New York Community Bancorp (NYSE:NYCB) and Astoria Financial (NYSE: AF) announced that both companies' boards had agreed not to extend the merger agreement, which is to be terminated as of January 1, 2017. This news comes after the bank's report that it did not expect to receive regulatory approval to close the deal before the end of the year.
Many investors were not big fans of this merger in the first place, as my colleague John Maxfield discussed in an article shortly after it was announced. For one thing, it was certain to push New York Community Bancorp, which has $49.5 billion in assets, over the $50 billion threshold that makes it the target of more intense regulatory attention and also translates to added compliance expenses.
Also, New York Community Bancorp has been one of the highest-paying bank stocks for some time. In an effort to remain under the $50 billion cap, the bank paid out a dividend yield of more than 5% for much of the past decade or so -- unheard of in the banking industry today. The dividend has already been cut once since the merger was announced, and there was widespread fear that further cuts were in the cards.
Finally, the main reason New York Community Bancorp has been so successful over the past few decades is that is has primarily focused on a lucrative market niche -- rent-controlled New York City apartment buildings. As a result, it has delivered mind-boggling returns to investors, and it has also run one of the most efficient and stable banking operations in the U.S.
Does it matter?
This absolutely changes the investment thesis from a long-term perspective. Now investors don't have to worry about the regulatory hurdles of the merger, and New York Community Bank can stay under the $50 billion threshold if it chooses to do so.
Most importantly, NYCB will not be diluting its ultra-efficient operation. The bank runs at an efficiency ratio of well under 50% (lower is better), while Astoria Financial and its 74% efficiency ratio was sure to change that. In addition, NYCB has some of the lowest delinquency and charge-off rates in the business, which are now secure.
The bottom line is that NYCB can now continue to be the NYCB investors have grown to love. Personally, I view the 2% drop on this announcement as a tremendous buying opportunity.