New York Community Bancorp, Inc. (NYB) beat Q2 earnings estimates pre-market today and shares are fairly flat in the first hours of trading. At a glance, EPS beat consensus by approximately 15%, coming in at $0.30 (per diluted share) compared to consensus of $0.26. Operating earnings rose 15.9% quarter over quarter, generating a return on stockholders' equity at 17.39%. Part of this increase is due to mortgage banking activity: the regional bank's seen a significant 65.9% increase in mortgage banking activity (totaling $58.3 million) since last quarter. The increase can be attributed to refinancing activity, which also increased prepayment penalty income, which is now at 3.30%, a 6 basis point increase from last quarter. On a year over year basis, prepayment penalty income is down 20 basis points.
Reasons to Like NYB:
- Improving operating earnings and increasing revenues from mortgage banking, which has seen results stemming from its traditional multi-family loans market, which now consists of 68.6% of total loans.
- Limiting and decreasing loans past due (specifically in the 30-89 day period); non-performing non-covered loans declined by $73.8 million to $252.0 million, a 22.7% improvement from December 31, 2011.
- Strong cash earnings increasing tangible stockholder's equity (Q2 cash earnings contributed $10.5 million more to tangible stockholders' equity than its second quarter 2012 GAAP earnings alone).
- Building its deposit base through the assumption of deposits from Aurora Bank. CDs accounted for the bulk of the increase and now represent 39.4% of total deposits while core deposits represent the other 60%.
- Dividend declared of $.25 per share (for 34 consecutive quarters), for a yield of approximately 8%; the dividend did not miss a beat during the financial crisis and should be considered defendable.
- As a regional bank, NYB is exposed solely to US banking demands (insulation from Europe).
- Uninvolved in proprietary trading and avoids the massive derivatives trades that many large banks engage in; less risk (and less reward, certainly), but it is generally a stable investment with a solid dividend.
Challenges Going Forward:
- Narrowing spreads between short- and long-term interest rates.
- When rates do rise (eventually), refinancing volume will decrease as the only reason consumers would refinance at higher rates is to avoid even higher rates in the long-term.
- A slow and grueling housing recovery: most recent data for residential sales in June 2012 came in at 350,000 the same day NYB reported. The number misses the 370,000 expectations and fell 8.4% from May (but gained 15.1% from June 2011). Meanwhile, median sales price of $233,000 is at the lowest since January.
- A combination of the above calls into question whether or not the mortgage lending increases presented in the earnings press release are sustainable in the long-term.
Currently, NYB trades in the middle of its 52-week range ($11.13-$14.31), a $3 range which NYB has traded, albeit choppily, within for the past year. While the stock is not guaranteed to stay within its 52 week range, I view it as a reasonable range when considering upside potential/ downside risk. With the recent EPS announcement, NYB trades at a P/E of 11 for the trailing twelve months and is more or less fairly valued. While not the sole reason to invest in any stock, NYB's dividend is very alluring at an annualized yield of about 8%, and with a lower payout ratio (same dividend, more earnings), NYB will have some more cash to invest or even sit-on as a 'just-in-case'. I believe that those seeking yield will be satisfied with NYB's fairly stable performance and strong dividend.