New York Community Bancorp is preparing to subject itself to heightened regulatory scrutiny, but Chief Executive Joe Ficalora isn't worried one bit.
Over 20 years as CEO, Ficalora turned the Westbury, Long Island, company into an earnings machine largely by playing it safe. He has consistently followed a strategy of making accretive deals and using the low-cost funding to lend into the New York multifamily market.
"Our business model has proven that we don't pose the same risk as other banks," Ficalora says. "We have decades of evidence that, even in the worst of times, our principal business does not lose money at anything close to the rate of other banks."
Ficalora now has to hope the regulators agree. New York Community is just $4.2 billion shy of $50 billion in assets. Crossing that threshold would make the company the first new systemically important financial institution under the Dodd-Frank Act.
New York Community could easily tiptoe over that mark with organic growth, but Ficalora says the likelihood of an acquisition "is extremely high." His team is actively looking for a transformative deal while remaining in constant contact with regulators.
The trouble has been finding the right target, and analysts are becoming increasingly doubtful that such a deal exists. Ficalora's last notable acquisition the failed AmTrust Bank in Cleveland took place in 2009.
Ficalora has "done a tremendous job at accretive acquisitions, but there aren't a lot of publicly traded companies that make a lot of sense on paper," says Bob Ramsey, an analyst at FBR Capital Markets. The company typically buys thrifts, "but there are fewer thrifts these days, and even fewer large thrifts."
New York Community is eager to find a takeover target with more than $20 billion in assets, but such a deal has proven to be Ficalora's white whale.
New York Community has already invested heavily in internal compliance to prepare for hitting $50 billion in assets. It hired Deloitte to run the same stress tests that regulators require for systemically important financial institutions, Ficalora says.
Several analysts think OneWest Bank in California, formed when an investor group led by George Soros and John Paulson bought assets of the failed IndyMac, is a good fit, but nothing has materialized.
New York's Emigrant Bank and Astoria Financial (AF) also bubble up in conversation, but analysts express doubts they would sell at an attractive price. New York Community was also rumored to be interested in the 94 Chicago branches that U.S. Bancorp is buying from RBS Citizens Financial Group.
Obvious candidates seem illusive, though Ficalora has an uncanny knack for finding bargains.
Ficalora "is a guy you don't want to bet against because he has pulled more rabbits out of his hat than I can remember," says Mark Fitzgibbon, an analyst at Sandler O'Neill. "Does the company have some challenges? Absolutely. But I think they're surmountable."
Absent acquisitions, New York Community has focused on building its multifamily portfolio, competing in a furiously competitive area that includes Signature Bank, M&T Bank, People's United and Flushing Financial.
Ficalora, who estimates that his company handles about more than fifth of the city's multifamily loans, says its market share is growing. Multifamily loans make up roughly 70% of the company's $32 billion in loans at Sept. 30.
Multifamily loans mostly consist of low risk, but low-yielding, assets given the high percentage of apartments that are rent regulated. And New York Community makes loans based on a building's rental income, as opposed to market value, which lowers the amount of money it is willing to lend.
So Ficalora has focused on running a tight ship, keeping costs in check so it can offer lower interest rates, says Peter Winter, an analyst at BMO Capital Markets. The company's efficiency ratio was 42% at Sept. 30.
New York Community is in a strong position because many of its biggest competitors "no longer exist," Ficalora says. Capital One bought North Fork Bancorp, and Independence Savings Bank is now part of Santander Bank. Investment banks that used to make loans scaled back or vanished during the financial crisis.
Prepayment revenue keeps flowing in. The company had record prepayment income in 2011 and 2012. It earned $104 million from prepayments through the first nine months of last year, putting it on pace to achieve a record year.
Concerns are growing that the prepayment boom could be nearing an end. While New York Community's loan growth has been strong, its yields remain relatively low, analysts say.
Analysts warn that the company is susceptible to rising rates. But Ficalora, a member of American Banker's CEO advisory board, has expressed more concern about an inverted yield curve, noting that the last time that occurred, in 2005, was the toughest period since he became CEO.
AmTrust's mortgage business has helped pad New York Community's earnings, accounting for roughly 5.4% of total revenue last year through Sept. 30, analysts at Keefe, Bruyette & Woods wrote in a Jan. 9 note to clients. They cautioned that mortgages could decline to less than 3% of the company's total revenue this year.
Ficalora says he has no interest in chasing fee income or otherwise stepping outside the company's traditional business model. So the company will be forced to look elsewhere for an earnings boost, which could mean more pressure to find that elusive acquisition.
"Our [earnings] strategy is very consistent with what we articulated the day the bank went public," Ficalora says. "We plan to grow the bank substantially with highly accretive deals."