Office loans are the snag in a strong quarter for New York Community

Emily Elconin/Bloomberg

Net interest income at New York Community Bancorp proved to be a pleasant surprise in the third quarter, but the celebration was at least partly dampened by a hefty uptick in souring loans.

On the plus side, net interest income totaled $882 million, topping analysts' expectations and contributing to a net interest margin of 3.27%. That was up six basis points from the prior quarter and well above the 2.95% to 3.05% range the bank forecasted in July.

Less happily, nonperforming loans at the Hicksville, New York, parent of Flagstar Bank totaled $392 million, up 68% from the prior period. Executives blamed the credit deterioration on two office loans totaling $124 million — one on a building in New York City and another on a pair of office towers in Syracuse, New York — that were moved into "nonperforming loan" status.

The $111.2 billion-asset company reported a $62 million provision for credit losses, up from $49 million in the second quarter.

Despite the unfavorable credit migration, the company's asset quality remains strong, CEO Thomas Cangemi assured investors Thursday during the company's earnings call.

Nonperforming loans represent 0.47% of total loans, up from 0.28% during the second quarter, and net charge-offs were $24 million, "a mere 3 basis points of average loans," Cangemi said.

"Our asset-quality metrics remain solid and continue to rank among the best relative to the industry and our peers," Cangemi told analysts. "These strong metrics reflect our conservative underwriting standards, which have served us well over multiple business cycles."

Observers keep looking for signs of stress in the office real estate sector at New York Community and across the industry. Of New York Community's $13.4 billion portfolio of commercial real estate loans, $3.4 billion, or 25%, are office-related loans, the company said. 

In total, New York Community's loan book is $84 billion. Multifamily loans, which have long been the company's bread-and-butter product, make up nearly 45% of the loan book, while commercial-and-industrial loans account for about 29%.

While the call elicited questions about the state of New York Community's office loan portfolio, some analysts were upbeat about the bigger picture.

With nonperforming loans at just 47 basis points of total loans, that's "a comparatively good level," said Mark Fitzgibbon, an analyst at Piper Sandler. In addition, the company's delinquencies in the 30- to 89-day range fell by about 50% from the previous quarter, he noted.

Cangemi became CEO in late 2020, and during his tenure New York Community has been focused on diversifying its lending portfolio. Part of the strategy is to push more relationship banking, which means that loans are generally made only if the relationship includes deposits.

Cangemi reiterated the strategy Thursday, saying it's a huge part of the company's evolution from a traditional thrift institution to a full-fledged commercial bank. Aiding in the transformation is the December 2022 acquisition of Troy, Michigan-based Flagstar Bank, a major player in the mortgage lending and warehouse space, and the government-assisted March 2023 acquisition of New York City-based Signature Bank, which was one of three banks to fail this spring due to liquidity problems.

"We're proud of the opportunity to diversify our lines and focus on deposit-relationship lending," Cangemi said. "If there's no deposit relationship, we're probably not going to make the loan."

The Flagstar systems conversion is scheduled to take place in the first quarter of 2024, and the Signature Bank conversion will follow, Chief Financial Officer John Pinto said on the call. Both conversions should lead to cost savings, he added.

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For the quarter, New York Community's noninterest expenses totaled $712 million, up 8% from the prior quarter, partly due to the recent cost of adding private banking teams.

In addition to former Signature employees, New York Community has picked up teams from the failed First Republic Bank. Eric Howell, a former president and chief operating officer at Signature who is now a senior executive at New York Community, said that the company has hired 59 group directors and 105 support staff personnel from First Republic.

"There was tremendous opportunity over the last couple of quarters to hire," Howell said. "I mean, this is truly a tremendous opportunity to fill a massive void in the marketplace for service-oriented institutions, and we're really happy with the talent that we brought on board."

Full-year noninterest expenses are expected to be about $2 billion-$2.1 billion, excluding merger-related costs, which is in line with the previous projection, the company said.

New York Community reported third-quarter adjusted net income of $274 million, excluding merger-related and restructuring charges, and earnings per share of 36 cents. That beat the average estimate of 33 cents per share from analysts surveyed by FactSet Research Systems.

Total deposits of $82.7 billion were down 7% from the previous quarter, reflecting an anticipated decline in custodial deposits related to the Signature acquisition. Such deposits now total about $2 billion, and executives say the majority of them should run off in coming weeks.

The company's stock price closed down 2.3% on Thursday.