Business context and reporting period
Filing identity mismatch: The supplied text is New York Community Bancorp, Inc.’s Form 10-Q for the quarter ended March 31, 2017—not a filing by Flagstar Bank, National Association. The summary below reflects the filing text.
New York Community Bancorp is a bank holding company operating New York Community Bank and New York Commercial Bank. Its business is concentrated in banking, particularly multifamily and commercial real estate lending, with a residential mortgage banking operation. The filing reports results for the three months ended March 31, 2017, compared with the first quarter of 2016; balance-sheet comparisons are primarily to December 31, 2016.
Financial performance and position
- Earnings: Net income available to common shareholders was $104.0 million, or $0.21 per diluted share, versus $129.9 million, or $0.27 per share, in Q1 2016. Pretax income was $164.2 million and income tax expense was $60.2 million.
- Interest income and margins: Net interest income was $294.9 million, down $32.9 million year over year. Net interest margin was 2.71%, versus 2.94%; excluding prepayment income, adjusted margin was 2.60%, versus 2.72% (non-GAAP). Prepayment income declined to $12.1 million from $23.7 million.
- Other income and expenses: Non-interest income was $32.2 million, down $3.1 million year over year. Non-interest expense was $166.9 million, up $8.5 million; compensation and benefits and general and administrative expense were the main stated increases. The efficiency ratio rose to 50.99% from 47.20% in the preceding quarter.
- Loans and credit: Total loans, net, were $39.0 billion, down $334.8 million from year-end. The portfolio remained heavily concentrated in multifamily lending: $27.0 billion, or 72.5% of non-covered loans held for investment. The allowance for non-covered loan losses was $154.5 million; non-covered net charge-offs were $5.6 million, largely related to taxi medallion and related loans.
- Asset quality: Non-performing non-covered assets were $70.4 million, or 0.15% of non-covered assets, compared with $68.1 million, or 0.14%, at year-end. Total non-performing assets including covered assets and non-covered purchased credit-impaired loans were $216.0 million, or 0.44% of assets.
- Deposits, debt, and liquidity: Deposits were $28.7 billion, down $161.4 million from year-end. Borrowed funds were $13.2 billion, down $459.9 million, including $11.4 billion of FHLB advances and $1.5 billion of repurchase agreements. The balance sheet reported cash and cash equivalents of $984.3 million. The MD&A separately cites $771.8 million of “most liquid assets”; the filing text does not clearly reconcile these figures. Available FHLB borrowing capacity was $7.9 billion; there were no FRB discount-window borrowings.
- Cash flow: Operating activities provided $370.1 million and investing activities provided $267.7 million; financing activities used $211.3 million. Cash and cash equivalents increased $426.4 million to $984.3 million during the quarter.
- Capital: A March preferred-stock offering generated $503.1 million net. Consolidated tier 1 risk-based, total risk-based, and leverage ratios were 12.23%, 13.71%, and 9.24%, respectively. Tangible common equity to tangible assets was 7.99%, and tangible book value per common share was $7.58.
Material changes versus comparable periods
- Year-over-year net income fell about 20%, primarily as lower net interest income and higher operating expenses outweighed other income.
- Interest expense increased $8.3 million year over year as deposit costs rose; the average cost of interest-bearing deposits increased to 0.75% from 0.63%. Lower securities balances and lower prepayment income also weighed on interest revenue.
- Management attributed weaker net interest income to higher market rates, lower prepayment income, rising deposit and borrowing costs, and restraint on asset growth.
- Compared with year-end, total assets declined $102.0 million to $48.8 billion. Stockholders’ equity increased $523.4 million, primarily due to the preferred-stock issuance.
- Multifamily and CRE loan participations of $214.9 million were sold during the quarter as part of management’s strategy to keep assets below the SIFI threshold. The company originated $1.7 billion of loans for investment.
Outlook, commentary, and risks
- The filing provides no quantified earnings or revenue guidance. Management said it continued to restrain asset growth and prepare for compliance with current Dodd-Frank requirements.
- Management identified interest-rate movements as a key risk. Its models estimated that an immediate 100-basis-point rate increase would reduce next-12-month net interest income by 3.55%; a 200-basis-point increase would reduce it by 7.81%. A parallel 100- or 200-basis-point increase was estimated to reduce net portfolio value by 1.57% or 10.86%, respectively. These are model estimates, not forecasts.
- Credit risks include concentration in New York multifamily and CRE loans, dependence on property cash flows and real-estate values, and taxi-medallion exposure. Management reported CRE concentration at 745.7% of the Banks’ total risk-based capital, below an agreed 850% limit.
- Covered loans remain subject to management estimates of expected cash flows and FDIC loss-sharing arrangements. At quarter-end, $127.5 million of covered loans were at least 90 days past due but treated as performing under the acquired-loan accounting method.
- Other material sensitivities include mortgage servicing rights valuations, securities impairment, goodwill impairment, and deferred tax asset estimates. The planned 2020 adoption of the expected-credit-loss standard (ASU 2016-13) could materially affect financial position and results; the ultimate impact was not yet determined.
- The company reported ordinary-course legal proceedings that management considered immaterial in aggregate, no material changes to the risk factors in its 2016 Form 10-K, and effective disclosure controls.
Most important facts for an investor to verify
- Confirm the intended issuer: the provided filing is New York Community Bancorp, Inc., not Flagstar Bank, National Association.
- Reconcile the $984.3 million balance-sheet cash and cash equivalents figure with the MD&A’s $771.8 million measure of most liquid assets.
- Track net interest margin, deposit pricing, prepayment income, and actual results against the filing’s modeled interest-rate sensitivities.
- Review trends in taxi-medallion delinquencies and charge-offs, non-performing loans, and the adequacy of loan-loss allowances.
- Assess multifamily and CRE geographic concentration, compliance with the 850% concentration limit, and the pace of management’s asset-growth strategy.
- Monitor capital and liquidity after the preferred offering, including the ability to sustain dividends and access wholesale funding.