New York Community Bancorp, an institution that stepped in last spring to help calm a lending industry roiled by regional bank failures, has sent shock waves of its own across markets by posting a loss and cutting its dividend by more than 70%.
The unexpected results add to the uncertainty surrounding commercial real estate values and outlooks going forward.
At the heart of the $252 million fourth-quarter net loss the bank holding company reported Wednesday were increased allowances and provisions for commercial real estate loan losses. The net loss was driven mostly by a $552 million provision for credit losses and a $185 million net charge-off fueled by multifamily and office properties. And its allowance for further real estate-related credit losses rose $373 million to nearly $1 billion, equating to 1.17% of total loans.
New York Community’s share price tumbled 38% Wednesday, while the Dow Jones U.S. Banks Index lost about 2% in value. The stock dropped again Thursday by about 11%, while the index fell another 1.5%.
“Rising interest rates have both tanked multifamily lending and made it difficult for owners of rent-regulated buildings to refinance their loans which have impacted New York Community’s business,” said Victor Rodriguez, CoStar's senior director of analytics for New York. “While yesterday’s news is largely related to the regional bank’s balance sheet, the recent slowdown in demand and rent in New York’s multifamily market may trigger increased distress within NYCB’s portfolio.”
The bank is highly concentrated in rent-regulated multifamily property, a real estate type that has historically performed well for the firm, according to Moody’s Investors Service, which is reviewing New York Community for a downgrade.
This economic cycle "may be different,” Moody’s said in its analysis. “While vacancy rates are low for this commercial real estate segment, properties may face different challenges this cycle due to higher interest expense when refinanced and already higher maintenance costs due to inflationary pressures. These higher costs may prove more challenging for owners of rent-regulated properties to pass along through rent increases to tenants.”
Rapid Growth
Last year was a period of transformation for New York Community. In December 2022 it completed the acquisition of Flagstar Bank, which held more than half its $90 billion in assets in commercial real estate loans, the largest among the 45 major bank lenders to the industry and far higher than the 11.6% average among all banks, according to data from the Federal Deposit Insurance Corp.
Soon after that Flagstar deal closed, New York Community reached a deal to acquire assets and liabilities of the failed Signature Bank from the FDIC.
The transaction added low-cost deposits and new business relationships, but it came at a price. With the deal, New York Community went over $100 billion in total assets, placing it in a category that receives heightened scrutiny from regulators. It also stretched the company's resources, according to the Motley Fool, a private financial and investing advice company based in Alexandria, Virginia.
New York Community “stretched itself thin last year when it opportunistically expanded, and now the company plans to retrench to shore up its balance sheet,” Motley Fool said this week. “In the long run, the moves should benefit shareholders and help make sure that New York Community doesn't get into the sort of situation that sank Signature. But given the rapid growth, investors are likely to take a wait-and-see approach to how the bank is able to manage its larger size.”
Christopher Marinac, an equity analyst for Janney Montgomery Scott, a U.S. broker-dealer, reached a similar conclusion in a note to clients.
“It is important for investors to recognize that NYCB elected not to delay credit and capital actions ahead of new regulatory rules,” Marinac said. “Taking early and preemptive action is painful in the short-term, while leading to greater credibility in the long-run. Ultimately, this is management’s way to enhance credibility with regulators and investors.”
Beyond Commercial Loans
In acquiring Signature’s assets, New York Community through Flagstar was intentionally moving to diversify its asset base away from primarily commercial property lending by expanding into more business lending. By buying Signature’s commercial and industrial business loans, it bought its way into a new sector and added a new portfolio of customers.
That diversification continued in the fourth quarter, according to New York Community.
“On the lending front, total loans held for investments were up $624 million or 3% annualized compared to the third quarter of 2023 to $84.6 billion,” Thomas Cangemi, president and CEO of the holding company, said on its earnings conference call Wednesday. “Most of the growth occurred in the commercial-industrial portfolio [a business loan category], partially offset by a decline in multifamily, while the rest of the [commercial real estate] portfolio remain unchanged.”
As of year-end, total commercial loans represented 46% of total loans, while multifamily loans represented 44% of total loans, representing significant diversification from a year ago.
By moving into more business lending, Cangemi said, New York Community is moving to get more in line with its new larger bank peer group.
And while it significantly boosted reserves for commercial property loan losses, John Pinto, the company’s chief financial officer, said that does not mean the company is expecting losses or abandoning commercial real estate lending.
“We have not seen significant losses in multifamily,” Pinto said. “We're still very comfortable in the quality of the multifamily portfolio. We're not seeing anything on the early-stage delinquency side yet either. … We're not seeing any significant trends in the multifamily portfolio besides the repricing risk.”