I've been quietly accumulating New York Community Bank (NYSE:NYCB) stock over the past few months. However, given the rash of negative articles and comments about the bank that we've seen in 2017, I felt compelled to defend the bank publicly.
While this article addresses various concerns about the bank, I do want to specifically lodge a rebuttal to the idea that NYCB is "decreasing shareholder value day after day" and that management is paying itself too much.
Management Isn't Against Shareholders
From reading the comment streams of recent articles about NYCB here at Seeking Alpha, you'd get the idea that management and shareholders were pitted against each other. To give just one of the many examples I could choose from, see this recent comment:
TheWallStreetKid isn't alone, quite a few commenters have suggested that management is taking advantage of shareholders. But by what means exactly - is there a legitimate gripe?
The biggest complaint is that NYCB cut the annual dividend from $1 to 68 cents as part of the repositioning associated with the Astoria Financial (NYSE:AF) merger. This move was entirely logical.
NYCB was paying a $1 dividend for many years in order to avoid going over the $50 billion SIFI limit. NYCB earned just a tad over $1/year and paid virtually 100% of earnings out as a dividend. In this way, management avoided SIFI regulation, and shareholders enjoyed a fat yield in the interim.
However, this was not an ideal situation, and investors who assumed the bank would have a 100% payout ratio indefinitely were misguided. Banks aren't REITs, they aren't supposed to pay all of earnings out. You want a bank to reinvest in its business and make new loans - a large dividend now greatly limits upside in the future since the bank can't grow assets.
Some long-time NYCB shareholders simultaneously complain about the lack of growth in recent years and the dividend cut. But you can't get both at the same time! Either management tries to grow the business, or it pays you an abnormally large dividend. You aren't going to get both, and don't blame the company for what turned out.
The bears cite NYCB's flat book value over the past half decade or so. Sure, there hasn't been any growth, but management was paying 100% of profits out as dividends, how exactly was book value supposed to go up? Last year - the first year with the reduced dividend - book value rose nicely. That's how things go when your payout ratio is at a more normal level again.
Now, you can say you didn't like the Astoria deal. That may or may not be fair. It seemed reasonable at the time, but with hindsight, it didn't pan out. Let's look at the bigger picture, though. A $10,000 investment in NYCB in 1993 is now worth $322,000 (and that's even with the recent dip in price). (source)
NYCB stock has returned a blistering 16%/year over the past 24 years. Sure, you can dock management for a perceived bad decision or two as of late, but on balance, this company has run circles around its other large banking rivals. Need I remind you that most of the large US financial firms got decimated in 2008?
The other complaint is that management is paying themselves too much. Their pay packages have gone up over the past 10 years at a rate somewhat faster than inflation - though really it has not been anything dramatic once you strip away the hyperbole. The CEO's total compensation package last year was $7.4 million, the CFO took home $2.8 million. Considering that this is a $50 billion in assets and $6.5 billion market cap firm, I simply can't work up much outrage at the size of their pay packages.
NYCB: A Fantastic Bank
Put aside all the worries about price action, mergers, and SIFI limits for a second.
NYCB is an outstanding bank. Start with the efficiency ratio, which comes in at an amazing 45%, compared with 60% for its peers. That signifies that management keeps a far tighter leash on expenses than its rivals. This runs contrary to the narrative that management is somehow taking advantage of us shareholders. Efficiency ratios of even 50% are considered to be very good; 45% is truly excellent.
The next pillar of the bank's strength is its remarkably high asset quality. The bank has virtually no loan losses now. That's not hyperbole. Net charge-offs have been under 0.1% every year from 2013 onward. Net charge-offs hit 0.2% in 2010, a year when they were at 3% for the average US bank. The difference is vast.
Similarly, the company has had far fewer non-performing assets through all recent credit cycles:
Credit NYCB's management, or perhaps its unique lending niche, regardless, the bank's assets are of impeccable quality.
The bank has had issues with growth, sure, but this has been primarily driven by the government's arbitrary SIFI limit. Since running into the limit, management has continued to run the bank in its usual highly efficient style with excellent loan underwriting. It has had to pass up growth opportunities that would have been otherwise available if the balance sheet could have grown. Still, it kicked out a 7% dividend for years while maintaining book value - you could get a far worse fate from a US bank investment.
The Road Ahead
It appears that NYCB won't be staying under the $50 billion SIFI limit all that much longer. There are several different scenarios going forward from here.
The Trump administration could alter SIFI regulation, allowing NYCB to grow organically once again. It's hard to handicap the odds of any particular proposed Trump reform actually becoming law, but numerous analysts view this as a plausible near-term development. The lifting of the SIFI limit would be a huge win for NYCB stock - you'd likely see it up double digits shortly after the change in regulation.
If we assume the SIFI limit isn't changed, NYCB has a couple of options at its disposal. It can try to engage in another substantial merger to lift it significantly over the $50 billion threshold. This is the path that was tried, and failed, with the Astoria deal. Given the level of animosity among the shareholder base, management would have to find a pretty good deal, I'd imagine, and the slide in NYCB stock makes it harder to get the math to work.
NYCB is also an increasingly attractive target for a larger bank. Given the huge divergence in banking stocks and NYCB stock since the election, NYCB is becoming more and more accretive to potential acquirers. It's pretty rare to find as large, high-quality, and efficient a bank as NYCB available at under 14x earnings in the post-Trump banking environment.
Finally, NYCB can continue with the path it was on prior to the aborted Astoria deal, jacking the dividend back to a 90%+ payout ratio and tightly managing the balance sheet to avoid the SIFI problem. This isn't an ideal long-term solution, however, it'd still deliver a 7% yield to shareholders from a low risk asset - viewed as a bond, NYCB stock would be quite attractive in this scenario.
NYCB hasn't materially changed over the past three years. The stock got bid up in 2015 as the chase for yield heated up. However, those late arrivals to the stock apparently missed the memo that the bank was going to try to jump over the SIFI limit, thus triggering a rather dramatic decline late that year as the yield tourists left for greener pastures following the dividend cut.
The stock settled around $15 in 2016 - a reasonable level given the bank's steady book value, asset base, loan performance metrics, and so on. However, once Trump won, NYCB stock started to rally - like the rest of US banking equities. The simple fact is that US banking shares, as a sector, are now worth more than they were in prior to election night.
Yet NYCB finds itself at multi-year lows now. Considering this was worth $15-$16 pretty consistently for years, and the banking environment has substantially improved, you can make an argument for NYCB being worth $18-20 today, in line with the magnitude of rallies in peer banking institutions. Haircut that for the bank's damaged profile with the Astoria deal, and you still have a stock that should be worth $16 or more today.
It simply doesn't make sense for such a high-quality bank with excellent efficiency and virtually nil non-performing loans to be trading at a 7% earnings yield. That becomes even more true when you see what extravagant multiples people are now paying for iffy too-big-to-fail banks that got splattered in 2008. NYCB has been a remarkably solid compounder over the decades, and the market's recent stampede out of the stock is creating an outstanding entry point here.
Disclosure: I am/we are long NYCB.
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.