New York Community Bancorp (NYCB) has seen its shares plummet since reporting a surprising fourth quarter loss and slashing its dividend. The pressure only mounted after Moody’s downgraded the company’s credit rating to junk. The bank named a new chairman and has taken other steps to assure investors, but it is raising some concern about the health of regional banks. NYCB’s woes stem, in part, from its decision to acquire some of the assets of Signature Bank, which failed during last year’s regional banking crisis.
David Smith, U.S. Banks Analyst at Autonomous Research, and Christopher Marinac , Director of Research at Janney Montgomery Scott joined Yahoo Finance Live to weigh in on the bank’s turmoil.
Marinac calls NYCB “a real player” in the multifamily home space. He points out that the company had been going through a “business model change” and that “what you want to see them do is really diversify their book.” However, he notes that none of the changes at the bank “can happen fast enough for investors that are worried about the stock.”
Overall, Marinac believes that part of the problem for New York Community Bancorp was that it was trying to get ahead of changes to capital requirement rules, a process that he describes as “painful” for the company. He says the market was shocked by the earnings announcement which caused a “loss of confidence.”
When it comes to concerns about what NYCB’s woes could mean for the regional banking sector as a whole, Smith believes that “These issues are contained to NYCB. These are issues that are pretty idiosyncratic to the bank with its transition from being a smaller, regional bank into a larger one that’s under stricter regulatory supervision.” He goes on to add that NYCB’s issues are more of “earnings rather than viability” nature.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor’s note: This article was written by Stephanie Mikulich
JOSH LIPTON: One thing I thought viewers might benefit from, Chris, is when we talk about NYCB, I bet a lot of viewers, they hear the word regional and so they just instantly think small, pint-sized, nothing to see here. But this is a fairly sizable lender, right?
CHRISTOPHER MARINAC: Oh, sure. They’re $116 billion balance sheet. They’re a real player, particularly in the multifamily marketplace, the mortgage marketplace. They do a fair amount of C&I lending. The company is going through a business model change that was happening anyways before this episode, and they’re a real player.
And I think what you want to see them do is really diversify their book. As David was saying, it would be healthy to take low-margin loans and put them into higher-margin loans. I think that will happen. The question is timing because none of this can happen fast enough for investors that are worried about the stock.
JULIE HYMAN: And Chris, to be clear as well, I mean, we were looking at a situation last spring where banks went out of business or were sold to other banks because they were– it looked like they were going out of business. And I would ask you first, Chris, and then you, David, is that something that is a concern in this particular case?
CHRISTOPHER MARINAC: Not for me. I think the company is a going concern and will do quite well. I think this is an episode where there’s been a loss of confidence because of the way that the earnings were communicated and simply the level of surprise about the dividend cut last week and sort of the surprise that the regulators have clearly been engaged here to kind of push them for change.
I think they were seen to be kind of a very untouchable company because they won the FDIC deal for Signature, but there’s a transition where the company has now joined the big leagues of the big national banks and they have to perform the same on both liquidity and risk management. It’s just a transition that has happened faster than folks realize. The capital roles are still changing within the Fed this year.
They’re not 100% done, but the banks are expected to be compliant pretty quickly. And I think some of this is NYCB wanting to get ahead of it and be very proactive. But it’s painful to cut the dividend and painful to take all of this credit change right away. We certainly would have wished it could have happened in a different light to kind of prepare the market instead of shock it last week.
JULIE HYMAN: And Dave?
DAVID SMITH: Yeah. I’d agree with Chris broadly. You know, I think these issues are contained in NYCB. These are issues pretty idiosyncratic to the bank with its transition from being a small regional bank into a larger one that’s under stricter regulatory supervision at this point.
I think when you compare NYCB to the banks that failed last year, it screens much better from a deposit standpoint, much higher share of insured deposits, lower interest rate marks on its balance sheet. So, you know, there are certainly questions about its earnings power in the medium term and potential credit issues and its multifamily book, but I think this is an issue of earnings rather than of viability, certainly.
JOSH LIPTON: And Chris, I’m just interested to get your take on whether you were surprised that maybe regulators weren’t more on top of NYCB. Just as Julie just noted, it was only about a year ago that we were dealing with Silicon Valley Bank.
CHRISTOPHER MARINAC: So, good question. I think the regulators were embarrassed by what happened with Silicon Valley, First Republic, and Signature. That’s on the FDIC. I think the OCC, who is now taking over, has a freshly minted client in NYCB and basically are saying, we’re not having this happen on our watch, and we’re going to manage this bank very carefully to make sure that they transition to the new world order.
I think we’re all guilty, myself included, that the company stress test in 2024, in June, really had to start happening now and that there were changes that had to happen in December 31 and here in the first quarter for the company to be prepared for that. That’s part of them raising their reserve to peer.
I think the main move in criticized loans, whether it’s multifamily or office, had a lot to do with stress testing those loans, taking a borrower, adding 200 basis points, and making sure that the cash flow debt service coverage was strong. And that’s a lot of the reason why there were downgrades of loans from past and non-past and then reserves established. I don’t think those loans are ultimately going bad.
They’re just going to struggle under a higher rate environment. But we may see the opposite. Rates may go back down and we may see a little bit of light at the end of the tunnel for them to refinance. It’s more of a timing issue than anything else.
JOSH LIPTON: Dave, Chris, thank you both so much for joining the show today, helping us kind of make sense of this story. And something tells me we’re going to keep talking about it. Appreciate it so much.
CHRISTOPHER MARINAC: Thank you.