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By Josh Boomgaarden

The banking industry is rife with risk. From heightened regulatory scrutiny to capital shortfalls, numerous banks, whether local, national, international, or foreign, have seen their shares slide on risk events. That does not appear to be the case with New York Community Bancorp (NYB), a $5.8 billion multi-bank holding company with branches in New York, New Jersey, Ohio, Florida, and Arizona. It is the only banking stock of the 28 we follow to earn a Low Risk rating, and for good reason. As our analysis of a spectrum of 4 regional banks shows, NYB is well-capitalized, does not appear to be involved in any regulatory or legal proceedings, and has not been weighed down by underperforming loans. Further, NYB has a dividend yield greater than 7.5%. In our opinion, NYB has set itself apart from its peers in the regional banking industry.

The four companies used in our comparison:

Company

Ticker

Price*

Market Cap.

D.I. Rating

Publish Date

New York Community Bancorp

NYB

13.21

$5.78B

Low Risk

1-Dec-11

Zion Bancorporation

ZION

17.88

$3.30B

Medium Risk - Positive Bias

29-Nov-11

Huntington Bancshares

HBAN

5.86

$5.06B

Medium Risk - Negative Bias

4-Oct-11

Fifth Third Bancorp

FITB

13.41

$12.34B

High Risk

26-Oct-11

*as of 9-Jan-12 close

Legal and Investigative Activity:

The dichotomy between our higher and lower risk names is abundantly clear from a legal and investigative standpoint. While none of the stocks in this analysis has experienced a level of scrutiny on par with the megabanks, both HBAN and FITB have disclosed issues relating to foreclosure practices. In addition, FITB is involved in two ongoing SEC investigations into the timing, notification, and disclosure process of its redemption of certain Trust Preferred Securities and its accounting for certain commercial loans. The two lower risk names, NYB and ZION, have not reported any significant regulatory activity in the past 5 years. While ZION is involved in a purported class action lawsuit relating to overdraft fees, NYB did not disclose any ongoing litigation in its most recent 10-Q.

Legal and investigative activity, particularly in relation to mortgage and foreclosure practices, has been a significant source of risk and uncertainty in the banking industry. While NYB’s price has been dragged lower, possibly due to a “guilt by association” mentality, it has yet to report any regulatory activity and has reported no ongoing legal proceedings. Not only may this limit downside risk, it allows management to focus capital and energy on growing the core business rather than dealing with past mistakes.

Company

Investigative Activity

SEC

DOJ

Other

Legal

New York Community Bancorp

-

-

-

-

Zion Bancorporation

-

-

-

X

Huntington Bancshares

-

X

X

-

Fifth Third Bancorp

X

-

X

X

Source: Company Filings

Net Charge-Offs and One-Time Items:

Perhaps even more striking than differences in regulatory activity is the spread in net charge-offs as a percentage of total assets. Since 2006, NYB has charged off less than one percent of its total assets (as of 30-Sep-11), shockingly below the next lowest rate of 5.78% at ZION. The higher risk names of HBAN and FITB have charged off increasingly higher amounts of their total assets at 7.32% and 8.12%, respectively. In addition, ZION, HBAN, and FITB have impaired significant amounts of goodwill in the past 5 years.

The conclusions to be drawn from the charge-off and goodwill data are relatively straightforward; NYB has deployed its capital much more conservatively and arguably more effectively than its peers. The company appears not to have engaged in the types of risky lending that were commonplace at the height of the housing boom, and has thus been rewarded with better loan performance. That conservative lending strategy manifests itself in the form of a lower net interest margin. While NYB does not receive as high of a yield on its interest-earning assets as some of its peers, it makes up for it with a higher rate of capital preservation.

Company

Net Charge-Offs (since 2006)

Total Assets

Percentage

Goodwill Impairment

Net Interest Margin (9M11)

New York Community Bancorp

$175M

$41.97B

0.41%

-

3.47%

Zion Bancorporation

$2.98B

$51.53B

5.78%

$990M

3.79%

Huntington Bancshares

$4.02B

$54.98B

7.32%

$2.61B

3.39%

Fifth Third Bancorp

$9.33B

$114.90B

8.12%

$965M

3.66%

Source: Company Filings

Executive Suite and Board Turnover:

FITB stands out amongst its peers with 3 chairmen, 3 CFOs, 2 CEOs, and 9 director departures in the last 5 years. While HBAN has also had 2 CEOs and 2 chairmen, it has not experienced such broad-based turnover as FITB. Of particular note with the two lower risk names is the stability in the CEO and CFO positions, which have remained constant for more than 5 years.

NYB has maintained a stable executive suite; an imperative attribute given the amount of instability seen in the banking industry and credit markets. Conversely, there have been 2 chairmen and 3 director departures. However, some of that risk is mitigated by the fact that the former chairman, CEO Joseph Ficarola, remains with the company. Further, it has been age driving director turnover. One of the departing members was 86 years old and two others passed away while still serving. That experience and leadership ability has undoubtedly contributed to NYB’s low risk profile despite the numerous pitfalls impacting its peers.

Company

Number in Last 5 Years

CEOs

CFOs

PAOs

Chairmen

Director Departures

New York Community Bancorp

1

1

1

2

3

Zion Bancorporation

1

1

2

1

0

Huntington Bancshares

2

1

2

2

7

Fifth Third Bancorp

2

3

3

3

9

Source: Company Filings

Capital Requirements:

Each bank in this analysis surpasses the FDIC’s requirements for classification as “well capitalized” consisting of a minimum leverage capital ratio of 5%, a minimum Tier 1 risk-based capital ratio of 6%, and a minimum total risk-based capital ratio of 10%.

Company

Leverage Capital

Risk-Based Capital

Tier 1

Total

New York Community Bancorp

9.16%

13.64%

14.25%

Zion Bancorporation

13.48%

16.10%

18.12%

Huntington Bancshares

10.24%

12.37%

15.11%

Fifth Third Bancorp

11.08%

11.96%

16.25%

Source: Company Filings

Valuation and Yield:

NYB currently yields 7.6%, significantly higher than HBAN at 2.7%, FITB at 2.4%, and ZION at 0.2%. Given the lack of regulatory scrutiny and charge-offs of less than 1% of assets since 2006, this regional banking company stands apart in our coverage universe with a Low Risk rating.

Company

Yield

P/BV

New York Community Bancorp

7.6%

1.04

Zion Bancorporation

0.2%

0.72

Huntington Bancshares

2.7%

1.00

Fifth Third Bancorp

2.4%

0.97

Source: Reuters

Dividend Sustainability:

With a yield north of 7.5%, investors would be right to question the long-term sustainability of NYB’s dividend payments. However, the company has maintained a steady $0.25 per quarter dividend dating back to Apr-04. While a positive growth rate would be ideal, the fact that NYB maintained its payout in the throes of the 2008 financial crisis is certainly appealing, especially given the rocky global outlook going forward.

NYB has maintained a relatively stable dividend payout ratio of around 87% since 2009. While this seems high, the stability created by the previously-highlighted conservative loan portfolio allows the company to be somewhat more aggressive with its capital distributions. Also of note is the nearly 12% annualized growth in dividend cash outflows contrasted with a 0% dividend growth rate. The discrepancy is due to share issuances, suggesting that there is capacity for dividend increases in the absence of any additional need to raise capital.

NYB Metric

2007

2008

2009

2010

2011

CAGR

(’07 - ’10)

Dividend Per Share

$1.00

$1.00

$1.00

$1.00

$1.00

0.0%

EPS

$0.90

$0.22

$1.11

$1.24

$0.82*

11.3%

Payout Ratio

1.11

4.55

0.90

0.81

NA*

Net Income

(in thousands)

$279,082

$77,884

$398,646

$541,017

$362,385*

24.7%

Dividend Cash Outflow

(in thousands)

$310,205

$333,509

$347,554

$434,366

$327,657*

11.9%

Source: Company Filings *Dividends have been paid for 2011, but full results have yet to be reported, so these numbers are based on 9M11 reported results.

Summary and Conclusions:

NYB has maintained a low risk profile in a relatively high risk industry. The company has reported no legal or investigative activity; has charged off less than 1% of its assets since 2006; has sustained a stable executive suite; and is well capitalized. In addition, it pays a hefty dividend yield of more than 7.5%. In our opinion, NYB has set itself apart from its peers in the regional banking industry.

Source: New York Community Bancorp: A Low Risk Regional Bank