New York Community Bancorp (NYCB) shareholders have endured a challenging five-week period, particularly those who have maintained their positions amid the turbulence.
The regional bank shocked investors with an unforeseen fourth-quarter loss announced on January 31, resulting in a significant 37.7% decline in share value by the end of the day.
Since then, the situation has remained volatile as the bank’s leadership grapples to regain stability. As of January’s end, the company boasted assets exceeding $110 billion.
A serious crisis, then Mnuchin happened
Wednesday saw a dramatic turn of events for New York Community Bancorp (NYCB), with shares plummeting to as low as $1.70, marking an 83% loss from January 30.
The downturn was triggered by a report in The Wall Street Journal suggesting that the company was seeking to raise new capital to bolster its balance sheet. However, the situation quickly reversed when news broke later in the afternoon that NYCB had successfully secured $1 billion in new capital.
The infusion of funds came from an investor group led by former Treasury Secretary Steven Mnuchin and his Liberty Strategic Capital, alongside other notable entities such as Hudson Bay Capital, Reverence Capital Partners, and Citadel Global Equities. As a result, NYCB shares surged to as high as $4.18 before settling at $3.48, marking an 8.1% increase for the day.
In light of the capital infusion, Mnuchin and Joseph Otting, former U.S. Comptroller of the Currency and current CEO of NYCB, will join the bank’s board. Otting, who shares ties with Mnuchin, served alongside him in the Trump Administration.
Additional board members include Allen Puwalski, Chief Investment Officer at Cybiont Capital, and Milton Berlinski, Head of Reverence Capital Partners, both based in New York.
While the deal provides a temporary reprieve, its long-term stability remains uncertain. Potential investors should approach NYCB shares cautiously, acknowledging the inherent risks involved.
Despite the positive development for NYCB, the SPDR S&P Regional Banking exchange-traded fund (KRE), which includes NYCB among its tracked regional banks, closed down 0.1% at $46, contrasting with the overall upward trend in the market.
Small Queens bank grows to operations in 7 states
The recent capital raise for NYCB aims to stabilize the institution, which traces its roots back to 1859 when it was founded as Queens County Savings Bank. Over the years, NYCB has expanded into a predominantly national operation, culminating in its rebranding under the Flagstar name following a merger with Flagstar Bank of Troy, Mich., finalized on Feb. 21, 2022.
With a network of 395 branches spanning across New York, Michigan, New Jersey, Ohio, Florida, Arizona, and Wisconsin, NYCB maintains a significant presence, particularly in and around New York City. Notably, the bank has been a major lender to owners and developers of rent-controlled apartments in New York.
The current financial challenges faced by NYCB come amid a history of growth through acquisitions. Over a span of 24 years, the bank executed 20 acquisitions of banks and financial firms stretching from New York to Arizona. Many of these acquisitions occurred with federal assistance in the aftermath of the 2008-2009 financial crisis.
The acquisitions predominantly focused on entities engaged in real estate lending, including both commercial and residential loans, reflecting NYCB’s strategic emphasis on real estate financing.
The acquisition of Flagstar Bank of Troy, Mich., marked a significant milestone for NYCB, as Flagstar was a commercial bank with one of the nation’s largest mortgage servicing businesses. Under the leadership of experienced managers, Flagstar had successfully navigated challenges and transformed a struggling institution into a reputable player in the industry.
However, NYCB’s final acquisition, involving Signature Bank, appears to have faced challenges from the outset. In this transaction, NYCB assumed $38.4 billion in assets and acquired 44 branches from Signature Bank.
Signature Bank was one of three major banks that unexpectedly collapsed in early 2023 due to deposit runs, causing significant disruptions in the banking sector. Among the trio, Silicon Valley Bank, despite its substantial asset base exceeding $200 billion, also succumbed to failure in March 2023. Following its collapse, Silicon Valley Bank became part of First Citizens Bancshares, headquartered in Raleigh, N.C.
Legacy of the 2008-09 crisis
The Signature deal had significant implications for NYCB on multiple fronts:
- Regulatory Oversight: The acquisition pushed NYCB’s assets beyond $100 billion, subjecting it to a new and stricter regulatory framework overseen by the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC). This heightened regulatory scrutiny required NYCB to enhance its capital reserves to meet stress test requirements mandated by the Fed. Capital serves as a vital buffer for banks, absorbing losses during adverse economic conditions or loan defaults.
- Asset Quality Concerns: The deal exposed underlying issues within NYCB’s asset portfolio and management systems. These issues, once surfaced, eroded investor confidence and resulted in significant financial repercussions for the bank. Flaws in asset management and risk assessment processes proved costly for NYCB and contributed to the decline in investor trust.
- Impact on Banking Regulation: The regulatory changes stemming from the Signature deal reflected a broader shift in the banking sector’s regulatory landscape. Following the 2008-2009 financial crisis, regulators implemented stricter oversight measures, particularly for larger banks deemed systemically important. This regulatory framework aimed to mitigate systemic risks and safeguard the stability of the financial system and the broader economy.
NYCB’s woes probably not a repeat of 2008 crisis
The NYCB crisis is deeply intertwined with the dynamics of the New York real estate market and regulatory changes. Regulatory changes, including stricter oversight and stress test requirements, have heightened scrutiny over the bank’s lending practices and asset quality. NYCB’s lending business relied heavily on loans to owners of rent-controlled apartments, which historically offered stable returns. However, changes in regulations and market dynamics have impacted the profitability and stability of this segment. The practice of leaving apartments vacant to increase rents after renovations has led to property devaluation and decreased profitability for owners. The value of properties tied to rent-controlled buildings has been negatively impacted by vacancies and regulatory uncertainties. Owners’ inability to vacate rent-controlled units or convert properties into high-priced condos has led to losses and decreased asset values. NYCB’s exposure to these properties, amounting to $18 billion in loans, has raised concerns about the valuation and quality of its loan portfolio. NYCB’s financial performance took a significant hit, with reported losses ballooning to $2.4 billion in the fourth quarter of 2023. The company’s CEO and a director resigned, and the SEC disclosure highlighted material weaknesses in internal controls related to loan review and risk assessment. These developments further eroded investor confidence and intensified concerns about the bank’s stability and governance practices. Overall, the NYCB crisis underscores the challenges faced by banks operating in complex real estate markets and navigating regulatory changes. The bank’s reliance on a specific segment of the market, coupled with governance and risk management issues, has contributed to its current predicament and sparked investor apprehension about its future prospects.