New York Community Bank: Best in Class

WESTBURY, N.Y. ( TheStreet) -- New York Community Bancorp ( NYB) has an interesting way of checking up on properties that are funded by a loan from the bank -- it sends a board member along with management out to inspect.

"Our board has been incredibly proactive with regards to determining that we are in fact undertaking reasonable credit risks," Chairman and CEO Joseph Ficalora said at an investor conference in mid-May. "That consistency over the course of decades has resulted in the people that bring product (loans) to the table knowing that they shouldn't waste their time and shouldn't waste our time bringing something that wouldn't qualify."

In addition, multi-family and commercial real estate loans need approval from the bank's mortgage and/or credit committees. The unique process may seem like an above and beyond measure, but it's indicative of how New York Community does business and a big part of why the commercial lender was able to avoid large disaster during the credit crisis.

Listen to CEO Ficalora in an interview with TheStreet on the uniqueness of its board of directors.

Of the 14 members on its board of directors, the fact that more than one director has the expertise to assess property sites is one of several advantages the $42 billion-asset thrift has in an industry where many troubled banks turned out to have boards composed of directors with little to no specific banking experience.

"What it shows is that the board is very connected to the loan portfolio and an integral part of the underwriting process," says Mark Fitzgibbon, director of research at Sandler O'Neill & Partners. "They know the markets, they know the building owners, they're uniquely suited to be able to render an opinion on the likelihood of getting repaid on the loan. There's no question it's a unique thing."

New York Community is the 22nd largest bank holding company in the United State. It doesn't make residential or consumer loans (referring customers to third-party outlets, such as PHH Corp. ( PHH) ), but rather focuses on originating multi-family loans, particularly loans for apartment buildings that are either rent-stabilized or rent-controlled in the metro New York area. Losses tend to be lower on these types of loans because of the steady cash flow from tenants as well as the thrift's own tight underwriting standards.

New York Community's niche focus and strict business standards helped it to avoid most of the troubles other lenders such as Citigroup ( C), Bank of America ( BAC) even JPMorgan Chase ( BAC) found themselves in.

"Our business model is not the banking industry model. We are not a consumer lender, we are a multi-family lender," Ficalora said at the conference. "Of the banks I'm aware of, we have the least exposure to consumer risks by choice. And in the period ahead the biggest change is going to be the effects of consumer risk on banking. ... Our business model fits into this environment better than the business models of most other banks."

Like fellow regional bank Cullen/Frost Bankers ( CFR), New York Community did not take bailout funds issued by the U.S. Treasury through the Troubled Asset Relief Program.

Shares of New York Community are up 15% this year vs. a decline of 1% for the S&P 500 index.

"A person who invested in our stock since 1993, when it went public, through the first quarter, has a 3,200% total return, which includes dividend returns as well as appreciation of stock," Ficalora noted at the Barclays conference. "With nine stock splits in the last 10 years, a shareholder that purchased 100 shares now has 2,700 shares. When we talk about being shareholder oriented and focused on providing returns for shareholders, it's in the numbers."

New York Community has earned some top-notch institutional ownership including BlackRock, which owns a 5.9% stake in the bank, and Capital World Investors -- a division of The Capital Group, one of the largest investment management firms for both individuals and institutions -- which owns a 5.83% stake, according to Securities and Exchange Commission filings.

Those investors are enjoying an extremely attractive dividend as the bank's stock is yielding roughly 6.5% vs. a regional bank average of 0.7%, according to Sterne Agee & Leach analysts. The company is also sitting on some $2.5 billion of cash, which gives it plenty of flexibility if needed, analysts say.

When it comes to expansion, New York Community prefers to acquire deposits by acquisition, which Ficalora says is more cost-efficient and a less risky form of growth, and the bank's been fairly aggressive in the past year. Last month, it bought the failed Desert Hills Bank of Phoenix, which had $497 million in total assets, and its Dec. 4 acquisition of AmTrust, another failed institution, put it on the map in Ohio, Arizona and Florida.

Listen below to CEO Ficalora on New York Community's acquisition strategy.

Sandler's Fitzgibbon says both acquisitions were beneficial because the bank was able to "buy things cheap from the government and New York Community has always been a very good buyer of troubled companies."

Still, the bank hasn't come through the financial crisis completely unscathed. Non-performing loans are rising, causing its loan loss allowance to rise to $127.5 million at year-end 2008 from $94.4 million in 2008. As of March 31, its ratio of non-performing loans to total loans was 2.61%, up from 2.04% in the fourth quarter.

In a Securities and Exchange Commission filing, New York Community noted the metro New York region, where most of its properties securing loans are located, saw unemployment rise last year to 10.4% in New York City, 7% on Long Island and 9.8% in New Jersey, while home prices declined 6.3%. In addition, 13.1% of Manhattan's office space was vacant this past December, as compared to 10.2% in December 2008.

Net charge-offs, however, came in at just 4 basis points of average loans in the first quarter compared an average of 81 basis points for the banks included in the SNL Bank and Thrift Index, according to company presentation slides.

Listen below to CEO Ficalora on why loan losses are so low.

In fact, last year resulted in New York Community's "best financial performance since 2004," the SEC filing said. "We expanded our net interest margin, increased our net interest income, and grew our earnings and capital meaningfully over the course of the year."

Matthew Kelley, the Sterne Agee analyst, says that New York Community has "significant earnings power" to offset any material increase in charge-offs or reserve building, according to a research note to clients on Apr. 22, in which he upgraded the bank's shares to neutral from sell.

Kelley estimates that New York Community will generate a return on assets between 1.25% and 1.30% over the next three years, higher than the average for other Northeast thrifts.

"A key driver of the superior profitability levels is an industry-leading efficiency ratio" at the bank, he wrote.

Peter Winter, an analyst at BMO Capital Markets, upgraded the stock to outperform in a May 24 note. Winter's reasons included a compelling valuation, a safe dividend, low earnings impact from regulatory reform, no overhang on its capital levels and a strengthened balance sheet from the acquisitions.

Winter has a $20 price target on the stock -- a level that represents 30% upside from where the bank was trading at on May 21, the last full trading day before the note was published.

New York Community "remained profitable throughout the cycle, did not cut its dividend and strengthened its balance sheet to its best position in years," Winter wrote.

--Written by Laurie Kulikowski in New York.