Let me start out by saying that New York Community Bancorp (NYSE:NYCB) is, in my opinion, one of the best-run banks in the country.
I could go on and on about why this is the case, but it ultimately comes down to two factors. First, it doesn't do stupid things with other people's money -- and, by that I mean that it doesn't underwrite bad loans. And second, it does what it should do with earnings -- that is, it distributes the vast majority to shareholders.
If other banks in this country acted as responsibly as New York Community Bancorp has over the last few decades, we wouldn't have found ourselves in the situation we did five years ago.
With that out of the way, allow me to play devil's advocate. If I were so inclined to find disfavor with the way New York Community Bancorp is run, the following one reason would be at the top of my list.
Another merger, which is expected, could lead to a dividend cut
The executives at New York Community Bancorp make no secret about the fact that they are actively seeking to make acquisitions. "We, obviously, are an acquisition-focused bank," its chief financial officer Thomas Cangemi said on the most recent conference call. And at the beginning of this year, its chief executive officer Joseph Ficalora added:
[T]he reality is that we've been very vocal about our intention of preparing ourselves as best as possible to be in a position to do [a large accretive acquisition]. I can't say to you that there is a definitive transaction that we're about to announce, but I can say to you that we are much further down the road with regards to the necessary work that needs to be done so as to be in a position to take advantage of that when that arises. It is our intention; it is the focus of many of the things that we're doing today. We are basically not looking at smaller transactions at all. So the likelihood that we do something is definitely in front of us. Exactly when that will be, many, many different things will make that decision.
This strategy has served New York Community Bancorp well in the past. In 2009 and 2010, it picked up nearly $9 billion in retail deposits from two bargain-basement acquisitions from the FDIC. And in the first quarter of last year, it negotiated a similar deal with Lehman Brothers Holdings to assume $2.3 billion in FDIC-insured deposits from Wilmington, Delaware-based Aurora Bank. The latter transaction allowed New York Community Bancorp to reduce its reliance on wholesale funding by 11.6% on a linked-quarter basis.
But at this point, the rules of the game have changed. This is because any future acquisition will take the bank over the $50 billion asset threshold, which thereby triggers submission to the Federal Reserve's Comprehensive Capital Analysis and Review, a process that "evaluates institutions' plans to make capital distributions, such as dividend payments or stock repurchases." As the central bank explains, "The Federal Reserve will approve capital distributions only for institutions whose capital plans it approves and who demonstrate sufficient financial strength even after making the planned capital distributions to continue operating as financial intermediaries under stressful economic and financial conditions."
While there's no question that New York Community Bancorp has a proven track record of financial strength, its commendable history of distributing virtually all of its net income to shareholders could thereby be in jeopardy. This is because the Fed has signaled, at least for the time being, a 30% cap on payout ratios for systematically important financial institutions -- that is, banks with more than $50 billion in assets on their balance sheets. As it said in the most recent CCAR guide, "The Federal Reserve expects that capital plans will reflect conservative common dividend payout ratios. In particular, requests that imply common dividend payout ratios above 30 percent of projected after-tax net income available to common shareholders in either the BHC baseline or supervisory baseline will receive particularly close scrutiny."
At the end of the day, investors love New York Community Bancorp in large part because of its generous dividend payout and yield. If this is placed in jeopardy from a future acquisition, it's hard to envision that this won't have a negative impact on the bank's stock.
John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.