Pinning down what the typical investor knows and doesn't know is easier said than done. On one hand, they're given far too little credit, sometimes even referred to as muppets, by the practitioners of finance. Yet on the other, they're given for too much credit by economists in ivory towers who assume that market participants known everything and act rationally at all times. Needless to say, it seems that reality probably lies somewhere in between.
What investors may not know about NYCB
This brings me to the one thing that I believe investors are most likely to miss about New York Community Bancshares (NYSE:NYCB). When you mention NYCB to someone that follows bank stocks, there are any number of things that would likely come to their mind. The most obvious is its massive 8% dividend yield. I mean, think about it: It's pretty hard to miss a yield like that when 3% is considered generous nowadays.
Or how about the fact that while NYCB is commonly referred to as a regional bank, virtually its entire portfolio of loans is collateralized by rent-controlled, multifamily apartment buildings situated in one of New York City's five boroughs: Manhattan, Brooklyn, the Bronx, Queens, and Staten Island. Not only is this unique, but it's also earned the bank's CEO Joseph Ficalora unwelcome attention. "He's a banker to the slumlords" said an attorney at Legal Services NYC-Bronx.
Or consider the fact that it was one of the few large lenders to both refuse TARP funds and steer almost completely clear of the subprime siren song that preceded the financial crisis. According to Ficalora, NYCB turned down $600 million in TARP funds in 2009 and instead raised $1 billion in capital from private investors. Despite the financial crisis, moreover, it never once reported an annual loss on its income statement over the last few years. And through a series of shrewd acquisitions, NYCB has grown its balance sheet by nearly 50% since 2007.
But like I said above, while the last two points may be a bit more nuanced than NYCB's blaringly obvious dividend yield, they are nevertheless not unknown aspects of the New York City-based lender. For something that's less commonly appreciated, but nevertheless massively important, I was thus forced to delve into the depths of the lender's financial statements. And what I found could very well dictate the bank's storyline over the foreseeable future.
Before getting to that, however, let's briefly revisit the nature of banking itself. Fundamentally, a bank is nothing more than a highly leveraged investment fund not unlike, say, a hedge fund. The principal differences being that banks are highly regulated, while hedge funds are not, and that banks have access to ridiculously cheap capital in the form of deposits, while hedge funds must borrow at higher rates from wholesale creditors. Consequently, a bank that's burdened by the former but doesn't fully benefit from the latter has considerable room to grow its bottom line. And herein lies the one thing most investors are likely overlooking when it comes to NYCB.
Take a glance at NYCB's most recent balance sheet, and you'll see what I mean. Out of $38.4 billion in liabilities, $24.5 billion are classified as deposits at an average annualized cost during the third quarter of 0.64%, and $13.2 billion are classified as wholesale borrowings at an average annualized cost of 3.78%. As you can see, the latter are six times more expensive than the former!
There are two ways to appreciate the significance of this. First, NYCB's net interest margin of 3.23% is markedly lower than many of its competitors. Comparable figures at US Bank (NYSE:USB), M&T Bank (NYSE:MTB), and BB&T (NYSE:TFC) come in at 3.59%, 3.77%, and 3.94%, respectively. And second, on a strictly dollars-and-cents basis, the extra roughly 3% that NYCB pays in interest expense on that $13.2 billion equates to approximately $100 million in forgone net interest income every quarter.
To bring the story full circle, in turn, the one thing investors are likely to miss about NYCB is its need to increase its deposit base quickly and in a major way. By doing so, the bank could free up a significant amount of revenue, which could then be passed on to shareholders via even larger dividends.