New York Community Bancorp (NYCB)

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Sean Hinton

New York Community Bancorp (NYSE:NYB) provides traditional banking products, like checking and savings accounts, and business loans to customers in the greater NYC metro area. In 2007, NYB earned $728 million in net revenue,^[1] 85% of which came from net interest income earned on its commercial loans. NYB specializes in loans for multi-family (apartment) buildings, which make up 68% of its loan portfolio,^[2] though it also originates and holds commercial loans, construction loans, and a limited number of loans for 1- to 4-family dwellings.

In 2007, NYB made three major acquisitions, adding 55 new branches (an increase of more than 33%).^[3] Like most banks, NYB has benefited from the Fed's 2007-2008 interest rate cuts; it can pay lower rates on customers' deposits while charging borrowers higher, long-term rates, expanding its net interest margin. Unlike most other banks, however, NYB has escaped most of the effects of the economic downturn and sluggish U.S. housing market. NYB specializes in loans collateralized by rent-controlled apartment buildings, which have consistently low vacancy rates; as a result, NYB's customers usually have a steady cash flow to repay their loans. Also, NYB does not originate subprime loans, so it avoided being damaged directly by the 2007-2008 subprime crisis.

Business Overview

After declining in 2005 and 2006, NYB's revenue and net income increased by 11.8% and 19.7%, respectively, in 2007.

Community Bank: Deposits

NYB's Community Bank segment is a consumer bank with 179 locations. It offers products including checking accounts, savings accounts, money market accounts and CDs. At the end of 2007, NYB had $13.2 billion in banking deposits. This was a 5% increase over the 2006 year-end figure of $12.6 billion, and the growth was partially attributed to the acquisitions during 2007 of PennFed, Doral, and Synergy.^[4]

Commercial Bank: Loans

The Commercial Bank segment consists of 38 branches, and like the Community Bank, competes by offering conveniences such as weekend hours, online banking, and 44 ATMs, 35 of which are 24-hour. 95% of NYB's loans are mortgage loans, with an emphasis on multi-family loans (which by themselves make up 68% of NYB's portfolio). The types of loans NYB holds in its portfolio are as follows:

• Multi-family (68%) - Loans secured by buildings that are home to more than 4 families (typically apartment buildings). NYB favors these loans because especially in the rent-controlled buildings that are common in its New York markets, vacancy rates are consistently low. Therefore, there is always enough cash-flow for the owner to pay back the loan. In fact, 2007 was 28th consecutive year without a loss of principal on a multi-family loan.^[3] These loans are generally used to make improvements to the buildings, which let owners charge higher rents from tenants.
• Commercial (19%) - Loans collateralized by commercial real estate, such as office buildings. Approval for these loans is based on the cash-flow of the properties involved, as well as the borrowers credit history and demonstrated skills in property management.^[5]
• Construction (6%) - Loans to build new residential or commercial buildings. Since construction loans are viewed as having higher credit risk than most other loans, NYB typically requires that the buildings being financed are pre-sold or pre-leased.^[5]
• One- to four-family (2%) - Just 2% of NYB's portfolio is made up of one- to four-family residential loans. This is largely due to the fact that while NYB markets these loans through its branches, it typically sells them to other institutions immediately after they close. The loans that are in NYB's portfolio are mostly from NYB's recent acquisitions.^[6]
• Other (5%) - The rest of NYB's loan portfolio consists mostly of commercial and industrial loans to businesses for purposes such as inventory and receivables management, purchases of capital and business expansion. Such loans made up 73% of the 'other loans' category in 2007. The rest ARE home equity and consumer loans, most of which were originated by NYB's acquisitions prior to their becoming part of NYB.^[6]

Trends/Forces

Low interest rates benefit NYB more than other banks.

Between September 2007 and April 2008, the U.S. Federal Reserve cut short-term interest rates from 5.25% to just 2%, and as of August 4, 2008 they were expected to remain at that level.^[7] NYB is particularly sensitive to interest rate changes because, as opposed to other banks that generate a larger percentage of their revenue from banking fees, 85% of NYB's revenue is net interest revenue - only 15% comes from fees.^[1] Low short-term interest rates benefit NYB because they increase NYB's net interest margin, which is the difference between interest it earns on its loans and interest it pays on its deposits. Since the interest rate on loans is relatively constant over long periods of time, while interest on deposits is paid at short-term rates, low short-term rates increase the margin.

NYB's focus on rent-controlled buildings = low vacancy rates

Rent-control and rent-stabilization are government policies that are intended to provide affordable housing by regulating the rent that land lords are able to charge their tenants.^[8] As a result of the policies, rent-regulated buildings have very low vacancy rates; even in harsh economic times, the low-rent apartments are in high demand.^[9] This demand ensures that the owners of these buildings will always have the cash-flow to pay back their loans to NYB. NYB hasn't lost principal in its multi-family loans for 28 consecutive years.^[3]

2007 acquisitions increased NYB's number of branches by 33%

NYB made three acquisitions in 2007 that helped it expand its network of branches, as well as providing new funding in the form of their deposit accounts. The first was that of PennFed in April, which added 24 branches to the Community Bank segment and gave NYB its first presence in parts of central and southern New Jersey.^[10] In July, NYB acquired eleven New York City branches of Doral Bank, expanding its Commercial Bank segment from 27 to 38 branches and providing $370 million of new deposits to use as funding for loans.^[11] Finally, in October, NYB acquired Synergy Financial Group, adding another 20 branches in central New Jersey.^[12] In its Q2 2008 earnings call, NYB declared its openness to making more acquisitions, although it will only pursue opportunities that don't have assets it considers to be too risky.^[13]

Competition/Market Share

The following table shows the distribution of deposits among banks, savings & loans and thrifts in areas served by NYB's Community Bank, including:

• Queens, Richmond, Nassau and Suffolk Counties in New York
• Essex County, Union County and the city of Bayonne in New Jersey.

The total of all bank deposits in these areas is $165.7 billion.^[14]

Note: The figures for deposits, share of deposits, and branches are only for the markets in which NYB operates. They do not reflect the total deposits and branches of competing firms, only those that compete directly with NYB. Revenue and net income figures, however, are for the entire firm.

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} NYB 2007 10-K, page 36
2. ↑ ^{2.0 2.1} NYB 2007 10-K, page 45
3. ↑ ^{3.0 3.1 3.2} NYB 2007 Annual Report, page 1
4. ↑ NYB 2007 10-K, page 8
5. ↑ ^{5.0 5.1} NYB 2007 10-K, page 48
6. ↑ ^{6.0 6.1} NYB 2007 10-K, page 49
7. ↑ AFP: Fed Likely to Keep Rates On Hold Amid Economic Uncertainty - AFP, 8/04/08
8. ↑ Rent Control FAQ - NYC Rent Guidelines Board
9. ↑ NYB 2007 10-K, page 47
10. ↑ NY Community Bancorp to acquire PennFed Financial Services - Long Island Business News, 11/3/06
11. ↑ New York Community Bancorp, Inc. Announces the Acquisition of 11 New York City Branches of Doral Bank, FSB by New York Commercial Bank - Business Wire, 3/15/07
12. ↑ New York Community Bancorp Buys Synergy Financial - BankNet360.com, 5/14/07
13. ↑ NYB 2Q 2008 Earnings Call Transcript - SeekingAlpha.com, 7/23/08
14. ↑ ^{14.0 14.1 14.2 14.3 14.4 14.5 14.6 14.7 14.8 14.9} Deposit Market Share - SNL Financial
15. ↑ JPM 2007 10-K, page 26
16. ↑ COF 2007 10-K, page 26
17. ↑ C 2007 10-K, page 19
18. ↑ AF 2007 10-K, page 39
19. ↑ WM 2007 10-K, page 9
20. ↑ WB 2007 Annual Report, page 51
21. ↑ TD 2007 Annual Report, page 79
22. ↑ Calculated using 12/31/07 exchange rate of 1.01 USD per CAD - x-rates.com
23. ↑ HBC 2007 Annual Report, page 337