New York Community Bancorp's (NYCB) CEO Joseph Ficalora on Q2 2016 Results - Earnings Call Transcript

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New York Community Bancorp Inc. (NYSE:NYCB)

Q2 2016 Earnings Conference Call

July 27, 2016, 08:30 PM ET

Executives

Joseph Ficalora - President and Chief Executive Officer

Thomas Cangemi - Chief Financial Officer

Robert Wann - Chief Operating Officer

John Pinto - Chief Accounting Officer

Analysts

Ebrahim Poonawala - Bank of America/Merrill Lynch

Ken Zerbe - Morgan Stanley

Robert Ramsey - FBR Capital Markets

Steven Alexopoulos - J.P. Morgan

Collyn Gilbert - KBW

Operator

Good morning and thank you all for joining the management team of New York Community Bancorp for its quarterly conference call. Today's discussion of the Company's second quarter 2016 results will be led by the President and Chief Executive Officer, Joseph Ficalora; together with Chief Financial Officer, Thomas Cangemi. Also joining in on the call are Robert Wann, the Company's Chief Operating Officer and John Pinto, the Company's Chief Accounting Officer.

Certain comments made on this call will contain forward-looking statements that 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 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; changes in legislation, regulation and policies; and the Company's ability to complete the proposed merger with Astoria Financial Corporation, which is pending the receipt of Regulatory approval at this time.

You will find more about the risk factors associated with the Company's forward-looking statements on Page nine of this morning's earnings release and in its SEC filings, including its 2015 Annual Report on Form 10-K. The release also includes reconciliations of certain GAAP and non-GAAP measures, which will be discussed during the conference call. If you would like a copy of this morning's release, please call the Company's Investor Relations department at 516-683-4420 or visit ir.mynycb.com.

As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. Later you will have a chance to ask questions during the Q&A. Instructions will be given at that time. To start the discussion, I will now turn the call over to Mr. Ficalora, who will provide a brief overview of the Company's second quarter 2016 performance, before opening the line for Q&A. Mr. Ficalora.

Joseph Ficalora

Thank you, Michelle and thank you all for joining us this morning, as we discuss the second quarter of 2016 earnings. Among the more notable features of our second quarter performance were the strong earnings we produced, and continued high volume reduction of our principle asset, the strength of our net interest margin, and the exceptional quality of our assets has reflected in our quarter-end measures.

In our press release this morning, we reported second quarter earnings of $126.5 million or $0.26 per diluted share, with the dollar amount representing a 1.04% return on average assets and 8.39% return on average equity and a 1.10% return on average tangible assets and a 14.4% on average tangible stockholders equity.

In the second quarter of 2016, total prepayment income from loans and securities contributed $26.4 million to interest income, a $2.5 million increase in some prepayment income of $23.7 million in the current quarter. Reflecting these amounts, total prepayment income contributed 24 basis points to our second quarter net interest margin as compared to 22 from the trialing three-months.

On a GAAP basis our net interest margin was 2.99% in the current second quarter, 5 basis points wider in the trailing quarter margin. Mortgage banking income contributed $7 million to our second quarter earnings reflecting a $2.8 million sequential increase. The increase was largely due to a reduction from the loss on servicing during the current quarter, most of which was attributable to a to a change in our MSR valuation model assumptions in the first quarter, and to a lesser extent a decline in hedged effectiveness during the period for unusual interest rate volatility.

Moving to our balance sheet, total assets increased $520.2 quarter-over-quarter reflecting strong loan production offset by strategic loan sales and a $244.2 million decline in securities. Consistent with our short-term goal of managing our assets under the SIFI threshold of $50 billion, we sold $1 billion with loans largely through participations from January through June including multi-family loans of $426.4 million and $19.9 million of CRE loans in the second quarter this year.

Year-to-date the sale of multi-family loans amounted to $865.3 million, while CRE loan sales totaled $160.8 million. Absent these sales, multi-family loans would have grown at an annualized rate of 11.7% and CRE loans would have grown at an annualized rate of 7.1% during the quarter.

Reflecting the decline in securities and loan sales in the amount of $446.3million, our assets totaled $49 billion at the end of second quarter, bringing our fourth quarter average to $49.2 billion [indiscernible] compared to $49.1 billion at the end of the first quarter of 2016. As of the case last quarter, the timing of when the [European Union] (Ph) crosses the SIFI threshold it could coincide with the completion Astoria of transaction, which is currently pending and waits for approval.

As we reported in this morning’s release, our pipeline is currently $2.8 billion, with the vast majority of loans in that pipeline consisting of held for investment loans. The environment for our primary lending niche remain competitive during the second quarter. notwithstanding the competitive land escape and as our current pipeline shows, we are still able to originate our fair share of high quality loans.

This is due in large part to New York Community’s longstanding relationship with the broker community and that is farmers. In the second quarter of 2016, we originate $2.7 billion of loans held for investment including $1.7 billion of multi-family loans and $466 million of CRE loans.

During the first six months of 2016, we originated $4.9 billion of loan held for investment, including $3.3 billion of multi-family loans and $546 million of CRE loans. At June 30, held for investment loans totaled during the $36.8 billion, with multi-family loan accounted to $26.8 billion of that amount.

Notably, this quarter marked a milestone for our specialty finance business. We originated $341 million from specialty finance loans during the second quarter, and as result surpassed $1 million in total debt balances. The quality of loans we produce continues to be a Company hallmark and our current asset quality measures prove that fact. On the year-to-date basis, we recorded net recovery rather than charge offs.

And our measures of asset quality remain along the lowest we have reported since 2008. Specifically, non-performance, non-covered assets represented 0.12% of total non-covered assets at the end of the second quarter and non-performing, non-covered loans also represented 0.12% of total non-covered loans at that date.

Overall, this was another solid quarter for the Company despite a challenging environment for the industry as a whole, reflecting both our earnings and capital strength. The Board of Directors last night declared a $0.17 share dividend payable on August 19 to shareholders of record as of August 8. The dividend representing 4.6% dividend yield based on last night’s closing price.

On that note, I would now ask the operator to open the lines for your question. We’ll do our best to get to all of you within the time remaining, but if we don’t, please feel free to call us, later today or this week. Michelle.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a questions-and-answer session [Operator Instructions] Our first question comes from the line of Ebrahim Poonawala with Merrill Lynch. Please proceed with your question.

Joseph Ficalora

Good morning, Ebrahim.

Thomas Cangemi

Good morning, Ebrahim.

Ebrahim Poonawala

Just first question on trying to understand sort of the loan participation this quarter, is it fair to assume that even though the SICAR timing is no longer an issue, you do not want to organically cross the $50 billion asset mark outside of the closing of the deal, which is why you will likely continue to do loan participations and keep asset balances below $50 billion?

Thomas Cangemi

Ebrahim this is Tom. I would say we were crystal clear on Joe's commentary that the company is expected to time the crossover with the Astoria transaction, which is pending regulatory approval. So we are pretty close in respect to the original guidance we gave from the previous year on the timing of the merger. So, obviously we are midyear, we are going to third quarter and we have nice room in respect to the actual crossover.

If you look at the four quarter look back for the company, about $3.1 billion of growth that we can put on to the balance sheet before we actually trip over the SIFI line, so we believe that's reasonable. At the same time, we are very active on looking at participating with some local institutions on the multi-family and CRE front and it's been very effective.

So, since the program was put in place back in 2014 the company had executed on $3.6 billion of business and these are participation agreement and these are relationships that are staying with the company and managed by the company. So we believe in the long-term this will be a great opportunity as the loan come back to refinance in the future.

Ebrahim Poonawala

Understood. And tied to that Tom, if you can sort of give us an update on how we should think about the requirement to meet with the liquidity coverage ratio, just the timing of this assuming you show the store at the end of the fourth quarter and I believe there are some updates from the regulator that could push out that timeline.

Thomas Cangemi

Yes, Ebrahim that's a very good point, as we are sitting patiently and waiting for the final guidance that on the [indiscernible]. However, there hasn’t been yet any specific adaptation on the guidance yet. So, we anticipate that the guidance should be - we hope that its out by the end of this quarter, but as of July 1st banks have to comply to the disclosure obligations and in the disclosure obligations there is a carve out of banks crossing over $50 billion. Now obviously we don’t control the guidance.

So we are waiting patiently as our analyst and our investors, but with that being said, assuming there is no change and assuming we have to be compliant as of the transaction of Astoria. The next day, we believe that the security that have rolled off in the beginning of the year, which is approximately $2.2 billion will be replaced with level one assets. Those are level two assets, mostly callable securities and a security portfolio from Astoria, which is approximately $2.8 billion of securities when they are remarked will be looked at for evaluation of LCR 1 with LCR 2, and that kind of yield on that portfolio is around 2.5% to 2.48%.

So market yield of I would say hovering around 225 to 230 so that's more of a mark-to-market adjustment on Astoria and an asset redeployment plan on the Astoria. If you are looking at secondly buying the replacement securities that we had in the beginning of the year that rolled and marking to market securities and evaluating Astoria's portfolio upon consolidation.

Joseph Ficalora

Ebrahim there is no escaping the fact that the bank has a business model that has been very consistent over the course of actually two decade of being a public company, and the execution of transactions has a meaningful impact on all of the relevant metrics of the company, including our concentration numbers and it so on. With the closing of the Astoria deal, our concentration number goes back to where it was all the way before the concentration rules were putting in place. So the impact of this deal is going to be very substantial on many of the things that we will do and certainly all of the relevant metrics of the company.

Ebrahim Poonawala

Understood and just the last question tied to Joe on what you alluded to in terms of how should we think about - we have heard some comments from your competitors around, what the impact of the regulatory scrutiny or pricing competition in the market may have on that loan growth in the back half of the year. When you look at both of those elements in terms of the scrutiny from the regulators, how does that change for you today versus 12 months ago and has the competitive environment gotten better or worse, as a result of that?

Joseph Ficalora

Yes. I would say that the regulators have been very focused with regard to concentration on us, because we have always had one of the highest concentration numbers in the industry. And last year, we saw in hearing that the regulators were speaking very publicly about their concerns about concentrations throughout the banking industry.

The obvious and then very appropriate concerns they have is that there are many banks that are concentrating in the NASDAQ class that they do not understand. The reality is that with closing of the deal, our concentration actually goes back to the beginning of concentration concerns. So if we go back to 2006 numbers with the closing of the deal.

So the good news for us is that we have had a continuous, ongoing business model that takes into account risk and takes into account the idea that we are very concentrated in a very, very good market that we understand very well. The other player in this market, many of whom come from outside our market always get very active during the upside of the cycle and always lose a lot of money during the downside of the cycle.

So, the discussions whether it would be initiated by regulators or just sound prudent banking is that we have a very, very consistent clear business model that we follow and we expect there to be cycle turn, and we have many, many cycles turn. The good news is, we have never charged capital during the cycle turn, as a result of losses in our concentrated assets. That is a very, very strong thing for us to be able to stay.

Thomas Cangemi

Ebrahim this is Tom. I just would follow-up with some of the Joe's commentary. Bear in mind, always public presses that we are hearing in a very real, the reality is that spreads are widening, loan offerings are now pricing into more about risk. But more importantly, I would say that the IO fresher's originate has decided significantly and you are seeing a less availability within the marketplace itself. So clearly the message is out there and we will respond and obviously that see nicer spread going into this, the very challenging banking environment will be attractive for the margin going forward.

Joseph Ficalora

Ebrahim, in the every single size return. our presence in the market has increased, mainly because the more irrational lender in the market and I'm not talking about specific competitive banks, but irrational lenders in the market, they chase the space, because they are taking massive losses during the cycle turn. So, it's not just the growth of a number it's the inability to establish a business model of actually tend goes through a cycle turn.

So it’s not just the growth of a number. Its inability to establish a business model that actually can go through a cycle turn without massive loss. Most people wind up losing huge amounts of money during cycle turns in particular in the New York market, those have lend that market. And by the way, as we all know, there are plenty of buildings in New York city at market, but there also kind of buildings in my Miami or in the last cycle in Las Vegas, or wherever else at market.

Market lenders are overwhelmingly at the greater risk. So we are in a very good place here and not a place that we are unfamiliar with. We have been down this path many times and we prepare ourselves for an adverse cycle turn. So all this discussion, I think is actually healthy for us.

Ebrahim Poonawala

Understood. Thanks for taking my questions.

Joseph Ficalora

Thank you.

Operator

Our next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.

Ken Zerbe

I guess, why don’t we start off with expenses, it like expenses ran fair bit higher than you prior guidance. Can you just talk about what is in there and whether or not sort of the $160 million level is sustainable at this point?

Joseph Ficalora

So Ken, I would say that given the historical quarter, previous quarter we had some one-time item, we had small litigation, these are that we put in place about $1.4 million we had of - merger related about a $1.2 million, yet some increase in consulting fees as we get closer to our SIFI cross over. I’m going to give you specific guidance for Q3, we are going to run probably around $160 million, ex-CDI, we think that’s reasonable. But as we get closer towards the SIFI crossover, we are seeing some uptick in the consulting side as we prepare ourselves. As well as personnel.

Ken Zerbe

Okay, so 160 ex-CDI, got it.

Joseph Ficalora

And I think that’s recent, yes. [indiscernible] and we have a nice adjustment and obviously first quarter payroll taxes versus Q2 was down very nicely. So that was a probably about $2.5 million adjustment going the other way, but I was clearly offset by items I previously discussed.

Ken Zerbe

Of course. Alright and then in terms of loan growth, Tom you mentioned I think you have $3.1 billion of growth possible, before you crossover the SIFI threshold. Given growth this quarter, may have been slightly under the lighter side, is the $3 billion imply that you may accelerate growth over the next couple of quarters, as you approach the deal closing or are you going to keep a fair bit of buffer in there just in case the deals gets delayed?

Thomas Cangemi

Hey Ken, let me be pretty clear, as far as the growth. We said having a low double-digit growth rate is very attractive position of being in and we have delivered that for many years, despite the cycle we sold $3.7 billion of participation for the marketplace since our inception of our short-term strategy to manage ourselves at the SIFI threshold.

With that being said, Q1 versus Q2, the interest earning average balance is down $1.1 billion that was solely from securities. Okay that’s probably about [indiscernible] a share that impacted the quarter. We expect to replace those securities as we get closer the LCR compliance and obviously we are still growing our loan book. And we are going a long book with pre-loan sales.

So when you look at the run rate for the company, we are still putting up low double-digit net long growth, pre-loan sales. We would be in the market, from time-to-time selling loans management balance sheet and like I indicated $3.1 billion is our current room, we will not crossover SIFI prematurely, we are just too close to be in a crossover position to drop the ball in the go line.

Joseph Ficalora

Yes Ken, the benefit is shows de minimis with regard to the extra few million that they might actually play will as a result of taking the chance of going over the $50 billion trigger. So we are not going to do that, we are saying far enough away so that we are not going to wind up triggering a material adverse consequence for a de minimis positive benefit. The deal itself will make it very compelling, but we are not going to know that until we actually get the approval and that’s out there some place that will be decided.

Thomas Cangemi

So Ken, bear in mind, like I indicated this public position about all the side regulatory views on concentration and theory as a whole, low CapEx, low interest rates. We are in a position now to see higher rate on our offerings. So our current portfolio yields around a 340 is coming into the market in that pipeline, but more importantly the spread in that business, of course treasuries have been very volatile in the past quarter.

We are looking at a five year treasury on 116, our spread is around 220 over. So our coupons are higher than they were in the previous quarter going into Q3. So we are seeing an attractive offering out there and I believe that risk is being re-priced into the marketplace. As I indicated, there is an expectation that interest only loans are less prevalent amongst some portfolio lenders and it appears that [indiscernible] type lending five year, seven year money to multi-family has moved from 220 to 240 respectively for five year and seven year and those attractive spreads that we haven't seen in quite some time.

Joseph Ficalora

So Ken. Our concentration greatly exaggerated only to the degree that that we are awaiting the closing of the transaction, which changes those numbers extraordinarily. And therefore the important thing for us is to be poised for the benefit of what happens when the deal closes rather than pressed upon the risk that we triggered adverse consequences through prematurely and the deal doesn’t close to some period thereafter.

Ken Zerbe

Got it, okay. And then last quick question, do you have any more securities that are eligible to be called?

Thomas Cangemi

So Ken its Tom. The good news there is that we envision no more than a $100 million in Q3 and that should be the end of our callable position that’s assuming the entire portfolio go away. We had a substantial amount of cash flow coming back to the company Q1, volatility of our interest rates during the February - marketplace going into Q2 with Brexit. So we believe it’s de minimis going forward.

Our intention are to replace the securities as we get closer to the closing of the Astoria and file for LCR, but it's going to be de minimis impact to the balance sheet. The good news is that we are not seeing the - and by the way these are not high yielding securities, so the impact to the margin is not material obviously.

Joseph Ficalora

Yes and as Tom is suggesting, the realignment of our securities portfolio comes with the SIFI size and clearly that will happen at some point in the future and we believe that even market conditions is far better for us to wait for that to actually happen.

Ken Zerbe

Okay. Thank you very much.

Joseph Ficalora

You are welcome.

Operator

Our next question comes from the line of Bob Ramsey with FBR Capital Markets. Please proceed with your question.

Joseph Ficalora

Good morning, Bob.

Robert Ramsey

Hey good morning, guys. I was wondering if you could just may be touch on the expected closing of the Astoria transaction, I mean is it fair to model to it at the end of the third, start of the fourth and what sort of I guess communicating have you had with regulators?

Joseph Ficalora

Yes, this is a process that's rather complex. We are not just talking about closing a deal, we are talking about the birth of the SIFI and there are many, many different people that are involved in this delivery. So, it's very difficult to try and ascertain when this will actually occur, because there are many different people involved from different perspectives. One of the things you should know is we have five different regulators that are truly involved in making this decision. So it's a involved process that will take some period of time that is uncertain. So I don’t know that anyone should try and actually fix a date.

Thomas Cangemi

Bob its Tom. I would say that the actual update is at in the current quarter, which is of the actually the Q2, we actually received our shareholder approval both at Astoria side and NYCB side. And we progressed towards our expectation of causing previous - our public discussions back when we announced the deal it was a fourth quarter call. So we are in the third quarter when and continue to tug away through our operating plans.

Robert Ramsey

Okay, alright, fair enough. Maybe you could talk for me to about more mortgage banking, I guess it is the environment, I would have thought it would be sort of a great environment for the productions side of things and you definitely saw a nice rebound from the first quarter, but not quite as strong as I would have expected with the drop in rates? Any thoughts there and sort of outlook.

Thomas Cangemi

Yes, I think we are well positioned going into Q3, I mean obviously we have been working with in number of new launches and we expect to the MSR valuations. Right now our MSR capitalization rate is 0.88 that’s down 10 basis points quarter-over-quarter that’s reasonable, its below 1.0, so we feel that the recalibration of our model was a first quarter event and a second quarter event.

However, the actual income items are up almost 70% quarter-over-quarter, we had a I'll call it a dismal Q1 because of the impact of that and we had a less of a dismal Q2, but however, we are still up almost 70%. And it's fair to say going into Q3, given what the purchase mortgage loans in the marketplace versus REFI, the [indiscernible] 70% purchase versus 30% REFI.

But more importantly we are seeing the opening of our gain on sale margins. So margins I would say in this environment is around 90 basis points, but up 10 bips from the previous quarter at 80, so we are probably setting ourselves up for a nice bump up and a continuation of increase profitability in the mortgage banking on that that we manage.

So obviously we put up around $7 million of mortgage banking income Q2 versus one in Q1, we could set ourselves up potential for a double going into Q3. So we can look at some way north of doubling the current income stream from Q2 versus Q3.

Robert Ramsey

Okay, great. That's helpful.

Thomas Cangemi

But bear in mind Bob, depending on market conditions, it's highly sensitive to interest rate and managing the MSR and hedged effectiveness.

Robert Ramsey

That’s fair, mortgage banking can be volatile. Last question and I'll hop out. I know you guys already touched on expense guidance for the year. I guess for the quarter the G&A improvement this quarter, was that all of the sort of seasonality that you highlighted and as you sort of look at expenses going forward is that comp line going to stay relatively flat to where it is this quarter on a go forward basis.

Thomas Cangemi

So, again I gave some guidance of going into Q3, we are looking at around $160 million ex-CDI. We had about a $3.5 million reduction on comp and benefits quarter-over-quarter that's predominant due to payroll, we are not downsizing, we are adding staff, we continue to add staff as we move along, especially as we get closer to the SIFI crossover. G&A was up we had a couple of one-time items, we had some merger related, we had litigation reserve. When you backed that out, those cost will probably be - my guess those couple of million dollars of dollar amounts would probably go towards payroll as we add more staff to get to the SIFI crossover.

I have said over the past few years, the increase in staff is not going to be a material adjustment to our P&L going forward, although it's going to be increase our operating expenses. We are taking it overtime, we have sent significant dollar going back to 2011 and here we are going to 2017 to be ready into a position to bridge the gap as a city bank. That all continue, and again it’s manageable, we feel highly confident that not going to be a material number at this stage.

Robert Ramsey

Okay. Thank you.

Joseph Ficalora

Sure.

Operator

Our next question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Joseph Ficalora

Good morning Steve.

Steven Alexopoulos

Hey good morning everybody. I wanted to first follow-up regarding the uncertainty you talked about, regarding closing the Australia deal, could you just the share thus far in the process, is everything going basically as expected, have there been any surprises that could lead to a taking longer than expected to close?

Joseph Ficalora

I would say no from the standpoint of surprise. This is a first time experience for us, and principally in the cases of many of these individuals that are Directors, a first time experience to them, even though there has been a SIFI created and it was not the same kind of things we are talking about here. So there is no surprises here, there is reality that it is a process that involves far more people than normal and has far more expectations with regard to ability to get the ascertain whether or not a SIFI is what in fact the we said the combined company becomes. And SIFI, has a whole criteria of different metrics and expectations and therefore they have to do an awful lot of work in order to get there. So I don’t think anybody can gauge exactly when this all happens, within weeks or month it could happen or it happens over a longer period of time.

Steven Alexopoulos

Okay, that’s fair and may be Tom following up on the commentary that pricing has gotten a little bit better on a multi-family loans, could you give us your outlook for the core margin here as we go into 3Q?

Thomas Cangemi

So again last quarter got it, I think it was flat to down few basis points, we actually were up three basis points quarter-over-quarter, obviously we had a substantial shift in the balance sheet, we had some securities had rolled off. Loan yields are up going into the quarter, so we expect that will be helpful, but bear in mind, if you look at where funding cost on in this environment, we have had a notable move on [indiscernible] market as we saw 25 basis points on one year by the financing. We have seen 26 basis point and that’s from the beginning of the year to today. 26 basis points on six month and 23 basis point on three months.

So borrowing costs are seeing some pressure, there is no question at the home loan bank system is pricing in higher cost to borrow money and even on the - for the nontraditional whole deposit market is seeing some price, given the change in effective fed fund. With that being said, my guidance for the quarter is probably flat to down maybe few basis points and we hope to be conservative there.

We are not seeing significant change in the margin as I said in the previous quarter. So we are balancing through this where there will be a change in margins when we become a SIFI bank and we deal with LCR requirement, that will have an impact, however there will be top-line beneficial, as our plan is to put on a positive carry, when we finance our securities transaction.

Steven Alexopoulos

Okay that’s great. And may be if I could just ask one follow-up to an earlier question. The bank that you are bringing and was referring to apply that the regulatory environment around [indiscernible] concentrations was about to get a lot more difficult for non-OCC banks, are you guys seeing a shift in the way, your regulators view your concentration, is there any change there?

Joseph Ficalora

No I would say that the visibility of regard the concentration has been evolving since last year and a although there is more conversation about it as you have noted that doesn't mean there hasn't been behind the scenes conversation about this for the last several quarters. The reality is we have always had a very high concentration number. So for the last several years before the rules even went in place we have always had regulators who have not been familiar with our business model, questioned size of our concentration.

So, I think from our perspective the discussion around concentration with regulatory focus is very appropriate and very typical of the kinds of concerns that should exist at the back end of a positive credit side. We are cycle players, we anticipate cycle turn and during cycle turn we always do better. So concentration is nearly one way of assessing the magnitude of risk you have in the given market. We always are risk averse with regard to how we lend and we are always concentrated in a particular class of asset in the New York market. So we are a very strong consistent supporter of low income housing in New York City.

The reality is that every single cycle we increase our lending in the concentrated market. So, if you look at us cycle-by-cycle we have actually been increasing our position in a period of adverse risk that takes in some cases banks out of business. We have talked about this many times [indiscernible]. Banks that have been around for many, many years who had a business during the credit cycle turns, concentration is nearly one way of talking about the exposure you will have to a particular class of asset.

This particular class of asset in the New York market is something for 45 years we have been involved in and over that 45 year period we have never had a charge to capital as a result of cycle turn based on our concentration in this asset class. There are no banks that have lent $66 billion or $67 billion in this market and not had a charge to capital as a result of cycle turn. So, the fact, the numbers, the reality of how we lend has stood the test of cycle turn. So being concentrated in an asset that greatly outperforms is an attribute, not a burden for us. And by the way we have had to discuss and explain this to every examiner that has come to the bank for the first time, because it's just so different than what you would see in anybody else's balance sheet.

So, yes the discussion is national and the regulatory is very, very appropriately recognizing that there is a significant increase in this particular class of assets around the country in the New York market. And for those lenders that are comfortable or otherwise that have not demonstrated a capacity to reasonably expect that they will perform well in the cycle turn there were limitations. And those limitations at this moment are regulatory, the limitations in a cycle turn are market.

The reality is we lend more during cycle turns not the not to push the regulator tells our peers not to lend, is because our peers are going out of business. It's because banks are virtually loosing so much money on this class of asset that we are doing a larger share of the market. So, this is not having the same kind of impact upon us as it has on others. Only because, if people actually look at our numbers it's through the apparent that we don’t have an undue, unexpected risk that has no justification for being, we had a risk that has been managed very well to decades.

Thomas Cangemi

Steven its Tom. I would just add to Joe’s comments here. That obviously given our size in the marketplace and where the technology is and these facts and stress testing, the heightened sense of awareness for all institutions including ourselves is focusing on risk management controls around concentration and that's where we have to be best-in-class and we have to focus on that. There is no question that there is a heightened sense of awareness there and enterprises management around on pre concentration is key and we need to be best on prices there. So we focus on that and in my opinion that's with the larger banks [indiscernible] have to be best-in-class there.

Steven Alexopoulos

Great that's really good color. Thanks guys.

Operator

Our next question comes from the line of Collyn Gilbert with KBW. Please proceed with your question.

Joseph Ficalora

Good morning Collyn.

Collyn Gilbert

Good morning guys. Just back Tom quickly on your comments about kind of the outlook on NIM and funding pressure, if we put the whole sale market aside and what is happening there. Where do you see kind of the retail deposit pricing trending? Is the market getting more competitive or less competitive and how do you see sort of the pricing differential in New York City versus what you are seeing out in Florida?

Thomas Cangemi

What I'll tell you is that obviously [indiscernible]. You go on the internet, you will get the bank offerings it's higher than it was six months ago right. So pretty much what retail customers are not going out two, three, four years it's still one year to 18 months bucket and those numbers are higher as far the cost of fund. That being said, as is borrowing cost, so clearly there has been an impact, but again it’s not a material impact. There has been an impact that bank as they add more on balance sheet liquidity and look at funding cost its costing you more money.

We are seeing maybe one or two basis points into our margin there. It's not a substantial change, but we have to be mindful of that. If you feel that rates could go up significantly from, yes that would impact our margin. Given where rates are and where the expectation of rates are going, we are not envisioning a substantial move to impact the funding cost of the bank. That being said, I want to just home back in the loan sites inside. We move billions of dollars and paper on a quarterly basis and the fact that there has been this concept of we will call it higher risk in respect to the space of CRE and multi-family. In particular CRE with both cap rates and interest rates where they are was getting better loan cycle and we anticipate to continue to get better spreads. So we think it's a balance.

Going back to those substantial adjustments to the securities book, $2.2 billion that rolled off in Q1 that would add 2.78 yield, so it is in those 350. I think what is notable for the quarter, we are seeing a much less of a change between what we have originated and what paid off. I think this particular quarter was about 50 basis points of a negative. Two, three years ago that was a 180 points, so the pain is less going forward and the actual coupon in the multi-family portfolio is around 342 and markets around just about 3.375 to 375 so blended a 342. So in the event the spread continue to widen and interest rates in the backend towards the pricing more risks in particular as I indicated interest only, people are pricing in more risk. There is of course the capital, it's a 107% versus 50% so it is cost of capital that should be positive towards the company's interest earning asset yields.

Collyn Gilbert

Okay that's helpful. And then just within your multi-family originations that you are seeing. Do you know what the split is between purchases and REFI just trying to get a sense of what the borrowers are doing?

Joseph Ficalora

I think it varies, it depends on who the people are in a given quarter that are actually refining their product or otherwise borrowing that product. In other words, as we sit today the marketplace is evolving and the risk taking by non-banks is always greater than the risk taking by banks, but the reality is that the lenders are not driving this market at a right time.

Thomas Cangemi

But yes, so Collyn just a bit, we still have nice bump up in actual loan prepayments and when you look at the quarter, quarter-over-quarter it’s not [indiscernible] security prepays as well as loan prepays and we have significant change Q1 from the securities got paid off that was about $12 million versus $8 million quarter-over-quarter a drop. But we made that up on loan prepayment activity. Being the activity is encouraging, Q2 we had an encouraging shift, the positive pre payment of month-over-month, each month prepayments slowly increased at a higher level and we are seeing some activity going into third quarter, so that’s another positive impact towards the company’s actual margin, not excluding prepayment.

Collyn Gilbert

Okay.

Joseph Ficalora

But there is also a very, very big difference between at market buildings and the kinds of building that we lend on. We have particular niche that is well below the market. The market lenders are the guys that are either here or in other market that are aggressive such as let’s say Miami. Where they are seeing change already, and our actual niche is not that much change. There may be somewhat change in who is providing the financing, but there is no change from a standpoint of the owners or the peoples that are bringing the [indiscernible] products broad base.

Collyn Gilbert

Okay, that’s all and just one final question. Can you guys just give us, your acquisitions thought are post the Astoria close, I mean, you gave obviously - once cross 50 the key is going to be scale that even more, can you just talk about either from a business…

Joseph Ficalora

Yes, I think you know us well, it is our business model to grow by acquisition, we are not going to just grow. We are in a elongated period. The concentrations numbers go up, until we do an acquisition and then it comes from down and then over a period of time, they go up again and then they come down. Again, we are in an elongated period, so our concentration numbers are higher today than normally they would be, if in fact we had executed on two transactions in less six to seven years.

So as we look for future period,, we would expect that we will continue to affectively grow. Remember, when the market turns and the FDIC is looking for a buyer, we are on the top of the list as available buyers to take troubled properties off the hands of the FDIC and that’s because our balance sheet is much stronger and better positions the deal with adversity. That’s a good thing, that’s not a bad thing.

Collyn Gilbert

Okay, but outside of FDIC deals, just may be traditional bank deals, do you feel like you would want to supplement may be with a more traditional bank portfolio versus [indiscernible] concentrated one like you have done, historically?

Robert Wann

No Collyn, I would share that Joe’s commentary is that obviously we have various features and now that we waited a long period of time to finally write acquisition to write merger partner to do the $50 billion crossovers. They believe the Astoria transaction is low risk, we believe that already as look at in the past four years, the lowest risk transaction. As we move forward that was our mission statement to get over $50 billion. Going forward, we are in Florida, we are in Arizona, we are in New York, New Jersey, we have the opportunities for the long-term business model to be proactive as we look at other opportunities.

We believe there will be substantial consolidation in the next five to ten years, even before that is next to the five years. Given the change of the environment. This is a unique opportunity and we think there is lots of consolidation is starting and I don’t think it’s the end, we just see significant opportunities in the marketplace. The good news for us, we are in multiple markets, so we expect to continue to evaluate multiple markets. But most importantly we have a very large yield payment so obviously that's the priority for the company.

Collyn Gilbert

Okay. Alright. Thank you very much.

Joseph Ficalora

You are welcome.

Operator

There are no more questions in the queue. I would like to turn the call back over to management for any closing comments.

Joseph Ficalora

Well thank you again for taking the time to join us this morning. We look forward to discussing our third quarter 2016 performance with you, which most likely will be during the last week of October. Thank you.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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