New York Community Bancorp(NYSE: NYCB) has had quite a turbulent year, starting earlier this year when it took significant charge-offs on its loan portfolio, resulting in a surprising $2.7 billion fourth-quarter loss.
Since then, its CEO has stepped down and it has overhauled its executive leadership, raised equity capital, and sold off large chunks of its mortgage businesses. The bank is undergoing a multiyear process to rejuvenate its business. Here's an in-depth look at its game plan and whether it's a compelling investment opportunity today.
New York Community Bancorp's massive loss and oversight failures
Over the past several years, banks' commercial real estate exposure has come under the microscope. Shifting workplace trends have significantly impacted office real estate values, and rising interest rates have made it more expensive to finance commercial real estate transactions.
New York Community Bancorp has significant exposure to commercial real estate, with multi-family properties making up nearly half of its $85 billion loan portfolio at the end of last year. Much of its multi-family portfolio is subject to rent control regulations, making it harder for landlords to increase rents at a time when borrowing costs are high -- which could trigger defaults if they are unable to meet their obligations.
In the fourth quarter, the bank reported a $260 million loss, primarily from two loans that accounted for $185 million of that loss.
Its troubles grew further when it announced a delay in its annual financial report due to "a material weakness in its internal controls," relating to the bank's loan review process, which noted "ineffective oversight, risk assessment, and monitoring activities." It took a $2.4 billion goodwill impairment charge, and its revised fourth-quarter loss ballooned to $2.7 billion.
NYCB Revenue (TTM) data by YCharts
The bank is undergoing a massive overhaul
In March, the bank received a $1 billion capital investment led by former Treasury Secretary Steve Mnuchin of Liberty Strategic Capital, along with Hudson Bay Capital, Citadel Securities, and other institutional investors.
As part of this capital infusion, New York Community Bancorp overhauled its entire management team, naming Joseph Otting, former comptroller of the currency under the Trump administration, as its CEO. It also hired a new chief risk officer and chief audit executive to address its internal control and risk assessment issues.
The bank is taking its medicine. In the second quarter, it completed a loan review across 75% of its commercial real estate portfolio. It has addressed some of the risks of these loans by doing additional charge-offs and building up its allowance for credit losses.
The bank is moving to raise more capital and shore up its balance sheet. In the second quarter, the bank sold $6.1 billion in mortgage warehouse loans, which it will use to pay down wholesale borrowings and fund future commercial and industrial loan growth.
Image source: Getty Images.
Following the sale of $5 billion of its mortgage warehouse loans to JPMorgan Chase, analysts at KBW told investors in a note that "This is arguably one of the more profitable businesses, in our view, and the path to a respectable return on tangible equity will continue to be difficult."
Flagstar Bank, a wholly owned subsidiary of New York Community Bancorp, announced in July that it would sell its residential mortgage servicing business, including mortgage servicing rights and the third-party origination platform, to Mr. Cooper Group for $1.4 billion. It expects to close the transaction in the fourth quarter of this year.
On top of that, the bank also announced a 1-for-3 reverse stock split in July, meaning the company would consolidate the existing stock into higher-priced shares.
Following the sale of its mortgage businesses and the reverse stock split, New York Community Bancorp expects a net loss of $2.20 to $2.30 per share this year, followed by a breakeven year next year. It hopes to turn a profit once again in 2026, and forecast earnings per share of $1.25 to $1.30.
Buy, sell, or hold New York Community Bancorp?
New York Community Bancorp is improving its balance sheet and has shored up liquidity this year with the equity infusion and sales of its mortgage warehousing and mortgage servicing businesses. This is a necessary move but could be a drag on the business, as these were some of its more profitable endeavors.
The bank is still at least a couple of years away from being profitable again, assuming its turnaround plans go smoothly. Therefore, I think it is still a few years away from being a worthwhile investment, and investors are best off avoiding the stock for now.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
