New York Community Bancorp Inc. expects elevated loan loss provisions and charge-offs through the rest of 2024 following a deep dive review of its commercial real estate loan portfolio.
The company conducted a deep dive analysis of credit quality in its commercial real estate (CRE) book including 75% of its $3.1 billion in office loans, 36% of of its $36.9 billion in multifamily loans, and 24% of $7.4 billion in non-office CRE loans during the first quarter, CFO Craig Gifford said during the company's first-quarter earnings call.
Following that, the company upped its total allowance for credit losses to $1.29 billion, or 1.56% of its loan book, from $1.05 billion, or 1.23% of its loan book, at Dec. 31, 2023. That included a 1.3% allowance for multifamily losses, a 10.3% allowance for office losses and a 1.52% allowance for non-office CRE losses.
While the company took a smaller provision for credit losses in the quarter of $315 million compared to $552 million in the linked quarter, it guided for high provisions throughout the remainder of 2024, Gifford said.
"We do expect to see an elevated level of provisioning through the rest of the year as market conditions potentially impact more borrowers," Gifford said. "Until the rate curve comes down ... there will be additional stress."
The company forecasts a total provision of $750 million to $800 million in 2024.
Given the stress in the sector, New York Community is looking to reduce its CRE exposure.
The company's total CRE loans are currently about $47 billion, and it hopes to reduce the total to $30 billion over the next three to five years. Office is the first place it plans to pare back.
"From a risk perspective, it would be our desire to reduce our exposure in the office marketplace," President and CEO Joseph Otting said during the call. "Clearly, the stress there, I think there's been a fundamental change in how people are going to work and what space is going to be used in the future. It's difficult to see the end on office."
To reach that $30 billion CRE target, it would also need to reduce its multifamily book. However, the company is less concerned about that book because "the portfolio has held up very well from the standpoint of the borrowers continue to make payments," Otting said.
Problems in multifamily have arisen from rising expenses, Otting said.
"You buy a new HVAC system, it's 30% or 40% higher than what it was 2 years ago, hiring people to do work on site, interest rate resets, just a lot of negative consequences on the expense side," Otting said.
Some credit quality cracks began to show in the quarter, with total nonperforming loans increasing sequentially to $798 million from $428 million, according to a company filing. Most of the charge-offs in the first quarter came from "a couple of office loans," Gifford said.
"The investors chose to come to us and we had to take over the property," the CFO said. We "believe that a loss is likely."
Meanwhile, net charge-offs declined quarter over quarter to $81 million from $185 million in the previous quarter, but the company expects that to increase as the year goes on.
"We'll see a ramping of charge-offs over the next couple of quarters," Gifford said. "As we get out beyond that, whether it's a charge-off or reserve build, we think it will come back to a more normalized run rate credit loss."
