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New York Community Bank’s Nosedive Has Regional Banks on Shaky Ground

The bank’s shares plunged after it announced it set aside a huge reserve for future loan defaults.

Photo of New York Community Bank building
Photo by Tdorante10 via CC BY-SA 4.0

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No good deed goes unpunished.

Shares of New York Community Bank plunged 37% on Wednesday after the company posted an unexpected fourth-quarter loss and cut its dividend by about 80% to shore up capital. The news sent tremors throughout the regional bank sector, knocking the KBW Regional Banking Index down 6%.

Commercial Crunch

An ironic part of Wednesday’s fallout for “small” banks is that New York Community has left them behind, which is part of the problem. Welcome to the big leagues, NYCB. After stepping in to buy the assets of collapsed Signature Bank last year, New York Community’s own assets crossed the unofficial “large bank” threshold of $100 billion, and CEO Thomas Cangemi was quick to point out that its new status had subjected the company to increased demands, such as “enhanced prudential standards, including risk-based and leverage capital requirements, liquidity standards,” and more.

But becoming a bigger bank doesn’t entirely explain the swing to a quarterly loss of $252 million:

  • A report in American Banker noted that the company cited “weakness in the office sector,” including charging off two large real-estate loans, one on an office building and the other on a multifamily property. It also boosted its reserve for loan losses, which doesn’t necessarily suggest the company sees defaults becoming more rare.
  • The bank slashed its dividend to 5 cents a share from 17 cents a share. RBC Capital markets analyst Jon Arfstrom referred to the cut as “highly unusual,” because there was little prior warning for investors.

Borrowers have had difficulties refinancing commercial real estate loans as property values have fallen while interest rates remain historically high. That’s not great news for regional or smaller lenders, which hold 70% of CRE loans, according to Citigroup research.

Help Line Disconnected: This new shot to regional bank resilience comes as the Federal Reserve offered a virtual “all-clear” signal last week, announcing that its Bank Term Funding Program, a pipeline created last year in the wake of Silicon Valley Bank’s collapse, would wind up as scheduled on March 11. While the program had become something of a deposit-arbitrage play for banks that weren’t in dire straits, removing this backstop could hit smaller banks with more at risk if commercial real estate goes south.