Why NYCB Stock Soared 28% Despite the Bank’s Wider-Than-Expected Loss

Shares of New York Community Bancorp (NYCB) soared 28% Wednesday after the bank laid out a plan to return to profitability, even as it reported a wider-than-expected loss for the first quarter.

Q1 Results ‘Better Than Worst-Case Fears’

NYCB reported a loss for the second consecutive quarter of $327 million or 45 cents per share, nearly double the $163.52 million and 22 cents per share loss analysts expected, according to estimates compiled by Visible Alpha. However, that loss narrowed significantly from the $2.7 billion loss the bank reported in the previous quarter, when it took a hit from its outsized exposure to commercial real estate loans.

Total interest income at $1.51 billion was up from $1.03 billion a year ago and just slightly below analysts’ estimates. However, net interest income fell to $309 million from $385 million in the year-ago quarter, thanks to higher interest expenses like borrowed funds and provisions for credit losses.

Jefferies analysts said in a Wednesday note that the first-quarter results were “better than worst-case fears.”

How Did NYCB Get Here?

The bank has suffered after reporting an unexpected loss for the fourth quarter of fiscal 2023, which was exacerbated by the revelation that the bank’s loans in the commercial real estate space were in trouble.

The bank replaced its CEO at the end of February and said the company had identified “material weaknesses” in internal controls “related to internal loan review, resulting from ineffective oversight, risk assessment and monitoring activities.”

Overexposure to commercial real estate loans for properties like office space that is vacant at higher rates than before the pandemic has affected regional lenders such as NYCB, as have elevated interest rates in the wake of the Federal Reserve’s rate hikes to curb inflation.

Multiple credit rating agencies downgraded NYCB, with Moody’s saying the changes at the bank’s executive level were happening “during a particularly challenging operating environment for the bank,” raising questions about its long-term creditworthiness.

In March, NYCB received a $1 billion investment from a group led by former Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital, as the bank told investors it was working to shift its loan portfolio away from its heavy focus on commercial real estate and rent-regulated multifamily housing.

A ‘Clear Path to Profitability’

“During the first quarter, we took a number of decisive actions designed to establish a strong foundation for future growth and sustainable profitability,” NYCB CEO Joseph Otting said, and suggested the company has a “clear path to profitability” by the end of 2026.

“We also completed an in-depth due diligence of the loan portfolio,” he said, noting “we anticipate an elevated level of loan loss provision over the remainder of 2024 related to the potential for market and rate conditions to impact borrower performance on certain portions of our loan portfolio.”

Wedbush analysts said that “while we certainly expect to see some bumpy quarters along the way, we view the plan as viable and achievable.”

“While deposit outflows were heavier than expected in the quarter, the deposit base seems to have stabilized since the end of the quarter, which we view as an incremental positive,” they said.

NYCB shares finished 28.3% higher at $3.40 Wednesday following the earnings release. They’ve still lost about two-thirds of their value so far this year.