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NYCB shares tumble 26% after ‘material weakness’ disclosure rattles investors

NYCB shares tumble 26% after 'material weakness' disclosure rattles investors © Reuters. FILE PHOTO: A screen displays the trading information for New York Community Bancorp on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., January 31, 2024. REUTERS/Brendan McDermid/File Photo

By Niket Nishant and Nupur Anand

(Reuters) -New York Community Bancorp (NASDAQ:) shares plunged nearly 26% on Friday after it replaced its CEO, reported a fourth-quarter loss that was more than 10 times what it previously stated and said it found “material weaknesses” in internal controls related to a loan review.

The news spooked already jittery investors, with NYCB shares down 65% this year.

“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,” said Octavio Marenzi, CEO of advisory and consulting firm Opimas LLC.

The bank’s shares closed down 25.9% at $3.55.

NYCB has been under pressure since it cut its dividend and posted a surprise fourth-quarter loss on Jan. 31, citing higher provisions tied to Commercial Real Estate loans.

Late on Thursday, the lender revised its quarterly loss to $2.7 billion, citing a $2.4 billion goodwill impairment tied to transactions from 2007 and before.

The lender’s market value tumbled about $900 million on Friday, bringing its total loss of market capitalization to almost $5 billion since Jan. 31.

NYCB said the weaknesses it disclosed on Thursday were related to “ineffective oversight, risk assessment and monitoring activities,” but would not impact financial results for fiscal 2023.

Citigroup analyst Keith Horowitz said the impairment should not be seen as a big surprise, but material weakness was a bigger issue.

“Significant changes will need to be made with respect to how they monitor credit risk, which we expect may lead to them being more proactive on recognizing issues,” he said.

NYCB said it will detail the remediation plan when it files its annual report with the Securities and Exchange Commission in 15 days.

Compared to its peers, NYCB has a low concentration of uninsured deposits and said last month it had enough liquidity to offer its customers expanded deposit insurance.

“The company has strong liquidity and a solid deposit base, and I’m confident we will execute on our turnaround plan to deliver increased shareholder value,” said new CEO Alessandro DiNello.

But Brian Mulberry, client portfolio manager at Zacks Investment Management, said he would be “very cautious” of the stock.

“Transparency is receding and a change in management could cause a loss of confidence from depositors,” he said.

Fitch Ratings downgraded NYCB and its subsidiary Flagstar Bank to ‘BB+’/’B’ from ‘BBB-‘/’F3’ on Friday evening.

Several other firms, including Moody’s (NYSE:) and Morningstar DBRS, have also downgraded the bank since its earnings.

Moody’s further downgraded the NYCB on Friday evening, cutting its long-term issuer rating to ‘B3’ from ‘Ba2,’ citing the Thursday filings. The ratings firm downgraded the long-term deposits of NYCB’s lead bank, Flagstar Bank, to ‘Ba3’ from ‘Baa2.’

EXECUTIVE CHANGES

The bank has made a slew of board and management changes, necessary to improve investor confidence, said Chris Marinac, director of research at financial adviser Janney Montgomery Scott.

NYCB on Friday named financial services veteran George Buchanan as its chief risk officer and Collen McCullum as its chief audit executive. DiNello, appointed as executive chairman last month, was on Thursday assigned the additional roles of president and CEO.

DiNello is the former CEO of Flagstar Bank, acquired by NYCB in 2022.

“The appointment will be viewed favorably given DiNello’s prior history of turning around Flagstar,” said Raymond James analyst Steve Moss.

Under DiNello’s leadership, Flagstar implemented changes to lift a consent order in 2016 imposed by regulators.

But with NYCB’s balance sheet exceeding a $100 billion regulatory threshold due to its acquisition of Flagstar and purchase of some assets of failed Signature Bank (OTC:), it is subject to stricter capital and liquidity norms as it has grown in size.

Short-sellers targeting its shares had already made about $150 million in paper profits through Thursday, before Friday’s plunge, according to data and analytics company Ortex.

NYCB’s stock slide sent traders in the options market looking for defensive positions with renewed gusto on Friday.

Other U.S. regional banks saw their shares slide, as concern was rekindled in the health of regional lenders. Since NYCB’s quarterly report on Jan. 31, the KBW Regional Banking index has lost nearly 10%, falling another 1.27% on Friday.

But analysts at J.P. Morgan said the NYCB situation was unique.

“We continue to view the situation at NYCB as being very specific and not representative of pressure and uncertainty on regional banks,” J.P. Morgan analyst Steven Alexopoulos said.

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