Shares of New York Community Bancorp fell more than 25% at the end of last week after the regional lender announced a change of chief executive officer and disclosed issues with its internal controls.

The regional bank announced last Thursday after the market closed that Alessandro DiNello, its executive chairman, is taking on the roles of president and CEO, effective immediately. He succeeds Thomas Cangemi, who served as president and CEO and has worked for the company for 27 years. Cangemi remains on the board.

In another leadership change, Marshall Lux was elevated to presiding director of the NYCB board, replacing Hanif Dahya. Lux served as global chief risk officer for Chase Consumer Bank at JP Morgan from 2007 to 2009.

Internal risk management

NYCB has been under pressure in recent months, partly due to concerns about its exposure to commercial real estate — a sector that the COVID-19 pandemic wreaked havoc on, with contraction issues lingering. In fact, it has a large concentration in loans on New York City apartment buildings with rent restrictions, a sector that has suffered amid higher interest rates, inflation and some 2019 revisions to state law.

Moody’s Investors Service downgraded the bank’s credit rating to several notches below investment grade and Fitch Ratings cut the rating to junk after the bank’s recent disclosures “prompted a reconsideration” around how adequately it has prepared for potential commercial real-estate losses.

Its most recent announcement about its internal controls echoes an amendment to its fourth-quarter results in which the bank disclosed weaknesses in its internal risk management.

“As part of management’s assessment of the Company’s internal controls, management identified material weaknesses in the Company’s internal controls related to internal loan review, resulting from ineffective oversight, risk assessment and monitoring activities,” the company said in a filing with the SEC.

“Sometimes when a bank gets bigger all of a sudden – like New York Community Bank did last year – it can be hard for internal controls to keep up.”

Merrill J Reynolds, banking industry consultant

“While we’ve faced recent challenges, we are confident in the direction of our bank and our ability to deliver for our customers, employees and shareholders in the long-term. The changes we’re making to our Board and leadership team are reflective of a new chapter that is underway,” DiNello said in the bank’s press release on Thursday.

Regional bank worries … again?

You might remember NYCB from having been one of the banks that acquired some assets from the failing Signature Bank last year – $40 billion of them.

Banks have people to make, check and double-check calculations, particularly ones concerning who is more likely to default on loans. “Material weaknesses,” as the bank called them, happen when an error occurs during that process and shows up in the bank’s financial reporting.

“Obviously that’s a real problem,” said Mayra Rodriguez Valladares, a financial risk consultant. “Whenever a bank discloses material weaknesses, regulators and traders start thinking, ‘Wait a minute, if it’s having problems with internal controls in this particular area of the bank, does it also mean that we can’t trust anything else?’” she said.

In these cases, it’s important for banks to quickly understand how deep their issues go, thinks banking industry consultant Merrill J Reynolds. “And you have to see what those problems add up to being as far as potential losses for the bank,” he said.

“Sometimes when a bank gets bigger all of a sudden – like New York Community Bank did last year – it can be hard for internal controls to keep up”, Reynolds added.

Adding to the concern in this space is that before NYCB’s disclosures, a deal to shore up a smaller regional bank based in Philadelphia, Republic First Bancorp, collapsed after the bank revealed its own internal-control issues. That bank said earlier this week its auditor had found “material weaknesses” in its controls at the end of 2022, including for key credit measures. 

The very mention of loan losses has reignited fears about the state of the commercial real estate market and regional banks more specifically. Several regional banks failed in 2023 after customers and investors became uneasy about the value of the debt on bank balance sheets, including Silicon Valley Bank.