Business context and reporting period
This is New York Community Bancorp, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The request metadata names Flagstar Bank, National Association, but the filing itself is for New York Community Bancorp, Inc. (NYSE: NYCB), the holding company for New York Community Bank and New York Commercial Bank.
The company operates a regional banking business with 253 branches. Its loan portfolio is concentrated in multi-family and commercial real estate lending, particularly in New York. Amounts below are U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial and operating performance
| Metric | Q2 2018 | Comparison |
|---|---|---|
| Net interest income | $264.0 | Down $23.8 year over year; down $6.3 from Q1 |
| Net interest margin | 2.33% | Down 32 basis points year over year and 9 basis points sequentially |
| Net income | $107.4 | Down 7% year over year; up 1% sequentially |
| Net income available to common shareholders | $99.1 | Down 7% year over year |
| Diluted EPS | $0.20 | $0.22 in Q2 2017; $0.20 in Q1 2018 |
| Non-interest income | $22.7 | Down $27.7 year over year |
| Non-interest expense | $138.1 | Down $25.6 year over year |
For the first six months, net interest income was $534.3 versus $582.7 in 2017; net income was $213.9 versus $219.2; common income was $197.5 versus $211.0; and diluted EPS was $0.40 versus $0.43. Six-month NIM was 2.37%, down from 2.68%.
Interest expense rose faster than interest income: Q2 interest expense increased to $153.4 from $111.3 a year earlier, while interest income rose to $417.3 from $399.1. Management attributed margin pressure primarily to higher funding costs, including higher deposit and borrowing rates. The Q2 efficiency ratio was 48.19%, compared with 47.45% in Q1.
Balance sheet, funding, liquidity, and capital
- At June 30, total assets were $50.47 billion, loans held for investment were $39.42 billion gross ($39.29 billion net), deposits were $29.56 billion, and stockholders’ equity was $6.79 billion.
- Loans held for investment grew $1.1 billion from year-end 2017, led by multi-family and C&I lending. Multi-family loans were $29.21 billion, or 74.1% of held-for-investment loans; CRE loans were $7.15 billion, or 18.2%.
- Deposits increased $453.7 million from year-end. Certificates of deposit rose to $10.31 billion; $7.7 billion, or 74.4% of CDs, were due within one year.
- Borrowed funds totaled $13.79 billion, including $13.23 billion of FHLB advances and $200 million of repurchase agreements. Total borrowed funds increased $880.2 million from year-end.
- Cash and cash equivalents were $2.20 billion, down from $2.53 billion at year-end. The company reported $6.8 billion of available FHLB borrowing capacity and access to Federal Reserve discount-window lines; there were no discount-window borrowings at quarter-end.
- For the six months, operating cash flow was $346.7 million, investing activities used $1.82 billion, and financing activities provided $1.15 billion. Cash declined $323.8 million over the period.
- Consolidated regulatory capital ratios were 11.16% CET1, 12.59% Tier 1 risk-based, 14.03% total risk-based, and 9.41% leverage. Tangible common equity to tangible assets was 8.02%; tangible book value per common share was $7.85.
Material changes versus comparable periods
- Higher funding costs compressed net interest income and NIM despite loan growth and higher asset yields. The average cost of interest-bearing liabilities increased to 1.54% in Q2 from 1.14% a year earlier.
- Q2 loan originations for investment were $2.95 billion, up 58% year over year and 22% sequentially. The multi-family portfolio continued to expand; CRE balances declined from year-end.
- The company redeployed excess cash into securities: available-for-sale securities increased to $4.12 billion from $3.53 billion at year-end, while cash declined.
- Non-interest income comparisons were affected by the 2017 sale of the mortgage banking business, prior-year securities gains, and FDIC indemnification expense. Mortgage banking income was zero in the 2018 quarter and first half.
- Non-interest expense decreased, reflecting the mortgage banking business exit and cost reductions. Q2 included an approximately $1.0 million write-down of repossessed taxi medallions.
- Non-performing loans declined to $56.5 million from $73.7 million at December 31; non-performing assets were $70.7 million. The allowance for loan losses was $160.7 million, or 0.41% of loans and 284.44% of non-performing loans.
Outlook, commentary, and risks
The filing provides no numerical earnings or margin guidance. Management described loan growth, expense reduction, and the reinvestment of excess cash into shorter-duration, variable-rate securities as current priorities. The board declared a $0.17-per-share quarterly common dividend on July 24, payable August 21, 2018.
The May 2018 change in the SIFI asset threshold to $250 billion means NYCB expects to be exempt from DFAST stress testing, CCAR, liquidity coverage ratio requirements, and resolution planning. The company noted it is not affected by every provision of the legislation.
- Credit and concentration: Multi-family, non-owner-occupied CRE, and ADC loans equaled 755.2% of the Banks’ total risk-based capital. Most multi-family and CRE loans are secured by New York properties; repayment depends in part on property income, values, occupancy, and local economic conditions. The portfolio includes rent-regulated apartments.
- Taxi medallions: Taxi medallion-related loans included $43.5 million of non-accrual loans, and repossessed taxi medallions were $9.0 million. Q2 taxi medallion-related net charge-offs were $5.8 million.
- Interest-rate exposure: The modeled impact of a parallel 100-basis-point rate increase was a 4.18% decline in projected 12-month net interest income and a 5.77% decline in net portfolio value. Management cautions that assumptions and actual outcomes may differ.
- Funding and liquidity: Increased wholesale borrowing and CD balances, along with near-term CD maturities, make funding costs and deposit retention important to monitor. The company also uses brokered deposits.
- Accounting and contingencies: Management said adoption of the expected-credit-loss standard (ASU 2016-13, planned for 2020) could materially affect the balance sheet and results. Goodwill was $2.44 billion; no impairment trigger was identified in Q2. Legal proceedings in the ordinary course were described as immaterial in aggregate, and no material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for New York Community Bancorp, Inc., not Flagstar Bank, National Association.
- Track whether loan growth and asset yields can offset continued increases in deposit and wholesale funding costs, and the resulting NIM pressure.
- Review the New York real estate concentration, CRE concentration measure, non-performing loans, allowance coverage, and taxi medallion exposures.
- Assess liquidity and funding mix, including the $7.7 billion of CDs maturing within one year, wholesale borrowings, brokered deposits, and available borrowing capacity.
- Monitor capital ratios and the potential effect of CECL adoption, interest-rate changes, and securities valuation movements.