Contagion or opportunity? NYCB shares trade at 1996 prices.

It’s been exactly a year since stories of community bank contagion made headlines, and now they’re back with a vengeance. Maybe it’s just a coincidence, but the implications and/or opportunities could be much broader this time around.

The subjects of heated discussion last year were Silicon Valley Bank, Signature Bank, and First Republic Bank. One that may need a bailout in early 2024 is New York Community Bancorp (NYSE:NYCB). Now, after NYCB stock plunged, some investors may be wondering if now is a good time to buy the dip.

From savior to potential failure

There is an irony here. That’s because New York Community Bancorp was once seen as a potential savior of Signature Bank. But things have changed, and now it’s New York Community Bancorp that needs a rescue mission. The company’s fourth-quarter financial press release revealed that it posted a shocking net loss of $193 million, compared to net income of $266 million in the previous quarter.

Additionally, New York Community Bancorp reduced its quarterly dividend from 17 cents per share to just 5 cents. Soon after, Moody’s downgraded the bank’s credit rating to ‘junk’ status.

While retail investors have been dropping NYCB stock like a hot potato, interestingly enough, many insiders have been buying shares. But they may be regretting that decision now, because New York Community Bancorp stock received an additional 25% discount on March 1.

It’s strange to see NYCB stock technically trading in penny stock territory since it’s currently below the $5 level. This would have been almost inconceivable at the end of 2023, when NYCB shares were comfortably hovering around $10.

But the fall of Silicon Valley Bank, Signature Bank, and First Republic Bank was also completely unexpected. However, it is difficult to compare New York Community Bancorp to other community banks because its circumstances are quite different.

The main issue, such as the failure of Signature Bank last year, was excessive investment in cryptocurrency or government bonds. When both cryptocurrency and bond prices fell, Signature Bank and several other local banks failed the “stress test,” so to speak.

This reminds me of an old quote from Warren Buffett about how you can tell who is swimming naked at low tide. New York Community Bancorp, who now appears to be swimming without any clothes on.

“Material Weakness” Indicates a Serious Problem

New York Community Bancorp may not be overleveraged in cryptocurrencies and/or government bonds like Signature Bank. However, the current problem is unlikely to be easily solved.

Here’s some language that might surprise potential buyers: New York Community Bancorp management identified “material weaknesses in the company’s internal controls related to internal loan review due to ineffective supervision, risk assessment and monitoring activities.”

These words were not a reporter’s interpretation of management commentary, but came directly from the bank itself. If this isn’t surprising enough, New York Community Bancorp also revealed that CEO Thomas Cangemi will be leaving and will be replaced by Chairman Alessandro DiNello.

DiNello’s appointment did not come without controversy. In a Feb. 25 letter, New York Community Bancorp Executive Director Hanif “Wally” Dahya declared that he “does not support” appointing DiNello as the bank’s chief executive officer.

As if that wasn’t enough, the filing also revealed that it included a new (or at least newly disclosed) $2.4 billion “goodwill” impairment charge for New York Community Bancorp. ”

It’s too early to definitively declare that New York Community Bancorp will be the next signature bank. But signs of trouble are hard to ignore.

At least investors can take some comfort from Wedbush analyst David Chiaverini’s suggestion that the banks’ problems may not metastasize into banking sector contagion.

Chiaverini assured investors that “NYCB’s problems are largely idiosyncratic in themselves due to its overexposure to rent-regulated multifamily lending.”

That’s nice to hear, but it doesn’t quell investors’ concerns about New York Community Bancorp. At the very least, it will take some time for DiNello to prove his suitability as the company’s new CEO.

Finally, keep in mind that a low stock price does not equate to a high valuation, and a falling knife is not always caught. So as long as negative news about New York Community Bancorp continues to emerge, there is no apparent reason to continue a dip-buying expedition with the stock.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.