FLAGSTAR BANK, NATIONAL ASSOCIATION quarterly report, Q3 FY2018

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SEC Filing Summary

Filing identity: The supplied filing is New York Community Bancorp, Inc.’s consolidated Form 10-Q, not a filing by Flagstar Bank, National Association. The summary below reflects the filing text provided.

Business context and reporting period

The report covers the quarter and nine months ended September 30, 2018. New York Community Bancorp is the holding company for New York Community Bank and New York Commercial Bank, with a concentrated lending business in multifamily and commercial real estate and a growing commercial and industrial portfolio. The company reported $51.2 billion of assets at quarter-end.

Financial performance and position

  • Third-quarter earnings: Net income was $106.8 million, down 3.3% year over year and 0.5% from the prior quarter. Net income available to common shareholders was $98.6 million; diluted EPS was $0.20, versus $0.21 a year earlier.
  • Nine-month earnings: Net income was $320.7 million, down 2.7% year over year; common-shareholder income was $296.1 million and diluted EPS was $0.60, down from $0.64.
  • Interest income and margins: Third-quarter interest income was $425.1 million and net interest income was $249.5 million, down 9.7% year over year. Net interest margin fell to 2.16% from 2.53% a year earlier and 2.33% in the preceding quarter. Management attributed pressure mainly to higher funding costs and lower loan prepayment income. Nine-month net interest income was $783.8 million, down 8.8%, and margin was 2.30%, down 33 basis points year over year.
  • Other income and expenses: Third-quarter non-interest income was $22.9 million, compared with $108.9 million a year earlier, when results included an $82.0 million gain on the sale of covered loans and mortgage banking operations. Third-quarter non-interest expense was $134.4 million, down 17.1% year over year. The nine-month expense total fell 16.5% to $411.7 million, reflecting the mortgage-banking exit and cost reductions. The nine-month effective tax rate was 24.56%, versus 37.00% in 2017, primarily reflecting tax reform.
  • Balance sheet: Assets were $51.2 billion, up 4% from year-end 2017. Loans held for investment were $39.8 billion, up about $1.4 billion; deposits were $30.3 billion, up $1.2 billion; and securities were $4.8 billion, up $1.3 billion. Cash and cash equivalents were $1.7 billion, down from $2.5 billion at year-end.
  • Funding and debt: Borrowed funds totaled $13.8 billion, including $13.3 billion of Federal Home Loan Bank advances. Certificates of deposit were $11.4 billion, or 37.6% of deposits; $8.8 billion of CDs were due within one year. Deposit growth was driven mainly by CDs.
  • Cash flow: For the first nine months, operating activities provided $219.9 million; investing activities used $2.9 billion, largely reflecting loan growth and securities purchases; financing activities provided $1.9 billion. Cash declined $796.4 million to $1.7 billion.
  • Capital and liquidity: Total stockholders’ equity was $6.8 billion. The consolidated company reported common equity tier 1 of 11.07%, total risk-based capital of 13.90%, and leverage capital of 9.26%, above stated minimums. Tangible common equity to tangible assets was 7.90%. Available FHLB borrowing capacity was $7.2 billion; the banks also had access to the Federal Reserve discount window, with no borrowings outstanding there.

Material changes versus comparable periods

  • Loan growth, particularly multifamily and C&I, and reinvestment of excess cash into securities expanded the balance sheet. Multifamily loans reached $29.5 billion; total C&I loans reached $2.3 billion. CRE loans declined to $7.0 billion.
  • Funding costs rose faster than asset yields: third-quarter cost of funds increased to 1.70% from 1.21% a year earlier, while the average yield on interest-earning assets was 3.67%, versus 3.59%. This compressed spread and margin.
  • Credit metrics improved from the prior year: non-performing assets were $67.8 million, or 0.13% of assets, versus $84.7 million, or 0.17%, a year earlier. Third-quarter net charge-offs were $2.2 million, compared with $40.4 million a year earlier.
  • Year-to-date common earnings were lower despite reduced expenses and taxes, reflecting weaker net interest income and the absence of the prior-year sale-related gain. Preferred dividends were $24.6 million in the first nine months of 2018, versus $16.4 million in 2017.

Outlook, commentary, risks, and unusual items

  • No quantified earnings or revenue guidance is provided. Management said expense reductions kept the company on track to meet its 2018 expense-reduction goals, but the filing does not state a specific target.
  • Management resumed organic balance-sheet growth after the SIFI threshold was raised to $250 billion, and continued shifting excess cash into higher-yielding securities. It cited rising short-term funding costs and lower prepayments as pressures on margin.
  • Interest-rate sensitivity models estimated that parallel rate increases of 100 and 200 basis points would reduce next-12-month net interest income by 3.99% and 7.43%, respectively, and reduce net portfolio value by 6.74% and 13.29%. These are model estimates, not forecasts, and depend on assumptions about rates, prepayments, and deposit behavior.
  • Credit and concentration risks include the portfolio’s heavy real-estate exposure and geographic concentration: 64.5% of multifamily loans and 67.5% of CRE loans were secured by New York City properties. Multifamily, non-owner-occupied CRE, and ADC loans represented 756.8% of the banks’ total risk-based capital, below an agreed 850% limit.
  • Taxi medallion-related loans were $80.7 million; $41.3 million were non-accrual. Repossessed taxi medallions totaled $8.6 million. Management identified economic conditions, real-estate values, interest rates, deposit flows, regulation, technology, and litigation as risks. It said risk factors were unchanged from the 2017 Form 10-K; ordinary-course legal proceedings were considered immaterial in aggregate.
  • Subsequent events: regulatory approval to merge the two bank subsidiaries was received October 1, with closing expected in the fourth quarter of 2018. The company announced a $300 million common-share repurchase authorization, intended to be funded with a like amount of subordinated notes. It completed a $300 million fixed-to-floating subordinated-note offering on November 6, 2018, initially bearing 5.90% interest through November 2023.
  • Unrealized losses on available-for-sale securities increased and contributed to accumulated other comprehensive loss of $91.1 million, versus $15.2 million at year-end 2017. Management attributed most security losses to interest rates and spread volatility, but noted that adverse credit or market developments could lead to future impairment losses. The allowance for loan losses was $159.7 million, or 0.40% of loans.

Important facts for investors to verify

  • Confirm the issuer: the supplied document is New York Community Bancorp, Inc.’s 10-Q, not Flagstar Bank, National Association’s filing.
  • Track net interest margin, deposit pricing and mix, CD maturities, and reliance on FHLB borrowings as growth continues.
  • Review multifamily and CRE concentration, New York property-market conditions, and taxi medallion loan and repossessed-asset exposure.
  • Assess the assumptions and eventual impact of the expected-credit-loss accounting standard, which management said could materially affect the balance sheet and results.
  • Verify execution and funding of the $300 million repurchase program, the subordinated notes’ future floating-rate terms, and completion of the bank-subsidiary merger.