NYCB posts bigger loss than expected on exposure to office real estate

By Niket Nishant and Manya Saini

(Reuters) -New York Community Bancorp reported second-quarter loss that was worse than Wall Street's expectations on Thursday, as it set aside more money to cover potential losses from its office and multi-family loan book.

Its shares fell 11% as the downbeat results upset the poise that the lender had regained over the last few months after an investment from former Treasury Secretary Steven Mnuchin and a promise to return to profitability next year.

Investors shrugged off a move by the bank's unit, Flagstar Bank, to sell its residential mortgage servicing business for $1.4 billion and comment from CEO Joseph Otting that it was looking to sell another $2 billion to $5 billion of loans.

A stock rout since a surprise loss and dividend cut in January has wiped out nearly two-thirds of the bank's market value.

NYCB stock is the second worst performer in the S&P 400 mid-cap index this year as investors fret over its exposure to New York's rent-regulated multi-family properties - apartment buildings with more than four units.

Low occupancy due to the popularity of remote working has also pressured its office loans, especially as interest rates stay higher for longer.

Its provisions for credit losses in the quarter rose to $390 million, compared with the estimate of $210.1 million, according to LSEG.

Analysts said the bank may have to increase it further as it reviews its loan portfolio. "There are $11 billion of CRE loans that have yet to be reviewed, which will be critical to how much more reserve build is necessary," said Jefferies analyst Casey Haire.

The bank's updated forecasts on Thursday suggested its turnaround could take longer. Losses this year could range between $2.20 and $2.30 per share, it said, worse than its earlier forecast of 50 cents to 55 cents.

The bank lost $1.05 per share on an adjusted basis for the three months ended June 30 compared with expectations of a loss of 42 cents.

Deposits grew 5.6% from the first quarter, but were costlier.

"With the company seeing several teams depart prior to as well as during the quarter, it was active with promotional deposit campaigns which helped to support deposit balances but at the expense of interest expense coming in well above our projection," J.P. Morgan's Steven Alexopoulos said.

OFFLOADING NON-CORE BUSINESS

The sale of Flagstar's mortgage servicing unit would boost NYCB's capital and allow it to exit a business highly sensitive to interest-rate changes.

"While the mortgage servicing business has made significant contributions to the bank, we also recognize the inherent financial and operational risk in a volatile interest rate environment," Otting said.

It would also help fund the bank's expansion into commercial and industrial lending, and comes days after it offloaded a chunk of loans to JPMorgan Chase as part of a pledge to sell some of its non-core assets.

Non-bank mortgage platform Mr Cooper will buy the business. The deal is expected to close in the fourth quarter.

The sale would help NYCB's interest-earning assets drop to around $104 billion at the end of the year, compared to $113.2 billion in June, Otting said.

But they would still be higher than $100 billion, which invites significantly more regulatory scrutiny and capital requirements.

(Reporting by Niket Nishant and Manya Saini in Bengaluru; Editing by Arun Koyyur)