A group of investors led by the former U.S. Department of Treasury Secretary Steven Mnuchin’s private equity firm, Liberty Strategic Capital, will inject $1 billion in equity investment in struggling New York Community Bancorp (NYCB), one of the nation’s largest residential mortgage servicers. The move strengthens the bank’s balance sheet amid a confidence crisis related to its commercial real estate loan portfolio.
Liberty is expected to invest $450 million, followed by $250 million from Hudson Bay Capital and $200 million from Reverence Capital Partners. Citadel Securities, other institutional investors, and company management members will also participate in the transaction, subject to definitive documentation and regulatory approvals.
In turn, the bank is expanding its board of directors, adding four new seats to include Mnuchin, the former Comptroller of the Currency Joseph Otting, Allen Puwalski from Hudson Bay, and Reverence Capital’s managing partner Milton Berlinski.
The leadership is also changing. A former CEO of OneWest Bank from 2010 and 2015, Otting will become the CEO of NYCB, replacing Alessandro DiNello, who has held the position since Thomas Cangemi stepped down earlier this week. DiNello was the CEO of Flagstar Bank, the depositary recently acquired by NYCB, and will be named as non-executive chairman.
NYCB concluded the acquisition of Flagstar Bank in December 2022 and rescued Signature Bank in March 2023. In January, it was involved in a confidence crisis after reporting a $193 million net loss available to common stockholders during the last three months of 2023, including a provision for loan losses of $552 million, mainly due to its exposure to commercial real estate loans.
The Long Island-based bank was under more pressure after rating agencies Fitch and Moody’s downgraded its debt ratings on March 1. This followed the company’s disclosure of internal control deficiencies and a $2.4 billion goodwill impairment.
DiNello said in a statement that the investment is “a positive endorsement of the turnaround that is underway.” It also allows the bank to “enter this next chapter with a strong balance sheet and liquidity position supported by a diversified and retail-focused deposit base,” he added.
“In evaluating this investment, we were mindful of the Bank’s credit risk profile,” Mnuchin said in a prepared statement. “With the over $1 billion of capital invested in the bank, we believe we now have sufficient capital should reserves need to be increased in the future to be consistent with or above the coverage ratio of NYCB’s large bank peers.”
On a call on February 7, management told analysts that the bank’s total liquidity was $37.3 billion, with a coverage ratio of 163%. Its capitalization ratio, measured by its common equity tier 1 (CET1), fell to 9.1% as of December 31, 2023, down from 9.59% in the third quarter.
Targeting a 10% CET1 ratio, the bank cut its quarterly dividend from $0.17 to $0.05 to assist with capital generation. Analysts at Keefe, Bruyette and Woods (KBW) estimate a mortgage servicing rights sale (MSR) could improve the bank’s CET1 ratio by 10 to 15 bp basis points.
NYCB became a large residential mortgage servicer after the acquisition of Flagstar. Its owned servicing portfolio reached $78 billion in unpaid principal value (UPB) at the end of 2023, with a carrying value of $1.1 billion, according to the KBW analysts.
In connection with the transaction, which is expected to close on March 11, NYCB will sell and issue shares of common stock at $2 and a series of convertible preferred stock with a conversion price of $2. NYCB stock was trading at $3.80 on Wednesday around 3 p.m. EST, up 18% compared to the previous closing.
Jefferies LLC is the exclusive financial advisor and sole placement agent to NYCB in the transaction.
