New York Community Bancorp's 'Dividend is Safe': KBW

NEW YORK ( TheStreet) -- New York Community Bancorp ( NYCB) is well-positioned to continue paying its very high dividend on common shares, according to KBW analyst Collyn Gilbert.

New York Community's shares closed at $15.42 Monday, returning 24% this year, following a 14% return during 2012. Based on a quarterly payout of 25 cents, the shares have a dividend yield of 6.49%.

That is a mighty fat dividend yield for a bank stock, and even though the bank has paid out 25 cents a quarter for 38 consecutive quarters, some analysts have questioned the company's ability to maintain the dividend.

Gilbert rates New York Community "outperform" and on Monday raised her price target for the shares to $17 from $15, following a meeting last week with NYCB CEO Joseph Ficalora and CFO Thomas Cangemi. Gilbert left her 2014 earnings estimate for New York Community unchanged at $1.09.

The bank reported its net interest margin (NIM) expanded to 3.15% during the second quarter from 2.95% in the first quarter, but the margin was down from 3.30% a year earlier. But if prepayment penalties on multifamily mortgage loans were factored out, the second-quarter margin would have been 2.68%, narrowing from 2.74% the previous quarter, and 3.09% a year earlier.

New York Community earned $122.5 million during the second quarter, or 28 cents a share. Prepayment income was a record $44.4 million, "driven by robust refinancing activity."

In anticipation of a tapering of the Federal Reserve's net monthly purchases of $85 billion in long-term securities, the market yield on 10-year U.S. Treasury bonds has increased to 2.61% on Monday from 1.70% at the end of April. According to Gilbert, the bank is poised to benefit from a steepening yield curve. "We think the margin is poised to be higherthan our current projections, as the core NIM appears to finally be stabilizing," she wrote in a note to clients on Monday.

New York Community reported a second-quarter return on average tangible assets (ROA) of 1.21% and a return on average tangible equity of 15.90%.

"NYCB indicated that it thought a 1.40% ROA is within reach," Gilbert wrote. "A 1.40% ROA would imply an EPS of $1.60. However, even a more conservative NIM assumption (which would include a 25 bps increase from our current 2014 projection), implies an EPS of $1.25."

Suspicion over New York Community Bancorp's ability to support the dividend centers on a high payout ratio, with the bank's quarterly earnings-per-share ranging from 27 cents to 29 cents over the past four quarters.

Citigroup analyst Josh Levin rates New York Community a "sell," and in a note on July 25 wrote "while the ~70 bp rise in the yield on the 5-year Treasury weakens the bear case for this stock, it nonetheless remains very much intact."

According to Levin, "the dividend isn't sustainable given the earnings profile and changing regulatory environment, and the lingering risk of a dividend cut alone should cause the stock to underperform."

New York Community Bancorp had $44.2 billion in total assets as of June 30. Ficalora has said during conference calls that the company is considering acquisitions, and moving above the $50 billion asset level would bring increased regulatory scrutiny, including annual stress tests conducted by the Federal Reserve.

For now, the company will conduct its own annual stress tests based on September data beginning in March 2014, while providing the results to the FDIC and the Federal Reserve.

In addition to a possible threat to the dividend from increased supervision from the Federal Reserve and/or a major acquisition, Levin wrote that "NYCB's expansion beyond its niche of low risk rent regulated multifamily lending into higher risk commercial and industrial lending is a tacit admission that the earnings growth prospects from its core business are not robust enough to defend the current dividend."

Levin estimates New York Community will earn 95 cents a share during 2014, and not cover the dividend. He estimates earnings will rise to $1.03 a share in 2015.

New York Community focuses on making multifamily mortgage loans in the New York City area, focusing on rent-controlled or rent-stabilized buildings, leading to minimal credit losses, even during the financial crisis.

The company reported a tangible equity ratio of 7.74% as of June 30 and that its main banking subsidiary was well capitalized, with a Tier 1 leverage ratio of 8.25% and a total risk-based capital ratio of 13.31%, as of June 30. New York Community's smaller bank subsidiary, New York Commercial Bank, was strongly capitalized with a Tier 1 leverage ratio of 10.99% and a total risk-based capital ratio of 16.99% as of June 30.

In addition to the high dividend, New York Community also stands out as one of the most efficient banks in the country, with a second-quarter efficiency ratio of 41.71%, improving from 43.25% during the first quarter. The efficiency ratio is, essentially, the number of pennies of overhead expense for each dollar of revenue.

Confidence in the Dividend

According to Gilbert, the "dividend payment doesn't seem threatened."

"While the market may view New York Community's dividend payout ratio as stressed, given its earnings flexibility (barbell effect of mortgage banking and spread income), regulatory capital position, and de minimis historical credit losses in conjunction with strong (and improving) credit results, we continue to believe that the dividend is safe," she wrote.

Gilbert also wrote that during her meeting with Ficalora and Cangemi, "They reiterated their comfort with maintaining their current dividend, as regulators continue to signal that the company's capital deployment strategies are well within an acceptable range."

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

>Contact by Email.

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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