The collapse of a regional bank is something many predicted last year. With rising interest rates and tough economic times, many believed it was only a matter of time. They were right. Signature Bank collapsed shortly after Silicon Valley Bank did in early 2023. While not a total surprise, the incident left many worried that other banks would follow suit.
Manhattan-based lender New York Community Bancorp (NYCB) has not experienced the same kind of bankruptcy as Signature or SVB, but it has been in a precarious position in recent months, and the possibility of the bank failing is very real. New York Community Bancorp is one of the largest lenders to commercial property owners in New York City. The bank recently got a lifeline with a $1 billion investment, but the key to its future may lie in action from the state legislature.
NYCB has deep roots in New York City. Founded in 1859 as Queen County Savings Bank, it changed its name to its current name in the early 2000s and began focusing on lending to rent-stabilized apartment owners. This was considered a low-risk business because rent-protected tenants tended to be more trustworthy, and owners of such buildings were allowed to raise rents if certain buildings were renovated. Around this time, the bank began a rush to acquire other smaller banks. NYCB gobbled up its rivals, growing its assets from $1.9 billion to $23 billion in three years.
By 2021, executives from NYCB and Flagstar, another regional bank, agreed to merge. “I see this as a clean slate,” NYCB's Thomas Cangemi said at a town hall meeting in spring 2021. “I call this Picasso drawing together.” After Signature Bank's highly publicized collapse, NYCB jumped on the opportunity for further growth, acquiring most of the bank for $2.7 billion, including Signature Bank's $38.4 billion in assets. But the acquisition came in a high-interest rate environment, and the bank's size exposed it to more regulation. Still, the bank's expansion ambitions were coming to fruition.
By early 2024, NYCB's assets will be more than $110 billion. Alarm bells sounded in January after NYCB posted an unexpected loss for the fourth quarter. By early March, the bank's stock price had plummeted to less than $2 a share, trading was halted, and management faced possible insolvency. After several executives left the bank in recent weeks, management has been taking steps to restore confidence in the bank among its key New York base.
In early March, NYCB appointed Joseph Otting as its new CEO as part of a $1 billion investment plan by a group of investors led by private equity fund Liberty Strategic Capital. Otting has experience as a banker and regulator, having served as Comptroller of the Currency for three years in the Trump administration before resigning in May 2020. His experience in finance and banking no doubt helped, but he also has close ties to former U.S. Treasury Secretary Steven Mnuchin, founder and managing partner of Liberty Strategic Capital. In the two months since joining the bank, Otting has been busy replacing NYCB's senior leadership, including its CFO, chief of staff and head of commercial real estate lending. The replacements were recruited from OneWest Bank and U.S. Bank, where Otting previously worked.
Multifamily housing makes up a big part of the bank's loan portfolio, with loans to rent-stabilized buildings in New York City making up nearly half of NYCB's $37 billion multifamily portfolio. In early May, NYCB reported that nonperforming loans in its portfolio totaled $800 million in the first quarter of this year, nearly four times the amount during the same period last year. Of the nonperforming loans, multifamily housing accounts for $339 million, which is not surprising given the bank's heavy reliance on rent-stabilized buildings in New York City.
For rent-stabilized apartment owners, the Housing Stability and Tenant Protection Act, enacted in New York State in 2019, has had a “devastating effect,” according to a report released by trade groups the New York Association of Realtors and the New York City Rent Stabilization Association. The law significantly reduced the impact by preventing owners from raising rents based on renovations to individual rooms or entire buildings. As a result, landlords struggled to repair units, leading to rising vacancy rates. According to a recent report by the Community Housing Investment Program (CHIP), a trade group for rent-stabilized owners, roughly two-thirds of rent-stabilized buildings have lost market value since 2018 due to stress from new regulations and high interest rates. In 2023, many rent-stabilized buildings sold for at least half of their previous sales price.
Fitch Ratings downgraded NYCB and its subsidiary Flagstar Bank to “BB” in early May, citing the bank's weak earnings and risks associated with its restructuring plan. Investor Milton Berlinski, part of a group led by Mnuchin, said he couldn't predict future macroeconomic conditions but was comfortable with NYCB's current situation. “Given the work we've done to date, we believe the $1 billion is sufficient based on our current review,” Berlinski said. “If conditions change in the future, we'll deploy more capital.”
Berlinski said the bank will sell assets in terms of reducing its exposure to the multifamily market, particularly rent-stabilized buildings, but how large will depend on how management thinks about restructuring the bank. In the bank's recent investor call, management said it will take a tougher stance on borrowers and “more actively manage” the portfolio. Bank executives also cited internal issues identified around supervision, risk assessments and monitoring activities during the bank's January earnings conference call.
While Berlinski and New York Commercial Bank executives are optimistic about the bank's new path, others in the industry are more gloomy about regional banks with large exposure to commercial real estate loans. There's been a lot of talk about a looming debt crisis in 2024. The Mortgage Bankers Association said earlier this year that it expects the amount of commercial real estate mortgages maturing this year to actually rise from $659 billion to $929 billion. Benefit Street's head of real estate Michael Comparato said at a recent event that hundreds of banks could fail in the coming days and others could be acquired. “I don't think most banks understand what's on their balance sheets,” Comparato said. “They're basically being told what to do by federal regulators, which is just as scary.”
The future is hard to predict, but what we know about NYCB’s situation allows us to speculate on some possible scenarios. After all, rent-stabilized buildings, originally the bank’s strength and growth driver, have become a weakness. Owners of rent-stabilized properties have suffered severe hardship since the pandemic, with many struggling to stay in business. However, challenges to state laws could play a major role in this niche going forward. Although the U.S. Supreme Court recently rejected a challenge to New York State’s landmark 2019 rent stabilization law, which further limited landlords’ ability to raise rents or deregulate apartments during a lease, owners and advocacy groups are working to successfully challenge it to the nation’s highest court. Success in overturning the controversial law, or even parts of it, could be a turning point for the market and a key guarantee for NYCB.