New York Community Bank (NYCB) is facing potential challenges in retaining deposits as Moody's Investors Service downgraded one of the bank's key ratings for the second time in a month. The regional lender, which has been grappling with financial difficulties, may now have to pay more to maintain its deposits, according to industry analysts.

Late last Friday, Moody's cut the deposit rating of NYCB's primary banking subsidiary by four notches, downgrading it from Baa2 to Ba3. This puts the bank's deposit rating three levels below investment grade. This downgrade comes after a previous two-notch cut from Moody's in early February. Analysts tracking the company have highlighted that such a downgrade could trigger contractual obligations from NYCB's counterparties that require the bank to maintain an investment grade rating for deposits.

Consumer deposits at FDIC-insured banks are typically covered up to $250,000, providing a level of reassurance for depositors. However, with NYCB's recent stock freefall, which started a month ago after the bank reported unexpected losses in the fourth quarter and higher provisions for loan losses, concerns about the status of its deposits have intensified. The bank's plummeting stock saw a further decline of 19% on Monday, making it a total drop of 72% this year. Currently, NYCB's shares are trading at less than $3 apiece.

One of the key points of interest for analysts and investors is the actual status of NYCB's deposits. In February, the bank reported having $83 billion in deposits as of February 5, with 72% of those deposits being insured or collateralized. However, these figures were compiled before Moody's began downgrading the bank's ratings, leading to speculation about potential flight of deposits since then.

Moody's ratings cuts could have a significant impact on funds in two crucial areas for NYCB. The first is a "Banking as a Service" business with $7.8 billion in deposits as of a regulatory filing in May. The second area is a mortgage escrow unit, which holds approximately $6 billion to $8 billion in deposits. Analyst Keith Horowitz from Citigroup stated concerns about the risk to servicing deposits in the event of a downgrade. NYCB executives previously indicated to Horowitz that a deposit rating four notches below investment grade would put the bank at risk. However, the deposit rating has fallen six notches since that statement was made.

The downgrade from Moody's raises questions about the contractual provisions that NYCB may be required to uphold in the event of breaching investment grade status. It remains unclear if downgrades from multiple rating agencies would be necessary to trigger contractual obligations. To secure replacement deposits, NYCB may explore options such as raising brokered deposits, issuing new debt, or borrowing from Federal Reserve facilities. However, these alternatives are anticipated to come at a higher cost, putting additional strain on NYCB's balance sheet.

At present, NYCB has not provided any comment on the recent downgrade. As the situation continues to unfold, market participants will closely monitor NYCB's efforts to retain deposits and manage the financial implications of these ratings downgrades.

Please note that this story is developing, and further updates may follow.