New York Community Bancorp (NYCB 0.61%) has faced turbulence this year as it deals with the fallout from taking significant charge-offs on its loan portfolio, which led to a surprising fourth-quarter loss. Since then, its CEO has stepped down as the bank overhauled its executive team and bolstered its financial position by raising equity capital and selling off large chunks of its loan portfolio.
New York Community Bancorp is undergoing a multiyear process to reinvigorate its business. Here's what investors need to know about its plan as they try to decide if it's a buy today.
New York Community Bancorp's large commercial real estate exposure
Banks' commercial real estate exposure has been a hot topic over the past few years. Shifting workplace trends and the rise of remote work have changed companies' office space needs all over, but some U.S. markets are feeling the impact far more than others. On top of that, higher interest rates have made it more expensive to finance commercial properties, impacting both the value of those assets and the returns investors demand to view these investments as worthwhile.
New York Community Bancorp has significant exposure to commercial real estate, with multifamily properties making up around 44% of its $84.6 billion loan portfolio as of the end of last year. Office loans accounted for 4%, and half of that portfolio is located in Manhattan, where vacancy rates are around 15%, according to Moody's.
In the fourth quarter, the bank reported a surprising loss of $260 million, primarily resulting from net charge-offs 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 charge-offs triggered concerns about the bank's other commercial real estate holdings. A lot of the properties underlying its multifamily portfolio are subject to rent control regulations, which can make it harder for landlords to increase rents. If landlords cannot raise rents to account for increased interest costs, their profits get squeezed, making it more challenging to meet their obligations, which could trigger defaults.
Things went from bad to worse when the bank announced that its annual 10-K report would be delayed due to "a material weakness in its internal controls." The material weakness was related to the bank's loan review process, which noted "ineffective oversight, risk assessment, and monitoring activities."
As a result, the bank 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 taking steps to improve its financial position
New York Community Bancorp has overhauled its executive team to turn things around. Former CEO Thomas Cangemi stepped down and was replaced by Alessandro DiNello, former CEO of Flagstar Bank, for one month. DiNello was replaced by Joseph Otting, a veteran bank industry executive who also served as comptroller of the currency in the Trump administration.
In addition, the bank has named George F. Buchanan III as executive vice president and chief risk officer and Colleen McCullum as executive vice president and chief audit executive. Buchanan brings 30 years of experience in risk management and credit, while McCullum was chief audit executive at United Community Bank. The leadership overhaul came as the bank received a $1 billion capital investment backed by Liberty Strategic Capital, Hudson Bay Capital, Citadel Securities, and other institutional investors.
In March, taking further actions to shore up its balance sheet, the bank sold that troubled cooperative loan at a gain, and also sold 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, which helped boost its CET1 ratio to 10.8%. Following that sale, analysts at KBW wrote in a note to 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."
Is New York Community Bancorp a buy?
New York Community Bancorp is taking steps to improve its finances. Between the $1 billion equity infusion from investors and the proceeds from its sold loans, the bank has bolstered its liquidity position, but that came at a cost. The equity raise significantly diluted shareholders, and the loans it sold were some of its more profitable ones.
It will take several years for this institution to return to being an efficient, high-performing regional bank. For that reason, most investors should avoid its stock for now.
