New York Community Bancorp : Tanks A Lot For The Dividend Cut

On our last coverage of New York Community Bancorp, Inc. (NYSE:NYCB), the stock was at $9.37, and we suggested that it was good but not “great”.

Well, if you are heavily underweight financial stocks, then this is one of the best you can add. If you are patient, the odds of you making 10% annualized returns from this point are quite high. But it’s likely to be a volatile next 12-24 months in our opinion and you don’t want to assume that those earnings estimates cannot go way lower.

Source: Earnings Drop Improves Risk-Reward

Our best pick was to stay with the secondary securities or use defensive covered calls to make dough. That caution seemed to be rather unwarranted in the last three months. A rising tide lifts all boats, though this one seemed to develop a leak this morning.

For the three months ended December 31, 2023, the Company reported a net loss of $252 million compared to net income of $207 million for the three months ended September 30, 2023. For the three months ended December 31, 2023, the Company reported a net loss available to common stockholders of $260 million compared to net income available to common stockholders of $199 million for the three months ended September 30, 2023. Diluted EPS totaled $(0.36) for the three months ended December 31, 2023 compared to diluted EPS of $0.27 for the three months ended September 30, 2023.

Source: Q4-2023 Earnings Release

That came with a massive dividend reduction as well to $0.05 a share from $0.17 a share. The pre-market action looks brutal.

Let’s dig in to see what everyone missed.

Q4-2023

NYCB began its presentation with “2023 accomplishments”. We would have probably chosen a different title for this one, considering what came alongside this. But one point here worth noting is that Category IV large bank class, which subjects NYCB to a higher level of scrutiny.

That said, NYCB has been over that $100 billion mark for a few quarters, and that was what we thought was the objective of buying Flagstar bank. Growth through a larger balance sheet. In the next slide, NYCB showed its relative position compared to its peers. The interesting evolution here of ACL (allowance for credit losses on loans and leases, not anterior cruciate ligament) from September 2022 to December 31, 2023, is what pretty much this quarter was all about.

One other point to take note of is that for all the amazing history about NYCB’s navigation of past cycles, the metrics here don’t exactly portray NYCB in a great light. Non-Performing assets are exactly where its peers are. 2023 charge-offs are worse than its peers.

Its reported CET1 ratio is actually well below its peers. Its adjusted CET1 ratio, which takes into account mark-to-market on longer duration securities, is better than its peers.

That is because NYCB does not have much of those long duration securities like Bank of America (BAC) for example. But hey, BAC is not the one cutting its dividend today.

A Closer Look At The Reserve Building

NYCB’s loss this quarter was due to a large reserve build in office and multifamily loans.

Now, we would be taking underserved credit if we said we saw this playing out like this. But we did caution investors that they need to focus on this and not the usual “low P/E-high dividend” mantra.

After all, the loan-to-value was about 59% to begin with. So if the original office property value was $100, NYCB loaned out $59 and if you value the property at $40, NYCB’s loss is $19. So your losses to total loans should be modest even in that scenario, but we would still be talking about $1.0 billion of total losses. That is a big number in relation to total tangible equity of about $7.4 billion. As to how this actually plays out, remains to be seen. But this space deserves watching for fallout and while we think NYCB will land up being fine, there will be more turbulence here.

Source: Earnings Drop Improves Risk-Reward

Looking deeper, the non-performing assets still continue to be relatively modest. There is hardly any single tenant office in there and 17% actually being in the medical office category.

But things are definitely deteriorating. This was the slide for Q2-2023 below.

Perhaps the writing is on the wall and all those headlines about commercial real estate coming to bite the economy in 2024, are actually true. NYCB is likely hunkering down for some big write-downs in 2024. We also saw increasing distress in its multifamily portfolio, where non-performing loans were disclosed for the first time in its presentation. Don’t dismiss on those small nonperforming loan numbers. They add up quickly when you are levered 12:1.

Verdict

We are big believers in using the tangible book value as a starting point, and this morning, NYCB will be at one of its largest discounts to that value.

But the story has changed. Big money managers won’t be chasing this after being blindsided with this quarter’s results. How do they go from almost 180% dividend coverage to a 70% dividend reduction in four quarters? How do they do this when they got a huge gift of free money from the FDIC in Q2-2023? We know the bulls will be lining up to punch us, but whatever story you believed in before these results, it was wrong. Wrong, wrong, wrong. This is a new day, and it will take at least six quarters to rebuild confidence. And guess what? You are no longer getting paid to wait. We don’t have a position here, and we likely won’t initiate one. If we did, it might be in one of the secondary securities, which we discuss below.

Other Plays On NYCB

New York Community Bancorp, Inc. DEP SHS REPSTG A (NYSE:NYCB.PR.A) pays a 6.375% coupon on par and currently yields 7.09% based on the pre-market price.

This one resets in 2027 and may be for those who believe that inflation is due for a resurgence and interest rates are likely to move higher in a secular fashion. That would make redemption highly probable and create a delicious yield to call. We have bought and sold these previously. Our entry was near $20 and exit near $23. That was when we had a huge level of faith in NYCB. So obviously, our margin of safety needs to be higher today.

New York Community Capital Trust V UNIT 05/07/51 (NYCB.PR.U) pays 6.0% on par value (note this is $50 in this case) and yields 7.1% currently.

This security also has a maturity date, and this creates a more interesting dynamic than NYCB.PR.A. We are watching both at present and don’t want to be early to pull the trigger.

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.