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Fitch Affirms Dime Community Bancshares, Inc.'s Ratings at 'BBB/F2'; Outlook Stable
March 29, 2017 / 5:30 PM / 8 months ago

Fitch Affirms Dime Community Bancshares, Inc.'s Ratings at 'BBB/F2'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, March 29 (Fitch) Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) for Dime Community Bancshares, Inc. (DCOM) and its principal banking subsidiary, Dime Community Bank at 'BBB/F2'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. Fitch reviewed DCOM as part of its U.S. Niche Real Estate Bank Peer Review, which also includes Astoria Financial Corporation, Inc., and New York Community Bancorp, Inc. While the business models of the U.S. Niche Real Estate Banks vary, these banks are generally characterized by their limited deposit franchises as well as geographic and loan concentrations when compared to larger U.S. banks. 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 and VRs Today's rating action reflects DCOM's stable asset quality, solid capital levels and concentrated business model. DCOM's primary ratings strength has been the demonstrated ability to execute on its niche broker-channelled multifamily lending while maintaining pristine asset quality. The asset quality track-record is reflective of DCOM's lending niche in smaller, 10-75 unit, rent-stabilized multifamily properties. Fitch views lending against rent stabilized rental properties within New York City favorably from an asset quality standpoint. Limited supply and very high demand drives stability in the vacancies and, therefore, cash flows derived from these properties. In June 2016, DCOM announced its long-standing CEO and shareholder Vincent Palagiano's plans to retire. He is succeeded by another DCOM veteran and former Chief Operating Officer of the company, Kenneth Mahon, who took office on Jan. 1, 2017. Fitch believes that Mahon's experience and long tenure at DCOM makes him a suitable candidate for the role and allows for a smooth transition in leadership which is incorporated in today's rating action. DCOM recently telegraphed a new strategy that is focused on gradually diversifying the business towards becoming a full-service commercial bank. Stuart Lubow, another seasoned banker and former CEO of Community National Bank was hired in early January 2017 to head up the Business Banking unit. He takes responsibility for developing and leading the bank's direct-relationship commercial business activities including C&I loans, direct-sourced CRE loans, SBA loans and the deposits and fees derived from the associated relationships. The diversification benefits and potential funding improvements that may be derived from the new strategy are positive to the ratings. However, Fitch views the entry into other commercial lending lines as indicative of an increased risk tolerance, a rating negative. Accordingly, the rating action incorporates our current expectation that the growth of loans from the Business Banking unit will be gradual. Additionally, it is our expectation that loans will be conservatively underwritten so as to preserve DCOM's strong asset quality and credit performance track record through the credit-cycle. DCOM's capital position remains good relative to its overall risk profile. As of 4Q16, DCOM had a CET 1 ratio of 11.44%, a 23bp decline from a year prior. This modest decline in capital was driven by growth in loans of 20%, which is well in excess of internal capital generation. Fitch notes that some of this loan growth relates to the deployment of capital derived from the gain on sale of some of the bank's buildings in 1Q16. Nevertheless, Fitch expects loan growth to keep pace with internal capital generation in 2017. Continued reduction in capital ratios could trigger negative rating action. DCOM reported strong deposit growth of 38% for the year ending Dec. 31, 2016 while the weighted average rate increased by 5bps over the year. While deposit growth lowered the loan-to-deposit ratio by 19.3%, DCOM's relatively high cost of deposits and reliance on wholesale funding remains a rating constraint. Finally, DCOM reported good earnings for FY16 with a ROAA of 1.31%. Looking forward, Fitch believes that a liability-sensitive balance sheet, a growing cost base and a relatively low reserve coverage ratio could contribute to weaker earnings, although this may be offset by higher yields from the new commercial lending lines. SUPPORT RATING AND SUPPORT RATING FLOOR The SR of '5' and SRF of 'NF' reflect Fitch's view that Dime Community Bancshares and Dime Community Bank are not considered systemically important and therefore, the probability of support is unlikely. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES DCOM's trust preferred issuances are rated four notches below DCOM's Viability Rating (VR) of 'bbb' in accordance with Fitch's assessment of the instruments' non-performance and loss severity risk profiles. HOLDING COMPANY DCOM's IDR and VR are equalized with those of its bank subsidiary, Dime Community 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. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities. Lastly, equalization is also supported by sound liquidity management at the holding company. RATING SENSITIVITIES IDRs and VRs Fitch sees limited upside in the company's ratings over the near term due to concentrations in the loan portfolio, undiversified earnings and relatively weak liquidity profile. The ratings are further constrained by the elevated risk associated with venturing into new commercial lending lines. Should the growth in DCOM's total loans exceed internal capital generation such that capital ratios are diluted by more than 80bps over a one-year period, negative rating pressure could ensue. Furthermore, the rating incorporates our expectation that growth from the Business Banking unit will be gradual and remain in the footprint where DCOM has hired the relevant expertise. Should this portfolio grow to over 100% of risk based capital over the next 12-18 months, negative rating action could develop. Finally, material loosening of rent-regulations in the New York area could be a negative rating driver for the institution, since rent regulations help maintain stable cash flows and valuations for multifamily properties in New York. Fitch believes DCOM's performance has historically benefitted from rent regulations on multifamily units in New York City. SUPPORT RATING AND SUPPORT RATING FLOOR DCOM's SR and SRF are sensitive to Fitch's assumption as to capacity to procure extraordinary support in case of need. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of the trust preferred securities are sensitive to any change in DCOM's VR. 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 Community Bank. 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 Rating at '5'; --Support Rating Floor at 'NF'. Dime Community Bank --Long-Term IDR at 'BBB'; --Short-Term IDR at'F2'; --Viability Rating at 'bbb'; --Long-term Deposits at 'BBB+'; --Short-term Deposits at 'F2'; --Support Rating at '5'; --Support Rating Floor at 'NF'. Dime Community Capital Trust I --Trust Preferred at 'BB-'. Contact: Primary Analyst Johannes Moller, CFA Associate Director +1-646-582-4954 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Stefan Kahandaliyanage, CFA Associate Director +1-646-582-4918 Committee Chairperson Sean Pattap Senior Director +1-212-908-0642 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. 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