New York Community Bancorp (NYCB 2.88%) continues to make a good impression on shareholders: It's third-quarter results again saw rising earnings and reflected a high 14.59% return on average tangible shareholder equity.
New York Community Bancorp just fetches a market capitalization of $7 billion (data courtesy of S&P Capital IQ), but many Wall Street banks could learn a lot from this smaller bank: A stringent focus on deposit growth, outstanding asset quality, and a competitive efficiency ratio differentiate this bank from its peers, including Wall Street firms.
Strong deposit franchise
One of the things that is really likable about smaller financial firms such as New York Community Bancorp is that they stay true to their roots. Community banking models rely on deep relationships to community members, including families, the average Joe worker, and small businesses.
While community banks and savings and loans institutions focus on their core banking functions, raking in deposits and lending, many Wall Street banks accentuate cyclical earnings drivers like Investment Banking or Trading.
New York Community Bancorp, on the other hand, concentrates on growing its core deposit base, both organically as well as via acquisitions: At the end of the third quarter, NYCB reported $28.3 billion of deposits on its balance sheet, which allowed the company a ranking of 22nd on a list of "the nation's largest depositories."
This is an astoundingly robust ranking considering New York Community Bancorp has only 272 branches and operates only in New York, New Jersey, Florida, Arizona, and Ohio.
Source: New York Community Bancorp Third Quarter Earnings Presentation.
Very high asset quality
Another theme that deserves special recognition relates to New York Community Bancorp's outstanding asset quality.
Asst quality can be measured by the ratio of charge-offs to average outstanding loans. Intuitively, the lower the charge-off ratio, the better the loan portfolio performance, and the lower the impact on earnings.
More importantly, New York Community Bancorp's net charge-off history compared to the ratio of the underlying SNL U.S. Bank and Thrift Index, suggests the bank has a tight grip on its loan portfolio and has engaged in superior risk management over long periods of time. In 2009, when the financial crisis was in full swing and asset quality suddenly became a huge issue, New York Community Bancorp reported an extraordinarily low net charge-off ratio of only 0.13%, which goes to show that the bank is way ahead of the curve.
Its outperformance during the S&L crisis in the early 1990s and during the recent financial crisis, in terms of higher-than-average asset quality, makes New York Community Bancorp clearly stand out from the crowd, and it lets shareholders sleep well at night.
Source: New York Community Bancorp Third Quarter Earnings Presentation.
Low efficiency ratios
When it comes to judging the cost base of a bank, a close look at the efficiency ratio can help. The efficiency ratio basically indicates how efficiently a company runs its banking operations.
The efficiency ratio divides a bank's expenses (not including interest expenses) by its revenues. Consequently, the lower the efficiency ratio, the less costs eat into profits, and the better the bank is running its business.
Interestingly, New York Community Bancorp has a significantly lower efficiency ratio compared to the SNL U.S. Bank and Thrift benchmark, and its efficiency ratio even improved in the last two consecutive quarters.
Source: New York Community Bancorp Third Quarter Earnings Presentation.
The Foolish bottom line
While Wall Street banks get all the attention, smaller and less-known banks are clearly worth a look. New York Community Bancorp is such a gem: The company clearly is on top of its business, and its deposit growth, firm cost controls evidenced by a low efficiency ratio, and above-average asset quality in times of distress suggest investors are going to hear much more from the bank in the future.
