New York Community Bancorp(NYSE: NYCB) was on the ropes not too long ago, forced to drastically cut its dividend and accept a $1 billion bailout. Now in full-on turnaround mode, the company's financial results are kind of ugly to look at. However, management remains on target to get back to peer-level performance by the end of 2026. What should investors do?
New York Community Bancorp is posting ugly numbers
If you look at New York Community Bancorp's second-quarter 2024 financial results, you'll probably want to run for the hills. The company's net loss totaled a hefty $323 million, which was a little better than the first quarter's $327 million loss, but way worse than Q2 2023's $413 million of positive net income. Those figures translate into a Q2 2024 per-share loss of $1.14 per share, a Q1 loss of $1.36, and a Q2 2023 profit of $1.66 per share.
Clearly, things are not great right now at New York Community Bancorp. This isn't a surprise.
Image source: Getty Images.
At the start of 2023, the bank ran into material operating and performance issues following two large bank acquisitions over the last couple of years. The big operating problem is that New York Community Bancorp grew so quickly, thanks to the acquisitions, that it was facing increasing regulatory scrutiny. It wasn't prepared for the added oversight. On the performance front, a number of large loans soured and left investors worried that more troubled loans could be lurking in the loan portfolio. The stock crumbled, the dividend was cut to a token penny per share per quarter, and the bank ended up taking a $1 billion handout to help it muddle through a turnaround.
New York Community Bancorp's turnaround is a work in progress
While hard to read, New York Community Bancorp's Q2 results were, basically, a result of its efforts to get the business back on track. According to CEO Joseph Otting:
Our second-quarter performance reflects the ongoing actions management is taking during this transitional year as we reposition the Bank for long-term success. During the quarter, we expanded our comprehensive review of the loan portfolio beyond the top 350 commercial real estate and multi-family loans to encompass 75% of these two portfolios and increased our loan loss provision and charge-off levels, accordingly. This puts us in a better position to resolve these loans at a future date.
We also continued to simplify our business model by agreeing to sell certain parts of our mortgage business, including our mortgage servicing rights to Mr. Cooper, one of the leading mortgage companies in the country. This comes on the heels of closing on the sale of our mortgage warehouse business earlier this week. In addition to simplifying our business model, collectively these two transactions also bolster our liquidity profile and result in higher capital ratios.
Essentially, management is doing what needs to be done, including adding "nine seasoned leaders to the executive management team." Many of those new hires came from other companies, so it is likely that they are getting well compensated to join what is, effectively, a bank muddling through a turnaround.
So costs are probably rising here even as performance has plunged. That said, the $1 billion cash infusion that New York Community Bancorp received gives it a solid financial foundation from which to overhaul its business. In that regard, it's understandable that "seasoned leaders" might be willing to risk accepting a job with the bank.
It's also understandable if more aggressive investors willing to buy turnaround stocks find New York Community Bancorp's story interesting. With the stock down more than 70% over the past year, there's likely to be material upside potential here.
But that will only be realized if management keeps making hard choices, like it has been for a couple of quarters at this point. Given that the CEO was brought in specifically to rehab the bank's business, it seems likely that the turnaround effort continues. The timeline, meanwhile, is still for another two years or so of tough sledding. Only the most aggressive turnaround investors will probably find the stock appealing, recognizing that the bank is still early in the process of righting the ship.
Most investors will want to avoid New York Community Bancorp
A struggling bank that is selling assets, working to shore up its finances, reviewing the quality of its loan portfolio, bringing in fresh leaders, and notching substantial losses is not something that most investors will want in their portfolios. New York Community Bancorp is a turnaround stock that only highly aggressive investors will appreciate. Even then, buying the stock likely means sitting through at least several more quarters filled with ugly earnings results, which won't be easy to do. Unless you have a very strong constitution, you'll probably want to wait for more progress on the turnaround before buying this bank.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
