Flagstar Financial Inc (NYCB) 2014 Q1 法說會逐字稿

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

Leading today's discussion of the company's first quarter 2014 performance will be President and Chief Executive Officer, Joseph Ficalora; together with Chief Financial Officer, Thomas Cangemi.

Also joining in on the 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 litigation, regulation and policies.

You'll find more about the risk factors associated with the company's forward-looking statements on page 6 of this morning's earnings release and in its SEC filings including its 2013 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 would like a copy of the earnings release please call the company Investor Relations Department at (516) 683-4420 or visit IR.myNYCB.com.

(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 first quarter performance before opening the lines for Q&A.

Mr. Ficalora, please proceed.

Thank you, Erica and thank you all for joining us this morning as we discuss our first quarter performance which was highlighted by the growth of our held for investment loans, the growth of our deposits, the quality of our assets.

And our solid financial results with GAAP earnings totaling $115.3 million or $0.26 per diluted share in the quarter and cash earnings totaling $125.7 million or $0.29 per diluted share.

Included in our GAAP and cash results was a one-time charge to income tax expense for $4.5 million, the result of a change in the New York State tax laws that took effect on March 31.

Meanwhile the one-time charge to income tax expense was exceeded by after-tax securities gains of $2.9 million together with a $2.3 million after-tax gain on the sale of Visa class B shares.

Now that these items are behind us I'd like to focus on those aspects of our performance that in our view were the most significant.

First on the list of course was the growth of our loans held for investment, and more particularly, the growth of our multifamily loan portfolio.

Held for investment loans rose 13.8% annualized over the course of the quarter while multifamily loans rose at an annualized rate of 14.6 %. That's the largest growth in many years.

In the first quarter of the year we originated $1.9 billion of multifamily loans for investment representing 69.1% of all the held for investment loans we produced.

Commercial real estate represented 16.8% of our current first quarter production with originations of CRE loans totaling $472.7 million.

While originations of CRE loans declined sequentially and rose from the year-earlier level, the volume of multifamily loans produced rose $96.3 million linked quarter and $397.2 million year-over-year.

Of course the growth of our multifamily and commercial real estate loans is driven by two factors.

First, the volume of loans we originate over the course of the quarter.

And second the level of refinancing activity and property sales.

After four consecutive quarters of robust activity, in our local real estate market property transactions declined in the first three months of this year.

As a result prepayment penalty income declined to $20.4 million in the current first quarter from $33 million in the fourth quarter of 2013.

Nonetheless, it is important to note that the first quarter is typically our lowest for prepayments and that the $20.4 million in prepayment penalty income we recorded in the first quarter was the highest level we recorded in the first three months of any year.

Meanwhile, prepayment penalty income added 19 basis points to our margin in the current first quarter as compared to 32 basis points in the trailing three-month period.

As a result our first quarter margin fell to 2.72% from 2.92% over the course of the quarter with prepayment penalty income accounting for 13 basis points of the 20 basis point decline.

Absent prepayment penalty income, the decrease in our margin would have amounted to seven basis points, within the range of guidance we gave on last quarter's conference call.

With a current pipeline of $3 billion including $2.4 billion of loans held for investment, we would expect to see a meaningful level of loan and asset growth throughout the current year.

Not incidentally, multifamily loans represented the bulk of the pipeline of held for investment loans.

As an aside I do want to note that while multifamily and loans remain our primary assets we were also pleased by the growth of our smaller held for investment loan portfolios at the end of March.

In the time since we added specialty finance to our product menu, the portfolio of specialty finance loans and leases has grown to $220.2 million, including $48.5 million or 28.2% rise in the first three months of this year.

It's important to note that this is a floating rate book of business that features an attractive current market yield.

Similarly, our portfolio of one-to-four family loans held for investment grew to $627 million at the end of the quarter including a $66.2 million or 11.8% increase since December 31.

Our current pipeline includes one-to-four family loans for sale of approximately $560 million exceeding last quarter's pipeline by approximately $160 million or 40%.

While originations of one-to-four family loans for sale declined over the course of the current first quarter we nonetheless saw a 14.6% increase in mortgage banking income as income from originations and servicing income both rose sequentially.

While the growth of our loan portfolio was certainly gratifying, so too was the deposit growth we enjoyed.

In the first three months of the year deposits rose $1.1 billion and we would expect to see continued growth over the course of the year.

As deposits increased we also took steps to reduce our wholesale funding.

As a result wholesale borrowings fell $277.7 million over the course of the quarter from the balance recorded at December 31.

The deposit growth that we enjoyed is indicative of a point I've made in previous conversations about our ability to increase deposits when we determined that the time to do so is right.

In addition to fueling our first time loan production the increase in deposits also served to enhance the funding mix.

In addition to loan and deposit growth, another first quarter highlight was our continued asset quality.

Notwithstanding the impact of the single loan that transferred to nonperforming status, non-covered assets represented 0.41% of total non-covered assets, and nonperforming non-covered loans represented 0.37% of total non-covered loans.

At the end of December the comparable measures were 0.40% and 0.35%.

Furthermore our ratio of net charge-offs to average loans was 0.01% in the current first quarter, consistent with the measure in the trailing three-month period.

Reflecting our asset quality, and the adequacy of our allowance for non-covered loan losses, no provision for losses on non-covered loans was recorded in the first quarter of this year.

As for the efficiency of our operations we were pleased to see a decline in our operating expense is largely due to a decrease in legal and other professional fees.

As I've mentioned before we've spent considerable time and resources upgrading our programs and processes and expanding our certain back-office departments to ensure our ability to comply with requirements of Dodd Frank.

We believe that the progress made over this time has been substantial, and as a result, our expenses declined in the first quarter of this year.

Based on the strength of our results and that of our capital position, the Board of Directors last night declared a $0.25 per share dividend payable on May 22 to shareholders of record at May 12.

This is our 80th consecutive quarterly cash dividend payment and our 41st consecutive dividend of $0.25 per share.

On that note I would ask the operator to open the line to your questions.

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

Please?

(Operator Instructions)

Bob Ramsey, FBR Capital Markets.

First question for you, Joe, I know you pointed out that prepayment penalty income while down sequentially is the highest level it's been in a first quarter ever, I'm just curious, as you look at the vintage of your books and activity in the market what you're thinking about for the year.

I know there's quarterly volatility and it's kind of tough to predict but do you think prepayments are stronger this year than last based on what you've seen in the first quarter?

I'd say the following.

There is no way to fully understand what prepayments will be.

It's a mix of many, many different factors.

It's got to do with the actual sale of assets.

If in fact pricing is very high, many of the people that have assets with us will in fact sell those assets, we will get lots of prepayments.

If there's plenty of product in the marketplace to buy, lots of people will be refinancing their loans because they need to actually have that funding to purchase these new opportunities as they may arise.

So the period ahead is uncertain, but we would expect that it will still be a strong period for prepayment income.

It's just something that we can't possibly measure.

Having come off of three consecutive years of increased prepayment income, we have no way of thinking that we're going to consistently increase the amount of prepayment income we have but there's no question that there will be prepayment income.

Okay.

I guess when I back out the prepayment penalty income the yield on your loan book this quarter I think was around 3.93%.

How does that compare with the yields on your pipeline as you head into the second quarter?

Bob, I'll answer that.

Right now the pipeline's approximately 3.60% going into the second quarter and the previous quarter the actual closing of loans was about 3.70%.

When you look at the current coupon that's embedded in the portfolio for multifamily only, that's a 3.73%.

So it's pretty much comparable with the current coupon that's remaining on the company's book.

Bob, it's important to note that overall with what Tom just said we're getting about a 3.70% on the loans that we closed over the last quarter.

That's pretty good in comparison to earlier quarters.

Have you all seen any firming of pricing or with the competitive pressures out there, was it just sort of a question of what you all are on the books this quarter?

I would tell you that obviously we look at it every day and obviously it's evolved with straight environment rates are significantly lower than what the forecast has as far as just rates between the 5-year and the 10-year, so it's a difficult environment but we're getting our share of business and the spread based off the 5-year treasury is attractive to how we fund.

Rates are not going down.

In our experience we're not seeing rates going down over the quarters from the last three or four quarters.

Rates are actually stabilizing.

I think your question is correct.

Rates in fact are not going down from here.

Great.

I guess last question and I'll hop out, but putting that all together, Tom, what is your outlook for the core margin next quarter?

I guess my view right now we're getting very close to in my opinion given a flat rate environment, not a rising rate environment we've been in a flat rate environment for a while, to stabilization so we're probably looking down four to six in the current quarter.

I wouldn't give guidance past the current quarter but four to six, and that should be close to the bottom, we're hoping that is the bottom.

So if you take six basis points being the worst, four basis points being the more aggressive view giving the interest-rate environment you're looking at maybe low 240 level for the margin ex-prepayment penalty.

And that should be hopefully the bottom.

Depending on interest rates.

Obviously I'm assuming the current curve.

Okay.

Great.

Thank you.

Collyn Gilbert, KBW.

Just quickly, Tom to follow-up on your comment on the multi-yield -- was 3.73% you said?

Did that include more seven-year product than what you guys have done the past?

I would say it's probably more five-year.

Over time you have some 10s but mostly 5.

Overwhelmingly we do mostly five-year lending.

We have some seven but the vast majority, it's our bread-and-butter type business over the past year, year and a half.

Okay, you're getting, I guess then the question is you've seen a pick up then in your five-year product?

Because I think wasn't the pricing --

It's blended.

It would be anywhere from 3.25% to 3.5% depending on the day but you have some 7s and 10s in there as well.

Got it.

Okay, so the 3.25% and 3.5% is consistent I think with what you guys have seen?

Okay.

I think what's most important is that the current coupon is 3.73%, that's the current coupon that's in the portfolio.

I got you.

Okay.

That's what's going away.

Okay.

That makes sense.

Okay.

And just mortgage banking, that was a strong showing this quarter, somewhat surprising.

Any thoughts there and what drove it and what your expeditions are going forward?

We've been fairly negative view as far as the marketplace given the environment.

We had significant volume of refi over the previous years.

It appears that December looked like on origination perspective the low point over the past five or six months.

So January was better than December, February is better than January and March is better than February.

And it seems like April is shaping up better than the previous month so we're moving in the right direction.

Unfortunately spreads are tight.

We're probably looking at all-in pricing margins around 70 BPs so it's pretty tight for the business model but you see, obviously servicing played a role there in helping total income view there as well but the bottom line is that we were guiding down probably 20%, quarter-over-quarter we were up 14.6%.

So obviously, pleasantly surprised but we were conservative on our guidance.

Okay.

And then just quickly on the deposit side, was that retail deposit or was that more broker deposits that came in?

A combination of both, 50% retail and 50% institutional.

More than broker deposits.

No broker deposits.

No broker deposits.

Okay.

All right.

Thanks.

Yes.

Ken Zerbe, Morgan Stanley.

Just a further question on the deposit growth.

Has anything changed?

Because it seems like obviously you're putting a little more emphasis on deposits which makes sense.

Especially with the AmTrust branches.

The bottom line is we've had a long-standing business model of growing deposits when we do deals.

We have an elongated period that we haven't done a deal.

So we're really doing what we naturally have the ability to do.

We could grow deposits whenever we choose to grow deposits.

We typically weight in growing deposits until we execute on a deal.

So since it's been such a long period we decided that we would take some deposits in this quarter.

Ken, obviously we have some very strong loan growth metrics that we have to fund and obviously the money is inexpensive when you compare to wholesale so it's a nice match for us right now.

Got it.

And Joe, should we take your comments or your new desire to grow deposits outside of an acquisition to indicate anything about the acquisition out there?

No.

I think the important thing here is that it's a fluid environment.

The ability to grow deposits is something that we obviously can turn on and turn off.

This demonstrates how readily that's doable.

And the reality here is that it's not a long-term commitment to something.

It doesn't change our perspective with regards to doing deals.

It just means that we wanted to actually take some deposits in this quarter, and we did.

Okay.

And as you can see the growth in our assets was huge this quarter.

The growth in our loan book is probably the long strongest growth that we've had in a long period of time.

Got it.

Just a quick question, on the specialty lending business, any -- when should we start to see a pick up there?

I know it's been sort of an opportunistic type business to be in, but just wondering if there's any improvement or growth on the horizon?

Ken, it's Tom.

I would say that we are ahead of budget in respect to profitability which is great, and one year out we're profitable.

That was the goal and the loan growth is starting to mature going into 2014.

We're seeing some nice growth.

We expect to see probably more outpaced growth going to the next few quarters.

They're ramping up very nicely.

The first few months is just getting ourselves, putting the business model in place, but we're running around $220 million going into the beginning of the year.

You're going to see very strong growth, potentially double the growth you saw in the previous quarters.

You'll see some nice growth in 2014.

As Mr. Ficalora indicated, that's a floating rate instrument and the yield is approximately 3.80% going to this environment which is attractive compared to current market yields.

All right.

Thank you.

Yes.

Moshe Orenbuch, Credit Suisse.

Maybe you could talk about a bit about how you're seeing the competitive environment in the core multifamily market?

Then I have got a follow-up.

I think the marketplace has many interested players.

Some of them are newer to the market, some of them have been here for long periods of time.

It's really not dramatically different than it's been over the last year or two.

Lots of players that are relatively small in comparison to those that they're replacing and much more importantly, those assets that are coming to the market in many cases are coming out of structured debt instruments, those are very large players that were in the market in '06, '07, '08.

They're not in the market at all now.

And therefore there's plenty to go around, evidencing that we in fact have grown our book by more in this quarter than we've grown in many years.

I would add the question at the growth level, we are currently in the first quarter ahead of our growth targets.

We're looking at a $3 billion total pipeline of which $2.4 billion is held for investment.

You have that coupled with the fact that the specialty finance book is growing.

You'll start seeing some more outsized growth in 2014 there.

And you have the fact that our warehouse is probably close to the bottom as of the end of the quarter.

So you should see some growth in the warehouse book, so you should expect to see some good asset growth on the loan side this year.

Great.

And as kind of a follow-up, could you talk a little bit about if we had a little bit of a steepening where short rates stay where they are and long rates start backing up like they did just a little less than a year ago, how that impacts volumes and margins and securities?

It's actually a good thing, no question.

Obviously we believe it will be a better operating environment for us.

Being low for too long is not good for anybody.

That's where we are today, so we are managing through a tough environment.

We would like to see a steeper curve and if it's a steeper curve we make more money.

The good news is that the portfolio, as in fact each and every quarter passes, the portfolio yields are coming down.

So the ability for our margins to stabilize and widen, they are in the horizon.

Right.

Lastly just as a clarification, Tom, you had said low 240s for the core margin as kind of a bottoming point, does that imply a couple of quarters?

Yes.

It looks like we're in it, this quarter, this should be, hopefully.

I guided down four to six basis points for Q2.

And that takes you down to somewhere in the 240s level, 245, 246, that should be the bottom all bearing the curve.

Obviously if rates do something that we don't anticipate that would impact the margin but given a flat rate environment that should be the bottom for the company and if the rates have a sloping curve we'll probably see some margin expansion.

Got it.

Thank you.

Yes.

Dave Rochester, Deutsche Bank.

This is actually [Temor Brazil], I'm filling in for Dave Rochester.

Just a couple of questions.

First one I guess is for Tom, can you provide a reconciliation within the servicing income given the MSR valuation adjustment and what the net hedging gain or loss was?

Sure.

I'll just reconcile the entire amount, the $14.609 million of revenue that was reported, the gain on sale from fair value derivatives was $3.778 million.

Loan servicing fee income was $12.310 million.

The change in MSR value was a negative $9.821 million.

And a gain from the MSR hedge was $8.342 million.

If you reconcile those numbers that gets you to $14.609 million.

Okay.

Great.

Thanks for that.

I guess just looking at the strong asset growth this quarter, the increased loan pipeline and just generally the more optimistic commentary regarding loan growth, is there a potential that you guys reach that $50 billion threshold towards the end of this year?

And maybe just your updated thoughts on reaching that $50 billion.

I think it's important to note that obviously we can manage the growth of the company.

And also the consequence of hitting the $50 billion mark is a four quarter assessment which goes into the future periods.

So we're not going to be impacted, even if we were, to let's say hit the $50 billion mark we're not going to be impacted until sometime in the end of 2015 or the beginning of 2016.

And that would be something that would be actually decided over the quarters ahead.

It's not something which is automatic.

It's something which takes into consideration a lot of information that evolves over a period of quarters.

I would just add we're very mindful of the planning phase going above $50 billion, so we're paying attention to that and as Mr. Ficalora indicated there is a planning phase and time period thereafter when you the four quarters of the average of $50 billion.

Okay.

Great.

And just maybe a follow-up on that for you, Joe, can you maybe provide a little bit of color regarding recent M&A chatter?

Recent M&A chatter?

Generally?

I think there's no question that there's going to be an uptick in M&A activity throughout the country over the period ahead.

There are an awful lot of institutions that are highly desirable of doing deals.

And they're just situating themselves as best as possible so as to make that happen.

As you're fully aware, doing a deal requires a lot of preparatory work with the respective regulators.

Each bank has to in fact ensure that they've communicated clearly with their regulators before they actually negotiate a deal to public disclosure.

And that does take some time and it does take a serious amount of effort.

But that doesn't mean there isn't a need for consolidation and a desire for consolidation within the banking industry.

Consolidation is the best way to make the industry stronger, and clearly, there's going to be consolidation in the period ahead.

Okay.

Great.

And just one last question, since the appointment of the new mayor here in New York that seems to be consistent chatter regarding the potential for rent freeze on rents tenants and I know your prior commentary has been that there's been very little impact to the multifamily market yet.

I'm just wondering from a theoretical perspective what kind of impact do you think the implementation of rent freeze would have on cap rates and subsequent market activity?

I think there's no question that the real estate market in New York is a very vibrant marketplace, it's vulnerable to adverse turn.

Typically in the at market area which is what is commonly the case everywhere.

With regard to rent regulated housing, the last thing the mayor would want to do is destroy the benefit or the value of rent regulated housing for the individual tenants.

If they do something that changes the practicality, let's be very clear.

There have been historical periods where rent regulated housing disappeared in thousands and thousands and thousands of units in buildings that went into default.

The single worst owner of real estate in New York City was New York City.

So there is no way in the world that it helps rent regulated tenants by having rent regulated housing deteriorate.

So there's no expectation that any action by the Rent Control Board or by the mayor is going to have a detrimental effect on tenants.

You can't make the situation better by devaluing the value of the buildings that in fact house rent regulated tenants.

So I think we're in a place where there's a lot of discussion about what will be done.

But at the end of the day what will be done will not be detrimental to the tenants and therefore it won't be detrimental to the value of the housing.

Okay.

Great.

Thank you for the color.

Sure.

Matthew Kelley, Sterne Agee.

Nice pipeline going into the second quarter.

Should we expect to see no provision again?

Or walk us through the analysis on why you don't need a provision for pretty significant growth.

Matt, we're in a very unique position.

We are probably in the best asset quality we've seen since going to the recession.

We have a range of reserve which we're hovering at the back end of the range, which is at the high-end, and my guess right now, if asset quality continues to perform, there's no adverse change in credit quality this year you probably have no provision this year.

Our battle right now is to deal with recapturing because obviously we expect to see more NPA's come off the book, we had a one-off this quarter, we had some very unique things happening with the book right now where we'll see some declines and all bearing aside, if credit quality remains strong we should not see any provisions in 2014.

So how low could the reserve coverage ratio go on non-covered loans.

We are in a place where the likelihood is that the reserve benefits from the disposition of assets.

Matt, I'm sorry.

I didn't hear that last comment.

I was just wondering, how low can the reserve to non-covered loans go?

It's at 45 basis points now, so no with no provisions and lots of growth, where do you see that a year from now?

We go through this quarterly exercise.

It's a process growth we go through internally.

Remember as we look at the four-year look back, losses drop-off from that year as we look at the out years for actual losses taking place at the company we have a history of very low losses.

So if anything through this process, putting up reserves for no expectation of loss is a difficult exercise on accounting principles.

Yes.

So we feel pretty confident that given where the environment is, the environment's changed, we're in a very unique credit quality environment.

Things are very robust in the New York City marketplace and we don't have any losses.

Matt, reserves are for losses, they're not for loans.

So the growth in our loan book does not necessitate a growth in our reserve.

An expectation that we actually have assets that have a representable risk of loss is all we need to be worried about.

I would also add, Matt, that it was interesting that even the covered portfolio had a nice recapture given the quality of the national real estate market.

We have loans that was associated with the AmTrust franchise throughout the nation and we had these pools recovering in this environment so there is definitely a recovery in credit throughout the United States.

Granted our investment portfolio, that we had the loans held for investment, is predominantly in the New York Metro area the covered portfolio gives you an indication that we're seeing some of these pools actually perform better than expected.

Okay.

And the just the second question, what were the recent terms on the new deposit money that was brought in, if you could break it out by retail and institutional that would be helpful, and I have one follow-on.

I would say the blended, obviously the high cost money was probably somewhere between 80 to 100 BPs on the CD side.

We had some interesting promotional accounts that went out through our retail franchise.

And on the institutional side we're looking at around 50 BPs, so blended, probably like 65, 70 all in?

Got you.

And then with the $50 billion threshold kind of in now here over the next, call it 6, 12, 18 months whenever, where would you like to see the loan or deposit ratio as you go through that level, and if you could also comment on your view on the dividend and the sustainability of the dividend, that have high payout ratio as you go through $50 billion now that that's something in our sights here?

I would say on a loan to deposit side, we're very comfortable with where we are.

If anything we are at a low point historically as a company.

As Mr. Ficalora indicated we typically grow our deposit franchise through acquisitions.

It's been a while since the company acquired an institution to fund its growth mission.

So we feel pretty geared up.

We've been saying it for quite some time that second half of 2014 could be the opportunity for this company.

We're working real hard to line that up.

And as far as the loan to deposit ratio it's not a concern to us.

We ran as high as 165.

Right now we're at the lowest range we've seen in a while.

So we believe that we have capacity and as Mr. Ficalora indicated, the ability to go into the deposit market and bring in funding to fund our loan growth.

As far as the dividend rule, it's very crystal-clear, right now we're below $50 billion and we focus on that.

If we were going to go over $50 billion, that's another process.

There's no question that we have open communication with our regulators with regard to deals that we might consider doing.

Likewise we have communication with our regulators with regard to our dividend.

We're not going to accidentally affect our dividend.

So the future period will in fact be a culmination of what we believe is in our shareholders' best interest including our dividend.

I would just add, it was exciting going through the March period working with our regulators, filing DFAST, with bells on, very comfortable where we are as a company and we continue to move into the next phase.

Our regulators are our partners, we are working with them and we're very pleased ongoing through the March period and now we're looking to the second half with the expectation that we could be back in the M&A game here and we believe that things are picking up, there is lots of conversation and it would be surprising for the company to tiptoe over $50 billion.

Okay.

Thank you.

Yes.

Steven Alexopoulos.

Just to follow-up on that point if you guys did crossed the $50 billion level due to a deal rather than organic growth, is it your understanding you still get the four quarter period before you'd become a CCAR bank?

CCAR versus capital planning, two different things.

You really have to bifurcate those issues.

There's a lot of rules you have to follow.

This is a complex process.

I don't want to be misquoted here.

You have CCAR regulations, you have capital planning regulations.

You have LCR regulations that are kicking.

So there's a number of things that we are paying attention to and we're spending a lot of man-hours making sure we get this right with working with our regulators so I think I want to say again, that this process is fluid.

If there is a deal to do and we go over $50 billion, our regulars will be right alongside with us approving that process.

And they'll give us the timeframe and you would expect that we'd have most of those metrics in place when we present a deal that takes us materially over $50 billion.

I think it's important to note that we would actually represent the first circumstance where the regulator and an institution would have to judge on the consequence of that kind of a transaction.

So there is a lot of preparatory work that is being done in that regard.

So I think that exactly how it will come out we'll understand before we do it.

Because we'll have all that preparatory discussions with our regulators.

And therefore, I don't think we should assume anything from history because this will be the first time it happens.

Right.

I will say specifically that first ones to know are going to be regulators, not the Street, because we will be working with them in advance of any transaction.

Got you.

Maybe Joe, just, just to follow-up on your prepared comments regarding the back-office, if I look at GAAP expenses, they are down roughly $2 million or so from the year-ago quarter.

How much are you incrementally spending now for BSA, AML, stress test compliance, and what are you offsetting these costs with given the total expenses continue to fall?

It's Tom.

I'll answer that question.

Obviously we had a significant amount of costs over the past three and half years to get where we are today.

This is our mission statement and again we've said it for the past year and half that it looks like second half of 2014 is where logically we would be in a very good position to capitalize on M&A because things have to be done as a bank given the changes with Dodd Frank and the regulatory environment.

Lots of expenses.

We envision going forward if we cross it, there will be more expenses.

And given the requirements that is assigned to the bank at $50 billion.

However, where we stand today we're going to run around $145 million a quarter, I'm going to give specific guidance on that, that's a reasonable range of our non-interest expense going forward, all bearing an M&A transaction and crossing $50 billion.

Okay.

Tom, any color on what you've been offsetting these increases?

Yes, a couple things, we had, remember we had a much different asset quality book going into the recession so the foreclosure expenses are down materially.

You have a large credit that goes into the book.

It's expensive.

You have real estate taxes, you have operating expenses, you have FDIC costs that are significantly lower as the environment has changed.

We envision that to continue.

And we envision that the overall foreclosure expenses to decline as well.

So we're running a tight ship.

We made some cost-cutting at the mortgage banks.

We're hoping that would ramp up again and hopefully we're down to the, we're trying to operate that obviously monthly.

Where we are in the black not in the red.

The good news there is that we've managed that very well, we were profitable every month with that business model.

They're doing a fine job there in mortgage banking in a very volatile, difficult environment and we are a very cost conscientious company.

The company has a history of having one of the top efficiency ratios since its public life, that's not going to change.

We're also in the phase of the credit cycle where we are likely to actually have recovery on assets rather than any additional losses on assets.

The net effect of that is only positive to us.

That goes back to the question with the reserve.

We will probably see some recoveries going into 2014 which would be more difficult justifying the level of our reserve we have currently.

So it's a challenge.

Okay.

Maybe just one final question.

Of the $21.5 billion of multifamily loan balances, roughly what percent of that would be on rent-stabilized properties?

It's actually very hard to know that.

There are no rent-stabilized buildings.

There are rent-stabilized tenants so at any given time the number of rent-stabilized tenants in a building devolves.

Typically going down.

But the reality is that that's ever-changing so we do not have a metric that we could share with you.

A very large percentage would be rent-stabilized.

But I don't know what number.

I would say the vast majority of the business model is some form of rent stabilization control given the nature of the product mix.

If you're doing a five-year loan in this environment, that's typically for some form of rent control and rent stabilization, that cash flow.

Okay.

Fair enough.

Thanks for the color.

You're welcome.

Kenneth Bruce, Bank of America Merrill Lynch.

It's [Cory Bohn] on for Ken Bruce.

So just looking at the deposits, I know you guys are building out the deposit base here.

But if I remember correctly, I think you guys are below market average on your rates.

Just wondering should we expect deposit costs to increase as you guys build those out and generally --

What I would say is that historically ex-acquisition this company's always been the low rate pass.

We have to fund our business model.

So given that when we haven't acquired institution of materiality since 2010, late 2009, we have a very unique opportunity to grow the loan book.

So with that being said we are using the deposit market to do so.

Deposits right now are in most cases cheaper than wholesale.

So we have to take advantage of what's attractive in the market place.

But the company's historically has always been as you said a low ratepayer.

To be in the market and be at the median range, would give with us the opportunity.

We have unique branch franchises not just in New York, we're in Ohio, Arizona, we're down in Palm Beach, Florida in the Palm Beach area, very attractive market to bring in funding at will.

Obviously paying a little bit more than the low ratepayer but we feel confident that we can continue with the strategy ex-acquisition.

With an acquisition that changes the game materially for this company.

We have a long history of doing transactions on the funding side.

Okay.

So I guess you guys saw two basis points or so on total funding costs.

How much more room do you guys see as you guys build out the deposit base, where do funding costs actually get to?

I wouldn't be too aggressive on reducing our cost of funds.

To keep it flat would be wonderful, if we're building billions of dollars of deposits to fund our growth.

Again, the low-lying fruit was taken down two and half years ago.

As far as the cost of funding concern.

You may see some benefit on the wholesale liability side because we're not going out long right now and we have some that's coming due in the next few years or so but as far as overall cost of funds I think the benefit here is going to be on asset yield stabilization and growth.

Okay.

Thanks.

Yes.

David Hochstim, Buckingham.

Could you just repeat where your MSR is at the end of the quarter and how many loans your servicing and --

Sure.

We have approximately $20.6 billion of UPB.

And the capitalization on that is a 4.6 multiple.

Which is valued at $238 million to capital.

Okay.

And then do you have any Visa shares left to sell or any MasterCard shares?

No.

We're out.

That's it.

Okay.

Those are my only remaining questions.

Thanks.

Thank you.

Rick Weiss, Boenning & Scattergood.

Question on your interest rate risks or sensitivity.

Has that changed much since December 31?

Again, Rick, we are definitely liability sensitive right now going into this environment.

It's a difficult rate environment.

We have a low flat rate environment for too long so right now we are liability sensitive.

As you can see we are growing our deposit book.

Our goal is to continue with that strategy ex-acquisition, and obviously, if there is an acquisition that will change the entire interest rate risk profile of the company, but yes, we are moving towards a little bit more liability sensitive.

Given this interesting environment that we're in right now.

Okay.

I guess also let me just for modeling purposes, what tax rate would you project for the rest of this year?

Obviously, we took that one time tax expense due to the change in the New York State tax law.

I would model 36.85% for the year.

Okay.

That's pretty exact.

Thank you.

Specific.

There you go.

And finally just to clarify on loan loss provision where you said it won't be -- did I hear right there won't be any approval?

Yes.

I don't envision for 2014 a provision.

If anything, as Mr. Ficalora indicated, we're envisioning some recoveries.

We had some very unique assets that are probably going to pay off through sales and/or recoveries that we're expecting through the legal system.

And as I indicated we're at the back end of the range so we're at the high end of the range for a period of time.

Given that those out years are dropping off when you look at expected losses, the forward look back here is that you have very little expected losses in the future based on the current environment.

Remember, Rick, most of our loans, 96.5% of it is in the New York City marketplace.

Rick, our experience over the course of decades is significantly better at disposition than that for other lenders.

And we're in the phase here where many of the assets that we in fact have in ORE, by example, are going to be disposed of at better values than we're carrying them.

And obviously, that would be predicated upon the valuation of the credit market.

The credit markets change adversely then you'd have to reassess.

We reassess this every quarter and it appears that things are very strong in the New York City marketplace.

Okay.

Yes, because I think if I go back historically, looking at -- you've run the loan loss reserve ratio at 45, 50 basis points before so this is back to the future then.

Exactly, what I would say going into the Great Recession, we had $26 million of total NPA's going into the Great Recession.

We had 52 consecutive quarters without a charge to the company's provision.

So we have a history of asset quality and that's the company's profile.

We have a long-term history of strong asset quality metrics, so we have to -- we go through GAAP, this is a quarterly analysis and obviously that drop off years as we continue going into out of the recession and years that are, we'll call it more attractive as far as asset quality, we have to justify our reserves.

Rick, over the course of four plus decades, our performance with regard to assets, disposition significantly better than that of the banking industry as a whole.

So our need for reserves is very different than the need of reserves in other banks.

I would just add the positives positive surprise was definitely on the AmTrust portfolio looking at the amount of pools that actually recovered due to borrowers going out and getting new financing on loans that we were surprised they got new financing, adjustable-rate mortgage that four, five years ago could not get financing have left the portfolio and the quality of that pool has improved significantly.

So that was a surprise in the quarter.

Okay.

I got it.

That's all my questions.

Thanks a lot, guys.

You bet.

Tom Alonso, Macquarie.

Just real quick one for you, Tom that $145 million OpEx number, that's ex-amortization, right?

That's correct.

Yes.

Okay.

Thanks, guys.

That's all I had.

Sure.

Collyn Gilbert.

Just really quick, I don't want to beat a dead horse on this, Tom, but you said zero provision for 2014.

Does that include then the impact of the negative provision this quarter so we will actually see gradual increases in the next three quarters?

Again, we do this analysis on the covered portfolio.

I don't -- again it depends on the performance.

If anything, remember 80% of that, 80% to 95%, we have the coverage from the FDIC, so net-net it's immaterial.

So you need to take the expense side as well as the provision side, so netting that is immaterial.

Okay.

Yes, I got it.

Okay.

And then just finally, Tom --

Collyn, I want to stress this point.

The overall pool of the AmTrust surprisingly turned more positive than we expected, that's just giving an indication of the credit metrics in the United States.

We don't do a lot lending outside of the New York City marketplace.

We do some, but this gives you a good indication that things are recovering through other parts of the United States.

Okay.

And then Tom, if we hear you, and interpret your comments correctly, you kind of are seeing -- you've shown that you can generate deposits.

You're not expecting a huge increase in funding costs.

Loan growth is the best that it's been.

Asset yields are -- credit's never been better.

These are all really positive comments that you're making.

We think so.

Is this reflected -- but truly, is this reflective that you feel more optimistic today than you felt in a long time about the nature of your business?

We're very optimistic.

It's been a challenge for two and half years to figure out where margins are going.

And again I feel pretty confident that we bottomed out the margin this quarter.

All bearing an unforeseen change in the curve.

I think one of the gentleman that answered -- raised the question about what happens if rates go up and it's a sloping curve, we will make more money.

If we have an inversion, that would be terrible for the company.

I don't envision an inversion, but I'm running a flat rate environment in my model and I'm bottoming out here somewhere in the mid-240s, ex-prepay so we're right there.

Okay.

All right.

As you indicated there is some very strong multifamily loan growth right now.

Obviously we don't dictate the rates.

The market dictates the rates and we participate in the market.

But we feel pretty good that we will command a sizable share of that book of business.

I know the prepay comp is difficult because we had a monster fourth quarter on prepay, as Mr. Ficalora indicated, that was the largest first quarter prepay in the history of the bank.

So it's tough to look at the comps and it's tough to give guidance on prepay because a lot of it's going to be predicated on property transactions.

And people going out for refinancing to buy buildings.

But it's still fairly robust in the New York City market so it's way too early to give any guidance on prepay.

We never give guidance on prepay but we came out with a pretty strong Q1 on prepay.

Okay.

Thanks.

You're welcome.

This does conclude our Q&A session for the day.

I would like to turn the call back over to Mr. Ficalora for any closing remarks.

Thank you.

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 this summer when we report our earnings for the second quarter of 2014 on or about July 23.

Thank you.

Thank you.

This does conclude today's first quarter 2014 earning's conference call with the Management team of New York Community Bancorp.

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