The bank's shares fell 11% on Thursday, following Wednesday's 38% drubbing
New York Community Bancorp surprised investors with what could be called a reset on Wednesday. The bank cut its quarterly dividend to 5 cents a share from 17 cents, set aside much more money to cover loan losses than usual and said it was working to raise its capital ratios to comply with regulations after growing in size to over $100 billion in assets, through acquisitions. The bank's stock dropped 38% on Wednesday.
So why did it drop another 11% on Thursday?
One reason might be that its level of loan-loss reserve coverage remains light, according to Wedbush analyst David Chiaverini.
Before looking at some bank data, let's get a few definitions out of the way.
A bank's provision for credit losses is the amount of money it adds to its loan-loss reserves. This affects pretax earnings directly.A bank's loan-loss reserves can also be called its allowance for credit losses, or ACL. This is a balance-sheet item - a contra asset that declines as problem loans are charged off.
New York Community Bancorp's (NYCB) fourth-quarter provision for credit losses came in at $552 million, compared with $62 million in the previous quarter and $124 million in the fourth quarter of 2022. The increased provision was tied to losses on two loans. One was a multifamily-mortgage loan that was written down as the bank transferred it to held-for-sale when it determined that "unique" credit aspects of the current loan were unfavorable. The other was an office-building loan that was charged off "based on an updated valuation."
The bank determined that because of "recent credit deterioration" within its portfolio of office-building loans, it would increase its ACL coverage ratio.
These actions by New York Community Bancorp underscore that it can be difficult for investors or analysts to predict an increase in nonperforming commercial real estate loans or loans secured by large residential buildings. For some loan types, such as credit-card loans or mortgage loans for one- to four-family residences, banks will report delinquent credits as past due 30 to 89 days, or past due 90+ days or nonaccrual - which means the lender expects to charge off the loan and book a loss.
But for problem loans such as the two at NYCB, there is a tendency to go straight to nonaccrual or even a charge off.
Growing pains for a larger bank
One reason NYCB is taking pains to increase its level of capital is that it is subject to a higher level of regulatory requirements following its acquisition of Flagstar Bank of Troy, Mich., in December 2022 and of deposits and loans from the failed Signature Bank of New York in March 2023. NYCB had $116 billion in total assets as of Dec. 31, placing it in the category of a Category IV bank. It will have to submit its first capital plan to the Federal Reserve in April.
During NYCB's earnings call on Wednesday, CEO Thomas Cangemi said the bank had "pivoted quickly" to build capital, enhance its risk-management processes and build its reserves, "which brings our ACL coverage more in line with peer banks, including Category IV banks," he said.
The dividend cut was an important part of the move to build capital. NYCB paid out $125 million in dividends on common shares during the third quarter.
A quick look at reserve coverage
In a note to clients on Wednesday, Wedbush analyst David Chiaverini reiterated his "underperform" rating for NYCB shares and wrote: "The company took a large loan-loss provision which increased its reserve/loan ratio to 1.17% (from 0.74%), but this reserve coverage remains below peers of 1.4%, despite NYCB having a higher-risk credit portfolio, in our view."
Let's look at the data to see where NYCB's level of reserve coverage fits in. We began a screen with the 24 stocks in the KBW Nasdaq Bank Index BKX, which is tracked by the Invesco KBW Bank exchange-traded fund KBWB and includes the largest U.S. banks. We added the 50 stocks in the KBW Nasdaq Regional Banking Index XX:KRX, which is tracked by the Invesco KBW Regional Banking ETF KBWR.
Publicly traded banks report their quarterly financial results to investors through filings with the Securities and Exchange Commission. Later they file uniform financial statements with regulators, which can be more detailed in certain areas than the SEC reports.
Some data on the makeup of banks' loan portfolios as of Dec. 31 isn't yet available in some of the SEC reports. So we began by looking at levels of concentrations for commercial and multifamily real-estate loans to the banks' total assets as of Sept. 31, using regulatory data provided by FactSet.
Among the 74 banks, it turns out that the big four -JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C) and Wells Fargo & Co. (WFC) - had combined ratios of commercial real estate plus multifamily residential loans of 6% or less of total assets. So we excluded those from our data set, along with Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), which each have exposure of only 1%. Then we excluded three large banks primarily focused on providing trust, asset-management and securities-custody services: Bank of New York Mellon Corp. (BK), State Street Corp. (STT) of Boston and Northern Trust Corp. (NTRS) of Chicago.
Among the largest 20 remaining banks, ratios of loan-loss reserves to total loans were available as of Dec. 31, based on the preliminary SEC data, except for East West Bancorp Inc. of Pasadena, Calif., for which we included the Sept. 30 ratio, based on regulatory data. The table is sorted by Dec. 31 total assets and includes the Sept. 30 concentrations of commercial real estate plus multifamily loans to total assets:
Bank Ticker City Dec. 31 total assets ($bil) Loan-loss reserves/ total loans Sept. 30 CRE + multifamily/ total assets
U.S. Bancorp USB Minneapolis $663 1.97% 6%
PNC Financial Services Group Inc. PNC Pittsburgh $562 1.49% 7%
Truist Financial Corp. TFC Charlotte, N.C. $535 1.54% 8%
Capital One Financial Corp. COF McLean, Va. $478 4.77% 6%
Citizens Financial Group Inc. CFG Providence, R.I. $222 1.44% 11%
Fifth Third Bancorp FITB Cincinnati $215 1.98% 5%
M&T Bank Corp. MTB Buffalo, N.Y. $208 1.59% 17%
KeyCorp KEY Cleveland $188 1.34% 9%
Huntington Bancshares Inc. HBAN Columbus, Ohio $189 1.85% 9%
Regions Financial Corp. RF Birmingham, Ala. $152 1.60% 8%
New York Community Bancorp Inc. NYCB Hicksville, N.Y. $116 1.17% 43%
Zions Bancorp N.A. ZION Salt Lake City $87 1.18% 22%
Comerica Inc. CMA Dallas $86 1.32% 15%
First Horizon Corp. FHN Memphis, Tenn. $82 1.26% 23%
Webster Financial Corp. WBS Stamford, Conn. $75 1.25% 26%
Western Alliance Bancorp. WAL Phoenix $71 0.67% 16%
Popular Inc. BPOP San Juan, Puerto Rico $71 2.06% 15%
East West Bancorp Inc. EWBC Pasadena, Calif. $70 1.29% 29%
Valley National Bancorp VLY Morristown, N.J. $61 0.89% 46%
Synovus Financial Corp. SNV Columbus, Ga. $60 1.10% 30%
Source: FactSet 
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