Flagstar Financial Inc (NYCB) 2009 Q2 法說會逐字稿

Good day everyone and welcome to the New York Community Bancorp's second quarter 2009 earnings conference call.

(Operator Instructions) For opening remarks and introductions I would like to turn the call over to Ilene Angarola, Director of Investor Relations.

Please go ahead.

Thank you.

Good morning everyone.

Thank you for joining the management team of New York Community Bancorp for our quarterly conference call.

Today's discussion of our second quarter 2009 performance will be lead by our Chairman, President and Chief Executive Officer, Joseph Ficalora, together with our Chief Financial Officer, Thomas Cangemi.

Also joining us today are Robert Wann, our Chief Operating Officer and John Pinto, our 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 general economic conditions and trends both nationally and in our local markets, changes in the financial or operating performance of our customers businesses or changes in real estate values which could impact quality of the assets securing our loans, 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 and changes in legislation regulation and policies, including those pertaining to banking, securities and taxation.

You will find a more detailed list of the risk factors associated with our forward-looking statements in our recent SEC filings and beginning on Page 9 of this morning's earnings release.

The release also includes reconciliations of certain GAAP and non-GAAP earnings and capital measures which will be discussed during this conference call.

If you would like a copy of the earnings release or the release we issued earlier today regarding our exchange offer, please call our Investor Relations department at 516-683-4420 or visit the Investor Relations portion of our website at www.mynycb.com.

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

Ficalora who will speak to you briefly before opening the lines for Q & A.

Mr.

Ficalora?

Thank you Ilene and good morning everybody.

We appreciate your joining us for this morning's discussion of our second quarter 2009 performance which demonstrated our ongoing ability to generate loan growth, expand our margin, produce solid cash and operating earnings and maintain a strong capital position, while at the same time managing our credit risk in a severely weakened economy.

I'll be happy to take your questions on these topics, as well as any other pertains to our second quarter performance following the conclusion of my opening remarks.

To begin, I would like to comment on the growth of our operating earnings, which rose 18.6% year-over-year to $89 million equivalent to a 13% increase in diluted operating earnings per share to $0.26.

Our cash earnings also rose during this time to $89 million and also were equivalent to $0.26 per diluted share.

On a GAAP basis, our earnings were reduced to $56.4 million equivalent to $0.16 per diluted share.

The reduction was due to an after-tax FDIC special assessment charge of $8.4 million and a non-cash after-tax charge of $24.2 million on other than temporary impairment of certain pooled, trust and other debt securities.

The two charges were respectively equivalent to $0.03 and $0.07 per diluted share.

Absent these charges, the cash operating earnings growth we achieved was driven by loan productions together with the strategic management of our funding costs.

Year-over-year, our average loan balance grew 9.3% to $22.4 billion, reflecting 12-month originations of $4.6 billion included in the 12-month amount or $1 billion of loans produced in the second quarter reflecting a link quarter increase of 5.2%.

During this time, our average cost of funds fell 85%, 85 basis points to 2.76%, the lowest level in 16 quarters as we capitalize on the actions of the FOMC.

During the quarter we continued to replace our higher cost certificates of deposit with lower cost money-market accounts, savings accounts and wholesale borrowings.

The benefits of our strategies are reflected in our second quarter net interest income which grew a solid 27.8% from the adjusted year earlier level and our net interest margin, which similarly grew 52 basis points year-over-year.

At 3.06%, our margin was the widest we've seen in 18 quarters and we would expect to see that level increase in the quarters ahead.

With $942 million of loans in our pipeline today, and $5.5 billion of CDs, with an average rate of 2.4%, expected to be priced downward in the next four quarters, further margin expansion appears likely to occur.

The growth of our net interest income and margin would have been even greater were it not for two distinct factors, both of which have their roots in the distressed economic environment.

First, prepayment penalty income continued to be anemic as many of our borrowers remain from refinancing during an extended period of economic uncertainty and a lack of property transactions in general permeated the marketplace.

While prepayment penalty income rose minimally, on a link quarter basis the year-over-year decline was more significant.

Secondly, the growth of our margin was tempered by the reversal of interest income on loans that transitioned to non-accrual status during the last three months.

Together with a $12 million provision for loan losses these factors also limited the growth of our second quarter 2009 operating earnings to the 18.6% increase I mentioned before.

The provision added $2.8 million to our allowance for loan losses after net charge-offs and was driven by our assessment of the allowance, current economic factors and importantly, the current and historical quality of our loan portfolio.

Even with non-performing loans rising to 1.49% of total loans, our level of net charge-offs remain modest at $9.2 million and represented a mere 0.04% of average loans.

During the quarter the comparable measures for S& L Bank & Thrift Index were substantially higher with non-performing loans representing 287% of loans outstanding and net charge-offs representing 0.73% of average loans.

In addition, our level of loans 30-89 days past due declined $38.3 million or 19% over the course of the quarter to $163 million at the end of the June.

With other real estate owned falling shy of $2 million, non-performing assets represented 1.04% of total assets at the end of the quarter.

By comparison, the ratio of NPAs to total assets for the S& L Bank & Thrift Index was substantially higher 2.61%.

While past performance is not necessarily a prelude to the future our experience from 1987-1992 during the last severe credit cycle, has thus far repeated itself in the current cycle turn.

For all six years of the last cycle turn, our total net charge-offs represented 0.07% of average outstanding loans, despite our non-performing loans having been as high as 2.48% of total loans during that time.

The difference between the volume of nonperforming loans and the volume of loans we charged off was substantial during that crisis and in the current cycle.

This has thus far continued to be the case.

We believe that the difference in largely due to underwriting standards, the expertise of the people that we work with and the fact that we are determined to realize the maximum value of the collateral.

Furthermore, with average LTVs of 61.1% and 54.3% during the second quarter, the performance of our multi-family and CRE loans has held up well in the cycle, despite a decline in real estate values in our marketplace.

Another measure of quality that we consider worthy of mention is the ratio of net charge-offs to average loan loss reserves.

Although our net charge-offs rose both year-over-year and link quarter, the second quarter 2009 amount represented 9.7% of our average loan loss allowance as compared to S& L Bank & Thrift Index measures of 23.5%.

Thus, our loan loss allowance was 10.6 times greater than our second quarter 2009 charge-offs.

For the S& L and Thrift Index, the loan loss allowance was 4.5 times the volume of loans charged off.

While the recession is having an impact on some of our borrowers and therefore on our asset quality measures, we believe that we are well equipped to withstand the credit cycle pressure and to continue producing earnings that support our position of capital strength.

Excluding accumulated other comprehensive loss, our tangible stockholders equity represented 5.83% of tangible assets.

Including accumulated other comprehensive loss, the measure is at 5.59%.

To enhance not only the strength, but also the quality of our capital, we announced earlier this morning in offer to exchange shares of our common stock for units of our bifurcated option note unit securities.

Assuming participation levels ranging from 25% to 100%, our ratio of tangible stockholders equity to tangible assets will increase to a range of 15 basis points to 57 basis points pro forma.

Based on the 5.59% ratio we reported this morning, that would bring our ratio of tangible stockholders equity to tangible assets to an approximate range of 5.74% to 6.16%.

Similarly, our tangible book value per share would increase between $0.06 per share and $0.23 per share on a pro forma basis to an approximate range of 4.98 to 5.15.

In addition the successful completion of the exchange offer is expected to enhance our net interest margin by eliminating the interest expense associated with the bonus units that are exchanged.

Although the exchange offer is expected to be modestly dilutive to earnings per share in 2010, we anticipate that such dilution will be offset by our strategic use of the capital that is generated through this exchange.

We would expect to grow our balance sheet in an earnings accretive manner, including through acquisitions of other thrifts or banks.

In view of our continued earnings capacity and the ongoing strength of our capital position, the Board of Directors last night declared the 22nd consecutive quarterly cash dividend at $0.25 per share.

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

As always we will do our best to get to everybody in a timely manner, but if you miss us, we certainly will be available to answer your questions after the call.

And now the first question, please?

The floor is now open for questions.

(Operator Instructions) We'll take our first question from Rick Weiss.

Good morning.

Good morning Rick, how are you?

Fine thanks.

Joe, I wonder if you could talk a little bit more about the relationship between the nonperforming assets which increased and the relatively low level of charge-offs and if there's been any kind of change that you're seeing from the regulators in terms of loan loss provisioning and whether it's the SEC or I guess it would be -- ?

No, I think Rick, the change that we're seeing is not at all inconsistent with what's happening in the market.

As a cycle evolves like this, many many different outstanding loans wind up paying slow and that's because people are rethinking their overall portfolios and their overall position and trying to figure out where they will spend the lesser funds that they may have.

In our case, we have some very large loans that have gone nonperforming, but we know that they have huge amounts of positive cash flow and that the money is just being used elsewhere, at least temporarily.

There's no way that those loans will ultimately default.

The owner of those properties is not going to give up the property.

He's just very confident that he has the where with all within those cash flows to keep that and by the way we're talking about a group of properties, so I think that as we've mentioned, going back to the prior cycle and the reason we talk about the prior cycle is because it is instructive to recognize that even though our nonperforming numbers go up dramatically, that is indicative of the stresses within the marketplace affecting each of our individual owners.

Having said that, the actual ability for the owner to make the payments to bring the property back to performing is very real and should there be circumstances where the property doesn't come back to performing, we also have the ability to look to that property's real value to go back and actually be fully-paid, so our performance isn't driven by the amount of nonperforming.

It's driven by the end of day, what is the ultimate value of the asset that has at least for some period of time gone nonperforming Now, we're going to be affected by that.

It affects our earnings because we reverse a substantial amount of income when it goes nonperforming, but likewise, when that property goes back to performing when we actually recapture all of the monies due us, we collect in many cases all those earnings.

Okay, and I guess what would be the average LTV on those properties that are nonperforming and I'll turn it over?

Well I think that's an interesting question.

The -- I don't have a number.

We have the number for the portfolio, but I don't have a number for the loans that go nonperforming, are they dramatically different.

I do know with regard to this large property owner, the LTVs are very low and the cash flows and the coverage ratios are very high, so each and every individual circumstance may very well be different.

Okay, thank you.

You're welcome, Rick.

Our next question comes from Tom Alonso at Fox-Pitt Kelton.

Good morning guys.

Good morning Tom how are you?

I just want to make sure I understand what you're saying on the NPLs here.

Are you saying a lot of this increase was driven by a single relationship?

Oh, no no no.

I meant that well over $50 million of the nonperforming is a single relationship.

Okay.

And that's not one loan.

That's a group of loans, but it's indicative of the fact that sometimes people manage their portfolios or manage their positions by taking from where they have strong cash flows and subplanting where they have otherwise weakness, so as to try and avoid losing something while they're in the process of let's say selling it.

Sure, understood.

So then what you're trying to say is these might be on NPL, they might stay on NPL until the borrower can figure out how to get out of a separate different property that's under stress at which time you expect them to come back to fully-performing?

That's right and that is indicative of what has actually happened over time, so that's why our nonperforming during periods of stress in the past has gone up dramatically with a very, very small amount of loss being taken because over time, the fundamental value of the asset is there, and when we look at our nonperforming today, we see that the nonperforming, it's for example, albeit our one to four family portfolio is very small.

The increase there is very high and certainly out of market we have significantly more nonperforming than in niche, so when you look at where we are, we in fact have had little to no loss in our core product, which represents well over 90% of our portfolio and there for, the losses that we are recognizing early in this cycle are the losses on properties which are not typical of our portfolio, so the actual losses that we're taking are now behind us on certain individual properties and I think we mentioned that we had a very large charge-off on one single property.

The largest component of loss was one single property and low and behold, that is a dramatic indication that the portfolio as a whole is very solid.

There are no trends here that are unexpected or trends here that are indicative of trouble to come.

We are in a stressed market.

We all recognize that and we said this consistently that we are going to have a stressed period and the most relevant change in the performance of our portfolio is that a share of our outstanding loans go nonperforming without there being a material change, there are very, very few banks I am sure, that have their niche assets performing anything close to our niche assets.

Our niche assets are performing almost at 100%.

Okay, okay, and then if I could just one more.

Just any color you can give us on that $5.2 million charge off would be appreciated.

I think the important thing is that we believe that that property is about as low as it will go and it will be resolved, we would hope, relatively soon.

Okay, thanks.

Okay.

We'll go next to Ken Zerbe at Morgan Stanley.

Thanks.

Just a little bit more on the out-of-footprint loans.

Obviously, since you did take the large charge this quarter, can you just remind us the balance of the out-of-footprint loans you have right now?

Good morning, it's Thomas Cangemi.

We have approximately 3.9% of the portfolio that's considered out-of-market.

Understood and going forward, should -- if I understand correctly, is that the area where we should be more concerned with potential losses or is it just happens that this is where the large charge came this quarter?

I guess based on our review of the portfolio, I think it's more of a one-up situation.

You have a couple of loans that over the past two or three quarters that we've taken charge-offs and they've been out-of-market loans.

I think if you want to look at it from the standpoint of concern, the chances are disproportionately that we're going to have losses outside of our niche, and then that basically means that if we have a $22 billion portfolio and we're likely to be taking losses on, let's just use a number, $1 billion worth of non-traditional loans, we have a significantly lesser exposure than one might think.

So, let's put it a different way.

If we have $1billion of loans at risk and we have $100 million in reserves, we have a 10% reserve to the loans that we're likely to take losses on.

There are very, very few banks that have a ratio anything close to that.

Understood.

The other question I just had was in terms of your borrowings, it looks like you're increasing the FHLB borrowings to pay down the brokerage CDs, but can you just contrast that?

I think a lot of the other banks that have reported already have been focusing much more on sort of core deposit growth and using that to pay down wholesale borrowings.

Why is FHLB the right -- a better method than core deposits for you guys?

Ken, it's Tom.

On a link quarter basis I believe our core deposit franchise, if you back out any movement on the brokerage side, it's up about $360 million.

We have a very low rate in the marketplace.

Liquidity is readily available as we speak today.

If we need to bring in $1 billion, it's there.

It's very fluid.

If you compare these offering rates to the highest medium rates in the marketplace, it's substantially above wholesale borrowings of the Home Loan Bank.

Home Loan Bank is our partner and we use it actively for the history of the Company.

We use that as a partnership and we look at the overall cost as the best value to the bottom line.

In this environment, even with our lower rates we're offering, we're seeing good core deposit growth.

No, understood.

I guess I was just thinking more from a franchise perspective, that obviously having more core deposits is better than having more FHLB, but I understand what you mean about the cost.

Historically, we've moved that number depending on market conditions.

If rates continue to remain low for quite a bit of time, you'll see a movement towards the core and obviously there's growth, accelerated growth, obviously we'll use both levers.

I think it's important to also recognize that our business model has been consistent over time that we grow our franchise by acquisition and thereby we grow our deposit base most meaningfully, by doing highly accretive deals.

It is definitely our expectation in this environment to be able to do highly accretive deals, beneficial to our shareholders and growing our available core deposits dramatically by acquisition, so we are less pressed by the need for day-to-day change in our core deposits.

Our core deposits are literally going up despite the fact, that we are paying very modest rates in the marketplace and that's an important ingredient to what is definitely good for our shareholders and certainly not detrimental to our viability as a community bank.

Our community bank has strong deposits in the neighborhoods that we serve because we in fact have extended banking hours and we have product to raise that are very attractive.

We're able to keep people, accepting for those that shop rate and by the way, the market, the New York market is rich in shoppers and therefore, when we want deposits we can always go out and get them.

Yes, I would add one other point, Ken.

If you look at the concentration of non-interest bearing demand for the Company, very high compared for a typical thrift.

Our commercial bank has a high concentration of non-interest bearing demand type deposits that is giving a very good value to the franchise and in addition the commercial banks credit performance is stellar.

Charge-offs have been about $200,000 so far for the six months and the NPAs are very minute.

As a business strategy, the cost of our deposits is significantly below our peers, as much as 70 basis points lower from the standpoint of performance of the public company, the public company has the capacity to perform extremely well because it has the capacity to build its franchise by acquisition and then that's a very, very important ingredient.

When you think about it, the ability to grow your franchise dramatically by highly accretive deals, is significantly better than it is to run a special and pay high rates to increase your deposits by let's say, $100 million and you pay a higher rate on $300 million or $400 million.

There is no cost benefit in doing that.

Understood.

Thank you very much.

You're quite welcome.

We'll take our next question from Bob Ramsey at FBR Capital Markets.

Good morning guys.

Good morning, Bob.

Could you tell tell me how much of your multi-family loan portfolio has got some mixed use and maybe ground retail level space?

Yes, it's very hard to know that number.

The multi-family portfolio probably has very little mixed use.

The commercial portfolio is where the mixed use typically shows up, so 71% of our portfolio is multi-family, 21% of our portfolio is characterized as commercial, within the commercial, some large percentage is in fact mixed use.

Mixed use, multi-family.

Okay.

And bear in mind also, that if the multi-family has less than 25% of the overall rent role that's commercial, it's classified as multi-family and if it's above 25% it's commercial real estate.

Yes.

Another thing to recognize, nothing in the numbers that we've produced today indicates that there is a problem in our multi-family or in our commercial product.

What we are seeing is as I indicated earlier, we have at least one very large holder and there are probably others, very large holder of real estate that has real estate with us and real estate with others.

The real estate with us is very, very well covered by the cash flows on those properties and those properties are not performing because he's electing to use those cash flows elsewhere.

He's not going to lose those properties, which means we're not going to lose any money on it.

So, although the volume of nonperforming may go up dramatically for us because we have large loans, though nonperforming, that doesn't mean we'll lose any income ultimately.

It impacts the period in which it's nonperforming, only to come back to us in full when it becomes performing and if it ever goes ultimately to a loss, we're likely to get paid just about all of the money in that portfolio.

So, when we talk about our multi-family and our commercial portfolio being 92% of our outstanding loans, that's an incredibly important number.

When we talk about the fact that we've had a large charge on a single property out-of-market, that's not our niche.

So, that large charge is not indicative of a trend we have to worry about.

If a bank reports to you that they've increased their nonperforming by 100 basis points and that's all on one to four family loans all over the country, the likelihood is that they're going to have a lot of loss on 100 basis points of increase in nonperforming.

When we have a large increase in nonperforming, it doesn't mean that we're going to have any loss that's necessarily tied to the increase in nonperforming, and we've tried to demonstrate that repeatedly by showing the numbers, the actual numbers.

We, as I've indicated have had significant nonperforming assets during stressful periods, with very little to no losses.

I mean, in 1989 and 1990, we had over 200 basis points nonperforming with zero losses.

Now, we are having more losses today because we have different assets that are exposed to the cycle and we are going to take losses on those assets, but as a percentage of our outstanding, that is a very, very small number.

The consistency and this is the important message, the consistency in the performance of the bulk, the masses of our outstanding loans is very, very indicative of what is different about us and others, so although there's a lot of discussion about nonperforming, it's the peripheral.

It's the limited amount of exposure that does exist in our portfolio, but that is a comparatively very small number.

It is not indicative of a fire that's going to take hold on the whole portfolio.

Okay, that's helpful.

Could you also -- I know in the past you all have said that the majority of the multi-family book is either rent-controlled or rent-stabilized, is that more than 75%, more than 90%?

Could you give just a little more color on how much of it is -- ?

I would guess because again, the number of individual units, there are no rent-controlled or rent-stabilized buildings.

There are rent-controlled or rent-stabilized apartments and that number does change, but having said that, given the profile of how we lend, I would say an extremely high percentage of the units that we have, are in fact still under one form of control or another, either rent-control or rent-stabilization.

When we do the loans, our baseline is to lend below the actual market within which that particular property resides, so when you think about it, our practice of lending below the market carries over to our commercial lending.

When we do lending on properties that are all retail, those properties likewise are below the market in which the building operates and it's important to us to have that kind of insulation against cycle downturns.

Fundamentally, we are a rational cycle player.

We expect the cycle to turn.

We never bought into the concept that prices were only going to go up and therefore, we consistently lend with an expectation that the markets are going to deteriorate and during that period, we expect to do extremely well.

Why?

Because we have.

We have in multiple cycles and we have as we sit right now, our fundamental assets, the assets that represent the bulk of our exposure are all performing extremely well.

Okay.

And then maybe one last question as it pertains to the exchange offer that you all announced this morning.

Right.

The $275 million sort of tops, if it moves the tangible equity 15-57 basis points, it's not a real big transaction in the grand scheme of things.

What made you all decide to do this?

Would you do more?

How did you think about doing this versus maybe adjusting the dividend since you pay out more than that annually through the dividend alone?

You're generating a lot of capital internally.

I would indicate that when you look at the bonus units we've had numerous inbound calls from the holders of the units itself.

Obviously, we look at this as a small pick up in capital, but once again, in this environment we see in the future, we expect to see in the future, very good opportunities for potential loan growth.

This is by all means, a favorable way to raise additional capital in front of the expectation of future loan book and in addition to that, future acquisitions.

We're seeing tremendous amount of opportunities in respect to doing some highly accretive acquisitions and obviously having the proper capital level is prudent to us and we obviously don't want to have our capital impact negatively on our transaction.

Okay.

Thank you.

And Mark Fitzgibbon at Sandler O'Neill.

Your line is open.

Good morning guys.

You gave a great break out of the NPAs, but I was wondering of the $165 million increase you had this quarter, could you also break that down -- what really drove the increase in NPAs this quarter?

Mark, it's Tom.

The bulk of it as, Joe indicated, it's the multi-family relationships which are a lot of them consolidated relationships, not one single loan, but a family of loans related to a specific borrower.

If anything, if you look at all our categories, which will be on the call so I can discuss that here, a one to four is around $14 million, as of June, as far as NPAs, the commercial real estate book was approximately $67 million and construction was about $79 million and multi-family $159 million and the commercial business loans at $17 million.

I saw that in the release, but I was just wondering of the $165 million increase this quarter, how much of that came from multi-family?

On a link quarter basis that was -- it went from $76 million to $159 million.

Okay and then secondly could you help us think about the margin in coming quarters and maybe give us a sense for how much you have in CD and borrowing repricing?

We have about $5.5 billion of CDs at 2.4% we expect to be priced this year in 12 months and as indicated last quarter we were pretty confident the margin would go through 3%.

As Joe indicated previously, the overall reversal of non-accrual interest did impact the quarter, however we still had over 3%, so we're pretty confident you'll see margin expansion throughout 2009 with the expectation that funding costs will go lower and the borrowing perspective we don't have a lot of repricing on the borrowing side.

We are probably short about $1billion, as far as short-term type liabilities, but indicated on my previous commentary is we need to get funding in the marketplace, both wholesale and retail, is at a much lower level so they are very attractive.

We feel pretty confident that the less NPAs that go in in the future, less reversals of non-accrual interest.

The spreads are still very strong, the business model has a great spread and actually hold the asset yields.

We did get hit on the asset yields, predominantly through the reversal, but we don't expect to see that consistently every quarter.

So, we'll see the margin north of 3% and hopefully it can improve every quarter throughout 2009.

And then the last question I had, you guys have been pretty quiet on the acquisition front for a while and I think in the past you've indicated part of the reason for that is that the dislocation in the capital markets has made it hard to do things and restructure balance sheets.

Is it likely that we'll see NYB as an acquire on the back half of this year?

I think the important opportunity that this market represents is that it's extremely likely that highly accretive deals would be possible with regulatory assistance.

Given the choices and obviously, I think you could assume that we've looked at every deal that has been recently announced, anywhere in proximity to our market and certainly, we virtually have the ability to look at every deal that is coming through the regulatory scheme, we will select the places where we want to play and certainly if we announce a deal, it will be a highly accretive deal.

The good news for us is that our balance sheet is stable, our income stream is growing and the likelihood we could do a highly accretive deal is driven by the reality that they're going to be very good deals to be done, and therefore, I'd say that easily within this year, we should be looking at a highly accretive deal.

Thank you.

We'll take our next question from Colin Gilbert at Stifel Nicolaus.

Thanks, good morning guys.

Can you guys talk a little bit about the new loan demand, what's driving it -- if it's current customers or new customers and then what's your expectation from loan growth from here?

I think it's fundamental here that the marketplace is, in fact, to some great degree changing with regard to our niche.

There's going to be massive amounts of loss in the New York market headlining on rent-controlled, rent-stabilized buildings because lots and lots of loans were made way, way over the appropriate cash flows of those properties and those loans will default.

That's one of the reasons we have such a small amount of prepay.

Our guys are slowing in the use of their appreciated values and in fact, even rolling over some of those loans to year six and seven.

Importantly for us to recognize, we have for the first time ever a building of cash flow values and properties in year six and by the time we're at a point where the market has depreciated sufficiently, where there are buildings selling at $0.10 or $0.15 or $.20 on the dollar, our people will be the buyer.

And since our people are in fact building their cash flow so as to be able to buy at that depreciated value, they're the smart guys that sell high and buy low.

We're likely to also be lending, in the depths of the cycle, we typically lend more money to our portfolio.

So, when things are really outrageous we're lending to our portfolio and we financing in the 30% range.

When things are really, really bad we're refinancing in the 92% range, so I think the opportunity for us is significantly in front of us because the larger players that were in our niche are all gone or they're all modified, meaning they are lending with a lesser focus and they are lending without the same teams in place.

So, I think that we're going to have an ever increasing percentage of our portfolio refinanced again to our benefit because that represents a significant amount of prepayment and we're also going to have those very same owners in many cases buying additional properties.

So, what I was mentioning earlier about the non-performing owner, he will likely be ultimately a buyer of assets a year or two years down the road, even though he has non-performing today, his non-performing is not non-performing because the cash flows aren't there.

It's because of how he's managing his own situation.

Okay, and so the timing, I don't know if you just kind of threw that out there, but when you said a year or two, is there any sense as you see your borrowers extend in year six and year seven, is that putting them out to 2010 or 2011?

I mean, any sense that -- ?

I'd say that it increases the likelihood.

It's very hard to say when they come back in.

They come back in based on what's actually happening in the market, so if there is significant opportunity to buy in our market within 6 to 12 months they will be in.

If the opportunity lags and the values deteriorate more slowly, remember when we do a new loan on a property that's at $0.20 on the dollar from the prior loan, that is not indicative of a troubled property.

That's indicative of a cash flow that is solid and a value that was way beyond expectation.

So, Riverton is a perfect example of that.

That property was in our portfolio at $11 million in 2005 and wound up defaulting to a Deutsche structure at 225% of the $25 million back loan.

There's no way in the world that loan could be paid.

The property defaulted but the cash flow is sound, so five years later from when we were in that property at $11 million, we could be in that property at $50 million or $60 million and it will be a perfectly good loan.

That's the opportunity.

The marketplace in New York is going to represent many new opportunities for new buyers.

There will be few of them, but those that buy will buy smart.

Everyone who buys is going to need a loan and certainly for those that we already have a relationship with, it will be very easy to see why it's a good loan to do.

Okay, that's helpful thanks.

And then just one quick follow-up.

I know you've spoken that the credit quality trends here are indicative of a longer term operating history, but was there anything specific, was there specific catalyst that lead to the sizeable increase this quarter?

It was just --

I think as I mentioned, one loan alone represents almost 60% of the charge was one loan and that loan is not a niche loan.

No, I don't mean the losses.

I mean the NPLs.

Oh, the NPLs is just normal that they go up.

So, there's nothing, no event that made these guys, made your borrowers decide to take cash flow elsewhere?

No, no, in one case we're articulating a specific that there is one loan that we know, not one loan, one relationship that we know has substantial cash values and substantial capacity to pay and he's just chosen not to pay because he's using that cash flow to cover probably a property that he's selling.

Colin, it's Tom.

On the last call that we discussed in Q1 we had about $200 million between the 30-89.

We expect a lot of those loans to fall into nonperforming because of the current status, and as Mr.

Ficalora indicated, one relationship encompasses approximately $50 million of loans that are cash flowing positively.

So, that money is being utilized to fund other problems to other banks.

So, we feel pretty confident that taking that particular relationship out and looking at the current bucket of 30-89, which is actually down 19% on a link quarter basis, it's somewhat encouraging.

We can't say it's a trend because it's too early, but we have a good feel that you don't see the large problems coming in waves.

So the good news is we're down about 19% link quarter on 30-89.

We knew what was in the bucket in the previous quarter, which we expected that to continue to roll into the NPA bucket and we worked through it.

Colin, I think it's important to recognize that the non-performance as we're reporting in this quarter, is very consistent with expectations and what we've been talking about over the course of several quarters now.

Okay.

Thank you.

Thank you.

We'll go next to Theodore [Kovaleff] at Horowitz & Associates.

Hi there.

Hi, Ted.

Just a couple of questions in terms of the non-performings.

Firstly, are these relationships that are the result of acquisitions or are they legacy relationships?

Yes, I think in many cases, I mean if we talk broadly not about a single property, in many cases, we're talking about acquired assets and in some cases we're talking about assets that were just done over the course of the last few years out-of-market for a variety of reasons and certainly, nothing within our niche.

And when I say that we're talking about substantively, our niche is holding up extremely well, even though there are properties that are in the New York market that are today on the nonperforming list, we have no expectation that those nonperforming loans will ever result in a loss to us.

And the ability to come back from the nonperforming status is demonstrated over and over and over again in our portfolio during periods of stress.

It's just natural that a smart large property owner will manage their positions and that means that for some short period of time and when I say short I'm not talking about days, I'm talking about months, but for some short period of time they may manage from good properties cash flows to preserve a property that they are in the process of disposing of.

That's a good thing and it doesn't mean that it's indicative of a significant amount of exposure to loss.

It means that it is indicative of a momentary change in our earnings because we reverse income and we certainly have a dampening effect on our overall yield on our mortgage portfolio, but that is recoverable and that's the important message.

The ability to recover these sums is literally banking into the future an enhancement to the income stream.

Now, in terms of the recovery, that was one of the other questions, is there going to be some penalty fee involved as well or is it just interest?

I think you've touched upon a reality.

In actuality, when loans go nonperforming, our loans are written such that you pay for that, so in all cases whatever the portfolio yield might have been, it's going to be enhanced.

Is this going to have a meaningful change in our earnings?

No.

Because our portfolios are so large, but with regard to a particular loan there is a higher cost to go nonperforming, but when you think about the ability to, let's say preserve a property on disposition, that extra cost is worth taking because going out to get new funding would be at a much higher cost in order to deal with an immediate problem.

This is a funding source that is discernible.

They know that they are going to pay an extra kicker to us, but it's well worth doing given the cost of doing new financing and so on and so fourth.

Okay, and then the last question, with regard to all of the other players who have essentially exited the market, have you been able to pick up any teams of lenders from them?

We have not chosen to take any, well I shouldn't say that.

There may be a couple of lenders that have joined us, but there are no material changes in our group.

Our group is stable and we certainly have the ability to continue lending at extremely high levels into the period in front of us with the existing people that we have in place.

Thanks very much.

You're quite welcome, Ted.

Andrew Wessel at J.P.

Morgan, your line is open.

Yes, thanks.

Hi, Andrew.

Hi, how are you?

The question was asked and answered.

I appreciate it.

Thank you.

All right, we'll go to Matthew Kelley at Sterne, Agee.

Good morning, Matt.

Matthew, your line is open.

You may need to unmute your phone.

You probably should move on to the next.

Yes, we will move on.

We will go to Christopher Nolan at Maxim Group.

Hi.

Thanks for taking my call.

Hi, Christopher.

How are you?

Good.

How are you?

Good.

Given your expectations, Joe, in terms of rising (inaudible) levels given as we move through the cycle.

How should we anticipate this drive the loan loss reserve coverage?

Should we expect the reserve ratio to go up?

I think that our reserve ratio, we've actually been very modestly increasing our reserves.

If you think about it, we had a very large disproported charge against our reserves.

We are likely to be increasing our reserves quarter-by-quarter into the period in front of us.

Not by dramatic amounts, by what we call manageable amounts, so our reserves will be going up and certainly charges to those reserves will come from a disparate group of loans, but certainly nothing close to the nonperforming portfolios that we're reporting.

Just a follow-up on that.

Should we anticipate that the reserve will go up sort of in lock step with loan growth or out pacing loan growth for the reserve ratio actually starts to increase?

I'd say that it depends on a lot of factors, but I think the safe thing to say is that our reserves will be going up.

Great.

And one quick one.

That NPA that everyone is talking about and for the multi-family, could you characterize that property or properties?

Is it Manhattan or outer Burroughs?

Is it a highrise?

Are you talking about the group of properties?

Yes, exactly.

Those are all within our market.

This owner is a very well regarded, large owner of property.

What he has with us, that $50 million is small in comparison to what he has outstanding.

So, we have no concern that we're going to lose any money.

Are these highrises or walk-ups?

They are a variety of properties, but the important thing is that they are all extremely well collateralized, extremely well cash flowing.

There is no expectation that he will let these go or that we will lose any money on this.

Okay, thank you very much for taking my call.

Sure.

And our next question comes from David Hochstim at Buckingham Research.

Good morning David.

Wonder if you could provide a little color on how loan terms and pricing might be changing looking at what you disclosed the margin on new loans in Q2, but what is the pipeline look like in terms of spreads or other terms?

I think obviously, you saw a slight drop that had a lot to do with the volatility of the five-year Treasury.

We're still pricing somewhere between 5% to 6% given the range depending on the current marketplace, but still a sizeable increase on the previous years.

You go back to 2007 and 2008 we were 150 over, so we're seeing some very good economics.

Funding is very low as far as cost to fund these types of transactions for us, which will end up in margin expansion.

Remember our overall portfolio yield is still south of that number, so we have a good opportunity in front of us to see the loan yields go up, which we haven't seen in the previous quarter because of the reversal of non-accrual interest, but we expect to see stabilization there and funding costs to go down.

But as far as the overall business trends, we're seeing a lot of bread and butter, I think 75% to 78% of all of the deals we see in the pipeline are multi-family bread and butter type deals.

And in terms of LTVs or debt service coverage are those changing?

No change.

If anything in this environment conservatism is the key.

I think the reality is that the excesses of the prior period, we're in expectations where we're inordinately high and we were always lower than the peers.

Meaning that people could get substantially more money in the marketplace, so they were always looking for a little extra.

That is not the case today.

People are thankful that they're able to get loans today and that will increase down the road.

Okay, and then can you just again talk about the out-of-niche lending which seems to be the basis of the credit problems.

What lead to some of those loans?

Some of those loans are Legacy products.

Some of those loans are loans that we made with people that we were otherwise doing business with and -- .

The reality is, it's a relatively small percentage, extremely small percentage of our outstanding loans and although an individual loan can go bad and have a material effect, such as this $5.2 million charge, there's no question that the portfolio is standing up very well with regard to the

And then just on the reserves, is it right to think about the reserve as reflecting your view of forward charge-offs for five or six quarters?

Oh, absolutely.

I think the important thing to recognize here is that our reserves are substantially stronger than the reserves at just about every other bank.

Reserves are for losses.

They are not for loans and if you look at the coverage ratio of the reserves in the biggest banks in this nation, it's extremely low.

When you look at the coverage ratio of banks generally, when we talk about the comparative numbers, we're actually giving you the reality that banks are charging off substantially more against their reserves than we are.

So our reserve coverage is substantially higher than that of our industry, and then people just kind of miss that because the percentage seems low when you look at it as a percentage of outstanding loans or as a percentage of nonperforming loans, but as a percentage of actual charge-offs, we have two or three or five or ten times the reserves of others depending on who they maybe.

So, do you think of it as reflecting sort of eight quarters worth of charge-offs?

I'd say that it's very, very hard to actually know over the course of eight quarters what the actual charges would be, but I'd say that our reserves, as they currently exist in relation to the charges that we're taking, are substantially stronger than the reserves of others and they're being disproportionately affected by the atypical loans that are in our portfolio.

It's very important to note that the loans that are resulting in losses represent a very small percentage of our outstanding loans, so those loans are in fact deteriorating earlier and we're taking larger losses now and therefore, prospectively the overall fundamental strength of our portfolio is going to continue to hold and therefore our reserves, as we build them, our reserves are going to be substantially greater that actual charges that we're taking.

Thank you very much.

You're quite welcome.

And that's all the time we have for questions today.

I'll turn the floor back over to Mr.

Ficolora for closing remarks.

Thank you all.

On behalf of our Board and management team, I thank you for the opportunity to discuss our second quarter 2009 performance.

We look forward to discussing our third quarter performance with you in the fall.

Thank you.

Thank you.

This does conclude today's New York Community Bancorp second quarter 2009 earnings conference call.

Please disconnect your lines at this time and have a wonderful day.