Fitch Takes Rating Action on U.S. Niche Real Estate Banks Following Industry Peer Review

NEW YORK--()--Fitch Ratings has completed a peer review of the following companies: Astoria Financial Corporation (AF), Dime Community Bancshares, Inc. (DCOM), Emigrant Bancorp, Inc. (EMIG), and New York Community Bancorp, Inc. (NYCB). These companies are part of Fitch's Niche Real Estate Bank peer group.

Fitch's Niche Real Estate Bank peer group is defined by the banks' that lend primarily in the New York City metropolitan, residential real estate market. With the exception of EMIG, niche banks have higher levels of multifamily lending than traditional depositories. They are also characterized by their narrow business models, geographic and loan concentrations, and limited deposit franchises. The group is comprised of banks with total assets ranging from $4 billion to $47 billion. Due to their lack of deposit franchises, these banks rely on higher cost, wholesale borrowings as their primary source of funding and typically have higher loan to deposit ratios. Fitch views these limitations as ratings constraints across the peer group.

Niche banks have benefited from the strength of the NY real estate market and focused business model. Given the group's concentrated loan portfolios and focus on multifamily lending in New York City's highly regulated real estate market, asset quality has remained strong with very low levels of charge-offs, despite elevated balances of nonperforming assets. Fitch has observed that the NYC multifamily market has historically been resilient to weaknesses in the economy given rent control regulations and a limited housing supply. Fitch expects asset quality to continue to improve, albeit gradually, as the foreclosure process in New York and New Jersey has proven to be more lengthy than other jurisdictions.

While niche bank earnings have remained relatively flat over the past year, the quality of earnings have improved marginally with banks relying less on reserve releases and securities gains to offset net interest margin (NIM) compression. Typically, niche banks experience greater NIM volatility than traditional commercial bank franchises due to a niche bank's smaller deposit franchise. However, fewer brick and mortar branches require less overhead cost, balancing margin pressure from the prolonged low interest rate environment. Fitch expects earnings performance to remain challenged in the near term with prepayment activity slowing as interest rates normalize.

Niche banks are more reliant on spread income than more diversified depositories. This lack of diversity of earnings is viewed negatively as these banks earnings tend to be more vulnerable to rapid changes in interest rates. Despite niche banks typically having shorter duration assets, the heavy reliance on more interest rate sensitive borrowings creates additional pressure in rising rate environments. Given the liability sensitive balance sheet at all four banks, this peer group is exposed to a rising interest rate environment, which will pressure spread income over the near- to intermediate-term. Fitch's rating actions incorporated these earnings challenges.

Fitch Ratings has upgraded the Long-Term and Short-Term Issuer Default Ratings (IDR) for Emigrant Bancorp (EMIG) to 'BB-'/'B' from 'B+'/'B', respectively, and maintained its Stable Outlook. EMIG's ratings diverge from the rest of the group due to its differing business model and legacy asset quality issues within the bank's 1-4 family residential loan portfolio. The rating action reflects EMIG's strong capital levels and reduced balance sheet risk. Ratings continue be constrained by EMIG's weaker business model and asset quality.

Ratings for DCOM, AF, and NYCB were all affirmed at their respective levels. NYCB's ratings lead the group with Long-Term and Short-Term IDRs at 'BBB+'/'F3', reflecting the NYCB's relatively strong company profile and resilient asset quality performance. The company's has a solid track record of consistent performance throughout the economic cycle. These strengths are balanced against NYCB's relatively higher risk funding profile and concentrated loan portfolio.

IDRs for DCOM and AF were affirmed at 'BBB'/'F2' and 'BBB-'/'F3', respectively. Ratings continue to be supported by stable asset quality performance and constrained by weak liquidity and funding profiles. DCOM's above peer average asset quality and earnings performance underpin its one notch rating differential.

Fitch has published Rating Action Commentaries for each niche bank, which are available on www.fitchratings.com. These include each issuer's key rating drivers and rating sensitivities and lists of all rating actions taken.

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

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Contacts

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