With its deal to buy Staten Island Bancorp, Independence Community Bancorp gets access to a much-needed source of low-cost deposits to fund its fast-growing multifamily-mortgage business.
The $1.5 billion deal is the second recent one by a New York thrift wanting to achieve cheaper loan funding. New York Community Bancorp. Inc. bought Roslyn Bancorp. in Brooklyn for $1.6 billion on Oct. 31 for pretty much the same reason. Roslyn was also an attractive deposit-gatherer, but its large securities portfolio clearly limited the premium New York Community paid.
In an interview Tuesday, Alan H. Fishman, Independence's president and chief executive, said Staten Island's deposits and branch network would enhance his company's overall business.
The addition of staff, branches, and deposits is "what you need" to maintain a leading share in the multifamily lending market, he said. "One plus one equals two and a quarter."
Independence was not interested in Staten Island's mortgage subsidiary, however, Mr. Fishman said. Independence struck a separate deal with Lehman Brothers to acquire SIB Mortgage Corp., which lost $1.5 million in the third quarter and a whopping $22 million last month, according to a 10-Q filed this month with the Securities and Exchange Commission.
The mortgage business is "a risk we are unwilling to assume," Mr. Fishman said in the interview. On a conference call with investors earlier Tuesday, he had said that unloading it was a "very important part of the transaction." [
Independence would have paid less for Staten Island - or may have passed altogether - had the deal not been struck the deal with Lehman, he said.
Mark Fitzgibbon, an analyst with Sandler O'Neill & Partner LP, said that the separate deal for the mortgage unit makes it difficult to evaluate what Independence would acquire in terms of future earnings.
Independence valued Staten Island's stock - which had been run up on takeover rumors all summer - at a 16% premium over Monday's closing price, and it is paying 2.5 times book value.
James M. Ackor of Royal Bank of Canada's RBC Capital Markets said that the price seems reasonable at first glance but "appears somewhat expensive" in light of the premium being paid over Staten Island's projected 2004 earnings.
The deal "is a little bit of a mixed bag, but the strategic merits will outweigh the price," Mr. Ackor said. Independence's stock fell 5.1% Tuesday, he said, partly in reaction to the deal price.
Independence would expand to 116 branches, about $17.3 billion of assets, $9.3 billion in deposits, and $9 billion in loans. Sixty percent of the loan book would be tied to commercial loans, including multifamily mortgages.
"One of our concerns is [that] our asset-generation is outstripping our deposit supply line," and this deal "clearly addresses that strategic challenge," Mr. Fishman said during the conference call. "It is not unreasonable for us to grow our commercial real estate portfolio by 5% or 10% a year."
Only "a handful" of branches would be closed, and most of the expected savings would come from back-office operations, Mr. Fishman said.
Independence has six branches in Manhattan and seven in the pipeline. The enlarged network in Staten Island, Brooklyn, Queens, and Long Island would let it focus on its expansion efforts on Manhattan "without being distracted and continuing to look at the suburbs," he said.
Staten Island's mortgage arm had been soaring until late June, when the yield on 10-year Treasuries - the benchmark for mortgage rates - jumped 150 basis points in only a few weeks. That brought the end of the refinancing boom and lowered the value of Staten Island's for-sale portfolio. A $17.4 million profit for the unit in last year's third quarter turned into a $1.5 million loss for the same period this year.
This month Staten Island announced that it had hired Keefe, Bruyette & Woods Inc. to explore "strategic options." Harry P. Doherty, Staten Island's chairman and CEO, said during the interview Tuesday that selling the mortgage operation but remaining independent had been one of them. In the end, he said, selling the whole company made the best sense for shareholders.
Mr. Fitzgibbon at Sandler said Staten Island had been under "intense pressure from shareholders."
Mr. Fishman would not say whether Independence had made offers to other companies in the area, where consolidation talk has been lively since New York Community announced its deal for Roslyn. Mr. Doherty said Staten Island had talked to other bidders but would not name them.
The deal is expected to close either late in the first quarter or early in the second, and the deal with Lehman could close earlier, Mr. Fishman said during the conference call.
