A year after Silicon Valley Bank failed, another regional lender displays warning symptoms

As the anniversary of last year’s banking turmoil approaches, New York Community Bank, a regional lender, is facing an increasingly challenging situation.

The shares of the struggling lender experienced a sharp decline of 25% on Friday, falling below $4 per share. This significant drop came in the wake of NYCB’s decision to restate their recent quarterly earnings, adjusting them downwards by $2.4 billion. Furthermore, the company also announced the formal replacement of its CEO and the delay in releasing an important annual report.

Investors are growing increasingly concerned about commercial real estate and the bank’s reported shortfalls in a critical aspect of its business. NYCB has acknowledged that inadequate oversight has resulted in “material weaknesses” in its loan portfolio review process, which is a troubling development.

According to a research note by Raymond James analyst Steve Moss, the disclosure raises concerns about the potential for higher credit costs over a prolonged period. Moss also expressed worry about New York Community Bank’s interest-only multi-family portfolio, stating that it may require a lengthy workout period unless interest rates decrease.

NYCB, once considered a beneficiary of the banking crisis after acquiring assets from Signature Bank, is now grappling with its own existential concerns, marking a significant shift in its fortunes.

A month ago, the bank’s direction took an abrupt turn following a fourth-quarter report that proved to be disastrous. The report revealed an unexpected loss, a significant reduction in dividends, and a surprising amount of provisions for loan losses, leaving analysts shocked.

Moody’s, the ratings agency, downgraded NYCB’s credit ratings to junk status due to concerns about the bank’s risk management capabilities. This decision was made following the departure of NYCB’s chief risk officer and chief audit executive.

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During that period, a few analysts found solace in the measures taken by NYCB to strengthen its capital. They also took note of the promotion of former Flagstar CEO Alessandro DiNello to executive chairman, which instilled confidence in the management team. Additionally, the bank’s stock experienced a temporary boost as a result of several insider purchases, indicating the executives’ faith in the bank.

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DiNello took over as CEO on Thursday following the resignation of his predecessor.

There are concerns about the stability of NYCB’s deposits in light of recent events. According to a recent announcement, the bank reported having $83 billion in deposits as of February 5, which is a slight increase compared to the end of the previous year. The majority of these deposits are insured, and the bank assured that it has sufficient resources to address any potential outflow of uninsured deposits.

According to D.A. Davidson analyst Peter Winter, there has been no update from NYCB regarding deposits, leading us to infer that they have decreased.

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Winter posed the question, “By how much?” as he contemplated the potential repercussions. He believed that corporate treasurers would be reevaluating their decision to maintain deposits at NYCB following the downgrade of their debt rating to junk status.

NYCB CEO DiNello, in a statement released on Friday, acknowledged the material weaknesses that were disclosed on Thursday. He mentioned that he has identified these weaknesses and is currently taking the necessary steps to address them. As part of this effort, he has appointed new executives to the positions of chief risk officer and chief audit executive.

He added that there is no expectation for the bank’s allowance for credit losses to change.

According to DiNello, the company possesses a robust deposit base and ample liquidity. He expressed confidence in the successful implementation of their turnaround strategy.

NYCB is currently facing increased pressure on its operations and profitability due to higher interest rates and an uncertain outlook for loan defaults. This has raised concerns about whether the bank, which has a history of acquiring other banks, will now be compelled to sell itself to a more financially stable partner.

According to Ben Emons, who heads fixed income at NewEdge Wealth, banks that trade below $5 per share are seen as vulnerable to potential government seizure in the eyes of the market.

On Friday, the stock of NYCB hit a 52-week low of $3.32 per share.

Citigroup analyst Keith Horowitz noted that there may be more inquiries about whether NYCB will sell. However, he expressed skepticism about the possibility of finding many potential buyers at the current price. Horowitz believes that NYCB is facing uncertainty and is unlikely to attract significant interest from other parties.

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