The Dodd-Frank Act has Joseph Ficalora swearing off the type of small-bank takeovers that built New York Community Bancorp (NYB).
Ficalora — after striking 11 deals in 12 years — wants his next purchase to vault his $43.5 billion-asset thrift well over the $50 billion-asset threshold set in Dodd-Frank. The reform law imposes tougher supervisory and capital rules on such "systemically important" institutions.
For the Westbury, N.Y., company to get branded too big to fail, it would have to be for a game-changing acquisition of at least half its size, says Ficalora, the president and chief executive. Otherwise, the extra scrutiny from Washington would not be worth it.
"The likelihood is that we'll do a bank bigger than $20 billion in assets rather than anything smaller than that," Ficalora says. "We don't want to do a few small, billion [-dollar] deals that tiptoe us into the $50 billion arena."
"We've cut off all of the smaller opportunities to prepare ourselves more for a larger one," he says.
Ficalora's M&A ambitions matter because his thrift is among the few East Coast banks that have buying power. Its share price and profitability are among the best in banking. Its 270 branches in New York, N.J., Ohio, Florida and Arizona operate near a lot of small banks it could pay up for.
New York Community has acquired two failed banks since the financial meltdown, including the $9.2 billion-asset AmTrust Bank in Cleveland in 2009.
Its most recent acquisition was in June, for $2.3 billion of deposits from Aurora Bank FSB.
Ficalora has the heft to outbid smaller rivals such as Susquehanna Bancshares (SUSQ) and Investors Bancorp (ISBC) for banks with a few dozen branches. His track record as a community banking dealmaker gives him credibility with sellers and overseers. More than half of the takeovers on Ficalora's watch have been for targets with assets of around $3 billion or less.
But his advantage as a buyer diminishes as he goes after bigger targets that would likely attract the interest a murderers row of larger M&A players. They are: M&T Bank (MTB) of Buffalo, N.Y.; U.S. Bancorp (USB) of Minneapolis; Toronto-Dominion Bank's TD Bank of Portland, Maine; BB&T (BBT) of Winston-Salem, N.C.; and PNC Financial Services Group (PNC) of Pittsburgh.
There are a handful of takeover targets in the $20 billion-asset plus range, and all of them would be worth a look. But New York Community would have a hard time outdueling any of them for, say, Synovus Financial (SNV) in Columbus, Georgia, or various U.S. units of Banco Santander or Royal Bank of Scotland.
Ficalora — who declined to comment on specific targets — acknowledges the tough competition at the larger end of the M&A market but says he is not fazed.
Many of the big, able buyers, such as PNC or BB&T, are busy closing or integrating big deals, he says. New York Community can afford to wait for an opening as its multifamily business and home mortgage businesses are going strong, he says.
"Obviously, there are fewer banks that would be large enough" to buy, he says. "But we're perfectly willing to be patient and wait for the opportunity to take the next step."
New York Community's business model and balance sheet mean it needs to eventually do another deal to maintain its profits and its dividend, one analyst says.
Sitting on the deal sidelines makes sense for now because its ideal targets — reasonably priced in-market deals, and low-risk takeovers of failed banks — are hard to find, says Matthew Kelley, an analyst with Sterne, Agee & Leach.
It has "earnings momentum" through at least the second half, but then the pressure will start to build, he says: "As we go into 2013, I think the need for a transaction to grow earnings is going to become much more significant."
That is because the home mortgages and prepayment fees on commercial mortgages that drove profits in the second quarter will not last, Kelley says.
Its primary business, loans on apartment buildings in the New York area, is perhaps the most competitive in banking, he says. Pricing pressure is squeezing the margins in that business to the point that the rates on New York Community's new multifamily loans are lower than what it is paying on about $5 billion in legacy wholesale borrowings, he says.
New York Community would desperately like to raise capital and replace that funding with core deposits, Kelley says. An accretive stock-based deal could accomplish that.