Struggling New York Community Bancorp Inc. found a deal for an equity investment at a time when it was highly unlikely to find a buyer, analysts and advisers said.
After facing weeks of turmoil following its 2023 fourth-quarter earnings results, stock price pressure and disclosures about internal control weaknesses, New York Community was forced to explore its strategic options. Under the direction of a new CEO, the company mulled over options such as shrinking through asset sales but eventually landed on a capital raise for a combined investment of more than $1 billion. Analysts said the equity infusion will allow the embattled bank to stay afloat, but it comes at a cost to shareholders.
"It's a pretty big pill in terms of dilution at a very low price," Christopher Marinac, director of research at Janney Montgomery Scott LLC, said in an interview. "I view this as a carjacking of the original shareholders of NYCB. It's really unfortunate, but it happened, and they're alive. ... The company can survive, should survive, and it has a lot of options with this capital and the conversion of the warrants, if and when they do that."
In a recent press release, New York Community disclosed the investors will own about 39.6% of the company following the issuance of the common stock. If the investors convert all warrants, Marinac estimates they will own about 54%.
However, other strategic options, such as a sale, were not in the cards given the company's large multifamily exposure in New York City, experts said.
"It's 44% of their loan portfolio, which right now is not very desirable," said Peter Winter, managing director and senior research analyst in the Financial Institutions Group at D.A. Davidson.
Fastest option
One reason a capital raise was likely the most attractive option for New York Community was because it was the fastest option. A whole-bank sale would require regulatory approval, while asset sales would have also taken time and run the risk of depleting capital, Raymond James analyst Steve Moss wrote in a March 7 note.
The capital raise, which closed less than a week after announcement, is structured with both common share issuance and a series of convertible preferred stock. New York Community likely used some preferred stock to avoid a change in control that would require a regulatory approval process, according to John Gorman, partner at Luse Gorman PC who represents financial institutions on M&A, regulation and other topics.
"It was structured ... to allow them to invest the funds without first having to go through a monthlong approval process," Gorman said in an interview.
Marinac agreed that speeding up regulatory approval was a reason, as was making the structure easier.
Disinterested, minimal potential buyers
Advisers said a sale was an unlikely option for New York Community given its unattractive loan book and large size at $113.90 billion in assets limiting the universe of potential buyers.
The company's concentration in multifamily loans, including rent-controlled properties in New York City with limited cash flow, would have been unappealing to buyers, two investment bankers told S&P Global Market Intelligence.
One of them, who has over 30 years of experience, told Market Intelligence that the unclear, developing situation would have been a turnoff for potential buyers. Although buyers might be interested because New York Community is trading at 20% of tangible book, "there's no hurry" to buy, and "it gives you more time to assess the situation," the i-banker said.
The other investment banker, who has two decades of experience, told S&P Global Market Intelligence that he did not think buyers will be interested in New York Community in the near future and does not think they would pursue an acquisition without assistance from the Federal Deposit Insurance Corp. this year.
Moreover, the list of potential buyers is limited given New York Community's size. To get speedy approval under the Office of the Comptroller's recent guidance, a buyer would need to be twice the size of the target. Under those guidelines, a buyer of New York Community must have at least $200 billion in assets.
There are only 22 US banks over that threshold, and the largest players, like JPMorgan Chase & Co. and Bank of America Corp., are precluded from doing depository deals due to a cap on percentages of the nation's deposits.
A number of other banks in that size threshold are already tied up with merger integration, like U.S. Bancorp, Bank of Montreal and Truist Financial Corp., or are facing regulatory issues that would inhibit deal approval, like The Toronto-Dominion Bank, which abandoned plans to purchase First Horizon Corp. after not receiving regulatory approval.
Turbulent times ahead
The company has a tough road ahead, as potential implications from their issues include fines from regulators.
"They'll have some regulatory charges, certainly some consulting expenses and overhead to deal with these issues that we know about, whether it's accounting things for internal controls or maybe fines that eventually happen," Marinac said.
In addition to the loan book, the recent disclosure of internal control issues brings even more concern.
"Their disclosure around internal controls with regard to credit is just shocking," Raymond James' Moss said in an interview. "This is a bank that, for decades, people have known to be a cash flow multifamily lender. And clearly, something went awry here."
