Morningstar DBRS Downgrades New York Community Bancorp, Inc.’s LT Issuer Rating to BBB (low); Trend Now Stable

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 (low) from BBB and the Short-Term Issuer Rating to R-2 (mid) from R-2 (high). Morningstar DBRS also downgraded the long term credit ratings of its primary banking subsidiary, Flagstar Bank, N.A. (the Bank), to BBB from BBB (high) and short-term credit ratings to R-2 (high) from R-1 (low). The trend for all credit ratings is now Stable. The Intrinsic Assessment (IA) for the Bank is BBB, 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 downgrade reflects our expectations that NYCB’s earnings will remain pressured over the near-term, as the Company continues its transformation to a more-diversified regional bank, and less commensurate with BBB-rated peers.

The recently announced management change and capital raise from high-profile and experienced investors should help restore confidence in the Company after a string of unexpected adverse announcements, including the large 4Q23 loss that raised uncertainty around the future of the Company. We note that the credit ratings downgrade would have been more severe absent the capital raise.

After completing two acquisitions in short-order and jumping over the $100 billion regulatory threshold as a Category IV bank, NYCB remains a work in progress and the Company needs to develop and deliver on a business plan, and make other investments to fulfill heightened regulatory requirements, which will take time. We view these needed investments, along with the costs of holding extra liquidity, paying higher rates for funding, and the potential for higher loan loss provisioning as pressuring earnings over the near term. Additionally, the Company needs to enhance its risk management infrastructure and complete remediation efforts to satisfy the material weakness in its internal controls. The recent hiring of a permanent Chief Risk Officer and Chief Audit Officer is a step forward in that process.

Additionally, NYCB’s outsized commercial real estate concentration, relative to most banking peers, remains a concern. While NYCB has a long track record of low loan losses through various economic and interest rate cycles, considerable headwinds of higher interest rates and higher costs are adversely impacting these borrowers and the valuations of these properties, including unfavorable rent regulations for some NY property owners.

The Stable trend reflects our view that the sizeable $1.05 billion capital infusion from key investors sets the Company on solid footing, providing flexibility to transform the business model while incurring higher expenses and loan loss provisioning, if needed.

CREDIT RATING DRIVERS

Morningstar DBRS would upgrade the credit ratings if NYCB is able to show progress delivering on the Company’s initiatives, including reducing its CRE concentration, improving the level and quality of the deposit base, and reporting consistent profitability in-line with higher rated peers.

Conversely, an inability to execute on the Company's initiatives at a reasonable cost, especially reducing its CRE concentration, or missteps in risk that negatively impact the franchise strength would result in a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: 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. 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 and the Company remains over-weight CRE. We view favorably the recent addition of Joseph Otting as CEO and a reconstituted board to help NYCB transition to a more-highly diversified regional bank. Overall, the retail bank operates over 400 branches in 12 states, has 134 private client banking teams with offices in 10 cities, and is the 7th largest bank originator of residential mortgages.

Earnings Combined Building Block (BB) Assessment: Good / Moderate
NYCB reported an unexpected large net loss for 4Q23 of $252 million that was subsequently made materially larger following a $2.4 billion goodwill write-down, as well as some other smaller items. With the Company likely facing higher funding costs and the need to invest in risk management, and holding higher levels of liquidity, earnings are likely to remain pressured. Nonetheless, we expect the Company to generate earnings in 2024 and build capital.

Risk Combined Building Block (BB) Assessment: Good / Moderate
NYCB’s has a 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. However, higher interest rates and operating costs are likely to pressure borrowers. The Company also needs to address the material weakness in its loan review process, enhancing its focus on credit risk management. Recent hires of a Chief Risk Officer and Chef Auditor should help rectify identified weakness in this area.

Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate
NYCB has historically been somewhat reliant on wholesale funding, with a loan to deposit ratio of approximately 110%. As a result, NYCB’s cost of funds is higher than many peers. The combination with Flagstar with its 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. Deposits remain an area that the Company’s needs to grow to get its loan to deposit ratio more in-line with peers. During this recent period of increased scrutiny, deposit balances did decline from year-end totals, but proved much more resilient and sticky than anticipated given the negative news the Company has experienced. Overall, the Company was able to reduce the uninsured portion of deposits to 20% from approximately one-third as of YE23.

Capitalization Combined Building Block (BB) Assessment: Good / Moderate
NYCB’s capital levels are improving significantly following the capital raise, including a pro forma CET1 ratio of approximately 10.3% up about 120 basis points from 9.10% at YE23, and meeting its previous YE24 target of 10%. The Company has also further cut its dividend to $0.01 per share, which will help it retain more capital going forward. The improved capital cushion should give the Company much greater flexibility to restructure its balance sheet and absorb higher credit losses.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/429098.

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 have been significant governance failures that could negatively affect the issuer's financial wellbeing or reputation. The Company recently reported a material weakness in internal controls related to its internal loan review. The challenge of 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 and Franchise 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 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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