A little more than a year ago, the future of New York Community Bancorp was unsettled, at best.
The Long Island-based company, which dominated the New York City multifamily lending space for decades, was ill-equipped to deal with the rapid growth that stemmed from two hefty acquisitions — Flagstar Bancorp in late 2022 and remnants of Signature Bank in early 2023.
Now the bank was trying to claw its way out of a dangerous situation: Its commercial real estate portfolio was stressed, its stock price had plummeted and customers were yanking out deposits.
New York Community swapped out leadership, disclosed material weaknesses in its internal controls and rushed to fill recently vacated roles, including chief risk officer. Analysts and ratings agencies downgraded the company, saying reserve-building to protect against losses would crimp its earnings.
As questions swirled about whether New York Community would survive, Joseph Otting was looking for an opportunity to get back into the banking business. The 67-year-old Otting — a one-time CEO of California-based OneWest Bank who later became the Comptroller of the Currency during the first Trump administration — wasn’t necessarily looking for a bank CEO job.
But that’s what he got when he, along with former Treasury Secretary Steven Mnuchin and other investors, decided to inject $1.05 billion of capital into the beleaguered New York company, stabilizing it against further deterioration and allaying some of the market’s fears about its survivability.
Otting, who is also the company’s chairman, moved quickly to get his hands around the problems, tackling capital issues and potential credit losses while selling off noncore businesses and replacing much of the legacy New York Community board and management team with his former colleagues and associates. The new team renamed the company Flagstar Financial last fall.
“When we got here, the questions at that time were, ‘Hey, does the bank have enough liquidity? Does it have enough capital? And how bad can the credit losses be?'” Otting told American Banker this week in one of his first formal media interviews since becoming CEO a year ago.
“And so for the first six to nine months, we undertook a process to look at what we want the bank to be [and] what [could] we consider divesting, so that we could strengthen and bolster the capital and liquidity of the company and narrow the focus … to being a classic regional bank.”
Twelve months into Otting’s tenure, Flagstar is still firmly in reconstruction mode, but analysts say its transformation into a classic regional bank is well underway. It’s charging after commercial-and-industrial loan growth, aided by plans to hire 100 commercial bankers this year. It’s building up its capital — its common equity Tier 1 ratio for the fourth quarter of 2024 was 11.86% — and it’s continuing to cut costs, aiming to trim $600 million in total.
Following quarterly losses in each of the four quarters of 2024, company executives are forecasting a return to profitability in the fourth quarter of this year. That could be a tall order. Rising interest rates, an economic slowdown and less commercial-and-industrial growth than expected could get in the way.
Flagstar must also keep reducing its commercial real estate exposure, said Ebrahim Poonawala, an analyst at Bank of America Securities. At the end of December, multifamily loans made up 47% of the company’s total loan book, the highest of its peer group, the bank disclosed in January.
“I don’t want to underestimate the execution risk,” Poonawala said. “Running a bank is difficult, period. Running a bank that’s essentially a de novo bank using the New York Community and Flagstar legacy is doubly difficult. But what helps is: The management team has a playbook.”
‘Cruising right along’
New York Community spent five decades carving a niche for itself as the dominant lender of multifamily loans in the New York City market. By late 2018, 75% of its loan book was multifamily, and more than 77% of those loans were made in the metro New York City region.
The business-model rationale was simple: The portfolio was largely low-risk loans on non-luxury, rent-controlled buildings, and losses on such properties were extremely low.
Meanwhile, other commercial real estate loans, including office building credits, made up 17% of all loans. Commercial-and-industrial loans were just a sliver of the pie at around 6%.
Victor J. Blue/Bloomberg
The company made attempts to reduce its reliance on multifamily lending and shift its funding mix from higher-cost wholesale borrowing and certificates of deposits to lower-cost deposits. Its 2022 acquisition of mortgage heavy-hitter Flagstar was an attempt to mix up the portfolio while also drawing in sorely needed lower-cost deposits.
Four months after closing the purchase of Troy, Michigan-based Flagstar, New York Community acquired much of the failed Signature Bank in New York City. The two deals pushed the combined organization above the $100 billion-asset threshold “sooner than anticipated,” then-CEO Thomas Cangemi said at the time. The bank was suddenly in a new realm, where the expectations for risk governance and compliance were higher.
By the time Otting arrived in 2024, the company was in trouble. It had reported an unexpected and sizable loss for the fourth quarter of 2023, disclosed stress in multifamily and office loans due to higher-for-longer interest rates, bolstered its reserves for bad loans and cut its dividend.
“This happened out of left field,” recalled Chris Marinac, an analyst at Janney Montgomery Scott who’s covered the bank for years. “This was a company that was cruising along. This was a ‘made’ bank, and they were seen like this because they had been blessed by the [Federal Deposit Insurance Corp.] to buy Signature Bank. But then they actually had to run that bank.”
“They had to recognize Signature’s risk and their own risk, and they were too slow to respond.”
‘A really good road map’
Otting and his team didn’t waste a minute. They got to work assessing the bank’s risk management and internal controls structure. They began a monthslong review of the entire loan book. They engaged with regulators, overhauled the board to include directors with bigger-bank experience and began hiring new leaders to run the different business segments.
Many of those individuals are people whom Otting has worked with previously. They have done stints at U.S. Bancorp, where Otting was vice chair; at OneWest, where he and Mnuchin turned around the failed IndyMac Bank and later sold it to CIT Group for a large profit; and at the Office of the Comptroller of the Currency, where Otting was the top regulator from 2017 to 2020.
Flagstar also sold certain noncore assets, including $5 billion of mortgage warehouse loans, which were acquired in May by JPMorgan Chase, and its residential mortgage servicing unit, which was bought last fall by Mr. Cooper. Those sales boosted capital levels.
By May, the company was ready to share its three-year targets, a move that Otting described to American Banker as “ballsy.” The targets include achieving an efficiency ratio of 55% to 60%, a common equity Tier 1 ratio of 11% to 12% and a return on average tangible common equity in the same 11% to 12% range. The forecast also includes targets for net interest income and net interest margin, fee income, noninterest expenses and provisions for loan losses.
“We really thought it was important to guide people … about where exactly we wanted to take this bank,” Otting said. It’s “a really good road map when you combine it with our strategic plan.”
In some ways, the work has been similar to what Otting and Mnuchin did at IndyMac and OneWest. Like New York Community, IndyMac was heavily concentrated in one segment, mortgages. So Otting had to build a commercial bank and diversify the balance sheet, he said.
That experience is critical for Flagstar’s success, Marinac said.
“What happened with OneWest is very instructive to what’s happening here,” Marinac said. “It includes not just turning around a problem bank, but creating a business and expanding it and then doing something with it. … This is about trying to grow [while] fixing credit issues.”
‘Can this bank … become profitable?’
Analysts give credit to Otting and his team for making big changes in the past year. But there’s still a lot of work to do, they acknowledge.
The pace of progress hinges on whether the bank will be able to revamp its loan portfolio. Turning a longtime multifamily lender into a more traditional commercial bank can be a lengthy process.
“The problem right now is with rates coming down,” said Peter Winter, an analyst at D.A. Davidson. “It’s accelerating paydowns in the multifamily space, and the issue is they don’t have enough commercial loan growth to offset the paydowns, so the balance sheet is still shrinking.”
So far, the bank is sticking with the expectation that it will return to profitability by the end of the year, largely because “they feel pretty confident” that later in 2024 “they’ll see commercial loan growth originations outpace payoffs and get the balance sheet growing,” Winter said.
“On paper, everything looks good from a credit perspective, but I think you need a couple of quarters to show it,” Winter said. “The stock still trades at 70% tangible book value, so I don’t think everybody is on board from a credit risk standpoint.”
Year to date, the stock price is up 25%. But it’s still far below where it was trading in mid-2023.
Given how OneWest was eventually sold, questions have arisen about whether Flagstar is ultimately being positioned to be acquired. At an industry conference last month, Otting said the bank would “be viewed as a very attractive franchise” after the credit issues are resolved, commercial-and-industrial lending is growing and the company starts recording profits again.
Otting, during the interview, said a sale “is not the end goal.” The company is investing $30 million to $40 million this year on anti-money-laundering software and customer privacy, plus another $70 million to $80 million on technology. “You don’t do that unless you have a long-term horizon,” he said.
As to the view that Flagstar still needs to execute, Otting doesn’t argue otherwise. He said he expects to be involved for about five years — three as CEO and another two as chairman.
“We solved capital. We solved liquidity. We solved credit,” he said. “And I think the next building block will be, can this team now grow the bank and become profitable?”
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