New York Community Bancorp, Inc. (including Flagstar Bank, N.A.) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The filing is by New York Community Bancorp, Inc., the holding company for Flagstar Bank, N.A.; it reports consolidated results. Flagstar was acquired in December 2022, and the FDIC-assisted Signature transaction closed March 20, 2023.
Financial results and position
- Q2 earnings: Net income was $413 million and net income available to common stockholders was $405 million; diluted EPS was $0.55. In Q2 2022, net income was $171 million and diluted EPS was $0.34. Q2 2023 included a $141 million Signature-related bargain purchase gain and $109 million of merger and restructuring expense.
- Six-month earnings: Net income was $2.419 billion and diluted EPS was $3.37, compared with $326 million and $0.66 in the first half of 2022. The 2023 period included a $2.142 billion Signature bargain purchase gain, so reported earnings are not a straightforward measure of recurring performance.
- Net interest income and margin: Q2 net interest income was $900 million, up 62% from Q1; net interest margin was 3.21%, up 61 basis points sequentially. The full-quarter contribution from Signature and higher asset yields drove the increase, partly offset by higher funding costs. First-half net interest income was $1.455 billion, versus $691 million a year earlier; first-half NIM was 2.94%, versus 2.48%.
- Credit costs and asset quality: Q2 provision for credit losses was $49 million; first-half provision was $219 million versus $7 million a year earlier. The allowance for credit losses on loans and leases was $594 million, or 0.71% of held-for-investment loans, at June 30. Non-performing loans were $233 million (0.28% of loans), up from $141 million at year-end; non-performing assets were $246 million, or 0.21% of assets. Loans 30–89 days past due increased to $335 million from $70 million at year-end. First-half net recoveries were $1 million.
- Balance sheet: Assets were $118.8 billion, up $28.7 billion from year-end but down from $123.7 billion at March 31. Deposits were $88.5 billion, up $29.8 billion from year-end. Loans held for investment were $83.3 billion, compared with $69.0 billion at year-end; loans held for sale were $2.2 billion, versus $1.1 billion.
- Funding and liquidity: Cash and cash equivalents were $15.8 billion. Ready liquidity was $37.7 billion, approximately matching $37.8 billion of uninsured deposits, equal to 43% of deposits. Wholesale borrowings were $15.4 billion, down from $20.3 billion at year-end; total borrowed funds were $16.4 billion. Brokered deposits were $9.3 billion. Management said liquidity and capital resources were sufficient for obligations over the next 12 months and foreseeable future.
- Capital and book value: The Bank’s CET1, Tier 1, total risk-based, and leverage ratios were 11.12%, 11.12%, 11.75%, and 8.06%, respectively; the filing states the Bank exceeded well-capitalized requirements. Tangible common equity to tangible assets was 6.43%, and tangible book value per common share was $10.29.
- Cash flow: For the first six months, operating cash flow was negative $1.57 billion, investing cash flow was positive $24.14 billion, and financing cash flow was negative $8.63 billion. Investing inflows included $25.0 billion of cash acquired in the Signature transaction; results also reflect changes in loans held for sale and other balance-sheet items.
Material changes and business developments
- The Signature transaction was the principal driver of year-to-date balance-sheet growth. The company assumed $33.6 billion of deposits and recorded $25.0 billion of acquired cash, among other acquired assets and liabilities. It recorded a $2.142 billion bargain purchase gain, subject to measurement-period adjustments; $449 million of loans were returned to the FDIC during Q2.
- Loan mix shifted: C&I loans increased to $23.9 billion from $12.3 billion at year-end, primarily due to Signature and growth in mortgage warehouse lending. Multifamily loans declined slightly to $37.8 billion; their share of held-for-investment loans fell to 45.4% from 55.3%. CRE loans increased to $10.6 billion, including loans acquired from Signature.
- Available-for-sale securities fell to $7.8 billion from $9.1 billion. The portfolio had a $668 million net unrealized loss, after tax, compared with $626 million at year-end. The company reported no held-to-maturity securities.
- Q2 non-interest expense was $661 million, including $109 million of merger-related and restructuring costs. Six-month non-interest expense was $1.137 billion, substantially higher than the prior year, primarily reflecting the acquired businesses.
Outlook, commentary, and risks
- The filing provides no specific earnings or revenue guidance. Management cited interest-rate changes, deposit pricing and flows, competition, real-estate values, CRE concentration scrutiny, acquisition integration, and fair-value estimates for acquired assets as factors that could affect results.
- Interest-rate sensitivity modeling estimated that a parallel 100-basis-point rate increase would raise next-12-month net interest income by 5.0%, while a 100-basis-point decrease would reduce it by 4.9%. These are model estimates, depend on assumptions, and are not forecasts.
- Credit risks include rising delinquencies and non-accrual loans, economic and interest-rate pressures, and exposure to multifamily and commercial real estate. Of the multifamily portfolio, $21.8 billion was secured by New York State properties subject to rent regulation. The filing reported $3.4 billion of office CRE loans, with no non-performing loans or recent charge-offs in that segment at quarter-end.
- Uninsured deposits and acquisition-related uncertainty remain important monitoring areas. The FDIC and company were still discussing settlement items, and acquisition fair values remained subject to adjustment. The company had no loss-sharing arrangement with the FDIC for Signature.
- The Bank committed to obtain prior OCC written non-objection before paying dividends for two years after the Signature transaction. The filing also states OCC approval is required for Bank dividends to the parent through at least November 1, 2024. The parent declared a $0.17-per-share common dividend on July 25, payable August 17, 2023.
- Management said disclosure controls were effective and that acquired Signature operations had been incorporated into oversight and monitoring processes. The filing highlights cybersecurity and service-interruption risks, including risks involving third-party providers. Ordinary-course legal matters were described as immaterial in aggregate.
Important facts for investors to verify
- How much of earnings excluding the Signature bargain purchase gain and acquisition-related costs reflects sustainable operating performance.
- Whether the $37.7 billion of ready liquidity remains available and sufficient as uninsured deposit balances and funding needs change.
- Subsequent trends in deposit retention, deposit costs, brokered funding, and net interest margin.
- Changes in delinquencies, non-accrual loans, credit-loss provisions, and collateral values—particularly in multifamily, office CRE, and acquired portfolios.
- Final Signature transaction settlement and purchase-accounting adjustments, including any resulting FDIC payment or revised acquired-asset values.
- Regulatory capital and dividend constraints, and the realization of expected acquisition integration benefits and costs.