Written by Niket Nishant
(Reuters) – New York Community Bancorp's stock plunged 23% on Friday after the company found “material weaknesses” in its internal controls related to loan underwriting, and the company has already reduced its commercial real estate (CRE) exposure. This upset investors who were concerned.
The bank said the vulnerabilities were related to “ineffective supervision, risk assessment and monitoring activities” but would not impact its financial results for fiscal year 2023.
Internal control is a process that ensures the accuracy and reliability of a company's financial reports.
NYCB said it will provide details of its remediation plan when it files its annual report with the U.S. Securities and Exchange Commission within 15 days.
The bank has been under pressure since posting an unexpected fourth-quarter loss on Jan. 31 due to higher provisions on CRE loans and a dividend cut to comply with tougher regulations.
Late Thursday, the company revised its quarterly loss to 10 times the announced amount, citing a $2.4 billion goodwill impairment charge related to pre-2007 transactions.
“NYCB appears to be an out-of-control bank and will likely be charged even higher fees for loan loss reserves,” said Octavio Marenzi, CEO of Opimas, an advisory and consulting firm.
The lender's market value was scheduled to decline by more than $900 million if current stock losses continued through the trading period. Since announcing its financial results, it has already posted losses of more than $4 billion.
Keith Horowitz, an analyst at Citigroup, said the impairment shouldn't come as a big surprise, but weaker materials are a bigger problem.
“This will require significant changes in how credit risk is monitored,” he said. “We expect this may lead to more proactive recognition of the issue.”
Compared to its peers, NYCB has previously disclosed that it has the lowest concentration of uninsured deposits and sufficient liquidity to provide extended deposit insurance to its customers.
“The company has strong liquidity and a solid deposit base, and we are confident that we can execute on our restructuring plan to increase shareholder value,” Dinero said.
But Brian Mulberry, client portfolio manager at Zacks Investment Management, said he would be “very cautious” about the stock.
“Transparency is in decline and a change in management could lead to a loss of trust from depositors,” he said.
Transfer of officers
The bank on Friday appointed financial services veteran George Buchanan as chief risk officer and Collen McCallum as chief audit officer.
After last month's share price decline due to CRE exposure, the lender began strengthening its management team, starting with the appointment of banking industry veteran Alessandro Dinero as executive chairman.
The former CEO of Flagstar Bank, which was acquired by NYCB in 2022, was on Thursday assigned the additional role of president and CEO.
“This appointment will be well-received given Mr. Dinero's past history of turning around Flagstar,” Raymond James analyst Steve Moss said.
Under his leadership, Flagstar escaped consent orders imposed on lenders by banking regulator the Office of the Comptroller of the Currency.
Soundness of local banks
NYCB's balance sheet exceeds the regulatory threshold of $100 billion due to its acquisition of Flagstar and some assets of failed Signature Bank, subjecting it to stricter capital and liquidity standards.
By Thursday, short sellers had made a paper profit of about $150 million on the company's stock, which has fallen 53% since the beginning of the year, according to data and analytics firm Ortex.
“We continue to view the NYCB situation as very unique and not representative of the pressure or uncertainty on local banks,” said JPMorgan analyst Stephen Alexopoulos.
Since the Jan. 31 NYCB quarterly report, the KBW Regional Bank Index has fallen nearly 9%. It fell another 2.5% on Friday.
Other banks, including Citizens Financial, Comerica and Regions Financial, each fell more than 1%.
Meanwhile, B Riley Financial shares fell 15% after the investment bank and brokerage firm cut its quarterly dividend in half late Thursday.
Bryant Riley, the company's chairman and co-chief executive officer, said the move was to focus on investment opportunities, including the possibility of repurchasing its own debt at attractive prices.
The bank said it is also considering strategic options for its appraisal and valuation services and retail, wholesale and industrial solutions businesses.
(Reporting by Niket Nishant in Bengaluru and Michelle Price in Washington; Additional reporting by Saquib Iqbal Ahmed; Editing by Arun Koyur)
