Joseph Ficalora still comes across as an optimist despite enduring one of the rockiest periods in his lengthy banking career.
Ficalora, who has been New York Community Bancorp's president and CEO since 1993, is running a company operating under a self-imposed effort to avoid becoming a systemically important financial institution. The Westbury company failed in its effort to buy Astoria Financial, and at three annual meetings investors pushed back against executive compensation.
New York Community's stock has fallen by more than 30% since late 2016, when it mutually agreed to walk away from Astoria. The historically active acquirer hasn't purchased a bank since it bought the failed Desert Hills Bank in March 2010.
The recent passage of comprehensive regulatory reform, especially the increase in the SIFI threshold, removes Ficalora's main reason for stunting growth.
“We do deals to be bigger and better,” Ficalora said in an interview. “What we do not do well is go through extended periods of time without the benefit of doing deals.”
With that in mind, Ficalora holds out hope that he can orchestrate smaller acquisitions — and complete them. Industry observers, on the other hand, believe more introspection is necessary.
Ideally, New York Community would find a deal to bring in low-cost deposits and reduce its funding costs. Those who follow the company, which has a loan-to-deposit ratio of 130%, are concerned about its ability to do so organically.
“Once you get ... over 100%, it becomes difficult to successfully manage increases in funding costs,” said Brock Vandervliet, a UBS analyst. The average bank he covers has a 91% loan-to-deposit ratio, he said.
Banks with ratios above 100% "use other forms of borrowings to do that, and those are very expensive," Vandervliet said. "In a rising rate environment, this tends to hammer the net interest margin.”
New York Community’s net interest margin narrowed by 29 basis points in the first quarter from a year earlier, to 2.42%.
The company’s strategy to buy banks to supplement its deposit base worked when it was generating high returns from a low-cost business model, before the financial crisis, said Collyn Gilbert, an analyst at Keefe, Bruyette & Woods. The company now operates with an inflated expense structure that reflects regulatory costs.
A lack of low-cost deposits, combined with diminished purchasing power, has New York Community "really kind of stuck,” Gilbert said. “Their plan is still to do acquisitions. There are some small deals they can probably do, I just don’t know how much it will ultimately move the needle.”
Ficalora said he is waiting for regulators to interpret the recently passed regulatory reform law before moving forward. Once he receives clarity, Ficalora said the company would look to do a small deal to “rejuvenate our currency” before moving on to something bigger. He believes the overall environment for mergers and acquisitions has improved.
“The likelihood that in a 12-month horizon there will be deals announced and executed is more probable today than it was a month ago, a quarter or a year ago,” Ficalora said, adding that the company would not limit itself geographically when considering targets.
Shareholder pressure over compensation also exists. Investors, in a nonbinding vote, rejected New York Community's compensation plan by a nearly 2-to-1 margin, and the chair of the company's compensation committee stepped down a day before the annual meeting.
The vote, meanwhile, did not surprise Gilbert, who said the board and management have "some challenges ahead they need to rectify."
Ficalora said he believes investors voted the way they did because they were following the advice of Institutional Shareholder Services, a leading proxy advisory firm. The firm based its recommendation on the company’s underperforming stock price, Ficalora said.
Ficalora isn't dodging that criticism, admitting that his company is suffering from "the worst stock performance that we’ve ever had." The veteran banker, who took a 33% pay cut in 2017, said the company has historically delivered high returns to investors.
“In recent periods, that number has been thwarted greatly by our inability to proceed forward with particular transactions,” Ficalora said. “The good news is the obstacles to transactions prospectively should be less and we should see an industry that is more receptive to consolidation. Therefore, I am optimistic that we will see favorable transactions on the horizon.”
New York Community would benefit from hiring its own deposit-gatherers, Vandervliet said. A bank's stock is its currency when it comes to acquisitions, he said, noting that New York Community's stock is "among the cheapest."
It's a chicken-and-egg situation, Vandervliet said. The company must improve its financial performance to increase it stock price, but it will be unable to do so unless it adopts a deposit-gathering culture or buys another financial institution. Meanwhile, it will be challenging to make an acquisition without boosting the stock price first.
"We think they're in a box," Vandervliet said. "They don’t seem to aggressively want to change their culture and hire bankers who would bring in deposits."