New York Community Bancorp, once a stock-market darling, is now facing major challenges after a CEO shake-up and weaknesses in risk monitoring. The bank, known for catering to New York City landlords, revealed significant weaknesses in its ability to monitor risks and replaced its CEO with the second-in-command from Flagstar. This move has caused concern among investors, who worry that the new CEO will set aside even more money to cover souring loans. Credit raters have downgraded the bank to junk status, and its shares have plummeted 73% this year.
The bank’s troubles can be traced back to a combination of financial risks, changing rules, and shifting regulators. In 2019, new rent restrictions became law, but instead of acknowledging the impact on its loan book, NYCB continued to grow through acquisitions. However, these acquisitions put the bank on a collision course with new rules for banks holding more than $100 billion in assets. This year, amid regulatory pressure, NYCB bolstered reserves and shareholders began selling off its stock.
This situation has broader implications for the banking industry as a whole. Many banks are under pressure to merge in order to afford the transition to tech-driven financial services. However, this is a risky time for the industry, with high interest rates and cracks in commercial real estate eroding the value of assets on balance sheets. Depositors are also able to withdraw cash faster than ever before, and shareholders have learned to sell off stocks at the first sign of trouble.
NYCB’s troubles are a stark contrast to its previous success. The bank’s former CEO, Joseph Ficalora, had a strategy of buying rivals and loaning their savings to Manhattan real estate investors. The bank grew rapidly through acquisitions and boasted a strong track record of asset quality. However, the new rent restrictions and the pandemic created challenges for NYCB. Despite predictions of losses, the bank’s level of troubled loans remained low in 2020 and 2021. This changed in 2023 when the bank announced a significant increase in its provision for loan losses and slashed its dividend.
The bank’s troubles continued to mount as credit rating agencies downgraded its credit to junk status. The bank’s assets surpassed $100 billion, triggering more rigorous regulation. Moody’s cited governance challenges and financial risks when it downgraded the bank’s credit rating. NYCB shocked shareholders and analysts with its unexpected troubles, and the new CEO will now face the challenge of turning the bank around.
Despite these challenges, some longtime fans of the bank remain loyal. Mark Hammond, who ran Flagstar through the financial crisis, has remained optimistic and even purchased NYCB’s stock. The bank has also stated that it doesn’t expect the weaknesses in its controls to result in changes to its allowance for credit losses. Additionally, commercial real estate veterans have noted that lenders have broad latitude to work out solutions with borrowers when loans sour.
In conclusion, New York Community Bancorp is facing major challenges after a CEO shake-up and weaknesses in risk monitoring. The bank’s troubles can be traced back to a combination of financial risks, changing rules, and shifting regulators. This situation has broader implications for the banking industry as a whole, as many banks are under pressure to merge in order to afford the transition to tech-driven financial services. Despite these challenges, some longtime fans of the bank remain loyal, and the new CEO will now face the challenge of turning the bank around.