• Loan-loss provision soars on sign of weakening credit quality
  • Bank is also bolstering balance sheet for stiffer regulation

New York Community Bancorp, one of the winners as regional lenders struggled and collapsed last year, plunged by a record as investors worried it’s now the harbinger of the industry’s next source of pain: commercial real estate.

The firm, which acquired part of Signature Bank last year, stockpiled cash as it contends with lending risks — including a pair of troubled loans for a co-op complex and office space — as well as stiffer regulation due to its size. The bank’s provision for loan losses surged to $552 million, shocking analysts and shareholders.

“All of the things they did kind of make sense and are probably good over the long term — but in the short term, the Street doesn’t like surprises,” Piper Sandler Cos. analyst Mark Fitzgibbon said in an interview. “They’ve ripped the Band-Aid off. I think they’re now healing, and I don’t think the problems get worse from here.”

The stock fell as much as 46% Wednesday, and was down 38% at the close of New York trading. The KBW Regional Banking Index dropped 6%, its worst day since a deposit run toppled Silicon Valley Bank last March.

Investors have been trying to gauge the potential fallout for US banks that held about $2.7 trillion in commercial real estate loans late last year, as property values tumble and borrowers desperate for new financing face heightened interest rates. The provision for loans was more than 10 times what analysts had estimated — and greater than the firm’s total provisions for the prior decade.

Executives emphasized that such measures, which resulted in a fourth-quarter loss, were part of a broader effort to bolster the bank for tougher capital requirements as it grows. Steps included slashing the firm’s quarterly payout to shareholders to 5 cents from 17 cents.

“We recognize the importance and impact of the dividend reduction on all of our stockholders, and it was not made lightly,” Chief Executive Officer Thomas Cangemi said in a statement. “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.”

New York Community Bancorp has swelled rapidly in the past 18 months through a pair of acquisitions, lifting total assets above the $100 billion threshold that brings more regulatory scrutiny. The bank’s 9.1% key capital ratio is below peers such as KeyCorp and Regions Financial Corp. that are in that category.

The firm said it wanted to build up loan-loss reserves to be better in line with other banks of its size and get ahead of potential weakness in the office and multifamily property markets. The amount of the company’s loans that were 30 to 89 days past due jumped 48% in the last three months of the year.

The bank said net charge-offs in the quarter were primarily related to two loans. One was a co-op loan with a feature that pre-funded capital expenditures. The borrower wasn’t in default, according to New York Community Bank, but the loan was transferred to held-for-sale status. The bank expects the loan to be sold this quarter.

“We also performed a review of other co-op loans and did not find any other loans with similar characteristics,” the bank said in the statement.

The other major charge-off was an office loan that went non-accrual during the third quarter, based on an updated valuation, the company said. “Given the impact of recent credit deterioration within the office portfolio, we determined it prudent to increase the allowance for credit losses coverage ratio.”

The two loans accounted for the bulk of the $185 million of net charge-offs the bank took during the fourth quarter, which also was more than its combined net charge-offs over the past 10 years.

Raymond James cut its rating on the bank to market perform from strong buy, with analyst Steve Moss writing in a note to clients that the quarterly results “will likely put the stock in the penalty box” until there’s “greater clarity around capital, credit and future business plans.”

Signature Purchase

New York Community Bancorp was among the top performers in the KBW index last year, gaining 19% while most other regional lenders struggled.

Signature was among three US banks that collapsed in rapid succession in March as they tried to adjust to a jump in interest rates that devalued their holdings. New York Community Bancorp, through its Flagstar Bank unit, agreed to buy $38 billion of Signature’s assets, including $25 billion in cash and about $13 billion in loans, from the Federal Deposit Insurance Corp.

Acquiring those deposits moved New York Community Bancorp into a regulatory category that requires additional capital levels. The company said that was responsible for the dividend cut and the boost to its provision for loan losses. The provision was $552 million, compared with analysts’ estimates of just $45 million.

The loss for the final three months of last year was $252 million, compared with a $206 million profit analysts had predicted. Revenue of $886 million fell short of expectations for almost $932 million.

Written by:  and  — With assistance from Edward Harrison @Bloomberg

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