When the shares of New York Community Bank began getting pounded in late January, Collyn Gilbert says she was feeling a “PTSD moment.” The first question on her mind was, “Is there going to be a contagion effect here?”
Gilbert brings a dual perspective to the way things played out from the first glimmers of trouble in 2023 to today’s banking headlines. Today she is the EVP and chief strategy and marketing officer at $62 billion regional Valley Bank. But she spent 25 years as a bank analyst, most recently at Keefe, Bruyette & Woods, including the years of the financial crisis, before joining the bank in 2020.
Gilbert wondered if the crisis of early 2023 was back. NYCB had itself been a part of the solution for New York’s failed Signature Bank. “Regional bank” began to be an epithet again in 2024, just as it had last year, when pundits and social media accelerated withdrawals from an eclectic collection of institutions — Silicon Valley Bank, Signature, First Republic and, in a related vein, Silvergate.
For a time, that feeling had faded. And some lessons have been learned: NYCB’s situation “reminded the market of what commercial real estate concentrations are and about the risks of holding a rent-stabilized portfolio in an inflationary environment,” says Gilbert. “It was helpful to see that stabilized and becoming a one-time event.”
New developments at NYCB will turn up the heat again, and bankers will likely have more “PTSD” moments as the situation at NYCB deepens. At the end of February the company disclosed that it had taken a writedown over a $2.4 billion goodwill impairment having to do with past acquisitions. The bank also cited major issues with internal controls. In the wake of these developments, longtime President and CEO Thomas Cangemi stepped down and was replaced by Alessandro DiNello, currently the NYCB board executive chairman.
NYCB shares were pounded again over this news. What will follow could be company-specific, or a déjà vu period. The latest news is very NYCB focused, but the markets are not always logical.
The events of the last 12 months have conflated the term “regional bank” with increased risk in the popular mind as well as some corners of the media. Must the regionals now shoulder the additional burden of reputational risk, just because they fall into the category?
It’s Not All About What the Rumor Mill Thinks
Insiders argue that popular conception is overstated.
“In a nutshell, the situation last year was a failure of the board and management of those banks to recognize that there is no way to be generating ROE in the high teens to low twenties in banking without taking a risk that you were unaware of: duration gap risk,” says Joshua Siegel, chairman and CEO at StoneCastle Partners, LLC.
Funding long-dated securities with overnight deposits, mostly uninsured, was a bad idea, he says. The lesson should have been learned back in the 1980s, Siegel adds, when such practices took down many savings institutions that funded mortgages with short-term money and kept the home loans in portfolio. “They were playing at being a hedge fund and that’s that.”
Yes, office commercial real estate is going through a fundamental shift in the face of changing societal attitudes towards work taking place and in New York City, rent-stabilized multifamily housing is a difficult way to make a lending business.
“Equity holders will take the first hit and banks will take some write-offs. But banks are built to take write-offs. That’s what happens,” says Siegel, and a veteran banking observer. “Will that collapse the system? No, but there will have to be some big chunks of write-offs.”
Siegel says the biggest challenge for regionals as lenders is that they typically must compete on price. “Regional banks are too big to have a good connection to their communities anymore and they are too small to compete with the majors. So, they are stuck with price, and that’s a very difficult place to be,” he explains.
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Increased Regulatory Focus and Continuing Resistance to M&A
The legacy of the “regional bank” crisis will be much more scrutiny, according to Keith Noreika, EVP and chairman of the banking supervision and regulation group at Patomak Global Partners.
“It’s put a lot more focus on them, regulatory focus and market focus,” says Noreika, a former acting Comptroller of the Currency. “They were chafing under the post-Dodd-Frank Act regulations. They got a little relief in 2018, and now things seem to be headed in the opposite direction.”
“The regulators realized that the expectations that have been placed on the largest banks already needed to be focused more on risk and business models, and further down, in the banking system,” says Richard Rosenthal, principal at Deloitte & Touche LLP. He points out that corporations have become more aware of where they build up deposits — there’s reluctance to repeat having too much money in one uninsured basket — and that regulators are paying more attention to funding contingency plans.
Economics aren’t being kind, either. Noreika points out that “the supposed rate cuts that the market keeps talking about may not materialize as soon as they thought. Rates may be higher for longer.” One good thing is that time heals, financially, at least in this sense: “The longer time goes on, the more bank balance sheets reset.” Term loans run off and adjustments to policy get worked into the mix.
But in the meantime, Noreika says, a large volume of CRE credit is resetting this year and next. Specifically, this refers to lower-rate CRE loans that will be maturing into a higher-rate environment, possibly into 2027. Borrowers have to be able to handle the increased rates.
The general belief is that larger institutions could weather this shift better than smaller ones, which has led some regional bankers to talk up the idea of mergers to get bigger. PNC Financial Group’s Bill Demchak, chairman, president and CEO, has stressed the idea of building size in order to command greater market share in the wake of the last year’s events. PNC has achieved some of this by growing new branches, and has announced plans for more expansion. But Demchak sees M&A as a necessity.
Read more: First Horizon’s CMO Powers Through Merger Misfire with Growth Strategy
Has Capital One Started Thawing the Icebox?
M&A has been a hard thing to accomplish in Washington during the Biden years. But Noreika detects a subtle shift in the wind.
He sees the proposed acquisition of Discover Financial Services by Capital One Financial Corp. as a bellwether of sorts. First, the acquisition of First Republic by JPMorgan Chase in 2023 has given some pause, he suggests. Why make that government-consecrated deal by a megabank that ordinarily couldn’t do another bank acquisition instead of letting another regional take it up?
“This could let middle-sized banks consolidate with one another and become larger and stronger,” says Noreika.
Political sensitivities abound, he admits, but he sees the card companies’ proposed deal as a “first-mover” that won’t be the last.
“The outlook for M&A is a little bit better because people are seeing Capital One and thinking, ‘Well, why not us too?’ Maybe they’ll start talking.”
— Keith Noreika, Patomak Global Partners
When the Comptroller’s Office announced proposed revisions to mergers involving national banks, in January, Acting Comptroller Michael Hsu gave a speech concerning some of the thinking behind it. Noreika feels the speech made NYCB stockholders nervous when the bank reported problems —exacerbating the stock market’s reaction, in his view.
Capital One’s hopeful projection of when approval would be granted — late 2024 or early 2025 — may seem over-optimistic. But even so, Noreika thinks change is coming and that Capital One may be catching the wave.
“Whoever wins the election will not be standing for reelection,” says Noreika. “So they will presumably have more freedom to hopefully do what makes the most economic sense.”
Regionals May Have to Reinvent Themselves
Rosenthal suggests that this is the time for regionals to dig deeply into the viability of their business models and to deal with regulatory expectations about their safety and soundness positions. Leaning-in on those efforts, he says, could do more than help these banks in the immediate term.
They could establish a track record that could make regulators regard them favorably in the event of a merger application, according to Rosenthal. Those who can’t earn that status may actually have to throttle back on growth or figure out more ways to move assets off their balance sheets. He believes short of growing much larger via M&A, they will not want to cross the threshold of $100 billion that brings in measures like liquidity reporting and “CCAR” — the intensive Comprehensive Capital and Analysis Review.
Ultimately, says StoneCastle’s Joshua Siegel, many regional banks need to decide what they really want to be. Merely being a multistate general purpose, full-service bank doesn’t cut it anymore.
“You can do that for a while longer, but it’s getting tired,” says Siegel. “It’s getting hard to differentiate.”
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Faster Than the Speed of Thought? Or Synched with Speed of Rumor?
The biggest challenge for regional banks is the way rumors percolate. “Things trickle down to the barbershop, the local ‘watering hole,” says StoneCastle’s Joshua Siegel. “They start talking about X bank. ‘Are they going to make it?’ They have no reason to make any assertion except that they hear things. It’s kind of like meme stocks.”
Siegel says much clarity could be added if regionals talked more in investor meetings about the measures they are taking to control factors like interest rate risk. It would quash some rumor mongering.
“If the first one waved their hand and said, ‘Let me tell you everything,’ everybody else would do it,” says Siegel. “But nobody wants to. They all want to protect their secret sauce. In the meantime, nobody knows what you’re doing or what your risk really is.”
Deloitte’s Rosenthal brings up an additional factor: faster payment platforms like The Clearing House Real-Time Payments Network and FedNow. In 2023, the “virtual run” factor spurred by social media, most memorably for Silicon Valley deposits, occurred along customary rails.
If your institution is having some trouble and the social media mill is turning, “friction is your friend,” says Rosenthal. Real-time payments are fast and immediate and work seven days a week, 24 hours a day.
“I worry,” says Rosenthal, “about whether or not all the rails and processes and controls are ready for that environment.”
Lessons Learned When Regionals Endured the 2023 Banking Debacle
Valley Bank’s Collyn Gilbert, EVP and chief strategy and marketing officer, had been through the financial crisis of 2007-08 as an analyst. Some of the 2023 scenes seemed familiar, such as going to sleep each night and wondering what the latest failure — and ripples — would be in the morning. She and Valley learned some lessons that won’t go to waste in an age when people take financial direction from posts on X and TikTok.Looking back on last year’s fraught period, Gilbert says Valley Bank learned the value of not taking customer relationships for granted and engaging in heavy-duty outreach.
“We literally went to hand-to-hand combat on customer calling,” Gilbert recounts. Bankers picked up the phone and talked to customers about Valley Bank’s liquidity and capital position and answered questions. For Gilbert this experience emphasized the need for financial institutions to nurture and maintain trust, a basic that she says got taken for granted for a while.
The lasting lesson for Gilbert is that building up customer education in palatable forms is critical. She says it was eye-opening “that there was such a lack of understanding around our customers, our associates and our shareholders of how deposits are insured, how they flow and where risks are.”
Today Valley is pushing messages on social channels, a website insights blog, in customer newsletters and in webinars. Business calling officers have talking points to bring up in the field. And the bank has also been putting Ira Robbins, CEO and chairman, into the spotlight in interviews and other venues to become a face and voice for Valley, and, in a sense, for regional banks.
One of the regionals’ problems, says Gilbert, is that they fall between well-represented community banks and large banks, both of which are well represented by trade groups. Many arrived where they are, in terms of size, through gradual consolidation. As a group they lack the cohesion of the extremes of the banking barbell.