At Inman Connect Las Vegas, July 30-Aug. 1 2024, the noise and misinformation will be banished, all your big questions will be answered, and new business opportunities will be revealed. Join us.

Wall Street investors are buying promises made by the new leadership of New York Community Bancorp that the company will return to profitability as soon as next year, but concerns remain about the impact of higher interest rates and commercial real estate loans on regional banks.

Shares in NYCB rebounded Wednesday even as the bank reported a $327 million first quarter net loss, as newly installed President and CEO Joseph Otting outlined plans to diversify its loan portfolio and work that’s been done to shore up the bank’s capital position, including the pending sale of $5 billion in assets.

Investment analysts were also encouraged that customers haven’t been rushing to withdraw funds — NYCB still had $74.9 billion in deposits as of March 31, down 8 percent from Dec. 31 and 12 percent from the same time a year ago.

All told, NYCB had $112.9 billion in assets at the end of the quarter, including $83.3 billion in loans, and total stockholders’ equity of $8.4 billion.

The performance of those loans remains a concern, with $264 million in nonperforming commercial real estate loans and $339 million in nonperforming multifamily loans on the books as of March 31, more than twice the level reported Dec. 31. All told, non-performing assets were up $369 million to $811 million.

“Since taking on the CEO role, my focus has been on transforming New York Community Bank into a high-performing, well-diversified regional bank,” Otting said in a statement Wednesday. “While this year will be a transitional year for the company, we have a clear path to profitability over the following two years.”

Otting said NYCB is on track to become profitable again in 2025 and achieve “peer level profitability” in 2026.

Shares in NYCB, which have traded for as little as $1.70 and as much as $14.22 in the last year, initially soared 37 percent after Wednesday’s earnings release, to $3.63, before giving up some of those gains.

“I know the past several months have been tumultuous and you have endured multiple challenges along the way,” Otting said. “Your dedication has been nothing short of amazing. My sincere thanks to each and every one of you.”

Shares in NYCB had briefly touched an all-time low on March 6 in the wake of the company’s disclosure that it had discovered “material weaknesses” in its internal controls that prompted a $2.4 billion writedown in goodwill from historical transactions.

But that day, a group of institutional investors announced a plan to inject $1 billion in capital into NYCB — and also install new leadership and revamp the company’s board of directors.

Otting — the administrator of the federal banking system during the Trump administration — was named CEO, becoming the third person to hold that title this year.

Former Flagstar Bank President and CEO Sandro DiNello, who was named CEO after longtime NYCB leader Thomas Cangemi resigned the position on Feb. 23, continues to serve as non-executive chairman.

NYCB added four new directors to its board as part of the deal, including Steven Mnuchin, Secretary of the Treasury during the Trump administration, Allen Puwalski of Hudson Bay Capital, and Milton Berlinski, managing partner of Reverence Capital.

Regional banks’ role in jumbo lending

New York Community Bancorp is the bank holding company for Flagstar Bank N.A., which operates 419 branches concentrated in the Northeast and Midwest with an additional presence in the Southeast and on the West Coast. Flagstar Mortgage, which operates nationally through a wholesale network of about 3,000 third-party mortgage originators, claims to be the 7th largest bank in the residential mortgage lending business.

For homebuyers, regional banks are an important source of “jumbo” mortgages that exceed Fannie Mae and Freddie Mac’s $766,550 conforming loan limit. But the “spread” between jumbo and conforming mortgage rates has widened as regional banks, stressed by rising interest rates and defaults on commercial loans, see their capital reserves dwindle.

While regional banks are often small, many play an outsized role in commercial and retail lending in their local markets. That’s put some regional banks under stress, as high vacancy rates in many markets have led more commercial and retail borrowers to default on their loans.

Higher interest rates have also forced banks of all sizes to write down the value of assets like government bonds and loans made when rates were lower.

Last year’s failures of Silicon Valley Bank, Signature Bank and First Republic Bank — largely driven by rising interest rates — put regional banks under heightened scrutiny by rating agencies.

On April 26, one of the regional banks under scrutiny — Philadelphia-based Republic First Bank (doing business as Republic Bank) — was closed by the Pennsylvania Department of Banking and Securities.

The Federal Deposit Insurance Corporation (FDIC) entered into an agreement with Lancaster, Pennsylvania-based Fulton Bank to purchase “substantially all” of the deposits and assets of Republic Bank for an undisclosed sum.

A recent analysis of 4,000 regional banks by consulting firm Klaros Group found 282 institutions, including NYCB, with potentially worrisome exposure to both commercial real estate and rising interest rates.

“Even among the more challenged banks, the problems seem tough but solvable,” Klaros Group co-founder and partner Brian Graham wrote. “A lot of incremental capital is required, through stand-alone capital raises for and, more likely for most, acquisitions by stronger, better-capitalized banks. Given how small the institutions in question are, consolidation would in no way reduce competition. So far at least, the number of failures we should expect, though greater than zero, is not that daunting.”

After NYCB acquired Flagstar Bancorp in a deal that closed in 2022, it merged its banking subsidiary, New York Community Bank, into Flagstar Bank N.A.

Last year, Flagstar Bank acquired 40 branch offices and substantially all of the deposits of Signature Bank from the FDIC for $2.7 billion, after the New York State Department of Financial Services closed the bank and appointed the FDIC as receiver.

On a call with investment analysts Wednesday, NYCB executives said one of their top priorities is to “fully integrate all three banks” — New York Community Bank, Flagstar and Signature — in order to create operational efficiencies. As of Dec. 31, NYCB employed 8,766 workers.

Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.

Email Matt Carter