Morningstar DBRS Downgrades New York Community Bancorp, Inc. to BBB; Negative Trend

DBRS, Inc. (Morningstar DBRS) downgraded the credit ratings of New York Community Bancorp, Inc. (NYCB or the Company), including the Company’s Long-Term Issuer Rating to BBB from BBB (high) and the Short-Term Issuer Rating to R-2 (high) from R-1 (low). Morningstar DBRS also downgraded the long term credit ratings of its primary banking subsidiary, Flagstar Bank, N.A. (the Bank), to BBB (high) from A (low), while confirming its short-term credit ratings at R-1 (low). The trend for all credit ratings are Negative. The Intrinsic Assessment (IA) for the Bank is BBB (high), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY CREDIT RATING CONSIDERATIONS

The credit ratings downgrade and Negative trend follows disappointing 4Q23 results, including a significant reserve build that rattled investor confidence given NYCB’s outsized commercial real estate concentration relative to most banking peers, an asset class that is under significant pressure. Additionally, the Company took further steps to better align itself with its large regional bank peer group, including building on balance sheet liquidity and cutting its common stock dividend to enable it to build capital levels. The Company is also facing challenges of meeting the higher regulatory bar that comes with being a Schedule IV bank (over $100 billion in assets), while at the same time fully integrating the Flagstar Bancorp (Flagstar) merger and certain assets and liabilities of Signature Bridge Bank that it acquired from the FDIC. Lastly, NYCB has questions regarding the robustness of its risk management framework following the recent departures of its Chief Risk Officer and Chief Audit Officer, albeit the Company noted that announcements to fill these key roles are imminent and interim management is in place.

At $37.3 billion, liquidity appears sufficient, but given the bank failures last spring, we remain cautious given that the adverse headline risk, including a significant decline in NYCB’s stock price, could eventually spook customer and depositor confidence. To date and despite all of the negative headlines, deposit balances have increased since year end and have been stable since the release of 4Q23 results. Against this backdrop, the Company still expects to remain profitable and build capital in 2024.

The credit ratings are supported by NYCB’s long track record of low loan losses that has outperformed peers through economic and interest rate cycles despite being heavily concentrated in commercial real estate, primarily rent-controlled multi-family buildings. While we acknowledge the considerable headwinds of higher interest rates and higher costs are having on these borrowers and the valuations of these properties, very conservative loan-to-values on most loans provide significant downside protection.

CREDIT RATING DRIVERS

Given the Negative trend, upward credit ratings pressure is unlikely. Morningstar DBRS would revise the trend back to Stable if NYCB is able to maintain deposit balances while remaining profitable.

Conversely, failure to show progress on Company initiatives, including building capital levels and reducing its CRE levels or missteps in managing operational and reputational risk that negatively impacts franchise strength would result in a credit ratings downgrade.

Additionally, the credit ratings would be downgraded if NYCB is unable to maintain deposit funding at a reasonable cost, or reports another outsized loan loss provision.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good / Moderate
NYCB is more diversified following the December 2022 merger with Flagstar Bancorp and acquisition of certain assets and liabilities from the former Signature Bank in March 2023. Over time, these acquisitions should help the Company further lower its CRE concentration given the additional business lines they added. Once primarily a leading producer of multi-family mortgage loans in New York City, with an emphasis on rent-regulated apartment buildings, the acquisitions have added C&I, mortgage warehouse lending, as well as residential mortgages and servicing. While these two sizeable acquisitions have helped with diversification, they have pushed NYCB into a Category IV bank that comes with more stringent regulatory requirements. Overall, the retail bank operates over 400 branches in 12 states.

Earnings Combined Building Block (BB) Assessment: Good
NYCB reported an unexpected large net loss for 4Q23 of $252 million, which included merger related items and the FDIC special assessment. While those expenses are one-time in nature, NYCB also had a significantly higher provision for credit losses to build reserve levels to those closer to peers and to reflect repricing risk in multi-family loans and deterioration in the office sector.

While the quarter resulted in a net loss, we note that earlier in the year, NYCB benefited from a $2.15 billion bargain purchase gain when it completed the purchase of certain Signature Bank assets and liabilities from the FDIC. As a result, reported FY23 net income increased significantly to $2.37 billion from $650 million in FY23. With the Company likely facing higher funding costs and the need to invest in risk management, while building liquidity and capital to meet tougher regulatory thresholds, earnings are likely to remain pressured. Nonetheless, we expect the Company to generate earnings in 2024 and build capital as long as funding remains resilient.

Risk Combined Building Block (BB) Assessment: Good / Moderate
NYCB’s has an high exposure to CRE and multi-family loans. The multi-family loan portfolio is focused primarily on rent-controlled/stabilized multi-family buildings in New York City, operating with consistent cash flows and low vacancies. This multi-family portfolio has exhibited very low, through-the-cycle credit costs, insulating the Company from periodic challenges in the New York rental market. As such, NYCB’s asset quality indicators remain sound, with nonperforming assets and net charge-offs remaining at low levels. Nonetheless, two large loans were written down in 4Q23 leading to higher than expected net charge-offs, but our view is that this is a one-off event and not indicative of losses to expect going forward.

Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate
NYCB has historically been somewhat reliant on wholesale funding, primarily FHLB advances secured by its loan portfolio, to fund the balance sheet. Additionally, the deposit mix was heavily tilted towards CDs and non-transaction accounts. As a result, NYCB’s cost of funds is higher than many peers. The combination with Flagstar with its large non-interest bearing escrow deposit balances, inherent with its mortgage servicing business, as well as the operating account deposits from Signature Bank helps to diversify and improve the funding profile. A challenge for NYCB will be to maintain and grow this deposit franchise at a reasonable cost in today’s volatile operating environment.

Capitalization Combined Building Block (BB) Assessment: Good / Moderate
NYCB’s capital levels are adequate, including a Common Equity Tier 1 ratio of 9.10% at December 31, 2023. The Company has slashed its common stock dividend in preparation of building capital towards a CET1 ratio of 10% by YE24.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/427907/.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Governance (G) Factors
The Governance factor(s) had a significant effect on the credit analysis:
The Governance factor is significant to NYCB’s credit ratings and affected the credit ratings and trends assigned to the Company. There has been significant governance failures that could negatively affect the issuer's financial wellbeing or reputation The role of Chief Risk Officer and Chief Audit Officer, key oversight positions, were vacated earlier although the Company indicated that new hires are in the works. The absence of these positions as the Company is transitioning to greater regulatory requirements as well as the unexpected quarterly loss on a reserve build, could result in reputational risk, customer attrition, loss of market share, and impaired financial performance. As a result, this factor is incorporated into NYCB’s Risk Management grid grades.

There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (January 23, 2024).

Morningstar DBRS notes that this press release was amended on July 8, 2024, to incorporate the disclosure for primary sources of information.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organizations: https://dbrs.morningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (June 22, 2023). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (January 23, 2024) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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