New York Community Bancorp Downgraded by KBW

NEW YORK (TheStreet) -- "We believe the best source of investor return for NYCB shares is its attractive dividend yield of 6.0%, as it pays investors to wait for the NYCB's next move, whatever that might ultimately be."

That's what KBW analyst Collyn Gilbert wrote in a note to clients on Wednesday when she cut her rating for New York Community Bancorp (NYCB) to "market perform" from "outperform," after the company reported its fourth-quarter results. The main reason for the downgrade was that the bank's share price was getting close to the analyst's $17 price target, but Gilbert also lowered her 2014 earnings estimate of NYCB to $1.04 from $1.09 and here 2015 EPS estimate to $1.19 from $1.27.

New York Community Bancorp has primarily been a dividend story for investors for quite a long time. The company pays a quarterly dividend of 25 cents a share, for a yield of 6.11%, based on Tuesday's closing price of $16.36. That's one of the highest dividend yields for any publicly traded U.S. bank. For many years, some analysts have continually questioned the bank's ability to continue paying out most of its earnings, but New York Community has paid the 25-cent dividend for 40 consecutive quarters.

Among the analysts who are negative on NYCB is Sterne Agee analyst Matthew Kelley, who on Wednesday reiterated his "underperform" rating for the bank, with a price target of $14.00. While he didn't discuss the dividend, Kelley in a note to clients wrote, "With profitability levels (ROA) expected to contract, the shares are overvalued vs. regional bank peers at 15.5x 2015E EPS (peers 14.4x), in our view."

Shares of New York Community declined 2.2% on Wednesday, after the company reported fourth-quarter earnings of $120.2 million, or 27 cents a share, compared to $114.2 million, or 26 cents a share, in the third quarter, and $122.8 million, or 28 cents a share, during the fourth quarter of 2012. The main factor in the sequential earnings improvement was a recovery of $5.8 million that had previously been added to reserves to cover loans with partial guarantees by the Federal Deposit Insurance Corp. acquired in 2010 along with the deposits and branches of the failed AmTrust Bank of Cleveland. During the third quarter, the bank had added to $9.5 million to reserves for covered loans.

Provisions for losses on non-covered loans declined to $3.0 million during the fourth quarter from $5.0 million the previous quarter and a year earlier. The bank's credit quality was very strong with nonperforming loans making up 0.35% of non-covered loans as of Dec. 31, reflecting NYCB's focus on making loans secured by apartment buildings in the New York City area with below-market rents.

New York Community's net interest income rose to $297.3 million in the fourth quarter from $294.3 million the previous quarter and $290.0 million a year earlier. The bank's average loans grew 4.5% sequentially and 4.7% year-over-year to $32.4 million in the fourth quarter. The bank's growth in loans and securities investments was strong enough to outweigh a narrowing net interest margin. The fourth-quarter margin was 2.92%, down from 3.04% the previous quarter and 3.15% a year earlier.


Prepayments of multifamily mortgage loans added $33.0 million to net interest income during the fourth quarter, compared to 39.6 million in the third quarter and $39.3 million during the fourth quarter of 2012.

Noninterest income declined to $38.8 million during the fourth quarter from $50.7 million the previous quarter and $55.5 million a year earlier, mainly reflecting the decline in one-to-four family mortgage production, in line with the industry, as long-term interest rates rose considerably during 2013. New York Community acquired a significant mortgage lending operation along with AmTrust in 2009. Mortgage banking income for the fourth quarter totaled $12.7 million, down from $16.2 million in the third quarter and $32.6 million in the fourth quarter of 2012.

Noninterest expense declined to $149.5 million in the fourth quarter from $150.3 million the previous quarter and $154.6 million a year earlier.

The bank reported a fourth-quarter return on average tangible assets 1.12% and a return on average tangible equity of 15.3%.

New York Community Bancorp had $46.7 billion in total assets as of Dec. 31. CEO Joseph Ficalora during recent conference calls has repeatedly made clear the company's desire to make a major acquisition, and the bank has made the necessary improvement in its reporting and compliance systems to handle the higher regulatory burden it will face when it exceeds the $50 billion threshold.

"We could conceivably do a small deal and a big deal down the road. Not tomorrow, obviously. But the important thing is that we're preparing ourselves for the opportunity to follow our business model, which is to grow by acquisition," Ficalora said during the bank's earnings conference call on Wednesday.

"We continue to be encouraged by NYCB's historical track record of above-average profitability, strong capital levels, disciplined risk management, well-positioned franchise in growing NY metro market, attractive dividend yield, and potential acquisition power. However, we view the next catalyst to increase the value of NYCB shares from here will likely derive from an acquisition, which, as this past year has shown, is not in NYCB's full control," Gilbert wrote.

The following chart shows the total return of New York Community Bancorp's stocks, assuming the reinvestment of dividends, against the KBW Bank Index (I:BKX) and the total return of the S&P 500 since the end of 2011:

NYCB Total Return Price Chart data by YCharts


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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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