New York Community Bancorp
faced an unexpected loss as it wrote down bad real estate loans, causing its stock to drop by 36% and influencing the share prices of regional banks nationwide. The commercial real estate sector, particularly the office segment, has struggled ever since the pandemic pushed millions of Americans to work from home. Regional banks are more heavily involved in real estate lending than larger banks and are thus more at risk of losses. In response to this, New York Community Bancorp reduced its quarterly dividend and hiked its loan-loss reserves. CEO Thomas R. Cangemi indicated that these significant moves were made to comply with stricter standards applied to large banks following recent acquisitions that increased the bank’s assets above $100 billion. The bank’s cash, capital, and risk levels will undergo their first regulator stress-test in April.
Despite Cangemi’s reassurances during the conference call that the actions taken were not indicative of sudden issues in the bank’s extensive commercial real estate loan portfolio, investors remain concerned about the adequacy of reserving among the less closely regulated regional banks that the bank is leaving behind. The
SPDR S&P Regional Banking ETF
recorded a 4% decline in a flat market on Wednesday following this news.
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“This was a significant negative surprise,” noted Jon G. Arfstrom, an analyst at RBC Capital Markets, in a statement on Wednesday.
The New York-based bank reduced its common dividend from $0.17 per quarter to $0.05 per share, and reported a net loss of $260 million for the fourth quarter, in contrast to a gain of $164 million for the same period the previous year. Analysts had anticipated earnings per share of 26 cents, according to FactSet.
Following its acquisition of Signature Bank during last year’s regional bank crisis, New York Community Bancorp set aside a $552 million provision for loan losses, aligning its allowance for credit losses more closely with that of larger banks. This provision stands in comparison to a $62 million provision for the three months ended on September 30.
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During the earnings call, CEO Thomas R. Cangemi clarified that the measures were aimed at aligning New York Community Bancorp with large “Category IV” banks rather than representing a negative outlook for credit. By the conclusion of 2024, the bank anticipates reaching a regulatory capital of 10% of assets, in line with such large banks.
When asked if regulators had coerced the bank to take these prudent actions, analyst Matt Breese of Stephens, Cangemi declined to speak specifically about regulatory conversations but acknowledged the bank’s significant adjustments to its capital position ahead of the April submission.
According to Sonny Kalsi, co-CEO of real estate investment and lending firm BentallGreenOak, regulators have been closely monitoring U.S. banks following the failures of Silicon Valley Bank and Signature last year. While this has averted wider failures, it has also constrained the lending that regional banks provide to the real estate industry.
Cangemi shared that New York Community Bancorp’s origination of real estate loans dropped by 90% in 2023. He noted that borrowers appear to be anticipating a rate cut by the Fed in the second half of 2024, causing them to postpone long-term borrowing decisions until then.
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Looking forward to 2024, the bank anticipates a 3% to 5% decline in total loans and a 3% to 5% increase in deposits.
The bank reported net charge-offs of $185 million for the fourth quarter, compared with $24 million for the three months ending on September 30. This increase was attributed to two loans: a co-op loan expected to be sold during the first quarter of 2024 and an office loan that became nonaccrual during the third quarter.
Total loans 30 to 89 days past due amounted to $250 million as of December 31, rising from $169 million on September 30, according to the company’s earnings report.
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With a substantial presence in the Northeast and Midwest, the bank is involved in multifamily lending, mortgage origination and servicing, and warehouse lending. New York Community Bancorp claims to be the second largest multifamily portfolio lender nationwide and the leading one in the New York City market area, focusing on rent-regulated, nonluxury apartment buildings.
Total commercial and industrial loans stood at $25.3 billion as of December 31, compared with $24.4 billion on September 30. Commercial loans represent 46% of total loans held for investment, while multifamily loans account for 44% at December 31, displaying significant diversification compared to a year ago. Residential loans and other loans represent 7% and 3% respectively of total loans held for investment.
On December 31, total deposits amounted to $81.4 billion, reflecting a $1.3 billion, or 2%, decrease from September 30. Although deposits actually grew by 2%, they were impacted by the dislocation from the Signature deal according to the bank’s report. CEO Cangemi emphasized that the decision to reduce the dividend was not taken lightly but was a prudent measure to accelerate efforts to build capital and support the company’s balance sheet.
“While these necessary actions negatively impacted our fourth quarter results, we are confident they better align our larger organization with our new peers and provide a solid foundation going forward,” he stated.
Cangemi expressed the belief that these measures would facilitate the bank’s continued growth. “We successfully grew into a $50 billion-plus bank in 2018, and we believe the actions we are taking now will make our transition to a $100 billion plus bank even more successful,” he added.
The bank significantly broadened its operations with the acquisitions of
Signature Bank
and Flagstar Bank, a regional lender based in Michigan. The latter acquisition closed just before last year’s regional bank crisis, which led to the downfall of three lenders, including Signature.
Reach out to Andrew Welsch at andrew.welsch@barrons.com and Bill Alpert at william.alpert@barrons.com
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