Flagstar Financial, Inc. (FLG) Q2 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to New York Community Bancorp's Second Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. For opening remarks and introductions, I would like to turn the call over to Ilene Angarola, Director of Investor Relations and Corporate Communications. Please go ahead.

Thank you. Good morning, and thank you all for joining the management team of New York Community Bancorp for our quarterly post-earnings release conference call. Today's discussion of our second quarter 2011 earnings will be led by our President and Chief Executive Officer, Joseph Ficalora; together with our Chief Financial Officer, Thomas Cangemi. Also, joining us on the call are Robert Wann, our Chief Operating Officer; and John Pinto, our Chief Accounting Officer. Certain of our comments will contain forward-looking statements, which are intended to be covered by the Safe Harbor provision 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 we currently anticipate due to a number of factors, many of which are beyond our control. Among those factors are, general economic conditions and trends, both nationally and in our local markets; changes in interest rates, which may affect our net income, prepayment penalty income, mortgage banking income and other future cash flows or the market value of our assets including our investment securities; changes in deposit flows and in the demand for deposit loan and investment products and other financial services; and changes in legislation, regulation and policy. You will find more about the risk factors associated with our forward-looking statements on Page 9 of this morning’s earnings release and in our SEC filings, including our 2010 Annual Report on Form 10-K, and our first quarter 2011 10-Q. The release also includes reconciliations of certain GAAP and non-GAAP earnings and capital measures, which will be discussed during this conference call. If you would like a copy of the earnings release, please call our Investor Relations department at 516-683-4420, or visit us on the web at ir@mynycb.com. To start the discussion, I'll now turn the call over to Mr. Ficalora, who will provide a brief overview of our second quarter performance before opening the line for Q&A. Mr. Ficalora?

Thank you, Ilene and thank you all for joining us this morning, as we discuss the highlights of our second quarter 2011 performance, and the various corporate strategies and external factors that drove our results. First, we reported GAAP earnings of $119.5 million or $0.27 per diluted share for the quarter, and second quarter operating earnings of $113.2 million or $0.26 per diluted share. Our GAAP earnings provided a 1.29% return on average tangible assets and a 16.76% return on average tangible stockholders’ equity, while our operating earnings provided prospective returns of 1.23% and 15.90%. Returns on our tangible assets and equity have in fact been a constant in our performance, and were among the various measures that contributed to our appearance among the top three performers on SNL Financial’s annual ranking of the nation’s 100 largest thrifts. Among banks with assets of $2 billion or more, we clearly were at the top of the list. We also reported cash earnings of $142 million or $0.33 per diluted share in that quarter, and those numbers are important because they represent the contribution made by earnings to tangible stockholders equity. Even after distributing $218.4 million in cash dividends in the first six months of 2011, our tangible stockholders equity rose to $3.1 billion at the end of the second quarter. Excluding AOCL, our ratio of adjusted tangible stockholders equity to adjusted tangible assets rose 25 basis points during this time to 8.15% given the strength of our tangible capital as well as the strength of our earnings, the board of directors again declared a quarterly cash dividend of $0.25 per share at our meeting last night. The dividend will be paid on 16 August to shareholders of record of August 5. In addition to citing our strong tangible common equity position,…

(Operator instructions) Thank you and our first question comes from Bob Ramsey with FBR Capital Markets. Go ahead please.

Hi, good morning guys.

Hi Bob.

I was hoping you could talk a little bit about expenses, the number obviously came in a little higher than you guys had guided for heading into this quarter, it looks like the G&A line particularly saw a big bump this quarter. I was just curious what happened in this quarter and what your outlook looks like going forward?

Hi Bob, it is Tom. The couple of items that moved the needle a little bit here. On the FDIC side, we are a little bit off on our budget. we probably got $1.5 million higher than expected on the FDIC insurance expense, as well as additional foreclosure expense, as the OREO book builds over time, we had some more additional expenses on OREO. My budget for probably next quarter it should be approximately 145ish, though slightly down from Q2.

Okay. And then maybe could you sort of touch on mortgage, you guys I know hit in on your opening comments, but with the servicing line I was a little surprised to see it drop as much as it did since the unpaid principal balances should be growing every quarter, was there a hedging loss in that line or..

Yes, hedging. We had an adjustment from the hedge position. We finally had about a $2.9 million adjustment against the fair value mark that we had against MSR as a negative, due to not fully covered on the hedge side. It was probably around 75% to 80% covered going into the Greek situation in the middle of the quarter, and we ended up getting more coverage towards the back end, end of the second quarter. So right now we are probably running around 93% to 95% hedged, but that definitely resulted in an adjustment to the value of inventory.

And on the origination side, can you talk about gain on sale margins in the quarter?

It is a little bit tight; obviously it is a very competitive environment. We are trying to hold share. We probably came in around 20 basis points in the previous quarter. I think we’re running around 77 to 80 basis points all in with the margins. So we will probably about 100 two quarters ago, 105.

Okay. Thank you guys.

Yes.

Thank you. Our next question comes from David Darst with Guggenheim. Go ahead please.

Good morning David.

Good morning.

Good morning David.

Tom, could you walk through some of your bond purchases and the yields and durations?

We have been spending most of our efforts on buying agency structure, predominantly in the multi-family space. We have been a very large buyer of agency multi-family thus [ph] paper in the marketplace at a discount. That is pretty much the product that you saw over the past six months, we came in early to the market, the prices were much cheaper when we first got into this space. Things have tightened up here. We are probably looking at yields anywhere from 3.60 to 3.80 on average, below 4%. Average life is somewhere between 7.7 to 8.8 years.

Okay and do you expect to continue those purchases and bring down the cash balance further?

I think depending on market opportunities, we had a lot of expected cost. So we positioned some of those securities to offset the cost that we expect to see in the forthcoming quarters. Cost should probably fall down dramatically after Q3, but we had a substantial amount of our callable debentures that came through, that was around 4% yield. So we probably lost ground 20 to 25 basis points just on the call features, and some that run up to portfolio, so we are being pro active on managing the portfolio between 14% to 17%. Now we are well below 20%. In fact it has been a while since we have put securities on the books. (inaudible) what we did put on the book are agency backed.

Okay. Thank you.

Thank you. Our next question comes from Collyn Gilbert with Stifel Nicolaus. Go ahead please.

Great, thanks. Good morning guys.

Hi Collyn.

Joe, could you just give a little bit more color on the pipeline as it stands today, you know, are there some larger credits in there at all, and then just talk a little bit about loan pricing as well.

Loan pricing continues to be quite aggressive. There are many players in the market that are looking to get these particular assets. We have had a long period of people appreciating the consistency of the performance of the assets that are most relevant to us. So we have lots of people that are in the market place trying to get these assets. So the reality is that our pipeline does have a mix as always of larger and smaller loans, our bread-and-butter is still the dominant component of our pipeline. But occasionally we have been doing some larger loans, so there are some large loans in the pipeline.

Collyn, I’d just also add what is interesting about this particular pipeline; the new money level is much higher than refi. Although we still expect to see continued refi given the rate environment, we are looking at more like 80% level on new money versus refinancing. So that should add to the growth for a quarter.

Okay, that is helpful. And just one quick follow up on that, can you just tell us where you guys are on your five-year multi-family product?

Right now it is probably around 2.75; I mean the five-year has come in quite a bit. So just slightly north of four and three eighths in that level, which is around 2.75 of the five year treasury.

Okay.

Behind it someday is 2.75 in a sense where the 5 year window is.

Okay, that is helpful. Thanks.

You are welcome.

Thank you. Our next question comes from Tom Alonso with Macquarie. Go ahead please.

Hi, thanks guys. I’m not sure if you disclosed the dollar amount of the loans that you sold on the premium financing?

92 million, it is in the press release.

Okay, great. Sorry, I missed that, and then your guidance on expenses that 145, yes, for next quarter that is without the what should I call it, amortization charge in there?

That is right, that is excluding CDI.

Okay.

CDI should be around $67 million, around that range.

Okay, that is great. And then just to make sure that I understand the cash deployment this quarter into the securities book that was because you had calls, or you expect calls to come in?

We had a substantial amount of calls over the past 24 months. Last year we had substantial revenue benefit from the average balance of the warehouse that we funded from mortgage banking. That warehouse has come down over $700 million on average, so that money has been deployed to securities. In addition to that we had a substantial amount of calls from our agency debenture book, anything north of 4% is being called in its environment, since we were actively buying those types of securities two or three years ago at the 4% level, you would expect a lot of that to be called. So we expected a lot of calls in Q2, we have a lot of calls, we expect some calls in Q3. So we are preparing for the expectation of additional calls given the accounting [ph] behind them. So we are placing the agency debentures with agency thus.

So, as we had a couple of billion dollars in cash that was not in the earning. And we have no reason to expect that there is going to be a substantial use of those funds to accommodate the mortgage company. So, holding the money without investment was not a good use of funds.

I think also, the good news on the mortgage side is that the average balance of the warehouse portfolio has improved slightly on a quarter-over-quarter basis. We are not off the lows. We started the quarter at the lows, and we had a significant downturn in Q1. So, hopefully we can rebuild that program up. We just launched our new products on the prime jumbo space where agency – for the (inaudible) and I believe a couple of days ago, we just launched a 10-1 product. So we are rolling out new products. Hopefully that can generate some more business.

Okay. Fair enough. Just on sort of the margin, I would have thought that putting all that cash to work would have sort of helped a little bit more than it did. Was it just the loan growth or kind of just the dynamic?

Tom, it was back loaded in the quarter. On average, length of security portfolios was up on average balance of $600 million, so if you look at the portfolio it was north of $1 billion, a lot of that was back loaded in June.

Okay, so we should see a little bit of a pickup there then?

I think on the margin side, you know, absent prepayment, fairly stable. I mean there is a possibility they can go up or down 5 or 10 basis points, but relatively stable. Basically, we're looking at our budget, it doesn't seem as dramatic as some of the – some of the other scenarios that we ran recently. So I think in general, we're predicting flat, you know, margins, give or take 5 or 10 basis points, excluding prepayment activity.

Okay, fair enough. Thanks guys.

Thank you. Our next question comes from Brad Ball with Evercore. Go ahead please.

Thanks guys.

Good morning.

Actually, good morning. A follow up to the last question, so what was the contribution from prepay payment penalties in the second quarter and what is your outlook for that contribution going forward?

I think the number is around 30 basis points, 30 basis points, we have a very substantial prepayment benefit for the quarter as we had in the past two quarters. So it has been very robust given the rate environment. We don't ever give outlook on prepay. The good news if that rate climb is low, we should get prepay. We see tremendous amount of opportunities within our own portfolio. The portfolios of 3.1 year average life, and it is a very large portfolio and on commercial real estate portfolio also is relatively short. So you will see some activity there as well. So it's fair to say that prepays are strong. We never give a prediction going forward but the result over the past nine months has been fabulous.

Great, and then the follow up on FDIC expense, what was it that caused the Delta of a $1.5 million?

You come up with an estimate based on what they give you and you actually put your model through a calculator and it is a bit that we are yet to pay. So, unfortunately given what we gave in the guidance, we didn't have the specific calculator in our hands. It was an estimate. So we were off by about $1.4, $1.5 million for the quarter, so we're going to be up that, multiply that by four quarters. So unfortunately, we figured about $1 million a month, and now it is about $1.5 million a month, $1.3 million a month.

And you know, other thrifts are talking to the FDIC about qualifying assets and possibly getting some relief based on the new assessment levels. Are you guys having those kind of conversations?

We're all going to begin together on this one. Unfortunately, the expense keeps getting higher.

Okay, that is a yes, I guess.

We're very proactive.

And then just one more question on the regulatory environment, Joe, thanks for the clarification to those that are still confused about your regulator, but has your regulator addressed with you the issue of your dividend?

No, we have had no new conversations with regard to dividends. We have been a Fed-guided institution since our beginnings. Most people miss the fact that we have been communicating, Fed is very interested in dividend and interested in liquidity, and those measures that are out there and being discussed have been discussed with us for years. So, this is not a new phenomenon for us. It's something that is very consistent and, obviously, most investors had no idea because, frankly, what we’ve found in the last three months is that most investors thought we were an OTS bank.

I would also say that the capital level at 815 [ph] is very, very high right now. Obviously, that is a substantial insulator when you look at other comparable banks that has had a very significant development payout ratio and tangible common equity is now north of 8%. So we're very comfortable having excess capital.

Okay. Thank you guys.

You are welcome.

Thank you. Our next question comes from Jack Micenko with SIG. Go ahead please.

Good morning Jack.

Hi guys. How are you?

Hi Jack.

Most of my questions have been asked and answered. I just wanted to talk about the CRE line item, a big move up there, quarter-to-quarter, just remind us what is going on there and what percentage of that would be quasi multifamily, just given the cash flows and that sort of thing, and what kind of growth should we sort of forecast in that book going forward. Thanks.

I think from the standpoint of what we seeing in the marketplace, we're seeing some very good opportunities at that extraordinarily low LTVs with high-quality property owners that gives us the ability to participate in some real commercial paper. Not commercial paper but commercial properties that are, in fact, adding to that overall growth in our commercial loans. So, as we look to the future, we continue to see strength in that particular category. There is, in fact, as always the case, on that line, some properties that are driven by multiuse as we have talked about in the past. But I think it's important to recognize that some of these properties are very large properties that, in fact, we have discussions with regard to sharing some of those loans with others. I think we talked about this over the last quarter or so. So that obviously would be our intent from time to time to share larger commercial properties with other people. Okay, so it sounds like that sort of traditional, more traditional commercial real estate rather than sort of a multifamily blend?

The large ones for sure.

Okay. All right. Thank you.

You're welcome.

Thank you, our next question comes from Matthew Clark with KBW. Go ahead, please.

Hi, good morning guys.

Good morning Matt.

Good morning.

On the margin, can you – is the margin you guys pointed of 350 core, was there any noise from FDIC/AmTrust in there.

No, pretty core of anything, the impact of the margin is still getting the results of a negative adjustment from FDIC assets. Obviously, the rate environment is still very low and you have a lot of repricing of the covered assets. That covered asset has come down dramatically in yields, given market interest rates and we're hoping that by Q3 that has just got to stabilize. They're down to the levels where you can't go much lower because a lot of it is the way (inaudible) and two thirds of that portfolio are adjusted rate mortgage loans. So, I think no, it's, just unfortunately, a negative impact because of the interest rate environment on the asset side.

Okay. Okay. But you haven't isolated the two?

No, no, as far as the funding side, we're at the point now where if you look at our corporate fund, it's probably the lowest in the industry. We had about just under $6 billion that is going to reprice on the CD book over the next 12 months instead of 129. Our rates are slightly lower than that, so we have some benefit there. But again, I think I’ve probably repeated this in the past three, four quarters, the low-lying fruit was taken on the CD side, and the funding side, we're still getting some slight benefit there. Not anything material but it is coming down very so slightly.

Okay and then in terms of the rate locks can you give us a sense for how much those were in 2Q relative to 1Q?

I think it was $1.1 billion versus $1.5 billion.

$1.1 billion this quarter?

It was funded.

That was actually, we funded about a $1.1 rate locks and probably looking at probably about just about $1.5 billion.

Okay. And then just on deals, given all we know about Basel III and Citi buffers, and I know obviously it has to do with institutions that are hell a lot larger than you guys, but just knowing what you all know today, does it still – or does it make you less willing to do a deal that would put you over $50 billion in assets?

Well, I think we said it in the last two quarters we're being very, very cautious about getting to that particular mark as a goal. So, we would much prefer to do, really, bigger deals and step over the 50 in a meaningful way so that the benefit of the deal offsets any of the detriment from being a bank characterized as a better-than-$50 billion bank and then taking on whatever those burdens may be. So we continue to be very restrained in our approach to doing deals, but we're very much aware that the marketplace over the quarters ahead will present many opportunities including big opportunities to do deals.

Okay. Thanks, guys.

Thank you.

Thank you. Our next question comes from Rick Weiss with Janney Montgomery Scott. Go ahead please.

Okay, thank you. Good morning.

Good morning.

Hi, how are you?

I am fine. In regards to the multifamily, what are you seeing in terms of the market, are there new competitors that are coming in, also, are rent rates starting to increase throughout you know your…

Well, I think it's important to recognize that most relevant to us is not whether or not the broader market has increases in rent rates. It's more relevant because we're in primarily rent-controlled units. What the individual owners do. So if individual owners are improving the property, the rents in those properties clearly go up. If the marketplace is seeing higher or lower rents, that is dealing with properties that are typically not in our portfolio, so when we look at the New York marketplace, it's stronger than it has been for quite some time. There is no question that the values of real estate, rental income, are, in fact, improving, but we're not a market player but we are a player in a niche that has specific controlled attributes that are beneficial in periods of difficulty, but also restrained in growth, in value or growth in cash flow. So, I think the important thing for us to know is that we're seeing good performance in our portfolios, and as I motioned earlier, an awful lot of our portfolio non-performing has come down dramatically, and we expect that to be the continued case. Plus, we're also going to see pretty favorable dispositions of assets as the months and quarters ahead [ph].

Let me ask you this. If the – so if rents go up for the overall market, does that make it easier for the owners of the rent control properties to get approvals to raise their rates?

No.

There is no tie-in? Okay.

The only way rent controlled and rent stabilized units get increases in rent has nothing to do with market, it has to do with the owner's relationship with the tenant. So the rent control board has a very rigid fixed rate. So the increases coming from the rent control board are always low. The only way good owners build value in their property is by improving the property, and by improving the property owners, actually tenants that have rights under rent control and rent stabilization, agree to new kitchens and new bathrooms and so on; and therefore, the rent control board with the agreement of the tenant allows for the recapture of that expenditure. But the recapture of that expenditure is literally brought into the increase stream over a 36-month period, and continues, and the owner of the building doesn't have to wait in order to have the value of his loan literally be able to refinance more. He has the ability to do that as soon as the rent control board has approved the increase in rents. So we actually get to lend more money as a result of that.

Right, okay, but you're not seeing that happen yet?

Oh, no. We are seeing that.

You are seeing that. Okay.

In other words, the question is whether or not the tenant agrees with the owner to have the rent go up.

Okay. I think I got it and also, are you seeing any – what is Fannie Mae up to?

Well, that is a very big question? The bad news is that Fannie and Freddie have consistently been a major contributor to the misvaluation and difficulties faced in the real estate markets, more in the one-to-four family than in the multifamily. But uniquely, they in fact, are doing more lending and they're literally arguing or making the case to politicians that they should be lending on 50-year-old and 75-year-old buildings because they make more money on those loans. As we all know, Fannie and Freddie are not in the business for making money but in the business for providing a secondary market support of a primary market. They are the primary market in one-to-four and they're trying to get a bigger share of the multifamily market by passing the assets through, you know, to others. So that activity is in flux. We're looking at change with regard to what Fannie and Freddie are doing in the period ahead.

Okay, those are my questions. Thank you.

Thank you.

Thank you, our next question comes from Steven Alexopoulos with JP Morgan. Go ahead, please.

Hi, good morning guys.

Hi Steven.

First I want to clarify, Tom did you say that only 20% of the $1.8 billion in held for investment pipeline is refi?

I said about 80% of the pipeline is going to be new money pipeline. 80%.

Which would imply 20% is refi, right?

Approximately. Again it bounces around in what we see right now, a substantial amount of new money which would be to probably continue – I would think probably, most definitely the continuation of growth in the portfolio. Last quarter it was around a 50/50 split on re-fi versus new money.

Okay. But I mean if we compare just the dollars of loans in the pipeline for refi this quarter versus last quarter, it implies it's down substantially, right over 50%. So, should we be thinking about – I know you don't give guidance on prepays but the prepay income should be down substantially...

It is way too early to tell. Given the rate environment we have significant amount of activity going on, our pipeline is checks in the drawer, so we can talk to the checks in the drawer which we know are going to close, so we have good visibility there. But the refi activity is still being very robust in general. So there is a lot of conversation going on with customers and my guess is that prepayment activity should be robust around 2011, and continuing to 2012, depending on, you know, the market condition and interest rate environments. If the market is very strong, interest rates are very low. The guys are definitely accessing their lending facilities for capital.

Okay. Okay that is helpful. And just one follow up question, without the prepayment income, I guess the core [ph] like 320-ish, given where rates are today, where do you see that bottoming?

I think we are pretty close in the short run, I gave some pretty good guide to the next quarter. I don't see the margin moving around a whole bit give or take 5 or 10 basis points up or down, and this is a pretty tough environment. Rates are low. We are dealing with a very low asset yield situation. However, be it a little bit higher rate too, we can have a nice pickup in the margin. So, I think we are positioned close to the bottom on the margin, ex-prepayments, so you are looking at that 320-ish level, and we feel pretty confident that we're not looking at severe margin deterioration given the current interest rate market. It is still a healthy spread out there.

Okay, just the final question, the yields that you're adding new multifamily today, how does that compare to the average what you added in the second quarter?

The average for the year has been close to – just south of 5%, like 4 and three quarters, so that is down about 100 BPS. That is the market condition. So right now if you look at 300 over the five-year, you are probably around 4 and three eights. But again on average, you have commercial real estate loans, which are priced higher, so I would probably say they would stay say 4.5.

Okay, so pretty consistent with the prior quarter.

Yes, I would say give or take 25 basis points.

Okay. Okay, those are my questions. Thanks.

You're welcome.

Thank you, our next question comes from Chris Nolan with CRT Capital. Go ahead please.

Good morning Chris.

Good morning Chris.

Hi guys. Joe, from your seat, does it look like this multifamily property market is getting little frothy? I mean, it seems to me that low rates, but also weak dollar sort of driving a lot of foreign money coming in.

I think that is obviously the case, but it's important to recognize that the markets were extraordinarily overpriced, way, way too much money was going into multifamily in New York over the last many years. And although that maybe the case in some circumstances even today that there are more dollars going into properties in the New York market, New York's doing very, very well that is not our principle asset. That is not what we principally do. So when we do a loan that is in a 40% or 50% LTV that is a real LTV, so we're not one of the guys that is out there doing 120%, 130% loans. There will be some of that in the market, and that will be on properties that would not qualify to be in our portfolio.

I guess to ask it another way, you know, if we were to either see a jump in treasury yields or some sort of strengthening in the dollar, could that negatively affect the valuations in this market because it seems to be a little bit of a distortion to the normal?

I think – even asking it another way, it really is the same. Meaning that the market is not what we do. So, so when, for example, (inaudible) was put out there at $5.4 billion, you know, $3 billion in excess of what would be a reasonable number to consider. That was a frothy market, and there were lenders willing to put way too many dollars on way too many properties. We're not at that level, but that is not us. So if we want to talk about New York generally, New York as you rightly suggest, New York generally would be more affected by the things you're saying, but our particular portfolio would be very, very slightly affected by that, if not at all affected by that.

Okay, given the weak housing market, there is no question the rental market is definitely up. There is a lot of people looking for rentals versus buying homes right now. Many people don’t have the credibility right now to get a home, will get a mortgage. So that is actually favorable towards the multifamily space.

Great, a quick follow up. The property tax cap proposed by Cuomo, are you get anything feedback in terms of improving cash margins for property operators in this at all or no real effect?

No real affect. I mean there could be isolated circumstances where it's more meaningful than other places but, again, given our niche, you know, the people that we're dealing with, the lending we're doing is significantly more conservative, so the change in the tax isn’t going to have a meaningful effect on how we calculate our numbers.

Great, thanks for the color.

You're welcome.

Thank you, our next question comes from David Hockston with Buckingham Research. Go ahead please.

Good morning.

Good morning, David.

Hi. I was wondering, could you just give us a little color on pricing, again competition, the pressure that you getting from Fannie Mae and I know you are seeing much in the way of new competition in your segment from other financial institutions?

You know, there are clearly occasionally people in the niche. Now, I want to be emphatic here, the New York market is different than our niche. So there can be lots and lots of people that are literally headlining lending in New York City and, in fact in some cases doing multifamily loans. So Riverton and other very large properties in Manhattan were, in fact, taken by non-traditional lenders on multifamily product, and they lend way, way, way too many dollars on those properties. And that is beginning to happen now, and will continue to happen into the future period. But those headlines are not our niche. And they will have no meaningful effect on how we lend.

Okay. Do you put in perspective the 275 margin you're getting today to kind of the highs and lows you've seen over the last 10 years?

Over the last 10 years – yes, obviously, you know, when you go further back our margins were more attractive. Normally during difficult periods, the numbers widen. So when we got into 8 and 9, the beginnings of 9, you saw Fannie go erratic in the market, and our rates were 100 basis points higher, so the reality is Fannie lets the market gravitate to its natural place, rates will be higher, we will earn more on that new product we put into the portfolio. If Fannie stays in the market, they will keep rates down. So the reality is that you can't gauge where Fannie is going to be because they're driven by a committee of government players. Ultimately, the decision is going to be made by the banking committee and whatever that decision may ultimately be is in front of us. It's not something that anybody can actually be sure of, it's in front of us and it is actively being considered. There are some people that are making believe they had nothing to do with the crisis; in fact, they had everything to do with the crisis. And certainly as we look today at what our politicians going to do with regard to getting Fannie out of the real estate markets is an unknown. Regardless of what they're saying, the way they vote is all that really counts and at the end of the day, if Fannie Mae continues to be a under the market player in one-to-four family or in multifamily, they will distort the market.

And I guess there aren’t enough opportunities to buy those loans at discounts to make up for it on your books.

Yes, the bottom line is they have a meaningful effect in how pricing occurs, on all kinds of loans, whether they be one-to-four family or multifamily because they actually play in that market, usually, not usually, always at a discount. So, the reality is if you want the markets to gravitate to normal, you have to have less lending by Fannie and Freddie.

Okay, not very encouraging, but – and then could you just, you’ve talked in the past about some accounting changes potentially that you thought could be positive…

The reality is that rationale accounting would greatly stabilize the financial sector but – and although there are people within the congress that are actively talking about this and it is an agenda item at the ABA, there is no certainty that reasonable people sit in positions of power at the FASB. I mean obviously, they have continued to make ridiculous suggestions that exasperate the situation. And lo and behold, unless people take them to task for the mistakes they make, there is no way of knowing when these mistakes will be corrected.

Okay. Thanks. Thank you.

You're welcome.

Thank you, our next question comes from Mike Turner with Compass Point. Go ahead, please.

Hi, good morning.

Good morning.

Hi, hopefully this is your last question on the margin. I'm trying to figure out first should this quarter kind of mark a bottom in net interest increase and then secondarily, you know, if I back out the prepayment fees, it looks like the yield was down close to almost 30 basis points quarter-over-quarter. If you're originating loans say 50 basis points below where that yield is, I am trying to figure out how the margin really hit the bottom here?

We deployed a substantial amount of our liquidity position in Q2, on average more towards the back end of the quarter that is going to boost the Q3 going forward, and at levels where you are earning 25 basis points on cash going into close to 4%, that does help your overall margin. In addition, you know, you have volume versus rate right now. And you're correct by saying the top line should hopefully have stabilized here. We also hope to have the benefits from the continuation, not saying that the mortgage banking is going to be robust, but we hope that the average balance of our warehouse bottomed out in Q2, because it was at a very low level, we get the benefit of the higher warehouse. That is a very significant benefit to the top one. We lost over $9 million, $8.8 million in Q1 just for the drop in the warehouse in a linked quarter basis off of Q4. I think what I said before, I gave very specific guidance margin should be relatively flat give or take 5 or 10 basis points ex-prepay.

I think it is important to recognize that many of the assets in the last couple of quarters that came out of our portfolio were at higher yields than the remaining portfolio has assets to give up. So we will lose less in yield, even though the yield that we are expecting to put on are about the same as they have been in the first quarter or in the second quarter, the yields that are coming off are lower yields. So the impact to the margin will be less in the period ahead.

Okay. Thanks. So then are you saying that, you know, this should mark a bottom in net interest increase or near a bottom?

I think it's fair to say that there is no guarantee in life. We feel pretty comfortable that we have a good visibility on the top-line, and you know top line has some significant negative impacts in the past six months on mortgage banking. We had a very robust warehouse facility that was north of $1 billion on average that dropped to about $200 million. That is a significant earning asset that disappeared that may not [ph] be the securities in our portfolio growth. So we replaced that asset going into Q3, we would like to see and replace it with different types of assets. It is not the held for sale asset that we turn on average in a two-weeks time period. Now it is a matter of you know just volume versus rate. Now if rates are low, we can’t control rate, but we believe that we will see some growth in volume both on the loan book, as well as the maintenance of the securities portfolio at a slightly higher level than it was in the previous three or 4 quarters given that we had to replace held for sale portfolio in the warehouse.

Okay. Thank you.

Thank you, our next question comes from Matthew Kelley with Sterne Agee.

Good morning Matt. Matthew Kelley - Sterne Agee & Leach: Yes, hi. Have you guys did any longer dated multifamily. I know some of the competitors out there have been going in this 7 and 10 year. What has been your involvement in those types of maturities?

Matt what we have been seeing is we're losing some business in that space. We have opted not to go into the 10-year space. Very selectively, we go out past our traditional product. So if we do lose some multifamily deals, we're losing it more on structure. We see some IO structures that have 10-year type of products. We're seeing the agencies obviously being aggressive there for the agencies built on [ph] more for the secondary market, and not so much for the portfolio being aggressive. So I will tell you that on a limited basis, we do that, and very limited. But the vast majority of our multifamily bread and butter loans are that the 10-year with a 5-year reset. Matthew Kelley - Sterne Agee & Leach: Okay, and then just getting back to incremental spreads versus portfolio spreads, Joe did you say that some of the stuff that is coming off and you the refi has lower coupons than the origination yields at four one eights to four and a quarter?

Yes, some of the stuff that is coming off has higher, not lower, higher yields that are earning for us today and last year and the year before. So the stuff that is coming off actually is earning more than the stuff that is being replaced with in our securities portfolio, as well as in our mortgage portfolio. And the good news, I think, now is that the highest yielding assets are the assets that have already come out of the portfolio, both securities and…

There is still a drag, but the drag is not as significant as it was in the past three, or four quarters. Matthew Kelley - Sterne Agee & Leach: Rates, the rates are very low right now, but on average, we got four and three quarters, just moving the multifamily bucket. It is not a horrific rate, but it is four and one eighth.

I think the important thing to focus on is that the rates that we’re going to get on the newly generated assets, we expect to be approximately the same. Obviously if there is a change in Fannie, it will get better, but the reality is that the rates that are in the portfolio that we are getting prepayments on, those rates were higher, the ones running off were higher last quarter or the quarter before than remains in the portfolio today. So the risk of loss of yields is less in this quarter and in the quarters ahead. Matthew Kelley - Sterne Agee & Leach: I guess, what I'm trying to reconcile, you have a portfolio yield at 5.70 and origination yields at four and a eighth to four and a quarter. If we stay here at these low rates for an extended period of time, would you consider restructuring the borrowings, which are still pretty high because your deposit costs are already pretty low, there is nothing much more to be done on that side or the funding part of the equation. So an extended period of low rates where you gradually track closer to four and a quarter on the new yield is going to drag down that portfolio yield pretty quickly.

Yes, I think you touched upon something back in May of ’08, we restructured liabilities to greater economic advantage. You know, will the environment such be that we can do that again? It could. It depends on a variety of factors but it could. That focusing on the liability side being restructured rather what happens on the asset side, so you have touched upon a very good point.

Matt, currently there is no restructuring plans in place. Matthew Kelley - Sterne Agee & Leach: Okay. What if the mortgage yields, excuse me, the NBS and securities yields went below the cost of borrowings?

I am sorry, what was that? Matthew Kelley - Sterne Agee & Leach: What was the mortgage backed and securities yield, which currently is I think 4:15, fell below your cost of wholesale fund at 3:93, and…

We look at our wholesale bond every day. It has something to do on restructuring, we can do a lot of accommodation without thinking capital consequences. That has to be the appropriate market conditions, if you look at it, we look at it on a daily basis, it has been on the table. The market conditions have to be perfect for us to make that change, but you have to look at the long-time horizon and what any consequences to future earnings and, more importantly, where the capital consequence could be. A pure restructuring would be very expensive on removing the liability and replacing it. But restructuring the liability and just reshuffling is a possibility depending on interest rate environment. As we stand today, if we look at it it's possible. We have done it in the past year, but it's a very insignificant amount, and it a couple of $100 million a quarter, not any material amount. Matthew Kelley - Sterne Agee & Leach: Okay. Last question, what was the accretion during the quarter, just looking at your accretable yields from your deals, those $51.7 million in the first quarter?

I don't have that number at my fingertips, but I can come back to you on that one. Matthew Kelley - Sterne Agee & Leach: But no changes or reclassifications?

I think with the change you're going to have, and like I said before on the call, you had on the old yield environment again. So the AmTrust portfolio is once again pricing lower. I believe we're getting close to that bottom on the repricing for the AmTrust portfolio. That is also going to help the margin. The margin has been hit dramatically over the past two years since FHE [ph] transaction because of interest rates. But most of those loans are just loans [ph] with no floors and they are repricing and they're making payments. Believe it or not, they're performing much better than expected and, therefore, we're earning less than we expected. That one is hitting the margin. We believe that is going to get close to stabilization in 2011. Matthew Kelley - Sterne Agee & Leach: Okay. All right, thank you.

Yes.

Thank you, our next question is a follow up from Bob Ramsey with FBR. Go ahead, please.

Hi Bob.

Hey, actually my questions have all been answered. Thank you, guys.

Thank you, Bob.

Thank you. At this time, this concludes our Q&A session for today's conference. I would like to turn it back to Joseph Ficalora for any closing remarks.

On behalf of our board and management team, I thank you for your interest in the company and our second quarter 2011 performance. We look forward to discussing our third quarter 2011 results with you on Wednesday morning, October 19, thank you all.