N.Y. Community Bancorp is a Feast or Famine

NEW YORK ( TheStreet) -- New York Community Bancorp ( NYCB) continues to look for a transformative deal to boost earnings and help the company maintain its industry-leading dividend on common shares.

The company, which is based in Westbury, N.Y., and operates under several local bank names, including Queens County Savings Bank, pays a quarterly dividend of 25 cents a share. That translates to a very high dividend yield of 7.51%, based on Wednesday's closing price of $13.32.

For investors, New York Community has been a fascinating play, not only because of the outsized dividend but because opinion is so divided about the company's ability to maintain the dividend since it pays out most of its earnings. Some analyst have been predicting a dividend for over five years but the company has managed to keep paying out 25 cents a share for 37 consecutive quarters.

The bank focuses on multi-family lending in the New York City area, concentrating on apartment buildings with below-market rents, leading to a long-term record for very strong asset quality. New York Community Bancorp has also expanded over a long period by acquiring local competitors. The company expanded its regional footprint beyond New York and New Jersey to include Ohio, Florida and Arizona, through its last major acquisition of the failed AmTrust Bank of Cleveland, in December 2009.

New York Community Bancorp on Wednesday reported first-quarter net income of $118.7 million, or 27 cents a share, compared to $122.8 million, or 28 cents a share, in the second quarter, and $118.3 million, or 27 cents a share, in the first quarter of 2012.

Net interest income declined to $275.2 million in the first quarter from $290.0 million the previous quarter and $288.4 million a year earlier. Net interest income was boosted by $19.9 million in loan prepayment penalty fees during the first quarter. Prepayment fees boosted net income by $39.3 million in the fourth quarter and $17.5 million during the first quarter of 2012. The company in the fourth quarter booked $17.9 million in prepayment fees on a single borrower relationship, with the prepayment of $545.5 million in multifamily mortgage loans.

The first-quarter net interest margin narrowed to 2.95% in the first quarter from 3.15% the previous quarter and 3.24% a year earlier. The margin was also boosted by prepayment income, by 21 basis points in the first quarter, 43 basis points in the fourth quarter and 20 basis points in the first quarter of 2012. In the fourth quarter, there was a

New York Community Bancorp CEO Joseph Ficalora said in the company's earnings release that "excluding prepays entirely, the difference between our current first and fourth quarter 2012 margins is a linked-quarter increase of two basis points. The stability of our margin, absent the impact of prepayment penalty income, was largely attributable to the growth of our average interest-earning assets to $37.1 billion, and a 20-basis point reduction in our average cost of funds to 1.61%."

"The linked-quarter decline in interest expense was largely due to the repositioning of $6.0 billion of borrowed funds that began late in the fourth quarter and continued in the first two weeks of 2013," Ficalora said.

New York Community Bancorp's average loans grew to $31.6 billion in the first quarter from $30.9 billion the previous quarter and $29.1 billion a year earlier.

The company's mortgage banking income declined to $26.1 million during the first quarter from $32.6 million in the fourth quarter and $35.2 million in the first quarter of 2012. Most regional banks saw a softening of mortgage revenue in the first quarter, as application volume declined and gain-on-sale spreads declined.

The bank's first-quarter earnings were boosted by $16.6 million in gains on securities sales.

A Positive Take on New York Community Bancorp's Stock

KBW analyst Collyn Gilbert in March upgraded New York Community Bancorp to an "outperform" rating from "market perform," and raised her price target for the shares to $15 from $13, saying in a report that "an acquisition for NYCB could prove to be a positive catalyst for the shares."

At a conference in March, Ficalora said "we are an acquirer of banks, and we are likely to do a highly accretive deal," according to a transcript provided by Thomson Reuters. With $44.5 billion as of March 31, a sizable deal would move the bank over the $50 threshold to be considered a "systemically important financial institution." This would subject New York Community to additional regulatory supervision, including annual Federal Reserve stress tests through the Capital Plan Review (CapPR).

Ficalora said in March that the company was "actively working toward getting regulatory approval so as to be a SIFI bank -- a bigger bank." He also that "it is our intent to do whatever the necessary work is to get that approval because, in the environment ahead, there will be opportunities to create great value for shareholders by doing, at least in our case, first a large deal and then whatever other deals we need to do."

When asked about the company's search for a large acquisition that would immediately boost earnings, Ficalora said during New York Community's earnings conference call on Wednesday that "there are many interesting opportunities in the marketplace. Not that this is a very active market, as I'm sure you are very much aware, but there are things to be considered, for sure."

When asked about the company's ability to maintain the dividend, considering the first-quarter earnings boost from $16.6 million in one-time securities gains, New York Community Bancorp CFO Thomas Cangemi said during the call on Wednesday that "we have the expectation that pre-payment penalty income will be robust this year," and that "if rates stay very low as they are today, our mortgage bank will be fine." Cangemi added that he felt "pretty good about pre-payment levels" and that he was "not really concerned about being able to pay the dividend."

Gilbert in a note to clients on late on Wednesday wrote that "we like NYCB's risk/reward positioning with upside above $16 & downside of $12. The flexible business model remains well hedged to various interest rate scenarios, which differentiates the bank from peers who have struggled in the challenging operating environment."

"While upside valuation reflects the inclusion of a large, transformational deal, those opportunities continue to exist," Gilbert wrote, adding that "downside reflects a 'worst case' independent operating environment that seems unlikely given increased stability over the last year or so."

Gilbert reiterated her "outperform" rating for New York Community. She estimates the company will earn $1.04 a share for all of 2013, with EPS climbing to $1.10 in 2014.

A Negative Take on the Stock

Citigroup analyst Josh Levin on Thursday cheerfully reiterated his "sell" rating for New York Community Bancorp, with a price target of $11, saying in a note to clients that "in the words of Mr. T, we predict pain."

"Our thesis remains that NYCB's dividend is not sustainable given the company's high payout ratio, weakening earnings profile, growing leverage and heightened regulatory scrutiny," Levin wrote, adding that "while NYCB may continue to look for ways to harvest non-recurring items to boost EPS, we view such activity as a bearish because it suggests that NYCB is running out of earnings levers to pull."

Levin estimates New York Community's earnings for all of 2013 will come in at 95 cents a share, meaning the company will dip into capital to cover the dividend. His 2014 EPS estimate is just 94 cents.

A Neutral View, With a "Safe Dividend"

BMO Capital Markets analyst Peter Winter has a neutral rating on New York Community Bancorp, and said in a report on Thursday that "we believe the dividend is safe given the strong capital ratios and solid credit trends."

New York Community reported a March 31 tangible equity ratio of 7.61%, compared to 7.65% the previous quarter and 7.64% a year earlier.

Winter's target price for New York Community is $13, and he estimates the company will earn $1.04 a share this year, with EPS declining slightly in 2014, to $1.02.

NYCB Chart NYCB data by YCharts

Interested in more on New York Community Bancorp? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., 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.

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