New York Community Bancorp (NYSE:NYCB) put the finishing touches on a nice year in the fourth quarter of 2020, and it looks to have another solid year ahead in terms of earnings. But the bank and its new leadership is much more focused on breaking away from its roots and transforming itself to create more shareholder value. Let's take a look at what new leadership has in mind for the transformation and also examine if it's achievable.
Getting away from the thrift model
NYCB is a roughly $56 billion-asset bank that is primarily a multifamily lender focused on nonluxury, residential apartment buildings with rent-regulated units. Because multifamily loans typically don't come with a lot of core deposits, the bank funds itself through a thrift model, which is an older type of bank model that relies on higher-cost deposits from sources such as certificates of deposit, savings and money market accounts, and other interest-bearing deposit sources.
The problem with the thrift model is that most of these deposit sources are impacted by the Federal Reserve's benchmark federal funds rate, so when the Fed lowers this rate, the bank benefits because it has to pay less for deposits. But when rates rise, it has to pay more for deposits. And similar to a thrift model, most of NYCB's loans are fixed-rate, so the bank's profitability is heavily tied to deposit pricing. Bank investors closely scrutinize a bank's deposit base, and prefer to see a franchise with sticky deposits that are more likely to stay put when interest rates rise. Whether over the last five years or last decade, NYCB shareholders have lost money on their investment.
At the end of last year, there was a major leadership shake-up when former President and CEO Joseph Ficalora abruptly retired after 55 years with NYCB and its predecessor companies. Then CFO Thomas Cangemi replaced him as the new leader of the bank. While I don't know the inner workings of the bank, based on Cangemi's comments on the bank's recent earnings call, it does seem like he and Ficalora had differing views on the strategic direction of the company: "I've been doing this for multiple decades alongside with Mr. Ficalora. And as you said, there's new leadership here; and clearly, we put the egos aside. This is all about doing the right thing for shareholders."
Using M&A to change the funding base
Cangemi seems very dedicated to acquiring another bank to jump-start NYCB's transformation. NYCB's deposit base is composed of less than 10% of non-interest-bearing deposits and 32% of higher-cost certificates of deposit. Changing that organically would take a lot of time, so the acquisition would accelerate these efforts.
Cangemi said many times on the earnings call, "we're looking at all opportunities." He added that NYCB would also look for deals that might help diversify the bank's revenue stream through new lending lines or increased fee income, which only made up about 5% of total revenue in 2020.
While Cangemi would like to supercharge the bank's transformation with M&A, he has plans to start driving the change organically as well. NYCB grew its specialty finance product nicely in 2020, and Cangemi wants to offer more services to customers the bank already interacts with. For instance, Cangemi said there is no reason the bank should not be providing lines of credit to wealthy customers that it already works with and might be looking for one. This would create more holistic relationships with customers and likely result in increased core deposits.
Can management pull off the transformation?
Management seems keen to make a deal, but the problem is the bank does not have the best stock currency right now. Recently trading at about $10.70 per share, the bank traded at 1.27 times book value. That will make it harder to do a stock transaction with attractive terms. The bank is also not sitting on a lot of excess capital compared to its peers, so it might not have enough cash to compete successfully. There are certainly other ways to fund a deal, but they may not be as attractive to shareholders.
All that said, I do have confidence in management's ability to improve shareholder value. For one, Cangemi seems very focused. On his first earnings call as CEO, he mentioned the word "shareholder" 12 times, usually discussing how the bank can drive shareholder value or do what's best for shareholders. Second, he's worked at NYCB for 22 years, so he obviously knows the multifamily business and should be able to maintain the bank's success in that segment while focusing on other areas of the business. Though transforming any company is rarely an easy process, Cangemi seems to have a deep understanding of the steps that need to be taken, and sometime that's half the battle.