NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Dime Community Bancshares, Inc. (DCOM) at 'BBB/F2'. The Rating Outlook remains Stable.
The Stable Outlook assumes that asset quality will remain strong, capital levels will remain relatively stable, and similar to peers, earnings could face headwinds in 2014. Fitch believes that earnings will come under pressure over the near term as the mortgage refinancing boom wanes. Given a liability sensitive balance sheet, earnings will also be exposed to higher interest rates, which will presumably occur over the near to intermediate term. A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT
DCOM's conservative risk appetite and demonstrated ability to execute on its multifamily lending strategy through various cycles is its primary ratings strength. DCOM's asset quality remains strong with NPAs and NCOs well below peer averages. Fitch believes that the low level of credit costs at the institution is attributed to solid underwriting, which includes low loan-to-values at origination, good cash flow coverage, and the usage of elevated stressed interest rates at underwriting. Additionally, Fitch attributes solid performance to DCOM's focus on multifamily rent-regulated apartments in NY which tend to have more stable cash flows and valuations.
Earnings were solid during 2013 with a return on average assets of 1.10%. Fitch expects earnings performance to decline somewhat in the near term due to lower prepayment fee revenue and the absence of mortgage banking income, though lower earnings performance is not expected to impact DCOM's ratings. The company exited its mortgage banking operations due primarily to increasing regulatory burden. Since mortgage revenues only comprised less than 1% of revenues in 2013, the exit is not expected to material impact earnings in 2014. However, DCOM's spread income is exposed to a higher interest rate environment given a liability sensitive balance sheet. Fitch's rating action incorporated a view that earnings will likely be challenging over the near to intermediate term as a result.
Similar to its peer banks, DCOM's liquidity profile remains a constraint on the overall rating for the institution. DCOM's business strategy tends to be more transaction-oriented, and as a result, its funding profile does not benefit from a sizeable relationship-driven deposit base. As a result, DCOM operates with higher loan to deposit ratio. At 140% at YE2013, DCOM's LTD was the highest of its four bank peer group. Further, its cost of funds of 1.26% in 2013 was also higher than peers.
Fitch reviewed DCOM as part of its Niche Bank Peer Review, which also includes Astoria Financial Corporation, Emigrant Bancorp, Inc., and New York Community Bancorp, 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
Fitch believes DCOM's ratings are solidly situated at current levels. Fitch sees limited upside in the company's ratings over the near term due to aforementioned concentrations in the loan portfolio, undiversified earnings profile, and relatively weaker liquidity profile.
Negative ratings pressure could occur if there were a significant change to rent regulations in New York City. DCOM has historically benefitted from rent regulations on multifamily apartments in New York City, which tend to have more stable cash flows and valuations.
DCOM's ratings could also under pressure given a material increase in problem loans, or a significant loss of business from any of DCOM's main commercial real estate brokers. DCOM is reliant on commercial real estate brokers for its loan generation.
Additionally, although not anticipated, any significant changes in the mix of business, either by product type or geography, would be carefully considered by Fitch to determine any potential ratings impact.
KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
DCOM's trust preferred issuances are notched below DCOM's VR. The notch differential reflects loss severity and an assessment of increment non-performance risk
RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
DCOM's preferred issuances are sensitive to changes in DCOM's VR. The rating sensitivities for the VR are listed above.
KEY RATING DRIVERS - HOLDING COMPANY
DCOM's IDR and VR are equalized with those of its bank subsidiary, Dime Savings Bank of Williamsburgh, 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 DCOM 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 Dime Savings Bank of Williamsburgh.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
DCOM'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
DCOM'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 affirmed the following ratings:
Dime Community Bancshares, Inc.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2';
--Viability rating at 'bbb';
--Support at '5';
--Support Floor at 'NF'.
Dime Savings Bank of Williamsburgh
--Long-term IDR at 'BBB';
--Long-term Deposits at 'BBB+';
--Short-Term IDR at 'F2';
--Short-Term Deposits at 'F2';
--Viability rating at 'bbb'.
--Support at '5';
--Support Floor at 'NF'.
Dime Community Capital Trust I
--Trust Preferred at 'BB-'.
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. 8, 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 1, 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. 5, 2013);
--'Corporate Bond Comparator 1Q14: US vs EMEA' (March 26, 2014);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).