Small banks like New York Community Bank (NYCB) have some big advantages over their bulge-bracket peers.

NYCB fared relatively well during the 2008 financial crisis, since it avoided the risky activities that got the major banks in trouble.

And, NYCB’s dividend yield towers above its big bank peers. With a 5.2% dividend yield, NYCB stock pays more than double the average dividend yield in the S&P 500 Index.

NYCB is one of 295 stocks with a 5%+ dividend yield.

Last year, NYCB committed the ‘cardinal sin’ in dividend growth investing—it cut its dividend. In light of this, investors could hardly be blamed for not trusting NYCB’s current dividend yield.

However, there was a valid reason for NYCB cutting its dividend, and it was not because of deteriorating financial performance.

Going forward, the new dividend level should be sustainable. Plus, NYCB offers a very strong dividend yield, at a time when interest rates remain low. Most other big bank stocks have current dividend yields in the 2%-3% range.

This article will discuss why NYCB’s 5% yield could be attractive for high-yield dividend investors.

Business Overview

NYCB is a bank holding company. It operates two major entities. It has the New York Community Bank, a savings bank established all the way back in 1859, with 225 branches. It also has New York Commercial Bank, which was established in 2005 and has 30 branches, all in Metro New York.

NYCB operates a savings and loans business model. It has $48.8 billion of assets, which makes it the 22nd largest bank holding company in the U.S.

It also has $28.7 billion in deposits, and a $27.1 billion multi-family loan portfolio.

The company performed well in 2016. NYCB had net profit of $495 million, and earnings-per-share of $1.01.

This was a significant recovery from the previous year, when the bank reported a net loss of $47 million. The loss was due mostly to a $141 million debt repositioning charge in 2015.

Once again, the strength of NYCB’s assets stood out last year.

Source: Q1 Earnings Presentation, page 11

NYCB’s high-quality assets consistently outperformed its banking peers during various industry downturns, including the savings and loan crisis, as well as the Great Recession.

This is why NYCB’s earnings held up well during the Great Recession:

• 2007 earnings-per-share of $0.90
• 2008 earnings-per-share of $0.83
• 2009 earnings-per-share of $1.13
• 2010 earnings-per-share of $1.24

The company remained profitable in 2008 and 2009. Although earnings declined in 2008, NYCB quickly recovered. Its earnings reached a new high by 2010.

This consistent profitability throughout the financial sector allowed NYCB to maintain its $1 per share dividend during the recession, while so many large banks cut their dividends and posted huge losses.

In 2016, non-performing assets represented just 0.14% of total assets.

Going forward, investors can expect NYCB to benefit from two growth catalysts: higher interest rates, and growth in loans and deposits.

Growth Prospects

NYCB has solid growth potential. It will benefit from higher interest rates. First-quarter earnings-per-share declined 22% year over year, due in large part to a 2% decline in total interest income.

Higher interest rates could help remedy this. Banks are typically among the biggest beneficiaries of rising rates, because it widens their profit margins. Earnings from loans tend to rise at a faster pace than interest paid on deposits.

In addition, the company will benefit from loan growth. It has a prudent loan strategy, which is to focus on multi-family loans.

Multi-family loans are particularly attractive, and the company has targeted growth specifically in this area. Multi-family loans represent 70% of NYCB’s total loan portfolio.

Source: Q1 Earnings Presentation, page 6

The reason is because these loans are highly stable, particularly during downturns.

Since NYCB went public, it has incurred just $145.5 million of losses on multi-family loans. Losses represented just 0.20% of the $73.1 billion of multi-family originated since 1993.

The majority of multi-family units in New York have rent control features. Of NYCB’s multi-family loans in the five boroughs of New York City, approximately 88% are collateralized by buildings with rent-regulated units.

Rent-regulated units typically have below-market rents. According to NYCB, these buildings are more likely to retain their tenants in downward credit cycles.

This helps explain NYCB’s extremely low losses on multi-family loans.

Moreover, multi-family loans are less costly to produce and service than other types of loans, which helps NYCB generate high levels of efficiency.

NYCB’s efficiency ratio expanded by nearly 8 full percentage points last quarter.

Dividend Analysis

It is understandable why investors would not view NYCB’s dividend favorably, given the company’s recent history.

It all started in 2016, when NYCB attempted to acquire Astoria Financial (AF), a similar New York-based savings and loan. Over the years, acquisitions have become a key part of NYCB’s growth strategy.

Source: Q1 Earnings Presentation, page 20

However, this acquisition carried significant implications.

Combined, NYCB and Astoria would have had $64 billion of assets, above the $50 billion threshold which makes a bank a Systemically Important Financial Institution, or “SIFI”.

This would have significantly elevated NYCB’s costs associated with compliance of SIFI regulations. In preparation, NYCB decided to cut its quarterly dividend by 32% in early 2016, from $0.25 per share to $0.17 per share.

Unfortunately, NYCB and Astoria terminated their merger agreement on December 20, 2016, after they concluded the merger was not likely to receive regulatory approval.

As a result, in hindsight it appears NYCB cut its dividend for nothing.

However, some context is important. With nearly $49 billion of assets at the end of the first quarter, NYCB was likely to earn ‘SIFI’ status in 2017 anyway.

This means a dividend cut was probably coming, with or without the Astoria acquisition.

Besides which, now that NYCB has right-sized its dividend, it is much more sustainable. NYCB’s pre-cut annualized dividend of $1 represented nearly all of the company’s 2016 earnings-per-share, of $1.01.

The revised annual dividend rate of $0.68 per share represents a payout ratio of 67%. Distributing two-thirds of earnings provides NYCB much more breathing room.

Plus, after NYCB clears the ‘SIFI’ hurdle, there is a possibility the company could raise its dividend, given its low payout ratio and growth potential.

Final Thoughts

When a company cuts its dividend, investors cannot be blamed for selling the stock and never looking back.

However, there are times when a dividend cut is not entirely the result of deteriorating fundamentals. NYCB is a special situation.

Given the unique circumstance NYCB found itself in last year, its dividend cut could be viewed differently within the proper context.

NYCB’s 5% dividend yield appears secure, making the stock an attractive choice for income investors.