08.04.2016, 01:16

Fitch Affirms and Withdraws Emigrant Bancorp's Ratings at 'BB/B'; Outlook Stable

OREANDA-NEWS. Fitch Ratings has affirmed and withdrawn the ratings of Emigrant Bancorp, Inc. (EMIG), Emigrant Bank, Emigrant Mercantile Bank, and trust preferred securities issued by EMIG's subsidiaries. The Rating Outlook remains Stable. Fitch has chosen to withdraw the ratings for commercial reasons. A full list of ratings follows at the end of this release.

Fitch reviewed EMIG as part of its U.S. Niche Real Estate Bank Peer Review, which also includes Astoria Financial Corporation, Inc., Dime Community Bancshares, Inc. and New York Community Bancorp, Inc.

The U.S. Niche Real Estate Banks are characterized by their narrow business models relative to other Fitch-rated banks, limited deposit franchises and geographic concentrations. Fitch views these limitations as ratings constraints across the peer group. The group is composed of banks with total assets ranging from approximately $5 billion to approximately $50 billion that lend primarily in the New York City metropolitan residential real estate market.

KEY RATING DRIVERS - IDRs, VRs and SENIOR DEBT

The affirmation of the ratings including the long-term Issuer Default Ratings (IDRs) at 'BB' and Viability ratings (VRs) at 'bb' and Stable Outlook reflects EMIG's solid capital levels, continuing reductions in non-performing assets (NPAs), and relatively stable core earnings. EMIG's ratings remain constrained by several key factors including its limited franchise and business position relative to peers, reliance on net interest income, and historically elevated net charge-offs through the cycle. Fitch also believes that EMIG's risk appetite is relatively high compared to those of peers, driven by EMIG's price sensitive deposit base and exposure to niche business lines with higher industry-wide loss content such as cash flow loans to lower middle-market private equity sponsored companies, fine art lending, sports lending, and syndicated loans.

Despite some modest reductions in 2015 due to risk-weighted asset growth, EMIG's capital ratios continue to be strong and ahead of peers. Emigrant Bank's Core Tier 1 Capital and Fitch Core Capital to Risk Weighted Assets ratios were 20.4% and 21.6%, respectively, as of Dec. 31, 2015, compared to the peer averages of 13.8% and 13.3%. EMIG has not paid material dividends over the past two years and continues to build capital through retained earnings, a key benefit afforded by its private ownership. The ratings and Stable Outlook assume the company will maintain strong capital ratios due to EMIG's relatively high risk loan portfolio.

EMIG's relatively stable, ongoing profitability continues to be a positive for the rating. EMIG has been profitable in each year since 2010 and has generated a solid amount of capital over this period. In 2015, the company had sizable gains from the sale of private equity investments. Stripping out these gains and holding compensation flat from 2014 due to one-off bonus payments in 2015, Fitch's calculated core return on average assets is approximately 50-60bps. Returns should be relatively stable near this level in the near term as a result of EMIG's limited fee revenue generating franchise and high cost base. Fitch views credit deterioration in the C&I loan portfolio or rising interest rates that pressure deposit costs as the main potential risks to EMIG's earnings profile.

EMIG's sale of its brick and mortar branches in 2013 has limited the company to online savings platforms as its primary source of deposit gathering. These online platforms are typically more price sensitive in a rising rate environment, which could negatively impact earnings, though these platforms to date have provided EMIG with a good source of funding since being established in 2005.

The sale of EMIG's retail branches has also limited the company's product set to mainly commercial products. Many of these products are originated through brokers or syndications and limit EMIG's ability to cross-sell fee-based services. To offset this, EMIG has aspired to build its wealth management and private banking franchise into a more meaningful fee contributor, though progress on this front has been limited.

Although net charge-offs for EMIG's higher risk and niche business lines have been low in recent years, NPAs remain elevated due to slow resolution of crisis-era mortgage loans. The significant growth seen in the commercial portfolio is also a concern, as this portfolio and commercial real estate generated significant losses in the previous credit cycle and could be a source of strain in a weaker economic environment. This view is in line with Fitch's industry-wide concerns about above-trend commercial loan growth.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

EMIG's trust preferred securities are rated 'B+', two notches below EMIG's 'bb' VR. The notch differential reflects loss severity and an assessment of incremental non-performance risk.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSITS

Emigrant Bank's long- and short-term deposit ratings, including the long-term deposit rating of 'BB+', reflect Fitch's view of how these deposits would be treated in liquidation by the FDIC.

KEY RATING DRIVERS - HOLDING COMPANY

EMIG's IDRs and VRs are equalized with those of its bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.

KEY RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS

EMIG, Emigrant Bank, and Emigrant Mercantile Bank have Support Ratings of '5' and Support Rating Floors of 'NF'. In Fitch's view, EMIG is not systemically important and, therefore, considers the probability of support to be unlikely. EMIG's IDR and VR do not incorporate any support.

RATING SENSITIVITIES - IDRs, VRs and SENIOR DEBT