New York Community Bancorp’s stock price plummeted 30% in pre-market trading on Friday after the lender disclosed “material weaknesses” in internal controls related to its loan review process. This revelation exacerbated existing investor concerns over NYCB’s commercial real estate loan exposures.
The weaknesses uncovered pertain to “ineffective oversight, risk assessment and monitoring activities,” NYCB stated. The bank said it will provide details on remediating these control gaps when it files its annual report with the Securities and Exchange Commission in the next 15 days.
NYCB has been under intensifying pressure since reporting a surprise $146 million fourth-quarter loss on January 31st attributed to higher loan loss provisions tied predominantly to commercial real estate loans. This prompted the lender to slash its dividend payout to strengthen its capital position amidst tightening regulatory scrutiny.
In a late Thursday filing, NYCB revised its Q4 loss figure to over $1 billion – more than 10 times the initially reported amount. This exponentially higher loss reflects a goodwill impairment charge related to acquisitions made in 2007 and earlier.
Although the massive goodwill write-down is not entirely unexpected, the internal control weaknesses uncovered around loan reviews raise more pressing concerns. Resolving these gaps in credit risk monitoring and oversight is likely to drive a more proactive approach by NYCB in recognizing emerging asset quality issues, according to Citigroup analyst Keith Horowitz.
NYCB’s stock market value is on track to shed over $1 billion if the steep pre-market losses hold through Friday’s trading session. This builds on the more than $4 billion in market capitalization already erased following the lender’s disappointing Q4 earnings release.
In the wake of January’s share price slide tied to heightened commercial real estate loan risks, NYCB appointed veteran banker Alessandro DiNello as executive chairman last month. On Thursday, the bank expanded DiNello’s responsibilities by naming him president and CEO.
According to Raymond James analyst Steven Moss, NYCB’s leadership shuffle represents a net positive given the significant issues disclosed by the bank over the past month.
Resolving the loan review control gaps in a timely manner will likely rank high on management’s priority list. Effective credit risk monitoring and oversight are crucial for NYCB to provide investors with increased confidence in the quality of the loan portfolio.
Until the material weaknesses are fully remediated and commercial real estate asset quality stabilized, NYCB faces a challenging road ahead to restore its credibility with shareholders. With pre-market trading indicating a further $1 billion-plus erosion in market value, the bank has considerable work to do to regain investor trust.
