Filing identity and reporting period
Important issuer mismatch: The request identifies Flagstar Bank, National Association, but the supplied filing is for New York Community Bancorp, Inc. (NYCB), not Flagstar. This summary describes the supplied NYCB Form 10-Q. It covers the unaudited quarter and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014.
NYCB is a bank holding company with New York Community Bank and New York Commercial Bank subsidiaries. Its business includes a large multifamily and commercial real estate lending franchise, deposit-taking, and residential mortgage banking.
Financial results and condition
| Metric | Q3 2015 / September 30, 2015 | Comparable period or prior balance |
|---|---|---|
| Net income | $114.7 million; diluted EPS $0.26 | Q3 2014: $120.3 million and $0.27 per diluted share |
| Nine-month net income | $357.7 million; diluted EPS $0.80 | Nine months 2014: $354.2 million and $0.80 per diluted share |
| Net interest income | Q3: $279.4 million; nine months: $857.3 million | Q3 2014: $289.0 million; nine months 2014: $856.7 million |
| Net interest margin | Q3: 2.56%; nine months: 2.63% | Q3 2014: 2.69%; nine months 2014: 2.69% |
| Non-interest income / expense | Q3: $37.6 million / $147.3 million; nine months: $151.7 million / $456.1 million | Q3 2014: $41.3 million / $145.2 million; nine months 2014: $131.1 million / $439.4 million |
| Total assets / stockholders’ equity | $49.05 billion / $5.83 billion | December 31, 2014: $48.56 billion / $5.78 billion |
| Loans, net | $36.49 billion | December 31, 2014: $35.65 billion |
| Deposits / borrowed funds | $28.28 billion / $14.72 billion | December 31, 2014: $28.33 billion / $14.23 billion |
| Cash and cash equivalents | $585.8 million | December 31, 2014: $564.2 million |
| Non-covered loan allowance | $146.0 million; 0.42% of non-covered loans | December 31, 2014: $139.9 million |
| Capital | Consolidated CET1 10.68%, Tier 1 10.95%, total risk-based 12.33%, leverage 7.61% | Each exceeded stated minimum capital-adequacy requirements |
Cash flow: For the nine months, operating activities provided $273.6 million, investing activities used $363.2 million, and financing activities provided $111.3 million. Cash increased $21.6 million to $585.8 million. Common dividends paid totaled $332.8 million, or $0.75 per share for the period.
Liquidity and funding: Management reported $7.4 billion in available FHLB-NY borrowing capacity and access to Federal Reserve discount-window capacity of up to $1.0 billion for the Community Bank and $152.4 million for the Commercial Bank; neither had discount-window borrowings at quarter-end. Certificates of deposit due within one year totaled $4.6 billion. Wholesale borrowings were 29.3% of total assets, and $5.6 billion were callable within the next 12 months.
Material changes versus comparable periods
- Third-quarter net income declined about 4.6% year over year, while nine-month net income increased about 1.0%. Third-quarter net interest income fell $9.6 million year over year and NIM narrowed 13 basis points.
- Management attributed pressure on quarterly interest income and margin partly to lower prepayment penalty income and the replacement of maturing or repaid assets with lower-yielding loans. Q3 loan prepayment penalty income was $23.1 million, down $2.3 million year over year.
- For the first nine months, net interest income was nearly flat year over year and NIM declined six basis points. Higher average loan balances and prepayment penalty income were offset by lower asset yields and increased interest expense.
- Q3 non-interest income was down $3.7 million year over year, including lower mortgage banking income and higher FDIC indemnification expense. Nine-month non-interest income rose $20.6 million, largely from loan participation-sale gains and other income, including a $7.8 million gain on sale of an OREO property.
- Nine-month non-interest expense increased $16.7 million year over year, primarily due to compensation and benefits, including salary increases, pension costs, payroll taxes, and $4.0 million of first-quarter severance expense.
- Non-performing non-covered loans fell to $55.2 million from $77.0 million at year-end 2014; non-covered OREO fell to $23.6 million from $62.0 million. Total non-performing non-covered assets declined to $78.8 million. The company recorded net recoveries on non-covered loans for the nine-month period.
- Deposits were nearly unchanged overall, but CDs declined $902.7 million while savings, transaction, and non-interest-bearing balances increased. Borrowed funds rose $497.3 million from year-end.
- The securities portfolio declined $336.8 million to $6.76 billion. Held-to-maturity securities had a reported fair value of $6.81 billion versus a carrying amount of $6.60 billion at September 30.
Outlook, management commentary, risks, and unusual items
- Planned wholesale-debt prepayment: After quarter-end, NYCB announced plans to prepay approximately $10 billion of wholesale borrowings in Q4 2015. It expected a one-time after-tax charge of approximately $614 million, with lower funding costs and interest expense, margin expansion, and earnings growth expected from Q1 2016. These are forward-looking expectations, not reported results.
- Equity offering: The company completed a 40.625 million-share offering at $16 per share on November 4, 2015, receiving $630.5 million net. A substantial portion went to a capital contribution to New York Community Bank; the remainder was designated for general corporate purposes, including dividends.
- Dividend outlook: The Board had declared a $0.25-per-share quarterly dividend payable November 18, 2015. Management subsequently expected a $0.17-per-share quarterly dividend beginning in Q1 2016, subject to Board and regulatory approval. Dividends over the next four quarters would require regulatory clearance in light of the planned prepayment charge.
- Astoria transaction: On October 28, 2015, NYCB entered a merger agreement with Astoria Financial, then reporting $15.1 billion of assets, $9.0 billion of deposits, and 87 offices. Astoria shareholders were to receive one NYCB share and $0.50 cash per share. Closing was expected in Q4 2016, subject to regulatory and shareholder approvals and other conditions; NYCB estimated issuing about 101 million shares. Management expected the transaction to take the combined company above the $50 billion asset threshold and bring heightened regulatory requirements.
- Bank subsidiary merger: NYCB had applied to merge New York Commercial Bank into New York Community Bank; the filing said the merger was not expected to affect customers or employees, subject to approvals.
- Interest-rate exposure: The one-year cumulative interest-rate gap was negative 12.51%. Internal simulations estimated that an immediate 100- or 200-basis-point rate increase would reduce next-12-month net interest income by 5.64% or 9.19%, respectively; estimated NPV would decline 2.95% or 8.39%. Management cautioned that these are model-based estimates and actual outcomes may differ.
- Concentrations and credit risks: Multifamily loans were 72.2% of non-covered loans held for investment; 73.5% of multifamily and 72.1% of commercial real estate loans were in New York City. Management cited real estate values, local economic conditions, occupancy and rental trends, borrower repayment capacity, and underwriting assumptions as relevant risks. ADC and commercial real estate lending carry distinct collateral and repayment risks.
- Covered assets and estimates: Covered loans remained subject to FDIC loss-sharing arrangements, but some non-residential Desert Hills loans had become non-covered after the related coverage expired. Covered-loan accounting, FDIC reimbursement estimates, loan-loss allowances, and MSR fair values rely on management assumptions. Q3 covered-loan recoveries were substantially offset by FDIC indemnification expense.
- Mortgage servicing and contingencies: Residential MSRs were valued using significant unobservable assumptions. The company reported an $8.2 million reserve for mortgage-sale representations and warranties. It disclosed ordinary-course legal proceedings that management considered immaterial in aggregate.
- Other disclosed items: Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated that there were no goodwill impairment triggering events identified in the first nine months of 2015.
Most important facts for investors to verify
- Confirm the issuer: the supplied filing is NYCB’s 10-Q, not a Flagstar Bank filing.
- Review the actual Q4 2015 cost, timing, and completion of the planned approximately $10 billion wholesale-borrowing prepayment and compare it with the estimated $614 million after-tax charge and projected savings.
- Verify the final proceeds and use of the November stock offering, the resulting dilution, and any effect on capital and dividend capacity.
- Track Astoria merger approvals, expected share issuance, integration costs and benefits, and implications of crossing the $50 billion regulatory threshold.
- Assess whether the anticipated $0.17 dividend was approved and paid, and whether regulatory restrictions or capital needs changed the plan.
- Monitor NIM, prepayment penalty income, funding costs, deposit retention and CD maturities, callable borrowings, and interest-rate sensitivity.
- Check whether credit quality, allowance adequacy, New York real estate concentration, covered-loan recoveries, and MSR valuations remain consistent with management’s assumptions.