New York Community Bancorp's (NYCB -3.26%) stock price plummeted 38% following its earnings announcement on Jan. 31, the most significant decline by the stock ever. The bank reported an unexpected loss for the fourth quarter, catching investors off guard.
New York Community Bancorp took significant charge-offs relating to a couple of loans in its portfolio and is working to rebuild its capital following its acquisition of Flagstar Bancorp. The stock hit its lowest price since the regional banking crisis impacted banks last March. Here's what investors need to know.
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Two loans resulted in a surprise loss for New York Community Bancorp
New York Community Bancorp is the parent company of New York Community Bank and Flagstar Bank, and its $111 billion in assets make it the 28th-largest bank in the U.S.
In recent years, New York Community Bancorp has moved to expand its footprint, adding Flagstar Bank and its $88 billion in assets and $58 billion in deposits in 2022. Last year, when Signature Bank went under, New York Community Bancorp acquired another $34 billion in deposits and $13 billion in loans, which looked like a sweet deal then.
Things were looking good for the bank, and the stock surged 85% from its regional banking crisis low from last March. However, investors were stunned after the company reported a Q4 loss of $0.36 per share when Wall Street expected a $0.28-per-share profit.
The big loss for New York Community Bancorp resulted from net charge-offs in the fourth quarter of $185 million, compared to $24 million in Q3. This big jump in net charge-offs was primarily due to two loans.
The first was a co-op loan with "a unique feature that pre-funded capital expenditures," according to the bank. While the loan wasn't in default, New York Community Bancorp transferred it to held for sale, so the charge-off hit its books in Q4. The bank expects to sell this loan in the first quarter and said it didn't find similar characteristics in its other co-op loans.
The second loan charge-off was an office loan that was non-accrual in the third quarter. The company said, "Given the impact of recent credit deterioration within the office portfolio, we determined it prudent to increase the allowance for credit losses coverage ratio." It recorded a $552 million provision for credit losses in Q4, up from $62 million in Q3.
The bank slashed its dividend to build capital
New York Community Bancorp is also building up its capital ratios. After acquiring Flagstar Bank and Signature Bank, the company has over $100 billion in total assets, making it a Category IV bank subject to more stringent capital requirements. These banks must meet specific risk-based and leverage capital requirements and liquidity standards while facing stress tests. In its earnings release, the company stated that it "crossed this important threshold sooner than anticipated."
As a result, New York Community Bancorp took steps to boost its capital. One move that likely irked investors was the bank slashing its quarterly dividend by 71%, from $0.17 to $0.05 per share, which came amid pressure from a top U.S. watchdog, according to anonymous sources cited by Bloomberg. In addition to cutting its dividend, the company also announced guidance for lower earnings during the year, and analysts cut their annual EPS forecast by 33% to $0.88 per share.
New York Community Bancorp is a cheap stock, but its risks shouldn't be ignored
The moves by New York Community Bancorp are painful but necessary for the bank to meet more stringent capital requirements. However, its profitability in the near term will be lower, and many expect it could take years for the bank to build up its capital to the necessary levels.
The company's situation is a reminder of the lingering effects of the Federal Reserve's higher interest rate policies. While credit has held up so far, concerns surround the commercial real estate market, and these loans make up a significant portion of New York Community Bancorp's loan investments.
The bank is also dealing with the reaction from its surprising loss. On Monday, Moody's cut its credit rating on the bank's long-term ratings to Ba2 from Baa3, which is junk status. Moody's cited "high governance risks" as the bank looks to fill the roles of chief risk officer and chief audit executive after former executives left those roles in recent months. Bloomberg also reported that executives for the bank had held talks with officials at the government's Office of the Comptroller of the Currency (OCC), a branch of the Department of the Treasury.
NYCB Price to Tangible Book Value data by YCharts
Today, New York Community Bancorp trades at a 47% discount to its tangible book value and well below its five-year average of a 31% premium to TBV. This sharp discount may appeal to investors looking for bargains, but it reflects the near-term uncertainty surrounding the bank.
There is still a lot the bank must do to rebuild its capital, and the worst thing that could happen here is a loss of confidence among customers who pull deposits. The bank noted that 72% of its deposits are FDIC-insured and that it has enough liquidity to cover any uninsured deposits.
Value investors looking to buy shares on the cheap should do it with eyes wide open and not risk more than they're willing to lose. Other investors are best left waiting for the dust to settle before deciding whether to scoop up shares of the bank stock.
