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Key Takeaways
- New York Community Bancorp. has said its board approved a proposal for a 1-for-3 reverse stock split set to come into effect during July.
- A reverse stock split is often performed in times of financial trouble and can improve the company’s image, and its appeal to institutional investors and traders.
- NYCB stock has lost more than 70% of its value year-to-date.
New York Community Bancorp, Inc. (NYCB) said it will go ahead with a 1-for-3 reverse stock split sometime mid-to-late July, after its board approved the move Wednesday.
The troubled lender‘s shareholders had given a greenlight to the reverse stock split during the annual meeting on June 5.
Why Do Companies Do Reverse Stock Splits?
A reverse stock split is a corporate action in which a publicly traded company will reduce the number of its shares on the market and available for trading, while boosting its stock price and maintaining its market valuation.
For example, if a company has 10 shares, worth $10 each, its market capitalization would be $100 (10x$10). If it carries out a 1-for-2 reverse stock split, it would have 5 shares, worth $20 at the time of the split while the market cap remains steady at $100.
Companies may carry out reverse stock splits when they need to boost their share price to attract investors who may be wary of buying the stock if it’s priced too low or even for certain compliance reasons. For example, EV-maker Nikola Corp. (NKLA) enacted a 1-for-30 reverse stock split on June 24 to avoid a delisting from the Nasdaq.
It is pretty much the opposite of a stock split, which companies do in order to increase the number of shares in the market, and reduce their price so that more investors can afford to buy the stock. Companies that recently undertook stock splits include Chipotle (CMG), Nvidia (NVDA), Amazon (AMZN) and Walmart (WMT).
NYCB Has Struggled
Shares of NYCB, which fell 0.7% to finish Thursday’s session at $3.04, have lost around 70% of their value year-to-date.
Concerns about the bank’s operations and its commercial real estate loan portfolio—especially multi-family homes—have relegated its shares to penny-stocks status.
At the end of the first quarter, two credit agencies downgraded the bank, citing “material weaknesses” in controls, while the company reported a surprise write-off of a $2.4 billion loss and sacked its chief executive of nearly 30 years. The company also received a $1 billion cash injection from a consortium of lenders to shore up its balance sheet.
The lender also acquired assets of the failed Signature Bank last year, pushing its combined assets over $100 billion and attracting greater regulatory scrutiny.