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) -- Preferred shares can produce a lot of money for investors, as they did for

Berkshire Hathaway

(BRK.A) - Get Berkshire Hathaway Inc. Class A Report

and some


(C) - Get Citigroup Inc. Report

holders. Now, a current exchange offer from

New York Community Bancorp


highlights an attractive opportunity.

New York Community Bancorp on July 29 commenced an offer to exchange $275 million in BONUS units for common shares. BONUS stands for "bifurcated option note unit securities," and each BONUS unit includes one trust-preferred share and a warrant to buy roughly 2.5 common shares for $20 each.

Warren Buffett's Berkshire Hathaway purchased $5 billion in preferred shares issued by

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report

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in October. In addition to a juicy 10% dividend, the deal includes warrants that allow Berkshire Hathaway to buy $5 billion in common shares at $115. Goldman's shares closed at $164 yesterday. And some investors who bought Citigroup preferred, or trust-preferred, shares at a discount before the company announced its recently completed exchange offer for common shares also profited. The company valued the preferred shares at par when the exchange was made.

New York Community Bancorp's preferred dividend is much safer than that of the common stock. The preferred dividend is cumulative, and while the company can suspend the dividends for up to 20 quarters consecutively, it's not allowed to pay any dividends on common shares until all preferred dividends in arrears are doled out.

Investors have pushed down the common shares by a third in the past year, suspicious that the dividend could be cut, even though the company has managed to maintain a quarterly payout of 25 cents a share since the second quarter of 2002.

That's because New York Community's payout ratio of cash dividends to net income before extra items has exceeded 100% over the past three full years and the first half of 2009.

The company has been able to maintain the generous dividend on common shares through the credit crisis because loan losses have been minimal and it raised $339 million in common equity in an oversubscribed offering in May 2008. New York Community also declined to apply for an infusion of government money via the Troubled Asset Relief Program, or TARP.

New York Community wants to exchange trust-preferred shares for common shares because the preferred shares aren't included in tangible common equity or tier 1 capital, two important ratios for investors and regulators. According to company filings, New York Community Bancorp's tangible common equity ratio was 5.59 as of June 30. The company's tier 1 leverage ratio was 7.74% and its total risk-based capital ratio was 11.57%, well ahead of the 5% and 10% required for most banks to be considered well-capitalized.

Another reason for the exchange offer is that a small number of investors control a majority of the BONUS units and have also sold New York Community's common shares short. These investors requested the company do the exchange, which New York Community determined would be good for the company as well as these investors, since the short-sellers would cover their short positions. Chief Executive Joseph R. Ficalora told that the exchange might not be compelling for long-term investors holding the BONUS units.

Moving through the credit crisis

Here's a breakdown of New York Community's most important figures: P>

A net loss of $155 million in the second quarter of 2008 reflected prepayment fees and other expenses incurred when the company repaid $4 billion in wholesale borrowings and replaced them with lower-cost funding. That has been paying off, with New York Community's net interest spread increasing over the past year to an annualized 3.04% in the first quarter of 2009, according to SNL Financial. The spread had gotten to as low as 1.90% in the second quarter of 2008, which reflected the prepayments of borrowings, as well as a hostile interest-rate environment.

Looking at loan quality, the nonperforming-assets ratio increased during the first half of 2008 but was still a relatively low 1.03%. Net charge-offs (actual loan losses) have been extraordinarily low, with the annualized net charge-off ratio peaking at just 0.16% in the second quarter. For 2008, the charge-off ratio was 0.03%, and the company had no charge-offs over the preceding 10 years.

Multifamily mortgages comprised 71% of total loans and nearly half the company's total assets as of June 30, as New York Community has traditionally focused on loans secured by apartment buildings with a preponderance of rent-stabilized or rent-controlled apartments. Since these buildings have many units with below-market rents, building managers tend to have steady cash flows and, thus, New York Community can boast of strong loan quality.

Also mitigating risks are conservative underwriting standards, with an average loan-to-value, or LTV, ratio of 61% on multifamily mortgages and an average LTV of 54% for commercial real estate loans, according to the company.

New York Community's challenge will be to continue improving its net-interest spread over the coming quarters as well as its earnings. The company consistently posted returns on average assets exceeding 1% through 2005, and returns on equity approaching 20% in 2002 and 2003.

Exchange details

At New York Community Bancorp, each BONUS consists of one trust-preferred share of New York Community Capital Trust V and a warrant to purchase about 2.5 common shares for $50, or about $20 each, at any time before May 7, 2051.

The company has the option of redeeming the warrants if common shares trade at 125% of the conversion price for 20 of the previous 20 trading days.

The BONUS units trade on the New York Stock Exchange under the symbol "NYB.PRU" and have a par value of $50 and a 6% coupon.

New York Community's common shares peaked at $35.57 on March 1, 2004, according to Bloomberg data, but investors holding the BONUS shares weren't allowed to exercise the warrants until Nov. 4, 2007, after which the stock peaked at $22 on Sept. 19, 2008.

The exchange offer expires Aug. 25, and the exchange ratio will be set Aug. 21. The ratio will be 2.4953 common shares plus $10 divided by the daily volume-weighted average price of the common shares for the five trading days ending Aug. 21.

Based on an average closing price of $11.31 for the five trading sessions through Thursday, the exchange ratio would be 0.8842 plus 2.4953 shares, or 3.3777 common shares for each BONUS unit.

The common shares closed at $11.29 Thursday, or $38.13 in value for a BONUS unit if the exchange were done on Thursday. The BONUS units closed at $38.15 on Thursday.

Because of the safer dividend and upside potential, purchasing and holding the BONUS shares would offer an excellent value. Based on the 6% coupon and $50 par value, each BONUS unit pays $3 a year, or 7.86% based on Wednesday's closing price. The common shares were yielding 8.86%.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.