Latest twist in NYCB Saga sees $1 billion capital infusion for new CEO

Just about a year ago, local banks became a hot topic in the market. This is because high interest rates and a shortage of deposits set off a chain of events that led to the collapse of three major banks and hit many others hard.

One of the tangential participants in last year’s banking collapse. New York Community Bancorp (NYSE:NYCB) is the focus of this year’s drama. On Thursday, the embattled bank, which had plunged into penny stock territory, delivered some good news. A group led by former Treasury Secretary Steve Mnuchin invested $1 billion.

The bank’s stock price more than doubled from about $1.75 per share Wednesday afternoon to about $3.73 per share as of Thursday afternoon. Let’s take a look at the latest changes from this crazy month for the bank.

too big and too fast

New York Community Bancorp was actually a beneficiary of last year’s banking crisis, acquiring $38 billion in assets from bankrupt Signature Bank through the Federal Deposit Insurance Corp., which had acquired the bank. New York Community Bank, through its subsidiary Flagstar Bank, has raised about $13 billion in loans and $34 billion in deposits from its predecessor, Signature Bank.

The bank’s stock price doubled to nearly $14 per share over the next month, making it one of the few bank stocks to outperform the market over the past year.

However, issues with using Signature assets began to surface early this year. New York Community Bank’s fourth-quarter earnings showed a net loss of $260 million, compared with a net income of $199 million in the previous quarter. The bank also reduced its dividend from 17 cents per share to 5 cents. This led to a massive sell-off in early February that saw the stock fall from more than $10 per share to less than $5 per share.

According to CNN, this has led some customers to withdraw their deposits. The news outlet added that between February 5 and March 5, the company’s deposit base fell by $6 billion to $77 billion.

As then-CEO Thomas Cangemi explained, just five weeks ago, New York Community Bank was growing too fast. Not only did it acquire the assets of Signature Bank last year, it also acquired Flagstar Bank in December 2022.

These two acquisitions brought NYCB’s total assets to over $100 billion. As a result, New York Community Bank moved into the large banking arena and was subject to enhanced prudential standards, including risk-based and leveraged capital requirements, liquidity standards, risk management requirements, and stress testing.

“We began preparing to become a $100 billion bank immediately after the completion of the Flagstar acquisition, but as a result of the Signature transaction, we have crossed this important milestone sooner than expected,” Cangemi said in the fourth quarter earnings report. “In anticipation of the integration of the three banks and the submission of our first capital plan in April of this year, we have quickly pivoted and accelerated several of the improvements necessary to become a $100 billion-plus Category IV bank.”

From bad to worse

The situation got worse when the company revised its earnings in its 8-K SEC filing on February 29th. The filing showed an actual net loss of $2.7 billion in the fourth quarter due to a previously undisclosed $2.4 billion goodwill impairment. The 2007 deal became fully impaired by the end of 2023.

In the same filing, New York Community Bank acknowledged several problematic situations regarding its internal controls. “Management has identified significant weaknesses in the Company’s internal controls related to internal loan review due to ineffective supervision, risk assessment and monitoring activities,” the filing reads. “Our disclosure controls and procedures and internal controls over financial reporting are not effective as of December 31, 2023,” it added.

The same day, the company issued a press release announcing that Cangemi was resigning as president and CEO after 27 years and that Alessandro DiNello, chairman of the board, had been appointed to replace him. DiNello was the CEO of Flagstar Bank and has served on the NYCB Board of Directors since Flagstar was acquired in late 2022.

But not everyone was thrilled about his appointment as CEO, as my colleague David Moadel wrote earlier this week. Board member Hanif Dahya wrote a letter saying he did not support DiNello’s appointment. Dahya subsequently stepped down from his position as director. A few days later, another change occurred at the top.

Will Mnuchin come to the rescue?

This long and strange journey took another turn Thursday when New York Community Bank announced it had hired a new CEO, Thomas Otting, to replace DiNello. After a brief management tenure, DiNello returned to the board of directors. Otting served as the U.S. Comptroller of the Currency during the Trump administration.

Another Trump official, former U.S. Treasury Secretary Steve Mnuchin, is also playing a big role in fixing NYCB. Mnuchin, founder of Liberty Strategic Capital, is one of three major private equity firms investing about $1 billion in the New York Community Bancorp, providing it with the capital it needs to meet regulatory requirements. Mnuchin’s Liberty Strategic Capital is investing $450 million, Hudson Bay Capital Management is investing $250 million, and Reverence Capital Partners is investing $200 million. The rest comes from other institutional investors.

“With over $1 billion of capital invested in the bank, we believe we now have sufficient capital in case we need to increase reserves in the future to match or exceed the coverage ratios of NYCB’s large bank peers,” Mnuchin said. “He said. “We are making this investment because we believe Sandro has taken the right steps to stabilize the company with new management and position NYCB as a leading national bank with over $100 billion in diversified and de-risked operations. I decided. “It’s a model that supports long-term profitability.”

Mnuchin was appointed to the board along with Otting, Reverence Capital’s Milton Berlinski and Allen Puwalski.

There’s a lot to unpack here, but the investment provides a lifeline to the floundering bank, at least for the time being. There are still many problems to be solved, plans to be implemented, and big questions to be answered. Despite its very cheap valuation, given the uncertainty, it’s probably not a stock you should consider right now.