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

A downgrade could trigger contractual obligations from NYCB's counterparties, according to analysts who track the company. (Consumer deposits at FDIC-insured banks are protected up to $250,000.)

NYCB finds itself in a stock slump that began a month ago when it reported a surprise fourth-quarter loss and steep 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. The bank's shares have fallen 72% this year, including Monday's 19% decline, and now trade below $3 apiece.

Of major interest to analysts and investors is the position of NYCB's deposits. Last month, the bank said it had $83 billion in deposits as of February 5, of which 72% were insured or co-depositors. But the figures come a day before Moody's began downgrading the bank's rating, fueling speculation about a possible flight of deposits since then.

Moody's ratings downgrade could hurt the fund in at least two areas: the “banking as a service” business with $7.8 billion in deposits, according to the May regulation; Filingand a mortgage escrow unit with $6 billion to $8 billion in deposits.

“There is risk to servicing deposits in the event of 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 points before it would be at risk. It has fallen 6 points since the note was released.

During the February 7 conference call, NYCB CFO John Pinto It confirmed that the bank's mortgage escrow business should maintain investment grade status and said deposit levels in the unit fluctuate between $6 billion and $8 billion.

“If there's an agreement with these depositors that you're going to be investment grade, theoretically that would be a trigger event,” KBW analyst Chris McCratty said of the Moody's downgrade.

NYCB did not immediately return calls or an email seeking comment.

NYCB could not determine what contracts should do in the event of a breach of investment grade status or whether multiple rating agency downgrades would be required to trigger contract provisions.

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

“They'll do whatever it takes to keep the deposit at home, but playing out this scenario makes it too cost prohibitive to fund the balance sheet,” McGratty said.

This story is developing. Check back for updates.

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