New York Community Bancorp (NYCB -3.26%) stock has struggled since the bank reported a surprising Q4 loss in late January because it took significant charge-offs on loans in its portfolio. Since then, things have gone from bad to worse for the bank, as it delayed its annual financial report filing due to deficiencies in its internal controls.
The bank is now under new leadership and recently raised $1 billion to bolster its capital and shore up its balance sheet. The stock is down 62% since the start of the year and appears to be cheap, however, investors will want to consider at least four things before buying the bank's stock today.
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1. The Q4 loss is related to weakness in commercial real estate
In the fourth quarter, New York Community Bancorp posted a loss of $0.36 per share at a time when Wall Street analysts expected a profit of $0.28 per share. The loss resulted from a $185 million net charge-off in the fourth quarter, primarily due to two loans in its portfolio.
The first was a co-op loan with "a unique feature that pre-funded capital expenditures." Although the loan wasn't in default, the bank transferred it to held for sale and took a charge-off during the fourth quarter. The bank noted that it didn't find similar characteristics in its other co-op loans and subsequently sold these loans in late February.
The second loan the bank charged off was an office loan that went non-accrual in the third quarter. The company said, "Given the impact of recent credit deterioration within the office portfolio, we determined it prudent to increase the allowance for credit losses coverage ratio." This spurred concern because of weakness in commercial real estate, and many wonder if other loans are vulnerable too. The bank holds loans worth $84.6 billion, 80% of which are in multifamily, commercial & industrial, and commercial real estate.
2. The bank recently identified issues in internal controls and oversight
Another cause of concern for New York Community Bancorp was the recent departure of its Chief Risk Officer, who left the bank earlier this year before the bank announced its financial results.
After further review, the bank found a material weakness in internal controls, which are 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. It will also take a $2.4 billion goodwill impairment charge, affecting its income statement for the fourth quarter ending Dec. 31, 2023.
3. Overhauled management will be making significant changes
The material weakness was the final straw, and the bank drastically overhauled the leadership team. Tom Cangemi, CEO since 2020, stepped down in late February. He was briefly replaced by Alessandro DiNello, former CEO of Flagstar Bank, which NYCB acquired in 2022. A few days later, Joseph Otting, who previously worked as the Comptroller of the Currency from 2017 to 2020, was named the new CEO.
The bank also filled other key management roles, including appointing George F. Buchanan III as Executive Vice President and Chief Risk Officer and Colleen McCullum as Executive Vice President and Chief Audit Executive. Buchanan has 30 years of experience in financial services-related risk management and credit, while McCullum was recently chief audit executive at United Community Bank.
4. New York Community recently raised $1 billion in capital
As part of the bank's efforts to bolster its capital position, it recently raised $1.05 billion in equity from Liberty Strategic Capital, Hudson Bay Capital Management, and Reverence Capital Partners. Former U.S. Treasury Secretary Steve Mnuchin is the founder and CEO of Liberty Strategic Capital and was appointed to the board of directors along with three others.
The capital raise is positive because it gives New York Community Bancorp additional capital to manage its balance sheet. Fitch Ratings reaffirmed its outlook and junk-level rating for the debt and said that "the capital infusion announced on March 6, 2024, is a positive near-term development for creditors and could limit downside ratings momentum."
According to analysts at Wedbush, the capital infusion is "tremendously dilutive," as it nearly doubles the number of shares outstanding to 1.5 billion while reducing the bank's tangible book value by 40% to $6 per share.
New York Community could take years to recover
New York Community Bancorp faces an uphill battle as it looks to shore up its balance sheet and improve its capital position while navigating weakness in the commercial real estate market. The recent equity raise is positive because it gives it much-needed funds to strengthen its balance. However, it is incredibly dilutive to existing shareholders, and it could take years for the bank to recover.
Investors with a high tolerance for risk who believe the bank can turn things around may find it appealing at today's price, but most investors are best off avoiding the stock for now.
