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Some NYCB filings could be at risk of leakage after Moody’s downgraded its ratings again.

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A sign is pictured above a New York Community Bank branch in Yonkers, New York, United States, January 31, 2024.

Mike Segar | Reuters

Regional lender Community Bank of New York may have to pay more to hold onto its deposits after one of the company’s key ratings was downgraded for the second time in a month.

Late Friday, Moody’s Investors Service lowered NYCB’s main banking subsidiary’s deposit rating by four notches from Baa2 to Ba3, placing it three levels below investment grade. This followed a two-notch cut from Moody’s in early February.

The downgrade could trigger contractual obligations from NYCB’s commercial clients that require the bank to maintain an investment-grade deposit rating, according to analysts who follow the company. (Consumer deposits at FDIC-insured banks are covered up to $250,000.)

NYCB ended up in a stockpile free fall It started a month ago when it announced a surprise fourth-quarter loss and larger provisions for loan losses. Concerns intensified last week after the bank’s new management discovered “material weaknesses” in the way it revised its commercial loans. The bank’s shares have fallen 73% this year, including a 23% drop on Monday, and now trade for less than $3 apiece.

The status of NYCB’s filings is of major interest to analysts and investors. Last month, the bank said it had $83 billion in deposits as of February 5, and that 72% of them were insured or guaranteed. But those numbers were from a day before Moody’s began downgrading the bank, sparking speculation that possible theft deposits since then.

Moody’s rating downgrades could impact the funds in at least two areas: A “banking as a service” business with $7.8 billion in deposits according to the May regulatory investigation. depositand a mortgage deposit unit with between $6 billion and $8 billion in deposits.

“There is potential risk to deposit servicing if there is a downgrade,” Citigroup analyst Keith Horowitz said in a Feb. 4 research note.

NYCB executives told Horowitz that the deposit rating, which Moody’s had set at A3 at the time, would have to fall four notches before being threatened. It has fallen six notches since this note was published.

During a conference call on February 7, NYCB CFO John Pinto confirmed that the bank’s mortgage deposit business was to maintain investment grade status and said deposit levels in the unit fluctuated between $6 billion and $8 billion.

“If there is a contract with these depositors that you have to be investment grade, that would theoretically be a trigger event,” Chris McGratty, an analyst at KBW, said of Moody’s rating downgrade.

NYCB did not immediately return calls and emails seeking comment.

It could not be determined what the contracts require NYCB to do if it fails to meet its investment status, or whether rating downgrades from multiple rating companies would be necessary to trigger contractual provisions. For example, while Fitch Ratings lowered NYCB’s credit ratings to junk Last week, it kept the bank’s long-term uninsured deposits at BBB-, one level above junk deposits.

To replace deposits, NYCB could raise brokered deposits, issue new debt or borrow from Federal Reserve facilities, but all of that would likely come at a higher cost, McGratty said.

“They will do everything in their power to keep deposits in-house, but as this scenario plays out, balance sheet funding costs could become increasingly prohibitive,” McGratty said.

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