DBRS Ratings on New York Community Bancorp Unchanged after 2Q12 Results – Sr. at BBB (high), Stable

DBRS, Inc. (DBRS) has today commented that its ratings for New York Community Bancorp, Inc. (NYB or the Company), including its BBB (high) Issuer & Senior Debt rating are unchanged following the release of 2Q12 results. The trend on all ratings is Stable. NYB reported net income of $131.2 million for 2Q12, up from $118.3 million for 1Q12 and $119.5 million for 2Q11. The Company’s improved sequential earnings reflected strong mortgage banking activity and higher multifamily loan demand. Specifically, higher QoQ earnings were attributable to a 12.7% increase in revenues, partially offset by a 3.5% increase in noninterest expense. The provision for non-FDIC covered loans remained flat sequentially, due to improving asset quality.

Higher QoQ revenues reflected increased levels of multifamily and residential mortgage refinancings, due to the continuing historic low interest rate environment. Specifically, higher sequential revenues reflected a significant 58.4% increase in noninterest income and a 2.9% increase in net interest income. Higher noninterest income mostly reflected a 65.9% increase in mortgage banking income, and to a far lesser extent, a 29.2% increase in other income. Partially offsetting these tailwinds was a 29.0% decrease in BOLI income and a 3.3% decline in fee income.

The increase in spread income was driven by a 6 bps widening of net interest margin (NIM) to 3.30% and a 1% increase in average earning assets to $35.9 billion. The significant 82% increase in prepayment penalty income contributed 36 bps to NIM compared to 20 bps during 1Q12. Meanwhile loans grew 1%, reflecting growth in multifamily loans (up 2.3%) partially offset by declines in CRE and acquisition, development and construction (ADC) loans.

The Company’s expense base remains well-managed, in DBRS’s opinion, as its broker driven lending platform drives a low cost business model. Indeed, the Company’s low efficiency ratio of 38.1% (Company calculated) is far below that of most other banks. Nonetheless, higher sequential expenses mostly reflected increases in general and administrative (G&A) costs, and occupancy and equipment expense. Most notably, G&A expenses increased 8.4% QoQ, largely attributable to costs associated with managing and disposing of foreclosed properties, as well as an increase in variable mortgage banking expenses.

Asset quality continued to trend positively, reflecting QoQ improvement in nonperforming assets (NPAs, non-covered) and net charge-offs (NCOs). During 2Q12, non-covered NPAs contracted by $68 million, or 18.4%, to $299 million and represented 0.84% of total loans, down from 1.01% in the prior quarter. Positively, the decline in nonperforming loans was broad-based, with the largest decreases seen within the multifamily, CRE, and ADC loan portfolios. Meanwhile, NCOs also declined $1.7 million to $13.9 million during the quarter and represented a low 0.20% of average loans (annualized). Finally, DBRS notes that NYB’s reserve coverage remains modest at 54.7% of nonperforming non-covered loans, yet is acceptable given the modest level of NCOs. At June 30, 2012, NYB’s loan loss reserves (for non-covered loans) of $137.9 million equated to approximately 9.9 times 2Q12 NCOs.

Although the Company’s liquidity profile remains adequate, NYB utilizes a sizable level of wholesale funds, which in general, is a less stable funding source and could potentially raise its funding costs, compress margins and constrain profitability. Positively, the Company strengthened its liquidity profile with deposits growing by 9% to $25 billion, reflecting the Aurora Bank acquisition that closed on June 28, 2012.

Finally, NYB’s capital remains sufficient and provides sound loss absorption capacity at current loss rates. At June 30, 2012, the Company’s tangible common equity ratio remained consistent to the prior quarter at 7.64%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating includes company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 13 October 2006
Most Recent Rating Update: 22 July 2011

For additional information on this rating, please refer to the linking document under Related Research.