Could New York Community Bancorp Become the Next Bank of ...

New York Community Bancorp (NYCB 0.18%) is not the first bank to run into financial trouble, cut its dividend, and accept a bailout. In fact, iconic Bank of America (BAC 1.44%) did each of those things during the Great Recession. But could New York Community Bancorp's future include a turnaround on the scale that Bank of America achieved?

What went wrong with Bank of America

During the Great Recession, which was a housing-led downturn, Bank of America made the ill-fated decision to buy a mortgage lender (Countrywide Financial). That move left Bank of America in a difficult position as the housing market cratered and home buyers with weaker credit profiles started to default. Bank of America reacted by cutting its dividend and taking a bailout. The stock price tanked. Since that point in time, the company has successfully returned its business to fighting form.

Once again, Bank of America is a highly respected industry leader. The stock has risen dramatically from the worst of the Great Recession. Its dividend is growing again, too, though it still remains below its pre-cut levels. Overall, investors who stepped in during the worst days have made out very well with Bank of America stock. That list, notably, includes Warren Buffett and Berkshire Hathaway, the company he heads.

BAC data by YCharts.

Can you take this bank's turnaround story and apply the same logic to New York Community Bancorp? Maybe, maybe not.

What went wrong with New York Community Bancorp

New York Community Bancorp actually managed to survive the most recent upheaval in the bank sector, which featured a number of bank runs and bank failures. In fact, it bought the assets of one of the banks that failed, a move that came shortly after its purchase of peer Flagstar Bank. This pair of transactions in a compressed period of time appears to be a key part of what got New York Community Bancorp in trouble.

In essence, it went from a rather small bank to a much larger one, which required more oversight by regulators. New York Community Bancorp wasn't prepared for the additional oversight and regulatory requirements. And, as if on cue, just as the company was starting to admit it needed to upgrade its internal controls, it announced that some large loans it had made had soured. It was a very bad look, and Wall Street dropped the stock like a rock.

The dividend was cut, the board of directors brought in new leadership to upgrade the bank's controls, and New York Community Bancorp accepted a bailout. The $1 billion cash infusion should give it the wherewithal to survive this period and thrive again in the future. But the turnaround isn't expected to be complete until at least the end of 2026. So this is a long-term effort, and only patient investors will want to be involved in the turnaround.

NYCB data by YCharts.

Notably, the second-quarter earnings release was a mixture of good operational updates and bad financial outcomes. So investors who do risk buying New York Community Bancorp will have to have strong stomachs if they hope to stick around long enough to benefit from the hoped-for, and seemingly progressing, turnaround.

There's plenty of upside

New York Community Bancorp is down around 70% from its 52-week highs. Even if it doesn't get back to those highs right away, there's still meaningful recovery potential here if the bank can prove to investors that it is on the mend. In that way, it could be a situation like Bank of America following the Great Recession.

However, there's one caveat. Bank of America is one of the largest banks in the U.S., and New York Community Bancorp is just a regional player. It seems unlikely that the government will step in to help New York Community Bancorp as it did with large banks like Bank of America. So there's really no backup of last resort for New York Community Bancorp. In other words, there's probably more risk in New York Community Bancorp's turnaround than there was in the successful turnaround at Bank of America.