New York Community accelerates transformation with Signature Bridge Bank deal

Back-to-back strategic transactions are expediting New York Community Bancorp Inc.'s evolution.

New York Community unit Flagstar Bank NA announced a deal for parts of Signature Bridge Bank NA a little more than four months after its parent closed the acquisition of Flagstar Bancorp Inc. The two deals put New York Community in a position to more than double its asset total from 2021 and make significant strides toward its strategic goals.

The acquisition of Flagstar helped jump-start the company's transition to becoming a more traditional commercial bank from a niche business model with a focus on multifamily lending; the Signature Bank deal further accelerates those initiatives to diversify its funding base and lending portfolio, along with greatly improving metrics such as loans-to-deposits and net interest margin, industry analysts said.

"These were structural changes that they intended to make anyway," Janney Montgomery Scott analyst Christopher Marinac said in an interview. "They simply were able to fast-track them in this manner."

Deposit benefits

New York Community suddenly finds itself with its lowest loan-to-deposit ratio in decades at a time when the metric has been increasing for many other banks.

The Signature deal brings the New York Community's loan-to-deposit ratio down to 88.31% on a pro forma basis, its lowest level since the bank made its mutual-to-stock conversion in November 1993 and much closer to the US public bank median of 82.46%. With $34 billion in deposits from the Signature deal, New York Community ups its total deposits to $92.71 billion on a pro forma basis from $35.06 billion in 2021, prior to both the Signature Bridge Bank and Flagstar transactions.

Higher deposit totals have the potential to lower funding costs. Historically, New York Community has relied largely on wholesale funding, which has kept its annual cost of funds above peers. Its annual cost of funds was 1.23% in 2022, compared to a 0.46% median for US public banks.

"They fixed a lot of their balance sheet issues with this transaction pretty quickly," D.A. Davidson analyst Peter Winter said in an interview.

Deposit leads

The Signature deal also brings increased opportunity to win back some of the deposits that fled prior to the bank's failure, New York Community executives said on the March 20 deal call.

"There's a big pool of customers out there that moved money to other institutions or left the institution," Piper Sandler analyst Mark Fitzgibbon said in an interview. "That's a huge opportunity for New York Community to go and get some of that back."

New York Community is acquiring less than 40% of the $88.59 billion in deposits Signature Bank reported having as of Dec. 31, 2022, according to S&P Global Market Intelligence data. Winning back some of those deposits could prove expensive.

"My concern would be what you have to pay to bring those customers back," Janney's Marinac said. "Do you have to incent them with a special rate? And can you make that work financially?"

To bring back some of those deposits, New York Community will need to rely on Signature's legacy private banking teams, making employee retention vital.

"It's going to get very competitive with some of the bigger banks like Citizens Financial Group Inc., M&T Bank Corp., trying to compete for some of that," Winter said. "That means the bigger challenge is actually retaining these private banking teams."

But the prospect of securing more deposits than it is already acquiring through the deal is just a small piece of this puzzle, Marinac said.

"I look at that as gravy," he said. "The main course for them is to be able to restructure the balance sheet, reduce loan to deposits, reduce the dependency on borrowings — that's going to significantly improve the attitude towards this company."

Other advantages

New York Community is also diversifying its loan portfolio, which was largely concentrated in multifamily lending before the two deals. In the Signature deal, New York Community will be acquiring $13 billion in commercial and industrial loans.

"It helps reduce their concentration in multifamily lending, which was their sort of the one-trick pony business that they were in for a long time," Fitzgibbon said. "And it gives them some new commercial lending verticals that they can grow and expand into."

The addition of the commercial and industrial book will add new lending verticals such as Small Business Administration lending and healthcare banking, New York Community President and CEO Thomas Cangemi said on the deal call.

The bank is also acquiring $25 billion in cash in the purchase and assumption agreement, which will give it room to pay down high-cost borrowings, Winter said, making the deal "very accretive to the margin."

When excluding cash on the balance sheet, New York Community expects to see net interest margin (NIM) expand in the second quarter, but market conditions will determine how much cash the company expects to keep on the balance sheet, according to CFO John Pinto.

Cangemi said NIM should expand "somewhere north" of 3% in the current environment. The bank's net interest margin was 2.26% in the fourth quarter of 2022.

More size, more regulation

With growth comes increased regulatory scrutiny, and even stricter regulation could be coming down the pike.

Some lawmakers are seeking to roll back 2018 legislation that eased regulations for banks with between $50 billion and $250 billion in assets. If passed, banks with assets in excess of $50 billion would once again be considered and regulated as "systemically important," subjecting them to annual stress tests and more onerous capital and liquidity rules.

New York Community may be crossing the $100 billion asset threshold at time when there is momentum to amp up regulatory pressure, but Winter said the bank already took steps to prepare for the old $50 billion mark.

"A lot of those technology and risk management investments have been made," Winter said.

Cangemi touted the company's preparedness level on the deal call, saying it has "all of the appropriate risk management tools to be a $100 billion bank."