Trading Halted for New York Community Bank: What Comes Next?

One commercial real estate banking professional, who asked not to be named, said he doubted the bank will survive the current stress.

“What’s happening now, no, I’m not convinced New York Community Bank will survive,” said the professional. “I don’t think they will, and, if and when that happens, it will be like Signature [Bank] going under — a vacuum will open, a daisy chain.”

Trading of New York Community Bank (NYCB) closed at $3.22 Tuesday — a 69 percent fall from the $10.38 share price the stock traded at prior to a Jan. 31 earnings call that reported a $252 million loss tied to loans on the bank’s office and rent-regulated properties and fourth-quarter credit losses reaching a staggering $552 million. 

As of press time Wednesday morning, NYCB’s stock hovered at just $1.76 per share. 

Since the fateful earnings call, NYCB has replaced its CEO, accounted for an additional $2.4 billion loss, and delayed the release of its annual financial report from 2023. Last month, Moody’s downgraded the bank’s stock to a mere two notches above junk status. 

Experts tie the bank’s problems to its $2.6 billion acquisition of Flagstar Bank in 2022 and its $38 billion purchase of the failed Signature Bank (SBNY)’s assets and deposits — moves that brought NYCB past the strict regulatory threshold of $100 billion in assets, a level normally reserved for the largest banks in the country. 

“They were a healthy bank until a few years ago, when they went on a buying spree and they bought $30 billion of Signature assets,” said Stijn Van Nieuwerburgh, professor of real estate finance at Columbia Business School. “The chief auditor left the company, then the chief risk manager left, they’ve had to restate their accounting — it just looks really bad from the outside in terms of bad controls and bad governance.” 

Big brother blues

Even beyond compliance issues and its dysfunctional C-suite, NYCB has been detrimentally impacted by its $37 billion multifamily housing portfolio. That portfolio includes $18 billion in loans backed by New York City rent-regulated apartments —  loans which have been thrown into disarray since a 2019 state law limited how much landlords can charge for rent on those apartments. 

These rent-stabilized apartments — formerly dependable moneymakers due to the high rents landlords could charge once tenants vacated aging properties with limited upkeep — have proven to be an albatross under the legislation, as tenants have remained in place and building values have plummeted together with shrinking rent rolls. 

“New York City multifamily, New York City rent-stabilized multifamily properties, all face the same headwinds from higher interest rates, but New York state passed its draconian rent-stabilization laws in 2019 and it depressed the values of rent-stabilized apartments and the loans and debt made against those,” explained Van Nieuwerburgh, “and those are exactly the loans New York Community Bank has heavy exposure to.” 

Robert Riva, a real estate attorney at Cole Schotz, said that over the last five to 10 years there’s been a trend. The largest commercial banks shifted their portfolios away from commercial real estate loans, with the vacuum in CRE lending being filled by regional banks — like NYCB — in the $50 billion to $100 billion asset range. 

“Smaller banks saw the opportunity and stepped in, and now the concentration of assets among smaller banks is 30 percent concentrated in CRE,” explained Riva. “That is an overwhelming percentage, outweighing all other areas, whether that’s consumer loans, mortgage lending, etc. And at the same time we’ve had this shock to the system with higher interest rates really hitting CRE hard and valuations dropping down 10 percent to 12 percent from just a few years ago.”

Riva said that the uncertainty underlying industry fundamentals has the potential to create long-term stress in the regional banking system. 

“You had banks doing the right thing, but the error in their decision-making was over the last few years concentrating too heavily in CRE,” he said. “If commercial real estate doesn’t recover, that alone could result in a domino effect of other banks feeling the same kind of stress that New York Community has.” 

And while it might seem easy to simply blame a bank for making its own mistakes, some seasoned banking veterans point the finger at regulators. 

George Klett, who was chairman of Signature Bank’s real estate committee for 30 years prior to the bank’s 2023 collapse, argued that regulatory pressure at Signature and NYCB is to blame for each bank’s woes, particularly Signature’s fatal dalliance with cryptocurrency.  

“The regulators were arrogant and obnoxious, and they had no knowledge of real estate and they were forcing all the banks to cut back on CRE lending,” Klett told CO. “When they start criticizing loans and say you need to have more reserves, they make banking less profitable. They forced Signature and New York Community Bank to get into business they didn’t know anything about.”

Sometimes the regulatory pressure went far beyond simply suggesting a move away from a certain type of lending pattern or asset class. 

Bloomberg reported that last year the Office of the Comptroller of the Currency forced NYCB to slash its dividend and stockpile extra capital in case it suffered unforeseen losses on CRE loans. NYCB eventually set aside $500 million for losses and cut its dividend by 70 percent — in turn shocking the market and directly contributing to its present stock market tribulations. 

Federal law requires regulators to assess banks more closely as soon as they pass $100 billion in assets. These measures include specific capital requirements, stress testing and new liquidity standards. And, while this oversight might be made under the auspices of ensuring the bank remains healthy, some capital markets professionals believe the supervision is injurious. 

“They become large enough to take scrutiny from regulators, and that regulator scrutiny is withering,” said the capital markets professional who requested anonymity. “Every time a sick bank goes under, regulators say we need to put additional scrutiny on the $50 billion banks and $25 billion banks, and it creates this domino effect of heightened scrutiny on regulated banks that makes everyone totally nervous.” 

When banks are nervous, they hold capital, buttress their walls, and don’t make as many loans. 

“The scrutiny is killing them,” the professional added.  

Capital concern

While a sharper microscope from state and federal regulators usually isn’t fatal for any particular commercial bank, a steep decline in stock price that triggers a flight from uninsured depositors is often the death blow. 

Lawrence J. White, a professor of economics at New York University, pointed out that NYCB’s uninsured deposit base — deposits which exceed the Federal Deposit Insurance Corporation (FDIC) insured threshold of $250,000 — are approximately one-third of the bank’s total deposits. 

“That’s below the overall banking average, which is 40 percent, but still that means there’s a substantial amount of depositors who are going to get nervous if they think the place would be put into receivership or a new owner would be found and the FDIC decides to not to keep them whole,” explained White. “The FDIC has got to be thinking, ‘Oh gosh, this is a black eye.’”

But the FDIC receivership process is not so much tied to any bank’s stock price or even its uninsured depositor ratios, but rather to capital levels that indicate a bank’s ability to withstand depositor outflows. As of Dec. 31, 2023, NYCB’s capital stood at roughly $10 billion (the difference between total assets and liabilities). 

Carl Fornaris, co-chair of financial services at law firm Winston & Strawn, said the FDIC’s licensing authority has a statutory obligation to close any bank after its capital level falls below a certain minimum threshold. 

“Where that is in any process one never knows because the information is not public, it’s confidential,” said Fornaris, who noted the secrecy is designed to prevent a run on the bank based on public perception. “But, if capital levels fall below a certain minimum, regulators have to act to close the bank to stop the bleeding.” 

New York Community Bank did not respond to requests for comment. 

Brian Pascus can be reached at bpascus@commercialobserver.com