Last month, the Federal Reserve reduced its benchmark interest rate by 50 basis points. It was the Fed's first interest rate cut since the pandemic hit in 2020, and it's a welcome relief to some of the more interest rate-sensitive companies.
New York Community Bancorp(NYSE: NYCB) is one bank welcoming those rate cuts. The bank has faced significant struggles this year, stemming from its huge write-offs in the fourth quarter last year followed by a big shakeup in its top management team.
New York Community Bancorp recently traded at $10.95 per share and looks like a potential buy, as the Federal Reserve is projected to cut interest rates by 2% over the next couple of years. If you're thinking about scooping up shares of the bank, there are some things you should consider first.
New York Community Bancorp's struggles
New York Community Bancorp has an extensive commercial real estate portfolio, and commercial real estate has faced some significant headwinds in recent years. The industry has come under pressure over the past several years as the Federal Reserve raised rates at their fastest pace in four decades in its fight against inflation.
Banks with heavy commercial real estate exposure have faced headwinds. New York Community Bancorp has significant exposure to multi-family properties, which comprised almost half of its $85 billion loan portfolio at the end of last year. The bank also had around $3.4 billion in office properties, some of the riskiest commercial real estate properties out there.
In the fourth quarter of last year, the bank reported a surprising loss of $260 million, resulting from a $185 million net charge-off primarily related to two loans in its portfolio. One loan was an office loan that went non-accrual in the third quarter, while the other was a cooperative loan with "a unique feature that pre-funded capital expenditures."
The bad news was compounded when the bank found a material weakness in internal controls designed to ensure the integrity and timely filing of the company's financial statements. Specifically, the company noted weakness in its loan review process and a lack of effective oversight and risk monitoring on its loan portfolio.
As a result, the bank said it could not file its annual 10-K report on time, and it had to take a $2.4 billion goodwill impairment charge, driving down its Q4 results even further.
NYCB Revenue (TTM) data by YCharts.
The bank has undergone a huge transformation
Since then, the bank has hired a new CEO, Chief Risk Officer, and Chief Audit Executive. The moves came as the bank received a $1 billion capital investment backed by former Treasury Secretary Steve Mnuchin's Liberty Strategic Capital, along with Hudson Bay Capital, Citadel Global Equities, and other institutional investors.
It has taken further action to shore up its balance sheet. In March, the company sold the cooperative loan at a gain, along with consumer loans with a net book value of $899 million. In May, it agreed to sell about $5 billion in mortgage warehouse loans to JPMorgan Chase. Following the sale, analysts at KBW told investors: "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."
In July, Flagstar Bank (a subsidiary of NYCB) announced it would sell its residential mortgage servicing business, including mortgage servicing rights and the third-party origination platform, to Mr. Cooper for about $1.4 billion. The transaction will add around 60 basis points to the bank's CET1 ratio and is expected to close in Q4 of this year.
Is it a buy?
Now that the Federal Reserve is cutting interest rates, banks stand to benefit. According to analysts at JPMorgan Chase, rate cuts will turn from a headwind for banks into a tailwind over the next several quarters. Mid-cap banks like NYCB, which is highly sensitive to interest rates, stand to benefit more from the effect.
NYCB's turnaround is well underway but will take some time to play out. However, the bank has made several moves to shore up its balance sheet and improve the foundation of its business. According to Barclays, the bank's CET1 could move over 11% by year-end.
Today, the stock is priced at a 36% discount to its tangible book value. While the turnaround will take time, the prospect of further interest rate cuts and an improving bottom line at its current valuation make New York Community Bancorp a good value buy today for patient investors willing to take on the risk.
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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 recommends Barclays Plc. The Motley Fool has a disclosure policy.
