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  • Martin Fridson, CFA and Michael Livian, CFA

NYCB's 45% Plunge: A Stark Reminder of Lingering Regional Bank Challenges

The recent 45% drop in New York Community Bancorp’s (NYCB) stock is a visible signal that problems within regional banks are still present. On January 31, 2024, NYCB faced significant setbacks, including a 71% cut in its dividend, due to poor fourth-quarter performance marked by increased loan losses and a need for higher reserves for potential real estate loan defaults. These issues, coupled with the challenges of adhering to stricter regulations after its assets exceeded $100 billion, underscore the broader vulnerabilities in the regional banking sector.

While preferred shares in regional banks might offer tax-advantaged appealing returns, investors need to be vigilant. The financial stability of these banks is under scrutiny, especially considering potential losses from long-term U.S. Treasury bonds amid rising interest rates. This situation necessitates close monitoring of various indicators.

To effectively track the risk associated with regional banks and safeguard investments, our approach is detailed and vigilant. We focus, among others, on several key metrics that help us assess a bank's financial health and potential risks:

  • Short Interest in the Bank's Common Stock: A high or increasing amount of short interest might indicate that investors are betting against the bank's stock, suggesting potential trouble ahead.

  • Percentage of FDIC-Insured Deposits: Banks with a significant amount of deposits exceeding the FDIC's $250,000 insurance limit are at a higher risk of experiencing rapid withdrawals in times of crisis.

  • Bank Size and Regulation: The size of the bank, measured by metrics such as total deposits, number of branches, and total equity, helps us understand its regulatory landscape. Smaller banks often face lighter regulations, which could affect the speed and efficiency of regulatory interventions.

  • Unrealized Losses Relative to Equity: This ratio gives us insight into how much of the bank's equity might be at risk if there were substantial withdrawals, affecting the bank's ability to withstand financial stress.

By closely watching these indicators, we aim to detect early signs of weakening confidence among lenders and depositors, which is crucial for maintaining the financial stability of these institutions and protecting our clients' investments.


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