New York Community Bancorp (NYCB -3.90%), now the parent company of Flagstar Bank, has not been a good stock to own since the Great Recession, with its share price down more than 46% since May 2008. The stock is also down about 13% over the last five years, and that's after a big rally this year.
But since completing its acquisition of Flagstar Bank and, more recently, the acquisition of certain assets and liabilities from Signature Bank, which was shut down by regulators in March, NYCB's situation has changed dramatically. NYCB has quickly gone from a poor-performing stock to a screaming buy. Here's why.
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NYCB is becoming a commercial bank
NYCB has historically operated a thrift banking model, which means it used higher-cost funding to originate lots of fixed-rate loans. This created a liability-sensitive balance sheet, meaning that the bank performed better in a falling-interest-rate environment because its deposits would reprice lower while its loan yields would largely stay the same. This is unusual for banks post-Great Recession, most of which tend to perform better in a rising-rate environment.
However, since Thomas Cangemi took over as CEO of the bank at the very start of 2021, he has vowed to change the bank into more of a commercial, relationship-oriented bank with stickier deposits that are less sensitive to interest rates, as well as more revenue diversity.
The acquisition of Flagstar was a big part of this plan, although the acquisition took about one year and seven months to receive all necessary regulatory approvals in order for the deal to close. The Signature Bank opportunity arose as a result of the banking crisis, and because regulators took control of the bank, NYCB was able to buy the assets it wanted at a discount, as well as gain access to cheaper and stickier deposits. The acquisition boosted NYCB's tangible book value (TBV) per share -- which bank stocks trade relative to -- by 20% while boosting the bank's earnings power by 15%.
The Signature acquisition is going better than expected
Acquiring the assets of a failed bank from the Federal Deposit Insurance Corporation is a unique situation because NYCB didn't have a lot of time to do due diligence, although they likely knew Signature pretty well because it had been a competitor.
Additionally, the deal closed right away, so NYCB didn't have time to prepare for the deal to close and the integration process to begin. And given that Signature was experiencing huge deposit outflows prior to being seized by regulators, there were questions about how much of the business NYCB would be able to retain.
But things seem to be going extraordinarily well. Management at NYCB previously modeled for 20% deposit outflows at Signature post-acquisition, but so far have seen less than 10% run-off, and management also said that the bank's cheaper, more attractive deposits stabilized in April and actually grew a little bit too. Furthermore, Signature had a lot of private banking teams. Of the 127 that NYCB acquired in the Signature deal, the bank has only lost two, which is a great achievement so far because private banking teams can certainly bounce around. NYCB retained Signature's CFO Eric Howell with the bank, which Cangemi says has helped with the retention efforts.
NYCB also saw its margin expand significantly in the first quarter, and Cangemi said it expects margin expansion throughout the year as the bank uses cash it acquired in the Signature deal to pay off higher-cost borrowings. Cangemi also believes the bank can continue to grow TBV materially from here, given the higher earnings power of the company.
The commercial bank transition has accelerated
NYCB's efforts to transition from a thrift model to a relationship-based commercial bank with stickier deposits and more lending verticals have been greatly accelerated by the acquisitions of Flagstar and the Signature assets and liabilities.
Even better, the bank currently has an annual dividend yield of 6.6%, and management seemed confident in their ability to keep paying it because they expect to build a lot of capital, which will improve the coverage ratio for the dividend.
With the stock trading at about 122% to its TBV per share and with expectations to grow TBV per share, continue to pay its dividend, and continue to improve its deposit base and earnings, I think NYCB is a screaming buy even though it's already up more than 19% this year. While I don't own the stock directly, I have been buying the Direxion Daily Regional Banks Bull 3X Shares (DPST -0.30%), a leveraged exchange-traded fund to regional bank stocks, and NYCB is currently the largest bank holding in the fund.
