FLAGSTAR BANK, NATIONAL ASSOCIATION quarterly report, Q2 FY2011

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SEC Filing Summary

Issuer discrepancy: The supplied filing is New York Community Bancorp, Inc.’s Form 10-Q, not a filing by FLAGSTAR BANK, NATIONAL ASSOCIATION. The figures below relate to New York Community Bancorp and its subsidiaries.

Business context and reporting period

Quarterly report for the three and six months ended June 30, 2011, filed August 9, 2011. The company operates community and commercial banking businesses and a residential mortgage banking business, with substantial multifamily and commercial real estate lending in the New York region.

Financial and operating metrics

  • Second-quarter earnings: Net income was $119.5 million and diluted EPS was $0.27, versus $131.4 million and $0.30 in Q2 2010. Pretax income was $182.1 million.
  • Net interest: Net interest income was $301.9 million, up 2.6% year over year. Net interest margin was 3.50%, up 8 basis points year over year but down 8 basis points from Q1 2011. Prepayment penalty income contributed $25.9 million.
  • Other income and expenses: Non-interest income was $58.9 million, down from $72.5 million; mortgage banking income fell to $11.8 million from $39.5 million. Non-interest expense rose to $155.0 million from $141.4 million, including higher FDIC premiums and OREO-related costs.
  • First-half results: Net income was $242.6 million and diluted EPS was $0.55, versus $255.6 million and $0.59 in the first half of 2010. Net interest income increased to $605.2 million; non-interest income declined to $117.5 million and non-interest expense increased to $301.7 million.
  • Balance sheet at June 30: Total assets were $40.6 billion; net loans $28.8 billion; securities $5.7 billion; deposits $21.8 billion; borrowed funds $13.0 billion; and stockholders’ equity $5.6 billion. Since year-end 2010, assets declined $588.1 million, securities increased $880.0 million, and borrowed funds declined $518.8 million.
  • Liquidity and cash flow: Cash and cash equivalents were $710.1 million, down from $1.9 billion at year-end, largely reflecting purchases of securities. For the first half, operating cash flow was $962.5 million, investing cash flow was negative $1.434 billion, and financing cash flow was negative $745.5 million; cash decreased $1.217 billion. CDs of $5.4 billion were due within one year.
  • Credit quality: Non-performing non-covered loans declined to $503.0 million (2.05% of non-covered loans) from $624.4 million at year-end. Non-performing non-covered assets were $559.6 million. The non-covered loan-loss allowance was $134.5 million, or 0.55% of non-covered loans. Covered loans 90 or more days past due were $356.3 million and are subject to FDIC loss-sharing agreements.
  • Capital: Tangible equity to tangible assets was 8.03%; adjusted tangible equity to adjusted tangible assets was 8.15%. Consolidated Tier 1 and total risk-based capital ratios were 13.94% and 14.55%; both subsidiary banks were reported as well-capitalized.

Material changes versus comparable periods

  • Q2 net income declined about 9% year over year, chiefly reflecting sharply lower mortgage banking income, partly offset by higher net interest income and lower non-covered loan-loss provision.
  • Q2 included an $18.1 million securities OTTI loss, $18.7 million net securities gains, a $9.8 million gain on disposition of the insurance premium financing business, and $7.6 million of FDIC indemnification income.
  • Multifamily and commercial real estate loan production supported growth in non-covered loans held for investment, which rose $810.9 million from year-end. Covered loans and loans held for sale declined.
  • Non-performing non-covered loans improved, but other real estate owned increased to $56.6 million from $28.1 million at year-end. First-half net charge-offs were $65.5 million, versus $59.5 million in the first half of 2010.

Outlook, commentary, risks, and unusual items

  • Management provided no formal earnings or financial guidance. It said the new prime jumbo loan activity was not expected to contribute materially to 2011 earnings.
  • Management cited economic uncertainty, high unemployment, declining property values, a flattening yield curve, and weaker mortgage refinancing and purchase activity. It emphasized multifamily and CRE lending, lower deposit costs, and reducing wholesale borrowings.
  • Key risks include deterioration in local real estate and economic conditions, credit losses, interest-rate and prepayment sensitivity, deposit outflows and reliance on wholesale funding, FDIC loss-share performance, securities impairment, and litigation or regulatory changes.
  • The filing disclosed an additional risk following Standard & Poor’s August 5, 2011 downgrade of U.S. sovereign debt and August 8 downgrades of certain agency-related debt. Management said these could affect securities values and funding secured by those instruments.
  • Other items to note: the Dodd-Frank Act is expected to phase out the treatment of trust preferred securities as Tier 1 capital from 2013 through 2016; and $512 million of senior notes mature in December 2011, with another $90 million due in June 2012.

Investor verification priorities

  • Confirm the issuer identity: this filing is for New York Community Bancorp, not Flagstar Bank, National Association.
  • Assess whether improving non-covered delinquency and non-performing loan figures are offset by rising OREO, charge-offs, or further provisioning.
  • Review the sustainability of earnings excluding securities gains, the business-disposition gain, FDIC income, and the securities impairment loss.
  • Verify liquidity and refinancing plans for near-term CD maturities and senior notes, and the sensitivity of funding costs and capital to market changes.
  • Monitor multifamily and CRE concentrations, FDIC-covered loan deterioration and reimbursement assumptions, and the effects of the U.S. and agency debt rating downgrades.