UPDATE: This article includes additional details and executive commentary from the earnings call.
New York Community Bancorp posted another bumpy quarter on its road to recovery but still sees light at the end of a long-term tunnel.
The Long Island-based company, which is rebranding to Flagstar Financial and will begin trading with a new ticker on Monday, posted a wider-than-expected net loss in the third quarter and lowered its outlook for turning a profit in the near future, as it completes the review of a commercial real estate portfolio that put it in a dangerous place earlier this year.
After raising new capital, overhauling management and revamping its strategy, Flagstar Financial Chairman and CEO Joseph Otting said the bank is focused on making sure it doesn't fall into beleaguered territory again. Otting, who served as Comptroller of the Currency in the Trump administration, said on a Friday morning call with analysts that the company is "building out the first and second and third line of defenses."
"Those were not here in the organization," Otting said. "We've worked closely with the regulatory community since we all arrived. I mean obviously, my background being the comptroller, I understand the importance of that. And so I think we've built a strong bridge to our regulators."
Chief Financial Officer Craig Nix said that the bank has instituted a monthly in-depth review at the business-line level on financial performance.
"I would say that we continue to improve our visibility into the portfolio, into the credit performance and into the expense profile of the company," Nix said. "Every month, we get more and more visibility."
During the three months ended Sept. 30, the company reported a net loss of $280 million, or 79 cents per share. Analysts polled by S&P had estimated a net loss of $141 million for the period.
It's been an unsettled — and often excruciatingly difficult — nine months at Flagstar Financial. Some of the bank's problems began coming to a head when it surpassed $100 billion in assets after a pair of acquisitions, including of the failed Signature Bank last spring, triggered enhanced regulatory scrutiny. The bank now sits at $114 billion in assets.
Looking deeper at Flagstar's loan portfolio led to a staggering provision for losses as it built padding for bad loans. In late January and well into February, its stock price tanked amid troubles with commercial real estate loans, deficiencies in internal controls and leadership changes.
After weeks of turmoil, the company received a $1.05 billion capital infusion from an investment group led by Otting and former Treasury Secretary Steven Mnuchin. Otting was then named chairman and CEO.
Since Otting and the new management stepped in, the bank's risk team has reviewed almost all of the CRE loans. The bank logged net charge-offs in the third quarter of $240 million, down from $349 million in the second quarter.
Flagstar is also making moves to boost its commercial and industrial loan portfolio in an effort to get out from under the real estate doom-loop narrative.
Otting said the bank saw substantial charge-offs across its multi-family and commercial real estate portfolio. "Our CRE exposure continues to decline through a combination of par pay-offs and proactively managing problem loans," he said in a press release.
Total CRE loans fell 6% from a year ago, and of the $2.1 billion of multi-family loans that have repriced this year, more than 90% have paid off at par or remain current, Otting said. The bank reduced its CRE exposure by about $1 billion in the third quarter.
The bank has also stiffened its underwriting standards to evaluate risk based on debt service coverage ratios, as opposed to loan-to-value ratios, as a massive reset in the real estate market has thrown "values" of properties into limbo.
Flagstar has more than $47 billion of CRE loans and $16 billion of C&I loans, and is aiming to reduce and increase those books, respectively, to about $30 billion each in the next three to five years — keeping its balance sheet relatively flat all the while. The bank has hired about 30 C&I veteran bankers to grow those relationships, with plans to bring on another 100 people to that workforce over time.
"Most of us who have joined this company have spent the vast majority of our career in the C&I kind of space and grew up in it," Otting said.
Although the bank sees hope for 2027, guidance for performance along the way dimmed on Friday. Flagstar reduced its projections for earnings across 2025 and 2026, as the bank now expects nonaccrual loans to remain through those years. Elevated charge-offs also lifted the bank's full-year provision for loan losses to $1.2 billion, as opposed to the prior expectation of $1.1 billion.
However, forecasted rate cuts from the Federal Reserve should help the liability-sensitive bank's margin, Nix said, as deposits begin to cost less and its CRE loans from the zero-rate era reprice. The net interest margin fell to 1.79% in the third quarter from 3.27% in the year-ago quarter.
Otting and his management's new strategic plan for Flagstar also includes simplifying its business model by selling non-core divisions.
The company said last week that it has laid off about 800 employees, or 8% of its workforce, and expects to terminate the employment of about 1,200 more when the Mr. Cooper sale is finalized.
