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Executives

Joseph R. Ficalora - Chief Executive Officer, President, Director, Chief Executive Officer of New York Community Bank, Chief Executive Officer of New York Commercial Bank, President of New York Community Bank, President of New York Commercial Bank, Director of New York Commercial Bank and Director of New York Community Bank

Thomas Robert Cangemi - Chief Financial Officer, Senior Executive Vice President, Chief Financial Officer of New York Commercial Bank, Chief Financial officer - New York Community Bank, Senior Executive Vice President of the New York Community Bank and Senior Executive Vice President of the Commercial Bank

Analysts

Ken A. Zerbe - Morgan Stanley, Research Division

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

David S. Hochstim - The Buckingham Research Group Incorporated

Moshe Orenbuch - Crédit Suisse AG, Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

Mark C. DeVries - Barclays Capital, Research Division

Thuy Nguyen - Moody's Corporation, Research Division

Bradley G. Ball - Evercore Partners Inc., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Josh Levin - Citigroup Inc, Research Division

David Rochester - Deutsche Bank AG, Research Division

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Theodore Kovaleff

New York Community Bancorp (NYCB) Q1 2013 Earnings Call April 24, 2013 9:30 AM ET

Operator

Good morning, and thank you, all, for joining the management team of New York Community Bancorp for its quarterly post-earnings release conference call. Leading today's discussion of the company's first quarter 2013 earnings will be the President and Chief Executive Officer, Joseph Ficalora; together with Chief Financial Officer, Thomas Cangemi. In addition, Chief Accounting Officer John Pinto is on the call.

Certain comments made by the company's management today will contain forward-looking statements which are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those the company currently anticipates due to a number of factors, many of which are beyond its control.

Among those factors are: general economic conditions and trends, both nationally and in the company's local markets; changes in interest rates, which may affect the company's net income, prepayment penalty income, mortgage banking income and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposit, loan and investment products and other financial services; and changes in legislation, regulation and policies.

You'll find more about the risk factors associated with the company's forward-looking statements beginning on Page 6 of this morning's earnings release and in its SEC filings, including its 2012 Annual Report on Form 10-K.

The release also includes reconciliations of certain GAAP and non-GAAP earnings and capital measures, which will be discussed during this conference call. If you'd like a copy of the earnings release, please call the company's Investor Relations department at (516) 683-4420 or visit ir.mynycb.com.

[Operator Instructions] To start the discussion, I'll now turn the conference over to Mr. Ficalora, who will provide a brief overview of the company's first quarter performance, before opening the line for Q&A. Mr. Ficalora?

Joseph R. Ficalora

Thank you, Johnny, and thank you, all, for joining us this morning as we discuss our first quarter performance and the primary factors that contributed to our results.

While the low level of market interest rates continue to pose a challenge, our earnings rose modestly year-over-year to $118.7 million and, at $0.27 per diluted share, were consistent with the year-earlier amount. In addition, our first quarter earnings provided a 1.19% return on average tangible assets and a 15.34% return on average tangible stockholders' equity.

Our cash earnings, meanwhile, totaled $128.6 million and were equivalent to $0.29 per diluted share. Reflecting the contribution to capital of our first quarter cash earnings, tangible stockholders' equity rose to $3.2 billion at the end of the quarter, representing a 7.75% of tangible assets excluding AOCL.

Among the factors contributing to the first quarter performance were: meaningful loan and deposit growth; the strong and improving quality of our assets; and the stability of our margins.

To begin, loan held for investment grew to $28.1 billion in the current first quarter, reflecting an annualized growth rate of 12.2%. The increase was primarily driven by multi-family lending and to a lesser extent, the production of commercial real estate and one-to-four family loans portfolio. Multi-family loans totaled $19.2 billion at the end of the quarter, representing 68.4% of total loans held for investment and an annualized growth rate of 13.4%.

In addition, multi-family loans represented $1.5 billion or 69.3% of loans produced for investment in the first 3 months of this year. Commercial real estate loans rose a more modest amount, to $7.5 billion, and accounted for 26.8% of total held for investment loans at March 31.

Looking ahead, our pipeline of loans currently approximates $3.5 billion, with loans held for investment accounting for approximately $1.8 billion of the total and loans held for sale accounting for approximately $1.7 billion.

Another first quarter highlight was the continued improvement in the quality of our assets, with the balances of nonperforming non-covered loans and assets declining from the balances at March 31 and December 31, 2012.

Specifically, nonperforming non-covered loans fell 36.8% year-over-year and 25.9% linked quarter to $193.6 million, representing 0.62% of total loans at the end of March.

Nonperforming non-covered assets declined 28.1% year-over-year and 9.2% linked quarter to $263.9 million, representing 0.59% of total assets at quarter end.

Our measures at March 31, 2013, are even more impressive when compared to our measures at March 31, 2010, when the Great Recession was at its peak. In the past 3 years, the balance of nonperforming loans declined 73.6% from the company high of $734.7 million and the balance of nonperforming assets fell 64.8% from a company high of $750.8 million. In addition, loans 30 to 89 days delinquent declined 67.5% year-over-year to $19.8 million. On a linked quarter basis, the balance was down 28.2%.

Furthermore, our net charge-offs represented 0.02% of average loans in the current first quarter as compared to 0.05% and 0.01% in the prior periods.

Meanwhile, total deposits rose $600.2 million in the first 3 months of this year to $25.5 billion, representing 57.2% of total assets, while borrowed funds declined to $13.2 billion, representing 29.6%.

Turning now from our balance sheet to our income statement, I'd like to say a few words about our net interest income and margin, which were $275.2 million and 2.95%, respectively, in the first 3 months of this year.

As you know, our net interest income and margin are impacted by a variety of factors, including the prepayment penalty income generated in connection with the prepayment of our multi-family and commercial real estate loans. In the first 3 -- in the first quarter of 2013, prepayment penalties contributed $19.9 million to our net interest income as compared to $39.3 million in the fourth quarter of 2012.

Of the fourth quarter amount, $17.9 million stemmed from one prepayment of a $545.5 million loan relationship with a single borrower. Excluding that prepayment, the contribution of prepays to our fourth quarter net interest income would have been $21.4 million and the contribution to our margin would have been 24 basis points instead of 43.

Not considering prepays, our margin reflects a linked quarter increase of 2 basis points. Largely reflecting the decline in prepayment penalty income, our net interest income and margin were lower in the first quarter than they were in the year earlier and trailing 3 months. Nonetheless, these declines were substantially tempered by the growth of our interest-earning assets and by the reduction in our cost of funds in the corresponding periods.

Reflecting the repositioning of borrowed funds totaling $6 billion in late December and early January, our average cost of borrowed funds fell 55 basis points linked quarter and 31 basis points year-over-year to 3.35%. As a result, our overall average cost of funds fell 20 basis points linked quarter and 28 basis points year-over-year to 1.61%.

While the reduction in our net interest was largely attributable to the decline in prepayment penalty income, the reduction in mortgage banking income was largely a function of seasonality and a decline in the refinancing activity as residential mortgage interest rates increased.

As refinancing activity fell, so too did the production of one-to-four family loans throughout the nation. As a result, mortgage banking income totaled $26.1 million in the current first quarter, down $9.1 million from the year-earlier level and $6.5 million from the trailing quarter amount.

Lastly, we were pleased to report that our board declared a quarterly cash dividend of $0.25 per share. The dividend is payable on May 17 to shareholders of record at the close of business on May 7, 2013. The dividend we declared last night was the 76th consecutive quarterly cash dividend since its inception and our 37th consecutive quarterly cash dividend of $0.25 per share.

On that note, I would ask that the operator open the lines for questions. As always, we will do our best to get to everybody in the time remaining. And now, first question, please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Ken Zerbe from Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

I guess my first question is just on the net interest margin. I think last call, you had mentioned you expect stability in NIM some time around middle of 2013. Do you guys still view that as a likely outcome? And if so, maybe if you could just kind of help us understand how much flexibility you have to lower deposit costs as your assets reprice lower, excluding any kind of additional restructuring.

Thomas Robert Cangemi

Honestly, our margin came in slightly better than what we expected in Q1 from the last call. You'll recall, we've guided down 3 to 5 basis points, we came in, x prepay, up 2. Given the interest rate environment, there's been a change in the market interest rates but loan yields are still coming on at reasonable levels to spread to the 5-year treasury. So we're seeing, we'll call it, slight beat in Q1 based on higher volume, as well as conservative estimates, given the restructuring that we did in Q1. But it feels like it's still at a slight decline. So Q2, I'll give specific guidance for Q2, down 5 to 8 basis points. And again, we hope that's conservative. There is a significant change in overall yields, however, we're seeing a nice drop in our funding costs, in particular the borrowing side. And we had indicated, we have done a restructuring early on, the beginning of Q1. And we'll probably going to see further reduction in our overall borrowed funds in the next couple of quarters, given that we have about $760 million maturing at a higher cost of funds rate, around 3 10 [ph] in coupon that's rolling off. So market rates are much lower than that. So again, we're seeing a slight inflection here, given the change in interest rates. Offsetting that is significant activity on prepay. I'm pleased to say that despite, looking at Q4 versus Q1, Q4 was a very active quarter and Q1, we had a reasonable showing of prepayment activity, we expect to see some very strong prepayment activity throughout the year, given that we're seeing good property sales and some large commercial real estate transactions refinancing. So we should probably see some stability from prepay and depending on the level of mortgage banking income, that's also, that's the bottom line.

Ken A. Zerbe - Morgan Stanley, Research Division

Got it. But just to be clear, the 5 to 8 basis points NIM compression is in second quarter, and then for the second half, would you expect modest compression from -- beyond that?

Thomas Robert Cangemi

Again, it seems like we're bouncing around here. We're close to stabilization. Given the change in interest rates, maybe we were off by a quarter. But that will be significantly made up of prepayment activity.

Ken A. Zerbe - Morgan Stanley, Research Division

Got you. And has prepayment activity picked up in the first month of the second quarter?

Thomas Robert Cangemi

It appears that we have some very large transactions that we'll sell to the marketplace and refinance within the marketplace beyond our control. Commercial real estate activities are very strong in the New York region, so we're seeing elevated levels. That's expected. This is a cycle that we're seeing, so we're seeing some good prepayment activity, we're very pleased with Q1, and we think this will continue.

Ken A. Zerbe - Morgan Stanley, Research Division

Perfect. And then just one last question, just on mortgage banking, I think a lot of other banks have talked about mortgage banking revenues trending lower, just given lower gain on sale margins over the course of the year. But you guys talked more about seasonality in terms of a weak first quarter. Is there anything that makes your portfolio, your origination platform different from most of the banks that we looked at, that you would get a bump up in the second quarter?

Thomas Robert Cangemi

Ken, I would tell you that we're pleased to look from the December low. December was probably the low point of actual rate lock activity. Rates are bouncing around at the end of the fourth quarter. It was a difficult Q1 with respect to the overall refinancing rates. So given that we're a whole side retailer, we saw some real slowdown in activity. But January, February, March, each month was a gradual improvement. We're going into Q2, into the buying and selling season for housing, and housing is relatively strong in the U.S. So we're seeing a good start of April. So it seems like -- I don't want to go out on a limb here, but it seems like Q2 should be better than Q1 just given what I was seeing in April. And then rates are a little bit lower. I think the swing of rates, being around the 3.30 to 3.50 level, is decent business, around 35% purchase activity, which is improving from the previous few quarters. If that swing of rate has fallen towards, say, 3.15, 3.20, then we'll see some more refinancing activities. So it seems like we're seeing some better mortgage banking volume right now, it's a little early. Highly rate-dependent. And remember we're not involved in the HARP programs, so we're not getting that benefit. But we are seeing some elevated levels internally.

Operator

And next, we'll move to Collyn Gilbert with KBW.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

So just to quickly follow-up, Tom, on your comment about maybe prepayment income being higher in '13 than what we would've thought going into the year, does that then mean correspondingly lower loan growth?

Thomas Robert Cangemi

Collyn, I will tell you that we feel pretty bullish about loan growth. We grew our overall held-for-investment portfolio to net 12%, annualized, multi-family up 13%. So we're seeing some very strong numbers going forward. Competition is always strong, but we do a good job getting our share, so we have a pretty strong pipeline, $1.8 billion versus the previous year's $1.6 billion. You'll recall, last year, we closed $2 billion in Q2 2012. So we see pretty strong growth going forward. You're going to have some large transactions and other activity that will trade away, but we're getting our share of business.

Joseph R. Ficalora

Collyn, there's no correlation between prepayment penalties and loan growth. I mean, if you look at last year, we had strong loan growth as well as some of the strongest prepayment penalties that we've had in many years. So the ability for us to actually gain share or produce loans is not in any way tied to loan growth.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, okay. And then just a question on expenses. You guys saw a big drop in G&A expenses this quarter. And I know you'd cited the FDIC premiums and then lower legal and professional fees. Is that a real number going forward? I mean, are we looking more now at that $150 million run rate versus the $153 million, $154 million that I think, Tom, you would've guided to in the past?

Thomas Robert Cangemi

Actually, I will give you a specific guidance. We're looking at probably $146 million, $147 million a quarter, and that's x CDI, so we typically carve out a quarter 5 [ph] intangible. Reason being, we've had a lot of expenses in the previous year associated with capital planning, getting ourselves prepared for Dodd-Frank changes, and that was a significant number, so going forward -- as well as we had a lot of portfolio expenses last year to manage some of these assets off the books. So it seems like expenses are going lower, and the run rate I'll give you today would be at $146 million, $147 million per quarter x CDI.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. That's helpful. And just one final question on the provision. I know that jumps around a bit, given kind of what the loss expectation is on the covered loans. How should we be thinking about that going forward? I mean, I don't know if you can answer it by saying what your loss rate expectation is on the covered loans, or -- just trying to get a better sense of how we should be thinking about the provision.

Thomas Robert Cangemi

Net charge-offs, and given the quality of the portfolio, hanging around charge-offs, so if we did not have charge-offs that we do on a quarterly basis, it should be approximate. If you look at the overall covered portfolio, if you net that against the FDIC NIM, it's not a big number. So I don't really want to give guidance there.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

All right. So just think about the provision matching net charge-offs?

Thomas Robert Cangemi

Net, approximately. I mean asset quality is showing nothing but positive strength. It seems like it wouldn't be back to the worst of things, and we're only seeing positive trends in asset quality continuing.

Operator

Our next question comes from David Hochstim, Buckingham Research.

David S. Hochstim - The Buckingham Research Group Incorporated

Can you just tell us what the components of mortgage banking income were in terms of the MSR revaluation and servicing income? And what happened with the gain on sale margin this quarter?

Thomas Robert Cangemi

Yes, sure. The gain on sale margin, that was under pressure given we had a significant change in the past 6 months on the volumes. So we saw about a 24 basis points decline, what we call our gain on sale pricing. So that's 1.26 in Q4, now it's 1.02 in Q1. It seems like things are stabilizing right now, rates are a little bit lower, we're seeing some good activity. As far as the components of mortgage servicing, mortgage origination, I believe it's in the press release, but $26.1 million is the total amount. $226,000 was the net income from servicing, $25.8 million was the mortgage origination number.

David S. Hochstim - The Buckingham Research Group Incorporated

Right. But on the mortgage servicing piece, was there hedge gain that was substantial this period? And how much MSR revaluation...

Thomas Robert Cangemi

Yes, we had a low MSR hedge at 5.8 offset by an inch deposited market [ph] 3.6 million for net, which close to about maybe $1.8 million off on the net-net number. And servicing income was approximately $9.3 million.

Moshe Orenbuch - Crédit Suisse AG, Research Division

$9.2 million?

Thomas Robert Cangemi

$9.3 million, gross. That's a gross number.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And then do you have any comments on how the search for a large, accretive acquisition is going so far?

Joseph R. Ficalora

Well, let's just say that there are many interesting opportunities in the marketplace, not that this is a very active market, as I'm sure you are very much aware, but there are things to be considered, for sure.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And then, could you just tell us what do you have in the way of unrealized gains on the available-for-sale securities portfolio at March 31?

Thomas Robert Cangemi

I think it's a small number. I think it's maybe $10 million, $15 million. Not a huge number. Most of our securities are up to maturity. We took advantage in the quarter, given some of our securities that were back paying CMOs, that the gains just vaporized. And given they were relatively short, we took advantage of market conditions. I think the net gain after tax on AFS is around $10 million or less.

Operator

Our next question comes from Bob Ramsey, FBR.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Just, I guess, maybe looking for a little bit of clarity around the margin. I know you guys said you're still expecting the level to stabilize a bit in the back half of the year. But it sounded like prepayments are a piece of that, and I think previously, the guidance had been sort of on a core basis x prepayments. So I'm just curious if I'm understanding that correctly.

Thomas Robert Cangemi

Let me clarify. For Q2, 5 to 8 down x prepay. But prepay is very strong going into this year, so we believe between prepayment penalty income coming in significantly lost any [ph] pressure in the margin, but that number I gave you was x prepayment.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay. And then as you think about the back half of the year from there, do the prepayments help you get stability, or is the core margins stable without prepayments?

Thomas Robert Cangemi

I think we're at pretty close to the same page we were at the beginning of the year. We're seeing and we're going to see lower wholesale liability costs coming down the next few quarters, given that we had some liabilities maturing, give some decent lots of money, $750 million, $760 million actually, at about 3.10, so that's significantly lower than the market today. In addition, we have a decent amount of CDs that are coming in, there are about 4.5 billion, around 1%-ish, depending on the positive initiative there, you may see some further reduction in cost of funds. So it seems like the cost of funds line item will come down. The big question is when will loan yields stop declining. Security yields appear that they are getting maybe 3 or 5 basis points a quarter for a couple of quarters, and we're getting closer to bottom there. We're not seeing the propensity of calls in that portfolio as we had 2 years ago. And the loans -- the loan yields are coming in around 3.30, 3.40-ish. So if you look at the Q1 guidance, we probably came in slightly better than expected, that was driven by a loan deal, and probably a conservative view of repositioning on the liabilities side. So I think, I still feel very confident that we're going to stabilize the margin. We may be off because of the beat in the first quarter, but if you blend that, we're probably pretty close to stabilization. Definitely 2013 may record losses given the change in market interest rates.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay, that helps. And then you sort of mentioned part of the challenge is that the loan yields are -- have been coming down, and I know some of your peers in the market have highlighted that they really see increasing rather than better pricing pressure out there, and that there are people that are just getting very aggressive in terms of pricing. I'm curious what you're seeing in the marketplace from a competitive perspective.

Thomas Robert Cangemi

Right now, like I've said, our bond yields for the quarter outperformed our model. So we came in approximately like a 3.40-ish for the quarter. What we're seeing for the pipeline yield is around probably like a 3.35-ish, We've announced the pipeline of $1.6 billion, but still little north, it's around 2.50 for the 5-year. Going forward, there's always pricing pressures. We try to be a market leader on doing good transactions. We don't want to be the lowest bidder in town. So we're doing a good job on holding off our levels. So we were seeing actual loan closings that we've done slightly better than our model expectation. We model around 2.50 over the 5-year.

Joseph R. Ficalora

Bob, there's no question there's a lot of discussion in the marketplace that really is intended to move rates, not necessarily reflective of the rates that are actually being closed.

Thomas Robert Cangemi

And Bob, I would just also add, we want to stick to our heading. We're seeing good core multi-family bread-and-butter deals. The typical saying, thanks, Joshua. We have the prepayment structure involved. We're not looking at going away from our niche, so we're still doing our niche business.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Great. And then the restructuring you all did this quarter, or at the end of last quarter and into this quarter, did you get the full benefit of that this quarter, or is there some lingering benefit that laps into the second?

Thomas Robert Cangemi

We had a few basis points going into Q2. It's because of the timing of the actual closings of those transactions.

Operator

Our next question comes from Mark DeVries, Barclays.

Mark C. DeVries - Barclays Capital, Research Division

Could you talk about how much uncovered loan growth you're targeting for this year? And as you grow your balance sheet, how well you can compensate your TCE ratio?

Thomas Robert Cangemi

We don't give a formal guidance on loan growth. It's been -- as you'd see, the first quarter, we had significant net loan growth when carve out loans held for sale, which definitely moved the number down, as well as covered assets, which bleeding off the portfolio. But I wouldn't say we're going to be -- 12% loan growth is probably considered a very aggressive number. But I think it's reasonable to say, mid to upper single digits is reasonable. And then [indiscernible] is generally on the year, it's highly dependent on interest rates, right? We feel fairly confident we'll get our share of business. And for modeling purposes, high single digits is reasonable for us, net.

Mark C. DeVries - Barclays Capital, Research Division

Okay, got it. And then on the TCE, how comfortable can -- how low can you comfortably take that?

Thomas Robert Cangemi

Depending on market conditions, we're not looking to leverage capital aggressively here until markets do change and we're running around a 70, 75-ish tangible common equity ratio. I don't see it going below 7 in the short term. But again, we'll watch over time, and if things become more robust, with spreads widening on the back end of the curve, then we'll probably take some capital, put some capital forth.

Mark C. DeVries - Barclays Capital, Research Division

Okay, great. And then how are you thinking about the longer-term shift of cash into securities? You've talked about bringing your securities up to 15% to 19% of assets. Is that still where you're thinking about taking it longer term?

Thomas Robert Cangemi

I think the big picture for us is that we have some excess cash and then we're fine with that, our securities portfolio could be larger. Obviously, market conditions will change. It hasn't been a market condition for buying securities, so we'll try just to manage our propensity of calls that come through the portfolio. So as you can see, there hasn't been a lot of growth there. But in the event there is a, call it, a reasonable spike in the back end of the curve that would create some value, then we'll go more aggressive on putting on some balance sheet growth there. We're trying to be conservative, we're trying to stay away from duration risk, and we're keeping it very simple on the securities side.

Mark C. DeVries - Barclays Capital, Research Division

Yes. It looks like you did a little bit out of the quarter there, did you take advantage of the moving rates?

Thomas Robert Cangemi

Yes, absolutely. A lot of that growth is in anticipation of future calls. We're just trying to manage the expectation of calls that may occur.

Thuy Nguyen - Moody's Corporation, Research Division

Okay. And what types of securities did you add in the quarter?

Thomas Robert Cangemi

Agency [indiscernible] paper and callable debentures, all government agency.

Operator

Our next question comes from Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Actually most of my questions have been asked, but one thing on the mortgage business. You kind of alluded to this. You said that there was a 24-basis-point drop in your gain on sale, kind of fourth to first quarter. What's it done since then? Because some of the data we looked at would've suggested that spreads got worse during Q1. Maybe they bounced back a little after, but where does that stand now?

Thomas Robert Cangemi

It seems like we're stabilizing. The good news, we're stabilized. It's going to move interest rates. April is shaping up very nicely. But again, it's way too early for the quarter. I don't want to give you any false guidance. But January was -- January, February, March, each month got better, and we adjusted our pricing to compete. Now we lost 24 basis points linked quarter, but that's not going to be a trend that will continue around this level. If we're running around 100, 102-ish, 105 gain in sale margin, if we hold that with higher volumes, we'll see better net mortgage banking income.

Operator

Next one, Mr. Brad Ball with Evercore.

Bradley G. Ball - Evercore Partners Inc., Research Division

Just back on the NIM, I'm trying to understand specifically what changed versus your guidance in January for down 3 to 5 and the result, which was up 2 basis points in the quarter. What really drove the difference versus your expectations?

Thomas Robert Cangemi

The big difference is higher loan yields have been closed, as well as the conservative view of the timing of the repositioning of the advances and repo [ph].

Bradley G. Ball - Evercore Partners Inc., Research Division

The loan yields throughout the quarter were higher than you had expected...

Thomas Robert Cangemi

The model is based on actual closing of the pipeline, that's correct.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And then...

Thomas Robert Cangemi

A couple of basis points there and a couple of basis points in the repositioning.

Bradley G. Ball - Evercore Partners Inc., Research Division

So specifically, the repositioning, that $6 billion of borrowed funds, is there more room to do more of that as we progress through this year in this rate environment?

Thomas Robert Cangemi

Yes, we're being very opportunistic. We pick our spots, we wait for markets to work to our advantage and we transact. So I'm not going to give a specific number but obviously, the one number that is going to have in this quarter, that we're going to pay off $750 million of advances at a 3.10, so the market is sub 1%, depending on the duration, it could slightly go up. It hasn't happened yet. That will be a benefit. And we have probably between $400 million to $600 million that could be moved around. I mean, that really hasn't delved into the counter-parties with some of the Wall Street firms, that we think there's some value there. But they just have to look at what they're going to charge to their balance sheet. If it becomes optimistic and the economics work, we'll take advantage of it. But I think, like I said on one of the previous questions, you'll see further declines in borrowing costs going into 2013, once you already know how stabilized the margin.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And just shifting, did you actually hold any one-to-four family loans for investment this quarter? Or what's the outlook for holding residential loans going forward?

Thomas Robert Cangemi

As you know, I think we said last year, loss [ph] decline [indiscernible] They estimated going to be between $35 million to $50 million per month, with an [indiscernible] balance sheet. So we've been very successful there. I think, the total now, we have around $200 million we put on the books so far. That started the initiative late last year. But it's been successful, it's been mostly fine one-offs [ph]. And again, to some extent, there was a small amount of tender loans.

Bradley G. Ball - Evercore Partners Inc., Research Division

Do you see that picking up going forward, given the rate environment?

Thomas Robert Cangemi

It all the depends on where rates are going. If rates are much higher, we'll see a higher level. Depending on what's sufficient to add to the balance sheet. But obviously, we're pleased with the current results. However, if rates were higher, we'll see better yields and more volumes. Most customers are still going to the 15 and 30 [ph], and we're not portfolio-ing those types of loans, we're selling those loans.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay, got it. And then finally, Joe, on the M&A question, you've said in the past that you would consider doing sort of a nontraditional deal, not necessarily the traditional bank deal. I wonder if you could just remind us what your sort of core M&A aspirations are. What are you looking for in a deal?

Joseph R. Ficalora

I definitely do not want to convey that we're looking outside of the norm. We have every expectation that there will be opportunities that are very much in line with our past experience and what you would reasonably expect. I think the comment that was made at an earlier date, that there were additional opportunities in the marketplace, was merely a statement of fact, that there are other opportunities, not necessarily that we will do, but certainly opportunities that are not traditional to what it is that you would expect to see us actually close a deal on. In all cases, however, we would be risk-averse. In all cases, we would be subject to the current guidelines with regard to regulatory oversight in preparation for doing deals. So it's not as though the marketplace has changed, at least for us, in any meaningful way. Not at all. But there is, in fact, going to be an opportunity to do and consider those things that you would reasonably expect should come to the market to create a better bank. And that's the goal, ultimately.

Operator

Our next question comes from Steven Alexopoulos, JPMorgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

It would seem that without securities gains, and Tom mentioned there wasn't much left in terms of unrealized gains, and with the NIM guidance, it's going to get tougher to earn the dividend over the next few quarters. I'm curious, one, if the payout ratio does cross above 100%, would you expect to just pay a portion of the dividend out of capital or is it more likely that the level would be reset?

Thomas Robert Cangemi

Steve, let me clarify so we're crystal clear. We have the expectation that prepayment penalty income will be robust this year. I'm giving a margin guidance, our margin is with prepay. The only reason why we carve assets is we believe that's our business model. So if you look at our business model, we're very bullish about levels of income that's generated from our core customer base, which includes significant prepayment penalty income. We believe we're on a prepayment cycle, that means that our earnings will be reflected positively in 2013 for prepayment activity, as well as if rates stay very low like they are today, our mortgage bank will do fine. So again, if you want to call that a onetime risk, let's hope that the Q1 is the low point. We see pretty bullish about prepay and mortgage banking picking up again, so hopefully, going forward, these conversations will be driven on an earnings growth. We feel pretty good about the prepayment level, not really concerned about being able to pay the dividend.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay. Let me just ask one follow-up, given how volatile the prepay is and how volatile the mortgage banking fees are. If in any 1 quarter you don't cover the dividend and need to pay it out of capital, do you need special permission from your regulator to do that?

Thomas Robert Cangemi

Again, I think we've clarified this in many, many calls. We file our SR 09-4, it's crystal clear what the process is. We have GAAP income. We go to our regulators when we fall short of the SR 09-4 definition. And we haven't had to have those conversations.

Operator

Our next question comes from Josh Levin, Citigroup.

Josh Levin - Citigroup Inc, Research Division

All the commentary and questions so far have been about when NIM would stabilize. Maybe since you have better visibility than we do, can you give us a sense of, at a ballpark level, at what level do you think NIM will stabilize?

Thomas Robert Cangemi

I think we're there. I mean, we've maintained this for a couple of quarters, we're basis points away. So again, when you're talking about stabilization, we look at NIM going up because we have prepayment activity. I think [indiscernible] articulated Q4 having a very large normal relationship, that was almost $18 million for one transaction. If you look at the core value of prepayment activity going into a term yield, it's material. That's how we run our business. So we see margins going up on prepayment activity. So we see our business model performing very well in this tough, difficult environment. We're getting around 250 [ph] over the 5-year treasury, and we're generating returns normal of the industry on assets, so we're pretty bullish about it. Again, we look at the model differently on a mathematical equation when you caught our prepay. Prepayment is our business model. That everyone loan we write, commercial, real estate, multi-family have embedded value in prepayments if we look at the term yield.

Josh Levin - Citigroup Inc, Research Division

So my follow-up question is, the core NIM, so the NIM x prepay, which you've talked about in the past, do you still see stabilize -- can you give a sense where that's going to stabilize?

Thomas Robert Cangemi

In 2013. Again, maybe 4 or 5 [ph] quarters, we said, I think, mid-2013, that's the...

Josh Levin - Citigroup Inc, Research Division

No, but the level, not when. What level do you think core -- is core NIM very close to bottoming?

Thomas Robert Cangemi

Again, I gave guidance for the quarter. Second quarter, down 5 to 8. You can do the math, that's where we are. I'm not going to give further guidance on the NIM.

Operator

Our next question comes from Dave Rochester, Deutsche Bank.

David Rochester - Deutsche Bank AG, Research Division

I was just wondering, does your loan growth expectation for the year factor-in any reduction in loan pricing, just given the pick up in competition in the market?

Joseph R. Ficalora

No.

Thomas Robert Cangemi

No, not yet. Dave, I mean, we're going to compete. We love the bread-and-butter business, 5-ish structure is our bread-and-butter opportunity. Commercial real estate loans, although they haven't grown as much in Q1 versus Q4, we still see decent activity there. We may have some loans that do trade away because of aggressive lenders. However, we think we can make it up on volume. And again, we price our business between around 2.50 over the 5-year. We're funding it at a very low cost of funds, I mean, we'll make decent returns there.

David Rochester - Deutsche Bank AG, Research Division

And you mentioned the roll-off or the higher cost funding in 2Q. I was just wondering if we'll see most of that benefit in 2Q given the timing, or will we see some of that go into 3Q as well? I was just wondering when that timing was.

Thomas Robert Cangemi

Dave, we'll see a continuing drop in the cost of funds for wholesale liabilities in Q2 and Q3. Ultimately, depending where rates go, it's going to be split between Q2 and Q3. And it's also depending on future repositioning that we decide to do depending on market condition.

David Rochester - Deutsche Bank AG, Research Division

And you mentioned that -- I'm sorry, go ahead.

Joseph R. Ficalora

David, I was just going to say that the growth in our loan book, the percentage growth, is probably stronger than it's been for many, many, many quarters.

David Rochester - Deutsche Bank AG, Research Division

Yes. And just one last one, the FHLB advances, you mentioned you can move around the $400 million to $600 million, I think it was. I was just wondering what the yield on that was today and what the normal maturity is on that.

Thomas Robert Cangemi

We'll try to push it out 4 years. These rates will eventually rise. We want to be prepared for that, so we've moved over $6 billion out to the curve. I think the average is 4 years there. We'll take little north of 100. Now, it's probably somewhere between 70 to 80, [indiscernible] depending on market conditions. And then we really like to work on our counter-parties. There is an opportunity there, it all depends on what they're going to charge us. So we're being patient, and I think that in the event market change, they do on a daily basis, we'll transact. So the [indiscernible] I believe, and they pattern with us, make a lot of attention to them and for us, and most of that will be behind us going into the second half of 2013 and we'll work on the counter-parties.

Operator

Our next question comes from Matthew Kelley, Sterne Agee.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Last quarter, you've kind of indicated that the pipeline looks like a 3.33 yield on multi-family, 3.83 on commercial real estate, so roughly 50 basis points higher on commercial versus multi. Is that spread holding on the 3.35 average yield in your current pipeline?

Thomas Robert Cangemi

Yes, literally it's almost identical. 35-ish for the pipeline, as we've announced last time. [indiscernible] markets move around, still early days, but that's an impressive levels of what others banks are quoting.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

And when we listened to some other companies, signature investors, people, they're mentioning that they're seeing some lengthening of terms, a little bit looser underwriting standards. Some people are giving up on prepays. I mean, what are you guys seeing in terms of the term activity and then just on underwriting standards?

Joseph R. Ficalora

Well, the term activity, obviously, is a part of what's been going on over the last year or so. But there are a variety of components of actually negotiating a particular deal. And based on the relationships that we've had, I think that we do have a different mix of expectations than many of our peers. So the results, likewise, wind up being different than our peers would see.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

And how is your mix different, a little bit longer or...

Joseph R. Ficalora

I think we probably are doing more loans that are in the 5-year range than others are. We're probably doing more better rate loans than others are. There's no escaping the fact that we are definite with regard to prepay, where others don't even look at prepay. So I think that when you think about being able to lend through multiple cycles to people that are actually cycle players, those relationships matter. And lo and behold, for a good reason, people choose to actually take their loan through a negotiation with us.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay. And your commentary about stabilization of the margin, does that imply or assume a more active mix shift, some cash into securities? Talk about the pace that we might see that change.

Thomas Robert Cangemi

I would say the pace would be depending on market conditions. So obviously, we're being very prudent. We feel that it's a real value destruction if going longer term and we'll keeping the securities portfolio small. If rates do rise, and eventually, they may rise, we will be able to take advantage of that. We have the capital, we have the focus. Right now, we're managing the amount of expectations of callable agency bonds that come back to the company that we have to replace just to keep the balance sheet running flat. But I don't see any significant growth until rates are high again. And we will transact opportunistically. And, Matt, the one other point I want to talk about, and going back to the discussion on the loan, it's interesting, we're seeing unique opportunities throughout the market. And when you quote a prepayment structure versus the yield maintenance structure, the coupon is typically lower for yield maintenance. We typically focus on prepayment activities, so we get a little bit more yield upfront pulled toward the back end, believe it or not. And that's the differential to some of the market conditions you may be hearing from other banks. Other banks struck their deals with yield maintenance, we typically do the 5-4-3-2-1 structure.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay, got you. And then one other thing. On the purchases of securities during the quarter, the agency debt bonds and the callable debentures, what was the average yield you're getting on those purchases?

Thomas Robert Cangemi

Probably like 2 -- close to 2.60.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay. And the cash flow -- the yield in the cash flows coming off?

Thomas Robert Cangemi

It's, I'd say, maybe 20 bps. Not a huge bleed on security yields. Other than what we sold, we sold some assets given market conditions. That was a little bit higher yield.

Operator

Our next question will come from Mike Turner with Compass Point.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

When I look at just the mortgage banking forecast, at least for the MBA, the Fannie and Freddie, they're all forecasting about a 30%, 40% decline from current levels in another year, a year and a half. I'm curious, what are -- I guess, how much operating expenses on the origination side do you have in that business? And how much could potentially come out if that comes to fruition on the origination side a year from now?

Thomas Robert Cangemi

Just to be clear, we are budgeting for the forecast -- [indiscernible] that number that you threw out off, that's what the numbers are being called refi-ing. Depending on any additional refi rates, that will change those numbers materially. But yes, it's a tough environment. We had a great year last year, $176 million pretax, we put up $26.1 pretax this quarter. It seems like Q2 should be better than Q1. I know it's early, but we're seeing some reasonable activity, given the rates are slightly lower going into the home activity season. So I think we're going to see probably lower numbers on a year-over-year basis, but those will be in line based on expectations. And we have a fairly good leverage model. There's an automated platform, the [indiscernible] platform, it is automated. And we could ratchet that down if we have to. We don't feel like we have to today, but we will ratchet it down if things get more difficult.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay. And then also just back on the NIM guidance, which is helpful. What is your assumption for average earning assets relative to the first quarter in that sort of stable with prepay?

Thomas Robert Cangemi

I would manage [indiscernible] model is 5% net asset growth for the year and spread out over 4 quarters.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Say that again, I'm sorry?

Thomas Robert Cangemi

5% for the year spread out over 4 quarters.

Operator

Our next question comes from Theodore Kovaleff with Informed Sources Service Group.

Theodore Kovaleff

One question for you. And I noticed that there was a significant increase, percentage-wise, in real estate owned, and I was wondering...

Joseph R. Ficalora

Yes, that was only -- that was one property. And although there has been an ongoing ownership in that property, the decision was made to move the property, and the value is definitely there, and we have every expectation that is only going to be going up. So that will be resolved in relatively short order. But as I mentioned, it's just one property that, that represents.

Operator

And that is all the time we have for questions. I'll now turn the call back over to our host.

Joseph R. Ficalora

Okay. Well, thank you, all, for joining us. On behalf of our board and management, I'd like to thank you for your interest in the company, our strategies and our performance. We look forward to chatting with you again in July when we report our earnings for the second quarter of 2013. Thank you.

Operator

Thank you. This does conclude today's first quarter 2013 earnings conference call with the management team of New York Community Bancorp. Please disconnect your lines at this time, and have a wonderful day.

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