Flagstar Financial Inc (NYCB) 2008 Q2 法說會逐字稿

Good day, everyone.

Welcome to the New York Community Bancorp Second Quarter 2008 earnings Conference Call.

Today's call is being recorded.

Now for opening remarks and introductions I'd like to turn the call over to the Executive Vice President and Director of Investor Relations, Ms.

[Eileen Angarola].

Please go ahead, ma'am.

Thanks.

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 lead by Joseph Ficalora, our Chairman, President and Chief Executive Officer and Thomas Cangemi, our Senior Executive Vice President and Chief Financial Officer.

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

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

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

Among those factors are changes in interest rates which may affect our net income, pre-payment 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, changes in the financial or operating performance of our customers businesses or changes in real estate values which could impact the quality of the assets security (inaudible) loans and changes in competitive pressures among financial institutions or (inaudible) financial institutions.

We will find a more detailed list of the risk factors associated with our forward-looking statements in our recent SEC filings and on Page 11 of this mornings earnings release.

The release also includes reconciliation of our GAAP and non- GAAP earnings, net interest income and capital measures which also will be discussed extensively on this mornings 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 at www.mynycb.com.

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

Ficalora, who will speak to you briefly about our performance and the benefits of the actions we took in the quarter before opening the lines for Q & A.

Thank you, Eileen and good morning, everyone.

Thank you for joining us for todays discussion of the Second Quarter 2008 performance and the significant strategic actions we took to enhance our earnings and capital.

Among the items we will be talking about are the benefits of the common stock offering we completed in the Second Quarter and its immediate contribution to capital.

The benefits of the repositioning we expect to see including the expansion of our margin and double digit earnings accretion in the quarters ahead.

The repositioning of certain borrowings during the quarter and the resultant distortion of of our Second Quarter GAAP financials.

The strength of our earnings on an operating basis which reflected the meaningful expansion of our net interest margin, the growth of our net interest income, and non- interest income, and the consistency of our operating efficiency ratio.

We'll also be speaking to the continued strength of our asset quality which is of particular importance in the current credit cycle, together with the healthy growth of our loan portfolio.

I know that's a lot to cover, and that you're likely to have multiple questions, so let me begin with the first of these items.

Our common stock offering on May 23rd.

The offering generated net proceeds of $339.2 million in the Second Quarter, including $199.2 million that served to offset the impact on our capital measures of repositioning $4 billion of wholesale borrowings with an average weighted interest rate of 5.19%.

The remainder of the proceeds, nearly $140 million, represented a pure contribution to capital.

As a result, our ratio of tangible stockholders equity to tangible assets rose 44 basis points to 6.14% over the course of the quarter and our ratio of adjusted tangible stockholder's equity to adjusted tangible assets rose 40 basis points to 6.18%.

It's important to note that the common stock offering was an earnings accretive action.

It was not motivated by a need to cover current or future losses nor did it need to be.

The quality of our assets remained intact at the end of the Second Quarter, with non-performing assets representing 0.10 % of total assets and non-performing loans representing 0.15 % of total loans.

I'll be returning to the topic of asset quality in just awhile.

Given the strength of our capital at the close of the quarter, the board of directors maintained the quarterly cash dividend at $0.25 per share.

The dividend will be paid on August 15 to shareholders of record at the close of business on August 6, 2008.

I might also add that the capital levels of your community bank and your commercial bank continue to be solid, each exceeding the requirements for classification as well capitalized bank.

We are pleased to rank among the safest and soundest banks in the nation, as reflected in our regulatory capital measures which have been supported by our consistently strong record of asset quality.

Returning to the strategic actions that were taken during the quarter, it is important to note that the repositioning is expected to add 25 basis points to our net interest margin beginning this quarter, and to be 12 to $0.14 accretive to our earnings per share over the next 12 months.

The $4 billion of borrowed funds we prepaid were replaced with $3.8.billion of lower cost federal home loan bank, New York advances and repurchase agreements featuring an average cost that was approximately 200 basis points lower than the 519.

We repositioned generating pre-tax charge of $325 million in the Second Quarter including $39.6 million that was recorded in interest expense in accordance with EITF issue 9619.

The remaining $285.4 million was recorded as non-interest expense.

The $325 million charge significantly distorted the level of interest expense and non-interest expense we recorded in the quarter and therefore, had a significant adverse impact on the quarters GAAP results.

The charge was equivalent to $199.2 million or $0.60 per diluted share on an after-tax basis and resulted in our recording a GAAP loss of $154.8 million in the quarter or $0.47 per diluted share.

Excluding this charge, our operating earnings increased by $ 4.9 million to $75.1 million on a link quarter basis equivalent to a penny increase in diluted operating earnings per share to $0.23.

These improvements were supported by an increase in our adjusted net interest income margin, both of which exclude the impact of $39.6 million debt repositioning charge recorded in interest expense.

Excluding this charge, our net interest income would have risen to $170.2 million and our margin would have expanded to 2.54%.

These improvements would have occurred despite the reduction in pre-payment penalty income over the course of the quarter and year-over-year.

With refinancing activity quelled by the uncertainty in the market, pre-payment penalty income totaled $8.2 million in the Second Quarter down from $10.3 million and $22.3 million in the trailing and year earlier three months.

Refinancing activity thus added 13 basis points to our Second Quarter 2008 margin as compared to 15 and 34 basis points in the prior periods.

In addition, the debt repositioning charge, our Second Quarter GAAP earnings were reduced by a non-cash after-tax loss of $29.8 million or $0.09 per diluted share on the other than temporary impairment of certain pool trust preferred securities and perpetual preferred stock.

Previously, the unrealized mark-to-market loss on these securities had been reflected as a reduction to equity through other comprehensive income.

As a result, other than temporary impairment had no affect on the stockholders equity-- tangible stockholders equity or our measures of capital strength.

As a result of the OTTI, the carrying value of the remaining pool trust preferred securities declined to $35.6 million including $17.3 million in income notes.

The carrying value of the remaining perpetual preferred stock was reduced to $29.2 million, included in this amount was $3.7 million of Freddie Mac exposure and $25.5 million of exposure to perpetual preferred stock of broker dealers, all investment grade.

Excluding the impact of the pre-tax impairment, and of certain other items recorded in the earlier quarters, our adjusted non-interest income would have increased on a link quarter basis as well as year-over-year.

I should also add that it took 25 years but the safe deposit litigation we inherited when we acquired Haven Bancorp has been resolved at last.

The settlement cost us $3.4 million in the Second Quarter, equivalent to $2.3 million after-tax.

Excluding the noise relating to the three charges I've mentioned, our operating efficiency ratio was a consistent 40.14% for the three months ended June 30, 2008.

Our Second Quarter results also reflect our first provision for loan losses in 51 quarters.

At $1.7 million, the provision exceeded actual charge-offs of $1.2 million and increased our allowance for loan losses to $92.9 million at the end of June.

Our decision to record a provision in the quarter was a response to specific circumstances including the level of charge-offs recorded and should not necessarily suggest that additional provisions will be made in the quarters ahead.

The fact is, we are very pleased with the quality of our loans at this juncture, and the fact that our loans or charge-offs stem from our small portfolio of other loans.

Notwithstanding the widespread deterioration in the financial and housing markets, we have yet to take a loss on any loan within our mortgage loan portfolio.

This is not to say that such loss will not occur some time in the future but that our portfolio has thus far retained its strength.

We continue to see opportunities for prudent multi-family lending as the growth of our loan portfolio and our current pipeline suggests.

At $20.9 billion, our loan portfolio was up $415.1 million from the balance recorded at the close of the trailing quarter reflecting an annualized growth of 8.1%.

The increase stemmed entirely from organic loan production with $1.6 billion of loans produced over the course of the quarter including $783 million of multi-family loans.

With a pipeline of approximately $1.3 billion including multi-family loans of $768 million, the growth of our portfolio is right where we want it to be.

It should, in short, while the strength of the fundamentals was masked by the debt repositioning charge and the Second Quarter charges I've mentioned, we expect that our Third Quarter performance will reflect not only the merits of our business model but also the significant benefits of our recent stock offering and the repositioning of our debt.

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

As always, we will do our best to get everybody in on time but if we should miss you, please feel free to call us on the Investor Relations line.

(OPERATOR INSTRUCTIONS).

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

Joe, good morning.

Good morning, Tony, how are you?

Fine.

I wondered if you could do two things.

First, give us a little more color here on the NPA's increase and trends that you're seeing in the construction and CN I portfolios and I guess your level of conviction that the provisions in the last half of the year may or may not be made.

Well, I guess the important thing is that our performing portfolios are significantly in line with expectations and better than the industry as a whole by a large measure.

The likelihood that we'll make additional provisions I guess will be driven by what actually may occur in all of the quarters in front of us.

I think the important thing to recognize is that the change in our non-performing is deminimus.

The actual charges that we may see, may also be characterized as deminimus and there for, the need for additional capital, not capital but the need for additional reserves may not even occur.

So it's the very hard to be sure as to what will happen but the important thing is that it should be very consistent with our historical experiences.

I think that as mentioned in the release, we're looking at charges on acquired assets.

No mortgage losses have been recorded in, I guess with our principal assets.

in 28 years, so the important thing here is even when we have non-performing, it's not like we have 100 house loans that go to 300 house loans all of which are going to result in an individual loss.

The likelihood of a house loan, for example, not resulting in a loss, is extremely low.

The likelihood that we will have a loss on an asset that goes non-performing is in fact not likely at all.

More of our loans have been non-performing over the course of years without there being a charge than I think anybody's portfolio.

If you look at the percentage of non-performing assets in '03 , '04, '05, those percentages were very high, but still, we had zero charge-offs.

Very high compared to our historical numbers.

Very low compared to the rest of the financial sector, so I think the important point here is that even when the non- performing goes up, it doesn't necessarily mean that we're going to have a meaningful charge.

The annoyance of quarterly charges on auto loans and such , that's a different product, and we will continue to

Secondly, Joe, versus the-- I think it was 257 points last quarter, look back over the last decade, what has been the widest credit spreads that you recall booking on on your loans?

I'd say probably in the range of 500 basis points.

Given what's happening at Fannie Mae and Wa Mu conduits and basically Sovereign and North Fork leaving the field, why should we expect just continued increases in this 257 here in the next few quarters?

I'd say that as we go further into this cycle, quarter by quarter by quarter, we should have wider spreads.

That has been the normal experience.

That should be the experience on a go forward basis here.

We regularly see fewer traditional good lenders in the market.

There are a couple of new lenders in the market that are different and therefor,e they're thrashing around and getting some product, but the real players in the market as we sit today, the single largest player in the market by far is Fannie Mae and exactly what they're going to do on a priority basis with their balance sheet is going to be decided by the Congress as well as by them, so I'm not sure exactly how they're going to materialize in the future here.

Final question, and that's just M & A.

I guess a little update on your appetite, the frequency of discussions that you're having today and the realistic odds that you'll find something else to do here over the next six - 12 months.

You know, I think the reality is that there is a significant heightened awareness that partnership makes sense.

There's increased dialogue, but there is in fact reality that asset risk must be considered, and unless we're able to mitigate asset risk to our comfort levels, we're not going to do a deal.

So pricing can easily become more and more favorable and asset risk is going to be a paramount component of any decision process.

So as we go down the road, I think it's without question, there could be circumstances where the assets could be totally resolved, regulatory or otherwise.

If the assets are totally resolved, very accretive deals could be done because the pricing differentials between our currency and the targets will be massive and therefore, overnight almost, we could find a very attractive deal that increases our earnings very substantially and does not represent an asset risk because the assets have been resolved either by regulators or by others.

There are a multitude of ways in which assets can be dealt with.

There are parties that are are perfectly willing to buy assets and to fund highly accretive deals.

Contemplate that we will only do an accretive deal with low risk on the asset side and this environment represents opportunity to accomplish that.

The number of shares necessary for our company to actually do an accretive deal will be substantially less than that would be required for many of the other buyers in the marketplace.

Therefore, we should be in a very attractive position to do highly accretive deals under the right circumstances.

Thanks, Joe.

You're welcome.

Now moving on to Greg Ketron with Citigroup.

Good morning.

Good morning, Greg.

Just a couple of questions.

One, regarding margin, if you can walk us through maybe what your expectations are even outside of the benefit from the debt repositioning, which I think you indicated will add 25 basis points, starting at Third Quarter but beyond that, some of the underlying margin trends that you may expect maybe going forward for the rest of this year and into early 2009?

Greg, it's Tom.

I would just reflect on-- we still see the continuation of deposit costs reducing dramatically.

We've had a substantial pick up here on the benefit of lower CD s although rates have risen in the past six weeks or so, we still have nice repricing going on in the portfolio, but more importantly the overall loan yields that we see in the portfolio around 550, do you believe that some of our higher yielding paper has been removed from the portfolio, we should see some benefits momentarily going forward on the loan side.

Modestly, we figure about 257 basis point spread in point spread in the quarter and the (inaudible) was very volatile so obviously the pricing was a little tight this quarter but it's reasonable to say that we'll start to see pricing increase based on the competitive nature of our business, being much less right now and having the ability to do more paper at higher spreads.

We see some good benefits on the asset sides as well as benefits on the funding side exclusive of the wholesale transaction that will add benefits in Q3.

Okay so may a fair way to think about lend yields going forward given the spreads that you're seeing over the five year CMT, maybe you've reached somewhat of a floor here and we may actually see yield increases going forward?

Depending on what the five year CMT does?

Right.

It's fair to say that if you look at asset yields in general , even security side, yields are much higher currently than they were four weeks ago so things are being priced more realistically, including multi-family

Okay.

And then the other question regarding credit, if you look at things like the construction book out on Long Island which I believe is in the 6 to $700 million range, as you look at auto, CNI, commercial real estate, maybe if you can share any color on trends there that may cause you any concerns, early stage delinquency levels, where they've increased or decreased compared to last quarter?

Yes.

Our portfolio and I'll talk to our portfolio.

Obviously the market is going to be different than our portfolio.

In the construction book, we have some very experienced, well established builders of communities that represent our construction book.

We did not grow our construction lending.

We are continuing to advance existing developments that are local and likely to be very successful at their conclusion.

The speed with which things are moving is a little slower but in fact things are moving in the right direction.

With regard to auto loans, that is not our product.

We only have that as a result of an acquisition of Synergy and this is the residue so if we're down to $30 million or $28 million or $26 million, that will continue quarter by quarter by quarter to pay off and unfortunately continue to result in losses, but when you put those losses to a balance sheet of our size, they're very deminimus.

Okay, anything on the CRE side?

CRE is fine.

CNI is a different kind of product as well.

There will be CNI losses as we go into the market in front of us.

I would think that we will see more losses than we are typically expected to have but we will see substantially fewer losses, substantially fewer losses, than everybody else in the financial sector.

If you look at our actual charges, they're going to be very small compared to our sector.

Okay.

Is there anything in delinquency patterns that you saw that changed?

No, nothing dramatic has occurred.

I mean, as I mentioned earlier, if you look at the delinquency that we may report, the number could go up because we have large loans.

It doesn't mean that we're going to lose any money, and over the course of many many years, we've had higher percentages of delinquencies and yet with those higher-- two times what we have today, two and a half times that we have today, in percentages of outstanding loans, and yet we have zero losses, so the measure of quality of asset isn't driven by delinquency, it's driven by charge and the reality is that we wind up charging off much less than our peers, and as I mentioned earlier, if you're looking at trends in one to four family, if you have 100 houses that are not performing this quarter and you have 200 houses next quarter, that's a lot because a very high percentage of those non-performing will actually go to loss.

If you look at our non-performing from one quarter to another, that number can change dramatically without there being any change-- meaningful change in losses.

So I think that the kinds of losses that we've actually been having over the last few quarters are on the CNI and the consumer loans.

They're all very deminimus and they're all as a result of acquisitions.

You know, can we have losses on assets that we've generated?

Absolutely.

Do we expect to have losses?

Absolutely.

But in perspective, we shall have fewer losses than the sector, surely, and an indication of how much loss we're going to take is not driven by the size of the non- performing, because by example, we have a very large loan.

If it goes into non-performing that percentage can change dramatically but that loan may be resolved with absolutely no loss.

So as I say, you can't look at the measure in the same way as you would look at that particular number when you're considering the risks in a one to four family lending portfolio as example because there you have lots of people, individual home loans that are on the verge of non-performing.

When they go there, coming back is not that easy.

When our loans go to non-performing there could be a variety of circumstances that will be resolved and ultimate disposition of the asset if we keep it will in fact be favorable.

Okay.

And when you look at your loan to values like commercial real estate somewhere around 56%, 63% on multi-family loans, is it fair to project that loan to value level across your other parts of the portfolio that would be commercial real estate, would it be that conservative?

No, actually, our commercial real estate has a lower LTV than our multi-family real estate, but I think if you look at the actual numbers, you'll see that our commercial real estate loans are structured the same as our multi-family loans and they have a shorter life, and they have a lower LTV , and in many cases, they're actually multi-family loans on the second and above floors.

They're retail on the first floor and if retail represents 25% of the income stream of let's say a 15 story building in Manhattan, where the retail is at market, and the rest of the building is controlled, that's considered a commercial loan in our portfolio.

But for the most part it has the attributes of a multi- family

Okay.

Great.

Thank you.

Appreciate it.

You're quite welcome.

Now moving to a question from Mark Fitzgibbon with Sandler O'Neill.

Good morning, Joe.

Good morning Mark.

Joe, what are the initial rates today on multi-family loans you're originating?

I'd say they're north of six.

Okay, and then secondly, the pipeline looked really strong going into the third quarter here, but typically, there's been seasonality in that multi-family business in the third quarter.

Do you think a lot of that pipeline may not close because of seasonal factors and some holidays --

Yeah, I think, Mark you're touching upon reality.

There is going to be far fewer business days for the relevant participants in this market.

However, the market is so unusual in that the factors that are impacting this market are somewhat extraordinary that it would be very hard to know.

I don't think we're going to fall short of our expectations here but how much beyond that we'll go I don't know.

Mark, it's Tom.

I would also add if you look at historical originations and growth, the client portfolio in the previous year and I believe the prior year too, we are in a growth mode.

We feel pretty confident throughout the year you'll start seeing more loans being booked on a net basis on a quarterly basis going throughout 2008 as discussed in the beginning of the year, first quarter, second quarter, third quarter, fourth quarter, each quarter should be higher than the other based on what we're seeing so our pipeline looks obviously encouraging here.

And secondly, did I understand correctly before when you were saying aside from the impact of the balance sheet repositioning the core margin should also continued to rise?

Absolutely.

Okay.

What should we assume for a normalized tax rate, Tom, in the coming quarters?

Is it still around 31-32%?

Well obviously if you go forward we tend to make more money, we feel pretty confident our earnings will increase here so obviously I would bump up of tax rate is around 32% going forward.

And then lastly could you share with us perhaps some of the strategies that you have for building the deposit base, maybe deposit programs or things of that nature?

Yeah, I guess there are a variety of ways in which we're approaching that including the unique circumstance where we actually have two banks.

We have the ability to cross over FDIC insurance so as to have double the benefit of FDIC insurance for depositors.

As I'm sure you're well aware, that has become an issue in recent weeks as a result of what happened with IndiMac, so many people have been raising the question because they don't quite understand the issue but the fact is that we uniquely can provide twice as much insurance to depositors on a relatively simple basis who can keep their deposits with us.

Now, of course the other reality is that a bank such as ours has no risk of need to pay that insurance based on the other strengths of the company and as I'm sure you're well aware, IndiMac, and any other bank that has ever had a need for FDIC insurance had a long period of deterioration that would have been ample opportunity to warn depositors that there could be a problem.

In the case of most of the banks in the nation, you're not seeing that kind of stuff, but it's normal when there's a headline about loss, for people to be concerned about FDIC insurance and our program, the thing that we're going to be putting out and pushing is in fact tied to building sound deposit relationships with yet even more insurance that is normally available in other banks.

Mark, it's Tom.

I would also add that obviously the core is holding up very nicely.

We have not been aggressive at all in the CD fund.

We have been letting the higher cost money roll off, (inaudible) liquidity.

We feel pretty confident on a liquidity level.

We are probably the low end of the spectrum throughout the entire second quarter and rates have moved up quite a bit.

We have very high cost CDs that are repricing lower and if we're 100 basis points off the market, they may choose to go there.

Thank you.

You're welcome.

You now we will take a question from Bob Hughes, KBW.

Hi, good morning, guys.

Good morning.

Question.

The repositioning took place about mid quarter; is that correct?

No.

Actually most of the repositioning actually closed on June 30th.

We had some of the liabilities that were put to work in the late part of June but the vast majority-- the super majority of it closed as of June 30.

Okay, so what was the net impact of the margin from the repositioning itself in the quarter?

It only affected the June month.

It did not affect May or April and it was a few basis points.

Did you say two basis points?

It went into July, August and September.

You'll see a noticeable difference going forward.

(inaudible)

So you would say that the third quarter margin should probably increase modestly on a core basis plus roughly 25 basis points?

Obviously, in the event we see a substantial amount of (inaudible) you can look at a significant increase but we feel pretty confident that the vast majority of all our wholesale liabilities only take place in July 1, we'll get a very sizeable benefit but in addition to that, Bob, if the CDs are still repricing lower, the core model itself outside the repositioning we're getting favorable results on the margins so if you look back on the previous quarter being Q2, margin was up but if you take out prepay, about 15 bips maybe four/five basis points was part of the repositioning.

The reality going forward, you're going to have a sizable benefit here for the core business models (inaudible) going into Q3 and beyond.

Okay.

It's clearly going to be helpful going forward, but coming off of third quarter (inaudible) of $0.33.

It will probably get you either slightly above

We feel that this is the quarter that will probably cover our dividend.

In the third quarter?

Yes.

Okay.

At the same time, though, you'll still be paying out pretty close to 100% of your earnings, meaning your book value is really not going to grow.

(inaudible) around six, 18, so we feel pretty confident our tangibles will stay well above six.

We like the position of our capital strength right now.

We raised a little bit more money on the last deal that we did on the stock side and we could have-- I'll be frank with you, there was a lot of money available to (inaudible) the capital ratio.

We clearly looked at the trade off between accretion and (inaudible) and we took enough money at that point in time to give us a little bit of capital cushion as well as the ability to reposition the wholesale book.

Right.

Given the growth opportunities you have, today presumably, why did you not raise more capital at four times tangible book then?

Very comfortable where our capital levels are now, Bob.

Very comfortable.

Comfortable and confident.

(inaudible) 620 now.

We haven't seen 620 since 2000.

No, I agree, but given that you're paying out 100% of earnings or so, you're not retaining a whole lot of capital support growth.

Oh well, of the expectation going forward we won't be paying out 100% of our-- we'll be making more than we are paying out.

I think Bob, if you look at the last couple of years, we've actually been paying out a higher percentage of our earnings and we've grown our capital year by year by year.

As we sit today, looking forward, the opportunity to grow capital is going to be accelerating and our earnings are going to be accelerating so the issue that might have been more relevant in 2005 or 2006 is materially less relevant in 2008 and 2009.

I would also add, what is very compelling right now is that the spread we're getting on our core business is very favorable compared to prior years.

We're not at the 500 basis point spread but we are closer to 300 and we had a lot of volatility in Q2 in respect to the market place.

If you start to see the continuation of a C (inaudible) curve here we can see significant benefits on the loan side.

Our loan-- average loan yields a multi-family of 5.5% and we have substantial cash flow that's going to refinance going forward.

We are very optimistic that we'll get benefits there.

We didn't see it that much on Q2, we will see it in the second half of '08.

Bob there's another reality here that you souldn't miss.

We've demonstrated that we can get access under very favorable terms to capital.

Should there be an opportunity for us to have a need for more capital to create a highly accretive deal, we'll do it.

There aren't any banks that I'm aware of that have done double digit accretion in the issuance of stock in the last couple of years prospectively.

We have a very good likelihood that we'll be able to do accretive issuance of stock and there'll be plenty of people that are willing to take that stock should we present them with the facts that this is an accretive deal.

I'm not sure you answered one of the original questions directly, but the 10 millionish increase in MPLs in the quarter, what drove that?

Of loan or two, it's probably as I mentioned, the increase --

I'm not asking about loss content.

I'm curious is that out of the multi-family Real Estate broker or is it -

I think it's split between Real Estate and commercial.

Two loans.

Yeah.

In other words, in other words, I think is that it's not an important matter.

Okay.

And then one final question, Joe.

I know the last couple quarters we talked a little bit about some of the assets that are classified as commercial real estate might be multi-family or unstableized multi-family in nature but if the cash flow generated from these properties are north of 25% coming off of maybe retail.

What we've seen in the commercial real estate space so far is that retail is by far the weakest subsegment with rising vacancies and minimal cash flow growth and I think projections for cash flow to decline.

How are you monitoring your portfolio with your retail exposures?

That's a good point, Bob.

Obviously we monitor our portfolio very diligently and what I could say to you is given the nature of the original loan, think about it from the standpoint of our loan is fixed for five years.

People who choose our loan have different expectations than normal commercial real estate property owners.

So the reality is that we are dealing with a different client base that has a different expectation, a value creation from the real estate that they hold and therefore, we have a different experience, so what you're seeing in commercial real estate generally is not necessarily what is going to impact us because the people that we're lending to are not the people that you would generally find in commercial real estate.

Okay.

That's all for you guys, thank you.

Thank you, Bob.

Now we'll take a question from Theodore Kovalef with [Junta] Capital

Yes, good morning.

Good morning, how are you?

Okay, thanks and yourselves?

Very well.

Good.

I was fiddling around with your savings from the reallocation of the loans that you said would bring in 12 to $0.14.

over the next year and one would assume thereafter, with a charge of $0.60, and it seems to me that that means that it will take a little less than 4.3 years to recoup the charge.

Now, am I missing something?

Is there going to be an incremental savings or what?

Ted, I would tell you that one thing that they're not willing to borrow.

It's wholesale liability and not the loan portfolio, and yes , it's around four years, we estimate around 4.01 years so approximately four years.

That is correct.

You're picking up between 12 to $0.14 a share and obviously there's a range there but we feel pretty confident that in this environment, it enhances the margin to generate capital going forward with the prudent decision and obviously, investors that have the ability to understand the transaction are invested into the transaction, but that is

Okay, very good.

Thank you.

Thank you.

Now we'll take a question from Matthew Kelley with Sterne Agee

Good morning, Matt.

Yeah, hi, guys.

Good morning.

The regulatory filings when it breaks down the construction loans basically evenly split between single family construction of 600 million and then other construction land development of 600 million, could you just give us some detail on each of those buckets and help us understand what's in each of those components?

I would just say if you look at the balance sheet, we're around 900, we've dropped considerably from a billion two, around 900 million as of June 30.

But I think it's also important.

We probably would be best if we do this when we sit down in front of some of the numbers that we have.

There's no escape from the fact that our construction book is primarily driven by developers of communities, so when you're talking about land development, you're often talking about people that have accumulated land for the purpose of building a whole community on that property.

If you look at some of the substantial property owners that we have, there's no question that some of them can very readily bank a large portion of the land assets that they have and not necessarily look to develop it in the near term.

But I think that it would be best if you want, we could talk more specifically about this off line.

And just some additional color.

Obviously we still have the Staten Island franchise that has about 125 million and that's pretty much small lots that are being knocked down and rebuilt between three or four, five units on a single lot which can take time to get approval but they get it done at Staten Island, it's about 125 million and you have a sizeable portion from the Roslyn franchise that we still are working very diligently through and feel very confident that the builders have the capacity to weather the downturn.

We don't see any negative trends there so overall the whole portfolio on the mortgage side has us performing stellar, as Joe indicated previously, not a dollar of principal loss in any mortgage assets in the portfolio.

What you're seeing for example, the $1.2 million charge-offs was driven by the Synergy loans, some small Richmond County loan that were acquired for Fleet years ago, we have a lot of small stuff and some stuff from CNI business from Atlantic, that stuff happens.

You have businesses that may fail in a tough environment and you may have some unsecured lendings.

The unsecured portfolio for NYB is significantly small.

We typically attach ourselves to some form of real estate.

Okay but just to be clear, within the single family development portfolio, there's nothing no individual project s that you're starting to get concerned about a in terms of sales activity?

No.

Obviously the market is off but these guys are substantial players.

Long Island by way of example.

We have some communities in Long Island, and prices have come down but they're well built along the way.

We are not doing large deals in this market.

We're winding down the portfolio.

We had a sizeable drop on a linked quarter basis you'll start to see considerable sizeable drops.

We're still getting out advances on commitments but those are commitments.

We're not taking on new projects.

And how much of the legacy Roslyn kind of holiday organization type of developments are in the portfolio today , those types of

They still stand as some of the best builders on Long Island, so there is some legacy loans but there are also many brand new loans.

We're perfectly willing or have been perfectly willing to lend to these developers.

They're very successful.

It's a strong book of business not only in the lending front but also depository front, and they're partners with us and obviously we're confident in their ability to weather a downturn but they also aren't going to risk their own capital strength by going out and building new projects in this environment.

Okay.

And just a second question also kind of looking at just some of the regulatory filings which provide a little bit more detail on a couple levels in the balance sheet.

If you look at other debt securities in your call reports about $400 million between held to maturity and available for sale and that's typically where we're seeing a lot of the higher risk assets that people are now marking down and taking other than temporary impairments on.

Is there anything else we should be concerned about beyond the trust preferred?

We feel pretty confident based on what we have in the portfolio, it's very strong asset quality.

What we took this quarter is obvious.

We had legacy (inaudible) and investments that we acquired back in 2003 that in particular the pool trust preferred, a lot of those bonds were on deferral this quarter.

We dealt with them and we felt very confident it was time to take a temporary impairment.

These were legacy assets, for example, the first stock portfolio that we have Freddie Mac is small, $5 million, wrote it down a little bit, we have some primary dealers but they're all investment grade so the reality of what's remaining is very strong portfolio and some of the largest banks, the JP Morgan of the world, Citi of the world , maybe not the best credit but they aren't B minus credit and HSBC, we have some strong investments in held to maturity we feel confident that is not close to an impairment and things change but we feel pretty confident that the actions we've taken this quarter was the prudent thing to

And how much single issue or trust preferred do you guys have?

What's the total amount of that?

We have a handful of of small names, local names that are very good friends of investors that we know very well.

We've dealt with these companies for multiple years and we're very confident and we underwrite them as giving that company a loan, so as you know, the typical needs that are out there, we have a nice investment for very good companies and some of them at very discounted levels.

So what is the dollar amount of single issue trust preferred?

We don't break it out.

But that would be in that other debt securities?

We have some very good financial institutions that are very strong that we have investments in and we've also purchased those in those companies as well.

Or other companies, (inaudible) we feel pretty confident that we have no issues there currently.

Okay, but it could be in that total $400 million--

It is in that total but you also have other type of investments that are triple A.

What would those be?

Oh, various agency types and investments that are not perpetual in nature.

Like debentures?

Would the agency debentures--

We have a lot of agency debentures, we have a sizeable amount of agency debentures.

I mean, help us understand.

This is an area people really want to get detail on and figure out where the risks lie on balance sheet.

I think-- (inaudible) no disrespect where we feel the risk lies in the balance sheet we dealt with this quarter, no question we've had some assets that we felt at this particular quarter was time to writedown, in particular the Pools Trust preferred securities and income notes.

We own a handful of bonds that we've acquired through an acquisition that were performing very nicely over multiple years and it went into deferral mode.

We opted to be aggressive and write them down.

That's where the risk lies and we actually articulated in our press release what's remaining, $30 million of Pools with $17 million is income and we have about $29 million left in the preferred stock.

Which are all investment grade.

Right, but the single issuer market is under some distress as well, so that's an important number.

We can talk off line.

Okay.

All right thank you.

Now moving to a question from [Mark Close with Oppenheimer and (inaudible)].

Good morning, gentlemen.

I wanted to circle back to the repositioning of your wholesale funding.

You know, when I-- present value that future benefit, I come out to a cost that's even using a pretty generous discount rate that's well over five years to pay this out and it begs the question as do you normally lock up your funding that far out or fix it that far out and if it wasn't fixed that far out, really what was the compelling reason to do this?

It's obviously, I think Ted Kovaleff had a (inaudible).

It's 4.01 years.

That's the way we compute the actual earn back, 4.01 years.

That's on a present value basis?

That's on the actual math--

Yeah, I know but let's deal with the real world.

There has to be present value.

There's some cost to the capital.

Fair enough.

When we went to the marketplace with a capital accretive deal and we're issuing stock at approximately 3.8 times tangible book to facilitate this transaction in a marketplace where we feel confident that the slope of the curve is going to add sizeable benefits to earnings and we took that to shareholders and shareholders were very comfortable with the transaction and we felt this was a good transaction at this particular time.

But more importantly, absent the wholesale transaction, the current marketing conditions for our core business model has changed dramatically.

We are locking in funding spends right now that are substantial that we haven't seen in about three to five years on wholesale and on retail, based on our multi-family product.

It was the right time to restructure a wholesale.

We would restructure a wholesale through a merger transaction, we were very close in multiple occasions so we mergered transactions, the reason these deals were not done were not because of pricing, it was not because of social issues.

It was because we could not dispose of the assets.

We felt this was a riskless type of transaction and respect to execution versus doing an M & A transaction and dealing with both regulatory approval side as well as dismantling the assets and the assets right now in this environment are very difficult to sell.

Yeah, I mean, I guess that it just smacks a lot of earnings management as opposed to shareholder accretion especially relative to your tangible capital levels, and I guess the question again I go back to is when would this funding have run-off on its own or when would you have been able to refund it without this $300 odd million charge?

Yeah, I think that what you're asking about is history and not tomorrow.

I know, but you're saying that we shouldn't view a $300 million charge as part of your operating earnings.

You know, battle sheet management in a spread bearing (inaudible), that's exactly what it is.

Well let me go back to the point on when we expect that money to actually (inaudible) We don't know and these are 10 year, (inaudible) and maybe now for another eight or nine years.

So we obviously take advantage of locking the significant benefit today.

There's no guarantee that some of these issuances would have been called depending on where rates are.

It's anyone's guess, correct?

so we felt at this particular time where it was heading and where our portfolio was heading we felt it opportunistic to do this transaction.

I think it's simple to say that it saves 200 basis points on $4 billion of liabilities immediately, so without question, the ability to save $80 million a year is definitely well worth doing, and I think that's the whole point here.

If you'd like to go into more detail about this, Tom will be available to talk further off line but there's no escaping the fact that the economics are very clear.

The stock that was issued resulted in o an opportunity to increase earnings for all shareholders double digit by reducing our actual cost of funds by $80 million a year.

Well it only reduces, it only increases your earnings power if you don't count the $0.60 it cost.

You can look at it that way.

Thank you.

Thanks.

Now we'll hear from Gary Gordon with (inaudible) Partners

Hi, thanks.

Gary, how are you?

Good.

Okay, question about prepayment fees, which are down from last quarter and a year ago and that makes common sense to me that says the department owner, I would think it's a tougher sale environment and--

You're 100% correct.

The uncertainties within the market and the continued adjustment by major property owners as to what they're going to sell and what they're going to refinance has been part and parcel of what's been going on here.

As we go down the road, there will be more and more intentional owner decision-making that will refinance their assets.

In the last couple of quarters, there's been a re-digestion of where the markets are and what individual owners are going to do.

The good news for us is that everybody that we have in our portfolio, I'm talking about the multi-family, everybody that we have in our portfolio has a short expectation to refinance.

They take a loan that explicitly necessitates refinancing within five years so that will happen.

It's just a matter of which quarter it will happen in.

Okay, so there's clearly an incentive to refinance because of the structure of the loan.

That's right.

There's less of an incentive to refinance because of a sale or for cash out presumably?

Yes.

That's correct.

Okay.

So that would suggest that if activity is slowing and your originations are strong, I would think that you're gaining market share?

Yeah, I think that that's true.

And that's likely every single quarter ahead we should both gain market share and we should also have the benefit of seeing an ever continuing likelihood that the people that we're continuing to deal with are in fact the survivors of the cycle.

They're going to be the people that will be not only making money on the assets that they hold and refinance but they will be the people that will actually be bringing to the table 1031 exchanges and other opportunities to buy into the market.

Okay, good.

And one last question.

You mentioned in the release that you're taking three operating systems going to one.

Right.

Is that material (inaudible) do you want to quantify that?

I think, well it's hard to, by the time it's all complete , it could be in the millions of dollars and the savings across-the-board will be substantial in way we operate the various individual banking components that we have today.

So I think that that will be a very substantial savings as we go down the

Okay, thank you.

You're welcome.

Now we'll move to James Abbot with FBR Capital Markets.

Good morning, Jim.

Welcome back.

Good morning to you, thank you.

Did you miss me last quarter?

(LAUGHTER) Well, I had a couple of questions on the reserve.

Historically, you've had some small charge-offs, very small but you've allowed the reserve to loan ratio to decline a little bit.

In this quarter, you obviously put a provision in there.

Is that, should we interpret that as a signal that we've reached a low level, low watermark on the reserve?

I think it's a composite of all of the other factors.

Obviously this quarter had a huge amount of noise.

This quarter had a huge contribution to our capital position.

There are lots of things that are unique to this quarter.

I wouldn't over interpret what it means about the quality of the loan book or the assessment of the market.

We believe the marketplace is going to deteriorate significantly quarter by quarter by quarter, and we believe that we have more than an adequate reserve.

I think as Tom mentioned earlier, we look at this quarter as an opportunity to do something internally that we normally would have done through a transaction.

Doing an accretive deal always has added to our reserve and we decided that this is a good quarter in which to add to our reserve.

The fact is if you look over the years, our reserve has gone up.

We haven't made a contribution to our reserve other than through the successful acquisition of companies and the way those reserves have been reallocated based on the assets that we kept in the portfolio.

So I think, I wouldn't read anything special into this other than the fact that the unique circumstances of this quarter presented an opportunity to raise the reserve as we, in fact, improved double digit our earnings per share.

The important thing is that this quarter has created significant upward momentum in our margins, in our earnings per share, in our capital position, and that's just consistent with that.

Well, Joe, what would allow the reserve to loan ratio to continue to decline then?

Because from a coverage ratio perspective, you got years of coverage, so historically that's kind of been the --

See I think the best way to look at it is, and there are different perspectives here, the SEC perspective is different than the regulatory perspective and certainly than investors or bank perspective.

The reality is we have had deminimus charges over the course of multiple cycles.

We've had deminimus charges through the worst of times that the last several decades have presented.

We will have charges over the cycle that we're in today but they aren't going to be very large charges.

So the adequacy of our reserve is driven by the actual charges that may go against the reserve, and when you think about it, we've had a very, very strong experience in that regard, so to compare our percentage to the percentage of a bank that in the last let's say 15 years has charged off 690 basis points over the course of those years versus us that's charged off maybe 0.2 or 0.3 basis points I think would be a mistake.

So I don't think the reserve levels that are common with regard to loan losses.

The reserve levels that are common to the industry are not relevant when looking at the actual losses that we've taken.

So the statistics verify what I just said.

It's not a matter of in order for everybody to be comfortable we all have to have the same reserves.

It's not so.

Did the special mention loans or loans of concern increase at all that would cause you to try to maintain the reserve ratio?

Jim, it's Tom.

I would answer that in respect to the commercial bank, it's a different operating platform.

We've been saying that all along quarter after quarter, a lot of these charges came from the commercial bank.

A lot of unsecured credits and again, if the economy backs very challenging which is very possible, you can look to see additional charges of the commercial bank.

We haven't had a loss on the mortgage portfolio in many, many years, so I think what you see here is legacy assets that are non-secured, we're charging them off.

Obviously this has a lot to do with the economy as the economy suffers a great deal, you would expect to see additional weakness at the commercial bank, and when we have to look at the reserves independently, both community bank and the commercial bank.

So you're saying that there was not a material shift at all in the--

The mortgage portfolio is extremely strong.

We're seeing obviously look at the MPAs, it's not a material move but one or two loans and we feel confident that will work them out.

So this is commercial banks so within the commercial bank there was some meaningful shift in the loans of concern, the watch list.

Well, they probably were charged off.

(inaudible) a $1 million charge off.

Some are commercial, like for example, the auto paper, with auto loans-- they all find the auto, it's going to be charged off.

With we have about-- approximately $30 million left in that portfolio.

Our goal is to wind it down to zero.

No, no, I'm not speaking about the charge-offs.

I'm speaking about the watch list behind the scene, stuff that we don't get a chance to see.

I think the important thing and I've said this before, because loans are watch listed or otherwise characterized as non-performing does not have the same result in our portfolio as it typically has in other loan portfolios and I'm just going to throw out a number.

If a bank has an experience where 13% of the loans that go non-performing result in a loss of 10 or 15% of the value of the loan, that's their experience.

In our case, even when loans are non-performing over the course of years, many many years, we've had non-performing loans that were watch listed or otherwise a higher visibility that have had zero losses.

Okay.

So I think that's the important distinction that people miss, that just because the number of loans that are special mention or on a watch list have gone up, it doesn't mean we're going to take a loss.

The actual experience has been, because we under write with the right people properly, that we have very little loss even when there's a circumstance where there is a delay in making a payment.

It doesn't mean that we won't have loss.

It just means that our experience is not typical to the industry.

Okay, let me just move on --

We're seeing very strong trends right now so we're very comfortable with the asset quality.

We aren't seeing substantial changes which is is a positive thing.

That could change at any quarter since the marketplace changes on a daily basis we're seeing some very good performance and I've got to tell you the mortgage portfolio extremely strong.

I'd reiterate the commercial bank, when you have unsecured assets you have businesses that fail you have to deal with those issues but on the mortgage side, we're a cash flow lender and we lend very prudently and we see the construction book is very strong, we're holding up very nicely outside of-- we're in New York, we're principally in the New York area, it's a pretty strong market right now and there's no guarantee New York going to stay strong forever but right now the trends are very favorable.

Can you give us real quick shifting gears because I've got to hop here but the CD duration, did you extend that at all during the quarter?

Just a little bit.

We're seeing some customers go out 18 months, two years but I'd say on average, we're probably in the 70% of our CDs are due within one year.

We're not getting the benefit as we had in the previous two quarters of 200 basis points but we'll probably get 50 to 75 depending on where we price our rates.

You just pay attention to the local papers here, again, banks are raising rates dramatically.

I think it has a lot to do with some of the headlines that are out there but we're still well below the spectrum and as liquidity needs take place, we're pricing our CDs below the market.

And your GAAP today?

Your one year GAAP?

It's probably I'd say slightly neutral, maybe one or 2% negative positive around neutral.

So no real change from the prior quarter?

Obviously, we did the big change with the repositioning.

And it went out well over three years but it's where we are for the wholesale book.

And then on your loans, the ones that prepaid that contributed the prepayment penalty income, were there any larger loans that were included --

Not at all.

A lot of small stuff.

Nothing major there.

I don't even think a million dollars.

So nothing large that we should consider as one-time?

Absolutely not.

Okay, thanks.

Very well.

We'll now move to [Steve Moss, Janney Montgomery Scott].

Good morning.

Hi, Steve.

With regard to the borrowings that were restructured this quarter, when are they callable?

A lot of them are on average, we went out-- we blended it but I would say the vast majority of our liabilities we're looking at like the 10 year three structure, 5-2 structure, a vast majority is 10-3 structure so you have a three year lock out.

Okay.

And then moving back to the --

Just to reemphasize, the stuff that was restructured was callable today.

So actually that was very helpful for us.

If rates do go higher.

Okay.

And then with regard to the securities portfolio here, in your 10-Q, where were the pool trust preferreds classified?

They were all market assets, there is no consequence to capital.

They were marked down on a monthly basis and every quarter we present our quarterly mark to AFS.

Were they within capital trust notes or corporate bonds?

A combination of both.

Okay.

So the corporate bonds, they had a pretty significant market March 31.

Were those the income notes?

Those we marked (inaudible) we had a mark on the income notes, we had a mark on the Pool Trust preferreds that we had and we also had a mark on the perpetual securities which there were three issuers of which one was Freddie Mac, for obvious reasons we marked that down.

Great.

And what else remains within the capital trust notes?

I think the remaining left is about $17 million on the income notes.

That's what's left in the portfolio.

We obviously, we (inaudible) went in deferral and we were obviously felt it's important to write them down this quarter.

Clearly, they could cash flow back up but they were given significant cash flow with multiple years of which these are legacy rather than purchases so we had them earning a very nice yield of return and we were prudent to write these down in this particular quarter because of the changes in the marketplace, no question there's been a significant amount of deferrals and (inaudible) the income notes are the first ones to be affected by that.

And within the health and maturity category where you have the capital trust notes, what's in there?

Again, various securities with multiple banks, local banks, large money center banks, we're pretty confident on the quality there.

I should say all investment grade, some investment grade, some are not investment grade.

Some are local competitors that we socialize with, we know their franchise very well.

These are securities that were underwritten as loans to companies.

Okay.

Thank you.

And we're very confident there.

Our final question today will come from Tom Alonso FPK.

You've actually managed to answer most of my questions.

Hi, Tom, how are you?

How are you guys holding up?

Good.

Yeah, most of mine have been answered, thanks.

Very well, you have a good day.

With that I'll turn the call back over to Mr.

Ficalora for closing remarks.

Okay, thank you.

On behalf of our board and management team, I thank you again for the opportunity to discuss the strategic actions that impacted our Second Quarter performance and the benefits we expect to see in the quarters ahead.

In the midst of a significant downturn in the financial and housing markets we remain intently focused on our business model which has enabled us to sustain our solid fundamentals at this time, as in the past, strong asset quality, profitable loan production, and efficient operation, and a balance sheet that is increasingly solid and there for well positioned to capitalize on opportunities for prudent growth in the quarters ahead.

Thank you.

Now we'll conclude your conference for today.

Thank you for your participation.

Everyone have a wonderful day.