The lender known for catering to the needs of New York homeowners is in significant trouble. Last week, NYCB revealed major weaknesses in its ability to monitor risks and replaced its CEO. Investors are now concerned that the new leadership may need to save even more money to cover deteriorating loans in addition to the $552 million shocker announced in January. Credit rating agencies have downgraded the bank to junk, and its shares have plummeted by 73% this year.

The way NYCB got here could serve as a blueprint for many other American regional banks in the coming months. It’s a tale of poorly managed financial risks in a rising interest rate environment and regulatory rule changes. The crash came this year. Amid regulatory pressure, NYCB bolstered its reserves, and shareholders offloaded their shares.

It’s a story with far-reaching implications. Because the majority of its rivals are in similar situations: too many branches in a digitizing banking economy and technology-focused financial services. But it’s a perilous moment for the industry. High-interest rates and cracks in commercial real estate erode asset values on balance sheets. Additionally, depositors can withdraw money faster than ever. Shareholders have learned to offload their shares at the first signs of serious trouble.

NYCB was a darling of the stock market before announcing its intention to accumulate cash at the end of January. But last week’s revelations caused the stock to plunge another 43% after the steep drop in January. The company said it didn’t expect weaknesses in its controls to lead to changes in its provision for loan losses. Credit rating agencies evidently disagree.

Yet NYCB was once an American success story. Six decades ago, Joseph Ficalora, grandson of Sicilian immigrants, joined Queens County Savings Bank. Returning from the Vietnam War, ignoring his father’s advice to get a union job, he enrolled in a bank management training program. He quickly climbed the ranks. When the company changed its name to New York Community Bank in 2000, he led the institution for years. Ficalora’s strategy was simple. He bought competitors, preserved their identity to attract family depositors, and lent their savings to Manhattan real estate investors. His favourite target was multifamily buildings with controlled or stabilized rents. While tenants could be counted on to stay and maintain their liquidity, many landlords took a more lucrative approach, renovating buildings to take advantage of rules allowing them to increase rents. By 2004, he had consolidated seven banks to make it the third-largest thrift in the United States. Assets were at $23 billion, up from $1.9 billion in three years. NYCB was just getting started. It then bought $11 billion in assets from the failed AmTrust Bank in 2009 and $2.2 billion in deposits from Aurora Bank in 2012. But by the end of 2020, the bank surprised investors by announcing that Ficalora would step down and be replaced by Cangemi, the same one fired last week.

Cangemi took over a bank facing difficulties. In 2019, New York tenants gained radical new protections that prevented landlords from raising rents on regulated apartments. NYCB’s loan portfolio was almost entirely made up of mortgages, mostly multifamily, and most were subject to New York rent rules. Instead of recognizing losses on its loan portfolio and making provisions, the bank chose to forge ahead with new acquisitions. Flagstar, then part of the Signature Bank portfolio, nearly doubled the company’s size, putting it on a collision course with new rules for banks holding more than $100 billion in assets. The pandemic triggered further stress. When offices emptied and businesses downsized, it caused even more problems for sector bankers.

But the problem didn’t manifest itself right away. Despite predictions that new rent rules would result in losses for landlords and their lenders, NYCB’s troubled loan level remained near its lowest records in 2020 and 2021, perhaps aided by record-low interest rates and the government’s pandemic response. The bank indeed had an impressive track record. NYCB could boast of a record level of non-profitable loans. The average losses over the past three decades were about 0.04% of its loan portfolio per year, while this figure was nearly 20 times higher for its competitors.
However, as investors began to gauge the impact of American banks’ $2.7 trillion in commercial real estate loans, values plummeted, borrowers faced higher interest rates, and problems surfaced. At the same time, buybacks had propelled NYCB’s assets beyond $100 billion, triggering stricter regulation. Federal oversight agencies found that the bank did not have enough capital to cover its losses. Its top risk and audit officials quietly left their roles. The rest of the story remains to be written. NYCB may survive this debacle, but many other American regional banks will not. The worst is yet to come.