Some NYCB deposits may be at risk after another Moody’s downgrade

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

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

The downgrade could trigger contractual obligations from business clients of NYCB who 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.)

NYCB has found itself in a stock freefall that began a month ago when it reported a surprise fourth-quarter loss and steeper provisions for loan losses. Concerns intensified last week after the bank’s new management found “material weaknesses” in the way it reviewed its commercial loans. Shares of the bank have fallen 73% this year, including a 23% decline Monday, and now trade hands for less than $3 apiece.

Of key interest for analysts and investors is the status of NYCB’s deposits. Last month, the bank said it had $83 billion in deposits as of Feb. 5, and that 72% of those were insured or collateralized. But the figures are from the day before Moody’s began slashing the bank’s ratings, sparking speculation about possible flight of deposits since then.

The Moody’s ratings cuts could impact funds in at least two areas: a “Banking as a Service” business with $7.8 billion in deposits as of a May regulatory filing, and a mortgage escrow unit with between $6 billion to $8 billion in deposits.

“There is potential risk to servicing deposits in the event of a downgrade,” Citigroup analyst Keith Horowitz said in Feb. 4 research note.

NYCB executives told Horowitz that the deposit rating,…