Flagstar Financial Inc (NYCB) 2013 Q1 法說會逐字稿

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

Leading today's discussion of the Company's first-quarter 2013 earnings will be the President and Chief Executive Officer, Joseph Ficalora, together with Chief Financial Officer, Thomas Cangemi.

In addition, Chief Accounting Officer, John Pinto, is on the call.

Certain of the comments made by the Company's management today 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 the Company currently anticipates due to a number of factors, many of which are beyond its control.

Among those factors are general economic conditions and trends, both nationally and in the Company's local markets; changes in interest rates which may affect the Company's net income, prepayment penalty income, mortgage banking income, and other future cash flows; or the market value of its assets, including its investment securities; changes 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 the Company's forward-looking statements beginning on page six of this morning's earnings release and in its SEC filings, including its 2012 annual report on Form 10-K.

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'd like a copy of the earnings release, please call the Company's Investor Relations Department at 516-683-4420 or visit ir.mynycb.com.

After the prepared remarks, we will have a question-and-answer period.

(Operator Instructions).

To start the discussion, I'll now turn the conference over to Mr. Ficalora, who will provide a brief overview of the Company's first-quarter performance before opening the line for Q&A.

Mr. Ficalora.

Thank you, Johnny, and thank you all for joining us this morning as we discuss our first-quarter performance and the primary factors that contributed to our results.

While the low level of market interest rates continue to pose a challenge, our earnings rose modestly year over year to $118.7 million and at $0.27 per diluted share were consistent with the year-earlier amount.

In addition, our first-quarter earnings provided a 1.19% return on average tangible assets and a 15.34% return on average tangible stockholders' equity.

Our cash earnings, meanwhile, totaled $128.6 million and were equivalent to $0.29 per diluted share.

Reflecting the contribution to capital of our first-quarter cash earnings, tangible stockholders' equity rose to $3.2 billion at the end of the quarter, representing a 7.75% of tangible assets, excluding AOCL.

Among the factors contributing to the first-quarter performance were meaningful loan and deposit growth, the strong and improving quality of our assets, and the stability of our margins.

To begin, loans held for investment grew to $28.1 billion in the current first quarter, reflecting an annualized growth rate of 12.2%.

The increase was primarily driven by multi-family lending and to a lesser extent the production of commercial real estate and one- to four-family loans for portfolio.

Multifamily loans totaled $19.2 billion at the end of the quarter, representing 68.4% of total loans held for investment and an annualized growth rate of 13.4%.

In addition, multifamily loans represented $1.57 billion or 69.3% of loans produced for investment in the first three months of this year.

Commercial real estate loans rose a more modest amount to $7.5 billion and accounted for 26.8% of total held-for-investment loans at March 31.

Looking ahead, our pipeline of loans currently approximates $3.5 billion with loans held for investment accounting for approximately $1.8 billion of the total and loans held for sale accounting for approximately $1.7 billion.

Another first-quarter highlight was the continued improvement in the quality of our assets with the balances of nonperforming, noncovered loans and assets declining from the balances at March 31 and December 31, 2012.

Specifically, nonperforming, noncovered loans fell 36.8% year over year and 25.9% linked quarter to $193.6 million, representing 0.62% of total loans at the end of March.

Nonperforming, noncovered assets declined 28.1% year over year and 9.2% linked quarter to $263.9 million, representing 0.59% of total assets at quarter end.

Our measures at March 31, 2013 are even more impressive when compared to our measures at March 31, 2010, when the great recession was at its peak.

In the past three years, the balance of nonperforming loans declined 73.6% from the Company high of $734.7 million, and the balance of nonperforming assets fell 64.8% from a Company high of $750.8 million.

In addition, loans 30 to 89 days delinquent declined 67.5% year over year to $19.8 million.

On a linked quarter basis, the balance was down 28.2%.

Furthermore, our net charge-offs represented 0.02% of average loans in the current first quarter as compared to 0.05% and 0.01% in the prior periods.

Meanwhile, total deposits rose $600.2 million in the first three months of this year to $25.5 billion, representing 57.2% of total assets, while borrowed funds declined to $13.2 billion, representing 29.6%.

Turning now from our balance sheet to our income statement, I'd like to say a few words about our net interest income and margin, which were $275.2 million and 2.95% respectively, in the first three months of this year.

As you know, our net interest income and margin are impacted by a variety of factors, including the prepayment penalty income generated in connection with the prepayment of our multifamily and commercial real estate loans.

In the first quarter of 2013, prepayment penalties contributed $19.9 million to our net interest income as compared to $39.3 million in the fourth quarter of 2012.

Of the fourth-quarter amount, $17.9 million stemmed from one pre-payment of $545.5 million loan relationship with a single borrower.

Excluding that prepayment, the contribution of pre-pays to our fourth-quarter net interest income would have been $21.4 million, and the contribution to our margin would have been 24 basis points instead of 43.

Not considering prepays, our margin reflects a linked quarter increase of 2 basis points.

Largely reflecting the decline in prepayment penalty income, our net interest income and margin were lower in the first quarter than they were in the year-earlier and trailing three months.

Nonetheless, these declines were substantially tempered by the growth of our interest earning assets and by the reduction in our cost of funds in the corresponding periods.

Reflecting the repositioning of borrowed funds totaling $6 billion in late December and early January, our average cost of borrowed funds fell 55 basis points linked quarter and 31 basis points year over year to 3.35%.

As a result, our overall average cost of funds fell 20 basis points linked quarter and 28 basis points year over year to 1.61%.

While the reduction in our net interest was largely attributable to the decline in prepayment penalty income, the reduction in mortgage banking income was largely a function of seasonality and a decline in the refinancing activity as residential mortgage interest rates increase.

As REIT financing activity fell, so, too, did the production of one-to-four family loans throughout the nation.

As a result, mortgage banking income totaled $26.1 million in the current first quarter, down $9.1 million from the year-earlier level and $6.5 million from the trailing quarter amount.

Lastly, we were pleased to report that our Board declared a quarterly cash dividend of $0.25 per share.

The dividend is payable on May 17 to shareholders of record at the close of business on May 7, 2013.

The dividend we declared last night was the 76th consecutive quarterly cash dividend since its inception and our 37th consecutive quarterly cash dividend of $0.25 per share.

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 remaining.

And now, first question, please.

(Operator Instructions).

Ken Zerbe, Morgan Stanley.

My first question is just on the net interest margin.

I think last call you had mentioned you expect stability in NIM sometime around middle of 2013.

Do you guys still view that as a likely outcome?

And if so, maybe you can just help us understand how much flexibility you have to lower deposit costs as your assets reprice lower, excluding any kind of additional restructuring.

Thanks.

It is Tom.

Obviously, our margin came in slightly better than what we expected in Q1 from the last call.

If you recall, we have guided down 3 to 5 basis points.

We came in ex pre-pay up 2. Given the interest rate environment, there's been a change in the market interest rates, but loan yields are still coming on at a reasonable level to spread the five-year treasury.

So we're seeing -- we will call it a [slight beat] in Q1 based on higher loan yields, as well as a conservative estimate on the restructuring that we did in Q1.

But it feels like we are still at a slight decline.

So Q2, I will give specific guidance for Q2 down 5 to 8 basis points, and again, we hope that is conservative.

There is a significant change in overall yields.

However, we are seeing a nice drop in our funding costs, in particular, the borrowing side.

We had indicated we had done a restructuring early on in the beginning of Q1.

And we're probably going to see further reduction in our overall borrowed funds in the next couple of quarters given that we have about $760 million maturing at a higher cost of funds rate, around $3.10 as the coupon is rolling off.

So market rates are much lower than that.

Again, we are seeing slight compression here given the change in interest rates.

Offsetting that is the significant activity on pre-pay.

I'm pleased to say that despite when you look at Q4 versus Q1, Q4 was a very active quarter, and Q1 we had a reasonable showing of prepayment activity.

We expect to see some very strong prepayment activity throughout the year given that we are seeing good property sales and some large commercial real estate transactions refinancing.

So we should probably see some stability from prepay, and depending on the level of mortgage banking income, that should also add to the bottom line.

Got it.

But just to be clear, the 5-day basis points NIM compression in the second quarter and then for the second half, would you expect modest compression from beyond that?

Again, it seems like we're bouncing around here.

But we are close to stabilization.

Given the change in interest rates, maybe we were off by a quarter, but that will be significantly made up on prepayment activity.

Got you.

And has prepayment activity picked up in the first month of the second quarter?

It appears that we have some very large transactions that will sell to the marketplace and refinance within the marketplace beyond our control.

Commercial real estate activity has been very strong in the New York region, so we are seeing elevated levels, as expected.

But this is a cycle that we're seeing, so we're seeing some good prepayment activity.

We are very pleased with Q1, and we think this will continue.

Perfect.

And then just one last question just on mortgage banking.

I think a lot of other banks have talked about mortgage banking revenues trending lower, just given lower gain on sale margins over the course of the year.

But you guys talked more about seasonality in terms of a weak first quarter.

Is there anything that makes your portfolio, your origination platform different from most of the other banks that we look at that you would get a bump up in second quarter?

I would tell you that we're pleased to look from December lows -- December was probably the low point of actual rate lock activity.

Rates are bouncing around at the end of the fourth quarter.

It was a difficult Q1 in respect to the overall refinancing rates.

So given that we are a wholesale aggregator, we saw some real slowdown in activity.

But January, February and March, each month was a gradual improvement.

We're going into Q2 into the buying and selling season for housing, and housing is relatively strong in the US.

So we're seeing a good start of April.

So it seems like -- I don't want to go out on a limb here, but it seems like Q1 should be better than Q1, just given what we're seeing in April, and then rates are a little bit lower.

I think the single rate being around a 3.30% to 3.50% level, it's a decent business, around 35% purchase activity, which is an improvement from the previous few quarters.

If that swing note rate happens to fall to, let's say, 3.15%, 3.20%, then we'll see some more refinancing activities.

So it seems like we're seeing some better mortgage banking volume right now.

It's a little early.

It is highly rate-dependent.

And remember, we are not involved in a HARP program, so we're not getting that benefit, but we are seeing some elevated levels that fit currently.

All right.

Thank you very much.

You bet.

Collyn Gilbert, KBW.

So just to quickly follow up, Tom, on your comment about maybe prepayment income being higher in 2013 than what we would have thought going into the year, does that then mean correspondingly lower loan growth?

Now, Collyn, I will tie you that --

No.

-- we feel pretty close about loan growth.

We grew out our overall held-for-investment portfolio of net 12% annualized, multi-family of 13%.

So we're seeing some very strong numbers going forward.

Competition is always strong, but we do a good job getting our share.

So we have a pretty strong pipeline, $1.8 billion versus the previous year of $1.6 billion.

If you recall, last year we closed $2 billion in Q2 2012.

So we see pretty strong growth going forward.

You're going to have some large transactions and some other activity that we will trade away, but we are getting our share of business.

There's no correlation between prepayment penalties and loan growth.

If you look at last year, we had strong loan growth, as well as some of the strongest prepayment penalties that we've had in many years.

So the ability for us to actually gain share or produce loans is not in any way tied to loan growth.

Okay.

And then just a question on expenses.

You guys saw a big drop in G&A expenses this quarter, and I know you had cited the FDIC premiums and then lower legal and professional fees.

Is that a real number going forward?

I mean are we looking more now at that $150 million run rate versus the $153 million, $154 million that I think, Tom, you would have guided to in the past?

Actually, I'll give you specific guidance.

We are looking at probably around $146 million, $147 million a quarter.

And that is ex-CDI, so we can carve out core deposit intangible.

The reason being, we've had a lot of expenses in the previous year associated with capital planning, getting ourselves prepared for Dodd-Frank changes, and that was a significant number.

So going forward -- as well as we had a lot of foreclosure expense last year to manage some of these assets off the books.

So it seems like expenses are going lower.

And then the run rate I will give you today would be, like, $146 million, $147 million per quarter, ex-CDI.

Okay.

That's helpful.

And just one final question on the provision.

I know that jumps around a bit given what the loss expectation is on the covered loans.

How should we be thinking about that going forward?

I don't know if you can answer it by saying what your loss rate expectation is on the covered loans or just trying to get a better sense of how we should be thinking about the provision?

That's covered, and given the quality of the portfolio, hanging around charge-offs, so if we -- the amount of charge-offs that we do on a quarterly basis should be approximate.

If you look at the overall covered portfolio, if you net that against the FDIC indemnification, it is not a big number.

So I don't even want to give guidance there.

So, just, you know --

All right.

So just think about the provision matching net charge-offs.

Approximately.

Asset quality is showing nothing but positive strength.

It seems like we've got through the worst of things, and we are only seeing positive trends in asset quality continuing.

Okay.

That's great.

Thanks, guys.

You bet.

David Hochstim, Buckingham Research.

Can you just tell us what the components of mortgage banking income were in terms of the MSR revaluation and servicing income, and what happened with the gain on sale margin this quarter versus --?

Yes, sure.

The gain on sale margin was under pressure given we had a significant change in the past six months of volume.

So we saw about a 24 basis point decline, what we call our gain-on-sale pricing.

It went from about a [126] in Q4 down to [102] in Q1.

It seems like things are stabilizing right now; the rates are a little bit lower.

We've seen some good activity.

As far as the components of mortgage servicing, mortgage origination, I believe it is in the press release, but $26.1 million is the total amount; $226,000 was the net income from servicing; $25.8 million was the mortgage origination number.

Right.

But on the mortgage servicing piece, was there hedge gain that was substantial this period, and how much MSR evaluation --?

Yes, we had a loss in MSR hedge of [$5.8 million], offsetting by a deposit of the $3.6 million for net was close to maybe $1.8 million off on a net-net number.

Okay.

And then where --?

Servicing income was approximately $9.3 million.

$9.2 million?

$9.3 million.

Gross.

$9.3 million.

Okay.

That is a gross number.

Okay.

And then do you have any comments on how the search for a large, accretive acquisition is going?

Well, let's just say that there are many interesting opportunities in the marketplace.

Not that this is a very active market, as I'm sure you are very much aware, but there are things to be considered, for sure.

Okay.

And then could you just tell us what do you have in the way of unrealized gains on the available-for-sale securities portfolio at March 31?

I think it's a small number.

I think it's maybe $10 million to $15 million.

Not a huge number.

Most of our securities are held for maturity.

We took advantage in the quarter given some of our securities that were fast paying CMOs that the gains were just vaporizing, and given they were relatively short, we took advantage of market conditions.

I think the net gain after tax is around $10 million.

Okay.

All right.

Thanks.

You're welcome.

Bob Ramsey, FBR.

I guess maybe looking for a little bit of clarity around the margin.

I know you guys that you're still expecting the level to stabilize a bit in the back half of the year, but it sounded like pre-payments are a piece of that.

And I think previously the guidance had been on a core basis, ex-prepayments.

I'm just curious if I'm understanding that correctly.

Well, let me clarify for Q2, 5 basis points to 8 basis points down ex-prepay.

Pre-pay is very strong going into this year, so we believe between prepayment penalty income coming in significantly will offset any pressure from the margin.

But that number I gave you is ex-prepayment.

Okay.

And then as you think about the back half of the year from there, do prepayments help you get stability, or is the core margin stable without prepayments?

I think we are at pretty close to the same price you were at the beginning of the year.

We are seeing -- we're going to see lower wholesale liability costs coming down the next few quarters, given that we have some liabilities maturing.

It is a decent plug of money, $750 million -- $760 million, actually, at about a $3.10, so that is significantly lower than the market today.

In addition, we have had a decent amount of CDs that are coming due, around $4.5 billion, around 1%-ish.

Depending on our deposit initiative there, you may see some further reduction in cost of funds.

So it seems like the cost of funds line item will come down.

Now the big question is, when will loan yields stop declining?

Security yields appear that they are getting maybe 3 to 5 basis points a quarter for a couple of quarters, and we're getting closer to the bottom there.

We are not seeing the propensity of calls in that portfolio as we had two years ago.

And the loan yields are coming in around 3.30%, 3.40%.

So if you look at the Q1 guidance, we probably came in probably better than expected.

That was driven by loan deals and probably a conservative view of the repositioning we did on the liability side.

So I think -- I still feel very confident that we are going to stabilize the margin.

We may be off because of the beat in the first quarter.

So if you blend that, we are probably pretty close to stabilization.

Definitely 2013 -- maybe we are a quarter off just given changes in the market interest rates.

Okay.

That helps.

And then you mentioned part of the challenge is that the loan yields have been coming down.

And I know some of your peers in the market have highlighted that they are really seeing increasing rather than better pricing pressure out there and that there are people that are just getting very aggressive in terms of pricing.

I'm curious what you're seeing in the marketplace from a competitive perspective.

Right now, I think like I said, our loan yields for the quarter outperformed our models.

So we came in approximately like a 3.40%-ish for the quarter.

What we're seeing for the pipeline yield is around probably like a 3.35%-ish.

So we've announced a pipeline of $1.6 billion.

But it's still low -- it is a little north of -- it's around 2.50% over the five year.

Going forward, there is always pricing pressures.

We try to be a market leader on doing goods transactions, so we don't want to be the lowest bid in town.

So we're doing a good job on holding out our level.

So we're seeing actual loan closings that we've done slightly better than our model expectation.

We model around 2.50% over the five-year.

Okay.

Great.

Then --.

There's no question there is a lot of discussion in the marketplace that really is intended to move rates, not necessarily reflective of the rates that are actually being closed.

Okay.

And Bob, I would also add, we want to stick to our netting.

We're seeing good core multi-family bread-and-butter deals, typical savings bank structure where we have the prepayment structure involving.

We're not looking at going away from our niche, so we're still doing our niche business.

Great.

And then the restructuring you all did this quarter or at the end of last quarter into this quarter, did you get the full benefit of that this quarter, or is there some lingering benefit that lapsed into the second?

There's a few basis points going into Q2 just because of the timing of the actual closings of those transactions.

Sure.

All right.

Thank you, guys.

You're welcome.

Mark DeVries, Barclays.

Could you talk about how much uncovered loan growth you are targeting for this year, and as you grow your balance sheet, how low you can comfortably take your TCE ratio?

We don't give a formal guidance on loan growth.

It's been, as you see, the first quarter we had significant net loan growth when you carve out loans held for sale, which definitely moved the number down, as well as covered assets, which are bleeding off the portfolio.

But I wouldn't say we are going to be -- 12% loan growth is probably a very aggressive number.

But I think it's reasonable to say mid- to upper-single digits is reasonable, and its timeframe is generally early in the year.

It's highly dependent on interest rates, right?

We feel very fairly confident we'll get our share of business, and modeling purposes or high single digits is reasonable for us, net.

Okay.

Got it.

And then on the TCE, how low can you comfortably take that?

Depending on market conditions, we're not looking to leverage capital aggressively here until markets do change.

We're running around a [775-ish] intangible common equity ratio.

I don't see it going below 7% in the short term.

But again, we will watch markets over time, and if things become more robust with spreads widening on the backend of the curve, then we will probably take some capital and put some capital to work.

Okay.

Great.

And then how are you thinking about the longer-term shift of cash into securities?

You've talked about bringing your securities up to 15% to 19% of assets.

Is that still where you're thinking about taking it longer-term?

I think the big picture for us is that we have some excess cash, and we're fine with that.

And our securities portfolio could be larger.

Obviously, market conditions will change.

It hasn't been a great market condition for buying securities.

So we will try to just manage our propensity of calls that comes through the portfolio.

So as you can see, there has been a lot of growth there.

But in the event there is a, we'll call it a reasonable spike in the back end of the curve that would create some value, then we will go more aggressive on putting on some balance sheet growth there.

We just want to be conservative.

We're trying to stay away from duration risk, and we're keeping it very simple on the security side.

Yes.

It looks like you did a little bit out of the quarter.

Did you take advantage of the move in rates?

Yes, absolutely.

A lot of that growth is in anticipation of future calls.

So we're just trying to manage the expectations of the calls that may occur in the summer.

Okay.

And what types of securities did you add in the quarter?

Agency does paper and callable debentures.

Agencies -- all government agencies.

Got it.

All right.

Thank you.

Very well.

Moshe Orenbuch, Credit Suisse.

Actually, most of my questions have been asked.

But one thing on the mortgage business, you kind of alluded to this.

You said that there was a 24 basis point drop in your gain on sale fourth to first quarter.

Yes.

But what has it done since then?

Because some of the data we looked at would have suggested that spreads got worse during Q1.

Maybe they bounced back a little after, but where does that stand now?

It seems like we're stabilizing.

The good news is we're stabilizing.

There's been a movement in interest rates.

April is shaping up very nicely, but again, it's way too early for the quarter.

I don't want to give you any false guidance.

But January, February, March -- each month got better, and we adjusted our prices to compete.

We lost 24 basis points linked quarter, so that's not going to be a trend.

I think around this level, if we are running around [102-ish], [105] gain on sale margin, if you hold that with higher volume, we will see better net mortgage banking income.

Got you.

Thanks.

Brad Ball, Evercore.

Just back on the NIM, I am trying to understand specifically what changed versus your guidance in January for down 3 to 5 and the result, which was up 2 basis points in the quarter.

What really drove the difference versus your expectations?

Yes, the big difference is higher loan yields that we closed, as well as a conservative view of the timing of the repositioning of the advances in repo.

The loan yields throughout the quarter were higher than you had expected --

Our model is based on the actual closing of the pipeline.

That's correct.

Okay.

So a couple of basis points there and a couple of basis points in the repositioning.

So specifically, the repositioning, the $6 billion in borrowed funds, is there more room to do more of that as we progress through this year and this rate environment?

Yes.

We are very opportunistic.

We pick our spots.

We wait for markets to work to our advantage and we transact.

So I'm not going to give you a specific number, but obviously, the one number that is going to happen this quarter that we are going to pay off was $760 million of advances at a 3.10%.

So the market is sub- 1% depending on duration we decide to go out.

It hasn't happened yet.

That will be of benefit.

And we have probably between $400 million to $600 million in more float they can be moved around, and we really haven't delved into the counterparties with some of the multi-family that we think there's some value there.

So I think they just have to look at what they are going to charge us for their balance sheet.

If it becomes opportunistic and the economics work, we will take advantage of it.

But I think what I said on one of the previous questions, you will see further declines in borrowing costs going into 2013.

Okay.

Which will be about how to stabilize the margin.

Okay.

And just shifting, did you actually hold any one-to-four family loans for investment this quarter?

Yes.

Or what is the outlook for holding residential loans going forward?

As you know, I think we said last year, we embarked upon a new program with [SUMA Prime] hybrid ARM loans, and they are portfolioing.

They estimate it is going to be between $35 to and $50 million per month with an appetite to accumulate to the balance sheet.

So we've been very successful there.

I think the total amount we had around $200 million we have put on the books so far.

That started the initiative late last year.

What has been successful has been mostly 5/1 ARMs.

And again, some 7/1s and a small amount of 10/1s.

Do you see that picking up going forward given the rate environment?

It all depends on where rates are going.

If rates are much higher, we will see a higher level, depending on our Board decision to add to the balance sheet.

But obviously, we're pleased with the current results.

However, if rates were higher, we would see better yield and more volume.

Most of the customers are still going into the 15- and 30-year product, and we're not portfolioing those types of loans.

We are selling those loans.

Okay.

Got it.

And then finally, Joe, on the M&A question, you've said in the past that you would consider doing a non-traditional deal, not necessarily the traditional bank deal.

I am wondering if you could just remind us what your core M&A aspirations are?

What are you looking for in a deal?

I definitely do not want to convey that we are looking outside of the norm.

We have every expectation that there will be opportunities that are very much in line with our past experience and what you would reasonably expect.

I think the comment that was made at an earlier date that there were additional opportunities in the marketplace was merely a statement of fact -- that there are other opportunities, not necessarily that we will do, but certainly opportunities that are not traditional to what it is that you would expect to see us actually close a deal on.

In all cases, however, we would be risk adverse.

In all cases, we would be subject to the current guidelines with regard to regulatory oversight in preparation to doing deals.

So it's not as though the marketplace has changed, at least for us, in any meaningful way.

Not at all.

But there is, in fact, going to be an opportunity to do and consider those things that you would reasonably expect should come to the market to create a better bank.

And that's the goal, ultimately.

Okay.

Great.

Thanks.

Sure.

Steven Alexopoulos, JPMorgan.

It would seem that without securities gains, and Tom mentioned there wasn't much left in terms of unrealized gains, and with the NIM guidance, it's going to get tougher to earn the dividend over the next few quarters.

I'm curious, one, if the payout ratio does cross above 100%, would you expect to just pay a portion of the dividend out of capital, or is it more likely that the level would be reset?

Let me clarify, so we are crystal clear.

We have the expectation that pre-payment penalty income will be robust this year.

So I'm giving a caution that our margin was pre-paid.

The only reason why we carve out to atlas is because we believe that's our business model.

So if you look at our business model, we're very bullish about levels of income that is generated from our core customer base, which includes significant prepayment penalty income.

We believe we are on a pre-payment cycle.

That means that our earnings will be reflected positively in 2013 for prepayment activities, as well as if rates stay very low as they are today, our mortgage bank will be fine.

So, again, if you want to carve out the one timers, let's hope that the Q1 is the low point.

We seem pretty bullish about prepaid and mortgage banking picking up here.

So hopefully going forward these conversations will be driven on earnings growth.

Feel pretty good about the pre-payment levels; not really concerned about being able to pay the dividend.

Okay.

Let me just ask one follow-up given how volatile the pre-pay is and how volatile the mortgage banking fees are.

If in any one quarter you don't cover the dividend and need to pay it out of capital, do you need special permission from your regulator to do that?

Again, I think we have clarified this in many, many calls.

We follow SR 09-4.

It is crystal clear what the process is.

We have GAAP income.

We go to our regulators when we fall short of the SR 09-4 definition, and we haven't had to have those conversations.

Okay.

Those are my questions.

Thanks.

Josh Levin, Citigroup.

All the commentary and questions so far have been about when NIM would stabilize.

Maybe, since you have better visibility than we do, can you give us a sense of at a ballpark level at what level you think NIM will stabilize?

I think we are there.

We have been saying this for a couple of quarters.

We are basis points away.

So again, when we talk about stabilization, we look at NIM going up because we have prepayment activity.

I think Mr. Ficalora articulated Q4 as having a very large, long relationship.

That was almost $18 million for one transaction.

If you look at the core value of pre-payment activity going into our term yield, it is material.

That's how we run our business.

So we see margins going up on prepayment activity.

So we see our business model performing very well in this tough, difficult environment.

We're getting around 2.50% over the five-year treasury, and we are generating returns well north of the industry on assets.

So we're pretty bullish about it.

Again, we look at the model differently on a mathematical equation when you carve out pre-pay.

Pre-payment is our business model.

Every loan we write in commercial real estate, multi-family has embedded value in prepayments.

So we look at the term yields.

So my follow-up question is the core NIM, so the NIM ex-pre-pay, which you have talked about in the past, do you still see stabilization -- can you give a sense of where that is going to stabilize?

In 2013.

Again, maybe we are off by a quarter.

We said in the mid-2013 --

No, but the level, not when.

What level do you think core -- is core NIM very close to bottoming?

Again, I gave guidance for the quarter.

The second quarter, down 5 to 8 basis points.

If you can do the math, that is where we are.

I am not going to give further guidance on the NIM.

Thank you.

Dave Rochester, Deutsche Bank.

I was just wondering, does your loan growth expectation for the year factor in any reduction in loan pricing, just given the pickup in competition in the market?

No.

No, not yet.

Dave, I mean we are going to compete.

We love the bread-and-butter business.

Five-year structure is our bread-and-butter opportunity.

Commercial real estate loans, although they haven't grown as much in Q1 versus Q4, we still see decent activity there.

You may have some loans that do trade away because of aggressive lenders; however, we think we can make it up on volume.

And again, we price our business at around 2.50% over the five-year.

We are funding it at very low cost of funds.

We will make decent returns there.

And you mentioned the roll-off of the higher cost funding in Q2.

I was just wondering if we'll see most of that benefit in 2Q given the timing, or will we see some of that go into 3Q as well?

I was just wondering when that timing was.

Dave, you'll see a continuing drop in the cost of funds for wholesale liabilities in Q2 and Q3.

Ultimately, depending on where rates go, it's going to be split between Q2 and Q3.

And it is also depending on future repositionings that we decided to do, depending on market conditions.

And you mentioned the -- I'm sorry, go ahead.

David, I was just going to say that the growth in our loan book, the percentage growth is probably stronger than it's been for many, many, many quarters.

Yes.

And just one last one, the FHLB advances you mentioned you could move around, the $400 million to $600 million, I think it was.

Right.

I was just wondering what the yield on that was today and what the normal maturity is on that?

We're trying to push it out four years.

The rates will eventually rise.

We want to be prepared for that, so we have moved over $6 billion out to the curve, and I think the average is four years there.

And we picked up one month of [100].

Now it is probably somewhere between [70 to 80], something we will move upon depending on market conditions.

And then, we really like to work on our counterparties.

There is some opportunity there; it all depends on what they're going to charge us.

So we are being patient.

And I think that in the event market conditions change -- they do on a daily basis -- we will transact.

So the [flawless] is more accommodative, I believe.

And they have boughten with us.

It makes a lot of sense for them and for us, and most of that will be behind us going into the second half of 2013, and we will work on the counterparties.

All right.

Great.

Thanks, guys.

Matthew Kelley, Sterne, Agee.

Last quarter you indicated that the pipeline was like a 3.33% yield on multi-family, 3.83% on commercial real estate, so roughly 50 basis points higher on commercial versus multi.

Is that spread holding on the 3.35% average yield in your current pipeline?

Yes.

Literally, it's almost identical.

Okay.

3.35%-ish for the total pipeline that we've announced last night.

Remember, our markets move around on a daily basis, but that's an impressive level to what other banks are quoting.

And, you know, when we listen to some of the other companies Signator Investors, People's, they are mentioning that they are seeing some lengthening of terms, a little bit looser underwriting standards.

Some people giving up on prepays.

I mean what are you guys seeing in terms of the term activity and then just underwriting standards?

Well, the term activity, obviously, is a part of what's been going on over the last year or so.

But there are a variety of components of actually negotiating a particular deal.

And based on the relationships that we've had, I think that we do have a different mix of expectations than many of our peers.

So the results, likewise, wind up being different than our peers would see.

And how is your mix different?

It meets a little bit longer or --?

I think we probably are doing more loans that are in the 5-year range than others are.

We are probably doing more -- better rate loans than others are.

There's no escaping the fact that we are definite with regard to prepay where others don't even look at prepay.

So I think that when you think about being able to lend through multiple cycles to people that are actually cycle players, those relationships matter.

And lo and behold, for a good reason, the people choose to actually take their loans through a negotiation with us.

Okay.

And your commentary about the stabilization of the margin, does that imply or assume a more active mix shift into some cash into securities, or talk about the pace that we might see that change?

I would say the pace would be depending on market conditions.

So obviously, we're being very prudent.

We feel that there is some real value destruction that is going away along the curve, and we are keeping the securities portfolio smaller.

If rates do rise and eventually they may rise, we will be able to take advantage of that.

We have the capital; we have the focus.

Right now we are managing the amount of expectations of callable agency bonds that come back to the Company that we have to replace just to keep the balance sheet running flat.

I don't see any significant growth until rates are higher here, and we will transact opportunistically.

And Matt, just one other point that I want to talk about is going back to your discussion on the loans, it's interesting we're seeing unique opportunities throughout the New York market.

And when you quote a pre-payment structure versus a yield maintenance structure, the coupon is typically lower for yield maintenance.

We typically focus on prepayment activity, so we get a little bit more yield upfront for less on the backend, believe it or not, and that's the differential to some of the market conditions you may be hearing from other banks.

Other banks structure their deals with yield maintenance.

We typically do the 5, 4, 3, 2, 1 structure.

Okay.

Got you.

And then one other, just on the purchases of securities during the quarter, the agency dust bonds and the callable debentures, what was the average yield you're getting on those purchases?

Probably close to 2.60%.

Okay.

And the cash flow, the yield on the cash flows coming off?

I'd say we're off by maybe 20 bps.

Not a huge lead on security yields, other than what we sold -- we sold some assets given market conditions.

That was a little bit higher yield.

Got it.

All right.

Thank you.

Yes.

Mike Turner, Compass Point.

When I look at just the mortgage banking forecast, at least for the MBA, the Fannie and Freddie and they are all forecasting about a 30%, 40% decline from current levels in another year, year and a half.

I'm curious, how much operating expenses on the origination side do have in that business, and how much could potentially come out if that comes to fruition on the origination side a year from now?

Just to be clear, we are budgeting what the forecast is for the public.

So it is not a surprise those numbers that you threw out at us, that is what the numbers are being currently cited.

Depending on any additional refi wave, that will change those numbers materially.

But yes, it's a tough environment.

We had a great year last year, $176 million pretax.

We put up $26.1 million pretax this quarter.

It seems like Q2 should be better than Q1.

I know it's early, but we're seeing some reasonable activity given rates are slightly lower going into the purchasing season, the home activity season.

So I think we are going to see probably lower numbers on a year-over-year basis, but they will be in line based on expectations, and we have a fairly good leveraged model.

There is an automated platform, the Gemstone platform that is automated, and we could ratchet that down if we have to.

We don't feel like we have to today, but we will ratchet it down if things get more difficult.

Okay.

Thank you.

And then also, just back on the NIM guidance, which is helpful, what is your assumption for average earning assets relative to the first quarter in that sort of stable with pre-paid --?

I would manage, if you're going to run a quick model, just 5% to 10% net asset growth through the year, and you spread it out over four quarters.

Say that again, I'm sorry.

About 5% for the year, spread out over four quarters.

Okay.

Thank you.

Theodore Kovaleff, Informed Sources Service Group.

One question for you, and I noticed that there was a significant increase, percentage-wise, in real estate owned.

And I was wondering (technical difficulty)?

Right.

That is Mulberry.

Yes, that was one property.

And although there had been an ongoing ownership in that property, the decision was made to move the property, and the value is definitely there.

And we have every expectation that is only going to be going up.

So that will be resolved in relatively short order.

But, as I mentioned, it's just one property that that represents.

Thank you.

Thank you.

Thank you and that is all the time we have for questions.

I'll now turn the call back over to our host.

Okay.

Well, thank you all for joining us.

On behalf of our Board and management, I'd like to thank you for your interest in the Company, our strategies, and our performance.

We look forward to chatting with you again in July when we report our earnings for the second quarter of 2013.

Thank you.

Thank you.

This does conclude today's first-quarter 2013 earnings conference call with the management team of New York Community Bancorp.

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