Table of Contents:
1. AI-Generated Summary of this Podcast (500 words)
2. AI-Generated Summary of $NYCB’s 4Q results (500 words)
3. Full Podcast Transcript (WhisperAI + editing)AI-Generated Summary of this Podcast (500 words)
New York Community Bancorp's (NYCB) fourth quarter of 2023 results indicate a significant downturn compared to the previous year, with net margins plummeting from 25% to a negative 17% year-over-year for the individual quarter. The primary driver of this decline was NYCB's acquisition of the underperforming Flagstar Bank during the SVB financial crisis, which was part of a Federal Reserve-led initiative to stabilize the sector by having healthier banks take over struggling entities. Consequently, the bank's provision expenses surged — from 18% to negative 38% of interest income, year over year, effectively doubling.
Despite the bleak quarterly performance, NYCB's annual net income as a proportion of interest income actually rose from 31% to 43% year over year, translating into an improved net profit on an annual basis. This anomaly raises questions about the drastic 40% drop in share price based solely on the fourth-quarter results when the annual figures suggest a stronger overall performance.
The financial statements reveal a significant one-time bargain purchase gain of $2.1 billion due to the Flagstar acquisition, which comprises nearly the entirety of the FY23 profits of $2.4 billion. Excluding this non-recurring gain, the results take a darker turn, with normalized net margins dropping markedly from 23% to 4% year over year, a factor that likely contributed to market skittishness.
Analyzing balance sheet figures, NYCB's total equity as a percentage of total assets declined marginally from 11% to 10% year over year, including the additional provisions from the acquisition. However, the bank's interest rate spreads and ratios remained relatively stable, with the interest-earning assets over interest-bearing liabilities ratio improving from 1.15 to 1.39 times. These figures suggest that the bank's balance sheet remains robust with no significant shifts in asset or liability compositions, and therefore, it does not appear to be at going concern risk.
Despite the stable balance sheet, there is a marked decline in normalized return on assets (ROA) and return on equity (ROE), with ROA dropping from 0.8% to 0.2% and ROE from 6.9% to 0.1% year over year. These drops are considerable and, if normalized, could justify the 40% dip in the bank's share price. However, without a deeper dive into the footnotes for additional qualitative assessment, particularly concerning delinquency rates in the commercial real estate sector, one cannot make a definitive statement on going concern risk. Still, preliminary analysis indicates the bank's exposure may lead to continued elevated provision expenses, which could further impact performance.
Overall, NYCB's FY23 presents a mixed picture—headline figures show growth bolstered by one-time gains, but underlying performance metrics are worrying. The bank appears to have adequate capitalization and interest income ratios to withstand immediate concerns, but the normalized profitability metrics reflect an institution that has encountered substantial headwinds post-acquisition. The market's negative reaction to NYCB's 4Q23 performance appears to be a response to both the one-off nature of its profit increase and concerns regarding its future earning potential and asset quality, particularly in commercial real estate.
AI-Generated Summary of $NYCB’s 4Q results + 4Q earnings call (500 words)
The recent precipitous decline in NYCB's share price post-4Q23 results is attributable largely to both its exceptional quarterly underperformance and the acquisition of the undercapitalized Flagstar Bank during the SBB financial crisis. NYCB, previously deemed stable, orchestrated a rescue of Flagstar Bank under Federal Reserve guidance, resulting in a substantial provision increase that severely impacted their quarter-on-quarter performance.
An examination of the 4Q23 results reveals a stark contrast between annual and quarterly performance metrics. While NYCB's full-year net income saw an uptick from 31% to 43% of interest income, the final quarter deviated drastically, with net margins plummeting from a positive 25% to a negative 17% on a year-over-year basis. This downturn is largely due to the aforementioned acquisition and its subsequent provisions, which more than doubled from 18% to a negative 38% of interest income when comparing the individual quarters year-over-year.
The 40% slide in share price reflects market reactions to both the immediate financial strain imposed by the Flagstar acquisition and the broader macroeconomic concerns, particularly regarding the commercial real estate sector. Nevertheless, it's crucial to highlight that NYCB's aggregate annual performance paints a more favorable picture of the bank's financial health.
NYCB's strategic response to these challenges was multi-pronged. It involved a recalibration of capital allocation priorities, including a dividend cut, to bolster capital reserves rapidly. These preemptive measures are geared towards ensuring compliance with Regulation YY as NYCB crosses the $100 billion asset threshold and transitions into a Category IV bank, thereby subject to more rigorous prudential standards. The company's management has underscored its commitment to reinforcing risk management capabilities and liquidity to mitigate going concern risk and secure long-term value enhancement.
Analyzing the balance sheet, one notes a substantial uptick in cash and cash equivalents, reflecting a strategic liquidity build in anticipation of regulatory changes. The significant provisioning for credit losses indicates a cautious approach towards potential future credit deterioration, linked to both organic portfolio growth and the assimilation of Flagstar's portfolio.
Looking ahead, the banking industry's observers will closely scrutinize NYCB's ability to integrate Flagstar effectively, realize synergies, and navigate the challenging interest rate environment. The bank's strategy to pivot towards capital conservation, enhance risk management frameworks, and ensure regulatory alignment will be pivotal in determining its resilience against any forthcoming financial stressors. The full impact of the Flagstar Bank acquisition will continue to unfold over the coming quarters, and it remains to be seen whether this strategic move will yield the anticipated diversification and growth benefits amidst a volatile banking landscape.
In summary, NYCB's fourth quarter of 2023 stands as a stark reminder of the potential volatility inherent in bank acquisitions, especially those conducted under distress situations. The significant provisions taken reflect a conservative stance by management, aiming to shore up the bank's balance sheet amidst heightened scrutiny from both the Federal Reserve and market participants. It will be essential for NYCB to maintain strict risk controls and execute a seamless integration to mitigate going concern risks and capitalize on growth opportunities presented by the acquisition in the longer term.
Full Podcast Transcript (WhisperAI + editing)
Hi guys, this is Aaron from Value Investing Substack. So today we're going to be talking about New York Community Bank, ticker NYCB's roughly 40% drop in share price in markets yesterday. And this came amid other news where the Fed also decided to maintain its current high interest rates. So I'm a value investor. When I see stock prices fall by 40%, it catches my attention. So I thought it was worth a look. And right now I'm looking at a spreadsheet of NYCB's full year to entry results as well as 4Q to entry results. And I'm going to give you a quick walkthrough of what I'm seeing in front of me.
And I'll actually write a full article about it this weekend. So if you want a written version with charts, there's so much I can convey there than over voice in this podcast. If you want a full written article, please subscribe to this newsletter. Check us out for older articles. We wrote about a similar regional bank called EWBC, East West Bancorp, which Li Lu owns about 5% off. So if you are a value investor, you probably know who Li Lu is. He's pretty famous, quite well associated to the late Charlie Munger, and EWBC has gone up by about 40% since I looked at it in August. So could NYCB do it, do it as well? I don't know because I've only looked at this for like an hour. But I want to communicate my findings to you and just give you a sense of whether yesterday's decline in share price by 40% was justified or not. Without further ado, let's dive right into it.
I'm going to be communicating their performance in percentages, for reasons I'll explain soon. But also because, if I describe in numbers on a podcast, one, it's hard to follow, right? Because you're not seeing the numbers in front of you. And if I'm jumping from line item to line item, you might just forget the earlier line item figures. Whereas if I describe them in terms of percentages, it’s a lot easier to hold them in your head. And secondly, it's because percentages are just much easier to make like a like comparison between this year and last year. But if you want the full figures, I'll do it in the article that I'm going to be publishing this weekend. So stay tuned for that.
But for now on the podcast, I think percentages are just the optimal way to describe things. A little bit of context before I dive into this, right? So why did NYCB's share price drop off a cliff yesterday? The reason is because 4Q23 performance dropped off a cliff year over year. It went from 25% net margin to negative 17% net margin on an individual quarter year and year comparison basis.
The reason for this is because NYCB actually acquired Flagstaff Bank, the underperforming Flagstar Bank amidst the SVB Financial crisis, which blew up in March last year. And basically it was a rescue operation orchestrated by the Fed to rescue non-healthy banks by the healthy banks. NYCB was presumably a healthy bank and it acquired the Flagstaff Bank, which was non-healthy. And as a result of this, NYCB management actually made provisions in 4Q, a pretty large provision. Provisions went up from 18% of interest income last year on the individual fourth quarter basis to negative 38% on individual 4Q23 this year. So it's more or less a doubling in provisions on a like for like basis. And that I think is what really caused or contributed to the 40% decline.
On top of fears of the commercial real estate sector being impacted, but that's more on the macro side, which we’ll touch a little bit on later on. But what's surprising right is that NYCB's full year net income actually increased from 31% of interest income last year to 43% of interest income this year. On a year and year basis, net profit actually improved. And when I first look into NYCB, this difference between the year annual performance versus the fourth quarter performance really struck me. Because why would the share price decline by 40% just based on individual 4Q performance, when annual performance actually improved year over year?
If we look at the gross profit level, so if you look at interest expense as a percentage of interest income, it was 33% last year before the acquisition of Flag Star bank. It was 44% this year post acquisition of Flag Star bank. So obviously that's a roughly, you know, one third worsening on the like for like basis. And that's obviously not good, right? On a provision basis, so we're talking about full year figures here, it went from 6% of interest income last year to 15% of interest income this year. So again, it's a 2.5x of that year on year. So that's also not good, right?
However, if you look at most of the other line items, so for instance, non interest expense, it went from 16% of interest income last year to 25% this year. And compensation, which was the biggest non interest expense increase, went from 17% of interest income last year to 21% this year, which isn't really, you know, huge, it's like quite kind of status quo. Whether or not you had the acquisition of Flagstar bank. So I'm thinking that most keep in mind, this is like a one hour look at their three statements, I'm thinking it's really the interest expense margin decline, as well as the provision of credit losses margin worsening by about doubling both respectively. That has contributed to most of the depression in sentiment.
However, if you look at net profit or net margin? Like I said earlier, the full year 22 net margin. So this is net profit to interest income was 31% last year to 43% this year. I just mentioned how interest expense and provision worsened by about a doubling on a like for like basis. Why did that profit increase when none of the other line items actually change much as aforementioned? The reason is very simple. There was a very significant one time or non recurring gain called a bargain purchase gain. And this amounted to 2.1 billion in full year 23.
So for those of you who are not familiar with bargain purchase gain, it's basically the discount between what NYCB paid for the acquisition of Flag Star Bank and Flag Star Bank's book value at a time. So if presumably the Fed asked NYCb to acquire Flag Star Bank to maintain the health of the wider banking sector, it's because Flag Star Bank is going to bankrupt, right? And obviously NYCB would insist to purchase or to acquire Flag Star Bank's equity as well as its liabilities at the discount. At a promotion price.
So therefore the discount between the actual book value versus their perceived book value would be 2.1 billion in this scenario. Theoretically and that 2.1 billion is basically almost all of full year 23 profits of 2.4 billion. So we need to back that out because that's a one time gain. So if you take normalized net profit, which is basically just net profit before the bargain purchase gain in percentage terms, the normalized net margin will actually decline quite substantially from 23% last year to 4% this year. That's like a five times drop. So yeah, I can see why markets might be spooked.
And in fact, even on a 4Q basis, it went from 42% last year to negative 18% this year. Right. So is it justified? Maybe. But, you know, no bank analysis is complete without comparing their profit performance to the balance sheet performance. And the reason is because banks are ROIC machines or in fact ROA machines. You need cash or deposits to loan out as loans to earn interest. And so there's a very direct relationship between how much you make and how much you have and how many assets you hold.
I'm not going to go into the real nitty-gritty here because I haven't really looked into their notes yet. This is just a three statement analysis done in like an hour. But I think you can eliminate a lot of possibilities just going by what I'm saying.
So if we look at their better sheet, the total asset composition hasn't really changed year on year. In fact, nothing has changed at all. I don't think the problem is actually due to anything that has changed on the asset side. Total assets basically doubled, but that's just normal when you acquire Flag Star Bank.
And then if you look at the percentage of mortgage and loans to total assets, they haven't really changed much. So I don't see how that would be bad. And then if you look at the liability side, again, the same story on a percentage basis, you know, liabilities, deposits, borrowings as a percentage of liabilities. They haven't changed much.
And all this is netted off to be reflected in equity. So equity also hasn't changed much. You know, I'll just give you a little bit of numbers for context. Total equity as a percentage of total assets went from 11 percent last year to 10 percent this year. That's negligible. The net interest income spread went from 2.17 percent last year to 2.09 percent this year. Net interest margin went from 2.35 percent last year to 2.99 percent this year. And total interest earning assets as a percentage of interest-bearing liabilities went from 1.15 times to 1.39 times year and year.
So nothing has changed on the balance sheet side. What has changed is net profit as a percentage of the balance sheet. So as we saw, headline net profit actually improved. It went from one percent last year to 2.1 percent this year. We're talking about financial 22 to financial 23. But the normalized ROA went from 0.8 percent last year to 0.2 percent this year. So that's like a four times drop.
And in terms of ROE, I'm just going to give you the headline ROE first, it's 9.2 percent last year to 22.4 percent this year. But again, this one includes that one time non-recurring bargain purchase gain. So the normalized ROE went from 6.9 percent last year to 0.1 percent this year, which is obviously not great. It's dropped by three times. I think if you just take these numbers at face value and you assume it's normalized going forward, I could see why it might justify a drop, a 40 percent drop in NYCB share price.
But you know, without doing a deep dive, this is just a three statement analysis. I wouldn't know for sure. I wouldn't say anything conclusive. I'm just giving you the numbers. This is more about communication than inference. So does it justify last yesterday's drop in 40 percent drop in share price? If this is normalized performance, I could see that happening. Because our on a normalized basis went from 0.8 to 0.2 percent year and year and the normalized ROE went from 6.9 percent to 2.1 percent. If this persists and doesn't improve, then yes. It's possible.
Having said that is NYCB facing any going concern risk? Honestly, I don't think so. I just looked at the balance sheet and interest and their liabilities as well as their equity and their interest rate spread. Their interest earning assets as a percentage of interest bearing liabilities. Nothing has really changed if you ask me. Has their year on year performance declined? Yes. Could the decline in performance be justified? Could the decline in performance, if normalized, justify a 40 percent drop in the share price potentially? Potentially. Is NYCB a going concern risk? I think almost absolutely not.
Again, I haven't really looked at the notes, so I can't say for sure. But just looking at their headline, balance sheet numbers, their percentages. Keep in mind, I've looked at East West Bancorp last year. So I kind of know what I'm looking at and it just doesn't really look like it. Again, a very quick number. Total equity as a percentage of total assets went from 11 percent last year to 10 percent this year. This includes the additional provisions from the Flag Star Bank acquisition. How can this be a going concern risk? Do you know what I mean?
Again, I don't want to jump the gun because I haven't really done a deep dive into their notes. But I'm just giving a very quick look at their delinquency rates, and specifically, I'm looking at the delinquency rates of their commercial real estate, which is the sector that everyone is worried about. You know, commercial estate is not doing very well. If you have exposure in it, you're going to have a lot of provisions going forward. It's going to hit your performance and therefore it's might become a going concern risk. And, you know, if the Fed doesn't lower rates, then this could be an extended thing.
So I'm looking at the delinquency rates. I'll give you the numbers. This is about commercial real estate specifically, because I don't think anyone's really worried about anything outside of CRE and C&I, so I'll give you CRE and commercial & industrial. So these numbers, like the absolute million dollar numbers, they’re really small. It went from 2 million to 20 million year on year for CRE and 2 million to 37 million in C&I. So yes, it's a huge jump from a relative basis.
But is it going to take them down? If you look at the mortgage loan numbers on their balance sheet, it went from 49 billion to 81 billion. You know, I'm really hoping I'm making a mistake here, because it just doesn't seem very likely that there's only been several basis points increase in delinquencies. Maybe I'm looking at the millions versus billions wrongly. But again, I already said I haven't really done a deep dive into the notes. So I don't want to make any statements or provide accountability there other than from a three statement basis.
However, just going by the total equity to total asset percentage, that has not changed materially at all. Eleven percent to ten percent. Okay, so it actually went from 11.0 percent to 9.6 percent year on year. Again, it's not substantial. Almost definitely not a going concern risk.
I’ll hold off from making any conclusions until I've given the notes a deeper look, but for now, I think we can really safely say that this is not a going concern risk. Is there underperformance risk? Could the underperformance be extended? Could the macro environment get worse? Yes, maybe. Will it go bankrupt? I find it very unlikely. So I'm just going to leave it at that. Stay tuned for the full article this weekend.
And if you want more, please subscribe to this newsletter. Help support the channel. Take a look at the earlier stock ideas. EWBC 0.00%↑ , as I mentioned earlier, it's already up about 40 percent since I wrote about it. Li Lu owns five percent of it. NYCB 0.00%↑ is pretty much an EWBC 0.00%↑ peer. I think it's about double in asset size. But it's in the same sector. They're both regional banks.
Intel is also up about 40 percent. And the laggards haven't really lagged by much. I don't think there has been anything which is down more than 10 percent since I talked about it. So, just have a look. There's some interesting stocks. There's PayPal PYPL 0.00%↑. There's Intel INTC 0.00%↑. There's Disney DIS 0.00%↑. We were discussing Dollar General DG 0.00%↑ as well recently.
And fundamentally, I'm a value investor at heart. If you like value investing, we also go very deep into value investing principles. Sign up for our newsletter, so that when an article is published, you’ll get in your inbox. Thank you for listening, and stay tuned for the full NYCB 0.00%↑ article this weekend.
Why Did $NYCB Crash -40% Yesterday? (Podcast)