Is the regional banking crisis that first reared its head nearly a year ago about to return? 

New York Community Bancorp Inc. (NYSE: NYCB) shares plummeted more than 37% on January 31 after the regional lender reported an unexpected loss of $260 million in the fourth quarter. 

The bank cited bad loans for commercial real estate, specifically apartment buildings and offices.

That resulted in a loss of 27 cents per share in the quarter. The New York Community Bancorp earnings data illustrate how stark that loss was: Analysts had anticipated earnings of 29 cents per share, nowhere in the universe of a 27 cents a share loss. 

Dramatic dividend cut

The bank also slashed its dividend by 70% and named a new executive chairman.

The New York Community Bancorp dividend yield currently stands at 16.23%, but that's a case of the yield rising as the stock of a troubled company is cratering.

The SPDR S&P Regional Banking ETF (NYSEARCA: KRE), which tracks the index of the same name, also gapped down on the New York Community Bancorp news as pessimism spread throughout the industry. That ETF is down 5.73% in the past week. 

The largest components in that index, and their one-week returns, are:

• Citizens Financial Group Inc. (NYSE: CFG): -4.9%
• Truist Financial Corp. (NYSE: TFC): -2.83%
• Huntington Bancshares Inc. (NASDAQ: HBAN): -2.99%
• Regions Financial Corp. (NYSE: RF): -4.45%
• Zions Bancorp NA (NASDAQ: ZION): -6.47%

New York Community Bancorp quickly scheduled a call with investors in an effort to stem the bleeding, but as you can see on the New York Community Bancorp chart, it appears to have been unsuccessful. 

Debt downgraded to junk status

Adding to the pain, bond rater Moody's downgraded the bank's long-term debt ratings to junk status. 

Downgrading a bank's debt to junk status signals an increased risk of default, which in turn erodes investor confidence in the bank's financial stability. This heightened risk perception frequently leads to higher borrowing costs for the bank, which cuts into profitability, driving the stock down even further. 

New York Community Bancorp stock is down 30.76% in the past week. 

This time the problem is real estate, not long bonds

This downturn in regional banking differs from last year's in that it's driven by commercial real estate defaults. 

Events that took down regional banks in 2023 were due to Silicon Valley Bank and a few others buying long-dated bonds without any protection against the Federal Reserve's fast pace of interest rate increases. 

Long-dated bonds are at risk when interest rates rise because their fixed interest payments become less attractive to new investors compared to newly issued bonds offering higher rates. 

This reduces demand for existing bonds, causing their prices to fall. When investors try to sell off long-dated bonds, that leads to losses.

Regional banks at risk from bad mortgage loans

However, regional banks are the financiers behind commercial mortgages in their areas. Some of these banks may have overestimated the ability of their borrowers to service their debt or perhaps didn't charge interest rates high enough to make it worth their while to take on extra risk.

The federal government is taking notice. 

Treasury Secretary Janet Yellen, speaking at a Congressional committee hearing recently, said she was concerned about regional banks, adding that regulators are working with the banks to make sure "loan loss reserves are built up to cover losses" and "dividend policies are appropriate."

She added, "I believe it's manageable, although there may be some institutions that are quite stressed by this problem." 

Work-from-home putting office loans in peril

Meanwhile, regional banks continue to rely heavily on commercial mortgages, with substantial portions of their loan portfolios locked up in real estate such as office buildings, apartment buildings, malls and hotels. 

These loans may become increasingly risky as more employees work from home, instead of commuting to an office building, which could lead to more defaults, with regional banks holding the bag.  

As of now, it doesn't look promising for big investors to swoop in and pick up bargains in the regional banking sector. The New York Community Bancorp analyst ratings show a consensus of "reduce," something you don't see very often. 

With investors, regulators and bond raters watching the industry very closely, it's wise to be wary of this part of the banking industry. Large-cap bank stocks, however, have very different business models and multiple streams of income, immunizing them from this particular problem of real-estate portfolio defaults.