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New York Community Bancorp (NYSE:NYCB)

Q1 2014 Earnings Call

April 30, 2014 9:30 am ET

Executives

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

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

Analysts

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

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

Ken A. Zerbe - Morgan Stanley, Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Timur Braziler - Deutsche Bank AG, Research Division

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

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

Karti Bhatt

David S. Hochstim - The Buckingham Research Group Incorporated

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Thomas Alonso - Macquarie Research

Operator

Good morning, and thank you all for joining the management team of the New York Community Bancorp for its quarterly post-earnings release conference call. Leading today's discussion of the company's first quarter 2014 performance will be President and Chief Executive Officer, Joseph Ficalora; together with Chief Financial Officer, Thomas Cangemi. Also joining in on the call are Chief Operating Officer, Robert Wann; and Chief Accounting Officer, John Pinto.

Certain of the comments made by 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 the 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 on Page 6 of this morning's earnings release and in its SEC filings, including its 2013 Annual Report on Form 10-K. The release also includes reconciliations of certain GAAP and non-GAAP earnings and capital measures which will be discussed during this conference call. If you would like a copy of the earnings release, please call the company Investor Relations department at (516) 683-4420 or visit ir.mynycb.com.

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

Joseph R. Ficalora

Thank you, Erica, and thank you all for joining us this morning as we discuss our first quarter performance, which was highlighted by the growth of our held-for-investment loans, the growth of our deposits, the quality of our assets and our solid financial results with GAAP earnings totaling $115.3 million or $0.26 per diluted share in the quarter and cash earnings totaling $125.7 million or $0.29 per diluted share. Included in our GAAP and cash results was a one-time charge to income tax expense of $4.5 million, the result of a change in the New York State tax laws that took effect on March 31. Meanwhile, the one-time charge to income tax expense was exceeded by after-tax securities gains of $2.9 million, together with a $2.3 million after-tax gain on the sale of Visa Class B shares.

Now that these items are behind us, I'd like to focus on those aspects of our performance that, in our view, were the most significant. First on the list, of course, was the growth of our loans held for investment and more particularly, the growth of our multi-family loan portfolio. Held-for-investment loans rose 13.8% annualized over the course of the quarter, while multi-family loans rose at an annualized rate of 14.6%. That's the largest growth in many years. In the first quarter of the year, we originated $1.9 billion of multi-family loans for investment, representing 69.1% of all the held-for-investment loans we produced.

Commercial real estate represented 16.8% of our current first quarter production, with originations of CRE loans totaling $472.7 million. While originations of CRE loans declined sequentially and rose from the year-earlier level, the volume of multi-family loans produced rose $96.3 million linked quarter and $397.2 million year-over-year. Of course, the growth of our multi-family and commercial real estate loans is driven by 2 factors: first, the volume of loans we originate over the course of the quarter; and second, the level of refinancing activity and property sales.

After 4 consecutive quarters of robust activity in our local real estate market, property transactions declined in the first 3 months of this year. As a result, prepayment penalty income declined to $20.4 million in the current first quarter from $33 million in the fourth quarter of 2013. Nonetheless, it is important to note that the first quarter is typically our lowest for prepayments, and that the $20.4 million in prepayment penalty income we recorded in the current first quarter was the highest level we recorded in the first 3 months of any year.

Meanwhile, prepayment penalty income added 19 basis points to our margin in the current first quarter as compared to 32 basis points in the trailing 3-month period. As a result, our first quarter margin fell to 272 from 292 over the course of the quarter, with prepayment penalty income accounting for 13 basis points of the 20-basis-point decline. Absent prepayment penalty income, the decrease in our margin would have amounted to 7 basis points, within the range of guidance we gave on last quarter's conference call. With the current pipeline of $3 billion, including $2.4 billion of loans held for investment, we would expect to see a meaningful level of loan and asset growth throughout the current year.

Not incidentally, multi-family loans represented the bulk of the pipeline of held-for-investment loans. As an aside, I do want to note that while multi-family and CRE loans remain our primary assets, we were also pleased by the growth of our smaller held-for-investment loan portfolios at the end of March.

In the time since we added specialty finance to our product menu, the portfolio of specialty finance loans and leases has grown to $220.2 million, including $48.5 million or 28.2% rise in the first 3 months of this year. It's important to note that this is a floating rate book of business that features an attractive current market deal. Similarly, our portfolio of one-to-four family loans held for investment grew to $627 million at the end of the quarter, including a $66.2 million or 11.8% increase since December 31. Our current pipeline includes one-to-four family loans for sale of approximately $560 million, exceeding last quarter's pipeline by approximately $160 million or 40%. While originations of one-to-four family loans for sale declined over the course of the current first quarter, we nonetheless saw a 14.6% increase in mortgage banking income, as income from originations and servicing income both rose sequentially.

While the growth of our loan portfolio was certainly gratifying, so too, was the deposit growth we enjoyed. In the first 3 months of the year, deposits rose $1.1 billion, and we would expect to see continued growth over the course of the year. As deposits increased, we also took steps to reduce our wholesale funding. As a result, wholesale borrowings fell $277.7 million over the course of the quarter from the balance recorded at December 31. The deposit growth that we enjoyed is indicative of a point I've made in previous conversations about our ability to increase deposits when we determined that the time to do so is right. In addition to fueling our first-time loan production, the increase in deposits also served to enhance the funding mix.

In addition to loan and deposit growth, another first quarter highlight was our continued asset quality. Notwithstanding the impact of the single loan that transferred to nonperforming status, non-covered assets represented 0.41% of total non-covered assets and nonperforming non-covered loans represented 0.37% of total non-covered loans. At the end of December, the comparable measures were 0.40% and 0.35%. Furthermore, our ratio of net charge-offs to average loans was 0.01% in the current first quarter, consistent with the measure in the trailing 3-month period, reflecting our asset quality and the adequacy of our allowance for non-covered loan losses, non -- no provision for losses on non-covered loans was recorded in the first quarter of this year.

As for the efficiency of our operation, we were pleased to see a decline in our operating expenses, largely due to a decrease in legal and other professional fees. As I've mentioned before, we have spent considerable time and resources upgrading our programs and processes and expanding our certain back-office departments to ensure our ability to comply with the requirements of Dodd-Frank.

We believe that the progress made over this time has been substantial and as a result, our expenses declined in the first quarter this year. Based on the strength of our results and that of our capital position, the Board of Directors, last night, declared a $0.25 per share dividend payable on May 22 to shareholders of record at May 12. This is our 80th consecutive quarterly cash dividend payment and our 41st consecutive dividend of $0.25 per share.

On that note, I would ask the operator to open the line to your questions. As always, we will do our best to get to everybody in the time that remains. Please?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Bob Ramsey with FBR Capital Markets.

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

First question for you, Joe, I know you pointed out that prepayment penalty income, while down sequentially, is the highest level it's been in a first quarter ever. I am just curious, as you sort of look at the vintage of your books and activity in the market, what you're thinking about for the year. I know there's quarterly volatility and it's kind of tough to predict. But do you think prepayments are stronger this year than last based on what you've seen in the first quarter?

Joseph R. Ficalora

Well, I'd say to you the following: There is no way to fully understand what prepayments will be. It's a mix of many, many different factors. It's got to do with the actual sale of assets. If, in fact, pricing is very high, many of the people that have assets with us will, in fact, sell those assets, we'll get lots of prepayments. If there's plenty of product in the marketplace to buy, lots of people will be refinancing their loans because they need to actually have that funding to purchase these new opportunities as they may arise. So the period ahead is uncertain. But we would expect that it'll still be a strong period for prepayment income. It's just something that we can't possibly measure. Having come off of 3 consecutive years of increased prepayment income, we have no way of thinking that we're going to consistently increase the amount of prepayment income we have. But there's no question that there will be prepayment income.

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

Okay. And I guess when I back out the prepayment penalty income, the yield on your loan book this quarter, I think, was around 3.93%. How does that compare with the yield on your pipeline as you head into the second quarter?

Thomas Robert Cangemi

Bob, yes, I'll answer that. Right now, our pipeline is approximately 3.60% going into the second quarter. And the previous quarter, the actual closing of loans is about a 3.70%. When you look at the current coupon that's embedded in the portfolio for multi-family only, that's a 3.73%. So it's pretty much comparable with the current coupon that's remaining on the company's books.

Joseph R. Ficalora

Bob, it's important to note that overall, what Tom just said is that we were getting about a 3.70% on the loans that we closed over the last quarter. That's pretty good in comparison to earlier quarters.

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

Have you all seen any firming of pricing? Or with the competitive pressures out there, was it just sort of a question of what you all were putting on the books this quarter?

Thomas Robert Cangemi

Bob, well, I would tell you that obviously, look at it every day and obviously, it's going to involve what interest rate environment rates are significantly lower than what the Bloomberg's forecast have as far as just rates between the 5-year and 10-year. So it's a difficult environment but we're getting our share of business and the spread, based off the 5-year Treasury, is attractive to how we fund it.

Joseph R. Ficalora

Rates are not going down. In our experience, we're not seeing rates going down over the course of the last 3 or 4 quarters. Rates are actually stabilizing. I think your question is correct. Rates, in fact, are not going down from here.

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

Great. I guess then last question and then I'll hop out. But putting that altogether, Tom, what is your outlook for the core margin next quarter?

Thomas Robert Cangemi

I guess my view right now, we're getting very, very close to, in my opinion, given a flat rate environment, not rising rate environment. We've been in a flat rate environment for a while, just stabilization. So we're probably looking down 4 to 6 basis points in the current quarter. I don't go -- I wouldn't give guidance past the current quarter but 4 to 6 basis points and that should be close to the bottom, we're hoping that is the bottom. So if you take 6 basis points being the worst, 4 basis points being the more aggressive view, given the interest rate environment, you're looking at a -- maybe low 240s level for the margin x prepayment penalty. And that should be hopefully the bottom, depending on interest rate. Obviously, I'm assuming the current curve.

Operator

We will take our next question from Collyn Gilbert from KBW.

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

So just quickly, Tom, to follow-up on your comment on the multi-yield -- I mean, was 3.73% you said? Did that include more 7-year product that what you guys have done in the past?

Thomas Robert Cangemi

I would say it's probably more 5-year, I mean, over time. I mean, we have some 10s, but mostly 5s.

Joseph R. Ficalora

Overwhelmingly, we do mostly 5-year lending.

Thomas Robert Cangemi

We have some 7s, but the vast -- it's our bread-and-butter type business over the past 1 year, 1.5 years.

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

All right. So you're getting -- I guess then the question is you're getting -- you've seen a pickup then in your 5-year product because I think -- wasn't the pricing, I guess, close...

Thomas Robert Cangemi

Collyn, you're looking anywhere from 3.25%, 3.5% depending on the day but you have some 7s and 10s there as well.

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

Okay. Got it. So the 3.25% and 3.50% is consistent, I think, with what you guys have seen. Okay.

Thomas Robert Cangemi

I think what's most important is that the current coupon is 3.73%. That's the current coupon that's in the portfolio.

Joseph R. Ficalora

That's what's going away.

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

Yes, yes, okay. Okay, that make sense, okay. And then just mortgage banking, that was a strong showing this quarter, somewhat surprising. Any thoughts there and what drove it and what your expectations is -- are going forward?

Thomas Robert Cangemi

We've been fairly negative view as far as the marketplace given the environment. We had significant volume of refi over the previous years. It appears that December looked like, on origination perspective, the low point over the past 5 or 6 months. So January was better than December. February's better than January and March is better than February and it seems like April is shaping up better than the previous month. So we're moving in the right direction. Unfortunately, spreads are tight. We're probably looking at all-in pricing margins around 70 bps, so it's pretty tight for the business model. But you see a -- obviously, servicing played a role there helping the total income view there as well. But bottom line is that we were guiding down probably 20% quarter-over-quarter. We were up 14.6%. So obviously, pleasantly surprised but we were conservative on our guidance.

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

Okay, okay. And then just quickly on the deposit side, was that retail deposit or was that more broker deposits that came in?

Thomas Robert Cangemi

A combination of both. 50% retail and 50% institutional.

Joseph R. Ficalora

It wasn't even broker deposits.

Thomas Robert Cangemi

No broker deposits.

Joseph R. Ficalora

No broker deposits.

Operator

Our next question comes from Ken Zerbe at Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

Just a further question on the deposit growth. Has anything changed? Because it seems like obviously, you're putting more emphasis on deposits, which makes sense, right, especially with the AmTrust branches…

Joseph R. Ficalora

The bottom line is we've got a long-standing business model of growing deposits when we do deals. We've had an elongated period that we haven't done a deal. So we're really doing what we naturally have the ability to do. We could grow deposits whenever we choose to grow deposits. We typically wait in growing deposits until we execute on a deal. So since it's been such a long period, we decided that we would take some deposits in this quarter.

Thomas Robert Cangemi

I mean, Ken, obviously, we have some very strong loan growth metrics we have to fund. And obviously, the money is inexpensive when you compare to wholesale so it's a nice match for us right now.

Ken A. Zerbe - Morgan Stanley, Research Division

Got it. And Joe, should we take your comments or your new desire to grow deposits outside of an acquisition to indicate anything about the acquisition outlook?

Joseph R. Ficalora

No, I think the important thing here is that it's a fluid environment. The ability to grow deposits is something that we obviously, can turn on and turn off. This demonstrates how readily that's doable. And the reality here is that it's not a long-term commitment to something. It doesn't change our perspective with regards to doing deals. It just means that we wanted to actually take some deposits in this quarter, and we did. And then as you can see, the growth in our assets was huge this quarter. The growth in our loan book is probably the strongest growth that we've had in a long period of time.

Ken A. Zerbe - Morgan Stanley, Research Division

Got it. And just a quick question. On the specialty lending business, any -- I guess, when should we start to see a pickup there? I know it's been sort of an opportunistic-type business to be in, but just wondering if there's any improvement or growth on the horizon.

Thomas Robert Cangemi

Ken, it's Tom. I would say that we are ahead of budget in respect of profitability, which is great. One year out, we're profitable. That was the goal and the loan growth is starting to mature going into 2014. We're seeing some nice growth. We expect to see probably more outpaced growth going into next few quarters. They're ramping up very nicely. The first few months is just getting ourselves putting the business model in place. We're running around $220 million going in to the beginning of the year. You're going to see a very strong growth, potentially double the growth you saw in the previous quarters. So you'll see some nice growth in 2014. As Mr. Ficalora indicated, that's a floating rate instrument and the yield's approximately 380 going into this environment, which attractive compared to current market yields.

Operator

Our next question comes from Moshe Orenbuch from Crédit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

And maybe you could just talk a little bit about how you're seeing kind of the competitive environment, kind of in the core multi-family market. And I've got a follow-up.

Joseph R. Ficalora

I think the marketplace has many interested players. Some of them are newer to the market, some of them have been here for long periods of time. It's really not dramatically different than it's been over the last year or 2. Lots of players that are relatively small in comparison to those that they're replacing. And much, much more importantly, those assets that are coming to the market, in many cases, are coming out of structured debt instruments. Those are very, very large players that were in the market in '06, '07, '08. They're not in the market at all now and therefore, there's plenty to go around evidencing that we, in fact, have grown our book by more in this quarter than we've grown in many years.

Thomas Robert Cangemi

I would add, the question is the growth level. We are currently in the first quarter ahead of our growth targets. We're looking at a $3 billion total pipeline, of which $2.4 billion is held for investment and you have that coupled with a fact that the specialty finance book is growing, you'll start seeing some more outsized growth in '14 there. And you have the fact that our warehouse is probably close to the bottom as of the end of the quarter. So that should – you'll see some growth in the warehouse. You should expect to see some good asset growth on the loan side this year.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Great. And just as kind of a follow-up, can you talk a little bit about if we had a little bit of a steepening where kind of short rates stay where they are and long rates kind of start backing up kind of like they did just a little less than 1 year ago, how that impacts volumes and margins and securities?

Joseph R. Ficalora

Yes. It's actually a good thing. No question.

Thomas Robert Cangemi

Yes. Obviously, we believe it will be a better operating environment for us. Being low for too long is not good for anybody. That's where we are today. So we're managing through a tough environment. We'd like to see a steeper curve and it's the steeper curve, we make more money.

Joseph R. Ficalora

Yes, the good news is that the portfolio as, in fact, each and every quarter passes, the portfolio yields are coming down. So the ability for our margins to stabilize and widen there in the horizon.

Thomas Robert Cangemi

Right.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Just lastly, just as a clarification, Tom, you had said kind of low 240s for the core margin is kind of the bottoming point, Does that imply a couple of quarters or…

Thomas Robert Cangemi

No, it looks like we're in it this quarter. It should be, hopefully, the -- I got it down 4 to 6 basis points for Q2 and that takes you down to somewhere in the 240-ish level, we'll take 245, 246-ish. That should be the bottom, all bearing the curve. Obviously, if rates do something that we don't anticipate, that would impact the margin. But given a flat rate environment, that should be the bottom for the company. And rates have a sloping curve, we'll probably some margin expansion.

Operator

Our next question comes from Dave Rochester from Deutsche Bank.

Timur Braziler - Deutsche Bank AG, Research Division

This is actually Timur Braziler filling in for Dave Rochester. Just a couple of questions. First one, I guess, is for Tom. Can you provide a reconciliation within the servicing income given the MSR valuation adjustment and what the net hedging gain or loss was?

Thomas Robert Cangemi

Sure. I'll just reconcile the entire amount. The $14.609 million of revenue that was reported, the gain on sale from fair value derivatives was $3.778 million. Loan servicing fee income was $12.310 million. The change in MSR value was a negative $9.821 million. And a gain from the MSR hedge was $8.342 million. If you reconcile those numbers, that gets you to $14.609 million.

Timur Braziler - Deutsche Bank AG, Research Division

Okay, great. And then, I guess, just looking at the strong asset growth this quarter, the increased loan pipeline and just generally the more optimistic commentary regarding loan growth, is there a potential that you guys reach that $50 billion threshold towards the end of this year? And maybe just your updated thoughts on reaching that $50 billion.

Joseph R. Ficalora

I think it's important to note that obviously, we can manage the growth of the company. And also the consequence of hitting the $50 billion mark is a 4-quarter assessment, which goes into the future period. So we're not going to be impacted, even if we were to, let's say, hit the $50 billion mark, we're not going to be impacted until sometime in the end of '15 or the beginning of '16. And that would be something that would be actually decided over the quarters ahead. It's not something which is automatic, it's something which takes into consideration a lot of information that evolves over a period of quarters.

Thomas Robert Cangemi

I would just add, we're very mindful of the planning phase going about $50 billion. So obviously, we're paying attention to that. And then as Mr. Ficalora indicated, there is planning phase and time period thereafter when you hit the 4 quarters of the average of $50 billion.

Timur Braziler - Deutsche Bank AG, Research Division

Okay, great. And just maybe a follow-up on that for you, Joe, can you maybe provide a little bit of color regarding recent M&A chatter?

Joseph R. Ficalora

Recent M&A chatter generally, you mean? I think there's no question that there's going to be an uptick in M&A activity throughout the country over the period ahead. There are an awful lot of institutions that are highly desirable of doing deals. And they're just situating themselves as best possible so as to make that happen. As you're fully aware, doing a deal requires a lot of preparatory work with their respective regulators. Each bank has to, in fact, ensure that they've communicated clearly with their regulators before they actually negotiate a deal to public disclosure. And that does take some time and it does take a serious amount of effort. But that doesn't mean there isn't a need for consolidation and a desire for consolidation within the banking industry. Consolidation is the best way to make the industry stronger. And clearly, there's going to be consolidation in the period ahead.

Timur Braziler - Deutsche Bank AG, Research Division

Okay, great. And I guess just one last question. Since the appointment of the new mayor here in New York, there seems to be consistent chatter regarding the potential for rent freeze on rent-stabilized tenants. And I know your prior commentary has been that there's been very little impact to the multi-family market yet. I'm just kind of wondering, from a theoretical perspective, what kind of impact do you think the implementation of rent freeze would have on cap rates and subsequent market activity?

Joseph R. Ficalora

I think there's no question that the real estate market in New York is a very vibrant marketplace. It's vulnerable to adverse turn typically in the at-market area, which is what is commonly the case everywhere. With regard to rent-regulated housing, the last thing the mayor would want to do is destroy the benefit or the value of rent-regulated housing for the individual tenants. If they do something that changes the practicality -- let's be very clear, there have been historical periods where rent-regulated housing disappeared in thousands and thousands and thousands of units in buildings that went into default. The single worst owner of real estate into in New York City was New York City. So there is no way in the world that it helps rent-regulated tenants by having rent-regulated housing deteriorate. So there's no expectation that any action by the rent control board or by the major is going to have a detrimental effect on tenants. You can't make the situation better by devaluing the value of the buildings that in fact house rent-regulated tenants. So I think we're in a place where there's a lot of discussion about what will be done. But at the end of the day, what will be done will not be detrimental for the tenants and therefore, it won't be detrimental to the value of the housing.

Operator

Our next question comes from Matthew Kelley with Sterne Agee.

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

Should we expect to see no provision again? Or walk us through the analysis on why you don't need a provision for pretty significant growth.

Thomas Robert Cangemi

Yes, so Matt, we're in a very unique position. We're in probably the best asset quality we've seen since going into the recession. We have a range of reserve which were hovering at the back end of the range, which is at the high end. And my guess right now, if asset quality continues to perform, I mean, there's no adverse change in credit quality this year, you'll probably have no provision this year. Our battle right now is to deal with recapturing because obviously, we expect to see more NPAs come off the book, we had a one-off this quarter, we have some very unique things happening with the book right now where we'll see some declines. And all bearing aside, if credit quality remain strong, we should not see any provisions in 2014.

Joseph R. Ficalora

Matt, we're in a place where the likelihood is that the reserve benefits from the disposition of assets.

Thomas Robert Cangemi

Matt, I'm sorry, I didn't hear that last comment.

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

I was just wondering how low can the reserve to non-covered loans go, it's at 45 basis points now. So with no provisions and lots of growth, where do you see that 1 year from now?

Thomas Robert Cangemi

We go through this quarterly exercise. It's a process we go through internally. Remember that as we look at the 4-year look back, your losses drop off from -- with that year as we look at the out years for actual losses taking place in the company, we have a history of very low losses. So if anything, through this process, putting up reserves for no expectation of loss is a difficult exercise on accounting principle. So we feel pretty confident that, given where the environment, environments change. We're in a very unique credit environment. Things are very robust in the New York City marketplace and we don't have any losses.

Joseph R. Ficalora

Matt, reserves are for losses, they're not for loans. So the growth in our loan book does not necessitate a growth in our reserve. An expectation that we actually have assets that have a representable risk of loss is all we need to be worried about.

Thomas Robert Cangemi

I would also add, Matt, that what's interesting that even the covered portfolio had a nice recapture, given the quality of the national real estate market. We have loans that was associated with the AmTrust franchise throughout the nation and we had some -- these pools recover in this environment. So there is definitely a recovery in credit throughout United States. Granted our investment portfolio that we have the loans held for investment is predominantly the New York metro area, the covered portfolio gives an indication that we're seeing some of these pools actually perform better than expected.

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

Okay. And then just the second question, what were the recent terms on the new deposit when it was brought in? If you could break it up by retail and institutional that would be helpful. And I have one follow-up.

Thomas Robert Cangemi

I would say the blended, I mean, obviously, the high cost money was probably somewhere between 80 to 100 bps on the CD side. We had some interesting promotional accounts that went out through our retail franchise. And on the institutional side, we're looking at around 50 bps. So blended, you're somewhere in -- probably like 65, 70 bps all in.

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

Got you. And then with the $50 billion threshold kind of in view now here over the next call it 6, 12, 18 months whenever. Where would you like to see the loan-to-deposit ratio as you go through that level? And if you could also comment on your view on the dividend and the sustainability of dividend, that high payout ratio as you go through $50 billion now that, that's something in our sights here?

Thomas Robert Cangemi

I would say on the loan-to-deposit side, we're very comfortable where we are, if anything, we're at a low point historically as a company. As Mr. Ficalora indicated, we typically grow our deposit franchise through acquisition. It's been a while since the company acquired an institution to fund its growth mission. So we feel pretty geared up. We've been saying it for quite some time that second half of '14 could be the opportunity for this company. We're working real hard to line that up. And as far as the loan-to-deposit ratio, it's not a concern to us. We ran as high as 165 right now, at the lowest range we've seen in a while. So we believe that we have the capacity, and as Mr. Ficalora indicated, the ability to bring -- go into the deposit market and bring in funding to fund our loan growth. As far as the dividend rule, it's very crystal clear. Right now we're below $50 billion and we focus on that. If we were going to go with $50 billion, that's another process.

Joseph R. Ficalora

There's no question that we have open communication with our regulators with regard to deals that we might consider doing. Likewise, we have communication with our regulators with regard to our dividend. We're not going to accidentally affect our dividend. So the future period will, in fact, be a culmination of what we believe is in our shareholders' best interest, including our dividend.

Thomas Robert Cangemi

I would just add, it was exciting going through the March period, working our regulators, filing BFAs with bells on, very comfortable where we are as a company. And we continue to move into the next phase. Our regulators are our partners. We're working with them and we're very pleased on going through the March period and now we're looking to the second half with expectation that we could be back in the M&A game here. And we believe that things are picking up. There is lots of conversation and it'll be surprising for the company to tiptoe over $50 billion.

Operator

Our next question comes from Steven Alexopoulos.

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

Just a follow-up on that point. If you guys did cross the $50 billion level due to a deal rather than organic growth, is it your understanding you still get the 4-quarter period before you become a CCAR bank?

Thomas Robert Cangemi

CCAR, we'll get CCAR versus capital planning are 2 different things. You really have to bifurcate those issues. There's a lot of rules you have to follow. This is a complex process. And it's -- I don't want to be misquoted here. You have CCAR regulations, you have capital planning regulations, you have LCR regulations that are kicking in. So there's a number of things that we're paying attention to and we're spending a lot of man hours making sure we get this right with working with our regulators. So I think -- I want to say again that this process is fluid. If there is a deal to do and we go over $50 billion, our regulators will be right alongside with us approving that process, and they'll give us the timeframe. And you would expect that we'd have most of those metrics in place when we present a deal that takes us materially over $50 billion.

Joseph R. Ficalora

I think it's important to note that we would actually represent the first circumstance where the regulator and an institution would have to judge the consequence of that kind of a transaction. So there is a lot of preparatory work that is being done in that regard. So I think that exactly how it will come out we'll understand before we do it because we'll have all that preparatory discussions with our regulators. And therefore, I don't think we should assume anything from history because this will be the first time it happens.

Thomas Robert Cangemi

Right. I will say specifically that the first one to know is going to be the regulators, not the Street. We'll be working with them in advance at any transaction.

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

I got you. And maybe, Joe, just a follow-up on your prepared comments regarding your investments at the back office. If I look at GAAP expenses, they're down roughly $2 million or so from the year-ago quarter. How much are you incrementally spending now for BFA, AML stress test compliance? And what are you offsetting these costs with given that total expenses continue to fall?

Thomas Robert Cangemi

It's Tom. I'll answer that question. I mean, obviously, we had a significant amount of costs over the past 3.5 years to get where we are today. And this is our mission statement, and again, we've said it for the past 1.5 years, that it looks like looks second half of '14 is where logically, we would be in a very good position to capitalize on M&A because there's things that had to be done as a bank, given the changes with Dodd-Frank and the regulatory environment. Lots of expenses, we envision, going forward, if we cross $50 billion there'll be more expenses. If we're -- and given the requirements that is assigned to the bank of $50 billion. However, where we stand today, we're going to run around $145 million a quarter. I'm going to give specific guidance on that. That's a reasonable range of our noninterest expense going forward, all bearing an M&A transaction and crossing $50 billion.

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

Okay. But Tom, any color on what you've been offsetting these increased costs with?

Thomas Robert Cangemi

Yes, couple of things. We had -- remember, we had a much different asset quality book going into the recession. So the foreclosure expenses are down materially, you have a large credit that goes into the book, it's expensive. You have real estate taxes, you have operating expenses, you have FDIC costs that are significantly lower as the environment has changed. We envision that to continue and we envision that the overall foreclosure expenses to decline as well. So we're running a tight ship. We made some cost cutting at the mortgage bank; we're hoping that would ramp up again and hopefully, we're down to the -- we're trying to operate that, obviously, monthly where we're in the black, not in the red. The good news there is that we've managed that very well where we're profitable every month with that business model. They're doing a fine job there in the mortgage banking in a very volatile, difficult environment. And we're a very cost-conscientious company. The company has a history of having one of the top efficiency ratios since its public life. That's not going to change.

Joseph R. Ficalora

We're also in the phase of the credit cycle where we're likely to actually have recovery on assets rather than any additional losses on assets. The net effect of that is only positive to us.

Thomas Robert Cangemi

And that goes back to the question with the reserve. We'll probably see some recoveries going to into 2014, which would be more difficult justifying the level of a reserve we have currently, so it's a challenge.

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

Okay. Maybe just one final question. Of the $21.5 billion of multi-family loan balances, roughly what percent of that would be on rent-stabilized properties?

Joseph R. Ficalora

It's actually very hard to know that. There are no rent-stabilized buildings, there are rent-stabilized tenants. So at any given time, the number of rent-stabilized tenants in a building evolves, typically going down. But the reality is that, that's ever-changing. So we do not have a metric that we could share with you. A very large percentage would be rent-stabilized, but I don't know what number.

Thomas Robert Cangemi

I would say the vast majority of the business model is there's some form of rent stabilization control given the nature the nature of the product mix. If you're doing a 5-year loan in this environment, that's typically, there's some form of rent control, rent stabilization in that cash flow.

Operator

And we'll take our next question from Kenneth Bruce from Bank of America Merrill Lynch.

Karti Bhatt

It's Karti Bhatt on for Ken Bruce. So just looking at the deposits, I mean, you guys are building out the deposit base here. But if I remember correctly, I think you guys are below March. Should we expect deposit costs to increase as you guys build this out? And generally...

Thomas Robert Cangemi

No. What I would say is that historically x acquisition, this company's always been the low rate path. We have to fund our business model. So given that when – we haven't acquired institution of materiality since 2010, late 2009, we have a very unique opportunity to grow the loan books. So with that being said, we're using the deposit model to do so. Deposits right now are, in most cases, cheaper than wholesale. So you have to take advantage of what's attractive in the marketplace. But the companies historically have always been, as you said, a low rate payer. To be in the market and be at the medium range will give us the opportunity. We have a unique branch of franchises, not just in New York, we're in Ohio, Arizona, we're down in Palm Beach, Florida, in the Palm Beach area. Very attractive market to bring in funding at will obviously, paying a little bit more than the low rate payer. But we feel very confident that we could continue with the strategy x acquisition. With an acquisition, that changes the game materially for this company. We have a long history of doing transactions on the funding side.

Karti Bhatt

Okay. So then I guess you guys saw 2 basis points or so on total funding costa. How much more room do you guys see as you guys build out the deposit base, where do funding cost actually get to?

Thomas Robert Cangemi

I wouldn't be too aggressive on reducing our cost of funds. To keep it flat would be wonderful if we're building billions of dollars of deposits to fund our growth. Again, the low line through was taken down 2.5 years ago, as far as the cost of funds are concerned. We may see some benefit on the wholesale liability side because we're not going out long right now. And we have some that's coming -- to come due in the next few years or so. But as far as overall cost of funds, I think the benefit here is going to be on asset yield stabilization, okay, and growth.

Operator

Our next question comes from Dave Hochstim from Buckingham.

David S. Hochstim - The Buckingham Research Group Incorporated

Could you just repeat where your MSR is at the end of quarter and how many loans you're servicing and…

Thomas Robert Cangemi

Yes, sure. We have approximately $20.6 billion UPB, and the capitalization on that is a 4.6 multiple, which values at $230 million of capital.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And then do you have any Visa shares left to sell or any MasterCard shares?

Thomas Robert Cangemi

No, we're out. That's it.

Operator

Our next question comes from Rick Weiss from Boenning and Scattergood.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Question on your interest rate sensitivity, has that changed much since December 31?

Thomas Robert Cangemi

Yes. Again, Rick, we are definitely liability-sensitive right now going into this environment. It's a difficult rate environment. We have a flat -- a low, flat rate environment for too long. So right now we are liability-sensitive. As you can see, we are growing our deposit book. Our goal is to continue with that strategy x acquisition. And obviously, if there is an acquisition, that'll change the entire interest rate risk profile of the company. But yes, we are moving towards a little bit more liability-sensitive given this interesting environment that we're in right now.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Okay. And I guess also let me do, for modeling purposes, what tax rate would you like project for the rest of this year?

Thomas Robert Cangemi

Yes, obviously, we took that one-time tax expenses due to the change in the New York State tax law. I would model 36.85% for the year.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Okay. That's pretty exact.

Thomas Robert Cangemi

Yes, and specific.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

There you go. And finally, just to clarify on the loan loss provision where you said it won't be any -- or did I hear right, there won't be any going forward?

Thomas Robert Cangemi

Yes, I don't envision for 2014, a provision. If anything, as Mr. Ficalora indicated, we envision some recoveries. We have some very unique assets that are probably going to pay off through sales and/or recoveries that we're expecting to the legal system. And as I indicated, we're at the back end of the range, so we're at the high end of the range for a period of time. Given that those out years or dropping off when you look at expected losses, the forward look back here is that you have very little expected losses in the future based on the current environment. Remember, Rick, most of our loans, 96.5% of it is in the New York City marketplace.

Joseph R. Ficalora

Rick, our experience over the course of decades is significantly better at disposition than that for other lenders. And we're in the phase here where many of the assets that we, in fact, have in ORE, by example, are going to be disposed of at better values than we're carrying them at.

Thomas Robert Cangemi

And obviously, Rick, that would be predicated upon the valuation of the credit market. If credit markets change adversely then we have to reassess. So we reassess this every quarter and it appears that things are very strong in the New York City marketplace.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Okay. Yes, because I think if I go back historically looking, you've run the loan loss reserve ratio at 45, 50 basis points before, so this is back to the future then?

Thomas Robert Cangemi

Yes, what I would say going into the Great Recession, we had $26 million of total NPAs going into the Great Recession. We had 52 consecutive quarters without a charge of the company's provision. So we have a history of asset quality, and that's the company's profile. We have a long-term history of strong asset quality metrics. So we have to -- we go through GAAP, this is a quarterly analysis and obviously, the drop off year as we continue going into -- out of the recession and years that are, we'll call, more attractive as far as asset quality, we have to justify our reserves.

Joseph R. Ficalora

Yes, Rick, over the course of 4-plus decades, our performance with regard to assets disposition, significantly better than that of the banking industry as a whole. So our need for reserves is very different than the need of reserves in other banks.

Thomas Robert Cangemi

I would just add, the positive surprise was definitely on the AmTrust portfolio, looking at the amount of pool that actually covered due to company -- borrowers going out and getting new financing on loans that we were surprised [indiscernible] financing, adjustable rate mortgage that 4 or 5 years ago could not get financing have left the portfolio and the quality of that pool has improved significantly. So that was a surprise in the quarter.

Operator

Our next question comes from Tom Alonso from Macquarie.

Thomas Alonso - Macquarie Research

Just real quick one for you, Tom. That 145 OpEx number, that's x amortization, right?

Thomas Robert Cangemi

That's correct, yes.

Operator

And we'll take our final question as a follow-up from Collyn Gilbert.

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

Just really quick. I don't want to beat a dead horse on this, Tom, but you said its 0 provision for '14, does that include then the impact of the negative provision this quarter so we will actually see gradual increases in the next 3 quarters?

Thomas Robert Cangemi

No. Again, we do the analysis on the covered portfolio. I don't -- again, it depends on the performance. If anything, remember 80% of that, 80%, 95%, we have the coverage from the FDIC so net-net, it's immaterial. So you need to take the expense side as well as the provision side. So netting that is immaterial.

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

Yes, I got it, okay. And then just finally, so Tom…

Thomas Robert Cangemi

But Collyn, I want to stress this point. The overall pool, the AmTrust surprisingly turned more positive than we expected. That's just giving an indication of the credit metrics in the United States. We don't do a lot of lending outside of the New York City marketplace. We do some, but this gives you a good indication that things are recovering through other parts of the United States.

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

Okay, okay. And then so Tom, if we hear you and interpret your comments correctly, I mean, you kind of are seeing -- you're showing you can generate deposits, you're not expecting a huge increase in funding costs, loan growth is the best that it's been, asset yields are -- I mean, credit has never been better. I mean, these are all really, really positive comments that you're making. Is this reflective…

Thomas Robert Cangemi

We think so.

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

So but truly, is this reflective that your -- feel more optimistic today than you felt in a long time about the nature of your business?

Thomas Robert Cangemi

What's very optimistic, it's been a challenge for 2.5 years to figure out where margins are going. And again, I feel pretty confident that we bottomed out the margin this quarter, all barring an unforeseen change in the curve. I think one of the gentlemen that answered -- raised the question about what happens if rates go up and it's a sloping curve, we'll make more money. If we have an inversion, that'd be terrible for the company. I don't envision an inversion but I'm running a flat rate environment in my model and I'm bottoming out here somewhere in the mid-240s x prepay, so we're right there. And as you indicated, there is some very strong multi-family loan books right now. I mean, obviously, we don't dictate the rates, the market dictates the rates and we participate in the market. But we feel pretty good that we will demand a sizable share of that book of business. I know the prepay comp, the comp is difficult because we had a monster fourth quarter on prepay. But as Mr. Ficalora indicated, that was the largest first quarter prepay in the history of the bank. So it's tough to look at the comps and it's tough to give guidance on prepay because it's -- a lot of it is going to be predicated on property transactions. And people going after refinancing just to buy a building. But it's still fairly robust in the New York City market. So it's way too early to give any guidance on prepay. We never give guidance on prepay but we came out with a pretty strong Q1 on prepay.

Operator

This does conclude our Q&A session for the day. I would like to turn the call back over to Mr. Ficalora for any closing remarks.

Joseph R. Ficalora

On behalf of our board and management team, I thank you for your interest in the company, our strategies and our performance. We look forward to chatting with you again this summer when we report our earnings for the second quarter of 2014 on or about July 23. Thank you.

Operator

Thank you. This does conclude today's first quarter 2014 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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