Flagstar Financial Inc (NYCB) 2012 Q2 法說會逐字稿

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

Leading today's discussion of our second-quarter 2012 earnings will be our President and Chief Executive Officer, Joseph Ficalora, together with our Chief Financial Officer, Thomas Cangemi.

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 markets; changes in interest rates, which may affect our net income, prepayment penalty income, mortgage banking income and other future cash flows, or the mass market value of our assets, including our investment securities; changes in the demand for deposit loan and investment products, and other financial services; and changes in legislation, regulations, and policies.

You will find more about the risk factors associated with our forward-looking statements on page 8 of this morning's earnings release and in our SEC filings, including our 2011 Annual Report on Form 10-K and our first-quarter 2012 10-Q.

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.mynycb.com.

To start the discussion, I'll now turn this call over to Mr. Ficalora, who will provide a brief overview of our second-quarter performance before opening the lines to Q&A.

Mr. Ficalora?

Thank you, Ilene.

And thank you all for joining us this morning as we discuss our strong second-quarter performance, and the various factors that contributed to our earnings and asset growth.

We were very pleased to report diluted GAAP and diluted operating earnings per share of $0.30 for the quarter, together with diluted cash earnings per share of $0.32.

Our GAAP earnings rose 11% on a linked quarter basis and were up 9.8% for the year-earlier amount.

Our operating earnings rose 11.3% on a linked quarter basis and up nearly 16% year-over-year.

As you might expect, we also saw an increase in our returns on average tangible equity and tangible assets.

On an operating basis, our ROTE was 17.39% in the current second quarter, and our ROTA was an equally healthy 1.36%.

Our ability to grow our earnings despite the challenges and the difficult rate environment can be attributed to three core components of our business strategy -- the production of multifamily loans for investment, the quality of our assets, and the production of 1 to 4 family loans for sale.

For the purposes of this morning's call, I'd like to begin by talking about multifamily lending, and our ongoing ability to compete the loans in a very attractive niche.

Despite what you may have read or heard about others competing for product, we originated $1.3 billion of multifamily loans in the second quarter, boosting the current year's production to $2.3 billion.

At the end of June, multifamily loans totaled $18.2 billion, reflecting a $753.5 million increase since the end of December, and an annualized growth rate of 8.6%.

One of the benefits of this lending niche is the way we structure our product -- with a fixed rate of interest in the first five years, and a fixed or adjustable rate of interest in years six through 10.

The vast majority of our multifamily loans refinance within three to four years of origination.

And when they do, they generate income to form a prepayment penalty.

With interest rates at historical lows and refinancing activity rising, prepayment penalty income reached a record $32 million in the second quarter, increasing our net interest income and our average loan and asset yields.

As a result, our margin rose 6 basis points on a linked quarter basis to 3.30%.

The growth of our earnings also was due to an increase in noninterest income, largely reflecting the higher mortgage banking revenues.

With mortgage rates still at historical lows, 1 to 4 family lending increased, as did the income we produced by originating and selling such loans.

In fact, more than $2.6 billion of 1 to 4 family loans were funded in the current second quarter, reflecting a linked quarter increase of $180.2 million and a year-over-year increase of $1.5 billion.

In addition to the robust level of loans produced, the increase in mortgage banking income reflects strong pricing margins and higher servicing income.

As a result, mortgage banking income rose to $58.3 million in the second quarter, a five-fold increase from the year-earlier level, and a 65.9% increase from the level produced in the first quarter of this year.

I think it's also important to note that, as of this morning, our pipeline exceeded $4.4 billion, with loans held for investment accounting for just about $1.8 billion, and 1 to 4 family loans held for sale accounting for $2.6 billion.

As pleased as we are with the revenue growth that stem from our loan production, so too are we pleased with our asset quality.

In the six months ended June 30, 2012, nonperforming, noncovered assets declined $111.1 million or 27.1% to $299.3 million, and the ratio to total assets improved to 0.69% from 0.98%.

Furthermore, early-stage delinquencies fell $73.1 million or 65.5% from the year-end balance to $38.6 million at the end of June.

With net charge-offs declining 48.4% year-over-year, and 10.8% linked quarter to $13.9 million, the improvements in asset quality were across the board.

Furthermore, net charge-offs represented 0.05% of average loans in the current second quarter, a year-over-year improvement of 0.09%.

On the liability side, our balance sheet, we reported 9% rise in deposits to $25 billion, reflecting the deposits assumed in our transaction with Aurora Bank, which closed on June 28.

In anticipation of that event, we reduced our wholesale borrowings to $12.2 billion, reflecting a linked quarter decrease of 11.6%.

Last on my list of results to discuss, and no less important, is our capital position, which continues to be strengthened as our earnings grow.

At the end of June, our adjusted tangible stockholders equity represented 7.79% of adjusted tangible assets, consistent with the measure at March 31.

Furthermore, we were pleased to report solid regulatory capital measures, including a Tier 1 leveraged capital ratio of 8.53% for New York Community Bank, and a Tier 1 leveraged cash flow ratio of 13.30% for New York Commercial bank.

Reflecting our continued capital strength and the ongoing strength of our earnings, the Board of Directors declared a $0.25 per share dividend at last night's meeting, payable on August 17 to shareholders of record at August 7.

On that note, I would ask that the Operator open the lines for questions.

As always, we will do our best to get to everybody in the time that remains.

And now, the first question, please.

The floor is now open for questions.

(Operator Instructions) Bob Ramsey, FBR.

Obviously, this is a very strong quarter for mortgage banking.

I was wondering, one, could you share a little color on the gain on sale margin in the quarter?

And then, two, as you think about the outlook for that business, into the third quarter, given your pipeline, it suggests volumes will be up and I would guess margins will be stable.

So, given that outlook, is there any reason not to expect mortgage banking earnings in the third quarter will be at least as strong as the second?

Hey, Bob, it's Tom.

I would just look at the business right now and look at where rates are.

We saw a little bit of a drop-off in new purchase business because of the amount of refinancing that's happening, given the 10 years hovering around 150.

So, given that we have another refinancing opportunity in front of us as well as additional purchase activity, it's fair to say that mortgage banking activity is very robust going into Q3.

Now it's very early on, but we're seeing some very strong volumes.

In addition, we're able to release some good margins.

So, margins have improved significantly from Q1.

We're looking at margins as benefit from spread on the warehouse about 140 to 150.

That's excluding the spread on the warehouse.

So we're seeing about 25 to 30 basis points improvement over the Q1 in respect to actual realization of margins.

But another thing is that we clearly are solidifying our position in this market.

So, regardless of what happens with rates, regardless of what happens with refinancing, we are in a position to gain share in the market.

And that's always a very good thing, especially when it's as big as this is.

We have a very large platform and, obviously, we're generating a tremendous amount of loans.

The ongoing ability for us to do that, even as the markets evolve, should be very strong.

Okay, great.

And then could you also share your thoughts on the margin outlook from here?

In respect to the margin, obviously, the rates are -- you know, it's a very low rate environment.

We've done extremely well navigating through a tough environment with respect to prepayment activity.

And looking at prepayment activity in 2012 and seeing the continuation of a lot of activity between commercial mortgages and multifamily, the margins are going to be under pressure ex-prepayment activity.

But that's our business model.

We touch a lot of files and get paid a lot of [C's], but when you take out the prepayment activity, you're looking at overall down margins because of interest rates.

So, probably a range -- probably around 12 to 15 basis points on the short-term.

And that's -- I'm only giving guidance for the next quarter.

But if you add prepayment activity into that number, we're navigating very well by stabilizing the margin.

Okay, thank you.

Brad Ball, Evercore.

(multiple speakers) I wonder if you can talk about the kind of pricing pressure, if any, you're seeing in the multifamily market today?

And what kind of coupons -- what are the yields on new multifamily loans?

Brad, actually, the closing yields we have was close to 4%, just south of 4% for the quarter.

So, we're seeing reasonable returns in respect to the current interest rate environment.

Rates are very low.

But if you look at the where the [5A] Treasury is trading, the [loans] we're putting on, we're still in the mid-3's as far as the current pipeline.

So, last quarter, we closed the book just under 4%.

Although we have a higher yield rolling off and that's part of the pressure on the margin, we're seeing some reasonable returns, given the current shape of the yield curve.

It doesn't mean that there aren't some people out there that are well below where the market should be.

So the range is fairly wide, even though we're pretty consistent.

So, this spreads over the five-year CMT is still in the [2.25%] -- [2.75%]?

[2.50%] to [2.75%], and depending on the product commercial, maybe another 25, 30 basis points above that.

But we're closing loans close to 4% in the previous block.

Going to this quarter, you're probably looking at somewhere in the mid-3's.

And if you look at that indicative to the current treasury curve, that's around 300 -- close to 300 over.

Remember, a couple of years ago, we were getting [1.50%] on a consistent basis, and now we're getting substantial prepayment income when prepayment income was basically for the year, less than we get in a quarter.

Okay.

And then just separately, was there any income statement impact from the Aurora deal?

I know the deal closed just before the end of the quarter.

No, no.

So the $24 million you were paid didn't show up anywhere?

That will be amortized over the expected life of the shorter-term CDs and the brokered deposits.

Okay, got it.

Yes, we just really -- rolled it over a year -- 18 months or so.

Great.

Thanks very much.

David Hochstim, Buckingham Research.

I wonder, could you just again clarify what happened in the mortgage banking in terms of servicing income?

Were there any write-downs of (multiple speakers) --?

Actually, servicing income, we had some outperformance there.

I mean, if you look on a linked quarter basis, we had a $10 million swing.

We actually -- our net hedge effectiveness was probably off by $2 million, so we had [about] a loss of approximately $2 million net of the (technical difficulty) [loss].

So all in, servicing income was about $5.3 million.

So when you take the origination income of (technical difficulty) $52.5 million and get the two together, you're at $58.3 million in total.

But servicing income actually showed a positive income for the quarter.

So it's basically that that servicing -- so the swing, the $10 million sequentially was really because you had more (multiple speakers) -- less gain?

Yes, I mean, last quarter, we had a (technical difficulty) [applied] loss and a [hedging] activity.

This quarter, we had -- we effectively hedged our MSR within $2 million.

We had a loss around $26.5 million on the mark and we had a gain on servicing hedging at $24 million.

So, net is $2 million.

Okay, all right.

And I guess if prepayments are picking up, we can have more MSR write-downs at some point till you get to the end of that?

No, I think it's more predictable.

I mean, our expectation will be modeled on what we see on the actual acceleration, depending on the coupon that we have in the book.

Right now I think it's a [4.27%], is our current coupon that's on the books.

So, those rates, if rates go much lower, yes, that will be correct, but then the origination fees will be substantially higher.

So that's how we look at the business.

Okay.

So, pretty good balance --?

Yes.

And then could you -- how much of the origination volume in the quarter was not conform -- was not GSE?

I'd say 97%, 98%.

We have a very small amount of jumbo paper that we've been selling to the secondary.

So almost all would sell for the GSEs?

Right.

So you're -- but you're still building that business to --?

Yes, absolutely.

I mean, we have our partnerships lined up and we're looking at additional relationships in the future.

And I think right now we're moving into other product that could be available by year-end.

And we are spending time on the FHA positions down the road.

And hopefully, by the end of the year, we'll have our FHA carved up and running.

That's the expectation by the fourth quarter.

So we are working on being -- offering a full array of mortgage products that are out there.

You know, there's been some significant news in the industry; with Wells Fargo dropping out of the wholesale platform and BofA last year, it gives us the opportunity to gather more share.

We're in the position of hiring people right now, given that we're seeing a demand in the pipeline.

So we're very pleased about this opportunity, given that our origination stream started with new rules.

If you go back to 2004 and 2009, it was a completely different business model.

The rules have changed when we acquired AmTrust and we're operating on much tighter rules, so we have much less risk in respect to underwriting.

We only have about two years' worth of build, so this portfolio is only about two years old.

And despite the amount of volume that we produced over those years, our UTB on servicing is $15 billion.

So we have this constant refinancing wave continuing and we see rates even lower this year.

You'll see that refinancing continue as well.

I mean, what most of our business is on the West Coast of the country, and that to refi on the West Coast is significantly cheaper than it is on the East Coast.

And how much was refi in this quarter as a percentage of the originations?

I don't have that number.

(multiple speakers) About 70%.

Okay.

It's about 75% -- I'd say right now 25 (multiple speakers)

(multiple speakers) Refi of our portfolio?

Or refi of loans?

(multiple speakers) -- new business at 75% is around the -- (multiple speakers) I believe that that's actually happened towards the latter of the part of the quarter.

The beginning of the quarter, we saw significant purchase activity.

As rates trended lower, refinancing kicked in further.

So as of June, you had a much higher level of refi versus purchase.

But 25% on an average for the quarter, which was pretty much what we expected, given what rates are.

Okay.

And then finally, on the release you noted that core deposits were down about $200 million -- $300 million in the quarter.

What's driving that?

Is that -- I mean, are you prefer -- is there an opportunity to lower your cost of funds by emphasizing notes [of posted] CDs?

(multiple speakers) Well, our focus is, no question, to take advantage of low rates.

We're going to be landing at -- you know, in the mid-3's, our deposit rates are going to come down.

I think the phenomenon is that we've been reducing our rates for years now and many banks are catching up.

So for us to reduce our CD rates, for example, we would see less pressure on (technical difficulty) [run-off levels] a very significant liquid balance sheet.

We have over $3 billion of cash as of June 30.

So we're very comfortable in keeping our rates lower.

And we're not going to get (technical difficulty) [the best] that we saw two years ago, but we definitely have some room to reduce our deposit rates, specifically into the CD book.

So what about in core deposits, I was wondering?

A couple basis points down.

But those balances ran down.

The core deposits, I think, were down in the quarter.

Yes, we did adjust rates on money market accounts.

Okay.

All right.

Well, thanks a lot.

You're welcome.

Collyn Gilbert, Stifel Nicolaus.

Just want to get a sense -- you just kind of mentioned that -- Tom, about your liquidity position.

Where do you see the use of your excess liquidity going?

I mean, how should --?

I mean, we're very excited about the opportunities in the marketplace.

You know, we had -- it's a very low interest rate environment.

We're dealing with a lot of refinancing and we're getting paid to refinance our product.

But we believe that, given typically fourth-quarter is a very strong quarter for the Company, we have a very strong pipeline going into Q3 -- which is abnormal, if you look at historically for the Company, Q3 is usually a lighter number for seasonality reasons.

But we're going to put our money back into our product.

We're shying away from the investment securities market, given where the duration risk is right now.

So we're very comfortable going into a core product and lending.

And we have a lot of liquidity to lend.

Okay.

So the reduction in borrowings that we saw this quarter, is there more room for that?

Or do you really think (multiple speakers) --?

That was a function of the Aurora transaction; that was stated.

We took in $2.2 billion, $2.3 billion of cash.

As of quarter-end, we had some short-term [borrowing] and we paid it off.

(multiple speakers)

(multiple speakers) What was the cost of those borrowings?

(multiple speakers) -- that actually raised our borrowing costs, given that that was overall a very inexpensive funding.

But going forward, I don't envision any more further reductions.

Absent a merger transaction, we would not see any further reduction in borrowings.

Okay.

Okay, so the -- and you said in the press release -- I just wanted clarification.

On the CRE decline, I mean, I hear you on the multifamily, but I mean, are you expecting similar momentum and growth on the CRE portfolio as well, despite the paydown this quarter?

You know, we said in the first quarter, we had annualized growth in Q1 of 20%.

That was not reasonable.

We did say to the marketplace that we had some larger deals that we put on for participation, and those participations were completed in Q2.

That's where the runoff came on.

It was not because we were losing business.

We had -- we got into the market and did some very strong deals that we had partnerships that were closed in Q2.

So it's fair to say that you'll see CRE up from here.

But again, not an annualized run rate of 20% and I think it's more manageable.

So if you take the runoff in Q1, I would not expect to see those types of declines at all in commercial real estate.

If anything, you'll see the uptake of commercial real estate.

The CRE business will be generating for us fee income and then other opportunities to grow the business and sell parts of the business at the same time.

Okay.

Okay, that's helpful.

And then just one final question.

I mean, obviously, the refinance activity here is just enormously robust.

And how do you think about the portfolio longer-term?

I know, Joe, you mentioned -- you say that generally these -- the multifamily borrower every three to four years will refinance.

I mean, do you see any risks with that being extended out in the event that rates do go higher down the road?

I mean, just trying (multiple speakers) --?

I think the important thing to recognize is that their business model necessitates that they get recognition of the increased cash flows they generate in a three-year period.

So, even if they -- and let me say it differently.

If they anticipate rates are definitively going to go up, they'll actually come in sooner and refi.

So the activity for us typically goes up as rates are definitively going up.

People are willing to wait when they think rates are, in fact, continuing to go down or maybe will stay down for long time.

As of right now, people have been waiting -- remember how slowly activity was in '09 and in the beginning of '10.

And we've said since mid-'10, that we see growth in our actual lending and growth in our prepayment penalties quarter-by-quarter on a go-forward basis.

And that's exactly what's been happening.

We would expect that that would continue to happen in the period in front of us.

And Collyn, remember that as these contracts are written with a term of five years and they've been resetting to year six, the big option goes -- and they very rarely do go into -- except for the exception of the '08 crisis, when many customers did go to year six, they pay additional points.

They go back to five, four, three, two, one again.

So if that does take place, we get a 20 basis point pickup per year for five years, and then they're back into a prepayment roll date.

And given where rates are, as Joe indicated, you'll see acceleration of refinancing, knowing that rates may be rising.

Got you.

Okay.

That was all I had.

Thanks, guys.

(multiple speakers) The asset life is still within that 2.9 to 3.2 years, which is relatively short asset, given the returns that you can find in the marketplace.

Okay, thanks.

Moshe Orenbuch, Credit Suisse.

Could you just talk -- maybe flesh out a little more just your assessment kind of the competitive environment?

One of your kind of local market banks that hadn't been a competitor kind of evidenced -- said this morning that they were thinking about getting in, kind of dipping a toe in, I guess.

(multiple speakers)

You know, I think the important thing to recognize -- and I appreciate the fact that analysts listen to every word that is said by everybody and looks for some relevance in that.

The fact is that the people that are not in the market were very large lenders.

The structure debt lenders had a very large share of the market.

They were lending grossly excessive amounts of money to anybody that wanted money.

So those bad loans were made and those bad loans have failed, and those lenders don't exist.

So when we look at the future period, if three or four or five or six other banks come into the market, they're not anything near as relevant as the people that were in the market just a few years ago.

So, I think the idea that there are going to be lots of players, that's fine.

It doesn't mean that it's going to take the market and cause a shifting away from what we do.

I think you know that many different players have indicated a desire and demonstrated a reality that they're doing multifamily lending, at the very same time that we're increasing our multifamily lending.

So I think the bad news about the market is sometimes people are irrational with regard to rates or with regard to terms.

That makes the market a little sloppy.

It's not ever good when Fannie and Freddie are in the market, but Fannie and Freddie have been in the market for quite some time, and they're still affecting rates in the market.

So I think the important thing to recognize is what our numbers are.

It's not as though anyone new who's coming to the market is meaningfully affecting the marketplace, given the fact that they are replacing those that are no longer in the market -- meaning the very large structured debt lenders and others that were aggressive in the marketplace; those guys are not there.

Their loans all need to be refinanced.

They were held off the market for a period of time because of their structure.

Those loans have to be ultimately refinanced and they're all in front of us.

Great.

Just a follow-up on the mortgage bank.

What do you think was the most significant factor?

Was it BofA kind of exiting correspondent?

Was it Wells exiting wholesale?

Was it just the general level of refi activity --?

I would say for sure it's the general market conditions, given our rates are so low, we're able to release the margin here.

There's been some dislocations regarding the competitors.

We had a lot of rate loss.

This is -- rate loss in the quarter were up on a very short Q1.

That should be indicative going into Q3, given where rates are.

Now this business model moves very rapidly, but we're in hiring mode right now.

That's telling you that we are seeing significant business levels right now.

Thanks, Tom.

Steven Alexopoulos, JPMorgan.

On the margin, would the range for the core NIM pressure going up -- right, we're now seeing down 12 to 15 versus down 10 -- or 8 to 10 last quarter -- can you help us think through this?

Is it incremental asset yield pressure, just given the backlog of refi's?

Or is your ability to lower deposit rates starting to slow?

Just trying to understand incrementally why the additional step-down.

I think you hit it right on the head with that deal.

First of all, we look at it as not core margin.

Our margin, core margin, was repayment activity but if you want to call it that, no question that rates are lower.

So you have 5% loans rolling off and you're putting on 3.50% to 4%, that adds pressure on the margin.

We're offsetting that pressure with the expectation of lower deposit costs, and more importantly, prepayment activity, as we go through our business model, and touch a lot of files and build a book.

We expect to see loan growth.

We expect to see some very strong mortgage banking revenues as well as elevated prepayment activities.

So we're going to manage through this tough margin environment.

However, the margin is still very strong -- the way we look at margin, which is our true margin, which includes [C's].

Yes.

Yes, I think the important thing to recognize is this is not new.

In every turn in interest rates, we've had the same benefit from our prepayment activity going up as, in fact, the rates are coming down.

So, the likelihood is that -- and this is very public -- the new rates in the market are significantly lower than the rates that are in the portfolio.

So, if we didn't have the benefit of prepayment, we would have a significant decrease in our margins.

But we do have contractual prepayments.

And therefore, we have an insulation factor that is consistent with what has happened period after period after period.

Okay, that's helpful.

When you guys think -- I know there's a lot of pieces to the margin, right?

But when you think about core net interest income, we're going to benefit from the prepayment income, that's pretty clear.

Can you grow core net interest income in this environment with this kind of pressure, given you do have good earning asset growth?

I mean, obviously, you know, we had a nice boost from our warehouse.

We said the warehouse would be up.

That was up two-fold on a linked quarter basis.

So assuming mortgage banking is elevated, we can build the warehouse business, that's a very high yielding asset class.

We've been reluctant to put out securities, given the risks in respect to interest rate risk; but in the event rates do go up, we would put $2 billion into that business, given that we've been reluctant to put any money in there.

But we're at the lowest level we've been as a public company in respect to securities for assets.

So we have many levers to pull at the appropriate time.

We have been managing the balance sheet super-conservatively.

And most importantly, our credit profile is stellar.

And I think looking at the deals that we may lose to the marketplace, we will not lose because of a [8 -- a 1/8] on an interest rate; we're going to lose because a bank will give more credit.

And that's where we differentiate ourselves as the true player in this business model.

Just one final question.

The Fed may be out with something next week, right, to further flatten the curve.

We'll see it maybe September.

Is there an absolute level of yield right on the multiproduct where you start to pull back to protect ROE and margin?

Thanks.

I mean, we're in this business for our shareholders.

We lend into this space.

So if the five-year is at 0, we'll get 300 basis points.

So that's -- going back to my last point, last quarter, we lend off the five-year ability of the curve.

We're not a 10-year lender.

We're not a 30-year lender.

So in the event, in that situation, mortgage banking will have significant benefits with lower rates.

In the five-year ability of the curve, if it's at 20 basis points, not 50 basis points, you'll see pricing probably increase a little bit.

So, we'll do north of 3%.

And you have funding costs zero.

So we're still going to have reasonable returns.

Our overall return on average assets, tangible assets, are [1.30].

That's a pretty strong showing compared to our peer group.

Okay, thanks for the color.

Ken Zerbe, Morgan Stanley.

Just a couple of quick ones on mortgage banking.

I guess, first of all, just on the gain on sale, a couple of the other originators are saying that they're not going to go any lower on rates, so they're going to try to hold rates.

I mean, is that -- just to be clear, is that the main reason why the gain on sale margins are still so high?

And are you seeing any change in incremental rates or yields being offered on mortgage, that could actually bring the gain on sale margins down going forward?

I think that's part of it, Ken.

I think also -- remember, it's done serious dislocation with some of the major players exiting.

So when you have major dislocations going on and -- we're a wholesaler, so we're not a retail originator.

We're a national wholesaler.

And you take out the two largest players in the market, you can release some margin and make some market [objects].

So we've been able to join that benefit.

But we're going to grow between [1.20% to 1.60%].

And this particular quarter, we picked up another 25 basis points because of competition.

And as you indicated, many banks are getting more money in the business because rates have not fallen as much, indicative of where the [10-year] has been trading, which we kind of -- where we reprice the [FMCL].

Okay.

No, that helps.

And then just another quick question, are you guys originating any HARP business?

No.

We opted not to go with that program.

Perfect.

Okay, that's it.

Thanks.

You're welcome.

Dave Rochester, Deutsche Bank.

Where are the roll-off rates now on the CRE and multifamily?

Are those high 5's?

Low 5's?

Just some sense there.

It's in the 5's.

In the 5's?

That's going to end soon, over the next quarter or two.

There's a point in time where there's just -- there are no more 5's left after a couple of years of this.

So I think we're coming to that stage, which hopefully, by next year, early next year, you'll have much lower coupons that will have to rethink themselves about refinancing.

Yes.

Yes, that makes sense.

And just on the -- I hear you on where the pipeline rates are in multifamily in the mid-3's.

We heard from brokers over the last few weeks that I guess pricing maybe has come down again for the market to maybe the low 3's -- maybe another 25 basis points.

Have you guys seen any of that pressure as well?

No.

I will tell you that we are seeing some in the agency space.

And that also has the old maintenance provision.

So, we priced in the prepayment structure versus the yield maintenance, we get 25 to 30 basis points more in economics, but they have the yield maintenance contracts.

So I think that's probably correct for Fannie Mae.

For after, I think the portfolio lenders are getting a reasonable spread of the five-year CMT.

It's your five-year lenders, right, all dealing with some 10-year paper, and then some guys doing high-yield paper.

But we try to stick to our knitting and focus on our core business, which is that five-year product.

You know the brokers are telling you about what's out there, because there are new players in the market that need to demonstrate that they're getting some assets.

And the only way to get them is by being somewhat irrational -- I/O, lower rates, longer terms.

They try to buy the loan with terms.

And certainly, that does make the market sloppy.

It doesn't necessarily mean that we have to do what they do.

But I think you will hear about lower rates and other terms that are not consistent with what we do.

All right, great.

Thanks, guys.

You're welcome.

Matthew Kelly, Sterne, Agee.

Just first on the margin guidance, you know obviously, Q4 and Q1, 8 to 10 basis points down goes to 12 to 15 basis points.

Is there any reason to not extrapolate that type of sequential pressure going forward?

Yes, I think there is.

I think there's going to be a point in time when we trough.

Now, I'm not going to say what quarter we trough, but as every quarter goes by, goes back to the thesis of at 50 basis points on the five-year [CMT], we're making 300 or 250, and then with funding costs at close to zero, you're getting close to that trough level.

So we give very short dated guidance.

We don't want to give guidance but we give it because it's obviously -- it's our business.

And as you look -- think about how we look at the margins, we look at it on -- including fees.

And given the elevation of refinancing activity and just business in general, we are seeing very robust prepayment activity.

And we will see that, the continuation, in the foreseeable future.

And when Mr. Ficalora talked about it in the early year, he said last year, we made close to $90 million and [now we can make] over $100 million.

You know?

And that was in our early guidance, but we're seeing that come to fruition now.

So, I think when you look at the business -- and again, we are a commercial real estate originator, predominantly multifamily, and every contract we write has [fee structurings] on.

And we're seeing lots of activity.

So, going back to your point, yes, the margin is under pressure, given interest rates -- we can't control interest rates; but we believe we have a very strong business model to balance right now, moving the economics where we're generating reasonable returns for shareholders.

And we're seeing that nice return on average assets north of [1.25-ish%] and return on tangible equity at around 17% in a tough environment.

Plus, Matt, we are originating loans for others, so the fee income that we get in our mortgage bank is obviously very, very positive.

And likewise, we're beginning to do that in commercial assets as well.

So we are originating assets and getting paid fees, even though we're not necessarily portfolioing those lower rates.

Weren't you generating fees from kind of commercial, lead bank participation origination fees?

I don't have that number.

At this juncture, it's not that much; but the reality is that we are positioning ourselves to move further into that business.

Okay.

Just getting back to the yields real quick.

I mean, I know right now you're at [2.50%] over the five-year.

But if you go back to kind of '05 to '07, before the bottom fell out of the overall market, that spread was down like [1.50% to 1.75%] (multiple speakers).

Yes.

Yes, different world.

(multiple speakers)

(multiple speakers) Yes, I know, but is there (multiple speakers) --

Every Wall Street house in the country was putting this stuff into package via transactions.

Sure.

But in the chase for yield, then watch more competitors coming in, why can't we see additional compression and spreads over the next year if we stay in this overall rate environment?

We don't have a crystal ball.

I don't see that coming, but we don't have the crystal ball.

Last question.

Basel III and just the new capital guidelines -- have you given any thought to how that might change your risk-weighted assets?

We looked at it very, very briefly and we did some quick numbers.

We have 300 to 400 basis points of cushion based on -- and the big offset is at the MSR predominantly for us.

Okay.

Okay, thank you.

You bet.

Mark DeVries, Barclays.

Could you give us an update on the opportunities you're seeing for acquisitions?

Well, the market is definitely rich with discussion.

There are lots of people that recognize that their particular business model is not well-suited for this evolving environment.

So, we do have conversations with people.

We've been very clear that we've been less willing to be active in smaller deals, mainly because of the consequence regulatory change presents over $50 billion.

So we're being very disciplined in not actively looking at smaller banks, but we are considering larger deals.

And there are certainly opportunities out there to be seriously considered.

Okay.

And when you say larger deals, is there an asset -- minimum asset size that you guys have in mind?

You know, I think that -- we're contemplating that, in combination, we would be $60 billion or better in order to basically accommodate the burdens of being bigger than $50 billion.

There's a lot of work that we're doing to prepare ourselves to be a SIFI bank.

It's good for us to do this work, because ultimately, deals can evolve relatively quickly.

But in this environment, there's a lot of preparatory effort that must go into making sure that everybody's onboard, including all of your regulators.

This is a specific regulatory need, because the rules from the regulator change, once you go over $50 billion.

Okay, thanks.

And then on the G&A, how much of the increase in the quarter is related to REO expense?

And how much was (multiple speakers) --

(multiple speakers) I would say -- yes, I would say the guidance we had for Q2 is about $145 million.

And about $5 million additional expenses, I'd say half of that was related to increased expected foreclosure and REO expenses.

And the other addition was just variable costs associated with the mortgage banking operations.

As we see more income, we're going to see a little bit more variable costs.

We have a lot of leverage there in the mortgage bank, but you'll see some incremental costs going into the year if mortgage banking continues to be robust.

As I stated previously, we are in the mode of hiring more contract underwriters.

We see some very good business lines, so we're gearing up for a very strong third quarter as well in mortgage banking.

So we have to spend some variable costs there.

But for guidance for Q3, my guess, depending where foreclosure expenses and REO expenses come in, and we have a lot of reductions of NPAs in the given quarter, I'd say $145 million is probably a reasonable range for Q3 for operating expenses, excluding CDI.

Okay, that's helpful.

Thank you.

You bet.

Mike Turner, Compass Point.

Given the low rate environment, it just seems like you guys are doing everything right -- not giving on credit, not changing your underwriting standards.

As we look out in the future, any thoughts to -- or any changes to your thoughts on refinancing your liabilities?

You know, we -- obviously, we've said this many, many times and many, many quarters, given the punitive impact of capital and the size of our wholesale book, we would restructure that in conjunction with a merger transaction.

We believe that's the right time to do it.

We think to do it in this environment, to earn back the capital if the time is way too long, it's well over five years, something we would not want to bring to our shareholders depending on market conditions.

Now, if rates change, you have more flexibility there.

But in this current rate environment, some of this stuff rolls off next year.

And as we get closer to '15 and '16, we'll start seeing some more rolling off and getting closer to maturity as we roll down the curve.

But given where rates are today, the -- out of the money value of that liability is substantial.

You know one of the things to recognize is, that gives us a definitive means of making a better bank.

So, in combination with someone else, we have the ability to withstand some of the adversity that may be out there six months, 12 months, 18 months, because we will have the ability to automatically restructure earnings in a way that favorably impacts the pro forma company.

So that's a deal benefit that actually helps both parties.

I think what's very important, if you look at the balance sheet as we stand today, our wholesale liabilities to total assets is at its lowest point probably in a good 10 years, just south of 28%.

The goal here was to get it [below 30], we're there.

We're going into an environment where we have an opportunity to take advantage of some reasonably good acquisition opportunities if priced effectively, where we can create value for shareholders.

So we've been very cautious on growing that wholesale liability book so we're not imbalanced; it's manageable.

And we'll deal with it as we look at acquisition opportunities.

Thanks.

That's very helpful.

And our final question comes from Mark Fitzgibbon with Sandler O'Neill.

Go ahead, please.

(multiple speakers) I wonder if, first, you could share with me the average rate on the multifamily loans you have in the pipeline.

Do you happen to have that?

Mid-3's, Mark.

I mean, I said, I think, earlier in the call, that we closed around 3 -- just 3.90-ish or just south of 4% for the quarter.

So what we're seeing in the pipeline for multi is probably mid-3's, commercial, add another 25 BIPS to that.

Okay.

And then secondly, how much do you have in CDs and borrowings maturing in the second half of this year?

It's a couple billion dollars.

And I'd say probably $2 billion to $3 billion the next six months.

And [at] high coupon [depending on 1.22%], I would think.

[1.22] on the CDs?

Yes.

Okay.

Great, thank you.

You bet.

And we have no more questions at this time.

I'll turn it back to Mr. Ficalora for closing remarks.

Surely.

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

We look forward to chatting with you again in October, when we report our third-quarter 2012 earnings, and wish you an enjoyable summer in the interim.

Thank you.

Thank you.

This does conclude today's second-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.