Does New York Community Bancorp have another surprise in store for investors?

One reason might be that its level of loan-loss reserve coverage remains light, according to Wedbush analyst David Chiaverini.

Before looking at some bank data, let’s get a few definitions out of the way.

• A bank’s provision for credit losses is the amount of money it adds to its loan-loss reserves. This affects pretax earnings directly.
• A bank’s loan-loss reserves can also be called its allowance for credit losses, or ACL. This is a balance-sheet item — a contra asset that declines as problem loans are charged off.

New York Community Bancorp’s NYCB fourth-quarter provision for credit losses came in at $552 million, compared with $62 million in the previous quarter and $124 million in the fourth quarter of 2022. The increased provision was tied to losses on two loans. One was a multifamily-mortgage loan that was written down as the bank transferred it to held-for-sale when it determined that “unique” credit aspects of the current loan were unfavorable. The other was an office-building loan that was charged off “based on an updated valuation.”

The bank determined that because of “recent credit deterioration” within its portfolio of office-building loans, it would increase its ACL coverage ratio.

Read: Banks’ office-loan exposure remains a ‘mixed bag’ as lenders manage through downturn

These actions by New York Community Bancorp underscore that it can be difficult for investors or analysts to predict an increase in nonperforming commercial real estate loans or loans secured by large residential buildings. For some loan types, such as credit-card loans or mortgage loans for one- to four-family residences, banks will report delinquent credits as past due 30 to 89 days, or past due 90+ days or nonaccrual — which means the lender expects to charge off the loan and book a loss.

But for problem loans such as the two at NYCB, there is a tendency to go straight to nonaccrual or even a charge off.

Growing pains for a larger bank

One reason NYCB is taking pains to increase its level of capital is that it is subject to a higher level of regulatory requirements following its acquisition of Flagstar Bank of Troy, Mich., in December 2022 and of deposits and loans from the failed Signature Bank of New York in March 2023. NYCB had $116 billion in total assets as of Dec. 31, placing it in the category of a Category IV bank. It will have to submit its first capital plan to the Federal Reserve in April.

During NYCB’s earnings call on Wednesday, CEO Thomas Cangemi said the bank had “pivoted quickly” to build capital, enhance its risk-management processes and build its reserves, “which brings our ACL coverage more in line with peer banks, including Category IV banks,” he said.

The dividend cut was an important part of the move to build capital. NYCB paid out $125 million in dividends on common shares during the third quarter.

A quick look at reserve coverage

In a note to clients on Wednesday, Wedbush analyst David Chiaverini reiterated his “underperform” rating for NYCB shares and wrote: “The company took a large loan-loss provision which increased its reserve/loan ratio to 1.17% (from 0.74%), but this reserve coverage remains below peers of 1.4%, despite NYCB having a higher-risk credit portfolio, in our view.”

Also read: NY Community Bancorp triggers worst bank stock drop since Silicon Valley Bank

Let’s look at the data to see where NYCB’s level of reserve coverage fits in. We began a screen with the 24 stocks in the KBW Nasdaq Bank Index , which is tracked by the Invesco KBW Bank exchange-traded fund and includes the largest U.S. banks. We added the 50 stocks in the KBW Nasdaq Regional Banking Index , which is tracked by the Invesco KBW Regional Banking ETF .

Publicly traded banks report their quarterly financial results to investors through filings with the Securities and Exchange Commission. Later they file uniform financial statements with regulators, which can be more detailed in certain areas than the SEC reports.

Some data on the makeup of banks’ loan portfolios as of Dec. 31 isn’t yet available in some of the SEC reports. So we began by looking at levels of concentrations for commercial and multifamily real-estate loans to the banks’ total assets as of Sept. 31, using regulatory data provided by FactSet.

Among the 74 banks, it turns out that the big four —JPMorgan Chase & Co. JPM, Bank of America Corp. BAC, Citigroup Inc. C and Wells Fargo & Co. WFC — had combined ratios of commercial real estate plus multifamily residential loans of 6% or less of total assets. So we excluded those from our data set, along with Goldman Sachs Group Inc. GS and Morgan Stanley MS, which each have exposure of only 1%. Then we excluded three large banks primarily focused on providing trust, asset-management and securities-custody services: Bank of New York Mellon Corp. BK, State Street Corp. STT of Boston and Northern Trust Corp. NTRS of Chicago.

Among the largest 20 remaining banks, ratios of loan-loss reserves to total loans were available as of Dec. 31, based on the preliminary SEC data, except for East West Bancorp Inc. of Pasadena, Calif., for which we included the Sept. 30 ratio, based on regulatory data. The table is sorted by Dec. 31 total assets and includes the Sept. 30 concentrations of commercial real estate plus multifamily loans to total assets:

Click the tickers for more about each bank, index or ETF.

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Among the 20 banks listed above, the average level of reserves to total loans was 1.59% as of Dec. 31, well above NYCB’s 1.17%. But we can exclude Capital One Financial Corp. COF, which had a low level of commercial real estate plus multifamily exposure, and had credit-card loans plus car loans making up 44% of total assets as of Sept. 31 — those loan types require a high level of reserves. Excluding Capital One brings the average for the remaining 19 banks down to 1.42% — still well above NYCB’s reserve coverage level.

During the earnings call, NYCB CEO Cangemi said the bank’s increase in loan-loss reserves reflected “the anticipation of office still having difficulties within the marketplace.”

John Pinto, NYCB’s chief financial officer, said he remained “very comfortable” with the quality of the bank’s multifamily portfolio.”

When Jefferies analyst Casey Haire said during the call that his calculations showed the bank would make “de minimis” provisions for credit losses during 2024 as it worked to increase its regulatory capital, Pinto said the fourth-quarter moves were made to cover “the emerging risks and the portfolio that we have currently.”

He added: “We are very comfortable with the early delinquencies that we’re seeing. And those trends have not dramatically jumped up.”

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