Flagstar Financial Inc (NYCB) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the New York Community Bancorp second quarter 2010 earnings conference call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. For opening remarks and introductions, I would like to turn the call over to Ilene Angarola, Executive Vice President and Director of Investor Relations. Please go ahead.

Thank you. Good morning everyone, and thank you for joining the management team of New York Community Bancorp for our quarterly post-earnings conference call. Today's discussion of our second-quarter earnings will be led by Chairman, President, and Chief Executive Officer, Joseph Ficalora, together with Thomas Cangemi, our Chief Financial Officer. Also joining us on the call are Robert Wann, our Chief Operating Officer, and John Pinto, our Chief Accounting Officer.

Certain of our comments will contain forward-looking statements, which are intended to be covered by the safe-harbor provision of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we currently anticipate, due to a number of factors, many of which are beyond our control.

Among those factors are; general economic conditions and trends, both nationally and in our local market, changes in the financial or operating performance of our customers' businesses, or changes in real values, which could impact the 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, including our investment securities, changes in legislation, regulation, policies, including but not limited to the effective final rules amending Regulation E that take effect, I believe, in August, and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

You will find a more detailed list of risk factors associated with our forward-looking statements in our 2009 annual report on Form 10-K, our first-quarter 2010 10-Q, and on page 10 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, please call our Investor Relations department at 516-683-4420, or visit us on the web at ir@myncb.com. I would now like to turn the floor 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, all. We appreciate your joining us for today's discussion of our second quarter 2010 performance, which was notable not only for the growth of our revenues and earnings, but also for an increase in loans originated for investment and improvement in our asset-quality measures and continued capital strength. I'd like to begin with growth in our GAAP earnings, which rose 141% year over year to $136 million, equivalent to a 94% rise in diluted GAAP earnings per share to $0.31. Our operating earnings rose 46% year over year to $130 million, equivalent to 15% rise in diluted operating earnings per share to $0.30.

I should also note that this was the fifth consecutive quarter in which our operating earnings increased. The penny difference between our diluted earnings per share on a GAAP and operating basis was largely due to an after-tax gain of $6.6 million on our FDIC-assisted acquisition of Desert Hills. Our cash earnings were up 67% from the year-earlier level and were equivalent to a 31% rise in diluted cash earnings per share, to $0.34. Reflecting three months' combined operations with both Desert Hills and AmTrust, total revenues rose 87% year over year, to $375 million, as net interest income rose 35% to more than $294 million, and non-interest income rose $80.4 million, primarily representing an increase in mortgage banking and servicing fees.

The net interest income growth we achieved was primarily fueled by the growth of our average interest-earning assets, which rose 21% to $34.4 billion year over year. The increase was the result of a 28% rise in the average balance of loans to $28.6 billion and the nine basis point rise in the average yield on loans to 5.84%. While average interest-bearing liabilities rose 30%, largely reflecting acquired deposits, the impact was exceeded by the benefit of a 59 basis point reduction in our average cost of funds to 2.17%. As a result, our spread rose 56 basis points to 3.45 from the year-earlier measure, and our margin rose 36 basis points, to 3.42%.

On a linked-quarter basis, our net interest income and margin were largely consistent with the trailing quarter measures, the first declining modestly and the second gaining one basis point. Loan originations totaled $3.1 billion in the current second quarter, including $971.5 million of loans held for investment. That is a 30% increase from the volume produced in the first quarter of this year. Multi-family and commercial real estate loans represented 76% of loans produced for investment during the quarter and were up 28% from the first-quarter amount.

While the linked-quarter increase in the volume of loans produced was, of course, gratifying, we are even more pleased by the size of our pipeline at this time. Just three months ago, our pipeline for loans held for investment was about $318 million. This morning, we reported a held-for-investment pipeline of about $902 million, representing a 184% increase over the past three months. While refinancing activity and property sales are still below normal volumes, we believe that today's pipeline is an encouraging indication of our potential for future loan growth. In addition, the current pipeline of loans originated for sale by our mortgage banking operation is $2.7 billion, significantly higher than the three month earlier amount. Given our enhanced liquidity, the strength of our capital position, we are well-positioned to meet the demand for loans as demand continues to grow.

Having addressed our earnings growth and the improvement in loan production, I'd like to discuss the improvements in our asset quality. For the first time in nine quarters, we reported declines in the balances of non-performing loans and assets. With those declines, an improvement in our asset-quality ratios. We also reported a decline in loans 30 to 89 days past due, for the second time since year-end. Specifically, non-performing assets represented 1.59% of total assets at the end of the second quarter, an 18 basis point improvement from the measure at March 31.

While other real estate owned rose during this time, the balance of non-performing loans fell 13.3% to $636.8 million during the quarter, equivalent to a 35 basis point improvement in non-performing loans to total loans ratio going down to 2.26%. Furthermore, loans 30 to 89 days past due declined by 29% to $154.6 million in the second quarter. That's in addition to a linked-quarter decline of 20% between December 31, 2009, and March 31, 2010. While net chargeoffs rose to $18.9 million in the second quarter, they nonetheless represented a modest 0.07% of average loans. At $22 million, our provision for loan losses represented 116.6% of the quarter's net chargeoffs and increased the loan loss allowance to $140.6 million at quarter end.

Though too soon to predict a trend, we are clearly pleased by the improvements in our asset-quality measures, which reflect our conservative underwriting and the nature of our primary lending niche. We also are pleased with our capital and our various capital measures, which have grown since the end of December and since March 31 . Excluding AOCL, tangible stockholders' equity represented 7.51% of tangible assets at the end of the quarter, representing a 26 basis point improvement in the first six months of this year. Similarly, tangible book value per share rose $0.17 from December 31's measure to $6.70 at the end of June.

These improvements were paralleled by improvements in our regulatory capital levels. The Community Bank had a leverage capital ratio of 8.35% at the end of the quarter, while the Commercial Bank had a leverage capital ratio of 12.37%. Both of these measures were well above the 5% required classification as well-capitalized institutions, and both exceed the ratios recorded at March 31.

In view of the strength of our earnings and our tangible capital position, the board of directors last night declared our 26th consecutive quarterly cash dividend of $0.25 per share. The dividend will be paid on August 17 to shareholders of record at August 6. In closing, we believe that our second-quarter performance was a good indication of our ability to generate earnings and revenues, originate loans, and maintain strong capital levels, qualities that should continue to serve us well as we adapt to the new rules that are bound to arise from the passage of Dodd-Frank.

At this time, I would be happy to take your questions. As always, we will do our best to get everybody in time allotted. However, should we miss you, please feel free to call our Investor Relations department or leave a message and we'll get back to you as soon as we can. Now, for the first question.

The floor is now open for questions. (Operator Instructions) In the interest of time, management asks that you limit yourself to one question. We also ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Thank you, and our first question is coming from Bob Ramsey with FBR Capital Markets. Go ahead, please.

Hey, good morning.

Good morning, Bob.

Can you talk about the loan pipeline? Is most of what's in there in the held for investment part-time line, it is multifamily and are you seeing any increase in loan demand, and is it mostly purchase or refi?

Right. Bob, as we've discussed in the past, you know, a great deal of the market that we are in, the niche that we specifically like to lend in, is kind of tied up in structured debt instruments that are virtually in need of unraveling. The good news, as we've suggested, as the cycle evolves, more and more product will, in fact, be available in our market. And we'll have the ability to do more and more lending.

We are, in a meaningful way, beginning to see that. And we would expect that on an ongoing basis, that would just increase. So there is, in fact, a strong component of multi-family that is coming in to our portfolio as we speak.

Thank you. Our next question comes from Greg Ketron with Citigroup. Go ahead, please.

Good morning, guys. Nice quarter.

Thank you, Greg.

Couple of questions, one on margin dynamics. The margin percent was relatively flat compared to the first quarter. I know on the last call, I think you had talked about maybe some more opportunities on CD repricing, but I also was wondering what outlook you may have there going forward, and also, on the loan production, what kind of yields are you seeing on that production or spreads?

Greg, it's Tom. I guess, you know, obviously, the rate environment has changed dramatically. We -- and I'm going to give a specific forecast, but we have some good work on the liability side. We're obviously repricing our CDs down aggressively here because money is extremely cheap in the marketplace. And we have lots of liquidity. So we'll probably get some good benefit, both on the deposit side and on the liability side. We expect to look at our liability base, maybe do some extensions and maybe some restructuring on -- from AmTrust. We have a lot of opportunity on the funding side, but bearing that in mind, rates are lower, so obviously the loan yields up 5% right now of the market, and you have security yields that are, you know, lowest we have seen in multiple years.

Thank you. Our next question comes from Mark Fitzgibbon with Sandler O'Neill. Please go ahead.

Good morning, guys.

Good morning, Mark.

This is actually Alex Twerdahl here. I was just wondering, with respect to the decline in non-performing assets, if you can just enlighten me on how much of that was due to organic workouts versus any loan sales that you might have done during the quarter.

Yes. I think it was actually both.

Yes, we had a number of great opportunities in the quarter. I liked what you said -- you know, recently, over the last two or three months, we've seen some great activity where we have customers actually buying those at par, we've seen some very good activity [for us] to invest into real estate at a price that makes sense. We see some bars selling some assets, we had asset sales, we had a number of note sales, note sales are approximately $56 million in the quarter, we had people getting more current. We had a cadre of different components bringing that non-performing number down.

As expected, we felt, going into Q2, the first real big movement of the decline on non-performing assets, and we expected to see the peak in the non-performing assets by -- we expect in September of 2010. That may be sooner. So the good news is that asset quality is improving both on the 30 to 89 bucket as well as actual non-performing coming off the book.

Mark, it's important to recognize that our metrics are very different than the industry as a whole. Our build in non-performing is often later in the cycle than the industry would be building. And our loss content is much less than the industry as a whole. So we've had, in this second quarter, about $197 million worth of loans that were characterized as non-performing resolved.

And the loss content for the resolutions was extremely low, and our expectation on a go-forward basis would be that we would have an ongoing continuing of what has been, for decades, a very consistent process.

Thank you.

Thank you. Our next question comes from Collyn Gilbert with Stifel Nicolaus. Go ahead, please.

Thanks, good morning, guys.

Hi, Collyn.

Could you just give us an update on if there's any new developments on the mortgage servicing business through -- that you acquired through AmTrust?

Yes. I think we're still doing a lot of work with that. We have servicing that we obviously are getting a tremendous amount of income from, and a part of that is the FDIC relationship, which is currently up for sale. So that has not been decided yet, and certainly we don't know whether we continue to do the servicing for that group or not.

So, the servicing component is something that we're going to definitely be building upon, looking to establish additional relationships, because we know we are going to be servicing the $6 billion plus in assets that we already have from the FDIC, and we expect that we are going to be getting more of that down the road, so we are spending a great deal of time ensuring that we're building a servicing platform that is not only going to meet our needs, but to meet the needs of others.

Collyn, I would just add that overall, the mortgage banking opportunities are very strong overall. Rates are significantly low, we're seeing some great new rate locks, we have significant potential originations going into Q3, and our rate [lot line] has been very, very consistent of [inaudible] each month, well ahead of our expectation of forecasting when this business is profitable. And we were well profitable early on in the year, and more importantly, the business is running extremely well, we're seeing some good revenue opportunities here, and we have great new business coming into the portfolio as we speak today.

Okay. Any sense on the timeline for when they are going to resolve the potential sale of this?

My guess -- look, depending on where the government is, it's probably going to take them some time, it's a fairly large asset. We expect sometime by 2010 it will be resolved. In the meantime, we are partnering with them and working with them.

Okay, that's helpful. Thanks.

Thank you. Our next question comes from Rick Weiss with Janney Montgomery Scott.

Good morning.

Good morning, Rick, how are you?

Well.

Hi, Rick.

Hey. I was wondering if you could just break down a little the other income line in the other income part of your income statement.

Right, right. A lot of it, Rick, is obviously mortgage banking servicing. I think we put out a number somewhere like $37.5 million or $39.5 million from both servicing and origination. I would say about close to $15.5 million is servicing and net, the others -- the gross pieces, the mortgage banking ops.

Okay, any kind of loan sales in there, too?

That's net of gain on sale, obviously. (Inaudible) scale of the mortgage banking operation.

Okay. All related to -- but the loan (inaudible) are all related to mortgage banking.

Yes.

Right, right. Servicing side and the origination side.

None of the origination that we do for portfolio is up for sale. The only origination that is being sold is, in fact, the business that explicitly will only originate for sale. We're not portfolioing anything that is being originated in the mortgage bank, and therefore, whenever you have a number that you're looking at, if the number is sold assets, it's coming from the mortgage bank, and if the number is portfolio earning assets, it's coming from the rest of our normal banking operations.

Okay, so none of the non-performing assets that were sold --

No, no, no. Those numbers are not in there.

Okay. Got it. Okay. Thank you.

Okay.

Thank you. Our next question comes from Matthew Kelley with Sterne Agee. Go ahead, please.

Morning. Hi, guys.

Hi, Matt.

Just wanted to talk about the securities portfolio, the decline, and then quantify the GSE buyout impact and --

Yes, yes.

-- those funds.

Kind of interesting. Obviously, they're buying a lot of the non-performing assets from the mortgage-backed pool, that's been consistent within the industry. More importantly, rates are significantly lower, and you will see a continuation of yield declines and securities until market rates change.

We have kept the portfolio relatively short, so we're getting a (lock) of cash flow, more than expected, and the goal here, if you look at the pipeline on loan, is to transition securities to loans over time. Our pipeline on the loan side is triple, I believe, from the last -- for investment. So we expect to see a lot of this excess cash come back to us already going back into loan yields, probably at the level slightly higher than the security yields were on the books, but there's going to be, no question, a drag on security yields, no question.

What was the dollar amount of buyouts?

Well, we had buyouts and calls. It was probably close to $1 billion.

Okay. Okay.

And again, depending where rates go, we have callable securities that may or may not be called, but it all depends on where rates are. Right now the ten-year (inaudible) this morning, as of last night was around 3.04%, 3.05%. At those levels, you're going to see a lot of cash flow coming in. People are refinancing, the government is calling bonds, and we're trying to keep things very liquid. We're not going to extend here.

Got you. And the -- just to clarify one more time, your production for the pipeline, the average yield in the pipeline, is it 5%, or is it up -- ?

This is on the -- on the multi-side and commercial, it's finally south of five. Obviously, (inaudible) we're allowed to be 100 plus off the five-year Treasury.

Okay.

(Inaudible ) 300. Depending on where the five-year is trading at. (Inaudible) deals right now are sub 5%. And that will -- and that's the marketplace.

Right.

Rates will come down dramatically.

So in the static rate environment, we have reached the inflection point in the margin.

Right. I think it's fair to say on the funding side, we have a lot of opportunity there, both at the AmTrust division as well as, just in general, deposit rates are not going up. We have some tremendous payoff opportunities on the liability side, which will probably transact given the current interest rates. We have some opportunity to shrink the balance sheet and make significant revenue benefits. We have the opportunity to extend some liability at a very favorable cost, all beneficial to the bottom line, may have some impact of the margin, but increase earnings, increase revenue.

Okay. All right, thank you.

Thank you. Our next question come from Tom Alonso with Macquarie. Go ahead, please.

Good morning, guys.

How are you?

Good morning, Tom.

I'm at loan pipeline, the multifamily piece, how much of that is refi? And if you could give us any color on what the prepays attached to that are.

Yes, as of right now, the refi component is still relatively small. But the reality is that that will change as the opportunity to buy properties increases. So we are seeing more activity in the market for sure, and we expect that that activity will continue to go up, but we're not near normal yet.

Yes, Tom, this is Tom. I will tell you that prepays are probably doubled, but it's from such a low amount -- you saw some good activity in Q2. My expectation for that -- we run that lap, but that could change dramatically. We're seeing some really good movement in the portfolio, just given the fact that we had non-performing assets selling at par, with borrowers, new customers buying assets and being comfortable taking no sales without a loss, is very encouraging. So we have the opportunity to see some good uptick in prepays, and the activity is real, more on the new purchase, but there is some refi, and there is opportunity to see people take advantage of those low interest rates. So that could also drive significant with repayments in the future.

Okay, great. Thanks, guys.

Yes.

Thank you. Our next question comes from Ken Zerbe with Morgan Stanley. Go ahead, please.

Great, thanks. Good morning. Was wondering if you could just elaborate a little bit on the higher loss content that you saw in your other loan category, and also address your expectation for reserve build over the back half of the year.

The other loan category -- the loss content in our primary assets is the long-term history that we have. With regard to other loans, that is loan by loan and isolated circumstance. Although we, in fact, have been very conservative in our approach to lending, we do have assets that were generated by others still. So, I don't think there are any trends or any way that we could tell you that there is certainty that you're looking at something which is going to repeat itself or otherwise it's consistent with our expectations.

Our expectations are consistent with the fact that over time, we have a significantly smaller amount of loss in the ultimate dispositions of assets, and through this cycle, 18 months, 24 months, we have been demonstrating that.

Ken, it's Tom. I will tell you that it's -- I believe it's a one-up situation, it's a handful of guys that just went bad. It's a tough environment. I believe these are from our divisions that we've acquired, these are not originated internally, so the reality that is we have a few bad relationships that went bad in the quarter, but nothing of a trend.

It's just a handful of guys that was probably -- several million bucks for the quarter, which is unusual for us. So you have a few lines of credit that went bad, guys went bankrupt. It's a tough environment, but not a trend.

And then the reserve build?

I think, look -- significant decline in [MPAs], significant decline in delinquencies back to back -- we feel pretty good where we're heading. There's a lot of activity in our loan recovery unit, we're seeing some very good opportunities to continue to drop the [MPAs], so I think we called last quarter that we expected peaking the [MPAs] probably by September of 2010. We may have peaked in March. So, if we peaked, and we see the reduction, I think the reserve build is consistent, just slightly more chargeoffs.

Thank you.

Thank you. Our next question comes from Bruce Harting with Barclays Capital. Go ahead, please.

Good morning.

Hi, Bruce, how are you?

Good. Just -- who are the borrowers and buyers that you're dealing with right now?

In many cases, we're dealing with the people who have long-term traditionally been in our market. I think that we're at a time here where people have been patient and waiting and waiting, and some of them have made the conscious decision that they don't want to wait any longer on the particular assets that are in front of them.

And the underwriting is the usual --

Oh, yes. It's basically -- the consistency in our underwriting is an important component of how we stay where we are. So our underwriting is perfectly fine. We're not compromising at all our underwriting. What is being compromised here is rate.

There's no escaping the fact that Fannie Mae may has been a meaningful downward pressure on rates for our particular lending. How they are, and then why they are, is out there for others to try and figure out. But the reality is that if you look at the market generally, rates on our products should be higher than they are, excepting for the presence of Fannie Mae.

So it's your usual -- the usual traffic. It's not private equity or new buyers.

Oh, no, no, no.

And then, can you just give an update on the deposit franchises -- Florida, Arizona, and New York?

Sure. They're all extraordinarily strong. They all are meeting our expectations, extraordinarily well. I think I've discussed this in the past, that when you look at our deposit base, the additions that we have in Florida, Arizona, and Ohio are significantly better than what we got from Roslyn or what we got in the local market. And we expect that to be the continuing case.

As is obvious, we have a huge amount of liquidity, we have a huge amount of cash coming in to us. We really are not looking to build our deposit base aggressively here, but the good news about our operations with regard to deposits, extremely sound, extremely efficient, getting better. Some of the systems things that we've done, I mean, very few banks integrate newly acquired systems in the first quarter that they acquired it. Albeit small, it's still an integration of a system -- that done with Desert Hills.

Certainly, we have enhanced our operations on the IT side dramatically with regard to all of our New York operations, and we have every expectation that we are going to continue to do that on a go-forward basis, making ourselves even more efficient by consolidating what today is four IT operating environments into two operating environments. So there are many good things on the horizon, Bruce.

I would also add, Bruce, is that, in general, we feel that regional pricing on the acquisition will result most likely in a lower cost of funds in the future because rates are extremely low, and we have some more opportunity in the markets to reduce rates is to come to the market. Which will help the cost of funds.

Thanks. And then [REGE] and Durbin amendment, any particular impact on any of the deposits you acquired, any debit income that goes away --

You know, there is, in our case, there is an effect, albeit a minor effect. When you look at a bank that is heavily involved in revenue from consumer banking, they are going to have major impact across the board with all of the changes that are coming out of Washington. Their viability as lenders is going to change. Their pricing structures are going to change. In our case, it is a relatively small component of our contributions to earnings. And although we will be affected, it will be relatively minor.

Thank you.

You're welcome.

Thank you. Our next question comes from Theodore Kovaleff with Horowitz & Associates. Go ahead, please.

Hey, there.

Hi, Ted. How are you?

I'm okay. Great. Two quick questions. One is, could you quantify in terms of earnings what has come out of the FDIC assistance? That's the first question. And the second question is, have you made any bids on any additional FDIC assistance, subsequent to Desert?

Unfortunately, Ted, two items we don't break out the detail of the transaction individually, and we're not going to comment on specific M&A transactions. But we are always looking for opportunities, and it's been fluid, and things are percolating out in the marketplace, in all the markets that we serve.

I think the good news, Ted, is that we have plenty on our plate today, and then we have every expectation that we'll be able to continue to grow earnings and certainly solidify the opportunities presented by this evolving market, quarter by quarter by quarter, ahead.

Okay, thanks.

You're welcome.

Thank you. Our next question comes from Gerard Cassidy with RBC Capital Markets. Go ahead, please.

Good morning, Gerard.

Good morning, Gerard.

Good morning, guys. As a follow-up on the acquisition front, would you guys start looking at traditional M&A deals like you have done historically, or are you still more interested in the FDIC stuff?

When you think about our business model, which was put in place back in 1993, we've always looked at deals. For the last two plus years, deals that weren't FDIC assisted, we in fact looked, but didn't do any. As we look to the future, the chances of us doing a deal away from the FDIC would be less than our doing a deal with the FDIC.

But I think you've known us long enough to know that we can be very patient, and certainly if we perceive there to be risks that we're uncomfortable with -- and we're certainly more uncomfortable than other buyers -- we're not likely to go forward. So I think that this is a good time for us to keep our powder dry. And I would say to you, more broadly, in the market, you're going to see a lot of deals sold. A lot of banks will sell in front of an FDIC intrusion, and that activity is going to pick up. And there will be buyers for that. We are not likely to be a buyer for that. And then there will be additional FDIC deals down the road, because the evolving cycle still has a lot of adjustments in it.

And on the -- assuming, when the FDIC runs out of deals over the next two or three years, possibly, in a non-FDIC deal, traditionally you have stuck to the metro New York marketplace in a non-FDIC deal. Would that still be the case going forward should something come up, or would you consider outside the metro New York marketplace doing a non- --

Yes, I think in any deal we look at, assets would be the driving force. So, the ability to dispose of assets would determine whether we would or we wouldn't be looking at something outside the immediate market. So, as I'm sure you're well aware, in the New York immediate market, there are very few banks that are in proximity of an FDIC deal. Down the road, that may change. But as we sit today, that is not the likely case.

So each and every opportunity will present its unique attributes, and more importantly, its unique risks. When we balance these things, we'll decide whether we will or won't be willing to go forward. On a very conservative basis, I think we've demonstrated over the course of 15 years that we have every intention of growth by acquisition, but we're willing to be very patient and to select where we will or won't play. And that means, for the most part, we're not going to play in a lot of games that might appear as though they're good map deals but not necessarily good economic deals.

Okay, thank you. And then, another question. Under the new Dodd-Frank bill, if I recall, the OTS is going to be folded into, I think, the OCC --

Correct.

Have you guys given any thought of the impact that might have for your organization?

None, because we're a New York state-chartered bank. We never were in the OTS.

Okay, so none of the subsidiaries were part of the --

Oh, no. No, no, no. None of our subsidiaries. We have a commercial bank and we have a thrift. Both of which operate under a multi-bank holding company, which is New York state-chartered.

Great, and then finally, you've done well with maintaining your dividend over the years during these challenging times.

Sure.

Do you guys have any -- when we get back to normalcy, let's assume 2012, maybe, for the industry -- is there any payout ratio that you guys focus on in terms of the dividend?

Yes.

That's why I would say, reasonably, getting back into that true run rate when the Company is rightsizing its margin and credit becomes less of an issue for the industry -- I would say somewhere like a 50% cash ratio, not a GAAP ratio.

So as we look at the cash earnings, we have a high contribution-to-cash earnings on the P&L. We would say around 50%.

And typically, does a 50% cash ratio lead to a higher GAAP payout ratio, then?

Yes.

Yes.

Okay, all right, thank you.

Thank you. Our next question comes from David Hochstim with Buckingham Research. Go ahead, please.

Good morning.

Good morning, David.

Wonder if you could just again provide some color on pricing on loans in the pipeline relative to Q1 or Q4, what the pricing looks like. And then, wonder if you could talk a little bit about how underwriting has changed in light of your experience over this last cycle, and you've talked about reducing the ADC portfolio, and it is coming down, but then you've had originations of about $30 million each in the last two quarters.

Yes, David, it's Tom. I'll talk pricing, and Joe will talk about the underwriting standards. Pricing came down because of interest rates, and as Joe indicated, Fannie Mae has been competitive, it's a competitive environment, and we're doing your traditional multi-family, commercial real estate deals that we're accustomed to doing, so you're looking at, probably, south of 5%. I would look at the five-year Treasury, price it around 3%, 3.25%, and add another 25 basis points above that for commercial real estate. That's pretty much the market right now. That came from a 5% rate, mid 5% down to high 4% in this environment, just given where the rally in the bond market has been.

And their funding costs have come down, though.

Absolutely. That would be a tremendous opportunity in funding, but unfortunately, rates are substantially lower and we can't control the Treasury curve. But there is a significant rally in the bond market that is creating very low interest rates right now, and the market is ripe for activity. So we're seeing good activity.

My gut tells me we will see some good prepayment activity as well in the second half of -- the current half we're in right now, second half 2009. And on the prepays, although they are small, they doubled from quarter to quarter, and that could be an ongoing trend given low interest rates. People willing to refinance their properties at these very low interest rates.

Are you seeing much competition from others besides Fannie Mae?

I'd say the usual. We have a nice pipeline. We believe our pipeline is almost triple for investment and typically we hit our pipeline and then some. So we should see some good loan growth.

As expected, last quarter, we predicted second half will be our growth on the assets. We have the cash. We have the capital. We're looking to put that money into multi-family loans. We're reluctant to grow the securities portfolio aggressively here with that sub -3% yield. It's just not an attractive long-term investment opportunity.

All right.

So I would expect so see a substantial decline in securities portfolio. That cash flow is going to be earmarked for our good, high-quality, multi-family credit in the five boroughs.

Okay. And on underwriting?

I'd say our under writing has been so consistent through, you know, many, many, many years. So there's no fundamental change in our underwriting. The thing that does change is how much the price will be the deciding factor, so whether we do the loan or we don't.

In many cases, our underwriting standards are exactly the same. Our dollars are often much less than some of our competitors, and in this environment we're not seeing as much of that as we had seen a year ago or two years ago. You know, you had a lot of conduits that were lending incredible amounts of money. They're not there now. So I think the important ingredient in our decision process today is, in fact, at what rate are we willing to do the loan?

What about lending outside New York? Very little. Very little. The activity is principally in our niche. That is what we focus upon. So our lending outside of New York is very little.

David, as you know, we originate for sale through the agencies.

Oh, yes. I'm talking about your -- not your core portfolio -- you're not going with customers somewhere else anymore -- ?

No, no, no. Yes.

And then on the ADC portfolio -- what are those $30 million?

Again, these are unique opportunities. We've had some very wealthy customers. We had some very nice deals. We're going to finance great transactions. And if you have a very good borrower that has significant cash balances in the bank, and it's doing a project, it's a very solid deal. We're not going to avoid it, but we're not building the business to grow it. Okay, we're still searching the community, and any loan we're doing in this environment, you would assume, is very low LTV, strong credit metrics, and significant relationship.

Okay, and then just to clarify on the chargeoff trend, should we expect elevated chargeoffs even though non-performers are coming down, because there's a lag, or is this several million from other was really just an aberration?

I think that's fair to say that the activity on the C&I portfolio was more of a one-up transaction, a handful of loans that just -- little collateral, it's from the commercial bank, the consumer bank. If you have these other unsecured lines and unsecured lending relationships, that tends to go bad in the bad economy.

(Inaudible), if you think about the chargeoffs and back that out, relatively low, we're seeing the movement on the [MPAs] and not charge -- we're not seeing the chargeoffs coming from the disposition of the assets. We're getting loans done at par. We're seeing people pay down. We're seeing property owners sell their assets at profits for themselves to move the [MPA] balances. So we had tremendous activity in Q2, we're seeing continued activity in Q3, we're hoping that we've already peaked on [MPAs]. So that's a good signal.

In the bulk of our portfolio, there's huge amounts of consistency, and there's going to be a lumpiness in how assets actually become non-performing and how assets get resolved, due to the presence of assets that are not common to the bulk of our portfolio.

So when you think about what the future may hold, we're confident that there will be a measured consistency in how we resolve assets with low loss content. Having said that, there will be isolated individual loans that will have distortions and sizable amounts of loss because they're not consistent with the portfolio metrics.

And you'll have fewer of those in the future, I hope.

That's right. As we go down the road, more and more of those are resolved and away, and since we're not generating those loans, we acquired those loans, they're a smaller and smaller and smaller percentage of our exposure.

Okay, thank you.

Okay?

Thank you.

Great.

Thank you. Our next question comes from Christopher Nolan with Maxim Group. Go ahead, please.

Morning. Hi. Thanks for taking my question.

Good morning, Chris.

Morning. Has the -- when Tom was alluding to the increase in sales of non-performing assets, is this increase related to appreciation in multi-family property valuations in New York?

Not really. The reality is that the New York market, as I'm sure you are aware, is rather fragmented. There are some places in the New York market where pricing is extraordinarily strong and was strong right through the first two years of this cycle. Other places where things dipped off and are coming back a little bit, and yet, other places where it continues to deteriorate.

So the resolution is more driven by the reality that we have assets that have real cash flow values, and those values are recognized by the market and they typically pay for them. So, smart property owners can see the real value in large components of what we have available for sale. And therefore, we have a typical experience where we have significantly less loss, because there is something there that a good property owner can recognize and will pay for.

Great. And the terms of new loan originations, it is five years, seven years, or -- ?

Typically, everything is the same as it's been. Our typical loan is a five-year loan. Having said that, there is always an exception, but exceptions are rare.

(Inaudible) five year with that.

Great. Thank you very much.

You're welcome.

Thank you. Our next question comes from Ken Bruce with Bank of America. Go ahead, please.

Good morning, Ken.

Good morning. Thank you, good morning. Couple of questions as it relates to the mortgage banking operations. You had mentioned that you plan to build out the platform. I was wondering, are you currently selling servicing today, or are you capitalizing servicing?

Right now we're capitalizing servicing, and we feel at a very conservative level, up 3.5 -- 3.4 times. So obviously the market is not fluid for servicing assets (inaudible), but that hopefully will change over time. The goal is to build a servicing book.

We have the expectation by the end of the year that some of the FDIC assets will be sold and we are going to have our own servicing portfolio in addition to what we acquired for the AmTrust transaction. So we're building -- we have about $3.5 billion that we originated ourselves for servicing retained, and we should hopefully get to that level of critical mass by the end of the year.

Great. And was there any write-up or impairment in the quarter?

No, it was immaterial. This is very small assets.

Okay. And in terms of the interest income contribution from loans held for sale, could you characterize that for me, please, in the quarter?

It's right at -- probably about $1.2 million a month. So about $3.5 million. It's building up. We're seeing a nice -- nice rate-lock pipeline. Because it's sitting on cash of (inaudible), we have an opportunity to put it on a nice asset (inaudible) as we deliver to the agency.

How long are you basically gestating those?

Average turn is 13 days.

Okay. And lastly, you had indicated that the securities portfolio is obviously paying down just, you know, given the calls and prepays. And it doesn't look like you had much asset growth. You're looking forward to some in the back half of the year. Can you project out and tell us what you think, average earning assets will grow or earning assets, for that matter -- ?

I would rather not project an asset, the value. I will tell you that we have a major asset -- we would call it reclassification on cash to loan. That's a significant benefit that we see going forward. As indicated, the pipeline is very strong. We're getting substantial cash flow both from securities book, as well as from the franchise itself on the FDIC from the transactions. So we have a lot of liquidity on balance sheets with the expectation to fund the core product. But that being said, that's a substantial revenue benefit, coming from 25 basis points of an asset to, let's say, 4.5% or 5%.

Obviously, security yields are coming down, so we're reluctant to be aggressive in building the portfolio. We have to maintain the portfolio. But we've probably been the lowest you have seen in probably well over a decade on that side.

The good news is that our normal transition from securities to loans is just obviously in front of us a function of the market. That is exactly what is being presented to us.

And I think, as expected, in the first quarter, we really feel second half will be a growth of loan books for us. We're seeing we had loan growth every quarter. We will see more loan growth as we finish up the year, going into 2011, that should continue.

Right. And fourth quarter would be, typically, your strong seasonal period?

Normally, yes.

Yes, I think that's fair to say, but look at the pipeline. The pipeline is a substantial enhancement from the previous quarter, so we'll have a good Q3 for sure and hopefully a very strong end of the year.

Great. Thank you for your comments

You're welcome.

Thank you. Our next question is a follow-up from Tom Alonso with Macquarie. Go ahead, please.

Actually, my follow-up has been answered. Thanks, guys.

Thank you.

Thank you. That is all the time we have for questions today. At this time, I would like to turn it back to our speaker, Joe Ficalora, for any closing remarks.

Sure. Thank you so much. On behalf of our board and management team, I thank you for the opportunity to discuss our second quarter 2010 performance. We are encouraged by the improvement in our asset quality, the increase in loan production, the continued growth of our revenues, and our earnings and our capital. Thank you so much.

Thank you. This does conclude today's New York Community Bancorp second quarter 2010 earnings conference call. Please disconnect your lines at this time, and have a wonderful day.