New York Community Bancorp: Nice Little Trade (NYSE:NYCB)

Prepared by Tara, Senior Analyst of the team at BAD BEAT Investing

Last month, my boss had highlighted New York Community Bancorp (NYCB) when it was $11.13 as a name we would love to buy under $10. Well, that panned out, and we were able to scoop shares at $9.50 and again at $9.0. With shares now pushing back toward the $11 mark, this was a nice little trade. Financials, and NYCB namely among others, have been a topic of discussion over at BAD BEAT Investing for a few weeks as we took the contrarian view that as the banks sold off during the recent rally, you had to buy for a rotation that was weeks, maybe months out at worse. That has all panned out. Now, at this juncture, we are beginning to revisit calls to buy banks in recent weeks. With NYCB, there was concern over rent control issues, fears that really didn’t seem to come to pass. While COVID-19 has certainly weighed on financials, we still like NYCB. To be clear, our short-term traders have begun taking profit. Scalping gains of 10-15% is what many of us do, but we think that you can hold this one into the teens with ease. Does that mean it will go straight up? Let’s not be silly. We believe that even if you do not get the price we did, it is still a great opportunity to get into the name on a dip, based on valuation, the dividend, and the long-term prospects for financials. Let’s check back as to why.

When the company reported earnings, New York and the Tri-State area were largely still under lockdown. The quarter had only some minimal exposure to the lockdown. In the present Q2, we are going to really see the brunt of the impacts, as April, and much of May, have been under such lockdown. But here is the thing. The Market knows this. The Market is looking way past H1 2020, and is looking to the latter half of H2 2020, if not already fiscal 2021. That is the reality. We are definitely bullish on the name as we move forward, but if you can get a pullback, then great. It is always good not to overpay.

Overall, this is a well-run regional bank with a near 7% dividend yield, which we think is safe. When Q2 is reported this summer, there are a few key metrics to keep an eye on. We will discuss one again what we saw in Q1, but keep in mind these are the metrics you should be watching for when Q2 is reported. It is likely to be an ugly quarter, but, it’s not about what is “happening now”, it is about where things are going in the medium term. That is why we like the financials, and still like NYCB.

We think that it is important to realize that unlike some of the major global banks, this regional bank is largely focused on traditional banking. Each year we are seeing more assets under management, but the lower returns in Q1 led to slightly lower revenues versus a year ago. They were down 1.3% in Q1, and earnings per share was flat. The EPS came in at $0.20. We suspect Q2 will be worse, but we like the share price relative to book value.

Below book value

Why are we bullish? Well, the bank is trading below book value. And book value expanded year over year to $13.15. An argument can be made to buy a small lot now and then add on a pullback, but let the market give you a price that is supreme. We also like the name on this decline because it is not about where the company has been, it’s about where it is going. We think book value takes a lump again in Q2, but should improve after that.

Bread and butter banking

Loan growth, deposit growth and a stabilization in the cost of funds have helped the company’s standing, despite interest rates being so low. Let us be perfectly clear here. Loans and deposits, including their trajectory and quality, are so critical for regional banks such as New York Community Bancorp. We like that New York Community Bancorp continues to grow both loans and deposits long term.

The loan portfolio grew nicely here. Total loans were up 4% to $42.3 billion. The types of loans show us that the bank is lending heavily to multi-family investments. Those loans increased $113.4 million to $31.3 billion. Commercial real estate loans declined slightly on a period-end basis, but increased on an average basis. These loans totaled $7.0 billion compared to $7.1 billion to enter the quarter, down $47.1 million, or 3% annualized.

On an average basis, the loan portfolio rose $41.9 million, or 2% annualized, to $7.1 billion compared to the previous quarter.

Origination activity was down compared to a strong fourth quarter of 2019, but increased 35% on a year-over-year basis.

We also think that it is great that in tandem with loan growth, we saw total average deposits were up nearly $325 million in the quarter versus a year ago to $31.97 billion. The increase in deposits came from savings accounts and non-interest bearing accounts. In general, it is a great trend when both loans and deposits are growing. For banks we recommend, this is nearly almost always the case.

A word on asset quality

It is nice to see loan growth, but only if the loans are quality. So we need to understand where the quality metrics are. This will also be something to watch for in Q2. In Q1, there was an increase in the provision for loan losses, driven by the growth in the loans discussed above and the uncertainty around the current economic environment resulting from COVID-19. This was a common theme for banks in Q1, and we will look to see the impacts in Q2. We would expect the level of provision for loan losses in 2020 to continue to reflect the overall growth of the bank’s loan portfolio, and this could incrementally increase or decrease depending on economic trends in the next few quarters. Further, the bank reported a provision for credit losses of $20.6 million, compared to a recovery for credit losses of $1.2 million in the year-ago quarter and a provision for credit losses of $1.7 million in the previous quarter.

Do be sure to keep an eye on non-performing assets. So far, non-performing assets as a percentage of total assets have been improving. Not sure if this will happen in Q2, so watch it. In Q1, non-performing loans actually fell by $12.1 million compared to the year-ago quarter, while total non-performing assets were also down nearly $14.7 million.

Take-home

So we need to really watch these metrics, and more, as the year progresses. That said, valuation remains attractive, more so on any dip. While short-term traders are locking in profit, we think you can stay in this in the longer term, but do not be surprised with volatility in shares. The bank is a great lender with a good balance sheet and an attractive dividend. We love the discount-to-book and the fact that EPS has held up. It is still attractive.

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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.

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