Shares of New York Community Bank (NYCB 1.41%) dropped 68.6% in the first six months of the year, according to data provided by S&P Global Market Intelligence. The bank slashed its dividend in response to a host of issues, and macroeconomic conditions are fueling investor skepticism about its prospects.
Slashing the dividend after struggling to manage acquisitions
NYCB had a rough first quarter. The company acquired Flagstar Bank and Signature Bank in 2023 with the goal of opportunistically expanding options and extending into commercial lending. Those moves presented risk along with opportunity, so investors have been closely monitoring commentary on the topic to see how things are progressing. Things took an ugly turn when NYCB reported its fourth-quarter financial results in January.
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The company's adjusted net income fell nearly 30% from the prior year. Wall Street expected generally accepted accounting principles (GAAP) earnings per share of $0.27, but the bank posted a concerning $0.36 loss. It also slashed its quarterly dividend from $0.17 to $0.05. Regional banks generally aren't growth stocks, so the dividend is a core driver of the stock's valuation. The cut was a major blow to the share price.
Disappointing headline figures were evidence of larger issues facing NYCB. Its balance sheet swelled following the 2023 acquisitions, pushing its total assets above $100 billion. That's a noteworthy threshold because it makes NYCB a Category IV bank, which means it receives extra scrutiny from regulators. Larger banks pose risks to the economy if they fail, so they need sufficient capital to cover unexpected losses. NYCB's capital ratios are lower than the peer group average, so its decision to reduce its dividend is an effort to align its balance sheet with similar banks.
Macroeconomic pressures aren't going away
The dividend is a major issue, but investor concerns were magnified by additional worrisome data in the quarterly report.
There were significant increases in its allowance for credit losses and charge-offs. These noncash expenses reflect a decreased likelihood of receiving payment on a small percentage of total loans outstanding. NYCB is much more exposed to commercial loans following the 2023 acquisitions, and investors are highly skeptical of the commercial real estate market. Office vacancy rates are high, and average rents are falling steeply in numerous major cities. Building owners may struggle to collect rents as previously forecast, impacting their ability to service loans. That would put a strain on the banks holding those loans. NYCB's fourth-quarter results indicated that these processes were already having negative effects, triggering the rapid sell-off.
The pain continued from there. The stock dropped nearly 50% further through February and March, extending the earnings-driven loss. Interest rates have been higher than expected as the Fed works to curb stubbornly high inflation. Office vacancies keep rising while rent prices fall, so the prospects for real estate owners and their lenders aren't improving.
NYCB's first-quarter earnings report came out on May 1 with moderately encouraging signs. The bank brought in a new executive management team and raised more than $1 billion through the issuance of new shares. This improved its liquidity position and capital ratios, but it drove significant dilution for existing shareholders. The bank's non-performing loans and allowance for credit losses increased once again in the first quarter, but that was better aligned with investor expectations following the disastrous quarterly report in January.
The stock was essentially flat from the start of April to the end of June. Its price-to-book ratio is down to 0.34. There's not imminent risk of NYCB failing, but the situation is challenging and will remain that way for a while. Catastrophic risk is on the table if commercial real estate deteriorates further. The stock's valuation clearly reflects that distress.
