SBNYP - New York Community Bancorp: Grabbed The Spoils From Signature Bank's Downfall

2023-03-21 04:53:22 ET

Summary

• Investors rejoiced as New York Community Bancorp finalized its purchase and assumption agreement on Signature Bank, signaling a strategic move with promising potential for investors.
• NYCB's latest acquisition speaks volumes about its business model, as regulators show confidence in the bank's move to expand its commercial reach.
• A surge of 32% in response to NYCB's latest acquisition highlights investor confidence in its potential to boost EPS and tangible book value per share by FY24.
• High-conviction investors who picked its 20-year lows last week are now reaping the rewards of its massive recovery.

New York Community Bancorp, Inc., or NY Community Bancorp ( NYCB ) investors cheered its purchase and assumption or P&A agreement to take over " certain assets and liabilities of Signature Bridge Bank ( SBNY )."

As a result of the acquisition, NYCB gained total assets of $38.4B , including cash of about $25B. In addition, deposits acquired were worth $34B without a deposit premium, resulting in an equity base of $2.73B.

In addition, NY Community Bancorp also took over nearly $12.9B in loans at a discount of 21% or about $2.7B. However, the FDIC embedded equity appreciation rights of $300M with a strike price of $6.654. Hence, based on yesterday's (March 20) closing price of $8.61, the FDIC's instruments are already deep in the money or ITM.

Despite the dilution from the FDIC's equity interest, it's still a solid deal for NYCB on many factors.

First, netting off the $300M in equity appreciation rights from the $2.7B discount taken against those loans (assuming those are good assets) still leaves investors with a $2.4B in " net benefit. "

Of course, the market is "not dumb." By the time you read this article, NYCB shares had surged nearly 32% from Friday's close, adding about $1.41B in market cap.

What are some of these loans that NY Community Bancorp took over?

Management highlighted that the bank carefully selected the asset base that would help further its transformation into "a full-service diversified commercial bank."

Hence, the nearly $13B loan acquired has exposure to "traditional commercial and industrial or C&I, Signature Financial, healthcare banking, mortgage warehouse, and SBA."

As a result, management stressed that the move "enhances" its commercial lending platform, diversifying its exposure from its core multifamily loan business.

Hence, the Pro Forma multifamily exposure is expected to fall to 46% from 55.3% at the end of Q4'22 . In addition, NYCB will gain access to Signature Bank's commercial relationship managers or RMs, accelerating the bank's growth into the higher-margin commercial space.

Furthermore, the significant $25B in cash will be utilized to "substantially" pay down its recent wholesale loans from the Federal Home Loan Bank or FHLB network to build excess cash.

Management also used yesterday's conference call as an opportunity to highlight the confidence of its depositors. CEO Thomas Cangemi stressed that despite the recent banking crisis engulfing regional banks, NY Community Bancorp's deposit base was "relatively stable." CFO John Pinto also added:

Starting on March 10, we started borrowing excess funds, tapping our FHLB lines to ensure we had the liquidity necessary to meet any unanticipated outflows given market conditions. We've continued to keep excess funds at the Fed to ensure that... We're only down $4 billion. Out of that $4 billion, almost $3 billion was to 1 customer that we have -- which was the circle relationship. When you look at that, the 1 relationship and the normal custodial outflows, we were down about 2% in deposits since March 9. So an extremely stable base. (NY Community Bancorp Investor/Analyst Update)

Still, concerns remain over whether the mostly uninsured deposits from Signature Bank will stay with NYCB.

As highlighted, NYCB took over about $34B in deposits from Signature Bank (excluding $4B of deposits linked to its digital banking business). That is down from the $89B in total deposits SBNY reported in January 2023 for its Q4'22 performance.

Management updated that its uninsured deposits account for about 40% of its Pro Forma total deposit base of approximately $92.7B. Keen investors should recall that NYCB reported $19.6B in uninsured deposits as of the end of 2022. Therefore, NY Community Bancorp likely acquired about $17.4B in uninsured deposits from SBNY, representing more than 50% of its $34B in deposits.

However, we believe the decisive and quick resolution between the FDIC and NYCB demonstrated that the regulators are confident in the abilities of management to instill confidence in SBNY depositors.

Moreover, only " 2% of its assets [were] allocated to treasuries" at the end of 2022. Hence, the threat of a significant outflow moving forward is less likely than its peers.

Moreover, management also highlighted that the acquisition is accretive to its adjusted EPS by 20% and its tangible book value per share by 15% based on its full-year 2024 projections.

However, investors should brace for a potentially weak earnings performance in H1'23, as management cautioned: "The second quarter of this year is going to have some noise in it just by all the additional liquidity that will be on the books, depending on market conditions."

Despite that, we believe the battering NYCB received over the past two weeks likely reflected the earnings impact.

As such, the market will likely turn toward the execution of its integration with Signature Bank. Moreover, an analyst on the call was concerned about whether differences in working "culture" could hinder the success of the integration. Hence, investors could attribute some discount to its valuation to account for these challenges.

High-conviction investors likely saw a fantastic opportunity last week as NYCB headed toward lows not seen in the past twenty years.

With the acquisition closed, we believe investors have already reflected the initial optimism, as seen in the sharp mean-reversion move toward its 50-week moving average or MA (blue line).

Its TTM tangible book value per share or TBVPS has also normalized to 1x, and its NTM adjusted P/E has also normalized to 7.6x.

With EPS and TVBPS accretion only in FY24, the market's focus will likely turn toward integration and execution risks of its enhanced set-up.

We assessed that investors should wait for a pullback following yesterday's spike before adding more positions.

But well done to the investors who bought the indiscriminate selling last week!

Rating: Hold (On Watch)

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