Flagstar Financial, Inc. (FLG) Q1 2012 Earnings Report, Transcript and Summary

Good day everyone and welcome to New York Community Bancorp’s First Quarter 2012 Earnings conference call. Today’s call is being recorded and 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 first quarter 2012 earnings will be led by our President and Chief Executive Officer, Joseph Ficarola, 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 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 we currently anticipate due to a number of factors, many of which are beyond our control. Among these 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 policies. You will find more about the risk factors associated with our forward-looking statements on Page 7 of this morning’s earnings release and in our SEC filings, including our 2011annual report on Form 10-K. The release also includes reconciliations with certain GAAP and non-GAAP earnings and capital measures which will be discussed during the 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. Ficarola who will provide a brief overview of our first quarter performance before opening the line for Q&A. Mr. Ficarola?

Thank you, Ilene, and thank you all for joining us this morning as we discuss our performance in the first quarter of 2012. As I stated in the earnings release, we were very pleased to report diluted GAAP and operating earnings per share of $0.27, which is consistent with the amounts recorded in the fourth quarter of 2011 and on an operating basis in the first quarter of last year. I would also note that our cash earnings equaled $0.29 per diluted share in the current first quarter and added $9.9 million more to our tangible capital than our GAAP earnings alone. At the end of the first quarter, tangible stockholders’ equity totaled $3.1 billion and represented 7.79% of tangible assets, excluding accumulated other comprehensive loss. Based on the continued strength of our earnings and that of our capital position, the Board of Directors last nigh declared our 33rd consecutive quarterly cash dividend of $0.25 per share. The dividend will be paid on May 17 to shareholders of record at the close of business on May 7. The consistency of our earnings speaks well to our business model given the degree to which the Bank earns and in general has been expected to decrease as the downward re-pricing of interest-earning assets has outpaced the downward re-pricing of interest-bearing liabilities. While we ourselves were not exempt from experiencing such pressure, I’m pleased to say that linked quarter reduction in our net interest margin, excluding prepayment penalty income, was a modest eight basis points. This was in line with our expectations and the range we provided in last quarter’s conference call. The impact of the modest decline in our margin on our first quarter earnings was largely offset by the volume of loans we produced over the course of the quarter and…

The floor is now open for questions At this time, if you have a question or comment, please press star, one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that while you pose your question, you pick up your handset to provide optimal sound quality. Thank you. Our first question is from the site of Bob Ramsey with FBR Capital Markets. Please go ahead. Your line is open. Bob Ramsey – FBR Capital Markets: Hey, good morning guys.

Good morning, Bob. Bob Ramsey – FBR Capital Markets: You know, you all had really strong commercial real estate loan growth this quarter, and I was wondering if you could share any color – was there anything large or lumpy in there? How are you thinking about the prospects going forward, and what did loan yields look like, particularly in the commercial real estate originations this quarter?

I think we had a couple of very attractive large commercial loans that we decided that we would actually do. The market is rich with assets of that caliber. We have not chosen to continually add these large loans to the portfolio. There were only two out of the ordinary in the quarter. And certainly, I think the good news for us is that we have the capacity to do these kinds of loans and certainly the opportunities are presenting themselves. Bob Ramsey – FBR Capital Markets: And with that being two loans, how much were those two loans of the total growth?

It was about—well, the two loans in size were about $400 million in combination. But the total growth was driven by the availability of lots of product besides those two loans. Bob Ramsey – FBR Capital Markets: And what was the yield on the loans, the commercial real estate loans originated this quarter?

Commercial real estate loans for the quarter, I’m not sure what the average was – about 4%? Roughly about 4%. Yeah. Bob Ramsey – FBR Capital Markets: Great. And then I did just want to ask you quickly about expenses this quarter. It looked like they were a little higher than the targeted range. So how are you thinking about expenses going forward, and has your outlook for the year changed? I think you all had said you expected to keep it more or less around 143 million plus CDI.

Yes Bob, it’s Tom Cangemi. How are you? I would say that that guidance still holds true for the remaining of the year. The elevation in Q1 was driven predominantly by elevated foreclosure expenses, a few extra million dollars unexpected; so we expect to run that 143 throughout the 2012 calendar year per quarter, excluding CDI. Bob Ramsey – FBR Capital Markets: Great. Thank you guys.

Our next question comes from the site of Brad Ball with Evercore Partners. Please go ahead. Your line is open. Brad Ball – Evercore Partners: Hi guys. Tom, I wonder if you can give us a sense as to the margin outlook from here. It came in right in the range that you had guided last quarter. And how much is there an impact from the average balances in the residential portfolio?

Well I guess as far as the previous quarter, the quarter feels very similar in respect to the interest rate environment as Q1, given where rates are. We still have a 10-year sub-2% on our range, so my guess right now would be that similar range between 8 to 10 again going into Q2 down. As far as the impact to residential, we had a significant drop at the end of the quarter for the warehouses, given the GC fee guarantee for the payroll—Congress payroll tax benefit that was out there that was deliverable as of March 31. That balance should pick up significantly going into Q2; so again, I guess our elevation of a higher mortgage banking warehouse, a range from 750 to a billion on average, should pick up very nicely in April going forward. So I guess that 8 to 10 is probably consistent with the previous quarter at that range – down 8 to 10. Brad Ball – Evercore Partners: Okay. And any comment on prepayment penalty fees going forward? They came in quite a bit lower than they had been.

Typically we never give guidance on prepay; and again, the fourth quarter was a substantial number so when you look at quarter-over-quarter, I was very specific I don’t expect to see a Q4 number in Q1. But 17 million was in a range we were very comfortable with, and again we budget the best we can. It’s something we can’t control, but it’s an elevated prepay environment and we expect to see continued prepayments through the year. It’s been very active.

It turns out that there were obviously more SATs in the fourth quarter and fewer SATs in the first quarter, and that’s not at all—that’s pretty much seasonal. That’s not at all unusual for that to happen.

But the level is clearly elevated. Brad Ball – Evercore Partners: Okay. And just stepping back after laying out the NIM guidance, what is the environment like that is driving the NIM here – you know, lower asset yields declining faster than funding cost, obviously. When can we hope to see a turn in that, if at all?

I guess—again, my forecast, if rates are 50 to 60 basis points higher from here in the belly of the curve, you’ll see a substantial turn. Obviously right now, it’s been relatively flat throughout the year. We’ve done fairly well based on our guidance. We’re running off of consensus on Bloomberg and if that’s the expectations, if you look at the out quarters, it’s forecasted to be a little bit higher. So we’re running off of Bloomberg consensus and our guess is that if rates stay around this level, you have some margin pressure; but if rates do move up a little bit here in the belly of the curve, you’ll see a significant amount of cash being deployed at much higher yields. On the funding side, you’re pretty much at a level of not going down much. We’ve had significant reductions in cost of funds over the past three years, but our average cost of fund for our retail operations are in the low 60’s. I don’t see a whole lot more benefit, with the exception of the Aurora franchise coming on which is an average of 20 basis points, which helps us a little bit going forward. Brad Ball – Evercore Partners: Okay. And then my last question on mortgage banking – it was very strong this quarter. We’re hearing that same message from a lot of other big mortgage bankers out there. Gain on sale seemed to be unusually strong. Was that the case for you guys, and what did the gain on sale come in at this quarter?

Gain on sale has been consistent at 120 level, the margin around 120 basis points. The reality is that we are in the selling season, so obviously Q1 was much better than we expected. And coming off a very strong Q3 of last year, going to Q4 very strong, Q1 was obviously a stronger quarter than those previous two quarters. So the expectation now is that April is looking strong and rates are still sub-2%, so you have a refinancing wave continuing. But what’s interesting, the change in our opinion is that there’s been an elevated purchase activity, and the elevated purchase activity can be very meaningful for the mortgage banking model, given that if someone is buying a home, if it’s 4.5 or 4%, they’re still going to close the deal to close on their home. So we saw a significant uptick towards the back end of the quarter to the tune of 70/30 split between refi and purchase activity, which is a breath of fresh air going into 2012.

And Brad, another positive is that we actually gained share, so we actually became a larger participant in that market.

Right. I think our estimate right now is that we dropped to probably number 13 for correspondent and number 8 to table funding in the United States. Brad Ball – Evercore Partners: Okay, thanks very much, guys.

Our next question comes from the site of Mark Fitzgibbon with Sandler O’Neill. Please go ahead. Your line is open. Mark Fitzgibbon – Sandler O’Neill: Hey guys, good morning.

Good morning, Mark. Mark Fitzgibbon – Sandler O’Neill: Just two quick questions – one to follow up on the loan yield question. The multi-family loans that you have in pipeline, what would you say the average yield on those are? I think you said 4% for CRE, but—

No, that was closed, not pipeline. Mark Fitzgibbon – Sandler O’Neill: Got you.

Mark, I would say in this environment, obviously rates are low. You have the five-year, which we pretty much price our five off the five-year treasury. You’re looking at probably high 3’s, mid to high 3’s. But historically over the past two or three quarters, we’ve been well over 4. This quarter, we closed our loans in excess of 4% if you look back over the past 90 days, so our expectation is that right now that rates are significantly lower given market conditions.

And then there are some in the market that are actually pricing below the market. Mark Fitzgibbon – Sandler O’Neill: Okay. And then secondly, I just was sort of curious of your thoughts on the M&A environment. Are you seeing activity picking up, more conversations out there? Just generally what you think.

Yeah, there’s definitely more conversation. Whether or not there will be more activity, I think depends on a lot of factors. But there’s definitely more conversation. Mar Fitzgibbon – Sandler O’Neill: Thank you.

Our next question comes from the site of Rick Weiss with Janney. Please go ahead. Your line is open. Rick Weiss – Janney: Thank you, good morning.

Good morning, Rick. Rick Weiss – Janney: With regards to multi-family, I was wondering if you’d talk a little bit about the competition, and also what’s the multi-family loan pipeline?

The multi-family loan pipeline is pretty strong. Obviously there are holidays in the first quarter that change activity a little bit, so we expect the second quarter’s pipeline to build and certainly the activity in the second quarter should be strong. So I’d say multi-family is going to continue to be an active product all through this year ahead, so we’re looking forward to good production in multi-family.

Rick, I would just add the majority of that pipeline is multi-family loans. Rick Weiss – Janney: Oh, okay. It would be, like, in the 50, 60%?

It’s close to 70. Rick Weiss – Janney: Seventy – okay, got it. And how about with the competition in the multi-family?

Well, there are various players, some that come and go. The newest players in the multi-family, both of them have been there in the past. Chase, obviously was there as WAMU, and now they’re there as Chase. And Astoria is there, but Astoria has been there before and has left the market and has come back to the market, so Astoria is in the market. And then there is the normal smaller bank players that are pretty consistent in the marketplace. So there are really—other than the two I mentioned, there are really no other significant changes in the marketplace. Rick Weiss – Janney: It looks like the yields are pretty low in the multi-family. Is that strictly a function of the interest rates, or there are also being more aggressive competitors, would you say?

I’d say it’s both. I’d say that there are some players in the market that are not that familiar with this particular niche, and obviously there are players that have bad alternative choices. So when they look at the alternative rates that they might get, they’re willing to accept lower rates on this asset because their alternative returns are even worse. So when you think of it in that respect, the market does have some activity that is below where the market normally should be given the overall positioning of the marketplace. Rick Weiss – Janney: Okay. And finally, you guys know better than I do how much concern there is with the high dividend payout ratio. Is there anything new that’s been developed with regulators—

I think the most important thing to recognize in that regard is that our payout ratio is not new. Our payout ratio has been high for many years. The way our payout ratio goes down is when we do highly accretive deals, the price of our stock goes up. So the single most likely change in our payout ratio will be a substantial increase in our earnings as a result of a highly accretive deal.

And Rick, we file SR09-4 and that’s regulatory guidance that we follow.

Right. The guidance hasn’t changed, Rick. The guidance has been the same for years. Rick Weiss – Janney: Well, that’s what I figured when you declared the dividend, but I just wanted to see if I can help clear it up.

Yeah. No, no, that’s fine. That’s fine. Rick Weiss – Janney: Got it. Okay, thank you very much.

You’re welcome.

Our next question comes from the site of Collyn Gilbert of Stifel Nicolaus. Please go ahead. Your line is open. Collyn Gilbert – Stifel Nicolaus: Great, thanks. Good morning guys.

Hi Collyn. Collyn Gilbert – Stifel Nicolaus: I just want to clarify a couple things that you said. First, Tom, you said that the shift in the mortgage production went from 70% purchased to 30% refi?

No, vice-versa. Historically over the past few quarters up until the third quarter, it was about 5%. It went from 5% to 30, so right now it’s about 70/30 going to the back end of Q1. That’s a very positive sign going into the selling season that a lot of the activity has moved to purchase. That means that regardless of what the interest rate is, the individual will close the loan; so if it’s 4.5 or 4%, you’re not going to lose that business as a fallout. So the interesting factor is that we’re seeing a lot of purchase activity in the United States given the environment. Collyn Gilbert – Stifel Nicolaus: Okay, that’s helpful. And then you had mentioned that the multi-family yields that you’re seeing now are kind of in the mid to high 3’s. Can you just remind us again of what the yields are of the production that’s rolling off?

It varies. It varies. Right now, I’d say our coupon is probably close to 5% on average. Our average coupon ex-prepayment in our margin that we just disclosed, that’s around 5%. So I don’t think you’re going to see the magnitude on the bleed on the asset yield going forward since it’s been bleeding for a number of years, given the low interest rate environment. Collyn Gilbert – Stifel Nicolaus: Okay, so your NIM guidance—core NIM guidance of the 8 to 10 basis points of compression assumes a fairly consistent drop in the loan yield that we say maybe from the fourth—

Oh absolutely, absolutely. Collyn Gilbert – Stifel Nicolaus: Yeah, okay.

We’re in an elevated refinancing wave. I mean, the prepayment activity is elevated. There’s a lot of good business going on right now, and actually our average lives have shortened. Collyn Gilbert – Stifel Nicolaus: Okay, okay. And then just want to follow up, Joe, on the two large CRE credits. So you said two credits comprised 400 million of outstandings?

Yeah, about that. It was actually a little more than that. Collyn Gilbert – Stifel Nicolaus: Okay. Can you just—I mean, that’s obviously a huge swing from what your bread and butter is. Can you just talk a little bit more about that?

In actuality, we’ve been very consistently in the commercial market as well as in the multi-family market, so the activity presented unique opportunities on low LTVs to do qualified loans with very big sponsors that were very attractive sponsors. So that’s why we did the loans as we did them, and there are plenty more of those loans out there; it’s just that we’re being very consistent in our approach to doing those kind of loans. Collyn Gilbert – Stifel Nicolaus: Okay, so low LTVs—I mean, what does that mean?

Forties, fifties. Collyn Gilbert – Stifel Nicolaus: Okay. Are these in-market? Were they in New York City?

All in-market, yeah. Collyn Gilbert – Stifel Nicolaus: Okay.

Yeah, all in-market with extraordinarily good sponsors. Collyn Gilbert – Stifel Nicolaus: Okay, all right. So then if we look at—so that was really—I mean, Tom, you had said that the pipeline now has shifted back towards the multi-family focus, because obviously in the first quarter it was much more geared to CRE.

No, it’s been very consistent. Obviously, as Joe indicated, two individual loans that totaled in excess of 400. The reality is that our business model is very consistent. We have a very strong multi-family pipeline going into Q2. And remember, Q1 typically is a slow quarter for us. We had some nice growth in Q1, but we expect to see good loan growth this year. If you annualize what we have, we never give specific guidance but we’re moving towards that high single digit net loan growth for the company. That could easily change depending on market conditions, and more favorably. We’re seeing very good volumes right now. We’re seeing activity. We’re seeing purchases. We’re seeing a lot of medications on rate, so we’re in an environment of elevated activity in the multi-family space. Collyn Gilbert – Stifel Nicolaus: Okay, okay. And then just one follow-up point on clarification – Joe, when you talked about competition hasn’t changed that much, how does the conduit? I mean, you mentioned some of the larger banks that’s in there, but what about—are you seeing any change in the conduit?

Conduits do commercial, mostly. They don’t typically do the bread and butter that we talk about as our multi-family. So they’re not presenting to us any unique pressures. Collyn Gilbert – Stifel Nicolaus: Okay, great.

I’ve said this many times – the New York market is vast, and things that sound the same—there are lots of people that say they do multi-family lending, and most of the losses that occurred in multi-family lending, rent controlled, rent stabilized, were not done by banks. They’re not done in our niche. They’re really a different product, and I think that’s what people miss. They hear about others and think that what they’re doing and we’re doing is the same, and in many cases it’s not at all the same. Collyn Gilbert – Stifel Nicolaus: Got you. Okay, that’s helpful. Thanks.

Our next question comes from the site of Moshe Orenbuch with Credit Suisse. Please go ahead. Your line is open. Moshe Orenbuch – Credit Suisse: Great, thanks. Just a quick follow up on the mortgage bank – could you talk about—you talked about, obviously, the positive effects of having more purchase activity, but as the HARP 2.0 kind of rolls out, do you foresee that kind of adding to volumes? Did it have an impact on the first quarter?

For our company, it did not have an impact. We are still evaluating the merits of HARP 2.0. We do not have that portfolio that’s coming off into the HARP program since we’re a fairly new originator, starting 2010. So for us, we’re still in the evaluation process if it’s a program that is worthwhile for us to participate in. Moshe Orenbuch – Credit Suisse: In other words, you’d be evaluating whether it’s worth refinancing others?

Well, you have to look at the pros and cons there.

And then you have to be qualified. We don’t necessarily have assets that would fall into that program.

Yeah, our business would come from other banks that are looking for refinancing in that program. Moshe Orenbuch – Credit Suisse: Okay, thanks.

And next we will go to the site of Matthew Kelley with Sterne Agee. Please go ahead. Your line is open. Matthew Kelley – Sterne Agee: Yeah, hi guys. There was an article in the Journal on Monday talking about Co-op City potentially looking to refinance that property. I know that’s your largest loan. Any comments on that and the likelihood of that happening?

It’s a great loan. We’ve said this for the six or seven years that we’ve been involved with Co-op City. I think we’ve handled that property extremely well. It’s been greatly improved as a result of the money that we have lent over time. The property was greatly renovated positively, and there’s a new electric plant there. The people there will do what’s in their best interest. If they can get a very low cost government loan, they will take it, and that’s all the better. Our participation with that loan has been a very positive event for the Bank and a very positive event for the community, and the outcome may very well be that they take a long-term lending from a government entity. That’s fine. Matthew Kelley – Sterne Agee: And does that loan have a prepayment penalty structure?

Oh, very large. Yes. Matthew Kelley –Sterne Agee: Got you. So you’d lose a pretty big yield but get a big prepayment?

Yes, exactly right. Matthew Kelley – Sterne Agee: Got you. And then moving to commercial real estate, I know one of the loans was 350 Park Avenue, 375 coupon to Vornado. How much of that type of lending do you anticipate doing over the next couple of years?

I’d say relatively little. I mean, Vornado is a party that we’ve been doing business with in the past, obviously a very strong sponsor, very, very attractive property, very good loan. So it’s not something that we’re actively involved in, meaning there is far more product on the table that we could choose to do than we obviously do, and in that unique circumstance we decided that that was a loan that we’d be willing to do. Matthew Kelley – Sterne Agee: Where do you see commercial real estate loans peaking as a percentage of total loans, like 29% now?

I’d say probably they’ve peaked as a percentage of loans. I mean, as I mentioned earlier, the pipeline, close to 70% is multi-family, so the likelihood that that number is going to down in the period ahead is very high. Matthew Kelley – Sterne Agee: Right. And could you walk us through the methodology on reserve coverage? Over the last year, you’ve put on close to $2 billion of the commercial real estate – obviously high quality credits, but changing the nature and composition of your portfolio away from your traditional bread and butter, lower risk multi-family type loans. How did that have an impact on your reserve methodology versus your existing portfolio, which has held up pretty well?

Yeah. I’d say importantly, and this is maybe unique to us and not to others, but the reality is we lose less money on commercial that we lose on multi-family, and it doesn’t change our risk profile at all. So the way we lend is demonstrated by the way we lose, as is the case for every single lender in the nation. Certainly we have lost significantly less on commercial than we’ve lost on multi-family, so the idea that we have a higher percentage of commercial would speak to a lower reserve requirement rather than a higher reserve requirement.

Matt, I would just add – historically if you look since the peak in 2010 March, the MPA book has dropped substantially. I mean, we are expecting significant drops in the quarters ahead, so obviously as the MPA book declines dramatically and charge-offs are de minimis, you have a range of reserve which—once again, we’re still a high range of reserve at both the community bank and the commercial bank. Matthew Kelley – Sterne Agee: Last question – how much of the 2.5 billion of commercial real estate you’ve put on over the last two or three years here would be REIT quality, class-A type properties, similar to the 350 Park Avenue property?

You’re talking about loans of that size type? Matthew Kelley – Sterne Agee: Yeah, that size and that type of collateral.

Very, very little. Yeah, very little. Matthew Kelley –Sterne Agee: All right, thank you.

Our next question comes from the site of David Hochstim with Buckingham Research. Please go ahead. Your line is open. David Hochstim – Buckingham Research: Yeah, good morning. Could you just clarify what we should expect in the way of the tax rate? It was a little bit higher this quarter.

Unfortunately it’s going to remain elevated – I would say low 36’s, 36.15, 36.20 is the range. David Hochstim – Buckingham Research: Okay. And then in mortgage banking, how much more of a write-down could you have in MSR? It seems like—

That’s all a function of the market at quarter-end. I mean, obviously rates significantly rallied—the buy market rallied towards the end of the quarter. We had a net negative mark on the overall servicing portfolio. We had a lot of amortization during the quarter, so that’s something you can’t control. As rates were to rise, amortization would slow down with the existing MSR, and it’s a function of mark end, so the end of the quarter mark. Given that you have substantial origination volume, when we look at the business, we net to 2 and mortgage banking operations was very strong. If rates were to rise, you get a benefit on the MSR valuation. David Hochstim – Buckingham Research: Right. And what’s the MSR at the end of the quarter?

It’s like 14.3 billion UPB. David Hochstim – Buckingham Research: Okay. And so the MSR itself is how much?

Oh, I believe it’s a 0.3 cap – a 3.8 times multiple capitalization. So I think it’s about a 0.97 is the valuation. David Hochstim – Buckingham Research: Okay. And then—

So the book is about 139 - $139 million in the book. David Hochstim – Buckingham Research: Okay. And then could you just again review the pricing on new multi-family loans? I mean, are you seeing competition from—you’ve talked about Fannie Mae as putting some pressure on rates in the past. Have they gotten worse or better?

Well, Fannie Mae is obviously still a market player, and they set rates broadly for the whole nation and certainly within our market. But they’re not the guys that are most active in our niche today that are affecting rates. There are just a couple banks that are more aggressive than others, and certainly insurance companies are less present right now than they were two quarters ago or four quarters ago. So I think that the marketplace is fluid – it changes from time to time as to who the players are. Currently, there are a couple of banks that are actively trying to get into, if you will, the marketplace, this niche, and they are a little more aggressive than others. So there may be, in some cases, 15 to 30 basis points below others in the same market. David Hochstim – Buckingham Research: I guess your option is to do less in the way of new origination, or to accept lower rates. Is that kind of how you think about it?

It’s each unique loan presents an opportunity to make that judgment. So if the attributes of a particular property are such that a lower rate is desirable, we’ll go ahead and do it at a lower rate. But the impact on rates generally is driven by availability of funding for the like product, so as long as there are people in the market that are actually offering below a market rate, then that will have an impact on the rates that everybody gets in the marketplace. David Hochstim – Buckingham Research: And if you think about a new loan originated, say, in April versus your marginal cost of funding that, the margin on that would be better than your overall book?

I would say it’s factored into my down 8 to 10 basis points in Q2. I mean, it’s the market. We can’t control the shape of the five-year treasury, so if you look at where it is now, it’s sub-1%. If you can get 300, that’s wonderful; but right now, it’s slightly tighter than that. We were 325 two quarters ago, 350 two quarters ago. I think it’s tightened a little bit due to competition, but the reality is if you look at where we were pre-recession, we were 110 to 150. So the economics of the business model are still very strong, and we were funding it with very low cost funds. So I think it’s a very attractive alternative asset class versus other investment vehicles.

You know, the amount of time that a player decides to be below the market is driven by many different factors. It could very well be that they’ll just come to market rather than earn less money trying to gain share. The desirability of gaining share is what drives people to literally price below the market, so we’ll have to see just how long they continue to play at that level. David Hochstim – Buckingham Research: And then last question – did you sell about—originate about 60 million of CRE loans for sale in the quarter? Is that right?

Yes, that’s right. David Hochstim – Buckingham Research: And there’s a gain on that?

Yes, it’s actually spread over the—

It’s insignificant. It’s spread over the—it’s a participation transaction. David Hochstim – Buckingham Research: So it’s not in the mortgage banking number?

No, no, no. David Hochstim – Buckingham Research: Okay, thanks.

Our next question comes from the site of Mark DeVries with Barclays. Please go ahead. Your line is open. Mark DeVries – Barclays: Yeah, thanks. It looks like your borrowing costs fell about 20 basis points sequential quarter. Can you give us a sense of what contributed to that?

We paid off our TOGP last quarter in Q4. That was the FDIC program that was about just under 600 million, and new borrowings are coming on on the short end at 40 BPs. You’ll see the rise in overall funding, it’s at 40 BPs and the tail of the TOGP, which is just around 600 million, that was a 4% type funding.

Yeah. Mark DeVries – Barclays: Okay, great. Can you give us a little more detail on the deposits you’re assuming from Aurora, kind of what the average maturity, average rate is on that, and what you plan to fund that with?

Basically the Aurora transaction is principally built up of $1.4 billion of brokered CDs and about $800 million of certificates of deposits. But our overall recognition of the cost of funds would be on average of 20 basis points. The life of this portfolio is very short on the brokered side. Our expectation is to retain as much of the CD relationship over time. Now remember, this is part of the Lehman bankruptcy transaction, therefore these customers have been through the Lehman bankruptcy and they’re still CD holders, so it’s been quite some time that they’ve been holding on. Their retention has been around 75% on the CD side. Brokered CDs will be paid off as they come due – that will end probably by the end of this year. It’s not a long duration book, but if we can hold 75% of that 800 million, it’s still a transaction that was worth our while; and again, it’s costing us 20 basis points net of the payment. It’s giving us 24 million.

And it’s very low cost. It sits in our Internet bank.

I mean, the first order of business is that we have, as we just discussed, overnight funds that are 40. You’re paying 20, you pick up 20 basis points the day we close the deal on a significant amount of that money. Mark DeVries – Barclays: Okay. And is that going to result in an accounting gain in the second quarter as well?

Again, it’s preliminary right now. We don’t expect to have any material accounting gain. Mark DeVries – Barclays: Okay. And finally, can you just remind us on what you’ve been investing in in the securities portfolio to keep the yield relatively stable?

It’s been the same old for the past couple of years. We’ve been active in the Fannie Mae DUS program that’s multi-family loans wrapped by the agency certificates at a level around 3%-type levels, predominantly at discount structures and callable agency. I’d like to say triple-triple, but now they’re double. But it’s all agency paper. Mark DeVries – Barclays: Okay, great. Thank you.

Our next question comes from the site of Dave Rochester with Deutsche Bank. Please go ahead. Your line is open. Dave Rochester – Deutsche Bank: Morning. Quick question for you – I don’t think you’ve given this data yet. The MSR valuation adjustment and the offsetting hedge this quarter?

Yeah, the MSR adjustment – I mean, the net activity in servicing is about negative 5 million. Of that amount, I think we’re flat on the hedge. It was probably about a $5 million adjustment to the MSR. Dave Rochester – Deutsche Bank: Okay, so—sorry, so MSR was written down 5 million. Is that right?

Yes, as of quarter-end. Dave Rochester – Deutsche Bank: Okay. And then the hedge offset that, or there was—

That’s the net effect of it. Dave Rochester – Deutsche Bank: Okay.

So it would be much—just bear with me, I’m trying to find my—I have it somewhere here. Bear with me. I’m within close proximity of the number. Dave Rochester – Deutsche Bank: No problem.

If we don’t have it, we can always get back to you, too.

Here we go. Overall, the net effect of the servicing book is just under $5 million. The income from the servicing is around 6.8 million – that’s the gross servicing fees. We had $11.4 million net mark against the servicing book, and the hedging loss is about 200,000. So net, it’s about a $4.8 million loss in servicing. Dave Rochester – Deutsche Bank: Got you. Okay, great. Thanks. And the increase in borrowings, I guess that was the stuff that was coming on at 40 basis points. What’s the duration on that?

It’s 30 days, two weeks. You know, the good news – when Aurora comes into play, that will be paid off. Dave Rochester – Deutsche Bank: Okay, so the borrowings should decline, the deposits come on, that’s—

You’ll definitely see a decline in the borrowings, but we’ll pick up around 20 basis points in that decline. Dave Rochester – Deutsche Bank: Got you, okay. And the covered loan runoff, a little over 100 million this quarter – is that a pace we should expect going forward? I mean, is there any reason why that should re-accelerate from here?

Last year, it was around 55 million per month. Now, it’s around 30 million a month, just probably under 100 million per quarter. Dave Rochester – Deutsche Bank: Okay, great. That’s all I had. Thanks.

Very good.

Our next question comes from the site of Josh Levin with Citigroup. Please go ahead. Your line is open. Josh Levin – Citigroup: Thank you. Good morning. You’ve spoken several times in the past about doing acquisitions that are only highly accretive to earnings. I want to ask – how do you think about potential M&A from a strategic perspective? Would an acquisition have to be in your footprint? Would you be willing to make a major acquisition that would change your lending profile so that multi-family was a much smaller part? How do you think about it that way?

I think we’ve been very, very consistent – we don’t change our lending profile in any dramatic way as a result of doing transactions. So if we do a transaction, the lending profile of the pro forma company would be basically transitional conceivably in the early months, because we don’t go out and buy our loans, we originate our loans. So if we do a transaction, the geography of the retail bank as is obviously proven by the Amtrust deal – I mean, Amtrust is—by far the most efficient retail banking that we do is in Florida, and the second most efficient is in Arizona. Now those are two markets there that you or others might think are troubled markets to be doing banking in. They’re troubled markets for assets, they’re not troubled markets for deposits. So I think we’ve said this many times before we ever did the Amtrust deal, and now we have absolute confirmation that we could do deals in very many different places in this country as long as we do the appropriate work in advance and we’re able to integrate the retail bank systems-wise efficiently. We can run banks in different states very cost-effectively, and that’s exactly what we would intend to do in any deal down the road. So by far, the best deposit deal we ever did was not, let’s say, Roslyn, which was a neighborhood bank. We lost hundreds of millions of dollars in deposits in the Roslyn deal because they were a high rate payer and we were a low rate payer. The best deposit flow we had in any deal we did was the Amtrust deal, so the opportunity for us is a national opportunity. It’s not restricted to a geography, and certainly it doesn’t change how we look at assets. So the idea that we would continue to do exactly what we’re doing today is very consistent with the 11 years or so that we’ve been doing deals. Josh Levin – Citigroup: Okay. I just want to follow up on that – that’s very helpful. The two deals you mentioned – Ohio and Arizona – I believe those were FDIC assisted transactions.

Correct. Josh Levin – Citigroup: Do you think there are a lot more of those in the pipeline also that are meaningful?

Well, I think the availability of FDIC deals will be driven by what happens in the marketplace. I’m going to guess that there will be opportunities around the country of sizeable deals that will be either driven by specific actions taken by the FDIC or just market conditions that allow for highly accretive deals to be put together. This is going to be a period – the period ahead – where there is going to be transition. A lot of opportunity will arise in the three and four and six quarters ahead, and those opportunities we’re well situated to take advantage of. Josh Levin – Citigroup: Thank you very much.

Okay.

Our next question comes from the site of Steven Alexopoulos with JP Morgan. Please go ahead. Your line is open. Steven Alexopoulos – JP Morgan: Good morning. Most of my questions have been answered. I just had two follow-ups. First on the core loan yields, they’re down 50 basis points, just over that, over the past year. Just from a 30,000 foot view, is there any reason to think ex-prepays in what’s going on there that the core loan yields couldn’t fall another 50 BPs, particularly if you’re booking the loans at 4 or below 4?

I think that number is pretty high, to be frank. I mean, obviously we had a substantial amount of prepayment activity in 2011, so when you look at the total margin, which is how we run our business model, it’s been very active and creating significant value for shareholders. If you look at the going forward marketplace and where our coupon is today, we are not near as high as the current coupon we were in ’09 and ’10. So going into ’12, you have a lower average coupon on the book, and you do have activity but I think the reality is I think the magnitude of the drop, that would too significant of a drop, personally.

One of the things to consider is that the average lives of our portfolio are within the three to four-year range, so a lot of the loans that are running off were only put on the books three or four years ago. So rates have been actually not as high—you know, rates in the 6 and the 7 and maybe even in the 8-year were higher than rates were in the 9 and 10 and 11-year. So the falloff rate is also going to go down, so the differentiation will narrow. Steven Alexopoulos – JP Morgan: That’s helpful. Do you have any options to limit margin pressure outside of the prepay fees – maybe deploy some of the 2 billion of cash, or should we just think of this as loan yields come down, margins are going to compress—

I think you should look at it as that we’re growing the business model. The prepayment activity, which we put into our margin, it is part of our business model. It’s very active and elevated in 2012, as it was in ’11, the highest year ever for the company, the public entity. But I think knowing that we’re in an active multi-family model right now in respect to modifications as far as new business, gaining share, you’ll have good loan growth and I think if rates are slightly higher, you will see stabilization. You know, we’re in a very low interest rate environment and we’re at—close with sub-1%. If you think rates are going to zero, then we’re going to have a lower margin. If rates are higher, which is highly probable, not short rates but longer term rates elevated 40, 50 BPs from here, you will see stabilization very quickly. Steven Alexopoulos – JP Morgan: Got you. And just one final question – given all the comments on the mortgage banking pipeline being so strong, do you feel that the fees are sustainable at this level, at least into the second quarter? Are we still running about the same rate?

Yeah, I think mortgage banking is going to be robust. The good news for us is that Q1 was a very significant quarter, given that it’s not the true selling season. April-May-June should be an active time of year for the business model, and given where our rates are today between refi and purchase activity, you’re seeing a very big shift in purchase. That could drive the bottom line. BofA, MetLife is out of the correspondent business. We picked up our slot as far as being the top originator. Right now, we’ve picked up one spot coming from 14 down to 13 in correspondent, and on table funding we’re number eight in the country, so we’re seeing good business. Obviously it’s impacted by rates. If rates were to spike dramatically from here, if we have a 10-year closer to 3%, my guess is refi would dry up dramatically but we’d have the portfolio yields kicking in. So we have a nice barbell strategy as part of our business model, and they’ve added significant value to shareholders since we’ve put them on our mix.

And the reality that we’re gaining share is a very important positive. You know, as each month goes by, our ability to gain share only goes up given the absence of some of the other players. Steven Alexopoulos – JP Morgan: Got you. Okay, thanks for the color.

Sure.

Next we will go to the site of Ken Bruce with Bank of America. Please go ahead. Your line is open. Ken Bruce – Bank of America: Thanks, good morning. My question is really more of a follow-up to the earlier questions on the NIM and your NIM guidance. I guess I’d like to understand a little bit better what is assumed in the NIM guidance in particular. It looks like just you had some borrowings that were a lot less expensive this quarter, and that was paying off high cost borrowings as well as some rotation into some shorter tenure borrowings. Do you expect that to continue? How do you get to maintaining the 8 to 10 basis points in NIM compression when—

We’d like to see stabilization. Obviously we’re running a fairly bearish interest rate model right now. This is a low interest rate environment, as discussed in the previous calls, that we have a situation where there’s 5-year below 1%. We lend off the 5-year, and we have investment yields sub-3%. So asset yields are coming down, funding costs are relatively stable, so we’re running that bear scenario into the out quarters. We’re following Bloomberg consensus and you can go on Bloomberg and look at what the consensus is. It’s not a significant rise in interest rates. If rates were to increase 40 to 60 basis points, you’d see probably stabilization. Ken Bruce – Bank of America: I think I understand the asset side of the equation. I guess I’m more interested in your strategy for liabilities and funding. Are you looking to rotate into shorter tenure borrowings or CDs in order to continue to provide some of the offset to the yields drifting down?

In the short term, what we have is a bank yield closing on our books of about $2.3 billion or 20 BPs that’s going to assist us in dropping some funding cost. At the same time, we won’t be borrowing from the Home Loan Bank; we’ll be paying off debt from the Home Loan Bank at 40, so we’re taking up some basis points right out of the gate once we close the Aurora deal. In addition to that, we’re in the market growing our deposit base. We’re looking towards this environment as a growth market for deposits, in particular Florida and Arizona, and we’re in the mean range there and we’re seeing some nice deposit growth. If we look at our quarter-over-quarter growth, it’s been significant for (inaudible) profile, so we had deposit growth—and again, CD rates are at or around this level, give or take maybe 10 basis points lower than the average coupon, so you’re not getting a significant benefit there. But if you look at our average cost of funds, including non-interest bearing demand, we’re in the low 60 basis points. That’s pretty low, so you can’t get much lower than that. Ken Bruce – Bank of America: Right. And what tenure CDs or borrowings are you taking currently?

The borrowings are short-term, which will be paid off on closing of Aurora, and the CDs are within one year to 18 months. That’s just the marketplace. No customers are really going past two or three years. Rates are too low. Ken Bruce – Bank of America: Right. Okay, thank you very much.

You’re welcome.

And next we will go to the site of Theodore Kovaleff with Horwitz & Associates. Please go ahead. Your line is open. Theodore Kovaleff – Horwitz & Associates: Good morning. My question was answered.

Oh, thank you, Ted. Theodore Kovaleff – Horwitz & Associates: Thank you very much.

Good to hear you.

And that appears to be all the questions, so I would now like to turn it back over to Joe Ficarola. Please proceed.

Thank you so much. On behalf of our Board and management team, I thank you for your interest in the company and our first quarter 2012 performance. We look forward to chatting with you again in July when we announce our second quarter results. Thank you so much.