Fitch Upgrades Emigrant Bancorp's IDR to 'BB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the long-term Issuer Default Rating for Emigrant Bancorp (EMIG) to 'BB-' from 'B+'. The short-term IDR has been affirmed at 'B'. The Rating Outlook is Stable.

The ratings upgrade reflects EMIG's maintenance of strong capital levels since the company sold its branches late last year. The divestitures resulted in a sizeable gain, and augmented capital ratios by roughly 477 basis points (bps). The rating upgrade also reflects a lower risk profile given reduced exposure to private equity and hedge funds, as a result of regulatory limits on these investments by the Volcker Rule. Fitch views reductions of private equity and hedge fund investments favourably since equity investments are less liquid and returns are more volatile.

EMIG's Stable Outlook incorporates Fitch's assumption that nonperforming assets (NPAs) will continue to decline, and core profitability will improve over the next 12 to 24 months. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT

Emigrant's capital levels are the company's primary ratings strength. Tangible common equity levels improved significantly after the sale of its branch network during second quarter 2013. EMIG recorded a sizeable gain on the sale, which boosted tangible common equity (TCE) by approximately 477 bps. At year-end 2013, TCE stands at 11.8%, and well above peer averages. Fitch's rating upgrade assumes the maintenance of strong capital levels as the company looks to build its wealth management and private banking businesses.

EMIG has materially reduced its investments in private equity funds to $159 million from $284 million a year ago. Fitch views this favourably because private equity investments are less liquid and returns are more volatile. Given passage of the Volcker Rule, Fitch expects EMIG's exposure to private equity and hedge funds to be limited in the future. That said, EMIG still has the capacity to invest in individual private equity investments (i.e. non-private equity fund investments). Despite the latitude granted to individual P/E investments under the Volcker Rule, Fitch still expects that individual private equity investments will be minimal.

Core earnings performance in 2013 was weak. Core ROAA totaled approximately 20 to 30 bps during the year. However, Fitch believes earnings performance in 2014 may improve due to lower overhead expenses associated with the company's branch network. However, this may be offset when interest rates rise as EMIG's balance sheet is liability sensitive, so exposed to a higher interest rate environment.

Asset quality continues to improve, albeit at a very slow pace. NPAs totaled $500 million compared to $579 million the prior year. NPAs are primarily driven by the legacy residential portfolio. Since many of the past due status residential loans are located in New York, the foreclosure process is protracted since it is a judicial foreclosure state. As such, Fitch expects residential NPAs to decline but at a moderate pace.

Fitch reviewed EMIG as part of its Niche Bank Peer Review, along with Astoria Financial Corporation, Dime Community Bancshares, Inc., and New York Community, Inc. Niche banks are defined by their narrow business models, limited deposit franchises and geographic concentrations. Fitch views these limitations as ratings constraints across the peer group. The group is comprised of banks with total assets ranging from $4 billion to $47 billion that lend primarily in the New York City metropolitan, residential real estate market.

RATING SENSITIVITIES - IDRS and VRs and SENIOR DEBT

EMIG's ratings are sensitive to a change in core earnings performance, and further improvement in asset quality. EMIG's ratings could see further positive momentum if earnings improve significantly, while maintaining low credit costs. EMIG's balance of NPAs is significantly elevated given the extended period of time it takes to work problem assets through the foreclosure process. Realized credit costs to date have been manageable. If EMIG materially winds down its balance of problem assets, while maintaining low credit costs, Fitch would view this favourably.

Over the long term, EMIG's ratings are sensitive to the company's ability to build up its wealth management franchise. To the extent that Fitch can observe stable and meaningful fee income from its wealth management business, Fitch could see further ratings improvement. That said, Fitch believes wealth management growth is a longer term proposition given the deep relationships needed in private banking and wealth management.

Conversely, Fitch believes a number of triggers could generate negative ratings pressure. Should EMIG not be able to generate core earnings or asset quality improvement over the next 12 to 24 months, EMIG's Negative ratings momentum could build. If capital levels decline significantly EMIG's ratings would be revisited. And finally, a meaningful increase to higher risk assets on the balance sheet such as leveraged loans could also be a driver for negative ratings action.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

EMIG's trust preferred issuances are notched below EMIG's VR. The notch differential reflects loss severity and an assessment of increment non-performance risk.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

EMIG's trust preferred issuances are sensitive to changes in EMIG's VR. The rating sensitivities for the VR are listed above.

KEY RATING DRIVERS - HOLDING COMPANY

EMIG's IDR and VR are equalized with those of its bank subsidiaries 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.

RATING SENSITIVITIES - HOLDING COMPANY

Should EMIG begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of its bank subsidiaries.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

EMIG's Support Rating and Support Rating Floor of '5' and 'NF' reflect Fitch's view that the company is unlikely to procure extraordinary support should such support be needed.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

EMIG's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

Fitch has upgraded the following ratings with a Stable Outlook.

Emigrant Bancorp

--Long-term IDR to 'BB-' from 'B+';

--Viability Rating to 'bb-' from 'b+';

--Senior unsecured to 'BB-' from 'B-/RR6'.

Emigrant Bank

--Long-term IDR 'BB-' from 'B+';

--Viability Rating to 'bb-' from 'b+';

--Long-term deposits to 'BB' from 'BB-'.

Emigrant Mercantile Bank

--Long-term IDR to 'BB-' from 'B+'.

Emigrant Capital Trust I & II

--Trust preferred stock to 'B' from 'CCC/RR6'.

Fitch has affirmed the following ratings

Emigrant Bancorp

--Short-term IDR 'at 'B';

--Support Rating at '5';

--Support Rating Floor at 'NF'.

Emigrant Bank

--Short-term IDR at 'B';

--Support Rating at '5';

--Support Rating Floor at 'NF';

--Short-term deposits at 'B'.

Emigrant Mercantile Bank;

--Short-term IDR at 'B';

--Support Rating at '5';

--Support Rating Floor at 'NF'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'2014 Outlook: U.S. Banks', Nov. 21, 2013;

--'U.S. Banks: Liquidity and Deposit Funding', Aug. 08, 2013;

--'U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)', June 18, 2013;

--'U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?', June 11, 2013;

--'Fitch Fundamentals Index', Jan. 15, 2014;

--'Risk Radar Global - 1Q13', April 01, 2014;

--'U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain)', Jan. 27, 2014;

--'Global Financial Institutions Rating Criteria', Jan. 31, 2014;

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria', Jan. 31, 2014;

--'Fitch Global Corporate Rating Activity -Third-Quarter 2013', Dec. 05, 2013;

--'Corporate Bond Comparator 1Q14: US vs EMEA', March 26, 2014;

--'Rating FI Subsidiaries and Holding Companies', Aug. 10, 2012.

Applicable Criteria and Related Research:

2014 Outlook: U.S. Banks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723989

U.S. Banks: Liquidity and Deposit Funding

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196

U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875

U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539

Fitch Fundamentals Index

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=729196

Risk Radar Global 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742560

U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732295

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Fitch Global Corporate Rating Activity -- Third-Quarter 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720480

Corporate Bond Comparator 1Q14: US vs EMEA

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=738296

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826462

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Contacts

Fitch Ratings
Primary Analyst:
Jaymin Berg, CPA, +1-212-908-0368
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Ilya Ivashkov, CFA, +1-212-908-0769
Senior Director
or
Committee Chairperson:
Julie Solar, +1-312-368-5472
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Jaymin Berg, CPA, +1-212-908-0368
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Ilya Ivashkov, CFA, +1-212-908-0769
Senior Director
or
Committee Chairperson:
Julie Solar, +1-312-368-5472
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com