DBRS Morningstar Confirms New York Community Bancorp, Inc. at BBB (high); Stable Trend

Following New York Community Bancorp, Inc.’s (NYCB or the Company) agreement to acquire Flagstar Bancorp, Inc. (Flagstar), DBRS, Inc. (DBRS Morningstar) has confirmed the ratings of NYCB, including the Company’s Long-Term Issuer Rating of BBB (high). DBRS Morningstar also confirmed the ratings of its primary banking subsidiary, New York Community Bank (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is A (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The ratings confirmation and maintenance of the Stable trend reflects the greater revenue, loan portfolio and funding diversity added by the Flagstar acquisition. Specifically, the combination adds Flagstar’s large mortgage banking business to NYCB’s multi-family lending operation, which is focused largely on rent-controlled/stabilized multi-family buildings in New York City. Overall, the pro-forma financial results are attractive, and immediately accretive to tangible book value per share. In DBRS Morningstar’s view, the combination does not add incrementally to credit risk as both companies lend predominately in historically low-credit risk business lines. However, as with all acquisitions, there are integration risks, especially for an acquisition of this size, and while NYCB has grown through acquisitions, it has been over ten years since its last banking transaction. Additionally, NYCB has purposefully kept its operation very focused on its multi-family business line and new businesses added with the Flagstar acquisition bring more complexity to the organization. Success of the transaction will stem from the Company’s ability to retain management familiar with these new business lines.

RATING DRIVERS
Over the longer-term, sustained levels of better-than-peer earnings generation, greater revenue diversity and an improved funding profile would result in an upgrade of ratings. Conversely, a significant weakening in asset quality or financial performance or operational issues with integration would result in a ratings downgrade.

RATING RATIONALE
NYCB announced the acquisition of Flagstar for approximately $2.6 billion in stock. The transaction is expected to close by YE2021, subject to shareholder and regulatory approval. The combination creates an $87 billion in assets institution with almost 400 branches in nine states. Flagstar, with approximately $29 billion in assets, adds approximately 158 branches in Michigan, Indiana, California, Wisconsin, and Ohio. It also provides home loans through a wholesale network of brokers and correspondents nationwide, as well as 87 retail locations in 28 states. Flagstar is a large national originator and servicer of mortgage loans, handling payments and record keeping for almost $250 billion of mortgage loans. Overall, we view the announced acquisition as improving the franchise strength of NYCB through increased product and geographic diversification, as well as better scale.

Despite the impact of the current operating environment, both banks have been performing well in recent periods. Flagstar has benefitted from the low rate environment and an active mortgage market, while NYCB’s structurally liability-sensitive balance sheet has seen ongoing benefits from wholesale funding and CDs repricing to lower rates.

Additionally, both banks have exhibited strong asset quality indicators. NYCB’s low credit risk loan portfolio is focused primarily on rent-controlled/stabilized multi-family buildings in New York City. With consistent cash flows and low vacancies, this multi-family portfolio has exhibited very low, through-the-cycle credit costs, insulating the Company from challenges in the New York rental market. As such, NYCB’s asset quality indicators remain pristine, with nonperforming assets and net charge-offs remaining at very low levels. Additionally, government assistance programs, including rent subsidies, and its focus on non-luxury rent regulated buildings should help insulate the Company from any downturn in NYC real estate. At Flagstar, the largest loan category is mortgage warehouse lending at 44% of the total portfolio. This asset class has also performed very well historically. Overall, the combination would lower NYCB’s significant concentration in multi-family lending to 56% of the loan portfolio from 75%.

NYCB remains somewhat reliant on wholesale funding, primarily FHLB advances secured by its loan portfolio, to fund the balance sheet. Additionally, the deposit mix is heavily tilted towards CDs and non-transaction accounts. As a result, NYCB’s cost of funds is higher than peers. The combination with Flagstar with its large non-interest escrow deposit balances, inherent with its mortgage servicing business, helps to diversify and improve the funding profile.

Capital levels are expected to remain sound at closing, including a Common Equity Tier 1 ratio estimated at 10.4%.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for NYCB are as follows: Franchise Strength – Good; Earnings Power – Strong/Good; Risk Profile –Good; Funding & Liquidity – Good; Capitalisation – Good.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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