A Special Niche Boosts New York Community Bancorp Earnings

Though New York Community Bancorp (NYSE: NYCB  ) saw a drop in its share price after releasing earnings yesterday, there is little doubt that investors are pleased with the bank's second-quarter results. The bank beat earnings per share estimates easily, aided by its largest ever jump in multi-family refinance-prepayment activity, which added 20 basis points to its net interest margin.

Mortgages down, but commercial loans are up
Like its peer Huntington Bancshares  (NASDAQ: HBAN  ) , New York Community saw a slowdown in residential mortgage refinancing activity due to higher interest rates. But, like Huntington and KeyCorp (NYSE: KEY  ) , the bank was able to improve in other areas. New York Community enjoyed higher mortgage servicing income in the second quarter, for example -- an area in which KeyCorp is also expanding, having recently acquired $110 billion in commercial loan servicing rights from Bank of America (NYSE: BAC  ) earlier this year.

Though Huntington missed on revenue projections, management noted a strong demand in commercial lending, as businesses see improvements in the economy. New York Community has recently launched its NYCB Specialty Finance Company, which is expected to increase the bank's commercial and industrial lending going forward.

Credit quality keeps improving, as well. New York Community saw its ratio of non-performing loans fall to its lowest point in four and a half years, to 0.54% from 0.69% in the year-ago quarter, while net charge-offs dropped to 0.01% from 0.05%. KeyCorp also made gains, seeing its loan-loss ratio decline from 1.79% one year ago to 1.65%, while net charge-offs fell to 0.38% last quarter, from its year-ago metric of 0.63%.

Multi-family refinancing
Though refinancing and new home mortgages are expected to slow further, New York Community has an ace in the hole: its stable of multi-family loans held for investment. In the second quarter, management noted that of the total loans held for investment -- $28.1 billion -- $2.9 billion represented multi-family mortgages.

For the bank, this represents a gold mine. Much of the refinancing being done -- and to be done in the future -- resides in this niche. The risk is quite low, because the bank has dealt with these parties in the past, refinancing debt as these clients purchase new properties. And, according to CFO Thomas Cangemi, this type of activity is prevalent in New York City -- giving the bank ample opportunity to rake in extra income on those prepaid loans as clients refinance. In the current mortgage-refinancing crunch, that's a notable win.

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