New York Community Bancorp Earnings: 3 Critical Takeaways

Earlier this morning, regional lender New York Community Bancorp (NYSE: NYCB  ) reported earnings for the fourth quarter of 2012. While the bottom line figure came in consistent with estimates, here are three critical takeaways buried in the high-yielding bank's earnings release.

1. Lower provisions fueled the bottom line
If you were to look only at NYCB's bottom line, it'd be hard to conclude that the bank had anything but a solid quarter.

For the three months ended Dec. 31, NYCB earned $122.8 million, or $0.28 per share, compared to $117.7 million, or $0.27 per share, in the year-ago period. Its earnings, in other words, grew a respectable 3.7% -- this is particularly impressive when you consider that the overall economy grew a mere 2.2% for the year, and actually contracted in the fourth quarter.

Once you move away from this figure, however, the numbers don't seem to add up, as both its net interest income and noninterest income were down on a year-over-year basis, and its noninterest expenses were up. What gives?

The answer is that NYCB benefited from a net $31 million swing in loan loss provisions. In the fourth quarter of last year, it set aside $5 million for future loan losses compared to the $20 million that it set aside in the fourth quarter of 2011. This boosted the bottom line by $15 million.

Also, as opposed to setting aside an added $12.7 million in provisions for so-called "covered" loans in the final three months of 2011 – these are partially insured loans acquired by NYCB in a FDIC-arranged transaction -- it recovered a net $3.3 million from the FDIC in the fourth quarter of last year. This equated to a swing of $16 million.

Excluding loan loss provisions, in turn, NYCB's net income would have actually contracted by roughly 4% on a year-over-year basis.

2. Net interest income fell
As I alluded to, NYCB's net interest income declined year over year by $10 million, going from $300 million in the fourth quarter of 2011 down to $290 million last quarter.

Aside from the mere decline, the bad news in this regard is that NYCB's total interest income fell by nearly $20 million thanks to falling interest rates. But the good news is that its total interest expense benefited from the same trend, dropping by roughly $8 million. Expressed in percentage terms, NYCB's net interest margin fell by a staggering 30 basis points on a year-over-year basis, and two basis points compared to the preceding quarter.

If you've been following earnings season thus far, this probably doesn't come as a surprise to you, as many of NYCB's competitors have reported similar trends. Two weeks ago, Wells Fargo (NYSE: WFC  ) , the nation's fourth largest bank by assets and largest mortgage lender, posted a 10-basis-point sequential decrease in its NIM in addition to the 25-basis-point fall that it reported in the third quarter. And last week, US Bancorp (NYSE: USB  ) , the nation's largest regional bank, posted a four-basis-point decline in its NIM.

Indeed, it's been a rare occurrence when banks have bucked this trend. The two that come to mind are Huntington Bancshares (NASDAQ: HBAN  ) and Bank of America (NYSE: BAC  ) . With respect to the former, its NIM expanded in the fourth quarter by three basis points, but as its chief financial officer reminded analysts on the conference call, Huntington presides over one of the lowest yielding securities portfolios in the industry and thus has significantly more flexibility to move the NIM needle. And B of A's, which similarly fell by three basis points sequentially, is a moving target considering the aggressive changes that the nation's second largest bank continues to make to its balance sheet -- click here to read my take on B of A's fourth-quarter earnings.

Getting back to NYCB, there are three important takeaways. First, the New York-based lender took advantage of the low interest rates by refinancing $6 billion of its own wholesale funding. This move, according to CFO Thomas Cangemi, resulted in a 117-basis point decline in the weighted average cost of the funds it repositioned -- though the full impact of this won't be reflected until the end of the current quarter.

Second, long-term interest rates began a considerable ascent during the back half of the fourth quarter. This raised refinancing rates by 50 basis points and, if maintained, will discourage further refinancing activity, which is the primary culprit of the contracting NIMs. The bank's forward guidance accordingly calls for a relatively small additional decline in NIM in the first quarter by three to five points, after which it should purportedly stabilize toward the middle of 2013.

And last but not least, the bank grew its loan book impressively on a year-over-year basis. Loans originated for investment increased 20%, to a near‐record $2.8 billion, and loans originated for sale totaled $3 billion in the fourth quarter, reflecting year‐over‐year growth of 8.4%. It's worth noting, moreover, that the bank entered the first quarter with the largest loan pipeline in its history.

Looking forward as opposed to back, then, NYCB's metrics should turn around sooner rather than later.

3. Impending large accretive transaction
The final point I want to make is that, as I point out in our comprehensive report on NYCB, the bank's executives continue to discuss the likelihood that a "large accretive transaction" will take place in the foreseeable future.

While Cangemi and CEO Joseph Ficalora provided few additional hints in this regard, they did make a couple of critical points. In the first case, they're not looking at small deals. If they do one, which it sounds like they will, it will be large. In the second case, they're also considering "nontraditional" acquisitions, presumably meaning a specialty finance company as opposed to a straight-up bank. And finally, Ficalora was clear that, despite the higher capital requirements that will come from passing the $50 billion threshold, NYCB should be able to continue paying its generous quarterly dividend without interference from regulators.

Want to learn more about NYCB?
A conservative portfolio, quality long-term management, and a huge dividend -- it would seem that there's a lot to like about New York Community Bancorp. But is it really that simple? To help you figure out whether New York Bank is a buy today, I invite you to read our premium research report on the bank. Click here now for instant access!


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