Business context and reporting period
Filing identity discrepancy: The supplied filing is New York Community Bancorp, Inc.’s Form 10-Q for the quarter ended June 30, 2016, not a filing by Flagstar Bank, National Association. The summary below describes the filing provided.
New York Community Bancorp is a bank holding company operating New York Community Bank and New York Commercial Bank. Its core lending business is multifamily and commercial real estate lending, alongside commercial lending and residential mortgage banking. Shareholders of NYCB and Astoria Financial approved their proposed merger in April 2016; regulatory approval remained pending at the filing date.
Financial results and position
Amounts below are in U.S. dollars; balance-sheet comparisons are June 30, 2016 versus December 31, 2015 unless noted.
| Metric | Q2 2016 | Comparison |
|---|---|---|
| Net interest income | $325.6 million | Up $40.5 million year over year; down $2.3 million sequentially |
| Net interest margin | 2.99% | 2.64% in Q2 2015; 2.94% in Q1 2016 |
| Non-interest income | $37.4 million | Down $24.5 million year over year |
| Non-interest expense | $160.9 million | Up $9.0 million year over year; includes $1.3 million merger expense |
| Net income | $126.5 million | Up from $123.7 million year over year; below Q1’s $129.9 million |
| Diluted earnings per share | $0.26 | $0.28 in Q2 2015 and $0.27 in Q1 2016 |
- For the six months ended June 30, net interest income was $653.4 million, net income was $256.4 million, and diluted EPS was $0.52, versus $577.9 million, $243.0 million, and $0.55, respectively, in the first half of 2015.
- Six-month non-interest income declined to $72.6 million from $114.1 million, chiefly reflecting lower mortgage banking income, including MSR valuation losses, and the absence of a prior-year OREO sale gain. Six-month non-interest expense rose to $319.4 million from $308.8 million.
- Total assets were $49.0 billion, down $1.3 billion. Net loans were $39.1 billion, up $1.1 billion; securities fell $2.2 billion to $4.0 billion, primarily due to repayments and calls.
- Deposits were $28.9 billion, up $456 million. CDs increased $1.7 billion to $7.0 billion, while savings fell $1.8 billion to $5.8 billion. Borrowed funds declined $1.8 billion to $13.9 billion, largely from paying down FHLB advances.
- Six-month cash flows: operating activities provided $287.7 million; investing activities provided $1.407 billion; financing activities used $1.558 billion. Cash and equivalents ended at $674.3 million.
- Stockholders’ equity was $6.04 billion, or 12.32% of assets; tangible equity was $3.60 billion, or 7.73% of tangible assets. Consolidated regulatory capital ratios included 10.19% CET1, 10.19% Tier 1, 11.68% total risk-based capital, and 7.92% leverage.
- Non-covered non-performing assets were $58.7 million, or 0.12% of non-covered assets; the non-covered loan-loss allowance was $153.1 million, or 0.41% of non-covered loans. Including covered and PCI exposures, non-performing assets were $212.9 million, or 0.43% of assets.
Material changes and management commentary
- Management attributed stronger year-over-year net interest income and margin primarily to the fourth-quarter 2015 refinancing of $10.4 billion of wholesale borrowings, replacing funding averaging 3.16% with funding averaging 1.58%. Q2 interest expense on borrowed funds was down $43.5 million year over year.
- Loan growth continued, particularly in multifamily lending. Non-covered loans held for investment increased $1.0 billion in the first half; multifamily loans were 72.7% of that portfolio. Originations for investment were $2.7 billion in Q2, below the prior-year quarter’s $3.5 billion.
- Management reported strong asset quality and $470,000 of net recoveries on non-covered loans for the first half. However, non-accrual other loans increased, including New York City taxi medallion loans; the filing reports $155.2 million of taxi medallion loans in the portfolio.
- Mortgage banking results were pressured by MSR fair-value changes. MSRs declined to $194.0 million from $247.7 million at year-end; management cited faster prepayment assumptions and interest-rate changes. Q2 mortgage banking income was $7.0 million versus $16.0 million a year earlier.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or revenue guidance is provided. Management cautioned that interest-rate movements, loan prepayments, deposit behavior, market conditions, and mortgage banking volumes can affect results. A 100-basis-point rate increase was modeled to reduce next-12-month net interest income by 3.83%; a 200-basis-point increase by 6.47%. These are scenario estimates, not forecasts.
- The one-year interest-rate gap was negative 18.67%. Management noted that actual outcomes could differ from models due to rates, prepayments, deposit withdrawals, and management actions.
- Liquidity resources included $7.4 billion of available FHLB-NY borrowing capacity and additional Federal Reserve discount-window capacity; no discount-window borrowings were outstanding. CDs of $6.5 billion, or 93.1% of CDs, were due within one year.
- Payment of future parent-company dividends may require regulatory clearance following the prior-year borrowing prepayment charge. The board declared a $0.17-per-share quarterly dividend in July 2016.
- The Astoria merger remained subject to regulatory approval and other closing conditions. Merger-related shareholder litigation was subject to a proposed settlement requiring court approval; the company said it would defend the claims if settlement was not completed. Other ordinary-course legal proceedings were described as immaterial in aggregate.
- Key risks include concentration in New York-area real estate, interest-rate and MSR valuation sensitivity, borrower and collateral performance, funding and deposit competition, merger execution and integration, and regulatory, operational, and cybersecurity risks. The company reported no material change to its previously disclosed risk factors.
- Management identified loan-loss allowances, MSR valuation, securities impairment, goodwill impairment, and deferred-tax-asset valuation as critical accounting areas involving judgment. A new expected-credit-loss accounting standard was under evaluation; adoption was not immediately required.
Important facts for investors to verify
- Confirm the issuer: the filing is for New York Community Bancorp, Inc., not Flagstar Bank, National Association.
- Check the status, regulatory approvals, and remaining litigation conditions for the proposed Astoria merger.
- Assess whether lower non-interest income and MSR fair-value losses persist, and whether the improvement in net interest margin is sustainable.
- Monitor New York real-estate concentrations, taxi medallion exposure, non-accrual trends, and the adequacy of loan-loss allowances.
- Review near-term CD maturities, wholesale funding dependence, dividend regulatory requirements, and interest-rate sensitivity assumptions.