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NYCB’s Tense Talks With Watchdog Led to Moves That Rocked Market

(Bloomberg) -- Mounting pressure from a top US watchdog led to New York Community Bancorp’s surprise decision to slash its dividend and stockpile cash in case commercial real estate loans go bad, according to people with direct knowledge of the matter.

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The drastic financial moves — which triggered a record plunge in the company’s stock and dragged down shares across the industry last week — followed behind-the-scenes conversations with officials from the Office of the Comptroller of the Currency, the people said, asking not to be identified describing the confidential discussions.

Two senior executives left their posts in the months before the bank unveiled its measures, one of the people said. As of late last year, the company’s website no longer showed chief risk officer Nicholas Munson and chief audit executive Meagan Belfinger on its leadership page. The changes weren’t publicly reported by the firm at the time.

A spokesperson for the OCC declined to comment, as did Munson and Belfinger. The bank confirmed Munson’s departure to the Financial Times and Bloomberg News on Monday, but declined to otherwise comment.

New York Community Bancorp has said building reserves is part of its widely expected transition to more stringent capital rules after the lender swelled beyond $100 billion in assets while acquiring parts of Signature Bank last year. But investors were rattled when it set aside $552 million for potential loan losses — more than 10 times what analysts anticipated — and slashed quarterly dividends by 70%.

The OCC wielded unusually tight control over those payouts after the firm’s acquisition of Flagstar Bank in late 2022. The deal gives the watchdog a right to object to any dividends set by the parent company through late 2024, regulatory filings show.

Then, last year, US watchdogs drew a painful lesson from the failure of another firm that had grown rapidly — Silicon Valley Bank. SVB collapsed after using deposits from tech companies to load up its balance sheet with long-term assets. When clients later tapped their cash to weather a slump in fundraising, SVB began selling holdings at losses to keep up with withdrawals, setting off panic and a run.

A Federal Reserve review ultimately found that examiners didn’t act swiftly enough to shore up the lender’s controls and balance sheet after it surpassed $100 billion in assets. In a letter outlining lapses, the Fed’s vice chair for supervision, Michael Barr, suggested authorities must sometimes be more aggressive — even forcing banks to hold extra capital awhile to “focus management’s attention.”

New York Community Bancorp almost doubled in size over the past 15 months thanks to its acquisition of Flagstar and opportunistic takeover of deposits and some loans from Signature Bank, which failed last year. The deals gave the 165-year-old lender new heft and drove up its share price.

The takeovers also catapulted its assets past $100 billion, placing the lender in a more rigorous category of regulation, in which the firm lagged behind its new peers in terms of capital and loan-loss reserves.

In recent months, global regulators and investors have grown more concerned about the declining value of US commercial properties and the inability of some borrowers to refinance — and whether regional lenders may get burned.

It’s unclear why or precisely when Munson and Belfinger exited their posts. Archived copies of the company’s website show they were listed among its leadership in early October but not by the end of the year.

On Wednesday, the bank said it would reduce shareholder payouts and beef up reserves, noting that debts 30 to 89 days past due had jumped 48% last quarter compared to the quarter before. Net charge-offs in the period were primarily related to a pair of debts tied to a co-op complex and offices.

“We are taking decisive actions to build capital, strengthen our balance sheet and risk management processes which better aligns us with the relevant peers for a bank of our larger size and complexity,” Chief Executive Officer Thomas Cangemi said on an earnings conference call Wednesday. He declined to comment on talks with regulators when an analyst asked if something had changed there.

The stock dropped 45% over the two days after its announcement, leading the broader KBW Regional Banking Index of 50 companies down 8.2%, its worst two-day performance since SVB imploded. An additional decline on Monday left the bank’s stock 48% lower than before its disclosure.

Tiered Regulation

US rules introduced under former President Donald Trump eased the regulatory burden on many small banks and introduced several tiers of scrutiny above them, based on a lender’s size and risk profile. Those range from Category I for the giant Wall Street firms down to Category IV for banks with between $100 billion and $250 billion assets — where New York Community Bancorp now sits. Firms below that level are deemed uncategorized.

Each level imposes new combinations of capital requirements, liquidity rules, stress testing and other must-dos. That can make it challenging for banks to jump from one bucket up to the next.

First Citizens Bancshares moved into Category IV with its 2022 purchase of CIT Group Inc. A year later, the North Carolina lender was, like NYCB, a winner of the banking turmoil when it scooped up assets on the cheap from the failed SVB. That took the firm over $200 billion in assets and prompted CEO Frank Holding Jr. to reassure investors: He had no plans to cross into Category III.

U.S. Bancorp, the biggest regional bank, last year promised federal regulators it would shrink its balance sheet and reduce its risk profile to avoid a previously planned move into Category II. The news that it would stay in Category III sent its shares 7% higher, even if it meant shedding assets and boosting capital.

(Updates stock performance in 15th paragraph. An earlier version of this story corrected the description of when personnel changes emerged.)

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