Flagstar Financial Inc (NYCB) 2015 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. Today's discussion of the Company's first-quarter 2015 performance will be led by 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 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 feature 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 politics.

You will find more about the risk factors associated with the Company's forward-looking statements on page 7 of this morning's earnings release and in its SEC filings, including its 2014 annual report on form 10K. The release also includes reconciliations of certain GAAP and non-GAAP earnings and its capital measures, which will be discussed during this conference call.

If you like a copy of the earnings release, please call the Company's investor relations department at 516-683-4420 or visit ir.mynycb.com.

(Operator Instructions)

To start the discussion, I will now turn the call 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, you may begin.

Thank you, Steve, and thank you, all, for joining us this morning as we discuss our first-quarter 2015 performance, which was notable for the strength of our earnings, the expansion of our margin, the quality of our assets, and the proactive management of our balance sheet.

To begin, we reported first-quarter GAAP and cash earnings of one $119.3 million and $129 million, which were respectively equivalent to $0.27 and $0.29 per diluted share. Notably, our GAAP earnings provided a 1.04% return on average tangible assets and a 14.32% return on average tangible stockholders' equity.

The strength of our earnings was largely fueled by the net interest income, which rose $9.1 million sequentially to $292.8 million. The increase was primarily driven by an $8.3 million sequential rise in prepayment penalty income to $30.1 million, reflecting an increase in property transactions and refinancing activity in our primary lending niche. The increase in transactions was not unexpected, given the increase in property values in our local market and the tendency of borrowers to capitalize on such increases when they occur.

The increase in prepayment penalty income also resulted in the expansion of our margin, which rose 7 basis points [linked] quarter to 2.68%. Specifically, prepayment penalty income contributed 28 basis points to our first-quarter margin, as compared to 20 basis points in the fourth quarter of 2014. Absent the contribution of prepayment penalty income, our margin would have declined 1 basis point linked quarter, a better result than we projected on our last earnings conference call.

Reflecting the rise in prepayments and the sale of loans, which I'll further discuss later, our portfolio of held for investment loans totaled $33 billion at the end of the quarter, a modest decline for the balance at December 31.

As mentioned this morning's release, the sale of loans was largely achieved through participations, which has proved to be an effective means of supporting two distinct goals. First, the sale of loans through participation enables us to retain control over those assets. And second, it supports our short-term objective of limiting our asset growth.

As we mentioned on our last earnings conference call and in the release we issued this morning, we've been taking steps to remain below the current SIFI threshold of $50 billion while, at the same time, maintaining or increasing the high volume of multi-family and commercial real estate loans we've produced. In the first three months of 2015, we reduced our assets by $307.5 million while, at the same time, producing $2.3 billion of multi-family and commercial real estate loans, combined.

The reduction in our balance sheet was achieved through securities calls of $40 million and, more particularly, the sale of $553.3 million of multi-family commercial real estate and one-to-four family loans. Multi-family loans accounted for $410.5 million of loans we sold, mostly through participation, while CRE loans accounted for $97.6 million of the quarter's sales.

Notwithstanding the sale of such loans and the increase in repayments, our multi-family loans totaled $23.5 billion at the end of the current first-quarter, reflecting a modest linked quarter reduction, while our CRE loans totaled $7.8 billion, reflecting a modest linked quarter increase. In other words, while we were clearly taking steps to limit the growth of our assets, our generation multi-family and CRE loans was in no way compromised. The pipeline we reported today is yet another indication of our drive to maintain our status as a leader in our traditional lending niche.

Of the $3.4 billion of loans -- our pipeline as of this morning -- approximately $10.2 billion (sic - see press release, "$2.2 billion") are loans held for investment while another $1.2 billion approximately are one-to-four family loans held for sale. multi-family and CRE loans represent the bulk of the pipeline, [but] held for investment loans were reported. And by that, I mean over 91%.

There's one last comment I'd like to make about our first-quarter loan sales. In addition to enabling us to limit the growth of our assets, the sale of loans generated a first-quarter gain of $5.9 million. The gain on sale of loans is included in non-interest income, which totaled $52.2 million in the first three months of this year. Also included in that amount was mortgage banking income of $18.4 million, reflecting a $2 million increase from the trailing quarter, (inaudible) as the decline in residential mortgage interest rates prompted an increase in home purchases and refinancing activity.

While non-interest income declined, despite the gain on the sale of loans and the rise in mortgage banking income, the linked quarter reduction was due to fourth-quarter securities gains of $8.7 million and the fourth-quarter recovery of $17.3 million on a security we had written off in 2009.

The next item I'd like to address is the quality of our assets, which continue to reflect the benefit of our underwriting standards and the quality of our particular multi-family lending niche. For the fourth consecutive quarter, we recorded net recoveries rather than net charge-offs. In fact, net recoveries total $1.3 million over the past 12 months.

We also reduced our balances of non-performing, non-covered loans and assets. Non-performing, non-covered assets represented 0.29% of total non-covered assets at the end of the quarter, an improvement from 0.3% at the end of December and from 0.41% at March 31, 2014.

Thus far, most of our comments focused on our assets. Now, it's time to look at our liabilities.

Consistent with our drive to attract deposits, deposits rose $602.7 million from December 31 balances to $28.9 billion at March 31. We also reduced our borrowed funds by nearly $1 billion, continuing the transition of our funding mix. As a result, deposits represented 60% of total assets, and borrowed funds represented 27.5% at March 31.

Moving on to capital, which continues to be solid. Stockholders' equity rose to $5.8 billion, while our tangible stockholders' equity rose to $3.4 billion at the end of the quarter. The GAAP amount was equivalent to 12.01% of total assets. The non-GAAP amount was equivalent to 7.32% of tangible assets at that date.

In view of our earnings and capital strength and our commitment to returning value, our Board of Directors last night declared our 45th consecutive quarterly cash dividend of $0.25 per share. The dividend is payable on May 22 to shareholders of record as of May 11, 2015.

On that note, I would now ask the operator to open the line for your questions. If we do not get to all of you within the time remaining, please feel free to call us later today or this week. Thank you. Operator?

(Operator Instructions)

David Hochstim, Buckingham Research.

Good morning.

Good morning, David.

I had a couple of questions for Tom. I wonder if you could give us some guidance on non-interest expense for the next couple of quarters and then also the breakdown on mortgage banking income.

Good morning, David.

So I would say, on the expense side, obviously, we had an elevated level. And obviously, in the press release, we've identified a few items that increased more than we expected. In particular, we have some severance costs as well as increase in payroll taxes and the like. And also, the pension expense increased, [and that will be ongoing].

So my guess, [in the] going-forward, here, were looking at a range of about $149 million for operating expenses versus the previous quarter -- about $155 million. That's ex-CDI. [So I would see a] reduction from Q2 versus Q1.

Okay.

And on the mortgage banking side, the Company had a very strong mortgage banking quarter. We were up approximately 12%, quarter over quarter sequentially. Obviously, January was a very strong month. We had a substantial rally in the treasury market.

We saw the billion lots come in in the month of January, so that was an impressive start for the quarter. And then it tapered off throughout the rest -- the remaining back half of the quarter -- but still had a very strong showing.

So with that being said, the mortgage assets are coming in very nicely, but not at those January levels, so I would be cautious on being too optimistic until we get to through the back half of this quarter. But it seems like we're doing good business going into the selling season, and margins, unfortunately, have tightened somewhat, in order to stay competitive. So my guess is that we're looking at levels of slightly below Q1 but hopefully above Q4.

Okay.

And then could you give us the gain and the impairment on servicing income for this quarter?

Yes. So for the quarter, we had $15.5 million of mortgage-related origination income. And the loan servicing fees was $11.8 million. We had a negative change in MSR value of $21.9 million, and we had a positive adjustment to the MSR hedge of $13 million, which brings the footing for $18.4 million, as compared to the net $16.5 million in the previous quarter.

Thank you.

You're welcome.

Dave Rochester, Deutsche Bank.

Good morning, guys.

A question on the margin -- how much did that extra yield maintenance boost the NIM or the security yields this quarter? And is that something you guys expect to continue, going forward?

So as you know, Dave, we have a sizable [Fannie Mae DUS] portfolio and some Freddie paper as well -- it's approximately $3 billion. Now, we don't forecast that, so obviously, we did get a benefit in Q1 for the margin of approximate three basis points. That, I believe, was about $4 million towards the positive impact in Q1.

But we have a very sizable portfolio. So it's reasonable to say that we received more potential yield-maintenance benefits from the [DUS] portfolio, but we don't budget that.

So ex the prepayments and ex the [DUS] potential that may happen down the road, you're looking at, unfortunately, a down margin, given the fact that you have the same interest rate and (inaudible) that we've been living with for the past few years. So we have a low rate environment, you have mortgage yields that are still coming in, and the five-year (inaudible) in the low 3%, which is still a nice spread at 165 to 175 over the (inaudible).

I've got you.

I'm sorry. I think we just got muted. Can you hear me, Dave?

Yes, I can hear you. Yes.

So I'd say the margin we're looking probably down, based on my similar guidance from the previous quarter, I'd say maybe five to eight basis points, depending on market conditions. That's excluding any value from the $3 billion [DUS] portfolio that we do have. For that to be significant, obviously, a lot of those transactions are principally due to sales transaction, not so much refinancing, but they're longer-duration type securities.

So that down five to eight BPs for next quarter, basically, assumes that three basis points of benefit you were talking about this quarter rolls off.

It's out. Right. I'm not giving any value to that.

Got you. Okay.

But that would be upside potential. And again, we're seeing -- occasionally, we do get some values from that portfolio. But remember, these are typically longer-dated assets that are put into the Fannie Mae products.

Got you. Okay, great.

And then, just on the balance sheet trends going into Q2. Should we expect more of the same kind of flat loan securities running off a little bit before you resume growth in the back half of the year?

So when we think about our strategy, I think we've done a good job over the past three quarters on articulating publicly where we're going to go with the balance sheet. Our goal is that we should see second-half growth. I think I said in the first-quarter that our overall net balance sheet gross should start to come back-loaded in 2015.

Yes.

We are well-positioned to move into 2016 if we decide to cross to the $50 billion world and become a [SIFI bank] in 2016. If we do that in the second quarter, that will push us out to a (inaudible) file in 2018, so it gives us ample time to prepare.

But most importantly, we've executed on the vast majority of the transactions that we need to have in our to get that 2016 timeframe. And you'll see some more transactions in 2015, in particular, second quarter. And from there, we'll see the balance sheet growth start to accelerate in the back end of the 2015 year.

So I would say that we feel very confident that we could do loan sales from time to time, but it's not going to be a necessity in order to keep us below the $50 billion mark. Because we're going to have some good growth, as we go toward the back half of 2015 -- on the loan side.

I think the important thing to recognize here, David, is that we would not be impacted by the SIFI rules directly until 2018. That emphasis is really important.

How we mechanically do it is something that we very firmly understand. But what the market needs to understand is that we will not be impacted by the rules until 2018.

Again, with the exception of LCR. We will be prepared for LCR once we cross.

Got you.

And then, from the stand of the LCR, how is that -- the plan -- progressing in the build-out of that segment?

It's moving according to plan. Our goal is to be fully implemented internally for 2015. And when we do cross over, we'll be able to be compliant.

Just one last one, on the expense guidance. I know you had a $4 million in severance which will likely be a lot lower in the next quarter, but you talked higher pension costs. Those probably stick around. What else drove that increase from what you thought about before, versus the $149 million now?

Ramp up of typical payroll taxes in Q1. That will be -- many offices will fulfill their requirements on payroll and (inaudible) and the like. That will be a significant adjustment Q2.

And the pension causes -- it is, unfortunately, the world we're living in, it's a lower rate environment for longer, and it's adjusting the -- unfortunate -- the liability that [hacks] the pension plan itself, as well as mortality rates. That has an industry -- [not] more of a corporate world phenomena.

So most pensions are increasing. Our number is about $1.7 million a quarter. That's in there. So when we adjust for those particular items, I'm looking at around $149 million guidance for Q2.

Got you.

And should it remain fairly stable through the end of this year, or do you see it up-ticking from $149 million?

I would say we can balance it there. Obviously, we're going to set some cost savings throughout the year. We're going to have some adds in regarding to our preparation to be a [SIFI bank]. So I think (inaudible), we should be pretty much around those levels throughout the year.

Okay, great. Thanks, guys.

My pleasure.

Ken Zerbe, Morgan Stanley.

Great, thanks.

Actually, just wanted to follow up. Just a really quick one on the whole $50 billion mark. Just given your answer to that last question, I mean -- knowing that you guys have wanted for so long to cross over $50 billion through a deal, and knowing that it's just really not happening over many years, is the new base case assumption that you just simply -- second-quarter, slow loan growth.

No.

Third, fourth ramp up, and you cross (multiple speakers).

No. I think the important thing to recognize here, Ken, is that we have a business model that we're very dedicated to. And we have very good reasons to believe that we can create great value for shareholders by executing on transactions whereby we grow the Company into being a better Company.

So we have a great deal of confidence that can be done. However, there's no reason in the world why we should not be preparing ourselves for the obvious -- that there could be, for whatever reason, a extension of time before we actually could execute on the closing of such a deal.

This environment is complex. This environment presents many opportunities, but it also presents a great deal of uncertainty with regard to execution time.

Given that, we are very much prepared to do, day-to-day, what we need to do so as to be effectively maintaining our earnings, maintaining our dividend, maintaining the quality of what makes this Company well-positioned to be an acquirer of others. Having said that, we cannot assume that the law is going to change, or that other factors are going to allow us to do this in a particular moment in time.

So the time that this can be done is truly in front of us, but we do not have certainly of that. That's why we're talking about 2018 under the rules, as they are defined.

And Ken, I would just add to Joe's comments, there, that we're expecting low double-digit net loan growth from here. So that -- we've already sold substantial assets, starting in the third quarter of 2014 and a continuation of the fourth quarter of 2014, as well as the first Q in 2015.

So where we stand today, we're modeling low double-digit net loan growth through our core business model. So we're originating. We have significant pipelines, our business is intact, and we may sell less loans in the future because we feel very confident that we have the ability to cross over [after] the transaction in 2016, which will push the CCAR requirements out to 2018.

I think the short-term business plan to manage through this interesting regulatory environment is intact, and I think we've been articulating it publicly, that we have a specific goal, here. We are in the multi-family business and CRE business in a very material way.

But most importantly, we are originating our product, and we have a tremendous amount of activity that's -- it's a very attractive asset class [that it's a] (inaudible). So we have the opportunity to continue originate and starting a backend of 2015 to grow again.

Yes. I think, Ken, it's a point to recognize that we're gaining market share in our fiscal asset and making money by actually sharing those assets with other bankers. There are plenty of bankers around the country who want the CRA quality of the assets that we're creating, and we get paid nicely for making that available.

Yes. And it does, as Mr. Ficalora indicated, through participations, we're working -- we're the controlling interest.

No, understood.

So last question, I guess -- barring a deal, if it does come, would you have any pushback to the sell-side community if they had you crossing $50 billion organically in early 2016?

I think we just said that on this call -- that we expect to cross sometime in 2016.

Yes.

I mean, the reality is that, again, we're not going to cross on January 1, 2016. That would be foolish to lose a complete year on CCAR. If we cross over the second quarter, which we believe we can manage our growth to cross over in the second quarter of 2016, absent an M&A transaction, we would then push our CCAR reporting requirement out to 2018.

Yes, LCR would kick in immediately, and we're preparing for that, and we've been preparing that for a while. But I think we expect the growth through acquisition, but absent -- if we announce a deal tomorrow, we still have to get that deal approved and closed, [regulatory-wise]. So it takes time. So absent an acquisition, you should expect to see the Company grow in 2016, north of $50 billion on a four-quarter average look-back.

Right. Ken, there's no accident, here. We are managing this well because we understand fully how to do that. So there will be no unexpected pregnancy. We're just not having sex.

So let's be clear, we're managing this in a manner that gives us high confidence that we can decide when we will actually cross over.

And I think, for the big picture, Ken, we moved on -- we expect to move on. I think we've moved on well over $2 billion of assets, either through calls and sales of securities and, more importantly, sales of loans -- some non-core and some core -- through participations.

But all in, we're going to move on close to $3 billion, and we should be -- we took the market risk, so that market risk is behind us, in respect of execution without loss. We've been executing these transactions profitably through our capital coffers, so we feel very confident that, where we stand today, we've minimized our market risk on execution.

Perfect. Thank you very much.

We're very happy about where we stand today.

Understood. All right. Thanks, guys.

Our pleasure

Steven Alexopoulos, JPMorgan.

Good morning, everyone.

To start -- to follow up on that. So now, at least, you're planning as a back up to cross in 2016 organically. How should we think about the ramp in expenses that will now be required? And will there be a large jump at some point, as you bring more consultants in, et cetera?

Yes, Steven. I've been crystal clear for the past multiple quarters. We've been working on this since 2011, so we're going into 2016. We do not expect any material cost increases to the Company's expense base.

Yes. I'd say to you, Steven, that the consultants that are nationally known are impressed with what they've actually been capable doing and recognizing in our environment. So that expense is already baked into the numbers you've been seeing.

And [bear in mind, our] expense ratio, based on a historic expense ratio, is significantly higher than it was six years ago. So we've absorbed significant costs. There will be more cost absorbed going forward, but it won't be material changes to our expense base.

On [each Q LA], what is the current balance of securities, and where do you need to get that to?

Yes. So, as indicated, we have a $3 billion [DUS] portfolio. And that's not level one, so that's a level two asset. So we will look at our complete (inaudible) securities when we do cross.

The downside risk, here, is that we have to buy substantial securities as we cross, which would add to the net interest income in a tighter margin perspective, depending on interest rate.

So we've been out of the securities markets for a extended period of time. We're still reducing our securities portfolio. When we do cross over, when we are required to be compliant with LCR, we will comply with the required level one security that we would need to have put on the balance sheet.

But we have an opportunity, given that we have -- we understand the multi-family business extremely well. We looked at the multi-family [DUS] portfolio as a tremendous value opportunity.

So for example, we're getting a high-yield business -- [this occurs, the purchase, years ago]. We're getting a nice, above-market yield. And we also have the benefits of yield maintenance on a $3 billion portfolio. So it's a very attractive asset class.

The offsetting of that would be going into the Ginnie Mae market, which are lower-yielding, longer duration. And we haven't bought Ginnie's in, probably, a good decade.

So that's something that we have to consider before we go into the treasury market and buy low-yielding treasuries as we get closer to crossing over $50 billion. But obviously, it's going to be interest rate sensitive and dependent, and we believe have adequate time to manage through that

Okay.

Maybe shifting gears for one minute. Astoria reported their multi-family pipeline fell almost 50% this quarter from year-end. They talked about the competitive environment being totally irrational. Your pipelines are up nicely, right? What you guys seeing in the market, right? As one of the largest players, I would think you would be seeing this, too.

I'd say that the marketplace is very rich. It has many players that are inexperienced and are excessively lending, putting way too many dollars on the table.

It does, in fact, represent challenge, but as evidenced by our unusual increases in our lending, we have relationships and knowledge of the market, such that we're able to be 15% loan growth last year. And loan growth this year is going to be extremely strong -- double digit. And we clearly have an ability to lend far more than we can portfolio.

So in that environment that everybody's recognizing is difficult, we have very good property owners in our niche that we lend to in a manner that is consistent with what we've been doing for decades. So I think that we're very pleased with how we're positioned in this marketplace.

There will be less involved lenders, newer participants in this market, who will lend too many dollars or otherwise not get high quality from this marketplace. That is not us.

Steve, I'd just add some more color to the commentary regarding the business. The pipeline that we have reported to have $2.1 billion, the average coupons are [$328 million]. So it's a strong coupon, when you compare that to the [five-year] treasury, which is around [$140 million].

If you look at where current market yields are today, it's between [$165 million to $180 million], depending on the marketplace, which is still North of 3% for the five-year paper. Seven-year products are about 3.5%. We see very little ten-year production right now, but if we were to do a co-op type transaction, it's around 4%.

So we're still seeing reasonable yields, but the spreads are very wide because the [rates are] typically lower from the belly of the curve to the back end of the curve. With that being said, we have a coupon that's sitting in our portfolio that the current coupon for multi-family at 3.54%.

So the continuation of that bleed is getting close to the market. I know this sounds repetitive every quarter, we've been saying this, but we're in a lower than longer environment. But with 3.54% on the multi-family paper, and we're originating around 3.25%. So we're pretty close.

If rates were to go higher in the back end of the curve or the belly of the curve, you start to see the [NIMs] stabilize sooner.

Perfect. Thanks for all the color.

Thank you.

Bob Ramsey, FBR Capital Markets.

Good morning, guys.

Tom, I was hoping you could talk a little bit more about loan sales. I know you sort of alluded to the fact that there already are some sort of in the works for the second quarter. What should we be thinking about, in terms of the balance and potential gain on sale for multi-family commercial real estate sales in the second quarter?

Obviously, it varies, depending on interest rates. We've been extremely proactive on trying to time our transactions to make real good economic sense. So all our loan transactions have been, I would say, principally well north of par -- somewhere in the $101 million to $102 million range, depending on market conditions.

And we expect to have a continuation in Q2 of a reasonable transaction, probably close to around what we saw in Q1 -- that type of principal balance. I'm not going to specifically say the execution until we execute, but that's obviously -- we feel pretty confident about that.

That will lead to a positive impact to the Company's second quarter to earnings, but it will also solidify one major point is that our transition to a SIFI bank in 2016. So assuming that we can execute approximately what we executed in Q1 into Q2, then we're looking at net loan growth for the remainder of the year.

Now, from of time to time, we may decide to sell participations with, let's say, margin credits or we do deals with banks that are interested in taking a piece of our very attractive multi-family credit or even the CRE credit. And we will get economic value at that.

And bear in mind, we're also servicing the [act]. So when you look at the absolute coupon, we're getting the servicing value plus the original coupon. So it is -- it's adding economic value.

But what's most important -- this is a strategy that we're not going to be selling (inaudible) loans every quarter. We are intact to move to 2016 and crossover $50 billion, assuming $50 billion is the $50 billion threshold. You know it's currently today, but we're monitoring Washington on a daily basis -- see what they do, as far as the level.

I think the important thing to recognize, here, is that quarter by quarter by quarter, we are gaining share of the marketplace. That is a very big positive, with regard to our business model.

I'm curious, too, with the loans sold, can you tell me what the yield was on the loans sold and whether it was new or seasoned loans?

No. These are all new. Everything is new.

These are all new.

So I would say we had a combination. We sold some CREs -- $100 million of CRE, and about $400 million and change of multi-family.

The overall yield of our entire program since we started executing on assets around low 3% -- like 3.08% to 3.11%, the range. So we're not giving up high coupons in order to accomplish this.

Bear in mind, the multi-family products have a CRA component to it in the New York City marketplace, which is attractive, and it adds value to other balance sheets that are having a difficult time sourcing CRA-type assets.

In our history, the only times we have ever sold multi-family assets were to people that actually had a need for or an appreciation of CRA. And therefore, the asset has a unique value to them. It's not just the yield on the asset or the safety the asset represents, it's also the meeting of their CRA component. So when a bank has a real CRA need, they will buy these assets at better premiums than otherwise they might generate.

And Bob, I would just add -- based on my expectations for Q2, what we've done Q1 -- that's the overall coupon, regarding this program, will be below what the current marketplace is.

So we feel good that at least, we're getting rid of assets that are slightly below the Company's multi-family coupon, which is, by now, at a 3.54% embedded into the Company's balance sheet. Market is around low 3%. So that's pretty much low 3% -- what's leaving the balance sheet.

Okay.

And then, since you guys are retaining the servicing, is it fair to assume that the buyer is not someone who's present in the Metro New York markets?

Correct.

Okay.

Let me take that back. They could be doing business in the New York market, but they're not doing extensive multi-family business in the New York market. They are good partners to have, and we're glad to work with them.

Right. Okay.

Right. Their needs, with regard -- for example, the CRA may very well be in the New York market.

I think the statement was that we did not want to push this paper out into the marketplace through a Wall Street type program. We did this internally; we worked with a handful of potential partners. In particular, on the commercial real estate side, there may be it that the sales in the future, depending on concentration of large credits.

But we've been very proactive on accomplishing those goals towards managing that $50 billion number. And we're pleased to say, as of Q2, that we're on our path to execute our short-term plan.

Okay.

It looked, too, like the specialty finance loans were down quite a bit in the quarter. Is that seasonal, or what's sort of driving that?

Yes. We had a bunch of customers that did a bunch of our capital markets activity in March. And literally, they [re-borrowed] in April, so we'll see a bump up as we go into Q2.

They've done a phenomenal job for us. The yield has been north of 3% all-in with fees. The fee structure has been fabulous for us, going into our margin. And they have done a phenomenal job on sourcing rate credits.

We're ahead of plan on the bottom line with them -- our new group. And we're probably looking at a portfolio that could get us close to $900 million by the end of the year.

Okay, great.

Last question, and I'll hop out. The prepayment penalty income of $30 million this quarter -- what was the amount of principal that was prepaid that generated those fees?

Yes. So we had a lot of activity, Bob. (Multiple speakers).

That number was -- I'm not exactly sure.

I have -- I can give you some statistics as far as the level of what we saw, in respect to loan activity. We had over $1.2 billion of [stat] that were not retained in the market, so we gad a lot of sales transactions. And we had about $700 million of activity that was retained with the Company on refi, so a combination of those two numbers [encompass] that $30 million benefit of prepayment penalty.

Right. And it's not driven by size; it's driven by time. So the prepayments are based on the amount of time the loan was in existence, not the size of the loan.

Obviously, applied to the overall dollar value that had prepayment, there's going to be a percentage of what that dollar volume is. But circumstances, loan by loan, will actually be different.

Yes. And Bob, as you'll recall, in the past three quarters, we've been expecting to see the property transactions come to fruition. This is a very -- we'll call it a, I shouldn't say expensive, but a -- lofty market, in respect to real estate. And many customers have been selling assets, and they've been up for sale for a while.

We're seeing the actual fruition of closing of these transactions, which we expected. In particular, we expect to see some more on the commercial real estate side. So this could be an ongoing phenomenon.

It's just that we haven't seen the levels of activity in CRE versus multi. Multi was very strong on the property transaction side.

Right. I think the important thing to recognize, here, is that prepayment occurs for many different reasons. And therefore, the strength of our prepayment, here, is that the same reason driving it as might've been two years ago.

Okay. And when you are seeing customers prepay or repay, are you seeing them -- when they do refinance with you -- borrow more? Or, I guess, what is it that's driving the refi activity (multiple speakers)?

Oh. It depends on the circumstances. So for example, if a guy is selling a property and taking millions of dollars in profit, he has significantly more money that he can utilize to actually leverage into a new borrowing from us.

So let's just use a number. The guy has got a $10 million investment -- $10 million loan with us. And he sells a property for $20 million.

He has significantly more money that he can actually borrow with. So he goes out and buys qualifying assets and winds up with, instead of $10 million in outstanding debt with us, $25 million in outstanding debt.

So this is a win-win proposition. We get paid; he gets paid. And lo and behold, we have more loans on a prospective basis.

Okay. Thank you, guys. That's helpful.

You're welcome.

Collyn Gilbert, KBW.

Thanks. Good morning, guys.

Just quickly, on the loan sale, what was the timing? When did you guys sell those loans in the quarter?

When did we sell the loans? I would say early March closing.

Yes. They may have been negotiated earlier, but closed on a date, as suggested.

Are you trying to calculate the average balance?

Yes. A little bit.

That's what I figured. I'd say it was probably early March.

Yes.

Okay.

And then, the deposit growth was enormous -- savings deposit growth was enormous this quarter. A little more color there? I know you had said, Tom, that it's been fairly easy to get to deposits in from the Florida market. Is that still what's driving that? Or if you could just talk a little bit about that.

So we've been publicly saying, Collyn, for quite some time that no, if you look at where we are in our wholesale markets versus our retail markets, we're pricing our product mix versus what the cost is for insurance versus having non-typical wholesale liability. So we've done a focused job on reducing our wholesale liabilities in total, given the additional cost that's involved on FDIC insurance.

So we've been making a concerted effort to try to bring in retail deposits. We haven't announced a material deal since AmTrust, so it's years. And our model growth through acquisitions, so we have to have a funding source.

When you compare funding sources from the retail market versus the wholesale market, the retail market, when you look at all-in FDIC expense to cover the wholesale, is more attractive right now. So we have been making a strong effort throughout the entire franchise.

But what's important is that we are looking also into the path of our commercial customers. We have a huge CRE book and a huge multi-family book that has the opportunity -- we'll call it the low-lying fruit -- where we should bringing in substantial deposit relationships from our customers. That is the goal for 2015 and beyond.

We believe what we've seen today is mostly retail. Our expectation is that we start seeing some more commercial deposits come in, even at a lower cost. That could be some upside potential for our franchise.

I think the important thing to recognize, here, is that since our business model is to grow by acquisition, in each acquisition, the principal purpose of doing the acquisition is to get deposits. So we are positioning ourselves today, because of the elongated period since the last transaction, we're actually paying up for deposits.

That is not typical in our business model, and certainly, when we execute a transaction, we will not have to pay at these levels. We will actually pay less, and we'll still have liquidity, and we'll still have the ability to add to the bottom line in a very attractive manner.

Okay.

And how much of an effort do you think you can be successful, here, with? I mean, how do you think that loan to deposit ratio migrates?

So we're going -- I'll take it quarter to quarter. But this is something that the bank is focused on. We want to bring better type deposit funding, given that we have not closed on a transaction in many years.

So the full [core] press is on at the bank. We want to bring in liabilities that are more attractive. Obviously, if the wholesale market becomes more attractive, we may shift our strategy. But right now, retail deposits and commercial deposits are much more attractive source of funding in today's interest rate environment.

Yes. The ability to do this is as simple and straightforward as you're going to the kitchen and turning on the faucet. We want more, we just turn the faucet a little higher.

Okay.

And is there a loan deposit ratio that you think you could take this to?

We're not looking at loans to deposit ratio. We're looking at what makes sense to fund the balance sheet.

We've always had, historically, a high loan to deposit ratio. Then we would acquire a company, and that ratio will come down substantially. So if you look at the past trend in the past three years, our deposit balances are up materially, our wholesale book is down materially.

But we continue to look at the balance sheet. And as we indicated, the balance sheet hasn't moved a whole lot since September of last year. But our core product and volume has been strong, so we've been doing significant originations on the multi-family CRE side.

But we're focusing on the balance sheet, as far as growth. As we grow, we will bring in more -- better liabilities, over time.

Okay. That's helpful.

And then, just one final question. I wanted to make sure I heard. Tom, you said second-quarter expenses, excluding amortization, you said, were going to be $149 million.

Yes. That's my guidance for the second quarter.

Okay.

And that's also ex CDI, Collyn.

Okay. All right.

So that's just running higher than kind of the $146 million, $147 million you guys were running in 2014. Just trying to understand what the pickup in expense -- why the pickup in expenses.

So of that previous guidance, again, the valuation of our pension liability, it's $1.7 million in a quarter, times 4. It's a pretty big number.

And unfortunately, that's a corporate phenomenon, not an industry phenomenon. If you have a pension plan -- [our] pension plan is frozen for many years, now. But unfortunately, there is a low interest rate environment, and mortality rates have increased, so you have to bear that liability for the P&L.

Got it. Okay. That's all I had. Thanks, guys.

Theodore [Kovaleff], House Scion Capital.

Good morning to you.

I wonder if you could give us a little color on what's going on in the various banking committees that might lead to a change in that $50 -- $50 billion.

(Inaudible) $50.

Yes. You know, Ted, I think the important thing, here, is that there are both senators and congressmen who actually have a keen understanding of why the consistent traditional manner in which regulation and examination has occurred in this country should be restored. The idea that each individual bank is examined for the risk profile of that specific institution and judgments are made by the various regulators as to how that particular institution is structured and representing risk to the system is appropriate and is being done, accepting that we have these artificial triggers at $10 billion and $50 billion that have meaningful adverse consequences.

And the principal regulators, Dodd-Frank -- Barney Frank himself recognizes that the $50 billion mark needs to be removed. The single largest regulators in the country -- [Terulo, Konig], the chairman of the OCC, FDIC all agree -- that these artificial triggers need to be removed.

So I think that there is general receptivity from rational, informed congressmen and senators. There are some that are zealot about their view and go out of their way to suggest that there is no way that we would change any of these rules, even if they're blatantly, obviously wrong.

And therefore, they're speaking, as was the actions taken by Pelosi. When this bill was passed -- and she commented that the reason we were doing this the way we're doing it was because at the end of the day, we would have thousands of pages that would come to us all. And we'd be able to figure out what was contained in the bill after it was passed. That's not the way American justice or American law should be created.

And certainly, the mistakes that were made back then need to be fixed. And there are very intelligent, rational people today who are prepared to take the steps to fix this. People who speak against this -- who speak against Frank himself -- are glaringly wrong in their epic to withstand or hold up something that is glaringly wrong, just because it exists.

So in any event, do I think it happened? I don't know. The future is extraordinary, and certainly, not everything that's right occurs.

What is expected is that the House is in a very good position to prepare a bill within -- by the end of this month. The Senate is prepared to do a bill by the end of May. They can literally go to a conference during the month of June.

And if everybody talks to the relevant, impacted parties, the regulators themselves are all asking for this change. So if everybody gets together and talks this through rationally, there will be change. But there's never any certainty in the political environment.

Okay. I thank you, and I hate to say that I agree.

Thank you, Ted.

Take care.

And we have no further questions at this time. I would like to turn the call back over to Mr. Ficalora for any closing remarks.

Sure. 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 discussing our second-quarter performance with you in July 2015. Thank you.

Thank you. This does conclude today's first-quarter 2015 earnings conference call with the management team of New York Community Bancorp. Please disconnect your lines at this time and have a wonderful day.