Flagstar Financial Inc (NYCB) 2008 Q1 法說會逐字稿

Good day, everyone.

Thank you for holding and welcome to the New York Community Bancorp's first quarter 2008 earnings call.

Today's conference is being recorded and for opening remarks and introductions,

I would like to turn the call over to the Executive Vice President and Director of Investor Relations, Ms.

Ilene Angarola.

Please go ahead, Ilene.

Thank you.

Good morning everyone and thank you for joining the management team of New York Community Bancorp for our quarterly post earnings conference call.

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

Also with us on the call today are Robert Wann, our Senior Executive Vice President and Chief Operating Officer, and our Executive Vice President and Chief Accounting Officer, John Pinto.

Our comments today will feature certain forward-looking statements, which are intended to be covered by the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we currently anticipate, due to a number of factors, many of which are beyond our control.

Among those factors are changes in interest rates, which may affect our net income, prepayment penalty income, and other future cash flows, or the market value of our assets, changes in deposit flows and the demand for deposits, loans, 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 risk factors associated with our forward-looking statements in our recent SEC filings and beginning on Page 8 of this morning's earnings release.

The release also includes the 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, www.mynycb.com.

I would now like to turn the call over to Mr.

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

Thank you, Eileen, and good morning, all.

Thank you for joining us for today's discussion of our first quarter 2008 performance.

As you might expect, we are very pleased with the results we reported this morning, and with the positive trends we've seen in our performance over the past 12 months.

In addition to the consistent quality of our assets, our first quarter performance was highlighted by earnings growth, loan deposit and asset growth, and the expansion of our net interest margin, not only on a link quarter basis, but also year-over-year.

These trends will be the focus of this morning's discussion, after which, I'll be happy to take as many questions as our allotted time allows.

At a time when eroding quality is of real concern to bank investors, I'm pleased to report that the balance of nonperforming assets declined by $660,000 on a link quarter basis and by $3.3 million, or 13% year-over-year.

At the end of March 2008, nonperforming assets totaled a modest $22.2 million, and represented 0.07% total assets.

Charge-offs totaled $396,000 during the quarter and represented 0.002% of average loans.

Consistent with our experience over the past 53 quarters, not one of our charge-offs recorded was on real estate loans.

I know that I've often said this before, but I believe it bears repeating, that the quality of our assets is a tribute to the unique attributes of our primary lending niche and our conservative underwriting standards, which by and large, have been constant, even as our loan portfolio has grown and become more diverse.

In the midst of the current crisis in the financial markets, our willingness to sacrifice earnings growth for the quality of our assets has never seemed more prudent, nor has our lending discipline seemed more well advised.

While we can't expect to remain immune to continuing downturn in the credit cycle, we believe that our standards and lending niche will continue to serve us well.

In the current market, the quality of our assets is both a distinction and an advantage, as it enables us to retain more of our earnings and thus sustain our capital strength.

At the end of March, the ratio of tangible stockholders equity to tangible assets was 5.78%, excluding market to market adjustments.

Including these adjustments, the ratio was 5.70%.

These ratios were accomplished, despite a charge to capital of $12.7 million for the split dollar post retirement benefit, relating to our investment in bank-owned life insurance, in connection with the adoption of EITF 06-4 on January 1.

By the way, most of that split dollar BOLI was put in place 14, 15 years ago.

Another first quarter highlight, was the strength of our loan production and an increasingly attractive spread environment.

In significant contrast to the 150 to 160-basis point spreads we earned in the past few years on our principle assets, the average spread on the multifamily and commercial real estate loans we originated in the first quarter, exceeded the average five-year constant maturity treasury, by 302 basis points.

Boosted by originations of $1.4 billion, our loan portfolio grew to $20.5 billion at the end of the first quarter.

While the level of loan growth was limited by repayments and the repositioning of certain loans acquired, with the synergy financial group last October, this was our third consecutive quarter of loan growth after two years of declines.

After securitization and sale of synergy loans in the first quarter, total loans grew at an annualized rate of 5%, with loans of $1 billion in our pipeline as of this morning, we would expect to see our portfolio growth to continue in the second quarter and for that matter, throughout 2008.

In addition to the cash flows produced by loan and securities repayments, the growth of our loan portfolio was funded by an increase in deposits over the past three months.

Deposits rose to $13.5 billion at the close of the first quarter, while the balance of wholesale borrowings declined to $12.1 billion.

We also were very pleased to report the continued growth of our net interest income and the expansion of our net interest margin on both a linked quarter basis and year-over-year.

During the quarter, our net interest income rose 4.6% to $161.5 million, while our margin increased by five basis points to 241.

In addition to a reduction in funding costs and an increase in interest earning assets, the link quarter improvements reflect a $5.8 million increase in prepayment penalty income to $10.3 million.

While prepayment penalty income declined year-over-year by $3.4 million, our net interest income rose by 10.4% during the same period.

In addition, notwithstanding the decline in prepayment penalty income, our margin expanded by nine basis points year-over-year.

This year-over-year increase, was driven by the growth of our interest earning assets in the wake of our three acquisitions and the organic loan production, and by the increase in the spreads on our multifamily and commercial real estate loans.

In addition, while the average yield on assets rose eight basis points year-over-year to 6.04% in the quarter, our average cost of funds declined by four basis points to 3.85%.

Largely reflecting the growth of our net interest income, our earnings totaled $72.4 million in the current first quarter, a 7.4% increase on a link quarter basis, and an 11.7% increase from the year earlier amount of earnings.

On a diluted per share basis, our earnings were up $0.01 from the trailing quarter level and consistent with the $0.22 per diluted share reported in the first quarter of 2007.

On an operating basis, our earnings totaled $70.2 million in the current first quarter and were equivalent to $0.22 per diluted share, the same as the GAAP amount.

Our cash earnings, with which our dividend is paid, totaled $82 million in the quarter and were equivalent to $0.25 per diluted share.

In view of the strength of our capital and our first quarter earnings, the Board of Directors last night declared a $0.25 per share dividend payable on May 16 to shareholders of record as of May 7, 2008.

We believe the solid performance trends we've seen will continue going forward and are confident in our ability to maintain the dividend at the current amount.

Having deliberately positioned our balance sheet to withstand the impact of a negative credit cycle, we look forward to distinguishing ourselves favorably in the quarters ahead.

At this time, I would like -- 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 our Investor Relations department, or leave a message for us and we'll do our best to get back to you during this week.

(OPERATOR INSTRUCTIONS) First up in the roster will be Sal DiMartino with Bear, Stearns.

Good morning.

Good morning, Sal.

I just have two questions, one on Joe in your comments you mentioned that average loan spreads are coming on at over 300 basis points.

Could you talk about competition in the marketplace and your view on how sustainable those types of spreads are?

And the second question is on deposit pricing, looks like your costs of deposits were down about 20 basis points sequentially and just wanted to know how quickly you think you'll be able to lower your deposit costs, especially if you think you're going to show stronger loan growth going forward.

I think the good news with regard to deposits, they are up despite the fact that we positioned ourselves in the middle or in the low range of deposit offering rates, so the opportunity continues and looks like it will be improving as we go through the three or four or five quarters in front of us.

We have almost $6 billion in deposits that have in the range of about 4.5% that will be repricing, which we believe to be down fairly substantially over the next four quarters.

So when we look at deposits, we see them flowing in, despite the fact that we're saving substantially on the deposit rate.

Now, with regard to -- your first question was?

Competition on lending?

Yeah, and the spreads that you're seeing.

Yeah, we're seeing a significant difference.

There is some lenders, some of the larger, more aggressive lenders are looking at 5 and 600 basis points that they are positioning themselves over their previous rates because there is a lack of funding for a large number of loans that are in the marketplace.

As I mentioned I guess in the earlier call, we're in a period when there's a lot of adjustment occurring.

People are rethinking the pricing on sales and rethinking the values of their assets and when and how they are going to refinance them.

So until this market readjusts itself, and that will take a few quarters, there's going to be less activity than we'll be seeing later in this year and certainly into 2009.

As we look at the competition, the competition has changed fairly dramatically.

Obviously none of the conduits are there.

None of the large players who have a bad perception of what it is that they are trying to accomplish in this market.

They are not there anymore.

The people that were most affected, North Fork and Independence, they obviously have been combined into other companies that have different priorities and are not necessarily as focused in this market, doing the lending within our niche.

Very important to make the distinction.

Our niche is not the multifamily market in New York City.

Our niche is a subset of that market, and we do expect that as time passes, we'll have a better opportunity to refinance more of what comes to market in the third and fourth and the quarters ahead.

Sal, it's Tom.

I just want to add another point to the deposit side.

The CD's that we're looking at for the year, approximately the number that Joe quoted -- 86% of that is coming due in 12 months and the average rate's around 435.

That's going to be a sizable benefit to future quarters, probably pick up -- absent any additional rate cuts, around 200 basis points.

,So currency deeds are probably in the mid two's CD rats?

That's correct, mid to low to low two's, and going lower depending on additional intervention by the feds.

Could you give us some color on the margin, if -- where it was in March and/or can you tell us the progression of the margin over the quarter from January through March?

Yeah, Sal, absent any prepayment activity, the margin looks -- it's moving in the right direction.

Obviously the rate cuts happen in the latter part of the quarter.

We will get sizable benefits throughout 2008 and beyond because of the cuts so we are positioned well to see margin expansion into 2008.

Okay, thanks.

You're welcome.

Next up, we have a question from Tony Davis, Stifel Nicolaus.

Good morning, Joe, Tom.

Good morning, Tony.

I gather that, that 1031 exchange volume has slowed a bit and I would infer from what you're saying here, until the fed has stopped cutting rates, we really shouldn't expect a surge in prepayments, is that fair?

I would say that's fair, because obviously you can never really gauge prepayment activity, but the dislocations that have occurred in this market are substantial.

And although there is no question that people are going to have to redeploy funds into this particular niche, that's going to occur over time.

And although we're very pleased with the opportunity, you know, to be prepared to do that, we have no way of knowing exactly when that's going to accelerate.

Tony, it's Tom.

Just an additional point there.

The average yield on the comm portfolio for multi's is still extremely low and still below the current yield that we are putting loans on, so if you look at the 2008 levels, they are still in their low fives and we're putting on credits north of that.

So we're in a good position to benefit, just on the movement of the portfolio.

What impact at this point do you, do you sense you're seeing in terms of property owner's attitudes about refinancing, about borrowing in anticipation of dislocation of Wall Street, layoffs, et cetera?

Is that having any impact yet?

I don't think that will impact our niche.

The people that live in rent-controlled, rent-stabilized buildings are not working on Wall Street.

I think the last cycle is the best to look at what happens when in fact we go through a serious downturn in real estate valuation or a slowing of the economy.

During the last cycle, we had zero nonperforming multifamily loans.

All of our buildings were fully occupied.

Rent controlled apartments, or rent-controlled or stabilized units typically continue to pay their loans and continue to occupy their space, even when the market slows.

At this repayment level, given your backlog, given the credit spreads you're getting right now, I, I surmise your appetite for loan growth is faster than five.

Our appetite is definitely beyond five, but the reality is we can't force the market.

We're not looking to press to do loans that do not meet our standards.

This is not the time to be sacrificing standards, so we do believe that the market is going to become more fluid and the opportunities are going to be increasing as we go ahead, but we're not going to force the issue, and certainly as we look at this market, it's still, it's still readjusting itself and, you know, our niche will be fine and grow rather substantially later in this year.

Tony, it's Tom.

I would also add that over the past three quarters we've seen net assets growth on the loan side and we were pretty comfortable with that mid single-digit level in Q1.

And if you look back two years prior to that, we had a substantial amount of declines in the portfolio.

The cost of the credit parameters that were being done in the marketplace.

So we're in a very unique position to capitalize on much higher spreads, coming from 150 going to around 300.

I think the multis were around 292 for the quarter, excommercial real estate.

Those are very healthy spreads and the current loans are on the portfolio were originated at spreads that were much tighter.

So we should see some unique benefits here in the core business model going forward.

Not that this is an issue, but final question, just a little detail on the $396,000 charge-off.

Yeah, yeah, that's basically on acquired assets.

They are typically auto loans or other consumer-type loans.

These are assets that ultimately are running off the balance sheet.

So when you look at our overall portfolio, we've had no charges at all for years and years and years, on the bulk of what the reserve represents.

So the reserve is way more than adequate, given the actual charges that are coming against it.

The assets that we're charging are diminimus compared to the portfolio and the assets that we're charging are virtually declining rapidly.

So even though we do have charges here, these charges are on assets that are dissipating.

Tony, a great degree of that was obviously part of our auto book that we've acquired through Synergy.

That portfolio's down, I think when we first started talking to them about 125, $125 million.

We sold some assets in the quarter.

We ended up right now with approximately $40, $42 million, $44 million total as of quarter end.

So it's clearly paying down very rapidly.

It's short-term paid, but it's high yielding paper and you're going to have some loss in this market and we're prepared to deal with that and hopefully in short order, the portfolio will shrink to zero.

Thank you, much.

You're welcome.

Next, from Lehman Brothers, this is Bruce Harting.

Good morning, Bruce.

Good morning.

Hi, Bruce.

With the strong loan growth opportunities and at these spreads, is there any consideration of, do you have the equity to, take advantage of the market, and if so, can you talk about, are you cherry picking the best loans?

Are you able to service all the customers coming to you and then would it make sense, given, what looks to be extremely unusually high ROEs on the business to, to deploy a little more capital?

Bruce, it's Tom.

I would address that the first comment on, as far as capital.

We're prepared to grow the portfolio more towards historical levels.

We've had a lot of cash flow over the past six months, just coming from the securities portfolio.

We were very prudent in terms of going into the same kind of product -- agency CMO's, agency debentures because of the excess cash flow that we received as expected.

Our goal is to have a lot of that excess liquidity going to our product and with that being said the balance sheet does not need to grow as dramatically because of the cash we're generating for securities and the like and repayments.

But more importantly, if we were to grow the portfolio, we'll call it, let's call it high teens to low 20's percentile, you still have excess capital at the bank and the holding company level to see very good growth for a number of years without going to the Capital Markets.

Okay.

And we run those models consistently.

Obviously 5% net loan growth is right on target as we expected due to the current trends, but we're prepared for a higher loan growth in future periods.

Bruce, another thing to consider, if we were to choose to raise capital, we would be raising capital to do accretive earnings.

So any capital that we would raise would be raised for the purpose of increasing our earnings.

That's very, very different than what's happening in the market today.

In all the cases that are catching the headlines, people are raising capital to deal with losses.

If we chose to raise capital, it would be for the purpose of increasing our earnings.

So in accretive capital deal is definitely in the desirable thing to do.

And, you might have talked about it already.

I just jumped off for one of the questions, but the deposit markets in the New York metropolitan area footprint, can you just talk about the competitive environment and seems like pricing's come down quite a bit and what's your sort of enter play between federal home loan bank borrowings and deposits, and is it a good time to go back into the deposit market and -

I'd say the good news, we've been very, very disciplined in how we've approached deposits.

Deposits have been coming down in cost consistently month by month by month and we expect that to be the continuing case.

We have been less aggressive in and our marketplace is becoming less aggressive, and so as a result, our deposit funding costs are going down rapidly and even though we're paying less than many of our peers, our deposits are actually going up.

And that's mainly because a lot of people are taking money out of equities or taking money out of bonds and putting it into savings, because, there is no question that in a deposit, you have a safe principle bet, and today, that does matter.

So when we look at the deposit cost of funds, we see it coming down consistently over the quarters ahead.

Thank you.

You're welcome.

A question now from Bob Hughes at KBW.

Hi, good morning, guys.

Good morning, Bob.

I guess a couple of questions, the, the increase in the construction book this quarter, is that related to new originations?

Is it related to drawdowns on existing commitments?

Is there any funding of interest reserves going on there?

Yeah, that's mainly drawdowns on commitments.

When you look at the construction book, it has a huge amount of money that has been allocated for the purpose of, building a particular, complex.

And the number that you're talking about does reflect in fact drawdowns.

Okay.

Should we expect to see that portfolio shrinking in the coming quarters?

When do you anticipate that peaking out?

I think we've already begun to see it come down and I think that that will continue to be the case.

We're not seeing, big opportunities with regard to -- let me put it differently.

We're not taking big opportunities with regard to construction lending-- but there are some out there.

There's no question.

In fact, I just saw a couple of books on $380 million in new construction, which we're not likely to take any of, but the fact is that our book, with regard to construction, should in fact be decreasing from the standpoint of new commitments and any dollar that you see flowing into that would be based on existing relationships that are bringing projects close to completion or otherwise building, a home base on a definitive contract.

Just additional comment on construction, just bear in mind about $180 million is the Co-op City facility, that will be moving into permanent financing.

That is, obviously done and that's going to be a matter of process over into the multifamily portfolio.

You have to kind of take that out of the total calculation.

Okay, okay great.

As I look at the margin in the quarter, if we exclude the impact from prepayment penalties, it looked like the margin might have actually been down about three basis points sequentially.

Is that--

That's accurate.

We're down about three bais points year-over-year.

Okay, but given, Joe you might have commented on some of the funding repricing over the course of this year, I didn't catch all that, but in general, combination of incremental balance sheet growth and some funding repricing, you would expect to see that margin lift in the second quarter?

Yes.

My comment previously, Bob, is that you're going to see in the quarters ahead exprepay, up margin.

Okay.

So obviously depending if it's, we did $10 million this quarter, previous quarter was around $5.5, which was very low, we see good trends on the funding side, tremendous trends on overall funding.

Not only do we reduce our CD rates dramatically, but our overall money market funds are down dramatically, so we're well positioned to take advantage of a lower rate environment and the overall spreads on the new business is significantly wider than it was in previous years.

We're not looking at 150 anymore.

We're looking at around 300, as indicated previously, 292 for multi for the quarter, 302, including CRE.

So overall, we're getting healthier spreads and we can fund that at an incremental benefit to the margin going forward.

Okay, and perhaps one final question.

It's -- I know your cash earnings are certainly higher.

But it's been, it's been two years of not earning the dividend.

Maybe it's a two-part question.

Number one, cash at the holding company today, and do you perceive running into any particular difficulties upstreaming cash to sustain the dividend, number one?

And then I have a follow-up from that.

This is Tom.

I would say that right now we have about 125 million as a holding company, as of 3-31.

Obviously we plan on earning our dividend on a GAAP basis in short order.

These are healthy trends for the company.

We're seeing an upward earnings per share growth going into 2008 and 2009, and we've been through a tough few years and now we're seeing the trends now in more favorable to the company.

So my -- our thinking right now is that up margins, up earnings, and obviously the goal was to cover the dividend on the GAAP basis, so we feel pretty confident there.

I think an important thing to recognize, Bob, is that the contributions to capital come from cash earnings, so our actual contributions to capital do in fact cover the amount of money that comes out of capital to pay the dividends.

Right, right.

Okay.

That's good.

I'll stop there.

All right.

Thank you so much, Bob.

We have a question now from Greg Ketron [ph] at CitiGroup.

Good morning.

Good morning.

Just a couple of questions, and you guys have answered some of this already.

But looking at the construction portfolio and commercial real estate portfolio, can you comment on the conditions that you're seeing in terms of any weakness there, any concerns you may have there going forward?

Well, obviously we have concerns with regard to construction lending wherever that may be.

The fact is that our existing relationships, the loans we have in place, we believe, are in fact, sustainable.

They have the kinds of property owners or builders, that have been through cycles in the past and they have, reserves and where with all to deal with a slowing construction environment.

So even if their product is not selling at the speed that it was selling at a year ago, it's selling at a speed that they can accommodate.

So I do think that construction lending across the nation and certainly even within our portfolio, is going to evidence a slowing and maybe even a devaluation of product that actually comes to the market.

But having said all of that, we're still very confident that the people that we're dealing with have the ability to manage through this particular cycle.

On the yields, on the yield side, bear in mind, all our deals have floors on the structure, which also gives them an intention, obviously if rates are going dramatically lower and they have a very good low LTV, they may look to go elsewhere, obviously, because they are paying a much higher rate through our structure and the market's down dramatically on rates.

They may look to move.

We're more than willing to take portfolio burnoff very quickly.

All right.

And if you look at your construction portfolio, can you comment on the mix of that, multifamily, versus single family?

Off hand I would say it's probably more in the way of residential homes that are located in communities that are gated communities.

You know, across Long Island, most of the people we're dealing with are the top builders on Long Island and they don't build a house.

They build a community.

So they have lots of people that are lined up to typically, buy into that community with the desire to be, on a golf course, in a gated community, with a clubhouse, so on, so forth.

Also, in excess of 90% is in our backyard, so the vast majority, 90% of it is literally a New York related product.

Not as much of that multifamily, but more concentrated towards residential?

That's right, yeah.

And then you also have the Co-op City structure, 180, that's obviously multifamily.

Right, okay.

Then one question on the margin, and Tom, I think you already answered this to a degree, but just maybe a little bit more color.

You had extra prepayment fees, which certainly you've got to consider that important revenue source, but just looking at it, the margin ex those, it did drop to three basis points.

Was this somewhat of a surprise to you, or were those your expectations for the first quarter, realizing that for the rest of this year it would be expanding?

We were pretty much right on, we felt pretty good about where we were in respect to asset gross, we were assuming around 5% net.

We had the securitization on hand that quarter.

On Synergy, we sold some auto paper.

The reality is that in this environment, prepays have doubled, it's great, but they have doubled off a very low base.

Five million is not a typical quarter for us, if that was in the fourth quarter, and having ten is much better.

We feel pretty good about overall margin benefits here in this low interest rate environment on the funding side.

As indicated previously, the asset yields in the portfolio for multifamily, very low fives, and we're getting north of that.

So, just the incremental spread here on new business is great, but even just running off the portfolio and seeing some of the cash flows coming off securities portfolio as well will all be additive to the margin.

So we're in a very unique position here to at least see some good margin growth without having aggressive asset growth.

In the event we have good asset growth in this environment, the margin growth will only be significantly better.

Okay, and then if you can comment, the CD portfolio certainly is a big anchor and very important to the margin picture of the declining rate environment.

Right.

Looking at the fact that rates have gone down 200 basis points, the CD rates have only gone down about 20 basis points over the last two quarters, so should we expect a pretty strong acceleration in that down pricing?

Oh, yes.

Right now I said previously $5.1 billion or 86% of our entire CD book reprices in 12 months and the average coupon in that's about 4.35%, so we're looking at about 200 basis points benefit today without any additional fed reduction on the short-term rates.

Okay, and from a maturity standpoint, is there a certain quarter where you have more maturities--

It's spread out throughout the--

Is it, okay.

It's an ongoing benefit.

Bear in mind the fed cuts in the first quarter will benefit greatly Q2, so obviously you don't see much in January, because a lot of that January money went into April.

So therefore the April refinances will be substantially lower than January and that was -- that was well over half a billion dollars.

So we're seeing some very nice significant benefits on CDs, but more importantly, the entire deposit base has been repriced.

We are one of the lower rate payors in the marketplace and we're holding on to positive base.

We're not looking to bring in aggressive funding, because we don't need the aggressive funding right now.

If loan growth is substantial, we will fund it via through the deposit market, as well as the wholesale market.

If you look at wholesale spreads versus incremental growth on the assets, they are very impressive compared to previous quarters.

We're seeing very nice economic spreads through borrowings as well as the CD markets.

So we're in a good position to capitalize on that.

Okay, great.

Thank you.

Appreciate it.

Thank you.

We'll move on to a question from Tom Alonso at Fox-Pitt Kelton.

Hi, good morning, guys.

Most of my questions have been asked.

Just one quick clarification point.

On the $1.6 million, the Visa gain, can you split that up just between the gain and what was the actual reversal of the accrual?

A million dollars was the reversal.

If you go back to the fourth quarter, we booked $1 million for the liability.

500,000 was reversal

So about half got reversed?

That's correct.

Great.

500 in liability, as well as we have the stock that's sitting out there for three years.

Okay.

Thanks.

That's it.

Thank you.

A question now from Gerard Cassidy, RBC Capital Markets.

Good morning, guys.

Good morning, Gerard.

Following occupy that last answer, the $500,000 reversal, was that taken out of the operating expense line, or was that just in the net number on the gain for Visa?

It's net.

Okay.

Second, you guys over the years have obviously done a number of acquisitions, and can you maybe -- and I apologize if you answered this question already since I've been jumping on and off the call, but in the acquisition, or on the acquisition front, can you give us a flavor of what you're seeing in terms of people being more interested or less interested in selling out now, we know prices are depressed because of what's going on out there.

And then second, are you also prepared, or have you contacted the regulators that you would be interested in failed institutions, should any of those come up in the metro New York market?

Yeah.

I'll answer the second question first and Joe will jump on the first question.

We're part of a national program with the regulators, where in the event there is a potential institution that may be viewed as a failed institution, we're notified to get the opportunity to review those opportunities alike, and obviously if we're interested, we can actually go through a process.

So we are, yes, queued in, and we're more than willing and ready to pounce on opportunities.

I think the other part, Gerard, is very -- well, maybe it's not publicly clear, but I think people are being more reasonable today and I think there's no question that there are deals to be made.

We are being very, very cautious with regard to taking on risk of pricing assets, but in any deal you have to price what it is you acquire on the day that you close the deal, so we're being very mindful that there must be an adequate amount of capital around to deal with the possibility that pricing will be erratic or in some ways be inappropriate at the time of close.

So there are deals that are going to be made, especially given the change in accounting for 2009.

People that want to do deals need to do them in the next several months.

Otherwise, the likelihood will decrease that deals will occur in 2009.

Can you refresh my memory about what's coming in '09 on the accounting that would make it less likely to do a deal versus now?

Well, for example, if you do a highly accretive deal, in this environment, you pretty much price the consideration value on or about the time of announcement.

Going forward in 2009 and the new adoption of the accounting rules, you are looking at pricing the consideration at the time of closing.

So for our example, a lot of our deals that we have created that are sizable deals, we had anywhere from 30 to 70% appreciation in our currency.

That would then be booked towards the good will level, where in previous acquisitions, it would not be booked.

That's clearly a significant detriment, in my opinion.

When you think about it, Gerard, it's penalizing good deals.

Yes, oh, sounds that way.

That's true.

Yeah.

One last question, you were talking about the Long Island housing developments, the gated communities.

Have you guys done any sensitivity analysis or just annecdotedly in talking to your developers about the impact that Wall Street might have on the higher end houses in these communities, considering--

No, I think -- Gerard, let me explain.

Sure.

Most of the people buying into those communities are people who are retiring.

So they are not the people that are on Wall Street.

The people on Wall Street are buying the house that the person is selling to move to a community further east on the island, where they are playing golf and just having a second home.

Often these homes represent the Northern home and they have something in the south as well.

So the people that are buying these homes are often people who are virtually financially well established and at the end of their life.

They are retiring.

So that market is still very, very rich and there are plentiful buyers, given the fact that baby boomers, we've talked about that over the course of decades, baby boomers represent the market that buy into these communities.

Thank you.

You're welcome.

Next up is Michael DeCinteo [ph], TCW.

My question was asked actually.

Thanks.

Thank you, Mike.

All right.

Moving on now to Mark Fitzgibbon at Sandler O'Neill.

Hi, Tom, hi, Joe.

Hi, Mark.

In the past you said doing deals would be sort of tough in this challenging environment because it would be difficult to restructure balance sheets given kind of the locked up credit markets.

Hey, has your view changed at all?

Mark, it's Tom.

I would say that things have boosted up dramatically in certain pockets, but have tightened up in other pockets.

For example, if you follow the Mallogen's [ph] Market, and the MBS side, and on the agency side, there was significant volatility in March and where we stand today, things have more normalized.

If you have very large jumbo credits right now, they are still probably very difficult to sell, but if you have the agency-type structure, there's no problem getting Fannie and Freddie to participate on securitization, so that market is very healthy.

Depending on the type of asset you're at looking to acquire, there is some risk and we're very cautious on, looking at the target and dismantling the assets that don't fit well with the combined company.

With that being said, compare the fourth quarter to where we are in the second quarter, it's been a significant change and it's been a change for the better and what's more focus for us, we feel pretty confident that in this environment, we can see opportunities not only on just in the asset side to dismantle assets for liquidity, but also on the capital side.

There's a lot of excess capital that is not being put to work that could be put to work on a combined balance sheet perspective with NYB.

Mark, as you know, we are a currency user to do deals.

We look at deals as an opportunity to come together as investors in the proforma company, so when you know that the pricing on assets is somewhat uncertain you have to be prepared as a seller or the buyer, to take into account that the price has to reflect the risk.

So whereas it used to be relatively consistent, the day you announce the deal you knew you were going pay, now we're not necessarily sure and the buyer and the seller have to come to an agreement as to how do we deal with that risk.

If in fact it goes well, everybody will just win more.

If in fact it goes badly, then everybody will still have a, an accretive deal.

That's the important thing, that the two parties discussing the deal recognize the inherent market risks that are present.

I would have to say that the critical nature of tangible book value accretion on a merger is the priority for us, especially in this environment.

And we stress test the targets assets in a very significant way, knowing that if a worst case scenario occurs, we'll still be able to have a tangible, accretive deal at closings.

We fee,l based on our multiples, right now that can occur in this type of environment.

Okay, and then the second question is on the expense side.

Are you still extracting costs from some of the past acquisitions, and if you are, how much more should we look for G&A to come down in coming quarters?

I think what we're going to see probably for the back half of the year, some benefit.

We're working on a company-wide cost containment program right now.

We're evaluating systems.

There will be a point in time where ultimately the company will be on one platform.

We're moving in that direction.

That will be very beneficial to the bottom line.

I would rather not give specific guidance on actual savings, but we are going to a company-wide analysis of all lines of businesses, and we -- I believe there will be savings on the systems side.

We do have the multiple platforms right now, Synergy should be integrated by the end of the year and then hopefully first quarter '09 we're looking at the most likely scenario of one platform, one bank platform, which will, in our opinion, drive efficiencies going forward.

In all aspects of the company.

Thank you.

You're welcome.

We'll take a question now from Sorin Roybeau [ph]-- at BlackRock.

Hi, Tom, hi, Joe.

Good morning.

I have a quick question, actually a couple.

So again, in the past, you have been very acquisitive in terms of gathering deposits.

And I was just noticing that your loan growth was relatively flat year-over-year, and my question is you say in this environment is tough to acquire banks, because it's hard to price their risky assets, but this flat loan growth, was that kind of deliberate and going forward, I guess what should we expect the growth in the top line to come from, from the widening in the spread, lower interest income, or should we expect loan growth to pick up, too?

I think both.

Actually, the fact is that our particular niche is readjusting itself and has been for the last several months.

We will see a period when in fact the normal recycling of the cash flows will result in significant refinance, that is coming down the road.

It's just been somewhat slowed by some of the market situation that will in fact eradicate.

So we're going to see loan growth increasing quarter by quarter by quarter, down the road.

So the ability for us to do acquisitions and transition assets is definitely in front of us.

The, the precaution that we've been exercising with regard to doing deals, is driven by the erratic marketplace and the uncertainties with regard to the pricing of their assets.

So it's very, very important for us to be confident that we're in a position where that number is livable, even if it's dramatically different than we set it at.

And that's an important component of when you'll see us actually announce a deal, when we're confident that the assets that we're pricing and the capital that we're using for that purpose, is more than adequate to keep the deal as accretive to tangible, it must be an accretive deal in order for us to do it.

That makes sense.

And then on financing, how -- I guess I'm not sure how to ask the question, but the people who are due to refinance or choose to repay and then say, look, I need a new loan let's refinance.

How does it look to you in terms of credit quality, if, say, they qualified two or three years ago and they come back now and you look at the cash flows and the environment, do you have, like -- can you break down the percentage of how many people you have to turn down, saying you no longer qualify?

I think the important thing to recognize here is that the principle asset we do is rate control, risk stabilized buildings, with property owners who are building cash flow.

They have a business model that works whether the external market is in fact going up in value or down in value and the last cycle by example, values collapsed and our particular niche continued to refinance their increasing cash flows, which is basically driven by their rent role and their rent role is driven by rent-controlled, rent-stabilized units.

So typically they are below the market and they are moving up as a result of the improvement of the building.

So that happens, whether the marketplace is decreasing in value and a perfect example is 1990, let's say.

When values were depleting all throughout the New York market, when vacancies in multifamily buildings were high, our buildings were fully occupied and refinancing, improving rent roles.

Because the rent roles were so far below the market, even though the rest of the market was deteriorating, our niche was not.

So I think that as we go forward, we'll continue to see that.

Now, obviously every loan we do is not a rent-control, rent-stabilized loan, but the important thing to recognize, nearly 70% of our loan portfolio is the niche I'm talking about.

Okay.

Even the commercial loans that we do, to a great extent, many of those commercial loans are also rent-controlled, rent-stabilized to some degree.

So I think that the difference between our asset class and the market generally, is very meaningful.

It doesn't mean we're not going to have an auto loan that goes bad or a consumer loan that goes bad, or some other diminimus amounts of loss.

It means that those losses will be significantly less than the losses being taken by the rest of the sector.

Okay, and then Tom, maybe if you could talk a little bit, the -- the assets you are tying to dispose of, you mentioned the auto loan book, that was the main reason for your increase in charges.

How -- can you quantify how much is left from your previous acquisitions that they are still in the run-off mode.

Yeah, we were, when we started talking to the targets, they had about, I think it was $125 million in total auto book.

We ended up with about a $35 million loan sale that occurred in the, $30 million loan sale occurred in Q1.

We're looking at right now around $40 million as the balance.

We're burning around $2.5 to $3 million per month, and it's, it's consistent.

It's a very short book of portfolio.

Our goal obviously is to see it go away, and we're not positioned to be in the auto business, but we have decent reserves against the book.

We felt obviously comfortable on the portfolio that was acquired.

We would like to sell it all, but the market conditions in Q4 and Q1 were not that healthy for that type of sale.

We were able to sell a decent portion of it in Q1.

So obviously we're left around $40 million and the goal is to watch it go down to zero through cash flow.

Is that all you have left for the balance sheet?

That's correct.

That's it.

What about the reserves, can you quantify them as like basis point.

How much have reserves--

I can't quantify that.

Okay, thanks, guys.

All right.

Question now from Matthew Kelly at Sterne Agee.

Good morning, Matt.

Hi, guys.

Hi, Matt.

Good detail on the deposits and the CDs earlier, but what about on the borrowings, the $12 billion.

What matures this year and at what rates?

And then second question, in a stable rate environment how much would you anticipate getting called away?

Right.

I will tell you no change in last quarter.

You know, we're very pleased to hold the borrowing level at where we are today, it was up just a tiny bit for the quarter.

In respect on the borrowing side, we're looking the--

He's talking about borrowings, is that right, Matt?

Yeah, that's correct.

The question for the borrowing is no different than last quarter, Matt.

In this environment, the book is not going to be called, so we anticipate to hold the current cost of funds in borrowing throughout '08, without the exception of additional growth.

If we have additional growth on borrowings, costs will come down.

As you know, if you are looking at our balance sheet, we opted not to be leveraging the balance sheet in this environment.

There's a lot of volatility out there, but if we were to put some wholesale on right now, it's much cheaper.

In a normalized environment, you're probably looking at still stability.

So we're not going to get a whole lot of benefit from the borrowings book, but over the past 3 1/2 years, overall cost of borrowings have been relatively flat and, we find opportunities here and there to reduce the cost, but this is significantly out of the money with respect to the call provision.

Okay, and then following up on some of the comments and questions on capital, I mean if the markets willing to give you a 370 multiple on tangible book, why don't you just issue stock kind of pro actively fill the war chest.

Looks like they will be creative tangible books and if there's enough asset growth here at 300 basis point spreads, and 15, 20% ROEs, it seems like it would be accretive on earnings as well.

Matt, we're not going to dilute our shareholder once we create earnings, that's no question.

Yes, it is accretive to tangible book value, but we're not looking for additional capital, unless we have the ability to create very good earnings per share growth with our capital.

It will over time, but we would have to do something that would immediately accretive, significantly beneficial to shareholders.

If we were to do something, it would not be the stress capital rates.

It would be the very shareholder-friendly situation that would create significant earnings per share growth and then that opportunity we would consider.

Okay.

And then following up on Gerard's question from earlier about opportunities that may arise on the regulatory assisted kind of transactions, would you consider kind of a deposit-rich type of franchise outside of your market?

If they're loans, obviously deposits are deposits.

We get tremendous amount of opportunity over the past four or five years.

We're very selective and we're not looking to jump out of our core markets unless something's very compelling.

When you have an assisted transaction, typically they are compelling, but it hasn't been -- I know there's been a lot of discussion about substantial amount of issues out there, but I haven't seen an influx of that yet.

So let's kind of wait and see right now.

Okay,alright, thank you.

Next question comes from Ted Kovaleff at Sky Capital.

Yes, and good morning.

Good morning, Ted.

How are you?

Just fine, thanks.

Got a couple of questions about the securitized loans and the sold auto loans and I'm wondering if you have any ongoing responsibilities there with them potentially being put back to you?

No.

No, the securitization on the straight Freddie deal, Freddie the other piece was it's Freddie, right?

Fannie, straight Fannie deal, that was about 75 million, 25 to 30 million I think was auto and that was a sale to a larger company with no recourse.

Great.

Well, thanks very much.

You're welcome.

Steve Moss from Janney Montgomery Scott is next.

Good morning.

Actually all of my questions have been answered.

Thank you.

All right.

Finally we will go to Ross Haberman at Haberman Fund.

Good morning, gentlemen.

How are you.

Good morning.

Just a quick question, Joe, do you have much condo conversion loan exposure?

And do you expect to see much of that involving your rent-controlled properties?

Or typically when that happens, that's an automatic repayment event?

Yeah, we don't have, we don't have much of that at all.

And we don't see this as being an issue that we're going to have to deal with.

Okay, thanks.

You're welcome.

With that, thank you very much for participating in the Q&A session, ladies and gentlemen.

I'll turn things back over to Mr.

Ficalora for any additional closing comments.

Thank you, again, for joining us for this morning's discussion.

We appreciate the opportunity to discuss the favorable trends that highlighted our first quarter performance and the components of our business model, which drove our results.

The quality of our assets, which continues to be solid, organic loan production at more attractive spreads, the efficient operation of our company, and our franchise, the continued repositioning of our balance sheet.

We look forward to talking to you again next quarter, when we expect to further report an increase in our loan growth, reflecting the substantial size of our pipeline and the continued reduction in our funding costs.

While the level of prepayment penalty income can be predicted, we would generally expect to see continued expansion of our net interest margin, together with continued net interest income growth.

Thank you.

Thanks again for joining us, ladies and gentlemen that will conclude the conference call.

Have a good day.