New York Community Bancorp (NYCB -1.19%) has been the leader in a very unusual lending niche. New York City has many rental apartment buildings filled with tenants who have below-market-rate leases. Thanks to New York law, those apartments have rents which are lower than other ("free market") apartments, and the rents can only be raised by small amounts each year. As you might imagine, people tend not to move out of those apartments, and when they do leave, the apartments are quickly rented to other people. The landlords' revenue from those buildings is not as high as from other buildings, but is extraordinarily stable.
This does mean that some of these landlords have little incentive to keep the buildings in good repair, and NYCB therefore finds itself sometimes dealing with people known as "slumlords." But only 0.12% of NYCB's loans are delinquent, and their charge-off rate this year so far has been approximately zero. A typical bank has around 1% of loans delinquent, and charges off around 0.5% per year; NYCB has much better loan performance than most other banks.
After the acquisition of Astoria Financial (AF), home mortgages will go from barely 1% of NYCB's portfolio to about 12%. (These are for one- to four-family homes; in the mortgage business, "multifamily" means an apartment building with at least five units). This business is (a little) less stable. Even in the best loan portfolio, some homeowners lose their jobs and fail to make their payments; some homes decline in value even during good times.
On the other hand, NYCB's net interest margin will be a little bit higher. Astoria's loan interest rates are lower, but its interest rates on deposits are even lower. The spread between the interest rates on deposits and the interest rates on loans (which is a bank's profit margin) will improve after the merger. NYCB management also has a good track record in integrating other banks; the bank has done a bunch of small mergers in recent years that have gone well.
It also plans on $140 million dollars per year in cost savings. Even if only part of that is realized, it could go a long way toward increasing the bank's profitability. Putting aside their large loss at the end of 2015 due to refinancing debt, the two banks together could be expected to have around $220 million in pre-tax net income next quarter, or $255 million if they realize the contemplated savings in expenses. The savings should come primarily from cutting branches in locations where they overlap, and reducing staff both at those branches, and in central functions, which will be consolidated. That will be offset somewhat by increased compliance and regulatory reporting, due to the increased size of the bank.
If NYCB can realize a good portion of the cost savings that it anticipates, and it retains the low-cost deposits in the existing Astoria Bank branches, it should be able to produce enough earnings to justify the price it is planning to pay in the merger.
