reported a surprise loss as it wrote down bad real estate loans, sending its stock tumbling Wednesday and dragging down the share prices of regional banks across the country.
“This was a major negative surprise,” Jon G. Arfstrom, an analyst at RBC Capital Markets, said in a Wednesday note.
New York Community Bancorp shares closed down 38%, at $6.47, after it slashed its quarterly dividend and increased its loan-loss reserves by a whopping half-billion dollars. Some 60% of NYCB’s loan book is commercial real estate.
Such borrowers, particularly in the office sector, have been hurting ever since the pandemic forced millions of Americans to work from home. Regional banks tend to do far more real estate lending than the big money center banks and are much more exposed to losses there.
On its morning conference call, NYCB said its dramatic actions were meant to meet the tighter standards that apply to large banks, as recent acquisitions lift its assets above $100 billion. NYCB’s cash, capital and risk levels will face their first regulator stress-test in April, said CEO Thomas R. Cangemi.
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Cangemi told listeners that the moves to boost reserves and cash didn’t reflect new problems in NYCB’s large book of commercial real estate loans, but investors seemed to wonder if other regional banks have adequate liquidity and reserves. While the S&P 500 index was off 1.6% Wednesday, the
fell 6% Wednesday, to $49.70, after the NYCB news and a Federal Reserve press conference that left traders unsure the Fed will cut rates in March.
All regional banks aren’t necessarily under-reserved, analysts said. Jefferies analyst Ken Usdin doesn’t cover NYCB, but he put out a note Wednesday to point out its differences from the other large regional banks he covers.
“Even the banks with the lowest reserve ratios in my group are higher, today, than where NYCB just took theirs to,” Usdin told Barron’s.
NYCB’s reserves for office loans is now 8%. Another New York-focused lender is
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Its reserves for office loans are 10.2%, notes Usdin.
As for liquidity, NYCB ended December with a ratio of loans-to-deposits of 104%. At the banks Usdin covers, that ratio averages 75%.
To build liquidity, NYCB reduced its common dividend from 17 cents per quarter to 5 cents per share, while posting a net loss of $260 million for the fourth quarter compared with a gain of $164 million for the same period a year ago. Analysts had expected earnings per share of 26 cents, according to FactSet. Instead, it lost 36 cents a share.
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NYCB recorded a $552 million provision for loan losses, a move that the bank says brings its allowance for credit losses more in line with large banks. NYCB’s lurch into big bank regulation followed its 2022 deal to buy Michigan-based Flagstar Bank and then the acquisition of $38 billion in assets of Signature Bank during last year’s regional bank crisis. The loan loss provision compares with a $62 million provision for the three months ended Sept. 30, according to the company.
On the company’s call, CEO Cangemi said the moves were more about bringing New York Community Bancorp more in line with large “Category IV” banks, rather than a negative outlook for credit. By the end of 2024, he expects that the bank’s regulatory capital will reach the 10% of assets expected of such big banks.
“This is laser-focused on looking at the company’s long term-plan and being part of a new Category IV banking institution,” Cangemi told listeners, “and having a capital position as we grow it into a level that were in our peer groups.”
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Analyst Matt Breese of Stephens asked if regulators had pressured the bank to take the prudential actions.
“We’re not going to speak specifically about our regulatory conversations,” said Cangemi. “But the reality is that we do have an April submission. We’ve adjusted our capital position significantly.”
Regulators have swarmed U.S. banks since last year’s failures of Silicon Valley Bank and Signature, says Sonny Kalsi, the co-CEO of the real estate investment and lending firm BentallGreenOak. That has prevented wider failures, but also crimped the lending that regional banks provide to the real estate industry.
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Regarding NYCB’s real estate loans, CEO Cangemi said the bank isn’t making many. Its originations dropped 90% in 2023. Borrowers seem to be betting that the Fed will cut rates in the second half of 2024, he said, and so they are putting off long-term borrowing decisions until then.
The bank said net charge-offs totaled $185 million for the fourth quarter, compared with $24 million for the three months ended Sept. 30. It attributed the jump to two loans: a co-op loan that the bank expects to be sold during the first quarter of 2024 and an office loan that went nonaccrual during the third quarter.
Total loans 30 to 89 days past due totaled $250 million as of Dec. 31, up from $169 at Sept. 30, according to the company’s earnings report.
The bank has a large footprint in the Northeast and Midwest. The company says it is the second largest multifamily portfolio lender in the country and the leading multifamily portfolio lender in the New York City market area, where it specializes in rent-regulated, nonluxury apartment buildings.
Among the analysts surprised by NYCB’s news was Steve Moss at Raymond James. On Jan. 10, he upped is rating on the stock to a Strong Buy after concluding that investors were too worried about the bank’s loans on New York rent-regulated apartment buildings. Moss cut his rating to Market Perform Wednesday, after realizing that the regulatory rules for crossing $100 billion in assets are “considerably more punitive” than he expected.
One who called it right was Wedbush’s David Chiaverini, who took NYCB to a Sell in November on concerns that the bank’s rent-regulated borrowers would have trouble coming up with more equity as they had to refinance maturing loans at higher rates.
Write to Bill Alpert at william.alpert@barrons.com and Andrew Welsch at andrew.welsch@barrons.com
