New York Community Bancorp is Growing Again

I invested in New York Community Bancorp (NYCB) on April 9, 2021. I paid $12.48 for my shares. I had 3 main reasons for investing when I did:

1. The SIFI threshold (which I’ll explain shortly) was raised in 2018 from $50 billion to $250 billion. Thus, it makes sense for NYCB to start growing assets again… well, at least by 500%.
2. Between its 1993 IPO and its 2014 arrival at the SIFI threshold, NYCB’s share price appreciated over 4300%. Past performance doesn’t guarantee future performance… but you sure like to see it.
3. Between the SIFI threshold raise and my date of purchase, NYCB grew its total assets organically by about 15%.
4. Bonus! A little over 2 weeks after I bought in, NYCB made its first acquisition announcement since the Astoria affair in 2015-2016. If it closes, it will be NYCB’s first (successful) acquisition since 2012.

Below, we’ll take a look at why NYCB “couldn’t” grow between 2014 and 2018. Then we’ll try to answer the question, “If they could grow, would they?” After that, we’ll talk about this Flagstar deal which, if it closes, will add $29 billion of assets.

Make growing ok again!

For today’s prospective NYCB investor, the most important part of NYCB’s story starts in 2010. That was the year that the Dodd-Frank Act was passed. One of the many new rules it imposed on banks was that if your asset balance averaged at least $50 billion for four straight quarters, you were a Systemically Important Financial Institution (“SIFI”), and too big to fail. Thus, you had to spend a ton of extra money every year to perform stress tests and the like, to make sure you wouldn’t fail.

This was an expense that the megabanks could absorb. But a relatively blue-collar, midcap bank like NYCB—which had assets of about $40 billion at the time—it meant that growing those assets past $50 billion simply didn’t make financial sense.

Ultimately, NYCB decided to keep growing organically until it reached that threshold, and then acquire another bank to “leap beyond” $50 billion in assets. It arrived at (just under) $50 billion in 2014 and, in 2015, signed a definitive merger agreement with Astoria Financial Corporation.

The deal didn’t close. It was rough. The press release consisted of one heartbroken sentence: “[NYCB and Astoria] today announced that their boards of directors have mutually agreed not to extend the companies’ definitive merger agreement, and to terminate the agreement effective January 1, 2017.”

NYCB had arrived at the new SIFI limit, stopped growing just long enough to buy Astoria, failed to buy it after all, and now faced a zero-growth future of undefined length.

Then-CEO Joseph Ficalora in his 2016 letter to shareholders:

The fact is, Dodd-Frank is bad legislation that was hastily cobbled together and that has been hurting both our industry and the US economy ever since. …had Dodd-Frank not been enacted, this letter would be discussing the strong financial metrics of a materially larger financial institution.

Instead of growing, NYCB… did what they could. They sold their $2 billion mortgage origination and servicing business for a gain of about $82 million and reinvested the cash into “higher-yielding investment securities”. With that balance-sheet space freed up, they grew their multifamily loan portfolio, which has been their bread and butter since well before their IPO. They also reduced their operating expenses by about $100 million.

These were dark days for NYCB. Not in an existential way—just generally dark. In his next shareholder letter, Ficalora articulated it again:

As shareholders ourselves, everyone at the Company… shares your frustration with the share price performance. ...regulatory relief notwithstanding, the Company plans to resume meaningful balance sheet growth in 2018.

Now, I can’t imagine what he had in mind for resuming meaningful growth regulatory relief notwithstanding but—hark!—in May of that year, the herald regulators sang and delivered the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”). NYCB doesn’t seem to have put out a press release about it; they just made cool, straight-faced mention of it in their next earnings report: “… [the EGRRCPA increases] the asset threshold to $250 billion from $50 billion…. …the Company… expects to be a main beneficiary of the increase in the SIFI threshold….”

Like other, similar banks, NYCB benefitted from the EGRRCPA in more ways than just that one. For example, they were finally able to combine their community banking business and their commercial banking business into one, easier-to-manage entity. But by far the most important takeaway about the EGRRCPA is that NYCB can grow again, whether organically, by acquisitions, or both, at least until its asset base reaches $250 billion.

NYCB used to grow, and accretively.

But just because they can grow doesn’t mean they will. First of all, how much of a grower was this company before Dodd-Frank?

Well, we’ve been talking about their problems with the $50-billion-asset threshold, right? When they IPOed in 1993, they had about $1.1 billion in assets. That ~5,000% asset growth between 1993 and 2014 was good enough for share price appreciation of over 4300%.

But Lord knows growth doesn’t mean accretion, especially in banking. So second of all, how well did they grow? How accretively?

Their efficiency ratio (noninterest expenses over total revenue) was almost always below 40% during those years, and often below 30%. True, most of that 5,000% asset growth was via acquisitions, but it’s not like they weren’t growing organically between transactions. NYCB actually grew total assets by $1 billion, 100% organically (again, with a sparkling efficiency ratio), through their first eight years as a public company. They also grew their diluted earnings per share by well over 50% during that time.

So yes—when they were able to grow in the past, they most certainly did. But have they been growing in the three years since the SIFI threshold was raised?

Again, yes.

As of March 31, 2018—about 60 days before the EGRRCPA—NYCB had ~$49.65 billion in assets. 90 days later, this number had increased by about 1.5% to ~$50.47 billion. Another 90 days and 1.5% later, they were at $51.25 billion. Since then, NYCB’s total assets have increased to about $58 billion.

And now they’re buying $29 billion in assets from Flagstar Financial Corporation (FBC), for 1.15x tangible book value.

Flagstar

I am no M&A expert. But here are some highlights:

Deposits

• NYCB’s total deposits will increase from $34.2 billion to over $50 billion. (Deposits are the cheapest source of lending money a bank can get.)
• 56% of the new deposits will be noninterest-bearing. (See?)

Mortgage

• NYCB sold its mortgage business in 2017.
• It will now be the #6 mortgage originator and the #6 mortgage sub-servicer in the US.
• …and a top-five mortgage warehouse lender. Far as I’m aware, NYCB has never had a mortgage warehouse business, at all.
• The board of directors will be 4/12 Flagstar people, so they won’t be left to navigate the new territory alone.

Income Diversification

• Net interest income will increase in absolute dollars but its proportion will fall from 86% of NYCB’s income to 65%.
• Net interest income itself will also be diversified; the value of NYCB’s multifamily loans will stay the same on an absolute basis but their proportion of the loan portfolio will fall from 75% to 56%.

My personal bottom line on the Flagstar deal is this: new (accretive) assets + new lines of business + NYCB’s management team (their current CEO was CFO for most [all?] of their other acquisitions) = probably good. I say probably because mergers are tricky after all, and you can’t know how execution will go ahead of time. But NYCB sure has an encouraging track record of successful acquisitions, the Astoria affair notwithstanding.

Besides all that--this is important--if this deal fails like the last one, it’ll be okay this time. NYCB’s growth depended on the Astoria deal. Its growth absolutely does not depend on this Flagstar deal. If it falls through, they can go back to growing organically while they line up their next target.

Conclusion

I have a hunch that the $250 billion SIFI threshold will be easier to cross than the $50 billion one. But even if it’s not, NYCB has a lot of growing to do before it’s a problem. If I have to sell my shares then—when the company is five times bigger by assets than when I bought in—I’m sure I’ll be ok with that.

In the meantime, I’ll collect my 5% dividend, pray that they start raising it (maybe in 2022 or 2023?), and watch this share price do whatever it does. If I must speculate, I speculate that the share price will increase slowly and irregularly for maybe the next year, and then increase more regularly and maybe more quickly, at least until the company’s assets column reaches the neighborhood of $250 billion.