New York Community Bancorp: Buy, Sell or Hold?

New York Community Bancorp (NYCB 0.64%) has had quite a turbulent year, starting earlier this year when it took significant write-offs on its loan portfolio, resulting in a surprising loss of $2.7 billion in the fourth quarter.

Since then, its CEO has stepped down and overhauled its executive leadership, raised equity capital and sold much of its mortgage business. The bank is going through a multi-year 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 Massive Losses and Supervisory Failures

Over the past few years, banks’ commercial real estate exposure has come under the microscope. Changing trends in the workplace have had a significant impact on the value of office real estate, and rising interest rates have made commercial real estate transactions more expensive to finance.

New York Community Bancorp has significant exposure to commercial real estate, with multifamily properties accounting for nearly half of its $85 billion loan portfolio at the end of last year. Much of its multifamily portfolio is subject to rent control regulations, making it difficult for landlords to raise rents at a time when borrowing costs are high — which could trigger defaults if they can’t meet their obligations.

In the fourth quarter, the bank reported a loss of $260 million, mainly from two loans that accounted for $185 million of that loss.

Its woes grew further when it announced a delay in its annual financial report due to “a significant weakness in its internal controls” related to the bank’s loan review process, which found “supervision, risk assessment and ineffective monitoring”. It took a $2.4 billion goodwill impairment charge, and its revised fourth-quarter loss widened to $2.7 billion.

NYCB Revenue (TTM) data from YCharts

The bank is undergoing a massive overhaul

In March, the bank received a $1 billion equity investment led by former Treasury Secretary Steve Mnuchin from 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, the former Comptroller of the Currency under the Trump administration, as CEO. It also hired a new chief risk officer and chief audit executive to address its internal control and risk assessment issues.

The bank takes its medicine. In the second quarter, it completed a review of loans for 75% of its commercial real estate portfolio. It addressed some of the risks of these loans by making additional offsets and creating loan loss provisions.

The bank is pushing to raise more capital and strengthen its balance sheet. In the second quarter, the bank sold $6.1 billion in mortgage-backed loans, which it will use to pay off wholesale loans and fund future growth in commercial and industrial loans.

Image source: Getty Images.

Following the sale of $5 billion of its mortgage deposit loans to JPMorgan Chaseanalysts at KBW told investors in a note that “this is undoubtedly one of the most profitable businesses in our view, and the path to a respectable return on equity will continue to be difficult.”

Flagstar Bank, a wholly-owned subsidiary of New York Community Bancorp, announced in July that it will sell its residential mortgage servicing business, including its mortgage servicing rights and third-party origination platform, to Mr. Cooper Group for $1.4 billion. The deal is expected to close in the fourth quarter of this year.

Additionally, the bank also announced a 1-for-3 reverse stock split in July, meaning the company will consolidate existing holdings into higher-priced stocks.

Following the sale of its mortgage business and a 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 next year. It hopes to turn a profit again in 2026 and estimates earnings per share of $1.25 to $1.30.

Buying, selling or owning New York Community Bancorp?

New York Community Bancorp is improving its balance sheet and bolstering its liquidity this year with capital infusions and sales of its custodial and mortgage servicing businesses. This is a necessary move, but could be a setback for the business as these have been some of its more profitable endeavors.

The bank is still at least a few 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 would be best off avoiding the stock for now.