Flagstar Financial Inc (NYCB) 2007 Q1 法說會逐字稿

Good day, everyone and welcome to this New York Community Bancorp first quarter 2007 earnings conference call.

Today's call is being recorded.

For opening remarks I'd like to turn the call over to the First Senior Vice President of Investor Relations, Ms.

Ilene Angarola.

Please go ahead, ma'am.

Good morning everyone and thank you for joining the management team of New York Community Bancorp for today's discussion of financial performance for the first quarter 2007.

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, Senior Executive Vice President, Chief Operating Officer, and John Pinto, 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, pre-payment penalties other cash flows, changes in deposit flows and changes in demand for deposit, loan and investment products, and other financial services in our local market and changes in competitive pressure among financial institutions or from nonfinancial institutions.

You will find a more detailed list of the risk factors associated with our forward-looking statements in our recent SEC fillings and beginning on page 7 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 our Investor Relations department at 516-683-4420 or visit our website, mynycb.com.

I'd now like to turn the call over to Mr.

Ficalora, who will make a brief presentation before opening the line for Q&A.

Thank you, Ilene, and good morning everyone.

We're pleased to have you with us for this morning's discussion of our first quarter 2007 performance, which reflected continuing improvement in operating metrics on a linked-quarter basis and a number of year-over-year improvements as well.

I plan to devote my comments today to the most meaningful of these improvements, which included the continued expansion of our net interest margin as well as the recent acquisition in New Jersey, the planned acquisition of 11 branches in New York City, and the post-merger repositioning of our balance sheet which is currently underway.

Among the many achievements we were pleased to report for a linked quarter increase in our operating earnings which was equivalent to a penny increase in our diluted operating earnings per share to $0.22.

We also realized an increase in our first quarter cash earnings which were equivalent to $0.24 per diluted share.

Reflecting the growth of our operating earnings, our return on average tangible assets rose 5 basis points to 104 in the quarter and our return on average tangible stockholders' equity rose 142 basis points to 20.04%.

The improvement in our earnings was attributable to the growth of our net interest income and the expansion of our net interest margin which occurred despite the continued inversion of the yield curve which has resulted in very difficult operating environment for all banks.

It's also very telling that these improvements took place despite the continued reduction of our interest earning assets in the two past quarters.

This, too, is an accomplishment that should not be overlooked.

Specifically, our margin rose five basis points from the trailing quarter measure and four basis points from the measure reported in the first quarter of 2006 a year ago.

The significance of this increase becomes more readily apparent when you realize that our last year-over-year improvement occurred in the first quarter of 2003.

The increase in our net interest income was driven by a rise in interest income and a simultaneous reduction in interest expense.

While the level of interest income was largely boosted by prepayment penalties and replenishment of our asset mix with higher yielding assets, the level of interest expense was largely reduced by a strategic decline in higher cost sources of funds.

Loan originations totaled $1.2 billion during the quarter exceeding the pipeline we reported in January by nearly $500 million.

Although the volume of loans we produced in the last three months was, in fact, substantial, the growth of our loan portfolio was tempered by the acceleration of refinancing activity and our decision to refrain from aggressive lending at this point in the credit cycle.

With the real estate market declining, we believe that the quality of our assets will be a critical factor in the process of distinguishing ourselves from other banks in our market, and in the process of competing for acquisitions of other banks and thrifts.

Reflecting our unremitting focus on asset quality, and our adherence to credit standards our ratio of nonperforming assets to total assets was a healthy 0.09% at March 31st.

In connection with the increase in the refinancing activity prepayment penalties reached their highest level in 11 quarters, rising 56.5% on a linked quarter basis to $13.7 million and 34.9% on a year-over-year basis.

As mentioned in this morning's release, the multifamily loans that left our portfolio had an average yield that was meaningful lower than the average yield on the multifamily loans we added in the last three months.

The yield on multifamily loans that are now off our books was 5.3% on average.

The average yield on our newer loans is in excess of 6%.

At the present time, our pipeline is approximately $725 million with multifamily loans, representing approximately $488 million, or 67%.

We continue to price our multifamily loans at 150 basis points above the five-year CMT which thus far in the month of April has averaged about 4.60%.

The improvement in our earnings on an operating basis was modestly tempered by an increase in our operating expenses, largely reflecting the full quarter impact of the acquisition of Atlantic.

Despite the significant expansion of our branch network and the resultant increase in staffing, our efficiency ratio continues to rank among the best in the nation and amounted to a respectable 40.73%.

We are very pleased that the enhancements we've made to our balance sheet over the past 11 quarters are beginning to be reflected in our financial results.

This is not to suggest in any way that the enhancements to our balance sheet have been completed.

To the contrary, we are well into the process of repositioning our assets and are funding in the wake of the Penn Fed transaction which was completed earlier this month on April 2nd.

The acquisition is provided us with assets of $2.3 billion, including $1.3 billion of one to four family loans.

I'm pleased to report the sale of the one to four family loans is already under contract and we expect to complete the sale by the end of June.

The proceeds from this transaction will be used to reduce our higher cost wholesale funding and to ramp up our lending at the appropriate time.

Furthermore, the addition of Penn Fed's deposits, which totalled about $1.6 billion, has provided us with additional liquidity.

The conversion of Penn Fed to our system will be completed sometime this summer, as well as the systems used by the 11 branches we are acquiring from Doral Bank F SB.

The branch acquisition is progressing on schedule and we believe we are on track to complete the acquisition in the third quarter of this year.

In summary, the first quarter of 2007 was a very good one for New York Community Bancorp and demonstrated the validity of our business plan.

In addition to improvements in several key performance measures, the quarter's results reflect the strength of our lending and the continued quality of our assets, and I also should add, our continued tangible capital strength.

At March 31st, our tangible stockholders equity equaled 5.86% of tangible assets excluding mark to market adjustments, representing a three-month increase of 20 basis points, including adjustments the ratio was 570 at the end of the quarter representing an increase of 23 basis points.

In view of the strength of our capital, and of our first quarter performance, the board of directors last night affirmed its commitment to our quarterly cash dividend of $0.25 per share.

As stated in this morning's release, the dividend will be paid on May 15th to shareholders of record at that time close of business on May 4th.

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

As always, we will do our best to get to everybody in the time allotted, but if we should miss you please feel free to call us individually this afternoon or during the week.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll take our first question from Tony Davis from Stifel Nicolaus.

Good morning, Joe, Tommy.

Good morning, Tony.

I recall, I believe, that over the last several years your customer refinance retention rate has been somewhere around 75% to 80%.

Is that about right?

Yeah, I'd say that over the past period -- or let me put it differently.

Earlier in the credit cycle, that is in fact our retention rate.

At the current time that is not our retention rate, and that has more to do with the fact that a lot of the larger assets in our portfolio are actually being sold in this very, very rich market and therefore being sold at very high prices and will not be refinanced by us based on those marked dispositions.

So the fact is that the environment does impact the degree to which we refinance, and this happens to be what we believe to be the back end of an elongated positive credit cycle with extraordinary valuations.

And therefore there's this good deal of activity moving from us because either they're refinancing at very high dollars or selling at very high dollars.

The good news about the sale, the people that we're dealing with are very smart property owners.

They will do a 1031 exchange and come back and buy a whole series of smaller properties that are more reasonably priced that will in fact be refinanced in the months and quarters ahead.

The other thing I want to run by you, the last two quarters you've seen loans decline here.

Just wondering about the influence of the Penn Fed merger on that, and what rate if any we should expect going forward in terms of loan growth.

Well, the decline -- please say that again, Tony because I wasn't quite sure if I understood what you asked first.

I just was wondering about the influence of the Penn Fed deal on that.

On what Tony?

That's what I didn't hear.

On the decline in loans.

Oh, I see.

Penn Fed has had no impact on our lending at all.

The disposition of assets in the Penn Fed deal is handled by a totally different group for a variety of balance sheet reasons that have nothing do with our lending positioning.

We are not adding to our portfolio virtually any assets from the Penn Fed transaction, and, therefore, the benefit, as I guess was mentioned in our press release is that we're going to have a great deal of liquidity in the period ahead, and we'll have a great deal of flexibility in making choices as to how we're going to either handle our funding or deploy assets.

Apparently, Tom, I guess you guys have chosen to pass on FAS 159.

That's correct.

We spent a lot of time evaluating, and we believe at the appropriate time we will reconsider it next year in '08.

However, there seems to be a lot of risk surrounding the implementation.

Therefore, we chose a conservative path to wait and see.

Thanks.

Next we'll go to Rick Weiss with Janney.

Good morning Rick.

I just wanted to revisit multifamily again; you were talking about passing on loans because pricing is so aggressive.

Who is pricing these loans so aggressively?

Is it the other banks or conduits?

I think it's mostly -- it's actually two things, Rick.

It's the pricing is less attractive.

We could live with the pricing.

It's the actual dollars that are being put on the table.

The market lending that is occurring is significantly beyond what we would be comfortable with.

We've always been a cash flow lender, and therefore market pricing, especially in the back vend a cycle, creates the greatest amount of risk for a lender.

And it always happens.

In the back of a cycle people are most aggressive to get assets, and therefore they're inclined to give more dollars, create a bigger asset with each loan, and therefore they're at a greater risk that when the cycle turns there isn't any equity in the property.

So that's what's impacting a lot of the loans that we're electing not to take.

The dollars are just too high given the fact that this is a very rich market.

For example, if you're in the beginning of a cycle and values are down, you have a great deal of room with regard to the up side valuation in a given property.

At the back end of an elongated positive credit cycle, people that are stretching to lend are lending at much greater risk since when a cycle turns, at least at this juncture it's evident in some segments of the cycle and some segment of the market.

There's no question that values are not necessarily going to be there when, in fact, the bank goes to get -- collect the funds.

Rick, it's Tom.

I would add to that that obviously in a quarter that [we had and] used to have, what's exciting now we saw very low coupons on the books and not every loan is going to be sold in the marketplace while trying to achieve the maximum dollars so the true bread and butter deals that come back to NYB we are refinancing.

It's the large sale transactions that are at levels that we would not even consider for our portfolio is where you're seeing the runoff.

Let me just change gears.

The balance sheets is looking as good as I've seen it look for you in a long time.

Yes.

Looks like you're all geared up and could do more M&A deals.

Can you talk a little about the market, what you see?

We've been very consistent.

There's probably more dialogue today in the marketplace and more rational reason for people to be considering consolidation today than at any time in our public history.

We've always had an expectation that we would do transactions.

That's part of our business model.

The reality is we're in more dialogue and more detailed discussions today than at any other time in our entire public history.

Rick, it it's Tom.

I would also add, obviously we're very excited about our liquidity position.

We're going into the second half of '07 with an expected strategic amount of liquidity from the Penn Fed loan sale, as well as from the continued strategic reduction of the portfolio which are low-coupon loans which have been sold that we're not refinancing, but giving us lot of liquidity to ramp up when lending gets good and or the opportunity to facilitate in market transactions.

The good news here is that we are well positioned to deploy the cash at the appropriate time and we'll evaluate both the debt side of our balance sheet as well as the opportunity to put out strong assets in this environment so we're sitting here waiting for the ramp-up.

In addition to that, we also have tremendous opportunities on the debt side that we could pay off high-cost liabilities and also benefit our margin without growing.

We haven't grown our balance sheet in two quarters but our margins have improved and our earnings are starting to increase on a linked quarter basis.

We feel that going forward that will continue.

You see, I think, Rick, one of the things about a consolidating market that is important, our positioning in this market is such that by doing transactions, we can demonstrate a value pickup for our shareholders and the shareholders of the company we acquire.

And that is not the case in most other circumstances.

The opportunity for accretive deals is, therefore, enhanced by the actual positioning of our balance sheet.

I guess are you seeing any pricing power shifting more to buyers than to sellers as it has been the last couple of years?

I think that as we proceed into a cycle that becomes inevitable.

Valuations on companies reflect their actual capacity to earn in a given market, and there's no question that you've seen many of our peer banks have a decrease in their earnings capacity on a relative basis; that makes for a more accretive deal.

From our perspective, Rick, it's obviously going to be focused on accretion immediately as well as the opportunity to generate additional tangible capital as far as consolidation.

so clearly that's been our focus since inception and that hasn't changed.

Thank you very much.

Thank you, Rick.

Next we'll hear from Jim Ackor from RBC Capital Markets.

Good morning, Jim.

Hey, good morning, guys.

How are you doing?

I'm doing fine.

You guys are buying some big things these days.

Did they give you a call this morning?

[ LAUGHTER ] Hey, got a couple of questions for you.

The prepayment penalty income, obviously a fairly sizable number.

How much of an influence does that have on your margin, sequentially, in terms of the basis points improvement, and would you expect, given where intermediate-term interest rates are now, I know ongoing stream prepayment penalty income over the next several quarters?

Jim, it's Tom.

Obviously it's part of our business model, so we're not going to articulate the differential.

You guys can calculate and carve it out, but assume a zero and take it out of the margin.

But the good news going into Q2 we feel very confident that Q1 was a strong pre-pay for us.

We feel that we should exceed in Q2.

We're very comfortable that the trend is continuing at least for our visibility.

We don't get a lot of visibility as far as how much prepaid we can actually receive on a quarter basis but we feel very confident that Q2 will be higher than Q1.

Okay, that's good.

The other thing, Tom, can you give me with Penn Fed the tangible book value per share?

We're not going to release that.

Too soon.

We're still going through the whole valuation based on the marked to market.

But I will tell you, though, the loan transaction was substantially better than what we expected based on what we had first sat down and looked at the company and announced the deal.

We have seen some nice valuations with a very fluid process on the loan sale transaction.

We're very pleased with the results and like I said previously we're very happy with our expected liquidity position but the mark on that portfolio, which is the vast majority of assets, were better than expected.

Thanks a lot.

Thank you.

Next we'll go to Sal DiMartino from Bear Stearns.

Hi, good morning, guys.

Good morning, Sal.

I just had a question, if maybe Joe, you could comment on the competitive landscape in multifamily.

It seems at least one, if not more, of your competitors are sort of stepping away from the bread and butter product that they used to originate.

I'm wondering whether or not you've seen any benefit from that.

I'd say that the changes that have occurred specifically with regard to multifamily loans in our marketplace are very visible.

I mean, the two largest competitors for us with regard to our niche would be Sovereign, previously Independence, and Northfork, I guess Cap One today.

The bottom line is there is a difference in focus and the way in which each of those newer structured entities are performing in our marketplace, and we consider that to be a good thing.

And as we go down the road I'm not at all displeased that they may actually get better for us.

So the bottom line is the changes that have occurred within our market have actually been favorable with regard to the most meaningful players.

There are lots and lots of very large players in the marketplace that go around doing things that make little sense and occasionally show up in a particular transaction, but they are here today and gone tomorrow.

I mean, as they've seen with for examples hedge funds and subprime loans, people who are in a business in a given day who are not historically players there wind up disappearing rather rapidly.

And as we go down the road in the cycle evolves, we will see more and more of that.

Thanks, Joe.

Just a question for Tom.

Tom, on the Penn Fed balance sheet restructuring, can you tell what you say the coupon was on those assets?

Just slightly below 5.5 all in.

Like 5.45ish.

Mostly 30-year and 15-year paper which the interest rate risk was not tolerable on our balance sheet and we're rather pleased with the execution.

Half was securitized and half was sold in the [homeloans] trade.

There were lots of big buyers who stepped up to that.

The quality in the portfolio is pristine.

So a it lot of interest regarding the quality in light of the Alt-A and subprime issues out there.

A tremendous amount of interest because of the asset quality.

Thanks, Tom.

Thanks, Joe.

Thank you.

Next we'll hear from James Abbott from Friedman, Billings, Ramsey.

Hi.

Good morning.

I was wondering if you could explain a little - as I backed out the prepayment penalty and came out of the loan yields, I came up with the loan yields fell to 5.84 from 5.91.

I might be off a basis point or so the way I calculated that, but I was wondering if you could fill in the gap.

You're suggesting that you've taken loans with low yields and replaced them with loans with higher yields.

So I can't understand that.

I also notice that construction loans were up and those have higher yields.

On the multi side, James, it's Tom -- 5.30 ran off on average, and about 612 on line, and obviously that was right in line, around 150 off the 5-year CMT.

What I would tell investors as well as analysts look at the five-year CMT for the quarter; on average, that's pretty much what we put on the books.

For this past quarter it was around just north of 6%.

We lost about a 530 in respect to the coupon.

That varies from a 475 coupon to a 580 coupon.

But in average, we put in a 5.3% runoff on multis, we put on north of 6% that.

And that trend is continuing as we speak.

Right.

I understand that.

Or that's my problem, is I can't understand why the -- once you exclude the prepayment penalty income why the nominal yield on the portfolio would go down when that sort of dynamic is taking place within the portfolio?

We could talk off-line and walk you through it.

Typically we don't give specific numbers on runoff.

The reason why we're doing that now, we're very excited to see our low coupon loans leaving the portfolio putting high coupon loans on the portfolio and getting substantial prepayment penalty income which is continuing as we speak; as indicated in our previous statement, we're very confident that Q2 prepaids will be higher than Q1.

So where we're going in this run rate we're very pleased with the activity and we're also pleased on a linked quarter basis that our earnings per share number are starting to improve driven by a lot of reasons, in particular one of them being the refinancing wave in our book of business.

We have an average coupon around 520ish, sitting on the books, 525ish.

So that continues to run off, if we put on 6% without prepaids we're putting on a nice benefit for the margin.

In addition to that we do get the benefit of prepayment penalty income.

Okay.

I appreciate that.

My second question is related to the expenses.

Obviously that was up a little bit more than what I was modeling.

Right.

$64 million, roughly $65 million to $74 million on linked quarter basis.

I think last quarter if you back out the one-time ESOP charge and points on the acquisition; on a run rate, I would say in the range of $68 million to $70 million, somewhere in between them on a quarter to quarter basis is a reasonable estimate.

It will vary a million, give or take a million, pre-CDI.

Then we need to add 5 million for the amortization?

Yeah, pre-CDI, that's correct.

Okay.

So 68 to 70.

68 to $70 million.

Any color, I think it was about a $10 million increase linked quarter?

The color I would give you is that the company has an incentive plan to be put in place and we feel very confident we'll be able to achieve incentives.

As you recall, we're coming to an earnings uptick that we are starting to accrue for incentives for the company because of our projections that we feel very confident earnings are moving in the right direction so we're starting to accrue for incentive plan, as well as other expenses for the Atlantic Bank transaction that occurred in the quarter.

And how many new hires and so forth -- how much of it is incentive, lake bonus accrual?

I would say the vast majority is for incentives.

And what is the incentive structure?

Is it based on production, is it based on --

We don't pay for production, we pay for bottom line profitability.

Obviously we have a branch-intensive plan we rolled out late last year which should kick in in 2007, whereas deposit flows come to the branch structure they will get paid incentives.

So we're accruing for that as well as management incentives for the bottom line profitability of the company, which we are happy to accrue now because we feel that we're at a point now to achieve those metrics.

And management incentives were not accrued at a similar rate in the prior year?

There wasn't much.

Okay, congratulations.

I also want to compliment you on the strong growth.

Solid.

Thank you.

[OPERATOR INSTRUCTIONS]

Next we'll go to Bob Hughes from KBW.

Good morning, guys.

Couple questions.

Joe, I wonder if you could talk to us a little bit about with what is going on with deposits.

It looks to me like your core, excluding CDs, are down about $ 1 billion since you guys closed the Atlantic deal.

I think a lot of that has to do with certain kinds of deposits within the group.

What I will tell you, obviously last quarter we roll up about $956 million.

Our brokered book is down dramatically from prior years.

Obviously we're buying companies that have very good core deposits.

So the plan will be to take the broker down to 0 over time.

We don't have much left but that's been a major positive for the company in the fourth quarter 2006.

Is that going to factor on core deposits?

Some is core, some is CDs.

As you say, going back through the past year, in the current quarter what we had roll off was mostly municipal deposits as well as hybrid money market deposits, which are very expensive money market funds that we have a small interest in.

Obviously we have liquidity right now.

So if aim going to pay 540 or 525 versus holding fed funds we're paying that debt off.

As it comes due we're letting it it run off.

This is not core customer accounts.

This is fluid money market funds.

Okay.

Given your expectations for loan growth, going forward, do you think it's reasonable to assume that we'll see deposit runoff?

I think you'll see broker deposit run-off; I don't think you will see any more deposit run-off.

I will tell you our core deposit back has held very stable especially in savings account and the core money market accounts, that's held in very nicely.

Our lowest cost of funds are not moving.

It's the fluid money that's priced very high that we're opting to leave.

We can participate in the municipal market and be 10 basis points above everybody else and get all the money we need.

Right now, like I said, we'll be sitting on $0.5 billion currently with another $1.3 billion coming from the Penn Fed sale.

So around $2 billion of liquidity going into the back half of Q2.

We have no need to pay 5.50 for money right now.

The incentive program mentioned earlier that's intended to build core.

The actual demand deposits and the relationships within the marketplace.

So we are expecting to build that market.

We're just allowing the higher cost out of market funds runoff since we have alternative funds that are coming into our balance sheet.

I would also add obviously when we do transactions we typically look at the target core liability as being the funding vehicle for the future quarters ahead and we just closed on a $1.6 billion of liabilities as of April 2nd.

We have a pending transaction of $370 million of additional liabilities coming to us so we feel pretty good about our funding base.

The goal over time is to continue to break down the leverage, bring it down to a more manageable point.

Coming from 50% we're down to 36% on our balance sheet.

We're moving in the right direction but the goal will be to look at our funding sources and focus on core liabilities, and that has been part of our acquisition strategy.

Tom, you know, we talked to a number of other multifamily lenders in the market.

I don't think many of your competitors are anticipating much of a change in the environment.

I don't see a lot of incentive to refinance in this market.

You guys seem to be a little bit different.

Obviously you're optimistic on the outlook for the second quarter.

Can you tell what you say else is driving that outside of potential property sales?

Are you doing anything from your end to induce prepayments?

I think, Bob, the important thing to recognize is that everybody's balance sheet reflects the actual process through which the individual institution chooses to lend.

We actually are very confident that we have the right people in our balance sheet.

The people that we choose to lend to and I guess the biggest example of this is that during the last cycle, many, many people were doing multi-family loans, we lost 0 and others lost the bank.

And they were all doing multifamily loans.

So the fact that you know someone who is doing multifamily loans doesn't mean they're doing it in the same way we're doing it.

The people we're dealing with are reflecting the kind of things we talked about earlier, that they have the opportunity because they have created real value in their property to, in some cases, sell their property at great benefit and then in the period in front of us they will refinance those gains and we will participate in the refinancing.

In other words, we're not doing it at the desk -- we're not refinancing those loans the day we satisfy them.

So you're seeing a drop-off for two quarters in our actual growth in the portfolio; but down the road those good property owners will be there to, in fact, refinance or actually finance the replacement property.

That's going to be very beneficial to us.

So it's all basically in the pipeline and the difference between us and others is the person we actually lend to.

Bob, it's Tom.

I would add to that, the exciting point about business right now is that we get a reasonable look over the next, let's call it 30 to 60 days of activity, and we're very confident lacking at Q2 verse Q1 that we'll be ahead on prepay.

That doesn't mean the second half is going to be at the same level but it's quarter to quarter, and Q4 was very strong for us.

Going into Q1 '07, now going into Q2, 2007.

We see the positive trend, we see some very good activity.

What's very promising that the coupons are very low leaving the book.

Having low coupons and getting paid, we have tremendous opportunity and flexibility on our margin right now, and that's giving us a reason to relax our ability to grow the balance sheet right now and wait for the market to turn around to our advantage.

What's very exciting that our refinancing book of business is very strong going into Q2, and that's going to obviously drive our earnings per share.

Okay.

Then just one last comment/question.

Joe, in response to changes in the competitive landscape, it would be my assessment that some of the competitors in the market like Sovereign, Northfork have been less willing to portfolio multifamily loans for very good reasons because they think it's uneconomic to do.

So so when we think about exing out prepayment penalty income which may be manufactured to some degree or is certainly going to be volatile and financial engineering that comes from deals, how do you guys really feel about your core business?

I think, Bob, our core business is absolutely fine.

Your interpretation of how our business is done is not necessarily at all consistent with the numbers over time.

The fact is, we've always had part of our term yield to include the ability to recognize that we benefit from the structured prepayment that is in our portfolio.

That is there and it's demonstrating that it's available to us.

It is not any different than what has happened over the course of many years except that we're being a little more explicit that we have those available funds to add to our margin and to add to our net bottom line.

At the end of the day we do see a significant opportunity to refinance the portfolio that we have because the yields that are in our portfolio are lower than the market yields that are available to us.

So over time that should result in ever increasing yield on assets.

That's a very good thing, and when we had a to the coupon change, the benefit of the prepayments, which is also structurally part and parcel of how our loans are prepared, then in fact we have even better returns like we had occur.

So that is part of how we do our business.

That's not in any way subject to, you know, change based upon interpretation.

Bob, it's Tom.

Last time I looked, 150 off the five-year CMT is not a terrible yield in this environment.

If you look at some alternative products, especially in the condo market, that's a very attractive yield in this environment based on the shape of the curve.

We'd like to see better we'd like to see 225 and 250 but it's not the market right now.

The markets go up and down.

We're prepared to lend into the marketplace for our customer base.

Back in 2002 and 2003 when other banks decided a 5% coupon was a terrible coupon, we were lending.

Now those 5 percenters are running a loss.

So we will always be there for our customers, that's our niche business.

We're very confident we can continue lending into our niche business.

Bob, I know that you referred to others interpreting that they don't want a portfolio assets.

I would remind you that we, in fact, have had over the course of many, many years the best judgment as to what assets we would put into our portfolio.

So our assessment of the assets that we are creating for the bank is that these assets meet our requirements, and therefore we're confident that these assets will outperform the assets of others.

There's no question that there is the availability of many players who will take assets over longer periods of time with far more dollars and some of the players that are not in our niche any longer.

Because if they're going to be extending their assets to, let's say, Fannie or other assets moving off their balance sheets, they're not going to be actually focusing on the very same people that we want to have in our portfolio as the cycle turns.

And the existence of those very smart owners who have been there through other cycles makes a difference between how we perform and others perform.

And I'll give you an example.

To assume that a credit card asset or an auto loan is better asset than the assets that we're creating absolutely denies the reality of the numbers.

No cycle has had better performance on credit cards or on auto loans than our multifamily loans.

In fact, our multifamily loans have outperformed all assets.

I think it's a little bit of a stretch to presume that what other people are doing should reflect what we should be doing.

Okay, thanks, guys.

Thanks, Bob.

Next we'll go to Thomas Kahn from Kahn Brothers & Company.

Could you please tell what you say you're buying in the way of assets and liabilities at Doral?

Hi.

It's Tom Cangemi.

What I'll tell you, we structured a very unique transaction with Doral.

We had the ability to do a grand transaction which fit like a glove with our Atlantic Bank franchise in New York City and take the liabilities and pick and choose the assets that we're very comfortable in acquiring, which is, for example, similar customers that we do business with.

So if a multifamily credit in our books and we're very comfortable with that particular credit -- we took the asset.

We were very focused on picking and choosing the asset book of business they had to offer to us.

Again this will be, depending what's left when we close the deal, we will be very focused on continuing that relationship with our customer base but the primary driver was no question the assets on the book similar customers to us as well as medallion business.

We're very excited about the medallion business.

The taxi medallion business has a very good history, and we liked the business a lot, and we intend to build the business.

That's another asset that we're acquiring.

Other than that we're getting a lot of liabilities and we're very excited about that.

It's also the presence of brand-new branches in our franchise that we believe we could actually build franchise or deposit base in better than they have been able to since they have been under a great deal of pressure for post of the time those branches have existed.

We're very excited that those branches add dramatically to our service model within the franchise, our primary franchise, and therefore we're going to be able to build those branches nicely.

I think it's a good deal.

You notice you're doing a lot more in the way of radio advertising, which I think is a good thing.

Are you trying to develop the NYCB name as a brand like HSBC as a brand so that eventually down the road that brand might be, who knows, a prevailing brand, particularly if you make acquisitions outside of New York state?

Yeah, I think there's no question that the greater the visibility of the common name for the bank, the greater the likelihood that all of the people who might actually choose to be depositors will recognize that they're part of the much larger bank, and that they have access to their funds through 200 branches rather than 30 or 40 branches.

I think we're doing the right thing by maintaining the identity of the banks acquired where they have a great deal of knowledge within the community that they've been there for 100 years or 120 years.

The ability to extend that with this branding is something that's going to work out very nicely.

And, by the way, there are many banks that emphasize a component of their identity.

As we become more and more familiar as NYCB there's no question that Community Bank could be the surviving entity that people will recognize because Community Bank will be, in every case, present.

Last question.

If I go into any branch in the family, and I want to transact business relating to an account at another member of the family, are we on a unified platform now?

Not as of today in all branches, although we are on a unified platform in selected branches, and we're going to be rolling that out ever more and more.

So we have two different banks, the Commercial Bank and the Community Bank, and they're both operating on separate systems, but we have an interlock between those banks that allows depositors to transact business from the Community Bank to the Commercial Bank --

The Community Bank on one platform, whether it's Queens County or Roslyn or whatever?

In the case of the community banks, all community banks are on the same platform.

I can go into a queens County branch and do transactions --

Absolutely.

All Queens, Roslyn, all Richmond County, all the branches part of the community bank are on the same system.

What I was speaking of, we even have the ability to transact activity over the two subsidiaries, the commercial bank.

So you can go into an Atlantic Bank branch and transact activity at Roslyn Savings Bank, and that is something that is highly desirable to us.

Down the road everybody will be on the same system.

As we said today we have the ability to operate with the -- and it's transparent to the customer -- with the ability for customers go to into selected branches, and down the road ever more, branches.

Thanks, Joe, Tom.

Thank you, Tom.

Next, we'll go to Matthew Kelley from Sterne, Agee.

I'm just curious -- what's the percentage of jumbo CDs at quarter-end?

Matt, I will have to get back to you.

I don't have that at my fingertips.

I missed some of the discussion on the expenses earlier, and I apologize.

But what is the all-in expense run rate for the second quarter with a full period of Penn Fed after cost savings?

I don't have that with me right now but I will tell you, after the Penn Federal transaction we were running around $68 million, $70 million per quarter; we've upped the first quarter for incentive plans that we started to accrue for.

Obviously the company is starting to attain its profitability based on our performance metric as well as branch rollout on the incentive side so we've started to accrue for some additional compensation plans.

Okay.

I recall, you know, just in the presentation for Penn Fed did you about $9 million in cost saves.

I believe that was 40%, so I mean, looks like about $14 million in annualized costs coming over from Penn Fed.

That would be conservative, Matt.

I would say that we feel very confident on the 40% cost savings that's a fair number to run for a model.

So operating expenses outside of new amortization costs, around $75 million?

Right.

If you include Penn Fed, that's correct.

And then anything on the expense items we should be aware of for Doral and those branches and networks?

Very small.

Obviously we're taking over the branch structure, we're not taking over the back office.

So we're merging our system.

How many people?

75?

About 70, 75 people, mostly retail.

Thank you very much.

Thank you.

We'll take our next question from Sal DiMartino no with Bear Stearns.

I just have a follow-up on the multi-family.

You mentioned more sales occurring given market values.

That implies indirectly that in future periods you may see higher 1031b exchanges.

Absolutely.

The existence of 1031b is definitely driven by having tax incentives to continue to reinvest profits within real estate.

And the people that we daily with on a favored basis the most are very, very familiar with 1031s and been using them for many, many years.

And they're there making money even when others are losing on the real estate they own.

They're still making profits.

In this immediate marketplace, we have a lot of very large facilities that are virtually creating for us great opportunity to trade out of the existing property and have the informed property owner buy, under more favorable terms, other assets and refinance those assets with us.

The bottom line is that happens over time.

It doesn't happen at the desk.

So we're confident we're going to have some good people who will be in a position to bay assets and need refinancing when, in fact, the cycle evolves, and certainly as the months and quarters pass, we're going to see those people back at our desk.

Thanks, Joe.

Thank you, Sal.

At this time there are no further questions.

I'd like to turn the call back over to the speaker for additional remarks.

Thank you for participating in this morning's discussion and for the opportunity to discuss the improvements in our operating earnings and the related performance measures as well as continuing quality of our assets and our tangible capital strength.

Although our optimism is tempered by the uncertainty surrounding interest rates, and their impact on market conditions, we look forward to reporting our second quarter operating earnings which will reflect the three-month benefit of the Penn Fed acquisition as well as the benefits of our post merger repositioning.

Thank you.

That does conclude today's teleconference.

We'd like to thank you all for your participation.

Have a wonderful afternoon.