The New York Community Bancorp (NYCB), a prominent bank holding company founded in 1859 and publicly listed since 1993, has recently faced a series of challenges that have led to a significant drop in its share prices. The company, headquartered in Westbury, New York, specialises in multi-family loans, mortgage origination and servicing, and warehouse lending. Despite its successful acquisitions of Flagstar Bank in December 2022 and Signature Bank amidst the regional banking crisis, NYCB has encountered internal weaknesses that have raised concerns among investors and analysts alike.
Analysing NYCB's 10-K Report
NYCB's 10-K report, a mandatory financial disclosure for all financial institutions, was submitted later than required and revealed a mixed picture of the company's performance. While the acquisition of Signature Bank added $21.1 billion in assets and increased deposits by $24 billion, earnings per common share and net income margins declined significantly between June and September 2023. The expenses incurred during the acquisitions of Flagstar and Signature Bank affected the company's financial results in the second and third quarters.
The report also highlighted an increase in commercial real estate, acquisition, and construction loans, as well as a rise in loans held for sale due to higher mortgage rates and seasonally lower balances. Although deposits at NYCB increased, primarily driven by the Signature Transaction, net interest earnings decreased by 2% in the three months ending September 2023 compared to the previous quarter. Credit losses also increased, largely due to the incorporation of commercial loans acquired in the Signature Bank Transaction and other factors such as inflation pressure.
Assessing NYCB's Financial Health
Despite the challenges faced by NYCB, a closer examination of the report reveals that the company has made profits, albeit impacted by factors such as the Signature Transaction and a decrease in custodial deposits. The company recorded a profit of $1 billion for the nine months ending September 2023, surpassing the previous year's figures for the same period. Interest income on loans increased due to higher loan rates and acquired loans, while interest-earning cash and cash equivalents grew due to short-term market rates and an increased average balance driven by the Signature Transaction.
NYCB has also emphasised its valuable assets in the report, indicating that although the Signature Transaction has drained funds, it has contributed to the company's interest-earning loans and asset possession. The company maintains its investment in the Federal Home Loan Bank of New York (FHLB-NY) and has not incurred any losses on equity securities in earnings for the three months ending September 2023.
The Root of NYCB's Troubles
NYCB's troubles began following the replacement of CEO Thomas Cangemi, who had led the company for nearly three decades, and the disclosure of a "Material weakness" in internal controls related to loan reviews. These weaknesses stemmed from inadequate oversight, risk assessment, and control activities, prompting concerns among analysts about the company's ability to restore faith in the wake of its share price losses.
Fitch Ratings and Moody's downgraded NYCB, citing the time required to rectify the material weakness and the critical period during which these changes occurred. The downgrade by Moody's, in particular, dealt a blow to the already fragile trust in the company. Furthermore, NYCB announced a 70% drop in dividends, causing further apprehension among customers and investors.
The Nature and Impact of Internal Weaknesses
The "Internal Weakness" disclosed by NYCB, resulting from ineffective oversight, risk management, and monitoring activities, led to substantial losses amounting to $2.7 billion. These losses, initially reported as $2.4 billion, were later revised upward. While NYCB has assured investors that these issues will not impact the company's financial results in the last quarter of fiscal 2023, analysts remain skeptical about the severity of the problem and its potential implications.
The lack of proper loan review at NYCB may have resulted in improper payment periods, necessitating additional reserve building related to the company's exposure to commercial real estate (CRE). Given NYCB's focus on housing loans and multi-family real estate loans, particularly in New York where a significant number of residents continue to work from home, any shortcomings in the loan reviewing system pose a significant threat that could lead to even greater losses.
Leadership Changes and Their Implications
The resignation of long-time CEO Thomas Cangemi and his replacement by former US Comptroller of the Currency, Joseph Otting, has added to the uncertainty surrounding NYCB. Cangemi's departure, which occurred amidst the company's downtrend, has caused panic among investors who had placed their trust in his extensive experience and leadership.
In the interim, Alessandro DiNello has taken on the role of acting CEO and president, acknowledging the current challenges and emphasising the bank's commitment to benefiting customers, employees, and stakeholders in the long term. The appointment of Joseph Otting, set to take effect on April 1, comes with a higher compensation package than his predecessor, raising questions about his ability to turn the company around within the limited timeframe of the approaching end of Q4 2023.
Regulatory Scrutiny and Acquisition Prospects
NYCB has been under the watchful eye of regulators, although they have not yet intervened directly. Axios reports that while regulators are monitoring the situation, they are hesitant to favour a takeover to avoid a repeat of the Silicon Valley Bank incident.
Recent developments, such as infusions by Steve Mnuchin and the implementation of new regulations within the company, have bought time for regulators to assess the need for a takeover. The report submitted to the regulators will also serve as a basis for determining whether any acquisition prospects should be kept at bay.
Drawing Parallels to Previous Banking Turmoil
The challenges faced by NYCB are reminiscent of the turmoil experienced by regional banks in the aftermath of the collapses of Silicon Valley Bank, Signature Bank, and First Bank in March and May of the previous year. NYCB's acquisition of Signature Bank has placed it in a precarious position, with the rising interest rates threatening loans to rent-regulated multi-family units and making it increasingly difficult to refinance commercial real estate loans.
Regional banks are also grappling with higher deposit costs and unstable office building loans. However, many banks have demonstrated resilience in the face of the Federal Reserve's interest rate hikes, with some, like NYCB, taking proactive measures such as acquiring distressed assets.
The Absence of Winners in Times of Turmoil
In the midst of the challenges faced by NYCB, there are no clear winners. The company is striving to find balance and maintain a positive reputation among its clientele by the end of its financial year. However, the uncertainty has led to a decline in deposits, with numbers falling by nearly $8 billion compared to the previous month, including a significant portion of uninsured deposits.
While NYCB has recorded losses, it has also generated profits, indicating that investors have not suffered a complete loss despite the reduction in dividends. The company's acquisition of Flagstar Bank in 2022 and assets from Signature Bank in 2023 has bolstered its asset base to over $100 billion, subjecting it to more stringent regulations. The report suggests that NYCB's assets are in line with the required balances.
Strategies for Resolution
NYCB has taken proactive steps to address the challenges it faces. The company has appointed George Buchanan as its Chief Risk Officer and Collen McCullum as its Chief Audit Officer, both seasoned financial professionals who have helped to restore investor confidence, as evidenced by the recent increase in share prices.
The company has also secured a $1 billion infusion from a group led by former US Treasury Secretary Steven Mnuchin and plans to book a gain from the sale of a consumer loan portfolio valued at $899 million. These developments have contributed to a 4% increase in NYCB's share value on the New York Stock Exchange.
Incoming CEO Joseph Otting has expressed confidence in the company's future, stating that he has thoroughly assessed the organisation's operations and conducted due diligence on its portfolio and balance sheet. He has also hinted at a new business plan aimed at increasing the company's market share and improving its financial performance in the coming months.
NYCB has committed to enhancing its internal loan review process, increasing the frequency and scope of reporting to prevent group analysis and ensure independent credit analysis. Acting CEO Alessandro DiNello has reassured stakeholders that the company is working diligently to safeguard the interests of customers, employees, and investors, and that the internal weaknesses will not have a lasting impact on the financial year's results.
Additionally, the US Federal Reserve and other stakeholders have introduced new reserve requirements to prevent a repeat of the crises experienced by Silicon Valley Bank and other institutions. Banks are now required to maintain reserves that ensure their liquidity in the face of internal weaknesses.
NYCB is actively working to address its challenges, although a specific timeline for resolution has not been provided. The management remains optimistic about the effectiveness of the new policies and the impact of recent hires on the company's performance.
As Joseph Otting prepares to assume the role of CEO, stakeholders eagerly await the implementation of his proposed business plan and its potential to boost the company's financial standing.
While some analysts have applauded the recent infusions and new plans, others remain cautious, suggesting that the improvements may be temporary and that regular shareholders may not benefit significantly from the recent developments.
Ultimately, financial decisions are personal, and individuals must carefully consider the available information before making any decisions regarding the acquisition or sale of NYCB shares. It is essential to stay informed and monitor the company's progress as it navigates these challenging times.