Why New York Community Bancorp May Be Priced Out Of The Acquisition Game

| About: New York (NYCB)
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Back in March, I wrote about the unbridled optimism embodied by some fans of Westbury, NY-based thrift New York Community Bancorp (NYSE:NYCB). Two new examples recently appeared. First, in a report dated August 6th, Morgan Stanley Ken Zerbe posited that if NYCB could find a deal that was accretive to EPS, protected the dividend and avoided tangible book value per share ("TBV-PS") dilution, such a deal could be "transformational." Second, on August 21st, Sandler O'Neill analyst Mark Fitzgibbon speculated that if M&T Bank's (NYSE:MTB) $3.8 billion deal for Hudson City Bancorp (NASDAQ:HCBK) fell through (the deal was announced nearly a year ago, on August 27, 2012; regulatory issues at MTB have prevented the deal from closing), NYCB might step in.

Let's start with Fitzgibbon's argument, since he at least suggests a specific deal. NYCB's current market cap is $6.8 billion. MTB's is $15.4 billion. HCBK's current market cap is $5.1 billion, materially above the $3.8 billion announced deal value because of MTB's 34% price increase since then. Bank stock prices in general have risen meaningfully over the last year. If the MTB/HCBK deal were to unravel, could NYCB buy HCBK, even at a modest premium to what its current stand-alone value would be? I strongly doubt it. NYCB is just too small.

Turning to Zerbe's argument, a deal meeting the criteria he lists might be transformational. Fine. Which specific target? Keep in mind that it behooves any intelligent acquisition target to think about the acquisition currency its shareholders would be receiving.

That should keep NYCB out of the acquisition game. Some facts:

Beginning with its acquisition of Haven Bancorp, which closed in November 2000, NYCB has completed seven whole-bank acquisitions comprising $3.4 billion in aggregate value. The largest, the $1.6 billion acquisition of Roslyn Bancorp, was completed on October 31, 2003.

NYCB's peak EPS was $1.65. It occurred in 2003, and contained only two months' worth of Roslyn's financial results. EPS began declining steadily after that, well before the financial crisis began, to a low of $0.23 in 2008. EPS recovered in 2009, increasing to $1.13. EPS grew again slightly in 2010, to $1.24, but was below this in 2011 and 2012. The mean sell-side EPS estimate for NYCB in 2015 is $1.09.

Even as EPS was falling, NYCB steadily grew its dividends per share ("DPS") in 2004 and 2005. It paid out more than 100% of its EPS as dividends in 2006 and 2007, and more than 400% in 2008. Over the last four fiscal years, it has paid out 87% of its EPS as dividends, well above the 40% dividend payout ratios of most banks. As banks cannot grow assets without growing equity as well (leverage is closely monitored by bank regulators), these payouts have made it impossible for NYCB to grow meaningfully.

Despite the horrible EPS track record, NYCB has yet to write off any of the $2.4 billion in goodwill that its acquisitions generated.

In order to improve its capital ratios, NYCB issued about $350 million of common equity in May 2008 and nearly $900 million in December 2009 (a year in which NYCB paid out about $370 million worth of common dividends). Amazingly, it was able to issue equity at both times at a price well above TBV-PS. The latter offering increased NYCB's TBV-PS materially.

NYCB's high closing share price of $35.12 occurred on February 27, 2004. On Friday, it closed at $15.37, 56% below this high. Many top-performing banks are at or near their all-time highs.

NYCB's short interest percentage at July 31st was 8.5%. This is well below the high of 14% in March 2009, but still well above that of most banks.

NYCB's dividend yield is currently 6.6%. It trades at 2.1x TBV-PS. Its 2012 return on average tangible common equity ("RoATCE") of 16.7% could be considered reasonable justification for NYCB's high price/TBV-PS multiple. Presumably short sellers believe that the dividend yield is supporting NYCB's stock price, and that it is vulnerable. It may be.

Joseph Ficalora, NYCB's current President and CEO, has held these titles since NYCB's inception in 1993. Mr. Ficalora is not Chairman of NYCB's Board; the Current Chairman, Dominick Ciampa, was elected Chairman in 2011. He has been a Director since 1995. Mr. Ciampa is a real estate developer. As CEO, Mr. Ficalora is presumably the chief architect of NYCB's acquisition strategy, although Mr. Ciampa has been involved as a Director for a very long time.

Should the above facts make a target shareholder eager to take NYCB's currency? Perhaps if he or she received a fat deal premium, and planned to sell his shares immediately. But if all the target shareholders planned that, NYCB's share price would plummet and the deal premium would evaporate.

Bank stock investors believe that a bank that grows is generally worth more than one that doesn't. I agree. So if NYCB can't grow organically because its dividend is so high, and it buys another, growing institution for a premium, but then has to turn its growth off (target shareholders have to receive the higher acquirer dividend, so target capital and earnings grow more slowly), does a deal make NYCB shareholders better off?

I recently wrote an article on bank M&A for the American Banker's BankThink blog, in which I likened M&A to a scalpel that can do wonders in the hands of a skilled surgeon. How good are Mr. Ficalora and team at this kind of surgery, and why do some analysts choose to believe that the next operation will go any better?

Disclosure: I 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.