New York Community Bancorp, a regional bank, experienced a significant drop in its shares, plummeting 30% before the bell on Friday. This decline came after the bank discovered “material weaknesses” in its internal controls related to loan review. These weaknesses were attributed to ineffective oversight, risk assessment, and monitoring activities. The bank plans to outline its remediation plan when it files its annual report with the U.S. Securities and Exchange Commission in 15 days.
Investors were already concerned about the bank’s exposure to commercial real estate (CRE), and the revelation of these material weaknesses only added to their worries. New York Community Bancorp has been under pressure since it reported an unexpected loss in the fourth quarter of 2022, primarily due to higher provisions tied to CRE loans. To address these challenges, the bank also reduced its dividend.
In a surprising turn of events, NYCB revised its quarterly loss to be ten times higher than initially stated. This revision was attributed to a $2.4 billion goodwill impairment related to transactions from 2007 and earlier. Octavio Marenzi, CEO of advisory and consulting firm Opimas LLC, commented on the situation, stating, “NYCB looks like a bank that is out of control, and it seems likely that they will have to take even steeper charges for loan loss provisions.”
The market value of New York Community Bancorp was expected to decline by $1 billion if the current share losses persisted. Since the release of its earnings report, the bank has already lost over $4 billion. Citigroup analyst Keith Horowitz noted that while the impairment should not come as a surprise, the material weaknesses in internal controls are a more significant concern. He emphasized that significant changes need to be made in how the bank monitors credit risk and anticipates that this may lead to a more proactive approach in recognizing issues.
In response to the decline in shares due to its CRE exposure, New York Community Bancorp appointed Alessandro DiNello as executive chairman. DiNello, a banking veteran and former CEO of Flagstar Bank, which was acquired by NYCB in 2022, was assigned the additional roles of president and CEO. This appointment was viewed favorably by analysts, given DiNello’s track record of turning around Flagstar Bank.
The bank also made changes to its board of directors, naming Marshall Lux as the presiding director, succeeding Hanif Dahya. Dahya expressed his lack of support for DiNello’s appointment as president and CEO upon his resignation.
The KBW Regional Banking index has experienced a nearly 9% decline since New York Community Bancorp’s report on January 31. The latest disclosure by the bank will further put regional banks under the spotlight.
In addition to NYCB’s struggles, investment bank and brokerage B Riley Financial also faced challenges. The company’s shares fell 14% in premarket trading after it announced a reduction in its quarterly dividend by half. Chairman and co-CEO Bryant Riley explained that this move was intended to focus on investment opportunities, including potentially repurchasing its own debt at attractive prices. B Riley Financial is also reviewing strategic options for its appraisal and valuation services and retail, wholesale, and industrial solutions businesses.
Overall, New York Community Bancorp’s shares plummeted due to the discovery of material weaknesses in its loan review controls. The bank’s exposure to commercial real estate and its unexpected loss in the fourth quarter of 2022 have raised concerns among investors. With changes in executive leadership and the need for significant improvements in internal controls, the bank faces challenges in restoring investor confidence. The performance of regional banks, including NYCB, will be closely watched in the coming days.