A $2.6 billion merger between New York Community Bancorp and Flagstar Bancorp that had executives three years ago promising handsome profits and much-needed diversification has instead delivered an institution on the cusp of collapse.
NYCB, which had its stock halted this afternoon before announcing a $1-billion cash infusion and a new CEO, can trace its dire straits to a decision to combine with Michigan-based mortgage specialist Flagstar Bancorp in 2021. In retrospect, the fact it took regulators an unusually long time to approve the deal may have been a warning sign: the two banks were very different institutions, which saw in each other a path to decisively move on from simmering headwinds for their portfolios. NYCB’s fate was tied to a change in policy for rent-regulated apartments, while Flagstar’s mortgage-focused business was facing a rising-rate environment that would hit profitability and originations.
And before fully sorting its Flagstar merger, which pushed combined assets to $90 billion, NYCB in March 2023 agreed to acquire former rival Signature Bank from the FDIC. Investors applauded the deal at the time, but months later it would become clear the bank wasn’t ready for the challenges accompanying its new size and the increased regulatory scrutiny that comes when a bank crosses the $100-billion-in-assets threshold.
“Could they get out of the hole they’re in? It’s possible,” Wedbush Securities analyst David Chiaverini told Crain’s on Tuesday, before the $1-billion cash infusion. “But I’m hesitant to put a percentage on that.”
Marriage on the rocks
For years, NYCB was essentially a one-trick pony that made loans to owners of rent-regulated apartments in New York City, a steady but unsexy business that came under attack after the legislature changed the state’s rent laws in 2019. Flagstar, on the other hand, specialized in business lending and residential mortgages. Putting the two institutions together would create a “dynamic commercial banking organization,” officials said when the deal was struck in the spring of 2021.
But Flagstar and NYCB’s problems have been building since the banks formally merged in December 2022, more than 18 months after the merger announcement and an indication regulators had concerns about the deal. “It’s been a very long engagement,” an exasperated NYCB CEO Tom Cangemi said in July 2022. “We’re looking forward to the marriage.” Regulators did not disclose why the review was taking so long.
The bank’s stock price has now collapsed from $10 a share to start the year to less than $2 at its nadir, after reporting a stunning quarterly loss in late January due to rising levels of troubled loans. On Wednesday the stock sank again on reports it is seeking a capital infusion before trading was halted. Last week credit agencies cut the bank’s rating to junk, a move that can trigger billions in deposit outflows. The bank reported deficiencies in its risk-management processes, an alarming admission that analysts say can mean further losses could lie ahead.
The bank has had 3 CEOs in a matter of days, swapping Cangemi for Flagstar executive Alessandro DiNello, who is now stepping aside post-infusion to make way for Joseph Otting, a former federal banking regulator.
The $1-billion infusion comes from a consortium led by Liberty Strategic Capital, Hudson Bay Capital, Reverence Capital Partners and Citadel Securities. Liberty is expected to invest $450 million, Hudson Bay $250 million, and Reverence $200 million.
For more than 30 years until his retirement at the end of 2020, NYCB was run by Joe Ficalora, a Queens-raised son of Sicilian immigrants whose stock-in-trade was lending to owners of New York’s 1 million rent-regulated apartments. Annual rent increases for this below-market housing are usually below inflation because they’re set by a nine-member board appointed by the mayor. Because vacancies never last long, their mortgages seldom go bad and with housing values in New York soaring there was relatively little risk in NYCB’s brand of banking.
But this delicate equation got scrambled in 2019, when the New York legislature passed a law that limited how much landlords can raise rents in regulated buildings after tenants leave. In October of that year, Ficalora predicted the new state law would cause headaches for rival lenders fighting to grab his business.
“Values in this niche are going to go down,” he said. “Expect headlines. We’re not going to be among the headlines as a loser.”
In December 2020, Ficalora retired at age 73 and was succeeded by longtime deputy Cangemi, who believed NYCB needed to grow and diversify. Four months after taking the helm he struck the deal with Flagstar, a move that bulked up NYCB to $90 billion in assets from $50 billion.
Flagstar was founded in 1987 as First Security Savings Bank by Tom Hammond, a Detroit entrepreneur who worked for Ford Motor in the 1960s before pivoting to finance and selling two mortgage companies he’d started. He resigned from the bank board in 2009, founded a hunting ranch in Utopia, Texas, and in 2011 his big-game hunting talents were cited by a foundation noting he had “taken” 13 lions, 11 elephants, five leopards, and more than three dozen Cape buffalo.
In 2009 the New York private equity firm MatlinPatterson Thrift Investments invested $250 million in the bank, now named Flagstar, to help the lender recover from the era’s housing bust. Flagstar’s stock fell to less than $1 a share and results were dragged down by costly settlements of Justice Department lawsuits concerning the bank’s lending practices during the pre-2008 boom years. But the fog gradually lifted and in 2016 federal regulators lifted a consent decree. Two years earlier, DiNello became CEO and ran the bank until it was acquired by NYCB.
Flagstar grew exponentially as ultra-low interest rates rocket-fueled the mortgage business. In 2018, the bank reached a deal with Wells Fargo to buy all of the San Francisco-based bank’s locations in Michigan, Indiana, and Ohio and an additional four in Wisconsin. The 52 new locations included 14 in Michigan’s Upper Peninsula. The year prior, Flagstar bought eight branches from Desert Community Bank in California. MatlinPatterson exited its Flagstar investment in November 2020 and the next year the bank agreed to merge with NYCB.
Only four months after the Flagstar deal closed, in March 2023 NYCB made another big deal, this time for its failed rival Signature Bank. In fact, the federal government paid NYCB $2 billion to take Signature’s deposits off its hands and kept the worrisome real estate portfolio, which was sold off later. Analysts described the deal as “almost too good to be true” for NYCB.
In the blink of an eye the bank had transformed from a New York niche player to a major regional lender with 400 branches and $120 billion in assets.
All this growth came with a price tag NYCB was slow to acknowledge. Once banks cross $100 billion in assets they’re required by regulators to hold more capital and retain more assets that can be sold quickly to raise cash in a pinch. NYCB knew these rules of the road but on a conference call in January Cangemi admitted it would have to comply with them “sooner than we had anticipated” and the bank would have to devote resources to “reset ourselves.”
Risks remain
The bank faces a host of unpleasant issues under new management. New board members include former Treasury Secretary Steven Mnuchin, whose Liberty Strategic Capital is the lead investor in the latest deal.
The correction in New York rent-regulated housing that Ficalora warned about five years ago is here, with some apartment buildings selling for 50% less than before, which could mean further loan losses at NYCB. Chiaverini estimates at least $6 billion worth of deposits are at risk of fleeing after the bank’s credit rating was cut to junk, but how many have vanished? What’s the outlook for the more traditional residential mortgage portfolio that Flagstar brought over? Does the bank’s business model even make sense any more?
“Twenty-six percent of this bank’s loans are rent-regulated or office loans,” said Chiaverini. “Those are high risk.”
If NYCB isn’t viable as a standalone, who might buy it? The usual suspect — JPMorgan’s Jamie Dimon — probably isn’t interested in boosting his exposure to a weak part of the housing market. Perhaps NYCB’s fate is to be acquired by a different bank with private equity investors contributing cash to help the survivor, Chiaverini predicted, before the $1-billion infusion.
At least one banking expert said they could envision a scenario in which an interested buyer could be attracted to the bank as a whole.
“There’s all sorts of value, in pieces or in whole,” said Michael Bell, a partner at the Detroit-based Honigman law firm and leader of the financial institutions practice group with a focus on bank M&A deals, particularly with credit unions.
“With the right buyer, you can manage risk and extract value. It’s been done before,” said Bell, who is not involved in any Flagstar-NYCB business. “There’s something appealing about buying a going concern that might have some bumps and bruises. There’s value in that.”
Michael Moran, a veteran banking executive and former vice president at Flagstar in the mid-2010s who now works in investment banking as a managing partner at Hovde Group, sees a bright spot that DiNello — who helped the bank emerge from its legal issues a decade ago — is now back at the bank. He remains as non-executive chairman.
“The hope is that (DiNello) and the management team can, at a minimum, dust off the playbook from 2012,” Moran said, acknowledging that the overall size of the bank and the makeup of its loan portfolio is vastly different from what executives faced at that time. “The hope is that the higher-ups can get their arms around the challenges they face today.”
In 2021, when NYCB announced its deal to acquire Flagstar, Bell told Crain’s that the deal could take the New York lender from a “one-trick pony” to a “nine-trick pony.”
Asked Tuesday whether that prediction had played out, Bell acknowledged that there was much to be desired with the promises offered by that combination.
“We only know what we know,” Bell said. “There’s a question about whether maximum value has been extracted from that combination? From an outsider’s perspective, you could say, perhaps not.”
Aaron Elstein, Nick Manes, Anna Fifelski , 2024-03-06 19:49:08
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