• Drop in shares follows New York Community’s surprise loss
  • Analyst says there’s ‘an unbelievable amount of skittishness’

Investors concerned about the surprise loss and dividend cut at New York Community Bancorp this week have dragged down the shares of other US regional banks that also have significant exposure to commercial-property loans. Among those taking a big hit is a lender one state over.

The shares of Valley National Bancorp slipped 14% in the two days after Hicksville, New York-based New York Community Bancorp reported fourth-quarter results that included $185 million of net charge-offs primarily related to two real estate loans and provisions for credit losses that were more than 10 times bigger than analysts expected. Valley National slumped even more on the NYCB news than when it reported earnings of its own that missed estimates last week, before rising 2.5% midday Friday.

Valley National, based in Morristown, New Jersey, has a high exposure to commercial-property loans relative to its peers. The bank reported that almost half its $50.2 billion loan book was in commercial real estate as of Dec. 31, with heavy exposure to New York, Florida and New Jersey. By collateral, office buildings account for about 10% of the bank’s lending in the sector, apartments and residential 24%, and retail 17%, according to a fourth-quarter earnings presentation.

It’s been less than a year since the failure of several regional lenders, including Silicon Valley Bank and First Republic Bank, and investors are now worried that exposure to commercial real estate could cause a fresh round of turmoil for the sector. The commercial-property market has been hammered by high interest rates and the work-from-home trend that’s boosted office vacancies and led many remote employees to relocate to cities with lower rents.

Even with its large exposure to commercial property, Valley National has been careful with its underwriting and isn’t worried about a significant amount of loans going bad, Chief Executive Officer Ira Robbins said.

“We had over $2 billion of loans repriced in the last 12 months on the commercial real estate,” Robbins said in an interview Friday with Bloomberg News. “We didn’t have to modify one loan — not one loan — which reflects the borrower strength that we have and the ability to absorb the higher-interest-rate and higher-operating-expense environment.”

Regulatory Scrutiny

Due to their regional focus, ties to local property markets and smaller size, lenders such as Valley National tend to have more exposure to commercial real estate than their Wall Street counterparts. They’re also less diversified, relying more on consumer and commercial banking than Bank of America Corp., JPMorgan Chase & Co. and other giants, which have more lines of business — a situation that could amplify the pain of any pressure points.

“The macro trade here of commercial real estate is bad — there is the headline issue for sure,” Steve Moss, an analyst at Raymond James Financial Inc., said in an interview. He has a market-perform rating on Valley National. “You do have some dynamic with macro commercial real estate shorts for the sector. It’s clearly a theme that’s going on in the market, and it’s just resulting in an unbelievable amount of skittishness.”

Valley National’s exposure to commercial real estate is likely high enough to attract extra regulatory scrutiny.

Under guidance from the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency, banks with high concentrations of commercial real estate loans and those which have steeply increased their lending to the sector are receiving closer review by regulators. One criteria is where commercial real estate loans account for 300% or more of an institution’s total capital.

At Valley National, that figure was about 550% at the end of the third quarter, the highest among banks with more than $50 billion in assets, according to an analysis of bank call reports by Bloomberg.

Valley National is in a different situation from New York Community Bancorp, Robbins said. Part of what hurt that lender’s fourth-quarter results is that NYCB is moving into a level of regulatory scrutiny that requires additional capital levels. Valley National — with $60.9 billion of total assets, far below the $100 billion threshold NYCB is contending with — doesn’t have those issues, and won’t have to deal with them for about five to six years, according to Robbins.

No ‘Pandemic’

“I view the credit-quality concerns that New York Community has as isolated, and that’s not something that’s going to turn into a pandemic,” said Anthony Polini, director of research at American Capital Partners, who has a strong buy rating on NYCB shares and a buy on Valley National. Both banks, he said, have strong underwriting for commercial real estate loans. “So the biggest problem we have today is not really the CRE environment, but how regulators are reacting to the CRE exposure.”

Still, Valley National last week reported results that disappointed investors. Provisions for credit losses totaled $20.7 million, more than the $13.4 million analysts had expected, and net charge-offs came in at $17.5 million, topping forecasts of $11.8 million. The lender’s shares slipped 4.4% the day of the results and they had yet to recover before the latest decline.

Robbins said on an earnings conference call with analysts that Valley National has been “curtailing commercial real estate originations” and that “we will continue to de-emphasize investor commercial real estate lending” in favor of commercial and industrial loans and financing for commercial buildings occupied by their owners.

“Our debt-service coverage and loan-to-value metrics remain very attractive,” he said. “We continue to closely monitor pools of maturing and resetting loans, and believe that our borrowers are well-positioned to absorb the pass-through of higher rates.”

Acquisition Acceleration

Founded in 1927, Valley National expanded in New Jersey and elsewhere through more than 30 acquisitions, which accelerated starting in the early 1990s. Robbins joined the company in 1996 and held several positions over two decades, overseeing areas including retail banking, technology, human resources, and mergers and acquisitions, before becoming CEO at the beginning of 2018.

Part of Valley National’s lending is to rent-controlled apartment buildings, a source of income subject to regulation uncertainties that also hurt investor confidence in New York Community Bank. Valley National had $420 million of fully rent-controlled loans yielding 4.6% as of the fourth quarter, and an additional $1.4 billion of loans on buildings that have some level of rent regulation.

In terms of acquisitions, “we wouldn’t be out there buying a large commercial real estate bank today,” Robbins said in the interview.

Valley National’s loan-loss provisions are likely to grow in 2024, and there could be charge-offs related to commercial real estate lending, said Nicholas Cucharale, an analyst at Hovde Group LLC. But such hits to results should be manageable for the bank given its diversified loan portfolio, he said.

The credit situation is hardly unique to Valley National, said Moss of Raymond James.

“People have to expect that credit costs and charge-offs are headed higher for the sector,” he said. “Given the current rate environment, it’s just going to be inherent.”

Written By:  and  — With assistance from Noah Buhayar @Bloomberg

 BullsNBears.com was founded to educate investors about the eight secular bear markets which have occurred in the US since 1802.  The site publishes bear market investing recommendations, strategies and articles by its analysts and unaffiliated third-party and qualified expert contributors.

No Solicitation or Investment Advice: The material contained in this article or report is for informational purposes only and is not a solicitation for any action to be taken based upon such material. The material is not to be construed as an offer or a recommendation to buy or sell a security nor is it to be construed as investment advice. Additionally, the material accessible through this article or report does not constitute a representation that the investments or the investable markets described herein are suitable or appropriate for any person or entity.