NYCB’s sweetheart deal with the FDIC may take a dividend cut off the table

Along with the deposits, NYCB purchased $12.9 billion in loans from the former Signature Bank, at a discount of $2.7 billion.

So the bottom line, according to NYCB, was that its cash position improved by $25 billion, which it plans to use “to pay down a substantial amount of its wholesale borrowings,” according to its press release announcing the deal. One concern for NYCB had been a high ratio of loans to deposits, which it said was 130% before the deal and 88% after.

NYCB’s shares were up 35% in premarket trading on Monday, after having fallen 26% this month through Friday. The shares had closed at $6.54 on Friday, and the 68-cent annual dividend made for a dividend yield of 10.40%. That showed investors were expecting a dividend cut.

And now that fear has gone by the wayside.

On March 9, after investors had become aware of Silicon Valley Bank’s losses on securities sold to raise cash to cover an outflow of deposits, but before SVB (held by SVB Financial Group
SIVB,
-60.41%
) failed the next day, NYCB was included on this list of 10 banks that either showed a decline in interest margins or only a slight increase, during a period in which most U.S. banks had managed to improve their margins as the Federal Reserve lifted rates quickly to fight inflation.

The above story was based on data supplied by FactSet. By its own non-GAAP calculation, NYCB’s net interest margin had narrowed to 2.28% in the fourth quarter from 2.44% a year earlier. At the same time, the U.S. banking industry’s net interest margin had widened to 3.32% in the fourth quarter from 2.55% a year earlier, according to the FDIC’s Quarterly Banking Profile.

In addition to its reliance on wholesale funding, NYCB’s narrow margin reflected its traditional focus on multifamily mortgage lending in the New York City Area. This has been a stable business for the bank for decades, with very few loan losses because of the quality of the buildings that feature below-market rents and loyal tenants. The “vast majority” of the apartment units are covered under New York City’s rent-stabilization laws, according to the bank’s most recent annual 10-K report.

But multifamily mortgage lending isn’t as lucrative as commercial and industrial lending. Along with the discounted loans, New York Community Bancorp has brought aboard lending teams from Signature Bank that specialize in “middle market specialty finance, healthcare lending and SBA lending, while adding to its existing verticals in mortgage warehouse lending, as well as traditional C&I lending,” according to the press release.

New York Community Bancorp CEO Thomas Cangemi said the deal would help to continue its “transformation from a predominantly multifamily lender to a diversified full-service commercial bank.”

The combination of the paydown of wholesale borrowings and shift to loans with higher interest rates should immediately reverse the poor net interest margin trend.

NYCB said it expected is earnings per share to increase 20% as a result of the deal.

Wedbush analyst David Chiaverini upgraded NYCB to an “outperform” rating from a neutral rating on Monday and raised his price target for the shares to $11 from $10. In a note to clients he wrote that the FDIC had priced Signature Bank’s assets “to move quickly.”

“Taking the $2.7 billion of discount netted against the $300 million of increased equity results in a net benefit to shareholders of $2.4 billion, which when compared to the company’s $4.5 billion market cap on 3/17, represents material upside to the
stock,” Chiaverini wrote.

The $300 million he referred to is equity appreciation rights granted the FDIC as part of the deal, as partial compensation to the regulator under the assumption that NYCB’s stock will rise.

While listing a dividend cut among potential threats to his price target for NYCB, Chiaverini believes “the likelihood of a dividend [reduction] is very remote as it helps supports the stock and there is strong insider ownership.”