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, Flagstar Bank, N.A. (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 follows NYCB’s announcement that it acquired certain assets and deposits from the former Signature Bank in an FDIC-assisted transaction at a discount of $2.7 billion. The Company is acquiring 40 branches and all remaining deposits (excluding those related to crypto currencies) totalling approximately $34 billion and select loan portfolios amounting to approximately $13 billion. The transaction also includes $25 billion in cash which the Company expects to use to pay off short-term and wholesale borrowings over time. As a result, the Company’s proforma loan to deposit ratio improves significantly, and interest rate sensitivity moves to a more neutral position. The transaction’s impact on risk-weighted capital ratios is expected to be neutral.
While we view the transaction as financially attractive, the recent upheaval in the deposit markets, especially for uninsured deposits, will likely make it more difficult for NYCB to maintain these deposits and customers. That said, the structure of the transaction adds significant flexibility to the Company’s balance sheet even if some deposit attrition continues. The acquired, largely C&I loans will increase the diversity of the NYCB’s loan portfolio. DBRS Morningstar notes, that while these acquired portfolios had historically performed well for Signature Bank, some are new asset classes for NYCB. With the integration of Flagstar already underway, this transaction adds further execution risk during a time of significant market volatility. Positively, NYCB has a strong track record integrating acquisitions and FDIC-assisted deals and has typically outperformed other banks in times of stress.
Over the longer-term, improved revenue and funding diversity that results in better-than-peer earnings would result in a ratings upgrade. Conversely, a significant weakening in asset quality or financial performance would result in a ratings downgrade. Additionally, operational issues with the integration of acquired franchises or the inability to maintain deposits would also lead to 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, C&I loans, residential mortgages and servicing, and mortgage warehouse lending. The combination with Flagstar, which closed in December 2022, and the addition of the Signature bank branches created an institution with 435 branches in 12 states and approximately $93 billion in deposits.
Earnings Combined Building Block (BB) Assessment: Good / Moderate
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 have historically been predominately spread driven. For 4Q22, NYCB reported earnings of $172 million equating to a sound return on average assets and return on average common equity of 0.95% and 9.34%, respectively.
Risk Combined Building Block (BB) Assessment: Strong / Good
NYCB’s multi-family loan portfolio is focused primarily on rent-controlled/stabilized multi-family buildings in New York City, operating 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. New asset classes entered in through acquisition may add incrementally to the risk profile.
Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate
NYCB has historically been somewhat reliant on wholesale funding, primarily FHLB advances secured by its loan portfolio, to fund the balance sheet. Additionally, the deposit mix was heavily tilted towards CDs and non-transaction accounts. As a result, NYCB’s cost of funds is higher than many peers. The combination with Flagstar with its large non-interest escrow deposit balances, inherent with its mortgage servicing business, as well as the operating account deposits from Signature Bank helps to diversify and improve the funding profile. With the Signature Bank deposits, the loan to deposit ratio improved to 88% from 118%. A challenge for NYCB will be to maintain and grow this deposit franchise in today’s volatile operating environment.
Capitalization Combined Building Block (BB) Assessment: Good / Moderate
NYCB’s capital levels have been sound, especially given the Company’s asset quality metrics, including a Common Equity Tier 1 ratio of 9.06% at December 31, 2022. The Signature Bank acquisition is neutral to regulatory capital levels given the addition of risk-weighted assets.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/411375
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. (May 17, 2022)
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations: https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations
(June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.
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.
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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