In April 2021, the multifamily lender and regional bank New York Community Bancorp (NYCB 1.92%) said it would buy Michigan-based Flagstar Bancorp (FBC) in an all-stock acquisition. But since then, NYCB and Flagstar have had to extend their merger agreement as the two await regulatory approval. The new merger agreement runs until Oct. 31, leaving NYCB with about three months to obtain regulatory approval and consummate the merger.
NYCB's shares have a strong annual dividend yield, currently 6.6%, but approval of the acquisition could be just what the bank needs to turn around the stock. Here's why.
A new strategic vision
Since Thomas Cangemi took over as chief executive officer of NYCB at the beginning of 2021, his plan has been to push the bank away from its outdated thrift model, which relies on fixed-rate lending and higher-cost funding, and more toward becoming a modern commercial bank. After all, NYCB's stock is down about 20% over the past five years, so shareholders are not exactly happy.
The acquisition of Flagstar would be the driving force of this long-needed transformation, because it would materially shift NYCB's deposit base away from higher-cost funding and into lower-cost core deposits.
Image source: New York Community Bancorp.
The chart above is slightly out of date because it came out in April 2021 and during an environment of zero-interest rates -- which has changed drastically. But as you can see, the addition of Flagstar would more than double non-interest-bearing deposits at NYCB. Flagstar would also bring down higher-cost funding sources at NYCB, such as funding from the Federal Home Loan Banks and from certificates of deposit.
NYCB has spent the past year launching other deposit initiatives like its banking-as-a-service program, which should make the mix more favorable. And the acquisition of Flagstar would diversify the combined company's revenue away from NYCB's large fixed-rate multifamily loan portfolio, and into more fee-income revenue streams.
Image source: New York Community Bancorp.
Completing the acquisition right now would be particularly beneficial for NYCB because of rapidly rising interest rates. Unlike most of the industry, NYCB actually doesn't benefit from higher rates; while higher rates raise the cost of its funding sources, most of NYCB's loans are fixed-rate and therefore don't adjust higher with the Federal Reserve's benchmark overnight lending rate. So when rates rise, NYCB typically sees its margins narrow over time.
Once NYCB acquires Flagstar, management believes the bank could be slightly asset-sensitive, meaning it would slightly benefit from higher rates -- so the quicker the merger can close, the better.
Where merger deliberations are now
NYCB is not the only large bank that has had to extend its merger agreement. Over the last year, politicians and regulators have debated large bank mergers, which has led to a slowdown in approvals, particularly at the Fed, which had a backlog of pending merger approvals earlier this year.
NYCB's merger extension is slightly different, however, because both NYCB and Flagstar amended the merger agreement so the combined company could operate under a national banking charter.
In addition to being regulated by the Federal Deposit Insurance Corp. and the Fed, which oversees bank holding companies, banks can actually choose their third regulator. They can either be regulated by their prospective state banking regulator, or get a national charter and be regulated by the Office of the Comptroller of the Currency (OCC). NYCB is currently state-regulated, but is applying for an OCC national charter as part of the acquisition, likely because the combined bank would have branches in 10 or more states.
The good news is that Cangemi seems confident about the merger closing. Executives of Flagstar have been on NYCB's earnings calls since the merger was announced and also sound confident, which seems promising as well. Flagstar's Chief Executive Officer Sandro DiNello told analysts not to read too much into the national charter application, because it's something Flagstar was going to do anyway and it makes sense to do it along with the merger.
Likelihood of approval
While I do like that Cangemi and DiNello continue to be on the earnings calls together and that they sound confident about obtaining regulatory approval, it's hard not to be a little nervous with only three months before the merger agreement runs out. Ultimately, I think it's more likely than not that NYCB obtains approval: While some small bank acquisitions have been called off recently, larger ones have gone through after delays.
If and when NYCB obtains approval, I think that will be a clear catalyst for the stock: It would materially improve NYCB's strategy of building a better deposit base and diversifying revenue.
