A banner is pictured above a New York Community Bank branch in Yonkers, New York, on January 31, 2024.
Mike Segar | Reuters
Regional lender Community Bank of New York The company may have to pay more to hold deposits after one of the company's key ratings was downgraded for the second time in one month.
Late Friday, Moody's Investors Service lowered the deposit rating of New York Commercial Bank's main banking branch by four notches, to Ba3 from Baa2, putting it three levels below investment grade. This came after Moody's downgraded it by two notches in early February.
A rating downgrade could trigger contractual obligations from New York Commercial Bank's commercial clients that require the bank to maintain an investment-grade deposit rating, according to analysts who track the company. Consumer deposits at FDIC-insured banks are covered up to $250,000.
New York Commercial Bank found itself in a stock freefall that began a month ago when it reported a surprise fourth-quarter loss and larger provisions for loan losses. Concerns increased last week after the bank's new management found “material weaknesses” in the way it reviewed its commercial loans. The bank's shares have fallen 73% this year, including a 23% drop on Monday, and shares now trade at less than $3 per share.
Among the matters of interest to analysts and investors is the status of New York Mercantile Bank deposits. Last month, the bank said it had deposits worth $83 billion as of February 5, 72% of which were insured or guaranteed. But those numbers date back to the day before Moody's began downgrading the bank's ratings, sparking speculation about possible deposit flight since then.
Moody's downgrades could affect funds in at least two areas: its “banking as a service” business with $7.8 billion in deposits as of a regulatory filing in May, and its mortgage underwriting unit with deposits between $6 billion and $8 billion.
“There is a potential risk to deposit servicing in the event of a credit rating downgrade,” Citigroup analyst Keith Horowitz said in a February 4 research note.
Bank of New York executives told Horowitz that its deposit rating, which Moody's pegged at A3 at the time, would have to fall four notches before it would be at risk. It has fallen six degrees since that note was published.
During a Feb. 7 conference call, John Pinto, chief financial officer of New York Commercial Bank, emphasized that the bank's mortgage underwriting business needed to maintain investment-grade status, and said deposit levels at the unit ranged between $6 billion and $8 billion.
“If there is a contract with these depositors that should be investment grade, in theory that would be a dramatic event,” Chris McGroty, an analyst at KBW, said of Moody's downgrade.
NYCB did not immediately respond to CNBC's calls or an email seeking comment.
It is not possible to determine what the contracts would force the New York Fed to do if it violates its investment grade status, or whether a downgrade from multiple rating companies would be needed to trigger the contractual provisions. For example, while Fitch Ratings downgraded New York Commercial Bank's credit rating to junk last week, it kept the bank's long-term uninsured deposits at BBB-, a level above junk.
To replace deposits, the New York central bank could raise brokered deposits, issue new debt or borrow from Federal Reserve facilities, but all of that would likely come at a higher cost, McGroty said.
“They will do whatever it takes to keep deposits at home, but as this scenario continues, financing the balance sheet may become more expensive,” McGroty said.
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