New York Community Bancorp (NYCB -3.26%) is a community bank with a strong regional market position in multi-family loans. The community bank has consistently benefited from solid loan growth, has low net-charge offs indicating a conservative underwriting process and convinces with its resilient business model during the financial crisis.
New York Community Bancorp is a regional bank with over 270 community and commercial bank branches in New York, New Jersey, Ohio, Florida and Arizona. With its wide-ranging branch network, about $48 billion in assets and $27 billion in deposits at the end of the first quarter, New York Community Bancorp is one of the 25 largest bank holding companies in the country.
Low net charge-offs indicate top asset quality
The financial crisis has impressively shown, that disciplined underwriting and the acceptance of only good credit risks are instrumental in driving shareholder value, or more importantly, are instrumental in not destroying shareholder value.
The collapse of banking stocks in 2008 and 2009 was largely driven by investors doubting the underlying asset quality with respect to mortgages and loans, which in turn were backing publicly traded mortgage-backed securities, for instance.
Therefore, in order to determine a bank's underwriting discipline and general approach to credit risk selection, investors should take a close look at a bank's most recent net-charge off history.
Charge-offs and provision expenses went through the roof in 2008 and 2009 as a result of the financial crisis, but they clearly are normalizing now.
Two themes are important when it comes to the evaluation of New York Community Bancorp's net charge-offs: 1. Charge-offs have been consistently improving since they marked their peak in 2011 at 0.35%. 2. New York Community Bancorp's charge-offs, as the chart below indicates, are substantially lower than the respective charge-off ratios of the competition, and this has been true for a variety of crises periods.
These are clear signs that the community bank enacts top underwriting discipline which leads to the selection of superior credit risks.
Source: New York Community Bancorp, Morgan Stanley Financials Conference June 10, 2014
Solid loan growth in its core business
As opposed to large-cap bank holding companies, community banks really drive loan growth for small- and medium sized businesses and are truly the backbone of the economy.
While Wall Street institutions like to boost their earnings by leveraging their investment banking resources, community banks like New York Community Bancorp actually go out there and do the dirty work: financing small business and entrepreneurs and making mortgages available to average families.
Over the last five years, New York Community Bancorp actually has transformed itself in becoming a leading multi-family loan provider in its core market in New York. Its designated loan portfolio has increased strongly from $16.8 billion in 2010 to $20.7 billion in 2013 and reflects a compound annual growth rate of 7%.
New York Community Bancorp's first quarter results indicate that the community bank is keeping the foot on the gas and continues to step up its efforts in its core business segment.
Source: New York Community Bancorp, Morgan Stanley Financials Conference June 10, 2014
Final assessment
A well-run community bank like New York Community Bancorp with superior credit risk selection skills, a disciplined underwriting approach and strong loan growth in its core business segment makes an attractive value proposition. With a track record in navigating difficult economic environments, New York Community Bancorp is clearly an interesting community bank investment.
