FLAGSTAR BANK, NATIONAL ASSOCIATION annual report, FY2009

Business context and reporting period

Entity mismatch: The supplied filing is New York Community Bancorp, Inc.’s Form 10-K, not a filing by Flagstar Bank, National Association. It reports the fiscal year ended December 31, 2009; results include only 27 days of AmTrust operations following the December 4, 2009 FDIC-assisted acquisition.

New York Community Bancorp operated New York Community Bank and New York Commercial Bank, with a primary lending focus on New York metropolitan multifamily and commercial real estate. The AmTrust acquisition expanded its branch network into Florida, Ohio, and Arizona.

Financial results and position

• Revenue and unusual items: Non-interest income was $157.6 million, including a $139.6 million pretax bargain-purchase gain on AmTrust. It also included $96.5 million of OTTI losses recognized in earnings. Management said the net effect of specified gains and charges added $49.3 million after tax, or $0.14 per diluted share.
• Cash flow: Operating activities provided $211.6 million; investing activities provided $3.75 billion, including acquisition-related cash; financing activities used $1.50 billion. Year-end cash and cash equivalents were $2.67 billion, versus $203.2 million at year-end 2008.
• Balance sheet and funding: Total assets were $42.15 billion, up 29.8% year over year. Net loans were $28.27 billion; deposits were $22.32 billion, up 55.2%; and borrowed funds were $14.16 billion. Deposits equaled 52.9% of assets, compared with 44.3% a year earlier.
• Debt and liquidity: Wholesale borrowings totaled $13.08 billion, principally FHLB advances of $8.96 billion and repurchase agreements of $4.13 billion. Available-for-sale securities were $1.52 billion. CDs totaling $7.21 billion—79.6% of year-end CDs—were due within one year. The filing reported substantial cash and funding sources, but future liquidity depends in part on deposit retention, wholesale funding access, and loan and securities cash flows.
• Credit quality: Non-performing loans rose to $578.1 million, or 2.04% of loans, from $113.7 million, or 0.51%. Non-performing assets were $593.3 million, or 1.41% of assets. Net charge-offs increased to $29.9 million, or 0.13% of average loans. The $127.5 million allowance covered 22.05% of non-performing loans and 0.45% of loans.
• Capital and shareholder returns: Stockholders’ equity was $5.37 billion, or 12.73% of assets; tangible equity to tangible assets was 7.13%. Consolidated total risk-based capital was 15.03%, and both banks were categorized as well capitalized. The company raised $864.9 million net in a December common-stock offering, issuing 69 million shares. It paid $1.00 per share in dividends for 2009 and declared a further $0.25 quarterly dividend in January 2010.

Material changes versus the prior comparable period

• Earnings improved sharply from 2008, when a $325.0 million pretax debt-repositioning charge and $104.3 million of OTTI losses materially depressed results. The 2009 comparison also benefits from the AmTrust bargain-purchase gain; reported earnings are not a clean measure of recurring performance.
• Net interest income rose 34.0% and net interest margin expanded 64 basis points, reflecting asset growth, lower funding costs, and a steeper yield curve. Average funding cost fell to 2.65% from 3.65%.
• Asset quality deteriorated materially: non-performing loans increased by $464.4 million, and the allowance increased by $33.1 million after the higher provision and net charge-offs.
• FDIC-related expenses rose to $45.8 million from $4.7 million, including a $14.8 million special assessment. Operating expenses increased to $384.0 million from $320.8 million, partly due to AmTrust and higher FDIC costs.
• AmTrust added $5.0 billion of covered loans, $8.2 billion of deposits, and $4.0 billion in cash and cash equivalents, and expanded the company’s branch footprint. The transaction’s fair-value estimates were preliminary and subject to adjustment.

Outlook, commentary, and risks

The filing provides no specific quantified earnings or revenue guidance. Management identified customer and deposit retention in the acquired AmTrust markets and future acquisition integration as priorities. It expected 2010 expenses to include the full-year impact of AmTrust, alongside potential contributions to interest and non-interest income.

Management cited continued economic weakness, regional unemployment, declining property values, and rising office vacancies as credit risks. Further deterioration could increase delinquencies, charge-offs, loan-loss provisions, and pressure on earnings and capital. Other material exposures include concentrated New York-area multifamily and CRE lending, interest-rate and prepayment risk, dependence on wholesale funding, FDIC loss-sharing compliance and collection, possible securities impairment, integration and customer attrition, regulatory changes and FDIC assessments, and potential repurchases of mortgage loans for documentation or underwriting defects.

The FDIC agreements cover 80% of losses up to $907 million and 95% above that threshold, with corresponding sharing of recoveries; coverage is subject to contractual servicing requirements and time limits. The filing also describes a potential FDIC true-up payment in 2020. KPMG issued unqualified opinions on the financial statements and internal control; the internal-control assessment excluded controls over the acquired AmTrust assets and related income.

Important facts for investors to verify

• Confirm the intended issuer: this document concerns New York Community Bancorp, Inc., not Flagstar Bank, National Association.
• Separate recurring operating earnings from the $139.6 million pretax AmTrust bargain gain, securities impairment charges, and other debt-related gains or charges.
• Review subsequent credit performance of non-covered loans, especially multifamily, CRE, ADC, troubled debt restructurings, and loans past due 30–89 days.
• Track realized losses, recoveries, servicing compliance, remaining coverage periods, and the carrying value of the FDIC loss-share receivable; acquired-loan valuations were preliminary.
• Assess integration progress, deposit retention and repricing, near-term CD maturities, callable borrowings, and the use of acquisition cash.
• Evaluate the effect of the 69 million-share offering on per-share results and the sustainability of the $0.25 quarterly dividend.