic is a much larger bank, obviously than [indiscernible] was.

You also have a lot of renewals there too, Bob.

Okay.

And maintaining the customer relationship which is key.

Very good and when do you think you might start providing against some of that commercial growth?

Well, I-- I think that based on what we've been hearing from the people that are actually in that market, they believe the summers usually are-- are slow, and it happens, you know, after September, October.

Bob, I would-- I would-- to answer that question -- I would -- keep in mind we just bought Atlantic Bank.

It's in the balance.

We've assessed the valuation of the reserves, we look at the appropriate risks, and we provide for that in conjunction with the acquisitions, we've taken over some of their reserves obviously and we wrote down certain assets that we were uncomfortable with.

That will be probably an ongoing process.

As what we said when we bought Atlantic Bank, when we made the announcement, we have no problem providing for loan losses when we start generating significant assets.

We haven't started generating significant assets at the Commercial Bank franchise, currently.

So, in the future that will be something that we're going to have to spend a whole lot of time understanding and looking at the risk of the types of assets that we're putting on.

Okay.

Great.

Thanks, Tom.

Yes.

Thank you, Thomas McGovern with Lehman Brothers has our next question.

Good morning.

Morning, Tom.

In terms of the competitive environment locally with Independent Community exiting the market and with companies like Historia and Dime de-emphasizing origination, at least right now in the current margin environment, is the competition now primarily from your large conduit lenders like Wamu or are there other players out there that are stepping up?

I think-- I think you have touched upon who the more aggressive players are in the market today.

The large conduit lenders and certainly to whatever avenues possible, Fanny Mae is still in the market.

Citibank has never really left the market, Wamu is an aggressive participant in this market for the kind of product that they like.

So, yes, we've had some changes, Norfolk and Independence were both active in our market, specifically in our niche.

They have both changed somewhat.

The reality is, that Sovereign is still going to be in the market.

There's also certainty that the-- the void that is created by their leaving can easily be filled by the multitude of alternative choices.

But you've touched upon the largest players who are active longer-term lower rates in this market.

All right.

And so really, they-- what they are offering competitively versus your product is really a longer term product and a [inaudible] rate?

Correct.

Yes.

And that is-- by the way that is consistent.

But as we sit today those are the guys that are extraordinary active in the market.

Not everybody who likes our particular product will take that as a solution, because most of our people are in fact planning on refinancing in a three to four-year time frame.

So that product doesn't really fit their needs.

The only people-- the only people who can take a 10 or a 15-year loan are people that are not expecting to refinance in a short period because the penalties to them are excessive should they elect to do that.

So the-- the fact is that there are people taking 10 and 15-year paper, but they are not necessary the best people for our portfolio.

And that is one of the things that over the course of time distinguishes the overall performance of our portfolio, our guys are typically short of view participants in the market who understand how to manage their property to a short refinancing three to four years.

Got it.

Thank a lot.

Thank you, Tom.

Thank you.

We'll go next to Friedman Billings Ramsey, James Abbott.

Hi, good morning.

Good morning, James.

Could you just give us -- you did a great job in the press release of giving us a break down on the loan composition at Atlantic bank.

Could you give us -- I was looking for three numbers on Atlantic Banks deposit break out at the end of the close just so we could get a sense, the non-interest bearing, the interest bearing core deposits, and then the CDs at the close?

I don't have the number in front of me, Jim, but you can call Ilene, and she can give you the break down.

Thank you.

I know the non-interest bearing was a sizable number and the core accounts, I think, was close to 70% I think the total-- 65, 70%.

I don't have the specific number in front of me.

Okay.

Okay.

Because it looked like Atlantic Bank grew, maybe a little bit?

Yes, they did.

That's correct.

They grew in the core not in the CD area.

They grew in the core.

That's correct.

That's one of the things I was looking for.

And then also could you-- because-- or because the quarter was a partial quarter for Atlantic Bank, could you give us the margin for June, perhaps to give us a sense on-- on a full--

We-- we don't disclose monthly margins, but, no question the margin in the past three months was sequentially going up on monthly basis.

Okay.

Okay.

One of the other questions is related to the dividend payment.

Now I know that the GAAP earnings per share number was $0.18, which was below the $0.25 number.

Obviously, the cash earnings was-- was $0.26.

What-- what regulatory issues are there are with paying a dividend and do they look at GAAP earnings --

Yes.

-- I understand that they look at two years of trailing retained earnings, but I'm not sure that I understand whether retained earnings is cash retained earnings or GAAP retained earnings.

Yeah, I think Jimmy, the important thing is that although people do focus on how much of your current earnings are you paying in your dividend, what is your pay out ratio, that is not a regulatory measure.

So dividends are paid out of accumulated earnings over the preceding two years plus the current year so the accumulated earnings are obviously substantially greater in our case, and therefore in any given period, dividends are-- are not driven by the actual earnings in the period.

I just had a-- and I looked back and I'll say this because they are so large, and so irrelevant, but going back, I guess '99, 2000 over a two-year period, the earnings at-- I guess it was Chase dropped from about $1.40 to $0.11, and while their earnings dropped they raised their dividend twice.

So their earnings were $0.11 and their dividend, I belive, was about $0.32 or $0.33.

So at the end of the day there is ample evidence and precedent that dividend has nothing to do with the current period's earnings with regard to regulators.

That is a myth or a misconception.

Dividends are in fact paid out of accumulated earnings for prior periods, and-- and that establishes a degree of stability that is-- is common to all of corporate America, it's not just to -- to us.

And therefore, this-- this focus upon, $0.24 cents, $0.25, it doesn't really matter, our strong capital ensures us that we have the ability to keep paying dividends.

Jim, it's Tom, on -- on just purely on the mathematics, obviously you know we have a significant level of capital at the bank subsidiary company, and if you look at what we-- in the worse case scenario making no money we still have in excess of $300 million that could be utilized for dividends going forward in this-- in this current year.

So, I mean, no question we have the capacity and we're very high bank regulatory ratio.

If you were to deplete that ratio dramatically just to pay dividends, we would still have ratios in excess of our peer group.

Just to be clear, that 300 million or 300 million and greater would be the accumulated earnings at the bank subsidiary that the regulators would be looking at?

That's correct. [indiscernible], correct.

Jim, another think to think about, over the course of preceding years, we, as well as currently many of our peers, manage our capital often to a neutral point.

U.S.

Bank Corp. for example, always pays out all of it earnings either through stock buy backs or dividends.

We historically often bought back stock and paid dividends in excess of our earnings, so many a time we would reduce our ratios, our tangible or our capital ratios, from one period to another.

That is not an uncommon fact in the current business environment.

Many of our peers today are reducing their tangible position consciously, while they are buying back their stock.

Capital utilization commonly is for the purpose of paying dividends or buying back stock.

And in our case, we are very focused on paying our dividends.

We obviously have the capacity to do it, and our capital, actually has grown.

So over the course of this quarter as a result of highly accretive transaction, we've grown our tangible by 40-basis point.

That is a very commendable thing to be able to accomplish when in fact the yield curve is inverted and we're paying a very, very strong dividend.

The realty is we are very focused on our dividend not our buy back.

I would also add to that, over the past two years we've toughed out sequential declines in our margin, we are very pleased that we're seeing an positive of impact to the margin, and at this point in time we're looking to hopefully future earnings growth over time going to our dividend pair ratio.

Okay.

Can I ask what your comfort level is on a GAAP-- on a tangible equity to tangible asset ratio basis is?

I think you mentioned with-- excluding the OCI adjustment, it's 5 to 6%.

We're 5.69 now we're ahead of our current modeling expectations.

Obviously we didn't grow the balance sheet as much this quarter.

We did think Atlantic transaction and the loan portfolio had some limited growth there.

I would say this company has made as low as 3.65 on tangible.

We're at 5.69, we're getting closer to that 6% threshold.

We do have a high dividend payout ratio, but being in the mid-5 is very strong capital for us.

Higher than the norm for NYB.

For a while you kept targeting 5.25, was there anything behind that--

Just the marketplace at the time, Jim.

Obviously the marketplace has changed dramatically rates are up on the short end substantially and the [indiscernible] interest rates really haven't gone a whole lot from where they were a year and a half ago.

So, obviously, we don't see the slope and 5.25 was assuming a slope in the curve.

We don't have a real slope in the curve currently.

Okay.

And then last-- last question is, do you have an outlook for loan growth in the third quarter?

The pipeline was obviously a little lighter than what we had modeled.

Are you looking for significant growth or -- it sounded like from your comments earlier, that you weren't looking for much growth in the third quarter?

At this juncture we're very comfortable with the possibility that loan growth might not occur in the third quarter.

That will help us in-- in basically stabilizing the overall mix in the balance sheet as we go into the last quarter, which should be a more active quarter than the third.

Okay.

Thank you.

And also, to piggyback off of a question that was asked earlier, [indiscernible] Community, in their conference call gave some very good color on -- and you gave the 18-month out look of loans that are repricing, but what they did is they broke it down and said here is how much is due, and what the rate is, and we could sort of do some math on that.

Would you have any information on that?

The only thing I would add to what I've discussed about the potential of actually stating maturity is that our current [indiscernible] on the multi-families are 5.34 and the market is 6.50 or north of that.

So, obviously as those loans roll off and new loans come on it will be significant benefit to asset yield as discussed over the past two quarters.

We continue to experience a significant benefit to asset yields as refinancing accelerates rating and loan production stays relatively strong we'll get a substantial benefit to the asset yields because of the low inherent coupon in the portfolio for multi-family loans.

Okay.

Well thank you very much I-- I appreciate that.

Thank you our next question will come from Matthew Kelley with Sterne, Agee.

Yes, hi, guys.

I was wondering if I could get a little bit of detail on the expense line.

I know that it said in the release that Atlantic Bank added $5.8 million in the quarter, and I guess you had that for about two months annualized so it would be about 8.8 million, but it looked like Atlantic had been running at about 16 million a quarter so it would imply greater than 50% cost savings is that what actually happened?

I think obviously-- Matt we're tightening our blet here.

These are tough times, we're all working hard to make money for the shareholders, and we're doing a company-wide view of what operations are profitable, what operations are not profitable.

We are making company-wide changes, which will help the bottom line, that's the focus in this year.

It's a tough year.

We understand earnings are under pressure.

So, that's what we're doing.

But if you look at just on a normalized basis, I would say on a quarterly-- probably 68 to $69 million on a quarter basis for the run rate currently.

High end being 70, low end being 68.

All right.

That's helpful.

And then just a question on-- on the borrowings, how much of the borrowings are now in that 10 year, no call 2 or 3 type structure our of the entire 10.3 billion?

I think right now it's maybe 25%.

Is that right, John?

Is variable? [MULTIPLE SPEAKERS] yes.

About 20-- 25% of our -- yes. 20 to 25% of [inaudible] which is also with the street is variable, the remainder is being fixed.

Obviously, we do have a high degree of [indiscernible].

But we're a different company we mismatched historically by around 18 months.

So when you look at our balance sheet we're not putting on long-term asset we're putting in medium term assets.

We try to get funding within 2 or 3 years.

Obviously, it's a tough environment in the shape of the curve, but it's not uncommon for the Company to have a high degree of advances in conjunction with competing with 5.5, 5% CD market in six months.

So, we're not playing the short game right now, we're trying to extend in this environment, and we have a nice, low asset yield that should benefit us [indiscernible] financing.

But I would say a lot of our money is two and three year type money because it was mismatched approximately 18 months off of the average life of multi-family loans.

Okay.

I guess what I'm trying to get at-- I know that right now the 10-year no call two or three type paper probably is cautionary like 470, 480; is that about right?

We locked in probably in the mid-4s.

I don't see a whole lot more extension there.

We-- we've really moved a lot on our liability based over the past six months.

The first half of 2006 was focusing on liability benefits and we opted, opportunistically in an inverted curve to move as much as we can opportunistically.

And that helped out -- will help the margin going forward.

As indicated in the first quarter we've done a lot of modifications right before the close of the quarter, and that will be benefit Q2, Q3, and Q4 as well as '07 and '08.

So we're really proactive on the liability front and I think that's what the benefits for the margin will continue to see, like I said previously, wholesale liability costs should remain very stable.

The issue for the sector as a whole is retail liabilities, that's something we can't control.

We're not going to be as competitive as some of our brethren in the area, the CD rates are very high.

So, we try to get as much business as we can but we're not going to go into a rate war when you are borrow money for our balance sheet that makes more sense.

If you could just talk about the preference for the no-- non-call type feature versus the fixed rate advance?

Obviously you are getting about 100-basis point advantage in today's environment.

Is that tied into your belief that rates are going higher and that's why your're doing the no-call structure for two or three years?

I would say yes, but I think it's tied into more into the casuals of multi-family, Matt, I think when you look at our -- we treat it as a two year borrowing and three year borrowing, we're not treating it as a ten year borrowing, we never teat the callables as a maturity, we treat it as the first call.

And we have significant amount of callability, however, we manage that historically, and we manage it very proactively.

But what about the prospect of rates being down three years from now?

Rates being down three years from now and having an average like 404 as a current, terrible.

Okay.

We have fairly low funding, we've restructured a lot of the borrowings.

For example, the borrowings we paid off, we paid off.

We didn't put more on relative to that transaction.

We paid off 5.90(ph) percent, that was a nice benefit for the Company.

It was the right thing to do at the appropriate time in light of the acquisition.

All right.

Thanks a lot.

Very good.

Thank you, Matt.

We'll go next to Greg Lapin with Tribeca Global.

Yes, that centered around my question on the advances, then what is the sensitivity if rate goes up a lot?

Do they-- when-- when do they put it to you?

I would say if rates go up dramatically from here.

Look at three month LIBOR, if three month LIBOR is up to 650 you're going to have a lot of calls, if three-month LIBOR is slightly lower than here it's a coin toss.

Obviously, it's based off of LIBOR funding.

We have had significant rises in LIBOR over the past two years and if rates do go down it's okay.

We'll give with the 4% funding cost.

Which is not a terrible position to be in.

And then on core deposits, what was responsible for the decline in them on a stand-alone basis.

I think-- I think no question, we have had-- we have had a substantial pipeline to close in Q1 in conjunction with the Atlantic Bank funding that we had coming over, so we utilized hybrid type money market accounts, broker type money market accounts that came through the Company that we offered to pay off.

So it's clearly a reduction of the high cost, we'll call fluid money that's out in the marketplace.

Okay.

Thanks.

Our next question will come from Jim Delyle with Chapel Street Partners.

Good morning, gentlemen.

Pardon me, I'm a bit of an interloper in community banks, I'm more comfortable in the mortgage finance world, residentials.

I'm trying to kind of normalize the way I look at this, between, like, say, mortgage rates and things like that where you have average cost of liability and average return on assets with a lot less callable debt, and I was hoping you could tell me the 592 interest rate swap, or 592 liabilities you paid off, what was the term on those when you paid them off?

Those were 10 years 5, 10 year 3s, 10 year 2s that were generated many, many years ago.

That we inherited -- actually this is actually from Richmond County, NYB, various acquisitions that were at a coupon at a very high cost of the Company in the current interest rate environment that was callable that would not have been called in this environment.

All right.

And as a result-- and do you disclose in here how much you pay to end those contracts?

You typically-- well it's a charge, obviously there's a restructuring charge for that, typically on a structure like this, you are paying the market valuation plus 10% on-- on the market valuation, so the penalty is probably around $2.5 million the charge is about 26 million gross.

Pre-tax?

Pre-tax. 18 million is the after tax approximately.

26 million pre-tax.

And what part of the quarter -- what I'm trying to end up doing is basically backing this back into your liability cost to come up with a more normalized nim(ph) for this adjustment.

So what I would basically be doing is just kind of adding back the run rate of that to your liability cost over this quarter.

Can you tell me when you terminated this over the quarter?

It was subsequent to the Atlantic acquisition.

Obviously, we publicly said that when we closed Atlantic we were going to utilize the securities cash flow from the sale to pay off the highest costs funding for the Company, and that's what placed after April, so it wasn't in April, I would say it's probably half way into May and all of June.

Okay so about half the quarter?

That's right.

And if you were to create a proxy liability source that replaced this, would the cost have been somewhere in the 430, 440 range?

We actually, proactively locked that in at 3906 to 416 on average in the first quarter.

So we actually, in anticipation of the restructuring, that was done in the first quarter.

Okay.

Thank you very much.

You're welcome.

Thanks, Jim.

We're go next to Kevin Timmons with C.L.

King and Associates.

Thanks, guys, couple things.

I wanted to check, if I heard correctly, there was a question about the cost levels and I think the guidance was 68 to 70 going forward.

Is that where --

Give or take, obviously, we only have two months of Atlantic expenses into the current operations for Q2.

I would estimate between 68 to 70 million per quarter.

Give or take.

That includes the full quarter of fact as well as any remaining cost saves?

The cost saves, we rung out a lot of cost saves initially we have some more to go, until we finish the integration, which will take place in Q3 and Q4, we'll see the full benefit of that no question in '07, but we have done a lot of work in getting where we need to go, and we have some room, however, we're being very conservative, so I'd say 68 to 70 million a quarter.

Okay.

And you the-- the implicit message there is that, if you can ring up the cost saves that at least would help to offset any inflationary pressure for --?

That's right, Kevin.

I think I've indicated previously, we're working very hard company wide to find efficiencies here, we're still a very efficient company but we do have a commercial banking franchise to the mix and the the commercial banking business is different than the thrift business.

The expenses are much higher, the people, costs are much higher, they are on the road, pounding the pavement getting loan deals for us and you pay for that.

So it's a different model than our typical thrift mode.

We concede to that and we're willing to make the investment in that, so when we looked at cost saves at both Atlantic and [inaudible] commercial it's not your typical thrift acquisition where you ring out a lot of cost saves.

The commercial banking franchise, the people generate the business, and the people are extremely valuable and maintain those relationships.

Sure.

Within the 68 to 70 that includes the amortization expense going forward?

That does not include CDI.

Okay.

Do you know roughly what the amortization expense will be off full quarter?

I think it was 1 million 6 a quarter, approximately.

Is that right, John?

Yes.

About 1 million 6 for the quarter.

So what is that going to translate onto as far as a full amortization charge on a quarterly basis going forward?

Add another 800 thousand -- another 800 thousand into -- another 550 -- add another 550 to the CDI line item that's on the press release, that should get you there.

Okay.

Thanks.

You disclosed the-- that you paid off of a bunch of broker's CDs what is the remaining balance of the broker's CD?

It's about 1 billion 7, it's in -- approximately 1 billion 5, 1 billion 7, and we'll be proactive there.

It's very expensive.

We utilize those markets because of loan growth.

In the planned acquisition our goal is to overtime pay it down and bring in core money.

But it's a source of funding that we utilize, and we like to -- as rates are higher here we'll finance out production with the cheapest cost of money that makes sense for our balance sheet, which -- that's why we paid down a significant amount of our broker money in conjunction with Atlantic, because it's very expensive.

Okay.

And then on a construction loans, I'm assuming you are not doing anything different there than you have been.

But can you kind of refresh us in what you're doing and where you're doing it?

There's a pretty --

I think the important thing there, Kevin, is that we're dealing with very experienced builders.

Almost all of the loans that we do with regard to construction lending are to people that are in our portfolio, have been in our portfolio for years and years.

They're very successful at what they do, they're very fast at executing on what they do, and they're just drawing on the loans that are already in place in many cases.

When we do an new loan, it's extraordinarily rare if we a loan is not with somebody that we already have a relationship with.

Right.

We're enjoying a significant benefit on the construction portfolio to the asset yields.

Obviously prime is up dramatically, we get the benefit when prime goes up we directly pass that through our customer base.

Yes.

Can you characterize, first of all geographically, are you primarily still on the Island with that stuff or it --