Filing identity and reporting period
Important mismatch: The supplied filing is New York Community Bancorp, Inc.’s Form 10-Q for the quarter ended September 30, 2013—not a filing by Flagstar Bank, National Association. The figures below summarize the filing text provided and should not be attributed to Flagstar.
New York Community Bancorp was the holding company for New York Community Bank and New York Commercial Bank, operating across Metro New York, New Jersey, Ohio, Florida, and Arizona. The filing reports unaudited results for Q3 and the nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. Dollar amounts below are in millions unless otherwise stated.
Financial results and position
- Q3 earnings: Net income was $114.2 million, or $0.26 per diluted share, versus $128.8 million, or $0.29, in Q3 2012. Nine-month net income was $355.4 million, or $0.80 per diluted share, compared with $378.3 million, or $0.86, in 2012.
- Interest income and margin: Q3 net interest income was $294.2 million, up $9.3 million year over year but down $5.7 million sequentially. Net interest margin was 3.04%, versus 3.17% a year earlier and 3.15% in Q2. For the first nine months, net interest income was $869.3 million versus $870.0 million; margin was 3.05% versus 3.23%.
- Other income and expenses: Q3 non-interest income was $50.7 million, down 37.9% year over year, primarily reflecting lower mortgage banking income ($16.2 million versus $52.6 million). Nine-month non-interest income fell to $180.0 million from $241.9 million. Q3 non-interest expense was $150.3 million versus $153.3 million; nine-month expense was $458.1 million versus $458.9 million.
- Credit costs: Q3 provisions were $5.0 million on non-covered loans and $9.5 million on covered loans. Nine-month provisions were $15.0 million and $18.6 million, respectively. The covered-loan provision was largely offset by $14.9 million of FDIC indemnification income for the nine-month period.
- Assets and lending: Total assets were $45.8 billion, up $1.6 billion from year-end 2012. Net loans were $32.1 billion; non-covered loans held for investment grew 6.9% to $29.2 billion, led by multifamily lending. Securities increased to $7.1 billion. Loans held for sale declined to $281.3 million from $1.2 billion.
- Asset quality: Non-performing non-covered loans fell to $124.4 million, or 0.43% of those loans, from $261.3 million, or 0.96%, at year-end. Non-performing non-covered assets were $196.9 million, or 0.46% of non-covered assets. Nine-month net charge-offs were $14.6 million, or 0.05% of average loans on a non-annualized basis. Separately, $238.6 million of covered loans were at least 90 days past due but treated as performing under the acquired-loan accounting method.
- Funding and liquidity: Deposits were $25.3 billion, up $431.8 million; borrowed funds were $14.6 billion, up $1.1 billion. Cash and cash equivalents were $1.25 billion, down from $2.43 billion at year-end. Nine-month operating cash flow was $1.33 billion, investing cash outflow was $3.74 billion, and financing cash flow was $1.23 billion. Available FHLB-NY borrowing capacity was $5.5 billion; the filing also reported up to $853.1 million of Federal Reserve discount-window capacity against pledged collateral.
- Capital and dividends: Stockholders’ equity was $5.70 billion, or 12.45% of assets; tangible equity to tangible assets was 7.48%. Consolidated total risk-based capital was 13.80%, and the banks exceeded their stated “well capitalized” thresholds. The company paid $0.75 per share in dividends during the first nine months and declared a further $0.25 quarterly dividend in October.
Material changes and management commentary
- Management attributed lower earnings chiefly to the sharp decline in residential mortgage refinancing and mortgage banking production as mortgage rates rose. Nine-month mortgage banking income fell $80.5 million year over year.
- Multifamily loan originations increased: $5.6 billion in the first nine months, up 39.7% year over year. Management said it shifted emphasis toward multifamily production; CRE production declined. The portfolio remained concentrated in multifamily and commercial real estate, largely in New York City.
- Prepayment penalty income supported interest income: $39.6 million in Q3 and $103.9 million in the first nine months, versus $31.5 million and $81.1 million in the comparable 2012 periods.
- Management reported that $6.6 billion of wholesale borrowings had been repositioned, reducing their weighted-average cost by 113 basis points and extending average call and maturity dates by about five years. Wholesale funding nevertheless increased overall during the period.
- Reported non-covered asset quality improved, but covered-loan credit estimates, FDIC loss-sharing recoveries, and the value of collateral remain relevant to assessing underlying risk. The FDIC loss-share receivable was $516.0 million, down from $566.5 million at year-end.
Outlook, risks, and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management expected mortgage banking income to remain subdued unless residential mortgage rates declined or stabilized; it also described continued multifamily lending and monitoring of interest-rate exposure.
- Interest-rate exposure: The one-year interest-rate gap was negative 12.14%, compared with negative 3.69% at year-end. Model estimates indicated that a 100- or 200-basis-point rate increase could reduce next-12-month net interest income by 2.43% or 4.66%, respectively; estimated net portfolio value fell 6.10% and 11.76% under those shocks. These are model-based estimates, not forecasts.
- Key credit and market risks: Management identified sensitivity to economic and real-estate conditions, property values and vacancies, interest rates and prepayments, deposit flows and wholesale funding access, securities valuations and potential impairment, and the performance of covered loans and FDIC loss-sharing arrangements. The multifamily/CRE portfolio’s geographic and property-type concentration is also material.
- Contingencies: The mortgage representation-and-warranty reserve was $8.8 million. Fourteen GSE repurchase requests totaling $3.7 million remained outstanding at September 30; management said reasonably possible losses beyond the reserve were not material. Legal actions in the ordinary course were described as immaterial in aggregate. The filing reported no material changes to its previously disclosed risk factors.
- Unusual disclosure to verify: The discussion of nine-month compensation expense refers to “$6.0 billion of retirement and severance charges” recorded in Q1. That amount appears inconsistent with the scale of the reported expenses; the filing text does not provide a clear, internally consistent value.
- Regulatory change: Basel III rules were scheduled to become effective beginning in 2015, with phased implementation. Management stated it expected the company and banks to meet fully phased-in requirements based on September 2013 data.
Most important facts for investors to verify
- Confirm the issuer: the supplied document is New York Community Bancorp’s 10-Q, not a Flagstar Bank filing.
- Verify the “$6.0 billion” retirement and severance charge reference against the original filing; do not assume the intended amount.
- Review the sustainability of earnings given lower mortgage banking revenue, declining net interest margin, and material dependence on prepayment penalties.
- Assess credit quality beyond non-covered loan metrics, including past-due covered loans, covered-loan provisions, FDIC reimbursements, and loss-share receivable assumptions.
- Evaluate funding and interest-rate sensitivity, including higher wholesale borrowings, the negative one-year gap, and the modeled impact of rising rates.
- Review capital definitions and Basel III effects, particularly the treatment of mortgage servicing rights, deferred tax assets, accumulated other comprehensive income, and trust preferred securities.