Big dreams come back to Bite New York Community Bank

During last spring's banking crisis, when a rival lender collapsed, New York Community Bank swooped in and acquired much of its business. Now the country is paying dearly for that decision.

The pain stems largely from a weakening commercial real estate market that prompted NYCB — which operates more than 400 branches under brands including Flagstar Bank — to admit mounting losses. In symmetry with last year's crisis, the bank said its newfound size after acquiring Signature Bank had exacerbated its problems by forcing it to keep more cash on hand, limiting its profitability and pushing it to divest distressed assets sooner. to sell than it might have been preferable.

Fears emerged last week that such pressure could be too much for the bank to bear, with NYCB shares losing almost two-thirds of their value as investors sold en masse after a dismal earnings report. After the bank rushed to project stability, including by releasing a new set of financial disclosures Tuesday evening that one analyst called a “late night news dump,” shares rose 7 percent on Wednesday.

Whether his efforts will last is an open question. NYCB executives, who had remained tight-lipped about the bank's finances just a week ago, opened the books Wednesday and laid out plans for a turnaround during a public conference call.

The bank appointed a new executive chairman, Alessandro DiNello, who led Flagstar before NYCB bought it in 2022. During the call, Mr. DiNello said he and NYCB CEO Thomas R. Cangemi would return the company to financial health.

The 164-year-old institution, founded in Queens, boasts on its website that “the opening of the borough's first local bank was accordingly met with elation and relief.” It is now based on Long Island and also has locations in the Midwest and elsewhere.

“This company has strong fundamentals, strong liquidity and a strong deposit base, which gives me confidence for our path forward,” Mr. DiNello said on Wednesday's call.

He said NYCB would consider raising more money or selling assets, adding that the bank would use all pre-tax income to build its savings.

“If we have to shrink, we will shrink,” Mr. DiNello said. “If we need to sell non-strategic assets, we will do so.”

Yet, as UBS analysts put it, there are “still some missing pieces of information,” including details about how the bank plans to finance its long-term debt.

Data released by the bank showed deposits were broadly stable through Tuesday, although it is unclear whether that was due to additional money from customers or money being shifted from other lenders. Executives also declined to promise how often they would provide further updates on deposit levels.

The bank's leaders continued to show some irritability, refusing to say, for example, when they would consider Mr. DiNello's promotion. “I don't see why that matters,” he said during the phone call.

The stock went on a wild run Wednesday, temporarily plunging by double-digits and repeatedly tripping the New York Stock Exchange's automated circuit breakers meant to halt a freefall before rebounding. Overall, regional bank stocks were slightly lower at Wednesday's close.

The problems at NYCB highlight the relatively shaky ground on which many regional and community banks find themselves. Unlike JPMorgan Chase, Bank of America and other banking giants, which have multiple lines of business, small and mid-sized lenders operate within just a few areas and can make loans that deteriorate all at once. That exposes them to a level of volatility that the country's largest banks rarely experience.

Some of NYCB's troubles began last spring when Silicon Valley Bank imploded, causing 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, seized Signature and auctioned off several parts of its operations.

Through its subsidiary Flagstar, NYCB made the most aggressive bid—one that allowed the government to incur the smallest short-term loss—and was chosen over others, including one from a much larger lender. The bank bought about $13 billion in mostly commercial and industrial loans on Signature's books, as well as $34 billion in deposits.

As recently as January 31, NYCB executives said Signature's acquisition had strengthened the bank by adding “low-cost deposits” and a profitable business that provides banking services to mid-market companies and wealthy families. But the acquisition also thrust the bank into a category of regulators — those with $100 billion or more in assets — that forced it to increase its reserves faster than necessary as a smaller lender.

Swallowing Signature's assets made sense for NYCB, as 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 nation's largest mortgage lenders.

At the same time, the real estate market began to show cracks due to the Federal Reserve's multiple rate hikes and the post-pandemic decline in office occupancy. That jeopardized much of Signature's portfolio, which contained older loans made in a different economic climate.

Some of these loans may need to be refinanced at interest rates that are higher than before, and others may simply need to be written off as losses. NYCB cut its dividend last week to preserve cash.

“Should they have known this was coming? Yes,” said Todd Baker, a banking and finance expert and senior fellow at Columbia University's Richman Center. “It seems clear to me that they really didn't know how quickly they had to adapt. The supervisors, who have already been burned once, are falling like a pile of stones.”

Representatives for the FDIC and the Office of the Comptroller of the Monetary Fund, another banking industry regulator, declined to comment. A Fed representative did not immediately respond to a request for comment.