New York Community Bancorp’s Biggest Weakness

New York Community Bancorp (NYSE: NYCB  ) is an exceptional bank. But that doesn't mean it's perfect in every respect. Its biggest weakness -- or, as a corollary, its biggest opportunity -- concerns its balance sheet, and specifically its source of funds.

A bank is nothing more than a leveraged fund -- albeit one that's heavily regulated and federally insured. A small sliver of capital is leveraged with borrowed money and then the two are used to purchase income-earning assets.

In this way, the prototypical bank is merely an arbiter of interest rates; its profit derives from the difference between its cost of funds and the yield on its earning assets. The objective is to maximize this so-called spread.

There are two levers that can be pulled on to do so. The first is the yield on earning assets. I'll leave this to the side for the time being, with the exception of mentioning one caveat: yield and risk are positively correlated. As a result, there's a limit to how much a prudent bank can depend on its earning asset yield to maximize its interest rate spread.

Alternatively, a bank could seek to minimize its cost of funds. The benefit to this approach is that it has the same impact on the spread as increasing the yield on earning assets, yet it doesn't carry the same degree of risk. And it's here, in turn, where New York Community Bancorp's biggest weakness lies.

Take a look at the following chart. This compares the New York-based bank's total cost of funds to three other banks: Wells Fargo, US Bancorp, and BB&T. See how much more expensive New York Community Bancorp's liabilities are?

The reason for this is twofold. In the first case, it relies on short- and long-term debt to a much greater degree than any of these competitors. Roughly a third, or 34%, of its funding comes from this source as opposed to deposits, the latter of which are considerably cheaper.

On top of this, when you dig into the nature of its deposit franchise, you see that an uncharacteristically small portion consists of noninterest-bearing deposits. Indeed, much of them are in the form of certificates of deposits, which are the most expensive type of all, costing 1.06% compared to the 0.41% that the bank pays on a typical savings account.

The net result is New York Community Bancorp's net interest margin, which measures "how successful a firm's investment decisions are compared to its debt situation," is markedly lower than the lion's share of its competitors.

So, what's the solution? According to New York Community Bancorp, it's to acquire a bank with an established deposit franchise already in place. As CFO Thomas Cangemi noted at a recent industry conference,

We are not a de novo grower of deposits. So historically, if you look at where we started back in 2000, at $3.3 billion in deposits, where we stand today, at $25.6 billion. Most of this is acquisition related.

This is a strategy that's worked for New York Community Bancorp in the past. And, given the continuity of management, there's little reason to conclude that it won't continue to work in the future. It's for this reason, in turn, that the flipside of this bank's greatest weakness really is perhaps its greatest opportunity.

Is this a better income option than NYCB's huge dividend?
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 02, 2014, at 10:43 PM, countryaire wrote:

    Some people that try to write professionally can take any comments as disrespectful. I'm not trying to be disrespectful but what was this guy trying to say? In plain english please. Thank you.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2876183, ~/Articles/ArticleHandler.aspx, 8/30/2015 2:04:16 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:04 PM
NYCB $17.64 Up +0.08 +0.46%
New York Community… CAPS Rating: ****
BBT $37.10 Down -0.13 -0.35%
BB&T Corp CAPS Rating: *****
USB $42.59 Up +0.01 +0.02%
US Bancorp CAPS Rating: ****
WFC $53.54 Down -0.49 -0.91%
Wells Fargo CAPS Rating: *****