NYCB - The Deal Of A Lifetime: New York Community Bancorp's Big Win At The Death Of Signature Bank

2023-03-21 08:24:31 ET

Summary

• The management team at New York Community Bancorp announced the purchase of a significant amount of assets from failed Signature Bank.
• This is a massive move that should add significant value to New York Community Bancorp and improve the company's own balance sheet.
• The firm was already attractive thanks to robust returns in recent years and a strong distribution.

During these difficult and uncertain times, it can be a breath of relief to see one of the companies that might otherwise be affected by the turbulence experience a great deal of upside. Such has been the case, fortunately, with New York Community Bancorp ( NYCB ), a rather small player in the banking industry that currently has a market capitalization of $5.9 billion. After news broke that the company had agreed to take on certain assets previously owned by the now-defunct Signature Bank ( SBNY ), the stock skyrocketed , closing up on March 20th by 31.7%. As opposed to the market being worried about the contagion spreading to this particular player, the market is optimistic that the structure of the deal and the nature of the assets in question will prove incredibly beneficial for the business. I would be inclined to agree with this assessment. All things considered, this is a savvy move that has been made by management and it will almost certainly add attractive upside potential for shareholders in the long run.

The deal of a lifetime

On March 19th, it became apparent that at least some of the assets of Signature Bank would be split off from the company and allocated elsewhere. A large chunk of assets, we later found out, were acquired by New York Community Bancorp and what is one of the largest financial transactions in the history of capitalism. All things considered, the transaction included about $38.4 billion worth of assets including loans of $13 billion that were purchased at a discount of $2.7 billion in all. It's worth noting that these are not all of the assets owned by Signature Bank. Somewhere around $60 billion worth of loans will remain under the control of the FDIC, and the deal did not include around $4 billion of deposits associated with cryptocurrency.

The transaction included $34 billion of deposits, representing all non-cryptocurrency-related deposits owned by Signature Bank. The pool of loans acquired includes a wide variety, such as traditional commercial and industrial, SBA, healthcare-related, and more. As part of the deal, New York Community Bancorp is also receiving $25 billion of cash from the FDIC that the bank plans to use to pay down a substantial portion of the $20.3 billion of wholesale borrowings on the company's books. The cash transfer will have the effect of lowering the loan-to-deposit ratio at the company from 118% to 88%. There are other aspects of the deal as well, such as the fact that New York Community Bancorp is slated to receive all branches owned by Signature Bank, with the pledge that it will keep all the employees at those branches. And in an interesting twist, the FDIC is going to receive equity appreciation instruments from New York Community Bancorp that could be worth up to $300 million and that would be payable in company stock.

This is a massive and truly transformative arrangement for New York Community Bancorp and its shareholders. Based on the data provided, this transaction will immediately increase the tangible book value per share of New York Community Bancorp by 15%, while increasing earnings per share by around 20%. Overall deposits for the bank will rise from $59 billion to $93 billion, plus the firm will be adding branches throughout New York, California, Connecticut, North Carolina, and Nevada, all because of the acquisition. Almost all of the different types of loans that New York Community Bancorp is receiving will add new verticals to the company's commercial lending platform, verticals that might never have gone into otherwise.

When everything is said and done, New York Community Bancorp will boast 435 with branches across the markets in which it operates. Of the 40 branches added, 29 are located in New York, with seven others in California. Historically speaking, New York Community Bancorp has focused its footprint largely on parts of the Rust Belt like Ohio, Michigan, Indiana, Arizona, and Wisconsin. It also has a sizable footprint in Florida and, naturally, it has operations in New York and California already. On the loan side of things, the company's portfolio will grow from $69 billion to nearly $82 billion.

This transaction proves beneficial to shareholders in multiple ways. One thing that it does, for instance, is to remove any doubt as to the health of New York Community Bancorp. The company did not have the same kind of exposure that the banks that have recently failed have had. But I wouldn't exactly say that the firm's structure made it beyond reproach. Of the loans that it had in its portfolio at the end of the 2022 fiscal year , only about $1.1 billion was structured as available for sale. Of the $69 billion that were held for investment, only $16.7 billion was due within the next year. The firm had cash on hand of only $2 billion, plus it had about $9.1 billion in available-for-sale debt. Though it is also true that, of the $58.7 billion of deposits, only $19.1 billion was uninsured. This means that the company would have been okay if the market moved against it. But after the transaction, there can be no doubt as to the health of the enterprise.

Operationally speaking, New York Community Bancorp has done quite well for itself in recent years. Between 2020 and 2022, net interest income for the business managed to rise from $1.04 billion to $1.26 billion. Over this window of time, net income grew from $478 million to $617 million. Even after the surge higher in share price that the company experienced on March 20th, it still boasted a yield of 7.9%. Investors would be right, in this environment, to question whether such a high yield is stable. But over the past three years, the dividend payout ratio of the company has improved, falling from 0.66 to 0.51. Ignoring the massive inflow of assets that the company is now experiencing because of this transaction, the firm could have afforded, almost, to double its distribution from what it is today. And with its balance sheet now in better shape and a significant expansion of its operations, I wouldn't be surprised to see the distribution increase even further once the dust settles.

Takeaway

At this point in time, I understand why investors might be cautious of anything in the financial sector. There definitely does exist risk. Having said that, New York Community Bancorp looks to be in impeccable shape. The benefits the company is receiving are undeniable and will go a long way toward adding additional value for shareholders in the years to come. The distribution looks safe at this point in time and I wouldn't be surprised if management raises it in the next year. Due to all of these factors, I would say that the company makes for a very clear 'strong buy' candidate at this time.

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