New York Community finds ways to diversify as it awaits OK on Flagstar deal

New York Community Bancorp, which is still awaiting approval to complete its latest acquisition, says it is advancing on other key initiatives to transform itself into a full-fledged commercial bank.

For starters, the Hicksville, New York, company is making progress on remixing its funding base to rely less on higher-cost funding sources such as certificates of deposit and wholesale borrowing and more on interest-checking accounts. At the same time, it is also gathering more deposits from loan customers and expanding its capabilities to add deposits via fintech partnerships.

Still, CEO Thomas Cangemi said that he’s eager to finalize the pending $2.6 billion acquisition of Flagstar Bancorp, which would diversify New York Community’s overall funding profile, reduce its interest rate sensitivity and expand its geographic presence and product offerings. The deal’s original April 24 deadline has been extended to Oct. 31 while Flagstar Bank, the federally chartered state savings bank subsidiary of Flagstar Bancorp in Troy, Michigan, seeks a national bank charter from the Office of the Comptroller of the Currency.

If the charter switch is approved, the acquisition would need OKs from the Federal Reserve and the OCC rather than the Fed and the Federal Deposit Insurance Corp. The New York State Department of Financial Services gave the deal a green light in April.

“Both teams are very confident” that the acquisition will be completed by the October deadline, Cangemi told analysts Wednesday during New York Community’s second-quarter earnings call. 

“It’s been a very long engagement, [and] we’re looking forward to the marriage,” Cangemi said.

Announced 15 months ago, the proposed acquisition is a major factor in New York Community’s efforts to revamp its business model under Cangemi, who took on the CEO role in December 2020 after the abrupt retirement of the company’s longtime former leader, Joseph Ficalora.

Theoretically, Flagstar’s sizable national mortgage warehouse business, along with its residential mortgage segment, would lower New York Community’s concentration in multifamily lending. Such loans make up more than three-quarters of New York Community’s loan book.

Meanwhile, it would shift New York Community’s balance sheet from liability-sensitive to asset-sensitive at a time when the Fed is rolling out a flurry of interest rate hikes. 

On Wednesday, Cangemi said the charter-change application was submitted to the OCC in mid-May. He did not provide any other updates, saying it’s “in the hands of the regulators.”

Meanwhile, some of the desired business model changes are showing up in other ways. 

During the second quarter, deposits rose 21% year over year to $41.2 billion, largely due to New York Community’s pursuit of banking-as-a-service opportunities. The company is one of several banks around the country that are embracing banking-as-a-service as a business line. 

In general, banking-as-a-service connects fintech companies that want to offer banking services with regulated banks whose charters possess unique capabilities. Such relationships are viewed by banks as a way to acquire new customers inexpensively and generate more fee income.

At New York Community, banking-as-a-service deposits are showing up in three categories: traditional banking-as-a-service business with fintech companies, government-related banking-as-a-service deposits and “mortgage as a service” deposits, which include escrow deposits for principal, interest payments and tax payments, the company said Wednesday.

As of June 30, traditional banking-as-a-service deposits totaled $5.5 billion, followed by “mortgage as a service” deposits totaling $1.6 billion and government-related banking-as-a-service deposits of $652 million, the company said. On the government side, the company has existing contracts and “numerous contracts in the works,” including agreements with the Rhode Island Department of Labor, Pennsylvania, Virginia and the U.S. Treasury’s prepaid debit card program, Cangemi said.

Banking-as-a-service deposits increased by $2.3 billion from the first quarter to $7.8 billion, the company said.

Separately, New York Community is undergoing a “cultural change” to make sure that more deposits are gathered from loan customers, Cangemi said. The idea behind that is to tap into multifamily and commercial borrowers to generate more lower-cost core-deposit growth.

“The passion here is that when we make a loan, we get the deposit balances,” he said. “We’ve had some great progress there that is going to be the focus going forward.”

Deposits gathered from loan relationships grew nearly $500 million quarter over quarter and now total $4.9 billion, the company said.