Flagstar Financial Inc (NYCB) 2015 Q2 法說會逐字稿

Good morning and thank you all for joining the management team of New York Community Bancorp for its quarterly post earnings release conference call. Today's discussion of the Company's second-quarter 2015 performance will be led by President and Chief Executive Officer Joseph Ficalora, together with Chief Financial Officer Thomas Cangemi. Also present on the call are Chief Operating Officer Robert Wann and Chief Accounting Officer John Pinto.

Certain 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 that 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 might affect the Company's net income; prepayment and penalty income; mortgage banking income; and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposit, loan and investment products and other financial services; and changes in legislation, regulation and policies. You will find more about the risk factors associated with the Company's forward-looking statements on page 8 of this morning's earnings release and in its SEC filings, including its 2014 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's 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 second-quarter performance before opening the line for Q&A. Mr. Ficalora?

Thank you, Keith, and thank you all for joining of this morning as we discuss our second-quarter performance and the specific strategies that contributed to our results. There are a number of items that we believe merits your attention: the exceptional quality of our assets; our continued strength as a lender; the consistency of our margin and the success of our efforts to manage our balance sheet growth.

To begin, I'd like to quickly say that our GAAP earnings growth sequentially and year over year, to $123.7 million and were equivalent to $0.28 per diluted share. In addition, our second quarter GAAP earnings provided a 1.09% return on average tangible assets and a 14.79% return on average tangible stockholders' equity. Our cash earnings for the quarter were similarly solid at $133.2 million or $0.30 per diluted share, reflecting our earnings and capital strength. The Board of Directors has declared a $0.25 per share dividend with a 46-consecutive quarter payable on August 18 to shareholders of record as of August 6.

The strength of our earnings and capital have long been supported by the quality of our assets which has been consistently superior throughout our public life. In the second quarter of 2015, we reported our best asset quality measures in 28 consecutive quarters. In other words, since the second quarter of 2008. Non-performing non-covered assets fell $53.9 million from the end of the year to $85.1 million and represented 0.18% of a total non-covered assets at the end of June. Much of the improvement was due to the sale of a single OREO property in the amount of $41.6 million. That's what was on our balance sheet; the property had a sales price of $55 million, which generated a pretax gain of $7.8 million in the second quarter of this year. As a result, OREO declined $35.8 million from the December 31 balance to $26.2 million at the end of June. In addition, non-performing non-covered loans declined by $18.1 million and represented 0.18% of total non-covered loans.

The demonstration of quality also extends to the absence of any net charge-offs; in fact, this was our fifth consecutive quarter reporting a net recovery. The quality of our assets stems from two primary sources. Our underwriting standards, which continue to reflect our risk-averse nature and the attractive characteristics of our multi-family lending niche. In the first month of 2015, multi-family loan originations represented $4.3 billion, or 69% of the loans we've produced for investment, including $2.6 billion in the second quarter alone.

Given the loan structure similarities between our multi-family and commercial real estate credits, we also originated CRE loans of $1.1 billion over the past two quarters, including $484.3 million in the second quarter of this year. Reflecting the strength of our multi-family and CRE loan production, we established a new record for the volume of held for investment loans produced in a single quarter; $3.5 billion to be exact. The fact that we originated more loans in the past three months than we've produced before in a single quarter may well seem ironic, given the emphasis we've placed in the last nine months on containing our balance sheet growth. Obviously, it's within our discretion as to how we will portfolio or sell these particular loans. Yet, from the time we embarked on this strategy through the end of the second quarter, our assets rose just $31.2 million to $48.6 billion at the end of the year.

Before I continue my comments on that particular topic, I also want to acknowledge the pipeline of loans we reported today. As of this morning, we are looking at loans of about $2.6 billion, including approximately $1.9 billion of loans held for investments and approximately $649.2 million of one-to-four family loans held for sell. Multi-family and CRE loans represent the bulk of our held for investment loans in our pipeline, approximately 89% of the total, to be somewhat more precise.

Returning to the top of the balance sheet growth or more particularly, its containment, our ability to limit our growth, while establishing a new record for loan production is just a sign of our ability to achieve our objectives but also the attractiveness of the loans we produce. Of the $1.6 billion of loans we sold since the end of last September, more than $1.1 billion, or 68%, were multi-family and commercial real estate loans. Another $522.2 million consisted of one-to-four family loans, that, at one time, had been held for investment loans. The vast majority of our sale had been through participations, given the quality of our loans and the status of our multi-family loans as CRA credits. Our search for willing partners and buyers has met with great success.

In addition to enabling us to contain the growth of our assets, the sale of loans has also supported our earnings by producing fairly attractive gains on sale. In the first six months of 2015, gains on the sale of multi-family and CRE loans amounted to $14.7 million, including $8.8 million in the second quarter of this year. Another appealing feature of our multi-family and CRE credits is the prepayment penalty income we received when loans prepay or refinance. While prepayment and penalty income rose year over year to $26.7 million, it declined from the level recorded in the first quarter 2015. As a result, the contribution to prepayment penalty income to our net interest margin declined on a linked-quarter basis from 2.68% to 2.64%, or 4 basis points. Excluding the contribution of prepayment penalties and the respective quarters, our second quarter margin was unchanged from the margin in the first quarter of this year.

The decline in prepayment penalties also affected our net interest income, which declined on a linked-quarter basis but rose year over year. The impact of the linked-quarter decline was more than offset by a rise in non-interest income, together with a linked-quarter decline in operating expenses. As a result, our efficiency ratio was 43.4% in the current second quarter, reflecting an improvement of 160 basis points.

Before opening for questions, there is one more comment I suspect is worthy of making and that has to do with the duration of our current balance sheet management strategy. As I mentioned, when we first disclosed our plans to contain the growth of our assets, this was a short-term objective, designed to maintain our assets below the current threshold for a SIFI bank. To be classified as a SIFI, the average of our total consolidated assets would need to exceed $50 billion over a four-quarter lookback and would not expect to cross over that line until the second quarter of next year.

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

(Operator Instructions)

Ken Zerbe, Morgan Stanley.

Thank you. Good morning.

Morning, Ken. How are you?

Doing well, thanks. In terms of the first question, I know you said in the past that you're waiting on the Shelby bill to progress one way, or the other in terms of whether or not SIFI buffer gets raised before you announced the deal. Can you just update us on your thoughts? Are you -- how are you feeling about the Shelby bill and what is your -- how do you feel about announcing a deal at some point in the near future?

I think, Ken, the important thing to recognize is, when you're dealing with the politics of Washington, there could be changes in the perception of what will happen from moment to moment. We clearly are of the view, that it is far better for us to be in a definitive situation, with regards to our actually being or not being a SIFI, when in fact, we consider the specific ramifications of the deal.

So, although we're doing lots of internal work, we're not in a position to have the relevant conversations with our regulators, which are the important conversations to have. Until we get to a point down the road that there is some clarity, as to whether or not we're going to be asking our regulator to classify us as a SIFI or not. So, that uncertainty has not changed.

There is a period of time, during which this could happen in the few months ahead, and then there is a likelihood that we would be more inclined to go forward without there being certainty of the politics, because there would be no capacity to truly engage when it might actually happen. So this is important to us. But it is not something that we manage or control; it is certainly something that we're prepared to deal with when the time presents itself.

Okay. A couple, maybe, numbers questions. In terms of the margin or the core margin, specifically, it looks like it held up a lot better than expected. Can you just talk about why it held up, and I suspect that maybe that some of the gains from selling the -- probably the premium that you get from selling the multi-family and CRE is in margin; is that correct? And --

Ken, good morning. It's Tom. So the upside supplied from our guidance of debt. The loan paid out on the multi-family and CRE portfolio was lower than what we expected and what we modeled, so had a sizable amount of amortization and prepayment on our portfolio at a much lower coupon. That is a very encouraging signal; however, we're not in a position to say that margins are going up, given there is still an uncertainty in the out cores with respect to rising interest rates.

What we also want to take into account that in Q1 and in Q2, we had the benefit of DUS prepayments in that particular benefit for Q2 is 5 basis points; in Q1, it was 4 basis points. When you take out DUS, take out prepayments, the actual margin with excluding prepayment and DUS is down 1 basis point, is still significantly better than our guidance so, the big upside beat was clearly on the prepayment of the coupons hanging off the lower levels.

I think an important thing to recognize, our particular asset model does have a stronger likelihood of a favorable rate than, in fact, it might have had one or two quarters ago.

Okay. So this is the last question then. The gains, $8.8 million, that you highlighted, that presumably is on other income, okay, so as long as you're below $50 billion, we should expect those gains to continue resulting in possibly a stronger other income than you have otherwise.

I mean, in this environment, we've been managing the balance sheet and we've been selling not only mortgage banking assets in the management portfolio, but also to the commercial portfolio as well. In the press release, we had indicated we were north of $14 million, [accumulatively] for the first six months of the year.

It is certainly not a bad business to be in, making money on the ability to sell quality asset participations.

All right. Thank you very much, guys. I appreciate it.

Mark Fitzgibbon, Sandler O'Neill.

Good morning, gentlemen.

Morning, Mark. How are you?

Just following up on the last question about the margin. Tom, what is your outlook for the NIM, excluding prepayment penalty income in the coming quarters

So I would say we are encouraged by a change in the coupons. Obviously, our coupons right now are substantially lower in our portfolio, than multi-family coupon is at 3.49% and the [series of 4.02%], so that's a significant drop. Markets around 3.25% for the bread and butter and top between 3.50% or 3.75% for a little bit of duration.

So we're looking at, again, close to stabilization, I would dive down 1 basis points to 3 basis points for Q3, given depending on what types of portfolio yields come off. We had a nice upsides of 5 [basis points] in Q2; we were hopeful, but there is no guarantee that's going to continue, but the good news that the portfolio [yields] are dramatically lower than they were a year ago, so the bleed over a year ago is over 150 basis points. Now, the bleed is around 50 basis points, so that's very encouraging.

And then, I wondered if you could share with us what the approximate average life of the wholesale borrowings are today?

We actually extended the borrowings about $1 billion over the past few months and towards the end of the quarter. So, we are trying to move very methodically as we look at where rates are going. We did some blending [expense] of the quarter of approximately $400 million. That's extended out to about 3.1 years and we did some just long-term borrowing to possibly $500 million -- $600 million at 2.8 years, so we're probably running around, what, 2.7 years, I think, John? About 2.7 years for the whole portfolio. We do have something [without beyond] liability sensitive, but we're still managing it very methodically as we see rates, with the expectation rates rising in the future.

And lastly, I wondered if you could just share with us, Joe, your thoughts on the deal environment, whether you think there will be large transaction opportunities for you in coming quarters?

I think that the deal environment, if anything, is getting to be more and more attractive. The likelihood that there are banks in the marketplace that would like to combine with a bank that has the attributes that we have, is very real. So, although we've had ongoing awareness, because every major player in the market brings us opportunities, we've had awareness of plenty of opportunities in the marketplace. We are very disciplined in how we will proceed and we are very sensitive to the expectations that our regulators will be consulted with before we actually negotiate a definitive deal.

So the immediacy of a change in the overall characteristics of the consolidated bank, whether it will be a SIFI or not, is material, and therefore we are, literally, actively involved with people who are addressing that issue. But as we all know, in the world of politics, there is no certainty as to when enough people come together to actually do something, which I think, arguably, is in this unique case, the $50 billion threshold in this unique case, so regulators are asking for this. In this unique case, there is an overwhelming awareness that, that metric is not appropriate. Even Barney Frank himself has publicly said that, so the reality is that, this should be and will be addressed; it's just a matter of when.

And Mark, it's Tom again. Just to clarify, the average maturity of our portfolio is four years, of the borrowings portfolio.

Thank you.

Sure. You're welcome.

Dave Rochester, Deutsche Bank.

Good morning, guys.

Morning, David.

Tom, on the NIM guidance, I was just wondering what your assumption is that you're including in that on the prepayment penalty income in those DUS securities? You said it was 5 basis points --

I'm basically calling out DUS entry [paid] to give you those two items excluded, so on an adjusted basis, that's 1 basis point to 3 basis points down, and that's we were down 5 basis points to 8 basis points last quarter guidance, so we came in flat. So again, it is fluid given where rates are. We're seeing significantly good prepayment activity in the portfolio and coupons, but that was a very good positive signal for Q2. We're hopeful going forward; that assumes both DUS and prepayments excluded on the margins down 1 basis point to 3 basis points.

Got you. And on the discussions that you're having with regulators or the relationship there regarding your deal, do you guys need to have all of your systems in place, like your LCR system, for example, before you're able to get approval for a deal that pushes you over the SIFI threshold? And can you update us just on where the progress is on the LCR?

It's Tom. I'll give you an update on LCR. We're moving ahead towards our project plan, and as discussed in previous quarters, our expectation is by year end. A vendor has been chosen and the system is being built. We still expect that to be completed by year end.

And then regarding whether you have to actually have that in place before you get approval; any sense there?

Well, we're hopeful that by year end, we will be in a very good position with LCR, but again, this is not a significant overhaul for the bank; this is an operating systems situation that we're very confident and I don't think [it's a highly factor] (multiple speakers) in doing deals. We will have it place then.

I think it is very important that you're not misunderstand what Tom is saying. We're not going to first consider a deal at the end of this year when this process is complete. We will compete -- complete this process and discuss this matter with our regulators as soon as it is appropriate for us to actually, on point, be dealing with a deal opportunity. So there is no expectation that we're not going to be considering a deal until the end of this year.

Got you. And then how do you think about capital as you resume stronger loan growth into 2016? You are at about 7.3% on TCE. Can you take that below 7% as you post stronger loan growth next year?

Dave, we have internal buffers that we have managed over time. We are very confident that our capital position is being very strong given our risk profile. We've been actively selling loan portfolio given the situation regarding the $50 billion threshold, but when we do ramp up growth, we also assume we'll ramp up profitability and mobility capital. We're very mindful about our capital position. We are very confident that if we ever need capital for growth, it will be very profitable to shareholders.

The other component of this is, we do not have the same needs for capital as banks that erode capital during cycle turns dramatically. The need for capital is ultimately discussed as a need to accommodate losses. We have not had a history of charging capital for losses in our principal assets and therefore, there's a very, very different dynamic at play with regard to our need for capital, and the need for capital in institutions that have a genuine expectation of their regulator and their Board that they will lose sizable amount of capital during a cycle turn.

So, Dave, the probability of an expected capital raise will most likely will be in conjunction with a merger announcement. We're very focused on looking at the pro forma capital position of a newco and the newco, ultimately practicing to our economics that it would take to run a larger bank on the capital position.

Got it.

(multiple speakers) We've done historically we're very comfortable on presenting an opportunity to shareholders to invest into a larger company on a new capital base.

That's very consistent with we've actually done deal after deal after deal.

Yes, okay, and then just one last one. Your appetite for loan sales, whether it's multi-family, commercial real estate, in the back half of the year since you guys are planning on ramping up loan growth, so I was just wondering how much we would expect to see there?

I think there is no question that we have a capacity to take share in this market. Whether or not we portfolio the asset is driven by the actual building, if you will, of a newco and a very large new company, versus where we would choose to be in the next three to 12 months, should we not be effectively closing a deal. So this is a good industry.

It does not, in any way, compromise our participation in the market with regards to real estate lending. In fact, if anything, it gives us greater share of the marketplace. That's a very, very good thing.

(multiple speakers) Assuming going to be back half of 2015, assuming we're going to see some good growth. Obviously, we'll position ourselves to cross-over sometime next year; as we indicated, second of next year, we will cross over and that's exclusive of LCR. So between LCR, our adds will be the balance sheet as well as good portfolio growth, you can have meaningful asset growth with the expectation that we will cross over into 2016.

So then we should -- on the loan sell side on -- in terms of loan sale activity, we should expect that to continue at least to a certain extent?

Yes. We are being very opportunistic; market conditions have been strong. There have been substantial appetite; there is a CRA component, some of our assets that we do sell. There's a lot of banks that are looking to participate and we're comfortable inviting them to participate.

Okay. Great. Thanks guys.

You are welcome.

Matthew Kelley, Piper Jaffray.

I'm wondering if we can just get a little update on your outlook for expenses going forward, so I'm hoping if you could provide some thoughts there?

Sure. So obviously, we had a some one-time severance expense in Q1. We probably came in slightly down based on guidance on Q2, we feel -- so my guess is that if you look at Q3, we're looking at about the same level, approximately $150 million for Q3. We had some additional costs there that, regarding they're just continuing growing towards that the SIFI World in Q2. I think at this level at $150 million, we should stabilize.

Okay, got you. And then, yesterday, Signature talked a little bit about some tax benefits coming through at state, city-type of level. Anything changing on your tax rate outlook?

So given our structure and where our assets are located, our tax level should be consistent with the previous quarter, so around 36.5%, 36.4% is our effective rate, so nothing meaningful should change there.

And then on the selling multi-family, commercial real estate loans, just talk a little bit about what you've been selling and kind of the variation in gain on sale margins you've experienced over the last several months as you've been embarking on this strategy and -- are the loans that you are selling, longer-durations? So maybe a little bit more detail --

No, no, no. I think it's important to recognize that we're participating in loans that we otherwise would hold in our portfolio, so there is no alternate characteristic of the loan that we do where we share a portion of the outstanding balance with a partner. So these loans, all of them, are in our portfolio. None of these loans are leaving our portfolio. All of these relationships are, in fact, being maintained.

The important thing here is that we have the flexibility to choose how much of every given loan we would want to share with somebody else. We get paid for that, upfront and ongoing, so it adds to the overall yield of that particular asset has to us.

So (multiple speaker) with the exception of the resi book, everything has been serviced by continuing servicing in controlling the asset class. We had some servicing release last year in terms of jumbo farm assets that we sold, but as far as the economics, subject to market conditions, there is a CRA component, like I said previously. There is some value there, because there is a need for CRA assets, especially in the OCE marketplace, and also as Joe indicated, we are participating, so we are controlling the assets.

We did $3.5 billion of production in Q2; if you normalize the Company's run rate, we're looking at 10% net loan growth run rate for loans held for investments. We didn't sell assets, so we're not as large as far as growth rates in the previous year; that was a pretty respectable rate in an uncertain environment when it comes to lending. So we are very pleased with the potential growth that we decided to portfolio all of our loans, and it feels like even to next year, if rates are higher, we can have a high single to low double-digit type net loan growth as we cross-over the SIFI threshold, which would be very attractive for our net interest income.

I think it demonstrates our capacity to gain share of our highly attractive niche within this market, and the gaining of share is very readily managed from the standpoint of there being a running market to participate in whatever we decide we're going to allow available --

So just another commentary, when you look at the some of the slight rise in Q2 interest rates, we had a significant rush for activity. That just goes to show how the customers will react to a rising rate environment; that takes place in the foreseeable quarters, you will see lots of activity and obviously, with our hope of higher coupons coming on the portfolio, because that was an encouraging the signal for a few weeks that we had in June.

Got it. Can you maybe give us an update on your taxi medallion loan book and what your plans are with that portfolio? There's been a lot of conversation around with some other banks in the marketplace, and what are you folks planning to do with yours?

Well, obviously, we have approximately $165 million of taxi medallion exposure and we have been monitoring on a monthly basis right now, it's 100% performing. We've adjusted the average monthly prices for the new market and we still have an LTV level that is around 65% LTV. So overall, we're pretty confident that, we will monitor it. We are just doing month to month and watching some of these individual owners decide to get anything else there, which has been so far our strategy. We are not looking to add more. It is on a case-by-case basis.

Okay. Thank you.

Sure.

Collyn Gilbert, KBW.

Tom, just to tighten on the loan growth outlook that you're thinking about. So just the one thing I want to confirm, so your target for crossing the $50 billion. Did you say second half of next year?

Yes, Collyn. It's pretty simple. We crossed all the way in the second quarter, let's say April, May or June, at the second quarter. We would then starting to see reporting in 2018, so by a lot of time to deal with planning process. With that being said, you assume you'll start seeing the ramped-up growth at the end of this year and we will still be well in line to not cross over prematurely.

So where we stand today, our average four-quarter lookback is $48.5 billion. We would have to add $6 billion tomorrow in Q3 to be, we'll call it, shipping over the SIFI line, so we have room there. We believe that going into Q3 and Q4, you'll start seeing growth. Typically, as everybody knows, if you follow the Company, the fourth quarter is always a robust origination quarter, so we can start seeing some good ramped up growth in Q4 going into 2016.

Okay. And that was a question, too, on the third quarter growth, because I know you said at the first quarter, you expected back half growth to really ramp up and it sounds like that's consistent again and just curious, is the drop off in the loan pipeline in the third quarter relevant to the --

Seasonality. As you know, it's always typically third quarter for the Company over the past 20, 30 years. There's been a seasonality issue; we are very confident that we'll have good production. Remember the Jewish holiday, the way they fall typically in September, you get a big ramp up in Q4.

Okay. And then just tying that into the outlook for the NIM, if you start to ramp up growth and your multi-family, your five-year multi-family product, did you say it was 3.25%?

Correct. Again, that changes on a weekly basis; if rates start to rise, that will be higher obviously.

Okay. So just thinking -- the core NIM, I mean, the preservation of the NIM maybe has been a function, too, would you say, of not adding to the balance sheet, so then when you start adding to the balance sheet, could we see a re-acceleration of that core NIM pressure?

Again, depending on what happens with short-term interest rates, we have nice sizable book from our live portfolio assets from our specialty finance business, so I'm being very cautious with respect to what happens with interest rates. Right now, we feel comfortable that a very slight modest adjustment, given what we saw in the past few quarters, is reasonable. We could have lower coupons.

We can have an upside NIM; we're being conservative. I've guided down 5 basis points to 8 basis points. We significantly outperformed the previous quarter based on the activity from the bars. So that is an encouraging signal, but again, I'm not going to say, one quarter is going to be trend.

Okay. That's helpful --

The good thing is that, Collyn, is that 3.49% is the average coupon for an entire multi-family book, so if we're putting out loans north of that in the future, that will be very encouraging and typically, when rates are rising, and you have a pent-up demand to come back to the table and locking in the next three to four years financing.

Got it; makes sense. And then just quick follow-up, you mentioned specialty finance. How is that portfolio looking? I think -- did you target -- was it $900 million by --

Yes fabulous. Their just slightly south of $800 million; we expect to be about $1 billion by the end of the year. We're doing extremely well. Very pleased with the operating performance; it's a good fees business so the margins, which has the nice fees, the yielding but most of them, are the short-term multi-family yields are looking attractive and two-thirds, I believe, is LIBOR-based funding.

So we'll have a nice ticket if and when rates go up. This will be as rates favor, we go higher interest rates and more importantly, the portfolio is 100% performing; we've been through the [state] exam and then we had one credit, which is clearly, it's off the books. So we feel pretty confident in doing a fabulous job growing to continue building that portfolio.

Collyn, this is very consistent with our expectations and our public comments over the course of the last year or so.

Got it. Okay, that's helpful; that's all I had. Thanks guys

Bob Ramsey, FBR Capital Markets.

Just wanted to touch on the other income line and just be sure I get all the moving pieces here. It was about $28 million; that includes the $7.8 million REO gain. What was in that line for gain on sale of the multi-family commercial real estate that you guys are participating out?

Approximately $8.5 million from the gain on sale

Sorry, did you say, approximately $1 million?

$8.5 million, I believe.

Okay, $8.5 million. Got it. So if we take that out, then it's is $14 million -- sorry, I guess it would be more like $12 million. Is $12 million sort of the right base plus any multi-family gain on sale in future quarters; is that the right way to think about it?

Assuming that we continue -- assuming that we're selling more going forward, but just to be clear in our press release, we've articulated the six-month cumulative benefits from these transactions of $1 billion and that would have been at least $14 million, so we have that in other income.

Okay. And will the pace of loan sales participations be similar to the third quarter to recent quarters, you think?

It depends. Again, we are confident that there is a very, very strong market. Very, very strong market and it's not a sure fall of looking out for loan growth in this type of asset class, so we're confident in our ability to continue to transact, but yes, depending on market conditions, we're always optimistic that we could move on in that asset.

I think the important thing is that have the discretion to make choices and the choice will be appropriate for the other event that are occurring in any other given quarter.

So Bob, the real point is we're trying to be focus on growth again and this will be first a gain on sale versus growth, right? You'll have a substantial amount of growth as we move into the SIFI cap and we'll get a benefit on top line instead of down into other income line over time.

Okay. All right.

(multiple speakers) It's a big deal of significant growth and like I said, if you carve out the loan sales for this year, we are growing at 10% net loan growth; last year was 12% if you do it pre-sale. That's pretty strong growth and again, given a higher rate environment, we believe that you tend to have a more higher portfolio of loan growth category given that you see more coming to the table to lock in rates, and we have a significant amount of growth so we've demonstrated in the past, in the right environment, growth can be very robust for us.

Okay. That's helpful. Shifting gears a little bit to mortgage banking. The pipeline in that business drop versus last quarter; is that just seasonality or how are you thinking about the mortgage origination outlook.

I think it's fair to say some of it's seasonality; maybe definitely because of interest rates. Interest rates are much higher on average on a quarter over quarter, so we expected flat to down until we came in more a little with our internal expectations. I've guided down for the third quarter the same. I don't see a robust pick-up where the rates are, given that the swing note rate is around 4% and the 30-years typical mortgage, and you have less refinancing more purchase right now.

We are not a true retail player. We are wholesale aggregator's. So we tend to lag the guys that have the retail platform, so clearly, the purchase market, which by the way, is somewhat lackluster, continues, it's probably going to be around this level, give or take, $1 million or $2 million slightly down, again, due to seasonality in total revenues.

In total mortgage rate revenues so including servicing?

Correct.

Okay and then on the service inside, you just have to break out this quarter of what were servicing fees, the MSR adjustments and hedge?

Sure. So for the quarter was $12.3 million with loan servicing fees; the change in MSR value was positive $14.6 million; and then MSR hedged a negative $21.5 million; the net effect $16 million, when you take into account, mortgage origination of $10.6 million.

Perfect. And then last question and I will hop off but I know you all said your multi-family core loan yields gets tweaked every week. Signature said on their call yesterday that they hadn't raised their pricing this week, I think for the first time, maybe they don't move quite as frequently by one-eighth of a point. I'm just curious, if you think about pricing over the course of the quarter, have you all seen a material change or lift in pricing for you guys in the market?

Yes. So I would say that we look at it daily. Because obviously, it is our business model. And clearly, when there is a significant bump up in the [belly of the curve] we react. So the good news is that people are stretching below 3%; we're slightly around 3.25% of the traditional papers. Commercial is around low 4%s, which is not terrible in this environment with the expectation of rates may move. If rates move, we're going to want to react given that we -- there's been so much pent-up demand for the move. We haven't had to move in multiple years, so I think that we now watch it daily and it is clearly, in my opinion, that banks are reacting towards the upside movement of interest rates and that will be very favorable for us.

All right. Great. Thank you guys.

You are welcome.

Ebrahim Poonawala, Bank of America Merrill Lynch.

Good morning guys.

Good morning.

Quick questions, just following up on LCR, just so that I understand it correctly. You will have the systems in place by year end, but you're not taking any balance sheet actions to begin complying with LCR as of now; is that correct?

Right. LCR, does not apply to a SIFI bank. We've publicly said that the five-year plan would be put in place in 2015; vendors having chosen. People have been hired. Our expectation is to have it complete by year end. With that being said, everything we're putting on assets, we put on assets when we acquire assets and that's when we're a SIFI bank.

What I think you need to recognize is that we need to be ready to deal with LCR in any conversation with the regulator surrounding a deal. So that conversation can happen a lot earlier than what Tom is talking about

As far as the five-year plan is concerned, we will be done by the end of year.

Understood and I guess following up on that, Joe, how important is the LCR benefit in a potential target that you're looking when you're looking at these targets in terms of data attractiveness to you, or does it not really clear to you?

No, no, every single deal brings attributes to the table and also challenges. So each deal is assessed based on the expected consequence regulatory as well as economically.

So big picture, we haven't had the target that has flushable liquidity and has lots of, we'll call it, level one assets and then very quickly on a pro forma basis. At the same instance, we have a target that has very little of that, then we would have to model them to be M&A run rate on a pro forma basis, while we would have to purchase to comply, so it's part of our pricing methodology and each -- on a case-by-case basis depending on the balance sheet target.

See, the outcome needs to be recognized by you, by the Street, as to the value creation in deal, so it's not going to be something that you're going to have to be guessing about. It will be pretty evident when we announce the deal so the market can properly price the outcome.

So bear in mind, historically for acquisition accounting for us, we have moved on billions of dollars of assets turning into cash. That cash would then need to be moved into a table prior LCR-type investment securities as an alternative to cash. So we've modeled that before, we've transacted that before, but more importantly, the market is ripe for asset acquisition; therefore, if you need to sell an asset, there is a very strong market for asset sales.

Understood and just one separate follow-up on M&A, Joe. Do you think you obviously have a currency advantage but the longer you wait for a deal -- we've had two large deals approved in the last month or so. Do you think you will be competing with a larger number of buyers if you wait six to eight months from now?

I think your speculation as to what the future may hold is something that we consider at all times. We can't control the positioning of others in the future markets. However, we do know that we clearly have a discernible capacity to create substantial value for anyone who chooses to combine with us. That opportunity is something that we've proven time and time again, and there will be ample evidence of why -- the metrics themselves will demonstrate the why a seller could expect that if I sell to it to A or if I sell it to B, there are differences in the outcome.

The speculation that our promise to pay is ever going to be delivered is time and time and time again been subject to the actual market conditions and the actual markets, the revaluation, if you will, of a combined newco. The reality is when we combine, we have very clear understanding of how the newco creates a greater value and therefore, why the Street reacts positively to the newco that we reproduce.

Understood. Thank you very much for taking my questions.

Sure.

David Darst, Guggenheim Securities.

Good morning.

Good morning, David. I think you're the fourth David this morning

Appreciate your comments on you're not meeting capital potential losses, but as you're thinking about the next year and if you begin to accelerate growth and there is not an acquisition, could you talk about your capital plans and that scenario?

So David, we don't disclose publicly our capital plans and what our prospects are and what our expectations are, but we're very confident that there is no need for capital in the short term, but if the Company's growing at very high levels, we're not bashful to fund that through good capital raises and shareholders, historically, have been very amenable towards accommodating that type of growth. So we're not in the mode to be raising capital in this environment with the exception of doing an acquisition.

We've been saying that for multiple years, that the likelihood of an acquisition is the way you would see a beneficial capital raise, where the combined company would have an earnings stream where people will buy into the new shares re-issued to pay for that acquisition. After that, we've done capital raises to afford our significant growth. If we see a significant opportunity to grow multi-family that will obtain a high-teen type level, teen growth rate, then you would assume that in order to fund the whole, you would have to have some additional capital. We are not bashful of doing that, given that especially in the right rate environment, if the spreads are very attractive to us, that would be considered profitable capital rates.

I think it's important to recognize that raising capital at the highest possible price is most desirable. So when we announced a highly accretive deal and we have an elongated period over, which we get to the point of actually closing the deal, we have the benefit of choosing the right place to issue capital at a very attractive price, and that's certainly one of the things that we will consider on a go forward basis here.

The reality is that the higher the pricing issue the capital asset, the better it will be in the circumstances and this is just history. We announced a deal on a Friday. We, in fact, had the market readjust pricing up 30% on that Monday. And we, in fact, issued capital thereafter. So the important thing is that there is a great deal of flexibility and opportunity for us to appropriately choose the place at which we will issue capital and you should assume that we will make that choice to the best advantage of all shareholders.

Okay. And is there still room, Tom, to continue to blend and extend your borrowings and does that reduce --

Absolutely. We will look at it from time to time. We get a little bit of movement over the past few months and obviously, if things change, market positions will react. We always look at the opportunities to blend and extend home loan bank advances and restructure some of our repo ranges with Wall Street, and from time to time we may extend some of our short-term borrowing debt to 2 to 3, 4 year bulletins, depending on market conditions. So we have this flexibility to move quickly, and we also have the flexibility to buy instrument that protect in a LIBOR- rate environment on a derivative perspective. So this is something to on a daily basis, we evaluate. We have been proactive, recently because of the significant chatter, but again, we have, in our opinion, ability to move when it's time to move.

Okay. Thank you.

Steven Alexopoulos, JPMorgan.

Joe, not to beat a dead horse, but I'm trying to reconcile your comments around M&A, with the potential for the SIFI threshold being raised. Is your M&A strategy on hold pending resolution of where that shakes out or are you now moving forward and not waiting for that to get resolved?

No, no, no. We knew all of the appropriate groundwork so as to understand the evolution of the marketplace. It is not as though there are new players coming into the market, but everybody's numbers change quarter by quarter by quarter. Our expectations are constantly being adjusted with those candidates that we would seriously consider combining with. There is good reason if, in fact, there is a strong likelihood that the first discussion of relevance is with the regulator.

If the regulator is looking to improve a SIFI, that is a different bar than if the regulator is just looking to approve a deal for a bank that doesn't have the burdens of being a SIFI. So for good reason, rather than have that consideration begin with a SIFI designation, because there is no deal that we would do that wouldn't make us a SIFI, in the current structured rules, but down the road, if that rule changes immediately, the consequence to us changes immediately, the discussion with the regulator is to approve a deal, not to approve a SIFI.

So it is very, very important and that when -- we're not talking here years or even quarters; we're not even talking months. So we do lots of work every day; we have conversations. We, in fact, know how to best position ourselves based on the evolving rate environment, the evolving credit environment, the attributes, or the less than attributes of a potential candidate.

Having said all of that, the most important first-hand conversation is with the regulator to either approve a SIFI or to approve a good deal. And we'd much rather have the regulator approving a good deal than approving a SIFI. So, it's worth our time, these weeks, months; it's worth our time to let this evolve and as you know, we have no capacity to judge the absolute certainty of or the timing of a political event.

Even though there is good reason to see why the regulators want this, the politicians should approve this; politics is politics. And we have no reason to either ask you or ask ourselves to be driven by a political outcome. We know what we like to see. We do not know what will happen.

Okay. And Joe, maybe to follow up on that. I believe you said you would need to have the LCR platform in process in place before bringing a deal to regulators. Are there any --

No, I think the very important point there is, in fact, we are going to asked the regulator to consider approving a SIFI, we have to demonstrate that as a SIFI, this is what we would look like, so there is a great deal of work that goes into that process but don't misconstrue, there is a very big difference between the ask and the conclusion.

So we may begin a process with the regulator in days, weeks, even months. And we may not end that process in days, weeks, or months. It depends on what is actually going to be on the table during that consideration.

But Joe, are there any other systems or infrastructure needs, maybe enterprise versus management or anything that you would also need to build out as you consider --

Sure. What I would add is, excuse me, but obviously we as we grow towards potentially being a SIFI bank, capital planning becomes key. So we've been working on capital planning for years, so we are very confident that we are in a very good position, but every year that we continue to mature to that level, you continue to grow with the marketplace, so I feel very good about where we are as a Company and we will continue to progress there.

But again, this is going back to LCR. LCR is merely a calculations and exercise from which that takes the information and makes sure on a monthly basis we comply. That is not the big risk here. I just wanted to requirements that we will have, but as far as the true focus for these banks that they have to have a good capital planning process and we're very proud of our capital planning process.

I think the important thing to recognize here is not a matter of everything has to be in place the day we begin the conversation. Everything has to be in place the day the regulator approves the actual transaction. There is going to be difference in time there for good reason. So we're very confident that we have the necessary tools to prepare and demonstrate to the decision-makers as to whether or not the new company will meet all of their expectations.

And I would just add, we will continue to add people in those specific types of areas. But again, it has been manageable and it's been over the past 4.5 years, five years now so it's been an ongoing mission for the Company.

So it's in our financials is what Tom is saying.

Okay. Maybe just one totally separate question. On the multi-family originations, did they include any larger long packages in the quarter or are those difficult to participate out here?

No, no, no. We do individual loans. Who don't typically do packages. I mean, obviously, we may arrange for a transaction with a particular bank where they're going to get, let's just use a number, $100 million in 10 loans. And then that, I guess you could construe it being a package.

But we do not do package lending deals. And we're not required or expecting that we will only deal with our partners in packaged deals. The loans that we put into that group will be loans that we are willing to participate with that particular party.

Okay. Okay. Thanks for taking my question.

All right. Great.

Kevin Barker, Compass Point.

Good morning. Just wanted to follow up on the previous question. Could you discuss when was the last time you did a major system overhaul on your risk management and your general ledger and your various systems?

Ongoing, I have been saying the major overhaul internally, if you look at where we are to grow is when we are close to announcing an acquisitions in 2001 -- I'm sorry, 2011. 2011, from now to over those past four to five years, we have been overhauling entire back-office to prepare ourselves to be a larger bank, so clearly that particular acquisition, it went away and handed it to somebody else and we continue to learn from what we need to do going forward.

We continue to add systems and people and with the overhaul, we are working very closely to be a larger institution. And we are very confident that we're moving in the right direction and when we have the opportunity to present an attractive transaction, we will do so with the expectation that we have our systems in place.

So you would say that in general, your general administrative expenses or your technology expenses that (multiple speakers) right now are adequate for what you will have as a larger organization or will be a similar --

I think we will. If we're going to double, we're going to increase the (inaudible), materially you are going to additional expenses, obviously on pro forma basis, but on a standalone basis, as we cross over and eventually become a C-Corp bank in 2018, we have more than adequate time to continue to add at a very modest pace and any additional costs necessary. Our asset acquisition, in acquisition, you have a new pro forma income stream, new pro forma expense base and you get the leverage raising the strength of both parties, which we plan to do.

Okay. Thank you for taking my questions.

You're welcome.

Matthew Kelly, Piper Jaffray.

Just a quick follow-up. As we start to model out this gain on sale business or the participation business, I should say, in the multi-family, commercial real estate, I wanted to make sure we got our numbers right here. So you mentioned earlier in the call, you had an $8.5 million participation gain in the second quarter. Is that on a denominator of the $477.6 million to get a gain on sale margin of $178 million; that seems pretty high but --

We have capital servicing and the capitalization of servicings; you have the combination of that as well.

Okay. So that is the number to use? I mean --

Yes, Matt, bear in mind, every transaction that we enter has different economics. You have a CRA component; you may have a straight, pure, non-CRA component, so you price differently. No different when you have interest rate components so if you price that the transaction or rate, if you're a little low and you want to get a higher coupons, you get paid.

Matt, if there's need a CRA asset, we'll pay more for a CRA asset.

How much of a basis point benefit do you get in your gain on sale margin for the CRA type of sale?

It varies; it depends. Depending on needs, it's all for example, if we're in the market and other baseline CRA asset you would be putting all assets at a premium level but that is no different than we buy securities on CRA; unfortunately you're spending out duration, you're putting on significant premiums in order to qualify to CRA qualifications. It's part of doing business as a bank.

I think if you check with all the banks, Matt, everybody pays up the CRA.

Yes, got you. Okay. What percent of the $478 million or so or participated out there in the second quarter were CRA assets?

The vast majority.

Okay. Okay. Got it. All right. Thank you.

You are welcome.

It appears we have no further questions. I will return the floor to you, Mr. Ficalora, for closing remarks

Sure. 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 third-quarter performance with you in October 2015. Thank you all.

And this does conclude today's second-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.