It’s highly unusual for the partners in a bank merger to terminate an agreement that they’ve already made public, so the recent announcement that New York Community Bancorp in Westbury, New York, and Astoria Financial Corp. in Lake Success, New York, would abandon their proposed $2 billion deal led to immediate speculation that the regulators had secretly torpedoed the proposed transaction. The banks did not give a reason in their joint statement in December 2016.
Announced in October 2015, the deal was supposed to close in December 2016. But New York Community issued a statement in November 2016 that “based on discussions with its regulators, it does not expect to receive the regulatory approvals required to consummate the proposed merger …by the end of 2016.” Instead, the banks agreed to terminate the merger agreement effective January 1, 2017.
The voluntary termination of a publicly announced bank merger because of regulatory complications is unusual because acquirers generally do their best to anticipate any possible roadblocks before entering into a formal merger agreement. This generally includes informal discussions with their primary regulator about any potential issues that could be problematic. Although these discussions should not be construed as a kind of pre-approval, it would be unusual for an acquirer to proceed with a proposed merger if its principal regulator expressed serious concern about any aspects of the deal in private.
It is unknown whether New York Community and Astoria decided to pursue their merger despite concerns that might have been voiced privately by their regulator, or if serious regulatory issues surfaced later upon a formal review. However, according to the investment banking firm Keefe Bruyette & Woods, the percentage of M&A applications to the Federal Reserve that have later been withdrawn have been on the rise in recent years, jumping from 15 percent in 2013 to 23 percent in 2015, and to 22 percent in the first six months of 2016. This increase occurred while annual M&A deal volume was growing at a much slower rate, which would suggest that the Fed has been taking a more critical perspective during its review process.
Issues that could have complicated the New York Community/Astoria deal include a high concentration of commercial real estate assets that would have comprised the combined entity’s balance sheet. New York Community is one of the top multifamily housing lenders in the country, while commercial real estate, multifamily and residential mortgages account for the majority of Astoria’s total loan portfolio.
Another factor that most likely complicated the deal’s regulatory approval process is that the combined bank would have crossed the $50 billion asset threshold level—New York Community had $49.5 billion in assets as of September 30, 2016, while Astoria had $14.8 billion. At this point, it would have become a Systemically Important Financial Institution, or SIFI, which would have exposed it to higher capitalization requirements and tougher regulatory scrutiny than are applied to smaller banks. The regulators generally require banks to have a SIFI compliance plan in place before crossing the $50 billion threshold, so New York Community most likely had already been preparing for this transition. However, the elevated SIFI requirements, combined with the bank’s significant commercial and residential real estate concentrations, might have made it difficult to gain regulatory approval in a timely manner.
In a research report published subsequent to the announced termination, KBW expected both banks to continue to seek out a merger combination. New York Community would seem to face the greater challenge in terms of finding an acceptable partner that won’t magnify its own commercial real estate concentration issues, and also because the bank’s organic growth trajectory will probably take it past the $50 billion threshold in 2017. Life as a SIFI grows more challenging—merger or no merger.