Flagstar Financial Inc (NYCB) 2013 Q2 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 second quarter 2013 earnings will be President and Chief Executive Officer, Joseph Ficalora, together with Chief Financial Officer, Thomas Cangemi.

Also joining in on the call are Chief Operating Officer, Robert Wann and Chief Accounting Officer, John Pinto.

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 will find more about the risk factors associated with the Company's forward-looking statements beginning on page 6 of this morning's Earnings Release and its SEC filings, including its 2012 annual report on Form 10-K and first quarter 2013 Form 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 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 will now turn this call over to Mr. Ficalora, who will provide a brief overview of the Company's second quarter performance before opening the line for Q&A.

Mr. Ficalora?

Thank you Kevin.

And thank you all for joining us this morning as we discuss our second quarter performance, and the various factors that contributed to its strength.

As I mentioned in the Earnings Release, there was a lot to like about the results we produced during the quarter, particularly in comparison with our first quarter results -- higher earnings, margin expansion, increased loan production, higher quality assets, and consistent capital strength.

To begin, our GAAP earnings rose sequentially to $122.5 million, providing a 1.21% return on average tangible assets, and a 15.90% return on average tangible stockholders equity.

On a non-GAAP basis, our cash earnings rose to $132.5 million, adding $10 million, or 8.1% more to our tangible capital than our GAAP earnings alone.

On a per share basis, our GAAP and cash earnings respectively rose to $0.28 and $0.30 in the second quarter of this year.

The link quarter growth of our earnings was primarily fueled by an increase in net interest income, together with a reduction in operating expenses.

Largely reflecting prepayment penalty income, our net interest income rose sequentially to $299.9 million, and our margin rose 20 basis points to 3.15% during the same time.

As prepayment penalties ebbed and flowed, with the volume of loans refinancing, it's clear that refinancing activity was robust in the last three months.

In fact, prepayment penalty income rose to a record $44.4 million in the current second quarter, adding 26 basis points more to our margins.

That trailing quarter amount.

In addition, our average cost of borrowed funds fell 13 basis points sequentially, to 3.22% in the quarter, partly reflecting the maturity of certain higher-cost repurchase agreements, as well as the continued repositioning of wholesale borrowings.

To date, we've repositioned wholesale borrowings of $6.6 billion, including $580 million in the last three months.

The maturity dates on the latter funds were extended by five years on average, and the average cost of such funds was reduced by about 73 basis points.

Although held for investment loans declined over the course of the quarter, originations increased sequentially and year-over-year.

In the second quarter of 2013, the average balance of loans rose to $31.9 billion, $326 million higher than the trailing quarter, and $1.2 billion higher than the average in the second quarter of 2012.

As usual, multifamily loans represented the bulk of our loans held for investment -- $19.2 billion, or 68.6%, to be precise.

Commercial real estate loans represented $7.3 billion, or 26.1% of the June 30 balance, with the remainder of the portfolio consisting of ADC, multiple family, and other mostly C&I loans.

While the production of held for investment loans rose both year-over-year and link quarter, the production of one to four family loans held for sale declined.

In contrast to our traditional lending niche, in which refinancing activity increased, the refinancing of residential mortgage loans declined as mortgage interest rates rose.

Looking ahead, our pipeline of loans is currently $3.4 billion, with loans held for investment accounting for approximately $2.5 billion, or 73% of that amount.

By the way, the $2.5 billion is the largest pipeline we've had in loans for investment, especially going into the third quarter of the year.

While quantity of loans we produce is, of course, important, we continue to hold to our long-held belief that quality trumps quantity.

In the second quarter of 2013, nonperforming non-covered assets represented 0.57% of total assets -- the lowest measure we've reported since March 31, 2009.

In addition, nonperforming non-covered loans represented 0.54% of total loans at the end of the second quarter, and this was the lowest measure we've reported since December 31, 2008.

Also of note, the ratio of net charge-offs to average loans was 0.01% in the current second quarter, improving upon the 0.02% we reported in the first quarter of this year.

Moving down our balance sheet, I'd like to point out that our balance of wholesale borrowings declined from the levels reported at the end of March and December, and represented 28.6% of total assets at the end of June.

We also continue to be gratified by our consistent capital position, which continues to reflect the strength of our earnings and our asset quality.

Accordingly, we were pleased to declare for the 38th consecutive quarter a quarterly cash dividend of $0.25 per share.

The dividend will be paid on August 16 to shareholders of record at the close of business August 7.

This concludes my prepared remarks, so I will ask the operator to open the line for your questions at this time.

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

Thank you.

(Operator Instructions)

Ken Zerbe with Morgan Stanley.

Great, thanks.

Couple questions for you.

I guess the first one, just in terms of margin, can you talk a little bit about the outlook for margin, given the rise in the rates we've seen in the back half of last quarter?

Where are you originating new loan yields?

When you think about NIM outlook in the maybe the back half of this year and into '14, how has that changed?

Thanks.

Good morning, this is Tom.

So I guess when you look at what we had in the past three quarters, they have been bumping around close to stabilization.

It looks like third quarter should be the down part of our margin.

So again, I'll guide down slightly 4 to 7 basis points going into the Q3, and then most likely by Q4, we've stabilized and hopefully if rates stay this type of a slow, we will probably see up margins next year.

So again, I'm not going to be too bullish on '14 yet.

It's early.

However, we see that going into the third quarter that this should be the bottom of some declines, very small declines, ex prepayment.

Obviously prepayment has been very strong, but looking at the -- take the prepays out of the equation, we're getting close to the bottom.

So I'd say fourth quarter should be the bottom, and you should see maybe another 4 to 7 basis points of potential declines.

Okay.

4 to 7 in third quarter.

Okay.

Right.

Sorry.

Next question for you, in terms of I guess the NYCB specialty finance company, so if I read this right it, it looks like you're now pushing more into C&I.

I don't mean this a bad way, but I will be pretty direct in my question, does this signal any kind of capitulation or a change in your outlook when it comes to commercial real estate that you now want to focus more on C&I?

No.

In actuality, this is merely the realization that this happens to be an extraordinarily good opportunity to actually originate low risk assets.

The group that we've engaged here was brought to us with a very attractive portfolio, and a 20-year history of performance metrics that rival our own.

And certainly, over the course of time, which includes obvious difficult periods, they've demonstrated time and time again that they know how to do this business with very, very little risk.

And therefore, since we're a risk averse Company, we like their business.

Just to add to that, the assets traded away, we bid on them, they traded at a higher price to another buyer, we ended up getting the people.

They just bought the assets.

So we started from scratch.

Got it.

With the people that generated a very successful track record, as Mr. Ficalora mentioned.

Historically, I believe the number they declared was about $7.5 billion over a 20-year period with losses about $1.4 million.

So a very sound, conservative group of lenders.

Okay, great.

And just one last question for you.

In terms of loan growth, I think average growth, a little bit lower than expected end of period, for held for investment was basically flat to down a little bit.

Was -- can you just reconcile your very strong pipeline versus what we saw this quarter?

Was it a timing issue?

Should we expect loan growth to sort of re-accelerate in the back half, or is the competition and refinancing just being too much of a headwind to really see any material growth?

Thanks.

It's fair to say that if you look at the average, we had a very strong quarter as far as activity.

However, the significant deals as of the end of June end up refinancing.

As you look at the prepay being robust, the highest ever, we're going into the third quarter, as Mr. Ficalora mentioned, at the highest pipeline historically for the Company as a public entity, $2.4 billion, $2.5 billion being the highest ever.

And on the multifamily side, the highest for multifamily.

So obviously, we had some significant refinancing activity, significant prepays, but going to the Q3, this should be probably a growth quarter, more than we typically see in Q3, given seasonality.

So we're heading up ourselves very nicely for the second half of the year with good loan growth.

Again, we feel fairly confident that loan growth should be in the high single digits going into '14.

By the way, we had a very large satisfaction at the end of the quarter, which impacted the numbers.

It was the second largest loan we've ever done, and that satisfaction obviously brought down the closing quarter number.

But on average, we had a very strong average balance for the quarter.

Great.

Thank you very much.

Collyn Gilbert with KBW.

Thanks.

Good morning guys.

Just kind of on that topic, what do you think the impact will be sort of longer term, or at least for the rest of the year, or '14 of this pull-through of refinance activity?

Do you -- obviously this came as a surprise, the accelerated prepays.

Do you think the borrower behavior is changing a little bit here?

And I guess ultimately where I'm trying to go is where your outlook is for loan growth.

No, I think this is very consistent with what we've been saying since mid 2010.

The period ahead is going to be very rich in refinancing, and in the amount of prepayment penalty that we collect.

Our business model is very consistent.

And what we're seeing here, this activity, is very much what we would expect.

And I would also add it's good news that rates are up materially from the previous quarter, so we have a much higher outlook in respect to higher asset yields.

And if you look at where we were going into Q1, where people were hovering around 3%, we're hovering around 3.5% to 3.75% on the re-offer rate for five-year paper, and 7 to 10 year paper is hovering around 4%.

That's a significant differential from the beginning of the year.

So the outlook is much more favorable for asset yields.

So you have a lot of customers that are scratching their heads, saying shall I refi today or tomorrow?

If not, they may miss a significant move.

And there's no question that that is driving their decisions.

We were very bullish on prepay going into the quarter.

We had a record quarter in prepay.

We said it last conference call, expect to see prepays were elevated.

You'll see the continuation of that.

This should be additive to the profitability of the Company.

And good news for us is that we also look at loan growth having a very strong pipeline going into the second half.

Colin, the number is right around three years.

So the average life of our principle loan is about three years.

That's very consistent over the last several couple of years.

That's been very, very consistent.

Right.

I guess I was just trying to see if the anxiousness to get to lock in now maybe curtails future demand.

No, I don't think so.

And when you think about it, our portfolio is constantly moving.

So if, if we're refinancing a $30 billion portfolio in the three-year period, that gives us a tremendous amount that can be refinanced each and every year.

Okay.

And just one quick follow-up on the specialty finances.

Do you have any sort of targeted size that you think that you could get it to?

I know, Tom, you talked about what the previous team did.

But what's your appetite in the near term for that business?

Conservatively in a 12-month period, we're budgeting between $500 million to $650 million.

The group was managing a $1 billion portfolio.

It's at high fee content with that portfolio to.

And they've done phenomenal job of looking forward to growing it, but we just started the business.

I think we just booked a handful of loans going into Q3, so it's not a material number today, but it will contribute to our growth.

And I think in reality over time, given our balance sheet and our capital, that number could easily be down the road a $2 billion portfolio.

Okay, and then just quickly, the average loan size within this business is targeted to be what?

Anywhere from $10 million to $40 million, that range.

Okay.

All right.

I'll hop off.

Thanks, guys.

You're welcome.

Bob Ramsey with FBR Capital Markets.

Morning Bob.

Hello, good morning guys.

I was hoping you could talk a little bit about mortgage and the outlook.

Obviously, you had much better servicing income this quarter.

I'm curious how much of that was MSR recovery, and how to think about the potential for further recovery if rates say where they are or trend higher.

That's correct.

The origination number was around $17 million.

The net servicing number was $6 million.

Of that, we had approximately $26 million write before we could change in the MSR versus the net of the hedge of $23 million.

So we were probably $3 million or $4 million positive on the net hedge of the MSR.

But net-net, it's been an interesting environment.

We saw a significant shift from refi to purchase.

So right now, it's fair to say that between 50% to 60% of our businesses is now purchase activity.

And refi has slowed down materially.

The swing note rate moved from 3.5% to 4.5% overnight and does impact us as a wholesale aggregator.

So once again, we're going to see downward mortgage banking activity.

But I just want to point out a specific statistic for the Company.

Last quarter, mortgage banking income was 6% of our net.

6% of revenues and 6% of net income.

So if you look at the totality of the earnings stream, it's a manageable number.

As we always talked about when we got in this business, is a [barbell] strategy.

We're enjoying the benefit of higher rates for the portfolio.

We're going to look at portfolio growth going into the second half of '13, and definitely into '14.

At the same time, prepays are elevated.

So we feel that it's a manageable barbell strategy, and it's definitely in a downward cycle.

And we pointed that out probably at the end of last quarter, that we saw a significant change in refinancing activity.

And I think that's an industry expectation right now.

Okay.

That's helpful.

And then Tom, often you give a little guidance around expenses.

I'm wondering what you're looking for in the third quarter.

You'll probably see some belt tightening going into Q4, just given the environment.

But around $447 million approximately ex-CDI per quarter.

Okay.

For the next two quarters.

Okay.

Thank you very much.

You bet.

Brad Ball with Evercore.

Morning Brad.

Good morning guys.

Morning Brad.

A couple of questions.

So on the multifamily prepays, did you actually see a pickup in the prepays late in the quarter following the rate rise?

Was there a reaction to the rate rise, and did that carry through for month to date here in July?

Brad, it's fluid.

I said on the conference call, and it was in the beginning of the quarter, that we were going to have a good prepay quarter.

And I see the sheets every day.

It's a robust prepay environment.

We're in that cyclical prepay environment.

This is last -- this will be the third year of that cycle, it started at the mid 2010 and it continues.

So here we are in July, and things are looking bright.

We never give guidance on prepay, because we can't control the prepay activity.

However, we had good property transactions.

Things were being traded out in New York City, and we had a lot of refinancing.

I think it's fair to say that refinancing did tick up towards the higher rate environment, but that doesn't stop property transactions.

So we're enjoying both.

Both on the commercial real estate portfolio, and the multifamily portfolio.

I think it's also important to recognize that we are in a niche.

The people that we deal with are cycle players.

At this point in the cycle, a lot of them are repositioning themselves to buy assets and therefore, they are funding those acquisitions.

So there's a lot of activity in the marketplace, and this will continue for the period ahead.

So we're in a very, very good place with regard to expectations.

It is not merely driven by rates.

Okay.

Fair enough.

And then on the mortgage banking side, you mentioned originations being down in more of a purchase mix.

What was the gain on sale in the quarter?

It was hovering just around 100, so we've definitely seen a fairly large squeeze from the beginning of the year.

I'd say it's about a 40-basis point squeeze going into the beginning of the quarter, first Q1, up until today.

So about 100 basis points.

Big picture, as a wholesale aggregator, long-term, 75 to 90 BPS is probably a more reasonable range.

Remember, we were not in a reasonable environment, given the government intervention and the acceleration of refinancing activity.

So if we hover around here on 90 to 100 basis points toward the end of 2013 with low origination volume.

There's no question that things will slow down.

As expected, by the way.

Sorry Tom, you said 40-point basis squeeze.

Is that from the beginning of the --

The beginning of the year.

That's right.

The beginning of the year through today?

Correct.

Okay, got you.

Great.

And then, sort of a bigger picture, Joe, I'd wonder if you could just tell us what you see in the bank M&A environment.

Do you see any heating up in the second half?

Is there anything of interest to you out there, in terms of you --

I think there's no question, since M&A has been our basic business model from the time that we became a public company in '93, we continually see all of the opportunities that the market has to offer.

And there's going to be I'm going to suggest a great deal of activity in the last half of this year, and then we certainly are very focused as we've been recently on waiting for the appropriate larger transaction.

We clearly are looking to do a highly accretive deal.

And there will be opportunities to do such.

Does your interest in opening up a C&I business, does that suggest that you might be interested in buying a bank that has commercial lending capability?

I think it's not a matter of changing direction.

The interest in this particular line of business is the consistency of the track record that is demonstratable as being risk averse.

That's the important component of this particular line of business.

We're not interested in C&I generally.

But we're interested in how well the people that we've now engaged actually do their business.

I think we're open to opportunities as they're presented to us.

For example, the mortgage banking business.

We were not planning on that business.

And it was being done so well that we've made a great deal of money doing that business.

So I think the idea that we could wind up with a acquisition of a company that's in a different line of business and maintain whatever it may be that we've acquired there, is very, very possible, as long as it's a demonstrated risk averse lending model.

Excellent.

Very helpful.

Thank you.

Okay.

Moshe Orenbuch with Credit Suisse.

Morning.

Great.

Thanks.

Could you talk a little bit, it seems like you've bought some securities.

Can you talk a little bit about your thoughts on how you're going to manage the portfolio in this environment?

Sure.

We've been reluctant over the past three years to grow it.

This is probably the first quarter where we saw the opportunity to really start thinking about real growth here, given that we had a significant market move on interest rates.

We're looking at probably growing that portfolio anywhere from a range of 15% to 18% over the next six months, more in line to the industry peers.

With that being said, that's up 100 basis points from the previous quarter.

So you're looking at probably security yields in general, probably at the bottom as of Q2, so you'll probably see security yields go up into the preceding -- in the forward quarter.

But I think that side of the asset yields would be a nice bump-up over time, so you're looking at anywhere from $350 million to $380 million depending on duration with new purchases, and predominantly in the multifamily [dust] space, as well as some agency space or government.

If you look on the asset side, on the loan yields, we're at probably the low for the Company, a 4.01% coupon on multifamily.

So we're getting close to seeing those asset yields start to bleed.

That's why we're fairly bullish on the margin stabilizing.

As we said last quarter, it's going to happen in 2013.

It looks like we're pretty much there, give or take a few basis points.

So I think on the asset side, we are seeing some stabilization, but that's when security yields should be up in the future.

All right.

And the increase in rates, any opportunities that it presents from a restructuring of the liability side of the balance sheet at all?

We have $200 million left in the future, but I think we really were proactive in the beginning of the year with the [home-owned] bank.

Because we finished off part of a the tail end, at about another $550 million going into Q2.

There's always that possibility.

There's some significant changes to the market, and we look at them.

But I think in general, we had some payoffs over the quarter, that was about $780 million.

Probably close to the bottoming of the cost of funds dropped, and hopefully the liabilities with exception of any new liabilities we put on, which in this environment would probably be short-term liabilities.

So obviously short-term liabilities are significantly lower cost, because we feel fairly confident that at least in the short run, that short-term rates are not rising significantly from here.

We're enjoying the benefit of a very steep slope right now.

All right.

And the last question for me is just you'd mentioned obviously the third year of really strong prepay penalty income.

What -- and I know you're hesitant to kind of forecast it, but is there any way to kind of bound how much of the existing book is still subject to that?

Any way to kind of--

I think if you look at the average life, we have a nice concentration of pure CRE, which has a little bit longer duration.

So those deals are coming to prepay, and interesting enough, they have higher prepayment structures to some of the longer duration paper.

And more importantly, if you looked at '09 where there really wasn't really any prepayment activity, a lot of [bars] extended with that very inexpensive option of paying a point to go out for the next five years.

We're seeing those guys come to the table today.

So we're enjoying the benefit of the people that rolled their coupons in 2009 are now prepaying today.

So it's about a three-year average life.

And I think you're going to see a long-term cycle of prepayment activity.

The portfolio is much larger, and we're seeing some good results in both the multifamily and the CRE book.

Great.

Thank you.

We never give specific guidance, but it's elevated and the good news is that it continued to be elevated.

So as the portfolio enjoys a higher yield going into the end of the year, if rates continue to rise, we should get close to where there's no more asset yield bleed and that will have some asset yield accretion over time.

Okay.

Thanks very much.

Rick Weiss with Boeinng & Scattergood.

Morning Rick.

Good morning.

Welcome back Rick.

Thanks Joe.

It's been a while.

I was wondering if you could talk a little bit about the loan competition for multifamily, and if you could give the percentage of loans that are prepaying, but in staying with your community bank versus refinancing away from you.

Yes.

I think it's important to recognize that when you look at this market today, there are far fewer competitors that are impacting our niche than there was five years ago.

So when you think about who are the players, there are people that you know, banks that are explicitly talking about being in the multifamily business or basically being in our niche.

That's a good thing.

Because the guys that had been in our niche were significantly larger, and they were lending significantly more ridiculous amounts of money.

So the availability of product for refi is significantly greater today, given the absence of the structured debt lenders, we have a opportunity to gain share.

That's why the numbers you see are the way they are.

So we're not aggressively lending in this market.

If we were to do a very big deal, we would change our lending profile dramatically in this market.

But having said that, the marketplace is rich, and although there are a lot of additional names, there is not a lot of additional dollars that are actually being lent against us in the market.

So you'll see people that show up with -- all of a sudden they're in the market and they're doing some loans.

Not a big deal.

It's not a big deal.

Okay.

So, the refinancing is about what we would expect at this point in the cycle.

And there's nothing unusual at least from the standpoint of our normal business model at this point in the cycle, so I think that our expectation is that the period ahead will continue to be robust.

We'll have a lot of opportunity to do new lending, and we will in fact have a significant amount of opportunity with regard to prepayment penalties.

Okay.

And I saw the average size of the multifamily really hasn't changed much over the last couple years.

Is there an opportunity to do significantly larger borrowing?

Not really.

I think the opportunity to do some larger -- we can do larger loans, because the structured debt lenders are not as active in the market.

A lot of the new guys that you were speaking of earlier, the new competitors, they're not very large.

So we will get a disproportionate share of the larger loans in the market.

But having said that, we're not in any way changing our risk profile.

We're not in any way changing the criteria by which we lend.

So we have some very, very large, very successful property owners.

We may get some of their bigger properties in the period ahead.

Rick, I would just add over the past six months, the two largest deals just totaled over $1 billion dollars (inaudible).

So I think, knowing -- I don't expect to see substantial deals leave the portfolio, so I think that goes back to my bullishness of asset growth.

I think we're going to see asset growth as we had a good inclination about Co-op City, we knew that was eventually going to go to a government structure, and one larger commercial creditor that paid off at the end of the quarter.

All right.

Got it.

Thank you very much.

You're welcome.

Josh Levin with Citi.

Good morning.

Tom, it sounded like, in response to an earlier question, it sounded like your guidance for NIM over the second half of the year, and maybe a quick look at '14, it sounded like that guidance was roughly unchanged versus the previous quarter when you gave guidance.

And I'm curios to why isn't it a little bit more bullish, given what's happened to the five-year treasury?

It's had a huge move since we last spoke.

We like to be conservative.

Number one, the first quarter of the year, we had an up margin and we guided down.

So I think we're close to bottoming on the margin.

It feels like the bottom is here on the margin, so probably one quarter off.

In '14, I don't have a crystal ball for 2014, but a great [sale] as it is, and I run it through my model, it's pretty bullish.

And you're going to have a margin that will be up.

But again, it's early.

This is one quarter of the significant rise in interest rates.

So we're going to capitalize on it.

We're now moving up securities, and putting on some growth there, up 100 basis points in the previous quarter and the loan pipeline is strong.

That's probably up 50 to 75 basis points.

Again, it's one quarter of activity in respect to this what we'll this call dislocation in interest rates.

If there's a negative economic situation going into the Fall and rates go the other way, again, I'm trying to be relatively conservative.

Okay.

Thank you.

And an accounting question, how much did accretable yield contribute to net interest income during the quarter, and how should we think about that trending going forward?

It's probably consistent with the previous question, I think it's around $50 million approximately.

And how will that trend going forward?

Covered loans around 4%.

Covered loans around 4%, so you're probably looking at, give or take maybe up 5% to 10% movers in that $50 million going forward.

Thank you very much.

And we'll put that in our Q when we file the Q, we'll have the exact number.

Thank you.

Yes.

David Hochstim with Buckingham Research.

Good morning David.

Hello David.

Hello.

Good morning.

Most of my questions were answered already, but I wondered, could you just give us a sense of what kind of opportunity there is to reduce deposit rates and continue the --

It's interesting.

When you talk about deposits, we are in five very distinct markets today.

And that's a very good thing.

That gives us a lot of flexibility as to how we would approach a given market.

And where deposit rates have the greatest differentiation between us and others, is in your traditional savings, money market deposits.

So there is an opportunity to actually seriously look at realigning ourselves with the rest of the competition in some of the markets that we're in.

And that will be a bottom line contributor.

Big picture, we're not the lowest rate pay, we're not the highest rate pay.

We're right in the middle right now, for the savings banks and we've been holding our level of deposits.

The good news for the market is that rates in general between we'll call it the two-year end, is pretty much stable given that short-term rates have not really moved a whole lot.

And customers aren't going into the three to five-year bucket.

We're still at the 18 (inaudible) two year bucket and one-year bucket.

Is there an opportunity then to scale back on CDs and --

I think, yes strategically that's probably a strategy.

Obviously, we're tightening our rates.

We're going to manage the Company to make sure we have the best opportunity on cost of funds.

And like I said, we're pretty much right in the middle of the pack right now.

We're not the lowest, we're not the highest.

You are seeing in the deposit mix a shift from CDs to our other type deposits.

Culturally, the Company has always been at the low end of the pack.

So we kind of moved up knowing we have some good loan growth coming in the out quarters.

And depending on loan growth, we have a significant rise in expected loan growth into '14.

We'll bring in more deposits.

And then, I think you sort of alluded to it, but could you just speak more specifically to competition from Fannie Mae, and has the rise in the 10-year made their rates less --

Spreads definitely have widened in the agency product, which is the good news, both on the security side and also our offering for some competition.

So if you look at where we could buy dust paper, it's pretty much the Fannie Mae wrapper of longer-term multifamily structure, you're around 3.5% to 3.4% or 3.5% and that's backed by the government.

So you kind of see that that's a little bit longer duration, but the spreads have definitely widened.

So typical purchases on Fannie Mae dust off of [slops] was going into the quarter between 35 and 40, we're seeing 50 to 70.

So about 25, 20 to 25 basis points of widening in the product mix, which is a good thing.

So obviously we're seeing better yields going into Q3 and Q4.

And is that helping then on the, attracting borrowers who would don't want to pay --

No.

I think the borrowers they would consider the five year structure because it's cheaper rate and to keep them out of the government's origination flow.

Okay.

Thanks.

Matthew Kelley with Sterne Agee.

Morning Matt.

Morning Matt.

Hello guys.

I was wondering if we could just get back to the discussion on the borrowings.

It seems like the market is pretty receptive to some of these blend and extend type trades, Astoria did one.

I just want to get your thoughts on why not do a little bit more on some of the longer duration borrowings that you have out there from '14 through '18 or so?

Well, just to go back a few quarters, we did it earlier.

So we were picking up north of $100 million to $120 million initially.

So we probably put out $6.5 billion already on blend and extend.

And we've done this historically, about four or five years ago, we did the same transaction.

So we look at all of ideas on the liability side.

We were probably earlier than most.

We did a little bit more in Q2.

Depending on market conditions, there is something deal with, we'll look at our repo book.

Right now, it's more of the negotiating with the street on the repo side and the street has a different perspective on restructuring.

And the stuff that you did in Q2, you were extending to what type of a term?

About 4.5 to 5 years.

Okay.

Got you.

And then --

We picked up around 75 BPS on that.

I'd say the low-lying fruit was done in the beginning of the year, actually towards the end of the fourth quarter of 2012 and into the first quarter of 2013.

It's well north of 100.

Okay.

And then the large satisfaction during the quarter, the one that paid off, what was the rate on that and where did that customer go?

Is it another bank or a securitization?

What type of structure --

We down-sized our position with them, so we could pass the deal, it was about $0.5 billion dollars position.

We took half the deal, and it's about 4%, low 4%s, it went into the high 3%s, so it wasn't a material change in the margin going forward.

I might call up Citi was a material change.

This was very manageable.

And they gave us a very healthy prepay.

Yes.

And what type of a lender did they go to?

It was, I believe the other it was--

It's shift.

It shifted -- (multiple speakers)

Cadre of other players.

One Wall Street guy --

We took 50% of the refinancing.

And that was the largest loan we had in the portfolio.

So we down-sized the risk.

Not because we're uncomfortable with the risk.

It was just that it was a large loan and it was a very attractive prepayment for us, and the current coupon was actually very nice compared to market.

Based on the refinancing, we still have $262 million in that loan.

It was just under a 3%, on the new yield.

Okay.

And then you had mentioned that the mortgage banking business in the first quarter was roughly 6% of revenue in net.

What was it in the second quarter roughly?

Second quarter '13 or '12?

The second quarter '13 in terms of the contribution in net.

Just trying to understand --

Just under 7%, 6.5%.

Okay.

So it's holding that relationship --

Yes, and again, but if you want to go back when we had significant volume, it was 20%.

So the reason why I mentioned that number, we put up a fairly strong quarter, but it's only 6% net of mortgage banking.

So from day one, we said it's a barbell strategy.

They're doing a fine job managing the business model, and we're taking a very conservative view about it.

But it's not a material number on the out [cores] in (inaudible) for 2013 and '14 and beyond.

It's a very smaller number today than it was when refi was robust.

So if you look around 6% to 7% net versus 20%, it's a big difference.

Yes, got it.

All right.

Thank you.

Thank you.

David Rochester with Deutsche Bank.

Hello, good morning, guys.

Just a follow-up on Bob's expense question earlier.

As mortgage volumes decline, is there any way you can cut expenses out of that business?

Yes.

And how much do you think you can bring those in?

My numbers do not have any expense cuts there, so you assume that if the mortgage volume does decline both on variable costs and fixed costs, you'll have a reduction in expenses.

Again, I gave you conservative numbers for Q3, Q4, it's around $147 million.

My guess is that you'll see lower numbers, if the mortgage business continues to slow down, there will be reduction, both on variable and fixed costs.

As well as other costs generally tightening, belt tightening in general.

Great.

And just on the securities growth that you had mentioned, the 15% to 18%.

Is that based on the assumption that rates stay here, or do you need to see rates move higher from here to get you more interested in doing that?

I think given where we're relaying our multifamily paper versus the agency product, it's all right on top of each other.

So it makes sense to put the money out here, even (inaudible) reluctant for 2.5 years to do it, it's because those rates were in the lower 2%s.

Now, we're in the high 3%s, and hopefully soon to be in the 4%s.

So as rates continue to rise, we will put some growth on.

We already committed to some decent growth in Q3, so you'll see both the asset yields start to pick up and you'll see the portfolio grow into Q3, and probably towards the back half of the year into Q4.

And then how should we be thinking about a much minimum cash lull you need to keep to run the business?

Should we look for cash to drop to maybe closer to the historical levels around $200 million, is that the bottom line?

I would say between $700 million to $1.1 billion, in that range depending on cash outflows.

$700 million to $1.1 billion?

(multiple speakers)

$1.1 billion.

(inaudible)

Okay.

Okay.

Great.

Thanks, guys.

You bet.

Ken Bruce with Bank of America.

Morning Ken.

Hello.

It's actually [Hardy Bodd] on for Ken Bruce.

Most of my questions have been answered, but just one quick one on the spec finance business.

Should we expect costs to increase for 2014?

You mentioned I guess $147 million in expense run rate ex CDI.

Again, it's a small group of originators that's been seasoned.

They've been doing this for well over 20 years, and our cost structure is embedded in that run rate I gave you.

Okay.

Thank you.

Jake Civiello with RBC Capital Markets.

Morning.

Morning.

Good morning.

Just one question.

How much specifically did the large satisfaction contribute to prepayment revenues in the quarter?

$15 million.

Okay.

Thank you.

You're welcome.

Collyn Gilbert with KBW.

Welcome back.

How are you?

Thanks.

Good.

Just a quick one.

What percent now of your multifamily portfolio is rent stabilized?

It's, it's -- honestly, I don't know.

Very high, but I don't know exactly what percentage it is.

But the reality is that it's rent regulated housing.

So in many cases, there are a certain number of units that are rent regulated through stabilization, and others that are just rent control.

Very historical.

But exactly what the mix is, I really do not know.

Okay.

But you would say the majority, greater than the majority is still --

Only majority, but to what extent it is building by building, I really don't know.

Okay.

Okay.

That was it.

Thanks.

Thanks.

Bye.

I'll turn the call back to Mr. Ficalora and our speakers for any closing remarks.

On behalf of our Board and Management Team, I thank you for your interest in the Company, our strategies, and our performance.

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

Thank you.

Thank you.

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

Please disconnect your lines at this time.

Have a wonderful day.