New York Community Bancorp could try to stunt its growth to delay topping $50 billion in assets and becoming subject to a range of new regulations.
The Waterbury, N.Y., thrift company grew almost 10% in the last year, ending up with $48.6 billion in assets at June 30.
Chief Executive Joe Ficalora has been trying for years to find a transformative deal that would push the bank well over $50 billion. On Wednesday, he raised the possibility that the thrift could enter a holding pattern to give it time to find the right acquisition.
Though he stopped short of saying New York Community would delay its growth, Ficalora said passing the threshold "would not be accidental." He suggested that the thrift could strategically manage its balance sheet to avoid averaging $50 billion in assets over four consecutive quarters, which would make New York Community a systemically important financial institution under the Dodd-Frank Act.
"We're very cognizant of the consequences of being bigger than $50 billion and we would manage how that occurs," Ficalora said during a conference call with analysts. Growth plans will be tied to the bank's M&A outlook. "We might choose to continue to grow because we're confident we're in the process of being ready to announce a deal," he added.
New York Community has been searching in vain for a large deal for years. Ficalora said he's recently considered a variety of deals, including banks that aren't widely discussed as sellers
But some analysts see very few options now that OneWest the $23 billion-asset, private equity-backed lender often cited as a likely target for Ficalora is off the table. CIT Group agreed earlier this week to buy OneWest for $3.4 billion.
"It's a tough spot, because OneWest was the only deal that made sense that I could see," said Bob Ramsey, an analyst at FBR Capital Markets. "Maybe there's an opportunity that I'm missing, but looking at the usual suspects, I don't see anything out there."
Beyond buying time for M&A, a delay in passing the $50 billion mark leaves open the possibility that the rule could be changed in time to save New York Community. A push to change the threshold is under way, though it's unclear if it will succeed. Rep. Blaine Luetkemeyer, R-Mo., recently introduced a bill that would give regulators more discretion in labeling banks as structurally important. The Senate Banking Committee has also been discussing the issue.
Federal Reserve Board Governor Daniel Tarullo helped fuel discussion when he said that $100 billion in assets might be a better threshold for systemically important status. Enhanced resolution planning and stress-testing procedures "do not seem to me to be necessary for banks between $50 billion and $100 billion in assets," he said in a May speech.
Ficalora offered guarded support for Tarullo's approach, saying banks with less than $100 billion in assets should be regulated "in a manner that does not reflect the extra burdens or regulatory expectations or consequences of being a giant."
Some industry observers have argued that it's absurd to classify New York Community, which is almost entirely dedicated to lending on New York City apartment buildings, with international juggernauts like JPMorgan Chase, Bank of America and Citigroup. Still, New York Community is not the only bank facing the unpleasant consequences of bumping up against $50 billion in assets. Last week, First Republic Bank in San Francisco saw its stock tumble after it disclosed the investments it plans to make to handle the new regulations.
By contrast, New York Community's stock rose roughly 2% Wednesday. The big difference is that First Republic's projected cost increases took analysts by surprise; New York Community has seen its costs rise more gradually, and has been investing in new processes since 2011.
New York Community has spent around $30 million on processes tied to becoming systematically important. Crossing the threshold will add about $10 million a year in expenses, Ficalora said. The biggest investments will involve upgrading the thrift's living-will plan and its comprehensive capital analysis and review, or CCAR, process, he said.
More significant than these costs could be a change to New York Community's capital planning, especially the possibility that it could have to cut its dividend.
New York Community paid out about 90% of its earnings last year, far more than any other systemically important institutions. Some industry observers are concerned that the Fed will force the thrift to pare down its payout when it is deemed systemically important.
Until that time comes, the thrift can delay its growth through loan sales or runoffs. It's an acceptable fallback plan, Ramsey says.
"They might be able to find a deal, or the $50 billion threshold might be raised," Ramsey said. "If nothing else works they can shrink the balance sheet. It's not a great strategy, but it's a backup plan."