An investor group led by Liberty Strategic Capital announced on Thursday that it would invest more than $1 billion in troubled New York Community Bank, where former Treasury Secretary Steve Mnuchin is planning to rejoin Joseph Otting at the helm.
The deal calls for Liberty Strategic to provide $450 million, Hudson Bay Capital Management to put in $250 million, and Reverence Capital Partners to provide $200 million. Ken Griffin’s Citadel Global Equities is also part of the deal, which is expected to close March 11. The group will end up with about 40% of NYCB, a person familiar with the situation told Fortune.
NYCB is planning to whittle its board down to nine members and add four new directors, including Mnuchin; Otting; Milton Berlinski, managing partner of Reverence Capital; and Allen Puwalski of Hudson Bay. Mnuchin and Otting both previously ran OneWest Bank.
Otting, the former comptroller of the currency, is set to become NYCB’s third CEO in barely a month, succeeding Sandro DiNello, who served for just a week and will resume his role as executive chairman. Otting officially takes over on April 1.
“I plan to get right to work digging into the business further, and working with Sandro to build on the steps he and the team have taken during this interim period,” Otting said during an investor call Thursday.
NYCB is one of the biggest regional banks in the U.S., with $116.3 billion of assets as of Dec. 31. The bank has grown through deals: NYCB acquired Flagstar in December 2022, making it one of the top 25 regional banks, with $88.4 billion of assets, and last year scooped up some assets and assumed certain liabilities of Signature Bank, one of three large banks that failed in 2023. (The other two were First Republic and Silicon Valley Bank. JPMorgan Chase ended up buying First Republic while First Citizens Bank scooped up SVB.)
The $1 billion investment ideally caps a rough period for NYCB. The bank on Jan. 31 reported a fourth-quarter loss of 36 cents a share that missed Wall Street expectations. It also slashed its dividend by 71% to 5 cents a share. This led Fitch to downgrade the bank’s debt on Feb. 2 to BBB-, while on Feb. 6, Moody’s Investors Service cut its rating on NYCB debt to junk.
Another bombshell hit on Feb. 29 when NYCB said it identified “material weaknesses” in its internal controls related to a loan review. The bank changed its fourth-quarter loss to $2.7 billion due to a $2.4 billion goodwill charge linked to historical transactions from 2007 and earlier, according to an SEC filing. Thomas Cangemi then stepped down as president and CEO after 27 years with the company, which named DiNello to succeed him as president and CEO.
On March 1, Fitch cut NYCB’s credit grade to junk. “Friday was not a great day,” DiNello said on the call Thursday.
Shares of NYCB have plunged more than 60% this year but bounced back slightly on Thursday with news of the investment, adding close to 6%. The stock was up again Friday morning, but those gains quickly evaporated, and by the middle of the afternoon shares had fallen about 8%, to $3.33.
“Although we view the cash infusion and new management and board as very positive announcements, we don’t see it as a near-term catalyst, and we believe there is still a risk that deposits and private bankers from Signature leave the bank,” Peter Winter, a senior research analyst at D.A. Davidson, wrote in a March 7 research note. He maintained his neutral rating with a $4 price target.
Getting the band back together
The $1 billion capital injection is also a reunion of sorts.
Mnuchin spent 17 years at Goldman Sachs working in fixed income, currencies, and commodities, while also overseeing mortgages, U.S. government money markets, and municipal bonds, the Wall Street Journal reported. He left the firm in late 2002 at age 39 with a reported $46 million stake in the bank. In 2009, he led the investor group that bought IndyMac, a failed California bank, which was renamed OneWest—and which was later criticized for ruthless foreclosure practices and alleged discriminatory lending practices.
CIT Group acquired OneWest in 2015 for $3.4 billion, resulting in substantial gains for Mnuchin and other investors. Roughly two years later, in February 2017, Mnuchin became secretary of the Treasury, leaving the post after Joe Biden was elected president. Mnuchin went on to found Liberty Strategic, a Washington, D.C.-based PE firm that focuses on investing in technology, financial services, and fintech, as well as new forms of content.
Otting had been president and CEO of OneWest, according to his OCC biography. When CIT scooped up OneWest in 2015, Otting became president of CIT Bank and copresident of CIT Group. He was sworn in as comptroller of the currency in November 2017 and left office in March 2020.
Berlinski spent 26 years at Goldman, where he was a founding member of the FIG group. He left the bank in 2012 and the following year launched Reverence Capital, a PE firm that invests in middle-market financial services companies. EverBank, the former TIAA Bank, is a Reverence portfolio company.
Berlinski and Mnuchin worked together at Goldman. “I interacted with him frequently in addition to being friends,” Berlinski told Fortune. But this is the first deal they’ve done together. And while he hasn’t worked with Otting previously, Berlinski said, “I have a lot of respect for Joseph’s abilities and experience in the banking industry.”
Closing time
The $1 billion transaction picked up speed mid- to late-last week when NYCB indicated to Mnuchin that it wanted to move forward. Mnuchin’s team then contacted Reverence, which had been looking at some loan portfolios NYCB had been trying to offload.
“As a firm, the Reverence team had a lot of knowledge of the bank and its loan portfolio. We were not starting from scratch,” Berlinski said.
Regulators such as the FDIC typically prefer to sell banks to other banks. PE firms and hedge funds also can’t acquire more than 24.9% of a bank’s voting equity without becoming bank holding companies. While Liberty and Reverence are PE firms, Citadel and Hudson Bay are hedge funds. None of the investors will own anything close to 25%, Fortune has learned.
Berlinski told Fortune that the NYCB transaction gives Reverence the ability to invest in a “strong, national franchise” that’s also a top 20-bank. “You don’t get those opportunities every day.”
