Filing scope and business context
Entity mismatch: The supplied filing is New York Community Bancorp, Inc.’s Form 10-K, not a filing for Flagstar Bank, National Association. The figures below describe New York Community Bancorp and its consolidated subsidiaries, including New York Community Bank and New York Commercial Bank.
The report covers the fiscal year ended December 31, 2012; quarterly figures include the three months ended December 31, 2012. The company operated 275 branches across five states. Its core lending businesses were New York-area multifamily and commercial real estate lending and nationwide residential mortgage origination for sale.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Net income | $501.1 million | $480.0 million |
| Diluted earnings per share | $1.13 | $1.09 |
| Net interest income | $1,160.0 million | $1,200.4 million |
| Net interest margin | 3.21% | 3.46% |
| Non-interest income | $297.4 million | $235.3 million |
| Non-interest expense | $613.5 million | $600.7 million |
| Total assets, year-end | $44.1 billion | $42.0 billion |
| Deposits, year-end | $24.9 billion | $22.3 billion |
| Borrowed funds, year-end | $13.4 billion | $14.0 billion |
- Fourth quarter: Net income was $122.8 million, or $0.28 diluted EPS, versus $117.7 million, or $0.27, in Q4 2011. Net interest income was $290.0 million versus $300.3 million; loan-loss provisions were $1.7 million versus $32.7 million.
- Profitability and efficiency: Return on average assets was 1.18%, return on average equity 9.06%, and the efficiency ratio 40.75%, compared with 1.17%, 8.73%, and 40.03%, respectively, in 2011.
- Loan book and credit quality: Loans were $31.8 billion at year-end, including $27.3 billion of non-covered loans held for investment. Multifamily loans were $18.6 billion and CRE loans $7.4 billion. Non-performing non-covered loans declined to $261.3 million, or 0.96% of non-covered loans, from $325.8 million, or 1.28%. Non-covered OREO fell to $29.3 million from $84.6 million. Net charge-offs were $41.3 million, or 0.13% of average loans, versus $100.7 million, or 0.35%, in 2011.
- Reserves: The allowance for non-covered loan losses was $140.9 million, 0.52% of non-covered loans and 53.93% of non-performing non-covered loans. The separate covered-loan allowance was $51.3 million. Covered assets were subject to FDIC loss-sharing agreements, but the filing notes coverage is partial and time-limited.
- Cash flow and liquidity: Operating activities provided $576.0 million; investing activities used $1.7 billion; financing activities provided $1.6 billion. Cash and cash equivalents were $2.4 billion. Available FHLB-NY borrowing capacity was $5.8 billion; the company also reported $426.6 million of available-for-sale securities at the banks and $166.0 million of potential discount-window borrowing capacity at the Community Bank.
- Funding and capital: Wholesale borrowings were $13.1 billion, or 29.6% of assets. Brokered deposits totaled $4.7 billion. Stockholders’ equity was $5.7 billion, or 12.81% of assets; tangible equity was $3.2 billion, or 7.65% of tangible assets. Consolidated total risk-based capital was 14.11%, Tier 1 risk-based capital 13.38%, and leverage capital 8.84%. Both bank subsidiaries were classified as well capitalized.
- Dividends: The company paid $1.00 per common share for 2012, totaling $438.5 million. The board declared a further $0.25 quarterly dividend in January 2013.
Material changes and unusual items
- Net income rose 4.4% year over year, despite a $40.4 million decline in net interest income. Lower asset yields reduced interest income more than lower funding costs reduced interest expense; net interest margin contracted 25 basis points.
- Mortgage banking income increased $98.0 million to $178.6 million as residential mortgage originations for sale grew 51.9% to $10.9 billion. Servicing recorded a $14.6 million loss, partly offsetting origination income.
- Multifamily and CRE prepayment penalty income rose to $120.4 million, adding 33 basis points to net interest margin. A $545.5 million borrower relationship prepaid during Q4 and accounted for $17.9 million of the year’s penalty income.
- Non-covered loan-loss provision declined to $45.0 million from $79.0 million; covered-loan provision was $18.0 million, partly offset by $14.4 million of FDIC indemnification income.
- Deposits increased by $2.6 billion, including deposits assumed from Aurora Bank in June 2012. Year-end deposits from that transaction were $1.3 billion. The company received $24.0 million in connection with the transaction to reduce the cost of the acquired funds.
- The company redeemed $69.2 million of trust preferred securities in December, recording a $2.3 million loss. It repositioned $3.5 billion of wholesale borrowings in late December and a further $2.4 billion in January 2013; management reported a 117-basis-point reduction in the weighted average cost on $6.0 billion of borrowings and an approximately four-year extension of weighted-average call and maturity dates.
- Non-interest expense rose $12.7 million, including increases in general and administrative costs and occupancy expense. Net securities gains fell to $2.0 million from $36.6 million in 2011.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management said available funding was expected to be sufficient for contractual obligations and commitments, while emphasizing that loan production, prepayment penalties, mortgage banking income, and funding costs depend on market conditions.
- Key exposures include interest-rate and refinancing risk, concentrated multifamily and CRE lending in the New York metropolitan region, real estate collateral values and vacancies, deposit competition and brokered-deposit replacement, and wholesale funding access. The one-year interest-rate gap was negative 3.69%; the company estimated that a parallel 100-basis-point rate increase would reduce next-12-month net interest income by 0.93%, and a 200-basis-point increase by 2.27%. These are model estimates, not forecasts.
- Regulatory capital rules were changing. Management estimated that the phase-out of certain trust preferred securities and cumulative preferred stock could reduce capital by $345.1 million, or 9.6%, and lower the Tier 1 leverage ratio by 85 basis points over the phase-in period. Management stated it believed the company would meet proposed Basel III capital requirements if then effective.
- At $44.1 billion of assets, the company was approaching the $50 billion threshold associated with heightened prudential standards under the Dodd-Frank Act. The filing describes potential added stress-testing, capital, liquidity, risk-management, and dividend constraints.
- Other material risks include FDIC loss-share compliance and expiry, mortgage-loan repurchase representations and warranties, valuation of mortgage servicing rights and securities, cyber and operational disruptions, regulatory changes, and potential litigation. The mortgage repurchase reserve was $8.3 million; open GSE repurchase requests at year-end covered 20 loans with a stated balance of $5.1 million. Management considered aggregate legal actions immaterial. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer: this is New York Community Bancorp, Inc., not Flagstar Bank, National Association.
- Review the full audited statements and notes, especially the distinction between covered and non-covered loan performance and the terms and remaining duration of FDIC loss-sharing arrangements.
- Assess the sustainability of earnings given lower net interest margin and the contribution from $120.4 million of prepayment penalties and elevated mortgage origination activity.
- Examine funding concentration, including $4.7 billion of brokered deposits, $13.1 billion of wholesale borrowings, and the timing and terms of the borrowing repositioning completed after year-end.
- Monitor New York-area CRE and multifamily concentrations, troubled debt restructurings, collateral values, and the adequacy of loan-loss allowances.
- Evaluate capital and dividend capacity in light of trust-preferred capital phase-out, proposed regulatory rules, and the potential approach to the $50 billion asset threshold.