Quality Performance In A Difficult Environment By New York Community Bancorp – New York Community Bancorp, Inc. (NYSE:NYCB) No ratings yet.

When we last covered New York Community Bancorp (NYCB) we were modestly positive on the regional bank in spite of headwinds from the yield curve. Our rationale was that the valuation compression alongside buybacks at a low price were sufficient to compensate for the problems on the compressed yield curve. We suggested investors maintain a bullish bias. With Q2-2019 results out and more changes on the interest rate front we decided to take a new look at this stock again.

Q2-2019 results

NYCB reported net income for the quarter of $97.2 million which was down slightly from the $97.6 million reported last year. Earnings per share were flat as lower overall income was more than offset by a lower share count. NYCB emphasized that its portfolio was back in growth mode and average assets are up about 1.5% since December 2018.

Source: NYCB Q2-2019 presentation

A good deal of that loan growth came in NYCB’s home turf of multifamily residential property mortgages.

Source: NYCB Q2-2019 presentation

Despite some recent press about rent control legislative changes, NYCB continues to find opportunities to lend in this segment. The key aspect which makes this loans so good is the relatively short term maturities which reduce risk for the bank.

Source: NYCB Q2-2019 presentation

NYCB is well aware of the negative perceptions that people have about how rent control would impact its portfolio, and did comment on it in the latest earnings release.

Source: NYCB Q2-2019 presentation

The key number here is the loan to value and that is so conservative, even for the highest regions such as New Jersey, that NYCB is taking no real risk here. While multi-family kept growing, the commercial real estate book has been a different story and is on track to post its fourth consecutive yearly decline.

Source: NYCB Q2-2019 presentation

Competition in this space is intense and NYCB is likely getting outbid by other banks. NYCB has been able to offset that decline though with its fastest growing segment, its speciality finance division.

Source: NYCB Q2-2019 presentation

This area represents a big opportunity for NYCB longer term although based on its size it is unlikely to move the overall needle in the next couple of years.

Buybacks

NYCB had announced its buyback last year and was prompt to start repurchasing shares under that. It did stop completely in Q2-2019 though.

During the second quarter of 2019, the Company did not repurchase any common shares under its previously announced share repurchase program. During the first quarter of 2019, the Company repurchased 7.1 million shares at an average price of $9.47. In total, the Company has repurchased 23.9 million shares of its common stock at an average price of $9.54, or $227.9 million under the current $300 million share repurchase authorization.

Source: NYCB Q2-2019 press release

While others may disagree with the logic of stopping share repurchases, we think it is a really prudent move as the accretiveness of share repurchases falls of sharply as we move over $10/share. At the current price of $12.00, share repurchases are neutral at best. We like that NYCB has so far bought back at extremely low prices and we hope they will continue to use that level of discretion.

Portfolio quality

Non-performing loans and net charge offs rose slightly in this quarter but they remain exceptionally low compared to the other regional banks.

Source: NYCB Q2-2019 presentation

Cumulative charge offs over the last 3 decades have averaged about 4% of what its peers have written off.

Source: NYCB Q2-2019 presentation

This was our key point in emphasizing a buy on this last time we wrote as we felt NYCB was less risky going into this part of the cycle.

We are switching to Neutral/Hold again

NYCB’s longer term worthiness is not in question here, but it has done really well compared to its peers since we made the call for a more constructive stance. NYCB has outperformed the broader index S&P 500 (SPY) by about 15%. Its outperformance of the peer index, the S&P regional banking ETF (KRE) has been even more stark, coming in near 24.25%.

ChartData by YCharts

The boost at lower levels from the share buyback is also dissipating and NYCB will (rightfully) withhold share buybacks at these levels. On a valuation standpoint, NYCB has approached closer to our fair value levels of around 1.5X-1.7X.

ChartData by YCharts

NYCB is also trading close to 16X next year’s earnings. Both metrics are now at justifiable premiums to regional banking index metrics.

Source: ETF-KRE

We would caution that the Price to Book may not be directly comparable as we have used price to Tangible Book for NYCB whereas the etf uses Price to (total) Book, which would include some levels of Goodwill and other intangibles. However, looking at some of its competitors individually, we can see that NYCB does command a premium

ChartData by YCharts

NYCB does have opportunities for growth here as its coupons reprice over the next two years alongside presumably lower funding costs from interest rate cuts.

Source: NYCB Q2-2019 presentation

We still think it will be a slow move and we would look for about 3% earnings growth in a best case scenario.

Conclusion

With another quarter in the bag we continue to see the low-risk execution that NYCB is famous for. There are some growth opportunities here and NYCB could start pushing off the EPS even in this flat rate curve environment. Based on that we think investors could likely see some more appreciation in the longer run. But from our perspective, the June-August selloff has produced far more compelling opportunities elsewhere that we just cannot see the point of continuing to have this on our buy list. We are downgrading the shares to a neutral/hold rating.

While NYCB did not make it into our high yield picks, our model portfolio is full of high-quality stocks which produce dependable income. Join us and get access to our portfolio targeting 9-10% yield, our preferred portfolio, our bond portfolio, and income tracking tools. You also get access to our report entitled “Our Favorite Picks for 2019.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

TIPRANKS: HOLD

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