Flagstar Financial Inc (NYCB) 2006 Q4 法說會逐字稿

Good day everyone and welcome to today's New York Community Bancorp Fourth Quarter 2006 Earnings Conference.

At this time for opening remarks and introductions I would like to turn the call over to the First Senior Vice President and Director of Investor Relations, Ms. 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 financial perform for the fourth quarter of 2006.

Today's conference call will be led by our Chairman, President and Chief Executive Officer, 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 a certain forward-looking statements which are intended to be covered by the Safe Harbor provision 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.

Prepayment penalties and other 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 nonfinancial institutions.

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 non-GAAP earnings and capital measures, which will also be discussed on this morning's call.

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

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

Mr. Ficalora.

Thank you Ilene, and good morning everyone.

We appreciate your joining us for this morning's discussion of our fourth quarter performance, which reflected a number of measurable achievements and demonstrated a viability of our business model.

First among these achievements is the link quarter expansion of our net interest margin.

Despite the continued inversion of the yield curve during the quarter, our margin rose three basis points to 2.27 over the past three months.

The reasons for the increase are also worthy of mention.

First, we experienced an increase in prepayment penalties during the quarter.

Second, we realize a meaningful increase in our loan and asset yields.

Reflecting an increase in refinancing activity, prepayment penalties rose 64% in the fourth quarter from the levels recorded in the third quarter of 2006 and the fourth quarter of 2005.

While the level of prepayment penalties will vary with the volume of refinancings, we would expect to see more year-over-year increases in the coming quarters given the expected weighted average lives of our multifamily and commercial real estate loan portfolios.

With the substantial volume of loans slated to reach their contractual maturity over the next eight quarters, the rise in prepayment penalties is likely to be sustained over the course of this year.

Another benefit of the increase in refinancing activity is the opportunity to replenish our portfolio with higher yielding loans.

In the fourth quarter of 2006, the average yield on loans was 6.08%, 14 basis points higher than the yield in the trailing quarter and 46 basis points higher than the yield in the earlier period.

Similarly, the average yield on our assets rose 12 basis points linked quarter and 46 basis points year-over-year to 5.86%.

These improvements are especially important when you consider the very measured approach to lending we took over the last two quarters when we opted to reduce our loan portfolio and therefore our assets rather than originate loans had loan to values that exceeded our maximum ratios.

Capitalizing on the strategic decline in loans in the recent quarter, we reduced our broker deposits by $916.3 million, while also reducing a portion of our higher cost CDs.

At the same time we opted to increase our use of wholesale funding sources which we found to be more attractively priced than certain retail funds in the current environment.

These actions also contributed to the improvement in our net interest margin and to the growth of our net interest income in the fourth quarter of the year.

While the opportunity to lend more than we did was very much present, we chose to adhere to our long-standing credit standards and to place more of an emphasis on asset quality than on the growth of our loan portfolio.

The quality of our assets was another of our main achievements this quarter.

As we reduced the level of nonperforming assets by $10.9 million or 32.6%, nonperforming assets totalled $22.5 million representing 0.08% of total assets at December 31st.

While we can't expect to sustain this level of asset quality on an indefinite basis, the fact is we have produced a very consistent record of solid asset quality over the course of decades.

Originations totalled $5 billion this year, down $1.4 billion from the 2005 level but enough to boost our loan portfolio by better than 15%.

At December 31, 2006, loans totalled $19.7 billion and represented 69% of total assets.

Securities, by comparison, totalled $4.9 billion and represented a far more modest 17.3% of total assets, reflecting the planned reduction in the portfolio.

Multifamily loans totalled $14.5 billion at year end and represented 74% loans outstanding while our capacity to generate C&I loans was boosted by our commercial bank acquisitions.

The fact is, that such loans represented little more than 3% of loans outstanding at that date.

At the present time, our pipeline is approximately $737 million.

Multifamily loans represent approximately $532 million of the current pipeline or 72%.

Turning away from our balance sheet and back to our income statement, we see another indication that the future is looking brighter than in the recent past.

Our fourth quarter 2006 diluted earnings per share were $0.21 on an operating basis consistent with the level in the third quarter of the year.

That we have been able to stabilize our operating earnings in the face of an inverted yield curve is testimony to the actions we've taken over the past 12 months.

In 2006, we had the benefit of two accretive merger transactions.

The acquisition of Long Island Financial Corp. at the end of 2005, and four months later the acquisition of Atlantic Bank.

While the addition of a commercial bank subsidiary has contributed to an increase in operating expenses, our operating efficiency ratio was nonetheless a respectable 39.12% in the quarter and 37.59% for the full year.

Two months from now we would expect to complete yet another accretive transaction, the acquisition of PennFed Financial.

In addition to adding 24 branches to our franchise in New Jersey, the acquisition represents an attractive funding source.

We expect to sell a significant portion of the acquired loan and the vast majority of the securities acquired in the transaction.

And to use the proceeds to fund the production of higher yield loans and or pay down our higher cost funding sources depending on market conditions at the time.

The transaction by the way, is progressing quite smoothly.

Conversations between the banks and our respective department heads have been taking place since November and the stage is set for the integration of our systems to take place not long after the transaction is closed.

In addition, the special meeting of PennFed shareholders has been scheduled and will take place on March 13.

Of course, no discussion of our performance would be complete without mention of our solid tangible capital measures which in the current operating environment have facilitated our commitment to maintaining our current dividend.

I'm pleased to report that at December 31, 2006, tangible stock holders equity equalled 5.66% of tangible assets excluding the tax mark to market adjustments on securities and representing a 25 basis point increase from the ratio recorded at year end 2005.

Including such adjustments are tangible stock holder's equity equaled 5.47% of tangible assets representing a year-over-year increase of 28 basis points.

The strength of our tangible stock holders equity stemmed in part from the strength of our adjusted cash earnings, which were $0.24 diluted share for the quarter and the $1.01 per diluted share for the year.

Reflecting the strength of our capital, the board last night declared a quarterly cash dividend of $0.25 per share payable on the 15th of February to shareholders of record at the close of business on February 5.

The ability of the company to maintain the dividend at this level throughout 2007 and beyond was significantly strengthened by the payment of a $325 million dividend by our principal bank subsidiary to the holding company in the fourth quarter of the year.

In summary, we are pleased with the accomplishments that highlighted our fourth quarter performance.

While our optimism at this point must be tempered by the continued inversion in the yield curve and current market conditions, we do believe that the strength of our business model, which includes our adherence to prudent credit standards, have set us a proper and exciting course for the remainder of the year.

At this time, I would be happy to take your questions.

As always, we will do our best to get everybody in the time allotted.

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

I'm open for questions now.

Thank you. [OPERATOR INSTRUCTIONS].

We will go first to Mark Fitzgibbon of Sandler O'Neill.

Good morning and thank you for taking my question.

Good morning, Mark.

First I was wondering you mentioned a merger related allocation of ESOP shares of 5.4 million in the quarter.

I wondered if you could explain exactly what that is and is that the piece that was not tax deductible.

Right.

That's the piece that's not tax deductible.

It happens every year in which we've closed a deal.

It has happened I guess over the course of the last six deal that we've done.

Mark, it's Tom.

Basically what happens as we accumulate dividends in the trust, those dividends then get released upon a transaction which then we get tax deductibility for the dividends that accumulated in the trust.

So it's a non-cash charge to capital where we actually get a cash benefit for the tax deductibility of our dividends.

So it's accumulated dividends in the trust that gets released to the share -- to the ESOP holders.

That's why the difference is so large between cash earnings and your GAAP earnings.

Got you.

And then the second question I had, you talked about prepayment penalties likely being strong going forward here.

But it looked like the weighted average life on the multifamily portfolio and the commercial real estate portfolio have held pretty steady around 3.7, 3.8 years.

Wouldn't that imply that prepayment penalties, you wouldn't see a lot of them for some time?

No.

Actually that weighted life is based on the mix of newly introduced loans to the portfolio as well as the existing portfolio.

But the reality is that there are many loans in our portfolio that have already attained significant improvement in cash flow value.

And therefore they would be normally expected to refinance in some cases in as little as one or two years.

We have some very, very large considerations in the current quarter and in the quarter ahead that would indicate that there is a significant improvement in the overall market value or cash flow value of whole pools of loans.

So the likelihood that we are going to see both from the standpoint of valuation due to improved cash flows as well as significant improvement in market values properties will be sold is very high.

So as I guess we've mentioned on occasion, some of the larger considerations that we have in the portfolio do refinance sometimes in as little as one or two years.

So that's -- in many cases, we've even had five.

But four or three points as a result of those refinancings.

Mark, it's Tom.

I would add to that, that if you look over the next number of years the average coupon that is going to contractually refinance is probably about 110 to 125 basis point below the current market coupon.

So in the event that happens if we're growing or if we're refinancing these loans or just paying off these loans and getting paid on points and paying down our high cost debt, we have margin benefit.

Okay.

And then in that same vein, I wondered if you give us a sense for directionally where you think the margin is headed given, assuming rates stay where they are and you continue to remix the balance sheet, should we expect the margin to continue to pick up a little in the first quarter and then maybe come back a little once the PennFed deal closes?

Mark it's Tom.

I would say going back to the last conference call we were pleasantly surprised for our results of the fourth quarter.

We expected any where from five or ten basis points down in the fourth quarter.

We were actually up three basis points in the [link] quarter basis.

We are probably going to hold in here at these levels right now, depending on the level of prepay.

As Joe indicated the prepays accelerate that, we will have nice margin benefits in the future.

Even with this let's call it sluggish prepayment levels we feel pretty confident our margin's going to hang in here.

Great.

Thank you, gentlemen.

We will go next to Salvi Martino of Bear Stearns.

Hi, good morning.

Good morning, Sal.

Just two questions.

The first one is a follow-up to Mark's question on the prepayments.

Joe, in your prepared remarks you sounded pretty upbeat about prepayment activity.

A couple of questions.

You know, really what changed this quarter to result in such a strong showing, and how are prepayments so far in the first quarter?

I think probably as we have been saying, our prepayments were in fact lagging normal activity.

And during the fourth quarter more people made the decision that they wanted to take a realization on the build in their cash flow.

Meaning that the portfolio holds a tremendous amount of additional value.

This additional value is the result of rent rolls going up and the owners make these decisions based on their assessments of where rates are going to be in the future, as well as other market factors that cause them to judge, it might be better to sell at ten times my cash flow for a very big price.

When that happens, we don't refinance the loan.

But there are plenty of people out there who will refinance the loan.

And the fact is that we just get paid the points.

In many cases because they are being paid so much money, they are paying four points to us because it's a very short lived loan.

And they are moving on and getting 1031 exchanges that they buy lower value properties with.

That is very, very consistent with the back end of a credit cycle.

Sal, I would add to that, obviously over the past number of quarters we talked about the overall maturity expectation of capital coming back to the company on scheduled refi.

What was very intriguing in the fourth quarter was that in the back half of the fourth quarter a lot of the loans are low coupon loans.

Bread and butter type NYB transactions that came back to the bank and [reified] with us and paid us the points.

That is great business so obviously we are turning that portfolio at a 4.75 to 5% coupon putting it back at 6.25, one fifty over the five year, and getting 3 to 4% on prepay.

That was a very encouraging trend in the back half of the fourth quarter.

Just, Tom, just a follow-up on your question, do you know the percentage of loans that actually refied and stayed with you and just went away from you?

In the back half the fourth quarter that number probably increased to over 50%.

However, during the year it's been very slow.

As Joe indicated a lot of the deals have been sale transactions.

But towards the back half of the fourth quarter we had probably about half the volume was staying with the company, which is a significant up tick from prior quarters.

And that does not mean next quarter and the quarter thereafter it's going to be at that level but we see some nice bread and butter deals coming back to the company, which is a typical New York based rent control, rent stabilized buildings getting excess cash flow and capitalizing on the market conditions.

Okay, thank you.

We will go next to Bob Hughes of KBW.

Good morning, guys.

Good morning, Bob.

Joe, you mentioned in your prepared comments I think that we should expect to see year-over-year increases in the coming quarters, in the prepayment penalty income.

I think if we look at the first quarter of '05 that number was about $10.2 million.

And correct me if I'm wrong, but does that suggest again a pretty material pickup in the first quarter?

Well, it easily could.

The way things currently sit, there are very significant prepayments that are in the works.

In the first quarter of last year that number represented one of the transactions that I was talking about.

A very large pool of properties that was sold for a very attractive price resulting in a very strong prepayment that we received.

There are very similar, in fact even larger transactions that are pending.

So, yes, it is entirely possible that we will be stronger in the first quarter of this year than last year.

Bob, it's Tom.

If you go back over the past three or four years you will see a trend where obviously we've been declining our level of annual prepayment penalty income generated.

For example, back in 2003, we had almost $60 million of actual income coming into the bank.

Last year, 2006 we closed at $29.5 million.

We feel pretty confident we will be above the $29.5 million going into 2007.

Sure.

Okay.

I wonder if you can comment on the core deposit trends.

I know you guys ran off a considerable sum of brokerage deposits in the quarter.

But if you, excluding CDs Joe, it looked like core deposits were down about 6% linked quarter.

What's can you tell us about what's going on there?

In actuality our operating cores is in the various branches and as you know we are a composite of different franchises.

There were some adjustments that were made.

In some cases they were fairly large adjustments due to very large relationships with people that either use their money or move their money for other business reasons.

And as well as it went out fairly quickly, that can come back to us fairly quickly.

I think the good news for us is that when we look across the franchise, we've had a significant hold or even growth in the operating cores.

The probably most indicative of difference activity with regard to deposits comes from Atlantic Bank.

The hold that Atlantic Bank is significantly better than with any bank transaction that has occurred.

This goes back even to the Haven deal or certainly the Long Island Commercial Bank deal.

That is very, very encouraging.

So we are poised now to be building with new tools better deposit relationships that will go across the larger franchise.

But that has not happened up to this date.

The good news is that we have been able to hold real banking relationships across the entire franchise.

You know, it varies from branch to branch.

But the franchises in good stead today and certainly we were encouraged by what we are seeing with regard to new systems and new products.

Bob, it's Tom.

I would add to that.

If you look at our true savings accounts, what's interesting over the past six months, they've stabilized.

There's very little runoff, and that's at a 1.1% average cost of funds.

Very very inexpensive money for the true savings account that have stabilized over the past six months.

When we ratcheted down our rates obviously there was more pressure.

But now that the marketplace in general has somewhat eased on raising the short-term rates in respect to the deposit offerings we've seen nice stabilization in the true savings focus business that we have at the bank.

In addition to that, we're very excited about PennFed knowing that it's a true core stable franchise, a very clean thrift that we're going to be acquiring in short order that will add in some nice overall deposits for the franchise to lever our loan book.

Okay.

Maybe last question then I can jump back in the queue.

On, I just wonder if you could give us a quick update on commercial.

Looked like you guys grew commercial loans at a pretty decent clip in the quarter.

I just want to know if the $737 million pipeline includes commercial loans as well?

Yes.

There are some commercial loans in there for sure.

What we are doing is I guess we mentioned, we're building a foundation for the commercial bank with the lending teams that were in place as well as additions to the lending teams.

We are very much aware of the environment that we are in and as you know we are a very conservative lender in any regard.

So we are doing commercial lending in a measured way that takes into account the attributes of particular businesses or particular opportunities to lend money that we have have every expectation to get back.

It's not something that we are rushing into.

It's something that we're as I said building as a foundation.

Bob, it's Tom.

In respect to that number, if you look at what we've discussed in Joe's conference call, was that 74% of the portfolio is multifamily.

If you take out in addition to construction book which turns on an average life of 18 months, you are probably looking at probably under 10% of the book potentially as C&I.

So the number is very small.

Okay.

Thanks, guys.

We will go next to Thomas Kahn of Kahn Brothers and Company.

Hi, guys.

Question, what about the integration of the platform and the computer platform and the ability to do some cross selling and how about the ability of getting commercial loan officers in some of your rich branches, savings branches, whether it's an awful lot of businesses in half a mile radius, that kind of thing?

Tom, that is very much part of our business model.

In the first place, the actual conversion from the legacy [Kirschman Metavanti] systems last year did occur during the month of November.

So we are today at the commercial bank on a brand-new bank way for [Metavanti] system that provides a very sophisticated platform from which to build product sales and other things.

With all these new systems, the real attribute comes from people designing effective tools to use the new high speed qualified system.

As I mentioned, the foundation for that platform is the commerce product.

The platform has had thousands of enhancements.

And, as we sit today we are looking at the possibility of having whole teams of people, not just in place to sell in the commercial bank branches, which represent only 29 of our branches today, but to cross sell products into all of the franchises.

So that is all being worked on as I've mentioned.

There are obviously lots of people involved in this.

As you may well appreciate, an integration of a fully new system is very different than merely taking an existing system and bringing somebody over to it.

So this was the creation of a totally new system.

Takes a lot of effort.

Also, we cannot miss the fact that a lot of resource goes to dealing with all of the [BFA] and other requirements in integrating sophisticated new systems that accommodate those requirements at the same time.

So as people have talked across the country, there is a lot of work, a lot of money, a lot of energy being spent on ensuring that the environment meets the requirements that have been set.

Just this morning there was a report that there is a change in certain reporting requirements that will be material to the industry as a whole.

That's why I guess it was reported broadly.

That's important to be put in place, too.

I think, Joe, I think there is a great opportunity going forward.

Even with existing customers.

Yes.

Of the various banks to do commercial business with them.

Absolutely.

And they used to going to Roslyn Savings Bank.

They have a business.

There are already customers but they are dealing with Chase or somebody else and they are unhappy.

You are 100% correct Tom.

There is no question that we have within our community bank franchise many longstanding relationships that do not include their business accounts.

Right.

So the ability to cross sell the new tools that we are putting in place is a very attractive, exciting opportunity.

So we will be selling not only to the people that are today depositors, but also the people that are within the markets.

We have many of our community bank branches are situated in extraordinary business districts.

So since we have not been marketing them in the past, putting the right teams of people in place to do so will give us the opportunity to gain new business just from the markets that we are already in.

We don't have to build 150 branches.

They already exist.

Thanks, Joe.

It's a great opportunity.

Thank you.

We will go next to Rick Weiss of Janney.

Good morning.

Good morning Rick, how are you?

Doing well.

Just wanted to go back to the multifamily.

Sure.

If you can talk about the decrease and a couple questions.

Has this ever occurred at NYBB before?

Also, it looks like the multifamily pipeline is lower than what it normally is at year end.

Is that planned or is this -- by competitive conditions?

Yes, I think, Rick, we have been saying this for quite sometime.

When you get to the back end of a elongated positive credit cycle, there are all kinds of people in the market that virtually will do things under terms that do not adequately match risk and reward.

There is all kinds of adjustment in the rate that they will take, in the structure of the loan, in the number of years they'll run the loan.

So it is prudent at this stage to be very measured in our approach to who we will lend to and how much we will lend to them.

And therefore we are being very diligent.

Remembering that our business model has always been that we will have an asset pool that should be better positioned to deal with the adversity of a credit cycle term.

So over the course of our entire public life, we've always opted to take a lesser rate than alternative assets could generate because we want to take a lesser risk.

And therefore when you look at how we've position ourselves over the last 12 years or so, the return that we get on a term basis, meaning the inclusion of points over a two year or three year period, gives us a better return than many of our peers, but the actual rate that we charge is often lower than the rates that people are getting on credit cards or automobiles or whatever.

Everybody knows that those assets will in fact lose substantially more money during a cycle turn.

There has not been a cycle turn.

When does it happen?

And how severe is it?

That is unknown.

But the important thing for us is that we are very measured in our approach to how we lend.

And therefore we are in a market that we understand and will do our best to get quality assets based on the terms that the market is providing us that meet our expectations.

This is not a time for us to be overly aggressive in originating loans.

It doesn't mean that there aren't going to be multifamily loans in our portfolio.

There will be plenty.

As we sit today, it still represents three-quarters of our portfolio.

There are no banks out there that I'm aware of that have three-quarters of their assets sitting in multifamily loans.

Rick, it's Tom.

I just want to add to the fourth quarter, keep in mind we've had one of our largest customers refi away and that was a coupon about a 4.75%.

So with those proceeds and that was a very sizable transaction, we used that money to pay down short-term volume to 550.

So even though we had some large customers that we would love to continue to refi however went to the condo and marketplace, we took that money and actually got margin benefits by paying down high cost debt.

So you will see a lot of that going forward but we expect it as you recall in the second half of 2006 that had very little if some loan decline in multifamily and depending on the marketplace.

We have a substantial amount of liquidity coming to us when we close the PennFed transaction, depending where market conditions are and the demand for [inaudible], we have the flexibility of putting on growth and or shrinking depending on the shape of the yield curve.

Right.

So it just looks like you are seeing more danger out there than you did at this time last year?

Yes, that's correct.

But just bear in mind we put on a lot of growth in the beginning of 2006.

And we also closed Atlantic Bank.

So if you look at all things being equal we grew the portfolio around 15% net loan growth with the acquisition, that number was tapered down as the yield curve was further inverted and was not a whole lot of spread there.

Now we have the benefit of a very low yielding multifamily coupon in a market that is about 110 basis points above our portfolio yield.

When you have a large block of loans coming off at 475 in the first half of '07, whatever we do with that, we pay down debt or we put loans on we will get margin benefit from.

So we're very excited about the portfolio yield and as discussed in prior quarters we expected to see a significant amount of cash flows from multifamily loans and it's occurring.

Okay.

Good.

So it looks like then the income growth will be coming more from spread rather than just volume?

Right.

We were in a position --

Okay.

Got it.

We are in a position right now if we grow, or if we stay where we are, we will get margin benefits on the multifamily books.

Okay.

Thank you very much.

Thank you.

We will go next to Tony Davis of Ryan Beck.

Good morning.

Good morning, Tony.

Just --I got on late so I apologize for this, but if you haven't said, Joe, what is the actual dollar amount of loans that will mature reprice in '07 and the same thing for the CD book?

Yes.

Do you know Tom?

It's in the [billings], obviously the numbers we gave a few quarters back, about 40% of our multifamily portfolio has to be priced.

If you look at the trend, it's been as expected.

So that's continuing, so the number is very sizable.

In addition to that, bear in mind over the past two years customers, retail customers have not been going long on CDs.

So the good news for our CD book we that we're priced at the market.

We had $6 billion of CDs that were 1% going to 5, we're probably about a 4.8% average coupon in the retail book of CDs.

That is the market for us right now.

We are putting CDs on between 475 to 5 and very little compression or margin expense there for the CD book.

So that's a major burden off the balance sheet and income statement.

Tony, with regard to the loan portfolio--

Yes.

Our business model is not a five year maturity that people actually plan on holding their loan for five years.

And we've had a much slower than usual refinancing.

So the only thing that we can tell you is what's on the calendar, what is the date.

That's all I meant.

The largest amount of refinancing occurs in the -- let me put it differently.

Some of the largest prepayment penalties we received are loans that were only in the portfolio for one to two years.

And in some cases those are some of the larger loans that we did that were whole pools of property, in other words they were put together for the purpose of preparing them for sale.

That is a very good thing to have in your portfolio.

So it's not as though the portfolio is going to have five year and refi across the board, it is always a mix of two year, three year, four year.

And at this juncture we are beginning to see more activity.

The calendar helps to push some of the older loans, meaning loans that have out there for three and a half years or four years or maybe even more than four years, they are more likely to refinancing in the three to eight month period.

However, we have lots of loans due to business positioning and market factors that are refinancing in 13 or 18 months versus waiting for the later end.

Right.

Tony, the thing with that is that very important to understand the coupons are extremely low.

When it leaves the portfolio, if we keep it and refinance it which is probably unlikely if it's a large package deal, because it's probably going to [that kind of] market, we are getting a sizable benefit on reducing funding and the [largest repricing] our overall loan book.

So look at the market now.

We're looking at new loans going on well north of 6%, and we have our average coupon at 5.19, which is a very low comparison.

So we are excited about the fact that stay or go, we are going to have margin benefits here.

Got you.

In that regard, on PennFed, you're still looking at around 9 million or so in cost to [cal] this year, number one.

Secondly, their debt looks like it's about 150 points more expensive than yours.

Their deposit costs are 65 points more expensive.

Does the 19 million transaction cost include prepayments on that debt and then finally how quickly do you think you will be able to conform their deposit rates to yours?

Well, obviously, we will take PennFed's entire balance sheet and look at our balance sheet as well, and look at the benefits of combining both.

We have a lot of opportunity now that it's a new year for us to look at enhancing our income stream on a combined basis, either through the securities portfolio or through the debt portfolio and their loan portfolio.

We are very excited as far as the timing of PennFed coming in in this particular point in time of the yield curve because we are kind of at a position where five years around four eightyish right now.

New loans coming on at reasonable levels, that could go either up or down but we have flexibility to deal with that .

But more importantly we also have flexibility to deal with our portfolio in conjunction with the acquisition.

So we are very excited about repositioning both balance sheets upon consolidation.

The plan has not been set yet.

We are working through it but we have a lot of flexibility and we will transact as we have always done in the past when we close the transaction.

Tony, I think the important word that Tom has emphasized a couple times is flexibility.

This gives us the ability to make decisions on 1.5, $1.8 billion worth of either liabilities or assets.

The liability decisions may be very different than the asset decisions from the standpoint of timing.

But the reality is, all of these decisions will be beneficial or accretive to earnings.

Correct.

Okay guys.

Thanks.

We'll go next to James Abbott of FDR.

Hi.

Thanks for taking the call.

Good morning.

Wondered if you could touch on a couple of things.

One is on the expense base.

It looks like the expenses were down about a $1.7 million on a link quarter basis one you strip out some of the noise.

Is that a fair analysis and is that a good run rate, somewhere around the $70 million per quarter?

Yes, Jim.

I would run with that going forward.

That's a good one?

And then, any seasonal expenses in the first quarter from FICA taxes or anything?

Or is, will there be some offset to that?

I think the dollar amount would be small because I would run with the fourth quarter as a reasonable guide going into Q1 '07.

Okay.

Thank you.

And also did you talk about -- were there any large loans that prepaid in the fourth quarter?

I know you referenced the year ago or the January quarter, but what did you have in the fourth quarter as far as what might be classified as a large loan, maybe --?

We had obviously,as previously discussed in the past two conference calls, we've had a very large relationship that we would love to have keep, but went to the [inaudible] market.

That constituted for the decline in the portfolio.

That was a sizable relationship that we refinanced in the past multiple times.

That loan is no longer in the portfolio.

That's a 475 coupon that left the portfolio that we used to pay down debt.

The prepay was very insignificant in that particular relationship because the way the loan was structured.

Absent that loan, the overall prepayment penalties that were generated for the quarter were spread out across the board, mostly bread and butter deals for the company, which is a lot of loans and small prepays dollar amounts.

I think Jim the important thing to recognize is that we do have some very large opportunities on the refinancing side that are actively being considered right now.

And that will be very beneficial in the immediate quarter as well as the quarter ahead.

The chance to have a large property pool sold is very, very attractive today.

The likelihood that the build and cash flows will refinance is very very real.

So we can't tell you exactly when each of these things will be executed.

But we can tell you that there is an active market that makes it very probable that a large component of our existing portfolio will be refinancing to our advantage.

Meaning that we will be taking off the books a lower yielding asset and getting a better yield as a result of that.

And we will be getting paid prepayment penalties for fairly sizable amount of money.

I appreciate that.

So there was no large contributor to prepayment penalties in the fourth quarter.

There was a large loan that prepaid but it was not a major factor in the prepayment penalty?

Right.

Okay.

Thank you.

And then also you mentioned earlier on the National Bank -- or on the Atlantic Bank, deposits were holding fairly well.

Is that to say that the National Bank of Greece'S deposits are still there?

Yes, the National bank of Greece still has a relationship with us.

But as you may well imagine, they had hundreds of millions of dollars that they had on deposit in their bank that they know longer have with us.

So we have a correspondent relationship with them that continues.

We have correspondent relationships with others that are on the verge of occurring.

The good news for us is that the old world deposit base of Atlantic Bank is actually stronger today and better mixed today than it was when in fact we received it.

Okay, I appreciate that.

Could you tell us the timing of the withdrawals?

Over the course of the last several months and quarters, it was several different transactions that occurred.

But in some cases it's not evident because we also built new relationships so sometimes when the money was going out we had other money that was coming in.

Okay.

So I think a quarter after the close you mentioned that there was no decline in deposits related to National Bank of Greece.

So I was just trying to see --

That's right.

It happened after that.

Okay.

So it wasn't all in the fourth quarter though?

Oh no no no.

Third quarter.

And then, a couple other quick ones.

The timing of the multifamily loans are coming due this year.

I know you suggested it's hard to exactly pick that.

But on a contractual maturity basis, is it evenly spread throughout the year?

Or is it weighted towards any one particular quarter?

The contractuals is evenly spread.

What Joe was talking about are the potential acceleration of local coupon loans that are required to pay very sizable prepayment penalty income to the company that will most likely transact in this year.

Those loans were not the normal type contractual loans.

These are loans that maybe have a 4% or a 5% or a 3% prepayment penalty that we wouldn't normally expect to happen today but they are in the queue right now to refinance.

Those are no question, a benefit to our margin regardless of what happens with the transaction. , But I would say absent those large tools of loans, it's spread out throughout the entire year as expected in the fourth quarter.

We expected to see some acceleration.

We actually had more than expected.

That's why we had some extra prepay for the quarter.

We budgeted X-amount of dollars and we came through budget every month.

We were very excited about the trend through the fourth quarter.

More excited towards the back half of the fourth quarter because a lot more bread and butter deals were being done and staying with the bank.

Last question is on the C&I originations.

It looked like that was a fairly solid number and so, I will certainly applaud that.

What can you tell us about the types of those loans?

Are they accounts receivable financing , are they asset based lending, are they -- and then maybe a little color on the median or average size?

It's very mixed.

Most of that lending is with known relationships.

There is very little of that lending occurring with new relationships.

And it's part of the commercial bank business model and as I've mentioned in the past, we have people that came in from Citibank and had longstanding relationships in the Long Island community.

They are also in a measured way adding to the portfolio.

But none of this is very large, Jim.

Okay.

But are the average sizes of the loans -- $5 million or 10?

The average size is relatively low.

Offhand I don't know.

We can get you that information.

It's not a material number in any case.

But we can get that back to you.

And did you have the originations for C&I loans last quarter?

We can get you the C&I information.

As you look at our numbers, obviously we originate huge amounts of loans.

C&I represents a very small piece of what we do.

Understood.

I think that's probably, as an earlier caller pointed out, though, an interesting opportunity for you --

It is.

Down the road we have not been actively doing that throughout the franchise yet.

So what we are seeing is mainly existing relationships and the solidification of a foundation to land on.

Okay.

That's what I was trying to get to the bottom and see.

As it ramps up, what types of stuff are you specializing in and how -- you know that kind of thing.

Appreciate the feedback if you can get back to me --

All right.

Very good.

We'll do that.

Move next to Jim Ackor of RBC Capital Markets.

Good morning, Jim.

Morning, guys.

Got a couple questions for you.

First of all, Joe, you mentioned the specific pullback or slow down in response to market conditions with the multifamily lending and volumes.

Was wondering if you might give us some examples of some of the terms or pricing that you are seeing.

I guess maybe -- and I'm not going to tell you who it is.

But we had a loan that is an incredibly attractive loan in our portfolio.

Is a classic cash flow build over time.

We were prepared to do that loan at $195 million on a third refinance and probably a four year period.

They were offered $325 million by Chase.

They were offered $350 million by another lender, a hedge fund and international lender ultimately gave them $375 million.

And that amount of money was at a lower rate.

I think it was 55 basis points lower than we were charging in a five year refinancing, they were giving them a ten year refinancing for a significantly lower rate at a dollar value that probably exceeded ten years worth of cash flow growth.

So when you have that kind of extreme in the marketplace, there is no question that if a property owner has other balance in their portfolio, they will take those extremes when they occur.

And we are also seeing people selling properties at extremely high prices and therefore again if they are able to sell a property that they couldn't cash flow up to that level in a decade, they may very well choose to sell it.

It doesn't mean that they are going out of business.

It means that they are going from properties that have been improved to a particular valuation point in this exaggerated market and going back into the market and buying properties that are less valued.

Because they are in a business which is an ongoing business.

So that's where our opportunity comes in refinancing the other properties.

We're not refinancing at these extraordinary levels.

We're refinancing what they buy because they are not going on vacation.

They are merely changing based on the market conditions what they are holding in their individual portfolios.

Very smart people.

Know how to live through the cycle.

And right now they are being paid incredible amounts of money.

It would be foolish for them not to take the money since there is no certainty these values will be there six months, 12 months, 18 months down the road.

Right.

That 375, what was that relative to the value of the property in your estimation?

We value that property, the appropriate lending level for that property in our mind was 195 million.

Now there are many examples of that at much lower levels, obviously.

Right.

Right.

Extreme level.

Exactly.

Exactly.

And, Jim, it's Wall Street.

It's new lenders.

It's people who have lots of money and they want assets.

They will lend in ways that we would never lend.

And therefore we should just let that happen.

Every loan in our portfolio for the most part has been in somebody else's portfolio at one time or another.

The best time for us is when the cycle turns because the irrational lenders lose money and pull away from the market.

That's when we lend most attractively.

Okay.

Good thinking.

Two more quick questions.

Sure.

Maybe, Tom, you can answer this one.

In terms of the cost of funds, average cost of funds, are you at a peak or should we expect that to gradually trend to the upside for another couple of quarters?

You know Jim, it varies.

Obviously we talked about the CD book.

The CD book has reacted very nicely and I think that has to do a lot with where we were a year ago and where the market is today.

Rates have been somewhat tapered down in the New York market.

It's more reasonable now and not as irrational.

And our portfolio on the CD book, which is around $6 billion, and relatively short term around your typical one year type structure, one year and 18 months, that had a substantial pop from 1% to 5% on average.

So right now we were looking at 4.88, 4.90ish coupon on cost of funds on the CD book.

The savings accounts are holding like a rock.

We're not seeing any runoff there.

So on the deposit book we believe [the courts] are in good shape.

Obviously we are a very large player with the advanced market and that is somewhat volatile.

But that's how we run our company.

We have a very large book of wholesale bonds that we have to deal with.

We also have a very significant acquisition that is going to close in a short order which could help us move some of those liabilities and assets around.

So I would say on the cost of funds for retail, I don't see a major rise here.

If anything, stabilization, and it probably has some pressure on the wholesale market depending on the shape of the yield curve.

Okay.

So we've dealt with that over time.

Okay.

And last question, thanks for the -- with regard to the C&I ramp and it looks like I agree with some of the other comments that it looks like an interesting opportunity.

I was wondering Joe if you might comment on when you might expect as you continue to grow that book of business and maybe start growing the reserves --

Yes, I think you will see step-by-step growth.

There is not going to be dramatic change here.

The worst time to lend is in the best of times.

And there is no question that as we look at the cycle today, everybody has very good performance numbers with regard to credit.

We are being very selective in who we lend to and how we lend even though we have the opportunity to open up many new relationships that will be beneficial to us over time, we are being very studied in that approach and we aren't just rushing out to do this aggressive leaf.

We are being very selective in who we lend to and how we lend even though we have the opportunity to open up many new relationships that will be beneficial to us over time, we are being very studied in that approach and we're not just rushing out to do this aggressively.

So I would not expect to see huge amounts of C&I lending.

Certainly we could lend materially more than we have been lending and we will see growth and earnings as a result of those relationships and certainly the people that we will be dealing with will be people that we either have already had experience with or people that we get very comfortable with right from the get-go.

So it's not as though we are entering into a new market aggressively.

We have a very large available market to choose from because we have so many existing relationships in a very attractive market.

The New York City market that we serve with our community bank branches is incredibly attractive.

So having proximity to all that business give us the ability to choose the good players in those markets.

Okay, great.

Thank you.

Thank you Jim.

We will go next to Dustin Brumbaugh of Ragen MacKenzie.

Good morning.

Morning.

This question has already been asked a couple of times but I was hoping to maybe get a little bit more on it specifically on the multifamily portfolio.

Appreciated the comments that you've made on the competitive environment and certainly appreciate the discipline and the underwriting.

But if you could kind of say what you have seen the competitive environment doing maybe over the last month or so, and kind of where you see it going this year and what are the implications for balance sheet growth in '07.

I think the good news for us is that we see enough product in the market to give us the flexibility to grow depending on all the other market conditions that are out there.

Our particular business model allows us to grow with difference in size and in some cases proximity or structure.

And when I say structure, I'm not talking about taking any additional credit risk.

I'm talking about the kinds of loan that we actually will do that are part of our business model.

We're not going outside of our business model.

We're not going to change our risks.

So we could grow fairly rapidly if in fact -- and when I say that, it's relative to the industry.

We could grow fairly rapidly or we could decide and this is an important thing to recognize, we could decide that we will lend on participations or otherwise lend in ways that will not portfolio assets but create assets for others and we will get paid fees both for servicing as well as originating.

That kind of opportunity has always been presented to us.

And where there is real size available, we can easily wind up being the conduit through which relationships are created that are very meaningful.

We maintain the relationship with the party, the dollars are more than we will lend and get paid for that, but we don't portfolio the risk.

Okay.

And thanks.

And so assuming you don't get much help from the yield curve through '07 and competitive environment stays as it is.

Let's assume that.

Would you expect assets to stay roughly flat this year?

No.

Doug, it's Tom.

I would say obviously we start our modeling process, we look at the marketplace.

We are being very conservative on rates and being very conservative on growth.

We feel very optimistic about our margin.

We don't have to grow this bank aggressively to grow our earnings per share.

We were coming off [troth] earnings.

So we feel as Joe said in this conference call that we bottomed out on the operating earnings side and see very good upward momentum going into '07 and '08.

So it's not driven by asset growth and I think that has a lot to do with the fact that our retail liabilities are [priced to] the market.

But more importantly, our overall loan yield are below the market.

So in depending on the level of activity on the multi-side, we can see some very good earnings per share growth without growing the balance sheet aggressively.

In addition to that, bear in mind we do have the PennFed transaction coming in a couple of months.

It's giving us asset growth.

Now depending what we do with those assets, will be depending on the marketplace.

I will tell you that we will sell a portion of the loans because of interest rate risk issues.

We don't want long term assets on the portfolio, but those are very low coupon type structure.

So that will give us a lot of liquidity.

So we're positioned to go either way.

But either way, in our modeling going forward we're very conservative and we feel that the company's operating earnings have bottomed in the third quarter, and third and fourth quarter was consistent and we look forward to earnings growth in '07 and '08.

Okay.

Thank you very much.

Thank you.

We will go next to Thomas McGovern of Lehman Brothers.

Good morning.

Good morning Tom.

In terms of the progression of coupon yields on multifamily loans over the last couple of quarters, has that been in a somewhat upward or flattish trend due to the yield curve in competition?

No.

I think compared to the competition, the rate may actually over the last couple of quarters, the rate may have been better than many of the rates that have been in the market.

That is often the case at this end of a cycle.

The fact is that the market has been aggressively changing over the last six months.

Everybody is aware that expectations with regard to rates have fluctuated dramatically and actual lending rates have also moved fairly dramatically over the course of that time.

So right now they are a little higher than they were four weeks ago.

And maybe eight weeks ago or ten weeks ago they were lower.

The bottom line is that on a relative comparison we are maintaining the kind of spreads that we have been talking about over the course of time.

However, the marketplace keeps changing rates and therefore the rates that we realize will change along with the marketplace.

The competitiveness of the market is very real.

It's been very competitive for years.

It is not a new phenomenon that the world is actively in the New York market.

It is in fact a very attractive place for all kinds of lenders.

Some of the guys that are being a little more aggressive today, maybe your hedge funds or others that have large amounts of money that want large pools of assets.

Tom, on average though for the quarter, we got better than 150 over.

So that's a very encouraging sign.

We are holding our line in the sand as far as our level to offer the rates to the marketplace and on average for the quarter of Q4 we were above 150.

So that's where we are and if you take today's environment at 480 on the five year, I haven't seen it recently, but figure around 480, [you want] the 6%.

And that going back to my point 5.19 coupon and 6, 6.25 rate coming on, it's an attractive benefit.

And we're reaping the rewards right now of the lower coupon paper looking to do something and that's somewhere in the fours.

Do you think if the fed cut rates near the end of the year, that that will provide a strong incremental benefit to those spreads?

You know, if the fed cuts rates, it's going to change our liability cost rates dramatically.

All of the other factors, I mean, remembering that the fed has moved hundreds of basis points without earning assets moving very much at all.

So the feds movement in rates is not necessarily going to be marked by a comparable move on the asset side.

There is probably far more speculation about the consequence of fed activity with regard to asset rates.

The asset rates will be affected in many ways by other things that are going to happen out there and certainly if credit becomes an issue, that will be more dramatic with regard to our activity than rates because there is not a material expectation that asset rates will change.

And Tom, you point out on a rate cut.

One rate cut [on a] 25, 50 basis points, does not add a lot of value to the asset side of the balance sheet.

Obviously, as Joe's saying, if the fed is cutting rates we're not raising the rates on the deposit side we will be aggressively trying to [preprice] our liabilities at a lower cost.

But our model has very conservative view in 2007 as far as the fed is concerned.

Okay, great.

Thanks a lot.

We're not budgeting aggressive rate cuts in '07.

We will go next to Theodore Kovalef of Sky Capital.

Hi, there.

Quick question for you with regard to the potential for additional mergers or acquisitions.

Right.

Your name is New York Community and I'm wondering how far you stretched the radius from I guess we can say Long Island outwards.

Well, I guess New York Community is in bit of a burden in that regard.

But the Bank of New York and others have done business in world markets over the course of decades.

It doesn't preclude our doing smart deals when opportunities present themselves because the banks that we buy operate under the same name that they were operating under before we acquired them.

So even though the holding company that owns the bank might be different, most of the people in the market that is being served by that local institution will not care nor will they necessarily know who the owner of the bank may be.

We will only go outside of our geography though if the economics of the deal are compelling to shareholders.

Clearly, our orientation is shareholder based.

So doing good things for the franchise and doing good things for operations that make it more valuable for the share base is always the focus.

And in some cases I guess example I've used in the past, South Jersey was not part of our franchise but it was a very, very good financial transaction that had benefits to us as a public company.

It did not in anyway enhance our franchise.

So there are opportunities that from time to time will come up.

The period in front of us is going to present a lot of challenge to many of our existing financial service providers.

There may be some very good opportunities to create value for shareholders that are not franchise driven.

However, there is also obvious benefit in building within your franchise.

I think you're well aware Ted that there are many banks that have opened up their geography over many, many states.

They have modified their name along the way.

If we were going to put the name "New York Community Bank" on the door, that would be more of a problem.

But since it's really the holding company, and these banks are only divisions of what would be Citi or would be Chase, when you think about it, Citi had a $12 billion thrift out west.

It was still Citi.

The fact that our name is what it is is not likely to preclude our doing accretive deals that make sense for shareholders.

Ted, on the follow up, what's exciting in today's environment is a lot of opportunities within our own back yard.

Okay, because, you know, you have been singing on the radio quite a bit about -- and clearly the rationale for that is to get the name New York Community tied with all the other branch or division names.

Yes.

Yes.

You are touching upon a reality that we thought was important mainly because too many of our customers weren't aware that they were part of this much larger family of banks.

Too many of our customers were virtually focused on let's say Richmond County or Roosevelt or Queen's County, and didn't realize that they could do banking when they were working in the city at an Atlantic branch or they could do banking in some of the other communities that we serve.

So I think the idea here is that people need to have a greater familiarity that the bank has many different existing franchises that are all tied together.

So that is going to continue for awhile so as to increase the likelihood that people are aware that they are part of a much larger robust family.

Okay.

Thanks very much.

Thank you, Ted.

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

We appreciate the opportunity to discuss with you the improvements in our net interest margin, the stabilization of our operating earnings, and the continued quality and strength of our balance sheet.

Obviously, if you missed an opportunity to speak to us we will be available this afternoon or later in the week.

Thank you.

That concludes today's conference.

We thank you all for joining us.