How New York Community is remaking itself after buying Flagstar

When Thomas Cangemi was promoted to president and chief executive officer of New York Community Bancorp in late 2020, he was direct about the need to revamp its business model.

The Long Island-based company, which has carved a niche as a lender of multifamily loans on nonluxury, rent-regulated apartments in New York City, had a funding problem. In order to grow, it needed to pull in more lower-cost deposits and ramp up the diversification of its loan book.

And to do that, it needed to complete a sizable acquisition, not build something from scratch. The once highly acquisitive thrift institution had not done a whole-bank deal since 2009.

"I'm not going to make an announcement that we're investing in the residential market and we're setting up a new residential portfolio," Cangemi, the company's longtime former chief financial officer, told analysts in January 2021 during his first earnings call as CEO.  "We're going to partner [because] partnerships will get it done a lot quicker and it will make rational sense."

Two years and one acquisition later, New York Community is deep into the process of transforming itself into a full-service commercial bank. While it awaited regulatory approval to buy Flagstar Bancorp in Troy, Michigan, the company worked on shedding higher-cost deposits such as certificates of deposit and wholesale funding and adding more interest-checking accounts. It also developed banking-as-a-service relationships with fintech users, mortgage borrowers and participants in certain government programs.

Now with Flagstar in the mix – the twice-delayed deal finally closed on Dec. 1 – New York Community operates 395 retail branches across nine states and leads a national mortgage business, all of which offer more opportunities for low-cost deposit growth. Its loan portfolio is more diverse, its profitability should improve over time, and its balance sheet has expanded by approximately 40%, from about $63 billion of assets to more than $88 billion.

The deal offers New York Community a chance to shift from a liability-sensitive interest rate position to a more neutral one, which is critical in the current rising interest rate environment.

The acquisition has been a push in the right direction when it comes to the company's desire to become a more traditional commercial bank, Piper Sandler analyst Mark Fitzgibbon said.

"They're not there yet, but they're much further along than they would have been," he said.

In his first interview with American Banker since becoming CEO, Cangemi said the company is laser-focused on achieving a successful integration, including a rebranding initiative that will roll out in early 2024. All nine bank brands that currently operate under the New York Community umbrella will be rebranded as "Flagstar," a name that better reflects the company's expanded geography. 

Ultimately, "getting the culture right" is the "premier priority" for the coming year, Cangemi said.

"If we don't get the culture right, large transactions don't do well," he said. "Getting it right, right at the beginning, that's something we're working on on a daily basis. It's in our DNA."

Commercial banking

New York Community finds ways to diversify as it awaits OK on Flagstar deal

The company says it’s making progress on other parts of its business-model revamp — including a shift to lower-cost deposit sources — while regulators weigh its application to buy Flagstar Bancorp in Troy, Michigan.

By Allissa Kline

July 27

Cangemi spoke with American Banker about his priorities as CEO, the status of the Flagstar integration, future M&A deals and the cultural change driving the company's transformation.

Here are the highlights of that conversation, which has been edited for length and clarity.

It's been almost two years to the day since the company announced a change in executive leadership and you took on the role of president and CEO, which made you the first new CEO in 28 years. Can you talk about the atmosphere of the company around that time?

THOMAS CANGEMI: Historically, we were never an aggressive gatherer of liabilities [from] an organic perspective. It was typically done through business combinations. That continued when I joined the firm[in 2001] … and we built a very significant funding mix through consolidation, so we had all these unique brands throughout the New York metro region. Ultimately we were focused on building the business model [and] staying very close to our core principles on lending, which was being the No. 1 rent-regulated lender in New York City and a very sizable multifamily player. … At the same time, our last transaction (the failed 2016 acquisition of Astoria Financial) hadn't taken place, so we hadn't been able to grow by putting another business combination together. … So we were in a position where we were $49.9 billion [of assets] for many, many years and we were unable to get the next transaction done, which really changed the dynamic of funding growth at our firm. … Clearly that was an impediment toward our valuation. It was a challenge to fund appropriately. 

So there were some challenges and you stepped into the role to bring in some new strategy.

Working with [former longtime CEO] Joe [Ficalora] for 23 years [and] completely understanding what needs to be done culturally, I was able to step into the role of CEO and exercise cultural change when it comes to organic growth and deposit gathering and really focus the business to be more of a commercial bank model than traditional thrift model. What does that mean? It means that when working with customers, we focus more toward relationship lending, which requires a give-and-take between the customer and the bank, which means there's a relationship. Historically, the bank was focused more on the lending side, not on the deposit side.

I will tell you, we're very pleased to say that since that change, it's a matter of culture that when we do a loan with a customer, we expect reciprocation on the funding side, on the deposit side, and that has worked extremely well from day one. It's a culture change. It was changed at the board level all the way down to the line managers to ensure that when we make these types of loans, we have a depository relationship and a full commercial banking relationship with these large customers that we covet. That's a major cultural step in a different direction. So it's really organic and focusing on the low-lying fruit within the franchise.

That was step one. When we looked at the business model, we felt very comfortable that … we were in a sfdfvery good position to continue the growth-by-acquisition strategy. … We thought it would take a significant business combination to move the needle and make a difference. 

Did you identify Flagstar early on? Had it been on your radar, or did you look around a bit?

We have a long affinity with Flagstar, going back to when we ran AmTrust Mortgage. We ran AmTrust Mortgage for a decade, so we truly understand the correspondent business. They were one of the top players in that business, so we were envious of how they operated. … In addition, we had ongoing dialogue with leadership over there, and I'd say going back to 2016-17 we've always been talking to Flagstar. So it's something that we've thought about: When is the right time to come together? We were close a few times, but obviously we never came to terms. Ultimately when there was a leadership change at NYCB, I thought, if we're shuffling our business model to have more diversity in asset classes and a better funding mix, that Flagstar … would be a good opportunity to try to get together. That's when I reached out to their CEO.

Where are you in the Flagstar integration process, and how long will it take to complete?

Having an elongated engagement, given the magnitude of time it took to close the deal, gave us a great opportunity to look at both franchises and take the best from both sides, both on operations and in processes and systems. That's been a very unique opportunity. … Collectively, we're going to be focused going into the New Year with a strategy to make sure we set the business model to take the best of both sides. We will also be rebranding the franchise as Flagstar Bank. This will be a process. It will probably take a year to roll it out, along with our [systems] conversion. We have branding all over the country now, and we're going to rebrand with one name, one energy, and we believe with a national footprint, this makes logical sense.

In the meantime, it's business as usual. Customers are not going to be impacted. We're running two different platforms, theirs and ours, as we focus on the longest integration of our history.

Are you worried that you're going to lose anything, culturally or otherwise, in changing the name to Flagstar? I'm thinking about the community banks under the New York Community umbrella.

We're not changing the people in the branches, the people that touch the consumers. Culture is key … and we have a long period of time to implement culture on the brand, and the brand and the people behind the brand is what banking is all about. I think what's exciting about it is our customers will now have more products to choose from. And by the way, if you were to drive from Suffolk County to New Jersey, you would pass many, many different [New York Community] brands, maybe a total of seven or eight brands, and that's within 65 miles.

So we've thought about this under previous leadership, and we decided to table it until we had a large enough deal that it would economically make sense to do something of this significance. Now that we're much larger and national, it becomes more obvious and relevant that we need to have a national brand.

Everyone always wants to know when the next deal is coming. When will you be ready to do another M&A deal, and what theoretically would you be looking for in the next deal?

So we are open for business. The priority is to integrate Flagstar, [and] we're very cognizant of what we have to do here on a stand-alone basis. We're interested in deposit opportunities. We're interested in technology partnerships. … We think there should be [M&A] opportunities, but the priority for the bank is to make sure we have a smooth transition for the new Flagstar.

What challenges do you expect to run into next year?

The challenge is the unknown view of the future when it comes to the recessionary environment, which is most probable in my opinion. With that being said, this company as a hallmark has done really well in difficult times. We have a long history of not losing money in the worst of times. We are opportunistic, so that's clearly something we're positioning for. We have very strong credit metrics. We understand that the interest rate risk is a priority here … but we're in a good position [with Flagstar in the fold] to rebalance our funding mix. I think it comes down to execution. That's what will keep me up at night, and then it comes down to culture. … That's how you create a successful merger.

If we're having another conversation in two or three years, what will this company look like?

I think we should have a better, diversified funding mix and asset mix. I would say that it's not so much the size, it's the makeup of the funding that's going to drive the profitability of this company. … I don't have an asset size in my mind. That's irrelevant in the short term. The focus is the change of funding mix and integrating the business to have more diversity and choice. 

I think over time, as we look at the allocation of capital and resources, we'll be very selective to ensure that we are competing at a high level with our competition, and talent is going to be key. We want to have the opportunity for people to come to the bank and jump on this experience of a new Flagstar. We want to have success around diversification of the business model [and] an efficient business model that creates value for shareholders, and do it in a way where we can serve our communities very well.

I think a lot of people talk about asset size, and there's a lot of reverberation in the regulatory world about $100 billion versus 50 [billion dollars] versus 150 [billion dollars]. What we're focusing on right now is that we have the largest transaction of our public life that we're going to execute on. We're going to be just south of $90 billion [of assets] on a pro-forma basis, and I think we still have a funding opportunity here that's going to be very powerful if we reblend the mix.

You don't have to get bigger to get better, right? I think we have enough scale here to drive long-term value.