New York Community Bancorp: Beaten Down Bank A Buy (NYSE:NYCB)

We have been encouraging our members to buy financials, as rising rates in our opinion are more of a benefit medium-term to banks’ possible earnings compared to the possible reduction in near-term loan demand from “rate shock.” We all know the Federal Reserve is continuing to raise rates to combat inflation. It has crushed markets this year. Really hammered them. But as banks continue to report Q3 earnings, they have largely been much better than expected and are showing the positive impacts of higher rates.

Frankly, regional consumer-centered banks have done the best. But more commercial-focused banks will benefit longer-term as well. Right now, though, regional banks are the ones we like the best. Some are performing better than others, and some are worse.

One stock that we think is worth a buy is New York Community Bancorp, Inc. (NYSE:NYCB). We really like the setup here in the $8 range for a nice tradeable bounce. This stock has certainly faced pressure in the last few months, like so many others, but better days are head as we see loan growth and widening net interest income on the horizon. This bank faced pressure the last two years from low rates, but that is in the past.

The major concern right now is that all of the Fed pressure will lead to a recession and that will hurt banks. We are seeing loan loss provisions building in the sector, given the economic woes. Still, we believe in taking a contrarian view and starting to build positions in beaten-down names, and there are some good opportunities in the banks, including NYCB. We like a buy in the stock based on valuation, the dividend, and the long-term prospects for financials. Let us discuss.

New York Community Bancorp headline numbers disappoint in Q3

Overall, this is a well-run regional bank with an over-7.5% dividend yield, which we think is safe. The company just reported a mixed Q3, which sent shares lower, and we think this is an opportunity to start scooping shares in the $8 range. Despite a mixed quarter relative to expectations, revenues were up 3.0% in Q3 to $343 million, but came up slightly short of expectations by $11 million The company saw earnings and earnings per share were flat from last year, and this was viewed as disappointing coming in at $0.31 per share and missing expectations by $0.01.

We suspect Q4 will still see some pressure, but we really like the set up for 2023, and the share price relative to book value is strong, when we factor in the underlying growth of the company.

Loans and deposits grow

We always look for loan and deposit growth in regional banks to see if the company is setting up for success. More deposits means more capital available to lend, and more loans tends to mean more fee income as well as interest income. That said, both deposits and loans grew. Total deposits increased $6.6 billion, or 25% annualized, to $41.7 billion versus the start of the year and were up $461 million from Q2.

There was also growth in loans. Total loans rose $3.2 billion or 9% annualized to $49.0 billion versus the start of the year and increased $447 million compared to the sequential quarter. There was one small problem we noted. Unlike most banks we have covered, the bank actually saw its net interest margin compress. That was a real surprise with higher rates. Net interest margin declined 30 basis points to 2.22% compared to the prior quarter. Addressing this issue, the CEO stated:

“We recorded very good loan and deposit growth, stellar asset quality, and stable operating expenses. In terms of our net interest margin, given the liability-sensitive nature of our balance sheet, we witnessed NIM compression. However, we still reported diluted earnings per share of $0.31 on a non-GAAP basis, excluding merger-related charges, which were in line with consensus and unchanged from the third quarter of last year.”

While that was disappointing, originations are actually up here, unlike many banks. The pipeline remains strong at $2.3 billion, of which there are over $1.0 billion of multi-family homes. With home values high and rates high, expect more investment in multi-families in coming years.

New York Community Bancorp asset quality

Loans were up and this was great, but we need a sense of asset quality here to ensure there is not a large degree of bad loans out their sitting on the balance sheet. Overall, this bank has stellar asset quality.

In Q3, there was an increase in the provision for loan losses versus a year ago, driven by the growth in the loans discussed above and the uncertainty around the current economic environment. This was a common theme for banks inQ3 this far. We would expect the level of provision for loan losses to grow. They were $2 million this quarter, up from a credit of $1 million a year ago. Perhaps a surprise, the provisions were lower than Q2 2022’s $9 million. Keep an eye on provisions to see if they increase.

Non-performing assets are another critical indicator. So far in 2022, non-performing assets as a percentage of total assets have been relatively stable. We’re not sure if this will continue for the rest of the year, so we will monitor it. In Q3, non-performing loans were down 10% from Q2. This is 0.09% of all loans and is negligible. However, the allowance for credit losses increased $2 million to $218 million vs Q2 2022, representing 480% of non-performing loans. This was a safety net.

We do want to point out that the bank is also highly efficient. The efficiency ratio during Q3 improved to 38.57% versus 38.84% a year ago. This was strong and is one of the most efficient banks we know. This drove strong return on assets of 1.02% and return on tangible equity of 14.81% in the quarter.

Attractive relative to book value

The valuation overall here is attractive. We really like to compare the share price to that of book value. The bank is still trading way below book value. Book value was $13.39, so at $8.65 for the current share, that’s a huge discount. The company is also just above tangible book value of $8.19. We love to buy bank stocks close to tangible book, so the value proposition is very strong here.

Final thoughts

The outlook is strong for financials. The dividend yield is superb, loans are growing as are deposits. We expect net interest margin to widen next year and the valuation remains attractive. We think it is set up nicely.