New York Community shares fall 35% on real estate pressure

New York Community Bank warned on Wednesday about “weakness in the office industry” and that its flagship multifamily portfolio could face pressure from rising interest rates.

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Shares of New York Community Bancorp fell 35% on Wednesday after the Long Island-based regional bank posted a huge quarterly loss, reported problems with its commercial real estate portfolio and slashed its dividend.

The bank’s earnings report caught investors off guard, revealing a series of moves the company has made to prepare for challenges. Real estate industry instabilityThe parent company of Flagstar Bank, which has $116.3 billion in assets, said there is “softness in the office building industry” and that its flagship multifamily portfolio may face pressure from rising interest rates.

The New York community wrote off two large real estate loans last quarter, one for an office building and the other for a multifamily building. It also stored large amounts of money in case other borrowers defaulted, which led to a net loan loss of $260 million in the fourth quarter. The company cut its dividend to 5 cents from 17 cents per share.

“We recognize the importance and impact of reducing our dividend on all of our shareholders and this decision was not taken lightly,” Thomas Cangemi, the bank’s chief executive, said in a release.

Investors dumped shares in New York Community, which fell 35% to $6.75 in morning trading.

RBC Capital Markets analyst Jon Arfstrom described the dividend cut as “highly unusual” and wrote that the move “did not signal to investors that Any kind of warning”. wrote in a note to customers, but their suddenness came as a complete surprise.

“These trends and decisions were completely unexpected,” Avstrom wrote.

New York Communities wrote off about $185 million in loans during the quarter, largely due to the two real estate loans.

One was a so-called “co-op” loan on a multifamily property that was in trouble but did not default. Bank executives, who plan to sell the loan this quarter, said there had been no shift in a broader review of the cooperative’s loans to identify others with “similar characteristics.”

“We remain very pleased with the quality of our multifamily portfolio,” Chief Financial Officer John Pinto told analysts on the company’s fourth-quarter earnings call.

The second real estate loan written off involved an office building that began experiencing problems last year and was valued at a lower valuation.

New York Communities’ loan portfolio has faced scrutiny in recent months, primarily over its exposure to office loans and multifamily loans in rent-stabilized buildings — two parts of the housing market that have drawn attention.

Multifamily loans in New York communities totaled $37.2 billion as of Dec. 31, or 44% of its total loans, according to the company’s earnings supplement. Total office loans were much smaller, about $3.4 billion as of the end of December.

Cangemi said the dividend cut would help the company boost its capital buffer – a key consideration as the company’s assets now exceed $100 billion, which would subject it to several tougher regulatory rules. constraint.

new york community Acquisition of Flagstar Bank in 2022 It is already approaching the $100 billion threshold. It jumped that hurdle during last year’s banking crisis by buying a large stake in failed Signature Bank.

Breaking the $100 billion asset mark means regulators now regulate New York community banks as so-called “Category 4” banks and subject them to a set of stricter standards, including regular stress tests and breathing capital requirements.

Cangemi said signing the agreement Announced in late March 2023the New York community “crossed this important threshold earlier than expected,” so it “quickly pivoted and accelerated some necessary enhancements.”

“We believe this is a prudent decision as it will allow us to accelerate capital build-out to support our balance sheet as a Category 4 bank,” he said in the release.

Compass Point Research & Trading analyst David Rochester wrote in a note to clients that the capital buildout is “more likely” to be a one-time event as the New York community prepares to make its balance sheets look more like larger banks.

In a separate research note, Autonomous Research analyst David Smith said the bank’s earnings call on Wednesday was “painful… as the bank continues to adjust to the new regulatory landscape.”

“Management is trying to paint a positive picture for the long-term outlook for New York communities, but the short-term outlook looks very challenging,” he wrote.

New York community executives also said Wednesday they had decided to delay a signature system conversion originally scheduled for this year until 2025. The goal, they said, is to avoid customer disruption and minimize costs to the New York community completing the Flagstar integration.

Cangemi said on the phone that the Flagstar retrofit is scheduled to take place in mid-February 2024.

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