Regulators thought too narrowly in OK of NYCB-Signature deal

New York Community Bancorp
In March 2023, NYCB’s acquisition of Signature Financial institution lowered its excessive loan-to-deposit ratio, lowering it from 118% to 88%. It additionally helped with its buyer acquisition technique.

Gabby Jones/Bloomberg

In immediately’s regulatory surroundings, mergers and acquisitions may be useful for regional banks; however as seen with New York Group Bancorp, they’re hardly ever a silver bullet. 

In March 2023, NYCB’s acquisition of Signature Financial institution made sense for 2 key causes. One, it addressed the financial institution’s excessive loan-to-deposit ratio, lowering it from 118% to 88%, a transfer doubtless welcomed by regulators. Two, it improved NYCB’s buyer acquisition technique. Earlier than the acquisition, NYCB centered primarily on “mass” banking. Signature’s wealth administration observe supplied entry to “prosperous” and “excessive internet price” merchandise, experience and clientele. 

In that regard, the Signature purchase appeared like a logical transfer with comparatively low regulatory threat. So, the place did issues go incorrect? 

NYCB (and regulators) had been centered on fixing an issue, however different elements had been at play. 

An LDR exceeding 100% suggests a financial institution has lent out extra money than it holds in deposits. This alerts potential points, together with liquidity threat, heavy dependence on various funding sources, monetary instability, imprudent lending practices and credit score threat. 

Due to this fact, the deal introduced a chance for NYCB to strengthen its place and contribute to monetary stability whereas increasing its attain. All of that resonated positively. 

Nonetheless, different elements, compounded by a protracted excessive rate of interest surroundings, induced a dramatic flip of occasions when NYCB held its fourth-quarter earnings name. One was business actual property circumstances. The Signature acquisition left NYCB with a $34 billion CRE mortgage portfolio, primarily in New York Metropolis. This portfolio confronted pandemic-induced challenges of distant and hybrid work, together with elevated threat of workplace mortgage defaults, diminished rental earnings and property valuation challenges. This led to an surprising $260 million loss in This autumn, primarily attributable to anticipated mortgage losses from workplace constructing loans. 

There have additionally been execution and integration dangers. Earlier than buying Signature, NYCB had already absorbed Flagstar Financial institution. The acquisitions of Flagstar and Signature elevated NYCB into a better asset class, pushing the financial institution over the $100 billion threshold and triggering stricter capital and liquidity necessities and extra bills, which impacted earnings. 

Moreover, the operational system conversion with Flagstar did not end till virtually a yr after NYCB acquired Signature. Concurrently integrating NYCB, Flagstar and Signature — every with its personal distinctive techniques, processes and tradition — introduced substantial execution dangers. One of many greatest challenges banks face is managing information and analytics. The basis of the issue typically lies in outdated techniques and incompatible information, hindering integration. The compatibility difficulty might have additionally impacted NYCB’s means to correctly assess execution and integration dangers, even when that they had all of the required monetary statements and stories. NYCB’s announcement in January revealed delays in Signature’s integration that would probably stretch into subsequent yr. Analysts subsequently expressed waning confidence in NYCB’s integration capabilities. 

Lastly, inner controls and governance performed a task. M&A requires sturdy inner controls and governance. Did NYCB use satisfactory threat fashions? Did the danger committee have entry to Signature’s actual property publicity? What monetary ratios had been thought-about and assessed past LDR? Together with dissenting voices would have helped. Additionally, compliance alone is not sufficient; transparency is essential. NYCB’s delay in disclosing key govt exits raised “governance considerations” amongst analysts.

So, what is the resolution? Merging monetary establishments isn’t any small feat, particularly when coping with quickly altering market dynamics, legacy techniques, differing processes and regulatory headwinds. NYCB’s journey highlights that regional banks eyeing an acquisition should contemplate just a few elements. One is broader market dynamics. Numerous CRE continues to be sitting on regional banks’ stability sheets. If contemplating an acquisition, assess the CRE portfolio that will likely be inherited. 

One other difficulty is rigorously assessing execution dangers and planning the mixing strategically. Guarantee somebody on the danger committee is taking part in satan’s advocate and difficult assumptions. 

Lastly, potential patrons should prioritize sturdy inner controls and governance. Guarantee satisfactory threat fashions and governance frameworks tackle all facets of the deal, good and dangerous. Assign duty for monitoring monetary ratios past primary metrics and embrace numerous viewpoints to boost decision-making. Compliance is only a baseline; prioritize transparency to construct belief. Be taught from situations like NYCB’s governance lapses and prioritize openness. 

So, was NYCB’s acquisition of Signature a mistake? It was the fitting determination on the time. Nonetheless, in hindsight, there have been a number of essential elements which might have been additional reviewed.

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