Your investment in a company is fundamentally about that company's future profits. But a critical factor in those future profits in the assets that drive the engine of the company.
In the banking world, the assets that fuel the earnings engine are loans. Yes, there are investment banks that make lots of income on fees, there are banks with significant insurance, trust, wealth management businesses. But in the purest sense, the business of banking is the business of lending.
Take New York Community Bancorp (NYSE:NYCB), for example: 88% of the bank's revenue comes from interest income.
In this case, there is no question: loans rule the roost.
Let's slice and dice the bank's loan portfolio and see exactly what's making this bank run. We'll use the most current available information from the bank's quarterly regulatory filing. For a complete review of New York Community Bancorp, including its valuation, click here.
At the end of the first quarter, the bank had $33.8 billion of loans outstanding. Those loans generated total interest income $415.8 million in the quarter. Overall that's about a 4% yield on the portfolio.
Breaking it down a big further, we can see that the bank's yields by collateral type are spread out about as one would expect. Riskier auto loans are priced higher than low risk Treasuries and other securities. Real estate, leasing, and commercial yields are somewhat comparable.
As we'll find out next, the "All Other Real Estate" category (which includes apartment loans) has an outsized impact on the overall loan portfolios yield because that segment is by far the bank's largest.
Spreading the risk around
The bank's loan portfolio is primarily made up of loans secured by multifamily real estate at 63%. Think apartment buildings. That's followed by commercial real estate in a distant second place at just 22%.
It's clear that the bank is heavily reliant on its multifamily business. It's far and away the largest component of the bank's portfolio and it's a segment that produces stout yields relative to the bank's other loan concentrations.
So what do you get when you buy New York Community Bancorp?
Net loans and leases plus securities (like mortgage backed securities, among others), represent 87% of New York Community Bancorp's assets. If you invest in this bank, you're investing in its ability to maximally turn those assets into profits.
There is an obvious risk we've uncovered in this exercise; the bank is very reliant on the multifamily housing market for both loan volume and loan yield. The bank's consumer products -- mortgages, home equity lines of credit, or auto loans -- all take a back seat to the focus on lending in commercial real estate, which by regulatory definitions includes multifamily.
I've called this bank undervalued, and I still stand by that assessment. However, any investor in New York Community Bancorp should be very comfortable and confident in the future of the rental markets in the bank's footprint.