June 21, 2024

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NYCB Ballooned Despite Real Estate Warnings in Years Before Fall

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(Bloomberg) — The mood was practically giddy when the heads of two regional banks hosted a town hall in the spring of 2021.

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The industry’s long drought in mergers was ending, and two lenders below the public’s radar, New York Community Bancorp and Flagstar, were poised to become more formidable by joining forces.

“I look at it as a blank page,” NYCB’s Thomas Cangemi said. “I call it a Picasso that we’re going to paint together.”

Three years later, the lender known for catering to New York City landlords is in serious trouble. Last week, it revealed major weaknesses in its ability to monitor risks and replaced Cangemi as CEO with the second fiddle at that town hall, Flagstar’s Sandro DiNello. Investors are worried the new boss will set aside even more money to cover souring loans, on top of a $552 million hit that shocked the market in January. Credit raters have slashed it to junk and its shares have cratered 73% this year.

How NYCB got here is a tale of percolating financial risks, changing rules and shifting regulators. New rent restrictions became law in 2019, but instead of acknowledging a hit to its loan book, the bank got bigger. Back-to-back acquisitions, first Flagstar and then parts of Signature Bank, almost doubled the firm’s size and set it on a collision course with new rules for banks holding more than $100 billion of assets.

The crash came this year. Amid regulatory pressure, NYCB bolstered reserves and shareholders unloaded its stock.

It’s a story with broad implications: Legions of rivals are under pressure to merge so they can afford to make the jump from street-corner branch networks to tech-driven financial services. But it’s a perilous moment for the industry. High interest rates and cracks in commercial real estate are eroding the value of assets on balance sheets. Depositors are able to pull cash faster than ever. Shareholders have learned to dump stocks at the first sign of serious trouble.

2024-03-04 19:00:26

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