Investor Thomas Kahn believes that the significant decline in New York Community Bancorp (NYCB) shares, which resulted from a 60% cut in dividends, could have been avoided if not for the actions of bank regulators. Kahn, who runs Kahn Brothers, a reputable New York investment firm founded by his father Irving Kahn, a renowned value investor and protégé of Benjamin Graham, has long-held substantial holdings in NYCB. As of September's filing, the firm owned $71 million worth of NYCB stock, representing nearly 1% of the total shares.
Kahn emphasizes the importance of confidence in the banking industry and criticizes regulators for undermining the trust of both the investment community and bank customers. He suggests that regulators, particularly those from the U.S. Treasury Department's Office of the Comptroller of the Currency (OCC), should have allowed NYCB more time to strengthen its capital instead of resorting to drastic measures like cutting dividends, which would inevitably cause panic in the market.
Although NYCB did not explicitly state that regulatory pressure influenced their decision to reduce dividends, they refrained from addressing questions concerning their interactions with regulators. The OCC declined to comment on specific banks or supervisory activities.
Following NYCB's announcement of a 70% dividend reduction and a substantial increase in loan loss provisions on January 31, the value of NYCB stock, including Kahn Brothers' holdings, has plummeted. This decline was exacerbated by NYCB's acquisition of Flagstar Bank and assets from the failed Signature Bank in 2023, which subjected them to stricter regulations as a result of their assets surpassing $100 billion.
Since the dividend-cut news, NYCB stock has dropped from $10.38 to $4.18 and experienced a further 7% decrease in Thursday's trading.
NYCB's Conservative Approach to Real Estate Loans
Kahn Brothers analysts recently had a productive discussion with NYCB following the news on January 31st. They ascertained that NYCB's book of commercial real estate loans remained stable, particularly with regard to their loans on rent-regulated apartment buildings, which accounted for almost half of their portfolio.
According to Kahn, the little old ladies living in rent-regulated apartments in Queens will continue to pay their rent without issue. This confidence in NYCB's borrowers reflects the bank's conservative lending practices.
NYCB had initially anticipated that regulators would grant them a year or more to boost their capital levels to match those of larger banks, following their acquisition of Signature loans. However, regulators demanded immediate action, leading NYCB to drastically reduce its dividend and surprise Wall Street.
Kahn suggests that the Office of the Comptroller of the Currency (OCC) should have foreseen the negative public reaction to this forced move. He goes as far as to call the regulator's decision "foolish" at best and "really, really stupid" at worst.
Despite this setback, Kahn is confident in the bank's leadership. He believes that NYCB's chief executive, Tom Cangemi, has skillfully guided the institution thus far. Additionally, board Chairman Sandro DiNello, who successfully turned around a troubled bank called Flagstar in the past, has now taken charge of steering NYCB through these challenging times.
Kahn Brothers maintains a significant position in NYCB and plans to increase their holdings in certain accounts. The stock is currently selling at just 40% of the bank's tangible book value per share. Kahn predicts that without this recent scare, the stock should command a price ranging from $10 to $15 per share.
In summary, NYCB's conservative lending approach, combined with capable leadership, positions the bank for future success. Despite the regulator's unexpected demands, Kahn Brothers remains bullish on NYCB and considers it a strong buying opportunity.
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