DBRS, Inc. (DBRS Morningstar) confirmed the ratings of New York Community Bancorp, Inc.’s (NYCB or the Company), including the Company’s Long-Term Issuer Rating of BBB (high) and Short-Term Issuer Rating of R-1 (low). DBRS Morningstar also confirmed the ratings of its primary banking subsidiary, New York Community Bank (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is A (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.
KEY RATING CONSIDERATIONS
The ratings confirmation and maintenance of the Stable trend reflects NYCB’s efficient operation and low credit risk loan portfolio, which is focused primarily on rent-controlled/stabilized multi-family buildings in New York City. With consistent cash flows and low vacancies, this multi-family portfolio has exhibited very low, through-the-cycle credit costs and should help insulate the Company from the upheaval in New York rental market.
The ratings also consider NYCB’s limited revenue diversity, reliance on wholesale funding, and a deposit mix geared toward rate-sensitive, non-transaction accounts, as well as its geographically concentrated loan book that includes some larger exposures. The funding mix results in a liability-sensitive balance sheet, which pressures earnings during periods of rising rates, but also benefits earnings as rates decline. The Company has some net interest margin (NIM) headwinds in the current rate environment, as higher cost borrowings and CDs reprice to higher rates over the next few quarters.
The acquisition of Flagstar Bancorp, Inc. (Flagstar), which was announced on April 27, 2021 and originally expected to close by YE2021, remains pending with the Company recently extending the merger termination date to October 31, 2022. When complete, the combination would add Flagstar’s large mortgage banking business, more robust consumer banking product offerings and attractive deposit platform, including low-cost escrow deposits, increasing both franchise and revenue diversity. When originally announced, the pro-forma financial results were viewed as attractive, and immediately accretive to tangible book value per share. In DBRS Morningstar’s view, the combination does not add incrementally to credit risk as both companies lend predominately in historically low-credit risk business lines. However, as with all acquisitions, there are integration risks, especially for an acquisition of this size, and while NYCB has grown through acquisitions, it has been over ten years since its last banking transaction. Additionally, NYCB has purposefully kept its operation very focused on its multi-family business line and new businesses added with the Flagstar acquisition bring more complexity to the organization. Success of the transaction will stem from the Company’s ability to retain management familiar with these new business lines.
Over the longer-term, sustained levels of better-than-peer earnings generation, greater revenue diversity and an improved funding profile would result in an upgrade of ratings. Conversely, a significant weakening in asset quality, financial performance or operational issues with the Flagstar merger integration would result in a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Good/Moderate
NYCB is a leading producer of multi-family mortgage loans in New York City, with an emphasis on rent-regulated apartment buildings. NYCB also originates CRE and to lesser extent C&I loans. The pending combination with Flagstar creates an $84 billion in assets institution with almost 400 branches in nine states. Flagstar, with approximately $23 billion in assets, adds 158 branches in Michigan, Indiana, California, Wisconsin, and Ohio. It also provides home loans through a wholesale network of brokers and correspondents nationwide, as well as 84 retail locations in 28 states. Flagstar is a large national originator and servicer of mortgage loans, handling payments and record keeping for approximately $300 billion of mortgage loans. Overall, we view the announced acquisition as improving the franchise strength of NYCB through increased product and geographic diversification, as well as better scale.
Earnings Combined Building Block (BB) Assessment: Good
NYCB’s earnings power is good, reflecting a sound efficiency ratio at the low end of peers and low through-the-cycle credit costs. Earnings are predominately spread driven. Both NYCB and Flagstar have been performing well in recent periods. For 1Q22, NYCB reported earnings of $147 million equating to a sound return on average assets and return on average common equity of 1.04% and 8.98%, respectively. Earnings are supported by strong cost controls and an industry-leading efficiency ratio of 39%.
Risk Combined Building Block (BB) Assessment: Strong
NYCB’s low credit risk loan portfolio is focused primarily on rent-controlled/stabilized multi-family buildings in New York City. With consistent cash flows and low vacancies, this multi-family portfolio has exhibited very low, through-the-cycle credit costs, insulating the Company from periodic challenges in the New York rental market. As such, NYCB’s asset quality indicators remain pristine, with nonperforming assets and net charge-offs remaining at very low levels. At Flagstar, the largest loan category is mortgage warehouse lending at 44% of the total portfolio. This asset class has also performed very well historically. Overall, the combination would lower NYCB’s significant concentration in multi-family lending to 56% of the loan portfolio from 75%.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
NYCB remains somewhat reliant on wholesale funding, primarily FHLB advances secured by its loan portfolio, to fund the balance sheet. Additionally, the deposit mix is heavily tilted towards CDs and non-transaction accounts. As a result, NYCB’s cost of funds is higher than peers. The combination with Flagstar with its large non-interest escrow deposit balances, inherent with its mortgage servicing business, helps to diversify and improve the funding profile.
Capitalization Combined Building Block (BB) Assessment: Good
NYCB’s capital levels have been sound, especially given the Company’s asset quality metrics,. including a Common Equity Tier 1 ratio of 9.45% at March 31, 2022. Limiting capital flexibility, DBRS Morningstar notes that the Company has a large dividend payout ratio, but this has improved in recent years. Capital levels are expected to remain sound at closing, including a Common Equity Tier 1 ratio estimated at 10.4%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/400287.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 23, 2022): https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022): ): https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
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