New York Community Bancorp Q3 Shows Lots of Upside

Earnings season for U.S. banks has focused more than usual on the issue of net interest margin, which is being painfully compressed by falling interest rates spurred by the Fed's QE3 program.

Like many other regional banks, New YorkCommunity Bancorp (NYS: NYB) has also noted this pressure in its Q3 earnings report. However, increased loan activity and the improving quality of those loans have helped boost the bank's bottom line.

Refi boom has been sweet for NYB
Although New York Community reported a decrease in NIM from 3.30% last quarter to 3.17% for Q3, net income increased for the bank by nearly 5% year over year, an improvement over the 7.5% decrease reported in last year's Q3 statement. NYB has historically concentrated on multi-family mortgage lending but notes that refinance activity has been a boon to the bank as well, more than doubling income in that area from last year. Pre-payment penalties have also contributed substantially to that total.

The quality of the loans being written is improving, too. Net charge-offs fell to 0.03% in Q3, continuing a downward trend from 0.05% and 0.04% in sequential quarters. Asset quality improved as well. Non-performing, non-covered loans represented just 0.82% of all loans in this past quarter, compared with 1.44% one year ago.

NIM pressure is making investors nervous
Depressed net interest margins have been a common thread in banks' earnings this month, and there's no letup in sight. Despite increased income from mortgage banking, Regions Financial's (NYS: RF) stock was walloped by investors after reporting a NIM drop from 3.16% last quarter to 3.08% in Q3. Credit Suisse has noted that even regionals with decent NIMs, like BB&T (NYS: BBT) , are feeling the pain, as that bank has warned of a drop of nearly 20 basis points for next quarter's results -- though some of this decrease is due to a 2009 acquisition. In addition, former positives for the regional banking sector, such as strong credit quality and reduced exposure to regulatory pressure, may not be enough to placate investors going forward.

What does this mean for NYB?
NIM compression will surely continue to be a problem for all banks over the next two years, affecting all financial institutions sooner or later. Even KeyCorp (NYS: KEY) , which showed a NIM increase of 17 bps year over year, admitted that much of that rise was due to accretion from acquisitions of branch locations and credit card portfolios.

Although commercial and industrial loans may be waning, the mortgage refinance activity should help make up some of that income loss. New York Community has done a good job in this respect, with both single- and multi-family loans.

This bank, much like M&T Bank (NYS: MTB) , has been strengthened by its acquisitions over the years, and NYB has quite a reach, stretching down to Florida and boasting a network of nearly 300 branch locations. Indeed, NYB should have no problems navigating the uncertainties of the next few quarters. This is a solid bank, with a yield of about 7%, with a steady dividend payout of $0.25 per share. And that's something investors can really sink their teeth into.

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