On January 31, 2024, New York Community Bancorp, Inc. (NYSE: NYCB) (“NYCB”) announced its earnings for the fourth quarter of 2023 and gave an update on recent developments at the company. NYCB’s press release can be found here.
There was an immediate negative reaction to the earnings release amongst market participants. On January 31, the company’s common stock closed at $6.47 per share after closing the previous day at $10.38 per share (a decline of 37.7%). Since then, the price per share has declined further and closed on February 16 at $4.90 per share.
Global Value Investment Corporation (“GVIC”) first invested in NYCB in 2004. During the subsequent twenty years, GVIC has invested in NYCB’s common stock on multiple occasions, often when market pricing significantly deviated from our appraised value of the company. For insight into NYCB, GVIC’s Senior Analyst Satendar Singh, and Vice President of Investment Research, Malcolm “Mac” MacLaren, share their thoughts on the recent news.
Satendar, can you provide a bit more clarity on the recent news?
NYCB’s January 31 earnings release reported record revenue driven by the integration of Flagstar Bank and certain assets of Signature Bridge Bank. However, the update also revealed that during the quarter there was a $552 million provision for credit losses, $185 million of net charge-offs (driven by two loans), and the dividend was reduced to $0.05 per share (from $0.17 per share). NYCB’s earnings release and management’s commentary indicated that the company decided to recognize the credit loss provision and reduce the dividend to bolster its balance sheet in order to comply with enhanced regulatory standards in light of recent growth. Both actions seem prudent to us, and we were aware that NYCB would need to meet more stringent capital requirements following the acquisition of Flagstar in December 2022 and purchase of certain assets of Signature Bridge Bank from FDIC receivership in March 2023. I believe what surprised the market was that NYCB took these actions in one fell swoop and in the same quarter.
Can you delve a bit more into the charge-off during the quarter?
The $185 million charge-off that was announced in the fourth quarter earnings press release is largely attributable to two loans: $112 million for a loan secured by a co-op property, and $40 million for an office property loan. The loan secured by a co-op property was not in default, but the loan was transferred to held for sale during the quarter, triggering an adjustment to its carrying value based on today’s interest rates. Excluding this loan, charge-offs in the fourth quarter dropped from 0.22% of average loans outstanding during the quarter to 0.09% – not an alarming figure, in our opinion. Furthermore, NYCB’s management believes the co-op loan is likely to be sold at a higher price than its current book value.
Can you share your thoughts about the dividend reduction?
GVIC views investments from a long-term perspective. Our twenty-year holding period for NYCB is evidence of our patience and conviction in the investment. Framing a sound and realistic capital allocation strategy is an important responsibility of a board of directors and management team, and a task which requires careful consideration. We welcome the dividend reduction to $0.05 per quarter from $0.17 per quarter, as we feel this action was necessary to accelerate the improvement of NYCB’s capital ratios. We believe the board of directors may need to think more strategically about the payment of a dividend, which, even after the announced reduction, still amounts to $145 million annually.
Maintaining the dividend, even at a reduced payout amount, shows NYCB’s confidence in its liquidity position and ability to comply with regulatory capital requirements, while remaining comparable to the dividend policies of its public company peers. We believe the dividend reduction along with the earnings generating power of the company should address any concerns about capitalization.
Mac, GVIC regularly interacts with company management – what did NYCB’s management say about the company’s outlook?
We recently spoke with Tom Cangemi, NYCB’s CEO and a member of its board of directors. We conduct regularly scheduled calls with senior management and investor relations as a core tenet of our research process and ongoing analysis of existing investments. Mr. Cangemi affirmed the need to make changes to the company’s balance sheet in order to come into compliance with applicable regulations governing Category IV banks. Mr. Cangemi reiterated that additional liquidity built during the fourth quarter allows the company to adjust its funding mix more efficiently if that becomes necessary. He also affirmed the credit quality of the commercial real estate loan portfolio and pointed out that as of quarter-end, NYCB’s allowances for credit losses was 1.17% of total loans held for investment, in-line with other banks of similar size. Over the next few years, we expect NYCB to focus on integrating the recent acquisitions of Flagstar Bank and certain assets of Signature Bridge Bank into NYCB’s operations and brand, which we believe will result in meaningful synergies and increased earnings power.
Do you have any concerns regarding the liquidity of the company?
We are of the opinion that NYCB is in a comfortable liquidity position, a sentiment that was reiterated by the company through a separate press release issued on February 6. As of that date, NYCB’s total liquidity of $37.3 billion exceeded the level of uninsured deposits, with a coverage ratio of 163%. NYCB’s management publicly stated on February 7 that deposits had increased relative to December 31, 2023, levels, which we view as a strong indication of the stability of NYCB’s deposit base. Sandro DiNello, who recently assumed an executive advisory role in addition to his seat on the board of directors, said, “overall, deposits are up from year-end 2023, as all areas of the company have performed strongly, including our private banking and mortgage teams. The press release we sent out last night tells the story of how resilient our deposits have been. While we are already in a strong liquidity position, again, as set forth in last night’s press release, we are committed to building liquidity further.”
What’s your perspective on the change in executives?
In the past two months there have been three executive changes: the appointment of a new Chief Risk Officer, the appointment of a new Chief Audit Executive, and the change in the designation of Sandro DiNello from Non-Executive Chairman to Executive Chairman. Mr. DiNello joined NYCB’s board as part of the merger with Flagstar Bank. We view Mr. DiNello’s designation change as a positive approach to bring additional experience and depth to NYCB’s management team in order to bolster compliance with more stringent regulatory requirements.
What do you think about the sell-off in the stock after the earnings announcement?
Frenetic selling has led to a decline in the price by 52% this year (through February 16). The sell-off started after the January 31 earnings release (which included the announcement of a $552 million loss provision, $185 in charge-offs, a net loss during the quarter, and a dividend reduction), and continued through a barrage of downgrades by the investment community (including Moody’s downgrading NYCB’s long-term debt ratings to non-investment grade status on February 6).
We believe the selling was an extreme overreaction. There are reasons to believe NYCB’s commercial real estate and multifamily portfolios are under stress, but we believe this stress was largely identified and addressed through management’s recent actions.
Satendar, how does the news affect your view of NYCB’s valuation?
We continue to believe the fundamentals of the company are sound, and the current market valuation is significantly discounted relative to our appraised value in a normalized environment. We will continue to monitor the company and ongoing developments in commercial loan defaults, as well as regulatory developments affecting the structure of NYCB’s balance sheet and core operations, but remain optimistic.