New York Community, OneWest Would Make Smart Bedfellows

Speculation that New York Community Bancorp (NYCB) is mulling a trip out West makes surprising sense even though many banks have paid dearly for far-flung expansions in recent years.

The Westbury company headed by Joseph Ficalora is said to be courting OneWest Bank, Reuters reported last week. Big investors, including funds managed by George Soros and John Paulson, created OneWest from the IndyMac assets they bought from the Federal Deposit Insurance Corp. in 2009.

Meanwhile, OneWest, based in Pasadena, Calif., has been rumored to be exploring various options, including an initial public offering. The $26 billion-asset OneWest did not return a call for comment, and the $44.6 billion-asset New York Community declined to comment on the potential deal.

However, analysts who follow New York Community think OneWest might be exactly the kind of deal Ficalora wants. The following are reasons why the unusual pairing could work.

Didn't the financial crisis show us that distant acquisitions are risky?

Despite its name, New York Community already has branches outside of New York.

It acquired the $12 billion-asset AmTrust Bank in Cleveland from the FDIC in 2009. That deal took it into Arizona, Florida and Ohio and has been successful, says Collyn Gilbert, an analyst with KBW.

Additionally, New York Community does acquisitions for deposits, not for loans. The deposits of its typical target — and of OneWest — are primarily retail. Such transactions carry much less integration risk than deals for a commercial lending platform, says Bob Ramsey, an analyst with FBR Capital Markets.

"Going out of a market as a lender is tough because you're the new kid on the block, but it is not the same on the deposit side," Ramsey says. "Collecting [certificates of deposits] in California is exactly the same as it is in New York."

Why does New York Community need a big deal?

Margin pressures are hurting New York Community's earnings, and mortgage banking is also slowing down, Matthew Kelley, an analyst with Sterne Agee, said in a March 8 research report. An acquisition could widen its earnings base and alleviate that pressure.

If structured properly, a deal could generate enough capital for New York Community to repay Federal Home Loan bank advances and other high-cost borrowings, Ramsey says.

A deal could boost 2014 earnings estimates 17.6% to $1.08 per share, Kelley wrote. A deal also would increase New York Community's tangible book value by 6.6%, Gilbert said in a note.

Is New York Community ready for stricter supervision?

With assets of $44 billion, it has to be mindful of hitting $50 billion in assets and becoming a systemically important financial institution under Dodd-Frank. Additional regulation and oversight accompany that status.

But New York Community has already invested heavily in preparing itself for crossing that threshold, Gilbert says. When it is ready to take the leap, the deal will be large. It is looking in the asset range of $15 billion to $25 billion, analysts say.

"The specific demands require that we spend millions of dollars and great effort in preparing ourselves to be bigger than $50 billion," Ficalora said last month at the Credit Suisse Financial Services Forum. "It is our expectation that when we are ready, we will bring a large deal to the regulators for their consideration."

Ficalora also told analysts on his fourth-quarter conference call that he is on the hunt for a transaction and not to expect a small one.

Why would OneWest be a good fit?

OneWest is a mortgage lender that New York Community can buy, let its mortgage-concentrated assets run off and then redeploy its deposits into multifamily lending in New York. That is New York Community's typical mind-set for acquisitions, and has worked for years, analysts say.

The pool of likely targets is small, too. Data from the FDIC show roughly two dozen banks with assets between $15 billion and $25 billion, and New York Community would not look at a bank that is heavy in commercial lending, analysts say. Gilbert says OneWest is among the most compatible with New York Community's preferences, but she wrote in a research note that Popular (BPOP) and First Horizon National (FTN) could be potential fits, too.

OneWest also has a 10-year loss-share agreement with the FDIC involving the IndyMac assets. The agreement is transferable with FDIC approval. New York Community already has the capability to manage that loss-share given its deal for AmTrust, and having that safety net could mitigate some of the risk on a large transaction as well as make it more attractive.

"Given their experience, they are better positioned to do an FDIC-related transaction," says David Darst, an analyst with Guggenheim Securities. "And in a tangential way, that is what this deal would be."

What would pricing and structure look like?

New York Community's acquisition strategy is built on deals that preserve book value.

It "doesn't dilute its tangible book value," Gilbert says. "They are very mindful of preserving or accreting it."

A deal would need to be priced near the seller's book value to prevent dilution. Gilbert projected that New York Community would price a OneWest deal at 110% of tangible book value.

Few targets that meet New York Community's criteria would be willing to accept a deal priced at or near book value. Private-equity investors like OneWest's often seek big payouts, but they were among the first to get loss sharing from the FDIC and the earliest deals were among the most financially attractive. That deal has been lucrative for its backers, so a big premium may not be as important to them.

"If they price it right when getting in, they are not as sensitive of getting out," Ramsey says.

Analysts diverge a bit on whether the deal would be stock or cash or some combination of them. Kelley said in his note that the company is trading at 1.90 times it tangible book value, giving it a strong currency in stock deal. But Gilbert says if OneWest's private-equity backers are looking for an exit, they would want cash.

Part of New York Community's motivation for doing a deal would be to build capital, so a cash transaction would complicate that, Ramsey says. Instead, it could do a concurrent capital raise and use the proceeds to pay OneWest's shareholders.

"Ultimately stock would be involved in way or another," Ramsey says.