FLAGSTAR BANK, NATIONAL ASSOCIATION quarterly report, Q3 FY2009

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Business context and reporting period

Important entity mismatch: The supplied filing is New York Community Bancorp, Inc.’s consolidated Form 10-Q for the quarter ended September 30, 2009, not a filing by Flagstar Bank, National Association. The figures below describe New York Community Bancorp and its banking subsidiaries; they should not be attributed to Flagstar.

The company is a bank holding company whose loan portfolio is concentrated in multifamily and commercial real estate lending, primarily in the New York metropolitan area. Financial statements are unaudited. The nine-month results are not necessarily indicative of full-year results.

Financial results and position

  • Third-quarter earnings: Net income was $98.6 million, or $0.28 per diluted share, versus $58.1 million, or $0.17 per share, in Q3 2008. Nine-month net income was $243.7 million, or $0.70 per share, compared with a $24.3 million loss, or $0.08 per share, a year earlier.
  • Interest income and margins: Q3 net interest income increased 24.5% year over year to $226.4 million. Net interest margin was 3.17%, up 49 basis points; interest-rate spread was 3.02%, up 54 basis points. For the first nine months, net interest income was $650.9 million, up 37.3%, and margin was 3.04%, up 69 basis points.
  • Credit costs and securities: Q3 provision for loan losses was $15.0 million, versus $0.4 million in Q3 2008; the nine-month provision was $33.0 million, versus $2.1 million. Nine-month OTTI losses recognized in earnings were $53.0 million. The filing reports $13.3 million of Q3 OTTI losses recognized in earnings after applying the non-credit portion to other comprehensive income.
  • Balance sheet: At September 30, total assets were $32.9 billion, loans net of allowance were $22.9 billion, deposits were $14.5 billion, total borrowed funds were $13.9 billion, and stockholders’ equity was $4.34 billion. Total loans increased 3.8% from year-end 2008; securities declined 7.6% to $5.5 billion.
  • Cash flow and liquidity: For the first nine months, operating activities provided $109.2 million, investing activities used $466.2 million, and financing activities provided $307.6 million. Cash and cash equivalents declined $49.4 million to $153.8 million. Available-for-sale securities totaled $813.0 million. CDs of $4.9 billion were due within one year.
  • Capital: Tangible equity to tangible assets was 6.03%, compared with 5.66% at year-end 2008; adjusted tangible equity to adjusted tangible assets was 6.25%, versus 5.94%. Consolidated Tier 1 and total risk-based capital ratios were 11.58% and 12.09%. Both banking subsidiaries were categorized as well capitalized.

Material changes versus comparable periods

  • Q3 earnings improved year over year, principally as lower deposit and funding costs more than offset lower asset yields and higher credit provisions. Average interest-bearing funding cost fell 79 basis points year over year.
  • Asset quality weakened materially: non-performing loans rose to $460.4 million, or 2.00% of loans, from $113.7 million, or 0.51%, at December 31, 2008. Non-performing assets reached $475.7 million, or 1.45% of assets. Loans 30–89 days past due increased to $221.2 million from $102.8 million at year-end.
  • The allowance for loan losses increased to $106.7 million from $94.4 million at year-end, while allowance coverage of non-performing loans fell to 23.17% from 83.00%.
  • Multifamily loans were $16.5 billion, 71.5% of total loans. ADC loans declined to $667.0 million; 12.2% of that portfolio was non-performing.
  • Year-to-date 2008 results included a $285.4 million debt repositioning expense, contributing to the prior-year nine-month net loss; therefore, the year-over-year earnings comparison includes a significant unusual-item effect.

Outlook, commentary, risks, and unusual items

  • Outlook: The filing provides no formal earnings guidance. Management described persistent recessionary pressure in its markets and identified continued unemployment and real-estate weakness as potential sources of further credit deterioration.
  • Credit risks: Management cited rising non-performing loans, charge-offs, and troubled debt restructurings. It emphasized collateral values and conservative underwriting as mitigating factors, but acknowledged future reserve needs could rise with worsening economic or local real-estate conditions.
  • Investment securities: Management reported unrealized losses of $38.9 million on available-for-sale securities and $71.9 million on held-to-maturity securities and stated it did not intend, and was not more likely than not required, to sell the securities before recovery. It warned that issuer, collateral, liquidity, and market deterioration could cause future OTTI.
  • Interest-rate exposure: The one-year gap was negative 3.77%. Model estimates indicated that a parallel 100- or 200-basis-point rate increase would reduce next-12-month net interest income by 1.05% or 2.27%, respectively; estimated net portfolio value would decline 7.16% or 16.55%.
  • Unusual items: Q3 earnings included a $13.3 million tax benefit related primarily to resolution of tax audits and a $5.7 million pre-tax gain on a debt exchange. The exchange extinguished $48.6 million of trust preferred securities and involved issuance of 4.8 million common shares. The quarter also included an $0.8 million FDIC special assessment; the second quarter had included a $14.0 million assessment.
  • Funding and taxes: Subject to FDIC approval, management anticipated prepaying approximately $120 million of 2010–2012 deposit insurance premiums in December 2009. A New York City tax-law change was expected to increase current tax expense by about $2 million in each of 2009 and 2010, with a larger increase beginning in 2011.
  • The board declared a $0.25-per-share quarterly dividend payable November 17, 2009. The filing reported no legal proceedings and no material changes to the risk factors in the 2008 Form 10-K.

Most important facts for investors to verify

  1. Confirm the filing identity: it is New York Community Bancorp, not Flagstar Bank.
  2. Assess the trend and subsequent performance of non-performing loans, past-due loans, charge-offs, and allowance coverage, especially in multifamily, CRE, and ADC portfolios.
  3. Review the composition, valuation assumptions, credit exposure, and later impairment outcomes for securities with unrealized losses and Level 3 valuations.
  4. Separate recurring earnings from the tax-audit benefit, debt-exchange gain, FDIC assessments, and prior-year debt-repositioning charge.
  5. Check whether the anticipated FDIC premium prepayment and deposit maturities affected liquidity, funding costs, or capital after quarter-end.
  6. Review sensitivity to interest-rate changes and confirm reported regulatory capital and dividend capacity at the bank-subsidiary level.