Real Estate

NYCB’s Surprise $2.7B Q4 Loss Rekindles Regional Bank Fears

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Worries about regional banks are flaring again this week after New York Community Bancorp (NYCB) disclosed that it lost $2.7 billion in the final three months of 2023, not $252 million as it had originally reported on Jan. 31.

Shares in NYCB, which in the last 12 months have traded for as little as $3.32 and as much as $14.22, plunged 26 percent Friday following a slew of surprising revelations in regulatory disclosures the bank filed after markets closed Thursday.

NYCB revealed that it had discovered “material weaknesses” in internal controls related to internal loan review, and was writing down $2.4 billion in goodwill from historical transactions dating back to 2007 and earlier. Companies must recognize goodwill impairments when they pay more than the book value for assets that later decline in value.

The bank also disclosed that President and CEO Thomas Cangemi had resigned his position as CEO on Feb. 23, although he continues to serve on the boards of the bank and its parent company. NYCB’s Chief Risk Officer Nick Munson and Chief Audit Officer Meagan Belfinger had previously left the company unannounced before earnings were released.

Cangemi, who spearheaded NYCB’s 2022 acquisition of Flagstar Bank, was replaced as CEO on Thursday by former Flagstar Bank President and CEO Sandro DiNello, who was appointed as executive chairman of the company’s board of directors on Feb. 7.

NYCB downplayed the impact of the $2.4 billion goodwill impairment, saying it did not dent the company’s cash reserves, and “has no impact on any of the company’s regulatory capital ratios” or the company’s compliance with covenants under any outstanding credit agreements.

“Over the last three weeks since being appointed as executive chairman, the company has taken swift action to improve all aspects of our operations,” DiNello said in announcing the hiring of a new chief risk officer, George F. Buchanan, and chief audit executive, Colleen McCullum.

Sandro DiNello

“The leadership team identified the material weaknesses disclosed yesterday and has been taking the necessary steps to address them, including appointing new executives,” DiNello said. “Our allowance for credit losses considered these weaknesses and is not expected to change. The company has strong liquidity and a solid deposit base, and I am confident we will execute on our turnaround plan to deliver increased shareholder value.”

But Raymond James director Steve Moss told The Wall Street Journal that it’s “particularly troubling” when companies disclose material weaknesses, as that language “creates a lot of risk and uncertainty.”

Investors fear that NYCB is not the only regional bank that could need fresh capital if the performance of loans they made to commercial developers continues to deteriorate. With office and retail vacancies remaining elevated in many markets after the pandemic, properties that served as collateral for loans can often be worth less than the outstanding balance on those loans.

Shares in Philadelphia-based Republic First Bancorp have been trading for just a penny this month, and a deal that would have provided more capital fell through Thursday after the bank disclosed it had discovered material weaknesses in its internal controls.

Impact on jumbo mortgage lending

Last year’s failures of Silicon Valley Bank, Signature Bank and First Republic Bank — largely driven by rising interest rates — put regional banks under heightened scrutiny by rating agencies. But NYCB saw Signature Bank’s failure as an opportunity to grow, with its Flagstar Bank subsidiary taking over Signature Bank’s retail branches in a $2.7 billion deal.

After the deal, NYCB had $116 billion assets — about the same size as Signature had been, but only half the size of Silicon Valley Bank and First Republic Bank, The Wall Street Journal reported. Republic First Bancorp has only $6 billion in assets, which limits the impact of its troubles.

Worries about the impact of falling commercial real estate values on regional banks are making jumbo mortgages costlier since regional banks have traditionally been leading providers of mortgages that exceed Fannie Mae and Freddie Mac’s $766,550 conforming loan limit.

Conforming, jumbo mortgage ‘spread’ widens

According to daily rate lock data tracked by the Optimal Blue Mortgage Market Indices, the “spread” between rates for jumbo and conforming mortgages widened after the Mar. 10, 2023 closure of Silicon Valley Bank — a trend that’s continued this year.

During January and February of 2023, Optimal Blue data shows the spread between jumbo and conforming mortgages averaged about 1 basis point (a basis point is one-hundredth of a percentage point).

At times in early 2023, rates on jumbo mortgages were lower than rates for conforming mortgages. But for the rest of the year, from March through December, the spread grew to an average of 19 basis points.

So far this year, through Feb. 29, the spread has widened to an average 42 basis points, at times exceeding half a percentage point.

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