New York Community Bancorp Reports Larger-than-Expected Q2 Loss Amid Asset Sales and Rising Provisions

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New York Community Bancorp (NYCB) reported a disappointing second-quarter loss that exceeded Wall Street’s expectations, as the bank increased its provisions to cover potential losses from its office and multi-family loan portfolios. The negative results led to an 11% drop in the bank’s shares, undoing recent gains following an investment from former Treasury Secretary Steven Mnuchin and a commitment to return to profitability in the coming year.

Despite efforts to bolster its position, including the sale of Flagstar Bank’s residential mortgage servicing business for $1.4 billion and plans to offload an additional $2 billion to $5 billion in loans, investor confidence remained shaken. The stock has suffered significantly since a surprise loss and dividend cut in January, with nearly two-thirds of its market value evaporating.

NYCB’s stock has become one of the worst performers in the S&P 400 mid-cap index this year, largely due to concerns over its exposure to New York’s rent-regulated multi-family properties and the impact of remote working on office loan performance. The bank’s provisions for credit losses soared to $390 million for the quarter, surpassing the estimated $210.1 million, according to LSEG data. Analysts have indicated that additional provisions might be necessary as the bank continues to review its loan portfolio, with Jefferies analyst Casey Haire highlighting the $11 billion in commercial real estate loans yet to be assessed.

The bank’s revised forecasts suggest that its recovery could take longer than anticipated. NYCB now projects losses for the year to range between $2.20 and $2.30 per share, a significant increase from its previous estimate of 50 to 55 cents per share. For the three months ended June 30, the bank reported an adjusted loss of $1.05 per share, compared to an expected loss of 42 cents.

Deposits grew by 5.6% from the previous quarter, but at a higher cost. J.P. Morgan’s Steven Alexopoulos noted that the bank’s efforts to attract deposits through promotional campaigns led to higher interest expenses than anticipated.

In a bid to strengthen its financial position, NYCB is offloading non-core assets. The sale of Flagstar’s mortgage servicing unit is expected to enhance the bank’s capital and reduce its exposure to interest rate volatility. CEO Joseph Otting acknowledged the risk associated with the mortgage servicing business and emphasized that the sale aligns with the bank’s strategy to focus on commercial and industrial lending. The transaction, set to close in the fourth quarter, will also facilitate the bank’s recent move to offload a portion of its loans to JPMorgan Chase.

The sale will reduce NYCB’s interest-earning assets to approximately $104 billion by year-end, down from $113.2 billion in June, though this figure will still exceed $100 billion, attracting increased regulatory scrutiny and capital requirements.