Over the last few weeks, three banks have collapsed, triggering fears that there could be broader contagion within the banking sector. But distress also creates opportunity, and New York Community Bancorp (NYCB 0.33%) has seized the day with its acquisition of certain assets and liabilities from Signature Bank (SBNY).
The deal has many complexities, but NYCB will buy about $34 billion of Signature's remaining deposits after Signature experienced a huge run on deposits before closing on March 11. Additionally, NYCB will take over all of Signature's 40 bank branches and more than $38 billion of assets, which includes more than $25 billion of cash and close to $13 billion of loans. The deal does not include Signature's crypto banking or fund finance businesses, and NYCB may end up servicing other Signature loans it didn't acquire.
The acquisition of these assets and liabilities from Signature is going to be transformational for NYCB, which has been working over the last few years to change its business model. Here's why.
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Accelerating the transformation
NYCB has long run an old-fashioned thrift banking model in which it relies on higher-cost funding to largely fund fixed-rate, multifamily loans. This creates a liability-sensitive balance sheet, meaning that when rates rise, more of the bank's liabilities, such as deposits, reprice higher than its assets pressuring the bank's margin. Most banks are asset-sensitive and tend to benefit from a rising interest rate environment, albeit not necessarily one as severe as what we've seen over the last year.
Since Thomas Cangemi became CEO of NYCB in early 2021, he has focused on remixing the balance sheet and positioning the bank as more of a modern commercial bank. This journey really began with NYCB's acquisition of Flagstar Bank, which was announced in the first half of 2021 and only closed in December 2022. This did make meaningful progress on Cangemi's mission by adding more non-interest-bearing (NIB) deposits, which the bank pays no interest on and should be stickier in nature, although not all NIB deposits are the same as we've seen with SVB Financial and Silvergate Capital. The acquisition also helped grow some other lending verticals, such as mortgage warehouse and commercial lending.
The acquisition of Signature's assets and liabilities continues to build on this journey. On the lending side, NYCB picks up Signature's traditional commercial and industrial and specialty equipment financing businesses, which are what all banks want these days because many of these relationships come with high-quality deposits. NYCB gets Signature's healthcare lending business, U.S. Small Business Administration lending team, and mortgage warehouse business as well. The deal also includes Signature's wealth management and securities-broker businesses, which will help the bank start to add some better sources of fee income.
But even better are the $25 billion of cash and deposits, roughly 40% of which are NIB. NYCB only had $12 billion of NIB deposits at the end of 2022, so the bank could more than double NIB deposits once this deal is complete. NYCB will be able to use the $25 billion of cash to pay down a large chunk of the $20 billion of higher-cost borrowings it had brought onto its balance sheet at the end of 2022. Replacing higher-cost borrowings with lower-cost deposits could materially increase NYCB's earnings.
Finally, the other thing to understand is that NYCB and Signature "were the go-to players in the multifamily space in Manhattan in the five boroughs," according to Cangemi. With a major competitor now gone, NYCB will gain increased pricing power, pick up new relationships, and increase market share over time.
A sweet, sweet deal
Management expects the deal to boost NYCB's tangible book value (TBV) per share, or net worth per share, by 15%. Bank stocks trade relative to TBV, so a rising TBV can very often lead to a higher stock price, which is a big reason why shares surged on Monday. Management also expects the deal to boost NYCB's earnings by 20% in 2024. It's certainly rare to see such high TBV and earnings accretion in a bank acquisition, so the deal is very financially compelling.
This really turned into a sweet deal for NYCB that dramatically accelerates NYCB's transformation from a thrift model to a modern commercial bank. The bank added high-quality deposits and essentially got to cherry-pick the loans and businesses it wanted from Signature. Additionally, because NYCB is purchasing certain assets and liabilities from Signature as opposed to the bank itself, NYCB will likely not be forced to deal with any litigation or overhanging regulatory issues that Signature still may face in the future.
The last thing I'll say is that NYCB would have never had this opportunity had it not been for the recent banking crisis. Not only would it have never had the chance to buy Signature, but regulators had also been cracking down on large bank mergers. NYCB's acquisition of Flagstar took one year and seven months to close. NYCB's acquisition of Signature's assets and liabilities took a matter of days, and the bank and stock are now much more compelling because of it.
