A Hard Look At New York Community Bancorp After A 60% Drop

New York Community Bancorp (NYSE:NYCB) stock dropped 60% from its earnings announcement on January 31, 2024 to February 8, 2024, then recovered 17% on February 9^th. However, it is still down 53%. This article will go over;

• Why it dropped.
• What the issues are.
• What management is doing to restore confidence.
• What the likelihood of failure is.
• Whether it is worth investing in.

As a brief background, NYCB is a regional bank based in Hicksville New York with $116 billion of assets on December 31, 2023. In December 2022, NYCB acquired Flagstar Bank, a Michigan based bank, with $25 billion in assets. In March 2023, NYCB acquired portions of the failed Signature Bank bringing in $38 billion of assets and $34 billion in deposits, including its branch network.

The Cause

The January 31, 2024 earnings report disclosed the following

1. A fourth quarter loss of $260 million, $193 million as adjusted.
2. The fourth quarter 2023 net interest margin was 2.82%, down 45 basis points from the third quarter, largely due to actions to build liquidity.
3. To build capital, NYCB decided to do so in part by significantly reducing its dividend from $0.17 to $0.05 per quarter.
4. To bring loss reserves closer to peer level, the bank added $552 million in loss reserves, up from $62 million the prior quarter. This was the cause of the loss note above.

I believe the 60% stock drop was the combination of the third and fourth items, but mostly the third. Both appear to have occurred after pressure from bank regulators. NYCB has historically been a high dividend low growth bank. It paid an above peer dividend yield of 5%-7% for many years. For that reason, it had a dividend investor base. Many of those investors are moving on as it no longer meets their investment criteria.

Issues

The bank faces a number of issues that exceed what its peers have. These are listed below.

1. The multi-family portfolio is massive and concentrated in the NYC area. It was $37.3 million on December 31, 2023, or 44% of the total portfolio. This is a way higher concentration than most peers. There are a lot of rent controlled properties in it. The concentration by size and location and rent limits are all major concerns. The bank has actively been reducing this ratio in recent years with both recent acquisitions helping.

2. NYCB had $3.4 billion of loans secured by office buildings mostly located in New York City as of September 30, 2023. That is 44% of tangible net worth. Office buildings are the most troubled type of real estate currently.

3. There is still a risk of deposit flight though the CEO has new said several times it wasn’t happening. There were $23 billion of uninsured or uncollateralized deposits as of December 31, 2023, which is 28% of the total. This amount is actually similar to their peer group.

4. NYCB is still under-reserved versus its peers. That is despite having a riskier portfolio of multi-family, office and retail real estate loans. The allowance for loan loss was 1.17% of loans on December 31, 2023. The peer average closer to 1.5%. NYCB has a lower loss reserve but a higher loan risk profile. They will likely be forced to build the reserves more in future quarters.

5. Non-performing loans were $428 million at December 31, 2023 or 0.51% of total loans up from 0.28% on June 30, 2023. This is similar to the peer but increasing more rapidly. There were $185 million of net charge-offs in the quarter compared to $24 million in the prior quarter. This was driven by two large loans.

6. The net interest margin will likely shrink in 2024 due largely to recent actions to shore up liquidity. Primarily this was from borrowing from the FHLB and parking those funds in cash. FHLB funds are almost always much more expensive than deposits.

7. Tangible net worth was only 6.7% as of assets as of December 31, 2023, down from 7.1% three months earlier. This is well below most peers whose ratio is mostly 10% or more. The problem was caused by NYCB not issuing more stock when acquiring the Signature Bank assets. Previously tangible net worth was similar to peer. The Wall Street Journal reported on February 10th that dilution or asset sales is being considered. Dilution may actually help the stock if it restores confidence.

8. The Signature Bank acquisition moved NYCB over $100 billion in assets. That moved it into a new category which results in much more regulatory oversight. This resulted in pressure by the regulators to build capital and loss reserves.

9. There is an overhang on the stock as its former dividend investor base moves on.

The combination of #3 and #4 alone should to significantly reduce earnings this year.

Management’s Response

The bank issued a press release on February 7, 2024 addressing the situation. The following is a quote from the release.

“Deposit Stability

• Total deposits of approximately $83.0 billion, which is up from year end 2023
• Total insured and collateralized deposits represent 72% of total deposits
• Total uninsured deposits, excluding collateralized and internal deposits, are $22.9 billion
• We maintain over $10 billion of reciprocal deposit capacity to offer expanded deposit insurance to our clients
• 90% of the balances in our top 20 deposit relationships are fully insured or collateralized

• Ample Liquidity

• Total liquidity of $37.3 billion which exceeds uninsured deposits, with a coverage ratio of 163%
• Cash held on balance sheet of approximately $17.0 billion
• Unencumbered securities of approximately $6.1 billion lendable value
• Fully collateralized credit facility with available capacity from the Federal Reserve Bank of New York and excess lendable value of collateral at the Federal Home Loan Bank of New York totaling $14.2 billion”

Much of what is presented here is quite good news. First of all, there has been no run on deposits like what happened to Signature Bank, Silicon Valley Bank and First Republic. Part of the reason appears to be found in the last bullet under Deposit Stability, that 90% of the largest depositors are fully insured or collateralized. Some banks collateralize uninsured deposits with investment grade marketable securities they have on their balance sheet such as treasuries, and mortgage-backed securities.

Other good news is that deposits actually increased to $83.0 billion in early February from $81.3 billion at year end. This is the opposite of a deposit run. There has been no panic by depositors despite being in the same market as Signature. It should be noted that NYCB has some 7 and 13 month above market CD specials right now.

Much of the rest describes overall liquidity which was $37.3 billion in early February, well above the $22.9 billion of uninsured and uncollateralized deposits. Signature Bank had 90% of its deposits uninsured and Silicon Valley Bank 88%. First Republic Bank which also failed in 2023 was 68% uninsured.

The liquidity while comforting, will also cause a drop in earnings, in fact it already has. The net interest margin had held up better than the peer over the past year until last quarter when it dropped from 3.27% in the third quarter of 2023 to 2.85% in the fourth quarter. That drop was due to actions taken to boost liquidity. Specifically, wholesale borrowings (probably mostly FHLB Advances) increased by $6.7 billion in the quarter. These are very expensive. Cash has increased from $11.5 billion at year end to $17.0 billion currently. That is also comforting but adds to earnings pressure if it was also funded by expensive borrowings or by loan sales.

Strengths

Commercial and industrial loans totaled $25.3 billion at December 31, 2023, which was 30% of total loans. This is relatively high versus peers and reduces interest rate risk. This loan type is also currently significantly safer than most commercial real estate loans.

NYCB has not been hurt by higher interest rates. Its net interest margin was 3.27% in the third quarter of 2023, up from 2.60% in the first quarter, when parts of Signature was acquired. The margin declined to 2.85% in the fourth quarter due to liquidity enhancing actions.

On February 9, 2024, 8 insiders bought over $870,000 of NYCB stock. This included the CEO and Executive Chairman. While clearly orchestrated, this is still additional skin in the game by a large portion of the insiders. What is particularly interesting is that the February 7^th press release discussed above did not stop the stock slide. But this, two days later, did.

Earnings Estimates

Piper Sandler recently provided a price target of $8 and said “the noise is receding” and “ we do not expect it to have a meaningful impact to our estimates”. The other analysts have a different view at least on earnings estimates. According to Yahoo Finance, the 2024 earnings estimate has dropped from $1.31 to $0.70. I’m with the other analysts due to pressure from liquidity actions and expected higher loan loss provisions needed to get them up to peer levels.

Takeaway

As of February 9, 2024, the market cap was $3.5 billion or 48% of the tangible book value of $7.3 billion on that date. It’s 45% if you add back unrealized losses on marketable securities.

The biggest issue is NYCB failed to bolster its loan reserves or capital sufficiently after its two large acquisitions. They had the opportunity to bolster their loss reserve after receiving a $2.1 billion bargain purchase gain when they acquired the Signature Bank assets in March, 2023, but didn’t do it. What made it worse is this happened as the bank crossed the threshold into a much heavier regulatory environment. That appears to have pushed their bank regulators to mandate actions (dividend cut and increased loss reserves) that spooked the market. In fact, the allowance for loan loss is still significantly below peers. This will likely result in continued heavier than normal quarterly loss provisions to catch up. NYCB also has a riskier loan portfolio than its peers as described in the next 2 paragraphs.

There is a concentration of multi-family loans in the New York City metro area. However, this one does not appear lethal. Many of the collateral properties are rent controlled which is a two-edged sword. On the one hand, landlords can get squeezed if they can’t raise rents at or above inflation or have to pay higher interest rates when their loans mature. On the other hand, these properties are almost always close to 100% leased. For that reason, if the bank has to foreclose on the rent controlled collateral properties, the losses are likely to be moderate. Those that are not rent controlled may be a bigger issue due to overbuilding in recent years.

The office portfolio, in my opinion, may eventually cause more losses than the multi-family portfolio, despite being 1/10^th the size. It is already seeing a rapid increase in problem loans. The loan balance was $3.4 billion on September 30, 2023. In a worst case, there could be over $1 billion of losses there.

Earnings over the next few quarters will likely shrink significantly from the levels of the first 3 quarters of 2023. This is due to the need to further boost loss reserves and interest margin reducing actions taken to boost liquidity.

There is an overhang on the stock as its former dividend investor base sells out.

That said, the likelihood of a bank failure anytime soon is quite low. The bank has sufficient liquidity to handle any deposit run, and that run has not happened. Uninsured deposits are way below levels of the regional banks that did fail last year and actually similar to their peer group. Issues from bad loans will take a while before becoming significant.

My Take

On February 9, 2024, I took a moderate position in NYCB stock at about $4.25. Here’s why. The knockout blow suffered by Signature, Silicon Valley and First Republic (a deposit run) hasn’t happened. It also appears unlikely to happen due to NYCB’s liquidity and much smaller level of uninsured deposits. I believe a lot of the stock crash was due to an overhang of the bank’s historic dividend investor base moving on. That is a temporary disruption.

With that aside, there are issues here and operating results are likely to suffer in the near term. However, I am a valuation driven investor and believe NYCB is worth more than 48% of tangible net worth. Losses are unlikely to be large enough to cut tangible net worth by 52%, though that is certainly a risk. Earnings power remains quite strong. Major asset quality problems if they occur are still down the road.

This is a short term trade for me. That’s why I don’t have the price target I usually include. I recommend it for investors willing to put a smaller portion of their portfolio in a higher risk stock.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.