The Roots of New York Community Bank’s Troubles
During last spring’s banking crisis, when a competing lender went under, New York Community Bank pounced, acquiring a big chunk of its business. Now, it is paying dearly for that decision.
The pain stems largely from a weakening commercial real estate market that impelled NYCB — which operates more than 400 branches under brands including Flagstar Bank — to admit to mounting losses. In a piece of symmetry with last year’s crisis, the bank said its newfound size after the acquisition of Signature Bank, had accelerated its troubles by forcing it to keep more money on hand, crimping its profitability and prompting it to consider selling distressed assets sooner than it might have preferred.
Over the past week, fears that such pressure could be too much for the bank to bear broke into the open, with NYCB’s stock shedding nearly two-thirds of its value as investors sold in droves after a dismal earnings report. After the bank rushed to project stability, including by releasing a new set of financial disclosures on Tuesday evening that one analyst termed a “late night news dump.”
The bank’s shares rose 7 percent on Wednesday, but resumed their decline on Thursday, losing 9 percent in early trading.
Whether its efforts will stick is an open question. NYCB executives, who just a week ago had been tight-lipped about the bank’s finances, opened up the books on Wednesday and laid out turnaround plans on a public conference call.
The bank appointed a new executive chairman, Alessandro DiNello, who ran Flagstar before NYCB bought it in 2022. On the call, Mr. DiNello said he and NYCB’s chief executive, Thomas R. Cangemi, would steer the company back to financial health.
The 164-year-old institution, which was founded in Queens, boasts on its website that “the opening of the borough’s first local bank was accordingly met with elation and relief.” Now based on Long Island, it also operates branches across the Midwest and elsewhere.
“This company has a strong foundation, strong liquidity and a strong deposit base, which gives me confidence for our path forward,” Mr. DiNello said during Wednesday’s call.
He said NYCB would consider raising more money or selling off assets, adding that the bank would divert any pretax income to building its savings.
“If we must shrink, then we will shrink,” Mr. DiNello said. “If we must sell nonstrategic assets, then we’ll do that.”
Yet, as analysts at UBS put it, “there are still some missing pieces of information,” including details about how the bank plans to finance its long-term debts.
Data released by the bank showed that its deposits were roughly steady through Tuesday, although it’s unclear whether that was due to additional money from customers or money shifted from other lenders. Executives also wouldn’t commit to how often they would provide further updates on deposit levels.
The bank’s leaders continued to show some prickliness, declining for instance to say when they began to consider Mr. DiNello’s promotion. “I don’t see why that matters,” he said on the call.
The stock took a wild run on Wednesday, temporarily plunging by a double-digit percentage and repeatedly tripping automated New York Stock Exchange circuit breakers intended to halt a free fall before rallying back. On the whole, regional bank stocks were slightly lower at Wednesday’s close.
The troubles at NYCB show the relatively shaky ground that many regional and community banks occupy. Unlike JPMorgan Chase, Bank of America and other banking giants, which have multiple lines of business, small and midsize lenders operate within only a few domains and can load up on loans that sour all at once. That exposes them to a level of volatility that the country’s largest banks rarely experience.
Some of NYCB’s troubles started last spring when Silicon Valley Bank imploded, setting off a mini-contagion among regional lenders that led to the closure of Signature and ended with the sale of First Republic Bank to JPMorgan. In March, the Federal Deposit Insurance Corporation, a banking regulator, effectively seized Signature and auctioned off different parts of its business.
Through its subsidiary Flagstar, NYCB made the most aggressive bid — one that would allow the government to sustain the smallest short-term loss — and it was selected over others, including one from a far larger lender. The bank bought about $13 billion of what were mainly commercial and industrial loans on Signature’s books, as well as $34 billion of deposits.
As recently as Jan. 31, NYCB executives said the Signature acquisition had strengthened the bank by adding “low-cost deposits” and a profitable business providing banking services to medium-size companies and wealthy families. But the acquisition also bumped the bank into a regulatory category — those with $100 billion or more in assets — that forced it to increase its reserves more quickly than it had needed to as a smaller lender.
Swallowing Signature’s assets made sense for NYCB, since the two banks operated in many of the same markets. But the Long Island bank was also still integrating new and old assets from its acquisition of Flagstar, one of the country’s largest residential mortgage servicers.
At the same time, the real estate market was beginning to show cracks resulting from the Federal Reserve’s multiple rate increases and the postpandemic drop in office occupancy. That put much of Signature’s portfolio, containing older loans made in a different economic environment, at risk.
Some of those loans may need to be refinanced at interest rates that are higher than they were earlier, and others may simply need to be written off as losses. NYCB cut its dividend last week to preserve cash.
“Should they have known that was coming? Yes,” said Todd Baker, a banking and finance expert who is a senior fellow at the Richman Center at Columbia University. “It feels clear to me that they really didn’t know how fast they were going to have to adjust. The regulators, having been burned once, are coming down like a ton of bricks.”
Representatives for the F.D.I.C. and the Office of the Comptroller of the Currency, another banking regulator, declined to comment. A representative of the Fed did not immediately respond to a request for comment.
