Flagstar Financial Inc (NYCB) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to New York Community Bancorp's first-quarter 2012 earnings conference call.

Today's call is being recorded, and 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, Director of Investor Relations and Corporate Communications.

Please go ahead.

Thank you.

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

Today's discussion of our first-quarter 2012 earnings will be led by our President and Chief Executive Officer, Joseph Ficalora; together with our Chief Financial Officer, Thomas Cangemi.

Also joining us on the call our 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 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 these factors are general economic conditions and trends, both nationally and in our local markets; changes in interest rates, which may affect our net income, prepayment penalty income, mortgage banking income and other future cash flows or the market value of our assets, including our investment securities; changes in deposit flows and in the demand for deposit loan and investment products and other financial services; and changes in legislation, regulation, and policies.

You'll find more about the risk factors associated with our forward-looking statements on page 7 of this morning's earnings release and in our SEC filings, including our 2011 annual report on Form 10-K.

The release also includes reconciliations with certain GAAP and non-GAAP earnings and capital measures which will be discussed during the 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.mynycb.com.

To start the discussion, I'll now turn the call over to Mr.

Ficalora, who will provide a brief overview of our first-quarter performance before opening the line for Q&A.

Mr.

Ficalora?

Thank you, Eileen, and thank you all for joining us this morning as we discuss our performance in the first quarter of 2012.

As I stated in the earnings release, we were very pleased to report diluted GAAP and operating earnings per share of $0.27, which is consistent with the amounts recorded in the fourth quarter of 2011, and on an operating basis, in the first quarter of last year.

I would also note that our cash earnings equaled $0.29 per diluted share in the current first quarter and added $9.9 million more to our tangible capital than our GAAP earnings alone.

At the end of the first quarter, tangible stockholders' equity totaled $3.1 billion and represented 7.79% of tangible assets, excluding accumulated other comprehensive loss.

Based on the continued strength of our earnings and that of our capital position, the Board of Directors last night declared our 33rd consecutive quarterly cash dividend of $0.25 per share.

The dividend will be paid on May 17 to shareholders of record at the close of business on May 7.

The consistency of our earnings speaks well to our business model, given the degree to which the bank earns and in general has been expected to decrease as the downward repricing of interest earning assets has outpaced the downward repricing of interest-bearing liabilities.

While we ourselves were not exempt from experiencing such pressure, I am pleased to say that linked quarter reduction in our net interest margin, excluding prepayment penalty income, was a modest 8 basis points.

This was in line with our expectations and the range we provided in last quarter's conference call.

The impact of the modest decline in our margin on our first-quarter earnings was largely offset by the volume of loans we produced over the course of the quarter and by the increase in income from mortgage banking activity.

First, loan originations totaled $4.6 billion in the quarter, including $2.1 billion of loans held for investment and $2.5 billion of loans held for sale.

Multifamily loans accounted for $1.1 billion of loans produced for investment, and commercial real estate loans accounted for $916 million of the remaining amount.

Reflecting the volume of loans we originated, the portfolio of loans held for investment grew $1 billion or 4% on a linked quarter basis to $26.6 billion on March 31.

We also were very pleased with the volume of loans produced for sale during the quarter and by the contribution of such activity to our bottom line.

All told, mortgage banking activity generated first-quarter income of $35.2 million, exceeding the trailing quarter by $10.5 million and the year-earlier amount by $15.2 million or 76.4%.

Yet another very positive feature of our first-quarter performance was the continued improvement in our asset quality.

For the sixth consecutive quarter, we reduced our nonperforming noncovered loans and assets.

We also saw a reduction in the volume of net charge-offs and in the balance of loans 30 to 89 days past due.

At the end of March, nonperforming noncovered assets represented 0.85% total assets, and nonperforming noncovered loans represented 1.01% of total loans.

The first ratio reflects a 13 basis point improvement from the trailing quarter measure and a 73 basis point improvement year over year.

The second ratio reflects a 10 basis point improvement from the trailing quarter measure and a year-over-year improvement of 118 basis points.

Meanwhile, net charge-offs represented 0.05% of average loans in the current first quarter, reflecting a 2 basis point improvement for the trailing quarter measure, and a 9 basis point improvement from the year over year.

In addition, loans 30 to 89 days past due declined $50.8 million to $60.9 million, reflecting a linked quarter improvement of 45.5%.

Reflecting this reduction, the decline in nonperforming assets, the balance of total delinquencies, reflect a linked quarter improvement of 18% at March 31.

Partly reflecting the improvement in asset quality, we recorded a $15 million provision for losses on noncovered loans in the first three months of this year.

Meanwhile, our allowance for losses on noncovered loans totaled $136.8 million, representing 44.68% of nonperforming covered loans at the end of March.

The current March 31 measure was 254 basis points higher than the measure was at December 31, 2011, and 2096 basis points higher than the measure at March 31 last year.

The last highlight I'll mentioned before opening for questions occurred on the last business day of the quarter, when we announced the signing of an agreement assume approximately $2.3 billion of FDIC insured deposits from Aurora Bank FSB.

As I said at that time, this was an attractive opportunity to assume low-cost funding, and consistent with our focus on earnings accretive strategies.

Pending regulatory approval, we look forward to completing the transaction at the end of the second quarter, at which time we not only will receive these deposits, but also a payment of $24 million from Aurora Bank.

As I said at the start of this discussion, our ability to generate consistent earnings at a time when bank earnings are generally under pressure says a lot about the merits of our business strategies.

It also says a lot about the strength of our resilience and our confidence in the prospects of the Company.

At this time I would ask the operator to open the lines for questions.

As always, we will do our best to get to everybody on this -- if time allows.

Now, the first question please.

Bob Ramsey, FBR Capital Markets.

Good morning, guys.

You all had really strong commercial real estate loan growth this quarter, and I was wondering if you could share any color -- was there anything large or lumpy in there?

How are you thinking about the prospects going forward, and what did loan yields look like, particularly in the commercial real estate originations this quarter?

I think we had a couple of very attractive, large commercial loans that we decided that we would actually do.

The market is rich with assets of that caliber.

We have not chosen to continually add these large loans to the portfolio.

There were only two out of the ordinary in the quarter.

And certainly, I think be good news for us is that we have the capacity to do these kinds of loans, and certainly the opportunities are presenting themselves.

And with that being two loans, how much were those two loans of the total growth?

It was about -- the two loans in size were about $400 million in combination.

But the total growth was driven by the availability of lots of product besides those two loans.

And what was the yield, like, on the loans, the commercial real estate loans originated this quarter?

Commercial real estate loans for the quarter -- I'm not sure what the average was.

About 4%?

Roughly about 4%.

Great.

And then I did just want to ask you quickly about the expenses this quarter.

It looked like they were a little higher than the sort of targeted range.

How are you thinking about expenses going forward, and has your outlook for the year changed?

I think you all had said you expected to keep it more or less around $143 million plus CDI.

Bob, it's Tom Cangemi.

How are you?

I would say that guidance still holds true for the remaining of the year.

The elevation in Q1 was driven predominantly by elevated foreclosure expenses, coupled with a few extra million dollars unexpected.

So we expect to run at $143 million throughout the 2012 calendar year, excluding CDIs.

Great.

Thank you, guys.

Brad Ball, Evercore Partners.

Hi, guys.

Tom, I wonder if you can give us a sense as to the margin outlook from here.

It came in right in the range that you had guided last quarter.

And how much is there an impact from the average balances in the residential portfolio?

I guess, as far as the previous quarter, the quarter feels very similar in respect to the interest rate environment as Q1, given where rates are.

We still have a ten-year sub 2% on that range.

So my guess right now would be that similar range, between 8 to 10, again, going into Q2 down.

As far as the impact to residential, we had a significant drop at the end of the quarter for the warehouses, given the GC fee guarantee for the payroll -- Congress payroll tax benefit that was out there that was deliverable as of March 31.

That balance should pick up significantly going into Q2.

So again, I guess our elevation of higher mortgage banking warehouse in a range of $750 million to $1 billion on average.

Should pick up very nicely in April going forward.

So I guess that 8 to 10 is probably consistent with the previous quarter, that range -- down into 10%.

Okay.

Any comment on prepayment penalty fees going forward?

They came in quite a bit lower than they had been.

Typically, we never give guidance on prepay.

Again, the fourth quarter was a substantial number.

So when you look at quarter over quarter, it was very specific that don't expect to see a Q4 number in Q1.

But $17 million was in a range we are very comfortable with, and again, that's -- we budget the best we can.

It's something we can't control, but it's an elevated prepay environment, and we expect to see continued prepayment throughout the year.

It's been very active.

It turns out there were obviously more SATs in the fourth quarter and fewer SATs in the first quarter.

And that's not at all -- that's pretty much seasonal.

That's not all unusual for that to happen.

The level is clearly elevated.

And just stepping back after laying out the NIM guidance, what is the environment like that's driving the NIM here?

Lower asset yields declining faster than funding costs, obviously.

When can we hope to see a turn in that, if at all?

I guess my forecasted rates are 50 to 60 basis points higher for me.

In the belly of the curve, you'll see a substantial turn.

Obviously, right now it's been relatively flat throughout the year.

We've done fairly well based on our guidance.

We are running off of consensus on Bloomberg, and that's the expectations.

If you look at the out quarters, it's forecasted to be a little bit higher, so we are running off of Bloomberg consensus.

Our guess is that if rates stay around this level, you have some margin pressure.

But if rates do move up here a little bit in the belly of the curve, you'll see a significant amount of cash being deployed at much higher yields.

On the funding side, you're pretty much at a level of not going down much.

We had significant reduction of cost of funds over the past 3 years, but our average cost of funds for our retail operations are in the low 60s.

I don't see a whole lot more benefit, with the exception of the Aurora franchise coming on, which is an average of 20 basis points, which will help us a little bit going forward.

My last question on mortgage banking -- it was very strong this quarter.

We are hearing that same message from a lot of other big mortgage bankers out there.

Gain on sale seemed to be unusually strong.

Was that the case for you guys, and what did the gain on sale come in at this quarter?

Gain on sale has been consistent at 120 level -- the margin around 120 basis points.

The reality is that we are in the selling season, so obviously Q1 was much better than we expected.

Coming off a very strong Q3 of last year going to Q4 very strong, Q1 was obviously a stronger quarter than those previous two quarters.

So the expectation now is that April is looking strong, and rates are still sub-2%, so you have a refinancing wave continuing.

But what's interesting -- the change in our opinion is that there's been an elevated purchase activity.

The elevated purchase activity can be very meaningful for the mortgage banking model, given that if someone is buying a home, if it's 4.5% or 4%, it is still going to close the deals to close on their homes.

So we saw a significant uptick towards the back end of the quarter, to the tune of 70%/30% split between re-fi and purchase activity, which is a breath of fresh air going into 2012.

And Brad, another positive is that we actually gained share.

So we actually became a larger participant in that market.

Right.

I think our estimate right now is that we dropped to probably number 13 for correspondent and number 8 to table funding in the United States.

Okay.

Thanks very much, guys.

Mark Fitzgibbon, Sandler O'Neill.

Good morning.

Just two quick questions.

One, to follow up on the loan yield question, of the multifamily loans you have in pipeline, what would you say the average yield on those are?

I think you said 4% for CRE.

That was closed, not pipeline.

I've got you.

Mark, I would say in this is environment, obviously, rates are low.

You have the 5-year, which we pretty much price our 5s off the five-year treasury.

You're looking at probably high 3%s, mid-to high 3%s.

But historically over the past two or three quarters, we've been well over 4%.

This quarter we closed our loans in excess of 4% if you look back over the past 90 days, so our expectations are right now that rates are significantly lower, given market conditions.

And then there are some in the market that are actually pricing below the market.

Okay.

Secondly, I just was sort of curious of your thoughts on M&A environment.

Are you seeing any activity picking up?

More conversations out there?

Generally, what are you seeing?

There's definitely more conversation.

Whether or not there will be more activity, I think, depends on a lot of factors.

But there's definitely more conversation.

Thank you.

Rick Weiss, Janney.

Thank you, good morning.

With regards to multifamily, I wonder if you could talk a little bit about the competition?

And also, what's the multifamily loan pipeline?

Multifamily loan pipeline is pretty strong.

Obviously, there are holidays in the first quarter that change activity a little bit, so we expect the second quarter's pipeline to build, and then certainly the activity in the second quarter should be strong.

So I would say multifamily is going to continue to be an active product all through this year ahead.

So we are looking forward to good production in multifamily.

Rick, I would just say the majority of the pipeline is multifamily loans.

Oh, okay.

It would be like in the 50%, 60%?

It's close to 70%.

Yes, right.

70%.

Okay, got it.

Okay.

And how about with the competition in the multifamily?

There are various players, some that come and go.

The newest players in the multifamily, and both of them have been there in the past -- I guess Chase obviously was there as WAMU, and now they are there, obviously, as Chase.

And Astoria is there, but Astoria has been there before, and has left the market, and has come back to the market.

So Astoria is in the market.

Then there are the normal, smaller bank players that are pretty consistent in the marketplace.

So there are -- really, other than the two I mentioned, there are really no other significant changes in the marketplace.

It's a very -- because it looks like the yields are pretty low on the multifamily.

Is that strictly a function of the interest rates, or they are also being more aggressive competitors, would you say?

I'd say it's both.

I would say that there are some players in the market that are not that familiar with this particular niche, and obviously there are players that have bad alternative choices.

So when they look at the alternative rates that they might get, they are willing to accept lower rates on this asset, because their alternative returns are even worse.

So when you think of it in that respect, the market does have some activity that is below where the market normally should be, given the overall positioning of the marketplace.

And finally, you guys know better than I do how much you consider rates with a high dividend payout ratio.

Is there anything new that's been developed with regulators?

I think the most important thing to recognize in that regard is that our payout ratio is not new.

Our payout ratio has been high for many years.

The way our payout ratio goes down is when we do highly accretive deals, the price of our stock goes up.

So the single most likely change in our payout ratio will be a substantial increase in our earnings as a result of a highly accretive deal.

Rick, we follow SR 09-4, and that's the regulatory guidance we follow.

Right.

The guidance hasn't changed, Rick.

The guidance has been the same for years.

That's what I figured when you declared the dividend, but I just wanted to see if I can help clear it up.

Yes.

No, no, that's fine, that's fine.

Got it.

Okay, thank you very much.

Collyn Gilbert, Stifel Nicolaus.

Thanks.

Good morning, guys.

I just want to clarify a couple things that you said.

First, Tom, you said that the shift in the mortgage production went from 70% purchased to 30% re-fi?

No, vice versa.

It was -- historically, over the past few quarters, up until the third quarter, it was about 5% It went from 5% to 30%, so right now it's about 70%/30% going to the back end of Q1.

That's a very positive sign going into the selling season -- that a lot of the activity has moved to purchase.

That means that regardless of what the interest rate is, the individual will close the loans.

So if it's 4.5% or 4%, you're not going to lose that business as a fallout.

So the interesting factor is that we are seeing a lot of purchase activity in the United States, given the environment.

Okay, that's helpful.

You had mentioned the multifamily yield that you're seeing now are kind of in the mid to high 3%s.

Can you just remind us again of what the yields are of the production that is rolling off?

Well, not production, but --

It varies, it varies, it varies.

Yes.

Right now I'd say our coupon is probably close to 5% on average.

Our average coupon X prepayment, in our margin that we just disclosed last night is around 5%.

So I don't think you're going to see the magnitude of the bleed on the asset yield going forward, since it's been bleeding for a number of years, given the low interest-rate environment.

So your NIM guidance, core NIM guidance, of the 8 to 10 basis points of compression assumes a fairly consistent drop in the loan yield that we saw, maybe, from the fourth?

Absolutely.

Absolutely.

We are in a elevated refinancing wave.

The prepayment activity is elevated.

There's a lot of good business going on right now, and actually, our average lives have shortened.

Okay.

And then just want to follow up, Joe, on the two large CRE credits.

You said two credits comprised $400 million of outstandings?

About that.

It was actually a little more than that.

That's obviously a huge swing from what your bread-and-butter is.

Can you sort of talk a little bit more about that?

In actuality, we have been very consistently in the commercial market as well as in the multifamily market.

So the activity was -- presented unique opportunities on low LTVs to do qualified loans with very big sponsors that were very attractive sponsors.

So that's why we did the loans as we did them.

And there are plenty more of those loans out there.

It's just that we are being very consistent in our approach to doing those kind of loans.

So low LTVs, is that -- what does that mean?

40%s, 50%s.

Okay.

Are these in-market, were they in New York City?

All in-market, yes.

All in-market with extraordinarily good sponsors.

Okay.

So then if we look at -- because one of -- so that was really -- and Tom, you had said that the pipeline now has shifted back towards the multifamily focus, because obviously in the first quarter, it was much more geared to CRE.

It has been very consistent.

Obviously, as Joe indicated, 2 individual loans that totaled in excess of $400 million; the reality is that our business model is very consistent.

We have a very strong multifamily pipeline going into Q2, and then the Q1 typically is a slow quarter for us.

We had some nice growth in Q1.

We expect to see good loan growth this year, and if you look -- if you annualize what we have, we never give specific guidance, but we are moving towards that high single-digit net loan growth for the Company.

That could easily change, depending on market conditions and more favorably.

We are seeing very good volumes right now.

We are seeing activity, we are seeing purchases, we're seeing a lot of modifications on rates.

We are in an environment of elevated activity in the multifamily space.

Just one follow-up point on clarification.

Joe, when you talked about competition hasn't changed that much, how does a conduit -- you mentioned some of the larger banks that's in there, what about -- are you seeing any change in the conduit?

The conduits do commercial, mostly.

They don't typically do the bread-and-butter that we talk about as our multifamily.

So they are not presenting to us any unique pressures.

Okay, great.

Thanks very much.

I've said this many times -- the New York market is vast.

And things that sound the same -- there are lots of people that say they do multifamily lending, and most of the losses that occurred in multifamily lending, rent control, rent-stabilized, were not done by banks.

They are not done in our niche.

They are really a different product.

And I think that's what people miss.

They hear about others and think what they are doing and we are doing is the same, and in many cases, it's not at all the same.

Got you, that's helpful.

Thanks.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

Just a quick follow-up on the mortgage bank.

Could you talk about -- you talked about, obviously, the positive effects of having more purchase activity, but as the HARP 2.0 kind of rolls out, do you foresee that kind of adding to volumes?

Did it have an impact in the first quarter?

For our Company, it did not have an impact.

We are still evaluating the merits of HARP 2.

We did not have that portfolio that's coming off into the HARP program.

Since we are a fairly new originator, starting in 2010.

So for us, we're still in the evaluation process, if it's a program that it's worthwhile for us to participate in.

In other words, you'd be evaluating whether it's worth refinancing others.

Well, there's -- you have to look at the pros and cons there.

And then you have to be qualified.

We don't necessarily have assets that would fall into that program.

Our business would come from other banks that are looking for refinancing in that program.

Thanks.

Matthew Kelley, Sterne Agee.

There was an article in the Journal on Monday talking about Co-op City potentially looking to refinance that property.

I know it's your largest loan.

Any comments on that and the likelihood of that happening?

It's a great loan.

We've said this the 6 or 7 years we've been involved with Co-op City.

I think we have handled that property extremely well; it's been greatly improved as a result of the money that we've lent.

Over time the property was greatly renovated, positively.

And there's a new electric plant there.

The people there will do what's in their best interest.

If we can get a very low-cost government loan, they will take it.

And that's all the better.

Our participation with that loan has been a very positive event for the Bank and a very positive event for the community, and the outcome may very well be that they take a long-term lending from a government entity.

That's fine.

Does that loan have a prepayment penalty structure to your -- (multiple speakers)

Very large, yes.

Got you.

So you lose a pretty big yield, but get a big prepayment.

Right.

Exactly right.

Moving to commercial real estate, I know one of the loans was 350 Park Avenue, 375 coupon turbinado.

How much of that type of lending do you anticipate doing over the next couple of years, kind of classic properties?

I'd say relatively little.

I mean, Grenada is a party that we've been doing business with in the past, obviously a very strong sponsor, very, very attractive property, very good loan.

So it's not something that we are actively involved in, meaning there's far more product on the table that we could choose to do than we obviously do.

And in that unique circumstance we decided that was a loan that we would be willing to do.

Where do you see commercial real estate loans peaking as a percentage of total loans, at like 29% now?

I'd say probably they have peaked as a percentage of loans.

As I'd mentioned earlier, the pipeline is -- close to 70% is multifamily.

So the likelihood that that number is going to go down in the period ahead is very high.

Right.

Can you walk us through the methodology on reserve coverage?

Over the last year, you put on close to $2 billion of the commercial real estate.

Obviously high quality credits, but changing the nature of your composition and composition of your portfolio away from your traditional bread-and-butter, lower risk multifamily type loans, how did that have an impact on your reserve methodology versus your existing portfolio, which has held up pretty well in terms of loan content?

I'd say, importantly, and this is maybe unique to us and not to others, but the reality is we lose less money on commercial than we lose our multifamily.

And it doesn't change our risk profile at all.

So the way we land is demonstrated by the way we lose, as is the case for every single lender in the nation.

And certainly we have lost significantly less on commercial than we've lost on multifamily.

So the idea that we have a higher percentage of commercial would speak to a lower reserve requirement rather than a higher reserve requirement.

Matt, I would just add, historically, if you look at since the peak in 2010 March, the NPA book has dropped substantially.

We are expecting significant drops in the quarters ahead.

So obviously, as the NPA book declines dramatically and charge-offs are de minimis, you have a range of reserve, which -- once again, we are still at a high range of reserve at both the Community Bank and the Commercial Bank.

Last question.

How much of the $2.5 billion of commercial real estate you put on over the last 2 or 3 years here would be re quality, class A type property, similar to the 350 Park Avenue property?

You're talking about loans of that size type?

Yes, that size and that type of collateral.

Very, very, very little.

Very little.

Okay, thank you.

David Hochstim, Buckingham Research.

Good morning.

Could you just clarify what we should expect in the way of the tax rate?

It was a little bit higher this quarter.

Unfortunately, it's going to remain elevated.

I'd say low 36%s, 36.15%, 36.20% the range.

Okay.

And then on the -- in mortgage banking, how much more of a write-down could you have in MSRs?

It seems like you could --

That's all a function of the market at quarter end.

Obviously, where rates significantly rallied -- the bond market rallied towards the end of the quarter -- we had a net negative mark on the overall servicing portfolio.

We had a lot of amortization during the quarter, so that's something you can't control.

As rates were to rise, amortization would slow down with the existing MSR, and -- it's a function of mark-end, the end of the quarter mark.

Given that you have substantial origination volume, when we look at the business, we net the two, and mortgage banking operations was very strong.

If rates were to rise, you get a benefit on the MSR valuation.

How much -- what's the MSR at the end of the quarter?

It's like $14.3 billion UTB.

And so the MSR itself is how much?

It's -- I believe it's 0.3 cap, three times capital, 3.8 times multiple capitalization.

So I think it's about 0.97 is the valuation.

Okay.

And then --

So the book is about $139 million -- $139 million on the book.

Okay.

And then could you just again review the pricing on the new multifamily loans?

Are you seeing competition from -- you have talked about Fannie Mae as putting some pressure on rates in the past.

Have they gotten worse or better?

Fannie Mae is obviously still a market player, they set rates broadly for the whole nation, and certainly within our market.

But they are not the guys that are most active in our niche today that are affecting rates.

And there are just a couple of banks that are more aggressive than others.

And certainly, insurance companies are less present right now than they were -- two quarters ago or four quarters ago.

So I think that the marketplace is fluid.

It changes from time to time as to who the players are.

Currently there are a couple of banks that are actively trying to get into, if you will, the marketplace, this niche, and they are a little more aggressive than others.

So they may be in some cases 15 to 30 basis points below others in the same market.

I guess your option is to do less in the way of new originations or to accept lower rates?

Is that kind of how you think about it?

It's -- each unique loan presents an opportunity to make that judgment.

So if the attributes of a particular property are such that a lower rate is desirable, we'll go ahead and do it at a lower rate.

But the impact on rates generally is driven by availability of funding for the like product.

So as long as there are people in the market that are actually offering below a market rate, then that will have an impact on the rates that everybody gets in the marketplace.

If you think about a new loan originated, say, in April versus your marginal cost of funding that, the margin on that would be better than your overall book?

I would say it's factored into my -- in my down 8 to 10 basis points in Q2.

It's the market.

We can't control the shape of the five-year treasury.

If you look at where it is now at sub-1%, if you can get 300, that's wonderful, but right now it's 5-year tighter in it.

We were 325 two quarters ago, 350 two quarters ago.

I think it's tightened a little bit due to competition, but the reality is if you look at where we were up pre-recession, we were 110 to 150.

So the economics of the business model are still very strong, and we were funding it with very low cost of funds.

I think it's a very attractive alternative asset class versus other investment vehicles.

The amount of time that a player decides to be below the market is driven by many different factors.

It could very well be that they will just come to market rather than earn less money trying to gain share.

The desirability of gaining share is what drives people to literally price below the market.

So we'll have to see just how long they continue to play at that level.

Last question was did you sell about -- originate about $60 million of CRE loans for sale in the quarter, is that the right number?

Yes, that's right.

And the gain on that?

Yes.

It's actually spread over the --

It's insignificant.

It's spread over -- it's a bunch of transactions.

So it's not in the mortgage banking number.

No, no, no, no, no.

Thanks.

Mark DeVries, Barclays Capital.

Thanks.

Good morning.

It looks like your borrowing costs fell about 20 basis points sequential quarter.

Could you give us a sense for what contributed to that?

We paid off our TLGP last quarter in Q4.

That was the FDIC program, that was about -- just under $600 million.

And new borrowings are coming on the short end at 40 bps.

You see the rise in overall funding; it's at 40 bps, and the payoff of the TLGP, which is just around $600 million, that was a 4% type funding.

(multiple speakers)

Okay.

Great.

Could you give us a little more detail on the deposits you're assuming from Aurora -- what the average maturity, average rate is on that, and what you plan to fund that with?

Basically, the Aurora transaction is principally built up of $1.4 billion of brokered CDs and about $800 million of certificate of deposits.

But our overall recognition of the cost of funds would be an average of 20 basis points.

The life of this portfolio is very short on the brokered side; our expectation is to retain as much of the CD relationship over time.

Remember, this is part of the lien and bankruptcy transaction; therefore, these customers have been through the lien and bankruptcy, and they're still CD holders.

So it's been quite some time as they're holding on.

Their retention has been around 75% on the CD side.

Brokered CDs will be paid off as they come due.

That will end, probably, by the end of this year; it's not a long-duration book.

But if we can hold 75% at $800 million, it is still a transaction that was worth our while, and again, it's costing us 20 basis points net of the payment they're giving us of $24 million.

It's very low cost.

It sits in our Internet bank.

The first order of business is that we have, as we just discussed, organized funds that are 40; we are paying 20, you pick up 20 basis points the day we close the deal on a significant amount of that money.

Okay.

Is that going to result in an accounting gain in the second quarter as well?

Again, it's preliminary right now.

We don't expect to have any material accounting gain.

Okay.

And finally, can you just remind us on what you've been investing in in the securities portfolio to keep the yield relatively stable?

It's the same old -- for the past couple of years, we have been active in the Fannie Mae DUS program that's multifamily loans wrapped by the agency certificates at a level around 3% type levels.

Probably discount structures and callable agency.

All -- I'd like to say triple triple, but now they are double.

But it's all agency paper.

Okay.

Great, thank you.

Dave Rochester, Deutsche Bank.

Good morning, guys.

A quick question for you.

I don't think you've given this data yet.

The MSR valuation adjustment and the offsetting hedge this quarter?

Yes.

The MSR adjustment -- the net activity and sourcing was about negative $5 million.

Of that amount, I think we were flat on the hedge.

It was probably about $5 million adjustment to the MSR.

Okay.

So, sorry, so MSR was written down $5 million, is that right?

Yes, as of quarter end.

And the hedge offset that, or there was --

That's the net effect of it.

Bear with me; I'm trying to find my sheet -- I had it somewhere here.

I'm within close proximity of the number --

No problem.

If we don't have it, we can always get back to you, too.

Here we go.

Overall, the net effect of the servicing book is just under $5 million.

The income from the servicing is around $6.8 million.

That's the gross servicing fees.

And we had an $11.4 million net mark against the servicing book, and the hedging loss is about $200,000.

So net, it's about a $4.8 million loss in servicing.

Got you.

Okay, great.

Thanks.

And the increase in borrowings, I guess that was the stuff that was coming out of 40 basis points.

What's the duration on that?

It's 30 days, 2 weeks.

The good news -- when Aurora comes into play, that will be paid off.

Okay.

So borrowings should decline, the deposits come on, is that --

We will definitely see a decline in the borrowings, but we'll pick up around 20 basis points in that decline.

Got you.

And the covered loan runoff -- a little over $100 million this quarter.

Is that a pace we should expect going forward?

Is there any reason why that should reaccelerate from here?

Last year was around $55 million per month; now it's around $30 million a month.

Just on probably under $100 million per quarter.

Okay, great.

That's all I had, thanks.

Josh Levin, Citigroup.

Thank you, good morning.

You've spoken several times in the past about doing acquisitions that are only highly accretive to earnings.

I want to ask how do you think about potential M&A from a strategic perspective?

Would an acquisition have to be in your footprint?

Would you be willing to make a major acquisition that would change your lending profile so that multifamily was a much smaller part?

How do you think about it that way?

I think we've been very, very consistent.

We don't change our lending profile in any dramatic way as a result of doing transactions.

So if we do a transaction, the lending profile of the pro forma company would be basically transitional, conceivably, in the early months, because we don't go out and buy our loans.

We originate our loans.

So if we do a transaction, the geography of the retail bank, as is obviously proven by the AmTrust deal.

AmTrust is by far the most efficient retail banking that we do is in Florida.

And the second most efficient is in Arizona.

Those are two markets there that you or others might think are troubled markets to be doing banking in.

They're troubled markets for assets; they are not troubled markets for deposits.

So I think we said this many times before we ever did the AmTrust deal, and now we have absolute confirmation that we can do deals in very many different places in this country as long as we do the appropriate work in advance and we are able to integrate the retail bank, systems-wise, efficiently, we can run banks in different states very cost effectively.

And that's exactly what we would intend to do in any deal down the road.

So by far, the best deposit deal we ever did was not, let's say, Roslyn, which was a neighborhood bank.

We lost hundreds of millions of dollars in deposits in the Roslyn deal, because they were a high ratepayer and we were a low ratepayer.

The best deposit flow we had in any deal we did was the AmTrust deal.

So the opportunity for us is a national opportunity.

It's not restricted to a geography.

And certainly it doesn't change how we look at assets.

So the idea that we would continue to do exactly what we are doing today is very consistent with the 11 years or so that we have been doing deals.

I just want to follow up on that; that's very hopeful.

The two deals you mentioned, Ohio and Arizona -- I believe those were FDIC-assisted transactions.

Correct.

Do you think there are a lot more of those in the pipeline, also, that are meaningful?

I think the availability of FDIC deals will be driven by what happens in the marketplace.

I'm going to guess that there will be opportunities around the country of sizable deals that will be either driven by specific actions taken by the FDIC, or just market conditions that allow for highly accretive deals to be put together.

This is going to be a period -- the period ahead is going to be a period where there's going to be transition.

A lot of opportunity will arise in the three, and four, and six quarters ahead, and those opportunities we are well situated to take advantage of.

Thank you very much.

Steven Alexopoulos, JPMorgan.

Most of my questions have been answered.

I just had two follow-ups.

First, on the core loan yields -- they are down 50 basis points, just over that, over the past year.

Just from a 30,000 foot view, is there any reason to think, ex-prepays and what's going on there, that the core loan yields couldn't fall another 50 bps, particularly you're booking new loans at 4% or below 4%?

I think that number is pretty high, to be frank.

Obviously we had a substantial amount of prepayment activity in 2011, so when you look at the total margins, which is how we run our business model, it's been very active in creating significant value for shareholders.

If you look at the go forward marketplace and where our coupon is today, we are not near as high as a current coupon we were in '09 and '10.

So going into '12 you have a lower average coupon on the book, and you do have activity, but I think the reality is -- I think the magnitude of drop.

That would be too significant of a drop, personally.

One of the things to consider is that the average lives of our portfolio are within the 3 to 4 year range.

So a lot of the loans that are running off were only put on the books three or four years ago.

So rates have been, actually, not as high -- rates in the six and seven, and maybe even in the eight year, were higher than rates were in the nine and 10 and 11 year.

So the falloff rate is also going to go down, so the differentiation will narrow.

That's helpful.

Do you have any options to limit margin pressure outside of the prepay fees, maybe deploy some of the $2 billion of cash, or should we just think of this as loan yields come down, margin is going to compress in line with that?

I think you should look at it as that we are growing the business model; the prepayment activity which we put into our margin is part of our business model, is very active and elevated in 2012, as it was in '11, the highest year ever for the Company as a public entity.

But I think knowing that we are in an active multifamily model right now, with respect to modifications, as far as new business, gaining share, you will just have a good loan growth.

And I think if rates are slightly higher, you will see stabilization.

We are in a very low interest rate environment, and we are at -- close with sub-1%.

If you think rates are going to zero, then we will have a lower margin.

If rates are higher, which is highly probable in the short -- not short rates, but longer-term rates, elevated 40, 50 bps from here, you will see stabilization very quickly.

And just one final question.

Given all the comments on the mortgage banking pipeline being so strong, do you feel that the fees are sustainable at this level?

At least into the second quarter, are we still running about the same rate?

I think mortgage banking is going to be robust.

The good news for us is that Q1 was a very significant quarter given that is not the true selling season.

April/May/June should be an active time of year for the business model, and given where rates are today, between re-fi and purchase activity, you are seeing a very big shift in purchase.

That could drive the bottom line.

BofA, MetLife is at a correspondent business.

We picked up our slot as far as us being the top originator.

Right now we are -- we picked up one spot as coming from 14 down to 13 in correspondent, and on table funding, we're number 8 in the country.

So we are seeing good business.

Obviously that does impact -- it's impacted by rates.

If rates were to spike dramatically from the year, if we have a 10-year closer to 3%, my guess is re-fi would dry up dramatically; but we have the portfolio yields kicking in.

So we have a nice barbell strategy part of our business model.

And they've added significant value to shareholders since we've put them on our mix.

The reality of that we are gaining share is a very important positive.

As each month goes by, our ability to gain share only goes up, given the absence of some of the other players.

Got you.

Okay, thanks for the color.

Ken Bruce, Bank of America.

Thanks, good morning.

My question is really more of a follow-up to the earlier questions on the NIM and your NIM guidance.

I guess I'd like to understand a little bit better what is in -- what is assumed in the NIM guidance, in particular.

It looks like you had some borrowings that were a lot less expensive this quarter, and that was paying off high-cost borrowings as well as some rotation into some shorter tenor borrowings.

Do expect that to continue?

Is that -- how do you get to the, I guess, maintaining 8 to 10 basis points in NIM compression when --

We like to see stabilization, obviously.

We are running a fairly bearish interest rate model right now.

This is a low interest rate environment, as discussed in the previous calls, that we had a situation where there's five years below 1%, we lend off the five year, and we have investment yield sub-3%.

So asset yields are coming down, funding costs are relatively stable, so we are running that bear scenario into the out quarters.

We're following Bloomberg consensus, and you can go on Bloomberg and look at what the consensus is.

It's not a significant rise in interest rates.

If rates were to increase 40 to 60 basis points in there, you'd see, probably, stabilization.

I think I understand the asset side of the equation.

I guess I am more interested in your strategy for liabilities and funding.

Are you looking to rotate into shorter tenor borrowings or CDs in order to continue to provide some of the offset to the yields drifting down with -- (multiple speakers)

In the short-term, what we have is we have a bank deal closing on our books of about [$2.3] billion or 20 BPS.

That's going to assist us in dropping some funding costs.

At the same time, we won't be borrowing from home loan bank.

We'll be paying off debt from the home loan bank at 40.

So we are picking up some basis points right out of the gate once we close the Aurora deal.

In addition to that, we are in the market for growing our deposit base.

We are looking towards this environment as a growth market for deposits, in particular Florida and Arizona, and we are in the mean range there.

We are seeing some nice deposit growth.

If you look at our quarter-over-quarter growth, it's been significant for our profile.

We had deposit growth, and that, again, CD rates are at or around this level, give or take maybe 10 basis points lower than average coupon, so you're not getting a significant benefit there.

But if you look at our average cost of funds, including non-interest-bearing demand, we are in the low 60 basis points.

That's pretty low.

You can't get much lower than that.

Right.

What tenor CDs or borrowings are you taking currently?

The borrowings are short-term, which will be paid off upon closing of Aurora, and the CDs are within one year to 18 months.

That's just the market place.

No customers are really going past two or three years.

Rates are too low.

Thank you very much.

Theodore Kovaleff, Horowitz & Associates.

Good morning.

My question was answered.

Thank you, Ted.

Thank you very much.

Good to hear you.

That appears to be all the questions.

I would now like to turn it back over to Joe Ficalora.

Thank you so much.

On behalf of our Board and management team, I thank you for your interest in the Company and our first-quarter 2012 performance.

We look forward to chatting with you again in July, when we announce our second-quarter results.

Thank you so much.

Thank you.

This does conclude today's first-quarter 2012 earnings conference call with the management team of New York Community Bancorp.

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