FLAGSTAR BANK, NATIONAL ASSOCIATION quarterly report, Q2 FY2013

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Filing summary

Important identification note: The supplied filing is New York Community Bancorp, Inc. (NYSE: NYCB), not Flagstar Bank, National Association. This summary reflects the filing text provided: NYCB’s unaudited Form 10-Q for the quarter ended June 30, 2013. Unless noted, amounts are in U.S. dollars.

Business context and reporting period

NYCB is a bank holding company with New York Community Bank and New York Commercial Bank subsidiaries. At June 30, 2013, it reported $44.2 billion in assets, 274 branches, and operations across Metro New York, New Jersey, Ohio, Florida, and Arizona. Its lending is concentrated in multifamily and commercial real estate, alongside a nationwide residential mortgage origination-and-sale business.

Financial results and key metrics

  • Second-quarter earnings: Net income was $122.5 million, or $0.28 per diluted share, versus $131.2 million, or $0.30, in Q2 2012. Net income increased from $118.7 million in Q1 2013.
  • Revenue and margins: Net interest income was $299.9 million, up $3.2 million year over year. Net interest margin was 3.15%, up from 2.95% sequentially but down from 3.30% a year earlier. Prepayment penalties contributed $44.4 million to Q2 interest income, a record quarterly level reported by management. Total non-interest income was $53.7 million, down from $98.2 million in Q2 2012.
  • Expenses and credit costs: Non-interest expense was $151.7 million, down $3.8 million year over year. Q2 provisions were $5.0 million for non-covered loans and $4.6 million for covered loans. Net charge-offs were $4.7 million, or 0.01% of average loans on a non-annualized basis.
  • First-half results: Net income was $241.2 million, or $0.55 per diluted share, versus $249.5 million, or $0.56, in the first half of 2012. Net interest income was $575.1 million and net interest margin was 3.05%, compared with $585.1 million and 3.27%, respectively, a year earlier.
  • Balance sheet and funding: Total assets were $44.2 billion, broadly unchanged from year-end 2012. Net loans were $31.6 billion; securities were $5.9 billion. Deposits rose $410.3 million to $25.3 billion, while borrowed funds declined $438.2 million to $13.0 billion. Cash and cash equivalents fell to $1.32 billion from $2.43 billion at year-end.
  • Cash flow: For the first half, operating activities provided $658.8 million, investing activities used $1.51 billion, and financing activities used $251.7 million. Cash and cash equivalents declined by $1.11 billion.
  • Capital and liquidity: Stockholders’ equity was $5.69 billion, or 12.87% of assets. Tangible equity to tangible assets was 7.74% (a non-GAAP measure); adjusted tangible equity to adjusted tangible assets was 7.87%. The company and both banks reported capital ratios above applicable minimums. Management reported $6.7 billion of available FHLB-NY borrowing capacity.

Material changes versus comparable periods

  • Q2 net income declined year over year despite slightly higher net interest income, primarily as mortgage banking income fell $35.1 million to $23.2 million when rising mortgage rates reduced refinancing activity. First-half mortgage banking income declined $44.2 million year over year.
  • Higher Q2 prepayment penalties supported net interest income and the sequential margin improvement. For the first half, however, lower asset yields outweighed growth in average interest-earning assets, and margin declined year over year.
  • Lower funding costs partly offset lower asset yields: Q2 average cost of funds was 1.56%, versus 1.90% a year earlier, supported by wholesale borrowing repositioning. The company said it had repositioned $6.6 billion of borrowings, reducing their weighted average cost by 113 basis points and extending average call and maturity dates by about five years.
  • Non-performing non-covered loans fell to $167.1 million from $261.3 million at year-end; the ratio to non-covered loans improved to 0.60% from 0.96%. Total non-performing assets, including covered assets, were $558.5 million, down from $648.3 million.
  • Non-covered loans held for investment increased $764.5 million from year-end to $28.0 billion, with multifamily loans comprising 68.5% of that portfolio. Covered loans declined to $3.0 billion from $3.3 billion.

Outlook, commentary, risks, and unusual items

  • Outlook: The filing gives no quantified earnings or revenue guidance. Management said mortgage banking income is expected to remain its largest non-interest income source, but emphasized that it can vary with interest rates, refinancing, competition, and loan demand. Management also noted that economic improvement in the company’s markets remained slow and mixed.
  • Interest-rate exposure: The one-year interest-rate sensitivity gap was negative 7.53%, compared with negative 3.69% at year-end. The company’s models estimated that a 100- or 200-basis-point rate increase would reduce next-12-month net interest income by 1.94% or 3.72%, respectively. These are model estimates, not forecasts, and depend on assumptions about repricing, prepayments, and deposit behavior.
  • Credit and concentration risks: Multifamily and CRE lending is concentrated in the New York region and depends in part on property income and real estate conditions. Management cited risks from local economic weakness, property values, vacancies, borrower performance, and underwriting estimates. Covered-loan estimates and related FDIC reimbursements also depend on expected cash flows and the loss-sharing agreements.
  • Other risks: The filing identifies market and interest-rate changes, deposit flows and wholesale funding access, regulatory changes, litigation, operational and technology disruption, and mortgage loan repurchase obligations as risks. Management reported no material change to the risk factors in the 2012 Form 10-K. Legal proceedings in the ordinary course were described as immaterial in the aggregate.
  • Unusual and judgment-sensitive items: First-half securities gains were $16.7 million, including $11.6 million from sales of held-to-maturity securities; the filing says those securities were sold after at least 85% of initial principal had been collected. First-quarter securities gains were $16.6 million, versus $0.1 million in Q2. Q1 also included $6.0 million of retirement and severance expense. The filing highlights estimates for loan-loss allowances, mortgage servicing rights, securities impairment, goodwill, and deferred tax assets as significant areas of judgment.
  • Dividends and regulation: The board declared a $0.25-per-share quarterly dividend payable August 16, 2013. Basel III capital rules issued in July 2013 were scheduled to take effect beginning in 2015, with phased implementation; management said the company and banks expected to meet fully phased-in requirements based on June 2013 data.

Most important facts for investors to verify

  • Confirm the filing identity: this is NYCB’s 10-Q, not a Flagstar Bank filing.
  • Assess how much earnings and net interest margin depend on prepayment penalties, and whether the unusually high Q2 level is sustainable.
  • Track mortgage banking income and production as refinancing activity responds to mortgage-rate changes.
  • Review credit quality trends, including the increase in loans 30–89 days past due, growth in OREO, and the distinction between covered and non-covered problem loans.
  • Examine the assumptions behind covered-loan cash flows, the $531.8 million FDIC loss-share receivable, and future reimbursement expectations.
  • Evaluate liquidity and funding sensitivity, including the decline in cash, brokered deposits, near-term CD maturities, wholesale borrowing costs, and negative one-year gap.
  • Review capital under the Basel III framework, including the potential treatment of mortgage servicing rights and trust preferred securities.