New York Community Bank’s stock price is plunging, but that won’t tell you if it’s on the brink of failure. Here’s what will

Some of the very first signs of banking stress in the crisis that unfolded last year were reflected in Silicon Valley Bank, Signature Bank and First Republic Bank’s nosediving share prices. All of them eventually failed.

So it’s no wonder why more people are questioning whether New York Community Bancorp (NYCB) will meet the same fate after the stock shed 60% of its value over the past week.

Now it’s under even more pressure after Moody’s Investors Service downgraded the bank’s credit grade to junk status Tuesday evening. Its stock plunged another 8% in premarket trading Wednesday.

“NYCB’s ratings could be further downgraded if the bank were to experience a loss of depositor confidence that challenges the bank’s liquid resources,” the ratings agency said.

The initial catalyst for the declines was the bank’s announcement last week that it would be slashing dividends after reporting a surprise loss of $252 million last quarter compared to a $172 million profit in the fourth quarter of 2022. The company also reported $552 million in loan losses coming primarily from soured commercial real estate loans. which have plummeted in value as people increasingly work from home and companies give up office space.

NYCB CEO Thomas Cangemi also blamed the bank’s poor quarter on its acquisition of $40 billion of assets from Signature Bank, which brought NYCB’s total assets above $100 billion. Crossing that threshold is significant for banks since it means, by law, they have to set aside more capital to protect against future losses. That limits the amount of money banks can loan out, however.

Given all that, the knee-jerk reaction investors had to NYCB earnings report was warranted and not indicative that the bank was at risk of failing, said David Chiaverini, a managing director at Wedbush Securities covering banks.

But the stock’s continued significant descent is starting to raise concerns, he said. “As the stock price goes lower, it increases the chance the bank could fall into receivership.” In other words: the bank could ultimately fail.

That’s because uninsured depositors — customers with more than $250,000 in a single account — could get more fearful that the bank will run out of money to cover their deposits.

Uninsured deposits represented around 40% of NYCB’s total deposits as of the third quarter of last year, according to the company’s earnings filing. That’s a considerably smaller share compared to Signature Bank and Silicon Valley Bank shortly before their demises.

So far, there’s no evidence that the bank is at risk of failing

As scary as it may be to see a bank’s stock price plunging, it’s not the best gauge for the bank’s viability.

The best source of information on that front is a bank’s deposit flows, Chiaverini said.

As of last quarter, deposits were down just 2% and declined even less excluding the custodial deposits connected to the acquisition of Signature Bank. But since last week’s earnings report, that could have changed drastically.

Analysts from Bank of America said in a note on Friday the feedback they’ve received from management “indicates that the bank is not seeing any unusual deposit inflow/outflows.”

However, NYCB has not provided any official update on deposit flows and did not respond to CNN’s inquiry.

The bank is likely to file a required annual report within the next month, based on the timing of prior filings. That report will give more insight into the bank’s deposit flows.

On Tuesday, Treasury Secretary Janet Yellen told lawmakers: “We are in touch with supervisors, and we are monitoring the current banking stress carefully.” She added that she did not want to comment on an individual bank.

“Commercial real estate is an area we have long been aware could create financial stability risks or losses in the banking system,” Yellen said during a hearing before the House Financial Services Committee.

The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency declined to comment.

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