An investor favorite, New York Community Bancorp (NYSE:NYCB), plans to merge with Astoria Financial (NYSE:AF).

New York Community Bancorp earned that popularity by paying a large percentage of its earnings to investors. In acquiring Astoria, it will fill in a hole in its portfolio by adding billions in retail despoits.

In this video segment, Motley Fool's senior banking specialist John Maxfield argues why banking investors should be excited about this deal.

Listen to the full podcast by clicking here. A full transcript follows the video.

 

Gaby Lapera: So this week we're going to lead off with a story about the New York Community Bancorp merger with Astoria Financial. I think that I kind of want to structure this as a ... I don't know if you all went to summer camp. A Rose and a Thorn is a summer camp activity that you do where you talk about one rose and one thorn of your day, except we're going to do it with a bank merger. So Maxfield, I would like for you to start. What is one rose about this bank merger?

John Maxfield: So here's the thing about New York Community Bancorp. This has been a long-term stock that dividend investors have absolutely loved throughout the years because it's yielded something like 70%. And the reason it's yielded such a high number for so long is that it pays out an enormous share of its earnings, in terms to its shareholders via dividends. So that's basically what the shareholders in New York Community Bancorp are there for.

Well the great thing about this bank is that its business model really protects it or insulates it from a lot of the market pressures that other banks face. For example, its business model is focusing on multifamily owners -- lending to owners of rent-controlled multifamily buildings in the New York City metropolitan area.

Lapera: And those are apartment buildings for everyone who's not in the banking slang know.

Maxfield: Exactly. And in the New York City area, you have some buildings where the rent controls that are enforced by the government; they keep the rent in some of these buildings way below the market value. And what that does for the owners of these buildings is it keeps them full at all times.

So the cash flow is really, it's almost like a guaranteed cash flow which means that the loans on these things are always good. And because they're big loans as opposed to small loans, the New York Community Bancorp is also a really efficient bank because it's just writing ... for every loan it writes, it gets much more bang for its buck than say a small community bank that's writing residential mortgages.

Well this merger ... the problem with New York Community Bancorp, the one issue that it had was that it relied -- because it didn't have a large retail deposit base -- it relied to a large extent on wholesale funding. And wholesale funding, this is loans from institutional investors, this is money in the money market, these are broker deposits, things like that. This is much more expensive money than retail deposits.

And so this merger, New York Community Bancorp; effectively they're presenting it as a merger, but it really is more of an acquisition of Astoria Financial by New York Community Bancorp. What this does is it brings in roughly $9 billion dollars' worth of retail, cheap retail deposits that will allow New York Community Bancorp to then use those to replace a lot of the high-cost funding on its balance sheet. So this is going to save New York Community Bancorp a bunch of money each quarter in interest expense and that really is the good part of this deal.

Lapera: Absolutely. This is a really, really exciting thing for them.

Gaby Lapera has no position in any stocks mentioned. John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.