NYCB surges despite housing warnings years ahead of fall

(Bloomberg) — When the heads of two regional banks held town halls in the spring of 2021, the mood was almost dizzying.

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The industry’s long merger drought is ending, and two banks that have stayed out of the public eye, New York Community Bank and Flagstar, are poised to become even stronger by joining forces.

“I see it as a blank slate. I call it a Picasso and we’ll paint it together,” said NYCB’s Thomas Cangemi.

Three years later, the bank known for catering to New York City landlords was in serious trouble. Last week, it exposed major weaknesses in its risk monitoring capabilities and replaced Cangemi as chief executive with Flagstar’s Sandro DiNello, its No. 2 at City Hall. Investors fear the new owner will set aside more money to pay off bad loans, on top of the $552 million loss that shocked markets in January. Credit rating agencies have rated it junk status, and its stock price has plummeted 73% this year.

How NYCB got to this point is a story of permeating financial risks, changing rules and changing regulators. The new rent restrictions became law in 2019, but rather than admitting the hit to its loan book, the bank expanded them. First, back-to-back acquisitions of Flagstar and later part of Signature Bank nearly doubled the company’s size and put it on a collision course with new rules for banks holding more than $100 billion in assets.

As the stock market crashed this year, NYCB increased reserves and shareholders sold shares under regulatory pressure.

It’s a story with broad implications: A slew of rivals are under pressure to merge so they can make the leap from a network of corner branches to technology-driven financial services. But this is a dangerous moment for the industry. High interest rates and investments in the cracks commercial real estate sector are eroding the value of assets on balance sheets. Savers are able to withdraw cash faster than ever before. Shareholders learned to sell their stocks at the first sign of serious trouble.

In fact, NYCB was a stock market darling until it announced a massive cash package in late January.

“Everything is going great, and then all of a sudden — bingo — you have this day,” said Michael Manzulli, a former chairman of the bank’s board of directors. “And you say: ‘Wow.'”

Some long-time fans remain loyal. Mark Hammond, the son of the founder who ran Flagstar during the financial crisis, bought into NYCB’s troubled shares with great optimism after the bank increased reserves. In an interview last month, he scoffed at real estate’s “paranoia.” Then last week’s disclosure sent the stock down another 43%.

A spokesman for the bank did not respond to a request for comment. The company said it does not expect the weakness in its controls to result in a change in its provisions for credit losses. Commercial real estate veterans say when problems arise with a loan, lenders have broad latitude to work out solutions with borrowers. In early February, the company said savers had entrusted more of their money to banks this year.

NYCB started small, then a former teller hatched a big strategy.

Sixty years ago, Joseph Ficalora, the grandson of Sicilian immigrants, joined the Queens County Savings Bank. After returning from the Vietnam War, instead of following his father’s advice and getting a union job in the health department, he signed up for a management training program. bank. His status quickly rose. He had already run the bank for many years when it changed its name to New York Community Bank in 2000.

Ficarora’s strategy is simple. He bought out competitors and retained their identities to attract mom-and-pop savers and lend their savings to Manhattan real estate investors. His best bets are multifamily apartment complexes with rent-controlled or stabilized properties. Meanwhile tenants can rely on To hang on and maintain cash flow, many landlords have taken a more profitable approach, rehabilitating buildings to take advantage of rules that allow them to raise rents.

By 2004, he had cobbled together seven banks into the third largest savings bank in the United States. Assets grew from $1.9 billion to $23 billion in three years, and he could boast that he watched 35 rival branches disappear from a single location in Flushing. .

NYCB is just getting started. It purchased $11 billion in assets from bankrupt AmTrust Bank in 2009 and $2.2 billion in deposits from Aurora Bank in 2012. However, a proposal to gain scale through the acquisition of Astoria Bank failed in 2016, and analysts said regulators may be hesitant to do so. That year, NYCB generously rewarded its bosses and provided unusually generous benefits.

Around that time, a Queens reporter asked Ficalora about the secret to his success and got a quick answer: “Always be an asset to your boss, not a threat.” But in late 2020, the bank announced that Ficalora would take action, He was replaced by long-time finance chief Cangeme three days after surprising investors.

If there was any malice, it doesn’t show in recent photos: when Canjimi received the honor last year, Ficarola, who was named the 2018 New York Person of the Year by the Italian Cultural Institute, stood smiling next to his successor.

Cangemi took over a bank that was facing obstacles. In 2019, New York renters won sweeping new protections that prevent landlords from raising rents in regulated apartments. Owners are outraged and their banks find themselves under pressure. NYCB’s loan portfolio is almost entirely mortgage loans, mostly multifamily, most of which are subject to New York’s rent rules.

The pandemic has triggered even more stress. As offices empty and companies cut back on square footage, that creates more trouble for the industry’s bankers.

But the pain was not immediately apparent. Despite predictions that new rent rules will lead to losses for landlords and their lenders, NYCB’s problem loan levels have hovered near historic lows in 2020 and 2021, perhaps helped by rock-bottom interest rates, which Cangemi attributes to Prudent Lending – with “strong asset quality and an unprecedented track record dating back more than 50 years”.

Regulators had long emphasized the bank’s focus on multifamily lending, said a person who worked in risk at the time and spoke on the condition of anonymity to discuss internal operations. But the response isn’t always easy to accept. One executive was so abrasive to regulators during a meeting. At the meeting, a colleague held a sidebar discussion with officials to make sure they were not offended, the person said.

The lender has long been proud of its track record. NYCB boasts that, excluding a few ill-fated taxi license loans, it has averaged about 0.04% of its loan book annually over the past three decades, a figure that is nearly 20 times its total loan volume. Competitors on key metrics are higher.

Without significant loan losses, Canjimi can focus on its desire for growth. He lamented at the town hall that delays in early deals had put the company in “a very difficult position.”

Things eased around late 2020, with Huntington Bancshares Inc., M&T Bank Corp. and Webster Financial Corp. unveiling plans to gobble up rivals.

Cangemi and DiNello soon announced their deals as well. Flagstar, the largest publicly owned savings bank in the Midwest and one of the nation’s largest servicers of residential mortgages, has a troubled history.

The company was founded by Tom Hammond, who moved to Detroit from Nebraska with fond memories of hitchhiking to bird paradise with his unloaded shotgun. He boasted of catching most of the wildlife in Alaska, the mountains of Europe, and the South Pacific.

Flagstar is also stuck. The bank suffered so much during the global financial crisis that it was bailed out by private equity firm MatlinPatterson Global Advisers. Over the next few years, the bank was busy cleaning up its act.

In 2012, Flagstar agreed to pay $133 million to settle a U.S. lawsuit that accused the bank of submitting false documents to insure substandard loans. A year later, the bank reached an agreement to pay $110 million to settle MBIA Inc.’s allegations that it misrepresented its quality. A $121.5 million settlement with Fannie Mae followed, with the Consumer Financial Protection Bureau ordering the bank to stop illegally preventing borrowers from saving their homes.

“When I got there, the bank was in trouble,” said David Wade, who joined in 2013 and left last year as a senior mortgage underwriter. “Things got so bad.”

But for 2021, Dinello can boast of “extraordinarily successful” earnings. It was so good that when the acquisition was announced in April, Wade and his colleagues didn’t understand where it was headed. “In fact, initially, many of us thought this was an acquisition of Flagstar, not the other way around,” Wade said. It took us a while to realize that these people actually had more money than we did. “

For years, community groups have urged banks and their regulators to support underserved tenants. Then, during merger talks, something going on behind the scenes came to the group’s attention.

In April 2022, the banks announced they wanted to operate under a national bank charter, which means they no longer need approval from the Federal Deposit Insurance Corporation. The Neighborhood and Housing Development Association, a nonprofit founded in 1974, is skeptical.

“They were unable to obtain the necessary approvals from FDIC regulators and are now seeking approval from another regulator in hopes of obtaining more favorable approval,” the group wrote to regulators months later. Do this? “

The Office of the Comptroller of the Currency ultimately approved the deal, but with one condition: the right to approve dividends by November of this year.

The deal was closely followed by another deal – a partial acquisition of rival Signature following its collapse. Both bring new customers and sticky accounts to NYCB. The moves also help reduce its reliance on multifamily loans, which fell to 46% at the start of 2023 from 55% at the end of the year.

Even so, old problems in Washington and New York haven’t gone away, with investors trying to gauge the impact of $2.7 trillion in commercial real estate loans held by U.S. banks as values ​​plummet and borrowers face sky-high interest rates.

These acquisitions pushed NYCB’s assets to more than $100 billion, triggering tighter regulations. Observations by federal regulators reveal that the bank’s new peers have more capital and deeper reserves to cover losses. Its top risk and audit executive quietly left.

Read more: NYCB talks with regulators spark market-shaking moves

On January 31, NYCB delivered a punch that shocked shareholders and analysts. Its loan loss provisions rose 10 times more than expected as the bank ran into problems on two loans for co-op apartments and office space. Dividend 70%.

“It’s like you have a car that you like and you sell it to someone and you see them a year later and they just tear it all up and don’t take care of it,” said Wade, a former senior mortgage underwriter. .”

A week later, Moody’s Investors Service downgraded its credit rating to junk status, citing governance challenges and financial risks. Last week, Moody’s further downgraded the rating.

At town hall meetings in 2021, Dinello and his peers didn’t express much anxiety about the future. “We laugh about it. We’re not going backwards. We’re going to keep moving forward,” Canjimi said, according to a note filed with regulators. “

But Dinello has the final say. “We have to take all these discussions, all the opportunities that we envision, and we have to make it happen,” he said. “We’re all going to look back on this this year. In years to come, we’re going to think, ‘Wow.'”

–With assistance from Hannah Levitt, Katanga Johnson, Bre Bradham, Diana Li, Jennifer Surane, and Steve Dickson.

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