Tag: credit

New York Community Bancorp’s new management team has plotted out a path to improved profitability, but they say 2024 will be a “transition year.” It remains to be seen just how rocky the next eight months will be.

The Long Island-based company, whose apartment-heavy commercial lending portfolio landed it in hot water earlier this year, warned investors Wednesday there will be more pain in coming quarters as it continues to root out troubled loans. Charge-offs and loan-loss provisions will be elevated this year before returning to more normal levels in 2025 and 2026, executives said.

Borrowers have so far shown “amazing resiliency,” new CEO Joseph Otting, the former top bank regulator, told analysts during the company’s first-quarter earnings call. Still, net charge-offs were $81 million during the quarter, while the provision for loan losses totaled $315 million — far above where both metrics were a year earlier. Nonperforming loans also skyrocketed year over year, totaling $798 million as of March 31.

The company said it is guiding for $750 million-$800 million in provisions for all of this year. It then expects that figure to drop to $150 million-$200 million next year and in 2026.

Analysts say there are still a lot of unknowns. One big question: How will New York Community, which has gone through significant turmoil since late January, ultimately close the gap between its current performance metrics and what the management team is aiming to achieve by 2026?

“I think it’s clearly still in the early stages” of a turnaround, said David Smith, an analyst at Autonomous Research who covers the bank. “They put out a more robust and detailed set of expectations than most investors expected, but it’s still a ‘Prove it’ story.”

Otting, who has been CEO for about eight weeks, expressed confidence that the new management team and restructured board of directors can get the $112.9 billion-asset company back to profitability. The company reported a $327 million net loss in the first quarter.

Otting, along with former Treasury Secretary Steven Mnuchin, turned around the failed IndyMac Bank and eventually sold it for a large profit. The two teamed up again in the New York Community rescue, which required a $1 billion capital infusion.

“We’ve done this before,” Otting said on the call. “And we feel we can do it again.”

Investors seemed to agree, at least a little, driving up the stock price by 30% Wednesday to $3.44 per share.

New York Community’s troubles began on Jan. 31 when the company reported a sizable fourth-quarter loss, signaled trouble in its commercial real estate loan portfolio and slashed its dividend, sparking a 37% decline in its share price. The sell-off continued in February, in part because of ongoing uncertainty about the company’s loan books. The surprise $1 billion investment, led by Mnuchin, was intended to ease the turmoil and bolster the company’s capital levels.

The plan laid out Wednesday includes both short-term and medium-term goals.

In the near term, New York Community, which is the parent company of Flagstar Bank, plans to sell or run off noncore assets, work out problem loans and reduce its operating expenses. Medium-term targets include diversifying the loan portfolio, which is currently dominated by multifamily loans; growing core deposits as a way to improve the company’s funding base; and increasing fee income.

A deal to sell noncore assets worth about $5 billion may be in the works, management said Wednesday, though they did not provide additional details about the asset class.

By the fourth quarter of 2026, New York Community aims to achieve a return on average assets of 1% and a return on average tangible common equity of 11%-12%. It is also targeting a common equity Tier 1 capital ratio of 11%-12%. That ratio was 9.45% in the first quarter.

Return on average assets was negative 1.13% in the first quarter, while return on average tangible common equity was negative 10.02%.

In recent weeks, the new management team has taken a “deep dive” into the health of the bank’s commercial real estate portfolio, said Craig Gifford, New York Community’s chief financial officer. The review covered both the bank’s $36.9 billion multifamily book and its $3.1 billion office loan portfolio.

The office portfolio makes up just 4% of the bank’s loans, but it’s part of a sector that’s been suffering a “high degree of stress,” Gifford said. The review of office loans, conducted with the help of an independent party, has thus far covered 75% of that portfolio. 

Executives have set aside a sizeable chunk of reserves to cover potential stress in their office loans. The bank said that its ratio of reserves to total office loans was about 10%, significantly above most of its peer banks. 

The comparable figure is significantly smaller for New York Community’s much-larger multifamily loan book, where the allowance for loan losses was 1.3% of the portfolio. The bank has examined its top 250 multifamily loans, but it has yet to take an in-depth look at 64% of the portfolio.

Given how much of the multifamily loan book still needs to be reviewed, “I think there’s uncertainty there,” Peter Winter, an analyst at D.A. Davidson, said Wednesday.

The multifamily sector has been hit hard, particularly rent-stabilized buildings in New York City, where landlords’ ability to raise rents has been drastically hampered by a 2019 state law. The new rent restrictions come on top of far stronger eviction protections for nonpaying tenants, along with ballooning maintenance and insurance costs, said Seth Glasser, a New York City multifamily broker at the firm Marcus & Millichap.

The value of rent-regulated buildings in New York has been “annihilated,” Glasser said, with potential sale prices falling by 50% or more. Few potential buyers want the buildings since they have “no business model,” and few lenders would finance any deal, he added.

“There’s some really significant distress that continues to emerge,” Glasser said. “It feels like it’s getting worse every month.”

Otting noted that the buildings’ expenses have risen sharply, but he also said that the limited number of vacant apartments means the buildings have a “pretty solid” revenue stream.

New York Community believes the probability of defaults is rising, Otting said, but the multifamily portfolio so far “has held up very well” as borrowers keep making their payments. 

Otting also expressed optimism that multifamily borrowers will remain relatively healthy even as their currently low interest rates reprice upward. So far, borrowers have been able to adjust to higher payments with “almost no delinquencies,” said Gifford, the bank’s CFO.

New York Community has brought on an experienced hand at managing loans that may fall into trouble. James Simons, who formerly ran loan workouts at U.S. Bank in Minneapolis, joined New York Community as a “special advisor to the CEO” to evaluate the health of its borrowers and whether it needs to set aside more reserves to cover potentially troubled loans, Otting said.

“The information is available to us,” he said. “We just need to formulate that information in the right way.”

The medium-term plan is to lower New York Community’s long-standing concentration in commercial real estate. The bank’s former chief executive, Thomas Cangemi, kick-started that journey with the 2022 acquisition of the consumer mortgage heavyweight Flagstar Bancorp in Troy, Michigan.

Just a few months after it completed the deal for Flagstar, New York Community acquired large portions of the failed Signature Bank. The acquisitions vaulted New York Community over $100 billion of assets, putting it into a category that prompts additional scrutiny from bank regulators. 

During the lengthy process to acquire Flagstar, the company switched its primary federal regulator from the Federal Deposit Insurance Corp. to the Office of the Comptroller of the Currency. On Wednesday, Otting, who formerly led the OCC, said the company was “not ready to be regulated” by that agency.

“So we have a lot of catching up to do to get our standards up,” Otting said. “But we’re committed to doing that, and we’ve hired the people who understand what that looks like.”

The company’s diversification plan also covers its deposits. Otting said the bank is focusing on continuing to grow core deposits — part of its ongoing shift away from New York Community’s legacy model of funding multifamily loans with higher-cost certificates of deposit, which has included bringing in new depositors from Flagstar and Signature.

New York Community has recently lost some bankers to smaller rivals, including Peapack-Gladstone Financial and Dime Community Bancshares, raising the risk that departing bankers will bring customers’ deposits with them. 

But the company’s deposits have stayed resilient after initial outflows in February, when its sharp stock decline prompted some depositors to leave. The bank started 2024 with $81.5 billion of deposits, a figure that dropped to $76.1 billion on March 7, when Mnuchin’s investment group announced plans to pump in new capital.

Deposits then fell slightly to $74.9 billion at the end of the first quarter, but they ticked up by $300 million as of April 29, according to company executives.