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Executives

Joseph Ficalora – President, Chief Executive Officer

Thomas Cangemi – Senior Executive Vice President, Chief Financial Officer

Ilene Angarola – Director of Investor Relations and Corporate Communications

Analysts

Bob Ramsey – FBR Capital Markets

Bradley Ball – Evercore Partners

David Hochstim – Buckingham Research

Collyn Gilbert – Stifel Nicolaus

Moshe Orenbuch – Credit Suisse

Steven Alexopoulos – JPMorgan

Ken Zerbe – Morgan Stanley

Dave Rochester – Deutsche Bank

Matthew Kelley – Sterne Agee

Mark DeVries – Barclays

Mike Turner – Compass Point

Mark Fitzgibbon – Sandler O’Neill

New York Community Bancorp, Inc. (NYB) Q2 2012 Earnings Call July 25, 2012 9:30 AM ET

Operator

Good day everyone and welcome to The New York Community Bancorp’s Second Quarter 2012 Earnings conference call. Today’s call is being recorded. At this time all participants have been placed in a listen-only mode. For opening remarks and introductions, I would like to turn the call over to Ilene Angarola, Director of Investor Relations and Corporate Communications. Please go ahead.

Ilene Angarola

Thank you. Good morning and thank you all for joining the management team of New York Community Bancorp for our quarterly post-earnings release conference call. Leading today’s discussion of our first quarter 2012 earnings will be our President and Chief Executive Officer, Joseph Ficalora, together with our Chief Financial Officer, Thomas Cangemi. Also joining us on the call are Robert Wann, our Chief Operating Officer, and John Pinto, our Chief Accounting Officer.

Certain of our comments will contain forward-looking statements which are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we currently anticipate due to a number of factors, many of which are beyond our control. Among those factors are general economic conditions and trends, both nationally and in our local markets; changes in interest rates which may affect our net income, prepayment penalty income, mortgage banking income and other future cash flows, or the market value of our assets, including our investment securities; changes in the demand for deposit loan and investment products and other financial services; and changes in legislation, regulation and policies. You will find more about the risk factors associated with our forward-looking statements on Page 8 of this morning’s earnings release and in our SEC filings, including our 2011annual report on Form 10-Know and our first quarter 2012 10-Q.

The release also includes reconciliations in certain GAAP and non-GAAP earnings and capital measures which will be discussed during the conference call. If you would like a copy of the earnings release, please call our investor relations department at 516-683-4420 or visit us on the web at ir.mynycb.com.

To start the discussion, I’ll now turn the call over to Mr. Ficalora who will provide a brief overview of our second quarter performance before opening the line for Q&A. Mr. Ficalora?

Joseph Ficalora

Thank you, Ilene, and thank you all for joining us this morning as we discuss our strong second quarter performance and the various factors that contribute to our earnings and asset growth.

We are very pleased to report diluted GAAP and diluted operating earnings per share of $0.30 for the quarter together with diluted cash earnings per share of $0.32. Our GAAP earnings rose 11% on a linked quarter basis and were up 9.8% for the year earlier amount. Our operating earnings rose 11.3% on a linked quarter basis and up nearly 16% year-over-year. As you might expect we also saw an increase in our returns on average tangible equity and tangible assets. On an operating basis our ROTE was 17.39% in the current second quarter and our ROTA was an equally healthy 1.36%.

Our ability to grow our earnings despite the challenges and the difficult rate environment can be attributed to three core components of our business strategy. The production of multi-family loans for investment, the quality of our assets, and the production of one to four family loans for [inaudible].

For the purposes of this morning’s call I would like to begin by talking about multi-family lending and our ongoing ability to compete for loans in a very attractive niche. Despite what you may have read or heard about others competing for product, we originated $1.3 billion of multi-family loans in the second quarter, boosting the current year’s production to $2.3 billion. At the end of June, multi-family loans totaled $18.2 billion, reflecting a $753.5 million increase since the end of December and an annualized growth rate of 8.6%. One of the benefits of this lending niche is the way we structure our product with a fixed rate of interest in the first five years and a fixed or adjustable rate of interest in years 6 through 10.

A vast majority of our multi-family loans are refinanced within three to four years of origination. And when they do, they generate income to form a pre-payment penalty. With interest rates at historical lows and refinancing activity rising, prepayment penalty income reached a record $32 million in the second quarter, increasing our net interest income and our average loan and asset yields. As a result, our margin rose six basis points on a linked quarter basis to 3.30%. The growth of our earnings also was due to an increase in non-interest income, largely reflecting the higher mortgage banking revenues. With mortgage rates still at historical lows, one to four family lending increased as did the income we produced by originating and selling such loans. In fact, more than $2.6 billion of one to four family loans were funded in the current second quarter reflecting a linked quarter increase of $180.2 million and a year-over-year increase of $1.5 billion.

In addition to the robust level of loans produced, the increase in mortgage banking income reflects strong pricing margins and higher servicing income. As a result, mortgage banking income rose to $58.3 million in the second quarter, a five-fold increase from the year earlier level and a 65.9% increase from the level produced in the first quarter of this year. I think it’s also important to note that as of this morning our pipeline exceeded $4.4 billion with loans held for investment accounting for just about $1.8 billion and one-to-four family loans helped the sale accounting for $2.6 billion.

As pleased as we are with the revenue growth that stem from our loan production, so too are we pleased with our asset quality. In the six months ended June 30, 2012, non-performing non-covered assets declined $111.1 million or 27.1% to $299.3 million and the ratio to total assets improved to 0.69% from 0.98%. Furthermore, early stage delinquencies fell $73.1 million or 65.5% from the year-end balance to $38.6 million at the end of June with net charge-offs declining 48.4% year-over-year and 10.8% linked quarter to $13.9 million. The improvements in asset quality were across the board. Furthermore, net charge-offs represented 0.05% of average loans in the current second quarter, a year-over-year improvement of 0.09%.

On the liability side, our balance sheet, we reported 9% rise in deposits to $25 billion reflecting the deposits assumed in our transaction with Aurora Bank which closed on June 28. In anticipation of that event, we reduced our wholesale borrowings to $12.2 billion reflecting a linked quarter decrease of 11.6%.

Last on my list of results to discuss, and no less important, is our capital position which continues to be strengthened as our earnings grow. At the end of June, our adjusted tangible stockholders equity represented 7.79% of adjusted tangible assets, consistent with the measure at March 31st. Furthermore, we were pleased to report solid regulatory capital measures including a Tier-1 leverage capital ratio of 8.53% for New York Community Bank and a Tier-1 leverage capital ratio of 13.30% for New York Commercial Bank.

Reflecting our continued capital strength and the ongoing strength of our earnings, the Board of Directors declared a $0.25 per share dividend at last night’s meeting, payable on August 17th to shareholders of record at August 7.

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

Question-and-Answer Session

Operator

The floor is now open for questions. [Operator Instructions] Thank you. Our first question is coming from Bob Ramsey with FBR. Go ahead, please.

Bob Ramsey – FBR Capital Markets

Hey, good morning.

Thomas Cangemi

Good morning, Bob.

Bob Ramsey – FBR Capital Markets

Obviously this is a very strong quarter for mortgage banking. I was wondering, one, could you share a little color on the gain on sale margin in the quarter? And then two, as you think about the outlook for that business into the third quarter, given your pipeline, I’d guess volumes will be up and I would guess margins will be stable. So given that outlook, is there any reason not to expect mortgage banking earnings in the third quarter will be at least as strong as the second?

Thomas Cangemi

Hey, Bob. It’s Tom. I would just look at the business right now. When you look at where rates are. We saw a little bit of a drop off in new purchase business because of the amount of refinancing that’s happening given the tenures hovering around 150. So given that we have another refinancing opportunity in front of us as well as additional purchase activity. It’s fair to say that mortgage banking activity is very robust going into Q3. It’s very early on, but we’re seeing some very strong volumes. In addition, we’re able to release some good margins, so margins have improved significantly from Q1.We’re looking at margins as benefit from spread on the warehouse, about 140 to 150, that’s excluding the spread on the warehouse. So we’re seeing about 25 to 30 basis points improvement over the Q1 with respect to actual realization of margins.

Unidentified Company Representative

Another thing is that, we clearly are solidifying our position in this market. So regardless of what happens with rates, regardless of what happens with refinancing, we are in a position to gain share in the market and that’s always a very good thing, especially when it’s as big as this is. We have a very large platform and obviously we’re generating a tremendous amount of loans. The ongoing ability for us to do that, even as the markets evolve should be very strong.

Bob Ramsey – FBR Capital Markets

Okay, great. And then could you also share your thoughts on the margin outlook from here?

Thomas Cangemi

With respect to the margin, obviously the rates are – it’s very low rate environment. We are doing extremely well navigating through a tough environment with respect to prepayment activity. And looking at prepayment activity in 2012, we’re seeing the continuation of a lot of activities between commercial mortgages and multifamily. The margins are going to be under pressure, actually prepayment activity, but that’s our business model. We touched a lot of files and get paid a lot of fees. So, when you take out the prepayment activity, you’re looking at overall down margins you got with interest rates. So, probably a range, probably around 12 to 15 basis points on the short term, and that’s giving guidance for the next quarter with the FEPM activity into that number we’re navigating very well by stabilizing that margin.

Bob Ramsey – FBR Capital Markets

Okay. Thank you.

Operator

Our next question comes from Brad Ball with Evercore. Your line is open.

Thomas Cangemi

Hey Brad.

Bradley Ball – Evercore Partners

Hey, guys. I’m wondering if you can talk about the kind of pricing pressure if any you’re seeing in the multifamily market today. And what kind of coupons, what are the yields on new multifamily loans?

Thomas Cangemi

Brad, while we’re – actually the closing yield we have was 4%, just south of 4% to the quarter. So, we are seeing reasonable returns and we expect in the current interest rate environment rates are very low, but if you look at where the Friday treasury is trading volumes are putting on we’re still in the midst of [inaudible] as far as the current pipeline. So, last quarter, we closed the book just under 4%, although we have a higher yield rolling off and that's part of the threshold on the margin. We are seeing some reasonable returns given the current shape of the yield curve.

Joseph Ficalora

It doesn’t mean that there aren’t some people out there that are well below where the market should be. So the range is fairly wide, even though we are pretty consistent.

Bradley Ball – Evercore Partners

The spreads over the five year CMP is still in the 2.25, 2.75?

Thomas Cangemi

Yes, 2.50 to 2.75, and depending on the product commercial maybe another 25, 30 basis points above that, but we’re closing loans close to 4% from the previous block, going to this we are probably looking at somewhere in the mid 3s. And if you look at that indicative to the current treasury curve, that’s around 300, close to 300.

Joseph Ficalora

Remember, couple of years ago we were getting 150 on a consistent basis, and now we’re getting substantial pre-payment income, when pre-payment income was basically for the year, less than we get in the quarter.

Bradley Ball – Evercore Partners

Okay. And then just separately, was there any income statement impacts from the Aurora deal? I know the deal closed just before the end of the quarter?

Thomas Cangemi

No.

Bradley Ball – Evercore Partners

So the $24 million you repaid didn’t show up anywhere?

Joseph Ficalora

That will be amortized over the expected life of the shorter-term CDs and the brokered deposits.

Bradley Ball – Evercore Partners

Okay got it.

Joseph Ficalora

Yeah, it’s really – a little bit over a year, 18 months or so…

Bradley Ball – Evercore Partners

Great, thanks very much.

Operator

Thank you. And our next question comes from David Hochstim with Buckingham Research. Go ahead please.

David Hochstim – Buckingham Research

Good morning.

Joseph Ficalora

Good morning.

David Hochstim – Buckingham Research

I was wondering could you just clarify what happened in the mortgage banking in terms of servicing income, were there any write-downs of…

Joseph Ficalora

Actually servicing income, we had some non-performance there. I mean, if you look at it on a linked quarter basis we had a $10 million swing. Actually our net hedge effectiveness was probably off by $2 million, so we had a loss of approximately $2 million. So all in servicing income was about $5.3 million. So when you take the origination income of 52 points I guess together you have 58.3 in total, but servicing income actually showed a positive income for the quarter.

David Hochstim – Buckingham Research

So it was basically that servicing – so the swing – the $10 million sequential was really because you had more…

Joseph Ficalora

Yeah I mean, last quarter we had a slide off in the hedging activity, and this quarter we effectively hedged our MSR within [inaudible]. We had a loss of around $26.5 million on the mark and we had a gain of servicing hedging of 24. So net is two.

David Hochstim – Buckingham Research

Okay, All right. And I guess if prepayments are picking up we could have more MSR write downs at some point, did you get to the end of that.

Joseph Ficalora

I think it’s more predictable. I mean, our application remodel would be on the actual acceleration depending on the coupon that we have in the book. Right now I think it’s a 427, is our current coupon that’s on the book. So with those rates, if rate goes much lower, yes, that will be correct, but then the origination fees would be substantially higher. So that’s how we look at the business.

David Hochstim – Buckingham Research

Okay. So a pretty good balance.

Joseph Ficalora

Yeah, you could say that.

David Hochstim – Buckingham Research

How much of the origination volume in the quarter was not confirmed, was not GSE?

Joseph Ficalora

I would say 97%, 98%. We have a very small amount of Jumbo paper that we have been selling to the second bidder.

David Hochstim – Buckingham Research

So almost all was sold for GSE, but you are still building that business?

Joseph Ficalora

Yeah, absolutely. I mean, we have partnerships mined up and we are looking at additional relationships in the future. But I think right now we are moving into other products that could be available by year end and we are spending time on the FHA positions down the road and hopefully by the end of the year we will have our FHA up and running. That’s the expectation by the fourth quarter. So we are working on offering a full array of mortgage products that are out there. There has been some significant news in the industry with Wells Fargo dropping out of the wholesale platform and BofA last year. It gives us the opportunity to gather more share, we are in the position of hiring people right now given that we are seeing a demand in the pipeline. So we are very pleased about this opportunity given that our origination actually started with new rules. If you go back to 2004 and 2009, it was a completely different business model. The rules have changed when we acquired AmTrust and we are operating on much tighter rules. So we have much less risk in respect to underwriting.

Thomas Cangemi

We only have about two years worth of bills. So this portfolio is only about two years old.

Joseph Ficalora

And despite the amount of volume that we have produced over those years UTB [ph] are servicing $15 billion. So we have had constant refinancing way of continuing and we see rates even lower. Here you will see that refinancing continue as well most of our businesses on the west coast of the country, and to refi the west coast is significantly cheaper than it is on the east coast.

David Hochstim – Buckingham Research

And how much was refi in this quarter as a percentage of the origination?

Joseph Ficalora

I don’t have that number. About 70%.

David Hochstim – Buckingham Research

Okay.

Joseph Ficalora

It’s about 75. I would say right now 25% is about new business and 75% is around the – that actually happened towards the latter part of the quarter. In the beginning of the quarter we saw a significant pressured activity. As rates trended lower, refinancing caved in further. So as of June you had a much higher level of refi versus purchase. But 25 % on average of the quarter was pretty much what we expected given the rates.

David Hochstim – Buckingham Research

Okay. And then finally on the release you noted that core deposits were down about $300 million in the quarter. What’s driving that? I mean is there an opportunity to lower your cost of funds by emphasizing notes for CD?

Joseph Ficalora

Well our focus there is no question is to take advantage of the rates. We are going to be lending – I mean, three of our deposit rates are going to come down. I think the phenomenon is that we have been reducing our rates for years now and many times we are catching up. So for us to reduce our CD rates, for example, we would see less pressure on – we have a very significant liquid balance sheet. We have over $3 billion cash as of June 30th. So we are very comfortable in keeping our rates lower and we are not going to get the [inaudible] years ago but we definitely have some room to reduce our deposit rates and specifically into the CD books.

David Hochstim – Buckingham Research

And what about core deposits?

Joseph Ficalora

[Inaudible].

David Hochstim – Buckingham Research

But those balances ramped down. The core deposits I think were down in the quarter.

Thomas Cangemi

Yeah we did adjust rates on money market accounts.

David Hochstim – Buckingham Research

Okay. All right, well thanks a lot.

Operator

Thank you. Our next question is coming from Collyn Gilbert with Stifel Nicolaus. Your line is open.

Collyn Gilbert – Stifel Nicolaus

All right thanks. Good morning guys. I just want to get a sense. You just kind of mentioned, Tom, about your liquidity position. Where do you see the use of your excess liquidity going? I mean, how should…

Thomas Cangemi

I mean, we are very excited about the opportunities in the marketplace. We had some very low interest rate environment. We are dealing with a lot of refinancing. We are getting paid to refinance our products but we believe that given typically the fourth quarter is a very strong quarter for the company. We have a very strong pipeline going into Q3, which is abnormal. If you look at historically for the company, Q3 is usually a wider number for seasonality reasons but we are going to put our money back into our product. We are shying away from the investment securities market given where the duration risk is right now. So we’re very comfortable on going into a core product and lending and we have a lot of liquidity to lend.

Collyn Gilbert – Stifel Nicolaus

Okay. So the reduction in borrowing that we saw this quarter, is there more room for that or you really think…

Thomas Cangemi

That was the function of the Aurora transaction that was stated. We took in $2.2 billion, $2.3 billion of cash. As of quarter end, we had some short-term borrowings we catered off.

Collyn Gilbert – Stifel Nicolaus

What was the cost of those borrowings?

Thomas Cangemi

It actually raised our borrowing cost given that that was overall a very inexpensive funding. But going forward, I don’t envision any more further reductions. Absent a merger transaction we would not see any further reduction in the borrowing.

Collyn Gilbert – Stifel Nicolaus

Okay. You said in the press – I just want a clarification on the CRE decline, I mean I hear you on the multi-family, but I mean, are you expecting some more momentum and growth on the CRE portfolio as well despite a pay down this quarter?

Thomas Cangemi

What we said in the first, we had annualized growth in Q1 of 20%. That was not reasonable. We just stayed to the marketplace that we had and larger deals that we put on some participation, and those participations were completed in Q2, that’s where the run off came on. It was not because of losing business. We got into the market and did some very strong deals that we had partnerships that we closed in Q2, so it’s fair to say that the CRE up from here, but again not an annualized one with 20%, and I think it’s more manageable. So if we take the run off in Q1 I would not expect to see those types of declines at all in commercial real estate. If anything you will see the uptick of commercial real estate.

Joseph Ficalora

The CRE business will be generating for a fee income and then other opportunities to grow the business and sell parts of the business at the same time.

Collyn Gilbert – Stifel Nicolaus

Okay. That’s helpful. Just one final question, I mean, obviously the refinance activity here is enormously robust, and how do you think about the portfolio longer term? I know, Joe, you mentioned, you say that generally these – the multi-family borrowers every three or four years will refinance. I mean, do you see any risks with that being extended out in the event that rates do go higher down the road?

Joseph Ficalora

Yeah, I think the important thing to recognize is that their business model necessitates that they – to get recognition of the increased cash flows they generate in a three-year period. So even if they – let me say it differently. If they anticipate rates are definitively going to go up, they’ll actually come in sooner and refi. So the activity for us typically goes up as rates are definitively going up. People are willing to wait when they think rates are in fact continuing to go down or maybe will stay down for a long time. As of right now, people have been waiting, remember how slow the activity was in 2009 and in the beginning of 2010. And we’ve said since mid 2010, that we see growth in our actual lending and growth in our prepayment penalties quarter-by-quarter on a go-forward basis and that’s exactly what’s been happening. We would expect if that would continue to happen in the period in front of us.

Thomas Cangemi

Remember that as these contracts are written with its term of five years and then they maybe setting to year six, they very rarely do go into [inaudible] crisis, when many customers [inaudible] they pay additional points. They go back to five, four, three, two, one again. So, if that does takes place, we get a 20 basis point pick up per year for five years and then they are back into a higher pre-payment of roll dates. And given where rates as Joe indicated you’ll see acceleration of refinancing knowing that rates may drive it.

Collyn Gilbert – Stifel Nicolaus

Got you. Okay, all right, that’s all I have. Thanks, guys.

Thomas Cangemi

[Inaudible] within that 2.9 to 3.2 years which is a relatively short asset given the returns that you can find in the marketplace.

Collyn Gilbert – Stifel Nicolaus

Okay, thanks.

Operator

Thank you. Our next question is coming from Moshe Orenbuch with Credit Suisse. Go ahead please.

Moshe Orenbuch – Credit Suisse

Great, good morning. Could you just talk, maybe flush out a little more just your assessment kind of the competitive environment, one of your kind of local market banks that hadn’t been a competitor kind of evidenced, you said this morning that they were thinking about getting in kind of dipping a tail in I guess.

Joseph Ficalora

I think the important thing to recognize, and I appreciate the fact that analysts listening every word that is said by everybody and looks for some relevance in that, the fact is that the people that are not in the market were very large lenders. The structured debt lenders had a very large share of the market. They were lending grossly excessive amounts of money to anybody that wanted money. So those bad loans were made and those bad loans have failed and those lenders don’t exist. So when we look at the future period, if three or four or five or six other banks come in to the market, they are not anything near as relevant as the people that were in the market just a few years ago. So I think the idea that they are going to be lots of players that’s fine, it doesn’t mean that it’s going to take the market and was a shifting away from what we do.

I think you know that many different players have indicated a desire and demonstrated a reality that they are doing multi-family lending at the very same time that we’re increasing our multi-family lending. So I think the bad news about the market is sometimes people are irrational with regard to rates, or with regards to terms, that makes the market a little sloppy. It’s not ever good, when Fannie and Freddy are in the market, but Fannie and Freddy have been in the market for quite some time, and they are still affecting rates in the market. So I think the important thing to recognize is what our numbers are. It’s not as though anyone new who is coming into the market is meaningfully affecting the marketplace given the facts that they are replacing those that are no longer in the market. Meaning the very large structured debt lenders and others that were aggressive in the marketplace, those guys are not there, their loans all needed to be refinanced, they were held off the market for a period of time because of their structure, those loans have to be ultimately refinanced and they are all in front of us.

Moshe Orenbuch – Credit Suisse

Just a follow-up on the mortgage bank. What do you think was the most significant factor? Was it BofA kind of exiting correspondent? Was it Wells exiting wholesale? Was it just a general level of refi activity?

Thomas Cangemi

I would say for sure the general market conditions, given the rates are still low we are able to release some margin here. There has been some dislocations regarding some competitors, we had a lot of rate losses. This is a rate loss in a quarter-over-quarter and up on a very strong Q1. That should be indicative going into Q3 given where our rates are. Now this business model moves very rapidly, but we are in hiring mode right now. That’s telling you that we are seeing significant business flows right now.

Moshe Orenbuch – Credit Suisse

Thanks, Tom.

Operator

Our next question comes from Steven Alexopoulos with JPMorgan. Your line is open.

Steven Alexopoulos – JPMorgan

Hey, good morning everyone. On the margin with the range for the core NIM pressure going up, we’re now seeing down 12 to 15 versus down 10 –or 8 to 10 last quarter. Can you help us think through this? Is it incremental asset yield pressure, just given the backlog of refis or is your ability to lower deposit rates starting to slow, just trying to understand incrementally why the additional step down?

Thomas Cangemi

All right. I think [inaudible] deal. First, we look at it as not core margin. Our margin core margin was prepayment activity but if you want to call it that, no question that rates are lower. So, we have 5% loans rolling-off you’re putting on 3.50% or 4% that has pressure on the margin. We’re offsetting that pressure with the expectation of lower deposit costs and more importantly pre-payment activity as we go through our business model and touch a lot of files and fill the book. We expect to see loan growth. We expect to see some very strong mortgage banking revenues as well as elevated prepayment activity. So, we know we’re going to manage through this tough margin environment; however, the margin is still very strong in the way we look at margin which is our true margin which includes these.

Joseph Ficalora

Yeah. I think the important thing to recognize is this is not new. In every turn in interest rates we’ve had the same benefit from our prepayment activity going up as in fact the rates are coming down. So the likelihood is that – and this is very public. The new rates in the market are significantly lower than the rates that are in the portfolio. So, if we didn't have the benefit of prepayment, we would have a significant decrease in our margins, but we do have contractual prepayments and therefore we have an insulation factor that is consistent with what has happened period after period after period.

Steven Alexopoulos – JPMorgan

Okay. That’s helpful. When you guys think – and I know there is a lot of pieces to the margin, right? When you think about core managers income, we’re going to benefit from the prepayment income, that’s pretty clear. Can you grow core net interest income in this environment with this kind of pressure, given you do have good earning asset growth?

Joseph Ficalora

Obviously we had a nice [inaudible] warehouse, we said the warehouse will be up. That was up two fold on a linked quarter basis. So assuming mortgage banking is elevated, we can build the warehouse business as a very high yielding asset class. We’ve been [inaudible] put up securities given the risk in respect to agency risks. So in the event they do go up we would put $2 billion into that business given that we’ve been reluctant to put any money in there. We are at the lowest level in terms of the public company and with respect to securities to assets. So we have many leverage to pull at the appropriate time. We are managing the balance sheet super conservatively, and most importantly our credit profile is stellar. I think looking at the deals that we may lose at the marketplace, we will not lose because of the [inaudible] on interest rate. We are going to lose because a bank will give more credit and that’s where we differentiate ourselves as a true player in this business line.

Steven Alexopoulos – JPMorgan

Just one final question that Fed maybe [inaudible] something next week that further flatten the curve, we’ll see, maybe September. Is there an absolute level of yield right on the multi product where you start to pull back to protect ROE and margin? Thanks.

Thomas Cangemi

We’re in this business through our shareholders, we lend into the space. So if the slider is at zero, we’ll get 300 basis points. Going back to my last one, last quarter, we lend up to five year ability of the curve, we’re not a 10-year lender, we are not a 30-year lender. So in the event in that situation, mortgage banking will have significant benefits with lower rates and the five-year ability of the curve, if it’s at 20 basis points not 50 basis points, you’ll see we probably increase profit. So we’re doing 3%, and you have funding cost zero. So we’re still going to have reasonable returns. Our overall return average assets, tangible assets are 130, that’s a pretty strong shelving compared to our peer group.

Steven Alexopoulos – JPMorgan

Okay. Thanks for the color.

Joseph Ficalora

You’re welcome.

Operator

Thank you. And our next question comes from Ken Zerbe from Morgan Stanley. Your line is up.

Ken Zerbe – Morgan Stanley

Good morning, guys. Just a couple of quick ones on mortgage banking, I guess first of all, just on the gain on sale, couple of the other origin areas are saying that they are not going to go any lower on rates, they are trying to hold rates. I mean, is that – just to be clear, is that the main reason why the gain on margins are still so high, and are you seeing any change in the incremental rates or yields being offered in mortgage that could actually bring the gain on margins down going forward?

Thomas Cangemi

I think that’s hard, Ken, I think also [inaudible] on serious dislocation with some of the major players exiting. So when you have major dislocation going on and I think we are a wholesaler, so we’re not a retail originator, we’re national wholesaler and we take out the two largest players in the market you can release some margin and make some market on it. So we’ve been joining that benefit. We’re going to be probably seeing 120 to 160 and this particular quarter we picked up another 25 basis points because of competition. And as you indicated, many banks are getting more money in the business plus retail national as much indicative of where the 10 years in trading which we kind of – where we fight the [inaudible].

Ken Zerbe - Morgan Stanley

Okay. That helps. And then just other quick question, are you guys originating any hard business?

Thomas Cangemi

No, we opted not to go step forward.

Ken Zerbe - Morgan Stanley

Perfect. That’s it. Thanks.

Thomas Cangemi

You’re welcome.

Operator

Your next question comes from Dave Rochester with Deutsche Bank. Your line is open.

Dave Rochester – Deutsche Bank

Hi, good morning, guys.

Joseph Ficalora

Good morning, David.

Dave Rochester – Deutsche Bank

Where are the roll off rates now on the CRE multi-family, are those high 5s, low 5s, just some sense there?

Thomas Cangemi

It is in the 5s.

Dave Rochester – Deutsche Bank

In the 5s?

Thomas Cangemi

And that’s in the end in the next quarter or two, in the point of time, the normal 5 less, it’s probably the ease of it, so I think we’re coming to that stage which hopefully by next year – early next year you’ll have much lower coupons that we’ll have to rethink in terms of our refinancing.

Dave Rochester – Deutsche Bank

Yeah, that makes sense. And just on the – I hear you on where the pipeline rates are in multi-family in the mid 3s, we had heard from brokers over the last few weeks, that I guess pricing maybe has come down in the hands of the market to maybe the low 3s, maybe another 25 basis points, or have you guys seen any of that pressure as well?

Thomas Cangemi

No, I would tell you that we are seeing some in the agency space. That also will not have yield minus position, so we’re pricing the prepayment structure versus yield management, we get 25 to 30 basis points more in economics, but they have the yielding in contracts. So I think that’s probably correct for Fannie Mae, perhaps.

Dave Rochester – Deutsche Bank

Okay.

Thomas Cangemi

I think the portfolio lenders are getting reasonable spread on 5 year [inaudible] 10-year paper, and there are some guys doing IO paper. But we try to stick to our netting and focus on our core business which is that five-year product.

Joseph Ficalora

Yeah. The brokers are telling you about what’s out there. Because there are new players in the market that need to demonstrate that we’re getting some assets and the only way they get them is by being somewhat irrational, I/O, lower rates, longer terms, they try to buy the loan with terms and certainly that does make the market sloppy. It doesn’t necessarily mean that we have to do what they do, but I think you will hear about lower rate and how the terms that are not consistent with what we do.

Dave Rochester – Deutsche Bank

All right, great. Thanks, guys.

Joseph Ficalora

You’re welcome.

Operator

Your next question comes from Matthew Kelley with Sterne Agee. Go ahead, please.

Matthew Kelley – Sterne Agee

Hey guys, just first in the margin guidance, Q4 and Q1, 8 to 10 basis points down, goes to 12 to 15 basis points, is there any reason to not extrapolate that type of sequential pressure going forward?

Thomas Cangemi

Yeah, I mean, there is. I think there is going to be a point of time where we trust. I am not going to tell you what quarter we trust, but as every quarter goes by it goes back to the thesis of 50 basis points on the five-year TMT, we’ll make it 300 or 250 and with earnings close to zero you are gaining close to that short level. So we give very short dated guidance. They don’t want to get guidance but we get it because it’s obviously not our business and if you think about how you will get the margin, we will get it including fee and given the elevation of refinancing activity and just business in general, we are seeing a very robust prepayment activity, and we will see that in the continuation and as we will see for the future. And what Mr. Ficalora talked about earlier in the year you are [inaudible] cost $90 million and [inaudible] overall $100 million. And that was our early guidance but we are seeing that come to fruition now. So I think when you look at the business – again we are commercial real estate originator, predominantly multi-family, every contract we write has fee structure involved and we are seeing lots of activity.

So going back to your point, yes, the margin is under pressure given the interest rates. We can’t control interest rates. We believe we have a very strong business model at the balance right now moving into the economics where we are generating reasonable returns for shareholders and we are seeing that nice return on average assets, north of 125-ish and return on tangible equity around 17% and it’s not combined.

Joseph Ficalora

[Inaudible] we are originating loans for others, so the fee income that we get in our mortgage bank is obviously very, very positive and likewise we are beginning to do that in commercial assets as well. So we are originating assets and getting paid fees even though we are not necessarily portfolioing those lower rates.

Matthew Kelley – Sterne Agee

What if you are generating fees from commercial lead bank participation or origination fees?

Joseph Ficalora

I don’t have that number. At this juncture it’s not that much. But the reality is that we are positioning ourselves to move further into that business.

Matthew Kelley – Sterne Agee

Okay. Just getting back to the yields real quick and I know right now you are 250 over the five-year. But if you go back to kind of ’05 to ’07 before the bottom fell out of the overall market that spread was down to like 150 to 175.

Joseph Ficalora

Yeah. That's a new world. Every [inaudible] country was, you know, putting this up in the package via transaction.

Matthew Kelley – Sterne Agee

Sure. But the change for yield and lots more competitors coming in, why can’t we see additional compression and spread over the next year if we stay in this overall environment.

Joseph Ficalora

We don’t have the crystal ball. I don’t see that coming but we don’t have the crystal ball.

Matthew Kelley – Sterne Agee

Last question. Basel III and just the new capital guidelines, have you given any thoughts how that might change your risk rated assets?

Joseph Ficalora

We looked at it very, very briefly and we did some quick numbers. We have 300 to 400 pages worth of cushion based on – and they lost [inaudible] predominantly for us.

Matthew Kelley – Sterne Agee

Okay thank you.

Operator

Our next question comes from Mark DeVries with Barclays. Go ahead please.

Mark DeVries – Barclays

Yeah thanks. Could you give us an update on the opportunity you are seeing for acquisitions?

Joseph Ficalora

Well, the market is definitely rich with discussions. There are lots of people that recognize that their particular business model is not well suited for this evolving environment. So we do have conversations with people. We have been very clear that we have been less willing to be active in smaller deals mainly because of the consequence. Regulatory change presents over $50 billion. So we are being very disciplined in not actively looking at smaller banks but we are considering larger deals and there are certainly opportunities out there to be seriously considered.

Mark DeVries – Barclays

Okay. And when you say larger deals, is there an asset – minimum asset that you have in mind?

Joseph Ficalora

You know I think that we are contemplating that in combination we would be $60 billion or better in order to basically accommodate the burdens of being bigger than $50 billion. There is a lot of work that we are doing to prepare ourselves to [inaudible] bank. It’s good for us to do this work because ultimately deals can evolve relatively quickly. But in this environment there is a lot of preparatory effort that must go into making sure that everybody is on board including all of your regulators. This is a specific regulatory need because the rules from the regulator change once you go over $50 billion.

Mark DeVries – Barclays

Okay, thanks. And then on the G&A, how much of the increase in the quarter is related to OREO expense and how much from [inaudible].

Joseph Ficalora

Yeah I would say the guidance we had for Q2 is about $145 million and about $5 million additional expenses. Half of that was related to increase expected foreclosure and OREO expenses, and the other addition was just variable cost associated with the mortgage banking operations. As we see more income we are going to see a little bit more variable cost. We have lot of leverage there in the mortgage bank but you will see some incremental cost going into the year if mortgage banking continues to be robust. As I stated previously we are in the mode of hiring. We will contract underwriters. We see some very good business lines. So we are gearing up for a very strong third quarter as well on mortgage banking. So we have to spend some variable cost there. But for guidance for Q3, my guess depending where foreclosure expenses and OREO expenses come in, we had a lot of reductions in MTAs in the given quarter. I would say 145 is probably a reasonable range for Q3 for operating expenses excluding CDI.

Mark DeVries – Barclays

Okay that’s helpful thank you.

Operator

Our next question comes from Mike Turner with Compass Point. Go ahead please.

Mike Turner – Compass Point

Hi good morning. Thank you. Given the low rate environment it just seems like you guys are doing everything right, not giving on credit, not changing your underwriting standards. As you look at the future any thoughts to or any changes to your thoughts on refinancing your liability?

Thomas Cangemi

Obviously we’ve said it many, many times in many quarters. Given the punitive impact capital and the size of our wholesale book, we would restructure that in conjunction with a merger transaction. We believe that’s the right time to do it. We think to do it in this environment, to earn back the capital is the time that's way too long, it’s well over 5 years, something we would not want to bring to our shareholders depending on market condition.

Now if rates change, you have more flexibility but in this current rate environment some of the stuff goes off next year as we get closer to ’15 and ’16 we’ll start seeing some more rolling off, we are getting closer to maturity as we roll down the curve. But given where rates are today, out of money value that liability is substantial.

Joseph Ficalora

One of the things you’ll recognize is that gives a definitive means of making a better bank. So in combination with someone else, we have the ability to withstand some of the adversity that maybe out there 6 months, 12 months, 18 months, because we will have the ability to automatically restructure earnings in a way that favorably impacts the pro forma company. So that’s a deal benefit that actually helps both parties.

Thomas Cangemi

I think what’s very important if you look at the balance sheet as we stand today, our wholesale liabilities in totaling assets that is lowest point probably in good 10 years were at just south of 28%. The goal here was to get below 30 [inaudible] and we’re going into an environment where we have an opportunity to take advantage of some reasonably good acquisition opportunities effectively where we can create value to shareholders. So, we’ve been very cautious on going that wholesale liability but not in balance, now it’s manageable and we’ll deal with it as we look at additional opportunities.

Mike Turner – Compass Point

Thanks. That’s very helpful.

Operator

Our final question comes from Mark Fitzgibbon with Sandler O’Neill. Go ahead please.

Mark Fitzgibbon – Sandler O’Neill

Hi guys, good morning. I wondered first you could share with me the average rate on the multifamily loans you have in pipeline. Do you happen to have that?

Thomas Cangemi

It’s reasonable. I mean I said I think early in the call that we closed around 3.90ish, just south of 4% for the quarter. So [inaudible] pipeline from all these [inaudible] to that.

Mark Fitzgibbon – Sandler O’Neill

Okay. And then secondly, how much do you have in CDs and borrowings maturing in the second half of this year?

Thomas Cangemi

It’s a couple of billion dollars, let’s say probably $2 billion to $3 billion in next six months and higher coupon, right on 1.22, I should say within.

Mark Fitzgibbon – Sandler O’Neill

1.22 on the CDs?

Thomas Cangemi

Yes.

Mark Fitzgibbon – Sandler O’Neill

Great, thank you.

Operator

We have no more questions at this time. I’ll turn it back to Ficarola for closing remarks.

Joseph Ficalora

On behalf of our boys in management team, I thank you for your interest in the company and our second quarter 2012 performance. We look forward to chatting with you again in October when we report our third quarter 2012 earnings and wish you an enjoyable summer. Thank you.

Operator

Thank you. This does conclude today’s second quarter 2012 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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